Toll Brothers, Inc. — Fiscal 2023 Third-Quarter Form 10-Q Summary
Business context and reporting period
Toll Brothers is a U.S. luxury homebuilder operating across five geographic regions: North, Mid-Atlantic, South, Mountain, and Pacific. The filing covers the three and nine months ended July 31, 2023, compared with the corresponding fiscal 2022 periods. The company also operates mortgage, title, apartment, land-development, and other ancillary businesses.
Key financial metrics
| Metric | Three months ended July 31, 2023 | Year-over-year change | Nine months ended July 31, 2023 | Year-over-year change |
|---|---|---|---|---|
| Total revenues | $2.688 billion | 8% | $6.975 billion | 6% |
| Home sales revenues | $2.675 billion | 19% | $6.914 billion | 13% |
| Income from operations | $515.1 million | 42% | $1.166 billion | 42% |
| Net income | $414.8 million | 52% | $926.5 million | 43% |
| Diluted EPS | $3.73 | 59% | $8.28 | 53% |
| Operating margin | Approximately 19.2% | Up from approximately 14.5% | Approximately 16.7% | Up from approximately 12.5% |
| Net margin | Approximately 15.4% | Up from approximately 11.0% | Approximately 13.3% | Up from approximately 9.8% |
| Cash flow from operating activities | Not separately reported for the quarter | — | $675.0 million provided | Compared with $246.6 million used |
Third-quarter deliveries increased 5% to 2,524 homes, while average delivered price increased 13% to approximately $1.060 million. Home sales cost of revenues declined to 72.2% of home sales revenue from 74.0%; SG&A declined to 8.6% of home sales revenue from 10.3%. Management attributed margin improvement primarily to product and geographic mix, price increases exceeding cost increases, lower interest expense as a percentage of revenue, and cost controls.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $1.033 billion at July 31, 2023, compared with $1.347 billion at October 31, 2022. Cash, cash equivalents, and restricted cash totaled $1.083 billion.
- The company had approximately $1.78 billion available under its $1.905 billion senior unsecured revolving credit facility, with no revolver borrowings and $121.0 million of outstanding letters of credit.
- Debt included $1.163 billion of loans payable, $1.596 billion of senior notes, and $70.5 million outstanding under the mortgage company facility. Total debt reported in the debt fair-value disclosure was approximately $2.837 billion at book value.
- The debt-to-total-capitalization ratio was 0.30 to 1.00. The revolving credit facility leverage ratio was approximately 0.28 to 1.00 versus a maximum permitted 1.75 to 1.00; management stated that all applicable debt covenants were satisfied.
- During the nine months, the company redeemed $400.0 million of senior notes, repurchased $239.3 million of common stock, and paid $69.1 million of dividends. The quarterly dividend was $0.21 per share.
Material changes versus the prior comparable period
- Demand improved substantially in the third quarter after weakness during the second half of calendar 2022. Net contracts increased 77% in units and 30% in value to 2,245 homes and $2.164 billion, respectively.
- Despite the quarterly rebound, nine-month net contracts declined 15% in units and 24% in value to 6,039 homes and $5.893 billion.
- Backlog at July 31, 2023 was $7.875 billion for 7,295 homes, down 30% in value and 32% in units from July 31, 2022. Backlog average contracted price increased 4% to approximately $1.080 million.
- Regional performance was strongest in the South and Pacific regions during the quarter. North revenue declined 22% and North income before taxes declined 40%; the South posted 79% revenue growth and 125% income-before-tax growth.
- Land sales and other revenue fell sharply to $13.0 million in the quarter and $60.7 million year to date, compared with $238.5 million and $433.2 million, respectively, primarily because prior-year periods included substantial land sales to joint ventures.
- Inventory increased to $9.204 billion from $8.733 billion at October 31, 2022. Nine-month inventory impairment charges were $22.4 million, including $17.7 million related to land held for sale, versus $10.7 million in the prior-year period.
- Income from unconsolidated entities increased in the quarter to $30.5 million, including a $35.0 million gain from a rental-property joint venture asset sale. Year-to-date income declined to $20.8 million from $28.0 million.
Outlook, commentary, risks, and unusual items
Management reported improved demand since January 2023, supported by limited resale inventory, demographic and migration trends, and the U.S. housing shortage. However, it cautioned that mortgage rates recently reached multi-decade highs and that the direction of rates, consumer confidence, inflation, and the broader economy remains difficult to predict. The filing does not provide a clear formal full-year revenue, earnings, or delivery guidance figure.
- Build times improved modestly but remained extended because of supply-chain, labor, and municipal disruptions.
- Management expects cash on hand, operating cash flow, joint-venture distributions, and available credit to fund operations, commitments, debt service, repurchases, and dividends for at least the next twelve months.
- The mortgage warehouse agreement, with $70.5 million outstanding at July 31, 2023, expires March 30, 2024. The company intends to refinance or renew it but provided no assurance that replacement financing will be available on favorable terms.
- The company had $900.4 million invested in unconsolidated entities and $345.4 million of remaining funding commitments. Guarantees covered joint-venture loan commitments of $3.181 billion; estimated maximum exposure under repayment and carry-cost guarantees was $509.8 million on amounts already borrowed and $642.2 million if all commitments were borrowed. Project-completion and certain indemnity exposures were not estimable.
- Land purchase contracts totaled $4.154 billion, with $3.701 billion of additional cash required beyond deposits. The company also expected to purchase approximately 8,300 additional home sites from joint ventures at prices to be determined.
- Outstanding surety bonds totaled $1.171 billion, including $856.1 million related primarily to community improvements; outstanding letters of credit totaled $121.0 million. Management did not believe draws were probable.
- Warranty accrual was $145.5 million, including $42.6 million for water-intrusion claims involving homes built in Pennsylvania and Delaware. The company stated that actual costs and insurance recoveries could differ materially from estimates, although it could not estimate a range.
- Year-to-date results included a $27.7 million net gain from litigation settlements and a $35.0 million joint-venture property-sale gain. Prior-year results included a $9.0 million gain from the bulk sale of smart-home monitoring accounts and a $21.0 million joint-venture property-sale gain.
- The company continued implementing a new enterprise resource planning system that will be a significant component of internal control over financial reporting. Disclosure controls were assessed as effective.
Investor verification checklist
- Verify whether the third-quarter improvement in contracts persists as mortgage rates remain elevated and whether backlog continues to decline or stabilizes.
- Track cancellation rates, sales incentives, average contracted prices, and regional mix because contract values declined year to date and incentives increased.
- Assess inventory growth, land purchase commitments, and future impairment risk relative to expected deliveries and demand.
- Review debt maturities, floating-rate exposure, the March 2024 mortgage warehouse expiration, and the company’s ability to maintain liquidity under stressed housing conditions.
- Evaluate joint-venture funding commitments, guarantees, project-completion obligations, and potential exposure beyond the estimated repayment and carry-cost guarantees.
- Monitor warranty and construction-defect claims, particularly the Pennsylvania and Delaware water-intrusion matters, for changes in reserves and recoveries.
- Separate recurring operating performance from unusual contributions from joint-venture asset sales, litigation settlements, impairments, and prior-period gains.