Toll Brothers, Inc. — Fiscal 2022 First-Quarter Form 10-Q Summary
Business context and reporting period
Toll Brothers is a luxury homebuilder operating through Traditional Home Building and City Living segments across U.S. suburban and urban markets. The filing covers the three months ended January 31, 2022, compared primarily with the three months ended January 31, 2021. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 | Change |
|---|---|---|---|
| Total revenue | $1.791 billion | $1.563 billion | +15% |
| Home sales revenue | $1.687 billion | $1.411 billion | +20% |
| Income from operations | $175.1 million | $119.1 million | +47% |
| Income before taxes | $200.8 million | $127.4 million | +58% |
| Net income | $151.9 million | $96.5 million | +57% |
| Diluted earnings per share | $1.24 | $0.76 | +63% |
| Operating margin | 9.8% | 7.6% | +220 bps |
| Net margin | 8.5% | 6.2% | +230 bps |
| Home deliveries | 1,929 units | 1,777 units | +9% |
| Average delivered price | $874,700 | $793,900 | +10% |
Home sales cost of revenues declined to 76.4% of home sales revenue from 79.5%, reflecting favorable product and geographic mix, selling-price increases exceeding cost increases, and lower interest expense as a percentage of revenue. SG&A increased 8% to $226.9 million but declined to 13.4% of home sales revenue from 14.9%.
Income from unconsolidated entities increased to $22.0 million from $1.2 million, primarily because of a $21.0 million gain from a property sale by a rental-property joint venture. Other income, net, declined to $3.7 million from $7.1 million, partly because of lower mortgage operating spreads and higher apartment-living losses.
Cash flow, liquidity, debt, and capital allocation
- Operating cash flow was negative $280.7 million, compared with positive $55.3 million in the prior-year quarter, primarily due to a $565.5 million increase in inventory and higher income-tax payments.
- Investing cash flow was negative $62.4 million, including $109.9 million invested in unconsolidated entities and $18.5 million of capital expenditures, partially offset by $65.8 million of investment returns.
- Financing cash flow was negative $617.0 million, including the $409.9 million redemption of senior notes, $128.1 million of share repurchases, $55.3 million of net loan repayments, and $21.1 million of dividends.
- Cash, cash equivalents, and restricted cash declined to $724.3 million at January 31, 2022, from $1.684 billion at October 31, 2021. Cash and cash equivalents alone were $671.4 million.
- Total debt carrying value was approximately $3.25 billion, consisting of $1.14 billion of loans payable, $2.00 billion of senior notes, and $101.6 million of mortgage-company borrowings.
- The company had no borrowings under its $1.905 billion revolving credit facility at January 31, 2022, with approximately $1.812 billion available after outstanding letters of credit. In February 2022, it borrowed $200 million under the facility.
- Debt-to-total-capitalization was approximately 0.38 to 1.00. The revolving-credit leverage ratio was approximately 0.44 to 1.00 versus a maximum of 1.75 to 1.00, and the company reported compliance with its debt covenants.
- The company repurchased approximately 3.014 million shares for about $185.8 million on an accrual basis during the quarter and paid a $0.17-per-share dividend.
Material changes versus the prior comparable period
- Net contracts increased 2% to 2,929 homes, while contract value increased 19% to $2.993 billion, reflecting a 17% increase in average contract value.
- Backlog increased 45% to $10.805 billion, or 11,302 homes, from $7.474 billion and 8,888 homes at January 31, 2021. Average backlog price increased 14% to $956,000.
- Traditional Home Building pretax income increased 56% to approximately $223 million. The Mountain and Mid-Atlantic regions posted particularly strong pretax growth, while City Living pretax income declined 61% because the prior-year period included a $38.3 million gain on commercial-property sales.
- Inventory increased to $8.584 billion from $7.916 billion at October 31, 2021. The company controlled or owned approximately 86,500 home sites at January 31, 2022, versus approximately 80,900 at October 31, 2021.
- Senior notes declined by approximately $410 million following redemption of the remaining 5.875% notes due February 2022.
- Inventory impairment charges increased to $2.2 million from $1.3 million, but remained relatively small compared with total inventory.
Guidance, outlook, commentary, and risks
Management reported continued strong demand, supported by demographic and migration trends, limited resale inventory, an extended period of underproduction of new homes, and mortgage rates that remained near historic lows despite recent increases. The filing does not provide a clear numerical earnings, delivery, or revenue guidance figure.
Management expects liquidity sources to be adequate for operations, commitments, debt service, share repurchases, dividends, and planned investments for at least the next twelve months. Planned cash uses include land acquisition and development, inventory additions, joint-venture funding, capital expenditures, debt repayment, repurchases, and dividends.
- Supply-chain disruptions, labor shortages, material-cost inflation, municipality-related delays, and the Omicron variant extended construction times and delayed deliveries. Management did not expect significant near-term improvement.
- Higher mortgage rates, inflation, economic uncertainty, changes in consumer demand, and the continuing effects of COVID-19 could reduce sales or margins.
- Land purchase contracts totaled approximately $4.654 billion, with $408.9 million of deposits and approximately $4.245 billion of additional cash required if purchases are completed. Many contracts are cancellable, subject to potential deposit forfeiture.
- The company had $679.6 million invested in unconsolidated entities and remaining funding commitments of $188.1 million. Its maximum estimated exposure under repayment and carry-cost guarantees was $237.2 million on debt already borrowed and $407.7 million assuming available commitments were fully borrowed.
- Outstanding surety bonds totaled approximately $1.104 billion, including $863.0 million related primarily to community improvements, and letters of credit totaled $92.9 million. Management did not believe material draws were probable.
- Water-intrusion and construction-related claims remain subject to estimation uncertainty. Recorded remaining estimated repair costs were approximately $53.2 million, with expected recoveries of approximately $4.6 million; actual costs and recoveries could differ materially.
- The company remains exposed to variable interest rates and the transition from LIBOR to alternative rates such as SOFR. A 1% increase in variable-rate interest rates would increase annual interest expense by approximately $7.6 million, before considering swaps.
- Disclosure controls were considered effective. Implementation of a new enterprise resource planning system remains a significant internal-control initiative.
Facts investors should verify
- Whether backlog converts into deliveries at expected rates given supply-chain, labor, permitting, and construction delays.
- Whether pricing increases continue to offset lumber, labor, materials, land, and financing-cost inflation.
- The effect of rising mortgage rates and broader economic conditions on contract cancellations, demand, and affordability.
- Future operating cash flow and the pace of inventory growth relative to deliveries and backlog.
- Actual funding needs and performance of unconsolidated entities, including joint-venture guarantees and contingent commitments.
- Changes in water-intrusion, warranty, construction-defect, legal, and insurance-related exposures.
- The timing and terms of the $200 million revolving-credit borrowing made after January 31, 2022, and subsequent liquidity levels.
- Execution of the ERP implementation and any effect on financial reporting controls.