Toll Brothers, Inc. Fiscal 2013 Form 10-K Summary
Business context and reporting period
Toll Brothers designs, builds, markets and arranges financing for luxury detached and attached homes, including traditional suburban communities and urban infill projects under Toll City Living. The company operated in 19 states and also held interests in apartments, joint ventures, distressed real estate investments, mortgage lending and related ancillary businesses.
The filing covers the fiscal year ended October 31, 2013. The requested fourth quarter corresponds to the three months ended October 31, 2013; the Form 10-K primarily reports full-year results with unaudited quarterly information.
Key financial metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change or observation |
|---|---|---|---|
| Revenue | $2.674 billion | $1.883 billion | Up 42.0% |
| Gross profit | $540.999 million | $350.686 million | Gross margin approximately 20.2% versus 18.6% |
| Income from operations | $201.067 million | $63.429 million | Operating margin approximately 7.5% versus 3.4% |
| Income before taxes | $267.697 million | $112.942 million | Pre-tax margin approximately 10.0% versus 6.0% |
| Net income | $170.606 million | $487.146 million | Fiscal 2012 included a $394.7 million deferred tax valuation allowance reversal |
| Diluted EPS | $0.97 | $2.86 | Comparability materially affected by the 2012 tax benefit |
| Cash flow from operations | $(568.963) million | $(171.537) million | Primarily reflected inventory growth, mortgage originations and other investments |
| Cash flow from investing | $332.703 million | $(560.546) million | Benefited from marketable securities sales and investment returns |
| Cash flow from financing | $230.408 million | $604.567 million | Included debt issuance and debt repayments |
Fiscal 2013 deliveries increased to 4,184 homes from 3,286. Net contracts signed increased to 5,294 homes valued at $3.634 billion, from 4,159 homes valued at $2.558 billion. Backlog increased to 3,679 homes valued at $2.629 billion, from 2,569 homes valued at $1.670 billion; approximately 96.5% of the 2013 backlog was scheduled for delivery by October 31, 2014.
At October 31, 2013, cash, cash equivalents and marketable securities totaled $825.5 million. Inventory was $4.650 billion, up from $3.733 billion. Total assets were $6.827 billion and total equity was $3.339 billion.
Total debt was $2.504 billion, consisting primarily of $2.321 billion of senior notes, $107.2 million of loans payable and a $75.0 million mortgage company warehouse loan. The company had no borrowings under its $1.04 billion revolving credit facility, approximately $958.4 million of availability, and $76.6 million of outstanding letters of credit under the facility.
Fourth-quarter information
For the three months ended October 31, 2013, revenue was $1.045 billion, gross profit was $222.3 million, income before taxes was $150.2 million and net income was $94.9 million. Approximate margins were 21.3% gross, 14.4% pre-tax and 9.1% net. The fourth quarter generated approximately 39% of full-year revenue and 56% of full-year net income.
Material changes versus the prior comparable period
- Revenue rose 42.0%, driven by a 27.3% increase in deliveries and an 11.6% increase in average delivered home price.
- Cost of revenues declined to 79.8% of revenue from 81.4%; excluding inventory impairments, the ratio declined to 79.6% from 80.6%.
- SG&A increased 18.3% in dollars but declined to 12.7% of revenue from 15.3%, reflecting operating leverage.
- Inventory impairment charges and write-offs declined to $4.5 million from $14.7 million; fiscal 2011 charges were $51.8 million.
- Traditional Home Building pre-tax income increased to $291.7 million from $135.2 million. City Living pre-tax income declined to $53.3 million from $61.9 million, primarily because of fewer urban unit deliveries and lower income from unconsolidated entities.
- Operating cash use increased substantially as inventory grew by $917.7 million and the company expanded land and community positions.
- Fiscal 2013 net income was substantially lower than fiscal 2012 because fiscal 2012 benefited from the $394.7 million reversal of deferred tax asset valuation allowances. Fiscal 2013 included a $4.6 million state valuation allowance reversal and a $3.2 million new state allowance.
Guidance, outlook, commentary and unusual items
- Management reported a strong housing-market recovery through the first nine months of fiscal 2013 but observed a leveling of demand beginning in the fourth quarter. Management attributed the pause to rising interest rates, higher home prices and political uncertainty, while characterizing it as potentially temporary.
- The company expected to be selling from 250 to 290 communities by October 31, 2014, including communities acquired from Shapell.
- On November 6, 2013, Toll Brothers agreed to acquire Shapell Industries’ single-family residential development business for approximately $1.60 billion in cash, subject to adjustments and closing conditions. The transaction included approximately 5,200 California home sites and was expected to close in the first calendar quarter of 2014.
- To fund the proposed acquisition, the company issued 7.2 million shares for net proceeds of $220.8 million and issued $600 million of senior notes for net proceeds of $596.2 million. It also obtained a commitment for a $500 million, 364-day unsecured revolving facility. The notes were subject to special mandatory redemption if the acquisition was not completed by the specified deadline.
- Following the acquisition, management expected to sell approximately $500 million of assets to reduce land concentration and borrowings, but provided no assurance that these sales would occur on acceptable terms or at all.
- In December 2013, Toll Brothers Realty Trust II sold substantially all of its assets. Management expected approximately $20 million of gain in the first quarter of fiscal 2014.
- Other income included $13.2 million from settlement of derivative litigation. The company also recognized $15.9 million of fiscal 2013 income from Gibraltar, its distressed real estate investment platform.
- Land purchase commitments totaled approximately $1.364 billion, with $1.287 billion of additional cash required if all parcels were acquired. The company also had $403.1 million invested in or advanced to unconsolidated entities and additional funding commitments of $92.1 million.
Principal risks and contingencies
- Demand, pricing, cancellations and margins remain sensitive to interest rates, mortgage availability, employment, consumer confidence, home prices and general housing conditions.
- A renewed housing downturn could result in additional inventory impairments, land write-offs, lower sales and reduced cash flow.
- The Shapell acquisition could be delayed or fail to close, and integration costs, unknown liabilities, California market concentration and asset-sale execution could reduce anticipated benefits.
- The company faces substantial land, construction, debt and joint-venture commitments. Maximum potential exposure under guarantees related to unconsolidated entities was estimated at $279.0 million if all related loan commitments were borrowed, compared with $65.7 million based on amounts actually borrowed at year-end.
- Outstanding surety bonds totaled $471.8 million and letters of credit totaled $89.3 million. Management did not believe draws were probable.
- Regulatory approvals, zoning, environmental matters, construction defects, warranty claims, weather, labor and material costs may delay projects or reduce profitability.
- The company had $341.7 million of gross deferred tax assets before valuation allowances and a remaining state valuation allowance of $55.7 million; realization depends on future taxable income.
- The filing states that current litigation is ordinary-course and adequately reserved, with no expected material adverse effect, but unfavorable outcomes could affect cash flow and results.
Most important facts for investors to verify
- Whether the Shapell acquisition closed on the expected terms, the resulting purchase accounting and incremental debt and equity dilution.
- Whether demand stabilized or weakened after the fiscal 2013 fourth-quarter slowdown, including order pace, cancellations, pricing and incentives.
- Conversion of the $2.629 billion backlog into deliveries and cash, including cancellation and margin performance.
- Inventory growth, land-acquisition commitments and any subsequent impairment charges.
- Liquidity after funding the acquisition, asset-sale execution and compliance with credit-facility covenants.
- Realization of deferred tax assets and the sustainability of earnings excluding unusual tax benefits and litigation-related income.
- Exposure to joint-venture guarantees, surety bonds, letters of credit and other off-balance-sheet commitments.
- Fiscal 2014 contribution from the Realty Trust II asset sale and the performance of Gibraltar and other non-core businesses.