Toll Brothers, Inc. - 10-Q Summary (Period Ended July 31, 2003)
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for Toll Brothers, Inc., a luxury homebuilder, for the nine-month and three-month periods ended July 31, 2003. The company operates in affluent markets across the United States, focusing on the construction and sale of single-family homes, townhomes, and land development. As of July 31, 2003, the company was selling from 180 communities.
Key Financial Metrics
| Metric | Nine Months Ended July 31, 2003 | Nine Months Ended July 31, 2002 | Three Months Ended July 31, 2003 | Three Months Ended July 31, 2002 |
|---|---|---|---|---|
| Total Revenues | $1,871.9 million | $1,623.4 million | $693.7 million | $580.7 million |
| Housing Sales Revenue | $1,837.4 million | $1,587.2 million | $678.5 million | $565.4 million |
| Net Income | $166.4 million | $150.5 million | $68.2 million | $53.5 million |
| Diluted EPS | $2.23 | $1.99 | $0.90 | $0.70 |
| Cash and Equivalents | $155.7 million | $102.3 million (Oct 31, 2002) | $155.7 million | $50.7 million (July 31, 2002) |
| Total Debt (Loans + Notes) | $1,300.9 million | $1,072.9 million (Oct 31, 2002) | $1,300.9 million | N/A |
| Backlog (Units/Value) | 4,411 homes / $2.49 billion | 3,441 homes / $1.90 billion | 4,411 homes / $2.49 billion | 3,441 homes / $1.90 billion |
Liquidity: The company reported a net cash outflow from operating activities of $142.6 million for the nine months ended July 31, 2003, primarily due to inventory increases and mortgage loan originations. However, cash flow from operations before land inventory purchases was positive at $179.9 million. The company increased its revolving credit facility to $575 million in July 2003.
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 15% year-over-year for the nine-month period, driven by a 16% increase in housing sales. This was attributed to a 10% increase in average home prices and a 6% increase in units delivered.
- Contract Activity: New sales contracts signed totaled $2.47 billion (4,404 homes) for the nine months ended July 31, 2003, an 18% increase over the prior year. The three-month period saw a 35% increase in contract value.
- Backlog Expansion: The backlog of homes under contract grew 31% to $2.49 billion (4,411 homes) compared to July 31, 2002.
- Debt Restructuring: The company issued $300 million of Senior Notes in November 2002 and recognized a $3.9 million pretax charge in the first quarter of fiscal 2003 related to the early retirement of $100 million in Senior Subordinated Notes.
- Inventory: Inventory increased to $2.97 billion from $2.55 billion at the end of the prior fiscal year, reflecting land acquisition and construction in progress.
Guidance, Outlook, and Risks
Outlook: Management expects to deliver approximately 4,900 homes in fiscal 2003 and 6,000 homes in fiscal 2004. The estimated average price of homes delivered is projected to be approximately $550,000 in fiscal 2003 and between $545,000 and $555,000 in fiscal 2004. SG&A expenses are expected to increase slightly as a percentage of revenues for the full year.
Recent Financing: In August 2003, the company sold 3.0 million shares of common stock for $86.4 million. In September 2003, it sold $250 million of Senior Notes to redeem $100 million of subordinated notes, incurring an estimated $3.3 million pretax charge in the fourth quarter.
Risks and Contingencies:
- Market Conditions: Results are sensitive to interest rates, availability of land, and economic conditions. The filing notes risks related to terrorist attacks, regulatory changes, and labor/material costs.
- Inventory Impairment: The company reviews inventory for impairment under SFAS No. 144. Write-offs of $4.3 million were incurred in the nine-month period ended July 31, 2003.
- Joint Ventures: The company has commitments to contribute up to $16.6 million to joint ventures if required.
Investor Verification Checklist
- Backlog Conversion: Verify the ability to convert the $2.49 billion backlog into revenue given the 4-5 year development cycle for typical communities.
- Debt Maturity Profile: Review the schedule of debt maturities, noting the upcoming redemption of $100 million in subordinated notes in October 2003 and the associated $3.3 million charge.
- Land Acquisition Costs: Assess the impact of rising land and construction costs on gross margins, as housing costs as a percentage of sales are expected to be slightly higher in fiscal 2003.
- Joint Venture Exposure: Confirm the status of capital commitments to unconsolidated entities and the Toll Realty Trust Group.
- Interest Rate Sensitivity: Evaluate the impact of potential interest rate hikes on variable rate debt (approx. $99 million outstanding) and customer mortgage affordability.