United States

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended March 31,September 30, 2017

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

Virginia54-1394360
(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

11700 Plaza America Drive, Suite 500

Reston, Virginia 20190

(703) 956-4000

(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)

(Not Applicable)

(Former name, former address, and former fiscal year if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes   No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, 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   No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

(Do not check if smaller reporting company)

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for companying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

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

As of April 25,October 26, 2017 there were 3,747,7783,739,858 total shares of common stock outstanding.



NVR, Inc.
FORM 10-Q
TABLE OF CONTENTS


NVR, Inc.

Form 10-Q

Table of Contents

Page

Item 1.

16

27

27

27

27

27

28

29

30

Exhibit Index

31



PART I. FINANCIALFINANCIAL INFORMATION

Item 1.Financial Statements

NVR, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

(unaudited)

 

 

March 31, 2017

 

 

December 31, 2016

 

ASSETS

 

 

 

 

 

 

 

 

Homebuilding:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

482,689

 

 

$

375,748

 

Restricted cash

 

 

14,857

 

 

 

17,561

 

Receivables

 

 

19,876

 

 

 

18,937

 

Inventory:

 

 

 

 

 

 

 

 

Lots and housing units, covered under sales agreements with customers

 

 

1,025,071

 

 

 

883,868

 

Unsold lots and housing units

 

 

129,931

 

 

 

145,065

 

Land under development

 

 

63,684

 

 

 

46,999

 

Building materials and other

 

 

13,748

 

 

 

16,168

 

 

 

 

1,232,434

 

 

 

1,092,100

 

 

 

 

 

 

 

 

 

 

Assets related to consolidated variable interest entity

 

 

1,248

 

 

 

1,251

 

Contract land deposits, net

 

 

369,703

 

 

 

379,844

 

Property, plant and equipment, net

 

 

45,116

 

 

 

45,915

 

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

 

 

41,580

 

 

 

41,580

 

Goodwill and finite-lived intangible assets, net

 

 

2,254

 

 

 

2,599

 

Other assets

 

 

277,489

 

 

 

257,811

 

 

 

 

2,487,246

 

 

 

2,233,346

 

 

 

 

 

 

 

 

 

 

Mortgage Banking:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

9,862

 

 

 

19,657

 

Restricted cash

 

 

2,122

 

 

 

1,857

 

Mortgage loans held for sale, net

 

 

213,433

 

 

 

351,958

 

Property and equipment, net

 

 

5,434

 

 

 

4,903

 

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

 

 

7,347

 

 

 

7,347

 

Other assets

 

 

16,855

 

 

 

24,875

 

 

 

 

255,053

 

 

 

410,597

 

Total assets

 

$

2,742,299

 

 

$

2,643,943

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

 

Homebuilding:

 

 

 

 

 

 

 

 

Accounts payable

 

$

237,700

 

 

$

251,212

 

Accrued expenses and other liabilities

 

 

317,828

 

 

 

336,318

 

Liabilities related to consolidated variable interest entity

 

 

879

 

 

 

882

 

Customer deposits

 

 

148,353

 

 

 

122,236

 

Senior notes

 

 

596,607

 

 

 

596,455

 

 

 

 

1,301,367

 

 

 

1,307,103

 

Mortgage Banking:

 

 

 

 

 

 

 

 

Accounts payable and other liabilities

 

 

32,652

 

 

 

32,399

 

 

 

 

32,652

 

 

 

32,399

 

Total liabilities

 

 

1,334,019

 

 

 

1,339,502

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity:

 

 

 

 

 

 

 

 

Common stock, $0.01 par value; 60,000,000 shares authorized; 20,555,330 shares issued as of both March 31, 2017 and December 31, 2016

 

 

206

 

 

 

206

 

Additional paid-in capital

 

 

1,570,270

 

 

 

1,515,828

 

Deferred compensation trust – 108,644 and 108,640 shares of NVR, Inc. common stock as of March 31, 2017 and December 31, 2016, respectively

 

 

(17,383

)

 

 

(17,375

)

Deferred compensation liability

 

 

17,383

 

 

 

17,375

 

Retained earnings

 

 

5,797,342

 

 

 

5,695,376

 

Less treasury stock at cost – 16,819,692 and 16,862,327 shares as of March 31, 2017 and December 31, 2016, respectively

 

 

(5,959,538

)

 

 

(5,906,969

)

Total shareholders' equity

 

 

1,408,280

 

 

 

1,304,441

 

Total liabilities and shareholders' equity

 

$

2,742,299

 

 

$

2,643,943

 

  September 30, 2017 December 31, 2016
ASSETS  
  
Homebuilding:  
  
Cash and cash equivalents $611,094
 $375,748
Restricted cash 13,797
 17,561
Receivables 20,448
 18,937
Inventory:    
Lots and housing units, covered under sales agreements with customers 1,187,508
 883,868
Unsold lots and housing units 158,049
 145,065
Land under development 19,182
 46,999
Building materials and other 11,820
 16,168
  1,376,559
 1,092,100
Assets related to consolidated variable interest entity 1,222
 1,251
Contract land deposits, net 365,142
 379,844
Property, plant and equipment, net 43,822
 45,915
Reorganization value in excess of amounts allocable to identifiable assets, net 41,580
 41,580
Goodwill and finite-lived intangible assets, net 1,563
 2,599
Other assets 266,572
 257,811
  2,741,799
 2,233,346
Mortgage Banking:  
  
Cash and cash equivalents 15,790
 19,657
Restricted cash 2,075
 1,857
Mortgage loans held for sale, net 258,554
 351,958
Property and equipment, net 6,308
 4,903
Reorganization value in excess of amounts allocable to identifiable assets, net 7,347
 7,347
Other assets 17,638
 24,875
  307,712
 410,597
Total assets $3,049,511
 $2,643,943
     
LIABILITIES AND SHAREHOLDERS' EQUITY  
  
Homebuilding:  
  
Accounts payable $267,039
 $251,212
Accrued expenses and other liabilities 337,932
 336,318
Liabilities related to consolidated variable interest entity 853
 882
Customer deposits 162,285
 122,236
Senior notes 596,913
 596,455
  1,365,022
 1,307,103
Mortgage Banking:  
  
Accounts payable and other liabilities 33,813
 32,399
  33,813
 32,399
Total liabilities 1,398,835
 1,339,502
     
Commitments and contingencies 

 
     
Shareholders' equity:  
  
Common stock, $0.01 par value; 60,000,000 shares authorized; 20,555,330 shares issued as of both September 30, 2017 and December 31, 2016 206
 206
Additional paid-in capital 1,626,112
 1,515,828
Deferred compensation trust – 108,638 and 108,640 shares of NVR, Inc. common stock as of September 30, 2017 and December 31, 2016, respectively (17,376) (17,375)
Deferred compensation liability 17,376
 17,375
Retained earnings 6,107,321
 5,695,376
Less treasury stock at cost – 16,819,467 and 16,862,327 shares as of September 30, 2017 and December 31, 2016, respectively (6,082,963) (5,906,969)
Total shareholders' equity 1,650,676
 1,304,441
Total liabilities and shareholders' equity $3,049,511
 $2,643,943
See notes to condensed consolidated financial statements.

1



NVR, Inc.

Condensed Consolidated Statements of Income

(in thousands, except per share data)

(unaudited)

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Homebuilding:

 

 

 

 

 

 

 

 

Revenues

 

$

1,247,587

 

 

$

1,121,504

 

Other income

 

 

1,102

 

 

 

767

 

Cost of sales

 

 

(1,026,017

)

 

 

(925,760

)

Selling, general and administrative

 

 

(99,904

)

 

 

(98,015

)

Operating income

 

 

122,768

 

 

 

98,496

 

Interest expense

 

 

(5,578

)

 

 

(4,842

)

Homebuilding income

 

 

117,190

 

 

 

93,654

 

 

 

 

 

 

 

 

 

 

Mortgage Banking:

 

 

 

 

 

 

 

 

Mortgage banking fees

 

 

29,505

 

 

 

22,522

 

Interest income

 

 

1,661

 

 

 

1,674

 

Other income

 

 

309

 

 

 

258

 

General and administrative

 

 

(16,246

)

 

 

(14,550

)

Interest expense

 

 

(258

)

 

 

(246

)

Mortgage banking income

 

 

14,971

 

 

 

9,658

 

 

 

 

 

 

 

 

 

 

Income before taxes

 

 

132,161

 

 

 

103,312

 

Income tax expense

 

 

(29,238

)

 

 

(38,009

)

 

 

 

 

 

 

 

 

 

Net income

 

$

102,923

 

 

$

65,303

 

 

 

 

 

 

 

 

 

 

Basic earnings per share

 

$

27.78

 

 

$

16.81

 

 

 

 

 

 

 

 

 

 

Diluted earnings per share

 

$

25.12

 

 

$

15.79

 

 

 

 

 

 

 

 

 

 

Basic weighted average shares outstanding

 

 

3,705

 

 

 

3,884

 

 

 

 

 

 

 

 

 

 

Diluted weighted average shares outstanding

 

 

4,097

 

 

 

4,135

 

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Homebuilding:  
  
  
  
Revenues $1,633,726
 $1,507,451
 $4,394,027
 $3,990,696
Other income 1,715
 703
 4,264
 2,223
Cost of sales (1,307,971) (1,242,292) (3,552,071) (3,294,421)
Selling, general and administrative (95,606) (92,867) (294,610) (290,925)
Operating income 231,864
 172,995
 551,610
 407,573
Interest expense (5,821) (5,338) (17,040) (14,734)
Homebuilding income 226,043
 167,657
 534,570
 392,839
         
Mortgage Banking:  
  
  
  
Mortgage banking fees 34,194
 30,118
 95,477
 79,082
Interest income 1,953
 2,000
 5,168
 5,111
Other income 583
 473
 1,398
 1,140
General and administrative (18,010) (14,959) (50,190) (44,345)
Interest expense (299) (286) (830) (792)
Mortgage banking income 18,421
 17,346
 51,023
 40,196
         
Income before taxes 244,464
 185,003
 585,593
 433,035
Income tax expense (82,362) (67,611) (172,691) (158,664)
         
Net income $162,102
 $117,392
 $412,902
 $274,371
         
Basic earnings per share $43.26
 $30.43
 $110.60
 $70.70
         
Diluted earnings per share $38.02
 $28.46
 $98.33
 $66.24
         
Basic weighted average shares outstanding 3,747
 3,858
 3,733
 3,881
         
Diluted weighted average shares outstanding 4,263
 4,125
 4,199
 4,142
See notes to condensed consolidated financial statements.

2



NVR, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

 

 

 

 

 

 

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net income

 

$

102,923

 

 

$

65,303

 

Adjustments to reconcile net income to net cash provided by (used in) operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

5,699

 

 

 

5,447

 

Equity-based compensation expense

 

 

10,589

 

 

 

10,549

 

Contract land deposit impairments (recoveries), net

 

 

1,717

 

 

 

(1,303

)

Gain on sale of loans, net

 

 

(23,231

)

 

 

(17,022

)

Mortgage loans closed

 

 

(784,928

)

 

 

(688,361

)

Mortgage loans sold and principal payments on mortgage loans held for sale

 

 

955,647

 

 

 

839,297

 

Distribution of earnings from unconsolidated joint ventures

 

 

2,070

 

 

 

3,521

 

Net change in assets and liabilities:

 

 

 

 

 

 

 

 

Increase in inventory

 

 

(140,334

)

 

 

(254,639

)

Decrease (increase) in contract land deposits

 

 

8,424

 

 

 

(2,353

)

Increase in receivables

 

 

(736

)

 

 

(4,022

)

Decrease in accounts payable and accrued expenses

 

 

(37,550

)

 

 

(1,382

)

Increase in customer deposits

 

 

26,117

 

 

 

15,587

 

Other, net

 

 

(16,024

)

 

 

(10,615

)

Net cash provided by (used in) operating activities

 

 

110,383

 

 

 

(39,993

)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Investments in and advances to unconsolidated joint ventures

 

 

(455

)

 

 

(138

)

Distribution of capital from unconsolidated joint ventures

 

 

2,480

 

 

 

4,017

 

Purchase of property, plant and equipment

 

 

(5,161

)

 

 

(5,431

)

Proceeds from the sale of property, plant and equipment

 

 

177

 

 

 

199

 

Net cash used in investing activities

 

 

(2,959

)

 

 

(1,353

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Purchase of treasury stock

 

 

(85,547

)

 

 

(87,101

)

Distributions to partner in consolidated variable interest entity

 

 

 

 

 

(150

)

Proceeds from the exercise of stock options

 

 

75,265

 

 

 

22,263

 

Net cash used in financing activities

 

 

(10,282

)

 

 

(64,988

)

 

 

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

 

97,142

 

 

 

(106,334

)

Cash and cash equivalents, beginning of the period

 

 

396,619

 

 

 

425,316

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of the period

 

$

493,761

 

 

$

318,982

 

 

 

 

 

 

 

 

 

 

Supplemental disclosures of cash flow information:

 

 

 

 

 

 

 

 

Interest paid during the period, net of interest capitalized

 

$

11,536

 

 

$

10,837

 

Income taxes paid during the period, net of refunds

 

$

7,079

 

 

$

16,516

 

  Nine Months Ended September 30,
  2017 2016
Cash flows from operating activities:  
  
Net income $412,902
 $274,371
Adjustments to reconcile net income to net cash provided by operating activities:  
  
Depreciation and amortization 17,087
 16,591
Equity-based compensation expense 32,678
 32,459
Contract land deposit impairments (recoveries), net 3,396
 (1,427)
Gain on sale of loans, net (73,372) (59,386)
Mortgage loans closed (2,860,903) (2,542,659)
Mortgage loans sold and principal payments on mortgage loans held for sale 3,033,239
 2,633,539
Distribution of earnings from unconsolidated joint ventures 5,120
 8,026
Net change in assets and liabilities:  
  
Increase in inventory (284,459) (309,824)
Decrease (increase) in contract land deposits 11,306
 (32,774)
Decrease (increase) in receivables 162
 (2,913)
Increase in accounts payable and accrued expenses 15,109
 59,736
Increase in customer deposits 40,049
 33,732
Other, net (11,538) (7,034)
Net cash provided by operating activities 340,776
 102,437
     
Cash flows from investing activities:  
  
Investments in and advances to unconsolidated joint ventures (455) (653)
Distribution of capital from unconsolidated joint ventures 6,081
 9,162
Purchase of property, plant and equipment (15,670) (16,513)
Proceeds from the sale of property, plant and equipment 664
 701
Net cash used in investing activities (9,380) (7,303)
     
Cash flows from financing activities:  
  
Purchase of treasury stock (230,199) (291,743)
Distributions to partner in consolidated variable interest entity 
 (217)
Proceeds from the exercise of stock options 130,245
 33,938
Net cash used in financing activities (99,954) (258,022)
     
Net increase (decrease) in cash and cash equivalents 231,442
 (162,888)
Cash and cash equivalents, beginning of the period 396,619
 425,316
     
Cash and cash equivalents, end of the period $628,061
 $262,428
     
Supplemental disclosures of cash flow information:  
  
Interest paid during the period, net of interest capitalized $23,112
 $20,899
Income taxes paid during the period, net of refunds $169,949
 $148,117
See notes to condensed consolidated financial statements.

3


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

1.

Basis of Presentation



1. Basis of Presentation
The accompanying unaudited, condensed consolidated financial statements include the accounts of NVR, Inc. (“NVR” or the “Company”) and its subsidiaries and certain other entities in which the Company is deemed to be the primary beneficiary (see Notes 2 and 3 to the accompanying condensed consolidated financial statements).  Intercompany accounts and transactions have been eliminated in consolidation.  The statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements.  Because the accompanying condensed consolidated financial statements do not include all of the information and footnotes required by GAAP, they should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.  In the opinion of management, all adjustments (consisting only of normal recurring accruals except as otherwise noted herein) considered necessary for a fair presentation have been included.  Operating results for the three and nine months ended March 31,September 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes.  Actual results could differ from those estimates.

On January 1, 2017, the Company adopted Accounting Standards Update (“ASU”) 2016-09, Compensation – Stock Compensation:  Improvements to Employee Share-Based Payment Accounting.  In connection with the adoption of ASU 2016-09, the Company:

Recorded the excess tax benefit from stock option exercises as a reduction to income tax expense prospectively beginning January 1, 2017.  In the prior year, the excess tax benefit was recorded to additional paid-in capital within shareholders’ equity.  The excess tax benefit recognized induring the first quarter ofthree months ended September 30, 2017 and 2016 was $19,900$8,357 and $6,284,$2,271, respectively.

  The excess tax benefit recognized during the nine months ended September 30, 2017 and 2016 was $44,720 and $10,949, respectively.

Presented the aforementioned excess tax benefit recognized as an operating activity on the statement of cash flows and retrospectively adjusted the prior year Statement of Cash Flows accordingly. In the prior year, the excess tax benefit was recognized as a cash inflow from financing activities and a corresponding cash outflow from operating activities. The retrospective adjustment resulted in a $6,284 decrease$10,949 increase to net cash usedprovided by operating activities and a $6,284$10,949 increase to net cash used in financing activities in the Consolidated Statement of Cash Flows for the threenine months ended March 31,September 30, 2016.

Made the election to recognize forfeitures of equity-based awards in the period in which they occur.  This election was applied using the modified retrospective transition method, which resulted in the Company recording a cumulative-effect adjustment, net of tax, to reduce beginning retained earnings by $957.  In the prior year, the Company estimated forfeitures based on its historical forfeiture rate.

No other adjustments were made as a result of the adoption of ASU 2016-09.

The Company also adopted ASU 2015-11, Inventory – Simplifying the Measurement of Inventory effective January 1, 2017.  The standard requires inventory to be measured at the lower of cost or net realizable value.  Under prior GAAP, impaired inventory was written down to net realizable value less a normal profit margin.  Under the new standard, impaired inventory will only be written down to the net realizable value. ASU 2015-11 was adopted prospectively and did not have a material effect on the Company’s consolidated financial statements.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)

For the three and nine months ended March 31,September 30, 2017 and 2016, comprehensive income equaled net income; therefore, a separate statement of comprehensive income is not included in the accompanying condensed consolidated financial statements.

4


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

2.

Variable Interest Entities

2. Variable Interest Entities
Fixed Price Finished Lot Purchase Agreements (“Lot Purchase Agreements”)

NVR generally does not engage in the land development business.  Instead, the Company typically acquires finished building lots at market prices from various development entities under Lot Purchase Agreements.  The Lot Purchase Agreements require deposits that may be forfeited if NVR fails to perform under the Lot Purchase Agreements.  The deposits required under the Lot Purchase Agreements are in the form of cash or letters of credit in varying amounts, and typically range up to 10% of the aggregate purchase price of the finished lots.

NVR believes this lot acquisition strategy reduces the financial requirements and risks associated with direct land ownership and land development.  NVR may, at its option, choose for any reason and at any time not to perform under these Lot Purchase Agreements by delivering notice of its intent not to acquire the finished lots under contract.  NVR’s sole legal obligation and economic loss for failure to perform under these Lot Purchase Agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained within the Lot Purchase Agreements.  In other words, if NVR does not perform under a Lot Purchase Agreement, NVR loses only its deposit.  None of the creditors of any of the development entities with which NVR enters Lot Purchase Agreements have recourse to the general credit of NVR.  NVR generally does not have any specific performance obligations to purchase a certain number or any of the lots, nor does NVR guarantee completion of the development by the developer or guarantee any of the developers’ financial or other liabilities.

NVR is not involved in the design or creation of the development entities from which the Company purchases lots under Lot Purchase Agreements.  The developer’s equity holders have the power to direct 100% of the operating activities of the development entity.  NVR has no voting rights in any of the development entities.  The sole purpose of the development entity’s activities is to generate positive cash flow returns for the equity holders.  Further, NVR does not share in any of the profit or loss generated by the project’s development.  The profits and losses are passed directly to the developer’s equity holders.

The deposit placed by NVR pursuant to the Lot Purchase Agreement is deemed to be a variable interest in the respective development entities.  Those development entities are deemed to be variable interest entities (“VIE”).  Therefore, the development entities with which NVR enters into Lot Purchase Agreements, including the joint venture limited liability corporations discussed below, are evaluated for possible consolidation by NVR.  An enterprise must consolidate a VIE when that enterprise has a controlling financial interest in the VIE.  An enterprise is deemed to have a controlling financial interest if it has i)(i) the power to direct the activities of a VIE that most significantly impact the entity’s economic performance, and ii)(ii) the obligation to absorb losses of the VIE that could be significant to the VIE or the rights to receive benefits from the VIE that could be significant to the VIE.

NVR believes the activities that most significantly impact a development entity’s economic performance are the operating activities of the entity.  The development entity’s equity investors bear the full risk during the development process. Unless and until a development entity completes finished building lots through the development process, the entity does not earn any revenues.  The operating development activities are managed solely by the development entity’s equity investors.

The development entities with which NVR contracts to buy finished lots typically select the respective projects, obtain the necessary zoning approvals, obtain the financing required with no support or guarantees from NVR, select who will purchase the finished lots and at what price, and manage the completion of the infrastructure improvements, all for the purpose of generating a cash flow return to the development entity’s equity holders and all independent of NVR.  The Company possesses no more than limited protective legal rights through the Lot Purchase Agreement in the specific finished lots that it is purchasing, and NVR possesses no participative rights in the development entities.  Accordingly, NVR does not have the power to direct the activities of a developer that
NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)

most significantly impact the developer’s economic performance.  For this reason, NVR has concluded that it is not the primary beneficiary of the development entities with which the Company enters into Lot Purchase Agreements, and therefore, NVR does not consolidate any of these VIEs.

5


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

As of March 31,September 30, 2017, NVR controlled approximately 74,30079,700 lots under Lot Purchase Agreements with third parties through deposits in cash and letters of credit totaling approximately $389,900$385,600 and $2,500,$2,100, respectively.  As noted above, NVR’s sole legal obligation and economic loss for failure to perform under these Lot Purchase Agreements is limited to the amount of the deposit pursuant to the liquidated damage provisions contained in the Lot Purchase Agreements.

In addition, NVR has certain properties under contract with land owners that are expected to yield approximately 8,7009,700 lots, which are not included in the number of total lots controlled.  Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with deposits in cash and letters of credit totaling approximately $11,800$11,700 and $100,$200, respectively, as of March 31,September 30, 2017, of which approximately $7,300$5,200 is refundable if NVR doescertain contractual conditions are not perform under the contract.met.  NVR generally expects to assign the raw land contracts to a land developer and simultaneously enter into a Lot Purchase Agreement with the assignee if the project is determined to be feasible.

NVR’s total risk of loss related to contract land deposits as of March 31,September 30, 2017 and December 31, 2016 was as follows:

 

 

March 31, 2017

 

 

December 31, 2016

 

Contract land deposits

 

$

401,737

 

 

$

411,150

 

Loss reserve on contract land deposits

 

 

(32,034

)

 

 

(31,306

)

Contract land deposits, net

 

 

369,703

 

 

 

379,844

 

Contingent obligations in the form of letters of credit

 

 

2,552

 

 

 

2,379

 

Specific performance obligations (1)

 

 

1,505

 

 

 

1,505

 

Total risk of loss

 

$

373,760

 

 

$

383,728

 

  September 30, 2017 December 31, 2016
Contract land deposits $397,330
 $411,150
Loss reserve on contract land deposits (32,188) (31,306)
Contract land deposits, net 365,142
 379,844
Contingent obligations in the form of letters of credit 2,315
 2,379
Specific performance obligations (1) 1,505
 1,505
Total risk of loss $368,962
 $383,728

(1)

As of both March 31,September 30, 2017 and December 31, 2016, the Company was committed to purchase 10 finished lots under specific performance obligations.


3.

Joint Ventures

3. Joint Ventures
On a limited basis, NVR obtains finished lots using joint venture limited liability corporations (“JVs”). The JVs are typically structured such that NVR is a non-controlling member and is at risk only for the amount the Company has invested, or has committed to invest, in addition to any deposits placed under Lot Purchase Agreements with the joint venture. NVR is not a borrower, guarantor or obligor on any debt of the JVs, as applicable. The Company enters into Lot Purchase Agreements to purchase lots from these JVs, and as a result has a variable interest in these JVs.

At March 31,September 30, 2017, the Company had an aggregate investment totaling approximately $47,700$42,300 in six JVs that are expected to produce approximately 7,4007,200 finished lots, of which approximately 4,1003,900 lots were controlled by the Company and the remaining approximately 3,300 lots were either under contract with unrelated parties or not currently under contract. In addition, NVR had additional funding commitments totaling approximately $5,800 in the aggregate to three of the JVs at March 31,September 30, 2017. The Company has determined that it is not the primary beneficiary of five of the JVs because either NVR and the other JV partner share power or the other JV partner has the controlling financial interest. The aggregate investment in unconsolidated JVs was approximately $47,400$41,900 and $49,000 at March 31,September 30, 2017 and December 31, 2016, respectively, and is reported in the “Other assets” line item on the accompanying condensed consolidated balance sheets. For the remaining JV, NVR has concluded that it is the primary beneficiary because the Company has the controlling financial interest in the JV.

6


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)


The condensed balance sheets as of March 31,September 30, 2017 and December 31, 2016 of the consolidated JV were as follows:

 

 

March 31, 2017

 

 

December 31, 2016

 

Assets:

 

 

 

 

 

 

 

 

Cash

 

$

1,210

 

 

$

1,214

 

Other assets

 

 

38

 

 

 

37

 

Total assets

 

$

1,248

 

 

$

1,251

 

 

 

 

 

 

 

 

 

 

Liabilities and equity:

 

 

 

 

 

 

 

 

Accrued expenses

 

$

547

 

 

$

550

 

Equity

 

 

701

 

 

 

701

 

Total liabilities and equity

 

$

1,248

 

 

$

1,251

 

  September 30, 2017 December 31, 2016
Assets:    
Cash $1,177
 $1,214
Other assets 45
 37
Total assets $1,222
 $1,251
     
Liabilities and equity:  
  
Accrued expenses $521
 $550
Equity 701
 701
Total liabilities and equity $1,222
 $1,251
The Company recognizes income from the JVs as a reduction to the lot cost of the lots purchased from the respective JVs when the homes are settled and is based on the expected total profitability and the total number of lots expected to be produced by the respective JVs. Distributions received from the unconsolidated JVs are allocated between return of capital and distributions of earnings based on the ratio of capital contributed by NVR to the total expected returns for the respective JVs, and are classified within the accompanying condensed consolidated statements of cash flows as cash flows from investing activities and operating activities, respectively.

4.

Land Under Development


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

In January 2017, the Company purchased a raw land parcel for approximately $14,400. TheIn September 2017, the Company sold that land parcel isto a developer for an amount which approximated NVR's net investment in the property as of the sale date. In conjunction with the sale, the Company also entered into a Lot Purchase Agreement with the developer for the option to purchase finished lots expected to produce approximately 90 lots.

be developed from the parcel.

As of March 31,September 30, 2017, NVR directly owned a total of fourthree separate raw land parcels with a carrying value of $63,684$19,182 that are expected to produce approximately 700400 finished lots. The Company also has additional funding commitments of approximately $11,200$9,000 under a joint development agreement related to one parcel, a portion of which the Company expects will be offset by development credits of approximately $6,200.

$4,800.

None of the raw parcels had any indicators of impairment as of March 31,September 30, 2017. Based on market conditions, NVR may on a limited basis continue to directly acquire additional raw parcels to develop into finished lots.

7



NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

5.


5. Capitalized Interest
Capitalized Interest

The Company capitalizes interest costs to land under development during the active development of finished lots.  In addition, the Company capitalizes interest costs to its joint venture investments while the investments are considered qualified assets pursuant to Accounting Standards Codification 835-20, Interest. Capitalized interest is transferred to sold or unsold inventory as the development of finished lots is completed, then charged to cost of sales upon the Company’s settlement of homes and the respective lots.  Interest incurred in excess of the interest capitalizable based on the level of qualified assets is expensed in the period incurred. NVR’s interest costs incurred, capitalized, expensed and charged to cost of sales during the three and nine months ended March 31,September 30, 2017 and 2016 was as follows:

 

Three Months Ended March 31,

 

 Three Months Ended September 30, Nine Months Ended September 30,

 

2017

 

 

2016

 

 2017 2016 2017 2016

Interest capitalized, beginning of period

 

$

5,106

 

 

$

4,434

 

 $5,952
 $4,576
 $5,106
 $4,434

Interest incurred

 

 

6,559

 

 

 

6,388

 

 6,615
 6,562
 19,754
 19,347

Interest charged to interest expense

 

 

(5,836

)

 

 

(5,088

)

 (6,120) (5,624) (17,870) (15,526)

Interest charged to cost of sales

 

 

(265

)

 

 

(376

)

 (778) (600) (1,321) (3,341)

Interest capitalized, end of period

 

$

5,564

 

 

$

5,358

 

 $5,669
 $4,914
 $5,669
 $4,914

6.

Earnings per Share


6. Earnings per Share
The following weighted average shares and share equivalents were used to calculate basic and diluted earnings per share for the three and nine months ended March 31,September 30, 2017 and 2016:

2016:

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Weighted average number of shares outstanding used to calculate basic EPS

 

 

3,705

 

 

 

3,884

 

Dilutive securities:

 

 

 

 

 

 

 

 

Stock options and restricted share units

 

 

392

 

 

 

251

 

Weighted average number of shares and share equivalents outstanding used to calculate diluted EPS

 

 

4,097

 

 

 

4,135

 

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Weighted average number of shares outstanding used to calculate basic EPS 3,747
 3,858
 3,733
 3,881
Dilutive securities:        
Stock options and restricted share units 516
 267
 466
 261
Weighted average number of shares and share equivalents outstanding used to calculate diluted EPS 4,263
 4,125
 4,199
 4,142
The following stock options and restricted share units issued under equity incentive plans were outstanding during the three and nine months ended March 31,September 30, 2017 and 2016, but were not included in the computation of diluted earnings per share because the effect would have been anti-dilutive.

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Anti-dilutive securities

 

 

79

 

 

 

46

 

7.

Excess Reorganization Value, Goodwill and Other Intangibles

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Anti-dilutive securities 8
 88
 17
 89

Reorganization value in excess of identifiable assets (“excess reorganization value”) is an indefinite-lived intangible asset that was created upon NVR’s emergence from bankruptcy on September 30, 1993.  Based on the allocation of the reorganization value, the portion of the reorganization value which was not attributed to specific tangible or intangible assets has been reported as excess reorganization value, which is treated similarly to goodwill.  Excess reorganization value is not subject to amortization.  Rather, excess reorganization value is subject to an impairment assessment on an annual basis or more frequently if changes in events or circumstances indicate that impairment may have occurred.  Because excess reorganization value was based on the reorganization value of NVR’s entire enterprise upon emergence from bankruptcy, the impairment assessment is conducted on an enterprise basis based on the comparison of NVR’s total equity to the market value of NVR’s outstanding publicly-traded common stock.

8



NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

As of March 31, 2017, goodwill and net finite-lived intangible assets totaled $441 and $1,813, respectively.  The remaining finite-lived intangible assets are amortized on a straight-line basis over a weighted average life of three years.  

The Company completed the annual impairment assessment of the excess reorganization value and goodwill during the first quarter of 2017 and determined that there was no impairment.

8.

Shareholders’ Equity


7. Shareholders’ Equity
A summary of changes in shareholders’ equity is presented below:

 

 

Common

Stock

 

 

Additional

Paid-In

Capital

 

 

Retained

Earnings

 

 

Treasury

Stock

 

 

Deferred

Compensation

Trust

 

 

Deferred

Compensation

Liability

 

 

Total

 

Balance, December 31, 2016

 

$

206

 

 

$

1,515,828

 

 

$

5,695,376

 

 

$

(5,906,969

)

 

$

(17,375

)

 

$

17,375

 

 

$

1,304,441

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cumulative-effect adjustment from adoption of ASU 2016-09, net of tax

 

 

 

 

 

1,566

 

 

 

(957

)

 

 

 

 

 

 

 

 

 

 

 

609

 

Net income

 

 

 

 

 

 

 

 

102,923

 

 

 

 

 

 

 

 

 

 

 

 

102,923

 

Deferred compensation activity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8

)

 

 

8

 

 

 

 

Purchase of common stock for treasury

 

 

 

 

 

 

 

 

 

 

 

(85,547

)

 

 

 

 

 

 

 

 

(85,547

)

Equity-based compensation

 

 

 

 

 

10,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

10,589

 

Proceeds from stock options exercised

 

 

 

 

 

75,265

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

75,265

 

Treasury stock issued upon option exercise and restricted share vesting

 

 

 

 

 

(32,978

)

 

 

 

 

 

32,978

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2017

 

$

206

 

 

$

1,570,270

 

 

$

5,797,342

 

 

$

(5,959,538

)

 

$

(17,383

)

 

$

17,383

 

 

$

1,408,280

 

  
Common
Stock
 
Additional
Paid-In
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Deferred
Compensation
Trust
 
Deferred
Compensation
Liability
 Total
Balance, December 31, 2016 $206
 $1,515,828
 $5,695,376
 $(5,906,969) $(17,375) $17,375
 $1,304,441
               
Cumulative-effect adjustment from adoption of ASU 2016-09, net of tax 
 1,566
 (957) 
 
 
 609
Net income 
 
 412,902
 
 
 
 412,902
Deferred compensation activity 
 
 
 
 (1) 1
 
Purchase of common stock for treasury 
 
 
 (230,199) 
 
 (230,199)
Equity-based compensation 
 32,678
 
 
 
 
 32,678
Proceeds from stock options exercised 
 130,245
 
 
 
 
 130,245
Treasury stock issued upon option exercise and restricted share vesting 
 (54,205) 
 54,205
 
 
 
Balance, September 30, 2017 $206
 $1,626,112
 $6,107,321
 $(6,082,963) $(17,376) $17,376
 $1,650,676
The Company repurchased 51110 shares of its common stock during the threenine months ended March 31,September 30, 2017. The Company settles stock option exercises and vesting of restricted share units by issuing shares of treasury stock.  Approximately 94153 shares were issued from the treasury account during the threenine months ended March 31,September 30, 2017 in settlement of stock option exercises and vesting of restricted share units.  Shares are relieved from the treasury account based on the weighted average cost basis of treasury shares acquired.

9.

Product Warranties


8. Product Warranties
The Company establishes warranty and product liability reserves (“warranty reserve”Warranty Reserve”) to provide for estimated future expenses as a result of construction and product defects, product recalls and litigation incidental to NVR’s homebuilding business.  Liability estimates are determined based on management’s judgment, considering such factors as historical experience, the likely current cost of corrective action, manufacturers’ and subcontractors’ participation in sharing the cost of corrective action, consultations with third party experts such as engineers, and discussions with the Company’s general counsel and outside counsel retained to handle specific product liability cases.
The following table reflects the changes in the Company’s warranty reserveWarranty Reserve during the three and nine months ended March 31,September 30, 2017 and 2016:

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Warranty reserve, beginning of period

 

$

93,895

 

 

$

87,407

 

Provision

 

 

8,961

 

 

 

8,842

 

Payments

 

 

(9,353

)

 

 

(9,557

)

Warranty reserve, end of period

 

$

93,503

 

 

$

86,692

 

9


  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Warranty reserve, beginning of period $95,394
 $87,953
 $93,895
 $87,407
Provision 12,940
 11,622
 35,107
 33,331
Payments (11,677) (11,551) (32,345) (32,714)
Warranty reserve, end of period $96,657
 $88,024
 $96,657
 $88,024

NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

10.

Segment Disclosures


9. Segment Disclosures
The following disclosure includes four homebuilding reportable segments that aggregate geographically the Company’s homebuilding operating segments, and the mortgage banking operations presented as a singleone reportable segment.  The homebuilding reportable segments are comprised of operating divisions in the following geographic areas:

Mid Atlantic:

Maryland, Virginia, West Virginia, Delaware and Washington, D.C.

North East:

New Jersey and Eastern Pennsylvania

Mid East:

New York, Ohio, Western Pennsylvania, Indiana and Illinois

South East:

North Carolina, South Carolina, Florida and Tennessee

Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, selling, general and administrative expenses and a corporate capital allocation charge.  The corporate capital allocation charge is eliminated in consolidation and is based on the segment’s average net assets employed.  The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker (“CODM”) to determine whether the operating segment’s results are providing the desired rate of return after covering the Company’s cost of capital.  In addition, certain assets, including goodwill and intangible assets and consolidation adjustments as discussed further below, are not allocated to the operating segments as those assets are neither included in the operating segment’s corporate capital allocation charge, nor in the CODM’s evaluation of the operating segment’s performance.  The Company records charges on contract land deposits when it is determined that it is probable that recovery of the deposit is impaired.  For segment reporting purposes, impairments on contract land deposits are generally charged to the operating segment upon the determination to terminatetermination of a Lot Purchase Agreement with the developer, or to restructurethe restructuring of a Lot Purchase Agreement resulting in the forfeiture of the deposit.  Mortgage banking profit before tax consists of revenues generated from mortgage financing, title insurance and closing services, less the costs of such services and general and administrative costs.  Mortgage banking operations are not charged a corporate capital allocation charge.

In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between segment profit and consolidated profit before tax include unallocated corporate overhead (including all management incentive compensation), equity-based compensation expense, consolidation adjustments and external corporate interest expense.  NVR’s overhead functions, such as accounting, treasury and human resources, are centrally performed and the costs are not allocated to the Company’s operating segments.  Consolidation adjustments consist of such items necessary to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to the Company’s operating segments.  External corporate interest expense primarily consists of interest charges on the Company’s 3.95% Senior Notes due 2022 (the “Senior Notes”) and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

Following are

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)

The following tables presentingpresent segment revenues, profit and assets with reconciliations to the amounts reported for the consolidated enterprise, where applicable:

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

Homebuilding Mid Atlantic

 

$

722,268

 

 

$

633,571

 

Homebuilding North East

 

 

106,231

 

 

 

97,153

 

Homebuilding Mid East

 

 

243,031

 

 

 

244,277

 

Homebuilding South East

 

 

176,057

 

 

 

146,503

 

Mortgage Banking

 

 

29,505

 

 

 

22,522

 

Total consolidated revenues

 

$

1,277,092

 

 

$

1,144,026

 

10


  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Revenues:        
Homebuilding Mid Atlantic $927,551
 $873,490
 $2,521,967
 $2,279,207
Homebuilding North East 141,033
 123,754
 374,804
 329,674
Homebuilding Mid East 338,900
 327,387
 895,168
 877,921
Homebuilding South East 226,242
 182,820
 602,088
 503,894
Mortgage Banking 34,194
 30,118
 95,477
 79,082
Total consolidated revenues $1,667,920
 $1,537,569
 $4,489,504
 $4,069,778

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Profit before taxes:        
Homebuilding Mid Atlantic $109,417
 $81,137
 $274,527
 $191,476
Homebuilding North East 18,762
 8,711
 41,980
 18,354
Homebuilding Mid East 44,990
 34,699
 103,135
 87,488
Homebuilding South East 26,849
 16,548
 64,330
 45,159
Mortgage Banking 19,336
 18,155
 53,293
 42,503
Total segment profit before taxes 219,354
 159,250
 537,265
 384,980
Reconciling items:        
Contract land deposit reserve adjustment (1) 1,910
 785
 (882) 3,421
Equity-based compensation expense (11,211) (11,081) (32,678) (32,459)
Corporate capital allocation (2) 51,904
 50,032
 147,737
 140,606
Unallocated corporate overhead (18,768) (18,459) (69,362) (74,485)
Consolidation adjustments and other 7,087
 9,798
 20,513
 25,660
Corporate interest expense (5,812) (5,322) (17,000) (14,688)
Reconciling items sub-total 25,110
 25,753
 48,328
 48,055
Consolidated profit before taxes $244,464
 $185,003
 $585,593
 $433,035
NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Profit before taxes:

 

 

 

 

 

 

 

 

Homebuilding Mid Atlantic

 

$

64,489

 

 

$

46,609

 

Homebuilding North East

 

 

9,106

 

 

 

4,065

 

Homebuilding Mid East

 

 

22,159

 

 

 

22,733

 

Homebuilding South East

 

 

14,569

 

 

 

12,786

 

Mortgage Banking

 

 

15,953

 

 

 

10,375

 

Total segment profit before taxes

 

 

126,276

 

 

 

96,568

 

Reconciling items:

 

 

 

 

 

 

 

 

Contract land deposit reserve adjustment (1)

 

 

(728

)

 

 

1,329

 

Equity-based compensation expense

 

 

(10,589

)

 

 

(10,549

)

Corporate capital allocation (2)

 

 

46,187

 

 

 

44,315

 

Unallocated corporate overhead

 

 

(27,234

)

 

 

(29,509

)

Consolidation adjustments and other

 

 

3,813

 

 

 

5,985

 

Corporate interest expense

 

 

(5,564

)

 

 

(4,827

)

Reconciling items sub-total

 

 

5,885

 

 

 

6,744

 

Consolidated profit before taxes

 

$

132,161

 

 

$

103,312

 


 

 

March 31, 2017

 

 

December 31, 2016

 

Assets:

 

 

 

 

 

 

 

 

Homebuilding Mid Atlantic

 

$

1,125,721

 

 

$

1,054,779

 

Homebuilding North East

 

 

137,409

 

 

 

126,720

 

Homebuilding Mid East

 

 

254,915

 

 

 

222,736

 

Homebuilding South East

 

 

230,127

 

 

 

214,225

 

Mortgage Banking

 

 

247,706

 

 

 

403,250

 

Total segment assets

 

 

1,995,878

 

 

 

2,021,710

 

Reconciling items:

 

 

 

 

 

 

 

 

Consolidated variable interest entity

 

 

1,248

 

 

 

1,251

 

Cash and cash equivalents

 

 

482,689

 

 

 

375,748

 

Deferred taxes

 

 

173,611

 

 

 

170,652

 

Intangible assets and goodwill

 

 

51,181

 

 

 

51,526

 

Contract land deposit reserve

 

 

(32,034

)

 

 

(31,306

)

Consolidation adjustments and other

 

 

69,726

 

 

 

54,362

 

Reconciling items sub-total

 

 

746,421

 

 

 

622,233

 

Consolidated assets

 

$

2,742,299

 

 

$

2,643,943

 

  September 30, 2017 December 31, 2016
Assets:    
Homebuilding Mid Atlantic $1,163,794
 $1,054,779
Homebuilding North East 145,094
 126,720
Homebuilding Mid East 278,609
 222,736
Homebuilding South East 288,473
 214,225
Mortgage Banking 300,365
 403,250
Total segment assets 2,176,335
 2,021,710
Reconciling items:    
Consolidated variable interest entity 1,222
 1,251
Cash and cash equivalents 611,094
 375,748
Deferred taxes 176,892
 170,652
Intangible assets and goodwill 50,490
 51,526
Contract land deposit reserve (32,188) (31,306)
Consolidation adjustments and other 65,666
 54,362
Reconciling items sub-total 873,176
 622,233
Consolidated assets $3,049,511
 $2,643,943

(1)

This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments.

(2)

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

 

Three Months Ended March 31,

 

 Three Months Ended September 30, Nine Months Ended September 30,

 

2017

 

 

2016

 

 2017 2016 2017 2016

Corporate capital allocation charge:

 

 

 

 

 

 

 

 

        

Homebuilding Mid Atlantic

 

$

29,124

 

 

$

27,186

 

 $32,025
 $31,960
 $92,154
 $87,911

Homebuilding North East

 

 

3,814

 

 

 

4,953

 

 4,244
 4,572
 12,191
 13,972

Homebuilding Mid East

 

 

6,742

 

 

 

6,699

 

 7,747
 7,366
 22,024
 21,523

Homebuilding South East

 

 

6,507

 

 

 

5,477

 

 7,888
 6,134
 21,368
 17,200

Total

 

$

46,187

 

 

$

44,315

 

 $51,904
 $50,032
 $147,737
 $140,606

11


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

11.

Fair Value


10. Fair Value
GAAP assigns a fair value hierarchy to the inputs used to measure fair value.  Level 1 inputs are quoted prices in active markets for identical assets and liabilities.  Level 2 inputs are inputs other than quoted market prices that are observable for the asset or liability, either directly or indirectly.  Level 3 inputs are unobservable inputs.

Financial Instruments

The estimated fair value of NVR’s Senior Notes as of March 31,September 30, 2017 was $619,020.$628,500.  The estimated fair value is based on recent market prices of similar transactions, which is classified as Level 2 within the fair value hierarchy.  The carrying value of the Senior Notes was $596,607$596,913 at March 31,September 30, 2017.  Except as otherwise noted below, NVR believes that insignificant differences exist between the carrying value and the fair value of its financial instruments, which consist of cash equivalents, due to their short term nature.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)

Derivative Instruments and Mortgage Loans Held for Sale

In the normal course of business, NVR’s wholly-owned mortgage subsidiary, NVR Mortgage Finance, Inc. (“NVRM”), enters into contractual commitments to extend credit to NVR’s homebuyers with fixed expiration dates.  The commitments become effective when the borrowers "lock-in" a specified interest rate within time frames established by NVRM.  All mortgagors are evaluated for credit worthiness prior to the extension of the commitment.  Market risk arises if interest rates move adversely between the time of the "lock-in" of rates by the borrower and the sale date of the loan to a broker/dealer.  To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, NVRM enters into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers.  The forward sales contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments.  NVRM does not engage in speculative or trading derivative activities.  Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers are undesignated derivatives and, accordingly, are marked to fair value through earnings.  At March 31,September 30, 2017, there were contractual commitments to extend credit to borrowers aggregating $603,327$668,936 and open forward delivery contracts aggregating $752,360,$838,131, which hedge both the rate lock loan commitments and closed loans held for sale.

The fair value of NVRM’s rate lock commitments to borrowers and the related input levels include, as applicable:

i)

the assumed gain/loss of the expected resultant loan sale (Level 2);

ii)

the effects of interest rate movements between the date of the rate lock and the balance sheet date (Level 2); and

iii)

the value of the servicing rights associated with the loan (Level 2).

The assumed gain/loss considers the excess servicing to be received or buydown fees to be paid upon securitization of the loan.  The excess servicing and buydown fees are calculated pursuant to contractual terms with investors.  To calculate the effects of interest rate movements, NVRM utilizes applicable published mortgage-backed security prices, and multiplies the price movement between the rate lock date and the balance sheet date by the notional loan commitment amount.  NVRM sells all of its loans on a servicing released basis, and receives a servicing released premium upon sale.  Thus, the value of the servicing rights which averaged 110 basis points of the loan amount as of March 31, 2017, is included in the fair value measurement and is based upon contractual terms with investors and varies depending on the loan type.  NVRM assumes an approximate 15%a fallout rate when measuring the fair value of rate lock commitments.  Fallout is defined as locked loan commitments for which NVRM does not close a mortgage loan and is based on historical experience.

The fair value of NVRM’s forward sales contracts to broker/dealers solely considers the market price movement of the same type of security between the trade date and the balance sheet date (Level 2).  The market price changes are multiplied by the notional amount of the forward sales contracts to measure the fair value.

Mortgage loans held for sale are recorded at fair value when closed, and thereafter are carried at the lower of cost or fair value, net of deferred origination costs, until sold.  Fair value is measured using Level 2 inputs.  The fair value of loans held for sale of $213,433$258,554 included on the

12


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

accompanying condensed consolidated balance sheet has been increased by $992$2,537 from the aggregate principal balance of $212,441.

$256,017.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)

The undesignated derivative instruments are included on the accompanying condensed consolidated balance sheet, as of March 31,September 30, 2017, as follows:

 

 

Fair Value

 

 

Balance Sheet Location

Rate lock commitments:

 

 

 

 

 

 

Gross assets

 

$

7,844

 

 

 

Gross liabilities

 

 

3,324

 

 

 

Net rate lock commitments

 

$

4,520

 

 

NVRM - Other assets

Forward sales contracts:

 

 

 

 

 

 

Gross assets

 

$

131

 

 

 

Gross liabilities

 

 

3,474

 

 

 

Net forward sales contracts

 

$

3,343

 

 

NVRM - Accounts payable and other liabilities

  Fair Value Balance Sheet Location
Rate lock commitments:    
Gross assets $7,221
  
Gross liabilities 3,610
  
Net rate lock commitments $3,611
 NVRM - Other assets
Forward sales contracts:    
Gross assets $1,771
  
Gross liabilities 802
  
Net forward sales contracts $969
 NVRM - Other assets
The fair value measurement as of March 31,September 30, 2017 was as follows:

 

 

Notional or

Principal

Amount

 

 

Assumed

Gain/(Loss)

From Loan

Sale

 

 

Interest

Rate

Movement

Effect

 

 

Servicing

Rights

Value

 

 

Security

Price

Change

 

 

Total Fair

Value

Measurement

Gain/(Loss)

 

Rate lock commitments

 

$

603,327

 

 

$

(2,871

)

 

$

1,771

 

 

$

5,620

 

 

$

 

 

$

4,520

 

Forward sales contracts

 

$

752,360

 

 

 

 

 

 

 

 

 

 

 

 

(3,343

)

 

 

(3,343

)

Mortgages held for sale

 

$

212,441

 

 

 

(979

)

 

 

(409

)

 

 

2,380

 

 

 

 

 

 

992

 

Total fair value measurement

 

 

$

(3,850

)

 

$

1,362

 

 

$

8,000

 

 

$

(3,343

)

 

$

2,169

 

  
Notional or
Principal
Amount
 
Assumed
Gain/(Loss)
From Loan
Sale
 
Interest
Rate
Movement
Effect
 
Servicing
Rights
Value
 
Security
Price
Change
 
Total Fair
Value
Measurement
Gain/(Loss)
Rate lock commitments $668,936
 $(1,433) $(1,361) $6,405
 $
 $3,611
Forward sales contracts $838,131
 
 
 
 969
 969
Mortgages held for sale $256,017
 (301) 265
 2,573
 
 2,537
Total fair value measurement   $(1,734) $(1,096) $8,978
 $969
 $7,117
For the three and nine months ended March 31,September 30, 2017, NVRM recorded a fair value adjustment to income of $1,572 and $2,931, respectively.  For the three and nine months ended September 30, 2016, NVRM recorded a fair value adjustment to expense of $2,017$758 and $657,$826, respectively.  Unrealized gains/losses from the change in the fair value measurements are included in earnings as a component of mortgage banking fees in the accompanying condensed consolidated statements of income.  The fair value measurement will be impacted in the future by the change in the value of the servicing rights, interest rate movements, security price fluctuations, and the volume and product mix of NVRM’s closed loans and locked loan commitments.

12.

Debt


11. Debt
Senior Notes

As of March 31,September 30, 2017, the Company had Senior Notes outstanding with a principal balance of $600,000. The Senior Notes mature on September 15, 2022 and bear interest at 3.95%, payable semi-annually in arrears on March 15 and September 15. The Senior Notes were issued at a discount to yield 3.97% and have been reflected net of the unamortized discount and unamortized debt issuance costs in the accompanying condensed consolidated balance sheet.

Credit Agreement

NVR has an unsecured Credit Agreement (the “Credit Agreement”), which provides for aggregate revolving loan commitments of $200,000 (the “Facility”). Under the Credit Agreement, the Company may request increases of up to $300,000 to the Facility in the form of revolving loan commitments or term loans to the extent that new or existing lenders agree to provide additional revolving loan or term loan commitments.  The Credit Agreement provides for a $100,000 sublimit for the issuance of letters of credit, of which approximately $8,900$7,200 was outstanding at March 31,September 30, 2017, and a $25,000 sublimit for a swing line commitment. The Credit Agreement termination date is July 15, 2021. There was no debt outstanding under the Facility at March 31,September 30, 2017.

13


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)


Repurchase Agreement

NVRM provides for its mortgage origination and other operating activities using cash generated from its operations, borrowings from its parent company, NVR, as well as a revolving mortgage repurchase agreement (the “Repurchase Agreement”), which is non-recourse to NVR.  The Repurchase Agreement provides for loan purchases up to $150,000, subject to certain sub-limits, and provides for an incremental commitment pursuant to which NVRM may from time to time request increases in the total commitment available under the Repurchase Agreement by up to $50,000 in the aggregate. Amounts outstanding under the Repurchase Agreement are collateralized by the Company’s mortgage loans held for sale. The Repurchase Agreement expires on July 26, 2017.25, 2018. At March 31,September 30, 2017, there were no borrowing base limitations reducing the amount available under the Repurchase Agreement. There was no debt outstanding under the Repurchase Agreement at March 31,September 30, 2017.

13.

Commitments and Contingencies


12. Commitments and Contingencies
In June 2010, the Company received a Request for Information from the United States Environmental Protection Agency (“EPA”) pursuant to Section 308 of the Clean Water Act. The request sought information about storm water discharge practices in connection with homebuilding projects completed or underway by the Company in New York and New Jersey. The Company cooperated with this request, and provided information to the EPA. The Company was subsequently informed by the United States Department of Justice (“DOJ”) that the EPA forwarded the information on the matter to the DOJ, and the DOJ requested that the Company meet with the government to discuss the status of the case. Meetings took place in January 2012, August 2012 and November 2014 with representatives from both the EPA and DOJ. The Company has continued discussionsentered a consent decree with the EPA and DOJ and is presently engaged in settlement discussions with them. Any settlement is expected to includesettle this matter. The U.S. District Court for the District of New Jersey approved the consent decree on September 7, 2017. The consent decree includes injunctive relief and payment of a civil penalty. Although there can be no assurance thatpenalty, which was paid in September 2017. The Company believes the disposition of this matter will not have a settlement will be reached, in 2015 the Company recorded a liabilitymaterial adverse effect on its results of operations and corresponding expense associated with an estimated civil penalty amount.

liquidity or on its financial condition.

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

14.

Income Taxes


13. Income Taxes
The Company’s effective tax rate duringfor the three and nine months ended March 31,September 30, 2017 was 33.7% and 29.5%, respectively.  For the three and nine months ended September 30, 2016, the Company’s effective tax rate was 22.1%36.5% and 36.8%36.6%, respectively. The 2017 effective tax rate was reduced as a result of the Company’s adoption of ASU 2016-09, which requires the excess tax benefit from stock option exercises to be recorded as a reduction to income tax expense in the period stock options are exercised.  TheDuring the three and nine months ended September 30, 2017, the Company recognized $19,900$8,357 and $44,720, respectively, in excess tax benefit inbenefits. During the first quarter of 2017. In the first quarter ofthree and nine months ended September 30, 2016, an excess tax benefitbenefits of $6,284 was$2,271 and $10,949, respectively, were recorded to additional paid-in capital within shareholders’ equity.

15.

Recent Accounting Pronouncements


14. Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers.  The standard will replace most existing revenue recognition guidance in GAAP when it becomes effective. In July 2015, the FASB delayed the standard’s effective date for one year. The standard is effective for the Company as of January 1, 2018. The Company plans to adopt the standard permitsusing the use of either the retrospective or cumulative effect transition method. The Company does not believe that the adoption of this standard will have a material effect on its consolidated financial statements and related disclosures.

NVR, Inc.
Notes to Condensed Consolidated Financial Statements
(dollars and shares in thousands)
(unaudited)

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842), which requires lessees to recognize most leases on-balance sheet with a liability equal to the present value of lease payments over the lease term and a right-of-use asset

14


NVR, Inc.

Notes to Condensed Consolidated Financial Statements

(dollars and shares in thousands)

(unaudited)

for the right to use the underlying asset over the lease term. Lessees will recognize expenses on their income statements in a manner similar to current GAAP. The standard also requires additional disclosures of key information about leasing arrangements. The standard is effective for the Company as of January 1, 2019. The Company believes that the adoption of this standard will have a material effect on both assets and liabilities presented on the balance sheet, and is further evaluating the impact of its adoption.

In June 2016, FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), which significantly changes the way impairment of financial assets is recognized. The standard will require immediate recognition of estimated credit losses expected to occur over the remaining life of many financial assets, which will generally result in earlier recognition of allowances for credit losses on loans and other financial instruments. The standard’s provisions will be applied as a cumulative-effect adjustment to beginning retained earnings as of the effective date. The standard is effective for the Company as of January 1, 2020. Early adoption is permitted for annual and interim periods beginning January 1, 2019. The Company is currently evaluating the effect that the standard will have on its consolidated financial statements and related disclosures.

In August 2016, FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. The objective of the standard is to address the diversity in practice of how certain cash receipts and payments are presented on the statement of cash flows. The standard requires that the guidance be applied retrospectively in the first interim and annual periods in which an entity adopts the guidance. The standard is effective for the Company as of January 1, 2018. The Company is currently evaluating the effect thatexpects the standard will have on itsto affect the presentation of the distributions from joint ventures in the consolidated statementsstatement of cash flows and related disclosures.

flows.

In November 2016, FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash. The amendments in the standard require that the statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash or restricted cash equivalents. As a result, restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown on the statement of cash flows. The standard is effective for the Company as of January 1, 2018. The Company does not believe that the adoption of this standard will have a material effect on its consolidated statements of cash flows and related disclosures.

In January 2017, FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350), Simplifying the Test for Goodwill Impairment. The standard’s objective is to simplify the subsequent measurement of goodwill by eliminating the second step from the goodwill impairment test. Under the amendments in the standard, an entity would perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. If the carrying amount of a reporting unit exceeds its fair value, an impairment charge would then be recognized, not to exceed the amount of goodwill allocated to that reporting unit. The standard is effective for the Company on January 1, 2020, and early adoption is permitted. The Company does not believe that the adoption of this standard will have a material effect on its consolidated financial statements and related disclosures.

15


In May 2017, FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718), Scope of Modification Accounting.  The amendments in the standard clarify when changes in a share-based payment award must be accounted for as a modification, and will allow entities to make certain changes to share-based payment awards without accounting for them as modifications.  Under the new guidance, entities will only apply modification accounting if there are substantive changes made to share-based payment awards.  If a change made to a share-based payment award does not affect the fair value, vesting conditions and classification as either an equity or liability instrument, modification accounting will not need to be applied.  The standard is effective for the Company on January 1, 2018, and early adoption is permitted. The Company does not believe that the adoption of this standard will have a material effect on its consolidated financial statements and related disclosures.


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

(dollars in thousands)

Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
(dollars in thousands)

Forward-Looking Statements

Some of the statements in this Quarterly Report on Form 10-Q, as well as statements made by us in periodic press releases or other public communications, constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.  Certain, but not necessarily all, of such forward-looking statements can be identified by the use of forward-looking terminology, such as “believes,” “expects,” “may,” “will,” “should,” or “anticipates” or the negative thereof or other comparable terminology.  All statements other than of historical facts are forward-looking statements.  Forward-looking statements contained in this document may include those regarding market trends, NVR’s financial position, business strategy, the outcome of pending litigation, investigations or similar contingencies, projected plans and objectives of management for future operations.  Such forward-looking statements involve known and unknown risks, uncertainties and other factors that may cause the actual results or performance of NVR to be materially different from future results, performance or achievements expressed or implied by the forward-looking statements.  Such risk factors include, but are not limited to the following: general economic and business conditions (on both a national and regional level); interest rate changes; access to suitable financing by NVR and NVR’s customers; increased regulation in the mortgage banking industry; the ability of our mortgage banking subsidiary to sell loans it originates into the secondary market; competition; the availability and cost of land and other raw materials used by NVR in its homebuilding operations; shortages of labor; weather related slow-downs; building moratoriums; governmental regulation; fluctuation and volatility of stock and other financial markets; mortgage financing availability; and other factors over which NVR has little or no control.  NVR undertakes no obligation to update such forward-looking statements except as required by law.  For additional information regarding risk factors, see Part II, Item 1A of this Quarterly Report on Form 10-Q and Part I, Item 1A of NVR’s Annual Report on Form 10-K for the fiscal year ended December 31, 2016.

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

Results of Operations for the Three and Nine Months Ended March 31,September 30, 2017 and 2016

Overview

Business

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

Mid Atlantic:

Maryland, Virginia, West Virginia, Delaware and Washington, D.C.

North East:

New Jersey and Eastern Pennsylvania

Mid East:

New York, Ohio, Western Pennsylvania, Indiana and Illinois

South East:

North Carolina, South Carolina, Florida and Tennessee

Our lot acquisition strategy is predicated upon avoiding the financial requirements and risks associated with direct land ownership and development.  We generally do not engage in land development (see discussion below of our land development activities). Instead, we typically acquire finished lots at market prices from various third party land developers pursuant to fixed price finished lot purchase agreements (“Lot Purchase Agreements”).  These Lot 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 Lot 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.

16


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.  Our continued success is contingent upon our ability to control an adequate supply of finished lots on which to build.

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 raw ground, we determine whether to sell the raw parcel to a developer and enter into a Lot Purchase Agreement with the developer to purchase the finished lots or 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 our finished lot inventory using Lot Purchase Agreements with forfeitable deposits.

As of March 31,September 30, 2017, we controlled lots as described below.

Lot Purchase Agreements

We controlled approximately 74,30079,700 lots under Lot Purchase Agreements with third parties through deposits in cash and letters of credit totaling approximately $389,900$385,600 and $2,500,$2,100, respectively. Included in the number of controlled lots are approximately 3,8004,200 lots for which we have recorded a contract land deposit impairment reserve of approximately $32,000$32,200 as of March 31,September 30, 2017.

Joint Venture Limited Liability Corporations (“JVs”)

We had an aggregate investment totaling approximately $47,700$42,300 in six JVs, expected to produce approximately 7,4007,200 lots. Of the lots to be produced by the JVs, approximately 4,1003,900 lots were controlled by us and approximately 3,300 were either under contract with unrelated parties or currently not under contract.

Land Under Development

We directly owned fourthree separate raw land parcels, zoned for their intended use, with a current cost basis, including development costs, of approximately $63,700$19,200 that we intend to develop into approximately 700400 finished lots. We had additional funding commitments of approximately $11,200$9,000 under a joint development agreement related to one parcel, a portion of which we expect will be offset by development credits of approximately $6,200. One$4,800. During the third quarter of our four2017, we sold a land parcels under development was purchased duringparcel we had acquired in January 2017 to a developer for approximately $14,400. The parcel isan amount which approximated our net investment in the property as of the sale date. In conjunction with the sale, we entered into a Lot Purchase Agreement with the developer for the option to purchase finished lots expected to produce approximately 90 lots.

be developed from the parcel.

See Notes 2, 3 and 4 to the condensed consolidated financial statements included herein for additional information regarding Lot Purchase Agreements, JVs and land under development, respectively.

Raw Land Purchase Agreements

In addition to the lots we currently control as discussed above, we have certain properties under contract with land owners that are expected to yield approximately 8,7009,700 lots.  Some of these properties may require rezoning or other approvals to achieve the expected yield.  These properties are controlled with deposits in cash and letters of credit totaling approximately $11,800$11,700 and $100,$200, respectively, as of March 31,September 30, 2017, of which approximately $7,300$5,200 is refundable if we docertain contractual conditions are not perform under the contract.met.  We generally expect to assign the raw land contracts to a land developer and simultaneously enter into a Lot Purchase Agreement with the assignee if the project is determined to be feasible.


Current Business Environment and Key Financial Results

During the first threenine months of 2017 we continued to experience steadyimproving new home demand consistent with that seen during 2016.as a result of favorable market conditions, including low interest rates, low unemployment and improved consumer confidence.  However, new home prices continued to be constrained due to the competitive market environment.

Our consolidated revenues for the firstthird quarter of 2017 totaled $1,277,092, a 12%$1,667,920, an 8% increase from the firstthird quarter of 2016.  Net income for the firstthird quarter ended March 31,September 30, 2017 was $102,923,$162,102, or $25.12$38.02 per diluted share, increases of 58%38% and 59%34% when compared to net income and diluted earnings per share in the firstthird quarter of 2016, respectively.  Our homebuilding gross profit margin percentage increased to 17.8%19.9% in the firstthird quarter of 2017 from 17.5%17.6% in the firstthird quarter of 2016. New orders, net of cancellations (“New Orders”) increased 7%21% in the firstthird quarter of 2017 compared to

17


the firstthird quarter of 2016, and the2016. The average sales price for New Orders in the firstthird quarter of 2017 of $392.6 increased 5%$382.8 decreased 3% compared to the firstthird quarter of 2016.

Net income and diluted earnings per share were favorably impacted by the reduction in our effective tax rate in the firstthird quarter of 2017 to 22.1%33.7% from 36.8%36.5% in the firstthird quarter of 2016.  The reduction in the effective tax rate was primarily due to our January 1, 2017 adoption of Accounting Standard Update (“ASU”) 2016-09, Compensation – Stock Compensation: Improvements to Employee Share-Based Payment AccountingAccounting.  , which resulted inSee additional discussion regarding the recognition of an income tax benefit of $19,900 related to excess tax benefit from stock option exercises in the first quarter of 2017.  In the first quarter of 2016, the excess tax benefit of $6,284 was recorded to additional paid-in capital within shareholders’ equity on the consolidated balance sheet.  Excluding the impact of the excess tax benefit recognizedadoption of ASU 2016-09 in the first quarter of 2017, the effective tax rate would have been 37.2%.  Additionally, the excess tax benefit in the first quarter of 2017 favorably impacted diluted earnings per share by $4.86 per share.

“Effective Tax Rate” section below.

We believe that a continuation of the housing market recovery is dependent upon a sustained overall economic recovery, driven by continued improvements in job and wage growth and household formation.  We expect to continue to face gross margin pressure duewhich will be impacted by modest pricing power and our ability to highermanage land and construction costs, which includes increasing lumber costs, as well as increased competition associated with an increase in the number of new home communities in our markets.costs. We also expect to face pressure on mortgage banking profit due to the competitive pricing pressures in the mortgage market. We believe that we are well positioned to take advantage of opportunities that may arise from future economic and homebuilding market volatility due to the strength of our balance sheet.

Homebuilding Operations

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

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Financial Data:

 

 

 

 

 

 

 

 

Revenues

 

$

1,247,587

 

 

$

1,121,504

 

Cost of sales

 

$

1,026,017

 

 

$

925,760

 

Gross profit margin percentage

 

 

17.8

%

 

 

17.5

%

Selling, general and administrative expenses

 

$

99,904

 

 

$

98,015

 

Operating Data:

 

 

 

 

 

 

 

 

Settlements (units)

 

 

3,256

 

 

 

3,006

 

Average settlement price

 

$

383.1

 

 

$

369.5

 

New orders (units)

 

 

4,424

 

 

 

4,137

 

Average new order price

 

$

392.6

 

 

$

375.7

 

Backlog (units)

 

 

8,052

 

 

 

7,360

 

Average backlog price

 

$

396.6

 

 

$

382.9

 

New order cancellation rate

 

 

15.6

%

 

 

15.3

%

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Financial Data:        
Revenues $1,633,726
 $1,507,451
 $4,394,027
 $3,990,696
Cost of sales $1,307,971
 $1,242,292
 $3,552,071
 $3,294,421
Gross profit margin percentage 19.9% 17.6% 19.2% 17.4%
Selling, general and administrative expenses $95,606
 $92,867
 $294,610
 $290,925
Operating Data:        
Settlements (units) 4,158
 3,922
 11,331
 10,509
Average settlement price $392.9
 $384.1
 $387.7
 $378.0
New orders (units) 4,200
 3,477
 13,302
 11,938
Average new order price $382.8
 $392.8
 $384.0
 $383.6
Backlog (units)     8,855
 7,658
Average backlog price     $386.1
 $389.4
New order cancellation rate 13.3% 17.7% 13.9% 15.1%
Consolidated Homebuilding - Three Months Ended March 31,September 30, 2017 and 2016

Homebuilding revenues increased 11%8% for the firstthird quarter of 2017 from the same period in 2016, as a result of a 6% increase in the number of units settled and a 2% increase in the average settlement price quarter over quarter. The increases in the number of units settled and the average settlement price were primarily attributable to a 9% higher backlog unit balance and a 1% higher average sales price of units in backlog, respectively, entering the third quarter of 2017 compared to the firstsame period in 2016.

Gross profit margin percentage in the third quarter of 2017 increased 235 basis points to 19.9% compared to the third quarter of 2016, due to modest improvement in pricing, moderating construction costs, and the increase in the number of units settled, which allowed us to better leverage certain operating costs.
The number of New Orders increased 21% while the average sales price of New Orders decreased 3% in the third quarter of 2017 compared to the third quarter of 2016.  The number of New Orders increased in each of our market segments due to more favorable market conditions in the third quarter of 2017 compared to the same period in 2016, which led to higher community absorption rates quarter over quarter.  The decrease in the average sales price of New Orders was primarily attributable to a shift in New Orders to lower priced markets and to lower priced products.  
Selling, general and administrative (“SG&A”) expenses in the third quarter of 2017 increased by 3% when compared to the same period in 2016, but as a percentage of revenue decreased to 5.9% in the third quarter of 2017 from 6.2% in the third quarter of 2016.  SG&A expenses as a percentage of revenue were favorably impacted by the 8% increase in homebuilding revenues coupled with relatively flat headcount quarter over quarter.
Consolidated Homebuilding - Nine Months Ended September 30, 2017 and 2016
Homebuilding revenues increased 10% for the nine months ended September 30, 2017 from the same period in 2016, as a result of an 8% increase in the number of units settled and a 4%3% increase in the average settlement price quarteryear over quarter.year.  The increases in the number of units settled and the average settlement price were primarily attributable to an 11% higher backlog unit balance and a 3% higher average sales price of units in backlog, respectively, entering the first quarter of 2017 compared to the same period inbacklog entering 2016.

Gross profit margin percentage in the first quarternine months of 2017 increased 31171 basis points to 17.8%19.2% compared to 17.4% in the first quarternine months of 2016, due primarily to modest improvement in pricing and construction costs and the increase in the number of units settled, which allowed us to better leverage certain operating costs.

The number of New Orders andincreased 11% while the average sales price of New Orders increased 7% and 4%, respectively,remained flat in the first quarternine months of 2017 when compared to the first quarternine months of 2016.  New Orders and the average sales price of  New Orders increased in each of our market segments due to more favorable market conditions in the first quarternine months of 2017 compared to the first quarternine months of 2016.  Additionally, New Orders were also favorably impacted by a 2% increase in the average number of active communities quarter over quarter. The increase in the average sales price of New Orders was attributable to a

18


relative shift in New Orders2016, which led to higher priced communities and a relative shift in New Orders to our single family product, quartercommunity absorption rates year over quarter, which generally sell at higher prices.

Selling, general and administrative (“year.  

SG&A”)&A expenses in the first quarternine months of 2017 increased 2%were relatively flat compared to the same period infirst nine months of 2016, but due to the increase in revenues, decreased as a percentage of revenue decreased to 8.0%6.7% in the first quarternine months of 2017 from 8.7%7.3% in the first quarternine months of 2016.

  SG&A expenses as a percentage of revenue were favorably impacted by the 10% increase in revenues.

Backlog units and dollars were 8,0528,855 units and $3,193,777,$3,418,710, respectively, as of March 31,September 30, 2017 compared to 7,3607,658 units and $2,818,394,$2,981,894, respectively, as of March 31,September 30, 2016.  The 9%16% increase in backlog units was primarily attributable to the aforementioned 7%a 14% increase in New Orders for the six-month period ended September 30, 2017 compared to the same period in the first quarter of 2017. The 13% increase in backlog2016. Backlog dollars waswere favorably impacted by the increase in backlog units and a 4% increase in the average sales price of New Orders for the six-month period ended March 31, 2017 compared to the same period in 2016.

units.

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 15.6%13.9% and 15.3%15.1% in the first threenine months of 2017 and 2016, respectively.  During the most recent four quarters, approximately 6% of a reporting quarter’s 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 during the remainder of 2017 or future years.

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


Reportable Segments

Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, SG&A expenses, and a corporate capital allocation charge determined at the corporate headquarters.  The corporate capital allocation charge eliminates in consolidation and is based on the segment’s average net assets employed.  The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker 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 terminatetermination of a Lot Purchase Agreement with the developer or to restructurethe restructuring of 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 presentation purposes below, the contract land deposit reserve at March 31,September 30, 2017 and December 31, 2016 has been allocated to the respective year’s reportable segments to show contract land deposits on a net basis.  The net contract land deposit balances below also include approximately $2,600$2,300 and $3,500$2,400 at March 31,September 30, 2017 and December 31, 2016, respectively, of letters of credit issued as deposits in lieu of cash.

The following tables summarize certain homebuilding operating activity by reportable segment for the three and nine months ended March 31,September 30, 2017 and 2016:

2016.

Selected Segment Financial Data:

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Revenues:

 

 

 

 

 

 

 

 

Mid Atlantic

 

$

722,268

 

 

$

633,571

 

North East

 

 

106,231

 

 

 

97,153

 

Mid East

 

 

243,031

 

 

 

244,277

 

South East

 

 

176,057

 

 

 

146,503

 

19


 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

Gross profit margin:

 

 

 

 

 

 

 

 

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Revenues:        

Mid Atlantic

 

$

127,905

 

 

$

106,809

 

 $927,551
 $873,490
 $2,521,967
 $2,279,207

North East

 

 

20,047

 

 

 

15,846

 

 141,033
 123,754
 374,804
 329,674

Mid East

 

 

44,386

 

 

 

44,653

 

 338,900
 327,387
 895,168
 877,921

South East

 

 

32,017

 

 

 

27,691

 

 226,242
 182,820
 602,088
 503,894

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Segment profit:

 

 

 

 

 

 

 

 

Mid Atlantic

 

$

64,489

 

 

$

46,609

 

North East

 

 

9,106

 

 

 

4,065

 

Mid East

 

 

22,159

 

 

 

22,733

 

South East

 

 

14,569

 

 

 

12,786

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

Gross profit margin percentage:

 

 

 

 

 

 

 

 

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
Gross profit margin:        

Mid Atlantic

 

 

17.7

%

 

 

16.9

%

 $176,482
 $148,539
 $470,809
 $383,353

North East

 

 

18.9

%

 

 

16.3

%

 29,854
 20,174
 75,088
 53,051

Mid East

 

 

18.3

%

 

 

18.3

%

 68,876
 58,781
 173,141
 157,843

South East

 

 

18.2

%

 

 

18.9

%

 46,842
 33,769
 120,224
 93,612

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Segment profit:        
Mid Atlantic $109,417
 $81,137
 $274,527
 $191,476
North East 18,762
 8,711
 41,980
 18,354
Mid East 44,990
 34,699
 103,135
 87,488
South East 26,849
 16,548
 64,330
 45,159

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Gross profit margin percentage:        
Mid Atlantic 19.0% 17.0% 18.7% 16.8%
North East 21.2% 16.3% 20.0% 16.1%
Mid East 20.3% 18.0% 19.3% 18.0%
South East 20.7% 18.5% 20.0% 18.6%
Operating Activity:

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

 

 

Units

 

 

Average

Price

 

 

Units

 

 

Average

Price

 

Settlements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid Atlantic

 

 

1,658

 

 

$

435.6

 

 

 

1,455

 

 

$

428.2

 

North East

 

 

268

 

 

$

396.4

 

 

 

277

 

 

$

350.7

 

Mid East

 

 

725

 

 

$

335.2

 

 

 

761

 

 

$

321.0

 

South East

 

 

605

 

 

$

291.0

 

 

 

513

 

 

$

285.5

 

Total

 

 

3,256

 

 

$

383.1

 

 

 

3,006

 

 

$

369.5

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

 

Units

 

 

Average

Price

 

 

Units

 

 

Average

Price

 

 Three Months Ended September 30, Nine Months Ended September 30,

New orders, net of cancellations:

 

 

 

 

 

 

 

 

 

 

 

 

 

 2017 2016 2017 2016
 Units 
Average
Price
 Units 
Average
Price
 Units 
Average
Price
 Units 
Average
Price
Settlements:  
  
  
  
  
  
  
  

Mid Atlantic

 

 

2,125

 

 

$

455.8

 

 

 

2,029

 

 

$

434.4

 

 2,048
 $452.8
 1,984
 $440.2
 5,682
 $443.8
 5,201
 $434.9

North East

 

 

359

 

 

$

424.4

 

 

 

341

 

 

$

365.7

 

 333
 $423.5
 330
 $375.0
 930
 $403.0
 896
 $367.9

Mid East

 

 

1,134

 

 

$

329.1

 

 

 

1,057

 

 

$

319.2

 

 1,021
 $331.9
 1,013
 $322.5
 2,693
 $332.3
 2,708
 $323.9

South East

 

 

806

 

 

$

301.3

 

 

 

710

 

 

$

297.1

 

 756
 $299.3
 595
 $307.3
 2,026
 $297.2
 1,704
 $295.7

Total

 

 

4,424

 

 

$

392.6

 

 

 

4,137

 

 

$

375.7

 

 4,158
 $392.9
 3,922
 $384.1
 11,331
 $387.7
 10,509
 $378.0

 

 

As of March 31,

 

 

 

2017

 

 

2016

 

 

 

Units

 

 

Average

Price

 

 

Units

 

 

Average

Price

 

Backlog:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Mid Atlantic

 

 

4,008

 

 

$

453.2

 

 

 

3,711

 

 

$

437.5

 

North East

 

 

699

 

 

$

421.5

 

 

 

604

 

 

$

380.7

 

Mid East

 

 

1,908

 

 

$

335.5

 

 

 

1,794

 

 

$

328.9

 

South East

 

 

1,437

 

 

$

308.0

 

 

 

1,251

 

 

$

299.7

 

Total

 

 

8,052

 

 

$

396.6

 

 

 

7,360

 

 

$

382.9

 

20


 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

New order cancellation rate:

 

 

 

 

 

 

 

 

 Three Months Ended September 30, Nine Months Ended September 30,
 2017 2016 2017 2016
 Units 
Average
Price
 Units 
Average
Price
 Units 
Average
Price
 Units 
Average
Price
New orders, net of cancellations:New orders, net of cancellations:              

Mid Atlantic

 

 

16.8

%

 

 

15.8

%

 2,113
 $435.7
 1,817
 $444.6
 6,501
 $441.4
 6,088
 $441.0

North East

 

 

13.5

%

 

 

15.6

%

 346
 $402.5
 305
 $387.9
 1,066
 $407.8
 960
 $377.6

Mid East

 

 

12.5

%

 

 

14.3

%

 939
 $336.1
 769
 $341.2
 3,218
 $330.3
 2,829
 $326.0

South East

 

 

17.2

%

 

 

15.0

%

 802
 $289.6
 586
 $302.3
 2,517
 $294.6
 2,061
 $296.2
Total 4,200
 $382.8
 3,477
 $392.8
 13,302
 $384.0
 11,938
 $383.6

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Average active communities:

 

 

 

 

 

 

 

 

Mid Atlantic

 

 

238

 

 

 

230

 

North East

 

 

43

 

 

 

39

 

Mid East

 

 

121

 

 

 

134

 

South East

 

 

84

 

 

 

75

 

Total

 

 

486

 

 

 

478

 

  As of September 30,
  2017 2016
  Units 
Average
Price
 Units 
Average
Price
Backlog:        
Mid Atlantic 4,360
 $439.8
 4,024
 $444.3
North East 744
 $414.6
 604
 $389.3
Mid East 2,024
 $334.8
 1,619
 $334.7
South East 1,727
 $298.4
 1,411
 $295.7
Total 8,855
 $386.1
 7,658
 $389.4

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
New order cancellation rate:        
Mid Atlantic 14.0% 17.1% 15.0% 15.1%
North East 12.0% 16.0% 12.7% 16.1%
Mid East 11.2% 17.5% 11.6% 14.5%
South East 14.5% 20.6% 14.5% 15.6%
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Average active communities:        
Mid Atlantic 232
 241
 238
 237
North East 42
 45
 43
 42
Mid East 122
 124
 120
 129
South East 83
 74
 84
 74
Total 479
 484
 485
 482
Homebuilding Inventory:

 

 

March 31, 2017

 

 

December 31, 2016

 

Sold inventory:

 

 

 

 

 

 

 

 

Mid Atlantic

 

$

628,717

 

 

$

544,840

 

North East

 

 

93,330

 

 

 

79,751

 

Mid East

 

 

167,278

 

 

 

141,033

 

South East

 

 

119,201

 

 

 

107,967

 

Total (1)

 

$

1,008,526

 

 

$

873,591

 

 

March 31, 2017

 

 

December 31, 2016

 

Unsold lots and housing units inventory:

 

 

 

 

 

 

 

 

 September 30, 2017 December 31, 2016
Sold inventory:    

Mid Atlantic

 

$

99,146

 

 

$

117,920

 

 $703,197
 $544,840

North East

 

 

5,940

 

 

 

6,370

 

 102,429
 79,751

Mid East

 

 

9,359

 

 

 

7,218

 

 194,186
 141,033

South East

 

 

12,824

 

 

 

10,872

 

 165,519
 107,967

Total (1)

 

$

127,269

 

 

$

142,380

 

 $1,165,331
 $873,591

(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 segments.

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

Sold and unsold inventory impairments:

 

 

 

 

 

 

 

 

 September 30, 2017 December 31, 2016
Unsold lots and housing units inventory:    

Mid Atlantic

 

$

9

 

 

$

52

 

 $126,249
 $117,920

North East

 

 

 

 

 

 

 4,940
 6,370

Mid East

 

 

 

 

 

 

 6,364
 7,218

South East

 

 

 

 

 

 

 15,640
 10,872

Total

 

$

9

 

 

$

52

 

Total (1) $153,193
 $142,380

21


(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 segments.
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Sold and unsold inventory impairments:        
Mid Atlantic $141
 $622
 $249
 $727
North East 5
 39
 12
 39
Mid East 
 
 
 
South East 
 99
 
 252
Total $146
 $760
 $261
 $1,018

Lots Controlled and Land Deposits:

 

 

March 31, 2017

 

 

December 31, 2016

 

Total lots controlled:

 

 

 

 

 

 

 

 

Mid Atlantic

 

 

35,250

 

 

 

35,350

 

North East

 

 

5,950

 

 

 

6,200

 

Mid East

 

 

19,500

 

 

 

19,050

 

South East

 

 

18,400

 

 

 

17,400

 

Total

 

 

79,100

 

 

 

78,000

 

 

March 31, 2017

 

 

December 31, 2016

 

Lots included in impairment reserve:

 

 

 

 

 

 

 

 

 September 30, 2017 December 31, 2016
Total lots controlled:    

Mid Atlantic

 

 

1,800

 

 

 

1,950

 

 37,250
 35,350

North East

 

 

500

 

 

 

550

 

 6,250
 6,200

Mid East

 

 

1,100

 

 

 

1,100

 

 20,700
 19,050

South East

 

 

400

 

 

 

400

 

 19,800
 17,400

Total

 

 

3,800

 

 

 

4,000

 

 84,000
 78,000

 

 

March 31, 2017

 

 

December 31, 2016

 

Contract land deposits, net:

 

 

 

 

 

 

 

 

Mid Atlantic

 

$

227,914

 

 

$

239,588

 

North East

 

 

26,038

 

 

 

27,648

 

Mid East

 

 

44,389

 

 

 

44,394

 

South East

 

 

73,914

 

 

 

70,593

 

Total

 

$

372,255

 

 

$

382,223

 

 

Three Months Ended March 31,

 

 

2017

 

 

2016

 

Contract land deposit impairments (recoveries), net:

 

 

 

 

 

 

 

 

 September 30, 2017 December 31, 2016
Lots included in impairment reserve:    

Mid Atlantic

 

$

986

 

 

$

(15

)

 1,900
 1,950

North East

 

 

 

 

 

-

 

 500
 550

Mid East

 

 

3

 

 

 

46

 

 1,150
 1,100

South East

 

 

 

 

 

(5

)

 650
 400

Total

 

$

989

 

 

$

26

 

 4,200
 4,000

  September 30, 2017 December 31, 2016
Contract land deposits, net:    
Mid Atlantic $214,009
 $239,588
North East 27,149
 27,648
Mid East 47,170
 44,394
South East 79,129
 70,593
Total $367,457
 $382,223
  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Contract land deposit impairments, net:        
Mid Atlantic $1,919
 $94
 $2,889
 $1,054
North East 16
 
 16
 
Mid East 4
 137
 9
 188
South East 
 563
 
 752
Total $1,939
 $794
 $2,914
 $1,994
Mid Atlantic

Three Months Ended March 31,September 30, 2017 and 2016

The Mid Atlantic segment had an approximate $17,900,$28,300, or 38%35%, increase in segment profit in the firstthird quarter of 2017 compared to the firstthird quarter of 2016.  The increase in segment profit was driven by an increase of approximately $88,700,$54,100, or 14%6%, in revenues and improved gross profit margins quarter over quarterquarter. Segment revenues increased primarily due primarily to a 14%3% increase in both the number of units settled.settled and the average price of units settled quarter over quarter.  The increase in the number of units settled was favorably impacted by a 2% higher backlog unit balance entering the third quarter of 2017 compared to the same period in 2016. The increase in the average settlement price was attributable to a shift in settlements to higher priced markets and to a 1% higher average price of units in backlog entering the third quarter of 2017 compared to the same period in 2016. The Mid Atlantic segment’s gross profit margin percentage increased to 19.0% in the third quarter of 2017 from 17.0% in the third quarter of 2016, due primarily to modest improvement in pricing and lower construction costs.

Segment New Orders increased 16% while the average sales price of New Orders decreased 2% in the third quarter of 2017 compared to the third quarter of 2016. New Orders increased despite a 4% decrease in the average number of active communities quarter over quarter as more favorable market conditions in the third quarter of 2017 led to higher community absorption rates within the segment.  The decrease in the average sales price of New Orders was primarily attributable to a shift in New Orders in the current year quarter to lower priced markets and lower priced products.
Nine Months Ended September 30, 2017 and 2016
The Mid Atlantic segment had an approximate $83,100, or 43%, increase in segment profit in the first nine months of 2017 compared to the first nine months of 2016.  The increase in segment profit was driven by an increase of segment revenues of approximately $242,800, or 11%, and improved gross profit margins year over year.  Segment revenues increased due to a 9% increase in the number of units settled and a 2% increase in the average settlement price year over year.  The increases in the number of units settled and the average settlement price was favorably impacted by a 13% higher backlog unit balance and a 2% higher average sales price of units in backlog entering 2017 compared to the backlog unit balance entering 2016.  The Mid Atlantic segment’s gross profit margin percentage increased to 17.7%18.7% in the first quarter of 2017 from 16.9%16.8% in the first quarter of 2016, due primarily to the increasemodest improvement in the number of units settled which allowed us to better leverage certain operating costs quarter over quarter.

pricing and moderating construction costs.

Segment New Orders increased 7% and the average sales price of New Orders each increased 5%was flat in the first quarternine months of 2017 compared to the first quarter ofsame period in 2016. The increase in New Orders iswas due to a 3% increase in the average number of active communities quarter over quarter and continuedmore favorable market conditions in the first quarter of 2017. The increase in the average sales price of New Orders was impacted by a relative shift in New Orders2017, which led to higher priced communities.

22


community absorption rates year over year.

North East

Three Months Ended March 31,September 30, 2017 and 2016

The North East segment had an approximate $5,000,$10,100, or 124%115%, increase in segment profit in the firstthird quarter of 2017 compared to the firstthird quarter of 2016 due to an increase in segment revenues of approximately $9,100,$17,300, or 9%14%, and improved gross profit margins, quarter over quarter. The increase in segment revenues was due primarily to a 13% increase in the average price of units settled offset partiallyquarter over quarter. The increase in the average settlement price was attributable to an 11% higher average sales price of units in backlog entering the third quarter of 2017 compared to the same period in 2016, driven by a 3% decreaseshift to higher priced markets in the segment and a shift to higher priced communities within certain markets. The North East segment’s gross profit margin percentage increased to 21.2% in the third quarter of 2017 from 16.3% in the third quarter of 2016. Gross profit margin and segment profit were favorably impacted by improvement in pricing and lower construction costs quarter over quarter. 
Segment New Orders and the average sales price of New Orders increased 13% and 4%, respectively, in the third quarter of 2017 compared to the third quarter of 2016. The increase in New Orders was attributable to more favorable market conditions in the third quarter of 2017 compared to the same period in 2016, which led to higher community absorption rates quarter over quarter. The increase in the average sales price of New Orders quarter over quarter was attributable to a shift in New Orders to higher priced markets within the segment.
Nine Months Ended September 30, 2017 and 2016
The North East segment had an approximate $23,600, or 129%, increase in segment profit in the first nine months of 2017 compared to the first nine months of 2016 due to an increase in segment revenues of approximately $45,100, or 14%, and improved gross profit margins, year over year. The increase in segment revenues was due to a 4% increase in the number of units settled quarterand a 10% increase in the average settlement price year over quarter.year. The increase in the number of units settled was primarily attributable to a 13% higher backlog unit balance entering 2017 compared to the backlog unit balance entering 2016, partially offset by a lower backlog turnover rate year over year. The increase in the average settlement price was favorably impacted byattributable to a 9% higher average sales price of units in backlog entering 2017 compared to the same period in 2016, anddriven by a shift in units settled to higher priced markets in the first quarter of 2017 comparedsegment and a shift to the first quarter of 2016. The decrease in settlements was due to a lower backlog turnover rate quarter over quarter.higher priced communities within certain markets. The North East segment’s gross profit margin percentage increased to 18.9%20.0% in the first quarternine months of 2017 from 16.3%16.1% in the first quarternine months of 2016. Gross profit margin and segment profit were favorably impacted by a relative shiftimprovement in settlements to markets with higher gross profit marginspricing, moderating construction costs and the increase in the first quarternumber of 2017 comparedunits settled, which allowed us to the same period in 2016.

better leverage certain operating costs.  


Segment New Orders and the average sales price of New Orders increased 5%11% and 16%8%, respectively, in the first quarternine months of 2017 compared to the first quarter ofsame period in 2016. The increase in New Orders was primarily due towere favorably impacted by a 10%3% increase in the average number of active communities year over year and by more favorable market conditions in 2017, which led to higher community absorption rates year over year. The increase in the average New Order sales price year over year, was attributable to a shift in New Orders to higher priced markets within the segment and a shift to higher priced communities within certain markets.
Mid East
Three Months Ended September 30, 2017 and 2016
The Mid East segment had an approximate $10,300, or 30%, increase in segment profit in the third quarter of 2017 compared to the third quarter of 2016. The increase in segment profit was driven by an increase in segment revenue of approximately $11,500, or 4%, and improved gross profit margins quarter over quarter. The increase in revenues was due to a 3% increase in the average price of units settled quarter over quarter. The increase in the average settlement price was attributable to a 2% higher average sales price of units in backlog entering the third quarter of 2017 compared to the same period in 2016. The segment’s gross profit margin percentage increased to 20.3% in the third quarter of 2017 from 18.0% in the third quarter of 2016.  Gross profit margins were favorably impacted by modest improvement in pricing and moderating construction costs quarter over quarter.
Segment New Orders increased 22%, while the average sales price of New Orders is attributabledecreased 1% in the third quarter of 2017 compared to the same period in 2016.  New Orders increased as more favorable market conditions in the third quarter of 2017 led to higher community absorption rates within the segment. The average sales price of New Orders was negatively impacted by a relative shift in New Orderssales to higherlower priced communities.

Mid East

Threemarkets within the segment.

Nine Months Ended March 31,September 30, 2017 and 2016

The Mid East segment had an approximate $600,$15,600, or 3%18%, decreaseincrease in segment profit in the first quarternine months of 2017 compared to the first quarternine months of 2016.  The decreaseincrease in segment profit was driven by a decreasean increase of approximately $1,200$17,200, or 2%, in revenues quarterand improved gross profit margins year over quarter.year.  The decreaseincrease in revenues was due primarily to a 5% decrease in the number of units settled, offset partially by a 4%3% increase in the average price of units settled.  The decrease in units settled, which was attributable to the backlog unit balance entering 2017 being flat with the backlog unit balance entering 2016 coupled with a slower backlog turnover rate quarter over quarter. The average settlement price increase was primarily attributable to a 3% higher average sales price of unitshomes in backlog entering 2017 compared to the same period in 2016. The segment’s gross profit margin percentage was 18.3%increased to 19.3% in both the first quarternine months of 2017 from 18.0% in the same period of 2016, primarily due to modest improvement in pricing and 2016.

moderating construction costs year over year.

Segment New Orders and the average sellingsales price of New Orders increased 7%14% and 3%1%, respectively, in the first quarternine months of 2017 compared to the same period in 2016.  New Orders increased despite a 10%6% decrease in the average number of active communities quarteryear over quarteryear as the more favorable market conditions in the first quarter of 2017 led to higher community absorption rates within the segment.

South East

Three Months Ended March 31,September 30, 2017 and 2016

The South East segment had an approximate $1,800,$10,300, or 14%62%, increase in segment profit in the firstthird quarter of 2017 compared to the firstthird quarter of 2016. The increase in segment profit was primarily driven by an increase of approximately $29,600,$43,400, or 20%24%, in revenues and improved gross profit margins quarter over quarter.  The increase in revenues was due to a 27% increase in the number of units settled, partially offset by a 3% decrease in the average price of units settled quarter over quarter. The increase in the number of units settled was primarily attributable to an 18% higher backlog unit balance entering the third quarter of 2017 compared to the same period in 2016, coupled with a higher backlog turnover rate quarter over quarter. The decrease in the average settlement price quarter over quarter is primarily attributable to a shift in settlements to lower priced markets and lower priced product within the segment. The South East segment’s gross profit margin percentage increased to 20.7% in the third quarter of 2017 from 18.5% in the third quarter of 2016, primarily due to modest improvement in pricing and the increase in the number of units settled, which allowed us to better leverage certain operating costs, partially offset by higher construction costs quarter over quarter.
Segment New Orders increased 37%, while the average sales price of New Orders decreased 4% in the third quarter of 2017 compared to the same period in 2016.  New Orders were favorably impacted by a 13% increase in

the average number of active communities in the third quarter of 2017 compared to the same period in 2016 and more favorable market conditions in the third quarter of 2017, which led to higher community absorption rates. The average sales price of New Orders was negatively impacted by a shift in New Orders to lower priced markets and lower priced products within the segment.
Nine Months Ended September 30, 2017 and 2016
The South East segment had an 18%approximate $19,200, or 42%, increase in segment profit in the first nine months of 2017 compared to the first nine months of 2016.  The increase in segment profit was primarily driven by an increase of approximately $98,200, or 19%, in revenues and improved gross profit margins.  The increase in revenues was primarily attributable to a 19% increase in the number of units settled.  The increase in the number of units settledsettlements was attributable to a 17% higher backlog unit balance entering 2017 compared to backlog entering 2016. The South East segment’s gross profit margin decreasedpercentage increased to 18.2%20.0% in the first quarternine months of 2017 from 18.9%18.6% in the first quarternine months of 2016 primarily due to modest improvement in pricing, partially offset by higher construction costs quarteryear over quarter.

year.

Segment New Orders andincreased 22%, while the average sales price of New Orders increased 14% and 1%, respectively,was relatively flat in the first quarternine months of 2017 compared to the same period in 2016.  New Orders were favorably impacted by a 12%13% increase in the average number of active communities in the first quarternine months of 2017 compared to the same period in 2016.  

2016 and more favorable market conditions in 2017, which led to higher community absorption rates.


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), equity-based compensation

23


expense, consolidation adjustments and external corporate interest expense. Our overhead functions, such as accounting, treasury and human resources, 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. External corporate interest expense primarily consists of interest charges on our 3.95% Senior Notes due 2022, and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Homebuilding consolidated gross profit:

 

 

 

 

 

 

 

 

Mid Atlantic

 

$

127,905

 

 

$

106,809

 

North East

 

 

20,047

 

 

 

15,846

 

Mid East

 

 

44,386

 

 

 

44,653

 

South East

 

 

32,017

 

 

 

27,691

 

Consolidation adjustments and other

 

 

(2,785

)

 

 

745

 

Homebuilding consolidated gross profit

 

$

221,570

 

 

$

195,744

 

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Homebuilding consolidated profit before taxes:

 

 

 

 

 

 

 

 

Mid Atlantic

 

$

64,489

 

 

$

46,609

 

North East

 

 

9,106

 

 

 

4,065

 

Mid East

 

 

22,159

 

 

 

22,733

 

South East

 

 

14,569

 

 

 

12,786

 

Reconciling items:

 

 

 

 

 

 

 

 

Contract land deposit impairment reserve (1)

 

 

(728

)

 

 

1,329

 

Equity-based compensation expense

 

 

(9,607

)

 

 

(9,832

)

Corporate capital allocation (2)

 

 

46,187

 

 

 

44,315

 

Unallocated corporate overhead

 

 

(27,234

)

 

 

(29,509

)

Consolidation adjustments and other

 

 

3,813

 

 

 

5,985

 

Corporate interest expense

 

 

(5,564

)

 

 

(4,827

)

Reconciling items sub-total

 

 

6,867

 

 

 

7,461

 

Homebuilding consolidated profit before taxes

 

$

117,190

 

 

$

93,654

 

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Homebuilding consolidated gross profit:        
Mid Atlantic $176,482
 $148,539
 $470,809
 $383,353
North East 29,854
 20,174
 75,088
 53,051
Mid East 68,876
 58,781
 173,141
 157,843
South East 46,842
 33,769
 120,224
 93,612
Consolidation adjustments and other 3,701
 3,896
 2,694
 8,416
Homebuilding consolidated gross profit $325,755
 $265,159
 $841,956
 $696,275


  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Homebuilding consolidated profit before taxes:        
Mid Atlantic $109,417
 $81,137
 $274,527
 $191,476
North East 18,762
 8,711
 41,980
 18,354
Mid East 44,990
 34,699
 103,135
 87,488
South East 26,849
 16,548
 64,330
 45,159
Reconciling items:        
Contract land deposit impairment reserve (1) 1,910
 785
 (882) 3,421
Equity-based compensation expense (10,296) (10,272) (30,408) (30,152)
Corporate capital allocation (2) 51,904
 50,032
 147,737
 140,606
Unallocated corporate overhead (18,768) (18,459) (69,362) (74,485)
Consolidation adjustments and other 7,087
 9,798
 20,513
 25,660
Corporate interest expense (5,812) (5,322) (17,000) (14,688)
Reconciling items sub-total 26,025
 26,562
 50,598
 50,362
Homebuilding consolidated profit before taxes $226,043
 $167,657
 $534,570
 $392,839

(1)

This item represents changes to the contract land deposit impairment reserve which are not allocated to the reportable segments.

(2)

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

 

Three Months Ended March 31,

 

 Three Months Ended September 30, Nine Months Ended September 30,

 

2017

 

 

2016

 

 2017 2016 2017 2016

Corporate capital allocation charge:

 

 

 

 

 

 

 

 

        

Mid Atlantic

 

$

29,124

 

 

$

27,186

 

 $32,025
 $31,960
 $92,154
 $87,911

North East

 

 

3,814

 

 

 

4,953

 

 4,244
 4,572
 12,191
 13,972

Mid East

 

 

6,742

 

 

 

6,699

 

 7,747
 7,366
 22,024
 21,523

South East

 

 

6,507

 

 

 

5,477

 

 7,888
 6,134
 21,368
 17,200

Total

 

$

46,187

 

 

$

44,315

 

 $51,904
 $50,032
 $147,737
 $140,606



Mortgage Banking Segment

Three and Nine Months Ended March 31,September 30, 2017 and 2016

We conduct our mortgage banking activity through NVR Mortgage Finance, Inc. (“NVRM”), a wholly owned subsidiary. NVRM focuses exclusively on serving the homebuilding segment customer base. NVRM sells all of the mortgage loans it closes to investors in the secondary markets on a servicing-released basis, typically within 30 days from

24


the loan closing. The following table summarizes the results of our mortgage banking operations and certain statistical data for the three and nine months ended March 31,September 30, 2017 and 2016:

 

 

Three Months Ended March 31,

 

 

 

2017

 

 

2016

 

Loan closing volume:

 

 

 

 

 

 

 

 

Total principal

 

$

843,341

 

 

$

753,840

 

 

 

 

 

 

 

 

 

 

Loan volume mix:

 

 

 

 

 

 

 

 

Adjustable rate mortgages

 

 

8

%

 

 

8

%

Fixed-rate mortgages

 

 

92

%

 

 

92

%

 

 

 

 

 

 

 

 

 

Operating profit:

 

 

 

 

 

 

 

 

Segment profit

 

$

15,953

 

 

$

10,375

 

Equity-based compensation expense

 

 

(982

)

 

 

(717

)

Mortgage banking income before tax

 

$

14,971

 

 

$

9,658

 

 

 

 

 

 

 

 

 

 

Capture rate:

 

 

86

%

 

 

88

%

 

 

 

 

 

 

 

 

 

Mortgage banking fees:

 

 

 

 

 

 

 

 

Net gain on sale of loans

 

$

23,231

 

 

$

17,022

 

Title services

 

 

6,157

 

 

 

5,379

 

Servicing fees

 

 

117

 

 

 

121

 

 

 

$

29,505

 

 

$

22,522

 

  Three Months Ended September 30, Nine Months Ended September 30,
  2017 2016 2017 2016
Loan closing volume:  
  
  
  
Total principal $1,115,494
 $1,055,163
 $3,000,448
 $2,751,410
         
Loan volume mix:        
Adjustable rate mortgages 9% 4% 8% 6%
Fixed-rate mortgages 91% 96% 92% 94%
         
Operating profit:        
Segment profit $19,336
 $18,155
 $53,293
 $42,503
Equity-based compensation expense (915) (809) (2,270) (2,307)
Mortgage banking income before tax $18,421
 $17,346
 $51,023
 $40,196
         
Capture rate: 88% 88% 87% 88%
         
Mortgage banking fees:        
Net gain on sale of loans $25,898
 $22,699
 $73,372
 $59,386
Title services 8,164
 7,279
 21,663
 19,265
Servicing fees 132
 140
 442
 431
  $34,194
 $30,118
 $95,477
 $79,082
Loan closing volume for the three and nine months ended March 31,September 30, 2017 increased by approximately $89,500,$60,300, or 12%6%, and $249,000, or 9%, respectively, from the same period forperiods in 2016. The increaseincreases in loan closing volume during the three and nine months ended March 31,September 30, 2017 waswere primarily attributable to the 6% and 8% increaseincreases, respectively, in the homebuilding segment’s number of units settled and the 4% increase in average loan amount when compared to the same periodperiods in 2016.

Segment profit for the three and nine months ended March 31,September 30, 2017 increased by approximately $5,600,$1,200, or 54%7%, and $10,800, or 25%, respectively, from the same periodperiods in 2016. The increase wasincreases were primarily attributable to an increase in mortgage banking fees, partially offset by an increase in general and administrative expenses. Mortgage banking fees increased by approximately $7,000$4,100 and $16,400 during the three and nine months ended March 31,September 30, 2017, respectively, resulting from the aforementioned increase in loan closing volume and an increase in secondary marketing gains on sales of loans. General and administrative expenses increased by approximately $1,400$2,900 and $5,900 during the three and nine months ended March 31,September 30, 2017, respectively, resulting from an increase in personnel costs.


Effective Tax Rate

Our effective tax rate during the three and nine months ended March 31,September 30, 2017 was 33.7% and 29.5%, respectively.  For the three and nine months ended September 30, 2016, our effective tax rate was 22.1%36.5% and 36.8%36.6%, respectively. The 2017 effective tax rate was reduced as a result of our January 1, 2017 adoption of ASU 2016-09, which requires the excess tax benefit from stock option exercises to be recorded as a reduction to income tax expense in the period stock options are exercised.  WeDuring the three and nine months ended September 30, 2017, we recognized $19,900$8,357, or $1.96 per diluted share, and $44,720, or $10.65 per diluted share, respectively, in excess tax benefit inbenefits.  During the first quarter of 2017. In the first quarter ofthree and nine months ended September 30, 2016, an excess tax benefitbenefits of $6,284 was$2,271 and $10,949, respectively, were recorded to additional paid-in capital within shareholders’ equity. We expect to experience volatility in our effective tax rate in future quarters as the amount of the excess tax benefit from equity-based awards is dependent on our stock price when awards are exercised as well as on the timing of exercises, which historically has varied from quarter to quarter.

Liquidity and Capital Resources

Lines of Credit and Notes Payable

Our homebuilding business segment funds its operations from cash flows provided by operating activities, a short-term unsecured working capital revolving credit facility and capital raised in the public debt and equity markets. The unsecured Credit Agreement (the “Credit Agreement”) provides for aggregate revolving loan commitments of $200,000. Under the Credit Agreement, we may request increases of up to $300,000 to the facility in the form of revolving loan

25


commitments or term loans to the extent that new or existing lenders agree to provide additional revolving loan or term loan commitments.  The Credit Agreement provides for a $100,000 sublimit for the issuance of letters of credit of which there was approximately $8,900$7,200 outstanding at March 31,September 30, 2017, and a $25,000 sublimit for a swing line commitment. The Credit Agreement termination date is July 15, 2021. There was no debt outstanding under the FacilityCredit Agreement at March 31,September 30, 2017.

Our mortgage banking subsidiary, NVRM, provides for its mortgage origination and other operating activities using cash generated from its operations, borrowings from its parent company, NVR, as well as a $150,000 revolving mortgage repurchase facility (the “Repurchase Agreement”), which is non-recourse to NVR.  The Repurchase Agreement provides for an incremental commitment pursuant to which we may request increases in the total commitment available under the Repurchase Agreement by up to $50,000 in the aggregate.  The Repurchase Agreement expires on July 26, 2017.25, 2018.  At March 31,September 30, 2017, there were no borrowing base limitations reducing the amount available under the Repurchase Agreement.  There was no debt outstanding under the Repurchase Agreement at March 31,September 30, 2017. We expect to renew the Repurchase Agreement with materially consistent terms and conditions prior to its expiration.

There have been no material changes in our lines of credit and notes payable during the threenine months ended March 31,September 30, 2017.  For additional information regarding lines of credit and notes payable, see Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2016.

Cash Flows

For the threenine months ended March 31,September 30, 2017, cash and cash equivalents increased by $97,142.$231,442.  Cash provided by operating activities was $110,383.$340,776.  Cash was provided by earnings for the threenine months ended March 31,September 30, 2017 and net proceeds of $170,719$172,336 from mortgage loan activity.  Cash was primarily used to fund the increase in homebuilding inventory of $140,334$284,459, which was primarily attributable to an increase in the number of units under construction at March 31,September 30, 2017 compared to December 31, 2016.

Net cash used in investing activities for the threenine months ended March 31,September 30, 2017 of $2,959$9,380 included cash used for purchases of property, plant and equipment of $5,161,$15,670, partially offset by the receipt of capital distributions from our unconsolidated JVs totaling $2,480.

$6,081.

Net cash used in financing activities was $10,282$99,954 for the threenine months ended March 31,September 30, 2017.  Cash was used to repurchase 50,922110,392 shares of our common stock at an aggregate purchase price of $85,547$230,199 under our ongoing common stock repurchase program, discussed below. Cash was provided from stock option exercise proceeds totaling $75,265.

$130,245.


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 Exchange Act.  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/401(k) Plan Trust or Employee Stock Ownership Plan Trust.  The repurchase program assists us in accomplishing our primary objective of creating increases in shareholder value.  See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds, of this Quarterly Report on Form 10-Q for further discussion of repurchase activity during the firstthird quarter of 2017.


Recent Accounting Pronouncements

See Note 1514 to the accompanying condensed consolidated financial statements for discussion of recently issued accounting pronouncements applicable to us.


Critical Accounting Policies

There have been no material changes to our critical accounting policies as previously disclosed in Part II, Item 7, of our Annual Report on Form 10-K for the year ended December 31, 2016.

26



Item
Item 3.Quantitative and Qualitative Disclosure about Market Risk

There have been no material changes in our market risks during the threenine months ended March 31,September 30, 2017. For additional information regarding our market risks, see Part II, Item 7A of our Annual Report on Form 10-K for the year ended December 31, 2016.


Item 4.Controls4. 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 our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Exchange Act Rule 13a-15.  Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the design and operation of these disclosure controls and procedures were effective.  There have been no changes in our internal control over financial reporting in the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.


PART II. OTHER INFORMATION

Item 1.Legal Proceedings

Item 1.Legal Proceedings

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 were subsequently informed by the United States Department of Justice (“DOJ”) that the EPA forwarded the information on the matter to the DOJ, and the DOJ requested that we meet with the government to discuss the status of the case. Meetings took place in January 2012, August 2012 and November 2014 with representatives from both the EPA and DOJ. We have continued discussionsentered a consent decree with the EPA and DOJ and are presently engaged in settlement discussions with them. Any settlement is expected to includesettle this matter. The U.S. District Court for the District of New Jersey approved the consent decree on September 7, 2017. The consent decree includes injunctive relief and payment of a civil penalty. Although there can be no assurance thatpenalty, which was paid in September 2017. We believe the disposition of this matter will not have a settlement will be reached, in 2015 we recorded a liabilitymaterial adverse effect on our results of operations and corresponding expense associated with an estimated civil penalty amount.

liquidity or on our financial condition.

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.


Item 1A.Risk Factors

Item1A. Risk Factors
There have been no material changes to the risk factors as previously disclosed in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2016.

27



Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

Item 2.Unregistered Sales of Equity Securities and Use of Proceeds

(dollars in thousands, except per share data)

We had two share repurchase authorizations outstanding during the quarter ended March 31,September 30, 2017. On November 2, 2016, and February 15, 2017, we publicly announced that our Board of Directors authorized the repurchase of our outstanding common stock in one or more open market and/or privately negotiated transactions, up to an aggregate of $300,000 per authorization.  The repurchase authorizations do not have expiration dates.  We repurchased the following shares of our common stock during the firstthird quarter of 2017:

Period

 

Total Number

of Shares

Purchased

 

 

Average

Price Paid

per Share

 

 

Total Number of

Shares Purchased

as Part of Publicly

Announced Plans

or Programs

 

 

Maximum Number

(or Approximate Dollar Value) of

Shares that May Yet

Be Purchased Under

the Plans or

Programs

 

January 1 - 31, 2017

 

 

50,922

 

 

$

1,679.96

 

 

 

50,922

 

 

$

98,314

 

February 1 - 28, 2017

 

 

 

 

$

 

 

 

 

 

$

398,314

 

March 1 - 31, 2017

 

 

 

 

$

 

 

 

 

 

$

398,314

 

Total

 

 

50,922

 

 

$

1,679.96

 

 

 

50,922

 

 

 

 

 


Period 
Total Number
of Shares
Purchased
 
Average
Price Paid
per Share
 
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs
 
Maximum Number
(or Approximate Dollar Value) of
Shares that May Yet
Be Purchased Under
the Plans or
Programs
July 1 - 31, 2017 7,910
 $2,394.38
 7,910
 $305,415
August 1 - 31, 2017 
 $
 
 $305,415
September 1 - 30, 2017 (1) 18,720
 $2,764.59
 18,720
 $253,660
Total 26,630
 $2,654.63
 26,630
  
(1) 2,001 outstanding shares were repurchased under the November 2, 2016 share repurchase authorization, which fully utilized the authorization. The remaining 16,719 outstanding shares were repurchased under the February 15, 2017 share repurchase authorization.


Item 6.Exhibits

28


Item 6.

Exhibits

(a) Exhibits

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File

Number

Exhibit

Number

Filing Date

10.1*

31.1

Amendment No. 1 to Employment Agreement between NVR, Inc. and Jeffrey D. Martchek dated April 18, 2017.

8-K

10.1

4/18/2017

31.1

31.2

32

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.

29


SIGNATURE


SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

NVR, Inc.

NVR, Inc.
Date:  April 28,October 30, 2017

By:

/s/ Daniel D. Malzahn

Daniel D. Malzahn

Senior Vice President, Chief Financial Officer and Treasurer

30


Exhibit Index

Incorporated by Reference

Exhibit Number

Exhibit Description

Form

File

Number

Exhibit

Number

Filing Date

10.1*

Amendment No. 1 to Employment Agreement between NVR, Inc. and Jeffrey D. Martchek dated April 18, 2017.

8-K

10.1

4/18/2017

31.1

Certification of NVR’s Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

31.2

Certification of NVR’s Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed herewith.

32

Certification of NVR’s Chief Executive Officer and Chief Financial Officer 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.


31


34