TOL

Toll Brothers, Inc. 10-K Summary (Fiscal Year Ended Oct 31, 2007)

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended October 31, 2007. Toll Brothers, Inc. is a national builder of luxury single-family detached and attached homes, operating in 22 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 significant industry-wide slowdown driven by declining consumer confidence, an oversupply of homes, and turmoil in the mortgage market.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Decline: Revenues decreased 24.4% to $4.65 billion, driven by a 22.3% drop in homes delivered and a 2.7% decrease in average selling price due to increased sales incentives.
• Profitability Collapse: Net income plummeted 94.8% to $35.7 million. The company recorded its first quarterly loss since becoming public in the fourth quarter of fiscal 2007.
• Impairment Charges: The company recognized $619.5 million in inventory impairment charges and write-offs in fiscal 2007, compared to $152.0 million in fiscal 2006. Additionally, a $59.2 million impairment charge was recorded on investments in unconsolidated entities, and a $9.0 million goodwill impairment was recognized.
• Backlog Contraction: Backlog value decreased 36.4% year-over-year, reflecting a 32.5% decline in the value of new contracts signed and high cancellation rates (27.9% of gross contracts signed in 2007 were cancelled).
• Cost of Revenues: Cost of revenues as a percentage of revenue increased to 88.8% in 2007 from 73.9% in 2006, primarily due to inventory write-downs and higher sales incentives.

Guidance, Outlook, and Risks

Guidance: Management estimates delivering between 3,900 and 5,100 homes in fiscal 2008 at an average price of $630,000 to $650,000. They anticipate cost of revenues and SG&A expenses will be higher as a percentage of revenues in fiscal 2008 due to lower projected revenues and continued incentives.

Management Commentary: The company attributes the slowdown to the mortgage market turmoil, oversupply of homes, and buyer concerns about home prices and the ability to sell existing homes. Despite the downturn, management believes its strong balance sheet, access to capital, and land positions provide a competitive advantage.

Risks and Contingencies:

• Market Conditions: Continued deterioration in the housing market could lead to further inventory write-downs and cancellations.
• Financing: Tightening credit standards may impede buyers' ability to secure mortgages, affecting closings.
• Legal Proceedings: Two securities class action lawsuits are pending against the company and certain officers/directors. The company intends to vigorously defend against these claims.
• Environmental: An EPA request for information regarding storm water discharge practices is ongoing; the outcome is currently unpredictable.

Key Facts for Investor Verification

• Inventory Valuation: Verify the adequacy of the $619.5 million inventory impairment charge and the assumptions used to determine fair value for remaining inventory in a declining market.
• Cancellation Rates: Monitor the 27.9% contract cancellation rate and its impact on future revenue recognition and backlog stability.
• Liquidity Position: Confirm the availability of the $1.22 billion revolving credit facility and the company's ability to meet debt obligations without further asset sales.
• Legal Exposure: Track the status of the two securities class action lawsuits and the EPA inquiry for potential financial impact.
• Unconsolidated Entities: Review the $59.2 million impairment on joint ventures and the remaining $183.2 million investment balance for further risk of loss.