Toll Brothers, Inc. — Fiscal 2012 First-Quarter Form 10-Q
Business context and reporting period
Toll Brothers is a luxury homebuilder operating in 20 states through North, Mid-Atlantic, South and West segments, with mortgage, title, distressed-real-estate and other ancillary businesses. The filing covers the three months ended January 31, 2012, compared with the three months ended January 31, 2011. The financial statements are unaudited.
Key financial metrics
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $322.0 million | $334.1 million | Down 3.6% |
| Loss from operations | $19.3 million | $10.2 million | Loss increased |
| Loss before tax | $6.4 million | $17.0 million | Loss narrowed |
| Net income (loss) | $(2.8) million | $3.4 million | Declined $6.2 million |
| Diluted EPS | $(0.02) | $0.02 | Declined |
| Cost of revenues | 84.4% of revenue | 84.4% of revenue | Flat |
| Operating margin | (6.0)% | (3.1)% | Lower |
| Net margin | (0.9)% | 1.0% | Lower |
Excluding inventory impairments and write-offs, cost of revenues was 81.8% of revenue versus 82.9% in the prior-year quarter. Selling, general and administrative expense increased to $69.6 million from $61.3 million, or 21.6% of revenue versus 18.3%; the prior-year period benefited from approximately $6.0 million of insurance recoveries and reversed accruals. Interest expense was $1.1 million in the prior-year quarter and no directly expensed interest was recorded in Q1 FY2012 because interest was capitalized to qualified inventory.
- Inventory was $3.66 billion at January 31, 2012, up from $3.42 billion at October 31, 2011.
- Inventory impairments and write-offs were $8.1 million, compared with $5.1 million in the prior-year quarter.
- Income from unconsolidated entities was $6.7 million, versus a $11.0 million loss, as the prior-year period included a $20.0 million impairment charge.
- Cash and cash equivalents were $575.7 million, with $143.7 million of marketable securities and $48.2 million of restricted cash.
- Net cash used in operating activities was $161.9 million, compared with $77.2 million in the prior-year quarter. The principal uses were inventory additions, reductions in accounts payable and accrued liabilities, the $57.6 million South Edge settlement payment and increased restricted cash.
- Net cash used in investing activities was $139.2 million, including the $144.7 million CamWest asset acquisition, approximately $70.9 million invested in a New York joint venture and $26.4 million invested in a non-performing loan portfolio.
- Net cash used in financing activities was $29.5 million. Total debt book value was approximately $1.62 billion, consisting principally of $1.49 billion of senior notes.
Material changes versus the prior comparable period
- Revenue declined because homes delivered decreased 1.1% and the average price declined 2.6%.
- Net contracts signed increased to $444.7 million and 652 homes from $307.2 million and 548 homes; gross contracts signed increased to $470.3 million and 695 homes from $325.9 million and 581 homes.
- Cancellation rates increased modestly to 6.2% of gross homes and 5.4% of gross contract value, compared with 5.7% and 5.7%, respectively.
- Backlog increased to $1.12 billion and 1,784 homes from $825.2 million and 1,472 homes, a 35.4% increase in value.
- The company acquired substantially all assets of CamWest Development for approximately $144.7 million in cash, adding approximately 1,245 owned home sites, 254 controlled sites and 15 selling communities.
- Controlled home sites increased to approximately 39,700 from 35,700 a year earlier, while the company was selling from 228 communities versus 200.
- The South Edge settlement resulted in a $57.6 million cash payment during the quarter; management stated that adequate provision had been made for remaining exposure.
Guidance, outlook, risks and unusual items
Management expects to be selling from 235 to 255 communities at October 31, 2012 and expects to reopen four temporarily closed communities by November 1, 2012. Management described the housing market as challenging but said conditions felt healthier than in the comparable prior-year period. It cited strength in metropolitan New York and the Washington, D.C.-to-Boston corridor, with improving conditions in Houston, Dallas, Raleigh, Southern California, parts of Florida, Detroit suburbs and Phoenix.
The company believes many markets may have reached a bottom but expects continued volatility. Its outlook depends on consumer confidence, employment, mortgage availability, home prices, financial-market stability and the release of deferred buyer demand. No specific earnings or revenue guidance was provided.
- Liquidity included $814.8 million available under an $885.0 million revolving credit facility, with no borrowings outstanding and approximately $70.2 million of letters of credit drawn against capacity.
- The credit facility required a maximum leverage ratio of 1.75 to 1.00 and minimum tangible net worth of approximately $1.87 billion; reported leverage was approximately 0.34 to 1.00 and tangible net worth approximately $2.56 billion.
- Land purchase commitments totaled $664.0 million, including $556.2 million of additional cash required if all commitments are completed.
- Unconsolidated-entity investments totaled $193.6 million, with approximately $49.3 million of additional funding commitments. Future impairment risk remains dependent on sales pace, prices, costs, financing and market conditions.
- At January 31, 2012, the company had $367.1 million of surety bonds, $83.5 million of letters of credit and $1.12 billion of backlog subject to construction, delivery and cancellation risks.
- Subsequent to quarter-end, the company issued $300 million of 5.875% senior notes due 2022 for net proceeds of $296.2 million. On March 5, 2012, it issued an additional $119.9 million of the notes in exchange for portions of notes due 2012 and 2013 and expects an approximately $1.1 million exchange-related charge in the quarter ending April 30, 2012.
- Legal matters include EPA and Department of Justice storm-water proceedings and shareholder derivative litigation. Management stated that adequate provisions had been recorded and that these matters were not expected to materially affect results, liquidity or financial condition.
- Inventory valuation, unconsolidated investments, tax assets and non-performing loan portfolios rely on significant estimates and could produce additional charges or changes in recognized income.
Most important facts for investors to verify
- Whether the strong contract-signing and backlog trends convert into deliveries and cash flow without materially higher cancellations.
- The sustainability of inventory values and the potential for additional impairments, particularly given $3.66 billion of inventory and 50 temporarily closed communities.
- Liquidity after the CamWest acquisition, New York joint-venture funding, land commitments and the South Edge settlement.
- The maturity profile, refinancing requirements and final effect of the 2022 note issuance and exchange transactions.
- The performance and funding obligations of unconsolidated joint ventures, including the New York high-rise project and remaining South Edge exposure.
- The recoverability of deferred tax assets and the resolution of approximately $101.0 million of unrecognized tax benefits.