NVR INC (NVR) FY 2024 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 2024 and 2023 items and year-to-year comparisons between 2024 and 2023. Discussions of 2022 items and year-to-year comparisons between 2023 and 2022 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, 2023.

Overview

Business Environment and Current Outlook

Demand for new homes weakened during the fourth quarter of 2024, due to rising mortgage interest rates and continued affordability issues attributable to high mortgage interest rates and home prices. New home demand continues to be favorably impacted by a limited, but increasing, supply of homes in the resale market; however, we expect that affordability issues, inflationary pressures, interest rate volatility and economic uncertainty may continue to weigh on future demand. We also expect to continue to face cost pressures related to building materials, labor and land costs which we expect will impact profit margins based on our ability to manage these costs while balancing sales pace and home prices. 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 and our disciplined lot acquisition strategy.

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.

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As of December 31, 2024, we controlled approximately 162,400 lots as discussed below.

Lot Purchase Agreements ("LPAs")

We controlled approximately 155,000 lots under LPAs with third parties through deposits in cash and letters of credit totaling approximately $764,900 and $8,700, respectively. Included in the number of controlled lots are approximately 10,700 lots for which we have recorded a contract land deposit impairment allowance of approximately $58,600 as of December 31, 2024.

Joint Venture Limited Liability Corporations (“JVs”)

We had an aggregate investment totaling approximately $29,300 in three JVs, expected to produce approximately 5,150 lots. Of the lots to be produced by the JVs, approximately 4,800 lots were controlled by us and approximately 350 lots were either under contract with unrelated parties or currently not under contract. We had additional funding commitments totaling approximately $8,400 to one of the JVs as of December 31, 2024.

Land Under Development

We owned land with a carrying value of approximately $65,400 that we expect to be developed into approximately 2,600 finished lots.

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 35,900 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 $20,400 as of December 31, 2024, of which approximately $8,400 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, 2024 totaled $10,524,479, an increase of 11% from $9,518,202 in 2023. Our net income for 2024 was $1,681,928, or $506.69 per diluted share, increases of 6% and 9% compared to 2023 net income and diluted earnings per share, respectively. Our homebuilding gross profit margin percentage was 23.7% in 2024 compared to 24.3% in 2023. Settlements for the year ended December 31, 2024 totaled 22,836 units, an increase of 11% from 2023. New orders, net of cancellations (“New Orders”) during 2024 were 22,560, an increase of 4% from 2023 while our average New Order sales price increased 2% to $457.7 in 2024. Our backlog of homes sold but not yet settled with the customer as of December 31, 2024 decreased on a unit basis by 3% to 9,953 units and increased on a dollar basis by 1% to $4,791,870 when compared to December 31, 2023. Income before tax from our mortgage banking segment totaled $154,935 in 2024, an increase of 17% when compared to $132,793 in 2023.

Homebuilding Operations

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

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Consolidated Homebuilding

Homebuilding revenues increased 11% in 2024 compared to 2023, as a result of an 11% increase in the number of units settled. The increase in the number of units settled was primarily attributable to a 12% higher backlog unit balance entering 2024 compared to the same period in 2023, coupled with a higher backlog turnover rate. The gross profit margin percentage in 2024 decreased to 23.7% from 24.3% in 2023. Gross profit margins were negatively impacted by higher lot costs and closing cost assistance.

New Orders and the average sales price of New Orders increased 4% and 2%, respectively, in 2024 when compared to 2023, despite the number of active communities remaining flat year over year. New Orders were higher year over year due to improved demand in the first three quarters of 2024 compared to the same period in 2023, attributable to a limited supply of homes in the resale market and stabilized mortgage interest rates. However, demand began to slow in the fourth quarter, primarily in our South East segment as affordability was negatively impacted in part by rising mortgage interest rates and by an increase in the supply of homes in the resale and new home markets within certain markets in our South East segment. The increase in the average sales price of New Orders is primarily attributable to a relative shift to higher priced markets and communities in certain of our reportable segments as discussed in the respective segments below.

Selling, general and administrative ("SG&A") expenses in 2024 increased by approximately $9,200 compared to 2023, and as a percentage of revenue decreased to 5.8% in 2024 from 6.3% in 2023. The increase in SG&A expense was due primarily to an increase of approximately $21,000 in personnel costs attributable to an increase in headcount year over year. Additionally, sales and marketing expenses were approximately $9,600 higher year over year due to an increase in model home related expenses. These increases were partially offset by a $24,000 decrease in equity-based compensation year over year due primarily to the non-qualified stock options to purchase shares of NVR common stock ("Options") and restricted stock units ("RSUs") issued as part of the 2018 four-year block grant being fully vested as of December 31, 2023.

Our backlog represents homes sold but not yet settled with our customers. As of December 31, 2024, our backlog decreased on a unit basis by 3% to 9,953 units, but increased on a dollar basis by 1% to $4,791,870 when compared to 10,229 units and $4,756,926, respectively, as of December 31, 2023. The decrease in backlog units was attributable to a higher backlog turnover rate year over year as the number of units settled exceeded New Orders year over year. Backlog dollars were higher primarily due to a 4% increase in the average price of units in backlog year over year, primarily attributable to a relative shift to higher priced markets and communities in certain of our reportable segments.

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. Calculated as the total of all cancellations during the period as a percentage of gross sales during the period, our cancellation rate was approximately 14%, 13% and 14% in 2024, 2023, and 2022, respectively. During the four quarters of each of 2024, 2023 and 2022, approximately 5% in 2024, 4% in 2023 and 4% in 2022, 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, we expect to settle substantially all of our December 31, 2024 backlog during 2025. See “Risk Factors” in Item 1A of this Form 10-K.

The rate at which we turn over our backlog is impacted by various factors, including, but not limited to, changes in New Order activity, internal production capacity, external subcontractor capacity, building material availability 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 impairment allowance as of December 31, 2024 and 2023 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 $8,700 and $7,700 as of December 31, 2024 and 2023, respectively, of letters of credit issued as deposits in lieu of cash.

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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:

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Operating Data:

Homebuilding Inventory:

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(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 $70,900, or 10%, increase in segment profit in 2024 compared to 2023, driven by an increase in segment revenues of approximately $233,800, or 6%, coupled with an increase in gross profit margins. Segment revenues increased due to a 6% increase in the number of units settled which was primarily attributable to an 11% higher backlog unit balance entering 2024 compared to backlog entering 2023. The Mid Atlantic segment’s gross profit margin percentage increased to 25.0% in 2024 from 24.4% in 2023. Gross profit margins were favorably impacted primarily by the improved leveraging of certain operating costs attributable to the increase in settlement activity, offset partially by higher lot costs and closing cost assistance year over year.

Segment New Orders increased 1% while the average sales price of New Orders increased 2% in 2024 compared to 2023. New Orders were slightly higher despite a 12% decrease in the average number of active communities year over year, due to a 14% higher sales absorption rate year over year. Sales demand remained favorable in certain markets within the segment due to a limited supply of homes in the resale market. The increase in the average sales price of New Orders was primarily attributable to a relative shift to higher priced communities in certain markets year over year.

North East

The North East segment had an approximate $48,200, or 29%, increase in segment profit in 2024 compared to 2023. Segment profits were favorably impacted by an increase in segment revenue of approximately $217,600, or 23%. Segment revenues were favorably impacted by a 13% increase in the number of units settled and an 8% increase in the average settlement price year over year. The increase in settlements was primarily attributable to a 16% higher backlog unit balance entering 2024 compared to backlog entering 2023. The increase in the average settlement price was primarily attributable to a 9% higher average sales price of units in backlog entering 2024 compared to backlog entering 2023. The segment’s gross profit margin percentage remained relatively flat.

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Segment New Orders and the average sales price of New Orders increased 6% and 9%, respectively, in 2024 compared to 2023. Despite a 13% decrease in the average number of active communities year over year, New Orders were favorably impacted by a 22% higher sales absorption rate year over year. Sales demand remained favorable in certain markets within the segment due to a limited supply of homes in the resale market. The increase in the average sales price of New Orders was primarily attributable to a relative shift to higher priced communities in certain markets year over year.

Mid East

The Mid East segment had an approximate $33,000, or 13%, increase in segment profit in 2024 compared to 2023. The increase in segment profit was driven by an increase in segment revenues of approximately $138,200, or 8%, coupled with an increase in gross profit margins year over year. Segment revenues increased due to a 4% increase in settlements year over year, coupled with a 3% increase in the average settlement price. The increase in settlements resulted from a 7% higher backlog unit balance entering 2024 compared to backlog entering 2023, coupled with a higher backlog turnover rate year over year. The increase in the average settlement price is attributable to a 2% higher average price of units in backlog entering 2024 compared to backlog entering 2023, coupled with a 5% higher average price of New Orders for the first six months of 2024 compared to the same period of 2023. The segment’s gross profit margin percentage increased to 22.3% in 2024 from 21.6% in 2023. Gross profit margin was favorably impacted by the improved leveraging of certain operating costs as settlement activity increased, offset partially by higher lot costs and closing cost assistance year over year.

Segment New Orders and the average sales price of New Orders each increased 3% in 2024 compared to 2023. Despite an 8% decrease in the average number of active communities year over year, New Orders were favorably impacted by 12% higher absorption rates year over year. Sales demand remained favorable in certain markets within the segment due to a limited supply of homes in the resale market. The increase in the average sales price of New Orders was primarily attributable to a relative shift to higher priced communities within certain markets year over year.

South East

The South East segment had an approximate $52,400, or 12%, decrease in segment profit in 2024 compared to 2023 due primarily to a decrease in gross profit margins to 22.3% in 2024 from 25.7% in 2023. Gross profit margins were negatively impacted primarily by higher lot costs and closing cost assistance. Segment revenues in 2024 were higher by approximately $388,200, or 16%, due to a 19% increase in the number of units settled, offset by a 3% decrease in the average price of units settled year over year. The increase in settlements was attributable primarily to a 15% higher backlog balance entering 2024 compared to the backlog entering 2023, coupled with a higher backlog turnover rate year over year. The decrease in the average settlement price was attributable primarily to a 7% lower average sales price of units in backlog entering 2024 compared to backlog entering 2023.

Segment New Orders increased 7% while the average sales price of New Orders remained flat year over year. The increase in New Orders was primarily attributable to a 28% increase in the average number of active communities year over year, offset partially by a 16% lower absorption rate within the segment year over year. As noted in the Consolidated Homebuilding section above, sales demand remained favorable through the first three quarters of 2024 compared to the same period in 2023, due to a limited supply of homes in the resale market and stabilized mortgage interest rates. However, demand began to slow in the fourth quarter as affordability was negatively impacted in part by rising mortgage interest rates and by an increase in the supply of homes in the resale and new home markets within certain markets in the segment.

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 3.00% Senior Notes due 2030, and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.

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(1)This item represents changes to the contract land deposit impairment allowance, which are not allocated to our 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 2024 was primarily attributable to the Options and RSUs issued as part of the 2018 four-year block grant being fully vested as of December 31, 2023. The increase in 2023 from 2022 was primarily attributable to a four year block grant of Options and RSUs in May 2022. See further discussion of equity-based compensation in Note 11 in the accompanying consolidated financial statements.

(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:

(4)     The consolidation adjustments and other in each period are primarily attributable to changes in units under construction year over year, and any significant changes in material costs, primarily lumber. Our reportable segments' results include the intercompany profits of our production facilities for home packages delivered to our homebuilding divisions. Costs related to

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homes not yet settled are reversed through the consolidation adjustment and recorded in inventory. These costs are subsequently recorded through the consolidation adjustment when the respective homes are settled.

Mortgage Banking Segment

We conduct our mortgage banking activity through NVRM, a wholly owned subsidiary. NVRM focuses 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 2024 increased by approximately $523,900, or 9%, from 2023.  The increase was primarily attributable to a 9% increase in the number of loans closed, resulting from an 11% increase in the homebuilding segment’s number of homes settled in 2024 as compared to 2023.

Segment profit in 2024 increased by approximately $20,900, or 15%, from 2023, which was 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 $28,500, or 14%, due to higher gains on sales of loans. General and administrative expenses increased by $11,100, or 13%, which was the result of increased personnel costs.

Mortgage Banking – Other

We sell all of the loans we originate into the secondary mortgage market. To the extent 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 defaults 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 (a small subset of such loans are serviced for a short period of time prior to sale), 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. As of December 31, 2024 and 2023, we had repurchase reserves of approximately $18,700 and $18,600, 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

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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 historically have experienced variability in our quarterly results, generally having higher New Order activity in the first half of the year and higher home settlements, revenue and net income in the second half of the year. However, in recent years our typical seasonal trends have been affected by significant changes in market conditions. As a result, our quarterly results of operations are not necessarily indicative of the results that may be expected for the full year.

Effective Tax Rate

Our consolidated effective tax rates in 2024 and 2023 were 20.50% and 17.46%, respectively. The increase in the effective tax rate is primarily attributable to a lower income tax benefit recognized for excess tax benefits from stock option exercises, which totaled approximately $95,100 and $153,600 for 2024 and 2023, 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. Given the limited number of participants in our deferred compensation plan, the retirement of a participant could result in a significant distribution of the rabbi trust shares and corresponding tax deduction for the Company.

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, 2024, we had a strong liquidity position with approximately $2,500,000 in cash and cash equivalents, approximately $285,000 in unused committed capacity under our revolving credit facility and $150,000 in unused committed capacity under our revolving mortgage repurchase facility. We believe that our current cash holdings and our anticipated cash flows generated by operating activities, together with the amounts under our revolving credit facility and revolving mortgage repurchase facility will be sufficient to fund our anticipated operations for at least the next twelve months and beyond.

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 the following:

(i) Payments due to service our debt and interest on that debt. Our current outstanding Senior Notes total $900,000 and mature in May 2030. Future interest payments on our current outstanding Senior Notes total approximately $145,050, with $27,000 due within the next twelve months.

(ii) Payment obligations totaling approximately $584,500 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.

(iii) Obligations under operating and finance leases related primarily to office space and our production facilities. See Note 12 of this Form 10-K for additional discussion of our leases.

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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 2024. For the year ended December 31, 2024, we repurchased 256,871 shares of our common stock at an aggregate purchase price of $2,057,677. As of December 31, 2024, we had approximately $868,200 available under Board approved repurchase authorizations.

Capital Resources

Senior Notes

As of December 31, 2024, we had a total of $900,000 in outstanding Senior Notes which 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 as of December 31, 2024.

Credit Agreement

We have an 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 $14,600 outstanding as of December 31, 2024. The Credit Agreement termination date is February 12, 2026. There were no borrowings outstanding under the Credit Agreement as of December 31, 2024.

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 14, 2025. As of December 31, 2024, there was no debt outstanding under the Repurchase Agreement and there were no borrowing base limitations.

See Note 8 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, 2024, cash, restricted cash and cash equivalents decreased by $550,777. Net cash provided by operating activities was $1,374,462, due primarily to cash provided by earnings in 2024. Cash was primarily used to fund the increase in contract land deposits of $157,291 attributable to an increase in the number of lots under control as of December 31, 2024 compared to December 31, 2023, and net mortgage loan activity of $105,790. Additional cash was used to fund the increase in inventory of $108,557 attributable to an increase in units under construction year over year.

Net cash used in investing activities in 2024 was $26,553. Cash was used primarily for purchases of property, plant and equipment of $29,212.

Net cash used by financing activities in 2024 was $1,898,686. Cash was used primarily to repurchase 256,871 shares of our common stock at an aggregate purchase price of $2,057,677 under our ongoing common stock repurchase program, discussed above. Cash was provided from stock option exercise proceeds totaling $161,625.

For the year ended December 31, 2023, cash, restricted cash and cash equivalents increased by $640,926. Net cash provided by operating activities was $1,497,993, due primarily to cash provided by earnings in 2023 and net cash proceeds of $46,136 from mortgage loan activity. Cash was primarily used to fund the increase in inventory of $161,875 attributable to an increase in units under construction as of December 31, 2023 compared to December 31, 2022.

Net cash used in investing activities in 2023 was $24,100. Cash was used primarily for purchases of property, plant and equipment of $24,877.

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Net cash used by financing activities in 2023 was $832,967. Cash was used primarily to repurchase 181,499 shares of our common stock at an aggregate purchase price of $1,081,815 under our ongoing common stock repurchase program, discussed above. Cash was provided from stock option exercise proceeds totaling $250,509.

As of December 31, 2024 and 2023, restricted cash totaled $53,692 and $52,550, respectively. Restricted cash was attributable to customer deposits for certain home sales and cash collected from customers for loans in process and closed mortgage loans held for sale.

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. 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, 2024 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 defect claims, 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

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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, 2024 consolidated balance sheet to be adequate (see Note 13 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 Options and 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 not 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 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 2024 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 for our customers to finance the purchase of their home. We sell all of the loans we originate into the secondary mortgage market, typically on a servicing released basis and 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. To the extent 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 defaults 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, 2024 consolidated balance sheet to be adequate (see Note 15 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 Business Environment and Current Outlook section above.

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