Toll Brothers, Inc. — Fiscal 2020 First-Quarter Form 10-Q
Reporting period: Three months ended January 31, 2020, compared with the three months ended January 31, 2019. Toll Brothers is a luxury and affordable-luxury homebuilder operating through Traditional Home Building and City Living segments in the United States.
Key Financial Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total revenue | $1.331 billion | $1.363 billion | (2%) |
| Home sales revenue | $1.297 billion | $1.319 billion | (2%) |
| Income from operations | $47.5 million | $124.4 million | (62%) |
| Income before taxes | $65.9 million | $151.4 million | (56%) |
| Net income | $56.9 million | $112.1 million | (49%) |
| Diluted earnings per share | $0.41 | $0.76 | (46%) |
| Operating margin | 3.6% | 9.1% | Down 5.5 points |
| Net margin | 4.3% | 8.2% | Down 3.9 points |
| Cash flow from operations | $(366.4) million | $(185.2) million | Higher use of cash |
Revenue, Profitability, Cash Flow, Debt and Liquidity
- Deliveries increased 5% to 1,611 homes, but average delivered price decreased 7% to approximately $805,300, reflecting a shift toward lower-priced markets and products, including acquired operations in Atlanta and South Carolina.
- Home sales cost of revenues rose to 81.7% of home sales revenue from 79.0%. Total SG&A increased 18% to $191.8 million and rose to 14.8% of home sales revenue from 12.3%.
- Cash and cash equivalents were $519.8 million at January 31, 2020, compared with $1.286 billion at October 31, 2019. Including restricted cash, period-end cash was $558.7 million.
- Operating cash usage was driven primarily by a $303.4 million inventory increase, a $172.2 million increase in receivables, prepaid expenses and other assets, and mortgage loan origination activity.
- Financing activities used $392.5 million, including $476.0 million for share repurchases and $15.0 million for dividends, partly offset by net loan borrowings of approximately $94.2 million.
- Inventory increased to $8.198 billion from $7.873 billion at October 31, 2019. Total assets were $10.587 billion and total equity was $4.705 billion.
- Loans payable were $1.277 billion, senior notes were $2.660 billion, and the mortgage company loan facility was $97.7 million. Total debt book value was approximately $4.048 billion.
- The company had a $1.905 billion unsecured revolving credit facility maturing November 1, 2024. At January 31, $150.0 million was drawn and approximately $163.1 million of letters of credit were outstanding; management reported approximately $1.59 billion of availability. An additional $200.0 million was borrowed after quarter-end.
- The leverage ratio was approximately 0.72 to 1.00 versus a maximum of 1.75 to 1.00, and tangible net worth was approximately $4.61 billion versus a required minimum of approximately $2.24 billion.
Material Changes Versus the Prior Comparable Period
- Net contracts signed increased 28% in value to $1.489 billion and 31% in units to 1,806 homes. Average contract value declined 2% to approximately $824,600.
- Backlog increased 2% in value to $5.450 billion and 9% in units to 6,461 homes, while average backlog price decreased 6% to approximately $843,500.
- Profitability declined substantially because of lower average selling prices, unfavorable product and geographic mix, higher incentives, higher land, labor and material costs, purchase-accounting effects from acquisitions, and increased SG&A.
- Income from unconsolidated entities increased to $12.1 million from $6.1 million, primarily due to a $10.7 million gain from selling the company’s interest in a rental-property joint venture.
- Other income decreased to $6.3 million from $20.9 million. The prior period included a $12.2 million gain on the sale of a golf-club property and an $8.4 million gain from a land sale to a rental-property joint venture.
- Inventory impairment charges declined to $1.0 million from $7.6 million, with no impairments recognized for operating communities in the current quarter.
- The effective tax rate decreased to 13.7% from 26.0%, primarily because of a $6.9 million benefit from the retroactive extension of the federal energy-efficient home credit.
- The company repurchased 11.686 million shares for $476.0 million, compared with 785,000 shares for $25.1 million in the prior-year quarter. Approximately 3.8 million additional shares were repurchased after January 31.
Guidance, Outlook, Commentary and Risks
- Management reported improving demand during fiscal 2020, supported by lower mortgage rates, strong household formation, limited housing supply and solid economic fundamentals. The company intends to expand in promising markets, increase its affordable-luxury presence, grow community count and improve capital efficiency.
- Management expects a greater mix of lower-priced products and fewer California deliveries, which may reduce average selling prices while increasing unit volume.
- The filing identifies COVID-19 as an emerging risk. As of the filing period, the company had not observed a significant demand impact, but stated that the breadth and duration of the economic and consumer-confidence effects were unknown.
- Land purchase commitments totaled $2.727 billion, including $2.527 billion of additional cash required if all commitments are acquired. Apartment-development land commitments totaled approximately $247.1 million.
- The company had $364.4 million invested in unconsolidated entities and remaining funding commitments of $36.6 million. Guarantees related to unconsolidated entities could expose the company to estimated maximum repayment and carry-cost obligations of $114.1 million on debt currently borrowed, or $183.1 million if related loan commitments were fully drawn.
- Warranty accruals were $188.9 million. Water-intrusion claims in Pennsylvania and Delaware remain subject to significant estimation uncertainty, insurance-coverage disputes and arbitration; management stated that actual costs and recoveries could differ materially from recorded amounts.
- The Pennsylvania Attorney General continues reviewing the company’s construction of stucco homes. Management cannot predict the scope or outcome.
- The company disclosed prior identity-theft incidents involving a third-party service provider and a more recent cyberattack that temporarily disrupted access to certain systems and may have compromised some internal data.
- The company adopted the new lease accounting standard on November 1, 2019, recording a $114.5 million right-of-use asset and a $118.5 million lease liability, without a material impact on earnings or cash flow.
- Management concluded that disclosure controls were effective. Implementation of a new enterprise resource planning system remains a significant internal-control project.
Investor Verification Items
- Verify whether stronger contract activity converts into deliveries without further deterioration in selling prices, incentives or gross margins.
- Monitor liquidity after the substantial share repurchases, the $366.4 million operating cash outflow and the $200.0 million post-quarter-end revolver borrowing.
- Assess inventory growth, land commitments and the ability to reduce acquisitions if housing demand weakens.
- Review the financial sensitivity of joint-venture guarantees, rental-property developments and additional funding commitments.
- Track the resolution and insurance recoveries associated with water-intrusion and other construction-defect claims.
- Evaluate the potential effects of COVID-19, interest rates, mortgage availability, consumer confidence, material and labor costs, and cybersecurity incidents on future results.