Toll Brothers, Inc. — Fiscal 2023 First-Quarter 10-Q Summary
Business context and reporting period
Toll Brothers is a U.S. luxury homebuilder operating across North, Mid-Atlantic, South, Mountain and Pacific regions, with related mortgage, title, rental-property, land-development and other businesses. This Form 10-Q covers the three months ended January 31, 2023; comparative figures are for the three months ended January 31, 2022. The interim financial statements are unaudited.
Key financial metrics
| Metric | Q1 FY2023 | Q1 FY2022 | Change |
|---|---|---|---|
| Total revenue | $1.780 billion | $1.791 billion | (1%) |
| Home sales revenue | $1.749 billion | $1.687 billion | 4% |
| Income from operations | $225.3 million | $175.1 million | 29% |
| Net income | $191.5 million | $151.9 million | 26% |
| Diluted earnings per share | $1.70 | $1.24 | 37% |
| Cash used in operating activities | $357.8 million | $280.7 million | Higher use |
| Cash used in investing activities | $69.4 million | $62.4 million | Higher use |
| Cash used in financing activities | $132.5 million | $617.0 million | Lower use |
Home deliveries declined 5% to 1,826 units, while average delivered price increased 10% to approximately $958,100. Home sales cost of revenues declined to 74.4% of home sales revenue from 76.4%, implying home sales gross margin of approximately 25.6% versus 23.6%. SG&A declined to $211.5 million, or 12.1% of home sales revenue, from 13.4%. Operating margin increased to approximately 12.7% from 9.8%, and net margin increased to approximately 10.8% from 8.5%.
Land sales and other revenue fell to $30.7 million from $103.7 million. Related costs were $42.4 million, producing a negative gross margin of approximately $11.7 million, compared with a positive gross margin of approximately $4.1 million in the prior-year quarter.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $791.6 million at January 31, 2023, down from $1.347 billion at October 31, 2022. Cash, cash equivalents and restricted cash totaled $838.9 million.
- Inventory was $9.099 billion, up from $8.733 billion at October 31, 2022. Operating-community inventory represented $8.020 billion.
- Total debt consisted of $1.146 billion of loans payable, $1.995 billion of senior notes and $71.2 million of mortgage-company borrowings, or approximately $3.212 billion in carrying value.
- The company had no borrowings under its $1.905 billion revolving credit facility and approximately $1.79 billion of availability, subject to approximately $120.4 million of outstanding letters of credit.
- Total stockholders’ equity was $6.201 billion. Debt to total capitalization was reported at 0.34 to 1.00, and the revolving-credit-facility leverage ratio was approximately 0.38 to 1.00 versus a maximum permitted 1.75 to 1.00.
- On February 14, 2023, after quarter-end, the company entered into a new five-year $1.905 billion revolving facility maturing February 14, 2028 and amended its term loan to extend $487.5 million of maturities to February 14, 2028, subject to specified interim maturities.
Material changes versus the prior comparable period
- Net contracts signed fell 50% to 1,461 homes, with contract value down 51% to $1.454 billion. Management attributed the decline principally to higher mortgage rates, inflation and economic uncertainty.
- Backlog declined 32% in units to 7,733 homes and 21% in value to $8.585 billion. Average backlog price increased 16% to approximately $1.110 million.
- Home sales revenue increased despite fewer deliveries because of higher prices and a more expensive product and geographic mix.
- Homebuilding income before taxes increased 18% to $278.3 million. South, Mountain and Pacific pretax income increased, while North and Mid-Atlantic pretax income declined.
- Income from unconsolidated entities declined to a $4.4 million loss from $22.0 million of income, primarily because the prior-year period included a $21.0 million gain from a rental-property joint-venture asset sale.
- Other income increased to $32.9 million from $3.7 million, primarily reflecting a $27.7 million net gain on litigation settlements and higher interest income.
- Inventory impairments and write-offs increased to $8.0 million from $2.2 million, and the company recorded an additional $13.0 million land impairment charge related to planned land sales.
- Operating cash use increased primarily because of inventory growth, lower accounts payable and accrued expenses, lower customer deposits and higher net income-tax payments.
- The company repurchased 187,000 shares for $9.4 million, compared with 3.013 million shares for $185.8 million in the prior-year quarter, and paid a $0.20 per-share dividend versus $0.17.
Outlook, management commentary, risks and unusual items
Management reported improved buyer traffic and demand at the beginning of calendar 2023 as mortgage rates declined from their November 2022 peak and certain economic indicators improved, but stated that the sustainability of this improvement was unclear. The company expects supply-chain, labor and construction-time disruptions to recede somewhat, although extended build times remained an issue.
Management expects available liquidity to fund operations, land and inventory investments, joint-venture commitments, debt service, dividends and share repurchases for at least the next twelve months. Near-term funding needs include the $400.0 million of senior notes due April 15, 2023 and refinancing or replacement of the mortgage-company warehouse agreement scheduled to expire March 31, 2023.
- The company controlled or owned approximately 71,300 home sites at January 31, 2023, including approximately 36,900 owned and 34,400 controlled through options.
- Outstanding land purchase contracts totaled $4.054 billion, with $447.0 million of deposits and $3.607 billion of additional cash required to acquire the land.
- Investments in unconsolidated entities totaled $908.9 million, with $308.3 million of remaining funding commitments.
- Guarantees related to unconsolidated entities covered aggregate loan commitments of $3.044 billion. Estimated maximum exposure under repayment and carry-cost guarantees was $418.8 million for debt already borrowed and $627.3 million if all commitments were borrowed; these estimates exclude recoveries, partner reimbursements and unquantifiable completion guarantees and indemnities.
- Surety bonds totaled $1.084 billion, including $812.3 million primarily related to community improvements. Letters of credit totaled $120.4 million.
- Warranty accruals were $156.9 million, including approximately $45.6 million for water-intrusion claims in Pennsylvania and Delaware. Management noted that actual costs and insurance recoveries could differ materially from estimates, although the range of potential differences could not be estimated.
- Principal risks include mortgage-rate and housing-demand volatility, affordability, inflation, land and labor availability, construction costs, supply-chain disruptions, inventory impairments, geographic concentration, joint-venture guarantees, legal and warranty claims, interest-rate exposure, regulatory matters and cybersecurity.
Management stated that there were no material changes to previously disclosed risk factors and that disclosure controls were effective. Implementation of a new enterprise resource planning system remains a significant internal-control initiative.
Most important facts for investors to verify
- Whether the early-2023 improvement in traffic and demand persists as mortgage rates, affordability and consumer confidence change.
- The pace of new contracts, cancellations, backlog conversion and incentives, particularly given the substantial decline in orders and backlog.
- Inventory levels, land commitments and impairment charges, especially in the North and Mid-Atlantic regions and in operating communities.
- Liquidity after repayment or refinancing of the $400.0 million senior notes due April 15, 2023 and renewal of the mortgage warehouse facility.
- Actual performance and funding needs of unconsolidated joint ventures, including guarantee exposure and possible additional capital contributions.
- The recurring nature of earnings excluding the $27.7 million litigation-settlement gain and the prior-year joint-venture asset-sale gain.
- Developments in warranty, construction-defect and water-intrusion claims, including the adequacy of recorded reserves and insurance recoveries.