The value of new sales contracts signed was $3.50 billion (4,871 homes) in the nine-month period ended July 31, 2006, a 36% decrease compared to the value of contracts signed in the comparable period of fiscal 2005 of $5.49 billion (7,996 homes). This decrease is attributable to a 39% decrease in the number of new contracts signed, offset in part by a 5% increase in the average value of each contract.
For the three-month period ended July 31, 2006, the value of new sales contracts signed was $1.01 billion (1,400 homes), a 46% decrease compared to the value of contracts signed in the comparable period of fiscal 2005 of $1.87 billion (2,705 homes). This decrease is attributable to a 48% decrease in the number of new contracts signed, offset in part by a 5% increase in the average value of each contract.
We believe this slowdown is attributable to a decline in consumer confidence, an overall softening of demand for new homes and an oversupply of homes available for sale. We attribute the reduction in demand to concerns on the part of prospective home buyers about the direction of home prices, due in part to many homebuilders advertising price reductions and increased sales incentives, and concerns about being able to sell their existing homes. In addition, we believe speculators and investors are no longer helping to fuel demand. We try to avoid selling homes to speculators and we generally do not build unattached homes without having a signed agreement of sale. Nonetheless, we have been impacted by an overall increase in the supply of homes available for sale in many markets as speculators attempt to sell the homes they previously purchased or cancel contracts for homes under construction, and as builders who, as part of their business strategy, were building homes in anticipation of capturing additional sales in a demand driven market attempt to reduce their inventories by lowering prices and adding incentives. In addition, based on the high cancellation rates reported by other builders, and on the increased cancellation rates we have experienced, non-speculative buyer cancellations are also adding to the supply of homes in the marketplace. In the nine-month and three-month periods ended July 31, 2006, our cancellation rates were approximately 12% and 18% of contracts signed, respectively. This compares to our historical average cancellation rate of approximately 7%, and an average cancellation rate of 4.6% in each of fiscal 2005 and 2004.
Despite this slowdown, we remain cautiously optimistic about the future growth of our business. Our industry demographics remain strong due to the continuing regulation-induced constraints on lot supplies and the growing number of affluent households. We believe the excess supply of available homes is a short-term phenomenon and that the market environment of tight supply and growing demand will return.
At July 31, 2006, we were selling from 295 communities compared to 230 communities at July 31, 2005 and October 31, 2005. We expect to be selling from approximately 300 communities at October 31, 2006.
At July 31, 2006, our backlog of traditional homes under contract was $5.18 billion (7,362 homes), 18% lower than the $6.29 billion (9,330 homes) backlog at July 31, 2005. The decrease in backlog at July 31, 2006 compared to the backlog at July 31, 2005 is primarily attributable to the decrease in the value and number of new contracts signed in the nine-month period ended July 31, 2006 as compared to the comparable period of fiscal 2005, and by higher deliveries in the nine-month period ended July 31, 2006 as compared to the comparable period of fiscal 2005, offset in part by a higher backlog at October 31, 2005 as compared to the backlog at October 31, 2004.
Home costs before interest expense as a percentage of home sales revenue were higher in the nine-month and three-month periods ended July 31, 2006 as compared to the comparable periods of fiscal 2005. The increases were largely the result of the costs of land and construction increasing faster then selling prices, higher sales incentives given on the homes delivered in the fiscal 2006 periods as compared to those delivered in the fiscal 2005 periods, higher overhead costs and higher inventory write-offs. We recognized $37.0 million and $23.9 million of write-offs of costs related to current and future communities in the nine-month and three-month periods ended July 31, 2006, respectively, as compared to $3.7 million and $1.2 million in the comparable periods of fiscal 2005. The write-offs in the nine-month period ended July 31, 2006 were attributable primarily to the write-off of deposits and predevelopment costs attributable to a number of land purchase contracts that we decided not to go forward with and the write-down of the carrying cost of several communities in Michigan and Massachusetts. The write-offs in the three-month period ended July 31, 2006 were attributable primarily to the write-off of deposits and predevelopment costs attributable to a number of land purchase contracts that we decided not to go forward with and the write-down of the carrying cost of one community in Michigan.
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As we stated in the guidance we provided on August 22, 2006 (which is not being reconfirmed or updated in this Form 10-Q), based on the size of our current backlog and the expected demand for our product, we believe that: we will deliver between 8,600 and 8,900 homes in fiscal 2006 and that the average delivered price of those homes will be between $685,000 and $690,000; for the full 2006 fiscal year, we expect that home costs before interest expense as a percentage of home sales revenues will be between 69.9% and 70.0% as compared to 67.8% for the full 2005 fiscal year; and in the fiscal year ending October 31, 2007, we expect to deliver between 7,000 and 8,000 homes at an average delivered price of between $635,000 and $645,000.
Percentage of Completion Revenues and Costs
We are developing several projects for which we are recognizing revenues and costs using the percentage of completion method of accounting. Revenues and costs of individual projects are recognized on the individual project’s aggregate value of units for which home buyers have signed binding agreements of sale and are based on the percentage of total estimated construction costs that have been incurred. Total estimated revenues and construction costs are reviewed periodically and any change is applied to current and future periods. We began recognizing revenue and costs using percentage of completion accounting on several projects in fiscal 2006. In the nine-month and three-month periods ended July 31, 2006, we recognized $138.7 million and $41.2 million of revenues, respectively, and $110.5 million and $32.0 million of costs before interest expense, respectively, on these projects. At July 31, 2006, our backlog of homes in communities that we account for using the percentage of completion method of accounting was $413.6 million compared to $142.5 million at July 31, 2005.
The guidance we gave on August 22, 2006 stated that, for the full 2006 fiscal year, we believe that, revenues recognized under the percentage of completion accounting method will be between $215 million and $220 million and costs before interest expense will be approximately 79.0% of revenues, and that, in the fiscal year ending October 31, 2007, we expect to recognize between $450 million and $550 million of revenues under the percentage of completion accounting method.
Land Sales Revenues and Costs
We are developing several communities in which we expect to sell a portion of the land to other builders or entities. The amount and profitability of land sales will vary from period to period depending upon the timing of the sale and delivery of the specific land parcels. In the nine-month and three-month periods ended July 31, 2006, land sales were $7.9 million and $1.1 million, respectively. Cost of land sales before interest expense was approximately $6.8 million and $.9 million in the nine-month and three-month periods ended July 31, 2006, respectively. In the nine-month and three-month periods ended July 31, 2005, land sales were $21.6 million and $10.6 million, respectively. Cost of land sales before interest expense was $15.7 million and $9.6 million in the nine-month and three-month periods ended July 31, 2005, respectively.
The guidance we gave on August 22, 2006 stated that, for the full fiscal 2006 year, land sales are expected to be approximately $12.4 million, and cost of land sales before interest expense is expected to be approximately 87.7 % of land sales revenue.
Interest Expense
We determine interest expense on a specific lot-by-lot basis for our traditional 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 for projects using the percentage of completion method of revenue recognition is determined based on the total estimated interest for the project and the percentage of total estimated construction costs that have been incurred to date.
Interest expense as a percentage of revenues was slightly lower in the nine-month and three-month periods ended July 31, 2006 as compared to the comparable periods of fiscal 2005.
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The guidance we gave on August 22, 2006 stated that, for the full 2006 fiscal year, we expect interest expense as a percentage of total revenues to be approximately 2.1%.
Selling, General and Administrative Expenses (“SG&A”)
SG&A spending increased by $79.6 million, or 23%, in the nine-month period ended July 31, 2006, and by $21.8 million, or 17%, in the three-month period ended July 31, 2006, in each case as compared to the comparable periods of fiscal 2005. The increased spending in both the nine-month and three-month periods was principally due to the costs incurred to support the increase in revenues in the nine month period of fiscal 2006 over the comparable period of fiscal 2005; the costs associated with the increase in the number of selling communities that we had during both periods of fiscal 2006 as compared to the comparable periods of fiscal 2005; and the expensing of stock option awards pursuant to SFAS 123R in both periods of fiscal 2006, which expense we did not have in the comparable periods of fiscal 2005. During the nine-month and three-month periods ended July 31, 2006, we recognized $21.5 million and $5.3 million of expense, respectively, related to stock option awards.
The guidance we gave on August 22, 2006 stated that, for the full 2006 fiscal year, we expect that SG&A as a percentage of revenues will be between 9.5% and 9.6% of revenues as compared to 8.3% for the full 2005 fiscal year.
Equity Earnings from Unconsolidated Entities
We are a participant in several joint ventures with unrelated parties and in the Trust and Trust II. 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. Many of our joint ventures are land development projects or high-rise/mid-rise construction projects and do not generate revenues and earnings for a number of years during the development of the property. Once development is complete, the joint ventures will generally, over a relatively short period of time, generate revenues and earnings until all the assets of the entities are sold. Because there is not a steady flow of revenues and earnings from these entities, the earnings recognized from these entities will vary significantly from quarter to quarter and year to year. In the nine-month and three-month periods ended July 31, 2006, we recognized $36.7 million and $7.3 million, respectively, of earnings from unconsolidated entities as compared to $9.5 million and $4.2 million in the comparable periods of fiscal 2005.
The guidance we gave on August 22, 2006 stated that, for fiscal 2006, we expect to recognize approximately $49.0 million of earnings from our investments in these joint ventures and in the Trust and Trust II.
Interest and Other Income
For the nine months ended July 31, 2006, interest and other income was $32.0 million, an increase of $5.4 million from the $26.6 million recognized in the comparable period of fiscal 2005. The increase was primarily the result of higher management and construction fee income, higher forfeited customer deposits and higher interest income, offset, in part, by lower broker fees and lower income realized from our ancillary businesses recognized in the fiscal 2006 period as compared to the comparable period of fiscal 2005.
For the three months ended July 31, 2006, interest and other income was $9.7 million, a decrease of $.9 million from the $10.6 million recognized in the comparable periods of fiscal 2005. The decrease was primarily the result of lower interest income, income realized from our ancillary businesses and brokerage fee income, offset, in part, by higher forfeited customer deposits and higher management and construction fee income recognized in the fiscal 2006 period compared to the comparable period of fiscal 2005.
The guidance we gave on August 22, 2006 stated that, for the full 2006 fiscal year, we expect interest and other income to be approximately $39.0 million compared to $41.2 million in fiscal 2005.
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Income before Income Taxes
For the nine-month period ended July 31, 2006, income before taxes was $835.5 million, a 3% increase over the $814.4 million realized in the comparable period of fiscal 2005. For the three-month period ended July 31, 2006, income before taxes was $285.2 million, a 21% decrease over the $362.6 million realized in the comparable period of fiscal 2005. The guidance we gave on August 22, 2006 stated that, for the full 2006 fiscal year, we expect income before income taxes to be between $1.19 billion and $1.24 billion.
Income Taxes
Income taxes were provided at an effective rate of 38.5% and 38.8% for the nine-month and three-month periods ended July 31, 2006, respectively, compared to 39.1% and 40.6% for the comparable periods of fiscal 2005. The difference in rates in fiscal 2006 periods as compared to the comparable periods of fiscal 2005 was primarily due to a manufacturing tax credit that we first became eligible for in fiscal 2006, the reversal of prior year tax provisions in the fiscal 2006 periods that we no longer needed due to the expiration of tax statutes, the recognition of estimated interest expense, net of estimated interest income in the fiscal 2006 periods on expected tax assessments and recoveries due to ongoing tax audits and the effect on the fiscal 2005 periods rates due to recomputing our net deferred tax liability, resulting from the change in our Base Rate from 37% at October 31, 2004 to 39.1% at July 31, 2005.
The guidance we gave on August 22, 2006 stated that, for the full fiscal 2006 year, we expect that our effective tax rate will be approximately 38.7% as compared to 39.1% in fiscal 2005.
CAPITAL RESOURCES AND LIQUIDITY
Funding for our business has been provided principally by cash flow from operating activities, unsecured bank borrowings and the public debt and equity markets. We have used our cash flow from operating activities, 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 backlog and the increasing number of communities in which we are offering homes for sale, invest in unconsolidated entities, repurchase our stock, and repay debt.
Cash flow from operating activities decreased in the nine-month period ended July 31, 2006 as compared to the comparable period of fiscal 2005. This decrease was primarily the result of increased inventory levels and the increase in contracts receivable related to projects that are using percentage of completion accounting, offset in part by our revenue growth in the fiscal 2006 period as compared to the fiscal 2005 period.
We expect that our inventory of land and land development costs will continue to increase and we are currently negotiating and searching for additional opportunities to obtain control of land for future communities. At July 31, 2006, the aggregate purchase price of land parcels under option and purchase agreements was approximately $3.74 billion (including approximately $1.17 billion of land to be acquired from joint ventures which we have invested in, made advances to or made loan guarantees on behalf of) of which we had paid or deposited approximately $194.6 million. In addition, we expect contracts receivable to continue to increase as we add additional projects that are accounted for using the percentage of completion accounting method and as more revenues are recognized under existing projects accounted for under the percentage of completion accounting method. We do not expect to deliver any of the homes in current projects accounted for using the percentage of completion method of accounting until fiscal 2007.
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. In addition, we generally do not begin construction of our traditional single-family homes until we have a signed contract with the home buyer. 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.
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In both the fiscal 2006 and 2005 periods, we have had a significant amount of cash invested in either short-term cash equivalents or short-term interest-bearing marketable securities. In addition, we have made a number of investments in unconsolidated entities related to the acquisition and development of land for future home sites or in entities that are constructing or converting apartment buildings into luxury condominiums. Our investment activities related to marketable securities and investments in and distributions of investments from unconsolidated entities are included in the Condensed Consolidated Statements of Cash Flows in the section “Cash flow from investing activities.”
In March 2006, we amended and extended our unsecured revolving credit facility and added a $300 million term loan facility. The amended revolving credit facility provides borrowing of up to $1.5 billion and extends to March 2011. At July 31, 2006, interest was payable on borrowings under the revolving credit facility at 0.475% (subject to adjustment based upon our debt ratings and leverage ratio) above the Eurodollar rate or other specified variable rates as selected by us from time to time. At July 31, 2006, we had no borrowings outstanding against the revolving credit facility, but had approximately $351.5 million of letters of credit outstanding under it. The $300 million term loan extends to March 2011 and interest is payable on borrowings under the term loan at 0.50% (subject to adjustment based upon our debt ratings and leverage ratio) above the Eurodollar rate or other specified variable rates as selected by us from time to time. Prior to the amendment to the revolving credit facility and entering into the term loan, we had periodically elected to maintain a loan balance outstanding on the revolving credit facility although we had significant amounts of available cash and cash equivalents.
To reduce borrowing costs, extend the maturities of our long-term debt and raise additional funds for general corporate purposes, during the last several fiscal years we issued four series of senior notes aggregating $1.15 billion. We used the proceeds from the issuance of the senior notes to redeem $470 million of senior subordinated notes and, together with other available cash, to repay a $222.5 million bank term loan. In addition, we raised approximately $86.2 million from the issuance of six million shares of our common stock in a public offering in August 2003.
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 access to the public debt and equity 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.
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HOUSING DATA
Revenues
| | Three months ended July 31, | |
| |
| |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| |
| |
| |
| |
| |
Region | | Units | | Units | | $ millions | | $ millions | |
| |
| |
| |
| |
| |
Northeast (CT, MA, NJ, NY, RI) | | 411 | | 310 | | 276.8 | | 184.0 | |
Mid-Atlantic (DE, MD, PA, VA) | | 678 | | 886 | | 447.4 | | 554.4 | |
Midwest (IL, MI) | | 105 | | 178 | | 74.6 | | 110.7 | |
Southeast (FL, NC, SC) | | 371 | | 236 | | 212.7 | | 139.0 | |
Southwest (AZ, CO, NV, TX) | | 459 | | 361 | | 308.0 | | 239.2 | |
West (CA) | | 133 | | 339 | | 169.4 | | 309.2 | |
| |
| |
| |
| |
| |
Total traditional | | 2,157 | | 2,310 | | 1,488.9 | | 1,536.5 | |
Percentage of completion * | | — | | — | | 41.2 | | — | |
| |
| |
| |
| |
| |
Total consolidated entities | | 2,157 | | 2,310 | | 1,530.1 | | 1,536.5 | |
Unconsolidated entities | | 23 | | 57 | | 14.2 | | 25.7 | |
| |
| |
| |
| |
| |
| | 2,180 | | 2,367 | | 1,544.3 | | 1,562.2 | |
| |
| |
| |
| |
| |
New Contracts
| | Three months ended July 31, | |
| |
| |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| |
| |
| |
| |
| |
Region | | Units | | Units | | $ millions | | $ millions | |
| |
| |
| |
| |
| |
Northeast (CT, MA, NJ, NY, RI) | | 222 | | 431 | | 146.4 | | 280.0 | |
Mid-Atlantic (DE, MD, PA, VA, WV) | | 476 | | 758 | | 309.5 | | 522.9 | |
Midwest (IL, MI, MN) | | 130 | | 149 | | 90.4 | | 108.4 | |
Southeast (FL, NC, SC) | | 176 | | 593 | | 120.8 | | 330.9 | |
Southwest (AZ, CO, NV, TX) | | 238 | | 544 | | 197.4 | | 391.7 | |
West (CA) | | 158 | | 230 | | 149.5 | | 238.2 | |
| |
| |
| |
| |
| |
Total traditional | | 1,400 | | 2,705 | | 1,014.0 | | 1,872.1 | |
Percentage of completion * | | 43 | | 41 | | 36.3 | | 44.1 | |
| |
| |
| |
| |
| |
Total consolidated entities | | 1,443 | | 2,746 | | 1,050.3 | | 1,916.2 | |
Unconsolidated entities | | 30 | | 111 | | 19.2 | | 63.4 | |
| |
| |
| |
| |
| |
| | 1,473 | | 2,857 | | 1,069.5 | | 1,979.6 | |
| |
| |
| |
| |
| |
Backlog
| | At July 31, | |
| |
| |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| |
| |
| |
| |
| |
Region | | Units | | Units | | $ millions | | $ millions | |
| |
| |
| |
| |
| |
Northeast (CT, MA, NJ, NY, RI) | | 1,013 | | 1,420 | | 697.2 | | 922.0 | |
Mid-Atlantic (DE, MD, PA, VA, WV) | | 1,951 | | 2,639 | | 1,306.5 | | 1,750.8 | |
Midwest (IL, MI, MN) | | 482 | | 505 | | 329.4 | | 358.3 | |
Southeast (FL, NC, SC) | | 1,597 | | 2,009 | | 920.7 | | 1,052.1 | |
Southwest (AZ, CO, NV, TX) | | 1,651 | | 1,926 | | 1,246.1 | | 1,315.1 | |
West (CA) | | 668 | | 831 | | 677.1 | | 893.0 | |
| |
| |
| |
| |
| |
Total traditional | | 7,362 | | 9,330 | | 5,177.0 | | 6,291.3 | |
| |
| |
| |
| |
| |
Percentage of completion * | | | | | | | | | |
Undelivered | | 663 | | 160 | | 552.3 | | 142.5 | |
Revenue recognized | | — | | — | | (138.7 | ) | — | |
| |
| |
| |
| |
| |
Net percentage of completion | | 663 | | 160 | | 413.6 | | 142.5 | |
| |
| |
| |
| |
| |
Total consolidated entities | | 8,025 | | 9,490 | | 5,590.6 | | 6,433.8 | |
Unconsolidated entities | | 19 | | 237 | | 12.6 | | 149.4 | |
| |
| |
| |
| |
| |
| | 8,044 | | 9,727 | | 5,603.2 | | 6,583.2 | |
| |
| |
| |
| |
| |
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Revenues
| | Nine months ended July 31, | |
| |
| |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| |
| |
| |
| |
| |
Region | | Units | | Units | | $ millions | | $ millions | |
| |
| |
| |
| |
| |
Northeast (CT, MA, NJ, NY, RI) | | 1,070 | | 793 | | 698.1 | | 447.6 | |
Mid-Atlantic (DE, MD, PA, VA) | | 1,954 | | 2,308 | | 1,295.5 | | 1,400.0 | |
Midwest (IL, MI, MN) | | 329 | | 414 | | 232.6 | | 256.8 | |
Southeast (FL, NC, SC) | | 1,160 | | 588 | | 634.3 | | 328.7 | |
Southwest (AZ, CO, NV, TX) | | 1,177 | | 914 | | 821.8 | | 584.0 | |
West (CA) | | 409 | | 795 | | 485.8 | | 734.5 | |
| |
| |
| |
| |
| |
Total traditional | | 6,099 | | 5,812 | | 4,168.1 | | 3,751.6 | |
Percentage of completion * | | — | | — | | 138.7 | | — | |
| |
| |
| |
| |
| |
Total consolidated entities | | 6,099 | | 5,812 | | 4,306.8 | | 3,751.6 | |
Unconsolidated entities | | 167 | | 207 | | 95.3 | | 90.5 | |
| |
| |
| |
| |
| |
| | 6,266 | | 6,019 | | 4,402.1 | | 3,842.1 | |
| |
| |
| |
| |
| |
New Contracts
| | Nine months ended July 31, | |
| |
| |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| |
| |
| |
| |
| |
Region | | Units | | Units | | $ millions | | $ millions | |
| |
| |
| |
| |
| |
Northeast (CT, MA, NJ, NY, RI) | | 731 | | 1,185 | | 493.4 | | 770.0 | |
Mid-Atlantic (DE, MD, PA, VA, WV) | | 1,575 | | 2,702 | | 1,035.6 | | 1,778.5 | |
Midwest (IL, MI, MN) | | 368 | | 473 | | 243.0 | | 330.8 | |
Southeast (FL, NC, SC) | | 737 | | 1,434 | | 477.9 | | 794.0 | |
Southwest (AZ, CO, NV, TX) | | 979 | | 1,489 | | 758.8 | | 1,049.5 | |
West (CA) | | 481 | | 713 | | 492.7 | | 762.9 | |
| |
| |
| |
| |
| |
Total traditional | | 4,871 | | 7,996 | | 3,501.4 | | 5,485.7 | |
Percentage of completion * | | 283 | | 104 | | 253.0 | | 78.2 | |
| |
| |
| |
| |
| |
Total consolidated entities | | 5,154 | | 8,100 | | 3,754.4 | | 5,563.9 | |
Unconsolidated entities | | 83 | | 270 | | 51.9 | | 164.1 | |
| |
| |
| |
| |
| |
| | 5,237 | | 8,370 | | 3,806.3 | | 5,728.0 | |
| |
| |
| |
| |
| |
* | Mid- and High-Rise projects that are accounted for under the percentage of completion method. |
PERCENTAGE OF COMPLETION DATA
Revenues
| | Three months ended July 31, | |
| |
| |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| |
| |
| |
| |
| |
Region | | Units | | Units | | $ millions | | $ millions | |
| |
| |
| |
| |
| |
Northeast | | | | | | 25.9 | | | |
Southeast | | | | | | 15.3 | | | |
| | | | | |
| | | |
Total | | | | | | 41.2 | | | |
| | | | | | |
| | | |
New Contracts
| | Three months ended July 31, | |
| |
| |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| |
| |
| |
| |
| |
Region | | Units | | Units | | $ millions | | $ millions | |
| |
| |
| |
| |
| |
Northeast | | 34 | | 28 | | 32.2 | | 15.0 | |
Mid-Atlantic | | 4 | | | | 1.4 | | | |
Midwest | | 4 | | | | 1.2 | | | |
Southeast | | 1 | | 13 | | 1.5 | | 29.1 | |
| |
| |
| |
| |
| |
Total | | 43 | | 41 | | 36.3 | | 44.1 | |
| |
| |
| |
| |
| |
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Backlog
| | At July 31, | |
| |
| |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| |
| |
| |
| |
| |
Region | | Units | | Units | | $ millions | | $ millions | |
| |
| |
| |
| |
| |
Northeast | | 507 | | 88 | | 396.3 | | 44.5 | |
Mid-Atlantic | | 52 | | | | 21.3 | | | |
Midwest | | 4 | | | | 1.2 | | | |
Southeast | | 77 | | 72 | | 115.8 | | 98.0 | |
Southwest | | 23 | | | | 17.7 | | | |
Less revenue recognized | | — | | | | (138.7 | ) | | |
| |
| |
| |
| |
| |
Total | | 663 | | 160 | | 413.6 | | 142.5 | |
| |
| |
| |
| |
| |
Revenues
| | Nine months ended July 31, | |
| |
| |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| |
| |
| |
| |
| |
Region | | Units | | Units | | $ millions | | $ millions | |
| |
| |
| |
| |
| |
Northeast | | | | | | 88.0 | | | |
Southeast | | | | | | 48.4 | | | |
Southwest | | | | | | 2.3 | | | |
| | | | | |
| | | |
Total | | | | | | 138.7 | | | |
| | | | | |
| | | |
New Contracts
| | Nine months ended July 31, | |
| |
| |
| | 2006 | | 2005 | | 2006 | | 2005 | |
| |
| |
| |
| |
| |
Region | | Units | | Units | | $ millions | | $ millions | |
| |
| |
| |
| |
| |
Northeast | | 236 | | 88 | | 213.4 | | 44.5 | |
Mid-Atlantic | | 22 | | | | 8.4 | | | |
Midwest | | 4 | | | | 1.2 | | | |
Southeast | | 5 | | 16 | | 17.8 | | 33.7 | |
Southwest | | 16 | | | | 12.2 | | | |
| |
| |
| |
| |
| |
Total | | 283 | | 104 | | 253.0 | | 78.2 | |
| |
| |
| |
| |
| |
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 July 31, 2006, our debt obligations by scheduled maturity, weighted-average interest rates and estimated fair value (amounts in thousands):
| | Fixed-Rate Debt | | Variable-Rate Debt (1)(2) | |
| |
| |
| |
Fiscal Year of Expected Maturity | | Amount | | Weighted -
Average
Interest
Rate | | Amount | | Weighted-
Average
Interest
Rate | |
| |
| |
| |
| |
| |
2006 | | $ | 95,478 | | 7.47 | % | $ | 83,602 | | 6.46 | % |
2007 | | | 78,779 | | 6.54 | % | | 124,671 | | 6.24 | % |
2008 | | | 28,662 | | 5.17 | % | | 150 | | 3.68 | % |
2009 | | | 3,178 | | 6.34 | % | | 150 | | 3.68 | % |
2010 | | | 800 | | 10.00 | % | | 150 | | 3.68 | % |
Thereafter | | | 1,571,022 | | 6.31 | % | | 312,995 | | 5.79 | % |
Discount | | | (9,118 | ) | | | | | | | |
| | |
|
| | | |
|
| | | |
Total | | $ | 1,768,801 | | 6.65 | % | $ | 521,718 | | 6.01 | % |
| | |
|
| | | |
|
| | | |
Fair value at July 31, 2006 | | $ | 1,701,219 | | | | $ | 521,718 | | | |
| | |
|
| | | |
|
| | | |
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(1) | We have a $1.8 billion credit facility consisting of a $1.5 billion, unsecured revolving credit facility and a $300 million term loan facility (collectively, the “Credit Facility”) with 31 banks, which extends to March 17, 2011. At July 31, 2006, interest was payable on borrowings under the revolving credit facility at 0.475% (subject to adjustment based upon our debt rating and leverage ratios) above the Eurodollar rate or at other specified variable rates as selected by us from time to time. At July 31, 2006, we had no outstanding borrowings against the revolving credit facility, but had letters of credit of approximately $351.5 million outstanding under it. Under the term loan facility, interest is payable at 0.50% (subject to adjustment based upon our debt rating and leverage ratios) above the Eurodollar rate or at other specified variable rates as selected by us from time to time. At July 31, 2006, interest was payable on the term loan at 5.88%. |
(2) | One of our subsidiaries has a $125 million line of credit with four 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 July 31, 2006, the subsidiary had $83.6 million outstanding under the line at an average interest rate of 6.46%. Borrowing under this line is included in the 2006 fiscal year maturities. |
Based upon the amount of variable rate debt outstanding at July 31, 2006 and holding the variable rate debt balance constant, each one percentage point increase in interest rates would increase our interest costs by approximately $5.2 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 the company have been 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 disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.
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 Rules 13a-15(e) and 15d-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 required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’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 internal control over financial reporting during our quarter ended July 31, 2006 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.
In January 2006, we received a request for information pursuant to Section 308 of the Clean Water Act from Region 3 of the Environmental Protection Agency (the “EPA”) requesting information about storm water discharge practices in connection with our homebuilding projects in the states that comprise EPA Region 3. To the extent the EPA’s review were to lead the EPA to assert violations of state and/or federal regulatory requirements and request injunctive relief and/or civil penalties, we would defend and attempt to resolve any such asserted violations. At this time we cannot predict the outcome of the EPA’s review.
There are no other proceedings required to be disclosed pursuant to Item 103 of Regulation S-K.
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ITEM 1A. RISK FACTORS
There has been no material change in our risk factors as previously disclosed in our Form 10-K for the fiscal year ended October 31, 2005 in response to Item 1A to Part I of such Form 10-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended July 31, 2006 we repurchased the following shares of our common stock (amounts in thousands, except per share amounts):
Period | | Total
Number of
Shares
Purchased | | Average
Price
Paid Per Share | | Total Number of
Shares Purchased as
Part of a Publicly
Announced
Plan or Program (1) | | Maximum
Number of Shares
that May Yet be
Purchased Under
the Plan or Program (1) | |
| |
| |
| |
| |
| |
May 1, 2006 through May 31, 2006 | | 1,117 | | $ | 28.90 | | 1,117 | | 12,679 | |
June 1, 2006 through June 30, 2006 | | 560 | | $ | 27.52 | | 560 | | 12,119 | |
July 1, 2006 through July 31, 2006 | | 3 | | $ | 24.63 | | 3 | | 12,116 | |
| |
| | | | |
| | | |
Total | | 1,680 | | $ | 28.43 | | 1,680 | | | |
| |
| | | | |
| | | |
(1) | On March 26, 2003, we announced that our Board of Directors had authorized the repurchase of up to 20 million shares of our common stock, par value $.01, from time to time, in open market transactions or otherwise, for the purpose of providing shares for our various employee benefit plans. The Board of Directors did not fix an expiration date for the repurchase program. |
Except as set forth above, we have not repurchased any of our equity securities.
Our bank credit agreement requires us to maintain a minimum tangible net worth (as defined in the credit agreement), which restricts the amount of dividends we may pay. In addition, our senior subordinated notes contain restrictions on the amount of dividends we may pay on our common stock. At July 31, 2006, under the most restrictive of these provisions, we could have paid up to approximately $960 million of cash dividends.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None
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ITEM 6. EXHIBITS
3.1 | By-laws of Toll Brothers, Inc., As Amended and Restated June 15, 2006, are hereby incorporated by reference to Exhibit 3.1 of the Registrant’s Form 8-K filed with the Securities and Exchange Commission on June 20, 2006. |
| |
4.1* | Twelfth Supplemental Indenture dated as of April 30, 2006 by and among the parties listed on Schedule I thereto, and J.P. Morgan Trust Company, National Association, as successor Trustee. |
| |
10.1* | Toll Brothers, Inc. Supplemental Executive Retirement Plan, as amended and restated, effective as of June 15, 2006. |
| |
10.2* | Amendment to the Toll Bros., Inc. Non-Qualified Deferred Compensation Plan, effective as of January 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. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | TOLL BROTHERS, INC.
(Registrant) |
Date: September 1, 2006 | | By: |
Joel H. Rassman
|
| | |
|
| | | Joel H. Rassman
Executive Vice President,
Treasurer and Chief
Financial Officer (Principal Financial Officer) |
Date: September 1, 2006 | | By: | Joseph R. Sicree |
| | |
|
| | | Joseph R. Sicree
Senior Vice President and
Chief Accounting Officer
(Principal Accounting Officer) |
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