TOL-2013.4.30-10Q




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, 2013
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 4, 2013, there were approximately 169,308,000 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 filed with the Securities and Exchange Commission and in this report.
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,” “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,
2013
 
October 31,
2012
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
703,101

 
$
778,824

Marketable securities
232,899

 
439,068

Restricted cash
33,801

 
47,276

Inventory
4,367,217

 
3,761,187

Property, construction and office equipment, net
125,289

 
109,971

Receivables, prepaid expenses and other assets
165,745

 
144,558

Mortgage loans held for sale
66,538

 
86,386

Customer deposits held in escrow
45,304

 
29,579

Investments in and advances to unconsolidated entities
357,532

 
330,617

Investments in distressed loans
48,707

 
37,169

Investments in foreclosed real estate
71,458

 
58,353

Deferred tax assets, net of valuation allowances
341,014

 
358,056

 
$
6,558,605

 
$
6,181,044

LIABILITIES AND EQUITY
 
 
 
Liabilities
 
 
 
Loans payable
$
96,572

 
$
99,817

Senior notes
2,322,397

 
2,080,463

Mortgage company warehouse loan
58,526

 
72,664

Customer deposits
205,821

 
142,977

Accounts payable
149,601

 
99,911

Accrued expenses
469,233

 
476,350

Income taxes payable
84,157

 
80,991

Total liabilities
3,386,307

 
3,053,173

Equity
 
 
 
Stockholders’ equity
 
 
 
Preferred stock, none issued

 

Common stock, 169,268 and 168,690 shares issued at April 30, 2013 and October 31, 2012, respectively
1,693

 
1,687

Additional paid-in capital
418,844

 
404,418

Retained earnings
2,750,503

 
2,721,397

Treasury stock, at cost — 2 and 53 shares at April 30, 2013 and October 31, 2012, respectively
(78
)
 
(983
)
Accumulated other comprehensive loss
(4,861
)
 
(4,819
)
Total stockholders’ equity
3,166,101

 
3,121,700

Noncontrolling interest
6,197

 
6,171

Total equity
3,172,298

 
3,127,871

 
$
6,558,605

 
$
6,181,044

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,
 
2013
 
2012
 
2013
 
2012
Revenues
$
940,605

 
$
695,636

 
$
516,004

 
$
373,681

 
 
 
 
 
 
 
 
Cost of revenues
765,950

 
578,429

 
420,013

 
306,821

Selling, general and administrative
157,597

 
137,893

 
79,550

 
68,256

 
923,547

 
716,322

 
499,563

 
375,077

Income (loss) from operations
17,058

 
(20,686
)
 
16,441

 
(1,396
)
Other:
 
 
 
 
 
 
 
Income from unconsolidated entities
8,076

 
13,676

 
4,993

 
6,989

Other income - net
24,160

 
16,251

 
19,534

 
10,056

Income before income taxes
49,294

 
9,241

 
40,968

 
15,649

Income tax provision (benefit)
20,188

 
(4,845
)
 
16,294

 
(1,223
)
Net income
$
29,106

 
$
14,086

 
$
24,674

 
$
16,872

Income per share:
 
 
 
 
 
 
 
Basic
$
0.17

 
$
0.08

 
$
0.15

 
$
0.10

Diluted
$
0.17

 
$
0.08

 
$
0.14

 
$
0.10

Weighted average number of shares:
 
 
 
 
 
 
 
Basic
169,222

 
166,652

 
169,380

 
166,994

Diluted
177,949

 
167,805

 
178,136

 
168,503

See accompanying notes


CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Amounts in thousands)
(Unaudited)
 
Six months ended April 30,
 
Three months ended April 30,
 
2013
 
2012
 
2013
 
2012
Net income
$
29,106

 
$
14,086

 
$
24,674

 
$
16,872

 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax:
 
 
 
 
 
 
 
Change in pension liability
(18
)
 
92

 
155

 
201

Change in fair value of available-for-sale securities
(37
)
 
156

 
(133
)
 
(87
)
Unrealized income (loss) on derivative held by equity investee
13

 
(728
)
 
(80
)
 
67

Other comprehensive (loss) income
(42
)
 
(480
)
 
(58
)
 
181

Total comprehensive income
$
29,064

 
$
13,606

 
$
24,616

 
$
17,053

See accompanying notes


3




TOLL BROTHERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)

Six months ended April 30,
 
2013
 
2012
Cash flow used in operating activities:
 
 
 
Net income
$
29,106

 
$
14,086

Adjustments to reconcile net income to net cash used in operating activities:
 
 
 
Depreciation and amortization
12,768

 
10,698

Stock-based compensation
10,027

 
8,831

Recovery of investments in unconsolidated entities

 
(1,621
)
Income from unconsolidated entities
(8,076
)
 
(12,055
)
Distributions of earnings from unconsolidated entities
8,855

 
1,550

Income from distressed loans and foreclosed real estate
(4,893
)
 
(10,004
)
Deferred tax provision (benefit)
18,348

 
(3,318
)
Deferred tax valuation allowances
(1,277
)
 
3,318

Inventory impairments and write-offs
1,738

 
10,128

Change in fair value of mortgage loans receivable and derivative instruments
292

 
284

Gain on marketable securities
(137
)
 
(39
)
Changes in operating assets and liabilities
 
 
 
Increase in inventory
(617,360
)
 
(202,466
)
Origination of mortgage loans
(301,952
)
 
(253,866
)
Sale of mortgage loans
322,160

 
266,713

Decrease (increase) in restricted cash
13,475

 
(27,638
)
Increase in receivables, prepaid expenses and other assets
(15,172
)
 
(29,769
)
Increase in customer deposits
47,119

 
28,838

Increase (decrease) in accounts payable and accrued expenses
36,405

 
(67,789
)
Increase (decrease) in income taxes payable
3,166

 
(6,959
)
Net cash used in operating activities
(445,408
)
 
(271,078
)
Cash flow provided by (used in) investing activities:
 
 
 
Purchase of property and equipment — net
(20,264
)
 
(6,528
)
Purchase of marketable securities
(36,162
)
 
(177,833
)
Sale and redemption of marketable securities
239,484

 
189,716

Investments in and advances to unconsolidated entities
(31,994
)
 
(75,008
)
Return of investments in unconsolidated entities
34,686

 
20,568

Investments in distressed loans and foreclosed real estate
(26,155
)
 
(27,490
)
Return of investments in distressed loans and foreclosed real estate
6,114

 
11,582

Acquisition of a business


 
(144,746
)
Net cash provided by (used in) investing activities
165,709

 
(209,739
)
Cash flow provided by financing activities:
 
 
 
Net proceeds from issuance of senior notes
298,050

 
296,227

Proceeds from loans payable
501,884

 
400,092

Principal payments of loans payable
(545,175
)
 
(429,709
)
Redemption of senior notes
(59,068
)
 


Proceeds from stock-based benefit plans
8,430

 
17,189

Receipts related to noncontrolling interest
33

 


Purchase of treasury stock
(178
)
 
(284
)
Net cash provided by financing activities
203,976

 
283,515

Net decrease in cash and cash equivalents
(75,723
)
 
(197,302
)
Cash and cash equivalents, beginning of period
778,824

 
906,340

Cash and cash equivalents, end of period
$
703,101

 
$
709,038

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, 2012 balance sheet amounts and disclosures included herein have been derived from the Company’s October 31, 2012 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, 2012. 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, 2013, the results of its operations for the six-month and three-month periods ended April 30, 2013 and 2012, and its cash flows for the six-month periods ended April 30, 2013 and 2012. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.
Recent Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2011-05, “Statement of Comprehensive Income” (“ASU 2011-05”), which requires entities to present comprehensive income in either a single continuous statement or in two separate, but consecutive, statements of net income and other comprehensive income. ASU 2011-05 was effective for our fiscal year beginning November 1, 2012. The adoption of this guidance, which related to presentation only, did not have an impact on the Company’s consolidated financial position, results of operations or cash flows but did require a change in the presentation of the Company’s comprehensive income from the notes of the condensed consolidated financial statements to the face of the condensed consolidated financial statements.
In February 2013, the FASB issued ASU No. 2013-02, "Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income" ("ASU 2013-02"). ASU 2013-02 requires entities to present information about reclassification adjustments from accumulated other comprehensive income in their financial statements in a single note or on the face of the financial statements. The adoption of this guidance, which relates to disclosure only, did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. ASU 2013-02 was effective for the Company’s fiscal quarter beginning February 1, 2013.
Revisions/Reclassifications
The Supplemental Guarantor Information included in Note 18 has been presented in a format that has been adjusted from prior annual and quarterly reports in order to (i) reflect the transfer of the balance sheet, statements of operations and cash flows of certain non-guarantor subsidiaries to guarantor subsidiaries as a result of such entities becoming guarantor subsidiaries as of April 30, 2013 and the reclassification of guarantor and non-guarantor intercompany advances and equity balances with corresponding offsets in the elimination column and (ii) revise the presentation of cash flows from operating activities, financing activities and investing activities in the condensed consolidating statements of cash flows for the six-month period ended April 30, 2012 to reflect intercompany activity, which had previously been included in cash flow from operating activities, as cash flow from investing activities and cash flow from financing activities. This revised presentation of the Supplemental Guarantor Information has no impact or effect on Toll Brothers, Inc.'s condensed consolidated financial statements for any period presented, including the Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income or Statements of Cash Flows.
Certain prior year amounts have been reclassified to conform to the fiscal 2013 presentation.

5




2. Inventory
Inventory at April 30, 2013 and October 31, 2012 consisted of the following (amounts in thousands):
 
April 30,
2013
 
October 31,
2012
Land controlled for future communities
$
62,203

 
$
56,300

Land owned for future communities
1,083,250

 
1,040,373

Operating communities
3,221,764

 
2,664,514

 
$
4,367,217

 
$
3,761,187

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.
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,
2013
 
October 31,
2012
Land owned for future communities:
 
 
 
Number of communities
22

 
40

Carrying value (in thousands)
$
157,181

 
$
240,307

Operating communities:
 
 
 
Number of communities
23

 
5

Carrying value (in thousands)
$
109,442

 
$
34,685

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,
 
2013
 
2012
 
2013
 
2012
Charge:
 
 
 
 
 
 
 
Land controlled for future communities
$
698

 
$
225

 
$
689

 
$
(552
)
Land owned for future communities

 
918

 

 

Operating communities
1,040

 
8,985

 
340

 
2,560

 
$
1,738

 
$
10,128

 
$
1,029

 
$
2,008

See Note 13, "Fair Value Disclosures", for information regarding 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 the fair values of those communities, net of impairment charges.
At April 30, 2013, the Company evaluated its land purchase contracts to determine if any of the selling entities were variable interest entities ("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, 2013, the Company determined that 71 land purchase contracts, with an aggregate purchase price of $908.5 million, on which it had made aggregate deposits totaling $32.1 million, were VIEs, and that it was not the primary beneficiary of any VIE related to its land purchase contracts.

6



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,
 
2013
 
2012
 
2013
 
2012
Interest capitalized, beginning of period
$
330,581

 
$
298,757

 
$
340,904

 
$
311,335

Interest incurred
64,051

 
60,467

 
32,303

 
31,568

Interest expensed to cost of revenues
(42,990
)
 
(33,989
)
 
(23,016
)
 
(17,668
)
Write-off against other income
(1,221
)
 
(1,582
)
 
(1,133
)
 
(1,582
)
Interest capitalized on investments in unconsolidated entities
(2,872
)
 
(1,137
)
 
(1,509
)
 
(1,137
)
Interest capitalized, end of period
$
347,549

 
$
322,516

 
$
347,549

 
$
322,516

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, 2013 and 2012 would have been reduced by approximately $43.4 million and $54.5 million, respectively.
3. Investments in and Advances to Unconsolidated Entities
The Company has investments in and advances to various unconsolidated entities. These entities include development joint ventures, a planned community joint venture, a structured asset joint venture, Toll Brothers Realty Trust and Trust II and other joint ventures. At April 30, 2013, the Company had investments in and advances to these unconsolidated entities of $357.5 million and was committed to invest or advance up to $126.8 million to these entities if they require additional funding. The Company’s investments in these entities are accounted for using the equity method of accounting. More specific information regarding its investments in, advances to and future commitments to these entities is provided below.
At April 30, 2013, the Company determined that two of its joint ventures were VIEs under the guidance within FASB Accounting Standards Codification ("ASC") 810, "Consolidation". However, the Company concluded that it was not the primary beneficiary of the VIEs because the power to direct the activities of these VIEs that most significantly impact their performance was shared by the Company and the VIEs' other members. Business plans, budgets and other major decisions are required to be unanimously approved by all members. Management and other fees earned by the Company are nominal and believed to be at market rates and there is no significant economic disproportionality between the Company and other members.
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, 2013, the Company had approximately $124.3 million invested in or advanced to the Development Joint Ventures and had a funding commitment of $30.3 million to three of the Development Joint Ventures which would be funded if additional investment in the ventures is required.
In March 2013, the Company entered into a joint venture with an unrelated party to develop a parcel of land in Texas into a master planned community consisting of approximately 2,900 lots. The Company has a 50% interest in this joint venture. The current plan is to develop the property in multiple phases and sell groups of lots to the members of the joint venture and to other third party home builders. The Company contributed $15.5 million of cash to the joint venture. The joint venture entered into a $25.0 million line of credit with a bank, secured by a deed of trust on the property. The line of credit can be expanded up to $40.0 million under certain conditions. At April 30, 2013, the joint venture had $20.0 million of borrowings under its line of credit. At April 30, 2013, the Company had an investment of $15.8 million in this joint venture and was committed to make additional contributions to this joint venture of up to $16.8 million.
The Company has a 50% interest in a joint venture that is developing over 2,000 home sites in Orange County, California on land that it owns. Under the terms of the operating agreement, the Company will acquire 266 home sites in the first phase of the property from the joint venture. The Company intends to acquire approximately 545 additional home sites from the joint venture. The Company has a commitment to provide up to $10.0 million of additional funds to this joint venture, if needed. The

7



joint venture has an $80.0 million credit facility from a bank to fund the development of the property. At April 30, 2013, the venture had $29.4 million borrowed under the facility.
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. At April 30, 2013, the Company had an investment of $30.4 million in this joint venture. At April 30, 2013, the participants agreed to contribute additional funds of up to $8.3 million each, if required.
Other Joint Ventures
At April 30, 2013, the Company had an aggregate of $166.2 million of investments in and advances to various joint ventures with unrelated parties to develop luxury for-sale and rental residential units, commercial space and a hotel. At April 30, 2013, the Company had $88.2 million of funding commitments to five of these joint ventures. Several of the joint ventures expect to finance future construction with external financing.
In April 2013, the Company entered into a joint venture with an unrelated party to develop a luxury, 38-story apartment building and retail space in Jersey City, New Jersey on land that the Company owned. The Company has a 50% interest in this joint venture. As part of the Company's initial capital contribution, it contributed land and improvements with a fair value of $28.8 million to the joint venture and subsequently received distributions of $10.2 million and the joint venture making a $1.2 million payment on our behalf to align the capital accounts of each of the members of the joint venture. The joint venture entered into a $120.0 million construction loan agreement with a bank to finance the development of this project. At April 30, 2013, the joint venture had no borrowings under the construction loan agreement. At April 30, 2013, the Company had an investment of $17.7 million in this joint venture and was committed to make additional contributions to this joint venture of up to $16.7 million.
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, 2013, the Company had an investment of $3.3 million in Trust II. Prior to the formation of Trust II, the Company formed Toll Brothers Realty Trust (“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. As of April 30, 2013, the Company had a net investment in the Trust of $0.2 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, 2013 and 2012, and $0.5 million and $0.6 million in the three-month periods ended April 30, 2013 and 2012, respectively.
Structured Asset Joint Venture
The Company, through Gibraltar Capital and Asset Management LLC (“Gibraltar”), is a 20% participant with two unrelated parties that purchased a 40% interest in an entity that owns and controls a portfolio of loans and real estate (“Structured Asset Joint Venture”). At April 30, 2013, the Company had an investment of $33.2 million in this Structured Asset Joint Venture. At April 30, 2013, the Company did not have any commitments to make additional contributions to this Structured Asset Joint Venture and has not guaranteed any of the joint venture’s liabilities.
Guarantees
The unconsolidated entities in which the Company has investments generally finance their activities with a combination of partner equity and debt financing. In some instances, the Company and its partners have guaranteed debt of certain unconsolidated entities which may include any, or all of the following: (i) project completion including any cost overruns, in whole or in part, (ii) repayment guarantees, generally covering a percentage of the outstanding loan, (iii) indemnification of the lender from environmental matters and (iv) indemnification of the lender from “bad boy acts” of the unconsolidated entity.
In some instances, the guarantees provided in connection with loans to an unconsolidated entity are joint and several. In these situations, the Company generally has a reimbursement agreement with its partner that provides that neither party is responsible for more than its proportionate share of the guarantee. However, if the joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, the Company may be liable for more than its proportionate share.
The Company believes that as of April 30, 2013, in the event it becomes legally obligated to perform under a guarantee of the obligation of an unconsolidated entity due to a triggering event, the collateral should be sufficient to repay a significant portion

8



of the obligation. If it is not, the Company and its partners would need to contribute additional capital into the venture. At April 30, 2013, the unconsolidated entities that have guarantees related to debt had loan commitments aggregating $225.0 million and had borrowed an aggregate of $49.4 million. The Company estimates that the maximum potential exposure under these guarantees, if the full amount of the loan commitments were borrowed, would be $225.0 million before any reimbursement from the Company's partners. Based on the amounts borrowed at April 30, 2013, the Company's maximum potential exposure under these guarantees is estimated to be $49.4 million before any reimbursement from the Company's partners.
In addition, the Company has guaranteed approximately $11.9 million of ground lease payments and insurance deductibles for two joint ventures.
As of April 30, 2013, the estimated aggregate fair value of the guarantees was approximately $1.3 million. The Company has not made payments under any of the guarantees.
The condensed balance sheets, as of the dates indicated, and the condensed statements of operations and comprehensive income (loss), 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 Other Joint Ventures described above.
Condensed Balance Sheets:
 
April 30, 2013
 
Develop-
ment Joint
Ventures
 
Home
Building
Joint
Ventures
 
 Trust
and Trust II
 
Structured
Asset
Joint
Venture
 
Total
Cash and cash equivalents
$
19,963

 
$
38,771

 
$
12,681

 
$
33,717

 
$
105,132

Inventory
308,294

 
272,326

 
5,685

 


 
586,305

Non-performing loan portfolio

 

 

 
159,925

 
159,925

Rental properties

 

 
168,340

 


 
168,340

Rental properties under development

 
78,799

 

 

 
78,799

Real estate owned (“REO”)

 

 
557

 
243,245

 
243,802

Other assets (1)
12,539

 
69,535

 
9,239

 
311,806

 
403,119

Total assets
$
340,796

 
$
459,431

 
$
196,502

 
$
748,693

 
$
1,745,422

Debt (1)
$
119,601

 
$
29,532

 
$
193,483

 
$
311,801

 
$
654,417

Other liabilities
22,046

 
14,320

 
5,059

 
1,179

 
42,604

Members’ equity (deficit)
199,149

 
415,579

 
(2,040
)
 
174,285

 
786,973

Noncontrolling interest

 

 


 
261,428

 
261,428

Total liabilities and equity
$
340,796

 
$
459,431

 
$
196,502

 
$
748,693

 
$
1,745,422

Company’s net investment in unconsolidated entities (2)
$
124,317

 
$
196,584

 
$
3,480

 
$
33,151

 
$
357,532

 

9



 
October 31, 2012
 
Develop-
ment Joint
Ventures
 
Home
Building
Joint
Ventures
 
 Trust
and Trust II
 
Structured
Asset
Joint
Venture
 
Total
Cash and cash equivalents
$
17,189

 
$
40,126

 
$
11,005

 
$
44,176

 
$
112,496

Inventory
255,561

 
251,029

 
5,643

 


 
512,233

Non-performing loan portfolio

 

 


 
226,315

 
226,315

Rental properties

 

 
173,767

 


 
173,767

Rental properties under development

 
43,695

 

 

 
43,695

Real estate owned (“REO”)

 

 

 
254,250

 
254,250

Other assets (1)
12,427

 
72,301

 
9,182

 
237,476

 
331,386

Total assets
$
285,177

 
$
407,151

 
$
199,597

 
$
762,217

 
$
1,654,142

Debt (1)
$
96,362

 
$
30,121

 
$
195,359

 
$
311,801

 
$
633,643

Other liabilities
14,390

 
9,770

 
5,202

 
561

 
29,923

Members’ equity (deficit)
174,425

 
367,260

 
(964
)
 
179,942

 
720,663

Noncontrolling interest

 

 


 
269,913

 
269,913

Total liabilities and equity
$
285,177

 
$
407,151

 
$
199,597

 
$
762,217

 
$
1,654,142

Company’s net investment in unconsolidated entities (2)
$
116,452

 
$
173,465

 
$
3,357

 
$
37,343

 
$
330,617

 
(1)
Included in other assets of the Structured Asset Joint Venture at April 30, 2013 and October 31, 2012 is $311.8 million and $237.5 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 the acquisition price of an investment in an entity in fiscal 2012 which was in excess of the Company's pro-rata share of the underlying equity, 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.


10



Condensed Statements of Operations and Comprehensive Income (Loss):
 
For the six months ended April 30, 2013
 
Develop-
ment Joint
Ventures
 
Home
Building
Joint
Ventures
 
Trust
and Trust II
 
Structured
Asset
Joint
Venture
 
Total
Revenues
$
35,022

 
$
22,757

 
$
20,303

 
$
21,714

 
$
99,796

Cost of revenues
17,805

 
19,973

 
9,010

 
19,493

 
66,281

Other expenses
758

 
1,292

 
10,427

 
2,316

 
14,793

Total expenses—net
18,563

 
21,265

 
19,437

 
21,809

 
81,074

Gain on disposition of loans and REO


 


 


 
39,704

 
39,704

Income from operations
16,459

 
1,492

 
866

 
39,609

 
58,426

Other income
5

 
444

 


 
154

 
603

Net income before noncontrolling interest
16,464

 
1,936

 
866

 
39,763

 
59,029

Less: Net income attributable to noncontrolling interest

 


 


 
(23,858
)
 
(23,858
)
Net income
16,464


1,936

 
866

 
15,905

 
35,171

Other comprehensive income (loss)

 
(195
)
 
477

 

 
282

Total comprehensive income
$
16,464

 
$
1,741

 
$
1,343

 
$
15,905

 
$
35,453

Company’s equity in earnings of unconsolidated entities (3)
$
2,796

 
$
1,199

 
$
1,010

 
$
3,071

 
$
8,076

 
 
For the three months ended April 30, 2013
 
Develop-
ment Joint
Ventures
 
Home
Building
Joint
Ventures
 
Trust
and Trust II
 
Structured
Asset
Joint
Venture
 
Total
Revenues
$
33,395

 
$
13,787

 
$
10,621

 
$
12,009

 
$
69,812

Cost of revenues
16,587

 
12,868

 
4,717

 
9,155

 
43,327

Other expenses
567

 
1,098

 
4,661

 
1,259

 
7,585

Total expenses—net
17,154

 
13,966

 
9,378

 
10,414

 
50,912

Gain on disposition of loans and REO


 


 


 
12,812

 
12,812

Income (loss) from operations
16,241

 
(179
)
 
1,243

 
14,407

 
31,712

Other income
2

 
424

 


 
75

 
501

Net income before noncontrolling interest
16,243

 
245

 
1,243

 
14,482

 
32,213

Less: Net income attributable to noncontrolling interest

 

 

 
(8,689
)
 
(8,689
)
Net income
16,243

 
245

 
1,243

 
5,793

 
23,524

Other comprehensive income (loss)

 
(195
)
 
175

 

 
(20
)
Total comprehensive income
$
16,243

 
$
50

 
$
1,418

 
5,793

 
$
23,504

Company’s equity in earnings of unconsolidated entities (3)
$
2,894

 
$
356

 
$
585

 
$
1,158

 
$
4,993


11



 
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

Total expenses—net
32,201

 
36,864

 
18,163

 
22,125

 
109,353

Gain on disposition of loans and REO


 


 


 
22,826

 
22,826

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

Other comprehensive loss

 

 
(50
)
 

 
(50
)
Total comprehensive income
$
4,036

 
$
10,681

 
$
485

 
$
5,334

 
$
20,536

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

Total expenses—net
205

 
18,126

 
8,035

 
7,714

 
34,080

Gain on disposition of loans and REO


 


 


 
7,517

 
7,517

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

Other comprehensive income

 

 
239

 

 
239

Comprehensive income (loss)
$
(204
)
 
$
5,984

 
$
1,426

 
$
3,038

 
$
10,244

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

 
$
3,490

 
$
458

 
$
1,505

 
$
6,989

 
(3)
Differences between the Company’s equity in earnings of unconsolidated entities and the Company's percentage interest in 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.


12



4. Investments in Distressed Loans and Foreclosed Real Estate
Investments in Distressed Loans
The Company’s investment in distressed loans consisted of the following as of the dates indicated (amounts in thousands):
 
April 30, 2013
 
October 31, 2012
Unpaid principal balance
$
102,131

 
$
99,693

Discount on acquired loans
(53,424
)
 
(62,524
)
Carrying value
$
48,707

 
$
37,169

The Company's investment in distressed loans includes performing loans and non-performing loans and also includes investments in loan participations classified as secured borrowings under ASC 860, "Transfers and Servicing".
For acquired distressed loans where it is probable that the Company will collect less than the contractual amounts due under the terms of the loan based, at least in part, on the assessment of the credit quality of the borrowers, the loans are accounted for under ASC Topic 310-30, "Loans and Debt Securities Acquired with Deteriorated Credit Quality" ("ASC 310-30"). Under ASC 310-30, provided the Company does not presently have the intention to utilize real estate secured by the loans for use in its operations or to significantly improve the collateral for resale, the amount by which the future cash flows expected to be collected at the acquisition date exceeds the estimated fair value of the loan, or accretable yield, is recognized in other income - net over the estimated remaining life of the loan using a level yield methodology. The difference between the contractually required payments of the loan as of the acquisition date and the total cash flows expected to be collected, or nonaccretable difference, is not recognized.
The Company may acquire distressed loans where it has determined that (1) it is possible to collect all contractual amounts due under the terms of the loan, (2) it expects to utilize the real estate secured by the loans in its operations, or (3) forecasted cash flows cannot be reasonably estimated. For non-performing loans acquired meeting these conditions, in accordance with ASC 310-10, "Receivable," the loans are classified as nonaccrual and interest income is not recognized. When a loan is classified as nonaccrual, any subsequent cash receipt is accounted for using the cost recovery method. For performing loans, payments are applied to principal and interest in accordance with the terms of the loan when received. As of April 30, 2013, the Company had investments in performing and non-performing loans, accounted for in accordance with ASC 310-10, of $13.9 million and $15.9 million, respectively. At October 31, 2012, the Company had investments in non-performing loans of $9.2 million. The Company had no investments in performing loans at October 31, 2012.
In the six months ended April 30, 2013, Gibraltar purchased distressed loans for approximately $26.0 million. The purchases included performing and non-performing loans secured by retail shopping centers, residential land and golf courses located in seven states.
The following table summarizes, for the distressed loans acquired in the six months ended April 30, 2012 that were accounted for in accordance with ASC 310-30, the accretable yield and the nonaccretable difference of the Company's investment in these loans as of their acquisition date (amounts in thousands).
 
Six-month period ended April 30, 2012
Contractually required payments, including interest
$
52,524

Nonaccretable difference
(5,125
)
Cash flows expected to be collected
47,399

Accretable yield
(20,514
)
Non-performing loans carrying amount
$
26,885

There were no distressed loans purchased during the six months ended April 30, 2013 that met the requirements of ASC 310-30.

13



The accretable yield activity for the Company’s investment in distressed loans accounted for under ASC 310-30 for the six-month and three-month periods ended April 30, 2013 and 2012 was as follows (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,
 
2013
 
2012
 
2013
 
2012
Balance, beginning of period
$
17,196

 
$
42,326

 
$
13,406

 
$
57,844

Loans acquired


 
20,514

 


 


Additions
471

 
2,826

 
471

 
3,010

Deletions
(3,915
)
 
(9,851
)
 
(1,528
)
 
(8,267
)
Accretion
(2,523
)
 
(6,559
)
 
(1,120
)
 
(3,331
)
Balance, end of period
$
11,229

 
$
49,256

 
$
11,229

 
$
49,256

Additions primarily respresent the reclassification to accretable yield from nonaccretable yield and the impact of impairments. Deletions primarily represent loan dispositions, which include foreclosure of the underlying collateral and resulting removal of the loans from the accretable yield portfolios, and reclassifications from accretable yield to nonaccretable yield. The reclassifications between accretable and nonaccretable 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 gather additional information regarding the loans and the underlying collateral, the accretable yield may change. Therefore, the amount of accretable income recorded in the six-month and three-month periods ended April 30, 2013 and 2012 is not necessarily indicative of future results.
Real Estate Owned (REO)
The following table presents the activity in REO for the six-month and three-month periods ended April 30, 2013 and 2012 (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,
 
2013
 
2012
 
2013
 
2012
Balance, beginning of period
$
58,353

 
$
5,939

 
$
68,764

 
$
6,488

Additions
14,317

 
12,802

 
3,277

 
11,638

Sales
(911
)
 
(615
)
 
(472
)
 

Impairments
(15
)
 

 

 

Depreciation
(286
)
 
(18
)
 
(111
)
 
(18
)
Balance, end of period
$
71,458

 
$
18,108

 
$
71,458

 
$
18,108

As of April 30, 2013, approximately $9.4 million and $62.0 million of REO was classified as held-for-sale and held-and-used, respectively. As of April 30, 2012, approximately $1.3 million and $16.8 million of REO was classified as held-for-sale and held-and-used, respectively. For the six-month and three-month periods ended April 30, 2013, the Company recorded gains of $1.5 million and $0.8 million from acquisitions of REO through foreclosure, respectively. For both the six-month and three-month period ended April 30, 2012, the Company recorded gains of $1.7 million from acquisitions of REO through foreclosure.
General
The Company’s earnings from Gibraltar's operations, excluding its investment in the Structured Asset Joint Venture, are included in other income - net in its condensed consolidated statements of operations. In the six-month periods ended April 30, 2013 and 2012, the Company recognized $1.1 million and $5.9 million of earnings, respectively, from Gibraltar's operations.
5. Senior Notes and Mortgage Company Loan Facilities
Senior Notes
At April 30, 2013, the Company had eight issues of Senior Notes outstanding with an aggregate principal amount of $2.33 billion.
On April 3, 2013, the Company, through Toll Brothers Finance Corp., issued $300 million principal amount of 4.375% Senior Notes due 2023 (the "4.375% Senior Notes") at par. The Company received $298.1 million of net proceeds from this issuance of 4.375% Senior Notes.

14



On May 13, 2013, the Company, through Toll Brothers Finance Corp., issued an additional $100.0 million principal amount of 4.375% Senior Notes at a price equal to 103% of par value. The Company received $102.3 million of net proceeds from this additional issuance of 4.375% Senior Notes.
In November 2012, the Company repaid the $59.1 million of its outstanding 6.875% Senior Notes due November 15, 2012.
Mortgage Company Loan Facilities
In July 2012, TBI Mortgage Company (“TBI Mortgage”), the Company's wholly-owned mortgage subsidiary, amended its Master Repurchase Agreement (the “Repurchase Agreement”) with Comerica Bank. The purpose of the Repurchase Agreement is to finance the origination of mortgage loans by TBI Mortgage and it is accounted for as a secured borrowing under ASC 860, “Transfers and Servicing.” The Repurchase Agreement, as amended, provides for loan purchases of up to $50 million, subject to certain sublimits. In addition, the Repurchase Agreement provides for an accordion feature under which TBI Mortgage may request that the aggregate commitments under the Repurchase Agreement be increased to an amount up to $75 million for a short period of time. The Repurchase Agreement, as amended, expires on July 23, 2013 and bears interest at LIBOR plus 2.00% per annum, with a minimum rate of 3.00%.
6. Accrued Expenses
Accrued expenses at April 30, 2013 and October 31, 2012 consisted of the following (amounts in thousands):
 
April 30,
2013
 
October 31,
2012
Land, land development and construction
$
132,718

 
$
126,866

Compensation and employee benefits
97,072

 
111,243

Insurance and litigation
96,443

 
101,908

Warranty
41,109

 
41,706

Interest
26,821

 
28,204

Other
75,070

 
66,423

 
$
469,233

 
$
476,350

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,
 
2013
 
2012
 
2013
 
2012
Balance, beginning of period
$
41,706

 
$
42,474

 
$
41,241

 
$
43,109

Additions – homes closed during the period
5,223

 
3,944

 
2,934

 
2,073

Addition – liabilities acquired


 
731

 


 

(Decrease) increase in accruals for homes closed in prior periods
(478
)
 
1,765

 
(212
)
 
(18
)
Charges incurred
(5,342
)
 
(5,917
)
 
(2,854
)
 
(2,167
)
Balance, end of period
$
41,109

 
$
42,997

 
$
41,109

 
$
42,997



15



7. 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,
 
2013
 
2012
 
$
 
%*
 
$
 
%*
Federal tax provision at statutory rate
17,253

 
35.0

 
3,234

 
35.0

State tax provision, net of federal benefit
2,051

 
4.2

 
391

 
4.2

Increase in unrecognized tax benefits

 


 
277

 
3.0

Reversal of accrual for uncertain tax positions


 


 
(5,279
)
 
(57.1
)
Increase in deferred tax assets – net


 


 
(2,100
)
 
(22.7
)
Valuation allowance – reversed
(1,277
)
 
(2.6
)
 
(3,318
)
 
(35.9
)
Accrued interest on anticipated tax assessments
1,982

 
4.0

 
1,950

 
21.1

Other
179

 
0.4

 


 


Income tax provision (benefit)
20,188

 
41.0

 
(4,845
)
 
(52.4
)
 
 
Three months ended April 30,
 
2013
 
2012
 
$
 
%*
 
$
 
%*
Federal tax provision at statutory rate
14,339

 
35.0

 
5,477

 
35.0

State tax provision, net of federal benefit
1,705

 
4.2

 
662

 
4.2

Increase in unrecognized tax benefits

 


 
(1,223
)
 
(7.8
)
Increase in deferred tax assets – net


 


 
(1,575
)
 
(10.0
)
Valuation allowance – reversed
(1,061
)
 
(2.6
)
 
(4,564
)
 
(29.2
)
Accrued interest on anticipated tax assessments
817

 
2.0

 


 


Other
494

 
1.2

 


 


Income tax provision (benefit)
16,294

 
39.8

 
(1,223
)
 
(7.8
)
* Due to rounding, amounts may not add.

The Company currently operates in 19 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. Based on 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 6.4% and 6.5% for fiscal 2013 and 2012, respectively.
At October 31, 2012, the Company evaluated evidence related to the need for its deferred tax asset valuation allowances and determined that the valuation allowance on its federal deferred tax assets and certain state valuation allowances were no longer needed. Accordingly, in the fourth quarter of fiscal 2012, the Company reversed a valuation allowance in the amount of $394.7 million.
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 $55.8 million and $57.0 million as of April 30, 2013 and October 31, 2012, respectively.


16



8. 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 (other than certain senior executives) by reducing the number of stock options it grants and, in their place, issued non-performance based restricted stock units ("RSUs") as a form of compensation. The Company also replaced its stock price-based restricted stock unit ("Stock Price-Based RSUs") awards for certain senior executives with a performance-based restricted stock (“Performance-Based RSUs”) award program. Additionally, the Company has an employee stock purchase plan that allows employees to purchase Company stock at a discount.
Information regarding the amount of total stock-based compensation expense and tax benefit recognized by the Company, for the periods indicated, is as follows (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,

2013
 
2012
 
2013
 
2012
Total stock-based compensation expense recognized
$
10,027

 
$
8,831

 
$
4,343

 
$
3,205

Income tax benefit recognized
$
3,666

 
$
3,235

 
$
1,588

 
$
1,174

At April 30, 2013 and October 31, 2012, the aggregate unamortized value of outstanding stock-based compensation awards was approximately $28.2 million and $14.2 million, respectively.
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 2013 and 2012 were as follows:
 
2013
 
2012
Expected volatility
44.04% - 48.13%
 
44.20% - 50.24%
Weighted-average volatility
46.70%
 
46.99%
Risk-free interest rate
0.64% - 1.56%
 
0.78% - 1.77%
Expected life (years)
4.48 - 8.88
 
4.59 - 9.06
Dividends
none
 
none
Weighted-average grant date fair value per share of options granted
$13.05
 
$8.70
Stock compensation expense, related to stock options, for the periods indicated, was as follows (amounts in thousands):
 
2013
 
2012
Six months ended April 30,
$
4,835

 
$
4,745

Three months ended April 30,
$
1,360

 
$
1,225


Performance-Based Restricted Stock Units
In the first quarter of fiscal 2013, the Executive Compensation Committee of the Company’s Board of Directors ("Executive Compensation Committee") approved awards of Performance-Based RSUs relating to shares of the Company’s common stock to certain of its senior management. The Performance-Based RSUs are based on the attainment of certain performance metrics of the Company in fiscal 2013. 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 as compared to the target

17



performance goals. 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 goals were approved by the Executive Compensation Committee. The Company evaluates the performance goals quarterly and estimates the number of shares underlying the Performance-Based 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 2013 and 2012 is provided below.
 
2013
 
2012
Estimated number of shares underlying Performance-Based RSUs to be issued
289,490

 
360,000

Closing price of the Company’s common stock on date performance goals were approved
$
37.78

 
$
20.50

Estimated aggregate fair value of Performance-Based RSUs to be issued (in thousands)
$
10,937

 
$
7,371

Performance-Based RSU expense recognized in the six months ended April 30, (in thousands):
$
2,588

 
$
1,920

Performance-Based RSU expense recognized in the three months ended April 30, (in thousands):
$
2,074

 
$
984

Unamortized value of Performance-Based RSUs at April 30, (in thousands):
$
11,986

 
$
5,452

Stock Price-Based Restricted Stock Units
Information regarding the amortization of the Company’s Stock Price-Based RSUs, for the periods indicated, is provided below (amounts in thousands).
 
2013
 
2012
Six months ended April 30,
$
979

 
$
1,528

Three months ended April 30,
$
416

 
$
679

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,
2013
 
October 31,
2012
Aggregate outstanding Stock Price-Based RSUs
306,000

 
506,000

Cumulative unamortized value of Stock Price-Based RSUs (in thousands)
$
1,064

 
$
2,042


In December 2012, the Company issued and distributed 200,000 shares of stock pursuant to a Stock Price-Based RSU award.

Non-Performance Based Restricted Stock Units
The Company issued RSUs to various officers, employees and non-employee directors. 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 issued in the six months ended April 30, 2013 and 2012 is as follows:
 
2013
 
2012
Number of RSUs issued
94,080

 
107,820

Closing price of the Company’s common stock on date of issuance
$
32.22

 
$
20.50

Aggregate fair value of RSUs issued (in thousands)
$
3,031

 
$
2,210

Information regarding the amortization of the Company’s RSUs, for the periods indicated, is as follows (amounts in thousands):
 
2013
 
2012
Six months ended April 30,
$
1,584

 
$
625

Three months ended April 30,
$
472

 
$
311



18



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,
2013
 
October 31,
2012
Aggregate outstanding RSUs
228,490

 
137,764

Cumulative unamortized value of RSUs (in thousands)
$
2,692

 
$
1,326

9. Employee Retirement Plans
The Company has two unfunded supplemental retirement plans (“SERPs”). 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,
 
2013
 
2012
 
2013
 
2012
Service cost
$
236

 
$
194

 
$
117

 
$
97

Interest cost
521

 
606

 
261

 
303

Amortization of prior service obligation
422

 
369

 
211

 
184

Amortization of unrecognized losses
72

 
33

 
36

 
17

Total costs
$
1,251

 
$
1,202

 
$
625

 
$
601

Benefits paid
$
444

 
$
225

 
$
211

 
$
110

10. Accumulated Other Comprehensive (Loss) Income
The tables below provide, for the periods indicated, the components of accumulated other comprehensive (loss) income (amounts in thousands).
 
 
Six months ended April 30, 2013
 
 
Employee Retirement Plans
 
Available-for-Sale Securities
 
Derivative Instruments
 
Total
Balance, beginning of period
 
$
(4,446
)
 
$
180

 
$
(553
)
 
$
(4,819
)
Other comprehensive (loss) income before reclassifications
 
(519
)
 
71

 
24

 
(424
)
Gross amounts reclassified from accumulated other comprehensive income (loss)
 
494

 
(137
)
 

 
357

Income tax benefit (expense)
 
7

 
29

 
(11
)
 
25

Other comprehensive (loss) income, net of tax
 
(18
)
 
(37
)
 
13

 
(42
)
Balance, end of period
 
$
(4,464
)
 
$
143

 
$
(540
)
 
$
(4,861
)

 
 
Three months ended April 30, 2013
 
 
Employee Retirement Plans
 
Available-for-Sale Securities
 
Derivative Instruments
 
Total
Balance, beginning of period
 
$
(4,619
)
 
$
276

 
$
(460
)
 
$
(4,803
)
Other comprehensive loss before reclassifications
 

 
(67
)
 
(127
)
 
(194
)
Gross amounts reclassified from accumulated other comprehensive income (loss)
 
247

 
(137
)
 

 
110

Income tax (expense) benefit
 
(92
)
 
71

 
47

 
26

Other comprehensive income (loss), net of tax
 
155

 
(133
)
 
(80
)
 
(58
)
Balance, end of period
 
$
(4,464
)
 
$
143

 
$
(540
)
 
$
(4,861
)
Reclassifications for the amortization of the employee retirement plans are included in selling, general and administrative expense in the condensed consolidated statements of operations. See Note 9 for additional information. Reclassifications for the

19



realized gain on available-for-sale securities are included in other income - net in the condensed consolidated statements of operations.
11. 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.
 
Six months ended April 30,
 
Three months ended April 30,
 
2013
 
2012
 
2013
 
2012
Number of shares purchased (in thousands)
5

 
13

 
3

 
10

Average price per share
$
33.61

 
$
22.51

 
$
34.49

 
$
23.13

Remaining authorization at April 30 (in thousands)
8,760

 
8,773

 
8,760

 
8,773

12. Income per Share Information
The table below provides, for the periods indicated, information pertaining to the calculation of income per share, common stock equivalents, weighted-average number of anti-dilutive options and shares issued (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,
 
2013
 
2012
 
2013
 
2012
Numerator:
 
 
 
 
 
 
 
Net income as reported
$
29,106

 
$
14,086

 
24,674

 
16,872

Plus: Interest and costs attributable to 0.5% Exchangeable Senior Notes, net of income tax benefit
804

 


 
401

 


Numerator for diluted earnings per share
$
29,910

 
$
14,086

 
$
25,075

 
$
16,872

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Basic weighted-average shares (a)
169,222

 
166,652

 
169,380

 
166,994

Common stock equivalents (b)
2,869

 
1,153

 
2,898

 
1,509

Shares attributable to 0.5% Exchangeable Senior Notes
5,858

 


 
5,858

 


Diluted weighted-average shares
177,949

 
167,805

 
178,136

 
168,503

Other information:
 
 
 
 
 
 
 
Weighted-average number of anti-dilutive options and restricted stock
units(b)
1,139

 
5,355

 
1,299

 
3,983

Shares issued under stock incentive and employee stock purchase plans
634

 
1,603

 
110

 
661

 
(a)
Basic weighted-average shares included the weighted-average number of shares outstanding for the period and vested shares issuable under restricted stock unit awards.
(b)
Based upon the average closing price of the Company’s common stock on the NYSE for the period.

13. Fair Value Disclosures
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.

20



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