Toll Brothers, Inc. - 10-Q Summary (Q1 Fiscal 2010)
Business Context and Reporting Period
This report covers the quarterly period ended January 31, 2010 (Fiscal Q1 2010). Toll Brothers, Inc. is a luxury homebuilder operating in four geographic segments: North, Mid-Atlantic, South, and West. The company continues to navigate a significant industry downturn characterized by reduced consumer confidence, tight credit markets, and high inventory levels, though it reported improved contract activity compared to the prior year.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 |
|---|---|---|
| Revenues | $326.7 million | $409.0 million |
| Net Loss | $(40.8) million | $(88.9) million |
| Loss Per Share (Diluted) | $(0.25) | $(0.55) |
| Cost of Revenues | $317.8 million (97.3% of Rev) | $486.0 million (118.8% of Rev) |
| Inventory Impairments | $33.4 million | $150.6 million |
| Cash and Equivalents | $1.57 billion | $1.81 billion (Oct 31, 2009) |
| Total Debt (Senior Notes + Loans) | ~$2.05 billion | ~$2.06 billion |
| Backlog (Units/Value) | 1,461 homes / $840.2 million | 1,647 homes / $1.04 billion |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 20.1% year-over-year due to a 10.4% drop in homes delivered and a 10.9% decrease in average sales price, driven by a shift to lower-priced products and increased sales incentives (averaging $98,700 per home).
- Improved Profitability: Net loss narrowed significantly by 54.1% compared to Q1 2009. This improvement was primarily driven by a drastic reduction in inventory impairment charges (down from $150.6 million to $33.4 million) and lower SG&A expenses.
- Contract Activity: Net contracts signed increased 128.5% in value and 97.7% in volume compared to Q1 2009. The contract cancellation rate improved dramatically to 6.7% from 37.1% in the prior year.
- Interest Expense: Directly expensed interest rose to $7.3 million from $0.8 million due to lower qualified inventory levels relative to total debt.
Guidance, Outlook, and Risks
- Fiscal 2010 Guidance: Management estimates delivering between 2,100 and 2,750 homes at an average sales price of $540,000 to $560,000. They expect cost of sales (excluding impairments) to be higher as a percentage of revenue due to incentives and interest costs.
- Liquidity: The company maintains a strong balance sheet with $1.75 billion in cash and marketable securities and approximately $1.38 billion available under a revolving credit facility. They recently redeemed $47.9 million of senior subordinated notes.
- Risks: Key risks include the potential for further inventory write-downs if market conditions deteriorate, the uncertainty of mortgage credit availability, and ongoing legal proceedings regarding storm water discharge and Chinese-made drywall. The company has recorded valuation allowances against all net deferred tax assets due to the prolonged downturn.
Investor Verification Checklist
- Inventory Valuation: Verify the assumptions used for the $33.4 million impairment charge and the remaining carrying value of $3.22 billion in inventory, particularly for temporarily closed communities.
- Backlog Quality: Assess the stability of the $840.2 million backlog given the historical volatility in cancellation rates, despite the recent improvement.
- Deferred Tax Assets: Review the $485.7 million in net deferred tax assets fully offset by valuation allowances and the potential for future reversals if profitability returns.
- Joint Venture Exposure: Examine the $154.3 million investment in unconsolidated entities and the $50.3 million maximum liability under completion guarantees.
- Legal Contingencies: Monitor the status of the EPA/DOJ storm water investigation and the Chinese drywall litigation for potential accrual changes.