Toll Brothers, Inc. — Fiscal 2016 First-Quarter Form 10-Q
Reporting period: Three months ended January 31, 2016; comparative period ended January 31, 2015. The interim financial statements are unaudited. Toll Brothers is a U.S. luxury homebuilder operating in 19 states through Traditional Home Building and City Living segments, with related mortgage, title, land development, rental, distressed-asset, and other ancillary businesses.
Financial Performance and Position
| Metric | Q1 2016 | Q1 2015 | Change |
|---|---|---|---|
| Revenue | $928.6 million | $853.5 million | +8.8% |
| Income from operations | $94.5 million | $97.1 million | -2.7% |
| Income before taxes | $116.8 million | $124.0 million | -5.8% |
| Net income | $73.2 million | $81.3 million | -10.0% |
| Diluted earnings per share | $0.40 | $0.44 | -9.1% |
| Cash flow from operating activities | $(23.2) million | $(33.0) million | Use decreased by $9.8 million |
| Cash and cash equivalents at period-end | $336.2 million | $500.9 million | Down from $919.0 million at October 31, 2015 |
- Margins: Cost of revenues increased to 76.7% of revenue from 76.2%; SG&A increased to 13.1% from 12.5%. Implied gross margin declined to approximately 23.3% from 23.8%, operating margin to approximately 10.2% from 11.4%, and net margin to approximately 7.9% from 9.5%.
- Deliveries: 1,063 homes delivered versus 1,091; revenue increased because the average delivered home price rose to approximately $873,500 from $782,300.
- Demand: Net contracts signed rose 24.5% in value to $1.09 billion, representing 1,250 homes versus 1,063 homes. Average contract value increased 5.9%.
- Backlog: $3.66 billion for 4,251 homes at January 31, 2016, up from $2.74 billion for 3,651 homes at January 31, 2015, and $3.50 billion at October 31, 2015.
- Inventory: $7.18 billion at January 31, 2016, up from $7.00 billion at October 31, 2015. Operating-community inventory increased to $5.19 billion from $4.89 billion.
- Debt and capitalization: Loans payable were $615.3 million, senior notes were $2.69 billion, and the mortgage company loan facility was $63.9 million. Total debt was approximately $3.39 billion, compared with $3.81 billion at October 31, 2015. Debt-to-total-capitalization was 0.45 to 1.00.
- Liquidity: The company had no borrowings under its $1.035 billion revolving credit facility, approximately $926.7 million of availability before considering outstanding letters of credit, and $108.3 million of letters of credit. Subsequent to January 31, 2016, it borrowed $75.0 million under the facility.
- Cash flow and capital allocation: Operating cash use was primarily driven by a $173.4 million increase in inventory. Financing cash use included $770.5 million of loan principal payments and $150.1 million of treasury-stock repurchases. The company repurchased 4.77 million shares during the quarter and approximately 2.0 million additional shares after quarter-end.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by an 11.7% increase in average delivered home price, partially offset by a 2.6% decline in delivered units.
- Profitability declined despite higher revenue because cost of revenues and SG&A grew faster than revenue. Management cited product mix, higher job-overhead and interest costs in City Living, increased compensation, sales and marketing spending, and professional fees.
- Income from unconsolidated entities increased to $8.6 million from $4.9 million, including a $2.9 million recovery of previously incurred charges related to a land-development joint venture.
- Other income declined to $13.7 million from $22.0 million, primarily because the prior-year period included an $8.1 million gain from a bulk sale of security-monitoring accounts; the current period included a $1.6 million gain.
- California revenue increased 31.0% and pretax income increased to $43.5 million from $24.9 million, while City Living pretax income declined to $43.7 million from $51.3 million, partly because the prior-year period benefited from a $3.6 million commercial-space sale.
- Cash declined substantially following debt repayment and share repurchases. Total equity decreased to $4.16 billion from $4.23 billion at October 31, 2015.
Outlook, Commentary, Risks, and Unusual Items
- Management reported strengthening customer demand from the third quarter of fiscal 2014 through the first quarter of fiscal 2016. However, customer deposits and signed contracts were flat during the first three weeks of February 2016 versus the comparable prior-year period, which management attributed primarily to global economic turmoil and the stock-market decline. Community traffic improved.
- The company expected demand growth to resume as economic turmoil abated and the stock market recovered, but the filing provides no formal quantitative revenue or earnings guidance.
- Management expected to return to normal operations at its Porter Ranch, California community during fiscal second quarter after a nearby natural-gas leak was permanently sealed and air quality returned to normal.
- Key operating risks include housing-market conditions, mortgage availability and underwriting standards, labor and subcontractor availability, land approvals, inventory valuation, construction costs, interest rates, competition, cancellations, and the extended development cycle.
- Land purchase commitments totaled $1.24 billion, with $1.16 billion of additional cash required if all parcels are acquired. The company also had approximately $274.8 million of remaining funding commitments to unconsolidated entities.
- Debt guarantees for unconsolidated entities had an estimated maximum exposure of $591.8 million based on amounts borrowed, or $945.2 million if all related loan commitments were drawn, excluding collateral recoveries and partner reimbursements. The company had not made payments under these guarantees.
- Outstanding surety bonds totaled $750.6 million, including $620.5 million primarily related to community improvements, and letters of credit totaled $108.3 million. Management did not believe draws were probable.
- Stucco-related repairs in Pennsylvania and Delaware and construction claims involving three California multifamily community associations remained contingencies. Management believed reserves and insurance were sufficient and did not expect excess resolutions to be material to financial condition.
- Effective tax rate was 37.4%, compared with 34.4%. Gross unrecognized tax benefits, including interest and penalties, were $52.5 million.
- The company adopted accounting guidance for troubled-debt restructurings without a material effect and expected future consolidation-guidance adoption to change disclosures for one joint venture without a material financial-statement effect.
Most Important Facts for Investors to Verify
- Whether the significant backlog and contract growth convert into deliveries and cash flow without further margin deterioration.
- Whether the February 2016 slowdown in contracts persists and how global-market volatility affects luxury-home demand and cancellations.
- Inventory growth, impairment trends, land commitments, and the recoverability of California and City Living projects.
- Liquidity after the $150.1 million quarterly repurchase, approximately $2.0 billion of subsequent repurchases, and the subsequent $75.0 million revolver borrowing.
- Debt maturities, variable-rate exposure, and covenant compliance; a 1% increase in variable borrowing rates was estimated to increase annual interest expense by approximately $5.8 million.
- Potential obligations under joint-venture guarantees, surety bonds, letters of credit, warranty reserves, and construction claims.
- The sustainability of unusual or nonrecurring items, including the joint-venture recovery, ancillary-business gains, and prior-year security-monitoring gain.