Toll Brothers, Inc. — Fiscal 2012 Third-Quarter Form 10-Q Summary
Business Context and Reporting Period
Toll Brothers is a luxury homebuilder operating across four U.S. geographic segments: North, Mid-Atlantic, South and West. This unaudited Form 10-Q covers the three and nine months ended July 31, 2012, within the fiscal year ending October 31, 2012. The filing describes a housing-market recovery characterized by stronger demand, low interest rates and pent-up buyer demand, while noting continued exposure to economic, mortgage-credit and housing-market conditions.
Financial Performance and Key Metrics
| Metric | Three Months Ended July 31 | Nine Months Ended July 31 |
|---|---|---|
| Revenue | $554.3 million, versus $394.3 million | $1.250 billion, versus $1.048 billion |
| Income from operations | $31.5 million, versus $(10.2) million | $10.8 million, versus $(44.6) million |
| Income before taxes | $43.0 million, versus $3.9 million | $52.2 million, versus $(44.6) million |
| Net income | $61.6 million, versus $42.1 million | $75.7 million, versus $24.8 million |
| Diluted EPS | $0.36, versus $0.25 | $0.45, versus $0.15 |
| Operating margin | 5.7%, versus negative 2.6% | 0.9%, versus negative 4.3% |
| Net margin | 11.1%, versus 10.7% | 6.1%, versus 2.4% |
- Homes delivered increased to 963 in the third quarter from 693 and to 2,198 for the nine-month period from 1,854.
- Cost of revenues declined to 80.8% of revenue in the quarter from 86.2%, and to 82.1% for the nine months from 85.7%. Excluding inventory impairments, cost of revenues was 80.2% for the quarter and 81.1% for the nine months.
- SG&A increased to $74.9 million in the quarter and $212.8 million for the nine months, but declined as a percentage of revenue to 13.5% and 17.0%, respectively.
- Inventory was $3.785 billion at July 31, 2012, up from $3.417 billion at October 31, 2011. Inventory impairments and write-offs were $3.1 million in the quarter and $13.2 million for the nine months, compared with $16.8 million and $34.9 million, respectively, in the comparable periods.
- Income from unconsolidated entities was $5.7 million in the quarter and $19.3 million for the nine months, compared with $11.3 million and $(11.0) million, respectively, in the prior-year periods.
Cash Flow, Debt and Liquidity
- Cash and cash equivalents were $601.5 million at July 31, 2012, compared with $906.3 million at October 31, 2011. Marketable securities were $275.9 million, compared with $233.6 million.
- Operating activities used $234.1 million during the nine months, principally reflecting inventory growth, lower accrued liabilities, the $57.6 million South Edge settlement payment and increased restricted cash.
- Investing activities used $377.4 million, including $144.7 million for the CamWest asset acquisition, $195.8 million for investments in unconsolidated entities, $30.1 million for non-performing loan portfolios and $7.3 million for property and equipment.
- Financing activities provided $306.6 million, primarily from the issuance of $300 million principal amount of 5.875% senior notes due 2022, which generated $296.2 million of net proceeds.
- Total reported debt consisted of $106.4 million of loans payable, $1.792 billion of senior notes and $63.1 million of mortgage-company warehouse borrowings. The debt table reported total principal amounts of approximately $1.962 billion, excluding discount.
- The company had $819.2 million available under its $885.0 million revolving credit facility, no borrowings under that facility and $65.8 million of outstanding letters of credit. The facility matures in October 2014.
- The company reported a leverage ratio of approximately 0.38 to 1.00 versus a maximum permitted ratio of 1.75 to 1.00, and tangible net worth of approximately $2.65 billion versus a required minimum of approximately $1.92 billion.
Material Changes Versus the Prior Comparable Period
- Revenue increased 40.6% in the third quarter and 19.3% for the nine months, driven primarily by higher home deliveries, stronger backlog and the CamWest acquisition.
- Net contracts signed increased 65.8% in the quarter to $674.4 million and 54.2% for the nine months to $1.874 billion. The number of net contracts increased to 1,119 in the quarter and 3,061 for the nine months.
- Backlog rose 58.9% year over year to $1.619 billion covering 2,559 homes, compared with $1.019 billion covering 1,780 homes.
- Contract cancellation rates improved to 4.5% of gross contract value in the quarter and 3.9% for the nine months, compared with 7.4% and 5.6%, respectively, in the prior-year periods.
- The company shifted from operating and pre-tax losses in the prior-year periods to operating and pre-tax profitability. The improvement reflected higher volume, better cost ratios and materially lower impairment charges.
- The nine-month results benefited from a $23.5 million income-tax benefit, including reversals of uncertain tax positions and deferred-tax valuation allowances. The prior-year period included a larger $69.4 million tax benefit, as well as $39.6 million of unconsolidated-entity impairments and $3.4 million of early debt-retirement costs.
Guidance, Outlook, Risks and Unusual Items
- Management stated that the fiscal 2012 selling season was the strongest and most sustained since the housing downturn and expected to be selling from approximately 225 to 235 communities at October 31, 2012.
- At July 31, 2012, the company controlled approximately 39,200 home sites, including approximately 31,500 owned sites, and had 226 selling communities. It had 45 temporarily closed communities and 50 communities acquired but not yet opened.
- Land purchase commitments totaled $548.5 million, of which $40.5 million had been deposited and $508.1 million would be required if all parcels were acquired.
- The company had $311.5 million invested in unconsolidated entities and was committed to invest or advance approximately $98.5 million if additional funding is required. It also guaranteed approximately $9.8 million of ground-lease payments for a joint venture.
- Outstanding surety bonds totaled $420.8 million, including $365.4 million related primarily to community improvements, and letters of credit totaled $78.8 million. Management did not believe it was probable that these instruments would be drawn.
- Key risks include housing demand and prices, mortgage availability, interest rates, land and construction costs, inventory impairments, joint-venture performance, tax recoverability, litigation, construction defects, regulatory approvals and access to capital.
- Management stated that current litigation and the EPA storm-water matter were not expected to have a material adverse effect. The filing also disclosed an agreement in principle to settle three shareholder derivative actions, subject to written documentation and court approval.
- Interest-rate sensitivity was primarily associated with variable-rate debt; a 1% increase in rates was estimated to increase annual interest expense by approximately $0.8 million based on the July 31, 2012 debt balance.
- The company had no material changes to the risk factors disclosed in its fiscal 2011 Form 10-K and stated that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether the housing recovery and elevated net contracts convert into deliveries, cash flow and sustainable margins.
- The quality and recoverability of the $3.785 billion inventory balance, including future impairment exposure under changing sales-price and absorption assumptions.
- The conversion of the $1.619 billion backlog and the effect of cancellations, buyer financing and construction delays.
- Liquidity after operating cash usage, land commitments, joint-venture funding requirements, debt maturities and mortgage-company obligations.
- The sustainability of earnings excluding unusual tax benefits, reduced impairments, joint-venture results and other ancillary-business income.
- Final resolution and financial impact, if any, of the South Edge-related exposure, EPA consent decree and shareholder derivative litigation.