Toll Brothers, Inc. annual report, FY2014

Toll Brothers, Inc. — Fiscal 2014 Form 10-K Summary

Business context and reporting period

This Form 10-K covers the fiscal year ended October 31, 2014, including fourth-quarter results. Toll Brothers designs, builds, markets, and finances luxury detached and attached homes, urban infill homes through City Living, and selected apartment, land-development, golf, mortgage, and distressed-real-estate investments. The Company operated in 19 states and completed the acquisition of Shapell Industries on February 4, 2014.

Fiscal 2014 deliveries: 5,397 homes from 347 communities.
Communities selling at year-end: 263, compared with 232 in fiscal 2013.
Owned or controlled home sites: 47,167, including approximately 36,224 owned and 10,943 optioned.
Shapell added approximately 4,950 California home sites and contributed $300.8 million of revenue and $37.2 million of pretax income from February 4 through October 31, 2014, excluding acquisition costs.

Financial performance and key metrics

Metric	Fiscal 2014	Fiscal 2013	Change
Revenue	$3.912 billion	$2.674 billion	+46.3%
Income from operations	$397.2 million	$201.1 million	+97.6%
Income before taxes	$504.6 million	$267.7 million	+88.5%
Net income	$340.0 million	$170.6 million	+99.3%
Diluted EPS	$1.84	$0.97	+89.7%
Operating margin	10.2%	7.5%	+2.7 points
Net margin	8.7%	6.4%	+2.3 points
Cash flow from operations	$313.2 million	$(569.0) million	Improved by $882.2 million

Cost of revenues was 78.8% of revenue, versus 79.8% in fiscal 2013. Excluding inventory impairments and warranty/litigation charges, cost of revenues was 77.4%, versus 79.6%.
Fiscal 2014 inventory impairment charges and write-offs were $20.7 million, versus $4.5 million in fiscal 2013.
Year-end cash, cash equivalents, and marketable securities were $598.3 million, down from $825.5 million.
Inventory increased to $6.490 billion from $4.650 billion, principally reflecting Shapell and increased land positions.
Total debt was $3.400 billion, up from $2.504 billion. Total equity was $3.861 billion, compared with $3.339 billion.
The Company had approximately $940.2 million available under its $1.035 billion revolving credit facility, no borrowings under that facility, and $94.8 million of outstanding letters of credit.
Fiscal 2014 fourth-quarter revenue was $1.351 billion and net income was $131.5 million. Fourth-quarter gross profit included $32.0 million of stucco-related, construction, and litigation charges.

Material changes versus the prior comparable period

Homes delivered increased 29.0% to 5,397, while the average delivered home price increased 13.4%.
Net contracts signed were $3.896 billion for 5,271 homes, compared with $3.634 billion for 5,294 homes. Dollar value increased 7.2%, while units declined slightly.
Excluding Shapell communities, fiscal 2014 net contracts declined 6.6% in units versus fiscal 2013, reflecting softer demand through much of the year.
Year-end backlog was $2.720 billion for 3,679 homes, compared with $2.629 billion for 3,679 homes. Approximately 98% of the backlog was scheduled for delivery by October 31, 2015.
West segment revenue increased 81.4%, substantially reflecting Shapell deliveries; West pretax income increased to $236.3 million from $111.3 million.
City Living revenue increased 64.9% to $281.4 million and pretax income increased to $104.6 million from $53.3 million, driven by higher high-rise deliveries and improved margins.
Cash flow changed from a $569.0 million use in fiscal 2013 to $313.2 million provided in fiscal 2014, although investing cash outflows were $1.452 billion, including $1.489 billion for Shapell.

Guidance, outlook, risks, contingencies, and unusual items

Management expected to sell from 270 to 310 communities by October 31, 2015 and stated that fourth-quarter fiscal 2014 demand strength continued into the first quarter of fiscal 2015.
Management was optimistic that demand would continue strengthening toward more normalized levels, supported by lower unemployment, improving consumer confidence, pent-up demand, and favorable long-term demographics. No specific fiscal 2015 revenue or earnings guidance was provided.
The Company recognized $41.1 million of income from unconsolidated entities, including a $23.5 million gain from the sale of Trust II assets and a $12.0 million distribution from a Realty Trust refinancing. It also recognized $2.9 million of previously deferred gains.
Mid-Atlantic pretax results included $25.0 million of stucco-related repair charges. The Company estimated potential stucco liability at approximately $54 million and expected to recover approximately 40% from insurers.
Joint-venture investments and advances totaled $447.1 million, with additional potential funding commitments of $84.5 million. Debt guarantees for unconsolidated entities had estimated maximum exposure of $219.0 million based on borrowings outstanding, or $599.2 million if all related loan commitments were drawn.
Land purchase commitments totaled $1.228 billion, including $1.124 billion of additional cash required after deposits. The Company also expected to purchase approximately 3,300 additional lots from joint ventures at prices to be determined.
Key risks include housing demand volatility, mortgage availability and cancellations, interest rates, land and inventory impairments, regulatory approvals, construction defects and warranty claims, subcontractor and material costs, joint-venture obligations, natural disasters, competition, and unknown Shapell liabilities.
Senior notes included $300 million due May 2015; total contractual obligations were $5.864 billion, including estimated interest, purchase obligations, leases, and retirement obligations.
The Company paid no cash dividends and expected to retain earnings for operations and periodic share repurchases.

Most important facts for an investor to verify

Whether the improvement in fourth-quarter and early fiscal 2015 demand persisted and translated into higher contracts, pricing, and backlog conversion.
The sustainability of margins after excluding the Shapell purchase-accounting effects and unusual warranty, litigation, land-sale, and joint-venture gains.
The adequacy of the $86.3 million warranty accrual and $100.4 million self-insurance accrual, particularly for stucco and construction-defect claims.
Cash requirements for the $6.490 billion inventory balance, $1.228 billion of land commitments, joint-venture commitments, and upcoming debt maturities.
Shapell integration results, acquired inventory valuations, purchase-accounting charges, and any previously unknown liabilities.
Actual exposure under joint-venture guarantees, letters of credit, surety bonds, and other off-balance-sheet arrangements.
The effect of mortgage availability, interest rates, cancellations, regulatory delays, and potential future inventory impairments on fiscal 2015 results.