TOL-2012.4.30-10Q




UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2012
or
o
 
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
(State or other jurisdiction of
incorporation or organization)
 
23-2416878
(I.R.S. Employer
Identification No.)
 
 
 
250 Gibraltar Road, Horsham, Pennsylvania
(Address of principal executive offices)
 
19044
(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 þ No o
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 þ No o
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 þ
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
 
 
(Do not check if a 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 o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At June 1, 2012, there were approximately 167,521,000 shares of Common Stock, $.01 par value, outstanding.






TOLL BROTHERS, INC.
TABLE OF CONTENTS
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 





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,” “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; fluctuating consumer demand and confidence; interest and 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 home buyers 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.

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.

For a more detailed discussion of these factors, see the information under the captions “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in our most recent annual report on Form 10-K with the Securities and Exchange Commission.

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.



1



PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS
TOLL BROTHERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
 
April 30,
2012
 
October 31,
2011
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
709,038

 
$
906,340

Marketable securities
218,434

 
233,572

Restricted cash
47,398

 
19,760

Inventory
3,767,877

 
3,416,723

Property, construction and office equipment, net
100,724

 
99,712

Receivables, prepaid expenses and other assets
143,857

 
105,576

Mortgage loans held for sale
50,527

 
63,175

Customer deposits held in escrow
31,068

 
14,859

Investments in and advances to unconsolidated entities
200,292

 
126,355

Investments in non-performing loan portfolios and foreclosed real estate
95,870

 
69,174

 
$
5,365,085

 
$
5,055,246

LIABILITIES AND EQUITY
 
 
 
Liabilities
 
 
 
Loans payable
$
103,880

 
$
106,556

Senior notes
1,791,942

 
1,490,972

Mortgage company warehouse loan
45,397

 
57,409

Customer deposits
128,921

 
83,824

Accounts payable
106,747

 
96,817

Accrued expenses
457,274

 
521,051

Income taxes payable
99,107

 
106,066

Total liabilities
2,733,268

 
2,462,695

Equity
 
 
 
Stockholders’ equity
 
 
 
Preferred stock, none issued
 
 
 
Common stock, 168,689 and 168,675 shares issued at April 30, 2012 and October 31, 2011, respectively
1,687

 
1,687

Additional paid-in capital
399,382

 
400,382

Retained earnings
2,248,337

 
2,234,251

Treasury stock, at cost — 1,370 and 2,946 shares at April 30, 2012 and October 31, 2011, respectively
(20,395
)
 
(47,065
)
Accumulated other comprehensive loss
(3,382
)
 
(2,902
)
Total stockholders’ equity
2,625,629

 
2,586,353

Noncontrolling interest
6,188

 
6,198

Total equity
2,631,817

 
2,592,551

 
$
5,365,085

 
$
5,055,246

See accompanying notes

2



TOLL BROTHERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
 
Six Months Ended April 30,
 
Three Months Ended April 30,
 
2012
 
2011
 
2012
 
2011
Revenues
$
695,636

 
$
653,791

 
$
373,681

 
$
319,675

Cost of revenues
578,429

 
558,319

 
306,821

 
276,354

Selling, general and administrative
137,893

 
128,301

 
68,256

 
67,050

Interest expense

 
1,504

 

 
392

 
716,322

 
688,124

 
375,077

 
343,796

Loss from operations
(20,686
)
 
(34,333
)
 
(1,396
)
 
(24,121
)
Other:
 
 
 
 
 
 
 
Income (loss) from unconsolidated entities
13,676

 
(22,345
)
 
6,989

 
(11,343
)
Other income - net
16,251

 
8,147

 
10,056

 
3,980

Income (loss) before income tax benefit
9,241

 
(48,531
)
 
15,649

 
(31,484
)
Income tax benefit
(4,845
)
 
(31,175
)
 
(1,223
)
 
(10,711
)
Net income (loss)
$
14,086

 
$
(17,356
)
 
$
16,872

 
$
(20,773
)
Income (loss) per share:
 
 
 
 
 
 
 
Basic
$
0.08

 
$
(0.10
)
 
$
0.10

 
$
(0.12
)
Diluted
$
0.08

 
$
(0.10
)
 
$
0.10

 
$
(0.12
)
Weighted average number of shares:
 
 
 
 
 
 
 
Basic
166,652

 
166,794

 
166,994

 
166,910

Diluted
167,821

 
166,794

 
168,535

 
166,910

See accompanying notes

3



TOLL BROTHERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
Six Months Ended April 30,
 
2012
 
2011
Cash flow (used in) provided by operating activities:
 
 
 
Net income (loss)
$
14,086

 
$
(17,356
)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
Depreciation and amortization
10,698

 
10,337

Stock-based compensation
8,831

 
7,717

(Recovery) impairments of investments in unconsolidated entities
(1,621
)
 
39,600

Income from unconsolidated entities
(12,055
)
 
(17,255
)
Distributions of earnings from unconsolidated entities
1,550

 
6,789

Income from non-performing loan portfolios and foreclosed real estate
(10,004
)
 
(473
)
Deferred tax benefit
(3,318
)
 
(6,515
)
Deferred tax valuation allowances
3,318

 
6,515

Inventory impairments and write-offs
10,128

 
18,048

Change in fair value of mortgage loans receivable and derivative instruments
284

 
818

Gain on marketable securities
(39
)
 

Changes in operating assets and liabilities
 
 
 
Increase in inventory
(202,466
)
 
(154,440
)
Origination of mortgage loans
(253,866
)
 
(301,778
)
Sale of mortgage loans
266,713

 
365,328

(Increase) decrease in restricted cash
(27,638
)
 
28,781

(Increase) decrease in receivables, prepaid expenses and other assets
(31,550
)
 
7,172

Increase in customer deposits
28,838

 
17,554

Decrease in accounts payable and accrued expenses
(67,789
)
 
(36,546
)
Decrease in income tax refund recoverable


 
141,590

Decrease in income taxes payable
(6,959
)
 
(18,241
)
Net cash (used in) provided by operating activities
(272,859
)
 
97,645

Cash flow used in investing activities:
 
 
 
Purchase of property and equipment — net
(4,747
)
 
(5,112
)
Purchase of marketable securities
(177,833
)
 
(329,105
)
Sale and redemption of marketable securities
189,716

 
227,080

Investment in and advances to unconsolidated entities
(75,008
)
 


Return of investments in unconsolidated entities
20,568

 
15,751

Investment in non-performing loan portfolios and foreclosed real estate
(27,490
)
 
(42,141
)
Return of investments in non-performing loan portfolios and foreclosed real estate
11,582

 


Acquisition of a business
(144,746
)
 


Net cash used in investing activities
(207,958
)
 
(133,527
)
Cash flow provided by (used in) financing activities:
 
 
 
Net proceeds from issuance of senior notes
296,227

 


Proceeds from loans payable
400,092

 
438,713

Principal payments of loans payable
(429,709
)
 
(498,960
)
Proceeds from stock-based benefit plans
17,189

 
4,676

Receipts related to noncontrolling interest


 
2,678

Purchase of treasury stock
(284
)
 
(389
)
Net cash provided by (used in) financing activities
283,515

 
(53,282
)
Net decrease in cash and cash equivalents
(197,302
)
 
(89,164
)
Cash and cash equivalents, beginning of period
906,340

 
1,039,060

Cash and cash equivalents, end of period
$
709,038

 
$
949,896

See accompanying notes

4



TOLL BROTHERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Basis of Presentation
The accompanying condensed 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 April 30, 2012, the results of its operations for the six-month and three-month periods ended April 30, 2012 and 2011, and its cash flows for the six-month periods ended April 30, 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 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

5



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.
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.


6



3. Inventory
Inventory at April 30, 2012 and October 31, 2011 consisted of the following (amounts in thousands):
 
April 30,
2012
 
October 31,
2011
Land controlled for future communities
$
41,442

 
$
46,581

Land owned for future communities
1,046,240

 
979,145

Operating communities
2,680,195

 
2,390,997

 
$
3,767,877

 
$
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.
 
April 30,
2012
 
October 31,
2011
Land owned for future communities:
 
 
 
Number of communities
33

 
43

Carrying value (in thousands)
$
194,678

 
$
256,468

Operating communities:
 
 
 
Number of communities
13

 
2

Carrying value (in thousands)
$
67,222

 
$
11,076


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).
 
Six months ended April 30,
 
Three months ended April 30,
 
2012
 
2011
 
2012
 
2011
Charge (recovery):
 
 
 
 
 
 
 
Land controlled for future communities
$
225

 
$
1,848

 
$
(552
)
 
$
2,197

Land owned for future communities
918

 

 

 

Operating communities
8,985

 
16,200

 
2,560

 
10,725

 
$
10,128

 
$
18,048

 
$
2,008

 
$
12,922

The table below provides, for the periods indicated, the number of operating communities that the Company tested for potential impairment, the number of operating communities in which it recognized impairment charges, the amount of impairment charges recognized, and, as of the end of the period indicated, the fair value of those communities, net of impairment charges ($ amounts in thousands).

7



 
 
 
Impaired operating communities
Three months ended:
Number of
communities tested
 
Number of
communities
 
Fair value of
communities,
net of
impairment charges
 
Impairment charges
Fiscal 2012:
 
 
 
 
 
 
 
January 31
113
 
8
 
$
49,758

 
$
6,425

April 30
115
 
2
 
$
22,962

 
2,560

 
 
 
 
 
 
 
$
8,985

Fiscal 2011:
 
 
 
 
 
 
 
January 31
143
 
6
 
$
56,105

 
$
5,475

April 30
142
 
9
 
$
40,765

 
10,725

July 31
129
 
2
 
$
867

 
175

October 31
114
 
3
 
$
3,367

 
710

 
 
 
 
 
 
 
$
17,085

At April 30, 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 April 30, 2012, the Company determined that 56 land purchase contracts, with an aggregate purchase price of $484.4 million, on which it had made aggregate deposits totaling $24.2 million, were VIEs, but 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): 
 
Six months ended April 30,
 
Three months ended April 30,
 
2012
 
2011
 
2012
 
2011
Interest capitalized, beginning of period
$
298,757

 
$
267,278

 
$
311,335

 
$
274,730

Interest incurred
60,467

 
58,434

 
31,568

 
28,718

Interest expensed to cost of revenues
(33,989
)
 
(35,382
)
 
(17,668
)
 
(17,300
)
Interest directly expensed to operations

 
(1,504
)
 

 
(392
)
Write-off against other income
(1,582
)
 
(318
)
 
(1,582
)
 
(248
)
Interest reclassified to property, construction and office equipment

 
(3,000
)
 

 

Interest capitalized on investments in unconsolidated entities
(1,137
)
 

 
(1,137
)
 

Interest capitalized, end of period
$
322,516

 
$
285,508

 
$
322,516

 
$
285,508

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 April 30, 2012 and 2011 would have been reduced by approximately $52.8 million and $54.5 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 April 30, 2012, the Company had approximately

8



$8.5 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.

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 at that time.
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 $20.0 million in the first quarter of fiscal 2011 and $9.6 million in the second quarter of fiscal 2011 related to its accrued exposure under the completion guarantee. The Company reduced its accrual by $3.9 million in the fourth quarter of fiscal 2011 based on its evaluation of its expected potential liability at that time. In the second quarter of fiscal 2012, the Company recovered $1.6 million of costs it previously accrued. The total cumulative impairment recognized for South Edge through April 30, 2012 was $94.4 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 and the conveyance of the real estate free of the prior debt owned by South Edge to a new joint venture, Inspirada Builders, LLC ("Inspirada"), organized by four of the members of South Edge.
The Company believes it has made adequate provision at April 30, 2012 for any remaining liabilities with respect to South Edge. The Company’s investment in Inspirada is carried at a nominal value.
The Company did not recognize any impairment charges in connection with the Development Joint Ventures in the six-month and three-month periods ended April 30, 2012. In the six-month and three-month periods ended April 30, 2012, the Company recovered $1.6 million of costs it previously accrued.
In the second quarter of fiscal 2012, the Company entered into an agreement to acquire a 50% interest in a joint venture for approximately $110 million. The Company made an initial deposit of $10 million against the acquisition price. This deposit is included in "Receivables, prepaid expenses and other assets" on its condensed consolidated balance sheet at April 30, 2012. The Company intends to acquire a substantial number of lots from the joint venture. This transaction is expected to be completed in the third quarter of fiscal 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. 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 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.

9



At April 30, 2012, the Company had an investment of $30.4 million, net of the $15.2 million of impairments previously recognized, in this joint venture. At April 30, 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.
Condominium Joint Ventures
At April 30, 2012, the Company had an aggregate of $121.5 million of investments in and advances, net of $63.9 million of impairment charges recognized, to five joint ventures with unrelated parties to develop luxury for-sale and rental residential units and commercial space.
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 $79.0 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.
The Company did not recognize any impairment charges in connection with its Condominium Joint Ventures in the six-month and three-month periods ended April 30, 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 April 30, 2012, the Company had an investment of $3.6 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 April 30, 2012, the Company had a net investment in the Trust of $0.5 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 $1.1 million in each of the six-month periods ended April 30, 2012 and 2011 and $0.6 million in each of the three-month periods ended April 30, 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 April 30, 2012, the Company had an investment of $35.7 million in this Structured Asset Joint Venture. At April 30, 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 April 30, 2012, the Company had accrued $2.1 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 $39.6 million and $19.6 million of impairment charges related to its investments in and advances to unconsolidated entities in the six-month and three-month periods ended April 30, 2011, respectively. The Company recognized a $1.6 million recovery of previous impairment charges recognized in the second quarter of fiscal 2012. The fiscal 2012 reversal and fiscal 2011 impairment charges recognized are included in “Income (loss) from unconsolidated entities” in the Company’s condensed consolidated statements of operations for the six-month and three-month periods ended April 30, 2012 and 2011.

10



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 included below (in thousands). The column titled "Home Building Joint Ventures" includes the planned community and condominium joint ventures described above.

Condensed Balance Sheets:
 
April 30, 2012
 
Develop-
ment Joint
Ventures
 
Home
Building
Joint
Ventures
 
 Trust
and Trust II
 
Structured
Asset
Joint
Venture
 
Total
Cash and cash equivalents
$
21,958

 
$
20,999

 
$
11,311

 
$
44,803

 
$
99,071

Inventory
175,277

 
280,886

 
5,580

 


 
461,743

Non-performing loan portfolio

 

 

 
259,545

 
259,545

Rental properties

 

 
175,971

 


 
175,971

Real estate owned (“REO”)

 

 
516

 
271,055

 
271,571

Other assets (1)
18,499

 
64,799

 
9,183

 
165,913

 
258,394

Total assets
$
215,734

 
$
366,684

 
$
202,561

 
$
741,316

 
$
1,526,295

Debt (1)
$
71,444

 
$
34,804

 
$
197,172

 
$
310,855

 
$
614,275

Other liabilities
20,533

 
5,288

 
3,479

 
414

 
29,714

Members’ equity
123,757

 
326,592

 
1,910

 
172,031

 
624,290

Non-controlling interest

 

 


 
258,016

 
258,016

Total liabilities and equity
$
215,734

 
$
366,684

 
$
202,561

 
$
741,316

 
$
1,526,295

Company’s net investment in unconsolidated entities (2)
$
8,538

 
$
151,883

 
$
4,167

 
$
35,704

 
$
200,292

 
 
October 31, 2011
 
Develop-
ment Joint
Ventures
 
Home
Building
Joint
Ventures
 
 Trust
and Trust 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 April 30, 2012 and October 31, 2011 of the Structured Asset Joint Venture is $165.9 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.

11



Condensed Statements of Operations:
 
For the six months ended April 30, 2012
 
Develop-
ment Joint
Ventures
 
Home
Building
Joint
Ventures
 
Trust
and Trust II
 
Structured
Asset
Joint
Venture
 
Total
Revenues
$
33,584

 
$
47,466

 
$
18,698

 
$
12,362

 
$
112,110

Cost of revenues
31,771

 
34,754

 
6,736

 
17,227

 
90,488

Other expenses
430

 
2,110

 
11,427

 
4,898

 
18,865

Gain on disposition of loans and REO


 


 


 
(22,826
)
 
(22,826
)
Total expenses—net
32,201

 
36,864

 
18,163

 
(701
)
 
86,527

Income from operations
1,383

 
10,602

 
535

 
13,063

 
25,583

Other income
2,653

 
79

 


 
275

 
3,007

Net income before noncontrolling interest
4,036

 
10,681

 
535

 
13,338

 
28,590

Less: Net income attributable to noncontrolling interest

 


 


 
(8,004
)
 
(8,004
)
Net income
$
4,036


10,681

 
$
535

 
$
5,334

 
$
20,586

Company’s equity in earnings of unconsolidated entities (3)
$
3,532

 
$
8,010

 
$
1,081

 
$
1,053

 
$
13,676

 
 
For the three months ended April 30, 2012
 
Develop-
ment Joint
Ventures
 
Home
Building
Joint
Ventures
 
Trust
and Trust II
 
Structured
Asset
Joint
Venture
 
Total
Revenues


 
$
24,036

 
$
9,222

 
$
7,654

 
$
40,912

Cost of revenues


 
16,961

 
3,393

 
5,701

 
26,055

Other expenses
$
205

 
1,165

 
4,642

 
2,013

 
8,025

Gain on disposition of loans and REO

 

 

 
(7,517
)
 
(7,517
)
Total expenses—net
205

 
18,126

 
8,035

 
197

 
26,563

Income (loss) from operations
(205
)
 
5,910

 
1,187

 
7,457

 
14,349

Other income
1

 
74

 


 
138

 
213

Net income (loss) before noncontrolling interest
(204
)
 
5,984

 
1,187

 
7,595

 
14,562

Less: Net income attributable to noncontrolling interest

 

 

 
(4,557
)
 
(4,557
)
Net income (loss)
$
(204
)
 
$
5,984

 
$
1,187

 
3,038

 
$
10,005

Company’s equity in (losses) earnings of unconsolidated entities (3)
$
1,536

 
$
3,490

 
$
458

 
$
1,505

 
$
6,989



12



 
For the six months ended April 30, 2011
 
Develop-
ment Joint
Ventures
 
Home
Building
Joint
Ventures
 
Trust
and Trust II
 
Structured
Asset
Joint
Venture
 
Total
Revenues
$
1,118

 
$
140,346

 
$
19,866

 
$
25,152

 
$
186,482

Cost of revenues
1,159

 
111,492

 
7,983

 
16,658

 
137,292

Other expenses
556

 
5,441

 
10,550

 
6,250

 
22,797

Gain on disposition of loans and REO

 

 

 
(10,886
)
 
(10,886
)
Total expenses—net
1,715

 
116,933

 
18,533

 
12,022

 
149,203

Income (loss) from operations
(597
)
 
23,413

 
1,333

 
13,130

 
37,279

Other income
5,791

 
154

 


 
158

 
6,103

Net income before noncontrolling interest
5,194

 
23,567

 
1,333

 
13,288

 
43,382

Less: Net income attributable to noncontrolling interest

 

 

 
(7,975
)
 
(7,975
)
Net income
$
5,194

 
$
23,567

 
$
1,333

 
5,313

 
$
35,407

Company’s equity in (losses) earnings of unconsolidated entities (3)
$
(29,649
)
 
$
3,432

 
$
2,667

 
$
1,205

 
$
(22,345
)

 
For the three months ended April 30, 2011
 
Develop-
ment Joint
Ventures
 
Home
Building
Joint
Ventures
 
Trust
and Trust II
 
Structured
Asset
Joint
Venture
 
Total
Revenues
$
33

 
$
52,331

 
$
10,715

 
$
13,150

 
$
76,229

Cost of revenues


 
42,323

 
4,494

 
7,100

 
53,917

Other expenses
399

 
2,431

 
4,548

 
2,979

 
10,357

Loss on disposition of loans and REO

 

 

 
488

 
488

Total expenses—net
399

 
44,754

 
9,042

 
10,567

 
64,762

Income (loss) from operations
(366
)
 
7,577

 
1,673

 
2,583

 
11,467

Other income
3,412

 
118

 


 
69

 
3,599

Net income before noncontrolling interest
3,046

 
7,695

 
1,673

 
2,652

 
15,066

Less: Net income attributable to noncontrolling interest

 

 

 
(1,591
)
 
(1,591
)
Net income
$
3,046

 
$
7,695

 
$
1,673

 
1,061

 
$
13,475

Company’s equity in (losses) earnings of unconsolidated entities (3)
$
(9,649
)
 
$
(4,502
)
 
$
2,203

 
$
605

 
$
(11,343
)
 
(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.

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


13




The following table summarizes for the portfolio acquired in fiscal 2012, the accretable yield and the nonaccretable difference on our investment in the non-performing loan portfolio as of its acquisition date (amounts in thousands).
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):
 
April 30, 2012
 
October 31, 2011
Unpaid principal balance
$
186,031

 
$
171,559

Discount on acquired loans
(108,269
)
 
(108,325
)
Carrying value
$
77,762

 
$
63,234

The activity in the accretable yield for the Company’s investment in the non-performing loan portfolios for the six-month and three-month periods ended April 30, 2012 and 2011 was as follows (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,
 
2012
 
2011
 
2012
 
2011
Balance, beginning of period
$
42,326

 


 
$
57,844

 


Additions
20,514

 
$
33,212

 


 
$
33,212

Accretion
(6,559
)
 
(500
)
 
(3,331
)
 
(500
)
Reductions from foreclosures and other dispositions
(9,949
)
 


 
(8,300
)
 


Transfer from nonaccretable yield to accretable yield
2,826

 


 
3,010

 


Other
98

 


 
33

 


Balance, end of period
$
49,256

 
$
32,712

 
$
49,256

 
$
32,712

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 six and three months ended April 30, 2012 is not necessarily indicative of expected future results.
Real Estate Owned (REO)
The following table presents the activity in REO for the six and three months ended April 30, 2012 (amounts in thousands):
 
Six months ended April 30, 2012
 
Three months ended April 30, 2012
Balance, beginning of period
$
5,939

 
$
6,488

Additions
12,802

 
11,638

Sales
(615
)
 

Depreciation
(18
)
 
(18
)
Balance, end of period
$
18,108

 
$
18,108

As of April 30, 2012, approximately $1.2 million and $16.9 million of REO was classified as held-for-sale and held-and-used, respectively.


14



General
The Company’s earnings from Gibraltar's operations are included in other income - net in its condensed consolidated statements of operations. In the six-month and three-month periods ended April 30, 2012, the Company recognized $5.9 million and $3.7 million of earnings, respectively, from Gibraltar's operations. In the six-month and three-month periods ended April 30, 2011, Gibraltar incurred a loss of $0.1 million and earnings of $0.3 million, respectively.
6. 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 $36.9 million principal amount of its 5.95% Senior Notes due 2013. The Company recognized a charge of $1.0 million in the quarter ended April 30, 2012 representing the aggregate costs associated with the exchange of both series of notes; these expenses are included in selling, general and administrative expenses on the condensed consolidated statement of operations.

7. Accrued Expenses
Accrued expenses at April 30, 2012 and October 31, 2011 consisted of the following (amounts in thousands):
 
April 30,
2012
 
October 31,
2011
Land, land development and construction
$
103,501

 
$
109,574

Compensation and employee benefit
97,596

 
96,037

Insurance and litigation
120,309

 
130,714

Commitments to unconsolidated entities
2,077

 
60,205

Warranty
42,997

 
42,474

Interest
28,976

 
25,968

Other
61,818

 
56,079

 
$
457,274

 
$
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. Warranty 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):
 
Six Months Ended April 30,
 
Three Months Ended April 30,
 
2012
 
2011
 
2012
 
2011
Balance, beginning of period
$
42,474

 
$
45,835

 
$
43,109

 
$
45,928

Additions – homes closed during the period
3,944

 
3,899

 
2,073

 
1,970

Addition – liabilities acquired
731

 


 


 

Increase (decrease) in accruals for homes closed in prior periods
1,765

 
647

 
(18
)
 
713

Charges incurred
(5,917
)
 
(4,060
)
 
(2,167
)
 
(2,290
)
Balance, end of period
$
42,997

 
$
46,321

 
$
42,997

 
$
46,321




15



8. Income Taxes
The tables below provide, for the periods indicated, reconciliations of the Company’s effective tax rate from the federal statutory tax rate (amounts in thousands).
 
Six months ended April 30,
 
2012
 
2011
 
$
 
%*
 
$
 
%*
Federal tax provision (benefit) at statutory rate
3,234

 
35.0

 
(16,986
)
 
(35.0
)
State taxes (benefit), net of federal benefit
391

 
4.2

 
(1,577
)
 
(3.3
)
Reversal of state tax provisions – finalization of audits

 

 
(2,340
)
 
(4.8
)
Increase in unrecognized tax benefits
277

 
3.0

 

 

Reversal of accrual for uncertain tax positions
(5,279
)
 
(57.1
)
 
(17,954
)
 
(37.0
)
Increase in deferred tax assets – net
(2,100
)
 
(22.7
)
 

 

Valuation allowance – recognized


 


 
19,577

 
40.3

Valuation allowance – reversed
(3,318
)
 
(35.9
)
 
(13,062
)
 
(26.9
)
Accrued interest on anticipated tax assessments
1,950

 
21.1

 
1,625

 
3.4

Other

 

 
(458
)
 
(0.9
)
Tax benefit
(4,845
)
 
(52.4
)
 
(31,175
)
 
(64.2
)
 * Due to rounding, amounts may not add.
 
Three months ended April 30,
 
2012
 
2011
 
$
 
%*
 
$
 
%*
Federal tax provision (benefit) at statutory rate
5,477

 
35.0

 
(11,019
)
 
(35.0
)
State taxes, net of federal benefit
662

 
4.2

 
(1,023
)
 
(3.3
)
Reversal of state tax provisions – finalization of audits

 

 


 


Decrease in unrecognized tax benefits
(1,223
)
 
(7.8
)
 

 

Reversal of accrual for uncertain tax positions


 


 


 


Increase in deferred tax assets – net
(1,575
)
 
(10.0
)
 

 

Valuation allowance – recognized


 


 
12,549

 
39.9

Valuation allowance – reversed
(4,564
)
 
(29.2
)
 
(11,802
)
 
(37.5
)
Accrued interest on anticipated tax assessments


 


 
813

 
2.6

Other

 

 
(229
)
 
(0.7
)
Tax benefit
(1,223
)
 
(7.8
)
 
(10,711
)
 
(34.0
)
* Due to rounding, amounts may not add.

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 among the various taxing jurisdictions and changes in tax regulations and their impact on the Company’s tax strategies, the Company estimated its rate for state income taxes at 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 six-month periods and three-month periods ended April 30, 2012 and 2011, is set forth in the table below (amounts in thousands).
Recognized in statements of operations:
 
Six-month period ended April 30, 2012
$
3,000

Six-month period ended April 30, 2011
$
2,500

Three-month period ended April 30, 2012
$

Three-month period ended April 30, 2011
$
1,250


16




The amounts accrued for potential interest and penalties at April 30, 2012 and October 31, 2011 are set forth in the table below (amounts in thousands).
Accrued at:
 
April 30, 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).
 
Six months ended April 30,
 
Three months ended April 30,
 
2012
 
2011
 
2012
 
2011
Balance, beginning of period
$
104,669

 
$
160,446

 
$
101,047

 
$
140,142

Increase in benefit as a result of tax positions taken in prior years
3,000

 
2,500

 


 
1,250

Increase in benefit as a result of tax positions taken in current year


 


 


 


Decrease in benefit as a result of resolution of uncertain tax positions
(3,723
)
 
(17,954
)
 
(1,223
)
 


Decrease in benefit as a result of completion of tax audits
(4,122
)
 
(3,600
)
 


 


Balance, end of period
$
99,824

 
$
141,392

 
$
99,824

 
$
141,392

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 April 30, 2012, the Company estimates that it will have approximately $81.8 million of tax loss carryforwards, resulting from losses that it expects to recognize on its fiscal 2011 federal 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 for recoverability in accordance with ASC 740.
At April 30, 2012 and October 31, 2011, the Company had recorded cumulative valuation allowances against its entire net deferred federal tax asset of $350.0 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 April 30, 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.

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 six-month and three-month periods ended ended April 30, 2012, the Company issued 1,601,295 and 660,967 shares under its stock-based benefit plans, respectively.

17



Information regarding the amount of total stock-based compensation expense recognized by the Company, for the periods indicated, is as follows (amounts in thousands):
 
2012
 
2011
Six months ended April 30,
$
8,831

 
$
7,717

Three months ended April 30,
$
3,205

 
$
2,345

At April 30, 2012 and October 31, 2011, the aggregate unamortized value of outstanding stock-based compensation awards was approximately $20.3 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:
 
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
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):
 
2012
 
2011
Six Months Ended April 30,
$
4,745

 
$
5,905

Three Months Ended April 30,
$
1,225

 
$
1,317


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 are probable of being issued. Information regarding the issuance, valuation assumptions and amortization of the Company’s Performance-Based RSUs issued in fiscal 2012 is provided below.

18



 
2012
Estimated number of shares underlying RSUs to be issued
360,000

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)
$
7,371

Performance-Based RSU expense recognized in the six months ended April 30, 2012 (in thousands):
$
1,920

Performance-Based RSU expense recognized in the three months ended April 30, 2012 (in thousands):
$
984

Unamortized value of Performance-Based RSUs at April 30, 2012 (in thousands):
$
5,452

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 to certain of its executives 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. In the three-month period ended April 30, 2012, the Target Price of the Stock Price-Based RSUs issued in December 2009 was met.
Information regarding the amortization of the Company’s Stock Price-Based RSUs, for the periods indicated, is provided below (amounts in thousands).
 
2012
 
2011
Six months ended April 30,
$
1,528

 
$
1,735

Three months ended April 30,
$
679

 
$
983

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 provided below.
 
April 30,
2012
 
October 31,
2011
Aggregate outstanding Stock Price-Based RSUs
706,000

 
706,000

Cumulative unamortized value of Stock Price-Based RSUs (in thousands)
$
3,401

 
$
4,929


Non-Performance Based Restricted Stock Units:
In December 2011 and 2010, the Company issued restricted stock units (“RSUs”) to various officers and employees. 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:
 
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):
 
2012
 
2011
Six months ended April 30,
$
625

 
$
66

Three months ended April 30,
$
311

 
$
39



19



Information regarding the aggregate number of outstanding RSUs and aggregate unamortized value of the outstanding RSUs, as of the date indicated, is as follows:
 
April 30,
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 officers. The table below provides, for the periods indicated, costs recognized and payments made related to its SERPs (amounts in thousands):
 
Six Months Ended April 30,
 
Three Months Ended April 30,
 
2012
 
2011
 
2012
 
2011
Service cost
$
194

 
$
153

 
$
97

 
$
76

Interest cost
606

 
645

 
303

 
323

Amortization of prior service obligation
369

 
347

 
184

 
173

Amortization of unrecognized losses
33

 

 
17

 

Total costs
$
1,202

 
$
1,145

 
$
601

 
$
572

Benefits paid
$
225

 
$
62

 
$
110

 
$
29


11. Accumulated Other Comprehensive Loss and Total Comprehensive Income (Loss)
Accumulated other comprehensive loss at April 30, 2012 and 2011 was primarily related to employee retirement plans. The table below provides, for the periods indicated, the components of total comprehensive income (loss) (amounts in thousands):
 
Six Months Ended April 30,
 
Three Months Ended April 30,
 
2012
 
2011
 
2012
 
2011
Net income (loss) as reported
$
14,086

 
$
(17,356
)
 
$
16,872

 
$
(20,773
)
Changes in pension liability
92

 
347

 
201

 
173

Change in fair value of available-for-sale securities
156

 
(5
)
 
(87
)
 
59

Unrealized (loss) gain on derivative held by equity investee
(728
)
 

 
67

 


Total comprehensive income (loss)
$
13,606

 
$
(17,014
)
 
$
17,053

 
$
(20,541
)
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 $0.01, 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.
 
Six months ended April 30,
 
Three months ended April 30,
 
2012
 
2011
 
2012
 
2011
Number of shares purchased
13,000

 
19,000

 
10,000

 
11,000

Average price per share
$
22.51

 
$
20.13

 
$
23.13

 
$
20.83

Remaining authorization at April 30 (in thousands):
8,773

 
11,811

 
8,773

 
11,811




20



13. Income (Loss) per Share Information
The table below provides, for the periods indicated, information pertaining to the calculation of income (loss) per share, common stock equivalents, weighted average number of anti-dilutive option and shares issued (amounts in thousands).
 
Six months ended April 30,
 
Three months ended April 30,
 
2012
 
2011
 
2012
 
2011
Basic weighted-average shares
166,652

 
166,794

 
166,994

 
166,910

Common stock equivalents (a)
1,169

 


 
1,541

 


Diluted weighted-average shares
167,821

 
166,794

 
168,535

 
166,910

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


 
1,537

 


 
1,630

Weighted average number of anti-dilutive options (b)
5,355

 
7,446

 
3,983

 
6,509

Shares issued under stock incentive and employee stock purchase plans
1,603

 
513

 
661

 
100

 
(a)
Common stock equivalents represent the dilutive effect of outstanding in-the-money stock options and Stock Price -Based RSUs whose Target Price criteria has been met. For the six-month and three-month periods ended April 30, 2011, there were no incremental shares attributed to outstanding options to purchase common stock because the Company had a net loss in the periods 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.

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).
 
 
 
Fair value
Financial Instrument
Fair value
hierarchy
 
April 30, 2012
 
October 31, 2011
Corporate Securities
Level 1
 
$
130,420

 
$
233,572

Certificates of Deposit
Level 1
 
$
58,000

 

Short-Term Tax-Exempt Bond Fund
Level 1
 
$
30,014

 

Residential Mortgage Loans Held for Sale
Level 2
 
$
50,527

 
$
63,175

Forward Loan Commitments—Residential Mortgage Loans Held for Sale
Level 2
 
$
(185
)
 
$
218

Interest Rate Lock Commitments (“IRLCs”)
Level 2
 
$
246

 
$
(147
)
Forward Loan Commitments—IRLCs
Level 2
 
$
(246
)
 
$
147

At April 30, 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 other income - net. Interest income on mortgage loans held for sale is calculated based upon the stated interest rate of each loan and is included in other income - net.
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).
 
Aggregate unpaid
principal balance
 
Fair value
 
Excess
At April 30, 2012
$
49,918

 
$
50,527

 
$
609

At October 31, 2011
$
62,765

 
$
63,175

 
$
410


21



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).
 
April 30, 2012
 
October 31, 2011
Amortized cost
$
218,558

 
$
233,852

Gross unrealized holding gains
14

 
28

Gross unrealized holding losses
(138
)
 
(308
)
Fair value
$
218,434

 
$
233,572


The remaining contractual maturities of marketable securities as of April 30, 2012 ranged from 2 months to 15 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. As further discussed in Note 1, determining the fair value of a community's inventory involves a number of variables, many of which are interrelated. If the Company used a different input for any of the various unobservable inputs used in its impairment analysis, the results of the analysis may have been different, absent any other changes. The table below summarizes, for the periods indicated, the ranges of certain quantitative unobservable inputs utilized in determining the fair value of impaired communities.
 
Selling price (in thousands)
 
Sales pace per year
(in units)
 
Discount rate
Three months ended April 30, 2012
$413 - $472
 
6 - 17
 
17.5%
Three months ended January 31, 2012
$344 - $2,287
 
1 - 25
 
13.0% - 18.8%
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).
 
Fair value of
inventory, net
of impairment
 
Impairment
charges
recognized
Three months ended:
 
 
 
Fiscal