Annual Reports

  • 10-K (Feb 20, 2014)
  • 10-K (Feb 19, 2013)
  • 10-K (Feb 22, 2012)
  • 10-K (Feb 25, 2011)
  • 10-K (Feb 26, 2010)
  • 10-K (Feb 25, 2009)

 
Quarterly Reports

 
8-K

 
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NVR 10-K 2012
10-K
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2011

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

Incorporation or Organization)

 

(IRS Employer

Identification Number)

11700 Plaza America Drive, Suite 500

Reston, Virginia

  20190
(Address of Principal Executive Offices)   (Zip Code)

Registrant’s telephone number, including area code: (703) 956-4000

 

 

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

 

Name of each exchange on which registered

Common stock, par value $0.01 per share   New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

 

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  x    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act.    Yes  ¨    No  x

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 check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a Smaller Reporting Company)    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).    Yes  ¨    No  x

The aggregate market value of the voting stock held by non-affiliates of NVR, Inc. on June 30, 2011, the last business day of NVR, Inc.’s most recently completed second fiscal quarter, was approximately $3,840,650,000.

As of February 17, 2012 there were 5,058,781 total shares of common stock outstanding.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement of NVR, Inc. to be filed with the Securities and Exchange Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934 on or prior to April 30, 2012 are incorporated by reference into Part III of this report.

 

 

 


Table of Contents

INDEX

 

          Page  

PART I

     

Item 1.

  

Business

     2   

Item 1A.

  

Risk Factors

     6   

Item 1B.

  

Unresolved Staff Comments

     11   

Item 2.

  

Properties

     11   

Item 3.

  

Legal Proceedings

     12   

Item 4.

  

Mine Safety Disclosures

     13   
  

Executive Officers of the Registrant

     13   

PART II

     

Item 5.

  

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

     13   

Item 6.

  

Selected Financial Data

     15   

Item 7.

  

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     16   

Item 7A.

  

Quantitative and Qualitative Disclosure About Market Risk

     37   

Item 8.

  

Financial Statements and Supplementary Data

     40   

Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     40   

Item 9A.

  

Controls and Procedures

     40   

Item 9B.

  

Other Information

     40   

PART III

     

Item 10.

  

Directors, Executive Officers, and Corporate Governance

     41   

Item 11.

  

Executive Compensation

     41   

Item 12.

  

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

     41   

Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     42   

Item 14.

  

Principal Accountant Fees and Services

     42   

PART IV

     

Item 15.

  

Exhibits and Financial Statement Schedules

     42   

 

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Table of Contents

PART I

 

Item 1. Business.

General

NVR, Inc. (“NVR”) was formed in 1980 as NVHomes, Inc. Our primary business is the construction and sale of single-family detached homes, townhomes and condominium buildings. To more fully serve customers of our homebuilding operations, we also operate a mortgage banking and title services business. We conduct our homebuilding activities directly. Our mortgage banking operations are operated primarily through a wholly owned subsidiary, NVR Mortgage Finance, Inc. (“NVRM”). Unless the context otherwise requires, references to “NVR”, “we”, “us” or “our” include NVR and its consolidated subsidiaries.

We are one of the largest homebuilders in the United States. While we operate in multiple locations in fifteen states, primarily in the eastern part of the United States, approximately 35% of our home settlements in 2011 occurred in the Washington, D.C. and Baltimore, MD metropolitan areas, which accounted for approximately 46% of our 2011 homebuilding revenues. Our homebuilding operations include the construction and sale of single-family detached homes, townhomes and condominium buildings under four trade names: Ryan Homes, NVHomes, Fox Ridge Homes and Rymarc Homes. The Ryan Homes, Fox Ridge Homes, and Rymarc Homes products are marketed primarily to first-time homeowners and first-time move-up buyers. The Ryan Homes product is currently sold in twenty-five metropolitan areas located in Maryland, Virginia, West Virginia, Pennsylvania, New York, North Carolina, South Carolina, Ohio, New Jersey, Delaware, Kentucky, Indiana, Illinois and Florida. The Fox Ridge Homes product is sold solely in the Nashville, TN metropolitan area and the Rymarc Homes product is sold solely in the Columbia, SC metropolitan area. The NVHomes product is marketed primarily to move-up and upscale buyers and is sold in the Washington, D.C., Baltimore, MD, Philadelphia, PA and the Maryland Eastern Shore metropolitan areas. In 2011, our average price of a settled unit was approximately $307,500.

Historically, we generally have not engaged in land development (see discussion below on our limited land development activities). Instead, we typically acquire finished building lots at market prices from various development entities under fixed price purchase agreements (“purchase agreements”) that require deposits that may be forfeited if we fail to perform under the purchase 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 up to 10%, of the aggregate purchase price of the finished lots.

We believe that our lot acquisition strategy avoids the financial requirements and risks associated with direct land ownership and land development. We may, at our option, choose for any reason and at any time not to perform under these purchase agreements by delivering notice of our intent not to acquire the finished lots under contract. Our 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 liquidated damage provision contained within the purchase agreements. We do not have any financial guarantees or completion obligations and we typically do not guarantee lot purchases on a specific performance basis under these purchase agreements. None of the creditors of any of the development entities with which we have entered these purchase agreements have recourse to our general credit. We generally seek to maintain control over a supply of lots believed to be suitable to meet our five-year business plan.

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, current economic conditions and the continued downturn of the homebuilding industry have exerted pressure on our developers’ ability to obtain acquisition and development financing or to raise equity investments to finance land development activity, potentially constraining our supply of finished lots. This pressure has necessitated that in certain specific strategic circumstances we deviate from our historical lot acquisition strategy and engage in joint venture arrangements with land developers or directly acquire raw ground already zoned for its intended use for development. Once we acquire control of any raw ground, we determine

 

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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 to 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 of our finished lot inventory using fixed price purchase agreements with forfeitable deposits.

As of December 31, 2011, we controlled approximately 48,200 lots under purchase agreements with deposits in cash and letters of credit totaling approximately $202.3 million and $3.2 million, respectively. Included in the number of controlled lots are approximately 10,600 lots for which we have recorded a contract land deposit impairment reserve of approximately $70.3 million as of December 31, 2011. In addition, we had an aggregate investment totaling approximately $89.5 million in four separate joint venture limited liability corporations (“JVs”), expected to produce approximately 6,700 lots. Of the lots controlled by the JVs, approximately 2,700 were not under contract at December 31, 2011. Further, as of December 31, 2011, we directly owned three separate raw parcels of land, zoned for their intended use, with a current cost basis, including development costs, of approximately $78.0 million that we intend to develop into approximately 800 finished lots for use in our homebuilding operations. See Note 3 and Note 4 to the consolidated financial statements included herein for additional information regarding JVs and land under development, respectively.

In addition to building and selling homes, we provide a number of mortgage-related services through our mortgage banking operations. Through operations in each of our homebuilding markets, NVRM originates mortgage loans almost exclusively for our homebuyers. NVRM generates revenues primarily from origination fees, gains on sales of loans and title fees. NVRM sells all of the mortgage loans it closes into the secondary markets on a servicing released basis.

Segment information for our homebuilding and mortgage banking businesses is included in Note 2 in the accompanying consolidated financial statements.

Current Business Environment

The homebuilding environment remains challenging as it continues to be impacted by the economic downturn and uncertainty that has existed in the U.S. throughout the past six years. The sluggish economy and high unemployment rates continue to weigh on consumer confidence and in turn, suppress housing demand, despite what have been historically low mortgage rates in 2011. New home sales also continue to be adversely impacted by a highly restrictive mortgage lending environment that has made it more difficult for our customers to obtain mortgage financing. We expect to continue to see market volatility, pricing pressure and reduced demand for new homes until there is economic stability and improved consumer confidence. For additional information and analysis of recent trends in our operations and financial condition, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.

Homebuilding

Products

We offer single-family detached homes, townhomes and condominium buildings with many different basic home designs. These home designs have a variety of elevations and numerous other options. Our homes combine traditional, colonial, or cottage exterior designs with contemporary interior designs and amenities, generally include two to four bedrooms and range from approximately 1,000 to 7,300 square feet. During 2011, the prices at which we settled homes ranged from approximately $103,000 to $2.3 million and averaged approximately $307,500. During 2010, our average price was approximately $297,100.

 

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Markets

Our four reportable homebuilding segments operate in the following geographic regions:

 

Mid Atlantic:    Maryland, Virginia, West Virginia and Delaware
North East:    New Jersey and eastern Pennsylvania
Mid East:    Kentucky, New York, Ohio, western Pennsylvania, Indiana and Illinois
South East:    North Carolina, South Carolina, Florida and Tennessee

Backlog

Backlog totaled 3,676 units and approximately $1.2 billion at December 31, 2011 compared to backlog of 2,916 units and approximately $1.0 billion at December 31, 2010. 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 14% in each of 2011, 2010 and 2009. Of a reporting quarter’s opening backlog, 6% during 2011 and 2010, and 7% during 2009, of that opening backlog balance 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 in future periods. See “Risk Factors” in Item 1A of this Form 10-K.

Further discussion of settlements, new orders and backlog activity by homebuilding reportable segment for each of the last three years can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Form 10-K.

Construction

We utilize independent subcontractors under fixed price contracts to perform construction work on our homes. We use several independent subcontractors in our various markets and we are not dependent on any single subcontractor or on a small number of subcontractors.

Sales and Marketing

Our preferred marketing method is for customers to visit a furnished model home featuring many built-in options and a landscaped lot. The garages of these model homes are usually converted into temporary sales centers where alternative facades and floor plans are displayed and designs for other models are available for review. Sales representatives are compensated predominantly on a commission basis.

Regulation

We and our subcontractors must comply with various federal, state and local zoning, building, environmental, advertising and consumer credit statutes, rules and regulations, as well as other regulations and requirements in connection with our construction and sales activities. All of these regulations have increased the cost to produce and market our products, and in some instances, have delayed our developers’ ability to deliver finished lots to us. Counties and cities in which we build homes have at times declared moratoriums on the issuance of building permits and imposed other restrictions in the areas in which sewage treatment facilities and other public facilities do not reach minimum standards. To date, restrictive zoning laws and the imposition of moratoriums have not had a material adverse effect on our construction activities.

 

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Competition and Market Factors

The housing industry is highly competitive. We compete with numerous homebuilders of varying size, ranging from local to national in scope, some of which have greater financial resources than we do. We also face competition from the home resale market. Our homebuilding operations compete primarily on the basis of price, location, design, quality, service and reputation. Historically, we have been one of the market leaders in each of the markets where we build homes.

The housing industry is cyclical and is affected by consumer confidence levels, prevailing economic conditions and interest rates. Other factors that affect the housing industry and the demand for new homes include the availability and the cost of land, labor and materials; changes in consumer preferences; demographic trends; and the availability of mortgage finance programs. See “Risk Factors” in Item 1A of this Form 10-K.

We are dependent upon building material suppliers for a continuous flow of raw materials. Whenever possible, we utilize standard products available from multiple sources. In the past, such raw materials have been generally available to us in adequate supply.

Mortgage Banking

We provide a number of mortgage related services to our homebuilding customers through our mortgage banking operations. Our mortgage banking operations also include separate subsidiaries that broker title insurance and perform title searches in connection with mortgage loan closings for which they receive commissions and fees. Because NVRM originates mortgage loans almost exclusively for our homebuilding customers, NVRM is dependent on our homebuilding segment. In 2011, NVRM closed approximately 7,000 loans with an aggregate principal amount of approximately $1.9 billion as compared to approximately 8,600 loans with an aggregate principal amount of approximately $2.2 billion in 2010.

NVRM sells all of the mortgage loans it closes to investors in the secondary markets on a servicing released basis, typically within 30 to 60 days from the loan closing. NVRM is an approved seller/servicer for FNMA mortgage loans and an approved lender/seller of GNMA, FHLMC, VA and FHA mortgage loans.

Competition and Market Factors

NVRM’s main competition comes from national, regional, and local mortgage bankers, mortgage brokers, thrifts and banks in each of these markets. NVRM competes primarily on the basis of customer service, variety of products offered, interest rates offered, prices of ancillary services and relative financing availability and costs.

Regulation

NVRM is an approved seller/servicer of FNMA mortgage loans and an approved lender/seller of GNMA, FHLMC, VA and FHA mortgage loans, and is subject to all of those agencies’ rules and regulations. These rules and regulations restrict certain activities of NVRM. NVRM is currently eligible and expects to remain eligible to participate in such programs. In addition, NVRM is subject to regulation at the state and federal level with respect to specific origination, selling and servicing practices.

Pipeline

NVRM’s mortgage loans in process that have not closed (“Pipeline”) at December 31, 2011 and 2010, had an aggregate principal balance of approximately $790 million and $670 million, respectively. NVRM’s cancellation rate was approximately 29% in 2011. During 2010 and 2009, NVRM’s loan cancellation rates were approximately 29% and 35%, respectively. We can provide no assurance that our historical loan cancellation rates are indicative of the actual loan cancellation rate that may occur in future periods. See “Risk Factors” in Item 1A in this Form 10-K.

 

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Employees

At December 31, 2011, we employed 2,765 full-time persons, of whom 1,077 were officers and management personnel, 182 were technical and construction personnel, 619 were sales personnel, 477 were administrative personnel and 410 were engaged in various other service and labor activities. None of our employees are subject to a collective bargaining agreement and we have never experienced a work stoppage. We believe that our employee relations are good.

Available Information

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). These filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. You may also read and copy any document we file at the SEC’s public reference room located at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.

Our principal internet website can be found at http://www.nvrinc.com. We make available free of charge on or through our website, access to our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports as soon as reasonably practicable after such material is electronically filed, or furnished, to the SEC.

Our website also includes a corporate governance section which contains our Corporate Governance Guidelines (which includes our Directors’ Independence Standards), Code of Ethics, Board of Directors’ Committee Charters for the Audit, Compensation, Corporate Governance, Nominating and Qualified Legal Compliance Committees, Policies and Procedures for the Consideration of Board of Director Candidates, Policies and Procedures Regarding Communications with the NVR, Inc. Board of Directors, the Independent Lead Director and the Non-Management Directors as a group. Additionally, amendments to and waivers from a provision of the Code of Ethics that apply to our principal executive officer, principal financial officer, principal accounting officer or persons performing similar functions will be disclosed on our website.

 

Item 1A. Risk Factors.

Forward-Looking Statements

Some of the statements in this Form 10-K, 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 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.

 

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Our business is affected by the risks generally incident to the residential construction business, including, but not limited to:

 

   

the availability of mortgage financing;

 

   

actual and expected direction of interest rates, which affect our costs, the availability of construction financing, and long-term financing for potential purchasers of homes;

 

   

the availability of adequate land in desirable locations on favorable terms;

 

   

unexpected changes in customer preferences; and

 

   

changes in the national economy and in the local economies of the markets in which we have operations.

All of these risks are discussed in detail below.

The homebuilding industry continues to experience a significant downturn. The continuation of this slowdown could adversely affect our business and our results of operations.

The homebuilding industry has continued to experience a significant downturn as a result of low consumer confidence driven by an economic recession, high unemployment levels, affordability issues and uncertainty as to the stability of home prices. Additionally, the tightening credit markets have made it more difficult for customers to obtain financing to purchase homes. As a result, we have experienced reduced demand for new homes. These ongoing market factors have also resulted in pricing pressures and in turn gross profit margin pressure in all of our markets. A continued downturn in the homebuilding industry could have a material adverse effect on our sales either through fewer gross sales and/or higher cancellation rates, which could have a material adverse effect on our profitability, stock performance, ability to service our debt obligations and future cash flows.

If the market value of our inventory or controlled lot position declines, our profit could decrease and we may incur losses.

Inventory risk can be substantial for homebuilders. The market value of building lots and housing inventories can fluctuate significantly as a result of changing market conditions. In addition, inventory carrying costs can be significant and can result in losses in a poorly performing project or market. We must, in the ordinary course of our business, continuously seek and make acquisitions of lots for expansion into new markets as well as for replacement and expansion within our current markets, which is generally accomplished by us entering fixed price purchase agreements and paying forfeitable deposits under the purchase agreement to developers for the contractual right to acquire the lots. In the event of further adverse changes in economic or market conditions, we may cease further building activities in communities or restructure existing purchase agreements, resulting in forfeiture of some or all of any remaining land contract deposit paid to the developer. Either action may result in a loss which could have a material adverse effect on our profitability, stock performance, ability to service our debt obligations and future cash flows.

If the underwriting quality of our mortgage originations is found to be deficient, our profit could decrease and we may incur losses.

We originate several different loan products to our customers to finance the purchase of their home. We sell all of the loans we originate into the secondary mortgage market generally within 30 to 60 days from origination. All of the loans that we originate are underwritten to the standards and specifications of the ultimate investor. Insofar as we underwrite our originated loans to those standards, we bear no increased concentration of credit risk from the issuance of loans, except in certain limited instances where early payment default occurs. In the event that a substantial number of the loans that we have originated fall into default and the investors to whom we sold the loan determine that we did not underwrite the loan in accordance with their requirements, we could be required to repurchase the loans from the investor or indemnify the investor for any losses incurred. This may result in a loss which could have a material adverse effect on our profitability, stock performance, ability to service our debt obligations and future cash flows.

 

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Because almost all of our customers require mortgage financing, the availability of suitable mortgage financing could impair the affordability of our homes, lower demand for our products, and limit our ability to fully deliver our backlog.

Our business and earnings depend on the ability of our potential customers to obtain mortgages for the purchase of our homes. In addition, many of our potential customers must sell their existing homes in order to buy a home from us. The tightening of credit standards and the availability of suitable mortgage financing could prevent customers from buying our homes and could prevent buyers of our customers’ homes from obtaining mortgages they need to complete that purchase, both of which could result in our potential customers’ inability to buy a home from us. If our potential customers or the buyers of our customers’ current homes are not able to obtain suitable financing, the result could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

If our ability to sell mortgages to investors is impaired, we may be required to fund these commitments ourselves, or may not be able to originate loans at all.

Our mortgage banking business sells all of the loans it originates into the secondary market usually within 30 to 60 days from the date of closing, and has up to approximately $25 million available in a repurchase agreement to fund mortgage closings. In October 2011, Bank of America discontinued their correspondent lending program. As a result, this reduced the number of investors available in our loan sale distribution channels, increasing the loan volume of the remaining correspondent investors and in turn lengthening the time period it takes for us to sell loans and increasing our inventory of mortgages held for sale at December 31, 2011. In the event that other disruptions to the secondary markets similar to this and to those which occurred during 2007 and 2008 continue to tighten or eliminate the available liquidity within the secondary markets for mortgage loans, or the underwriting requirements by our secondary market investors continue to become more stringent, our ability to sell future mortgages could decline and we could be required, among other things, to fund our commitments to our buyers with our own financial resources, which is limited, or require our home buyers to find another source of financing. The result of such secondary market disruption could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

Interest rate movements, inflation and other economic factors can negatively impact our business.

High rates of inflation generally affect the homebuilding industry adversely because of their adverse impact on interest rates. High interest rates not only increase the cost of borrowed funds to homebuilders but also have a significant effect on housing demand and on the affordability of permanent mortgage financing to prospective purchasers. We are also subject to potential volatility in the price of commodities that impact costs of materials used in our homebuilding business. Increases in prevailing interest rates could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

Our financial results also are affected by the risks generally incident to our mortgage banking business, including interest rate levels, the impact of government regulation on mortgage loan originations and servicing and the need to issue forward commitments to fund and sell mortgage loans. Our homebuilding customers account for almost all of our mortgage banking business. The volume of our continuing homebuilding operations therefore affects our mortgage banking business.

Our mortgage banking business also is affected by interest rate fluctuations. We also may experience marketing losses resulting from daily increases in interest rates to the extent we are unable to match interest rates and amounts on loans we have committed to originate with forward commitments from third parties to purchase such loans. Increases in interest rates may have a material adverse effect on our mortgage banking revenue, profitability, stock performance, ability to service our debt obligations and future cash flows.

 

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Our operations may also be adversely affected by other economic factors within our markets such as negative changes in employment levels, job growth, and consumer confidence and availability of mortgage financing, one or all of which could result in reduced demand or price depression from current levels. Such negative trends could have a material adverse effect on homebuilding operations.

These factors and thus, the homebuilding business, have at times in the past been cyclical in nature. Any downturn in the national economy or the local economies of the markets in which we operate could have a material adverse effect on our sales, profitability, stock performance and ability to service our debt obligations. In particular, approximately 35% of our home settlements during 2011 occurred in the Washington, D.C. and Baltimore, MD metropolitan areas, which accounted for approximately 46% of our homebuilding revenues in 2011. Thus, we are dependent to a significant extent on the economy and demand for housing in those areas.

Our inability to secure and control an adequate inventory of lots could adversely impact our operations.

The results of our homebuilding operations are dependent upon our continuing ability to control an adequate number of homebuilding lots in desirable locations. There can be no assurance that an adequate supply of building lots will continue to be available to us on terms similar to those available in the past, or that we will not be required to devote a greater amount of capital to controlling building lots than we have historically. An insufficient supply of building lots in one or more of our markets, an inability of our developers to deliver finished lots in a timely fashion due to their inability to secure financing to fund development activities or for other reasons, or our inability to purchase or finance building lots on reasonable terms could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

Volatility in the credit and capital markets may impact our ability to access necessary financing.

If we require working capital greater than that provided by our operations, we may be required to seek to obtain alternative financing. No assurance can be given that additional financing will be available on terms that are favorable or acceptable. In addition, the credit and capital markets are experiencing significant volatility that is difficult to predict. If we are required to seek financing to fund our working capital requirements, continued volatility in these markets may restrict our flexibility to access financing. If we are at any time unsuccessful in obtaining sufficient capital to fund our planned homebuilding expenditures, we may experience a substantial delay in the completion of any homes then under construction, or we may be unable to control or purchase finished building lots. Any delay could result in cost increases and could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

Our mortgage banking operations are dependent in part on the availability, cost and other terms of mortgage financing facilities, and may be adversely affected by any shortage or increased cost of such financing. No assurance can be given that any additional or replacement financing will be available on terms that are favorable or acceptable. Our mortgage banking operations are also dependent upon the securitization market for mortgage-backed securities, and could be materially adversely affected by any fluctuation or downturn in such market.

Government regulations and environmental matters could negatively affect our operations.

We are subject to various local, state and federal statutes, ordinances, rules and regulations concerning zoning, building design, construction and similar matters, including local regulations that impose restrictive zoning and density requirements in order to limit the number of homes that can eventually be built within the boundaries of a particular area. These regulations may further increase the cost to produce and market our products. In addition, we have from time to time been subject to, and may also be subject in the future to, periodic delays in our homebuilding projects due to building moratoriums in the areas in which we

 

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operate. Changes in regulations that restrict homebuilding activities in one or more of our principal markets could have a material adverse effect on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

We are also subject to a variety of local, state and federal statutes, ordinances, rules and regulations concerning the protection of health and the environment. We are subject to a variety of environmental conditions that can affect our business and our homebuilding projects. The particular environmental laws that apply to any given homebuilding site vary greatly according to the location and environmental condition of the site and the present and former uses of the site and adjoining properties. Environmental laws and conditions may result in delays, cause us to incur substantial compliance and other costs, or prohibit or severely restrict homebuilding activity in certain environmentally sensitive regions or areas, thereby adversely affecting our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, contains numerous provisions affecting residential mortgages and mortgage lending practices. Because these provisions are to be implemented through future rulemaking, the ultimate impact of such provisions on lending institutions, including our mortgage banking subsidiary, will depend on how the implementing rules are written.

We are an approved seller/servicer of FNMA mortgage loans and an approved lender/seller of GNMA, FHLMC, VA and FHA mortgage loans, and are subject to all of those agencies’ rules and regulations. Any significant impairment of our eligibility to sell/service these loans could have a material adverse impact on our mortgage operations. In addition, we are subject to regulation at the state and federal level with respect to specific origination, selling and servicing practices including the Real Estate Settlement and Protection Act. Adverse changes in governmental regulation may have a negative impact on our mortgage loan origination business.

We face competition in our housing and mortgage banking operations.

The homebuilding industry is highly competitive. We compete with numerous homebuilders of varying size, ranging from local to national in scope, some of whom have greater financial resources than we do. We face competition:

 

   

for suitable and desirable lots at acceptable prices;

 

   

from selling incentives offered by competing builders within and across developments; and

 

   

from the existing home resale market.

Our homebuilding operations compete primarily on the basis of price, location, design, quality, service and reputation.

The mortgage banking industry is also competitive. Our main competition comes from national, regional and local mortgage bankers, thrifts, banks and mortgage brokers in each of these markets. Our mortgage banking operations compete primarily on the basis of customer service, variety of products offered, interest rates offered, prices of ancillary services and relative financing availability and costs.

There can be no assurance that we will continue to compete successfully in our homebuilding or mortgage banking operations. An inability to effectively compete may have an adverse impact on our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

A shortage of building materials or labor, or increases in materials or labor costs may adversely impact our operations.

The homebuilding business has from time to time experienced building material and labor shortages,

 

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including shortages in insulation, drywall, certain carpentry work and concrete, as well as fluctuating lumber prices and supply. In addition, high employment levels and strong construction market conditions could restrict the labor force available to our subcontractors and us in one or more of our markets. Significant increases in costs resulting from these shortages, or delays in construction of homes, could have a material adverse effect upon our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

Product liability litigation and warranty claims may adversely impact our operations.

Construction defect and home warranty claims are common and can represent a substantial risk for the homebuilding industry. The cost of insuring against construction defect and product liability related claims, as well as the claims themselves, can be high. In addition, insurance companies limit coverage offered to protect against these claims. Further restrictions on coverage availability, or significant increases in premium costs or claims, could have a material adverse effect on our financial results.

We are subject to litigation proceedings that could harm our business if an unfavorable ruling were to occur.

From time to time, we may become involved in litigation and other legal proceedings relating to claims arising from our operations in the normal course of business. As described in, but not limited to, Part I, Item 3, “Legal Proceedings” of this Form 10-K, we are currently subject to certain legal proceedings. Litigation is subject to inherent uncertainties, and unfavorable rulings may occur. We cannot assure you that these or other litigation or legal proceedings will not materially affect our ability to conduct our business in the manner that we expect or otherwise adversely affect us should an unfavorable ruling occur.

Weather-related and other events beyond our control may adversely impact our operations.

Extreme weather or other events, such as significant snowfalls, hurricanes, tornadoes, earthquakes, forest fires, floods, terrorist attacks or war, may affect our markets, our operations and our profitability. These events may impact our physical facilities or those of our suppliers or subcontractors, causing us material increases in costs, or delays in construction of homes, which could have a material adverse effect upon our sales, profitability, stock performance, ability to service our debt obligations and future cash flows.

 

Item 1B. Unresolved Staff Comments.

None.

 

Item 2. Properties.

Our corporate offices are located in Reston, Virginia, where we currently lease approximately 61,000 square feet of office space. The current corporate office lease expires in April 2015.

In connection with the operation of the homebuilding segment, we lease manufacturing facilities in the following six locations: Thurmont, Maryland; Burlington County, New Jersey; Farmington, New York; Kings Mountain, North Carolina; Darlington, Pennsylvania; and Portland, Tennessee. These facilities range in size from approximately 40,000 square feet to 400,000 square feet and combined total approximately 1 million square feet of manufacturing space. Each of these leases contains various options for extensions of the lease and for the purchase of the facility. The Portland lease expires in 2014, the Thurmont and Farmington leases expire in 2019, the Kings Mountain and Burlington County leases expire in 2022 and 2023, respectively, and the Darlington lease expires in 2025. In March 2011, we purchased a manufacturing facility in Dayton, Ohio and began production in June 2011. The Dayton facility contains approximately 100,000 square feet of manufacturing space. Due to the economic downturn and the related decline in our homebuilding activity, our current plant utilization has dropped to approximately 31% of total capacity.

 

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We also, in connection with both our homebuilding and mortgage banking businesses, lease office space in multiple locations for homebuilding divisional offices and mortgage banking and title services branches under leases expiring at various times through 2019, none of which are individually material to our business. We anticipate that, upon expiration of existing leases, we will be able to renew them or obtain comparable facilities on terms acceptable to us.

 

Item 3. Legal Proceedings.

On July 18, 2007, former and current employees filed lawsuits against us in the Court of Common Pleas in Allegheny County, Pennsylvania and Hamilton County, Ohio, in Superior Court in Durham County, North Carolina, and in the Circuit Court in Montgomery County, Maryland, and on July 19, 2007 in the Superior Court in New Jersey, alleging that we incorrectly classified our sales and marketing representatives as being exempt from overtime wages. These lawsuits are similar in nature to another lawsuit filed on October 29, 2004 by another former employee in the United States District Court for the Western District of New York. The complaints seek injunctive relief, an award of unpaid wages, including fringe benefits, liquidated damages equal to the overtime wages allegedly due and not paid, attorney and other fees and interest, and where available, multiple damages. The suits were filed as purported class actions. However, while a number of individuals have filed consents to join and assert federal claims in the New York action, none of the groups of employees that the lawsuits purport to represent have been certified as a class. The lawsuits filed in Ohio, Pennsylvania, Maryland, New Jersey and North Carolina have been stayed pending further developments in the New York action.

We believe that our compensation practices in regard to sales and marketing representatives are entirely lawful and in compliance with two letter rulings from the United States Department of Labor (“DOL”) issued in January 2007. The three courts to most recently consider similar claims against other homebuilders have acknowledged the DOL’s position that sales and marketing representatives were properly classified as exempt from overtime wages and the only court to have directly addressed the exempt status of such employees concluded that the DOL’s position was valid. Accordingly, we have vigorously defended and intend to continue to vigorously defend these lawsuits. Because we are unable to determine the likelihood of an unfavorable outcome of these cases, or the amount of damages, if any, we have not recorded any associated liabilities on the accompanying consolidated balance sheets.

In June 2010, we received a Request for Information from the United States Environmental Protection Agency (“EPA”) pursuant to Section 308 of the Clean Water Act. The request sought information about storm water discharge practices in connection with homebuilding projects completed or underway by us in New York and New Jersey. We cooperated with this request, and provided information to the EPA. We have since been informed by the United States Department of Justice (“DOJ”) that the EPA forwarded the information on the matter to the DOJ, and the DOJ requested that we meet with the government to discuss the status of the case. A meeting took place in late January 2012 with representatives from both the EPA and DOJ. It is not yet known what next steps, if any, the DOJ will take in the matter. We intend to continue cooperating with any future EPA and/or DOJ inquiries. At this time, we cannot predict the outcome of this inquiry, nor can we reasonably estimate the potential costs that may be associated with its eventual resolution.

In August 2011, the Wage and Hour Division of the U.S. Department of Labor (“DOL”) notified us that it was initiating an investigation to determine our compliance with the Fair Standards Labor Act (“FSLA”). In the notice, the DOL requested certain information, including payroll data for a two year period and multiple community-specific items related to our homebuilding operations. We have cooperated with this information request, have either provided or made available the information that the DOL has requested and expect to continue to cooperate with the DOL’s investigation. We believe that our payroll practices are in compliance with the FSLA. At this time, we cannot predict the outcome of this investigation, nor can we reasonably estimate the potential costs that may be associated with its eventual resolution.

We are also involved in various other litigation arising in the ordinary course of business. In the opinion of management, and based on advice of legal counsel, this litigation is not expected to have a material adverse effect on our financial position, results of operations or cash flows. Legal costs incurred in connection with outstanding litigation are expensed as incurred.

 

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Item 4. Mine Safety Disclosures.

None.

Executive Officers of the Registrant

 

Name

   Age   

Positions

Paul C. Saville

   56    President and Chief Executive Officer of NVR

Robert A. Goethe

   57    President of NVRM

Dennis M. Seremet

   57    Senior Vice President, Chief Financial Officer and Treasurer of NVR

Robert W. Henley

   45    Vice President and Controller of NVR

Paul C. Saville was named President and Chief Executive Officer of NVR, effective July 1, 2005. Prior to July 1, 2005, Mr. Saville had served as Senior Vice President Finance, Chief Financial Officer and Treasurer of NVR since September 30, 1993 and Executive Vice President from January 1, 2002 through June 30, 2005.

Robert A. Goethe was named President of NVRM effective January 25, 2010. From 2008 until January, 2010, Mr. Goethe served as a Senior Principal of Mortgage Connect Corp. From 2006 to 2008, Mr. Goethe served as the Senior Executive Vice President of Regions Mortgage Corporation, and from 1996 until 2006, he served as the Chief Executive Officer of Regions Financial Corporation.

Dennis M. Seremet was named Vice President, Chief Financial Officer and Treasurer of NVR, effective July 1, 2005 and Senior Vice President effective December 14, 2007. Prior to July 1, 2005, Mr. Seremet had been Vice President and Controller of NVR since April 1, 1995.

Robert W. Henley was named Vice President and Controller of NVR effective July 1, 2005. From May 2000 to June 30, 2005, Mr. Henley was the Assistant Controller.

PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Our shares of common stock are listed and principally traded on the New York Stock Exchange. The following table sets forth the high and low prices per share for our common stock for each fiscal quarter during the years ended December 31, 2011 and 2010:

 

     HIGH      LOW  

Prices per Share:

     

2011

     

Fourth Quarter

   $ 692.19       $ 554.71   

Third Quarter

   $ 760.37       $ 555.58   

Second Quarter

   $ 788.79       $ 701.00   

First Quarter

   $ 804.32       $ 674.07   

2010

     

Fourth Quarter

   $ 699.28       $ 611.50   

Third Quarter

   $ 680.05       $ 595.00   

Second Quarter

   $ 769.50       $ 627.43   

First Quarter

   $ 759.27       $ 655.00   

 

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As of the close of business on February 17, 2012, there were 351 shareholders of record.

We have never paid a cash dividend on our shares of common stock and have no current intentions to do so in the future.

We had two repurchase authorizations outstanding during the quarter ended December 31, 2011. On July 28, 2011 (“July Authorization”) and on December 14, 2011 (“December Authorization”), we publicly announced the Board of Directors’ approval for us to repurchase up to an aggregate of $300 million per authorization, of our common stock in one or more open market and/or privately negotiated transactions. The repurchase authorizations do not have expiration dates. The following table provides information regarding common stock repurchases for the quarter ended December 31, 2011:

 

                          Maximum Number (or  
                   Total Number of      Approximate Dollar  
                   Shares Purchased      Value) of Shares that  
     Total Number      Average      as Part of Publicly      May Yet Be  
     of Shares      Price Paid      Announced Plans      Purchased Under the  

Period

   Purchased      per Share      or Programs      Plans or Programs  

October 1 - 31, 2011

     38,323       $ 591.65         38,323       $ 19,897,000   

November 1 - 30, 2011

     —         $ —           —         $ 19,897,000   

December 1 - 31, 2011

     —         $ —           —         $ 319,897,000   
  

 

 

       

 

 

    

Total

     38,323       $ 591.65         38,323      
  

 

 

       

 

 

    

 

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STOCK PERFORMANCE GRAPH

COMPARISON OF CUMULATIVE TOTAL EQUITYHOLDER RETURN ON EQUITY

The following chart graphs our performance in the form of cumulative total return to holders of our Common Stock since December 31, 2006 in comparison to the Dow/Home Construction Index and the Dow Jones Industrial Index for that same period, assuming that $100 was invested in NVR stock and the indices on December 31, 2006.

 

LOGO

 

Item 6. Selected Financial Data.
  (dollars in thousands, except per share amounts)

The following tables set forth selected consolidated financial data. The selected income statement and balance sheet data have been derived from our consolidated financial statements for each of the periods presented and is not necessarily indicative of results of future operations. The selected financial data should be read in conjunction with, and is qualified in its entirety by, the consolidated financial statements and related notes included elsewhere in this report.

 

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    Year Ended December 31,  
    2011     2010     2009     2008     2007  

Consolidated Income Statement Data:

         

Homebuilding data:

         

Revenues

  $ 2,611,195      $ 2,980,758      $ 2,683,467      $ 3,638,702      $ 5,048,187   

Gross profit

    445,570        542,466        497,734        457,692        821,128   

Mortgage Banking data :

         

Mortgage banking fees

    47,954        61,134        60,381        54,337        81,155   

Interest income

    5,702        5,411        2,979        3,955        4,900   

Interest expense

    875        1,126        1,184        754        681   

Consolidated data:

         

Income from continuing operations

  $ 129,420      $ 206,005      $ 192,180      $ 100,892      $ 333,955   

Income from continuing operations per diluted share (1)

  $ 23.01      $ 33.42      $ 31.26      $ 17.04      $ 54.14   
    December 31,  
    2011     2010     2009     2008     2007  

Consolidated Balance Sheet Data:

         

Homebuilding inventory

  $ 533,150      $ 431,329      $ 418,718      $ 400,570      $ 688,854   

Contract land deposits, net

    131,930        100,786        49,906        29,073        188,528   

Total assets

    1,779,485        2,260,061        2,395,770        2,103,236        2,194,416   

Notes and loans payable

    1,613        92,089        147,880        210,389        286,283   

Shareholders’ equity

    1,374,799        1,740,374        1,757,262        1,373,789        1,129,375   

Cash dividends per share

    —          —          —          —          —     

 

(1) For the years ended December 31, 2011, 2010, 2009, 2008 and 2007, income from continuing operations per diluted share was computed based on 5,623,817; 6,164,617; 6,148,769; 5,920,285 and 6,167,795 shares, respectively, which represents the weighted average number of shares and share equivalents outstanding for each year.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
  (dollars in thousands, except per share data)

Results of Operations for the Years Ended December 31, 2011, 2010 and 2009

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 and Delaware
North East:    New Jersey and eastern Pennsylvania
Mid East:    Kentucky, New York, Ohio, western Pennsylvania, Indiana and Illinois
South East:    North Carolina, South Carolina, Tennessee and Florida

 

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Our lot acquisition strategy is predicated upon avoiding the financial requirements and risks associated with direct land ownership and development. Historically, we have not engaged in land development to obtain finished lots for use in our homebuilding operations. Instead, we have acquired finished lots 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, economic conditions and the continued downturn of the homebuilding industry have exerted pressure on our developers’ ability to obtain acquisition and development financing or to raise equity investments to finance land development activity, potentially constraining our supply of finished lots. This pressure has necessitated that in certain specific strategic circumstances we deviate from our historical lot acquisition strategy and engage in joint venture arrangements with land developers or directly acquire 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 to 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 of our finished lot inventory using fixed price purchase agreements with forfeitable deposits.

As of December 31, 2011, we controlled approximately 48,200 lots under purchase agreements with deposits in cash and letters of credit totaling approximately $202,300 and $3,200, respectively. Additionally, we controlled approximately 6,700 lots through joint venture limited liability corporations with an aggregate investment of approximately $89,500. Of the lots controlled by the joint ventures, approximately 2,700 were not under contract at December 31, 2011. Included in the number of controlled lots are approximately 10,600 lots for which we have recorded a contract land deposit impairment reserve of approximately $70,300 as of December 31, 2011. See Note 3 to the consolidated financial statements included herein for additional information regarding contract land deposits. Further, as of December 31, 2011, we had approximately $78,000 in land under development, that once fully developed will result in approximately 800 lots.

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

The homebuilding environment remained challenging throughout 2011 as it continued to be impacted by the economic downturn and uncertainty that has been experienced over the past several years. The sluggish economy and high unemployment rates continue to weigh on consumer confidence and in turn, suppress housing demand. In addition, new home sales and selling prices continue to be pressured by market uncertainty surrounding home prices and by a more restrictive mortgage lending environment. As a result, our new orders, net of cancellations (“new orders”), for 2011 were down 2% from the prior year while our average new order selling price of $304.1 remained flat year over year. Gross profit margins in 2011 within our homebuilding business were negatively impacted by pricing pressure and increased construction and sales incentive costs year over year, declining to 17.1% from 18.2% in 2010.

 

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Consolidated revenues totaled $2,659,149 for 2011, a decrease of 13% from $3,041,892 in 2010. Net income declined 37% to $129,420 in 2011 from the prior year and diluted earnings per share declined 31% to $23.01 year over year.

We believe that significant economic uncertainties remain which could result in continued sales, pricing and gross margin pressure over the next several quarters. Further, our expectation of continued sales and pricing pressures has been factored into the impairment analysis of our homebuilding inventory, land under development and contract land deposits. We assess our land under development, including land under development held in joint ventures, and contract land deposits each quarter for impairment on a community-by-community basis by considering, among other items, overall market and economic conditions, and analyzing, as applicable, current sales absorption levels and recent sales’ gross profit. At this time, we do not believe that any of the land under development is impaired, and we consider the allowance for losses on contract land deposits reflected on the December 31, 2011 balance sheet to be adequate. Further, we believe that our homebuilding inventory is stated at the lower of cost or market. However, there can be no assurance that we will not incur impairment charges in the future due to unanticipated adverse changes in the economy or other events adversely affecting specific markets or the homebuilding industry. In addition, the Dodd-Frank Wall Street Reform and Consumer Protection Act, enacted on July 21, 2010, contains numerous provisions affecting residential mortgages and mortgage lending practices. Because these provisions are to be implemented through future rulemaking, the ultimate impact of such provisions on lending institutions, including our mortgage banking subsidiary, will depend on how the implementing rules are written. Despite these ongoing economic uncertainties, we believe that we are well positioned to withstand this market uncertainty and take advantage of opportunities that may arise due to the strength of our balance sheet and liquidity.

Homebuilding Operations

The following table summarizes the results of our consolidated homebuilding operations and certain operating activity for each of the last three years:

 

     Year Ended December 31,  
     2011     2010     2009  

Revenues

   $ 2,611,195      $ 2,980,758      $ 2,683,467   

Cost of sales

   $ 2,165,625      $ 2,438,292      $ 2,185,733   

Gross profit margin percentage

     17.1     18.2     18.5

Selling, general and administrative expenses

   $ 264,266      $ 257,394      $ 233,152   

Settlements (units)

     8,487        10,030        9,042   

Average settlement price

   $ 307.5      $ 297.1      $ 296.4   

New orders (units)

     9,247        9,415        9,409   

Average new order price

   $ 304.1      $ 304.0      $ 292.7   

Backlog (units)

     3,676        2,916        3,531   

Average backlog price

   $ 315.8      $ 328.6      $ 304.9   

New order cancellation rate

     14     14     14

Consolidated Homebuilding Revenues

Homebuilding revenues for 2011 decreased 12% from 2010, as a result of a 15% decrease in the number of homes settled, offset partially by a 4% increase in the average settlement price year over year. The decrease in the number of homes settled was attributable to a 17% lower beginning backlog unit balance entering 2011 as compared to the same period in 2010, coupled with lower new orders in the first half of 2011 as compared to the first half of 2010. Average settlement prices in the current year were favorably impacted by an 8% higher average price of homes in the beginning backlog entering 2011 compared to the same period in 2010.

Homebuilding revenues for 2010 increased 11% from 2009, as a result of an 11%, increase in the number of homes settled. The increase in the number of homes settled was primarily attributable to the impact of the

 

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federal homebuyer tax credit which resulted in strong first quarter sales and increased settlements through the second quarter of 2010 as compared to the same period in 2009. In addition, the increase in settlements was also favorably impacted by a 12% higher beginning backlog unit balance entering 2010 compared to the same period in 2009.

Consolidated Homebuilding New Orders

New orders in 2011 decreased 2% when compared to the prior year, while the average sales price of new orders remained flat year over year. As discussed in the Overview section above, we continue to face selling pressure in most of our markets due to continuing economic uncertainty, driven by low consumer confidence and high unemployment rates. We expect to face continued sales and pricing pressure over the next several quarters until we see economic stability and improved consumer confidence levels.

New orders in 2010 remained flat with 2009 new orders, while the average sales price of new orders increased 4% year over year. New orders remained flat despite a strong first quarter in 2010, driven we believe by the federal homebuyer tax credit, and increased sales in the Indianapolis, IN, Orlando, FL and Raleigh, NC markets, each of which began operations in the second half of 2009. From the first quarter of 2010, we experienced a consistent decline in the number of new orders across all of our markets in each of the second, third and fourth quarters of 2010 compared to the respective periods in 2009. The increase in the average price of new orders year over year, was attributable to a product mix shift away from our attached products to our detached product which generally sell at higher price points.

Consolidated Homebuilding Gross Profit

Gross profit margins in 2011 declined to 17.1% from 18.2% in 2010. As discussed in the Overview section above, gross profit margins in 2011 were negatively impacted by pricing pressure and increased construction and sales incentive costs. We expect to experience gross profit margin pressure over at least the next several quarters due to significant market uncertainties as discussed in the Overview section above.

Gross profit margins in 2010 declined slightly to 18.2% from 18.5% in 2009. Gross profit margins in 2010 were negatively impacted by a contract land deposit impairment charge of approximately $4,300, or 14 basis points, while 2009 gross profit margins were favorably impacted by the recovery of approximately $6,500, or 24 basis points, of contract land deposits previously determined to be uncollectible.

Consolidated Homebuilding Selling, General and Administrative (“SG&A”)

SG&A expenses in 2011 increased approximately $6,900, or 3%, compared to 2010 and as a percentage of revenue increased to 10.1% in 2011 from 8.6% in the prior year. The increase in SG&A expenses was primarily attributable to an approximate $10,500 increase in equity-based compensation costs in 2011 compared to 2010. The increase in equity-based compensation resulted primarily from the favorable impact in 2010 of a reversal of approximately $6,600 in equity-based compensation expense related to an adjustment of our stock option forfeiture estimates to our actual forfeiture experience, while there was no forfeiture adjustment recorded in 2011. In addition, the increase in equity-based compensation expense in 2011 resulted from incurring a full year of expense in 2011 for non-qualified stock options and restricted share units granted in the second quarter of 2010 under the 2010 Equity Incentive Plan. This increase in SG&A expenses was partially offset by an approximate $4,100 decrease in personnel costs, primarily driven by a $7,800 decline in management incentives year over year. SG&A expenses increased as a percentage of revenue due to the aforementioned 12% decrease in revenues year over year.

SG&A expenses in 2010 increased approximately $24,200 compared to 2009, but remained flat as a percentage of revenue year over year. The increase in SG&A expenses was attributable to an approximate $13,500 increase in stock-based compensation costs in 2010 compared to the same period in 2009, due to the grant of non-qualified stock options and restricted share units under the 2010 Equity Incentive Plan, offset partially by a reversal of approximately $6,600 in stock-based compensation expense previously recorded to

 

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SG&A expense as we adjusted our stock option forfeiture estimates to our actual forfeiture experience. SG&A expense was also higher due to an approximate $5,600 increase in management incentive costs as 2009 incentive plans were limited to payouts of 50% of incentive earned, while no similar restrictions were imposed on 2010 incentive compensation. In addition, SG&A expenses were impacted by an approximate $7,600 increase in selling and marketing costs year over year due primarily to an approximate $5,700 increase in advertising and model home costs attributable in part to an increase in the average number of active communities to 371 communities in 2010 from 355 communities in 2009.

Consolidated Homebuilding Backlog

Backlog units and dollars increased approximately 26% to 3,676 and 21% to $1,160,879, respectively, as of December 31, 2011 compared to 2,916 and $958,287 as of December 31, 2010. The increase in backlog units was primarily attributable to the decreased settlement activity in 2011 as discussed above. Backlog dollars were favorably impacted by the backlog unit increase, offset partially by a 4% decline in the average price of homes in backlog in 2011 compared to 2010.

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 14% in each of 2011, 2010 and 2009. Of a reporting quarter’s opening backlog, 6% during 2011 and 2010, and 7% during 2009, of that opening backlog balance 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 in future periods. See “Risk Factors” in Item 1A of this Report.

Backlog units and dollars decreased approximately 17% to 2,916 and 11% to $958,287, respectively, as of December 31, 2010 compared to 3,531 and $1,076,437 as of December 31, 2009. The decrease in backlog units was primarily attributable to the increased settlement activity in 2010 as discussed above. Backlog dollars were negatively impacted by the decrease in backlog units.

 

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Reportable Homebuilding 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 years 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 December 31, 2011, 2010 and 2009, respectively, has been allocated to the reportable segments to show contract land deposits on a net basis. The net contract land deposit balances below also includes approximately $3,200, $6,600 and $4,900 at December 31, 2011, 2010 and 2009, respectively, of letters of credit issued as deposits in lieu of cash. The following tables summarize certain homebuilding operating activity by reportable segment for each of the last three years:

Selected Segment Financial Data:

 

     Year Ended December 31,  
     2011     2010     2009  

Revenues:

      

Mid Atlantic

   $ 1,582,826      $ 1,780,521      $ 1,661,244   

North East

     221,146        287,561        254,654   

Mid East

     549,384        632,377        505,431   

South East

     257,839        280,299        262,138   
  

 

 

   

 

 

   

 

 

 

Total

   $ 2,611,195      $ 2,980,758      $ 2,683,467   
  

 

 

   

 

 

   

 

 

 

Gross profit margin:

      

Mid Atlantic

   $ 286,266      $ 338,586      $ 307,525   

North East

     37,220        48,528        42,282   

Mid East

     85,385        109,579        85,931   

South East

     42,116        41,074        36,490   
  

 

 

   

 

 

   

 

 

 

Total

   $ 450,987      $ 537,767      $ 472,228   
  

 

 

   

 

 

   

 

 

 

Segment profit:

      

Mid Atlantic

   $ 148,373      $ 209,496      $ 185,861   

North East

     13,463        25,090        19,572   

Mid East

     27,194        56,882        38,012   

South East

     14,162        10,870        7,384   
  

 

 

   

 

 

   

 

 

 

Total

   $ 203,192      $ 302,338      $ 250,829   
  

 

 

   

 

 

   

 

 

 

Gross profit margin percentage:

      

Mid Atlantic

     18.1     19.0     18.5

North East

     16.8     16.9     16.6

Mid East

     15.5     17.3     17.0

South East

     16.3     14.7     13.9

Segment Operating Activity:

 

     Year Ended December 31,  
     2011      2010      2009  
     Units      Average
Price
     Units      Average
Price
     Units      Average
Price
 

Settlements:

                 

Mid Atlantic

     4,238       $ 373.4         5,043       $ 353.0         4,722       $ 351.8   

North East

     728       $ 303.6         920       $ 312.5         882       $ 288.7   

Mid East

     2,335       $ 235.1         2,886       $ 219.0         2,323       $ 216.3   

South East

     1,186       $ 217.1         1,181       $ 237.2         1,115       $ 235.1   
  

 

 

       

 

 

       

 

 

    

Total

     8,487       $ 307.5         10,030       $ 297.1         9,042       $ 296.4   
  

 

 

       

 

 

       

 

 

    

 

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     Year Ended December 31,  
     2011      2010      2009  
     Units      Average
Price
     Units      Average
Price
     Units      Average
Price
 

New orders, net of cancellations:

                 

Mid Atlantic

     4,616       $ 364.2         4,775       $ 365.1         4,809       $ 347.4   

North East

     872       $ 300.1         827       $ 317.3         904       $ 293.5   

Mid East

     2,412       $ 238.7         2,656       $ 221.3         2,552       $ 217.3   

South East

     1,347       $ 218.1         1,157       $ 231.9         1,144       $ 230.2   
  

 

 

       

 

 

       

 

 

    

Total

     9,247       $ 304.1         9,415       $ 304.0         9,409       $ 292.7   
  

 

 

       

 

 

       

 

 

    

Backlog:

                 

Mid Atlantic

     1,973       $ 370.3         1,595       $ 396.2         1,863       $ 359.0   

North East

     376       $ 303.0         232       $ 315.9         325       $ 302.8   

Mid East

     807       $ 245.6         730       $ 234.7         960       $ 224.7   

South East

     520       $ 227.0         359       $ 227.6         383       $ 244.1   
  

 

 

       

 

 

       

 

 

    

Total

     3,676       $ 315.8         2,916       $ 328.6         3,531       $ 304.9   
  

 

 

       

 

 

       

 

 

    

Operating Data:

 

     Year Ended December 31,  
     2011     2010     2009  

New order cancellation rate:

      

Mid Atlantic

     13.3     11.3     14.4

North East

     13.1     16.4     14.5

Mid East

     14.6     15.0     13.9

South East

     13.0     18.9     14.8

Average active communities:

      

Mid Atlantic

     188        171        168   

North East

     34        33        37   

Mid East

     106        108        100   

South East

     56        59        50   
  

 

 

   

 

 

   

 

 

 

Total

     384        371        355   
  

 

 

   

 

 

   

 

 

 

Homebuilding Inventory:

 

     As of December 31,  
     2011      2010      2009  

Sold inventory:

        

Mid Atlantic

   $ 233,458       $ 182,128       $ 219,885   

North East

     35,502         20,703         36,315   

Mid East

     52,141         43,506         60,107   

South East

     35,410         23,711         21,521   
  

 

 

    

 

 

    

 

 

 

Total (1)

   $ 356,511       $ 270,048       $ 337,828   
  

 

 

    

 

 

    

 

 

 

Unsold lots and housing units inventory:

        

Mid Atlantic

   $ 53,587       $ 42,682       $ 47,120   

North East

     4,041         3,687         4,152   

Mid East

     7,830         11,089         16,353   

South East

     14,917         8,967         4,783   
  

 

 

    

 

 

    

 

 

 

Total (1)

   $ 80,375       $ 66,425       $ 72,408   
  

 

 

    

 

 

    

 

 

 

 

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(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.

 

     Year Ended December 31,  
     2011      2010      2009  

Unsold inventory impairments:

        

Mid Atlantic

   $ 1,045       $ 1,520       $ 1,286   

North East

     246         420         598   

Mid East

     554         434         592   

South East

     228         820         268   
  

 

 

    

 

 

    

 

 

 

Total

   $ 2,073       $ 3,194       $ 2,744   
  

 

 

    

 

 

    

 

 

 

Lots Controlled and Land Deposits:

 

     As of December 31,  
     2011      2010      2009  

Total lots controlled:

        

Mid Atlantic

     29,402         30,201         26,938   

North East

     4,751         4,025         3,898   

Mid East

     11,879         11,061         10,163   

South East

     6,944         7,023         5,338   
  

 

 

    

 

 

    

 

 

 

Total

     52,976         52,310         46,337   
  

 

 

    

 

 

    

 

 

 

Lots included in impairment reserve:

        

Mid Atlantic

     5,724         5,973         6,575   

North East

     658         594         846   

Mid East

     2,409         2,055         2,022   

South East

     1,765         1,678         1,363   
  

 

 

    

 

 

    

 

 

 

Total

     10,556         10,300         10,806   
  

 

 

    

 

 

    

 

 

 

Contract land deposits, net

        

Mid Atlantic

   $ 101,674       $ 82,165       $ 38,729   

North East

     11,502         8,525         3,513   

Mid East

     16,122         11,876         5,242   

South East

     5,860         4,830         3,161   
  

 

 

    

 

 

    

 

 

 

Total

   $ 135,158       $ 107,396       $ 50,645   
  

 

 

    

 

 

    

 

 

 
     Year Ended December 31,  
     2011      2010      2009  

Contract land deposit impairments:

        

Mid Atlantic

   $ 6,741       $ 9,150       $ 18,425   

North East

     818         4,898         2,489   

Mid East

     493         1,686         7,244   

South East

     311         4,618         5,236   
  

 

 

    

 

 

    

 

 

 

Total

   $ 8,363       $ 20,352       $ 33,394   
  

 

 

    

 

 

    

 

 

 

 

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Mid Atlantic

2011 versus 2010

The Mid Atlantic segment had an approximate $61,100, or 29%, decrease in segment profit in 2011 compared to 2010. Revenues decreased approximately $197,700, or 11%, in 2011 from 2010 on a 16% decrease in the number of units settled, offset partially by a 6% increase in the average settlement price year over year. The decrease in the number of homes settled was attributable to a 14% lower beginning backlog unit balance entering 2011 as compared to the same period in 2010, coupled with a 12% decline in new orders in the first half of 2011 compared to the first half of 2010. Average settlement prices in the current year were favorably impacted by a 10% higher average price of homes in the beginning backlog entering 2011 compared to the same period in 2010. The segment’s gross profit margin percentage decreased to 18.1% in 2011 from 19.0% in 2010. Segment profit and gross profit margins were negatively impacted by pricing pressure and increased construction and sales incentive costs in addition to the reduced settlement volume year over year and its impact on our ability to leverage certain operating costs.

Segment new orders in 2011 declined approximately 3% from 2010, while the average sales price of new orders in 2011 remained flat year over year. New orders were lower despite a 10% increase in the number of active communities year over year for the reasons previously discussed in the Overview section above. New orders were also negatively impacted by an increase in the cancellation rate to 13.3% in 2011 from 11.3% in 2010.

2010 versus 2009

The Mid Atlantic segment had an approximate $23,600, or 13%, increase in segment profit in 2010 compared to 2009. Revenues increased approximately $119,300, or 7%, in 2010 from 2009 on a 7% increase in the number of units settled. The increase in units settled was attributable to the impact of the federal homebuyer tax credit which we believe resulted in higher first quarter sales and increased settlements through the second quarter of 2010 as compared to the same period in 2009. In addition, 2010 settlements were also favorably impacted by a 5% higher beginning backlog unit balance entering 2010 as compared to 2009. The segment’s gross profit margin percentage increased to 19.0% in 2010 from 18.5% in 2009. Segment profit and gross profit margins were favorably impacted by lower contract land deposit impairment charges in 2010 of $9,150, or 51 basis points, compared to $18,425, or 111 basis points in 2009.

Segment new orders in 2010 declined approximately 1%, while the average sales price of new orders in 2010 increased approximately 5%, as compared to new orders and the average sales price in 2009. The increase in the average price of new orders was attributable to a product mix shift away from our attached products to our detached product which generally sell at higher price points.

North East

2011 versus 2010

The North East segment had an approximate $11,600, or 46% decrease in segment profit in 2011 compared to 2010. Revenues decreased approximately $66,400, or 23%, in 2011 from 2010. The decrease in revenues was primarily due to a 21% decrease in the number of units settled, which was attributable to a 29% lower backlog unit balance entering 2011 as compared to the backlog unit balance entering 2010. In addition, settlements were negatively impacted by a slower backlog turnover rate in 2011 compared to 2010. Gross profit margins remained relatively flat period over period, as lower contract land deposit impairment charges in 2011 of $818, or 37 basis points, compared to 2010 of $4,898, or 170 basis points, were offset by pricing pressure and increased construction and sales incentive costs year over year. In addition, gross profit margins and segment profit were negatively affected by the lower settlement volume year over year which impacted our ability to leverage certain operating costs.

 

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Segment new orders in 2011 increased 5% compared to 2010, while the average sales price of new orders decreased 5% year over year. New orders were favorably impacted by the increase in the number of active communities year over year. Average selling prices were lower year over year due to a product mix shift from our detached product to our attached product which generally sells at lower price points.

2010 versus 2009

The North East segment had an approximate $5,500, or 28% increase in segment profit in 2010 compared to 2009. Revenues increased approximately $32,900, or 13%, in 2010 from 2009. Revenues increased due to a 4% increase in the number of units settled and an 8% increase in the average settlement price year over year. The increase in units settled was primarily attributable to the impact of the federal homebuyer tax credit which we believe resulted in higher first quarter sales and increased settlements through the second quarter of 2010 as compared to the same period in 2009. The increase in the average settlement price resulted from a product mix shift away from our attached products to our detached product, which generally sells at higher price points. Gross profit margins remained relatively flat period over period, as the higher contract land deposit impairment charges in 2010 of $4,898, or 170 basis points, compared to 2009 of $2,489, or 98 basis points, were offset by improved leveraging of fixed operating costs due to higher settlement volume year over year.

Segment new orders in 2010 decreased 9% compared to 2009, while the average sales price of new orders increased 8% year over year. Subsequent to the April 30, 2010 expiration of the federal homebuyer tax credit, we experienced a decline in new orders in each quarter of 2010 as compared to the respective quarters of 2009. The average sales price of new orders has been favorably impacted by a product mix shift away from our attached products to our detached product, which generally sells at higher price points.

Mid East

2011 versus 2010

The Mid East segment had an approximate $29,700, or 52%, decrease in segment profit in 2011 compared to 2010, driven by a decrease in revenues of approximately $83,000, or 13%, year over year. The decline in revenues was primarily due to a 19% decrease in the number of units settled, offset partially by a 7% increase in the average price of homes settled year over year. Units settled in 2011 were negatively impacted by a 24% lower beginning backlog unit balance entering 2011 compared to the same period in 2010 coupled with a 15% decline in new orders in the first half of 2011 compared to the first half of 2010. The increase in the average settlement price in 2011 is attributable to a 4% higher average price of homes in the beginning backlog year over year and an 8% higher average price of new orders in the first half of 2011 compared to the same period in 2010. Gross profit margins declined to 15.5% in 2011 from 17.3% in 2010. Gross profit margins and segment profit were negatively impacted by pricing pressure and increased construction and sales incentive costs year over year and by the lower settlement volume year over year which impacted our ability to leverage certain operating costs.

Segment new orders in 2011 decreased 9% compared to 2010, while the average new order selling price increased 8% year over year. New orders were lower year over year due to the economic circumstances discussed in the Overview section above. In addition, new orders were negatively impacted by a lower number of active communities in certain of our markets year over year, most notably the Ohio and New York regions which were down 10% and 11% respectively. The increase in the average selling price is attributable to a shift in mix to higher priced communities in certain markets.

2010 versus 2009

The Mid East segment had an approximate $18,900, or 50%, increase in segment profit in 2010 compared to 2009. The increase in segment profit was driven by an increase in revenues of approximately $126,900, or 25%, in 2010 compared to 2009 primarily due to a 24% increase in the number of units settled year over year. The increase in units settled was attributable to the impact of the federal homebuyer tax credit which we believe resulted in higher first quarter sales and increased settlements through the second quarter of 2010 as

 

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compared to the same period in 2009. In addition, settlements were favorably impacted by a 31% higher beginning backlog entering 2010 compared to the same period in 2009. Gross profit margins remained relatively flat year over year, at 17.3% in 2010 compared to 17.0% in 2009.

Segment new orders and the average new order selling price in 2010 increased 4% and 2%, respectively compared to 2009. New orders were favorably impacted primarily by the 178 new orders in 2010 in Indianapolis, IN, market which began operations in the fourth quarter of 2009. This increase was offset partially by an increase in the cancellation rate in both the third and fourth quarters of 2010 to 21% in each quarter as compared to 15% and 13% in the third and fourth quarters of 2009, respectively.

South East

2011 versus 2010

The South East segment had an approximate $3,300, or 30%, increase in segment profit in 2011 compared to 2010, despite an 8% decrease in revenues year over year. The number of units settled remained flat year over year, while the average price of homes settled in 2011 decreased 9% compared to 2010. The decrease in the average settlement price in 2011 is attributable to the 7% lower average price of units in backlog entering 2011 compared to the same period in 2010. Gross profit margins increased to 16.3% in 2011 from 14.7% in 2010 due primarily to lower contract land deposit impairment charges in 2011 of $311, or 12 basis points, compared to $4,618, or 165 basis points, in 2010. Despite this gross profit margin improvement year over year, the South East segment’s gross profit margins, similar to our other segments, have been negatively impacted by pricing pressure and increased construction and sales incentive costs year over year.

Segment new orders increased 16% in 2011 compared to 2010, while the average selling price of new orders decreased 6% year over year. The increase in new orders is primarily attributable to an increase in the number of active communities in the Raleigh, NC and Orlando, FL markets. In addition, new orders were favorably impacted by a decline in the cancellation rate in the South East segment to 13% in 2011 from 19% in 2010. The decrease in the average selling price is attributable to product mix shift to lower priced, more affordable homes in certain of our markets in the South East segment.

2010 versus 2009

The South East segment had an approximate $3,500, or 47%, increase in segment profit in 2010 compared to 2009. The increase in segment profit was driven by an increase of approximately $18,200, or 7%, in revenues in 2010 from 2009 due primarily to a 6% increase in the number of units settled. The increase in units settled was primarily attributable to the impact of the federal homebuyer tax credit which we believe resulted in higher first quarter sales and increased settlements through the second quarter of 2010 as compared to the same period in 2009. In addition, settlements were favorably impacted by an 8% higher beginning backlog entering 2010 compared to the same period in 2009. Gross profit margins increased to 14.7% in 2010 from 13.9% in 2009 due in part to lower contract land deposit impairment charges in 2010 of $4,618, or 165 basis points, compared to $5,236, or 200 basis points in 2009, coupled with improved leveraging of fixed operating costs due to higher settlement volume year over year.

Segment new orders and the average sales price of new orders for 2010 remained relatively flat with 2009. New orders were favorably impacted by an 18% increase in the average number of active communities year over year, and by the increase of approximately 80 new orders in 2010 in the Orlando, FL and Raleigh, NC markets, in which we began operations in the third quarter of 2009. These favorable variances were offset by higher cancellations rates in the segment in both the third and fourth quarters of 2010 of 32% and 19% respectively, compared to 14% and 18% for the respective quarters of 2009 and lower absorption rates year over year. Market conditions continued to deteriorate in this segment throughout 2010. The challenging market conditions, coupled with the expiration of the federal homebuyer tax credit in April of 2010, attributed to the segment’s higher cancellation rates and fewer new orders in each the second, third and fourth quarters of 2010 as compared to the respective quarters in 2009.

 

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Homebuilding Segment Reconciliations to Consolidated Homebuilding Operations

In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between homebuilding segment profit and homebuilding consolidated profit before tax include unallocated corporate overhead (which includes all management incentive compensation), stock-based compensation expense, consolidation adjustments and external corporate interest expense. Our overhead functions, such as accounting, treasury, human resources, etc., are centrally performed and the costs are not allocated to our operating segments. Consolidation adjustments consist of such items 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 segments. Likewise, stock-based compensation expense is not charged to the operating segments. External corporate interest expense is primarily comprised of interest charges on our senior notes, and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

 

     Year Ended December 31,  
     2011     2010     2009  

Homebuilding Consolidated Gross Profit:

      

Homebuilding Mid Atlantic

   $ 286,266      $ 338,586      $ 307,525   

Homebuilding North East

     37,220        48,528        42,282   

Homebuilding Mid East

     85,385        109,579        85,931   

Homebuilding South East

     42,116        41,074        36,490   

Consolidation adjustments and other (1)

     (5,417     4,699        25,506   
  

 

 

   

 

 

   

 

 

 

Consolidated homebuilding gross profit

   $ 445,570      $ 542,466      $ 497,734   
  

 

 

   

 

 

   

 

 

 

Homebuilding Consolidated Profit Before Tax:

      

Homebuilding Mid Atlantic

   $ 148,373      $ 209,496      $ 185,861   

Homebuilding North East

     13,463        25,090        19,572   

Homebuilding Mid East

     27,194        56,882        38,012   

Homebuilding South East

     14,162        10,870        7,384   

Reconciling items:

      

Contract land deposit impairment reserve (2)

     (2,878     16,206        42,939   

Equity-based compensation expense (3)

     (61,359     (50,357     (43,495

Corporate capital allocation (4)

     71,226        65,971        61,753   

Unallocated corporate overhead (5)

     (45,355     (55,992     (44,103

Consolidation adjustments and other

     20,477        15,848        4,970   

Corporate interest expense (6)

     (715     (4,546     (9,810
  

 

 

   

 

 

   

 

 

 

Reconciling items sub-total

     (18,604     (12,870     12,254   
  

 

 

   

 

 

   

 

 

 

Homebuilding consolidated profit before taxes

   $ 184,588      $ 289,468      $ 263,083   
  

 

 

   

 

 

   

 

 

 

 

(1) The year over year variances in consolidation adjustments and other related primarily to changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments.
(2) This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments. The 2011 and 2010 variances are attributable to year over year reductions in amounts allocated to our operating segments that had been previously reserved.
(3) The increase in equity-based compensation expense in 2011 compared to the prior year was primarily due to recognizing a full year of expense in 2011 related to non-qualified stock options and restricted share units granted in the second quarter of 2010 under the 2010 Equity Incentive Plan. In addition, stock-based compensation expense in 2010 was reduced by an approximate $7,000 pre-tax reversal of stock-based compensation expense attributable to the adjustment of our option forfeiture estimates based on our actual forfeiture experience.

 

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(4) This item represents the elimination of the corporate capital allocation charge included in the respective homebuilding reportable segments. The corporate capital allocation charge is based on the segment’s monthly average asset balance, and is as follows for the years presented:

 

     Year Ended December 31,  
     2011      2010      2009  

Homebuilding Mid Atlantic

   $ 48,697       $ 44,758       $ 40,765   

Homebuilding North East

     5,763         5,926         6,473   

Homebuilding Mid East

     11,074         9,657         8,863   

Homebuilding South East

     5,692         5,630         5,652   
  

 

 

    

 

 

    

 

 

 

Total

   $ 71,226       $ 65,971       $ 61,753   
  

 

 

    

 

 

    

 

 

 

 

(5) The decrease in unallocated corporate overhead in 2011 from 2010 was primarily attributable to reduced management incentive costs year over year. The increase in costs in 2010 from 2009 was attributable to higher personnel levels year over year and to higher management incentive costs as the 2009 incentive plan was limited to a payout of 50% of the maximum bonus opportunity while no similar restrictions were imposed on 2010 incentive compensation.
(6) The decrease in corporate interest expense in 2011 from 2010 was attributable to the redemption upon maturity of the outstanding senior notes in the second quarter of 2010 and the termination of the working capital credit facility in the fourth quarter of 2010.

Mortgage Banking Segment

We conduct our 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 years ended December 31, 2011, 2010 and 2009:

 

     2011     2010     2009  

Loan closing volume:

      

Total principal

   $ 1,868,472      $ 2,219,946      $ 2,060,376   
  

 

 

   

 

 

   

 

 

 

Loan volume mix:

      

Adjustable rate mortgages

     9     4     1
  

 

 

   

 

 

   

 

 

 

Fixed-rate mortgages

     91     96     99
  

 

 

   

 

 

   

 

 

 

Operating profit:

      

Segment profit

   $ 26,102      $ 35,704      $ 38,138   

Equity-based compensation expense

     (3,114     (2,779     (2,807
  

 

 

   

 

 

   

 

 

 

Mortgage banking income before tax

   $ 22,988      $ 32,925      $ 35,331   
  

 

 

   

 

 

   

 

 

 

Capture rate:

     88     90     91
  

 

 

   

 

 

   

 

 

 

Mortgage banking fees:

      

Net gain on sale of loans

   $ 34,632      $ 46,225      $ 46,960   

Title services

     12,769        14,108        12,787   

Servicing fees

     553        801        634   
  

 

 

   

 

 

   

 

 

 
   $ 47,954      $ 61,134      $ 60,381   
  

 

 

   

 

 

   

 

 

 

 

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2011 versus 2010

Loan closing volume for the year ended December 31, 2011 decreased 16% from 2010. The 2011 decrease was primarily attributable to an 18% decrease in the number of units closed, partially offset by a 3% increase in the average loan amount year over year. The decrease in the number of units closed and the increase in the average loan amount are primarily attributable to the aforementioned decrease in the homebuilding segment’s number of units settled and the increase in the average settlement prices in 2011 as compared to 2010. The decrease in the number of units closed was also partially attributable to a 2 percentage point decrease in the number of loans closed by NVRM for our homebuyers who obtain a mortgage to purchase the home (“Capture Rate”), which decreased to 88% compared to 90% in 2010.

Segment profit for the year ended December 31, 2011 decreased approximately $9,600 from 2010. The decrease in segment profit was primarily attributable to an approximate $13,200 decrease in mortgage banking fees, partially offset by an approximate $3,350 decrease in general and administrative expenses. The decrease in mortgage banking fees was primarily attributable to the aforementioned 16% decrease in closed loan volume. The decrease in general and administrative expenses is primarily attributable to an approximate $1,200 decrease in the provision for loan loss and an approximate $1,500 decrease in management incentive compensation compared to the same period in 2010.

2010 versus 2009

Loan closing volume for the year ended December 31, 2010 increased 8% from 2009. The 2010 increase was primarily attributable to a 7% increase in the number of units closed and a 1% increase in the average loan amount year over year. The increases in the number of units closed and the average loan amount are attributable to the increase in the homebuilding segment’s number of units settled and the increase in the average settlement prices in 2010 as compared to 2009.

Segment profit for the year ended December 31, 2010 decreased approximately $2,400 from 2009. The decrease in segment profit was primarily attributable to an approximate $5,800 increase in general and administrative expenses. The increase in general and administrative expenses was primarily the result of a $6,000 increase in the provision for loan loss compared to 2009. The $5,800 increase in general and administrative expenses was partially offset by an approximate $2,500 increase in interest income primarily as a result of the change in our loan sale distribution channels.

Mortgage Banking – Other

We sell all of the loans we originate into the secondary mortgage market. Insofar as we underwrite our originated loans to the standards and specifications of the ultimate investor, we have no further financial obligations from the issuance of loans, except in certain limited instances where early payment default occurs. Those underwriting standards are typically equal to or more stringent than the underwriting standards required by FNMA, VA and FHA. NVRM has always maintained an allowance for losses on mortgage loans originated that reflects our judgment of the present loss exposure in the loans that we have originated and sold. The allowance is calculated based on an analysis of historical experience and anticipated losses on mortgages held for investment, real estate owned, and specific expected loan repurchases or indemnifications. For the period January 1, 2005 to December 31, 2011, we have originated approximately $19,032,000 of mortgage loans and have cumulative actual charges incurred related to mortgage indemnifications and repurchases of approximately $5,800 during that period. Because we sell all of our loans and do not service them, there is often a substantial delay between the time that a loan goes into default and the time that the investor requests us to reimburse them for losses incurred because of the default. We believe that all of the loans that we originate are underwritten to the standards and specifications of the ultimate investor to whom we sell our originated loans. We employ a quality control department to ensure that our underwriting controls are effective, and further assess the underwriting function as part of our assessment of internal controls over financial reporting. At December 31, 2011, we had an allowance for loan losses of approximately $12,850. Although we consider the allowance for loan losses reflected on the December 31, 2011 balance sheet to be adequate, there can be no assurance that this allowance will prove to be adequate to cover losses on loans previously originated.

 

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Historically, we sold a substantial number of our loans to Bank of America through their correspondent lending program. However, in October 2011, Bank of America discontinued their correspondent lending program. As a result, this decreased the number of investors available in our loan sale distribution channels. The remaining correspondent investors are now dealing with a larger volume of loans and are performing a much more comprehensive review of loan files prior to purchase, which has resulted in loans remaining in inventory for a longer period of time before being sold. Prior to Bank of America discontinuing their correspondent lending program, loans were typically sold within 30 days. This time period has now increased to 30 to 60 days, resulting in an increase in the mortgages held for sale balance included in the consolidated balance sheet for December 31, 2011 compared to the prior year.

NVRM is dependent on our homebuilding segment’s customers for business. As new orders and selling prices of the homebuilding segment decline, NVRM’s operations will also be adversely affected. In addition, the mortgage segment’s operating results may be adversely affected in future periods due to the continued tightening and volatility of the credit markets as well as increased regulation of mortgage lending practices.

Seasonality

Overall, we do not experience material seasonal fluctuations in sales, settlements or loan closings.

Effective Tax Rate

Our consolidated effective tax rate in 2011, 2010 and 2009 was 37.65%, 36.10% and 35.60%, respectively. The 2009 effective tax rate was favorably impacted by the expiration of certain tax reserves, the receipt of tax refunds from the amendment of certain prior year federal and state returns, and a tax benefit related to compensation expense recorded for certain outstanding option grants that were previously considered to be a permanent non-deductible tax difference.

Recent Accounting Pronouncements Pending Adoption

In May 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, which amends Accounting Standards Codification (“ASC”) 820 providing consistent guidance on fair value measurement and disclosure requirements between U.S. GAAP and International Financial Reporting Standards. ASU 2011-04 is effective for fiscal years beginning after December 15, 2011. The implementation of ASU 2011-04 is not expected to have a material impact on the Company’s financial statements.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment, which amends ASC 350 to first assess qualitative factors before performing the quantitative goodwill impairment testing. ASU 2011-08 is effective for fiscal years beginning after December 15, 2011. The implementation of ASU 2011-08 is not expected to have a material impact on the Company’s financial statements.

Liquidity and Capital Resources

Lines of Credit and Notes Payable

Our homebuilding segment provides for its working capital cash requirements using cash generated from operations. Effective October 27, 2010, we voluntarily terminated our $300,000 unsecured working capital revolving credit facility which was set to expire on December 6, 2010. We currently do not intend to enter into a new credit facility; however, effective October 27, 2010, we entered into an uncommitted collateralized letter of credit facility to issue letters of credit in our ordinary course of business. See Note 11 in the accompanying consolidated financial statements for further discussion of letters of credit.

 

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Our mortgage subsidiary, NVRM, provides for its mortgage origination and other operating activities using cash generated from operations, borrowings from its parent company, NVR, as well as a revolving mortgage repurchase facility, which is non-recourse to NVR. On August 2, 2011, NVRM entered into a repurchase agreement with U.S. Bank National Association which provides for loan purchases up to $25,000, subject to certain sub-limits (“Repurchase Agreement”). The Repurchase Agreement replaced our expiring $125,000 revolving mortgage repurchase agreement. The purpose of the Repurchase Agreement is to finance the origination of mortgage loans by NVRM. The Repurchase Agreement expires on August 1, 2012.

Advances under the Repurchase Agreement carry a Pricing Rate based on the Libor Rate plus the Libor Margin, or the Default Pricing Rate, as determined under the Repurchase Agreement, provided that the Pricing Rate shall not be less than 3.75%. There are several restrictions on purchased loans, including that they cannot be sold to others, they cannot be pledged to anyone other than the agent, and they cannot support any other borrowing or repurchase agreement. The Repurchase Agreement contains various affirmative and negative covenants. The negative covenants include among others, certain limitations on transactions involving acquisitions, mergers, the incurrence of debt, sale of assets and creation of liens upon any of its Mortgage Notes. Additional covenants include (i) a tangible net worth requirement, (ii) a minimum liquidity requirement, (iii) a minimum net income requirement, and (iv) a maximum leverage ratio requirement. The Company was in compliance with all covenants under the Repurchase Agreement at December 31, 2011. At December 31, 2011 there was no debt outstanding under the Repurchase Agreement and there were no borrowing base limitations. The average Pricing Rate for amounts outstanding under the previous repurchase agreement at December 31, 2010 was 4.1%.

Equity Repurchases

In addition to funding growth in our homebuilding and mortgage banking operations, we historically have used a substantial portion of our excess liquidity to repurchase outstanding shares of our common stock in open market and privately negotiated transactions. This ongoing repurchase activity is conducted pursuant to publicly announced Board authorizations, and is typically executed in accordance with the safe-harbor provisions of Rule 10b-18 promulgated under the Securities and Exchange Act of 1934, as amended. In addition, the Board resolutions authorizing us to repurchase shares of our common stock specifically prohibit us from purchasing shares from our officers, directors, Profit Sharing/401K Plan Trust or Employee Stock Ownership Plan Trust. The repurchase program assists us in accomplishing our primary objective, creating increases in shareholder value. See Part II, Item 5 of this Form 10-K for disclosure of amounts repurchased during the fourth quarter of 2011. For the year ended December 31, 2011, we repurchased 1,017,588 shares of our common stock at an aggregate purchase price of approximately $689,300. As of December 31, 2011, we had approximately $319,900 available under two board approved repurchase authorizations.

Cash Flows

For the year ended December 31, 2011, cash and cash equivalents decreased by $712,956. Net cash provided by operating activities was $1,463. Cash provided by homebuilding operations was used to fund the increase to homebuilding inventory of $99,527, as a result of an increase in the units under construction at the end of 2011 as compared to the same period in 2010. In addition, cash was used to fund the $42,385 increase in contract land deposits year over year. The presentation of operating cash flows was reduced by $22,835, which is the amount of the excess tax benefit realized from stock option exercises and deferred compensation plan distributions during 2011 and credited directly to additional paid in capital. Investing activities during 2011 used net cash of $61,866, primarily as a result of our investment in a joint venture with Morgan Stanley Real Estate Investing of $61,250 (see Note 3 to the accompanying consolidated financial statements included herein for further discussion). In addition, cash was used to purchase $11,444 in property, plant and equipment during 2011. These uses of cash from investing activities were partially offset by capital distributions received from our unconsolidated joint ventures. Net cash used by financing activities was $652,553. During 2011, we spent approximately $689,300 to repurchase 1,017,588 shares of our common stock under our ongoing common stock

 

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repurchase program as discussed above. In addition, cash was used in the repayment of approximately $90,000 of the outstanding NVRM repurchase facility due to our decision to substantially reduce the available credit capacity under the Repurchase Agreement. These uses of cash from financing activities were offset partially by equity-based activity which provided stock option exercise proceeds of $106,999 and the realization of $22,835 in excess income tax benefits from stock option exercises and deferred compensation plan distributions.

For the year ended December 31, 2010, cash and cash equivalents decreased by $56,400. Net cash provided by operating activities was $55,388. Cash was provided primarily by homebuilding operations and was used to fund increases to contract land deposits. The presentation of operating cash flows was reduced by $63,558, which is the amount of the excess tax benefit realized from stock option exercises and deferred compensation plan distributions during 2010 and credited directly to additional paid in capital. Investing activities provided net cash of $212,440, primarily due to the net redemption of $219,535 in marketable securities at maturity during the year. Net cash used by financing activities was $324,228. During 2010, we repurchased 644,562 shares of our common stock at an aggregate purchase price of $417,079 under our ongoing common stock repurchase program. In addition, we redeemed the remaining outstanding 5% Senior Notes due 2010, totaling $133,370, upon their maturity on June 15, 2010. Stock option exercise activity during 2010 provided $77,492 in exercise proceeds and we realized $63,558 in excess income tax benefits from the exercise of stock options and deferred compensation plan distributions. We also increased net borrowings under the mortgage warehouse facility by $77,579 due to a change in the distribution channel for the sale of mortgage loans closed.

In 2009, cash and cash equivalents increased by approximately $102,500. Operating activities provided cash of $241,642. Cash was provided primarily by homebuilding operations and by an approximate $32,400 decrease in mortgage loans held for sale. The presentation of operating cash flows was reduced by approximately $66,400, which is the amount of the excess tax benefit realized from the exercise of stock options and deferred compensation plan distributions during the period and credited directly to additional paid in capital. Net cash used for investing activities during 2009 was $221,617 for the year ended December 31, 2009, which primarily resulted from the net purchase of marketable securities during 2009. The marketable securities, which were debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies, were classified as held-to-maturity securities and matured within one year. Net cash provided by financing activities during 2009 was $82,482. Financing cash flow was favorably impacted by approximately $78,500 of proceeds from the exercise of stock options and the realization of approximately $66,400 in excess income tax benefits from the exercise of stock options and deferred compensation plan distributions. Cash was used by financing activities to reduce net borrowings under the mortgage warehouse facility by approximately $32,200 and we repurchased $29,950 of our 5% Senior Notes due 2010, at par during 2009.

At December 31, 2011, 2010 and 2009, the homebuilding segment had restricted cash of approximately $19,119, $22,889 and $4,600, respectively, which is included in “Other assets” on the accompanying consolidated balance sheets. The higher restricted cash balances in 2011 and 2010 as compared to 2009 were primarily attributable to holding requirements related to outstanding letters of credit issued under the letter of credit agreement we entered into in October 2010 as discussed further in Note 11 in the accompanying consolidated financial statements. In addition, restricted cash relates to customer deposits for certain home sales.

We believe that our current cash holdings, cash generated from operations and borrowings available under our mortgage repurchase agreement and the public debt and equity markets will be sufficient to satisfy near and long term cash requirements for working capital and debt service in both our homebuilding and mortgage banking operations.

 

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Off-Balance Sheet Arrangements

Lot Acquisition Strategy

We generally do not engage in land development. Instead, we typically acquire finished building lots at market prices from various land developers under fixed price purchase agreements that require deposits that may be forfeited if we fail 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 up to 10%, of the aggregate purchase price of the finished lots.

We believe that our lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and land development. We may, at our option, choose for any reason and at any time not to perform under these purchase agreements by delivering notice of our intent not to acquire the finished lots under contract. Our 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 liquidated damage provision contained within the purchase agreements. We do not have any financial guarantees or completion obligations and we typically do not guarantee lot purchases on a specific performance basis under these purchase agreements.

At December 31, 2011, we controlled approximately 53,000 lots with an aggregate purchase price of approximately $4,600,000, by making or committing to make deposits of approximately $253,000 in the form of cash and letters of credit. Our entire risk of loss pertaining to the aggregate purchase price contractual commitment resulting from our non-performance under the contracts is limited to our $205,500 deposit paid, plus the additional $47,500 referred to below. Of the $253,000 deposit total, approximately $202,300 was in cash and approximately $3,200 was in letters of credit which had been issued as of December 31, 2011. The remaining balance of approximately $47,500 relates to deposits to be paid subsequent to December 31, 2011 assuming that contractual development milestones are met by the developers (see Contractual Obligations section below). As of December 31, 2011, we had recorded an impairment valuation allowance of approximately $70,300 related to the cash deposits currently outstanding. Please refer to Note 1 in the accompanying consolidated financial statements for a further discussion of the contract land deposits and Note 3 in the accompanying consolidated financial statements for a description of our lot acquisition strategy in relation to our accounting related to the consolidation of variable interest entities.

Bonds and Letters of Credit

We enter into bond or letter of credit arrangements with local municipalities, government agencies, or land developers to collateralize our obligations under various contracts. We had approximately $46,300 of contingent obligations under such agreements as of December 31, 2011 (inclusive of the $3,200 of lot acquisition deposits in the form of letters of credit discussed above). We believe we will fulfill our obligations under the related contracts and do not anticipate any material losses under these bonds or letters of credit.

Mortgage Commitments and Forward Sales

In the normal course of business, our mortgage banking segment enters into contractual commitments to extend credit to buyers of single-family homes with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within time frames established by us. All mortgagors are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the “lock-in” of rates by the borrower and the sale date of the loan to a broker/dealer. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, we enter into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers. The forward sale contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. We do not engage in speculative or trading derivative activities. Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers are undesignated derivatives, and, accordingly, are marked to fair value through earnings. At December 31, 2011, there were contractual commitments to extend credit to borrowers aggregating $126,929 and open forward delivery contracts aggregating $353,555. Please refer to Note 12 in the accompanying consolidated financial statements for a description of our fair value accounting.

 

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Contractual Obligations

Our fixed, non-cancelable obligations as of December 31, 2011, were as follows:

 

     Payments due by period  
     Total      Less than
1 year
     1-3
years
     3-5
years
     More than
5 years
 

Capital lease (a)

   $ 1,978       $ 609       $ 1,369       $ —         $ —     

Operating leases (b)

     65,944         16,983         21,732         12,878         14,351   

Purchase obligations (c)

     47,525         *         *         *         *   

Executive Officer employment contracts (d)

     7,491         1,871         3,747         1,873         —     

Other long-term liabilities (e)

     18,859         18,332         527         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 141,797       $ 37,795       $ 27,375       $ 14,751       $ 14,351   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The present value of this obligation is included on the consolidated balance sheets. See Note 7 in the accompanying consolidated financial statements for additional information regarding capital lease obligations.
(b) See Note 11 in the accompanying consolidated financial statements for additional information regarding operating leases.
(c)(*) Amounts represent required payments of forfeitable deposits with land developers under existing, fixed price purchase agreements, assuming that contractual development milestones are met by the developers. We expect to make all payments of these deposits within the next three years, but due to the nature of the contractual development milestones that must be met, we are unable to accurately estimate the portion of the deposit obligation that will be made within one year and that portion that will be made within one to three years.
(d) We have entered into employment agreements with our four executive officers. Each of the agreements expires on January 1, 2016 and provides for payment of a minimum base salary, which may be increased at the discretion of the Compensation Committee of NVR’s Board of Directors (the “Compensation Committee”), and annual incentive compensation of up to 100% of base salary upon achievement of annual performance objectives established by the Compensation Committee. The agreements also provide for payment of severance benefits upon termination of employment, in amounts ranging from $0 to two times the executive officer’s then annual base salary, depending on the reason for termination, plus up to $100 in outplacement assistance. Accordingly, total payments under these agreements will vary based on length of service, any future increases to base salaries, annual incentive payments earned, and the reason for termination. The agreements have been reflected in the above table assuming the continued employment of the executive officers for the full term of the respective agreements, and at the executive officers’ current base salaries. The above balances do not include any potential annual incentive compensation. The actual amounts paid could differ from that presented.
(e) Amounts represent payments due under incentive compensation plans and are included on the accompanying consolidated balance sheets, approximately $1,425 of which is recorded in the Mortgage Banking “Accounts payable and other liabilities” line item, and the remainder in the Homebuilding “Accrued expenses and other liabilities” line item.

Critical Accounting Policies

General

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America (“GAAP”) requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. We continually

 

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evaluate the estimates we use to prepare the consolidated financial statements and update those estimates as necessary. In general, our estimates are based on historical experience, on information from third party professionals, and other various assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ materially from those estimates made by management.

Homebuilding Inventory

The carrying value of inventory is stated at the lower of cost or market value. Cost of lots and completed and uncompleted housing units represent the accumulated actual cost of the units. Field construction supervisors’ salaries and related direct overhead expenses are included in inventory costs. Interest costs are not capitalized into inventory, with the exception of land under development. Upon settlement, the cost of the unit is expensed on a specific identification basis. Cost of manufacturing materials is determined on a first-in, first-out basis.

Sold inventory is evaluated for impairment based on the contractual selling price compared to the total estimated cost to construct. Unsold inventory is evaluated for impairment by analyzing recent comparable sales prices within the applicable community compared to the costs incurred to date plus the expected costs to complete. Any calculated impairments are recorded immediately.

Land Under Development and Contract Land Deposits

Land Under Development

On a very limited basis, we directly acquire raw parcels of land already zoned for its intended use to develop into finished lots. Land under development includes the land acquisition costs, direct improvement costs, capitalized interest, where applicable, and real estate taxes.

Land under development, including the land under development held by our unconsolidated joint ventures and the related joint venture investments, is reviewed for potential write-downs when impairment indicators are present. In addition to considering market and economic conditions, we assess land under development impairments on a community-by-community basis, analyzing, as applicable, current sales absorption levels, recent sales’ gross profit, and the dollar differential between the projected fully-developed cost of the lots and the current market price for lots. If indicators of impairment are present for a community, we perform an analysis to determine if the undiscounted cash flows estimated to be generated by those assets are less than their carrying amounts, and if they are, impairment charges are required to be recorded in an amount by which the carrying amount of the assets exceeds the fair value of the assets. Our determination of fair value is primarily based on discounting the estimated future cash flows at a rate commensurate with the inherent risks associated with the assets and related estimated cash flow streams.

At December 31, 2011, we had approximately $78,000 in land under development in three separate communities. In addition, at December 31, 2011, we had an aggregate investment totaling approximately $89,500 in four separate JVs that controlled land under development. None of the three communities classified as land under development nor any of the undeveloped land held by the four JVs had any indicators of impairment at December 31, 2011. As such, we do not believe that any of the land under development is impaired at this time. However, there can be no assurance that we will not incur impairment charges in the future due to unanticipated adverse changes in the economy or other events adversely affecting specific markets or the homebuilding industry.

Contract Land Deposits

We purchase finished lots under fixed price purchase agreements that require deposits that may be forfeited if we fail to perform under the contract. The deposits are in the form of cash or letters of credit in varying amounts and represent a percentage of the aggregate purchase price of the finished lots.

 

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We maintain an allowance for losses on contract land deposits that reflects our judgment of the present loss exposure in the existing contract land deposit portfolio at the end of the reporting period. To analyze contract land deposit impairments, we utilize a loss contingency analysis that is conducted each quarter. In addition to considering market and economic conditions, we assess contract land deposit impairments on a community-by-community basis pursuant to the purchase contract terms, analyzing, as applicable, current sales absorption levels, recent sales’ gross profit, the dollar differential between the contractual purchase price and the current market price for lots, a developer’s financial stability, a developer’s financial ability or willingness to reduce lot prices to current market prices, and the contract’s default status by either us or the developer along with an analysis of the expected outcome of any such default.

Our analysis is focused on whether we can sell houses profitably in a particular community in the current market with which we are faced. Because we don’t own the finished lots on which we had placed a contract land deposit, if the above analysis leads to a determination that we can’t sell homes profitably at the current contractual lot price, we then determine whether we will elect to default under the contract, forfeit our deposit and terminate the contract, or whether we will attempt to restructure the lot purchase contract, which may require us to forfeit the deposit to obtain contract concessions from a developer. We also assess whether an impairment is present due to collectability issues resulting from a developer’s non-performance because of financial or other conditions.

Although we consider the allowance for losses on contract land deposits reflected on the December 31, 2011 consolidated balance sheet to be adequate (see Note 1 to the accompanying consolidated financial statements included herein), there can be no assurance that this allowance will prove to be adequate over time to cover losses due to unanticipated adverse changes in the economy or other events adversely affecting specific markets or the homebuilding industry.

Intangible Assets

Reorganization value in excess of identifiable assets (“excess reorganization value”) is an indefinite life intangible asset that was created upon our emergence from bankruptcy on September 30, 1993. Based on the allocation of our reorganization value, the portion of our reorganization value which was not attributed to specific tangible or intangible assets has been reported as excess reorganization value, which is treated similarly to goodwill. Excess reorganization value is not subject to amortization. Rather, excess reorganization value is subject to an impairment assessment on an annual basis or more frequently if changes in events or circumstances indicate that impairment may have occurred. Because excess reorganization value was based on the reorganization value of our entire enterprise upon bankruptcy emergence, the impairment assessment is conducted on an enterprise basis based on the comparison of our total equity compared to the market value of our outstanding publicly-traded common stock. We do not believe that excess reorganization value is impaired at this time. However, changes in strategy or continued adverse changes in market conditions could impact this judgment and require an impairment loss to be recognized if our book value, including excess reorganization value, exceeds the fair value.

Warranty/Product Liability Accruals

Warranty and product liability accruals are established to provide for estimated future costs as a result of construction and product defects, product recalls and litigation incidental to our business. Liability estimates are determined based on our 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 evaluations by our General Counsel and outside counsel retained to handle specific product liability cases. Although we consider the warranty and product liability accrual reflected on the December 31, 2011 consolidated balance sheet to be adequate (see Note 11 to the accompanying consolidated financial statements included herein), there can be no assurance that this accrual will prove to be adequate over time to cover losses due to increased costs for material and labor, the inability or refusal of manufacturers or subcontractors to financially participate in corrective action, unanticipated adverse legal settlements, or other unanticipated changes to the assumptions used to estimate the warranty and product liability accrual.

 

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Equity-Based Compensation Expense

Compensation costs related to our equity-based compensation plans are recognized within our income statement. The costs recognized are based on the grant date fair value. Compensation cost for share-based grants is recognized on a straight-line basis over the requisite service period for the entire award (from the date of grant through the period of the last separately vesting portion of the grant).

We calculate the fair value of our non-publicly traded, employee stock options using the Black-Scholes option-pricing model. While the Black-Scholes model is a widely accepted method to calculate the fair value of options, its results are dependent on input variables, two of which, expected term and expected volatility, are significantly dependent on management’s judgment. We have concluded that our historical exercise experience is the best estimate of future exercise patterns to determine an option’s expected term. To estimate expected volatility, we analyze the historical volatility of our common stock over a period equal to the option’s expected term. Changes in management’s judgment of the expected term and the expected volatility could have a material effect on the grant-date fair value calculated and expensed within the income statement. In addition, we are required to estimate future grant forfeitures when considering the amount of stock-based compensation costs to record. We have concluded that our historical forfeiture rate is the best measure to base our estimate of future forfeitures of equity-based compensation grants. However, there can be no assurance that our future forfeiture rate will not be materially higher or lower than our historical forfeiture rate, which would affect the aggregate cumulative compensation expense recognized.

Mortgage Loan Loss Allowance

We originate several different loan products to our customers to finance the purchase of their home. We sell all of the loans we originate into the secondary mortgage market generally within 30 to 60 days from origination. All of the loans that we originate are underwritten to the standards and specifications of the ultimate investor. Insofar as we underwrite our originated loans to those standards, we bear no increased concentration of credit risk from the issuance of loans, except in certain limited instances where early payment default occurs. Those underwriting standards are typically equal to or more stringent than the underwriting standards required by FNMA, VA and FHA. We employ a quality control department to ensure that our underwriting controls are effectively operating, and further assess the underwriting function as part of our assessment of internal controls over financial reporting. We maintain an allowance for losses on mortgage loans originated that reflects our judgment of the present loss exposure in the loans that we have originated and sold. The allowance is calculated based on an analysis of historical experience and anticipated losses on mortgages held for investment, real estate owned, and specific expected loan repurchases or indemnifications. Although we consider the allowance for loan losses reflected on the December 31, 2011 consolidated balance sheet to be adequate (see Note 13 to the accompanying consolidated financial statements included herein), there can be no assurance that this allowance will prove to be adequate over time to cover losses due to unanticipated changes to the assumptions used to estimate the mortgage loan loss allowance.

Impact of Inflation, Changing Prices and Economic Conditions

See Risk Factors included in Item 1A herein. See also the discussion above under Overview of Current Business Environment.

 

Item 7A. Quantitative and Qualitative Disclosure About Market Risk.

Market risk is the risk of loss arising from adverse changes in market prices and interest rates. Our market risk arises from interest rate risk inherent in our financial instruments. Interest rate risk results from the possibility that changes in interest rates will cause unfavorable changes in net income or in the value of interest rate-sensitive assets, liabilities and commitments. Lower interest rates tend to increase demand for mortgage loans for home purchasers, while higher interest rates make it more difficult for potential borrowers to purchase residential properties and to qualify for mortgage loans. We have no market rate sensitive instruments held for speculative or trading purposes.

 

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Our mortgage banking segment is exposed to interest rate risk as it relates to its lending activities. The mortgage banking segment originates mortgage loans, which are sold through either optional or mandatory forward delivery contracts into the secondary markets. All of the mortgage banking segment’s loan portfolio is held for sale and subject to forward sale commitments. NVRM also sells all of its mortgages held for sale on a servicing released basis.

NVRM has available a mortgage Repurchase Agreement, which provides for loan repurchases up to $25,000, subject to certain sub limits. The Repurchase Agreement is used to fund NVRM’s mortgage origination activities. Advances under the Repurchase Agreement carry a Pricing Rate based on the LIBOR Rate plus the LIBOR Margin, or the Default Pricing Rate, as determined under the Repurchase Agreement, provided that the Pricing Rate shall not be less than 3.75%. At December 31, 2011 there was no debt outstanding under the Repurchase Agreement.

The following table represents the contractual balances of our on-balance sheet financial instruments at the expected maturity dates, as well as the fair values of those on-balance sheet financial instruments at December 31, 2011. The table does not include the debt of our consolidated joint venture as it is non-recourse to us. The expected maturity categories take into consideration the actual and anticipated amortization of principal and do not take into consideration the reinvestment of cash or the refinancing of existing indebtedness. Because we sell all of the mortgage loans we originate into the secondary markets, we have made the assumption that the portfolio of mortgage loans held for sale will mature in the first year. Consequently, advances outstanding under the Repurchase Agreement are also assumed to mature in the first year.

 

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           Maturities (000’s)                            
     2012     2013     2014     2015      Thereafter      Total     Fair
Value
 

Mortgage banking segment

                

Interest rate sensitive assets:

                

Mortgage loans held for sale

   $ 250,826        —          —          —           —         $ 250,826      $ 252,352   

Average interest rate

     4.0     —          —          —           —           4.0  

Interest rate sensitive liabilities:

                

Variable rate repurchase agreement

     —          —          —          —           —           —          —     

Average interest rate

     —          —          —          —           —           —       

Other:

                

Forward trades of mortgage-backed securities (a)

   $ (2,430     —          —          —           —         $ (2,430   $ (2,430

Forward loan commitments (a)

   $ 833        —          —          —           —         $ 833      $ 833   

Homebuilding segment

                

Interest rate sensitive assets:

                

Interest-bearing deposits

   $ 442,693        —          —          —           —         $ 442,693      $ 442,693   

Average interest rate

     0.3     —          —          —           —           0.3  

Interest rate sensitive liabilities:

                

Fixed rate obligations , including interest

   $ 609      $ 644      $ 725      $ —         $ —         $ 1,978      $ 1,978   

Average interest rate

     13.2     13.3     13.9           13.3  

 

(a) Represents the fair value recorded pursuant to ASC 815, Derivatives and Hedging.

 

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Item 8. Financial Statements and Supplementary Data.

The financial statements listed in Item 15 are filed as part of this report and are incorporated herein by reference.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

 

Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

As of the end of the period covered by this report, an evaluation was performed under the supervision and with the participation of our management, including the principal executive officer and principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934.

Based on that evaluation, the principal executive officer and principal financial officer concluded that the design and operation of these disclosure controls and procedures as of December 31, 2011 were effective to provide reasonable assurance that information required to be disclosed in our reports under the Securities and Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions regarding required disclosure.

There have been no changes in our internal controls over financial reporting identified in connection with the evaluation referred to above that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under the framework in Internal Control – Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2011. Our internal control over financial reporting as of December 31, 2011 has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their attestation report which is included herein.

 

Item 9B. Other Information.

None.

 

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PART III

 

Item 10. Directors, Executive Officers, and Corporate Governance.

Item 10 is hereby incorporated by reference to our Proxy Statement expected to be filed with the Securities and Exchange Commission on or prior to April 30, 2012. Reference is also made regarding our executive officers to “Executive Officers of the Registrant” following Item 4 of Part I of this report.

 

Item 11. Executive Compensation.

Item 11 is hereby incorporated by reference to our Proxy Statement expected to be filed with the Securities and Exchange Commission on or prior to April 30, 2012.

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.

Security ownership of certain beneficial owners and management is hereby incorporated by reference to our Proxy Statement expected to be filed with the Securities and Exchange Commission on or prior to April 30, 2012.

Equity Compensation Plan Information

The table below sets forth information as of the end of our 2011 fiscal year for (i) all equity compensation plans approved by our shareholders and (ii) all equity compensation plans not approved by our shareholders:

 

Plan category

   Number of securities
to be issued upon
exercise of
outstanding options,
warrants and rights
     Weighted-average
exercise price of
outstanding options,
warrants and rights
     Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
the first column)
 

Equity compensation plans approved by security holders (1)

     552,138       $ 476.97         239,646   

Equity compensation plans not approved by security holders

     340,047       $ 585.93         —     
  

 

 

    

 

 

    

 

 

 

Total

     892,185       $ 518.50         239,646   
  

 

 

    

 

 

    

 

 

 

 

(1) This category includes the restricted share units (“RSUs”) authorized by the 2010 Equity Incentive Plan, which was approved by our shareholders at the May 4, 2010 Annual Meeting. At December 31, 2011, there are 154,483 RSUs outstanding, issued at a $0 exercise price. Of the total 239,646 shares remaining available for future issuance, up to 85,517 may be issued as RSUs. The weighted-average exercise price of outstanding options under security holder approved plans excluding outstanding RSUs was $662.26.

Equity compensation plans approved by our shareholders include the NVR, Inc. Management Long-Term Stock Option Plan; the NVR, Inc. 1998 Management Long-Term Stock Option Plan; the 1998 Directors’

 

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Long-Term Stock Option Plan; and the 2010 Equity Incentive Plan. The only equity compensation plan that was not approved by our shareholders is the NVR, Inc. 2000 Broadly-Based Stock Option Plan. See Note 10 in the accompanying consolidated financial statements for a description of each of our equity compensation plans.

 

Item 13. Certain Relationships and Related Transactions, and Director Independence.

Item 13 is hereby incorporated by reference to our Proxy Statement expected to be filed with the Securities and Exchange Commission on or prior to April 30, 2012.

 

Item 14. Principal Accountant Fees and Services.

Item 14 is hereby incorporated by reference to our Proxy Statement expected to be filed with the Securities and Exchange Commission on or prior to April 30, 2012.

PART IV

 

Item 15. Exhibits and Financial Statement Schedules.

The following documents are filed as part of this report:

 

1. Financial Statements

NVR, Inc.-Consolidated Financial Statements

Reports of Independent Registered Public Accounting Firm

Consolidated Balance Sheets

Consolidated Statements of Income

Consolidated Statements of Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

 

2. Exhibits

 

Exhibit
Number

 

Description

    3.1   Restated Articles of Incorporation of NVR, Inc. (“NVR”). Filed as Exhibit 3.1 to NVR’s Annual Report on Form 10-K for the year ended December 31, 2010 and incorporated herein by reference.
    3.2   Bylaws, as amended, of NVR, Inc. Filed as Exhibit 3.2 to NVR’s Annual Report on Form 10-K for the year ended December 31, 2010 and incorporated herein by reference.
    4.1   Indenture dated as of April 14, 1998 between NVR, as issuer and the Bank of New York as trustee. Filed as Exhibit 4.3 to NVR’s Current Report on Form 8-K filed April 23, 1998 and incorporated herein by reference.
    4.2   Form of Note (included in Indenture filed as Exhibit 4.1).
  10.1*   Employment Agreement between NVR, Inc. and Paul C. Saville dated December 21, 2010. Filed as Exhibit 10.1 to NVR’s Form 8-K filed on December 21, 2010 and incorporated herein by reference.
  10.2*   Employment Agreement between NVR, Inc. and Dennis M. Seremet dated December 21, 2010. Filed as Exhibit 10.2 to NVR’s Form 8-K filed on December 21, 2010 and incorporated herein by reference.

 

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  10.3*   Employment Agreement between NVR, Inc. and Robert A. Goethe dated December 21, 2010. Filed as Exhibit 10.3 to NVR’s Form 8-K filed on December 21, 2010 and incorporated herein by reference.
  10.4*   Employment Agreement between NVR, Inc. and Robert W. Henley dated December 21, 2010. Filed as Exhibit 10.4 to NVR’s Form 8-K filed on December 21, 2010 and incorporated herein by reference.
  10.5*   Profit Sharing Plan of NVR, Inc. and Affiliated Companies. Filed as Exhibit 4.1 to NVR’s Registration Statement on Form S-8 (No. 333-29241) filed June 13, 1997 and incorporated herein by reference.
  10.6*   Employee Stock Ownership Plan of NVR, Inc. Incorporated by reference to NVR’s Annual Report on Form 10-K/A for the year ended December 31, 1994.
  10.7*   NVR, Inc. 1998 Management Long-Term Stock Option Plan. Filed as Exhibit 4 to NVR’s Registration Statement on Form S-8 (No. 333-79951) filed June 4, 1999 and incorporated herein by reference.
  10.8*   NVR, Inc. 1998 Directors’ Long-Term Stock Option Plan. Filed as Exhibit 4 to NVR’s Registration Statement on Form S-8 (No. 333-79949) filed June 4, 1999 and incorporated herein by reference.
  10.09*   NVR, Inc. Management Long-Term Stock Option Plan. Filed as Exhibit 99.3 to NVR’s Registration Statement on Form S-8 (No. 333-04975) filed May 31, 1996 and incorporated herein by reference.
  10.10*   NVR, Inc. 2000 Broadly-Based Stock Option Plan. Filed as Exhibit 99.1 to NVR’s Registration Statement on Form S-8 (No. 333-56732) filed March 8, 2001 and incorporated herein by reference.
  10.11*   NVR, Inc. Nonqualified Deferred Compensation Plan. Filed as Exhibit 10.1 to NVR’s Form 8-K filed on December 16, 2005 and incorporated herein by reference.
  10.12*   Description of the Board of Directors’ compensation arrangement. Filed as Exhibit 10.27 to NVR’s Annual Report on Form 10-K for the period ended December 31, 2004 and incorporated herein by reference.
  10.13*   The NVR, Inc. 2010 Equity Incentive Plan. Filed as exhibit 10.1 to NVR’s Form S-8 (No. 333-166512) filed on May 4, 2010 and incorporated herein by reference.
  10.14*   The Form of Non-Qualified Stock Option Agreement (Management grants) under the NVR, Inc. 2010 Equity incentive Plan. Filed as exhibit 10.1 to NVR’s Form 8-K filed on May 6, 2010 and incorporated herein by reference.
  10.15*   The Form of Non-Qualified Stock Option Agreement (Director grants) under the NVR, Inc. 2010 Equity incentive Plan. Filed as exhibit 10.2 to NVR’s Form 8-K filed on May 6, 2010 and incorporated herein by reference.
  10.16*   The Form of Restricted Share Units Agreement (Management grants) under the NVR, Inc. 2010 Equity incentive Plan. Filed as exhibit 10.3 to NVR’s Form 8-K filed on May 6, 2010 and incorporated herein by reference.
  10.17*   The Form of Restricted Share Units Agreement (Director grants) under the NVR, Inc. 2010 Equity incentive Plan. Filed as exhibit 10.4 to NVR’s Form 8-K filed on May 6, 2010 and incorporated herein by reference.

 

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  10.18*   The Form of Non-Qualified Stock Option Agreement under the NVR, Inc. 2000 Broadly Based Stock Option Plan. Filed as Exhibit 10.1 to NVR’s Form 8-K filed January 3, 2008 and incorporated herein by reference.
  10.19*   The Form of Non-Qualified Stock Option Agreement under the 1998 Directors’ Long- Term Stock Option Plan. Filed as Exhibit 10.34 to NVR’s Annual Report on Form 10-K for the period ended December 31, 2007 and incorporated herein by reference.
  10.20*   Summary of 2012 Named Executive Officer annual incentive compensation plan. Filed herewith.
  21   NVR, Inc. Subsidiaries. Filed herewith.
  23   Consent of KPMG LLP (Independent Registered Public Accounting Firm). Filed herewith.
  31.1   Certification of NVR’s Chief Executive Officer pursuant to Rule 13a-14(a). Filed herewith.
  31.2   Certification of NVR’s Chief Financial Officer pursuant to Rule 13a-14(a). Filed herewith.
  32   Certification of NVR’s Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed herewith.
101.INS    XBRL Instance Document
101.SCH    XBRL Taxonomy Extension Schema Document
101.CAL    XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF    XBRL Taxonomy Extension Definition Linkbase Document
101.LAB    XBRL Taxonomy Extension Label Linkbase Document
101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document

 

* Exhibit is a management contract or compensatory plan or arrangement.

 

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

 

NVR, Inc.

  By:  

/s/ Paul C. Saville

    Paul C. Saville
    President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Signature

  

Title

 

Date

/s/ Dwight C. Schar

   Chairman   February 22, 2012
Dwight C. Schar     

/s/ C. E. Andrews

   Director   February 22, 2012
C. E. Andrews     

/s/ Robert C. Butler

   Director   February 22, 2012
Robert C. Butler     

/s/ Timothy M. Donahue

   Director   February 22, 2012
Timothy M. Donahue     

/s/ Thomas D. Eckert

   Director   February 22, 2012
Thomas D. Eckert     

/s/ Alfred E. Festa

   Director   February 22, 2012
Alfred E. Festa     

/s/ Manuel H. Johnson

   Director   February 22, 2012
Manuel H. Johnson     

/s/ William A. Moran

   Director   February 22, 2012
William A. Moran     

/s/ David A. Preiser

   Director   February 22, 2012
David A. Preiser     

/s/ W. Grady Rosier

   Director   February 22, 2012
W. Grady Rosier     

/s/ John M. Toups

   Director   February 22, 2012
John M. Toups     

/s/ Paul W. Whetsell

   Director   February 22, 2012
Paul W. Whetsell     

/s/ Paul C. Saville

   Principal Executive Officer   February 22, 2012
Paul C. Saville     

 

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/s/ Dennis M. Seremet

   Principal Financial Officer   February 22, 2012
Dennis M. Seremet     

/s/ Robert W. Henley

   Principal Accounting Officer   February 22, 2012
Robert W. Henley     

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

NVR, Inc.:

We have audited the accompanying consolidated balance sheets of NVR, Inc. and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of NVR, Inc. as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), NVR, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 22, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.

KPMG LLP

McLean, Virginia

February 22, 2012

 

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Report of Independent Registered Public Accounting Firm

The Board of Directors and Shareholders

NVR, Inc.:

We have audited NVR, Inc.’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). NVR, Inc.’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, NVR, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of NVR, Inc. as of December 31, 2011 and 2010, and the related consolidated statements of income, shareholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2011, and our report dated February 22, 2012 expressed an unqualified opinion on those consolidated financial statements.

KPMG LLP

McLean, Virginia

February 22, 2012

 

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NVR, Inc.

Consolidated Balance Sheets

(in thousands, except share and per share data)

 

     December 31,  
     2011      2010  

ASSETS

     

Homebuilding:

     

Cash and cash equivalents

   $ 475,566       $ 1,190,731   

Receivables

     6,789         6,948   

Inventory:

     

Lots and housing units, covered under sales agreements with customers

     363,833         275,272   

Unsold lots and housing units

     82,578         70,542   

Land under development

     78,045         78,058   

Manufacturing materials and other

     8,694         7,457   
  

 

 

    

 

 

 
     533,150         431,329   

Assets related to consolidated variable interest entity

     20,182         22,371   

Contract land deposits, net

     131,930         100,786   

Property, plant and equipment, net

     23,243         19,523   

Reorganization value in excess of amounts allocable to identifiable assets, net

     41,580         41,580   

Deferred tax assets, net

     155,881         184,930   

Other assets

     112,997         58,075   
  

 

 

    

 

 

 
     1,501,318         2,056,273   
  

 

 

    

 

 

 

Mortgage Banking:

     

Cash and cash equivalents

     4,766         2,661   

Mortgage loans held for sale, net

     252,352         177,244   

Property and equipment, net

     1,694         950   

Reorganization value in excess of amounts allocable to identifiable assets, net

     7,347         7,347   

Other assets

     12,008         15,586   
  

 

 

    

 

 

 
     278,167         203,788   
  

 

 

    

 

 

 

Total assets

   $ 1,779,485       $ 2,260,061   
  

 

 

    

 

 

 

 

      (Continued)

See notes to consolidated financial statements.

 

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NVR, Inc.

Consolidated Balance Sheets (Continued)

(in thousands, except share and per share data)

     December 31,  
     2011     2010  

LIABILITIES AND SHAREHOLDERS’ EQUITY

    

Homebuilding:

    

Accounts payable

   $ 125,649      $ 115,578   

Accrued expenses and other liabilities

     183,810        237,052   

Liabilities related to consolidated variable interest entity

     1,013        500   

Non-recourse debt related to consolidated variable interest entity

     4,983        7,592   

Customer deposits

     61,223        53,705   

Other term debt

     1,613        1,751   
  

 

 

   

 

 

 
     378,291        416,178   
  

 

 

   

 

 

 

Mortgage Banking:

    

Accounts payable and other liabilities

     26,395        13,171   

Note payable

     —          90,338   
  

 

 

   

 

 

 
     26,395        103,509   
  

 

 

   

 

 

 

Total liabilities

     404,686        519,687   
  

 

 

   

 

 

 

Commitments and contingencies

    

Shareholders’ equity:

    

Common stock, $0.01 par value; 60,000,000 shares authorized; 20,556,198 and 20,557,913 shares issued as of December 31, 2011 and 2010, respectively

     206        206   

Additional paid-in-capital

     1,072,779        951,234   

Deferred compensation trust – 152,964 and 158,894 shares of NVR, Inc. common stock as of December 31, 2011 and 2010, respectively

     (25,581     (27,582

Deferred compensation liability

     25,581        27,582   

Retained earnings

     4,158,492        4,029,072   

Less treasury stock at cost – 15,578,565 and 14,894,357 shares as of December 31, 2011 and 2010, respectively

     (3,856,678     (3,240,138
  

 

 

   

 

 

 

Total shareholders’ equity

     1,374,799        1,740,374   
  

 

 

   

 

 

 

Total liabilities and shareholders’ equity

   $ 1,779,485      $ 2,260,061   
  

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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NVR, Inc.

Consolidated Statements of Income

(in thousands, except per share data)

 

     Year Ended     Year Ended     Year Ended  
     December 31, 2011     December 31, 2010     December 31, 2009  

Homebuilding:

      

Revenues

   $ 2,611,195      $ 2,980,758      $ 2,683,467   

Other income

     4,301        9,299        8,697   

Cost of sales

     (2,165,625     (2,438,292     (2,185,733

Selling, general and administrative

     (264,266     (257,394     (233,152
  

 

 

   

 

 

   

 

 

 

Operating income

     185,605        294,371        273,279   

Interest expense

     (1,017     (4,903     (10,196
  

 

 

   

 

 

   

 

 

 

Homebuilding income

     184,588        289,468        263,083   
  

 

 

   

 

 

   

 

 

 

Mortgage Banking:

      

Mortgage banking fees

     47,954        61,134        60,381   

Interest income

     5,702        5,411        2,979   

Other income

     456        767        629   

General and administrative

     (30,249     (33,261     (27,474

Interest expense

     (875     (1,126     (1,184
  

 

 

   

 

 

   

 

 

 

Mortgage banking income

     22,988        32,925        35,331   
  

 

 

   

 

 

   

 

 

 

Income before taxes

     207,576        322,393        298,414   

Income tax expense

     (78,156     (116,388     (106,234
  

 

 

   

 

 

   

 

 

 

Net income

   $ 129,420      $ 206,005      $ 192,180   
  

 

 

   

 

 

   

 

 

 

Basic earnings per share

   $ 23.66      $ 34.96      $ 33.10   
  

 

 

   

 

 

   

 

 

 

Diluted earnings per share

   $ 23.01      $ 33.42      $ 31.26   
  

 

 

   

 

 

   

 

 

 

Basic weighted average shares outstanding

     5,469        5,893        5,807   
  

 

 

   

 

 

   

 

 

 

Diluted weighted average shares outstanding

     5,624        6,165        6,149   
  

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements.

 

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NVR, Inc.

Consolidated Statements of Shareholders’ Equity

(in thousands)

 

     Common
Stock
     Additional
Paid-in
Capital
    Retained
Earnings
     Treasury
Stock
    Deferred
Compensation
Trust
    Deferred
Compensation
Liability
    Total  

Balance, December 31, 2008

   $ 206       $ 722,265      $ 3,630,887       $ (2,979,569   $ (74,978   $ 74,978      $ 1,373,789   

Net income

     —           —          192,180         —          —          —          192,180   

Deferred compensation activity

     —           —          —           —          34,179        (34,179     —     

Equity-based compensation

     —           46,302        —           —          —          —          46,302   

Tax benefit from stock options exercised and deferred compensation distributions

     —           66,448        —           —          —          —          66,448   

Proceeds from stock options exercised

     —           78,543        —           —          —          —          78,543   

Treasury stock issued upon option exercise

     —           (83,027     —           83,027        —          —          —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2009

     206         830,531        3,823,067         (2,896,542     (40,799     40,799        1,757,262   

Net income

     —           —          206,005         —          —          —          206,005   

Deferred compensation activity

     —           —          —           —          13,217        (13,217     —     

Purchase of common stock for treasury

     —           —          —           (417,079     —          —          (417,079

Equity-based compensation

     —           53,136        —           —          —          —          53,136   

Tax benefit from stock options exercised and deferred compensation distributions

     —           63,558        —           —          —          —          63,558   

Proceeds from stock options exercised

     —           77,492        —           —          —          —          77,492   

Treasury stock issued option exercise

     —           (73,483     —           73,483        —          —          —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2010

     206         951,234        4,029,072         (3,240,138     (27,582     27,582        1,740,374   

Net income

     —           —          129,420         —          —          —          129,420   

Deferred compensation activity

     —           —          —           —          2,001        (2,001     —     

Purchase of common stock for treasury

     —           —          —           (689,302     —          —          (689,302

Equity-based compensation

     —           64,473        —           —          —          —          64,473   

Tax benefit from stock options exercised and deferred compensation distributions

     —           22,835        —           —          —          —          22,835   

Proceeds from stock options exercised

     —           106,999        —           —          —          —          106,999   

Treasury stock issued upon option exercise

     —           (72,762     —           72,762        —          —          —     
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

Balance, December 31, 2011

   $ 206       $ 1,072,779      $ 4,158,492       $ (3,856,678   $ (25,581   $ 25,581      $ 1,374,799   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

 

See notes to consolidated financial statements

 

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NVR, Inc.

Consolidated Statements of Cash Flows

(in thousands)

 

     Year Ended
December 31, 2011
    Year Ended
December 31, 2010
    Year Ended
December 31, 2009
 

Cash flows from operating activities:

      

Net income

   $ 129,420      $ 206,005      $ 192,180   

Adjustments to reconcile net income to net cash provided by operating activities:

      

Depreciation and amortization

     6,672        7,263        9,713   

Excess income tax benefit from equity-based compensation

     (22,835     (63,558     (66,448

Equity-based compensation expense

     64,473        53,136        46,302   

Contract land deposit impairments (recoveries)

     11,241        4,264        (6,464

Gain on sale of loans

     (34,632     (46,225     (46,960

Gain on sale of fixed assets

     (217     (167     (358

Deferred tax expense

     23,732        13,558        21,905   

Mortgage loans closed

     (1,754,655     (2,109,505     (1,943,074

Proceeds from sales of mortgage loans

     1,716,966        2,011,765        2,018,151   

Principal payments on mortgage loans held for sale

     4,271        2,554        2,072   

Distribution of earnings from unconsolidated joint ventures

     2,347        1,307        —     

Net change in assets and liabilities:

      

Increase in inventory

     (99,527     (8,783     (18,148

Increase in contract land deposits

     (42,385     (53,866     (14,848

Decrease in receivables

     465        1,532        3,682   

(Decrease) increase in accounts payable, accrued expenses and customer deposits

     (2,977     56,752        82,578   

Other, net

     (896     (20,644     (38,641
  

 

 

   

 

 

   

 

 

 

Net cash provided by operating activities

     1,463        55,388        241,642   
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchase of marketable securities

     —          (150,000     (858,362

Redemption of marketable securities at maturity

     —          369,535        638,827   

Investments in unconsolidated joint ventures

     (61,600     (2,000     —     

Distribution of capital from unconsolidated joint ventures

     10,653        1,193        —     

Purchase of property, plant and equipment

     (11,444     (6,943     (3,044

Proceeds from the sale of property, plant and equipment

     525        655        962   
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by investing activities

     (61,866     212,440        (221,617
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Purchase of treasury stock

     (689,302     (417,079     —     

Net (repayments) borrowings under note payable and credit lines

     (90,476     77,579        (32,559

Repayments under non-recourse debt related to consolidated variable interest entity

     (7,958     (4,167     —     

Borrowings under non-recourse debt related to consolidated variable interest entity

     5,349        11,759        —     

Redemption of senior notes

     —          (133,370     (29,950

Excess income tax benefit from equity-based compensation

     22,835        63,558        66,448   

Proceeds from the exercise of stock options

     106,999        77,492        78,543   
  

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

     (652,553     (324,228     82,482   
  

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

     (712,956     (56,400     102,507   

Cash and cash equivalents, beginning of year

     1,193,750        1,250,150        1,147,643   
  

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

   $ 480,794      $ 1,193,750      $ 1,250,150   
  

 

 

   

 

 

   

 

 

 

 

        (Continued)

See notes to consolidated financial statements.

 

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Table of Contents

NVR, Inc.

Consolidated Statements of Cash Flows (Continued)

(in thousands)

     Year Ended
December 31, 2011
     Year Ended
December 31, 2010
    Year Ended
December 31, 2009
 

Supplemental disclosures of cash flow information:

       

Interest paid during the year, net of interest capitalized

   $ 2,000       $ 5,805      $ 10,010   
  

 

 

    

 

 

   

 

 

 

Income taxes paid during the year, net of refunds

   $ 49,763       $ 40,669      $ (28,807
  

 

 

    

 

 

   

 

 

 

Supplemental disclosures of non-cash activities:

       

Investment in newly formed consolidated joint venture

   $ —         $ (25,214   $ —     

Change in net consolidated variable interest entities

   $ —         $ —        $ (976

See notes to consolidated financial statements.

 

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Table of Contents

NVR, Inc.

Notes to Consolidated Financial Statements

(dollars in thousands, except per share data)

 

1. Summary of Significant Accounting Policies

Principles of Consolidation

The accompanying co