Toll Brothers, Inc. 10-K Summary (Fiscal Year Ended Oct 31, 2008)
Business Context and Reporting Period
This report covers the fiscal year ended October 31, 2008. Toll Brothers, Inc. is a national builder of luxury single-family detached and attached homes, operating in 21 states across four geographic segments: North, Mid-Atlantic, South, and West. The company targets move-up, empty-nester, active-adult, and second-home buyers. The reporting period was characterized by a severe downturn in the homebuilding industry, driven by declining consumer confidence, high unemployment, falling home prices, and a credit market crisis.
Key Financial Metrics
- Revenue: $3.16 billion (down 32% from $4.65 billion in 2007).
- Net Loss: $297.8 million (compared to net income of $35.7 million in 2007).
- Loss Per Share: $1.88 (Basic and Diluted).
- Backlog: $1.33 billion (2,046 homes) at period end, a 54% decrease from the prior year.
- Cash and Cash Equivalents: $1.63 billion.
- Total Debt: $2.14 billion.
- Inventory Impairments: $645.0 million recognized in cost of revenues.
- Unconsolidated Entity Losses: $186.4 million, primarily due to impairment charges.
Material Changes vs. Prior Period
- Deliveries: Total homes delivered dropped to 4,743 from 6,687 in 2007.
- Contracts Signed: Net new contracts signed decreased 47% in value to $1.61 billion. The average sales incentive increased to $70,200 per home from $34,100 in 2007.
- Profitability: Gross margins were severely compressed. Cost of revenues as a percentage of revenue for completed contracts rose to 96.4% from 86.9% in 2007, largely due to inventory write-downs and higher incentives.
- Geographic Performance: All four geographic segments reported losses before income taxes in 2008, whereas three were profitable in 2007. The West and South segments reported the largest losses.
Guidance, Outlook, and Risks
Management stated that providing specific guidance for fiscal 2009 is difficult due to market uncertainties. However, they estimate delivering between 2,000 and 3,000 homes in fiscal 2009 at an average sales price of $600,000 to $625,000. They anticipate higher cost of sales as a percentage of revenue and higher SG&A as a percentage of revenue due to lower projected sales volume.
Key Risks and Contingencies:
- Market Downturn: Continued severity of the housing recession and credit market instability.
- Cancellations: High rates of contract cancellations (25.3% of gross contracts in 2008) threaten backlog realization.
- Financing: Risks related to refinancing debt maturing in 2011 and 2012-2015, and the ability of buyers to secure mortgages.
- Legal Proceedings: Ongoing securities class action and shareholder derivative suits regarding stock sales by directors and officers.
Investor Verification Checklist
- Verify the sustainability of the $1.63 billion cash position against the $2.14 billion debt load and upcoming maturities.
- Assess the likelihood of further inventory impairments given the $645 million already recognized and the 54% drop in backlog.
- Monitor the actual cancellation rate of the current $1.33 billion backlog against the historical 20-21% cancellation rate.
- Review the status of the securities class action litigation and potential liability exposure.
- Confirm the company's ability to refinance its $343 million senior subordinated notes due in 2011 and the $1.15 billion in senior notes due between 2012 and 2015.