TOL-2012.7.31-10Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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| | |
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
or
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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)
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| | |
Delaware (State or other jurisdiction of incorporation or organization) | | 23-2416878 (I.R.S. Employer Identification No.) |
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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):
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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 August 29, 2012, there were approximately 168,202,000 shares of Common Stock, $.01 par value, outstanding.
TOLL BROTHERS, INC.
TABLE OF CONTENTS
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission ( “SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by the fact that they do not relate to matters of strictly historical or factual nature and generally discuss or relate to estimates or other expectations regarding future events. They contain words such as “anticipate,” “estimate,” “expect,” “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)
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| | | | | | | |
| July 31, 2012 | | October 31, 2011 |
| (unaudited) | | |
ASSETS | | | |
Cash and cash equivalents | $ | 601,451 |
| | $ | 906,340 |
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Marketable securities | 275,928 |
| | 233,572 |
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Restricted cash | 47,008 |
| | 19,760 |
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Inventory | 3,784,705 |
| | 3,416,723 |
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Property, construction and office equipment, net | 101,216 |
| | 99,712 |
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Receivables, prepaid expenses and other assets | 132,967 |
| | 105,576 |
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Mortgage loans held for sale | 72,544 |
| | 63,175 |
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Customer deposits held in escrow | 30,731 |
| | 14,859 |
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Investments in and advances to unconsolidated entities | 311,481 |
| | 126,355 |
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Investments in non-performing loan portfolios and foreclosed real estate | 98,241 |
| | 69,174 |
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| $ | 5,456,272 |
| | $ | 5,055,246 |
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LIABILITIES AND EQUITY | | | |
Liabilities | | | |
Loans payable | $ | 106,399 |
| | $ | 106,556 |
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Senior notes | 1,792,453 |
| | 1,490,972 |
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Mortgage company warehouse loan | 63,128 |
| | 57,409 |
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Customer deposits | 141,523 |
| | 83,824 |
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Accounts payable | 106,517 |
| | 96,817 |
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Accrued expenses | 464,722 |
| | 521,051 |
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Income taxes payable | 79,724 |
| | 106,066 |
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Total liabilities | 2,754,466 |
| | 2,462,695 |
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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 |
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Additional paid-in capital | 397,302 |
| | 400,382 |
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Retained earnings | 2,309,980 |
| | 2,234,251 |
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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 |
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Noncontrolling interest | 6,185 |
| | 6,198 |
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Total equity | 2,701,806 |
| | 2,592,551 |
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| $ | 5,456,272 |
| | $ | 5,055,246 |
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See accompanying notes
TOLL BROTHERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
(Unaudited)
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| | | | | | | | | | | | | | | |
| 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 |
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Cost of revenues | 1,026,357 |
| | 898,266 |
| | 447,928 |
| | 339,947 |
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Selling, general and administrative | 212,785 |
| | 192,906 |
| | 74,892 |
| | 64,605 |
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Interest expense | — |
| | 1,504 |
| | — |
| | — |
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| 1,239,142 |
| | 1,092,676 |
| | 522,820 |
| | 404,552 |
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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 |
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Other income - net | 22,032 |
| | 14,356 |
| | 5,781 |
| | 6,209 |
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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 |
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Income tax benefit | (23,536 | ) | | (69,395 | ) | | (18,691 | ) | | (38,220 | ) |
Net income | $ | 75,729 |
| | $ | 24,752 |
| | $ | 61,643 |
| | $ | 42,108 |
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Income per share: | | | | | | | |
Basic | $ | 0.45 |
| | $ | 0.15 |
| | $ | 0.37 |
| | $ | 0.25 |
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Diluted | $ | 0.45 |
| | $ | 0.15 |
| | $ | 0.36 |
| | $ | 0.25 |
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Weighted average number of shares: | | | | | | | |
Basic | 166,990 |
| | 167,221 |
| | 167,664 |
| | 168,075 |
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Diluted | 168,613 |
| | 168,666 |
| | 170,229 |
| | 169,338 |
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See accompanying notes
TOLL BROTHERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
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| Nine Months Ended July 31, |
| 2012 | | 2011 |
Cash flow (used in) provided by operating activities: | | | |
Net income | $ | 75,729 |
| | $ | 24,752 |
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Adjustments to reconcile net income to net cash (used in) provided by operating activities: | | | |
Depreciation and amortization | 16,523 |
| | 17,123 |
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Stock-based compensation | 12,227 |
| | 10,147 |
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(Recovery) impairments of investments in unconsolidated entities | (1,621 | ) | | 39,600 |
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Income from unconsolidated entities | (17,727 | ) | | (28,595 | ) |
Distributions of earnings from unconsolidated entities | 4,028 |
| | 7,315 |
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Income from non-performing loan portfolios and foreclosed real estate | (12,725 | ) | | (1,187 | ) |
Deferred tax benefit | 1,477 |
| | 4,329 |
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Deferred tax valuation allowances | (1,477 | ) | | (4,329 | ) |
Inventory impairments and write-offs | 13,249 |
| | 34,861 |
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Change in fair value of mortgage loans receivable and derivative instruments | (244 | ) | | 628 |
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Gain on marketable securities | (40 | ) | |
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Expenses related to early retirement of debt | — |
| | 3,414 |
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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 |
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(Increase) decrease in restricted cash | (27,248 | ) | | 36,681 |
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Increase in receivables, prepaid expenses and other assets | (22,175 | ) | | (2,955 | ) |
Increase in customer deposits | 41,777 |
| | 18,090 |
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Decrease in accounts payable and accrued expenses | (58,865 | ) | | (37,773 | ) |
Decrease in income tax refund recoverable |
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| | 141,590 |
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Decrease in income taxes payable | (26,342 | ) | | (56,461 | ) |
Net cash (used in) provided by operating activities | (234,096 | ) | | 46,367 |
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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 |
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Investments in and advances to unconsolidated entities | (195,813 | ) | |
|
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Return of investments in unconsolidated entities | 33,231 |
| | 26,285 |
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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 |
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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:
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Level 1: | | Fair value determined based on quoted prices in active markets for identical assets or liabilities. |
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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):
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| | | | | | | |
| 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.
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| | | | | | | |
| 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).
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| | | | | | | | | | | | | | | |
| 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