TOL

Toll Brothers, Inc. - 10-Q Summary (Period Ended July 31, 2009)

Business Context and Reporting Period

This is a Quarterly Report (Form 10-Q) for Toll Brothers, Inc., a luxury homebuilder, for the three-month and nine-month periods ended July 31, 2009. The company operates in four geographic segments: North, Mid-Atlantic, South, and West. The reporting period reflects continued severe challenges in the housing market, characterized by declining consumer confidence, high unemployment, and tight credit conditions, though management noted signs of stabilization in contract cancellations and demand in the third quarter.

Key Financial Metrics

Note: Cost of revenues exceeded revenues in both periods due to significant inventory impairment charges and high sales incentives.

Material Changes vs. Prior Period

• Revenue Decline: Revenues for the nine months ended July 31, 2009, decreased 48.4% compared to the same period in 2008 ($2,457.0 million), driven by a 42.5% drop in homes delivered and an 8.7% decrease in average sales price.
• Increased Losses: Net loss widened significantly to $644.4 million for the nine-month period (vs. $219.0 million loss in 2008). This was primarily due to a $443.7 million valuation allowance against deferred tax assets and $391.2 million in inventory and joint venture impairments.
• Contract Activity: Net new contracts signed for the nine months totaled $873.9 million (1,685 homes), a 35% decrease in value from the prior year. However, the number of net new contracts in the third quarter increased 3% year-over-year, marking the first such increase in over three years.
• Cancellation Rates: The contract cancellation rate improved significantly to 8.5% in the third quarter of 2009, down from 19.4% in the same period of 2008.
• Debt Restructuring: The company issued $400 million of 8.91% Senior Notes in April 2009 and redeemed approximately $293 million of senior subordinated notes during the quarter.

Guidance, Outlook, and Risks

• Fourth Quarter Guidance: Management estimates delivering between 475 and 725 homes in the quarter ended October 31, 2009, at an average sales price of $550,000 to $575,000. Cost of sales as a percentage of revenue is expected to be higher than the prior year due to incentives and slower delivery paces.
• Liquidity: The company maintains a strong balance sheet with $1.66 billion in cash and approximately $1.35 billion available under its revolving credit facility. Management believes it has sufficient resources to fund operations and pursue opportunities.
• Key Risks:
  • Market Conditions: Continued uncertainty in the housing market, credit availability, and economic conditions.
  • Inventory Impairments: Ongoing risk of further write-downs if market conditions do not improve.
  • Tax Assets: Significant valuation allowances have been recorded against deferred tax assets due to the uncertainty of future profitability.
  • Legal Proceedings: Ongoing litigation includes a securities class action, shareholder derivative suits, and an EPA/DOJ investigation regarding storm water discharge practices.

Investor Verification Checklist

• Deferred Tax Assets: Verify the sustainability of the $416.8 million valuation allowance recorded against federal deferred tax assets and the likelihood of realizing the remaining $151.7 million net asset.
• Inventory Valuation: Assess the adequacy of inventory reserves given the $379.9 million in impairment charges for the nine-month period and the potential for further write-downs in the West and South segments.
• Backlog Quality: Review the backlog of 1,626 homes ($930.7 million) for potential cancellations, noting the improved but still volatile cancellation rate.
• Debt Covenants: Confirm compliance with the Credit Facility's leverage ratio (0.23 to 1.00) and tangible net worth requirements ($2.59 billion).
• Legal Exposure: Monitor the status of the securities class action and EPA/DOJ settlement discussions for potential financial impact.