Toll Brothers, Inc. Fiscal 2012 Form 10-K Summary
Business context and reporting period
Toll Brothers designs, builds, markets and finances luxury detached and attached homes, with related apartment, condominium, commercial and distressed-real-estate investments. The filing covers the fiscal year ended October 31, 2012, including quarterly data for the fourth quarter ended October 31, 2012. The company operated in 19 states and had 224 selling communities and approximately 40,350 owned or optioned home sites at year-end.
Key financial metrics
| Metric | Fiscal 2012 | Fiscal 2011 | Change |
|---|---|---|---|
| Revenue | $1.883 billion | $1.476 billion | +27.6% |
| Income before income taxes | $112.9 million | $(29.4) million | Returned to pretax profit |
| Net income | $487.1 million | $39.8 million | Material increase |
| Diluted EPS | $2.86 | $0.24 | Material increase |
| Gross profit | Approximately $350.7 million | Approximately $215.1 million | Gross margin improved to approximately 18.6% from 14.6% |
| Operating income | $63.4 million | $(47.7) million | Returned to operating profit |
| Cash flow from operations | $(169.0) million | $52.9 million | Declined, primarily from inventory and mortgage activity |
| Cash, equivalents and marketable securities | $1.218 billion | $1.140 billion | +6.8% |
| Total debt | $2.253 billion | $1.655 billion | Increased primarily from senior-note issuance |
| Inventory | $3.761 billion | $3.417 billion | +10.1% |
Reported fiscal 2012 net income was substantially affected by a $394.7 million reversal of deferred tax asset valuation allowances. Excluding this reversal, the company recorded an income tax provision of approximately $20.5 million; therefore, the reported net margin of approximately 25.9% is not representative of recurring operating profitability. Operating margin was approximately 3.4%.
- Homes delivered increased to 3,286 from 2,611, while revenue per delivered home also increased.
- Gross contracts signed increased to $2.665 billion on 4,341 homes from $1.708 billion on 2,965 homes.
- Net contracts signed increased to $2.558 billion on 4,159 homes, up 59.4% in value and 49.4% in units.
- Backlog rose to $1.670 billion on 2,569 homes from $981.1 million on 1,667 homes; approximately 96% of the year-end backlog was scheduled for delivery by October 31, 2013.
- Contract cancellation rates improved to 4.2% of units and 4.0% of value from 6.1% and 6.0%, respectively.
- Inventory impairment charges and write-offs declined to $14.7 million from $51.8 million; no impairment charges were recorded on unconsolidated entities in fiscal 2012, compared with $40.9 million in fiscal 2011.
Liquidity, debt and commitments
At October 31, 2012, Toll Brothers held $778.8 million of cash and cash equivalents and $439.1 million of marketable securities. Its $885 million revolving credit facility, maturing in October 2014, had no borrowings outstanding and approximately $814.9 million of availability after letters of credit. The company reported a leverage ratio of approximately 0.31 to 1.00 versus a 1.75 to 1.00 maximum covenant and tangible net worth of approximately $3.07 billion.
Fiscal 2012 financing included approximately $300 million of 5.875% senior notes due 2022 and $287.5 million of 0.5% exchangeable senior notes due 2032. The company had $2.080 billion of senior notes recorded at year-end. It repaid the $59.1 million of 6.875% senior notes due November 15, 2012 in November 2012. Contractual obligations totaled approximately $4.026 billion, including $2.708 billion of senior-note obligations, $993.3 million of purchase obligations and $128.4 million of loans payable.
Cash used in operating activities was $169.0 million, cash used in investing activities was $563.1 million and cash provided by financing activities was $604.6 million. Investing uses included the $144.7 million CamWest acquisition, $217.2 million of funding for joint ventures, $30.1 million for non-performing loan portfolios and $14.5 million for property and equipment. The company stated that existing cash and credit sources were expected to fund current operations and contractual obligations.
Material changes versus the prior comparable period
- Revenue and deliveries increased substantially, supported by stronger demand, higher beginning backlog, more selling communities and the CamWest acquisition.
- Cost of revenues declined to 81.4% of revenue from 85.4%; excluding impairments, the ratio improved to 80.6% from 81.9%.
- SG&A increased 9.9% in dollars but declined to 15.3% of revenue from 17.7%.
- The company moved from operating and pretax losses to operating and pretax profits. South and West segments became profitable before taxes, while North and Mid-Atlantic remained profitable.
- Land controlled increased to approximately 40,350 home sites from 37,497, reflecting renewed land acquisition activity. The company acquired control of approximately 6,100 home sites during fiscal 2012.
- CamWest, acquired in November 2011 for approximately $144.7 million, contributed 201 deliveries and $99.7 million of revenue in fiscal 2012.
- The company increased investments in unconsolidated entities to $330.6 million from $126.4 million and had $97.0 million of additional funding commitments.
Guidance, outlook, commentary and risks
Management believed the U.S. housing market began recovering in fiscal 2012, supported by lower unemployment, improved consumer confidence, rising home prices, reduced inventory and low mortgage rates. Management expected to be selling from 225 to 255 communities by October 31, 2013 and anticipated reopening three temporarily closed communities. The company cited its backlog as support for expected fiscal 2013 revenue and pretax-income growth, but did not provide specific numerical earnings guidance.
Key risks include a renewed housing downturn, weaker employment or consumer confidence, higher mortgage rates, tighter mortgage standards, increased cancellations, lower home prices, inventory impairments, construction-cost inflation, land-approval delays, regulatory restrictions, adverse weather, construction-defect claims, joint-venture funding obligations and refinancing risk. Approximately $704.1 million of additional cash could be required to acquire land under existing purchase commitments. The company also had $330.6 million invested in unconsolidated entities, $97.0 million of additional funding commitments, $9.8 million of guaranteed ground-lease payments, $382.2 million of surety bonds and $83.1 million of letters of credit.
Legal proceedings were described as arising principally in the ordinary course of business. A Clean Water Act matter was subject to a consent decree, and shareholder derivative litigation was subject to a proposed settlement; management did not expect these matters to have a material adverse effect. Internal control over financial reporting was determined effective, and the independent auditor issued unqualified opinions.
Important facts for investors to verify
- Separate recurring operating performance from the $394.7 million deferred-tax valuation-allowance reversal included in fiscal 2012 net income.
- Confirm the conversion of the $1.670 billion backlog into deliveries, revenue and cash flow during fiscal 2013, including cancellation trends.
- Monitor operating cash flow, inventory growth and the company’s ability to fund land purchases and joint-venture commitments without materially increasing leverage.
- Review the maturity schedule for senior notes and other debt, including the 2013-2015 obligations and the October 2014 revolving-credit-facility maturity.
- Assess the sensitivity of inventory and joint-venture valuations to sales pace, pricing, incentives, discount rates and housing-market conditions.
- Evaluate exposure from mortgage commitments, construction warranties, surety bonds, letters of credit, litigation and regulatory matters.
- Consider potential dilution from the approximately 5.9 million shares issuable upon conversion of the 0.5% exchangeable senior notes.