Toll Brothers, Inc. — Fiscal 2021 Third-Quarter Form 10-Q
Business context and reporting period
Toll Brothers is a luxury and affordable-luxury homebuilder operating through Traditional Home Building and urban infill/City Living segments across U.S. markets. The filing covers the three and nine months ended July 31, 2021, compared primarily with the corresponding 2020 periods. The financial statements are unaudited.
Key financial metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenues | $2.255 billion | $1.651 billion | $5.749 billion | $4.532 billion |
| Home sales revenues | $2.234 billion | $1.628 billion | $5.481 billion | $4.441 billion |
| Income from operations | $276.7 million | $149.6 million | $580.2 million | $289.7 million |
| Net income | $234.9 million | $114.8 million | $459.3 million | $247.3 million |
| Diluted EPS | $1.87 | $0.90 | $3.63 | $1.87 |
| Operating margin | 12.3% | 9.1% | 10.1% | 6.4% |
| Effective tax rate | 22.6% | 24.4% | 23.5% | 22.7% |
| Operating cash flow | Not separately provided for the quarter | Not separately provided for the quarter | $448.4 million | $141.6 million |
Home sales cost of revenues declined to 77.3% of home sales revenue in the quarter from 79.0% and to 78.1% for the nine months from 79.7%. SG&A was 10.5% of home sales revenue in the quarter versus 11.9%, and 12.1% for the nine months versus 14.0%. Deliveries increased 28% to 2,597 homes in the quarter and 20% to 6,645 homes for the nine months. Average delivered prices increased 7% to $860,400 in the quarter and 3% to $824,900 for the nine months.
Liquidity, debt, and capital allocation
- Cash and cash equivalents were $946.1 million at July 31, 2021, compared with $1.371 billion at October 31, 2020. Cash, cash equivalents, and restricted cash totaled $1.018 billion.
- Debt carrying values included $1.037 billion of loans payable, $2.404 billion of senior notes, and $148.7 million under the mortgage company loan facility. Total debt was approximately $3.598 billion, excluding certain presentation differences.
- The company had no borrowings under its $1.905 billion revolving credit facility and approximately $1.790 billion of availability after outstanding letters of credit of $115.3 million.
- The revolving credit facility leverage ratio was approximately 0.49 to 1.00 versus a maximum of 1.75 to 1.00; tangible net worth was approximately $4.97 billion versus a required minimum of approximately $2.15 billion.
- Financing activities used $837.9 million during the nine months, including $275.1 million for share repurchases, $56.1 million of dividends, $216.9 million of net loan repayments, and $294.2 million for senior-note redemptions.
- The quarterly dividend increased to $0.17 per share from $0.11. The company repurchased 1.655 million shares during the quarter at an average price of $57.66.
Material changes versus the prior comparable periods
- Third-quarter revenue increased 37%, operating income increased 85%, and net income increased 105%. For the nine months, revenue increased 27%, operating income doubled, and net income increased 86%.
- Net contracts signed increased 11% in units and 35% in value during the quarter, to 3,154 homes and $2.980 billion. For the nine months, contracts increased 46% in units and 62% in value, to 9,515 homes and $8.541 billion.
- Backlog at July 31, 2021 increased 47% in units and 55% in value year over year, to 10,661 homes valued at $9.438 billion. Backlog average price increased 5% to $885,200.
- Traditional Home Building pretax income increased 46% in the quarter and 52% for the nine months. City Living pretax income increased to $65.9 million in the quarter and $111.1 million for the nine months, partly reflecting commercial-property gains and easier COVID-19 comparisons.
- Income from unconsolidated entities increased to $16.6 million in the quarter and $28.3 million for the nine months, including gains from joint-venture property sales.
- The company incurred a $35.2 million pretax charge for early retirement of debt during the nine months, primarily related to redeeming $250 million of 5.625% senior notes due 2024.
- Inventory increased to $8.293 billion from $7.659 billion at October 31, 2020. Nine-month inventory impairments and write-offs were $16.0 million, down from $21.9 million.
Outlook, management commentary, risks, and unusual items
Management reported continued strong demand, supported by limited resale supply, low mortgage rates, favorable demographics, an improving economy, and long-term underproduction of new homes. The company raised prices in most communities and limited lot releases in certain South and Mountain markets where demand exceeded supply. No specific quantitative earnings or delivery guidance is provided in the filing text.
Supply-chain disruptions, labor shortages, and material-cost inflation remained significant constraints. Delivery times increased by approximately two weeks on average during the quarter. Management stated that price increases, trade-partner relationships, operating scale, and recent improvement in lumber prices may help offset cost pressures, but cautioned that further disruptions could extend delivery times.
- COVID-19 effects remained uncertain, including potential impacts on demand, construction, mortgage rates, employment, consumer confidence, and financial markets.
- The company had approximately $4.065 billion of aggregate land purchase commitments, with $3.754 billion of additional cash required if all parcels are acquired, plus approximately $97.8 million of apartment-development land commitments.
- Investments in unconsolidated entities totaled $550.4 million, with remaining funding commitments of $77.5 million. Guarantees covered entities with $1.17 billion of borrowed debt; maximum estimated repayment and carry-cost exposure was $238.6 million on borrowed amounts and $340.6 million if all commitments were borrowed.
- Warranty accruals were $150.4 million. Remaining estimated water-intrusion repair costs were approximately $68.6 million, with expected insurance and supplier recoveries of approximately $41.8 million. Management noted that actual costs and recoveries could differ materially.
- The Pennsylvania Attorney General continues reviewing construction of stucco homes; management cannot predict the eventual scope or outcome.
- In August 2021, the company acquired StoryBook Homes for approximately $38.8 million and announced a strategic apartment-development partnership with Equity Residential targeting $733 million of combined initial equity investment, or approximately $1.83 billion of aggregate value assuming 60% leverage.
- Management stated that existing resources and access to capital should be adequate for current operations and contractual obligations, while acknowledging uncertainty regarding future financing availability and terms.
Most important facts for investors to verify
- Whether strong contract growth and the $9.44 billion backlog convert to deliveries without elevated cancellations or further construction delays.
- Whether pricing gains continue to offset labor, materials, land, and supply-chain costs, particularly in the South and Mountain regions.
- The maturity profile and refinancing requirements for senior notes and other debt, including the approximately $468 million of fixed-rate debt maturing in fiscal 2022.
- Exposure to land commitments, joint-venture guarantees, apartment-development investments, and potential funding requirements.
- The ultimate cost and insurance recovery associated with water-intrusion, stucco, warranty, and other construction-defect claims.
- The contribution and repeatability of unusual gains from joint-venture property sales and the Hoboken commercial-asset sale.
- Execution of the ERP implementation and the financial impact of the StoryBook acquisition and Equity Residential partnership.