Toll Brothers, Inc. — Fiscal 2015 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended October 31, 2015, including the fourth quarter. Toll Brothers designs, builds, markets and finances luxury detached and attached homes, urban infill properties, and for-rent apartments in 19 states. Operations include Traditional Home Building, City Living, mortgage and title services, manufacturing, golf and country-club operations, distressed real-estate investments and joint ventures.
At October 31, 2015, the Company controlled approximately 44,253 home sites across 539 communities, including 288 selling communities. It delivered 5,525 homes during fiscal 2015 and had a $3.50 billion backlog representing 4,064 homes.
Key financial metrics
| Metric | Fiscal 2015 | Fiscal 2014 | Change |
|---|---|---|---|
| Revenue | $4.171 billion | $3.912 billion | Up 6.6% |
| Income from operations | $446.9 million | $397.2 million | Up 12.5% |
| Income before taxes | $535.6 million | $504.6 million | Up 6.1% |
| Net income | $363.2 million | $340.0 million | Up 6.8% |
| Diluted EPS | $1.97 | $1.84 | Up 7.1% |
| Gross margin | 21.6% | 21.2% | Improved |
| Operating margin | 10.7% | 10.2% | Improved |
| Net margin | 8.7% | 8.7% | Approximately flat |
| Cash flow from operations | $60.2 million | $313.2 million | Down materially |
- Net contracts signed increased to $4.96 billion on 5,910 homes, from $3.90 billion on 5,271 homes. Contract value rose 27.2%, driven by a 12.1% increase in units and a 13.4% increase in average contract value.
- Inventory increased to $7.00 billion from $6.49 billion. Total assets were $9.21 billion and total equity was $4.23 billion at year-end.
- Total debt was $3.79 billion, consisting primarily of $2.69 billion of senior notes, $1.00 billion of loans payable and $100.0 million outstanding under the mortgage-company facility.
- Cash, cash equivalents and marketable securities totaled $929.0 million. Approximately $566.1 million was available under the $1.035 billion revolving credit facility after $350.0 million of borrowings and approximately $118.9 million of letters of credit.
- Debt-to-total-capitalization was 0.47 to 1.00. The revolving credit facility covenant permitted leverage of up to 1.75 to 1.00; reported leverage was approximately 0.68 to 1.00.
- Fiscal 2015 financing cash flow of $325.3 million included issuance of $350.0 million of 4.875% senior notes due 2025. The Company repaid $300.0 million of senior notes and repurchased $56.9 million of common stock.
Material changes versus the prior comparable period
- Revenue growth reflected 2.4% more homes delivered and a 4.2% increase in average delivered-home price. The increase in demand was strongest in the West and California contract markets, while South unit contracts declined 14.5% and City Living unit contracts declined 10.0%.
- Backlog increased 28.8% in value and 10.5% in units. Approximately 96% of backlog homes were expected to be delivered by October 31, 2016.
- Cost of revenues declined to 78.4% of revenue from 78.8%; excluding inventory impairment and warranty and litigation charges, the ratio improved to 77.3% from 77.6%.
- Inventory impairment charges increased to $35.7 million from $20.7 million, including $22.3 million related to operating communities and $12.6 million related to land owned for future communities.
- Income from unconsolidated entities fell to $21.1 million from $41.1 million, primarily because fiscal 2014 included a $23.5 million gain and a $12.0 million distribution associated with Toll Brothers Realty Trust entities.
- Operating cash flow fell sharply as the Company invested $352.0 million in inventory, paid $65.5 million of income taxes and increased investments in working capital.
- The Company controlled fewer home sites, declining to 44,253 from 47,167, while owned home sites declined to 35,872 from 36,243. Land purchase commitments totaled $1.22 billion, with $1.14 billion of additional cash required if all parcels are acquired.
Guidance, outlook, risks and unusual items
Management stated that customer demand strengthened from the third quarter of fiscal 2014 through fiscal 2015 and expressed optimism that the improvement would continue. The filing does not provide specific fiscal 2016 revenue, earnings or delivery guidance. Management cited improving economic conditions, demographic growth and potential pent-up demand among millennials and affluent buyers as favorable factors.
- Fiscal 2015 included an $8.1 million gain from a bulk sale of security-monitoring accounts and $13.2 million of income from land sales. These items are not necessarily recurring.
- The Company recorded a $14.7 million fourth-quarter charge for estimated stucco-related repairs in Pennsylvania and Delaware. Estimated potential liability for known and unknown stucco claims increased to approximately $80.3 million, with expected insurance recovery of approximately 40%.
- The Company recorded $6.9 million of fiscal 2015 charges related to construction claims involving multifamily communities in California. One claim was settled during fiscal 2015 and a second was settled in December 2015; review of a remaining claim was continuing.
- Joint-venture investments totaled $412.9 million, with additional funding commitments of up to $195.6 million. Debt guarantees for unconsolidated entities had estimated maximum exposure of $514.3 million based on amounts borrowed, or $980.2 million if all related loan commitments were drawn, before collateral recoveries and partner reimbursements.
- Other key risks include housing-demand declines, mortgage availability and cancellations, interest-rate increases, inventory impairments, land-approval delays, construction costs, subcontractor performance, regulatory restrictions, weather and natural disasters, cybersecurity, warranty and construction-defect claims, and joint-venture losses.
- Debt maturities and estimated interest obligations totaled $6.36 billion across the contractual-obligation schedule. Variable-rate debt of approximately $964.1 million was exposed to interest-rate changes; a 1% increase would increase annual interest expense by approximately $9.6 million, assuming balances remain constant.
- The Company had no cash dividend history and expected to retain earnings. It repurchased 1.665 million shares during fiscal 2015 and had 18.535 million shares remaining under its authorization at October 31, 2015.
Most important facts for an investor to verify
- Whether the strong contract and backlog growth continued after October 31, 2015, and whether backlog converted to deliveries without elevated cancellations.
- Whether inventory growth, land commitments and joint-venture funding requirements remain consistent with operating cash generation and liquidity.
- The ultimate cost, timing and insurance recoveries associated with stucco, construction-defect, warranty and litigation matters.
- Whether inventory impairment charges remain elevated, particularly in operating communities and future land holdings.
- Refinancing capacity and covenant headroom for senior notes, the term loan, revolving credit facility and mortgage-company facility.
- The recurring versus nonrecurring composition of other income, land-sale gains, ancillary-business gains and income from unconsolidated entities.
- Management’s subsequent outlook for housing demand, pricing, construction costs, mortgage availability and fiscal 2016 deliveries.
- The filing reports unqualified audit opinions and effective disclosure controls and internal control over financial reporting as of October 31, 2015.