Toll Brothers, Inc. — Form 10-Q Summary
Business context and reporting period
Toll Brothers is a luxury homebuilder operating across four U.S. geographic segments: North, Mid-Atlantic, South and West, with mortgage, title, landscaping, security, golf and distressed-real-estate investment activities. The filing covers the three and nine months ended July 31, 2011, compared with the corresponding 2010 periods. The company reported from 207 selling communities at July 31, 2011 and expected 210 to 220 communities by October 31, 2011.
Financial performance and key metrics
| Metric | Three months ended July 31, 2011 | Three months ended July 31, 2010 | Nine months ended July 31, 2011 | Nine months ended July 31, 2010 |
|---|---|---|---|---|
| Revenue | $394.3 million | $454.2 million | $1,048.1 million | $1,092.2 million |
| Net income (loss) | $42.1 million | $27.3 million | $24.8 million | $(53.9) million |
| Diluted EPS | $0.25 | $0.16 | $0.15 | $(0.33) |
| Loss from operations | $(10.2) million | $(7.6) million | $(44.6) million | $(133.0) million |
| Cost of revenues as a percentage of revenue | 86.2% | 85.8% | 85.7% | 92.7% |
| Operating cash flow | Not separately provided | Not separately provided | $46.5 million | $(62.5) million |
Nine-month revenue declined 4.0%, primarily because homes delivered decreased 4.5%, partly offset by a 0.5% increase in average selling price. Third-quarter revenue declined 13.2%, reflecting a 13.7% decrease in homes delivered, partly offset by a 0.6% increase in average selling price.
Excluding inventory impairments, cost of revenues was 82.4% of revenue for the nine-month period and 82.0% for the quarter, compared with 84.6% and 83.0%, respectively, in the prior-year periods. SG&A was $192.9 million for nine months and $64.6 million for the quarter, representing 18.4% and 16.4% of revenue.
Nine-month results included $34.9 million of inventory impairments and write-offs, $39.6 million of impairments of investments in unconsolidated entities, $3.4 million of debt-repurchase costs and a $69.4 million income-tax benefit. The quarter included $16.8 million of inventory impairments, $3.4 million of debt-repurchase costs and a $38.2 million tax benefit.
At July 31, 2011, cash and cash equivalents were $890.1 million and marketable securities were $294.3 million, for combined cash and marketable securities of approximately $1.18 billion. Inventory was $3.42 billion, up from $3.24 billion at October 31, 2010. Total assets were $5.08 billion and stockholders’ equity was $2.61 billion.
Debt included $1.50 billion of senior notes, $104.5 million of loans payable and $39.9 million of mortgage-company warehouse borrowings. Total debt book value was approximately $1.65 billion. The company had no borrowings under its $885 million revolving credit facility, with $777.5 million available and approximately $107.5 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Nine-month net income improved from a $53.9 million loss to $24.8 million of income, despite lower revenue, primarily because inventory impairments declined by $53.4 million and directly expensed interest declined by $17.1 million.
- Third-quarter net income increased to $42.1 million from $27.3 million, although revenue fell $59.9 million and inventory impairments increased from $12.5 million to $16.8 million.
- Nine-month net contracts signed increased 5.0% to $1.21 billion, or 2,140 homes. Third-quarter net contracts increased 1.7% to $406.7 million, or 713 homes.
- Backlog at July 31, 2011 increased 8.5% year over year to $1.02 billion, representing 1,780 homes, compared with $939.4 million and 1,636 homes.
- Contract cancellations were 5.6% of gross contracts for the nine-month period, versus 6.0% in the prior year, but increased to 7.4% for the quarter from 5.3% by value.
- Inventory increased 5.6% from October 31, 2010, while the company expanded controlled home sites to approximately 36,200 from 34,900.
- Senior notes outstanding declined through open-market repurchases, including $45.1 million of 6.875% Senior Notes due 2012 during the quarter.
Guidance, outlook, risks and unusual items
Management believed many housing markets had reached a bottom but expected continued volatility. The outlook depended on improving employment, consumer confidence, financial-market stability and home prices. Management expected pent-up demand to emerge gradually and viewed the company’s land portfolio, liquidity, geographic diversification and brand as strategic advantages.
Key risks included prolonged weakness in housing demand, home-price declines, unemployment, mortgage availability, cancellations, inventory impairment, land-approval delays, construction costs, labor and material availability, interest rates, access to capital, regulatory changes, warranty and construction-defect claims, and litigation.
The company had $561.96 million of aggregate land purchase commitments at July 31, 2011. After deposits and credits, additional cash required to acquire the land was estimated at $472.3 million, of which $57.0 million was recorded in accrued expenses. The company also had $384.8 million of surety bonds primarily supporting governmental improvement obligations.
Unconsolidated investments and the non-performing loan portfolio totaled $186.9 million, with $11.8 million of additional funding commitments. A joint venture had a $327.9 million loan subject to litigation and a proposed settlement requiring bankruptcy-court approval. Management believed adequate provisions had been recorded and did not expect a material adverse effect.
The company received a $154.3 million federal tax refund during fiscal 2011. The unusually large tax benefits primarily reflected reversals of uncertain tax positions, expired tax statutes, settlements and valuation allowances; therefore, reported net income was materially affected by tax items that may not recur.
Important facts for investors to verify
- Whether improved contracts and backlog convert into deliveries and cash flow while cancellations remain elevated in some markets.
- The sensitivity of the $3.42 billion inventory balance and $1.03 billion of land held for future communities to home prices, sales pace and further impairment charges.
- The sustainability of profitability excluding the $69.4 million nine-month tax benefit and other unusual items.
- Debt maturities, refinancing requirements and the company’s ability to preserve revolving-credit availability and covenant compliance.
- The ultimate cost and timing of the joint-venture litigation and proposed settlement, EPA and DOJ storm-water proceedings, and shareholder derivative litigation.
- Future funding needs for land commitments, joint ventures, mortgage operations, letters of credit and surety bonds.