Toll Brothers, Inc. — Fiscal 2021 First-Quarter Form 10-Q
Reporting period: Three months ended January 31, 2021, compared with the three months ended January 31, 2020. Toll Brothers is a luxury and affordable-luxury homebuilder operating through Traditional Home Building and City Living, with five geographic regions in the Traditional Home Building segment.
Financial and Operating Highlights
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total revenue | $1.563 billion | $1.331 billion | 17% |
| Home sales revenue | $1.411 billion | $1.297 billion | 9% |
| Land sales and other revenue | $152.7 million | $34.1 million | Substantial increase |
| Income from operations | $119.1 million | $47.5 million | 151% |
| Net income | $96.5 million | $56.9 million | 70% |
| Diluted EPS | $0.76 | $0.41 | 85% |
| Operating margin | 7.6% | 3.6% | Improved |
| Home sales cost as % of home sales revenue | 79.5% | 79.6% | Slight improvement |
| SG&A as % of home sales revenue | 14.9% | 16.8% | Improved |
| Cash flow from operating activities | $55.3 million provided | $366.4 million used | Improved by $421.7 million |
Home deliveries increased 10% to 1,777 units, while the average delivered price declined 1% to approximately $793,900 due primarily to geographic and product mix. Net contracts signed increased 59% to 2,874 homes, with contract value up 68% to $2.51 billion. Backlog rose 38% in units and 37% in value to 8,888 homes worth $7.47 billion.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $949.7 million at January 31, 2021, down from $1.371 billion at October 31, 2020. Cash, cash equivalents and restricted cash totaled $979.9 million.
- Inventory was $7.924 billion, up from $7.659 billion at October 31, 2020, reflecting investment in operating communities.
- Total debt, including loans payable, senior notes and the mortgage company loan facility, was approximately $3.736 billion at book value, compared with $3.958 billion at October 31, 2020.
- The Company voluntarily repaid $150 million of its term loan in January 2021, leaving $650 million outstanding due November 2025.
- The $1.905 billion revolving credit facility had no borrowings and approximately $120.2 million of outstanding letters of credit. Approximately $1.785 billion was available.
- The leverage ratio was approximately 0.57 to 1.00 versus a maximum covenant of 1.75 to 1.00; tangible net worth was approximately $4.72 billion versus a minimum requirement of approximately $2.10 billion.
- Debt to total capitalization was 0.44 to 1.00, and total stockholders’ equity was $4.79 billion.
Material Changes Versus the Prior Comparable Period
- Demand strengthened materially following the COVID-19-related slowdown in fiscal 2020. Management attributed the increase to low mortgage rates, limited housing supply, demographic trends and increased consumer focus on the home.
- Traditional Home Building revenue increased 11%; the Mountain region increased 44%, while Pacific revenue declined 16%. City Living home sales revenue declined 80% because of lower deliveries.
- Income before taxes increased 93% to $127.4 million. City Living reported $32.7 million of pre-tax income, benefiting from a $38.3 million gain on the sale of Hoboken commercial assets.
- SG&A declined 4% to $210.7 million, primarily reflecting cost-reduction initiatives, workforce reductions and lower advertising and broker commission spending.
- Income from unconsolidated entities declined 90% to $1.2 million, due partly to the absence of a prior-year gain, $2.1 million of impairments at Home Building Joint Ventures, COVID-19-related hotel losses and rental-property lease-up costs.
- The effective tax rate increased to 24.3% from 13.7%, principally because the prior-year period benefited from a $6.9 million retroactive federal energy-efficient home credit.
- The Company repurchased 4.027 million shares for $179.4 million, compared with 11.686 million shares for $476.0 million in the prior-year quarter. The quarterly dividend was $0.11 per share.
Cash Flow, Commitments and Unusual Items
- Operating cash flow benefited from net income, mortgage loan sales, customer deposits and working-capital changes, partly offset by a $274.3 million inventory investment.
- Investing cash use was $9.8 million, including $112.8 million invested in unconsolidated entities, offset by $79.4 million of proceeds from commercial property sales and $37.9 million of investment returns.
- Financing cash use was $462.3 million, primarily reflecting debt repayments, share repurchases, dividends and a $10.0 million senior-note redemption.
- Land purchase commitments totaled $2.753 billion, with $207.6 million deposited and approximately $2.545 billion of additional cash required if all commitments are completed. Apartment-development commitments were approximately $121.5 million.
- The Company had $571.6 million invested in unconsolidated entities and up to $89.7 million of remaining funding commitments. Maximum estimated exposure under repayment and carry-cost guarantees was $236.7 million for debt already borrowed and $327.5 million if all related loan commitments were borrowed.
- Outstanding surety bonds totaled $988.9 million, including $800.4 million primarily related to community improvements. Management did not believe significant draws were probable.
- Warranty accruals were $150.9 million. Water-intrusion claims in Pennsylvania and Delaware remain subject to significant estimation uncertainty, insurance disputes and potential litigation.
- In February 2021, the Company announced redemption of all $250 million of its 5.625% Senior Notes due 2024, scheduled for March 15, 2021. A pre-tax early-extinguishment charge of approximately $34 million was expected in fiscal second quarter 2021.
Guidance, Outlook and Risks
Management did not provide a clear numerical full-year revenue, earnings or delivery forecast in the filing. Management expects strong demand, pricing actions and limitations on lot releases to continue through fiscal 2021 if market conditions remain favorable. The Company believes it has adequate resources and capital-market access to fund operations and contractual obligations, but cautioned that COVID-19, employment, mortgage rates, consumer confidence, financing availability, materials and labor costs, land availability, weather, regulation and litigation could materially affect results.
COVID-19 remains a significant uncertainty, including the duration and severity of the pandemic, government restrictions, vaccine effectiveness, economic disruption and potential effects on demand, construction schedules and joint ventures. The Pennsylvania Attorney General’s review of stucco construction remains unresolved, and management cannot predict its scope or outcome. Disclosure controls were considered effective; implementation of a new enterprise resource planning system remains an important internal-control project.
Important Facts for Investors to Verify
- Whether the $7.47 billion backlog converts to deliveries and revenue at expected margins, particularly given supply-chain, labor and construction timing risks.
- The sustainability of elevated contract-signing activity, pricing increases and demand after pandemic-related housing-market effects normalize.
- The extent to which the $38.3 million Hoboken asset-sale gain and other joint-venture gains affected reported earnings and are not recurring.
- Potential exposure from water-intrusion and stucco claims, insurance recoveries, legal proceedings and warranty estimates.
- Progress and financial impact of the planned $250 million 2024-note redemption and approximately $34 million expected charge.
- Funding requirements for $2.753 billion of land commitments, $89.7 million of joint-venture commitments and related guarantee exposures.
- Future inventory growth, cash generation and the effect of share repurchases and dividends on liquidity.