TOL

Toll Brothers, Inc. 10-Q Summary

Business Context and Reporting Period

This report covers the quarterly period ended April 30, 2009 (Fiscal Q3 2009) and the six-month period ended April 30, 2009. Toll Brothers, Inc. is a luxury homebuilder operating in four geographic segments: North, Mid-Atlantic, South, and West. The company is navigating a severe downturn in the housing market characterized by declining consumer confidence, high unemployment, and tight credit conditions.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 51% year-over-year for both the six-month and three-month periods. This was driven by a 46-47% drop in homes delivered and a 7-9% decrease in average sales prices due to increased incentives and a shift to lower-priced products.
• Improved Net Loss: Despite lower revenues, the net loss narrowed slightly compared to the prior year periods (down 9% for six months and 11% for three months), primarily due to significantly lower inventory impairment charges ($270.3M vs. $420.7M for six months).
• Backlog Reduction: Backlog dropped 55% to $944.3 million (1,581 homes) at April 30, 2009, compared to $2.08 billion at April 30, 2008.
• Contract Activity: Net new contracts signed fell 51% in value for the six-month period. Cancellation rates remained elevated but showed signs of leveling off in some regions.
• Debt Restructuring: The company issued $400 million of 8.91% Senior Notes in April 2009 and announced the redemption of $293 million of senior subordinated notes in May 2009.

Guidance, Outlook, and Risks

• Fiscal 2009 Guidance: Management estimates delivering between 2,200 and 2,800 homes for the full fiscal year at an average sales price of $590,000 to $620,000. They expect cost of sales as a percentage of revenue to be higher than in fiscal 2008 due to incentives, while SG&A expenses in total dollars will be lower but higher as a percentage of revenue.
• Liquidity: The company maintains a strong balance sheet with $1.96 billion in cash and approximately $1.34 billion available under its revolving credit facility. Management believes it has sufficient resources to fund operations and pursue opportunities.
• Risks: Key risks include the dislocation in the secondary mortgage market, continued decline in home prices, high unemployment, and the potential for further inventory write-downs if market conditions deteriorate. The company also faces ongoing legal proceedings, including a securities class action and EPA storm water discharge investigations.
• Unusual Items: The period included a $2.1 million charge related to the early retirement of debt. Inventory impairments remain a significant non-cash expense impacting reported losses.

Investor Verification Checklist

• Inventory Valuation: Verify the assumptions used for the $270.3 million in inventory impairments and the remaining carrying value of $3.7 billion in inventory.
• Debt Maturities: Confirm the status of the $293 million senior subordinated notes redemption scheduled for May 28, 2009, and the terms of the new $400 million senior notes.
• Backlog Quality: Assess the cancellation risk within the $944.3 million backlog, given the high cancellation rates observed in the current period.
• Deferred Tax Assets: Review the $430.6 million in net federal deferred tax assets and the company's ability to realize them given current losses.
• Legal Exposure: Monitor the status of the securities class action and EPA settlement discussions for potential financial impact.