SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
_X_ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED July 31, 2003
OR
___ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO_______
Commission file number 1-9186
Toll Brothers, Inc.
(Exact name of registrant as specified in its charter)
Delaware 23-2416878
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
3103 Philmont Avenue, Huntingdon Valley, Pennsylvania 19006
(Address of principal executive offices) (Zip Code)
(215) 938-8000
(Registrant's telephone number, including area code)
Not applicable
(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:
Common Stock, $.01 par value: 73,060,929 shares at September 5, 2003.
TOLL BROTHERS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
Statement on Forward-Looking Information 1
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets (Unaudited)
at July 31, 2003 and October 31, 2002 2
Condensed Consolidated Statements of Income
(Unaudited) For the Nine Months and Three
Months Ended July 31, 2003 and 2002 3
Condensed Consolidated Statements of Cash Flows
(Unaudited) For the Nine Months Ended
July 31, 2003 and 2002 4
Notes to Condensed Consolidated Financial
Statements (Unaudited) 5
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
ITEM 3. Quantitative and Qualitative Disclosures
About Market Risk 28
ITEM 4. Controls and Procedures 29
PART II. Other Information
Item 1. Legal Proceedings 29
Item 2. Changes in Securities and Use of Proceeds 29
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 and Reports on Form 8-K 29
SIGNATURES 30
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 joint ventures and the Toll Realty Trust Group, 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," "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, 2002.
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 all of or some of its subsidiaries, or any of them, unless
the context otherwise requires.
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Amounts in thousands)
July 31, October 31,
2003 2002
---------- ----------
(Unaudited)
ASSETS
Cash and cash equivalents $ 155,683 $ 102,337
Inventory 2,965,669 2,551,061
Property, construction and office
equipment, net 39,926 38,496
Receivables, prepaid expenses and
other assets 81,722 93,310
Mortgage company loans receivable 101,608 63,949
Customer deposits held in escrow 27,103 23,019
Investments in and advances to
unconsolidated entities 30,622 23,193
---------- ----------
$3,402,333 $2,895,365
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Loans payable $ 282,694 $ 253,194
Senior notes 298,182 -
Senior subordinated notes 719,973 819,663
Mortgage company warehouse loan 94,647 48,996
Customer deposits 167,185 134,707
Accounts payable 133,117 126,391
Accrued expenses 310,376 281,275
Income taxes payable 107,852 101,630
---------- ----------
Total liabilities 2,114,026 1,765,856
---------- ----------
Stockholders' equity:
Preferred stock, none issued
Common stock 740 740
Additional paid-in capital 101,443 102,600
Retained earnings 1,268,237 1,101,799
Treasury stock (82,113) (75,630)
---------- ----------
Total stockholders' equity 1,288,307 1,129,509
---------- ----------
$3,402,333 $2,895,365
========== ==========
See accompanying notes
2
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands, except per share data)
(Unaudited)
Nine months ended Three months ended
July 31, July 31,
2003 2002 2003 2002
---------------------------- -----------------------
Revenues:
Housing sales $1,837,386 $1,587,168 $678,523 $565,355
Land sales 21,027 26,519 7,640 12,478
Equity earnings
from unconsolidated
entities 700 1,743 555 246
Interest and other 12,764 7,952 6,967 2,628
---------------------------- -----------------------
1,871,877 1,623,382 693,685 580,707
---------------------------- -----------------------
Costs and expenses:
Housing sales 1,334,645 1,149,720 492,239 409,657
Land sales 13,462 18,125 2,745 8,947
Selling, general and
administrative expenses 206,354 172,866 73,216 61,874
Interest 50,135 45,258 17,630 15,626
Expenses related to early
retirement of debt 3,890 - - -
---------------------------- -----------------------
1,608,486 1,385,969 585,830 496,104
---------------------------- -----------------------
Income before income taxes 263,391 237,413 107,855 84,603
Income taxes 96,953 86,909 39,696 31,103
---------------------------- -----------------------
Net income $ 166,438 $ 150,504 $ 68,159 $ 53,500
============================ =======================
Earnings per share:
Basic $2.38 $2.13 $0.98 $0.76
Diluted $2.23 $1.99 $0.90 $0.70
Weighted average number of shares:
Basic 70,038 70,562 69,848 70,835
Diluted 74,481 75,722 75,534 76,685
See accompanying notes
3
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
(Unaudited)
Nine months ended
July 31,
2003 2002
-------- --------
Cash flows from operating activities
Net income $166,438 $150,504
Adjustments to reconcile net income to net
cash used in operating activities:
Depreciation and amortization 8,841 8,104
Equity from earnings of unconsolidated
entities (700) (1,743)
Deferred tax provision 4,473 2,037
Provision for write-offs 4,305 3,352
Write-off of unamortized debt issuance costs 973
Changes in operating assets and liabilities:
Increase in inventory (370,699) (331,259)
Origination of mortgage loans (516,590) (258,288)
Sale of mortgage loans 476,738 253,357
Decrease (increase) in receivables, prepaid
expenses and other assets 9,763 (16,394)
Increase in customer deposits 32,478 35,633
Increase in accounts payable
and accrued expenses 39,290 29,169
Increase (decrease) in current
income taxes payable 2,062 (6,687)
-------- --------
Net cash used in operating activities (142,628) (132,215)
-------- --------
Cash flows from investing activities:
Purchase of property, construction
and office equipment, net (8,946) (10,642)
Investments in and advances to
unconsolidated entities (11,127) (5,523)
Distributions from unconsolidated entities 3,150 2,800
-------- --------
Net cash used in investing activities (16,923) (13,365)
-------- --------
Cash flows from financing activities:
Proceeds from loans payable 822,796 332,621
Principal payments of loans payable (789,008) (452,335)
Net proceeds from issuance of public debt 297,885 149,748
Redemption of subordinated debt (100,000) -
Proceeds from stock-based benefit plans 6,656 12,532
Purchase of treasury stock (25,432) (29,082)
-------- --------
Net cash provided by financing activities 212,897 13,484
-------- --------
Increase (decrease) in cash and cash equivalents 53,346 (132,096)
Cash and cash equivalents, beginning of period 102,337 182,840
-------- --------
Cash and cash equivalents, end of period $155,683 $ 50,744
======== ========
See accompanying notes
4
TOLL BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the rules and regulations of the Securities and
Exchange Commission for interim financial information. The October 31, 2002
balance sheet amounts and disclosures included herein have been derived from our
October 31, 2002 audited financial statements. Since the accompanying condensed
consolidated financial statements do not include all the information and
footnotes required by accounting principles generally accepted in the United
States for complete financial statements, we suggest that they be read in
conjunction with the financial statements and notes thereto included in our
October 31, 2002 Annual Report on Form 10-K. In the opinion of management, the
accompanying unaudited condensed consolidated financial statements include all
adjustments, which are of a normal recurring nature, necessary to present fairly
our financial position as of July 31, 2003, the results of our operations for
the nine-month and three-month periods ended July 31, 2003 and 2002 and our cash
flows for the nine months ended July 31, 2003 and 2002. The results of
operations for such interim periods are not necessarily indicative of the
results to be expected for the full year.
Statement of Financial Accounting Standards ("SFAS") No. 144, "Accounting for
the Impairment or Disposal of Long-Lived Assets," provides guidance on financial
accounting and reporting for the impairment or disposal of long-lived assets and
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" and the accounting and reporting provisions
of Accounting Principles Board Opinion No. 30, "Reporting the Results of
Operations - Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
adoption of SFAS No. 144 as of November 1, 2002 did not have a material impact
on our financial condition or results of operations.
SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of
FASB Statement 13, and Technical Corrections," requires all gains and losses
from the extinguishment of debt to be included as an item from continuing
operations. The provisions of SFAS No. 145 relating to the rescission of SFAS
No. 4, "Reporting Gains and Losses from Extinguishment of Debt," became
effective for our fiscal year ending October 31, 2003. For the nine months ended
July 31, 2003 and the three months ended January 31, 2003, we recognized a
pretax charge of approximately $3.9 million related to the retirement in
December 2002 of our 8 3/4% Senior Subordinated Notes due 2006. Under previous
accounting principles generally accepted in the United States, this charge would
have been treated as an extraordinary item.
SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and
Disclosure" ("SFAS No. 148"), which amends SFAS No. 123, "Accounting for
Stock-Based Compensation," provides alternative methods of transition for a
voluntary change to the fair value based method of accounting for stock-based
compensation. It also requires prominent disclosures in both annual and interim
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. We have not
elected to change to the fair-value based method of accounting for stock-based
employee compensation. The financial disclosures required by SFAS No. 148 have
been provided in the notes to the financial statements. The Financial Accounting
Standards Board ("FASB") has announced that it intends to have a new rule in
place by the end of 2004 that requires stock based compensation be treated as a
cost that is reflected in the financial statements.
5
The FASB issued FASB Interpretation No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45"). FIN 45 elaborates on the existing disclosure
requirements for most guarantees, including loan guarantees such as standby
letters of credit. It also clarifies that at the time a company issues a
guarantee, the company must recognize an initial liability for the fair value,
or market value, of the obligation it assumes under the guarantee and must
disclose that information in its interim and annual financial statements. The
provisions related to recognizing a liability at inception of the guarantee for
the fair value of the guarantor's obligations does not apply to product
warranties. The initial recognition and initial measurement provisions apply on
a prospective basis to guarantees issued or modified after December 31, 2002.
The adoption of the initial recognition and initial measurement provisions of
FIN 45 did not have a material effect on our financial position or results of
operations. The disclosures related to product warranty costs required by FIN 45
have been provided in the notes to the financial statements.
The FASB issued FASB Interpretation No. 46, "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51" ("FIN 46"). A Variable Interest
Entity ("VIE") is an entity with insufficient equity investment or in which the
equity investors lack some of the characteristics of a controlling financial
interest. Pursuant to FIN 46, an enterprise that absorbs a majority of the
expected losses of the VIE must consolidate the VIE. FIN 46 is effective
immediately for VIE's created after January 31, 2003. For VIE's created on or
before January 31, 2003, FIN 46 must be applied at the beginning of the first
interim or annual reporting period beginning after June 15, 2003 (our quarter
ending October 31, 2003). FIN 46 may apply to certain of our option contracts to
acquire land that we entered into prior to January 31, 2003. We are in the
process of evaluating the applicability of FIN 46 to these contracts. The
adoption of FIN 46 for entities created after January 31, 2003 did not have a
material effect on our financial position and results of operations and we do
not believe that it will have a material effect on our financial position or
results of operations for entities created prior to January 31, 2003.
Certain prior year amounts have been reclassified to conform with the fiscal
2003 presentation.
2. Inventory
Inventory consisted of the following (amounts in thousands):
July 31, October 31,
2003 2002
----------- ----------
Land and land development costs $ 957,420 $ 772,796
Construction in progress 1,656,190 1,491,108
Sample homes and sales offices 189,004 163,722
Land deposits and costs of future
development 152,438 114,212
Other 10,617 9,223
---------- ----------
$2,965,669 $2,551,061
========== ==========
6
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.
We capitalize certain interest costs to inventory during the development and
construction period. Capitalized interest is charged to interest expense when
the related inventory is closed. Interest incurred, capitalized and expensed for
the nine-month and three-month periods ended July 31, 2003 and 2002 are
summarized as follows (amounts in thousands):
Nine months ended Three months ended
July 31, July 31,
2003 2002 2003 2002
---------------------- ----------------------
Interest capitalized,
beginning of period $123,637 $ 98,650 $142,072 $113,637
Interest incurred 76,831 67,550 25,800 22,307
Interest expensed (50,135) (45,258) (17,630) (15,626)
Write-off to cost of sales (431) (685) (340) (61)
---------------------- ----------------------
Interest capitalized,
end of period $149,902 $120,257 $149,902 $120,257
====================== ======================
3. Loans Payable, Senior Notes and Senior Subordinated Notes
In July 2003, we increased our revolving credit facility by $35 million to $575
million. The facility extends through March 2006. At July 31, 2003, we did not
have any borrowing outstanding against the facility and we had approximately
$108.1 million of letters of credit outstanding under the facility. In addition,
we increased the amount of our term loan, which extends through July 2005, by
$15 million to $222.5 million.
On November 22, 2002, we issued $300 million of 6.875% Senior Notes due 2012. We
redeemed all of the $100 million outstanding 8 3/4% Senior Subordinated Notes
due 2006 on December 27, 2002 at a price of 102.917% of the principal amount. We
recognized a pretax charge of $3.9 million in the first quarter of fiscal 2003
representing the premium paid on redemption and the write-off of unamortized
bond issuance costs. We also repaid $80 million of borrowing under our revolving
credit facility on December 2, 2002. The remaining proceeds have been used for
general corporate purposes.
4. Earnings per Share Information
Information pertaining to the calculation of earnings per share for the nine-
month and three-month periods ended July 31, 2003 and 2002 are as follows
(amounts in thousands):
Nine months ended Three months ended
July 31, July 31,
2003 2002 2003 2002
---------------------- ----------------------
Basic weighted average
shares 70,038 70,562 69,848 70,835
Common stock equivalents 4,443 5,160 5,686 5,850
------------------- --------------------
Diluted weighted average
shares 74,481 75,722 75,534 76,685
=================== ====================
7
5. Stock Repurchase Program
In March 2003, our Board of Directors re-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. For the nine-month period ended July 31, 2003,
we repurchased approximately 1.3 million shares. We did not repurchase any
shares under the program during the three-month period ended July 31, 2003. At
July 31, 2003, we had approximately 9.8 million shares remaining under the
repurchase authorization.
6. Warranty Costs
We accrue for the expected warranty costs at the time each home is closed and
title and possession have been transferred to the homebuyer. Costs are accrued
based upon historical experience. Changes in the warranty accrual for the
nine-month and three-month periods ended July 31, 2003 are as follows (amounts
in thousands):
Nine months ended Three months ended
July 31, 2003 July 31, 2003
----------------- ------------------
Balance, beginning of period $29,197 $30,814
Additions during period 13,274 4,886
Charges incurred in period (10,565) (3,794)
------- -------
Balance, end of period $31,906 $31,906
======= =======
7. Related Party Transaction
In May 2003, we sold a 62.2 acre parcel of land to Toll Brothers Realty Trust
Group (the "Trust") for $9.8 million. Because we own one-third of the Trust, we
only recognized two-thirds of the revenue, cost and profit on the sale. The
remaining one-third of the profit on the sale reduced our investment in the
Trust. For additional information about this transaction see "Item 2.
Management's Discussion and Analysis of Financial Condition and Results of
Operations - Critical Accounting Policies - Joint Venture Accounting" in this
Form 10-Q.
8. Stock Based Benefit Plans
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS No.
148, requires the disclosure of the estimated value of employee option grants
and their impact on net income using 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.
8
For the purposes of providing the pro forma disclosures, the fair value of
options granted was estimated using the Black-Scholes option pricing model with
the following weighted-average assumptions used for grants in each of the
nine-month and three-month periods ended July 31, 2003 and 2002.
2003 2002
------ ------
Risk-free interest rate 3.53% 5.02%
Expected life (years) 7.1 7.5
Volatility 43.37% 41.30%
Dividends none none
Net income and net income per share as reported in these condensed consolidated
financial statements and on a pro forma basis, as if the fair-value-based method
described in SFAS No. 123 had been adopted, for the nine-month and three-month
periods ended July 31, 2003 and 2002, were as follows (amounts in thousands,
except per share amounts):
Nine months ended Three months ended
July 31, July 31,
---------------------------------- ---------------------------------
2003 2002 2003 2002
---------------------------------- ---------------------------------
Net income:
As reported $166,438 $150,504 $68,159 $53,500
Pro forma $155,464 $139,514 $64,471 $49,917
Basic income per share:
As reported $2.38 $2.13 $0.98 $0.76
Pro forma $2.22 $1.98 $0.92 $0.70
Diluted net income
per share:
As reported $2.23 $1.99 $0.90 $0.70
Pro forma $2.09 $1.84 $0.85 $0.65
Weighted average grant
date fair value per
share of options
granted $10.24 $11.17 $10.24 $11.17
9. Subsequent Events
In August 2003, we sold 3.0 million shares of common stock for an aggregate net
sales price of $86.4 million. The proceeds from this sale will be used for
general corporate purposes. In connection with this sale, we gave the
underwriter the right to purchase, for a period of thirty days expiring on
September 12, 2003, up to an additional 300,000 shares of common stock at a
price of $28.80 per share.
On September 3, 2003, we sold $250 million of 5.95% Senior Notes due 2013. The
net proceeds of $246.3 million will be used to redeem all of our outstanding
$100 million 7 3/4% Senior Subordinated Notes on October 6, 2003 at a price of
102.583% of the principal amount and for general corporate purposes. We will
realize a pretax charge of approximately $3.3 million and a tax benefit of $1.2
million in the three-month period ended October 31, 2003. The pretax charge
represents the premium we will pay on redemption and the write-off of
unamortized issuance costs.
9
10. Supplemental Disclosure to Statements of Cash Flows
The following are supplemental disclosures to the statements of cash flows for
the nine months ended July 31, 2003 and 2002 (amounts in thousands):
2003 2002
--------- ---------
Supplemental disclosure of cash flow information:
Interest paid, net of
capitalized amounts $ 13,995 $ 11,834
========= =========
Income taxes paid $ 88,868 $ 91,558
========= =========
Supplemental disclosures of non-cash activities:
Cost of residential inventories acquired
through seller financing $ 48,722 $ 13,284
========= =========
Income tax benefit relating to exercise
of employee stock options $ 312 $ 4,921
========= =========
Stock bonus award $ 9,643 $ 6,853
========= =========
Contribution to employee retirement plan $ 1,180 $ 883
========= =========
Cash flow from operating activities before land inventory purchases:
Net cash used in operating activities $(142,628) $(132,215)
Land purchases 322,493 235,103
--------- ---------
Cash flow from operating activities
before land inventory purchases $ 179,865 $ 102,888
========= =========
11. Supplemental Guarantor Information
Our wholly-owned, indirect subsidiary, Toll Brothers Finance Corp. (the
"Subsidiary Issuer"), issued senior debt on November 22, 2002 and September 3,
2003. The obligations of the Subsidiary Issuer to pay principal, premiums, if
any, and interest is guaranteed jointly and severally on a senior basis by Toll
Brothers, Inc. and substantially all of our wholly-owned homebuilding
subsidiaries (the "Guarantor Subsidiaries"). The guarantees are full and
unconditional. Our non-homebuilding subsidiaries (the "Non-Guarantor
Subsidiaries") did not guarantee the debt.
10
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. Prior to its issuance of senior
debt, the Subsidiary Issuer did not have any operations. Supplemental
consolidating financial information of Toll Brothers, Inc., the Subsidiary
Issuer, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries and the
eliminations to arrive at Toll Brothers, Inc. financial statements on a
consolidated basis are as follows:
Consolidating Balance Sheet at July 31, 2003 (amounts in thousands $)
Non-
Toll Subsid- Guarantor Guarantor
Brothers, iary Subsid- Subsid- Elim- Consol-
Inc. Issuer iaries iaries inations idated
--------------------------------------------------------------------------------
ASSETS
Cash & cash equivalents 146,480 9,203 155,683
Inventory 2,965,250 419 2,965,669
Property, construction
& office equipment - net 30,037 9,889 39,926
Receivables, prepaid
expenses and other assets 878 47,605 33,040 199 81,722
Mortgage Company
loans receivable 101,608 101,608
Customer deposits held
in escrow 27,103 27,103
Investments in & advances to
unconsolidated entities 30,622 30,622
Investments in & advances to
consolidated entities 1,397,651 301,658 (310,366) (14,387) (1,374,556) -
--------------------------------------------------------------------------------
1,397,651 302,536 2,936,731 139,772 (1,374,357) 3,402,333
================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
Loans payable 278,084 4,610 282,694
Senior notes 298,182 298,182
Senior subordinated notes 719,973 719,973
Mortgage company
warehouse loan 94,647 94,647
Customer deposits 167,185 167,185
Accounts payable 133,109 8 133,117
Accrued expenses 4,354 280,112 25,910 310,376
Income taxes payable 109,344 (1,492) 107,852
--------------------------------------------------------------------------------
Total liabilities 109,344 302,536 1,578,463 123,683 - 2,114,026
--------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 740 3,003 (3,003) 740
Additional paid-in capital 101,443 4,420 1,734 (6,154) 101,443
Retained earnings 1,268,237 1,353,848 11,352 (1,365,200) 1,268,237
Treasury stock (82,113) (82,113)
--------------------------------------------------------------------------------
Total equity 1,288,307 - 1,358,268 16,089 (1,374,357) 1,288,307
--------------------------------------------------------------------------------
1,397,651 302,536 2,936,731 139,772 (1,374,357) 3,402,333
================================================================================
11
Consolidating Balance Sheet at October 31, 2002 (amounts in thousands $)
Non-
Toll Subsid- Guarantor Guarantor
Brothers, iary Subsid- Subsid- Elim- Consol-
Inc. Issuer iaries iaries inations idated
--------------------------------------------------------------------------------
ASSETS
Cash & cash equivalents 99,815 2,522 102,337
Inventory 2,550,708 353 2,551,061
Property, construction
& office equipment - net 29,036 9,460 38,496
Receivables, prepaid
expenses and other assets (368) 68,287 24,813 578 93,310
Mortgage Company
loans receivable 2,193 61,756 63,949
Customer deposits held
in escrow 23,019 23,019
Investments in & advances to
unconsolidated entities 23,193 23,193
Investments in & advances to
consolidated entities 1,231,507 (37,580) 10,464 (1,204,391) -
--------------------------------------------------------------------------------
1,231,139 - 2,758,671 109,368 (1,203,813) 2,895,365
================================================================================
LIABILITIES & STOCKHOLDERS' EQUITY
LIABILITIES
Loans payable 241,151 12,043 253,194
Senior subordinated notes 819,663 819,663
Mortgage company
warehouse loan 48,996 48,996
Customer deposits 134,707 134,707
Accounts payable 126,324 67 126,391
Accrued expenses 244,868 36,407 281,275
Income taxes payable 101,630 101,630
--------------------------------------------------------------------------------
Total liabilities 101,630 - 1,566,713 97,513 - 1,765,856
--------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Common stock 740 3,003 (3,003) 740
Additional paid-in capital 102,600 4,420 1,734 (6,154) 102,600
Retained earnings 1,101,799 1,187,538 7,118 (1,194,656) 1,101,799
Treasury stock (75,630) (75,630)
--------------------------------------------------------------------------------
Total equity 1,129,509 - 1,191,958 11,855 (1,203,813) 1,129,509
--------------------------------------------------------------------------------
1,231,139 - 2,758,671 109,368 (1,203,813) 2,895,365
================================================================================
12
Consolidating Statement of Income for the Nine Months ended July 31, 2003
(amounts in thousands $)
Non-
Toll Subsid- Guarantor Guarantor
Brothers, iary Subsid- Subsid- Elim- Consol-
Inc. Issuer iaries iaries inations idated
--------------------------------------------------------------------------------
Revenues:
Home sales 1,837,386 1,837,386
Land sales 21,027 21,027
Equity earnings 700 700
Earnings from
subsidiaries 263,434 (263,434) -
Other (4) 14,452 12,159 22,848 (36,691) 12,764
---------------------------------------------------------------------------------
263,430 14,452 1,871,272 22,848 (300,125) 1,871,877
---------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 1,345,798 2,089 220 1,348,107
Selling, general
and administrative 39 54 208,085 13,071 (14,895) 206,354
Interest 14,398 50,065 1,221 (15,549) 50,135
Expenses related to
retirement of debt 3,890 3,890
---------------------------------------------------------------------------------
39 14,452 1,607,838 16,381 (30,224) 1,608,486
---------------------------------------------------------------------------------
Income before
income taxes 263,391 - 263,434 6,467 (269,901) 263,391
Income taxes 96,953 96,969 2,389 (99,358) 96,953
---------------------------------------------------------------------------------
Net income 166,438 - 166,465 4,078 (170,543) 166,438
=================================================================================
Consolidating Statement of Income for the Nine Months ended July 31, 2002
(amounts in thousands $)
Non-
Toll Subsid- Guarantor Guarantor
Brothers, iary Subsid- Subsid- Elim- Consol-
Inc. Issuer iaries iaries inations idated
--------------------------------------------------------------------------------
Revenues:
Home sales 1,587,168 1,587,168
Land sales 26,519 26,519
Equity earnings 1,743 1,743
Earnings from
subsidiaries 237,420 (237,420) -
Other 8,187 13,242 (13,477) 7,952
---------------------------------------------------------------------------------
237,420 - 1,623,617 13,242 (250,897) 1,623,382
---------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 1,166,181 1,060 604 1,167,845
Selling, general
and administrative 7 174,850 8,786 (10,777) 172,866
Interest 45,166 651 (559) 45,258
---------------------------------------------------------------------------------
7 - 1,386,197 10,497 (10,732) 1,385,969
---------------------------------------------------------------------------------
Income before
income taxes 237,413 - 237,420 2,745 (240,165) 237,413
Income taxes 86,909 86,913 1,014 (87,927) 86,909
---------------------------------------------------------------------------------
Net income 150,504 - 150,507 1,731 (152,238) 150,504
=================================================================================
13
Consolidating Statement of Income for the Three Months ended July 31, 2003
(amounts in thousands $)
Non-
Toll Subsid- Guarantor Guarantor
Brothers, iary Subsid- Subsid- Elim- Consol-
Inc. Issuer iaries iaries inations idated
--------------------------------------------------------------------------------
Revenues:
Home sales 678,523 678,523
Land sales 7,640 7,640
Equity earnings 555 555
Earnings from
subsidiaries 107,891 (107,891) -
Other 5,281 6,773 8,709 (13,796) 6,967
---------------------------------------------------------------------------------
107,891 5,281 693,491 8,709 (121,687) 693,685
---------------------------------------------------------------------------------
Costs and expenses:
Cost of sales 494,014 713 257 494,984
Selling, general
and administrative 36 20 73,978 4,811 (5,629) 73,216
Interest 5,261 17,608 514 (5,753) 17,630
---------------------------------------------------------------------------------
36 5,281 585,600 6,038 (11,125) 585,830
---------------------------------------------------------------------------------
Income before
income taxes 107,855 - 107,891 2,671 (110,562) 107,855
Income taxes 39,696 39,710 986 (40,696) 39,696
---------------------------------------------------------------------------------
Net income 68,159 - 68,181 1,685 (69,866) 68,159
=================================================================================
Consolidating Statement of Income for the Three Months ended July 31, 2002
(amounts in thousands $)
Non-
Toll Subsid- Guarantor Guarantor
Brothers, iary Subsid- Subsid- Elim- Consol-
Inc. Issuer iaries iaries inations idated
--------------------------------------------------------------------------------
Revenues:
Home sales 565,355 565,355
Land sales 12,478 12,478
Equity earnings 246 246
Earnings from
subsidiaries 84,603 (84,603) -
Other 2,645 4,895 (4,912) 2,628
---------------------------------------------------------------------------------
84,603 - 580,724 4,895 (89,515) 580,707
---------------------------------------------------------------------------------
Costs and expenses
Cost of sales 417,893 (987) 1,698 418,604
Selling, general
and administrative 62,633 4,544 (5,303) 61,874
Interest 15,595 182 (151) 15,626
---------------------------------------------------------------------------------
- - 496,121 3,739 (3,756) 496,104
---------------------------------------------------------------------------------
Income before
income taxes 84,603 - 84,603 1,156 (85,759) 84,603
Income taxes 31,103 31,105 514 (31,619) 31,103
---------------------------------------------------------------------------------
Net income 53,500 - 53,498 642 (54,140) 53,500
=================================================================================
14
Consolidating Statement of Cash Flows for the Nine Months ended July 31, 2003
(amounts in thousands $)
Non-
Toll Subsid- Guarantor Guarantor
Brothers, iary Subsid- Subsid- Elim- Consol-
Inc. Issuer iaries iaries inations idated
--------------------------------------------------------------------------------
Cash flows from
operating activities
Net income 166,438 166,466 4,078 (170,544) 166,438
Adjustments to reconcile net
Income to net cash provided by
(used in) operating activities
Depreciation & amortization 132 7,460 1,249 8,841
Deferred income taxes 5,795 (1,322) 4,473
Provision for write-offs 4,305 4,305
Equity earnings (700) (700)
Expenses related to
retirement of debt 973 973
Changes in operating
assets and liabilities
Increase in inventory (370,633) (66) (370,699)
Origination of mortgage loans (516,590) (516,590)
Sale of mortgage loans 476,738 476,738
(Increase) decrease in
receivables, prepaid
expense and other (166,511) (302,371) 291,321 16,780 170,544 9,763
Increase in customer deposits 32,478 32,478
Increase in accounts payable
and accrued expenses 10,823 4,354 34,671 (10,558) 39,290
Decrease in current -
taxes payable 2,231 (169) 2,062
---------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 18,776 (297,885) 166,341 (29,860) - (142,628)
---------------------------------------------------------------------------------
Cash flows from
investing activities
Purchase of property,
construction &
office equipment (7,269) (1,677) (8,946)
Investment in
unconsolidated entities (11,127) (11,127)
Distributions from
unconsolidated entities 3,150 3,150
---------------------------------------------------------------------------------
Net cash used in
investing activities - - (15,246) (1,677) - (16,923)
---------------------------------------------------------------------------------
Cash flows from
financing activities
Proceeds from loans payable 336,069 486,727 822,796
Principal payments on
loans payable (340,499) (448,509) (789,008)
Net proceeds from issuance of
public debt 297,885 297,885
Redemption of public debt (100,000) (100,000)
Proceeds from stock-based
benefit plans 6,656 6,656
Purchase of treasury shares (25,432) (25,432)
---------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (18,776) 297,885 (104,430) 38,218 - 212,897
---------------------------------------------------------------------------------
Increase(decrease) in cash
& equivalents - - 46,665 6,681 - 53,346
Cash & equivalents,
beginning of period 99,815 2,522 102,337
---------------------------------------------------------------------------------
Cash & equivalents,
end of period - - 146,480 9,203 - 155,683
=================================================================================
15
Consolidating Statement of Cash Flows for the Nine Months ended July 31, 2002
(amounts in thousands $)
Non-
Toll Subsid- Guarantor Guarantor
Brothers, iary Subsid- Subsid- Elim- Consol-
Inc. Issuer iaries iaries inations idated
--------------------------------------------------------------------------------
Cash flows from
operating activities
Net income 150,504 150,508 1,731 (152,239) 150,504
Adjustments to reconcile net
income to net cash provided by
(used in) operating activities
Depreciation & amortization 7,431 673 8,104
Deferred income taxes 2,037 2,037
Provision for write-offs 3,352 3,352
Equity earnings (1,743) (1,743)
Changes in operating
assets and liabilities
Increase in inventory (331,755) 496 (331,259)
Origination of mortgage loans (258,288) (258,288)
Sale of mortgage loans 253,357 253,357
Increase in receivables,
prepaid expense and other (137,038) (28,872) (2,723) 152,239 (16,394)
Increase in customer deposits 35,633 35,633
Increase in accounts payable
and accrued expenses 7,734 16,154 5,281 29,169
Decrease in current
taxes payable (6,687) (6,687)
---------------------------------------------------------------------------------
Net cash provided by (used in)
operating activities 16,550 - (149,292) 527 - (132,215)
---------------------------------------------------------------------------------
Cash flows from
investing activities
Purchase of property,
construction &
office equipment (7,099) (3,543) (10,642)
Investment in
unconsolidated entities (5,523) (5,523)
Distributions from
unconsolidated entities 2,800 2,800
---------------------------------------------------------------------------------
Net cash used in
investing activities - - (9,822) (3,543) - (13,365)
---------------------------------------------------------------------------------
Cash flows from
financing activities
Proceeds from loans payable 100,929 231,692 332,621
Principal payments on
loans payable (222,174) (230,161) (452,335)
Net proceeds from issuance of
public debt 149,748 149,748
Redemption of public debt
Proceeds from stock-based
benefit plans 12,532 12,532
Purchase of treasury shares (29,082) (29,082)
---------------------------------------------------------------------------------
Net cash (used in) provided by
financing activities (16,550) - 28,503 1,531 - 13,484
---------------------------------------------------------------------------------
Decrease in cash
& equivalents - - (130,611) (1,485) - (132,096)
Cash & equivalents,
beginning of period 179,434 3,406 182,840
---------------------------------------------------------------------------------
Cash & equivalents,
end of period - - 48,823 1,921 - 50,744
=================================================================================
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
CRITICAL ACCOUNTING POLICIES
The preparation of our consolidated financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and the related disclosure of contingent assets and
liabilities. On an ongoing basis, we evaluate our estimates, including but not
limited to those related to the recognition of income and expenses, impairment
of assets, estimates of future improvement costs, capitalization of costs,
provision for litigation, insurance and warranty claims and income taxes. We
base our estimates on historical experience and on various other assumptions
that are believed to be reasonable under the circumstances, the results of which
form the basis of making judgments about the carrying value of assets and
liabilities that are not readily apparent from other sources. Actual results may
differ from these estimates and assumptions or conditions.
We believe the following critical accounting policies reflect the more
significant judgments and estimates used in the preparation of our consolidated
financial statements.
Basis of Presentation
Our financial statements include the accounts of Toll Brothers, Inc. and its
majority-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated. Investments in 20% to 50% owned partnerships
and affiliates are accounted for on the equity method. Investments in less than
20% owned entities are accounted for on the cost method.
Inventory
Inventory is stated at the lower of cost or fair value in accordance with SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." In
addition to direct acquisition, land development and home construction costs,
costs include interest, real estate taxes and direct overhead costs related to
development and construction, which are capitalized to inventories during the
period beginning with the commencement of development and ending with the
completion of construction.
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. Since our inventory is considered a long-lived
asset under accounting principles generally accepted in the United States, we
are required to review the carrying value of 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 or the
sales pace declines significantly or some other factor indicates a possible
impairment in the recoverability of the asset, we evaluate the property in
accordance with the guidelines of SFAS No. 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.
17
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. Based upon this
review, we decide: (a) as to land that is under a purchase contract but not
owned, whether the contract will be terminated or renegotiated; and (b) as to
land we own, whether the land can be developed as contemplated or in an
alternative manner, or should be sold. We then further determine which costs
that have been capitalized to the property are recoverable and which costs
should be written off.
Income Recognition
Revenue and cost of sales are recorded at the time each home, or lot, is closed
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.
Joint Venture Accounting
We have investments in and advances to three joint ventures with independent
third parties to develop and sell land that was owned or is currently owned by
our venture partners. We recognize our share of earnings from the sale of lots
to other builders. We do not recognize earnings from lots we purchase from the
joint ventures, but instead reduce our cost basis in these lots by our share of
the earnings on those lot sales.
We are obligated to purchase 180 lots from one of the ventures, of which we have
purchased 45 lots to date, and have the right to purchase up to 385 lots from
the second. The third venture has sold all the land that it owned and is
currently in the process of completing the final land improvements on the site,
which could take 12 months or more to finish. Two of the joint ventures also
participate in the profits earned from home sales on the lots sold to other
builders above certain agreed upon levels. At July 31, 2003, we had an aggregate
amount of approximately $23.9 million invested in or advanced to these joint
ventures and were committed to contribute additional capital in an aggregate
amount of approximately $16.6 million if the joint ventures require it.
We also own 50% of a joint venture with an unrelated third party that is
currently selling and building an active-adult, age-qualified community. At July
31, 2003, our investment was $1.3 million in this joint venture. We do not have
any commitment to contribute additional capital to this joint venture.
18
In addition, Toll Brothers Realty Trust Group (the "Trust") was formed in 1998
to take advantage of commercial real estate opportunities that may present
themselves from time to time. The Trust currently owns and operates several
office buildings and an apartment complex, and land for the construction of an
apartment complex. The Trust is effectively owned by Toll Brothers, Inc., a
number of our senior executives and/or directors including Robert I. Toll, Bruce
E. Toll (and certain members of his family), Zvi Barzilay (and certain members
of his family) and Joel H. Rassman, and the Pennsylvania State Employees
Retirement System. We provide development, finance and management services to
the Trust and receive fees under various agreements. At July 31, 2003, our
investment in the Trust was $5.4 million. The Trust has a $25 million revolving
credit facility that extends through June 2005. As collateral for this facility,
we and the other groups of investors each entered into a subscription agreement
whereby each group of investors agreed to invest up to an additional $9.3
million if required by the Trust. The subscription agreements that were due to
expire in August 2003 were extended until August 2005.
In December 2002, our Board of Directors, upon the recommendation of its Real
Estate Utilization Committee (the "Committee"), which is comprised of members of
the Board of Directors who do not have a financial interest in the Trust,
approved the sale to the Trust of a 62.2-acre parcel of land, which is a portion
of our master planned community known as The Estates at Princeton Junction in
New Jersey, that is intended for development as multi-family apartment buildings
(the "Property"). The Committee's recommendation was based upon the following
advantages to us: (a) we will be able to influence the design and construction
quality so as to enhance the overall master planned community; (b) there are
synergies of development and marketing costs which may be a benefit to us; (c)
the Trust will maintain a high quality of operations, ensuring that the
existence of the apartments in the master plan will not negatively affect the
image of the community as a whole; and (d) as has been our experience with
another Trust property, apartment tenants are potential customers for our
townhomes and single-family homes. Moreover, the sale has allowed us to recover
cash, remove the Property from our balance sheet, and free us from the need to
provide capital from our credit facility to build the apartment units. The $9.8
million purchase price was approved by the Committee after reviewing an offer
from an independent third party and after reviewing an independent professional
appraisal. The sale was completed in May 2003.
We do not currently guarantee any indebtedness of the joint ventures or the
Trust. Our total commitment to these entities is not material to our financial
condition. These investments are accounted for on the equity method.
19
RESULTS OF OPERATIONS
The following table sets forth, for the nine-month and three-month periods ended
July 31, 2003 and 2002, a comparison of certain income statement items related
to our operations (amounts in millions):
Nine months ended Three months ended
July 31, July 31,
2003 2002 2003 2002
-------------------- -------------------- ------------------- ---------------
$ % $ % $ % $ %
-------------------- -------------------- ------------------- ---------------
Housing sales
Revenues 1,837.4 1,587.2 678.5 565.4
Costs 1,334.6 72.6 1,149.7 72.4 492.2 72.5 409.7 72.5
- ---------------------------------------------------------------------------------------------------------------------
Land sales
Revenues 21.0 26.5 7.6 12.5
Costs 13.5 64.0 18.1 68.3 2.7 35.9 8.9 71.7
- ---------------------------------------------------------------------------------------------------------------------
Equity earnings from
unconsolidated
entities 0.7 1.7 .6 .2
- ---------------------------------------------------------------------------------------------------------------------
Other 12.8 8.0 7.0 2.6
- ---------------------------------------------------------------------------------------------------------------------
Total revenues 1,871.9 1,623.4 693.7 580.7
- ---------------------------------------------------------------------------------------------------------------------
Selling, general
& administrative
expenses* 206.4 11.0 172.9 10.6 73.2 10.6 61.9 10.7
- ---------------------------------------------------------------------------------------------------------------------
Interest expense* 50.1 2.7 45.3 2.8 17.6 2.5 15.6 2.7
- ---------------------------------------------------------------------------------------------------------------------
Expenses related to
early retirement
of debt* 3.9 0.2
- ---------------------------------------------------------------------------------------------------------------------
Total costs
and expenses* 1,608.5 85.9 1,386.0 85.4 585.8 84.5 496.1 85.4
- ---------------------------------------------------------------------------------------------------------------------
Income before
income taxes* 263.4 14.1 237.4 14.6 107.9 15.5 84.6 14.6
- ---------------------------------------------------------------------------------------------------------------------
Income taxes 97.0 86.9 39.7 31.1
- ---------------------------------------------------------------------------------------------------------------------
Net income* 166.4 8.9 150.5 9.3 68.2 9.8 53.5 9.2
- ---------------------------------------------------------------------------------------------------------------------
Note: Due to rounding, amounts may not add.
* Percentages are based on total revenues.
HOUSING SALES
Housing revenues for the nine-month and three-month periods ended July 31, 2003
were higher than those for the comparable period of 2002 by approximately $250
million, or 16%, and $113 million, or 20%, respectively. The increase in the
nine-month period was attributable to a 10% increase in the average price of the
homes delivered and a 6% increase in the number of homes delivered. The increase
in the three-month period was attributable to a 10% increase in the average
price of the homes delivered and a 9% increase in the number of homes delivered.
The increases in the average price of homes delivered in the fiscal 2003 periods
were the result of increased base selling prices, a shift in the location of
homes delivered to more expensive areas and increased expenditures on options
and lot premiums selected by our homebuyers. The increases in the number of
homes delivered in the fiscal 2003 periods were primarily due to the higher
backlog of homes at October 31, 2002 as compared to October 31, 2001 which was
primarily the result of a 17% increase in the number of new contracts signed in
fiscal 2002 over fiscal 2001.
20
The value of new sales contracts signed was $2.47 billion (4,404 homes) in the
nine months ended July 31, 2003, an 18% increase over the $2.09 billion (3,908
homes) value of new sales contracts signed in the comparable period of fiscal
2002. The value of new sales contracts signed was $952.7 million (1,671 homes)
in the three months ended July 31, 2003, a 35% increase over the $704.2 million
(1,274 homes) value of new sales contracts signed in the comparable period of
fiscal 2002. The increase in the nine-month period is attributable to a 13%
increase in the number of units sold and a 5% increase in the average selling
price of the homes. The increase in the three-month period is attributable to a
31% increase in the number of units sold and a 3% increase in the average
selling price of the homes. The increase in the average selling price in both
periods was attributable to increases in base selling prices and increased
option and lot premiums selected by our home buyers. The increase in the number
of units sold in the nine-month and three-month periods is attributable to the
continued demand for our product and the increase in the number of communities
from which we are selling. We were selling from 180 communities at July 31,
2003, 176 at April 30, 2003, 170 communities at October 31, 2002, 167
communities at July 31, 2002, 166 at April 30, 2002 and 155 communities at
October 31, 2001. At October 31, 2003 we expect to be selling from approximately
190 communities and approximately 205 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 in our markets, attractive
mortgage rates and the belief of potential customers that the purchase of a home
is a stable investment in the current period of economic uncertainty. At July
31, 2003, we had over 46,500 home sites under our control nationwide in markets
we consider to be affluent.
At July 31, 2003, our backlog of homes under contract was $2.49 billion
(4,411 homes), 31% higher than the $1.90 billion (3,441 homes) backlog at July
31, 2002. The increase in backlog at July 31, 2003 compared to the backlog at
July 31, 2002 is primarily attributable to a higher backlog at October 31, 2002
as compared to the backlog at October 31, 2001 and the increase in the value and
number of new contracts signed in the first nine months of fiscal 2003 as
compared to the first nine months of fiscal 2002, offset, in part, by an
increase in the number of homes delivered in the first nine months of fiscal
2003 compared to the first nine months of fiscal 2002.
Based on the size of our current backlog, the continued demand for our product,
the increased number of selling communities from which we are operating and the
additional communities we expect to open in the coming months, we believe that
we will deliver approximately 4,900 homes in fiscal 2003 and approximately 6,000
homes in fiscal 2004. We estimate that the average price of the homes delivered
will be approximately $550,000 in fiscal 2003 and between $545,000 and $555,000
in fiscal 2004.
Housing costs as a percentage of housing sales increased slightly in the
nine-month period ended July 31, 2003 as compared to the comparable period of
fiscal 2002. The increase was primarily the result of increased land and
improvement costs and higher inventory write-offs, offset, in part, by higher
selling prices. We incurred $4.3 million in write-offs in the nine-month period
ended July 31, 2003 as compared to $3.4 million in the comparable period of
fiscal 2002.
21
Housing costs as a percentage of housing sales in the three-month period ended
July 31 2003 on an overall basis was approximately the same as the comparable
period of fiscal 2002. As a percentage of housing sales, land and land
improvement costs were higher in the fiscal 2003 quarter as compared to the
comparable quarter in fiscal 2002 and construction costs were lower. For the
three months ended July 31, 2003, we incurred $2.0 million in write-offs as
compared to $1.6 million in the comparable period of fiscal 2002.
For the full 2003 fiscal year, we expect that housing costs as a percentage of
housing revenues will be slightly higher than in fiscal 2002.
LAND SALES
We are developing several communities in which we sell a portion of the land to
other builders. The amount of land sales will vary from quarter to quarter
depending upon the scheduled timing of the delivery of the land parcels. Land
sales amounted to $21.0 million and $7.6 million for the nine months and three
months ended July 31, 2003, respectively, including $6.6 million from the sale
of land to the Toll Brothers Realty Trust Group. (See "Critical Accounting
Policies - Joint Venture Accounting" for a description of the sale to the
Trust). For the nine months and three months ended July 31, 2002, land sales
were $26.5 million and $12.5 million, respectively. For the full 2003 fiscal
year, land sales are expected to be approximately $25 million compared to $36.2
million in fiscal 2002.
EQUITY EARNINGS IN UNCONSOLIDATED ENTITIES
We are a participant in several joint ventures and in Toll Brothers Realty Trust
Group. We recognize our proportionate share of the earnings from these entities.
(See "Critical Accounting Policies - Joint Venture Accounting" for a description
of our investments in and commitments to these entities.) Earnings from the
joint ventures will vary significantly from quarter to quarter. For the
nine-month and three-month periods of fiscal 2003, we recognized $.7 million and
$.6 million of earnings from these unconsolidated entities. For the nine-month
and three-month periods of fiscal 2002, we recognized $1.7 million and $.2
million of earnings from these unconsolidated entities. For fiscal 2003, we
expect to realize approximately $1.2 million of income from our investments in
the joint ventures and the Trust in fiscal 2003 compared to $1.9 million in
fiscal 2002.
INTEREST AND OTHER INCOME
For the nine months ended July 31, 2003, interest and other income was $12.8
million, an increase of $4.8 million, as compared to $8.0 million in the
comparable period of fiscal 2002. This increase was primarily the result of a
$3.5 million profit realized from the sale of a small commercial property in
fiscal 2003, and higher income realized from our ancillary businesses offset, in
part, by decreases in interest income, retained customer deposits and management
and construction fee income.
For the three months ended July 31, 2003, interest and other income was $7.0
million, an increase of $4.3 million, as compared to $2.6 million in the
comparable period of fiscal 2002. This increase was primarily the result of a
$3.5 million profit realized from the aforementioned sale of a small commercial
property in fiscal 2003 and higher income realized from our ancillary
businesses.
For the full 2003 fiscal year, we expect interest and other income to be
approximately $16 million compared to $11.7 million in fiscal 2002.
22
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
In the nine-month and three-month periods ended July 31, 2003, SG&A spending
increased by $33.5 million and $11.3 million, or 19% and 18%, respectively, as
compared to the comparable periods of fiscal 2002. This increased spending was
principally due to higher sales commissions, higher costs incurred to operate
the greater number of selling communities that we had during the fiscal 2003
periods as compared to the comparable periods of fiscal 2002 and higher
insurance costs. For the full 2003 fiscal year, we expect that SG&A will
increase slightly as a percentage of revenues compared to the full 2002 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 in the nine-month and three-month periods ended July 31, 2003 was
slightly lower than in the comparable periods of fiscal 2002. For the full 2003
fiscal year, we expect interest expense as a percentage of revenues to be
slightly lower than the fiscal 2002 percentage.
EXPENSES RELATED TO THE EARLY RETIREMENT OF DEBT
We recognized a pretax charge of $3.9 million in the quarter ended January 31,
2003 representing the premium paid on the early redemption of our 8 3/4% Senior
Subordinated Notes due 2006 and the write-off of unamortized bond issuance costs
related to those notes. No similar charge was incurred in fiscal 2002.
In September 2003, we announced the redemption of all our outstanding $100
million of 7 3/4% Senior Subordinated Notes on October 6, 2003 at a price of
102.583% of the principal amount. We will realize a charge of approximately $3.3
million in the three-month period ending October 31, 2003. The charge represents
the premium we will pay on the early redemption of the notes and the write-off
of unamortized issuance costs.
INCOME BEFORE INCOME TAXES
Income before taxes increased in the nine-month and three-month periods ended
July 31, 2003 by $26.0 million or 11%, and $23.3 million or 27%, respectively,
as compared to the comparable periods of fiscal 2002.
INCOME TAXES
Income taxes were provided at an effective rate of 36.8% for both the nine-
month and three-month periods ended July 31, 2003. Income taxes were provided at
an effective rate of 36.6% and 36.8% for the nine-month and three-month periods
ended July 31, 2002, respectively. The difference in rates in the nine-month
period of fiscal 2003 as compared to the comparable period of fiscal 2002 was
due primarily to higher tax-free income in the fiscal 2002 period as compared to
the fiscal 2003 period.
23
CAPITAL RESOURCES AND LIQUIDITY
Funding for our operations has been provided principally by cash flow from
operating activities, unsecured bank borrowings and the public 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 immediately buy lots to replace
the ones delivered. Accordingly, we believe that cash flow from operating
activities before land inventory purchases is a better gauge of liquidity. See
Note 10 for the calculation of cash flow from operating activities before land
inventory purchases.
Cash flow from operating activities, before land inventory purchases, has
improved as operating results have improved. One of the main factors that
determines cash flow from operating activities, before land inventory purchases,
is the level of revenues from the delivery of homes and from land sales. We
anticipate that cash flow from operating activities, before land inventory
purchases, will continue to be strong due to the expected increase in home
deliveries in fiscal 2003 and 2004 as compared to fiscal 2002. 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 July 31, 2003, we had option contracts to acquire land of
approximately $928.2 million, of which approximately $92.6 million had been paid
or deposited. We have used our cash flow from operating activities, before land
inventory purchases, bank borrowings and public financing, 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 delivery time between the time
that 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 predict with reasonable
accuracy the number of homes we will deliver in the next six to nine months.
Should our business decline significantly, our inventory would decrease as we
complete and deliver the homes under construction and we do not commence
construction of as many new homes, resulting in a temporary increase in our cash
flow from operations; moreover, we might delay or curtail our acquisition of
additional land, which would further reduce our inventory levels and cash needs.
In July 2003, we increased our revolving credit facility by $35 million to $575
million and our term loan by $15 million to $222.5 million. Our revolving credit
facility extends to March 2006. At July 31, 2003, we had no borrowings and
approximately $108.1 million of letters of credit outstanding under the
facility.
In November 2002, we issued $300 million of 6.875% Senior Notes due 2012. We
used the proceeds to repay all of the $100 million principal amount outstanding
of our 8 3/4% Senior Subordinated Notes due 2006, to repay bank debt and for
general corporate purposes.
In August 2003, we sold 3.0 million shares of common stock for an aggregate
sales price of $86.4 million. The proceeds from this sale will be used for
general corporate purposes. In connection with this sale, we gave the
underwriter the right to purchase, for a period of thirty days which expires
September 12, 2003, up to an additional 300,000 shares of common stock at a
price of $28.80 per share.
24
In September 2003, we sold $250 million of 5.95% Senior Notes due 2013. The net
proceeds of $246.3 million will be used to redeem all of our outstanding $100
million 7 3/4% Senior Subordinated Notes on October 6, 2003 at a price of
102.583% of the principal amount and for general corporate purposes.
We believe that we will be able to continue to fund our activities through a
combination of existing cash resources, cash flow from operations and existing
sources of credit, including the public 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. 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. Since the sales prices of homes are fixed at the time a buyer enters
into a contract to acquire a home and we generally contract to sell a home
before commencement of 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 costs,
as well as in 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.
25
HOUSING DATA
(For the nine months and three months ended July 31, 2003 and 2002)
Closings
Nine months ended July 31, 2003 2002
-------------------------------- -----------------------------
Units $million Units $million
-------------------------------- -----------------------------
Northeast
(MA, RI, NH, CT, NY, NJ) 511 307.8 650 337.5
Mid-Atlantic (PA, DE, MD,VA) 1,213 593.4 1,110 517.5
Midwest (OH, IL, MI) 269 143.4 305 142.4
Southeast (FL, NC, TN) 476 219.2 433 172.3
Southwest (AZ, NV, TX,CO) 512 267.8 389 209.0
West Coast (CA) 352 305.8 271 208.5
------------------------------ -----------------------------
Total 3,333 1,837.4 3,158 1,587.2
============================== =============================
Contracts
Nine months ended July 31, 2003 2002
-------------------------------- -----------------------------
Units $million Units $million
-------------------------------- -----------------------------
Northeast
(MA, RI, NH, CT, NY, NJ) 704 406.7 667 385.7
Mid-Atlantic (PA, DE, MD,VA) 1,726 856.8 1,449 675.5
Midwest (OH, IL, MI) 356 191.1 313 159.8
Southeast (FL, NC, SC, TN) 428 216.8 551 252.0
Southwest (AZ, NV, TX,CO) 589 340.7 490 243.7
West Coast (CA) 601 453.3 438 374.9
------------------------------ -----------------------------
Total 4,404 2,465.4 3,908 2,091.6
============================== =============================
Backlog
At July 31, 2003 2002
-------------------------------- -----------------------------
Units $million Units $million
-------------------------------- -----------------------------
Northeast
(MA, RI, NH, CT, NY, NJ) 853 483.6 668 378.9
Mid-Atlantic (PA, DE, MD,VA) 1,647 810.8 1,172 550.2
Midwest (OH, IL, MI) 351 192.1 302 157.1
Southeast (FL, NC, SC, TN) 336 202.0 446 231.1
Southwest (AZ, NV, TX,CO) 613 341.6 443 222.2
West Coast (CA) 611 456.0 410 365.0
------------------------------ -----------------------------
Total 4,411 2,486.1 3,441 1,904.5
============================== =============================
26
Closings
Three months ended July 31, 2003 2002
-------------------------------- -----------------------------
Units $million Units $million
-------------------------------- -----------------------------
Northeast
(MA, RI, NH, CT, NY, NJ) 179 112.6 214 114.5
Mid-Atlantic (PA, DE, MD,VA) 445 221.7 429 203.4
Midwest (OH, IL, MI) 103 57.1 89 41.6
Southeast (FL, NC, TN) 131 69.3 143 58.0
Southwest (AZ, NV, TX,CO) 212 114.0 142 77.7
West Coast (CA) 118 103.8 76 70.2
------------------------------ -----------------------------
Total 1,188 678.5 1,093 565.4
============================== =============================
Contracts
Three months ended July 31, 2003 2002
-------------------------------- -----------------------------
Units $million Units $million
-------------------------------- -----------------------------
Northeast
(MA, RI, NH, CT, NY, NJ) 247 141.7 218 125.5
Mid-Atlantic (PA, DE, MD,VA) 643 322.5 468 225.4
Midwest (OH, IL, MI) 136 74.6 111 58.4
Southeast (FL, NC, SC) 154 77.3 164 82.1
Southwest (AZ, NV, TX,CO) 207 119.1 184 94.3
West Coast (CA) 284 217.5 129 118.5
------------------------------ -----------------------------
Total 1,671 952.7 1,274 704.2
============================== =============================
(1) Contracts for the nine months ended July 31, 2003 and 2002 include $6.5
million (21 homes) and $8.9 million (26 homes), respectively, from an
unconsolidated 50% owned joint venture. Contracts for the three months ended
July 31, 2003 and 2002 include $1.1 million (3 homes) and $4.2 million (12
homes), respectively, from this joint venture.
(2) Backlog at July 31, 2003 and 2002 includes $5.8 million (19 homes) and $5.4
million (15 homes), respectively, from the joint venture described in note
(1) above.
27
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 will 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 such debt until we are required to refinance such debt.
The table below sets forth, at July 31, 2003, our debt obligations, principal
cash flows by scheduled maturity, weighted-average interest rates and estimated
fair value (amounts in thousands):
Fixed Rate Debt Variable Rate
Debt (1)(2)
Fiscal Weighted Weighted
Year of Average Average
Expected Interest Interest
Maturity Amount Rate (%) Amount Rate (%)
- ---------- ------------ --------- ---------- ----------
2003 $ 17,198 6.88% $94,797 2.63%
2004 25,438 5.44% 150 1.25%
2005 226,633 7.39% 150 1.25%
2006 4,416 6.67% 150 1.25%
2007 102,534 7.70% 150 1.25%
Thereafter 921,865 7.76% 3,860 1.25%
Discount (1,845)
---------- -------
Total $1,296,239 7.46% $99,257 2.58%
========== =======
Fair value at
July 31, 2003 $1,373,449 $99,257
========== =======
(1) At July 31, 2003, we had a $575 million unsecured revolving credit facility
with 17 banks which extends to March 2006. At July 31, 2003, we had no
borrowings and approximately $108.1 million of letters of credit outstanding
under the facility. Interest is currently payable on borrowings under this
facility at .90% (this rate will vary based upon our corporate debt rating
and leverage ratios) above the Eurodollar rate or at other specified
variable rates as selected by us from time to time.
(2) One of our subsidiaries has a $95 million line of credit with two banks to
fund mortgage originations. The line is due within 90 days of demand by the
bank and bears interest at the bank's overnight rate plus an agreed upon
margin. At July 31, 2003, the subsidiary had $94.6 million outstanding under
the line at an average interest rate of 2.64%. Borrowing under this line is
included in the 2003 fiscal year maturities.
Based upon the amount of variable rate debt outstanding at July 31, 2003 and
holding the variable rate debt balance constant, each one-percentage point
increase in interest rates would increase our interest costs by approximately
$1.0 million per year.
28
ITEM 4. CONTROLS AND PROCEDURES
Our chief executive officer and chief financial officer evaluated the
effectiveness of our disclosure controls and procedures (as defined in Rules
13a, 15(c)and 15(d)-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") and,
based on that evaluation, concluded that, as of the Evaluation Date, we had
sufficient controls and procedures for recording, processing, summarizing and
reporting information that is required to be disclosed in our reports under the
Securities Exchange Act of 1934, as amended, within the time periods specified
in the SEC's rules and forms.
There has not been any change in our internal control over financial reporting
during our quarter ended July 31, 2003 that has materially affected, or is
reasonably likely to materially affect, our internal control over our 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. Changes in Securities and Use of Proceeds
None
ITEM 3. Defaults upon Senior Securities
None
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
None
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 31.1* - Certification of Robert I. Toll pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 31.2* - Certification of Joel H. Rassman pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.1* - Certification of Robert I. Toll pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
Exhibit 32.2* - Certification of Joel H. Rassman pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
*Filed electronically herewith.
29
(b) Reports on Form 8-K
During the quarter ended July 31, 2003, we filed the following
Current Reports on Form 8-K:
(1) On May 8, 2003, we filed a Current Report on Form 8-K
for the purpose of filing a press release related to the
announcement of preliminary information related to our second
quarter 2003 revenues and contracts signed and the value of
our backlog of undelivered homes as of April 30, 2003.
(2) On May 28, 2003, we filed a Current Report on Form 8-K for
the purpose of filing a press release related to the
announcement of our quarter ended April 30, 2003 financial
results.
(3) On July 1, 2003, we filed a Current Report on Form 8-K for
the purpose of filing a press release related to the announcement
of increases to our bank credit facilities.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOLL BROTHERS, INC.
(Registrant)
Date: September 10, 2003 By: Joel H. Rassman
-----------------
Joel H. Rassman
Executive Vice President,
Treasurer and Chief
Financial Officer
Date: September 10, 2003 By: Joseph R. Sicree
------------------
Joseph R. Sicree
Vice President -
Chief Accounting Officer
(Principal Accounting Officer)
30