<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission file number 1-12378
NVR, Inc.
-------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Virginia 54-1394360
- ------------------------------- -------------------------------
(State or other jurisdiction of (IRS employer identification
incorporation or organization) number)
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 ___
---
As of July 19, 1999 there were 10,129,415 total shares of common stock
outstanding.
1
<PAGE>
<TABLE>
<CAPTION>
NVR, Inc.
FORM 10-Q
INDEX
====================================================================================
Page
----
<S> <C>
PART I FINANCIAL INFORMATION
------
Item 1. NVR, Inc. Condensed Consolidated Financial Statements
-----------------------------------------------------
Condensed Consolidated Balance Sheets at June 30, 1999
(unaudited) and December 31, 1998 ................................ 3
Condensed Consolidated Statements of Income for the
Three Months Ended June 30, 1999 (unaudited)
and June 30, 1998 (unaudited) and the
Six Months Ended June 30, 1999 (unaudited)
and June 30, 1998 (unaudited)..................................... 5
Condensed Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1999 (unaudited) and
June 30, 1998 (unaudited)......................................... 6
Notes to Condensed Consolidated Financial Statements.............. 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................... 10
PART II OTHER INFORMATION
-------
Item 1. Legal Proceeding.................................................. 16
Item 4. Submission of Matters to a Vote of Security Holders............... 17
Item 6. Exhibits and Reports on Form 8-K.................................. 17
Exhibit Index..................................................... 17
Signature......................................................... 18
</TABLE>
2
<PAGE>
PART I
------
Item 1.
- -------
NVR, Inc.
Condensed Consolidated Balance Sheets
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, 1999 December 31,
ASSETS (unaudited) 1998
------------ -------------
<S> <C> <C>
Homebuilding:
Cash and cash equivalents $ 78,192 $ 59,118
Receivables 7,222 1,515
Inventory:
Lots and housing units, covered under
sales agreements with customers 277,483 236,447
Unsold lots and housing units 32,835 45,478
Manufacturing materials and other 4,483 6,713
------------ -------------
314,801 288,638
Property, plant and equipment, net 11,989 16,663
Reorganization value in excess of amounts
allocable to identifiable assets, net 56,981 60,062
Goodwill, net 9,113 9,659
Contract land deposits 47,332 40,699
Other assets 40,836 41,301
------------ -------------
566,466 517,655
------------ -------------
Mortgage Banking:
Cash and cash equivalents 16,091 9,386
Mortgage loans held for sale, net 223,883 178,695
Mortgage servicing rights, net 3,142 3,680
Property and equipment, net 2,550 934
Reorganization value in excess of amounts
allocable to identifiable assets, net 10,067 10,611
Goodwill, net 3,185 -
Other assets 8,626 3,398
------------ -------------
267,544 206,704
------------ -------------
Total assets $ 834,010 $ 724,359
============ ===========
</TABLE>
See notes to condensed consolidated financial statements.
(Continued)
3
<PAGE>
NVR, Inc.
Condensed Consolidated Balance Sheets (Continued)
(dollars in thousands, except per share data)
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
------------- -----------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS'
EQUITY
Homebuilding:
Accounts payable $ 97,890 $ 88,272
Accrued expenses and other liabilities 114,730 103,683
Customer deposits 47,935 34,639
Notes payable 3,802 4,054
Other term debt 5,327 5,434
Senior notes 145,000 145,000
------------ -------------
414,684 381,082
------------ -------------
Mortgage Banking:
Accounts payable and other liabilities 26,147 11,709
Notes payable 196,937 165,849
------------ -------------
223,084 177,558
------------ -------------
Total liabilities 637,768 558,640
------------ -------------
Commitments and contingencies
Shareholders' equity:
Common stock, $0.01 par value; 60,000,000
shares authorized; 20,606,189 and 20,190,971
shares issued as of June 30, 1999 and
December 31, 1998, respectively 203 202
Paid-in-capital 185,740 174,173
Retained earnings 186,953 132,683
Less treasury stock at cost; 10,306,474
and 9,805,132 shares at June 30, 1999
and December 31, 1998, respectively (176,654) (141,339)
------------ -------------
Total shareholders' equity 196,242 165,719
------------ -------------
Total liabilities and shareholders'
equity $ 834,010 $ 724,359
============ =============
</TABLE>
See notes to condensed consolidated financial statements.
4
<PAGE>
NVR, Inc.
Condensed Consolidated Statements of Income
(dollars in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
------------------------------ -------------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Homebuilding:
Revenues $ 492,058 $ 385,738 $ 921,745 $ 677,285
Other income 433 1,010 922 1,165
Cost of sales (408,167) (325,846) (764,711) (573,802)
Selling, general and administrative (34,169) (29,284) (62,392) (49,249)
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets and goodwill (1,814) (1,887) (3,627) (3,773)
----------- ----------- ----------- -----------
Operating income 48,341 29,731 91,937 51,626
Interest expense (3,359) (5,486) (6,740) (9,639)
----------- ----------- ----------- -----------
Homebuilding income 44,982 24,245 85,197 41,987
----------- ----------- ----------- -----------
Mortgage Banking:
Mortgage banking fees 12,465 10,684 25,987 18,371
Interest income 3,822 2,300 6,573 4,155
Other income 163 122 257 344
General and administrative (9,192) (6,681) (18,514) (12,264)
Amortization of reorganization value
in excess of amounts allocable to
identifiable assets and goodwill (412) (272) (772) (544)
Interest expense (2,345) (1,634) (4,016) (3,125)
----------- ----------- ----------- -----------
Operating income 4,501 4,519 9,515 6,937
Total segment income 49,483 28,764 94,712 48,924
Income tax expense (21,220) (13,269) (40,442) (22,569)
----------- ----------- ----------- -----------
Income Before Extraordinary Item 28,263 15,495 54,270 26,355
Extraordinary loss from extinguishment
of indebtedness (net of a $4,220 tax
benefit for the three and six months
ended June 30, 1998) - (6,743) - (6,743)
----------- ---------- ----------- ----------
Net Income $ 28,263 $ 8,752 $ 54,270 $ 19,612
=========== =========== =========== ===========
Basic Earnings per Share:
Income before extraordinary loss $ 2.66 $ 1.36 $ 5.04 $ 2.32
Extraordinary loss - (0.59) - (0.59)
----------- ----------- ----------- -----------
Basic earnings per share $ 2.66 $ 0.77 $ 5.04 $ 1.73
=========== =========== =========== ===========
Diluted Earnings per Share:
Income before extraordinary loss $ 2.26 $ 1.15 $ 4.28 $ 1.96
Extraordinary loss - (0.50) - (0.50)
----------- ----------- ----------- -----------
Diluted earnings per share $ 2.26 $ 0.65 $ 4.28 $ 1.46
=========== =========== =========== ===========
</TABLE>
See notes to condensed consolidated financial statements.
5
<PAGE>
NVR, Inc.
Condensed Consolidated Statements of Cash Flows
(dollars in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------------
1999 1998
--------------- ---------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 54,270 $ 19,612
Adjustments to reconcile net income to
net cash provided (used) by operating activities:
Depreciation and amortization 6,753 6,799
Pre-tax extraordinary loss-extinguishment of indebtedness - 10,963
Mortgage loans closed (1,649,180) (1,237,123)
Proceeds from sales of mortgage loans 1,676,426 1,172,047
Gain on sale of mortgage servicing rights (1,473) (244)
Gain on sale of loans (18,912) (13,380)
Net change in assets and liabilities:
Increase in inventories (26,163) (50,696)
Increase in receivables (7,591) (2,459)
Increase in accounts payable, customer deposits and
accrued expenses 55,445 35,141
Other, net 4,738 (3,259)
--------------- ---------------
Net cash provided (used) by operating activities 94,313 (62,599)
--------------- ---------------
Cash flows from investing activities:
Proceeds from sales of mortgage-backed securities - 474
Business acquisition, net of cash acquired (3,697) -
Purchase of property, plant and equipment (3,720) (1,239)
Principal payments on mortgage-backed securities 1,884 2,981
Proceeds from sales of mortgage servicing rights 18,204 8,570
Other, net 4,151 (673)
--------------- ---------------
Net cash provided by investing activities 16,822 10,113
--------------- ---------------
Cash flows from financing activities:
Redemption of mortgage bonds (713) (1,842)
Extinguishment of 11% Senior Notes - (120,235)
Deferred financing fees - (2,233)
Issuance of 8% Senior Notes - 145,000
Net (repayments) borrowings under notes payable (45,357) 66,032
Purchases of treasury stock (40,616) (7,495)
Other, net 1,330 274
--------------- ---------------
Net cash provided (used) by financing activities (85,356) 79,501
--------------- ---------------
Net increase in cash 25,779 27,015
Cash, beginning of the period 68,504 45,725
--------------- ---------------
Cash, end of period $ 94,283 $ 72,740
=============== ===============
Supplemental disclosures of cash flow information:
Interest paid during the period $ 10,602 $ 17,799
=============== ===============
Income taxes paid, net of refunds $ 30,829 $ 12,604
=============== ===============
</TABLE>
See notes to condensed consolidated financial statements.
6
<PAGE>
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
1. Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements
include the accounts of NVR, Inc. and its subsidiaries ("NVR" or the "Company").
Intercompany accounts and transactions have been eliminated in consolidation.
The statements have been prepared in accordance with generally accepted
accounting principles 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 generally accepted accounting
principles for complete financial statements. Because the accompanying condensed
consolidated financial statements do not include all of the information and
footnotes required by generally accepted accounting principles, they should be
read in conjunction with the financial statements and notes thereto included in
the Company's 1998 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, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999.
For the quarters and six-month periods ended June 30, 1999 and 1998,
comprehensive income equaled net income, therefore, a separate statement of
comprehensive income is not included in the accompanying financial statements.
2. Shareholders' Equity
A summary of changes in shareholders' equity is presented below:
<TABLE>
<CAPTION>
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balance, December 31, 1998 $ 202 $ 174,173 $ 132,683 $ (141,339)
Net income - - 54,270 -
Tax benefit from stock-based
compensation activity - 6,986 - -
Option activity 1 1,329 - -
Treasury stock purchases - - - (40,616)
Performance share activity - 3,252 - 5,301
---------- ---------- ---------- ----------
Balance, June 30, 1999 $ 203 $ 185,740 $ 186,953 $ (176,654)
========== =========== ========== ==========
</TABLE>
Approximately 365,000 shares were reissued from the treasury during January
1999 in satisfaction of benefits earned and expensed in 1998 under an equity-
based employee benefit plan. The average cost basis for the shares reissued from
the treasury was $14.52 per share. In addition, 467,565 options were exercised
during the first six months of 1999, with NVR realizing approximately $1,330 in
aggregate equity proceeds for these option exercises.
3. Business Acquisition
On March 4, 1999, NVR Mortgage Acquisition, Inc. ("NVRMA"), a wholly owned
subsidiary of NVR Mortgage Finance, Inc. ("NVR Finance"), NVR's wholly owned
mortgage banking subsidiary, purchased all of the outstanding capital stock of
First Republic Mortgage Corporation ("First Republic") for approximately $5,300
in cash. First Republic, based in Rockville, Maryland is a leading mortgage
7
<PAGE>
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
lender in the Baltimore and Washington Metropolitan area. NVRMA accounted for
this acquisition using the purchase method, and the operations of the acquired
business have been included in NVR's consolidated financial statements for the
first six months of 1999 beginning on the date of the acquisition. Goodwill of
approximately $3,300 that was generated pursuant to the purchase transaction
will be amortized using the straight-line method over 5 years.
4. Debt
In January 1999, NVR Finance amended its mortgage warehouse facility to
increase the available borrowing limit to $203,000, of which $178,000 is
committed. In June 1999, the facility was extended to expire on September 30,
1999. The other terms and conditions are substantially the same as those in
effect at December 31, 1998. The Company is currently finalizing the terms of a
new annually renewable facility and expects that the new facility will be in
place prior to the expiration of the existing facility.
5. Segment Disclosures
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.
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1999
- --------------------------------------
Homebuilding Mortgage Banking Totals
-------------- ---------------- -------------
<S> <C> <C> <C>
Revenues from external customers $ 921,745 $ 25,987 $ 947,732 (a)
Segment profit 88,824 10,287 99,111 (b)
Segment assets 500,372 254,292 754,664 (b)
</TABLE>
(a) Total amounts for the reportable segments equal the respective amounts for
the consolidated enterprise.
(b) The following reconciles segment profit and segment assets to the
respective amounts for the consolidated enterprise:
<TABLE>
<S> <C> <C> <C>
Segment profit $ 88,824 $ 10,287 $ 99,111
Less: amortization of excess
reorganization value and goodwill (3,627) (772) (4,399)
-------------- -------------- -------------
Consolidated income before income
taxes $ 85,197 $ 9,515 $ 94,712
============== ============== =============
Segment assets $ 500,372 $ 254,292 $ 754,664
Add: Excess reorganization value
and goodwill 66,094 13,252 79,346
-------------- -------------- -------------
Total consolidated assets $ 566,466 $ 267,544 $ 834,010
============== ============== =============
</TABLE>
8
<PAGE>
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars in thousands, except share data)
<TABLE>
<CAPTION>
For the Six Months Ended June 30, 1998
- --------------------------------------
Homebuilding Mortgage Banking Totals
-------------- ---------------- -------------
<S> <C> <C> <C>
Revenues from external customers $ 677,285 $ 18,371 $ 695,656 (c)
Segment profit 45,760 7,481 53,241 (d)
Segment assets 420,347 203,643 623,990 (d)
</TABLE>
(c) Total amounts for the reportable segments equal the respective amounts for
the consolidated enterprise.
(d) The following reconciles segment profit and segment assets to the
respective amounts for the consolidated enterprise:
<TABLE>
<S> <C> <C> <C>
Segment profit $ 45,760 $ 7,481 $ 53,241
Less: amortization of excess
reorganization value and goodwill (3,773) (544) (4,317)
-------------- -------------- -------------
Consolidated income before income
taxes and extraordinary loss $ 41,987 $ 6,937 $ 48,924
============== ============== =============
Segment assets $ 420,347 $ 203,643 $ 623,990
Add: Excess reorganization value
and goodwill 76,345 11,155 87,500
-------------- -------------- -------------
Total consolidated assets $ 496,692 $ 214,798 $ 711,490
============== ============== =============
</TABLE>
6. Stock Option Plan
During the second quarter of 1999, the Company's Shareholders approved the
Board of Directors' adoption of the 1998 Management Long-Term Stock Option Plan
(the "Stock Option Plan") and the 1998 Directors' Long-Term Stock Option Plan
(the "Directors' Plan").
Under the Stock Option Plan, awards of non-qualified stock options
("Options") to purchase 1,000,000 Shares of the Company's common stock
("Shares") may be granted to executive officers and other key management
personnel. Each Option will be granted for a period of ten (10) years from the
date of grant. As of June 30, 1999, 931,000 Options have been granted under the
Stock Option Plan. The exercise price was equal to the fair market value of the
Company's Shares on the date of grant. The Options granted will vest as to
thirty-three and one-third percent (33 1/3 %) of the underlying Shares on each
of December 31, 2003, 2004, and 2005, with vesting based upon continued
employment.
Also as of June 30, 1999, 87,500 Options authorized under the Directors'
Plan were granted to the Company's outside directors at an exercise price equal
to the fair market value of the Company's Shares on the date of grant, leaving
62,500 options available for future grants. The Options were granted for a ten
(10) year period beginning from the date of grant, and vest as to twenty-five
percent (25%) of the underlying Shares on each of December 31, 2002, 2003, 2004
and 2005.
9
<PAGE>
Item 2.
- -------
Management's Discussion and Analysis of
Financial Condition and Results of Operations
(dollars in thousands, except per share amounts)
Forward-Looking Statements
Some of the statements in this Form 10-Q, as well as statements made by the
Company in periodic press releases, constitute "forward-looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1995.
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, the Company's financial position, business strategy, projected plans,
objectives of management for future operations and certain statements regarding
the Company's Year 2000 readiness, 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 the Company 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 regional and national level), interest rate changes, competition, the
availability and cost of land and other raw materials used by the Company in its
homebuilding operations, shortages of labor, weather related slow downs,
building moratoria, governmental regulation, the ability of the Company to
integrate any acquired business, technological problems encountered with Year
2000 issues, certain conditions in financial markets and other factors over
which the Company has little or no control.
Results of Operations for the Three and Six Months Ended June 30, 1999 and 1998
NVR, Inc. ("NVR" or the "Company") 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.
Homebuilding Segment
Three Months Ended June 30, 1999 and 1998
During the second quarter of 1999, homebuilding operations generated
revenues of $492,058 compared to revenues of $385,738 in the second quarter of
1998. The change in revenues is primarily due to a 21.5% increase in the number
of homes settled from 1,995 in 1998 to 2,424 in 1999 and to a 5.2% increase in
the average settlement price from $192.2 in 1998 to $202.1 in 1999. The increase
in settlements is a direct result of the substantially higher backlog at the
beginning of the 1999 quarter as compared to the beginning of the same 1998
quarter. The increase in the average settlement price is attributable to single
family detached units representing a larger percentage of the total units
settled in the current period as compared to the prior year period, and to price
increases in certain of the Company's markets. New orders of 2,855 during the
second quarter of 1999 were 12.7% higher than the 2,533 new orders generated
during the prior 1998 period. The increase in new orders was the result of
increased sales in markets outside the Baltimore/Washington area.
Gross profit margins in the second quarter of 1999 increased to 17.0%
compared to 15.5% for the second quarter of 1998. The increase in gross profit
margins was due to continuing favorable market conditions, which provided the
Company the opportunity to increase selling prices in certain of its markets,
and to the Company's continued focus on controlling construction costs. In
addition, these
10
<PAGE>
favorable market conditions have enabled the Company to increase the sales and
settlement pace per community, which allows the Company to better leverage fixed
costs. While the Company expects to continue the trend of higher year over year
quarterly gross profit margins for the remainder of 1999, such gross profit
margins may be lower than those realized in the first and second quarters of
1999 due to continuing increases in the cost of lumber and certain other
commodities.
Selling, general and administrative ("SG&A") expenses for the second
quarter of 1999 increased $4,885 from the second quarter of 1998, but as a
percentage of revenues, decreased from 7.6% in 1998 to 6.9% in the second
quarter of 1999. Approximately $2,400 of the increase in SG&A expenses is due to
a net quarter to quarter increase for compensation cost attributable to
management incentive plans. The increase in SG&A dollars is also attributable to
the aforementioned increase in revenues. The percentage decrease is primarily
attributable to the improved operating efficiencies resulting from continuing
favorable market conditions as explained above and the overall larger revenue
base.
Backlog units and dollars were 5,447 and $1,190,412, respectively, at June
30, 1999 compared to 4,452 and $910,568, respectively, at June 30, 1998. The
increase in backlog units and dollars is primarily due to the 12.5% increase in
new orders for the six months ended June 30, 1999, compared to the same 1998
period, and, to a lesser extent, to a 7.4% increase in the average selling price
to $213.2 in the first six months of 1999 from $198.6 in the first six months of
1998. The average selling price increase is due to the increased selling prices
in certain of the Company's markets, and to single family detached units
representing a larger percentage of the total units sold in the current period
as compared to the prior year period.
The Company believes that earnings before interest, taxes, depreciation and
amortization ("EBITDA") provides a meaningful comparison of operating
performance of the homebuilding segment because it excludes the amortization of
certain intangible assets and the recognition of certain significant non-cash
expenses. Although the Company believes the calculation is helpful in
understanding the performance of the homebuilding segment, EBITDA should not be
considered a substitute for net income or cash flow as indicators of the
Company's financial performance or its ability to generate liquidity.
Calculation of EBITDA:
<TABLE>
<CAPTION>
Three Months Ended June 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating income $ 48,341 $ 29,731
Depreciation 858 890
Amortization of excess reorganization
value and goodwill 1,814 1,887
Other non-cash expenses 4,395 4,300
---------- ----------
Homebuilding EBITDA $ 55,408 $ 36,808
========== ==========
% of Homebuilding revenues 11.3% 9.5%
</TABLE>
Homebuilding EBITDA in the second quarter of 1999 was $18,600 or 50.5%
higher than in the second quarter of 1998, and as a percentage of revenue
increased from 9.5% to 11.3%.
Mortgage Banking Segment
Three Months Ended June 30, 1999 and 1998
The mortgage banking segment generated operating income, excluding the
amortization of excess reorganization value and goodwill, of $4,913 for the
three months ended June 30, 1999 compared to operating income of $4,791 during
the same period in 1998. Total loan closings were $869,774 and $658,789 during
the respective quarters ended June 30, 1999 and 1998, representing an overall
increase of 32.0%. Approximately $155,000 of the increased loan closing
production was the result of loans originated by First Republic Mortgage
Corporation ("First Republic"), which was acquired by the Company in March 1999
(see below for additional information regarding the acquisition). Excluding the
11
<PAGE>
origination activity of First Republic, loan origination activity increased 8.5%
in the current quarter compared to the prior year quarter.
Although mortgage banking fees had a net quarter to quarter increase of
$1,781, or 16.7% from the overall increase in loan closing volume, the increase
was impacted by unfavorable market pricing caused by increased competition, and
to a lesser extent, lower margins in the Company's wholesale and retail
operations due to a reduction in refinance activity. The increased revenues were
also partially offset by higher general and administrative expenses primarily
due to costs incurred to integrate and consolidate First Republic's operations
into the Company. The increase to general and administrative expenses was also
partially due to costs associated with the expansion of the Company's title
services operations, and to costs incurred for the implementation of the
Company's new loan origination system (see the Year 2000 disclosure below). A
summary of mortgage banking fees is noted below:
<TABLE>
<CAPTION>
Mortgage Banking Fees: 1999 1998
---------- ----------
<S> <C> <C>
Net gain on sale of loans $ 8,854 $ 7,679
Servicing 346 471
Title services 2,670 2,290
Gain on sale of servicing rights 595 244
---------- ----------
$ 12,465 $ 10,684
========== ==========
</TABLE>
Subsequent to June 30, 1999, the Company has continued to experience a
reduction in refinance activity, which particularly affects its wholesale and
retail branch operations. In response to these market conditions, the Company
has commenced a consolidation of its mortgage banking operations that do not
directly support the Company's homebuilding activities.
Homebuilding Segment
Six Months Ended June 30, 1999 and 1998
During the first six months of 1999, homebuilding operations generated
revenues of $921,745 compared to revenues of $677,285 in the first six months of
1998. The increase in revenues was primarily due to a 27.8% increase in the
number of homes settled from 3,538 in 1998 to 4,522 in 1999, and to a 6.6%
increase in the average settlement price from $190.5 in 1998 to $203.1 in 1999.
The increase in settlements is a direct result of the substantially higher
backlog at the beginning of the 1999 period as compared to the beginning of the
same 1998 period. The increase in the average settlement price is attributable
to single family detached units representing a larger percentage of the total
units settled in the current period as compared to the prior year period, and to
price increases in certain of the Company's markets. New orders increased by
12.5% to 5,396 for the six months ended June 30, 1999 compared with 4,795 for
the six months ended June 30, 1998. The increase in new orders was predominantly
the result of increased sales in markets outside the Baltimore/Washington area.
Gross profit margins for the first six months of 1999 increased to 17.0%
compared to 15.3% for the six months ended June 30, 1998. The increase in gross
profit margins was due to continuing favorable market conditions, which provided
the Company the opportunity to increase selling prices in certain of its
markets, and to the Company's continued focus on controlling construction costs.
In addition, these favorable market conditions have enabled the Company to
increase the sales and settlement pace per community, which allows the Company
to better leverage fixed costs. While the Company expects to continue the trend
of higher year over year quarterly gross profit margins for the remainder of
1999, such gross profit margins may be lower than those realized in the first
and second quarters of 1999 due to continuing increases in the cost of lumber
and certain other commodities.
SG&A expenses for 1999 increased $13,143 as compared to the same 1998
period, but as a percentage of revenues decreased from 7.3% to 6.8%.
Approximately $6,600 of the increase in SG&A
12
<PAGE>
expenses is due to a net period to period increase for compensation costs
attributable to management incentive plans. The increase in SG&A dollars is also
attributable to the aforementioned increase in revenues. The percentage decrease
is primarily attributable to the improved operating efficiencies resulting from
continuing favorable market conditions as explained above and the overall larger
revenue base.
During the six months ended June 30, 1999 and 1998, the Company incurred
$8,335 and $4,300, respectively, for non-cash charges related to the 1994
Management Equity Incentive Plan (the "Plan"), a variable stock plan adopted by
the Board of Directors (the "Board") pursuant to the Company's 1993 Plan of
Reorganization. The Company expects to recognize a total non-cash expense of
approximately $17,100 relative to the Plan for full year 1999. The Company
recognized $9,081 for non-cash Plan expenses for full year 1998.
Calculation of Homebuilding EBITDA:
<TABLE>
<CAPTION>
Six Months Ended June 30,
--------------------------
1999 1998
---------- ----------
<S> <C> <C>
Operating income $ 91,937 $ 51,626
Depreciation 1,604 1,826
Amortization of excess reorganization
value and goodwill 3,627 3,773
Other non-cash expenses 8,553 4,300
---------- ----------
Homebuilding EBITDA $ 105,721 $ 61,525
========== ==========
% of Homebuilding revenues 11.5% 9.1%
</TABLE>
Homebuilding EBITDA for the first six months of 1999 was $44,196 or 71.8%
higher than the first six months of 1998, and as a percentage of revenues
increased from 9.1% to 11.5%.
Mortgage Banking Segment
Six Months Ended June 30, 1999 and 1998
The mortgage banking segment generated operating income, excluding the
amortization of excess reorganization value and goodwill, of $10,287 for the six
months ended June 30, 1999 compared to operating income of $7,481 during the
same period in 1998. Total loan closings were $1,649,180 and $1,237,123 during
the respective first halves 1999 and 1998, representing an overall increase of
33.3%. Approximately $234,000 of the increased loan closing production was the
result of loans originated by First Republic Mortgage Corporation ("First
Republic"), which was acquired by the Company in March 1999 (see below for
additional information regarding the acquisition). Excluding the origination
activity of First Republic, loan origination activity increased 14.4% in the
current quarter compared to the prior year quarter.
Although mortgage banking fees had a net period to period increase of
$7,616, or 41.5%, from the overall increase in loan closing volume, the increase
was impacted by unfavorable market pricing caused by increased competition and
lower margins in the Company's wholesale and retail operations due to a
reduction in refinance activity, both of which affected the Company's second
quarter 1999 results. The increased revenues were partially offset by higher
general and administrative expenses primarily due to costs incurred to integrate
and consolidate First Republic's operations into the Company. To a lesser
extent, the increase in general and administrative costs was also partially due
to costs associated with the expansion of the Company's title services
operations, and to costs incurred for the implementation of the Company's new
loan origination system (see the Year 2000 disclosure below). A summary of
mortgage banking fees is noted below:
13
<PAGE>
<TABLE>
<CAPTION>
Mortgage Banking Fees: 1999 1998
--------- ---------
<S> <C> <C>
Net gain on sale of loans $ 18,898 $ 13,380
Servicing 580 663
Title services 5,036 4,084
Gain on sale of servicing rights 1,473 244
--------- ---------
$ 25,987 $ 18,371
========= =========
</TABLE>
Effective Tax Rates
The effective tax rates were 42.7% for the six months ended June 30, 1999
compared to 46.1% for the six months ended June 30, 1998. The reduction in the
effective tax rate is primarily due to a higher level of taxable income in the
current period relative to fixed permanent differences.
Recent Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires all derivatives to be
recognized as either assets or liabilities on the balance sheet and be measured
at fair value. Depending on the hedge designation, changes in such fair value
will be recognized in either other comprehensive income or current earnings on
the income statement. During June, 1999, the FASB issued SFAS No. 137, which
amended SFAS No. 133. SFAS No. 133, as amended, is now effective for all fiscal
quarters of all fiscal years beginning after June 15, 2000. At the present time,
the Company cannot determine the impact that SFAS No. 133, as amended, will have
on its financial statements upon adoption on January 1, 2001, as such impact
will be determined based on loans held in inventory and forward mortgage
delivery contracts outstanding at the date of adoption.
Business Acquisition
On March 4, 1999, NVR Mortgage Acquisition, Inc. ("NVRMA"), a wholly owned
subsidiary of NVR Mortgage Finance, Inc. ("NVR Finance"), NVR's wholly owned
mortgage banking subsidiary, purchased all of the outstanding capital stock of
First Republic for approximately $5,300 in cash. First Republic, based in
Rockville, Maryland, is a leading mortgage lender in the Baltimore and
Washington Metropolitan area. NVRMA accounted for this acquisition using the
purchase method, and the operations of the acquired business have been included
in NVR's consolidated financial statements for the first quarter of 1999
beginning on the date of the acquisition. Goodwill of approximately $3,300 that
was generated pursuant to the purchase transaction will be amortized using the
straight-line method over 5 years.
Year 2000 Issue
The Year 2000 Issue is the risk that computer programs using two-digit date
fields will fail to properly recognize the year 2000, with the result being
business interruptions due to computer system failures by the Company's software
or hardware or that of government entities, service providers and vendors.
With the assistance of a consulting firm, the Company has completed its
assessment of exposure to Year 2000 Issues and has developed a detailed plan to
remediate areas of exposure in both its homebuilding and mortgage banking
segments, as discussed below.
The Company has substantially completed its remediation and testing efforts
on its core Homebuilding, Secondary Marketing, Servicing, Settlement Services
and non-Information
14
<PAGE>
Technology (e.g., phones, HVAC, etc.) systems and believes that these systems
are now Year 2000 compliant. The total Year 2000 Issue cost for these systems
was approximately $525, the majority of which was expensed during 1998.
The mortgage banking segment also utilizes a Loan Origination System.
During 1997 a decision was made to replace the existing Loan Origination system
to obtain greater operating efficiencies. The existing system is not Year 2000
compliant. The Company has purchased a new commercially available software
package for Loan Origination processing which has been certified to be Year 2000
compliant by the vendor. The Company has tested the system and believes that it
is Year 2000 compliant. The Company has developed a detailed rollout plan and
started implementation in February 1999 into its mortgage branches. Through the
date of this report, the Company has successfully completed the installation of
the new loan origination system in 66% of the Company's mortgage operations. The
Company expects to deploy the new system in each branch by the end of the third
quarter of 1999. The total cost of this project is estimated to be $3,700, of
which the Company has expended $3,125 to date.
The Company initiated formal communications with its significant suppliers
and service providers during 1998 to determine the extent to which the Company
may be vulnerable to their failure to correct their own Year 2000 Issues and is
continuing those communications during 1999. To the extent that responses to
Year 2000 readiness are unsatisfactory, the Company will attempt to identity
alternative suppliers and service providers who have demonstrated Year 2000
readiness. As a normal course of business, the Company seeks to maintain
multiple suppliers where possible. The Company cannot be assured that it will be
successful in finding such alternative suppliers, service providers and
contractors or, if it is successful in finding such alternative suppliers,
service providers and contractors, that it will be able to do so at comparable
prices. In the event that any of the Company's significant suppliers or service
providers do not successfully and timely achieve Year 2000 compliance, and the
Company is unable to replace them at comparable prices, the Company's business
or operations could be adversely affected. To date, none of the Company's
significant suppliers or service providers has asserted that they will not be
Year 2000 compliant by December 31, 1999.
The Company presently believes that upon remediation of its core business
software and hardware applications, the Year 2000 Issue will not present a
material adverse risk to the Company's future consolidated results of
operations, liquidity, and capital resources. However, if such remediation on
all of the Company's core systems is not completed in a timely manner or the
level of timely compliance by key suppliers or service providers is not
sufficient, the Year 2000 Issue could have a material impact on the Company's
operations including, but not limited to, delays in homebuilding and mortgage
products resulting in loss of revenues, increased operating costs, loss of
customers or suppliers, or other significant disruptions to the Company's
business. In addition, widespread disruptions in the national or international
economy, including, for example, disruptions affecting financial markets,
commercial and investment banks, governmental agencies, utility services, such
as heat, lights, power and telephones, and transportation systems could also
have an adverse impact on the Company. The likelihood and effects of such
disruptions are not determinable at this time.
The Company will evaluate the necessity for contingency planning during
1999 as it implements and tests its Loan Origination System and if
communications with significant suppliers and service providers indicate that
the Company may be vulnerable to their failure to correct their own Year 2000
Issues. This evaluation will continue throughout 1999.
15
<PAGE>
Liquidity and Capital Resources
The Company has $255,000 available for issuance under a shelf registration
statement filed with the Securities and Exchange Commission on January 20, 1998.
The shelf registration statement was declared effective on February 27, 1998 and
provides that securities may be offered from time to time in one or more series
and in the form of senior or subordinated debt.
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, 2001. The Facility provides for borrowings of up to $100,000 of which
$60,000 is currently committed. Under the terms of the Facility, an additional
$10,000 uncommitted overline is available to the Company on a limited basis. Up
to approximately $24,000 of the Facility is currently available for issuance in
the form of letters of credit, of which $12,293 was outstanding at June 30,
1999. There were no direct borrowings outstanding under the Facility as of June
30, 1999.
NVR's mortgage banking segment provides for its mortgage origination and
other operating activities using cash generated from operations as well as
various short-term credit facilities. NVR Finance and its subsidiaries have
available mortgage warehouse facilities with an aggregate available borrowing
limit of $203,000, of which $178,000 is committed, to fund its mortgage
origination activities. There was $171,297 outstanding under these facilities at
June 30, 1999. The current facility expires on September 30, 1999. The Company
is currently finalizing the terms of a new facility and expects that the new
facility will be in place prior to the expiration of the existing facility. NVR
Finance also currently has available an aggregate of $150,000 of borrowing
capacity in various uncommitted gestation and repurchase agreements. There was
an aggregate of $24,552 outstanding under such gestation and repurchase
agreements at June 30, 1999.
The Company 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.
Other Elements Impacting Liquidity
During the six months ended June 30, 1999, the Company repurchased
approximately 866,000 shares of its common stock at an aggregate purchase price
of $40,616. The Company 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 the Company's debt
agreements.
Part II
-------
Item 1. Legal Proceeding
- -------
During April 1999, NVR was served with a lawsuit filed in the United States
District Court in Baltimore by a group of homeowners who purchased homes in a
community in Howard County, Maryland. The suit alleges violation of certain
Federal environmental laws, as well as State consumer protection and nuisance
statutes relating to the alleged failure of NVR to disclose to its purchasers
that their homes were built on a site formerly used as an unlicensed landfill.
The developer of the property and another homebuilder are also named as
defendants in the action. The plaintiffs are seeking injunctive relief and
damages of approximately $75,000,000. The Company believes that it has valid
defenses to the plaintiffs' claims and intends to vigorously defend the case.
Accordingly, the income statements for the three and six month periods ended
June 30, 1999, included in the accompanying financial statements to this
Quarterly Report on Form 10-Q, do not include a loss contingency related to this
lawsuit. No assurances can be given, however, regarding the risk or range of
possible loss to the Company, if any.
16
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
- -------
NVR held its Annual Meeting of Shareholders on May 4, 1999.
Four matters were voted upon at the Annual Meeting:
<TABLE>
<CAPTION>
Votes Withheld Authority
Matter For to Vote
----------------------------------------- ------------ ------------------
<S> <C> <C>
1. Election of two directors to serve
three year terms:
Dwight C. Schar 10,301,189 258,305
George E. Slye 10,300,325 259,169
<CAPTION>
Votes Votes Not
For Against Abstentions Voted
----------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
2. Adoption of the 1998 Management
Long-Term Stock Option Plan 5,027,522 2,623,170 32,125 3,290,410
3. Adoption of the 1998 Directors'
Long-Term Stock Option Plan 5,051,529 2,586,814 44,474 3,290,410
4. Ratification of appointment of KPMG
LLP as independent auditors
for NVR 10,533,885 16,465 30,645 392,232
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
- -------
a. 11. Computation of Earnings per Share.
b. 27. Financial Data Schedule.
c. The Company did not file any reports on Form 8-K during
the quarter ended June 30, 1999.
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Description Page
- ------ ------------------------------------ ----
<S> <C> <C>
11 Computation of Earnings per Share 19
27 Financial Data Schedule 20
</TABLE>
17
<PAGE>
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.
July 27, 1999 NVR, Inc.
--
By:/s/ Paul C. Saville
--------------------
Paul C. Saville
Senior Vice President Finance,
Chief Financial Officer, and Treasurer
18
<PAGE>
Exhibit 11
NVR, Inc.
Computation of Earnings Per Share
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
-------------------------- ------------------------
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
1. Net income $ 28,263 $ 8,752 $ 54,270 $ 19,612
========= ========= ========== ==========
2. Average number of shares
outstanding 10,606 11,356 10,774 11,376
3. Shares issuable upon exercise
of dilutive options, warrants and
subscriptions outstanding during
period, based on average market
price 1,921 2,065 1,892 2,055
--------- ----------- ---------- ----------
4. Average number of shares and
share equivalents outstanding
(2 + 3) 12,527 13,421 12,666 13,431
========= =========== ========== ==========
5. Basic earnings per share (1/2) $ 2.66 $ 0.77 $ 5.04 $ 1.73
========= =========== ========== ==========
6. Diluted earnings per share (1/4) $ 2.26 $ 0.65 $ 4.28 $ 1.46
========= =========== ========== ==========
</TABLE>
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM NVR, INC.'S
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN FORM 10-Q FOR THE SIX MONTHS ENDED
JUNE 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 94,273
<SECURITIES> 0
<RECEIVABLES> 7,222
<ALLOWANCES> 0
<INVENTORY> 314,801
<CURRENT-ASSETS> 0
<PP&E> 14,539
<DEPRECIATION> 0
<TOTAL-ASSETS> 834,010
<CURRENT-LIABILITIES> 0
<BONDS> 145,000
0
0
<COMMON> 185,943
<OTHER-SE> 10,299
<TOTAL-LIABILITY-AND-EQUITY> 834,010
<SALES> 921,745
<TOTAL-REVENUES> 955,484
<CGS> 764,711
<TOTAL-COSTS> 845,617
<OTHER-EXPENSES> 4,399<F1>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,756
<INCOME-PRETAX> 94,712
<INCOME-TAX> 40,442
<INCOME-CONTINUING> 54,270
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 54,270
<EPS-BASIC> 5.04
<EPS-DILUTED> 4.28
<FN>
<F1>ITEM REPRESENTS THE NON-CASH AMORTIZATION OF EXCESS REORGANIZATION VALUE AND
GOODWILL.
</FN>
</TABLE>
