Toll Brothers, Inc. Form 10-Q Summary
Business context and reporting period
Toll Brothers is a luxury and affordable-luxury homebuilder operating through Traditional Home Building and City Living segments across U.S. markets. The filing covers the three and six months ended April 30, 2021, the second quarter and first six months of fiscal 2021, compared with the corresponding fiscal 2020 periods.
Management reported that demand remained very strong, supported by low mortgage rates, limited resale inventory, favorable demographics, an under-supply of new homes, and an improving economy. Comparisons with fiscal 2020 were affected by COVID-19 disruptions and stay-at-home orders, particularly in the second quarter of 2020.
Key financial metrics
| Metric | Three months ended April 30, 2021 | Year-over-year change | Six months ended April 30, 2021 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $1.93 billion | +25% | $3.49 billion | +21% |
| Home sales revenue | $1.84 billion | +21% | $3.25 billion | +15% |
| Income from operations | $184.4 million | +99% | $303.5 million | +117% |
| Net income | $127.9 million | +69% | $224.4 million | +69% |
| Diluted EPS | $1.01 | From $0.59 | $1.77 | From $0.99 |
| Operating margin | 9.6% | From 6.0% | 8.7% | From 4.9% |
| Net margin | 6.6% | From 4.9% | 6.4% | From 4.6% |
Home sales cost of revenues declined to 78.1% of home sales revenue in the quarter from 80.5%, and to 78.7% for the six-month period from 80.1%. Management attributed the improvement primarily to price increases, favorable product and geographic mix, lower inventory impairments, and lower interest expense as a percentage of home sales. SG&A was 11.9% of home sales revenue in the quarter and 13.2% for the six months, compared with 13.8% and 15.2%, respectively.
Deliveries increased 18% to 2,271 homes in the quarter and 15% to 4,048 homes for the six months. Average delivered prices increased 3% to approximately $809,000 in the quarter and 1% to approximately $802,000 for the six months.
Demand, contracts, backlog, and inventory
- Second-quarter net contracts increased 85% to 3,487 homes, with contract value up 97% to $3.05 billion.
- Six-month net contracts increased 72% to 6,361 homes, with contract value up 83% to $5.56 billion.
- April 30 backlog increased 57% to 10,104 homes and 58% to $8.69 billion; average backlog price was approximately $860,000.
- The company owned or controlled approximately 74,500 home sites, including approximately 38,000 owned and 36,500 controlled through options.
- Inventory was $8.26 billion at April 30, 2021, up from $7.66 billion at October 31, 2020, driven primarily by operating-community inventory.
- Inventory impairments and write-offs were $2.8 million for the six months, compared with $15.2 million in the prior-year period.
Cash flow, liquidity, and debt
- Cash and cash equivalents were $715.0 million at April 30, 2021, compared with $1.37 billion at October 31, 2020. Cash, cash equivalents, and restricted cash totaled $746.4 million.
- Operating cash flow was positive at $27.3 million for the six months, compared with negative $191.1 million in the prior-year period. Inventory investment used $528.0 million of cash.
- Investing activities provided $41.6 million, including $144.0 million of returns from unconsolidated entities and $80.4 million from asset sales, partly offset by $153.8 million of investments in unconsolidated entities.
- Financing activities used $719.1 million, including $294.2 million for senior-note redemption, $179.6 million for share repurchases, $212.8 million of net loan repayments, and $35.3 million of dividends.
- Total debt carrying value, including loans payable, senior notes, and the mortgage company facility, was approximately $3.59 billion. Debt to total capitalization was 0.42 to 1.00.
- The company had no borrowings under its $1.905 billion revolving credit facility and approximately $1.790 billion of availability after outstanding letters of credit of $114.9 million.
- The company repaid $150 million of its term loan in January 2021, leaving $650 million outstanding due November 1, 2025.
- The company redeemed $250 million of 5.625% senior notes due 2024 and recorded a $34.2 million pretax early-retirement charge.
Material changes versus the prior comparable period
- Revenue, deliveries, contracts, backlog, operating income, and net income increased substantially, although the prior-year comparison was depressed by the initial COVID-19 disruption.
- Profitability improved as selling prices increased faster than costs, mix shifted toward higher-margin products and markets, and SG&A was leveraged over higher revenue.
- Land sales and other revenue increased to $93.9 million in the quarter and $246.5 million for the six months. The six-month period included $38.3 million of gains from selling a Hoboken parking garage and retail space.
- Income from unconsolidated entities increased to $10.5 million in the quarter and $11.7 million for the six months, including gains from joint-venture property sales and lower impairment charges.
- Cash generation improved from the prior year, but cash declined because of debt repayment, senior-note redemption, share repurchases, dividends, and continued investment in inventory and joint ventures.
- The quarterly dividend increased from $0.11 to $0.17 per share. The company repurchased approximately 4.0 million shares during the six months, compared with approximately 15.9 million in the prior-year period.
Guidance, outlook, commentary, and risks
Management did not provide a clear full-year quantitative earnings or delivery guidance figure in the filing text. Management expects strong demand to continue through fiscal 2021 if market conditions remain favorable and intends to continue raising prices and limiting lot releases to manage growth and profitability.
Management expects pricing to offset most labor and material cost increases, particularly lumber, but identified supply-chain disruptions, material availability, construction labor shortages, mortgage rates, inflation, employment, consumer confidence, and the continuing COVID-19 pandemic as uncertainties.
- Land purchase commitments totaled $3.28 billion, with $3.06 billion of additional cash potentially required if all parcels are acquired.
- The company had $533.6 million invested in unconsolidated entities and up to $88.3 million of additional funding commitments.
- Guarantees related to unconsolidated entities represented estimated maximum exposure of $259.7 million on debt already borrowed and $352.9 million if all relevant commitments were borrowed, before collateral recoveries or partner reimbursements.
- Warranty accruals were $153.6 million. Water-intrusion claims and related insurance recoveries remain subject to significant estimation uncertainty, litigation, arbitration, and potentially material differences from recorded amounts.
- The Pennsylvania Attorney General continues to review construction of stucco homes; management cannot predict the scope or outcome.
- Outstanding surety bonds totaled $1.06 billion and letters of credit totaled $114.9 million. Management did not believe draws were probable.
- The company is implementing a new enterprise resource planning system that will be a significant component of internal control over financial reporting.
Facts investors should verify
- Whether strong contract activity and the $8.69 billion backlog convert into deliveries without materially higher cancellations or construction delays.
- Whether price increases continue to offset lumber, labor, transportation, and other construction-cost inflation.
- The aging, maturity profile, and refinancing requirements of the approximately $3.59 billion of debt.
- Cash requirements for the $3.28 billion of land commitments, joint-venture funding, and apartment-development commitments.
- The ultimate cost and insurance recovery associated with water-intrusion, construction-defect, and other legal claims.
- The effect of COVID-19 developments, mortgage rates, inflation, housing affordability, and economic conditions on demand and margins.
- The extent to which reported earnings benefited from unusual items, including the $38.3 million Hoboken asset-sale gain, joint-venture gains, and the $34.2 million debt-retirement charge.