Toll Brothers, Inc. — Fiscal 2014 First-Quarter 10-Q Summary
Business context and reporting period
The filing covers the three months ended January 31, 2014, compared with the three months ended January 31, 2013. Toll Brothers designs, builds, markets and finances luxury and move-up residential properties, including traditional suburban homes and urban infill developments. The company operated in 20 states and was selling from 238 communities at January 31, 2014.
Key financial metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Revenue | $643.7 million | $424.6 million | Up 51.6% |
| Income from operations | $31.8 million | $0.6 million | Significant increase |
| Income before taxes | $71.2 million | $8.3 million | Significant increase |
| Net income | $45.6 million | $4.4 million | Significant increase |
| Diluted earnings per share | $0.25 | $0.03 | Increase |
| Cash used in operating activities | $250.4 million | $305.8 million | Lower use of cash |
| Cash and cash equivalents at period-end | $1.190 billion | $368.8 million | Increase |
Revenue growth reflected 928 homes delivered versus 746 in the prior-year quarter and an average delivered home price of approximately $693,600 versus $569,200. Cost of revenues declined to 79.9% of revenue from 81.5%; excluding inventory impairments, the ratio declined to 79.6% from 81.3%. SG&A declined to 15.2% of revenue from 18.4%. Reported operating margin was approximately 4.9% versus 0.1%, and net margin was approximately 7.1% versus 1.0%.
Net contracts signed totaled $701.7 million for 916 homes, compared with $614.4 million for 973 homes. Backlog increased to $2.69 billion for 3,667 homes from $1.86 billion for 2,796 homes, increases of 44.5% in value and 31.1% in units.
Operating cash use was driven primarily by a $363.9 million increase in inventory. Financing activities provided $803.1 million, including $600.0 million of senior-note proceeds and $220.4 million of net equity issuance proceeds. At January 31, 2014, inventory was $5.236 billion, up from $4.650 billion at October 31, 2013, while total liabilities were $4.133 billion and total equity was $3.627 billion.
Material changes versus the prior comparable period
- Home deliveries increased 24.4%, while the average delivered home price increased 21.9%.
- Traditional Home Building revenue rose to $633.5 million from $411.7 million. City Living revenue declined to $10.2 million from $12.9 million.
- Traditional Home Building income before taxes increased to $81.9 million from $30.4 million. City Living moved to a $1.1 million loss from $2.7 million of income.
- Income from unconsolidated entities increased to $22.9 million from $3.1 million, primarily because of a $23.5 million gain from Toll Brothers Realty Trust II’s sale of substantially all of its assets.
- Other income increased to $16.5 million from $4.6 million, including $2.9 million of previously deferred gains on initial property sales to Trust II.
- Inventory impairment charges increased to $2.0 million from $0.7 million.
- The company issued 7.2 million common shares in November 2013 and issued $600 million of senior notes to help fund the planned Shapell acquisition.
Guidance, outlook, commentary and unusual items
Management described demand as having leveled off beginning in the fourth quarter of fiscal 2013 and continuing into fiscal 2014. Management attributed the pause to higher interest rates, rising home prices, political uncertainty and severe weather. The company nevertheless expected to be selling from 250 to 290 communities at October 31, 2014, compared with 238 at January 31, 2014.
On February 4, 2014, after the reporting date, Toll Brothers completed its approximately $1.60 billion cash acquisition of Shapell Industries. The acquisition added approximately 4,950 California home sites, 11 active selling communities and approximately $120 million of cash, and included assumed contracts for approximately 126 homes valued at approximately $105.3 million. The company stated that it may selectively sell assets, but cautioned that the timing and terms of such sales are uncertain.
The acquisition was financed with a $485 million five-year unsecured term loan, $370 million initially borrowed under the existing revolving credit facility, and proceeds from November 2013 debt and equity financings. The revolving-facility borrowing was fully repaid by February 26, 2014. A new $500 million 364-day unsecured revolving facility was established for additional liquidity and was intended to remain undrawn.
At January 31, 2014, the company had approximately $1.20 billion of cash, cash equivalents and marketable securities and approximately $963.9 million available under its $1.035 billion revolving credit facility. Its leverage ratio was approximately 0.51 to 1.00 versus a 1.75 to 1.00 maximum covenant, and tangible net worth was approximately $3.57 billion versus a minimum of approximately $2.42 billion.
Key risks include housing-demand volatility, interest rates, mortgage availability, home-buyer cancellations, land and inventory impairment, lengthy regulatory approvals, construction costs, access to financing, execution of the Shapell integration and asset sales, and obligations related to joint ventures. The company had $1.168 billion of land purchase commitments, $76.9 million of potential additional funding commitments to unconsolidated entities, and estimated maximum guarantee exposure of $89.8 million based on amounts currently borrowed, or $424.8 million if all guaranteed loan commitments were drawn.
Most important facts for investors to verify
- Whether demand, contracts signed and cancellation rates recover after the reported weather- and rate-related slowdown.
- The contribution, integration costs and eventual asset sales associated with the Shapell acquisition.
- Inventory growth, carrying values and future impairment risk, particularly as inventory reached $5.236 billion.
- Cash conversion and the extent to which operating cash use remains driven by land and construction investment.
- Debt maturities, interest-rate exposure and compliance with revolving-credit and term-loan covenants after the acquisition financing.
- Performance and funding requirements of unconsolidated joint ventures, including guarantee and contingent funding exposure.
- City Living profitability, which deteriorated to a pretax loss during the quarter.
- Management’s community-count outlook of 250 to 290 communities at fiscal year-end and the related land acquisition pace.