Edgar Filing: TOLL BROTHERS INC

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

TOL-2012.7.31-10Q

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 July 31, 2012



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):

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 August 29, 2012, there were approximately 168,202,000 shares of Common Stock, $.01 par value, outstanding.

TOLL BROTHERS, INC.

TABLE OF CONTENTS



	Page No.

Statement on Forward-Looking Information	1

PART I. Financial Information

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)	2

Condensed Consolidated Statements of Operations (Unaudited)	3

Condensed Consolidated Statements of Cash Flows (Unaudited)	4

Notes to Condensed Consolidated Financial Statements (Unaudited)	5

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	35

Item 3. Quantitative and Qualitative Disclosures About Market Risk	52

Item 4. Controls and Procedures	52

PART II. Other Information

Item 1. Legal Proceedings	53

Item 1A. Risk Factors	53

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	54

Item 6. Exhibits	55

SIGNATURES	56

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.

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(Amounts in thousands)



	July 31, 2012			October 31, 2011
	(unaudited)
ASSETS
Cash and cash equivalents	$	601,451		$	906,340
Marketable securities	275,928			233,572
Restricted cash	47,008			19,760
Inventory	3,784,705			3,416,723
Property, construction and office equipment, net	101,216			99,712
Receivables, prepaid expenses and other assets	132,967			105,576
Mortgage loans held for sale	72,544			63,175
Customer deposits held in escrow	30,731			14,859
Investments in and advances to unconsolidated entities	311,481			126,355
Investments in non-performing loan portfolios and foreclosed real estate	98,241			69,174
	$	5,456,272		$	5,055,246
LIABILITIES AND EQUITY
Liabilities
Loans payable	$	106,399		$	106,556
Senior notes	1,792,453			1,490,972
Mortgage company warehouse loan	63,128			57,409
Customer deposits	141,523			83,824
Accounts payable	106,517			96,817
Accrued expenses	464,722			521,051
Income taxes payable	79,724			106,066
Total liabilities	2,754,466			2,462,695
Equity
Stockholders’ equity
Preferred stock, none issued
Common stock, 168,689 and 168,675 shares issued at July 31, 2012 and October 31, 2011, respectively	1,687			1,687
Additional paid-in capital	397,302			400,382
Retained earnings	2,309,980			2,234,251
Treasury stock, at cost — 707 and 2,946 shares at July 31, 2012 and October 31, 2011, respectively	(10,211		)	(47,065		)
Accumulated other comprehensive loss	(3,137		)	(2,902		)
Total stockholders’ equity	2,695,621			2,586,353
Noncontrolling interest	6,185			6,198
Total equity	2,701,806			2,592,551
	$	5,456,272		$	5,055,246

See accompanying notes

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Amounts in thousands, except per share data)

(Unaudited)



	Nine Months Ended July 31,						Three Months Ended July 31,
	2012			2011			2012			2011
Revenues	$	1,249,955		$	1,048,096		$	554,319		$	394,305
Cost of revenues	1,026,357			898,266			447,928			339,947
Selling, general and administrative	212,785			192,906			74,892			64,605
Interest expense	—			1,504			—			—
	1,239,142			1,092,676			522,820			404,552
Income (loss) from operations	10,813			(44,580		)	31,499			(10,247		)
Other:
Income (loss) from unconsolidated entities	19,348			(11,005		)	5,672			11,340
Other income - net	22,032			14,356			5,781			6,209
Expenses related to early retirement of debt	—			(3,414		)	—			(3,414		)
Income (loss) before income tax benefit	52,193			(44,643		)	42,952			3,888
Income tax benefit	(23,536		)	(69,395		)	(18,691		)	(38,220		)
Net income	$	75,729		$	24,752		$	61,643		$	42,108
Income per share:
Basic	$	0.45		$	0.15		$	0.37		$	0.25
Diluted	$	0.45		$	0.15		$	0.36		$	0.25
Weighted average number of shares:
Basic	166,990			167,221			167,664			168,075
Diluted	168,613			168,666			170,229			169,338

See accompanying notes

TOLL BROTHERS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Amounts in thousands)

(Unaudited)



	Nine Months Ended July 31,
	2012			2011
Cash flow (used in) provided by operating activities:
Net income	$	75,729		$	24,752
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Depreciation and amortization	16,523			17,123
Stock-based compensation	12,227			10,147
(Recovery) impairments of investments in unconsolidated entities	(1,621		)	39,600
Income from unconsolidated entities	(17,727		)	(28,595		)
Distributions of earnings from unconsolidated entities	4,028			7,315
Income from non-performing loan portfolios and foreclosed real estate	(12,725		)	(1,187		)
Deferred tax benefit	1,477			4,329
Deferred tax valuation allowances	(1,477		)	(4,329		)
Inventory impairments and write-offs	13,249			34,861
Change in fair value of mortgage loans receivable and derivative instruments	(244		)	628
Gain on marketable securities	(40		)
Expenses related to early retirement of debt	—			3,414
Changes in operating assets and liabilities
Increase in inventory	(222,421		)	(208,204		)
Origination of mortgage loans	(434,780		)	(457,383		)
Sale of mortgage loans	426,559			504,724
(Increase) decrease in restricted cash	(27,248		)	36,681
Increase in receivables, prepaid expenses and other assets	(22,175		)	(2,955		)
Increase in customer deposits	41,777			18,090
Decrease in accounts payable and accrued expenses	(58,865		)	(37,773		)
Decrease in income tax refund recoverable				141,590
Decrease in income taxes payable	(26,342		)	(56,461		)
Net cash (used in) provided by operating activities	(234,096		)	46,367
Cash flow used in investing activities:
Purchase of property and equipment — net	(7,318		)	(6,927		)
Purchase of marketable securities	(317,569		)	(420,087		)
Sale and redemption of marketable securities	270,503			318,372
Investments in and advances to unconsolidated entities	(195,813		)
Return of investments in unconsolidated entities	33,231			26,285
Investments in non-performing loan portfolios and foreclosed real estate	(30,090		)	(42,141		)
Return of investments in non-performing loan portfolios and foreclosed real estate	14,412			101
Acquisition of a business	(144,746		)
Net cash used in investing activities	(377,390		)	(124,397		)
Cash flow provided by (used in) financing activities:
Net proceeds from issuance of senior notes	296,227
Proceeds from loans payable	675,481			666,659
Principal payments of loans payable	(689,242		)	(715,131		)
Redemption of senior notes				(48,437		)
Proceeds from stock-based benefit plans	24,515			23,731
Receipts related to noncontrolling interest				2,678
Purchase of treasury stock	(384		)	(463		)
Net cash provided by (used in) financing activities	306,597			(70,963		)
Net decrease in cash and cash equivalents	(304,889		)	(148,993		)
Cash and cash equivalents, beginning of period	906,340			1,039,060
Cash and cash equivalents, end of period	$	601,451		$	890,067

See accompanying notes

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 July 31, 2012, the results of its operations for the nine-month and three-month periods ended July 31, 2012 and 2011, and its cash flows for the nine-month periods ended July 31, 2012 and 2011. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.

Inventory

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

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 cash flows and 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.

3. Inventory

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



	July 31, 2012		October 31, 2011
Land controlled for future communities	$	52,662	$	46,581
Land owned for future communities	1,096,396		979,145
Operating communities	2,635,647		2,390,997
	$	3,784,705	$	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.



	July 31, 2012		October 31, 2011
Land owned for future communities:
Number of communities	35		43
Carrying value (in thousands)	$	206,744	$	256,468
Operating communities:
Number of communities	10		2
Carrying value (in thousands)	$	52,135	$	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).



	Nine months ended July 31,				Three months ended July 31,
	2012		2011		2012		2011
Charge:
Land controlled for future communities	$	661	$	2,486	$	435	$	637
Land owned for future communities	918		16,000		—		16,000
Operating communities	11,670		16,375		2,685		175
	$	13,249	$	34,861	$	3,120	$	16,812

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).



		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
July 31	115	4	$	6,609	2,685
					$	11,670
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 July 31, 2012, the Company evaluated its land purchase contracts to determine if any of the selling entities were VIEs and, if they were, whether the Company was the primary beneficiary of any of them. Under these land purchase contracts, the Company does not possess legal title to the land and its risk is generally limited to deposits paid to the sellers and the creditors of the sellers generally have no recourse against the Company. At July 31, 2012, the Company determined that 52 land purchase contracts, with an aggregate purchase price of $437.9 million, on which it had made aggregate deposits totaling $22.7 million, were VIEs, and that it was not the primary beneficiary of any VIE related to its land purchase contracts.

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



	Nine months ended July 31,						Three months ended July 31,
	2012			2011			2012			2011
Interest capitalized, beginning of period	$	298,757		$	267,278		$	322,516		$	285,508
Interest incurred	93,027			86,820			32,560			28,387
Interest expensed to cost of revenues	(59,823		)	(56,327		)	(25,834		)	(20,946		)
Interest directly expensed to operations	—			(1,504		)	—			—
Write-off against other income	(1,664		)	(861		)	(82		)	(543		)
Interest reclassified to property, construction and office equipment	—			(3,000		)	—			—
Interest capitalized on investments in unconsolidated entities	(2,260		)	—			(1,123		)	—
Interest capitalized, end of period	$	328,037		$	292,406		$	328,037		$	292,406

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 July 31, 2012 and 2011 would have been reduced by approximately $50.6 million and $55.3 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 July 31, 2012, the Company had approximately $117.3 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, and its successor entity, Inspirada Builders, LLC (collectively, "Inspirada"). The Company believes it has made adequate provision at July 31, 2012 for any remaining liabilities with respect to Inspirada. 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 nine-month and three-month periods ended July 31, 2012. In the nine-month period ended July 31, 2012, the Company recovered $1.6 million of costs it previously accrued.

In the third quarter of fiscal 2012, the Company acquired a 50% interest in an existing joint venture for approximately $110.0 million. The joint venture intends to develop over 2,000 home sites in Orange County, California on land that it owns. The joint venture expects to borrow additional funds to complete the development of this project. The Company intends to acquire a substantial number of lots from the joint venture. The Company does not have any additional commitment to fund this joint venture.

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 July 31, 2012, the Company had an investment of $31.0 million, net of $15.2 million of impairments previously recognized, in this joint venture. At July 31, 2012, the participants 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.

Other Joint Ventures

At July 31, 2012, the Company had an aggregate of $124.3 million of investments in and advances, net of $63.9 million of impairment charges previously recognized, to various joint ventures with unrelated parties to develop luxury for-sale and rental residential units, commercial space and a hotel.

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 $84.0 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 rental units and retail space.

In addition, in the third quarter of fiscal 2012, the Company invested $3.9 million in a joint venture in which it has a 50% interest that will develop a high-rise luxury for-sale condominium/hotel project in the metro-New York market. The Company expects to make additional investments of approximately $49.2 million for the development of this property. The joint venture expects to borrow additional funds to complete the construction of this project. The Company has also guaranteed approximately $9.8 million of payments related to the ground lease on this project.

The Company did not recognize any impairment charges in connection with these joint ventures in the nine-month and three-month periods ended July 31, 2012 and 2011.

Toll Brothers Realty Trust and Trust II

In fiscal 2005, the Company, together with the Pennsylvania State Employees Retirement System (“PASERS”), formed Toll Brothers Realty Trust II (“Trust II”) to be in a position to invest in commercial real estate opportunities. Trust II is owned 50% by the Company and 50% by an affiliate of PASERS. At July 31, 2012, the Company had an investment of $3.0 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 (collectively, the “Shareholders”). As of July 31, 2012, the Company had a net investment in the Trust of $0.3 million. The Company provides development, finance and management services to the Trust and recognized fees under the terms of various agreements in the amounts of $1.7 million and $1.6 million in the nine-month periods ended July 31, 2012 and 2011, respectively and $0.6 million and $0.5 million in the three-month periods ended July 31, 2012 and 2011, respectively. 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 July 31, 2012, the Company had an investment of $35.7 million in this Structured Asset Joint Venture. At July 31, 2012, the Company did not have any commitments to make additional contributions to the joint venture and has not guaranteed any of the joint venture’s liabilities. If the joint venture needs additional capital and a participant fails to make a requested capital contribution, the other participants may make a contribution in consideration for a preferred return or may make the additional capital contribution and diminish the non-contributing participant’s ownership interest.

General

At July 31, 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 of impairment charges related to its investments in and advances to unconsolidated entities in the nine-months ended July 31, 2011. The Company recorded a $1.6 million recovery of previous impairment charges in the second quarter of fiscal 2012. The fiscal 2012 recovery and fiscal 2011 impairment charge recognized are included in “Income (loss) from unconsolidated entities” in the Company’s condensed consolidated statements of operations for the nine-month and three-month periods ended July 31, 2012 and 2011.

The condensed consolidated balance sheets, as of the dates indicated, and the condensed consolidated statements of operations, for the periods indicated, for the Company’s unconsolidated entities in which it has an investment, aggregated by type of business, are included below (in thousands). The column titled "Home Building Joint Ventures" includes the Planned Community and Other Joint Ventures described above.

Condensed Balance Sheets:



	July 31, 2012
	Develop- ment Joint Ventures		Home Building Joint Ventures		Trust and Trust II			Structured Asset Joint Venture		Total
Cash and cash equivalents	$	17,618	$	23,018	$	9,995		$	40,832	$	91,463
Inventory	253,984		274,175		5,621					533,780
Non-performing loan portfolio								240,723		240,723
Rental properties					174,982					174,982
Real estate owned (“REO”)								270,215		270,215
Other assets (1)	16,697		70,789		9,625			189,785		286,896
Total assets	$	288,299	$	367,982	$	200,223		$	741,555	$	1,598,059
Debt (1)	$	96,862	$	33,658	$	196,266		$	311,571	$	638,357
Other liabilities	16,873		4,582		5,690			304		27,449
Members’ equity (deficit)	174,564		329,742		(1,733		)	171,872		674,445
Noncontrolling interest								257,808		257,808
Total liabilities and equity	$	288,299	$	367,982	$	200,223		$	741,555	$	1,598,059
Company’s net investment in unconsolidated entities (2)	$	117,305	$	155,272	$	3,230		$	35,674	$	311,481



	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 (“REO”)					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
Noncontrolling 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 July 31, 2012 and October 31, 2011 of the Structured Asset Joint Venture is $189.3 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 the acquisition price of an investment in an entity in fiscal 2012 which was in excess of the Company's prorata 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.

Condensed Statements of Operations:



	For the nine months ended July 31, 2012
	Develop- ment Joint Ventures		Home Building Joint Ventures		Trust and Trust II		Structured Asset Joint Venture			Total
Revenues	$	37,109	$	76,325	$	27,827	$	20,858		$	162,119
Cost of revenues	34,696		55,028		10,186		26,048			125,958
Other expenses	1,060		3,166		16,027		6,958			27,211
Gain on disposition of loans and REO							(24,691		)	(24,691		)
Total expenses—net	35,756		58,194		26,213		8,315			128,478
Income from operations	1,353		18,131		1,614		12,543			33,641
Other income	2,663		118				428			3,209
Net income before noncontrolling interest	4,016		18,249		1,614		12,971			36,850
Less: Net income attributable to noncontrolling interest							(7,784		)	(7,784		)
Net income	$	4,016	$	18,249	$	1,614	$	5,187		$	29,066
Company’s equity in earnings of unconsolidated entities (3)	$	3,451	$	13,318	$	1,556	$	1,023		$	19,348



	For the three months ended July 31, 2012
	Develop- ment Joint Ventures			Home Building Joint Ventures		Trust and Trust II		Structured Asset Joint Venture			Total
Revenues	$	3,525		$	28,859	$	9,129	$	8,496		$	50,009
Cost of revenues	2,925			20,274		3,450		8,821			35,470
Other expenses	630			1,056		4,600		2,060			8,346
Gain on disposition of loans and REO								(1,865		)	(1,865		)
Total expenses—net	3,555			21,330		8,050		9,016			41,951
Income (loss) from operations	(30		)	7,529		1,079		(520		)	8,058
Other income	10			39		—		153			202
Net income (loss) before noncontrolling interest	(20		)	7,568		1,079		(367		)	8,260
Less: Net loss attributable to noncontrolling interest								220			220
Net income (loss)	$	(20	)	$	7,568	$	1,079	(147		)	$	8,480
Company’s equity in earnings (losses) of unconsolidated entities (3)	$	(81	)	$	5,308	$	475	$	(30	)	$	5,672



	For the nine months ended July 31, 2011
	Develop- ment Joint Ventures			Home Building Joint Ventures			Trust and Trust II		Structured Asset Joint Venture			Total
Revenues	$	4,643		$	207,645		$	28,863	$	37,624		$	278,775
Cost of revenues	3,987			165,456			11,382		26,371			207,196
Other expenses	839			7,605			14,955		8,780			32,179
Gain on disposition of loans and REO									(55,727		)	(55,727		)
Total expenses—net	4,826			173,061			26,337		(20,576		)	183,648
Income (loss) from operations	(183		)	34,584			2,526		58,200			95,127
Other income (loss)	7,479			(1		)			228			7,706
Net income before noncontrolling interest	7,296			34,583			2,526		58,428			102,833
Less: Net income attributable to noncontrolling interest									(35,059		)	(35,059		)
Net income	$	7,296		$	34,583		$	2,526	23,369			$	67,774
Company’s equity in (losses) earnings of unconsolidated entities (3)	$	(29,695	)	$	10,839		$	3,167	$	4,684		$	(11,005	)



	For the three months ended July 31, 2011
	Develop- ment Joint Ventures			Home Building Joint Ventures			Trust and Trust II		Structured Asset Joint Venture			Total
Revenues	$	3,524		$	67,299		$	8,997	$	12,471		$	92,291
Cost of revenues	2,829			53,964			3,399		9,714			69,906
Other expenses	283			2,164			4,404		2,529			9,380
Gain on disposition of loans and REO									(44,841		)	(44,841		)
Total expenses—net	3,112			56,128			7,803		(32,598		)	34,445
Income from operations	412			11,171			1,194		45,069			57,846
Other income (loss)	1,689			(155		)			71			1,605
Net income before noncontrolling interest	2,101			11,016			1,194		45,140			59,451
Less: Net income attributable to noncontrolling interest									(27,084		)	(27,084		)
Net income	$	2,101		$	11,016		$	1,194	18,056			$	32,367
Company’s equity in earnings (losses) of unconsolidated entities (3)	$	(46	)	$	7,407		$	500	$	3,479		$	11,340

(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 fiscal 2012, Gibraltar acquired 12 non-performing loans with an unpaid principal balance of approximately $56.6 million. The non-performing loans are secured primarily by commercial land and buildings in various stages of completion.

The following table summarizes for the loans acquired in fiscal 2012, the accretable yield and the non-accretable difference on our investment in the non-performing loans as of its acquisition date (amounts in thousands).



Contractually required payments, including interest	$	58,234
Non-accretable difference	(8,235		)
Cash flows expected to be collected	49,999
Accretable difference	(20,514		)
Non-performing loans carrying amount	$	29,485

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



	July 31, 2012			October 31, 2011
Unpaid principal balance	$	143,981		$	171,559
Discount on acquired loans	(83,732		)	(108,325		)
Carrying value	$	60,249		$	63,234

The activity in the accretable yield for the Company’s investment in the non-performing loan portfolios for the nine-month and three-month periods ended July 31, 2012 and 2011 was as follows (amounts in thousands):



	Nine months ended July 31,						Three Months Ended July 31,
	2012			2011			2012			2011
Balance, beginning of period	$	42,326					$	49,256		$	32,712
Additions	20,514			$	33,212
Accretion	(9,214		)	(2,229		)	(2,655		)	(1,729		)
Reductions from foreclosures and other dispositions	(24,090		)	(451		)	(14,141		)	(451		)
Transfer from non-accretable yield to accretable yield	4,123						1,297
Other	98
Balance, end of period	$	33,757		$	30,532		$	33,757		$	30,532

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 nine-month and three-month periods ended July 31, 2012 and 2011 is not necessarily indicative of expected future results.

Real Estate Owned (REO)

The following table presents the activity in REO for the nine-month and three-month periods ended July 31, 2012 and 2011(amounts in thousands):



	Nine months ended July 31,					Three months ended July 31,
	2012			2011		2012			2011
Balance, beginning of period	$	5,939				$	18,108
Additions	33,663			$	734	20,861			$	734
Sales	(1,346		)			(731		)
Impairments	(126		)			(126		)
Depreciation	(138		)			(120		)
Balance, end of period	$	37,992		$	734	$	37,992		$	734

As of July 31, 2012, approximately $1.8 million and $36.2 million of REO was classified as held-for-sale and held-and-used, respectively. For the nine-month period ended July 31, 2012, the Company recorded gains of $1.7 million from acquisitions of REO through foreclosure. For the three-month period ended July 31, 2012, the Company recorded an insignificant loss from REO acquisitions through foreclosures.

General

The Company’s earnings from Gibraltar's operations are included in Other Income - Net in its condensed consolidated statements of operations. In the nine-month and three-month periods ended July 31, 2012, the Company recognized $6.5 million and $0.6 million of earnings, respectively, from Gibraltar's operations. In the nine-month and three-month periods ended July 31, 2011, Gibraltar incurred a loss of $0.5 million and earnings of $0.6 million, respectively.

6. Senior Notes Payable and Mortgage Company Loan Facilities

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 $1.2 million in the nine-months ended July 31, 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.

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 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%, with a minimum rate of 3.00%.

7. Accrued Expenses

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



	July 31, 2012		October 31, 2011
Land, land development and construction	$	109,612	$	109,574
Compensation and employee benefit	94,600		96,037
Insurance and litigation	114,542		130,714
Commitments to unconsolidated entities	2,101		60,205
Warranty	42,260		42,474
Interest	39,256		25,968
Other	62,351		56,079
	$	464,722	$	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):



	Nine Months Ended July 31,						Three Months Ended July 31,
	2012			2011			2012			2011
Balance, beginning of period	$	42,474		$	45,835		$	42,997		$	46,321
Additions – homes closed during the period	6,994			6,147			3,050			2,248
Addition – liabilities acquired	731
Increase (decrease) in accruals for homes closed in prior periods	1,236			18			(529		)	(629		)
Charges incurred	(9,175		)	(7,810		)	(3,258		)	(3,750		)
Balance, end of period	$	42,260		$	44,190		$	42,260		$	44,190

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).



	Nine months ended July 31,
	2012				2011
	$		%*		$		%*
Federal tax provision (benefit) at statutory rate	18,268		35.0		(15,625	)	(35.0	)
State tax provision (benefit), net of federal provision (benefit)	2,205		4.2		(1,451	)	(3.3	)
Reversal of state tax provisions – finalization of audits	(1,782	)	(3.4	)	(19,273	)	(43.2	)
Reversal of accrual for uncertain tax positions	(18,073	)	(34.6	)	(30,827	)	(69.0	)
Valuation allowance – recognized	1,400		2.7		18,791		42.1
Valuation allowance – reversed	(31,164	)	(59.7	)	(23,123	)	(51.8	)
Accrued interest on anticipated tax assessments	2,600		5.0		2,799		6.3
Other	3,010		5.7		(686	)	(1.5	)
Tax benefit	(23,536	)	(45.1	)	(69,395	)	(155.4	)

* Due to rounding, amounts may not add.



	Three months ended July 31,
	2012				2011
	$		%*		$		%*
Federal tax provision at statutory rate	15,034		35.0		1,361		35.0
State tax, net of federal provision	1,815		4.2		126		3.2
Reversal of state tax provisions – finalization of audits	(1,782	)	(4.2	)	(16,933	)	(435.5	)
Decrease in unrecognized tax benefits	(277	)	(0.6	)
Reversal of accrual for uncertain tax positions	(12,794	)	(29.8	)	(12,873	)	(331.1	)
Valuation allowance – recognized	3,500		8.1
Valuation allowance – reversed	(27,847	)	(64.8	)	(10,846	)	(279.0	)
Accrued interest on anticipated tax assessments	650		1.5		1,174		30.2
Other	3,010		7.1		(229	)	(5.9	)
Tax benefit	(18,691	)	(43.5	)	(38,220	)	(983.1	)

* 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. 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 6.5% 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 nine-month periods and three-month periods ended July 31, 2012 and 2011, is set forth in the table below (amounts in thousands).



Recognized in statements of operations:
Nine-month period ended July 31, 2012	$	4,000
Nine-month period ended July 31, 2011	$	2,500
Three-month period ended July 31, 2012	$	1,000
Three-month period ended July 31, 2011	$	1,806

The amounts accrued for potential interest and penalties at July 31, 2012 and October 31, 2011 are set forth in the table below (amounts in thousands).



Accrued at:
July 31, 2012	$	23,136
October 31, 2011	$	29,200

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



	Nine months ended July 31,						Three months ended July 31,
	2012			2011			2012			2011
Balance, beginning of period	$	104,669		$	160,446		$	99,824		$	141,392
Increase in benefit as a result of tax positions taken in prior years	4,000			5,943			1,000			3,443
(Decrease) increase in benefit as a result of resolution of uncertain tax positions				(17,954		)	3,723
Decrease in benefit as a result of lapse of statute of limitation	(28,764		)	(8,790		)	(24,642		)	(8,790		)
Decrease in benefit as a result of completion of tax audits	(1,782		)	(35,370		)	(1,782		)	(31,770		)
Balance, end of period	$	78,123		$	104,275		$	78,123		$	104,275

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. In July 2012, the Company filed its 2011 federal income tax return and claimed $94.5 million of tax loss carryforwards. 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, “Income Taxes”.

At July 31, 2012 and October 31, 2011, the Company had recorded cumulative valuation allowances against its entire net deferred federal tax asset of $354.8 million and $353.3 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 July 31, 2012. In 2011, the Company took steps to merge a number of entities to better align financial and tax reporting and to reduce administrative complexity going forward. Some of these mergers occurred in higher state tax jurisdictions creating additional state tax deferred assets of $28.9 million, offset

entirely by an increase in the state tax valuation allowance. Future valuation allowances in these jurisdictions may continue to be recognized if the Company believes it will not generate sufficient future taxable income to utilize any future state deferred tax assets.

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.

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
Nine months ended July 31,	$	12,227	$	10,147
Three months ended July 31,	$	3,367	$	2,430

At July 31, 2012 and October 31, 2011, the aggregate unamortized value of outstanding stock-based compensation awards was approximately $17.3 million and $12.7 million, respectively.

Due to the losses recognized by the Company over the past several years and the uncertainty of the timing of 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
Nine months ended July 31,	$	6,091	$	7,307
Three months ended July 31,	$	1,346	$	1,402

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.



	2012
Estimated number of shares underlying RSUs to be issued	366,000
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)	$	7,503
Performance-Based RSU expense recognized in the nine months ended July 31, 2012 (in thousands):	$	2,931
Performance-Based RSU expense recognized in the three months ended July 31, 2012 (in thousands):	$	1,011
Unamortized value of Performance-Based RSUs at July 31, 2012 (in thousands):	$	4,572

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 vest and the recipients are 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. In the three-month period ended July 31, 2012, the Target Price of the Stock Price-Based RSUs issued in December 2010 and 2008 were met. The Stock Price-Based RSUs issued in December 2008 were paid in the three-month period ended July 31, 2012. The recipient of this RSU elected to use a portion of the shares underlying the RSU to pay the required income withholding taxes on the payout. The gross value of the RSU payout was $5,934,000 (200,000 shares), the income tax withholding was $2,409,000 (81,200 shares) and the net value of the shares delivered was $3,525,000 (118,800 shares).

Information regarding the amortization of the Company’s Stock Price-Based RSUs, for the periods indicated, is provided below (amounts in thousands).



	2012		2011
Nine months ended July 31,	$	2,207	$	2,718
Three months ended July 31,	$	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.



	July 31, 2012		October 31, 2011
Aggregate outstanding Stock Price-Based RSUs	506,000		706,000
Cumulative unamortized value of Stock Price-Based RSUs (in thousands)	$	2,722	$	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	106,970		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)	$	2,193	$	299

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



	2012		2011
Nine months ended July 31,	$	933	$	105
Three months ended July 31,	$	308	$	39

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



	July 31, 2012		October 31, 2011
Aggregate outstanding RSUs	137,964		30,994
Cumulative unamortized value of RSUs (in thousands)	$	1,621	$	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):



	Nine Months Ended July 31,				Three Months Ended July 31,
	2012		2011		2012		2011
Service cost	$	291	$	229	$	97	$	76
Interest cost	909		968		303		323
Amortization of prior service obligation	553		520		184		173
Amortization of unrecognized losses	50				17
Total costs	$	1,803	$	1,717	$	601	$	572
Benefits paid	$	535	$	96	$	310	$	34

11. Accumulated Other Comprehensive Loss and Total Comprehensive Income

Accumulated other comprehensive loss at July 31, 2012 and 2011 was primarily related to employee retirement plans. The table below provides, for the periods indicated, the components of total comprehensive income (amounts in thousands):



	Nine Months Ended July 31,						Three Months Ended July 31,
	2012			2011			2012			2011
Net income as reported	$	75,729		$	24,752		$	61,643		$	42,108
Changes in pension liability	293			520			201			173
Change in fair value of available-for-sale securities	414			(189		)	258			(194		)
Unrealized loss on derivative held by equity investee	(942		)				(214		)
Total comprehensive income	$	75,494		$	25,083		$	61,888		$	42,087

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.



	Nine months ended July 31,				Three months ended July 31,
	2012		2011		2012		2011
Number of shares purchased	16,000		23,000		3,000		4,000
Average price per share	$	23.75	$	20.18	$	28.10	$	20.44
Remaining authorization at July 31 (in thousands):	8,770		11,807		8,770		11,807

13. 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 option and shares issued (amounts in thousands).



	Nine months ended July 31,		Three months ended July 31,
	2012	2011	2012	2011
Basic weighted-average shares	166,990	167,221	167,664	168,075
Common stock equivalents (a)	1,623	1,445	2,565	1,263
Diluted weighted-average shares	168,613	168,666	170,229	169,338
Weighted average number of anti-dilutive options (b)	4,663	7,118	3,279	6,461
Shares issued under stock incentive and employee stock purchase plans	2,269	2,227	666	1,713


(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.


(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	July 31, 2012			October 31, 2011
Corporate Securities	Level 2	$	187,808		$	233,572
Certificates of Deposit	Level 1	$	58,000
Short-Term Tax-Exempt Bond Fund	Level 1	$	30,120
Residential Mortgage Loans Held for Sale	Level 2	$	72,544		$	63,175
Forward Loan Commitments—Residential Mortgage Loans Held for Sale	Level 2	$	(604	)	$	218
Interest Rate Lock Commitments (“IRLCs”)	Level 2	$	358		$	(147	)
Forward Loan Commitments—IRLCs	Level 2	$	(358	)	$	147

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

During the third quarter of fiscal 2012, the Company reevaluated the methodologies used by third party brokers in determining the estimated fair value of its investments in corporate securities. Based on this reevaluation, the Company concluded the estimated fair value of these investments was determined using Level 2 inputs. In prior periods, corporate securities were classified as Level 1.

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 July 31, 2012	$	70,986	$	72,544	$	1,558
At October 31, 2011	$	62,765	$	63,175	$	410

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

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



	July 31, 2012			October 31, 2011
Amortized cost	$	275,738		$	233,852
Gross unrealized holding gains	229			28
Gross unrealized holding losses	(39		)	(308		)
Fair value	$	275,928		$	233,572

The rem