TOL

Toll Brothers, Inc. 10-Q Summary

Business Context and Reporting Period

This is a Quarterly Report on Form 10-Q for Toll Brothers, Inc., a luxury homebuilder, for the period ended April 30, 2007. The company operates in four geographic segments: North, Mid-Atlantic, South, and West. The reporting period covers the first two quarters of fiscal year 2007.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 19% for the six-month period and 19% for the three-month period compared to the prior year. This was driven by an 18% decrease in homes delivered and a slight decrease in average selling prices.
• Profitability Drop: Net income fell 73% year-over-year for the six-month period. Income before taxes dropped from $550.2 million to $146.7 million.
• Inventory Write-downs: The company recognized significant inventory write-downs of $216.6 million for the six months ended April 30, 2007, compared to only $13.1 million in the prior year period. This included $199.1 million for operating communities and $17.5 million for land controlled for future communities.
• Goodwill Impairment: A $9.0 million goodwill impairment charge was recognized in the quarter ended January 31, 2007, related to the Detroit market.
• Backlog Reduction: Total backlog decreased 32% to $4.15 billion (5,746 homes) from $6.07 billion (8,739 homes) a year ago.
• Contract Cancellations: Cancellation rates increased significantly. For the six months ended April 30, 2007, cancellations represented 24% of gross contracts signed, compared to 9% in the prior year period.

Guidance, Outlook, and Risks

• Outlook: Management remains "cautiously optimistic" but acknowledges a slowdown in new contracts due to declining consumer confidence, oversupply of homes, and the sub-prime mortgage market turmoil. The company expects to deliver between 6,100 and 6,900 homes in fiscal 2007 with an average delivered price between $670,000 and $680,000.
• Liquidity: The company maintains a strong balance sheet with $553.1 million in cash and approximately $1.15 billion available under its revolving credit facility. It has a leverage ratio of 0.53 to 1.00, well below the 2.00 to 1.00 covenant limit.
• Risks: Key risks include continued high contract cancellation rates, potential for further inventory write-downs if market conditions deteriorate, and the impact of interest rate fluctuations on variable-rate debt. The company is also facing two class-action lawsuits (securities and consumer) which it intends to vigorously defend.
• Unusual Items: The company sold its cable TV and broadband internet business, realizing a $9.6 million gain included in "Interest and other income."

Investor Verification Checklist

• Inventory Valuation: Verify the assumptions used for the $216.6 million in inventory write-downs and the remaining fair value of the 24 communities subject to write-downs.
• Cancellation Trends: Monitor the trend of contract cancellations, particularly in the South (Florida) and West segments, where rates exceeded 30-40%.
• Backlog Quality: Assess the composition of the remaining $4.15 billion backlog to determine the likelihood of future deliveries given the high cancellation environment.
• Liquidity Position: Confirm the availability of the $1.56 billion revolving credit facility and the status of letters of credit ($412.2 million outstanding).
• Legal Proceedings: Track the status of the securities class action filed in April 2007 and the consumer class action filed in May 2007.