Toll Brothers, Inc. — Form 10-Q Summary
Reporting period: Fiscal quarter and six months ended April 30, 2022; comparisons are primarily with the periods ended April 30, 2021. Toll Brothers is a luxury homebuilder operating through Traditional Home Building and City Living segments across U.S. markets.
Financial and Operating Highlights
| Metric | Three months ended April 30, 2022 | Six months ended April 30, 2022 |
|---|---|---|
| Total revenues | $2.28 billion, up 18% | $4.07 billion, up 16% |
| Home sales revenues | $2.19 billion, up 19% | $3.87 billion, up 19% |
| Income from operations | $281.7 million, up 53% | $456.7 million, up 50% |
| Net income | $220.6 million, up 72% | $372.5 million, up 66% |
| Diluted earnings per share | $1.85, versus $1.01 | $3.08, versus $1.77 |
| Operating margin | 12.4%, versus 9.6% | 11.2%, versus 8.7% |
| Net margin | 9.7%, versus 6.6% | 9.2%, versus 6.4% |
| Homes delivered | 2,407, up 6% | 4,336, up 7% |
| Average delivered price | $908,400, up 12% | $893,400, up 11% |
- Margins: Home sales cost of revenues declined to 75.9% of home sales revenue in the quarter from 78.1%, and to 76.1% for the six months from 78.7%. Management attributed the improvement to price increases exceeding cost increases, favorable product and geographic mix, and lower interest expense as a percentage of revenue.
- Cash flow: Operating activities used $205.0 million in the first six months, compared with $27.3 million provided in the prior-year period, primarily because of increased inventory investment. Investing activities used $71.9 million, while financing activities used $819.7 million.
- Liquidity: Cash and cash equivalents were $535.0 million at April 30, 2022, compared with $1.64 billion at October 31, 2021. Approximately $1.82 billion was available under the $1.905 billion revolving credit facility, with no borrowings and $84.0 million of letters of credit outstanding at quarter-end. The company borrowed $200.0 million under the facility in May 2022.
- Debt: Loans payable were $1.20 billion, senior notes were $1.99 billion, and the mortgage company loan facility was $113.7 million. Total debt reported in the balance sheet was approximately $3.30 billion. The debt-to-total-capitalization ratio was 0.38 to 1.00.
- Balance sheet: Inventory increased to $8.98 billion from $7.92 billion at October 31, 2021. Total stockholders’ equity was $5.36 billion. The company repurchased 5.2 million shares for $292.3 million during the first six months and paid $44.3 million of dividends.
Material Changes Versus the Prior Comparable Period
- Revenue and profitability increased substantially, driven by higher deliveries, higher average selling prices, and improved home sales margins.
- Net contracts signed increased 1% in value to $3.09 billion in the quarter, despite an 18% decline in units to 2,874. For the six months, contract value rose 9% to $6.08 billion, while units declined 9% to 5,803. Average contract prices increased 23% in the quarter and 20% for the six months.
- Backlog at April 30, 2022 increased 35% in value to $11.71 billion and 16% in units to 11,768 homes. Average backlog price increased 16% to approximately $994,700.
- Traditional Home Building pre-tax income increased 58% in the quarter and 57% for the six months. Mountain and Pacific were the largest contributors to the increase.
- City Living pre-tax income declined to a $0.3 million loss in the quarter and $12.5 million for the six months, compared with $12.5 million and $45.2 million of income, respectively. The prior-year six-month period benefited from a $38.3 million gain on commercial asset sales.
- The prior-year periods included $34.2 million and $35.2 million of pre-tax early debt-retirement charges for the quarter and six months, respectively; no comparable charges occurred in 2022.
- Other income included a $9.0 million gain from the bulk sale of security-monitoring accounts. The company also recorded a $5.2 million impairment related to Hoboken office space and a $1.6 million impairment related to a manufacturing facility.
Guidance, Outlook, Risks, and Contingencies
- Management reported that housing conditions remained robust but that demand had moderated because of higher home prices, sharply higher mortgage rates, inflation concerns, stock-market volatility, and broader macroeconomic conditions.
- Management expects housing demand to remain supported over the long term by demographic and migration trends, limited resale inventory, a prolonged undersupply of new homes, and continued interest in homeownership. The filing does not provide a clear quantitative full-year earnings or delivery guidance figure.
- Supply-chain disruptions, labor shortages, material availability, and municipality-related delays have extended construction times and delayed deliveries. Management does not expect these conditions to improve significantly in the near term and expects continued cost pressure.
- Key risks include mortgage-rate increases, inflation, recessionary conditions, reduced buyer sentiment, construction and labor constraints, land availability and pricing, natural disasters, COVID-19 developments, competition, regulatory matters, litigation, cybersecurity, and changes in interest-rate benchmarks.
- The company expects to fund near-term needs through cash, operating cash flow, joint-venture distributions, and available bank borrowing capacity. It identified the $400.0 million of 4.375% senior notes due April 15, 2023 as a significant upcoming debt obligation.
- At April 30, 2022, the company had $4.62 billion of aggregate land purchase commitments, including $4.22 billion of additional cash required after deposits. It also had $259.1 million of remaining funding commitments to unconsolidated entities.
- Joint-venture guarantees could expose the company to estimated repayment and carry-cost obligations of up to $266.6 million based on amounts currently borrowed, or $481.9 million if all related loan commitments were drawn, before collateral recoveries or partner reimbursements.
- Outstanding surety bonds totaled $1.15 billion, and the company estimated that approximately $423.4 million of related community-improvement work remained. Management does not believe outstanding bonds or letters of credit are probable of being drawn.
- Recorded remaining estimated repair costs for water-intrusion claims were approximately $50.6 million, with expected recoveries of approximately $4.5 million. Management noted that actual costs and recoveries could differ materially from estimates.
- Management concluded that disclosure controls were effective. Implementation of a new ERP system remains a significant component of the company’s internal control environment.
Important Facts for Investors to Verify
- Whether the moderation in orders continues as mortgage rates, prices, inflation, and buyer sentiment evolve.
- Backlog conversion, cancellation rates, delivery timing, and the extent to which supply-chain and labor constraints affect margins.
- Inventory growth, land commitments, and operating cash flow, particularly given the first-half cash use and large future land requirements.
- Liquidity after the May 2022 $200.0 million revolver borrowing and the company’s plans for the 2023 senior-note maturity.
- Exposure from unconsolidated joint ventures, guarantees, funding commitments, and potential partner reimbursement limitations.
- Potential variability from unusual items, including joint-venture asset-sale gains, the security-monitoring account sale, impairments, and the absence of prior-year debt-retirement charges.