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UNITED STATES
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 JANUARY 31, 2005
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.
(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.)
250 GIBRALTAR ROAD, HORSHAM, PENNSYLVANIA 19044
(Address of principal executive offices) (Zip Code)
(215) 938-8000
(Registrant's telephone number, including area code)
NOT APPLICABLE
(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 by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
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:
At March 7, 2005, there were approximately 77,506,000 shares of Common
Stock, $.01 par value, outstanding.
TOLL BROTHERS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
Page No.
--------
Statement on Forward-Looking Information 1
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets at January 31, 2005 (Unaudited)
and October 31, 2004 2
Condensed Consolidated Statements of Income (Unaudited) For the
Three Months Ended January 31, 2005 and 2004 3
Condensed Consolidated Statements of Cash Flows (Unaudited) For the
Three Months Ended January 31, 2005 and 2004 4
Notes to Condensed Consolidated Financial Statements (Unaudited) 5
ITEM 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 16
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk 22
ITEM 4. Controls and Procedures 23
PART II. Other Information
Item 1. Legal Proceedings 23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3. Defaults upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 24
SIGNATURES 24
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, anticipated income to be realized
from our investments in unconsolidated entities, interest expense, growth and
expansion, ability to acquire land, ability to sell homes and properties,
ability to deliver homes from backlog, ability to gain approvals and to open new
communities, ability to secure materials and subcontractors, average delivered
prices of homes, ability to maintain the liquidity and capital necessary to
expand and take advantage of future opportunities and stock market valuations.
In some cases you can identify those so called forward-looking statements by
words such as "may," "will," "should," "expect," "plan," "anticipate,"
"believe," "estimate," "predict," "potential," "project," "intend," "can,"
"could," "might," 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, 2004.
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 words "we," "us," and "our," they refer to Toll
Brothers, Inc. and its subsidiaries, unless the context otherwise requires.
Reference herein to "fiscal 2006," "fiscal 2005," and "fiscal 2004," refer to
our fiscal year ending October 31, 2006 and October 31, 2005 and our fiscal year
ended October 31, 2004.
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
January 31, October 31,
2005 2004
---------- ----------
(Unaudited)
ASSETS
Cash and cash equivalents $ 340,622 $ 465,834
Marketable securities 144,789 115,029
Inventory 4,145,727 3,878,260
Property, construction and office
equipment, net 58,176 52,429
Receivables, prepaid expenses and
other assets 154,050 146,212
Mortgage loans receivable 74,395 99,914
Customer deposits held in escrow 69,344 53,929
Investments in and advances to
unconsolidated entities 109,871 93,971
---------- ----------
$5,096,974 $4,905,578
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable $ 372,408 $ 340,380
Senior notes 845,790 845,665
Senior subordinated notes 450,000 450,000
Mortgage company warehouse loan 64,416 92,053
Customer deposits 329,150 291,424
Accounts payable 192,404 181,972
Accrued expenses 555,982 574,202
Income taxes payable 178,193 209,895
---------- ----------
Total liabilities 2,988,343 2,985,591
---------- ----------
Stockholders' equity
Preferred stock, none issued
Common stock, 77,002 shares issued at
January 31, 2005 and October 31, 2004 770 770
Additional paid-in capital 232,728 200,938
Retained earnings 1,880,923 1,770,730
Treasury stock, at cost - 155 shares
and 2,181 shares at January 31, 2005
and October 31, 2004, respectively (5,790) (52,451)
---------- ----------
Total stockholders' equity 2,108,631 1,919,987
---------- ----------
$5,096,974 $4,905,578
========== ==========
See accompanying notes
2
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Three months ended January 31,
-----------------------------
2005 2004
-------- --------
Revenues:
Home sales $989,097 $589,577
Land sales 1,225 5,987
Equity earnings in unconsolidated entities 1,935 665
Interest and other 6,883 1,683
-------- --------
999,140 597,912
-------- --------
Costs and expenses:
Home sales 685,493 422,428
Land sales 779 5,303
Selling, general and administrative 107,065 76,653
Interest 21,812 14,558
-------- --------
815,149 518,942
-------- --------
Income before income taxes 183,991 78,970
Income taxes 73,798 28,886
-------- --------
Net income $110,193 $50,084
======== ========
Earnings per share:
Basic $ 1.45 $ 0.68
======== ========
Diluted $ 1.33 $ 0.62
======== ========
Weighted average number of shares:
Basic 75,826 73,839
Diluted 83,042 80,819
See accompanying notes
3
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Three Months ended January 31,
------------------------------
2005 2004
----------- --------
Cash flow from operating activities:
Net income $ 110,193 $50,084
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 4,251 3,563
Amortization of initial benefit obligation 950
Equity earnings in unconsolidated entities (1,935) (665)
Deferred tax provision 15,366 1,436
Provision for inventory write-offs 2,343 897
Changes in operating assets and liabilities
Increase in inventory (222,058) (191,038)
Origination of mortgage loans (181,558) (114,319)
Sale of mortgage loans 207,077 127,143
Increase in receivables, prepaid
expenses and other assets (7,626) (6,702)
Increase in customer deposits 22,311 17,966
Increase (decrease) in accounts payable and accrued expenses 20,708 (4,337)
Decrease in current income taxes payable (14,568) (11,526)
----------- --------
Net cash used in operating activities (44,546) (127,498)
----------- --------
Cash flow from investing activities:
Purchase of property and equipment, net (9,137) (3,829)
Purchase of marketable securities (1,039,017) (459,249)
Sale of marketable securities 1,009,257 518,950
Investments in and advances to unconsolidated entities (16,214) (27,616)
Distributions from unconsolidated entities 2,250 2,450
----------- --------
Net cash used in investing activities (52,861) 30,706
----------- --------
Cash flow from financing activities:
Proceeds from loans payable 246,167 172,259
Principal payments of loans payable (289,528) (192,639)
Proceeds from stock based benefit plans 15,776 6,095
Purchase of treasury stock (220) (8,850)
----------- --------
Net cash used in financing activities (27,805) (23,135)
----------- --------
Net decrease in cash and cash equivalents (125,212) (119,927)
Cash and cash equivalents, beginning of period 465,834 234,506
----------- --------
Cash and cash equivalents, end of period $ 340,622 $114,579
=========== ========
See accompanying notes
4
TOLL BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(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 ("SEC") for interim financial information. The October 31,
2004 balance sheet amounts and disclosures included herein have been derived
from our October 31, 2004 audited financial statements. Since the accompanying
condensed consolidated financial statements do not include all the information
and footnotes required by U.S. generally accepted accounting principles for
complete financial statements, we suggest that they be read in conjunction with
the financial statements and notes thereto included in our October 31, 2004
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 January 31, 2005, the results of our operations for the
three months ended January 31, 2005 and 2004 and our cash flows for the three
months ended January 31, 2005 and 2004. The results of operations for such
interim periods are not necessarily indicative of the results to be expected for
the full year.
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004),
"Share-Based Payment" ("SFAS 123R"), effective for periods beginning after June
15, 2005. SFAS 123R requires that all stock-based compensation be treated as a
cost that is reflected in the financial statements. Under the provisions of SFAS
123R, the Company has the choice of adopting the fair-value-based method of
expensing of stock options using (a) the "modified prospective method" whereby
the Company recognizes the expense only for periods beginning after June 15,
2005, or (b) the "modified retrospective method" whereby the Company recognizes
the expense for all years and interim periods since the effective date of SFAS
123 or for only those interim periods of the year of initial adoption of SFAS
123R. The Company has not yet determined which method it will adopt. The Company
is required to adopt the new standard for its fiscal period beginning August 1,
2005. See Note 8, "Stock Based Benefit Plans", for pro forma information
regarding the Company's expensing of stock options for the three-month periods
ended January 31, 2005 and 2004.
Auction rate securities in the amount of $115.0 million have been reclassified
from cash and cash equivalents to marketable securities in the October 31, 2004
balance sheet to conform with the fiscal 2005 financial statement presentation.
2. INVENTORY
Inventory consisted of the following (amounts in thousands):
January 31, October 31,
2005 2004
----------- ----------
Land and land development costs $1,171,148 $1,242,417
Construction in progress 2,488,498 2,178,112
Sample homes and sales offices 210,319 208,416
Land deposits and costs of
future development 263,338 237,353
Other 12,424 11,962
---------- ----------
$4,145,727 $3,878,260
========== ==========
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.
5
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 delivered. Interest incurred, capitalized
and expensed for the three-month periods ended January 31, 2005 and 2004 is
summarized as follows (amounts in thousands):
2005 2004
-------- --------
Interest capitalized, beginning of period $173,442 $154,314
Interest incurred 29,150 28,240
Interest expensed (21,812) (14,558)
Write-off to cost and expenses (107) (168)
-------- --------
Interest capitalized, end of period $180,673 $167,828
======== ========
3. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
The Company has investments in and advances to several joint ventures with
unrelated parties to develop land. Some of these joint ventures develop land for
the sole use of the venture partners, including the Company, and others develop
land for sale to the venture partners and to unrelated builders. The Company
recognizes its share of earnings from the sale of home sites to other builders.
The Company does not recognize earnings from home sites it purchases from the
joint ventures, but instead reduces its cost basis in these home sites by its
share of the earnings on the home sites. At January 31, 2005, the Company had
approximately $58.3 million invested in or advanced to these joint ventures and
was committed to contributing additional capital in an aggregate amount of
approximately $20.6 million if the joint ventures require it. At January 31,
2005, one of the joint ventures had obtained third-party financing of $535
million of which the Company had guaranteed its pro-rata share of approximately
$53.6 million. In February 2005, one of the joint ventures was the successful
bidder on a large tract of land in Las Vegas, Nevada. The Company estimates that
its proportionate share of the land purchase cost and general site improvements
will be approximately $109.1 million of which approximately $15.6 million was
included in the $58.3 million of investments in and advances to unconsolidated
entities at January 31, 2005.
In January 2004, the Company entered into a joint venture in which it has a 50%
interest with an unrelated party to develop Maxwell Place, an approximately
830-home luxury condominium community on the Hoboken, New Jersey waterfront. At
January 31, 2005, the Company had investments in and advances to the joint
venture of $29.2 million and was committed to making up to $1.0 million of
additional investments in and advances to it. The Company and its joint venture
partner each have guaranteed $7.5 million of principal amount of one of the
loans obtained by this joint venture. The Company expects that the joint venture
will obtain third-party financing for the construction of this project and that
the Company and other joint venture partner will be required to guarantee a
portion of the loan.
In October 2004, the Company entered into a joint venture in which it has a 50%
interest with an unrelated party to convert a 525-unit apartment complex, The
Hudson Tea Buildings, located in Hoboken, New Jersey, into luxury condominium
units. At January 31, 2005, the Company had investments in and advances to the
joint venture of $7.5 million, and was committed to making up to $1.5 million of
additional investments in and advances to it. The Company has a minority
interest in a joint venture with unrelated parties that has developed and is
currently marketing The Sky Club, a 326-unit, 17-story, two-tower structure,
located in Hoboken, New Jersey. At January 31, 2005, the Company's investment in
this joint venture was $8.0 million. The Company does not have any commitment to
contribute additional capital to this joint venture.
To take advantage of commercial real estate opportunities, the Company formed
Toll Brothers Realty Trust Group (the "Trust") in 1998. The Trust is effectively
owned one-third by the Company, one-third by Robert I. Toll, Bruce E. Toll (and
members of his family), Zvi Barzilay (and members of his family), Joel H.
Rassman and other members of the Company's senior management, and one-third by
the Pennsylvania State Employees Retirement System (collectively, the
"Shareholders"). In addition, the Shareholders entered into subscription
agreements whereby each group has agreed to invest additional capital in an
amount not to exceed $9.3 million if required by the Trust. The subscription
agreements expire in August 2005. At January 31, 2005, the Company had an
investment of $6.0 million in the Trust. This investment is accounted for on the
equity method. The Company provides development, finance and management services
to the Trust and received fees under the terms of various agreements in the
amount of $.4 million in each of the three-month periods ended January 31, 2005
and 2004. The Company believes that the transactions between itself and the
Trust were on terms no less favorable than it would have agreed to with
unrelated parties.
6
4. ACCRUED EXPENSES
Accrued expenses at January 31, 2005 and October 31, 2004 consisted of the
following (amounts in thousands):
January 31, October 31,
2005 2004
----------- -----------
Land, land development
and construction costs $227,039 $229,045
Compensation and employee benefit costs 69,598 89,865
Warranty costs 43,479 42,133
Other 215,866 213,159
-------- --------
$555,982 $574,202
======== ========
5. WARRANTY COSTS
The Company accrues for the expected warranty costs at the time each home is
closed and title and possession have been transferred to the home buyer. Costs
are accrued based upon historical experience. Changes in the warranty accrual
for the three-month periods ended January 31, 2005 and 2004 are as follows
(amounts in thousands):
2005 2004
------ ------
Balance, beginning of period $42,133 $33,752
Additions 6,682 3,885
Charges incurred (5,336) (3,610)
------- -------
Balance, end of period $43,479 $34,027
======= =======
6. EMPLOYEE RETIREMENT PLAN
In October 2004, the Company established an unfunded defined benefit retirement
plan (the "Retirement Plan") effective as of September 1, 2004. For the
three-month period ended January 31, 2005, the Company recognized the following
costs related to this plan (amounts in thousands):
Service cost $ 78
Interest cost 194
Amortization of initial benefit obligation 950
------
$1,222
======
The Company used a 5.69% discount rate in its calculation of the present value
of its projected benefit obligation.
7. INCOME TAXES
The Company's estimated combined federal and state income tax rate before
providing for the effect of permanent book-tax differences ("Base Rate") was
38.5% in 2005 and 37.0% in 2004. The increase in the Base Rate was due to an
increase in the Company's estimated effective state income tax rate. The
increase in the estimated effective state income tax rate was due to a
combination of an expected shift in income to states with higher tax rates and
changes in state income tax regulations.
The effective tax rates for the three-month periods ended January 31, 2005 and
2004 were 40.1% and 36.6%, respectively. For the three-month period ended
January 31, 2005, the primary difference between the Company's Base Rate and
effective tax rate was the effect of an adjustment due to the recomputation of
the Company's net deferred tax liability of approximately $3.7 million resulting
from the change in the Company's Base Rate from 37.0% at October 31, 2004 to
38.5% at January 31, 2005 offset, in part, by tax-free income. For the
three-month period ended January 31, 2004, the primary difference between the
Company's Base Rate and effective tax rate was the effect of tax-free income.
7
8. STOCK BASED BENEFIT PLANS
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148 ("SFAS 123"), requires the disclosure of the estimated value of employee
option grants and their impact on net income. SFAS 123 (revised 2004)
"Share-Based Payment" ("SFAS 123R"), requires the estimated value of employee
option grants to be recorded as an expense. SFAS 123 requires the use of option
pricing models that are designed to estimate the value of options that, unlike
employee stock options, can be traded at any time and are transferable. In
addition to restrictions on trading, employee stock options may include other
restrictions such as vesting periods and periods of time when they cannot be
exercised. Further, such models require the input of highly subjective
assumptions, including the expected volatility of the stock price. Therefore, in
management's opinion, the existing models do not provide a reliable single
measure of the value of employee stock options. For fiscal 2004, the fair value
of options granted was estimated using the Black-Scholes option pricing model.
In order to better value option grants as required by SFAS 123R, the Company has
developed a lattice model which it believes better reflects the establishment of
the fair value of option grants. The Company has used the lattice model for the
fiscal 2005 valuation. The weighted-average assumptions used for stock option
grants in the three-month periods ended January 31, 2005 and 2004 were
approximately as follows:
2005 2004
------ ------
Risk-free interest rate 3.64% 3.73%
Expected life (years)
5.70 6.99
Volatility 31.31% 42.97%
Dividends none none
Net income and net income per share as reported in these condensed consolidated
financial statements and on a pro forma basis, as if the fair-value-based method
described in SFAS 123R and SFAS 123 had been adopted, for the three-month
periods ended January 31, 2005 and 2004 were as follows (amounts in thousands,
except per share amounts):
2005 2004
-------- --------
Net income As reported $110,193 $50,084
Pro forma $106,021 $46,390
Basic net income per share As reported $1.45 $0.68
Pro forma $1.40 $0.63
Diluted net income per share As reported $1.33 $0.62
Pro forma $1.28 $0.57
Weighted-average grant date
fair value per share of
options granted $23.34 $19.47
9. EARNINGS PER SHARE INFORMATION
Information pertaining to the calculation of earnings per share for the
three-month periods ended January 31, 2005 and 2004 are as follows (amounts in
thousands):
2005 2004
------ ------
Basic weighted average shares 75,826 73,839
Common stock equivalents 7,216 6,980
------ ------
Diluted weighted average shares 83,042 80,819
====== ======
8
10. STOCK REPURCHASE PROGRAM
In March 2003, the Company's Board of Directors authorized the repurchase of up
to 10 million shares of its Common Stock, par value $.01, from time to time, in
open market transactions or otherwise, for the purpose of providing shares for
its various employee benefit plans. At January 31, 2005, the number of shares
that the Company was authorized to repurchase was approximately 9.3 million
shares.
11. COMMITMENTS AND CONTINGENCIES
At January 31, 2005, the Company had agreements to purchase land for future
development with an aggregate purchase price of approximately $2.54 billion,
including approximately $157.4 million of land from unconsolidated entities
which the Company has investments in, advances to and loan guarantees on behalf
of (See Note 3. "Investments in and Advances to Unconsolidated Entities" for
more information regarding these entities). The Company has paid or deposited
$159.4 million on these purchase agreements. Purchase of the properties is
generally contingent upon satisfaction of certain requirements by us and the
sellers.
At January 31, 2005, we had outstanding surety bonds amounting to approximately
$653.2 million related primarily to our obligations to various governmental
entities to construct improvements in our various communities. We estimate that
approximately $241.0 million of work remains to be performed on these
improvements. We have an additional $86.2 million of surety bonds outstanding
which guarantee other of our obligations. We do not believe that any outstanding
bonds will be drawn upon.
At January 31, 2005, we had agreements of sale outstanding to deliver 7,292
homes with an aggregate sales value of approximately $4.89 billion.
At January 31, 2005, we were committed to provide approximately $521.7 million
of mortgage loans to our home buyers and to others. All loans with committed
interest rates are covered by take-out commitments from third-party lenders,
which minimizes our interest rate risk. We also arrange a variety of mortgage
programs that are offered to our home buyers through outside mortgage lenders.
We have a $1.18 billion unsecured revolving credit facility with 29 banks that
extends to July 15, 2009. At January 31, 2005, interest was payable on
borrowings under the facility at 0.625%, subject to adjustment based upon our
debt rating and leverage ratios, above the Eurodollar rate or at other specified
variable rates as selected by us from time to time. At January 31, 2005, we had
no outstanding borrowings against the facility and approximately $169.3 million
of letters of credit outstanding under it. Under the terms of the revolving
credit agreement, we are not permitted to allow our maximum leverage ratio, as
defined in the agreement, to exceed 2.00 to 1.00 and, at January 31, 2005, we
were required to maintain a minimum tangible net worth, as defined in the
agreement, of approximately $1.36 billion. At January 31, 2005, our leverage
ratio was approximately .63 to 1.00 and our tangible net worth was approximately
$2.07 billion. Based upon the minimum tangible net worth requirement of the
revolving credit facility, our ability to pay dividends and repurchase our
common stock was limited to approximately $713.4 million at January 31, 2005.
We have an unsecured term loan of $222.5 million from 11 banks at a
weighted-average interest rate of 7.18% repayable in July 2005. Under the terms
of the term loan agreement, we are not permitted to allow our maximum leverage
ratio, as defined in the agreement, to exceed 2.25 to 1.00 and, at January 31,
2005, we were required to maintain a minimum tangible net worth, as defined in
the agreement, of approximately $1.04 billion. At January 31, 2005, our leverage
ratio was approximately .65 to 1.00 and our tangible net worth was approximately
$2.08 billion. Based upon the minimum tangible net worth requirement of the term
loan, our ability to pay dividends and repurchase our common stock was limited
to approximately $1.04 billion at January 31, 2005.
We are involved in various claims and litigation arising in the ordinary course
of business. We believe that the disposition of these matters will not have a
material effect on our business or on our financial condition.
9
12. SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
The following are supplemental disclosures to the statements of cash flows for
the three months ended January 31, 2005 and 2004 (amounts in thousands):
2005 2004
------- -------
Cash flow information:
Interest paid,
net of amount capitalized $16,092 $14,556
======= =======
Income taxes paid $73,000 $38,984
======= =======
Non-cash activity:
Cost of inventory acquired through
seller financing $47,752 $5,816
======= =======
Income tax benefit related to
exercise of employee stock options $32,500 $4,952
======= =======
Stock bonus awards $30,396 $20,288
======= =======
10
13. SUPPLEMENTAL GUARANTOR INFORMATION
Toll Brothers Finance Corp., a wholly-owned, indirect subsidiary (the
"Subsidiary Issuer"), is the issuer of three series of senior notes aggregating
$850 million. The obligations of the Subsidiary Issuer to pay principal,
premiums, if any, and interest are guaranteed jointly and severally on a senior
basis by Toll Brothers, Inc. and substantially all of our wholly-owned home
building subsidiaries (the "Guarantor Subsidiaries"). The guarantees are full
and unconditional. Our non-home building subsidiaries and certain home building
subsidiaries (the "Non-Guarantor Subsidiaries") did not guarantee the debt.
Separate financial statements and other disclosures concerning the Guarantor
Subsidiaries are not presented because management has determined that such
disclosures would not be material to investors. The Subsidiary Issuer has not
had and does not have any operations other than the issuance of the three series
of senior notes and the lending of the proceeds from the senior notes to
subsidiaries of Toll Brothers, Inc. Supplemental consolidating financial
information of Toll Brothers, Inc., the Subsidiary Issuer, the Guarantor
Subsidiaries, the Non-Guarantor Subsidiaries and the eliminations to arrive at
Toll Brothers, Inc. on a consolidated basis are as follows:
CONDENSED CONSOLIDATING BALANCE SHEET AT JANUARY 31, 2005 ($ IN THOUSANDS)
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents 332,260 8,362 340,622
Marketable securities 139,789 5,000 144,789
Inventory 4,145,368 359 4,145,727
Property, construction and office
equipment, net 47,841 10,335 58,176
Receivables, prepaid expenses
and other assets 4,798 99,042 73,569 (23,359) 154,050
Mortgage loans receivable 74,395 74,395
Customer deposits held in escrow 69,344 69,344
Investments in and advances to
unconsolidated entities 109,871 109,871
Investments in and advances to
consolidated entities 2,288,824 857,419 (1,140,973) (1,671) (2,003,599) -
--------------------------------------------------------------------------------
2,288,824 862,217 3,802,542 170,349 (2,026,958) 5,096,974
================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable 368,098 4,310 372,408
Senior notes 845,790 845,790
Senior subordinated notes 450,000 450,000
Mortgage company
warehouse loan 64,416 64,416
Customer deposits 329,150 329,150
Accounts payable 192,392 12 192,404
Accrued expenses 16,427 485,349 77,633 (23,427) 555,982
Income taxes payable 180,193 (2,000) 178,193
--------------------------------------------------------------------------------
Total liabilities 180,193 862,217 1,824,989 144,371 (23,427) 2,988,343
--------------------------------------------------------------------------------
Stockholders' equity
Common stock 770 2,003 (2,003) 770
Additional paid-in capital 232,728 4,420 2,734 (7,154) 232,728
Retained earnings 1,880,923 1,973,133 21,241 (1,994,374) 1,880,923
Treasury stock (5,790) (5,790)
--------------------------------------------------------------------------------
Total stockholders' equity 2,108,631 - 1,977,553 25,978 (2,003,531) 2,108,631
--------------------------------------------------------------------------------
2,288,824 862,217 3,802,542 170,349 (2,026,958) 5,096,974
================================================================================
11
CONDENSED CONSOLIDATING BALANCE SHEET AT OCTOBER 31, 2004 ($ IN THOUSANDS)
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents 456,836 8,998 465,834
Marketable securities 110,029 5,000 115,029
Inventory 3,877,900 360 3,878,260
Property, construction
and office equipment, net 42,431 9,998 52,429
Receivables, prepaid
expenses and other assets 4,929 94,052 63,740 (16,509) 146,212
Mortgage loans receivable 99,914 99,914
Customer deposits held
in escrow 53,929 53,929
Investments in and advances
to unconsolidated entities 93,971 93,971
Investments in and advances
to consolidated entities 2,131,882 854,888 (1,098,623) (3,403) (1,884,744) -
--------------------------------------------------------------------------------
2,131,882 859,817 3,630,525 184,607 (1,901,253) 4,905,578
================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
Liabilities
Loans payable 335,920 4,460 340,380
Senior notes 845,665 845,665
Senior subordinated notes 450,000 450,000
Mortgage company
warehouse loan 92,053 92,053
Customer deposits 291,424 291,424
Accounts payable 181,964 8 181,972
Accrued expenses 14,152 510,437 66,194 (16,581) 574,202
Income taxes payable 211,895 (2,000) 209,895
--------------------------------------------------------------------------------
Total liabilities 211,895 859,817 1,769,745 160,715 (16,581) 2,985,591
--------------------------------------------------------------------------------
Stockholders' equity
Common stock 770 2,003 (2,003) 770
Additional paid-in capital 200,938 4,420 2,734 (7,154) 200,938
Retained earnings 1,770,730 1,856,360 19,155 (1,875,515) 1,770,730
Treasury stock (52,451) (52,451)
--------------------------------------------------------------------------------
Total stockholders equity 1,919,987 - 1,860,780 23,892 (1,884,672) 1,919,987
--------------------------------------------------------------------------------
2,131,882 859,817 3,630,525 184,607 (1,901,253) 4,905,578
================================================================================
12
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
JANUARY 31, 2005 ($ IN THOUSANDS)
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------
Revenues:
Home sales 989,097 989,097
Land sales 1,225 1,225
Equity earnings 1,935 1,935
Interest and other 12,852 6,190 10,865 (23,024) 6,883
Earnings from subsidiaries 184,001 (184,001) -
--------------------------------------------------------------------------------
184,001 12,852 998,447 10,865 (207,025) 999,140
--------------------------------------------------------------------------------
Costs and expenses:
Home sales 684,798 1,105 (410) 685,493
Land sales 779 779
Selling, general
and administrative 10 140 107,085 5,910 (6,080) 107,065
Interest 12,712 21,784 541 (13,225) 21,812
--------------------------------------------------------------------------------
10 12,852 814,446 7,556 (19,715) 815,149
--------------------------------------------------------------------------------
Income before income taxes 183,991 - 184,001 3,309 (187,310) 183,991
Income taxes 73,798 67,228 1,223 (68,451) 73,798
--------------------------------------------------------------------------------
Net income 110,193 - 116,773 2,086 (118,859) 110,193
--------------------------------------------------------------------------------
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
JANUARY 31, 2004 ($ IN THOUSANDS)
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------
Revenues:
Home sales 589,577 589,577
Land sales 5,987 5,987
Equity earnings 665 665
Interest and other 9,847 1,390 6,347 (15,901) 1,683
Earnings from subsidiaries 78,970 (78,970) -
--------------------------------------------------------------------------------
78,970 9,847 597,619 6,347 (94,871) 597,912
--------------------------------------------------------------------------------
Costs and expenses:
Home sales 421,879 849 (300) 422,428
Land sales 5,303 5,303
Selling, general
and administrative 96 76,931 4,436 (4,810) 76,653
Interest 9,751 14,536 215 (9,944) 14,558
--------------------------------------------------------------------------------
- 9,847 518,649 5,500 (15,054) 518,942
--------------------------------------------------------------------------------
Income before income taxes 78,970 - 78,970 847 (79,817) 78,970
Income taxes 28,886 28,886 313 (29,199) 28,886
--------------------------------------------------------------------------------
Net income 50,084 - 50,084 534 (50,618) 50,084
--------------------------------------------------------------------------------
13
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED
JANUARY 31, 2005 ($ IN THOUSANDS)
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------
Cash flow from operating activities:
Net income 110,193 116,773 2,086 (118,859) 110,193
Adjustments to reconcile net income
to net cash used in operating
activities:
Depreciation and amortization 125 3,728 398 4,251
Amortization of initial benefit 950 950
obligation
Equity earnings in
unconsolidated entities (1,935) (1,935)
Deferred tax provision 15,366 15,366
Provision for inventory write-offs 2,343 2,343
Changes in operating assets
and liabilities
(Increase) decrease in inventory (222,059) 1 (222,058)
Origination of mortgage loans (181,558) (181,558)
Sale of mortgage loans 207,077 207,077
(Increase) decrease in
receivables, prepaid expenses
and other assets (156,943) (2,400) 37,573 (11,561) 125,705 (7,626)
Increase in customer deposits 22,311 22,311
Increase (decrease) in accounts
payable and accrued expenses 30,396 2,275 (16,560) 11,443 (6,846) 20,708
Decrease in current
income taxes payable (14,568) (14,568)
--------------------------------------------------------------------------------
Net cash (used in) provided
by operating activities (15,556) - (56,876) 27,886 - (44,546)
--------------------------------------------------------------------------------
Cash flow from investing activities:
Purchase of property and equipment, net (8,402) (735) (9,137)
Purchase of marketable securities (1,034,017) (5,000) (1,039,017)
Sale of marketable securities 1,005,257 4,000 1,009,257
Investments in and advances to
unconsolidated entities (16,214) (16,214)
Distributions from unconsolidated
entities 2,250 2,250
--------------------------------------------------------------------------------
Net cash used in investing
activities - - (51,126) (1,735) - (52,861)
--------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds from loans payable 80,182 165,985 246,167
Principal payments of loans payable (95,756) (193,772) (289,528)
Proceeds from stock based benefit plans 15,776 15,776
Purchase of treasury stock (220) (220)
--------------------------------------------------------------------------------
Net cash provided by
(used in) financing activities 15,556 - (15,574) (27,787) - (27,805)
--------------------------------------------------------------------------------
Net decrease in cash
and cash equivalents - - (123,576) (1,636) - (125,212)
Cash and cash equivalents,
beginning of period 455,836 9,998 465,834
--------------------------------------------------------------------------------
Cash and cash equivalents, end of period - - 332,260 8,362 - 340,622
================================================================================
14
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED
JANUARY 31, 2004 ($ THOUSANDS)
Toll Non-
Brothers, Subsidiary Guarantor Guarantor
Inc. Issuer Subsidiaries Subsidiaries Eliminations Consolidated
-----------------------------------------------------------------------------------
Cash flow from operating activities:
Net income 50,084 50,084 534 (50,618) 50,084
Adjustments to reconcile net income
to net cash used in operating activities:
Depreciation and amortization 75 3,054 434 3,563
Equity earnings in
unconsolidated entities (665) (665)
Deferred tax provision 1,436 1,436
Provision for inventory write-offs 897 897
Changes in operating assets
and liabilities
(Increase) decrease in inventory (191,068) 30 (191,038)
Origination of mortgage loans (114,319) (114,319)
Sale of mortgage loans 127,143 127,143
(Increase) decrease in receivables,
prepaid expenses and other assets (57,519) 560 2,554 (4,552) 52,255 (6,702)
Increase in customer deposits 17,966 17,966
Increase (decrease) in accounts
payable and accrued expenses 20,288 (635) (26,596) 4,243 (1,637) (4,337)
(Decrease) increase in current
income taxes payable (11,534) 8 (11,526)
-------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 2,755 - (143,774) 13,521 - (127,498)
-------------------------------------------------------------------------------
Cash flow from investing activities:
Purchase of property and equipment, net (3,517) (312) (3,829)
Purchase of marketable securities (455,249) (4,000) (459,249)
Sale of marketable securities 518,950 518,950
Investments in and advances to
unconsolidated entities (27,616) (27,616)
Distributions from unconsolidated
entities 2,450 2,450
-------------------------------------------------------------------------------
Net cash used in investing
activities - - 35,018 (4,312) - 30,706
-------------------------------------------------------------------------------
Cash flow from financing activities:
Proceeds from loans payable 80,700 91,559 172,259
Principal payments of loans payable (88,128) (104,511) (192,639)
Proceeds from stock based benefit plans 6,095 6,095
Purchase of treasury stock (8,850) (8,850)
-------------------------------------------------------------------------------
Net cash used in financing
activities (2,755) - (7,428) (12,952) - (23,135)
-------------------------------------------------------------------------------
Net (decrease) increase in cash
and cash equivalents - - (116,184) (3,743) - (119,927)
Cash and cash equivalents,
beginning of period 226,331 8,175 234,506
-------------------------------------------------------------------------------
Cash and cash equivalents, end of period - - 110,147 4,432 - 114,579
===============================================================================
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Our first quarter of fiscal 2005 was another record quarter for us. Revenues and
net income for the three months ended January 31, 2005 increased 67% and 120%,
respectively, as compared to the comparable quarter of fiscal 2004. In addition,
our backlog, homes under contract but not yet delivered, at January 31, 2005 of
$4.89 billion (7,292 homes) was up 66% over our backlog at January 31, 2004. We
believe backlog is a useful predictor of future results because for each home
included in backlog, we have a binding signed agreement of sale with a
non-refundable cash deposit averaging approximately 7% of the purchase price
from our buyer, and over the next nine to twelve months we expect to deliver the
home in backlog and recognize the revenues and related income. Based upon this
strong quarter and our backlog, we are raising our guidance for fiscal 2005. We
now expect that the total number of homes closed for fiscal 2005 will be between
8,050 and 8,400 homes with an average delivered price of $640,000 and $645,000
and that net income will grow approximately 60% in fiscal 2005 as compared to
fiscal 2004.
We also believe that, due to the continuing strong demand for our homes, a
recovering economy, our diversified offerings in the luxury move-up,
active-adult, and empty-nester urban and suburban niches, and our growing
portfolio of well-positioned communities in upscale markets, fiscal 2006 will be
another record year.
Geographic and product diversification, access to lower-cost capital, a
versatile and abundant home mortgage market and improving demographics are
promoting strong and steady demand for those builders who can control land and
persevere through the increasingly difficult regulatory approval process. This
evolution in our industry favors the large, publicly traded home building
companies with the capital and expertise to control home sites and gain market
share. We currently own or control more than 63,000 home sites in 47 markets we
consider to be affluent, a substantial number of which sites already have the
approvals necessary for development. We believe that as the approval process
becomes more difficult, and as the political pressure from no-growth proponents
increases, our expertise in taking land through the approval process and our
already approved land positions should allow us to continue to grow for a number
of years to come.
Because of the length of time that it takes to obtain the necessary approvals on
a property, complete the land improvements on it, and deliver a home after a
home buyer signs an agreement of sale, we are subject to many risks. We attempt
to reduce our risks by: controlling land for future development through options
whenever possible, thus allowing us to obtain the necessary governmental
approvals before acquiring title to the land; generally commencing construction
of a home after executing an agreement of sale with a buyer; and using
subcontractors to perform home construction and land development work on a
fixed-price basis.
Our revenues have grown on average over 20% per year in the last decade. We have
funded this growth through the reinvestment of profits, bank borrowings and
capital market transactions. At January 31, 2005, we had $485.4 million of cash,
cash equivalents and marketable securities and approximately $1.01 billion
available under our bank revolving credit facility which extends to July 15,
2009. In addition, during the second quarter of 2004, we issued $300 million of
4.95% Senior Notes due 2014. We used a portion of the proceeds from these notes
to redeem $170 million of our 8 1/8% Senior Subordinated Notes due 2009. With
these resources, our strong cash flow from operations before inventory growth,
and our history of success in accessing the public debt markets, we believe we
have the resources available to continue to grow in fiscal 2005 and beyond.
CRITICAL ACCOUNTING POLICIES
We believe the following critical accounting policies reflect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
INVENTORY
Inventory is stated at the lower of cost or fair value in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." 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.
16
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 time periods are
possible depending on the number of home sites in a community. Our master
planned communities, consisting of several smaller communities, may take up to
10 years or more to complete. Because our inventory is considered a long-lived
asset under U.S. generally accepted accounting principles, we are required to
review the carrying value of each of our 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, 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. 144. If this evaluation indicates that an impairment loss
should be recognized, we charge cost of sales for the estimated impairment loss
in the period determined.
In addition, we review all 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 as planned. Based upon
this review, we decide: (a) as to land that is under a purchase contract but not
owned, whether the contract will likely be terminated or renegotiated and (b) as
to land we own, whether the land will likely be developed as contemplated or in
an alternative manner, or should be sold. We then further determine which costs
that have been capitalized to the property are recoverable and which costs
should be written off. We incurred $2.3 million in write-offs of costs related
to current and future communities in the three-month period ended January 31,
2005 as compared to $1.0 million in the comparable period of fiscal 2004.
INCOME RECOGNITION
Revenue and cost of sales are recorded at the time each home or home site is
delivered and title and possession are transferred to the buyer.
Land, land development and related costs, both incurred and estimated to be
incurred in the future, are amortized to the cost of homes closed based upon the
total number of homes to be constructed in each community. Any changes to the
estimated costs subsequent to the commencement of delivery of homes are
allocated to the remaining undelivered homes in the community. Home construction
and related costs are charged to the cost of homes closed under the specific
identification method.
The estimated land, common area development and related costs of master planned
communities, including the cost of golf courses, net of their estimated residual
value, are allocated to individual communities within a master planned community
on a relative sales value basis. Any change in the estimated cost is allocated
to the remaining lots in each of the communities of the master planned
community.
USE OF ESTIMATES
In the ordinary course of doing business, we must make estimates and judgments
that affect decisions on how we operate and the reported amounts of assets,
liabilities, revenues and expenses. These estimates include, but are not limited
to, those related to the recognition of income and expenses, impairment of
assets, estimates of future improvement and amenity costs, capitalization of
costs to inventory, provisions for litigation, insurance and warranty costs, and
income taxes. We base our estimates on historical experience and on various
other assumptions that are believed to be reasonable under the circumstances. On
an ongoing basis, we evaluate and adjust our estimates based on the information
currently available. Actual results may differ from these estimates and
assumptions or conditions.
OFF-BALANCE SHEET ARRANGEMENTS
We have investments in and advances to several joint ventures and to Toll
Brothers Realty Trust Group (the "Trust"). At January 31, 2005, we had
investments in and advances to these unconsolidated entities of $109.9 million,
were committed to invest or advance an additional $32.4 million to these
entities if needed and had guaranteed approximately $61.1 million of these
entities' indebtedness. See Note 3 to the Condensed Consolidated Financial
Statements, "Investments in and Advances to Unconsolidated Entities" for more
information regarding these entities. Our total commitment to these entities is
not material to our financial condition. Investments in 20%-to-50% owned
entities are accounted for using the equity method. Investments in less than
20%-owned entities are accounted for on the cost method.
17
RESULTS OF OPERATIONS
The following table sets forth, for the three-month periods ended January 31,
2005 and 2004, a comparison of certain income statement items related to our
operations ($ in millions):
------------------------------------------------------
2005 2004
--------------------------- -------------------------
$ % $ %
------------- ------------ ----------- ------------
Home sales
Revenues 989.1 589.6
Cost of sales 685.5 69.3 422.4 71.6
Land sales
Revenues 1.2 6.0
Cost of sales 0.8 63.6 5.3 88.6
Equity earnings in
unconsolidated entities 1.9 0.7
Interest and other 6.9 1.7
Total revenues 999.1 597.9
Selling, general and
administrative expenses* 107.1 10.7 76.7 12.8
Interest expense* 21.8 2.2 14.6 2.4
Total costs and expenses* 815.1 81.6 518.9 86.8
Income before income taxes* 184.0 18.4 79.0 13.2
Income taxes 73.8 28.9
Net income* 110.2 11.0 50.1 8.4
* Percentages are based on total revenues.
Note: Amounts may not add due to rounding.
HOME SALES
Home sales revenues for the three months ended January 31, 2005 were higher than
those for the comparable period of 2004 by approximately $399.5 million, or 68%.
The increase was attributable to a 47% increase in the number of homes delivered
and a 14% increase in the average price of the homes delivered. The increase in
the average price of the homes delivered in the fiscal 2005 period was the
result of increased selling prices and a shift in the location of homes
delivered to more expensive areas offset by a change in product mix to smaller,
lower-priced products such as attached homes and age-qualified homes. The
increase in the number of homes delivered in the three-month period of fiscal
2005 was primarily due to the higher backlog of homes at October 31, 2004 as
compared to October 31, 2003, which was primarily the result of a 62% increase
in the number of new contracts signed in fiscal 2004 over fiscal 2003.
The value of new sales contracts signed was $1.44 billion (2,173 homes) in the
three months ended January 31, 2005, a 60% increase over the value of contracts
signed in the comparable period of fiscal 2004 of $902.8 million (1,512 homes).
This increase is attributable to a 44% increase in the number of new contracts
signed and an 11% increase in the average value of each contract (due primarily
to the location and size of homes sold and increases in base selling prices).
The increase in the number of new contracts signed is attributable to the
continued demand for our product and an increase in the number of communities
from which we are selling. At January 31, 2005, we were selling from 225
communities compared to 205 communities at January 31, 2004 and 220 communities
at October 31, 2004.
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 belief of potential customers that the purchase of a home is a stable
investment in the current period of economic uncertainty. At January 31, 2005,
we had over 63,000 home sites under our control nationwide in markets we
consider to be affluent.
At January 31, 2005, our backlog of homes under contract was $4.89 billion
(7,292 homes), 66% higher than the $2.95 billion (5,079 homes) backlog at
January 31, 2004. The increase in backlog at January 31, 2005 compared to the
backlog at January 31, 2004 is primarily attributable to a higher backlog at
October 31, 2004 as compared to the backlog at October 31, 2003 and the increase
in the value and number of new contracts signed in the fiscal 2005 period as
compared to the fiscal 2004 period, offset, in part, by higher deliveries in the
fiscal 2005 period compared to the fiscal 2004 period. Based on the size of our
current backlog, the continued demand for our product, 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 between
8,050 and 8,400 homes in fiscal 2005 and that the average delivered price of
those homes will be between $640,000 and $645,000.
18
Home costs as a percentage of home sales revenue decreased 235 basis points
(2.35%) in the three-month period ended January 31, 2005 as compared to the
comparable period of fiscal 2004. The decrease was largely the result of selling
prices increasing at a greater rate than costs and the efficiencies realized
from the increased number of homes delivered. For the full 2005 fiscal year, we
expect that home costs as a percentage of home sales revenues will decrease
between 275 and 315 basis points as compared to the full 2004 fiscal year due to
selling prices continuing to increase at a greater rate than costs and
efficiencies realized from the increase in the number of homes to be delivered
in fiscal 2005 as compared to fiscal 2004.
LAND SALES
We are developing several communities in which we sell a portion of the 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 were $1.2 million for the three months ended January 31, 2005 as compared
to $6.0 million for the comparable period of fiscal 2004. For the full 2005
fiscal year, land sales are expected to be approximately $21.0 million compared
to $22.5 million in fiscal 2004. Cost of land sales is expected to be
approximately 65% of land sales revenues in fiscal 2005 as compared to
approximately 70% in fiscal 2004.
EQUITY EARNINGS IN UNCONSOLIDATED ENTITIES
We are a participant in several joint ventures and in the Trust. We recognize
our proportionate share of the earnings from these entities. (See Note 3 to the
Condensed Consolidated Financial Statements, "Investments in and Advances to
Unconsolidated Entities" for more information regarding our investments in and
commitments to these entities.) Earnings from these entities will vary
significantly from quarter to quarter depending on the level of activity of each
entity during the period. For the three months ended January 31, 2005, we
recognized $1.9 million of earnings from unconsolidated entities as compared to
$.7 million in the comparable period of fiscal 2004. For the full 2005 fiscal
year, we expect to realize approximately $12.0 million of earnings from our
investments in the joint ventures and the Trust compared to $15.7 million in
fiscal 2004.
INTEREST AND OTHER INCOME
For the three months ended January 31, 2005, interest and other income was $6.9
million, an increase of $5.2 million from the $1.7 million recognized in the
comparable period of fiscal 2004. This increase was primarily the result of
higher interest income, higher management and construction fee income and higher
income realized from our ancillary businesses in the fiscal 2005 period. For the
full 2005 fiscal year, we expect interest and other income to be approximately
$28.0 million compared to $15.4 million in fiscal 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A spending increased by $30.4 million, or 40%, in the three-month period
ended January 31, 2005 as compared to the comparable period of fiscal 2004. This
increased spending was principally due to the costs incurred to support the 68%
increase in home sales revenues, the costs associated with the increase in the
number of selling communities that we had during the three-month period of
fiscal 2005 as compared to the comparable period of fiscal 2004 and the
continued costs incurred in the search for new land to replace the home sites
that were sold during the period and to expand our land position to enable us to
grow in the future. For the full 2005 fiscal year, we expect that SG&A as a
percentage of revenues will decrease slightly compared to the full 2004 fiscal
year.
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.
19
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 lower in the three-month period ended January 31, 2005 as
compared to the comparable period of fiscal 2004. For the full 2005 fiscal year,
we expect interest expense as a percentage of total revenues to be approximately
2.3% as compared to 2.4% in fiscal 2004.
INCOME BEFORE INCOME TAXES
For the three-month period ended January 31, 2005, income before taxes was
$184.0 million, an increase of 133% over the $79.0 million earned in the
comparable period of fiscal 2004.
INCOME TAXES
Income taxes were provided at an effective rate of 40.1% and 36.6% for the
three-month periods ended January 31, 2005 and 2004, respectively. The
difference in rates in the three-month period of fiscal 2005 as compared to the
comparable period of fiscal 2004 was due primarily to a change in the estimated
Base Rate to 38.5% from 37.0% in fiscal 2005 and the impact of recomputing our
net deferred tax liability using the new Base Rate. The change in the Base Rate
was due to the combination of changes in tax legislation and regulations and an
expected shift in income to states with higher tax rates in fiscal 2005.
CAPITAL RESOURCES AND LIQUIDITY
We fund our operations principally from cash flow from operating activities,
unsecured bank borrowings and the public debt and equity markets.
In general, cash flow from operating activities assumes that as each home is
delivered we will purchase a home site to replace it. Because we own several
years' supply of home sites, we do not need to buy home sites immediately to
replace the ones delivered. Accordingly, we believe that cash flow from
operating activities before inventory additions is currently a better gauge of
liquidity.
Cash flow from operating activities, before inventory additions, has improved as
operating results have improved. One of the main factors that determine cash
flow from operating activities, before inventory additions, is the level of
revenues from the delivery of homes and land sales. We anticipate that cash flow
from operating activities, before inventory additions, will continue to be
strong in fiscal 2005 due to the expected increase in home deliveries in fiscal
2005, as compared to fiscal 2004. We expect that our inventory will continue to
increase and we are currently negotiating and searching for additional
opportunities to obtain control of land for future communities. At January 31,
2005, we had commitments to acquire land of approximately $2.54 billion, of
which approximately $159.4 million had been paid or deposited (See Note 11 to
the Condensed Consolidated Financial Statements, "Commitments and Contingencies"
for more information concerning these commitments). We have used our cash flow
from operating activities, before inventory additions, bank borrowings and the
proceeds of public debt and equity offerings to: acquire additional land for new
communities; fund additional expenditures for land development; fund
construction costs needed to meet the requirements of our increased backlog and
the increasing number of communities in which we are offering homes for sale;
repurchase our stock; and repay debt.
We generally do not begin construction of a home until we have a signed contract
with the home buyer. Because of the significant amount of time between the time
a home buyer enters into a contract to purchase a home and the time that the
home is built and delivered, we believe we can estimate, with reasonable
accuracy, the number of homes we will deliver in the next 9 to 12 months. Should
our business decline significantly, our inventory would decrease as we complete
and deliver the homes under construction but do not commence construction of as
many new homes, resulting in a temporary increase in our cash flow from
operations. In addition, under such circumstances, we might delay or curtail our
acquisition of additional land, which would further reduce our inventory levels
and cash needs.
We believe that we will be able to continue to fund our expected growth and meet
our contractual obligations through a combination of existing cash resources,
cash flow from operating activities, our existing sources of credit and the
public debt markets.
20
INFLATION
The long-term impact of inflation on us is manifested in increased costs for
land, land development, construction and overhead, as well as in increased sales
prices of our homes. We generally contract for land significantly before
development and sales efforts begin. Accordingly, to the extent land acquisition
costs are fixed, increases or decreases in the sales prices of homes may affect
our profits. Because the sales price of each of our homes is fixed at the time a
buyer enters into a contract to acquire a home, and because we generally
contract to sell our homes before we begin construction, any inflation of costs
in excess of those anticipated may result in lower gross margins. We generally
attempt to minimize that effect by entering into fixed-price contracts with our
subcontractors and material suppliers for specified periods of time, which
generally do not exceed one year.
In general, housing demand is adversely affected by increases in interest rates
and housing costs. Interest rates, the length of time that land remains in
inventory and the proportion of inventory that is financed affect our interest
costs. If we are unable to raise sales prices enough to compensate for higher
costs, or if mortgage interest rates increase significantly, affecting
prospective buyers' ability to adequately finance home purchases, our revenues,
gross margins and net income would be adversely affected. Increases in sales
prices, whether the result of inflation or demand, may affect the ability of
prospective buyers to afford new homes.
HOUSING DATA
($ IN MILLIONS)
CLOSINGS Three months ended January 31,
----------------------------------------------------------------------
2005 2004 2005 2004
--------------- --------------- ---------------- ----------------
Region Units Units $ $
- -------------------------------------------- --------------- --------------- ---------------- ----------------
Northeast (CT,MA,NH,NJ,NY,RI) 229 183 123.3 104.6
Mid-Atlantic (DE,MD,PA,VA) 663 405 386.9 201.4
Midwest (IL,MI,OH) 95 72 57.0 40.9
Southeast (FL,NC,SC,TN) 155 121 84.4 53.7
Southwest (AZ,CO,NV,TX) 248 149 155.8 81.8
West (CA) 200 155 181.7 107.2
-------------- -------------- --------------- ---------------
Total consolidated entities 1,590 1,085 989.1 589.6
Total unconsolidated entities 63 5 26.4 1.5
-------------- -------------- --------------- ---------------
1,653 1,090 1,015.5 591.1
============== =============== =============== ===============
NEW CONTRACTS Three months ended January 31,
----------------------------------------------------------------------
2005 2004 2005 2004
--------------- --------------- ---------------- ----------------
Region Units Units $ $
- -------------------------------------------- --------------- --------------- ---------------- ----------------
Northeast (CT,MA,NH,NJ,NY,RI) 319 222 200.6 137.9
Mid-Atlantic (DE,MD,PA,VA) 767 527 471.4 283.8
Midwest (IL,MI,OH) 112 120 78.0 71.7
Southeast (FL,NC,SC,TN) 381 174 205.4 85.4
Southwest (AZ,CO,NV,TX) 366 233 254.3 143.5
West (CA) 228 236 233.4 180.5
-------------- -------------- --------------- ---------------
Total consolidated entities 2,173 1,512 1,443.1 902.8
Total unconsolidated entities 36 5 15.6 1.6
-------------- -------------- --------------- ---------------
2,209 1,517 1,458.7 904.4
============== =============== =============== ===============
21
BACKLOG January 31,
----------------------------------------------------------------------
2005 2004 2005 2004
--------------- --------------- ---------------- ----------------
Region Units Units $ $
- -------------------------------------------- --------------- --------------- ---------------- ----------------
Northeast (CT,MA,NH,NJ,NY,RI) 1,118 971 676.8 552.7
Mid-Atlantic (DE,MD,PA,VA) 2,349 1,796 1,456.8 919.5
Midwest (IL,MI,OH) 463 342 305.4 194.0
Southeast (FL,NC,SC,TN) 952 464 584.5 250.1
Southwest (AZ,CO,NV,TX) 1,469 793 948.2 458.5
West (CA) 941 713 916.2 570.3
-------------- -------------- --------------- ---------------
Total consolidated entities 7,292 5,079 4,887.9 2,945.1
Total unconsolidated entities 147 15 65.0 4.8
-------------- -------------- --------------- ---------------
7,439 5,094 4,952.9 2,949.9
============== =============== =============== ===============
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk primarily due to fluctuations in interest rates.
We utilize both fixed-rate and variable-rate debt. For fixed-rate debt, changes
in interest rates generally affect the fair market value of the debt instrument,
but not our earnings or cash flow. Conversely, for variable-rate debt, changes
in interest rates generally do not impact the fair market value of the debt
instrument, but do affect our earnings and cash flow. We do not have the
obligation to prepay fixed-rate debt prior to maturity, and, as a result,
interest rate risk and changes in fair market value should not have a
significant impact on our fixed-rate debt until we are required or elect to
refinance it.
The table below sets forth, at January 31, 2005, our debt obligations, principal
cash flows by scheduled maturity, weighted-average interest rates and estimated
fair value (amounts in thousands):
Fixed-Rate Debt Variable-Rate Debt(1)(2)
---------------------------------- --------------------------------------
Weighted Weighted
Fiscal Year of Average Average
Expected Maturity Amount Interest Rate Amount Interest Rate
- ----------------------------- ------------------ -------------- ------------------- -----------------
2005 $277,123 6.53% $64,416 3.68%
2006 33,088 5.63% 150 1.88%
2007 48,506 6.98% 150 1.88%
2008 5,403 6.02% 150 1.88%
2009 103,178 7.95% 150 1.88%
Thereafter 1,200,800 6.60% 3,710 1.88%
Discount (4,210)
----------------- ------------------
Total $1,663,888 6.66% $68,726 3.57%
================= ==================
Fair value at
January 31, 2005 $1,749,656 $68,726
================= ==================
(1) At January 31, 2005, we had a $1.18 billion unsecured revolving credit
facility with 29 banks which extends to July 2009. At January 31, 2005, we
had no borrowings and approximately $169.3 million of letters of credit
outstanding under the facility. At January 31, 2005, interest was payable
on borrowings under this facility at .625% (subject to adjustment based
upon our debt rating and leverage ratios) above the Eurodollar rate or at
other specified variable rates as selected by us from time to time.
(2) One of our subsidiaries has a $125 million line of credit with three banks
to fund mortgage originations. The line is due within 90 days of demand by
the banks and bears interest at the banks' overnight rate plus an agreed
upon margin. At January 31, 2005, the subsidiary had $64.4 million
outstanding under the line at an average interest rate of 3.68%. Borrowing
under this line is included in the 2005 fiscal year maturities.
Based upon the amount of variable rate debt outstanding at January 31, 2005 and
holding the variable rate debt balance constant, each one percentage point
increase in interest rates would increase our interest costs by approximately
$.7 million per year.
22
ITEM 4. CONTROLS AND PROCEDURES
Management, including our chief executive officer and chief financial officer,
evaluated the effectiveness of our disclosure controls and procedures as of the
end of the period covered by this report (as defined in Rule 13a-15(e) under the
Securities Exchange Act of 1934, as amended) (the "Evaluation Date") and, based
on that evaluation, concluded that, as of the Evaluation Date, we had sufficient
controls and procedures for recording, processing, summarizing and reporting
information that is required to be disclosed in our reports under the Securities
Exchange Act of 1934, as amended, within the time periods specified in the SEC's
rules and forms.
There has not been any change in our internal control over financial reporting
during our quarter ended January 31, 2005 that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
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 our financial
condition. There are no proceedings required to be disclosed pursuant to Item
103 of Regulation S-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended January 31, 2005, we repurchased the following
shares of our common stock (amounts in thousands, except per share amounts):
Maximum
Total Number Number
of Shares of Shares
Purchased as that May
Total Average Part of a Yet be
Number of Price Publicly Purchased
Shares Paid Per Announced Under the
Period Purchased (1) Share Plan or Program (2) Plan or Program
------------------- --------------- ---------- --------------------- -----------------
November 1, 2004 to
November 30, 2004 3 49.97 1 9,273
December 1, 2004 to
December 31, 2004 6 63.19 2 9,271
January 1, 2005 to
January 31, 2005 4 70.29 1 9,270
---------------- ---------------------
Total 13 62.75 4
================ =====================
(1) Pursuant to the provisions of our stock option plans, participants
are permitted to use the value of our common stock that they own to pay
for the exercise of options. During the three months ended January 31,
2005, we received 9,085 shares with an average fair market value per
share of $64.07 for the exercise of stock options. These shares are
included in the table above.
(2) On March 26, 2003, we announced that our Board of Directors had
authorized the repurchase of up to 10 million 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 our various
employee benefit plans. The Board of Directors did not fix an
expiration date for the repurchase program.
Except as set forth above, we have not repurchased any of our equity securities.
23
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS
10.1 Toll Brothers, Inc. Stock Incentive Plan(1998) Form of
Stock Award is hereby incorporated by reference to Exhibit
10.1 of the Registrant's Form 8-K filed with the Securities
and Exchange Commission on December 17, 2004.
31.1* Certification of Robert I. Toll pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
31.2* Certification of Joel H. Rassman pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002.
32.1* Certification of Robert I. Toll pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
32.2* Certification of Joel H. Rassman pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002.
*Filed electronically herewith.
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: March 14, 2005 By: Joel H. Rassman
-------------------
Joel H. Rassman
Executive Vice President,
Treasurer and Chief
Financial Officer (Principal Financial Officer)
Date: March 14, 2005 By: Joseph R. Sicree
----------------------
Joseph R. Sicree
Vice President -
Chief Accounting Officer
(Principal Accounting Officer)
24