Toll Brothers, Inc. — Fiscal 2021 Form 10-K
Business context and reporting period
Toll Brothers designs, builds, markets, sells and finances luxury and affordable-luxury homes, urban condominiums and for-rent apartment communities. The company operated in 24 states and the District of Columbia at October 31, 2021, through Traditional Home Building and City Living segments.
The filing covers the fiscal year ended October 31, 2021. Fourth-quarter results are included in the annual filing but are not separately audited.
Key financial metrics
| Metric | Fiscal 2021 | Fiscal 2020 | Change |
|---|---|---|---|
| Total revenue | $8.79 billion | $7.08 billion | 24% |
| Home sales revenue | $8.43 billion | $6.94 billion | 22% |
| Income from operations | $1.02 billion | $550.3 million | 86% |
| Income before taxes | $1.10 billion | $586.9 million | 87% |
| Net income | $833.6 million | $446.6 million | 87% |
| Diluted earnings per share | $6.63 | $3.40 | 95% |
| Cash flow from operating activities | $1.30 billion | $1.01 billion | 29% |
| Home sales cost as percentage of home sales revenue | 77.5% | 79.8% | Improved 230 bps |
| Effective tax rate | 24.2% | 23.9% | Up 30 bps |
| Homes delivered | 9,986 | 8,496 | 18% |
| Net contracts signed | $11.54 billion; 12,472 homes | $8.00 billion; 9,932 homes | 44% value; 26% units |
| Year-end backlog | $9.50 billion; 10,302 homes | $6.37 billion; 7,791 homes | 49% value; 32% units |
Fiscal fourth-quarter revenue was $3.04 billion, including $2.95 billion of home sales revenue. Fourth-quarter net income was $374.3 million and diluted EPS was $3.02, compared with $199.3 million and $1.55, respectively, in the prior-year quarter.
At October 31, 2021, cash and cash equivalents were $1.64 billion, total equity was $5.34 billion, total debt including the mortgage company loan facility was approximately $3.57 billion, and the debt-to-total-capitalization ratio was 0.40 to 1.00. The company had approximately $1.81 billion available under its $1.905 billion revolving credit facility, with no revolving borrowings outstanding and $94.5 million of letters of credit.
Material changes versus the prior comparable period
- Strong housing demand, price increases and higher deliveries drove revenue and profit growth. Average delivered home price increased 3% to $844,400, while average contract price increased 15% to $925,300.
- Gross profitability improved as price increases outpaced cost increases, product and geographic mix improved, interest expense as a percentage of home sales revenue declined, and inventory impairments decreased to $26.5 million from $55.9 million.
- SG&A increased 6% to $922.0 million, but declined to 10.9% of home sales revenue from 12.5%.
- Income from unconsolidated entities increased to $74.0 million from $0.9 million, primarily due to gains from property sales by rental-property joint ventures.
- The company redeemed $250.0 million of 5.625% senior notes due 2024 and recorded a $35.2 million pre-tax early-debt-retirement charge. It also repaid the remaining $409.9 million of 5.875% senior notes due February 2022 on November 15, 2021.
- Fiscal 2021 financing uses included $378.3 million of share repurchases, $76.6 million of dividends and $294.2 million of senior-note redemptions. The company repurchased 7.4 million shares during the fiscal year.
- Inventory increased to $7.92 billion from $7.66 billion, while land controlled or owned through options increased to approximately 80,900 home sites from 63,200.
Guidance, outlook, commentary, risks and unusual items
Management did not provide a specific fiscal 2022 revenue, earnings or delivery forecast in the provided filing text. It expects to deliver approximately 90% of the October 31, 2021 backlog by October 31, 2022 and believes liquidity will be adequate for operations, commitments, debt service, share repurchases and dividends for the foreseeable future.
- Demand remained strong entering fiscal 2022, supported by limited resale inventory, favorable demographics, low mortgage rates and an undersupply of new homes. Management continued raising prices and limiting lot releases in some communities to manage profitability and production capacity.
- Supply-chain disruptions, building-material shortages and tight construction labor markets extended build times by up to eight weeks beyond the typical nine-to-twelve-month cycle. Management did not expect material or labor conditions to significantly improve in the near term.
- Key risks include housing-market and mortgage-rate deterioration, inflation, reduced affordability, cancellations, construction delays, higher labor and material costs, regulatory and entitlement delays, adverse weather and natural disasters, and concentration in California.
- Construction-defect and water-intrusion claims relating primarily to Pennsylvania and Delaware remain material judgment areas. The self-insurance accrual was $236.4 million at year-end, and warranty accrual was $145.1 million. Management stated that actual costs and recoveries could differ materially from estimates.
- Land purchase commitments totaled approximately $4.45 billion, against which $336.4 million had been deposited; additional cash required if all commitments are completed was approximately $4.12 billion.
- The company had $599.1 million invested in unconsolidated entities and potential additional funding commitments of $248.0 million. Maximum estimated exposure under repayment and carry-cost guarantees for borrowed joint-venture debt was $222.0 million.
- The company entered a strategic apartment-development partnership with Equity Residential and targeted an initial combined equity investment of $733.0 million, representing approximately $1.83 billion of aggregate project value assuming 60% leverage.
- A multi-year ERP implementation is ongoing. Management concluded internal control over financial reporting was effective, but controls for the acquired StoryBook Homes business were excluded from the assessment because the acquisition was completed during fiscal 2021.
Most important facts for investors to verify
- Whether supply-chain and labor constraints continue to delay deliveries or reduce gross margins.
- Backlog conversion, cancellation rates, pricing, incentives and sales pace in fiscal 2022.
- Exposure to California housing conditions and other high-cost geographic markets.
- Changes in inventory valuations, land impairments and the $4.45 billion land-purchase commitment pipeline.
- Ultimate costs and insurance recoveries associated with Pennsylvania and Delaware water-intrusion claims and other construction-defect matters.
- Joint-venture funding requirements, debt guarantees and the timing of apartment-project monetizations.
- Debt maturities, interest-rate exposure, LIBOR transition effects and compliance with credit-facility covenants.
- Execution of the ERP implementation and integration of StoryBook Homes controls.