Toll Brothers, Inc. Fiscal 2024 First-Quarter 10-Q Summary
Business context and reporting period
Toll Brothers, Inc. is a luxury homebuilder operating across five geographic regions: North, Mid-Atlantic, South, Mountain, and Pacific. This Form 10-Q covers the three months ended January 31, 2024, compared with the three months ended January 31, 2023. The filing was submitted March 1, 2024.
Financial and operating metrics
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Total revenue | $1.95 billion | $1.78 billion | Up 9% |
| Home sales revenue | $1.93 billion | $1.75 billion | Up 10% |
| Income from operations | $308.4 million | $225.3 million | Up 37% |
| Net income | $239.6 million | $191.5 million | Up 25% |
| Diluted earnings per share | $2.25 | $1.70 | Up 32% |
| Homes delivered | 1,927 | 1,826 | Up 6% |
| Average delivered price | $1.003 million | $958,100 | Up 5% |
| Net contracts signed | 2,042 homes; $2.06 billion | 1,461 homes; $1.45 billion | Up 40% in units; 42% in value |
| Backlog at January 31 | 6,693 homes; $7.08 billion | 7,733 homes; $8.58 billion | Down 13% in units; 18% in value |
Home sales cost of revenues declined to 72.4% of home sales revenue from 74.4%, supporting improved profitability. The implied consolidated operating margin increased to approximately 15.8% from 12.7%, and the net margin increased to approximately 12.3% from 10.8%. Selling, general and administrative expense increased 9% to $230.0 million but declined to 11.9% of home sales revenue from 12.1%.
Income before taxes was $311.2 million, compared with $253.8 million. The effective tax rate declined to 23.0% from 24.5%. Losses from unconsolidated entities increased to $9.2 million from $4.4 million, while other income declined to $11.9 million from $32.9 million because the prior-year period included a $27.7 million litigation settlement gain.
Cash flow, debt, and liquidity
- Cash and cash equivalents were $754.8 million at January 31, 2024, down from $1.30 billion at October 31, 2023. Cash, cash equivalents, and restricted cash totaled $800.0 million.
- Operating activities used $307.0 million of cash, primarily reflecting a $499.0 million increase in inventory. This was an improvement from $357.8 million of operating cash used in the prior-year quarter.
- Investing activities used $59.4 million, including $58.9 million invested in unconsolidated entities.
- Financing activities used $178.0 million, including $145.6 million of net debt repayments and $23.3 million of dividends.
- Total debt reported on the balance sheet was approximately $2.72 billion, consisting primarily of $1.06 billion of loans payable and $1.60 billion of senior notes. The company had no borrowings under its $1.905 billion revolving credit facility and approximately $1.76 billion of availability, subject to approximately $146.1 million of outstanding letters of credit.
- The debt-to-total-capitalization ratio was 0.28 to 1.00. The company reported compliance with applicable debt covenants; its revolving-credit leverage ratio was approximately 0.32 to 1.00 versus a maximum of 1.75 to 1.00.
- Inventory increased to $9.58 billion from $9.06 billion at October 31, 2023. Operating communities represented $8.85 billion of inventory.
Material changes versus the prior comparable period
- Demand improved substantially, with net contracts increasing 40% in units and 42% in value. Management attributed the improvement to a healthy job market, improving consumer sentiment, low resale inventory, and a broader community base.
- Deliveries increased despite a smaller beginning backlog, helped by higher backlog conversion, improved construction cycle times, and more quick move-in homes.
- Profitability benefited from product and geographic mix, pricing increases exceeding cost increases, lower interest expense as a percentage of revenue, and lower inventory impairments.
- Inventory impairments included in home sales cost of revenues declined to $1.5 million from $8.0 million. The prior-year period also included $13.0 million of land impairment charges; no comparable land impairment was recorded in Q1 FY2024.
- Regional performance was mixed. Contract value increased sharply in the Mountain and Pacific regions, while North deliveries and pretax income declined. South and Mid-Atlantic operations posted significant increases in deliveries and pretax income.
- The company repurchased approximately 628,000 shares during the quarter and retained authorization to repurchase up to 20 million shares. It paid a $0.21-per-share dividend.
Guidance, outlook, risks, contingencies, and unusual items
Management did not provide specific full-year numerical guidance in the supplied filing text. Management expects liquidity to be sufficient for operations, inventory investment, debt service, joint-venture funding, dividends, and share repurchases for at least the next twelve months. Second-quarter operating cash flow is expected to include approximately $181 million from a February 2024 land sale.
- In February 2024, the company sold a parcel of land for net cash proceeds of $180.7 million and expects a pretax gain of approximately $175.0 million in the quarter ending April 30, 2024.
- The company controlled or owned approximately 70,400 home sites at January 31, 2024, including approximately 34,400 controlled through options, and operated 377 selling communities.
- The company had $995.8 million invested in unconsolidated entities and remaining funding commitments of $340.2 million.
- Guarantees related to unconsolidated entities had estimated maximum exposure of $571.7 million based on amounts borrowed, excluding recoveries, partner reimbursements, project-completion guarantees, and certain indemnities that are not estimable.
- Land purchase contracts had an aggregate purchase price of $4.51 billion, with $4.07 billion of additional cash required after deposits, although many contracts are cancellable subject to deposit forfeiture.
- Outstanding surety bonds totaled $1.21 billion, and letters of credit totaled $146.1 million. Management did not believe that material draws were probable.
- Risks include mortgage-rate and affordability changes, economic conditions, demand volatility, land and labor availability, material costs, geographic concentration, inventory valuation, weather and natural disasters, legal and warranty claims, joint-venture obligations, financing access, and cybersecurity.
- Water-intrusion claims in Pennsylvania and Delaware had estimated recorded repair costs of approximately $40.7 million at January 31, 2024. Management stated that currently known potential differences from recorded estimates were not expected to be material.
Important facts for investors to verify
- Whether strong contract activity converts into deliveries and replenishes the 18% year-over-year backlog decline in value.
- The sustainability of the 72.4% home sales cost ratio and approximately 15.8% operating margin as interest rates, incentives, labor costs, and construction costs change.
- Cash conversion and inventory growth, particularly the effect of additional quick move-in homes and land investment on operating cash flow.
- The timing and realized economics of the expected $175.0 million pretax gain from the February 2024 land sale.
- Potential cash requirements from land purchase commitments, joint-venture funding commitments, guarantees, surety bonds, warranty claims, and litigation.
- Exposure to variable-rate debt and refinancing, including the approximately $7.1 million annual pretax sensitivity to a one-percentage-point increase in variable interest rates before considering swaps.
- Regional trends, especially weaker North and Mountain deliveries and the concentration of contract growth in the Mountain and Pacific regions.