Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
1
.
|
Basis of Presentation
|
The accompanying unaudited, condensed consolidated financial statements include the accounts of NVR, Inc. (“NVR” or the “Company”) and its subsidiaries and certain other entities in which the Company is deemed to be the primary beneficiary (see Notes 2 and 3 to the accompanying condensed consolidated financial statements). Intercompany accounts and transactions have been eliminated in consolidation. The statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation have been included. Operating results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
On January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2016-09,
Compensation – Stock Compensation: Improvements to Employee Share-Based Payment Accounting
. In connection with the adoption of ASU 2016-09, the Company:
|
•
|
Recorded the excess tax benefit from stock option exercises as a reduction to income tax expense prospectively beginning January 1, 2017. In the prior year, the excess tax benefit was recorded to additional paid-in capital within shareholders’ equity. The excess tax benefit recognized in the first quarter of 2017 and 2016 was $19,900 and $6,284, respectively.
|
|
•
|
Presented the aforementioned excess tax benefit recognized as an operating activity on the statement of cash flows and retrospectively adjusted the prior year Statement of Cash Flows accordingly. In the prior year, the excess tax benefit was recognized as a cash inflow from financing activities and a corresponding cash outflow from operating activities. The retrospective adjustment resulted in a $6,284 decrease to net cash used by operating activities and a $6,284 increase to net cash used in financing activities in the Consolidated Statement of Cash Flows for the three months ended March 31, 2016.
|
|
•
|
Made the election to recognize forfeitures of equity-based awards in the period in which they occur. This election was applied using the modified retrospective transition method, which resulted in the Company recording a cumulative-effect adjustment, net of tax, to reduce beginning retained earnings by $957. In the prior year, the Company estimated forfeitures based on its historical forfeiture rate.
|
No other adjustments were made as a result of the adoption of ASU 2016-09.
The Company also adopted ASU 2015-11,
Inventory – Simplifying the Measurement of Inventory
effective January 1, 2017. The standard requires inventory to be measured at the lower of cost or net realizable value. Under prior GAAP, impaired inventory was written down to net realizable value less a normal profit margin. Under the new standard, impaired inventory will only be written down to the net realizable value. ASU 2015-11 was adopted prospectively and did not have a material effect on the Company’s consolidated financial statements.
For the three months ended March 31, 2017 and 2016, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying condensed consolidated financial statements.
4
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
2.
|
Variable Interest Entities
|
Fixed Price Finished Lot Purchase Agreements (“Lot Purchase Agreements”)
NVR generally does not engage in the land development business. Instead, the Company typically acquires finished building lots at market prices from various development entities under Lot Purchase Agreements. The Lot Purchase Agreements
require deposits that may be forfeited if NVR fails to perform under the Lot Purchase Agreements. The deposits required under the Lot Purchase Agreements are in the form of cash or letters of credit in varying amounts, and typically range up to 10% of the aggregate purchase price of the finished lots.
NVR believes this lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and land development. NVR may, at its option, choose for any reason and at any time not to perform under these Lot Purchase Agreements by delivering notice of its intent not to acquire the finished lots under contract. NVR’s sole legal obligation and economic loss for failure to perform under these Lot Purchase Agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained within the Lot Purchase Agreements. In other words, if NVR does not perform under a Lot Purchase Agreement, NVR loses only its deposit. None of the creditors of any of the development entities with which NVR enters Lot Purchase Agreements have recourse to the general credit of NVR.
NVR generally does not have any specific performance obligations to purchase a certain number or any of the lots, nor does NVR guarantee completion of the development by the developer or guarantee any of the developers’ financial or other liabilities.
NVR is not involved in the design or creation of the development entities from which the Company purchases lots under Lot Purchase Agreements.
The developer’s equity holders have the power to direct 100% of the operating activities of the development entity. NVR has no voting rights in any of the development entities. The sole purpose of the development entity’s activities is to generate positive cash flow returns for the equity holders. Further, NVR does not share in any of the profit or loss generated by the project’s development. The profits and losses are passed directly to the developer’s equity holders.
The deposit placed by NVR pursuant to the Lot Purchase Agreement is deemed to be a variable interest in the respective development entities. Those development entities are deemed to be variable interest entities (“VIE”). Therefore, the development entities with which NVR enters into Lot Purchase Agreements, including the joint venture limited liability corporations discussed below, are evaluated for possible consolidation by NVR. An enterprise must consolidate a VIE when that enterprise has a controlling financial interest in the VIE. An enterprise is deemed to have a controlling financial interest if it has i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and ii) the obligation to absorb losses of the VIE that could be significant to the VIE or the rights to receive benefits from the VIE that could be significant to the VIE.
NVR believes the activities that most significantly impact a development entity’s economic performance are the operating activities of the entity. The development entity’s equity investors bear the full risk during the development process. Unless and until a development entity completes finished building lots through the development process, the entity does not earn any revenues. The operating development activities are managed solely by the development entity’s equity investors.
The development entities with which NVR contracts to buy finished lots typically select the respective projects, obtain the necessary zoning approvals, obtain the financing required with no support or guarantees from NVR, select who will purchase the finished lots and at what price, and manage the completion of the infrastructure improvements, all for the purpose of generating a cash flow return to the development entity’s equity holders and all independent of NVR. The Company possesses no more than limited protective legal rights through the Lot Purchase Agreement in the specific finished lots that it is purchasing, and NVR possesses no participative rights in the development entities. Accordingly, NVR does not have the power to direct the activities of a developer that most significantly impact the developer’s economic performance. For this reason, NVR has concluded that it is not the primary beneficiary of the development entities with which the Company enters into Lot Purchase Agreements, and therefore, NVR does not consolidate any of these VIEs.
5
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
As of
March 31, 2017
, NVR controlled approximately
74,300
lots under Lot Purchase Agreements with third parties through deposits in cash and letters of credit totaling approximately $
389,900
and $
2,500
, respectively. As noted above,
NVR’s sole legal obligation and economic loss for failure to perform under thes
e Lot Purchase Agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained in the Lot Purchase Agreements
.
In addition, NVR has certain properties under contract with land owners that are expected to yield approximately 8,700 lots, which are not included in the number of total lots controlled. Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with deposits in cash and letters of credit totaling approximately $11,800 and $100, respectively, as of March 31, 2017, of which approximately $7,300 is refundable if NVR does not perform under the contract. NVR generally expects to assign the raw land contracts to a land developer and simultaneously enter into a Lot Purchase Agreement with the assignee if the project is determined to be feasible.
NVR’s total risk of loss related to contract land deposits as of March 31, 2017 and December 31, 2016 was as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Contract land deposits
|
|
$
|
401,737
|
|
|
$
|
411,150
|
|
Loss reserve on contract land deposits
|
|
|
(32,034
|
)
|
|
|
(31,306
|
)
|
Contract land deposits, net
|
|
|
369,703
|
|
|
|
379,844
|
|
Contingent obligations in the form of letters of credit
|
|
|
2,552
|
|
|
|
2,379
|
|
Specific performance obligations (1)
|
|
|
1,505
|
|
|
|
1,505
|
|
Total risk of loss
|
|
$
|
373,760
|
|
|
$
|
383,728
|
|
|
(1)
|
As of both March 31, 2017 and December 31, 2016, the Company was committed to purchase 10 finished lots under specific performance obligations.
|
On a limited basis, NVR obtains finished lots using joint venture limited liability corporations (“JVs”). The JVs are typically structured such that NVR is a non-controlling member and is at risk only for the amount the Company has invested, or has committed to invest, in addition to any deposits placed under Lot Purchase Agreements with the joint venture.
NVR is not a borrower, guarantor or obligor on any debt of the JVs, as applicable. The Company enters into Lot Purchase Agreements to purchase lots from these JVs, and as a result has a variable interest in these JVs.
At March 31, 2017, the Company had an aggregate investment totaling approximately $47,700 in six JVs that are expected to produce approximately 7,400 finished lots, of which approximately 4,100 lots were controlled by the Company and the remaining approximately 3,300 lots were either under contract with unrelated parties or not currently under contract. In addition, NVR had additional funding commitments totaling approximately $5,800 in the aggregate to three of the JVs at March 31, 2017. The Company has determined that it is not the primary beneficiary of five of the JVs because either NVR and the other JV partner share power or the other JV partner has the controlling financial interest. The aggregate investment in unconsolidated JVs was approximately $47,400 and $49,000 at March 31, 2017 and December 31, 2016, respectively, and is reported in the “Other assets” line item on the accompanying condensed consolidated balance sheets. For the remaining JV, NVR has concluded that it is the primary beneficiary because the Company has the controlling financial interest in the JV.
6
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
The condensed balance sheets as of March 31, 2017 and December
31, 2016 of the consolidated JV were as follows:
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Assets:
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,210
|
|
|
$
|
1,214
|
|
Other assets
|
|
|
38
|
|
|
|
37
|
|
Total assets
|
|
$
|
1,248
|
|
|
$
|
1,251
|
|
|
|
|
|
|
|
|
|
|
Liabilities and equity:
|
|
|
|
|
|
|
|
|
Accrued expenses
|
|
$
|
547
|
|
|
$
|
550
|
|
Equity
|
|
|
701
|
|
|
|
701
|
|
Total liabilities and equity
|
|
$
|
1,248
|
|
|
$
|
1,251
|
|
The Company recognizes income from the JVs as a reduction to the lot cost of the lots purchased from the respective JVs when the homes are settled and is based on the expected total profitability and the total number of lots expected to be produced by the respective JVs. Distributions received from the unconsolidated JVs are allocated between return of capital and distributions of earnings based on the ratio of capital contributed by NVR to the total expected returns for the respective JVs, and are classified within the accompanying condensed consolidated statements of cash flows as cash flows from investing activities and operating activities, respectively.
4.
|
Land Under Development
|
On a limited basis, NVR directly acquires raw land parcels already zoned for its intended use to develop into finished lots. Land under development includes the land acquisition costs, direct improvement costs, capitalized interest where applicable, and real estate taxes.
In January 2017, the Company purchased a raw land parcel for approximately $14,400. The parcel is expected to produce approximately 90 lots.
As of March 31, 2017, NVR directly owned a total of
four
separate raw land parcels with a carrying value of $63,684 that are expected to produce approximately 700 finished lots. The Company also has additional funding commitments of approximately $11,200 under a joint development agreement related to one parcel, a portion of which the Company expects will be offset by development credits of approximately $6,200.
None of the raw parcels had any indicators of impairment as of March 31, 2017. Based on market conditions, NVR may on a limited basis continue to directly acquire additional raw parcels to develop into finished lots.
7
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
The Company capitalizes interest costs to land under development during the active development of finished lots. In addition, the Company capitalizes interest costs to its joint venture investments while the investments are considered qualified assets pursuant to Accounting Standards Codification 835-20,
Interest
. Capitalized interest is transferred to sold or unsold inventory as the development of finished lots is completed, then charged to cost of sales upon the Company’s settlement of homes and the respective lots. Interest incurred in excess of the interest capitalizable based on the level of qualified assets is expensed in the period incurred. NVR’s interest costs incurred, capitalized, expensed and charged to cost of sales during the three months ended March 31, 2017 and 2016 was as follows:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Interest capitalized, beginning of period
|
|
$
|
5,106
|
|
|
$
|
4,434
|
|
Interest incurred
|
|
|
6,559
|
|
|
|
6,388
|
|
Interest charged to interest expense
|
|
|
(5,836
|
)
|
|
|
(5,088
|
)
|
Interest charged to cost of sales
|
|
|
(265
|
)
|
|
|
(376
|
)
|
Interest capitalized, end of period
|
|
$
|
5,564
|
|
|
$
|
5,358
|
|
The following weighted average shares and share equivalents were used to calculate basic and diluted earnings per share for the
three months ended March 31, 2017 and 2016
:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted average number of shares outstanding used to calculate basic EPS
|
|
|
3,705
|
|
|
|
3,884
|
|
Dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options and restricted share units
|
|
|
392
|
|
|
|
251
|
|
Weighted average number of shares and share equivalents outstanding used to calculate diluted EPS
|
|
|
4,097
|
|
|
|
4,135
|
|
The following stock options and restricted share units issued under equity incentive plans were outstanding during the three months ended March 31, 2017 and 2016, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Anti-dilutive securities
|
|
|
79
|
|
|
|
46
|
|
7.
|
Excess Reorganization Value, Goodwill and Other Intangibles
|
Reorganization value in excess of identifiable assets (“excess reorganization value”) is an indefinite-lived intangible asset that was created upon NVR’s emergence from bankruptcy on September 30, 1993. Based on the allocation of the reorganization value, the portion of the reorganization value which was not attributed to specific tangible or intangible assets has been reported as excess reorganization value, which is treated similarly to goodwill. Excess reorganization value is not subject to amortization. Rather, excess reorganization value is subject to an impairment assessment on an annual basis or more frequently if changes in events or circumstances indicate that impairment may have occurred. Because excess reorganization value was based on the reorganization value of NVR’s entire enterprise upon emergence from bankruptcy, the impairment assessment is conducted on an enterprise basis based on the comparison of NVR’s total equity to the market value of NVR’s outstanding publicly-traded common stock.
8
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
As of
March 31, 2017
, goodwill and net finite-lived intangible assets totaled $441 and $
1
,
813
, respectively. The remaining finite-lived intangible assets are amortized on a straight-line basis over a weighted average life of three years.
The Company completed the annual impairment assessment of the excess reorganization value and goodwill during the first quarter of 2017 and determined that there was no impairment.
A summary of changes in shareholders’ equity is presented below:
|
|
Common
Stock
|
|
|
Additional
Paid-In
Capital
|
|
|
Retained
Earnings
|
|
|
Treasury
Stock
|
|
|
Deferred
Compensation
Trust
|
|
|
Deferred
Compensation
Liability
|
|
|
Total
|
|
Balance, December 31, 2016
|
|
$
|
206
|
|
|
$
|
1,515,828
|
|
|
$
|
5,695,376
|
|
|
$
|
(5,906,969
|
)
|
|
$
|
(17,375
|
)
|
|
$
|
17,375
|
|
|
$
|
1,304,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative-effect adjustment from adoption of ASU 2016-09, net of tax
|
|
|
—
|
|
|
|
1,566
|
|
|
|
(957
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
609
|
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
102,923
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
102,923
|
|
Deferred compensation activity
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8
|
)
|
|
|
8
|
|
|
|
—
|
|
Purchase of common stock for treasury
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(85,547
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(85,547
|
)
|
Equity-based compensation
|
|
|
—
|
|
|
|
10,589
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
10,589
|
|
Proceeds from stock options exercised
|
|
|
—
|
|
|
|
75,265
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,265
|
|
Treasury stock issued upon option exercise and restricted share vesting
|
|
|
—
|
|
|
|
(32,978
|
)
|
|
|
—
|
|
|
|
32,978
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance, March 31, 2017
|
|
$
|
206
|
|
|
$
|
1,570,270
|
|
|
$
|
5,797,342
|
|
|
$
|
(5,959,538
|
)
|
|
$
|
(17,383
|
)
|
|
$
|
17,383
|
|
|
$
|
1,408,280
|
|
The Company repurchased 51 shares of its common stock during the three months ended March 31, 2017. The Company settles stock option exercises and vesting of restricted share units by issuing shares of treasury stock. Approximately 94 shares were issued from the treasury account during the three months ended March 31, 2017 in settlement of stock option exercises and vesting of restricted share units. Shares are relieved from the treasury account based on the weighted average cost basis of treasury shares acquired.
The Company establishes warranty and product liability reserves (“warranty reserve”) to provide for estimated future expenses as a result of construction and product defects, product recalls and litigation incidental to NVR’s homebuilding business. Liability estimates are determined based on management’s judgment, considering such factors as historical experience, the likely current cost of corrective action, manufacturers’ and subcontractors’ participation in sharing the cost of corrective action, consultations with third party experts such as engineers, and discussions with the Company’s general counsel and outside counsel retained to handle specific product liability cases. The following table reflects the changes in the Company’s warranty reserve during the three months ended March 31, 2017 and 2016:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Warranty reserve, beginning of period
|
|
$
|
93,895
|
|
|
$
|
87,407
|
|
Provision
|
|
|
8,961
|
|
|
|
8,842
|
|
Payments
|
|
|
(9,353
|
)
|
|
|
(9,557
|
)
|
Warranty reserve, end of period
|
|
$
|
93,503
|
|
|
$
|
86,692
|
|
9
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
The following disclosure includes four homebuilding reportable segments that aggregate geographically the Company’s homebuilding operating segments, and the mortgage banking operations presented as a single reportable segment. The homebuilding reportable segments are comprised of operating divisions in the following geographic areas:
Mid Atlantic:
|
|
Maryland, Virginia, West Virginia, Delaware and Washington, D.C.
|
North East:
|
|
New Jersey and Eastern Pennsylvania
|
Mid East:
|
|
New York, Ohio, Western Pennsylvania, Indiana and Illinois
|
South East:
|
|
North Carolina, South Carolina, Florida and Tennessee
|
Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, selling, general and administrative expenses and a corporate capital allocation charge. The corporate capital allocation charge is eliminated in consolidation and is based on the segment’s average net assets employed. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker (“CODM”) to determine whether the operating segment’s results are providing the desired rate of return after covering the Company’s cost of capital. In addition, certain assets, including goodwill and intangible assets and consolidation adjustments as discussed further below, are not allocated to the operating segments as those assets are neither included in the operating segment’s corporate capital allocation charge, nor in the CODM’s evaluation of the operating segment’s performance. The Company records charges on contract land deposits when it is determined that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are charged to the operating segment upon the determination to terminate a Lot Purchase Agreement with the developer, or to restructure a Lot Purchase Agreement resulting in the forfeiture of the deposit. Mortgage banking profit before tax consists of revenues generated from mortgage financing, title insurance and closing services, less the costs of such services and general and administrative costs. Mortgage banking operations are not charged a corporate capital allocation charge.
In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between segment profit and consolidated profit before tax include unallocated corporate overhead (including all management incentive compensation), equity-based compensation expense, consolidation adjustments and external corporate interest expense. NVR’s overhead functions, such as accounting, treasury and human resources, are centrally performed and the costs are not allocated to the Company’s operating segments. Consolidation adjustments consist of such items necessary to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to the Company’s operating segments. External corporate interest expense primarily consists of interest charges on the Company’s 3.95% Senior Notes due 2022 (the “Senior Notes”) and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.
Following are tables presenting segment revenues, profit and assets, with reconciliations to the amounts reported for the consolidated enterprise, where applicable:
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Revenues:
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic
|
|
$
|
722,268
|
|
|
$
|
633,571
|
|
Homebuilding North East
|
|
|
106,231
|
|
|
|
97,153
|
|
Homebuilding Mid East
|
|
|
243,031
|
|
|
|
244,277
|
|
Homebuilding South East
|
|
|
176,057
|
|
|
|
146,503
|
|
Mortgage Banking
|
|
|
29,505
|
|
|
|
22,522
|
|
Total consolidated revenues
|
|
$
|
1,277,092
|
|
|
$
|
1,144,026
|
|
10
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Profit before taxes:
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic
|
|
$
|
64,489
|
|
|
$
|
46,609
|
|
Homebuilding North East
|
|
|
9,106
|
|
|
|
4,065
|
|
Homebuilding Mid East
|
|
|
22,159
|
|
|
|
22,733
|
|
Homebuilding South East
|
|
|
14,569
|
|
|
|
12,786
|
|
Mortgage Banking
|
|
|
15,953
|
|
|
|
10,375
|
|
Total segment profit before taxes
|
|
|
126,276
|
|
|
|
96,568
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
Contract land deposit reserve adjustment (1)
|
|
|
(728
|
)
|
|
|
1,329
|
|
Equity-based compensation expense
|
|
|
(10,589
|
)
|
|
|
(10,549
|
)
|
Corporate capital allocation (2)
|
|
|
46,187
|
|
|
|
44,315
|
|
Unallocated corporate overhead
|
|
|
(27,234
|
)
|
|
|
(29,509
|
)
|
Consolidation adjustments and other
|
|
|
3,813
|
|
|
|
5,985
|
|
Corporate interest expense
|
|
|
(5,564
|
)
|
|
|
(4,827
|
)
|
Reconciling items sub-total
|
|
|
5,885
|
|
|
|
6,744
|
|
Consolidated profit before taxes
|
|
$
|
132,161
|
|
|
$
|
103,312
|
|
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Assets:
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic
|
|
$
|
1,125,721
|
|
|
$
|
1,054,779
|
|
Homebuilding North East
|
|
|
137,409
|
|
|
|
126,720
|
|
Homebuilding Mid East
|
|
|
254,915
|
|
|
|
222,736
|
|
Homebuilding South East
|
|
|
230,127
|
|
|
|
214,225
|
|
Mortgage Banking
|
|
|
247,706
|
|
|
|
403,250
|
|
Total segment assets
|
|
|
1,995,878
|
|
|
|
2,021,710
|
|
Reconciling items:
|
|
|
|
|
|
|
|
|
Consolidated variable interest entity
|
|
|
1,248
|
|
|
|
1,251
|
|
Cash and cash equivalents
|
|
|
482,689
|
|
|
|
375,748
|
|
Deferred taxes
|
|
|
173,611
|
|
|
|
170,652
|
|
Intangible assets and goodwill
|
|
|
51,181
|
|
|
|
51,526
|
|
Contract land deposit reserve
|
|
|
(32,034
|
)
|
|
|
(31,306
|
)
|
Consolidation adjustments and other
|
|
|
69,726
|
|
|
|
54,362
|
|
Reconciling items sub-total
|
|
|
746,421
|
|
|
|
622,233
|
|
Consolidated assets
|
|
$
|
2,742,299
|
|
|
$
|
2,643,943
|
|
|
(1)
|
This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments.
|
|
(2)
|
This item represents the elimination of the corporate capital allocation charge included in the respective homebuilding reportable segments. The corporate capital allocation charge is based on the segment’s monthly average asset balance, and was as follows for the periods presented:
|
|
|
Three Months Ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Corporate capital allocation charge:
|
|
|
|
|
|
|
|
|
Homebuilding Mid Atlantic
|
|
$
|
29,124
|
|
|
$
|
27,186
|
|
Homebuilding North East
|
|
|
3,814
|
|
|
|
4,953
|
|
Homebuilding Mid East
|
|
|
6,742
|
|
|
|
6,699
|
|
Homebuilding South East
|
|
|
6,507
|
|
|
|
5,477
|
|
Total
|
|
$
|
46,187
|
|
|
$
|
44,315
|
|
11
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
GAAP assigns a fair value hierarchy to the inputs used to measure fair value. Level 1 inputs are quoted prices in active markets for identical assets and liabilities. Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly. Level 3 inputs are unobservable inputs.
Financial Instruments
The estimated fair value of NVR’s Senior Notes as of March 31, 2017 was $619,020. The estimated fair value is based on recent market prices of similar transactions, which is classified as Level 2 within the fair value hierarchy. The carrying value of the Senior Notes was $596,607 at March 31, 2017. Except as otherwise noted below, NVR believes that insignificant differences exist between the carrying value and the fair value of its financial instruments, which consist of cash equivalents, due to their short term nature.
Derivative Instruments and Mortgage Loans Held for Sale
In the normal course of business, NVR’s wholly-owned mortgage subsidiary, NVR Mortgage Finance, Inc. (“NVRM”), enters into contractual commitments to extend credit to NVR’s homebuyers with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by NVRM. All mortgagors are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the "lock-in" of rates by the borrower and the sale date of the loan to a broker/dealer. To mitigate the effect of the interest rate risk inherent
in providing rate lock commitments to borrowers, NVRM enters into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers. The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. NVRM does not engage in speculative or trading derivative activities. Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers are undesignated derivatives and, accordingly, are marked to fair value through earnings. At March 31, 2017, there were contractual commitments to extend credit to borrowers aggregating $603,327 and open forward delivery contracts aggregating $752,360, which hedge both the rate lock loan commitments and closed loans held for sale.
The fair value of NVRM’s rate lock commitments to borrowers and the related input levels include, as applicable:
|
i)
|
the assumed gain/loss of the expected resultant loan sale (Level 2);
|
|
ii)
|
the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and
|
|
iii)
|
the value of the servicing rights associated with the loan (Level 2).
|
The assumed gain/loss considers the excess servicing to be received or buydown fees to be paid upon securitization of the loan. The excess servicing and buydown fees are calculated pursuant to contractual terms with investors. To calculate the effects of interest rate movements, NVRM utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount. NVRM sells all of its loans on a servicing released basis, and receives a servicing released premium upon sale. Thus, the value of the servicing rights, which averaged 110 basis points of the loan amount as of March 31, 2017, is included in the fair value measurement and is based upon contractual terms with investors and varies depending on the loan type. NVRM assumes an approximate 15% fallout rate when measuring the fair value of rate lock commitments. Fallout is defined as locked loan commitments for which NVRM does not close a mortgage loan and is based on historical experience.
The fair value of NVRM’s forward sales contracts to broker/dealers solely considers the market price movement of the same type of security between the trade date and the balance sheet date (Level 2). The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.
Mortgage loans held for sale are carried at the lower of cost or fair value, net of deferred origination costs, until sold. Fair value is measured using Level 2 inputs. The fair value of loans held for sale of $213,433 included on the
12
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
accompanying condensed consolidated bala
nce sheet has been increased by $
992
from the aggregate principal balance of $
212
,
441
.
The undesignated derivative instruments are included on the accompanying condensed consolidated balance sheet, as of March 31, 2017, as follows:
|
|
Fair Value
|
|
|
Balance Sheet Location
|
Rate lock commitments:
|
|
|
|
|
|
|
Gross assets
|
|
$
|
7,844
|
|
|
|
Gross liabilities
|
|
|
3,324
|
|
|
|
Net rate lock commitments
|
|
$
|
4,520
|
|
|
NVRM - Other assets
|
Forward sales contracts:
|
|
|
|
|
|
|
Gross assets
|
|
$
|
131
|
|
|
|
Gross liabilities
|
|
|
3,474
|
|
|
|
Net forward sales contracts
|
|
$
|
3,343
|
|
|
NVRM - Accounts payable and other liabilities
|
The fair value measurement as of March 31, 2017 was as follows:
|
|
Notional or
Principal
Amount
|
|
|
Assumed
Gain/(Loss)
From Loan
Sale
|
|
|
Interest
Rate
Movement
Effect
|
|
|
Servicing
Rights
Value
|
|
|
Security
Price
Change
|
|
|
Total Fair
Value
Measurement
Gain/(Loss)
|
|
Rate lock commitments
|
|
$
|
603,327
|
|
|
$
|
(2,871
|
)
|
|
$
|
1,771
|
|
|
$
|
5,620
|
|
|
$
|
—
|
|
|
$
|
4,520
|
|
Forward sales contracts
|
|
$
|
752,360
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,343
|
)
|
|
|
(3,343
|
)
|
Mortgages held for sale
|
|
$
|
212,441
|
|
|
|
(979
|
)
|
|
|
(409
|
)
|
|
|
2,380
|
|
|
|
—
|
|
|
|
992
|
|
Total fair value measurement
|
|
|
$
|
(3,850
|
)
|
|
$
|
1,362
|
|
|
$
|
8,000
|
|
|
$
|
(3,343
|
)
|
|
$
|
2,169
|
|
For the three months ended March 31, 2017 and 2016, NVRM recorded a fair value adjustment to expense of $2,017 and $657, respectively. Unrealized gains/losses from the change in the fair value measurements are included in earnings as a component of mortgage banking fees in the accompanying condensed consolidated statements of income. The fair value measurement will be impacted in the future by the change in the value of the servicing rights, interest rate movements, security price fluctuations, and the volume and product mix of NVRM’s closed loans and locked loan commitments.
Senior Notes
As of March 31, 2017, the Company had Senior Notes outstanding with a principal balance of $600,000. The Senior Notes mature on September 15, 2022 and bear interest at 3.95%, payable semi-annually in arrears on March 15 and September 15. The Senior Notes were issued at a discount to yield 3.97% and have been reflected net of the unamortized discount and unamortized debt issuance costs in the accompanying condensed consolidated balance sheet.
Credit Agreement
NVR has an unsecured Credit Agreement (the “Credit Agreement”), which provides for aggregate revolving loan commitments of $200,000 (the “Facility”). Under the Credit Agreement, the Company may request increases of up to $300,000 to the Facility in the form of revolving loan commitments or term loans
to the extent that new or existing lenders agree to provide additional revolving loan or term loan commitments.
The Credit Agreement provides for a $100,000 sublimit for the issuance of letters of credit, of which approximately $8,900 was outstanding at March 31, 2017, and a $25,000 sublimit for a swing line commitment. The Credit Agreement termination date is July 15, 2021. There was no debt outstanding under the Facility at March 31, 2017.
13
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
Repurchase Agr
eement
NVRM provides for its mortgage origination and other operating activities using cash generated from its operations, borrowings from its parent company, NVR, as well as a revolving mortgage repurchase agreement (the “Repurchase Agreement”), which is non-recourse to NVR. The Repurchase Agreement provides for loan purchases up to $150,000, subject to certain sub-limits, and provides for an incremental commitment pursuant to which NVRM may from time to time request increases in the total commitment available under the Repurchase Agreement by up to $50,000 in the aggregate. Amounts outstanding under the Repurchase Agreement are collateralized by the Company’s mortgage loans held for sale. The Repurchase Agreement expires on
July 26, 2017. At March 31, 2017, there were no borrowing base limitations reducing the amount available under the Repurchase Agreement. There was no debt outstanding under the Repurchase Agreement at March 31, 2017.
13.
|
Commitments and Contingencies
|
In June 2010, the Company received a Request for Information from the United States Environmental Protection Agency (“EPA”) pursuant to Section 308 of the Clean Water Act. The request sought information about storm water discharge practices in connection with homebuilding projects completed or underway by the Company in New York and New Jersey. The Company cooperated with this request, and provided information to the EPA. The Company was subsequently informed by the United States Department of Justice (“DOJ”) that the EPA forwarded the information on the matter to the DOJ, and the DOJ requested that the Company meet with the government to discuss the status of the case. Meetings took place in January 2012, August 2012 and November 2014 with representatives from both the EPA and DOJ. The Company has continued discussions with the EPA and DOJ and is presently engaged in settlement discussions with them. Any settlement is expected to include injunctive relief and payment of a civil penalty. Although there can be no assurance that a settlement will be reached, in 2015 the Company recorded a liability and corresponding expense associated with an estimated civil penalty amount.
The Company and its subsidiaries are also involved in various other litigation arising in the ordinary course of business. In the opinion of management, and based on advice of legal counsel, this litigation is not expected to have a material adverse effect on the financial position, results of operations or cash flows of the Company. Legal costs incurred in connection with outstanding litigation are expensed as incurred.
The Company’s effective tax rate during the three months ended March 31, 2017 and 2016 was 22.1% and 36.8%, respectively. The 2017 effective tax rate was reduced as a result of the Company’s adoption of ASU 2016-09, which requires the excess tax benefit from stock option exercises to be recorded as a reduction to income tax expense in the period stock options are exercised. The Company recognized $19,900 in excess tax benefit in the first quarter of 2017. In the first quarter of 2016, an excess tax benefit of $6,284 was recorded to additional paid-in capital within shareholders’ equity.
1
5
.
|
Recent Accounting Pronouncements
|
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09,
Revenue from Contracts with Customers
, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The standard will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB delayed the standard’s effective date for one year. The standard is effective for the Company as of January 1, 2018. The standard permits the use of either the retrospective or cumulative effect transition method. The Company does not believe that the adoption of this standard will have a material effect on its consolidated financial statements and related disclosures.
In February 2016, FASB issued ASU 2016-02,
Leases (Topic 842)
, which requires lessees to recognize most leases on-balance sheet with a liability equal to the present value of lease payments over the lease term and a right-of-use asset
14
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)
for the right to use the underlying asset over the lease term. Lessees will recognize expenses on their income statements in a manner similar to current GAAP. The standard also requires additional disclosures of key information about leasing arrangem
ents. The standard is effective for the Company as of January 1, 2019. The Company believes that the adoption of this standard will have a material effect on both assets and liabilities presented on the balance sheet, and is further evaluating the impact o
f its adoption.
In June 2016, FASB issued ASU 2016-13,
Financial Instruments – Credit Losses (Topic 326)
, which significantly changes the way impairment of financial assets is recognized. The standard will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. The standard’s provisions will be applied as a cumulative-effect adjustment to beginning retained earnings as of the effective date. The standard is effective for the Company as of January 1, 2020. Early adoption is permitted for annual and interim periods beginning January 1, 2019. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.
In August 2016, FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments
. The objective of the standard is to address the diversity in practice of how certain cash receipts and payments are presented on the statement of cash flows. The standard requires that the guidance be applied retrospectively in the first interim and annual periods in which an entity adopts the guidance. The standard is effective for the Company as of January 1, 2018. The Company is currently evaluating the effect that the standard will have on its consolidated statements of cash flows and related disclosures.
In November 2016, FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230), Restricted Cash
. The amendments in the standard require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash or restricted cash equivalents. As a result, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. The standard is effective for the Company as of January 1, 2018. The Company does not believe that the adoption of this standard will have a material effect on its consolidated statements of cash flows and related disclosures.
In January 2017, FASB issued ASU 2017-04,
Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment
. The standard’s objective is to simplify the subsequent measurement of goodwill by eliminating the second step from the goodwill impairment test. Under the amendments in the standard, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would then be recognized, not to exceed the amount of goodwill allocated to that reporting unit. The standard is effective for the Company on January 1, 2020, and early adoption is permitted. The Company does not believe that the adoption of this standard will have a material effect on its consolidated financial statements and related disclosures.
15