Toll Brothers, Inc. — Fiscal 2015 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended April 30, 2015; comparative periods ended April 30, 2014. Toll Brothers is a U.S. luxury homebuilder operating in 19 states through Traditional Home Building and City Living segments, with related mortgage, land development, rental, ancillary and joint-venture activities.
Financial performance and liquidity
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Revenue | $852.6 million vs. $860.4 million | $1,706.0 million vs. $1,504.1 million |
| Net income | $67.9 million vs. $65.2 million | $149.3 million vs. $110.8 million |
| Diluted EPS | $0.37 vs. $0.35 | $0.81 vs. $0.60 |
| Income from operations | $66.4 million vs. $68.1 million | $163.5 million vs. $99.8 million |
| Cost of revenues as a percentage of revenue | 79.6% vs. 80.0% | 77.9% vs. 79.9% |
| SG&A as a percentage of revenue | 12.6% vs. 12.1% | 12.5% vs. 13.4% |
| Income before taxes | $86.5 million vs. $93.5 million | $210.6 million vs. $164.7 million |
- Six-month revenue increased 13.4%, reflecting 2,286 deliveries versus 2,146 and a higher average delivered home price of approximately $746,300 versus $700,900.
- Second-quarter revenue declined 0.9%, primarily because deliveries fell to 1,195 homes from 1,218, partly offset by a higher average delivered home price of approximately $713,500 versus $706,400.
- Six-month operating margin improved to approximately 9.6% from 6.6%; net margin increased to approximately 8.7% from 7.4%. Second-quarter operating margin was approximately 7.8% versus 7.9%, and net margin was approximately 8.0% versus 7.6%.
- Cash used in operating activities was $37.9 million for the six months, improving from $66.2 million used in the prior-year period. Inventory increased by $201.9 million.
- Cash and cash equivalents were $532.2 million at April 30, 2015, with $10.0 million of marketable securities. Approximately $937.2 million was available under the $1.035 billion revolving credit facility; there were no borrowings under that facility, although $97.8 million of letters of credit were outstanding.
- Total debt book value was approximately $3.40 billion, comprising $674.8 million of loans payable, $2.66 billion of senior notes and $70.1 million under the mortgage company facility. Debt-to-total-capitalization was 0.46 to 1.00.
- Backlog was $3.48 billion on 4,387 homes, up 8.6% in value from $3.21 billion on 4,324 homes at April 30, 2014.
Material changes versus the prior comparable period
- Net contracts signed increased 24.9% in value and 12.3% in units for the six months, to $2.47 billion and 2,994 homes. The average contract value increased 11.2%.
- Traditional Home Building six-month contract value increased 27.0%, led by the West and North regions. City Living contract value declined 3.4% for the six months, although it increased 20.8% in the second quarter.
- City Living revenue increased 176.1% for the six months because of higher-priced New York City deliveries, but declined 52.1% in the second quarter because of delivery timing and new product openings.
- Income from unconsolidated entities decreased to $11.1 million from $37.2 million for the six months and to $6.2 million from $14.3 million for the quarter. The prior-year period benefited from a $23.5 million Trust II gain and a $12.0 million Trust refinancing distribution.
- Other income increased to $35.9 million from $27.6 million for the six months, including an $8.1 million gain from the bulk sale of security-monitoring accounts.
- Inventory impairment charges increased to $13.3 million from $3.9 million for the six months, including $12.0 million related to operating communities. The second-quarter charge was $12.2 million versus $1.9 million.
- The effective tax rate declined to 29.1% from 32.7% for the six months and to 21.5% from 30.2% for the quarter, aided by a $13.7 million reversal of a previously recognized tax provision related to a taxing-jurisdiction settlement.
Outlook, risks and unusual items
- Management reported strengthening customer demand since the third quarter of fiscal 2014 and said the trend continued into the third quarter of fiscal 2015. It expressed optimism that demand may continue strengthening, while noting that results remain dependent on housing-market conditions.
- Management expected to be selling from 270 to 310 communities by October 31, 2015, compared with 269 communities at April 30, 2015.
- The company owned or controlled approximately 45,000 home sites, including approximately 8,600 under options, and had $1.06 billion of land purchase commitments. Deposits totaled $71.1 million, leaving approximately $990.4 million of potential additional cash requirements if all parcels are acquired.
- Investments in unconsolidated entities totaled $467.3 million, with remaining funding commitments of $80.9 million. Debt guarantees for joint ventures had estimated maximum exposure of $412.5 million based on amounts borrowed, or $922.2 million if full loan commitments were drawn, before partner reimbursement.
- The company had $610.5 million of surety bonds related primarily to community improvements and an additional $106.3 million securing other obligations. Management did not believe outstanding bonds or letters of credit were likely to be drawn.
- Warranty and self-insurance reserves included ongoing exposure from stucco-related claims in Pennsylvania and Delaware. Management believed existing reserves and insurance were sufficient, but noted that actual costs could differ materially from estimates. Three multifamily construction claims in the West were also under early review.
- In May 2015, after the reporting date, the company repaid $300.0 million of 5.15% senior notes at maturity using $50.0 million of cash and $250.0 million borrowed under the revolving credit facility.
- Management stated that it expected adequate resources and access to capital to fund operations and contractual obligations, while cautioning that economic conditions and industry uncertainty could affect future financing availability.
Investor verification points
- Verify whether stronger contract activity converts into deliveries, revenue and cash generation, particularly given the quarter’s lower deliveries and continued inventory investment.
- Monitor the size, timing and recoverability of inventory, land commitments and the elevated operating-community impairment charges.
- Assess liquidity after the May 2015 senior-note repayment, including revolving-credit borrowings, interest costs and covenant compliance.
- Review the potential impact of joint-venture guarantees, funding commitments, land purchases and construction obligations.
- Evaluate the sustainability of earnings excluding the $8.1 million security-monitoring gain, tax benefit and volatile joint-venture and land-sale results.
- Track stucco-related warranty claims, multifamily construction claims and any changes to reserves or insurance recoveries.
- Consider sensitivity to mortgage availability, interest rates, home prices, sales pace, cancellations, construction costs and regional demand, particularly in the South and City Living markets.