Toll Brothers, Inc. — Fiscal 2022 Form 10-K Summary
Business context and reporting period
Toll Brothers designs, builds, markets, sells and finances luxury and affordable-luxury homes, and develops for-rent apartments primarily through joint ventures. The company operated in 24 states and the District of Columbia at October 31, 2022. This filing covers the fiscal year ended October 31, 2022; the requested fourth quarter ended October 31, 2022.
- Operating communities: 459, including 348 selling communities.
- Homes delivered: 10,515 in fiscal 2022; 3,765 in the fourth quarter.
- Home sites owned or controlled: approximately 76,000.
- Backlog: $8.87 billion, representing 8,098 homes; approximately 90% expected to be delivered in fiscal 2023.
Financial performance and key metrics
| Metric | Fiscal 2022 | Fiscal 2021 | Change |
|---|---|---|---|
| Total revenue | $10.28 billion | $8.79 billion | 17% |
| Home sales revenue | $9.71 billion | $8.43 billion | 15% |
| Income from operations | $1.51 billion | $1.02 billion | 48% |
| Income before income taxes | $1.70 billion | $1.10 billion | 55% |
| Net income | $1.29 billion | $833.6 million | 54% |
| Diluted earnings per share | $10.90 | $6.63 | 64% |
| Cash flow from operations | $986.8 million | $1.30 billion | Down $316.3 million |
- Home sales gross margin was approximately 25.5%, compared with 22.5% in fiscal 2021, based on reported home sales revenue and cost of home sales.
- Operating margin was approximately 14.7%, compared with 11.6%.
- Net margin was approximately 12.5%, compared with 9.5%.
- Fiscal 2022 income included a $141.2 million net gain from a Southern California Gas Company litigation settlement. The settlement generated approximately $148 million of net cash proceeds in the fourth quarter.
- Income from unconsolidated entities declined to $23.7 million from $74.0 million, primarily because fiscal 2021 included substantially larger gains from rental-property joint venture asset sales.
- Inventory increased to $8.73 billion from $7.92 billion, including $7.68 billion in operating communities. Inventory impairment charges and write-offs were $32.7 million.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1.35 billion at October 31, 2022, compared with $1.64 billion at October 31, 2021.
- Approximately $1.79 billion was available under the $1.905 billion revolving credit facility; there were no revolver borrowings and $117.7 million of outstanding letters of credit.
- Total reported debt, including loans payable, senior notes and the mortgage company loan facility, was approximately $3.33 billion. Debt-to-total-capitalization was 0.36 to 1.00.
- A $400.0 million senior-notes maturity was due April 15, 2023. Substantial portions of the revolving facility and $650.0 million term loan mature in November 2026, with smaller portions maturing in 2025.
- Fiscal 2022 financing cash uses included $542.7 million of share repurchases, $88.9 million of dividends and $409.9 million of senior-note redemptions. The company repurchased 11.0 million shares during the year and paid $0.77 per share in dividends.
- Investments in unconsolidated entities totaled $852.3 million, with additional funding commitments of up to $304.3 million.
Material changes versus the prior comparable period
- Deliveries increased 5% and average delivered price increased 9%, driving a 15% increase in home sales revenue.
- Net contracts signed declined 34% in units and 21% in value to 8,255 homes and $9.07 billion. The average contract value increased 19% to approximately $1.10 million.
- Backlog declined 21% in units and 7% in value, although average backlog price increased 19% to approximately $1.10 million.
- Demand weakened materially in the second half of fiscal 2022. Third- and fourth-quarter net contracts declined 60% in units and 56% in value year over year.
- Home sales cost of revenues decreased to 74.5% of home sales revenue from 77.5%, reflecting price increases, favorable product and geographic mix, and lower interest cost as a percentage of revenue.
- Operating cash flow declined as inventory investment increased by $618.8 million, compared with $196.2 million in fiscal 2021.
- The company acquired a San Antonio home builder for approximately $48.1 million in cash, adding 16 communities and approximately 450 home sites.
- The company reclassified City Living as no longer a reportable operating segment and now reports five geographic home-building segments.
Guidance, outlook, commentary and risks
Management did not provide a specific fiscal 2023 earnings or delivery guidance in the filing. Management expects approximately 90% of October 31, 2022 backlog homes to be delivered in fiscal 2023 and believes long-term housing fundamentals remain favorable because of demographic and migration trends and a national housing shortage. Near-term demand remains uncertain because of higher mortgage rates and macroeconomic conditions.
- Supply-chain disruptions, labor shortages and municipal delays extended construction cycles; management expects these pressures to recede as weaker demand reduces industry-wide starts.
- Key risks include further housing-demand deterioration, higher mortgage rates, inflation, cancellations, lower sales prices, margin compression and inventory impairments.
- Land commitments totaled $4.32 billion, with $463.5 million deposited and approximately $3.86 billion of additional cash required if all parcels are acquired. The company forfeited control of more than 9,000 lots during fiscal 2022.
- Joint-venture debt guarantees had estimated maximum exposure of $390.5 million on borrowings outstanding and $597.8 million if all related commitments were drawn, excluding certain indemnities and recoveries.
- Construction-defect and water-intrusion claims remain material. Accrued self-insurance was $251.6 million and warranty reserves were $164.4 million at October 31, 2022; management states actual costs could differ materially from estimates.
- The company is implementing a multi-year enterprise resource planning system. Related controls are not yet fully mature and implementation problems could affect operations or financial reporting.
- Interest-rate exposure includes variable-rate debt and the anticipated transition from LIBOR to an alternative reference rate. The company hedged $400.0 million of term-loan exposure through October 2025.
Most important facts for investors to verify
- Whether contract signings, cancellations, pricing and incentives stabilize after the sharp second-half fiscal 2022 slowdown.
- Whether the $8.87 billion backlog converts on schedule and at reported margins.
- The effect of higher mortgage rates, affordability pressure and potential further housing-market weakness on sales pace and inventory valuations.
- Cash generation after inventory additions, the April 2023 senior-note maturity, share repurchases, dividends and joint-venture funding requirements.
- The adequacy of reserves and insurance recoveries for Pennsylvania and Delaware water-intrusion claims and other construction-defect matters.
- The impact of the $141.2 million litigation gain and other nonrecurring items when assessing normalized earnings.
- The sensitivity of inventory and joint-venture valuations to changes in sales prices, absorption rates, discount rates, rents and capitalization rates.