Document



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended April 30, 2018
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission file number 001-09186
TOLL BROTHERS, INC.
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of
incorporation or organization)
 
23-2416878
(I.R.S. Employer
Identification No.)
 
 
 
250 Gibraltar Road, Horsham, Pennsylvania
(Address of principal executive offices)
 
19044
(Zip Code)
(215) 938-8000
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
 
 
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
 
Smaller reporting company o
 
 
 
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o No þ
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:
At June 1, 2018, there were approximately 151,865,000 shares of Common Stock, $0.01 par value, outstanding.





TOLL BROTHERS, INC.
TABLE OF CONTENTS
 
Page No.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 







STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included in this report or in other materials we have filed or will file with the Securities and Exchange Commission (“SEC”) (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. One can identify these statements by the fact that they do not relate to matters of a strictly historical or factual nature and generally discuss or relate to future events. These statements contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “can,” “could,” “might,” “should,” and other words or phrases of similar meaning. 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; home warranty and construction defect claims; 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 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, investigations, and claims.
From time to time, forward-looking statements also are included in other reports on Forms 10-K, 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 market conditions, 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 a more detailed discussion of these factors, see the information under the captions “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our most recent Annual Report on Form 10-K filed with the SEC and in this report.
When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Toll Brothers, Inc. and its subsidiaries, unless the context otherwise requires. References herein to fiscal year refer to our fiscal years ended or ending October 31.



1



PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOLL BROTHERS, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
 
April 30,
2018
 
October 31,
2017
 
(unaudited)
 
 
ASSETS
 
 
 
Cash and cash equivalents
$
475,113

 
$
712,829

Restricted cash and investments
1,161

 
2,482

Inventory
7,871,569

 
7,281,453

Property, construction, and office equipment, net
185,676

 
189,547

Receivables, prepaid expenses, and other assets
599,755

 
542,217

Mortgage loans held for sale
111,811

 
132,922

Customer deposits held in escrow
135,072

 
102,017

Investments in unconsolidated entities
456,762

 
481,758

Deferred tax assets, net of valuation allowances
6,807

 


 
$
9,843,726

 
$
9,445,225

LIABILITIES AND EQUITY
 
 
 
Liabilities
 
 
 
Loans payable
$
649,299

 
$
637,416

Senior notes
2,860,290

 
2,462,463

Mortgage company loan facility
103,550

 
120,145

Customer deposits
469,586

 
396,026

Accounts payable
324,605

 
275,223

Accrued expenses
936,414

 
959,353

Income taxes payable
13,386

 
57,509

Total liabilities
5,357,130

 
4,908,135

Equity
 
 
 
Stockholders’ equity
 
 
 
Preferred stock, none issued

 

Common stock, 177,937 shares issued at April 30, 2018 and October 31, 2017
1,779

 
1,779

Additional paid-in capital
715,949

 
720,115

Retained earnings
4,690,272

 
4,474,064

Treasury stock, at cost — 26,073 and 20,732 shares at April 30, 2018 and October 31, 2017, respectively
(925,317
)
 
(662,854
)
Accumulated other comprehensive loss
(1,980
)
 
(1,910
)
Total stockholders’ equity
4,480,703

 
4,531,194

Noncontrolling interest
5,893

 
5,896

Total equity
4,486,596

 
4,537,090

 
$
9,843,726

 
$
9,445,225

See accompanying notes.

2



TOLL BROTHERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
(Amounts in thousands, except per share data)
(Unaudited)
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
2018
 
2017
Revenues
$
2,774,667

 
$
2,284,242

 
$
1,599,199

 
$
1,363,512

 
 
 
 
 
 
 
 
Cost of revenues
2,232,637

 
1,810,443

 
1,298,157

 
1,077,441

Selling, general and administrative
323,919

 
283,847

 
166,652

 
146,752

 
2,556,556

 
2,094,290

 
1,464,809

 
1,224,193

Income from operations
218,111

 
189,952

 
134,390

 
139,319

Other:
 
 
 
 
 
 
 
Income from unconsolidated entities
41,444

 
92,349

 
2,564

 
45,904

Other income – net
24,791

 
26,689

 
15,794

 
13,986

Income before income taxes
284,346

 
308,990

 
152,748

 
199,209

Income tax provision
40,429

 
113,936

 
40,938

 
74,571

Net income
$
243,917

 
$
195,054

 
$
111,810

 
$
124,638

 
 
 
 
 
 
 
 
Other comprehensive income, net of tax
341

 
337

 
170

 
168

Total comprehensive income
$
244,258

 
$
195,391

 
$
111,980

 
$
124,806

 
 
 
 
 
 
 
 
Per share:
 
 
 
 
 
 
 
Basic earnings
$
1.58

 
$
1.20

 
$
0.73

 
$
0.76

Diluted earnings
$
1.55

 
$
1.15

 
$
0.72

 
$
0.73

Cash dividends declared
$
0.19

 
$
0.08

 
$
0.11

 
$
0.08

 
 
 
 
 
 
 
 
Weighted-average number of shares:
 
 
 
 
 
 
 
Basic
154,306

 
163,040

 
152,731

 
163,492

Diluted
157,013

 
170,910

 
155,129

 
171,403

See accompanying notes.


3



TOLL BROTHERS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
 
Six months ended April 30,
 
2018
 
2017
Cash flow (used in) provided by operating activities:
 
 
 
Net income
$
243,917

 
$
195,054

Adjustments to reconcile net income to net cash (used in) provided by operating activities:

 

Depreciation and amortization
12,520

 
12,123

Stock-based compensation
15,347

 
15,585

Income from unconsolidated entities
(41,444
)
 
(92,349
)
Distributions of earnings from unconsolidated entities
39,508

 
108,864

Income from foreclosed real estate and distressed loans
(1,026
)
 
(4,018
)
Deferred tax (benefit) provision
(29,886
)
 
3,816

Change in deferred tax valuation allowances


 
262

Inventory impairments and write-offs
17,685

 
8,917

Other
754

 
2,501

Changes in operating assets and liabilities
 
 
 
Increase in inventory
(540,898
)
 
(190,125
)
Origination of mortgage loans
(575,285
)
 
(513,836
)
Sale of mortgage loans
594,933

 
671,899

Decrease in restricted cash and investments
1,321

 
12,445

(Increase) decrease in receivables, prepaid expenses, and other assets
(97,388
)
 
56,034

Increase in customer deposits
40,505

 
57,405

Increase (decrease) in accounts payable and accrued expenses
14,204

 
(128,634
)
(Decrease) increase in income taxes payable
(19,714
)
 
27,117

Net cash (used in) provided by operating activities
(324,947
)
 
243,060

Cash flow provided by (used in) investing activities:
 
 
 
Purchase of property and equipment — net
(6,501
)
 
(11,709
)
Sale and redemption of marketable securities and restricted investments — net


 
18,049

Investments in unconsolidated entities
(10,800
)
 
(113,515
)
Return of investments in unconsolidated entities
54,315

 
98,087

Investment in foreclosed real estate and distressed loans
(195
)
 
(513
)
Return of investments in foreclosed real estate and distressed loans
3,122

 
4,376

Acquisition of a business


 
(85,183
)
Net cash provided by (used in) investing activities
39,941

 
(90,408
)
Cash flow provided by (used in) financing activities:
 
 
 
Proceeds from issuance of senior notes
400,000

 
300,000

Debt issuance costs for senior notes
(3,410
)
 
(2,830
)
Proceeds from loans payable
1,238,283

 
769,454

Principal payments of loans payable
(1,276,148
)
 
(1,173,880
)
Proceeds from stock-based benefit plans
9,133

 
40,628

Purchase of treasury stock
(291,478
)
 
(15,422
)
Dividends paid
(29,090
)
 
(13,051
)
Net cash provided by (used in) financing activities
47,290

 
(95,101
)
Net (decrease) increase in cash and cash equivalents
(237,716
)
 
57,551

Cash and cash equivalents, beginning of period
712,829

 
633,715

Cash and cash equivalents, end of period
$
475,113

 
$
691,266

See accompanying notes.

4



TOLL BROTHERS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Significant Accounting Policies
Basis of Presentation
The accompanying condensed consolidated financial statements include the accounts of Toll Brothers, Inc. (the “Company,” “we,” “us,” or “our”), 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 we have effective control of the entity, in which case we would consolidate the entity.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial information. The October 31, 2017 balance sheet amounts and disclosures included herein have been derived from our October 31, 2017 audited financial statements. Since the accompanying condensed consolidated financial statements do not include all the information and footnotes required by U.S. generally accepted accounting principles (“GAAP”) for complete financial statements, we suggest that they be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017 (“2017 Form 10-K”). In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which are of a normal recurring nature, necessary to present fairly our financial position as of April 30, 2018; the results of our operations for the six-month and three-month periods ended April 30, 2018 and 2017; and our cash flows for the six-month periods ended April 30, 2018 and 2017. The results of operations for such interim periods are not necessarily indicative of the results to be expected for the full year.
Reclassification
The Condensed Consolidated Statement of Cash Flows for the six months ended April 30, 2017 was restated to reflect a reclassification of approximately $18.0 million of cash flow from “Net cash (used in) provided by operating activities” to “Net cash provided by (used in) investing activities” related to restricted investment activity. In addition, certain other prior period amounts have been reclassified to conform to the fiscal 2018 presentation.
Recent Accounting Pronouncements
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-02, “Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income” (“ASU 2018-02”). ASU 2018-02 allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act enacted on December 22, 2017 and also requires entities to disclose their accounting policy for releasing income tax effects from accumulated other comprehensive income. We elected to adopt ASU 2018-02 in the first quarter of fiscal 2018, and the adoption did not have a material effect on our consolidated financial statements and disclosures.
In March 2017, the FASB issued ASU No. 2017-07, “Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost” (“ASU 2017-07”). ASU 2017-07 requires an employer to report the service cost component of pension and other post-retirement benefit costs in the same line item as other compensation costs arising from services rendered by the pertinent employees while the other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. We adopted ASU 2017-07 on November 1, 2017, and the adoption did not have a material effect on our consolidated financial statements and disclosures.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects related to the accounting for share-based payment transactions, including the accounting for income taxes and forfeitures, statutory tax withholding requirements and classification on the statement of cash flows. We adopted ASU 2016-09 on November 1, 2017. Excess tax benefits or deficiencies for stock-based compensation are now reflected in our Condensed Consolidated Statements of Operations and Comprehensive Income as a component of income tax expense, whereas previously they were recognized in equity. We have also elected to account for forfeitures as they occur, rather than estimate expected forfeitures. As a result of adopting ASU 2016-09, the impact of recognizing excess tax benefits and deficiencies in our Condensed Consolidated Statements of Operations and Comprehensive Income resulted in a $4.0 million reduction in our income tax expense in the six-month period ended April 30, 2018. The remaining aspects of adopting ASU 2016-09 did not have a material impact on our financial statements and disclosures.

5



In February 2017, the FASB issued ASU No. 2017-05, “Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets” (“ASU 2017-05”). ASU 2017-05 is meant to clarify the scope of the original guidance within Subtopic 610-20 that was issued in connection with ASU 2014-09, as defined below, which provides guidance for recognizing gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. ASU 2017-05 also added guidance for partial sales of nonfinancial assets. ASU 2017-05 is effective for our fiscal year beginning November 1, 2018 and we are required to adopt ASU 2017-05 concurrent with the adoption of ASU 2014-09. We are currently evaluating the impact that the adoption of ASU 2017-05 may have on our consolidated financial statements and disclosures.
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers” (“ASU 2014-09”), which provides guidance for revenue recognition. ASU 2014-09 affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets. ASU 2014-09 supersedes the revenue recognition requirements in Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition,” and most industry-specific guidance. ASU 2014-09 also supersedes some cost guidance included in ASC Subtopic 605-35, “Revenue Recognition—Construction-Type and Production-Type Contracts.” The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which a company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These judgments and estimates include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each separate performance obligation. In August 2015, the FASB issued ASU 2015-14 “Revenue from Contracts with Customers” (“ASU 2015-14”), which delays the effective date of ASU 2014-09 by one year. ASU 2014-09, as amended by ASU 2015-14, is effective for our fiscal year beginning November 1, 2018, and, at that time, we expect to adopt the new standard under the modified retrospective approach. We do not believe the adoption of ASU 2014-09 will have a material impact on the amount or timing of our home building revenues. However, we currently expect that the adoption of ASU 2014-09 will result in a reclassification to our current presentation of forfeited customer deposits in our Consolidated Statements of Operations and Comprehensive Income; a reclassification to our current presentation of certain model home costs in our Consolidated Balance Sheets; a change to our current accounting for certain deferred marketing costs as well as incomplete deliverables at the time a home closes; and a change to the timing of recognition of revenues and profits on land sale transactions and certain management fees that we earn from our unconsolidated entities. We are continuing to evaluate the impact the adoption of ASU 2014-09 may have on other aspects of our business and on our consolidated financial statements and disclosures.
In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“ASU 2016-02”), which requires an entity to recognize assets and liabilities on the balance sheet for the rights and obligations created by leased assets and provide additional disclosures. ASU 2016-02 is effective for our fiscal year beginning November 1, 2019, and, at that time, we will adopt the new standard using a modified retrospective approach. We are currently evaluating the impact that the adoption of ASU 2016-02 may have on our consolidated financial statements and disclosures.
2. Inventory
Inventory at April 30, 2018 and October 31, 2017 consisted of the following (amounts in thousands):
 
April 30,
2018
 
October 31,
2017
Land controlled for future communities
$
164,206

 
$
87,158

Land owned for future communities
1,064,967

 
1,142,870

Operating communities
6,642,396

 
6,051,425

 
$
7,871,569

 
$
7,281,453

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 12 months of the end of the fiscal period being reported on; and communities preparing to open for sale. The carrying value attributable to operating communities includes the cost of homes under construction, land and land development costs, the carrying cost of home sites in current and future phases of these communities, and the carrying cost of model homes.
Communities that were previously offering homes for sale but are temporarily closed due to business conditions, do not have any remaining backlog, and are not expected to reopen within 12 months of the end of the fiscal period being reported on have been classified as land owned for future communities.

6



Information regarding the classification, number, and carrying value of these temporarily closed communities, as of the dates indicated, is provided in the table below:
 
April 30,
2018
 
October 31,
2017
Land owned for future communities:
 
 
 
Number of communities
16

 
14

Carrying value (in thousands)
$
126,998

 
$
110,732

Operating communities:
 
 
 
Number of communities
2

 
6

Carrying value (in thousands)
$
14,493

 
$
26,749

The amounts we have provided for inventory impairment charges and the expensing of costs that we believed not to be recoverable, for the periods indicated, are shown in the table below (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
2018
 
2017
Land controlled for future communities
$
377

 
$
782

 
$
260

 
$
121

Land owned for future communities
247

 
1,200

 
247

 
1,200

Operating communities
17,061

 
6,935

 
13,325

 
2,935

 
$
17,685

 
$
8,917

 
$
13,832

 
$
4,256

See Note 11, “Fair Value Disclosures,” for information regarding 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 the fair values of those communities, net of impairment charges.
At April 30, 2018, we evaluated our land purchase contracts, including those to acquire land for apartment developments, to determine whether any of the selling entities were VIEs and, if they were, whether we were the primary beneficiary of any of them. Under these land purchase contracts, we do not possess legal title to the land; our risk is generally limited to deposits paid to the sellers and predevelopment costs incurred; and the creditors of the sellers generally have no recourse against us. At April 30, 2018, we determined that 119 land purchase contracts, with an aggregate purchase price of $1.95 billion, on which we had made aggregate deposits totaling $133.0 million, were VIEs, and that we were not the primary beneficiary of any VIE related to our land purchase contracts. At October 31, 2017, we determined that 104 land purchase contracts, with an aggregate purchase price of $1.43 billion, on which we had made aggregate deposits totaling $65.6 million, were VIEs and that we were not the primary beneficiary of any VIE related to our land purchase contracts.
Interest incurred, capitalized, and expensed, for the periods indicated, was as follows (amounts in thousands): 
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
2018
 
2017
Interest capitalized, beginning of period
$
352,049

 
$
369,419

 
$
354,496

 
$
376,880

Interest incurred
81,269

 
85,310

 
42,582

 
43,536

Interest expensed to cost of revenues
(78,912
)
 
(68,486
)
 
(45,027
)
 
(40,558
)
Interest expensed in other income
(1,001
)
 
(1,995
)
 
(285
)
 
(1,953
)
Interest capitalized on investments in unconsolidated entities
(3,602
)
 
(4,214
)
 
(1,891
)
 
(1,820
)
Previously capitalized interest transferred to investments in unconsolidated entities

 
(4,030
)
 

 

Previously capitalized interest on investments in unconsolidated entities transferred to inventory
115

 
209

 
43

 
128

Interest capitalized, end of period
$
349,918

 
$
376,213

 
$
349,918

 
$
376,213


7




3. Investments in Unconsolidated Entities
We have investments in various unconsolidated entities. These entities, which are structured as joint ventures (i) develop land for the joint venture participants and for sale to outside builders (“Land Development Joint Ventures”); (ii) develop for-sale homes (“Home Building Joint Ventures”); (iii) develop luxury for-rent residential apartments, commercial space, and a hotel (“Rental Property Joint Ventures”), which includes our investment in Toll Brothers Realty Trust (the “Trust”); and (iv) invest in distressed loans and real estate and provide financing and land banking to residential builders and developers for the acquisition and development of land and home sites (“Gibraltar Joint Ventures”).
The table below provides information as of April 30, 2018, regarding active joint ventures that we are invested in, by joint venture category ($ amounts in thousands):
 
Land
Development
Joint Ventures
 
Home Building
Joint Ventures
 
Rental Property
Joint Ventures
 
Gibraltar
Joint Ventures
 
Total
Number of unconsolidated entities
7
 
4
 
14
 
5
 
30
Investment in unconsolidated entities
$
222,099

 
$
86,220

 
$
134,252

 
$
14,191

 
$
456,762

Number of unconsolidated entities with funding commitments by the Company
4
 
1
 
1
 
1

 
7
Company’s remaining funding commitment to unconsolidated entities
$
22,081

 
$
8,300

 
$
530

 
$
9,621

 
$
40,532

Certain joint ventures in which we have investments obtained debt financing to finance a portion of their activities. The table below provides information at April 30, 2018, regarding the debt financing obtained by category ($ amounts in thousands):
 
Land
Development
Joint Ventures
 
Home Building
Joint Ventures
 
Rental Property
Joint Ventures
 
Total
Number of joint ventures with debt financing
4
 
3
 
13
 
20
Aggregate loan commitments
$
198,500

 
$
381,441

 
$
1,062,138

 
$
1,642,079

Amounts borrowed under loan commitments
$
184,834

 
$
217,273

 
$
768,254

 
$
1,170,361

More specific and/or recent information regarding our investments in, advances to, and future commitments to these entities is provided below.
Land Development Joint Ventures
During the six months ended April 30, 2018, our Land Development Joint Ventures sold approximately 449 lots and recognized revenues of $102.8 million. We acquired 55 of these lots for $7.3 million. Our share of the joint venture income from the lots we acquired of $0.9 million was deferred by reducing our basis in those lots. During the six months ended April 30, 2017, our Land Development Joint Ventures sold approximately 509 lots and recognized revenues of $100.8 million. We acquired 162 of these lots for $46.2 million. Our share of the income from the lots we acquired of $7.0 million was deferred by reducing our basis in those lots. The Company recognized other than temporary impairment charges in connection with one Land Development Joint Venture of $2.0 million for the six months ended April 30, 2017. There were no other than temporary impairment charges recognized for the six months ended April 30, 2018.
During the three months ended April 30, 2018, our Land Development Joint Ventures sold approximately 200 lots and recognized revenues of $62.6 million. We acquired 25 of these lots for $4.2 million. Our share of the joint venture income of $0.4 million from the lots we acquired was deferred by reducing our basis in those lots. During the three months ended April 30, 2017, our Land Development Joint Ventures sold approximately 206 lots and recognized revenues of $44.6 million. We acquired 60 of these lots for $21.2 million. Our share of the income of $3.3 million from the lots we acquired was deferred by reducing our basis in those lots. The Company recognized other than temporary impairment charges in connection with one Land Development Joint Venture of $2.0 million for the three months ended April 30, 2017. There were no other than temporary impairment charges recognized for the three months ended April 30, 2018.
Home Building Joint Ventures
Our Home Building Joint Ventures are delivering homes in New York City, New York, and Jupiter, Florida. During the six months ended April 30, 2018 and 2017, our Home Building Joint Ventures delivered 54 homes with a sales value of $67.9 million, and 143 homes with a sales value of $370.6 million, respectively. During the three months ended April 30, 2018 and

8



2017, our Home Building Joint Ventures delivered 26 homes with a sales value of $35.4 million, and 56 homes with a sales value of $153.2 million, respectively.
Rental Property Joint Ventures
As of April 30, 2018, our Rental Property Joint Ventures owned 14 for-rent apartment projects and a hotel, which are located in the metro Boston, Massachusetts to metro Washington, D.C. corridor. At April 30, 2018, our joint ventures had approximately 2,800 units that were occupied or ready for occupancy, 750 units in the lease-up stage, and 1,550 units under active development. In addition, we either own, have under contract, or under a letter of intent approximately 10,300 units, of which 750 units are under active development. We intend to develop these units in joint ventures with unrelated parties in the future.
In the second quarter of fiscal 2018, we entered into a joint venture with an unrelated party to develop a 308-unit luxury for-rent residential apartment building in the Capitol Riverfront of Washington, D.C. Prior to the formation of this joint venture, we acquired the property and incurred approximately $27.4 million of land and land development costs. Our partner acquired a 50% interest in this entity for $17.8 million, including subsequent reimbursement by our partner for development and construction costs incurred by us prior to the sale. As a result of the sale of 50% of our interest to our partner, we recognized a gain of $1.0 million in the second quarter of fiscal 2018. In addition, due to our continued involvement in the joint venture primarily through guarantees provided on the joint venture’s debt, we deferred $3.8 million of gain from the sale. Concurrent with its formation, the joint venture entered into a $72.7 million construction loan agreement to finance the development of this project. At April 30, 2018, we had an investment of $11.0 million in this joint venture. At April 30, 2018, there were no outstanding borrowings under the construction loan facility.
In the first quarter of fiscal 2018, one of our Rental Property Joint Ventures sold its assets to an unrelated party for $219.0 million. The joint venture had owned, developed, and operated a student housing community in College Park, Maryland. In connection with the sale, the joint venture’s existing $110.0 million loan was repaid. We received cash of $39.3 million and recognized a gain of $30.8 million in the six months ended April 30, 2018, which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income.
In the first quarter of fiscal 2018, we entered into a joint venture with an unrelated party to develop a 112-unit luxury for-rent residential apartment project in Belmont, Massachusetts. Prior to the formation of this joint venture, we acquired the property and incurred approximately $22.1 million of land and land development costs. Our partner acquired a 50% interest in this entity for $11.0 million and we subsequently received cash of $10.8 million from our partner. At January 31, 2018, our partner had the right, if certain events did not occur, to exit the venture and require us to repurchase their interest. Given this contingency, as of January 31, 2018, our investment, net of our partner’s contribution, was recorded in “Receivables, prepaid expenses, and other assets” on our Condensed Consolidated Balance Sheet. This right of our partner expired in the second quarter of fiscal 2018 and, accordingly, during the second quarter of fiscal 2018, our net investment in this property of $11.3 million was reclassified to “Investments in unconsolidated entities” on our Condensed Consolidated Balance Sheet. In March 2018, the joint venture entered into a $42.4 million construction loan agreement to provide financing for the development of this property. At April 30, 2018, this joint venture had no outstanding borrowings under the construction loan facility. At April 30, 2018, we had an investment of $15.6 million in this joint venture.
In the second quarter of fiscal 2017, we sold 50% of our interest in a Rental Property Joint Venture to an unrelated third party. In connection with the sale, we, along with our partner, recapitalized the joint venture and refinanced the existing $112.2 million construction loan with a $133.0 million, 10-year fixed rate loan. As a result of these transactions, we received cash of $42.9 million and recognized a gain of $20.5 million in the six months and three months ended April 30, 2017 which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income. At April 30, 2018, we had a 25% interest and a $6.5 million investment in this joint venture.
In the first quarter of fiscal 2017, we sold 50% of our interest in a Rental Property Joint Venture to an unrelated party. In connection with the sale, we, along with our partner, recapitalized the joint venture and refinanced the existing $54.1 million construction loan with a $56.0 million, 10-year fixed rate loan. As a result of these transactions, we received cash of $12.0 million and recognized a gain of $6.2 million in the six months ended April 30, 2017, which is included in “Income from unconsolidated entities” in our Condensed Consolidated Statements of Operations and Comprehensive Income. At April 30, 2018, we had a 25% interest and a $2.7 million investment in this joint venture.
In 1998, we formed the Trust to invest in commercial real estate opportunities. The Trust is effectively owned one-third by us; one-third by current and former members of our senior management; and one-third by an unrelated party. As of April 30, 2018, our investment in the Trust was zero as cumulative distributions received from the Trust have been in excess of the carrying amount of our net investment. We provide development, finance, and management services to the Trust and recognized fees under the terms of various agreements in the amount of $1.2 million and $0.8 million in the six-month periods ended April 30,

9



2018 and 2017, respectively. We recognized fees of $0.6 million and $0.4 million in the three-month periods ended April 30, 2018 and 2017, respectively.
Subsequent Event
In May 2018, one of our Rental Property Joint Ventures sold its assets to an unrelated party for $65.5 million. The joint venture had owned, developed, and operated a multifamily rental property located in Westborough, Massachusetts. In connection with the sale, the joint venture’s outstanding loan balance of $30.1 million was repaid and we were released from our guarantees. We received cash of $12.1 million and expect to recognize a gain from the sale of approximately $8.6 million in the third quarter of fiscal 2018.
Gibraltar Joint Ventures
We, through our wholly owned subsidiary, Gibraltar Capital and Asset Management, LLC (“Gibraltar”), are a member in several ventures with an institutional investor to provide builders and developers with land banking and venture capital. These ventures finance builders’ and developers’ acquisition and development of land and home sites and pursue other complementary investment strategies. We also are a member in a separate venture with the same institutional investor, which purchased, from Gibraltar, certain foreclosed real estate owned and distressed loans in fiscal 2016. Our ownership interest in these ventures is approximately 25%. As of April 30, 2018, we had an investment of $14.2 million in these ventures.
Guarantees
The unconsolidated entities in which we have investments generally finance their activities with a combination of partner equity and debt financing. In some instances, we and our partners have guaranteed debt of certain unconsolidated entities. These guarantees may include any or all of the following: (i) project completion guarantees, including any cost overruns; (ii) repayment guarantees, generally covering a percentage of the outstanding loan; (iii) carry cost guarantees, which cover costs such as interest, real estate taxes, and insurance; (iv) an environmental indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (v) indemnification of the lender from “bad boy acts” of the unconsolidated entity.
In some instances, the guarantees provided in connection with loans to an unconsolidated entity are joint and several. In these situations, we generally have a reimbursement agreement with our partner that provides that neither party is responsible for more than its proportionate share or agreed upon share of the guarantee; however, if a joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, we may be liable for more than our proportionate share.
We believe that, as of April 30, 2018, in the event we become legally obligated to perform under a guarantee of an obligation of an unconsolidated entity due to a triggering event, the collateral in such entity should be sufficient to repay a significant portion of the obligation. If it is not, we and our partners would need to contribute additional capital to the venture. At April 30, 2018, certain unconsolidated entities have loan commitments aggregating $1.19 billion, of which, if the full amount of the debt obligations were borrowed, we estimate $301.4 million to be our maximum exposure related to repayment and carry cost guarantees. At April 30, 2018, the unconsolidated entities had borrowed an aggregate of $721.8 million, of which we estimate $228.7 million to be our maximum exposure related to repayment and carry cost guarantees. The terms of these guarantees generally range from 4 months to 47 months. These maximum exposure estimates do not take into account any recoveries from the underlying collateral or any reimbursement from our partners.
As of April 30, 2018, the estimated aggregate fair value of the guarantees provided by us related to debt and other obligations of certain unconsolidated entities was approximately $5.5 million. We have not made payments under any of the guarantees, nor have we been called upon to do so.
Variable Interest Entities
At April 30, 2018 and October 31, 2017, we determined that eight of our joint ventures were VIEs under the guidance of ASC 810, “Consolidation.” However, we have concluded that we were not the primary beneficiary of these VIEs because the power to direct the activities of such VIEs that most significantly impact their performance was either shared by us and such VIEs’ other partners or such activities were controlled by our partner. For VIEs where the power to direct significant activities is shared, business plans, budgets, and other major decisions are required to be unanimously approved by all members. Management and other fees earned by us are nominal and believed to be at market rates, and there is no significant economic disproportionality between us and the other members. The information presented below regarding the investments, commitments, and guarantees in unconsolidated entities deemed to be VIEs is also included in the information provided above.
At April 30, 2018 and October 31, 2017, our investments in the unconsolidated entities deemed to be VIEs, which are included in “Investments in unconsolidated entities” in the accompanying Condensed Consolidated Balance Sheets, totaled $34.2

10



million and $35.9 million, respectively. At April 30, 2018, the maximum exposure of loss to our investments in these entities was limited to our investments in the unconsolidated VIEs, except with regard to $70.0 million of loan guarantees and $10.2 million of additional commitments to the VIEs. Of our potential exposure for these loan guarantees, $70.0 million is related to repayment and carry cost guarantees, of which $67.1 million was borrowed at April 30, 2018. At October 31, 2017, the maximum exposure of loss to our investments in these entities was limited to our investments in the unconsolidated VIEs, except with regard to $70.0 million of loan guarantees and $10.5 million of additional commitments to the VIEs. At October 31, 2017, $70.0 million of our potential exposure for these loan guarantees was related to repayment and carry cost guarantees, of which $61.3 million was borrowed at October 31, 2017.
Joint Venture Condensed Financial Information
The Condensed Balance Sheets, as of the dates indicated, and the Condensed Statements of Operations, for the periods indicated, for the unconsolidated entities in which we have an investment are included below (in thousands):
Condensed Balance Sheets:
 
April 30,
2018
 
October 31,
2017
Cash and cash equivalents
$
117,419

 
$
153,828

Inventory
1,064,578

 
1,148,209

Loans receivable, net
13,605

 
22,495

Rental properties
837,381

 
970,497

Rental properties under development
322,958

 
190,541

Real estate owned
34,329

 
53,902

Other assets
156,690

 
156,618

Total assets
$
2,546,960

 
$
2,696,090

Debt, net of deferred financing costs
$
1,156,927

 
$
1,199,583

Other liabilities
156,538

 
135,292

Members’ equity
1,201,558

 
1,332,285

Noncontrolling interest
31,937

 
28,930

Total liabilities and equity
$
2,546,960

 
$
2,696,090

Company’s net investment in unconsolidated entities (1)
$
456,762

 
$
481,758

 
(1)
Differences between our net investment in unconsolidated entities and our underlying equity in the net assets of the entities are primarily a result of the acquisition price of an investment in a Land Development Joint Venture in fiscal 2012 that was in excess of our pro rata share of the underlying equity; impairments related to our investments in unconsolidated entities; interest capitalized on our investments; the estimated fair value of the guarantees provided to the joint ventures; gains recognized from the sale of our ownership interests; and distributions from entities in excess of the carrying amount of our net investment.

11



Condensed Statements of Operations:
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
2018
 
2017
Revenues
$
276,284

 
$
500,727

 
$
82,663

 
$
205,024

Cost of revenues
209,410

 
290,894

 
60,660

 
125,188

Other expenses
44,584

 
39,722

 
20,297

 
18,588

Total expenses
253,994

 
330,616

 
80,957

 
143,776

Gain on disposition of loans and real estate owned
26,480

 
31,639

 
11,809

 
22,753

Income from operations
48,770

 
201,750

 
13,515

 
84,001

Other income
80,866

 
9,497

 
1,502

 
6,912

Income before income taxes
129,636

 
211,247

 
15,017

 
90,913

Income tax provision
349

 
6,314

 
151

 
2,487

Net income including earnings from noncontrolling interests
129,287

 
204,933

 
14,866

 
88,426

Less: income attributable to noncontrolling interest
(11,937
)
 
(13,089
)
 
(5,855
)
 
(11,009
)
Net income attributable to controlling interest
$
117,350

 
$
191,844

 
$
9,011

 
$
77,417

Company’s equity in earnings of unconsolidated entities (2)
$
41,444

 
$
92,349

 
$
2,564

 
$
45,904

(2)
Differences between our equity in earnings of unconsolidated entities and the underlying net income of the entities are primarily a result of a basis difference of an acquired joint venture interest; distributions from entities in excess of the carrying amount of our net investment; recoveries of previously incurred charges; unrealized gains on our retained joint venture interests; and our share of the entities’ profits related to home sites purchased by us which reduces our cost basis of the home sites acquired.
4. Receivables, Prepaid Expenses, and Other Assets
Receivables, prepaid expenses, and other assets at April 30, 2018 and October 31, 2017, consisted of the following (amounts in thousands):
 
April 30, 2018
 
October 31, 2017
Expected recoveries from insurance carriers and others
$
147,911

 
$
153,774

Improvement cost receivable
100,490

 
99,311

Escrow cash held by our captive title company
37,847

 
45,923

Properties held for rental apartment development
208,838

 
146,288

Prepaid expenses
20,375

 
23,223

Other
84,294

 
73,698

 
$
599,755

 
$
542,217

See Note 6, “Accrued Expenses,” for additional information regarding the expected recoveries from insurance carriers and others.
5. Loans Payable, Senior Notes, and Mortgage Company Loan Facility
Loans Payable
At April 30, 2018 and October 31, 2017, loans payable consisted of the following (amounts in thousands):
 
April 30,
2018
 
October 31,
2017
Senior unsecured term loan
$
500,000

 
$
500,000

Loans payable – other
150,806

 
139,116

Deferred issuance costs
(1,507
)
 
(1,700
)
 
$
649,299

 
$
637,416


12



Senior Unsecured Term Loan
We have a $500.0 million, five-year senior unsecured term loan facility (the “Term Loan Facility”) with a syndicate of banks. The Term Loan Facility, as amended, matures in August 2021. At April 30, 2018, the interest rate on borrowings was 3.30% per annum. We and substantially all of our 100%-owned home building subsidiaries are guarantors under the Term Loan Facility. The Term Loan Facility contains substantially the same financial covenants as our Credit Facility, as described below.
Credit Facility
We have a $1.295 billion, unsecured, five-year revolving credit facility (the “Credit Facility”) with a syndicate of banks. The Credit Facility is scheduled to expire in May 2021. We and substantially all of our 100%-owned home building subsidiaries are guarantors under the Credit Facility.
Under the terms of the Credit Facility, at April 30, 2018, our maximum leverage ratio (as defined in the credit agreement) may not exceed 1.75 to 1.00, and we are required to maintain a minimum tangible net worth (as defined in the credit agreement) of no less than approximately $2.45 billion. Under the terms of the Credit Facility, at April 30, 2018, our leverage ratio was approximately 0.72 to 1.00, and our tangible net worth was approximately $4.44 billion. Based upon the limitations related to our repurchase of common stock in the Credit Facility, our ability to repurchase our common stock was limited to approximately $2.45 billion as of April 30, 2018.
At April 30, 2018, we had no outstanding borrowings under the Credit Facility and had approximately $146.4 million of outstanding letters of credit that were issued under the Credit Facility. At April 30, 2018, the interest rate on borrowings under the Credit Facility would have been 3.41% per annum.
Loans Payable – Other
“Loans payable – other” primarily represent purchase money mortgages on properties we acquired that the seller had financed and various revenue bonds that were issued by government entities on our behalf to finance community infrastructure and our manufacturing facilities. At April 30, 2018, the weighted-average interest rate on “Loans payable – other” was 4.15% per annum.
Senior Notes
At April 30, 2018, we had eight issues of senior notes outstanding with an aggregate principal amount of $2.87 billion. In January 2018, the Company issued $400.0 million principal amount of 4.350% Senior Notes due 2028. The Company received $396.4 million of net proceeds from the issuance of these senior notes. In March 2017, the Company issued $300.0 million principal amount of 4.875% Senior Notes due 2027 (“4.875% Senior Notes”). The Company received $297.2 million of net proceeds from the issuance of these senior notes. In June 2017, we issued an additional $150.0 million principal amount of the previously established 4.875% Senior Notes at a premium to par value plus accrued interest. We received $156.4 million of net proceeds from the issuance of these additional notes.
Mortgage Company Loan Facility
In October 2017, TBI Mortgage® Company (“TBI Mortgage”), our wholly owned mortgage subsidiary, entered into a mortgage warehousing agreement (the “Warehousing Agreement”) with a syndicate of banks to finance the origination of mortgage loans by TBI Mortgage. The Warehousing Agreement is accounted for as a secured borrowing under ASC 860, “Transfers and Servicing.” In December 2017, the Warehousing Agreement was amended to provide for loan purchases up to $75.0 million, subject to certain sublimits. Prior to this amendment, the Warehousing Agreement provided for loan purchases up to $100.0 million. In addition, the Warehousing Agreement, as amended, provides for an accordion feature under which TBI Mortgage may request that the aggregate commitments under the Warehousing Agreement be increased to an amount up to $150.0 million for a short period of time. The Warehousing Agreement, as amended, expires on December 6, 2018, and borrowings thereunder bear interest at LIBOR plus 1.90% per annum. At April 30, 2018, the interest rate on the Warehousing Agreement, as amended, was 3.81% per annum.

13



6. Accrued Expenses
Accrued expenses at April 30, 2018 and October 31, 2017 consisted of the following (amounts in thousands):
 
April 30,
2018
 
October 31,
2017
Land, land development, and construction
$
160,174

 
$
146,168

Compensation and employee benefits
127,826

 
149,145

Escrow liability
36,897

 
45,209

Self-insurance
169,395

 
149,303

Warranty
297,343

 
329,278

Deferred income
37,633

 
42,798

Interest
40,318

 
36,035

Commitments to unconsolidated entities
9,025

 
8,870

Other
57,803

 
52,547

 
$
936,414

 
$
959,353

As previously disclosed in Note 7, “Accrued Expenses” in our 2017 Form 10-K, in response to a significant number of water intrusion claims received in fiscal 2014 and thereafter, from owners of stucco and non-stucco homes in communities located in Pennsylvania and Delaware (which are in our Mid-Atlantic region), we reviewed homes built in these communities from 2002 through 2013 to determine whether repairs related to these homes would likely be needed.
Our quarterly review process includes an analysis of many factors to determine whether a claim is likely to be received and the estimated costs to resolve any such claim, including: the closing dates of the homes; the number of claims received; our inspection of homes; an estimate of the number of homes we expect to repair; the type and cost of repairs that have been performed in each community; the estimated costs to remediate pending and future claims; the expected recovery from our insurance carriers and suppliers; and the previously recorded amounts related to these claims. We also monitor legal developments relating to these types of claims and review the volume and relative merits of claims in litigation or arbitration.
Based on our review performed as of April 30, 2018, we determined that no adjustments to our previously recorded estimated costs were necessary. Our estimates are predicated on several assumptions for which there is uncertainty including assumptions about, but not limited to, the number of homes to be repaired, the extent of repairs needed, the cost of those repairs, outcomes of pending litigations, arbitrations, and investigations, and expected recoveries from insurance carriers and suppliers. Due to the degree of judgment required and the potential for variability in the underlying assumptions, it is reasonably possible that our actual costs and recoveries could differ from those recorded, such differences could be material, and therefore, we are unable to estimate the range of any such differences. As of April 30, 2018 and 2017, our recorded aggregate estimated repair costs to be incurred for known and unknown water intrusion claims was $324.4 million, which remains unchanged from the amounts recorded as of October 31, 2017 and 2016. As of April 30, 2018, we recorded an aggregate of $152.6 million of estimated recoveries from our insurance carriers and suppliers for these claims, which also remains unchanged from the amounts recorded as of October 31, 2017 and 2016.
Our recorded remaining estimated repair costs related to water intrusion were approximately $220.4 million as of April 30, 2018 and $251.8 million as of October 31, 2017. Our recorded remaining expected recoveries from insurance carriers and suppliers were approximately $105.5 million as of April 30, 2018 and $119.7 million as of October 31, 2017.
The table below provides, for the periods indicated, a reconciliation of the changes in our warranty accrual (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
2018
 
2017
Balance, beginning of period
$
329,278

 
$
370,992

 
$
311,450

 
$
364,058

Additions – homes closed during the period
14,687

 
12,701

 
8,462

 
7,597

Addition – liabilities acquired in a business acquisition


 
1,111

 


 


Increase in accruals for homes closed in prior years
3,154

 
3,188

 
1,211

 
1,494

Reclassification from other accruals


 
1,082

 


 
350

Charges incurred
(49,776
)
 
(33,140
)
 
(23,780
)
 
(17,565
)
Balance, end of period
$
297,343

 
$
355,934

 
$
297,343

 
$
355,934


14



7. Income Taxes
We recorded income tax provisions of $40.4 million and $113.9 million for the six months ended April 30, 2018 and 2017, respectively. The effective tax rate was 14.2% for the six months ended April 30, 2018, compared to 36.9% for the six months ended April 30, 2017. For the three months ended April 30, 2018 and 2017, we recorded income tax provisions of $40.9 million and $74.6 million, respectively. The effective tax rate for the three months ended April 30, 2018 was 26.8%, compared to 37.4% for the three months ended April 30, 2017. The income tax provision for the six months and three months ended April 30, 2018 reflects the impact of the Tax Cuts and Jobs Act (the “Tax Act”), which was enacted into law on December 22, 2017. The income tax provision for the six months ended April 30, 2018 also reflects excess tax benefit related to stock-based compensation resulting from the adoption of ASU 2016-09; excess tax benefits are now reflected as a component of income taxes. The income tax provisions for all periods included a provision for state income taxes; interest accrued on anticipated tax assessments; tax benefits related to the utilization of domestic production activities deductions; and other permanent differences.
The Tax Act, among other changes, reduced the corporate income tax rate from 35% to 21% effective for tax years beginning after December 31, 2017. For companies with a fiscal year that does not end on December 31, the change in law requires the application of a blended tax rate for the year of the change. Our blended tax rate for our fiscal year ending October 31, 2018 will be 23.3%. Thereafter, the applicable statutory rate will be 21%. ASC 740, “Income Taxes” (“ASC 740”) requires all companies to reflect the effects of the new law in the period in which the law was enacted. Accordingly, we reduced the statutory tax rate applied to earnings for the six months and three months ended April 30, 2018 from 35% to 23.3%. In addition, we remeasured our net deferred tax liability for the tax law change, which resulted in an income tax benefit of $31.2 million in the six months ended April 30, 2018. Since the Tax Act includes many broad and complex changes to the U.S. tax code, we continue to analyze the impact of the provisions of the Tax Act on our financial statements and disclosures.
In December 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”), which provides guidance on accounting for the tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the enactment date for companies to complete the accounting relating to the Tax Act under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete, but it is able to determine a reasonable estimate, it must record a provisional estimate in its financial statements.
In connection with our initial analysis of the impact of the Tax Act on the three months ended January 31, 2018, and in accordance with SAB 118, we recorded a provisional net tax benefit of $31.2 million related to the re-measurement of our net deferred tax liability based on the rates at which our deferred tax balances are expected to reverse in the future. As of April 30, 2018, no changes were made to the provisional net tax benefit. However, we are still analyzing certain aspects of the Tax Act including the impact of the Tax Act on our deferred tax assets and liabilities, including the estimate of the reversal of existing deferred tax assets and deferred tax liabilities at varying statutory rates and an estimate of the impact of the grandfathering provisions related to performance based executive compensation. The final impact of the Tax Act may differ significantly from this provisional amount, due to, among other things, changes in interpretations and assumptions made by us as a result of additional information and additional guidance that may be issued by the U.S. Department of the Treasury or any other relevant governing body. Any change to the provisional amount would be reflected as a discrete benefit or expense in the quarter that the adjustment is identified.
We currently operate in 20 states and are subject to various state tax jurisdictions. We estimate our state tax liability based upon the individual taxing authorities’ regulations, estimates of income by taxing jurisdiction, and our ability to utilize certain tax-saving strategies. We estimate our rate for the full fiscal year 2018 for state income taxes will be approximately 7.1%. Our state income tax rate for the full fiscal year 2017 was 6.5%.
At April 30, 2018, we had $17.3 million of gross unrecognized tax benefits, including interest and penalties. If these unrecognized tax benefits were to reverse in the future, they would have a beneficial impact on our effective tax rate at that time. During the next 12 months, it is reasonably possible that our unrecognized tax benefits will change, but we are not able to provide a range of such change. The possible changes would 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.

15



8. Stock-Based Benefit Plans
We grant stock options and various types of restricted stock units to our employees and our nonemployee directors. Additionally, we have an employee stock purchase plan that allows employees to purchase our stock at a discount. Information regarding the amount of total stock-based compensation expense and tax benefit recognized by us, for the periods indicated, is as follows (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
2018
 
2017
Total stock-based compensation expense recognized
$
15,347

 
$
15,585

 
$
6,458

 
$
6,256

Income tax benefit recognized
$
4,359

 
$
6,094

 
$
1,843

 
$
2,441

At April 30, 2018 and October 31, 2017, the aggregate unamortized value of outstanding stock-based compensation awards was approximately $34.3 million and $24.2 million, respectively.
9. Stock Repurchase Program and Cash Dividend
Effective December 13, 2017, our Board of Directors terminated our previous share repurchase program and authorized, under a new repurchase program, the repurchase of 20 million shares of our common stock in open market transactions or otherwise for general corporate purposes, including to obtain shares for the Company’s equity award and other employee benefit plans. The Board of Directors did not fix any expiration date for this repurchase program.
The table below provides, for the periods indicated, information about our share repurchase programs:
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
2018
 
2017
Number of shares purchased (in thousands)
6,221

 
563

 
1,794

 
5

Average price per share
$
46.86

 
$
27.41

 
$
45.44

 
$
35.57

Remaining authorization at April 30 (in thousands)
16,876

 
15,276

 
16,876

 
15,276

Approximately 3.1 million shares purchased in the six months ended April 30, 2018 were acquired under the previous share repurchase program.
On February 21, 2017, our Board of Directors approved the initiation of quarterly cash dividends to shareholders. During the six months ended April 30, 2018 and 2017, we declared and paid dividends of $0.19 and $0.08 per share, respectively. During the three months ended April 30, 2018 and 2017, we declared and paid dividends of $0.11 and $0.08 per share, respectively.

16



10. Earnings per Share Information
The table below provides, for the periods indicated, information pertaining to the calculation of earnings per share, common stock equivalents, weighted-average number of antidilutive options, and shares issued (amounts in thousands):
 
 
Six months ended April 30,
 
Three months ended April 30,
 
 
2018
 
2017
 
2018
 
2017
Numerator:
 
 
 
 
 
 
 
 
Net income as reported
 
$
243,917

 
$
195,054

 
$
111,810

 
$
124,638

Plus interest and costs attributable to 0.5% Exchangeable Senior Notes, net of income tax benefit (a)
 


 
769

 


 
385

Numerator for diluted earnings per share
 
$
243,917

 
$
195,823

 
$
111,810

 
$
125,023

 
 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
 
Basic weighted-average shares
 
154,306

 
163,040

 
152,731

 
163,492

Common stock equivalents (b)
 
2,707

 
2,011

 
2,398

 
2,051

Shares attributable to 0.5% Exchangeable Senior Notes (a)
 


 
5,859

 


 
5,860

Diluted weighted-average shares
 
157,013

 
170,910

 
155,129

 
171,403

 
 
 
 
 
 
 
 
 
Other information:
 
 
 
 
 
 
 
 
Weighted-average number of antidilutive options and restricted stock units (c)
 
823

 
3,535

 
278

 
1,865

Shares issued under stock incentive and employee stock purchase plans
 
880

 
1,974

 
57

 
694

(a)
On September 15, 2017, we redeemed these notes for cash.
(b)
Common stock equivalents represent the dilutive effect of outstanding in-the-money stock options using the treasury stock method and shares expected to be issued upon the conversion of restricted stock units under our equity award programs.
(c)
Weighted-average number of antidilutive options and restricted stock units are based upon the average closing price of our common stock on the New York Stock Exchange for the period.
11. Fair Value Disclosures
Financial Instruments
The table below provides, as of the dates indicated, a summary of assets (liabilities) related to our financial instruments, measured at fair value on a recurring basis (amounts in thousands):
 
 
 
 
Fair value
Financial Instrument
 
Fair value
hierarchy
 
April 30,
2018
 
October 31, 2017
Mortgage Loans Held for Sale
 
Level 2
 
$
111,811

 
$
132,922

Forward Loan Commitments — Mortgage Loans Held for Sale
 
Level 2
 
$
1,570

 
$
861

Interest Rate Lock Commitments (“IRLCs”)
 
Level 2
 
$
(6,092
)
 
$
(1,293
)
Forward Loan Commitments — IRLCs
 
Level 2
 
$
6,092

 
$
1,293

At April 30, 2018 and October 31, 2017, the carrying value of cash and cash equivalents and restricted cash and investments approximated fair value.
Mortgage Loans Held for Sale
At the end of the reporting period, we determine the fair value of our mortgage loans held for sale and the forward loan commitments we have entered into as a hedge against the interest rate risk of our mortgage loans and commitments using the market approach to determine fair value.

17



The table below provides, as of the dates indicated, the aggregate unpaid principal and fair value of mortgage loans held for sale (amounts in thousands):
 
Aggregate unpaid
principal balance
 
Fair value
 
Excess / (Deficiency)
At April 30, 2018
$
112,213

 
$
111,811

 
$
(402
)
At October 31, 2017
$
131,861

 
$
132,922

 
$
1,061

Inventory
We recognize inventory impairment charges based on the difference in the carrying value of the inventory and its fair value at the time of the evaluation. The fair value of inventory was determined using Level 3 criteria. See Note 1, “Significant Accounting Policies – Inventory,” in our 2017 Form 10-K for information regarding our methodology for determining fair value. The table below summarizes, for the periods indicated, the ranges of certain quantitative unobservable inputs utilized in determining the fair value of impaired operating communities:
Three months ended:
Selling price
per unit
($ in thousands)
 
Sales pace
per year
(in units)
 
Discount rate
Fiscal 2018:
 
 
 
 
 
January 31
381 - 1,029
 
7 - 10
 
13.8% - 19.0%
April 30
485 - 522
 
10 - 16
 
16.9%
 
 
 
 
 
 
Fiscal 2017:
 
 
 
 
 
January 31
692 - 880
 
4 - 12
 
16.3%
April 30
827 - 856
 
6 - 11
 
16.3%
July 31
465 - 754
 
3 - 10
 
16.5% - 19.5%
October 31
467 - 540
 
12 - 30
 
16.4%
The table below provides, for the periods indicated, the fair value of operating communities whose carrying value was adjusted and the amount of impairment charges recognized ($ amounts in thousands):
 
 
 
Impaired operating communities
Three months ended:
Number of
communities tested
 
Number of
communities
 
Fair value of
communities,
net of
impairment charges
 
Impairment charges recognized
Fiscal 2018:
 
 
 
 
 
 
 
January 31
64
 
5
 
$
13,318

 
$
3,736

April 30 (1)
65
 
4
 
$
21,811

 
13,325

 
 
 
 
 
 
 
$
17,061

Fiscal 2017:
 
 
 
 
 
 
 
January 31
57
 
2
 
$
8,372

 
$
4,000

April 30
46
 
6
 
$
25,092

 
2,935

July 31
53
 
4
 
$
5,965

 
1,360

October 31
51
 
1
 
$
6,982

 
1,500

 
 
 
 
 
 
 
$
9,795

(1)
Includes $12.0 million of impairments from one community located in our North segment.

18



Debt
The table below provides, as of the dates indicated, the book value and estimated fair value of our debt (amounts in thousands):
 
 
 
April 30, 2018
 
October 31, 2017
 
Fair value
hierarchy
 
Book value
 
Estimated
fair value
 
Book value
 
Estimated
fair value
Loans payable (a)
Level 2
 
$
650,806

 
$
651,929

 
$
639,116

 
$
639,088

Senior notes (b)
Level 1
 
2,869,876

 
2,877,967

 
2,469,876

 
2,626,131

Mortgage company loan facility (c)
Level 2
 
103,550

 
103,550

 
120,145

 
120,145

 
 
 
$
3,624,232

 
$
3,633,446

 
$
3,229,137

 
$
3,385,364

(a)
The estimated fair value of loans payable was based upon contractual cash flows discounted at interest rates that we believed were available to us for loans with similar terms and remaining maturities as of the applicable valuation date.
(b)
The estimated fair value of our senior notes is based upon their market prices as of the applicable valuation date.
(c)
We believe that the carrying value of our mortgage company loan borrowings approximates their fair value.
12. Other Income – Net
The table below provides the significant components of other income – net (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
2018
 
2017
Interest income
$
3,292

 
$
1,930

 
$
1,212

 
$
989

Income from ancillary businesses
7,456

 
9,716

 
4,873

 
7,481

Management fee income from home building
unconsolidated entities, net
7,425

 
7,971

 
4,354

 
3,682

Retained customer deposits
4,155

 
3,054

 
3,071

 
1,308

Income from land and other sales
3,287

 
5,086

 
2,587

 
1,527

Other
(824
)
 
(1,068
)
 
(303
)
 
(1,001
)
Total other income – net
$
24,791

 
$
26,689

 
$
15,794

 
$
13,986

Management fee income from home building unconsolidated entities presented above primarily represents fees earned by Toll Brothers City Living® (“City Living”) and home building operations. In addition, in the six-month periods ended April 30, 2018 and 2017, our apartment living operations earned fees from unconsolidated entities of $4.0 million and $2.8 million, respectively. In the three-month periods ended April 30, 2018 and 2017, our apartment living operations earned fees from unconsolidated entities of $1.7 million and $1.3 million, respectively. Fees earned by our apartment living operations are included in income from ancillary businesses.
Income from ancillary businesses includes our mortgage, title, landscaping, security monitoring, Gibraltar, and golf course and country club operations. The table below provides, for the periods indicated, revenues and expenses for our ancillary businesses (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
2018
 
2017
Revenues
$
65,234

 
$
61,294

 
$
33,911

 
$
32,414

Expenses
$
57,778

 
$
51,578

 
$
29,038

 
$
24,933

The table below provides, for the periods indicated, revenues and expenses recognized from land and other sales (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
2018
 
2017
Revenues
$
45,186

 
$
146,837

 
$
38,218

 
$
2,123

Expenses
(38,065
)
 
(146,205
)
 
(31,797
)
 
(1,932
)
Deferred gain on land sale to joint venture
(3,834
)
 


 
(3,834
)
 


Deferred gain recognized

 
4,454

 

 
1,336

Income from land and other sales
$
3,287

 
$
5,086

 
$
2,587

 
$
1,527


19



Land sale revenues for the six months and three months ended April 30, 2018 include $28.8 million related to in substance real estate sale transactions which resulted in two Rental Property Joint Ventures in which we have a 50% interest in each. On one of these transactions, we recognized a gain of $1.0 million in the second quarter of fiscal 2018. In addition, due to our continued involvement in the joint venture primarily through guarantees provided on the joint venture’s debt, we deferred $3.8 million of gain from the sale. We expect to recognize this deferred gain as the related guarantees expire.
Land sale revenues for the six months ended April 30, 2017 include $143.3 million related to an in substance real estate sale transaction which resulted in a new Home Building Joint Venture in which we have a 20% interest. No gain or loss was realized on the sale. The deferred gains recognized in the fiscal 2017 periods relate to the sale of a property in fiscal 2015 to a Home Building Joint Venture in which we had a 25% interest. Due to our continued involvement in this unconsolidated entity through our ownership interest and guarantees provided on the entity’s debt, we deferred the $9.3 million gain realized on the sale. We recognized the gain as units were sold to the ultimate home buyers which is included in deferred gains recognized above. In the fourth quarter of fiscal 2017, we purchased the remaining inventory from this Home Building Joint Venture. The remaining unamortized deferred gain was used to reduce the basis of the inventory acquired.
13. Commitments and Contingencies
Legal Proceedings
We are involved in various claims and litigation arising principally in the ordinary course of business. We believe that adequate provision for resolution of all current claims and pending litigation has been made for probable losses. We believe that the disposition of these matters will not have a material adverse effect on our results of operations and liquidity or on our financial condition.
In April 2017, the SEC informed the Company that it was conducting an investigation and requested that we voluntarily produce documents and information relating to our estimated repair costs for stucco and other water intrusion claims in fiscal 2016. The Company has produced detailed information and documents in response to this request. See Note 6, “Accrued Expenses” for additional information regarding these warranty charges. In March 2018, the Pennsylvania Attorney General informed the Company that it was conducting a review of our construction of stucco homes in Pennsylvania after 2005 and requested that we voluntarily produce documents and information. The Company will produce documents and information in response to this request. Management cannot at this time predict the eventual scope or outcome of these matters.
Land Purchase Commitments
Generally, our purchase agreements to acquire land parcels do not require us to purchase those land parcels, although we, in some cases, forfeit any deposit balance outstanding if and when we terminate a purchase agreement. Information regarding our land purchase commitments, as of the dates indicated, is provided in the table below (amounts in thousands):
 
April 30, 2018
 
October 31, 2017
Aggregate purchase commitments:
 
 
 
Unrelated parties
$
2,443,177

 
$
1,986,276

Unconsolidated entities that the Company has investments in
234,893

 
248,801

Total
$
2,678,070

 
$
2,235,077

 
 
 
 
Deposits against aggregate purchase commitments
$
175,234

 
$
97,706

Credits to be received from unconsolidated entities
123,985

 
134,630

Additional cash required to acquire land
2,378,851

 
2,002,741

Total
$
2,678,070

 
$
2,235,077

Amount of additional cash required to acquire land included in accrued expenses
$
3,028

 
$
4,329

In addition, we expect to purchase approximately 2,300 additional home sites over a number of years from several joint ventures in which we have interests; the purchase prices of these home sites will be determined at a future date.
At April 30, 2018, we also had purchase commitments to acquire land for apartment developments of approximately $214.0 million, of which we had outstanding deposits in the amount of $9.3 million. We intend to develop these projects in joint ventures with unrelated parties in the future.
We have additional land parcels under option that have been excluded from the aggregate purchase commitments 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.

20



Investments in Unconsolidated Entities
At April 30, 2018, we had investments in a number of unconsolidated entities, were committed to invest or advance additional funds, and had guaranteed a portion of the indebtedness and/or loan commitments of these entities. See Note 3, “Investments in Unconsolidated Entities,” for more information regarding our commitments to these entities.
Surety Bonds and Letters of Credit
At April 30, 2018, we had outstanding surety bonds amounting to $735.8 million, primarily related to our obligations to governmental entities to construct improvements in our communities. We estimate that approximately $363.3 million of work remains on these improvements. We have an additional $178.3 million of surety bonds outstanding that guarantee other obligations. We do not believe that it is probable that any outstanding bonds will be drawn upon.
At April 30, 2018, we had outstanding letters of credit of $146.4 million under our Credit Facility. These letters of credit were issued to secure our various financial obligations, including insurance policy deductibles and other claims, land deposits, and security to complete improvements in communities in which we are operating. We do not believe that it is probable that any outstanding letters of credit will be drawn upon.
Backlog
At April 30, 2018, we had agreements of sale outstanding to deliver 7,030 homes with an aggregate sales value of $6.36 billion.
Mortgage Commitments
Information regarding our mortgage commitments, as of the dates indicated, is provided in the table below (amounts in thousands):
 
April 30,
2018
 
October 31, 2017
Aggregate mortgage loan commitments:
 
 
 
IRLCs
$
609,389

 
$
350,740

Non-IRLCs
1,449,031

 
1,146,872

Total
$
2,058,420

 
$
1,497,612

Investor commitments to purchase:
 
 
 
IRLCs
$
609,389

 
$
350,740

Mortgage loans held for sale
106,980

 
125,710

Total
$
716,369

 
$
476,450

14. Information on Segments
We operate in two segments: traditional home building and urban infill. We build and sell detached and attached homes in luxury residential communities located in affluent suburban markets that cater to move-up, empty-nester, active-adult, age-qualified, and second-home buyers in the United States (“Traditional Home Building”). We also build and sell homes in urban infill markets through City Living.
We have determined that our Traditional Home Building operations operate in five geographic segments: North, Mid-Atlantic, South, West, and California. The states comprising each geographic segment are as follows:
North:    Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey, and New York
Mid-Atlantic:    Delaware, Maryland, Pennsylvania, and Virginia
South:    Florida, North Carolina, and Texas
West:    Arizona, Colorado, Idaho, Nevada, and Washington
California:    California
In addition, in the first quarter of fiscal 2018, we acquired our first parcel of land in Salt Lake City, Utah. Once operations commence, Utah will be included in our West segment.

21



Revenue and income (loss) before income taxes for each of our segments, for the periods indicated, were as follows (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
2018
 
2017
Revenues:
 
 
 
 
 
 
 
Traditional Home Building:
 
 
 
 
 
 
 
North
$
360,494

 
$
334,983

 
$
226,214

 
$
189,345

Mid-Atlantic
461,865

 
410,542

 
254,907

 
226,491

South
412,206

 
337,307

 
240,714

 
195,111

West
607,421

 
513,835

 
349,388

 
302,702

California
725,446

 
593,079

 
438,342

 
373,303

Traditional Home Building
2,567,432

 
2,189,746

 
1,509,565

 
1,286,952

City Living
207,235

 
94,496

 
89,634

 
76,560

Total
$
2,774,667

 
$
2,284,242

 
$
1,599,199

 
$
1,363,512

 
 
 
 
 
 
 
 
Income (loss) before income taxes:
 
 
 
 
 
 
 
Traditional Home Building:
 
 
 
 
 
 
 
North
$
2,036

 
$
20,606

 
$
1,657

 
$
10,513

Mid-Atlantic
34,344

 
33,543

 
20,444

 
21,911

South
39,278

 
33,930

 
27,130

 
20,819

West
78,653

 
67,822

 
48,049

 
42,325

California
146,518

 
126,529

 
85,661

 
83,336

Traditional Home Building
300,829

 
282,430

 
182,941

 
178,904

City Living
46,649

 
85,032

 
16,685

 
41,930

Corporate and other
(63,132
)
 
(58,472
)
 
(46,878
)
 
(21,625
)
Total
$
284,346

 
$
308,990

 
$
152,748

 
$
199,209

“Corporate and other” is comprised principally of general corporate expenses such as the offices of our executive officers; the corporate finance, accounting, audit, tax, human resources, risk management, information technology, marketing, and legal groups; interest income; income from certain of our ancillary businesses, including Gibraltar; and income from our Rental Property Joint Ventures and Gibraltar Joint Ventures.
Total assets for each of our segments, as of the dates indicated, are shown in the table below (amounts in thousands):
 
April 30,
2018
 
October 31,
2017
Traditional Home Building:
 
 
 
North
$
1,085,200

 
$
1,074,969

Mid-Atlantic
1,185,334

 
1,121,013

South
1,291,941

 
1,184,956

West
1,423,300

 
1,275,298

California
2,983,624

 
2,630,041

Traditional Home Building
7,969,399

 
7,286,277

City Living
555,876

 
647,174

Corporate and other
1,318,451

 
1,511,774

Total
$
9,843,726

 
$
9,445,225

“Corporate and other” is comprised principally of cash and cash equivalents, restricted cash and investments, deferred tax assets, investments in our Rental Property Joint Ventures, expected recoveries from insurance carriers and suppliers, our Gibraltar investments and operations, manufacturing facilities, and our mortgage and title subsidiaries.

22



15. Supplemental Disclosure to Condensed Consolidated Statements of Cash Flows
The following are supplemental disclosures to the Condensed Consolidated Statements of Cash Flows, for the periods indicated (amounts in thousands): 
 
 
Six months ended April 30,
 
 
2018
 
2017
Cash flow information:
 
 
 
 
Interest paid, net of amount capitalized
 
$
5,878

 
$
7,659

Income tax payments
 
$
90,352

 
$
83,666

Income tax refunds
 
$
322

 
$
925

Noncash activity:
 
 
 
 
Cost of inventory acquired through seller financing or municipal bonds, net
 
$
46,575

 
$
26,232

Financed portion of land sale
 


 
$
625

Reduction in inventory for our share of earnings in land purchased from unconsolidated entities and allocation of basis difference
 
$
861

 
$
7,094

Rental property acquired by capital land lease
 


 
$
7,167

Deferred tax decrease related to stock-based compensation activity included in additional paid-in capital
 


 
$
5,068

Transfer of other assets to inventory
 
$
21,189

 


Transfer of inventory to investment in unconsolidated entities
 


 
$
36,256

Transfer of other assets to investment in unconsolidated entities
 
$
21,546

 


Reclassification of deferred income from accrued expenses to investment in unconsolidated entities
 
$
5,995

 


Miscellaneous (decreases) increases to investments in unconsolidated entities
 
$
(378
)
 
$
1,951

Acquisition of a Business:
 
 
 
 
Fair value of assets purchased
 


 
$
90,560

Liabilities assumed
 


 
$
5,377

Cash paid
 


 
$
85,183


23



16. Supplemental Guarantor Information
At April 30, 2018, our 100%-owned subsidiary, Toll Brothers Finance Corp. (the “Subsidiary Issuer”), has issued the following outstanding Senior Notes (amounts in thousands):
 
 
Original amount issued and amount outstanding
4.0% Senior Notes due December 31, 2018
 
$
350,000

6.75% Senior Notes due November 1, 2019
 
$
250,000

5.875% Senior Notes due February 15, 2022
 
$
419,876

4.375% Senior Notes due April 15, 2023
 
$
400,000

5.625% Senior Notes due January 15, 2024
 
$
250,000

4.875% Senior Notes due November 15, 2025
 
$
350,000

4.875% Senior Notes due March 15, 2027
 
$
450,000

4.350% Senior Notes due February 15, 2028
 
$
400,000

The obligations of the Subsidiary Issuer to pay principal, premiums, if any, and interest are guaranteed jointly and severally on a senior basis by us and substantially all of our 100%-owned home building subsidiaries (the “Guarantor Subsidiaries”). The guarantees are full and unconditional. Our non-home building subsidiaries and several of our home building subsidiaries (together, the “Nonguarantor Subsidiaries”) do not guarantee these Senior Notes. The Subsidiary Issuer generates no operating revenues and does not have any independent operations other than the financing of our other subsidiaries by lending the proceeds from the above-described debt issuances. The indentures under which the Senior Notes were issued provide that any of our subsidiaries that provide a guarantee of our obligations under the Credit Facility will guarantee the Senior Notes. The indentures further provide that any Guarantor Subsidiary may be released from its guarantee so long as (i) no default or event of default exists or would result from release of such guarantee; (ii) the Guarantor Subsidiary being released has consolidated net worth of less than 5% of the Company’s consolidated net worth as of the end of our most recent fiscal quarter; (iii) the Guarantor Subsidiaries released from their guarantees in any fiscal year comprise in the aggregate less than 10% (or 15% if and to the extent necessary to permit the cure of a default) of our consolidated net worth as of the end of our most recent fiscal quarter; (iv) such release would not have a material adverse effect on our and our subsidiaries’ home building business; and (v) the Guarantor Subsidiary is released from its guaranty under the Credit Facility. If there are no guarantors under the Credit Facility, all Guarantor Subsidiaries under the indentures will be released from their guarantees.
As of October 31, 2017, one of our 100%-owned subsidiaries was released from its guarantee obligation on these Senior Notes. The Condensed Consolidating Statements of Operations and Comprehensive Income (Loss) and of Cash Flows for the six months and three months ended April 30, 2017 presented below has been retroactively restated to reflect this subsidiary as a Nonguarantor Subsidiary.
Separate financial statements and other disclosures concerning the Guarantor Subsidiaries are not presented because management has determined that such disclosures would not be material to investors.
Supplemental consolidating financial information of Toll Brothers, Inc., the Subsidiary Issuer, the Guarantor Subsidiaries, the Nonguarantor Subsidiaries, and the eliminations to arrive at Toll Brothers, Inc. on a consolidated basis is presented below ($ amounts in thousands).

24



Condensed Consolidating Balance Sheet at April 30, 2018:
 
Toll
Brothers,
Inc.
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

 

 
284,320

 
190,793

 

 
475,113

Restricted cash and investments

 

 
281

 
880

 

 
1,161

Inventory

 

 
7,694,392

 
177,177

 

 
7,871,569

Property, construction and office equipment, net

 

 
161,885

 
23,791

 

 
185,676

Receivables, prepaid expenses and other assets

 


 
321,212

 
390,340

 
(111,797
)
 
599,755

Mortgage loans held for sale

 

 

 
111,811

 

 
111,811

Customer deposits held in escrow

 

 
127,822

 
7,250

 

 
135,072

Investments in unconsolidated entities

 

 
47,223

 
409,539

 

 
456,762

Investments in and advances to consolidated entities
4,487,504

 
2,916,816

 
155,315

 
127,177

 
(7,686,812
)
 

Deferred tax assets, net of valuation allowances
6,807

 


 


 


 


 
6,807

 
4,494,311

 
2,916,816

 
8,792,450

 
1,438,758

 
(7,798,609
)
 
9,843,726

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Loans payable

 

 
649,299

 


 

 
649,299

Senior notes

 
2,860,290

 

 

 

 
2,860,290

Mortgage company loan facility

 

 

 
103,550

 

 
103,550

Customer deposits

 

 
455,002

 
14,584

 

 
469,586

Accounts payable

 

 
322,704

 
1,901

 

 
324,605

Accrued expenses
222

 
38,685

 
558,264

 
457,801

 
(118,558
)
 
936,414

Advances from consolidated entities

 


 
1,705,147

 
602,297

 
(2,307,444
)
 

Income taxes payable
13,386

 

 

 


 

 
13,386

Total liabilities
13,608

 
2,898,975

 
3,690,416

 
1,180,133

 
(2,426,002
)
 
5,357,130

Equity
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Common stock
1,779

 

 
48

 
3,006

 
(3,054
)
 
1,779

Additional paid-in capital
715,949

 
49,400

 


 
93,734

 
(143,134
)
 
715,949

Retained earnings (deficit)
4,690,272

 
(31,559
)
 
5,101,986

 
155,992

 
(5,226,419
)
 
4,690,272

Treasury stock, at cost
(925,317
)
 

 

 

 

 
(925,317
)
Accumulated other comprehensive loss
(1,980
)
 

 


 

 


 
(1,980
)
Total stockholders’ equity
4,480,703

 
17,841

 
5,102,034

 
252,732

 
(5,372,607
)
 
4,480,703

Noncontrolling interest

 

 

 
5,893

 

 
5,893

Total equity
4,480,703

 
17,841

 
5,102,034

 
258,625

 
(5,372,607
)
 
4,486,596

 
4,494,311

 
2,916,816

 
8,792,450

 
1,438,758

 
(7,798,609
)
 
9,843,726


25



Condensed Consolidating Balance Sheet at October 31, 2017:
 
Toll
Brothers,
Inc.
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents

 

 
533,204

 
179,625

 

 
712,829

Restricted cash and investments

 

 
1,500

 
982

 

 
2,482

Inventory

 

 
7,017,331

 
264,122

 

 
7,281,453

Property, construction and office equipment, net

 

 
165,464

 
24,083

 

 
189,547

Receivables, prepaid expenses and other assets


 


 
319,592

 
296,699

 
(74,074
)
 
542,217

Mortgage loans held for sale

 

 

 
132,922

 

 
132,922

Customer deposits held in escrow

 

 
96,956

 
5,061

 

 
102,017

Investments in unconsolidated entities

 

 
66,897

 
414,861

 

 
481,758

Investments in and advances to consolidated entities
4,589,228

 
2,514,649

 
91,740

 
126,799

 
(7,322,416
)
 

 
4,589,228

 
2,514,649

 
8,292,684

 
1,445,154

 
(7,396,490
)
 
9,445,225

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Loans payable

 

 
637,416

 


 

 
637,416

Senior notes

 
2,462,463

 

 

 

 
2,462,463

Mortgage company loan facility

 

 

 
120,145

 

 
120,145

Customer deposits

 

 
377,083

 
18,943

 

 
396,026

Accounts payable

 

 
271,617

 
3,606

 

 
275,223

Accrued expenses
141

 
34,345

 
563,577

 
440,631

 
(79,341
)
 
959,353

Advances from consolidated entities

 


 
1,584,957

 
659,904

 
(2,244,861
)
 

Income taxes payable
57,893

 

 

 
(384
)
 

 
57,509

Total liabilities
58,034

 
2,496,808

 
3,434,650

 
1,242,845

 
(2,324,202
)
 
4,908,135

Equity
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity
 
 
 
 
 
 
 
 
 
 
 
Common stock
1,779

 

 
48

 
3,006

 
(3,054
)
 
1,779

Additional paid-in capital
720,115

 
49,400

 


 
93,734

 
(143,134
)
 
720,115

Retained earnings (deficit)
4,474,064

 
(31,559
)
 
4,857,986

 
99,673

 
(4,926,100
)
 
4,474,064

Treasury stock, at cost
(662,854
)
 

 

 

 

 
(662,854
)
Accumulated other comprehensive loss
(1,910
)
 

 


 

 


 
(1,910
)
Total stockholders’ equity
4,531,194

 
17,841

 
4,858,034

 
196,413

 
(5,072,288
)
 
4,531,194

Noncontrolling interest

 

 

 
5,896

 

 
5,896

Total equity
4,531,194

 
17,841

 
4,858,034

 
202,309

 
(5,072,288
)
 
4,537,090

 
4,589,228

 
2,514,649

 
8,292,684

 
1,445,154

 
(7,396,490
)
 
9,445,225






26



Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) for the six months ended April 30, 2018:
 
Toll
Brothers,
Inc.
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues

 

 
2,627,343

 
237,658

 
(90,334
)
 
2,774,667

Cost of revenues

 

 
2,093,152

 
171,743

 
(32,258
)
 
2,232,637

Selling, general and administrative
32

 
1,627

 
333,128

 
40,334

 
(51,202
)
 
323,919

 
32

 
1,627

 
2,426,280

 
212,077

 
(83,460
)
 
2,556,556

Income (loss) from operations
(32
)
 
(1,627
)
 
201,063

 
25,581

 
(6,874
)
 
218,111

Other:
 
 
 
 
 
 
 
 
 
 
 
Income from unconsolidated entities

 

 
6,733

 
34,711

 

 
41,444

Other income  net

 


 
12,683

 
4,066

 
8,042

 
24,791

Intercompany interest income

 
69,203

 
389

 
2,081

 
(71,673
)
 

Interest expense

 
(67,576
)
 
(2,081
)
 
(786
)
 
70,443

 

Income from subsidiaries
284,378

 

 
65,653

 

 
(350,031
)
 

Income before income taxes
284,346

 

 
284,440

 
65,653

 
(350,093
)
 
284,346

Income tax provision
40,429

 

 
40,442

 
9,335

 
(49,777
)
 
40,429

Net income
243,917

 

 
243,998

 
56,318

 
(300,316
)
 
243,917

Other comprehensive income
341

 


 


 


 


 
341

Total comprehensive income
244,258

 

 
243,998

 
56,318

 
(300,316
)
 
244,258


Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) for the six months ended April 30, 2017:
 
Toll
Brothers,
Inc.
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues

 

 
2,239,917

 
129,698

 
(85,373
)
 
2,284,242

Cost of revenues

 

 
1,767,348

 
79,634

 
(36,539
)
 
1,810,443

Selling, general and administrative
24

 
1,965

 
297,218

 
35,178

 
(50,538
)
 
283,847

 
24

 
1,965

 
2,064,566

 
114,812

 
(87,077
)
 
2,094,290

Income (loss) from operations
(24
)
 
(1,965
)
 
175,351

 
14,886

 
1,704

 
189,952

Other:
 
 
 
 
 
 
 
 
 
 
 
Income from unconsolidated entities

 

 
8,478

 
83,871

 

 
92,349

Other income  net
4,682

 


 
11,142

 
8,809

 
2,056

 
26,689

Intercompany interest income

 
75,053

 


 
2,146

 
(77,199
)
 

Interest expense

 
(77,745
)
 


 
(954
)
 
78,699

 

Income from subsidiaries
304,332

 

 
104,102

 

 
(408,434
)
 

Income (loss) before income taxes
308,990

 
(4,657
)
 
299,073

 
108,758

 
(403,174
)
 
308,990

Income tax provision (benefit)
113,936

 
(1,717
)
 
110,268

 
40,099

 
(148,650
)
 
113,936

Net income (loss)
195,054

 
(2,940
)
 
188,805

 
68,659

 
(254,524
)
 
195,054

Other comprehensive income
337

 


 


 


 


 
337

Total comprehensive income (loss)
195,391

 
(2,940
)
 
188,805

 
68,659

 
(254,524
)
 
195,391














27



Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) for the three months ended April 30, 2018:
 
Toll
Brothers,
Inc.
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues

 

 
1,511,989

 
133,544

 
(46,334
)
 
1,599,199

Cost of revenues

 

 
1,218,344

 
94,256

 
(14,443
)
 
1,298,157

Selling, general and administrative
14

 
787

 
171,049

 
20,161

 
(25,359
)
 
166,652

 
14

 
787

 
1,389,393

 
114,417

 
(39,802
)
 
1,464,809

Income (loss) from operations
(14
)
 
(787
)
 
122,596

 
19,127

 
(6,532
)
 
134,390

Other:
 
 
 
 
 
 
 
 
 
 
 
Income from unconsolidated entities

 

 
1,601

 
963

 

 
2,564

Other income  net

 


 
6,798

 
3,022

 
5,974

 
15,794

Intercompany interest income

 
36,508

 
389

 
1,058

 
(37,955
)
 

Interest expense

 
(35,721
)
 
(1,058
)
 
(418
)
 
37,197

 

Income from subsidiaries
152,762

 

 
23,752

 

 
(176,514
)
 

Income before income taxes
152,748

 


154,078

 
23,752

 
(177,830
)
 
152,748

Income tax provision (benefit)
40,938

 

 
52,971

 
(2,527
)
 
(50,444
)
 
40,938

Net income
111,810

 


101,107


26,279


(127,386
)

111,810

Other comprehensive income
170

 


 


 


 


 
170

Total comprehensive income
111,980

 


101,107


26,279


(127,386
)

111,980



Condensed Consolidating Statement of Operations and Comprehensive Income (Loss) for the three months ended April 30, 2017:
 
Toll
Brothers,
Inc.
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues

 

 
1,324,094

 
84,002

 
(44,584
)
 
1,363,512

Cost of revenues

 

 
1,043,091

 
50,163

 
(15,813
)
 
1,077,441

Selling, general and administrative
24

 
997

 
153,337

 
18,230

 
(25,836
)
 
146,752

 
24

 
997


1,196,428


68,393


(41,649
)
 
1,224,193

Income (loss) from operations
(24
)
 
(997
)

127,666


15,609


(2,935
)
 
139,319

Other:
 
 
 
 
 
 
 
 
 
 
 
Income from unconsolidated entities

 

 
3,334

 
42,570

 

 
45,904

Other income  net
2,289

 


 
3,891

 
4,309

 
3,497

 
13,986

Intercompany interest income

 
38,557

 


 
2,146

 
(40,703
)
 

Interest expense

 
(39,850
)
 


 
(291
)
 
40,141

 

Income from subsidiaries
196,944

 

 
62,054

 

 
(258,998
)
 

Income (loss) before income taxes
199,209

 
(2,290
)

196,945


64,343


(258,998
)
 
199,209

Income tax provision (benefit)
74,571

 
(868
)
 
73,647

 
24,173

 
(96,952
)
 
74,571

Net income (loss)
124,638

 
(1,422
)

123,298


40,170


(162,046
)
 
124,638

Other comprehensive income
168

 


 


 


 


 
168

Total comprehensive income (loss)
124,806

 
(1,422
)

123,298


40,170


(162,046
)
 
124,806

 


28



Condensed Consolidating Statement of Cash Flows for the six months ended April 30, 2018:
 
Toll
Brothers,
Inc.
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash (used in) provided by operating activities
(34,719
)
 
5,576

 
(355,917
)
 
61,174

 
(1,061
)
 
(324,947
)
Cash flow provided by (used in) investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment - net

 

 
(6,660
)
 
159

 

 
(6,501
)
Investments in unconsolidated entities

 

 
(1,393
)
 
(9,407
)
 

 
(10,800
)
Return of investments in unconsolidated entities

 

 
23,421

 
30,894

 

 
54,315

Investment in foreclosed real estate and distressed loans

 

 


 
(195
)
 

 
(195
)
Return of investments in foreclosed real estate and distressed loans

 

 

 
3,122

 

 
3,122

Intercompany advances
346,154

 
(402,166
)
 

 


 
56,012

 

Net cash provided by (used in) investing activities
346,154

 
(402,166
)
 
15,368

 
24,573

 
56,012

 
39,941

Cash flow provided by (used in) financing activities:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of senior notes

 
400,000

 

 


 

 
400,000

Debt issuance costs for senior notes

 
(3,410
)
 

 


 

 
(3,410
)
Proceeds from loans payable

 

 
450,000

 
788,283

 

 
1,238,283

Principal payments of loans payable

 

 
(471,270
)
 
(804,878
)
 

 
(1,276,148
)
Proceeds from stock-based benefit plans
9,133

 

 

 

 

 
9,133

Purchase of treasury stock
(291,478
)
 

 

 

 

 
(291,478
)
Dividends paid
(29,090
)
 

 

 

 

 
(29,090
)
Intercompany advances


 

 
112,935

 
(57,984
)
 
(54,951
)
 

Net cash provided by (used in) financing activities
(311,435
)
 
396,590

 
91,665

 
(74,579
)
 
(54,951
)
 
47,290

Net (decrease) increase in cash and cash equivalents

 

 
(248,884
)
 
11,168

 

 
(237,716
)
Cash and cash equivalents, beginning of period

 

 
533,204

 
179,625

 

 
712,829

Cash and cash equivalents, end of period

 

 
284,320

 
190,793

 

 
475,113


29



Condensed Consolidating Statement of Cash Flows for the six months ended April 30, 2017:
 
Toll
Brothers,
Inc.
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Nonguarantor
Subsidiaries
 
Eliminations
 
Consolidated
Net cash provided by (used in) operating activities
54,209

 
6,729

 
(86,868
)
 
280,465

 
(11,475
)
 
243,060

Cash flow (used in) provided by investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment — net

 

 
(12,043
)
 
334

 

 
(11,709
)
Sale and redemption of marketable securities and restricted investments — net
10,631

 

 


 
7,418

 

 
18,049

Investments in unconsolidated entities

 

 
(1,969
)
 
(111,546
)
 

 
(113,515
)
Return of investments in unconsolidated entities

 

 
29,566

 
68,521

 

 
98,087

Investment in foreclosed real estate and distressed loans

 

 


 
(513
)
 

 
(513
)
Return of investments in foreclosed real estate and distressed loans

 

 


 
4,376

 

 
4,376

Acquisition of a business

 

 
(85,183
)
 

 

 
(85,183
)
Investment paid - intercompany

 

 
(45,000
)
 

 
45,000

 

Intercompany advances
(76,995
)
 
(303,899
)
 

 

 
380,894

 

Net cash used in investing activities
(66,364
)
 
(303,899
)
 
(114,629
)
 
(31,410
)
 
425,894

 
(90,408
)
Cash flow (used in) provided by financing activities:
 
 
 
 
 
 
 
 
 
 
 
Proceeds from issuance of senior notes

 
300,000

 

 


 

 
300,000

Debt issuance costs for senior notes

 
(2,830
)
 

 


 

 
(2,830
)
Proceeds from loans payable

 

 
125,000

 
644,454

 

 
769,454

Principal payments of loans payable

 

 
(380,555
)
 
(793,325
)
 

 
(1,173,880
)
Proceeds from stock-based benefit plans
40,628

 

 

 

 

 
40,628

Purchase of treasury stock
(15,422
)
 

 

 

 

 
(15,422
)
Dividends paid
(13,051
)
 

 

 

 

 
(13,051
)
Investment received - intercompany


 

 

 
45,000

 
(45,000
)
 

Intercompany advances


 

 
475,693

 
(106,274
)
 
(369,419
)
 

Net cash (used in) provided by financing activities
12,155

 
297,170

 
220,138

 
(210,145
)
 
(414,419
)
 
(95,101
)
Net increase in cash and cash equivalents

 

 
18,641

 
38,910

 

 
57,551

Cash and cash equivalents, beginning of period

 

 
583,440

 
50,275

 

 
633,715

Cash and cash equivalents, end of period

 

 
602,081

 
89,185

 

 
691,266


 



30



ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”)
This discussion and analysis is based on, should be read together with, and is qualified in its entirety by, the accompanying unaudited condensed consolidated financial statements and related notes, as well as our consolidated financial statements, notes thereto, and the related MD&A contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2017 (“2017 Form 10-K”). It also should be read in conjunction with the disclosure under “Statement on Forward-Looking Information” in this report.
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 canceled during the relevant period, which includes contracts that were signed during the relevant period and in prior periods. Backlog consists of homes under contract but not yet delivered to our home buyers (“backlog”). Backlog conversion represents the percentage of homes delivered in the period from backlog at the beginning of the period.
We operate in two segments: Traditional Home Building and City Living. We conduct our Traditional Home Building operations in five geographic areas around the United States: (1) the North, consisting of Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey, and New York; (2) the Mid-Atlantic, consisting of Delaware, Maryland, Pennsylvania, and Virginia; (3) the South, consisting of Florida, North Carolina, and Texas; (4) the West, consisting of Arizona, Colorado, Idaho, Nevada, and Washington, and (5) California.
OVERVIEW
Financial and Operational Highlights
In the six-month period ended April 30, 2018, we recognized $2.77 billion of revenues and net income of $243.9 million, as compared to $2.28 billion of revenues and net income of $195.1 million in the six-month period ended April 30, 2017. In the three-month period ended April 30, 2018, we recognized $1.60 billion of revenues and net income of $111.8 million, as compared to $1.36 billion of revenues and net income of $124.6 million in the three-month period ended April 30, 2017.
In the six-month periods ended April 30, 2018 and 2017, the value of net contracts signed was $4.07 billion (4,488 homes) and $3.26 billion (4,033 homes), respectively. In the three-month periods ended April 30, 2018 and April 30, 2017, the value of net contracts signed was $2.38 billion (2,666 homes) and $2.02 billion (2,511 homes).
The value of our backlog at April 30, 2018 was $6.36 billion (7,030 homes), as compared to our backlog at April 30, 2017 of $5.00 billion (6,018 homes). Our backlog at October 31, 2017 was $5.06 billion (5,851 homes), as compared to backlog of $3.98 billion (4,685 homes) at October 31, 2016.
At April 30, 2018, we had $475.1 million of cash and cash equivalents on hand and approximately $1.15 billion available under our $1.295 billion revolving credit facility (the “Credit Facility”) that matures in May 2021. At April 30, 2018, we had no outstanding borrowings under the Credit Facility. We did have approximately $146.4 million of outstanding letters of credit under the Credit Facility.
At April 30, 2018, we owned or controlled through options approximately 51,000 home sites, as compared to approximately 48,300 at October 31, 2017; and approximately 48,800 at October 31, 2016. Of the approximately 51,000 total home sites that we owned or controlled through options at April 30, 2018, we owned approximately 32,000 and controlled approximately 19,000 through options. Of the 32,000 home sites owned, approximately 17,000 were substantially improved. In addition, at April 30, 2018, we expect to purchase approximately 2,300 additional home sites over a number of years from several joint ventures in which we have interests, at prices not yet determined.
At April 30, 2018, we were selling from 283 communities, compared to 305 at October 31, 2017; and 310 at October 31, 2016.
At April 30, 2018, our total stockholders’ equity and our debt to total capitalization ratio were $4.48 billion and 0.45 to 1.00, respectively.
Our Business Environment and Current Outlook
We believe that solid and improving demand for homes, the limited supply of resale and new homes, and the financial strength of our affluent buyers, coupled with our solid land positions and the capital to expand, are driving our growth. Our buyers are further benefiting from a solid employment picture, strong consumer confidence, a robust stock market, and increasing equity in their existing homes. We believe that gradually rising interest rates tied to a strengthening economy will not upset demand. In the six months ended April 30, 2018, the value and number of net signed contracts increased 24.9% and 11.3%, respectively,

31



as compared to the six months ended April 30, 2017; and increased 49.1% and 38.4%, respectively, as compared to the six months ended April 30, 2016.
We believe we are also benefiting from the appeal and national recognition of our brand and a lack of large scale competition in the affordable end of the luxury new home market. Our home designs and customization program differentiate us within our segment of the luxury home market. The breadth of products we offer enables us to appeal to a wide range of demographic groups, including affluent move-up, empty-nester and millennial buyers, which we believe is also fueling demand for our homes. We believe that many of our communities are in desirable locations that are difficult to replace and that many of these communities have substantial embedded value that may be realized in the future as the housing recovery strengthens.
The supply of new and existing homes continues to trail the growth in population and households. We believe that in certain markets, the new home market has significant pent-up demand. We believe that, as the national economy continues to improve and as the millennial generation comes of age, pent-up demand for homes will continue to be released. We expect that this increase in demand will drive production of new homes to address the existing deficit in housing supply compared to projected household growth.
Other
Tax Reform
On December 22, 2017, the Tax Cuts and Jobs Act (the “Tax Act”) was enacted into law, which changed many longstanding foreign and domestic corporate and individual tax rules, as well as rules pertaining to the taxation of employee compensation and benefits. These changes include: (i) reducing the corporate income tax rate from 35% to 21% for tax years beginning after December 31, 2017; (ii) eliminating the corporate alternative minimum tax (“AMT”); (iii) changing rules related to uses and limitations of net operating loss carryforwards created in tax years beginning after December 31, 2017; (iv) repeal of the domestic production activities deduction for tax years beginning after December 31, 2017; and (v) establishing new limits on the federal tax deductions individual taxpayers may take as a result of mortgage loan interest payments, and state and local tax payments, including real estate taxes.
As required under accounting rules, we remeasured our net deferred tax liability for the tax law change, which resulted in an income tax benefit of $31.2 million in the six months ended April 30, 2018. Since the Tax Act includes many broad and complex changes to the U.S. tax code, we continue to analyze the impact the provisions of the Tax Act may have on our financial statements. See Note 7, “Income Taxes” in Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information regarding the impact of the Tax Act.
Defective I-Joists
In early July 2017, one of our lumber suppliers publicly announced a floor joist recall. We believe that these floor joists were present in approximately 350 of our homes that had been built or were under construction in our North and West geographic segments. Of the approximately 350 affected homes, eight of them had already been delivered to home buyers at the time the joist recall was announced. After the joist recall was announced, 39 home buyers canceled their contracts and 20 home buyers transferred their contracts to another home site. The supplier has or will reimburse us for the costs associated with the remediation of the defective floor joists. This remediation has been completed for all affected homes. At April 30, 2018, there were approximately 57 affected homes in backlog and another 46 were not yet sold. We began delivering these homes in the first quarter of fiscal 2018 and expect to deliver the remaining homes in backlog by the end of fiscal 2018. We do not believe the resolution of this issue will be material to our results of operations, liquidity, or financial condition.

32



RESULTS OF OPERATIONS – OVERVIEW
The following table compares certain items in our Condensed Consolidated Statements of Operations and Comprehensive Income and other supplemental information for the six months and three months ended April 30, 2018 and 2017 ($ amounts in millions, unless otherwise stated). For more information regarding results of operations by segment, see “Segments” in this MD&A.
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Revenues
$
2,774.7

 
$
2,284.2

 
21
 %
 
$
1,599.2

 
$
1,363.5

 
17
 %
Cost of revenues
2,232.6

 
1,810.4

 
23
 %
 
1,298.2

 
1,077.4

 
20
 %
Selling, general and administrative
323.9

 
283.8

 
14
 %
 
166.7

 
146.8

 
14
 %
 
2,556.6

 
2,094.3

 
22
 %
 
1,464.8

 
1,224.2

 
20
 %
Income from operations
218.1

 
190.0

 
15
 %
 
134.4

 
139.3

 
(4
)%
Other
 
 
 
 
 
 
 
 
 
 
 
Income from unconsolidated entities
41.4

 
92.3

 
(55
)%
 
2.6

 
45.9

 
(94
)%
Other income – net
24.8

 
26.7

 
(7
)%
 
15.8

 
14.0

 
13
 %
Income before income taxes
284.3

 
309.0

 
(8
)%
 
152.7

 
199.2

 
(23
)%
Income tax provision
40.4

 
113.9

 
(65
)%
 
40.9

 
74.6

 
(45
)%
Net income
$
243.9

 
$
195.1

 
25
 %
 
$
111.8

 
$
124.6

 
(10
)%
 
 
 
 
 
 
 
 
 
 
 
 
Supplemental information:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues as a percentage of revenues
80.5
%
 
79.3
%
 

 
81.2
%
 
79.0
%
 
 
SG&A as a percentage of revenues
11.7
%
 
12.4
%
 

 
10.4
%
 
10.8
%
 
 
Effective tax rate
14.2
%
 
36.9
%
 
 
 
26.8
%
 
37.4
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Deliveries – units
3,309

 
2,828

 
17
 %
 
1,886

 
1,638

 
15
 %
Deliveries – average delivered price *
$
838.5

 
$
807.7

 
4
 %
 
$
847.9

 
$
832.4

 
2
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net contracts signed – value
$
4,073.6

 
$
3,262.3

 
25
 %
 
$
2,383.2

 
$
2,019.3

 
18
 %
Net contracts signed – units
4,488

 
4,033

 
11
 %
 
2,666

 
2,511

 
6
 %
Net contracts signed – average selling price *
$
907.7

 
$
808.9

 
12
 %
 
$
893.9

 
$
804.2

 
11
 %
 
 
 
 
 
 
 
 
 
 
 
 
 
April 30, 2018
 
April 30, 2017
 
%
Change
 
October 31, 2017
 
October 31, 2016
 
%
Change
Backlog – value
$
6,360.4

 
$
5,000.9

 
27
 %
 
$
5,061.5

 
$
3,984.1

 
27
 %
Backlog – units
7,030

 
6,018

 
17
 %
 
5,851

 
4,685

 
25
 %
Backlog – average selling price *
$
904.8

 
$
831.0

 
9
 %
 
$
865.1

 
$
850.4

 
2
 %
* $ amounts in thousands.
Note: Due to rounding, amounts may not add.
Revenues and Cost of Revenues
The increase in revenues for the six months ended April 30, 2018, as compared to the six months ended April 30, 2017, was attributable to a 17% increase in the number of homes delivered primarily due to higher backlog at October 31, 2017, as compared to October 31, 2016, and a 4% increase in the average price of the homes delivered. The increase in the average delivered home price was mainly due to an increase in the number of homes delivered in California and City Living where home prices are higher, and, in California where there was a shift in the number of homes delivered to more expensive areas and/or products in the fiscal 2018 period, as compared to the fiscal 2017 period. These increases were partially offset by an increase in deliveries of lower priced attached and age-targeted products primarily in our North segment and an increase in deliveries in Idaho, where average delivered home prices are lower than the Company average, in the fiscal 2018 period, as compared to the fiscal 2017 period. The increase in cost of revenues, as a percentage of revenues, in the six months ended April 30, 2018, as compared to the six months ended April 30, 2017, was principally due to higher inventory impairment charges, higher material and labor costs, and a higher number of closings in attached home communities (including active-adult), primarily in our North segment where margins are lower than our Company average. These increases were offset, in part, by an increase in revenues generated in California and City Living, where cost of revenues, as a percentage of revenues,

33



are lower than the Company average, and lower interest expense in the six months ended April 30, 2018, as compared to the six months ended April 30, 2017. In the six months ended April 30, 2018 and 2017 periods, interest expense as a percentage of revenues was 2.8% and 3.0%, respectively, and we recognized inventory impairments and write-offs of $17.7 million and $8.9 million, respectively.
The increase in revenues for the three months ended April 30, 2018, as compared to the three months ended April 30, 2017, was attributable to a 15% increase in the number of homes delivered primarily due to higher backlog at October 31, 2017, as compared to October 31, 2016, and a 2% increase in the average price of the homes delivered. The increase in the average delivered home price was primarily due to an increase in the number of homes delivered in California where home prices are higher and a shift in the number of homes delivered to more expensive areas and/or products in California and City Living in the fiscal 2018 period, as compared to the fiscal 2017 period. These increases were partially offset by an increase in deliveries of lower priced attached home communities (including active-adult) primarily in our North segment and a shift in the number of homes delivered to less expensive areas and/or products in our West segment including an increase in deliveries in Idaho where average delivered home prices are lower than the Company average, in the fiscal 2018 period, as compared to the fiscal 2017 period. The increase in cost of revenues, as a percentage of revenues, in the three months ended April 30, 2018, as compared to the three months ended April 30, 2017, was principally due to higher inventory impairment charges, higher material and labor costs, and a higher number of closings in attached home communities (including active-adult), primarily in our North segment where margins are lower than our Company average. These increases were offset, in part, by an increase in revenues generated in California and City Living, where cost of revenues, as a percentage of revenues, are lower than the Company average, and lower interest expense in the three months ended April 30, 2018, as compared to the three months ended April 30, 2017. In the three months ended April 30, 2018 and 2017, interest expense as a percentage of revenues was 2.8% and 3.0%, and we recognized inventory impairments and write-offs of $13.8 million and $4.3 million, respectively.
Selling, General and Administrative Expenses (“SG&A”)
SG&A spending increased by $40.1 million in the six-month period ended April 30, 2018, as compared to the six-month period ended April 30, 2017. As a percentage of revenues, SG&A was 11.7% and 12.4% in the fiscal 2018 period and the fiscal 2017 period, respectively. The dollar increase in SG&A was due primarily to increased compensation costs due to a higher number of employees; increased sales and marketing costs; and increased insurance costs due to increased revenues. The higher sales and marketing costs were the result of the increased number of homes delivered, increased spending on advertising, and higher design studio operating costs. The increased number of employees was due primarily to the overall increase in our business in the fiscal 2018 period, as compared to the fiscal 2017 period. The decrease in SG&A as a percentage of revenues in the fiscal 2018 period, as compared to the fiscal 2017 period, was due to SG&A spending increasing 14% while revenues increased 21% from the fiscal 2017 period.
SG&A spending increased by $19.9 million in the three-month period ended April 30, 2018, as compared to the three-month period ended April 30, 2017. As a percentage of revenues, SG&A decreased to 10.4% in the fiscal 2018 period, from 10.8% in the fiscal 2017 period. The dollar increase in SG&A was due primarily to increased compensation costs due to a higher number of employees; increased sales and marketing costs; and increased insurance costs due to increased revenues. The higher sales and marketing costs were the result of the increased number of homes delivered, increased spending on advertising, and higher design studio operating costs. The increased number of employees was due primarily to the increase in the number of operating communities that we had in the fiscal 2018 period, as compared to the fiscal 2017 period. The decrease in SG&A as a percentage of revenues in the fiscal 2018 period, as compared to the fiscal 2017 period, was due to SG&A spending increasing 14% while revenues increased 17% from the fiscal 2017 period.
Income from Unconsolidated Entities
We have investments in various unconsolidated entities. These entities, which are structured as joint ventures (i) develop land for the joint venture participants and for sale to outside builders (“Land Development Joint Ventures”); (ii) develop for-sale homes (“Home Building Joint Ventures”); (iii) develop luxury for-rent residential apartments, commercial space, and a hotel (“Rental Property Joint Ventures”), which includes our investment in Toll Brothers Realty Trust (the “Trust”); and (iv) invest in distressed loans and real estate and provide financing and land banking to residential builders and developers for the acquisition and development of land and home sites (“Gibraltar Joint Ventures”).
We recognize our proportionate share of the earnings and losses from these various unconsolidated entities. Many of our unconsolidated entities are land development projects, high-rise/mid-rise condominium construction projects, or for-rent apartments projects, which do not generate revenues and earnings for a number of years during the development of the property. Once development is complete for land development projects and high-rise/mid-rise condominium construction projects, these unconsolidated entities will generally, over a relatively short period of time, generate revenues and earnings until all of the assets of the entity are sold. Further, once for-rent apartments projects are complete and stabilized, we may monetize a portion of these projects through a recapitalization or a sale of all or a portion of our ownership interest in the joint venture,

34



resulting in income. Because there is not a steady flow of revenues and earnings from these entities, the earnings recognized from these entities may vary significantly from quarter to quarter and year to year.
The decrease in income from unconsolidated entities in the six-month period ended April 30, 2018, as compared to the six-month period ended April 30, 2017, was due mainly to lower income from two of our Home Building Joint Ventures located in New York City, New York, where the fiscal 2017 period benefited from the commencement of deliveries in the fourth quarter of fiscal 2016 and $26.7 million of gains recognized related to the sale of 50% of our ownership interests in two of our Rental Property Joint Ventures located in Jersey City, New Jersey, and the suburbs of Philadelphia, Pennsylvania, in the fiscal 2017 period. These decreases were partially offset by a $30.8 million gain recognized in the fiscal 2018 period from the sale by one of our Rental Property Joint Ventures of its student housing community in College Park, Maryland.
The decrease in income from unconsolidated entities for the three-month period ended April 30, 2018, as compared to the three-month period ended April 30, 2017, was due principally to lower income from two of our Home Building Joint Ventures located in New York City, New York, where the fiscal 2017 period benefited from the ongoing deliveries which had commenced in the fourth quarter of fiscal 2016 and a $20.5 million gain recognized in the fiscal 2017 period related to the sale of 50% of our ownership interests in one of our Rental Property Joint Ventures located in Jersey City, New Jersey.
Other Income – Net
The table below provides, for the periods indicated, the components of “Other income – net” (amounts in thousands):
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
2018
 
2017
Income from ancillary businesses
$
7,456

 
$
9,716

 
$
4,873

 
$
7,481

Management fee income from home building
unconsolidated entities, net
7,425

 
7,971

 
4,354

 
3,682

Income from land and other sales
3,287

 
5,086

 
2,587

 
1,527

Other
6,623

 
3,916

 
3,980

 
1,296

Total other income – net
$
24,791

 
$
26,689

 
$
15,794

 
$
13,986

The decreases in income from ancillary businesses in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to decreases in earnings from Gibraltar Capital and Asset Management, LLC (“Gibraltar”) due to the continued liquidation of its distressed loans and foreclosed real estate assets. Gibraltar’s current business strategy is, through joint ventures, to finance builders’ and developers’ acquisition and development of land and home sites and pursue other complementary investment strategies.
Management fee income from home building unconsolidated entities presented above primarily represents fees earned by our City Living and home building operations. In addition, in the six-month periods ended April 30, 2018 and 2017, our apartment living operations earned fees from unconsolidated entities of $4.0 million and $2.8 million, respectively. In the three-month periods ended April 30, 2018 and 2017, our apartment living operations earned fees from unconsolidated entities of $1.7 million and $1.3 million, respectively. Fees earned by our apartment living operations are included in income from ancillary businesses.
The decrease in income from land and other sales in the six-month period ended April 30, 2018, as compared to the six-month period ended April 30, 2017, was primarily due to $4.5 million of previously deferred gains recognized in the fiscal 2017 period related to the sale of a property in fiscal 2015 to a Home Building Joint Venture in which we had a 25% interest. Due to our continued involvement in this unconsolidated entity through our ownership interest and guarantees provided on the entity’s debt, we deferred the $9.3 million gain realized on the sale. We recognized the gain as units were sold to the ultimate home buyers. In the fourth quarter of fiscal 2017, we purchased the remaining inventory from this Home Building Joint Venture. The remaining unamortized deferred gain was used to reduce the basis of the inventory acquired.
Income Before Income Taxes
For the six-month period ended April 30, 2018, we reported income before income taxes of $284.3 million, as compared to $309.0 million in the six-month period ended April 30, 2017. For the three-month period ended April 30, 2018, we reported income before income taxes of $152.7 million, as compared to $199.2 million in the three-month period ended April 30, 2017.
Income Tax Provision
We recognized income tax provisions of $40.4 million and $40.9 million in the six-month and three-month periods ended April 30, 2018, respectively. Based upon the blended federal statutory rate of 23.3% for the fiscal 2018 periods, our federal tax provisions would have been $66.3 million and $35.6 million in the six-month and three-month periods ended April 30, 2018,

35



respectively. The difference between the tax provision recognized and the tax provision based on the federal statutory rate in the six-month period ended April 30, 2018 was mainly due to the impact of the Tax Act, excess tax benefits related to stock-based compensation, and tax benefits related to the utilization of domestic production activities deductions, offset, in part, by the provision for state income taxes. See Note 7, “Income Taxes” in Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information regarding the impact of the Tax Act. The difference between the tax provision recognized and the tax provision based on the federal statutory rate in the three-month period ended April 30, 2018 was primarily due to the provision for state income taxes partially offset by tax benefits related to the utilization of domestic production activities deductions.
In the six-month and three-month periods ended April 30, 2017, we recognized income tax provisions of $113.9 million and $74.6 million, respectively. Based upon the federal statutory rate of 35%, our federal tax provisions would have been $108.1 million and $69.7 million in the six-month and three-month periods ended April 30, 2017, respectively. The differences between the tax provisions recognized and the tax provisions based on the federal statutory rate were due mainly to the provision for state income taxes and interest accrued on anticipated tax assessments, partially offset by tax benefits related to the utilization of domestic production activities deductions and other permanent differences.
Contracts
The aggregate value of net contracts signed increased $811.3 million, or 25%, in the six-month period ended April 30, 2018, as compared to the prior year period. In the six-month periods ended April 30, 2018 and 2017, the value of net contracts signed was $4.07 billion (4,488 homes) and $3.26 billion (4,033 homes), respectively.
The aggregate value of net contracts signed increased $363.9 million, or 18.0%, in the three-month period ended April 30, 2018, as compared to the prior year period. In the three-month periods ended April 30, 2018 and 2017, the value of net contracts signed was $2.38 billion (2,666 homes) and $2.02 billion (2,511 homes), respectively.
The increases in the aggregate value of net contracts signed in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly the result of increases of 11% and 6% in the number of net contracts signed in the six-month and three-month periods, respectively, and increases of 12% and 11% in the average value of each contract signed in the six-month and three-month periods, respectively. The increases in the number of net contracts signed were the result of increased demand, offset, in part, by a decrease in the number of selling communities in the fiscal 2018 periods, as compared to the fiscal 2017 periods. The increases in average price of net contracts signed in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were principally due to a shift in the number of contracts signed to more expensive areas and/or products and price increases in the fiscal 2018 periods, as compared to the fiscal 2017 periods. In the six-month and three-month periods ended April 30, 2018, the number of net contracts signed in California, where average sales prices are higher, represented 21% of total net contracts, as compared to 15% in the six-month and three-month periods ended April 30, 2017. These increases were partially offset by decreases in the average sales price of net contracts signed in City Living in the fiscal 2018 periods, as compared to the fiscal 2017 periods, which were principally due to a shift to less expensive buildings in the fiscal 2018 periods, as compared to the fiscal 2017 periods.
Backlog
The increase in the value of our backlog at April 30, 2018, as compared to the backlog at April 30, 2017, was primarily attributable to the 27% higher value of backlog at October 31, 2017, as compared to the backlog at October 31, 2016 and a 25% increase in the value of net contracts signed in the six-month period ended April 30, 2018, as compared to the fiscal 2017 period, offset, in part, by a 21% increase in the value of deliveries in the six-month period ended April 30, 2018, as compared to the fiscal 2017 period.
The value of our backlog at April 30, 2018 increased 27% to $6.36 billion (7,030 homes), as compared to the value of our backlog at April 30, 2017 of $5.00 billion (6,018 homes). Our backlog at October 31, 2017 and 2016 was $5.06 billion (5,851 homes) and $3.98 billion (4,685 homes), respectively.
For more information regarding results of operations by segment, see “Segments” in this MD&A.
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 capital markets. At April 30, 2018 and October 31, 2017, we had $475.1 million and $712.8 million of cash and cash equivalents, respectively. Cash used in operating activities during the six-month period ended April 30, 2018 was $324.9 million. Cash used in operating activities during the fiscal 2018 period was primarily related to the purchase of inventory; an increase in receivables, prepaid expenses, and other assets; and a decrease in income taxes payable; offset, in part, by net income adjusted for stock-based compensation, inventory impairments,

36



depreciation and amortization, and deferred taxes; an increase in mortgage loans sold, net of mortgage loans originated; and increases in customer deposits, accounts payable, and accrued expenses.
In the six-month period ended April 30, 2018, cash provided by investing activities was $39.9 million, which was primarily related to $57.4 million of cash received as returns on our investments in unconsolidated entities, foreclosed real estate, and distressed loans. This was offset, in part, by $10.8 million used to fund our investments in unconsolidated entities and $6.5 million for the purchase of property and equipment.
We generated $47.3 million of cash from financing activities in the six-month period ended April 30, 2018 primarily from the net proceeds of $396.6 million from the issuance of $400.0 million aggregate principal amount of 4.350% Senior Notes due 2028 and the proceeds of $9.1 million from our stock-based benefit plans; offset, in part, by the repurchase of $291.5 million of our common stock; the repayment of $37.9 million of loans payable, net of borrowings; and the payment of dividends on our common stock of $29.1 million.
At April 30, 2017, we had $691.3 million of cash and cash equivalents. At October 31, 2016, we had $633.7 million of cash and cash equivalents. Cash provided by operating activities during the six-month period ended April 30, 2017 was $243.1 million. Cash provided by operating activities during the fiscal 2017 period was primarily related to net income adjusted for stock-based compensation, inventory impairments, and depreciation and amortization; an increase in mortgage loans sold, net of mortgage loans originated; an increase in customer deposits; a decrease in receivables, prepaid expenses, and other assets, and an increase in income taxes payable, offset, in part, by an increase in inventory and decreases in accounts payable and accrued expenses.
In the six-month period ended April 30, 2017, cash used in investing activities was $90.4 million. Cash used in investing activities was primarily related to $113.5 million used to fund our investments in unconsolidated entities, $85.2 million used to acquire substantially all the assets and operations of Coleman Real Estate Holding, LLC, and $11.7 million for the purchase of property and equipment. This was offset, in part, by $102.5 million of cash received as returns on our investments in unconsolidated entities, foreclosed real estate, and distressed loans, and $18.0 million from net sales of restricted investments.
We used $95.1 million of cash from financing activities in the six-month period ended April 30, 2017 primarily for the repayment of $404.4 million of loans payable, net of repayments, the repurchase of $15.4 million of our common stock, and the payment of a dividend on our common stock of $0.08 per share, $13.1 million in the aggregate, offset, in part, by the net proceeds of $297.2 million from the issuance of $300.0 million aggregate principal amount of 4.875% Senior Notes due 2027 and the proceeds of $40.6 million from our stock-based benefit plans.
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 a supply of several years of home sites, we do not need to buy home sites immediately to replace those that we deliver. In addition, we generally do not begin construction of our detached homes until we have a signed contract with the home buyer. Should our business remain at its current level or decline, we believe that our inventory levels would 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 delay, decrease, or curtail our acquisition of additional land, as we did during the period from April 2006 through January 2010, which would further reduce our inventory levels and cash needs. At April 30, 2018, we owned or controlled through options approximately 51,000 home sites, of which we owned approximately 32,000. Of our owned home sites at April 30, 2018, significant improvements were completed on approximately 17,000 of them.
At April 30, 2018, the aggregate purchase price of land parcels under option and purchase agreements was approximately $2.68 billion (including $234.9 million of land to be acquired from joint ventures in which we have invested). Of the $2.68 billion of land purchase commitments, we paid or deposited $175.2 million, and, if we acquire all of these land parcels, we will be required to pay an additional $2.38 billion. The purchases of these land parcels are scheduled to occur over the next several years. In addition, we expect to purchase approximately 2,300 additional home sites over a number of years from several joint ventures in which we have interests. 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. In addition, at April 30, 2018, we had purchase commitments to acquire land for apartment developments of approximately $214.0 million, of which we had outstanding deposits in the amount of $9.3 million.
We have a $1.295 billion, unsecured, five-year revolving credit facility (the “Credit Facility”) that is scheduled to expire in May 2021. Under the terms of the Credit Facility, our maximum leverage ratio (as defined in the credit agreement) may not exceed 1.75 to 1.00, and we are required to maintain a minimum tangible net worth (as defined in the credit agreement) of no less than approximately $2.45 billion. Under the terms of the Credit Facility, at April 30, 2018, our leverage ratio was approximately 0.72 to 1.00, and our tangible net worth was approximately $4.44 billion. Based upon the limitations related to

37



our repurchase of common stock in the Credit Facility, our ability to repurchase our common stock was limited to approximately $2.45 billion as of April 30, 2018. At April 30, 2018, we had no outstanding borrowings under our Credit Facility and had outstanding letters of credit thereunder of approximately $146.4 million.
We believe that we will have adequate resources and sufficient access to the capital markets and external financing sources to continue to fund our current operations and meet our contractual obligations. Due to the uncertainties 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.
OFF-BALANCE SHEET ARRANGEMENTS
We have investments in Land Development Joint Ventures; Home Building Joint Ventures; Rental Property Joint Ventures; and Gibraltar Joint Ventures.
Our investments in these entities are accounted for using the equity method of accounting. We are a party to several joint ventures with unrelated parties to develop and sell land that is owned by the joint ventures. We recognize our proportionate share of the earnings from the sale of home sites to other builders, including our joint venture partners. We do not recognize earnings from the home sites we purchase from these ventures at the time of our purchase; instead, our cost basis in the home sites is reduced by our share of the earnings realized by the joint venture from sales of those home sites to us.
At April 30, 2018, we had investments in these entities of $456.8 million and were committed to invest or advance up to an additional $40.5 million to these entities if they require additional funding. At April 30, 2018, we had agreed to terms for the acquisition of 327 home sites from two Land Development Joint Ventures for an estimated aggregate purchase price of $234.9 million. In addition, we expect to purchase approximately 2,300 additional home sites over a number of years from several joint ventures in which we have interests; the purchase price of these home sites will be determined at a future date.
The unconsolidated entities in which we have investments generally finance their activities with a combination of partner equity and debt financing. In some instances, we and our partners have guaranteed debt of certain unconsolidated entities. These guarantees may include any or all of the following: (i) project completion guarantees, including any cost overruns; (ii) repayment guarantees, generally covering a percentage of the outstanding loan; (iii) carry cost guarantees, which cover costs such as interest, real estate taxes, and insurance; (iv) an environmental indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (v) indemnification of the lender from “bad boy acts” of the unconsolidated entity.
In some instances, the guarantees provided in connection with loans to an unconsolidated entity are joint and several. In these situations, we generally have a reimbursement agreement with our partner that provides that neither party is responsible for more than its proportionate share or agreed-upon share of the guarantee; however, if the joint venture partner does not have adequate financial resources to meet its obligations under the reimbursement agreement, we may be liable for more than our proportionate share.
We believe that, as of April 30, 2018, in the event we become legally obligated to perform under a guarantee of the obligation of an unconsolidated entity due to a triggering event, the collateral in such entity should be sufficient to repay all or a significant portion of the obligation. If it is not, we and our partners would need to contribute additional capital to the entity. At April 30, 2018, certain unconsolidated entities have loan commitments aggregating $1.19 billion, of which, if the full amount of the debt obligations were borrowed, we estimate $301.4 million to be our maximum exposure related to repayment and carry cost guarantees. At April 30, 2018, the unconsolidated entities had borrowed an aggregate of $721.8 million, of which we estimate $228.7 million to be our maximum exposure related to repayment and carry cost guarantees. The terms of these guarantees generally range from 4 months to 47 months. These maximum exposure estimates do not take into account any recoveries from the underlying collateral or any reimbursement from our partners.
For more information regarding these joint ventures, see Note 3, “Investments in Unconsolidated Entities,” in the Notes to Condensed Consolidated Financial Statements in this Form 10-Q.
CRITICAL ACCOUNTING POLICIES
As disclosed in our 2017 Form 10-K, our most critical accounting policies relate to inventory, income taxes–valuation allowances, revenue and cost recognition, and warranty and self-insurance. Since October 31, 2017, there have been no material changes to those critical accounting policies.

38



SEGMENTS
The tables below summarize information related to units delivered and revenues, net contracts signed, and income (loss) before income taxes, by segment, for the periods indicated, and information related to backlog, by segment, as of the dates indicated.
Units Delivered and Revenues:
 
Six months ended April 30,
 
Revenues
($ in millions)
 
Units Delivered
 
Average Delivered Price
($ in thousands)
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Traditional Home Building:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North
$
360.5

 
$
335.0

 
8
%
 
547

 
486

 
13
%
 
$
659.0

 
$
689.3

 
(4
)%
Mid-Atlantic
461.9

 
410.5

 
13
%
 
730

 
664

 
10
%
 
$
632.7

 
$
618.2

 
2
 %
South
412.2

 
337.3

 
22
%
 
540

 
464

 
16
%
 
$
763.3

 
$
726.9

 
5
 %
West
607.4

 
513.8

 
18
%
 
944

 
776

 
22
%
 
$
643.4

 
$
662.1

 
(3
)%
California
725.5

 
593.1

 
22
%
 
455

 
403

 
13
%
 
$
1,594.5

 
$
1,471.7

 
8
 %
     Traditional Home Building
2,567.5

 
2,189.7

 
17
%
 
3,216

 
2,793

 
15
%
 
$
798.4

 
$
784.0

 
2
 %
City Living
207.2

 
94.5

 
119
%
 
93

 
35

 
166
%
 
$
2,228.0

 
$
2,700.0

 
(17
)%
Total
$
2,774.7

 
$
2,284.2

 
21
%
 
3,309

 
2,828

 
17
%
 
$
838.5

 
$
807.7

 
4
 %
 
Three months ended April 30,
 
Revenues
($ in millions)
 
Units Delivered
 
Average Delivered Price
($ in thousands)
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Traditional Home Building:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North
$
226.2

 
$
189.3

 
19
%
 
338

 
277

 
22
 %
 
$
669.3

 
$
683.6

 
(2
)%
Mid-Atlantic
254.9

 
226.5

 
13
%
 
398

 
367

 
8
 %
 
$
640.5

 
$
617.1

 
4
 %
South
240.7

 
195.1

 
23
%
 
319

 
274

 
16
 %
 
$
754.6

 
$
712.1

 
6
 %
West
349.4

 
302.7

 
15
%
 
532

 
441

 
21
 %
 
$
656.7

 
$
686.4

 
(4
)%
California
438.4

 
373.3

 
17
%
 
270

 
248

 
9
 %
 
$
1,623.5

 
$
1,505.3

 
8
 %
     Traditional Home Building
1,509.6

 
1,286.9

 
17
%
 
1,857

 
1,607

 
16
 %
 
$
812.9

 
$
800.8

 
2
 %
City Living
89.6

 
76.6

 
17
%
 
29

 
31

 
(6
)%
 
$
3,090.8

 
$
2,469.7

 
25
 %
Total
$
1,599.2

 
$
1,363.5

 
17
%
 
1,886

 
1,638

 
15
 %
 
$
847.9

 
$
832.4

 
2
 %
Net Contracts Signed:
 
Six months ended April 30,
 
Net Contract Value
($ in millions)
 
Net Contracted Units
 
Average Contracted Price
($ in thousands)
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Traditional Home Building:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North
$
450.0

 
$
435.9

 
3
 %
 
634

 
684

 
(7
)%
 
$
709.8

 
$
637.3

 
11
 %
Mid-Atlantic
559.9

 
583.5

 
(4
)%
 
872

 
943

 
(8
)%
 
$
642.1

 
$
618.8

 
4
 %
South
578.5

 
498.1

 
16
 %
 
769

 
672

 
14
 %
 
$
752.3

 
$
741.2

 
1
 %
West
779.0

 
684.4

 
14
 %
 
1,149

 
1,055

 
9
 %
 
$
678.0

 
$
648.7

 
5
 %
California
1,547.2

 
929.3

 
66
 %
 
952

 
614

 
55
 %
 
$
1,625.2

 
$
1,513.5

 
7
 %
Traditional Home Building
3,914.6

 
3,131.2

 
25
 %
 
4,376

 
3,968

 
10
 %
 
$
894.6

 
$
789.1

 
13
 %
City Living
159.0

 
131.1

 
21
 %
 
112

 
65

 
72
 %
 
$
1,419.6

 
$
2,016.9

 
(30
)%
Total
$
4,073.6

 
$
3,262.3

 
25
 %
 
4,488

 
4,033

 
11
 %
 
$
907.7

 
$
808.9

 
12
 %

39



 
Three months ended April 30,
 
Net Contract Value
($ in millions)
 
Net Contracted Units
 
Average Contracted Price
($ in thousands)
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Traditional Home Building:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North
$
252.5

 
$
264.2

 
(4
)%
 
363

 
408

 
(11
)%
 
$
695.6

 
$
647.4

 
7
 %
Mid-Atlantic
347.8

 
346.9

 
 %
 
548

 
563

 
(3
)%
 
$
634.6

 
$
616.2

 
3
 %
South
339.5

 
294.1

 
15
 %
 
466

 
406

 
15
 %
 
$
728.4

 
$
724.5

 
1
 %
West
445.1

 
438.2

 
2
 %
 
660

 
703

 
(6
)%
 
$
674.4

 
$
623.4

 
8
 %
California
901.2

 
594.1

 
52
 %
 
564

 
388

 
45
 %
 
$
1,597.9

 
$
1,531.2

 
4
 %
Traditional Home Building
2,286.1

 
1,937.5

 
18
 %
 
2,601

 
2,468

 
5
 %
 
$
878.9

 
$
785.1

 
12
 %
City Living
97.1

 
81.8

 
19
 %
 
65

 
43

 
51
 %
 
$
1,494.3

 
$
1,901.0

 
(21
)%
Total
$
2,383.2

 
$
2,019.3

 
18
 %
 
2,666

 
2,511

 
6
 %
 
$
893.9

 
$
804.2

 
11
 %
Backlog:
 
At April 30,
 
Backlog Value
($ in millions)
 
Backlog Units
 
Average Backlog Price
($ in thousands)
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Traditional Home Building:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North
$
905.6

 
$
793.7

 
14
 %
 
1,304

 
1,175

 
11
 %
 
$
694.5

 
$
675.5

 
3
 %
Mid-Atlantic
839.7

 
782.9

 
7
 %
 
1,285

 
1,265

 
2
 %
 
$
653.4

 
$
618.9

 
6
 %
South
982.2

 
897.2

 
9
 %
 
1,284

 
1,168

 
10
 %
 
$
765.0

 
$
768.2

 
 %
West
1,143.6

 
975.9

 
17
 %
 
1,602

 
1,427

 
12
 %
 
$
713.8

 
$
683.9

 
4
 %
California
2,316.8

 
1,203.9

 
92
 %
 
1,384

 
744

 
86
 %
 
$
1,674.0

 
$
1,618.1

 
3
 %
Traditional Home Building
6,187.9

 
4,653.6

 
33
 %
 
6,859

 
5,779

 
19
 %
 
$
902.2

 
$
805.3

 
12
 %
City Living
172.5

 
347.3

 
(50
)%
 
171

 
239

 
(28
)%
 
$
1,009.0

 
$
1,453.0

 
(31
)%
Total
$
6,360.4

 
$
5,000.9

 
27
 %
 
7,030

 
6,018

 
17
 %
 
$
904.8

 
$
831.0

 
9
 %
 
At October 31,
 
Backlog Value
($ in millions)
 
Backlog Units
 
Average Backlog Price
($ in thousands)
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
 
2017
 
2016
 
% Change
Traditional Home Building:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
North
$
816.1

 
$
692.8

 
18
 %
 
1,217

 
977

 
25
 %
 
$
670.6

 
$
709.1

 
(5
)%
Mid-Atlantic
741.6

 
610.0

 
22
 %
 
1,143

 
986

 
16
 %
 
$
648.8

 
$
618.7

 
5
 %
South
815.9

 
736.4

 
11
 %
 
1,055

 
960

 
10
 %
 
$
773.4

 
$
767.1

 
1
 %
West
972.0

 
766.5

 
27
 %
 
1,397

 
1,020

 
37
 %
 
$
695.7

 
$
751.5

 
(7
)%
California
1,495.1

 
867.7

 
72
 %
 
887

 
533

 
66
 %
 
$
1,685.6

 
$
1,627.9

 
4
 %
Traditional Home Building
4,840.7

 
3,673.4

 
32
 %
 
5,699

 
4,476

 
27
 %
 
$
849.4

 
$
820.7

 
3
 %
City Living
220.8

 
310.7

 
(29
)%
 
152

 
209

 
(27
)%
 
$
1,452.7

 
$
1,486.5

 
(2
)%
Total
$
5,061.5

 
$
3,984.1

 
27
 %
 
5,851

 
4,685

 
25
 %
 
$
865.1

 
$
850.4

 
2
 %


40



Income (Loss) Before Income Taxes ($ amounts in millions):
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
% Change
 
2018
 
2017
 
% Change
Traditional Home Building:
 
 
 
 
 
 
 
 
 
 
 
North
$
2.0

 
$
20.6

 
(90
)%
 
$
1.7

 
$
10.5

 
(84
)%
Mid-Atlantic
34.3

 
33.5

 
2
 %
 
20.4

 
21.9

 
(7
)%
South
39.3

 
33.9

 
16
 %
 
27.1

 
20.8

 
30
 %
West
78.7

 
67.8

 
16
 %
 
48.0

 
42.3

 
13
 %
California
146.5

 
126.6

 
16
 %
 
85.7

 
83.4

 
3
 %
Traditional Home Building
300.8

 
282.4

 
7
 %
 
182.9

 
178.9

 
2
 %
City Living
46.6

 
85.0

 
(45
)%
 
16.7

 
41.9

 
(60
)%
Corporate and other
(63.1
)
 
(58.4
)
 
8
 %
 
(46.9
)
 
(21.6
)
 
117
 %
Total
$
284.3

 
$
309.0

 
(8
)%
 
$
152.7

 
$
199.2

 
(23
)%
“Corporate and other” is comprised principally of general corporate expenses such as the offices of our executive officers; the corporate finance, accounting, audit, tax, human resources, risk management, information technology, marketing, and legal groups; interest income; income from certain of our ancillary businesses, including Gibraltar; and income from our Rental Property Joint Ventures and Gibraltar Joint Ventures.
Traditional Home Building
North
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Units Delivered and Revenues:
 
 
 
 
 
 
 
 
 
 
 
Revenues ($ in millions)
$
360.5

 
$
335.0

 
8
 %
 
$
226.2

 
$
189.3

 
19
 %
Units delivered
547

 
486

 
13
 %
 
338

 
277

 
22
 %
Average delivered price ($ in thousands)
$
659.0

 
$
689.3

 
(4
)%
 
$
669.3

 
$
683.6

 
(2
)%
 
 
 
 
 
 
 
 
 
 
 
 
Net Contracts Signed:
 
 
 
 
 
 
 
 
 
 
 
Net contract value ($ in millions)
$
450.0

 
$
435.9

 
3
 %
 
$
252.5

 
$
264.2

 
(4
)%
Net contracted units
634

 
684

 
(7
)%
 
363

 
408

 
(11
)%
Average contracted price ($ in thousands)
$
709.8

 
$
637.3

 
11
 %
 
$
695.6

 
$
647.4

 
7
 %
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues as a percentage of revenues
90.1
%
 
84.4
%
 
 
 
91.8
%
 
86.0
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes ($ in millions)
$
2.0

 
$
20.6

 
(90
)%
 
$
1.7

 
$
10.5

 
(84
)%
 
 
 
 
 
 
 
 
 
 
 
 
Number of selling communities at April 30,
48

 
54

 
(11
)%
 
 
 
 
 
 
The increases in the number of homes delivered in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to increases in the number of homes closed in Michigan and New Jersey, which were attributable to the increased number of homes in backlog in those markets at October 31, 2017, as compared to the number of homes in backlog at October 31, 2016. The decreases in the average price of homes delivered in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to a shift in the number of homes delivered to less expensive areas and/or products in the fiscal 2018 periods, as compared to the fiscal 2017 periods, particularly in Massachusetts and Michigan, where we had a significant increase in the number of homes closed in attached home communities (including active-adult).
The decreases in the number of net contracts signed in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were principally due to a decrease in the number of selling communities in the fiscal 2018 periods, as compared to the fiscal 2017 periods. The increases in the average value of each contract signed in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to shifts in the number of contracts signed to more expensive areas and/or products in the fiscal 2018 periods, as compared to the fiscal 2017 periods, particularly in Massachusetts, Michigan and New Jersey.
The decreases in income before income taxes in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were principally attributable to higher cost of revenues, as a percentage of revenues, offset, in part, by higher earnings from

41



increased revenues. The increases in cost of revenues, as a percentage of revenues, in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were primarily due to higher inventory impairment charges, a shift in product mix/areas to lower-margin areas, and higher material and labor costs in the fiscal 2018 periods, as compared to the fiscal 2017 periods.
Inventory impairment charges were $16.5 million and $13.4 million in the six months and three months ended April 30, 2018, respectively, as compared to $3.6 million and $3.5 million in the six month and three months ended April 30, 2017, respectively. During our review of operating communities for impairment in the three months ended April 30, 2018, primarily due to a lack of improvement and/or a decrease in customer demand as a result of weaker than expected market conditions, we determined that the pricing assumptions used in prior impairment reviews for one operating community located in Connecticut needed to be reduced. As a result of this reduction in expected sales prices, we determined that this community was impaired. Accordingly, the carrying value of this community was written down in the three months ended April 30, 2018 to its estimated fair value resulting in a charge to income before income taxes of $12.0 million. In addition, during our review of operating communities for impairment in the three months ended January 31, 2018, primarily due to a lack of improvement and/or a decrease in customer demand, we decided to sell the remaining lots in a bulk sale in one community located in Illinois rather than sell and construct homes as previously intended. The carrying value of this community was written down to its estimated fair value resulting in a charge to income before income taxes in the three months ended January 31, 2018 of $2.2 million.
Mid-Atlantic
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Units Delivered and Revenues:
 
 
 
 
 
 
 
 
 
 
 
Revenues ($ in millions)
$
461.9

 
$
410.5

 
13
 %
 
$
254.9

 
$
226.5

 
13
 %
Units delivered
730

 
664

 
10
 %
 
398

 
367

 
8
 %
Average delivered price ($ in thousands)
$
632.7

 
$
618.2

 
2
 %
 
$
640.5

 
$
617.1

 
4
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net Contracts Signed:
 
 
 
 
 
 
 
 
 
 
 
Net contract value ($ in millions)
$
559.9

 
$
583.5

 
(4
)%
 
$
347.8

 
$
346.9

 
 %
Net contracted units
872

 
943

 
(8
)%
 
548

 
563

 
(3
)%
Average contracted price ($ in thousands)
$
642.1

 
$
618.8

 
4
 %
 
$
634.6

 
$
616.2

 
3
 %
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues as a percentage of revenues
84.0
%
 
82.6
%
 
 
 
84.0
%
 
81.6
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes ($ in millions)
$
34.3

 
$
33.5

 
2
 %
 
$
20.4

 
$
21.9

 
(7
)%
 
 
 
 
 
 
 
 
 
 
 
 
Number of selling communities at April 30,
57

 
66

 
(14
)%
 
 
 
 
 
 
The increases in the number of homes delivered in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to increases in the number of homes closed in Pennsylvania and Maryland, which was attributable to an increase in the number of homes in backlog in those markets at October 31, 2017, as compared to the number of homes in backlog at
October 31, 2016. The increases in the average price of homes delivered in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were primarily due to shifts in the number of homes delivered to more expensive areas and/or products in the fiscal 2018 periods, as compared to the fiscal 2017 periods.
The decreases in the number of net contracts signed in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were principally due to a decrease in the number of selling communities, offset, in part, by increases in demand in Pennsylvania in the fiscal 2018 periods, as compared to the fiscal 2017 periods. The increases in the average value of each contract signed in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to shifts in the number of contracts signed to more expensive areas and/or products in the fiscal 2018 periods, as compared to the fiscal 2017 periods.
The increase in income before income taxes in the six months ended April 30, 2018, as compared to the six months ended April 30, 2017, was mainly due to higher earnings from increased revenues and a $2.0 million impairment charge we recognized on one of our Land Development Joint Ventures in the fiscal 2017 period, partially offset by an increase in cost of revenues, as a percent of revenues, in the six months ended April 30, 2018, as compared to the six months ended April 30, 2017. The increase in cost of revenues, as a percentage of revenues was mainly due to higher material and labor costs in the fiscal 2018 period, as compared to the fiscal 2017 period, partially offset by lower inventory impairment charges in the fiscal 2018 period, as compared to the fiscal 2017 period. In the six months ended April 30, 2018, inventory impairment charges were $0.1 million, as compared to $5.0 million in the six months ended April 30, 2017. In the first quarter of fiscal 2017, during our review of operating communities for impairment, primarily due to a lack of improvement and/or a decrease in customer demand as a result of weaker than expected market conditions, we determined that the pricing assumptions used in prior

42



impairment reviews for one operating community located in Maryland needed to be reduced. As a result of this reduction in expected sales prices, we determined that this community was impaired. Accordingly, the carrying value of this community was written down in the fiscal 2017 period to its estimated fair value resulting in a charge to income before taxes of $3.9 million.
The decrease in income before income taxes in the three months ended April 30, 2018, as compared to the three months ended April 30, 2017, was primarily due to an increase in cost of revenues, as a percentage of revenues, in the fiscal 2018 period, as compared to the fiscal 2017 period, offset, in part, by higher earnings from increased revenues and a $2.0 million impairment charge we recognized on one of our Land Development Joint Ventures in the fiscal 2017 period. The increase in cost of revenues, as a percentage of revenues, was mainly due to higher material and labor costs in the fiscal 2018 period, as compared to the fiscal 2017 period.
South
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Units Delivered and Revenues:
 
 
 
 
 
 
 
 
 
 
 
Revenues ($ in millions)
$
412.2

 
$
337.3

 
22
 %
 
$
240.7

 
$
195.1

 
23
%
Units delivered
540

 
464

 
16
 %
 
319

 
274

 
16
%
Average delivered price ($ in thousands)
$
763.3

 
$
726.9

 
5
 %
 
$
754.6

 
$
712.1

 
6
%
 
 
 
 
 
 
 
 
 
 
 
 
Net Contracts Signed:
 
 
 
 
 
 
 
 
 
 
 
Net contract value ($ in millions)
$
578.5

 
$
498.1

 
16
 %
 
$
339.5

 
$
294.1

 
15
%
Net contracted units
769

 
672

 
14
 %
 
466

 
406

 
15
%
Average contracted price ($ in thousands)
$
752.3

 
$
741.2

 
1
 %
 
$
728.4

 
$
724.5

 
1
%
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues as a percentage of revenues
83.3
%
 
81.2
%
 
 
 
82.5
%
 
81.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes ($ in millions)
$
39.3

 
$
33.9

 
16
 %
 
$
27.1

 
$
20.8

 
30
%
 
 
 
 
 
 
 
 
 
 
 
 
Number of selling communities at April 30,
62

 
76

 
(18
)%
 
 
 
 
 
 
The increases in the number of homes delivered in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to increases in the number of homes closed in Florida and Texas which were attributable to the increased number of homes in backlog as of October 31, 2017, as compared to the number of homes in backlog at October 31, 2016. The increases in the average price of homes delivered in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were primarily due to a shift in the number of homes delivered to more expensive areas and/or products in the fiscal 2018 period, as compared to the fiscal 2017 period.
The increases in the number of net contracts signed in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to an increase in demand in Florida and Texas and an increase in the number of selling communities in Texas. These increases were partially offset by a decrease in the number of selling communities in Florida.
The increases in income before income taxes in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were principally due to higher earnings from increased revenues, offset, in part, by higher cost of revenues, as a percentage of revenues. The increases in cost of revenues, as a percentage of revenues, were primarily due to higher material and labor costs in the fiscal 2018 periods, as compared to the fiscal 2017 periods.

43



West
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Units Delivered and Revenues:
 
 
 
 
 
 
 
 
 
 
 
Revenues ($ in millions)
$
607.4

 
$
513.8

 
18
 %
 
$
349.4

 
$
302.7

 
15
 %
Units delivered
944

 
776

 
22
 %
 
532

 
441

 
21
 %
Average delivered price ($ in thousands)
$
643.4

 
$
662.1

 
(3
)%
 
$
656.7

 
$
686.4

 
(4
)%
 
 
 
 
 
 
 
 
 
 
 
 
Net Contracts Signed:
 
 
 
 
 
 
 
 
 
 
 
Net contract value ($ in millions)
$
779.0

 
$
684.4

 
14
 %
 
$
445.1

 
$
438.2

 
2
 %
Net contracted units
1,149

 
1,055

 
9
 %
 
660

 
703

 
(6
)%
Average contracted price ($ in thousands)
$
678.0

 
$
648.7

 
5
 %
 
$
674.4

 
$
623.4

 
8
 %
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues as a percentage of revenues
79.2
%
 
78.7
%
 
 
 
79.2
%
 
78.3
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes ($ in millions)
$
78.7

 
$
67.8

 
16
 %
 
$
48.0

 
$
42.3

 
13
 %
 
 
 
 
 
 
 
 
 
 
 
 
Number of selling communities at April 30,
72

 
79

 
(9
)%
 
 
 
 
 
 
The increases in the number of homes delivered in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to the increased number of homes in backlog at October 31, 2017, as compared to the number of homes in backlog at October 31, 2016. The decreases in the average price of homes delivered in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were primarily due to increases in deliveries in Idaho, where average delivered home prices are lower than our Company average, in the fiscal 2018 periods, as compared to the fiscal 2017 periods.
The increase in the number of net contracts signed in the six months ended April 30, 2018, as compared to the six months ended April 30, 2017, was principally due to a significant increase in demand, offset, in part, by a decrease in the number of selling communities. The decrease in the number of net contracts signed in the three months ended April 30, 2018, as compared to the three months ended April 30, 2017, was due mainly to a decrease in the number of selling communities. The increases in the average value of each contract signed in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to a shift in the number of contracts signed to more expensive areas and/or products and price increases in the fiscal 2018 periods, as compared to the fiscal 2017 periods.
The increases in income before income taxes in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were due mainly to higher earnings from the increased revenues offset in part by higher cost of revenues, as a percentage of revenues. The increases in cost of revenues, as a percentage of revenues, were primarily due to a shift in the number of homes delivered to lower-margin products and/or locations and higher material and labor costs in the fiscal 2018 periods, as compared to the fiscal 2017 periods.

44



California
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Units Delivered and Revenues:
 
 
 
 
 
 
 
 
 
 
 
Revenues ($ in millions)
$
725.5

 
$
593.1

 
22
%
 
$
438.4

 
$
373.3

 
17
%
Units delivered
455

 
403

 
13
%
 
270

 
248

 
9
%
Average delivered price ($ in thousands)
$
1,594.5

 
$
1,471.7

 
8
%
 
$
1,623.5

 
$
1,505.3

 
8
%
 
 
 
 
 
 
 
 
 
 
 
 
Net Contracts Signed:
 
 
 
 
 
 
 
 
 
 
 
Net contract value ($ in millions)
$
1,547.2

 
$
929.3

 
66
%
 
$
901.2

 
$
594.1

 
52
%
Net contracted units
952

 
614

 
55
%
 
564

 
388

 
45
%
Average contracted price ($ in thousands)
$
1,625.2

 
$
1,513.5

 
7
%
 
$
1,597.9

 
$
1,531.2

 
4
%
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues as a percentage of revenues
73.6
%
 
73.6
%
 
 
 
74.5
%
 
73.2
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes ($ in millions)
$
146.5

 
$
126.6

 
16
%
 
$
85.7

 
$
83.4

 
3
%
 
 
 
 
 
 
 
 
 
 
 
 
Number of selling communities at April 30,
38

 
36

 
6
%
 
 
 
 
 
 
The increases in the number of homes delivered in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to the increased number of homes in backlog at October 31, 2017, as compared to the number of homes in backlog at October 31, 2016. The increases in the average price of homes delivered in fiscal 2018 periods, as compared to the fiscal 2017 periods, were primarily due to a shift in the number of homes delivered to more expensive areas and/or products and increased selling prices of homes delivered in fiscal 2018 periods, as compared to the fiscal 2017 periods.
The increases in the number of net contracts signed in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were due mainly to an increase in demand and an increase in the number of selling communities in the fiscal 2018 periods, as compared to the fiscal 2017 periods. The increases in the average value of each contract signed in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to a shift in the number of contracts signed to more expensive areas and/or products and increased selling prices in the fiscal 2018 periods, as compared to the fiscal 2017 periods.
The increases in income before income taxes in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were primarily due to higher earnings from the increased revenues in the fiscal 2018 periods, as compared to the fiscal 2017 periods. The increase in income before income taxes in the three months ended April 30, 2018, as compared to the three months ended April 30, 2017, was partially offset by higher cost of revenues, as a percentage of revenues. The higher cost of revenues, as a percentage of revenues, was primarily due to a shift in the number of homes delivered to lower-margin products and/or locations, offset, in part, by price increases on delivered homes, in the three months ended April 30, 2018, as compared to the three months ended April 30, 2017.

45



City Living
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
 
2017
 
Change
 
2018
 
2017
 
Change
Units Delivered and Revenues:
 
 
 
 
 
 
 
 
 
 
 
Revenues ($ in millions)
$
207.2

 
$
94.5

 
119
 %
 
$
89.6

 
$
76.6

 
17
 %
Units delivered
93

 
35

 
166
 %
 
29

 
31

 
(6
)%
Average delivered price ($ in thousands)
$
2,228.0

 
$
2,700.0

 
(17
)%
 
$
3,090.8

 
$
2,469.7

 
25
 %
 
 
 
 
 
 
 
 
 
 
 
 
Net Contracts Signed:
 
 
 
 
 
 
 
 
 
 
 
Net contract value ($ in millions)
$
159.0

 
$
131.1

 
21
 %
 
$
97.1

 
$
81.8

 
19
 %
Net contracted units
112

 
65

 
72
 %
 
65

 
43

 
51
 %
Average contracted price ($ in thousands)
$
1,419.6

 
$
2,016.9

 
(30
)%
 
$
1,494.3

 
$
1,901.0

 
(21
)%
 
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues as a percentage of revenues
76.6
%
 
75.7
%
 
 
 
81.1
%
 
78.1
%
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Income before income taxes ($ in millions)
$
46.6

 
$
85.0

 
(45
)%
 
$
16.7

 
$
41.9

 
(60
)%
 
 
 
 
 
 
 
 
 
 
 
 
Number of selling communities at April 30,
6

 
5

 
20
 %
 
 
 
 
 
 
The increase in the number of homes delivered in the six months ended April 30, 2018, as compared to the six months ended April 30, 2017, was principally due to homes delivered at one building located in Hoboken, New Jersey and one building located in New York City, New York, which commenced deliveries in the second half of fiscal 2017. The decrease in the average price of homes delivered in the six months ended April 30, 2018, as compared to the six months ended April 30, 2017, was primarily due to a shift in the number of homes delivered to less expensive buildings. In the six months ended April 30, 2018, 43% of the units delivered were located in New York City, New York, where home prices are higher, as compared to 57% in the six months ended April 30, 2017. The increase in the average price of homes delivered in the three months ended April 30, 2018, as compared to the three months ended April 30, 2017, was primarily due to a shift in the number of homes delivered to more expensive buildings. In the three months ended April 30, 2018, 69% of the units delivered were located in New York City, New York, as compared to 58% in the three months ended April 30, 2017.
The increases in the number of net contracts signed in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were primarily due to strong sales at one building located in Jersey City, New Jersey, which opened in the third quarter of fiscal 2017. The decreases in the average sales price of net contracts signed in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were principally due to a shift to less expensive buildings in the fiscal 2018 periods, as compared to the fiscal 2017 periods.
The decreases in income before income taxes in the fiscal 2018 periods, as compared to the fiscal 2017 periods, were mainly due to decreases in earnings from our investments in unconsolidated entities and a shift in the number of homes delivered to buildings with a lower margin, partially offset by higher earnings from increased revenues. In addition, in the six months and three months ended April 30, 2017, we recognized $4.5 million and $1.3 million, respectively, of previously deferred gains. The deferred gains recognized in the fiscal 2017 periods relate to the sale of a property in fiscal 2015 to a Home Building Joint Venture in which we had a 25% interest. Due to our continued involvement in this unconsolidated entity through our ownership interest and guarantees provided on the entity’s debt, we deferred the $9.3 million gain realized on the sale. Through September 2017, we recognized the gain as units were delivered to the ultimate home buyers. In the fourth quarter of fiscal 2017, we purchased the remaining inventory from this Home Building Joint Venture. The remaining unamortized deferred gain was used to reduce the basis of the inventory acquired.

46



In the six months and three months ended April 30, 2018, earnings from our investments in unconsolidated entities decreased $57.5 million and $24.9 million, respectively, as compared to the six months and three months ended April 30, 2017. The fiscal 2017 periods benefited from the commencement of deliveries from two City Living Home Building Joint Ventures in the fourth quarter of fiscal 2016. The tables below provide information related to deliveries, revenues, and net contracts signed by our City Living Home Building Joint Ventures, for the periods indicated, and the related backlog for the dates indicated ($ amounts in millions):
 
Six months ended April 30,
 
Three months ended April 30,
 
2018
Units
 
2017
Units
 
2018
$
 
2017
$
 
2018
Units
 
2017
Units
 
2018
$
 
2017
$
Deliveries
5

 
106

 
$
21.5

 
$
337.4

 
2

 
33

 
$
10.8

 
$
132.8

Net contracts signed
74

 
23

 
$
148.4

 
$
37.1

 
18

 
9

 
$
45.8

 
$
7.1

 
At April 30,
 
At October 31,
 
2018
Units
 
2017
Units
 
2018
$
 
2017
$
 
2017
Units
 
2016
Units
 
2017
$
 
2016
$
Backlog
115

 
31

 
$
226.0

 
$
108.2

 
46

 
114

 
$
99.1

 
$
408.5

Corporate and Other
In the six months ended April 30, 2018 and 2017, loss before income taxes was $63.1 million and $58.4 million, respectively. The increase in the loss before income taxes in the fiscal 2018 period, as compared to the fiscal 2017 period, was principally attributable to higher SG&A costs, offset, in part, by a $3.2 million increase in earnings from our investments in unconsolidated entities. The increase in earnings from our investments in unconsolidated entities in the fiscal 2018 period, as compared to the fiscal 2017 period, was mainly due to a $30.8 million gain recognized from the sale in the fiscal 2018 period by one of our Rental Property Joint Ventures of its student housing community in College Park, Maryland, partially offset by $26.7 million of gains recognized related to the sale of 50% of our ownership interests in two of our Rental Property Joint Ventures located in Jersey City, New Jersey, and the suburbs of Philadelphia, Pennsylvania in the fiscal 2017 period. The increase in SG&A costs in the fiscal 2018 period, as compared to the fiscal 2017 period, was due primarily to increased compensation costs due to our increased number of employees primarily related to our increased business activity.
In the three months ended April 30, 2018 and 2017, loss before income taxes was $46.9 million and $21.6 million, respectively. The increase in the loss before income taxes in the fiscal 2018 period, as compared to the fiscal 2017 period, was mainly due to lower earnings from our investments in unconsolidated entities and higher SG&A costs. The lower earnings from our investments in unconsolidated entities in the fiscal 2018 period, as compared to the fiscal 2017 period, were mainly due to a $20.5 million gain recognized related to the sale of 50% of our ownership interest in one of our Rental Property Joint Ventures located in Jersey City, New Jersey, in the fiscal 2017 period. The increase in SG&A costs in the fiscal 2018 period, as compared to the fiscal 2017 period, was due primarily to increased compensation costs due to our increased number of employees primarily related to our increased business activity.
AVAILABLE INFORMATION
Our principal Internet address is www.tollbrothers.com, and our Investor Relations website is located at www.tollbrothers.com/investor-relations. 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 through our Investor Relations website, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.
We provide information about our business and financial performance, including our corporate profile, on our Investor Relations website. Additionally, we webcast our earnings calls and certain events we participate in with members of the investment community on our Investor Relations website. Further corporate governance information, including our codes of ethics, corporate governance guidelines, and board committee charters, is also available on our Investor Relations website. The content of our websites is not incorporated by reference into this Quarterly Report on Form 10-Q or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.

47



ITEM 3. 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 impact the fair value of the debt instrument, but do affect our earnings and cash flow. We do not have the obligation to prepay fixed-rate debt before maturity, and, as a result, interest rate risk and changes in fair value should not have a significant impact on our fixed-rate debt until we are required or elect to refinance it.
The table below sets forth, at April 30, 2018, our debt obligations by scheduled maturity, weighted-average interest rates, and estimated fair value (amounts in thousands):
 
 
Fixed-rate debt
 
Variable-rate debt (a)
Fiscal year of maturity
 
Amount
 
Weighted-
average
interest rate
 
Amount
 
Weighted-
average
interest rate
2018
 
$
60,478

 
3.00%
 
$

 
—%
2019
 
386,677

 
3.99%
 
103,700

 
3.80%
2020
 
257,034

 
6.69%
 
150

 
1.91%
2021
 
4,174

 
4.60%
 
500,150

 
3.30%
2022
 
422,673

 
5.87%
 
150

 
1.91%
Thereafter
 
1,875,986

 
4.77%
 
13,060

 
1.88%
Bond discounts, premiums and deferred issuance costs, net
 
(9,586
)
 

 
(1,507
)
 

Total
 
$
2,997,436

 
4.95%
 
$
615,703

 
3.35%
Fair value at April 30, 2018
 
$
3,016,235

 
 
 
$
617,210

 
 
(a)
Based upon the amount of variable-rate debt outstanding at April 30, 2018, and holding the variable-rate debt balance constant, each 1% increase in interest rates would increase the interest incurred by us by approximately $6.2 million per year.
ITEM 4. 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 Commission’s 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.
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 April 30, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

48



PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various claims and litigation arising principally in the ordinary course of business. We believe that adequate provision for resolution of all current claims and pending litigation has been made for probable losses and that the disposition of these matters will not have a material adverse effect on our results of operations and liquidity or on our financial condition.
In April 2017, the SEC informed the Company that it was conducting an investigation and requested that we voluntarily produce documents and information relating to our estimated repair costs for stucco and other water intrusion claims in fiscal 2016. The Company has produced detailed information and documents in response to this request. See Note 6, “Accrued Expenses” in the Notes to Condensed Consolidated Financial Statements in this Form 10-Q for additional information regarding these warranty charges. In March 2018, the Pennsylvania Attorney General informed the Company that it was conducting a review of our construction of stucco homes in Pennsylvania after 2005 and requested that we voluntarily produce documents and information. The Company will produce documents and information in response to this request. Management cannot at this time predict the eventual scope or outcome of these matters.
ITEM 1A. RISK FACTORS
There have been no material changes in our risk factors as previously disclosed in Part I, Item 1A., “Risk Factors,” in our 2017 Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities
During the three-month period ended April 30, 2018, we repurchased the following shares of our common stock:
Period
 
Total number
of shares purchased (a)
 
Average
price
paid per share
 
Total number of shares purchased as part of publicly announced plans or programs (b)
 
Maximum
number of shares
that may yet be
purchased under the plans or programs (b)
 
 
(in thousands)
 
 
 
(in thousands)
 
(in thousands)
February 1, 2018 to February 28, 2018
 
1,419

 
$
46.08

 
1,419

 
17,251

March 1, 2018 to March 31, 2018
 
374

 
$
43.03

 
374

 
16,877

April 1, 2018 to April 30, 2018
 
1

 
$
42.78

 
1

 
16,876

Total
 
1,794

 
$
45.44

 
1,794

 
 
(a)
Our stock incentive plans permit us to withhold from the total number of shares that otherwise would be issued to a performance based restricted stock unit recipient or a restricted stock unit 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 recipient. During the three months ended April 30, 2018, we withheld 350 of the shares subject to performance based restricted stock units and restricted stock units to cover approximately $15,197 of income tax withholdings and we issued the remaining 923 shares to the recipients. The shares withheld are not included in the total number of shares purchased in the table above.
Our stock incentive plans also 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. During the three-month period ended April 30, 2018, the net exercise method was not employed to exercise options.
(b)
On May 23, 2016, our Board of Directors authorized the repurchase of 20 million shares of our common stock in open market transactions or otherwise for general corporate purposes, including to obtain shares for the Company’s equity award and other employee benefit plans. Effective December 13, 2017, our Board of Directors terminated the May 2016 share repurchase program and authorized, under a new repurchase program, the repurchase of 20 million shares of our common stock in open market transactions or otherwise for general corporate purposes, including to obtain shares for the Company’s equity award and other employee benefit plans. The Board of Directors did not fix any expiration date for this new repurchase program.

49



Except as set forth above, we have not repurchased any of our equity securities during the three-month period ended April 30, 2018.
Dividends
In February 2017, our Board of Directors approved the initiation of quarterly cash dividends to shareholders. During the six months ended April 30, 2018, we paid a quarterly cash dividend of $0.11 per share on April 27, 2018 to shareholders of record on the close of business on April 13, 2018 and we paid a quarterly cash dividend of $0.08 per share on January 26, 2018 to shareholders of record on the close of business on January 12, 2018. 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, our capital requirements, our operating and financial condition, and any contractual limitations then in effect. Our bank credit agreement requires us to maintain a minimum tangible net worth (as defined in the credit agreement), which restricts the amount of dividends we may pay. At April 30, 2018, under the most restrictive provisions of our bank credit agreement, we could have paid up to approximately $1.99 billion of cash dividends.

ITEM 6. EXHIBITS
4.1*
 
 
4.2*
 
 
4.3*
 
 
4.4*
 
 
31.1*
 
 
31.2*
 
 
32.1*
 
 
32.2*
 
 
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
*
Filed electronically herewith.

50



SIGNATURES
Pursuant to the requirements 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.
 
 
TOLL BROTHERS, INC.
 
 
(Registrant)
 
 
 
 
 
Date:
June 4, 2018
By:
 
/s/ Martin P. Connor

 
 
 
 
Martin P. Connor
Senior Vice President and Chief Financial
Officer (Principal Financial Officer)
 
 
 
 
 
Date:
June 4, 2018
By:
 
/s/ Michael J. Grubb
 
 
 
 
Michael J. Grubb
Senior Vice President and Chief Accounting
Officer (Principal Accounting Officer)


51