Toll Brothers, Inc. — Fiscal 2013 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
Toll Brothers is a luxury and upscale residential homebuilder operating in four U.S. geographic segments: North, Mid-Atlantic, South and West. The filing covers the three and six months ended April 30, 2013, compared with the corresponding fiscal 2012 periods. Financial statements are unaudited.
Financial Results and Key Metrics
| Metric | Three months ended April 30, 2013 | Three months ended April 30, 2012 | Six months ended April 30, 2013 | Six months ended April 30, 2012 |
|---|---|---|---|---|
| Revenue | $516.0 million | $373.7 million | $940.6 million | $695.6 million |
| Income from operations | $16.4 million | $(1.4) million | $17.1 million | $(20.7) million |
| Net income | $24.7 million | $16.9 million | $29.1 million | $14.1 million |
| Diluted EPS | $0.14 | $0.10 | $0.17 | $0.08 |
| Operating margin | 3.2% | (0.4)% | 1.8% | (3.0)% |
| Cost of revenues as a percentage of revenue | 81.4% | 82.1% | 81.4% | 83.2% |
| SG&A as a percentage of revenue | 15.4% | 18.3% | 16.8% | 19.8% |
Revenue growth reflected 894 homes delivered in the quarter versus 671 in the prior-year quarter, and 1,640 homes delivered in the six-month period versus 1,235. Average delivered home price increased to approximately $577,200 in the quarter and $573,500 year to date.
- Cash and cash equivalents were $703.1 million at April 30, 2013, compared with $778.8 million at October 31, 2012.
- Marketable securities were $232.9 million, down from $439.1 million at October 31, 2012.
- Inventory was $4.37 billion, up from $3.76 billion, primarily due to increased operating-community inventory.
- Total debt book value was approximately $2.49 billion, consisting principally of $2.33 billion of senior notes. Total liabilities were $3.39 billion.
- Net cash used in operating activities was $445.4 million, compared with $271.1 million in the prior-year six-month period, primarily reflecting inventory investment.
- Investing activities provided $165.7 million, principally from net sales of marketable securities and investment returns.
- Financing activities provided $204.0 million, including $298.1 million of net proceeds from issuing 4.375% senior notes due 2023.
- The company had $817.9 million available under its $885.0 million revolving credit facility, with no borrowings outstanding and approximately $67.1 million of letters of credit outstanding.
Material Changes Versus the Prior Comparable Period
- Six-month revenue increased 35.2%, while quarterly revenue increased 38.1%.
- Net contracts signed increased 40.4% in units and 50.3% in value for the six-month period, reaching $1.80 billion across 2,726 homes. Quarterly net contracts increased 35.9% in units and 57.4% in value.
- Backlog increased to $2.53 billion across 3,655 homes at April 30, 2013, up 68.9% in value and 52.1% in units from April 30, 2012.
- Cost efficiency improved, with cost of revenues declining as a percentage of revenue and SG&A leverage improving. Inventory impairment charges declined to $1.7 million for six months from $10.1 million in the prior-year period.
- Income from unconsolidated entities declined to $8.1 million from $13.7 million for six months, reflecting lower contributions from substantially completed condominium joint ventures.
- Other income included $13.2 million of net income from the settlement of three shareholder derivative lawsuits. This was a material unusual item and benefited 2013 earnings.
- The 2012 comparison included a $1.6 million recovery of previously incurred charges related to an unconsolidated development joint venture and a $4.8 million income tax benefit, whereas 2013 included a $20.2 million tax provision.
- Land controlled increased to approximately 45,200 home sites from approximately 40,350 at October 31, 2012. Inventory and land purchase commitments increased accordingly.
Guidance, Outlook, Risks and Unusual Items
Management reported continued housing-market recovery, citing improving employment, consumer confidence, home prices, reduced inventory and low mortgage rates. Management expected to open approximately 50 communities during the six months ending October 31, 2013 and projected selling from approximately 225 to 255 communities at October 31, 2013. The company controlled approximately 4,550 planned apartment units, with expected revenue generation beginning in 2015.
- Land purchase commitments totaled approximately $1.24 billion, with $1.19 billion of additional cash required if all commitments are acquired. Apartment-development purchase commitments added approximately $63.1 million.
- The company had $357.5 million invested in unconsolidated entities and commitments to provide up to $126.8 million of additional funding.
- Joint-venture guarantees had a stated maximum potential exposure of approximately $49.4 million based on amounts borrowed, or $225.0 million if all related loan commitments were drawn, before partner reimbursements.
- Outstanding surety bonds totaled $469.4 million and letters of credit totaled $79.9 million. Management believed draws were not probable.
- Key risks include housing demand, mortgage availability, interest rates, employment, home prices, land and construction costs, regulatory approvals, inventory impairments, joint-venture performance, litigation, warranty and construction-defect claims, and access to capital.
- The filing states that no material changes occurred in previously disclosed risk factors. Management concluded that disclosure controls and procedures were effective.
Most Important Facts for Investors to Verify
- Whether the sharp increase in contracts and backlog converts into deliveries and sustainable cash generation.
- Whether inventory growth and approximately $1.2 billion of potential additional land funding create liquidity or impairment risk if housing demand weakens.
- The portion of 2013 earnings attributable to the $13.2 million litigation settlement and the sustainability of recurring earnings excluding that item.
- Future gross margins, SG&A leverage and impairment charges as land, labor and construction costs rise.
- Debt maturities, refinancing requirements and compliance with the revolving-credit leverage and tangible-net-worth covenants.
- Actual performance of unconsolidated entities, joint-venture funding requirements and potential guarantee exposure.
- Whether management’s projected community openings and apartment-development plans are achieved without materially increasing capital requirements.