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NVR > SEC Filings for NVR > Form 10-Q on 2-May-2014All Recent SEC Filings

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Form 10-Q for NVR INC


2-May-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

(dollars in thousands)

Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases or 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, as amended. 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 comparable terminology. All statements other than of historical facts are forward-looking statements. Forward-looking statements contained in this document may include those regarding market trends, NVR's financial position, business strategy, the outcome of pending litigation, investigations or similar contingencies, projected plans and objectives of management for future operations. 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 future results, performance or achievements expressed or implied by the forward-looking statements. Such risk factors include, but are not limited to the following: general economic and business conditions (on both a national and regional level); interest rate changes; access to suitable financing by NVR and NVR's customers; increased regulation in the mortgage banking industry; the ability of our mortgage banking subsidiary to sell loans it originates into the secondary market; 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 moratoriums; governmental regulation; fluctuation and volatility of stock and other financial markets; mortgage financing availability; and other factors over which NVR has little or no control. NVR undertakes no obligation to update such forward-looking statements except as required by law. For additional information regarding risk factors, see Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of NVR's Form 10-K for the fiscal year ended December 31, 2013.

Unless the context otherwise requires, references to "NVR," "we," "us," or "our" include NVR and its consolidated subsidiaries.

Results of Operations for the Three Months Ended March 31, 2014 and 2013

Overview

Business

Our primary business is the construction and sale of single-family detached homes, townhomes and condominium buildings, all of which are primarily constructed on a pre-sold basis. To fully serve customers of our homebuilding operations, we also operate a mortgage banking and title services business. We primarily conduct our operations in mature markets. Additionally, we generally grow our business through market share gains in our existing markets and by expanding into markets contiguous to our current active markets. Our four homebuilding reportable segments consist of the following regions:

 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

Our lot acquisition strategy is predicated upon avoiding the financial requirements and risks associated with direct land ownership and development. Historically, we generally have not engaged in land development to obtain finished lots for use in our homebuilding operations. Instead, we typically have acquired finished lots


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at market prices from various third party land developers pursuant to fixed price purchase agreements. These purchase agreements require deposits, typically ranging up to 10% of the aggregate purchase price of the finished lots, in the form of cash or letters of credit that may be forfeited if we fail to perform under the purchase agreement. This strategy has allowed us to maximize inventory turnover, which we believe enables us to minimize market risk and to operate with less capital, thereby enhancing rates of return on equity and total capital.

Our continued success is contingent upon our ability to control an adequate supply of finished lots on which to build, and on our developers' ability to timely deliver finished lots to meet the sales demands of our customers. However, during the past several years, the impact of economic conditions on the homebuilding industry negatively impacted our developers' ability to obtain acquisition and development financing or to raise equity investments to finance land development activity. As a result, in certain specific strategic circumstances we deviated from our historical lot acquisition strategy and engaged in joint venture arrangements with land developers or directly acquired raw ground already zoned for its intended use for development. Once we acquire control of any raw ground, we determine whether to sell the raw parcel to a developer and enter into a fixed price purchase agreement with the developer to purchase the finished lots, or whether we will hire a developer to develop the land on our behalf. While joint venture arrangements and direct land development activity are not our preferred method of acquiring finished building lots, we may enter into additional transactions in the future on a limited basis where there exists a compelling strategic or prudent financial reason to do so. We expect, however, to continue to acquire substantially all our finished lot inventory using fixed price purchase agreements with forfeitable deposits.

As of March 31, 2014, we controlled approximately 59,400 lots under purchase agreements with deposits in cash and letters of credit totaling approximately $303,900 and $2,400, respectively. Included in the number of controlled lots are approximately 8,300 lots for which we have recorded a contract land deposit impairment reserve of approximately $57,700 as of March 31, 2014. In addition, we controlled approximately 5,800 lots through four joint venture limited liability corporations ("JVs") with an aggregate investment of approximately $86,300. Further, as of March 31, 2014, we directly owned five separate raw parcels of land, zoned for their intended use, with a current cost basis, including development costs, of approximately $46,100 that once fully developed will result in approximately 650 lots. Of the total finished lots expected to be developed, 125 lots are under contract to be sold to an unrelated party under lot purchase agreements. See Notes 2, 3 and 4 to the condensed consolidated financial statements included herein for additional information regarding fixed price purchase agreements, JVs and land under development, respectively.

In addition to constructing homes primarily on a pre-sold basis and utilizing what we believe is a conservative lot acquisition strategy, we focus on obtaining and maintaining a leading market position in each market we serve. This strategy allows us to gain valuable efficiencies and competitive advantages in our markets, which we believe contributes to minimizing the adverse effects of regional economic cycles and provides growth opportunities within these markets.

Current Business Environment and Key Financial Results

As disclosed at December 31, 2013, during the second half of 2013, housing demand was negatively impacted by a rapid increase in mortgage interest rates, higher home prices and buyer uncertainty attributable to a decline in affordability. This trend continued into the first quarter of 2014 as homebuyers continue to adjust to the current mortgage interest rate environment and reduced affordability levels. The housing market continues to face challenges from tight mortgage underwriting standards.

Our consolidated revenues for the first quarter of 2014 totaled $811,310, a 5% increase from the first quarter of 2013. Our net income and diluted earnings per share in the current quarter were $23,849 and $5.16, respectively, decreases of 32% and 25%, respectively, compared to the first quarter of 2013. Net income and diluted earnings per share were negatively impacted by an approximate $10,200 decrease in pre-tax mortgage banking income, an approximate $12,200 increase in our homebuilding selling, general and administrative ("SG&A") expenses and an approximate $6,900 charge to income tax expense due to the reversal of certain


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previously recognized tax deductions. We expect our full year effective tax rate for 2014 to be consistent with our recent historical range. Our gross profit margin within our homebuilding business increased to 18.0% in the first quarter of 2014 compared to 16.9% in the first quarter of 2013. Our new orders, net of cancellations ("New Orders") decreased 5% compared to the first quarter of 2013, while the average sales price for New Orders increased 7% quarter over quarter.

While our gross profit margin improved from year ago levels, we continue to face gross margin pressure due to increasing land and construction costs. In addition, the mortgage banking industry has become more competitive as interest rates have increased, resulting in reduced loan profitability. We believe that a continuation of the housing market recovery which began in 2012 is dependent upon a sustained overall economic recovery, driven by continued improvement in unemployment and consumer confidence levels. Due to the strength of our balance sheet, we believe that we are well positioned to take advantage of opportunities that may arise from future economic and homebuilding market volatility.

Homebuilding Operations

The following table summarizes the results of operations and other data for the
consolidated homebuilding operations:



                                                         Three Months Ended
                                                             March 31,
                                                        2014           2013
       Revenues                                       $ 799,187      $ 750,868
       Cost of sales                                  $ 655,152      $ 624,085
       Gross profit margin percentage                      18.0 %         16.9 %
       Selling, general and administrative expenses   $  90,632      $  78,413
       Settlements (units)                                2,211          2,272
       Average settlement price                       $   361.4      $   330.4
       New orders (units)                                 3,325          3,510
       Average new order price                        $   368.1      $   343.0
       Backlog (units)                                    6,059          6,217
       Average backlog price                          $   374.7      $   350.6
       New order cancellation rate                         11.5 %         13.2 %

Consolidated Homebuilding - Three Months Ended March 31, 2014 and 2013

Homebuilding revenues increased 6% for the first quarter of 2014 from the same period in 2013 primarily as a result of a 9% increase in the average settlement price quarter over quarter, partially offset by a 3% decrease in the number of homes settled in the current year's first quarter. The increase in the average settlement price was primarily attributable to the average price of homes in backlog being approximately 8% higher entering the first quarter of 2014 compared to the same period in 2013. The higher average price of homes in backlog entering 2014 was attributable to the improved market conditions experienced in 2013. The number of homes settled decreased primarily due to a slight decrease in the backlog turnover rate quarter over quarter.

Gross profit margins in the quarter ended March 31, 2014 increased 114 basis points compared to the first quarter of 2013 due primarily to our average settlement prices increasing at a higher rate than material and lot costs have increased quarter over quarter.


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The number of New Orders decreased 5% in first quarter of 2014 when compared to the first quarter of 2013, while the average sales price of New Orders increased 7% quarter over quarter. New Orders were lower despite a 10% increase in the average number of active communities quarter over quarter due to lower absorption levels in each of our market segments. The increase in the average sales price of New Orders is attributable to the favorable market conditions in 2013 which led to increasing prices entering 2014. In addition, average sales prices were favorably impacted by a relative shift in New Orders to our Mid-Atlantic and North East market segments from our South East market segment.

SG&A expenses in the first quarter of 2014 increased approximately $12,200, or 16%, compared to the first quarter of 2013 and increased as a percentage of revenue to 11.3% from 10.4% quarter over quarter. SG&A dollars increased primarily due to an approximate $6,900 increase in personnel costs and an approximate $3,800 increase in sales and marketing costs quarter over quarter due to the 10% increase in the average number of active communities in the current year quarter.

Backlog units and dollars were 6,059 units and $2,270,474, respectively, as of March 31, 2014 compared to 6,217 units and $2,179,566, respectively, as of March 31, 2013. The decrease in backlog units was primarily attributable to the aforementioned decrease in New Orders in the first quarter of 2014 compared to the first quarter of 2013. Backlog dollars were favorably impacted by a 9% higher average price of New Orders for the six-month period ended March 31, 2014 compared to the six-month period ended March 31, 2013.

Backlog, which represents homes sold but not yet settled with the customer, may be impacted by customer cancellations for various reasons that are beyond our control, such as failure to obtain mortgage financing, inability to sell an existing home, job loss, or a variety of other reasons. In any period, a portion of the cancellations that we experience are related to new sales that occurred during the same period, and a portion are related to sales that occurred in prior periods and therefore appeared in the opening backlog for the current period. Expressed as the total of all cancellations during the period as a percentage of gross sales during the period, our cancellation rate was approximately 12% and 13% in the first quarters of 2014 and 2013, respectively. During the most recent four quarters, approximately 5% of a reporting quarter's opening backlog cancelled during the fiscal quarter. We can provide no assurance that our historical cancellation rates are indicative of the actual cancellation rate that may occur during the remainder of 2014 or future years.

The backlog turnover rate is impacted by various factors, including, but not limited to, changes in New Order activity, internal production capacity, external subcontractor capacity and other external factors over which we do not exercise control.

Reportable Segments

Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, SG&A expenses, and a corporate capital allocation charge determined at the corporate headquarters. The corporate capital allocation charge eliminates in consolidation, is based on the segment's average net assets employed, and is charged using a consistent methodology in the periods presented. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker to determine whether the operating segment's results are providing the desired rate of return after covering our cost of capital. We record charges on contract land deposits when we determine that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are generally charged to the operating segment upon the determination to terminate a finished lot purchase agreement with the developer or to restructure a lot purchase agreement resulting in the forfeiture of the deposit. We evaluate our entire net contract land deposit portfolio for impairment each quarter. For additional information regarding our contract land deposit impairment analysis, see the Critical Accounting Policies section within this Management Discussion and Analysis. For presentation purposes below, the contract land deposit reserve at March 31, 2014 and 2013 has been allocated to the respective year's reportable segments to show contract land deposits on a net basis. The net contract land deposit balances below also include approximately $2,400 and $2,900 at March 31, 2014 and 2013, respectively, of letters of credit issued as deposits in lieu of cash. The following tables summarize certain homebuilding operating activity by reportable segment for the three months ended March 31, 2014 and 2013:


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Selected Segment Financial Data:



                                         Three Months Ended
                                             March 31,
                                        2014           2013
                       Revenues:
                       Mid Atlantic   $ 465,030      $ 431,868
                       North East     $  78,792      $  62,611
                       Mid East       $ 150,648      $ 170,756
                       South East     $ 104,717      $  85,633

                       Gross profit margin:
                       Mid Atlantic   $  89,286      $  77,280
                       North East     $  14,308      $  10,380
                       Mid East       $  20,849      $  21,054
                       South East     $  18,947      $  13,013

                       Segment profit (loss):
                       Mid Atlantic   $  41,012      $  36,539
                       North East     $   6,306      $   3,686
                       Mid East       $    (249 )    $   1,823
                       South East     $   8,046      $   3,647

                       Gross profit margin percentage:
                       Mid Atlantic        19.2 %         17.9 %
                       North East          18.2 %         16.6 %
                       Mid East            13.8 %         12.3 %
                       South East          18.1 %         15.2 %

Operating Activity:



                                        Three Months Ended March 31,
                                  2014        2013        2014        2013
                                        Units               Average Price
                  Settlements:
                  Mid Atlantic     1,124       1,138     $ 413.7     $ 379.4
                  North East         233         191     $ 338.2     $ 327.8
                  Mid East           478         593     $ 315.1     $ 287.9
                  South East         376         350     $ 278.4     $ 244.7

                  Total            2,211       2,272     $ 361.4     $ 330.4

                  New orders, net of cancellations:
                  Mid Atlantic     1,675       1,716     $ 428.8     $ 399.2
                  North East         298         293     $ 346.3     $ 322.2
                  Mid East           891         949     $ 312.0     $ 301.3
                  South East         461         552     $ 269.7     $ 251.4

                  Total            3,325       3,510     $ 368.1     $ 343.0


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                                        Three Months Ended March 31,
                                  2014        2013        2014        2013
                                        Units               Average Price
                  Backlog:
                  Mid Atlantic     3,261       3,261     $ 429.0     $ 402.0
                  North East         560         535     $ 349.0     $ 326.8
                  Mid East         1,445       1,508     $ 318.9     $ 305.5
                  South East         793         913     $ 271.5     $ 255.5

                  Total            6,059       6,217     $ 374.7     $ 350.6

                                                Three Months Ended
                                                     March 31,
                                                2014            2013
               New order cancellation rate:
               Mid Atlantic                        11.0 %        14.2 %
               North East                          13.4 %        11.7 %
               Mid East                             9.6 %        11.5 %
               South East                          15.9 %        13.6 %

               Average active communities:
               Mid Atlantic                         242           205
               North East                            44            37
               Mid East                             125           129
               South East                            70            64

               Total                                481           435

Homebuilding Inventory:



                                              As of March 31,
                                             2014           2013
                   Sold inventory:
                   Mid Atlantic          $    450,786     $ 419,847
                   North East                  55,671        52,080
                   Mid East                   118,267       118,027
                   South East                  56,872        56,589

                   Total (1)             $    681,596     $ 646,543

                   Unsold lots and housing units inventory:
                   Mid Atlantic          $     73,560     $  46,873
                   North East                   3,874         3,403
                   Mid East                    10,316        14,785
                   South East                   9,599         9,970

                   Total (1)             $     97,349     $  75,031

(1) The reconciling items between segment inventory and consolidated inventory include certain consolidation adjustments 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 our operating segment.


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                                                      Three Months Ended
                                                           March 31,
                                                      2014           2013
           Sold and Unsold inventory impairments:
           Mid Atlantic                             $      97       $    -
           North East                                       1            16
           Mid East                                        78            -
           South East                                      -             -

           Total                                    $     176       $    16

Lots Controlled and Land Deposits:



                                                   As of March 31,
                                                 2014          2013
                Total lots controlled:
                Mid Atlantic                      32,800        32,300
                North East                         5,800         4,800
                Mid East                          16,900        15,400
                South East                        10,300         7,200

                Total                             65,800        59,700

                Lots included in impairment reserve:
                Mid Atlantic                       3,894         4,769
                North East                           813           887
                Mid East                           2,331         2,436
                South East                         1,238         1,465

                Total                              8,276         9,557

                Contract land deposits, net:
                Mid Atlantic                   $ 161,335     $ 133,491
                North East                        18,976        13,369
                Mid East                          38,816        32,627
                South East                        29,506        16,623

                Total                          $ 248,633     $ 196,110

                                                             Three Months Ended March 31,
                                                           2014                      2013
Contract land deposit impairments (recoveries):
Mid Atlantic                                           $         -              $           (55 )
North East                                                        2                          -
Mid East                                                         11                          50
South East                                                       36                          -

Total                                                  $         49             $            (5 )


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Mid Atlantic

Three Months Ended March 31, 2014 and 2013

The Mid Atlantic segment had an approximate $4,500, or 12%, increase in segment profit in the first quarter of 2014 compared to the first quarter of 2013. The increase in segment profit was driven by an increase of approximately $33,200, or 8%, in revenues quarter over quarter due primarily to a 9% increase in the average settlement price. The increase in the average settlement price was favorably impacted by a 7% higher average price of homes in backlog entering 2014 compared to the same period in 2013. The Mid Atlantic segment's gross profit margin percentage increased to 19.2% in 2014 from 17.9% in 2013, due primarily to our average settlement prices increasing at a higher rate than lot and certain material costs have increased quarter over quarter.

Segment New Orders decreased 2%, while the average selling price increased 7% in the first quarter of 2014 from the same period in 2013. New Orders were lower despite an 18% increase in the average number of active communities in the first quarter of 2014 compared to the same period in 2013 due to lower absorption levels attributable to lower traffic levels quarter over quarter. The increase in the average sales price of New Orders is attributable to the favorable market conditions in 2013, which led to higher average sales prices entering 2014.

North East

Three Months Ended March 31, 2014 and 2013

. . .

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