Toll Brothers, Inc. 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended July 31, 2002, and the nine-month period ended on the same date. Toll Brothers, Inc. is a homebuilder and land developer operating primarily in affluent markets across the United States. The company reported a two-for-one stock split effective March 28, 2002, with all share data restated accordingly.
Key Financial Metrics
Revenue and Profitability (Nine Months Ended July 31, 2002):
- Total Revenues: $1,623.4 million (up 3.2% from $1,573.9 million in the prior year).
- Housing Sales Revenue: $1,587.2 million (up 3.8% year-over-year).
- Net Income: $150.5 million (up 3.7% from $145.1 million).
- Diluted Earnings Per Share (EPS): $1.99 (up from $1.85).
- Income Before Taxes: $237.4 million (up 3.4% year-over-year).
- Effective Tax Rate: 36.6%.
Liquidity and Balance Sheet (As of July 31, 2002):
- Cash and Cash Equivalents: $50.7 million (down from $182.8 million at Oct 31, 2001).
- Inventory: $2,525.7 million (up from $2,183.5 million).
- Total Liabilities: $1,710.7 million.
- Stockholders' Equity: $1,059.2 million.
- Debt: Loans payable of $254.6 million and Subordinated notes of $819.6 million.
Cash Flow (Nine Months Ended July 31, 2002):
- Net Cash Used in Operating Activities: $(132.2) million (improved from $(221.4) million in the prior year).
- Net Cash Provided by Financing Activities: $13.5 million.
- Net Decrease in Cash: $132.1 million.
Material Changes vs. Prior Period
- Housing Deliveries: For the nine months, deliveries increased 3% (3,158 units vs. 3,079 units), driven by a higher percentage of backlog conversion. However, for the third quarter alone, deliveries declined 3% (1,093 units vs. 1,129 units) due to softness in new contracts in late fiscal 2001 and early fiscal 2002.
- New Contracts: Significant improvement in sales activity. New contracts for the nine months totaled 3,908 units valued at $2.09 billion, a 24% increase in value and 15% increase in units compared to the prior year. Third-quarter contracts increased 30% in value.
- Backlog: Backlog at July 31, 2002, was $1.90 billion (3,441 homes), representing a 21% increase in value and 13% increase in units compared to July 31, 2001.
- Costs and Margins: Housing costs as a percentage of sales decreased due to selling prices rising faster than costs, lower land costs, and reduced inventory write-offs ($3.4 million vs. $6.6 million in the prior nine-month period).
- SG&A Expenses: Increased 13% to $172.9 million, primarily due to operating from more selling communities (167 vs. 142).
Guidance, Outlook, and Risks
Management Commentary and Outlook:
- Fiscal 2002 Guidance: Management expects to deliver between 4,275 and 4,425 homes for the full fiscal year, with housing sales revenues between $2.17 billion and $2.27 billion.
- Fiscal 2003 Outlook: Based on current backlog and demand, the company anticipates delivering approximately 5,000 homes in fiscal 2003 with an average delivered price of $525,000 to $530,000.
- Market Drivers: Demand is attributed to affluent household growth, baby boomer maturation, constricted land supply, and attractive mortgage rates.
Risks and Contingencies:
- Economic Sensitivity: Results are sensitive to local and national economic conditions, interest rate fluctuations, and the aftermath of the September 11, 2001, terrorist attacks.
- Regulatory Delays: Increased governmental regulation has caused delays in opening new communities.
- Inventory Impairment: The company reviews inventory for impairment; write-downs are charged to cost of sales if values are not recoverable.
- Joint Ventures: The company has commitments to contribute up to $31 million to joint ventures if required, though total commitments are not considered material.
Investor Verification Checklist
- Verify the sustainability of the 24% increase in new contract values given the prior softness in Q4 2001 and Q1 2002.
- Monitor the conversion rate of the $1.90 billion backlog into actual deliveries for the fourth quarter of fiscal 2002.
- Review the impact of the $132 million cash outflow from operations on liquidity, noting the reduction in cash reserves from $182.8 million to $50.7 million.
- Assess the company's ability to maintain the projected average selling price of $525,000–$530,000 for fiscal 2003 in a potentially volatile economic environment.
- Confirm the status of the $535 million revolving credit facility and the recent expansion to $615 million announced in August 2002.