Toll Brothers, Inc. — Fiscal 2010 Form 10-K Summary
Business context and reporting period
Toll Brothers designs, builds, markets and arranges financing for luxury single-family detached and attached homes, condominiums and related residential developments across 19 states. The filing covers the fiscal year ended October 31, 2010; the fourth quarter ended October 31, 2010 is included in the annual results.
The company operated 228 communities under development and controlled approximately 34,852 home sites at year-end, including 28,891 owned sites and 5,961 controlled through options. It delivered 2,642 homes during fiscal 2010.
Key financial metrics
| Metric | Fiscal 2010 | Fiscal 2009 | Change |
|---|---|---|---|
| Revenue | $1.495 billion | $1.755 billion | Down 14.8% |
| Loss before income taxes | $117.2 million | $496.5 million | Loss narrowed |
| Net loss | $3.4 million | $755.8 million | Substantial improvement |
| Basic and diluted loss per share | $0.02 loss | $4.68 loss | Improved |
| Cost of revenues as a percentage of revenue | 92.5% | 111.2% | Improved |
| SG&A as a percentage of revenue | 17.6% | 17.8% | Slightly improved |
| Operating cash flow | $146.3 million used | $283.2 million provided | Unfavorable change |
| Cash, cash equivalents and Treasury/Agency securities | $1.237 billion | $1.909 billion | Down $672.0 million |
| Total debt | $1.711 billion | $2.135 billion | Down $424.4 million |
| Inventory | $3.242 billion | $3.184 billion | Up $58.2 million |
Fiscal 2010 included a $113.8 million income tax benefit, principally reflecting tax-loss carrybacks. The company also recorded $115.3 million of inventory impairments and write-offs, compared with $465.4 million in fiscal 2009. Excluding the tax benefit, the company remained loss-making.
Fourth-quarter revenue was $402.6 million, gross profit was $35.4 million, loss before taxes was $9.5 million and net income was $50.5 million. The quarterly net income was primarily affected by tax benefits and should not be viewed as representative of recurring operating profitability.
Housing demand, contracts and backlog
- Gross contracts signed were $1.570 billion for 2,789 homes, compared with $1.626 billion for 2,903 homes in fiscal 2009.
- Net contracts signed increased 12.8% in value to $1.472 billion, or 2,605 homes, from $1.305 billion, or 2,450 homes.
- Contract cancellations declined to $98.3 million, or 184 homes, from $321.2 million, or 453 homes. The cancellation rate fell to 6.6% of units and 6.3% of contract value, versus 15.6% and 19.8%, respectively.
- Year-end backlog was $852.1 million, or 1,494 homes, down 2.6% in value and 2.4% in units from fiscal 2009. Approximately 97% of backlog was scheduled for delivery by October 31, 2011.
- Average sales incentives declined to approximately $82,600 per delivered home, or 12.7% of gross home price, from $93,200, or 13.6%, in fiscal 2009.
Liquidity, debt and cash flow
- The company had approximately $1.237 billion of cash, cash equivalents and marketable U.S. Treasury and Agency securities at October 31, 2010.
- A new $885 million revolving credit facility extending to October 2014 replaced the prior facility and term loan. Approximately $799 million was available at year-end, with no borrowings outstanding and approximately $86 million of letters of credit outstanding under the facility.
- Fiscal 2010 financing activities used $471.0 million, principally for repayment of the $331.7 million bank term loan, repayment or redemption of approximately $94.0 million of senior and senior subordinated notes, and repayment of other loans.
- Senior notes totaled $1.544 billion at year-end, with maturities principally from 2012 through 2019. The company reported a leverage ratio of approximately 0.19 to 1.00 versus a maximum permitted ratio of 1.75 to 1.00.
- Fiscal 2010 operating cash flow was negative because of inventory investment, restricted cash for letters of credit and mortgage loan originations exceeding mortgage loan sales.
Material changes versus the prior comparable period
- Revenue and deliveries declined because of the lower beginning backlog and a 4.4% decline in average delivered home price, partly reflecting a shift toward lower-priced products.
- Profitability improved substantially as inventory impairments declined, SG&A decreased by 16.0%, sales incentives moderated and joint ventures contributed $23.5 million of income versus a $7.5 million loss in fiscal 2009.
- Despite the narrower net loss, the company remained in an extended housing downturn and generated negative operating cash flow.
- The company increased controlled home sites by approximately 5,600 net sites during fiscal 2010 and expected to sell from 215 to 225 communities by October 31, 2011, compared with 195 at October 31, 2010.
- Inventory increased modestly despite continued write-downs, while cash and securities declined as the company repaid debt, acquired inventory and made investments.
Outlook, commentary, risks and unusual items
Management believed many housing markets had reached a bottom but did not expect a near-term recovery and anticipated continued volatility. It identified employment, consumer confidence, financial-market stability and home prices as key recovery drivers. Management also cited potential long-term benefits from pent-up housing demand, limited approved land in certain markets and reduced competition from smaller builders.
- Major risks include prolonged weak housing demand, home-price declines, unemployment, foreclosures, mortgage-credit restrictions, cancellations, increased sales incentives and additional inventory impairments.
- Inventory valuation depends on estimates of sales pace, pricing, incentives, construction costs and regulatory approvals. Further deterioration could produce additional write-downs.
- Land purchase commitments totaled approximately $550.4 million, including $466.0 million of potential additional payments if all applicable parcels are acquired.
- The company had investments and advances to unconsolidated entities of $198.4 million, additional funding commitments of $11.8 million, and approximately $67.8 million of debt guarantees related to joint ventures.
- Outstanding surety bonds totaled $440.5 million and letters of credit totaled $140.4 million. Management did not believe material draws were probable.
- Pending matters included EPA and Department of Justice discussions concerning storm-water practices, shareholder derivative litigation, and Chinese-manufactured drywall claims. Management stated that adequate provisions had been recorded and that these matters were not expected to have a material adverse effect, although it could not estimate losses beyond accrued amounts.
- The company had $409.2 million of deferred tax assets fully offset by valuation allowances. It recorded an estimated $141.6 million federal tax refund receivable for fiscal 2011, subject to the final amount of taxable losses and tax authority review.
Important facts for investors to verify
- Whether improving net contracts and lower cancellations persist after fiscal 2010 and translate into higher deliveries and margins.
- The conversion of the $852.1 million backlog into closings, including cancellation and delivery risks.
- Whether additional inventory or joint-venture impairments are required as market assumptions change.
- The timing and amount of the expected $141.6 million tax refund and the future realizability of deferred tax assets.
- Debt maturities beginning in 2012, availability under the revolving facility and compliance with credit covenants.
- Exposure from land commitments, joint-venture guarantees, surety bonds, letters of credit and unresolved litigation.
- Whether management’s expectation of a gradual housing recovery and expansion to 215–225 selling communities is achieved.