Overview

In 2012, new home sales in the U.S. increased for the first time since 2005. Although this volume remains very low compared to historical levels, the improved environment and our restructuring actions contributed to our return to profitability in 2012 as net new orders, closings, revenues, gross margin, and overhead leverage all improved compared with 2011. During the year, our net new orders increased 25% over 2011 from 4% fewer active communities. We also generated significant positive operating cash flow, highlighting some of the benefits of our efforts to improve our capital efficiency. By using our existing land assets more efficiently, allocating capital more effectively, and controlling unsold ("spec") inventory, we continued to enhance our balance sheet and position the Company to deliver higher long-term returns.

While the timing of a broad, sustainable recovery in the homebuilding industry remains uncertain, we believe that new home demand is moving along a path toward recovery. The value in new housing resulting from affordable prices, low mortgage rates, escalating rents, and more energy-efficient homes is providing consumers with a compelling reason to buy a new home, especially relative to the ever more expensive rental market and the tightened supply of available existing homes. In the short term, we believe that 2013 will be a better year for U.S. housing than 2012 in spite of continued high levels of unemployment and related low levels of consumer confidence, a challenging U.S. macroeconomic environment, and potential regulatory reforms that may impact the housing and mortgage industries. In the long term, we continue to believe that the national publicly-traded builders will have a competitive advantage over local builders through their ability to leverage economies of scale at a local level, access to more reliable and lower cost financing through the capital markets, ability to control and entitle large land positions, and greater geographic and product diversification. Among the national publicly-traded peer group, we believe that builders with more significant land positions, broad geographic and product diversity, and sustainable capital positions will benefit as market conditions recover. We continue to focus on our primary operational objectives:

• Improving our inventory turns;

• More effectively allocating the capital invested in our business using a risk-based portfolio approach;

• Enhancing revenues through more strategic pricing, including establishing clear business models for each of our brands based on systematic, consumer-driven input, optimizing our pricing through the expanded use of options and lot premiums, and lessening our reliance on spec home sales;

• Reducing our house costs through common house plan management, value-engineering our house plans, and working with suppliers to reduce costs; and

• Maintaining an efficient overhead structure.

Continued focus on these operational objectives, combined with improvements in industry conditions, have resulted in a return to profitability in our homebuilding operations and an increase in profits in our financial services businesses.

The following is a summary of our operating results by line of business ($000's omitted, except per share data):

                                                        Years Ended December 31,
                                                 2012            2011             2010
Income (loss) before income taxes:
Homebuilding                                 $   157,991     $  (275,830 )   $ (1,240,155 )
Financial Services                                25,563         (34,470 )          5,609
Income (loss) from continuing operations
before income taxes                              183,554        (310,300 )     (1,234,546 )
Income tax expense (benefit)                     (22,591 )       (99,912 )       (137,817 )
Net income (loss)                            $   206,145     $  (210,388 )   $ (1,096,729 )
Per share data - assuming dilution:
Net income (loss)                            $      0.54     $     (0.55 )   $      (2.90 )

• The Homebuilding income (loss) before income taxes included charges related to the following items ($000's omitted):

                                                  2012         2011          2010
Land-related charges (see   Note 5  )           $ 17,195    $  35,786    $   216,352
Loss on debt retirements (see   Note 7  )         32,071        5,638         38,920
Restructuring costs (see   Note 3  )              11,787       19,696         50,718
Goodwill impairments (see   Note 2  )                  -      240,541        656,298
Insurance-related adjustments (see   Note 13  )        -            -        280,390
                                                $ 61,053    $ 301,661    $ 1,242,678

For additional information on each of the above, see the applicable Notes to the Consolidated Financial Statements.

Our Homebuilding operating results improved significantly from the losses experienced in 2011 and 2010 as the result of the lower charges listed in the above table, as well as higher revenues, increased gross margins, and improved overhead leverage.

• The Financial Services income in 2012 compared to the loss in 2011 was due to higher origination volumes, improved loan pricing, and lower loss reserves related to loans originated in previous years. Such loss reserves totaled $49.0 million in 2012, compared with $59.3 million in 2011 (see Note 13 to the Consolidated Financial Statements). The Financial Services loss in 2011 compared to the income in 2010 was primarily due to increased loan loss reserves in 2011 as such reserves totaled $16.9 million in 2010.

• The income tax benefits in 2012, 2011, and 2010 were attributable primarily to the favorable resolution of certain federal and state income tax matters.

Homebuilding Operations

The following is a summary of income (loss) before income taxes for our
Homebuilding operations ($000's omitted):
                                                         Years Ended December 31,
                                               FY 2012 vs.                     FY 2011 vs.
                                  2012           FY 2011          2011           FY 2010           2010
Home sale revenues            $ 4,552,412           15  %     $ 3,950,743          (11 )%     $  4,419,812
Land sale revenues                106,698           29  %          82,853          198  %           27,815
Total Homebuilding revenues     4,659,110           16  %       4,033,596           (9 )%        4,447,627
Home sale cost of revenues
(a)                             3,833,451           11  %       3,444,398          (14 )%        4,006,385
Land sale cost of revenues
(b)                                94,880           60  %          59,279           11  %           53,555
Selling, general and
administrative expenses
("SG&A") (c)                      514,457           (1 )%         519,583          (42 )%          895,102
Equity in (earnings) loss of
unconsolidated entities (d)        (3,873 )         21  %          (3,194 )         12  %           (2,843 )
Other expense (income), net
(e)                                66,298          (77 )%         293,102          (61 )%          742,385
Interest income, net               (4,094 )          9  %          (3,742 )        (45 )%           (6,802 )
Income (loss) before income
taxes                         $   157,991          157  %     $  (275,830 )         78  %     $ (1,240,155 )
Supplemental data:
Gross margin from home sales         15.8 %    300 bps               12.8 %    340 bps                 9.4 %
SG&A as a percentage of home                     (190)                           (710)
sale revenues                        11.3 %        bps               13.2 %        bps                20.3 %
Closings (units)                   16,505            8  %          15,275          (11 )%           17,095
Average selling price         $       276            7  %     $       259            0  %     $        259
Net new orders:
Units                              19,039           25  %          15,215            0  %           15,148
Dollars (f)                   $ 5,424,300           37  %     $ 3,953,829            1  %     $  3,898,950
Cancellation rate                      15 %                            19 %                             19 %
Active communities at
December 31                           670           (4 )%             700          (11 )%              786
Backlog at December 31:
Units                               6,458           65  %           3,924           (2 )%            3,984
Dollars                       $ 1,931,538           82  %     $ 1,059,649            0  %     $  1,056,563

(a) Includes the amortization of capitalized interest. Home sale cost of revenues also includes land and community valuation adjustments of $13.4 million, $15.9 million, and $169.7 million for 2012, 2011, and 2010, respectively.

(b) Includes net realizable value adjustments for land held for sale of $1.5 million, $9.8 million, and $39.1 million for 2012, 2011, and 2010, respectively.

(c) SG&A for 2010 includes the adverse impact of insurance reserve adjustments totaling $280.4 million.

(d) Includes impairments of our investments in unconsolidated joint ventures, which totaled $1.9 million in 2010.

(e) Includes goodwill impairment charges of $240.5 million and $656.3 million in 2011 and 2010, respectively. Also includes the write-off of deposits and pre-acquisition costs for land option contracts we elected not to pursue of $2.3 million, $10.0 million, and $5.6 million in 2012, 2011, and 2010, respectively, and net losses related to the redemption of debt totaling $32.1 million, $5.6 million, and $38.9 million in 2012, 2011, and 2010, respectively.

(f) Net new order dollars represent a composite of new order dollars combined with other movements of the dollars in backlog related to cancellations and change orders.

Home sale revenues

Home sale revenues for 2012 were higher than 2011 by $601.7 million, or 15%. The increase was attributable to a 7% increase in the average selling price combined with an 8% increase in closings. The increase in average selling price reflects an ongoing shift in our revenue mix toward move-up buyers and improved market conditions. The increase in closings was realized from 4% fewer active communities and was concentrated primarily in our North and Southwest segments.

Home sale revenues for 2011 were lower than 2010 by $469.1 million, or 11%. The decrease was attributable to an 11% decrease in closings as average selling prices remained stable from 2010 to 2011. The decline in closings for 2011 compared with 2010 occurred in each of our Homebuilding segments, except for Florida, and resulted primarily from lower industry volumes, in part due to the expiration of the federal homebuyer tax credit that existed during 2010. This tax credit favorably impacted new orders and closings during the first half of 2010, in part we believe by pulling forward customer demand. The 11% decrease in our active communities also contributed to the lower closings.

Home sale gross margins

Home sale gross margins were 15.8% in 2012, compared with 12.8% in 2011 and 9.4% in 2010. Gross margins during 2012 and 2011 benefited from lower land and community valuation adjustments of $13.4 million and $15.9 million, respectively, compared to $169.7 million in 2010. The increase in gross margins was despite increased capitalized interest amortization, which reduced gross margins by 10 basis points and 70 basis points in 2012 and 2011, respectively, as compared with the comparable prior year periods. The higher capitalized interest amortization was attributable primarily to debt assumed with our 2009 merger with Centex.

Excluding the impact of land and community valuation adjustments and capitalized interest amortization, adjusted home sale gross margins improved to 20.9% in 2012 from 17.9% in 2011 and 16.7% in 2010 (see the Non-GAAP Financial Measures section for a reconciliation of adjusted home sale gross margins). These improved gross margins reflect a combination of factors, including shifts in the product mix of homes closed toward move-up buyers, better alignment of our product offering with current market conditions, contributions from our strategic pricing and house cost reduction objectives, and, in 2012, an improved demand and pricing environment.

Land sales

We periodically elect to sell parcels of land to third parties in the event such assets no longer fit into our strategic operating plans or are zoned for commercial or other development. Land sale revenues and their related gains or losses vary between periods, depending on the timing of land sales and our strategic operating decisions. Land sales had margin contributions of $11.8 million, $23.6 million, and $(25.7) million in 2012, 2011, and 2010, respectively. These margin contributions included net realizable value adjustments related to land held for sale totaling $1.5 million, $9.8 million, and $39.1 million in 2012, 2011, and 2010, respectively.

SG&A

In order to reduce overhead costs, we have reconfigured our organization in recent years to better align our overhead structure with expected volumes. These actions have included consolidating many local divisions along with reducing corporate and support staffing across a number of functions. As a result, SG&A as a percentage of home sale revenues dropped from 13.2% in 2011 to 11.3% in 2012. The gross dollar amount of our SG&A decreased $5.1 million, or 1%, in 2012 compared to 2011 due to this improved overhead leverage, partially offset primarily by higher incentive compensation resulting from our improved operating results.

The gross dollar amount of our SG&A decreased $375.5 million, or 42%, in 2011 compared to 2010 while SG&A as a percentage of home sale revenues dropped to 13.2% in 2011 from 20.3% in 2010. SG&A in 2010 included $280.4 million in insurance reserve adjustments, substantially all of which related to general liability construction defect claims (see Note 13 to the Consolidated Financial Statements for additional discussion of insurance reserve adjustments). Excluding these insurance reserve adjustments, SG&A as a percentage of home sale revenues was 13.2% and 13.9% in 2011 and 2010, respectively. (See the Non-GAAP Financial Measures section for a reconciliation of SG&A as a percentage of home sale revenue, excluding insurance reserve adjustments). This improved overhead leverage resulted from a combination of better matching our overall cost structure with the current business environment and lower severance and equity compensation expense in 2011 compared to 2010.

Equity in (earnings) loss of unconsolidated entities

Equity in (earnings) loss of unconsolidated entities was $(3.9) million, $(3.2) million, and $(2.8) million for 2012, 2011, and 2010, respectively. The majority of our unconsolidated entities represent land development joint ventures. As a result, the timing of income and losses varies between periods depending on the timing of transactions and circumstances specific to each entity.

Other expense (income), net

Other expense (income), net includes the following ($000's omitted):

                                                 2012            2011            2010
Write-offs of deposits and pre-acquisition
costs   (Note 4)                             $     2,278     $    10,002     $     5,594
Loss on debt retirements   (Note 7)               32,071           5,638          38,920
Lease exit and related costs   (Note 3)            7,306           9,900          28,378
Amortization of intangible assets   (Note
1)                                                13,100          13,100          13,100
Goodwill impairments   (Note 2)                        -         240,541         656,298
Miscellaneous expense (income), net               11,543          13,921              95
                                             $    66,298     $   293,102     $   742,385

For additional information on each of the above, see the applicable Notes to the Consolidated Financial Statements. Miscellaneous expense (income), net includes $5.1 million in 2012 and $17.1 million in 2011 related to the write-down of notes receivable.

Interest income, net

The increase in interest income, net for 2012 compared with 2011 resulted primarily from higher invested cash balances. The decrease in interest income, net in 2011 compared with 2010 resulted from lower invested cash balances.

Net new orders

Net new orders increased 25% in 2012 compared with 2011 while selling from 4% fewer active communities in 2012 (670 at December 31, 2012). The increase in net new orders was broad-based as each of our reportable segments experienced increases during 2012, with the largest increases occurring in our North and Southwest segments. The cancellation rate (canceled orders for the period divided by gross new orders for the period) was 15% in 2012 compared to 19% in 2011. Ending backlog units, which represent orders for homes that have not yet closed, increased 65% at December 31, 2012 compared with December 31, 2011, due to the increase in net new orders.

Net new order levels were essentially flat for 2011 compared with 2010. Net new orders reflected the impact of the federal homebuyer tax credit that expired during 2010, which favorably impacted new orders during the first half of 2010, and the reduced number of active communities in 2011. At December 31, 2011, we had 700 active communities, a decrease of 11% from December 31, 2010. The cancellation rate for 2011 was unchanged from 2010 at 19%. Ending backlog was essentially flat at December 31, 2011 compared with December 31, 2010, consistent with the overall new order levels.

Homes in production

The following is a summary of our homes in production at December 31, 2012 and 2011:

                      2012     2011
Sold                 4,162    2,640
Unsold
Under construction     753    1,381
Completed              503    1,481
                     1,256    2,862
Models               1,119    1,278
Total                6,537    6,780

The slight decrease in homes in production at December 31, 2012 compared to December 31, 2011 is the result of a significant reduction in homes unsold to customers ("spec homes"), largely offset by a large increase in the number of sold homes in production. Reducing our reliance on sales of spec homes is a component of our strategic pricing and inventory turns objectives, so we focused in 2012 on lowering the overall level of spec home inventory, especially completed specs ("final specs"). The increase in sold homes in production resulted from the significant increase in net new orders and backlog.

Controlled lots

The following is a summary of our lots under control at December 31, 2012 and 2011:

                         December 31, 2012                     December 31, 2011
                  Owned     Optioned    Controlled      Owned     Optioned    Controlled
Northeast         9,211       2,655        11,866      10,540       2,121        12,661
Southeast        13,372       2,756        16,128      15,016       3,215        18,231
Florida          23,906       3,689        27,595      26,444       2,136        28,580
Texas            12,218       3,685        15,903      14,759       4,231        18,990
North            12,946       2,603        15,549      15,084       1,676        16,760
Southwest        31,407       1,427        32,834      35,090         698        35,788
Total           103,060      16,815       119,875     116,933      14,077       131,010

Developed (%)        27 %        34 %          28 %        28 %        38 %          29 %

Of our controlled lots, 103,060 and 116,933 were owned and 9,634 and 10,060 were under option agreements approved for purchase at December 31, 2012 and 2011, respectively. In addition, there were 7,181 and 4,017 lots under option agreements pending approval at December 31, 2012 and 2011, respectively. While we continue to purchase land positions where it makes strategic and economic sense to do so, the reduction in lots resulting from closings, land disposition activity, and withdrawals from land option contracts exceeded the number of lots added by new transactions during the year ended December 31, 2012. This trend is consistent with our focus on improving our inventory turns.

The remaining purchase price under our land option agreements totaled $923.4 million at December 31, 2012. These land option agreements, which generally may be canceled at our discretion and in certain cases extend over several years, are secured by deposits and pre-acquisition costs totaling $70.1 million, of which only $2.9 million is refundable.

Non-GAAP Financial Measures

This report contains information about our home sale gross margins and selling, general and administrative expenses ("SG&A") reflecting certain adjustments. These measures are considered non-GAAP financial measures under the SEC's rules and should be considered in addition to, rather than as a substitute for, the comparable GAAP financial measures as measures of our operating performance. Management and our local divisions use these measures in evaluating the operating performance of each community and in making strategic decisions regarding sales pricing, construction and development pace, product mix, and other daily operating decisions. We believe they are relevant and useful measures to investors for evaluating our performance through (1) gross profit generated on homes delivered during a given period and (2) the efficiency of our overhead cost structure and for comparing our operating performance to other companies in the homebuilding industry. Although other companies in the homebuilding industry report similar information, the methods used may differ. We urge investors to understand the methods used by other companies in the homebuilding industry to calculate gross margins and SG&A and any adjustments thereto before comparing our measures to that of such other companies.

The following tables set forth reconciliations of these non-GAAP financial measures to the GAAP financial measures that management believes to be most directly comparable ($000's omitted):

Home sale gross margin
                                                          Years Ended December 31,
                                                    2012            2011            2010
Home sale revenues                              $ 4,552,412     $ 3,950,743     $ 4,419,812
Home sale cost of revenues                        3,833,451       3,444,398       4,006,385
Home sale gross margin                              718,961         506,345         413,427
Add:
Land and community valuation adjustments (a)    $     6,969     $    10,498     $   141,592
Capitalized interest amortization (a)               224,291         189,382         180,918
Adjusted home sale gross margin                 $   950,221     $   706,225     $   735,937

Home sale gross margin as a percentage of home
sale revenues                                          15.8 %          12.8 %           9.4 %
Adjusted home sale gross margin as a percentage
of home sale revenues                                  20.9 %          17.9 %          16.7 %

(a) Write-offs of capitalized interest related to land and community valuation adjustments are reflected in capitalized interest amortization.

SG&A
                                                            Years Ended December 31,
                                                      2012            2011            2010
Home sale revenues                                $ 4,552,412     $ 3,950,743     $ 4,419,812

SG&A                                              $   514,457     $   519,583     $   895,102
Less: Insurance reserve adjustments (a)                     -               -         280,390
SG&A excluding insurance reserve adjustments      $   514,457     $   519,583     $   614,712

SG&A as a percentage of home sale revenues               11.3 %          13.2 %          20.3 %
SG&A excluding insurance reserve adjustments as a
percentage of home
  sale revenues                                          11.3 %          13.2 %          13.9 %

(a) Adjustments to recorded insurance reserves, primarily related to general liability exposures.

Homebuilding Segment Operations

Our homebuilding operations represent our core business. Homebuilding offers a
broad product line to meet the needs of homebuyers in our targeted markets. As
of December 31, 2012, we conducted our operations in 58 markets located
throughout 28 states. For reporting purposes, our Homebuilding operations are
aggregated into six reportable segments:

Northeast:     Connecticut, Delaware, Maryland, Massachusetts, New Jersey, New
               York, Pennsylvania,
               Rhode Island, Virginia
Southeast:     Georgia, North Carolina, South Carolina, Tennessee
Florida:       Florida
Texas:         Texas
North:         Illinois, Indiana, Michigan, Minnesota, Missouri, Northern
               California, Ohio, Oregon, Washington
Southwest:     Arizona, Colorado, Nevada, New Mexico, Southern California

We also have a reportable segment for our financial services operations, which consist principally of mortgage banking and title operations. The Financial Services segment operates generally in the same markets as the Homebuilding segments.

The following table presents selected financial information for our reportable Homebuilding segments:

                                             Operating Data by Segment ($000's omitted)
                                                      Years Ended December 31,
                                         FY 2012 vs. FY                    FY 2011 vs. FY
                             2012             2011             2011             2010              2010
Home sale revenues:
Northeast                $   722,691                1  %   $   714,609               (5 )%   $    754,280
Southeast                    689,163                2  %       675,124              (10 )%        752,509
Florida                      620,156               11  %       557,865                3  %        539,996
Texas                        666,759                8  %       615,319               (4 )%        638,424
North                        989,510               36  %       727,085              (16 )%        861,559
. . .