Toll Brothers, Inc. — Fiscal 2024 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended April 30, 2024. Toll Brothers is a luxury-focused U.S. homebuilder operating across five geographic regions: North, Mid-Atlantic, South, Mountain and Pacific. The filing was submitted May 31, 2024.
Financial and Operating Highlights
| Metric | Three months ended April 30, 2024 | Year-over-year change | Six months ended April 30, 2024 | Year-over-year change |
|---|---|---|---|---|
| Total revenues | $2.84 billion | 13% | $4.79 billion | 12% |
| Home sales revenue | $2.65 billion | 6% | $4.58 billion | 8% |
| Income from operations | $623.5 million | 46% | $931.9 million | 43% |
| Net income | $481.6 million | 50% | $721.2 million | 41% |
| Diluted earnings per share | $4.55 | 60% | $6.80 | 49% |
| Operating margin | 22.0% | Up from 17.0% | 19.5% | Up from 15.2% |
| Net margin | 17.0% | Up from 12.8% | 15.1% | Up from 11.9% |
| Cash flow from operating activities | Not separately provided | — | $152.0 million | Up from $145.6 million |
- Quarterly deliveries increased 6% to 2,641 homes; the average delivered price was approximately $1.00 million, essentially unchanged year over year.
- Six-month deliveries increased 6% to 4,568 homes, while the average delivered price increased 2% to approximately $1.00 million.
- Net contracts signed increased 30% to 3,041 homes worth $2.94 billion in the quarter. For the six-month period, net contracts increased 34% to 5,083 homes worth $5.01 billion.
- At April 30, 2024, backlog was 7,093 homes valued at $7.38 billion, down 6% in units and 12% in value from April 30, 2023. Average backlog price declined 6% to approximately $1.04 million.
- Home sales cost of revenues was 74.2% of home sales revenue in the quarter and 73.4% for the six-month period, compared with 73.6% and 73.9%, respectively, in the prior-year periods.
- SG&A was $237.7 million in the quarter and $467.7 million for the six-month period. SG&A as a percentage of home sales revenue improved to 9.0% and 10.2%, respectively, from 9.1% and 10.4%.
Cash, Debt and Liquidity
- Cash and cash equivalents were $1.03 billion at April 30, 2024, compared with $1.30 billion at October 31, 2023. Cash, cash equivalents and restricted cash totaled $1.09 billion.
- Operating activities generated $152.0 million during the first six months. Investing activities used $100.7 million, principally for $99.6 million of investments in unconsolidated entities. Financing activities used $308.2 million, including $180.1 million for share repurchases and $47.1 million for dividends.
- Total debt, including loans payable, senior notes and the mortgage company loan facility, was approximately $2.84 billion at April 30, 2024. Senior notes totaled $1.60 billion and loans payable totaled $1.11 billion.
- The company had no borrowings under its $1.905 billion revolving credit facility and approximately $170.0 million of outstanding letters of credit. Approximately $1.74 billion was available under the facility at April 30, 2024. On May 2, 2024, committed capacity was increased to $1.955 billion.
- The debt-to-total-capitalization ratio was approximately 0.28 to 1.00. The company reported compliance with applicable debt covenants; its revolving-credit leverage covenant was 1.75 to 1.00 maximum, versus an actual ratio of approximately 0.28 to 1.00.
- On March 12, 2024, the quarterly dividend was increased from $0.21 to $0.23 per share. The company repurchased 1.50 million shares during the quarter at an average price of $120.60 and had 18.498 million shares remaining under its authorization.
Material Changes Versus the Prior Comparable Period
- Profit growth benefited materially from a February 2024 sale of a Northern Virginia land parcel. The transaction generated $180.7 million of net cash proceeds and a $175.2 million pretax gain, contributing approximately $124.1 million to quarterly net income.
- Homebuilding results improved due to higher deliveries, stronger backlog conversion, more selling communities and improved build times as supply-chain and labor disruptions largely normalized.
- Net contracts increased substantially, but backlog declined year over year because deliveries and spec-home activity exceeded the prior-year level and spec homes generally have lower average contract values.
- Mountain-region performance weakened: quarterly and six-month pretax income declined 39% and 27%, respectively. Results reflected lower deliveries, unfavorable product mix and higher inventory impairment charges, including a $24.9 million charge related to one master-planned community.
- Inventory increased to $9.93 billion from $9.06 billion at October 31, 2023. Operating-community inventory represented $9.10 billion of the total.
- Inventory impairment charges increased to $28.4 million for the quarter and $29.9 million for the six-month period, compared with $11.1 million and $19.1 million, respectively, in the prior-year periods.
- Income from unconsolidated entities improved to $5.9 million from a $5.3 million loss in the quarter, primarily due to a $21.0 million share of a rental-property joint venture gain. Six-month results remained a $3.3 million loss, improved from a $9.7 million loss.
- Prior-year six-month results included a $27.7 million net gain from litigation settlements that did not recur.
Guidance, Outlook, Risks and Unusual Items
- Management stated that demand remained solid despite elevated mortgage rates, supported by a resilient economy, favorable demographics, limited resale inventory and persistent housing underproduction. Management believes its affluent luxury customer base is less sensitive to mortgage-rate affordability pressures.
- The filing does not provide a clear numerical full-year revenue, delivery or margin guidance figure. Management expects available cash, operating cash flow, joint-venture distributions and borrowing capacity to fund operations, commitments, debt service, dividends and repurchases for the foreseeable future.
- Key risks include mortgage-rate and affordability changes, economic conditions, inflation, consumer sentiment, land availability and pricing, competition, labor and materials availability, tariffs, weather and natural disasters, governmental approvals and regulation, litigation, warranty and construction-defect claims, joint-venture performance, cybersecurity and access to capital.
- The company had $1.00 billion invested in unconsolidated entities and $319.4 million of remaining funding commitments. Its estimated maximum exposure under repayment and carry-cost guarantees was $590.6 million for amounts already borrowed, or $694.8 million assuming full borrowing under applicable commitments. These estimates exclude recoveries, partner reimbursements and certain project-completion and indemnity exposures.
- Land purchase contracts had an aggregate purchase price of $4.63 billion, with $445.7 million of deposits and $4.19 billion of additional cash required if acquired. The company also expects to purchase approximately 8,400 additional home sites from joint ventures at prices to be determined.
- Outstanding surety bonds totaled $1.25 billion, including $918.7 million related primarily to community improvements, and letters of credit totaled $170.0 million. Management did not believe material draws were probable.
- The warranty accrual was $206.7 million at April 30, 2024. Recorded estimated repair costs for Pennsylvania and Delaware water-intrusion claims were approximately $40.1 million; management did not believe currently known potential differences would be material.
- The company recognized a $4.4 million gain from a bulk sale of smart-home security monitoring accounts, a $5.0 million gain on a private-company investment, and $5.0 million of write-offs in its apartment rental development business during the six-month period.
Important Facts for Investors to Verify
- Whether the $175.2 million land-sale gain is nonrecurring and how results perform excluding this item.
- Backlog conversion, cancellation rates, spec-home inventory and the sustainability of the 30% quarterly increase in net contracts.
- Inventory growth, particularly the Mountain-region impairment charge and the risk of additional write-downs if pricing or demand weakens.
- Cash generation after inventory investment, share repurchases, dividends, joint-venture funding and land commitments.
- Debt maturities, floating-rate exposure and the effect of a 1% interest-rate increase, which the filing estimates would increase annual interest expense by approximately $8.7 million before considering swaps.
- Joint-venture guarantee exposure, funding commitments and the ability of partners and underlying collateral to absorb losses.
- Warranty, construction-defect, litigation and environmental claims, including exposures not fully estimable in the filing.