Toll Brothers, Inc. — Fiscal 2012 Second-Quarter Form 10-Q
Business context and reporting period
Toll Brothers is a luxury homebuilder operating across four U.S. geographic segments: North, Mid-Atlantic, South, and West. The filing covers the three and six months ended April 30, 2012, within fiscal 2012. The financial statements are unaudited.
Key financial metrics
| Metric | Three months ended Apr. 30, 2012 | Three months ended Apr. 30, 2011 | Six months ended Apr. 30, 2012 | Six months ended Apr. 30, 2011 |
|---|---|---|---|---|
| Revenue | $373.7 million | $319.7 million | $695.6 million | $653.8 million |
| Net income (loss) | $16.9 million | $(20.8) million | $14.1 million | $(17.4) million |
| Diluted EPS | $0.10 | $(0.12) | $0.08 | $(0.10) |
| Loss from operations | $(1.4) million | $(24.1) million | $(20.7) million | $(34.3) million |
| Cash flow from operating activities | Not separately provided for the quarter | $(272.9) million | $97.6 million |
Revenue increased 16.9% in the quarter and 6.4% year to date. Derived gross margins were approximately 17.9% for the quarter and 16.8% year to date; derived net margins were approximately 4.5% and 2.0%, respectively. Cost of revenues declined to 82.1% of revenue in the quarter and 83.2% year to date, versus 86.4% and 85.4% in the comparable periods.
At April 30, 2012, cash and cash equivalents were $709.0 million and marketable securities were $218.4 million, for approximately $927.5 million of immediately reported cash and marketable investments. Inventory was $3.77 billion, up from $3.42 billion at October 31, 2011. Total liabilities were $2.73 billion and total equity was $2.63 billion.
Debt included $103.9 million of loans payable, $1.79 billion of senior notes, and $45.4 million of mortgage-company warehouse borrowings. The Company had $819.3 million available under its $885.0 million revolving credit facility, no borrowings under that facility, and $65.7 million of letters of credit outstanding under it. The reported leverage ratio was approximately 0.37 to 1.00 versus a maximum permitted ratio of 1.75 to 1.00.
Material changes versus the prior comparable period
- Net income improved from a loss of $20.8 million to income of $16.9 million in the quarter and from a loss of $17.4 million to income of $14.1 million for the six months.
- Income benefited from substantially lower impairment charges. Six-month inventory impairments declined to $10.1 million from $18.0 million, while investment impairment charges from unconsolidated entities declined from $39.6 million to zero; the Company recorded a $1.6 million recovery of previously accrued charges in 2012.
- Net contracts signed increased 50.7% in the quarter to $754.7 million and 48.4% year to date to $1.20 billion. Unit cancellations declined to 2.4% of gross contracts in the quarter and 3.7% year to date, versus 3.9% and 4.6%, respectively.
- Backlog increased 48.9% year over year to $1.50 billion, representing 2,403 homes, compared with $1.01 billion and 1,760 homes at April 30, 2011.
- The Company issued $300 million principal amount of 5.875% senior notes due 2022 for $296.2 million of net proceeds and exchanged additional 2022 notes for portions of notes due 2012 and 2013.
- Operating cash flow shifted to a use of $272.9 million from a source of $97.6 million, primarily due to inventory investment, the South Edge settlement payment, changes in working capital, and replacement of letters of credit with cash deposits.
- The Company acquired substantially all assets of CamWest Development LLC for approximately $144.7 million in cash, adding approximately 1,245 owned home sites, 254 controlled sites, and 15 selling communities.
Guidance, outlook, commentary, and risks
Management reported a broad-based improvement in demand and described the spring selling season as the strongest and most sustained since the housing downturn began. It expects to be selling from approximately 230 to 245 communities at October 31, 2012, compared with 230 communities at April 30, 2012. At April 30, the Company controlled approximately 39,500 home sites, including 32,300 owned sites.
The filing does not provide formal revenue, earnings, margin, or cash-flow guidance. Management believes the Company has sufficient liquidity to fund current operations and contractual obligations, but cautions that tight credit markets and economic uncertainty could make future refinancing or additional financing more difficult or more expensive.
Key risks include housing demand and consumer confidence, interest rates, unemployment, home prices, buyer access to mortgage financing, cancellations, land and regulatory approvals, inventory valuation, construction costs and delays, availability of labor and materials, competition, joint-venture performance, legal proceedings, warranty and construction-defect claims, and the recoverability of deferred tax assets. Inventory impairment analysis depends on estimates of sales pace, pricing, incentives, costs, discount rates, and alternative land uses.
Commitments and contingencies included approximately $524.7 million of land purchase commitments, $49.3 million of potential additional funding for unconsolidated entities, $368.7 million of surety bonds related primarily to community improvements, and $78.7 million of letters of credit. The Company stated that outstanding bonds and letters of credit were not likely to be drawn. It also reported a pending consent decree concerning alleged Clean Water Act storm-water violations and shareholder derivative litigation, while stating that adequate provisions had been made and that these matters were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether the sharp improvement in contracts, backlog, and profitability is sustained after adjusting for the CamWest acquisition, high-rise deliveries, lower impairments, and other unusual items.
- Whether inventory growth to $3.77 billion converts into deliveries and cash without additional material write-downs.
- The sustainability of operating cash flow, which was negative $272.9 million year to date despite reported net income.
- The timing and funding requirements for $524.7 million of land commitments and approximately $49.3 million of unconsolidated-entity commitments.
- The future impact of the $1.95 billion reported debt balance, 2022 and earlier note maturities, and the terms and availability of revolving credit.
- The outcome of the South Edge-related guarantees and settlement exposure, Clean Water Act proceedings, shareholder litigation, warranty claims, and other contingencies.
- The realizability of deferred tax assets and the potential reversal or settlement of approximately $99.8 million of unrecognized tax benefits.