Toll Brothers, Inc. Fiscal 2023 Form 10-K Summary
Business Context and Reporting Period
Toll Brothers designs, builds, markets, sells and arranges financing for luxury and affordable-luxury single-family and attached homes, urban condominiums and rental communities. The company operated in 24 states and the District of Columbia at October 31, 2023, through five geographic home-building segments: North, Mid-Atlantic, South, Mountain and Pacific. The filing covers the fiscal year ended October 31, 2023; fourth-quarter results correspond to the three months ended October 31, 2023.
- Fiscal 2023 deliveries: 9,597 homes from 481 communities.
- Operating communities at year-end: 432, including 370 selling communities.
- Owned or optioned home sites: approximately 70,700.
- Backlog: $6.95 billion covering 6,578 homes; approximately 96% was expected to be delivered in fiscal 2024.
Financial Performance and Key Metrics
| Metric | Fiscal 2023 | Fiscal 2022 | Change |
|---|---|---|---|
| Total revenue | $9.995 billion | $10.276 billion | (3%) |
| Home sales revenue | $9.866 billion | $9.711 billion | 2% |
| Income from operations | $1.725 billion | $1.509 billion | 14% |
| Income before taxes | $1.842 billion | $1.704 billion | 8% |
| Net income | $1.372 billion | $1.287 billion | 7% |
| Diluted earnings per share | $12.36 | $10.90 | 13% |
| Operating cash flow | $1.266 billion | $986.8 million | 28% |
- Home deliveries declined 9% to 9,597, while average delivered price increased 11% to approximately $1.028 million.
- Home sales cost of revenues improved to 73.1% of home sales revenue from 74.5%, implying a home sales gross margin of approximately 26.9% versus 25.5%.
- Income before taxes represented 18.4% of total revenue versus 16.6% in fiscal 2022; net margin was approximately 13.7% versus 12.5%.
- Fiscal 2023 included $30.7 million of inventory impairment charges and $30.6 million of land impairment charges associated with planned land sales.
- Inventory increased to $9.058 billion from $8.733 billion, with operating-community inventory rising to $8.221 billion.
- Cash and cash equivalents were $1.300 billion at year-end. The company had approximately $1.79 billion available under its $1.905 billion revolving credit facility, with no revolver borrowings and $118.9 million of letters of credit outstanding.
- Total debt, including loans payable, senior notes and the mortgage company loan facility, was approximately $2.86 billion before certain discounts and issuance costs. Debt-to-total-capitalization was 0.30 to 1.00.
- Fiscal 2023 financing uses included $561.6 million of share repurchases, $400.0 million of senior-note redemptions, $160.3 million of net loan repayments and $91.1 million of dividends.
Fourth-Quarter Results
| Metric | Three months ended October 31, 2023 | Three months ended October 31, 2022 |
|---|---|---|
| Home sales revenue | $2.952 billion | $3.581 billion |
| Land sales and other revenue | $68.2 million | $131.2 million |
| Income before taxes | $605.0 million | $841.1 million |
| Net income | $445.5 million | $640.5 million |
| Diluted EPS | $4.11 | $5.63 |
Fourth-quarter fiscal 2022 results benefited from a $141.2 million net gain related to a Southern California Gas Company litigation settlement. This unusual item materially limits direct year-over-year comparability.
Material Changes Versus the Prior Comparable Period
- Net contracts signed declined 13% in value to $7.908 billion and 2% in units to 8,077 homes. Average contract value fell 11% to approximately $979,000, reflecting a shift toward less expensive products and markets and higher incentives.
- Year-end backlog declined 22% in value and 19% in units, primarily because deliveries exceeded additions to backlog and new contracts had lower average values.
- Revenue declined despite higher home sales revenue because land sales and other revenue fell 77% to $128.9 million from $564.4 million.
- Operating income improved because of better home sales margins, lower SG&A and lower interest cost as a percentage of home sales revenue.
- SG&A declined 7% to $909.4 million, and SG&A as a percentage of home sales revenue declined to 9.2% from 10.1%.
- Income from unconsolidated entities increased to $50.1 million from $23.7 million, supported by rental-property joint-venture asset sales and a $16.0 million gain on the sale of a joint-venture interest.
- The company controlled approximately 70,700 home sites at year-end versus approximately 76,000 a year earlier and forfeited control of more than 4,000 lots during fiscal 2023 as planned communities no longer met development criteria.
Cash Flow, Capital Allocation and Liquidity
- Operating cash flow was $1.266 billion, compared with $986.8 million in fiscal 2022, while inventory increased by only $22.2 million.
- Investing cash outflow was $150.6 million, including $216.4 million invested in unconsolidated entities and $73.0 million of property and equipment purchases, partly offset by $112.7 million of joint-venture investment returns.
- Financing cash outflow was $1.170 billion, driven by repurchases, debt redemptions, loan repayments and dividends.
- The company stated that available cash, operating cash flow, joint-venture distributions and borrowing capacity should be adequate for operations, strategic investments, debt service, repurchases and dividends for at least the next twelve months.
- Contractual land purchase commitments totaled approximately $4.223 billion, against deposits of $449.9 million and additional potential cash requirements of $3.773 billion. The company also expected to purchase approximately 8,200 additional home sites from joint ventures at prices not yet determined.
- The company had $959.0 million invested in unconsolidated entities and up to $400.8 million of additional funding commitments.
Guidance, Outlook, Risks and Unusual Items
Management reported solid demand since January 2023 despite elevated mortgage rates, citing limited resale inventory, favorable demographics and a long-term housing shortage. Management noted that the 30-year fixed mortgage rate had declined from above 8% to approximately 7.25% near the filing date, but emphasized that the direction of mortgage rates and the broader economy remained uncertain. The filing does not provide a clear numerical fiscal 2024 revenue, delivery or margin guidance.
- Key risks include mortgage-rate and affordability pressure, demand deterioration, cancellations, competitive pricing, land and inventory impairments, inflation, labor and material availability, regulatory approvals, weather and natural disasters, and construction-defect claims.
- Self-insurance accruals were $230.7 million and warranty accruals were $206.2 million at October 31, 2023. Construction-defect and water-intrusion claims, particularly involving Pennsylvania and Delaware homes, may require significant future payments; the company stated that its estimates could differ materially from actual costs.
- The company guaranteed obligations of certain unconsolidated entities. At year-end, maximum estimated exposure under repayment and carry-cost guarantees was $544.1 million for borrowings outstanding and $688.0 million if all related commitments were borrowed; these estimates exclude recoveries, partner reimbursements and unquantifiable project-completion and environmental exposures.
- The company was implementing a multi-year enterprise resource planning system. Management concluded that internal control over financial reporting was effective, but acknowledged that new procedures and controls were not yet mature.
- Interest-rate exposure remains material: a 1% increase in variable-rate debt rates would increase annual interest expense by approximately $7.5 million before considering interest-rate swaps.
- Fiscal 2023 unusual items included rental-joint-venture gains, $27.7 million of net litigation-settlement gains, $30.7 million of inventory impairments and $30.6 million of land impairments. Fiscal 2022 included the substantially larger $141.2 million litigation-settlement gain.
Investor Verification Checklist
- Verify the pace and profitability of converting the $6.95 billion backlog, particularly the expected 96% fiscal 2024 delivery rate.
- Monitor net contracts, cancellations, incentives and average contract value as mortgage rates and affordability change.
- Assess inventory carrying values and sensitivity to sales prices, absorption rates, construction costs and further impairment charges.
- Review upcoming debt maturities, including $317.6 million in fiscal 2024, $123.9 million in fiscal 2025 and $536.3 million in fiscal 2026, and the refinancing environment.
- Evaluate land purchase commitments, joint-venture funding requirements and guarantee exposure relative to available liquidity.
- Track warranty, self-insurance and water-intrusion claims, including recoveries from insurers and suppliers.
- Separate recurring operating performance from gains on litigation settlements, joint-venture asset sales and other nonrecurring items.
- Confirm the effect of the ERP implementation on reporting processes and internal controls in subsequent filings.