10-K 1 tol-20141031x10k.htm 10-K TOL-2014.10.31-10K



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
For the fiscal year ended October 31, 2014
 
 
or
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT of 1934
 
 
For the transition period from           to
Commission file number 1-9186
TOLL BROTHERS, INC.
(Exact name of Registrant as specified in its charter)
Delaware
23-2416878
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
250 Gibraltar Road, Horsham, Pennsylvania
19044
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code
(215) 938-8000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common Stock (par value $.01)*
 
New York Stock Exchange
Guarantee of Toll Brothers Finance Corp. 5.15% Senior Notes due 2015
 
New York Stock Exchange
* Includes associated Right to Purchase Series A Junior Participating Preferred Stock
 
 
    
Securities registered pursuant to Section 12(g) of the Act:    None

Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.Yes x No o
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Act.
Yes o No x
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 x 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 x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x
 
Accelerated filer o
 
Non-accelerated filer o
 
Smaller reporting company o
 
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
As of April 30, 2014, the aggregate market value of the Common Stock held by non-affiliates (all persons other than executive officers and directors of Registrant) of the Registrant was approximately $5,562,615,000.
As of December 19, 2014, there were approximately 175,440,000 shares of Common Stock outstanding.
Documents Incorporated by Reference: Portions of the proxy statement of Toll Brothers, Inc. with respect to the 2015 Annual Meeting of Stockholders, scheduled to be held on March 10, 2015, are incorporated by reference into Part III of this report.









TABLE OF CONTENTS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 




PART I
ITEM 1. BUSINESS
General
Toll Brothers, Inc., a corporation incorporated in Delaware in May 1986, began doing business through predecessor entities in 1967. When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Toll Brothers, Inc. and its subsidiaries, unless the context otherwise requires. References herein to “fiscal 2015,” “fiscal 2014,” “fiscal 2013,” “fiscal 2012,” “fiscal 2011,” “fiscal 2010,” “fiscal 2009,” and “fiscal 2008” refer to our fiscal years ending or ended October 31, 2015; October 31, 2014; October 31, 2013; October 31, 2012; October 31, 2011; October 31, 2010; October 31, 2009; and October 31, 2008, respectively.
We design, build, market, and arrange financing for detached and attached homes in luxury residential communities. We cater to move-up, empty-nester, active-adult, age-qualified, and second-home buyers in the United States (“Traditional Home Building Product”). We also build and sell homes in urban infill markets through Toll Brothers City Living® (“City Living”). At October 31, 2014, we were operating in 19 states. In the five years ended October 31, 2014, we delivered 18,120 homes from 554 communities, including 5,397 homes from 347 communities in fiscal 2014.
We are developing several master planned communities in which we intend to build homes on a portion of the lots and sell the remaining lots to other builders. Two of these master planned communities are being developed 100% by us, and the remaining communities are being developed through joint ventures with other builders or financial partners.
Over the past several years, we have acquired control of a number of land parcels as for-rent apartment projects, including two student housing sites, totaling approximately 4,850 units. These projects, which are located in the metro Boston to metro Washington, D.C. corridor, are being developed or will be developed with partners and marketed under our Toll Brothers Apartment Living and Toll Brothers Campus Living brand names. Through Toll Brothers Realty Trust, we also have interests in approximately 1,450 operating apartment units in the Washington, D.C. area and in Princeton Junction, New Jersey.
In February 2014, we acquired the home building business of Shapell Industries, Inc., a Delaware corporation (“Shapell”), for $1.49 billion in cash, net of cash acquired. Prior to the acquisition, Shapell designed, constructed, and marketed single-family detached and attached homes and developed land in master planned communities and neighborhoods throughout coastal Northern and Southern California. See “Acquisition” below for more information.
In fiscal 2010, we formed Gibraltar Capital and Asset Management, LLC (“Gibraltar”) to invest in distressed real estate opportunities. Gibraltar focuses primarily on residential loans and properties, from unimproved ground to partially and fully improved developments, as well as commercial opportunities.
We operate our own land development, architectural, engineering, mortgage, title, landscaping, security monitoring, lumber distribution, house component assembly, and manufacturing operations. We also develop, own, and operate golf courses and country clubs, which generally are associated with several of our master planned communities.
We also operate through a number of joint ventures. These 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”); (iv) invest in commercial real estate opportunities; and (v) invest in a portfolio of distressed loans and real estate (“Structured Asset Joint Venture”). We earn construction and management fee income from many of these joint ventures.
Our communities are generally located on land we have either acquired and developed or acquired fully approved and, in some cases, improved. At October 31, 2014, we were operating in the following major suburban and urban residential markets:
Philadelphia, Pennsylvania, metropolitan area
Lehigh Valley area of Pennsylvania
Central and northern New Jersey
Virginia and Maryland suburbs of Washington, D.C.
District of Columbia
Boston, Massachusetts, metropolitan area
Fairfield, Hartford, and New Haven Counties, Connecticut

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Westchester, Dutchess, and Ulster Counties, New York
Boroughs of Manhattan and Brooklyn in New York City
Los Angeles, California, metropolitan area
San Francisco Bay, Sacramento, and San Jose areas of northern California
San Diego and Palm Springs, California, areas
Phoenix, Arizona, metropolitan area
Raleigh and Charlotte, North Carolina, metropolitan areas
Dallas, San Antonio, Houston, and Austin, Texas, metropolitan areas
Southeast and southwest coasts and the Jacksonville and Orlando areas of Florida
Las Vegas and Reno, Nevada, metropolitan areas
Detroit, Michigan, metropolitan area
Chicago, Illinois, metropolitan area
Denver, Colorado, metropolitan area and Fort Collins, Colorado
Minneapolis/St. Paul, Minnesota, metropolitan area, and
Seattle, Washington, metropolitan area
In recognition of our achievements, we have received numerous awards from national, state, and local home builder publications and associations. In 2014, we were named Builder of the Year by Builder Magazine and in 2012, we were named Builder of the Year by Professional Builder magazine.
We believe that, in fiscal 2012, the housing market began to recover from the significant slowdown that started in the fourth quarter of our fiscal year ended October 31, 2005. During fiscal 2012 and the first nine months of fiscal 2013, we saw a strong recovery in the number and value of new sales contracts signed. The number of net contracts signed in fiscal 2012 and 2013, as compared to fiscal 2011, increased approximately 50% and 90%, respectively, and the value of net contracts signed over the same period increased 59% and 126%, respectively. Although the number and value of fiscal 2012 and 2013 net contracts signed increased over fiscal 2011, they were still significantly below what we recorded in fiscal 2005.
In fiscal 2014, we signed 5,271 contracts with an aggregate value of $3.90 billion, compared to 5,294 contracts with an aggregate value of $3.63 billion in fiscal 2013. Beginning in the fourth quarter of fiscal 2013, we experienced a leveling in demand that continued through the second quarter of fiscal 2014, and was followed by a decline in demand in the third quarter of fiscal 2014. More recently we have seen a strengthening in customer demand. In fiscal 2014’s fourth-quarter, net signed contracts of $970.8 million and 1,282 units increased 16% in dollars and 10% in units, compared to fiscal 2013’s fourth-quarter net signed contracts of $839.0 million and 1,163 units. The strength in demand that we saw in the fourth quarter of fiscal 2014 has continued into the first quarter of fiscal 2015. We are optimistic that the recent strengthening in customer demand will continue for the foreseeable future, with customer demand ultimately growing at more normalized levels. We believe that, as the national unemployment rate continues to decline and consumer confidence improves, pent-up demand for homes will begin to be released.
For information and analysis of recent trends in our operations and financial condition, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 of this Annual Report on Form 10-K (“Form 10-K”), and for financial information about our results of operations, assets, liabilities, stockholders’ equity, and cash flows, see the accompanying Consolidated Financial Statements and Notes thereto in Item 15(a)1 of this Form 10-K.
At October 31, 2014, we had 556 communities containing approximately 47,167 home sites that we owned or controlled through options. Of the 47,167 home sites, approximately 14,947 were substantially improved. Of the 556 communities, 307 were residential communities under development (“operating communities”) containing 21,359 home sites and 249 were future communities, containing 25,808 home sites. Of our 307 operating communities at October 31, 2014, a total of 263 communities were offering homes for sale; 30 communities were sold out but not all homes had been completed and delivered; 6 communities had backlog to deliver but had been temporarily shut down and are expected to reopen in fiscal 2015; and 8 communities were preparing to reopen. Of the 21,359 home sites in operating communities, 17,680 were available for sale and 3,679 were under agreement of sale but not yet delivered (“backlog”). We expect to be selling from 270 to 310 communities by

2



October 31, 2015. Of the approximately 47,167 total home sites that we owned or controlled through options at October 31, 2014, we owned approximately 36,224 home sites and controlled approximately 10,943 home sites through options. Included in the 249 future communities are 20 communities containing 2,506 home sites that had previously been open but were shut down due to the slowdown in the housing market.
At October 31, 2014, we were offering homes in 263 communities at prices, for our Traditional Home Building Product, excluding customized options, lot premiums, and sales incentives, generally ranging from approximately $200,000 to $2,000,000 with some homes offered at prices substantially higher than $2,000,000. During fiscal 2014, we delivered 5,397 homes at an average base price of approximately $625,000. On average, our home buyers added approximately 19.9%, or $124,000 per home, in customized options and lot premiums to the base price of homes we delivered in fiscal 2014, as compared to 20.7% or $115,000 per home in fiscal 2013 and 18.6% or $96,000 in fiscal 2012.
We had a backlog of $2.72 billion (3,679 homes) at October 31, 2014; $2.63 billion (3,679 homes) at October 31, 2013; and$1.67 billion (2,569 homes) at October 31, 2012. Of the 3,679 homes in backlog at October 31, 2014, approximately 98% are scheduled to be delivered by October 31, 2015.
Our business is subject to many risks associated with obtaining the necessary approvals on a property and completing the land improvements on it. We attempt, where possible, to reduce certain risks by controlling land for future development through options (also referred to herein as “land purchase contracts” or “option and purchase agreements”). These options enable us to obtain the necessary governmental approvals before we acquire title to the land. We also reduce certain risks by generally commencing construction of a detached home only after executing an agreement of sale and receiving a substantial down payment from the buyer, and by using subcontractors to perform home construction and land development work on a fixed-price basis.
Investments in Unconsolidated Entities
We have investments in and advances to various unconsolidated entities. These entities include land development joint ventures, home building joint ventures, rental property joint ventures, Toll Brothers Realty Trust (“Trust”) and Toll Brothers Realty Trust II (“Trust II”), and a structured asset joint venture. At October 31, 2014, we had investments in and advances to these unconsolidated entities of $447.1 million and were committed to invest or advance up to an additional $84.5 million to these entities if they require additional funding.
In fiscal 2014, 2013, and 2012, we recognized income from the unconsolidated entities in which we had an investment of $41.1 million, $14.4 million, and $23.6 million, respectively. In addition we earned construction and management fee income from these unconsolidated entities of $7.3 million in fiscal 2014, $2.9 million in fiscal 2013, and $2.2 million in fiscal 2012.
Land Development Joint Ventures
We have investments in and advances to a number of Land Development Joint Ventures to develop land. Some of these Land Development Joint Ventures develop land for the sole use of the venture participants, including us, and others develop land for sale to the joint venture participants and to unrelated builders. At October 31, 2014, we had approximately $140.2 million invested in or advanced to our Land Development Joint Ventures and funding commitments of $32.8 million to four of the Land Development Joint Ventures which would be funded if additional investments in the ventures are required. At October 31, 2014, three of these joint ventures had aggregate loan commitments of $175.0 million and outstanding borrowings against these commitments of $96.1 million.
At October 31, 2014, we had purchase commitments or understandings to acquire 573 home sites from three of these Land Development Joint Ventures for an estimated aggregate purchase price of $184.3 million. In addition, we expect to purchase approximately 3,300 additional lots from several Land Development Joint Ventures in which we have interests; the purchase price of the lots will be determined at a future date.
Home Building Joint Ventures
At October 31, 2014, we had an aggregate of $189.5 million of investments in and advances to various Home Building Joint Ventures to develop approximately 560 luxury for-sale homes. At October 31, 2014, we had $33.2 million of funding commitments to two of these joint ventures.
Rental Property Joint Ventures
Over the past several years, we acquired control of a number of land parcels as for-rent apartment projects, including two student housing sites. At October 31, 2014, we controlled a number of land parcels as for-rent apartment projects containing approximately 4,850 units. These projects, which are located in the metro Boston to metro Washington, D.C. corridor, are being developed or will be developed with partners under the brand names Toll Brothers Apartment Living and Toll Brothers Campus

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Living. A number of these sites had been acquired by us as part of a larger purchase or were originally acquired to be developed as for-sale homes. Of the 4,850 planned units at October 31, 2014, 1,900 are owned by joint ventures in which we have an interest, and are currently under construction; approximately 1,800 are owned by us; 800 of them are under contract to be purchased; and 350 of them are under letters of intent.
Toll Brothers Realty Trust and Toll Brothers Realty Trust II
Through the Trust, we also have interests in approximately 1,450 operating apartment units in the Washington, D.C. area and in Princeton Junction, New Jersey. In the second quarter of fiscal 2014, the Trust refinanced the mortgage on one of its properties and distributed $36.0 million of the net proceeds from the refinancing to its partners. We received $12.0 million as our share of the proceeds and recognized this distribution as income in the second quarter of fiscal 2014. This income is included in “Income from unconsolidated entities” in our Consolidated Statements of Operations and Comprehensive Income in this Form 10-K.
We have a 50% interest in Trust II, which invests in commercial real estate opportunities. In fiscal 2014, Trust II sold substantially all of its assets to an unrelated party. As a result of this sale, we realized a profit of approximately $24.1 million representing our share of the gain on the sale; this gain is included in “Income from unconsolidated entities” in our Consolidated Statements of Operations and Comprehensive Income in this Form 10-K. In addition, we recognized $2.9 million of previously deferred gains on our initial sales of the properties to Trust II. This gain was included in “Other income - net” in our Consolidated Statements of Operations and Comprehensive Income in this Form 10-K.
Gibraltar
In fiscal 2010, we formed Gibraltar to invest in distressed real estate opportunities. Gibraltar focuses primarily on residential loans and properties, from the raw ground to partially and fully improved developments, as well as commercial opportunities. At October 31, 2014, Gibraltar had investments in distressed loans of approximately $4.0 million, investments in foreclosed real estate of $69.8 million, and $20.0 million invested in a joint venture in which it is a 20% participant with two unrelated parties that purchased a 40% interest in an entity that owns and controls a portfolio of loans and real estate.
Acquisition
On February 4, 2014, we completed our acquisition of Shapell pursuant to the Purchase and Sale Agreement (the “Purchase Agreement”) dated November 6, 2013 with Shapell Investment Properties, Inc. (“SIPI”). We acquired all of the equity interests in Shapell from SIPI on February 4, 2014, for $1.49 billion, net of cash acquired (the “Acquisition”). We acquired the single-family residential real property development business of Shapell, including a portfolio of approximately 4,950 home sites in California, some of which we have sold and may continue to sell to other builders. The Acquisition provided us with a premier California land portfolio including 11 active selling communities, as of the Acquisition date, in affluent, high-growth markets: the San Francisco Bay area, metro Los Angeles, Orange County, and the Carlsbad market. As part of the Acquisition, we assumed contracts to deliver 126 homes with an aggregate value of approximately $105.3 million.
As part of the Acquisition, we did not acquire the apartment and commercial rental properties owned and operated by Shapell (the “Shapell Commercial Properties”) or Shapell’s mortgage lending activities relating to their home building operations. Accordingly, the Purchase Agreement provides that SIPI will indemnify us for any loss arising out of or resulting from, among other things, (i) any liability (other than environmental losses, subject to certain exceptions) related to the Shapell Commercial Properties, and (ii) any liability (other than environmental losses, subject to certain exceptions) to the extent related to Shapell Mortgage, Inc.
We financed the Acquisition with a combination of $370.0 million of borrowings under our $1.035 billion revolving credit facility (“Credit Facility”), $485.0 million from a term loan facility, as well as $815.7 million in net proceeds from debt and equity financings completed in November 2013. See Note 6, “Loans Payable, Senior Notes, and Mortgage Company Loan Facility” and Note 9, “Stockholders’ Equity” of our consolidated financial statements for further details.
As a result of the Acquisition, Shapell became our wholly-owned subsidiary. Accordingly, the results of operations of Shapell are included in our consolidated financial statements from the date of the Acquisition. For the period from February 4, 2014 to October 31, 2014, revenues and income before income taxes from the Shapell operations, excluding $5.3 million of acquisition costs, were $300.8 million and $37.2 million, respectively.
Our Communities
Our home building communities are generally located in affluent suburban areas near major highways providing access to major cities. We also currently operate in the affluent urban markets of Hoboken and Jersey City, New Jersey; New York City, New York; and Philadelphia, Pennsylvania. The following table lists the 19 states in which we were operating at October 31, 2014, and the fiscal years in which we or our predecessors commenced operations:

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State
 
Fiscal year of entry
 
State
 
Fiscal year of entry
Pennsylvania
 
1967
 
Texas
 
1995
New Jersey
 
1982
 
Florida
 
1995
Delaware
 
1987
 
Arizona
 
1995
Massachusetts
 
1988
 
Nevada
 
1998
Maryland
 
1988
 
Illinois
 
1998
Virginia
 
1992
 
Michigan
 
1999
Connecticut
 
1992
 
Colorado
 
2001
New York
 
1993
 
Minnesota
 
2005
California
 
1994
 
Washington
 
2012
North Carolina
 
1994
 
 
 
 
We develop individual stand-alone communities as well as multi-product, master planned communities. Our master planned communities, many of which include golf courses and other country club-type amenities, enable us to offer multiple home types and sizes to a broad range of move-up, empty-nester, active-adult, and second-home buyers. We seek to realize efficiencies from shared common costs, such as land development and infrastructure, over the several communities within the master planned community.
Each of our detached home communities offers several home plans with the opportunity for home buyers to select various exterior styles. We design each community to fit existing land characteristics. We strive to achieve diversity among architectural styles within a community by offering a variety of house models and several exterior design options for each model, preserving existing trees and foliage whenever practicable, and curving street layouts to allow relatively few homes to be seen from any vantage point. Normally, homes of the same type or color may not be built next to each other. Our communities have attractive entrances with distinctive signage and landscaping. We believe that our added attention to community detail avoids a “development” appearance and gives each community a diversified neighborhood appearance that enhances home values.
Our traditional attached home communities generally offer one- to four-story homes, provide for limited exterior options, and often include commonly owned recreational facilities such as clubhouses, playing fields, swimming pools, and tennis courts.
We market our high quality homes to upscale luxury home buyers, generally comprised of those persons who have previously owned a principal residence and who are seeking to buy a larger or more desirable home — the so-called “move-up” market. We believe our reputation as a developer of homes for this market enhances our competitive position with respect to the sale of our smaller, more moderately priced homes.
We also market to the 50+ year-old “empty-nester” market, which we believe has strong growth potential. We have developed a number of home designs with features such as one-story living and first-floor master bedroom suites, as well as communities with recreational amenities such as golf courses, marinas, pool complexes, country clubs, and recreation centers that we believe appeal to this category of home buyers. We have integrated certain of these designs and features in some of our other home types and communities. We also develop active-adult, “age-qualified” communities for households in which at least one member must be 55+ years of age. As of October 31, 2014, we were selling from 36 active-adult/age-qualified communities and expect to open additional active-adult/age-qualified communities during the next few years. Of the value and number of net contracts signed in fiscal 2014, approximately 12% and 16%, respectively, were in active-adult/age-qualified communities; in fiscal 2013, approximately 9% and 12%, respectively, were in such communities; and in fiscal 2012, approximately 8% and 10%, respectively were in active-adult/age-qualified communities.
In order to serve a growing market of affluent move-up families, empty-nesters, and young professionals seeking to live in or close to major cities, we have developed and are developing a number of high-density, high-, mid- and low-rise urban luxury communities. These communities are currently marketed under our City Living brand. These communities, which we are currently developing or planning to develop on our own or through joint ventures, are located in Bethesda, Maryland; Hoboken and Jersey City, New Jersey; the boroughs of Manhattan and Brooklyn, New York; and Philadelphia, Pennsylvania and its suburbs.

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The table below provides information related to deliveries and revenues and net contracts signed by our City Living group in communities it is developing on its own or through joint ventures in fiscal 2014, 2013, and 2012 and its backlog at October 31, 2014, 2013, and 2012:
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
 
Units
 
Units
 
Units
 
$ millions
 
$ millions
 
$ millions
Deliveries
266
 
147
 
358
 
283.6
 
179.5
 
279.3
Net contracts
265
 
286
 
329
 
490.1
 
291.3
 
324.7
Backlog at October 31,
199

200

61

436.1

229.5

117.7
A great majority of our City Living’s communities are high-rise projects and take an extended period of time to construct. We generally start selling homes in these communities after construction has commenced and by the time construction has been completed we typically have a significant number of homes in backlog. Once construction has been completed, the homes in backlog in these communities are generally delivered very quickly.
We believe that the demographics of the move-up, empty-nester, active-adult, age-qualified, and second-home upscale markets will provide us with the potential for growth in the coming decade. According to the U.S. Census Bureau (“Census Bureau”), the number of households earning $100,000 or more (in constant 2013 dollars) at September 2014 stood at 27.6 million, or approximately 23% of all U.S. households. This group has grown at three times the rate of increase of all U.S. households since 1980. According to Harvard University’s June 2014 report, “The State of the Nation’s Housing,” demographic forces are likely to drive the addition of 1.24 million new households per year during the next decade for a total of between 11.6 and 13.2 million new households formed during the 2015 through 2025 period. Preliminary estimates using the Census Bureau’s 2012 population projections suggest even stronger growth in net new households of 1.28 million per year between now and 2020.
Housing starts, which encompass the units needed for household formations, second homes, and the replacement of obsolete or demolished units, have not kept pace with this projected household growth. According to the Census Bureau’s October 2014 New Residential Sales Report, new home inventory stands at a supply of just 5.6 months, based on current sales paces. If demand and pace increase significantly, the supply of 5.6 months could quickly be drawn down. During the period 1970 through 2007, total housing starts in the United States averaged approximately 1.6 million per year, while during the period 2008 through 2013, total housing starts averaged approximately 0.7 million per year according to the Census Bureau.
During the 2006 – 2011 housing market downturn, the pipeline of approved and improved home sites dwindled in many markets as many builders and developers lacked both the capital and the economic incentive to invest in bringing home sites through approvals. We believe that, as demand strengthens, builders and developers with approved land in well-located markets will be poised to benefit. We believe that this will be particularly true for us because much of our land portfolio is in the Washington, D.C. to Boston corridor and in California where land is relatively scarce and approvals are more difficult to obtain.
Our Homes
In most of our detached home communities, we offer a number of different house floor plans, each with several substantially different architectural styles. In addition, the exterior of each basic floor plan may be varied further by the use of stone, stucco, brick, or siding. Our traditional attached home communities generally offer several different floor plans with two, three, or four bedrooms.
We offer some of the same basic home designs in similar communities; however, we are continuously developing new designs to replace or augment existing ones to ensure that our homes reflect current consumer tastes. We use our own architectural staff and also engage unaffiliated architectural firms to develop new designs. During the past fiscal year, we introduced 244 new models for our Traditional Home Building Product (205 detached models and 39 attached models).
In our Traditional Home Building Product communities, a wide selection of options are available to home buyers for additional charges. The number and complexity of options in our Traditional Home Building Product typically increase with the size and base selling price of our homes. Major options include additional garages, extra fireplaces, guest suites, finished lofts, and other additional rooms.

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The table below provides the average value of options purchased by our home buyers, including lot premiums, and the value of the options as a percent of the base selling price of the homes purchased in fiscal 2014, 2013, and 2012:
 
 
2014
 
2013
 
2012
 
 
Option value (in thousands)
 
Percent of base selling price
 
Option value (in thousands)
 
Percent of base selling price
 
Option value (in thousands)
 
Percent of base selling price
Traditional Home Building Product
 
 
 
 
 
 
 
 
 
 
 
 
    Detached
 
$
144

 
22.2
%
 
$
138

 
24.0
%
 
$
124

 
23.1
%
    Attached
 
$
61

 
14.3
%
 
$
54

 
13.5
%
 
$
51

 
12.7
%
City Living Product
 
$
27

 
2.6
%
 
$
26

 
2.1
%
 
$
23

 
3.2
%
In general, our attached homes and City Living products do not offer significant structural options to our home buyer and thus they have a smaller option value as a percentage of base selling price.
As a result of our wide product and geographic diversity, we have a wide range of base sales prices. The general range of base sales prices for our different lines of homes at October 31, 2014, was as follows:
Traditional Home Building Product
 
 
 
Detached homes
 
 
 
Move-up
$
255,000

to
$
1,010,000

Executive
188,000

to
1,055,000

Estate
349,000

to
1,992,000

Active-adult, age-qualified
225,000

to
778,000

Attached homes
 
 
 
Flats
$
258,000

to
$
432,000

Townhomes/Carriage homes
212,000

to
702,000

Active-adult, age-qualified
267,000

to
680,000

 City Living Product
 
 
 
Flats
$
301,000

to
$
916,000

High-rise/mid-rise
380,000

to
8,950,000

A number of projects that we are developing are offering units at prices substantially in excess of those listed above.
At October 31, 2014, we were selling homes from 263 communities, compared to 232 communities at October 31, 2013, and 224 communities at October 31, 2012. In addition, at October 31, 2014, we had 25 communities that were temporarily closed due to market conditions, of which we currently expect to reopen approximately eight prior to October 31, 2015. We expect to be selling homes from 270 to 310 communities at October 31, 2015.
The following table summarizes certain information with respect to our operating communities at October 31, 2014:
 
 
Total number of communities
 
Number of selling communities
 
Homes approved
 
Homes closed
 
Homes under contract but not closed
 
Home sites available
Traditional Home Building:
 
 
 
 
 
 
 
 
 
 
 
 
North
 
70

 
59

 
9,949


4,501

 
878

 
4,570

Mid-Atlantic
 
77

 
68

 
11,095


4,643

 
830

 
5,622

South
 
70

 
55

 
7,336


2,925

 
963

 
3,448

West
 
83

 
76

 
7,382


2,659

 
864

 
3,859

Traditional Home Building
 
300

 
258

 
35,762

 
14,728

 
3,535

 
17,499

City Living
 
7

 
5

 
578


253

 
144

 
181

Total
 
307

 
263

 
36,340

 
14,981

 
3,679

 
17,680


7



At October 31, 2014, significant site improvements had not yet commenced on approximately 6,412 of the 17,680 available home sites. Of the 17,680 available home sites, 1,142 were not yet owned by us but were controlled through options. Of the 3,679 home sites in backlog, 19 were not owned by us but were controlled through options.
Of our 307 operating communities at October 31, 2014, a total of 263 communities were offering homes for sale; 30 communities were sold out but not all homes had been completed and delivered; 6 communities had backlog to deliver but had been temporarily shut down and are expected to reopen in fiscal 2015; and 8 communities were preparing to reopen. Of the 263 communities in which homes were being offered for sale at October 31, 2014, a total of 206 were detached home communities and 57 were attached home communities. At October 31, 2014, we had 505 homes (exclusive of model homes) under construction or completed but not under contract in our traditional communities, of which 315 were in detached home communities and 190 were in attached home communities. In addition, we had 123 units that were temporarily being held as rental units. At October 31, 2014, we had 178 homes (exclusive of model homes) under construction or completed but not under contract, in seven City Living communities that were wholly-owned.
At the end of each fiscal quarter, we review the profitability of each of our operating communities. For those communities operating below certain profitability thresholds, we estimate the expected future cash flow for each of those communities. For each community whose estimated cash flow is not sufficient to recover its carrying value, we estimate the fair value of the community in accordance with U.S. generally accepted accounting principles (“GAAP”) and recognize an impairment charge for the difference between the estimated fair value of the community and its carrying value. In fiscal 2014, 2013, and 2012, we recognized impairment charges related to operating communities of $17.6 million, $3.3 million, and $13.1 million, respectively.
For more information regarding revenues, net contracts signed, income (loss) before income taxes, and assets by segment, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Segments” in Item 7 of this Form 10-K.
Land Policy
Before entering into an agreement to purchase a land parcel, we complete extensive comparative studies and analyses that assist us in evaluating the acquisition. Historically, we have attempted to enter into option agreements to purchase land for future communities; however, in recent years, we have had more success in negotiating land parcels for immediate purchase since many sellers were in financial distress, not in a position to wait for our obtaining land approvals, or unwilling to take the financial risk of not completing the sale. We have also entered into several joint ventures with other builders or developers to develop land for the use of the joint venture participants or for sale to outside parties. In addition, we have, at times, acquired the underlying mortgage on a property and subsequently obtained title to that property.
Where possible, we enter into agreements to purchase land, referred to in this Form 10-K as “land purchase contracts,” “purchase agreements,” “options,” or “option agreements,” on a nonrecourse basis, thereby limiting our financial exposure to the amounts expended in obtaining any necessary governmental approvals, the costs incurred in the planning and design of the community, and, in some cases, some or all of our deposit. The use of these agreements may increase the price of land that we eventually acquire, but reduces our risk by allowing us to obtain the necessary development approvals before acquiring the land or allowing us to delay the acquisition to a later date. Historically, as approvals were obtained, the value of the purchase agreements and land generally increased; however, in any given time period, this may not happen. We have the ability to extend some of these purchase agreements for varying periods of time, in some cases by making an additional payment and, in other cases, without making any additional payment. Our purchase agreements are typically subject to numerous conditions, including, but not limited to, the ability to obtain necessary governmental approvals for the proposed community. Our deposit under an agreement may be returned to us if all approvals are not obtained, although predevelopment costs may not be recoverable. We generally have the right to cancel any of our agreements to purchase land by forfeiture of some or all of the deposits we have made pursuant to the agreement.
In response to market conditions during the 2006 – 2011 downturn in the housing industry, we reevaluated and renegotiated or canceled many of our land purchase contracts. In addition, we sold, and may continue to sell, certain parcels of land that we identified as nonstrategic. As a result, we reduced our home sites controlled from a high of approximately 91,200 at April 30, 2006 to approximately 47,200 at October 31, 2014.
Based on our belief that the housing market has begun to recover and the revival of demand in certain areas, we have begun to increase our land positions. In many situations, the opportunity to buy land as the housing market emerged from the downturn necessitated the outright purchase of the land due to the distressed nature of the seller. Our optioned land as a percentage of land controlled has declined from our historical averages as a result of our cancellation of many land purchase contracts during the downturn, the need for distressed sellers to liquidate their land positions, and our purchase of Shapell in February 2014.
During fiscal 2014 and 2013, we acquired control of approximately 3,936 home sites (net of options terminated and home sites sold) and, approximately 12,462 home sites (net of options terminated), respectively. At October 31, 2014, we controlled

8



approximately 47,167 home sites, as compared to approximately 48,628 home sites at October 31, 2013, and 40,350 home sites at October 31, 2012. In addition, at October 31, 2014, we expect to purchase approximately 3,300 additional home sites from several land development joint ventures in which we have an interest.
We are developing several master planned communities in which we intend to build homes on a portion of the lots and sell the remaining lots to other builders. Two of these master planned communities are being developed 100% by us, and the remaining communities are being developed through joint ventures with other builders or financial partners.
Our ability to continue development activities over the long term will be dependent upon, among other things, a suitable economic environment and our continued ability to locate and enter into options or agreements to purchase land, obtain governmental approvals for suitable parcels of land, and consummate the acquisition and complete the development of such land.
The following is a summary of home sites for future communities that we either owned or controlled through options or purchase agreements at October 31, 2014, as distinguished from our operating communities:
 
 
Number of communities
 
Number of home sites
Traditional Home Building:
 
 
 
 
North
 
35

 
3,856

Mid-Atlantic
 
53

 
5,536

South
 
41

 
4,893

West
 
108

 
9,851

Traditional Home Building
 
237

 
24,136

City Living
 
12

 
1,672

Total
 
249

 
25,808

Of the 25,808 planned home sites at October 31, 2014, we owned 16,026 and controlled 9,782 through options and purchase agreements.
At October 31, 2014, the aggregate purchase price of land parcels subject to option and purchase agreements in operating communities and future communities was approximately $1.23 billion (including $184.3 million of land to be acquired from joint ventures in which we have invested). Of the $1.23 billion of land purchase commitments, we paid or deposited $103.4 million, and, if we acquire all of these land parcels, we will be required to pay an additional $1.12 billion. The purchases of these land parcels are expected to occur over the next several years. We have additional land parcels under option that have been excluded from the aforementioned aggregate purchase price since we do not believe that we will complete the purchase of these land parcels and no additional funds will be required from us to terminate these contracts. These option contracts have either been written off or written down to the estimated amount that we expect to recover on them when the contracts are terminated.
We evaluate all of the land owned or optioned for future communities on an ongoing basis for continued economic and market feasibility. During each of the fiscal years ended October 31, 2014, 2013, and 2012, such feasibility analysis resulted in approximately $3.1 million, $1.2 million, and $1.7 million, respectively, of capitalized costs related to land owned or optioned for future communities being charged to cost of revenues because such costs were no longer deemed to be recoverable or exceeded the properties’ fair value.
We have a substantial amount of land currently under control for which approvals have been obtained or are being sought. We devote significant resources to locating suitable land for future development and obtaining the required approvals on land under our control. There can be no assurance that the necessary development approvals will be secured for the land currently under our control or for land that we may acquire control of in the future or that, upon obtaining such development approvals, we will elect to complete the purchases of land under option or complete the development of land that we own. We generally have been successful in obtaining governmental approvals in the past. We believe that we have an adequate supply of land in our existing communities and proposed communities (assuming that all properties are developed) to maintain our operations at current levels for several years.
Community Development
We typically expend considerable effort in developing a concept for each community, which includes determining the size, style, and price range of the homes; the layout of the streets and individual home sites; and the overall community design. After the necessary governmental subdivision and other approvals have been obtained, which may take several years, we improve the

9



land by clearing and grading it; installing roads, underground utility lines, and recreational amenities; erecting distinctive entrance structures; and staking out individual home sites.
Each community is managed by a project manager. Working with sales staff, construction managers, marketing personnel, and, when required, other in-house and outside professionals such as accountants, engineers, and architects, a project manager is responsible for supervising and coordinating the various developmental steps such as land approval, land acquisition, marketing, selling, construction, and customer service, and monitoring the progress of work and controlling expenditures. Major decisions regarding each community are made in consultation with senior members of our management team.
We act as a general contractor for most of our projects. Subcontractors perform all home construction and land development work, generally under fixed-price contracts. We purchase most of the materials we use in our home construction and in our land development activities directly from the manufacturers or producers. We generally have multiple sources for the materials we purchase, and we have not experienced significant delays due to unavailability of necessary materials. See “Manufacturing/Distribution Facilities” in Item 2 of this Form 10-K.
Our construction managers coordinate subcontracting activities and supervise all aspects of construction work and quality control. One of the ways in which we seek to achieve home buyer satisfaction is by providing our construction managers with incentive compensation arrangements based upon each home buyer’s satisfaction, as expressed by the buyers’ responses on pre- and post-closing questionnaires.
The most significant variable affecting the timing of our revenue stream, other than housing demand, is the opening of the community for sale, which generally occurs shortly after receipt of final land regulatory approvals. Receipt of approvals permits us to begin the process of obtaining executed sales contracts from home buyers. Although our sales and construction activities vary somewhat by season, which can affect the timing of closings, any such seasonal effect is relatively insignificant compared to the effect of the timing of receipt of final regulatory approvals, the opening of the community, and the subsequent timing of closings.
Marketing and Sales
We believe that our marketing strategy for our Traditional Home Building Product, which emphasizes our more expensive “Estate” and “Executive” lines of homes, has enhanced our reputation as a builder/developer of high quality upscale homes. We believe this reputation results in greater demand for all of our lines of homes. We generally include attractive decorative features such as chair rails, crown moldings, dentil moldings, vaulted and coffered ceilings, and other aesthetic elements, even in our less expensive homes, based on our belief that this additional construction expense enhances our product and improves our marketing and sales effort.
In determining the prices for our homes, we utilize, in addition to management’s extensive experience, an internally developed value analysis program that compares our homes with homes offered by other builders in each local marketing area. In our application of this program, we assign a positive or negative dollar value to differences between our product features and those of our competitors, such as house and community amenities, location, and reputation.
We typically have a sales office in each community that is staffed by our own sales personnel. Sales personnel are generally compensated with both salary and commission. A significant portion of our sales is also derived from the introduction of customers to our communities by local cooperating real estate agents.
We expend great effort and cost in designing and decorating our model homes, which play an important role in our marketing. In our models, we create an attractive atmosphere, which may include bread baking in the oven, fires burning in fireplaces, and music playing in the background. Interior decorating varies among the models and is carefully selected to reflect the lifestyles of prospective buyers.
Increasingly, the Internet is an important resource we use in marketing and providing information to our customers. Visitors to our website, www.TollBrothers.com, can obtain detailed information regarding our communities and homes across the country, take panoramic or video tours of our homes, and design their own home based upon our available floor plans and options. We also advertise in newspapers, in other local and regional publications, and on billboards. We also use color brochures to market our communities.
We have a two-step sales process. The first step takes place when a potential home buyer visits one of our communities and decides to purchase one of our homes, at which point the home buyer signs a non-binding deposit agreement and provides a small, refundable deposit. This deposit will reserve, for a short period of time, the home site or unit that the home buyer has selected. This deposit also locks in the base price of the home. Because these deposit agreements are non-binding, they are not recorded as signed contracts, nor are they recorded in backlog. Deposit rates are tracked on a weekly basis to help us monitor the strength or weakness in demand in each of our communities. If demand for homes in a particular community is strong,

10



senior management determines whether the base selling prices in that community should be increased. If demand for the homes in a particular community is weak, we determine whether or not sales incentives and/or discounts on home prices should be adjusted.
The second step in the sales process occurs when we actually sign a binding agreement of sale with the home buyer and the home buyer gives us a cash down payment that is generally nonrefundable. Cash down payments currently average approximately 8% of the total purchase price of a home. Between the time that the home buyer signs the non-binding deposit agreement and the binding agreement of sale, he or she is required to complete a financial questionnaire that gives us the ability to evaluate whether the home buyer has the financial resources necessary to purchase the home. If we determine that the home buyer is not financially qualified, we will not enter into an agreement of sale with the home buyer. During fiscal 2014, 2013, and 2012, our customers signed net contracts for $3.90 billion (5,271 homes), $3.63 billion (5,294 homes), and $2.56 billion (4,159 homes), respectively. When we report net contracts signed, the number and value of contracts signed are reported net of all cancellations occurring during the reporting period, whether signed in that reporting period or in a prior period. Only outstanding agreements of sale that have been signed by both the home buyer and us as of the end of the period for which we are reporting are included in backlog.
Customer Mortgage Financing
We maintain relationships with a widely diversified group of mortgage financial institutions, many of which are among the largest in the industry. We believe that regional and community banks continue to recognize the long-term value in creating relationships with affluent customers such as our home buyers, and these banks continue to provide such customers with financing.
We believe that our home buyers generally are, and should continue to be, better able to secure mortgages due to their typically lower loan-to-value ratios and attractive credit profiles, as compared to the average home buyer. Nevertheless, in recent years, tightened credit standards have shrunk the pool of potential home buyers and hindered accessibility of or eliminated certain loan products previously available to our home buyers. Our home buyers continue to face stricter mortgage underwriting guidelines, higher down payment requirements, and narrower appraisal guidelines than in the past. In addition, some of our home buyers continue to find it more difficult to sell their existing homes as prospective buyers of their homes may face difficulties obtaining a mortgage. In addition, other potential buyers may have little or negative equity in their existing homes and may not be able or willing to purchase a larger or more expensive home.
While the range of mortgage products available to a potential home buyer is more limited than it was in the period 2005 through 2007, we have seen an expansion in available mortgage product over the past several years. Indications from industry participants, including commercial banks, mortgage banks, mortgage real estate investment trusts, and mortgage insurance companies, are that availability, parameters, and pricing of loans exceeding the conforming and conforming high-balance loan limits (“jumbo loans”) are improving. We believe any such improvements would likely serve to enhance financing alternatives for existing buyers qualifying for jumbo loans, and also help to offset the reduction in Fannie Mae/Freddie Mac-eligible loan amounts in some markets. Based on the mortgages provided by our mortgage subsidiary, we do not expect the change in the Fannie Mae/Freddie Mac-eligible loan amounts to have a significant impact on our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act provides for a number of new requirements relating to residential mortgage lending practices. These include, among others, minimum standards for mortgages and related lender practices, the definitions and parameters of a qualified mortgage and a qualified residential mortgage, future risk retention requirements, limitations on certain fees, prohibition of certain tying arrangements, and remedies for borrowers in foreclosure proceedings in the event that a lender violates fee limitations or minimum standards. We do not believe that the effect of these requirements on our mortgage subsidiary will be significant, although it will restrict us from providing a comprehensive package of services to our home buyers due to fee restrictions imposed upon our home buyers as to what they are permitted to pay to our affiliated businesses.
Our mortgage subsidiary provides mortgage financing for a portion of our home closings. Our mortgage subsidiary determines whether the home buyer qualifies for the mortgage he or she is seeking based upon information provided by the home buyer and other sources. For those home buyers who qualify, our mortgage subsidiary provides the home buyer with a mortgage commitment that specifies the terms and conditions of a proposed mortgage loan based upon then-current market conditions.


11



Information about the number and amount of loans funded by our mortgage subsidiary is contained in the table below.
Fiscal year
 
Total
Toll Brothers, Inc. settlements (a)
 
TBI Mortgage Company
financed settlements*(b)
 
Gross
capture rate (b/a)
 
Amount
financed
(in thousands)
2014
 
5,397

 
1,866

 
34.6%
 
$
801,493

2013
 
4,184

 
1,803

 
43.1%
 
$
717,335

2012
 
3,286

 
1,572

 
47.8%
 
$
585,732

2011
 
2,611

 
1,361

 
52.1%
 
$
508,880

2010
 
2,642

 
1,451

 
54.9%
 
$
530,575

*
TBI Mortgage Company financed settlements exclude brokered and referred loans, which amounted to approximately  11.4%, 10.7%,10.7%, 11.5%, and 5.8% of our closings in fiscal 2014, 2013, 2012, 2011, and 2010, respectively.
Prior to the actual closing of the home and funding of the mortgage, the home buyer may lock in an interest rate based upon the terms of the commitment. At the time of rate lock, our mortgage subsidiary agrees to sell the proposed mortgage loan to one of several outside recognized mortgage financing institutions (“investors”) that are willing to honor the terms and conditions, including the interest rate, committed to the home buyer. We believe that these investors have adequate financial resources to honor their commitments to our mortgage subsidiary. At October 31, 2014, our mortgage subsidiary was committed to fund $901.0 million of mortgage loans. Of these commitments, $191.6 million, as well as $93.3 million of mortgage loans receivable, have “locked-in” interest rates. Our mortgage subsidiary funds its commitments through a combination of its own capital, capital provided from us, its loan facility, and the sale of mortgage loans to various investors. Our mortgage subsidiary has commitments from investors to acquire all $284.9 million of these locked-in loans and receivables. Our home buyers have not locked in the interest rate on the remaining $709.4 million.
Competition
The home building business continues to be highly competitive and fragmented. We compete with numerous home builders of varying sizes, ranging from local to national in scope, some of which have greater sales and financial resources than we do. Sales of existing homes, whether by a homeowner or by a financial institution that has acquired a home through a foreclosure, also provide competition. We compete primarily on the basis of price, location, design, quality, service, and reputation. We also believe our financial stability, relative to many others in our industry, is a favorable competitive factor as more home buyers focus on builder solvency.
Since the 2006 – 2011 downturn in the housing market, we have seen a decline in competition from the small and mid-sized private builders that had been our primary competitors in the luxury market prior to the downturn. We believe that many of these builders are no longer in business and that access to capital by the remaining private builders continues to be severely constrained. There are fewer and more selective lenders serving our industry as compared to prior years and we believe that these lenders gravitate to the home building companies that offer them the greatest security, the strongest balance sheets, and the broadest array of potential business opportunities. While some builders may re-emerge with new capital, the scarcity of attractive land is a further impediment to their re-emergence. We believe that reduced competition, combined with attractive long-term demographics will reward those well-capitalized builders that have persevered through the 2006 – 2011 downturn.
We believe that geographic and product diversification, access to lower-cost capital, and strong demographics benefit those builders, like us, who can control land and efficiently navigate through the increasingly difficult regulatory approval process. We believe that these factors favor the large publicly traded home building companies with the capital and expertise to control home sites and gain market share. We also believe that during the 2006 – 2011 downturn in the housing market, many builders and land developers reduced the number of home sites that were taken through the approval process. The approval process continues to be difficult and lengthy, and the political pressure from no-growth proponents continues to increase. We believe our expertise in taking land through the approval process and our already-approved land positions will allow us to grow in the years to come as market conditions continue to improve.
Regulation and Environmental Matters
We are subject to various local, state, and federal statutes, ordinances, rules, and regulations concerning zoning, building design, construction, and similar matters, including local regulations that impose restrictive zoning and density requirements. In a number of our markets, there has been an increase in state and local legislation authorizing the acquisition of land as dedicated open space, mainly by governmental, quasi-public, and nonprofit entities. In addition, we are subject to various licensing, registration, and filing requirements in connection with the construction, advertisement, and sale of homes in our

12



communities. The impact of these laws and requirements has been to increase our overall costs, and they may have delayed, and in the future may delay, the opening of communities or may have caused, and in the future may cause, us to conclude that development of particular communities would not be economically feasible, even if any or all necessary governmental approvals were obtained. See “Land Policy” in this Item 1. We also may be subject to periodic delays or may be precluded entirely from developing communities due to building moratoriums in one or more of the areas in which we operate. Generally, such moratoriums often relate to insufficient water or sewage facilities or inadequate road capacity.
In order to secure certain approvals in some areas, we may be required to provide affordable housing at below market rental or sales prices. The impact of these requirements on us depends on how the various state and local governments in the areas in which we engage, or intend to engage, in development implement their programs for affordable housing. To date, these restrictions have not had a material impact on us.
We also are subject to a variety of local, state, and federal statutes, ordinances, rules, and regulations concerning protection of public health and the environment (“environmental laws”). The particular environmental laws that apply to any given community vary greatly according to the location and environmental condition of the site and the present and former uses of the site. Complying with these environmental laws may result in delays, may cause us to incur substantial compliance and other costs, and/or may prohibit or severely restrict development in certain environmentally sensitive regions or areas.
We maintain a policy of engaging independent environmental consultants to evaluate land for the potential of hazardous or toxic materials, wastes, or substances before consummating an acquisition. Because we generally have obtained such assessments for the land we have purchased, we have not been significantly affected to date by the presence of such materials.
Our mortgage subsidiary is subject to various state and federal statutes, rules, and regulations, including those that relate to licensing, lending operations, and other areas of mortgage origination and financing. The impact of those statutes, rules, and regulations can be to increase our home buyers’ cost of financing, increase our cost of doing business, and restrict our home buyers’ access to some types of loans.
Insurance/Warranty
All of our homes are sold under our limited warranty as to workmanship and mechanical equipment. Many homes also come with a limited 10-year warranty as to structural integrity.
We maintain insurance, subject to deductibles and self-insured amounts, to protect us against various risks associated with our activities, including, among others, general liability, “all-risk” property, construction defects, workers’ compensation, automobile, and employee fidelity. We accrue for our expected costs associated with the deductibles and self-insured amounts.
Employees
At October 31, 2014, we employed approximately 3,500 persons full-time. At October 31, 2014, we were subject to one collective bargaining agreement that covered less than 2% of our employees. We believe our employee relations are good.
Available Information
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission (the “SEC”). These filings are available to the public over the internet at the SEC’s website at http://www.sec.gov. All of the documents we file with the SEC may also be read and copied at the SEC’s public reference room located at 100 F Street, NE, Washington, DC 20549. Please call the SEC at 1-800-SEC-0330 for further information on the public reference room.
Our principal Internet address is www.TollBrothers.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 available through our website, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The contents of our website are not, however, a part of this Form 10-K.
FORWARD-LOOKING STATEMENTS
Certain information included in this report or in other materials we have filed or will file with the SEC (as well as information included in oral statements or other written statements made or to be made by us) contains or may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. You can identify these statements by the fact that they do not relate to matters of strictly historical or factual nature and generally discuss or relate to future events. These statements contain words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe,” “may,” “can,” “could,” “might,” “should” and other words or

13



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; 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; legal proceedings and claims; the anticipated benefits to be realized from the consummation of the Acquisition and the related post-closing asset sales.
From time to time, forward-looking statements also are included in other reports on Forms 10-Q and 8-K, in press releases, in presentations, on our website and in other materials released to the public. Any or all of the forward-looking statements included in this report and in any other reports or public statements made by us are not guarantees of future performance and may turn out to be inaccurate. This can occur as a result of incorrect assumptions or as a consequence of known or unknown risks and uncertainties. Many factors mentioned in this report or in other reports or public statements made by us, such as 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 discussion of factors that we believe could cause our actual results to differ materially from expected and historical results, see “Item 1A – Risk Factors” below. This discussion is provided as permitted by the Private Securities Litigation Reform Act of 1995, and all of our forward-looking statements are expressly qualified in their entirety by the cautionary statements contained or referenced in this section.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information about our executive officers is incorporated by reference from Part III, Item 10 of this Form 10-K.
ITEM 1A. RISK FACTORS
We are subject to demand fluctuations in the housing industry. Any reduction in demand would adversely affect our business, results of operations and financial condition.
We believe that, in fiscal 2012, the housing market began to recover from the significant slowdown that started in the fourth quarter of our fiscal year ended October 31, 2005. During fiscal 2012 and the first nine months of fiscal 2013, we saw a strong recovery in the number of new sales contracts signed. Beginning in the fourth quarter of fiscal 2013, we experienced a leveling in demand that continued through the second quarter of fiscal 2014, declined in the third quarter of fiscal 2014 and has more recently strengthened. In fiscal 2014’s fourth-quarter, net signed contracts of $970.8 million and 1,282 units rose 16% in dollars and 10% in units, compared to fiscal 2013’s fourth-quarter net signed contracts of $839.0 million and 1,163 units. The strength in demand that we saw in the fourth quarter of fiscal 2014 has continued into the first quarter of fiscal 2015.
Demand for our homes is subject to fluctuations, often due to factors outside of our control. In a housing market downturn, our sales and results of operations will be adversely affected; we may have significant inventory impairments and other write-offs; our gross margins may decline significantly from historical levels; and we may incur substantial losses from operations. We cannot predict the continuation of the current recovery, nor can we provide assurance that should the recovery not continue, our response will be successful.
Adverse changes in economic conditions in markets where we conduct our operations and where prospective purchasers of our homes live could reduce the demand for homes and, as a result, could adversely affect our business, results of operations and financial condition.
Adverse changes in economic conditions in markets where we conduct our operations and where prospective purchasers of our homes live have had and may in the future have a negative impact on our business. Adverse changes in employment levels, job growth, consumer confidence, interest rates, and population growth, or an oversupply of homes for sale may reduce demand and depress prices for our homes and cause home buyers to cancel their agreements to purchase our homes. This, in turn, could adversely affect our results of operations and financial condition.

14



Increases in cancellations of existing agreements of sale could have an adverse effect on our business.
Our backlog reflects agreements of sale with our home buyers for homes that have not yet been delivered. We have received a deposit from our home buyer for each home reflected in our backlog, and generally we have the right to retain the deposit if the home buyer does not complete the purchase. In some cases, however, a home buyer may cancel the agreement of sale and receive a complete or partial refund of the deposit for reasons such as state and local law, the home buyer’s inability to obtain mortgage financing, his or her inability to sell his or her current home, or our inability to complete and deliver the home within the specified time. At October 31, 2014, we had 3,679 homes with a sales value of $2.72 billion in backlog. If economic conditions decline, or if mortgage financing becomes less available, we could experience an increase in home buyers canceling their agreements of sale with us, which could have an adverse effect on our business and results of operations.
The home building industry is highly competitive, and, if other home builders are more successful or offer better value to our customers, our business could decline.
We operate in a very competitive environment, which is characterized by competition from a number of other home builders in each market in which we operate. We compete with large national and regional home building companies and with smaller local home builders for land, financing, raw materials, and skilled management and labor resources. We also compete with the resale home market, also referred to as the “previously owned or existing” home market. An oversupply of homes available for sale or the heavy discounting of home prices by some of our competitors could adversely affect demand for our homes and the results of our operations. An increase in competitive conditions can have any of the following impacts on us: delivering fewer homes; sale of fewer homes or higher cancellations by our home buyers; an increase in selling incentives and/or reduction of prices; and realization of lower gross margins due to lower selling prices or an inability to increase selling prices to offset increased costs of the homes delivered. If we are unable to compete effectively in our markets, our business could decline disproportionately to that of our competitors.
If we are not able to obtain suitable financing, or if the interest rates on our debt are increased, or if our credit ratings are lowered, our business and results of operations may decline.
Our business and results of operations depend substantially on our ability to obtain financing, whether from bank borrowings or from financing in the public debt markets. Our revolving credit facility matures in July 2018, our $500.0 million term loan matures in February 2019, and $2.66 billion of our senior notes become due and payable at various times from May 2015 through September 2032. We cannot be certain that we will be able to continue to replace existing financing or find additional sources of financing in the future on favorable terms or at all.
If we are not able to obtain suitable financing at reasonable terms or replace existing debt and credit facilities when they become due or expire, our costs for borrowings will likely increase and our revenues may decrease or we could be precluded from continuing our operations at current levels.
Increases in interest rates can make it more difficult and/or expensive for us to obtain the funds we need to operate our business. The amount of interest we incur on our revolving bank credit facility and term loan fluctuates based on changes in short-term interest rates and the amount of borrowings we incur. Increases in interest rates generally and/or any downgrading in the ratings that national rating agencies assign to our outstanding debt securities could increase the interest rates we must pay on any subsequent issuances of debt securities, and any such ratings downgrade could also make it more difficult for us to sell such debt securities.
If we cannot obtain letters of credit and surety bonds, our ability to operate may be restricted.
We use letters of credit and surety bonds to secure our performance under various construction and land development agreements, escrow agreements, financial guarantees, and other arrangements. Should banks decline to issue letters of credit or surety companies decline to issue surety bonds, our ability to operate could be significantly restricted and could have an adverse effect on our business and results of operations.
If our home buyers or our home buyers’ buyers are not able to obtain suitable financing, our results of operations may decline.
Our results of operations also depend on the ability of our potential home buyers to obtain mortgages for the purchase of our homes. The uncertainties in the mortgage markets and their impact on the overall mortgage market, including the tightening of credit standards and increased government regulation, could adversely affect the ability of our customers to obtain financing for a home purchase, thus preventing our potential home buyers from purchasing our homes. Moreover, future increases in the cost of home mortgage financing could prevent our potential home buyers from purchasing our homes. In addition, where our potential home buyers must sell their existing homes in order to buy a home from us, increases in mortgage costs and/or lack of availability of mortgages could prevent the buyers of our potential home buyers’ existing homes from obtaining the mortgages

15



they need to complete their purchases, which would result in our potential home buyers’ inability to buy a home from us. Similar risks apply to those buyers whose contracts are in our backlog of homes to be delivered. If our home buyers, potential buyers, or buyers of our home buyers’ current homes cannot obtain suitable financing, our sales and results of operations could be adversely affected.
If our ability to resell mortgages to investors is impaired, our home buyers may be required to find alternative financing.
Generally, when our mortgage subsidiary closes a mortgage for a home buyer at a previously locked-in rate, it already has an agreement in place with an investor to acquire the mortgage following the closing. Should the resale market for our mortgages decline or the underwriting standards of our investors become more stringent, our ability to sell future mortgages could be adversely affected and either we would have to commit our own funds to long-term investments in mortgage loans, which could, among other things, delay the time when we recognize revenues from home sales on our statements of operations, or our home buyers would be required to find an alternative source of financing. If our home buyers cannot obtain another source of financing in order to purchase our homes, our sales and results of operations could be adversely affected.
If land is not available at reasonable prices, our sales and results of operations could decrease.
In the long term, our operations depend on our ability to obtain land at reasonable prices for the development of our residential communities. Due to the 2006 – 2011 downturn, our supply of available home sites, both owned and optioned, decreased from a peak of approximately 91,200 home sites controlled at April 30, 2006, to approximately 47,167 at October 31, 2014. In the future, changes in the general availability of land, competition for available land, availability of financing to acquire land, zoning regulations that limit housing density, and other market conditions may hurt our ability to obtain land for new residential communities at prices that will allow us to make a reasonable profit. If the supply of land appropriate for development of our residential communities becomes more limited because of these factors or for any other reason, the cost of land could increase and/or the number of homes that we are able to sell and build could be reduced.
If the market value of our land and homes declines, our results of operations will likely decrease.
The market value of our land and housing inventories depends on market conditions. We acquire land for expansion into new markets and for replacement of land inventory and expansion within our current markets. If housing demand decreases below what we anticipated when we acquired our inventory, we may not be able to make profits similar to what we have made in the past, may experience less than anticipated profits, and/or may not be able to recover our costs when we sell and build homes. Due to the significant decline in our business during 2006 to 2011, we recognized significant write-downs of our inventory. In fiscal 2012 and the first nine months of fiscal 2013, we saw a recovery in our business, although not back to 2005 levels. During fiscal 2012 and the first nine months of fiscal 2013, we saw a strong recovery in the number of new sales contracts signed. Beginning in the fourth quarter of fiscal 2013, we have experienced a leveling in demand that continued through the second quarter of fiscal 2014, declined in the third quarter of fiscal 2014, and has more recently strengthened. The strength in demand that we saw in the fourth quarter of fiscal 2014 has continued into the first quarter of fiscal 2015. If the current recovery in market conditions does not continue or market conditions worsen, we may have to recognize write-downs of our inventories and/or may have to sell land or homes at a loss.
We rely on subcontractors to construct our homes. The failure of our subcontractors to properly construct our homes may be costly.
We engage subcontractors to perform the actual construction of our homes. Despite our quality control efforts, we may discover that our subcontractors were engaging in improper construction practices. The occurrence of such events could require us to repair the homes in accordance with our standards and as required by law. The cost of satisfying our legal obligations in these instances may be significant, and we may be unable to recover the cost of repair from subcontractors, suppliers and insurers.
We participate in certain joint ventures where we may be adversely impacted by the failure of the joint venture or its participants to fulfill their obligations.
We have investments in and commitments to certain joint ventures with unrelated parties. These joint ventures may borrow money to help finance their activities. In certain circumstances, the joint venture participants, including ourselves, are required to provide guarantees of certain obligations relating to the joint ventures. In most of these joint ventures, we do not have a controlling interest and, as a result, are not able to require these joint ventures or their participants to honor their obligations or renegotiate them on acceptable terms. If the joint ventures or their participants do not honor their obligations, we may be required to expend additional resources or suffer losses, which could be significant.

16



Government regulations and legal challenges may delay the start or completion of our communities, increase our expenses, or limit our home building activities, which could have a negative impact on our operations.
The approval of numerous governmental authorities must be obtained in connection with our development activities, and these governmental authorities often have broad discretion in exercising their approval authority. We incur substantial costs related to compliance with legal and regulatory requirements. Any increase in legal and regulatory requirements may cause us to incur substantial additional costs or, in some cases, cause us to determine that the property is not feasible for development.
Various local, state, and federal statutes, ordinances, rules, and regulations concerning building, zoning, sales, and similar matters apply to and/or affect the housing industry. Governmental regulation affects construction activities as well as sales activities, mortgage lending activities, and other dealings with home buyers. The industry also has experienced an increase in state and local legislation and regulations that limit the availability or use of land. Municipalities may also restrict or place moratoriums on the availability of utilities, such as water and sewer taps. In some areas, municipalities may enact growth control initiatives, which will restrict the number of building permits available in a given year. In addition, we may be required to apply for additional approvals or modify our existing approvals because of changes in local circumstances or applicable law. If municipalities in which we operate take actions like these, it could have an adverse effect on our business by causing delays, increasing our costs, or limiting our ability to operate in those municipalities. Further, we may experience delays and increased expenses as a result of legal challenges to our proposed communities, whether brought by governmental authorities or private parties.
Our mortgage subsidiary is subject to various state and federal statutes, rules, and regulations, including those that relate to licensing, lending operations, and other areas of mortgage origination and financing. The impact of those statutes, rules, and regulations can increase our home buyers’ cost of financing, increase our cost of doing business, and restrict our home buyers’ access to some types of loans.
Increases in taxes or government fees could increase our costs, and adverse changes in tax laws could reduce demand for our homes.
Increases in real estate taxes and other local government fees, such as fees imposed on developers to fund schools, open space, and road improvements, and/or provide low- and moderate-income housing, could increase our costs and have an adverse effect on our operations. In addition, increases in local real estate taxes could adversely affect our potential home buyers, who may consider those costs in determining whether to make a new home purchase and decide, as a result, not to purchase one of our homes. In addition, any changes in the income tax laws that would reduce or eliminate tax deductions or incentives to homeowners, such as a change limiting the deductibility of real estate taxes or interest on home mortgages, could make housing less affordable or otherwise reduce the demand for housing, which in turn could reduce our sales and hurt our results of operations.
Adverse weather conditions, natural disasters, and other conditions could disrupt the development of our communities, which could harm our sales and results of operations.
Adverse weather conditions and natural disasters, such as hurricanes, tornadoes, earthquakes, floods, droughts, and fires, can have serious effects on our ability to develop our residential communities. We also may be affected by unforeseen engineering, environmental, or geological conditions or problems. Any of these adverse events or circumstances could cause delays in the completion of, or increase the cost of, developing one or more of our residential communities and, as a result, could harm our sales and results of operations.
If we experience shortages or increased costs of labor and supplies or other circumstances beyond our control, there could be delays or increased costs in developing our communities, which could adversely affect our operating results.
Our ability to develop residential communities may be adversely affected by circumstances beyond our control, including work stoppages, labor disputes, and shortages of qualified trades people, such as carpenters, roofers, masons, electricians, and plumbers; changes in laws relating to union organizing activity; lack of availability of adequate utility infrastructure and services; our need to rely on local subcontractors who may not be adequately capitalized or insured; and shortages, delays in availability, or fluctuations in prices of building materials. Any of these circumstances could give rise to delays in the start or completion of, or could increase the cost of, developing one or more of our residential communities. We may not be able to recover these increased costs by raising our home prices because the price for each home is typically set months prior to its delivery pursuant to the agreement of sale with the home buyer. If that happens, our operating results could be harmed.
We are subject to one collective bargaining agreement that covers approximately 2% of our employees. We have not experienced any work stoppages due to strikes by unionized workers, but we cannot make assurances that there will not be any work stoppages due to strikes or other job actions in the future. We use independent contractors, many of whom are

17



nonunionized, to construct our homes. At any given point in time, those subcontractors, who are not yet represented by a union may be unionized.
Product liability claims and litigation and warranty claims that arise in the ordinary course of business may be costly, which could adversely affect our business.
As a home builder, we are subject to construction defect and home warranty claims arising in the ordinary course of business. These claims are common in the home building industry and can be costly. In addition, the costs of insuring against construction defect and product liability claims are high, and the amount of coverage offered by insurance companies is currently limited. There can be no assurance that this coverage will not be further restricted and become more costly. If the limits or coverages of our current and former insurance programs prove inadequate, or we are not able to obtain adequate, or reasonably priced, insurance against these types of claims in the future, or the amounts currently provided for future warranty or insurance claims are inadequate, we may experience losses that could negatively impact our financial results.
We record expenses and liabilities based on the estimated costs required to cover our self-insured liability under our insurance policies, and estimated costs of potential claims and claim adjustment expenses that are above our coverage limits or that are not covered by our insurance policies. These estimated costs are based on an analysis of our historical claims and industry data, and include an estimate of claims incurred but not yet reported. The projection of losses related to these liabilities requires actuarial assumptions that are subject to variability due to uncertainties regarding construction defect claims relative to our markets and the types of product we build, insurance industry practices and legal or regulatory actions and/or interpretations, among other factors. Key assumptions used in these estimates include claim frequencies, severities and settlement patterns, which can occur over an extended period of time. In addition, changes in the frequency and severity of reported claims and the estimates to settle claims can impact the trends and assumptions used in the actuarial analysis, which could be material to our consolidated financial statements. Due to the degree of judgment required and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated, and the difference could be material to our consolidated financial statements.
Our cash flows and results of operations could be adversely affected if legal claims are brought against us and are not resolved in our favor.
Claims have been brought against us in various legal proceedings that have not had, and are not expected to have, a material adverse effect on our business or financial condition. Should such claims be resolved in an unfavorable manner or should additional claims be filed in the future, it is possible that our cash flows and results of operations could be adversely affected.
We could be adversely impacted by the loss of key management personnel or if we fail to attract qualified personnel.
Our future success depends, to a significant degree, on the efforts of our senior management and our ability to attract qualified personnel. Our operations could be adversely affected if key members of our senior management leave our employ or we cannot attract qualified personnel to manage the expected growth in our business.
Changes in tax laws or the interpretation of tax laws may negatively affect our operating results.
We believe that our recorded tax balances are adequate; however, it is not possible to predict the effects of possible changes in the tax laws or changes in their interpretation and whether they could have a material adverse impact on our operating results. We have filed our tax returns in prior years based upon certain filing positions we believe are appropriate. If the Internal Revenue Service or state taxing authorities disagree with these filing positions, we may owe additional taxes.
In the construction of a high-rise building, whether a for-sale or a for-rental property, we incur significant costs before we can begin construction, sell and deliver the units to our customers, or commence the collection of rent and recover our costs. We may be subject to delays in construction that could lead to higher costs which could adversely affect our operating results. Changing market conditions during the construction period could negatively impact selling prices and rents, which could adversely affect our operating results.
Before a high-rise building generates any revenues, we make material expenditures to acquire land; to obtain permits, development approvals, and entitlements; and to construct the building. It generally takes several years for us to acquire the land and construct, market, and deliver units or lease units in a high-rise building. Completion times vary on a building-by-building basis depending on the complexity of the project, its stage of development when acquired, and the regulatory and community issues involved. As a result of these potential delays in the completion of a building, we face the risk that demand for housing may decline during the period and we may be forced to sell or lease units at a loss or for prices that generate lower profit margins than we initially anticipated. Furthermore, if construction is delayed, we may face increased costs as a result of inflation or other causes and/or asset carrying costs (including interest on funds used to acquire land and construct the

18



building). These costs can be significant and can adversely affect our operating results. If values decline, we may also be required to recognize material write-downs of the book value of the building in accordance with GAAP.
Our high-rise business is subject to swings in delivery volume due to the extended construction time, levels of pre-sales, and quick delivery of units once the building is complete.
Our quarterly operating results will fluctuate depending on the timing of completion of construction of our high-rise building, levels of pre-sales and the relatively short delivery time of the pre-sold units, once the building is completed. Depending on the number of high-rise buildings that are completed in a quarter, our quarterly operating results may be uneven and may be marked by lower revenues and earnings in some quarters than in others.
Our quarterly operating results may fluctuate due to the seasonal nature of our business.
Our quarterly operating results fluctuate with the seasons; normally, a significant portion of our agreements of sale are entered into with customers in the winter and spring months. Construction of one of our traditional homes typically proceeds after signing the agreement of sale with our customer and can require seven months or more to complete. Weather-related problems may occur in the late winter and early spring, delaying starts or closings or increasing costs and reducing profitability. In addition, delays in opening new communities or new sections of existing communities could have an adverse impact on home sales and revenues. Expenses are not incurred and recognized evenly throughout the year.
Because of these factors, our quarterly operating results may be uneven and may be marked by lower revenues and earnings in some quarters than in others.
We invest in distressed loans and assets related to real estate at significant discounts; however, if the real estate markets deteriorate significantly, we could suffer losses.
We formed Gibraltar to invest in distressed real estate opportunities. Our investments have involved acquisitions of portfolios or interests in portfolios of distressed loans, some of which have been converted to real estate owned; however, these investments present many risks in addition to those inherent in normal lending activities, including the risk that the recovery of the United States real estate markets will abate and not resume for many years and that the value of our investments will not be recoverable. There is also the possibility that, if we cannot liquidate our investments as expected, we would be required to reduce the value at which they are carried on our financial statements.
Future terrorist attacks against the United States or increased domestic or international instability could have an adverse effect on our operations.
Future terrorist attacks against the United States or any foreign country or increased domestic or international instability could significantly reduce the number of new contracts signed, increase the number of cancellations of existing contracts, and/or increase our operating expenses, which could adversely affect our business.
Information technology failures and data security breaches could harm our business.
As part of our normal business activities, we use information technology and other computer resources to carry out important operational activities and to maintain our business records. Our computer systems, including our backup systems, are subject to interruption or damage from power outages, computer and telecommunications failures, computer viruses, security breaches (including through cyber attack and data theft), usage errors, and catastrophic events such as fires, floods, tornadoes, and hurricanes. If our computer systems and our backup systems are compromised, degraded, damaged, or breached, or otherwise cease to function properly, we could suffer interruptions in our operations or unintentionally allow misappropriation of proprietary or confidential information (including information about our home buyers and business partners), which could damage our reputation and require us to incur significant costs to remediate or otherwise resolve these issues.
Our acquisition of Shapell may expose us to unknown liabilities.
As part of the Acquisition, we acquired all the outstanding equity interests of Shapell, and as a result we will generally be subject to all of its liabilities, other than certain excluded liabilities as set forth in the Purchase Agreement. If previously unknown liabilities or other obligations of Shapell emerge in the future including contingent liabilities, our business could be materially affected. We may learn additional information about Shapell that adversely affects us, such as unknown liabilities, including liabilities under environmental laws, issues that could affect our ability to comply with the Sarbanes-Oxley Act, or issues that could affect our ability to comply with other applicable laws.


19



ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
Headquarters
Our corporate office, which we lease from an unrelated party, contains approximately 200,000 square feet and is located in Horsham, Pennsylvania.
Manufacturing/Distribution Facilities
We own a manufacturing facility of approximately 300,000 square feet located in Morrisville, Pennsylvania; a manufacturing facility of approximately 186,000 square feet located in Emporia, Virginia; and a manufacturing facility of approximately 134,000 square feet located in Knox, Indiana. We lease, from an unrelated party, a facility of approximately 56,000 square feet located in Fairless Hills, Pennsylvania. In addition, we own a 34,000-square foot manufacturing, warehouse, and office facility in Culpepper, Virginia. At these facilities, we manufacture open wall panels, roof and floor trusses, and certain interior and exterior millwork to supply a portion of our construction needs. These facilities supply components used in our North, Mid-Atlantic, and South geographic segments. These operations also permit us to purchase wholesale lumber, plywood, windows, doors, certain other interior and exterior millwork, and other building materials to supply to our communities. We believe that increased efficiencies, cost savings, and productivity result from the operation of these plants and from the wholesale purchase of materials.
Office and Other Facilities
We own or lease from unrelated parties office and warehouse space and golf course facilities in various locations, none of which are material to our business.
ITEM 3. LEGAL PROCEEDINGS
We are involved in various claims and litigation arising principally in the ordinary course of business. 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.
ITEM 4. MINE SAFETY DISCLOSURES
Not Applicable
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Shares of our common stock are listed on the New York Stock Exchange (“NYSE”) under the symbol “TOL”. The following table sets forth, for the fiscal quarters indicated, the reported high and low sales prices per share of our common stock as reported on the NYSE:
 
Three months ended
 
October 31
 
July 31
 
April 30
 
January 31
2014
 
 
 
 
 
 
 
       High
$
35.94

 
$
37.60

 
$
39.94

 
$
37.58

       Low
$
28.92

 
$
32.39

 
$
33.42

 
$
31.61

2013
 
 
 
 
 
 
 
       High
$
35.01

 
$
39.24

 
$
37.94

 
$
38.35

       Low
$
29.64

 
$
30.31

 
$
29.87

 
$
28.50

The closing price of our common stock on the NYSE on the last trading day of our fiscal years ended October 31, 2014, 2013, and 2012 was $31.95, $32.88, and $33.01, respectively. At December 19, 2014, there were approximately 704 record holders of our common stock.

20



Issuer Purchases of Equity Securities
During the three months ended October 31, 2014, we repurchased the following shares under our repurchase program:
Period
 
Total
number of
shares purchased (b)
 
Average
price
paid per share
 
Total number
of shares
purchased as
part of a
publicly
announced plan or program (a)
 
Maximum
number
of shares that
may yet be
purchased
under the plan or program (a)
 
 
(in thousands)
 
 
 
(in thousands)
 
(in thousands)
August 1 to August 31, 2014
 
 
 
 
 
 
 
8,258

September 1 to September 30, 2014
 
1

 
$
33.08

 
1

 
8,257

October 1 to October 31, 2014
 
2,936

 
$
30.78

 
2,936

 
5,321

Total
 
2,937

 
$
30.78

 
2,937

 


(a)
On March 20, 2003, our Board of Directors authorized the repurchase of up to 20 million shares of our common stock in open market transactions or otherwise for the purpose of providing shares for our various employee benefit plans. The Board of Directors did not fix an expiration date for the repurchase program.

On December 16, 2014, our Board of Directors authorized the repurchase of 20 million shares of our common stock in open market transactions or otherwise for the purpose of providing shares for the Company’s equity award and other
employee benefit plans and for any other and additional purpose or purposes as may be determined from time to time by
the Board of Directors or the Public Debt & Equity Securities Committee of the Board of Directors. Additionally, our
Board of Directors terminated, effective December 31, 2014, our March 2003 share repurchase program.

(b)
Our stock incentive plans permit us to withhold from the total number of shares that otherwise would be issued to a restricted stock unit (“RSU”) recipient upon distribution that number of shares having a fair value at the time of distribution equal to the applicable income tax withholdings due and remit the remaining shares to the RSU recipient. During the three months ended October 31, 2014, we withheld 1,184 of the shares subject to restricted stock units to cover $42,000 of income tax withholdings and we issued the remaining 1,672 shares to the recipients. The shares withheld in connection with the net exercise method are not included in the total number of shares purchased in the table above.

Except as set forth above, we did not repurchase any of our equity securities during the three-month period ended October 31, 2014.

21



Stockholder Return Performance Graph
The following graph and chart compares the five-year cumulative total return (assuming that an investment of $100 was made on October 31, 2009, and that dividends, if any, were reinvested) from October 31, 2009, to October 31, 2014, for (a) our common stock, (b) the S&P Homebuilding Index and (c) the S&P 500®:
Comparison of 5 Year Cumulative Total Return Among Toll Brothers, Inc., the S&P 500®, and
the S&P Homebuilding Index
October 31:
 
2009
 
2010
 
2011
 
2012
 
2013
 
2014
Toll Brothers, Inc.
 
100.00

 
103.58

 
100.69

 
190.59

 
189.84

 
184.47

S&P 500®
 
100.00

 
116.52

 
125.94

 
145.09

 
184.52

 
216.39

S&P Homebuilding
 
100.00

 
97.32

 
93.39

 
221.58

 
213.43

 
250.59

Dividends
We have not paid any cash dividends on our common stock to date and expect that, for the foreseeable future, we will not do so. Rather, we expect to follow a policy of retaining earnings in order to finance our business and, from time to time, repurchase shares of our common stock. The payment of dividends is within the discretion of our Board of Directors and any decision to pay dividends in the future will depend upon an evaluation of a number of factors, including our results of operations, 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 agreement), which restricts the amount of dividends we may pay. At October 31, 2014, under the most restrictive provisions of our bank credit agreement, we could have paid up to approximately $1.32 billion of cash dividends.

22



ITEM 6. SELECTED FINANCIAL DATA
The following tables set forth selected consolidated financial and housing data at and for each of the five fiscal years in the period ended October 31, 2014. They should be read in conjunction with the Consolidated Financial Statements and Notes thereto, listed in Item 15(a)1 of this Form 10-K beginning at page F-1 and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in Item 7 of this Form 10-K.
Summary Consolidated Statements of Operations and Balance Sheets (amounts in thousands, except per share data):
Year ended October 31:
 
2014
 
2013
 
2012
 
2011
 
2010
Revenues
 
$
3,911,602

 
$
2,674,299

 
$
1,882,781

 
$
1,475,881

 
$
1,494,771

Income (loss) before income taxes
 
$
504,582

 
$
267,697

 
$
112,942

 
$
(29,366
)
 
$
(117,187
)
Net income (loss)
 
$
340,032

 
$
170,606

 
$
487,146

 
$
39,795

 
$
(3,374
)
Earnings (loss) per share:
 
 
 
 
 
 
 
 
 
 
Basic
 
$
1.91

 
$
1.01

 
$
2.91

 
$
0.24

 
$
(0.02
)
Diluted
 
$
1.84

 
$
0.97

 
$
2.86

 
$
0.24

 
$
(0.02
)
Weighted average number of shares outstanding:
 
 
 
 
 
 
 
 
 
 
Basic
 
177,578

 
169,288

 
167,346

 
167,140

 
165,666

Diluted
 
185,875

 
177,963

 
170,154

 
168,381

 
165,666

At October 31:
 
2014
 
2013
 
2012
 
2011
 
2010
Cash, cash equivalents, and marketable securities
 
$
598,341

 
$
825,480

 
$
1,217,892

 
$
1,139,912

 
$
1,236,927

Inventory
 
$
6,490,321

 
$
4,650,412

 
$
3,732,703

 
$
3,416,723

 
$
3,241,725

Total assets
 
$
8,416,902

 
$
6,827,459

 
$
6,181,044

 
$
5,055,246

 
$
5,171,555

Debt:
 
 
 
 
 
 
 
 
 
 
Loans payable
 
$
654,261

 
$
107,222

 
$
99,817

 
$
106,556

 
$
94,491

Senior debt
 
2,655,044

 
2,321,442

 
2,080,463

 
1,490,972

 
1,544,110

Mortgage company loan facility
 
90,281

 
75,000

 
72,664

 
57,409

 
72,367

Total debt
 
$
3,399,586

 
$
2,503,664

 
$
2,252,944

 
$
1,654,937

 
$
1,710,968

Equity
 
$
3,860,697

 
$
3,339,164

 
$
3,127,871

 
$
2,592,551

 
$
2,559,013

Housing Data
Year ended October 31:
 
2014
 
2013
 
2012
 
2011
 
2010

Closings:
 
 
 
 
 
 
 
 
 
 
 
Number of homes
 
5,397

 
4,184

 
3,286

 
2,611

 
2,642

 
Value (in thousands)
 
$
3,911,602

 
$
2,674,299

 
$
1,882,781

 
$
1,475,881

 
$
1,494,771

 
Net contracts signed:
 
 
 
 
 
 
 
 
 
 
 
Number of homes
 
5,271

 
5,294

 
4,159

 
2,784

 
2,605

 
Value (in thousands)
 
$
3,896,490

 
$
3,633,908

 
$
2,557,917

 
$
1,604,827

 
$
1,472,030

 
At October 31:
 
2014
 
2013
 
2012
 
2011
 
2010
Backlog:
 
 
 
 
 
 
 
 
 
 
Number of homes
 
3,679

 
3,679

 
2,569

 
1,667

 
1,494

Value (in thousands)
 
$
2,719,673

 
$
2,629,466

 
$
1,669,857

 
$
981,052

 
$
852,106

Number of selling communities
 
263

 
232

 
224

 
215

 
195

Home sites:
 
 
 
 
 
 
 
 
 
 
Owned
 
36,243

 
33,967

 
31,327

 
30,199

 
28,891

Controlled
 
10,924

 
14,661

 
9,023

 
7,298

 
5,961

Total
 
47,167

 
48,628

 
40,350

 
37,497

 
34,852


23



ITEM 7. 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 consolidated financial statements and notes thereto included in Item 15(a)1 of this Form 10-K, beginning at page F-1.  It also should be read in conjunction with the disclosure under “Forward-Looking Statements” in Part 1 of this Form 10-K.
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 2015;” “fiscal 2014;” “fiscal 2013;” “fiscal 2012;” “fiscal 2011;” “fiscal 2010;” and “fiscal 2009” refer to our fiscal years ending or ended October 31, 2015; October 31, 2014; October 31, 2013; October 31, 2012; October 31, 2011; and October 31, 2009, respectively.
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.
OVERVIEW
Our Business
We design, build, market, and arrange financing for detached and attached homes in luxury residential communities. We cater to move-up, empty-nester, active-adult, age-qualified, and second-home buyers in the United States (“Traditional Home Building Product”). We also build and sell homes in urban infill markets through Toll Brothers City Living® (“City Living”). At October 31, 2014, we were operating in 19 states. In the five years ended October 31, 2014, we delivered 18,120 homes from 554 communities, including 5,397 homes from 347 communities in fiscal 2014.
We are developing several master planned communities in which we intend to build homes on a portion of the lots and sell the remaining lots to other builders. Two of these master planned communities are being developed 100% by us, and the remaining communities are being developed through joint ventures with other builders or financial partners.
Over the past several years, we have acquired control of a number of land parcels as for-rent apartment projects, including two student housing sites, totaling approximately 4,850 units. These projects, which are located in the metro Boston to metro Washington, D.C. corridor, are being developed or will be developed with partners under the brand names Toll Brothers Apartment Living and Toll Brothers Campus Living. Through Toll Brothers Realty Trust (“Trust”), we also have interests in approximately 1,450 operating apartment units in the Washington, D.C. area and in Princeton Junction, New Jersey.
In February 2014, we acquired the home building business of Shapell Industries, Inc., a Delaware corporation (“Shapell”), for $1.49 billion in cash, net of cash acquired. Prior to the acquisition, Shapell designed, constructed, and marketed single-family detached and attached homes and developed land in master planned communities and neighborhoods throughout coastal Northern and Southern California. See “Acquisition” below for more information.
In fiscal 2010, we formed Gibraltar Capital and Asset Management, LLC (“Gibraltar”) to invest in distressed real estate opportunities. Gibraltar focuses primarily on residential loans and properties, from unimproved land to partially and fully improved developments, as well as commercial opportunities.
We operate our own land development, architectural, engineering, mortgage, title, landscaping, security monitoring, lumber distribution, house component assembly, and manufacturing operations. In addition, in certain markets, we develop land for sale to other builders, often through joint venture structures with other builders or with financial partners. We also develop, own, and operate golf courses and country clubs, which generally are associated with several of our master planned communities.
We have investments in and advances to various unconsolidated entities. We have investments in joint ventures (i) to develop land for the joint venture participants and for sale to outside builders (“Land Development Joint Ventures”); (ii) to develop for-sale homes (“Home Building Joint Ventures”); (iii) to develop luxury for-rent residential apartments, commercial space and a hotel (“Rental Property Joint Ventures”); (iv) to invest in commercial real estate opportunities; and (v) to invest in a portfolio of distressed loans and real estate (“Structured Asset Joint Venture”).
Fiscal 2014 Financial Highlights
In fiscal 2014, we recognized $3.91 billion of revenues and net income of $340.0 million, as compared to $2.67 billion of revenues and net income of $170.6 million in fiscal 2013.
At October 31, 2014, we had $598.3 million of cash, cash equivalents, and marketable securities on hand and approximately $940.2 million available under our $1.035 billion revolving credit facility that matures in August 2018.

24



Acquisition
On February 4, 2014, we completed our acquisition of Shapell pursuant to the Purchase and Sale Agreement (the “Purchase Agreement”) dated November 6, 2013 with Shapell Investment Properties, Inc. (“SIPI”). We acquired all of the equity interests in Shapell from SIPI on February 4, 2014, for $1.49 billion, net of cash acquired (the “Acquisition”). We acquired the single-family residential real property development business of Shapell, including a portfolio of approximately 4,950 home sites in California, some of which we have sold and may continue to sell to other builders. This acquisition provided us with a premier California land portfolio including 11 active selling communities, as of the acquisition date, in affluent, high-growth markets: the San Francisco Bay area, metro Los Angeles, Orange County, and the Carlsbad market. As part of the Acquisition, we assumed contracts to deliver 126 homes with an aggregate value of approximately $105.3 million.
We did not acquire the apartment and commercial rental properties owned and operated by Shapell (the “Shapell Commercial Properties”) or Shapell’s mortgage lending activities relating to their home building operations. Accordingly, the Purchase Agreement provides that SIPI will indemnify us for any loss arising out of or resulting from, among other things, (i) any liability (other than environmental losses, subject to certain exceptions) related to the Shapell Commercial Properties, and (ii) any liability (other than environmental losses, subject to certain exceptions) to the extent related to Shapell Mortgage, Inc.
We financed the Acquisition with a combination of $370.0 million of borrowings under our $1.035 billion revolving credit facility (“Credit Facility”), $485.0 million from a term loan facility, as well as $815.7 million in net proceeds from debt and equity financings completed in November 2013. See Note 6, “Loans Payable, Senior Notes, and Mortgage Company Loan Facility” and Note 9, “Stockholders’ Equity” of our consolidated financial statements for further details.
As a result of the Acquisition, Shapell became our wholly-owned subsidiary. Accordingly, the Shapell results are included in our consolidated financial statements from the date of the Acquisition. For the period from February 4, 2014 to October 31, 2014, revenues and income before income taxes from the Shapell operations, excluding $5.3 million of acquisition costs, were $300.8 million and $37.2 million, respectively.
Our Challenging Business Environment and Current Outlook
We believe that, in fiscal 2012, the housing market began to recover from the significant slowdown that started in the fourth quarter of our fiscal year ended October 31, 2005. During fiscal 2012 and the first nine months of fiscal 2013, we saw a strong recovery in the number and value of new sales contracts signed. The number of net contracts signed in fiscal 2012 and 2013, as compared to fiscal 2011, increased approximately 50% and 90%, respectively, and the value of net contracts signed over the same period increased 59% and 126%, respectively. Although the number and value of fiscal 2012 and 2013 net contracts signed increased over fiscal 2011, they were still significantly below what we recorded in fiscal 2005.
In fiscal 2014, we signed 5,271 contracts with an aggregate value of $3.90 billion, compared to 5,294 contracts with an aggregate value of $3.63 billion in fiscal 2013. Beginning in the fourth quarter of fiscal 2013, we experienced a leveling in demand that continued through the second quarter of fiscal 2014, and was followed by a decline in demand in the third quarter of fiscal 2014. More recently we have seen a strengthening in customer demand. In fiscal 2014’s fourth quarter, net signed contracts of $970.8 million and 1,282 units rose 16% in dollars and 10% in units, compared to fiscal 2013’s fourth-quarter net signed contracts of $839.0 million and 1,163 units. The strength in demand that we saw in the fourth quarter of fiscal 2014 has continued into the first quarter of fiscal 2015. We are optimistic that the recent strengthening in customer demand will continue for the foreseeable future, with demand ultimately growing at more normalized levels. We believe that, as the national unemployment rate continues to decline and consumer confidence improves, pent-up demand for homes will begin to be released.

We believe that the demographics of the move-up, empty-nester, active-adult, age-qualified, and second-home upscale markets will provide us with the potential for growth in the coming decade. According to the U.S. Census Bureau (“Census Bureau”), the number of households earning $100,000 or more (in constant 2013 dollars) at September 2014 stood at 27.6 million, or approximately 23% of all U.S. households. This group has grown at three times the rate of increase of all U.S. households since 1980. According to Harvard University’s June 2014 report, “The State of the Nation’s Housing,” demographic forces are likely to drive the addition of 1.24 million new households per year during the next decade, for a total of between 11.6 and 13.2 million new households formed during the 2015 through 2025 period. Preliminary estimates using the Census Bureau’s 2012 population projections suggest even stronger growth in net new households of 1.28 million per year between now and 2020.

Housing starts, which encompass the units needed for household formations, second homes, and the replacement of obsolete or demolished units, have not kept pace with this projected household growth. According to the Census Bureau’s October 2014 New Residential Sales Report, new home inventory stands at a supply of just 5.6 months, based on current sales paces. If demand and pace increase significantly, the supply of 5.6 months could quickly be drawn down. During the period 1970

25



through 2007, total housing starts in the United States averaged approximately 1.6 million per year, while during the period 2008 through 2013, total housing starts averaged approximately 0.7 million per year according to the Census Bureau.
During the 2006 – 2011 housing market downturn, the pipeline of approved and improved home sites dwindled in many markets as many builders and developers lacked both the capital and the economic incentive to invest in bringing home sites through approvals. We believe that, as demand strengthens, builders and developers with approved land in well-located markets will be poised to benefit. We believe that this will be particularly true for us because much of our land portfolio is in the Washington, D.C. to Boston corridor and in California where land is relatively scarce and approvals are more difficult to obtain.
We continue to believe that many of our communities are in desirable locations that are difficult to replace and in markets where approvals have been increasingly difficult to achieve. We believe that many of these communities have substantial embedded value that may be realized in the future as the housing recovery strengthens.
Competitive Landscape
The home building business is highly competitive and fragmented. We compete with numerous home builders of varying sizes, ranging from local to national in scope, some of which have greater sales and financial resources than we do. Sales of existing homes, whether by a homeowner or by a financial institution that has acquired a home through a foreclosure, also provide competition. We compete primarily on the basis of price, location, design, quality, service, and reputation. We also believe our financial stability, relative to many others in our industry, is a favorable competitive factor as more home buyers focus on builder solvency.
Since the 2006 – 2011 downturn in the housing market, we have seen a decline in competition from the small and mid-sized private builders that had been our primary competitors in the luxury market prior to the downturn. We believe that many of these builders are no longer in business and that access to capital by the remaining private builders continues to be severely constrained. There are fewer and more selective lenders serving our industry as compared to prior years and we believe that these lenders gravitate to the home building companies that offer them the greatest security, the strongest balance sheets, and the broadest array of potential business opportunities. While some builders may re-emerge with new capital, the scarcity of attractive land is a further impediment to their re-emergence. We believe that reduced competition, combined with attractive long-term demographics will reward those well-capitalized builders that have persevered through the 2006 – 2011 downturn.
We believe that geographic and product diversification, access to lower-cost capital, and strong demographics benefit those builders, like us, who can control land and efficiently navigate through the increasingly difficult regulatory approval process. We believe that these factors favor the large publicly traded home building companies with the capital and expertise to control home sites and gain market share. We also believe that during the 2006 – 2011 downturn in the housing market, many builders and land developers reduced the number of home sites that were taken through the approval process. The approval process continues to be difficult and lengthy, and the political pressure from no-growth proponents continues to increase; we believe our expertise in taking land through the approval process and our already-approved land positions will allow us to grow in the years to come as market conditions continue to improve.
Land Acquisition and Development
Based on our experience during prior downturns in the housing industry, we believe that attractive land acquisition opportunities arise in difficult times for those builders that have the financial strength to take advantage of them. In the current environment, we believe our strong balance sheet, liquidity, access to capital, broad geographic presence, diversified product line, experienced personnel, and national brand name all position us well for such opportunities now and in the future.
Our business is subject to many risks, because of the extended length of time that it takes to obtain the necessary approvals on a property, complete the land improvements on it, and deliver a home after a home buyer signs an agreement of sale. In certain cases, we attempt to reduce some of these risks by utilizing one or more of the following methods: controlling land for future development through options (also referred to herein as “land purchase contracts” or “option and purchase agreements”). These options enable us to obtain the necessary governmental approvals to be obtained before acquiring title to the land; generally commencing construction of a detached home only after executing an agreement of sale and receiving a substantial down payment from the buyer; and using subcontractors to perform home construction and land development work on a fixed-price basis.
In response to market conditions during the 2006 – 2011 downturn in the housing industry, we reevaluated and renegotiated or canceled many of our land purchase contracts. In addition, we sold, and may continue to sell, certain parcels of land that we identified as nonstrategic. As a result, we reduced our home sites controlled from a high of approximately 91,200 at April 30, 2006, to approximately 47,167 at October 31, 2014.

26



Based on our belief that the housing market has begun to recover, and the revival of demand in certain areas, we have been increasing our land positions. In many situations, the opportunity to buy land as the housing market emerged from the downturn necessitated the outright purchase of the land due to the distressed nature of the seller. Our optioned land as a percentage of land controlled has declined from our historical averages as a result of our cancellation of many land purchase contracts during the downturn, the need for distressed sellers to liquidate their land positions, and our purchase of Shapell in February 2014.
During fiscal 2014 and 2013, we acquired control of approximately 3,936 home sites (net of options terminated and home sites sold) and, approximately 12,462 home sites (net of options terminated and home sites sold), respectively. At October 31, 2014, we controlled approximately 47,167 home sites, as compared to approximately 48,628 home sites at October 31, 2013, and 40,350 home sites at October 31, 2012. In addition, at October 31, 2014, we expect to purchase approximately 3,300 additional home sites from several land development joint ventures in which we have an interest. Included in the 3,936 home sites that we acquired control of in fiscal 2014 are approximately 4,400 home sites we acquired from Shapell. See “Overview - Acquisition” in this MD&A for more information about the Shapell acquisition.
Of the approximately 47,167 total home sites that we owned or controlled through options at October 31, 2014, we owned approximately 36,224 and controlled approximately 10,943 through options. Of the 47,167 home sites, approximately 14,947 were substantially improved.
At October 31, 2014, we were selling from 263 communities, compared to 232 communities at October 31, 2013, and 224 communities at October 31, 2012. We expect to be selling from 270 to 310 communities by October 31, 2015.
Customer Mortgage Financing
We maintain relationships with a widely diversified group of mortgage financial institutions, many of which are among the largest in the industry. We believe that regional and community banks continue to recognize the long-term value in creating relationships with high-quality, affluent customers such as our home buyers, and these banks continue to provide such customers with financing.
We believe that our home buyers generally are, and should continue to be, better able to secure mortgages due to their typically lower loan-to-value ratios and attractive credit profiles, as compared to the average home buyer. Nevertheless, in recent years, tightened credit standards have shrunk the pool of potential home buyers and hindered accessibility of or eliminated certain loan products previously available to our home buyers. Our home buyers continue to face stricter mortgage underwriting guidelines, higher down payment requirements, and narrower appraisal guidelines than in the past. In addition, some of our home buyers continue to find it more difficult to sell their existing homes as prospective buyers of their homes may face difficulties obtaining a mortgage. In addition, other potential buyers may have little or negative equity in their existing homes and may not be able or willing to purchase a larger or more expensive home.
While the range of mortgage products available to a potential home buyer is more limited than it was in the period 2005 through 2007, we have seen an expansion in available mortgage product over the past several years. Indications from industry participants, including commercial banks, mortgage banks, mortgage real estate investment trusts, and mortgage insurance companies, are that availability, parameters, and pricing of loans exceeding the conforming and conforming high-balance loan limits (“jumbo loans”) are improving. We believe any such improvements would likely serve to enhance financing alternatives for existing buyers qualifying for jumbo loans, and also help to offset the reduction in Fannie Mae/Freddie Mac-eligible loan amounts in some markets. Based on the mortgages provided by our mortgage subsidiary, we do not expect the change in the Fannie Mae/Freddie Mac-eligible loan amounts to have a significant impact on our business.
The Dodd-Frank Wall Street Reform and Consumer Protection Act provides for a number of new requirements relating to residential mortgage lending practices. These include, among others, minimum standards for mortgages and related lender practices, the definitions and parameters of a qualified mortgage and a qualified residential mortgage, future risk retention requirements, limitations on certain fees, prohibition of certain tying arrangements, and remedies for borrowers in foreclosure proceedings in the event that a lender violates fee limitations or minimum standards. We do not believe that the effect of these requirements on our mortgage subsidiary will be significant, although it will restrict us from providing a comprehensive package of services to our home buyers due to fee restrictions imposed upon our home buyers as to what they are permitted to pay to our affiliated businesses.

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Toll Brothers Apartment Living/Toll Brothers Campus Living
Over the past several years, we have acquired control of a number of land parcels as for-rent apartment projects, including two student housing sites. At October 31, 2014, we controlled a number of land parcels as for-rent apartment projects containing approximately 4,850 units. These projects, which are located in the metro Boston to metro Washington, D.C. corridor, are being developed or will be developed with partners and marketed under the Toll Brothers Apartment Living and Toll Brothers Campus Living brand names. A number of these sites had been acquired by us as part of a larger purchase or were originally acquired to be developed as for-sale homes. Of the 4,850 planned units at October 31, 2014, 1,900 are owned by joint ventures in which we have an interest, and are currently under construction; approximately 1,800 are owned by us; 800 of them are under contract to be purchased; and 350 of them are under letters of intent.
Toll Brothers Realty Trust and Toll Brothers Realty Trust II
Through the Trust, we also have interests in approximately 1,450 operating apartment units in the Washington, D.C. area and in Princeton Junction, New Jersey. In the second quarter of fiscal 2014, the Trust refinanced the mortgage on one of its properties and distributed $36.0 million of the net proceeds from the refinancing to its partners. We received $12.0 million as our share of the proceeds and recognized this distribution as income in the second quarter of fiscal 2014. This income is included in “Income from unconsolidated entities” in our Consolidated Statements of Operations and Comprehensive Income in this Form 10-K.
We have a 50% interest in Toll Brothers Realty Trust II (“Trust II”), which invests in commercial real estate opportunities. In fiscal 2014, Trust II sold substantially all of its assets to an unrelated party. As a result of this sale, we realized a profit of approximately $24.1 million representing our share of the gain on the sale; this gain is included in “Income from unconsolidated entities” in our in our Consolidated Statements of Operations and Comprehensive Income in this Form 10-K. In addition, we recognized $2.9 million of previously deferred gains on our initial sales of the properties to Trust II. This gain was included in “Other income - net” in our Consolidated Statements of Operations and Comprehensive Income in this Form 10-K.
Gibraltar
We continue to look for distressed real estate opportunities through Gibraltar. Gibraltar continues to selectively review new opportunities, including bank portfolios and other distressed real estate investments.
In fiscal 2013, Gibraltar acquired four loans directly and invested in a loan participation for an aggregate purchase price of approximately $26.0 million. The loans are secured by retail shopping centers, residential land, and golf courses located in seven states.
At October 31, 2014, Gibraltar had investments in distressed loans of approximately $4.0 million, investments in foreclosed real estate of $69.8 million, and an investment in a structured asset joint venture of $20.0 million. In fiscal 2014, 2013, and 2012, we recognized income, including equity in the earnings from our investment in a structured asset joint venture, of $16.3 million, $15.9 million and $7.2 million from the Gibraltar operations, respectively.
CONTRACTS AND BACKLOG
The aggregate value of net sales contracts signed increased 7.2% in fiscal 2014, as compared to fiscal 2013, and 42.1% in fiscal 2013, as compared to fiscal 2012. The value of net sales contracts signed was $3.90 billion (5,271 homes) in fiscal 2014, $3.63 billion (5,294 homes) in fiscal 2013, and $2.56 billion (4,159 homes) in fiscal 2012.
The increase in the aggregate value of net contracts signed in fiscal 2014, as compared to fiscal 2013, was the result of an increase in the average value of each contract signed, offset, in part, by a slight decline in the number of net contracts signed. The increase in the average value of each contract signed in fiscal 2014, as compared to fiscal 2013, was due primarily to a change in mix of contracts signed to more expensive areas and/or higher priced products.
In fiscal 2014, we signed 328 contracts at communities we acquired from Shapell. Excluding the net contracts signed at the communities acquired in the Acquisition, net contracts signed declined 6.6% in fiscal 2014 as compared to fiscal 2013. The decline in units was due to an overall softening of demand in fiscal 2014. Beginning in the fourth quarter of fiscal 2013, we experienced a leveling in demand that continued through the second quarter of fiscal 2014, declined in the third quarter of fiscal 2014 and strengthened in the fourth quarter of fiscal 2014. Fiscal 2014’s fourth-quarter, net signed contracts of 1,282 units rose 10%, compared to fiscal 2013’s fourth-quarter net signed contracts of 1,163 units. The strength in demand that we saw in the fourth quarter of fiscal 2014 has continued into the first quarter of fiscal 2015.
The increase in the number of net contracts signed in fiscal 2013, as compared to fiscal 2012, was primarily due to the continued recovery in the U.S. housing market in fiscal 2013 and the reduced competition from the small and mid-sized private builders that had been our primary competitors in the luxury market. The increase in the average value of each contract signed

28



in fiscal 2013, as compared to fiscal 2012, was due primarily to a change in mix of contracts signed to more expensive areas, higher priced products, increased prices, and reduced incentives given on new contracts signed.
Backlog consists of homes under contract but not yet delivered to our home buyers (“backlog”). The value of our backlog at October 31, 2014, 2013, and 2012 was $2.72 billion (3,679 homes), $2.63 billion (3,679 homes), and $1.67 billion (2,569 homes), respectively. Approximately 98% of the homes in backlog at October 31, 2014 are scheduled to be delivered by October 31, 2015. The 3.4% increase in the value of homes in backlog at October 31, 2014, as compared to October 31, 2013, was due to the higher backlog at the beginning of fiscal 2014, as compared to the beginning of fiscal 2013, an increase in the value of net contracts signed in fiscal 2014, as compared to fiscal 2013, and backlog acquired in the Shapell acquisition, offset, in part, by the increase in the aggregate value of our deliveries in fiscal 2014, as compared to the aggregate value of deliveries in fiscal 2013.
The 57.5% and 43.2% increase in the value and number of homes in backlog at October 31, 2013, as compared to October 31, 2012, was due to the increase in the number and the average value of net contracts signed in fiscal 2013, as compared to fiscal 2012, offset, in part, by the increase in the aggregate value and number of our deliveries in fiscal 2013, as compared to the aggregate value and number of deliveries in fiscal 2012.
For more information regarding revenues, net contracts signed, and backlog by geographic segment, see “Segments” in this MD&A.
CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements.
Inventory
Inventory is stated at cost unless an impairment exists, in which case it is written down to fair value in accordance with U.S. generally accepted accounting principles (“GAAP”). In addition to direct land acquisition, land development, and home construction costs, costs also include interest, real estate taxes, and direct overhead related to development and construction, which are capitalized to inventory during periods beginning with the commencement of development and ending with the completion of construction. For those communities that have been temporarily closed, no additional capitalized interest is allocated to the community’s inventory until it reopens, and other carrying costs are expensed as incurred. Once a parcel of land has been approved for development and we open the community, it can typically take four or more years to fully develop, sell, and deliver all the homes in that community. Longer or shorter time periods are possible depending on the number of home sites in a community and the sales and delivery pace of the homes in a community. Our master planned communities, consisting of several smaller communities, may take up to 10 years or more to complete. Because our inventory is considered a long-lived asset under GAAP, we are required to regularly review the carrying value of each of our communities and write down the value of those communities when we believe the values are not recoverable.
Operating Communities: When the profitability of an operating community deteriorates, the sales pace declines significantly, or some other factor indicates a possible impairment in the recoverability of the asset, the asset is reviewed for impairment by comparing the estimated future undiscounted cash flow for the community to its carrying value. If the estimated future undiscounted cash flow is less than the community’s carrying value, the carrying value is written down to its estimated fair value. Estimated fair value is primarily determined by discounting the estimated future cash flow of each community. The impairment is charged to cost of revenues in the period in which the impairment is determined. In estimating the future undiscounted cash flow of a community, we use various estimates such as (i) the expected sales pace in a community, based upon general economic conditions that will have a short-term or long-term impact on the market in which the community is located and on competition within the market, including the number of home sites available and pricing and incentives being offered in other communities owned by us or by other builders; (ii) the expected sales prices and sales incentives to be offered in a community; (iii) costs expended to date and expected to be incurred in the future, including, but not limited to, land and land development costs, home construction costs, interest costs, and overhead costs; (iv) alternative product offerings that may be offered in a community that will have an impact on sales pace, sales price, building cost, or the number of homes that can be built in a particular community; and (v) alternative uses for the property, such as the possibility of a sale of the entire community to another builder or the sale of individual home sites.
Future Communities: We evaluate all land held for future communities or future sections of operating communities, whether owned or optioned, to determine whether or not we expect to proceed with the development of the land as originally contemplated. This evaluation encompasses the same types of estimates used for operating communities described above, as well as an evaluation of the regulatory environment in which the land is located and the estimated probability of obtaining the necessary approvals, the estimated time and cost it will take to obtain those approvals, and the possible concessions that will be required to be given in order to obtain them. Concessions may include cash payments to fund improvements to public places

29



such as parks and streets, dedication of a portion of the property for use by the public or as open space, or a reduction in the density or size of the homes to be built. Based upon this review, we decide (i) as to land under contract to be purchased, whether the contract will likely be terminated or renegotiated, and (ii) as to land we own, whether the land will likely be developed as contemplated or in an alternative manner, or should be sold. We then further determine whether costs that have been capitalized to the community are recoverable or should be written off. The write-off is charged to cost of revenues in the period in which the need for the write-off is determined.
The estimates used in the determination of the estimated cash flows and fair value of both current and future communities are based on factors known to us at the time such estimates are made and our expectations of future operations and economic conditions. Should the estimates or expectations used in determining estimated fair value deteriorate in the future, we may be required to recognize additional impairment charges and write-offs related to current and future communities.
We provided for inventory impairment charges and the expensing of costs that we believed not to be recoverable in each of the three fiscal years ended October 31, 2014, 2013, and 2012, as shown in the table below (amounts in thousands):
 
2014
 
2013
 
2012
Land controlled for future communities
$
3,123

 
$
1,183

 
$
451

Land owned for future communities


 


 
1,218

Operating communities
17,555

 
3,340

 
13,070

 
$
20,678

 
$
4,523

 
$
14,739

The table below provides, for the periods indicated, the number of operating communities that we reviewed for potential impairment, the number of operating communities in which we recognized impairment charges, the amount of impairment charges recognized, and, as of the end of the period indicated, the fair value of those communities, net of impairment charges
($ amounts in thousands):
 
 
 
 
Impaired operating communities
Three months ended:
 
Number of
communities tested
 
Number of communities
 
Fair value of
communities,
net of
impairment charges
 
Impairment charges
Fiscal 2014:
 
 
 
 
 
 
 
 
January 31
 
67
 
1
 
$
7,131

 
$
1,300

April 30
 
65
 
2
 
$
6,211

 
1,600

July 31
 
63
 
1
 
$
14,122

 
4,800

October 31
 
55
 
7
 
$
38,473

 
9,855

 
 
 
 
 
 
 
 
$
17,555

Fiscal 2013:
 
 
 
 
 
 
 
 
January 31
 
60
 
2
 
$
5,377

 
$
700

April 30
 
79
 
1
 
$
749

 
340

July 31
 
76
 
1
 
$
191

 
100

October 31
 
63
 
2
 
$
6,798

 
2,200

 
 
 
 
 
 
 
 
$
3,340

Fiscal 2012:
 
 
 
 
 
 
 
 
January 31
 
113
 
8
 
$
49,758

 
$
6,425

April 30
 
115
 
2
 
$
22,962

 
2,560

July 31
 
115
 
4
 
$
6,609

 
2,685

October 31
 
108
 
3
 
$
9,319

 
1,400

 
 
 
 
 
 
 
 
$
13,070


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Income Taxes — Valuation Allowance
Significant judgment is applied in assessing the realizability of deferred tax assets. In accordance with GAAP, a valuation allowance is established against a deferred tax asset if, based on the available evidence, it is more likely than not that such asset will not be realized. The realization of a deferred tax asset ultimately depends on the existence of sufficient taxable income in either the carryback or carryforward periods under tax law. We assess the need for valuation allowances for deferred tax assets based on GAAP’s “more-likely-than-not” realization threshold criteria. In our assessment, appropriate consideration is given to all positive and negative evidence related to the realization of the deferred tax assets. Forming a conclusion that a valuation allowance is not needed is difficult when there is significant negative evidence such as cumulative losses in recent years. This assessment considers, among other matters, the nature, consistency, and magnitude of current and cumulative income and losses, forecasts of future profitability, the duration of statutory carryback or carryforward periods, our experience with operating loss and tax credit carryforwards being used before expiration, and tax planning alternatives.
Our assessment of the need for a valuation allowance on our deferred tax assets includes assessing the likely future tax consequences of events that have been recognized in our consolidated financial statements or tax returns. Changes in existing tax laws or rates could affect our actual tax results, and our future business results may affect the amount of our deferred tax liabilities or the valuation of our deferred tax assets over time. Our accounting for deferred tax assets represents our best estimate of future events.
Due to uncertainties in the estimation process, particularly with respect to changes in facts and circumstances in future reporting periods (carryforward period assumptions), actual results could differ from the estimates used in our analysis. Our assumptions require significant judgment because the residential home building industry is cyclical and is highly sensitive to changes in economic conditions. If our results of operations are less than projected and there is insufficient objectively verifiable positive evidence to support the more-likely-than-not realization of our deferred tax assets, a valuation allowance would be required to reduce or eliminate our deferred tax assets.
Our deferred tax assets consist principally of the recognition of losses primarily driven by inventory impairments and impairments of investments in and advances to unconsolidated entities. In accordance with GAAP, we assess whether a valuation allowance should be established based on our determination of whether it was more likely than not that some portion or all of the deferred tax assets would not be realized. In fiscal 2009, we recorded valuation allowances against substantially all of our deferred tax assets. We believed that the continued downturn in the housing market, the uncertainty as to its length and magnitude, our continued recognition of impairment charges, and our recent operating losses were significant negative evidence of the need for a valuation allowance against our deferred tax assets.
We file tax returns in the various states in which we do business. Each state has its own statutes regarding the use of tax loss carryforwards. Some of the states in which we do business do not allow for the carryforward of losses, while others allow for carryforwards for five years to 20 years.
At October 31, 2012, we re-evaluated the evidence related to the need for our deferred tax asset valuation allowances and determined that the valuation allowances on our federal deferred tax assets and certain state deferred tax assets were no longer needed because of sufficient positive objective evidence. That evidence principally consisted of (i) an indication that the events and conditions that gave rise to significant reported losses in recent years were unlikely to recur in the foreseeable future, (ii) a return to profitability in 2012, (iii) strong backlog evidencing that profitability would likely increase in 2013, and (iv) long net operating loss carryforward periods that provided evidence that, even without significant growth, these deferred tax assets would more likely than not be realized.
Based on this re-evaluation, we reversed $394.7 million of federal and state deferred tax asset valuation allowances in fiscal 2012. In fiscal 2014 and 2013, we continued to re-evaluate our need for a state deferred tax asset valuation allowance and updated our fiscal 2012 analysis. Based upon our operating results in fiscal 2014 and 2013, we reversed an additional $13.3 million and $4.6 million of state deferred tax asset valuation allowances in fiscal 2014 and 2013, respectively.
Revenue and Cost Recognition
The construction time of our homes is generally less than one year from when construction of the home begins, although some homes may take more than one year to complete. Revenues and cost of revenues from these home sales are recorded at the time each home is delivered and title and possession are transferred to the buyer.
For our standard attached and detached homes, land, land development, and related costs, both incurred and estimated to be incurred in the future, are amortized to the cost of homes closed based upon the total number of homes to be constructed in each community. Any changes resulting from a change in the estimated number of homes to be constructed or in the estimated costs subsequent to the commencement of delivery of homes are allocated to the remaining undelivered homes in the community. Home construction and related costs are charged to the cost of homes closed under the specific identification

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method. For our master planned communities, the estimated land, common area development, and related costs, including the cost of golf courses, net of their estimated residual value, are allocated to individual communities within a master planned community on a relative sales value basis. Any changes resulting from a change in the estimated number of homes to be constructed or in the estimated costs are allocated to the remaining home sites in each of the communities of the master planned community.
For high-rise/mid-rise projects, land, land development, construction, and related costs, both incurred and estimated to be incurred in the future, are generally amortized to the cost of units closed based upon an estimated relative sales value of the units closed to the total estimated sales value. Any changes resulting from a change in the estimated total costs or revenues of the project are allocated to the remaining units to be delivered.
Forfeited customer deposits: Forfeited customer deposits are recognized in other income-net in our Consolidated Statements of Operations and Comprehensive Income in the period in which we determine that the customer will not complete the purchase of the home and we have the right to retain the deposit.
Sales Incentives: In order to promote sales of our homes, we grant our home buyers sales incentives from time-to-time. These incentives will vary by type of incentive and by amount on a community-by-community and home-by-home basis. Incentives that impact the value of the home or the sales price paid, such as special or additional options, are generally reflected as a reduction in sales revenues. Incentives that we pay to an outside party, such as paying some or all of a home buyer’s closing costs, are recorded as an additional cost of revenues. Incentives are recognized at the time the home is delivered to the home buyer and we receive the sales proceeds.
Warranty and Self-Insurance
Warranty: We provide all of our home buyers with a limited warranty as to workmanship and mechanical equipment. We also provide many of our home buyers with a limited ten-year warranty as to structural integrity. We accrue for expected warranty costs at the time each home is closed and title and possession are transferred to the home buyer. Warranty costs are accrued based upon historical experience. Adjustments to our warranty liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs.
Self-Insurance: We maintain, and require the majority of our subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our home building activities, subject to certain self-insured retentions, deductibles and other coverage limits (“self-insured liability”). We also provide general liability insurance for our subcontractors in Arizona, California, Nevada and Washington, where eligible subcontractors are enrolled as insureds under our general liability insurance policies in each community in which they perform work. For those enrolled subcontractors, we absorb their general liability associated with the work performed on our homes within the applicable community as part of our overall general liability insurance and our self-insurance through our captive insurance subsidiary.
We record expenses and liabilities based on the estimated costs required to cover our self-insured liability and the estimated costs of potential claims and claim adjustment expenses that are above our coverage limits or that are not covered by our insurance policies. These estimated costs are based on an analysis of our historical claims and industry data, and include an estimate of claims incurred but not yet reported (“IBNR”).
We engage a third-party actuary that uses our historical claim and expense data, input from our internal legal and risk management groups, as well as industry data, to estimate our liabilities related to unpaid claims, IBNR associated with the risks that we are assuming for our self-insured liability and other required costs to administer current and expected claims. These estimates are subject to uncertainty due to a variety of factors, the most significant being the long period of time between the delivery of a home to a home buyer and when a structural warranty or construction defect claim is made, and the ultimate resolution of the claim. Though state regulations vary, construction defect claims are reported and resolved over a prolonged period of time, which can extend for 10 years or longer. As a result, the majority of the estimated liability relates to IBNR. Adjustments to our liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs.
The projection of losses related to these liabilities requires actuarial assumptions that are subject to variability due to uncertainties regarding construction defect claims relative to our markets and the types of product we build, insurance industry practices and legal or regulatory actions and/or interpretations, among other factors. Key assumptions used in these estimates include claim frequencies, severities and settlement patterns, which can occur over an extended period of time. In addition, changes in the frequency and severity of reported claims and the estimates to settle claims can impact the trends and assumptions used in the actuarial analysis, which could be material to our consolidated financial statements. Due to the degree

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of judgment required, the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated, and the difference could be material to our consolidated financial statements.
OFF-BALANCE SHEET ARRANGEMENTS
We have investments in and advances to various unconsolidated entities. We have investments in joint ventures (i) to develop land for the joint venture participants and for sale to outside builders (“Land Development Joint Ventures”); (ii) to develop for-sale homes (“Home Building Joint Ventures”); (iii) to develop luxury for-rent residential apartments, commercial space and a hotel (“Rental Property Joint Ventures”); (iv) to invest in commercial real estate opportunities (Trust and Trust II); and (v) to invest in a portfolio of distressed loans and real estate (“Structured Asset Joint Venture”).
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 venture. 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, but reduce our cost basis in the home sites by our share of the earnings from those home sites.
At October 31, 2014, we had investments in and advances to these entities of $447.1 million, and were committed to invest or advance up to an additional $84.5 million to these entities if they require additional funding. At October 31, 2014, we had purchase commitments or understandings to acquire 573 home sites from three of these Land Development Joint Ventures for an estimated aggregate purchase price of $184.3 million. In addition, we expect to purchase approximately 3,300 additional home sites from several joint ventures in which we have interests; the purchase price of these home sites will be determined at a future date.
Under the terms of our joint venture agreement to develop a high-rise luxury for-sale/rental project in the metro New York market, upon completion of the construction of the building, we will acquire ownership of the top 18 floors of the building to sell, for our own account, luxury condominium units and our partner will receive ownership of the lower floors containing residential rental units and retail space. We expect to receive title to our floors during the first half of fiscal 2015. At the time of transfer, our investment in this joint venture will be transferred to inventory. At October 31, 2014 our investment in this joint venture was $130.8 million.
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 which may include any, or all, of the following: (i) project completion including any cost overruns, in whole or in part; (ii) repayment guarantees, generally covering a percentage of the outstanding loan; (iii) indemnification of the lender from environmental matters of the unconsolidated entity; (iv) a hazardous material indemnity that holds the lender harmless against any obligations for which the lender may incur liability resulting from the threat or presence of any hazardous or toxic substances at or near the property covered by a loan; 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 October 31, 2014, 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 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 October 31, 2014, the unconsolidated entities that have guarantees related to debt had loan commitments aggregating $599.2 million and had borrowed an aggregate of $219.0 million. We estimate that our maximum potential exposure under these guarantees, if the full amount of the loan commitments were borrowed, would be $599.2 million before any reimbursement from our partners. Based on the amounts borrowed at October 31, 2014, our maximum potential exposure under these guarantees is estimated to be $219.0 million before any reimbursement from our partners.
In addition, we have guaranteed approximately $11.2 million of ground lease payments and insurance deductibles for three joint ventures.
For more information regarding these joint ventures, see Note 4, “Investments in and Advances to Unconsolidated Entities” in the Notes to Consolidated Financial Statements in this Form 10-K.
The trends, uncertainties or other factors that negatively impact our business and the industry in general also impacted the unconsolidated entities in which we have investments. We review each of our investments on a quarterly basis for indicators of

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impairment. A series of operating losses of an investee, the inability to recover our invested capital, or other factors may indicate that a loss in value of our investment in the unconsolidated entity has occurred. If a loss exists, we further review to determine if the loss is other than temporary, in which case we write down the investment to its fair value. The evaluation of our investment in unconsolidated entities entails a detailed cash flow analysis using many estimates including but not limited to expected sales pace, expected sales prices, expected incentives, costs incurred and anticipated, sufficiency of financing and capital, competition, market conditions and anticipated cash receipts, in order to determine projected future distributions. Each of the unconsolidated entities evaluates its inventory in a similar manner. See “Critical Accounting Policies - Inventory” contained in this MD&A for more detailed disclosure on our evaluation of inventory. If a valuation adjustment is recorded by an unconsolidated entity related to its assets, our proportionate share is reflected in income (loss) from unconsolidated entities with a corresponding decrease to our investment in unconsolidated entities. Based upon our evaluation of the fair value of our investments in unconsolidated entities, we determined that no impairments of our investments occurred in fiscal 2014, 2013 and 2012.
RESULTS OF OPERATIONS
The following table compares certain items in our Consolidated Statements of Operations and Comprehensive Income for fiscal 2014, 2013, and 2012 ($ amounts in millions):
 
2014
 
2013
 
2012
 
$
 
%
 
$
 
%
 
$
 
%
Revenues
3,911.6

 
 
 
2,674.3

 
 
 
1,882.8

 
 
Cost of revenues
3,081.8

 
78.8
 
2,133.3

 
79.8
 
1,532.1

 
81.4
Selling, general and administrative
432.5

 
11.1
 
339.9

 
12.7
 
287.3

 
15.3
 
3,514.4

 
89.8
 
2,473.2

 
92.5
 
1,819.4

 
96.6
Income from operations
397.2

 
 
 
201.1

 
 
 
63.4

 
 
Other:
 
 
 
 
 
 
 
 
 
 
 
Income from unconsolidated entities
41.1

 
 
 
14.4

 
 
 
23.6

 
 
Other income - net
66.2

 
 
 
52.2

 
 
 
25.9

 
 
Income before income taxes
504.6

 
 
 
267.7

 
 
 
112.9

 
 
Income tax provision (benefit) (a)
164.6

 
 
 
97.1

 
 
 
(374.2
)
 
 
Net income
340.0

 
 
 
170.6

 
 
 
487.1

 
 
Note: Amounts may not add due to rounding.
(a)
In fiscal 2012, we recognized a reversal of $394.7 million of federal and state deferred tax asset valuation allowances. See “Critical Accounting Policies - Income Taxes - Valuation Allowance” in this MD&A for information regarding the reversal of valuation allowances against our net deferred tax assets.
FISCAL 2014 COMPARED TO FISCAL 2013
REVENUES AND COST OF REVENUES
Revenues in fiscal 2014 were higher than those for fiscal 2013 by approximately $1.24 billion, or 46.3%. This increase was attributable to a 29.0% increase in the number of homes delivered and a 13.4% increase in the average price of the homes delivered. In fiscal 2014, we delivered 5,397 homes with a value of $3.91 billion, as compared to 4,184 homes in fiscal 2013 with a value of $2.67 billion. The increase in the number of homes delivered in fiscal 2014, as compared to fiscal 2013, was primarily due to the 43.2% higher number of homes in backlog at the beginning of fiscal 2014, as compared to the beginning of fiscal 2013, and the backlog of homes acquired from Shapell in February 2014. The increase in the average price of homes delivered in fiscal 2014, as compared to fiscal 2013, was primarily attributable to a shift in the number of homes delivered to more expensive areas and/or products in fiscal 2014.
Cost of revenues as a percentage of revenues was 78.8% in fiscal 2014, as compared to 79.8% in fiscal 2013. We recognized inventory impairment charges and write-offs of $20.7 million and $32.0 million in charges related to warranty and litigation in fiscal 2014 (See Note 7,Accrued Expenses”, in the Notes to the Consolidated Financial Statements for more information on the warranty and litigation related charges). In fiscal 2013, we recognized inventory impairment charges and write-offs of $4.5 million. Cost of revenues as a percentage of revenues, excluding impairments and charges related to warranty and litigation, was 77.4% of revenues in fiscal 2014, as compared to 79.6% in fiscal 2013. The decrease in cost of revenues as a percentage of revenues, excluding inventory impairment charges and charges related warranty and litigation, in fiscal 2014, as compared to fiscal 2013, was due primarily to lower cost of land, construction and interest costs in fiscal 2014, as compared to fiscal 2013; offset, in part, by the impact on costs in fiscal 2014 from the application of purchase accounting on the homes delivered from

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the Acquisition. The lower cost of revenues as a percentage of revenues was the result of price increases in the October 31, 2013 backlog that exceeded cost increases on the homes delivered, and a change in product mix to higher margin communities.
Interest cost in fiscal 2014 was $137.5 million or 3.5% of revenues, as compared to $112.3 million or 4.2% of revenues in fiscal 2013.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (“SG&A”)
SG&A increased by $92.6 million in fiscal 2014, as compared to fiscal 2013. As a percentage of revenues, SG&A was 11.1% in fiscal 2014, as compared to 12.7% in fiscal 2013. The amounts for fiscal 2014 and 2013 include $6.1 million and $1.4 million of expenses incurred in connection with the Acquisition, respectively. The decline in SG&A, excluding the acquisition costs, as a percentage of revenues, was due to SG&A spending increasing by 25.4% while revenues increased 46.3%. The dollar increase in SG&A costs, excluding the acquisition costs, was due primarily to increased compensation costs due to our increased number of employees and higher sales commissions, increased sales and marketing costs, and increased insurance costs. The higher sales commissions and a portion of the increased marketing costs were the result of the increase in the number of homes delivered and the increased sales revenues in fiscal 2014 over fiscal 2013.
INCOME FROM UNCONSOLIDATED ENTITIES
We are a participant in several unconsolidated entities. We recognize our proportionate share of the earnings and losses from these entities. Many of our unconsolidated entities are land development projects or high-rise/mid-rise condominium construction projects and do not generate revenues and earnings for a number of years during the development of the property. Once development is complete, 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. Because there is not a steady flow of revenues and earnings from these entities, the earnings recognized from these entities will vary significantly from quarter to quarter and year to year.
In fiscal 2014, we recognized $41.1 million of income from unconsolidated entities, as compared to $14.4 million in fiscal 2013. The $26.7 million increase in income from unconsolidated entities in fiscal 2014, as compared to fiscal 2013, was due primarily to our recognition of a $23.5 million gain, representing our share of the gain on the sale by Trust II of substantially all of its assets to an unrelated party in December 2013, a $12.0 million distribution from the Trust in April 2014 due to the refinancing of one of the Trust’s apartment complexes, and an increase in income from one of our home building joint ventures due to increased activity in fiscal 2014 as compared to fiscal 2013. These increases were offset, in part, by lower income realized from Gibraltar’s Structured Asset Joint Venture, lower income from our land development joint ventures due to decreased activity from these joint ventures in fiscal 2014 as compared to fiscal 2013, and a settlement of litigation at one of our unconsolidated entities resulting in a charge to our earnings of $2.6 million in the fourth quarter of fiscal 2014.
OTHER INCOME - NET
Other income - net includes the gains and losses from our ancillary businesses, income from Gibraltar, interest income, management fee income, retained customer deposits, income/losses on land sales, and other miscellaneous items.
In fiscal 2014 and 2013, other income - net was $66.2 million and $52.2 million, respectively. Fiscal 2013 other income-net includes $13.2 million of income from the previously disclosed settlement of derivative litigation. Excluding these settlement proceeds, the increase in other income - net in fiscal 2014, as compared to fiscal 2013, was due to a $21.1 million increase in earnings from land sales, a $4.2 million increase in income from our Gibraltar operations, and a $4.4 million increase in management fee income in fiscal 2014, as compared to fiscal 2013. These increases were offset, in part, by lower interest income and miscellaneous income in the fiscal 2014 period, as compared to fiscal 2013. The increase in income from land sales was due to our sale of land to reduce land concentration and outstanding borrowings as a result of the Acquisition. The increase in management fee income is the result of the increase in activity in the various joint ventures in which we have investments.
INCOME BEFORE INCOME TAXES
In fiscal 2014, we reported income before income taxes of $504.6 million, as compared to $267.7 million in fiscal 2013.
INCOME TAX PROVISION (BENEFIT)
We recognized a $164.6 million income tax provision in fiscal 2014. The tax provision in fiscal 2014 included the reversal of $13.3 million of state deferred tax asset valuation allowances and the recording of $1.3 million of new state tax deferred asset valuation allowances. See “Critical Accounting Policies - Income Taxes - Valuation Allowance” in this MD&A for information regarding the reversal of valuation allowances against our net deferred tax assets.
Excluding the changes in the deferred tax valuation allowances, we recognized a $176.5 million tax provision in fiscal 2014. Based upon the federal statutory rate of 35%, our federal tax provision would have been $176.6 million. Our tax provision,

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excluding the changes in the deferred tax valuation allowance, included the recognition of a $23.8 million provision for state income taxes (net of federal tax benefit), the recognition of a $5.7 million provision for uncertain tax positions taken; and $1.8 million of accrued interest and penalties (net of federal tax benefit) for previously accrued taxes on uncertain tax positions, offset, in part, by the reversal of $11.0 million of previously accrued tax provisions on uncertain tax positions (net of federal tax provision) that were no longer necessary due to the expiration of the statute of limitations and the settlement of state income tax audits; a $14.8 million tax benefit from our utilization of domestic production activities deductions; and a $6.2 million tax benefit related to other miscellaneous permanent deductions.
We recognized an income tax provision of $97.1 million in fiscal 2013. The tax provision in fiscal 2013 included the reversal of $4.6 million of state deferred tax asset valuation allowances and the recording of $3.2 million of new state tax deferred asset valuation allowances.
Excluding the changes in the deferred tax valuation allowances, we recognized a $98.4 million tax provision in fiscal 2013. Based upon the federal statutory rate of 35%, our federal tax provision would have been $93.7 million. The difference between the tax provision recognized and the tax provision based on the federal statutory rate was due primarily to an $11.4 million provision for state income taxes (net of tax benefit) and $3.7 million of accrued interest and penalties (net of tax benefit), offset, in part, by the reversal of $5.6 million of previously accrued taxes and related interest (net of tax provision). The reversal of previously accrued taxes and related interest on uncertain tax positions is due primarily to the expiration of the statute of limitations on these items.
FISCAL 2013 COMPARED TO FISCAL 2012
REVENUES AND COST OF REVENUE
Revenues in fiscal 2013 were higher than those for fiscal 2012 by approximately $791.5 million, or 42.0%. This increase was attributable to a 27.3% increase in the number of homes delivered and an 11.6% increase in the average price of the homes delivered. In fiscal 2013, we delivered 4,184 homes with a value of $2.67 billion, as compared to 3,286 homes in fiscal 2012 with a value of $1.88 billion. The increase in the number of homes delivered in fiscal 2013, as compared to fiscal 2012, was primarily due to the 54.1% higher number of homes in backlog at the beginning of fiscal 2013, as compared to the beginning of fiscal 2012, and the 40.4% increase in the number of net contracts signed in the first six months of fiscal 2013, as compared to the comparable period of fiscal 2012. The increase in the average price of homes delivered in fiscal 2013, as compared to fiscal 2012, was primarily attributable to a shift in the number of homes delivered to more expensive areas and/or products and increases in selling prices in fiscal 2013.
Cost of revenues as a percentage of revenues was 79.8% in fiscal 2013, as compared to 81.4% in fiscal 2012. We recognized inventory impairment charges and write-offs of $4.5 million in fiscal 2013 and $14.7 million in fiscal 2012. Cost of revenues as a percentage of revenues, excluding impairments, was 79.6% of revenues in fiscal 2013, as compared to 80.6% in fiscal 2012. The decrease in cost of revenues as a percentage of revenue, excluding inventory impairment charges, in fiscal 2013, as compared to fiscal 2012, was due primarily to lower materials, labor, interest, and closing costs; improved absorption of job overhead due to the increased number of homes closed in fiscal 2013, as compared to fiscal 2012; and the reduced impact on costs in fiscal 2013, as compared to fiscal 2012, from the application of purchase accounting on the homes delivered from the acquisition of CamWest Development LLC (“CamWest”) in November 2011, offset, in part, by the increased cost of land and land improvements in fiscal 2013, as compared to fiscal 2012.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES (“SG&A”)
SG&A increased by $52.6 million in fiscal 2013, as compared to fiscal 2012. As a percentage of revenues, SG&A was 12.7% in fiscal 2013, as compared to 15.3% in fiscal 2012. The decline in SG&A as a percentage of revenues was due to SG&A increasing by 18.3% while revenues increased 42.0%. The dollar increase in SG&A costs was due primarily to increased compensation, information technology, insurance, sales, and marketing costs and the expensing of costs incurred for the pending acquisition of Shapell.
INCOME FROM UNCONSOLIDATED ENTITIES
We are a participant in several unconsolidated entities. We recognize our proportionate share of the earnings and losses from these entities. Most of our unconsolidated entities are land development projects or high-rise/mid-rise construction projects and do not generate revenues and earnings for a number of years during the development of the property. Once development is complete, 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. Because there is not a steady flow of revenues and earnings from these entities, the earnings recognized from these entities will vary significantly from quarter to quarter and year to year.

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In fiscal 2013, we recognized $14.4 million of income from unconsolidated entities, as compared to $23.6 million in fiscal 2012. In fiscal 2012, we recognized a $2.3 million recovery of costs previously incurred related to a joint venture. The $6.9 million decrease in income in fiscal 2013, as compared to fiscal 2012, excluding the recovery recognized in fiscal 2012, was due principally to lower income in fiscal 2013, as compared to fiscal 2012, generated from two condominium joint ventures due to their substantial completion in fiscal 2012, offset, in part, by higher income realized from Gibraltar's Structured Asset Joint Venture, a distribution received in fiscal 2013 from the Trust in excess of our cost basis, and a land development joint venture that sold a large parcel of land to an outside developer in fiscal 2013, as compared to fiscal 2012.
OTHER INCOME - NET
Other income - net includes the gains and losses from our ancillary businesses, income from Gibraltar, interest income, management fee income, retained customer deposits, income/losses on land sales, and other miscellaneous items.
In fiscal 2013 and 2012, other income - net was $52.2 million and $25.9 million, respectively. Other income-net in fiscal 2013 includes $13.2 million of income from the previously disclosed settlement of derivative litigation. Excluding these settlement proceeds, the increase in other income - net in fiscal 2013, as compared to fiscal 2012, was due to increased income from our Gibraltar operations, increased income from our ancillary operations, higher earnings from land sales, and higher other miscellaneous income in fiscal 2013, as compared to fiscal 2012. These increases were offset, in part, by lower retained customer deposits in the fiscal 2013 period, as compared to fiscal 2012.
INCOME BEFORE INCOME TAXES
In fiscal 2013, we reported income before income taxes of $267.7 million, as compared to $112.9 million in fiscal 2012.
INCOME TAX PROVISION (BENEFIT)
We recognized an income tax provision of $97.1 million in fiscal 2013, as compared to an income tax benefit of $374.2 million in fiscal 2012. The tax provision in fiscal 2013 included the reversal of $4.6 million of state deferred tax asset valuation allowances and the recording of $3.2 million of new state tax deferred asset valuation allowances. The tax benefit in fiscal 2012 included the reversal of $394.7 million of federal and state deferred tax asset valuation allowances. See “Critical Accounting Policies - Income Taxes - Valuation Allowance” in this MD&A for information regarding the reversal of valuation allowances against our net deferred tax assets.
Excluding the changes in the deferred tax valuation allowances, we recognized a $98.4 million tax provision in fiscal 2013. Based upon the federal statutory rate of 35%, our federal tax provision would have been $93.7 million. The difference between the tax provision recognized and the tax provision based on the federal statutory rate was due primarily to an $11.4 million provision for state income taxes, net of federal income tax benefit and $3.7 million of accrued interest and penalties (net of federal tax provision), offset, in part, by the reversal of $5.6 million of previously accrued taxes and related interest on uncertain tax positions (net of federal tax provision). The reversal of previously accrued taxes and related interest on uncertain tax positions is due primarily to the expiration of the statute of limitations on these items.
Excluding the reversal of the deferred tax valuation allowances, we recognized a tax provision of $20.5 million in fiscal 2012. Based upon the federal statutory rate of 35%, our federal tax provision would have been $39.5 million. The difference between the tax provision excluding the reversal of deferred tax valuation allowances and the tax provision based on the federal statutory rate was due primarily to the reversal of $34.2 million of previously accrued taxes and related interest on uncertain tax positions (net of federal tax provision) due to the expiration of the statute of limitations of the applicable filings or the completion of audits during fiscal 2012, offset, in part, by the recognition of $4.7 million of state income tax provision (net of federal tax benefit), a $5.5 million provision on uncertain tax positions (net of federal tax provision) taken in fiscal 2012, and $5.0 million of accrued interest and penalties.
CAPITAL RESOURCES AND LIQUIDITY
Funding for our business has been, and continues to be, provided principally by cash flow from operating activities before inventory additions, unsecured bank borrowings, and the public debt and equity markets. At October 31, 2014, we had $598.3 million of cash, cash equivalents, and marketable securities on hand and approximately $940.2 million available under our $1.035 billion revolving credit facility, which extends to August 2018.
Cash provided by operating activities during fiscal 2014 was $313.2 million. It was generated primarily from $440.9 million of net income before stock-based compensation, depreciation and amortization, inventory impairments and write-offs, and deferred taxes; an $82.1 million increase in accounts payable and accrued expenses; and a $52.4 million increase in income taxes payable; offset, in part, by the net purchase of $272.0 million of inventory.

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Cash used in our investing activities during fiscal 2014 was $1.45 billion. The cash used in investing activities was primarily related to the $1.49 billion used to acquire Shapell, $113.0 million used to fund investments in unconsolidated entities, $15.1 million for the purchase of property and equipment, offset, in part, by $127.0 million of cash received as returns on our investments in unconsolidated entities, distressed loans, and foreclosed real estate, and $40.2 million of sales of marketable securities.
We generated $952.2 million of cash from financing activities in fiscal 2014, primarily from the issuance of 7.2 million shares of our common stock in November 2013 that raised $220.4 million; $595.3 million from the issuance in November 2013 of $350.0 million of 4.0% Senior Notes due 2018 and $250.0 million of 5.625% Senior Notes due 2024; the borrowing of $500.0 million under a five-year term loan from a syndicate of eleven banks; and $28.4 million from the proceeds of our stock-based benefit plans, offset, in part, by the repayment of $268.0 million of our 4.95% Senior Notes in March 2014; the repurchase of $90.7 million of our common stock; and the repayment of $40.8 million of other loans payable, net of new borrowings.
At October 31, 2013, we had $825.5 million of cash, cash equivalents, and marketable securities on hand and approximately $958.4 million available under our $1.035 billion revolving credit facility. Cash used in operating activities during fiscal 2013 was $569.0 million primarily for the acquisition of inventory; the origination of mortgage loans, net of sales to outside investors; and the purchase of commercial property for development, offset, in part, by pretax income from operations, an increase in our accounts payable and accrued expenses, an increase in customer deposits, and a decrease in restricted cash. In fiscal 2013, cash provided by our investing activities was $332.7 million, including $417.8 million of sales and redemptions of marketable securities, and $97.2 million of cash received as returns on our investments in unconsolidated entities, distressed loans, and foreclosed real estate. The cash provided by investing activities was offset, in part, by $36.2 million of purchases of marketable securities, $93.4 million of investments in unconsolidated entities, $26.2 million of investments in distressed loans and foreclosed real estate, and $26.6 million in purchases of property and equipment. We generated $230.4 million of cash from financing activities in fiscal 2013, primarily from the issuance of $400 million of 4.375% Senior Notes due 2023, $24.4 million from the proceeds of our stock-based benefit plans, and a tax benefit of $15.8 million from our stock-based compensation plans. The cash provided by financing activities was offset, in part, by the repayment at maturity of $59.1 million of our 6.875% Senior Notes in November 2012; the repayment at maturity of $104.8 million of our 5.95% Senior Notes in September 2013; $31.0 million of loans payable repayments, net of new borrowings; and $15.4 million for the repurchase of our common stock.
At October 31, 2012, we had $1.22 billion of cash, cash equivalents, and marketable securities on hand and approximately $814.9 million available under a then available $885 million revolving credit facility. Cash used in operating activities during fiscal 2012 was $171.5 million primarily from the acquisition of inventory; the origination of mortgage loans, net of sales to outside investors; and the reduction of our accounts payable and accrued expenses, offset, in part, by pretax income from operations. In fiscal 2012, cash used in our investing activities was $560.5 million, including $580.0 million of purchases of marketable securities, $144.7 million for the acquisition of the assets of CamWest, $217.2 million to fund new investments in in unconsolidated entities, $30.1 million for investments in a nonperforming loan portfolio and $11.9 million for the purchase of property and equipment. The cash used in investing activities was offset, in part, by $368.3 million of sales and redemptions of marketable securities, $55.1 million of cash received as returns on our investments in unconsolidated entities and in nonperforming loan portfolios and foreclosed real estate. We generated $604.6 million of cash from financing activities in fiscal 2012, primarily from the issuance of $300 million of 5.875% Senior Notes due 2022 in February 2012, the issuance of $287.5 million of 0.5% Senior Exchangeable Notes due 2017 in September 2012, $33.7 million from the proceeds of our stock-based benefit plans, and $15.3 million of net new borrowings under our mortgage company warehouse facility. The cash provided by financing activities was offset, in part, by $28.4 million of cash used to repay loans payable, net of new borrowings.
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, although in the past several years, due to the increase in the number of attached-home communities from which we were operating (all of the units of which are generally not sold prior to the commencement of construction), the number of speculative homes in our inventory increased significantly. Should our business remain at its current level or 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 or curtail our acquisition of additional land, as we did during the period April 2006 through January 2010, which would further reduce our inventory levels and cash needs. At October 31, 2014, we owned or controlled through options 47,167 home sites, as compared to 48,628 at October 31, 2013; 40,350 at October 31, 2012; and 91,200 at April 30, 2006, the high point of our home sites owned and controlled. Of the 47,167 home sites owned or controlled through options at October 31, 2014, we owned 36,224. Of our owned home sites at October 31, 2014, significant improvements were completed on approximately 14,947 of them.

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In February 2014, we acquired all of the equity interests in Shapell, consisting of Shapell’s single-family residential real property development business, including a portfolio of approximately 4,950 home sites in California. See “Overview - Acquisition” in this MD&A for more information about the Shapell acquisition.
At October 31, 2014, the aggregate purchase price of land parcels under option and purchase agreements was approximately $1.23 billion (including $184.3 million of land to be acquired from joint ventures in which we have invested). Of the $1.23 billion of land purchase commitments, we had paid or deposited $103.4 million and, if we acquire all of these land parcels, we will be required to pay an additional $1.12 billion. The purchases of these land parcels are scheduled over the next several years. We have additional land parcels under option that have been excluded from the aforementioned aggregate purchase amounts since we do not believe that we will complete the purchase of these land parcels and no additional funds will be required from us to terminate these contracts.
During the past several years, we have had a significant amount of cash invested in either short-term cash equivalents or short-term interest-bearing marketable securities. In addition, we have made a number of investments in unconsolidated entities related to the acquisition and development of land for future home sites or in entities that are constructing or converting apartment buildings into luxury condominiums. Our investment activities related to marketable securities and to investments in and distributions of investments from unconsolidated entities are contained in the Consolidated Statements of Cash Flows under “Cash flow (used in) provided by investing activities.”
In August 2013, we entered into a $1.035 billion revolving credit facility with a syndicate of 15 banks, which extends to August 2018. At October 31, 2014, we had no borrowings under the credit facility but had outstanding letters of credit of approximately $94.8 million. At October 31, 2014, interest would have been payable on borrowings under our credit facility at a rate per annum of 2.10% (subject to adjustment based upon our debt rating and leverage ratios) above the Eurodollar rate or at other specified variable rates as selected by us from time to time. We are obligated to pay an undrawn commitment fee of 0.30% (subject to adjustment based upon our debt rating and leverage ratios) based on the average daily unused amount of the credit facility. Under the terms of the credit facility, we are not permitted to allow our maximum leverage ratio (as defined in the credit agreement) to exceed 1.75 to 1.00, and we are required to maintain a minimum tangible net worth (as defined in the credit agreement) of approximately $2.48 billion at October 31, 2014. At October 31, 2014, our leverage ratio was approximately 0.71 to 1.00, and our tangible net worth was approximately $3.80 billion. At October 31, 2014, based upon the minimum tangible net worth requirement, our ability to pay dividends was limited to an aggregate amount of approximately $1.32 billion or the repurchase of our common stock of approximately $1.74 billion.
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.
INFLATION
The long-term impact of inflation on us is manifested in increased costs for land, land development, construction, and overhead. We generally contract for land significantly before development and sales efforts begin. Accordingly, to the extent land acquisition costs are fixed, increases or decreases in the sales prices of homes will affect our profits. Prior to the 2006 – 2011 downturn in the housing market, the sales prices of our homes generally increased over time. Because the sales price of each of our homes is fixed at the time a buyer enters into a contract to purchase a home and because we generally contract to sell our homes before we begin construction, any inflation of costs in excess of those anticipated may result in lower gross margins. We generally attempt to minimize that effect by entering into fixed-price contracts with our subcontractors and material suppliers for specified periods of time, which generally do not exceed one year. The 2006 – 2011 downturn in the housing market and related slowdown in the home building industry and the decline in the sales prices of our homes in that period, without a corresponding reduction in the costs, had an adverse impact on our profitability. During fiscal 2012 and the first nine months of fiscal 2013, we saw a strong recovery in the number and value of new sales contracts signed. In fiscal 2012 and fiscal 2013, the number of net contracts signed increased 50% and 90%, respectively, as compared to fiscal 2011, and we were able to increase our sales prices. Beginning in the fourth quarter of fiscal 2013, we experienced a leveling in demand that continued through the second quarter of fiscal 2014, declined in the third quarter of fiscal 2014 and strengthened in the fourth quarter of fiscal 2014. The strength in demand that we saw in the fourth quarter of fiscal 2014 has continued into the first quarter of fiscal 2015.
In general, housing demand is adversely affected by increases in interest rates and housing costs. Interest rates, the length of time that land remains in inventory, and the proportion of inventory that is financed affect our interest costs. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage interest rates increase significantly, affecting prospective buyers’ ability to adequately finance home purchases, our revenues, gross margins, and net income could be

39



adversely affected. Increases in sales prices, whether the result of inflation or demand, may affect the ability of prospective buyers to afford new homes.
CONTRACTUAL OBLIGATIONS
The following table summarizes our estimated contractual payment obligations at October 31, 2014 (amounts in millions):
 
2015
 
2016 – 2017
 
2018 – 2019
 
Thereafter
 
Total
Senior notes (a)
$
432.6

 
$
655.2

 
$
515.4

 
$
1,802.2

 
$
3,405.4

Loans payable (a)
79.3

 
57.0

 
529.1

 
55.5

 
720.9

Mortgage company loan facility (a)
91.7

 
 
 
 
 
 
 
91.7

Operating lease obligations
10.2

 
14.8

 
9.3

 
0.8

 
35.1

Purchase obligations (b)
811.7

 
578.5

 
118.1

 
19.1

 
1,527.4

Retirement plans (c)
5.9

 
14.1

 
12.8

 
50.0

 
82.8

Other
0.4

 
0.3

 
 
 
 
 
0.7

 
$
1,431.8

 
$
1,319.9

 
$
1,184.7

 
$
1,927.6

 
$
5,864.0

(a)
Amounts include estimated annual interest payments until maturity of the debt. Of the amounts indicated, $2.7 billion of the senior notes, $654.3 million of loans payable, and $90.3 million of the mortgage company loan facility were recorded on the October 31, 2014 Consolidated Balance Sheet.
(b)
Amounts represent our expected acquisition of land under purchase agreements and the estimated remaining amount of the contractual obligation for land development agreements secured by letters of credit and surety bonds.
(c)
Amounts represent our obligations under our deferred compensation plan, supplemental executive retirement plans and our 401(k) salary deferral savings plans. Of the total amount indicated, $58.8 million was recorded on the October 31, 2014 Consolidated Balance Sheet.
SEGMENTS
We operate in two segments: Traditional Home Building and City Living, our urban development division. Within Traditional Home Building, we operate in four geographic segments around the United States: the North, consisting of Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Jersey, and New York; the Mid-Atlantic, consisting of Delaware, Maryland, Pennsylvania, and Virginia; the South, consisting of Florida, North Carolina, and Texas; and the West, consisting of Arizona, California, Colorado, Nevada, and Washington.
The following tables summarize information related to revenues, net contracts signed, and income (loss) before income taxes by segment for fiscal years 2014, 2013, and 2012. Information related to backlog at October 31, 2014, 2013, and 2012 and assets by segment at October 31, 2014 and 2013, has also been provided.
Units Delivered and Revenues ($ amounts in millions):
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
 
Units
 
Units
 
Units
 
$
 
$
 
$
Traditional Home Building:
 
 
 
 
 
 
 
 
 
 
 
North
1,110

 
874

 
687

 
662.7

 
485.0

 
350.7

Mid-Atlantic
1,292

 
1,146

 
958

 
817.3

 
652.9

 
535.7

South
1,204

 
1,018

 
624

 
836.5

 
641.3

 
361.8

West
1,527

 
1,009

 
744

 
1,313.7

 
724.4

 
437.9

Traditional Home Building
5,133

 
4,047

 
3,013

 
3,630.2

 
2,503.6

 
1,686.1

City Living
264

 
137

 
273

 
281.4

 
170.7

 
196.7

 Total
5,397

 
4,184

 
3,286

 
3,911.6

 
2,674.3

 
1,882.8


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Net Contracts Signed ($ amounts in millions):
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
 
Units
 
Units
 
Units
 
$
 
$
 
$
Traditional Home Building:
 
 
 
 
 
 
 
 
 
 
 
North
1,040

 
1,197

 
821

 
664.8

 
697.5

 
445.2

Mid-Atlantic
1,220

 
1,414

 
1,115

 
763.9

 
851.3

 
625.5

South
1,211

 
1,225

 
931

 
886.2

 
831.4

 
582.1

West
1,590

 
1,177

 
1,037

 
1,312.4

 
966.6

 
653.7

Traditional Home Building
5,061

 
5,013

 
3,904

 
3,627.3

 
3,346.8

 
2,306.5

City Living
210

 
281

 
255

 
269.2

 
287.1

 
251.4

 Total
5,271

 
5,294

 
4,159

 
3,896.5

 
3,633.9

 
2,557.9

Backlog at October 31 ($ amounts in millions):
 
2014
 
2013
 
2012
 
2014
 
2013
 
2012
 
Units
 
Units
 
Units
 
$
 
$
 
$
Traditional Home Building:
 
 
 
 
 
 
 
 
 
 
 
North
878

 
948

 
625

 
564.6

 
562.5

 
350.0

Mid-Atlantic
830

 
902

 
634

 
519.5

 
573.0

 
374.5

South
963

 
956

 
749

 
723.2

 
673.5

 
483.5

West
864

 
675

 
507

 
697.2

 
593.2

 
351.0

Traditional Home Building
3,535

 
3,481

 
2,515

 
2,504.5

 
2,402.2

 
1,559.0

City Living
144

 
198

 
54

 
215.2

 
227.3

 
110.9

 Total
3,679

 
3,679

 
2,569

 
2,719.7

 
2,629.5

 
1,669.9

Income (Loss) Before Income Taxes ($ amounts in millions):
 
2014
 
2013
 
2012
Traditional Home Building:
 
 
 
 
 
North
$
57.0

 
$
32.7

 
$
13.9

Mid-Atlantic
79.0

 
79.8

 
63.0

South
113.6

 
67.9

 
18.9

West
236.3

 
111.3

 
39.4

Traditional Home Building
485.9

 
291.7

 
135.2

City Living
104.6

 
53.3

 
61.9

Corporate and other
(85.9
)
 
(77.3
)
 
(84.2
)
Total
$
504.6

 
$
267.7

 
$
112.9

“Corporate and other” is comprised principally of general corporate expenses such as: the offices of the Executive Chairman, Chief Executive Officer, and President; and the corporate finance, accounting, audit, tax, human resources, risk management, information technology, marketing, and legal groups, offset, in part, by interest income, income from our ancillary businesses and Gibraltar, and income from a number of our unconsolidated entities.

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Total Assets ($ amounts in millions):
 
At October 31,
 
2014
 
2013
Traditional Home Building:
 
 
 
North
$
1,053.8

 
$
963.6

Mid-Atlantic
1,267.6

 
1,231.4

South
1,165.6

 
954.0

West
2,676.2

 
1,290.4

Traditional Home Building
6,163.2

 
4,439.4

City Living
834.9

 
674.3

Corporate and other
1,418.8

 
1,713.8

Total
$
8,416.9

 
$
6,827.5

“Corporate and other” is comprised principally of cash and cash equivalents, marketable securities, restricted cash, deferred tax assets and the assets of our Gibraltar investments, manufacturing facilities and mortgage subsidiary.
FISCAL 2014 COMPARED TO FISCAL 2013
North
Revenues in fiscal 2014 were higher than those in fiscal 2013 by $177.7 million, or 36.6%. The increase in revenues was primarily attributable to a 27.0% increase in the number of homes delivered and an increase of 7.6% in the average selling price of the homes delivered. The increase in the number of homes delivered in fiscal 2014, as compared to fiscal 2013, was primarily due to a higher backlog at October 31, 2013, as compared to October 31, 2012. The increase in the average price of homes delivered in fiscal 2014, as compared to fiscal 2013, was primarily attributable to a shift in the number of homes delivered to more expensive areas and/or products in fiscal 2014.
The value of net contracts signed in fiscal 2014 was $664.8 million, a 4.7% decrease from the $697.5 million of net contracts signed during fiscal 2013. This 4.7% decrease was primarily due to a 13.1% decrease in the number of net contracts signed, offset, in part, by a 9.7% increase in the average value of each net contract. The decrease in the number of net contracts signed was primarily due to weakening in demand driven by uncertainty in the economy and world events, fragile consumer confidence and reduced affordability, and an extended period of limited real personal income growth. The increase in the average sales price of net contracts signed in fiscal 2014, as compared to fiscal 2013, was primarily attributable to a shift in the number of contracts signed to more expensive areas and/or products in fiscal 2014.
In fiscal 2014, we reported income before income taxes of $57.0 million, as compared to $32.7 million in fiscal 2013. This increase in income was primarily attributable to higher earnings from the increased revenues and $3.1 million of earnings from land sales in fiscal 2014, offset, in part, by higher inventory impairment charges and higher SG&A in fiscal 2014, as compared to fiscal 2013. We recognized inventory impairment charges of $9.1 million and $1.8 million in fiscal 2014 and 2013, respectively. The increase in SG&A was due primarily to increased compensation, sales, and marketing costs, primarily due to the increase in the number of homes delivered.
Mid-Atlantic
Revenues in fiscal 2014 were higher than those in fiscal 2013 by $164.4 million, or 25.2%. The increase in revenues was primarily attributable to a 12.7% increase in the number of homes delivered and an 11.0% increase in the average selling price of the homes delivered. The increase in the number of homes delivered in fiscal 2014, as compared to fiscal 2013, was primarily due to a higher backlog at October 31, 2013, as compared to October 31, 2012, primarily in Maryland, Pennsylvania, and Virginia. The increase in the average price of homes delivered in fiscal 2014, as compared to fiscal 2013, was primarily attributable to a shift in the number of homes delivered to more expensive areas and/or products in fiscal 2014.
The value of net contracts signed during fiscal 2014 decreased by $87.4 million, or 10.3%, from fiscal 2013. The decrease was due to a 13.7% decrease in the number of net contracts signed, partially offset by 4.0% increase in the average value of each net contract. The decrease in the number of net contracts signed was primarily due to a decrease in the number of selling communities in Pennsylvania and a weakening in demand driven by uncertainty in the economy and world events, fragile consumer confidence and reduced affordability, and an extended period of limited real personal income growth. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products in fiscal 2014.

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We reported income before income taxes, in fiscal 2014 and 2013, of $79.0 million and $79.8 million, respectively. The decrease in income before income taxes was primarily due to $25.0 million in charges for stucco-related repairs in communities located in Pennsylvania and Delaware, higher impairment charges, and higher SG&A costs in fiscal 2014, as compared to fiscal 2013, offset, in part, by higher earnings from the increased revenues and $2.9 million of earnings from land sales in the fiscal 2014. The earnings from land sales in fiscal 2014 represent previously deferred gains on our initial sales of properties to Trust II. Inventory impairment charges, in fiscal 2014 and 2013, were $9.1 million and $0.5 million, respectively.
South
Revenues in fiscal 2014 were higher than those in fiscal 2013 by $195.2 million, or 30.4%. This increase was attributable to an 18.3% increase in the number of homes delivered and a 10.3% increase in the average price of the homes delivered. The increase in the number of homes delivered in fiscal 2014, as compared to fiscal 2013, was primarily due to a higher backlog at October 31, 2013, as compared to October 31, 2012. The increase in the average price of the homes delivered in fiscal 2014, as compared to fiscal 2013, was primarily attributable to a shift in the number of homes delivered to more expensive areas and/or products in fiscal 2014.
In fiscal 2014, the value of net contracts signed increased by $54.8 million, or 6.6%, as compared to fiscal 2013. The increase was attributable to a 7.8% increase in the average value of net contracts signed, offset, in part, by a 1.1% decrease in the number of net contracts signed. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products in fiscal 2014. The decrease in the number of net contracts signed in fiscal 2014, as compared to fiscal 2013, was primarily due to decreased demand in North Carolina, partially offset by increases in the number of net contracts signed in Texas.
We reported income before income taxes of $113.6 million in fiscal 2014, as compared to $67.9 million in fiscal 2013. The increase in income before income taxes was primarily due to higher earnings from the increased revenues, lower cost of revenues as a percent of revenues, and higher earnings from land sales, partially offset by higher SG&A costs, in fiscal 2014 as compared to fiscal 2013. The decrease in cost of revenues as a percentage of revenue in fiscal 2014, as compared to fiscal 2013, was due primarily to a change in product mix/areas to higher margin areas, lower interest, and increased prices in the fiscal 2014 period, as compared to the fiscal 2013 period. Earnings from land sales increased from $1.4 million in fiscal 2013 to $5.2 million in fiscal 2014.
West
Revenues in fiscal 2014 were higher than those in fiscal 2013 by $589.3 million, or 81.4%. The increase in revenues was attributable to a 51.3% increase in the number of homes delivered and a 19.8% increase in the average sales price of the homes delivered. The increase in the number of homes delivered was primarily due to the delivery of 334 Shapell homes in California in the period from February 4, 2014 to October 31, 2014 and a higher backlog at October 31, 2013, as compared to October 31, 2012, primarily in California and Washington. The increase in the average price of the homes delivered was primarily due to a shift in the number of homes delivered to more expensive products and/or locations in fiscal 2014.
The value of net contracts signed during fiscal 2014 increased $345.8 million, or 35.8%, as compared to fiscal 2013. This increase was due to a 35.1% increase in the number of net contracts signed and a 0.5% increase in the average value of each net contract signed. In fiscal 2014, we signed 328 contracts with a value of $311.8 million at communities we acquired from Shapell. Excluding these Shapell communities, the value of net contracts signed during fiscal 2014 increased $34.0 million, or 3.5%, as compared to fiscal 2013. The increase in the value of net contracts signed, excluding Shapell, was due to an increase of 7.2% in the number of net contracts signed, offset by a 3.4% decrease in the average value of each net contract signed. The increase in the number of net contracts signed, excluding Shapell, was primarily due to an increase in selling communities in Colorado and Nevada, partially offset by a reduction of available inventory in fiscal 2014, as compared to the fiscal 2013 period, in California. The decrease in the average sales price of net contracts signed, excluding Shapell, was primarily due to a shift in the number of contracts signed to less expensive areas and/or products.
In fiscal 2014, we reported income before income taxes of $236.3 million, as compared to $111.3 million in fiscal 2013. The increase in income before income taxes was primarily due to higher earnings from increased revenues, lower cost of revenues as a percentage of revenues, and $13.8 million of earnings from land sales in fiscal 2014, as compared to $3.0 million in fiscal 2013, offset, in part, by higher SG&A costs in fiscal 2014, which includes $6.1 million of expenses incurred in the Shapell acquisition. The decrease in cost of revenues as a percentage of revenues in fiscal 2014 was primarily due to a shift in the number of homes delivered to better margin products and/or locations, lower interest, and increases in selling prices, offset, in part, by the impact of purchase accounting on the homes delivered in fiscal 2014 from the Acquisition.


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City Living
Revenues in fiscal 2014 were higher than those in fiscal 2013 by $110.7 million, or 64.9%. The increase in revenues was primarily attributable to a 92.7% increase in the number of homes delivered, offset, in part, by a decrease of 14.5% in the average selling price of the homes delivered. The increase in the number of homes delivered in fiscal 2014, as compared to fiscal 2013, was primarily due to an increase in homes delivered in the New Jersey and New York urban markets, which was primarily attributable to higher backlog at October 31, 2013, as compared to October 31, 2012. The decrease in the average price of homes delivered in fiscal 2014, as compared to fiscal 2013, was primarily attributable to a shift in the number of homes delivered to less expensive products and/or locations.
The value of net contracts signed in fiscal 2014 was $269.2 million, a 6.2% decrease from the $287.1 million of net contracts signed during fiscal 2013. This decrease was primarily due to a 25.3% decrease in the number of net contracts signed, offset, in part, by a 25.5% increase in the average value of each net contract. The decrease in the number of net contracts signed was primarily due the commencement of sales at two of our high-rise buildings located in the New York and New Jersey urban markets in the second quarter of fiscal 2013 where sales were high during the initial opening period. The increase in the average sales price of net contracts signed was primarily due to the opening of two high-rise buildings located in Manhattan and the sale of the final unit at The Touraine, a high-rise building located in Manhattan, which had higher selling prices than other City Living locations.
In fiscal 2014, we reported income before income taxes of $104.6 million, as compared to $53.3 million in fiscal 2013. This increase in income was primarily attributable to higher earnings from increased revenues and lower cost of revenues as a percentage of revenues in fiscal 2014, as compared to fiscal 2013, partially offset by a decrease in earnings from unconsolidated entities and higher SG&A in fiscal 2014, as compared to 2013. Cost of revenues as a percentage of revenues was 58.5% and 65.7% in fiscal 2014 and 2013, respectively. Earnings from unconsolidated entities decreased from income of $1.2 million in fiscal 2013 to a loss of $3.6 million in fiscal 2014. The decrease in cost of revenues as a percentage of revenue in fiscal 2014, as compared to fiscal 2013, was primarily due to the increase in the number of homes delivered at two of our high-rise buildings located in the New York and New Jersey urban markets, which had better margins than other City Living locations. The decrease in income from unconsolidated entities was due principally to a settled litigation at one of our unconsolidated entities resulting in a charge to our earnings of $2.6 million in the fourth quarter of fiscal 2014.
Other
In fiscal 2014 and 2013, corporate and other loss before income taxes was $85.9 million and $77.3 million, respectively. The increase in the loss in fiscal 2014, as compared to fiscal 2013, was primarily due to $13.2 million of income in fiscal 2013 from the settlement of litigation and higher SG&A in fiscal 2014, as compared to fiscal 2013, offset, in part, by an increase in earnings from unconsolidated entities from $9.6 million in fiscal 2013 to $42.0 million in fiscal 2014, and increased income from our Gibraltar operations in fiscal 2014, as compared to fiscal 2013. The increase in SG&A costs was due primarily to increased compensation costs due to our increased number of employees and higher insurance costs. The increase in income from unconsolidated entities was due primarily to our recognition of a $23.5 million gain representing our share of the gain on the sale by Trust II of substantially all of its assets to an unrelated party in December 2013 and a $12.0 million distribution from the Trust in April 2014 due to the refinancing of one of the Trust’s apartment properties. The increase attributable to the Trust and Trust II gains was partially offset by lower income realized from Gibraltar’s Structured Asset Joint Venture.
FISCAL 2013 COMPARED TO FISCAL 2012
North
Revenues in fiscal 2013 were higher than those in fiscal 2012 by $134.3 million, or 38.3%. The increase in revenues was primarily attributable to a 27.2% increase in the number of homes delivered and an increase of 8.7% in the average selling price of the homes delivered. The increase in the number of homes delivered in fiscal 2013, as compared to fiscal 2012, was primarily due to a higher backlog at October 31, 2012, as compared to October 31, 2011. The increase in the average price of homes delivered in fiscal 2013, as compared to fiscal 2012, was primarily attributable to a shift in the number of homes delivered to more expensive areas and/or products and increases in selling prices in fiscal 2013.
The value of net contracts signed in fiscal 2013 was $697.5 million, a 56.7% increase from the $445.2 million of net contracts signed during fiscal 2012. This 56.7% increase was primarily due to a 45.8% increase in the number of net contracts signed and a 7.5% increase in the average value of each net contract. The increase in the number of net contracts signed was primarily due to an improvement in home buyer demand in fiscal 2013, as compared to fiscal 2012. The increase in the average sales price of net contracts signed in fiscal 2013, as compared to fiscal 2012, was primarily attributable to a shift in the number of contracts signed to more expensive areas and/or products and increases in selling prices in fiscal 2013.

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In fiscal 2013, we reported income before income taxes of $32.7 million, as compared to $13.9 million in fiscal 2012. This increase in income was primarily attributable to higher earnings from the increased revenues in fiscal 2013, as compared to fiscal 2012, offset, in part, by higher SG&A. The increase in SG&A was due primarily to increased compensation, sales, and marketing costs.
Mid-Atlantic
Revenues in fiscal 2013 were higher than those in fiscal 2012 by $117.2 million, or 21.9%. The increase in revenues was primarily attributable to a 19.6% increase in the number of homes delivered and a 1.9% increase in the average selling price of the homes delivered. The increase in the number of homes delivered in fiscal 2013, as compared to fiscal 2012, was primarily due to a higher backlog at October 31, 2012, as compared to October 31, 2011, primarily in Pennsylvania and Virginia. The increase in the average price of homes delivered in fiscal 2013, as compared to fiscal 2012, was primarily attributable to a shift in the number of homes delivered to more expensive areas and/or products and increases in selling prices in fiscal 2013.
The value of net contracts signed during fiscal 2013 increased by $225.8 million, or 36.1%, from fiscal 2012. The increase was due to a 26.8% increase in the number of net contracts signed and a 7.3% increase in the average value of each net contract. The increase in the number of net contracts signed was primarily due to an increase in home buyer demand in fiscal 2013, as compared to fiscal 2012. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products and increases in selling prices in fiscal 2013.
We reported income before income taxes in fiscal 2013 and 2012 of $79.8 million and $63.0 million, respectively. The increase in the income before income taxes in fiscal 2013 was primarily due to higher earnings from the increased revenues and lower inventory impairment charges in fiscal 2013, as compared to fiscal 2012, offset, in part, by higher SG&A in fiscal 2013, as compared to fiscal 2012. We recognized inventory impairment charges of $0.5 million and $6.0 million in fiscal 2013 and 2012, respectively.
South
Revenues in fiscal 2013 were higher than those in fiscal 2012 by $279.5 million, or 77.3%. This increase was attributable to a 63.1% increase in the number of homes delivered and an 8.7% increase in the average price of the homes delivered. The increase in the number of homes delivered in fiscal 2013, as compared to fiscal 2012, was primarily due to a higher backlog at October 31, 2012, as compared to October 31, 2011, which was the result of an increase in the number of net contracts signed in fiscal 2012 as compared to fiscal 2011. The increase in the average price of the homes delivered in fiscal 2013, as compared to fiscal 2012, was primarily attributable to a shift in the number of homes delivered to more expensive areas and/or products and increases in selling prices in fiscal 2013.
In fiscal 2013, the value of net contracts signed increased by $249.3 million, or 42.8%, as compared to fiscal 2012. The increase was attributable to increases of 31.6% and 8.5% in the number and average value of net contracts signed, respectively. The increase in the number of net contracts signed in fiscal 2013, as compared to fiscal 2012, was primarily due to increased demand in fiscal 2013. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products and increases in selling prices in fiscal 2013.
We reported income before income taxes of $67.9 million in fiscal 2013, as compared to $18.9 million in fiscal 2012. The increase in the income before income taxes was primarily due higher earnings from the increased revenues and lower inventory impairment charges in fiscal 2013, as compared to fiscal 2012, offset, in part, by higher SG&A in fiscal 2013, as compared to fiscal 2012. We recognized inventory impairment charges of $2.4 million and $5.2 million in fiscal 2013 and 2012, respectively.
West
Revenues in fiscal 2013 were higher than those in fiscal 2012 by $286.5 million, or 65.4%. The increase in revenues was attributable to a 35.6% increase in the number of homes delivered and a 22.0% increase in the average sales price of the homes delivered. The increase in the number of homes delivered was primarily due to a higher backlog at October 31, 2012, as compared to October 31, 2011, which was the result of an increase in the number of net contracts signed in fiscal 2012, as compared to fiscal 2011. The increase in the average price of the homes delivered was primarily due to a shift in the number of homes delivered to more expensive products and/or locations and increases in selling prices in fiscal 2013.
The value of net contracts signed during fiscal 2013 increased $312.9 million, or 47.9%, as compared to fiscal 2012. This increase was due to a 13.5% increase in the number of net contracts signed and a 30.3% increase in the average value of each net contract signed. The increase in the number of net contracts signed was primarily due to increased demand in fiscal 2013. The increase in the average sales price of net contracts signed was primarily due to a shift in the number of contracts signed to more expensive areas and/or products and increases in base selling prices in fiscal 2013.

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In fiscal 2013, we reported income before income taxes of $111.3 million, as compared to $39.4 million in fiscal 2012. The increase in income before income taxes was primarily due to higher earnings from the increased revenues and lower cost of revenues as a percentage of revenues in fiscal 2013, as compared to fiscal 2012, offset, in part, by higher SG&A in fiscal 2013. Cost of revenues as a percentage of revenues was 78.3% of revenues in fiscal 2013, as compared to 82.7% in fiscal 2012. The decrease in cost of revenues as a percentage of revenues in fiscal 2013, as compared to fiscal 2012, was primarily due to a shift in the number of homes delivered to better margin products and/or locations and the impact of purchase accounting on the homes delivered in fiscal 2012 from our acquisition of CamWest.
City Living
Revenues in fiscal 2013 were lower than those in fiscal 2012 by $26.0 million, or 13.2%. The decrease in revenues was primarily attributable to a 49.8% decrease in the number of homes delivered, offset, in part, by an increase of 72.9% in the average selling price of the homes delivered. The decrease in the number of homes delivered in fiscal 2013, as compared to fiscal 2012, was primarily due to a decrease in the number of homes delivered in two of our high-rise buildings located in the New York and New Jersey urban markets, which substantially settled out in fiscal 2012, partially offset by the commencement of closing at The Touraine, a high-rise building located in the New York urban market. The increase in the average price of homes delivered in the fiscal 2013 period, as compared to the fiscal 2012 period, was primarily attributable to closings at The Touraine. In fiscal 2013, we closed 21 units at The Touraine with an average sales price of $4.2 million for each unit. Excluding The Touraine, the average selling price of the homes delivered decreased by 2.3% primarily due to an increase in the number of homes delivered in the Philadelphia urban market, which has lower average sales prices than other City Living markets.
The value of net contracts signed in fiscal 2013 was $287.1 million, a 14.2% increase from the $251.4 million of net contracts signed during fiscal 2012. This increase was primarily due to a 10.2% increase in the number of net contracts signed and a 3.6% increase in the average value of each net contract. The increase in the number of net contracts signed was primarily due to two high-rise buildings located in the New York and New Jersey urban markets (160 East 22nd Street in Manhattan and Maxwell Place in Hoboken, New Jersey) that opened in fiscal 2013, offset, in part, by net contracts signed in fiscal 2012 at two high-rise buildings that commenced sales in the second half of fiscal 2011. The increase in the average sales price of net contracts signed in fiscal 2013, as compared to fiscal 2012, was primarily attributable due to a shift in the number of contracts signed to more expensive areas and/or products and increases in base selling prices in fiscal 2013, as compared to the fiscal 2012 period.
In fiscal 2013, we reported income before income taxes of $53.3 million, as compared to $61.9 million in fiscal 2012. This decrease in income was primarily attributable to a decrease in income from unconsolidated entities from $15.2 million in fiscal 2012 to $1.2 million in fiscal 2013 and lower earnings from decreased revenues in fiscal 2013, as compared to 2012, partially offset by lower cost of revenues as a percentage of revenues in fiscal 2013, as compared to fiscal 2012. The decrease in income from unconsolidated entities was due principally to a decrease in income generated from two of our high-rise joint ventures where there were fewer units remaining for sale since fiscal 2012 as they have closed most or all of their condominium units. Cost of revenues as a percentage of revenues was 65.7% and 70.4% in fiscal 2013 and 2012, respectively. The decrease in cost of revenues as a percentage of revenue in fiscal 2013, as compared to fiscal 2012, was primarily due to the increase in the number of homes delivered at The Touraine, which had better margins than other City Living locations.
Other
In fiscal 2013 and 2012, other loss before income taxes was $77.3 million and $84.2 million, respectively. The decrease in fiscal 2013, as compared to fiscal 2012, was primarily due to $13.2 million of income from the previously disclosed settlement of derivative litigation in fiscal 2013, increased income from our Gibraltar operations and investment in its structured asset joint venture, increased income from our ancillary operations, and higher earnings from land sales in fiscal 2013, as compared to fiscal 2012, partially offset by higher unallocated SG&A in fiscal 2013. The increase in unallocated SG&A in fiscal 2013 was primarily due to higher compensation, office, and information technology expenses as a result of the increase in our business activity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk primarily due to fluctuations in interest rates. We utilize both fixed-rate and variable-rate debt. For fixed-rate debt, changes in interest rates generally affect the fair market value of the debt instrument, but not our earnings or cash flow. Conversely, for variable-rate debt, changes in interest rates generally do not affect the fair market value of the debt instrument, but do affect our earnings and cash flow. We do not have the obligation to prepay fixed-rate debt prior to maturity, and, as a result, interest rate risk and changes in fair market value should not have a significant impact on our fixed-rate debt until we are required or elect to refinance it.

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The following table shows our debt obligations, principal cash flows by scheduled maturity, weighted-average interest rates, and estimated fair value as of October 31, 2014 ($ amounts in thousands):