Toll Brothers, Inc. quarterly report, Q2 FY2016

Toll Brothers, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended April 30, 2016; fiscal year ends October 31. The filing is unaudited. Toll Brothers operates Traditional Home Building and City Living segments across U.S. luxury and urban markets.

Financial Results and Key Metrics

Metric	Six months 2016	Six months 2015	Three months 2016	Three months 2015
Revenue	$2.044 billion	$1.706 billion	$1.116 billion	$852.6 million
Income from operations	$211.1 million	$163.5 million	$116.6 million	$66.4 million
Net income	$162.2 million	$149.3 million	$89.1 million	$67.9 million
Diluted EPS	$0.91	$0.81	$0.51	$0.37
Operating margin	10.3%	9.6%	10.5%	7.8%
Net margin	7.9%	8.7%	8.0%	8.0%

Revenue increased 20% for the six-month period and 31% for the quarter. Net income increased 9% and 31%, respectively.
Deliveries increased 4% to 2,367 homes for the six months and 9% to 1,304 homes for the quarter. Average delivered prices rose 16% and 20%, respectively, to $863,600 and $855,500.
Net contracts signed increased 11% to $2.732 billion for the six months and 3% to $1.645 billion for the quarter. Contracted units increased 8% and 3%, respectively.
Backlog at April 30, 2016 was $4.192 billion, representing 4,940 homes, up 20% in value and 13% in units from April 30, 2015. Average backlog price was $848,600.
Cost of revenues declined to 77.4% of revenue from 77.9% for the six months and to 78.0% from 79.6% for the quarter. SG&A declined to 12.2% and 11.5% of revenue, respectively, from 12.5% and 12.6%.
Income from unconsolidated entities increased to $17.8 million from $11.1 million for the six months. Other income declined to $28.4 million from $35.9 million, partly because the prior period included a larger gain from a bulk sale of security-monitoring accounts.
The effective tax rate rose to 36.9% from 29.1% for the six months and to 36.6% from 21.5% for the quarter. The 2015 periods benefited from a $13.7 million reversal of a previously recognized tax provision.

Cash Flow, Debt, and Liquidity

Cash used in operating activities was $15.9 million, compared with $37.9 million in the prior-year period. Inventory increased $289.7 million, principally reflecting continued community and home construction investment.
Investing activities provided $42.3 million, including returns from unconsolidated entities and foreclosed real estate investments.
Financing activities used $522.3 million, including $297.9 million of net loan repayments and $230.3 million for treasury-stock purchases.
Cash and cash equivalents declined to $423.2 million at April 30, 2016, from $919.0 million at October 31, 2015. Total debt book value was approximately $3.520 billion, consisting principally of $2.692 billion of senior notes, $711.3 million of loans payable, and a $100.0 million mortgage-company facility.
The company reported a debt-to-total-capitalization ratio of 0.46 to 1.00, a leverage ratio of approximately 0.74 to 1.00, and tangible net worth of approximately $4.13 billion. The existing revolving credit facility had $100.0 million drawn and approximately $94.8 million of outstanding letters of credit at quarter-end.
After quarter-end, Toll Brothers entered into a new $1.215 billion unsecured revolving credit facility maturing in May 2021, terminated the prior facility, and subsequently borrowed an additional $450.0 million under the new facility.

Material Changes Versus the Prior Comparable Period

Growth was led by higher home prices, favorable product and geographic mix, increased deliveries, and stronger California and City Living results.
California revenue increased 85% for the six months and 156% for the quarter; California income before taxes increased 154% and 245%, respectively.
City Living revenue increased 53% for the six months and 223% for the quarter, while income before taxes increased 3% and 145%, respectively.
South revenue and income before taxes declined 10% and 16% for the six months, reflecting fewer deliveries and lower earnings from unconsolidated entities.
Inventory impairments and write-offs decreased to $7.6 million from $13.3 million for the six months and to $6.4 million from $12.2 million for the quarter.
Inventory increased to $7.285 billion from $6.998 billion at October 31, 2015. Operating-community inventory increased to $5.539 billion from $4.889 billion.
The company repurchased 7.7 million shares for $230.3 million during the six months, including 2.9 million shares during the quarter. A new authorization for up to 20 million shares became effective May 23, 2016.

Guidance, Outlook, Risks, and Unusual Items

Management characterized the housing market as experiencing slow but steady growth, supported by low interest rates, improving employment, constrained supply, and demographic demand. No quantitative revenue or earnings guidance was provided.
The company controlled approximately 45,400 home sites and was selling from 299 communities at April 30, 2016. Land purchase commitments totaled $1.453 billion, with $1.372 billion of additional cash potentially required.
Investments in unconsolidated entities totaled $424.3 million, with $289.2 million of remaining funding commitments. Joint ventures had $1.151 billion of debt outstanding, and Toll Brothers estimated maximum guarantee exposure of approximately $624.7 million based on amounts borrowed, or $945.2 million if all commitments were drawn.
Stucco-related warranty reserves were approximately $43.6 million at April 30, 2016, with expected insurance recovery of $35.2 million. The company recorded an additional $5.1 million gross reserve in the quarter and noted that actual costs could vary.
Outstanding surety bonds totaled $764.9 million, and letters of credit totaled approximately $94.8 million. Management did not believe draws on these instruments were probable.
Management expects to resume normal operations at the Porter Ranch community during the second half of fiscal 2016 after a nearby natural-gas leak was sealed and air quality returned to normal levels; demand had remained reduced during the disruption.
Market risks include interest-rate changes, housing demand, pricing, cancellations, land approvals, construction costs, availability of materials and subcontractors, inventory impairment, warranty claims, joint-venture performance, and access to financing. A 1% increase in variable interest rates would increase annual interest expense by approximately $7.1 million, assuming constant debt balances.
Management stated that current reserves and insurance were sufficient for identified construction claims and that pending litigation was not expected to have a material adverse effect, while acknowledging estimation uncertainty.

Investor Verification Priorities

Verify whether backlog conversion, contract growth, and elevated average selling prices continue, particularly in California and City Living.
Assess cash generation relative to inventory growth, land commitments, share repurchases, and the post-quarter-end $450.0 million revolving-facility borrowing.
Review debt maturities, variable-rate exposure, credit-facility covenants, and the company’s ability to refinance or access additional capital.
Monitor inventory impairments, community sales pace, cancellations, pricing assumptions, and the concentration of assets in California and other higher-priced markets.
Evaluate joint-venture funding commitments, debt guarantees, construction progress, and potential exposure beyond the company’s stated collateral and partner recoveries.
Track stucco warranty claims, insurance recoveries, multifamily construction litigation, and other warranty or self-insurance costs.
Confirm the effect of the new credit facility, subsequent share repurchases, and the new May 23, 2016 repurchase authorization in later filings.