Toll Brothers, Inc. — Fiscal 2020 Form 10-K Summary
Business context and reporting period
Toll Brothers designs, builds, markets, sells and finances luxury and affordable-luxury homes, urban condominiums and rental apartments. At October 31, 2020, it operated in 24 states and the District of Columbia through Traditional Home Building and City Living segments, with 317 selling communities and approximately 63,200 owned or controlled home sites.
The filing covers the fiscal year ended October 31, 2020. Although the request references 2020 Q4, this is an annual Form 10-K; fourth-quarter data is included in the quarterly information in the filing.
Key financial metrics
| Metric | Fiscal 2020 | Fiscal 2019 | Change |
|---|---|---|---|
| Total revenue | $7.08 billion | $7.22 billion | Down 2% |
| Home sales revenue | $6.94 billion | $7.08 billion | Down 2% |
| Income from operations | $550.3 million | $680.8 million | Down 19% |
| Income before taxes | $586.9 million | $787.2 million | Down 25% |
| Net income | $446.6 million | $590.0 million | Down 24% |
| Diluted EPS | $3.40 | $4.03 | Down 16% |
| Cash flow from operations | $1.01 billion | $437.7 million | Up $570.5 million |
| Cash and cash equivalents | $1.37 billion | $1.29 billion | Up 7% |
| Total debt | $3.96 billion | $3.92 billion | Up 1% |
Home sales cost of revenues was 79.8% of home sales revenue versus 78.2% in 2019, implying home sales gross margin of approximately 20.2% versus 21.8%. Income before taxes was 8.3% of total revenue versus 10.9% in 2019, and net income was approximately 6.3% versus 8.2%.
- Homes delivered increased 5% to 8,496, but average delivered price declined 7% to approximately $816,500.
- Net contracts signed increased 19% in value to $8.00 billion and 23% in units to 9,932 homes.
- Year-end backlog increased 21% in value to $6.37 billion and 24% in units to 7,791 homes; approximately 94% was expected to be delivered in fiscal 2021.
- Inventory declined to $7.66 billion from $7.87 billion, while total assets increased to $11.07 billion.
- The Company paid $0.44 per share in dividends and repurchased $634.1 million of common stock during the year.
Liquidity, debt and cash flow
Operating cash flow was supported by net income, a $352.9 million inventory decrease, higher customer deposits and working-capital changes. Investing cash usage was $177.8 million, including $109.6 million for property and equipment, $71.7 million for unconsolidated entities and $60.3 million for acquisitions. Financing cash usage was $753.3 million, primarily reflecting share repurchases, debt repayments and dividends.
At year-end, Toll Brothers had no borrowings under its $1.905 billion revolving credit facility and approximately $1.79 billion available, subject to approximately $119.0 million of outstanding letters of credit. The Company also had an $800.0 million term loan. Most revolving commitments and all term-loan commitments were extended to November 2025. Senior notes totaled approximately $2.66 billion and mature from 2022 through 2029.
The debt-to-total-capitalization ratio was 0.45 to 1.00. The Company reported a leverage ratio of approximately 0.49 to 1.00 against a maximum permitted ratio of 1.75 to 1.00.
Material changes versus the prior comparable period
- Profitability weakened despite stronger demand: net income fell 24% and income before taxes fell 25%, primarily due to lower average selling prices, unfavorable product and geographic mix, higher land, labor and material costs, and increased inventory impairments.
- Demand rebounded sharply after the initial COVID-19 disruption. Fourth-quarter net contracts reached a company record of 3,407 homes valued at $2.74 billion.
- Traditional Home Building backlog rose substantially, particularly in the Mountain and Mid-Atlantic regions, while City Living revenue fell 52% and City Living income before taxes fell 58%.
- Income from unconsolidated entities declined to $0.9 million from $24.9 million, reflecting lower joint-venture earnings, a $6.0 million impairment of a Home Building Joint Venture and COVID-19-related losses.
- Inventory impairment charges increased to $55.9 million from $42.4 million, including $31.7 million related to land owned for future communities.
- SG&A declined 1% in dollars but increased to 12.5% of home sales revenue from 12.4%, reflecting cost reductions, workforce reductions, a $7.5 million severance charge and ERP implementation costs.
- The Company acquired Thrive and Keller for approximately $79.2 million in cash, adding approximately 1,100 home sites.
- Third-party broker commissions of $138.6 million were reclassified from home sales cost of revenues to SG&A; this presentation change increases reported home sales gross margin but does not affect income or cash flow.
Guidance, outlook, commentary and unusual items
Management expected fiscal 2021 deliveries to increase significantly because of the year-end backlog and the typical nine- to twelve-month construction cycle. Management planned to continue raising prices and limiting lot releases if strong demand persisted, while remaining cautious about the uncertain economic and housing-market effects of COVID-19.
- Management attributed demand strength to low interest rates, an undersupply of homes and consumers’ increased focus on the importance of housing.
- Future City Living development was temporarily paused following the pandemic.
- The Company recorded a $10.7 million gain from selling its interest in a rental-property joint venture and $13.0 million of gains from golf club property sales.
- Water-intrusion claims related primarily to Pennsylvania and Delaware homes remained significant. The year-end estimated repair-cost accrual was $79.5 million, with expected insurance and supplier recoveries of $68.4 million; management stated that actual results could differ materially and that it could not estimate the range of possible differences.
- Land purchase commitments totaled $2.64 billion, including $2.42 billion of additional cash required if all parcels are acquired. Apartment-development land commitments added approximately $111.3 million.
- Joint ventures had $430.7 million of Company investments, up to $75.0 million of additional funding commitments, and guaranteed debt exposure estimated at up to $179.1 million on amounts already borrowed.
- The Pennsylvania Attorney General’s review of stucco homes remained unresolved; management could not predict its scope or outcome.
- The Company implemented a new ERP system and excluded the acquired Thrive and Keller businesses from its internal-control assessment. Management and the auditor concluded that internal control over financial reporting was effective as of October 31, 2020.
- Subsequent to year-end, the Company entered interest-rate swaps covering $400.0 million of the term loan and expected to recognize an approximately $24.0 million gain from a parking-garage sale in fiscal 2021.
Most important facts for investors to verify
- Whether the unusually strong contract pace and $6.37 billion backlog convert into fiscal 2021 deliveries without elevated cancellations or construction delays.
- Whether pricing actions offset inflation in land, labor and materials and restore home sales gross margins.
- The geographic and product concentration of earnings, particularly the Pacific region and California exposure.
- The adequacy of inventory valuations and the potential for additional impairment charges if housing demand, pricing or sales pace deteriorates.
- The ultimate cost and insurance recovery associated with Pennsylvania and Delaware water-intrusion claims.
- Liquidity and covenant compliance as senior notes begin maturing in 2022 and as land purchase commitments become payable.
- Potential exposure from joint-venture guarantees, apartment projects, surety bonds and letters of credit.
- The impact of COVID-19 on mortgage availability, employment, demand, subcontractors, construction schedules and City Living operations.
- Progress and control implications of the multi-year ERP implementation.