Toll Brothers, Inc. — Form 10-Q Summary
Business context and reporting period
Toll Brothers is a luxury residential builder operating through Traditional Home Building and City Living segments. This filing covers the three and nine months ended July 31, 2017, with comparisons to the corresponding 2016 periods. The balance sheet is presented as of July 31, 2017, compared with October 31, 2016.
Financial and operating metrics
| Metric | Three months ended July 31, 2017 | Three months ended July 31, 2016 | Nine months ended July 31, 2017 | Nine months ended July 31, 2016 |
|---|---|---|---|---|
| Revenue | $1.503 billion | $1.270 billion | $3.787 billion | $3.314 billion |
| Income from operations | $171.7 million | $143.5 million | $360.5 million | $354.6 million |
| Net income | $148.6 million | $105.5 million | $343.6 million | $267.7 million |
| Diluted EPS | $0.87 | $0.61 | $2.01 | $1.52 |
| Operating margin | 11.4% | 11.3% | 9.5% | 10.7% |
| Net margin | 9.9% | 8.3% | 9.1% | 8.1% |
| Net contracts signed | $1.811 billion; 2,163 homes | $1.452 billion; 1,748 homes | $5.073 billion; 6,196 homes | $4.185 billion; 4,991 homes |
| Homes delivered | 1,899 | 1,507 | 4,727 | 3,874 |
Revenue increased 18% for the quarter and 14% year to date, primarily from higher delivery volume. Net income increased 41% for the quarter and 28% year to date. Cost of revenues was 78.3% of revenue in the quarter and 78.9% year to date, compared with 78.1% and 77.7%, respectively, in the prior-year periods. SG&A was 10.3% of quarterly revenue and 11.6% year to date.
Backlog at July 31, 2017 was $5.309 billion for 6,282 homes, up 21% in both value and units from July 31, 2016. The average backlog price was approximately $845,100. The company was selling from 312 communities, compared with 297 a year earlier, and owned or controlled approximately 47,800 home sites.
Cash provided by operating activities was $424.9 million for the first nine months of fiscal 2017, compared with cash used of $325.3 million in the prior-year period. Cash used in investing activities was $76.2 million, including $119.7 million invested in unconsolidated entities and $85.2 million for the Coleman acquisition. Cash used in financing activities was $36.2 million.
Cash and cash equivalents were $946.2 million at July 31, 2017, compared with $633.7 million at October 31, 2016. Debt included $3.149 billion of senior notes, $619.6 million of loans payable, and $57.9 million of mortgage company borrowings. The company had no borrowings under its $1.295 billion revolving credit facility and approximately $1.15 billion of availability, subject to approximately $146.5 million of outstanding letters of credit.
Material changes versus the prior comparable period
- Home deliveries rose 22% for the nine-month period and 26% for the quarter, while average delivered prices declined 6% in both periods due to product and geographic mix, including lower-priced Boise homes.
- Net contracts signed increased 21% year to date and 25% in the quarter, driven by higher demand and a larger selling-community base.
- Income from unconsolidated entities increased to $112.3 million from $22.8 million year to date and to $19.9 million from $5.0 million in the quarter. The increase included stronger results from New York City home-building ventures and gains from selling interests in two rental-property ventures.
- City Living revenue declined 21% year to date but increased 88% in the quarter; City Living pretax income increased 77% year to date and 218% in the quarter, aided substantially by joint-venture earnings.
- The effective tax rate declined to 33.0% from 36.4% year to date and to 27.0% from 35.5% in the quarter, primarily because of a $27.1 million year-to-date and $27.9 million quarterly benefit related mainly to reversal of a state deferred-tax valuation allowance.
- The company acquired substantially all of Coleman Real Estate Holdings’ assets and operations for $85.2 million in November 2016, adding approximately 1,750 home sites and 15 selling communities.
Outlook, commentary, risks, contingencies, and unusual items
Management described the housing market as strengthening, citing demand, low interest rates, limited housing supply, employment, consumer confidence, and the financial condition of its affluent buyers. Management expects continued demand and believes its brand, product breadth, land positions, and balance sheet support growth, but the filing does not provide formal full-year revenue, earnings, delivery, or margin guidance.
- On August 25, 2017, Hurricane Harvey affected Houston operations. The company stated that it was too early to assess the impact but believed insurance coverage was adequate. Houston represented approximately 2% of home-building revenue in fiscal 2016 and the first nine months of fiscal 2017.
- A supplier recall affected floor joists in approximately 350 homes. The supplier committed to absorb remediation costs, and management did not expect a material financial impact.
- The SEC is investigating the company’s estimated repair costs for stucco and other water-intrusion claims. Management cannot predict the scope or outcome.
- Remaining estimated liability for known and unknown stucco and water-intrusion claims was $269.3 million at July 31, 2017, with expected recoveries of approximately $122.7 million. Management stated that actual costs could differ materially from estimates.
- The company had $1.881 billion of aggregate land purchase commitments, with $1.786 billion of additional cash required if all parcels are acquired, plus approximately $150.1 million of apartment-development land commitments.
- Investments in unconsolidated entities totaled $514.3 million, with $52.9 million of remaining funding commitments. Estimated maximum exposure under repayment and carry-cost guarantees was $207.1 million for debt already borrowed and $250.5 million if all related commitments were borrowed.
- The company announced redemption of all $287.5 million of 0.5% Exchangeable Senior Notes on September 15, 2017. Its $400 million of 8.91% Senior Notes were scheduled to mature in October 2017.
- Inventory impairments and write-offs were $11.3 million year to date, including a $3.9 million impairment of a Maryland operating community and a $2.0 million impairment of a Maryland land-development joint venture.
Most important facts for investors to verify
- Whether the strong backlog and contract growth convert into deliveries without further deterioration in average selling prices or gross margins.
- The timing and funding sources for the September 2017 exchangeable-note redemption and October 2017 senior-note maturity.
- The ultimate cost, insurance recoveries, and potential consequences of stucco and water-intrusion claims and the related SEC investigation.
- The financial effect of Hurricane Harvey and any insurance recoveries or construction delays.
- The sustainability of earnings from unconsolidated entities, including gains from asset or ownership-interest sales that may not recur.
- Exposure from land commitments, joint-venture funding obligations, guarantees, inventory impairments, and changing interest rates.