Toll Brothers, Inc. — Fiscal 2011 Form 10-K Summary
Business context and reporting period
Toll Brothers designs, builds, markets and finances luxury single-family and attached homes, including urban, active-adult, second-home and condominium projects. The company operated in 19 states through four geographic segments: North, Mid-Atlantic, South and West.
The filing covers the fiscal year ended October 31, 2011. Fiscal fourth-quarter data are presented on an unaudited basis. The U.S. housing market remained depressed, although management believed many markets had reached a bottom and expected eventual recovery as employment, consumer confidence, financial markets and home prices stabilized.
Key financial metrics
| Metric | Fiscal 2011 | Fiscal 2010 | Change |
|---|---|---|---|
| Revenue | $1.476 billion | $1.495 billion | Down 1.3% |
| Gross profit | $215.1 million | $118.2 million | Up $96.9 million |
| Gross margin | 14.6% | 7.9% | Improved |
| Loss from operations | $47.7 million | $167.8 million | Improved |
| Loss before taxes | $29.4 million | $117.2 million | Improved |
| Net income (loss) | $39.8 million | $(3.4) million | Improved |
| Basic and diluted EPS | $0.24 | $(0.02) | Improved |
| Operating cash flow | $52.9 million | $(146.3) million | Improved |
| Cash, equivalents and marketable securities | $1.140 billion | $1.237 billion | Down $97.0 million |
| Total debt | $1.655 billion | $1.711 billion | Down $56.0 million |
Fiscal 2011 net income benefited materially from a $69.2 million income tax benefit, including reversals of previously accrued uncertain tax positions and valuation allowances. The company reported a pretax loss and therefore did not generate positive pretax operating earnings.
Fiscal fourth-quarter revenue was $427.8 million, gross profit was $65.3 million, pretax income was $15.3 million and net income was $15.0 million. Fourth-quarter net income included a $10.3 million tax benefit.
Operating and housing metrics
- Homes delivered declined to 2,611 from 2,642; revenue was broadly stable because of product and geographic mix.
- Gross contracts signed increased to $1.708 billion, or 2,965 homes, from $1.570 billion, or 2,789 homes.
- Net contracts signed increased 9.0% to $1.605 billion, or 2,784 homes, from $1.472 billion, or 2,605 homes.
- Contract cancellations fell to 6.1% of gross units and 6.0% of gross dollars, compared with 6.6% and 6.3%, respectively, in fiscal 2010.
- Backlog increased 15.1% in value to $981.1 million, representing 1,667 homes, from $852.1 million and 1,494 homes.
- The company was selling from 215 communities at year-end, compared with 195 in fiscal 2010, and controlled approximately 37,497 home sites.
Material changes versus the prior comparable period
- Cost of revenues declined to 85.4% of revenue from 92.1%. Excluding inventory impairments, the ratio improved to 81.9% from 84.4%, reflecting lower costs on delivered homes, fewer quick-delivery homes, purchasing efficiencies and reduced costs in certain communities.
- Inventory impairments and write-offs decreased to $51.8 million from $115.3 million. Impairments related to unconsolidated entities increased to $40.9 million from none in fiscal 2010.
- SG&A declined slightly to $261.4 million, but increased as a percentage of revenue to 17.7% from 17.6%.
- Directly expensed interest declined to $1.5 million from $22.8 million, primarily because of lower debt and increased qualifying inventory.
- Cash flow from operations improved to $52.9 million, supported in part by receipt of a $154.3 million federal tax refund, but inventory increased by $215.7 million.
- The company repurchased or redeemed $55.1 million of senior notes and repurchased $49.1 million of common stock during fiscal 2011.
- Net income improved despite a $1.2 million loss from unconsolidated entities, compared with $23.5 million of income in fiscal 2010, because of lower operating losses, lower inventory impairments and the tax benefit.
Debt, liquidity and commitments
- Cash and marketable securities totaled $1.140 billion at October 31, 2011. The company had approximately $784.7 million available under its $885 million revolving credit facility, which matures in October 2014.
- No borrowings were outstanding under the revolving credit facility, although letters of credit totaled approximately $100.3 million under the facility.
- Total debt was $1.655 billion, including $1.491 billion of senior notes, $106.6 million of loans payable and $57.4 million under the mortgage company warehouse facility.
- Senior notes and other debt have significant scheduled maturities, including approximately $92.8 million in fiscal 2012, $294.7 million in fiscal 2013 and $272.0 million in fiscal 2014, excluding certain estimated interest amounts in the contractual-obligations table.
- Land purchase commitments totaled approximately $564.4 million, of which $526.4 million remained payable if all parcels were acquired.
- Investments in and advances to unconsolidated entities totaled $126.4 million, with additional potential funding commitments of approximately $11.8 million.
Guidance, outlook, risks and unusual items
- Management expected to be selling from 235 to 255 communities at October 31, 2012. Forty-five communities were temporarily closed and were not expected to reopen before that date.
- Management viewed the company’s liquidity, balance sheet, geographic diversity, brand and land positions as advantages in pursuing distressed real estate and land opportunities.
- In November 2011, Toll Brothers acquired substantially all of CamWest Development LLC’s assets for approximately $143.7 million in cash. The acquisition added 15 selling communities, approximately 1,245 owned home sites and 254 controlled home sites.
- In November 2011, the company paid $57.6 million related to the settlement of the South Edge joint-venture matter. The filing states that adequate provision had been recorded at October 31, 2011.
- The housing downturn, unemployment, weak consumer confidence, foreclosures, home-price declines, mortgage availability, cancellations and competition from existing homes remained principal risks.
- Further inventory or joint-venture impairments remain possible because valuations depend on sales pace, pricing, incentives, construction costs, approvals and market conditions.
- The company had $427.4 million of deferred tax assets before valuation allowances and had recorded valuation allowances against the entire net deferred tax asset.
- The Department of Justice and EPA were engaged in settlement discussions concerning alleged Clean Water Act storm-water violations. The company also faced shareholder derivative litigation; management did not expect these matters to have a material adverse effect.
- Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective.
Most important facts an investor should verify
- Whether higher net contracts and backlog convert into deliveries and cash without increased incentives, cancellations or margin erosion.
- The sustainability of reported profitability excluding the $69.2 million tax benefit and other nonrecurring items.
- Future inventory and joint-venture impairment exposure, particularly in the South and West segments.
- Liquidity after the CamWest acquisition, South Edge settlement and other post-year-end investments, compared with upcoming debt maturities and land commitments.
- The valuation and recoverability of the $3.417 billion inventory balance and the $126.4 million investment balance in unconsolidated entities.
- The status and ultimate cost of environmental, shareholder derivative, warranty, construction-defect and joint-venture contingencies.