Business Context and Reporting Period
Company: Toll Brothers, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: July 31, 1999
Business Overview: Toll Brothers is a homebuilder and developer. During the period, the company expanded operations through the acquisition of the Silverman Companies (March 1999) and initiated land sales from the South Riding development in Virginia.
Key Financial Metrics
| Metric (Nine Months Ended July 31, 1999) | Amount (in thousands) |
|---|---|
| Total Revenues | $1,021,231 |
| Housing Sales Revenue | $1,002,883 |
| Net Income | $68,130 |
| Earnings Per Share (Diluted) | $1.81 |
| Cash and Cash Equivalents | $63,895 |
| Residential Inventories | $1,435,587 |
| Total Liabilities | $1,037,780 |
| Loans Payable | $236,900 |
| Subordinated Notes | $469,397 |
| Backlog (Value) | $1,092,660 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenues increased 22% to $1.02 billion for the nine months ended July 31, 1999, compared to $836.5 million in the prior year. Housing sales revenue rose 20% to $1.00 billion.
- Profitability: Net income increased 20% to $68.1 million from $56.8 million. Diluted EPS rose to $1.81 from $1.49.
- Backlog Expansion: The backlog of homes under contract increased 29% to $1.09 billion (2,483 homes) compared to $844 million (1,971 homes) in the prior year.
- Inventory Build: Residential inventories grew significantly by $324 million to $1.44 billion, reflecting land acquisition and construction activity.
- Cost Structure: Land and construction costs as a percentage of housing revenues increased due to a higher mix of closings in newer, higher-cost markets (Arizona, Florida, Nevada, North Carolina, Texas) and the Silverman acquisition.
Guidance, Outlook, and Risks
- Debt Restructuring: The company issued $270 million in new Senior Subordinated Notes (8% and 8 1/8% due 2009) in early 1999. Proceeds were used to redeem $70 million of 9 1/2% notes due 2003 and repay bank debt. This resulted in an extraordinary loss of $1.46 million (net of tax) in Q1 1999.
- Acquisition Impact: The acquisition of Silverman Companies is expected to be accretive to earnings in fiscal 1999. The apartment asset acquisition is expected to complete in Q4 1999.
- Liquidity: The company maintains a $440 million unsecured revolving credit facility. As of July 31, 1999, $100 million in loans and $35.7 million in letters of credit were outstanding.
- Year 2000 Readiness: Management believes almost all programs are Year 2000 compliant and costs are immaterial. However, risks remain regarding the compliance of significant third-party providers (subcontractors, suppliers, financial institutions).
- Market Risks: Results are subject to economic conditions, interest rate fluctuations, land availability, and weather conditions.
Investor Verification Checklist
- Inventory Valuation: Verify the $1.44 billion residential inventory balance, particularly the $487 million in land and land development costs, given the expansion into newer markets.
- Debt Service: Confirm the impact of the new $270 million note issuance on future interest expenses and cash flow requirements.
- Backlog Conversion: Monitor the conversion rate of the $1.09 billion backlog into revenue, noting the 29% year-over-year increase.
- Acquisition Integration: Assess the financial performance of the Silverman Companies operations and the completion of the apartment asset acquisition.
- Year 2000 Contingencies: Review the status of third-party provider compliance to ensure no operational disruptions occur near the millennium changeover.