Toll Brothers, Inc. — Fiscal 2013 First-Quarter Form 10-Q
Reporting period: Three months ended January 31, 2013; filed March 7, 2013. Toll Brothers is a luxury and upscale residential homebuilder operating across four U.S. geographic segments: North, Mid-Atlantic, South and West.
Business Context and Reporting Period
The company reported that the housing recovery continued during fiscal 2013, supported by improving consumer confidence, rising home prices, reduced inventory and low mortgage rates. Net contracts signed increased substantially, although demand remained below historical levels and mortgage underwriting remained restrictive.
During the quarter, Toll Brothers controlled approximately 43,700 home sites, including approximately 33,500 owned sites. It opened 12 communities, sold out of 11 communities and expected to open approximately 70 communities during the remaining nine months of fiscal 2013.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $424.6 million | $322.0 million | +31.9% |
| Homes delivered | 746 | 564 | +32.3% |
| Cost of revenues | $345.9 million | $271.6 million | +27.4% |
| Gross margin | 18.5% | 15.6% | Improved |
| SG&A | $78.0 million | $69.6 million | +12.1% |
| SG&A as percentage of revenue | 18.4% | 21.6% | Improved |
| Income (loss) from operations | $0.6 million | $(19.3) million | Improved |
| Net income (loss) | $4.4 million | $(2.8) million | Returned to profitability |
| Diluted EPS | $0.03 | $(0.02) | Improved |
| Cash flow from operations | $(305.8) million | $(162.1) million | Greater use of cash |
Cost of revenues excluding impairments was 81.3% of revenue, compared with 81.8% in the prior-year quarter. Inventory impairment charges declined to $0.7 million from $8.1 million.
Liquidity, Capital Resources and Debt
- Cash and cash equivalents were $368.8 million at January 31, 2013, compared with $778.8 million at October 31, 2012.
- Marketable securities were $424.8 million, resulting in cash and marketable securities of approximately $793.6 million.
- Inventory increased to $4.16 billion from $3.76 billion, principally reflecting land acquisitions and increased investment in operating communities.
- Total debt carrying value was approximately $2.16 billion, comprising $2.02 billion of senior notes, $93.3 million of loans payable and $43.5 million of mortgage company warehouse borrowings.
- The company repaid $59.1 million of senior notes due November 2012 and used $108.1 million in financing cash flow during the quarter.
- At January 31, 2013, $819.0 million was available under the $885.0 million revolving credit facility, with no borrowings outstanding and $66.0 million of letters of credit outstanding.
- The company reported a leverage ratio of approximately 0.43 to 1.00 versus a maximum permitted 1.75 to 1.00, and tangible net worth of approximately $3.08 billion versus a required minimum of approximately $2.14 billion.
Material Changes Versus the Prior Comparable Period
- Net contracts signed increased 49.2% in units and 38.2% in value, to 973 homes valued at $614.4 million from 652 homes valued at $444.7 million.
- Backlog increased 66.4% to $1.86 billion representing 2,796 homes, compared with $1.12 billion representing 1,784 homes.
- Home deliveries increased 32.3%, driving the revenue increase.
- The company moved from an operating loss and net loss to modest operating and net profitability.
- Income from unconsolidated entities declined to $3.1 million from $6.7 million, primarily because certain development and condominium ventures had substantially completed their projects.
- Operating cash use increased primarily because inventory increased by $378.7 million, compared with a $108.5 million increase in the prior-year quarter.
- Land purchase commitments increased to $1.04 billion from $747.0 million, with $996.4 million of additional cash required if all commitments are completed.
Guidance, Outlook, Commentary and Risks
Management expected to be selling from approximately 225 to 255 communities at October 31, 2013. It stated that the company’s land portfolio, financial strength, liquidity, geographic diversification and approved land positions should support growth as housing conditions improve. No formal revenue or earnings guidance was provided in the filing.
Key risks include fluctuations in consumer demand, mortgage availability, interest rates, unemployment, home prices, land and construction costs, regulatory approvals, construction delays, inventory impairment, weather, competition and access to capital. Homebuyer cancellations were $45.3 million, or 6.9% of gross contract value, compared with 5.4% in the prior-year quarter.
The company had $321.9 million invested in unconsolidated entities and $91.9 million of additional funding commitments. It also guaranteed approximately $11.9 million of joint venture liabilities. Outstanding surety bonds totaled $436.5 million and letters of credit totaled $78.8 million.
Legal matters included an EPA storm-water matter subject to a consent decree submitted for approval and shareholder derivative litigation subject to a proposed settlement. Management stated that these matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, and no material changes to internal control over financial reporting were reported.
Most Important Facts for Investors to Verify
- Whether the significant backlog and contract growth convert into deliveries and sustainable margins.
- Whether inventory growth and approximately $1.04 billion of land purchase commitments can be funded without materially weakening liquidity.
- The timing and terms of upcoming debt maturities, including the $250 million original issue of 5.95% senior notes with $104.8 million outstanding and other senior notes due in 2014 and 2015.
- Whether cancellation rates, mortgage availability and affordability remain supportive of demand.
- The valuation assumptions supporting inventory and joint venture assets, including sales pace, pricing and discount rates.
- The funding requirements and contingent liabilities associated with unconsolidated entities, guarantees, surety bonds and letters of credit.
- The effect of tax provisions, uncertain tax positions and the recoverability of deferred tax assets on future earnings and cash flow.