Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Overview

On August 18, 2009, we completed the acquisition of Centex through the merger of PulteGroup’s merger subsidiary with and into Centex pursuant to the Agreement and Plan of Merger dated as of April 7, 2009 among PulteGroup, Pi Nevada Building Company, and Centex. As a result of the merger, Centex became a wholly-owned subsidiary of PulteGroup. Accordingly, the results of Centex are included in our consolidated financial statements from the date of the merger.

The U.S. housing market and broader economy remain in a period of uncertainty. While we have experienced some stabilization in our local markets, homebuilding industry volumes remain at near historically low levels. This more stable environment has resulted in a significant reduction in the level of land-related charges recorded during 2011 compared with recent years. However, significant short-term uncertainty remains such that we are not anticipating a broad recovery in homebuilding in the near term. Factors that are currently impacting the homebuilding industry negatively include:

•	High levels of unemployment and associated low levels of consumer confidence;

•	Continued high levels of foreclosure activity;

•	Increased costs and standards related to FHA loans, which are a significant source of customer financing; and

•	Uncertainty regarding the potential impacts of reforms to the overall U.S. financial services and mortgage industries, including the Dodd-Frank Wall Street Reform and Consumer Protection Act enacted into law on July 21, 2010; potential limitations on the mortgage interest income tax deduction; and potential future restructurings of Fannie Mae and Freddie Mac.

During 2011, we experienced a return to a somewhat more traditional demand pattern as new orders were higher in the first half of the year and home closings increased in each quarter throughout the year. While our overall volumes in 2011 were moderately lower than in 2010, the combination of improved gross margins, a more efficient overhead structure, and lower asset impairment charges resulted in a significant improvement in our bottom line results. We believe that improved employment levels and consumer confidence are necessary to unlock the pent-up demand that we believe has built up in recent years. Accordingly, we continue to operate our business with the expectation that difficult market conditions will continue to impact us for at least the near term while also positioning ourselves to capitalize upon growth when industry conditions improve. While we are purchasing land positions where it makes strategic and economic sense to do so, the opportunity to purchase developed lots in premium locations has become more limited and competitive in many of our markets. We also continue to evaluate each of our existing land parcels to determine whether the strategy and economics support holding the parcel or disposing of it. We have closely evaluated and made significant reductions in employee headcount and overhead expenses since the beginning of the industry downturn, including a further consolidation of our field organization and select corporate functions during 2011. Due to the persistence of these difficult market conditions, maintaining an efficient overhead structure will continue to be a significant area of focus. We are also adjusting the content in our homes to provide our customers more affordable alternatives and are building homes with smaller floor plans in certain of our communities.

Our outlook is cautious for 2012 as the timing of a sustainable recovery in the homebuilding industry remains uncertain. 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, 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. In the short-term, we expect that market conditions will remain challenging, and our visibility as to future earnings performance is limited. Our evaluations for land-related charges recorded to date were based on our best estimates of the future cash flows for our communities. If conditions in the homebuilding industry or our local markets worsen in the future, if the current difficult market conditions extend beyond our expectations, or if our strategy related to certain communities changes, we may be required to evaluate our assets for further impairments or write-downs, which could result in future charges that might be significant.

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

	Years Ended December 31,
	2011				2010				2009
Income (loss) before income taxes:
Homebuilding*	$	(275,830	)		$	(1,240,155	)		$	(1,920,081	)
Financial Services	(34,470		)		5,609				(55,038		)
Income (loss) from continuing operations before income taxes	(310,300		)		(1,234,546		)		(1,975,119		)
Income tax expense (benefit)	(99,912		)		(137,817		)		(792,552		)
Net income (loss)	$	(210,388	)		$	(1,096,729	)		$	(1,182,567	)
Per share data - assuming dilution:
Net income (loss)	$	(0.55	)		$	(2.90	)		$	(3.94	)

*	Amounts previously classified as "non-operating" have been reclassified to "Homebuilding" (see to the Consolidated Financial Statements).

•	The losses experienced by Homebuilding in 2011, 2010, and 2009 resulted primarily from significant charges related to the following ($000's omitted):

	2011				2010				2009
Land-related charges (see Note 6)	$	35,786			$	216,352			$	973,289
Goodwill impairments (see Note 3)	240,541				656,298				562,990
Restructuring costs (see Note 4)	19,696				50,718				64,453
Merger-related costs (see Note 2)	1,730				4,133				72,079
Loss on debt retirements (see Note 8)	5,638				38,920				31,594
Insurance-related adjustments (see Note 15)	—				280,390				—
	$	303,391			$	1,246,811			$	1,704,405

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

Merger-related costs represent transaction and integration costs resulting directly from the Centex merger. In total, Homebuilding incurred $129.1 million of such costs in 2009. These costs consisted of $57.0 million of restructuring costs (primarily severance and lease exit costs) included in the above table within restructuring costs plus $72.1 million of investment banking and other professional fees, amortization of certain fair value adjustments, and certain other integration costs.

In addition to the above charges, Homebuilding continued to experience low volumes in 2009 through 2011. The revenue decline for the year ended December 31, 2011 was due in part to the impact of a federal homebuyer tax credit that existed during the first half of 2010 as well as lower average selling prices and fewer active communities in 2011. The lower revenue in 2011 and 2010 was partially offset by improved gross margins, reduced overhead costs, and lower impairment charges.

•

The Financial Services loss in 2011 compared to income in 2010 was due to lower volumes and increased loss reserves related to loans originated in previous years. Such loss reserves totaled $59.3 million in 2011, compared with $16.9 million in 2010 (see Note 15 to the Consolidated Financial Statements). Financial Services income in 2010 was improved from 2009 primarily due to reduced loan loss reserves, which totaled $60.9 million in 2009. The Financial Services loss in 2009 also included certain integration costs directly related to the Centex merger totaling $8.4 million, which consisted primarily of severance benefits and lease exit and related asset impairment costs.

•	The income tax benefits in 2011 and 2010 were attributable primarily to the favorable resolution of certain federal and state income tax matters. The income tax benefit in 2009 reflected the impact of the Worker, Homeownership, and Business Assistance Act of 2009, which allowed us to carry back 2009 taxable losses to prior years and receive refunds of previously paid federal income taxes.

Homebuilding Operations

The following is a summary of income (loss) before income taxes for our Homebuilding operations ($000’s omitted):

	Years Ended December 31,
	2011				FY 2011 vs. FY 2010			2010				FY 2010 vs. FY 2009			2009
Home sale revenues	$	3,950,743			(11	)%		$	4,419,812			14	%		$	3,869,297
Land sale revenues	82,853				198	%		27,815				(71	)%		97,292
Total Homebuilding revenues	4,033,596				(9	)%		4,447,627				12	%		3,966,589
Home sale cost of revenues (a)	3,444,398				(14	)%		4,006,385				(6	)%		4,274,474
Land sale cost of revenues (b)	59,279				11	%		53,555				(75	)%		211,170
Selling, general and administrative expenses ("SG&A") (c)	519,583				(42	)%		895,102				33	%		672,434
Equity in (earnings) loss of unconsolidated entities (d)	(3,194		)		12	%		(2,843		)		(106	)%		49,668
Other expense (income), net (e)	293,102				(61	)%		742,385				8	%		685,829
Interest income, net	(3,742		)		(45	)%		(6,802		)		(1	)%		(6,905		)
Income (loss) before income taxes	$	(275,830	)		(78	)%		$	(1,240,155	)		(35	)%		$	(1,920,081	)
Supplemental data:
Gross margin from home sales	12.8		%		340 bps			9.4		%		1,990 bps			(10.5		)%
SG&A as a percentage of home sale revenues	13.2		%		(710) bps			20.3		%		290 bps			17.4		%
Closings (units)	15,275				(11	)%		17,095				14	%		15,013
Average selling price	$	259			0	%		$	259			0	%		$	258
Net new orders:
Units	15,215				0	%		15,148				7	%		14,185
Dollars (f)	$	3,953,829			1	%		$	3,898,950			(19	)%		$	4,816,057
Cancellation rate	19		%					19		%					23		%
Active communities at December 31	700				(11	)%		786				(11	)%		882
Backlog at December 31:
Units	3,924				(2	)%		3,984				(33	)%		5,931
Dollars	$	1,059,649			0	%		$	1,056,563			(33	)%		$	1,577,424

(a)	Includes the amortization of capitalized interest. Home sale cost of revenues also includes land and community valuation adjustments of $15.9 million, $169.7 million, and $751.2 million for 2011, 2010, and 2009, respectively.

(b)	Includes net realizable value adjustments for land held for sale of $9.8 million, $39.1 million, and $113.7 million for 2011, 2010, and 2009, 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 and $54.1 million in 2010 and 2009, respectively.

(e)

Includes goodwill impairment charges of $240.5 million, $656.3 million, and $563.0 million in 2011, 2010, and 2009, respectively. Also includes the write-off of deposits and pre-acquisition costs for land option contracts we elected not to pursue of $10.0 million, $5.6 million, and $54.3 million in 2011, 2010, and 2009, respectively, and net losses related to the redemption of debt totaling $5.6 million, $38.9 million, and $31.6 million in 2011, 2010, and 2009, 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.

Centex merger

As indicated above, the Centex merger had a significant impact on our post-acquisition operating results. Centex was consolidated for the full year in our 2011 and 2010 operating results, however, if not for the impact of the Centex merger, our revenues, closings, and net new orders in 2010 would have experienced significant decreases from 2009. Our reported home sale revenues, closings, and net new orders for 2010 as reflected in the above tables represent decreases of 19%, 22%, and 28%, respectively, from the combined operating results of the two companies from 2009. However, these lower volumes were offset by lower land-related charges, improved gross margins and operating leverage, and our elimination of the substantial majority of duplicative overhead costs from the combined companies. Excluding the impact of the goodwill impairments and insurance-related losses recorded in 2010 and 2009, our Homebuilding income (loss) before income taxes in 2010 was significantly improved from the losses reported by either company or the combined companies in 2009. This illustrates the impact of the various actions we took to restructure our combined homebuilding operations into a more efficient organization as well as a somewhat more stable environment for the homebuilding industry, albeit at lower industry volumes.

Home sale revenues

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 for orders under contract by April 30 and closed by September 30. 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 revenues for 2010 were higher than 2009 by $550.5 million, or 14%. The increase in home sale revenues in 2010 over 2009 was attributable to a 14% increase in closings as average selling prices remained stable from 2009 to 2010. As discussed above under Centex merger, the increase in revenues in 2010 resulted from the Centex merger, which contributed $1.9 billion in 2010 compared to $1.1 billion in 2009. The federal homebuyer tax credit described above also contributed to increased revenues in the first half of 2010, which were partially offset by lower revenues in the second half of 2010.

Home sale gross margins

Home sale gross margins were 12.8% in 2011, compared with 9.4% in 2010 and (10.5)% in 2009. Gross margins during 2011 benefited from lower land and community valuation adjustments of $15.9 million, compared with $169.7 million and $751.2 million in 2010 and 2009, respectively. The benefit of these lower charges was partially offset by increased amortization of capitalized interest due to debt assumed with the Centex merger.

Gross margins were also adversely impacted in 2009 by a fair value adjustment related to homes under construction inventory acquired in the Centex merger. We recognized this fair value adjustment as an increase of $31.1 million to home sale cost of revenues as the related homes closed. The amortization of this adjustment was not significant in 2011 or 2010. Excluding the impact of land and community valuation adjustments, amortization of capitalized interest, and merger-related costs, adjusted home sale gross margins improved to 17.9% in 2011 from 16.7% in 2010 and 12.3% in 2009 (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 and geographic mix of homes closed, better alignment of our product offering with current market conditions, and a shift in our sales strategy toward more “pre-selling” of homes.

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 $23.6 million, $(25.7) million, and $(113.9) million in 2011, 2010, and 2009, respectively. These margin contributions included net realizable value adjustments related to land held for sale totaling $9.8 million, $39.1 million, and $113.7 million in 2011, 2010, and 2009, respectively.

SG&A

In order to further reduce overhead costs and drive greater leverage, we reconfigured our organization during the fourth quarter of 2010 and again in the second quarter of 2011, consolidating certain local divisions. Along with these changes in our field operations, we also further reduced corporate and support staffing across a number of functions to further consolidate and streamline our operating processes. These actions were a continuation of a series of actions we have taken over the last several years to better align our overhead structure with expected volumes.

The gross dollar amount of our SG&A decreased $375.5 million, or 42%, in 2011 compared to 2010. SG&A, as a percentage of home sale revenues, was 13.2% in 2011, compared with 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 15 to the Consolidated Financial Statements for additional discussion of insurance reserve adjustments). SG&A as a percentage of home sales revenues excluding these insurance reserve adjustments 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). Excluding the insurance reserve adjustments from 2010, our SG&A declined significantly in gross dollars in 2011 and resulted in an improvement in overhead leverage. 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.

The gross dollar amount of our SG&A increased $222.7 million, or 33%, in 2010 compared to 2009. SG&A, as a percentage of home sale revenues, was 20.3% in 2010, compared with 17.4% in 2009. The increase in 2010 compared to 2009 was the result of the insurance reserve adjustments taken in 2010 noted above. SG&A as a percentage of home sales revenues excluding these insurance reserve adjustments was 13.9% and 17.4% in 2010 and 2009, respectively. This decrease resulted primarily from lower severance costs and the elimination of certain overhead costs directly related to the Centex merger that impacted 2009. In 2010, SG&A included severance costs of $22.3 million. During 2009, SG&A included transaction and integration costs related to the Centex merger, including severance costs, totaling $70.5 million, as well as certain duplicative corporate and divisional overhead costs during the transition period following the merger.

Equity in (earnings) loss of unconsolidated entities

Equity in (earnings) loss of unconsolidated entities was $(3.2) million, $(2.8) million, and $49.7 million, for 2011, 2010, and 2009, respectively. The primary cause for this change in results is the lower levels of impairments related to these entities recorded during 2011 and 2010 as compared to 2009. There were no impairments of investments in unconsolidated joint ventures in 2011, while impairments totaled $1.9 million and $54.1 million in 2010 and 2009, 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):

	2011				2010				2009
Write-offs of deposits and pre-acquisition costs (Note 5)	$	10,002			$	5,594			$	54,256
Loss on debt retirements (Note 8)	5,638				38,920				31,594
Lease exit and related costs (Note 4)	9,900				28,378				24,803
Amortization of intangible assets (Note 1)	13,100				13,100				14,008
Goodwill impairments (Note 3)	240,541				656,298				562,990
Miscellaneous expense (income), net	13,921				95				(1,822		)
	$	293,102			$	742,385			$	685,829

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

Interest income, net

The decrease in interest income, net in 2011 compared with 2010 resulted from lower invested cash balances that resulted primarily from the significant debt retirements we completed in 2011 and 2010. The slight decrease in interest income, net in 2010 compared with 2009 resulted from higher invested cash balances offset by lower interest rates. Additionally, $1.5 million of Homebuilding interest costs were expensed directly to interest expense in 2010 because our debt balance exceeded the amount of active inventory for certain periods and thus was not capitalized into inventory.

Net new orders

Net new order levels were essentially flat for 2011 compared with 2010. Net new orders reflect 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 (canceled orders for the period divided by gross new orders for the period) for 2011 was unchanged from 2010 at 19%. Ending backlog, which represents orders for homes that have not yet closed, was essentially flat at December 31, 2011 compared with December 31, 2010, consistent with the overall new order levels.

For 2010, net new orders increased 7% compared with 2009 primarily due to incremental orders resulting from the Centex merger and the positive impact of the federal homebuyer tax credit in the first half of 2010, partially offset in the latter half of 2010 by a lower average sales pace per community. Excluding Centex, net new order units decreased moderately during 2010 due to the uncertainty in the overall U.S. housing industry. Cancellation rates were slightly lower in 2010 at 19%, compared to 23% in 2009. At December 31, 2010, we had 786 active selling communities, a decrease of 11% from December 31, 2009. Ending backlog at December 31, 2010 declined 33% from December 31, 2009 as the result of the lower community count and the impact of the federal homebuyer tax credit, which pulled forward demand into the first half of 2010.

Homes in production

The following is a summary of our homes in production at December 31, 2011 and 2010:

		2011			2010
Sold		2,640			2,790
Unsold
Under construction		1,381			1,638
Completed		1,481			1,856
		2,862			3,494
Models		1,278			1,452
Total		6,780			7,736

Included in our total homes in production were 2,862 and 3,494 homes that were unsold to customers (“spec homes”) at December 31, 2011 and 2010, respectively, of which 1,481 and 1,856 homes, respectively, were completed (“final specs”). The reduction in homes in production at December 31, 2011 compared to 2010 resulted primarily from our lower community count combined with a conscious effort to reduce the number of spec homes, especially final specs.

Controlled lots

The following is a summary of our lots under control at December 31, 2011 and 2010:

		December 31, 2011									December 31, 2010
		Owned			Optioned			Controlled			Owned			Optioned			Controlled
Northeast		10,540			2,121			12,661			11,582			2,567			14,149
Southeast		15,016			3,215			18,231			15,691			3,981			19,672
Florida		26,444			2,136			28,580			30,855			1,922			32,777
Texas		14,759			4,231			18,990			16,748			4,258			21,006
North		15,084			1,676			16,760			16,804			1,954			18,758
Southwest		35,090			698			35,788			40,284			548			40,832
Total		116,933			14,077			131,010			131,964			15,230			147,194
Developed (%)		28	%		38	%		29	%		30	%		39	%		31	%

Of our controlled lots, 116,933 and 131,964 were owned and 10,060 and 10,082 were under option agreements approved for purchase at December 31, 2011 and 2010, respectively. In addition, there were 4,017 and 5,148 lots under option agreements pending approval at December 31, 2011 and 2010, respectively. While we are purchasing 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, 2011.

The remaining purchase price related to land under option for use by our Homebuilding operations at future dates approximated $698.0 million at December 31, 2011. These land option agreements, which may be canceled at our discretion, and may extend over several years, are secured by deposits and pre-acquisition costs totaling $57.0 million, of which only $4.6 million is refundable. This balance excludes contingent payment obligations which may or may not become actual obligations to us.

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,
	2011				2010				2009
Home sale revenues	$	3,950,743			$	4,419,812			$	3,869,297
Home sale cost of revenues	3,444,398				4,006,385				4,274,474
Home sale gross margin	506,345				413,427				(405,177		)
Add:
Land and community valuation adjustments (a)	$	10,498			$	141,592			$	683,014
Capitalized interest amortization (a)	189,382				180,918				165,355
Merger-related costs (b)	1,730				4,133				31,147
Adjusted home sale gross margin	$	707,955			$	740,070			$	474,339
Home sale gross margin as a percentage of home sale revenues	12.8		%		9.4		%		(10.5		)%
Adjusted home sale gross margin as a percentage of home sale revenues	17.9		%		16.7		%		12.3		%

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

(b)	Home sale gross margin was adversely impacted by the amortization of a fair value adjustment to homes under construction inventory acquired with the Centex merger. This fair value adjustment is being amortized as an increase to home sale cost of revenues over the related home closings.

SG&A
	Years Ended December 31,
	2011				2010				2009
Home sale revenues	$	3,950,743			$	4,419,812			$	3,869,297
SG&A	$	519,583			$	895,102			$	672,434
Less: Insurance reserve adjustments (a)	—				280,390				—
SG&A excluding insurance reserve adjustments	$	519,583			$	614,712			$	672,434
SG&A as a percentage of home sale revenues	13.2		%		20.3		%		17.4		%
SG&A excluding insurance reserve adjustments as a percentage of home sale revenues	13.2		%		13.9		%		17.4		%

(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, 2011, we conducted our operations in 61 markets located throughout 29 states. During 2011, we realigned our organizational structure and reportable segment presentation. Accordingly, the segment information provided herein has been reclassified to conform to the current presentation for all periods presented.

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, Hawaii, Nevada, New Mexico, Southern California

As part of the change in presentation, we removed the "Other non-operating" distinction. Amounts previously classified within "Other non-operating" have been reclassified to "Other homebuilding."

We also have one 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,
	2011				FY 2011 vs. FY 2010			2010				FY 2010 vs. FY 2009			2009
Home sale revenues:
Northeast	$	714,609			(5	)%		$	754,280			18	%		$	640,595
Southeast	675,124				(10	)%		752,509				34	%		561,187
Florida	557,865				3	%		539,996				22	%		444,161
Texas	615,319				(4	)%		638,424				34	%		476,799
North	727,085				(16	)%		861,559				13	%		763,851
Southwest	660,741				(24	)%		873,044				(11	)%		982,704
	$	3,950,743			(11	)%		$	4,419,812			14	%		$	3,869,297
Income (loss) before income taxes:
Northeast	$	29,320			(15	)%		$	34,619			117	%		$	(207,461	)
Southeast	45,060				92	%		23,454				144	%		(52,930		)
Florida	44,946				186	%		(51,995		)		82	%		(283,242		)
Texas	33,329				108	%		16,026				126	%		7,078
North	(12,376		)		(2,267	)%		571				100	%		(120,998		)
Southwest	36,647				157	%		(64,140		)		82	%		(356,643		)
Other homebuilding (a)	(452,756		)		62	%		(1,198,690		)		(32	)%		(905,885		)
	$	(275,830	)		78	%		$	(1,240,155	)		35	%		$	(1,920,081	)
Closings (units):
Northeast	1,880				(10	)%		2,083				19	%		1,748
Southeast	2,771				(10	)%		3,095				35	%		2,296
Florida	2,251				1	%		2,224				13	%		1,962
Texas	3,327				(7	)%		3,563				36	%		2,616
North	2,579				(16	)%		3,055				12	%		2,733
Southwest	2,467				(20	)%		3,075				(16	)%		3,658
	15,275				(11	)%		$	17,095			14	%		15,013
Average selling price:
Northeast	$	380			5	%		$	362			(1	)%		$	366
Southeast	244				0	%		243				0	%		244
Florida	248				2	%		243				8	%		226
Texas	185				3	%		179				(2	)%		182
North	282				0	%		282				1	%		279
Southwest	268				(6	)%		284				6	%		269
	$	259			0	%		$	259			0	%		$	258

(a)	Other homebuilding includes the amortization of intangible assets, goodwill impairment, amortization of capitalized interest, net losses related to the redemption of debt, and other costs not allocated to the operating segments.

The following tables present additional selected financial information for our reportable Homebuilding segments:

		Operating Data by Segment ($000's omitted)
		Years Ended December 31,
		2011				FY 2011 vs. FY 2010			2010				FY 2010 vs. FY 2009			2009
Net new orders - units:
Northeast		1,749				6	%		1,650				(5	)%		1,731
Southeast		2,642				(4	)%		2,747				20	%		2,297
Florida		2,314				13	%		2,046				11	%		1,850
Texas		3,278				5	%		3,129				35	%		2,322
North		2,635				(3	)%		2,716				14	%		2,392
Southwest		2,597				(9	)%		2,860				(20	)%		3,593
		15,215				0	%		15,148				7	%		14,185
Net new orders - dollars:
Northeast		$	674,134			9	%		$	617,899			(32	)%		$	904,103
Southeast		645,993				(3	)%		662,650				(10	)%		735,174
Florida		581,778				18	%		494,587				(6	)%		523,798
Texas		606,239				6	%		570,860				(13	)%		658,255
North		748,089				(1	)%		757,639				(18	)%		924,600
Southwest		697,596				(12	)%		795,315				(26	)%		1,070,127
		$	3,953,829			1	%		$	3,898,950			(19	)%		$	4,816,057
Cancellation rates:
Northeast		14		%					16		%					17		%
Southeast		16		%					16		%					21		%
Florida		13		%					11		%					21		%
Texas		28		%					29		%					28		%
North		17		%					17		%					22		%
Southwest		19		%					18		%					24		%
		19		%					19		%					23		%
Unit backlog:
Northeast		425				(24	)%		556				(44	)%		989
Southeast		602				(18	)%		731				(32	)%		1,079
Florida		658				11	%		595				(23	)%		773
Texas		825				(6	)%		874				(33	)%		1,308
North		709				9	%		653				(34	)%		992
Southwest		705				23	%		575				(27	)%		790
		3,924				(2	)%		3,984				(33	)%		5,931
Backlog dollars:
Northeast		$	178,934			(18	)%		$	219,409			(38	)%		$	355,789
Southeast		154,533				(16	)%		183,664				(33	)%		273,523
Florida		174,039				16	%		150,126				(23	)%		195,534
Texas		153,927				(6	)%		163,007				(29	)%		230,571
North		207,507				11	%		186,503				(36	)%		290,424
Southwest		190,709				24	%		153,854				(34	)%		231,583
		$	1,059,649			0	%		$	1,056,563			(33	)%		$	1,577,424

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

		Operating Data by Segment ($000's omitted)
		Years Ended December 31,
		2011				FY 2011 vs. FY 2010			2010				FY 2010 vs. FY 2009			2009
Land-related charges*:
Northeast		$	4,958			17	%		$	4,235			(98	)%		$	201,864
Southeast		2,429				(83	)%		14,141				(74	)%		54,205
Florida		3,999				(93	)%		56,833				(77	)%		250,250
Texas		828				(88	)%		6,814				(38	)%		11,032
North		14,867				(47	)%		28,076				(71	)%		97,330
Southwest		3,263				(96	)%		78,123				(73	)%		287,988
Other homebuilding		5,442				(81	)%		28,130				(60	)%		70,620
		$	35,786			(83	)%		$	216,352			(78	)%		$	973,289

*	Land-related charges include land and community valuation adjustments, net realizable value adjustments for land held for sale, write-offs of deposits and pre-acquisition costs for land option contracts we elected not to pursue, and impairments of our investments in unconsolidated entities. See Notes 5 and 6 to the Consolidated Financial Statements for additional discussion of these charges.

Northeast:

For 2011, Northeast home sale revenues decreased 5% compared with 2010 due to a 10% decrease in closings offset in part by a 5% increase in the average selling price. The reduction in closing volumes was primarily due to fewer closings in our Mid-Atlantic division, in part due to a lower active community count. The decreased income before income taxes was primarily due to expense of $21.9 million in 2011 related to the write-down of a note receivable and the unfavorable resolution of certain contingencies. Such expense was partially offset by improved gross margin compared to the prior year. Land-related charges were comparable between periods, totaling $5.0 million in 2011, compared with $4.2 million in 2010. Net new order units increased 6% in 2011, led by our operations in the Northeast Corridor and Mid-Atlantic.

For 2010, Northeast home sale revenues increased 18% compared with 2009 due to a 19% increase in closings offset slightly by a 1% decrease in the average selling price. The majority of the increase in volumes resulted from increased sales in our Mid-Atlantic division. Excluding Centex, home sale revenues and closings decreased moderately, while average selling price increased slightly compared with 2009. The income before income taxes was primarily attributable to higher revenues, increased gross margin, improved overhead leverage compared with 2009, and a decrease in land-related charges to $4.2 million in 2010, compared with $201.9 million in 2009. Net new orders decreased 5% compared with 2009 due to decreased activity in our Northeast Corridor division. Excluding Centex, net new orders decreased moderately compared with 2009.

Southeast:

For 2011, Southeast home sale revenues decreased 10% compared with 2010 due to a 10% decrease in closings as there was no change in the average selling price. The reduction in closing volumes was primarily due to fewer closings in our Georgia division as well as a lower active community count across all divisions. Gross margin improved compared with the prior year period. The increased income before income taxes was also due to lower land-related charges, which totaled $2.4 million in 2011, compared with $14.1 million in 2010. Net new order units decreased 4% in 2011, due in part to decreased activity in our Tennessee division.

For 2010, Southeast home sale revenues increased 34% compared with 2009 due to a 35% increase in closings as there was no change in the average selling price. The increase in closing volumes was largely due to significant increases in our sales volumes in our Coastal Carolinas and Tennessee divisions due to the Centex merger. Excluding Centex, home sale revenues and average selling price increased slightly compared with 2009 and there was no change in closings. The income before income taxes was primarily attributable to higher revenues, increased gross margin, improved overhead leverage compared with 2009, and a decrease in land-related charges to $14.1 million in 2010, from $54.2 million in 2009. New orders increased 20% compared with 2009 largely due to the Centex merger. Excluding Centex, net new orders decreased moderately compared with 2009.

Florida:

For 2011, Florida home sale revenues increased 3% compared with 2010 due to a 1% increase in closings combined with a 2% increase in the average selling price. The majority of this improvement was due to increased closing volumes in North Florida. The income before income taxes in 2011 was attributable to improved gross margins and significantly lower land-related charges than in 2010. Land-related charges were $4.0 million in 2011, compared with $56.8 million in 2010. Net new order units increased by 13% in 2011, in part due to grand openings or grand re-openings at several large communities.

For 2010, Florida home sale revenues increased 22% compared with 2009 due to a 13% increase in closings combined with a 8% increase in the average selling price. The majority of this improvement was due to our South Florida market as our North Florida market experienced a significant reduction in revenues. Excluding Centex, home sale revenues decreased slightly, closings decreased moderately, and average selling price increased slightly compared with 2009. The significant decrease in loss before income taxes in 2010 was attributable to higher revenues and lower land-related charges, which totaled $56.8 million and $250.3 million in 2010 and 2009, respectively. Gross margins increased moderately compared with 2009. Net new orders increased by 11% compared with 2009 primarily due to increased activity in our South Florida market due to the Centex merger. Excluding Centex, net new orders for 2010 decreased moderately from 2009.

Texas:

For 2011, Texas home sale revenues decreased 4% compared with the prior year period due to a 7% decrease in closings partially offset by a 3% increase in the average selling price. The reduction in closing volumes was mainly due to Central Texas and San Antonio. The increased income before income taxes in 2011 was attributable to improved gross margins and lower land-related charges than in the prior year period. Land-related charges were $0.8 million in 2011, compared with $6.8 million in 2010. Net new order units increased by 5% for 2011, in part due to the grand opening of a large community in Houston.

For 2010, Texas home sale revenues increased 34% compared with 2009 due to a 36% increase in closings offset in part by a 2% decrease in the average selling price. Excluding Centex, home sale revenues and closings decreased slightly and average selling price increased slightly compared with 2009. The increased income before income taxes in 2010 was attributable to higher revenues and lower land-related charges, which totaled $6.8 million and $11.0 million in 2010 and 2009, respectively. Gross margins increased moderately compared with 2009. Net new orders increased by 35% compared with 2009, with the largest increases coming from our Houston and Dallas markets due to the Centex merger. Excluding Centex, net new orders for 2010 decreased moderately from 2009.

North:

For 2011, North home sale revenues decreased 16% compared with the prior year period due to a 16% decrease in closings as there was no change in average selling price. The decrease in closing volumes was due to significantly fewer closings in our Minnesota, St. Louis, and Northern California divisions. Gross margin decreased slightly. The loss before income taxes was primarily due to the reduced revenues, offset in part by reduced land-related charges. Land-related charges totaled $14.9 million in 2011, compared with $28.1 million in 2010. Net new order units decreased by 3% in 2011 compared with 2010, primarily in our Minnesota, St. Louis, and Northern California divisions. The sales volumes for our Northern California division reflect the impact of the state homebuyer tax credit that existed in California during 2010. The expiration of this tax credit exacerbated the already challenging local market conditions. These declines were partially offset by improvements in our other North divisions.

For 2010, North home sale revenues increased 13% compared with 2009 due to a 12% increase in closings combined with a 1% increase in the average selling price. The increase in closing volumes was due to increased sales in our Pacific Northwest and St. Louis divisions due to the Centex merger. Excluding Centex, home sale revenues and closings decreased slightly while average selling price increased slightly compared with 2009. In 2010, North recorded land-related charges totaling $28.1 million, compared to land-related charges of $97.3 million in 2009. Gross margins increased moderately compared with 2009. Net new orders increased by 14% compared with 2009 primarily due to increased activity in our Indianapolis, St. Louis, and Minnesota markets, largely due to the Centex merger. Excluding Centex, net new orders for 2010 decreased moderately compared to 2009.

Southwest:

For 2011, Southwest home sale revenues decreased 24% compared with the prior year period due to a 20% decrease in closings and a 6% decrease in average selling price. The decreases were due to weakness in each of our divisions combined with the close-out in late 2010 of our luxury condo community in Hawaii that had average selling prices in excess of $1 million. The increase in income before income taxes was primarily due to improved gross margins and the significant decrease in land-related charges. Land-related charges totaled $3.3 million in 2011, compared with $78.1 million in 2010. The Southwest also benefited from land sale gains totaling $15.5 million in 2011. Net new order units decreased by 9% in 2011 compared with 2010, due to the close-out of our community in Hawaii as well as reduced activity in our Las Vegas and Southern California markets. The sales volumes for our Southern California division reflect the impact of the state homebuyer tax credit that existed in California during 2010. The expiration of this tax credit exacerbated the already challenging local market conditions.

For 2010, Southwest home sale revenues decreased 11% compared with 2009 due to a 16% decrease in closings partially offset by a 6% increase in average selling price. The majority of the decline in volumes was due to our Las Vegas and Arizona markets. Excluding Centex, home sale revenues and closings decreased significantly while average sales price was unchanged compared with 2009. The decreased loss before income taxes in 2010 compared with 2009 was attributable primarily to lower land-related charges of $78.1 million in 2010 compared with $288.0 million in 2009 as well as moderately improved gross margins. Net new orders decreased by 20% in 2010 compared with 2009 primarily due to declines in Las Vegas and Arizona. Excluding Centex, net new orders for 2010 decreased significantly compared to 2009.

Financial Services Operations

We conduct our Financial Services operations, which include mortgage and title operations, through Pulte Mortgage and other subsidiaries. In originating mortgage loans, we initially use our own funds and funds available pursuant to a repurchase agreement with the Company. We subsequently sell such mortgage loans to outside investors. Substantially all of the loans we originate are sold in the secondary market within a short period of time after origination. We sell the servicing rights for the loans we originate on a flow basis through fixed price servicing sales contracts to reduce the risks and costs inherent in servicing loans. This strategy results in owning the servicing rights for only a short period of time. The servicing sales contracts provide for the reimbursement of payments made when loans prepay within specified periods of time, usually 90 to 120 days after sale.

The following table presents selected financial information for our Financial Services operations ($000’s omitted):

	Years Ended December 31,
	2011				FY 2011 vs. FY 2010			2010				FY 2010 vs. FY 2009			2009
Mortgage operations revenues	$	83,260			(12	)%		$	94,587			2	%		$	92,933
Title services revenues	19,834				(27	)%		27,076				9	%		24,867
Total Financial Services revenues	103,094				(15	)%		121,663				3	%		117,800
Expenses	137,666				19	%		116,122				(33	)%		172,854
Equity in (earnings) loss of unconsolidated entities	(102		)		50	%		(68		)		325	%		(16		)
Income (loss) before income taxes	$	(34,470	)		(715	)%		$	5,609			110	%		$	(55,038	)
Total originations:
Loans	9,482				(12	)%		10,770				0	%		10,737
Principal	$	1,986,225			(13	)%		$	2,273,394			0	%		$	2,276,390
Supplemental data:
Capture rate	78.5		%					77.5		%					85.3		%
Average FICO score	748							749							743
Loan application backlog	$	583,472			4	%		$	558,821			(36	)%		$	877,933
Agency production for funded originations	99		%					99		%					99		%
FHA agency production	30		%					38		%					40		%

Operating as a captive business model primarily targeted to supporting our Homebuilding operations, the operating results of our Financial Services operations are highly correlated to Homebuilding. Since 2007, the mortgage industry has experienced a significant overall tightening of lending standards and a shift toward agency production and fixed rate loans versus adjustable rate mortgages (“ARMs”). Our Homebuilding customers continue to account for substantially all loan production, representing 99% of loan originations for 2011, and 98% of loan originations for both 2010 and 2009.

Revenues

Total Financial Services revenues during 2011 decreased 15% compared to 2010, due in large part to a 12% decrease in loan origination volumes compared to 2010 resulting from lower Homebuilding volumes. Interest income, which is included in mortgage operations revenues, was moderately lower in 2011 than in 2010 due to lower interest rates on loans originated.

Financial Services revenues during 2010 increased 3% compared with 2009, primarily as a result of improved loan pricing in 2010 compared to 2009. Interest income was lower in 2010 than in 2009 due to a combination of lower interest rates and selling loans faster in 2010.

The substantial majority of loan production in 2011, 2010, and 2009 consisted of fixed rate loans, the majority of which are prime, conforming loans. The shift toward agency fixed-rate loans has contributed to profitability as such loans generally result in higher profitability due to higher servicing values, less competition, and structured guidelines that allow for expense efficiencies when processing the loan. Additionally, the historically low interest rates of the last two years has contributed to profitability by reducing the level of pricing competition in the market. Our capture rate, which represents loan originations from our Homebuilding operations as a percentage of total loan opportunities from our Homebuilding operations, excluding cash closings, decreased in 2011 and 2010 from 2009.

Loan origination liabilities

Our mortgage operations may be responsible for losses associated with mortgage loans originated and sold to investors in the event of errors or omissions relating to representations and warranties that the loans sold meet certain requirements, including representations as to underwriting standards, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. If determined to be at fault, we either repurchase the loans from the investors or reimburse the investors' losses (a “make-whole” payment).

Historically, our overall losses relating to this risk were not significant Beginning in 2009, however, we experienced a significant increase in losses as a result of the high level of loan defaults and related losses in the mortgage industry and increasing aggressiveness by investors in presenting such claims to us. To date, the significant majority of these losses relates to loans originated in 2006 and 2007, during which period inherently riskier loan products became more common in the mortgage origination market. During 2011, 2010, and 2009, we recorded additional provisions for losses as a change in estimate primarily to reflect projected claim volumes in excess of previous estimates. Losses related to loan origination liabilities totaled $59.3 million, $16.9 million, and $60.9 million in 2011, 2010, and 2009, respectively, and are reflected in Financial Services expenses. Given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, it is reasonably possible that future losses may exceed our current estimates. See our Critical Accounting Policies and Estimates and Note 15 to the Consolidated Financial Statements for additional discussion.

We entered into an agreement in conjunction with the wind down of Centex's mortgage operations, which ceased loan origination activities in December 2009, that provides a guaranty for one major investor of loans originated by Centex. This guaranty provides that we will honor the potential repurchase obligations of Centex's mortgage operations related to breaches of representations and warranties in the origination of a certain pool of loans. Other than with respect to this pool of loans, our contractual repurchase obligations are limited to our mortgage subsidiaries, which are included in non-guarantor subsidiaries (see Note 16 for a discussion of non-guarantor subsidiaries).

The mortgage subsidiary of Centex also sold loans to a bank for inclusion in residential mortgage-backed securities (“RMBSs”) issued by the bank. In connection with these sales, Centex's mortgage subsidiary entered into agreements pursuant to which it may be required to indemnify the bank for losses incurred by investors in the RMBSs arising out of material errors or omissions in certain information provided by the mortgage subsidiary relating to the loans and loan origination process. The bank has notified us that it has been named defendant in two lawsuits alleging various violations of federal and state securities laws asserting that untrue statements of material fact were included in the registration statements used to market the sale of two RMBS transactions which included $162 million of loans originated by Centex's mortgage subsidiary. Neither Centex's mortgage subsidiary nor the Company is named as a defendant in these actions. These actions are in their preliminary stage, and we cannot yet quantify Centex's mortgage subsidiary's potential liability as a result of these indemnification obligations. We do not believe, however, that these matters will have a material adverse impact on the results of operations, financial position, or

cash flows of the Company. We are aware of six other RMBS transactions with such indemnity provisions that include an aggregate $116 million of loans, and we are not aware of any current or threatened legal proceedings regarding those transactions.

Income before income taxes

The loss before income taxes in 2011 was due to increased loss reserves related to contingent loan origination liabilities (see Loan origination liabilities above). In addition, loan loss provisions related to our portfolio loans, real estate owned, and mortgage reinsurance reserves totaled $1.7 million and $1.2 million in 2011 and 2010, respectively. Excluding these aggregate losses, our Financial Services segment experienced higher profitability during 2011, primarily as the result of improved loan pricing.

Income before income taxes increased significantly in 2010 compared with 2009 primarily due to lower expenses related to contingent loan origination liabilities (see Loan origination liabilities above). In addition, loan loss provisions related to our portfolio loans, real estate owned, and mortgage reinsurance reserves totaled $1.2 million and $9.8 million in 2010 and 2009, respectively. The 2009 loss before income taxes also included certain integration costs directly related to the Centex merger totaling $8.4 million, which consisted primarily of severance benefits and lease exit and related asset impairment costs.

Income Taxes

Our effective tax rate is affected by a number of factors, the most significant of which are the valuation allowance recorded against our deferred tax assets and changes in our unrecognized tax benefits. Our effective tax rates were a benefit of 32.2%, 11.2%, and 40.1% in 2011, 2010, and 2009, respectively. Due to the effect of our valuation allowance and changes in our unrecognized tax benefits, our effective tax rates for 2009 through 2011 are not correlated to the amount of our pretax loss.

The income tax benefits for 2011 and 2010 were primarily due to the favorable resolution of certain federal and state income tax matters. Our 2009 income tax benefit was primarily due to the impact of the Worker, Homeownership, and Business Assistance Act of 2009 (the “Act”). The Act allowed us to carry back 2009 taxable losses to prior years and receive refunds of previously paid federal income taxes.

Liquidity and Capital Resources

We finance our land acquisition, development, and construction activities and financial services operations by using internally-generated funds and existing credit arrangements. We routinely monitor current and expected operational requirements and financial market conditions to evaluate accessing other available financing sources, including revolving bank credit and securities offerings. Based on our current financial condition and credit relationships, we believe that our operations and borrowing resources are sufficient to provide for our current and foreseeable capital requirements. However, we continue to evaluate the impact of market conditions on our liquidity and may determine that modifications are appropriate if market conditions deteriorate or if the current difficult market conditions extend beyond our expectations.

At December 31, 2011, we had cash and equivalents of $1.1 billion and senior notes of $3.1 billion. We also had restricted cash balances of $101.9 million, the substantial majority of which related to cash serving as collateral under certain letter of credit facilities. Other financing sources include various letter of credit facilities and surety bond arrangements. In recent years, an additional source of liquidity has been refunds of federal income taxes paid in prior years, especially in 2010 as a result of the Worker, Homeownership, and Business Assistance Act of 2009.

We follow a diversified investment approach for our cash and equivalents by maintaining such funds with a diversified portfolio of banks within our group of relationship banks in high quality, highly liquid, short-term investments, generally money market funds and federal government or agency securities. We monitor our investments with each bank and do not believe our cash and equivalents are exposed to any material risk of loss. However, there can be no assurances that losses of principal balance on our cash and equivalents will not occur.

Our ratio of debt to total capitalization was 61.4% at December 31, 2011, and 49.5% net of cash and equivalents, including restricted cash. While these debt-to-capital ratios remain above our desired targets, they are not likely to improve significantly until we return to consistent profitability.

Credit agreements

We maintain an unsecured letter of credit facility expiring in June 2014 that permits the issuance of up to $200.0 million of letters of credit. At December 31, 2011, $152.7 million of letters of credit were outstanding under this facility.

On March 25, 2011, we voluntarily terminated our $250.0 million unsecured revolving credit facility (the “Credit Facility”). The termination was effective March 30, 2011. The Credit Facility was scheduled to expire in June 2012, and we did not pay any penalties as a result of the early termination, although we did record a charge of $1.3 million related to unamortized issuance costs. The Credit Facility had no outstanding borrowings and was being used solely to issue letters of credit. We determined it would be more cost effective to enter into separate cash-collateralized letter of credit agreements than to maintain the Credit Facility. The termination of the Credit Facility released $250.0 million of cash that we were required by the Credit Facility to maintain in liquidity reserve accounts.

In connection with the termination of the Credit Facility, we entered into separate cash-collateralized letter of credit agreements with a number of financial institutions. These agreements provide capacity to issue letters of credit totaling up to $191.2 million, the majority of which is uncommitted. Letters of credit totaling $83.2 million were outstanding under these agreements at December 31, 2011. Under these agreements, we are required to maintain deposits with these financial institutions in amounts approximating the letters of credit outstanding. Such deposits are included in restricted cash.

Pulte Mortgage

Pulte Mortgage provides mortgage financing for the majority of our home closings by using its own funds and funds available pursuant to a repurchase agreement with the Company. Pulte Mortgage uses these resources to finance its lending activities until the mortgage loans are sold to third party investors, which generally occurs within 30 days. Given our liquidity position and the cost of third party financing relative to existing mortgage rates, Pulte Mortgage allowed each of its third party borrowing arrangements to expire during 2010 and began funding its operations using Company resources. At December 31, 2011, we funded $127.3 million of Pulte Mortgage's financing needs via the repurchase agreement with the Company.

Stock repurchase programs

Pursuant to the two $100 million stock repurchase programs authorized by our Board of Directors in October 2002 and October 2005, and the $200 million stock repurchase authorization in February 2006 (for a total stock repurchase authorization of $400 million), we have repurchased a total of 9,688,900 shares for a total of $297.7 million. There have been no repurchases under these programs since 2006. We had remaining authorization to purchase common stock aggregating $102.3 million at December 31, 2011.

Dividends

On November 24, 2008, our Board of Directors discontinued the regular quarterly dividend on the Company's common stock effective in the first quarter of 2009. Future dividends will depend upon a variety of factors considered relevant by the Board of Directors, including our earnings, capital requirements, financial condition, market conditions, and other factors.

Cash flows

In the years 2009 and 2010, we generated significant positive cash flow through refunds of income taxes paid in prior year combined with cash acquired in the Centex merger and limiting the level of reinvestment into inventory. We used this positive cash flow to, among other things, maintain significant cash reserves as well as retire outstanding debt. Over the last three years, we have retired $3.2 billion of debt, including debt assumed in the Centex merger (see Note 8 to the Consolidated Financial Statements for additional details regarding these retirements). Additionally, we used $26.6 million and $111.2 million in 2011 and 2010, respectively, to repurchase at a discount prior to their maturity certain community development district obligations in order to improve the future financial performance of the related communities (see Note 15 to the Consolidated Financial Statements) and also voluntarily used Company funds to finance Pulte Mortgage’s lending operations.

We do not anticipate that we will be able to generate positive cash flow in the near future at the same levels as in 2009 and 2010. During 2011, we generated positive operating cash flow. However, should growth conditions return to the homebuilding industry, we may need to invest significant capital into our operations to support such growth.

Operating activities

Our net cash provided by operating activities in 2011 was $17.2 million, compared with net cash provided by operating activities of $590.9 million and $729.4 million in 2010 and 2009, respectively. Generally, the primary drivers of cash flow from operations are profitability and inventory levels. The net losses for 2011, 2010, and 2009 were largely the result of non-cash asset impairments and insurance reserve adjustments, so the cash flows from operations each period primarily relate to changes in working capital. Our positive cash flow from operations in 2011 was primarily the result of a net decrease in inventories combined with income tax refunds, net of payments, of $62.2 million offset by financing Pulte Mortgage's lending operations, which reduced cash flows from operations by $52.8 million in 2011.

Our positive cash flow from operations for 2010 was primarily the result of income tax refunds, net of payments, of $941.3 million. After adjusting for these tax refunds, operating cash flow was negative for 2010. Cash flows from operations in 2010 were negatively impacted by the voluntary repurchase of certain community development district obligations for $111.2 million (see above) and using $74.5 million to finance Pulte Mortgage's lending operations. During 2010, inventory levels and residential mortgage loans available-for-sale decreased slightly. Operating cash flows in 2009 benefited from a significant net decrease in inventory and residential mortgage loans available-for-sale, along with income tax refunds, net of payments, of $357.2 million.

Because we used Company resources to finance Pulte Mortgage's operations during 2011, the majority of cash flows related to Pulte Mortgage are now included in cash flows from operating activities, represented primarily by changes in the balance of residential mortgage loans available-for-sale. Previously, including in 2009, changes in the balance of residential mortgage loans available-for-sale were largely offset by changes in borrowings under Pulte Mortgage's credit arrangements, which were included in cash flows from financing activities.

Investing activities

Net cash used in investing activities was $93.6 million in 2011, compared with net cash used in investing activities of $19.5 million in 2010 and net cash provided by investing activities of $1.7 billion in 2009. The increase from 2010 to 2011 is primarily due to the $83.2 million of restricted cash we are now required to maintain related to our new letter of credit facilities, offset in part by increased proceeds from the sale of fixed assets related to the consolidation of certain facilities and a decrease in contributions to unconsolidated entities. Our contributions to unconsolidated entities and investments in capital expenditures have declined in recent years as the result of the reduction in our overall land investments and consolidations of local operating facilities.

The net cash used in investing activities in 2010 was primarily the result of investments in unconsolidated entities and capital expenditures, partially offset by distributions from unconsolidated entities and a reduction in residential mortgage loans held for investment. Substantially all of the cash provided by investing activities in 2009 was the result of cash acquired in the Centex merger.

Financing activities

Net cash used in financing activities totaled $323.9 million, $948.4 million, and $2.2 billion in 2011, 2010, and 2009, respectively. Cash used in financing activities in 2011 related primarily to the use of $321.1 million to reduce outstanding senior notes, of which $13.9 million was at their scheduled maturity date while the remainder was prior to their scheduled maturity dates.

Net cash used in financing activities in 2010 was primarily the result of the repurchase of senior notes as well as repayments made under Financial Services credit arrangements. As discussed above, we are now using internal funds to finance Pulte Mortgage's operations, the effects of which are reflected in cash flows from operating activities.

The cash used in financing activities in 2009 was largely attributable to $1.9 billion used to retire outstanding debt combined with reductions in amounts outstanding under our Financial Services credit arrangements resulting from the reduction in mortgage loans available-for-sale.

Inflation

We, and the homebuilding industry in general, may be adversely affected during periods of high inflation because of higher land and construction costs. Inflation may also increase our financing costs. In addition, higher mortgage interest rates significantly affect the affordability of permanent mortgage financing to prospective homebuyers. While we attempt to pass on to our customers increases in our costs through increased sales prices, current industry conditions have resulted in significant pressure on sales prices in many of our markets. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, our revenues, gross margins, and net income would be adversely affected.

Seasonality

We experience variability in our quarterly results from operations due to the seasonal nature of the homebuilding industry. Historically, we have experienced significant increases in revenues and cash flow from operations during the fourth quarter based on the timing of home closings. However, the challenging market conditions experienced since early 2006 have lessened the seasonal variations of our results. During 2011, we experienced a return to a somewhat more traditional demand pattern as new orders were higher in the first half of the year and home closings increased in each quarter throughout the year. However, given the current significant uncertainty in the homebuilding industry, we can make no assurances as to when and to what degree our historical seasonality will recur.

Contractual Obligations and Commercial Commitments

The following table summarizes our payments under contractual obligations as of December 31, 2011:

	Payments Due by Period ($000’s omitted)
	Total				2012				2013-2014				2015-2016				After 2016
Contractual obligations:
Long-term debt (a)	$	5,364,482			$	289,872			$	1,105,454			$	1,211,421			$	2,757,735
Operating lease obligations	144,949				32,590				51,990				35,838				24,531
Other long-term liabilities (b)	426				426				—				—				—
Total contractual obligations (c)	$	5,509,857			$	322,888			$	1,157,444			$	1,247,259			$	2,782,266

(a)	Represents principal and interest payments related to our senior notes.

(b)	Represents limited recourse collateralized financing arrangements and related interest payments.

(c)	We do not have any payments due in connection with capital lease or long-term purchase obligations.

We are subject to the usual obligations associated with entering into contracts (including land option contracts) for the purchase, development, and sale of real estate in the routine conduct of our business. Option contracts for the purchase of land enable us to defer acquiring portions of properties owned by third parties and unconsolidated entities until we have determined whether to exercise our option, which may serve to reduce our financial risks associated with long-term land holdings. At December 31, 2011, we had $52.5 million of non-refundable deposits and pre-acquisition costs relating to option agreements to acquire 14,077 homesites with a remaining purchase price of $698.0 million. We expect to acquire approximately half of these lots within the next two years and the remainder thereafter.

At December 31, 2011, we had $171.9 million of gross unrecognized tax benefits and $36.9 million of related accrued interest and penalties. We are currently under examination by various taxing jurisdictions and anticipate finalizing the examinations with certain jurisdictions within the next twelve months. However, the final outcome of these examinations is not yet determinable. The statute of limitations for our major tax jurisdictions remains open for examination for tax years 1998-2011.

The following table summarizes our other commercial commitments as of December 31, 2011:

	Amount of Commitment Expiration by Period ($000’s omitted)
	Total				2012				2013-2014				2015-2016				After 2016
Other commercial commitments:
Guarantor credit facilities (a)	$	283,199			$	83,199			$	200,000			$	—			$	—

(a)

The $200.0 million in 2014 represents the capacity of our unsecured letter of credit facility, of which $152.7 million was outstanding at December 31, 2011, while the $83.2 million in 2012 represents letters of credit outstanding under our cash-collateralized letter of credit agreements. The above table excludes an aggregate $1.2 billion of surety bonds, which typically do not have stated expiration dates.

Off-Balance Sheet Arrangements

We use letters of credit and surety bonds to guarantee our performance under various contracts, principally in connection with the development of our projects. The expiration dates of the letter of credit contracts coincide with the expected completion date of the related homebuilding projects. If the obligations related to a project are ongoing, annual extensions of the letters of credit are typically granted on a year-to-year basis. At December 31, 2011, we had outstanding letters of credit of $235.9 million. Surety bonds generally do not have stated expiration dates; rather, we are released from the bonds as the contractual performance is completed. These bonds, which approximated $1.2 billion at December 31, 2011, are typically outstanding over a period of approximately three to five years. Because significant construction and development work has been performed related to the applicable projects but has not yet received final acceptance by the respective counterparties, the aggregate amount of surety bonds outstanding is in excess of the projected cost of the remaining work to be performed.

In the ordinary course of business, we enter into land option agreements in order to procure land for the construction of houses in the future. At December 31, 2011, these agreements had an aggregate remaining purchase price of $698.0 million. Pursuant to these land option agreements, we provide a deposit to the seller as consideration for the right to purchase land at different times in the future, usually at predetermined prices. In certain instances, we are required to record the land under option as if we own it. At December 31, 2011, we consolidated certain land option agreements and recorded assets of $24.9 million as land, not owned, under option agreements.

At December 31, 2011, aggregate outstanding debt of unconsolidated joint ventures was $11.1 million, of which our proportionate share of such joint venture debt was $3.2 million. Of our proportionate share of joint venture debt, we provided limited recourse guaranties for $1.2 million at December 31, 2011. See Note 7 to the Consolidated Financial Statements for additional information.

Critical Accounting Policies and Estimates

The accompanying consolidated financial statements were prepared in conformity with United States generally accepted accounting principles. When more than one accounting principle, or the method of its application, is generally accepted, we select the principle or method that is appropriate in our specific circumstances (see Note 1 of our Consolidated Financial Statements). Application of these accounting principles requires us to make estimates about the future resolution of existing uncertainties; as a result, actual results could differ from these estimates. In preparing these consolidated financial statements, we have made our best estimates and judgments of the amounts and disclosures included in the consolidated financial statements, giving due regard to materiality.

Revenue recognition

Homebuilding – Homebuilding revenue and related profit are generally recognized at the time of the closing of the sale, when title to and possession of the property are transferred to the buyer. In situations where the buyer’s financing is originated by Pulte Mortgage, our wholly-owned mortgage subsidiary, and the buyer has not made an adequate initial or continuing investment as required by ASC 360-20, “Property, Plant, and Equipment - Real Estate Sales,” the profit on such sales is deferred until the sale of the related mortgage loan to a third-party investor has been completed, unless there is a loss on the sale in which case the loss on such sale is recognized at the time of closing.

Financial Services – Mortgage servicing fees represent fees earned for servicing loans for various investors. Servicing fees are based on a contractual percentage of the outstanding principal balance, or a contracted set fee in the case of certain sub-servicing arrangements, and are credited to income when related mortgage payments are received or the sub-servicing fees are earned. Loan origination fees, commitment fees, and certain direct loan origination costs are recognized as incurred. Expected

gains and losses from the sale of residential mortgage loans and their related servicing rights are included in the measurement of written loan commitments that are accounted for at fair value through Financial Services revenues at the time of commitment. Subsequent changes in the fair value of these loans are reflected in Financial Services revenues as they occur. Interest income is accrued from the date a mortgage loan is originated until the loan is sold. Loans are placed on non-accrual status once they become greater than 90 days past due their contractual terms. Subsequent payments received are applied according to the contractual terms of the loan.

Inventory valuation

Inventory is stated at the lower of accumulated cost or fair value, as determined in accordance with ASC 360-10, “Property, Plant, and Equipment – Impairment or Disposal of Long-Lived Assets” (“ASC 360-10”). Accumulated cost includes costs associated with land acquisition, land development, and home construction costs, including interest, real estate taxes, and certain direct and indirect overhead costs related to development and construction. For those communities for which construction and development activities have been idled, applicable interest and real estate taxes are expensed as incurred. Land acquisition and development costs are allocated to individual lots using an average lot cost determined based on the total expected land acquisition and development costs and the total expected home closings for the community. The specific identification method is used to accumulate home construction costs.

We capitalize interest cost into homebuilding inventories. Each layer of capitalized interest is amortized over a period that approximates the average life of communities under development. Interest expense is allocated over the period based on the cyclical timing of home closings.

Cost of revenues includes the construction cost, average lot cost, estimated warranty costs, and commissions and closing costs applicable to the home. The construction cost of the home includes amounts paid through the closing date of the home, plus an appropriate accrual for costs incurred but not yet paid, based on an analysis of budgeted construction costs. This accrual is reviewed for accuracy based on actual payments made after closing compared with the amount accrued, and adjustments are made if needed. Total community land acquisition and development costs are based on an analysis of budgeted costs compared with actual costs incurred to date and estimates to complete. The development cycles for our communities range from under one year to in excess of ten years for certain master planned communities. Adjustments to estimated total land acquisition and development costs for the community affect the amounts costed for the community’s remaining lots.

In accordance with ASC 360-10, we record valuation adjustments on land inventory when events and circumstances indicate that they may be impaired and when the cash flows estimated to be generated by those assets are less than their carrying amounts. For communities that demonstrate indicators of impairment, we compare the expected undiscounted cash flows for these communities to their carrying value. For those communities whose carrying values exceed the expected undiscounted cash flows, we calculate the fair value of the community. Impairment charges are required to be recorded if the fair value of the community’s inventory is less than its carrying value.

We generally determine the fair value of each community’s inventory using a combination of discounted cash models and market comparable transactions, where available. These estimated cash flows are significantly impacted by estimates related to expected average selling prices and sale incentives, expected sales paces and cancellation rates, expected land development and construction timelines, and anticipated land development, construction, and overhead costs. Such estimates must be made for each individual community and may vary significantly between communities. Due to uncertainties in the estimation process, the significant volatility in demand for new housing, and the long life cycles of many communities, actual results could differ significantly from such estimates.

Investments in unconsolidated entities

We have investments in a number of unconsolidated entities, including joint ventures, with independent third parties. Many of these unconsolidated entities purchase, develop, and/or sell land and homes in the United States and Puerto Rico. The equity method of accounting is used for unconsolidated entities over which we have significant influence; generally this represents partnership equity or common stock ownership interests of at least 20% and not more than 50%. Under the equity method of accounting, we recognize our proportionate share of the profits and losses of these entities. Certain of these entities sell land to us. In these situations, we defer the recognition of profits from such activities until the time the related homes are sold. The cost method of accounting is used for investments in which we have less than a 20% ownership interest and do not have the ability to exercise significant influence.

We evaluate our investments in unconsolidated entities for recoverability in accordance with ASC 323, “Investments – Equity Method and Joint Ventures”. If we determine that a loss in the value of the investment is other than temporary, we write down the investment to its estimated fair value. Any such losses are recorded to equity in (earnings) loss of

unconsolidated entities. Additionally, each unconsolidated entity evaluates its long-lived assets, such as inventory, for recoverability in accordance with ASC 360-10. Our proportionate share of any such impairments under ASC 360-10 are also recorded to equity in (earnings) loss of unconsolidated entities. Evaluations of recoverability under both ASC 323 and ASC 360-10 are primarily based on projected cash flows supplemented by market comparable transactions, where available. Due to uncertainties in the estimation process and the significant volatility in demand for new housing, actual results could differ significantly from such estimates.

Residential mortgage loans

In accordance with ASC 825, “Financial Instruments” (“ASC 825”), we use the fair value option for our residential mortgage loans available-for-sale. Election of the fair value option for residential mortgage loans available-for-sale allows a better offset of the changes in fair values of the loans and the derivative instruments used to economically hedge them without having to apply complex hedge accounting provisions. Changes in the fair value of these loans are reflected in revenues as they occur.

Loans held for investment consist of a portfolio of loans that either have been repurchased from investors or were not saleable upon closing. These loans are carried at cost and are reviewed for impairment when recoverability becomes doubtful.

Loan origination liabilities

Our mortgage operations may be responsible for losses associated with mortgage loans originated and sold to investors in the event of errors or omissions relating to representations and warranties that the loans sold meet certain requirements, including representations as to underwriting standards, the existence of primary mortgage insurance, and the validity of certain borrower representations in connection with the loan. If determined to be at fault, we either repurchase the loans from the investors or reimburse the investors' losses (a “make-whole” payment).

We sell a substantial majority of the loans we originate to investors each month, retaining limited risk related to such loans. Historically, our overall losses relating to this risk were not significant. Beginning in 2009, however, we experienced a significant increase in losses as a result of the high level of loan defaults and related losses in the mortgage industry and increasing aggressiveness by investors in presenting such claims to us. To date, the significant majority of these losses relates to loans originated in 2006 and 2007, during which period inherently riskier loan products became more common in the mortgage origination market. In 2006 and 2007, we originated $39.5 billion of loans, excluding loans originated by Centex's former subprime loan business sold by Centex in 2006. Because we generally do not retain the servicing rights to the loans we originate, information regarding the current and historical performance, credit quality, and outstanding balances of such loans is limited. Estimating these loan origination liabilities is further complicated by uncertainties surrounding numerous external factors, such as various macroeconomic factors (including unemployment rates and changes in home prices), actions taken by third parties, including the parties servicing the loans, and the U.S. federal government in its dual capacity as regulator of the U.S. mortgage industry and conservator of the government-sponsored enterprises commonly known as Fannie Mae and Freddie Mac, which own or guarantee the majority of mortgage loans in the U.S.

Most requests received to date relate to make-whole payments on loans that have been foreclosed, generally after a portion of the loan principal had been paid down, which reduces our exposure. Requests not immediately refuted by us undergo extensive analysis to confirm the exposure, attempt to cure the identified defect, and, when necessary, determine our liability. We establish liabilities for such anticipated losses based upon, among other things, the level of current unresolved repurchase requests, the volume of estimated probable future repurchase requests, our ability to cure the defects identified in the repurchase requests, and the severity of the estimated loss upon repurchase. Determining these estimates and the resulting liability requires a significant level of management judgment. We are generally able to cure or refute over 60% of the requests received from investors such that repurchases or make-whole payments are not required. For those requests requiring repurchases or make-whole payments, actual loss severities generally approximate 50% of the outstanding principal balance.

Our current estimates assume that claim volumes will not decline to pre-2009 levels until after 2013, an extension of two years beyond our previous estimates as of December 31, 2010. Given the volatility in the mortgage industry and the uncertainty regarding the ultimate resolution of these claims, it is reasonably possible that future losses may exceed our current estimates. For example, if the total number of loans we are required to repurchase is ultimately 10% lower or higher than our current estimates, the amount of future losses would decrease or increase by approximately $13.0 million.

Intangible assets

We have recorded intangible assets related to tradenames acquired with the Centex merger completed in 2009 and the Del Webb merger completed in 2001, which are being amortized over their estimated useful lives. The carrying values and ultimate realization of these assets are dependent upon estimates of future earnings and benefits that we expect to generate from their use. If we determine that the carrying values of intangible assets may not be recoverable based upon the existence of one or more indicators of impairment, we use a projected undiscounted cash flow method to determine if impairment exists. If the carrying values of the intangible assets exceed the expected undiscounted cash flows, then we measure impairment as the difference between the fair value of the asset and the recorded carrying value. While the industry downturn in recent years has resulted in a decline in the fair value of these intangible assets, this decline has not yet resulted in an impairment of the assets' carrying values. However, if our expectations of future results and cash flows decrease significantly or if our strategy related to the use of the intangible assets changes, the related intangible assets may be impaired.

Allowance for warranties

Home purchasers are provided with a limited warranty against certain building defects, including a one-year comprehensive limited warranty and coverage for certain other aspects of the home’s construction and operating systems for periods of up to ten years. We estimate the costs to be incurred under these warranties and record a liability in the amount of such costs at the time product revenue is recognized. Factors that affect our warranty liability include the number of homes sold, historical and anticipated rates of warranty claims, and the cost per claim. We periodically assess the adequacy of our recorded warranty liability for each geographic market in which we operate and adjust the amounts as necessary. Actual warranty costs in the future could differ from our estimates.

Self-insured risks

We maintain, and require our subcontractors to maintain, general liability insurance coverage. We also maintain builders' risk, property, errors and omissions, workers compensation, and other business insurance coverage. These insurance policies protect us against a portion of the risk of loss from claims. However, we retain a significant portion of the overall risk for such claims either through policies issued by our captive insurance subsidiaries or through our own self-insured per occurrence and aggregate retentions, deductibles, and claims in excess of available insurance policy limits.

Our general liability insurance includes coverage for certain construction defects. While construction defect claims can relate to a variety of circumstances, the majority of our claims relate to alleged problems with siding, plumbing, foundations and other concrete work, windows, roofing, and heating, ventilation and air conditioning systems. The availability of general liability insurance for the homebuilding industry and its subcontractors has become increasingly limited, and the insurance policies available require companies to maintain higher per occurrence and aggregate retention levels. In certain instances, we may offer our subcontractors the opportunity to purchase insurance through one of our captive insurance subsidiaries or to participate in a project-specific insurance program provided by the Company. Policies issued by the captive insurance subsidiaries represent self-insurance of these risks by the Company. This self-insured exposure is limited by reinsurance policies that we purchase. General liability coverage for the homebuilding industry is complex, and our coverage varies from policy year to policy year. We are self-insured for a per occurrence deductible, which is capped at an overall aggregate retention level. Beginning with the first dollar, amounts paid on insured claims satisfy our per occurrence and aggregate retention obligations. Any amounts incurred in excess of the occurrence or aggregate retention levels are covered by insurance up to our purchased coverage levels. Our insurance policies, including the captive insurance subsidiaries' reinsurance policies, are maintained with highly-rated underwriters for whom we believe counterparty default risk is not significant.

At any point in time, we are managing over 1,000 individual claims related to general liability, property, errors and omission, workers compensation, and other business insurance coverage. We reserve for costs associated with such claims (including expected claims management expenses relating to legal fees, expert fees, and claims handling expenses) on an undiscounted basis at the time product revenue is recognized for each home closing and evaluate the recorded liabilities based on actuarial analyses of our historical claims. The actuarial analyses calculate an estimate of the ultimate net cost of all unpaid losses, including estimates for incurred but not reported losses ("IBNR"). IBNR represents losses related to claims incurred but not yet reported plus development on reported claims. These estimates make up a significant portion of our liability and are subject to a high degree of uncertainty due to a variety of factors, including changes in claims reporting and resolution patterns, third party recoveries, insurance industry practices, the regulatory environment, and legal precedent. State regulations vary, but construction defect claims are reported and resolved over an extended period often exceeding ten years. In certain instances, we have the ability to recover a portion of its costs under various insurance policies or from its subcontractors or other third parties. Estimates of such amounts are recorded when recovery is considered probable.

The recorded reserves include loss estimates related to both (i) existing claims and related claim expenses and (ii) IBNR and related claim expenses. Liabilities related to IBNR and related claim expenses represented approximately 78% of the total general liability reserves, which represent the vast majority of the total recorded reserves, at both December 31, 2011 and 2010. The actuarial analyses that determine the IBNR portion of reserves consider a variety of factors, including the frequency and severity of losses, which are based on our historical claims experience supplemented by industry data. The actuarial analyses of the reserves also consider historical third party recovery rates and claims management expenses.

Adjustments to estimated reserves are recorded in the period in which the change in estimate occurs. Because the majority of our recorded reserves relates to IBNR, adjustments to reserve amounts for individual existing claims generally do not impact the recorded reserves materially. However, changes in the frequency and timing of reported claims and the estimates of specific claim values can impact the underlying inputs and trends utilized in the actuarial analyses, which could have a material impact on the recorded reserves.

We have experienced a high level of insurance-related expenses in recent years, primarily due to the adverse development of general liability claims, the frequency and severity of which have increased significantly over historical levels. During 2010, we experienced a greater than anticipated frequency of newly reported claims and a significant increase in specific case reserves related to certain known claims. The general nature of these claims was not out of the ordinary, but the frequency and severity of the claims were in excess of our historical experience. As a result of these unfavorable trends, we recorded additional reserves totaling $280.4 million ($0.74 per basic and diluted share) within selling, general, and administrative expenses. Substantially all of this additional reserve related to general liability exposures, a large portion of which resulted from revising our actuarial assumptions surrounding the long-term frequency, severity, and development of claims. During the industry downturn over the last several years, and especially in 2010, we experienced adverse claim frequency and severity compared with longer term averages. In 2010, we deemed it appropriate to assume that the long-term future frequency, severity, and development of claims will most closely resemble the claims activity experienced in recent years.

Our recorded reserves for all such claims totaled $741.4 million and $785.6 million at December 31, 2011 and 2010, respectively, the vast majority of which relate to general liability claims. Because of the inherent uncertainty in estimating future losses related to these claims, actual costs could differ significantly from estimated costs. Based on the actuarial analyses performed, we believe the range of reasonably possible losses related to these claims is $650 million to $850 million. While this range represents our best estimate of our ultimate liability related to these claims, due to a variety of factors, including those factors described above, there can be no assurance that the ultimate costs realized by us will fall within this range.

Income taxes

We calculate our provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In assessing the realizability of deferred tax assets, we consider whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. Our assessment considers, among other matters, the nature, frequency, and magnitude of current and cumulative income and losses, forecasts of future profitability, the duration of statutory carryback or carryforward periods, our experience with operating loss and tax credit carryforwards being used before expiration, and tax planning alternatives. The ultimate realization of deferred tax assets is primarily dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. In determining the future tax consequences of events that have been recognized in our financial statements or tax returns, judgment is required. Differences between the anticipated and actual outcomes of these future tax consequences could have a material impact on our consolidated results of operations or financial position.

We follow the provisions of ASC 740, “Income Taxes” (“ASC 740”), which prescribes a minimum recognition threshold a tax position is required to meet before being recognized in the financial statements. ASC 740 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, and disclosure. Significant judgment is required to evaluate uncertain tax positions. Evaluations of our tax positions consider changes in facts or circumstances, changes in law, correspondence with taxing authorities, and settlements of audit issues.

New accounting pronouncements

See Note 1 to the Consolidated Financial Statements.