Toll Brothers, Inc. — Fiscal 2019 First Quarter Form 10-Q
Reporting period: Three months ended January 31, 2019; filed March 8, 2019. Comparisons are with the three months ended January 31, 2018. Toll Brothers operates traditional homebuilding and urban infill businesses, primarily serving affluent U.S. markets.
Financial and Operating Highlights
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $1.363 billion | $1.175 billion | +16% |
| Home sales revenue | $1.319 billion | $1.175 billion | +12% |
| Income from operations | $124.4 million | $83.7 million | +49% |
| Income before taxes | $151.4 million | $131.6 million | +15% |
| Net income | $112.1 million | $132.1 million | -15% |
| Diluted EPS | $0.76 | $0.83 | -8% |
| Operating margin | 9.1% | 7.1% | +200 bps |
| Home sales cost as percentage of home sales | 79.0% | 79.5% | Improved 50 bps |
| Operating cash flow | $(185.2) million | $(329.8) million | Use improved |
Deliveries increased 8% to 1,530 homes, while the average delivered price increased 4% to approximately $862,300. Net contracts signed declined 24% to 1,379 homes, with contract value down 31% to $1.163 billion. Backlog at January 31, 2019 was $5.367 billion for 5,954 homes, down 4% in value and 5% in units year over year.
Cash and cash equivalents were $801.7 million at January 31, 2019, down from $1.182 billion at October 31, 2018. Total debt reported on the balance sheet was approximately $3.587 billion, consisting primarily of $1.000 billion of loans payable and $2.512 billion of senior notes. Total stockholders’ equity was $4.820 billion, and debt to total capitalization was 0.43 to 1.00.
The company had no borrowings under its $1.295 billion revolving credit facility and approximately $1.12 billion of availability after outstanding letters of credit. Its leverage ratio was approximately 0.60 to 1.00 versus a maximum covenant ratio of 1.75 to 1.00.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected 8% higher deliveries and a 4% increase in average delivered price. Traditional Home Building revenue increased 19%, while City Living revenue declined 42%.
- Operating performance improved as home sales cost declined modestly as a percentage of revenue and SG&A increased only 3%, to $162.2 million, versus 12% home-sales revenue growth.
- Net income declined despite higher pretax income because Q1 2018 included a $31.2 million tax benefit from the Tax Cuts and Jobs Act; Q1 2019 had a $39.4 million tax provision and a 26.0% effective tax rate.
- Income from unconsolidated entities fell to $6.1 million from $38.9 million, primarily because Q1 2018 included a $30.8 million gain from a joint-venture asset sale.
- Q1 2019 included a $12.2 million gain from the sale of a golf club property and an $8.4 million gain from land sold to a newly formed rental-property joint venture.
- The company adopted the new revenue recognition standard on November 1, 2018 using the modified retrospective method. The adoption did not materially affect reported revenue or earnings, but it changed the presentation of land sales and retained customer deposits and reduced opening retained earnings by approximately $18.0 million.
- Inventory increased to $7.715 billion from $7.598 billion at October 31, 2018. Inventory impairments and write-offs increased to $7.6 million from $3.9 million.
Outlook, Commentary, Risks, and Contingencies
Management reported a moderation in demand beginning in the fourth quarter of fiscal 2018 and continuing in Q1 2019, particularly in California. The company attributed the slowdown to higher interest rates, higher home prices, and weaker buyer sentiment. Management believes many communities remain in desirable, difficult-to-replace locations with substantial embedded value, but the filing does not provide formal full-year earnings or delivery guidance.
The company owned or controlled approximately 54,000 home sites at January 31, 2019, including approximately 33,500 owned sites and 20,500 optioned sites. Land purchase commitments totaled $2.400 billion, with $2.175 billion of additional cash required if all commitments are completed. Apartment-development purchase commitments totaled approximately $274.2 million.
Joint-venture exposure included $409.4 million of investments, $28.0 million of remaining funding commitments, and estimated maximum exposure of $261.5 million on repayment and carry-cost guarantees for debt already borrowed by unconsolidated entities. These estimates exclude potential recoveries from collateral and partner reimbursements.
Water-intrusion claims relating primarily to older homes in Pennsylvania and Delaware remain subject to significant estimation uncertainty. Recorded remaining estimated repair costs were approximately $161.0 million, with remaining expected insurance and supplier recoveries of approximately $104.1 million. Management stated that actual costs and recoveries could differ materially and that resolution is expected to take several years.
The Pennsylvania Attorney General is reviewing the company’s construction of stucco homes built after January 1, 2005. The company has provided requested documents, but management cannot predict the scope or outcome. The filing states that no material changes occurred to previously disclosed risk factors.
At January 31, 2019, outstanding surety bonds totaled $874.7 million, including $713.8 million related primarily to community improvements and $160.9 million securing other obligations. Outstanding letters of credit totaled $174.4 million. Management did not believe it was probable that the bonds or letters of credit would be drawn.
Management believes available cash, operating resources, credit facilities, capital-market access, and external financing will be adequate for current operations and contractual obligations, while acknowledging that future refinancing or additional financing may not be available on acceptable terms.
Most Important Facts for Investors to Verify
- Whether the sharp decline in new contracts, particularly the 58% decline in California contract value, persists into subsequent quarters.
- Backlog conversion, cancellations, pricing, incentives, and gross margins as demand moderates.
- Inventory levels, impairment charges, land commitments, and the pace of cash deployment.
- Liquidity after debt maturities, share repurchases, dividends, letters of credit, and joint-venture funding obligations.
- Potential changes in water-intrusion repair costs, insurance recoveries, and the Pennsylvania stucco-home review.
- The effect of joint-venture guarantees and rental-apartment investments on future cash requirements and earnings volatility.
- Whether the Q1 gains from the golf club and land transactions are nonrecurring and therefore not indicative of ongoing earnings.