Toll Brothers, Inc. — Fiscal 2017 First-Quarter Form 10-Q
Reporting period: Three months ended January 31, 2017; comparative period ended January 31, 2016. Toll Brothers is a luxury homebuilder operating through Traditional Home Building and City Living segments across U.S. markets.
Financial performance and key metrics
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Revenue | $920.7 million | $928.6 million | (1%) |
| Income from operations | $50.6 million | $94.5 million | (46%) |
| Income before taxes | $109.8 million | $116.8 million | (6%) |
| Net income | $70.4 million | $73.2 million | (4%) |
| Diluted EPS | $0.42 | $0.40 | Increase |
| Operating margin | 5.5% | 10.2% | Down 4.7 points |
| Net margin | 7.6% | 7.9% | Down 0.3 points |
| Effective tax rate | 35.9% | 37.4% | Down 1.5 points |
| Cash from operating activities | $42.0 million | $(23.2) million | Improvement |
Cost of revenues increased 3% to $733.0 million, or 79.6% of revenue versus 76.7% in the prior year. SG&A increased 13% to $137.1 million, or 14.9% of revenue versus 13.1%. Inventory impairment and write-off charges increased to $4.7 million from $1.3 million.
Net contracts signed increased to $1.24 billion and 1,522 homes, compared with $1.09 billion and 1,250 homes. Backlog increased to $4.35 billion and 5,145 homes at January 31, 2017, from $3.66 billion and 4,251 homes a year earlier.
Balance sheet, debt, and liquidity
- Cash and cash equivalents were $373.5 million, down from $633.7 million at October 31, 2016.
- Inventory was $7.54 billion, up from $7.35 billion, driven primarily by operating communities.
- Total debt, including loans payable, senior notes, and the mortgage company facility, was approximately $3.63 billion at carrying value; estimated fair value was $3.75 billion.
- Senior notes had aggregate principal outstanding of approximately $2.71 billion.
- The $1.295 billion revolving credit facility had $250.0 million drawn, approximately $112.4 million of letters of credit outstanding, and approximately $932.6 million of availability as reported in MD&A.
- The company’s leverage ratio was approximately 0.79 to 1.00 versus a maximum covenant of 1.75 to 1.00; tangible net worth was approximately $4.28 billion versus a minimum requirement of approximately $2.64 billion.
- Subsequent to January 31, 2017, the company borrowed an additional $125.0 million under the revolving credit facility.
Operating cash flow was positive despite a $135.8 million inventory increase and a $170.1 million decrease in accounts payable and accrued expenses. Investing cash outflows included $99.9 million for unconsolidated entities and $85.2 million for the Coleman acquisition. Financing cash outflows included net loan repayments and $15.2 million of share repurchases.
Material changes versus the prior comparable period
- Revenue was broadly stable, but operating income declined substantially because of higher cost of revenues, increased SG&A, higher impairment charges, and fewer high-margin City Living closings.
- Deliveries increased 12% to 1,190 homes, while average delivered price decreased 11% to $773.7 thousand, primarily because of fewer high-priced metro New York City deliveries and the inclusion of lower-priced Coleman homes.
- Traditional Home Building revenue increased 14%, but City Living revenue declined 87% to $17.9 million as deliveries fell to four homes from 45.
- Income from unconsolidated entities increased to $46.4 million from $8.6 million, primarily due to stronger results from New York City joint ventures and other joint-venture gains.
- In November 2016, Toll Brothers acquired substantially all assets and operations of Coleman for $85.2 million, adding approximately 1,750 home sites, 128 assumed home-delivery contracts, and 15 selling communities.
- The company repurchased 557,000 shares at an average price of $27.33, compared with 4.77 million shares in the prior-year quarter.
Outlook, commentary, risks, and unusual items
Management stated that housing demand continued to strengthen and cited improving economic conditions, household formation, limited housing supply, and favorable demographics as growth drivers. The company believed its financial strength, approved home-site inventory, and desirable locations supported future expansion. The filing does not provide formal full-year revenue or earnings guidance.
- Inventory impairment charges included a $3.9 million write-down of a Maryland operating community after revised pricing assumptions.
- Joint-venture earnings can vary significantly between periods because development and condominium projects may generate earnings unevenly. The quarter benefited from increased New York City joint-venture activity and a $6.2 million gain related to a rental-property joint venture.
- Investments in unconsolidated entities totaled $601.7 million, with an additional $65.6 million of potential funding commitments.
- Guarantees related to unconsolidated entities had estimated maximum exposure of $206.5 million for repayment and carry-cost guarantees on total loan commitments, including $147.0 million related to amounts already borrowed. No guarantee payments had been required.
- Land purchase commitments totaled $1.44 billion, with $1.37 billion of additional cash required if all parcels are acquired. Apartment-development land commitments added approximately $84.3 million.
- Known and unknown stucco and water-intrusion claims had an estimated remaining liability of $291.7 million, partially offset by expected recoveries of approximately $140.0 million. Actual costs could differ materially from estimates.
- Outstanding surety bonds totaled $804.8 million, and letters of credit totaled approximately $112.4 million. Management did not believe draws were probable.
- Variable-rate debt totaled approximately $819.2 million; a 1 percentage-point increase in interest rates would increase annual interest expense by approximately $8.2 million, assuming balances remain constant.
- The company disclosed ordinary-course litigation and stated that adequate provisions had been recorded and that current matters were not expected to have a material adverse effect.
- On February 21, 2017, the board approved a quarterly cash dividend of $0.08 per share, payable April 28, 2017.
Most important facts for investors to verify
- Whether the substantial increase in contracts and backlog converts into deliveries without further deterioration in average selling prices or gross margins.
- Whether higher SG&A, inventory costs, and impairment charges moderate as community volumes expand.
- The sustainability and timing of earnings from unconsolidated entities, particularly New York City condominium and rental-property ventures.
- Liquidity after the subsequent $125.0 million revolver borrowing, planned land purchases, joint-venture commitments, debt maturities, and the new dividend.
- Potential cash exposure from joint-venture guarantees, land commitments, stucco and water-intrusion claims, surety bonds, and letters of credit.
- City Living’s sharply lower deliveries and revenue, despite relatively strong reported segment income and backlog.
- The company’s ability to maintain credit-facility covenants and refinance or repay senior notes, including the 2017 maturity and exchangeable notes’ holder put rights.