Toll Brothers, Inc. 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended January 31, 2009 (Fiscal Q2 2009). Toll Brothers, Inc. is a luxury homebuilder operating in four geographic segments: North, Mid-Atlantic, South, and West. The company is navigating a severe downturn in the housing market characterized by declining consumer confidence, high unemployment, and credit market turmoil.
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 |
|---|---|---|
| Revenues | $409.0 million | $842.3 million |
| Net Loss | $(88.9) million | $(96.0) million |
| Loss Per Share (Basic/Diluted) | $(0.55) | $(0.61) |
| Operating Cash Flow | $(59.3) million | $60.2 million |
| Cash and Equivalents (End of Period) | $1.53 billion | $956.6 million |
| Total Debt (Notes & Loans) | ~$2.1 billion | ~$2.1 billion |
| Backlog (Value) | $1.04 billion | $2.40 billion |
Note: Cost of revenues was $486.0 million (118.8% of revenue) in Q2 2009, driven significantly by impairment charges.
Material Changes vs. Prior Period
- Revenue Decline: Revenues dropped 51% year-over-year due to a 45% decrease in homes delivered and a 10% decrease in average sales price.
- Impairment Charges: The company recognized $150.6 million in inventory impairment charges and $6.0 million in impairment charges on unconsolidated entities. Total impairments were $156.6 million, compared to $245.5 million in the prior year.
- Backlog Contraction: Backlog decreased 56% to $1.04 billion, reflecting a 66% drop in the value of net new contracts signed ($127.8 million vs. $375.1 million).
- Cash Flow Reversal: Operating cash flow swung from a positive $60.2 million in Q2 2008 to a negative $59.3 million in Q2 2009, primarily due to payments on accounts payable and tax settlements.
- Segment Performance: All four geographic segments reported losses before income taxes in Q2 2009, whereas the North and Mid-Atlantic segments were profitable in Q2 2008.
Guidance, Outlook, and Risks
- Fiscal 2009 Guidance: Management estimates delivering between 2,000 and 3,000 homes for the full fiscal year at an average sales price of $600,000 to $625,000.
- Margin Outlook: Cost of sales as a percentage of revenue is expected to be higher in fiscal 2009 due to sales incentives and slower sales per community. SG&A expenses are expected to be lower in absolute terms but higher as a percentage of revenue.
- Liquidity: The company maintains $1.53 billion in cash and cash equivalents and approximately $1.32 billion available under a revolving credit facility. Management believes it has sufficient resources to fund operations and potential opportunities.
- Risks: Key risks include the dislocation in the secondary mortgage industry, tightening credit standards, high cancellation rates of home purchase contracts, and the potential for further inventory write-downs if market conditions do not stabilize.
- Legal Proceedings: The company is engaged in settlement discussions with the DOJ and EPA regarding storm water discharge practices. A securities class action suit and a shareholder derivative action remain pending.
Investor Verification Checklist
- Inventory Valuation: Verify the assumptions used for the $150.6 million inventory impairment charge and the remaining carrying value of $3.93 billion in inventory.
- Backlog Quality: Assess the risk of further cancellations given the 37% cancellation rate of gross contracts in Q2 2009.
- Debt Covenants: Confirm compliance with the Credit Facility's leverage ratio (currently 0.22:1.00) and tangible net worth requirements ($3.14 billion).
- Joint Venture Exposure: Review the $145.4 million investment in unconsolidated entities and the $63.3 million in guarantees, noting two joint ventures have received notices of default.
- Tax Position: Monitor the realization of deferred tax assets ($450.1 million) and the impact of the $171.4 million in unrecognized tax benefits.