Item 4. Submission of Matters to a Vote of Security Holders.

107K characters. Original on sec.gov · Markdown

Item 4. Submission of Matters to a Vote of Security Holders.

No matters were submitted to a vote of security holders during the quarter ended December 31, 2009.

Executive Officers of the Registrant


Name	Age	Positions
Dwight C. Schar	68	Chairman of the Board of NVR
Paul C. Saville	54	President and Chief Executive Officer of NVR
William J. Inman	62	President of NVRM
Dennis M. Seremet	54	Senior Vice President, Chief Financial Officer and Treasurer of NVR
Robert W. Henley	43	Vice President and Controller of NVR

Dwight C. Schar relinquished the title of Executive Officer effective February 4, 2009, but will continue to serve as Chairman of the Board. Mr. Schar’s revised role continues the leadership transition that separated the roles of Chairman and CEO to strengthen the operating and governance structure of the Company. Mr. Schar has been Chairman of the Board since September 30, 1993. Mr. Schar also served as our President and Chief Executive Officer from September 30, 1993 through June 30, 2005.

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

William J. Inman has been President of NVRM since January 1992. In January 2010, Mr. Inman has announced his intention to retire after a period of transition to a successor. This transition should be completed in the first quarter of 2010.

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

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

PART II


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

Our shares of common stock are listed and principally traded on the New York Stock Exchange. The following table sets forth the high and low prices per share for our common stock for each fiscal quarter during the years ended December 31, 2009 and 2008:


	HIGH		LOW
Prices per Share:

*2009*
Fourth Quarter	$	742.00	$	607.00
Third Quarter	$	698.28	$	477.41
Second Quarter	$	533.89	$	416.24
First Quarter	$	500.05	$	310.69

*2008*
Fourth Quarter	$	600.00	$	316.82
Third Quarter	$	639.80	$	452.00
Second Quarter	$	679.37	$	498.00
First Quarter	$	661.00	$	436.20

As of the close of business on February 24, 2010, there were 383 shareholders of record.

We have never paid a cash dividend on our shares of common stock. Our bank indebtedness contains certain restrictive covenants, which limit our ability to pay cash dividends on our common stock. For additional information, see the discussion of the restrictive covenants in the Liquidity and Capital Resources discussion of Management’s Discussion and Analysis of Financial Condition and Results of Operations, in Part II, Item 7 of the Form 10-K.

We had one repurchase authorization outstanding during the quarter ended December 31, 2009. On July 31, 2007 (“July Authorization”), we publicly announced the Board of Directors’ approval for us to repurchase up to an aggregate of $300 million of our common stock in one or more open market and/or privately negotiated transactions. The July Authorization does not have an expiration date. We did not repurchase any shares of our common stock during the fourth quarter of 2009. We have $226.3 million available under the July Authorization as of December 31, 2009.

Stock Performance Graph

COMPARISON OF CUMULATIVE TOTAL EQUITYHOLDER RETURN ON EQUITY

The following chart graphs our performance in the form of cumulative total return to holders of our Common Stock since December 31, 2004 in comparison to the Dow/Home Construction Index and the Dow Jones Industrial Index for that same period. The Dow/Home Construction Index is comprised of NVR, Inc., Pulte Homes, Inc., DR Horton, Inc., Lennar Corp., Toll Brothers, Inc., MDC Holdings, Inc., KB Home, Ryland Group, Inc., Meritage Homes Corp., Standard Pacific Corp., Skyline Corp. and M/I Homes, Inc.

(LINE GRAPH)

Assumes that $100 was invested in NVR stock and the indices on December 31, 2004.


Item 6.		Selected Financial Data.

(dollars in thousands, except per share amounts)

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


	Year Ended December 31,
	2009		2008		2007		2006		2005
Consolidated Income Statement Data:
*Homebuilding data:*
Revenues	$	2,683,467	$	3,638,702	$	5,048,187	$	6,036,236	$	5,177,743
Gross profit		497,734		457,692		821,128		1,334,971		1,439,713

*Mortgage Banking data*:
Mortgage banking fees		60,381		54,337		81,155		97,888		84,604
Interest income		2,979		3,955		4,900		7,704		5,014
Interest expense		1,184		754		681		2,805		1,759

*Consolidated data:*
Income from continuing operations (1)	$	192,180	$	100,892	$	333,955	$	587,412	$	697,559
Income from continuing operations per diluted share (2)	$	31.26	$	17.04	$	54.14	$	88.05	$	89.61


	December 31,
	2009		2008		2007		2006		2005
Consolidated Balance Sheet Data:
Homebuilding inventory	$	418,718	$	400,570	$	688,854	$	733,616	$	793,975
Contract land deposits, net		49,906		29,073		188,528		402,170		517,241
Total assets		2,395,770		2,103,236		2,194,416		2,473,808		2,237,669
Notes and loans payable		147,880		210,389		286,283		356,632		463,141
Shareholders’ equity		1,757,262		1,373,789		1,129,375		1,152,074		677,162
Cash dividends per share		—		—		—		—		—


(1)		Effective January 1, 2006, we adopted Statement of Financial Accounting Standards No. 123(R), Share-Based Payment, as codified in Accounting Standards Codification “ASC” 718, Compensation —Stock Compensation, pursuant to which we recognized $29,944, $31,560, $11,669 and $37,982 of stock-based compensation costs, net of tax, during 2009, 2008, 2007 and 2006, respectively. The 2007 stock-based compensation amount is net of approximately $19,200 of stock-based compensation expense, net of tax, that we reversed based on our determination that the performance metric related to certain outstanding stock options would not be met. As of December 31, 2008 the performance target was not met and all 348,490 outstanding options subject to the performance target expired unexercisable. The year ended December 31, 2005 does not include any stock-based compensation expense.

(2)		For the years ended December 31, 2009, 2008, 2007, 2006 and 2005, income from continuing operations per diluted share was computed based on 6,148,769; 5,920,285; 6,167,795; 6,671,571; and 7,784,382 shares, respectively, which represents the weighted average number of shares and share equivalents outstanding for each year.


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

(dollars in thousands, except per share data)

Results of Operations for the Years Ended December 31, 2009, 2008, and 2007

Overview

Business

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


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

We believe we operate our business with a conservative operating strategy. We do not engage in land development and primarily construct homes on a pre-sold basis. This strategy allows us to maximize inventory turnover, which enables us to minimize market risk and to operate with less capital, thereby enhancing rates of return on equity and total capital. In addition, 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.

Because we do not develop land, our continued success is contingent upon our ability to control an adequate supply of finished lots on which to build, and on our developers’ ability to timely deliver finished lots to meet the sales demands of our customers. We acquire finished building lots at market prices from various land developers under purchase agreements. These purchase agreements require deposits, typically ranging up to 10% of the aggregate purchase price of the finished lots, in the form of cash or letters of credit that may be forfeited if we fail to perform under the purchase agreement. However, we believe that this lot acquisition strategy avoids the financial requirements and risks associated with direct land ownership and development. As of December 31, 2009, we controlled approximately 46,300 lots with deposits in cash and letters of credit totaling approximately $140,700 and $4,900, respectively. Included in the number of controlled lots are approximately 10,800 lots for which we have recorded a contract land deposit impairment reserve of approximately $89,500 as of December 31, 2009. See Note 1 in the accompanying consolidated financial statements included herein for additional information regarding contract land deposits.

Overview of Current Business Environment

During 2009, the homebuilding environment began to exhibit some stabilization after several years of declining sales and selling prices. Despite this stabilization, the homebuilding market remains challenging and many market uncertainties remain due to the continuing economic recession. Homebuyer confidence continues to be negatively impacted by concerns regarding job stability driven by historically high unemployment rates. Reduced demand and high foreclosure rates have contributed to high levels of existing and new homes available for sale. The sales of new and existing homes also continue to be adversely impacted by a tighter mortgage lending environment that has made it more difficult for our customers to obtain mortgage financing, as well as making it difficult to sell their current homes. In addition, tighter lending requirements requiring higher downpayments have negatively impacted affordability. Despite current market conditions and a decrease in the average number of active communities year over year, new orders, net of cancellations (“new orders”) for 2009 increased 7% from the prior year. The increase in new orders was in part attributable to a 47% increase in new orders in the fourth quarter of 2009 compared to the same period in 2008, a period in which we experienced a significant drop-off in new orders due to a sharp decline in overall economic conditions. In addition, we believe new orders during the current year were also favorably impacted by the federal tax credit for first time homebuyers, as we experienced an increase in the percentage of first time homebuyers, year over year. New orders were also favorably impacted in 2009 by higher absorption rates in each of our market segments and by a decline in our cancellation rate to 14% from 23% in 2008. New order selling prices continued to be negatively impacted in most of our markets by the challenging market conditions leading to a 6% decline in the average new order selling price in 2009 compared to 2008.

Consolidated revenues for 2009 decreased 26% to $2,743,848 from $3,693,039 in 2008. Net income for 2009 was $192,180, $31.26 per diluted share, compared to net income of $100,892, $17.04 per diluted share in 2008, a 90% increase in net income and an 83% increase in diluted earnings per share. Gross profit margins within our homebuilding business increased to 18.5% in 2009 from 12.6% in 2008, as prior year gross profit margins were negatively impacted by a $165,000 contract land deposit impairment charge.

Over the last several years, due to the significant decline in new orders and selling prices, we worked with our developers to reduce lot prices to current market values and/or to defer scheduled lot purchases to coincide with our slower than expected sales pace. In communities where we were unsuccessful in negotiating necessary adjustments to the purchase agreements to meet current market prices, we exited the community and forfeited our deposit under the applicable purchase agreement. In addition, we also forfeited our deposits in certain communities we did not exit in order to restructure the purchase agreement to current market prices. During 2008, we incurred contract land deposit impairment charges of approximately $165,000 from actual or expected terminations, or from restructured purchase agreements where we forfeited, or determined we would forfeit, the deposit. In 2009, as the result of market stabilization in several of our markets, we recognized a net recovery of approximately $6,500 of contract land deposits previously considered to be uncollectible. As noted above, as of December 31, 2009 we had a reserve of approximately $89,500 on outstanding contract land deposits related to approximately 10,800 lots. These lots are included in the total number of lots controlled mentioned above. In addition to controlling lot costs, we also have worked aggressively with our subcontractors and suppliers to gain efficiencies and reduce material and labor costs incurred in the construction process. We also continue to evaluate and alter our product offerings where necessary to provide competitively priced homes.

We expect to continue to experience pressure on sales and selling prices over at least the next several quarters in all of our market segments due to significant uncertainties in the homebuilding market. Certain of the government’s stimulus programs which we believe helped to stabilize home prices, such as the federal tax credit for first time and move-up buyers and the Federal Reserve’s purchases of mortgage-backed securities, are expected to end in 2010, the result of which may lead to a decline in demand and higher mortgage interest rates. Despite these uncertainties, we believe that we are well positioned to take advantage of opportunities that may arise due to the strength of our balance sheet and liquidity. As of December 31, 2009, our cash and cash equivalents and marketable securities balances totaled approximately $1,468,000. During 2009 we repurchased $29,950 of our senior notes, reducing the principal amount of senior notes to $133,370. All of our outstanding senior notes are due in June of 2010.

Homebuilding Operations

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


	Year Ended December 31,
	2009			2008			2007
Revenues	$	2,683,467		$	3,638,702		$	5,048,187
Cost of sales	$	2,185,733		$	3,181,010		$	4,227,059
Gross profit margin percentage		18.5	%		12.6	%		16.3	%
Selling, general and administrative expenses	$	233,152		$	308,739		$	343,520
Settlements (units)		9,042			10,741			13,513
Average settlement price	$	296.4		$	338.4		$	373.2
New orders (units)		9,409			8,760			12,270
Average new order price	$	292.7		$	311.3		$	352.0
Backlog (units)		3,531			3,164			5,145
Average backlog price	$	304.9		$	316.9		$	371.3

Consolidated Homebuilding Revenues

Homebuilding revenues for 2009 decreased 26% from 2008, as a result of a 16%, or 1,699 unit, decrease in the number of homes settled and a 12% decrease in the average settlement price. The decrease in the number of units settled was primarily attributable to our beginning backlog units being approximately 39%, or 1,981

units, lower entering 2009 compared to the backlog unit balance entering 2008, offset partially by a higher backlog turnover rate period over period. Average settlement prices were impacted primarily by a 15% lower average price of homes in the beginning backlog entering 2009 compared to the same period in 2008, coupled with a 9% decline in the average sales price of new orders for the first six months of 2009 as compared to the same period in 2008.

Homebuilding revenues for 2008 decreased 28% from 2007, primarily as a result of a 21% decrease in the number of homes settled and a 9% decrease in the average settlement price. The decrease in the number of units settled was primarily attributable to our beginning backlog units being approximately 19% lower entering 2008 compared to the beginning backlog units entering 2007 and lower new orders year over year. Average settlement prices were impacted primarily by a 10% lower average price of homes in the beginning backlog entering 2008 compared to the same period in 2007 and also by lower average sales prices for new orders in 2008 compared to 2007.

Consolidated Homebuilding New Orders

New orders in 2009 increased by 7% compared to 2008, while the average sales price of new orders decreased 6% year over year. As mentioned above in the Overview section, the increase in new orders in the current year was in part attributable to a 47% increase in new orders in the fourth quarter of 2009 compared to the same period in 2008, a period in which we experienced a significant drop-off in new orders due to a sharp decline in overall economic conditions. In addition, new orders in 2009 were favorably impacted by higher absorption rates, offsetting the 17% decrease in the average number of active communities year over year. We believe new orders in the current year were also favorably impacted by the federal tax credit for first-time homebuyers as well as by a decrease in the cancellation rate to 14% in 2009 from 23% in 2008. To meet affordability issues in many of our markets, we have altered our product offerings to provide smaller, lower priced products.

New orders and the average sales price of new orders decreased 29% and 12%, respectively in 2008 compared to 2007. Both the number of new orders and the average selling prices were negatively impacted by the continued deterioration in market conditions in 2008 from the prior year. New orders were also negatively impacted by a 16% decrease in the average number of active communities year over year to 427 in 2008 from 505 in 2007 and a reduction in traffic per community, year over year.

Consolidated Homebuilding Gross Profit

Gross profit margins in 2009 improved to 18.5% compared to 12.6% in 2008 primarily due to a favorable variance in contract land deposit impairment charges year over year. In 2009 we recognized the recovery of approximately $6,500, or 24 basis points, of contract land deposits previously determined to be uncollectible. In 2008 we recognized a contract land deposit impairment charge of approximately $165,000, or 454 basis points. Gross profit margins in 2009 were also favorably impacted as a result of us exiting a significant number of poor performing communities in 2008 which were producing lower gross profit margins. In addition, gross profit margins in 2009 were favorably impacted by lower lumber and certain other commodity costs as well as by cost control measures implemented to reduce subcontractor and material costs in prior periods. We expect to experience continued fluctuations in gross profit margins due to the aforementioned economic uncertainties still prevalent in the market.

Gross profit margins in 2008 declined to 12.6% compared to 16.3% in 2007 despite lower contract land deposit impairment charges in 2008 of approximately $165,000, or 454 basis points, compared to approximately $261,800, or 519 basis points in 2007. The decline in gross profit margins was primarily driven by continued pressure on selling prices as a result of challenging market conditions including a decline in demand due to low consumer confidence levels and deteriorating credit markets.

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

SG&A expenses in 2009 decreased approximately $75,600 compared to 2008, but increased slightly as a percentage of revenue to 8.7% in 2009 from 8.5% in 2008. The decrease in SG&A expenses was primarily attributable to a $36,300 decrease in selling and marketing costs in 2009 compared to 2008 due to a 17% decrease in the average number of active communities year over year to 355 in 2009 from 427 in 2008. In addition, personnel costs were down approximately $26,900 due primarily to 24% decrease in average staffing levels year over year.

SG&A expenses in 2008 decreased approximately $34,800, or 10%, from 2007, but increased as a percentage of revenue to 8.5% in 2008 from 6.8% in 2007. The decrease in SG&A expenses was attributable to a decrease in selling and marketing costs of approximately $31,000 related to the previously mentioned 16% reduction in the average number of active communities in 2008 compared to 2007. In addition, personnel costs decreased approximately $20,000 as a result of lower staffing levels and lower management incentive costs year over year. These declines were offset partially by an increase of approximately $24,600 in stock-based compensation expense in 2008 compared to 2007. This increase was attributable to the reversal of approximately $28,450 in SG&A classified stock-based compensation costs in the third quarter of 2007 related to approximately 400,000 outstanding stock options which were subject to a performance metric which we determined in 2007 would not be achieved.

Consolidated Homebuilding Backlog

Backlog units and dollars were 3,531 and $1,076,437, respectively, as of December 31, 2009 compared to 3,164 and $1,002,795 as of December 31, 2008. Net new order and settlement activity during 2009 resulted in the increase in backlog units year over year. The 7% increase in backlog dollars was primarily attributable to the 12% increase in backlog units offset partially by a 4% decrease in the average price of homes in ending backlog.

Backlog, which represents homes sold but not yet settled with the customer, may be impacted by customer cancellations for various reasons that are beyond our control, such as failure to obtain mortgage financing, inability to sell an existing home, job loss, or a variety of other reasons. In any period, a portion of the cancellations that we experience are related to new sales that occurred during the same period, and a portion are related to sales that occurred in prior periods and therefore appeared in the opening backlog for the current period. Expressed as the total of all cancellations during the period as a percentage of gross sales during the period, our cancellation rate was approximately 14%, 23% and 21% in 2009, 2008 and 2007, respectively. During 2009 and 2008, approximately 7% and 10% of a reporting quarter’s opening backlog cancelled during the fiscal quarter, respectively. We can provide no assurance that our historical cancellation rates are indicative of the actual cancellation rate that may occur in 2010. See “Risk Factors” in Item 1A of this Report.

Backlog units and dollars were 3,164 and $1,002,795, respectively, as of December 31, 2008 compared to 5,145 and $1,910,504 as of December 31, 2007. The 39% decrease in backlog units was attributable to our beginning backlog units being approximately 19% lower entering 2008 compared to the same period in 2007. In addition, backlog units were negatively impacted by the aforementioned 29% decline in new orders year over year. Backlog dollars were negatively impacted by the decrease in backlog units coupled with a 15% decrease in the average price of homes in ending backlog, resulting primarily from an 8% decrease in the average selling price for new orders over the six-month period ended December 31, 2008 compared to the same period in 2007.

Consolidated Homebuilding — Other Charges

We reassessed our goodwill and intangible asset balances for impairment in the fourth quarter of 2008, as a result of the continuing declines in new orders and backlog as discussed above and the continuing deterioration of the homebuilding environment in each of our markets spurred further in 2008 by the credit crisis in the latter part of 2008. As a result of this assessment, it was determined that the goodwill and intangible assets related to our Rymarc Homes and Fox Ridge Homes operations were fully impaired and we wrote-off a total of $11,686 related to such assets in 2008. We completed the annual assessment of the intangible asset balance in 2009 and

determined that there was no impairment. See Note 1 in the accompanying consolidated financial statements included herein for further discussion of intangible assets.

Reportable Homebuilding Segments

Homebuilding profit before tax includes all revenues and income generated from the sale of homes, less the cost of homes sold, SG&A expenses, and a corporate capital allocation charge determined at the corporate headquarters. The corporate capital allocation charge eliminates in consolidation, is based on the segment’s average net assets employed, and is charged using a consistent methodology in the years presented. The corporate capital allocation charged to the operating segment allows the Chief Operating Decision Maker to determine whether the operating segment’s results are providing the desired rate of return after covering our cost of capital. We record charges on contract land deposits when we determine that it is probable that recovery of the deposit is impaired. For segment reporting purposes, impairments on contract land deposits are generally charged to the operating segment upon the determination to terminate a finished lot purchase agreement with the developer or to restructure a lot purchase agreement resulting in the forfeiture of the deposit. We evaluate our entire net contract land deposit portfolio for impairment each quarter. For additional information regarding our contract land deposit impairment analysis, see the Critical Accounting Policies section within this Management Discussion and Analysis. For presentation purposes below, the contract land deposit reserve at December 31, 2009, 2008 and 2007, respectively, has been allocated to the reportable segments to show contract land deposits on a net basis. The net contract land deposit balances below also includes $4,900, $5,400 and $9,000 at December 31, 2009, 2008 and 2007, respectively, of letters of credit issued as deposits in lieu of cash. The following tables summarize certain homebuilding operating activity by reportable segment for each of the last three years:


	Year Ended December 31,
	2009			2008			2007
Mid Atlantic:
Revenues	$	1,661,244		$	2,161,764		$	3,099,053
Settlements (units)		4,722			5,240			6,634
Average settlement price	$	351.8		$	412.5		$	467.0
New Orders (units)		4,809			4,290			5,695
Average new order price	$	347.4		$	373.4		$	436.5
Backlog (units)		1,863			1,776			2,726
Average backlog price	$	359.0		$	371.3		$	447.2
Gross profit margin	$	307,525		$	294,699		$	547,753
Gross profit margin percentage		18.51	%		13.63	%		17.67	%
Segment profit	$	185,861		$	103,690		$	291,012
New order cancellation rate		14.40	%		24.40	%		25.20	%
Inventory:
Sold inventory	$	219,885		$	215,587		$	369,025
Unsold lots and housing units	$	47,120		$	30,370		$	81,752
Unsold inventory impairments	$	1,286		$	1,163		$	2,143
Contract land deposits, net	$	36,643		$	14,808		$	91,290
Total lots controlled		26,938			23,711			36,102
Total lots reserved		6,575			7,565			8,970
Contract land deposit impairments	$	18,425		$	81,834		$	153,601
Average active communities		168			205			242

North East:
Revenues	$	254,654		$	347,142		$	433,631
Settlements (units)		882			1,086			1,247
Average settlement price	$	288.7		$	319.7		$	347.7
New Orders (units)		904			884			1,212
Average new order price	$	293.5		$	298.5		$	338.7
Backlog (units)		325			303			505
Average backlog price	$	302.8		$	288.8		$	338.8
Gross profit margin	$	42,282		$	46,607		$	57,860
Gross profit margin percentage		16.60	%		13.43	%		13.34	%
Segment profit	$	19,572		$	13,182		$	11,176
New order cancellation rate		14.50	%		19.70	%		19.00	%
Inventory:
Sold inventory	$	36,315		$	31,321		$	55,441
Unsold lots and housing units	$	4,152		$	4,195		$	5,011
Unsold inventory impairments	$	598		$	573		$	268
Contract land deposits, net	$	2,646		$	1,233		$	8,426
Total lots controlled		3,898			3,619			6,176
Total lots reserved		846			1,879			2,336
Contract land deposit impairments	$	2,489		$	11,190		$	13,553
Average active communities		37			39			50


	Year Ended December 31,
	2009			2008			2007
Mid East:
Revenues	$	505,431		$	659,649		$	860,139
Settlements (units)		2,323			2,762			3,321
Average settlement price	$	216.3		$	237.4		$	257.7
New Orders (units)		2,552			2,380			3,160
Average new order price	$	217.3		$	229.5		$	248.2
Backlog (units)		960			731			1,113
Average backlog price	$	224.7		$	223.9		$	245.4
Gross profit margin	$	85,931		$	104,761		$	155,736
Gross profit margin percentage		17.00	%		15.88	%		18.11	%
Segment profit	$	38,012		$	39,643		$	78,547
New order cancellation rate		13.90	%		17.70	%		14.90	%
Inventory:
Sold inventory	$	60,107		$	41,751		$	74,455
Unsold lots and housing units	$	16,353		$	14,549		$	5,534
Unsold inventory impairments	$	592		$	69		$	367
Contract land deposits, net	$	4,182		$	5,578		$	17,828
Total lots controlled		10,163			11,027			14,191
Total lots reserved		2,022			3,553			3,053
Contract land deposit impairments	$	7,244		$	10,393		$	10,838
Average active communities		100			118			140

South East:
Revenues	$	262,138		$	470,147		$	655,364
Settlements (units)		1,115			1,653			2,311
Average settlement price	$	235.1		$	284.4		$	283.6
New Orders (units)		1,144			1,206			2,203
Average new order price	$	230.2		$	261.2		$	290.0
Backlog (units)		383			354			801
Average backlog price	$	244.1		$	260.5		$	308.6
Gross profit margin	$	36,490		$	60,173		$	144,253
Gross profit margin percentage		13.92	%		12.80	%		22.01	%
Segment profit	$	7,384		$	7,904		$	87,701
New order cancellation rate		14.80	%		28.90	%		20.30	%
Inventory:
Sold inventory	$	21,521		$	29,781		$	55,658
Unsold lots and housing units	$	4,783		$	5,878		$	8,271
Unsold inventory impairments	$	268		$	129		$	—
Contract land deposits, net	$	2,272		$	302		$	24,103
Total lots controlled		5,338			6,626			11,089
Total lots reserved		1,363			3,738			2,641
Contract land deposit impairments	$	5,236		$	20,081		$	4,766
Average active communities		50			65			73

Mid Atlantic

2009 versus 2008

The Mid Atlantic segment had an approximate $82,200, or 79%, increase in segment profit in 2009 compared to 2008. Revenues for the Mid Atlantic segment, which represents approximately 62% of total homebuilding revenues for the year, decreased approximately $500,500, or 23%, in 2009 compared to 2008. Revenues declined due to a 10%, or 518 unit, decrease in units settled and a 15% decrease in the average settlement price of homes in 2009 compared to 2008. The decrease in units settled is attributable to a 35%, or 950 unit, lower backlog balance at the beginning of 2009 compared to the same period in 2008, offset partially by a higher backlog turnover rate year over year. The decrease in the average settlement price is primarily attributable to a 17% lower average price of homes in the beginning backlog year over year, coupled with a 9% decline in the average sales price of new orders for the first six months of 2009 as compared to the same period in 2008. The segment’s gross profit margin percentage increased to 18.5% in 2009 from 13.6% in 2008. Gross profit margins were favorably impacted by lower contract land deposit impairment charges in 2009 of $18,425, or 111 basis points, compared to $81,834, or 379 basis points, in 2008. Gross profit margins in 2009 were also favorably impacted as a result of us exiting poor performing communities in 2008 which were producing lower gross profit margins. In addition, 2009 gross profit margins as well as segment profit were favorably impacted by lower lumber and certain other commodity costs as well as by cost control measures taken in prior quarters, reducing material and personnel costs.

Segment new orders in 2009 increased 12% from 2008, while the segment’s average sales price of new orders decreased 7% year over year. New orders increased despite an 18% decrease in the average number of active communities in 2009 compared to 2008. New orders were favorably impacted in part by a 43% increase in the number of new orders in the fourth quarter of 2009 compared to the same period in 2008, as a result of the significant impact of the fourth quarter 2008 credit crisis on the homebuilding market. New orders were also favorably impacted in the current year by a decrease in the cancellation rate in 2009 to 14% from 24% during 2008. In addition we believe that the federal tax credit for first-time homebuyers had a favorable impact on new orders in the current year, as first-time homebuyers made up a higher percentage of our total sales in the segment year over year.

Net new order and settlement activity in 2009 resulted in a 5% increase in backlog units, while backlog dollars remained relatively flat year over year. The increase in backlog units is primarily attributable to the aforementioned increase in new orders in the fourth quarter of 2009 compared to the same period in 2008. Backlog dollars were impacted by the increase in backlog units, offset partially by a 3% decrease in the average price of homes in ending backlog.

2008 versus 2007

The Mid Atlantic segment had an approximate $187,300, or 64%, decrease in segment profit in 2008 compared to 2007. Revenues for the Mid Atlantic segment, which represent approximately 59% of total homebuilding revenues for the year, decreased approximately $937,300, or 30%, for the year from the prior year period. This decrease was attributable to a 21% decrease in the number of units settled and a 12% decrease in the average settlement price. The decrease in units settled was attributable to a 26% lower backlog unit balance at the beginning of 2008 compared to the same period in 2007 and to a 25% decline in new orders year over year. The decrease in the average settlement price was primarily attributable to an 11% lower average price of homes in the beginning backlog period over period and was also impacted by lower average selling prices of new orders in 2008 compared to 2007. The segment’s gross profit margin percentage fell to 13.6% in 2008 from 17.7% in 2007. Gross profit margins were adversely affected by the downward pressure on selling prices which resulted in the aforementioned 12% decrease in the average settlement price. Gross profit margins were also negatively impacted in each respective period by contract land deposit impairment charges of $81,834, or 379 basis points, in 2008 compared to $153,601, or 496 basis points, in 2007.

New orders in the Mid Atlantic segment for 2008 decreased 25% from 2007 and the segment’s average new order sales price decreased 15% year over year. New orders and the average selling price for new orders were down in each of our markets within the Mid Atlantic segment and were negatively impacted by challenging market conditions. In addition, new orders were negatively impacted by a 15% decrease in the average number of active communities to 205 in 2008 from 242 in 2007 within the segment. Backlog units and dollars decreased approximately 35% and 46%, respectively, year over year. The decrease in backlog units was attributable to the beginning backlog units being approximately 26% lower entering 2008 compared to the same period in 2007. In addition, backlog units were negatively impacted by the aforementioned decline in new orders in 2008 compared to 2007. Backlog dollars were negatively impacted by the decrease in backlog units and a 17% decrease in the average price of homes in ending backlog.

North East

2009 versus 2008

The North East segment had an approximate $6,400, or 49%, increase in segment profit in 2009 compared to 2008, despite a decrease in revenues of approximately $92,500, or 27%, year over year. The decline in revenues was due to a 19%, or 204 unit, decrease in the number of units settled and a 10% decrease in the average settlement price year over year. The decrease in the number of units settled and the average settlement price is primarily attributable to a 40%, or 202 unit, lower beginning backlog balance entering 2009 compared to 2008 and 15% lower average price of homes in beginning backlog year over year. Gross profit margins increased to 16.6% in 2009 from 13.4% in 2008. The increase in gross margins was attributable primarily to lower contract land deposit impairment charges in 2009 of $2,489, or 98 basis points, compared to 2008 of $11,190, or 322 basis points. In addition, 2009 gross profit margins as well as segment profit were favorably impacted by lower lumber and certain other commodity costs as well as by cost control measures taken in prior quarters, reducing material and personnel costs.

Segment new orders in 2009 increased 2% from 2008, while the segment’s average sales price for new orders decreased 2% year over year. New orders were favorably impacted in part by a 26% increase in the number of new orders in the fourth quarter of 2009 compared to the same period in 2008, as a result of the significant impact of the fourth quarter 2008 credit crisis on the homebuilding market. We believe new orders were also favorably impacted in the current year by the federal tax credit for first-time homebuyers and by a decrease in the cancellation rate to 15% in 2009 from 20% in 2008.

Net new order and settlement activity in 2009 resulted in an increase in backlog units and dollars of approximately 7% and 13%, respectively. The increase in backlog units is primarily attributable to the aforementioned increase in new orders in the fourth quarter of 2009 compared to the fourth quarter of 2008. Backlog dollars were impacted by the increase in backlog units coupled with a 5% increase in the average selling price for new orders for the six-month period ended December 31, 2009 compared to the same period in 2008.

2008 versus 2007

The North East segment had an approximate $2,000, or 18%, increase in segment profit in 2008 compared to 2007, despite a decrease in revenues of approximately $86,500, or 20%, year over year. Revenues declined due to a 13% decrease in the number of units settled and an 8% decrease in the average settlement price year over year. The decrease in the number of units settled and the average settlement price was primarily attributable to a 7% lower beginning backlog balance and 6% lower average price of homes in beginning backlog entering 2008 compared to 2007. In addition, the number of units settled was negatively impacted by a decline in new orders year over year. Gross profit margins in the North East segment in 2008 were relatively flat with the prior year at 13.4% compared to 13.3% in 2007. Contract land deposit impairment charges for the segment decreased to approximately $11,190, or 322 basis points, in 2008 compared to approximately $13,553, or 313 basis points, in 2007. The increase in segment profit was primarily attributable to the decrease in contract land deposit impairment charges, cost control measures and reduced sales and marketing costs due to a 22% reduction in the average number of active communities during 2008 compared to 2007.

Segment new orders and the average new order sales price for 2008 decreased 27% and 12%, respectively, from 2007 due to challenging market conditions. In addition, new orders were negatively impacted by a decrease in the average number of active communities within the North East segment. Backlog units and dollars decreased approximately 40% and 49%, respectively, year over year. The decrease in backlog units was attributable to the decline in new orders in 2008 compared to 2007, in addition to a 7% lower beginning backlog unit balance entering 2008 compared to the same period in 2007. The decrease in backlog dollars was due to the decrease in backlog units and to the 12% decrease in the average selling price for new orders for the six-month period ended December 31, 2008 compared to the same period in 2007.

Mid East

2009 versus 2008

The Mid East segment had an approximate $1,600, or 4%, decrease in segment profit and an approximate $154,200, or 23%, decrease in revenues in 2009 compared to 2008. Revenues decreased due to a 16%, or 439 unit, decrease in the number of units settled and a 9% decrease in the average settlement price period over period. The decreases in the number of units settled and the average settlement price were primarily attributable to a 34%, or 382 unit, lower beginning backlog balance and 9% lower average price of homes in beginning backlog year over year, respectively. In addition, average settlement prices were negatively impacted by a 10% decline in the average sales price of new orders for the first six months of 2009 as compared to the same period in 2008. Gross profit margins increased year over year, as cost reduction measures initiated in prior periods offset the decrease in the average settlement price in 2009 compared to 2008. Gross profit margins in 2009 were also favorably impacted as a result of us exiting poor performing communities in 2008 which were producing lower gross profit margins.

Segment new orders in 2009 increased 7% from 2008, while the segment’s average sales price for new orders decreased 5% year over year. New orders were favorably impacted in part by a 51% increase in the number of new orders in the fourth quarter of 2009 compared to the same period in 2008, as a result of the significant impact of the fourth quarter 2008 credit crisis on the homebuilding market. We believe new orders in the current year were also favorably impacted by the federal tax credit for first-time homebuyers, and a decrease in the cancellation rate to 14% in 2009 from 18% in 2008, despite a reduction in the average number of active communities year over year. New order average sale prices continue to be negatively impacted by market conditions, which have required us to alter our product offerings and reduce prices in each market within this segment.

Net new order and settlement activity in 2009 resulted in an increase in backlog units and dollars of approximately 31% and 32%, respectively. The increase in backlog units is primarily attributable to the aforementioned increase in new orders in the fourth quarter of 2009 compared to the fourth quarter of 2008. Backlog dollars were impacted by the increase in backlog units.

2008 versus 2007

The Mid East segment had an approximate $38,900, or 50%, decrease in segment profit in 2008 compared to 2007. Revenues decreased approximately $200,500, or 23%, in 2008 from 2007 due to a 17% decrease in the number of units settled and an 8% decrease in the average settlement price period over period. The decrease in the number of units settled and the average settlement price was primarily attributable to a 13% lower beginning backlog balance and 9% lower average price of homes in beginning backlog period over period. In addition, the number of units settled was negatively impacted by a decline in new orders year over year. Gross profit margins decreased to 15.9% in 2008 from 18.1% in 2007. Contract land deposit impairment charges in the segment were approximately $10,393, or 158 basis points, in 2008 compared to $10,838, or 126 basis points, in 2007. The decline in gross profit margins was primarily driven by continued pressure on selling prices due to challenging market conditions which resulted in an 8% decrease in the average settlement price year over year.

Segment new orders and the average new order sales price in 2008, decreased 25% and 8%, respectively, from 2007. New orders were negatively impacted by market conditions which remained challenging. In addition, new orders were negatively impacted by a 16% decrease in the average number of active communities within the Mid East segment year over year and by an increase in the cancellation rate in the segment to 18% in 2008 from 15% in 2007. Backlog units and dollars decreased approximately 34% and 40%, respectively, year over year. The decrease in backlog units was attributable to the beginning backlog units being approximately 13% lower entering 2008 compared to the same period in 2007. In addition, backlog units were negatively impacted by the decline in new orders in 2008 compared to 2007. The decrease in backlog dollars was attributable to the decrease in backlog units and to a 9% decrease in the average selling price for new orders for the six-month period ended December 31, 2008 compared to the same period in 2007.

South East

2009 versus 2008

The South East segment had an approximate $500, or 7% decrease in segment profit and an approximate $208,000, or 44%, decrease in revenues in 2009 compared to 2008. Revenues decreased primarily due to a 33%, or 538 unit, decrease in the number of units settled and a 17% decrease in the average settlement price year over year. The decrease in units settled was attributable to a 56%, or 447 unit, lower beginning backlog balance entering 2009 compared to the same period in 2008 coupled with a 25%, or 203 unit, decrease in new orders during the first six months of 2009 as compared to the first six months of 2008. The decrease in the average settlement price was primarily attributable to a 16% lower average price of units in backlog entering 2009 compared to the same period in 2008, coupled with a 16% decline in the average sales price of new orders for the first six months of 2009 as compared to the same period in 2008. Gross profit margins increased to 13.9% in 2009 from 12.8% in 2008. Gross profit margins were favorably impacted by lower contract land deposit impairment charges in 2009 of $5,236, or 200 basis points, compared to $20,081, or 427 basis points, in 2008. This favorable impact on gross profit margins year over year was partially offset by a 12% decline in average new order sales prices in 2009 from 2008, as the South East segment market conditions remain more challenging than those seen in our other market segments.

Segment new orders and the average new order sales price decreased 5% and 12%, respectively, in 2009 compared to 2008. New orders have been negatively impacted by a 23% decrease in the average number of active communities year over year. In addition, as mentioned above, the challenging market conditions in the South East segment have continued to negatively impact both new orders and new order sales prices. We believe new orders were favorably impacted in the current year by the federal tax credit for first-time homebuyers and by a decrease in cancellation rates to 15% in 2009 from 29% in 2008.

Net new order and settlement activity in 2009 resulted in an 8%, or 29 unit, increase in backlog, while backlog dollars remained relatively flat year over year. The increase in backlog units is primarily attributable to an 84%, or 122 unit, increase in the number of new orders in the fourth quarter of 2009 compared to the fourth quarter of 2008, as a result of the significant impact of the fourth quarter 2008 credit crisis on the homebuilding market. Backlog dollars were impacted by the increase in backlog units, offset partially by a 6% decrease in the average price of homes in ending backlog due to a decrease in the average selling price for new orders for the six-month period ended December 31, 2009 compared to the same period in 2008.

2008 versus 2007

The South East segment had an approximate $79,800, or 91%, decrease in segment profit in 2008 compared to 2007. Revenues decreased approximately $185,200, or 28%, in 2008 from 2007 due to a 29% decrease in the number of units settled period over period. The decrease in units settled was attributable to a 12% lower beginning backlog unit balance entering 2008 compared to the same period in 2007 and to a decline in new orders year over year. Gross profit margins decreased to 12.8% in 2008 from 22.0% in 2007. Gross profit margins were negatively impacted in 2008 by increased contract land deposit impairment charges of approximately $20,081, or 427 basis points, in 2008 compared to approximately $4,766, or 73 basis points, in

Gross profit margins were also negatively impacted by the use of increased sales incentives, and by higher average lot and operating costs per settled unit.

Segment new orders and the average new order sales price decreased 45% and 10%, respectively, during 2008 compared to 2007. Market conditions within the South East segment continued to deteriorate throughout 2008. These worsening market conditions resulted in lower sales absorption rates within our active communities and higher cancellation rates year over year. New orders were negatively impacted by a 10% decrease in the average number of active communities to 65 in 2008 from 73 in 2007 within the segment. Cancellation rates in the overall segment increased to 29% in 2008 from 20% in 2007. The 45% decrease in new orders for 2008, coupled with a 12% lower beginning backlog balance entering 2008 compared to 2007, resulted in a 56% decrease in backlog units as of December 31, 2008 compared to December 31, 2007. The decrease in backlog units coupled with a decline of 16% in the average backlog price, resulted in a 63% decline in backlog dollars year over year.

Homebuilding Segment Reconciliations to Consolidated Homebuilding Operations

In addition to the corporate capital allocation and contract land deposit impairments discussed above, the other reconciling items between homebuilding segment profit and homebuilding consolidated profit before tax include unallocated corporate overhead (which includes all management incentive compensation), stock option compensation expense, goodwill and intangible asset impairment charges, consolidation adjustments and external corporate interest expense. Our overhead functions, such as accounting, treasury, human resources, etc., are centrally performed and the costs are not allocated to our operating segments. Consolidation adjustments consist of such items to convert the reportable segments’ results, which are predominantly maintained on a cash basis, to a full accrual basis for external financial statement presentation purposes, and are not allocated to our operating segments. Likewise, stock option compensation expense and goodwill and intangible asset impairment charges are not charged to the operating segments. External corporate interest expense is primarily comprised of interest charges on our outstanding senior notes and working capital line borrowings, and is not charged to the operating segments because the charges are included in the corporate capital allocation discussed above.


	Year Ended December 31,
	2009		2008			2007
Homebuilding Consolidated Gross Profit:
Homebuilding Mid Atlantic	$	307,525	$	294,699		$	547,753
Homebuilding North East		42,282		46,607			57,860
Homebuilding Mid East		85,931		104,761			155,736
Homebuilding South East		36,490		60,173			144,253
Consolidation adjustments and other (1)		25,506		(48,548	)		(84,474	)

Consolidated homebuilding gross profit	$	497,734	$	457,692		$	821,128


	Year Ended December 31,
	2009			2008			2007
Homebuilding Consolidated Profit Before Tax:
Homebuilding Mid Atlantic	$	185,861		$	103,690		$	291,012
Homebuilding North East		19,572			13,182			11,176
Homebuilding Mid East		38,012			39,643			78,547
Homebuilding South East		7,384			7,904			87,701
Reconciling items:
Contract land deposit recoveries (impairments) (1)		42,939			(41,134	)		(79,002	)
Stock option expense (2)		(43,495	)		(38,681	)		(13,542	)
Corporate capital allocation (3)		61,753			108,509			152,363
Unallocated corporate overhead (4)		(44,103	)		(52,696	)		(58,990	)
Consolidation adjustments and other (5)		4,970			24,437			28,846
Impairment of goodwill and intangible assets (6)		—			(11,686	)		—
Corporate interest expense		(9,810	)		(12,417	)		(12,535	)

Reconciling items sub-total		12,254			(23,668	)		17,140

Homebuilding consolidated profit before taxes	$	263,083		$	140,751		$	485,576


(1)		This item primarily represents changes to the contract land deposit impairment reserve, which is not allocated to the reportable segments. During both 2009 and 2008, unallocated reserves decreased from the respective prior year as a result of charging previously reserved land impairments to the operating segments, and to certain recoveries of deposits previously determined in prior periods to be impaired.

(2)		The increase in stock option expense in 2009 and 2008 compared to 2007 is due to the reversal of stock-based compensation costs of $29,350 during the third quarter of 2007 related to certain stock options subject to a performance metric. During 2007, we determined that it was improbable that we would meet the performance metric and accordingly reversed all performance-based option expense recorded through that period.

(3)		This item represents the elimination of the corporate capital allocation charge included in the respective homebuilding reportable segments. The decrease in the corporate capital allocation charge from 2007 to 2008 and from 2008 to 2009 is due to decreases in segment asset balances in each of the respective years, due to the decrease in operating activity year over year. The corporate capital allocation charge is based on the segment’s monthly average asset balance, and is as follows for the years presented:


	Year Ended December 31,
	2009		2008		2007
Homebuilding Mid Atlantic	$	40,765	$	73,042	$	106,032
Homebuilding North East		6,473		10,081		14,669
Homebuilding Mid East		8,863		12,902		17,381
Homebuilding South East		5,652		12,484		14,281

Total	$	61,753	$	108,509	$	152,363


(4)		The decreases in unallocated corporate overhead year over year are primarily driven by a reduction in personnel and other overhead costs as part of our focus to size our organization to meet current year activity levels.

(5)		The decrease in 2009 from 2008 is attributable primarily to changes in the corporate consolidation entries based on production volumes year over year, as well as to a decrease in interest income earned related to lower interest rates in 2009 as compared to 2008.

(6)		The 2008 impairment charge relates to the write-off of goodwill and indefinite life intangible assets related to our 2005 acquisition of Rymarc Homes and the goodwill related to our 1997 acquisition of Fox Ridge Homes.

Mortgage Banking Segment

We conduct our mortgage banking activity through NVR Mortgage Finance, Inc. (“NVRM”), a wholly owned subsidiary. NVRM focuses almost exclusively on serving the homebuilding segment’s customer base. Following is a table of financial and statistical data for the years ended December 31, 2009, 2008 and 2007:


	2009			2008			2007
*Loan closing volume:*
Total principal	$	2,060,376		$	2,351,341		$	3,225,324


*Loan volume mix:*
Adjustable rate mortgages		1	%		5	%		17	%

Fixed-rate mortgages		99	%		95	%		83	%


*Operating Profit:*
Segment Profit	$	38,138		$	29,227		$	54,576
Stock option expense		(2,807	)		(2,523	)		(647	)

Mortgage banking income before tax	$	35,331		$	26,704		$	53,929


*Capture rate:*		91	%		85	%		85	%


*Mortgage Banking Fees:*
Net gain on sale of loans	$	46,960		$	38,921		$	60,128
Title services		12,787			14,581			20,304
Servicing fees		634			835			723

	$	60,381		$	54,337		$	81,155

2009 versus 2008

Loan closing volume for the year ended December 31, 2009 decreased 12% from 2008. The 2009 decrease was primarily attributable to a 7% decrease in the number of units closed and a 6% decrease in the average loan amount year over year. These decreases are attributable to the aforementioned decrease in the homebuilding segment’s number of units settled and the decrease in the average settlement prices in 2009 as compared to 2008. The aforementioned decrease in builder settlements in 2009 compared to 2008, was partially offset by a 6 percentage point increase in the number of loans closed by NVRM for our homebuyers who obtain a mortgage to purchase the home (“Capture Rate”), which increased to 91% for the period ended December 31, 2009, compared to 85% for the same period in 2008.

Segment profit for the year ended December 31, 2009 increased approximately $8,900 from 2008. The increase was partially attributable to an approximate $6,000 increase in mortgage banking fees, which was primarily the result of a decrease in incentives. The increase was partially offset by a decrease in fees attributable to the aforementioned decrease in closed loan volume. The increase in mortgage banking fees for the year ended December 31, 2009 was also partially attributable to an approximate $440 increase in unrealized income from the fair value measurement of our locked loan commitments, forward mortgage-backed securities sales, and closed loans held for sale, which is included in mortgage banking fees. The fair value calculations are classified as Level 2 observable inputs as defined by GAAP (refer to Note 11, in the accompanying consolidated financial statements for additional information). The aforementioned fair value measurements will be impacted in the future by changes in volume and product mix of our closed loans and locked loan commitments.

The increase in segment profit for the year ended December 31, 2009 was also partially attributable to an approximate $4,400 decrease in general and administrative expenses compared to the same period for 2008. The decrease in general and administrative expenses was primarily the result of a decrease in salary and other personnel costs primarily as the result of an approximate 24% decrease in staffing compared to the same period for 2008.

2008 versus 2007

Loan closing volume for the year ended December 31, 2008 decreased 27% from 2007. The 2008 decrease was primarily attributable to a 19% decrease in the number of units closed and a 10% decrease in the average loan amount year over year. These decreases are attributable to the aforementioned decrease in the homebuilding segment’s number of units settled and average settlement prices in 2008 as compared to 2007.

Segment profit for the year ended December 31, 2008 decreased approximately $25,300 from 2007. The decrease was primarily due to a decrease in mortgage banking fees attributable to the aforementioned decrease in closed loan volume and a reduction in fees charged to customers to assist our selling efforts in the homebuilding segment. The decrease to mortgage banking fees was partially offset by 31 basis point increase in fees received for servicing released premiums as a result of the product mix shift towards fixed rate mortgages, partly driven by an increase in the use of FHA fixed rate loan products, which generally carry a higher servicing released premium than other non-FHA loan products.

The decrease to mortgage banking fees for the year ended December 31, 2008 was also partially offset by an approximate $900 increase in unrealized income from the fair value measurement of our locked loan commitments, forward mortgage-backed securities sales, and closed loans held for sale, which is included in mortgage banking fees. The fair value measurement was the result of changes to the GAAP fair value measurement, which the Company adopted on a prospective basis as of January 1, 2008. As a result of the adoption of the GAAP fair value measurement changes, the fair value measurement for locked loan commitments and closed loans held for sale includes the assumed gain/loss on the expected resultant loan sale and the value of the servicing rights associated with the loan. This is in addition to the prior fair value measurement, which only considered the effects of interest rate movements between the date of the rate lock and either the loan closing date or the balance sheet date. The fair value calculations are classified as Level 2 observable inputs as defined in GAAP (refer to Note 11 in the accompanying consolidated financial statements for additional information). The fair value measurement will be impacted in the future by the change in volume and product mix of our closed and locked loan commitments.

Mortgage Banking — Other

NVRM is dependent on our homebuilding segment’s customers for business. As sales and selling prices of the homebuilding segment decline, NVRM’s operations are likewise adversely affected. In addition, NVRM’s operating results may be adversely affected in future periods due to the continued tightening and volatility of the credit markets.

Seasonality

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

Effective Tax Rate

Our consolidated effective tax rate in 2009, 2008 and 2007 was 35.6%, 39.75% and 38.1%, respectively. The lower effective tax rate in 2009 was due to the expiration of certain tax reserves previously established, the amendment of certain prior year federal and state income tax returns that we believe will result in tax refunds and recent IRS guidance allowing us to take a larger benefit under Internal Revenue Code Section 199, domestic manufacturing deduction. In addition, due to Mr. Schar relinquishing his Executive Officer role with us in 2009, a tax benefit was generated related to compensation expense recorded for certain outstanding option grants held by Mr. Schar that were previously considered to be a

permanent non-deductible tax difference. The higher effective tax rate in 2008 was primarily due to the reduction in tax exempt interest income and lower pre-tax income in 2008 compared to 2007. We expect our effective tax rate in 2010 to be in-line with our effective tax rates in 2008 and 2007.

Recent Accounting Pronouncements Pending Adoption

In June 2009, the FASB issued SFAS No. 166, Accounting for Transfers of Financial Assets, as codified in ASC 860, Transfers and Servicing, which changes the conditions for reporting a transfer of a portion of a financial asset as a sale and requires additional year-end and interim disclosures. These amendments are effective for fiscal years beginning after November 15, 2009, the implementation of which are not expected to have a material impact on the Company’s financial statements.

In June 2009, the FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R), as codified in ASC 810, Consolidation, through Accounting Standards Update 2009-17. This statement amends FASB Interpretation 46R related to the consolidation of variable interest entities (“VIEs”) and revises the approach to determining the primary beneficiary of a VIE to be more qualitative in nature and requires companies to more frequently reassess whether they must consolidate a VIE. The amendment to ASC 810 is effective for fiscal years beginning after November 15, 2009. We are evaluating the impact of the amendment and currently believe that upon adoption, the majority of development entities associated with our fixed price purchase agreements would no longer be required to be consolidated.

Liquidity and Capital Resources

Lines of Credit and Notes Payable

Our homebuilding segment generally provides for its working capital cash requirements using cash generated from operations, a short-term unsecured working capital revolving credit facility (the “Facility”) and the public debt and equity markets. On August 4, 2009, NVR entered into an amendment to its $600,000 Facility to reduce the total available borrowings under the Facility to $300,000. In addition, the amended Facility eliminates the accordion feature and amended or eliminated certain non-financial covenants. Borrowings under the Facility are subject to certain borrowing base limitations. The Facility expires on December 6, 2010 and outstanding amounts bear interest at either (i) the prime rate or (ii) London Interbank Offering Rate (“LIBOR”) plus applicable margin as defined within the Facility. Up to $150,000 of the Facility is currently available for issuance in the form of letters of credit, of which $13,218 was outstanding at December 31, 2009. The Facility contains various affirmative and negative covenants. The negative covenants include among others, certain limitations on transactions involving the creation of guarantees, sale of assets, acquisitions, mergers, investments and unsold inventory levels. Additional covenants include (i) a minimum adjusted consolidated tangible net worth requirement, (ii) a maximum leverage ratio requirement, and (iii) an interest coverage ratio requirement. These covenants restrict the amount that we would be able to pay in dividends each year. We are also subject to borrowing base restrictions if our senior debt rating falls below investment grade. At December 31, 2009, we were in compliance with all covenants under the Facility and we have maintained our investment grade rating on our senior debt. Additionally, at December 31, 2009, there were no borrowing base limitations reducing the amount available to us for borrowings, and we had no direct borrowings outstanding under the Facility.

NVR’s mortgage banking segment provides for its mortgage origination and other operating activities using cash generated from operations as well as a revolving mortgage repurchase facility. On August 5, 2009, NVRM renewed and amended its Master Repurchase Agreement dated August 5, 2008 with U.S. Bank National Association, as Agent and representative of itself as a Buyer, and the other Buyers (the “Amended Repurchase Agreement”). The Amended Repurchase Agreement provides for loan purchases up to $100,000, subject to certain sub-limits. In addition, the Amended Repurchase Agreement provides for an accordion feature under which NVRM may request that the aggregate commitments under the Amended Repurchase Agreement be increased to an amount up to $125,000. The Amended Repurchase Agreement expires on August 3, 2010. Advances under the Amended Repurchase Agreement carry a Pricing Rate, based on the

Libor Rate plus the Libor Margin, or at NVRM’s option, the Balance Funded Rate, as these terms are defined in the Amended Repurchase Agreement. The Amended Repurchase Agreement contains various affirmative and negative covenants. The negative covenants include among others, certain limitations on transactions involving acquisitions, mergers, the incurrence of debt, sale of assets and creation of liens upon any of its Mortgage Notes. Additional covenants include (i) a tangible net worth requirement, (ii) a minimum liquidity requirement, (iii) a minimum tangible net worth ratio, (iv) a minimum net income requirement, and (v) a maximum leverage ratio requirement, all of which we were compliant with at December 31, 2009. As of December 31, 2009, there was $12,344 outstanding under the Amended Repurchase Agreement, and borrowing base limitations reduced the amount available to us for borrowing to approximately $38,900. The weighted-average Pricing Rate for amounts outstanding under the Amended Repurchase Agreement was 2.6% during 2009. The average Pricing Rate for amounts outstanding at December 31, 2009 was 4.1%.

On June 17, 2003, we completed an offering, at par, for $200,000 of 5% Senior Notes due 2010 (the “Notes”) under a shelf registration statement filed in 1998 with the Securities and Exchange Commission (the “SEC”). The Notes mature on June 15, 2010 and bear interest at 5%, payable semi-annually in arrears on June 15 and December 15. The Notes are general unsecured obligations and rank equally in right of payment with all of our existing and future unsecured senior indebtedness and indebtedness under our working capital credit facility. The Notes are senior in right of payment to any future subordinated indebtedness that we may incur. We may redeem the Notes, in whole or in part, at any time upon not less than 30 nor more than 60 days notice at a redemption price equal to the greater of (a) 100% of the principal amount of the Notes to be redeemed, or (b) the discounted present value of the remaining scheduled payments of the Notes to be redeemed, plus, in each case, accrued and unpaid interest. The indenture governing the Notes contains certain covenants which, among other items, restricts our ability to (i) create, incur, assume or guarantee any secured debt, (ii) enter into sale and leaseback transactions, and (iii) merge with or into other companies or sell all or substantially all of our assets. At December 31, 2009 we were in compliance with all covenants under the Notes. In December 2008, we repurchased $36,680 of the Notes on the open market at 99.25% of par, resulting in a pre-tax gain of approximately $251. In April 2009 and August 2009, we repurchased $27,950 and $2,000 of the Notes, respectively, on the open market at par. The outstanding balance of the Notes at December 31, 2009 was $133,370.

On September 8, 2008, we filed a shelf registration statement (the “2008 Shelf Registration”) with the SEC to register for future offer and sale, an unlimited amount of debt securities, common shares, preferred shares, depositary shares representing preferred shares and warrants. We expect to use the proceeds received from future offerings, if any, issued under the 2008 Shelf Registration for general corporate purposes. This discussion of NVR’s shelf registration capacity does not constitute an offer of any securities for sale.

Equity Repurchases

In addition to funding growth in our homebuilding and mortgage banking operations, we historically have used a substantial portion of our excess liquidity to repurchase outstanding shares of our common stock in open market and privately negotiated transactions. This ongoing repurchase activity is conducted pursuant to publicly announced Board authorizations, and is typically executed in accordance with the safe-harbor provisions of Rule 10b-18 promulgated under the Securities and Exchange Act of 1934, as amended. In addition, the Board resolutions authorizing us to repurchase shares of our common stock specifically prohibit us from purchasing shares from our officers, directors, Profit Sharing/401K Plan Trust or Employee Stock Ownership Plan Trust. The repurchase program assists us in accomplishing our primary objective, creating increases in shareholder value. On July 31, 2007, we publicly announced the board of directors’ approval for us to repurchase up to an aggregate of $300 million of our common stock in one or more open market and/or privately negotiated transactions (“July Authorization”). The July Authorization does not have an expiration date. We did not repurchase any shares of our common stock during 2009. We have $226,300 available under the July Authorization as of December 31, 2009.

Cash Flows

For the year ended December 31, 2009, our operating activities provided cash of $241,642. Cash was provided primarily by homebuilding operations and by an approximate $32,400 decrease in mortgage loans held for sale. The presentation of operating cash flows was reduced by approximately $66,400, which is the amount of the excess tax benefit realized from the exercise of stock options during the period and credited directly to additional paid in capital.

Net cash used for investing activities during 2009 was $221,617 for the year ended December 31, 2009, which primarily resulted from the net purchase of marketable securities during 2009. The marketable securities, which are debt securities issued by the U.S. Treasury and other U.S. government corporations and agencies, are classified as held-to-maturity securities and mature within one year.

Net cash provided by financing activities during 2009 was $82,482 for the year ended December 31, 2009. Financing cash flow was favorably impacted by approximately $78,500 of proceeds from the exercise of stock options and the realization of approximately $66,400 in excess income tax benefits from the exercise of stock options. Cash was used by financing activities to reduce net borrowings under the mortgage warehouse facility by approximately $32,200 and we repurchased $29,950 of our 5% Senior Notes due 2010, at par during 2009.

In 2008, cash and cash equivalents increased by approximately $483,000. Operating activities provided cash of $462,361. Cash was provided primarily by homebuilding operations and a reduction in our homebuilding inventories of approximately $288,000 due to a reduction in the number of homes under construction at the end of 2008 as compared to the same period in 2007. Operating cash flow was reduced by a decrease in our customer deposits of approximately $66,000. The presentation of operating cash flows was also reduced by approximately $50,000, which is the amount of the excess tax benefit realized from the exercise of stock options during the period and credited directly to additional paid in capital. Cash used for investing activities of $5,498 in 2008, was used primarily for property and equipment purchases. Financing activities in 2008 provided $26,571 due primarily to proceeds from the exercise of stock options of approximately $52,000 and the realization of approximately $50,000 in excess income tax benefits from the exercise of stock options. Cash was used in financing activities to reduce net borrowings under the mortgage warehouse facility by approximately $39,000 and to repurchase $36,680 of our 5% Senior Notes due 2010 at a cost of approximately $36,400.

In 2007, cash and cash equivalents increased by approximately $108,090. Operating activities provided cash of $558,766. Cash was provided primarily by homebuilding operations and an approximate $71,000 decrease in mortgage loans held for sale. The presentation of operating cash flows was reduced by approximately $69,000, related to the amount of the excess tax benefit realized from the exercise of stock options during the year. Cash provided by operating activities were partially offset by cash used for financing activities of $441,361, due to our repurchase of approximately $507,500 of our common stock.

At December 31, 2009, 2008 and 2007, the homebuilding segment had restricted cash of approximately $4,600, $4,500 and $6,200, respectively, which relates to customer deposits on certain home sales.

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

Off Balance Sheet Arrangements

Lot Acquisition Strategy

We do not engage in land development. Instead, we typically acquire finished building lots at market prices from various land developers under fixed price purchase agreements that require deposits that may be forfeited if we fail to perform under the agreement. The deposits required under the purchase agreements are in the form of cash or letters of credit in varying amounts and represent a percentage, typically ranging up to 10%, of the aggregate purchase price of the finished lots.

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

At December 31, 2009, we controlled approximately 46,300 lots with an aggregate purchase price of approximately $3,900,000, by making or committing to make deposits of approximately $167,100 in the form of cash and letters of credit. Our entire risk of loss pertaining to the aggregate purchase price contractual commitment resulting from our non-performance under the contracts is limited to the $167,100 deposit. Of the $167,100 deposit total, approximately $140,700 is in cash and approximately $4,900 is in letters of credit which have been issued as of December 31, 2009. Subsequent to December 31, 2009, we will pay approximately $21,500 in additional deposits assuming that contractual development milestones are met by the developers (see Contractual Obligations section below). As of December 31, 2009, we had recorded an impairment valuation allowance of approximately $89,500 related to the cash deposits currently outstanding. Please refer to Note 1 in the accompanying consolidated financial statements for a further discussion of the contract land deposits and Note 3 in the accompanying consolidated financial statements for a description of our lot acquisition strategy in relation to our accounting related to the consolidation of variable interest entities_._

Bonds and Letters of Credit

We enter into bond or letter of credit arrangements with local municipalities, government agencies, or land developers to collateralize our obligations under various contracts. We had approximately $36,900 of contingent obligations under such agreements as of December 31, 2009 (inclusive of the $4,900 of lot acquisition deposits in the form of letters of credit discussed above). We believe we will fulfill our obligations under the related contracts and do not anticipate any material losses under these bonds or letters of credit.

Mortgage Commitments and Forward Sales

In the normal course of business, our mortgage banking segment enters into contractual commitments to extend credit to buyers of single-family homes with fixed expiration dates. The commitments become effective when the borrowers “lock-in” a specified interest rate within time frames established by NVR. All mortgagors are evaluated for credit worthiness prior to the extension of the commitment. Market risk arises if interest rates move adversely between the time of the “lock-in” of rates by the borrower and the sale date of the loan to a broker/dealer. To mitigate the effect of the interest rate risk inherent in providing rate lock commitments to borrowers, we enter into optional or mandatory delivery forward sale contracts to sell whole loans and mortgage-backed securities to broker/dealers. The forward sale contracts lock in an interest rate and price for the sale of loans similar to the specific rate lock commitments. NVR does not engage in speculative or trading derivative activities. Both the rate lock commitments to borrowers and the forward sale contracts to broker/dealers are undesignated derivatives, and, accordingly, are marked to fair value through earnings. At December 31, 2009, there were contractual commitments to extend credit to borrowers aggregating approximately $130,100, and open forward delivery sale contracts aggregating approximately $141,800. Please refer to Note 11 in the accompanying consolidated financial statements for a description of our fair value accounting.

Contractual Obligations

Our fixed, non-cancelable obligations as of December 31, 2009, were as follows:


	Payments due by period
			Less than			1-3			3-5			More than
	Total		1 year			years			years			5 years
Debt (a)	$	148,770	$	148,770		$	—		$	—		$	—
Capital leases (b)	$	3,066		408			1,289			1,313			56
Operating leases (c)	$	70,551		19,678			22,742			13,227			14,904
Purchase obligations (d)		21,534			*			*			*			*
Executive officer employment contracts (e)	$	1,705		1,705			—			—			—
Other long-term liabilities (f)	$	23,926		23,480			446			—			—

Total	$	269,552	$	194,041		$	24,477		$	14,540		$	14,960


(a)		Payments include interest payments due on the 5% Senior Notes due 2010. See Note 6 in the accompanying consolidated financial statements for additional information regarding debt and related matters.

(b)		The present value of these obligations is included on the Consolidated Balance Sheets. See Note 6 in the accompanying consolidated financial statements for additional information regarding capital lease obligations.

(c)		See Note 10 in the accompanying consolidated financial statements for additional information regarding operating leases.

(d)(*)		Amounts represent required payments of forfeitable deposits with land developers under existing, fixed price purchase agreements, assuming that contractual development milestones are met by the developers. We expect to make all payments of these deposits within the next three years, but due to the nature of the contractual development milestones that must be met, we are unable to accurately estimate the portion of the deposit obligation that will be made within one year and that portion that will be made within one to three years.

(e)		We have entered into employment agreements with three of our executive officers. Each of the agreements expires on January 1, 2011 and provides for payment of a minimum base salary, which may be increased at the discretion of the Compensation Committee of NVR’s Board of Directors (the “Compensation Committee”), and annual incentive compensation of up to 100% of base salary upon achievement of annual performance objectives established by the Compensation Committee. The agreements also provide for payment of severance benefits upon termination of employment, in amounts ranging from $0 to two times the executive officer’s then annual base salary, depending on the reason for termination, plus up to $60 in outplacement assistance. Accordingly, total payments under these agreements will vary based on length of service, any future increases to base salaries, annual incentive payments earned, and the reason for termination. The agreements have been reflected in the above table assuming the continued employment of the executive officers for the full term of the respective agreements, and at the executive officers’ current base salaries. The above balances do not include any potential annual incentive compensation. The actual amounts paid could differ from that presented.

(f)		Amounts represent payments due under incentive compensation plans and are included on the Consolidated Balance Sheet, $2,100 of which is recorded in the Mortgage Banking accounts payable and other liabilities line item.

Critical Accounting Policies

General

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

statements, and the reported amounts of revenues and expenses during the reporting periods. We continually 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.

Variable Interest Entities

GAAP requires the primary beneficiary of a variable interest entity to consolidate that entity in its financial statements. The primary beneficiary of a variable interest entity is the party that absorbs a majority of the variable interest entity’s expected losses, receives a majority of the entity’s expected residual returns, or both, as a result of ownership, contractual, or other financial interests in the entity. Expected losses are the expected negative variability in the fair value of an entity’s net assets exclusive of its variable interests, and expected residual returns are the expected positive variability in the fair value of an entity’s net assets, exclusive of its variable interests.

Forward contracts, such as the fixed price purchase agreements utilized by us to acquire finished lot inventory, are deemed to be variable interests. Therefore, the development entities with which we enter fixed price purchase agreements are examined for possible consolidation by us, including certain joint venture limited liability corporations (“LLCs”) utilized by us to acquire finished lots on a limited basis. We have developed a methodology to determine whether we, or, conversely, the owner(s) of the applicable development entity, are the primary beneficiary of a development entity. The methodology used to evaluate our primary beneficiary status requires substantial management judgment and estimates. These judgments and estimates involve assigning probabilities to various estimated cash flow possibilities relative to the development entity’s expected profits and losses and the cash flows associated with changes in the fair value of finished lots under contract. Although we believe that our accounting policy is designed to properly assess our primary beneficiary status relative to our involvement with the development entities from which we acquire finished lots, changes to the probabilities and the cash flow possibilities used in our evaluation could produce widely different conclusions regarding whether we are or are not a development entity’s primary beneficiary, possibly resulting in additional, or fewer, development entities being consolidated on our financial statements. See Note 3 to the accompanying consolidated financial statements for further information.

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. Upon settlement, the cost of the unit is expensed on a specific identification basis. Cost of manufacturing materials is determined on a first-in, first-out basis.

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

Contract Land Deposits

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

We maintain an allowance for losses on contract land deposits that reflects our judgment of the present loss exposure in the existing contract land deposit portfolio at the end of the reporting period. To analyze contract land deposit impairments, we utilize a loss contingency analysis that is conducted each quarter. In

addition to considering market and economic conditions, we assess contract land deposit impairments on a community-by-community basis pursuant to the purchase contract terms, analyzing, as applicable, current sales absorption levels, recent sales’ gross profit, the dollar differential between the contractual purchase price and the current market price for lots, a developer’s financial stability, a developer’s financial ability or willingness to reduce lot prices to current market prices, and the contract’s default status by either us or the developer along with an analysis of the expected outcome of any such default.

Our analysis is focused on whether we can sell houses profitably in a particular community in the current market with which we are faced. Because we don’t own the finished lots on which we had placed a contract land deposit, if the above analysis leads to a determination that we can’t sell homes profitably at the current contractual lot price, we then determine whether we will elect to default under the contract, forfeit our deposit and terminate the contract, or whether we will attempt to restructure the lot purchase contract, which may require us to forfeit the deposit to obtain contract concessions from a developer. We also assess whether an impairment is present due to collectibility 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, 2009 balance sheet to be adequate (see Note 1 in the accompanying consolidated financial statements), there can be no assurance that this allowance will prove to be adequate over time to cover losses due to unanticipated adverse changes in the economy or other events adversely affecting specific markets or the homebuilding industry.

Intangible Assets

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

Warranty/Product Liability Accruals

Warranty and product liability accruals are established to provide for estimated future costs as a result of construction and product defects, product recalls and litigation incidental to our business. Liability estimates are determined based on our judgment considering such factors as historical experience, the likely current cost of corrective action, manufacturers’ and subcontractors’ participation in sharing the cost of corrective action, consultations with third party experts such as engineers, and evaluations by our General Counsel and outside counsel retained to handle specific product liability cases. Although we consider the warranty and product liability accrual reflected on the December 31, 2009 balance sheet (see Note 10 in the accompanying consolidated financial statements) to be adequate, 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.

Stock Option Expense

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

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

Impact of Inflation, Changing Prices and Economic Conditions

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

Previous: Item 3. Legal Proceedings. · Next: Item 7A. Quantitative and Qualitative Disclosure About Market Risk.

Item 4. Submission of Matters to a Vote of Security Holders.

Item 4. Submission of Matters to a Vote of Security Holders.

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents