10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended January 31, 2012

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number 1-9186

 

 

TOLL BROTHERS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   23-2416878

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

250 Gibraltar Road, Horsham, Pennsylvania   19044
(Address of principal executive offices)   (Zip Code)

(215) 938-8000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “an accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨ (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

At March 1, 2012, there were approximately 166,729,000 shares of Common Stock, $.01 par value, outstanding.

 

 

 


Table of Contents

TOLL BROTHERS, INC.

TABLE OF CONTENTS

 

     Page No.  

Statement on Forward-Looking Information

     1   

PART I. Financial Information

  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets at January 31, 2012 (Unaudited) and October 31, 2011

     2   

Condensed Consolidated Statements of Operations for the Three Months Ended January 31, 2012 and 2011 (Unaudited)

     3   

Condensed Consolidated Statements of Cash Flows for the Three Months Ended January 31, 2012 and 2011 (Unaudited)

     4   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     5   

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

     32   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     47   

Item 4. Controls and Procedures

     47   

PART II. Other Information

  

Item 1. Legal Proceedings

     48   

Item 1A. Risk Factors

     48   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     49   

Item 6. Exhibits

     50   

SIGNATURES

     51   


Table of Contents

STATEMENT ON FORWARD-LOOKING INFORMATION

Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission ( “SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by the fact that they do not relate to matters of strictly historical or factual nature and generally discuss or relate to estimates or other expectations regarding future events. They contain words such as “anticipate,” “estimate,” “expect,” “envision,” “project,” “intend,” “plan,” “believe,” “may,” “can,” “could,” “might,” “should” and other words or phrases of similar meaning in connection with any discussion of future operating or financial performance. Such statements may include, but are not limited to, information related to: anticipated operating results; home deliveries; financial resources and condition; changes in revenues; changes in profitability; changes in margins; changes in accounting treatment; cost of revenues; selling, general and administrative expenses; interest expense; inventory write-downs; unrecognized tax benefits; anticipated tax refunds; sales paces and prices; effects of home buyer cancellations; growth and expansion; joint ventures in which we are involved; anticipated results from our investments in unconsolidated entities; the ability to acquire land and pursue real estate opportunities; the ability to gain approvals and to open new communities; the ability to sell homes and properties; the ability to deliver homes from backlog; the ability to secure materials and subcontractors; the ability to produce the liquidity and capital necessary to expand and take advantage of opportunities; and legal proceedings and claims.

Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us are not guarantees of future performance and may turn out to be inaccurate. Consequently, actual results may differ materially from those that might be anticipated from our forward looking statements. Therefore, we caution you not to place undue reliance on our forward-looking statements. The factors that could cause actual results to differ from those expressed or implied by our forward-looking statements include, among others: local, regional, national, and international economic conditions; demand for homes; changes in consumer confidence; changes in interest rates; unemployment rates; changes in sales conditions, including home prices, in the markets where we build homes; conditions in our newly entered markets and newly acquired operations; the competitive environment in which we operate; the availability and cost of land for future growth; conditions that could result in inventory write-downs or write-downs associated with investments in unconsolidated entities; the ability to recover our deferred tax assets; the availability of capital; uncertainties in the capital and securities markets; liquidity in the credit markets; changes in tax laws and their interpretation; effects of governmental legislation and regulation; the outcome of various legal proceedings; the availability of adequate insurance at reasonable cost; the impact of construction defect, product liability and home warranty claims, including the adequacy of self-insurance accruals and the applicability and sufficiency of our insurance coverage; the ability of customers to obtain financing for the purchase of homes; the ability of customers to sell their existing homes; the ability of the participants in various joint ventures to honor their commitments; the availability and cost of labor and building and construction materials; the cost of raw materials; construction delays; domestic and international political events; and weather conditions. This statement is provided as permitted by the Private Securities Litigation Reform Act of 1995.

When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Toll Brothers, Inc. and its subsidiaries, unless the context otherwise requires. References herein to “fiscal 2012,” and to “fiscal 2011,” “fiscal 2010,” “fiscal 2009,” and “fiscal 2008” refer to our fiscal years ending October 31, 2012, October 31, 2011, October 31, 2010, October 31, 2009, and October 31, 2008, respectively.

Forward-looking statements speak only as of the date they are made. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise.

 

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Table of Contents

PART I — FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)

 

September 30, September 30,
       January 31, 2012      October 31, 2011  
       (unaudited)         

ASSETS

       

Cash and cash equivalents

     $ 575,694       $ 906,340   

Marketable securities

       143,729         233,572   

Restricted cash

       48,241         19,760   

Inventory

       3,655,100         3,416,723   

Property, construction and office equipment, net

       101,499         99,712   

Receivables, prepaid expenses and other assets

       98,191         105,576   

Mortgage loans receivable

       36,911         63,175   

Customer deposits held in escrow

       25,089         14,859   

Investments in and advances to unconsolidated entities

       193,626         126,355   

Investments in non-performing loan portfolios and foreclosed real estate

       96,822         69,174   
    

 

 

    

 

 

 
     $ 4,974,902       $ 5,055,246   
    

 

 

    

 

 

 

LIABILITIES AND EQUITY

       

Liabilities

       

Loans payable

     $ 93,279       $ 106,556   

Senior notes

       1,491,442         1,490,972   

Mortgage company warehouse loan

       31,864         57,409   

Customer deposits

       97,334         83,824   

Accounts payable

       105,311         96,817   

Accrued expenses

       451,414         521,051   

Income taxes payable

       100,276         106,066   
    

 

 

    

 

 

 

Total liabilities

       2,370,920         2,462,695   
    

 

 

    

 

 

 

Equity

       

Stockholders’ equity

       

Preferred stock, none issued

       

Common stock, 168,689 and 168,675 shares issued at January 31, 2012 and October 31, 2011, respectively

       1,687         1,687   

Additional paid-in capital

       399,743         400,382   

Retained earnings

       2,231,465         2,234,251   

Treasury stock, at cost—2,021 shares and 2,946 shares at January 31, 2012 and October 31, 2011, respectively

       (31,531      (47,065

Accumulated other comprehensive loss

       (3,563      (2,902
    

 

 

    

 

 

 

Total stockholders’ equity

       2,597,801         2,586,353   

Noncontrolling interest

       6,181         6,198   
    

 

 

    

 

 

 

Total equity

       2,603,982         2,592,551   
    

 

 

    

 

 

 
     $ 4,974,902       $ 5,055,246   
    

 

 

    

 

 

 

See accompanying notes

 

2


Table of Contents

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)

 

September 30, September 30,
       Three months ended
January 31,
 
       2012      2011  

Revenues

     $ 321,955       $ 334,116   
    

 

 

    

 

 

 

Cost of revenues

       271,608         281,965   

Selling, general and administrative

       69,637         61,251   

Interest expense

          1,112   
    

 

 

    

 

 

 
       341,245         344,328   
    

 

 

    

 

 

 

Loss from operations

       (19,290      (10,212

Other:

       

Income (loss) from unconsolidated entities

       6,687         (11,002

Interest and other

       6,195         4,167   
    

 

 

    

 

 

 

Loss before income tax benefit

       (6,408      (17,047

Income tax benefit

       (3,622      (20,464
    

 

 

    

 

 

 

Net (loss) income

     $ (2,786    $ 3,417   
    

 

 

    

 

 

 

(Loss) income per share:

       

Basic

     $ (0.02    $ 0.02   
    

 

 

    

 

 

 

Diluted

     $ (0.02    $ 0.02   
    

 

 

    

 

 

 

Weighted average number of shares:

       

Basic

       166,311         166,677   

Diluted

       166,311         168,121   

See accompanying notes

 

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TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)

 

September 30, September 30,
       Three months ended January 31,  
       2012      2011  

Cash flow used in operating activities:

       

Net (loss) income

     $ (2,786    $ 3,417   

Adjustments to reconcile net (loss) income to net cash used in operating activities:

       

Depreciation and amortization

       5,229         4,387   

Stock-based compensation

       5,626         5,373   

Impairments of investments in unconsolidated entities

          20,000   

Income from unconsolidated entities

       (6,687      (8,998

Distributions of earnings from unconsolidated entities

       872         2,793   

Income from non-performing loan portfolios and foreclosed real estate

       (4,138   

Deferred tax benefit

       (1,246      (6,589

Deferred tax valuation allowances

       1,246         6,589   

Inventory impairments and write-offs

       8,120         5,126   

Change in fair value of mortgage loans receivable and derivative instruments

       346         714   

Gain on marketable securities

       (39   

Changes in operating assets and liabilities

       

Increase in inventory

       (108,468      (120,875

Origination of mortgage loans

       (120,662      (182,659

Sale of mortgage loans

       146,895         233,891   

(Increase) decrease in restricted cash

       (28,481      8,498   

Decrease in receivables, prepaid expenses and other assets

       11,929         7,937   

Increase in customer deposits

       3,230         2,277   

Decrease in accounts payable and accrued expenses

       (67,127      (38,987

Decrease in income taxes payable

       (5,790      (20,082
    

 

 

    

 

 

 

Net cash used in operating activities

       (161,931      (77,188
    

 

 

    

 

 

 

Cash flow used in investing activities:

       

Purchase of property and equipment—net

       (3,540      (4,281

Purchase of marketable securities

          (119,238

Sale and redemption of marketable securities

       88,217         102,500   

Investment in and advances to unconsolidated entities

       (71,784   

Return of investments in unconsolidated entities

       15,333         6,305   

Investment in non-performing loan portfolios and foreclosed real estate

       (26,410   

Return of investments in non-performing loan portfolios and foreclosed real estate

       3,702      

Acquisition of a business

       (144,746   
    

 

 

    

 

 

 

Net cash used in investing activities

       (139,228      (14,714
    

 

 

    

 

 

 

Cash flow used in financing activities:

       

Proceeds from loans payable

       199,139         266,035   

Principal payments of loans payable

       (237,896      (329,754

Proceeds from stock-based benefit plans

       9,334         3,323   

Purchase of treasury stock

       (64      (163
    

 

 

    

 

 

 

Net cash used in financing activities

       (29,487      (60,559
    

 

 

    

 

 

 

Net decrease in cash and cash equivalents

       (330,646      (152,461

Cash and cash equivalents, beginning of period

       906,340         1,039,060   
    

 

 

    

 

 

 

Cash and cash equivalents, end of period

     $ 575,694       $ 886,599   
    

 

 

    

 

 

 

See accompanying notes

 

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TOLL BROTHERS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1. Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements include the accounts of Toll Brothers, Inc. (the “Company”), a Delaware corporation, and those majority-owned subsidiaries it controls. All significant intercompany accounts and transactions have been eliminated. Investments in 50% or less owned partnerships and affiliates are accounted for using the equity method unless it is determined that the Company has effective control of the entity, in which case the entity would be consolidated.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The October 31, 2011 balance sheet amounts and disclosures included herein have been derived from the Company’s October 31, 2011 audited financial statements. Since the accompanying condensed consolidated financial statements do not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements, the Company suggests that they be read in conjunction with the consolidated financial statements and notes thereto included in its Annual Report on Form 10-K for the fiscal year ended October 31, 2011. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly the Company’s financial position as of January 31, 2012, the results of its operations for the three-month periods ended January 31, 2012 and 2011, and its cash flows for the three-month periods ended January 31, 2012 and 2011. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

Inventory

Inventory is stated at cost unless an impairment exists, in which case it is written down to fair value in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 360, “Property, Plant and Equipment” (“ASC 360”). In addition to direct land acquisition costs, land development costs and home construction costs, costs also include interest, real estate taxes and direct overhead related to development and construction, which are capitalized to inventory during the period beginning with the commencement of development and ending with the completion of construction. For those communities that have been temporarily closed, no additional capitalized interest is allocated to a community’s inventory until it re-opens. While the community remains closed, carrying costs such as real estate taxes are expensed as incurred.

The Company capitalizes certain interest costs to qualified inventory during the development and construction period of its communities in accordance with ASC 835-20, “Capitalization of Interest” (“ASC 835-20”). Capitalized interest is charged to cost of revenues when the related inventory is delivered. Interest incurred on homebuilding indebtedness in excess of qualified inventory, as defined in ASC 835-20, is charged directly to operations in the period incurred.

Once a parcel of land has been approved for development and the Company opens one of its typical communities, it may take four or more years to fully develop, sell and deliver all the homes in such community. Longer or shorter time periods are possible depending on the number of home sites in a community and the sales and delivery pace of the homes in a community. The Company’s master planned communities, consisting of several smaller communities, may take up to ten years or more to complete. Because the Company’s inventory is considered a long-lived asset under GAAP, the Company is required, under ASC 360, to regularly review the carrying value of each community and write down the value of those communities for which it believes the values have been impaired.

Current Communities: When the profitability of a current community deteriorates, the sales pace declines significantly, or some other factor indicates a possible impairment in the recoverability of the asset, the asset is reviewed for impairment by comparing the estimated future undiscounted cash flow for the community to its carrying value. If the estimated future undiscounted cash flow is less than the community’s carrying value, the carrying value is written down to its estimated fair value. Estimated fair value is primarily determined by

 

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discounting the estimated future cash flow of each community. The impairment is charged to cost of revenues in the period in which the impairment is determined. In estimating the future undiscounted cash flow of a community, the Company uses various estimates such as: (a) the expected sales pace in a community, based upon general economic conditions that will have a short-term or long-term impact on the market in which the community is located and on competition within the market, including the number of home sites available and pricing and incentives being offered in other communities owned by the Company or by other builders; (b) the expected sales prices and sales incentives to be offered in a community; (c) costs expended to date and expected to be incurred in the future, including, but not limited to, land and land development, home construction, interest and overhead costs; (d) alternative product offerings that may be offered in a community that will have an impact on sales pace, sales price, building cost or the number of homes that can be built on a particular site; and (e) alternative uses for the property such as the possibility of a sale of the entire community to another builder or the sale of individual home sites.

Future Communities: The Company evaluates all land held for future communities or future sections of current communities, whether owned or under contract, to determine whether or not it expects to proceed with the development of the land as originally contemplated. This evaluation encompasses the same types of estimates used for current communities described above, as well as an evaluation of the regulatory environment applicable to the land and the estimated probability of obtaining the necessary approvals, the estimated time and cost it will take to obtain the approvals and the possible concessions that will be required to be given in order to obtain them. Concessions may include cash payments to fund improvements to public places such as parks and streets, dedication of a portion of the property for use by the public or as open space or a reduction in the density or size of the homes to be built. Based upon this review, the Company decides (a) as to land under contract to be purchased, whether the contract will likely be terminated or renegotiated, and (b) as to land owned, whether the land will likely be developed as contemplated or in an alternative manner, or should be sold. The Company then further determines whether costs that have been capitalized to the community are recoverable or should be written off. The write-off is charged to cost of revenues in the period in which the need for the write-off is determined.

The estimates used in the determination of the estimated cash flows and fair value of both current and future communities are based on factors known to the Company at the time such estimates are made and its expectations of future operations and economic conditions. Should the estimates or expectations used in determining estimated fair value deteriorate in the future, the Company may be required to recognize additional impairment charges and write-offs related to current and future communities.

Variable Interest Entities: The Company has a significant number of land purchase contracts and several investments in unconsolidated entities which it evaluates in accordance with ASC 810, “Consolidation” (“ASC 810”). The Company analyzes its land purchase contracts and the unconsolidated entities in which it has an investment to determine whether the land sellers and unconsolidated entities are variable interest entities (“VIEs”) and, if so, whether the Company is the primary beneficiary. If the Company is determined to be the primary beneficiary of a VIE, it must consolidate the VIE. A VIE is an entity with insufficient equity investment or in which the equity investors lack some of the characteristics of a controlling financial interest. In determining whether it is the primary beneficiary, the Company considers, among other things, whether it has the power to direct the activities of the VIE that most significantly impact the entity’s economic performance, including, but not limited to, determining or limiting the scope or purpose of the VIE, selling or transferring property owned or controlled by the VIE, or arranging financing for the VIE. The Company also considers whether it has the obligation to absorb losses of or the right to receive benefits from the VIE.

Fair Value Disclosures

The Company uses ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), to measure the fair value of certain assets and liabilities. ASC 820 provides a framework for measuring fair value in accordance with GAAP, establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value and requires certain disclosures about fair value measurements.

 

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The fair value hierarchy is summarized below:

 

Level 1:      Fair value determined based on quoted prices in active markets for identical assets or liabilities.
Level 2:      Fair value determined using significant observable inputs, generally either quoted prices in active markets for similar assets or liabilities or quoted prices in markets that are not active.
Level 3:      Fair value determined using significant unobservable inputs, such as pricing models, discounted cash flows, or similar techniques.

2. Acquisition

In November 2011, the Company acquired substantially all of the assets of CamWest Development LLC (“CamWest”) for approximately $144.7 million in cash. The assets acquired were primarily inventory. As part of the acquisition, the Company assumed contracts to deliver approximately 29 homes with an aggregate value of $13.7 million. The average price of the homes in backlog was approximately $471,000. The assets the Company acquired included approximately 1,245 home sites owned and 254 home sites controlled through land purchase agreements. The Company’s selling community count increased by 15 communities at the acquisition date. The acquisition of the assets of CamWest was not material to the Company’s results of operations or its financial condition.

3. Inventory

Inventory at January 31, 2012 and October 31, 2011 consisted of the following (amounts in thousands):

 

 

September 30, September 30,
       January 31,        October 31,  
       2012        2011  

Land controlled for future communities

     $ 43,215         $ 46,581   

Land owned for future communities

       1,068,747           979,145   

Operating communities

       2,543,138           2,390,997   
    

 

 

      

 

 

 
     $ 3,655,100         $ 3,416,723   
    

 

 

      

 

 

 

Operating communities include communities offering homes for sale, communities that have sold all available home sites but have not completed delivery of the homes, communities that were previously offering homes for sale but are temporarily closed due to business conditions or non-availability of improved home sites and that are expected to reopen within twelve months of the end of the fiscal period being reported on, and communities preparing to open for sale. The carrying value attributable to operating communities includes the cost of homes under construction, land and land development costs, the carrying cost of home sites in current and future phases of these communities and the carrying cost of model homes, less impairment charges recognized against the communities.

Communities that were previously offering homes for sale but are temporarily closed due to business conditions that do not have any remaining backlog and are not expected to reopen within twelve months of the end of the fiscal period being reported on have been classified as land owned for future communities

Information regarding the classification, number and carrying value of these temporarily closed communities, as of the date indicated, is provided in the table below.

 

 

September 30, September 30,
       January 31,        October 31,  
       2012        2011  

Land owned for future communities:

         

Number of communities

       44           43   

Carrying value (in thousands)

     $ 245,025         $ 256,468   

Operating communities:

         

Number of communities

       6           2   

Carrying value (in thousands)

     $ 49,723         $ 11,076   

 

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During the three-month period ended January 31, 2011, the Company reclassified $20.0 million of inventory related to commercial retail space located in one of its high-rise projects to property, construction and office equipment. The $20.0 million was reclassified due to the completion of construction of the facilities and the substantial completion of the high-rise project of which the facilities are a part.

The Company provided for inventory impairment charges and the expensing of costs that it believed not to be recoverable, for the periods indicated; these are shown in the table below (amounts in thousands).

 

 

September 30, September 30,
       Three months ended
January 31,
 
       2012        2011  

Charge (recovery):

         

Land controlled for future communities

     $ 777         $ (349

Land owned for future communities

       918        

Operating communities

       6,425           5,475   
    

 

 

      

 

 

 
     $ 8,120         $ 5,126   
    

 

 

      

 

 

 

At January 31, 2012, the Company evaluated its land purchase contracts to determine if any of the selling entities were VIEs and, if they were, whether the Company was the primary beneficiary of any of them. Under these land purchase contracts, the Company does not possess legal title to the land and its risk is generally limited to deposits paid to the sellers and the creditors of the sellers generally have no recourse against the Company. At January 31, 2012, the Company determined that 57 land purchase contracts, with an aggregate purchase price of $437.9 million, on which it had made aggregate deposits totaling $25.5 million, were VIEs, and that it was not the primary beneficiary of any VIE related to its land purchase contracts.

Interest incurred, capitalized and expensed, for the periods indicated, was as follows (amounts in thousands):

 

 

September 30, September 30,
       Three months ended
January 31,
 
       2012      2011  

Interest capitalized, beginning of period

     $ 298,757       $ 267,278   

Interest incurred

       28,899         29,716   

Interest expensed to cost of revenues

       (16,321      (18,082

Interest directly expensed to operations

          (1,112

Write-off against other income

          (70

Interest reclassified to property, construction and office equipment

          (3,000
    

 

 

    

 

 

 

Interest capitalized, end of period

     $ 311,335       $ 274,730   
    

 

 

    

 

 

 

Inventory impairment charges are recognized against all inventory costs of a community, such as land, land improvements, cost of home construction and capitalized interest. The amounts included in the table directly above reflect the gross amount of capitalized interest without allocation of any impairment charges recognized. The Company estimates that, had inventory impairment charges been allocated on a pro rata basis to the individual components of inventory, capitalized interest at January 31, 2012 and 2011 would have been reduced by approximately $53.9 million and $53.8 million, respectively.

4. Investments in and Advances to Unconsolidated Entities

The Company has investments in and advances to various unconsolidated entities.

Development Joint Ventures

The Company has investments in and advances to a number of joint ventures with unrelated parties to develop land (“Development Joint Ventures”). Some of these Development Joint Ventures develop land for the sole use of the venture participants, including the Company, and others develop land for sale to the joint venture participants and to unrelated builders. The Company recognizes its share of earnings from the sale of home sites by the Development Joint Ventures to other builders. With regard to home sites the Company purchases from the Development Joint Ventures, the Company reduces its cost basis in those home sites by its share of the earnings on the home sites it purchases. At January 31, 2012, the Company had approximately $8.6 million, net of impairment charges, invested in or advanced to the Development Joint Ventures. In addition, the Company has a funding commitment of $3.5 million to one Development Joint Venture should an additional investment in that venture be required.

 

 

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Table of Contents

Some of the impairments related to Development Joint Ventures since 2008 were attributable to the Company’s investment in South Edge LLC (“South Edge”), a Development Joint Venture organized to develop a master planned community in the City of Henderson, Nevada. In 2008 and 2009, based on the deterioration of the real estate market in Nevada and the filing of lawsuits against the Company and the other parent companies of the members of South Edge by lenders to South Edge to collect on completion guaranties executed in favor of the lenders, the Company recognized impairments which totaled $70.3 million.

During fiscal 2010, the members of South Edge engaged in negotiations with the lenders to settle the lenders’ claims. Based on the status of the lawsuits and the ongoing negotiations, the Company believed that it had adequately provided for a settlement of these claims.

In December 2010, some of the lenders filed an involuntary bankruptcy petition against South Edge, claiming that the involuntary bankruptcy filing triggered obligations on payment guarantees executed by the Company and the other parent companies of the members of South Edge in favor of the lenders. In February, 2011, the Bankruptcy Court upheld the involuntary petition and appointed a trustee to take over the operations of South Edge. Based on this court decision, the potential liability under the payment guaranty and the further erosion in the value of the real property owned by South Edge, the Company recorded additional impairments of $20 million in the first quarter of fiscal 2011 and $9.6 million in the second quarter of fiscal 2011. The Company reversed $3.9 million of previously recognized impairments on South Edge in the fourth quarter of fiscal 2011 based on its evaluation of its expected potential liability at that time. The total cumulative impairment recognized for South Edge through January 31, 2012 was $96 million.

During the third quarter of fiscal 2011, the Company and a majority of the members of South Edge reached an agreement with the lenders and the bankruptcy trustee to settle the disputes involving South Edge. The settlement provided, among other things, for payments by the members of South Edge to the lenders (the Company’s share was $63.2 million, $57.6 million of which was paid in November 2011) and the conveyance of the real estate free of the prior debt owned by South Edge to a new joint venture organized by four of the members of South Edge.

The Company believes it has made adequate provision at January 31, 2012 for any remaining liabilities with respect to South Edge. The Company’s investment in the successor joint venture to South Edge is carried at nominal value.

The Company did not recognize any impairment charges in connection with the Development Joint Ventures in the three-month period ended January 31, 2012.

Planned Community Joint Venture

The Company entered into a joint venture in October 2008 for the development and sale of homes in a master planned community (the “Planned Community Joint Venture”). During both fiscal 2009 and 2010, the joint venture’s performance was as expected and the Company estimated that the fair value of its investment exceeded its carrying value at the end of each of the reporting periods. In the early part of fiscal 2011, the Company saw signs of increased sales activity consistent with the seasonality of that market and it continued to believe the investment was not impaired. In the late spring of 2011, demand for homes in this community unexpectedly weakened. When the Company evaluates the carrying value of its investment, it considers the current and long-term outlook for the operations of the community and the anticipated period of time, if ever, it would take for the fair value of the investment to recover above the carrying value of the investment. Applying that standard, the Company’s review of the joint venture’s expected future performance based on its historical performance and market conditions at that time, as well as expected sales paces and prices and the joint venture’s expected cash flows led the Company to determine that the value of its investment was impaired and that this impairment was other than temporary. As a result, in the second quarter of fiscal 2011, the Company recognized an impairment charge of $10.0 million. That market continued to worsen and, in the fourth quarter of fiscal 2011, the Company determined that the value of its investment was further impaired and that this impairment was other than temporary and the Company recognized an additional impairment charge of $5.2 million. Therefore, as of January 31, 2012, the Company had recognized cumulative impairment charges in connection with the Planned Community Joint Venture of $15.2 million.

At January 31, 2012, the Company had an investment of $30.7 million, net of the $15.2 million of impairments recognized, in this Planned Community Joint Venture. At January 31, 2012, the participants had agreed to contribute additional funds of up to $8.3 million each, if required. If a participant fails to make a required capital contribution, the other participant may make the additional contribution and diminish the non-contributing participant’s ownership interest.

 

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Table of Contents

At January 31, 2012, this joint venture did not have any indebtedness.

Condominium Joint Ventures

At January 31, 2012, the Company had an aggregate of $119.4 million of investments in and advances to five joint ventures with unrelated parties to develop luxury for-sale and rental residential units and commercial space (“Condominium Joint Ventures”).

In December 2011, the Company entered into a joint venture to develop a high-rise luxury for-sale/rental project in the metro-New York market. The Company has invested $76.7 million and is committed to make additional investments of $37.5 million. Under the terms of the agreement, upon completion of the construction of the building, the Company will acquire ownership of the top eighteen floors of the building to sell, for its own account, luxury condominium units and its partner will receive ownership of the lower floors containing residential, for lease units and retail space.

As of January 31, 2012, the Company had recognized cumulative impairment charges against its investments in the Condominium Joint Ventures and its pro rata share of impairment charges recognized by these Condominium Joint Ventures in the amount of $63.9 million. The Company did not recognize any impairment charges in connection with its Condominium Joint Ventures in the three-month period ended January 31, 2012 and 2011.

Toll Brothers Realty Trust and Trust II

In fiscal 2005, the Company, together with the Pennsylvania State Employees Retirement System (“PASERS”), formed Toll Brothers Realty Trust II (“Trust II”) to be in a position to invest in commercial real estate opportunities. Trust II is owned 50% by the Company and 50% by an affiliate of PASERS. At January 31, 2012, the Company had an investment of $0.4 million in Trust II. Prior to the formation of Trust II, the Company formed Toll Brothers Realty Trust (the “Trust”) in 1998 to invest in commercial real estate opportunities. The Trust is effectively owned one-third by the Company; one-third by Robert I. Toll, Bruce E. Toll (and members of his family), Douglas C. Yearley, Jr. and former members of the Company’s senior management; and one-third by an affiliate of PASERS (collectively, the “Shareholders”). As of January 31, 2012, the Company had a net investment in the Trust of $0.3 million. The Company provides development, finance and management services to the Trust and recognized fees under the terms of various agreements in the amounts of $0.5 million in each of the three-month periods ended January 31, 2012 and 2011. The Company believes that the transactions between itself and the Trust were on terms no less favorable than it would have agreed to with unrelated parties.

Structured Asset Joint Venture

In July 2010, the Company, through Gibraltar Capital and Asset Management LLC (“Gibraltar”), invested $29.1 million in a joint venture in which it is a 20% participant with two unrelated parties to purchase a 40% interest in an entity that owns and controls a portfolio of loans and real estate (“Structured Asset Joint Venture”). At January 31, 2012, the Company had an investment of $34.2 million in this Structured Asset Joint Venture. At January 31, 2012, the Company did not have any commitments to make additional contributions to the joint venture and has not guaranteed any of the joint venture’s liabilities. If the joint venture needs additional capital and a participant fails to make a requested capital contribution, the other participants may make a contribution in consideration for a preferred return or may make the additional capital contribution and diminish the non-contributing participant’s ownership interest.

General

At January 31, 2012, the Company had accrued $2.6 million of aggregate exposure with respect to its estimated obligations to unconsolidated entities in which it has an investment. The Company’s investments in these entities are accounted for using the equity method. The Company recognized $20.0 million of impairment charges related to its investments in and advances to its Development Joint Ventures in the three-month period ended January 31, 2011. The Company did not recognize any impairment charges related to its investments in and advances to unconsolidated entities in the three-month period ended January 31, 2012. The fiscal 2011 impairment charges related to these entities are included in “Loss from unconsolidated entities” in the Company’s consolidated statement of operations for the three month period ended January 31, 2011.

The condensed consolidated balance sheets, as of the dates indicated and the condensed consolidated statements of operations, for the periods indicated, for the Company’s unconsolidated entities in which it has an investment, aggregated by type of business, are as follows (in thousands):

 

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Table of Contents

Condensed Balance Sheets:

 

 

September 30, September 30, September 30, September 30, September 30,
       January 31, 2012  
       Develop-
ment Joint
Ventures
       Home
Building
Joint
Ventures
       Toll
Brothers
Realty Trust
I and II
       Structured
Asset

Joint
Venture
       Total  

Cash and cash equivalents

     $ 13,067         $ 9,282         $ 10,620         $ 29,996         $ 62,965   

Inventory

       191,031           296,781           5,542                493,354   

Non-performing loan portfolio

                      288,130           288,130   

Rental properties

                 176,979                176,979   

Real estate owned (“REO”)

                 1,087           239,573           240,660   

Other assets (1)

       21,047           58,989           9,033           172,024           261,093   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total assets

     $ 225,145         $ 365,052         $ 203,261         $ 729,723         $ 1,523,181   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Debt (1)

     $ 71,444         $ 35,363         $ 198,066         $ 311,562         $ 616,435   

Other liabilities

       21,127           9,363           4,473           424           35,387   

Members’ equity

       132,574           320,326           722           170,995           624,617   

Non-controlling interest

                      246,742           246,742   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total liabilities and equity

     $ 225,145         $ 365,052         $ 203,261         $ 729,723         $ 1,523,181   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Company’s net investment in unconsolidated
entities (2)

     $ 8,592         $ 150,135         $ 700         $ 34,199         $ 193,626   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

September 30, September 30, September 30, September 30, September 30,
       October 31, 2011  
       Develop-
ment Joint
Ventures
       Home
Building
Joint
Ventures
       Toll
Brothers
Realty Trust
I and II
       Structured
Asset

Joint
Venture
       Total  

Cash and cash equivalents

     $ 14,190         $ 10,663         $ 11,726         $ 48,780         $ 85,359   

Inventory

       218,339           170,239           5,501                394,079   

Non-performing loan portfolio

                      295,044           295,044   

Rental properties

                 178,339                178,339   

Real estate owned

                 1,087           230,872           231,959   

Other assets (1)

       150,316           20,080           9,675           159,143           339,214   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total assets

     $ 382,845         $ 200,982         $ 206,328         $ 733,839         $ 1,523,994   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Debt (1)

     $ 327,856         $ 50,515         $ 198,927         $ 310,847         $ 888,145   

Other liabilities

       5,352           9,745           3,427           382           18,906   

Members’ equity

       49,637           140,722           3,974           172,944           367,277   

Non-controlling interest

                      249,666           249,666   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Total liabilities and equity

     $ 382,845         $ 200,982         $ 206,328         $ 733,839         $ 1,523,994   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

Company’s net investment in unconsolidated
entities (2)

     $ 17,098         $ 72,734         $ 1,872         $ 34,651         $ 126,355   
    

 

 

      

 

 

      

 

 

      

 

 

      

 

 

 

 

(1) Included in other assets at January 31, 2012 and October 31, 2011 of the Structured Asset Joint Venture is $165.5 million and $152.6 million, respectively, of restricted cash held in a defeasance account which will be used to repay debt of the Structured Asset Joint Venture.

 

(2) Differences between the Company’s net investment in unconsolidated entities and its underlying equity in the net assets of the entities is primarily a result of impairments related to the Company’s investments in unconsolidated entities, a loan made to one of the entities by the Company, and distributions from entities in excess of the carrying amount of the Company’s net investment.

 

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Table of Contents

Condensed Statements of Operations:

 

 

September 30, September 30, September 30, September 30, September 30,
       For the three months ended January 31, 2012  
       Develop-
ment Joint
Ventures
       Home
Building
Joint
Ventures
       Toll
Brothers
Realty Trust
I and II
     Structured
Asset
Joint
Venture
     Total  

Revenues

     $ 33,584         $ 23,430         $ 9,476       $ 8,133       $ 74,623   
    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

 

Cost of revenues

       31,771           17,794           3,343         11,067         63,975   

Other expenses

       225           945           6,785         2,631         10,586   

Loss on disposition of loans and REO

                    44         44   
    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

 

Total expenses—net

       31,996           18,739           10,128         13,742         74,605   
    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

 

Income (loss) from operations

       1,588           4,691           (652      (5,609      18   

Other income

       2,653           5              137         2,795   
    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

 

Net income (loss) before noncontrolling interest

       4,241           4,696           (652      (5,472      2,813   

Less: Net loss attributable to noncontrolling interest

                    (3,283      (3,283
    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

 

Net income (loss)

     $ 4,241           4,696         $ (652    $ (2,189    $ 6,096   
    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

 

Company’s equity in earnings (losses) of unconsolidated entities (3)

     $ 1,996         $ 4,520         $ 623       $ (452    $ 6,687   
    

 

 

      

 

 

      

 

 

    

 

 

    

 

 

 

 

September 30, September 30, September 30, September 30, September 30,
       For the three months ended January 31, 2011  
       Develop-
ment Joint
Ventures
     Home
Building
Joint
Ventures
       Toll
Brothers
Realty Trust
I and II
     Structured
Asset
Joint
Venture
     Total  

Revenues

     $ 1,085       $ 88,014         $ 9,150       $ 12,002       $ 110,251   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

Cost of revenues

       1,159         69,169           3,489         9,558         83,375   

Other expenses

       157         3,009           6,002         3,271         12,439   

Gain on disposition of loans and REO

                  (11,374      (11,374
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

Total expenses—net

       1,316         72,178           9,491         1,455         84,440   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

Income (loss) from operations

       (231      15,836           (341      10,547         25,811   

Other income

       2,379         36              88         2,503   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

Net income (loss) before noncontrolling interest

       2,148         15,872           (341      10,635         28,314   

Less: Net income attributable to noncontrolling interest

                  (6,383      (6,383
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

Net income (loss)

     $ 2,148       $ 15,872         $ (341      4,252       $ 21,931   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

Company’s equity in (losses) earnings of unconsolidated entities (3)

     $ (20,000    $ 7,934         $ 464       $ 600       $ (11,002
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

 

 

(3) Differences between the Company’s equity in earnings (losses) of unconsolidated entities and the underlying net income (loss) of the entities is primarily a result of impairments related to the Company’s investment in unconsolidated entities, distributions from entities in excess of the carrying amount of the Company’s net investment, and the Company’s share of the entities’ profits related to home sites purchased by the Company which reduces the Company’s cost basis of the home sites.

 

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Table of Contents

5. Investments in Non-Performing Loan Portfolios and Foreclosed Real Estate

In December 2011, Gibraltar acquired a portfolio of non-performing loans consisting of 11 loans with an unpaid principal balance of approximately $51.4 million. The portfolio includes non-performing loans secured primarily by commercial land and buildings in various stages of completion.

The following table summarizes for the portfolios acquired the accretable yield and the nonaccretable difference on our investments in those non-performing loans portfolios as of their acquisition dates (amounts in thousands).

 

 

September 30,
       Three months ended
January 31, 2012
 

Contractually required payments, including interest

     $ 52,524   

Nonaccretable difference

       (5,125
    

 

 

 

Cash flows expected to be collected

       47,399   

Accretable difference

       (20,514
    

 

 

 

Non-performing loans carrying amount

     $ 26,885   
    

 

 

 

The Company’s investment in non-performing loan portfolios consisted of the following as of the dates indicated (amounts in thousands):

 

 

September 30, September 30,
       January 31,
2012
     October 31,
2011
 

Unpaid principal balance

     $ 216,620       $ 171,559   

Discount on acquired loans

       (126,286      (108,325
    

 

 

    

 

 

 

Carrying value

     $ 90,334       $ 63,234   
    

 

 

    

 

 

 

The Company’s earnings from the portfolios and management fees earned are included in interest and other income in its condensed consolidated statements of operations. In the three-month period ended January 31, 2012, the Company recognized $2.1 million of earnings from its investments in the loan portfolios.

The activity in the accretable yield for the Company’s investment in the non-performing loan portfolios for the three months ended January 31, 2012 was as follows (amounts in thousands):

 

 

September 30,

Balance at October 31, 2011

     $ 42,326   

Additions

       20,514   

Accretion

       (3,228

Reductions from foreclosures and other dispositions

       (1,648

Other

       (120
    

 

 

 

Balance at January 31, 2012

     $ 57,844   
    

 

 

 

The additions to accretable yield and the accretion of interest income are based on various estimates regarding loan performance and the value of the underlying real estate securing the loans. As the Company continues to obtain updated information regarding the loans and the underlying collateral, the accretable yield may change. Therefore, the amount of accretable income recorded in the three month period ended January 31, 2012 is not necessarily indicative of expected future results.

6. Subsequent Event/Senior Notes Payable

On February 7, 2012, the Company, through Toll Brothers Finance Corp., issued $300 million principal amount of 5.875% Senior Notes due 2022 (the “5.875% Senior Notes”). The Company received $296.2 million of net proceeds from the issuance of the 5.875% Senior Notes.

On March 5, 2012, the Company, through Toll Brothers Finance Corp., issued an additional $119.9 million principal amount of its 5.875% Senior Notes in exchange for $80.7 million principal amount of its 6.875% Senior Notes due 2012 and for $36.9 million principal amount of its 5.95% Senior Notes due 2013. The Company expects to recognize a charge of approximately $1.1 million in the quarter ending April 30, 2012 representing the aggregate costs associated with the exchange of both series of notes.

 

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Table of Contents

7. Accrued Expenses

Accrued expenses at January 31, 2012 and October 31, 2011 consisted of the following (amounts in thousands):

 

 

September 30, September 30,
       January 31,
2012
       October 31,
2011
 

Land, land development and construction

     $ 103,955         $ 109,574   

Compensation and employee benefit

       91,016           96,037   

Insurance and litigation

       127,260           130,714   

Commitments to unconsolidated entities

       2,609           60,130   

Warranty

       43,109           42,474   

Interest

       29,611           25,968   

Other

       53,854           56,154   
    

 

 

      

 

 

 
     $ 451,414         $ 521,051   
    

 

 

      

 

 

 

The Company accrues for expected warranty costs at the time each home is closed and title and possession are transferred to the home buyer. Costs are accrued based upon historical experience. The table below provides, for the periods indicated, a reconciliation of the changes in the Company’s warranty accrual (amounts in thousands):

 

 

September 30, September 30,
       Three months ended
January 31,
 
       2012      2011  

Balance, beginning of period

     $ 42,474       $ 45,835   

Additions – homes closed during the period

       1,871         1,929   

Addition – liabilities acquired

       731      

Increase (decrease) in accruals for homes closed in prior periods

       1,783         (66

Charges incurred

       (3,750      (1,770
    

 

 

    

 

 

 

Balance, end of period

     $ 43,109       $ 45,928   
    

 

 

    

 

 

 

8. Income Taxes

The table below provides, for the periods indicated, a reconciliation of the Company’s effective tax rate from the federal statutory tax rate (amounts in thousands).

 

 

September 30, September 30, September 30, September 30,
       Three months ended January 31,  
       2012      2011  
       $      %*      $      %*  

Federal tax (benefit) provision at statutory rate

       (2,243      (35.0      (5,966      (35.0

State taxes, net of federal benefit

       (271      (4.2      (554      (3.3

Reversal of state tax provisions – finalization of audits

             (2,340      (13.7

Increase in unrecognized tax benefits

       1,500         23.4         

Reversal of accrual for uncertain tax positions

       (5,279      (82.4      (17,954      (105.3

Increase in deferred tax assets – net

       (525      (8.2      

Valuation allowance – recognized

       4,089         63.8         7,027         41.2   

Valuation allowance – reversed

       (2,843      (44.3      (1,260      (7.4

Accrued interest on anticipated tax assessments

       1,950         30.4         813         4.8   

Other

             (230      (1.3
    

 

 

    

 

 

    

 

 

    

 

 

 

Tax provision (benefit)

       (3,622      (56.5      (20,464      (120.0
    

 

 

    

 

 

    

 

 

    

 

 

 

 

 

* Due to rounding, amounts may not add.

 

14


Table of Contents

The Company currently operates in 20 states and is subject to various state tax jurisdictions. The Company estimates its state tax liability based upon the individual taxing authorities’ regulations, estimates of income by taxing jurisdiction and the Company’s ability to utilize certain tax-saving strategies. Due primarily to a change in the Company’s estimate of the allocation of income or loss, as the case may be, among the various taxing jurisdictions and changes in tax regulations and their impact on the Company’s tax strategies, the Company’s estimated rate for state income taxes was 6.5% and 5.0% for fiscal 2012 and 2011, respectively.

The Company recognizes in its tax benefit potential interest and penalties. Information as to the amounts recognized in its tax benefit, before reduction for applicable taxes and reversal of previously accrued interest and penalties, of potential interest and penalties in the three-month periods ended January 31, 2012 and 2011, and the amounts accrued for potential interest and penalties at January 31, 2012 and October 31, 2011 are set forth in the table below (amounts in thousands).

 

 

September 30,

Recognized in statements of operations:

    

Three-month period ended January 31, 2012

     $ 3,000   

Three-month period ended January 31, 2011

     $ 1,250   

Accrued at:

    

January 31, 2012

     $ 29,500   

October 31, 2011

     $ 29,200   

The table below provides, for the periods indicated, a reconciliation of the change in the unrecognized tax benefits (amounts in thousands).

 

 

September 30, September 30,
       Three months ended January 31,  
       2012      2011  

Balance, beginning of period

     $ 104,669       $ 160,446   

Increase in benefit as a result of tax positions taken in prior years

       4,500         1,250   

Decrease in benefit as a result of resolution of uncertain tax positions

       (4,000      (17,954

Decrease in benefit as a result of completion of tax audits

       (4,122      (3,600
    

 

 

    

 

 

 

Balance, end of period

     $ 101,047       $ 140,142   
    

 

 

    

 

 

 

The Company’s unrecognized tax benefits are included in “Income taxes payable” on the Company’s Condensed Consolidated Balance Sheets. If these unrecognized tax benefits reverse in the future, they would have a beneficial impact on the Company’s effective tax rate at that time. During the next twelve months, it is reasonably possible that the amount of unrecognized tax benefits will change. The anticipated changes will be principally due to expiration of tax statutes, settlements with taxing jurisdictions, increases due to new tax positions taken and the accrual of estimated interest and penalties.

The Company is allowed to carry forward tax losses for 20 years and apply such tax losses to future taxable income to realize federal deferred tax assets. As of January 31, 2012, the Company estimates that it will have approximately $52.0 million of tax loss carryforwards, resulting from losses that it expects to recognize on its fiscal 2011 tax return. In addition, the Company expects to be able to reverse previously recognized valuation allowances against future tax provisions during any future period for which it reports book income before income taxes. The Company will continue to review its deferred tax assets in accordance with ASC 740.

At January 31, 2012 and October 31, 2011, the Company had recorded cumulative valuation allowances against its entire net deferred federal tax asset of $354.6 million and $353.4 million, respectively.

For state tax purposes, due to past and projected losses in certain jurisdictions where the Company does not have carryback potential and/or cannot sufficiently forecast future taxable income, the Company has recognized net cumulative valuation allowances against its state deferred tax assets of $74.0 million as of January 31, 2012. In 2011, the Company took steps to merge a number of entities to better align financial and tax reporting and to reduce administrative complexity going forward. Some of these mergers occurred in higher state tax jurisdictions creating additional state tax deferred assets of $28.9 million, offset entirely by an increase in the state tax valuation allowance. Future valuation allowances in these jurisdictions may continue to be recognized if the Company believes it will not generate sufficient future taxable income to utilize any future state deferred tax assets.

 

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9. Stock-Based Benefit Plans

The Company grants stock options, restricted stock and various types of restricted stock units to its employees and its non-employee directors. Beginning in fiscal 2012, the Company changed the mix of stock-based compensation to its employees by reducing the number of stock options it grants and, in their place, issued non-performance based restricted stock units as a form of compensation. The Company also has an employee stock purchase plan that allows employees to purchase Company stock at a discount. In the three-month period ended January 31, 2012, the Company issued 941,678 shares under its stock-based benefit plans.

Information regarding the amount of total stock-based compensation expense recognized by the Company, for the periods indicated, is as follows (amounts in thousands):

 

 

September 30, September 30,
       2012        2011  

Three months ended January 31:

     $ 5,626         $ 5,373   

At January 31, 2012 and October 31, 2011, the aggregate unamortized value of outstanding stock-based compensation awards was approximately $23.3 million and $12.7 million, respectively.

Due to the losses recognized by the Company over the past several years and its inability to forecast future pre-tax profits, the Company has not recognized a tax benefit on its stock-based compensation expense in the fiscal 2012 and 2011 periods.

Information about the Company’s more significant stock-based compensation programs is outlined below.

Stock Options:

The fair value of each option award is estimated on the date of grant using a lattice-based option valuation model that uses assumptions noted in the following table. The lattice-based option valuation model incorporates ranges of assumptions for inputs, which are disclosed in the table below. Expected volatilities were based on implied volatilities from traded options on the Company’s stock, historical volatility of the Company’s stock and other factors. The expected lives of options granted were derived from the historical exercise patterns and anticipated future patterns and represent the period of time that options granted are expected to be outstanding; the range given below results from certain groups of employees exhibiting different behaviors. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant.

The weighted-average assumptions and the fair value used for stock option grants in fiscal 2012 and 2011 were as follows:

 

 

September 30, September 30,
       2012      2011

Expected volatility

     44.20% – 50.24%      45.38% – 49.46%

Weighted-average volatility

     46.99%      47.73%

Risk-free interest rate

     0.78% – 1.77%      1.64% – 3.09%

Expected life (years)

     4.59 – 9.06      4.29 – 8.75

Dividends

     none      none

Number of options issued (in thousands)

         

Weighted-average grant date fair value per share of options granted

     $8.70      $7.94

Stock compensation expense, related to stock options, for the periods indicated, was as follows (amounts in thousands):

 

 

September 30, September 30,
       2012        2011  

Three months ended January 31:

     $ 3,522         $ 4,588   

 

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Performance-Based Restricted Stock Units:

In December 2011, the Executive Compensation Committee of the Company’s Board of Directors approved awards of performance-based restricted stock units (“Performance-Based RSUs”) relating to shares of the Company’s common stock to certain of its senior management. The use of Performance-Based RSUs replaced the use of stock price-based restricted stock units awarded in prior years. The Performance-Based RSUs are based on the attainment of certain performance metrics of the Company in fiscal 2012. The number of shares underlying the Performance-Based RSUs that will be issued to the recipients may range from 90% to 110% of the base award depending on actual performance metrics as compared to the target performance metrics. The Performance-Based RSUs vest over a four-year period; provided the recipients continue to be employed by the Company or serve on the board of directors of the Company (as applicable) as specified in the award document.

The value of the Performance-Based RSUs was determined to be equal to the estimated number of shares of the Company’s common stock to be issued multiplied by the closing price of the Company’s common stock on the NYSE on the date the Performance-Based RSUs were awarded. The Company evaluates the performance-based metrics quarterly and estimates the number of shares underlying the RSUs that will be issued. Information regarding the issuance, valuation assumptions and amortization of the Company’s Performance-Based RSUs issued in fiscal 2012 is as follows:

 

 

September 30,
       2012  

Estimated number to be issued

       350,000   

Closing price of the Company’s common stock on date of issuance

     $ 20.50   

Estimated aggregate fair value of Performance-Based RSUs issued (in thousands)

     $ 7,185   

Performance-Based RSU expense recognized in the three months ended January 31, 2012 (in thousands):

     $ 936   

Unamortized value of Performance-Based RSUs at January 31, 2012 (in thousands):

     $ 6,249   

Stock Price-Based Restricted Stock Units:

In each of December 2010, 2009 and 2008, the Executive Compensation Committee of the Company’s Board of Directors approved awards of market performance-based restricted stock units (“Stock Price-Based RSUs”) relating to shares of the Company’s common stock. The Stock Price-Based RSUs will vest and the recipients will be entitled to receive the underlying shares if the average closing price of the Company’s common stock on the New York Stock Exchange (“NYSE”), measured over any 20 consecutive trading days ending on or prior to five years from date of issuance of the Stock Price-Based RSUs increases 30% or more over the closing price of the Company’s common stock on the NYSE on the date of issuance (“Target Price”), provided the recipients continue to be employed by the Company or serve on the board of directors of the Company (as applicable) as specified in the award document. The Company determined the aggregate value of the Stock Price-Based RSUs using a lattice-based option pricing model.

Information regarding the amortization of the Company’s Stock Price-Based RSUs, for the periods indicated, is as follows (amounts in thousands):

 

 

September 30,

Three months ended January 31, 2012

     $ 848   

Three months ended January 31, 2011

     $ 752   

Information regarding the aggregate number of outstanding Stock Price-Based RSUs and aggregate unamortized value of the outstanding Stock Price-Based RSUs, as of the date indicated, is as follows:

 

 

September 30, September 30,
       January 31,
2012
       October 31,
2011
 

Aggregate outstanding Stock Price-Based RSUs

       706,000           706,000   

Cumulative unamortized value of Stock Price-Based RSUs (in thousands)

     $ 4,081         $ 4,929   

 

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Non-Performance Based Restricted Stock Units:

In December 2011 and 2010, the Company issued restricted stock units (“RSUs”). These RSUs generally vest in annual installments over a four-year period. The value of the RSUs was determined to be equal to the number of shares of the Company’s common stock to be issued pursuant to the RSUs, multiplied by the closing price of the Company’s common stock on the NYSE on the date the RSUs were awarded. Information regarding these RSUs is as follows:

 

 

September 30, September 30,
       2012        2011  

Number of RSUs issued

       107,820           15,497   

Closing price of the Company’s common stock on date of issuance

     $ 20.50         $ 19.32   

Aggregate fair value of RSUs issued (in thousands)

     $ 2,210         $ 299   

Information regarding the amortization of the Company’s RSUs, for the periods indicated, is as follows (amounts in thousands):

 

 

September 30, September 30,
       2012        2011  

Three months ended January 31:

     $ 314         $ 27   

Information regarding the aggregate number of outstanding RSUs and aggregate unamortized value of the outstanding RSUs, as of the date indicated, is as follows:

 

 

September 30, September 30,
       January 31,
2012
       October 31,
2011
 

Aggregate outstanding RSUs

       138,814           30,994   

Cumulative unamortized value of RSUs (in thousands)

     $ 2,275         $ 379   

10. Employee Retirement Plans

The Company has two unfunded supplemental retirement plans (“SERPs”) for certain employees. The table below provides, for the periods indicated, costs recognized and payments made related to its SERPs (amounts in thousands):

 

 

September 30, September 30,
       Three months  ended
January 31,
 
       2012        2011  

Service cost

     $ 97         $ 76   

Interest cost

       303           323   

Amortization of prior service obligation

       184           173   

Amortization of unrecognized losses

       17        
    

 

 

      

 

 

 

Total costs

     $ 601         $ 572   
    

 

 

      

 

 

 

Benefits paid

     $ 115         $ 34   
    

 

 

      

 

 

 

 

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11. Accumulated Other Comprehensive Loss and Total Comprehensive (Loss) Income

Accumulated other comprehensive loss at January 31, 2012 and January 31, 2011 was primarily related to employee retirement plans.

The table below provides, for the periods indicated, the components of total comprehensive (loss) income (amounts in thousands):

 

 

September 30, September 30,
       Three months ended
January 31,
 
       2012      2011  

Net (loss) income as reported

     $ (2,786    $ 3,417   

Changes in pension liability

       (109      173   

Change in fair value of available-for-sale securities

       243         64   

Unrealized loss on derivative held by equity investee

       (795   
    

 

 

    

 

 

 

Comprehensive (loss) income

     $ (3,447    $ 3,654   
    

 

 

    

 

 

 

12. Stock Repurchase Program

In March 2003, the Company’s Board of Directors authorized the repurchase of up to 20 million shares of its common stock, par value $.01, from time to time, in open market transactions or otherwise, for the purpose of providing shares for its various employee benefit plans. The table below provides, for the periods indicated, information about the Company’s share repurchase program.

 

 

September 30, September 30,
       Three months ended
January 31,
 
       2012        2011  

Number of shares purchased

       3,000           8,000   

Average price per share

     $ 20.61         $ 19.23   

Remaining authorization at January 31 (in thousands):

       8,783           11,822   

13. (Loss) Income per Share Information

The table below provides, for the periods indicated, information pertaining to the calculation of (loss) income per share, common stock equivalents, weighted average number of anti-dilutive option and shares issued (amounts in thousands):

 

 

September 30, September 30,
       Three months ended
January 31,
 
       2012        2011  

Basic weighted-average shares

       166,311           166,677   

Common stock equivalents (a)

       —             1,444   
    

 

 

      

 

 

 

Diluted weighted-average shares

       166,311           168,121   
    

 

 

      

 

 

 

Common stock equivalents excluded from diluted weighted-average shares due to anti-dilutive
effect (a)

       796           —     
    

 

 

      

 

 

 

Weighted average number of anti-dilutive options (b)

       5,906           8,383   
    

 

 

      

 

 

 

Shares issued under stock incentive and employee stock purchase plans

       942           414   
    

 

 

      

 

 

 

 

(a) Common stock equivalents represent the dilutive effect of outstanding in-the-money stock options. For the three-month period ended January 31, 2012, there were no incremental shares attributed to outstanding options to purchase common stock because the Company had a net loss in the period and any incremental shares would be anti-dilutive.

 

(b) Based upon the average closing price of the Company’s common stock on the NYSE for the period.

 

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14. Fair Value Disclosures

The table below provides, as of the date indicated, a summary of assets (liabilities) related to the Company’s financial instruments, measured at fair value on a recurring basis (amounts in thousands).

 

 

September 30, September 30, September 30,
              Fair value  

Financial Instrument

     Fair value
hierarchy
     January 31,
2012
     October 31,
2011
 

Corporate Securities

     Level 1      $ 143,729       $ 233,572   

Residential Mortgage Loans Held for Sale

     Level 2      $ 36,911       $ 63,175   

Forward Loan Commitments—Residential Mortgage Loans Held for Sale

     Level 2      $ (96    $ 218   

Interest Rate Lock Commitments (“IRLCs”)

     Level 2      $ 85       $ (147

Forward Loan Commitments—IRLCs

     Level 2      $ (85    $ 147   

At January 31, 2012 and October 31, 2011, the carrying value of cash and cash equivalents and restricted cash approximated fair value.

At the end of the reporting period, the Company determines the fair value of its mortgage loans held for sale and the forward loan commitments it has entered into as a hedge against the interest rate risk of its mortgage loans using the market approach to determine fair value. The evaluation is based on the current market pricing of mortgage loans with similar terms and values as of the reporting date and by applying such pricing to the mortgage loan portfolio. The Company recognizes the difference between the fair value and the unpaid principal balance of mortgage loans held for sale as a gain or loss. In addition, the Company recognizes the fair value of its forward loan commitments as a gain or loss. These gains and losses are included in interest and other income. Interest income on mortgage loans held for sale is calculated based upon the stated interest rate of each loan and is included in “interest and other income”.

The table below provides, as of the date indicated, the aggregate unpaid principal and fair value of mortgage loans held for sale as of the date indicated (amounts in thousands).

 

 

September 30, September 30, September 30,
       Aggregate unpaid
principal balance
       Fair value        Excess  

At January 31, 2012

     $ 36,532         $ 36,911         $ 379   

At October 31, 2011

     $ 62,765         $ 63,175         $ 410   

IRLCs represent individual borrower agreements that commit the Company to lend at a specified price for a specified period as long as there is no violation of any condition established in the commitment contract. These commitments have varying degrees of interest rate risk. The Company utilizes best-efforts forward loan commitments (“Forward Commitments”) to hedge the interest rate risk of the IRLCs and residential mortgage loans held for sale. Forward Commitments represent contracts with third-party investors for the future delivery of loans whereby the Company agrees to make delivery at a specified future date at a specified price. The IRLCs and Forward Commitments are considered derivative financial instruments under ASC 815, “Derivatives and Hedging”, which requires derivative financial instruments to be recorded at fair value. The Company estimates the fair value of such commitments based on the estimated fair value of the underlying mortgage loan and, in the case of IRLCs, the probability that the mortgage loan will fund within the terms of the IRLC. To manage the risk of non-performance of investors regarding the Forward Commitments, the Company assesses the credit worthiness of the investors on a periodic basis.

The table below provides, as of the date indicated, the amortized cost, gross unrealized holding gains, gross unrealized holding losses and fair value of marketable securities (amounts in thousands).

 

 

September 30, September 30,
       January 31,
2012
     October 31,
2011
 

Amortized cost

     $ 143,766       $ 233,852   

Gross unrealized holding gains

       46         28   

Gross unrealized holding losses

       (83      (308
    

 

 

    

 

 

 

Fair value

     $ 143,729       $ 233,572   
    

 

 

    

 

 

 

 

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The remaining contractual maturities of marketable securities as of January 31, 2012 ranged from less than one month to nine months.

The Company recognizes inventory impairment charges based on the difference in the carrying value of the inventory and its fair value at the time of the evaluation. The fair value of the aforementioned inventory was determined using Level 3 criteria. See Note 1, “Significant Accounting Policies, Inventory” for additional information regarding the Company’s methodology on determining fair value. The table below provides, for the periods indicated, the fair value of inventory whose carrying value was adjusted and the amount of impairment charges recognized (amounts in thousands).

 

 

September 30, September 30,
        Fair value of
inventory, net

of impairment
       Impairment
charges
recognized
 

Three months ended:

         

January 31, 2012

     $ 49,758         $ 6,425   

January 31, 2011

     $ 56,105         $ 5,475   

Gibraltar’s portfolio of non-performing loans was recorded at fair value at inception based on the acquisition price as determined by Level 3 inputs. The estimated fair value was determined using Level 3 inputs and was based on discounted future cash flows generated by the loans discounted at the rates used to value the portfolios at the acquisition dates. The table below provides, as of the date indicated, the carrying amount and estimated fair value of the non-performing loan portfolios (amounts in thousands).

 

 

September 30, September 30,
       January 31,
2012
       October 31,
2011
 

Carrying amount

     $ 90,334         $ 63,234   

Estimated fair value

     $ 91,667         $ 64,539   

The table below provides, as of the date indicated, the book value and estimated fair value of the Company’s debt (amounts in thousands).

 

 

September 30, September 30, September 30, September 30,
       January 31, 2012        October 31, 2011  
       Book value        Estimated
fair value
       Book value        Estimated
fair value
 

Loans payable (a)

     $ 93,279         $ 88,137         $ 106,556         $ 98,950   

Senior notes (b)

       1,499,371           1,634,469           1,499,371           1,614,010   

Mortgage company warehouse loan (c)

       31,864           31,864           57,409           57,409   
    

 

 

      

 

 

      

 

 

      

 

 

 
     $ 1,624,514         $ 1,754,470         $ 1,663,336         $ 1,770,369   
    

 

 

      

 

 

      

 

 

      

 

 

 

 

(a) The estimated fair value of loans payable was based upon their indicated market prices or the interest rates that the Company believed were available to it for loans with similar terms and remaining maturities as of the applicable valuation date.

 

(b) The estimated fair value of the Company’s senior notes is based upon their indicated market prices.

 

(c) The Company believes that the carrying value of its mortgage company loan borrowings approximates their fair value.

15. Interest and Other Income

Interest and other income includes the activity of the Company’s non-core ancillary businesses which include its mortgage, title, landscaping, security monitoring, structured loan and non-performing portfolio group and golf course and country club operations. The table below provides, for the periods indicated, revenues and expenses for the Company’s non-core ancillary businesses (amounts in thousands).

 

 

September 30, September 30,
       Three months ended January 31,  
       2012        2011  

Revenue

     $ 17,311         $ 13,823   

Expense

     $ 14,089         $ 13,266   

 

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Table of Contents

16. Legal Proceedings

The Company is involved in various claims and litigation arising principally in the ordinary course of business.

In January 2006, the Company received a request for information pursuant to Section 308 of the Clean Water Act from Region 3 of the U.S. Environmental Protection Agency (“EPA”) concerning storm water discharge practices in connection with its homebuilding projects in the states that comprise EPA Region 3. The Company provided information to the EPA pursuant to the request. The U.S. Department of Justice (“DOJ”) has assumed responsibility for the oversight of this matter and has alleged that the Company has violated regulatory requirements applicable to storm water discharges and that it may seek injunctive relief and/or civil penalties. The Company is presently engaged in settlement discussions with representatives from the DOJ and the EPA.

On November 4, 2008, a shareholder derivative action was filed in the Chancery Court of Delaware by Milton Pfeiffer against Robert I. Toll, Zvi Barzilay, Joel H. Rassman, Bruce E. Toll, Paul E. Shapiro, Robert S. Blank, Carl B. Marbach, and Richard J. Braemer. The plaintiff purports to bring his claims on behalf of Toll Brothers, Inc. and alleges that the director and officer defendants breached their fiduciary duties to the Company and its stockholders with respect to their sales of shares of the Company’s common stock during the period beginning on December 9, 2004 and ending on November 8, 2005. The plaintiff alleges that such stock sales were made while in possession of non-public, material information about the Company. The plaintiff seeks contribution and indemnification from the individual director and officer defendants for costs and expenses incurred by us in connection with defending a now-settled related class action. In addition, again purportedly on the Company’s behalf, the plaintiff seeks disgorgement of the defendants’ profits from their stock sales.

On March 4, 2009, a second shareholder derivative action was brought by Oliverio Martinez in the U.S. District Court for the Eastern District of Pennsylvania. The case was brought against the eleven then-current members of the Company’s board of directors and its Chief Accounting Officer. This complaint alleges breaches of fiduciary duty, waste of corporate assets, and unjust enrichment during the period from February 2005 to November 2006. The complaint further alleges that certain of the defendants sold the Company’s stock during this period while in possession of allegedly non-public, material information and plaintiff seeks disgorgement of profits from these sales. The complaint also asserts a claim for equitable indemnity for costs and expenses incurred by the Company in connection with a now-settled related class action lawsuit.

On April 1, 2009, a third shareholder derivative action was filed by William Hall, also in the U.S. District Court for the Eastern District of Pennsylvania, against the eleven then-current members of the Company’s board of directors and its Chief Accounting Officer. This complaint is identical to the previous shareholder complaint filed in Philadelphia and, on July 14, 2009, the two cases were consolidated. On April 30, 2010, the plaintiffs filed an amended consolidated complaint.

The Company’s Certificate of Incorporation and Bylaws provide for indemnification of its directors and officers. The Company has also entered into individual indemnification agreements with each of its directors.

Due to the high degree of judgment required in determining the amount of potential loss related to the various claims and litigation in which the Company is involved, including those noted above, and the inherent variability in predicting future settlements and judicial decisions, the Company cannot estimate a range of reasonably possible losses in excess of its accruals for these matters. The Company believes that adequate provision for resolution of all claims and pending litigation has been made for probable losses and the disposition of these matters will not have a material adverse effect on the Company’s results of operations and liquidity or on its financial condition.

17. Commitments and Contingencies

Land Purchase Commitments

Generally, the Company’s option and purchase agreements to acquire land parcels do not require the Company to purchase those land parcels, although the Company may, in some cases, forfeit any deposit balance outstanding if and when it terminates an option and purchase agreement. If market conditions are weak, approvals needed to develop the land are uncertain or other factors exist that make the purchase undesirable, the Company may not expect to acquire the land. Whether an option and purchase agreement is legally terminated or not, the Company reviews the amount recorded for the land parcel subject to the option and purchase agreement to determine if the amount is recoverable. While the Company may not have formally terminated the option and purchase agreements for those land parcels that it does not expect to acquire, it has written off any non-refundable deposits and costs previously capitalized to such land parcels in the periods that it determined such costs were not recoverable.

 

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Table of Contents

Information regarding the Company’s purchase commitments, as of the date indicated, is provided in the table below (amounts in thousands).

 

 

September 30, September 30,
       January 31,
2012
       October 31,
2011
 

Aggregate purchase commitments:

         

Unrelated parties

     $ 539,636         $ 551,905   

Unconsolidated entities that the Company has investments in

       124,387           12,471   
    

 

 

      

 

 

 

Total

     $ 664,023         $ 564,376   
    

 

 

      

 

 

 

Deposits against aggregate purchase commitments

     $ 32,199         $ 37,987   

Credit to be received from amounts previously contributed to unconsolidated entities

       75,600        

Additional cash required to acquire land

       556,224           526,389   
    

 

 

      

 

 

 

Total

     $ 664,023         $ 564,376   
    

 

 

      

 

 

 

The Company has additional land parcels under option that have been excluded from the aforementioned aggregate purchase amounts since it does not believe that it will complete the purchase of these land parcels and no additional funds will be required from the Company to terminate these contracts.

Investments in and Advances to Unconsolidated Entities

See Note 4, “Investments in and Advances to Unconsolidated Entities,” for more information regarding the Company’s commitments to these entities.

Surety Bonds and Letters of Credit

At January 31, 2012, the Company had outstanding surety bonds amounting to $367.1 million, primarily related to its obligations to various governmental entities to construct improvements in the Company’s various communities. The Company estimates that $206.6 million of work remains on these improvements. The Company has an additional $65.7 million of surety bonds outstanding that guarantee other obligations of the Company. The Company does not believe it is probable that any outstanding bonds will be drawn upon.

At January 31, 2012, the Company had outstanding letters of credit of $83.5 million, including $70.2 million under its credit facility and $13.3 million collateralized by restricted cash. These letters of credit were issued to secure various financial obligations of the Company including insurance policy deductibles and other claims, land deposits and security to complete improvements in communities which it is operating. The Company believes it is not probable that any outstanding letters of credit will be drawn upon.

Backlog

At January 31, 2012, the Company had agreements of sale outstanding to deliver 1,784 homes with an aggregate sales value of $1.1 billion.

Mortgage Commitments

The Company’s mortgage subsidiary provides mortgage financing for a portion of the Company’s home closings. For those home buyers to whom the Company’s mortgage subsidiary provides mortgages, it determines whether the home buyer qualifies for the mortgage he or she is seeking based upon information provided by the home buyer and other sources. For those home buyers that qualify, the Company’s mortgage subsidiary provides the home buyer with a mortgage commitment that specifies the terms and conditions of a proposed mortgage loan based upon then-current market conditions. Prior to the actual closing of the home and funding of the mortgage, the home buyer will lock in an interest rate based upon the terms of the commitment. At the time of rate lock, the Company’s mortgage subsidiary agrees to sell the proposed mortgage loan to one of several outside recognized mortgage financing institutions (“investors”), which is willing to honor the terms and conditions, including interest rate, committed to the home buyer. The Company believes that these investors have adequate financial resources to honor their commitments to its mortgage subsidiary.

 

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Table of Contents

Information regarding the Company’s mortgage commitments, as of the date indicated, is provided in the table below (amounts in thousands).

 

 

September 30, September 30,
       January 31,
2012
       October 31,
2011
 

Aggregate mortgage loan commitments:

         

IRLCs

     $ 92,623         $ 129,553   

Non-IRLCs

       342,633           306,722   
    

 

 

      

 

 

 

Total

     $ 435,256         $ 436,275   
    

 

 

      

 

 

 

Investor commitments to purchase:

         

IRLCs

     $ 92,623         $ 129,553   

Mortgage loans receivable

       34,385           60,680   
    

 

 

      

 

 

 

Total

     $ 127,008         $ 190,233   
    

 

 

      

 

 

 

18. Geographic Segments

Revenue and (loss) income before income taxes for each of the Company’s geographic segments, for the periods indicated, were as follows (amounts in thousands):

 

 

September 30, September 30,
       Three months ended January 31,  
       2012      2011  

Revenue:

       

North

     $ 75,580       $ 82,497   

Mid-Atlantic

       100,799         103,815   

South

       76,466         61,903   

West

       69,110         85,901   
    

 

 

    

 

 

 

Total

     $ 321,955       $ 334,116   
    

 

 

    

 

 

 

(Loss) income before income taxes:

       

North

     $ 1,201       $ 7,068   

Mid-Atlantic

       10,642         8,088   

South

       (2,077      (1,348

West

       5,603         (15,240

Corporate and other

       (21,777      (15,615
    

 

 

    

 

 

 

Total

     $ (6,408    $ (17,047
    

 

 

    

 

 

 

“Corporate and other” is comprised principally of general corporate expenses such as the Offices of the Executive Chairman, the Chief Executive Officer and President, and the corporate finance, accounting, audit, tax, human resources, risk management, marketing and legal groups, directly expensed interest, interest income and income from the Company’s ancillary businesses and income (loss) from a number of its unconsolidated entities.

Total assets for each of the Company’s geographic segments, as of the date indicated, are shown in the table below (amounts in thousands).

 

 

September 30, September 30,
       January 31,
2012
       October 31,
2011
 

North

     $ 1,102,276         $ 1,060,215   

Mid-Atlantic

       1,305,586           1,235,847   

South

       771,461           760,097   

West

       785,085           650,844   

Corporate and other

       1,010,494           1,348,243   
    

 

 

      

 

 

 

Total

     $ 4,974,902         $ 5,055,246   
    

 

 

      

 

 

 

Corporate and other is comprised principally of cash and cash equivalents, marketable securities, restricted cash, the assets of the Company’s manufacturing facilities and mortgage subsidiary, and its Gibraltar investments.

 

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Table of Contents

The Company provided for inventory impairment charges and the expensing of costs that it believed not to be recoverable and write-downs of its investments in unconsolidated entities (including its pro-rata share of impairment charges recognized by the unconsolidated entities in which it has an investment) for the periods indicated, is shown in the table below; the net carrying value of inventory and investments in and advances to unconsolidated entities for each of the Company’s geographic segments, as of the date indicated, is also shown (amounts in thousands).

 

 

September 30, September 30, September 30, September 30,
       Net Carrying Value        Three months ended  
       At January 31,        At October 31,        January 31,  
       2012        2011        2012      2011  

Inventory:

                 

Land controlled for future communities:

                 

North

     $ 11,462         $ 19,390         $ 24       $ 158   

Mid-Atlantic

       22,045           21,592           199         66   

South

       5,016           3,812           555         306   

West

       4,692           1,787           (1      (879
    

 

 

      

 

 

      

 

 

    

 

 

 
       43,215           46,581           777         (349
    

 

 

      

 

 

      

 

 

    

 

 

 

Land owned for future communities:

                 

North

       244,835         $ 231,085           

Mid-Atlantic

       473,981           455,818           

South

       132,936           125,461           918      

West

       216,995           166,781           
    

 

 

      

 

 

      

 

 

    

 

 

 
       1,068,747           979,145           918         —     
    

 

 

      

 

 

      

 

 

    

 

 

 

Operating communities:

                 

North

       764,010           738,473           2,265         1,275   

Mid-Atlantic

       682,497           659,081           

South

       551,990           539,582           4,160      

West

       544,641           453,861              4,200   
    

 

 

      

 

 

      

 

 

    

 

 

 
       2,543,138           2,390,997           6,425         5,475   
    

 

 

      

 

 

      

 

 

    

 

 

 

Total

     $ 3,655,100         $ 3,416,723         $ 8,120       $ 5,126   
    

 

 

      

 

 

      

 

 

    

 

 

 

Investments in and advances to unconsolidated entities:

                 

North

     $ 119,389         $ 40,734           

South

       30,746           32,000           

West

       8,592           17,098            $ 20,000   

Corporate

       34,899           36,523           
    

 

 

      

 

 

      

 

 

    

 

 

 

Total

     $ 193,626         $ 126,355         $ —         $ 20,000   
    

 

 

      

 

 

      

 

 

    

 

 

 

 

25


Table of Contents

19. Supplemental Disclosure to Statements of Cash Flows

The following are supplemental disclosures to the statements of cash flows for the three months ended January 31, 2012 and 2011 (amounts in thousands):

 

 

September 30, September 30,
       2012      2011  

Cash flow information:

       

Interest paid, net of amount capitalized

        $ 587   

Interest capitalized, net of amount paid

     $ 766      

Income tax payment

     $ 2,093      

Income tax refunds

        $ 381   

Non-cash activity:

       

Cost of inventory acquired through seller financing municipal bonds or recorded due to VIE criteria, net

     $ 431       $ 21,584   

Increase in SERP benefits

     $ 310      

Miscellaneous (decreases) increases to inventory

     $ (75    $ 2,137   

Reclassification of inventory to property, construction and office equipment

        $ 20,005   

(Increase) reduction of investments in unconsolidated entities due to increase/reduction in letters of credit or accrued liabilities

     $ (26    $ 19,106   

Transfer of inventory to investment in non-performing loan portfolios and foreclosed real estate

     $ 802      

Transfer of inventory to investment in unconsolidated entities

     $ 5,793      

Unrealized loss on derivative held by equity investee

     $ 795      

Miscellaneous (decreases) increases to investments in unconsolidated entities

     $ (18    $ 540   

Acquisition of a Business:

       

Fair value of assets purchased

     $ 149,959      

Liabilities assumed

     $ 5,213      

Cash paid

     $ 144,746      

20. Supplemental Guarantor Information

A 100% owned subsidiary of the Company, Toll Brothers Finance Corp. (the “Subsidiary Issuer”), issued $300 million of 6.875% Senior Notes due 2012 on November 22, 2002; $250 million of 5.95% Senior Notes due 2013 on September 3, 2003; $300 million of 4.95% Senior Notes due 2014 on March 16, 2004; $300 million of 5.15% Senior Notes due 2015 on June 2, 2005; $400 million of 8.91% Senior Notes due 2017 on April 13, 2009; and $250 million of 6.75% Senior Notes due 2019 on September 22, 2009. Through January 31, 2012, the Subsidiary Issuer has redeemed $160.2 million of its 6.875% Senior Notes due 2012, $108.4 million of its 5.95% Senior Notes due 2013 and $32.0 million of its 4.95% Senior Notes due 2014. The obligations of the Subsidiary Issuer to pay principal, premiums, if any, and interest is guaranteed jointly and severally on a senior basis by the Company and substantially all of the Company’s 100% owned home building subsidiaries (the “Guarantor Subsidiaries”). The guarantees are full and unconditional. The Company’s non-home building subsidiaries and several of its home building subsidiaries (the “Non-Guarantor Subsidiaries”) do not guarantee the debt. Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that such disclosures would not be material to investors. Prior to the above described senior debt issuances, the Subsidiary Issuer did not have any operations.

Supplemental consolidating financial information of Toll Brothers, Inc., the Subsidiary Issuer, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the eliminations to arrive at Toll Brothers, Inc. on a consolidated basis is presented below ($ amounts in thousands).

 

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Table of Contents

Condensed Consolidating Balance Sheet at January 31, 2012

 

 

       Toll                      Non-                
       Brothers,      Subsidiary        Guarantor      Guarantor                
       Inc.      Issuer        Subsidiaries      Subsidiaries      Eliminations      Consolidated  

ASSETS

                     

Cash and cash equivalents

               441,916         133,778            575,694   

Marketable securities

               143,729               143,729   

Restricted cash

       28,307              18,434         1,500            48,241   

Inventory

               3,496,927         158,173            3,655,100   

Property, construction and office equipment, net

               98,408         3,091            101,499   

Receivables, prepaid expenses and other assets

          6,444           75,622         17,827         (1,702      98,191   

Mortgage loans receivable

                  36,911            36,911   

Customer deposits held in escrow

               23,309         1,780            25,089   

Investments in and advances to unconsolidated entities

               77,473         116,153            193,626   

Investments in non-performing loan portfolios and foreclosed real estate

                  96,822            96,822   

Investments in and advances to consolidated entities

       2,671,770         1,513,343           (943,024      (236,201      (3,005,888      —     
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 
       2,700,077         1,519,787           3,432,794         329,834         (3,007,590      4,974,902   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES AND EQUITY

                     

Liabilities:

                     

Loans payable

               92,079         1,200            93,279   

Senior notes

          1,491,442                    1,491,442   

Mortgage company warehouse loan

                  31,864            31,864   

Customer deposits

               93,356         3,978            97,334   

Accounts payable

               103,491         1,820            105,311   

Accrued expenses

          28,345           306,994         117,857         (1,782      451,414   

Income taxes payable

       102,276                 (2,000         100,276   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

       102,276         1,519,787           595,920         154,719         (1,782      2,370,920   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

Equity:

                     

Stockholders’ equity:

                     

Common stock

       1,687              3,054         2,003         (5,057      1,687   

Additional paid-in capital

       399,743              1,366         2,734         (4,100      399,743   

Retained earnings

       2,231,465              2,836,017         164,197         (3,000,214      2,231,465   

Treasury stock, at cost

       (31,531                    (31,531

Accumulated other comprehensive loss

       (3,563           (3,563         3,563         (3,563
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

       2,597,801         —             2,836,874         168,934         (3,005,808      2,597,801   

Noncontrolling interest

                  6,181            6,181   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

       2,597,801         —             2,836,874         175,115         (3,005,808      2,603,982   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 
       2,700,077         1,519,787           3,432,794         329,834         (3,007,590      4,974,902   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

 

27


Table of Contents

Condensed Consolidating Balance Sheet at October 31, 2011

 

 

       Toll                      Non-                
       Brothers,      Subsidiary        Guarantor      Guarantor                
       Inc.      Issuer        Subsidiaries      Subsidiaries      Eliminations      Consolidated  

ASSETS

                     

Cash and cash equivalents

               775,300         131,040            906,340   

Marketable securities

               233,572               233,572   

Restricted cash

               19,084         676            19,760   

Inventory

               2,911,211         505,512            3,416,723   

Property, construction and office equipment, net

               77,001         22,711            99,712   

Receivables, prepaid expenses and other assets

          6,768           74,980         26,067         (2,239      105,576   

Mortgage loans receivable

                  63,175            63,175   

Customer deposits held in escrow

               10,682         4,177            14,859   

Investments in and advances to unconsolidated entities

               86,481         39,874            126,355   

Investments in non-performing loan portfolios and foreclosed real estate

                  69,174            69,174   

Investments in and advances to consolidated entities

       2,694,419         1,508,550           (727,258      (467,395      (3,008,316      —     
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 
       2,694,419         1,515,318           3,461,053         395,011         (3,010,555      5,055,246   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

LIABILITIES AND EQUITY

                     

Liabilities:

                     

Loans payable

               61,994         44,562            106,556   

Senior notes

          1,490,972                    1,490,972   

Mortgage company warehouse loan

                  57,409            57,409   

Customer deposits

               71,388         12,436            83,824   

Accounts payable

               96,645         172            96,817   

Accrued expenses

          24,346           320,021         178,965         (2,281      521,051   

Income taxes payable

       108,066                 (2,000         106,066   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

Total liabilities

       108,066         1,515,318           550,048         291,544         (2,281      2,462,695   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

Equity:

                     

Stockholders’ equity:

                     

Common stock

       1,687              3,054         2,003         (5,057      1,687   

Additional paid-in capital

       400,382              1,366         2,734         (4,100      400,382   

Retained earnings

       2,234,251              2,909,487         92,532         (3,002,019      2,234,251   

Treasury stock, at cost

       (47,065                    (47,065

Accumulated other comprehensive loss

       (2,902           (2,902         2,902         (2,902
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

Total stockholders’ equity

       2,586,353         —             2,911,005         97,269         (3,008,274      2,586,353   

Noncontrolling interest

                  6,198            6,198   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

Total equity

       2,586,353         —             2,911,005         103,467         (3,008,274      2,592,551   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 
       2,694,419         1,515,318           3,461,053         395,011         (3,010,555      5,055,246   
    

 

 

    

 

 

      

 

 

    

 

 

    

 

 

    

 

 

 

 

28


Table of Contents

Condensed Consolidating Statement of Operations for the three months ended January 31, 2012 ($ in thousands):

 

 

       Toll                    Non-                  
       Brothers,      Subsidiary      Guarantor      Guarantor                  
       Inc.      Issuer      Subsidiaries      Subsidiaries        Eliminations      Consolidated  

Revenues

             327,692         12,386           (18,123      321,955   
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Cost of revenues

             271,277         2,281           (1,950      271,608   

Selling, general and administrative

       13         478         73,256         9,550           (13,660      69,637   

Interest expense

          25,286                 (25,286      —     
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 
       13         25,764         344,533         11,831           (40,896      341,245   
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Loss from operations

       (13      (25,764      (16,841      555           22,773         (19,290

Other

                     

Income from unconsolidated entities

             5,229         1,458              6,687   

Interest and other

       7         25,764         5,212         233           (25,021      6,195   

Loss from subsidiaries

       (6,402                 6,402         —     
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Loss before income tax benefit

       (6,408      —           (6,400      2,246           4,154         (6,408

Income tax (benefit) provision

       (3,622         (3,618      1,269           2,349         (3,622
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Net (loss) income

       (2,786      —           (2,782      977           1,805         (2,786
    

 

 

    

 

 

    

 

 

    

 

 

      

 

 

    

 

 

 

Condensed Consolidating Statement of Operations for the three months ended January 31, 2011 ($ in thousands):

 

 

       Toll                    Non-                
       Brothers,      Subsidiary      Guarantor      Guarantor                
       Inc.      Issuer      Subsidiaries      Subsidiaries      Eliminations      Consolidated  

Revenues

             325,055         25,150         (16,089      334,116   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Cost of revenues

             269,275         15,947         (3,257      281,965   

Selling, general and administrative

       28         341         63,988         8,528         (11,634      61,251   

Interest expense

          25,845         1,112            (25,845      1,112   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
       28         26,186         334,375         24,475         (40,736      344,328   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loss (income) from operations

       (28      (26,186      (9,320      675         24,647         (10,212

Other

                   

(Loss) income from unconsolidated entities

             6,521         (17,523         (11,002

Interest and other

          26,186         (14,220      (1,538      (6,261      4,167   

Loss from subsidiaries

       (17,019               17,019         —     
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Loss before income tax benefit

       (17,047      —           (17,019      (18,386      35,405         (17,047

Income tax benefit

       (20,464         (22,359      (22,058      44,417         (20,464
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Net income

       3,417         —           5,340         3,672         (9,012      3,417   
    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

29


Table of Contents

Condensed Consolidating Statement of Cash Flows for the three months ended January 31, 2012 ($ in thousands):

 

 

000000 000000 000000 000000 000000 000000
    Toll                 Non-              
    Brothers,     Subsidiary     Guarantor     Guarantor              
    Inc.     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Cash flow used in operating activities:

           

Net (loss) income

    (2,786       (2,782     977        1,805        (2,786

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:

           

Depreciation and amortization

      794        4,419        16          5,229   

Stock-based compensation

    5,626                5,626   

Income (loss) from unconsolidated entities

        (7,729     1,042          (6,687

Distributions of earnings from unconsolidated entities

        872            872   

Income from non-performing loan portfolios and foreclosed real estate

          (4,138       (4,138

Deferred tax benefit

    (1,246             (1,246

Deferred tax valuation allowances

    1,246                1,246   

Inventory impairments and write-offs

        8,120            8,120   

Change in fair value of mortgage loans receivable and derivative instruments

          346          346   

Gain on marketable securities

        (39         (39

Changes in operating assets and liabilities

           

Increase in inventory

        (100,509     (7,959       (108,468

Origination of mortgage loans

          (120,662       (120,662

Sale of mortgage loans

          146,895          146,895   

(Increase) decrease in restricted cash

    (28,307       650        (824       (28,481

Decrease (increase) in receivables, prepaid expenses and other assets

    22,096        (4,793     (177,441     174,480        (2,413     11,929   

Increase (decrease) in customer deposits

        9,291        (6,061       3,230   

(Decrease) increase in accounts payable and accrued expenses

    (109     3,999        (11,553     (60,072     608        (67,127

Decrease in income taxes payable

    (5,790             (5,790
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

    (9,270     —          (276,701     124,040        —          (161,931
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow used in investing activities:

           

Purchase of property and equipment—net

        (2,711     (829       (3,540

Sale and redemption of marketable securities

        88,217            88,217   

Investment in and advances to unconsolidated entities

        (256     (71,528       (71,784

Return of investments in unconsolidated entities

        15,333            15,333   

Investment in non-performing loan portfolios and foreclosed real estate

          (26,410       (26,410

Return of investments in non-performing loan portfolios and foreclosed real estate

          3,702          3,702   

Acquisition of a business

        (144,746         (144,746
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

        (44,163     (95,065       (139,228
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow (used in) provided by financing activities:

           

Proceeds from loans payable

          199,139          199,139   

Principal payments of loans payable

        (12,520     (225,376       (237,896

Proceeds from stock-based benefit plans

    9,334                9,334   

Purchase of treasury stock

    (64             (64
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    9,270          (12,520     (26,237       (29,487
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net decrease (increase) in cash and cash equivalents

    —          —          (333,384     2,738        —          (330,646

Cash and cash equivalents, beginning of year

        775,300        131,040          906,340   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of year

    —          —          441,916        133,778        —          575,694   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Condensed Consolidating Statement of Cash Flows for the three months ended January 31, 2011 ($ in thousands):

 

 

    Toll                 Non-              
    Brothers,     Subsidiary     Guarantor     Guarantor              
    Inc.     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Cash flow from operating activities:

           

Net income

    3,417          5,340        3,672        (9,012     3,417   

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

           

Depreciation and amortization

    28        807        3,239        313          4,387   

Stock-based compensation

    5,373                5,373   

Impairments of investments in unconsolidated entities

          20,000          20,000   

Income from unconsolidated entities

        (5,922     (3,076       (8,998

Distributions of earnings from unconsolidated entities

        593        2,200          2,793   

Inventory impairments and write-offs

        5,126            5,126   

Deferred tax benefit

    (6,589             (6,589

Deferred tax valuation allowance

    6,589                6,589   

Change in fair value of mortgage loans receivable and derivative instruments

          714          714   

Changes in operating assets and liabilities

           

Decrease in inventory

        (39,214     (81,661       (120,875

Origination of mortgage loans

          (182,659       (182,659

Sale of mortgage loans

          233,891          233,891   

Decrease in restricted cash

        8,498            8,498   

Decrease (increase) in receivables, prepaid expenses and other assets

    8,712        (3,709     (69,228     63,393        8,769        7,937   

Increase (decrease) in customer deposits

        (1,183     3,460          2,277   

(Decrease) increase in accounts payable and accrued expenses

    (608     2,902        (41,317     (207     243        (38,987

Decrease in income taxes payable

    (20,082             (20,082
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by operating activities

    (3,160     —          (134,068     60,040        —          (77,188
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow from investing activities:

           

Purchase of property and equipment

        (1,189     (3,092       (4,281

Purchase of marketable securities

        (119,238         (119,238

Sale of marketable securities

        102,500            102,500   

Return of investments from unconsolidated entities

        6,305            6,305   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

        (11,622     (3,092       (14,714
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash flow from financing activities:

           

Proceeds from loans payable

          266,035          266,035   

Principal payments of loans payable

        (6,794     (322,960       (329,754

Proceeds from stock-based benefit plans

    3,323                3,323   

Purchase of treasury stock

    (163             (163
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash (used in) provided by financing activities

    3,160          (6,794     (56,925       (60,559
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net (decrease) increase in cash and cash equivalents

    —          —          (152,484     23        —          (152,461

Cash and cash equivalents, beginning of period

    —          —          930,387        108,673        —          1,039,060   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents, end of period

    —          —          777,903        108,696        —          886,599   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)

This discussion and analysis is based on, should be read with, and is qualified in its entirety by, the accompanying unaudited condensed consolidated financial statements and related notes, as well as our consolidated financial statements and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations as contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2011. It also should be read in conjunction with the disclosure under “Statement on Forward-Looking Information” in this report.

Unless otherwise stated, net contracts signed represents a number or value equal to the gross number or value of contracts signed during the relevant period, less the number or value of contracts cancelled during the relevant period, which includes contracts that were signed during the relevant period and in prior periods.

OVERVIEW

Financial Highlights

In the three-month period ended January 31, 2012, we recognized $322.0 million of revenues and reported a net loss of $2.8 million and a pre-tax loss of $6.4 million, as compared to $334.1 million of revenues, net income of $3.4 million and a pre-tax loss of $17.0 million in the three-month period ended January 31, 2011. Fiscal 2012 first quarter pre-tax loss included $8.1 million of inventory impairments and write-offs. Fiscal 2011 first quarter pre-tax loss included $5.1 million of inventory impairments and write-offs and a $20.0 million impairment charge related to our investments in unconsolidated entities. During the fiscal 2012 period we recognized an income tax benefit of $3.6 million, as compared to an income tax benefit of $20.5 million in the fiscal 2011 period.

Our Challenging Business Environment and Current Outlook

The ongoing downturn in the U.S. housing market, which began in the fourth quarter of our fiscal 2005, has been the longest and most severe since the Great Depression. The value of our net contracts signed in fiscal 2011 was $1.60 billion, a decline of 78% from the $7.15 billion of net contracts signed in fiscal 2005. The downturn, which we believe started with a decline in consumer confidence, an overall softening of demand for new homes and an oversupply of homes available for sale, has been exacerbated by, among other things, a decline in the overall economy, increased unemployment, the increased number of vacant homes, fear of job loss, a decline in home prices and the resulting reduction in home equity, the large number of homes that are or will be available due to foreclosures, the inability of some of our home buyers or some prospective buyers of their homes to sell their current home, and the direct and indirect impact of tightened availability of mortgage loans.

We continue to believe that many of our markets and housing in general have reached bottom; however, we expect that there may be more periods of volatility in the future. We also believe that our target customers generally have remained employed during this downturn, but that many have deferred their home buying decisions because of concerns over the direction of the economy and media headlines suggesting that home prices continue to decline. We continue to believe that, once the economy and consumer confidence improve and the unemployment rate declines, pent-up demand will be released and, gradually, more buyers will enter the market. We continue to believe that the key to a full recovery in our business depends on these factors as well as a sustained stabilization of financial markets and home prices.

We also believe that the medium and long-term futures for us and the homebuilding industry are bright. A 2011 Harvard University study projects that under both low- and high- growth scenarios, housing demand in the 2010-2020 period should exceed that of the previous three decades. In many markets, the pipeline of approved and improved home sites has dwindled as builders and developers have lacked both the capital and the economic benefit for bringing sites through approvals. Therefore, we believe when demand picks up, builders and developers with approved land in well-located markets will be poised to benefit. We believe that this will be particularly true for us because our land portfolio is heavily weighted in the metro-Washington, DC to metro-Boston corridor where land is scarce, approvals are more difficult to obtain and overbuilding has been relatively less prevalent than in the Southeast and Western regions.

We continue to seek a balance between our short-term goal of selling homes in a tough market and our long-term goal of maximizing the value of our communities. We continue to believe that many of our communities are in desirable locations that are difficult to replace and in markets where approvals have been increasingly difficult to obtain. We believe that many of these communities have substantial embedded value that may be realized in the future and that this value should not necessarily be sacrificed in the current soft market.

 

 

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Although, historically, our first fiscal quarter is the most challenging time to gauge sentiment among home buyers, in general, the market feels healthier to us than it did in the comparable period of fiscal 2011. The urban metro-New York City market remains very strong. We are also encouraged by the continued health of the Washington, DC-to-Boston corridor, along with Houston, Dallas, Raleigh, and more recently Southern California, including metro-San Diego. We are also seeing some recovery on the east coast of Florida, in the Detroit suburbs and metro Phoenix.

Competitive Landscape

Based on our experience during prior downturns in the housing industry, we believe that attractive land acquisition opportunities arise in difficult times for those builders that have the financial strength to take advantage of them. In the current challenging environment, we believe our strong balance sheet, liquidity, access to capital, broad geographic presence, diversified product line, experienced personnel and national brand name all position us well for such opportunities now and in the future.

We continue to see reduced competition from the small and mid-sized private builders that had been our primary competitors in the luxury market. We believe that many of these builders are no longer in business and that access to capital by the surviving private builders is already severely constrained. We envision that there will be fewer and more selective lenders serving our industry when the market rebounds and that those lenders likely will gravitate to the homebuilding companies that offer them the greatest security, the strongest balance sheets and the broadest array of potential business opportunities. We believe that this reduced competition, combined with attractive long-term demographics, will reward those well-capitalized builders that can persevere through the current challenging environment.

As market conditions improve over time, we believe that geographic and product diversification, access to lower-cost capital and strong demographics will benefit those builders, like us who can control land and persevere through the increasingly difficult regulatory approval process. We believe that these factors favor the large publicly traded homebuilding companies with the capital and expertise to control home sites and gain market share. We also believe that over the past five years, many builders and land developers reduced the number of home sites that were taken through the approval process. The process continues to be difficult and lengthy, and the political pressure from no-growth proponents continues to increase, but we believe our expertise in taking land through the approval process and our already-approved land positions will allow us to grow in the years to come, as market conditions improve.

Land Acquisition and Development

Because of the length of time that it takes to obtain the necessary approvals on a property, complete the land improvements on it, and deliver a home after a home buyer signs an agreement of sale, we are subject to many risks. In certain cases, we attempt to reduce some of these risks by utilizing one or more of the following methods: controlling land for future development through options (also referred to herein as “land purchase contracts” or “option and purchase agreements”), thus allowing the necessary governmental approvals to be obtained before acquiring title to the land; generally commencing construction of a detached home only after executing an agreement of sale and receiving a substantial down payment from the buyer; and using subcontractors to perform home construction and land development work on a fixed-price basis. Our risk reduction strategy of generally not commencing the construction of a detached home until we have an agreement of sale with a buyer was effective prior to this current downturn in the housing market, but, due to the number of cancellations of agreements of sale that we had during fiscal 2007, 2008 and 2009, many of which were for homes on which we had commenced construction, the number of homes under construction in detached single-family communities for which we did not have an agreement of sale increased. With our contract cancellation rates returning to more normal levels in fiscal 2010 through the end of the current fiscal quarter, and the sale of these units which we had under construction related to the cancellations, we have reduced the number of unsold units to more historical levels. In addition, over the past several years, the number of our attached-home communities has grown, resulting in an increase in the number of unsold units under construction.

In response to the decline in market conditions over the past several years, we have re-evaluated and renegotiated or cancelled many of our land purchase contracts. In addition, we have sold, and may continue to sell, certain parcels of land that we have identified as non-strategic. As a result, we reduced our land position from a high of approximately 91,200 home sites at April 30, 2006 to approximately 39,700 home sites at January 31, 2012. We

 

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continue to position ourselves for the anticipated recovery through the opportunistic and, we believe, prudent purchase of land and the continued growth of our community count. Based on our belief that the housing market has bottomed, the increased attractiveness of land available for purchase and the revival of demand in certain areas, we have begun to increase our land positions. During fiscal 2011, we acquired control of approximately 5,300 home sites (net of options terminated) and in the three-month period ended January 31, 2012, 2,800 home sites (net of options terminated) including approximately 1,500 home sites that were acquired in the CamWest asset purchase. Of the 39,700 home sites controlled at January 31, 2012, we owned approximately 32,400. Of these 32,400 home sites, significant improvements were completed on approximately 12,200 of them. At January 31, 2012 and 2011, we were selling from 228 and 200 communities, respectively. At October 31, 2011, we were selling from 215 communities, compared to 195 communities at October 31, 2010. Our November 2011 acquisition of CamWest assets increased our selling community count by 15.

We expect to be selling from 235 to 255 communities at October 31, 2012. At January 31, 2012, we had 50 communities that were temporarily closed due to market conditions and 48 communities that we had acquired the land for but have temporarily decided not to open. We expect to reopen 4 communities by November 1, 2012.

Availability of Customer Mortgage Financing

We maintain relationships with a widely diversified group of mortgage financial institutions, many of which are among the largest and, we believe, most reliable in the industry. We believe that regional and community banks continue to recognize the long-term value in creating relationships with high-quality, affluent customers such as our home buyers, and these banks continue to provide such customers with financing.

We believe that our home buyers generally are, and should continue to be, better able to secure mortgages due to their typically lower loan-to-value ratios and attractive credit profiles as compared to the average home buyer. Nevertheless, in recent years, tightened credit standards have shrunk the pool of potential home buyers and hindered accessibility of or eliminated certain loan products previously available to our home buyers. Our home buyers continue to face stricter mortgage underwriting guidelines, higher down payment requirements and narrower appraisal guidelines than in the past. In addition, some of our home buyers continue to find it more difficult to sell their existing homes as prospective buyers of their homes may face difficulties obtaining a mortgage. In addition, other potential buyers may have little or negative equity in their existing homes and may not be able to or willing to purchase a larger or more expensive home.

While the range of mortgage products available to a potential home buyer is not what it was in 2005 – 2007, we have seen improvements over the past year. Indications from industry participants, including commercial banks, mortgage banks, mortgage REITS and mortgage insurance companies are that availability, parameters and pricing of jumbo loans are all improving. We believe that improvement should not only enhance financing alternatives for existing jumbo buyers, but should help to offset the reduction in Fannie Mae/Freddie Mac-eligible loan amounts in some markets. Based on the mortgages provided by our mortgage subsidiary during the past 15 months, we do not expect the change in the Fannie Mae/Freddie Mac-eligible loan amounts to have a significant impact on our business.

There has been significant media attention given to mortgage put-backs, a practice by which a buyer of a mortgage loan tries to recoup losses from the loan originator. We do not believe this is a material issue for our mortgage subsidiary. Of the approximately 14,300 loans sold by our mortgage subsidiary since November 1, 2004, only 26 have been the subject of either actual indemnification payments or take-backs or contingent liability loss provisions related thereto. We believe that this is due to (i) our typical home buyer’s financial position and sophistication, (ii) on average, our home buyers who use mortgage financing to purchase a home pay approximately 30% of the purchase price in cash, (iii) our general practice of not originating certain loan types such as option adjustable rate mortgages and down payment assistance products, and our origination of very few sub-prime, high loan-to-value and no documentation loans and (iv) our elimination of “early payment default” provisions from each of our agreements with our mortgage investors several years ago.

The Dodd-Frank Wall Street Reform and Consumer Protection Act provides for a number of new requirements relating to residential mortgage lending practices, many of which are subject to further rule making. These include, among others, minimum standards for mortgages and related lender practices, the definitions and parameters of a Qualified Mortgage and a Qualified Residential Mortgage, future risk retention requirements, limitations on certain fees, prohibition of certain tying arrangements, and remedies for borrowers in foreclosure proceedings in the event that a lender violates fee limitations or minimum standards. The ultimate effect of such provisions on lending institutions, including our mortgage subsidiary, will depend on the rules that are ultimately promulgated.

 

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Gibraltar

We continue to look for other distressed real estate opportunities through Gibraltar. Gibraltar continues to selectively review a steady flow of new opportunities, including FDIC and bank portfolios and other distressed real estate investments. In December 2011, Gibraltar acquired three portfolios of non-performing loans consisting of 11 loans with an unpaid principal balance of approximately $51.4 million. The portfolio included non-performing loans secured by commercial land and buildings in various stages of completion. The portfolios that Gibraltar previously acquired were primarily residential acquisition, development, and construction loans secured by properties in various stages of completion.

At January 31, 2012, Gibraltar had direct investments in loan portfolios, real estate owned and a participation in a loan portfolio of approximately $96.8 million and an investment in a structured asset joint venture of $34.2 million. At January 31, 2012, Gibraltar directly, through a loan participation and through a joint venture, controlled 338 loans and properties with a net unpaid principal or estimated fair value of approximately $668.3 million.

During the three-month periods ended January 31, 2012 and 2011, we recognized net income of $1.7 million and $0.2 million from the Gibraltar operations, respectively.

CONTRACTS AND BACKLOG

The aggregate value of gross sales contracts signed increased 44.3% in the three-month period ended January 31, 2012, as compared to the three-month period ended January 31, 2011. The value of gross sales contracts signed was $470.3 million (695 homes) and $325.9 million (581 homes) in the three-month period ended January 31, 2012 and 2011, respectively. The increase in the aggregate value of gross contracts signed in the three-month period ended January 31, 2012, as compared to the comparable period of fiscal 2011, was the result of a 19.6% increase in the number of gross contracts signed, and a 20.6% increase in the average value of each contract signed. The increase in the number of gross contracts signed was primarily due to increased demand and the increase in the number of selling communities in the fiscal 2012 period, as compared to the fiscal 2011 period. Approximately 70% of the increase in the average value of each contract signed was due to the sales contracts signed at one of our luxury high-rise de