e10vk
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the fiscal year ended October 31, 2011
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or |
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of
1934 |
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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
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23-2416878 |
(State or other jurisdiction of
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I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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250 Gibraltar Road, Horsham, Pennsylvania
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19044 |
(Address of principal executive offices)
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(Zip Code) |
Registrants telephone number, including area code
(215) 938-8000
Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange |
Title of each class |
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on which registered |
Common Stock (par value $.01)*
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New York Stock Exchange |
Guarantee of Toll Brothers Finance Corp. 6.875% Senior Notes due 2012
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New York Stock Exchange |
Guarantee of Toll Brothers Finance Corp. 5.95% Senior Notes due 2013
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New York Stock Exchange |
Guarantee of Toll Brothers Finance Corp. 4.95% Senior Notes due 2014
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New York Stock Exchange |
Guarantee of Toll Brothers Finance Corp. 5.15% Senior Notes due 2015
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New York Stock Exchange |
Guarantee of Toll Brothers Finance Corp. 8.910% Senior Notes due 2017
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New York Stock Exchange |
Guarantee of Toll Brothers Finance Corp. 6.750% Senior Notes due 2019
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New York Stock Exchange |
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* |
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Includes associated Right to Purchase Series A Junior Participating Preferred Stock |
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the
Registrant is a well-known seasoned issuer, as defined in Rule 405 of
the Securities Act.
Yes þ No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Act. Yes o No þ
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K
(§229.405 of this chapter) is not contained herein, and will not be contained, to the best of
Registrants knowledge, in definitive proxy or information statements incorporated by reference in
Part III of this Form 10-K or any amendment to this Form 10-K. þ
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 the definitions of large accelerated filer, accelerated filer and
smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
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Large accelerated filer þ
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Accelerated filer o
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Non-accelerated filer o
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Smaller reporting company o |
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(Do not check if a smaller reporting company)
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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
As of April 30, 2011, the aggregate market value of the Common Stock held by non-affiliates (all
persons other than executive officers and directors of Registrant) of the Registrant was
approximately $3,085,667,000.
As of December 12, 2011, there were approximately 166,366,000 shares of Common Stock outstanding.
Documents Incorporated by Reference: Portions of the proxy statement of Toll Brothers, Inc. with
respect to the 2012 Annual Meeting of Stockholders, scheduled to be held on March 14, 2012, are
incorporated by reference into Part III of this report.
TABLE OF CONTENTS
PART I
ITEM 1. BUSINESS
General
Toll Brothers, Inc., a Delaware corporation formed in May 1986, began doing business through
predecessor entities in 1967. 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. Except as
otherwise indicated, information in this report does not reflect the acquisition of CamWest
Development LLC, a Seattle, Washington home builder, disclosed under Subsequent Events.
We design, build, market and arrange financing for single-family detached and attached homes in
luxury residential communities. We are also involved, directly and through joint ventures, in
projects where we are building, or converting existing rental apartment buildings into, high-, mid-
and low-rise luxury homes. We cater to move-up, empty-nester, active-adult, age-qualified and
second-home buyers in the United States. At October 31, 2011, we were operating in 19 states.
Our traditional, single-family communities are generally located on land we have either acquired
and developed or acquired fully-approved and, in some cases, improved. We also operate through a
number of joint ventures. At October 31, 2011, we were operating in the following major suburban
and urban residential markets:
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Philadelphia, Pennsylvania metropolitan area |
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Lehigh Valley area of Pennsylvania |
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Central and northern New Jersey |
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Virginia and Maryland suburbs of Washington, D.C. |
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Baltimore, Maryland metropolitan area |
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Eastern Shore of Maryland and Delaware |
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Richmond, Virginia metropolitan area |
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Boston, Massachusetts metropolitan area |
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Fairfield, Hartford, New Haven and New London Counties, Connecticut |
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Westchester, Dutchess, Ulster and Saratoga Counties, New York |
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Boroughs of Manhattan and Brooklyn in New York City |
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Los Angeles, California metropolitan area |
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San Francisco Bay, Sacramento and San Jose areas of northern California |
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San Diego and Palm Springs, California areas |
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Phoenix, Arizona metropolitan area |
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Raleigh and Charlotte, North Carolina metropolitan areas |
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Dallas, San Antonio and Houston, Texas metropolitan areas |
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Southeast and southwest coasts and the Jacksonville and Orlando areas of Florida |
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Las Vegas and Reno, Nevada metropolitan areas |
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Detroit, Michigan metropolitan area |
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Chicago, Illinois metropolitan area |
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Denver, Colorado metropolitan area |
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Minneapolis/St. Paul, Minnesota metropolitan area, and |
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Hilton Head area of South Carolina |
We continue to explore additional geographic areas and markets for expansion, as appropriate.
We operate our own land development, architectural, engineering, mortgage, title, landscaping,
security monitoring, lumber distribution, house component assembly, and manufacturing operations.
We also develop, own and operate golf courses and country clubs associated with several of our
master planned communities. We have investments in a number of joint ventures to develop land
1
for
the sole use of the venture participants, including ourselves, and to develop land for sale to the
joint venture participants and to
unrelated builders. We are a participant in joint ventures with
unrelated parties to develop luxury condominium projects, including for-sale residential units and
commercial space, and to develop a single master planned community. In addition, we formed Toll
Brothers Realty Trust (Trust) and Toll Brothers Realty Trust II (Trust II) to invest in
commercial real estate opportunities. In fiscal 2010, we formed Gibraltar Capital and Asset
Management (Gibraltar) to invest in distressed real estate opportunities, which may be different
than our traditional homebuilding operations.
The U.S. housing market continues to struggle from a significant slowdown that began in the fourth
quarter of our fiscal year end October 31, 2005 (fiscal 2005). The value of our net contracts
signed in fiscal 2011 was 77.6% lower than the value of our net contracts signed in fiscal 2005.
The slowdown, which we believe started with a decline in consumer confidence, an overall softening
of demand for new homes and an oversupply of homes available for sale, has been exacerbated by,
among other things, a decline in the overall economy, increased unemployment, the large number of
homes that are vacant, and homes that have been or will be foreclosed on due to the current
economic downturn, fear of job loss, a decline in home prices and the resulting reduction in home
equity, the inability of some of our home buyers, or some prospective buyers of their homes, to
sell their current homes, the deterioration in the credit markets, and the direct and indirect
impact of the turmoil in the mortgage loan market.
We believe many of our markets and housing in general have reached bottom; however, we expect that
there may be more periods of volatility in the future. We believe that, once the unemployment rate
declines and confidence improves, pent-up demand will be released, and, gradually, more buyers will
enter the market. We believe that the key to a full recovery in our business depends on these
factors as well as a sustained stabilization of financial markets and home prices.
At October 31, 2011, we had $1.14 billion of cash, cash equivalents and marketable securities on
hand and approximately $784.7 million available under our $885.0 million revolving credit facility
which extends to October 2014. During fiscal 2011, we used available cash to repurchase or redeem
$55.1 million of our senior notes. Between October 31, 2006 and October 31, 2011, we increased our
cash position (including marketable securities) by approximately $507.4 million and reduced debt by
approximately $692.9 million.
For information and analyses of recent trends in our operations and financial condition, see
Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7
of this Annual Report on Form 10-K (Form 10-K), and for financial information about our results
of operations, assets, liabilities, stockholders equity and cash flows, see the accompanying
Consolidated Financial Statements and Notes thereto in Item 8 of this Form 10-K.
At October 31, 2011, we had 437 communities containing approximately 37,497 home sites that we
owned or controlled through options. Of the 437 communities, 243 communities containing
approximately 16,839 home sites were residential communities under construction (current
communities) and 194, containing 20,658 home sites, were for future communities. Of our 243
current communities, 215 were offering homes for sale and 28 were sold out but not all homes had
been completed and delivered. Of the 16,839 home sites in current communities, 15,172 were
available for sale and 1,667 were under agreement of sale but not yet delivered (backlog). We
expect to be selling from 235 to 255 communities by October 31, 2012. Of the approximately 37,497
total home sites that we owned or controlled through options at October 31, 2011, we owned
approximately 30,199 and controlled approximately 7,298 through land purchase agreements.
At October 31, 2011, we were offering single-family detached homes in 165 communities at prices,
excluding customized options, lot premiums and sales incentives, generally ranging from $188,000 to
$1,883,000 with some homes offered at prices higher than $1,883,000. During fiscal 2011, we
delivered 1,800 single-family detached homes at an average base price of approximately $567,000. On
average, our single-family detached home buyers added approximately 21.8%, or $124,000 per home, in
customized options and lot premiums to the base price of single-family detached homes we delivered
in fiscal 2011, as compared to 24.3% or $145,000 per home in fiscal 2010 and 26% or $163,000 in
fiscal 2009.
At October 31, 2011, we were offering attached homes in 50 communities at prices, excluding
customized options, lot premiums and sales incentives, generally ranging from $185,000 to $800,000,
with some units offered at prices higher than $800,000. During fiscal 2011, we delivered 811
attached homes at an average base price of
approximately $411,000. On average, our attached home buyers added approximately 12.6%, or $52,000
per home, in customized options and lot premiums to the base price of attached homes we delivered
in fiscal 2010, as compared to 9.7% or $45,700 per home in fiscal 2010 and 9.0% or $44,600 in
fiscal 2009.
2
We had a backlog of $981.1 million (1,667 homes) at October 31, 2011 and $852.1 million (1,494
homes) at October 31, 2010. Of the homes in backlog at October 31, 2010, approximately 96% are
scheduled to be delivered by October 31, 2012.
Because of the length of time that it takes to obtain the necessary approvals on a property,
complete the land improvements on it, and deliver a home after a home buyer signs an agreement of
sale, we are subject to many risks. We attempt to reduce certain risks by controlling land for
future development through options (also referred to herein as land purchase contracts or option
and purchase agreements), thus allowing the necessary governmental approvals to be obtained before
acquiring title to the land; generally commencing construction of a detached home only after
executing an agreement of sale and receiving a substantial down payment from the buyer; and using
subcontractors to perform home construction and land development work on a fixed-price basis. Our
risk reduction strategy of generally not commencing the construction of a detached home until we
have an agreement of sale with a buyer was implemented prior to this current downturn in the
housing market, but, due to the number of cancellations of agreements of sale that we had during
fiscal 2007, 2008 and 2009, many of which were for homes on which we had commenced construction,
the number of homes under construction in detached single-family communities for which we did not
have an agreement of sale increased from our historical levels. With our fiscal 2010 and 2011 contract cancellation
rates returning to the levels we experienced prior to the current downturn in the housing market and the sale of these units, we have
reduced the number of unsold units to more historical levels. In addition, over the past several
years, the number of our attached-home communities has grown, resulting in an increase in the
number of unsold units under construction.
Subsequent Event
In November 2011, we acquired substantially all of the assets of CamWest Development LLC
(CamWest) for approximately $143.7 million in cash. The assets acquired were primarily inventory.
For calendar year 2011, CamWest expected to deliver approximately 180 homes and produce revenues
of approximately $90 million. CamWest develops a variety of home types, including luxury
single-family homes, condominiums, and townhomes throughout the Seattle, Washington metropolitan
area, primarily in King and Snohomish Counties. CamWests homes typically sell from the mid
$300,000s to over $600,000. As part of the acquisition, we 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 we acquired included approximately 1,245 home sites
owned and 254 home sites controlled through land purchase agreements. This acquisition increased
our selling community count by 15 communities to 230.
Our Communities
Our communities are generally located in affluent suburban areas near major highways providing
access to major cities. We also operate in the affluent urban markets of Hoboken and Jersey City,
New Jersey; New York City, New York; and Philadelphia, Pennsylvania. The following table lists the
19 states in which we were operating at October 31, 2011 and the fiscal years in which we or our
predecessors commenced operations:
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Fiscal year |
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Fiscal year |
State |
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of entry |
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State |
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of entry |
Pennsylvania |
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1967 |
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Texas |
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1995 |
New Jersey |
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1982 |
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Florida |
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1995 |
Delaware |
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1987 |
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Arizona |
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1995 |
Massachusetts |
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1988 |
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Nevada |
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1998 |
Maryland |
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1988 |
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Illinois |
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1998 |
Virginia |
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1992 |
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Michigan |
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1999 |
Connecticut |
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1992 |
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Colorado |
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2001 |
New York |
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1993 |
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South Carolina |
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2002 |
California |
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1994 |
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Minnesota |
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2005 |
North Carolina |
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1994 |
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We market our high-quality single-family homes to upscale luxury home buyers, generally comprised
of those persons who have previously owned a principal residence and who are seeking to buy a
larger or more desirable
home the so-called move-up market. We believe our reputation as a developer of homes for this
market enhances our competitive position with respect to the sale of our smaller, more moderately
priced, detached homes, as well as our attached homes.
3
We also market to the 50+ year-old empty-nester market, which we believe has strong growth
potential. We have developed a number of home designs with features such as one-story living and
first-floor master bedroom suites, as well as communities with recreational amenities such as golf
courses, marinas, pool complexes, country clubs and recreation centers that we believe appeal to
this category of home buyers. We have integrated certain of these designs and features in some of
our other home types and communities.
We develop active-adult, age-qualified/targeted communities for households in which at least one
member is 55 years of age. As of October 31, 2011, we were selling from 18 such communities and
expect to open additional age-qualified/targeted communities during the next few years. Of the
value and number of net contracts signed in fiscal 2011, approximately 10% and 13%, respectively,
were in active-adult communities; in fiscal 2010, approximately 11% and 15%, respectively, were in
such communities. In fiscal 2009, approximately 10% and 13% of the value and number of net
contracts signed were in active-adult communities.
We also have been selling homes in the second-home market for several years and currently offer
them in Arizona, Florida, Nevada and South Carolina.
In order to serve a growing market of affluent move-up families, empty-nesters and young
professionals seeking to live in or close to major cities, we have developed and are developing a
number of high-density, high-, mid- and low-rise urban luxury communities and are in the process of
converting several for-rent apartment buildings to condominiums. These communities, which we are
currently developing on our own or through joint ventures, are located in Dublin and San Jose,
California; Singer Island, Florida; Chicago, Illinois suburbs; North Bethesda, Maryland; Hoboken,
New Jersey; the boroughs of Manhattan and Brooklyn, New York; Philadelphia, Pennsylvania and its
suburbs; and Leesburg, Virginia.
We believe that the demographics of the move-up, empty-nester, active-adult, age-qualified and
second-home upscale markets will provide us with the potential for growth in the coming decade.
According to the U.S. Census Bureau, the number of households earning $100,000 or more (in constant
2010 dollars) at September 2011 stood at 24.3 million, or approximately 20.5% of all U.S.
households. This group has grown at four times the rate of increase of all U.S. households since
1980. According to a September 2011 Harvard University study, the number of projected new household
formations during the 10-year period between 2010 and 2020 will be at least 11.8 million.
Although the leading edge of the baby boom generation is now in its mid 60s, the largest group of
baby boomers, the more than four million born annually between 1954 and 1964, is now in its peak
move-up home buying years. The number of households with persons 55 to 64 years old, the focus of
our age-qualified communities, is projected to increase significantly over the next 10 years.
We develop individual stand-alone communities as well as multi-product, master planned communities.
We currently have 29 master planned communities. Our master planned communities, many of which
include golf courses and other country club-type amenities, enable us to offer multiple home types
and sizes to a broad range of move-up, empty-nester, active-adult and second-home buyers. We seek
to realize efficiencies from shared common costs, such as land development and infrastructure, over
the several communities within the master planned community. We currently have master planned
communities in Arizona, California, Florida, Illinois, Maryland, Michigan, Nevada, North Carolina,
Pennsylvania and Virginia.
Each of our single-family detached-home communities offers several home plans, with the opportunity
for home buyers to select various exterior styles. We design each community to fit existing land
characteristics. We strive to achieve diversity among architectural styles within a community by
offering a variety of house models and several exterior design options for each model, preserving
existing trees and foliage whenever practicable, and curving street layouts to allow relatively few
homes to be seen from any vantage point. Normally, homes of the same type or color may not be built
next to each other. Our communities have attractive entrances with distinctive signage and
landscaping. We believe that our added attention to community detail avoids a development
appearance and gives each community a diversified neighborhood appearance that enhances home
values.
Our traditional attached home communities generally offer one- to four-story homes, provide for
limited exterior options and often include commonly owned recreational facilities such as
clubhouses, playing fields, swimming pools and tennis courts.
4
Our Homes
In most of our single-family detached home communities, we offer a number of different house floor
plans, each with several substantially different architectural styles. In addition, the exterior of
each basic floor plan may be varied further by the use of stone, stucco, brick or siding. Our
traditional attached home communities generally offer several different floor plans with two, three
or four bedrooms.
We offer some of the same basic home designs in similar communities. However, we are continuously
developing new designs to replace or augment existing ones to ensure that our homes reflect current
consumer tastes. We use our own architectural staff and also engage unaffiliated architectural
firms to develop new designs. During the past year, we introduced 69 new single-family detached
models, 18 new single-family attached models and 93 new condominium models.
In all of our communities, a wide selection of options is available to home buyers for additional
charges. The number and complexity of options typically increase with the size and base selling
price of our homes. Major options include additional garages, extra fireplaces, guest suites,
finished lofts, and other additional rooms. On average, options purchased by our detached home
buyers, including lot premiums, added approximately 21.8%, or $124,000 per home, to the base price
of homes delivered in fiscal 2011, as compared to 24.3% or $145,000 per home in fiscal 2010 and 26%
or $163,000 in fiscal 2009. Options purchased by our attached home buyers, including lot premiums,
added, on average, approximately 12.6%, or $52,000 per home, to the base price of homes delivered
in fiscal 2011, as compared to 9.7% or $45,700 per home in fiscal 2010.
As a result of our wide product and geographic diversity, we have a wide range of base sales
prices. The general range of base sales prices for our different lines of homes at October 31,
2011, was as follows:
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Detached homes |
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Move-up |
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$ |
209,000 |
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to |
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$ |
840,000 |
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Executive |
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188,000 |
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to |
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930,000 |
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Estate |
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334,000 |
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to |
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1,883,000 |
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Active-adult, age-qualified |
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216,000 |
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to |
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566,000 |
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Attached homes |
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Flats |
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$ |
208,000 |
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to |
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$ |
625,000 |
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Townhomes/Carriage homes |
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185,000 |
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to |
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760,000 |
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Active-adult, age-qualified |
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190,000 |
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to |
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492,000 |
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Mid-rise/high-rise |
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291,000 |
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to |
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800,000 |
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A number of mid-rise/high-rise projects that we are developing either on our own or through joint
ventures are offering units at prices in excess of $800,000.
At October 31, 2011, we were selling from 215 communities, compared to 195 communities at October
31, 2010 and 200 communities at October 31, 2009. We expect to be selling from 235 to 255
communities at October 31, 2012. In addition, at October 31, 2011, we had 45 communities that were
temporarily closed due to market conditions, none of which we currently expect to reopen prior to
October 31, 2012.
The following table summarizes certain information with respect to our residential communities
under development at October 31, 2011:
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Total |
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Number of |
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Homes under |
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Geographic |
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number of |
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selling |
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Homes |
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Homes |
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contract but |
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Home sites |
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Segment |
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communities |
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communities |
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approved |
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closed |
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not closed |
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available |
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North |
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66 |
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58 |
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9,809 |
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4,447 |
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553 |
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4,809 |
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Mid-Atlantic |
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67 |
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61 |
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9,974 |
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5,082 |
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487 |
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4,405 |
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South |
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66 |
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56 |
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7,021 |
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2,676 |
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442 |
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3,903 |
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West |
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44 |
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40 |
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4,664 |
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2,424 |
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185 |
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2,055 |
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Total |
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243 |
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215 |
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31,468 |
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14,629 |
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1,667 |
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15,172 |
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At October 31, 2011, significant site improvements had not yet commenced on approximately 5,146 of
the 15,172 available home sites. Of the 15,172 available home sites, 857 were not yet owned by us,
but were controlled through options.
5
Of our 243 communities under development at October 31, 2011, 215 were offering homes for sale and
28 were sold out but not all homes had been completed and delivered. Of the 215 communities in
which homes were being offered for sale at October 31, 2011, 165 were single-family detached home
communities and 50 were attached home communities. At October 31, 2011, we had 703 homes (exclusive
of model homes) under construction or completed but not under contract, of which 183 were in
detached home communities and 520 were in attached home communities. In addition, we had 196 units
that were temporarily being held as rental units. Of the 520 homes under construction or completed
but not under contract in attached home communities at October 31, 2011, 282 were in high- and
mid-rise projects and 57 were in two communities that we acquired and are converting to condominium
units.
At the end of each fiscal quarter, we review the profitability of each of our operating
communities. For those communities operating below certain profitability thresholds, we estimate
the expected future cash flow for each of those communities. For each community whose estimated
cash flow is not sufficient to recover its carrying value, we estimate the fair value of the
community in accordance with U.S. generally accepted accounting principles (GAAP) and recognize
an impairment charge for the difference between the estimated fair value of the community and its
carrying value. In fiscal 2011, 2010 and 2009, we recognized impairment charges related to
operating communities of $17.2 million, $53.5 million and $267.4 million, respectively.
For more information regarding revenues, gross contracts signed, contract cancellations, net
contracts signed, and sales incentives provided on units delivered; (loss) income before income
taxes; and assets by geographic segment; see Managements Discussion and Analysis of Financial
Condition and Results of Operation Geographic Segments in Item 7 of this Form 10-K and Note 17
to the Consolidated Financial Statements in Item 15 of this Form 10-K.
Land Policy
Before entering into an agreement to purchase a land parcel, we complete extensive comparative
studies and analyses on detailed internally-designed forms that assist us in evaluating the
acquisition. Historically, we have attempted to enter into option agreements to purchase land for
future communities. However, in order to obtain better terms or prices, or due to competitive
pressures, we acquire property outright from time to time. We have also entered into several joint
ventures with other builders or developers to develop land for the use of the joint venture
participants or for sale to outside third parties. In addition, we have, at times, acquired the
underlying mortgage on a property and subsequently obtained title to that property.
We generally enter into agreements to purchase land, referred to in this Form 10-K as land
purchase contracts, purchase agreements, options or option agreements, on a non-recourse
basis, thereby limiting our financial exposure to the amounts expended in obtaining any necessary
governmental approvals, the costs incurred in the planning and design of the community and, in some
cases, some or all of our deposit. The use of options or purchase agreements may increase the price
of land that we eventually acquire, but reduces our risk by allowing us to obtain the necessary
development approvals before acquiring the land or allowing us to delay the acquisition to a later
date. Historically, as approvals were obtained, the value of the options, purchase agreements and
land generally increased. However, in any given time period, this may not happen. We have the
ability to extend some of these options for varying periods of time, in some cases by making an
additional payment and, in other cases, without making any additional payment. Our purchase agreements are
typically subject to numerous conditions including, but not limited to, the ability to obtain
necessary governmental approvals for the proposed community. Our deposit under an agreement may be
returned to us if all approvals are not obtained, although pre-development costs may not be
recoverable. We generally have the right to cancel any of our agreements to purchase land by
forfeiture of some or all of the deposits we have made pursuant to the agreement. We are currently
evaluating many opportunities to acquire distressed properties from various sources. We believe
that, in general, we will not be able to purchase these distressed properties through the use of
purchase options, but will be required to purchase them outright.
In response to the decline in market conditions over the past several years, we have re-evaluated
and renegotiated or cancelled many of our land purchase contracts. In addition, we have sold, and
may continue to sell, certain parcels of land that we have identified as non-strategic. As a
result, we reduced our home sites controlled from a high of approximately 91,200 at April 30, 2006
to approximately 37,500 at October 31, 2011.
6
Based on our experience during prior downturns in the housing industry, we believe that attractive
land acquisition opportunities may arise in difficult times for those builders that have the
financial strength to take advantage of them. In the current challenging environment, we believe
our strong balance sheet, liquidity, access to capital, broad
geographic presence, diversified product line, experienced personnel and national brand name all
position us well for such opportunities now and in the future. Based on our belief that the housing
market has bottomed, the increased attractiveness of land available for purchase and the revival of
demand in certain areas, we have begun to increase our land positions. During the twelve-month
period ended October 31, 2011, we acquired control of approximately 5,300 home sites (net of
options terminated) and, during fiscal 2010, we acquired control of approximately 5,600 home sites
(net of options terminated). At October 31, 2011, we controlled approximately 37,500 home sites,
as compared to approximately 34,900 home sites at October 31, 2010 and 31,900 home sites at October
31, 2009.
Our ability to continue development activities over the long-term will be dependent, among other
things, upon a suitable economic environment and our continued ability to locate and enter into
options or agreements to purchase land, obtain governmental approvals for suitable parcels of land,
and consummate the acquisition and complete the development of such land.
The following is a summary of home sites for future communities that we either owned or controlled
through purchase agreements at October 31, 2011, as distinguished from those communities currently
under development:
|
|
|
|
|
|
|
|
|
|
|
Number of |
|
|
Number of |
|
Geographic segment |
|
communities |
|
|
home sites |
|
North |
|
|
38 |
|
|
|
4,585 |
|
Mid-Atlantic |
|
|
79 |
|
|
|
8,708 |
|
South |
|
|
34 |
|
|
|
3,728 |
|
West |
|
|
43 |
|
|
|
3,637 |
|
|
|
|
|
|
|
|
|
|
|
194 |
|
|
|
20,658 |
|
|
|
|
|
|
|
|
Of the 20,658 planned home sites at October 31, 2011, we owned 14,217 and controlled 6,441 through
options and purchase agreements. At October 31, 2011, the aggregate purchase price of land parcels
subject to option and purchase agreements in operating communities and future communities was
approximately $564.4 million (including $12.5 million of land to be acquired from joint ventures in
which we have invested). Of the $564.4 million of land purchase commitments, we paid or deposited
$38.0 million and, if we acquire all of these land parcels, we will be required to pay an
additional $526.4 million. The purchases of these land parcels are scheduled over the next several
years. We have additional land parcels under option that have been excluded from the aforementioned
aggregate purchase amounts since we do not believe that we will complete the purchase of these land
parcels and no additional funds will be required from us to terminate these contracts; these land
parcels have either been written off or written down to the estimated amount that we expect to
recover on them when the contract is terminated.
We evaluate all of the land owned or optioned for future communities on an ongoing basis for
continued economic and market feasibility. During each of the fiscal years ended October 31, 2011,
2010 and 2009, such feasibility analyses resulted in approximately $34.7 million, $61.8 million and
$198.0 million, respectively, of capitalized costs related to land owned or optioned for future
communities being charged to cost of revenues because such costs were no longer deemed to be
recoverable or exceeded the properties fair value.
We have a substantial amount of land currently under control for which approvals have been obtained
or are being sought. We devote significant resources to locating suitable land for future
development and obtaining the required approvals on land under our control. There can be no
assurance that the necessary development approvals will be secured for the land currently under our
control or for land which we may acquire control of in the future or that, upon obtaining such
development approvals, we will elect to complete the purchases of land under option or complete the
development of land that we own. We generally have been successful in obtaining governmental
approvals in the past. Based upon our current decreased level of business, we believe that we have
an adequate supply of land in our existing communities and proposed communities (assuming that all
properties are developed) to maintain our operations at current levels for several years.
Community Development
We typically expend considerable effort in developing a concept for each community, which includes
determining the size, style and price range of the homes; the layout of the streets and individual
home sites; and the overall community design. After the necessary governmental subdivision and
other approvals have been obtained, which may take several years, we improve the land by clearing
and grading it; installing roads, underground utility lines and recreational amenities; erecting
distinctive entrance structures; and staking out individual home sites.
7
Each community is managed by a project manager. Working with sales staff, construction managers,
marketing personnel and, when required, other in-house and outside professionals such as
accountants, engineers, architects and legal counsel, a project manager is responsible for
supervising and coordinating the various developmental steps such as land approval, land
acquisition, marketing, selling, construction and customer service, and monitoring the progress of
work and controlling expenditures. Major decisions regarding each community are made in
consultation with senior members of our management team.
The most significant variable affecting the timing of our revenue stream, other than housing
demand, is the opening of the community for sale, which generally occurs shortly after receipt of
final land regulatory approvals. Receipt of approvals permits us to begin the process of obtaining
executed sales contracts from home buyers. Although our sales and construction activities vary
somewhat by season, which can affect the timing of closings, any such seasonal effect is relatively
insignificant compared to the effect of the timing of receipt of
final regulatory approvals,
the opening of the community and the subsequent timing of closings. In the current economic and
housing slowdown, we have delayed the opening of new communities and temporarily shut down a number
of operating communities to reduce operating expenses and conserve cash.
We act as a general contractor for most of our projects. Subcontractors perform all home
construction and land development work, generally under fixed-price contracts. We purchase most of
the materials we use to build our homes and in our land development activities directly from the
manufacturers or producers. We generally have multiple sources for the materials we purchase and we
have not experienced significant delays due to unavailability of necessary materials. See
Manufacturing/Distribution Facilities in Item 2 of this Form 10-K.
Our construction managers coordinate subcontracting activities and supervise all aspects of
construction work and quality control. One of the ways in which we seek to achieve home buyer
satisfaction is by providing our construction managers with incentive compensation arrangements
based upon each home buyers satisfaction, as expressed by the buyers responses on pre- and
post-closing questionnaires.
We maintain insurance, subject to deductibles and self-insured amounts, to protect us against
various risks associated with our activities, including, among others, general liability,
all-risk property, construction defects, workers compensation, automobile and employee fidelity.
We accrue for our expected costs associated with the deductibles and self-insured amounts.
Marketing and Sales
We believe that our marketing strategy, which emphasizes our more expensive Estate and
Executive lines of homes, has enhanced our reputation as a builder-developer of high-quality
upscale housing. We believe this reputation results in greater demand for all of our lines of
homes. We generally include attractive decorative features such as chair rails, crown moldings,
dentil moldings, vaulted and coffered ceilings and other aesthetic elements, even in our less
expensive homes, based on our belief that this additional construction expense enhances our image
and improves our marketing and sales effort.
In determining the prices for our homes, we utilize, in addition to managements extensive
experience, an internally developed value analysis program that compares our homes with homes
offered by other builders in each local marketing area. In our application of this program, we
assign a positive or negative dollar value to differences between our product features and those of
our competitors, such as house and community amenities, location and reputation.
We expend great effort in designing and decorating our model homes, which play an important role in
our marketing. In our models, we attempt to create an attractive atmosphere, which may include
bread baking in the oven, fires burning in fireplaces, and music playing in the background.
Interior decorating varies among the models and is carefully selected to reflect the lifestyles of
prospective buyers. During the past several years, we have received numerous awards from various
home builder associations for our interior merchandising.
We typically have a sales office in each community that is staffed by our own sales personnel.
Sales personnel are generally compensated with both salary and commission. A significant portion of
our sales is also derived from the introduction of customers to our communities by local
cooperating realtors.
8
We advertise in newspapers, in other local and regional publications, and on billboards. We also
use attractive color brochures to market our communities. The internet is also an important
resource we use in marketing and providing
information to our customers. Visitors to our web site, www.tollbrothers.com, can obtain detailed
information regarding our communities and homes across the country, take panoramic or video tours
of our homes and design their own home based upon our available floor plans and options.
Due to the current weak market conditions and in an effort to promote the sales of homes, including
the significant number of speculative homes that we had due to sales contract cancellations, we
increased the amount of sales incentives offered to home buyers. These incentives vary by type and
amount on a community-by-community and home-by-home basis. In addition, due to the current
downturn, we are selectively testing certain markets for acceptance of smaller homes,
energy-efficient products and fewer high-end option offerings.
All of our homes are sold under our limited warranty as to workmanship and mechanical equipment.
Many homes also come with a limited ten-year warranty as to structural integrity.
We have a two-step sales process. The first step takes place when a potential home buyer visits one
of our communities and decides to purchase one of our homes, at which point the home buyer signs a
non-binding deposit agreement and provides a small, refundable deposit. This deposit reserves, for
a short period of time, the home site or unit that the home buyer has selected and locks in the
base price of the home. Deposit rates are tracked on a weekly basis to help us monitor the strength
or weakness in demand in each of our communities. If demand for homes in a particular community is
strong, senior management determines whether the base selling prices in that community should be
increased whereas if demand for the homes in a particular community is weak, we may determine
whether sales incentives and/or discounts on home prices should be adjusted. Because these deposit
agreements are non-binding, they are not recorded as signed contracts, nor are they recorded in
backlog.
The second step in the sales process occurs when we actually sign a binding agreement of sale with
the home buyer and the home buyer gives us a cash down payment which is generally non-refundable.
Cash down payments currently average approximately 7.9% of the total purchase price of a home,
although, historically, they have averaged approximately 7% of the total purchase price of a home.
Between the time that the home buyer signs the non-binding deposit agreement and the binding
agreement of sale, he or she is required to complete a financial questionnaire that gives us the
ability to evaluate whether the home buyer has the financial resources necessary to purchase the
home. If we determine that the home buyer is not financially qualified, we will not enter into an
agreement of sale with the home buyer. During fiscal 2011, 2010 and 2009, our customers signed
gross contracts for $1.71 billion (2,965 homes), $1.57 billion (2,789 homes) and $1.63 billion
(2,903 homes), respectively. During fiscal 2011, fiscal 2010 and fiscal 2009, our home buyers
cancelled home purchase contracts with a value of $102.8 million (181 homes), $98.3 million (184
homes) and $321.2 million (453 homes), respectively. Contract cancellations in a fiscal year
include all contracts cancelled in that fiscal year, whether signed in that fiscal year or signed
in prior fiscal years. When we report net contracts signed, the number and value of contracts
signed are reported net of all cancellations occurring during the reporting period, whether signed
in that reporting period or in a prior period. Only outstanding agreements of sale that have been
signed by both the home buyer and us as of the end of the period for which we are reporting are
included in backlog. As a result of cancellations, we retained $2.1 million, $11.2 million and
$21.8 million of customer deposits in fiscal 2011, 2010 and 2009, respectively. These retained
deposits are included in interest and other income in our Consolidated Statements of Operations. At
October 31, 2011, there is an additional $3.5 million of customer deposits related to sales
contracts that were either cancelled or in default and are subject to dispute with the customer
that we have not yet recognized in income.
While we try to avoid selling homes to speculators and generally do not build detached homes
without first having a signed agreement of sale, we have been impacted by an overall increase in
the supply of homes available for sale in many markets due primarily to the large number of homes
that are or will be available for sale from increased foreclosures.
9
Our mortgage subsidiary provides mortgage financing for a
portion of our home closings. Our mortgage subsidiary determines whether the home buyer qualifies
for the mortgage he or she is seeking based upon information provided by the home buyer and other
sources. For those home buyers that qualify, our mortgage subsidiary provides the home buyer with a
mortgage commitment that specifies the terms and conditions of a proposed mortgage loan based upon
then-current market conditions. Information about the number and amount of loans funded by our
mortgage subsidiary is contained in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
TBI Mortgage Company |
|
|
Gross |
|
|
Amount |
|
|
|
Toll Brothers, Inc. |
|
|
Financed |
|
|
Capture Rate |
|
|
Financed |
|
Fiscal Year |
|
Settlements (a) |
|
|
Settlements*(b) |
|
|
(b/a) |
|
|
(in thousands) |
|
2011 |
|
|
2,611 |
|
|
|
1,361 |
|
|
|
52.1% |
|
|
$ |
508,880 |
|
2010 |
|
|
2,642 |
|
|
|
1,451 |
|
|
|
54.9% |
|
|
$ |
530,575 |
|
2009 |
|
|
2,965 |
|
|
|
1,341 |
|
|
|
45.2% |
|
|
$ |
489,269 |
|
|
|
|
* |
|
TBI Mortgage Company financed settlements exclude brokered and referred loans which amounted to approximately
11.5%, 5.8% and 5.0% of our closings in 2011, 2010 and 2009, respectively. |
Prior to the actual closing of the home and funding of the mortgage, the home buyer will lock in an
interest rate based upon the terms of the commitment. At the time of rate lock, our mortgage
subsidiary agrees to sell the proposed mortgage loan to one of several outside recognized mortgage
financing institutions (investors) that it uses, which is willing to honor the terms and
conditions, including the interest rate, committed to the home buyer. We believe that these
investors have adequate financial resources to honor their commitments to our mortgage subsidiary.
At October 31, 2011, our mortgage subsidiary was committed to fund $436.3 million of mortgage
loans. Of these commitments, $129.6 million, as well as $62.8 million of mortgage loans receivable,
have locked-in interest rates. Our mortgage subsidiary funds its commitments through a
combination of its own capital, capital provided from us, its loan facility and from the sale of
mortgage loans to various investors. Our mortgage subsidiary has commitments from investors to
acquire $190.2 million of these locked-in loans and receivables. Our home buyers have not locked in
the interest rate on the remaining $306.7 million.
There has been significant media attention given to mortgage put-backs, a practice by which a buyer
of a mortgage loan tries to recoup losses from the loan originator. We do not believe this is a
material issue for our mortgage subsidiary. Of the approximately 13,900 loans sold by our mortgage
subsidiary since November 1, 2004, only 30 have been the subject of either actual indemnification
payments or take-backs or contingent liability loss provisions related thereto. We believe that
this is due to (i) our typical home buyers financial position and sophistication, (ii) on average,
our home buyers who use mortgage financing to purchase a home pay approximately 30% of the purchase
price in cash, (iii) our general practice of not originating certain loan types such as option
adjustable rate mortgages and down payment assistance products, and our origination of very few
sub-prime, high loan-to-value and no documentation loans and (iv) our elimination of early payment
default provisions from each of our agreements with our mortgage investors several years ago. In
order for us to incur a loss, a mortgage buyer must demonstrate either (i) a material error on our
part in issuing the mortgage or (ii) consumer fraud. In addition, the amount of any such loss would
be reduced by any proceeds received on the disposition of the collateral associated with the
mortgage.
Competition
The homebuilding business is highly competitive and fragmented. We compete with numerous home
builders of varying sizes, ranging from local to national in scope, some of which have greater
sales and financial resources than we do. Sales of existing homes, whether by a homeowner or by a
financial institution that has acquired a home through a foreclosure, also provide competition. We
compete primarily on the basis of price, location, design, quality, service and reputation;
however, we believe our financial stability, relative to most others in our industry, has become an
increasingly favorable competitive factor as more home buyers focus on builder solvency. We
continue to see reduced competition from the small and mid-sized private builders that had been our
primary competitors in the luxury market. We believe that access by these private builders to
capital has been severely constrained. We believe that there will be fewer and more selective
lenders serving our industry when the market rebounds and that those lenders likely will gravitate
to the homebuilding companies that offer them the greatest security, the strongest balance sheets
and the broadest array of potential business opportunities. We believe that this reduced
competition, combined with attractive long-term demographics, will reward those well-capitalized
builders that can persevere through the current challenging environment.
10
Regulation and Environmental Matters
We are subject to various local, state and federal statutes, ordinances, rules and regulations
concerning zoning, building design, construction and similar matters, including local regulations
that impose restrictive zoning and density requirements in order to limit the number of homes that
can eventually be built within the boundaries of a particular property or locality. In a number of
our markets, there has been an increase in state and local legislation authorizing the acquisition
of land as dedicated open space, mainly by governmental, quasi-public and non-profit
entities. In addition, we are subject to various licensing, registration and filing requirements in
connection with the construction, advertisement and sale of homes in our communities. The impact of
these laws has been to increase our overall costs, and may have delayed the opening of communities
or caused us to conclude that development of particular communities would not be economically
feasible, even if any or all necessary governmental approvals were obtained. See Land Policy in
this Item 1. We also may be subject to periodic delays or may be precluded entirely from developing
communities due to building moratoriums in one or more of the areas in which we operate. Generally,
such moratoriums relate to insufficient water or sewage facilities or inadequate road capacity.
In order to secure certain approvals in some areas, we may be required to provide affordable
housing at below market rental or sales prices. The impact on us depends on how the various state
and local governments in the areas in which we engage, or intend to engage, in development
implement their programs for affordable housing. To date, these restrictions have not had a
material impact on us.
We also are subject to a variety of local, state and federal statutes, ordinances, rules and
regulations concerning protection of public health and the environment (environmental laws). The
particular environmental laws that
apply to any given community vary greatly according to the location and environmental condition of
the site and the present and former uses of the site. Complying with these environmental laws may
result in delays, may cause us to incur substantial compliance and other costs, and/or may prohibit
or severely restrict development in certain environmentally sensitive regions or areas.
We maintain a policy of engaging independent environmental consultants to evaluate land for the
potential of hazardous or toxic materials, wastes or substances before consummating an acquisition.
Because we generally have obtained such assessments for the land we have purchased, we have not
been significantly affected to date by the presence of such materials.
Our mortgage subsidiary is subject to various state and federal statutes, rules and regulations,
including those that relate to licensing, lending operations and other areas of mortgage
origination and financing. The impact of those statutes, rules and regulations can increase our
home buyers cost of financing, increase our cost of doing business, as well as restrict our home
buyers access to some types of loans.
Employees
At October 31, 2011, we employed 2,215 persons full-time. At October 31, 2011, we were subject to
one collective bargaining agreement that covered approximately 2% of our employees. We consider our
employee relations to be good.
Available Information
Our principal internet address is www.tollbrothers.com. We make our annual reports on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports
filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934
available on our web site, free of charge, as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the Securities and Exchange Commission (SEC). The contents of our web site are not, however, a part of
this Form 10-K.
Code of Ethics
The Company has adopted a Code of Ethics for Principal Executive Officer and Senior Financial
Officers (Code of Ethics) that applies to the Companys principal executive officer, principal
financial officer, principal accounting officer, controller and persons performing similar
functions designated by the Companys Board of Directors. The Code of Ethics is available on the
Companys internet website at www.tollbrothers.com under Investor Relations: Company Information:
Corporate Governance. If the Company were to amend or waive any provision of its Code of Ethics,
the Company intends to satisfy its disclosure obligations with respect to any such waiver or
amendment by posting such information on its internet website set forth above rather than by filing
a Form 8-K.
11
FORWARD-LOOKING STATEMENT
Certain information included in this report or in other materials we have filed or will file with
the 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.
From time to time, forward-looking statements also are included in other periodic reports on Forms
10-Q and 8-K, in press releases, in presentations, on our website and in other materials released
to the public. 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. This can occur as a result of incorrect assumptions or as a consequence of
known or unknown risks and uncertainties. Many factors mentioned in this report or in other reports
or public statements made by us, such as government regulation and the competitive environment,
will be important in determining our future performance. Consequently, actual results may differ
materially from those that might be anticipated from our forward-looking statements.
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 discussion of factors that we believe could cause our actual results to differ materially from
expected and historical results see Item 1A Risk Factors below. This discussion is provided as
permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking
statements are expressly qualified in their entirety by the cautionary statements contained or
referenced in this section.
EXECUTIVE
OFFICERS OF THE REGISTRANT
Information about our executive officers
is incorporated by reference from Part III, Item 10 of this annual
report.
ITEM 1A. RISK FACTORS
The homebuilding industry remains in an extended period of slowdown, and its duration and levels of
severity are uncertain in the current state of the economy. A continued slowdown in our business
would likely further adversely affect our results of operations and financial condition.
The downturn in the homebuilding industry, which we believe began in the fourth quarter of our
fiscal 2005, has become one of the most severe in U.S. history. This downturn, which we believe
started with a decline in consumer confidence, a decline in home prices and an oversupply of homes
available for sale, has been exacerbated by, among other things, a decline in the overall economy,
increasing unemployment, fear of job loss, a decline in the securities markets, the number of homes
that are or will be available for sale due to foreclosures, an inability of home buyers to sell
their current homes, a deterioration in the credit markets, and the direct and indirect impact of
the turmoil in the mortgage loan market. All of these factors have contributed to the significant
decline in the demand for new homes. Moreover, it is still unclear whether the governments
legislative and administrative measures aimed at restoring liquidity to the credit markets and
providing relief to homeowners facing foreclosure have helped to effectively stabilize prices and
home values, or restore consumer confidence and increase demand in the homebuilding industry.
As a result of this continued downturn, our sales and results of operations have been adversely
affected, we have incurred significant inventory impairments and other write-offs, our gross
margins have declined significantly from historical levels, and we incurred substantial losses,
after write-offs, during fiscal 2011, 2010, 2009 and 2008. We cannot predict the duration or levels
of severity of the current challenging conditions, nor can we provide assurance that our responses
to the current downturn or the governments attempts to address the troubles in the economy will be
successful. If these conditions persist or continue to worsen, they will further adversely affect
our operating results and financial condition.
12
Additional adverse changes in economic conditions in markets where we conduct our operations and
where prospective purchasers of our homes live could further reduce the demand for homes and, as a
result, could continue to adversely affect our results of operations and financial condition.
Adverse changes in economic conditions in markets where we conduct our operations and where
prospective purchasers of our homes live have had and may continue to have a negative impact on our
business. Adverse changes in employment levels, job growth, consumer confidence, interest rates and
population growth, or an oversupply of homes for sale may further reduce demand and depress prices
for our homes and cause home buyers to cancel their agreements to purchase our homes. This, in
turn, could continue to adversely affect our results of operations and financial condition.
Continued cancellations of existing agreements of sale will have a continued adverse effect on our
business.
Our backlog reflects agreements of sale with our home buyers for homes that have not yet been
delivered. We have received a deposit from our home buyer for each home reflected in our backlog,
and generally we have the right to retain the deposit if the home buyer does not complete the
purchase. In some cases, however, a home buyer may
cancel the agreement of sale and receive a complete or partial refund of the deposit for reasons
such as state and local law, the home buyers inability to obtain mortgage financing, his or her
inability to sell his or her current home or our inability to complete and deliver the home within
the specified time. If the current industry downturn or the current decline in economic conditions
continues, or if mortgage financing becomes less available, more home buyers may cancel their
agreements of sale with us, which would have a continued adverse effect on our business and results
of operations.
The homebuilding industry is highly competitive and if others are more successful or offer better
value to our customers, our business could decline.
We operate in a very competitive environment, which is characterized by competition from a number
of other home builders in each market in which we operate. We compete with large national and
regional homebuilding companies and with smaller local home builders for land, financing, raw
materials and skilled management and labor resources. We also compete with the resale, also
referred to as the previously owned or existing, home market, which has increased significantly
due to the large number of homes that are vacant, and homes that have been foreclosed on or will be
foreclosed on, due to the current economic downturn. An oversupply of homes available for sale and
the heavy discounting of home prices by some of our competitors have adversely affected demand for
our homes and the results of our operations. Increased competition could require us to further
increase our selling incentives and/or reduce our prices. If we are unable to compete effectively
in our markets, our business could decline disproportionately to that of our competitors.
If we are not able to obtain suitable financing, our interest rates are increased or our credit
ratings are lowered, our business and results of operations may decline.
Our business and results of operations depend substantially on our ability to obtain financing for
the development of our residential communities, whether from bank borrowings or from financing in
the public debt markets. Our revolving credit facility matures in October 2014 and $1.50 billion of
our senior notes become due and payable at various times from November 2012 through November 2019.
Due to the deterioration of the credit markets and the uncertainties that exist in the economy
overall and for home builders in general, we cannot be certain that we will be able to continue to
replace existing financing or find additional sources of financing in the future.
If we are not able to obtain suitable financing at reasonable terms or replace existing debt and
credit facilities when they become due or expire, our costs for borrowings will likely increase and
our revenues may decrease, or we could be precluded from continuing our operations at current
levels.
Increases in interest rates can make it more difficult and/or expensive for us to obtain the funds
we need to operate our business. The amount of interest we incur on our revolving bank credit
facility fluctuates based on changes in short-term interest rates, the amount of borrowings we
incur and the ratings that national rating agencies assign to our outstanding debt securities.
Increases in interest rates generally and/or any downgrading in the ratings that national rating
agencies assign to our outstanding debt securities could increase the interest rates we must pay on
any subsequent issuances of debt securities, and any such ratings downgrade could also make it more
difficult for us to sell such debt securities.
13
If we cannot obtain letters of credit and surety bonds, our ability to operate may be restricted.
We use letters of credit and surety bonds to secure our performance under various construction and
land development agreements, escrow agreements, financial guarantees and other arrangements. Should
banks decline to issue letters of credit or surety companies decline to issue surety bonds, our
ability to operate could be significantly restricted and could have an adverse effect on our
business and results of operations.
If our home buyers or our home buyers buyers are not able to obtain suitable financing, our
results of operations may further decline.
Our results of operations also depend on the ability of our potential home buyers to obtain
mortgages for the purchase of our homes. The uncertainties in the mortgage markets and their impact
on the overall mortgage market, including the tightening of credit standards, could adversely
affect the ability of our customers to obtain financing for a home purchase, thus preventing our
potential home buyers from purchasing our homes. Moreover, future increases in the cost of home
mortgage financing could prevent our potential home buyers from purchasing our homes. In addition,
where our potential home buyers must sell their existing homes in
order to buy a home from us,
increases in mortgage costs and/or lack of availability of mortgages could prevent the buyers of
our potential home buyers existing homes from obtaining the mortgages they need to complete their
purchases, which would result in our potential home buyers inability to buy a home from us.
Similar risks apply to those buyers whose contract is in our backlog of homes to be delivered. If
our home buyers, potential buyers or buyers of our home buyers current homes cannot obtain
suitable financing, our sales and results of operations would be adversely affected.
If our ability to resell mortgages to investors is impaired, our home buyers will be required to
find alternative financing.
Generally, when our mortgage subsidiary closes a mortgage for a home buyer at a previously
locked-in rate, it already has an agreement in place with an investor to acquire the mortgage
following the closing. Due to the deterioration of the credit and financial markets, the number of
investors that are willing to purchase our mortgages has decreased and the underwriting standards
of the remaining investors have become more stringent. Should the resale market for our mortgages
further decline or the underwriting standards of our investors become more stringent, our ability
to sell future mortgages could decline and we would either have to commit our own funds to long
term investments in mortgage loans, which could, among other things, delay the time when we
recognize revenues from home sales on our statements of operations or our home buyers would be
required to find an alternative source of financing. If our home buyers cannot obtain another
source of financing in order to purchase our homes, our sales and results of operations could be
adversely affected.
If land is not available at reasonable prices, our sales and results of operations could decrease.
In the long term, our operations depend on our ability to obtain land for the development of our
residential communities at reasonable prices. Due to the current downturn in our business, our
supply of available home sites, both owned and optioned, has decreased from a peak of approximately
91,200 home sites controlled at April 30, 2006 to approximately 37,500 at October 31, 2011. In the
future, changes in the general availability of land, competition for available land, availability
of financing to acquire land, zoning regulations that limit housing density and other market
conditions may hurt our ability to obtain land for new residential communities at prices that will
allow us to make a reasonable profit. If the supply of land appropriate for development of our
residential communities becomes more limited because of these factors, or for any other reason, the
cost of land could increase and/or the number of homes that we are able to sell and build could be
reduced.
If the market value of our land and homes drops, our results of operations will likely decrease.
The market value of our land and housing inventories depends on market conditions. We acquire land
for expansion into new markets and for replacement of land inventory and expansion within our
current markets. If housing demand decreases below what we anticipated when we acquired our
inventory, we may not be able to make profits similar to what we have made in the past, may
experience less than anticipated profits and/or may not be able to recover our costs when we sell
and build homes. Due to the significant decline in our business since September 2005, we have
recognized significant write-downs of our inventory. If these adverse market conditions continue or
worsen, we may have to write down our inventories further and/or may have to sell land or homes at
a loss.
14
We participate in certain joint ventures where we may be adversely impacted by the failure of the
joint venture or its participants to fulfill their obligations.
We have investments in and commitments to certain joint ventures with unrelated parties to develop
land. These joint ventures may borrow money to help finance their activities. In certain
circumstances, the joint venture
participants, including ourselves, are required to provide guarantees of certain obligations
relating to the joint ventures. As a result of the continued downturn in the homebuilding industry,
some of these joint ventures or their participants have or may become unable or unwilling to
fulfill their respective obligations. In addition, in many of these joint ventures, we do not have
a controlling interest and as a result, we are not able to require these joint ventures or their
participants to honor their obligations or renegotiate them on acceptable terms. If the joint
ventures or their participants do not honor their obligations, we may be required to expend
additional resources or suffer losses, which could be significant.
Government regulations and legal challenges may delay the start or completion of our communities,
increase our expenses or limit our homebuilding activities, which could have a negative impact on
our operations.
The approval of numerous governmental authorities must be obtained in connection with our
development activities, and these governmental authorities often have broad discretion in
exercising their approval authority. We incur substantial costs related to compliance with legal
and regulatory requirements. Any increase in legal and regulatory requirements may cause us to
incur substantial additional costs, or in some cases cause us to determine that the property is not
feasible for development.
Various local, state and federal statutes, ordinances, rules and regulations concerning building,
zoning, sales and similar matters apply to and/or affect the housing industry. Governmental
regulation affects construction activities as well as sales activities, mortgage lending activities
and other dealings with consumers. The industry also has experienced an increase in state and local
legislation and regulations that limit the availability or use of land. Municipalities may also
restrict or place moratoriums on the availability of utilities, such as water and sewer taps. In
some areas, municipalities may enact growth control initiatives, which will restrict the number of
building permits available in a given year. In addition, we may be required to apply for additional
approvals or modify our existing approvals because of changes in local circumstances or applicable
law. If municipalities in which we operate take actions like these, it could have an adverse effect
on our business by causing delays, increasing our costs or limiting our ability to operate in those
municipalities. Further, we may experience delays and increased expenses as a result of legal
challenges to our proposed communities, whether brought by governmental authorities or private
parties.
Increases in taxes or government fees could increase our costs, and adverse changes in tax laws
could reduce demand for our homes.
Increases in real estate taxes and other local government fees, such as fees imposed on developers
to fund schools, open space, road improvements, and/or provide low and moderate income housing,
could increase our costs and have an adverse effect on our operations. In addition, increases in
local real estate taxes could adversely affect our potential home buyers who may consider those
costs in determining whether to make a new home purchase and decide, as a result, not to purchase
one of our homes. In addition, any changes in the income tax laws that would reduce or eliminate
tax deductions or incentives to homeowners, such as a change limiting the deductibility of real
estate taxes or interest on home mortgages, could make housing less affordable or otherwise reduce
the demand for housing, which in turn could reduce our sales and hurt our results of operations.
Adverse weather conditions, natural disasters and other conditions could disrupt the development of
our communities, which could harm our sales and results of operations.
Adverse weather conditions and natural disasters, such as hurricanes, tornadoes, earthquakes,
floods and fires, can have serious effects on our ability to develop our residential communities.
We also may be affected by unforeseen engineering, environmental or geological conditions or
problems. Any of these adverse events or circumstances could cause delays in the completion of, or
increase the cost of, developing one or more of our residential communities and, as a result, could
harm our sales and results of operations.
15
If we experience shortages or increased costs of labor and supplies or other circumstances beyond
our control, there could be delays or increased costs in developing our communities, which could
adversely affect our operating results.
Our ability to develop residential communities may be adversely affected by circumstances beyond
our control, including: work stoppages, labor disputes and shortages of qualified trades people,
such as carpenters, roofers, electricians and plumbers; changes in laws relating to union
organizing activity; lack of availability of adequate utility infrastructure and services; our need
to rely on local subcontractors who may not be adequately capitalized or insured; and shortages,
delays in availability, or fluctuations in prices of building
materials. Any of these
circumstances could give rise to delays in the start or completion of, or could increase the cost
of, developing one or more of our residential communities. We may not be able to recover these
increased costs by raising our home prices because the price for each home is typically set months
prior to its delivery pursuant to the agreement of sale with the home buyer. If that happens, our
operating results could be harmed.
We are subject to one collective bargaining agreement that covers approximately 2% of our
employees. We have not experienced any work stoppages due to strikes by unionized workers, but we
cannot assure you that there will not be any work stoppages due to strikes or other job actions in
the future. We use independent contractors to construct our homes. At any given point in time, some
or all of these subcontractors, who are not yet represented by a union, may be unionized.
Product liability claims and litigation and warranty claims that arise in the ordinary course of
business may be costly, which could adversely affect our business.
As a home builder, we are subject to construction defect and home warranty claims arising in the
ordinary course of business. These claims are common in the homebuilding industry and can be
costly. In addition, the costs of insuring against construction defect and product liability claims
are high, and the amount of coverage offered by insurance companies is currently limited. There can
be no assurance that this coverage will not be further restricted and become more costly. If the
limits or coverages of our current and former insurance programs prove inadequate, or we are not
able to obtain adequate, or reasonably priced, insurance against these types of claims in the
future, or the amounts currently provided for future warranty or insurance claims are inadequate,
we may experience losses that could negatively impact our financial results.
Our cash flows and results of operations could be adversely affected if legal claims are brought
against us and are not resolved in our favor.
Claims have been brought against us in various legal proceedings that have not had, and are not
expected to have, a material adverse effect on our business or financial condition. Should such
claims be resolved in an unfavorable manner or should additional claims be filed in the future, it
is possible that our cash flows and results of operations could be adversely affected.
We could be adversely impacted by the loss of key management personnel.
Our future success depends, to a significant degree, on the efforts of our senior management. Our
operations could be adversely affected if key members of senior management leave our employ. As a
result of a decline in our stock price, previous retention mechanisms, such as equity awards, have
diminished in value and, therefore, may become less effective as incentives for our senior
management to continue to remain employed with us.
Changes in tax laws or the interpretation of tax laws may negatively affect our operating results.
We believe that our recorded tax balances are adequate. However, it is not possible to predict the
effects of possible changes in the tax laws or changes in their interpretation and whether they
could have a material negative effect on our operating results. We have filed claims for refunds of
taxes paid in prior years based upon certain filing positions we believe are appropriate. If the
Internal Revenue Service disagrees with these filing positions, we may have to return some of the
refunds we have received.
16
We may not be able to realize our deferred tax assets.
At October 31, 2011, we had $427.4 million of deferred tax assets against which we have recognized
valuation allowances equal to the entire amount of such deferred tax assets. Losses for federal
income tax purposes can generally be carried back two years and carried forward for a period of 20
years. In order to realize our net deferred tax assets, we must generate sufficient taxable income
in such future years.
In addition, our ability to utilize net operating losses (NOLs), built-in losses, and tax credit
carryforwards to offset our future taxable income and/or to recover previously paid taxes would be
limited if we were to undergo an ownership change, as determined under Internal Revenue Code
Section 382 (Section 382). A Section 382 ownership change occurs if a stockholder or a group of
stockholders who are deemed to own at least 5% of our common stock increase their ownership by more
than 50 percentage points over their lowest ownership percentage within a rolling three-year
period. If an ownership change occurs, Section 382 would impose an annual limit on the amount of
NOLs we can use to reduce our taxable income equal to the product of the total value of our
outstanding equity immediately prior to the ownership change (reduced by certain items specified in
Section 382) and the federal long-term tax-exempt interest rate in effect for the month of the
ownership change. A number of special rules apply to calculating this annual limit.
While the complexity of Section 382s provisions and the limited knowledge any public company has
about the ownership of its publicly traded stock make it difficult to determine whether an
ownership change has occurred, we currently believe that an ownership change has not occurred.
However, if an ownership change were to occur, the annual limitation under Section 382 could result
in a material amount of our NOLs expiring unused. This would significantly impair the value of our
NOL asset and, as a result, have a negative impact on our financial position and results of
operations.
During 2010, our stockholders approved an amendment to our second restated certificate of
incorporation that is designed to deter transfers of our common stock that could result in an
ownership change. However, these measures cannot guarantee complete protection against an ownership
change and it remains possible that one may occur.
Our business is seasonal in nature, so our quarterly operating results fluctuate.
Our quarterly operating results fluctuate with the seasons; normally, a significant portion of our
agreements of sale are entered into with customers in the winter and spring months. Construction of
a customers home typically proceeds after signing the agreement of sale and can require 12 months
or more to complete. Weather-related problems may occur in the late winter and early spring,
delaying starts or closings or increasing costs and reducing profitability. In addition, delays in
opening new communities or new sections of existing communities could have an adverse impact on
home sales and revenues. Expenses are not incurred and recognized evenly throughout the year.
Because of these factors, our quarterly operating results may be uneven and may be marked by lower
revenues and earnings in some quarters than in others.
We invest in distressed loans and real estate related assets at significant discounts; however, if
the real estate markets deteriorate significantly we could suffer losses.
We formed Gibraltar Capital and Asset Management to invest in distressed real estate opportunities.
Our investments have involved acquisitions of portfolios of, or interests in portfolios of
distressed loans, some of which have been converted to real estate owned. However, these
investments present many risks in addition to those inherent in normal lending activities,
including the risk that the recovery of the United States real estate markets will not take place
for many years and that the value of our investments are not recoverable. There is also the
possibility that, if we cannot liquidate our investments as expected, we would be required to
reduce the value at which they are carried on our financial statements.
Decreases in the market value of our investments in marketable securities could have an adverse
impact on our results of operations.
We have significant amount of funds invested in marketable securities during the year, the market
value of which is subject to changes from period to period. Decreases in the market value of our
marketable securities could have an adverse impact on our results of operations.
Future terrorist attacks against the United States or increased domestic
or international instability could have an adverse effect on our operations.
In the weeks following the September 11, 2001 terrorist attacks, we experienced
a sharp decrease in the number of new contracts signed for homes and an increase in the cancellation of existing contracts. Although new
home purchases stabilized and subsequently recovered in the months after that initial period, adverse developments in the war on
terrorism, future terrorist attacks against the United States, or increased domestic or international instability could adversely
affect our business.
17
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 2. PROPERTIES
Headquarters
Our corporate office, which we lease from an unrelated third party, contains approximately 200,000
square feet and is located in Horsham, Pennsylvania.
Manufacturing/Distribution Facilities
We own a manufacturing facility of approximately 300,000 square feet located in Morrisville,
Pennsylvania, a manufacturing facility of approximately 186,000 square feet located in Emporia,
Virginia, and a manufacturing facility of approximately 134,000 square feet in Knox, Indiana. We
lease, from an unrelated third party, a facility of approximately 144,000 square feet located in
Fairless Hills, Pennsylvania. At these facilities, we manufacture open wall panels, roof and floor
trusses, and certain interior and exterior millwork to supply a portion of our construction needs.
These facilities supply components used in our North, Mid-Atlantic and South geographic segments.
These operations also permit us to purchase wholesale lumber, plywood, windows, doors, certain
other interior and exterior millwork and other building materials to supply to our communities. We
believe that increased efficiencies, cost savings and productivity result from the operation of
these plants and from the wholesale purchase of materials.
Office and Other Facilities
We own or lease from unrelated third parties office and warehouse space and golf course facilities
in various locations, none of which are material to our business.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and litigation arising principally in the ordinary course of
business.
In January 2006, we received a request for information pursuant to Section 308 of the Clean Water
Act from Region 3 of the U.S. Environmental Protection Agency (EPA) concerning storm water
discharge practices in connection with our homebuilding projects in the states that comprise EPA
Region 3. We provided information to the EPA pursuant to the request. The U.S. Department of
Justice (DOJ) has assumed responsibility for the oversight of this matter and has alleged that we
have violated regulatory requirements applicable to storm water discharges and that it may seek
injunctive relief and/or civil penalties. We are presently engaged in settlement discussions with
representatives from the DOJ and the EPA.
On November 4, 2008, a shareholder derivative action was filed in the Chancery Court of Delaware by
Milton Pfeiffer against Robert I. Toll, Zvi Barzilay, Joel H. Rassman, Bruce E. Toll, Paul E.
Shapiro, Robert S. Blank, Carl B. Marbach, and Richard J. Braemer. The plaintiff purports to bring
his claims on behalf of Toll Brothers, Inc. and alleges that the director and officer defendants
breached their fiduciary duties to us and our stockholders with respect to their sales of shares of
our common stock during the period from December 9, 2004 to November 8, 2005. The plaintiff alleges
that such stock sales were made while in possession of non-public, material information about us.
The plaintiff seeks contribution and indemnification from the individual director and officer
defendants for costs and expenses incurred by us in connection with defending a now-settled related
class action. In addition, again purportedly on our behalf, the plaintiff seeks disgorgement of the
defendants profits from their stock sales.
On March 4, 2009, a second shareholder derivative action was brought by Oliverio Martinez in the
U.S. District Court for the Eastern District of Pennsylvania. The case was brought against the
eleven then-current members of our board of directors and Chief Accounting Officer. This complaint
alleges breaches of fiduciary duty, waste of corporate assets, and unjust enrichment during the
period from February 2005 to November 2006. The complaint further alleges that certain of the
defendants sold our stock during this period while in possession of allegedly non-public, material
information and plaintiff seeks disgorgement of profits from these sales. The complaint also
asserts a claim for equitable indemnity for costs and expenses incurred by us in connection with
defending a now-settled related class action lawsuit.
18
On April 1, 2009, a third shareholder derivative action was filed by William Hall, also in the U.S.
District Court for the Eastern District of Pennsylvania, against the eleven then-current members of
our board of directors and Chief Accounting Officer. This complaint is identical to the previous
shareholder complaint filed in Philadelphia and, on July 14, 2009, the two cases were consolidated.
On April 30, 2010, the plaintiffs filed an amended consolidated complaint.
Our Certificate of Incorporation and Bylaws provide for indemnification of our directors and
officers. We have also entered into individual indemnification agreements with each of our
directors.
We believe the disposition of these matters is not expected to have a material adverse effect on
our results of operations and liquidity or on our financial condition.
ITEM 4. REMOVED AND RESERVED
PART II
ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our common stock is traded on the New York Stock Exchange (Symbol: TOL).
The following table sets forth the price range of our common stock on the New York Stock Exchange
for each fiscal quarter during the two years ended October 31, 2011.
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Three months ended |
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October 31 |
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July 31 |
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April 30 |
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January 31 |
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2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High |
|
$ |
20.31 |
|
|
$ |
21.93 |
|
|
$ |
22.42 |
|
|
$ |
21.33 |
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Low |
|
$ |
13.16 |
|
|
$ |
19.53 |
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|
$ |
19.08 |
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|
$ |
17.36 |
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2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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High |
|
$ |
19.33 |
|
|
$ |
23.31 |
|
|
$ |
23.66 |
|
|
$ |
21.80 |
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Low |
|
$ |
15.57 |
|
|
$ |
15.85 |
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|
$ |
18.08 |
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|
$ |
16.82 |
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The closing price of our common stock on the New York Stock Exchange on the last trading day of our
fiscal years ended October 31, 2011, 2010 and 2009 was $17.44, $17.94 and $17.32, respectively. At
December 12, 2011, there were approximately 811 record holders of our common stock.
For information regarding securities authorized for issuance under equity compensation plans, see
Equity Compensation Plan Information in Item 12 of this Form 10-K.
We have not paid any cash dividends on our common stock to date and expect that, for the
foreseeable future, we will not do so. Rather, we expect to follow a policy of retaining earnings
in order to finance our business and, from time to time, repurchase shares of our common stock. The
payment of dividends is within the discretion of our Board of Directors and any decision to pay
dividends in the future will depend upon an evaluation of a number of factors, including our
results of operations, capital requirements, our operating and financial condition, and any
contractual limitation then in effect. In this regard, our senior subordinated notes contain
restrictions on the amount of dividends we may pay on our common stock. In addition, our bank
credit agreement requires us to maintain a minimum tangible net worth (as defined in the
agreement), which restricts the amount of dividends we may pay. At October 31, 2011, under the most
restrictive of these provisions, we could have paid up to approximately $680 million of cash
dividends.
19
Issuer Purchases of Equity Securities
During the three months ended October 31, 2011, we repurchased the following shares under our
repurchase program:
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Total number |
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Maximum |
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of shares |
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number |
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|
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purchased as |
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|
of shares that |
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|
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Total |
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Average |
|
|
part of a |
|
|
may yet be |
|
|
|
number of |
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|
price |
|
|
publicly |
|
|
purchased |
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|
|
shares |
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paid per |
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announced |
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under the plan |
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Period |
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purchased (a)(b) |
|
|
share |
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plan or program (c) |
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or program (c) |
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(in thousands) |
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(in thousands) |
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(in thousands) |
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August 1 to August 31, 2011 |
|
|
1,475 |
|
|
$ |
16.99 |
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|
|
1,475 |
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|
|
10,356 |
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September 1 to September 30, 2011 |
|
|
1,567 |
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|
$ |
15.01 |
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|
|
1,567 |
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|
|
8,789 |
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October 1 to October 31, 2011 |
|
|
3 |
|
|
$ |
17.71 |
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|
|
3 |
|
|
|
8,786 |
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|
|
|
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|
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Total |
|
|
3,045 |
|
|
$ |
15.97 |
|
|
|
3,045 |
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(a) |
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The terms of our Restricted Stock Unit awards (RSUs) permit us to withhold from the
total number of
shares of our common stock that an employee is entitled to receive upon distribution pursuant
to a RSU that number of shares having a fair market value at the time of distribution equal to
the applicable income tax withholdings, and remit the remaining shares to the employee. During
the three months ended October 31, 2011, we withheld 66 shares subject to RSUs with an average
fair market value per share of $17.11 to cover income taxes on distributions, and distributed
143 shares to employees. The 66 shares withheld are not included in the total number of shares
purchased in the table above. |
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(b) |
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Our stock incentive plans permit participants to exercise non-qualified stock options
using a net exercise
method. In a net exercise, we generally withhold from the total number of shares that
otherwise would be
issued to the participant upon exercise of the stock option that number of shares having a
fair market value at
the time of exercise equal to the option exercise price and applicable income tax withholdings,
and remit the remaining shares to the participant. In addition, our stock incentive plans also
permit participants to use the fair market value of Company common stock they own to pay for
the exercise of stock options (stock swap method). During the three months ended October 31,
2011, neither the net exercise method or the stock swap method was used to exercise stock
options. |
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(c) |
|
On March 20, 2003, our Board of Directors authorized the repurchase of up to 20 million
shares of our
common stock in open market transactions or otherwise, for the purpose of providing shares for
our various
employee benefit plans. The Board of Directors did not fix an expiration date for the
repurchase program. |
Except as set forth above, we did not repurchase any of our equity securities during the
three-month period ended October 31, 2011.
20
Stockholder Return Performance Graph
The following graph and chart compares the five-year cumulative total return (assuming an
investment of $100 was made on October 31, 2006 and that dividends, if any, were reinvested) from
October 31, 2006 to October 31, 2011,
for (a) our common stock, (b) the Standard & Poors Homebuilding Index (the S&P Homebuilding
Index) and (c) the Standard & Poors 500 Composite Stock Index (the S&P 500 Index):
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|
October 31: |
|
2006 |
|
|
2007 |
|
|
2008 |
|
|
2009 |
|
|
2010 |
|
|
2011 |
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|
Toll Brothers, Inc. |
|
|
100.00 |
|
|
|
79.25 |
|
|
|
79.97 |
|
|
|
59.91 |
|
|
|
62.05 |
|
|
|
60.33 |
|
S&P 500 |
|
|
100.00 |
|
|
|
114.56 |
|
|
|
73.21 |
|
|
|
80.38 |
|
|
|
93.66 |
|
|
|
101.24 |
|
S&P Homebuilding |
|
|
100.00 |
|
|
|
51.65 |
|
|
|
29.11 |
|
|
|
31.71 |
|
|
|
30.86 |
|
|
|
29.62 |
|
ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial and housing data at and for each of
the five fiscal years in the period ended October 31, 2011. It should be read in conjunction with
the Consolidated Financial Statements and Notes thereto, included in this Form 10-K beginning at
page F-1, and Managements Discussion and Analysis of Financial Condition and Results of
Operations, included in Item 7 of this Form 10-K.
21
Summary Consolidated Statements of Operations and Balance Sheets (amounts in thousands, except per
share data):
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|
Year ended October 31: |
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Revenues |
|
$ |
1,475,881 |
|
|
$ |
1,494,771 |
|
|
$ |
1,755,310 |
|
|
$ |
3,148,166 |
|
|
$ |
4,635,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes |
|
$ |
(29,366 |
) |
|
$ |
(117,187 |
) |
|
$ |
(496,465 |
) |
|
$ |
(466,787 |
) |
|
$ |
70,680 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
39,795 |
|
|
$ |
(3,374 |
) |
|
$ |
(755,825 |
) |
|
$ |
(297,810 |
) |
|
$ |
35,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.24 |
|
|
$ |
(0.02 |
) |
|
$ |
(4.68 |
) |
|
$ |
(1.88 |
) |
|
$ |
0.23 |
|
Diluted |
|
$ |
0.24 |
|
|
$ |
(0.02 |
) |
|
$ |
(4.68 |
) |
|
$ |
(1.88 |
) |
|
$ |
0.22 |
|
Weighted average number
of shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
167,140 |
|
|
|
165,666 |
|
|
|
161,549 |
|
|
|
158,730 |
|
|
|
155,318 |
|
Diluted |
|
|
168,381 |
|
|
|
165,666 |
|
|
|
161,549 |
|
|
|
158,730 |
|
|
|
164,166 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 31: |
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash, cash equivalents and
marketable securities |
|
$ |
1,139,912 |
|
|
$ |
1,236,927 |
|
|
$ |
1,908,894 |
|
|
$ |
1,633,495 |
|
|
$ |
900,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventory |
|
$ |
3,416,723 |
|
|
$ |
3,241,725 |
|
|
$ |
3,183,566 |
|
|
$ |
4,127,475 |
|
|
$ |
5,572,655 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
5,055,246 |
|
|
$ |
5,171,555 |
|
|
$ |
5,634,444 |
|
|
$ |
6,586,836 |
|
|
$ |
7,220,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans payable |
|
$ |
106,556 |
|
|
$ |
94,491 |
|
|
$ |
472,854 |
|
|
$ |
613,594 |
|
|
$ |
696,814 |
|
Senior debt |
|
|
1,490,972 |
|
|
|
1,544,110 |
|
|
|
1,587,648 |
|
|
|
1,143,445 |
|
|
|
1,142,306 |
|
Senior subordinated debt |
|
|
|
|
|
|
|
|
|
|
47,872 |
|
|
|
343,000 |
|
|
|
350,000 |
|
Mortgage company loan facility |
|
|
57,409 |
|
|
|
72,367 |
|
|
|
27,015 |
|
|
|
37,867 |
|
|
|
76,730 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt |
|
$ |
1,654,937 |
|
|
$ |
1,710,968 |
|
|
$ |
2,135,389 |
|
|
$ |
2,137,906 |
|
|
$ |
2,265,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
$ |
2,592,551 |
|
|
$ |
2,559,013 |
|
|
$ |
2,516,482 |
|
|
$ |
3,237,653 |
|
|
$ |
3,535,245 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Housing Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31: |
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Closings (1): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of homes |
|
|
2,611 |
|
|
|
2,642 |
|
|
|
2,965 |
|
|
|
4,743 |
|
|
|
6,687 |
|
Value (in thousands) |
|
$ |
1,475,881 |
|
|
$ |
1,494,771 |
|
|
$ |
1,755,310 |
|
|
$ |
3,106,293 |
|
|
$ |
4,495,600 |
|
Revenues percentage of
completion (in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
41,873 |
|
|
$ |
139,493 |
|
Net contracts signed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of homes |
|
|
2,784 |
|
|
|
2,605 |
|
|
|
2,450 |
|
|
|
2,927 |
|
|
|
4,440 |
|
Value (in thousands) |
|
$ |
1,604,827 |
|
|
$ |
1,472,030 |
|
|
$ |
1,304,656 |
|
|
$ |
1,608,191 |
|
|
$ |
3,010,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 31: |
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Backlog: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of homes |
|
|
1,667 |
|
|
|
1,494 |
|
|
|
1,531 |
|
|
|
2,046 |
|
|
|
3,950 |
|
Value (in thousands) (2) |
|
$ |
981,052 |
|
|
$ |
852,106 |
|
|
$ |
874,837 |
|
|
$ |
1,325,491 |
|
|
$ |
2,854,435 |
|
Number of selling
communities |
|
|
215 |
|
|
|
195 |
|
|
|
200 |
|
|
|
273 |
|
|
|
315 |
|
Home sites: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Owned |
|
|
30,199 |
|
|
|
28,891 |
|
|
|
26,872 |
|
|
|
32,081 |
|
|
|
37,139 |
|
Controlled |
|
|
7,298 |
|
|
|
5,961 |
|
|
|
5,045 |
|
|
|
7,703 |
|
|
|
22,112 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
37,497 |
|
|
|
34,852 |
|
|
|
31,917 |
|
|
|
39,784 |
|
|
|
59,251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Excludes 88 units and 336 units delivered in fiscal 2008 and 2007, respectively, which were
accounted for
using the percentage of completion accounting method with an aggregate delivered value of
$86.1 million in
fiscal 2008 and $263.3 million in fiscal 2007. |
|
(2) |
|
Net of revenues of $55.2 million and $170.1 million of revenue recognized in fiscal 2007 and
2006,
respectively, under the percentage of completion accounting method. At October 31, 2008 and
thereafter, we
did not have any revenue recognized on undelivered units accounted for under the percentage of
completion
accounting method. |
22
ITEM 7. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless otherwise stated in this report, net contracts signed represents a number or value equal to the gross
number or value of contracts signed during the relevant period, less the number or value of
contracts cancelled during the relevant period, which includes contracts that were signed during
the relevant period and in prior periods.
OVERVIEW
Our Business
We design, build, market and arrange financing for single-family detached and attached homes in
luxury residential communities. We are also involved, directly and through joint ventures, in
projects where we are building, or converting existing rental apartment buildings into, high-, mid-
and low-rise luxury homes. At October 31, 2011, we were operating in 19 states. In the five years
ended October 31, 2011, we delivered 20,072 homes from 530 communities, including 2,611 homes from
247 communities in fiscal 2011. In addition, through our subsidiary Gibraltar Capital and Asset
Management LLC (Gibraltar), we invest in distressed real estate opportunities which may be
different than our traditional homebuilding operations.
Fiscal 2011 Financial Highlights
In the twelve-month period ended October 31, 2011, we recognized $1.48 billion of revenues and net
income of $39.8 million, as compared to $1.49 billion of revenues and a net loss of $3.4 million in
fiscal 2010. Fiscal 2011 income included $51.8 million of inventory impairments and write-offs,
$40.9 million of impairment charges related to our investments in unconsolidated entities, $3.8
million of expenses related to repurchases of our debt, and an income tax benefit of $69.2 million.
The fiscal 2010 loss included inventory impairments and write-offs of $115.3 million, $1.2 million
of expenses related to repurchases of our debt, and an income tax benefit of $113.8 million.
At October 31, 2011, we had $1.14 billion of cash, cash equivalents and marketable securities on
hand and approximately $784.7 million available under our $885.0 million revolving credit facility
which matures in October 2014. During fiscal 2011, we used available cash to repurchase or redeem
$55.1 million of our senior notes. Between October 31, 2006 and October 31, 2011, we increased our
cash position (including marketable securities) by approximately $507.4 million and reduced debt by
approximately $692.9 million.
Recent Development
In November 2011, we acquired substantially all of the assets of CamWest Development LLC. CamWest
develops a variety of home types, including luxury single-family homes, condominiums, and townhomes
throughout the Seattle, Washington metropolitan area, primarily in King and Snohomish Counties. For
calendar year 2011, CamWest expected to deliver approximately 180 homes and produce revenues of
approximately $90 million. The assets we acquired included approximately 1,245 home sites owned
and 254 home sites controlled through land purchase agreements. The acquisition increased our
selling community count by 15 communities.
Our Challenging Business Environment and Current Outlook
The ongoing downturn in the U.S. housing market, which began in the fourth quarter of our fiscal
2005, has been the longest and most severe since the Great Depression. The value of our net
contracts signed in fiscal 2011 was $1.60 billion, a decline of 78% from the $7.15 billion of net
contracts signed in fiscal 2005. The downturn, which we believe started with a decline in consumer
confidence, an overall softening of demand for new homes and an oversupply of homes available for
sale, has been exacerbated by, among other things, a decline in the overall economy, increased
unemployment, the increased number of vacant homes, fear of job loss, a decline in home prices and
the resulting reduction in home equity, the large number of homes that are vacant and homes that
are or will be available due to foreclosures, the inability of some of our home buyers or some
prospective buyers of their homes to sell their current home, and the direct and indirect impact of
the turmoil in the mortgage loan market.
We continue to believe that many of our markets and housing in general have reached bottom;
however, we expect that there may be more periods of volatility in the future. Our target customers
generally have remained employed during this downturn. Many have deferred their home buying
decisions, however, because of concerns over the direction of the economy and media headlines
suggesting that home prices continue to decline. We continue to believe that, once the economy and
consumer confidence improve and the unemployment rate declines, pent-up
demand will be released and, gradually, more buyers will enter the market. We continue to believe
that the key to a full recovery in our business depends on these factors as well as a sustained
stabilization of financial markets and home prices.
23
We also believe that the medium and long-term futures
for us and the homebuilding industry are bright. A
2011 Harvard University study projects that under both low- and high- growth scenarios, housing
demand in the 2010-2020 period should exceed that of the previous three decades. In many
markets, the pipeline of approved and improved home
sites has dwindled as builders and developers have lacked both the capital and the economic benefit
for bringing sites through approvals. Therefore, when demand picks up, builders and developers with
approved land in well-located markets will be poised to benefit. We believe that this will be
particularly true for us because our land portfolio is heavily weighted in the metro Washington, DC
to metro Boston corridor where land is scarce, approvals are more difficult to obtain and
overbuilding has been relatively less prevalent than in the Southeast and Western regions.
We continue to seek a balance between our short-term goal of selling homes in a tough market and
our long-term
goal of maximizing the value of our communities. We continue to believe that many of our
communities are in desirable locations that are difficult to replace and in markets where approvals
have been increasingly difficult to obtain. We believe that many of these communities have
substantial embedded value that may be realized in the future and that this value should not
necessarily be sacrificed in the current soft market.
Competitive Landscape
Based on our experience during prior downturns in the housing industry, we believe that attractive
land acquisition opportunities arise in difficult times for those builders that have the
financial strength to take advantage of them. In the current challenging environment, we believe
our strong balance sheet, liquidity, access to capital, broad geographic presence, diversified
product line, experienced personnel and national brand name all position us well for such
opportunities now and in the future.
We continue to see reduced competition from the small and mid-sized private builders that had been
our primary competitors in the luxury market. We believe that many of these builders are no longer
in business and that access to capital by the surviving private builders is already severely
constrained. We envision that there will be fewer and more selective lenders serving our industry
when the market rebounds and that those lenders likely will gravitate to the homebuilding companies
that offer them the greatest security, the strongest balance sheets and the broadest array of
potential business opportunities. We believe that this reduced competition, combined with
attractive long-term demographics, will reward those well-capitalized builders that can persevere
through the current challenging environment.
As market conditions improve over time, we believe that geographic and product diversification,
access to lower-cost capital and strong demographics will benefit those builders, like us who can
control land and persevere through the increasingly difficult regulatory approval process. We
believe that these factors favor the large publicly traded homebuilding companies with the capital
and expertise to control home sites and gain market share. We also believe that over the past five
years, many builders and land developers reduced the number of home
sites that were taken
through the approval process. The process continues to be difficult and lengthy, and the political
pressure from no-growth proponents continues to increase, but we believe our expertise in taking
land through the approval process and our already-approved land positions will allow us to grow in
the years to come, as market conditions improve.
Land Acquisition and Development
Because of the length of time that it takes to obtain the necessary approvals on a property,
complete the land improvements on it, and deliver a home after a home buyer signs an agreement of
sale, we are subject to many risks. In certain cases, we attempt to reduce some of these risks by
utilizing one or more of the following methods: controlling land for future development through
options (also referred to herein as land purchase contracts or option and purchase agreements),
thus allowing the necessary governmental approvals to be obtained before acquiring title to the
land; generally commencing construction of a detached home only after executing an agreement of
sale and receiving a substantial down payment from the buyer; and using subcontractors to perform
home construction and land development work on a fixed-price basis. Our risk reduction strategy of
generally not commencing the construction of a detached home until we have an agreement of sale
with a buyer was effective prior to this current downturn in the housing market, but, due to the
number of cancellations of agreements of sale that we had during fiscal 2007, 2008 and 2009, many
of which were for homes on which we had commenced construction, the number of homes under
construction in detached single-family communities for which we did not have an agreement of sale
increased from our historical levels. With our contract cancellation rates returning to more normal
levels in fiscal 2010 and 2011, and the sale of these units, we have reduced the number of unsold
units to more historical levels. In addition, over the past several years, the number of our
attached-home communities has grown, resulting in an increase in the number of unsold units under
construction.
24
In response to the decline in market conditions over the past several years, we have re-evaluated
and renegotiated or cancelled many of our land purchase contracts. In addition, we have sold, and
may continue to sell, certain parcels of land that we have identified as non-strategic. As a
result, we reduced our land position from a high of approximately 91,200 home sites at April 30,
2006, to approximately 37,500 home sites at October 31, 2011. We continue to position ourselves for
the anticipated recovery through the opportunistic and, we believe, prudent purchase of land and
the continued growth of our community count. Based on our belief that the housing market has
bottomed, the
increased attractiveness of land available for purchase and the revival of demand in certain areas,
we have begun to increase our land positions. During fiscal 2011 and fiscal 2010, we acquired
control of approximately 5,300 home sites (net of options terminated) and 5,600 home sites (net of
options terminated), respectively. Of the 37,500 home sites controlled at October 31, 2011, we
owned approximately 30,200. Of these 30,200 home sites, significant improvements were completed on
approximately 11,693 of them. At October 31, 2011, we were selling from 215 communities, compared
to 195 and 200 communities at October 31, 2010 and 2009, respectively. Our November 2011
acquisition of CamWest assets further increases the number of our home sites controlled and our
selling community count.
We expect to be selling from 235 to 255 communities at October 31, 2012. In addition, at October
31, 2011, we had 45 communities that were temporarily closed due to market conditions, none of
which we expect to reopen prior to October 31, 2012.
Availability of Customer Mortgage Financing
We maintain relationships with a widely diversified group of mortgage financial institutions, many
of which are among the largest and, we believe, most reliable in the industry. We believe that
regional and community banks continue to recognize the long-term value in creating relationships
with high-quality, affluent customers such as our home buyers, and these banks continue to provide
such customers with financing.
We believe that our home buyers generally are, and should continue to be, better able to secure
mortgages due to
their typically lower loan-to-value ratios and attractive credit profiles as compared to the
average home buyer. Nevertheless, in recent years, tightened credit standards have shrunk the pool
of potential home buyers and hindered accessibility of or eliminated certain loan products
previously available to our home buyers. Our home buyers continue to face stricter mortgage
underwriting guidelines, higher down payment requirements and narrower appraisal guidelines than in
the past. In addition, some of our home buyers continue to find it more difficult to sell their
existing homes as prospective buyers of their homes may face difficulties obtaining a mortgage. In
addition, other potential buyers may have little or negative equity in their existing homes and may
not be able to or willing to purchase a larger or more expensive home.
While the range of mortgage products available to a potential home buyer is not what it was in 2005
2007, we have seen improvements over the past year. Indications from industry
participants, including commercial banks, mortgage banks, mortgage REITS and mortgage insurance
companies are that availability, parameters and pricing of jumbo loans are all improving. We
believe that improvement should not only enhance financing alternatives for existing jumbo buyers,
but should help to offset the reduction in Fannie Mae/Freddie Mac-eligible loan amounts in some
markets. Based on the mortgages provided by our mortgage subsidiary during fiscal 2011, we do not
expect the change in the Fannie Mae/Freddie Mac-eligible loan amounts to have a significant impact
on our business.
There has been significant media attention given to mortgage put-backs, a practice by which a buyer
of a mortgage loan tries to recoup losses from the loan originator. We do not believe this is a
material issue for our mortgage subsidiary. Of the approximately 13,900 loans sold by our mortgage
subsidiary since November 1, 2004, only 30 have been the subject of either actual indemnification
payments or take-backs or contingent liability loss provisions related thereto. We believe that
this is due to (i) our typical home buyers financial position and sophistication, (ii) on average,
our home buyers who use mortgage financing to purchase a home pay approximately 30% of the purchase
price in cash, (iii) our general practice of not originating certain loan types such as option
adjustable rate mortgages and down payment assistance products, and our origination of very few
sub-prime, high loan-to-value and no documentation loans and (iv) our elimination of early payment
default provisions from each of our agreements with our mortgage investors several years ago.
25
The Dodd-Frank Wall Street Reform and Consumer Protection Act provides for a number of new
requirements relating to residential mortgage lending practices, many of which are subject to
further rule making. These include, among others, minimum standards for mortgages and related
lender practices, the definitions and parameters of a Qualified Mortgage and a Qualified
Residential Mortgage, future risk retention requirements, limitations on certain fees, prohibition
of certain tying arrangements, and remedies for borrowers in foreclosure proceedings in the event
that a lender violates fee limitations or minimum standards. The ultimate effect of such provisions
on lending institutions, including our mortgage subsidiary, will depend on the rules that are
ultimately promulgated.
Gibraltar
We continue to look for other distressed real estate opportunities
through Gibraltar. Gibraltar continues to selectively review a steady flow of new
opportunities, including FDIC and bank portfolios and other distressed real estate
investments. In September, 2011, Gibraltar acquired three portfolios of non-performing
loans consisting of 38 loans with an unpaid principal balance of approximately $71.4 million. The
portfolios include residential acquisition, development, and construction loans secured by properties
at various stages of completion.
In March 2011, Gibraltar acquired a 60% participation in a portfolio
of 83 non-performing loans with outstanding principal balances aggregating
approximately $200 million. The portfolio consists primarily of residential
acquisition, development and construction loans secured by properties at various
stages of completion. Gibraltar oversees the day-to-day management of the portfolio
in accordance with the business plans which are jointly approved by Gibraltar and the
co-participant.
In fiscal 2011, Gibraltar acquired an interest in four properties
through foreclosure or obtaining deeds in lieu of foreclosure
related to this loan portfolio. At October 31, 2011,
Gibraltars pro-rata
share of the carrying value of these properties was $5.9 million.
In July 2010, Gibraltar invested in a joint venture in which it is a 20%
participant with two unrelated parties to purchase a 40% interest in
an entity that owned a $1.7 billion face value FDIC portfolio of
former Amtrust Bank assets.
During the fiscal 2011, we recognized $6.9 million of income from the
Gibraltar operations.
CONTRACTS AND BACKLOG
The aggregate value of gross sales contracts signed increased 8.7% in fiscal 2011, as compared to
fiscal 2010, and decreased 3.4% in fiscal 2010, as compared to fiscal 2009. The value of gross
sales contracts signed was $1.71 billion (2,965 homes) in fiscal 2011, $1.57 billion (2,789 homes)
in fiscal 2010 and $1.63 billion (2,903 homes) in fiscal 2009. The increase in the aggregate value
of gross contracts signed in the fiscal 2011, as compared to fiscal 2010, was the result of a 6.3%
increase in the number of gross contracts signed, and a 2.3% increase in the average value of each
contract signed. The increase in the number of gross contracts signed in fiscal 2011, as compared
to fiscal 2010, was primarily due to the increase in the number of selling communities in fiscal
2011. The decrease in the aggregate value of gross contracts signed in fiscal 2010, as compared to
fiscal 2009, was the result of a 3.9% decrease in the number of gross contracts signed, offset, in
part, by a slight increase in the average value of each contract signed.
In fiscal 2011, 2010, 2009 and 2008, home buyers cancelled $102.8 million (181 homes), $98.3
million (184 homes), $321.2 million (453 homes) and $733.2 million (993 homes) of signed contracts,
respectively. As a percentage of the number of gross contracts signed in fiscal 2011, 2010, 2009
and 2008, home buyers cancelled 6.1%, 6.6%, 15.6% and 25.3%, in those respective years, and 6.0%,
6.3%, 19.8% and 31.3% of the value of gross contracts signed in those respective years. Our
contract cancellation rates in fiscal 2011 and 2010 have been comparable to the cancellation rates
prior to fiscal 2006.
The aggregate value of net contracts signed increased 9.0% in fiscal 2011, as compared to fiscal
2010. The value of net contracts signed was $1.60 billion (2,784 homes) in fiscal 2011, $1.47
billion (2,605 homes) in fiscal 2010 and $1.30 billion (2,450 homes) in fiscal 2009. The increase
in fiscal 2011, as compared to fiscal 2010, was the result of a 6.9% increase in the number of net
contracts signed, and a 2.0% increase in the average value of each contract signed. The increase in
the number of contracts signed in fiscal 2011 was primarily due to the increased number of
communities that we had open for sale in fiscal 2011, as compared to fiscal 2010.
The aggregate value of net contracts signed increased 12.8% in fiscal 2010, as compared to fiscal
2009. The increase in fiscal 2010, as compared to fiscal 2009, was the result of a 6.3% increase in
the number of net contracts signed and a 6.1% increase in the average value of each contract
signed. The increase in the number of net contracts signed in fiscal 2010, as compared to fiscal
2009, was due to the significant decline in contract cancellations in fiscal 2010 as compared to
fiscal 2009. The increase in the average value of net contracts signed in fiscal 2010, as compared
to fiscal 2009, was due primarily to a 24.7% lower average value of the contracts cancelled in
fiscal 2010, as compared to the average value of contracts cancelled in fiscal 2009, and lower
sales incentives given to home buyers in fiscal 2010, as compared to fiscal 2009, offset, in part,
by a shift in the number of contracts signed to less expensive products in fiscal 2010, as compared
to fiscal 2009.
26
Backlog consists of homes under contract but not yet delivered to our home buyers. The value of our
backlog at October 31, 2011, 2010 and 2009 was $981.1 million (1,667 homes), $852.1 million (1,494
homes) and $874.8 million (1,531 homes), respectively. The 15.1% and 11.6% increase in the value
and number of homes of backlog at October 31, 2011 as compared the October 31, 2010, was due to the
increase in the number and the average value of net contracts signed in fiscal 2011, as compared to
fiscal 2010 and the decrease in the aggregate value and number of our deliveries in fiscal 2011, as
compared to the aggregate value and number of deliveries in fiscal 2010, offset, in part, by the
decrease in the value of our backlog at October 31, 2010, as compared to our backlog at October 31,
2009. The decreases in backlog at October 31, 2010, as compared to the backlog at October 31, 2009
and at October 31, 2009, as compared to October 31, 2008, were primarily attributable to the
continued decline in the new home market in fiscal 2010 and 2009, and the decrease in the value and
number of net contracts signed in fiscal 2010, as compared to fiscal 2009, as well as in fiscal
2009, as compared to fiscal 2008, offset, in part, by lower deliveries in both fiscal 2010 and
2009, as compared to the preceding fiscal years.
For more information regarding revenues, gross contracts signed, contract cancellations and net
contracts signed by geographic segment, see Geographic Segments in this MD&A.
CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies reflect the more significant judgments and
estimates used in the preparation of our consolidated financial statements.
Inventory
Inventory is stated at cost unless an impairment exists, in which case it is written down to fair
value in accordance with GAAP. In addition to direct land acquisition, land development 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 periods 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 the
communitys inventory until it re-opens, and other carrying costs are expensed as incurred. Once a
parcel of land has been approved for development and we open the community, it can typically take
four or more years to fully develop, sell and deliver all the homes. 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. Our master planned communities, consisting of several smaller
communities, may take up to ten years or more to complete. Because our inventory is considered a
long-lived asset under GAAP, we are required to regularly review the carrying value of each of our
communities and write down the value of those communities for which we believe 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 communitys 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, we
use 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 us 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
costs, home construction costs, interest costs 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 in a particular community; 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.
27
Future Communities: We evaluate all land held for future communities or future sections of current
communities, whether owned or optioned, to determine whether or not we expect 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 in which the land is located and the
estimated probability of obtaining the necessary approvals, the estimated time and cost it will
take to obtain those 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, we decide (a) as to land under contract to be purchased,
whether the contract will likely be terminated or renegotiated, and (b) as to land we own, whether
the land will likely be developed as contemplated or in an alternative manner, or should be sold.
We then further determine 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 us at the time such estimates are made and our
expectations of future operations and economic conditions. Should the estimates or expectations
used in determining estimated fair value deteriorate in the future, we may be required to recognize
additional impairment charges and write-offs related to current and future communities.
We provided for inventory impairment charges and the expensing of costs that we believed not to be
recoverable in each of the three fiscal years ended October 31, 2011, 2010 and 2009 as shown in the
table below (amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Land controlled for future communities |
|
$ |
17,752 |
|
|
$ |
6,069 |
|
|
$ |
28,518 |
|
Land owned for future communities |
|
|
17,000 |
|
|
|
55,700 |
|
|
|
169,488 |
|
Operating communities |
|
|
17,085 |
|
|
|
53,489 |
|
|
|
267,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,837 |
|
|
$ |
115,258 |
|
|
$ |
465,411 |
|
|
|
|
|
|
|
|
|
|
|
The table below provides, for the periods indicated, the number of operating communities that we
tested for potential impairment, the number of operating communities in which we 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 millions).
|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired operating communities |
|
|
|
|
|
|
|
|
|
|
|
Fair value of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
communities, |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
net of |
|
|
|
|
|
|
communities |
|
|
Number of |
|
|
impairment |
|
|
Impairment |
|
Three months ended: |
|
tested |
|
|
communities |
|
|
charges |
|
|
charges |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31 |
|
|
260 |
|
|
|
14 |
|
|
$ |
60,519 |
|
|
$ |
22,750 |
|
April 30 |
|
|
161 |
|
|
|
7 |
|
|
$ |
53,594 |
|
|
|
15,020 |
|
July 31 |
|
|
155 |
|
|
|
7 |
|
|
$ |
21,457 |
|
|
|
6,600 |
|
October 31 |
|
|
144 |
|
|
|
12 |
|
|
$ |
39,209 |
|
|
|
9,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
53,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31 |
|
|
289 |
|
|
|
41 |
|
|
$ |
216,227 |
|
|
$ |
108,300 |
|
April 30 |
|
|
288 |
|
|
|
36 |
|
|
$ |
181,790 |
|
|
|
67,410 |
|
July 31 |
|
|
288 |
|
|
|
14 |
|
|
$ |
67,713 |
|
|
|
46,822 |
|
October 31 |
|
|
254 |
|
|
|
21 |
|
|
$ |
116,379 |
|
|
|
44,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
267,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28
Variable Interest Entities: We have a significant number of land purchase contracts and several
investments in unconsolidated entities which we evaluate in accordance with GAAP. We
analyze our land purchase contracts and the unconsolidated entities
in which we have an investment to determine whether the land sellers and unconsolidated entities
are variable interest entities (VIEs) and, if so, whether we are the primary beneficiary. If we
are determined to be the primary beneficiary of the VIE, we must consolidate it. 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 we are the primary
beneficiary, we consider, among other things, whether we have the power to direct the activities of
the VIE that most significantly impact the entitys 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. We also consider
whether we have the obligation to absorb losses of the VIE or the right to receive benefits from
the VIE. At October 31, 2011, the Company had determined that 48 land purchase contracts, with an
aggregate purchase price of $453.0 million, on which we had made aggregate deposits totaling $24.2
million, were VIEs, and that we were not the primary beneficiary of any VIE related to these land
purchase contracts.
Income Taxes Valuation Allowance
Significant judgment is required in estimating valuation allowances for deferred tax assets. In
accordance with GAAP, a valuation allowance is established against a deferred tax asset if, based
on the available evidence, it is more likely than not that such asset will not be realized. The
realization of a deferred tax asset ultimately depends on the existence of sufficient taxable
income in either the carryback or carryforward periods under tax law. We periodically assess the
need for valuation allowances for deferred tax assets based on GAAPs more-likely-than-not
realization threshold criteria. In our assessment, appropriate consideration is given to all
positive and negative evidence related to the realization of the deferred tax assets. This
assessment considers, among other matters, the nature, frequency and magnitude of current and
cumulative income and losses, forecasts of future profitability, the duration of statutory
carryback or carryforward periods, our experience with operating loss and tax credit carryforwards
being used before expiration, and tax planning alternatives.
Our assessment of the need for a valuation allowance on our deferred tax assets includes assessing
the likely future tax consequences of events that have been recognized in our consolidated
financial statements or tax returns. We base our estimate of deferred tax assets and liabilities on
current tax laws and rates and, in certain cases, on business plans and other expectations about
future outcomes. Changes in existing tax laws or rates could affect our actual tax results and our
future business results may affect the amount of our deferred tax liabilities or the valuation of
our deferred tax assets over time. Our accounting for deferred tax assets represents our best
estimate of future events.
Due to uncertainties in the estimation process, particularly with respect to changes in facts and
circumstances in future reporting periods (carryforward period assumptions), it is possible that
actual results could differ from the estimates used in our historical analyses. Our assumptions
require significant judgment because the residential homebuilding industry is cyclical and is
highly sensitive to changes in economic conditions. If our results of operations are less than
projected and there is insufficient objectively positive verifiable evidence to support the likely
realization of our deferred tax assets, a valuation allowance would be required to reduce or
eliminate our deferred tax assets.
Since the beginning of fiscal 2007, we recorded significant deferred tax assets. These deferred tax
assets were generated primarily by inventory impairments and impairments of investments in and
advances to unconsolidated entities. In accordance with GAAP, we assessed whether a valuation
allowance should be established based on our determination of whether it is more likely than not
that some portion or all of the deferred tax assets would not be realized. We believe that the
continued downturn in the housing market, the uncertainty as to its length and magnitude, our
continued recognition of impairment charges, and our cumulative operating losses in recent years are significant evidence of the need for a valuation
allowance against our net deferred tax assets. We have recorded valuation allowances against all of
our net deferred tax assets.
We are 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 addition, we will be able to reverse previously
recognized valuation allowances during any future period in which we report book income before
taxes. We will continue to review our deferred tax assets in accordance with GAAP.
29
On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 (the Act) was
enacted into law. The Act amended Section 172 of the Internal Revenue Code to allow net operating
losses realized in a tax
year ending after December 31, 2007 and beginning before January 1, 2010 to be carried back for up
to five years
(such losses were previously limited to a two-year carryback). This change allowed us to carry back
our fiscal 2010 taxable losses to prior years and receive a tax refund of $154.3 million which was
received in the second quarter of fiscal 2011. We had recorded an expected refund of $141.6 million
in our October 31, 2010 consolidated financial statements.
For state tax purposes, due to past losses and projected future losses in certain jurisdictions
where we do not have carryback potential and/or cannot sufficiently forecast future taxable income,
we recognized net cumulative valuation allowances against our state deferred tax assets of $74.0
million as of October 31, 2011 and $45.0 million as of October 31, 2010. Future valuation
allowances in these jurisdictions may continue to be recognized if we believe we will not generate
sufficient future taxable income to utilize future state deferred tax assets.
Revenue and Cost Recognition
The construction time of our homes is generally less than one year, although some homes may take
more than one year to complete. Revenues and cost of revenues from these home sales are recorded at
the time each home is delivered and title and possession are transferred to the buyer. Closing
normally occurs shortly after construction is substantially completed.
For our standard attached and detached homes, land, land development and related costs, both
incurred and estimated to be incurred in the future, are amortized to the cost of homes closed
based upon the total number of homes to be constructed in each community. Any changes resulting
from a change in the estimated number of homes to be constructed or in the estimated costs
subsequent to the commencement of delivery of homes are allocated to the remaining undelivered
homes in the community. Home construction and related costs are
charged to
the cost of homes closed under the specific identification method. The estimated land, common area
development and related costs of master planned communities, including the cost of golf courses,
net of their estimated residual value, are allocated to individual communities within a master
planned community on a relative sales value basis. Any changes resulting from a change in the
estimated number of homes to be constructed or in the estimated costs are allocated to the
remaining home sites in each of the communities of the master planned community.
For high-rise/mid-rise projects, land, land development, construction and related costs, both
incurred and estimated to be incurred in the future, are generally amortized to the cost of units
closed based upon an estimated relative sales value of the units closed to the total estimated
sales value. Any changes resulting from a change in the estimated total costs or revenues of the
project are allocated to the remaining units to be delivered.
Forfeited customer deposits are recognized in other income in the period in which we determine that
the customer will not complete the purchase of the home and we have the right to retain the
deposit.
Sales Incentives: In order to promote sales of our homes, we grant our home buyers sales
incentives from time-to-time. These incentives will vary by type of incentive and by amount on a
community-by-community and home-by- home basis. Incentives that impact the value of the home or the
sales price paid, such as special or additional options, are generally reflected as a reduction in
sales revenues. Incentives that we pay to an outside party, such as paying some or all of a home
buyers closing costs, are recorded as an additional cost of revenues. Incentives are recognized at
the time the home is delivered to the home buyer and we receive the sales proceeds.
OFF-BALANCE SHEET ARRANGEMENTS
We have investments in and advances to various unconsolidated entities. At October 31, 2011, we had
investments in and advances to these entities, net of impairment charges recognized, of $126.4
million, and were committed to invest or advance $11.8 million to these entities if they require
additional funding.
The trends,
uncertainties or other factors that have negatively impacted our business
and the industry in general have also impacted the unconsolidated entities
in which we have investments. We review each of our investments on a quarterly
basis for indicators of impairment.
A series of operating losses of an investee, the inability to recover our invested
capital, or other factors may indicate that a loss in value of our investment in
the unconsolidated entity has occurred. If a loss exists, we further review to
determine if the loss is other than temporary, in which case, we write down the
investment to its fair value. The evaluation of our investment in unconsolidated
entities entails a detailed cash flow analysis using many estimates including but
not limited to expected sales pace, expected sales prices, expected incentives,
costs incurred and anticipated, sufficiency of financing and capital, competition,
market conditions and anticipated cash receipts, in order to determine projected
future distributions. Each of the unconsolidated entities
evaluates its inventory in a similar manner as we do. See Critical Accounting Policies Inventory in this MD&A
for more detailed disclosure on our evaluation of inventory.
If a valuation adjustment is recorded
by an unconsolidated entity related to
its assets, our proportionate share is reflected in (loss)
income from unconsolidated
entities with a corresponding decrease to our investment in unconsolidated entities.
During fiscal 2011,
based upon our evaluation of the fair value of our investments in unconsolidated
entities, we determined, due to the continued deterioration of the market in which
some of our joint ventures operate, that there was an other than temporary impairment
of our investments in these joint ventures. Based on this determination, we recognized
$40.9 million of impairment charges against the carrying value of our investments.
30
On October 27, 2011, a bankruptcy court issued an order confirming a plan of reorganization for
South Edge, LLC (South Edge), a Nevada land development joint venture, which was the subject of an involuntary bankruptcy petition filed in
December, 2010. Pursuant to the plan of reorganization, South Edge settled litigation
regarding a loan made by a syndicate of lenders to South Edge having a principal balance of
$327.9 million, for which we had executed certain completion guarantees and conditional repayment
guarantees. The confirmed plan of reorganization provided for a cash settlement to the lenders, the
acquisition of land by us and the other members of South Edge which are parties to the
agreement, and the resolution of all claims between members of the lending syndicate representing
99% of the outstanding amounts due under the loan, the bankruptcy trustee and the members of South Edge which are parties to the agreement. We believe we have made adequate provision
at October 31, 2011 for the settlement, including the accrual for our share of the cash payments required under
the agreement, any remaining exposure to lenders which are not parties to the agreement and
recording impairments to reflect the estimated fair value of land to be acquired. In November 2011,
we made a payment of $57.6 million as our share of the settlement.
Our investments in these entities are accounted for using the equity method.
RESULTS OF OPERATIONS
The following table compares certain items in our statement of operations for fiscal 2011, 2010 and
2009 ($ amounts in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
|
$ |
|
|
% |
|
Revenues |
|
|
1,475.9 |
|
|
|
|
|
|
|
1,494.8 |
|
|
|
|
|
|
|
1,755.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
1,260.8 |
|
|
|
85.4 |
|
|
|
1,376.6 |
|
|
|
92.1 |
|
|
|
1,951.3 |
|
|
|
111.2 |
|
Selling, general and administrative |
|
|
261.4 |
|
|
|
17.7 |
|
|
|
263.2 |
|
|
|
17.6 |
|
|
|
313.2 |
|
|
|
17.8 |
|
Interest expense |
|
|
1.5 |
|
|
|
0.1 |
|
|
|
22.8 |
|
|
|
1.5 |
|
|
|
7.9 |
|
|
|
0.5 |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,523.6 |
|
|
|
103.2 |
|
|
|
1,662.5 |
|
|
|
111.2 |
|
|
|
2,272.5 |
|
|
|
129.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(47.7 |
) |
|
|
|
|
|
|
(167.8 |
) |
|
|
|
|
|
|
(517.2 |
) |
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from
unconsolidated entities |
|
|
(1.2 |
) |
|
|
|
|
|
|
23.5 |
|
|
|
|
|
|
|
(7.5 |
) |
|
|
|
|
Interest and other income |
|
|
23.4 |
|
|
|
|
|
|
|
28.3 |
|
|
|
|
|
|
|
41.9 |
|
|
|
|
|
Expenses related to early
retirement of debt |
|
|
(3.8 |
) |
|
|
|
|
|
|
(1.2 |
) |
|
|
|
|
|
|
(13.7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(29.4 |
) |
|
|
|
|
|
|
(117.2 |
) |
|
|
|
|
|
|
(496.5 |
) |
|
|
|
|
Income tax (benefit) provision |
|
|
(69.2 |
) |
|
|
|
|
|
|
(113.8 |
) |
|
|
|
|
|
|
259.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
|
39.8 |
|
|
|
|
|
|
|
(3.4 |
) |
|
|
|
|
|
|
(755.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note: Amounts may not add due to rounding.
31
FISCAL 2011 COMPARED TO FISCAL 2010
REVENUES AND COST OF REVENUES
Revenues for fiscal 2011 were lower than those for fiscal 2010 by approximately $18.9 million, or
1.3%. This decrease was primarily due to a decrease in the number of homes delivered. The decrease
in the number of homes delivered in fiscal 2011, as compared to fiscal 2010, was primarily due to
the lower number of homes in backlog at the beginning of fiscal 2011, as compared to the beginning
of fiscal 2010.
Cost of revenues as a percentage of revenues was 85.4% in fiscal 2011, as compared to 92.1% in
fiscal 2010. In fiscal 2011 and 2010, we recognized inventory impairment charges and write-offs of
$51.8 million and $115.3 million, respectively. Cost of revenues as a percentage of revenues,
excluding impairments, was 81.9% of revenues in fiscal 2011, as compared to 84.4% in fiscal 2010.
The decrease in cost of revenues, excluding inventory impairment charges, as a percentage of
revenue in fiscal 2011, as compared to fiscal 2010, was due primarily to lower costs, as a
percentage of revenues, on the homes delivered in fiscal 2011 than those delivered in fiscal 2010.
The lower percentage was primarily due to the delivery of fewer quick-delivery homes in fiscal
2011, as compared to fiscal 2010, as our supply of quick-delivery homes has dwindled, the reduction
in costs realized from our new centralized purchasing initiatives, and reduced costs realized in
fiscal 2011 because fewer homes were delivered from certain higher cost communities, as compared to
fiscal 2010, as these communities delivered their final homes. Generally, the cost, as a
percentage of revenues, of a quick-delivery home is higher than our standard contract and build
homes (to be built homes). The reduction in costs was offset, in part, by higher interest costs
in fiscal 2011, as compared to fiscal 2010. In fiscal 2011 and 2010, interest cost as a percentage
of revenues was 5.3% and 5.1%, respectively. The higher interest cost as a percentage of revenue
was due to inventory generally being held for a longer period of time and, over the past several
years, fewer qualifying assets to which interest can be allocated which resulted in higher amounts
of capitalized interest allocated to qualifying inventory.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
SG&A decreased by $1.9 million in fiscal 2011, as compared to fiscal 2010. As a percentage of
revenues, SG&A was 17.7% in fiscal 2011, as compared to 17.6% in fiscal 2010. The increase in SG&A,
as a percentage of revenues, was due primarily to increased compensation costs and increased sales
and marketing costs, offset, in part, by an insurance claim recovery and the reversal of previously
accrued costs due to changes in estimates. The increased compensation and sales and marketing costs
were due primarily to the increased number of communities we had open in fiscal 2011, as compared
to fiscal 2010.
INTEREST EXPENSE
Interest incurred on average homebuilding indebtedness in excess of average qualified inventory is
charged directly to the statement of operations in the period incurred. Interest expensed directly
to the statement of operations in fiscal 2011 and fiscal 2010 was $1.5 million and $22.8 million,
respectively. The decrease in the amount of interest expensed directly was due to a higher amount
of qualified inventory and a lower amount of debt in fiscal 2011, as compared to fiscal 2010. Due
to the increase in qualified inventory and the decrease of our indebtedness in the last six months
of fiscal 2011, we did not have any directly expensed interest in that period.
(LOSS) INCOME FROM UNCONSOLIDATED ENTITIES
We are a participant in several joint ventures. We recognize our
proportionate share of the earnings and losses from these entities. The trends, uncertainties or
other factors that have negatively impacted our business and the industry in general and which are
discussed in the Overview section of this MD&A have also impacted the unconsolidated entities in
which we have investments. Most of our joint ventures are land development projects or
high-rise/mid-rise construction projects and do not generate revenues and earnings for a number of
years during the development of the property. Once development is complete, the joint ventures will
generally, over a relatively short period of time, generate revenues and earnings until all the
assets of the entity are sold. Because there is not a steady flow of revenues and earnings from
these entities, the earnings recognized from these entities will vary significantly from year to
year.
In fiscal 2011, we recognized $1.2 million of losses from unconsolidated entities, as compared to
$23.5 million of income in fiscal 2010. The loss in fiscal 2011 included $40.9 million of
impairment charges that we recognized on our investments in unconsolidated entities. No impairment
charges were recognized in fiscal 2010. See Off-Balance Sheet Arrangements in this MD&A for
information related to these impairment charges. The income from unconsolidated entities in fiscal
2011, excluding the impairment charges recognized, was $39.7 million in fiscal 2011, as compared to
$23.5 million in fiscal 2010. The increase was due principally to higher income generated in fiscal
2011 from two of our high-rise construction ventures which had significantly more deliveries in
fiscal 2011, as compared to fiscal 2010, income generated from our structured asset joint venture
and distributions in fiscal 2011 from ventures in excess of our cost basis in the ventures of $7.3
million, offset, in part, by the reversal in fiscal 2010 of $11.0 million of accrued costs related
to litigation against us and an unconsolidated entity in which we had an investment, due to
settlement of the litigation for an amount that was less than we had previously estimated.
32
INTEREST AND OTHER INCOME
For fiscal 2011 and 2010, interest and other income was $23.4 million and $28.3 million,
respectively. The decrease in interest and other income in fiscal 2011 was primarily due to a
decline of $9.1 million of retained customer deposits in fiscal 2011, as compared to fiscal 2010,
offset, in part, by increased management fee income, an increase in interest income and a profit
participation received in fiscal 2011 from the sale of a non-core asset in fiscal 2009, as compared to fiscal
2010.
EXPENSES RELATED TO EARLY RETIREMENT OF DEBT
In fiscal 2011, we purchased $55.1 million of our senior notes in the open market at various prices
and expensed
$3.8 million related to the premium paid on, and other debt redemption costs of, our senior notes.
In fiscal 2010, we purchased $45.5 million of our senior notes in open market purchases at various
prices and expensed $1.2 million related to the premium paid and other debt redemption costs of our
senior notes and the write-off of the unamortized costs related to our revolving credit facility
that was terminated in October 2010.
LOSS BEFORE INCOME TAXES
For fiscal 2011, we reported a loss before income tax benefit of $29.4 million, as compared to a
loss before income tax benefit of $117.2 million in fiscal 2010.
INCOME TAX BENEFIT
We recognized a $69.2 million tax benefit in fiscal 2011. Based upon the federal statutory rate of
35%, our tax benefit would have been $10.3 million. The difference between the tax benefit
recognized and the tax benefit based on the federal statutory rate was due primarily to the
reversal of $52.3 million of previously accrued taxes on uncertain tax positions that were resolved
during fiscal 2011, a reversal of prior valuation allowances of $25.7 million that were no longer
needed, an increase of deferred tax assets, net, of $25.9 million and a tax benefit for state
income taxes, net of federal benefit of $1.0 million, offset, in part, by $43.9 million of net new
deferred tax valuation allowance and $3.1 million of accrued interest and penalties.
We recognized a $113.8 million tax benefit in fiscal 2010. Based upon the federal statutory rate of
35%, our tax benefit would have been $41.0 million. The difference between the tax benefit
recognized and the tax benefit based on the federal statutory rate was due primarily to the
reversal of prior tax provisions of $39.5 million due to the expiration of statutes and
settlements, a reversal of prior valuation allowances of $128.6 million that were no longer needed,
and a tax benefit for state income taxes, net of federal benefit of $3.8 million offset, in part,
by an increase in unrecognized tax benefit of $35.6 million, and a net new deferred tax valuation
allowance of $55.5 million and $9.3 million of accrued interest and penalties.
The large reversal of valuation allowances previously recognized in fiscal 2010 was due to our
expected recovery of certain deferred tax assets through our ability to carryback fiscal 2010 tax
losses to prior years and receive a refund of the applicable federal taxes. The recovery of
deferred tax assets principally related to inventory impairments and impairments of investments in
and advances to unconsolidated entities recognized for income tax purposes in fiscal 2010 that were
recognized for book purposes in prior years. See Critical Accounting Policies Income Taxes
Valuation Allowance, above, for information regarding the valuation allowances against our net
deferred tax assets.
FISCAL 2010 COMPARED TO FISCAL 2009
RESULTS OF OPERATIONS
In fiscal 2010, we recognized $1.49 billion of revenues and a net loss of $3.4 million, as compared
to $1.76 billion of revenues and a net loss of $755.8 million in fiscal 2009. In fiscal 2010 and
fiscal 2009, we recognized $115.3 million and $465.4 million of inventory impairments and
write-offs, respectively. In fiscal 2010, we recognized an income tax benefit of $113.8 million, as
compared to an income tax provision of $259.4 million in fiscal 2009. In addition, we recognized
$11.3 million of joint venture impairment charges and write-offs in fiscal 2009.
33
REVENUES AND COST OF REVENUES
Revenues in fiscal 2010 were lower than those in fiscal 2009 by approximately $260.5 million, or
14.8%. This decrease was attributable to a 10.9% decrease in the number of homes delivered and a
4.4% decrease in the average price of the homes delivered. The decrease in the number of homes
delivered in fiscal 2010 was primarily due to a 25.2% decline in the number of homes in backlog at
October 31, 2009, as compared to October 31, 2008, offset, in part, by a 6.3% increase in the
number of net contracts signed in fiscal 2010, as compared to fiscal 2009. The 4.4% decrease in the
average price of the homes delivered in fiscal 2010, as compared to fiscal 2009, was due to a shift
in product mix to lower priced product, offset, in part, by a decrease in sales incentives, as a
percentage of the homes gross sales price, given on homes closed in fiscal 2010, as compared to
fiscal 2009. Average sales incentives given on homes delivered in fiscal 2010 amounted to
approximately $82,600 per home or 12.7% of the gross price of the home delivered, as compared to
approximately $93,200 per home or 13.6% of the gross price of the home delivered in fiscal 2009.
The decrease in per home sales incentives in fiscal 2010, as compared to fiscal 2009, was primarily
due to lower sales incentives provided on contracts in backlog at October 31, 2009, as compared to
value of sales incentives on contracts in backlog at October 31, 2008, and the decrease in sales
incentives given on contracts signed in fiscal 2010 that were delivered in fiscal 2010, as compared
to contracts signed in fiscal 2009 and delivered in fiscal 2009.
Cost of revenues as a percentage of revenues was 92.1% in fiscal 2010, as compared to 111.2% in
fiscal 2009. In fiscal 2010 and 2009, we recognized inventory impairment charges and write-offs of
$115.3 million and $465.4 million, respectively. Interest cost as a percentage of revenues was 5.1%
in fiscal 2010, as compared to 4.5% in fiscal 2009. The higher interest cost as a percentage of
revenue was due to inventory generally being held for a longer
period of time, fewer qualifying assets to which interest can be allocated which resulted in higher
amounts of capitalized interest allocated to qualifying inventory, and lower average prices of
homes delivered. Cost of revenues as a percentage of revenues, excluding impairments and interest,
was 79.7% of revenues in fiscal 2010, as compared to 80.2% in fiscal 2009. This decline was
primarily due to lower incentives given on homes delivered and lower overhead and closing costs,
offset, in part, by higher cost of land, land improvement and house construction costs.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (SG&A)
SG&A expense decreased by $50.0 million, or 16.0%, in fiscal 2010, as compared to fiscal 2009. As a
percentage of revenues, SG&A was 17.6% in fiscal 2010, as compared to 17.8% in fiscal 2009. The
reduction in SG&A expense in fiscal 2010, as compared to fiscal 2009, was due primarily to lower
compensation and related costs, reduced advertising, promotion and model operating costs, reduced
insurance costs and a decrease in the write-off of deferred marketing costs related to closed
communities.
INTEREST EXPENSE
Interest incurred on average homebuilding indebtedness in excess of average qualified inventory is
charged directly to the statement of operations in the period incurred. Interest expensed directly
to the statement of operations in fiscal 2010 was $22.8 million, as compared to $7.9 million in
fiscal 2009 due to the lower amounts of qualified inventory.
INCOME (LOSS) FROM UNCONSOLIDATED ENTITIES
In fiscal 2010, we recognized $23.5 million of income from unconsolidated entities, as compared to
a $7.5 million loss in fiscal 2009. The loss in fiscal 2009 included $11.3 million of impairment
charges that we recognized on two of our investments in unconsolidated entities. In the fourth
quarter of fiscal 2010, we reversed $11.0 million of accrued costs related to litigation against us
and an unconsolidated entity in which we had an investment, due to settlement of the litigation for
an amount that was less than we had previously estimated.
INTEREST AND OTHER INCOME
Interest and other income were $28.3 million in fiscal 2010 and $41.9 million in fiscal 2009. The
decrease in interest and other income in fiscal 2010, as compared to fiscal 2009, was primarily due
to declines in fiscal 2010, as compared to fiscal 2009, of $10.6 million of retained customer
deposits and $3.4 million in interest income.
34
EXPENSES RELATED TO EARLY RETIREMENT OF DEBT
In fiscal 2010, we purchased $45.5 million of our senior notes in open market purchases at various
prices and expensed $1.2 million related to the premium paid and other debt redemption costs of our
senior notes and the write-off of the unamortized costs related to our revolving credit facility
that was terminated in October 2010.
In fiscal 2009, we redeemed $295.1 million principal amount of senior subordinated notes, conducted
a tender offer for $200.0 million principal amount of senior notes and incurred $13.7 million of
expenses related to the redemption and the tender offer, representing the call premium, the
write-off of unamortized debt issuance costs and costs incurred to complete the tender offer.
LOSS BEFORE INCOME TAX (BENEFIT) PROVISION
In fiscal 2010 and 2009, we reported a loss before income tax (benefit) provision of $117.2 million
and $496.5 million, respectively.
INCOME TAX (BENEFIT) PROVISION
In fiscal 2010 and 2009, we recognized an income tax benefit of $113.8 million and an income tax
provision of $259.4 million, respectively. Excluding the valuation allowances recognized against
our federal and state deferred tax assets in fiscal 2010 and 2009 and recoveries of previously
recognized valuation allowances, we recognized a tax benefit in fiscal 2010 and 2009 of $40.7
million and $198.9 million, respectively.
In fiscal 2010 and 2009, we recognized $55.4 million and $458.3 million of valuation allowance,
respectively. In addition, in fiscal 2010, we reversed $128.6 million of valuation allowances
previously recognized. The decline in the valuation allowances recognized in fiscal 2010, as
compared to fiscal 2009, was due primarily to the decline in the amount of inventory impairments
and impairments of investments in and advances to unconsolidated entities recognized in fiscal
2010, as compared to fiscal 2009. The reversal of valuation allowances previously recognized in
fiscal 2010 is due to our expected recovery of certain deferred tax assets through our ability to
carryback fiscal 2010 tax losses to prior years and receive a refund of the applicable federal
taxes. The recovery of deferred tax assets principally related to inventory impairments and
impairments of investments in and advances to unconsolidated entities recognized for income tax
purposes in fiscal 2010 that were recognized for book purposes in prior years. See Critical
Accounting Policies Income Taxes Valuation Allowance, above, for information regarding the
valuation allowances against our net deferred tax assets.
Excluding valuation adjustments, the difference in the effective tax rate for fiscal 2010, as
compared to fiscal 2009, was primarily due to: (a) the reversal in fiscal 2010 of $39.5 million of
accruals against potential tax assessments, which were no longer needed due to our settlement of
various federal and state audits and the expiration of the
applicable statute of limitations for federal and state tax purposes, as compared to $77.3 million
in fiscal 2009; (b) the recording of $35.6 million of unrecognized tax benefits in fiscal 2010, as
compared to $39.5 million in fiscal 2009; (c) the recognition of $9.3 million of interest and
penalties in fiscal 2010, as compared to $6.8 million of interest and penalties recognized in
fiscal 2009; (d) the recognition of a $3.8 million state tax benefit, before valuation allowance,
in fiscal 2010, as compared to a $14.5 million state tax benefit, before valuation allowance,
recognized in fiscal 2009; and (e) the loss of tax credits recognized in years prior to fiscal 2009
that were lost due to the elimination of taxable income in those years as a result of the carryback
of fiscal 2009 tax losses. The increase in the interest and penalties recognized is due to the
increase in number of tax years open to assessment and potential additional taxes due. The decline
in the state tax benefit is due primarily to the decline in the reported loss in fiscal 2010, as
compared to fiscal 2009.
CAPITAL RESOURCES AND LIQUIDITY
Funding for our business has been and continues to be provided principally by cash flow from
operating activities before inventory additions, unsecured bank borrowings and the public debt and
equity markets. Prior to fiscal 2008, we used our cash flow from operating activities before
inventory additions, bank borrowings and the proceeds of public debt and equity offerings to
acquire additional land for new communities, fund additional expenditures for land development,
fund construction costs needed to meet the requirements of our backlog, invest in unconsolidated
entities, purchase our stock and repay debt. Between October 31, 2006 and October 31, 2011, we
increased our cash position (including marketable securities) by approximately $507.4 million and
reduced debt by approximately $692.9 million.
35
At October 31, 2011, we had $1.14 billion of cash and cash equivalents and marketable securities on
hand and approximately $784.7 million available under our $885 million revolving credit facility
which extends to October 2014. In fiscal 2011, cash flow provided by operating activities was $52.9
million. Cash provided by operating activities during fiscal 2011 was primarily from our earnings
before inventory and joint venture impairments, and depreciation and amortization, the receipt of a
$154.3 million federal income tax refund and a decrease in restricted cash, offset, in part, by an
increase in inventory. We used $74.5 million of cash in our investing activities in fiscal 2011,
primarily for investments made in non-performing loan portfolios and marketable securities and the
purchase of property, construction and office equipment, offset, in part, by the return of
investments from unconsolidated entities and from our non-performing loan portfolios. We also used
$111.1 million of cash in financing activities in fiscal 2011, principally for the $58.8 million
redemption of senior notes, the net repayment of $31.4 million of loans payable and the purchase of
$49.1 million of treasury stock, offset, in part by proceeds received from our stock-based benefit
plans. During November and December of 2011, we used $143.7 million of our available cash for the
acquisition of the CamWest assets, $57.6 million to fund the litigation settlement related to South Edge and $70.5 million to fund a new joint venture project in New
York City.
At October 31, 2010, we had $1.24 billion of cash and cash equivalents and marketable securities on
hand, a decrease of $672.0 million compared to October 31, 2009. In fiscal 2010, cash flow used in
operating activities was $146.3 million. Cash used in operating activities during fiscal 2010 was
primarily used to acquire inventory, collateralize approximately $54.4 million of letters of credit
and fund an increase in mortgage loan originations in excess of mortgage loan sales, offset, in
part, by cash flow generated from our earnings before inventory impairments, depreciation and
amortization. We used $151.4 million of cash in our investing activities in fiscal 2010, primarily
for investments in marketable securities and for investments made in our unconsolidated entities.
We also used $471.0 million of cash in financing activities in fiscal 2010, principally for the
repayment of our $331.7 million bank term loan, $94.0 million for the redemption of senior and
senior subordinated notes, and repayment of $103.2 million of other loans payable, offset, in part,
by $45.4 million of net borrowings on our mortgage company warehouse loan, $7.6 million of
proceeds from stock-based benefit plans and $5.0 million of tax benefits from stock-based
compensation.
In fiscal 2009, our cash and cash equivalents and marketable securities increased by $275.4
million. In fiscal 2009, cash flow provided by operating activities was $283.2 million. Cash
provided by operating activities was primarily generated by a reduction in inventory and the
receipt of income tax refunds on previously paid taxes, offset, in part, by the payment of accounts
payable and accrued liabilities and income tax payments made for the settlement of previously
accrued tax audits. The decreases in inventory, accounts payable and accrued liabilities were
primarily due to the decline in our business as previously discussed. We used $132.2 million of
cash in our investing activities in fiscal 2009, primarily for investments in marketable securities
and for investments in our unconsolidated entities. We also generated a net of $23.2 million of
cash from financing activities in fiscal 2009, principally from the issuance of an aggregate of
$650.0 million principal amount of senior notes in the public debt markets (net proceeds amounted
to $635.8 million), $637.0 million of other borrowings (primarily from our mortgage company
warehouse loan), and issuance of securities under our stock-based benefit plans and the tax
benefits of stock-based compensation, offset, in part, by the redemption of, and tender for, an
aggregate of $495.1 million principal amount of senior and senior subordinated notes, $12.0 million
of expenses related to such redemption and tender offer, and the repayment of $785.9 million of
other borrowings, of which $624.2 million was on our mortgage company warehouse loan.
In general, our cash flow from operating activities assumes that, as each home is delivered, we
will purchase a home site to replace it. Because we own several years supply of home sites, we do
not need to buy home sites immediately to replace those which we deliver. In addition, we generally
do not begin construction of our single-family detached homes until we have a signed contract with
the home buyer, although in the past several years, due to the high cancellation rate of customer
contracts and the increase in the number of attached-home communities from which we were operating
(all of the units of which are generally not sold prior to the commencement of construction), the
number of speculative homes in our inventory increased significantly. Should our business remain at
its current level or further decline, we believe that our inventory levels would continue to
decrease as we complete and deliver the homes under construction but do not commence construction
of as many new homes, as we complete the improvements on the land we already own and as we sell and
deliver the speculative homes that are currently in inventory, resulting in additional cash flow
from operations. In addition, we might continue to delay or curtail our acquisition of additional
land, as we have since the second half of fiscal 2006, which would further reduce our inventory
levels and cash needs. At October 31, 2011, we owned or controlled through options 37,497 home
sites, as compared to 34,852 at October 31, 2010, 31,917 at October 31, 2009 and 91,200 at April
30, 2006, the high point of our home sites owned and controlled. Of the 37,497 home sites owned or
controlled through options at October 31,
2011, we owned 30,199; of our owned home sites, significant improvements were completed on
approximately 11,693 of them.
36
At October 31, 2011, the aggregate purchase price of land parcels under option and purchase
agreements was approximately $564.4 million (including $12.5 million of land to be acquired from
joint ventures in which we have invested). Of the $564.4 million of land purchase commitments, we
had paid or deposited $38.0 million and, if we acquire all of these land parcels, we will be
required to pay an additional $526.4 million. The purchases of these land parcels are scheduled
over the next several years. We have additional land parcels under option that have been excluded
from the aforementioned aggregate purchase amounts since we do not believe that we will complete
the purchase of these land parcels and no additional funds will be required from us to terminate
these contracts.
During the past several years, we have had a significant amount of cash invested in either
short-term cash equivalents or short-term interest-bearing marketable securities. In addition, we
have made a number of investments in unconsolidated entities related to the acquisition and
development of land for future home sites or in entities that are constructing or converting
apartment buildings into luxury condominiums. Our investment activities related to marketable
securities and to investments in and distributions of investments from unconsolidated entities are
contained in the Consolidated Statements of Cash Flows under Cash flow used in investing
activities.
In October 2010, we entered into an $885 million revolving credit facility with 12 banks, which
extends to October 2014. The facility replaced a $1.89 billion credit facility consisting of a
$1.56 billion unsecured revolving credit facility and a $331.7 million term loan facility
with 30 banks, which extended to March 17, 2011. Prior to the closing of the new credit
facility, we repaid the term loan under the old credit facility from cash on hand. At October 31,
2011, we had no outstanding borrowings under the new credit facility but had outstanding letters of
credit of approximately $100.3 million. At October 31, 2011, interest would have been payable on
borrowings under our credit facility at 2.75% (subject to adjustment based upon our debt rating and
leverage ratios) above the Eurodollar rate or at other specified variable rates as selected by us
from time to time. We are obligated to pay an undrawn commitment fee of 0.50% (subject to
adjustment based upon our debt rating and leverage ratios) based on the average daily unused amount
of the credit facility. Under the terms of the credit facility, we are not permitted to allow our
maximum leverage ratio (as defined in the credit agreement) to exceed 1.75 to 1.00, and we are
required to maintain a minimum tangible net worth (as defined in the credit agreement) of
approximately $1.87 billion at October 31, 2011. At October 31, 2011, our leverage ratio was
approximately 0.18 to 1.00, and our tangible net worth was approximately $2.55 billion. Based upon
the minimum tangible net worth requirement, our ability to pay dividends and repurchase our common
stock was limited to an aggregate amount of approximately $680 million at October 31, 2011. In
addition, at October 31, 2011, we had $13.2 million of letters of credit outstanding with three
banks which were not part of our new credit facility; these letters of credit were collateralized
by $13.5 million of cash deposits.
We believe that we will be able to continue to fund our current operations and meet our contractual
obligations through a combination of existing cash resources and our existing sources of credit.
Due to the deterioration of the credit markets and the uncertainties that exist in the economy and
for home builders in general, we cannot be certain that we will be able to replace existing
financing or find sources of additional financing in the future.
CONTRACTUAL OBLIGATIONS
The following table summarizes our estimated contractual payment obligations at October 31, 2011
(amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
2013 2014 |
|
|
2015 2016 |
|
|
Thereafter |
|
|
Total |
|
Senior notes (a) |
|
$ |
99.3 |
|
|
$ |
711.3 |
|
|
$ |
413.4 |
|
|
$ |
734.8 |
|
|
$ |
1,958.8 |
|
Loans payable (a) |
|
|
39.0 |
|
|
|
26.2 |
|
|
|
9.4 |
|
|
|
68.8 |
|
|
|
143.4 |
|
Mortgage company
warehouse loan (a) |
|
|
58.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58.4 |
|
Operating lease obligations |
|
|
10.4 |
|
|
|
15.5 |
|
|
|
9.8 |
|
|
|
9.0 |
|
|
|
44.7 |
|
Purchase obligations (b) |
|
|
499.5 |
|
|
|
200.8 |
|
|
|
46.8 |
|
|
|
28.8 |
|
|
|
775.9 |
|
Retirement plans (c) |
|
|
3.0 |
|
|
|
13.0 |
|
|
|
14.6 |
|
|
|
43.8 |
|
|
|
74.4 |
|
Other |
|
|
0.6 |
|
|
|
1.0 |
|
|
|
0.7 |
|
|
|
|
|
|
|
2.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
710.2 |
|
|
$ |
967.8 |
|
|
$ |
494.7 |
|
|
$ |
885.2 |
|
|
$ |
3,057.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
(a) |
|
Amounts include estimated annual interest payments until maturity of the debt. Of the
amounts indicated,
$1.49 billion of the senior notes, $106.6 million of loans payable
and $57.4 million of the
mortgage
company warehouse loan were recorded on the October 31, 2011 Consolidated Balance Sheet. |
|
(b) |
|
Amounts represent our expected acquisition of land under options or purchase
agreements and the
estimated remaining amount of the contractual obligation for land development
agreements secured by
letters of credit and surety bonds. Amounts do not include the $143.7 million payment to acquire substantially all of the
assets of CamWest and the $57.6 million payment made to settle the South Edge litigation. |
|
(c) |
|
Amounts represent our obligations under our deferred compensation and supplemental
executive
retirement plan and our 401(k) salary deferral savings plans. Of the total amount indicated, $49.8 million was recorded on the October
31, 2011 Consolidated Balance Sheet. |
INFLATION
The long-term impact of inflation on us is manifested in increased costs for land, land
development, construction and overhead. We generally contract for land significantly before
development and sales efforts begin. Accordingly, to
the extent land acquisition costs are fixed, increases or decreases in the sales prices of homes
will affect our profits. Prior to the current downturn in the economy and the decline in demand for
homes, the sales prices of our homes generally increased. Because the sales price of each of our
homes is fixed at the time a buyer enters into a contract to purchase a home and because we
generally contract to sell our homes before we begin construction, any inflation of costs in excess
of those anticipated may result in lower gross margins. We generally attempt to minimize that
effect by entering into fixed-price contracts with our subcontractors and material suppliers for
specified periods of time, which generally do not exceed one year. The slowdown in the homebuilding
industry over the past several years and the decline in the sales prices of our homes, without a
corresponding reduction in the costs, have had an adverse impact on our profitability.
In general, housing demand is adversely affected by increases in interest rates and housing costs.
Interest rates, the length of time that land remains in inventory and the proportion of inventory
that is financed affect our interest costs. If we are unable to raise sales prices enough to
compensate for higher costs, or if mortgage interest rates increase significantly, affecting
prospective buyers ability to adequately finance home purchases, our revenues, gross margins and
net income would be adversely affected. Increases in sales prices, whether the result of inflation
or demand, may affect the ability of prospective buyers to afford new homes.
GEOGRAPHIC SEGMENTS
We operate in four geographic segments around the United States: the North, consisting of
Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey and New York; the
Mid-Atlantic, consisting of Delaware, Maryland, Pennsylvania and Virginia; the South, consisting of
Florida, North Carolina, South Carolina and Texas; and the West, consisting of Arizona, California,
Colorado and Nevada. In fiscal 2010, we discontinued the sale of homes in West Virginia and
Georgia. The operations of West Virginia and Georgia were immaterial to the Mid-Atlantic and South
geographic segments, respectively.
The following tables summarize information related to revenues, gross contracts signed, contract
cancellations, net contracts signed, total revenues and (loss) income before income taxes by
geographic segment for fiscal years 2011, 2010 and 2009, and information related to backlog at October 31, 2011, 2010 and 2009 and
assets by geographic segment at October 31, 2011 and 2010. (Note: Amounts in tables may not
add due to rounding)
Units Delivered and Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
Units |
|
|
Units |
|
|
Units |
|
|
(In millions) |
|
|
(In millions) |
|
|
(In millions) |
|
North |
|
|
718 |
|
|
|
774 |
|
|
|
983 |
|
|
$ |
381.6 |
|
|
$ |
407.7 |
|
|
$ |
585.3 |
|
Mid-Atlantic |
|
|
887 |
|
|
|
876 |
|
|
|
862 |
|
|
|
499.7 |
|
|
|
488.4 |
|
|
|
492.7 |
|
South |
|
|
522 |
|
|
|
498 |
|
|
|
544 |
|
|
|
285.0 |
|
|
|
264.3 |
|
|
|
288.2 |
|
West |
|
|
484 |
|
|
|
494 |
|
|
|
576 |
|
|
|
309.6 |
|
|
|
334.4 |
|
|
|
389.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,611 |
|
|
|
2,642 |
|
|
|
2,965 |
|
|
$ |
1,475.9 |
|
|
$ |
1,494.8 |
|
|
$ |
1,755.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38
Gross Contracts Signed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
Units |
|
|
Units |
|
|
Units |
|
|
(In millions) |
|
|
(In millions) |
|
|
(In millions) |
|
North |
|
|
817 |
|
|
|
813 |
|
|
|
847 |
|
|
$ |
466.6 |
|
|
$ |
418.6 |
|
|
$ |
442.8 |
|
Mid-Atlantic |
|
|
936 |
|
|
|
902 |
|
|
|
899 |
|
|
|
524.1 |
|
|
|
502.5 |
|
|
|
498.7 |
|
South |
|
|
713 |
|
|
|
551 |
|
|
|
559 |
|
|
|
416.6 |
|
|
|
297.1 |
|
|
|
281.6 |
|
West |
|
|
499 |
|
|
|
523 |
|
|
|
598 |
|
|
|
300.3 |
|
|
|
352.1 |
|
|
|
402.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,965 |
|
|
|
2,789 |
|
|
|
2,903 |
|
|
$ |
1,707.6 |
|
|
$ |
1,570.3 |
|
|
$ |
1,625.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contracts Cancelled:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
Units |
|
|
Units |
|
|
Units |
|
|
(In millions) |
|
|
(In millions) |
|
|
(In millions) |
|
North |
|
|
67 |
|
|
|
68 |
|
|
|
184 |
|
|
$ |
37.0 |
|
|
$ |
35.2 |
|
|
$ |
136.4 |
|
Mid-Atlantic |
|
|
37 |
|
|
|
44 |
|
|
|
102 |
|
|
|
19.8 |
|
|
|
23.4 |
|
|
|
74.7 |
|
South |
|
|
45 |
|
|
|
39 |
|
|
|
87 |
|
|
|
28.1 |
|
|
|
21.1 |
|
|
|
50.5 |
|
West |
|
|
32 |
|
|
|
33 |
|
|
|
80 |
|
|
|
17.9 |
|
|
|
18.6 |
|
|
|
59.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
181 |
|
|
|
184 |
|
|
|
453 |
|
|
$ |
102.8 |
|
|
$ |
98.3 |
|
|
$ |
321.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Contracts Signed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
Units |
|
|
Units |
|
|
Units |
|
|
(In millions) |
|
|
(In millions) |
|
|
(In millions) |
|
North |
|
|
750 |
|
|
|
745 |
|
|
|
663 |
|
|
$ |
429.6 |
|
|
$ |
383.4 |
|
|
$ |
306.4 |
|
Mid-Atlantic |
|
|
899 |
|
|
|
858 |
|
|
|
797 |
|
|
|
504.3 |
|
|
|
479.1 |
|
|
|
424.0 |
|
South |
|
|
668 |
|
|
|
512 |
|
|
|
472 |
|
|
|
388.5 |
|
|
|
276.0 |
|
|
|
231.1 |
|
West |
|
|
467 |
|
|
|
490 |
|
|
|
518 |
|
|
|
282.4 |
|
|
|
333.5 |
|
|
|
343.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,784 |
|
|
|
2,605 |
|
|
|
2,450 |
|
|
$ |
1,604.8 |
|
|
$ |
1,472.0 |
|
|
$ |
1,304.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contract Cancellation Rates:
(as a percentage of gross contracts signed, based on units and dollars)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
Units |
|
|
Units |
|
|
Units |
|
|
$ |
|
|
$ |
|
|
$ |
|
North |
|
|
8.2 |
% |
|
|
8.4 |
% |
|
|
21.7 |
% |
|
|
7.9 |
% |
|
|
8.4 |
% |
|
|
30.8 |
% |
Mid-Atlantic |
|
|
4.0 |
% |
|
|
4.9 |
% |
|
|
11.3 |
% |
|
|
3.8 |
% |
|
|
4.7 |
% |
|
|
15.0 |
% |
South |
|
|
6.3 |
% |
|
|
7.1 |
% |
|
|
15.6 |
% |
|
|
6.8 |
% |
|
|
7.1 |
% |
|
|
17.9 |
% |
West |
|
|
6.4 |
% |
|
|
6.3 |
% |
|
|
13.4 |
% |
|
|
6.0 |
% |
|
|
5.3 |
% |
|
|
14.8 |
% |
Total |
|
|
6.1 |
% |
|
|
6.6 |
% |
|
|
15.6 |
% |
|
|
6.0 |
% |
|
|
6.3 |
% |
|
|
19.8 |
% |
Backlog at October 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
Units |
|
|
Units |
|
|
Units |
|
|
(In millions) |
|
|
(In millions) |
|
|
(In millions) |
|
North |
|
|
553 |
|
|
|
521 |
|
|
|
550 |
|
|
$ |
307.4 |
|
|
$ |
259.3 |
|
|
$ |
283.6 |
|
Mid-Atlantic |
|
|
487 |
|
|
|
475 |
|
|
|
493 |
|
|
|
288.9 |
|
|
|
284.4 |
|
|
|
293.6 |
|
South |
|
|
442 |
|
|
|
296 |
|
|
|
282 |
|
|
|
263.2 |
|
|
|
159.7 |
|
|
|
148.0 |
|
West |
|
|
185 |
|
|
|
202 |
|
|
|
206 |
|
|
|
121.6 |
|
|
|
148.7 |
|
|
|
149.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,667 |
|
|
|
1,494 |
|
|
|
1,531 |
|
|
$ |
981.1 |
|
|
$ |
852.1 |
|
|
$ |
874.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39
Revenues and (Loss) Income Before Taxes:
The following table summarizes by geographic segment total revenues and (loss) income before income
taxes for each of the years ended October 31, 2011, 2010 and 2009 ($ amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before |
|
|
|
Revenues |
|
|
income taxes |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
North |
|
$ |
381.6 |
|
|
$ |
407.7 |
|
|
$ |
585.3 |
|
|
$ |
42.5 |
|
|
$ |
(2.3 |
) |
|
$ |
(103.3 |
) |
Mid-Atlantic |
|
|
499.7 |
|
|
|
488.4 |
|
|
|
492.7 |
|
|
|
57.6 |
|
|
|
33.9 |
|
|
|
(25.0 |
) |
South |
|
|
285.0 |
|
|
|
264.3 |
|
|
|
288.2 |
|
|
|
(25.9 |
) |
|
|
(35.2 |
) |
|
|
(49.4 |
) |
West |
|
|
309.6 |
|
|
|
334.4 |
|
|
|
389.1 |
|
|
|
(27.1 |
) |
|
|
(11.9 |
) |
|
|
(209.0 |
) |
Corporate and other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(76.5 |
) |
|
|
(101.7 |
) |
|
|
(109.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,475.9 |
|
|
$ |
1,494.8 |
|
|
$ |
1,755.3 |
|
|
$ |
(29.4 |
) |
|
$ |
(117.2 |
) |
|
$ |
(496.5 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate and other is comprised principally of general corporate expenses such as the offices of
the Executive
Chairman, Chief Executive Officer and President, and the corporate finance, accounting, audit, tax,
human
resources, risk management, marketing and legal groups, directly expensed interest, offset in part
by interest
income, income from our ancillary businesses and income from a number of our unconsolidated
entities.
Total Assets:
Total assets for each of the Companys geographic segments at October 31, 2011 and 2010 are shown
in the table below ($ amounts in millions).
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
North |
|
$ |
1,060.2 |
|
|
$ |
961.3 |
|
Mid-Atlantic |
|
|
1,235.9 |
|
|
|
1,161.5 |
|
South |
|
|
760.1 |
|
|
|
693.8 |
|
West |
|
|
650.8 |
|
|
|
712.4 |
|
Corporate and other |
|
|
1,348.2 |
|
|
|
1,642.6 |
|
|
|
|
|
|
|
|
Total |
|
$ |
5,055.2 |
|
|
$ |
5,171.6 |
|
|
|
|
|
|
|
|
Corporate and other is comprised principally of cash and cash equivalents, marketable securities,
income tax
refund recoverable and the assets of the Companys manufacturing facilities and mortgage
subsidiary.
FISCAL 2011 COMPARED TO FISCAL 2010
North
Revenues in fiscal 2011 were lower than those for fiscal 2010 by $26.1 million, or 6.4%. The
decrease in revenues was primarily attributable to a 7.2% decrease in the number of homes
delivered. The decrease in the number of homes delivered in the fiscal 2011 period, as compared to
the fiscal 2010 period, was primarily due to a lower backlog at October 31, 2010, as compared to
October 31, 2009 and a reduction in the number of units closed at several of our high-rise
communities where unit availability has dwindled.
The value of net contracts signed in fiscal 2011 was $429.6 million, a 12.1% increase from the
$383.4 million of net contracts signed during fiscal 2010. This increase was primarily due to an
11.3% increase in the average value of each net contract. The increase in the average sales price
of net contracts signed in fiscal 2011, as compared to fiscal 2010, was primarily attributable to a
shift in the number of contracts signed to more expensive areas and/or products in fiscal 2011, as
compared fiscal 2010.
For the year ended October 31, 2011, we reported income before income taxes of $42.5 million, as
compared to a $2.3 million loss for fiscal 2010. The increase in income in fiscal 2011 was primarily attributable to a decrease in impairment charges in fiscal 2011 of $25.6
million, as compared to fiscal 2010, an increase in income from unconsolidated entities of $19.5
million in fiscal 2011, as compared to fiscal 2010, and lower costs on homes delivered in fiscal
2011 than those delivered in fiscal 2010, offset, in part, by higher SG&A expenses and a decline in
retained customer deposits in fiscal 2011, as compared to fiscal 2010. In fiscal 2011 and 2010, we
recognized inventory impairment charges of $3.8 million and $29.4 million, respectively. The
increase in income
from unconsolidated entities in fiscal 2011 was due principally to income generated from two of our
high-rise construction joint ventures which commenced delivery of units in the second and third
quarters of fiscal 2010 and the recovery of an investment in an unconsolidated entity that we had
previously impaired.
40
Mid-Atlantic
Revenues in fiscal 2011 were higher than those of fiscal 2010 by
$11.3 million, or 2.3%. This
increase was attributable to a 1.3% increase in the number of homes delivered and a 1.1% increase
in the average price of the homes delivered. The increase in the number of homes delivered in
fiscal 2011, as compared to fiscal 2010, was primarily due a higher number of net contracts signed
in the first six-months of fiscal 2011, as compared to the first six months of fiscal 2010, offset,
in part, by a lower backlog at October 31, 2010, as compared to October 31, 2009. The increase in
the average price of the homes delivered in the fiscal 2011 period, as compared to the fiscal 2010
period, was primarily related to a shift in the number of homes delivered to more expensive
products and/or locations.
The value of net contracts signed in fiscal 2011
increased by $25.2 million, or 5.3%, from the
value of net contracts signed in fiscal 2010. The increase was due to a 4.8% increase in the number
of contracts signed and a 0.5% increase in the average value of each net contract signed. The
increase in the number of net contracts signed in fiscal 2011, as compared to fiscal 2010, was
primarily due to an increase of 22.3% in the number of net contracts signed, primarily in Virginia,
in the three months ended October 31, 2011, as compared to the three months ended October 31, 2010.
We reported income before income taxes for fiscal 2011 and 2010 of $57.6 million and $33.9 million,
respectively. The increase in the income before income taxes was primarily due to a decrease in the
cost of revenues in fiscal 2011, as compared to fiscal 2010. The decrease in the cost of revenues
was primarily due to lower costs of the homes delivered in fiscal 2011 than those delivered in
fiscal 2010 and lower impairment charges in fiscal 2011, as compared to fiscal 2010. The lower
costs were due to the delivery of fewer quick-delivery homes in the fiscal 2011 period, as compared
to the fiscal 2010 period, as our supply of such homes has dwindled, and to reduced sales
incentives in general on the homes delivered in fiscal 2011, as compared to fiscal 2010. Generally,
we give higher sales incentives on quick-delivery homes than on our to-be-built homes. In addition,
reduced costs were realized in the fiscal 2011 period because fewer homes were delivered from
certain higher cost communities in fiscal 2011, as compared to the fiscal 2010 period, as these
communities closed out. We recognized inventory impairment charges of $4.3 million and $11.0
million for fiscal 2011 and 2010, respectively.
South
Revenues in fiscal 2011 were higher than those in fiscal 2010 by $20.7 million, or 7.8%. This
increase was attributable to a 4.8% increase in the number of homes delivered and a 2.9% increase
in the average price of the homes delivered. The increase in the number of homes delivered in
fiscal 2011, as compared to fiscal 2010, was primarily due to the increased number of communities
that we were delivering from in fiscal 2011, as compared to fiscal 2010. The increase in the
average price of the homes delivered in fiscal 2011, as compared to fiscal 2010, was primarily
attributable to a shift in the number of homes delivered, to more expensive areas and/or products
in fiscal 2011, as compared to fiscal 2010.
In fiscal 2011, the value of net contracts signed increased by $112.5 million, or 40.8%, as
compared to fiscal 2010. The increase was attributable to increases of 30.5% and 7.9% in the number
and average value of net contracts signed, respectively. The increase in the number of net
contracts signed in fiscal 2011, as compared to fiscal 2010, was primarily due to an increase in
the number of selling communities in fiscal 2011, as compared to fiscal 2010. The increase in the
average sales price of net contracts signed was primarily due to a shift in the number of contracts
signed to more expensive areas and/or products in fiscal 2011, as compared to fiscal 2010.
For fiscal 2011 and 2010, we reported losses before income taxes of $25.9 million and $35.2
million, respectively. The decline in the loss before income taxes was primarily due to lower
impairment charges in fiscal 2011 of $16.3 million, as compared to fiscal 2010, and lower costs on
homes delivered in fiscal 2011 than those delivered in fiscal 2010, offset, in part, by an increase
in the loss from unconsolidated entities of $15.6 million in fiscal 2011, as compared to fiscal
2010. Cost of revenues as a percentage of revenues, excluding impairments, was 78.2% of revenues
in fiscal 2011, as compared to 80.4% in fiscal 2010. This decrease in fiscal 2011, as compared to
fiscal 2010, was due primarily to lower sales incentives, primarily on quick-delivery homes, in
fiscal 2011, as compared to fiscal 2010. The increase in the loss from unconsolidated entities was
primarily due to $15.2 million of impairment charges that we recognized on one of our investments.
41
West
Revenues in fiscal 2011 were lower than those in fiscal 2010 by $24.8 million, or 7.4%. The
decrease in revenues was attributable to a 5.5% decrease in the average sales price of the homes
delivered and a 2.0% decrease in the number of homes delivered. The decrease in the average price
of the homes delivered was primarily due to a shift in the number of homes delivered to less
expensive products and/or locations, primarily in Arizona and Nevada, in fiscal 2011, as compared
to fiscal 2010.
The value of net contracts signed during fiscal 2011 decreased $51.1 million, or 15.3%, as compared
to fiscal 2010. This decrease was due to an 11.2% decrease in the average value of each net
contract signed and a 4.7% decrease in the number of net contracts signed. The decrease in the
average sales price of net contracts signed was primarily due to a shift in the number of contracts
signed to less expensive areas and/or products in fiscal 2011, as compared to fiscal 2010. The
decrease in the number of net contracts signed was due to an 11.5% decline in the number of selling
communities in fiscal 2011, as compared to fiscal 2010, offset, in part, by an increase in housing
demand in Arizona in fiscal 2011, as compared to fiscal 2010.
We reported losses before income taxes for fiscal 2011 and 2010 of $27.1 million and $11.9 million,
respectively. The increase in the loss before income taxes was primarily due to a decrease in
income from unconsolidated entities of $35.9 million in fiscal 2011, as compared to fiscal 2010,
offset, in part, by lower inventory impairment charges and lower cost of revenues, excluding
impairments, in fiscal 2011, as compared to fiscal 2010. The increase in the loss from
unconsolidated entities was primarily due to $25.7 million of impairment charges that we recognized
on one of our investments in unconsolidated entities in fiscal 2011 and the reversal of $11.0 million in
fiscal 2010 of accrued costs related to litigation against us and an unconsolidated entity in which
we had an investment, due to settlement of the litigation for an amount that was less than we
previously estimated. In fiscal 2011 and fiscal 2010, we recognized inventory impairment charges
and write-offs of $22.9 million and $37.7 million, respectively. Cost of revenues as a percentage
of revenues, excluding impairments, was 75.9% in fiscal 2011, as compared to 78.4% in
fiscal 2010. The decrease in cost of revenues, excluding inventory impairment charges, as a
percentage of revenue in fiscal 2011, as compared to fiscal 2010, was due primarily to the delivery
of fewer quick-delivery homes in fiscal 2011, as compared to fiscal 2010, as our supply of such
homes has dwindled, and to reduced sales incentives on quick-delivery homes delivered in fiscal
2011, as compared to fiscal 2010. Generally, we give higher sales incentives on quick-delivery
homes than on our to-be-built homes.
Other
For fiscal 2011 and 2010, other loss before income taxes was $76.5 million and $101.7 million,
respectively. The decrease in the loss in fiscal 2011, as compared to fiscal 2010, was primarily
due to a decrease of $21.2 million of interest directly expensed in fiscal 2011, as compared to
fiscal 2010, and an increase of $7.2 million of income recognized from our Gibraltar operations in
fiscal 2011, as compared to fiscal 2010, offset, in part, by an increase of $2.6 million of costs
related to the repurchase of our senior notes in open market transactions, in fiscal 2011, as
compared to fiscal 2010.
FISCAL 2010 COMPARED TO FISCAL 2009
North
Revenues for the year ended October 31, 2010 were lower than those for the year ended October 31,
2009 by $177.6 million, or 30.3%. The decrease in revenues was attributable to a 21.3% decrease in
the number of homes delivered and a 11.5% decrease in the average price of the homes delivered. The
decrease in the number of homes delivered in fiscal 2010, as compared to fiscal 2009, was primarily
due to our lower backlog at October 31, 2009, as compared to October 31, 2008. The decline in
backlog at October 31, 2009, as compared to October 31, 2008, was due primarily to an 11.2%
decrease in the number of net contracts signed in fiscal 2009 over fiscal 2008. The decrease in the
average price of the homes delivered in the year ended October 31, 2010, as compared to fiscal
2009, was primarily due to a shift in the number of homes delivered to less expensive products
and/or locations and higher sales incentives given on the homes delivered in fiscal 2010 as
compared to fiscal 2009.
The value
of net contracts signed in the year ended October 31, 2010 was
$383.4 million, a 25.1%
increase from the $306.4 million of net contracts signed during the year ended October 31, 2009.
This increase was primarily due to a 12.4% increase in the number of net contracts signed and an
11.4% increase in the average value of each net contract. The increase in the number of net
contracts signed in fiscal 2010, as compared to fiscal 2009, was primarily due to a decrease in the
number of contracts cancelled in the year ended October 31, 2010, as compared to the year ended
October 31, 2009, and an improvement in housing demand in the first two quarters of fiscal 2010, as
compared to fiscal 2009. The increase in the average sales price of net contracts signed in fiscal
2010, as compared to fiscal 2009, was primarily attributable to a decrease in cancellations in fiscal 2010 at one of
our high-rise communities located in a New Jersey urban market, which had higher average prices
than our typical home. The average sales price of gross contracts signed in the year ended October
31, 2010 was $514,800, a 1.5% decrease from the $522,800 average sales price of gross contracts
signed during the year ended October 31, 2009.
42
We reported losses before income taxes of $2.3 million in the year ended October 31, 2010, as
compared to $103.3 million in fiscal 2009. The decrease in the loss was primarily due to lower cost
of revenues as a percentage of revenues, lower selling, general and administrative expenses in the
year ended October 31, 2010, as compared to the year ended October 31, 2009, and $12.7 million of
income recognized from unconsolidated entities in fiscal 2010, as compared to $2.5 million of loss
recognized from unconsolidated entities in fiscal 2009. Cost of revenues before interest as a
percentage of revenues was 89.4% in fiscal 2010, as compared to 104.7% in fiscal 2009. The lower
cost of revenues was primarily the result of lower impairment charges in fiscal 2010, as compared
to fiscal 2009, partially offset by increased sales incentives given to home buyers on the homes
delivered. We recognized inventory impairment charges of $29.4 million in fiscal 2010, as compared
to $145.4 million in fiscal 2009. As a percentage of revenues, higher sales incentives increased
cost of revenues by approximately 2.1% in the year ended October 31, 2010, as compared to fiscal
2009. The loss from unconsolidated entities in fiscal 2009 included a $6.0 million impairment
charge related to one of the unconsolidated entities.
Mid-Atlantic
For the year ended October 31, 2010, revenues were lower than those for fiscal 2009 by $4.3
million, or 0.9%, primarily due to a 2.5% decrease in the average sales price of the homes
delivered, offset, in part, by a 1.6% increase in the number of homes delivered. The decrease in
the average price of the homes delivered in fiscal 2010, as compared to fiscal 2009, was primarily
related to a shift in the number of homes delivered to less expensive products and/or locations.
The increase in the number of homes delivered in the year ended October 31, 2010, as compared to
the year ended October 31, 2009, was primarily due to a 41.7% increase in the number of gross
contracts signed and a decline of 75.8% in the number of contracts canceled in the first three
months of fiscal 2010, as compared to the comparable period of fiscal 2009. The increased number of
contracts signed early in fiscal 2010 and the reduced number of contracts canceled from that years
beginning backlog allowed us to deliver more units in fiscal 2010 than in fiscal 2009.
The value of net contracts signed during the year ended October 31, 2010 increased by $55.1
million, or 13.0%, from the year ended October 31, 2009. The increase was due to a 7.7% increase in
the number of net contracts signed and a 5.0% increase in the average value of each net contract
signed. The increase in the number of net contracts signed was due primarily to a decrease in the
number of contracts cancelled in fiscal 2010, as compared to fiscal 2009. The increase in the
average value of each net contract signed was primarily due to cancellations of higher priced homes
in fiscal 2009, as compared to cancellations of lower priced homes in fiscal 2010.
We reported income before income taxes for the year ended October 31, 2010 of $33.9 million as
compared to a loss before income taxes in fiscal 2009 of $25.0 million. The increase in the income
before income taxes was primarily due to lower impairment charges and lower selling, general and
administrative expenses, in the twelve months ended October 31, 2010, as compared to the twelve
months ended October 31, 2009. We recognized inventory impairment charges of $11.0 million in
fiscal 2010, as compared to $59.7 million in fiscal 2009.
South
Revenues during the year ended October 31, 2010 were lower than those in fiscal 2009 by $23.9
million, or 8.3%. This decrease was attributable to an 8.5% decrease in the number of homes
delivered, offset, in part, by a 0.2% increase in the average price of the homes delivered. The
decrease in the number of homes delivered in fiscal 2010, as compared to fiscal 2009, was primarily
due to lower backlog at October 31, 2009, as compared to October 31, 2008. The decline in backlog
at October 31, 2009, as compared to October 31, 2008, was due primarily to a 28.2% decrease in the
number of net contracts signed in fiscal 2009 over fiscal 2008.
In fiscal 2010, the value of net contracts signed increased by $45.0 million, or 19.5%, as compared
to fiscal 2009. The increase was attributable to increases of 8.5% and 10.1% in the number and
average value of net contracts signed, respectively. The increase in the number of net contracts
signed in fiscal 2010, as compared to fiscal 2009, was primarily due to a decrease in the number of
contract cancellations from 87 in fiscal 2009 to 39 in fiscal 2010. The increase in the average
sales price of net contracts signed was primarily due to a decrease in the number of cancellations
in fiscal 2010, as compared to fiscal 2009, which had a higher average sales price, and to a shift
in the number of contracts signed to more expensive areas and/or products in fiscal 2010, as
compared to fiscal 2009.
43
We reported losses before income taxes for the years ended October 31, 2010 and 2009 of $35.2
million and $49.4 million, respectively. The decline in the loss before income taxes was primarily
due to lower impairment charges and lower selling, general and administrative costs in fiscal 2010,
as compared to fiscal 2009, offset, in part, by lower revenues in fiscal 2010, as compared to
fiscal 2009. Impairment charges decreased from $52.8 million in the year ended October 31, 2009 to
$37.2 million in the year ended October 31, 2010.
West
Revenues in the year ended October 31, 2010 were lower than those in the year ended October 31,
2009 by $54.8 million, or 14.1%. The decrease in revenues was attributable to a 14.2% decrease in
the number of homes delivered, offset in part, by a 0.2% increase in the average price of homes
delivered. The decrease in the number of homes delivered in fiscal 2010 was primarily attributable
to lower backlog at October 31, 2009, as compared to October 31, 2008. The increase in the average
price of the homes delivered was primarily due to lower sales incentives given on the homes
delivered in fiscal 2010, as compared to fiscal 2009, partially offset, by a shift in the number of
homes delivered to less expensive products and/or locations in fiscal 2010, as compared to fiscal
2009.
The value of net contracts signed during the twelve months ended October 31, 2010 decreased $9.7
million, or 2.8%, as compared to fiscal 2009. This decrease was due to a 5.4% decrease in the
number of net contracts signed, offset in part, by a 2.7% increase in the average value of each net
contract signed. The decrease in the number of net contracts signed was primarily due to a 28%
decline in the number of selling communities in fiscal 2010, as compared to fiscal 2009, partially
offset by a decrease in the number of contracts canceled in fiscal 2010, as compared to fiscal
2009. The increase in the average sales price of net contracts signed was primarily due to a shift
in the number of contracts signed in more expensive areas and/or product in fiscal 2010, as
compared to fiscal 2009.
We reported losses before income taxes in fiscal 2010 of $11.9 million, as compared to $209.0
million in fiscal 2009. The decrease in the loss before income taxes was primarily due to lower
impairment charges, lower selling, general and administrative expenses and decreased sales
incentives given to home buyers on homes delivered in fiscal 2010, as compared to fiscal 2009, and
income of $10.7 million recognized from unconsolidated entities in fiscal 2010, as compared to a
$5.0 million loss recognized from unconsolidated entities in fiscal 2009, offset, in part, by a
shift in product mix of homes delivered to lower margin product or areas. We recognized inventory
impairment charges of $37.7 million and $207.5 million in the years ended October 31, 2010 and
2009, respectively. As a percentage of revenues, lower sales incentives decreased cost of revenues
by approximately 5.1% in fiscal 2010, as compared to fiscal 2009. The income from unconsolidated
entities in fiscal 2010 included a reversal of $11.0 million of accrued costs related to litigation
against us and an unconsolidated entity in which we had an investment, due to settlement of the
litigation for an amount that was less than we had previously estimated. The loss from
unconsolidated entities in fiscal 2009 included a $5.3 million impairment charge related to one of
the unconsolidated entities.
Corporate and Other
Other loss before income taxes for the year ended October 31, 2010 was
$101.7 million, a decrease
of $8.1 million from the $109.8 million loss before income taxes reported for the year ended
October 31, 2009. This decrease was primarily the result of lower unallocated selling, general and
administrative expenses of $14.9 million in fiscal 2010, as compared to fiscal 2009, and $13.7
million of expenses related to the early retirement of debt in fiscal 2009, as compared to $1.2
million in fiscal 2010, offset, in part, by a $14.9 million increase in interest directly expensed
in fiscal 2010, as compared to fiscal 2009, and a $3.3 million decline in interest income in fiscal
2010, as compared to fiscal 2009. Interest expensed directly was $22.8 million and $7.9 million in
fiscal 2010 and 2009, respectively. See Fiscal 2010 Compared to Fiscal 2009 -Interest Expense for
additional information on interest directly expensed.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk primarily due to fluctuations in interest rates. We utilize both
fixed-rate and variable-rate debt. For fixed-rate debt, changes in interest rates generally affect
the fair market value of the debt instrument, but not our earnings or cash flow. Conversely, for
variable-rate debt, changes in interest rates generally do not affect the fair market value of the
debt instrument but do affect our earnings and cash flow. We do not have the obligation to prepay
fixed-rate debt prior to maturity and, as a result, interest rate risk and changes in fair market
value should not have a significant impact on such debt until we are required to refinance such
debt.
44
At October 31, 2011, our debt obligations, principal cash flows by scheduled maturity,
weighted-average interest rates and estimated fair value were as follows ($ amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-Rate Debt |
|
|
Variable-Rate Debt (a) |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
Average |
|
|
|
|
|
|
Average |
|
|
|
|
|
|
|
Interest |
|
|
|
|
|
|
Interest |
|
Fiscal Year of Maturity |
|
Amount |
|
|
Rate (%) |
|
|
Amount |
|
|
Rate (%) |
|
2012 |
|
$ |
35,268 |
|
|
|
3.51 |
|
|
$ |
57,559 |
|
|
|
3.49 |
|
2013 |
|
|
294,592 |
|
|
|
6.29 |
|
|
|
150 |
|
|
|
0.27 |
|
2014 |
|
|
271,819 |
|
|
|
4.94 |
|
|
|
150 |
|
|
|
0.27 |
|
2015 |
|
|
301,722 |
|
|
|
5.15 |
|
|
|
150 |
|
|
|
0.27 |
|
2016 |
|
|
1,805 |
|
|
|
5.84 |
|
|
|
150 |
|
|
|
0.27 |
|
Thereafter |
|
|
687,876 |
|
|
|
7.94 |
|
|
|
12,095 |
|
|
|
0.18 |
|
Discount |
|
|
(8,399 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,584,683 |
|
|
|
6.50 |
|
|
$ |
70,254 |
|
|
|
2.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value at October 31, 2011 |
|
$ |
1,700,115 |
|
|
|
|
|
|
$ |
70,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Based upon the amount of variable-rate debt outstanding at October 31, 2011 and holding the
variable-rate
debt balance constant, each 1% increase in interest rates would increase the interest
incurred by us by
approximately $0.7 million per year. |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Reference is made to the financial statements, listed in Item 15(a)(1)), which appear at pages F-1
through
F-50 of this report and which are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE
Not applicable.
ITEM 9A. CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Any controls and procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the control system are met. Further, the
design of a control system must reflect the fact that there are resource constraints and the
benefits of controls must be considered relative to costs. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that all control
issues and instances of fraud, if any, within the company have been detected. Because of the
inherent limitations in a cost-effective control system, misstatements due to error or fraud may
occur and not be detected. However, our disclosure controls and procedures are designed to provide
reasonable assurance of achieving their objectives.
Our chief executive officer and chief financial officer, with the assistance of management,
evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, (the Exchange Act)
as of the end of the period covered by this report (the Evaluation Date). Based on that
evaluation, our chief executive officer and chief financial officer concluded that, as of the
Evaluation Date, our disclosure controls and procedures were effective to provide reasonable
assurance that information required to be disclosed in our reports under the Exchange Act is
recorded, processed, summarized and reported within the time periods specified in the Securities
and Exchange Commissions rules and forms, and that such information is accumulated and
communicated to management, including our chief executive officer and chief financial officer, as
appropriate to allow timely decisions regarding required disclosure.
45
Managements Annual Report on Internal Control Over Financial Reporting and Attestation Report of
the Independent Registered Public Accounting Firm
Managements Annual Report on Internal Control Over Financial Reporting and the report of our
independent registered public accounting firm on internal control over financial reporting are
incorporated herein from pages F-1 and F-2, respectively.
Changes in Internal Control Over Financial Reporting
There has not been any change in our internal control over financial reporting (as that term is
defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our quarter ended October
31, 2011 that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table includes information with respect to all persons serving as executive officers
as of the date of this Form 10-K. All executive officers serve at the pleasure of our Board of
Directors.
|
|
|
|
|
|
|
Name |
|
Age |
|
Positions |
Robert I. Toll
|
|
|
70 |
|
|
Executive Chairman of the Board and Director |
|
|
|
|
|
|
|
Douglas C. Yearley,
Jr.
|
|
|
51 |
|
|
Chief Executive Officer and Director |
|
|
|
|
|
|
|
Zvi Barzilay
|
|
|
65 |
|
|
President, Chief Operating Officer and Director |
|
|
|
|
|
|
|
Martin P. Connor
|
|
|
47 |
|
|
Senior Vice President, Chief Financial Officer and Treasurer |
Robert I. Toll, with his brother Bruce E. Toll, the Vice Chairman of the Board and a Director of
Toll Brothers, Inc., co-founded our predecessors operations in 1967. Robert I. Toll served as
Chairman of the Board and Chief Executive Officer from our inception until June 2010, when he
assumed the new position of Executive Chairman of the Board.
Douglas C. Yearley, Jr. joined us in 1990 as assistant to the Chief Executive Officer with
responsibility for land acquisitions. He has been an officer since 1994, holding the position of
Senior Vice President from January 2002 until November 2005, the position of Regional President
from November 2005 until November 2009, and the position of Executive Vice President from November
2009 until June 2010 when he was promoted to his current position of Chief Executive Officer. Mr.
Yearley was elected a Director of Toll Brothers, Inc. in June 2010.
Zvi Barzilay joined us as a project manager in 1980 and has been an officer since 1983. Mr.
Barzilay was elected a Director of Toll Brothers, Inc. in 1994. He has held the position of Chief
Operating Officer since May 1998 and the position of President
since November 1998. Effective
December 31, 2011, Mr. Barzilay will be retiring from his position of President and Chief Operating
Officer and resigning as a Director of Toll Brothers, Inc.
Martin P. Connor joined the Company as Vice President and Assistant Chief Financial Officer in
December 2008 and was elected a Senior Vice President in December 2009. Mr. Connor was appointed to
his current position of Senior Vice President, Chief Financial Officer and Treasurer in September
2010. From June 2008 to December 2008, Mr. Connor was President of Marcon Advisors LLC, a finance
and accounting consulting firm which he founded. From October 2006 to June 2008, Mr. Connor was
Chief Financial Officer and Director of Operations for ONeill Properties, a diversified commercial
real estate developer in the Mid-Atlantic area. Prior to October 2006, he spent over 20 years at
Ernst & Young LLP as an Audit and Advisory Business Services Partner, responsible for the real
estate practice for Ernst & Young LLP in the Philadelphia marketplace. During the period from 1998
to 2005, he served on the Toll Brothers, Inc. engagement.
46
Richard T. Hartman, currently one of our Regional Presidents, has been appointed to the positions
of Executive Vice President and Chief Operating Officer, effective January 1, 2012. Mr. Hartman,
age 54, joined us in 1980 and served in various positions with us, including as Regional President
since 2005.
The other information required by this item will be included in the Election of Directors and
Corporate Governance sections of our Proxy Statement for the 2012 Annual Meeting of Stockholders
(the 2012 Proxy Statement) and is incorporated herein by reference.
Code of Ethics
The Company has adopted a Code of Ethics for Principal Executive Officer and Senior Financial
Officers (Code of Ethics) that applies to the Companys principal executive officer, principal
financial officer, principal accounting officer, controller and persons performing similar
functions designated by the Companys Board of Directors. The Code of Ethics is available on the
Companys internet website at www.tollbrothers.com under Investor Relations: Company Information:
Corporate Governance. If the Company were to amend or waive any provision of its Code of Ethics,
the Company intends to satisfy its disclosure obligations with respect to any such waiver or
amendment by posting such information on its internet website set forth above rather than by filing
a Form 8-K.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item will be included in the Executive Compensation section of
our 2012 Proxy Statement and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Except as set forth below, the information required in this item will be included in the Voting
Securities and Beneficial Ownership section of our 2012 Proxy Statement and is incorporated herein
by reference.
The following table provides information as of October 31, 2011 with respect to compensation plans
(including individual compensation arrangements) under which our equity securities are authorized
for issuance.
Equity Compensation Plan Information
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of securities to |
|
|
|
|
|
|
Number of securities |
|
|
|
be issued upon exercise |
|
|
Weighted-average |
|
|
remaining available for future |
|
|
|
of outstanding |
|
|
exercise price |
|
|
issuance under equity compensation |
|
|
|
options, warrants |
|
|
of outstanding |
|
|
plans (excluding securities |
|
|
|
and rights |
|
|
options, warrants |
|
|
reflected in column (a)) |
|
Plan Category |
|
(in thousands) |
|
|
and rights |
|
|
(in thousands) |
|
|
|
(a) |
|
|
(b) |
|
|
(c) |
|
Equity compensation
plans approved by
security holders |
|
|
12,868 |
|
|
$ |
20.94 |
|
|
|
6,712 |
|
Equity compensation
plans not approved by
security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
12,868 |
|
|
$ |
20.94 |
|
|
|
6,712 |
|
|
|
|
|
|
|
|
|
|
|
|
ITEM 13. CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information required in this item will be included in the Corporate Governance and Certain
Transactions sections of our 2012 Proxy Statement and is incorporated herein by reference.
47
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required in this item will be included in the Ratification of the Re-Appointment
of Independent Registered Public Accounting Firm section of the 2012 Proxy Statement and is
incorporated herein by reference.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) Financial Statements and Financial Statement Schedules
|
|
|
|
|
Page |
1. Financial Statements |
|
|
|
|
|
Managements Annual Report on Internal Control Over Financial Reporting |
|
F-1 |
|
|
|
Reports of Independent Registered Public Accounting Firm |
|
F-2 |
|
|
|
Consolidated Statements of Operations for the Years Ended
October 31, 2011, 2010 and 2009 |
|
F-4 |
|
|
|
Consolidated
Balance Sheets as of October 31, 2011 and 2010 |
|
F-5 |
|
|
|
Consolidated Statements of Changes in Equity for the
Years Ended October 31, 2011, 2010 and 2009 |
|
F-6 |
|
|
|
Consolidated Statements of Cash Flows for the Years Ended
October 31, 2011, 2010 and 2009 |
|
F-7 |
|
|
|
Notes to Consolidated Financial Statements |
|
F-8 |
2. Financial Statement Schedules
None
Financial statement schedules have been omitted because they are either not applicable or the
required information is included in the financial statements or notes hereto.
(b) Exhibits
The following exhibits are included with this report or incorporated herein by reference:
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
3.1
|
|
Second Restated Certificate of Incorporation of the Registrant, dated September 8, 2005, is
hereby incorporated by reference to Exhibit 3.1 of the Registrants Form 10-Q for the quarter
ended July 31, 2005. |
|
|
|
3.2
|
|
Certificate of Amendment of the Second Restated Certificate of Incorporation of the Registrant,
filed with
the Secretary of State of the State of Delaware, is hereby incorporated by reference to
Exhibit 3.1 of the
Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on
March 22, 2010. |
|
|
|
3.3
|
|
Certificate of Amendment of the Second Restated Certificate of Incorporation of the
Registrant
dated as of March 16, 2011 is hereby incorporated by reference to Exhibit 3.1 of the Registrants
Current Report on Form 8-K filed with the Securities and Exchange Commission on March 18,
2011. |
48
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
3.4
|
|
By-laws of the Registrant, as Amended and Restated June 11, 2008, are hereby incorporated by
reference to Exhibit 3.1 of the Registrants Current Report on Form 8-K filed with the
Securities and
Exchange Commission on June 13, 2008. |
|
|
|
3.5
|
|
Amendment to the By-laws of the Registrant, dated as of September 24, 2009, is hereby
incorporated by
reference to Exhibit 3.1 of the Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 24, 2009. |
|
|
|
3.6
|
|
Amendment to the By-laws of the Registrant, dated as of June 15, 2011 is hereby incorporated
by
reference to Exhibit 3.1 of the Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on June 16, 2011. |
|
|
|
4.1
|
|
Specimen Stock Certificate is hereby incorporated by reference to Exhibit 4.1 of the
Registrants Form
10-K for the fiscal year ended October 31, 1991. |
|
|
|
4.2
|
|
Indenture dated as of November 22, 2002 among Toll Brothers Finance Corp., as issuer, the
Registrant, as
guarantor, and Bank One Trust Company, NA, as Trustee, including form of guarantee, is hereby
incorporated by reference to Exhibit 4.1 of the Registrants Current Report on Form 8-K filed
with the
Securities and Exchange Commission on November 27, 2002. |
|
|
|
4.3
|
|
Authorizing Resolutions, dated as of November 15, 2002, relating to $300,000,000
principal amount of
6.875% Senior Notes of Toll Brothers Finance Corp. due 2012, guaranteed on a senior basis by
the
Registrant and certain subsidiaries of the Registrant is hereby incorporated by reference to
Exhibit 4.2 of the Registrants Form 8-K filed with the Securities and Exchange Commission
on November 27, 2002. |
|
|
|
4.4
|
|
Authorizing Resolutions, dated as of September 3, 2003, relating to $250,000,000
principal amount of
5.95% Senior Notes of Toll Brothers Finance Corp. due 2013, guaranteed on a senior basis by
the
Registrant and certain subsidiaries of the Registrant is hereby incorporated by reference to
Exhibit 4.1 of
the Registrants Form 8-K filed with the Securities and Exchange Commission on September 29,
2003. |
|
|
|
4.5
|
|
Authorizing Resolutions, dated as of March 9, 2004, relating to $300,000,000 principal
amount of 4.95%
Senior Notes of Toll Brothers Finance Corp. due 2014, guaranteed on a senior basis by the
Registrant and
certain subsidiaries of the Registrant is hereby incorporated by reference to Exhibit 4.1 of
the Registrants
Current Report on Form 8-K filed with the Securities and Exchange Commission on April 1, 2004. |
|
|
|
4.6
|
|
Authorizing Resolutions, dated as of May 26, 2005, relating to $300,000,000 principal
amount of 5.15%
Senior Notes of Toll Brothers Finance Corp. due 2015, guaranteed on a senior basis by the
Registrant and
certain subsidiaries of the Registrant is hereby incorporated by reference to Exhibit 4.1 of
the Registrants
Current Report on Form 8-K filed with the Securities and Exchange Commission on June 8, 2005. |
49
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
4.7
|
|
First Supplemental Indenture dated as of May 1, 2003 by and among the parties listed on
Schedule A
thereto, and Bank One Trust Company, National Association, as Trustee, is hereby incorporated
by
reference to Exhibit 4.4 of the Registrants Registration Statement on Form S-4/A filed with
the Securities
and Exchange Commission on June 16, 2003, File Nos. 333-103931, 333-103931-01, 333-103931-02,
333-103931-03 and 333-103931-04. |
|
|
|
4.8
|
|
Second Supplemental Indenture dated as of November 3, 2003 by and among the parties listed on
Schedule A thereto, and Bank One Trust Company, National Association, as Trustee, is hereby
incorporated by reference to Exhibit 4.5 of the Registrants Registration Statement on Form
S-4/A filed with the Securities and Exchange Commission on November 5, 2003, File Nos.
333-109604, 333-109604-01, 333-109604-02,
333-109604-03 and 333-109604-04. |
|
|
|
4.9
|
|
Third Supplemental Indenture dated as of January 26, 2004 by and among the parties listed on
Schedule A thereto, and J.P. Morgan Trust Company, National Association, as successor Trustee,
is hereby incorporated by reference to Exhibit 4.1 of the Registrants Form 10-Q for the
quarter ended January 31, 2004. |
|
|
|
4.10
|
|
Fourth Supplemental Indenture dated as of March 1, 2004 by and among the parties listed on
Schedule A thereto, and J.P. Morgan Trust Company, National Association, as successor Trustee,
is hereby incorporated by reference to Exhibit 4.2 of the Registrants Form 10-Q for the
quarter ended January 31, 2004. |
|
|
|
4.11
|
|
Fifth Supplemental Indenture dated as of September 20, 2004 by and among the parties listed
on
Schedule A thereto, and J.P. Morgan Trust Company, National Association, as successor
Trustee, is hereby
incorporated by reference to Exhibit 4.9 of the Registrants Form 10-K for the fiscal year
ended October 31,
2004. |
|
|
|
4.12
|
|
Sixth Supplemental Indenture dated as of October 28, 2004 by and among the parties
listed on
Schedule A thereto, and J.P. Morgan Trust Company, National Association, as successor Trustee,
is hereby
incorporated by reference to Exhibit 4.10 of the Registrants Form 10-K for the fiscal year
ended
October 31, 2004. |
|
|
|
4.13
|
|
Seventh Supplemental Indenture dated as of October 31, 2004 by and among the parties
listed on
Schedule A thereto, and J.P. Morgan Trust Company, National Association, as successor Trustee,
is hereby
incorporated by reference to Exhibit 4.11 of the Registrants Form 10-K for the fiscal year
ended
October 31, 2004. |
|
|
|
4.14
|
|
Eighth Supplemental Indenture dated as of January 31, 2005 by and among the parties listed
on Schedule A thereto, and J.P. Morgan Trust Company, National Association, as successor
Trustee, is hereby incorporated by reference to Exhibit 4.1 of the Registrants Form 10-Q for
the quarter ended April 30, 2005. |
|
|
|
4.15
|
|
Ninth Supplemental Indenture dated as of June 6, 2005 by and among the parties listed on
Schedule A thereto, and J.P. Morgan Trust Company, National Association, as successor Trustee,
is hereby incorporated by reference to Exhibit 4.1 of the Registrants Form 10-Q for the
quarter ended July 31, 2005. |
|
|
|
4.16
|
|
Tenth Supplemental Indenture dated as of August 1, 2005 by and among the parties listed on
Schedule A thereto, and J.P. Morgan Trust Company, National Association, as successor Trustee,
is hereby incorporated by reference to Exhibit 4.13 of the Registrants Registration Statement
on Form S-4 filed with the Securities and Exchange Commission on September 29, 2005, File Nos.
333-128683, 333-128683-01, 333-128683-02, 333-128683-03 and 333-128683-04. |
50
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
4.17
|
|
Eleventh Supplemental Indenture dated as of January 31, 2006 by and among the parties
listed on Schedule I thereto, and J.P. Morgan Trust Company, National Association, as
successor Trustee, is hereby incorporated by reference to Exhibit 4.1 of the Registrants Form
10-Q for the quarter ended April 30, 2006. |
|
|
|
4.18
|
|
Twelfth Supplemental Indenture dated as of April 30, 2006 by and among the parties listed on
Schedule I thereto, and J.P. Morgan Trust Company, National Association, as successor Trustee,
is hereby incorporated by reference to Exhibit 4.1 of the Registrants Form 10-Q for the
quarter ended July 31, 2006. |
|
|
|
4.19
|
|
Thirteenth Supplemental Indenture dated as of July 31, 2006 by and among the parties listed
on Schedule I thereto, and J.P. Morgan Trust Company, National Association, as successor
Trustee, is hereby incorporated by reference to Exhibit 4.16 of the Registrants Form 10-K for
the year ended October 31, 2006. |
|
|
|
4.20
|
|
Fourteenth Supplemental Indenture dated as October 31, 2006 by and among the parties listed
on Schedule I thereto, and The Bank of New York Trust Company, N.A. as successor Trustee,
is hereby incorporated by reference to Exhibit 4.1 of the Registrants Form 10-Q for the
quarter ended April 30, 2007. |
|
|
|
4.21
|
|
Fifteenth Supplemental Indenture dated as of June 25, 2007 by and among the parties
listed
on Schedule I thereto, and The Bank of New York Trust Company, N.A. as successor Trustee,
is hereby incorporated by reference to Exhibit 4.1 of the Registrants Form 10-Q for the
quarter ended July 31, 2007. |
|
|
|
4.22
|
|
Sixteenth Supplemental Indenture dated as of June 27, 2007 by and among the parties
listed
on Schedule I thereto, and The Bank of New York Trust Company, N.A. as successor Trustee,
is hereby incorporated by reference to Exhibit 4.2 of the Registrants Form 10-Q for the
quarter ended July 31, 2007. |
|
|
|
4.23
|
|
Seventeenth Supplemental Indenture dated as of January 31, 2008, by and among the
parties listed on
Schedule A thereto, and The Bank of New York Trust Company, N.A. as successor Trustee, is
hereby
incorporated by reference to Exhibit 4.1 of the Registrants Form 10-Q for the quarter ended
April 30, 2009. |
|
|
|
4.24
|
|
Indenture, dated as of April 20, 2009, among Toll Brothers Finance Corp., the Registrant and
the other guarantors named therein and The Bank of New York Mellon, as trustee, is hereby
incorporated by reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed
with the Securities and Exchange Commission on April 24, 2009. |
|
|
|
4.25
|
|
Authorizing Resolutions, dated as of April 20, 2009, relating to the $400,000,000 principal
amount of 8.910% Senior Notes due 2017 of Toll Brothers Finance Corp. guaranteed on a Senior
Basis by the Registrant and certain of its subsidiaries, is hereby incorporated by reference
to Exhibit 4.2 to the Registrants Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 24, 2009. |
|
|
|
4.26
|
|
Form of Global Note for Toll Brothers Finance Corp.s 8.910% Senior Notes due 2017 is hereby
incorporated by reference to Exhibit 4.3 to the Registrants Current Report on Form 8-K filed
with the Securities and Exchange Commission on April 24, 2009. |
|
|
|
4.27
|
|
Authorizing Resolutions, dated as of September 22, 2009, relating to the $250,000,000
principal amount of 6.750% Senior Notes due 2019 of Toll Brothers Finance Corp. guaranteed on
a Senior Basis by the Registrant and certain of its subsidiaries, is hereby incorporated by
reference to Exhibit 4.1 to the Registrants Current Report on Form 8-K filed with the
Securities and Exchange Commission on September 22, 2009. |
|
|
|
4.28
|
|
Form of Global Note for Toll Brothers Finance Corp.s 6.750% Senior Notes due 2019 is hereby
incorporated by reference to Exhibit 4.2 to the Registrants Current Report on Form 8-K filed
with the Securities and Exchange Commission on September 22, 2009. |
51
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
4.29
|
|
Rights Agreement dated as of June 13, 2007, by and between the Registrant and American Stock
Transfer & Trust Company, as Rights Agent, is hereby incorporated by reference to Exhibit
4.1 to
the Registrants Current Report on Form 8-K filed with the Securities and Exchange
Commission
on June 18, 2007. |
|
|
|
10.1
|
|
Credit Agreement by and among First Huntingdon Finance Corp., the Registrant and the
lenders which
are parties thereto dated October 22, 2010, is hereby incorporated by reference to Exhibit
10.1 of the
Registrants Current Report on Form 8-K filed with the Securities and Exchange Commission on
October 27, 2010. |
|
|
|
10.2*
|
|
Toll Brothers, Inc. Employee Stock Purchase Plan (amended and restated effective January
1, 2008) is
hereby incorporated by reference to Exhibit 4.31 of the Registrants Form 10-K for the year
ended
October 31, 2007. |
|
|
|
10.3*
|
|
Toll Brothers, Inc. Stock Option and Incentive Stock Plan (1995) is hereby incorporated
by reference to
Exhibit 10.1 of the Registrants Form 10-Q for the quarter ended April 30, 1995. |
|
|
|
10.4*
|
|
Amendment to the Toll Brothers, Inc. Stock Option and Incentive Stock Plan (1995) dated
May 29, 1996
is hereby incorporated by reference to Exhibit 10.9 the Registrants Form 10-K for the fiscal
year ended
October 31, 1996. |
|
|
|
10.5*
|
|
Amendment to the Toll Brothers, Inc. Stock Option and Incentive Stock Plan (1995)
effective March 22,
2001 is hereby incorporated by reference to Exhibit 10.3 of the Registrants Form 10-Q for the
quarter ended July 31, 2001. |
|
|
|
10.6*
|
|
Amendment to the Toll Brothers, Inc. Stock Option and Incentive Stock Plan (1995)
effective
December 12, 2007 is hereby incorporated by reference to Exhibit 10.9 of the Registrants Form
10-K for
the year ended October 31, 2007. |
|
|
|
10.7*
|
|
Toll Brothers, Inc. Stock Incentive Plan (1998) is hereby incorporated by reference to
Exhibit 4 of the
Registrants Registration Statement on Form S-8 filed with the Securities and Exchange
Commission
on June 25, 1998, File No. 333-57645. |
|
|
|
10.8*
|
|
Amendment to the Toll Brothers, Inc. Stock Incentive Plan (1998) effective March 22, 2001
is hereby
incorporated by reference to Exhibit 10.4 of the
Registrants Form 10-Q for the quarter ended
July 31, 2001. |
|
|
|
10.9*
|
|
Amendment to the Toll Brothers, Inc. Stock Incentive Plan (1998) effective December 12,
2007 is hereby
incorporated by reference to Exhibit 10.4 of the Registrants Current Report on Form 8-K
filed with the Securities and Exchange Commission on March 18, 2008. |
52
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10.10*
|
|
Toll Brothers, Inc. Amended and Restated Stock Incentive Plan for Employees (2007)
(amended and
restated as of September 17, 2008, is hereby incorporated by reference to Exhibit 4.1 of the
Registrants
Amendment No. 1 to Toll Brothers, Inc.s Registration Statement on Form S-8 (No. 333-143367)
filed
with the Securities and Exchange Commission on October 29, 2008. |
|
|
|
10.11*
|
|
Toll Brothers, Inc. Amended and Restated Stock Incentive Plan for Non-Employee Directors
(2007)
(amended and restated as of September 17, 2008) is hereby incorporated by reference to Exhibit
4.1 of
the Registrants Amendment No. 1 to Toll Brothers,
Inc.s Registration Statement on Form S-8
(No. 333-144230) filed with the Securities and Exchange Commission on October 29, 2008. |
|
|
|
10.12*
|
|
Form of Non-Qualified Stock Option Grant pursuant to the Toll Brothers, Inc. Stock
Incentive Plan
for Employees (2007) is hereby incorporated by reference to
Exhibit 10.1 of the Registrants
Form 8-K filed with the Securities and Exchange Commission on December 19, 2007. |
|
|
|
10.13*
|
|
Form of Addendum to Non-Qualified Stock Option Grant pursuant to the Toll Brothers, Inc.
Stock
Incentive Plan for Employees (2007) is hereby incorporated by reference to Exhibit 10.3 of
the Registrants Form 10-Q for the quarter ended July 31, 2007. |
|
|
|
10.14*
|
|
Form of Stock Award Grant pursuant to the Toll Brothers, Inc. Stock Incentive Plan for
Employees (2007)
is hereby incorporated by reference to Exhibit 10.4 of the Registrants Form 10-Q for the
quarter ended
July 31, 2007. |
|
|
|
10.15*
|
|
Form of Restricted Stock Unit Award pursuant to the Toll Brothers, Inc. Amended and
Restated Stock Incentive Plan for Employees (2007) is hereby incorporated by reference to
Exhibit 10.19 of the Registrants Form 10-K for the period ended October 31, 2008. |
|
|
|
10.16*
|
|
Restricted Stock Unit Award to Robert I. Toll, dated December 19, 2008, pursuant to the
Toll Brothers, Inc. Amended and Restated Stock Incentive Plan for Employees (2007) is
incorporated by reference to Exhibit 10.20 of the Registrants Form 10-K for the period ended
October 31, 2008. |
|
|
|
10.17*
|
|
Restricted Stock Unit Award to Robert I. Toll, dated December 21, 2009, pursuant to the
Toll Brothers, Inc. Amended and Restated Stock Incentive Plan for Employees (2007) is
incorporated by reference to Exhibit 10.17 of the Registrants Form 10-K for the period ended
October 31, 2009. |
|
|
|
10.18*
|
|
Form of Non-Qualified Stock Option Grant pursuant to the Toll Brothers, Inc. Stock
Incentive Plan for
Non-Employee Directors (2007) is hereby incorporated by reference to Exhibit 10.2 of the
Registrants
Current Report on Form 8-K filed with the Securities and Exchange Commission on December 19,
2007. |
|
|
|
10.19*
|
|
Form of Addendum to Non-Qualified Stock Option Grant pursuant to the Toll Brothers, Inc.
Amended and
Restated Stock Incentive Plan for Non-Employee Directors (2007) is hereby incorporated by
reference to Exhibit 10.6 of the Registrants Form 10-Q for the quarter ended July 31, 2007. |
|
|
|
10.20*
|
|
Form of Stock Award Grant pursuant to the Toll Brothers, Inc. Stock Incentive Plan for
Non-Employee
Directors (2007) is hereby incorporated by reference to Exhibit 10.7 of the Registrants Form
10-Q for the
quarter ended July 31, 2007. |
|
|
|
10.21
|
|
Form of Stock Award Amendment pursuant to the Toll Brothers, Inc. Amended and Restated Stock
Incentive Plan for Non-Employee Directors (2007) is hereby incorporated by reference to
Exhibit 10.4 of
the Registrants Form 10-Q for the quarter ended January 31, 2010. |
|
|
|
10.22*
|
|
Toll Brothers, Inc. Cash Bonus Plan (amended and restated as of December 9, 2009) is
incorporated by reference to Exhibit 10.21 of the Registrants Form 10-K for the period ended
October 31, 2009. |
53
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
10.23*
|
|
Toll Brothers, Inc. Senior Officer Bonus Plan is hereby incorporated by reference to
Addendum C to Toll Brothers, Inc.s definitive proxy statement on Schedule 14A for the Toll
Brothers, Inc. 2010 Annual Meeting of Stockholders held on March 17, 2010 filed with the
Securities and Exchange Commission on February 1, 2010. |
|
|
|
10.24*
|
|
Toll Brothers, Inc. Supplemental Executive Retirement Plan (amended and restated
effective as of December 12, 2007) is hereby incorporated by reference to Exhibit 10.1 to the
Registrants Form 10-Q for the quarter ended July 31, 2010. |
|
|
|
10.25*
|
|
Agreement dated March 5, 1998 between the Registrant and Bruce E. Toll regarding Mr.
Tolls resignation and related matters is hereby incorporated by reference to Exhibit 10.2 to the
Registrants Form 10-Q for the quarter ended April 30, 1998. |
|
|
|
10.26*
|
|
Advisory and Non-Competition Agreement between the Registrant and Bruce E. Toll, dated as
of November 1, 2010, is incorporated by reference to Exhibit 10.34 of the Registrants Form
10-K for the period ended October 31, 2010. |
|
|
|
10.27*
|
|
Toll Bros., Inc. Non-Qualified Deferred Compensation Plan, amended and restated as of
November 1, 2008, is incorporated by reference to Exhibit 10.45 of the Registrants Form 10-K for the period
ended October 31, 2008. |
|
|
|
10.28*
|
|
Amendment Number 1 dated November 1, 2010 to the Toll Bros., Inc. Non-Qualified Deferred
Compensation Plan, amended and restated as of November 1, 2008, is incorporated by
reference to Exhibit 10.40 of the Registrants Form 10-K for the period ended October 31,
2010. |
|
|
|
10.29
|
|
Form of Indemnification Agreement between the Registrant and the members of its Board of
Directors, is hereby incorporated by reference to Exhibit 10.1 to the Registrants Current
Report on Form 8-K filed with the Securities and Exchange Commission on March 17, 2009. |
|
|
|
10.30*
|
|
Restricted Stock Unit Award to Douglas C. Yearley, Jr., dated December 20, 2010, pursuant
to the Toll Brothers, Inc. Amended and Restated Stock Incentive Plan for Employees (2007), is incorporated by reference to Exhibit 10.42 of the Registrants Form 10-K for the period ended October 31,
2010. |
|
|
|
10.31*
|
|
Restricted Stock Unit Award to Martin P. Connor, dated December 20, 2010, pursuant to the
Toll Brothers, Inc. Amended and Restated Stock Incentive Plan for Employees (2007), is incorporated
by reference to Exhibit 10.43 of the Registrants Form 10-K for the period ended October 31, 2010. |
|
|
|
10.32*
|
|
Restricted Stock Unit Award to Robert I. Toll, dated December 20, 2010, pursuant to the
Toll Brothers, Inc. Amended and Restated Stock Incentive Plan for Employees (2007), is incorporated by reference
to Exhibit 10.44 of the Registrants Form 10-K for the period ended October 31, 2010. |
|
|
|
10.33**
|
|
Form of Performance Based Restricted Stock Unit Award pursuant to the
Toll Brothers, Inc. Amended and Restated Stock Incentive Plan for Employees (2007), is filed herewith. |
|
|
|
12***
|
|
Statement re: Computation of Ratios of Earnings to Fixed Charges. |
|
|
|
21***
|
|
Subsidiaries of the Registrant. |
|
|
|
23.1***
|
|
Consent of Ernst & Young LLP, Independent Registered Public Accountant. |
|
|
|
23.2***
|
|
Consent of WeiserMazars LLP, Independent Registered Public Accountant. |
54
|
|
|
Exhibit |
|
|
Number |
|
Description |
|
|
|
31.1***
|
|
Certification of Douglas C. Yearley, Jr. pursuant to Section 302 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
31.2***
|
|
Certification of Martin P. Connor pursuant to Section 302 of the Sarbanes-Oxley Act of
2002. |
|
|
|
32.1***
|
|
Certification of Douglas C. Yearley, Jr. pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002. |
|
|
|
32.2***
|
|
Certification of Martin P. Connor pursuant to Section 906 of the Sarbanes-Oxley Act of
2002. |
|
|
|
99.1***
|
|
Financial Statements of TMF Kent Partners, LLC. |
|
|
|
99.2***
|
|
Financial Statements of KTL 303 LLC. |
|
|
|
101.INS***
|
|
XBRL Instance Document |
|
|
|
101.SCH***
|
|
XBRL Schema Document |
|
|
|
101.CAL***
|
|
XBRL Calculation Linkbase Document |
|
|
|
101.LAB***
|
|
XBRL Labels Linkbase Document |
|
|
|
101.PRE***
|
|
XBRL Presentation Linkbase Document |
|
|
|
101.DEF***
|
|
XBRL Definition Linkbase Document |
|
|
|
* |
|
This exhibit is a management contract or compensatory plan or arrangement required to be
filed as an exhibit
to this report. |
|
** |
|
This exhibit is a management contract or compensatory plan or arrangement required to be
filed as an exhibit to this report and is furnished electronically herewith. |
|
*** |
|
Furnished electronically herewith. |
55
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized, in the Township of Horsham, Commonwealth of
Pennsylvania on December 22, 2011.
|
|
|
|
|
|
TOLL BROTHERS, INC.
|
|
|
By: |
/s/ Douglas C. Yearly, Jr.
|
|
|
|
Douglas C. Yearley, Jr. |
|
|
|
Chief Executive Officer
(Principal Executive Officer) |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ Robert I. Toll
Robert I. Toll
|
|
Executive Chairman of the Board of Directors
|
|
December
22, 2011 |
|
|
|
|
|
/s/ Bruce E. Toll
Bruce E. Toll
|
|
Vice Chairman of the Board and Director
|
|
December
22, 2011 |
|
|
|
|
|
/s/ Douglas C. Yearley,
Jr.
Douglas C. Yearley, Jr.
|
|
Chief Executive Officer and Director
(Principal Executive Officer)
|
|
December
22, 2011 |
|
|
|
|
|
/s/ Zvi Barzilay
Zvi Barzilay
|
|
President, Chief Operating Officer and Director
|
|
December
22, 2011 |
|
|
|
|
|
/s/ Martin P. Connor
Martin P. Connor
|
|
Senior Vice President, Chief Financial Officer
and Treasurer (Principal Financial Officer)
|
|
December
22, 2011 |
|
|
|
|
|
/s/ Joseph R. Sicree
Joseph R. Sicree
|
|
Senior Vice President and Chief Accounting
Officer (Principal Accounting Officer)
|
|
December
22, 2011 |
|
|
|
|
|
/s/ Robert S. Blank
Robert S. Blank
|
|
Director
|
|
December
22, 2011 |
|
|
|
|
|
/s/ Edward G. Boehne
Edward G. Boehne
|
|
Director
|
|
December
22, 2011 |
|
|
|
|
|
/s/ Richard J. Braemer
Richard J. Braemer
|
|
Director
|
|
December
22, 2011 |
|
|
|
|
|
/s/ Christine N. Garvey
Christine N. Garvey
|
|
Director
|
|
December
22, 2011 |
|
|
|
|
|
/s/ Carl B. Marbach
Carl B. Marbach
|
|
Director
|
|
December
22, 2011 |
|
|
|
|
|
/s/ Stephen A. Novick
Stephen A. Novick
|
|
Director
|
|
December
22, 2011 |
|
|
|
|
|
/s/ Paul E. Shapiro
Paul E. Shapiro
|
|
Director
|
|
December
22, 2011 |
56
Managements Annual Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in the Securities Exchange Act Rule 13a-15(f).
Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles.
Internal control over financial reporting includes those policies and procedures that: (i) pertain
to the maintenance of records that in reasonable detail accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements. Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Under the supervision and with the participation of our management, including our principal
executive officer and our principal financial officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the framework in Internal
Control Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on this evaluation under the framework in Internal Control Integrated
Framework, our management concluded that our internal control over financial reporting was
effective as of October 31, 2011.
Our independent registered public accounting firm, Ernst & Young LLP, has issued its report, which
is included herein, on the effectiveness of our internal control over financial reporting.
F-1
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Toll Brothers, Inc.
We have audited Toll Brothers, Inc.s internal control over financial reporting as of October 31,
2011, based on criteria established in Internal ControlIntegrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Toll
Brothers, Inc.s management is responsible for maintaining effective internal control over
financial reporting, and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Managements Annual Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on the companys internal control
over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk,
and performing such other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Toll Brothers, Inc. maintained, in all material respects, effective internal
control over financial reporting as of October 31, 2011, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Toll Brothers, Inc. and subsidiaries as
of October 31, 2011 and 2010, and the related consolidated statements of operations, changes in
equity, and cash flows for each of the three years in the period ended October 31, 2011 of Toll
Brothers, Inc. and subsidiaries and our report dated December 22, 2011 expressed an unqualified
opinion thereon.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 22, 2011
F-2
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders of Toll Brothers, Inc.
We have audited the accompanying consolidated balance sheets of Toll Brothers, Inc. as of October
31, 2011 and 2010, and the related consolidated statements of operations, changes in equity, and
cash flows for each of the three years in the period ended October 31, 2011. These financial
statements are the responsibility of the Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material
respects, the consolidated financial position of Toll Brothers, Inc. at October 31, 2011 and 2010,
and the consolidated results of its operations, changes in equity and its cash flows for each of
the three years in the period ended October 31, 2011, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Toll Brothers Inc.s internal control over financial reporting as of October
31, 2011, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission and our report dated December 22,
2011 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Philadelphia, Pennsylvania
December 22, 2011
F-3
CONSOLIDATED STATEMENTS OF OPERATIONS
(Amounts in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
Revenues |
|
$ |
1,475,881 |
|
|
$ |
1,494,771 |
|
|
$ |
1,755,310 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
1,260,770 |
|
|
|
1,376,558 |
|
|
|
1,951,312 |
|
Selling, general and administrative |
|
|
261,355 |
|
|
|
263,224 |
|
|
|
313,209 |
|
Interest expense |
|
|
1,504 |
|
|
|
22,751 |
|
|
|
7,949 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,523,629 |
|
|
|
1,662,533 |
|
|
|
2,272,470 |
|
|
|
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(47,748 |
) |
|
|
(167,762 |
) |
|
|
(517,160 |
) |
Other: |
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income from unconsolidated entities |
|
|
(1,194 |
) |
|
|
23,470 |
|
|
|
(7,518 |
) |
Interest and other income |
|
|
23,403 |
|
|
|
28,313 |
|
|
|
41,906 |
|
Expenses related to early retirement of debt |
|
|
(3,827 |
) |
|
|
(1,208 |
) |
|
|
(13,693 |
) |
|
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
|
(29,366 |
) |
|
|
(117,187 |
) |
|
|
(496,465 |
) |
Income tax (benefit) provision |
|
|
(69,161 |
) |
|
|
(113,813 |
) |
|
|
259,360 |
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
39,795 |
|
|
$ |
(3,374 |
) |
|
$ |
(755,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.24 |
|
|
$ |
(0.02 |
) |
|
$ |
(4.68 |
) |
|
|
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.24 |
|
|
$ |
(0.02 |
) |
|
$ |
(4.68 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
167,140 |
|
|
|
165,666 |
|
|
|
161,549 |
|
Diluted |
|
|
168,381 |
|
|
|
165,666 |
|
|
|
161,549 |
|
See accompanying notes
F-4
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2011 |
|
|
2010 |
|
ASSETS |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
906,340 |
|
|
$ |
1,039,060 |
|
Marketable securities |
|
|
233,572 |
|
|
|
197,867 |
|
Restricted cash |
|
|
19,760 |
|
|
|
60,906 |
|
Inventory |
|
|
3,416,723 |
|
|
|
3,241,725 |
|
Property, construction and office equipment, net |
|
|
99,712 |
|
|
|
79,916 |
|
Receivables, prepaid expenses and other assets |
|
|
105,576 |
|
|
|
97,039 |
|
Mortgage loans receivable |
|
|
63,175 |
|
|
|
93,644 |
|
Customer deposits held in escrow |
|
|
14,859 |
|
|
|
21,366 |
|
Investments in and advances to unconsolidated entities |
|
|
126,355 |
|
|
|
198,442 |
|
Investments in non-performing loan portfolios and
foreclosed real estate |
|
|
69,174 |
|
|
|
|
|
Income tax refund recoverable |
|
|
|
|
|
|
141,590 |
|
|
|
|
|
|
|
|
|
|
$ |
5,055,246 |
|
|
$ |
5,171,555 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND EQUITY |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Loans payable |
|
$ |
106,556 |
|
|
$ |
94,491 |
|
Senior notes |
|
|
1,490,972 |
|
|
|
1,544,110 |
|
Mortgage company warehouse loan |
|
|
57,409 |
|
|
|
72,367 |
|
Customer deposits |
|
|
83,824 |
|
|
|
77,156 |
|
Accounts payable |
|
|
96,817 |
|
|
|
91,738 |
|
Accrued expenses |
|
|
521,051 |
|
|
|
570,321 |
|
Income taxes payable |
|
|
106,066 |
|
|
|
162,359 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
2,462,695 |
|
|
|
2,612,542 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
Stockholders equity |
|
|
|
|
|
|
|
|
Preferred stock, none issued |
|
|
|
|
|
|
|
|
Common stock, 168,675 and 166,413 shares issued
at October 31, 2011 and 2010, respectively |
|
|
1,687 |
|
|
|
1,664 |
|
Additional paid-in capital |
|
|
400,382 |
|
|
|
360,006 |
|
Retained earnings |
|
|
2,234,251 |
|
|
|
2,194,456 |
|
Treasury stock, at cost - 2,946 shares
and 5 shares at October 31,
2011 and 2010, respectively |
|
|
(47,065 |
) |
|
|
(96 |
) |
Accumulated other comprehensive loss |
|
|
(2,902 |
) |
|
|
(577 |
) |
|
|
|
|
|
|
|
Total stockholders equity |
|
|
2,586,353 |
|
|
|
2,555,453 |
|
Noncontrolling interest |
|
|
6,198 |
|
|
|
3,560 |
|
|
|
|
|
|
|
|
Total equity |
|
|
2,592,551 |
|
|
|
2,559,013 |
|
|
|
|
|
|
|
|
|
|
$ |
5,055,246 |
|
|
$ |
5,171,555 |
|
|
|
|
|
|
|
|
See accompanying notes,
F-5
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accum- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compre- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
|
hensive |
|
|
Non- |
|
|
|
|
|
|
Common |
|
|
Paid-In |
|
|
Retained |
|
|
Treasury |
|
|
Income |
|
|
Controlling |
|
|
Total |
|
|
|
Stock |
|
|
Capital |
|
|
Earnings |
|
|
Stock |
|
|
(Loss) |
|
|
Interest |
|
|
Equity |
|
|
|
Shares |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
Balance, November 1, 2008 |
|
|
160,369 |
|
|
|
1,604 |
|
|
|
282,090 |
|
|
|
2,953,655 |
|
|
|
(21 |
) |
|
|
325 |
|
|
|
|
|
|
|
3,237,653 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(755,825 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(755,825 |
) |
Purchase of treasury stock |
|
|
(79 |
) |
|
|
(1 |
) |
|
|
1 |
|
|
|
|
|
|
|
(1,473 |
) |
|
|
|
|
|
|
|
|
|
|
(1,473 |
) |
Exercise of stock options |
|
|
4,415 |
|
|
|
44 |
|
|
|
22,954 |
|
|
|
|
|
|
|
1,322 |
|
|
|
|
|
|
|
|
|
|
|
24,320 |
|
Employee benefit plan
issuances |
|
|
26 |
|
|
|
|
|
|
|
486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
486 |
|
Conversion of restricted
stock units to stock |
|
|
1 |
|
|
|
|
|
|
|
35 |
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
48 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
10,925 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,925 |
|
Issuance of restricted stock |
|
|
|
|
|
|
|
|
|
|
27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27 |
|
Formation of majority-
owned joint venture |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,283 |
|
|
|
3,283 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,962 |
) |
|
|
|
|
|
|
(2,962 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2009 |
|
|
164,732 |
|
|
|
1,647 |
|
|
|
316,518 |
|
|
|
2,197,830 |
|
|
|
(159 |
) |
|
|
(2,637 |
) |
|
|
3,283 |
|
|
|
2,516,482 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,374 |
) |
Purchase of treasury stock |
|
|
(31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(588 |
) |
|
|
|
|
|
|
|
|
|
|
(588 |
) |
Exercise of stock options |
|
|
1,684 |
|
|
|
17 |
|
|
|
33,638 |
|
|
|
|
|
|
|
620 |
|
|
|
|
|
|
|
|
|
|
|
34,275 |
|
Employee benefit plan
issuances |
|
|
24 |
|
|
|
|
|
|
|
435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
435 |
|
Conversion of restricted
stock units to stock |
|
|
3 |
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
31 |
|
|
|
|
|
|
|
|
|
|
|
92 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
9,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,332 |
|
Issuance of restricted stock |
|
|
1 |
|
|
|
|
|
|
|
22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
Other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,060 |
|
|
|
|
|
|
|
2,060 |
|
Capital contribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
277 |
|
|
|
277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2010 |
|
|
166,413 |
|
|
|
1,664 |
|
|
|
360,006 |
|
|
|
2,194,456 |
|
|
|
(96 |
) |
|
|
(577 |
) |
|
|
3,560 |
|
|
|
2,559,013 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,795 |
|
Purchase of treasury stock |
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(49,102 |
) |
|
|
|
|
|
|
|
|
|
|
(49,103 |
) |
Exercise of stock options |
|
|
2,236 |
|
|
|
23 |
|
|
|
23,156 |
|
|
|
|
|
|
|
1,940 |
|
|
|
|
|
|
|
|
|
|
|
25,119 |
|
Employee benefit plan
issuances |
|
|
15 |
|
|
|
|
|
|
|
285 |
|
|
|
|
|
|
|
126 |
|
|
|
|
|
|
|
|
|
|
|
411 |
|
Conversion of restricted
stock units to stock |
|
|
10 |
|
|
|
|
|
|
|
208 |
|
|
|
|
|
|
|
67 |
|
|
|
|
|
|
|
|
|
|
|
275 |
|
Stock-based compensation |
|
|
|
|
|
|
|
|
|
|
8,626 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,626 |
|
Issuance of restricted
stock and stock units |
|
|
1 |
|
|
|
|
|
|
|
8,102 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,102 |
|
Other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,325 |
) |
|
|
|
|
|
|
(2,325 |
) |
Capital contribution |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,638 |
|
|
|
2,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, October 31, 2011 |
|
|
168,675 |
|
|
|
1,687 |
|
|
|
400,382 |
|
|
|
2,234,251 |
|
|
|
(47,065 |
) |
|
|
(2,902 |
) |
|
|
6,198 |
|
|
|
2,592,551 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
F-6
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Cash flow provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
39,795 |
|
|
$ |
(3,374 |
) |
|
$ |
(755,825 |
) |
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
23,142 |
|
|
|
20,044 |
|
|
|
23,925 |
|
Stock-based compensation |
|
|
12,768 |
|
|
|
11,677 |
|
|
|
10,987 |
|
Excess tax benefits from stock-based compensation |
|
|
|
|
|
|
(4,954 |
) |
|
|
(24,817 |
) |
Impairments of investments in unconsolidated entities |
|
|
40,870 |
|
|
|
|
|
|
|
11,300 |
|
Income from unconsolidated entities |
|
|
(39,676 |
) |
|
|
(23,470 |
) |
|
|
(3,782 |
) |
Distributions of earnings from unconsolidated entities |
|
|
12,081 |
|
|
|
10,297 |
|
|
|
816 |
|
Income from non-performing loan portfolios |
|
|
(5,113 |
) |
|
|
|
|
|
|
|
|
Change in deferred tax asset |
|
|
(18,188 |
) |
|
|
60,697 |
|
|
|
(52,577 |
) |
Deferred tax valuation allowances |
|
|
18,188 |
|
|
|
(60,697 |
) |
|
|
458,280 |
|
Inventory impairments |
|
|
51,837 |
|
|
|
115,258 |
|
|
|
465,411 |
|
Change in fair value of mortgage loans receivable and
derivative instruments |
|
|
475 |
|
|
|
(970 |
) |
|
|
|
|
Expenses related to early retirement of debt |
|
|
3,827 |
|
|
|
1,208 |
|
|
|
13,693 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in inventory |
|
|
(215,738 |
) |
|
|
(140,344 |
) |
|
|
489,213 |
|
Origination of mortgage loans |
|
|
(630,294 |
) |
|
|
(628,154 |
) |
|
|
(571,158 |
) |
Sale of mortgage loans |
|
|
659,610 |
|
|
|
579,221 |
|
|
|
577,263 |
|
Decrease (increase) in restricted cash |
|
|
41,146 |
|
|
|
(60,906 |
) |
|
|
|
|
(Increase) decrease in receivables, prepaid
expenses and other assets |
|
|
(11,521 |
) |
|
|
(3,115 |
) |
|
|
20,045 |
|
Increase (decrease) in customer deposits |
|
|
13,175 |
|
|
|
(15,182 |
) |
|
|
(45,706 |
) |
Decrease in accounts payable and accrued expenses |
|
|
(28,899 |
) |
|
|
(38,598 |
) |
|
|
(149,065 |
) |
Decrease (increase) in income tax refund recoverable |
|
|
141,590 |
|
|
|
20,250 |
|
|
|
(161,840 |
) |
(Decrease) increase in current income taxes payable |
|
|
(56,225 |
) |
|
|
14,828 |
|
|
|
(22,972 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities |
|
|
52,850 |
|
|
|
(146,284 |
) |
|
|
283,191 |
|
|
|
|
|
|
|
|
|
|
|
Cash flow used in investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment net |
|
|
(9,553 |
) |
|
|
(4,830 |
) |
|
|
(2,712 |
) |
Purchase of marketable securities |
|
|
(452,864 |
) |
|
|
(157,962 |
) |
|
|
(101,324 |
) |
Sale and redemption of marketable securities |
|
|
408,831 |
|
|
|
60,000 |
|
|
|
|
|
Investment in and advances to unconsolidated entities |
|
|
(132 |
) |
|
|
(58,286 |
) |
|
|
(31,342 |
) |
Return of investments in unconsolidated entities |
|
|
43,309 |
|
|
|
9,696 |
|
|
|
3,205 |
|
Investment in non-performing loan portfolios and
foreclosed real estate |
|
|
(66,867 |
) |
|
|
|
|
|
|
|
|
Return of investments in non-performing loan portfolios
and foreclosed real estate |
|
|
2,806 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(74,470 |
) |
|
|
(151,382 |
) |
|
|
(132,173 |
) |
|
|
|
|
|
|
|
|
|
|
Cash flow (used in) provided by financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from issuance of senior notes |
|
|
|
|
|
|
|
|
|
|
635,765 |
|
Proceeds from loans payable |
|
|
921,251 |
|
|
|
927,233 |
|
|
|
636,975 |
|
Principal payments of loans payable |
|
|
(952,621 |
) |
|
|
(1,316,514 |
) |
|
|
(785,883 |
) |
Redemption of senior subordinated notes |
|
|
|
|
|
|
(47,872 |
) |
|
|
(296,503 |
) |
Redemption of senior notes |
|
|
(58,837 |
) |
|
|
(46,114 |
) |
|
|
(210,640 |
) |
Proceeds from stock-based benefit plans |
|
|
25,531 |
|
|
|
7,589 |
|
|
|
22,147 |
|
Excess tax benefits from stock-based compensation |
|
|
|
|
|
|
4,954 |
|
|
|
24,817 |
|
Purchase of treasury stock |
|
|
(49,102 |
) |
|
|
(588 |
) |
|
|
(1,473 |
) |
Change in noncontrolling interest |
|
|
2,678 |
|
|
|
320 |
|
|
|
(2,000 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(111,100 |
) |
|
|
(470,992 |
) |
|
|
23,205 |
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents |
|
|
(132,720 |
) |
|
|
(768,658 |
) |
|
|
174,223 |
|
Cash and cash equivalents, beginning of year |
|
|
1,039,060 |
|
|
|
1,807,718 |
|
|
|
1,633,495 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
906,340 |
|
|
$ |
1,039,060 |
|
|
$ |
1,807,718 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes
F-7
Notes to Consolidated Financial Statements
1. Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements include the accounts of Toll Brothers, Inc. (the
Company), a Delaware corporation, and its majority-owned subsidiaries. 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.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles (GAAP) requires management to make estimates and assumptions that affect the amounts
reported in the financial statements and accompanying notes. Actual results could differ from those
estimates.
Cash and Cash Equivalents
Liquid investments or investments with original maturities of three months or less are classified
as cash equivalents. The carrying value of these investments approximates their fair value.
Marketable Securities
Marketable securities are classified as available-for-sale, and accordingly, are stated at fair
value, which is based on quoted market prices. Changes in unrealized gains and losses are excluded
from earnings and are reported as other comprehensive income, net of income tax effects, if any.
Restricted Cash
Restricted cash primarily represent cash deposits collateralizing outstanding letters of credit
with three banks that were in the Companys prior bank revolving credit facility that chose not to
participate in the Companys new revolving credit facility and cash deposited into a voluntary
employee benefit association to fund certain future employee benefits. As the Company replaces the
letters of credit with new letters of credit issued under its new revolving credit facility, the
restricted cash related to the replaced letters of credit will be returned to the Company.
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 communitys inventory until it
re-opens. While the community remains closed, carrying costs such as real estate taxes are expensed
as incurred.
The Company capitalizes certain interest costs to qualified inventory during the development and
construction period of its communities in accordance with ASC 835-20, Capitalization of Interest
(ASC 835-20). Capitalized interest is charged to cost of revenues when the related inventory is
delivered. Interest incurred on homebuilding indebtedness in excess of qualified inventory, as
defined in ASC 835-20, is charged to the statement of 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 Companys master
planned communities, consisting of several smaller communities, may take up to ten years or more to
complete. Because the Companys 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.
F-8
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 communitys
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 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 entitys 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.
Property, Construction and Office Equipment
Property, construction and office equipment are recorded at cost and are stated net of accumulated
depreciation of $153.3 million and $146.3 million at October 31, 2011 and 2010, respectively.
Depreciation is recorded using the straight-line method over the estimated useful lives of the
assets.
Mortgage Loans Receivable
Residential mortgage loans held for sale are measured at fair value in accordance with the
provisions of ASC 825, Financial Instruments (ASC 825). The Company believes the use of ASC 825
improves consistency of mortgage loan valuations between the date the borrower locks in the
interest rate on the pending mortgage loan and the date of the mortgage loan sale. 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
F-9
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. Interest income on mortgage loans held for sale is calculated based upon the stated
interest rate of each loan. In addition, the recognition of net origination costs and fees
associated with residential mortgage loans originated are expensed as incurred. These gains and
losses, interest income and origination costs and fees are recognized in interest and other income
in the accompanying Consolidated Statements of Operations.
Investments in and Advances to Unconsolidated Entities
The trends, uncertainties or other factors that have negatively impacted our business and the
industry in general have also impacted the unconsolidated entities in which the Company has
investments. In accordance with ASC 323,
InvestmentsEquity Method and Joint Ventures, the
Company reviews each of its investments on a quarterly basis for indicators of impairment. A series of operating losses of an investee, the inability
to recover the Companys invested capital, or other factors may indicate that a loss in value of
the Companys investment in the unconsolidated entity has occurred. If a loss exists, the Company
further reviews to determine if the loss is other than temporary, in which case, it writes down the
investment to its fair value. The evaluation of the Companys investment in unconsolidated entities
entails a detailed cash flow analysis using many estimates including but not limited to expected
sales pace, expected sales prices, expected incentives, costs incurred and anticipated, sufficiency
of financing and capital, competition, market conditions and anticipated cash receipts, in order to
determine projected future distributions.
Each of the unconsolidated entities evaluates its inventory
in a similar manner as the Company does. See Inventory above for more detailed disclosure on the Companys evaluation
of inventory. If a valuation adjustment is recorded by an unconsolidated entity related to its assets, the Companys
proportionate share is reflected in the Companys (loss) income from unconsolidated entities with a corresponding
decrease to its investment in unconsolidated entities.
The Company is a party to several joint ventures with independent third parties to develop and sell
land that is owned by its joint venture partners. The Company recognizes its proportionate share of
the earnings from the sale of home sites to other builders. The Company does not recognize earnings
from the home sites it purchases from these ventures, but reduces its cost basis in the home sites
by its share of the earnings from those home sites.
In fiscal 2010, the Company formed Gibraltar Capital and Asset Management LLC (Gibraltar) to
invest in distressed real estate opportunities. Through Gibraltar, the Company has invested in a
structured asset joint venture.
The Company is also a party to several other joint ventures. The Company recognizes
its proportionate share of the earnings and losses of its
unconsolidated entities.
Investments in Non-Performing Loan Portfolios and Foreclosed Real Estate
The Companys investments in non-performing loan portfolios were initially recorded at cost which
the Company believes was fair value. The fair value was determined by discounting the cash flows
expected to be collected from the portfolios using a discount rate that management believes a
market participant would use in determining fair value. Management estimated cash flows expected to
be collected on a loan-by-loan basis considering the contractual terms of the loan, current and
expected loan performance, the manner and timing of disposition, the nature and estimated fair
value of real estate or other collateral, and other factors it deemed appropriate. The estimated
fair value of the loans at acquisition was significantly less than the contractual amounts due
under the terms of the loan agreements.
Since, at the acquisition date, the Company expected to collect less than the contractual amounts
due under the terms of the loans based, at least in part, on the assessment of the credit quality
of the borrowers, the loans are accounted for in accordance with ASC Topic 310-30, Loans and Debt
Securities Acquired with Deteriorated Credit Quality (ASC 310-30). Under ASC 310-30, the
accretable yield, or the amount by which the cash flows expected to be collected at the acquisition
date exceeds the estimated fair value of the loan, is recognized in
interest and other income over the
estimated remaining life of the loan using a level yield methodology provided the Company
does not presently have the intention to utilize real estate secured by the loans for use in its operations or
significantly improving the collateral for resale. The difference between the
contractually required payments of the loan as of the acquisition date and the total cash flows
expected to be collected, or nonaccretable difference, is not recognized.
Pursuant to ASC 310-30, the Company aggregated loans with common risk characteristics into pools
for purposes of recognizing interest income and evaluating changes in estimated cash flows. Loan
pools are evaluated as a single loan for purposes of placing the pool on nonaccrual status or
evaluating loan impairment. Generally, a loan pool is classified as nonaccrual when management is
unable to reasonably estimate the timing or amount of cash flows expected to be collected from the
loan pool or has serious doubts about further collectability of principal or interest. Proceeds
received on nonaccrual loan pools generally are either applied against principal or reported as
interest and other income, depending on managements judgment as to the collectability of principal. For the year
ended October 31, 2011, none of the Companys loan pools were on nonaccrual status.
F-10
A loan is removed from a loan pool only when the Company sells, forecloses or otherwise receives
assets in satisfaction of the loan, or the loan is written off. Loans removed from a pool are
removed at their amortized cost (unpaid principal balance less unamortized discount and provision
for loan loss) as of the date of resolution.
The Company periodically re-evaluates cash flows expected to be collected for each loan pool based
upon all available information as of the measurement date. Subsequent increases in cash flows
expected to be collected are recognized prospectively through an adjustment to the loan pools
yield over its remaining life, which may result in a reclassification from nonaccretable difference
to accretable yield. Subsequent decreases in cash flows expected to be collected are evaluated to
determine whether a provision for loan loss should be established. If decreases in expected cash
flows result in a decrease in the estimated fair value of the loan pool below its amortized cost,
the loan pool is deemed to be impaired and the Company will record a provision for loan losses to
write the loan pool down to its estimated fair value. For the year ended October 31, 2011, the
Company did not record a provision for loan losses.
The Companys investments in non-performing loans are classified as held for investment because the
Company has the intent and ability to hold them for the foreseeable future.
Real Estate Owned (REO)
REO assets, either directly owned or owned through a participation arrangement, acquired through
subsequent foreclosure or deed in lieu actions on non-performing loans are initially recorded at
fair value based upon third-party appraisals, broker opinions of value, or internal valuation
methodologies (which may include discounted cash flows, capitalization rates analyses or comparable
transactional analyses). Unobservable inputs used in estimating the fair value of REO assets are
based upon the best information available under the circumstances, and take into consideration the
financial condition and operating results of the asset, local market conditions, the availability
of capital, interest and inflation rates, and other factors deemed appropriate by management. REO
assets acquired are reviewed to determine if they should be classified as held and used or held
for sale. REO classified as held and used is stated at carrying cost unless an impairment
exists, in which case it is written down to fair value in accordance with ASC 360-10-35. REO
classified as held for sale is carried at the lower of carrying amount or fair value less cost
to sell. Any decreases in estimated fair value subsequent to the acquisition date are recognized
through an impairment reserve. For both classifications, carrying costs incurred after the
acquisition, including property taxes and insurance, are expensed.
Loan Sales
As part of its disposition strategy for the loan portfolios, the Company may sell certain loans to
third-party purchasers. The Company recognizes gains or losses on the sale of mortgage loans when
the loans have been legally isolated from the Company and it no longer maintains effective control
over the transferred assets.
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.
In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosure about Fair Value
Measurements (ASU 2010-06), which amended ASC 820 to increase disclosure requirements regarding
recurring and non-recurring fair value measurements. The Company adopted ASU 2010-06 as of February
1, 2010, except for the disclosures about Level 3 fair value disclosures which will be effective
for the Company on November 1, 2011. The adoption of ASU 2010-06 did not have a material impact on
the Companys consolidated financial position, results of operations or cash flows.
F-11
The fair value hierarchy is summarized below:
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Level 1: |
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Fair value determined based on quoted prices in active markets for
identical assets or liabilities. |
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Level 2: |
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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. |
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Level 3: |
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Fair value determined using significant unobservable inputs, such as
pricing models, discounted cash flows, or similar techniques. |
Treasury Stock
Treasury stock is recorded at cost. Issuance of treasury stock is accounted for on a first-in,
first-out basis. Differences between the cost of treasury stock and the re-issuance proceeds are
charged to additional paid-in capital.
Revenue and Cost Recognition
The construction time of the Companys homes is generally less than one year, although some homes
may take more than one year to complete. Revenues and cost of revenues from these home sales are
recorded at the time each home is delivered and title and possession are transferred to the buyer.
For single family detached homes, closing normally occurs shortly after construction is
substantially completed. In addition, the Company has several high-rise/mid-rise projects that do
not qualify for percentage of completion accounting in accordance with ASC 360, which are included
in this category of revenues and costs. Based upon the current accounting rules and
interpretations, the Company does not believe that any of its current or future communities
currently qualify or will qualify in the future for percentage of completion accounting.
For the Companys standard attached and detached homes, land, land development and related costs,
both incurred and estimated to be incurred in the future, are amortized to the cost of homes
closed based upon the total number of homes to be constructed in each community. Any changes
resulting from a change in the estimated number of homes to be constructed or in the estimated
costs subsequent to the commencement of delivery of homes are allocated to the remaining
undelivered homes in the community. Home construction and related costs are charged to the cost of
homes closed under the specific identification method. The estimated land, common area development
and related costs of master planned communities, including the cost of golf courses, net of their
estimated residual value, are allocated to individual communities within a master planned community
on a relative sales value basis. Any changes resulting from a change in the estimated number of
homes to be constructed or in the estimated costs are allocated to the remaining home sites in each
of the communities of the master planned community.
For high-rise/mid-rise projects that do not qualify for percentage of completion accounting, land,
land development, construction and related costs, both incurred and estimated to be incurred in the
future, are generally amortized to the cost of units closed based upon an estimated relative sales
value of the units closed to the total estimated sales value. Any changes resulting from a change
in the estimated total costs or revenues of the project are allocated to the remaining units to be
delivered.
Forfeited customer deposits: Forfeited customer deposits are recognized in other income in the
period in which the Company determines that the customer will not complete the purchase of the home
and it has the right to retain the deposit.
Sales Incentives: In order to promote sales of its homes, the Company grants its home buyers
sales incentives from time to time. These incentives will vary by type of incentive and by amount
on a community-by-community and home-by-home basis. Incentives that impact the value of the home or
the sales price paid, such as special or additional options, are generally reflected as a reduction
in sales revenues. Incentives that the Company pays to an outside party, such as paying some or all
of a home buyers closing costs, are recorded as an additional cost of revenues. Incentives are
recognized at the time the home is delivered to the home buyer and the Company receives the sales
proceeds.
Advertising Costs
The Company expenses advertising costs as incurred. Advertising costs were $11.1 million, $9.2
million and $11.5 million for the years ended October 31, 2011, 2010 and 2009, respectively.
F-12
Warranty Costs
The Company provides all of its home buyers with a limited warranty as to workmanship and
mechanical equipment. The Company also provides many of its home buyers with a limited ten-year
warranty as to structural integrity. The Company accrues for expected warranty costs at the time
each home is closed and title and possession have been transferred to the buyer. Costs are accrued
based upon historical experience.
Insurance Costs
The Company accrues for the expected costs associated with the deductibles and self-insured amounts
under its various insurance policies.
Stock-Based Compensation
The Company accounts for its stock-based compensation in accordance with ASC 718, Compensation
Stock Compensation (ASC 718). The Company used a lattice model for the valuation for its stock
option grants. The option pricing models used are designed to estimate the value of options that,
unlike employee stock options and restricted stock units, can be traded at any time and are
transferable. In addition to restrictions on trading, employee stock options and restricted stock
units may include other restrictions such as vesting periods. Further, such models require the
input of highly subjective assumptions, including the expected volatility of the stock price.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740, Income Taxes (ASC 740).
Deferred tax assets and liabilities are recorded based on temporary differences between the amounts
reported for financial reporting purposes and the amounts deductible for income tax purposes. In
accordance with the provisions of ASC 740, the Company assesses the realizability of its deferred
tax assets. A valuation allowance must be established when, based upon available evidence, it is
more likely than not that all or a portion of the deferred tax assets will not be realized. See
Income Taxes Valuation Allowance below.
Provisions (benefits) for federal and state income taxes are calculated on reported pretax earnings
(losses) based on current tax law and also include, in the applicable period, the cumulative effect
of any changes in tax rates from those used previously in determining deferred tax assets and
liabilities. Such provisions (benefits) differ from the amounts currently receivable or payable
because certain items of income and expense are recognized for financial reporting purposes in
different periods than for income tax purposes. Significant judgment is required in determining
income tax provisions (benefits) and evaluating tax positions. The Company establishes reserves for
income taxes when, despite the belief that its tax positions are fully supportable, it believes
that its positions may be challenged and disallowed by various tax authorities. The consolidated
tax provisions (benefit) and related accruals include the impact of such reasonably estimable
disallowances as deemed appropriate. To the extent that the probable tax outcome of these matters
changes, such changes in estimates will impact the income tax provision (benefit) in the period in
which such determination is made.
ASC 740 clarifies the accounting for uncertainty in income taxes recognized and prescribes a
recognition threshold and measurement attributes for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides
guidance on de-recognition, classification, interest and penalties, accounting in interim periods,
disclosure and transition. ASC 740 requires a company to recognize the financial statement effect
of a tax position when it is more-likely-than-not (defined as a substantiated likelihood of more
than 50%), based on the technical merits of the position, that the position will be sustained upon
examination. A tax position that meets the more-likely-than-not recognition threshold is measured
to determine the amount of benefit to be recognized in the financial statements based upon the
largest amount of benefit that is greater than 50% likely of being realized upon ultimate
settlement with a taxing authority that has full knowledge of all relevant information. The
inability of the Company to determine that a tax position meets the more-likely-than-not
recognition threshold does not mean that the Internal Revenue Service (IRS) or any other taxing
authority will disagree with the position that the Company has taken.
If a tax position does not meet the more-likely-than-not recognition threshold, despite the
Companys belief that its filing position is supportable, the benefit of that tax position is not
recognized in the statements of operations and the Company is required to accrue potential interest
and penalties until the uncertainty is resolved. Potential interest and penalties are recognized as
a component of the provision for income taxes which is consistent with the Companys historical
accounting policy. Differences between amounts taken in a tax return and amounts recognized in the
financial statements are considered unrecognized tax benefits. The Company believes that it has a
reasonable basis for each of its filing positions and intends to defend those positions if
challenged by the IRS or another taxing jurisdiction. If the IRS or other taxing authorities do not
disagree with the Companys position, and after the statute
of limitations expires, the Company will recognize the unrecognized tax benefit in the period that
the uncertainty of the tax position is eliminated.
F-13
Income Taxes Valuation Allowance
Significant judgment is required in estimating valuation allowances for deferred tax assets. In
accordance with ASC 740, a valuation allowance is established against a deferred tax asset if,
based on the available evidence, it is more likely than not that such asset will not be realized.
The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable
income in either the carryback or carryforward periods under tax law. The Company periodically
assesses the need for valuation allowances for deferred tax assets based on ASC 740s
more-likely-than-not realization threshold criterion. In the Companys assessment, appropriate
consideration is given to all positive and negative evidence related to the realization of the
deferred tax assets. This assessment considers, among other matters, the nature, frequency and
severity of current and cumulative income and losses, forecasts of future profitability, the
duration of statutory carryback or carryforward periods, its experience with operating loss and tax
credit carryforwards being used before expiration, and tax planning alternatives.
The Companys assessment of the need for a valuation allowance on its deferred tax assets includes
assessing the likely future tax consequences of events that have been recognized in its
consolidated financial statements or tax returns. The Company bases its estimate of deferred tax
assets and liabilities on current tax laws and rates and, in certain cases, on business plans and
other expectations about future outcomes. Changes in existing tax laws or rates could affect actual
tax results and future business results may affect the amount of deferred tax liabilities or the
valuation of deferred tax assets over time. The Companys accounting for deferred tax assets
represents its best estimate of future events using the guidance provided by ASC 740.
Due to uncertainties in the estimation process, particularly with respect to changes in facts and
circumstances in future reporting periods (carryforward period assumptions), it is reasonably
possible that actual results could differ from the estimates used in the Companys historical
analyses. The Companys assumptions require significant judgment because the residential
homebuilding industry is cyclical and is highly sensitive to changes in economic conditions. If
the Companys results of operations are less than projected and there is insufficient objectively
verifiable evidence to support the likely realization of its deferred tax assets, a valuation
allowance would be required to reduce or eliminate its deferred tax assets.
Noncontrolling Interest
The Company has a 67% interest in an entity that is developing land. The financial statements of
this entity are consolidated in the Companys consolidated financial statements. The amounts shown
in the Companys Consolidated Balance Sheets under Noncontrolling interest represent the
noncontrolling interest attributable to the 33% minority interest not owned by the Company.
Geographic Segment Reporting
The Company has determined that its home building operations operate in four geographic segments:
North, Mid-Atlantic, South and West. The states comprising each geographic segment are as follows:
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North:
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Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey, and New York |
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Mid-Atlantic:
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Delaware, Maryland, Pennsylvania and Virginia |
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South:
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Florida, North Carolina, South Carolina and Texas |
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West:
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Arizona, California, Colorado and Nevada |
In fiscal 2010, the Company discontinued the sale of homes in West Virginia and Georgia. At October
31, 2010, the Company had no backlog in West Virginia and Georgia. The operations in West Virginia
and Georgia were immaterial to the Mid-Atlantic and South geographic segments, respectively.
Related Party Transactions
See Note 3. Investments and Advances to Unconsolidated Entities for information
regarding Toll Brothers Realty Trust.
F-14
Recent Accounting Pronouncements
In June 2009, the FASB revised its authoritative guidance in ASC 860, Transfers and Servicing
(ASC 860). The amendment eliminated the concept of a qualifying special-purpose entity, created
more stringent conditions for reporting a transfer of a portion of a financial asset as a sale,
clarified other sale-accounting criteria, and changed the initial measurement of a transferors
interest in transferred financial assets. The amendment was adopted by the Company for its fiscal
year beginning November 1, 2010. The adoption has not had a material impact on the Companys
consolidated financial position, results of operations or cash flows.
In June 2009, the FASB revised its authoritative guidance for determining the primary beneficiary
of a VIE. In December 2009, the FASB issued Accounting Standards Update No. 2009-17, Improvements
to Financial Reporting by Enterprises Involved with Variable Interest Entities (ASU 2009-17),
which amended provisions of ASC 810 to reflect the revised guidance for consolidation purposes. The
amendments to ASC 810 replace the quantitative-based risk and rewards calculation for determining
which reporting entity, if any, has a controlling interest in a VIE with an approach focused on
identifying which reporting entity has the power to direct the activities of a VIE that most
significantly impact the entitys economic performance and has either the obligation to absorb
losses of or the right to receive benefits from the entity. The Company adopted the amended
provisions for its fiscal year beginning November 1, 2010. The adoption of the amended provisions
of ASC 810 has not had a material effect on the Companys consolidated financial position, results
of operations or cash flows.
In May 2011, the FASB issued Accounting Standards Update 2011-04, Amendments to Achieve Common
Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS, (ASU 2011-04) which
amends ASC 820 to clarify existing guidance and minimize differences between GAAP and International
Financial Reporting Standards (IFRS). ASU 2011-04 requires entities to provide information about
valuation techniques and unobservable inputs used in Level 3 fair value measurements and provide a
narrative description of the sensitivity of Level 3 measurements to changes in unobservable inputs.
ASU 2011-04 will be effective for the Companys fiscal quarter beginning February 1, 2012 and is
not expected to have a material impact on the Companys consolidated financial position, results of
operations or cash flows.
In June 2011, the FASB issued Accounting Standards Update No. 2011-05, Statement of Comprehensive
Income (ASU 2011-05), which requires entities to present net income and other comprehensive
income in either a single continuous statement or in two separate, but consecutive, statements of
net income and other comprehensive income. The adoption of this guidance, which relates to
presentation only, is not expected to have a material impact on the Companys consolidated
financial position, results of operations or cash flows. ASU 2011-05 will be effective for the
Companys fiscal year beginning November 1, 2012.
Reclassification
In order to provide attractive mortgage financing to its home buyers, the Companys homebuilding
operations subsidize the Companys mortgage subsidiary. In fiscal 2011, the Company determined that
the amount of subsidies in fiscal 2010 were in excess of the mortgage companys costs and
reclassified the excess from interest and other income to cost of revenues. The table below
provides information regarding the changes made to the previously reported fiscal 2010 statement of
operations (amounts in thousands).
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Cost of |
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Interest and |
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revenues |
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other income |
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As reported |
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$ |
1,383,075 |
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$ |
34,830 |
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Reclassified |
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1,376,558 |
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28,313 |
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Increase (decrease) |
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$ |
(6,517 |
) |
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$ |
6,517 |
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The above reclassifications of cost of revenues resulted in a decrease in the Companys loss from
operations.
Certain other prior period amounts have been reclassified to conform to the fiscal 2011
presentation.
F-15
2. Inventory
Inventory at October 31, 2011 and 2010 consisted of the following (amounts in thousands):
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2011 |
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2010 |
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Land controlled for future communities |
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$ |
46,581 |
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$ |
31,899 |
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Land owned for future communities |
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979,145 |
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923,972 |
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Operating communities |
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2,390,997 |
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2,285,854 |
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$ |
3,416,723 |
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$ |
3,241,725 |
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During fiscal 2010 and 2009, the Company sold non-strategic inventory for $22.5 million and $47.7
million, respectively, and recognized income of $0.9 million in fiscal 2010 and a loss of $0.1
million in fiscal 2009. The Company did not sell any non-strategic inventory in fiscal 2011. The
net gain/loss, including the related capitalized interest, is included in interest and other income
in the Companys Consolidated Statements of Operations for fiscals 2010 and 2009.
Operating communities include communities offering homes for sale, communities that have sold all
available home sites but have not completed delivery of the homes, communities that were previously
offering homes for sale but are temporarily closed due to business conditions or non-availability
of improved home sites and that are expected to reopen within twelve months of the end of the
fiscal year being reported on, and communities preparing to open for sale. The carrying value
attributable to operating communities includes the cost of homes under construction, land and land
development costs, the carrying cost of home sites in current and future phases of these
communities and the carrying cost of model homes.
Communities that were previously offering homes for sale but are temporarily closed due to business
conditions that do not have any remaining backlog and are not expected to reopen within twelve
months of the end of the fiscal period being reported on have been classified as land owned for
future communities.
Information regarding the classification, number and carrying value of these temporarily closed
communities at
October 31, 2011, 2010 and 2009 is provided in the table below ($ amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Land owned for future communities: |
|
|
|
|
|
|
|
|
|
|
|
|
Number of communities |
|
|
43 |
|
|
|
36 |
|
|
|
16 |
|
Carrying value (in thousands) |
|
$ |
256,468 |
|
|
$ |
212,882 |
|
|
$ |
75,942 |
|
Operating communities: |
|
|
|
|
|
|
|
|
|
|
|
|
Number of communities |
|
|
2 |
|
|
|
13 |
|
|
|
16 |
|
Carrying value (in thousands) |
|
$ |
11,076 |
|
|
$ |
78,100 |
|
|
$ |
91,477 |
|
The Company provided for inventory impairment charges and the expensing of costs that it believed
not to be recoverable in each of the three fiscal years ended October 31, 2011, 2010 and 2009 as
shown in the table below (amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Land controlled for future communities |
|
$ |
17,752 |
|
|
$ |
6,069 |
|
|
$ |
28,518 |
|
Land owned for future communities |
|
|
17,000 |
|
|
|
55,700 |
|
|
|
169,488 |
|
Operating communities |
|
|
17,085 |
|
|
|
53,489 |
|
|
|
267,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,837 |
|
|
$ |
115,258 |
|
|
$ |
465,411 |
|
|
|
|
|
|
|
|
|
|
|
F-16
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 the Company
recognized impairment charges, and 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 millions).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired Communities |
|
|
|
|
|
|
|
|
|
|
|
Fair Value of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Communities |
|
|
|
|
|
|
Number of |
|
|
|
|
|
|
Net of |
|
|
|
|
|
|
Communities |
|
|
Number of |
|
|
Impairment |
|
|
Impairment |
|
Three months ended: |
|
Tested |
|
|
Communities |
|
|
Charges |
|
|
Charges |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2010: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31 |
|
|
260 |
|
|
|
14 |
|
|
$ |
60,519 |
|
|
$ |
22,750 |
|
April 30 |
|
|
161 |
|
|
|
7 |
|
|
$ |
53,594 |
|
|
|
15,020 |
|
July 31 |
|
|
155 |
|
|
|
7 |
|
|
$ |
21,457 |
|
|
|
6,600 |
|
October 31 |
|
|
144 |
|
|
|
12 |
|
|
$ |
39,209 |
|
|
|
9,119 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
53,489 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2009: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
January 31 |
|
|
289 |
|
|
|
41 |
|
|
$ |
216,227 |
|
|
$ |
108,300 |
|
April 30 |
|
|
288 |
|
|
|
36 |
|
|
$ |
181,790 |
|
|
|
67,410 |
|
July 31 |
|
|
288 |
|
|
|
14 |
|
|
$ |
67,713 |
|
|
|
46,822 |
|
October 31 |
|
|
254 |
|
|
|
21 |
|
|
$ |
116,379 |
|
|
|
44,873 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
267,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At October 31, 2011, 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 October 31, 2011, the Company determined
that 48 land purchase contracts, with an aggregate purchase price of $453.0 million, on which it
had made aggregate deposits totaling $24.2 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 in each of the three fiscal years ended October 31,
2011, 2010 and 2009 was as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Interest capitalized, beginning of year |
|
$ |
267,278 |
|
|
$ |
259,818 |
|
|
$ |
238,832 |
|
Interest incurred |
|
|
114,761 |
|
|
|
114,975 |
|
|
|
118,026 |
|
Interest expensed to cost of revenues |
|
|
(77,623 |
) |
|
|
(75,876 |
) |
|
|
(78,661 |
) |
Interest directly expensed to
statement of operations |
|
|
(1,504 |
) |
|
|
(22,751 |
) |
|
|
(7,949 |
) |
Write-off against other income |
|
|
(1,155 |
) |
|
|
(8,369 |
) |
|
|
(10,116 |
) |
Interest reclassified to property,
construction and office equipment |
|
|
(3,000 |
) |
|
|
(519 |
) |
|
|
|
|
Capitalized interest applicable to
inventory transferred to joint
ventures |
|
|
|
|
|
|
|
|
|
|
(314 |
) |
|
|
|
|
|
|
|
|
|
|
Interest capitalized, end of year |
|
$ |
298,757 |
|
|
$ |
267,278 |
|
|
$ |
259,818 |
|
|
|
|
|
|
|
|
|
|
|
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 October 31, 2011, 2010 and 2009 would
have been reduced by approximately $54.0 million, $53.3 million and $57.5 million, respectively.
F-17
During fiscal 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.
During fiscal 2010, the Company reclassified $18.7 million of inventory related to two non-equity
golf course facilities to property, construction and office equipment. The $18.7 million was
reclassified due to the completion of construction of the facilities and the substantial completion
of the master planned communities of which the golf facilities are a part.
3. Investments in and Advances to Unconsolidated Entities
The Company has investments in and advances to various unconsolidated entities. In fiscal 2010, the Company formed
Gibraltar to invest in distressed real estate
opportunities. Through Gibraltar, the Company has invested in a structured asset joint venture.
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. At
October 31, 2011, the Company had approximately $17.1 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.
As of October 31, 2011, the Company had recognized cumulative impairment charges in connection with
its current Development Joint Ventures of $97.5 million. These impairment charges are attributable
to investments in certain Development Joint Ventures where the Company determined there were losses
in value in the investments that were other than temporary. In fiscal 2011 and 2009, the Company
recognized impairment charges in connection with its Development Joint Ventures of $25.7 million
and $5.3 million, respectively. The Company did not recognize any impairment charges in connection
with the Development Joint Ventures in fiscal 2010.
On October 27, 2011, a bankruptcy court issued an order confirming a plan of reorganization for
South Edge, LLC (South Edge), a Nevada land development joint venture, which was the subject of an involuntary bankruptcy petition
filed in December 2010. Pursuant to the plan of reorganization, South Edge
settled litigation regarding a loan made by a syndicate of lenders to it having a principal balance of $327.9 million, for which the Company had executed certain
completion guarantees and conditional repayment guarantees. The confirmed plan of reorganization
provided for a cash settlement to the lenders, the acquisition of
land by the Company and the other members of South Edge which are parties to the agreement, and the resolution of all claims
between members of the lending syndicate representing 99% of the outstanding amounts due under the
loan, the bankruptcy trustee and the members of South Edge which are parties to the
agreement. The Company believes it had made adequate provision at October 31 2011, for the settlement, including
accruing for its share of the cash payments required under the agreement, for any remaining
exposure to lenders which are not parties to the agreement and recording impairments to reflect the
estimated fair value of land to be acquired. The Company paid $57.6 million in November 2011 to
settle this matter. The disposition of the above matter did not have a material adverse effect on
the Companys results of operations and liquidity or on its financial condition.
Planned Community Joint Venture
The Company is a participant in a joint venture with an unrelated party to develop a single master
planned community (the Planned Community Joint Venture). At October, 31, 2011, the Company had an
investment of $32.0 million in this Planned Community Joint Venture. At October 31, 2011, each
participant had agreed to contribute additional funds up to $8.3 million, 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 participants ownership interest. At
October 31, 2011, this joint venture did not have any indebtedness. The Company recognized
impairment charges in connection with the Planned Community Joint Venture of $15.2 million in
fiscal 2011. The Company did not recognize any impairment charges in connection with the Planned
Community Joint Venture in fiscal 2010 or fiscal 2009.
F-18
Condominium Joint Ventures
At October 31, 2011, the Company had an aggregate of $40.7 million of investments in four joint
ventures with unrelated parties to develop luxury for-sale and rental
residential units and commercial space (Condominium Joint Ventures). At October 31, 2011, the
Condominium Joint Ventures had aggregate loan commitments of $39.0 million, against which
approximately $35.9 million had been borrowed. Included in the aggregate loan commitments and
amount borrowed was $18.4 million due to the Company.
As of October 31, 2011, the Company had recognized cumulative impairment charges against its
investments in the Condominium Joint Ventures and its pro rata share of impairment charges
recognized by these Condominium Joint Ventures in the amount of $63.9 million. The Company did not
recognize any impairment charges in connection with its Condominium Joint Ventures in fiscal 2011
and 2010; however, it recognized $6.0 million of impairment charges in fiscal 2009. At October 31,
2011, the Company did not have any commitments to make contributions to any Condominium Joint
Venture.
Structured Asset Joint Venture
In July 2010, the Company, through 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 October
31, 2011, the Company had an investment of $34.7 million in this Structured Asset Joint Venture. At
October 31, 2011, the Company did not have any commitments to make additional contributions to the
joint venture and has not guaranteed any of the joint ventures 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 participants ownership interest.
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 October 31, 2011, the Company had an investment of $1.5 million in Trust II. Prior to
the formation of Trust II, the Company formed Toll Brothers Realty Trust (the Trust) in 1998 to
invest in commercial real estate opportunities. The Trust is effectively owned one-third by the
Company; one-third by Robert I. Toll, Bruce E. Toll (and members of his family), Zvi Barzilay (and
members of his family), Douglas C. Yearley, Jr. and former members of the Companys senior
management; and one-third by an affiliate of PASERS (collectively, the Shareholders). As of
October 31, 2011, the Company had a net investment in the Trust of $0.4 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 $2.9 million, $3.1 million and $2.1 million in fiscal
2011, 2010 and 2009, 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.
General
At October 31, 2011, the Company had accrued $60.1 million of aggregate exposure with respect to
its estimated obligations to unconsolidated entities in which it has an investment. The Companys
investments in these entities are accounted for using the equity method. The Company recognized
$40.9 million and $11.3 million of impairment charges related to its investments in and advances to
unconsolidated entities in fiscal 2011 and 2009. The Company did not recognize any impairment
charges related to its investments in and advances to unconsolidated entities in fiscal 2010.
Impairment charges related to these entities are included in (Loss) income from unconsolidated
entities in the Companys consolidated statements of operations.
F-19
The condensed balance sheets as of October 31, 2011 and 2010 and condensed statements of operations
for the years ended October 31, 2011, 2010 and 2009 for unconsolidated entities, aggregated by type
of business, are as follows (in thousands):
Condensed Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2011 |
|
|
|
|
|
|
|
Home |
|
|
Toll |
|
|
Structured |
|
|
|
|
|
|
Develop- |
|
|
Building |
|
|
Brothers |
|
|
Asset |
|
|
|
|
|
|
ment Joint |
|
|
Joint |
|
|
Realty Trust |
|
|
Joint |
|
|
|
|
|
|
Ventures |
|
|
Ventures |
|
|
I and II |
|
|
Venture |
|
|
Total |
|
Cash and cash equivalents |
|
$ |
14,190 |
|
|
$ |
10,663 |
|
|
$ |
11,726 |
|
|
$ |
48,780 |
|
|
$ |
85,359 |
|
Inventory |
|
|
37,340 |
|
|
|
170,239 |
|
|
|
5,501 |
|
|
|
|
|
|
|
213,080 |
|
Non-performing loan portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
295,044 |
|
|
|
295,044 |
|
Rental properties |
|
|
|
|
|
|
|
|
|
|
178,339 |
|
|
|
|
|
|
|
178,339 |
|
Real estate owned |
|
|
|
|
|
|
|
|
|
|
1,087 |
|
|
|
230,872 |
|
|
|
231,959 |
|
Other assets (1) |
|
|
331,315 |
|
|
|
20,080 |
|
|
|
9,675 |
|
|
|
159,143 |
|
|
|
520,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
382,845 |
|
|
$ |
200,982 |
|
|
$ |
206,328 |
|
|
$ |
733,839 |
|
|
$ |
1,523,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt (1) |
|
$ |
327,856 |
|
|
$ |
50,515 |
|
|
$ |
198,927 |
|
|
$ |
310,847 |
|
|
$ |
888,145 |
|
Other liabilities |
|
|
5,352 |
|
|
|
9,745 |
|
|
|
3,427 |
|
|
|
382 |
|
|
|
18,906 |
|
Members equity |
|
|
49,637 |
|
|
|
140,722 |
|
|
|
3,974 |
|
|
|
172,944 |
|
|
|
367,277 |
|
Non-controlling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249,666 |
|
|
|
249,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
382,845 |
|
|
$ |
200,982 |
|
|
$ |
206,328 |
|
|
$ |
733,839 |
|
|
$ |
1,523,994 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys net investment in
unconsolidated entities (2) |
|
$ |
17,098 |
|
|
$ |
72,734 |
|
|
$ |
1,872 |
|
|
$ |
34,651 |
|
|
$ |
126,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2010 |
|
|
|
|
|
|
|
Home |
|
|
Toll |
|
|
Structured |
|
|
|
|
|
|
Develop- |
|
|
Building |
|
|
Brothers |
|
|
Asset |
|
|
|
|
|
|
ment Joint |
|
|
Joint |
|
|
Realty Trust |
|
|
Joint |
|
|
|
|
|
|
Ventures |
|
|
Ventures |
|
|
I and II |
|
|
Venture |
|
|
Total |
|
Cash and cash equivalents |
|
$ |
21,224 |
|
|
$ |
14,831 |
|
|
$ |
13,154 |
|
|
$ |
21,287 |
|
|
$ |
70,496 |
|
Inventory |
|
|
486,394 |
|
|
|
343,463 |
|
|
|
5,340 |
|
|
|
|
|
|
|
835,197 |
|
Non-performing loan portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
498,256 |
|
|
|
498,256 |
|
Rental properties |
|
|
|
|
|
|
|
|
|
|
185,658 |
|
|
|
|
|
|
|
185,658 |
|
Real estate owned |
|
|
|
|
|
|
|
|
|
|
1,934 |
|
|
|
124,775 |
|
|
|
126,709 |
|
Other assets (1) |
|
|
194,541 |
|
|
|
29,374 |
|
|
|
9,401 |
|
|
|
15,003 |
|
|
|
248,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
702,159 |
|
|
$ |
387,668 |
|
|
$ |
215,487 |
|
|
$ |
659,321 |
|
|
$ |
1,964,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt (1) |
|
$ |
379,793 |
|
|
$ |
208,295 |
|
|
$ |
184,616 |
|
|
$ |
303,192 |
|
|
$ |
1,075,896 |
|
Other liabilities |
|
|
60,385 |
|
|
|
11,207 |
|
|
|
3,952 |
|
|
|
265 |
|
|
|
75,809 |
|
Members equity |
|
|
261,981 |
|
|
|
168,166 |
|
|
|
26,919 |
|
|
|
146,248 |
|
|
|
603,314 |
|
Non-controlling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
209,616 |
|
|
|
209,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and equity |
|
$ |
702,159 |
|
|
$ |
387,668 |
|
|
$ |
215,487 |
|
|
$ |
659,321 |
|
|
$ |
1,964,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys net investment in
unconsolidated entities (2) |
|
$ |
58,551 |
|
|
$ |
99,259 |
|
|
$ |
11,382 |
|
|
$ |
29,250 |
|
|
$ |
198,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Included in other assets at October 31, 2011 and 2010 of the Structured Asset Joint Venture is $152.6 million
and $8.5 million, respectively, of restricted cash held in a defeasance account which will be used to repay debt
of the Structured Asset Joint Venture.
|
|
(2) |
|
Differences between the Companys net investment in unconsolidated entities and its
underlying equity in the net assets of the entities is primarily a result of impairments
related to the Companys 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 Companys net investment. |
F-20
Condensed Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended October 31, 2011 |
|
|
|
|
|
|
|
Home |
|
|
Toll |
|
|
Structured |
|
|
|
|
|
|
Develop- |
|
|
Building |
|
|
Brothers |
|
|
Asset |
|
|
|
|
|
|
ment Joint |
|
|
Joint |
|
|
Realty Trust |
|
|
Joint |
|
|
|
|
|
|
Ventures |
|
|
Ventures |
|
|
I and II |
|
|
Venture |
|
|
Total |
|
Revenues |
|
$ |
4,624 |
|
|
$ |
242,326 |
|
|
$ |
37,728 |
|
|
$ |
46,187 |
|
|
$ |
330,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
3,996 |
|
|
|
191,922 |
|
|
|
15,365 |
|
|
|
30,477 |
|
|
|
241,760 |
|
Other expenses |
|
|
1,527 |
|
|
|
8,954 |
|
|
|
18,808 |
|
|
|
10,624 |
|
|
|
39,913 |
|
Gain on disposition of loans and REO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,406 |
|
|
|
61,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(899 |
) |
|
|
41,450 |
|
|
|
3,555 |
|
|
|
66,492. |
|
|
|
110,598 |
|
Other income |
|
|
9,498 |
|
|
|
1,605 |
|
|
|
|
|
|
|
252 |
|
|
|
11,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before noncontrolling interest |
|
|
8,599 |
|
|
|
43,055 |
|
|
|
3,555 |
|
|
|
66,744. |
|
|
|
121,953 |
|
Less: Net income attributable to
noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,048 |
|
|
|
40,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
8,599 |
|
|
$ |
43,055 |
|
|
$ |
3,555 |
|
|
$ |
26,696 |
|
|
$ |
81,905 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys equity in (losses) earnings of
unconsolidated entities (3) |
|
$ |
(25,272 |
) |
|
$ |
15,159 |
|
|
$ |
3,580 |
|
|
$ |
5,339 |
|
|
$ |
(1,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended October 31, 2010 |
|
|
|
|
|
|
|
Home |
|
|
Toll |
|
|
Structured |
|
|
|
|
|
|
Develop- |
|
|
Building |
|
|
Brothers |
|
|
Asset |
|
|
|
|
|
|
ment Joint |
|
|
Joint |
|
|
Realty Trust |
|
|
Joint |
|
|
|
|
|
|
Ventures |
|
|
Ventures |
|
|
I and II |
|
|
Venture |
|
|
Total |
|
Revenues |
|
$ |
7,370 |
|
|
$ |
132,878 |
|
|
$ |
34,755 |
|
|
$ |
16,582 |
|
|
$ |
191,585 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
6,402 |
|
|
|
106,638 |
|
|
|
13,375 |
|
|
|
6,693 |
|
|
|
133,108 |
|
Other expenses |
|
|
1,522 |
|
|
|
8,121 |
|
|
|
18,693 |
|
|
|
2,977 |
|
|
|
31,313 |
|
Loss on disposition of loans and REO |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,272 |
) |
|
|
(5,272 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(554 |
) |
|
|
18,119 |
|
|
|
2,687 |
|
|
|
1,640 |
|
|
|
21,892 |
|
Other income |
|
|
13,616 |
|
|
|
572 |
|
|
|
|
|
|
|
5 |
|
|
|
14,193 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before noncontrolling
interest |
|
|
13,062 |
|
|
|
18,691 |
|
|
|
2,687 |
|
|
|
1,645 |
|
|
|
36,085 |
|
Less: Net income attributable to
noncontrolling interest |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
987 |
|
|
|
987 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
13,062 |
|
|
$ |
18,691 |
|
|
$ |
2,687 |
|
|
$ |
658 |
|
|
$ |
35,098 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys equity in earnings of
unconsolidated entities (3) |
|
$ |
10,664 |
|
|
$ |
11,272 |
|
|
$ |
1,402 |
|
|
$ |
132 |
|
|
$ |
23,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended October 31, 2009 |
|
|
|
|
|
|
|
Home |
|
|
Toll |
|
|
Structured |
|
|
|
|
|
|
Develop- |
|
|
Building |
|
|
Brothers |
|
|
Asset |
|
|
|
|
|
|
ment Joint |
|
|
Joint |
|
|
Realty Trust |
|
|
Joint |
|
|
|
|
|
|
Ventures |
|
|
Ventures |
|
|
I and II |
|
|
Venture |
|
|
Total |
|
Revenues |
|
$ |
144 |
|
|
$ |
48,719 |
|
|
$ |
34,955 |
|
|
$ |
|
|
|
$ |
83,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
141 |
|
|
|
76,525 |
|
|
|
13,943 |
|
|
|
|
|
|
|
90,609 |
|
Other expenses |
|
|
1,025 |
|
|
|
8,482 |
|
|
|
17,994 |
|
|
|
|
|
|
|
27,501 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations |
|
|
(1,022 |
) |
|
|
(36,288 |
) |
|
|
3,018 |
|
|
|
|
|
|
|
(34,292 |
) |
Other income (loss) |
|
|
15,483 |
|
|
|
(1,879 |
) |
|
|
|
|
|
|
|
|
|
|
13,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income |
|
$ |
14,461 |
|
|
$ |
(38,167 |
) |
|
$ |
3,018 |
|
|
$ |
|
|
|
$ |
(20,688 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Companys
equity in (losses) earnings
of unconsolidated entities
(3) |
|
$ |
(5,120 |
) |
|
$ |
(3,676 |
) |
|
$ |
1,278 |
|
|
$ |
|
|
|
$ |
(7,518 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3) |
|
Differences between the Companys equity in earnings (losses) of unconsolidated entities and
the underlying net income of the entities is primarily a result of impairments related to the
Companys investment in unconsolidated entities, distributions from entities in excess of the
carrying amount of the Companys net investment, and the Companys share of the entities
profits related to home sites purchased by the Company which reduces the Companys cost basis
of the home sites. |
F-21
4. Investments in Non-Performing Loan Portfolios and Foreclosed Real Estate
In
March 2011, the Company, through Gibraltar, acquired a 60% participation in a portfolio
of non-performing loans. The portfolio of 83 loans, with an unpaid principal balance of
approximately $200.3 million consisted primarily of residential acquisition, development and
construction loans secured by properties at various stages of completion. The Company oversees the
day-to-day management of the portfolio in accordance with the business plans which are jointly
approved by the Company and the co-participant. The Company receives a management fee for such
services. The Company recognizes income from the loan portfolio based upon its participation
interest until such time as the portfolio meets certain internal rates of return as stipulated in
the participation agreement. Upon reaching the stipulated internal rates of return, the Company
will be entitled to receive additional income above its participation percentage from the
portfolio. Since the acquisition of the loan portfolio, the Company
sold its interest in one loan to
a third party resulting in a gain of approximately $0.6 million.
In fiscal 2011, the Company acquired an interest in four properties through foreclosure
or obtaining deeds in lieu of foreclosure related to this loan portfolio. At October 31, 2011,
the Companys pro-rata share of the carrying value of these properties was $5.9 million.
In
September 2011, Gibraltar acquired three portfolios of
non-performing loans consisting of 38 loans with an unpaid principal balance of approximately $71.4
million. The portfolios include residential acquisition, development, and construction loans
secured by properties at various stages of completion.
The
Companys earnings from the portfolios and management fees earned are included in interest and
other income in its consolidated statements of operations. In fiscal 2011, the Company recognized $1.5 million
of earnings from its investments in the loan portfolios.
The following summarizes the accretable yield and the nonaccretable difference on our investments
in non-performing loans portfolios as of their acquisition dates (amounts in thousands):
|
|
|
|
|
Contractually required payments, including interest |
|
$ |
200,047 |
|
Nonaccretable difference |
|
|
(81,723 |
) |
|
|
|
|
Cash flows expected to be collected |
|
|
118,324 |
|
Accretable difference |
|
|
(51,462 |
) |
|
|
|
|
Non-performing loans carrying amount |
|
$ |
66,862 |
|
|
|
|
|
The Companys investment in non-performing loan portfolios consisted of the following at October
31, 2011 (amounts in thousands):
|
|
|
|
|
Unpaid principal balance |
|
$ |
171,559 |
|
Discount on acquired loans |
|
|
(108,325 |
) |
|
|
|
|
Carrying value |
|
$ |
63,234 |
|
|
|
|
|
The activity in the accretable yield for the Companys investment in the non-performing loan
portfolios for the year ended October 31, 2011 was as follows (amounts in thousands):
|
|
|
|
|
Balance at November 1, 2010 |
|
$ |
|
|
Additions |
|
|
51,462 |
|
Accretion |
|
|
(4,480 |
) |
Reductions from foreclosures and other dispositions |
|
|
(4,599 |
) |
Other |
|
|
(57 |
) |
|
|
|
|
Balance at October 31, 2011 |
|
$ |
42,326 |
|
|
|
|
|
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 gather additional information regarding the loans and the
underlying collateral, the accretable yield may change. Therefore, the amount of accretable
income recorded in the year ended October 31, 2011 is not necessarily indicative of expected
future results.
F-22
5. Credit Facility, Loans Payable, Senior Notes, Senior Subordinated Notes and Mortgage Company
Warehouse Loan
Credit Facility
On October 22, 2010, the Company entered into an $885 million revolving credit facility (New
Credit Facility) with 12 banks, which extends to October 2014. The New Credit Facility replaced a
$1.89 billion credit facility consisting of a $1.56 billion unsecured revolving credit facility and
a $331.7 million term loan facility
(collectively, the Old Credit Facility) with 30 banks, which extended to March 17, 2011. Prior to
the closing of the New Credit Facility, the Company repaid the term loan under the Old Credit
Facility from cash on hand.
At October 31, 2011, the Company had no outstanding borrowings under the New Credit Facility but
had outstanding letters of credit of approximately $100.3 million. At October 31, 2011, interest
would have been payable
on borrowings under the New Credit Facility at 2.75% (subject to adjustment based upon the
Companys debt rating and leverage ratios) above the Eurodollar rate or at other specified variable
rates as selected by the Company from time to time. Under the terms of the New Credit Facility, the
Company is not permitted to allow its maximum leverage ratio (as defined in the credit agreement)
to exceed 1.75 to 1.00 and is required to maintain a minimum tangible net worth (as defined in the
New Credit Facility agreement) of approximately $1.87 billion at October 31, 2011. At October 31,
2011, the Companys leverage ratio was approximately 0.18 to 1.00 and its tangible net worth was
approximately $2.55 billion. Based upon the minimum tangible net worth requirement, the Companys
ability to pay dividends and repurchase its common stock was limited to an aggregate amount of
approximately $680 million at October 31, 2011. The Company is obligated to pay an undrawn
commitment fee of 0.50% (subject to adjustment based upon the Companys debt rating and leverage
ratios) based on the average daily unused amount of the facility.
Loans Payable
The Companys loans payable represent purchase money mortgages on properties the Company has
acquired that the seller has financed and various revenue bonds that were issued by government
entities on behalf of the Company to finance community infrastructure and the Companys
manufacturing facilities. Information regarding the Companys loans payable at October 31, 2011 and
2010 is included in the table below ($ amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Aggregate loans payable at October 31 |
|
$ |
106,556 |
|
|
$ |
94,491 |
|
Weighted-average interest rate |
|
|
3.99 |
% |
|
|
3.75 |
% |
Interest rate range |
|
|
0.16%-7.87 |
% |
|
|
0.50% - 8.00 |
% |
Loans secured by assets |
|
|
|
|
|
|
|
|
Carrying value of loans secured by assets |
|
$ |
105,092 |
|
|
$ |
93,029 |
|
Carrying value of assets securing loans |
|
$ |
283,169 |
|
|
$ |
257,563 |
Senior Notes
At October 31, 2011 and 2010, the Companys senior notes consisted of the following (amounts in
thousands):
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
6.875% Senior Notes due November 15, 2012 |
|
$ |
139,776 |
|
|
$ |
194,865 |
|
5.95% Senior Notes due September 15, 2013 |
|
|
141,635 |
|
|
|
141,635 |
|
4.95% Senior Notes due March 15, 2014 |
|
|
267,960 |
|
|
|
267,960 |
|
5.15% Senior Notes due May 15, 2015 |
|
|
300,000 |
|
|
|
300,000 |
|
8.91% Senior Notes due October 15, 2017 |
|
|
400,000 |
|
|
|
400,000 |
|
6.75% Senior Notes due November 1, 2019 |
|
|
250,000 |
|
|
|
250,000 |
|
Bond discount |
|
|
(8,399 |
) |
|
|
(10,350 |
) |
|
|
|
|
|
|
|
|
|
$ |
1,490,972 |
|
|
$ |
1,544,110 |
|
|
|
|
|
|
|
|
The senior notes are the unsecured obligations of Toll Brothers Finance Corp., a 100%-owned
subsidiary of the Company. The payment of principal and interest is fully and unconditionally
guaranteed, jointly and severally, by the Company and a majority of its home building subsidiaries
(together with Toll Brothers Finance Corp., the Senior Note Parties). The senior notes rank
equally in right of payment with all the Senior Note Parties existing and future unsecured senior
indebtedness, including the New Credit Facility. The senior notes are structurally subordinated to
the prior claims of creditors, including trade creditors, of the subsidiaries of the Company that
are not guarantors of the senior notes. The senior notes are redeemable in whole or in part at any
time at the option of
the Company, at prices that vary based upon the then-current rates of interest and the remaining
original term of the notes.
F-23
The Company has repurchased, and may from time to time in the future repurchase, its senior notes
in the open market or otherwise. The table below provides for the periods indicated, the amount of
senior notes the Company has redeemed and the amount of expenses related to the retirement of the
notes (amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Fiscal year: |
|
|
|
|
|
|
|
|
|
|
|
|
6.875% Senior notes due 2012 |
|
$ |
55,089 |
|
|
|
|
|
|
$ |
105,135 |
|
5.95% Senior notes due 2013 |
|
|
|
|
|
$ |
13,500 |
|
|
|
94,985 |
|
4.95% Senior notes due 2014 |
|
|
|
|
|
|
32,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
55,089 |
|
|
$ |
45,540 |
|
|
$ |
200,120 |
|
|
|
|
|
|
|
|
|
|
|
Expenses related to retirement of debt |
|
$ |
3,827 |
|
|
$ |
744 |
|
|
$ |
11,626 |
|
|
|
|
|
|
|
|
|
|
|
Expenses related to the retirement of notes includes, if any, premium paid, write-off of
unamortized debt issuance costs and other debt redemption costs.
Senior Subordinated Notes
The senior subordinated notes were the unsecured obligations of Toll Corp., a 100%-owned subsidiary
of the Company; were guaranteed on a senior subordinated basis by the Company; were subordinated to
all existing and future senior indebtedness of the Company; and were structurally subordinated to
the prior claims of creditors, including trade creditors, of the Companys subsidiaries other than
Toll Corp. The indentures governing these notes restricted certain payments by the Company,
including cash dividends and repurchases of Company stock.
The table below provides for the periods indicated, the amount of senior subordinated notes the
Company has redeemed and the amount of expenses related to the retirement of the notes (amounts in
thousands).
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2009 |
|
Fiscal year: |
|
|
|
|
|
|
|
|
8.25% Senior Subordinated Notes due December 2011 |
|
$ |
47,872 |
|
|
$ |
102,128 |
|
8 1/4% Senior Subordinated Notes due February 2011 |
|
|
|
|
|
|
193,000 |
|
|
|
|
|
|
|
|
Total |
|
$ |
47,872 |
|
|
$ |
295,128 |
|
|
|
|
|
|
|
|
Expenses related to retirement of debt |
|
$ |
34 |
|
|
$ |
2,067 |
|
|
|
|
|
|
|
|
Mortgage Company Loan Facilities
TBI Mortgage Company (TBI Mortgage), the Companys wholly-owned mortgage subsidiary, has a 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. 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 25, 2012 and bears interest
at LIBOR plus 1.25%, with a minimum rate of 3.50%. Borrowings under this facility are included in
the fiscal 2012 maturities.
At October 31, 2011 and 2010, there were $57.4 million and $72.4 million, respectively, outstanding
under the Repurchase Agreement, which are included in liabilities in the accompanying Consolidated
Balance Sheets. At October 31, 2011 and 2010, amounts outstanding under the Repurchase Agreement
are collateralized by $63.2 million and $93.6 million, respectively, of mortgage loans held for
sale, which are included in assets in the Companys balance sheets. As of October 31, 2011, there
were no aggregate outstanding purchase price limitations reducing the amount available to TBI
Mortgage. There are several restrictions on purchased loans under the Repurchase Agreement,
including that they cannot be sold to others, they cannot be pledged to anyone other than the
agent, and they cannot support any other borrowing or repurchase agreement.
F-24
General
As of October 31, 2011, the annual aggregate maturities of the Companys loans and notes during
each of the next five fiscal years are as follows (amounts in thousands):
|
|
|
|
|
|
|
Amount |
|
2012 |
|
$ |
92,827 |
|
2013 |
|
|
294,742 |
|
2014 |
|
|
271,969 |
|
2015 |
|
|
301,872 |
|
2016 |
|
|
1,955 |
|
6. Accrued Expenses
Accrued expenses at October 31, 2011 and 2010 consisted of the following (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Land, land development and construction |
|
$ |
109,574 |
|
|
$ |
110,301 |
|
Compensation and employee benefit |
|
|
96,037 |
|
|
|
95,107 |
|
Insurance and litigation |
|
|
130,714 |
|
|
|
143,421 |
|
Commitments to unconsolidated entities |
|
|
60,130 |
|
|
|
88,121 |
|
Warranty |
|
|
42,474 |
|
|
|
45,835 |
|
Interest |
|
|
25,968 |
|
|
|
26,998 |
|
Other |
|
|
56,154 |
|
|
|
60,538 |
|
|
|
|
|
|
|
|
|
|
$ |
521,051 |
|
|
$ |
570,321 |
|
|
|
|
|
|
|
|
The Company accrues expected warranty costs at the time each home is closed and title and
possession have been transferred to the home buyer. Changes in the warranty accrual during fiscal
2011, 2010 and 2009 were as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Balance, beginning of year |
|
$ |
45,835 |
|
|
$ |
53,937 |
|
|
$ |
57,292 |
|
Additions homes closed
during the year |
|
|
8,809 |
|
|
|
9,147 |
|
|
|
10,499 |
|
Additions (reductions) to
accruals for homes closed
in prior years |
|
|
(828 |
) |
|
|
(4,684 |
) |
|
|
1,697 |
|
Charges incurred |
|
|
(11,342 |
) |
|
|
(12,565 |
) |
|
|
(15,551 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
42,474 |
|
|
$ |
45,835 |
|
|
$ |
53,937 |
|
|
|
|
|
|
|
|
|
|
|
7. Income Taxes
A reconciliation of the Companys effective tax rate from the federal statutory tax rate for the
fiscal years ended October 31, 2011, 2010 and 2009 is set forth below ($ amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
$ |
|
|
%* |
|
|
$ |
|
|
%* |
|
|
$ |
|
|
%* |
|
Federal tax benefit at statutory rate |
|
|
(10,278 |
) |
|
|
35.0 |
|
|
|
(41,015 |
) |
|
|
35.0 |
|
|
|
(173,763 |
) |
|
|
35.0 |
|
State taxes, net of federal benefit |
|
|
(954 |
) |
|
|
3.2 |
|
|
|
(3,809 |
) |
|
|
3.3 |
|
|
|
(14,522 |
) |
|
|
2.9 |
|
Reversal of accrual for uncertain tax positions |
|
|
(52,306 |
) |
|
|
178.1 |
|
|
|
(39,485 |
) |
|
|
33.7 |
|
|
|
(77,337 |
) |
|
|
15.6 |
|
Accrued interest on anticipated tax assessments |
|
|
3,055 |
|
|
|
(10.4 |
) |
|
|
9,263 |
|
|
|
(7.9 |
) |
|
|
6,828 |
|
|
|
(1.4 |
) |
Increase in unrecognized tax benefits |
|
|
|
|
|
|
|
|
|
|
35,575 |
|
|
|
(30.3 |
) |
|
|
39,500 |
|
|
|
(8.0 |
) |
Increase in deferred tax assets, net |
|
|
(25,948 |
) |
|
|
88.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance recognized |
|
|
43,876 |
|
|
|
(149.4 |
) |
|
|
55,492 |
|
|
|
(47.4 |
) |
|
|
458,280 |
|
|
|
(92.3 |
) |
Valuation allowance reversed |
|
|
(25,689 |
) |
|
|
87.5 |
|
|
|
(128,640 |
) |
|
|
109.7 |
|
|
|
|
|
|
|
|
|
Reversal of tax credits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
(2.0 |
) |
Other |
|
|
(917 |
) |
|
|
3.1 |
|
|
|
(1,194 |
) |
|
|
1.0 |
|
|
|
10,374 |
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax (benefit)provision |
|
|
(69,161 |
) |
|
|
235.5 |
|
|
|
(113,813 |
) |
|
|
97.1 |
|
|
|
259,360 |
|
|
|
(52.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Due to rounding, amounts may not add. |
F-25
The Company currently operates in 19 states and is subject to various state tax jurisdictions.
The Company estimates its state tax liability based upon the individual taxing authorities
regulations, estimates of income by taxing jurisdiction and the Companys ability to utilize
certain tax-saving strategies. Due primarily to a change in the Companys estimate of the
allocation of income or loss, as the case may be, among the various taxing jurisdictions and
changes in tax regulations and their impact on the Companys tax strategies, the Companys
estimated rate for state income taxes was 5.0% for each of fiscal 2011, and 2010 and 4.5% for
fiscal 2009.
The (benefit) provision for income taxes for each of the fiscal years ended October 31, 2011, 2010
and 2009 is set forth below (amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Federal |
|
$ |
(21,517 |
) |
|
$ |
(67,318 |
) |
|
$ |
333,311 |
|
State |
|
|
(47,644 |
) |
|
|
(46,495 |
) |
|
|
(73,951 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(69,161 |
) |
|
$ |
(113,813 |
) |
|
$ |
259,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
$ |
(43,212 |
) |
|
$ |
(156,985 |
) |
|
$ |
(229,003 |
) |
Deferred |
|
|
(25,949 |
) |
|
|
43,172 |
|
|
|
488,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(69,161 |
) |
|
$ |
(113,813 |
) |
|
$ |
259,360 |
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the change in the unrecognized tax benefits for the years ended October 31,
2011, 2010 and 2009 is set forth below (amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Balance, beginning of year |
|
$ |
160,446 |
|
|
$ |
171,366 |
|
|
$ |
320,679 |
|
Increase in benefit as a result of tax
positions taken in prior years |
|
|
8,168 |
|
|
|
14,251 |
|
|
|
11,000 |
|
Increase in benefit as a result of tax
positions taken in current year |
|
|
|
|
|
|
15,675 |
|
|
|
47,500 |
|
Decrease in benefit as a result of settlements |
|
|
(17,954 |
) |
|
|
|
|
|
|
(138,333 |
) |
Decrease in benefit as a result of
completion of audits |
|
|
(33,370 |
) |
|
|
|
|
|
|
|
|
Decrease in benefit as a result of lapse of
statute of limitation |
|
|
(12,621 |
) |
|
|
(40,846 |
) |
|
|
(69,480 |
) |
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
104,669 |
|
|
$ |
160,446 |
|
|
$ |
171,366 |
|
|
|
|
|
|
|
|
|
|
|
The Company has reached final settlement of its federal tax returns for fiscal years through 2009.
The federal settlements resulted in a reduction in the Companys unrecognized tax benefits. The
state impact of any amended federal return remains subject to examination by various states for a
period of up to one year after formal notification of such amendments is made to the states.
The Companys unrecognized
tax benefits are included in Income taxes payable on the Companys
consolidated balance sheets. If these unrecognized tax benefits reverse in the future, they would
have a beneficial impact on the Companys effective tax rate at that time. During the next twelve
months, it is reasonably possible that the amount of unrecognized tax benefits will change but we
are not able to provide a range of such change. The anticipated changes will be principally due to
the expiration of tax statutes, settlements with taxing jurisdictions, increases due to new tax
positions taken and the accrual of estimated interest and penalties.
F-26
The Company recognizes in its tax provision, potential interest and penalties. Information as to
the amounts recognized in its tax provision, before reduction for applicable taxes and reversal of
previously accrued interest and penalties, of potential interest and penalties in the twelve-month
periods ended October 31, 2011, 2010 and 2009, and the amounts accrued for potential interest and
penalties at October 31, 2011 and 2010 is set forth in the table below (amounts in thousands).
|
|
|
|
|
Recognized in statements of operations: |
|
|
|
|
Fiscal
year |
|
|
|
|
2011 |
|
$ |
4,700 |
|
2010 |
|
$ |
14,300 |
|
2009 |
|
$ |
11,000 |
|
|
|
|
|
|
Accrued at: |
|
|
|
|
October 31, 2011 |
|
$ |
29,200 |
|
October 31, 2010 |
|
$ |
39,209 |
|
The amounts accrued for interest and penalties are included in Income taxes payable on the
Companys consolidated balance sheets.
Since the beginning of fiscal 2007, the Company has recorded significant deferred tax assets. These
deferred tax assets were generated primarily by inventory impairments and impairments of
investments in and advances to unconsolidated entities. In accordance with ASC 740, the Company
assessed whether a valuation allowance should be established based on its determination of whether
it is more likely than not that some portion or all of the deferred tax assets will not be
realized. The Company believes that the continued downturn in the housing market, the uncertainty
as to its length and magnitude, the cumulative operating losses in recent years, and the Companys continued recognition of impairment charges, are
significant evidence of the continued need for a valuation allowance against its net deferred tax
assets. The Company has recorded valuation allowances against its entire net deferred tax asset as
of October 31, 2011 and 2010.
The components of net deferred tax assets and liabilities at October 31, 2011 and 2010 are set
forth below (amounts in thousands).
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
5,573 |
|
|
$ |
4,917 |
|
Impairment charges |
|
|
427,807 |
|
|
|
415,801 |
|
Inventory valuation differences |
|
|
10,036 |
|
|
|
13,093 |
|
Stock-based compensation expense |
|
|
44,319 |
|
|
|
48,657 |
|
Amounts related to unrecognized tax benefits |
|
|
47,387 |
|
|
|
55,090 |
|
State tax, net operating loss carryforward |
|
|
18,406 |
|
|
|
11,159 |
|
Federal tax net operating loss carryforward |
|
|
11,232 |
|
|
|
|
|
Other |
|
|
5,382 |
|
|
|
3,497 |
|
|
|
|
|
|
|
|
Total assets |
|
|
570,142 |
|
|
|
552,214 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Capitalized interest |
|
|
94,129 |
|
|
|
91,731 |
|
Deferred income |
|
|
(10,553 |
) |
|
|
(10,097 |
) |
Depreciation |
|
|
32,416 |
|
|
|
29,334 |
|
Deferred marketing |
|
|
(9,295 |
) |
|
|
(3,635 |
) |
Other |
|
|
36,074 |
|
|
|
35,698 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
142,771 |
|
|
|
143,031 |
|
|
|
|
|
|
|
|
Net deferred tax assets before valuation allowances |
|
|
427,371 |
|
|
|
409,183 |
|
Cumulative valuation allowance state |
|
|
(74,030 |
) |
|
|
(45,030 |
) |
Cumulative valuation allowance federal |
|
|
(353,341 |
) |
|
|
(364,153 |
) |
|
|
|
|
|
|
|
Net deferred tax assets |
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
F-27
On November 6, 2009, the Worker, Homeownership, and Business Assistance Act of 2009 (the Act) was
enacted into law. The Act amended Section 172 of the Internal Revenue Code to allow net operating
losses realized in a tax
year ending after December 31, 2007 and beginning before January 1, 2010 to be carried back for up
to five years (such losses were previously limited to a two-year carryback). This change allowed
the Company to carry back its fiscal 2010 taxable loss against taxable income reported in fiscal
2006 and receive a federal tax refund in its second quarter of fiscal 2011 of $154.3 million. The tax
losses generated in fiscal 2010 were primarily from the recognition for tax purposes of previously
recognized book impairments and the recognition of stock option expenses recognized for book
purposes in prior years.
For federal income tax purposes, the Company carried back tax losses incurred in fiscal 2009
against taxable income it reported in fiscal 2007 and received a tax refund in fiscal 2010 of
$152.7 million. The tax losses generated in fiscal 2009 were primarily from the recognition for tax
purposes of previously recognized book impairments and the recognition of stock option expenses not
recognized for book purposes.
The Company is allowed to carry forward tax losses for 20 years and apply such tax losses to future
taxable income to realize federal deferred tax assets. As of October 31, 2011, the Company
estimates that it will have approximately
$45.0 million of tax loss carryforwards, resulting from losses that it expects to recognize on its
fiscal 2011 tax return. In addition, the Company expects to be able to reverse its previously recognized
valuation allowances against future tax provisons during any future period in which it reports book income before income taxes.
The Company will continue to review its deferred tax assets in accordance with ASC 740.
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 October 31, 2011 and $45.0 million
as of October 31, 2010. 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.
8. Stockholders Equity
The Companys authorized capital stock consists of 400 million shares of common stock, $.01 par
value per share and 15 million shares of preferred stock, $.01 par value per share. At October 31,
2011, the Company had 165.7 million shares of common stock issued and outstanding (excluding 2.9
million shares of treasury stock), 13.7 million shares of common stock reserved for outstanding
stock options and restricted stock units, 6.7 million shares of common stock reserved for future
stock option and award issuances and 0.6 million shares of common stock reserved for issuance under
the Companys employee stock purchase plan. As of October 31, 2011, the Company had not issued any
shares of preferred stock.
Issuance of Common Stock
In each of fiscal 2011, 2010 and 2009, the Company issued 1,250 shares of restricted common stock
pursuant to its stock incentive plans to certain outside directors. The Company is amortizing the
fair market value of the awards on the date of grant over the period of time that each award vests.
At October 31, 2011, 1,875 shares of the restricted stock awards were unvested.
Stock Repurchase Program
In March 2003, the Companys Board of Directors authorized the repurchase of up to 20 million
shares of its common stock from time to time, in open market transactions or otherwise, for the
purpose of providing shares for its various benefit plans.
Information about the Companys share repurchase program for the fiscal years ended October 31,
2011, 2010 and 2009 is in the table below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Number of shares purchased (in thousands) |
|
|
3,068 |
|
|
|
31 |
|
|
|
79 |
|
Average price per share |
|
$ |
16.00 |
|
|
$ |
19.24 |
|
|
$ |
18.70 |
|
Remaining authorization at October 31(in
thousands): |
|
|
8,786 |
|
|
|
11,855 |
|
|
|
11,885 |
|
F-28
Stockholder Rights Plan and Transfer Restriction
In June 2007, the Company adopted a shareholder rights plan (2007 Rights Plan). The rights issued
pursuant to the 2007 Rights Plan will become exercisable upon the earlier of (i) ten days following
a public announcement that a person or group of affiliated or associated persons has acquired, or
obtained the right to acquire, beneficial ownership of 15% or more of the outstanding shares of
the Companys common stock or (ii) ten business days following the commencement of a tender offer
or exchange offer that would result in a person or group beneficially owning 15% or more of the
outstanding shares of common stock. No rights were exercisable at October 31, 2011.
On March 17, 2010, the Board of Directors of the Company adopted a Certificate of Amendment to the
Second Restated Certificate of Incorporation of the Company (the Certificate of Amendment). The
Certificate of Amendment includes an amendment approved by the Companys stockholders at the 2010
Annual Meeting which restricts certain transfers of the Companys common stock in order to preserve
the tax treatment of the Companys net operating and unrealized tax losses. The Certificate of
Amendments transfer restrictions generally restrict any direct or indirect transfer of the
Companys common stock if the effect would be to increase the direct or indirect ownership of any
Person (as defined in the Certificate of Amendment) from less than 4.95% to 4.95% or more of the
Companys common stock, or increase the ownership percentage of a Person owning or deemed to own
4.95% or more of the Companys common stock. Any direct or indirect transfer attempted in violation
of this restriction would be void as of the date of the prohibited transfer as to the purported
transferee.
9. Stock-Based Benefit Plans
The Company has two active stock incentive plans, one for employees (including officers) and one
for non-employee directors. The Companys active stock incentive plans provide for the granting of
incentive stock options (solely to employees) and non-qualified stock options with a term of up to
ten years at a price not less than the market price of the stock at the date of grant. The
Companys active stock incentive plans also provide for the issuance of stock appreciation rights
and restricted and unrestricted stock awards and stock units, which may be performance based.
The Company has two additional stock incentive plans for employees, officers and directors that are
inactive except for outstanding stock option grants at October 31, 2011. No additional options may
be granted under these plans. Stock options granted under these plans were made with a term of up
to ten years at a price not less than the market price of the stock at the date of grant and
generally vested over a four-year period for employees and a two-year period for non-employee
directors.
Stock Options
Stock options granted to employees generally vest over a four-year period, although certain grants
may vest over a longer or shorter period, and stock options granted to non-employee directors
generally vest over a two-year period. Shares issued upon the exercise of a stock option are either
from shares held in treasury or newly issued shares.
The Company used a lattice model for the valuation for all option grants in fiscal 2011, 2010 and
2009. Expected volatilities are based on implied volatilities from traded options on the Companys
stock and the historical volatility of the Companys stock. The expected life of options granted is
derived from the historical exercise patterns and anticipated future patterns and represents the
period of time that options granted are expected to be outstanding; the range given above results
from certain groups of employees exhibiting different behavior. 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 fair value used for stock option grants in each of the fiscal
years ended October 31, 2011, 2010 and 2009 are set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Expected volatility |
|
45.38% - 49.46% |
|
46.74% - 51.41% |
|
46.74% - 50.36% |
Weighted-average volatility |
|
47.73% |
|
49.51% |
|
48.06% |
Risk-free interest rate |
|
1.64% - 3.09% |
|
2.15% - 3.47% |
|
1.24% - 1.90% |
Expected life (years) |
|
4.29 - 8.75 |
|
4.44 - 8.69 |
|
4.29 - 8.52 |
Dividends |
|
none |
|
none |
|
none |
Weighted-average fair value
per share of options granted |
|
$7.94 |
|
$7.63 |
|
$8.60 |
F-29
The fair value of stock option grants is recognized evenly over the vesting period of the options
or over the period between the grant date and the time the option becomes non-forfeitable by the
employee, whichever is shorter. Stock option expense is included in the Companys selling, general
and administrative expenses in the accompanying Consolidated Statements of Operations. Information
regarding the stock-based compensation for fiscal 2011, 2010 and 2009 is set forth below (amounts
in thousands).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Stock-based compensation expense
recognized |
|
$ |
8,626 |
|
|
$ |
9,332 |
|
|
$ |
10,925 |
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit recognized |
|
|
|
(a) |
|
$ |
3,266 |
|
|
$ |
4,370 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Due to the losses recognized by the Company over the past several years and its
inability to forecast future pre-tax profits, the Company has not recognized or estimated a
tax benefit on its stock based compensation expense in fiscal 2011. |
In fiscal 2010 and 2009, as part of severance plans for certain employees, the Company extended the
period in which an option could be exercised on 175,813 options and 46,052 options, respectively.
The Company expensed $552,000 and $322,000 of stock option expense related to these extensions in
fiscal 2010 and 2009, respectively. These amounts are included in the stock-based compensation in
the table above.
At October 31, 2011, total compensation cost related to non-vested awards not yet recognized was
approximately $7.4 million and the weighted-average period over which the Company expects to
recognize such compensation costs and tax benefit is 2.5 years.
The following table summarizes stock option activity for the Companys plans during each of the
fiscal years ended October 31, 2011, 2010 and 2009 (amounts in thousands, except per share
amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
Weighted- |
|
|
|
Number |
|
|
average |
|
|
Number |
|
|
average |
|
|
Number |
|
|
average |
|
|
|
of |
|
|
exercise |
|
|
of |
|
|
exercise |
|
|
of |
|
|
exercise |
|
|
|
options |
|
|
price |
|
|
options |
|
|
price |
|
|
options |
|
|
price |
|
Balance, beginning |
|
|
14,339 |
|
|
$ |
19.36 |
|
|
|
16,123 |
|
|
$ |
17.73 |
|
|
|
19,854 |
|
|
$ |
14.73 |
|
Granted |
|
|
1,103 |
|
|
|
19.32 |
|
|
|
1,015 |
|
|
|
18.39 |
|
|
|
1,092 |
|
|
|
21.68 |
|
Exercised |
|
|
(2,467 |
) |
|
|
11.07 |
|
|
|
(2,498 |
) |
|
|
8.72 |
|
|
|
(4,436 |
) |
|
|
5.03 |
|
Cancelled |
|
|
(107 |
) |
|
|
20.12 |
|
|
|
(301 |
) |
|
|
17.03 |
|
|
|
(387 |
) |
|
|
20.49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, ending |
|
|
12,868 |
|
|
$ |
20.94 |
|
|
|
14,339 |
|
|
$ |
19.36 |
|
|
|
16,123 |
|
|
$ |
17.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable,
at October 31, |
|
|
10,365 |
|
|
$ |
21.24 |
|
|
|
11,670 |
|
|
$ |
19.00 |
|
|
|
13,171 |
|
|
$ |
16.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options available for
grant at October 31, |
|
|
6,712 |
|
|
|
|
|
|
|
8,038 |
|
|
|
|
|
|
|
9,168 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about stock options outstanding and exercisable at
October 31, 2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding |
|
|
Options exercisable |
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
|
|
|
average |
|
|
|
|
|
|
|
|
|
|
remaining |
|
|
Weighted- |
|
|
|
|
|
|
remaining |
|
|
Weighted- |
|
Range of |
|
Number |
|
|
contractual |
|
|
average |
|
|
Number |
|
|
contractual |
|
|
average |
|
exercise |
|
outstanding |
|
|
life |
|
|
exercise |
|
|
exercisable |
|
|
life |
|
|
exercise |
|
prices |
|
(in 000s) |
|
|
(in years) |
|
|
price |
|
|
(in 000s) |
|
|
(in years) |
|
|
price |
|
$10.35 - $10.88 |
|
|
2,484 |
|
|
|
0.8 |
|
|
$ |
10.66 |
|
|
|
2,484 |
|
|
|
0.8 |
|
|
$ |
10.66 |
|
$18.38 - $20.21 |
|
|
5,249 |
|
|
|
5.1 |
|
|
$ |
19.36 |
|
|
|
3,489 |
|
|
|
3.3 |
|
|
$ |
19.57 |
|
$20.76 - $22.18 |
|
|
2,376 |
|
|
|
6.5 |
|
|
$ |
21.13 |
|
|
|
1,648 |
|
|
|
2.3 |
|
|
$ |
21.06 |
|
$31.82 - $35.97 |
|
|
2,759 |
|
|
|
4.0 |
|
|
$ |
33.04 |
|
|
|
2,744 |
|
|
|
4.0 |
|
|
$ |
33.05 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,868 |
|
|
|
4.3 |
|
|
$ |
20.94 |
|
|
|
10,365 |
|
|
|
3.4 |
|
|
$ |
21.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-30
The intrinsic value of options outstanding and exercisable is the difference between the fair
market value of the Companys common stock on the applicable date (Measurement Value) and the
exercise price of those options that had an exercise price that was less than the Measurement
Value. The intrinsic value of options exercised is the difference between the fair market value of
the Companys common stock on the date of exercise and the exercise price.
Information pertaining to the intrinsic value of options outstanding and exercisable at October 31,
2011, 2010 and 2009 is provided below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Intrinsic value of options outstanding |
|
$ |
16,839 |
|
|
$ |
35,214 |
|
|
$ |
54,646 |
|
Intrinsic value of options exercisable |
|
$ |
16,839 |
|
|
$ |
35,214 |
|
|
$ |
54,646 |
|
Information pertaining to the intrinsic value of options exercised and the fair value of options
which became vested or modified in each of the fiscal years ended October 31, 2011, 2010 and 2009
is provided below (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Intrinsic value of options exercised |
|
$ |
23,573 |
|
|
$ |
25,327 |
|
|
$ |
74,659 |
|
Fair value of options vested |
|
$ |
11,027 |
|
|
$ |
12,336 |
|
|
$ |
15,528 |
|
The Companys stock incentive plans permit optionees to exercise stock options using a net
exercise method at the discretion of the Executive Compensation Committee of the Board of
Directors (Executive Compensation Committee). In a net exercise, the Company withholds from the
total number of shares that otherwise would be issued to an optionee upon exercise of the stock
option that number of shares having a fair market value at the time of exercise equal to the option
exercise price and applicable income tax withholdings and remits the remaining shares to the
optionee. Information regarding the use of the net exercise method for fiscal 2011, 2010 and 2009
is set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Options exercised |
|
|
194,000 |
|
|
|
1,201,372 |
|
|
|
93,000 |
|
Shares withheld |
|
|
98,918 |
|
|
|
798,420 |
|
|
|
21,070 |
|
|
|
|
|
|
|
|
|
|
|
Shares issued |
|
|
95,082 |
|
|
|
402,952 |
|
|
|
71,930 |
|
|
|
|
|
|
|
|
|
|
|
Average market value per share withheld |
|
$ |
18.94 |
|
|
$ |
17.96 |
|
|
$ |
21.29 |
|
|
|
|
|
|
|
|
|
|
|
Aggregate market value of shares
withheld (in thousands) |
|
$ |
1,873 |
|
|
$ |
14,341 |
|
|
$ |
400 |
|
|
|
|
|
|
|
|
|
|
|
In addition, pursuant to the provisions of the Companys stock incentive plans, optionees are
permitted to use the value of the Companys common stock that they own to pay for the exercise of
options (stock swap method). Information regarding the use of the stock swap method for fiscal
2011, 2010 and 2009 is set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Options exercised |
|
|
28,900 |
|
|
|
29,512 |
|
|
|
38,379 |
|
Shares tendered |
|
|
14,807 |
|
|
|
14,459 |
|
|
|
9,237 |
|
|
|
|
|
|
|
|
|
|
|
Shares issued |
|
|
14,093 |
|
|
|
15,053 |
|
|
|
29,142 |
|
|
|
|
|
|
|
|
|
|
|
Average market value per share withheld |
|
$ |
20.53 |
|
|
$ |
19.71 |
|
|
$ |
21.40 |
|
|
|
|
|
|
|
|
|
|
|
Aggregate market value of shares
tendered (in thousands) |
|
$ |
304 |
|
|
$ |
285 |
|
|
$ |
198 |
|
|
|
|
|
|
|
|
|
|
|
Performance Based Restricted Stock Units:
In December 2010, 2009 and 2008, the Executive Compensation Committee of the Companys Board of
Directors approved awards of performance-based restricted stock units (Performance-Based RSUs)
relating to shares of the Companys common stock. The Performance-Based RSUs will vest and the
recipients will be entitled to receive the underlying shares if the average closing price of the
Companys 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 Performance-Based RSUs
increases 30% or more over the closing price of the Companys 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 stipulated in the award document.
The Company determined the aggregate value of the Performance-Based RSUs using a lattice-based
option pricing model.
F-31
The Company used a lattice based option pricing model to determine the fair value of the 2009 and
2008 Performance-Based RSUs. Expenses related to the performance-based RSUs are included in the
Companys selling, general and administrative expenses. Information regarding the issuance,
valuation assumptions, amortization and unamortized balances of the Companys Performance-Based
RSUs in and at the relevant periods and dates in fiscal 2011, 2010 and 2009 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Performance-Based RSUs issued: |
|
|
|
|
|
|
|
|
|
|
|
|
Number issued |
|
|
306,000 |
|
|
|
200,000 |
|
|
|
200,000 |
|
Closing price of the Companys
common stock on date of
issuance |
|
$ |
19.32 |
|
|
$ |
18.38 |
|
|
$ |
21.70 |
|
Target price |
|
$ |
25.12 |
|
|
$ |
23.89 |
|
|
$ |
28.21 |
|
Volatility |
|
|
48.22 |
% |
|
|
49.92 |
% |
|
|
48.14 |
% |
Risk-free interest rate |
|
|
1.99 |
% |
|
|
2.43 |
% |
|
|
1.35 |
% |
Expected life |
|
3.0 years |
|
3.0 years |
|
3.0 years |
Aggregate fair value of
Performance-Based RSUs issued
(in thousands) |
|
$ |
4,994 |
|
|
$ |
3,160 |
|
|
$ |
3,642 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance-Based RSU expense
recognized (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Twelve months ended October 31, |
|
$ |
3,701 |
|
|
$ |
2,121 |
|
|
$ |
1,045 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
At October 31: |
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate outstanding
Performance-Based RSUs |
|
|
706,000 |
|
|
|
400,000 |
|
|
|
200,000 |
|
Cumulative unamortized value
of Performance- Based RSUs (in
thousands) |
|
$ |
4,929 |
|
|
$ |
3,636 |
|
|
$ |
2,597 |
|
Non-Performance Based Restricted Stock Units:
In December 2010 and 2009, the Company issued restricted stock units (RSUs) relating to shares of
the Companys common stock to several 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 Companys common stock to be issued pursuant to the RSUs, multiplied by the closing price of
the Companys common stock on the NYSE on the date the RSUs were awarded. Information regarding
these RSUs is as follows:
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
Non-Performance-Based RSUs issued: |
|
|
|
|
|
|
|
|
Number issued |
|
|
15,497 |
|
|
|
19,663 |
|
Closing price of the Companys common stock on date
of issuance |
|
$ |
19.32 |
|
|
$ |
18.38 |
|
Aggregate fair value of RSUs issued (in thousands) |
|
$ |
299 |
|
|
$ |
361 |
|
|
|
|
|
|
|
|
|
|
Non-Performance-Based RSU expense recognized (in
thousands): |
|
|
|
|
|
|
|
|
Twelve months ended October 31, |
|
$ |
144 |
|
|
$ |
138 |
|
|
|
|
|
|
|
|
|
|
At October 31: |
|
|
|
|
|
|
|
|
Aggregate Non-Performance-Based RSUs outstanding |
|
|
30,994 |
|
|
|
19,663 |
|
Cumulative unamortized value of
Non-Performance-Based RSUs (in thousands) |
|
$ |
379 |
|
|
$ |
224 |
|
Restricted Stock Units in Lieu of Compensation
In December 2008, the Company issued restricted stock units (RSUs) relating to 62,051 shares of
the Companys common stock to a number of employees in lieu of a portion of the employees bonuses
and in lieu of a portion of one employees 2009 salary. These RSUs, although not subject to
forfeiture, will vest in annual installments over a four-year period, unless accelerated due to
death, disability or termination of employment, as more fully described in the RSU award document.
Because the RSUs are non-forfeitable, the value of the RSUs was determined to be equal
to the number of shares of the Companys common stock to be issued pursuant to
F-32
the RSUs, multiplied
by $21.70, the closing price of the Companys common stock on the NYSE on December 19, 2008, the
date the RSUs were awarded. The amount applicable to employee bonuses was charged to the Companys
accrual for bonuses that it made in fiscal 2008 and the amount applicable to salary deferral
($130,000) was charged to selling, general and administrative expense in the three-month period
ended January 31, 2009. The Companys stock incentive plan permits the Company to withhold from the
total number of shares that otherwise would be issued to a RSU recipient upon distribution that
number of shares having a fair value at the time of distribution equal to the applicable income tax
withholdings due and remit the remaining shares to the RSU participant. Information relating to the
distribution of shares and the withholding of taxes on the RSUs for fiscal 2011, 2010 and 2009 is
set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Shares withheld |
|
|
741 |
|
|
|
924 |
|
|
|
836 |
|
Shares issued |
|
|
8,975 |
|
|
|
2,749 |
|
|
|
1,509 |
|
Value of shares withheld (in thousands) |
|
$ |
15 |
|
|
$ |
17 |
|
|
$ |
15 |
|
Employee Stock Purchase Plan
The Companys employee stock purchase plan enables substantially all employees to purchase the
Companys common stock at 95% of the market price of the stock on specified offering dates without
restriction, or at 85% of the market price of the stock on specified offering dates subject to
restrictions. The plan, which terminates in December 2017, provides that 1.2 million shares be
reserved for purchase. At October 31, 2011, 612,000 shares were available for issuance.
Information regarding the Companys employee stock purchase plan for fiscal 2011, 2010 and 2009 is
set forth below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Shares issued |
|
|
23,079 |
|
|
|
23,587 |
|
|
|
25,865 |
|
Average price per share |
|
$ |
15.59 |
|
|
$ |
16.20 |
|
|
$ |
16.49 |
|
Compensation expense recognized (in
thousands) |
|
$ |
54 |
|
|
$ |
57 |
|
|
$ |
64 |
|
10. Income (Loss) Per Share Information
Information pertaining to the calculation of income (loss) per share for each of the fiscal years
ended October 31, 2011, 2010 and 2009 is as follows (amounts in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2011 |
|
|
2010 |
|
|
2009 |
|
Basic weighted-average shares |
|
|
167,140 |
|
|
|
165,666 |
|
|
|
161,549 |
|
Common stock equivalents |
|
|
1,241 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted-average shares |
|
|
168,381 |
|
|
|
165,666 |
|
|
|
161,549 |
|
|
|
|
|
|
|
|
|
|
|
Common stock equivalents excluded from diluted
weighted-average shares due to anti-dilutive effect
(a) |
|
|
|
|
|
|
1,968 |
|
|
|
3,936 |
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of anti-dilutive options (b) |
|
|
7,936 |
|
|
|
8,401 |
|
|
|
7,604 |
|
|
|
|
|
|
|
|
|
|
|
Shares issued under stock incentive and employee
stock purchase plans |
|
|
2,390 |
|
|
|
1,712 |
|
|
|
4,442 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Common stock equivalents represent the dilutive effect of outstanding
in-the-money stock options using the treasury stock method. For fiscal 2010 and 2009,
there were no incremental shares attributed to outstanding options to purchase common
stock because the Company had a net loss in fiscal 2010 and fiscal 2009 and any
incremental shares would be anti-dilutive. |
|
(b) |
|
Based upon the average quarterly closing price of the Companys common stock on
the NYSE for the period. |
F-33
11. Fair Value Disclosures
A summary of assets and (liabilities) at October 31, 2011 and October 31, 2010 related to the
Companys financial instruments, measured at fair value on a recurring basis, is set forth below
(amounts in thousands).