NVR INC (NVR) FY 2021 MD&A

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations.

(dollars in thousands, except per share data)

Results of Operations

This section of this Form 10-K generally discusses 2021 and 2020 items and year-to-year comparisons between 2021 and 2020. Discussions of 2019 items and year-to-year comparisons between 2020 and 2019 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020.

Overview

Business Environment and Current Outlook

Demand for new homes remained strong across each of our markets throughout 2021, driven by historically low mortgage rates and limited housing supply. As a result, we were able to consistently increase prices throughout the year, allowing us to improve profitability despite rising lumber and other material costs and labor costs. Additionally, strong housing demand has resulted in increased construction activity and demand for building materials and contractor labor, which, coupled with the ongoing effects of the COVID-19 pandemic, has led to supply chain disruptions and longer construction cycle times. We expect to continue to face these disruptions well into 2022 and continue to work closely with our suppliers and trade partners to manage these disruptions.

Although current demand for new homes is strong, there is uncertainty regarding the extent and timing of the supply chain disruption and the effects of the ongoing pandemic and related economic relief efforts on the U.S. economy, inflation, unemployment, consumer confidence, demand for new homes and home affordability. We expect to continue to face cost pressures related to building materials, particularly lumber, as well as labor and land costs. As a result, profit margins will be impacted based on our ability to manage these costs while balancing sales pace and pricing. Although we are unable to predict the extent to which this will impact our operational and financial performance, 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.

Business

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

Our lot acquisition strategy is predicated upon avoiding the financial 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 from various third party land developers pursuant to LPAs. These LPAs 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 LPA. 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.

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 limited 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 an LPA 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 of our finished lot inventory using LPAs with forfeitable deposits.

12

Table of Contents

As of December 31, 2021, we controlled approximately 124,900 lots as discussed below.

Lot Purchase Agreements ("LPAs")

We controlled approximately 122,800 lots under LPAs with third parties through deposits in cash and letters of credit totaling approximately $521,900 and $10,100, respectively. Included in the number of controlled lots are approximately 4,900 lots for which we have recorded a contract land deposit impairment reserve of approximately $30,000 as of December 31, 2021.

Joint Venture Limited Liability Corporations (“JVs”)

We had an aggregate investment totaling approximately $20,300 in four JVs, expected to produce approximately 2,300 lots. Of the lots to be produced by the JVs, approximately 1,900 lots were controlled by us and approximately 400 lots were either under contract with unrelated parties or currently not under contract.

Land Under Development

We owned land with a carrying value of approximately $12,100 that we intend to develop into approximately 200 finished lots. We had additional funding commitments of approximately $2,700 under a joint development agreement related to one project, a portion of which we expect will be offset by development credits of approximately $800.

See Notes 3, 4 and 5 to the consolidated financial statements included herein for additional information regarding LPAs, 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 15,500 lots. Some of these properties may require rezoning or other approvals to achieve the expected yield. These properties are controlled with cash deposits totaling approximately $5,300 as of December 31, 2021, of which approximately $3,400 is refundable if we do not perform under the contract. We generally expect to assign the raw land contracts to a land developer and simultaneously enter into an LPA with the assignee if the project is determined to be feasible.

Key Financial Results

Our consolidated revenues for the year ended December 31, 2021 totaled $8,951,025, an increase of 19% from $7,536,923 in 2020. Our net income for 2021 was $1,236,719, or $320.48 per diluted share, increases of 37% and 39% compared to 2020 net income and diluted earnings per share, respectively. Our homebuilding gross profit margin percentage was 22.3% in 2021 compared to 19.0% in 2020. Settlements for the year ended December 31, 2021 totaled 21,540 units, an increase of 9% from 2020. New orders, net of cancellations (“New Orders”) during 2021 were 22,721, a decrease of 2% from 2020 while our average New Order sales price increased 15% to $436.1 in 2021. Our backlog of homes sold but not yet settled with the customer as of December 31, 2021 increased on a unit basis by 10% to 12,730 units and increased on a dollar basis by 26% to $5,782,035 when compared to December 31, 2020. Income before tax from our mortgage banking segment totaled $171,604 in 2021, an increase of 23% when compared to $140,073 in 2020 due primarily to an increase in secondary marketing gains on sales of loans.

Homebuilding Operations

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

13

Table of Contents

Consolidated Homebuilding

Homebuilding revenues increased 19% in 2021 compared to 2020, as a result of a 9% increase in both the number of units settled and in the average settlement price year over year. The increase in the number of units settled was attributable to a 40% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate year over year. The increase in the average settlement price was primarily attributable to a 4% higher average sales price of units in backlog entering 2021 compared to backlog entering 2020 coupled with a 15% increase in the average sales price of New Orders in the first six months of 2021 compared to the same period in 2020. The gross profit margin percentage in 2021 increased to 22.3% from 19.0% in 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power in prior quarters and improved leveraging of certain operating costs attributable to the increase in settlement activity year over year. These favorable factors were partially offset by higher prices for lumber, certain other commodities and labor year over year.

The number of New Orders decreased 2% while the average sales price of New Orders increased 15% in 2021 when compared to 2020.  The number of New Orders in the current year were lower due primarily to a 9% decrease in the average number of active communities year over year. The increase in the average sales price of New Orders was primarily attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and provided us sustained pricing power since the second half of 2020.

Selling, general and administrative ("SG&A") expenses in 2021 increased by $43,800 compared to 2020, but as a percentage of revenue decreased to 5.5% in 2021 from 5.9% in 2020 due to improved leveraging of SG&A costs. The increase in SG&A expense year over year was attributable primarily to increased incentive compensation attributable to stronger performance year over year, as well as increased personnel costs due to increased headcount.

Our backlog represents homes sold but not yet settled with our customers. Backlog units and dollars were 12,730 units and $5,782,035, respectively, as of December 31, 2021 compared to 11,549 units and $4,575,899, respectively, as of December 31, 2020.  Backlog units were higher despite an 11% decrease in New Orders during the six-month period ending December 31, 2021 compared to the same period in 2020, due to a lower backlog turnover rate year over year. Our backlog turnover rate was negatively impacted by a longer production cycle attributable to supply chain disruptions and subcontractor capacity constraints. Backlog dollars were higher due to a 15% increase in the average sales price of New Orders during the six-month period ended December 31, 2021 compared to the same period in 2020.

In addition to the impact of the COVID-19 pandemic, our backlog 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 beginning backlog for the current period.  Additionally, a substantial majority of our cancellations occur prior to starting construction on a home. Expressed as the total of all cancellations during the period as a percentage of gross New Orders during the period, our cancellation rate was 9.2%, 14.9% and 14.6% in 2021, 2020, and 2019, respectively. Additionally, approximately 3% in 2021 and 6% in both 2020 and 2019, of a reporting quarter’s opening backlog cancelled during the quarter. We can provide no assurance that our historical cancellation rates are indicative of the actual cancellation rate that may occur in future years. Other than those units that are cancelled, and subject to potential construction delays resulting from COVID-19 related restrictions and/or continued supply chain disruptions, we expect to settle substantially all of our December 31, 2021 backlog during 2022. See “Risk Factors” in Item 1A of this Form 10-K.

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 Homebuilding Segments

Homebuilding segment profit 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 by corporate management. 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 is providing the desired rate of return after covering our cost of capital.

We record impairment 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 termination of an LPA with the developer, or the restructuring of an LPA 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 December 31, 2021 and 2020 has been allocated to the reportable segments for the respective years to show contract land deposits on a net basis. The net contract land deposit balances below also include approximately $10,100 and $8,100 at December 31, 2021 and 2020, respectively, of letters of credit issued as deposits in lieu of cash.

14

Table of Contents

The following tables summarize certain homebuilding operating activity by reportable segment for each of the last three years:

Selected Segment Financial Data:

Segment Operating Activity:

15

Table of Contents

Operating Data:

Homebuilding Inventory:

16

Table of Contents

(1)Total segment inventory differs from consolidated inventory due to 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. These consolidation adjustments are not allocated to our operating segments.

Lots Controlled and Land Deposits:

Mid Atlantic

The Mid Atlantic segment had an approximate $297,100, or 68%, increase in segment profit in 2021 compared to 2020, driven by improved gross profit margins and an increase in segment revenues of approximately $381,300, or 10%, year over year. Segment revenues increased due primarily to an 11% increase in the average settlement price year over year. The increase in the average settlement price was primarily attributable to a 7% higher average sales price of units in backlog entering 2021 compared to backlog entering 2020, coupled with a 17% increase in the average sales price of New Orders in the first six months of 2021 compared to the same period in 2020. The Mid Atlantic segment’s gross profit margin percentage increased to 24.4% in 2021 from 18.8% in 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power and improved leveraging of certain operating costs attributable to the increase in settlement activity year over year. These favorable factors were partially offset by higher prices for lumber, certain other commodities and labor year over year.

17

Table of Contents

Segment New Orders decreased 5% while the average sales price of New Orders increased 15% in 2021 compared to 2020. New Orders were negatively impacted primarily by a 13% decrease in the average number of active communities year over year. The increase in the average sales price of New Orders year over year was attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and have provided us sustained pricing power since the second half of 2020.

North East

The North East segment had an approximate $54,800, or 108%, increase in segment profit in 2021 compared to 2020, driven by an increase in segment revenues of approximately $229,100, or 43%, year over year and improved gross profit margins. The increase in segment revenues was attributable to a 21% increase in the number of units settled and an 18% increase in the average settlement price year over year. The increase in the number of units settled was attributable to a 62% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate year over year. The increase in the average settlement price was primarily attributable to a 10% higher average sales price of units in backlog entering 2021 compared to backlog entering 2020, coupled with a 28% increase in the average sales price of New Orders in the first six months of 2021 compared to the same period in 2020. The segment’s gross profit margin percentage increased to 21.4% in 2021 from 19.0% in 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power and improved leveraging of certain operating costs attributable to the increase in settlement activity year over year. These favorable factors were partially offset by higher prices for lumber, certain other commodities and labor year over year.

Segment New Orders decreased 3% while the average sales price of New Orders increased 19% in 2021 compared to 2020. New Orders were negatively impacted primarily by a 13% decrease in the average number of active communities year over year. The increase in the average sales price of New Orders year over year was attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and provided us sustained pricing power since the second half of 2020.

Mid East

The Mid East segment had an approximate $103,200, or 61%, increase in segment profit in 2021 compared to 2020. The increase in segment profit was driven by an increase of segment revenues of approximately $367,100, or 24%, year over year and improved gross profit margins. Segment revenues increased due to increases in the number of units settled and the average settlement price of 15% and 8%, respectively, year over year. The increase in the number of units settled was largely attributable to a 59% higher backlog unit balance entering 2021 compared to the backlog unit balance entering 2020, offset partially by a lower backlog turnover rate year over year. The increase in the average settlement price was primarily attributable to a 4% higher average sales price of units in backlog entering 2021 compared to the same period in 2020, coupled with a 13% increase in the average sales price of New Orders in the first six months of 2021 compared to the same period in 2020. The segment’s gross profit margin percentage increased to 20.7% in 2021 from 18.5% in 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power and by improved leveraging of certain operating costs attributable to the increase in settlement activity year over year, offset partially by higher prices for lumber, certain other commodities and labor year over year.

Segment New Orders decreased 4% while the average sales price of New Orders increased 12% in 2021 compared to 2020. New Orders were negatively impacted primarily by a 7% decrease in the average number of active communities in 2021 compared to 2020. The increase in the average sales price of New Orders was attributable to favorable market conditions which, coupled with low housing inventory levels, drove demand and provided us sustained pricing power since the second half of 2020.

South East

The South East segment had an approximate $125,000, or 61%, increase in segment profit in 2021 compared to 2020. The increase in segment profit was primarily driven by an increase in segment revenues of approximately $395,400, or 25%, year over year and improved gross profit margins. The increase in revenues was attributable to a 16% increase in the number of units settled and an 8% increase in the average settlement price year over year. The number of units settled were favorably impacted by a 46% higher backlog unit balance entering 2021 compared to the same period in 2020, offset partially by a lower backlog turnover rate year over year. The increase in the average settlement price was primarily attributable to a 3% higher average sales price of units in backlog entering 2021 compared to the same period in 2020, coupled with a 16% increase in the average sales price of New Orders in the first six months of 2021 compared to the same period in 2020. The segment’s gross profit margin percentage increased to 23.6% in 2021 from 20.5% in 2020. Gross profit margins were favorably impacted by the increase in the average settlement price attributable to improved pricing power and improved leveraging of certain operating costs attributable to the increase in settlement activity year over year. These favorable factors were partially offset by higher prices for lumber, certain other commodities and labor year over year.

Segment New Orders and the average sales price of New Orders increased 6% and 18%, respectively, in 2021 compared to 2020. New Orders and the average sales price of New Orders were higher due to favorable market conditions which, coupled with low housing inventory levels, drove demand and provided us sustained pricing power since the second half of 2020.

18

Table of Contents

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 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 is primarily comprised of interest charges on our 3.95% Senior Notes due 2022 and 3.00% Senior Notes due 2030, and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

(1)This item represents changes to the contract land deposit impairment reserve, which are not allocated to the reportable segments. See further discussion of contract land deposit impairment charges in Note 3 in the accompanying consolidated financial statements.

(2)The decrease in equity-based compensation expense in 2020 was primarily attributable to stock options issued in 2014 under the 2014 Equity Incentive Plan becoming fully vested in 2019. In addition, there were higher stock option forfeitures in 2020 compared to 2019.

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

19

Table of Contents

(4)     The decrease in consolidation adjustments and other in 2021 compared to 2020 is driven by changes in lumber prices in 2021. Our reportable segments' results include intercompany profits of our production facilities for home packages delivered to our homebuilding divisions. For homes not yet settled, these intercompany profits are reversed through the consolidation adjustments. Due to the significantly higher lumber prices in the first half of 2021, the previously reversed intercompany profits were recognized in subsequent quarters through the consolidation adjustment as homes were settled, and our consolidated homebuilding margins were negatively impacted by the higher lumber costs.

Mortgage Banking Segment

We conduct our mortgage banking activity through NVRM, a wholly owned subsidiary. NVRM focuses almost exclusively on serving the homebuilding segment customer base. The following table summarizes the results of our mortgage banking operations and certain statistical data for each of the last three years:

Loan closing volume in 2021 increased by approximately $756,100, or 14%, from 2020.  The increase was primarily attributable to a 6% increase in the number of loans closed year over year due primarily to the aforementioned increase in the homebuilding segment’s number of settlements in 2021 as compared to 2020 and an 8% increase in the average loan amount in 2021 compared to 2020.

Segment profit in 2021 increased by approximately $32,900, or 23%, from 2020.  The increase in segment profit was primarily attributable to an increase in mortgage banking fees.  Mortgage banking fees increased by approximately $41,300, or 20%, resulting from the aforementioned increase in loan closing volume and an increase in secondary marketing gains on sales of loans.

20

Table of Contents

Mortgage Banking – Other

We sell all of the loans we originate into the secondary mortgage market.  Insofar as we underwrite our originated loans to the standards and specifications of the ultimate investor, we have no further financial obligations from the issuance of loans, except in certain limited instances where repurchases or early payment default occur.  Those underwriting standards are typically equal to or more stringent than the underwriting standards required by FNMA, GNMA, FHLMC, VA and FHA.  Because we sell all of our loans and do not service them, there is often a substantial delay between the time that a loan goes into default and the time that the investor requests us to reimburse them for losses incurred because of the default.  We believe that all of the loans that we originate are underwritten to the standards and specifications of the ultimate investor to whom we sell our originated loans.  We employ a quality control department to ensure that our underwriting controls are effective, and further assess the underwriting function as part of our assessment of internal controls over financial reporting.

We maintain a reserve for losses on mortgage loans originated that reflects our judgment of the present loss exposure from the loans that we have originated and sold. At December 31, 2021 and 2020, we had repurchase reserves of approximately $21,400 and $20,500, respectively.

NVRM is dependent on our homebuilding operation’s customers for business.  If new orders and selling prices of the homebuilding segment decline, NVRM’s operations will also be adversely affected.  In addition, NVRM’s operating results may be adversely affected in future periods due to tightening and volatility of the credit markets, changes in investor funding times, increased regulation of mortgage lending practices and increased competition in the mortgage market.

Seasonality

We generally have higher New Order activity in the first half of the year and higher home settlements, revenues and net income in the second half of the year, however, the impact of the pandemic in both 2021 and 2020 on home demand, as well as supply chain disruptions, have affected our typical seasonal New Order and settlement trends.

Effective Tax Rate

Our consolidated effective tax rates in 2021 and 2020 were 22.24% and 16.40%, respectively. The higher effective tax rate in 2021 was attributable primarily to the recognition of a lower income tax benefit related to excess tax benefits from stock option exercises in 2021. Excess tax benefit recognized in 2021 and 2020 were approximately $48,400 and $92,200, respectively.

We expect continued tax rate volatility in future years attributable to the recognition of excess tax benefits from equity plan activity and distributions from the deferred compensation plans.

Recent Accounting Pronouncements Pending Adoption

See Note 1 to the accompanying consolidated financial statements for discussion of recently issued accounting pronouncements applicable to us.

Liquidity and Capital Resources

We fund our operations primarily from our current cash holdings and cash flows generated by operating activities. In addition, we have available a short-term unsecured working capital revolving credit facility and revolving mortgage repurchase facility, as further described below. As of December 31, 2021, we had a strong liquidity position with approximately $2,600,000 in cash and cash equivalents, approximately $284,000 in unused committed capacity under our revolving credit facility and $150,000 in unused committed capacity under our revolving mortgage repurchase facility.

Material Cash Requirements

We believe that our current cash holdings, cash generated from operations, and cash available under our short-term unsecured credit agreement and revolving mortgage repurchase facility, as well as the public debt and equity markets, will be sufficient to satisfy both our short term and long term cash requirements for working capital to support our daily operations and meet commitments under our contractual obligations with third parties. Our material contractual obligations primarily consist of (i) payments due to service our debt and interest on that debt. During 2022, we expect to use cash holdings to repurchase or retire $600,000 in senior notes maturing in September 2022. Future interest payments on our outstanding senior notes total approximately $242,800, with approximately $43,700 due within twelve months, (ii) payment obligations totaling approximately $300,000 under existing LPAs for deposits to be paid to land developers, assuming that contractual development milestones are met by the developers and we exercise our option to acquire finished lots under those LPAs. We expect to make the majority of these payments within the next three years, and (iii) obligations under operating and finance leases related primarily to office space and our production facilities (see Part I, Item 2 and Note 13 of this Form 10-K for additional discussion of our properties and leases, respectively).

21

Table of Contents

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 program assists us in accomplishing our primary objective, creating increases in shareholder value. See “Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities” in Item 5 of this Form 10-K for disclosure of amounts repurchased during the fourth quarter of 2021. For the year ended December 31, 2021, we repurchased 322,038 shares of our common stock at an aggregate purchase price of $1,538,019. As of December 31, 2021, we had approximately $508,000 available under Board approved repurchase authorizations.

Capital Resources

Senior Notes

As of December 31, 2021, we had a total of $1,500,000 in outstanding Senior Notes, $600,000 of which mature in September 2022 and the remaining $900,000 mature in May 2030. The Senior Notes are senior unsecured obligations and rank equally in right of payment with any of our existing and future unsecured senior indebtedness, will rank senior in right of payment to any of our future indebtedness that is by its terms expressly subordinated to the Senior Notes and will be effectively subordinated to any of our existing and future secured indebtedness to the extent of the value of the collateral securing such indebtedness. The indenture governing the Senior Notes does not contain any financial covenants; however, it does contain, among other items, and subject to certain exceptions, covenants that restrict our ability to create, incur, assume or guarantee secured debt, enter into sale and leaseback transactions and conditions related to mergers and/or the sale of assets. We were in compliance with all covenants under the Senior Notes at December 31, 2021.

Credit Agreement

We have a unsecured revolving credit agreement (the "Credit Agreement") with a group of lenders which may be used for working capital and general corporate purposes. The Credit Agreement provides for aggregate revolving loan commitments of $300,000 (the "Facility"). Under the Credit Agreement, we 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. In addition, the Credit Agreement provides for a $100,000 sublimit for the issuance of letters of credit of which there was approximately $16,100 outstanding at December 31, 2021. The Credit Agreement termination date is February 12, 2026. There were no borrowings outstanding under the Credit Agreement as of December 31, 2021.

Repurchase Agreement

Our mortgage banking subsidiary, NVRM, has an unsecured revolving mortgage repurchase agreement (the "Repurchase Agreement") which is non-recourse to NVR. The purpose of the Repurchase Agreement is to finance the origination of mortgage loans by NVRM. The Repurchase Agreement provides borrowing capacity up to $150,000, subject to certain sublimits. The Repurchase Agreement expires on July 20, 2022. At December 31, 2021, there was no debt outstanding under the Repurchase Agreement and there were no borrowing base limitations.

See Note 9 of this Form 10-K for additional disclosures regarding our Senior Notes, Credit Agreement and Repurchase Agreement.

Cash Flows

For the year ended December 31, 2021, cash, restricted cash and cash equivalents decreased by $172,798. Net cash provided by operating activities was $1,242,393, due primarily to cash provided by earnings in 2021 and net proceeds of $344,750 from mortgage loan activity. Additionally, cash was provided by an increase in customer deposits of $176,705 attributable to the increase in our ending backlog year over year. Cash was primarily used to fund the increase in inventory of $238,284, attributable to an increase in units under construction at December 31, 2021 compared to December 31, 2020.

Net cash used in investing activities in 2021 was $18,179. Cash was used primarily for purchases of property, plant and equipment.

Net cash used by financing activities in 2021 was $1,397,012. Cash was used primarily to repurchase shares of our common stock under our ongoing common stock repurchase program as discussed above. Cash was provided from stock option exercise proceeds totaling $142,370.

For the year ended December 31, 2020, cash, restricted cash and cash equivalents increased by $1,648,978. Net cash provided by operating activities was $925,269, due primarily to cash provided by earnings in 2020 and net proceeds of $212,636 from mortgage loan activity. Additionally, cash was provided by an increase in customer deposits attributable to the increase in our ending backlog year over year. Cash was primarily used to fund the increase in inventory of $362,384, attributable to an increase in units under construction at December 31, 2020 compared to December 31, 2019.

Net cash used in investing activities in 2020 of $3,933 was primarily used for purchases of property, plant and equipment of $16,119, offset partially by the receipt of capital distributions from our unconsolidated JVs totaling $11,625.

22

Table of Contents

Net cash provided by financing activities in 2020 was $727,642, due primarily to the net proceeds received from the issuance of the 2030 Senior Notes totaling $923,905 and by $180,866 in proceeds from stock option exercises in 2020. Cash was used during the period to repurchase 93,346 shares of our common stock at an aggregate purchase price of $371,078 under our ongoing common stock repurchase program discussed above.

At December 31, 2021 and 2020, the homebuilding segment had restricted cash of $60,730 and $28,912, respectively. Restricted cash in each year was attributable to customer deposits for certain home sales.

Critical Accounting Policies and Estimates

General

The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. We continually evaluate the estimates we use to prepare the consolidated financial statements and update those estimates as necessary. In general, our estimates are based on historical experience, on information from third party professionals, and other various assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ materially from those estimates made by management.

Homebuilding Inventory

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

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

Contract Land Deposits

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

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

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

Although we consider the allowance for losses on contract land deposits reflected on the December 31, 2021 consolidated balance sheet to be adequate (see Note 1 to the accompanying consolidated financial statements included herein), there can be no assurance that this allowance will prove to be adequate over time to cover losses due to unanticipated adverse changes in the economy or other events adversely affecting specific markets or the homebuilding industry.

Warranty/Product Liability Reserves

We establish warranty and product liability reserves to provide for estimated future expenses as a result of construction and product defects, product recalls and litigation incidental to our homebuilding business. Liability estimates are determined based on our judgment considering such factors as historical experience, the likely current cost of corrective action, manufacturers’ and

23

Table of Contents

subcontractors’ participation in sharing the cost of corrective action, consultations with third party experts such as engineers, and discussions with our General Counsel and outside counsel retained to handle specific product liability cases. Although we consider the warranty and product liability accrual reflected on the December 31, 2021 consolidated balance sheet to be adequate (see Note 14 to the accompanying consolidated financial statements included herein), there can be no assurance that this accrual will prove to be adequate over time to cover losses due to increased costs for material and labor, the inability or refusal of manufacturers or subcontractors to financially participate in corrective action, unanticipated adverse legal settlements, or other unanticipated changes to the assumptions used to estimate the warranty and product liability accrual.

Equity-Based Compensation

We recognize equity-based compensation expense within our income statement for all share-based payment arrangements, which include non-qualified stock options to purchase shares of NVR common stock ("Options") and restricted share units ("RSUs"). Compensation expense is based on the grant-date fair value of the Options and RSUs granted, and is recognized on a straight-line basis over the requisite service period for the entire award (from the date of grant through the period of the last separately vesting portion of the grant). Options and RSUs which are subject to a performance condition are treated as a separate award from the “service-only” Options and RSUs, and compensation expense is recognized when it becomes probable that the stated performance target will be achieved. We calculate the fair value of our Options, which are non-publicly traded, using the Black-Scholes option-pricing model. The grant date fair value of the RSUs is the closing price of our common stock on the day immediately preceding the date of grant. The reversal of compensation expense previously recognized for grants forfeited is recorded in the period in which the forfeiture occurs.

As noted above, we calculate the fair value of our Options, which are non-publicly traded, using the Black-Scholes option-pricing model. While the Black-Scholes model is a widely accepted method to calculate the fair value of options, its results are dependent on input variables, two of which, expected term and expected volatility, are significantly dependent on management’s judgment. We have concluded that our historical exercise experience is the best estimate of future exercise patterns to determine an Option’s expected term. To estimate expected volatility, we analyze the historical volatility of our common stock over a period equal to the Option’s expected term. Changes in management’s judgment of the expected term and the expected volatility could have a material effect on the grant-date fair value calculated and expensed within the income statement.

In addition, when recognizing equity-based compensation cost related to “performance condition” Option and RSU grants, we are required to make a determination as to whether the performance conditions will be met prior to the completion of the actual performance period.  The performance metric is based on our return on capital performance during a specified three year period based on the date of Option grant. While we currently believe that this performance condition will be satisfied at the target level and are recognizing compensation expense related to such Options and RSUs accordingly, our future expected activity levels could cause us to make a different determination, resulting in a change to the compensation expense to be recognized related to performance condition Option and RSU grants that would otherwise have been recognized to date.

Although we believe that the compensation costs recognized in 2021 are representative of the cumulative ratable amortization of the grant-date fair value of unvested Options and RSUs outstanding, changes to the estimated input values such as expected term and expected volatility and changes to the determination of whether performance condition grants will vest, could produce widely different expense valuations and recognition.

Mortgage Repurchase Reserve

We originate several different loan products to our customers to finance the purchase of their home. We sell all of the loans we originate into the secondary mortgage market, on a servicing released basis, typically within 30 days from closing. All of the loans that we originate are underwritten to the standards and specifications of the ultimate investor. Those underwriting standards are typically equal to or more stringent than the underwriting standards required by FNMA, GNMA, FHLMC, VA and FHA. Insofar as we underwrite our originated loans to those standards, we bear no increased concentration of credit risk from the issuance of loans, except in certain limited instances where repurchases or early payment default occur. We employ a quality control department to ensure that our underwriting controls are effectively operating, and further assess the underwriting function as part of our assessment of internal controls over financial reporting. We maintain a reserve for losses on mortgage loans originated that reflects our judgment of the present loss exposure in the loans that we have originated and sold. The reserve is calculated based on an analysis of historical experience and exposure. Although we consider the mortgage repurchase reserve reflected on the December 31, 2021 consolidated balance sheet to be adequate (see Note 16 to the accompanying consolidated financial statements included herein), there can be no assurance that this reserve will prove to be adequate over time to cover losses due to unanticipated changes to the assumptions used to estimate the mortgage repurchase reserve.

Impact of Inflation, Changing Prices and Economic Conditions

See “Risk Factors” included in Item 1A of this Form 10-K for a description of the impact of inflation, changing prices and economic conditions on our business and our financial results. See also the discussion of the current business environment in the Overview section above.

24

Table of Contents