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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 APRIL 30, 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 Identification No.)
incorporation or organization)
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 June 1, 2005, there were approximately 77,389,591 shares of Common Stock,
$.01 par value, outstanding.
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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 April 30, 2005 (Unaudited)
and October 31, 2004................................................... 2
Condensed Consolidated Statements of Income (Unaudited) For the
Six Months and Three Months Ended April 30, 2005 and 2004.............. 3
Condensed Consolidated Statements of Cash Flows (Unaudited) For the
Six Months Ended April 30, 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.................................................. 19
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.............. 27
ITEM 4. Controls and Procedures................................................. 27
PART II. Other Information
Item 1. Legal Proceedings....................................................... 28
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds............. 28
Item 3. Defaults upon Senior Securities......................................... 29
Item 4. Submission of Matters to a Vote of Security Holders..................... 29
Item 5. Other Information....................................................... 29
Item 6. Exhibits................................................................ 30
SIGNATURES....................................................................................... 31
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.
References herein to "fiscal 2006," "fiscal 2005," and "fiscal 2004" refer to
our fiscal years 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)
APRIL 30, OCTOBER 31,
2005 2004
----------- -----------
(UNAUDITED)
ASSETS
Cash and cash equivalents ......................... $ 566,668 $ 465,834
Marketable securities ............................. 115,029
Inventory ......................................... 4,299,587 3,878,260
Property, construction and office equipment, net .. 63,649 52,429
Receivables, prepaid expenses and other assets .... 152,009 146,212
Mortgage loans receivable ......................... 78,663 99,914
Customer deposits held in escrow .................. 76,681 53,929
Investments in and advances to unconsolidated
entities........................................ 114,196 93,971
---------- ----------
$5,351,453 $4,905,578
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Loans payable .................................... $ 358,922 $ 340,380
Senior notes ..................................... 845,914 845,665
Senior subordinated notes ........................ 450,000 450,000
Mortgage company warehouse loan .................. 69,108 92,053
Customer deposits ................................ 389,265 291,424
Accounts payable ................................. 202,918 181,972
Accrued expenses ................................. 611,340 574,202
Income taxes payable ............................. 147,964 209,895
---------- ----------
Total liabilities ............................. 3,075,431 2,985,591
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, none issued
Common stock, 77,580 shares and 77,002 shares
issued at April 30 , 2005
and October 31, 2004, respectively.............. 776 770
Additional paid-in capital ....................... 251,646 200,938
Retained earnings ................................ 2,051,056 1,770,730
Unearned compensation ............................ (834)
Treasury stock, at cost - 356 shares and 2,181
shares at April 30, 2005
and October 31, 2004, respectively.............. (26,622) (52,451)
---------- ----------
Total stockholders' equity .................... 2,276,022 1,919,987
---------- ----------
$5,351,453 $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)
SIX MONTHS ENDED THREE MONTHS ENDED
APRIL 30, APRIL 30,
----------------------- ---------------------
2005 2004 2005 2004
---------- ---------- ---------- --------
REVENUES:
Home sales ................................................................... $2,215,095 $1,403,886 $1,225,998 $814,309
Land sales ................................................................... 11,025 7,998 9,800 2,011
Equity earnings in unconsolidated entities ................................... 5,308 1,394 3,373 729
Interest and other ........................................................... 15,992 4,119 9,109 2,436
---------- ---------- ---------- --------
2,247,420 1,417,397 1,248,280 819,485
---------- ---------- ---------- --------
COSTS AND EXPENSES:
Home sales ................................................................... 1,516,142 1,007,051 830,649 584,623
Land sales ................................................................... 6,095 6,806 5,316 1,503
Selling, general and administrative .......................................... 223,423 166,547 116,358 89,894
Interest ..................................................................... 49,938 35,754 28,126 21,196
Expenses related to early retirement of debt ................................. 7,748 7,748
---------- ---------- ---------- --------
1,795,598 1,223,906 980,449 704,964
---------- ---------- ---------- --------
Income before income taxes .................................................... 451,822 193,491 267,831 114,521
Income taxes .................................................................. 171,496 70,969 97,698 42,083
---------- ---------- ---------- --------
Net income .................................................................... $ 280,326 $ 122,522 $ 170,133 $ 72,438
========== ========== ========== ========
EARNINGS PER SHARE:
Basic ........................................................................ $ 3.66 $ 1.65 $ 2.20 $ 0.97
========== ========== ========== ========
Diluted ...................................................................... $ 3.34 $ 1.51 $ 2.01 $ 0.89
========== ========== ========== ========
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic ........................................................................ 76,570 74,123 77,313 74,406
Diluted ...................................................................... 83,859 81,123 84,676 81,426
See accompanying notes
3
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED APRIL 30,
--------------------------
2005 2004
----------- -----------
Cash flow from operating activities:
Net income ....................................... $ 280,326 $ 122,522
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation and amortization................... 8,978 7,336
Amortization of initial benefit obligation...... 1,901
Equity earnings in unconsolidated entities...... (5,308) (1,394)
Deferred tax provision.......................... 12,993 3,600
Provision for inventory write-offs.............. 2,554 1,225
Write-off of unamortized debt discount and
financing costs................................ 841
Changes in operating assets and liabilities:
Increase in inventory ......................... (380,172) (476,866)
Origination of mortgage loans ................. (368,422) (313,592)
Sale of mortgage loans ........................ 389,672 293,049
Increase in receivables, prepaid expenses and
other assets.................................. (5,392) (19,645)
Increase in customer deposits 75,089 58,732
Increase in accounts payable and accrued
expenses...................................... 84,678 74,176
(Decrease) increase in current income taxes
payable....................................... (26,097) 12,793
----------- -----------
Net cash provided by (used in) operating
activities................................... 70,800 (237,223)
----------- -----------
Cash flow from investing activities:
Purchase of property and equipment, net .......... (18,450) (8,067)
Purchase of marketable securities ................ (1,970,588) (1,169,177)
Sale of marketable securities .................... 2,085,617 1,254,805
Investments in and advances to unconsolidated
entities........................................ (19,933) (30,359)
Distributions from unconsolidated entities ....... 5,015 2,450
----------- -----------
Net cash provided by investing activities .... 81,661 49,652
----------- -----------
Cash flow from financing activities:
Proceeds from loans payable ...................... 497,048 428,608
Principal payments of loans payable .............. (545,160) (422,444)
Net proceeds from issuance of senior notes ....... 297,432
Redemption of senior subordinated notes .......... (170,000)
Proceeds from stock based benefit plans .......... 27,175 10,820
Purchase of treasury stock ....................... (30,690) (8,963)
----------- -----------
Net cash (used in) provided by financing
activities................................... (51,627) 135,453
----------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... 100,834 (52,118)
Cash and cash equivalents, beginning of period .... 465,834 234,506
----------- -----------
Cash and cash equivalents, end of period .......... $ 566,668 $ 182,388
=========== ===========
See accompanying notes
4
TOLL BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
Our condensed consolidated financial statements include the accounts of Toll
Brothers, Inc. (the "Company"), a Delaware corporation, 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. Investments in less than 20%-owned
entities are accounted for on the cost method.
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, the Company suggests that they
be read in conjunction with the financial statements and notes thereto
included in its 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 the Company's financial position as of April 30,
2005, the results of its operations for the six months and three months ended
April 30, 2005 and 2004 and its cash flows for the six months ended April 30,
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. In April 2005, the SEC adopted a rule permitting issuers
to implement SFAS 123R at the beginning of their next fiscal year that begins
after June 15, 2005. The Company expects that the FASB will adopt the SEC's
rule. 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
the date that SFAS 123R is adopted, 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. Under the SEC's rule, the Company is
required to adopt the new standard for its fiscal year 2006 and under the
FASB's current rule 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 six-month and three-month periods
ended April 30, 2005 and 2004.
Auction rate securities in the amount of $115.0 million, $105.1 million and
$190.7 million have been reclassified from cash and cash equivalents to
marketable securities at October 31, 2004, April 30, 2004 and October 31, 2003
to conform with the fiscal 2005 financial statement presentation.
5
2. INVENTORY
Inventory consisted of the following (amounts in thousands):
APRIL 30, OCTOBER 31,
2005 2004
---------- -----------
Land and land development costs .................... $1,053,536 $1,242,417
Construction in progress ........................... 2,724,396 2,178,112
Sample homes and sales offices ..................... 217,013 208,416
Land deposits and costs of future development ...... 292,320 237,353
Other .............................................. 12,322 11,962
---------- ----------
$4,299,587 $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.
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 six-month and three-month periods ended
April 30, 2005 and 2004 is summarized as follows (amounts in thousands):
SIX MONTHS ENDED THREE MONTHS ENDED
APRIL 30, APRIL 30,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Interest capitalized,
beginning of period........................................................ $173,442 $154,314 $180,673 $167,828
Interest incurred ........................................................... 58,148 56,505 28,998 28,265
Interest expensed ........................................................... (49,938) (35,754) (28,126) (21,196)
Write-off to cost and expenses .............................................. (855) (649) (748) (481)
-------- -------- -------- --------
Interest capitalized, end of period ......................................... $180,797 $174,416 $180,797 $174,416
======== ======== ======== ========
The Company evaluates its land purchase contracts in accordance with the
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51" as amended by FIN 46R. Pursuant to
FIN 46, an enterprise that absorbs a majority of the expected losses of the
variable interest entities ("VIE") must consolidate the VIE. A VIE is an
entity with insufficient equity investment or in which the equity investors
lack some of the characteristics of a controlling financial interest. At
April 30, 2005 and October 31, 2004, the Company had recorded $20.3 million
and $15.4 million of land purchase contracts, respectively, as inventory
pursuant to the terms of FIN 46.
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 April 30, 2005, the
Company had approximately $59.7 million invested in or advanced to these joint
ventures and was committed to contributing additional capital in an aggregate
amount of approximately $112.0 million if the joint ventures require it. At
April 30, 2005, one of the joint ventures had obtained third-party financing
of $535 million, of which the Company had guaranteed approximately $53.6
million, its pro-rata share of the amount financed. The Company expects that
another of the joint ventures will obtain third-party financing for the
acquisition and general site improvements of its land project and that the
Company and the other joint venture partners will be required to guarantee
their pro rata portions of the loan. If the financing is completed and the
6
Company guarantees its portion of the loan, the Company's unfunded commitment
to the joint venture will be reduced by the amount guaranteed.
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 in Hoboken, New Jersey. At
April 30, 2005, the Company had investments in and advances to the joint
venture of $30.2 million and was committed to making up to $1.0 million of
additional investments in and advances to it. The joint venture has obtained a
loan to finance a portion of the construction, of which the Company and its
joint venture partner each have guaranteed $25.0 million of principal amount
of the loan. The Company expects that the joint venture will obtain additional
third-party financing to fund the remaining portion of the construction of
this project and that the Company and the other joint venture partner may be
required to guarantee their pro-rata portions of any additional loans.
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 April 30, 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
April 30, 2005, the Company's investment in this joint venture was $10.7
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 April 30, 2005, the Company had an
investment of $6.1 million in the Trust. The Company provides development,
finance and management services to the Trust and received fees under the terms
of various agreements in the amount of $1.5 million and $1.1 million in the
six-month and three-month periods ended April 30, 2005, respectively. 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.
4. ACCRUED EXPENSES
Accrued expenses consisted of the following (amounts in thousands):
APRIL 30, OCTOBER 31,
2005 2004
--------- -----------
Land, land development
and construction costs............................. $287,331 $229,045
Compensation and employee benefit costs ............. 81,186 89,865
Warranty costs ...................................... 46,058 42,133
Other ............................................... 196,765 213,159
-------- --------
$611,340 $574,202
======== ========
7
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 six-month and three-month periods ended April 30, 2005 and 2004 are as
follows (amounts in thousands):
THREE MONTHS
SIX MONTHS ENDED ENDED
APRIL 30, APRIL 30,
------------------ -----------------
2005 2004 2005 2004
-------- ------- ------- -------
Balance, beginning of period ................................................... $ 42,133 $33,752 $43,479 $34,027
Additions ...................................................................... 15,512 9,920 8,830 6,035
Charges incurred ............................................................... (11,587) (7,447) (6,251) (3,837)
-------- ------- ------- -------
Balance, end of period ......................................................... $ 46,058 $36,225 $46,058 $36,225
======== ======= ======= =======
6. EMPLOYEE RETIREMENT PLAN
In October 2004, the Company established an unfunded defined benefit
retirement plan effective as of September 1, 2004. For the six-month and
three-month periods ended April 30, 2005, the Company recognized the following
costs related to this plan (amounts in thousands):
SIX MONTHS ENDED THREE MONTHS ENDED
APRIL 30, 2005 APRIL 30, 2005
---------------- ------------------
Service cost .......................... $ 156 $ 78
Interest cost ......................... 388 194
Amortization of initial benefit
obligation........................... 1,901 951
------ ------
$2,445 $1,223
====== ======
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 operates in 20 states and is subject to various state tax
jurisdictions. The Company estimates its state tax liability based upon the
individual taxing authorities' regulations, estimates of income and its ability
to utilize certain tax saving strategies. Due primarily to a change in the
Company's estimate of the allocation of income to the various taxing
jurisdictions, the Company's estimated effective state income tax rate for
fiscal 2005 has been revised to 4.6% from the estimated effective state income
tax rate of 5.4% used at January 31, 2005.
Provisions for federal and state income taxes are calculated on reported
pre-tax earnings based on current tax law and also include, in the current
period, the cumulative effect of any changes in tax rates from those used
previously in determining deferred tax assets and liabilities. Such provisions
differ from the amounts currently receivable or payable because certain items
of income and expense are recognized for financial reporting purposes in
different periods than for income tax purposes. Significant judgment is
required in determining income tax provisions and evaluating tax positions. We
establish reserves for income taxes when, despite the belief that our tax
positions are fully supportable, we believe that our positions may be
challenged and disallowed by various tax authorities. The consolidated tax
provision and related accruals include the impact of such reasonably estimable
disallowances as deemed appropriate. To the extent that the probable tax
outcome of these matters changes, such changes in estimate will impact the
income tax provision in the period in which such determination is made.
The Company's estimated combined federal and state income tax rate before
providing for the effect of permanent book-tax differences ("Base Rate") was
38.0% in 2005 and 37.0% in 2004. The increase in the Base Rate was due primarily
to an increase in the Company's estimated state income tax rate. The increase in
the
8
estimated 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 six-month periods ended April 30, 2005 and
2004 were 38.0% and 36.7% respectively. The effective rate for the six-month
period ended April 30, 2005 was positively impacted by the effect of tax free
income offset by the recomputation of the Company's net deferred tax
liability. For the six-month period ended April 30, 2004, the primary
difference between the effective rate and the Base Rate was the effect of tax
free income.
The effective tax rates for the three-month periods ended April 30, 2005 and
2004 were 36.5% and 36.7% respectively. The difference between the effective
rate and the Base Rate in the fiscal 2005 period was the effect of an
adjustment due to the recomputation of the Company's net deferred tax
liability of approximately $2.1 million and the recalculation of the tax
provision for the three-month period ended January 31, 2005 of approximately
$.9 million resulting from a change in the Company's estimated Base Rate from
38.5% at January 31, 2005 to 38.0% at April 30, 2005 and by tax-free income.
For the three-month period ended April 30, 2004, the primary difference
between the effective rate and the Base Rate was the effect of tax free
income.
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, 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 valuation of the
fiscal 2005 grants.
Under the terms of the Company's stock option grants, options are exercisable
for a period of 10 years and vest over a period of two to four years, provided
the grantee remains in the employ of the Company during the vesting period. The
pro forma disclosure disclosed below reflects the amortization of the stock
option expense over the expected vesting period.
The weighted-average assumptions used for stock option grants in fiscal 2005
and 2004 were approximately:
2005 2004
----- -----
Weighted-average risk-free interest rate ...................... 3.64% 3.73%
Weighted-average expected life (years) ........................ 5.70 6.99
Weighted-average volatility ................................... 31.31% 42.97%
Dividends ..................................................... none none
9
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 six-month and three-month periods ended April 30, 2005 and 2004 were
as follows (amounts in thousands, except per share amounts):
SIX MONTHS ENDED THREE MONTHS ENDED
APRIL 30, APRIL 30,
------------------- ------------------
2005 2004 2005 2004
-------- -------- -------- -------
Net income............................................................. As reported $280,326 $122,522 $170,133 $72,438
Pro forma $272,617 $115,315 $166,133 $68,429
Basic net income per share............................................. As reported $ 3.66 $ 1.65 $ 2.20 $ 0.97
Pro forma $ 3.56 $ 1.56 $ 2.15 $ 0.92
Diluted net income per share........................................... As reported $ 3.34 $ 1.51 $ 2.01 $ 0.89
Pro forma $ 3.25 $ 1.42 $ 1.96 $ 0.84
Weighted-average grant date
fair value per share of
options granted...................................................... $ 23.34 $ 19.47 $ 23.34 $ 19.47
9. EARNINGS PER SHARE INFORMATION
Information pertaining to the calculation of earnings per share for the
six-month and three-month periods ended April 30, 2005 and 2004 are as follows
(amounts in thousands):
SIX MONTHS THREE MONTHS
ENDED ENDED
APRIL 30, APRIL 30,
--------------- ---------------
2005 2004 2005 2004
------ ------ ------ ------
Basic weighted average shares ....................................................... 76,570 74,123 77,313 74,406
Common stock equivalents ............................................................ 7,289 7,000 7,363 7,020
------ ------ ------ ------
Diluted weighted average shares ..................................................... 83,859 81,123 84,676 81,426
====== ====== ====== ======
10.
STOCKHOLDERS EQUITY
At April 30, 2005, the Company's authorized share capital consisted of 100
million shares of common stock, $.01 par value per share, and 1 million shares
of preferred stock, $.01 par value per share. At the Company's 2005 Annual
Meeting of Stockholders, the stockholders authorized the Board of Directors to
file amendments, from time to time, to the Company's Certificate of
Incorporation to increase the number of authorized shares of common stock up
to 400 million shares and the number of authorized shares of preferred stock
up to 15 million shares. Under a resolution adopted by the Board of Directors
of the Company on March 11, 2005, only 200 million of the 300 million
additional authorized shares of common stock may be used for any purpose other
than for stock splits, stock dividends and similar stock distributions to
stockholders unless prior stockholder approval is obtained.
The Company issued 11,000 shares of restricted common stock pursuant to its
Stock Incentive Plan (1998) to certain directors and an employee. The Company
is amortizing the fair market value of the awards on the date of grant over
the period of time that each award vests. At April 30, 2005, the Company had
11,000 shares of unvested restricted stock awards outstanding.
At April 30, 2005, the Company had approximately 77.6 million shares of
common stock outstanding, approximately 14.3 million shares of common stock
reserved for outstanding options, approximately 3.1 million shares of common
stock reserved for future option and award issuances, and approximately .4
million shares reserved for issuance under the Company's employee stock
purchase plan. At April 30, 2005, the Company had not issued any shares of
preferred stock.
In March 2003, the Company's Board of Directors authorized the repurchase of
up to 10 million shares of its common stock from time to time, in open market
transactions or otherwise, for the purpose of providing shares for its various
employee benefit plans. During the six-month and three-month periods ended
April 30, 2005, the Company repurchased 421,000 and 408,000 shares,
respectively. At April 30, 2005, the remaining number of shares that the
Company was authorized to repurchase was approximately 8.9 million shares.
10
11. COMMITMENTS AND CONTINGENCIES
At April 30, 2005, the Company had agreements to purchase land for future
development with an aggregate purchase price of approximately $2.6 billion,
including approximately $30.2 million of land from unconsolidated entities in
which the Company has investments in, advances to or on behalf of which the
Company has guaranteed loans. (See Note 3. "Investments in and Advances to
Unconsolidated Entities" for more information regarding these entities). The
Company's option contracts to acquire the home sites do not require the
Company to buy the home sites, although the Company may forfeit any deposit
balance outstanding if and at the time it terminates the option contract. The
Company has paid or deposited $149.3 million on these purchase agreements, of
which $104.2 was non-refundable. Any deposit in the form of a standby letter of
credit is recorded as a liability at the time the standby letter of credit is
issued. Included in accrued liabilities is $47.6 million representing the
Company's outstanding standby letters of credit issued in connection with the
purchase of home sites by the Company.
At April 30, 2005, the Company had outstanding surety bonds amounting to
approximately $669.5 million related primarily to its obligations to various
governmental entities to construct improvements in its various communities.
The Company estimates that approximately $265.4 million of work remains to be
performed on these improvements. The Company has an additional $87.7 million
of surety bonds outstanding which guarantee other of its obligations. The
Company does not believe that any outstanding bonds will be drawn upon.
At April 30, 2005, the Company had agreements of sale outstanding to deliver
8,561 homes with an aggregate sales value of approximately $5.9 billion.
At April 30, 2005, the Company was committed to provide approximately $632.6
million of mortgage loans to its home buyers and to others. All loans with
committed interest rates are covered by take-out commitments from third-party
lenders, which minimizes the Company's interest rate risk. The Company also
arranges a variety of mortgage programs that are offered to its home buyers
through outside mortgage lenders.
The Company has a $1.18 billion unsecured revolving credit facility with 29
banks that extends to July 15, 2009. At April 30, 2005, interest was payable
on borrowings under the facility at 0.625%, subject to adjustment based upon
the Company's debt rating and leverage ratios, above the Eurodollar rate or at
other specified variable rates as selected by it from time to time. At
April 30, 2005, the Company had no outstanding borrowings against the facility
and approximately $188.1 million of letters of credit outstanding under it.
Under the terms of the revolving credit agreement, the Company is not
permitted to allow its maximum leverage ratio, as defined in the agreement, to
exceed 2.00 to 1.00 and, at April 30, 2005, the Company was required to
maintain a minimum tangible net worth, as defined in the agreement, of
approximately $1.42 billion. At April 30, 2005, the Company's leverage ratio
was approximately .51 to 1.00 and its tangible net worth was approximately
$2.24 billion. Based upon the minimum tangible net worth requirement of the
revolving credit facility, the Company's ability to pay dividends and
repurchase its common stock was limited to approximately $1.01 billion at
April 30, 2005.
11
At April 30, 2005, the Company had 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, the Company was not permitted
to allow its maximum leverage ratio, as defined in the agreement, to exceed 2.25
to 1.00 and, at April 30, 2005, the Company was required to maintain a minimum
tangible net worth, as defined in the agreement, of approximately $1.04 billion.
At April 30, 2005, the Company's leverage ratio was approximately .50 to 1.00
and its tangible net worth was approximately $2.25 billion. Based upon the
minimum tangible net worth requirement of the term loan, the Company's ability
to pay dividends and repurchase its common stock was limited to approximately
$1.56 billion at April 30, 2005. On June 3, 2005, the Company repaid this term
loan (See Note 13. "Subsequent Events").
The Company is involved in various claims and litigation arising in the
ordinary course of business. The Company believes that the disposition of
these matters will not have a material effect on its business or on its
financial condition.
12. SUPPLEMENTAL DISCLOSURE TO STATEMENTS OF CASH FLOWS
The following are supplemental disclosures to the statements of cash flows
for the six months ended April 30, 2005 and 2004 (amounts in thousands):
2005 2004
-------- -------
Cash flow information:
Interest paid,
net of amount capitalized............................... $ 23,974 $13,614
======== =======
Income taxes paid....................................... $184,600 $54,584
======== =======
Non-cash activity:
Cost of inventory acquired through
seller financing....................................... $ 43,709 $25,820
======== =======
Income tax benefit related to
exercise of employee stock options..................... $ 48,827 $10,971
======== =======
Stock bonus awards...................................... $ 30,396 $20,288
======== =======
Contribution to employee retirement plan................ $ 1,301
======== =======
13. SUBSEQUENT EVENTS
In June 2005, Toll Brothers Finance Corp., a wholly-owned, indirect
subsidiary of the Company, sold $300 million of 5.15% Senior Notes due 2015. The
obligations of Toll Brothers Finance Corp. to pay principal, premiums, if any,
and interest are guaranteed jointly and severally on a senior basis by the
Company and substantially all of the Company's home building subsidiaries. The
guarantees are full and unconditional. The Company's non-homebuilding
subsidiaries and certain homebuilding subsidiaries did not guarantee the debt.
The Company will use a portion of the proceeds from the senior note offering to
redeem all of its outstanding $100 million 8% Senior Subordinated Notes due 2009
at 102.667% of principal amount. The remainder of the proceeds were used to
repay a portion of the Company's $222.5 million bank term loan on June 3, 2005.
The repayment and redemption will result in a pre-tax charge in the Company's
quarter ending July 31, 2005 of approximately $4.2 million which represents the
call premium on the notes, the loan termination charge and the write-off of the
unamortized issuance costs.
On June 2, 2005, the Company announced the acquisition of substantially all
of the assets of the Central Florida Division of Landstar Homes ("Landstar").
Landstar designs, constructs, markets and sells homes in the Orlando
Metropolitan area. For the full calendar year 2005, Landstar anticipates
delivering approximately 520 homes and producing revenues of approximately $150
million. The Company expects the acquisition of Landstar to have no effect on
earnings per share in its third quarter ending July 31, 2005 and to add
approximately $0.01 per share (diluted) in its fourth quarter ending October 31,
2005. The acquisition price of Landstar is not material to the financial
position of the Company.
12
14. SUPPLEMENTAL GUARANTOR INFORMATION
At April 30, 2005, Toll Brothers Finance Corp. (the "Subsidiary Issuer") was
the issuer of three series of senior notes aggregating $850 million. In June
2005, the Subsidiary Issuer issued a fourth series of senior notes. The
obligations of the Subsidiary Issuer to pay principal, premiums, if any, and
interest are guaranteed jointly and severally on a senior basis by the Company
and substantially all of its wholly-owned home building subsidiaries (the
"Guarantor Subsidiaries"). The guarantees are full and unconditional. The
Company's non-home building subsidiaries and certain home building subsidiaries
(the "Non-Guarantor Subsidiaries") did not guarantee the debt. Separate
financial statements and other disclosures concerning the Guarantor Subsidiaries
are not presented because management has determined that such disclosures would
not be material to investors. The Subsidiary Issuer has not had and does not
have any operations other than the issuance of the senior notes and the lending
of the proceeds from the senior notes to subsidiaries of the Company.
Supplemental consolidating financial information of the Company, the Subsidiary
Issuer, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the
eliminations to arrive at the Company on a consolidated basis are as follows:
CONDENSED CONSOLIDATING BALANCE SHEET AT APRIL 30, 2005 ($ IN THOUSANDS)
(UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
ASSETS
Cash and cash equivalents ................. 551,408 15,260 566,668
Inventory ................................. 4,299,262 325 4,299,587
Property, construction and office
equipment, net........................... 50,771 12,878 63,649
Receivables, prepaid expenses and
other assets............................. 4,657 92,408 82,133 (27,189) 152,009
Mortgage loans receivable ................. 78,663 78,663
Customer deposits held in escrow .......... 76,681 76,681
Investments in and advances to
unconsolidated entities.................. 114,196 114,196
Investments in and advances to
consolidated entities.................... 2,425,986 855,409 (1,110,035) (928) (2,170,432) --
--------- ------- ---------- ------- ---------- ---------
2,425,986 860,066 4,074,691 188,331 (2,197,621) 5,351,453
========= ======= ========== ======= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable ............................ 353,958 4,964 358,922
Senior notes ............................. 845,914 845,914
Senior subordinated notes ................ 450,000 450,000
Mortgage company
warehouse loan.......................... 69,108 69,108
Customer deposits ........................ 389,265 389,265
Accounts payable ......................... 202,884 34 202,918
Accrued expenses ......................... 14,152 537,220 87,227 (27,259) 611,340
Income taxes payable ..................... 149,964 (2,000) 147,964
--------- ------- ---------- ------- ---------- ---------
Total liabilities....................... 149,964 860,066 1,933,327 159,333 (27,259) 3,075,431
--------- ------- ---------- ------- ---------- ---------
Stockholders' equity
Common stock ............................. 776 2,003 (2,003) 776
Additional paid-in capital ............... 251,646 4,420 2,734 (7,154) 251,646
Retained earnings ........................ 2,051,056 2,136,944 24,261 (2,161,205) 2,051,056
Unearned compensation .................... (834) (834)
Treasury stock, at cost .................. (26,622) (26,622)
--------- ------- ---------- ------- ---------- ---------
Total stockholders' equity.............. 2,276,022 -- 2,141,364 28,988 (2,170,362) 2,276,022
--------- ------- ---------- ------- ---------- ---------
2,425,986 860,066 4,074,691 188,331 (2,197,621) 5,351,453
========= ======= ========== ======= ========== =========
13
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 AND 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) (52,541)
--------- ------- ---------- ------- ---------- ---------
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
========= ======= ========== ======= ========== =========
14
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED APRIL 30,
2005 ($ IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 2,215,095 2,215,095
Land sales ............................... 11,025 11,025
Equity earnings .......................... 5,308 5,308
Interest and other ....................... 25,705 14,717 21,943 (46,373) 15,992
Earnings from subsidiaries ............... 451,840 (451,840) --
------- ------ --------- ------ -------- ---------
451,840 25,705 2,246,145 21,943 (498,213) 2,247,420
------- ------ --------- ------ -------- ---------
Costs and expenses:
Home sales ............................... 1,514,952 2,306 (1,116) 1,516,142
Land sales ............................... 6,095 6,095
Selling, general and administrative ...... 18 281 223,404 12,354 (12,634) 223,423
Interest ................................. 25,424 49,854 1,142 (26,482) 49,938
------- ------ --------- ------ -------- ---------
18 25,705 1,794,305 15,802 (40,232) 1,795,598
------- ------ --------- ------ -------- ---------
Income before income taxes ................ 451,822 -- 451,840 6,141 (457,981) 451,822
Income taxes .............................. 171,496 169,957 2,334 (172,291) 171,496
------- ------ --------- ------ -------- ---------
Net income ................................ 280,326 -- 281,883 3,807 (285,690) 280,326
------- ------ --------- ------ -------- ---------
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE SIX MONTHS ENDED APRIL 30,
2004 ($ IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 1,403,886 1,403,886
Land sales ............................... 7,998 7,998
Equity earnings .......................... 1,394 1,394
Interest and other ....................... 20,872 3,502 15,042 (35,297) 4,119
Earnings from subsidiaries ............... 193,494 (193,494) --
------- ------ --------- ------ -------- ---------
193,494 20,872 1,416,780 15,042 (228,791) 1,417,397
------- ------ --------- ------ -------- ---------
Costs and expenses:
Home sales ............................... 1,005,951 1,781 (681) 1,007,051
Land sales ............................... 6,806 6,806
Selling, general and administrative ...... 3 214 167,069 9,627 (10,366) 166,547
Interest ................................. 20,658 35,712 579 (21,195) 35,754
Expenses related to
early retirement of debt................ 7,748 7,748
------- ------ --------- ------ -------- ---------
3 20,872 1,223,286 11,987 (32,242) 1,223,906
------- ------ --------- ------ -------- ---------
Income before income taxes ................ 193,491 -- 193,494 3,055 (196,549) 193,491
Income taxes .............................. 70,969 70,970 1,129 (72,099) 70,969
------- ------ --------- ------ -------- ---------
Net income ................................ 122,522 -- 122,524 1,926 (124,450) 122,522
------- ------ --------- ------ -------- ---------
15
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
APRIL 30, 2005 ($ IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 1,225,998 1,225,998
Land sales ............................... 9,800 9,800
Equity earnings .......................... 3,373 3,373
Interest and other ....................... 12,853 8,527 11,078 (23,349) 9,109
Earnings from subsidiaries ............... 267,839 (267,839) --
------- ------ --------- ------ -------- ---------
267,839 12,853 1,247,698 11,078 (291,188) 1,248,280
------- ------ --------- ------ -------- ---------
Costs and expenses:
Home sales ............................... 830,154 1,201 (706) 830,649
Land sales ............................... 5,316 5,316
Selling, general and administrative ...... 8 141 116,319 6,444 (6,554) 116,358
Interest ................................. 12,712 28,070 601 (13,257) 28,126
------- ------ --------- ------ -------- ---------
8 12,853 979,859 8,246 (20,517) 980,449
------- ------ --------- ------ -------- ---------
Income before income taxes ................ 267,831 -- 267,839 2,832 (270,761) 267,831
Income taxes .............................. 97,698 99,843 1,058 (100,901) 97,698
------- ------ --------- ------ -------- ---------
Net income ................................ 170,133 -- 167,996 1,774 (169,770) 170,133
------- ------ --------- ------ -------- ---------
CONDENSED CONSOLIDATING STATEMENT OF INCOME FOR THE THREE MONTHS ENDED
APRIL 30, 2004 ($ IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 814,309 814,309
Land sales ............................... 2,011 2,011
Equity earnings .......................... 729 729
Interest and other ....................... 11,025 2,112 8,695 (19,396) 2,436
Earnings from subsidiaries ............... 114,524 (114,524) --
------- ------ ------- ----- -------- -------
114,524 11,025 819,161 8,695 (133,920) 819,485
------- ------ ------- ----- -------- -------
Costs and expenses:
Home sales ............................... 584,072 932 (381) 584,623
Land sales ............................... 1,503 1,503
Selling, general and administrative ...... 3 118 90,138 5,191 (5,556) 89,894
Interest ................................. 10,907 21,176 364 (11,251) 21,196
Expenses related to
early retirement of debt................ 7,748 7,748
------- ------ ------- ----- -------- -------
3 11,025 704,637 6,487 (17,188) 704,964
------- ------ ------- ----- -------- -------
Income before income taxes ................ 114,521 -- 114,524 2,208 (116,732) 114,521
Income taxes .............................. 42,083 42,084 816 (42,900) 42,083
------- ------ ------- ----- -------- -------
Net income ................................ 72,438 -- 72,440 1,392 (73,832) 72,438
------- ------ ------- ----- -------- -------
16
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED
APRIL 30, 2005 ($ IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Cash flow from operating activities:
Net income ............................... 280,326 281,883 3,807 (285,690) 280,326
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization........... 249 7,874 855 8,978
Amortization of initial benefit
obligation............................. 1,901 1,901
Equity earnings in unconsolidated
entities............................... (5,308) (5,308)
Deferred tax provision.................. 12,993 12,993
Provision for inventory write-offs...... 2,554 2,554
Changes in operating assets and liabilities:
(Increase) decrease in inventory ...... (380,207) 35 (380,172)
Origination of mortgage loans ......... (368,422) (368,422)
Sale of mortgage loans ................ 389,672 389,672
(Increase) decrease in receivables,
prepaid expenses and other assets .... (294,104) (249) 12,160 (19,568) 296,369 (5,392)
Increase in customer deposits ......... 75,089 75,089
Increase in accounts
payable and accrued expenses ......... 30,397 43,901 21,059 (10,679) 84,678
Decrease in current income taxes
payable .............................. (26,097) (26,097)
-------- ---- ---------- -------- -------- ----------
Net cash provided by
operating activities................ 3,515 -- 39,847 27,438 -- 70,800
-------- ---- ---------- -------- -------- ----------
Cash flow from investing activities:
Purchase of property and equipment, net .. (14,715) (3,735) (18,450)
Purchase of marketable securities ........ (1,970,588) (1,970,588)
Sale of marketable securities ............ 2,080,617 5,000 2,085,617
Investments in unconsolidated affiliate .. (19,933) (19,933)
Distributions from unconsolidated
entities................................. 5,015 5,015
-------- ---- ---------- -------- -------- ----------
Net cash provided by investing
activities ......................... -- -- 80,396 1,265 -- 81,661
-------- ---- ---------- -------- -------- ----------
Cash flow from financing activities:
Proceeds from loans payable .............. 159,886 337,162 497,048
Principal payments of loans payable ...... (185,557) (359,603) (545,160)
Proceeds from stock based benefit plans .. 27,123 27,123
Unearned stock compensation .............. (834) (834)
Purchase of restricted shares ............ 886 886
Purchase of treasury stock ............... (30,690) (30,690)
-------- ---- ---------- -------- -------- ----------
Net cash used in
financing activities ............... (3,515) -- (25,671) (22,441) (51,627)
-------- ---- ---------- -------- -------- ----------
Net increase in cash
and cash equivalents ..................... -- -- 94,572 6,262 -- 100,834
Cash and cash equivalents, beginning of
period................................... 456,836 8,998 465,834
-------- ---- ---------- -------- -------- ----------
Cash and cash equivalents, end of period .. -- -- 551,408 15,260 -- 566,668
======== ==== ========== ======== ======== ==========
17
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED
APRIL 30, 2004 ($ IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Cash flow from operating activities:
Net income ............................... 122,522 122,524 1,926 (124,450) 122,522
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization........... 167 6,311 858 7,336
Equity earnings in unconsolidated
entities.............................. (1,394) (1,394)
Deferred tax provision.................. 3,600 3,600
Provision for inventory write-offs...... 1,225 1,225
Write-off of unamortized debt issuance
costs ................................. 841 841
Changes in operating assets and
liabilities:
Increase in inventory ................. (476,616) (250) (476,866)
Origination of mortgage loans ......... (313,592) (313,592)
Sale of mortgage loans ................ 293,049 293,049
(Increase) decrease in receivables,
prepaid expenses and other assets .... (162,353) (299,844) 323,800 (12,848) 131,600 (19,645)
Increase in customer deposits ......... 58,732 58,732
Increase in accounts
payable and accrued expenses ......... 21,590 2,245 43,452 14,039 (7,150) 74,176
Increase in current
income taxes payable ................. 12,784 9 12,793
-------- -------- ---------- -------- -------- ----------
Net cash provided by (used in)
operating activities................ (1,857) (297,432) 78,875 (16,809) -- (237,223)
-------- -------- ---------- -------- -------- ----------
Cash flow from investing activities:
Purchase of property and equipment, net .. (7,563) (504) (8,067)
Purchase of marketable securities ........ (1,169,177) (1,169,177)
Sale of marketable securities ............ 1,254,805 1,254,805
Investments in and advances to
unconsolidated entities................. (30,359) (30,359)
Distributions from unconsolidated
entities................................. 2,450 2,450
-------- -------- ---------- -------- -------- ----------
Net cash provided by (used in)
investing activities -- -- 50,156 (504) -- 49,652
-------- -------- ---------- -------- -------- ----------
Cash flow from financing activities:
Proceeds from loans payable .............. 160,542 268,066 428,608
Principal payments of loans payable ...... (173,583) (248,861) (422,444)
Net proceeds from issuance of
senior notes ........................... 297,432 297,432
Redemption of subordinated notes ......... (170,000) (170,000)
Proceeds from stock based benefit plans .. 10,820 10,820
Purchase of treasury stock ............... (8,963) (8,963)
-------- -------- ---------- -------- -------- ----------
Net cash provided by (used in)
financing activities 1,857 297,432 (183,041) 19,205 -- 135,453
-------- -------- ---------- -------- -------- ----------
Net (decrease) increase in cash
and cash equivalents ..................... -- -- (54,010) 1,892 -- (52,118)
Cash and cash equivalents, beginning of
period................................... 226,331 8,175 234,506
-------- -------- ---------- -------- -------- ----------
Cash and cash equivalents, end of period .. -- -- 172,321 10,067 -- 182,388
======== ======== ========== ======== ======== ==========
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
Revenues for the six-month and three-month periods ended April 30, 2005
increased by 59% and 52%, respectively, compared to the comparable periods of
fiscal 2004. Net income for the six-month and three-month periods ended
April 30, 2005 increased by 129% and 135%, respectively, compared to the
comparable periods of fiscal 2004. In addition, our backlog, homes under
contract but not yet delivered, at April 30, 2005 of $5.87 billion (8,561
homes) was up by 57% over our backlog at April 30, 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 many of the homes in
backlog and recognize the revenues and related income. Although our unit
deliveries for the three-month period ended April 30, 2005 were slightly below
the low end of our expected range of deliveries for the quarter ended April 30,
2005, we still expect that the total number of homes closed for fiscal 2005
will be between 8,100 and 8,400 homes, with an average delivered price between
$645,000 and $655,000. We estimate that net income will grow approximately 70%
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 68,000 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 only 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 April 30, 2005, we had $566.7 million of
cash and cash equivalents and approximately $991.9 million available under our
bank revolving credit facility which extends to July 15, 2009. In addition, a
significant portion of our debt does not mature until 2009 and beyond which we
believe gives us a stable financial platform on which to grow. In June 2005,
we issued $300 million of 5.15% Senior Notes due 2015. The proceeds from this
offering are expected to be used to redeem all of our $100 million of 8%
Senior Subordinated Notes due 2009 and were used to repay a portion of our
$222.5 million term loan on June 3, 2005. 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.
19
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"
("SFAS 144"). 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 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
$2.6 million and $.3 million in write-offs of costs related to current and
future communities in the six-month and three-month periods ended April 30,
2005, respectively, as compared to $1.2 million and $.3 million in the
comparable periods of fiscal 2004.
INCOME RECOGNITION
Revenues 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
20
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 April 30, 2005, we had
investments in and advances to these unconsolidated entities of $114.2
million, were committed to invest or advance an additional $114.5 million to
these entities if needed and had guaranteed approximately $78.6 million of
these entities' indebtedness. See Note 3 to the Condensed Consolidated
Financial Statements, "Investments in and Advances to Unconsolidated Entities"
for more information regarding these entities. Our total commitment to these
entities is not material to our financial condition. Investments in 20%-to-50%
owned entities are accounted for using the equity method. Investments in less
than 20%-owned entities are accounted for on the cost method.
RESULTS OF OPERATIONS
The following table sets forth, for the six-month and three-month periods
ended April 30, 2005 and 2004, a comparison of certain income statement items
related to our operations ($ in millions):
SIX MONTHS ENDED APRIL 30, THREE MONTHS ENDED APRIL 30,
-------------------------------- ------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- ------------
$ % $ % $ % $ %
------- ---- ------- ---- ------- ---- ----- ----
Home sales
Revenues .................................................. 2,215.1 1,403.9 1,226.0 814.3
Cost of sales ............................................. 1,516.1 68.4% 1,007.1 71.7% 830.6 67.8% 584.6 71.8%
Land sales
Revenues .................................................. 11.0 8.0 9.8 2.0
Cost of sales ............................................. 6.1 55.3% 6.8 85.1% 5.3 54.2% 1.5 74.7%
Equity earnings in
unconsolidated entities ................................... 5.3 1.4 3.4 0.7
Interest and other ......................................... 16.0 4.1 9.1 2.4
Total revenues ............................................. 2,247.4 1,417.4 1,248.3 819.5
Selling, general and
administrative expenses* .................................. 223.4 9.9% 166.5 11.8% 116.4 9.3% 89.9 11.0%
Interest expense* .......................................... 49.9 2.2% 35.8 2.5% 28.1 2.3% 21.2 2.6%
Expenses related to early
retirement of debt* ....................................... - 7.7 0.5% - 7.7 0.9%
Total costs and expenses* .................................. 1,795.6 79.9% 1,223.9 86.3% 980.4 78.5% 705.0 86.0%
Income before
income taxes* ............................................. 451.8 20.1% 193.5 13.7% 267.8 21.5% 114.5 14.0%
Income taxes ............................................... 171.5 71.0 97.7 42.1
Net income* ................................................ 280.3 12.5% 122.5 8.6% 170.1 13.6% 72.4 8.8%
- ---------------
* Percentages are based on total revenues.
Note: Amounts may not add due to rounding.
HOME SALES
Home sales revenues for the six-month and three-month periods ended April 30,
2005 were higher than those for the comparable periods of 2004 by
approximately $811.2 million, or 58%, and $411.7 million, or 51%,
respectively. The increase in the six-month period was attributable to a 37%
increase in the number of homes delivered and a 15% increase in the average
price of the homes delivered. The increase in the three-month period was
attributable to a 31% increase in the number of homes delivered and a 15%
increase in the average price of the homes delivered. The increase in the
average price of the homes delivered in the fiscal 2005 periods was the result
of increased selling prices and a shift in the location of homes delivered to
21
more expensive areas. The increase in the number of homes delivered in the
fiscal 2005 periods 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 42% increase in the number of new contracts signed in fiscal 2004
over fiscal 2003.
The value of new sales contracts signed in the six months ended April 30,
2005 was $3.65 billion (5,354 homes), a 46% increase over the $2.50 billion
(4,107 homes) value of new sales contracts signed in the comparable period of
fiscal 2004. The value of new sales contracts signed in the three months ended
April 30, 2005 was $2.20 billion (3,181 homes), a 38% increase over the $1.60
billion (2,595 homes) value of new sales contracts signed in the comparable
period of fiscal 2004. The increase in the six-month period was attributable
to a 30% increase in the number of new contracts signed and a 12% 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
three-month period was attributable to a 23% increase in the number of new
contracts signed and a 12% 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 April 30, 2005, we were selling from
227 communities compared to 205 communities at April 30, 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 recent period of economic uncertainty. At April 30, 2005, we
had over 68,000 home sites under our control nationwide in markets we consider
to be affluent.
At April 30, 2005, our backlog of homes under contract was $5.87 billion
(8,561 homes), 57% higher than the $3.73 billion (6,211 homes) backlog at
April 30, 2004. The increase in backlog at April 30, 2005 compared to the
backlog at April 30, 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 first six
months of fiscal 2005 as compared to the comparable period of fiscal 2004,
offset, in part, by an increase in the number of homes delivered in the first
six months of fiscal 2005 compared to the comparable period of fiscal 2004.
Based on the size and the expected delivery dates of our current backlog, we
believe that we will deliver between 8,100 and 8,400 homes in fiscal 2005 and
that the average delivered price of those homes will be between $645,000 and
$655,000.
Home costs as a percentage of home sales revenues decreased by 330 basis
points (3.30%) and 400 basis points in the six-month and three-month periods
ended April 30, 2005, respectively, compared to the comparable periods of
fiscal 2004. The decreases were largely the result of selling prices
increasing at a greater rate than costs, as well as from 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
by 330 to 350 basis points compared to the full 2004 fiscal year due to
selling prices continuing to increase at a greater rate than costs, as well as
from 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 and the profitability of such sales
will vary from quarter to quarter depending upon the timing of the delivery of
the specific land parcels sold. Land sales were $11.0 million for the six months
ended April 30, 2005 and $9.8 million for the three months ended April 30, 2005.
For the six-month and three-month periods ended April 30, 2004, land sales were
$8.0 million and $2.0 million, respectively. For the full 2005 fiscal year, land
sales are expected to be approximately $29.0 million, compared to $22.5 million
in fiscal 2004. Cost of land sales is expected to be approximately 72% of land
sales revenues in fiscal 2005, as compared to approximately 70% in fiscal 2004.
22
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 six months ended
April 30, 2005, we recognized $5.3 million of earnings from unconsolidated
entities as compared to $1.4 million in the comparable period of fiscal 2004.
For the three months ended April 30, 2005, we recognized $3.4 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 six months ended April 30, 2005, interest and other income was $16.0
million, an increase of $11.9 million from the $4.1 million recognized in the
comparable period of fiscal 2004. For the three months ended April 30, 2005,
interest and other income was $9.1 million, an increase of $6.7 million from
the $2.4 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 periods. For the full 2005 fiscal year, we
expect interest and other income to be approximately $30.0 million compared to
$15.4 million in fiscal 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A spending increased by $56.9 million, or 34%, in the six-month period
ended April 30, 2005 and by $26.5 million, or 29%, in the three-month period
ended April 30, 2005, compared to the comparable periods of fiscal 2004. The
increased spending was principally due to the costs incurred to support the
59% and 52% increases in revenues in the six-month and three-month periods of
fiscal 2005, respectively, compared to the comparable periods of fiscal 2004,
the costs associated with the increased number of communities from which we
were selling during the fiscal 2005 periods as compared to the comparable
periods 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 by 40 to
55 basis points 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. 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 approximately 2.2% and 2.3%
of revenues in the six-month and three-month periods of fiscal 2005,
respectively, compared to 2.5% and 2.6% in the comparable periods of fiscal
2004
For the full 2005 fiscal year, we expect interest expense as a percentage of
total revenues to be approximately 2.2% as compared to 2.4% in fiscal 2004.
INCOME BEFORE INCOME TAXES
For the six-month period ended April 30, 2005, income before taxes was
$280.3 million, an increase of 129% over the $122.5 million earned in the
comparable period of fiscal 2004. For the three-month period ended April 30,
2005, income before taxes was $170.1 million, an increase of 135% over the
$72.4 million earned in the comparable period of fiscal 2004.
23
INCOME TAXES
Income taxes were provided at an effective rate of 38.0% and 36.5% for the
six-month and three-month periods ended April 30, 2005, respectively. For each
of the six-month and three-month periods of fiscal 2004, income taxes were
provided at an effective rate of 36.7%. The difference in rates in fiscal 2005
compared to the comparable periods of fiscal 2004 was due primarily to a
change in our estimated Base Rate for the fiscal 2005 periods 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. See Note 7 to the Condensed Consolidated
Financial Statements, "Income Taxes" for additional information regarding the
change in the income tax rates and the impact on the financial statements.
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
determines 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 April 30, 2005, we had commitments to acquire land of
approximately $2.6 billion, of which approximately $149.3 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.
In June 2005, we issued $300 million of 5.15% Senior Notes due 2015. We
expect to use the net proceeds from the issuance of the notes to redeem all of
our $100 million Senior Subordinated Notes due 2009 and have used the
remainder to repay a portion of our $222.5 million bank term loan which was
repaid in full on June 3, 2005. On May 31, 2005, we gave notice to the trustee
of our 8% Senior Subordinated Notes due 2009 that we will redeem the $100
million of outstanding notes on June 30, 2005. We expect to recognize a charge
of approximately $4.2 million related to the redemption of the notes and
repayment of the term loan in our quarter ending July 31, 2005.
We have a $1.18 billion bank credit facility which extends through July
2009. At April 30, 2005, we did not have any borrowings under the facility and
had approximately $188.1 million of letters of credit outstanding under it.
24
We believe that we will be able to continue to fund our expected growth and
meet our contractual obligations through a combination of existing cash
resources, cash flow from operating activities, our existing sources of credit
and the public debt markets.
INFLATION
The long-term impact of inflation on us is manifested in increased costs for
land, land development, construction and overhead, as well as in increased
sales prices of our homes. We generally contract for land significantly before
development and sales efforts begin. Accordingly, to the extent land
acquisition costs are fixed, increases or decreases in the sales prices of
homes may affect our profits. Because the sales price of each of our homes is
fixed at the time a buyer enters into a contract to acquire a home, and
because we generally contract to sell our homes before we begin construction,
any inflation of costs in excess of those anticipated may result in lower
gross margins. We generally attempt to minimize that effect by entering into
fixed-price contracts with our subcontractors and material suppliers for
specified periods of time, which generally do not exceed one year.
In general, housing demand is adversely affected by increases in interest
rates and housing costs. Interest rates, the length of time that land remains
in inventory and the proportion of inventory that is financed affect our
interest costs. If we are unable to raise sales prices enough to compensate
for higher costs, or if mortgage interest rates increase significantly,
affecting prospective buyers' ability to adequately finance home purchases,
our revenues, gross margins and net income would be adversely affected.
Increases in sales prices, whether the result of inflation or demand, may
affect the ability of prospective buyers to afford new homes.
HOUSING DATA
($ IN MILLIONS)
SIX MONTHS ENDED APRIL 30,
CLOSINGS ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
-------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT,MA,NH,NJ,NY,RI) ............................................................... 483 399 263.6 229.4
Mid-Atlantic (DE,MD,PA,VA) .................................................................. 1,422 939 845.6 475.5
Midwest (IL,MI,OH) .......................................................................... 236 171 146.1 99.6
Southeast (FL,NC,SC,TN) ..................................................................... 352 313 189.7 145.1
Southwest (AZ,CO,NV,TX) ..................................................................... 553 339 344.8 189.2
West (CA) ................................................................................... 456 387 425.3 265.1
----- ----- ------- -------
Total consolidated entities............................................................... 3,502 2,548 2,215.1 1,403.9
Unconsolidated entities................................................................... 150 11 64.9 3.4
----- ----- ------- -------
3,652 2,559 2,280.0 1,407.3
===== ===== ======= =======
SIX MONTHS ENDED APRIL 30,
NEW CONTRACTS ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
-------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT,MA,NH,NJ,NY,RI) ............................................................... 814 504 519.5 300.3
Mid-Atlantic (DE,MD,PA,VA) .................................................................. 1,944 1,438 1,255.5 799.6
Midwest (IL,MI,OH) .......................................................................... 324 307 222.4 184.0
Southeast (FL,NC,SC,TN) ..................................................................... 844 442 467.7 216.8
Southwest (AZ,CO,NV,TX) ..................................................................... 945 658 657.8 391.8
West (CA) ................................................................................... 483 758 524.7 610.3
----- ----- ------- -------
Total consolidated entities............................................................... 5,354 4,107 3,647.6 2,502.8
Unconsolidated entities................................................................... 159 10 100.7 3.2
----- ----- ------- -------
5,513 4,117 3,748.3 2,506.0
===== ===== ======= =======
25
THREE MONTHS ENDED APRIL 30,
CLOSINGS --------------------------------
2005 2004 2005 2004
----- ----- ------- -----
REGION UNITS UNITS $ $
---------------------------------------------------------------------------------------------- ----- ----- ------- -----
Northeast (CT,MA,NH,NJ,NY,RI) ................................................................. 254 216 140.3 124.8
Mid-Atlantic (DE,MD,PA,VA) .................................................................... 759 534 458.7 274.1
Midwest (IL,MI,OH) ............................................................................ 141 99 89.1 58.6
Southeast (FL,NC,SC,TN) ....................................................................... 197 192 105.4 91.5
Southwest (AZ,CO,NV,TX) ....................................................................... 305 190 188.9 107.4
West (CA) ..................................................................................... 256 232 243.6 157.9
----- ----- ------- -----
Total consolidated entities................................................................. 1,912 1,463 1,226.0 814.3
Unconsolidated entities..................................................................... 87 6 38.4 1.9
----- ----- ------- -----
1,999 1,469 1,264.4 816.2
===== ===== ======= =====
THREE MONTHS ENDED APRIL 30,
NEW CONTRACTS ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
-------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT,MA,NH,NJ,NY,RI) ............................................................... 495 282 318.8 162.5
Mid-Atlantic (DE,MD,PA,VA) .................................................................. 1,177 911 784.1 515.8
Midwest (IL,MI,OH) .......................................................................... 212 187 144.4 112.3
Southeast (FL,NC,SC,TN) ..................................................................... 463 268 262.3 131.3
Southwest (AZ,CO,NV,TX) ..................................................................... 579 425 403.5 248.3
West (CA) ................................................................................... 255 522 291.4 429.8
----- ----- ------- -------
Total consolidated entities............................................................... 3,181 2,595 2,204.5 1,600.0
Unconsolidated entities................................................................... 123 5 85.2 1.6
----- ----- ------- -------
3,304 2,600 2,289.7 1,601.6
===== ===== ======= =======
APRIL 30,
BACKLOG ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
-------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT,MA,NH,NJ,NY,RI) ............................................................... 1,359 1,037 855.4 590.4
Mid-Atlantic (DE,MD,PA,VA) .................................................................. 2,767 2,173 1,782.3 1,161.2
Midwest (IL,MI,OH) .......................................................................... 534 430 360.6 247.7
Southeast (FL,NC,SC,TN) ..................................................................... 1,218 540 741.4 289.9
Southwest (AZ,CO,NV,TX) ..................................................................... 1,743 1,028 1,162.7 599.5
West (CA) ................................................................................... 940 1,003 964.0 842.2
----- ----- ------- -------
Total consolidated entities............................................................... 8,561 6,211 5,866.4 3,730.9
Unconsolidated entities................................................................... 183 14 111.7 4.5
----- ----- ------- -------
8,744 6,225 5,978.1 3,735.4
===== ===== ======= =======
26
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 April 30, 2005, our debt obligations,
principal cash flows by scheduled maturity, weighted-average interest rates
and estimated fair value (amounts in thousands):
FIXED-RATE DEBT (2) VARIABLE-RATE DEBT(1)(3)
-------------------------- ------------------------
WEIGHTED WEIGHTED
FISCAL YEAR OF AVERAGE AVERAGE
EXPECTED MATURITY AMOUNT INTEREST RATE AMOUNT INTEREST RATE
------------------------------------------------------------------------ ---------- ------------- -------- -------------
2005 .................................................................... $257,053 7.43% $69,108 4.09%
2006 .................................................................... 36,040 5.39% 150 2.57%
2007 .................................................................... 54,312 6.84% 150 2.57%
2008 .................................................................... 5,011 6.02% 150 2.57%
2009 .................................................................... 101,396 7.98% 150 2.57%
Thereafter .............................................................. 1,200,800 6.60% 3,710 2.57%
Discount ................................................................ (4,086)
---------- -------
Total................................................................. $1,650,526 6.80% $73,418 4.00%
========== =======
Fair value at
April 30, 2005 .......................................................... $1,708,840 $73,418
========== =======
- ---------------
(1) At April 30, 2005, we had a $1.18 billion unsecured revolving credit
facility with 29 banks which extends to July 2009. At April 30, 2005, we
had no borrowings and approximately $188.1 million of letters of credit
outstanding under the facility. At April 30, 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) In June 2005, one of our subsidiaries issued $300 million of 5.15% Senior
Notes due 2015. The proceeds from the sale are expected to be used to
redeem all of our $100 million of Senior Subordinated Notes due 2009 on
June 30, 2005 and the remainder was used to repay a portion of our $222.5
million bank term loan.
(3) 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 April 30, 2005, the subsidiary had $69.1 million
outstanding under the line at an average interest rate of 4.09 %. Borrowing
under this line is included in the 2005 fiscal year maturities.
Based upon the amount of variable rate debt outstanding at April 30, 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.
ITEM 4. CONTROLS AND PROCEDURES
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls must be
considered relative to costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have
been
27
detected. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Our chief executive officer and chief financial officer, with the assistance
of management, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this report (the
"Evaluation Date"). Based on that evaluation, our chief executive officer and
chief financial officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective to ensure that information
that is required to be disclosed in our reports under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to management, including our chief
executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
There has not been any change in our internal control over financial
reporting during our quarter ended April 30, 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 April 30, 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 PLAN OR PROGRAM (2)
------------------------------------------------------------- ------------- -------- --------------- -------------------
February 1, 2005 February 28, 2005 ........................... 2 83.56 2 9,268
March 1, 2005 to March 31, 2005 .............................. 66 76.08 66 9,202
April 1, 2005 to April 30, 2005 .............................. 340 74.69 339 8,863
--- ---
Total...................................................... 408 74.97 407
=== ===
- ---------------
(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 April 30, 2005, we
received 1,263 shares with an average fair market value per share of $80.12
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 did not repurchase any of our equity
securities.
28
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Our 2005 Annual Meeting of Stockholders was held on March 17, 2005.
The following proposals were submitted to and approved by stockholders at
the 2005 Annual Meeting. There were 73,287,800 shares of Common Stock eligible
to vote at the 2005 Annual Meeting.
1. The election of three directors to hold office until the 2008 Annual
Meeting of Stockholders and until their respective successors are duly elected
and qualified.
NOMINEE FOR WITHHELD AUTHORITY
-------------------------------------------- ---------- ------------------
Robert I. Toll 70,184,262 1,373,941
Bruce E. Toll 69,729,824 1,828,379
Joel H. Rassman 69,826,880 1,731,324
The directors whose term of office continued subsequent to the 2005 Annual
Meeting of Stockholders were: Zvi Barzilay, Robert S. Blank, Edward G. Boehne,
Richard J. Braemer, Roger S. Hillas, Carl B. Marbach, Stephen A. Novick and
Paul E. Shapiro.
2. The approval of amendments to the Company's Certificate of Incorporation
to increase the authorized shares of the Company's capital stock.
FOR AGAINST ABSTAIN
-------------------------------------------------------- --------- -------
44,053,200 7,600,044 40,844
3. The approval of an amendment to the Toll Brothers, Inc. Cash Bonus Plan.
FOR AGAINST ABSTAIN
-------------------------------------------------------- --------- -------
47,534,166 4,079,587 43,317
4. The approval of an amendment to the Toll Brothers, Inc. Executive Officer
Cash Bonus Plan.
FOR AGAINST ABSTAIN
-------------------------------------------------------- --------- -------
49,836,994 1,769,630 76,075
5. The approval of the re-appointment of Ernst & Young LLP as our independent
registered public accounting firm for the 2005 fiscal year.
FOR AGAINST ABSTAIN
---------------------------------------------------------- ------- -------
70,747,014 838,119 30,349
ITEM 5. OTHER INFORMATION
None
29
ITEM 6. EXHIBITS
4.1* Eighth Supplemental Indenture dated as of January 31, 2005 by and
among the parties listed on Schedule A thereto, and J.P. Morgan
Trust Company, National Association, as successor Trustee.
10.1 Toll Brothers, Inc. Cash Bonus Plan, as amended and approved by
stockholders on March 17, 2005, is hereby incorporated by
reference to Exhibit 10.1 of the Registrant's Form 8-K filed with
the Securities and Exchange Commission on April 4, 2005.
10.2 Toll Brothers, Inc. Executive Officer Cash Bonus Plan, as amended
and approved by stockholders on March 17, 2005, is hereby
incorporated by reference to Exhibit 10.2 of the Registrant's
Form 8-K filed with the Securities and Exchange Commission on
April 4, 2005.
10.3 Toll Brothers, Inc. Stock Incentive Plan (1998) Form of Employee
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 April 8, 2005.
10.4 Toll Brothers, Inc. Executive Officer Cash Bonus Plan 2005
Performance Goals, as amended on April 28, 2005, is hereby
incorporated by reference to Exhibit 10.1 of the Registrant's
Form 8-K filed with the Securities and Exchange Commission on
April 29, 2005.
10.5 Agreement to Abolish Stock Redemption Agreement between Robert I.
Toll and Toll Brothers, Inc. dated April 28, 2005 is hereby
incorporated by reference to Exhibit 10.1 of the Registrant's
Form 8-K filed with the Securities and Exchange Commission on
May 3, 2005.
10.6 Agreement to Abolish Stock Redemption Agreement between Bruce E.
Toll and Toll Brothers, Inc. dated April 28, 2005 is hereby
incorporated by reference to Exhibit 10.1 of the Registrant's
Form 8-K filed with the Securities and Exchange Commission on
May 3, 2005.
10.7 Advisory and Non-Competition Agreement between Toll Brothers, Inc.
and Bruce E. Toll dated as of November 1, 2004 is hereby
incorporated by reference to Exhibit 10.1 of the Registrant's
Form 8-K filed with the Securities and Exchange Commission on
February 1, 2005.
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.
30
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: June 9, 2005 By: Joel H. Rassman
-----------------------
Joel H. Rassman
Executive Vice
President,
Treasurer and Chief
Financial Officer
(Principal Financial
Officer)
Date: June 9, 2005 By: Joseph R. Sicree
-----------------------
Joseph R. Sicree
Vice President --
Chief Accounting
Officer
(Principal Accounting
Officer)
31