(dollars in thousands, except per share data)
Forward-Looking Statements
Some of the statements in this Quarterly Report on Form 10-Q, as well as
statements made by us in periodic press releases or other public communications,
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as
amended. Certain, but not necessarily all, of such forward-looking statements
can be identified by the use of forward-looking terminology, such as "believes,"
"expects," "may," "will," "should," or "anticipates" or the negative thereof or
other comparable terminology. All statements other than of historical facts are
forward-looking statements. Forward-looking statements contained in this
document may include those regarding market trends, our financial position and
financial results, business strategy, the outcome of pending litigation,
investigations or similar contingencies, projected plans and objectives of
management for future operations. Such forward-looking statements involve known
and unknown risks, uncertainties and other factors that may cause our actual
results or performance to be materially different from future results,
performance or achievements expressed or implied by the forward-looking
statements. Such risk factors include, but are not limited to the following: the
impact of COVID-19 on us and the economy generally; general economic and
business conditions (on both a national and regional level); interest rate
changes; access to suitable financing by us and our customers; increased
regulation in the mortgage banking industry; the ability of our mortgage banking
subsidiary to sell loans it originates into the secondary market; competition;
the availability and cost of land and other raw materials used by us in our
homebuilding operations; shortages of labor; weather related slow-downs;
building moratoriums; governmental regulation; fluctuation and volatility of
stock and other financial markets; mortgage financing availability; and other
factors over which we have little or no control. We undertake no obligation to
update such forward-looking statements except as required by law. For additional
information regarding risk factors, see Part II, Item 1A of this Quarterly
Report on Form 10-Q and Part I, Item 1A of NVR's Annual Report on Form 10-K for
the fiscal year ended December 31, 2019.
Unless the context otherwise requires, references to "NVR," "we," "us," or "our"
include NVR and its consolidated subsidiaries.
Results of Operations for the Three Months Ended March 31, 2020 and 2019
Overview
Impact of COVID-19
As the global spread of COVID-19 continues, the pandemic has significantly
adversely impacted and may continue to significantly adversely impact our
business. Our primary focus as we face this challenge is to do everything we can
to ensure the safety and well-being of our employees, customers and trade
partners. Residential construction has been deemed an essential business in each
of our markets throughout the pandemic, except Pennsylvania and New York. In
addition, state and/or local governments in each of our markets have instituted
social distancing and other restrictions, which have resulted in significant
changes to the way we conduct business. In all markets where we are permitted to
operate, we are operating in accordance with the guidelines issued by the
Centers for Disease Control and Prevention as well as state and local
guidelines.
We experienced increased sales cancellations and decreased new orders in late
March as compared to the period immediately prior to the widespread outbreak of
COVID-19 in the U.S. During the month of April, we have continued to experience
a significant decline in new orders and an elevated level of cancellations. The
additional uncertainty in the marketplace as a result of the pandemic could
continue to lead to additional cancellations and decreased orders going forward.
The COVID-19 pandemic also had an impact on our backlog of homes sold but not
yet delivered. Due to governors' orders in Pennsylvania and New York, the
inability to continue residential construction activities in March and April has
impacted our ability to complete construction and settle houses sold. As of May
1, 2020, we were able to resume residential construction activities in
Pennsylvania.
                                       19
--------------------------------------------------------------------------------
  Table of Contents
Our mortgage banking operations continued to conduct loan closings throughout
the first quarter. During the last few weeks of March, there was significant
disruption in the mortgage market as investors tightened their credit standards
or exited the market, which resulted in significantly lower values for mortgage
servicing rights and fewer customers able to qualify for a mortgage.
There is uncertainty regarding the extent and timing of disruption to our
business that may result from COVID-19 and related governmental actions. There
is also uncertainty as to the effects of the pandemic and related economic
relief efforts on the U.S. economy, unemployment, consumer confidence, demand
for our homes and the mortgage market, including lending standards and secondary
mortgage markets. We are unable to predict the extent to which this will impact
our operational and financial performance, including the impact of future
developments such as the duration and spread of COVID-19, corresponding
governmental actions, and the impact of such on our employees, customers and
trade partners.
Business
Our primary business is the construction and sale of single-family detached
homes, townhomes and condominiums, all of which are primarily constructed on a
pre-sold basis. To fully serve customers of our homebuilding operations, we also
operate a mortgage banking and title services business. We primarily conduct our
operations in mature markets. Additionally, we generally grow our business
through market share gains in our existing markets and by expanding into markets
contiguous to our current active markets. Our four homebuilding reportable
segments consist of the following regions:
Mid Atlantic:                  Maryland, Virginia, West Virginia, Delaware and Washington, D.C.
North East:                    New Jersey and Eastern Pennsylvania
Mid East:                      New York, Ohio, Western Pennsylvania, Indiana and Illinois
South East:                    North Carolina, South Carolina, Florida and Tennessee


Our lot acquisition strategy is predicated upon avoiding the financial
requirements and risks associated with direct land ownership and development. We
generally do not engage in land development (see discussion below of our land
development activities). Instead, we typically acquire finished lots at market
prices from various third party land developers pursuant to fixed price finished
lot purchase agreements ("Lot Purchase Agreements"). These Lot Purchase
Agreements require deposits, typically ranging up to 10% of the aggregate
purchase price of the finished lots, in the form of cash or letters of credit
that may be forfeited if we fail to perform under the Lot Purchase
Agreement. This strategy has allowed us to maximize inventory turnover, which we
believe enables us to minimize market risk and to operate with less capital,
thereby enhancing rates of return on equity and total capital.
In addition to constructing homes primarily on a pre-sold basis and utilizing
what we believe is a conservative lot acquisition strategy, we focus on
obtaining and maintaining a leading market position in each market we
serve. This strategy allows us to gain valuable efficiencies and competitive
advantages in our markets, which we believe contributes to minimizing the
adverse effects of regional economic cycles and provides growth opportunities
within these markets. Our continued success is contingent upon our ability to
control an adequate supply of finished lots on which to build.
In certain specific strategic circumstances, we deviate from our historical lot
acquisition strategy and engage in joint venture arrangements with land
developers or directly acquire raw ground already zoned for its intended use for
development. Once we acquire control of raw ground, we determine whether to sell
the raw parcel to a developer and enter into a Lot Purchase Agreement with the
developer to purchase the finished lots or to hire a developer to develop the
land on our behalf. While joint venture arrangements and direct land development
activity are not our preferred method of acquiring finished building lots, we
may enter into additional transactions in the future on a limited basis where
there exists a compelling strategic or prudent financial reason to do so. We
expect, however, to continue to acquire substantially all our finished lot
inventory using Lot Purchase Agreements with forfeitable deposits.
As of March 31, 2020, we controlled approximately 103,600 lots as described
below.
Lot Purchase Agreements
We controlled approximately 100,150 lots under Lot Purchase Agreements with
third parties through deposits in cash and letters of credit totaling
approximately $431,200 and $6,600, respectively. Included in the number of
                                       20
--------------------------------------------------------------------------------
  Table of Contents
controlled lots are approximately 9,500 lots for which we have recorded a
contract land deposit impairment reserve of approximately $63,200 as of
March 31, 2020.
Joint Venture Limited Liability Corporations ("JVs")
We had an aggregate investment totaling approximately $27,800 in four JVs,
expected to produce approximately 6,200 lots. Of the lots to be produced by the
JVs, approximately 2,850 lots were controlled by us and approximately 3,350 were
either under contract with unrelated parties or currently not under contract. We
had additional funding commitments totaling approximately $4,200 in the
aggregate to one of the JVs at March 31, 2020.
Land Under Development
We directly owned five separate raw land parcels, zoned for their intended use,
with a cost basis, including development costs, of approximately $68,100 that we
intend to develop into approximately 600 finished lots. We had additional
funding commitments of approximately $5,900 under a joint development agreement
related to one parcel, a portion of which we expect will be offset by
development credits of approximately $2,700.
See Notes 2, 3 and 4 to the condensed consolidated financial statements included
herein for additional information regarding Lot Purchase Agreements, JVs and
land under development, respectively.
Raw Land Purchase Agreements
In addition, we have certain properties under contract with land owners that are
expected to yield approximately 7,200 lots, which are not included in the number
of total lots controlled. Some of these properties may require rezoning or other
approvals to achieve the expected yield. These properties are controlled with
deposits in cash and letters of credit totaling approximately $1,200 and $100,
respectively, as of March 31, 2020, of which approximately $800 is refundable if
certain contractual conditions are not met. We generally expect to assign the
raw land contracts to a land developer and simultaneously enter into a Lot
Purchase Agreement with the assignee if the project is determined to be
feasible.
Key Financial Results
Our consolidated revenues for the first quarter of 2020 totaled $1,582,528, a 6%
decrease from the first quarter of 2019. Net income for the first quarter ended
March 31, 2020 was $175,703, or $44.96 per diluted share, decreases of 7% and 6%
when compared to net income and diluted earnings per share in the first quarter
of 2019, respectively. Our homebuilding gross profit margin percentage decreased
to 16.8% in the first quarter of 2020 from 18.5% in the first quarter of 2019.
New orders, net of cancellations ("New Orders") decreased by 2% in the first
quarter of 2020 compared to the first quarter of 2019. The average sales price
for New Orders in the first quarter of 2020 increased by 1% to $372.3 compared
to the first quarter of 2019.

                                       21
--------------------------------------------------------------------------------
  Table of Contents
Homebuilding Operations
The following table summarizes the results of operations and other data for the
consolidated homebuilding operations:
                                                                  Three Months Ended March 31,
                                                                     2020                2019
Financial Data:
Revenues                                                      $    1,555,707        $ 1,643,206
Cost of sales                                                 $    1,294,743        $ 1,338,806
Gross profit margin percentage                                          16.8   %           18.5  %
Selling, general and administrative expenses                  $      110,167        $   115,734
Operating Data:
New orders (units)                                                     5,015              5,139
Average new order price                                       $        372.3        $     367.0
Settlements (units)                                                    4,230              4,493
Average settlement price                                      $        367.8        $     365.7
Backlog (units)                                                        9,018              9,011
Average backlog price                                         $        381.6        $     376.8
New order cancellation rate                                             20.8   %           14.1  %



Consolidated Homebuilding - Three Months Ended March 31, 2020 and 2019
Homebuilding revenues decreased 5% in the first quarter of 2020 compared to the
same period in 2019, as a result of a 6% decrease in the number of units
settled. The number of units settled was lower primarily due to a 2% lower
backlog unit balance entering 2020 compared to the backlog unit balance entering
2019. Additionally, March settlement activity was negatively impacted by the
COVID-19 pandemic.
Gross profit margin percentage in the first quarter of 2020 decreased to 16.8%,
from 18.5% in the first quarter of 2019. Gross profit margin in the first
quarter of 2020 was negatively impacted by contract land deposit impairment
charges of approximately $36,400, or 234 basis points of revenue.
The number of New Orders decreased 2% while the average sales price of New
Orders increased 1% in the first quarter of 2020 compared to the first quarter
of 2019. The decrease in New Orders was attributable primarily to a decrease in
New Orders in our Mid Atlantic market segments, partially driven by a decrease
in the average number of active communities in the market segment. Additionally,
in March, we experienced an increase in sale cancellations and a decrease in New
Orders due to the impact of the COVID-19 pandemic on consumer demand. Our
cancellation rate in the first quarter of 2020 increased to 21% compared to 14%
in the same period of 2019.
Selling, general and administrative ("SG&A") expense in the first quarter of
2020 decreased by approximately $5,600, and as a percentage of revenue was
essentially flat quarter over quarter. SG&A expense was favorably impacted by a
decrease in stock based compensation expense of approximately $12,700 due to the
reversal of approximately $6,500 in stock based compensation related to
forfeited stock options in the first quarter of 2020, coupled with the stock
options issued in 2014 under the 2014 Equity Incentive Plan becoming fully
vested December 31, 2019. This decrease was partially offset by higher personnel
costs quarter over quarter.
Our backlog represents homes sold but not yet settled with our customers.
Backlog units and dollars of 9,018 units and $3,441,151, respectively, as of
March 31, 2020 were relatively flat compared to 9,011 units and $3,395,132,
respectively, as of March 31, 2019. As previously discussed, state and local
governments in Pennsylvania and New York issued various orders in March that
prohibited residential construction. Our backlog as of March 31, 2020 included
1,178 units and $482,530 in Pennsylvania and New York, of which 510 units and
$203,249 had not started construction on that date. The remaining 668 units are
in various stages of construction. As of May 1, 2020, we were able to resume
residential construction activities in Pennsylvania, subject to certain
restrictions, while New York's prohibition on residential construction
continued. Once we are able to continue
                                       22
--------------------------------------------------------------------------------
  Table of Contents
residential construction, we expect to complete construction of these homes and
deliver them to the buyers with whom we are currently under contract. However,
in light of the current economic conditions, we expect this backlog may
experience a higher level of cancellations than the rest of our backlog due to
uncertainty as to how these states will respond to re-opening and our ability to
promise a delivery date on these units.
In addition to the potential 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 opening backlog for the current
period. Expressed as the total of all cancellations during the period as a
percentage of gross sales during the period, our cancellation rate was
approximately 21% and 14% in the first three months of 2020 and 2019,
respectively. During the most recent four quarters, approximately 6% of a
reporting quarter's opening backlog cancelled during the fiscal quarter. We can
provide no assurance that our historical cancellation rates are indicative of
the actual cancellation rate that may occur during the remainder of 2020 or
future years. Other than those units that are cancelled, and subject to
potential construction delays resulting from COVID-19 related restrictions, we
expect to settle substantially all of our March 31, 2020 backlog within the next
twelve months.
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, such as the impact of governmental orders to cease or limit
construction activities as a result of COVID-19.
Reportable 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 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 a Lot Purchase Agreement with the
developer, or the restructuring of a Lot Purchase Agreement resulting in the
forfeiture of the deposit. We evaluate our entire net contract land deposit
portfolio for impairment each quarter. For presentation purposes below, the
contract land deposit reserve at March 31, 2020 and December 31, 2019 has been
allocated to the respective year's reportable segments to show contract land
deposits on a net basis. The net contract land deposit balances below also
include approximately $6,600 and $5,500 at March 31, 2020 and December 31, 2019,
respectively, of letters of credit issued as deposits in lieu of cash.
The following tables summarize certain homebuilding operating activity by
reportable segment for the three months ended March 31, 2020 and 2019.
Selected Segment Financial Data:
                                     Three Months Ended March 31,
                                     2020                       2019
Revenues:
Mid Atlantic                  $      774,057                $ 881,324
North East                           106,136                  122,627
Mid East                             320,695                  338,549
South East                           354,818                  300,706



                                       23

--------------------------------------------------------------------------------


  Table of Contents
                                             Three Months Ended March 31,
                                             2020                       2019
Gross profit margin:
Mid Atlantic                          $      144,328                $ 162,733
North East                                    22,743                   22,839
Mid East                                      58,288                   61,349
South East                                    74,975                   59,578



                                                       Three Months Ended March 31,
                                                             2020                   2019
Gross profit margin percentage:
Mid Atlantic                                                           18.6  %     18.5  %
North East                                                             21.4  %     18.6  %
Mid East                                                               18.2  %     18.1  %
South East                                                             21.1  %     19.8  %



                                        Three Months Ended March 31,
                                       2020                        2019
Segment profit:
Mid Atlantic                     $      81,673                  $ 99,364
North East                              10,151                    11,460
Mid East                                31,164                    35,475
South East                              47,144                    35,036


Operating Activity:
                                                                            Three Months Ended March 31,
                                                                          2020                                   2019
                                                                                 Average                    Average
                                                                   Units          Price         Units        Price
New orders, net of cancellations:
Mid Atlantic                                                        2,061       $ 442.2        2,444       $ 419.1
North East                                                            358       $ 382.2          313       $ 381.4
Mid East                                                            1,225       $ 326.2        1,214       $ 320.3
South East                                                          1,371       $ 305.6        1,168       $ 302.5
Total                                                               5,015       $ 372.3        5,139       $ 367.0



                                                       Three Months Ended March 31,
                                                     2020                                   2019
                                                            Average                    Average
                                              Units          Price         Units        Price
Settlements:
Mid Atlantic                                   1,795       $ 431.2        2,143       $ 411.2
North East                                       281       $ 377.7          303       $ 404.7
Mid East                                         985       $ 325.6        1,030       $ 328.7
South East                                     1,169       $ 303.5        1,017       $ 295.7
Total                                          4,230       $ 367.8        4,493       $ 365.7



                                       24

--------------------------------------------------------------------------------


  Table of Contents
                                   As of March 31,
                           2020                                 2019
                                Average                    Average
                    Units        Price         Units        Price
Backlog:
Mid Atlantic       3,878       $ 445.3        4,449       $ 426.9
North East           664       $ 407.6          573       $ 391.3
Mid East           2,053       $ 331.5        1,990       $ 330.3
South East         2,423       $ 314.9        1,999       $ 307.3
Total              9,018       $ 381.6        9,011       $ 376.8



                                                    Three Months Ended March 31,
                                                          2020                   2019
New order cancellation rate:
Mid Atlantic                                                        21.8  %     14.8  %
North East                                                          21.7  %     12.1  %
Mid East                                                            20.8  %     12.8  %
South East                                                          19.1  %     14.2  %



                                                   Three Months Ended March 31,
                                                         2020                  2019
Average active communities:
Mid Atlantic                                                        189        211
North East                                                           40         29
Mid East                                                            138        125
South East                                                          108         84
Total                                                               475        449


Homebuilding Inventory:

                      March 31, 2020       December 31, 2019
Sold inventory:
Mid Atlantic         $      654,219       $         575,216
North East                  106,389                  77,965
Mid East                    207,435                 190,700
South East                  240,423                 230,640
Total (1)            $    1,208,466       $       1,074,521


                                       25

--------------------------------------------------------------------------------

Table of Contents



                                               March 31, 2020       December 31, 2019
Unsold lots and housing units inventory:
Mid Atlantic                                  $      118,882       $        104,459
North East                                            24,027                 28,331
Mid East                                              22,701                 15,333
South East                                            43,208                 35,420
Total (1)                                     $      208,818       $        183,543


(1) The reconciling items between segment inventory and consolidated inventory
include certain consolidation adjustments necessary to convert the reportable
segments' results, which are predominantly maintained on a cash basis, to a full
accrual basis for external financial statement presentation purposes. These
consolidation adjustments are not allocated to our operating segments.
Lots Controlled and Land Deposits:
                             March 31, 2020      December 31, 2019
Total lots controlled:
Mid Atlantic                       41,900                 42,400
North East                          9,600                  9,900
Mid East                           22,900                 24,200
South East                         29,200                 28,400
Total                             103,600                104,900



                                   March 31, 2020       December 31, 2019
Contract land deposits, net:
Mid Atlantic                      $      187,753       $        205,433
North East                                41,290                 50,348
Mid East                                  53,924                 57,053
South East                                92,930                106,523
Total                             $      375,897       $        419,357



                                                                                      Three Months Ended March 31,
                                                                                       2020                    2019
Contract land deposit impairments (recoveries), net:
Mid Atlantic                                                                    $            -           $         289
North East                                                                                   -                   1,250
Mid East                                                                                   266                       -
South East                                                                                 454                       -
Total                                                                           $          720           $       1,539



Mid Atlantic
Three Months Ended March 31, 2020 and 2019
The Mid Atlantic segment had an approximate $17,700, or 18%, decrease in segment
profit in the first quarter of 2020 compared to the first quarter of 2019. The
decrease in segment profit was driven by a decrease in segment revenues of
approximately $107,300, or 12%, quarter over quarter. Segment revenues decreased
due to a 16%
                                       26
--------------------------------------------------------------------------------
  Table of Contents
decrease in the number of units settled, offset partially by a 5% increase in
the average settlement price quarter over quarter. The decrease in the number of
units settled was impacted by a 13% lower backlog unit balance entering 2020
compared to the backlog unit balance entering 2019. The increase in the average
settlement price was primarily attributable to a 4% higher average sales price
of units in backlog entering 2020 compared to backlog entering 2019. The Mid
Atlantic segment's gross profit margin percentage remained relatively flat in
the first quarter of 2020 compared to the first quarter of 2019.
Segment New Orders decreased 16%, while the average sales price of New Orders
increased 6% in the first quarter of 2020 compared to the first quarter of 2019.
New Orders decreased primarily due to a 10% decrease in the average number of
active communities quarter over quarter, coupled with an increase in the
cancellation rate quarter over quarter as a result of the COVID-19 pandemic.
North East
Three Months Ended March 31, 2020 and 2019
The North East segment had an approximate $1,300, or 11%, decrease in segment
profit in the first quarter of 2020 compared to the first quarter of 2019 due
primarily to a decrease in segment revenues of approximately $16,500, or 13%,
quarter over quarter. The decrease in segment revenues was attributable to a 7%
decrease in both the number of units settled and the average settlement price
quarter over quarter. The decrease in units settled was primarily attributable
to a decrease in settlements in our Eastern Pennsylvania markets. As discussed
above, the state and local governments in Pennsylvania issued various orders
that prohibited residential construction in March. The decrease in the average
settlement price was attributable to a relative shift in settlements to lower
priced markets. The segment's gross profit margin percentage increased to 21.4%
in the first quarter of 2020 from 18.6% in the first quarter of 2019, primarily
due to a product mix shift.
Segment New Orders increased 14%, while the average sales price of New Orders
remained flat, in the first quarter of 2020 compared to the first quarter of
2019. The increase in New Orders was primarily attributable to a 38% increase in
the average number of active communities quarter over quarter, offset partially
by an increase in the cancellation rate quarter over quarter as a result of the
COVID-19 pandemic.
Mid East
Three Months Ended March 31, 2020 and 2019
The Mid East segment had an approximate $4,300, or 12%, decrease in segment
profit in the first quarter of 2020 compared to the first quarter of 2019, due
primarily to a decrease in segment revenues of approximately $17,900, or 5%,
quarter over quarter. Segment revenues decreased primarily due to a 4% decrease
in the number of units settled and a 1% decrease in the average settlement price
quarter over quarter. The decrease in units settled was in part attributable to
a decrease in settlements in our Western Pennsylvania markets. As discussed
above, the state and local governments in Pennsylvania issued various orders
that prohibited residential construction in March. The segment's gross profit
margin percentage was essentially flat quarter over quarter.
Segment New Orders and the average sales price of New Orders increased 1% and
2%, respectively, in the first quarter of 2020 compared to the first quarter of
2019. New Orders increased primarily due to an 11% increase in the average
number of active communities quarter over quarter, offset partially by an
increase in the cancellation rate as a result of the COVID-19 pandemic. The
increase in the average sales price of New Orders is attributable to a shift in
New Orders to higher priced markets.
South East
Three Months Ended March 31, 2020 and 2019
The South East segment had an approximate $12,100, or 35%, increase in segment
profit in the first quarter of 2020 compared to the first quarter of 2019. The
increase in segment profit was primarily driven by an increase in segment
revenues of approximately $54,100, or 18%, coupled with improved gross profit
margins quarter over quarter. The increase in revenues is attributable to a 15%
increase in the number of units settled and a 3% increase in the average
settlement price quarter over quarter. The number of units settled and the
average settlement price were favorably impacted by a 20% higher backlog unit
balance and 3% higher average sales price of units in
                                       27
--------------------------------------------------------------------------------
  Table of Contents
backlog entering 2020 compared to the same period in 2019. The segment's gross
profit margin percentage increased to 21.1% in the first quarter of 2020 from
19.8% in the first quarter of 2019, due primarily to lower construction costs,
offset partially by higher lot costs as a percentage of revenue.
Segment New Orders and the average sales price of New Orders increased 17% and
1%, respectively, in the first quarter of 2020 compared to the first quarter of
2019. New Orders were favorably impacted by a 28% increase in the average number
of active communities, offset partially by an increase in the cancellation rate
quarter over quarter as a result of the COVID-19 pandemic.
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 income 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 primarily consists of interest
charges on our 3.95% Senior Notes due 2022, and is not charged to the operating
segments because the charges are included in the corporate capital allocation
discussed above.
                                                                Three Months Ended March 31,
                                                                2020                       2019
Homebuilding consolidated gross profit:
Mid Atlantic                                             $      144,328                $ 162,733
North East                                                       22,743                   22,839
Mid East                                                         58,288                   61,349
South East                                                       74,975                   59,578
Consolidation adjustments and other                             (39,370)                  (2,099)
Homebuilding consolidated gross profit                   $      260,964                $ 304,400



                                                                                      Three Months Ended March 31,
                                                                                       2020                    2019
Homebuilding consolidated income before taxes:
Mid Atlantic                                                                    $       81,673           $      99,364
North East                                                                              10,151                  11,460
Mid East                                                                                31,164                  35,475
South East                                                                              47,144                  35,036
Reconciling items:
Contract land deposit impairment reserve (1)                                           (35,615)                    950
Equity-based compensation expense (2)                                                   (7,069)                (19,972)
Corporate capital allocation (3)                                                        56,650                  54,559
Unallocated corporate overhead                                                         (37,639)                (31,735)
Consolidation adjustments and other                                                      9,654                   9,247
Corporate interest expense                                                              (6,194)                 (5,974)
Reconciling items sub-total                                                            (20,213)                  7,075
Homebuilding consolidated income before taxes                                   $      149,919           $     188,410


                                       28
--------------------------------------------------------------------------------
  Table of Contents
(1)This item represents changes to the contract land deposit impairment reserve,
which are not allocated to the reportable segments. See further discussion of
lot deposit impairment charges in Note 2 in the accompanying condensed
consolidated financial statements.
(2)The decrease in equity-based compensation expense for the three-month period
ended March 31, 2020 was primarily attributable to the reversal of approximately
$6,500 in equity-based compensation related to forfeited stock options during
the quarter, coupled with the stock options issued in 2014 under the 2014 Equity
Incentive Plan becoming fully vested December 31, 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 periods presented:
                                                             Three Months 

Ended March 31,


                                                            2020                        2019
Corporate capital allocation charge:
Mid Atlantic                                          $      29,755                  $ 30,417
North East                                                    5,558                     4,727
Mid East                                                      9,363                     9,015
South East                                                   11,974                    10,400
Total                                                 $      56,650                  $ 54,559



Mortgage Banking Segment
Three Months Ended March 31, 2020 and 2019
We conduct our mortgage banking activity through NVR Mortgage Finance, Inc.
("NVRM"), a wholly owned subsidiary. NVRM focuses exclusively on serving the
homebuilding segment customer base. NVRM sells all of the mortgage loans it
closes to investors in the secondary markets on a servicing-released basis,
typically within 30 days from the loan closing. The following table summarizes
the results of our mortgage banking operations and certain statistical data for
the three months ended March 31, 2020 and 2019:
                                                        Three Months Ended March 31,
                                                           2020                2019
Loan closing volume:
Total principal                                     $    1,132,104        $ 1,140,999

Loan volume mix:
Adjustable rate mortgages                                        2   %             11  %
Fixed-rate mortgages                                            98   %             89  %

Operating profit:
Segment profit                                      $       11,879        $    29,558
Equity-based compensation expense                             (423)         

639


Mortgage banking income before tax                  $       11,456        $    30,197

Capture rate:                                                   91   %             88  %

Mortgage banking fees:
Net gain on sale of loans                           $       18,400        $    34,957
Title services                                               8,253              8,700
Servicing fees                                                 168                148
                                                    $       26,821        $    43,805


                                       29

--------------------------------------------------------------------------------
  Table of Contents
Loan closing volume for the three months ended March 31, 2020 decreased by
approximately $8,900, or 1%, from the same period in 2019. The decrease in loan
closing volume during the three months ended March 31, 2020 was primarily
attributable to the 6% decrease in the homebuilding segment's number of units
settled during the three months ended March 31, 2020, compared to the same
period in 2019, offset partially by an increase in the capture rate, quarter
over quarter.
Segment profit for the three months ended March 31, 2020 decreased by
approximately $17,700, or 60%, from the same period in 2019. This decrease was
primarily attributable to a decrease of approximately $17,000, or 39%, in
mortgage banking fees, primarily due to the reduction in fair value of mortgage
servicing rights as a result of the disruptions in the mortgage market related
to the COVID-19 pandemic.
Effective Tax Rate
Our effective tax rate during the three months ended March 31, 2020 was a
benefit of 8.9% as compared to an expense of 13.8% for the three months ended
March 31, 2019. Our effective tax rate was favorably impacted by the recognition
of an income tax benefit related to excess tax benefits from stock option
exercises totaling $55,655 for the three months ended March 31, 2020, and
$28,478 for the three months ended March 31, 2019.
We expect to experience volatility in our effective tax rate in future quarters
as the amount of the excess tax benefit from equity-based awards is dependent on
our stock price when awards are exercised as well as on the timing of exercises,
which historically has varied from quarter to quarter.
Liquidity and Capital Resources
Overview
We have a very strong liquidity position as of March 31, 2020, with $1,091,996
in cash and cash equivalents, $188,600 in unused committed capacity under our
revolving credit facility and $150,000 in unused committed capacity under our
revolving mortgage repurchase facility. In addition, on May 4, 2020, we
completed the offering of $600,000 aggregate principal amount of 3.000% Senior
Notes. See Note 15 for additional discussion of the senior note offering.
Lines of Credit and Notes Payable
Our homebuilding business segment funds its operations from cash flows provided
by operating activities, a short-term unsecured working capital revolving credit
facility and capital raised in the public debt and equity markets. Our unsecured
Credit Agreement (the "Credit Agreement") provides for aggregate revolving loan
commitments of $200,000. Under the Credit Agreement, we may request increases of
up to $300,000 to the facility in the form of revolving loan commitments or term
loans to the extent that new or existing lenders agree to provide additional
revolving loan or term loan commitments. The Credit Agreement provides for a
$100,000 sublimit for the issuance of letters of credit of which there was
approximately $11,400 outstanding at March 31, 2020, and a $25,000 sublimit for
a swing line commitment. The Credit Agreement termination date is July 15, 2021.
There was no debt outstanding under the Credit Agreement at March 31, 2020.
Our mortgage banking subsidiary, NVRM, provides for its mortgage origination and
other operating activities using cash generated from its operations, borrowings
from its parent company, NVR, as well as a $150,000 revolving mortgage
repurchase facility (the "Repurchase Agreement"), which is non-recourse to
NVR. The Repurchase Agreement expires on July 22, 2020. At March 31, 2020, there
were no borrowing base limitations reducing the amount available under the
Repurchase Agreement. There was no debt outstanding under the Repurchase
Agreement at March 31, 2020.
There have been no material changes in our lines of credit and notes payable
during the three months ended March 31, 2020. For additional information
regarding lines of credit and notes payable, see Part II, Item 7 of our Annual
Report on Form 10-K for the year ended December 31, 2019.
Cash Flows
For the three months ended March 31, 2020, cash, restricted cash, and cash
equivalents decreased by $42,537. Cash provided by operating activities was
$68,441. Cash was provided by earnings for the three months
                                       30

--------------------------------------------------------------------------------


  Table of Contents
ended March 31, 2020 and net proceeds of $94,742 from mortgage loan activity.
Cash was primarily used to fund the increase in homebuilding inventory of
$168,352, due to an increase in the number of units under construction at
March 31, 2020 compared to December 31, 2019.
Net cash used in investing activities for the three months ended March 31, 2020
of $3,258 included cash used for purchases of property, plant and equipment of
$3,510, partially offset by the proceeds from the sale of property, plant and
equipment totaling $252.
Net cash used in financing activities was $107,720 for the three months ended
March 31, 2020. Cash was used to repurchase 57,611 shares of our common stock at
an aggregate purchase price of $216,582 under our ongoing common stock
repurchase program, discussed below. Cash was provided from stock option
exercise proceeds totaling $109,062.
Equity Repurchases
In addition to funding growth in our homebuilding and mortgage banking
operations, we historically have used a substantial portion of our excess
liquidity to repurchase outstanding shares of our common stock in open market
and privately negotiated transactions. This ongoing repurchase activity is
conducted pursuant to publicly announced Board authorizations, and is typically
executed in accordance with the safe-harbor provisions of Rule 10b-18
promulgated under the Exchange Act. In addition, the Board resolutions
authorizing us to repurchase shares of our common stock specifically prohibit us
from purchasing shares from our officers, directors, Profit Sharing/401(k) Plan
Trust or Employee Stock Ownership Plan Trust. The repurchase program assists us
in accomplishing our primary objective of creating increases in shareholder
value. See Part II, Item 2, Unregistered Sales of Equity Securities and Use of
Proceeds, of this Quarterly Report on Form 10-Q for further discussion of
repurchase activity during the first quarter of 2020.
Critical Accounting Policies
There have been no material changes to our critical accounting policies as
previously disclosed in Part II, Item 7, of our Annual Report on Form 10-K for
the year ended December 31, 2019.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
There have been no material changes in our market risks during the three months
ended March 31, 2020. For additional information regarding our market risks, see
Part II, Item 7A of our Annual Report on Form 10-K for the year ended
December 31, 2019.
Item 4. Controls and Procedures
As of the end of the period covered by this report, an evaluation was performed
under the supervision and with the participation of our management, including
our Chief Executive Officer and Chief Financial Officer, of the effectiveness of
the design and operation of our disclosure controls and procedures, as defined
in Exchange Act Rule 13a-15. Based on that evaluation, our Chief Executive
Officer and Chief Financial Officer concluded that the design and operation of
these disclosure controls and procedures were effective. There have been no
changes in our internal control over financial reporting in the last fiscal
quarter that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.

© Edgar Online, source Glimpses