CORRESP 1 filename1.htm Comment letter 3-25-2013




April 5, 2013

VIA EDGAR TRANSMISSION

Mr. Terence O'Brien
Division of Corporation Finance
Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549-7010 
Re:
Toll Brothers, Inc.
 
Form 10-K
 
Filed December 28, 2012
 
File No. 1-9186
Dear Mr. O'Brien:
We have reviewed your letter of March 25, 2013 regarding the Toll Brothers, Inc. (the “Company”) Annual Report on Form 10-K for the fiscal year ended October 31, 2012 (the “Form 10-K”). To facilitate your review, we have organized our response to include each comment to which we are responding herein prior to the response to that comment. This document is being submitted via EDGAR.
We understand that your review and comments are intended to assist us in compliance with applicable disclosure requirements and to enhance the overall quality of the disclosure in our filings. We share these objectives and are responding to your comments with these goals in mind.
The Company acknowledges that it is responsible for the adequacy and accuracy of the disclosures contained in its filings; that Securities and Exchange Commission (the “Commission”) staff comments or changes to disclosure in response to staff comments do not foreclose the Commission from taking any action with respect to the filing; and that the Company may not assert the Commission’s staff comments as a defense in any proceeding initiated by the Commission or any person under the federal securities laws of the United States.
Form 10-K for the year ended October 31, 2012
Management's Discussion and Analysis, page 22
1.
In future filings, where you disclose the $487.2 million net income reported in fiscal 2012, please disclose and quantify the reversal of your deferred tax asset valuation allowances. For example, your summary financial data should include an appropriate footnote.
Response: In future filings, we will expand our disclosure of the reported net income in fiscal 2012 to include references to the reversal of our deferred tax asset valuation allowance where appropriate.
 




Securities and Exchange Commission
April 5, 2013
Page 2

Off-Balance Sheet Arrangements, page 30

2.
In our letter dated February 24, 2012, we asked you to, among other things, expand the disclosure in MD&A and the footnotes to provide the specific facts and circumstances surrounding the $40.9 million aggregate impairment in your joint ventures within the South and West segments and to disclose the other clarifying information provided in your response dated February 17, 2012. In your letter also dated February 24, 2012, you said "In future filings, we will expand our disclosures related to both comments in your February 24 letter, and we will include the changes outlined in our February 17 response to your February 14 letter. Please explain how you have addressed this matter in your 2012 Form 10-K. The one-sentence disclosure on page F-17 that the impairments were attributable to the investment in South Edge LLC does not appear to adequately address our concern that a reader cannot understand the current factors influencing the markets in which you conduct your business absent this expanded clarifying information. We also note no specific information regarding the $14.7 million inventory impairment, which is material to fiscal 2012 pre-tax income.
Response: We expanded our disclosure in our April 30, 2012 Form 10-Q on page 9 in Note 4 to more fully disclose the impairments recognized in fiscal 2011. When we evaluated our disclosures in the preparation of our July 31, 2012 Form 10-Q, we reviewed the joint venture impairment disclosures contained in the April 30, 2012 Form 10-Q and concluded that extensive disclosure regarding South Edge was no longer meaningful since the impairment was the result of litigation and not further deterioration of the market. With regard to the disclosure of the impairment recognized on our investment in Planned Community Joint Venture, we concluded that this market had stabilized and that the extensive disclosure included in the April 30, 2012 Form 10-Q was no longer meaningful in our subsequent filings.
When we evaluate our disclosures in our financial statements and in our MD&A, we endeavor to provide the user with information that is useful and relevant to the current trends in our business. Because we evaluate the joint ventures in which we participate in a similar manner as we evaluate our wholly-owned communities, we apply the same standards in evaluating the carrying value of our investments. We state this in the second paragraph of Off-Balance Sheet Arrangements in the MD&A (page 30) and in the Accounting Policy note of our Consolidated Financial Statements (page F-10).
In response to your comment regarding the $14.7 million of inventory impairment in fiscal 2012, in Note 3, Inventory (page F-16), we disclose the breakdown of the inventory impairments and the expensing of costs that we do not believe to be recoverable between the different classes of inventory and reference Note 12, Fair Value Disclosures, relating to the $13.1 million of impairments to operating communities. The disclosures in Note 1, Significant Accounting Policies, Inventory (page F-8 & F-9), describe the methodology and the various factors that may result in the recognition of inventory impairments. In Note 12, Fair Value Disclosures (page F-36), the Company discloses more specific quantitative inputs used in the determination of the fair value of the operating communities on which we recognized $13.1 million of impairment charges.
We believe that our Form 10-K disclosures are appropriate and would be happy to discuss them with you or members of your staff.
  


Securities and Exchange Commission
April 5, 2013
Page 3

Supplemental Guarantor Information, page F-45
3.
Please tell us why there is no adjustment in the Parent's operating cash flow reconciliation to back out the $112,981 (page F-48) equity income from consolidated subsidiaries since it appears the Parent did not actually receive this amount in cash given that none of the three subsidiary columns present a dividend paid to the Parent in 2012. If this amount is included in the $127,150 adjustment (page F-50), please clarify whether this item includes lending activities. If so, please present: i) any intercompany assets/liabilities in a separate line item; ii) any intercompany receivables as assets; and iii) any intercompany payables as liabilities. In this last regard, the Guarantor Subsidiaries $(1,173,254) asset account should be presented as a liability since it presumably constitutes a liability. Additionally, please present the Rule 3-10 financial statements at the level of detail required by Rule 3-10(i)(1) of Regulation S-X. In this regard, please identify the $116,835 Other income - net item in the Subsidiary Issuer Statement of Operations. Please provide us a revised draft of your Rule 3-10 data assuming you have made the foregoing changes. Lastly, explain in detail how you concluded that any intercompany receivables are valid assets, instead of capital transactions, and if they are assets, please describe the nature of the transactions that primarily generated the receivables/payables, and support the quantification of the components of receivables/payable by the related contracts outlining repayment terms, interest rates, collateral, etc.
Response:
(a) The $112,981 of equity income is included in the $127,150. The $127,150 does not include lending activities. We will break this out as a separate line item in future filings.
(b) In future filings, we will include intercompany payables in the liability section of the balance sheet.
(c) The $116,835 of Other income - net reported for the Subsidiary Issuer represents interest income from the advances to Guarantor and Non-Guarantor and Subsidiaries. We will include this as a separate line item in future filings.
(d) The intercompany receivable on the Subsidiary Issuer's balance sheet relates to advances made by the Subsidiary Issuer to Toll Bros., Inc., our wholly-owned general contractor, investment manager and paying agent. Toll Bros., Inc. advances funds to our operating subsidiaries as needed to acquire inventory and fund their related activities. Funds are returned to Toll Bros., Inc. as homes are delivered to our home buyers. When the Subsidiary Issuer needs funds to pay interest or principal, funds are returned to it by Toll Bros., Inc. All interest incurred by the Subsidiary Issuer is passed through to our operating subsidiaries. Interest is allocated to the operating subsidiaries based upon the amount of operating inventory the subsidiary has.
While we believe that our disclosures in our 2012 Form 10-K are appropriate, we will revise the disclosures in future filings to clarify the aforementioned items. As requested, the revised draft of our Rule 3-10 data as of and for the year ended October 31, 2012, reflecting the above referenced changes, is presented below.


Securities and Exchange Commission
April 5, 2013
Page 4

Consolidating Balance Sheet at October 31, 2012 ($ in thousands):
 
Toll
Brothers,
Inc.
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
—

 
—

 
711,375

 
67,449

 
—

 
778,824

Marketable securities
 
 
 
 
378,858

 
60,210

 
 
 
439,068

Restricted cash
28,268

 
 
 
17,561

 
1,447

 
 
 
47,276

Inventory
 
 
 
 
3,527,677

 
233,510

 
 
 
3,761,187

Property, construction and office equipment, net
 
 
 
 
106,963

 
3,008

 
 
 
109,971

Receivables, prepaid expenses and other assets
134

 
15,130

 
77,175

 
68,300

 
(16,181
)
 
144,558

Mortgage loans held for sale
 
 
 
 
 
 
86,386

 
 
 
86,386

Customer deposits held in escrow
 
 
 
 
27,312

 
2,267

 
 
 
29,579

Investments in and advances to unconsolidated entities
 
 
 
 
70,145

 
260,472

 
 
 
330,617

Investments in distressed loans
 
 
 
 
 
 
37,169

 
 
 
37,169

Investments in foreclosed real estate
 
 
 
 
 
 
58,353

 
 
 
58,353

Investments in and advances to consolidated entities
2,823,052

 
2,092,810

 
 
 
 
 
(4,915,862
)
 
—

Deferred tax assets, net of valuation allowances
358,056

 
 
 
 
 
 
 
 
 
358,056

 
3,209,510

 
2,107,940

 
4,917,066

 
878,571

 
(4,932,043
)
 
6,181,044

LIABILITIES AND EQUITY
 
 
 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
 
 
 
Loans payable
 
 
 
 
69,393

 
30,424

 
 
 
99,817

Senior notes
 
 
2,032,335

 
 
 
 
 
48,128

 
2,080,463

Mortgage company warehouse loan
 
 
 
 
 
 
72,664

 
 
 
72,664

Customer deposits
 
 
 
 
136,225

 
6,752

 
 
 
142,977

Accounts payable
 
 
 
 
99,889

 
22

 
 
 
99,911

Accrued expenses
 
 
27,476

 
341,233

 
119,244

 
(11,603
)
 
476,350

Advances from consolidated entities
 
 
 
 
1,173,254

 
632,496

 
(1,805,750
)
 
—

Income taxes payable
82,991

 
 
 
 
 
(2,000
)
 
 
 
80,991

Total liabilities
82,991

 
2,059,811

 
1,819,994

 
859,602

 
(1,769,225
)
 
3,053,173

Equity:
 
 
 
 
 
 
 
 
 
 
 
Stockholders’ equity:
 
 
 
 
 
 
 
 
 
 
 
Common stock
1,687

 
 
 
48

 
3,006

 
(3,054
)
 
1,687

Additional paid-in capital
404,418

 
49,400

 
 
 
1,734

 
(51,134
)
 
404,418

Retained earnings
2,721,397

 
(1,271
)
 
3,101,833

 
8,068

 
(3,108,630
)
 
2,721,397

Treasury stock, at cost
(983
)
 
 
 
 
 
 
 
 
 
(983
)
Accumulated other comprehensive loss
 
 
 
 
(4,809
)
 
(10
)
 
 
 
(4,819
)
Total stockholders’ equity
3,126,519

 
48,129

 
3,097,072

 
12,798

 
(3,162,818
)
 
3,121,700

Noncontrolling interest
 
 
 
 
 
 
6,171

 
 
 
6,171

Total equity
3,126,519

 
48,129

 
3,097,072

 
18,969

 
(3,162,818
)
 
3,127,871

 
3,209,510

 
2,107,940

 
4,917,066

 
878,571

 
(4,932,043
)
 
6,181,044




Securities and Exchange Commission
April 5, 2013
Page 5

Consolidating Statement of Operations for the fiscal year ended October 31, 2012 ($ in thousands):
 
Toll
Brothers,
Inc.
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Revenues
 
 
 
 
1,880,908

 
79,850

 
(77,977
)
 
1,882,781

Cost of revenues
 
 
 
 
1,523,074

 
22,736

 
(13,715
)
 
1,532,095

Selling, general and administrative
95

 
2,965

 
307,292

 
41,055

 
(64,150
)
 
287,257

Interest expense
 
 
115,141

 
 
 
576

 
(115,717
)
 
—

 
95

 
118,106

 
1,830,366

 
64,367

 
(193,582
)
 
1,819,352

Income (loss) from operations
(95
)
 
(118,106
)
 
50,542

 
15,483

 
115,605

 
63,429

Other:
 
 
 
 
 
 
 
 
 
 
 
Income from unconsolidated entities
 
 
 
 
16,035

 
7,557

 
 
 
23,592

Other income - net
56

 
 
 
19,569

 
3,795

 
2,501

 
25,921

Intercompany interest income
 
 
116,835

 
 
 
 
 
(116,835
)
 
—

Income from consolidated subsidiaries
112,981

 
 
 
26,835

 
 
 
(139,816
)
 
—

Income before income tax benefit (provision)
112,942

 
(1,271
)
 
112,981

 
26,835

 
(138,545
)
 
112,942

Income tax (benefit) provision
(374,204
)
 
 
 
25,805

 
6,129

 
(31,934
)
 
(374,204
)
Net income
487,146

 
(1,271
)
 
87,176

 
20,706

 
(106,611
)
 
487,146



Securities and Exchange Commission
April 5, 2013
Page 6

Consolidating Statement of Cash Flows for the fiscal year ended October 31, 2012 ($ in thousands):
 
Toll
Brothers,
Inc.
 
Subsidiary
Issuer
 
Guarantor
Subsidiaries
 
Non-
Guarantor
Subsidiaries
 
Eliminations
 
Consolidated
Cash flow (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
Net income (loss)
487,146

 
(1,271
)
 
87,176

 
20,706

 
(106,611
)
 
487,146

Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
Depreciation and amortization
22

 
5,036

 
18,459

 
340

 
(1,271
)
 
22,586

Stock-based compensation
15,575

 
 
 
 
 
 
 
 
 
15,575

Recovery of investment in unconsolidated entities
 
 
 
 
(2,311
)
 
 
 
 
 
(2,311
)
Excess tax benefits from stock-based compensation
(5,776
)
 
 
 
 
 
 
 
 
 
(5,776
)
Income from unconsolidated entities
 
 
 
 
(13,724
)
 
(7,557
)
 
 
 
(21,281
)
Distributions of earnings from unconsolidated entities
 
 
 
 
5,258

 
 
 
 
 
5,258

Income from consolidated subsidiaries
(112,981
)
 
 
 
(26,835
)
 
 
 
139,816

 
—

Income from non-performing loan portfolios and foreclosed real estate
 
 
 
 
 
 
(12,444
)
 
 
 
(12,444
)
Deferred tax benefit
41,810

 
 
 
 
 
 
 
 
 
41,810

Deferred tax valuation allowances
(394,718
)
 
 
 
 
 
 
 
 
 
(394,718
)
Inventory impairments and write-offs
 
 
 
 
14,739

 
 
 
 
 
14,739

Change in fair value of mortgage loans receivable and derivative instruments
 
 
 
 
 
 
(670
)
 
 
 
(670
)
Gain on sale of marketable securities
 
 
 
 
(40
)
 
 
 
 
 
(40
)
Changes in operating assets and liabilities
 
 
 
 
 
 
 
 
 
 
 
Increase in inventory
 
 
 
 
(111,788
)
 
(84,160
)
 
 
 
(195,948
)
Origination of mortgage loans
 
 
 
 
 
 
(651,618
)
 
 
 
(651,618
)
Sale of mortgage loans
 
 
 
 
 
 
629,397

 
 
 
629,397

Decrease (increase) in restricted cash
(28,268
)
 
 
 
1,523

 
(771
)
 
 
 
(27,516
)
(Increase) decrease in receivables, prepaid expenses and other assets
1,483

 
(1,331
)
 
(228,184
)
 
219,833

 
(25,723
)
 
(33,922
)
(Increase) decrease in intercompany amounts
(15,652
)
 
(584,260
)
 
445,996

 
155,174

 
(1,258
)
 
—

Increase (decrease) in customer deposits
 
 
 
 
48,157

 
(3,774
)
 
 
 
44,383

(Decrease) increase in accounts payable and accrued expenses
(2,584
)
 
3,130

 
5,363

 
(59,493
)
 
(4,953
)
 
(58,537
)
Decrease in current income taxes payable
(25,075
)
 
 
 
 
 
 
 
 
 
(25,075
)
Net cash (used in) provided by operating activities
(39,018
)
 
(578,696
)
 
243,789

 
204,963

 
—

 
(168,962
)
Cash flow used in investing activities:
 
 
 
 
 
 
 
 
 
 
 
Purchase of property and equipment — net
 
 
 
 
(13,706
)
 
(789
)
 
 
 
(14,495
)
Purchase of marketable securities
 
 
 
 
(519,737
)
 
(60,221
)
 
 
 
(579,958
)
Sale and redemption of marketable securities
 
 
 
 
368,253

 
 
 
 
 
368,253

Investment in and advances to unconsolidated entities
 
 
 
 
(3,637
)
 
(213,523
)
 
 
 
(217,160
)
Return of investments in unconsolidated entities
 
 
 
 
32,659

 
5,709

 
 
 
38,368

Investment in non-performing loan portfolios and foreclosed real estate
 
 
 
 
 
 
(30,090
)
 
 
 
(30,090
)
Return of investments in non-performing loan portfolios and foreclosed real estate
 
 
 
 
 
 
16,707

 
 
 
16,707

Acquisition of a business
 
 
 
 
(144,746
)
 
 
 
 
 
(144,746
)
Net cash used in investing activities
—

 
—

 
(280,914
)
 
(282,207
)
 
—

 
(563,121
)
Cash flow provide by (used in) financing activities:
 
 
 
 
 
 
 
 
 
 
 
Net proceeds from issuance of senior notes
 
 
578,696

 
 
 
 
 
 
 
578,696

Proceeds from loans payable
 
 
 
 
 
 
1,002,934

 
 
 
1,002,934

Principal payments of loans payable
 
 
 
 
(26,800
)
 
(989,281
)
 
 
 
(1,016,081
)
Proceeds from stock-based benefit plans
33,747

 
 
 
 
 
 
 
 
 
33,747

Excess tax benefits from stock-based compensation
5,776

 
 
 
 
 
 
 
 
 
5,776

Purchase of treasury stock
(505
)
 
 
 
 
 
 
 
 
 
(505
)
Net cash provided by (used in) financing activities
39,018

 
578,696

 
(26,800
)
 
13,653

 
—

 
604,567

Net decrease in cash and cash equivalents
—

 
—

 
(63,925
)
 
(63,591
)
 
—

 
(127,516
)
Cash and cash equivalents, beginning of year
—

 
—

 
775,300

 
131,040

 
—

 
906,340

Cash and cash equivalents, end of year
—

 
—

 
711,375

 
67,449

 
—

 
778,824



Securities and Exchange Commission
April 5, 2013
Page 7

*                                                                                  *                                                                                  *
We are grateful for your assistance in this matter. Please do not hesitate to call me at (215) 938-8045 with any questions or further comments you may have regarding this letter or if you wish to discuss our responses to the Comment Letter.
Yours truly,
/s/ Joseph R. Sicree
Joseph R. Sicree
Senior Vice President and
Chief Accounting officer