TOL

Toll Brothers, Inc. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended April 30, 2010, and the six-month period ended on that date. Toll Brothers, Inc. is a luxury homebuilder operating in four geographic segments: North, Mid-Atlantic, South, and West. The company reported a net loss for the period, though results showed significant improvement compared to the prior year due to reduced inventory impairments and lower contract cancellation rates.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 21.0% for the six-month period and 21.9% for the three-month period compared to the prior year. This was driven by a decrease in the number of homes delivered (13.3% and 16.2% respectively) and a decrease in average sales prices (8.9% and 6.7% respectively).
• Improved Profitability: Despite lower revenues, the net loss narrowed significantly (52.8% reduction for six months). This improvement was primarily due to a substantial decrease in inventory impairment charges ($75.7 million vs. $270.3 million for the six-month period) and lower selling, general, and administrative (SG&A) expenses.
• Contract Activity: Net contracts signed increased 77.5% in value for the six-month period and 55.7% for the three-month period. The contract cancellation rate improved dramatically to 5.9% (six months) and 5.3% (three months) compared to 27.3% and 21.7% in the prior year periods.
• Backlog: Backlog increased 5.2% to $993.5 million (1,738 homes) at April 30, 2010, compared to $944.3 million at April 30, 2009.

Guidance, Outlook, and Risks

• Fiscal 2010 Guidance: Management estimates delivering between 2,200 and 2,750 homes in fiscal 2010 at an average sales price between $550,000 and $560,000.
• Outlook: Management believes many markets are turning the corner but expects a gradual recovery dependent on consumer confidence and unemployment rates. The company is actively acquiring land, having secured control of over 2,800 lots in the six-month period.
• Liquidity: The company maintains a strong balance sheet with $1.55 billion in cash and marketable securities and approximately $1.40 billion available under a revolving credit facility.
• Risks and Contingencies:
  • Legal Proceedings: Ongoing litigation includes a securities class action, shareholder derivative suits, and EPA/DOJ investigations regarding stormwater discharge. Additionally, the company is involved in litigation regarding defective Chinese-made drywall in West Florida homes.
  • Inventory Valuation: Significant judgment is required in assessing inventory impairment. Future deterioration in market conditions could necessitate additional write-downs.
  • Tax Assets: The company has recorded valuation allowances against its entire net deferred tax assets ($493.3 million) due to uncertainty in realizing these assets, though it expects tax refunds from carrybacks.

Investor Verification Checklist

• Inventory Impairment Trends: Verify if the reduction in impairment charges ($75.7M vs $270.3M) is sustainable or if further write-downs are likely given the housing market volatility.
• Contract Cancellation Rates: Monitor if the improved cancellation rate (5.9%) holds steady, as high cancellations previously eroded backlog and revenue.
• Land Acquisition Strategy: Assess the cost and location of the 2,800 new lots acquired to ensure they align with the company's luxury market positioning and future demand.
• Legal Exposure: Review updates on the Chinese drywall litigation and EPA stormwater settlement discussions for potential financial impact beyond current accruals.
• Deferred Tax Assets: Evaluate the likelihood of reversing the $493.3 million valuation allowance on deferred tax assets as the company moves toward profitability.