TOL

Toll Brothers, Inc. 10-Q Summary

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended April 30, 2008 (Fiscal 2008 Q3) and the six-month period ended April 30, 2008. Toll Brothers, Inc. is a national homebuilder operating in four geographic segments: North, Mid-Atlantic, South, and West. The company reported a significant deterioration in financial performance compared to the prior year, driven by a severe slowdown in the housing market, increased contract cancellations, and substantial inventory and joint venture impairment charges.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 27% for the six months and 30% for the three months ended April 30, 2008, compared to the prior year. This was primarily due to a 28% decrease in homes delivered and increased sales incentives (averaging $68,000 per home in the six-month period vs. $29,000 in the prior year).
• Impairment Charges: The company recognized $533.6 million in inventory and joint venture impairment charges for the six months ended April 30, 2008, compared to $225.6 million in the prior year. This included $420.7 million in inventory write-offs and $112.8 million in losses from unconsolidated entities.
• Backlog Contraction: Backlog value dropped 50% to $2.08 billion, and unit count dropped 47% to 3,035 homes. Net new contracts signed declined 55% in value and 40% in volume for the six-month period.
• Profitability: The company swung from a net income of $91.0 million in the prior six-month period to a net loss of $189.7 million. Cost of revenues as a percentage of revenue increased to 103.0% (including impairments) from 84.0% in the prior year.

Guidance, Outlook, and Risks

• Guidance: Management provided guidance on June 3, 2008, projecting full fiscal year 2008 deliveries between 4,200 and 4,800 homes with an average delivered price of $630,000 to $650,000. They expect costs as a percentage of revenues to be higher than in fiscal 2007 due to incentives and slower deliveries.
• Liquidity: The company maintains a strong balance sheet with $1.24 billion in cash and $1.27 billion available under a revolving credit facility. Leverage ratio was 0.31 to 1.00, well below the 2.00 to 1.00 covenant limit.
• Risks:
  • Market Conditions: Continued decline in consumer confidence, inability of buyers to sell existing homes, and mortgage market turmoil.
  • Joint Ventures: Risk of additional losses from unconsolidated entities if partners fail to meet obligations or if market conditions worsen.
  • Legal Proceedings: Ongoing securities class action suits and environmental investigations (EPA/DOJ) regarding storm water discharge, though management does not expect a material impact.

Investor Verification Checklist

• Impairment Sustainability: Verify if the $533.6 million in impairment charges represents a one-time write-down or if further write-downs are likely given the continued market downturn.
• Backlog Quality: Assess the cancellation rate (26.4% for the six months) and the likelihood of the remaining $2.08 billion backlog converting to revenue.
• Joint Venture Exposure: Review the specific details of the $196.6 million invested in unconsolidated entities and the $50.3 million in outstanding guarantees to understand potential future liabilities.
• Interest Rate Sensitivity: Confirm the impact of rising interest rates on variable-rate debt ($613 million) and the ability of buyers to secure financing.
• Land Position: Evaluate the $1.80 billion in land purchase commitments and the company's ability to renegotiate or terminate options without significant loss of deposits.