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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 2002
OR
/_/ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM __________TO__________
Commission file number 1-9186
Toll Brothers, Inc.
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(Exact name of registrant as specified in its charter)
Delaware 23-2416878
- ------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3103 Philmont Avenue, Huntingdon Valley, Pennsylvania 19006
- ----------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(215) 938-8000
----------------------------------------------------
(Registrant's telephone number, including area code)
Not applicable
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes _X_ No ___
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Common Stock, $.01 par value: 70,197,050 shares as of September 6, 2002
TOLL BROTHERS, INC. AND SUBSIDIARIES
INDEX
Page No.
Statement of Forward-Looking Information 1
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
as of July 31, 2002 and October 31, 2001 2
Condensed Consolidated Statements of Income
(Unaudited) For the Nine Months and Three
Months Ended July 31, 2002 and 2001 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) For the Nine Months Ended
July 31, 2002 and 2001 4
Notes to Condensed Consolidated Financial
Statements (Unaudited) 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 16
ITEM 4. Controls and Procedures 16
PART II. Other Information 16
SIGNATURES 17
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included herein and in our other reports, SEC filings,
statements and presentations is forward-looking within the meaning of the
Private Securities Litigation Reform Act of 1995, including, but not limited to,
statements concerning our anticipated operating results, financial resources,
changes in revenues, changes in profitability, interest expense, growth and
expansion, ability to acquire land, ability to sell homes and properties,
ability to deliver homes from backlog, ability to open new communities, ability
to secure materials and subcontractors and stock market valuations. In some
cases you can identify those so called forward-looking statements by words such
as "may," "should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," or "continue" or the negative of those words or other
comparable words. Such forward-looking information involves important risks and
uncertainties that could significantly affect actual results and cause them to
differ materially from expectations expressed herein and in our other reports,
SEC filings, statements and presentations. These risks and uncertainties include
local, regional and national economic and political conditions, the consequences
of any future terrorist attacks such as those that occurred on September 11,
2001, the effects of governmental regulation, the competitive environment in
which we operate, fluctuations in interest rates, changes in home prices, the
availability and cost of land for future growth, the availability of capital,
fluctuations in capital and securities markets, the availability and cost of
labor and materials, and weather conditions.
Additional information concerning potential factors that we believe could cause
our actual results to differ materially from expected and historical results is
included under the caption "Factors That May Affect Our Future Results" in Item
1 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2001.
If one or more of the assumptions underlying our forward-looking statements
proves incorrect, then our actual results, performance or achievements could
differ materially from those expressed in, or implied by the forward-looking
statements contained in this report. Therefore, we caution you not to place
undue reliance on our forward-looking statements. This statement is provided as
permitted by the Private Securities Litigation Reform Act of 1995.
When this report uses the word "we," "us," and "our," they refer to Toll
Brothers, Inc. and its subsidiaries, unless the context otherwise requires.
1
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
July 31, October 31,
2002 2001
---------- ----------
(Unaudited)
ASSETS
Cash and cash equivalents $ 50,744 $ 182,840
Inventory 2,525,660 2,183,541
Property, construction and office
equipment, net 36,917 33,095
Receivables, prepaid expenses and
other assets 82,287 74,481
Mortgage loans receivable 31,585 26,758
Customer deposits held in escrow 25,048 17,303
Investments in unconsolidated entities 17,692 14,182
---------- ----------
$2,769,933 $2,532,200
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Loans payable $ 254,601 $ 362,712
Subordinated notes 819,643 669,581
Mortgage company warehouse loans 26,434 24,754
Customer deposits 137,411 101,778
Accounts payable 130,241 132,970
Accrued expenses 253,832 229,671
Income taxes payable 88,581 98,151
---------- ----------
Total liabilities 1,710,743 1,619,617
---------- ----------
Stockholders' equity:
Preferred stock
Common stock 740 369
Additional paid-in-capital 101,811 107,014
Retained earnings 1,032,416 882,281
Treasury stock (75,777) (77,081)
---------- ----------
Total stockholders' equity 1,059,190 912,583
---------- ----------
$2,769,933 $2,532,200
========== ==========
See accompanying notes
- 2 -
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
Nine months ended Three months ended
July 31, July 31,
---------------------------------- -----------------------------
2002 2001 2002 2001
---------------------------------- -----------------------------
Revenues:
Housing sales $1,587,168 $1,529,394 $565,355 $573,479
Land sales 26,519 25,166 12,478 2,749
Equity earnings from
unconsolidated joint
ventures 1,743 7,575 246 2,314
Interest and other 7,952 11,718 2,628 5,526
---------------------------------- ------------------------------
1,623,382 1,573,853 580,707 584,068
---------------------------------- ------------------------------
Costs and expenses:
Housing sales 1,149,720 1,131,136 409,657 417,756
Land sales 18,125 19,611 8,947 2,073
Selling, general and
administrative expenses 172,866 152,894 61,874 54,555
Interest 45,258 40,506 15,626 15,524
---------------------------------- ------------------------------
1,385,969 1,344,147 496,104 489,908
---------------------------------- ------------------------------
Income before income taxes 237,413 229,706 84,603 94,160
Income taxes 86,909 84,559 31,103 34,716
---------------------------------- ------------------------------
Net income $150,504 $145,147 $53,500 $59,444
================================== ==============================
Earnings per share:
Basic $2.13 $2.01 $0.76 $0.83
Diluted $1.99 $1.85 $0.70 $0.77
Weighted average number of shares:
Basic 70,562 72,287 70,835 71,677
Diluted 75,722 78,269 76,685 77,413
See accompanying notes
- 3 -
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine months ended
July 31,
----------------------------------
2002 2001
---------- ---------
Cash flows from operating activities:
Net income $ 150,504 $ 145,147
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 8,104 7,233
Equity from earnings of unconsolidated
joint ventures (1,743) (7,575)
Deferred tax provision 2,037 5,732
Changes in operating assets and liabilities:
Increase in inventory (327,907) (394,925)
Origination of mortgage loans (258,288) (121,358)
Sale of mortgage loans 253,357 110,348
(Increase) decrease in receivables, prepaid
expenses and other assets (16,394) 559
Increase in customer deposits 35,633 10,316
Increase in accounts payable
and accrued expenses 29,169 24,084
Decrease in current income taxes payable (6,687) (923)
---------- ---------
Net cash used in operating activities (132,215) (221,362)
---------- ---------
Cash flows from investing activities:
Purchase of property, construction
and office equipment, net (10,642) (12,262)
Investments in unconsolidated entities (5,523)
Distributions from unconsolidated entities 2,800 14,017
---------- ---------
Net cash (used in) provided by
investing activities (13,365) 1,755
---------- ---------
Cash flows from financing activities:
Proceeds from loans payable 332,621 108,869
Principal payments of loans payable (452,335) (98,978)
Net proceeds from issuance of subordinated debt 149,748 196,975
Proceeds from stock-based benefit plans 12,532 12,909
Purchase of treasury stock (29,082) (36,500)
---------- ---------
Net cash provided by financing activities 13,484 183,275
---------- ---------
Decrease in cash and cash equivalents (132,096) (36,332)
Cash and cash equivalents, beginning of period 182,840 161,860
---------- ---------
Cash and cash equivalents, end of period $ 50,744 $ 125,528
========== =========
See accompanying notes
- 4 -
TOLL BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in thousands, except per share amounts)
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for interim financial information. The October 31, 2001
balance sheet amounts and disclosures included herein have been derived from our
October 31, 2001 audited financial statements. Since the accompanying condensed
consolidated financial statements do not include all the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements, we suggest that they be read in
conjunction with the financial statements and notes thereto included in our
October 31, 2001 Annual Report on Form 10-K. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements include all
adjustments, which are of a normal recurring nature, necessary to present fairly
our financial position as of July 31, 2002, the results of our operations for
the nine months and three months ended July 31, 2002 and 2001 and our cash flows
for the nine months ended July 31, 2002 and 2001. The results of operations for
such interim periods are not necessarily indicative of the results to be
expected for the full year.
On March 4, 2002, our Board of Directors declared a two-for-one split of our
common stock in the form of a stock dividend to stockholders of record on March
14, 2002. The additional shares were distributed on March 28, 2002. All share
and per share information has been restated to reflect this split.
Statement of Financial Accounting Standards ("SFAS") No.142, "Goodwill and
Other Intangible Asset" provides guidance on accounting for certain intangibles
and eliminates the amortization of goodwill and certain intangible assets.
Intangible assets, including goodwill, that are not subject to amortization are
required to be tested for impairment and possible write-down on an annual basis.
We adopted SFAS 142 on November 1, 2001, the first day of our 2002 fiscal year.
We had $8.9 million of goodwill at November 1, 2001. The adoption of SFAS 142
did not have a material impact on our financial statements. For the nine-month
and three-month periods ended July 31, 2001, we amortized $795 (net of $466 of
income taxes) and $265 (net of $156 of income taxes) of goodwill, respectively.
Had we not amortized goodwill during the nine-month and three-month periods
ended July 31, 2001, we would have reported net income, diluted earnings per
share and basic earnings per share of $145,942, $1.86 and $2.02, respectively,
for the nine-month period and $59,709, $.77 and $.83, respectively, for the
three-month period.
Certain amounts reported in prior periods have been reclassified for comparative
purposes.
- 5 -
2. Inventory
Inventory consisted of the following:
July 31, October 31,
2002 2001
---------- ------------
Land and land development costs $ 758,105 $ 833,386
Construction in progress 1,474,904 1,146,485
Sample homes and sales offices 160,835 107,744
Land deposits and costs of future
development 122,421 89,360
Other 9,395 6,566
---------- ----------
$2,525,660 $2,183,541
========== ==========
Construction in progress includes the cost of homes under construction, land and
land development costs and the carrying costs of lots that have been
substantially improved.
The Company capitalizes certain interest costs to inventory during the
development and construction period. Capitalized interest is charged to interest
expense when the related inventory is closed. Interest incurred, capitalized and
expensed is summarized as follows:
Nine months ended Three months ended
July 31, July 31,
------------------------------ --------------------------
2002 2001 2002 2001
------------------------------ --------------------------
Interest capitalized,
beginning of period $ 98,650 $ 78,443 $113,637 $ 90,426
Interest incurred 67,550 58,110 22,307 20,711
Interest expensed (45,258) (40,506) (15,626) (15,524)
Write-off to cost of sales (685) (755) (61) (321)
---------------------------- ---------------------------
Interest capitalized,
end of period $120,257 $ 95,292 $120,257 $ 95,292
============================ ===========================
3. Earnings per Share Information
Information pertaining to the calculation of earnings per share for the nine
months and three months ended July 31, 2002 is as follows:
Nine months ended Three months ended
July 31, July 31,
----------------------------- --------------------------
2002 2001 2002 2001
----------------------------- --------------------------
Basic weighted average
shares 70,562 72,287 70,835 71,677
Common stock equivalents 5,160 5,982 5,850 5,736
----------------------------- --------------------------
Diluted weighted average
shares 75,722 78,269 76,685 77,413
============================= ==========================
- 6 -
4. Subordinated Notes
In November 2001, we issued $150,000 of 8.25% Senior Subordinated Notes due
2011. We used the proceeds for general corporate purposes, including the
acquisition of inventory.
5. Stock Repurchase Program
Our Board of Directors has authorized the repurchase of up to 10,000 shares of
our common stock, par value $.01, from time to time, in open market transactions
or otherwise, for the purpose of providing shares for the Company's various
employee benefit plans. As of July 31, 2002, the Company had repurchased
approximately 5,257 shares under the program.
6. Supplemental Disclosure to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flow for
the nine months ended July 31, 2002 and 2001:
Nine months ended
July 31,
----------------------------------
2002 2001
---------- ----------
Supplemental disclosure of cash flow information:
Interest paid, net of
capitalized amounts $11,834 $ 8,987
========== ==========
Income taxes paid $91,558 $79,750
========== ==========
Supplemental disclosures of non-cash activities:
Cost of residential inventories acquired
through seller financing $13,993 $28,982
========== ==========
Income tax benefit relating to exercise
of employee stock options $ 4,921 $ 5,128
========== ==========
Stock bonus award $ 6,853 $ 4,413
========== ==========
Contribution to employee retirement plan $883 $791
========== ==========
- 7 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
Basis of Presentation
Our financial statements include the accounts of Toll Brothers, Inc. and its
majority owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in 20% to 50% owned partnerships
and affiliates are accounted for on the equity method.
Inventory
Inventory is stated at the lower of cost or fair value in accordance with
Statement of Financial Accounting Standards ("SFAS") No. 121. In addition to
direct acquisition, land development and home construction costs, costs include
interest, real estate taxes and direct overhead costs related to development and
construction, which are capitalized to inventories during the period beginning
with the commencement of development and ending with the completion of
construction.
It takes approximately four to five years to fully develop, sell and deliver all
the homes in one of our typical communities. Longer or shorter lengths of time
are possible depending on the number of home sites in a community. Since our
inventory is considered a long lived asset under accounting principles generally
accepted in the United States, we are required to review the carrying value of
the communities and write-down the value of those communities for which we
believe the values are not recoverable. When the profitability of a current
community deteriorates or the sales pace declines significantly or some other
factor indicates a possible impairment in the recoverability of the asset, we
evaluate the property in accordance with the guidelines of SFAS No. 121. If this
evaluation indicates an impairment loss should be recognized, we charge cost of
sales for the estimated impairment loss in that quarter.
In addition, we review all the land held for future communities or future
sections of current communities, whether owned or under contract, to determine
whether or not we expect to proceed with the development of the land. Based upon
this review, we decide: (a) as to land that is under a purchase contract but not
owned, whether the contract will be terminated or renegotiated; and (b) as to
land we own, whether the land can be developed as contemplated or in an
alternative manner or should be sold. Based upon this review, we further
determine what costs that have been capitalized to the property are recoverable
and what costs should be written-off.
Land, land development and related costs (both incurred and estimated to be
incurred) are amortized to the cost of homes closed based upon the total number
of homes to be constructed in each community. Home construction and related
costs are charged to the cost of homes closed under the specific identification
method. Any changes to the estimated costs subsequent to the commencement of
delivery of homes are allocated to the remaining homes in the community.
The estimated land, common area development and related costs of master planned
communities (including the cost of golf courses, net of its estimated residual
value) are allocated to individual communities within the master planned
community on a relative sales value basis. Any change in the estimated costs are
allocated to the remaining lots in each of the communities of the master planned
community.
- 8 -
Income Recognition
Revenue and cost of sales are recorded at the time each home, or lot, is closed
and title and possession is transferred to the buyer.
Joint Venture Accounting
We have entered into three joint ventures with independent third parties to
develop and sell land that was owned or is currently owned by our venture
partners. We recognize our share of earnings from the sale of lots to other
builders. We do not recognize earnings from lots we purchase, but reduce our
cost basis in the lots by our share of the earnings on those lots. We have
agreed to purchase 180 lots from one of the ventures and 46 lots from another,
and we have the right to purchase up to 385 lots from the third. We also will
participate in the profits earned from the lots sold to other builders above
certain agreed upon levels. At July 31, 2002 we had approximately $9 million
invested in these joint ventures and were committed to contribute additional
capital of approximately $31 million if the joint ventures require it.
In addition, we effectively own one-third of Toll Brothers Realty Trust Group
(the "Trust"), which was formed with a number of our senior executives and
directors and with the Pennsylvania State Employees Retirement System to take
advantage of commercial real estate opportunities that may present themselves
from time to time. We provide development, finance and management services to
the Trust and receive fees under various agreements. At July 31, 2002, our
investment in the Trust was $7.5 million. We also entered into a subscription
agreement whereby each group of investors agreed to invest an additional $9.3
million if required by the Trust. The original subscription agreement was to
expire in June 2002 but was extended to August 2003. The Trust currently owns
and operates several office buildings and an apartment complex, a portion of
which is still under construction.
We also own 50% of a joint venture with an unrelated third party that is
currently selling and building an active adult, age-qualified community. At July
31, 2002, our investment was $1.2 million in this joint venture.
We do not currently guarantee any indebtedness of the joint ventures or the
Trust. Our total commitment to these entities is not material to our financial
condition. These investments are accounted for on the equity method.
- 9 -
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, comparisons of
certain income statement items related to the Company's operations (amounts in
millions):
Nine months ended Three months ended
July 31, July 31,
----------------------------------------------- --------------------------------------------
2002 2001 2002 2001
--------------------- ------------------ ------------------ -------------------
$ % $ % $ % $ %
Housing sales
Revenues 1,587.2 1,529.4 565.4 573.5
Costs 1,149.7 72.4 1,131.1 74.0 409.7 72.5 417.8 72.8
Land sales
Revenues 26.5 25.2 12.5 2.7
Costs 18.1 68.3 19.6 77.9 8.9 71.7 2.1 75.4
Equity earnings from
unconsolidated
joint ventures 1.7 7.6 0.2 2.3
Other 8.0 11.7 2.6 5.5
--------- ---------- ------- --------
Total revenues 1,623.4 1,573.9 580.7 584.1
--------- ---------- ------- --------
Selling, general
& administrative
expenses* 172.9 10.6 152.9 9.7 61.9 10.7 54.6 9.3
Interest expense* 45.3 2.8 40.5 2.6 15.6 2.7 15.5 2.7
--------- ---------- ------- --------
Total costs
and expenses* 1,386.0 85.4 1,344.1 85.4 496.1 85.4 489.9 83.9
--------- ---------- ------- --------
Income before
income taxes* 237.4 14.6 229.7 14.6 84.6 14.6 94.2 16.1
========= ========== ======= ========
* Percentages are based on total revenues
Note: Amounts may not add due to rounding.
HOUSING SALES
Housing revenues for the nine months ended July 31, 2002 were higher than those
for the comparable period of 2001 by approximately $58 million, or 4%. The
revenue increase in the nine-month period was attributable to a 3% increase in
the number of homes delivered and a 1% increase in the average price of the
homes delivered. Housing revenues for the three months ended July 31, 2002
declined approximately $8.1 million or 1% over the three-month period ended July
31, 2001. The decrease in revenues in the three-month period of fiscal 2002 was
- 10 -
attributable to a 3% decrease in the number of homes delivered offset in part by
a 2% increase in the average price of the homes delivered. The increase in the
average price of the homes delivered in both periods of fiscal 2002 was the
result of increased selling prices and a shift in the location of homes
delivered to more expensive areas. Homes delivered in the nine-month period are
generally those homes that were in backlog at the beginning of the period and
the homes contracted for during the first three months of the period. The
increase in the number of homes delivered in the nine month period of fiscal
2002 is primarily due to our delivering a higher percentage of homes that were
in backlog at October 31, 2001 and homes contracted for in the first quarter of
fiscal 2002 compared to the percentage of homes we delivered in the fiscal 2001
period from the October 31, 2000 backlog and homes contracted for in the first
quarter of fiscal 2001.
Homes delivered in our fiscal third quarter are generally homes that would have
been contracted for in the fourth quarter of the prior fiscal year and the first
quarter of the current fiscal year. The decrease in the number of homes
delivered in the three-month period ended July 31, 2002 compared to the three-
month period ended July 31, 2001 was due primarily to the decline in new
contracts signed in our fourth quarter of fiscal 2001 compared to the fourth
quarter of fiscal 2000 and the continued softness in new contract signing that
we encountered in the first portion of the first quarter of fiscal 2002. The
decline in new contracts in the fourth quarter of fiscal 2001 and the softness
in the first part of the first quarter of fiscal 2002 was due primarily to the
slowing economy exacerbated by the tragic events of September 11, 2001 and the
delays in the opening of new communities due to increased governmental
regulation. We believe that the decline in contracts in the fourth quarter of
fiscal 2001 and the softness in new contract signing that we encountered in the
first part of the first quarter of fiscal 2002 will also have a negative impact
on the number of homes delivered in the fourth quarter of fiscal 2002. We expect
that the negative impact of the aforementioned slowdown on unit deliveries in
the fourth quarter of fiscal 2002 will be significantly reduced by an increase
in the delivered price of the homes. For fiscal 2002, we expect to deliver
between 4,275 and 4,425 homes, compared to 4,358 homes in fiscal 2001, and
realize revenues from housing sales of between $2.17 billion and $2.27 billion
as compared to $2.18 billion in fiscal 2001.
The value of new sales contracts signed amounted to $2.09 billion (3,908 homes)
in the nine months ended July 31, 2002, a 24% increase over the value of
contracts signed in the comparable period of fiscal 2001 of $1.69 billion (3,396
homes). This increase is attributable to a 15% increase in the number of units
sold and an 8% increase in the average selling price of the homes (due primarily
to the location and size of homes sold and increases in base selling prices).
For the three months ended July 31, 2002, the value of contracts signed
increased 30% over the comparable period of fiscal 2001. This increase was
primarily attributable to a 17% increase in the number of units sold and an 11%
increase in the average selling price of the homes. The increase in the number
of units sold is attributable to an increase in the number of communities from
which we are selling and the continued demand for our product. At July 31, 2002,
we were selling from 167 communities compared to 142 communities at July 31,
2001 and 155 communities at October 31, 2001.
We believe that the demand for our product is attributable to an increase in the
number of affluent households, the maturation of the baby boom generation, a
constricted supply of available new home sites, attractive mortgage rates and
the appeal on the part of potential customers that the purchase of a home is a
stable investment in the current period of economic uncertainty. At July 31,
2002, we had over 42,000 home sites under our control nationwide in markets we
consider as affluent.
- 11 -
At July 31, 2002, our backlog of homes under contract was $1.90 billion
(3,441 homes), 21% higher than the $1.58 billion (3,055 homes) backlog at July
31, 2001 and 35% higher than the $1.41 billion (2,727 homes) backlog at October
31, 2001. The increase in backlog at July 31, 2002 is primarily attributable to
the increase in the number of new contracts signed and the increased prices of
the homes sold during fiscal 2002 as previously discussed. Based on the size of
our current backlog, the continued demand for our product and the increased
number of selling communities from which we are operating and the additional
communities we expect to open in the coming months, we believe that we will
deliver approximately 5,000 homes in fiscal 2003 and the average delivered price
of those homes will be approximately $525,000 to $530,000.
Housing costs as a percentage of housing sales decreased in both periods of
fiscal 2002 as compared to the comparable periods of fiscal 2001. The decreases
were largely the result of selling prices increasing at a greater rate than
costs, lower land and improvement costs, improved operating efficiencies and
lower inventory write-offs, offset in part by sales incentives provided to
customers in the later part of the fourth quarter of fiscal 2001 and the
beginning of the first quarter of fiscal 2002 to help reduce the effect on new
orders from the economic slowdown in the later part of fiscal 2001 and the
tragedy of September 11th. The Company incurred $3.4 million and $1.6 million in
write-offs in the nine-month and three-month periods ended July 31, 2002,
respectively, as compared to $6.6 million and $2.3 million in the comparable
periods of fiscal 2001.
LAND SALES
We are developing several master planned communities in which we sell land to
other builders. The amount of land sales will vary from quarter to quarter
depending upon the scheduled timing of the delivery of the land parcels. Land
sales amounted to $26.5 million and $12.5 million for the nine months and three
months ended July 31, 2002, respectively, as compared to $25.2 million and $2.7
million for the comparable periods of 2001.
EQUITY EARNINGS IN UNCONSOLIDATED JOINT VENTURES
We have entered into three joint ventures to develop and sell lots to other
builders. We also acquire or will acquire lots from these ventures for our own
use. We recognize our share of earnings from the sale of lots to other builders
but do not recognize earnings from lots we purchase. We reduce our cost basis in
the lots we purchase from the joint ventures by our share of the earnings on
those lots. Earnings from the joint ventures will vary significantly from
quarter to quarter.
INTEREST AND OTHER INCOME
Interest and other income decreased $3.8 million in the nine-month period ended
July 31, 2002 as compared to the comparable period of fiscal 2001. The decrease
was principally due to a decrease in interest income, the gain from the sale of
an office building constructed by the Company recognized in the 2001 period, a
decrease in earnings from the Company's ancillary businesses, offset in part by
increased income from retained customer deposits.
- 12 -
For the three months ended July 31, 2002, interest and other income decreased
$2.9 million as compared to the three months ended July 31, 2001. This decrease
was primarily the result of a gain realized in the 2001 period on the sale of an
office building constructed by the Company, a decrease in interest income and a
decrease in earnings from the Company's ancillary businesses.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A spending increased by $20.0 million or 13% and $7.3 million or 13% in the
nine-month and three-month periods ended July 31, 2002 as compared to the
comparable periods of fiscal 2001. This increased spending was principally due
to the greater number of selling communities that we had during both periods of
fiscal 2002 as compared to the comparable periods of fiscal 2001.
INTEREST EXPENSE
We determine interest expense on a specific lot-by-lot basis for our
homebuilding operations and on a parcel-by-parcel basis for land sales. As a
percentage of total revenues, interest expense varies depending on many factors
including the period of time that we owned the land, the length of time that the
homes delivered during the period were under construction, and the interest
rates and the amount of debt carried by us in proportion to the amount of our
inventory during those periods. Interest expense as a percentage of revenues was
slightly higher in the nine-month period ending July 31, 2002 as compared to the
comparable period of 2001, and approximately the same for the three-month period
ending July 31, 2002 as compared to the three-month period of fiscal 2001.
INCOME BEFORE INCOME TAXES
Income before taxes increased 3% in the nine-month period ended July 31, 2002
over the comparable period of fiscal 2001 and declined 10% in the three-month
period ended July 31, 2002 as compared to the comparable period of fiscal 2001.
INCOME TAXES
Income taxes were provided at an effective rate of 36.6% and 36.8% for the nine-
month periods ended July 31, 2002 and 2001, respectively. For the three-month
periods ended July 31, 2002 and 2001, income taxes were provided at 36.8% and
36.9%, respectively. The difference in rates in the nine-month periods and
three-month periods of fiscal 2002 as compared to comparable periods of fiscal
2001 was due primarily to higher tax-free income in fiscal 2002 as compared to
fiscal 2001.
CAPITAL RESOURCES AND LIQUIDITY
Funding for our operations has been provided principally by cash flows from
operations, unsecured bank borrowings and the public debt markets.
Cash flow from operations, before inventory additions, has improved as operating
results have improved. One of the main factors that determines cash flow from
operations, before inventory additions, is the level of revenues from the
delivery of homes and land sales. We anticipate that cash flow from operations,
before inventory additions, will continue to be strong. We have used our cash
flow from operations, before inventory additions, bank borrowings and public
debt to: acquire additional land for new communities; fund additional
expenditures for land development; fund construction costs needed to meet the
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requirements of our increased backlog and continuing expansion of the number of
communities in which we are offering homes for sale; repurchase our stock; and
repay debt. We expect that inventory will continue to increase and we are
currently negotiating and searching for additional opportunities to obtain
control of land for future communities.
At July 31, 2002, we had a $535 million unsecured revolving credit facility with
16 banks, of which $90 million extends to February 2003 and $445 million extends
to March 2006. At July 31, 2002, we had $15 million of loans and approximately
$70 million of letters of credit outstanding under the facility. In August 2002,
we increased the amount of our term loan due July 2005 from $192.5 million to
$207.5 million and increased the amount of our revolving credit facility to $615
million, $525 million of which extends to March 2006.
We believe that we will be able to continue to fund our activities through a
combination of existing cash resources, cash flow from operations and existing
sources of credit.
HOUSING DATA ($ in millions)
CLOSINGS: Nine months ended July 31, 2002 2001
units $ units $
----------------------- ----------------------
Northeast (MA, RI, NH, CT, NY, NJ) 650 337.5 706 358.3
Mid-Atlantic (PA, DE, MD, VA) 1,110 517.5 954 441.2
Midwest (OH,IL, MI) 305 142.4 319 149.1
Southeast (FL, NC, TN) 433 172.3 356 159.1
Southwest (AZ, NV, TX) 389 209.0 416 203.8
West Coast (CA) 271 208.5 328 217.9
----------------------- ----------------------
Total 3,158 1,587.2 3,079 1,529.4
======================= ======================
CONTRACTS: Nine months ended July 31, 2002 2001
units $ units $
----------------------- ----------------------
Northeast (MA, RI, NH, CT, NY, NJ) 680 391.5 640 322.3
Mid-Atlantic (PA, DE, MD, VA) 1,436 669.8 1,221 565.2
Midwest (OH,IL, MI) 313 159.7 398 172.3
Southeast (FL, NC, TN) 551 252.0 421 190.6
Southwest (AZ, NV, TX, CO) 490 243.7 403 210.3
West Coast (CA) 438 374.9 313 224.5
----------------------- ----------------------
Total 3,908 2,091.6 3,396 1,685.2
======================= ======================
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BACKLOG AT JULY 31, 2002 2001
units $ units $
----------------------- ----------------------
Northeast (MA, RI, NH, CT, NY, NJ) 681 384.6 657 331.5
Mid-Atlantic (PA, DE, MD, VA) 1,159 544.5 946 443.3
Midwest (OH,IL, MI) 302 157.1 349 158.8
Southeast (FL, NC, TN) 446 231.1 377 178.1
Southwest (AZ, NV, TX, CO) 443 222.2 404 215.9
West Coast (CA) 410 365.0 322 251.5
----------------------- ----------------------
Total 3,441 1,904.5 3,055 1,579.1
======================= ======================
CLOSINGS: Three months ended July 31, 2002 2001
units $ units $
----------------------- ----------------------
Northeast (MA, RI, NH, CT, NY, NJ) 214 114.5 243 125.9
Mid-Atlantic (PA, DE, MD, VA) 429 203.4 355 163.4
Midwest (OH,IL, MI) 89 41.6 116 59.0
Southeast (FL, NC, TN) 143 58.0 141 59.8
Southwest (AZ, NV, TX) 142 77.7 155 80.2
West Coast (CA) 76 70.2 119 85.2
----------------------- ----------------------
Total 1,093 565.4 1,129 573.5
======================= ======================
CONTRACTS: Three months ended July 31, 2002 2001
units $ units $
----------------------- ----------------------
Northeast (MA, RI, NH, CT, NY, NJ) 231 131.2 197 102.9
Mid-Atlantic (PA, DE, MD, VA) 455 219.7 430 194.2
Midwest (OH,IL, MI) 111 58.4 102 48.7
Southeast (FL, NC, TN) 164 82.1 146 66.3
Southwest (AZ, NV, TX, CO) 184 94.3 131 70.0
West Coast (CA) 129 118.5 79 60.7
----------------------- ----------------------
Total 1,274 704.2 1,085 542.8
======================= ======================
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NOTE: Contracts for the three-month and nine-month periods ended July 31, 2002
include $4,209 (12 homes) and $8,859 (26 homes), respectively, from an
unconsolidated 50% owned joint venture. Contracts for the three-month and
nine-month periods ended July 31, 2001 include $1,861 (6 homes) and $11,638 (41
homes), respectively, from this joint venture. Backlog at July 31, 2002 and July
31, 2001 includes $5,386 (15 homes) and $9,081 (30 homes), respectively, from
this joint venture.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our market risk from October 31, 2001.
For more information regarding our market risk, see Item 7A, Quantitative and
Qualitative Disclosures About Market Risk, in our Annual Report on Form 10-K for
the fiscal year ended October 31, 2001.
ITEM 4. Controls and Procedures
There have not been any significant changes in internal controls or in other
factors that could significantly affect internal controls subsequent to the date
of the chief executive officer's and chief financial officer's most recent
evaluation.
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
We are involved in various claims and litigation arising principally in the
ordinary course of business. We believe that the disposition of these matters
will not have a material adverse effect on our business or on our financial
condition. There are no proceedings required to be disclosed pursuant to Item
103 of Regulation S-K.
ITEM 2. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults upon Senior Securities
None.
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None.
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ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 99.1* Certification of Robert I. Toll pursuant
to Section 906 of the Sarbanes-Oxley Act of
2002.
Exhibit 99.2* Certification of Joel H. Rassman pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*Filed electronically herewith.
(b) Reports on Form 8-K
During the quarter ended July 31, 2002, we filed a Current
Report on Form 8-K on July 2, 2002 for the purpose of filing
Exhibit 11, "Statement re: computation of per share earnings"
reflecting the restated earnings per share for our two-for-one
stock split, and filing Exhibit 99.1 reflecting the
transitional disclosure required by Statement of Financial
Accounting Standards No.142.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOLL BROTHERS, INC.
(Registrant)
Date: September 10, 2002 By: /s/ Joel H. Rassman
--------------------
Joel H. Rassman
Executive Vice President,
Treasurer and Chief
Financial Officer
Date: September 10, 2002 By: /s/ Joseph R. Sicree
---------------------
Joseph R. Sicree
Vice President -
Chief Accounting Officer
(Principal Accounting Officer)
- 17 -
CERTIFICATION
I, Robert I. Toll, Chief Executive Officer of Toll Brothers, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of Toll Brothers, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
Date: September 10, 2002 By: /s/ Robert I. Toll
------------------
Robert I. Toll
Chief Executive Officer
CERTIFICATION
I, Joel H. Rassman, Chief Financial Officer of Toll Brothers, Inc., certify
that:
1. I have reviewed this quarterly report on Form 10-Q of Toll Brothers, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
Date: September 10, 2002 By: /s/ Joel H. Rassman
-------------------
Joel H. Rassman
Chief Financial Officer