Toll Brothers, Inc. — Form 10-Q Summary
Business context and reporting period
Toll Brothers is a luxury homebuilder operating through Traditional Home Building and City Living segments across U.S. markets. This unaudited Form 10-Q covers the three and nine months ended July 31, 2016, with comparisons to the corresponding 2015 periods. Fiscal year-end is October 31, 2016.
Financial performance and position
| Metric | Nine months ended July 31, 2016 | Prior comparable period | Change |
|---|---|---|---|
| Revenue | $3.314 billion | $2.734 billion | +21% |
| Income from operations | $354.6 million | $250.9 million | +41% |
| Operating margin | 10.7% | 9.2% | +150 basis points |
| Income before taxes | $420.9 million | $318.0 million | +32% |
| Net income | $267.7 million | $216.0 million | +24% |
| Diluted EPS | $1.52 | $1.18 | +29% |
| Net margin | 8.1% | 7.9% | Improved |
For the third quarter, revenue was $1.270 billion, up 24%; operating income was $143.5 million, up 64%; and net income was $105.5 million, up 58%. Diluted EPS was $0.61 versus $0.36. Third-quarter operating margin was 11.3% versus 8.5%.
- Home deliveries increased 5% to 3,874 units for the nine months and 6% to 1,507 units for the quarter.
- Average delivered price increased 16% for both periods, to $855,500 for the nine months and $842,700 for the quarter, primarily from geographic and product mix.
- Net contracts signed increased 13% in value and 12% in units for the nine months, and 18% in both value and units for the quarter.
- Backlog at July 31, 2016 was $4.375 billion covering 5,181 homes, up 19% in value and 17% in units from July 31, 2015.
- Cost of revenues declined to 77.7% of revenue from 78.7% for the nine months and to 78.1% from 80.2% for the quarter. SG&A declined to 11.6% from 12.1% for the nine months and to 10.6% from 11.3% for the quarter.
- California was the largest growth contributor; nine-month revenue increased 101% and pretax income increased 177%. South revenue declined 7% and pretax income declined 16%.
Cash flow, debt and liquidity
- Cash used in operating activities was $325.3 million versus $111.3 million in the prior-year period, primarily reflecting a $667.5 million increase in inventory and higher net mortgage loan originations.
- Cash provided by investing activities was $14.5 million, while financing activities used $256.4 million.
- Cash and cash equivalents declined to $351.9 million at July 31, 2016 from $919.0 million at October 31, 2015. Marketable securities of $10.0 million held at October 31, 2015 were sold during the period.
- Inventory increased to $7.671 billion from $6.998 billion, including $5.570 billion in operating communities.
- Total debt book value was approximately $3.892 billion, consisting principally of $1.059 billion of loans payable, $2.693 billion of senior notes and $125.0 million of mortgage-company borrowings.
- The new unsecured revolving credit facility was $1.295 billion, with $450.0 million drawn, approximately $80.0 million of letters of credit outstanding and approximately $765.0 million available at July 31, 2016. The leverage ratio was approximately 0.84 to 1.00 versus a maximum of 1.75 to 1.00.
- Debt to total capitalization was 0.48 to 1.00. Subsequent to quarter-end, the company repaid $100.0 million under the revolving facility and extended the term-loan maturity to August 2, 2021.
Material changes and unusual items
- Inventory impairment charges declined to $11.4 million from $31.3 million for the nine months and to $3.7 million from $18.0 million for the quarter.
- The effective tax rate was 36.4% for the nine months versus 32.1% in 2015; the prior-year period included a $13.7 million tax provision reversal.
- The company repurchased 11.4 million shares for $327.6 million during the nine months, including 3.7 million shares during the quarter. Approximately 18.1 million shares remained authorized at July 31, 2016.
- Additional stucco-related warranty charges were $4.3 million for the nine months and $1.9 million for the quarter. Remaining related warranty reserves were approximately $40.3 million, with expected insurance recoveries of $36.6 million.
- Other income included land-sale gains, joint-venture activity and ancillary businesses. The nine-month period benefited from a $4.9 million gain on the sale of a joint-venture interest and a $1.3 million gain related to Gibraltar assets; the prior-year period benefited from an $8.1 million security-monitoring bulk-sale gain.
Outlook, commentary and risks
Management described housing demand as generally strengthening from the third quarter of fiscal 2014 through the third quarter of fiscal 2016 and characterized the housing market as continuing to grow slowly but steadily. Management cited low interest rates, improving employment, constrained supply and demographic demand. It stated that current liquidity and access to capital should be adequate to fund operations and contractual obligations, while cautioning that future financing may be affected by economic and homebuilding-market uncertainties.
- The company controlled approximately 48,700 home sites, including 35,600 owned sites and 13,100 optioned sites, and was selling from 297 communities.
- Land purchase commitments totaled $1.559 billion, against deposits of $69.5 million, leaving approximately $1.489 billion of additional cash required if all commitments are completed.
- The company had $461.6 million invested in unconsolidated entities and up to $280.1 million of additional funding commitments.
- Debt guarantees for unconsolidated entities had estimated maximum exposure of approximately $600.0 million based on amounts borrowed, or $871.5 million if all related loan commitments were drawn.
- Outstanding surety bonds totaled $798.3 million, and letters of credit totaled approximately $94.1 million. Management did not believe material draws were probable.
- California operations remained exposed to market conditions and the lingering effects of the Porter Ranch natural-gas-leak incident, although management expected operations there to gradually normalize.
- Key risks include housing demand and pricing, interest rates, inventory valuation, land approvals and commitments, construction costs and subcontractor availability, joint-venture performance, warranty and construction claims, liquidity and refinancing access, and legal or regulatory developments.
Investor verification checklist
- Verify conversion of the $4.375 billion backlog into deliveries, revenue and cash flow, including cancellation trends.
- Assess whether California growth and elevated average selling prices are sustainable and whether Porter Ranch demand continues to recover.
- Monitor inventory growth, impairment charges and the $1.489 billion of potential additional land-acquisition funding.
- Reconcile operating cash outflows with inventory expansion, mortgage activity and share repurchases.
- Review debt maturities, variable-rate exposure and credit-facility covenant headroom.
- Evaluate exposure from joint-venture funding commitments and guarantees, warranty reserves, insurance recoveries and construction claims.
- Confirm subsequent-period effects of the $100.0 million revolving-facility repayment and term-loan maturity extension.