UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
For the quarterly period ended June 30, 2003
OR
For the transition period from to
Commission File Number: 1-12378
NVR, Inc.
(Exact name of registrant as specified in its charter)
7601 Lewinsville Road, Suite 300
McLean, Virginia 22102
(703) 761-2000
(Address, including zip code, and telephone number, including
area code, of registrant’s principal executive offices)
(Not Applicable)
(Former name, former address, and former fiscal year if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act of 1934). Yes x No ¨
As of August 4, 2003 there were 7,152,347 total shares of common stock outstanding.
Form 10-Q
INDEX
PART I
Item 1.
Item 2.
Item 4.
PART II
Item 6.
2
Condensed Consolidated Balance Sheets
(in thousands, except per share and share data)
ASSETS
Homebuilding:
Cash and cash equivalents
Receivables
Inventory:
Lots and housing units, covered under sales agreements with customers
Unsold lots and housing units
Manufacturing materials and other
Inventory not owned, consolidated per FIN 46
Property, plant and equipment, net
Reorganization value in excess of amounts allocable to identifiable assets, net
Goodwill, net
Contract land deposits
Other assets
Mortgage Banking:
Mortgage loans held for sale, net
Mortgage servicing rights, net
Property and equipment, net
Total assets
(Continued)
See notes to condensed consolidated financial statements.
3
Condensed Consolidated Balance Sheets (Continued)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Accounts payable
Accrued expenses and other liabilities
Liabilities related to inventory not owned, consolidated per FIN 46
Obligations under incentive plans
Customer deposits
Other term debt
Senior notes
Accounts payable and other liabilities
Notes payable
Total liabilities
Commitments and contingencies
Shareholders’ equity:
Common stock, $0.01 par value; 60,000,000 shares authorized; 20,597,709 and 20,602,921 shares issued as of June, 30, 2003 and December 31, 2002
Additional paid-in-capital
Deferred compensation trust - 453,207 and 428,698 shares as of June 30, 2003 and December 31, 2002, respectively, of NVR, Inc. common stock
Deferred compensation liability
Retained earnings
Less treasury stock at cost – 13,362,526 and 13,580,531 shares at June 30, 2003 and December 31, 2002, respectively
Total shareholders’ equity
Total liabilities and shareholders’ equity
4
Condensed Consolidated Statements of Income
(in thousands, except per share data)
(unaudited)
Revenues
Other income
Cost of sales
Selling, general and administrative
Operating income
Interest expense
Homebuilding income
Mortgage banking fees
Interest income
General and administrative
Mortgage banking income
Total segment income
Income tax expense
Net Income
Basic earnings per share
Diluted earnings per share
Basic average shares outstanding
Diluted average shares outstanding
5
Condensed Consolidated Statements of Cash Flows
(in thousands)
Cash flows from operating activities:
Net income
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
Mortgage loans closed
Proceeds from sales of mortgage loans
Gain on sale of mortgage servicing rights
Gain on sale of loans
Net change in assets and liabilities:
Increase in inventories
Increase in receivables
Increase in contract land deposits
Increase in accounts payable, customer deposits and accrued expenses
(Decrease) increase in obligations under incentive plans
Other, net
Net cash provided by operating activities
Cash flows from investing activities:
Purchase of property, plant and equipment
Principal payments on mortgage loans held for sale
Proceeds from sales of mortgage servicing rights, net
Net cash provided by investing activities
Cash flows from financing activities:
Purchase of NVR common stock for funding of deferred compensation plan
Net (repayments) borrowings under notes payable and other term debt
Payment of senior note consent fees
Issuance of 5% Senior Notes due 2010
Purchase of treasury stock
Proceeds from exercise of stock options
Net cash provided (used) by financing activities
Net increase (decrease) in cash and cash equivalents
Cash and cash equivalents, beginning of the period
Cash and cash equivalents, end of period
Supplemental disclosures of cash flow information:
Interest paid during the period
Income taxes paid, net of refunds
Supplemental disclosures of non-cash activities:
6
Notes to Condensed Consolidated Financial Statements
(in thousands except per share and share data)
The accompanying unaudited, condensed consolidated financial statements include the accounts of NVR, Inc. (“NVR” or the “Company”) and its subsidiaries and other entities in which the Company is deemed to be the primary beneficiary (see Note 2). 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 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 accounting principles generally accepted in the United States of America for complete financial statements. Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America, they should be read in conjunction with the financial statements and notes thereto included in the Company’s 2002 Annual Report on Form 10-K. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six month period ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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.
For the three and six month periods ended June 30, 2003 and 2002, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying financial statements.
NVR’s Finished Lot Acquisition Strategy
The Company does not engage in the land development business. Instead, the Company acquires finished building lots at market prices from various development entities under fixed price purchase agreements that require deposits that may be forfeited if NVR fails to perform under the agreement. The deposits required under the purchase agreements are in the form of cash or letters of credit in varying amounts and represent a percentage, typically ranging from 0% to 10% of the aggregate purchase price of the finished lots.
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 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 purchase agreements is limited to the amount of the deposit pursuant to the liquidating damage provision contained within the purchase agreement. NVR does not have any financial guarantees or completion obligations and does not guarantee specific performance under these purchase agreements.
Adoption of FIN 46
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 requires the primary beneficiary of a
7
variable interest entity to consolidate that entity. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the variable interest entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual, or other financial interests in the entity. Prior to the issuance of FIN 46, an enterprise generally consolidated an entity when the enterprise had a controlling financial interest in the entity through ownership of a majority voting interest. Upon adoption, FIN 46 applied immediately to variable interest entities created after January 31, 2003. Beginning July 1, 2003, FIN 46 will apply to variable interest entities created before February 1, 2003.
Subsequent to January 31, 2003 and through June 30, 2003, the Company entered into fixed price lot purchase agreements with an aggregate exercise price of approximately $411,100, by making or committing to make deposits of approximately $25,100. The Company evaluated these agreements entered into subsequent to January 31, 2003 pursuant to the requirements of FIN 46. The Company determined that it is the primary beneficiary of certain of the variable interest entities with which it has entered into purchase agreements. NVR estimated the current fair value of the land underlying these purchase agreements and consolidated that amount and a related liability. The liabilities represent the difference between the estimated current fair value of the land under contract and the Company’s related deposits. The effect of the consolidation at June 30, 2003 was the inclusion on the balance sheet of $7,804 to Inventory Not Owned Consolidated Per FIN 46 with a corresponding inclusion of $7,375 to Liabilities Related To Inventory Not Owned Per FIN 46. NVR does not have access to the financial records of the development entities with which it enters into fixed price purchase agreements, and as a result was unable to consolidate the variable interest entities’ results of operations or cash flows.
The Company has not yet determined the effect of adopting FIN 46 for its currently unconsolidated partnership interests and fixed price purchase agreements that existed as of January 31, 2003. However, that evaluation may require that NVR consolidate assets, liabilities and results of operations of certain of its unconsolidated partnerships and consolidate the estimated fair value of the land (with the related liability) underlying certain of its fixed price purchase agreements. NVR cannot make any definitive conclusion until it completes its evaluation.
At June 30, 2003, the Company had eight active stock-based employee compensation plans. As permitted under Statement of Financial Accounting Standard (“FAS”) No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure, an amendment of FASB Statement No. 123, NVR has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangements as defined by Accounting Principles Board Opinion (“APB”) No. 25, Accounting for Stock Issued to Employees, and related interpretations including Financial Accounting Standards Board Interpretation No. 44, Accounting for Certain Transactions involving Stock Compensation, an interpretation of APB No. 25. The following table illustrates the effect on net income and earnings per share if the company had applied the fair value recognition provisions of FAS 123 to stock-based employee compensation.
8
Net income, as reported
Deduct: Total stock-based employee compensation expense determined under fair value-based method for all awards, net of related tax effects
Pro forma net income
Earnings per share:
Basic—as reported
Basic—pro forma
Diluted—as reported
Diluted—pro forma
A summary of changes in shareholders’ equity is presented below:
Balance, December 31, 2002
Deferred compensation activity, net
Purchase of common stock for treasury
Option activity
Tax benefit from stock-based compensation activity
Treasury shares issued upon option exercise
Balance, June 30, 2003
Approximately 568,000 options to purchase shares of the Company’s common stock were exercised during the first six months of 2003. The Company settles option exercises by issuing shares of treasury stock to option holders. Shares are relieved from the treasury account based on the weighted average cost basis of treasury shares acquired.
The Company repurchased approximately 355,000 shares of its common stock at an aggregate purchase price of $115,452 during the six months ended June 30, 2003.
9
NVR operates in two business segments: homebuilding and mortgage banking. Corporate general and administrative expenses are fully allocated to the homebuilding and mortgage banking segments in the information presented below.
For the Six Months Ended June 30, 2003
Revenues from external customers
Segment profit
Segment assets
Add: Excess reorganization value and goodwill
Total consolidated assets
For the Three Months Ended June 30, 2003
For the Six Months Ended June 30, 2002
For the Three Months Ended June 30, 2002
10
On June 17, 2003, the Company issued, at par, $200,000 of 5% Senior Notes due 2010 (the “Notes”). The offering of the Notes resulted in aggregate net proceeds of approximately $199,700, after deducting offering expenses. The Notes mature on June 15, 2010 and bear interest at 5%, payable semi-annually in arrears on June 15 and December 15, commencing on December 15, 2003. The Notes are general unsecured obligations and rank equally in right of payment with all of NVR’s existing and future unsecured senior indebtedness and indebtedness under our existing credit facility. On July 14, 2003, the Company used approximately $120,700 of the proceeds to redeem all of the outstanding 8% Senior Notes due 2005 and accrued interest. The redemption will result in a third quarter pre-tax charge as follows:
Call premium
Unamortized consent fees
Unamortized bond issue costs
Total
Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, requires goodwill and reorganization value in excess of amounts allocable to identifiable assets (“excess reorganization value”) to be tested for impairment on an annual basis subsequent to the year of adoption. The Company completed the annual assessment of impairment during the first quarter of 2003 and determined that there was no impairment of either goodwill or excess reorganization value.
The FASB issued FIN 45, Guarantors’ Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, in November 2002. FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee for all guarantees issued after December 31, 2002. NVR has not issued any guarantees subsequent to December 31, 2002, and accordingly, the adoption of FIN 45 had no impact on the Company’s financial condition, results of operations or cash flows.
FIN 45 also requires additional disclosures to be made by a guarantor in its interim and annual financial statements regarding its obligations under certain guarantees, including product warranties. The Company establishes warranty and product liability reserves 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 our General Counsel and other outside counsel retained to handle specific product liability cases. The following table reflects the changes in the Company’s warranty reserve during the six months ended June 30, 2003:
Warranty reserve, December 31, 2002
Provision
Payments
Warranty reserve, June 30, 2003
11
In April 2003, the FASB issued FAS 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS 133, Accounting for Derivative Instruments and Hedging Activities. FAS 149 is effective for contracts entered into or modified after June 30, 2003. NVR is currently evaluating the impact of FAS 149 on its results of operations and financial condition and cannot make any definitive conclusion until it completes its evaluation.
In May 2003, the FASB issued FAS 150,Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity which establishes standards regarding classification and measurement of certain financial instruments with the characteristics of both liabilities and equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. Adoption of FAS 150 will not have a material impact on NVR’s results of operations, cash flows or financial condition.
12
Forward-Looking Statements
Some of the statements in this Form 10-Q, as well as statements made by NVR in periodic press releases and other public communications, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934. Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other variations thereof or comparable terminology, or by discussion of strategies, each of which involves risks and uncertainties. All statements other than of historical facts included herein, including those regarding market trends, NVR’s financial position, business strategy, projected plans and objectives of management for future operations, are forward-looking statements. Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of NVR to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. Such risk factors include, but are not limited to, general economic and business conditions (on both a national and regional level), interest rate changes, access to suitable financing, competition, the availability and cost of land and other raw materials used by NVR in its homebuilding operations, shortages of labor, weather related slow downs, building moratoria, governmental regulation, the ability of NVR to integrate any acquired business, fluctuation and volatility of stock and other financial markets and other factors over which NVR has little or no control.
Results of Operations for the Three and Six Months Ended June 30, 2003 and 2002
NVR, Inc. (“NVR”) operates in two business segments: homebuilding and mortgage banking. Corporate general and administrative expenses are fully allocated to the homebuilding and mortgage banking segments in the information presented below. Unless otherwise indicated, all references to dollars in this Item 2 are in thousands.
Homebuilding Segment
NVR operates in the following geographic regions:
Washington:
Baltimore:
North:
South:
The following table summarizes settlements, new orders and backlog unit activity for the three and six month periods ended June 30, 2003 and 2002 by region:
13
Washington
Baltimore
North
South
Average Settlement Price (in 000’s)
New Orders:
Backlog:
Three Months Ended June 30, 2003 and 2002
During the second quarter of 2003, homebuilding operations generated revenues of $828,563 compared to revenues of $769,910 in the second quarter of 2002. The increase in revenues was due primarily to a 6.5% increase in the average settlement price in 2003 compared to the average settlement price in 2002. Average prices of homes settled increased primarily due to favorable market conditions which allowed NVR to increase prices in certain markets. New orders increased 13.2% during the second quarter of 2003 compared with new orders generated during the same period in 2002 as a result of favorable market conditions and a 4% increase in total active communities quarter over quarter. Home settlements were relatively flat quarter over quarter as a result of weather related and development delays during the second quarter of 2003 in certain of NVR’s markets.
Gross profit margins in the second quarter of 2003 increased to 24.8% as compared to 23.9% for the second quarter of 2002. The increase in gross margins was due primarily to the aforementioned favorable market conditions, and relatively stable costs for lumber and certain other commodities quarter over quarter.
Selling, general and administrative (“SG&A”) expenses for the second quarter of 2003 increased $2,377 from the second quarter of 2002, but as a percentage of revenues, decreased to 7.3% from 7.5%. The decrease in SG&A costs as a percentage of revenues is primarily attributable to a decrease of approximately $6,600 in incentive compensation largely as a result of the termination of the high performance management incentive compensation plan at December 31, 2002.
Backlog units and dollars were 8,017 and $2,556,321, respectively, at June 30, 2003 compared to 6,729 and $1,956,655, respectively, at June 30, 2002. The increase in backlog units is primarily attributable to a 14% higher beginning backlog balance at January 1, 2003 as compared to January 1, 2002. Additionally, new orders for the six-month period ended June 30, 2003 increased 6.0% as compared to the six-month period ended June 30, 2002. The increase in backlog dollars is attributable to
14
the aforementioned increase in backlog units in addition to a 7.1% increase in the average sales price during the same comparative six-month periods.
Six Months Ended June 30, 2003 and 2002
During the first six months of 2003, homebuilding operations generated revenues of $1,551,938 compared to revenues of $1,444,892 in the first six months of 2002. The increase in revenues was primarily due to a 9.2% increase in the average settlement price in 2003 compared to 2002, offset partially by a 1.7% decrease in the number of homes settled. The increase in the average selling price is primarily attributable to favorable market conditions allowing NVR to increase prices in certain markets. The decrease in the number of units settled is primarily attributable to weather related and development delays in certain of NVR’s markets. New orders increased by 6.0% for the six months ended June 30, 2003 as compared with the six months ended June 30, 2002. The increase in new orders was primarily the result of increased sales in NVR’s markets outside the Washington region. New orders in the Washington region decreased primarily as a result of an 11% decline in the number of active communities for the six-month period ended June 30, 2003 as compared to the same period in 2002.
Gross profit margins for the first six months of 2003 increased to 25.1% compared to 23.9% for the six months ended June 30, 2002. The increase in gross profit margins was due to the aforementioned favorable market conditions, and relatively stable costs for lumber and certain other commodities year over year.
SG&A expenses for the six months ended June 30, 2003 increased $5,919 compared to the same 2002 period, but as a percentage of revenues decreased to 7.2% from 7.3%. The increase in SG&A costs is primarily attributable to an increase in personnel and selling and marketing costs to facilitate continued growth objectives in existing markets. This increase was partially offset by a decrease of approximately $9,000 in incentive compensation largely as a result of the termination of the high performance management incentive compensation plan at December 31, 2002.
Mortgage Banking Segment
Three and Six Months Ended June 30, 2003 and 2002
NVR conducts its mortgage banking activity through NVR Mortgage Finance, Inc. (“NVRM”), a wholly owned subsidiary. NVRM focuses almost exclusively on serving the homebuilding segment’s customer base. Following is a table of financial and statistical data for the three and six months ended June 30, 2003 and 2002:
Loan closing volume:
Total principal
Segment profit:
Mortgage Banking Fees:
Net gain on sale of loans
Title services
Servicing
Gain (loss) on sale of servicing
Loan closing volume for the three months ended June 30, 2003 increased 8% over the same period for 2002. The 2003 increase is attributable to a 6% increase in the average loan amount due to the homebuilding segment’s higher average selling prices, and to a 2% increase in the number of loans closed. Segment profit for the three months ended June 30, 2003 increased approximately $3,100 over
15
2002. The increase is primarily due to an increase in mortgage banking fees attributable to the aforementioned 8% increase in closed loan volume, increased secondary marketing gains, and higher revenues per loan. Secondary marketing gains for the three months ended June 30, 2003 increased approximately $750 over 2002 due to a more favorable pricing environment. Average revenues per loan (including origination fees, ancillary fees and discount points) for 2003 increased by approximately 9% due to the continuing favorable market environment.
Loan closing volume for the six months ended June 30, 2003 also increased 8% over the same period for 2002. The 2003 increase is attributable to a 9% increase in the average loan amount due to the homebuilding segment’s higher average selling prices, offset by a 1% reduction in the number of loans closed. Segment profit for the six months ended June 30, 2003 increased approximately $5,400 over 2002. The increase is primarily due to an increase in mortgage banking fees attributable to the aforementioned 8% increase in closed loan volume, increased secondary marketing gains, and higher revenues per loan. Secondary marketing gains for the six months ended June 30, 2003 increased approximately $1,600 over 2002 due to a more favorable pricing environment. Average revenues per loan (including origination fees, ancillary fees and discount points) for 2003 increased by approximately 14% due to the continuing favorable market environment.
Recent Accounting Pronouncements
NVR does not engage in the land development business. Instead, NVR acquires finished building lots at market prices from various development entities under fixed price purchase agreements that require deposits that may be forfeited if NVR fails to perform under the agreement. The deposits required under the purchase agreements are in the form of cash or letters of credit in varying amounts and represent a percentage, typically ranging from 0% to 10% of the aggregate purchase price of the finished lots.
Application of FIN 46 to NVR
In January 2003, the Financial Accounting Standards Board (“FASB”) issued Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities. FIN 46 requires the primary beneficiary of a variable interest entity to consolidate that entity. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the variable interest entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual, or other financial interests in the entity. Prior to the issuance of FIN 46, an enterprise generally consolidated an entity when the enterprise had a controlling financial interest in the entity through ownership of a majority voting interest. Upon adoption, FIN 46 applied immediately to variable interest entities created after January 31, 2003. Beginning July 1, 2003, FIN 46 will apply to variable interest entities created before February 1, 2003.
Subsequent to January 31, 2003 and through June 30, 2003, NVR entered into fixed price lot purchase agreements with an aggregate exercise price of approximately $411,100, by making or committing to make deposits of approximately $25,100. NVR evaluated these agreements entered into subsequent to January 31, 2003 pursuant to the requirements of FIN 46. NVR determined that it
16
is the primary beneficiary of certain of the variable interest entities with which it has entered into purchase agreements. NVR estimated the current fair value of the land underlying these purchase agreements and consolidated that amount and a related liability. The liabilities represent the difference between the estimated current fair value of the land under contract and NVR’s related deposits. The effect of the consolidation at June 30, 2003 was the inclusion on the balance sheet of $7,804 to Inventory Not Owned Consolidated Per FIN 46 with a corresponding inclusion of $7,375 to Liabilities Related To Inventory Not Owned Per FIN 46. NVR does not have access to the financial records of the development entities with which it enters into fixed price purchase agreements, and as a result was unable to consolidate the variable interest entities’ results of operations or cash flows.
NVR has not yet determined the effect of adopting FIN 46 for its currently unconsolidated partnership interests and fixed price purchase agreements that existed as of January 31, 2003. However, that evaluation may require that NVR consolidate assets, liabilities and results of operations of certain of its unconsolidated partnerships and consolidate the estimated fair value of the land (with the related liability) underlying certain of its fixed price purchase agreements. NVR cannot make any definitive conclusion until it completes its evaluation.
Other Accounting Pronouncements
In April 2003, the FASB issued Statement of Financial Accounting Standard (“FAS”) No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging Activities. FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and for hedging activities under FAS 133, Accounting for Derivative Instruments and Hedging Activities. FAS 149 is effective for contracts entered into or modified after June 30, 2003. NVR is currently evaluating the impact of FAS 149 on its results of operations and financial condition and cannot make any definitive conclusion until it completes its evaluation.
In May 2003, the FASB issued FAS 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity which establishes standards regarding classification and measurement of certain financial instruments with the characteristics of both liabilities and equity. FAS 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. Adoption of FAS 150 will not have a material impact on NVR’s results of operations, cash flows or financial condition.
Liquidity and Capital Resources
On June 17, 2003, NVR completed an offering, at par, for $200,000 of 5% Senior Notes due 2010 (the “Notes”) under a shelf registration statement filed with the Securities and Exchange Commission on January 20, 1998 (the “Shelf”). The Shelf, as declared effective on February 27, 1998, provides that securities may be offered from time to time in one or more series and in the form of senior or subordinated debt. The offering of the Notes resulted in aggregate net proceeds of approximately $199,700, after deducting offering expenses. The Notes mature on June 15, 2010 and bear interest at 5%, payable semi-annually in arrears on June 15 and December 15, commencing on December 15, 2003. The Notes are general unsecured obligations and rank equally in right of payment with all of NVR’s existing and future unsecured senior indebtedness and indebtedness under our existing credit facility. The Notes are senior in right of payment to any future subordinated indebtedness that we may incur. Subsequent to the offering of the Notes, NVR has $55,000 available for issuance under the Shelf.
17
On July 14, 2003, NVR used approximately $120,700 of the proceeds received from the sale of the Notes to redeem all of the $115,000 outstanding 8% Senior Notes due 2005 at a price of 104% of the principal amount outstanding plus accrued interest. The redemption will result in a third quarter pre-tax charge as follows:
NVR’s homebuilding segment generally provides for its working capital cash requirements using cash generated from operations and a short-term unsecured working capital revolving credit facility (the “Facility”). The Facility expires on May 31, 2004. The Facility provides for unsecured borrowings of up to $135,000, subject to certain borrowing base limitations. Up to approximately $40,000 of the Facility is currently available for issuance in the form of letters of credit of which $19,811 was outstanding at June 30, 2003. There were no direct borrowings outstanding under the Facility as of June 30, 2003. At June 30, 2003, borrowing base limitations reduced the amount available to NVR for borrowings to approximately $128,000.
NVR’s mortgage banking segment provides for its mortgage origination and other operating activities using cash generated from operations as well as a short-term credit facility. NVR’s mortgage banking segment has available an annually renewable mortgage warehouse facility with an aggregate available borrowing limit of $175,000 to fund its mortgage origination activities. Management believes that the mortgage warehouse facility will be renewed with terms consistent with the current warehouse facility prior to its expiration on August 30, 2003. There was $107,054 outstanding under this facility at June 30, 2003. At June 30, 2003 borrowing base limitations reduced the amount available to NVR for borrowings to approximately $121,000. NVR’s mortgage banking segment also currently has available an aggregate of $50,000 of borrowing capacity in various uncommitted gestation and repurchase agreements. There was an aggregate of $7,598 outstanding under such gestation and repurchase agreements at June 30, 2003.
In November 2002, the Board of Directors approved the repurchase of up to an aggregate of $150,000 of NVR’s common stock in one or more open market and/or privately negotiated transactions. NVR had fully utilized the November 2002 stock repurchase authorization as of March 31, 2003. In February 2003, the Board of Directors approved the repurchase of up to an additional aggregate of $150,000 of NVR’s common stock in one or more open market and/or privately negotiated transactions. Through August 4, 2003, NVR had repurchased shares of its common stock at an aggregate purchase price of approximately $71,700 pursuant to the February 2003 repurchase authorization. In aggregate, NVR repurchased approximately 355,000 shares of its common stock at an aggregate purchase price of $115,452 during the six months ended June 30, 2003. NVR may, from time to time, repurchase additional shares of its common stock, pursuant to repurchase authorizations by the Board of Directors and subject to the restrictions contained within NVR’s debt agreements.
Management believes that internally generated cash and borrowings available under credit facilities will be sufficient to satisfy near and long term cash requirements for working capital in both its homebuilding and mortgage banking operations.
Critical Accounting Policies
The following significant change has been made to NVR’s critical accounting policies subsequent to the disclosure of critical accounting policies in NVR’s Annual Report on Form 10-K for the year ended December 31, 2002:
18
As noted above, in January 2003, the FASB issued FIN 46, Consolidation of Variable Interest Entities. FIN 46 requires the primary beneficiary of a variable interest entity to consolidate that entity. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the variable interest entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual, or other financial interests in the entity. The methodology used to evaluate whether NVR is the primary beneficiary of a variable interest entity requires substantial management judgment and estimates. These judgments and estimates involve assigning probabilities to various estimated cash flow possibilities relative to the variable interest entity’s expected profits and losses and the cash flows associated with changes in the fair value of finished lots under contract. The estimates used by management to assess probabilities of various cash flows must be considered in the context that NVR is not in the land development business, does not possess any in-house expertise relative to the land development business, and that NVR does not have access to the books and records of any of the development entities evaluated as a variable interest entity. Although management believes that its accounting policy is designed to properly assess NVR’s primary beneficiary status relative to its involvement with variable interest entities, changes to the probabilities and the cash flow possibilities used in NVR’s evaluation could produce different conclusions regarding NVR’s status or non-status as a variable interest entity’s primary beneficiary. Subsequent to January 31, 2003 through June 30, 2003, NVR entered into fixed price lot purchase agreements with an aggregate exercise price of approximately $411,100, of which NVR consolidated $7,804 at June 30, 2003.
As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of NVR’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of NVR’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective. There have been no significant changes in NVR’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation.
19
Votes
For
Not
Voted
1. Election of three directors to serve three year terms:
J. Carter Bacot
C. Scott Bartlett, Jr.
William A. Moran
2. Ratification of appointment of KPMG LLP as independent auditors for NVR
Form 8-K filed on April 18, 2003 reporting the issuance of a press release reporting the financial results for the quarter ended March 31, 2003.
Form 8-K filed on June 17, 2003 reporting the Third Supplemental Indenture to the Indenture dated April 14, 1998, by and between NVR, Inc. and U.S. Bank Trust National Association.
Form 8-K filed on June 18, 2003 reporting the sale of $200,000,000 aggregate principal amount of its 5% Senior Notes (“Notes”) due 2010. The Form 8-K included the following exhibits: (a) Underwriting Agreement dated June 12, 2003, between NVR, Inc. and Credit Suisse First Boston LLC; (b) Fourth Supplemental Indenture between NVR, Inc. and U.S. Bank Trust National Association, as trustee, including the form of global note evidencing the Notes; (c) Opinion of Hogan & Hartson L.L.P. regarding the legality of the Notes; (d) Statement of Computation of Ratios of Earnings to Combined Fixed Charges; and (e) Consent of Hogan & Hartson L.L.P.
20
Exhibit Index
Description
21
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
August 7, 2003
/s/ Paul C. Saville
Paul C. Saville
Executive Vice President, Chief FinancialOfficer and Treasurer
22