Toll Brothers, Inc. — Fiscal 2017 Second-Quarter Form 10-Q
Reporting period: Three and six months ended April 30, 2017, compared with the corresponding 2016 periods. Toll Brothers is a luxury residential homebuilder operating through Traditional Home Building and City Living segments across U.S. markets.
Financial and Operating Metrics
| Metric | Three months ended April 30 | Six months ended April 30 |
|---|---|---|
| Revenue | $1.364 billion, up 22% | $2.284 billion, up 12% |
| Income from operations | $138.2 million, up 19% | $188.8 million, down 11% |
| Net income | $124.6 million, up 40% | $195.1 million, up 20% |
| Diluted earnings per share | $0.73 versus $0.51 | $1.15 versus $0.91 |
| Operating margin | 10.1% versus 10.5% | 8.3% versus 10.3% |
| Net margin | 9.1% versus 8.0% | 8.5% versus 7.9% |
| Effective tax rate | 37.4% versus 36.6% | 36.9%, unchanged |
- Six-month deliveries increased 19% to 2,828 homes; average delivered price declined 6% to approximately $807,700. Second-quarter deliveries increased 26% to 1,638 homes, while average delivered price declined 3% to approximately $832,400.
- Net contracts signed increased 19% to $3.26 billion for the six months and 23% to $2.02 billion for the quarter. Units signed increased 24% and 26%, respectively, while average contract prices declined 4% and 3%.
- Backlog at April 30, 2017 was $5.00 billion for 6,018 homes, up 19% in value and 22% in units from April 30, 2016.
- Income from unconsolidated entities increased to $92.3 million for the six months and $45.9 million for the quarter, primarily reflecting stronger City Living joint-venture results and $26.7 million of gains from selling interests in two rental-property joint ventures.
- Cash provided by operating activities was $260.4 million, compared with cash used of $15.9 million in the prior-year period. Inventory increased to $7.60 billion from $7.35 billion at October 31, 2016.
- Cash and cash equivalents were $691.3 million at April 30, 2017, compared with $633.7 million at October 31, 2016. The company reported approximately $1.18 billion of availability under its $1.295 billion revolving credit facility, with no borrowings outstanding and $120.0 million of letters of credit.
- Debt consisted of $637.9 million of loans payable, $2.994 billion of senior notes, and $61.1 million under the mortgage-company facility. Total debt book value was approximately $3.69 billion. The debt-to-total-capitalization ratio was 0.45 to 1.00.
- Stockholders’ equity was $4.45 billion. The company initiated a quarterly dividend of $0.08 per share and repurchased $15.4 million of common stock during the six months.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by higher delivery volumes and increased selling communities, including the November 2016 Coleman acquisition. Coleman added approximately 1,750 home sites and 15 selling communities.
- Six-month operating margin declined because cost of revenues increased faster than revenue. Contributing factors included higher material and labor costs, lower-margin product mix, purchase-accounting effects from Coleman, and higher inventory impairments.
- Quarterly operating income improved despite modest margin compression because volume growth outpaced cost growth. Six-month operating income declined because the prior-year period benefited from a more favorable mix of City Living closings.
- Traditional Home Building revenue increased 18% for the six months, led by the West and California regions. City Living revenue declined 51% for the six months because of fewer available units, although City Living income before taxes increased 42% due largely to joint-venture earnings.
- Income from unconsolidated entities benefited from deliveries at New York City joint ventures and gains on rental-property joint-venture interest sales. These gains are non-recurring or may not be consistently repeatable.
Outlook, Risks, Contingencies, and Unusual Items
- Management described housing demand as strengthening, supported by low interest rates, limited housing supply, employment and consumer confidence, buyer home equity, and demand from affluent and other demographic groups. Management expects continued benefit from pent-up demand and household formation but provided no specific quantitative earnings or revenue guidance in the filing.
- Land purchase commitments totaled approximately $1.51 billion, of which $77.7 million had been deposited and $1.43 billion would be payable if all parcels are acquired. The company also expects to purchase approximately 3,600 additional joint-venture home sites at prices not yet determined.
- The company had $540.2 million invested in unconsolidated entities and additional funding commitments of $56.2 million. Guarantees related to joint-venture debt and carry costs had an estimated maximum exposure of $157.8 million based on amounts borrowed and $194.0 million if all applicable commitments were drawn.
- Inventory impairment charges and write-offs were $8.9 million for the six months, versus $7.6 million in the prior-year period. A $3.9 million impairment was recorded for a Maryland community and a $2.0 million impairment was recorded on a Maryland land-development joint venture.
- Known stucco and other water-intrusion claims had an estimated remaining liability of $282.8 million, with expected recoveries of approximately $130.4 million. Management stated that actual costs could differ materially because of uncertainty in claim volume and remediation costs.
- In April 2017, the SEC began an investigation and requested documents concerning the company’s fiscal 2016 estimates for stucco and water-intrusion repairs. Management could not predict the scope or outcome.
- A $400 million principal amount of 8.91% senior notes was scheduled to mature in October 2017. Holders of $287.5 million of 0.5% exchangeable senior notes could require repurchase at par plus accrued interest on December 15, 2017. Management stated that future refinancing availability could be affected by economic and housing-market conditions.
- The company had $1.32 billion of surety bonds primarily related to community improvements and other obligations, plus $120.0 million of letters of credit. Management did not believe material draws were probable.
- Variable-rate debt was approximately $573.4 million; a 1% increase in interest rates would increase annual interest expense by approximately $5.7 million, assuming balances remained constant.
Important Facts for Investors to Verify
- Whether backlog conversion and contract growth continue without further declines in average selling prices.
- Whether cost inflation, product mix, Coleman purchase-accounting effects, and inventory impairments continue to pressure gross and operating margins.
- The sustainability of the unusually large increase in income from unconsolidated entities and the extent to which it reflects one-time joint-venture gains.
- The outcome and potential financial impact of the SEC investigation and water-intrusion claims.
- Refinancing or repayment plans for the October 2017 senior-note maturity and the December 2017 exchangeable-note put right.
- Actual funding requirements under land commitments, joint ventures, guarantees, surety bonds, and letters of credit.
- Whether housing demand, interest rates, labor and material costs, and regional conditions support management’s favorable outlook.