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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(MARK ONE)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JULY 31, 2005
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM _______________ TO _____________
COMMISSION FILE NUMBER 1-9186
TOLL BROTHERS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 23-2416878
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
250 GIBRALTAR ROAD, HORSHAM, PENNSYLVANIA 19044
------------------------------------------ --------------
(Address of principal executive offices) (Zip Code)
(215) 938-8000
----------------------------------------------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
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(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes |X| No |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes |X| No |_|
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
At September 5, 2005, there were approximately 155,691,000 shares of Common
Stock, $.01 par value, outstanding.
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TOLL BROTHERS, INC. AND SUBSIDIARIES
TABLE OF CONTENTS
PAGE NO.
Statement on Forward-Looking Information....................... 1
PART I. Financial Information
ITEM 1. Financial Statements
Condensed Consolidated Balance Sheets
at July 31, 2005 (Unaudited)
and October 31, 2004................. 2
Condensed Consolidated Statements of
Income (Unaudited) For the
Nine Months and Three Months Ended
July 31, 2005 and 2004................ 3
Condensed Consolidated Statements of
Cash Flows (Unaudited) For the
Nine Months Ended July 31, 2005 and
2004.................................. 4
Notes to Condensed Consolidated
Financial Statements (Unaudited)............................... 5
ITEM 2. Management's Discussion and Analysis
of Financial Condition and
Results of Operations................ 20
ITEM 3. Quantitative and Qualitative
Disclosures About Market Risk.................................. 27
ITEM 4. Controls and Procedures............... 28
PART II. Other Information
Item 1. Legal Proceedings..................... 29
Item 2. Unregistered Sales of Equity
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.............................. 30
SIGNATURES..................................................... 31
STATEMENT ON FORWARD-LOOKING INFORMATION
Certain information included herein and in our other reports, SEC filings,
statements and presentations is forward-looking within the meaning of the
Private Securities Litigation Reform Act of 1995, including, but not limited
to, statements concerning our anticipated operating results, financial
resources, changes in revenues, changes in profitability, anticipated income
to be realized from our investments in unconsolidated entities, interest
expense, growth and expansion, ability to acquire land, ability to sell homes
and properties, ability to deliver homes from backlog, ability to gain
approvals and to open new communities, ability to secure materials and
subcontractors, average delivered prices of homes, ability to maintain the
liquidity and capital necessary to expand and take advantage of future
opportunities and stock market valuations. In some cases you can identify
those so called forward-looking statements by words such as "may," "will,"
"should," "expect," "plan," "anticipate," "believe," "estimate," "predict,"
"potential," "project," "intend," "can," "could," "might," or "continue" or
the negative of those words or other comparable words. Such forward-looking
information involves important risks and uncertainties that could
significantly affect actual results and cause them to differ materially from
expectations expressed herein and in our other reports, SEC filings,
statements and presentations. These risks and uncertainties include local,
regional and national economic and political conditions, the consequences of
any future terrorist attacks such as those that occurred on September 11,
2001, the effects of governmental regulation, the competitive environment in
which we operate, fluctuations in interest rates, changes in home prices, the
availability and cost of land for future growth, the availability of capital,
fluctuations in capital and securities markets, the availability and cost of
labor and materials, and weather conditions.
Additional information concerning potential factors that we believe could
cause our actual results to differ materially from expected and historical
results is included under the caption "Factors That May Affect Our Future
Results" in Item 1 of our Annual Report on Form 10-K for the fiscal year ended
October 31, 2004. If one or more of the assumptions underlying our
forward-looking statements proves incorrect, then our actual results,
performance or achievements could differ materially from those expressed in,
or implied by the forward-looking statements contained in this report.
Therefore, we caution you not to place undue reliance on our forward-looking
statements. This statement is provided as permitted by the Private Securities
Litigation Reform Act of 1995.
When this report uses the words "we," "us," and "our," they refer to Toll
Brothers, Inc. and its subsidiaries, unless the context otherwise requires.
References herein to "fiscal 2006," "fiscal 2005," and "fiscal 2004" refer to
our fiscal years ending October 31, 2006 and October 31, 2005 and our fiscal
year ended October 31, 2004, respectively.
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS)
JULY 31, OCTOBER 31,
2005 2004
----------- -----------
(UNAUDITED)
ASSETS
Cash and cash equivalents ......................... $ 505,947 $ 465,834
Marketable securities ............................. 115,029
Inventory ......................................... 4,840,115 3,878,260
Property, construction and office equipment, net .. 72,735 52,429
Receivables, prepaid expenses and other assets .... 166,858 146,212
Mortgage loans receivable ......................... 82,929 99,914
Customer deposits held in escrow .................. 86,721 53,929
Investments in and advances to unconsolidated
entities........................................ 126,566 93,971
---------- ----------
$5,881,871 $4,905,578
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Loans payable .................................... $ 152,655 $ 340,380
Senior notes ..................................... 1,139,743 845,665
Senior subordinated notes ........................ 350,000 450,000
Mortgage company warehouse loan .................. 72,149 92,053
Customer deposits ................................ 438,184 291,424
Accounts payable ................................. 261,244 181,972
Accrued expenses ................................. 767,510 574,202
Income taxes payable ............................. 173,708 209,895
---------- ----------
Total liabilities ............................. 3,355,193 2,985,591
---------- ----------
STOCKHOLDERS' EQUITY
Preferred stock, none issued
Common stock, 156,266 shares and 154,004 shares
issued at July 31, 2005 and October 31, 2004,
respectively.................................... 1,563 770
Additional paid-in capital ....................... 260,178 200,938
Retained earnings ................................ 2,265,808 1,770,730
Unearned compensation ............................ (760)
Treasury stock, at cost - 2 shares and 4,362
shares at July 31, 2005 and October 31, 2004,
respectively.................................... (111) (52,451)
---------- ----------
Total stockholders' equity .................... 2,526,678 1,919,987
---------- ----------
$5,881,871 $4,905,578
========== ==========
See accompanying notes.
2
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
NINE MONTHS ENDED JULY THREE MONTHS ENDED JULY
31, 31,
----------------------- -----------------------
2005 2004 2005 2004
---------- ---------- ---------- ----------
Revenues:
Home sales ................................................................. $3,751,594 $2,395,150 $1,536,499 $ 991,264
Land sales ................................................................. 21,608 20,938 10,583 12,940
Equity earnings in unconsolidated entities ................................. 9,539 6,945 4,231 5,551
Interest and other ......................................................... 26,575 7,483 10,583 3,364
---------- ---------- ---------- ----------
3,809,316 2,430,516 1,561,896 1,013,119
---------- ---------- ---------- ----------
COSTS AND EXPENSES:
Home sales ................................................................. 2,539,885 1,716,535 1,023,743 709,484
Land sales ................................................................. 15,707 14,315 9,612 7,509
Selling, general and administrative ........................................ 349,706 270,155 126,283 103,608
Interest ................................................................... 85,532 59,970 35,594 24,216
Expenses related to early retirement of debt ............................... 4,056 8,229 4,056 481
---------- ---------- ---------- ----------
2,994,886 2,069,204 1,199,288 845,298
---------- ---------- ---------- ----------
Income before income taxes .................................................. 814,430 361,312 362,608 167,821
Income taxes ................................................................ 318,572 132,775 147,076 61,806
---------- ---------- ---------- ----------
Net income .................................................................. $ 495,858 $ 228,537 $ 215,532 $ 106,015
========== ========== ========== ==========
EARNINGS PER SHARE:
Basic ...................................................................... $ 3.22 $ 1.54 $ 1.39 $ 0.71
========== ========== ========== ==========
Diluted .................................................................... $ 2.94 $ 1.41 $ 1.27 $ 0.66
========== ========== ========== ==========
WEIGHTED AVERAGE NUMBER OF SHARES:
Basic ...................................................................... 153,851 148,398 155,274 148,705
Diluted .................................................................... 168,426 162,110 169,843 161,840
See accompanying notes.
3
TOLL BROTHERS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED JULY
31,
-------------------------
2005 2004
----------- -----------
Cash flow from operating activities:
Net income ....................................... $ 495,858 $ 228,537
Adjustments to reconcile net income to net cash
provided by operating
activities:
Depreciation and amortization................... 14,355 11,231
Amortization of initial benefit obligation...... 2,851
Equity earnings in unconsolidated entities...... (9,539) (6,945)
Deferred tax provision.......................... 27,501 12,113
Provision for inventory write-offs.............. 3,722 2,441
Write-off of unamortized debt discount and
financing costs................................. 416 1,322
Changes in operating assets and liabilities
Increase in inventory ......................... (899,807) (728,665)
Origination of mortgage loans ................. (599,634) (516,397)
Sale of mortgage loans ........................ 616,619 482,968
Increase in receivables, prepaid expenses and
other assets.................................... (20,735) (67,912)
Increase in customer deposits ................. 113,968 110,998
Increase in accounts payable and accrued
expenses........................................ 297,273 139,251
Increase in current income taxes payable ...... 7,221 26,086
----------- -----------
Net cash provided by (used in) operating
activities...................................... 50,069 (304,972)
----------- -----------
Cash flow from investing activities:
Purchase of property and equipment, net .......... (31,655) (13,543)
Purchase of marketable securities ................ (3,599,814) (1,568,142)
Sale of marketable securities .................... 3,714,843 1,752,753
Investments in and advances to unconsolidated
entities........................................ (29,961) (60,792)
Distributions from unconsolidated entities ....... 6,905 23,588
----------- -----------
Net cash provided by investing activities .... 60,318 133,864
----------- -----------
Cash flow from financing activities:
Proceeds from loans payable ...................... 786,321 693,407
Principal payments of loans payable .............. (1,059,720) (684,384)
Net proceeds from issuance of public debt ........ 293,597 297,432
Redemption of senior subordinated notes .......... (100,000) (170,000)
Proceeds from stock based benefit plans .......... 40,640 12,065
Purchase of treasury stock ....................... (31,112) (20,138)
----------- -----------
Net cash (used in) provided by financing
activities...................................... (70,274) 128,382
----------- -----------
Net increase (decrease) in cash and cash
equivalents..................................... 40,113 (42,726)
Cash and cash equivalents, beginning of period .... 465,834 234,506
----------- -----------
Cash and cash equivalents, end of period .......... $ 505,947 $ 191,780
=========== ===========
See accompanying notes.
4
TOLL BROTHERS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
GENERAL
Our condensed consolidated financial statements include the accounts of Toll
Brothers, Inc. (the "Company"), a Delaware corporation, and its majority-owned
subsidiaries. All significant intercompany accounts and transactions have been
eliminated. Investments in 20% to 50% owned entities are accounted for on the
equity method. Investments in less than 20% owned entities are accounted for
on the cost method.
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission ("SEC") for interim financial information. The
October 31, 2004 balance sheet amounts and disclosures included herein have
been derived from the Company's October 31, 2004 audited financial statements.
Since the accompanying condensed consolidated financial statements do not
include all the information and footnotes required by U.S. generally accepted
accounting principles for complete financial statements, the Company suggests
that they be read in conjunction with the financial statements and notes
thereto included in its October 31, 2004 Annual Report on Form 10-K. In the
opinion of management, the accompanying unaudited condensed consolidated
financial statements include all adjustments, which are of a normal recurring
nature, necessary to present fairly the Company's financial position as of
July 31, 2005, the results of its operations for the nine months and three
months ended July 31, 2005 and 2004 and its cash flows for the nine months
ended July 31, 2005 and 2004. The results of operations for such interim
periods are not necessarily indicative of the results to be expected for the
full year.
RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 123 (revised
2004), "Share-Based Payment" ("SFAS 123R"), effective for periods beginning
after June 15, 2005. In April 2005, the SEC adopted a rule permitting issuers
to implement SFAS 123R at the beginning of their next fiscal year that begins
after June 15, 2005. The Company expects that the FASB will adopt the SEC's
rule. SFAS 123R requires that all stock-based compensation be treated as a
cost that is reflected in the financial statements. Under the provisions of
SFAS 123R, the Company has the choice of adopting the fair-value-based method
of expensing of stock options using (a) the "modified prospective method,"
whereby the Company recognizes the expense only for periods beginning after
the date that SFAS 123R is adopted, or (b) the "modified retrospective
method," whereby the Company recognizes the expense for all years and interim
periods since the effective date of SFAS 123 or for only those interim periods
of the year of initial adoption of SFAS 123R. The Company has not yet
determined which method it will adopt. Under the SEC's rule, the Company is
required to adopt the new standard for its fiscal year 2006 and under the
FASB's current rule for its fiscal period beginning August 1, 2005. See Note
9, "Stock Based Benefit Plans," for pro forma information regarding the
Company's expensing of stock options for the nine-month and three-month
periods ended July 31, 2005 and 2004.
In June 2005, the Emerging Issues Task Force ("EITF") released Issue No.
04-5 "Determining Whether a General Partner, or the General Partner as a
Group, Controls a Limited Partnership or Similar Entity When the Limited
Partners Have Certain Rights" ("EITF 04-5"). EITF 04-5 provides guidance in
determining whether a general partner controls a limited partnership and
therefore should consolidate the limited partnership in its financial
statements. EITF 04-5 states that the general partner in a limited partnership
is presumed to control that limited partnership and that the presumption may
be overcome if the limited partners have either (1) the substantive ability to
dissolve or liquidate the limited partnership or otherwise remove the general
partner without cause, or (2) substantive participating rights. The effective
date for applying the guidance in EITF 04-5 is (1) June 29, 2005 for all new
limited partnerships and existing limited partnerships for which the
partnership agreement is modified after that date, and (2) no later than the
beginning of the first reporting period in fiscal years beginning after
December 15, 2005, for all other limited partnerships.
5
Implementation of EITF 04-5 did not have a material impact on the Company's
financial position during the quarter ended July 31, 2005.
RECLASSIFICATION
Auction rate securities in the amount of $115.0 million, $6.1 million and
$191.0 million have been reclassified from cash and cash equivalents to
marketable securities at October 31, 2004, July 31, 2004 and October 31, 2003,
respectively, to conform with the fiscal 2005 financial statement
presentation.
STOCK SPLIT
On June 9, 2005, the Company's Board of Directors declared a two-for-one
split of the Company's common stock in the form of a stock dividend to
stockholders of record on June 21, 2005. The additional shares of stock were
distributed as of the close of business on July 8, 2005. All share and per
share information has been adjusted and restated to reflect this split.
ACQUISITION
In June 2005, the Company acquired substantially all of the assets of the
Central Florida Division of Landstar Homes ("Landstar"). Landstar designs,
constructs, markets and sells homes in the Orlando metropolitan area. For the
full calendar year 2005, Landstar anticipated delivering approximately 520
homes and producing revenues of approximately $150 million. Of the
approximately $209.0 million (566 homes) of homes sold but not delivered at
the acquisition date of Landstar, the Company delivered $21.3 million (73
homes) of homes between the acquisition date and July 31, 2005. The Company
realized no profit from the delivery of these homes since they were
substantially complete at the acquisition date, and under purchase accounting
rules, the Company allocated a portion of the purchase price to the unrealized
profit on these homes at the acquisition date. The Company did not recognize
revenues on these home deliveries but has reduced the value of the acquired
inventory by the amount of revenue realized. The Company expects that the
deliveries from this acquisition will have a minimal impact on the Company's
earnings in its fiscal quarter ending October 31, 2005. The acquisition price
of Landstar is not material to the financial position of the Company.
2. INVENTORY
Inventory consisted of the following (amounts in thousands):
JULY 31, OCTOBER 31,
2005 2004
---------- -----------
Land and land development costs .................... $1,329,243 $1,242,417
Construction in progress ........................... 2,934,669 2,178,112
Sample homes and sales offices ..................... 216,953 208,416
Land deposits and costs of
future development................................ 347,019 237,353
Other .............................................. 12,231 11,962
---------- -----------
$4,840,115 $3,878,260
========== ==========
Construction in progress includes the cost of homes under construction, land
and land development costs and the carrying costs of lots that have been
substantially improved.
6
The Company capitalizes certain interest costs to inventory during the
development and construction period. Capitalized interest is charged to
interest expense when the related inventory is delivered. Interest incurred,
capitalized and expensed for the nine-month and three-month periods ended
July 31, 2005 and 2004 is summarized as follows (amounts in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
JULY 31, JULY 31,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Interest capitalized, beginning of period ................................... $173,442 $154,314 $180,797 $174,416
Interest incurred ........................................................... 87,069 85,137 28,921 28,632
Interest expensed ........................................................... (85,532) (59,970) (35,594) (24,216)
Write-off to cost and expenses .............................................. (868) (784) (13) (135)
-------- -------- -------- --------
Interest capitalized, end of period ......................................... $174,111 $178,697 $174,111 $178,697
======== ======== ======== ========
The Company evaluates its land purchase contracts in accordance with the
FASB Interpretation No. 46 ("FIN 46"), "Consolidation of Variable Interest
Entities, an interpretation of ARB No. 51" as amended by FIN 46R. Pursuant to
FIN 46, an enterprise that absorbs a majority of the expected losses of the
variable interest entities ("VIE") must consolidate the VIE. A VIE is an
entity with insufficient equity investment or in which the equity investors
lack some of the characteristics of a controlling financial interest. At
July 31, 2005 and October 31, 2004, the Company had recorded $73.3 million and
$15.4 million of land purchase contracts, respectively, as inventory pursuant
to the terms of FIN 46.
3. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED ENTITIES
The Company has investments in and advances to several joint ventures with
unrelated parties to develop land. Some of these joint ventures develop land
for the sole use of the venture partners, including the Company, and others
develop land for sale to the venture partners and to unrelated builders. The
Company recognizes its share of earnings from the sale of home sites to other
builders. The Company does not recognize earnings from home sites it purchases
from the joint ventures, but instead reduces its cost basis in these home
sites by its share of the earnings on the home sites. At July 31, 2005, the
Company had approximately $76.3 million invested in or advanced to these joint
ventures and was committed to contributing additional capital in an aggregate
amount of approximately $34.3 million (in addition to $129.7 million of loan
guarantees by the Company related to two of the joint ventures' debt as
described below) if required by the joint ventures. At July 31, 2005, one of
the joint ventures had a loan commitment of $535 million, of which the Company
has guaranteed up to $56.2 million, its pro-rata share of the amount financed,
and the joint venture had approximately $402 million borrowed against this
commitment. At July 31, 2005, a second joint venture had a loan commitment of
$490 million, of which the Company has guaranteed up to $73.5 million, its
pro-rata share of the loan commitment, and the joint venture had approximately
$375 million borrowed against this commitment.
In January 2004, the Company entered into a joint venture in which it has a
50% interest with an unrelated party to develop Maxwell Place, an
approximately 800-unit luxury condominium community in Hoboken, New Jersey. At
July 31, 2005, the Company had investments in and advances to the joint
venture of $30.1 million and was committed to making up to $1.0 million of
additional investments in and advances to the joint venture. The joint venture
has obtained a loan to finance a portion of the construction, of which the
Company and its joint venture partner each have separately guaranteed $25.0
million of the principal amount of the loan. The Company expects that the
joint venture will obtain additional third-party financing to fund the
remaining portion of the construction of this project and that the Company and
the other joint venture partner may be required to guarantee their pro-rata
portions of any additional loans.
In October 2004, the Company entered into a joint venture in which it has a
50% interest with an unrelated party to convert a 525-unit apartment complex,
The Hudson Tea Buildings, located in Hoboken, New Jersey, into luxury
condominium units. At July 31, 2005, the Company had investments in and
advances to the joint venture of $7.5 million, and was committed to making up
to $1.5 million of additional investments in and advances to the joint
venture.
7
The Company has a minority interest in a joint venture with unrelated
parties that has developed and marketed The Sky Club, a 326-unit, 17-story,
two-tower structure, located in Hoboken, New Jersey. The joint venture has
delivered substantially all of the units in the Sky Club. At July 31, 2005,
the Company's investment in this joint venture was $5.7 million. The Company
does not have any commitment to contribute additional capital to this joint
venture.
To take advantage of commercial real estate opportunities, the Company
formed Toll Brothers Realty Trust Group (the "Trust") in 1998. The Trust is
effectively owned one-third by the Company, one-third by Robert I. Toll, Bruce
E. Toll (and members of his family), Zvi Barzilay (and members of his family),
Joel H. Rassman and other members of the Company's senior management, and
one-third by the Pennsylvania State Employees Retirement System (collectively,
the "Shareholders"). In addition, the Shareholders entered into subscription
agreements (which were to expire in August 2005), whereby each group agreed to
invest additional capital in an amount not to exceed $9.3 million if required
by the Trust. In August 2005, the capital investment amounts under the
subscription agreements were reduced to $1.9 million for each Shareholder and
the expiration dates were extended to August 2006. At July 31, 2005, the
Company had an investment of $6.1 million in the Trust. The Company provided
development, finance and management services to the Trust and received fees
under the terms of various agreements in the amount of $1.9 million and $.4
million in the nine-month and three-month periods ended July 31, 2005,
respectively, compared to $1.3 million and $.3 million in the comparable
periods of fiscal 2004. The Company believes that the transactions between
itself and the Trust have been on terms no less favorable than it would have
agreed to with unrelated parties.
4. LOANS PAYABLE, SENIOR NOTES AND SENIOR SUBORDINATED NOTES
In June 2005, Toll Brothers Finance Corp., a wholly-owned, indirect
subsidiary of the Company, sold $300 million of 5.15% Senior Notes due 2015.
The obligations of Toll Brothers Finance Corp. to pay principal, premiums, if
any, and interest are guaranteed jointly and severally on a senior basis by
the Company and substantially all of the Company's home building subsidiaries.
The guarantees are full and unconditional. The Company's non-home building
subsidiaries and certain home building subsidiaries did not guarantee the
debt.
In June 2005, the Company repaid all of its $222.5 million bank term loan
that would have matured in July 2005 and redeemed all of its outstanding $100
million 8% Senior Subordinated Notes due 2009 at 102.667% of principal amount.
The repayment and redemption resulted in a pre-tax charge in the Company's
quarter ended July 31, 2005 of approximately $4.1 million, which represented
the bank term loan termination charge, the call premium on the notes and the
write-off of the unamortized issuance costs.
5. ACCRUED EXPENSES
Accrued expenses consisted of the following (amounts in thousands):
JULY 31, OCTOBER 31,
2005 2004
-------- -----------
Land, land development
and construction costs.............................. $371,929 $229,045
Compensation and employee benefit costs .............. 100,638 89,865
Warranty costs ....................................... 48,346 42,133
Other ................................................ 246,597 213,159
-------- --------
$767,510 $574,202
======== ========
8
6. WARRANTY COSTS
The Company accrues for expected warranty costs at the time each home is
closed and title and possession have been transferred to the home buyer. Costs
are accrued based upon historical experience. Changes in the warranty accrual
for the nine-month and three-month periods ended July 31, 2005 and 2004 are as
follows (amounts in thousands):
THREE MONTHS
NINE MONTHS ENDED ENDED
JULY 31, JULY 31,
------------------- -----------------
2005 2004 2005 2004
-------- -------- ------- -------
Balance, beginning of period .................................................. $ 42,133 $ 33,752 $46,058 $36,225
Additions ..................................................................... 25,265 16,640 9,752 6,720
Charges incurred .............................................................. (19,052) (12,187) (7,464) (4,740)
-------- -------- ------- -------
Balance, end of period ........................................................ $ 48,346 $ 38,205 $48,346 $38,205
======== ======== ======= =======
7. RETIREMENT PLAN
In October 2004, the Company established an unfunded defined benefit
retirement plan effective as of September 1, 2004. For the nine-month and
three-month periods ended July 31, 2005, the Company recognized the following
costs related to this plan (amounts in thousands):
NINE MONTHS ENDED THREE MONTHS ENDED
JULY 31, 2005 JULY 31, 2005
----------------- ------------------
Service cost ......................... $ 234 $ 78
Interest cost ........................ 582 194
Amortization of initial benefit
obligation.......................... 2,851 950
------ ------
$3,667 $1,222
====== ======
The Company used a 5.69% discount rate in its calculation of the present
value of its projected benefit obligation.
8. INCOME TAXES
The Company operates in 20 states and is subject to various state tax
jurisdictions. The Company estimates its state tax liability based upon the
individual taxing authorities' regulations, estimates of income and its
ability to utilize certain tax saving strategies. Due primarily to a change in
the Company's estimate of the allocation of income to the various taxing
jurisdictions and changes in tax regulations and their impact on the Company's
tax strategies, the Company's estimated effective state income tax rate for
fiscal 2005 has been revised to 6.3% from the estimated effective state income
tax rate of 4.6% used at April 30, 2005.
Provisions for federal and state income taxes are calculated on reported
pre-tax earnings based on current tax law and also include, in the current
period, the cumulative effect of any changes in tax rates from those used
previously in determining deferred tax assets and liabilities. Such provisions
differ from the amounts currently receivable or payable because certain items
of income and expense are recognized for financial reporting purposes in
different periods than for income tax purposes. Significant judgment is
required in determining income tax provisions and evaluating tax positions. We
establish reserves for income taxes when, despite the belief that our tax
positions are fully supportable, we believe that our positions may be
challenged and disallowed by various tax authorities. The consolidated tax
provision and related accruals include the impact of such reasonably estimable
disallowances as deemed appropriate. To the extent that the probable tax
outcome of these matters changes, such changes in estimate will impact the
income tax provision in the period in which such determination is made.
The Company's estimated combined federal and state income tax rate before
providing for the effect of permanent book-tax differences ("Base Rate") was
39.1% for 2005 and 37.0% for 2004. The increase in the Base Rate was due
primarily to an increase in the Company's estimated state income tax rate. The
increase in
9
the estimated state income tax rate was due to a combination of an expected
shift in income to states with higher tax rates and changes in state income
tax regulations.
The effective tax rates for the nine-month periods ended July 31, 2005 and
2004 were 39.1% and 36.7%, respectively. For the nine-month period ended
July 31, 2005, the recalculation of the Company's net deferred tax liability
using the new estimated state tax rate (the "FAS 109 Adjustment") resulted in
an additional tax provision of approximately $2.9 million. The impact of the
FAS 109 Adjustment in the nine-month period was offset by the positive impact
of tax-free income on the tax provision. For the nine-month period ended
July 31, 2004, the primary difference between the effective rate and the Base
Rate was the effect of tax-free income.
The effective tax rates for the three-month periods ended July 31, 2005 and
2004 were 40.6% and 36.8%, respectively. The difference between the effective
rate and the Base Rate in the fiscal 2005 period was the additional tax
provision provided in the period for a FAS 109 Adjustment of approximately
$1.4 million and the recalculation of the tax provision for the six-month
period ended April 30, 2005 of approximately $5.0 million resulting from a
change in the Company's estimated Base Rate from 38.0% at April 30, 2005 to
39.1% at July 31, 2005, offset, in part, by the positive impact of tax-free
income on the tax provision. For the three-month period ended July 31, 2004,
the primary difference between the effective rate and the Base Rate was the
effect of tax-free income.
9. STOCK BASED BENEFIT PLANS
SFAS No. 123, "Accounting for Stock-Based Compensation," as amended by SFAS
No. 148 ("SFAS 123"), requires the disclosure of the estimated value of
employee option grants and their impact on net income. SFAS 123 (revised
2004), "Share-Based Payment" ("SFAS 123R"), requires the estimated value of
employee option grants to be recorded as an expense. SFAS 123 requires the use
of option pricing models that are designed to estimate the value of options
that, unlike employee stock options, can be traded at any time and are
transferable. In addition to restrictions on trading, employee stock options
may include other restrictions such as vesting periods and periods of time
when they cannot be exercised. Further, such models require the input of
highly subjective assumptions, including the expected volatility of the stock
price. Therefore, in management's opinion, the existing models do not provide
a reliable single measure of the value of employee stock options. For fiscal
2004, the fair value of options granted was estimated using the Black-Scholes
option pricing model.
In order to better value option grants, the Company has developed a lattice
model which it believes better reflects the establishment of the fair value of
option grants. The Company has used the lattice model for the valuation of the
fiscal 2005 grants.
Under the terms of the Company's stock option grants, options are
exercisable for a period of 10 years and generally vest over a period of two
to four years, provided the grantee remains in the employ of the Company
during the vesting period. In some cases, options will continue to vest upon
an employee's retirement and agreement not to compete. The pro forma
disclosure presented below reflects the amortization of the stock option
expense over the expected vesting period.
The weighted-average assumptions used for stock option grants in fiscal 2005
and 2004 were approximately:
2005 2004
----- -----
Weighted-average risk-free interest rate .............. 3.64% 3.73%
Weighted-average expected life (years) ................ 5.70 6.99
Weighted-average volatility ........................... 31.31% 42.97%
Dividends ............................................. none none
10
Net income and net income per share as reported in these condensed
consolidated financial statements and on a pro forma basis, as if the
fair-value-based method described in SFAS 123R and SFAS 123 had been adopted,
for the nine-month and three-month periods ended July 31, 2005 and 2004 were
as follows (amounts in thousands, except per share amounts):
NINE MONTHS ENDED THREE MONTHS ENDED
JULY 31, JULY 31,
------------------- -------------------
2005 2004 2005 2004
-------- -------- -------- --------
Net income ........................................................ As reported $495,858 $228,537 $215,532 $106,015
Pro forma $484,137 $215,830 $211,520 $101,508
Basic net income per share ........................................ As reported $ 3.22 $ 1.54 $ 1.39 $ 0.71
Pro forma $ 3.15 $ 1.45 $ 1.36 $ 0.68
Diluted net income per share ...................................... As reported $ 2.94 $ 1.41 $ 1.27 $ 0.66
Pro forma $ 2.87 $ 1.33 $ 1.25 $ 0.63
Weighted-average grant date
fair value per share of
options granted .................................................. $ 11.67 $ 9.74 $ 11.67 $ 9.74
10. EARNINGS PER SHARE INFORMATION
The calculation of earnings per share for the nine-month and three-month
periods ended July 31, 2005 and 2004 is based upon the following share
information (amounts in thousands):
THREE MONTHS
NINE MONTHS ENDED ENDED
JULY 31, JULY 31,
----------------- -----------------
2005 2004 2005 2004
------- ------- ------- -------
Basic weighted average shares ................................................... 153,851 148,398 155,274 148,705
Common stock equivalents ........................................................ 14,575 13,712 14,569 13,135
------- ------- ------- -------
Diluted weighted average shares ................................................. 168,426 162,110 169,843 161,840
======= ======= ======= =======
11. STOCKHOLDERS EQUITY
At July 31, 2005, the Company's authorized share capital consisted of 200
million shares of common stock, $.01 par value per share, and 1 million shares
of preferred stock, $.01 par value per share. The Company's Board of Directors
is authorized to file amendments, from time to time, to the Company's
Certificate of Incorporation to increase the number of authorized shares of
common stock up to 400 million shares and the number of authorized shares of
preferred stock up to 15 million shares.
The Company issued 22,000 shares of restricted common stock pursuant to its
Stock Incentive Plan (1998) to certain directors and an employee in fiscal
2005. The Company is amortizing the fair market value of the awards on the
date of grant over the period of time that each award vests. At July 31, 2005,
the Company had 22,000 shares of unvested restricted stock awards outstanding.
At July 31, 2005, the Company had approximately 156.3 million shares of
common stock outstanding, approximately 26.8 million shares of common stock
reserved for outstanding options, approximately 6.1 million shares of common
stock reserved for future option and award issuances, and approximately .4
million shares reserved for issuance under the Company's employee stock
purchase plan. At July 31, 2005, the Company had not issued any shares of
preferred stock.
In March 2003, the Company's Board of Directors authorized the repurchase of
up to 20 million shares of its common stock from time to time, in open market
transactions or otherwise, for the purpose of providing shares for its various
employee benefit plans. During the nine-month and three-month periods ended
July 31, 2005, the Company repurchased 857,000 shares and 15,000 shares,
respectively. At July 31, 2005, the remaining number of shares that the
Company was authorized to repurchase was approximately 17.7 million shares.
11
12. COMMITMENTS AND CONTINGENCIES
At July 31, 2005, the Company had agreements to purchase land for future
development with an aggregate purchase price of approximately $3.59 billion,
including approximately $34.8 million of land from unconsolidated entities
which the Company has investments in, advances to, or on behalf of which the
Company has guaranteed loans. The Company is also committed to acquire land
with an approximate cost of $199.7 million from two joint ventures which the
Company has investments in and advances to, of approximately $48.3 million and
has guaranteed up to $129.7 million of their loan commitments. See Note 3
"Investments in and Advances to Unconsolidated Entities" for more information
regarding these entities. The Company's option contracts to acquire the home
sites do not require the Company to buy the home sites, although the Company
may forfeit any deposit balance outstanding if and at the time it terminates
the option contract. The Company has paid or deposited $267.1 million on these
purchase agreements, of which $190.4 million was non-refundable. Any deposit
in the form of a standby letter of credit is recorded as a liability at the
time the standby letter of credit is issued. Included in accrued liabilities
is $77.0 million representing the Company's outstanding standby letters of
credit issued in connection with its options to purchase home sites.
At July 31, 2005, the Company had outstanding surety bonds amounting to
approximately $675.9 million related primarily to its obligations to various
governmental entities to construct improvements in its various communities.
The Company estimates that approximately $242.7 million of work remains to be
performed on these improvements. The Company has an additional $85.9 million
of surety bonds outstanding which guarantee other of its obligations. The
Company does not believe that any outstanding bonds will be drawn upon.
At July 31, 2005, the Company had agreements of sale outstanding to deliver
9,490 homes with an aggregate sales value of approximately $6.43 billion.
At July 31, 2005, the Company was committed to provide approximately $657.1
million of mortgage loans to its home buyers and to others. All loans with
committed interest rates are covered by take-out commitments from third-party
lenders, which minimizes the Company's interest rate risk. The Company also
arranges a variety of mortgage programs that are offered to its home buyers
through outside mortgage lenders.
The Company has a $1.2 billion unsecured revolving credit facility with a
group of 30 banks that extends to July 15, 2009. At July 31, 2005, interest
was payable on borrowings under the facility at 0.625%, subject to adjustment
based upon the Company's debt rating and leverage ratios, above the Eurodollar
rate or at other specified variable rates as selected by the Company from time
to time. At July 31, 2005, the Company had no outstanding borrowings against
the facility and approximately $269.1 million of letters of credit outstanding
under it. Under the terms of the revolving credit agreement, the Company is
not permitted to allow its maximum leverage ratio, as defined in the
agreement, to exceed 2.00 to 1.00 and, at July 31, 2005, the Company was
required to maintain a minimum tangible net worth, as defined in the
agreement, of approximately $1.55 billion. At July 31, 2005, the Company's
leverage ratio was approximately .53 to 1.00 and its tangible net worth was
approximately $2.48 billion. Based upon the minimum tangible net worth
requirement of the revolving credit facility, the Company's ability to pay
dividends and repurchase its common stock was limited to approximately $1.15
billion at July 31, 2005.
The Company is involved in various claims and litigation arising in the
ordinary course of business. The Company believes that the disposition of
these matters will not have a material effect on its business or on its
financial condition.
12
13. 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, 2005 and 2004 (amounts in thousands):
2005 2004
-------- -------
Cash flow information:
Interest paid, net of amount capitalized....... $ 33,289 $30,847
======== =======
Income taxes paid ............................... $283,850 $94,576
======== =======
Non-cash activity:
Cost of inventory acquired through
seller financing.............................. $ 65,770 $85,950
======== =======
Income tax benefit related to
exercise of employee stock options............. $ 70,909 $11,649
======== =======
Stock bonus awards .............................. $ 30,396 $20,288
======== =======
Contribution to employee retirement plan ........ $ 1,301
=======
14. SUPPLEMENTAL GUARANTOR INFORMATION
At July 31, 2005, Toll Brothers Finance Corp. (the "Subsidiary Issuer") was
the issuer of four series of senior notes aggregating $1.15 billion. The
obligations of the Subsidiary Issuer to pay principal, premiums, if any, and
interest are guaranteed jointly and severally on a senior basis by the Company
and substantially all of its wholly-owned home building subsidiaries (the
"Guarantor Subsidiaries"). The guarantees are full and unconditional. The
Company's non-home building subsidiaries and certain home building
subsidiaries (the "Non-Guarantor Subsidiaries") did not guarantee the debt.
Separate financial statements and other disclosures concerning the Guarantor
Subsidiaries are not presented because management believes that such
disclosures would not be considered by investors to be material. The
Subsidiary Issuer has not had and does not have any operations other than the
issuance of the senior notes and the lending of the proceeds from the senior
notes to other subsidiaries of the Company.
13
Supplemental consolidating financial information of the Company, the
Subsidiary Issuer, the Guarantor Subsidiaries, the Non-Guarantor Subsidiaries
and the eliminations to arrive at the Company on a consolidated basis are as
follows:
CONDENSED CONSOLIDATED BALANCE SHEET AT JULY 31, 2005
(AMOUNTS IN THOUSANDS)(UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
ASSETS
Cash and cash equivalents ................. 485,437 20,510 505,947
Inventory ................................. 4,839,813 302 4,840,115
Property, construction
and office equipment, net ................ 60,161 12,574 72,735
Receivables, prepaid
expenses and other assets ................ 5,433 107,228 85,355 (31,158) 166,858
Mortgage loans receivable ................. 82,929 82,929
Customer deposits held
in escrow ................................ 86,721 86,721
Investments in and advances
to unconsolidated entities ............... 126,566 126,566
Investments in and advances
to consolidated entities ................. 2,702,386 1,153,312 (1,479,818) 1,784 (2,377,664) --
--------- --------- ---------- ------- ---------- ---------
2,702,386 1,158,745 4,226,108 203,454 (2,408,822) 5,881,871
========= ========= ========== ======= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable ............................ 147,697 4,958 152,655
Senior notes ............................. 1,139,743 1,139,743
Senior subordinated notes ................ 350,000 350,000
Mortgage company
warehouse loan.......................... 72,149 72,149
Customer deposits ........................ 438,184 438,184
Accounts payable ......................... 261,223 21 261,244
Accrued expenses ......................... 19,002 684,335 95,261 (31,088) 767,510
Income taxes payable ..................... 175,708 (2,000) 173,708
--------- --------- ---------- ------- ---------- ---------
Total liabilities....................... 175,708 1,158,745 1,881,439 170,389 (31,088) 3,355,193
--------- --------- ---------- ------- ---------- ---------
Stockholders' equity
Common stock ............................. 1,563 2,003 (2,003) 1,563
Additional paid-in capital ............... 260,178 (11,907) 2,734 9,173 260,178
Retained earnings ........................ 2,265,808 2,356,576 28,328 (2,384,904) 2,265,808
Unearned stock compensation .............. (760) (760)
Treasury stock, at cost .................. (111) (111)
--------- --------- ---------- ------- ---------- ---------
Total stockholders' equity.............. 2,526,678 -- 2,344,669 33,065 (2,377,734) 2,526,678
--------- --------- ---------- ------- ---------- ---------
2,702,386 1,158,745 4,226,108 203,454 (2,408,822) 5,881,871
========= ========= ========== ======= ========== =========
14
CONDENSED CONSOLIDATED BALANCE SHEET AT OCTOBER 31, 2004
(AMOUNTS INTHOUSANDS)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
ASSETS
Cash and cash equivalents ................. 456,836 8,998 465,834
Marketable securities ..................... 110,029 5,000 115,029
Inventory ................................. 3,877,900 360 3,878,260
Property, construction
and office equipment, net ................ 42,431 9,998 52,429
Receivables, prepaid
expenses and other assets ................ 4,929 94,052 63,740 (16,509) 146,212
Mortgage loans receivable ................. 99,914 99,914
Customer deposits held
in escrow ................................ 53,929 53,929
Investments in and advances
to unconsolidated entities ............... 93,971 93,971
Investments in and advances
to consolidated entities ................. 2,131,882 854,888 (1,098,623) (3,403) (1,884,744) --
--------- ------- ---------- ------- ---------- ---------
2,131,882 859,817 3,630,525 184,607 (1,901,253) 4,905,578
========= ======= ========== ======= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Loans payable ............................ 335,920 4,460 340,380
Senior notes ............................. 845,665 845,665
Senior subordinated notes ................ 450,000 450,000
Mortgage company warehouse loan .......... 92,053 92,053
Customer deposits ........................ 291,424 291,424
Accounts payable ......................... 181,964 8 181,972
Accrued expenses ......................... 14,152 510,437 66,194 (16,581) 574,202
Income taxes payable ..................... 211,895 (2,000) 209,895
--------- ------- ---------- ------- ---------- ---------
Total liabilities....................... 211,895 859,817 1,769,745 160,715 (16,581) 2,985,591
--------- ------- ---------- ------- ---------- ---------
Stockholders' equity
Common stock ............................. 770 2,003 (2,003) 770
Additional paid-in capital ............... 200,938 4,420 2,734 (7,154) 200,938
Retained earnings ........................ 1,770,730 1,856,360 19,155 (1,875,515) 1,770,730
Treasury stock, at cost .................. (52,451) (52,451)
--------- ------- ---------- ------- ---------- ---------
Total stockholders' equity.............. 1,919,987 -- 1,860,780 23,892 (1,884,672) 1,919,987
--------- ------- ---------- ------- ---------- ---------
2,131,882 859,817 3,630,525 184,607 (1,901,253) 4,905,578
========= ======= ========== ======= ========== =========
15
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JULY 31,2005
(AMOUNTS IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 3,751,594 3,751,594
Land sales ............................... 21,608 21,608
Equity earnings .......................... 9,539 9,539
Interest and other ....................... 41,252 24,508 33,538 (72,723) 26,575
Earnings from subsidiaries ............... 814,465 (814,465) --
------- ------ --------- ------ -------- ---------
814,465 41,252 3,807,249 33,538 (887,188) 3,809,316
------- ------ --------- ------ -------- ---------
Costs and expenses:
Home sales ............................... 2,537,476 3,547 (1,138) 2,539,885
Land sales ............................... 15,707 15,707
Selling, general and administrative ...... 35 434 350,146 19,284 (20,193) 349,706
Interest ................................. 40,818 85,399 1,904 (42,589) 85,532
Expenses related to early
retirement of debt...................... 4,056 4,056
------- ------ --------- ------ -------- ---------
35 41,252 2,992,784 24,735 (63,920) 2,994,886
------- ------ --------- ------ -------- ---------
Income before income taxes ................ 814,430 -- 814,465 8,803 (823,268) 814,430
Income taxes .............................. 318,572 315,318 3,442 (318,760) 318,572
------- ------ --------- ------ -------- ---------
Net income ................................ 495,858 -- 499,147 5,361 (504,508) 495,858
======= ====== ========= ====== ======== =========
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE NINE MONTHS ENDED JULY 31,2004
(AMOUNTS IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 2,395,150 2,395,150
Land sales ............................... 20,938 20,938
Equity earnings .......................... 6,945 6,945
Interest and other ....................... 33,749 6,298 24,072 (56,636) 7,483
Earnings from subsidiaries ............... 361,332 (361,332) --
------- ------ --------- ------ -------- ---------
361,332 33,749 2,429,331 24,072 (417,968) 2,430,516
------- ------ --------- ------ -------- ---------
Costs and expenses:
Home sales ............................... 1,714,546 2,795 (806) 1,716,535
Land sales ............................... 14,315 14,315
Selling, general and administrative ...... 20 351 271,002 14,707 (15,925) 270,155
Interest ................................. 33,398 59,907 1,038 (34,373) 59,970
Expenses related to early
retirement of debt...................... 8,229 8,229
------- ------ --------- ------ -------- ---------
20 33,749 2,067,999 18,540 (51,104) 2,069,204
------- ------ --------- ------ -------- ---------
Income before income taxes ................ 361,312 -- 361,332 (5,532) (366,864) 361,312
Income taxes .............................. 132,775 132,782 2,044 (134,826) 132,775
------- ------ --------- ------ -------- ---------
Net income ................................ 228,537 -- 228,550 (3,488) (232,038) 228,537
======= ====== ========= ====== ======== =========
16
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JULY 31, 2005
(AMOUNTS IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 1,536,499 1,536,499
Land sales ............................... 10,583 10,583
Equity earnings .......................... 4,231 4,231
Interest and other ....................... 15,547 9,791 11,595 (26,350) 10,583
Earnings from subsidiaries ............... 362,625 (362,625) --
------- ------ --------- ------ -------- ---------
362,625 15,547 1,561,104 11,595 (388,975) 1,561,896
------- ------ --------- ------ -------- ---------
Costs and expenses:
Home sales ............................... 1,022,524 1,241 (22) 1,023,743
Land sales ............................... 9,612 9,612
Selling, general and administrative ...... 17 153 126,742 6,930 (7,559) 126,283
Interest ................................. 15,394 35,545 762 (16,107) 35,594
Expenses related to early
retirement of debt...................... 4,056 4,056
------- ------ --------- ------ -------- ---------
17 15,547 1,198,479 8,933 (23,688) 1,199,288
------- ------ --------- ------ -------- ---------
Income before income taxes ................ 362,608 -- 362,625 2,662 (365,287) 362,608
Income taxes .............................. 147,076 145,361 1,108 (146,469) 147,076
------- ------ --------- ------ -------- ---------
Net income ................................ 215,532 -- 217,264 1,554 (218,818) 215,532
======= ====== ========= ====== ======== =========
CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED JULY 31, 2004
(AMOUNTS IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Revenues:
Home sales ............................... 991,264 991,264
Land sales ............................... 12,940 12,940
Equity earnings .......................... 5,551 5,551
Interest and other ....................... 12,877 2,796 9,030 (21,339) 3,364
Earnings from subsidiaries ............... 167,838 (167,838) --
------- ------ --------- ----- -------- ---------
167,838 12,877 1,012,551 9,030 (189,177) 1,013,119
------- ------ --------- ----- -------- ---------
Costs and expenses:
Home sales ............................... 708,595 1,014 (125) 709,484
Land sales ............................... 7,509 7,509
Selling, general and administrative ...... 17 137 103,933 5,080 (5,559) 103,608
Interest ................................. 12,740 24,195 459 (13,178) 24,216
Expenses related to early
retirement of debt...................... 481 481
------- ------ --------- ----- -------- ---------
17 12,877 844,713 6,553 (18,862) 845,298
------- ------ --------- ----- -------- ---------
Income before income taxes ................ 167,821 -- 167,838 2,477 (170,315) 167,821
Income taxes .............................. 61,806 61,812 915 (62,727) 61,806
------- ------ --------- ----- -------- ---------
Net income ................................ 106,015 -- 106,026 1,562 (107,588) 106,015
======= ====== ========= ===== ======== =========
17
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2005
(AMOUNTS IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Cash flow from operating activities:
Net income ............................... 495,858 499,147 5,361 (504,508) 495,858
Adjustments to reconcile net income to
net
cash used in operating activities:
Depreciation and amortization........... 481 12,575 1,299 14,355
Amortization of initial benefit
obligation............................... 2,851 2,851
Equity earnings in unconsolidated
entities .............................. (9,539) (9,539)
Deferred tax provision.................. 27,501 27,501
Provision for inventory write-offs...... 3,722 3,722
Write-off of unamortized debt issuance
costs ................................. 416 416
Changes in operating assets and
liabilities:
(Increase) decrease in inventory ...... (899,865) 58 (899,807)
Origination of mortgage loans ......... (599,634) (599,634)
Sale of mortgage loans ................ 616,619 616,619
(Increase) decrease in receivables,
prepaid expenses and other assets.... (570,504) (298,928) 368,998 (22,990) 502,689 (20,735)
Increase in customer deposits ......... 113,968 113,968
Increase in accounts payable and
accrued expenses.................... 30,396 4,850 247,455 29,080 (14,508) 297,273
Increase in current income taxes
payable.............................. 7,221 7,221
-------- -------- ---------- -------- -------- ----------
Net cash (used in) provided by
operating activities................ (9,528) (293,597) 339,728 29,793 (16,327) 50,069
-------- -------- ---------- -------- -------- ----------
Cash flow from investing activities:
Purchase of property and equipment, net .. (27,780) (3,875) (31,655)
Purchase of marketable securities ........ (3,599,814) (3,599,814)
Sale of marketable securities ............ 3,709,843 5,000 3,714,843
Investments in and advances to
unconsolidated entities................. (29,961) (29,961)
Distributions from unconsolidated
entities................................. 6,905 6,905
-------- -------- ---------- -------- -------- ----------
Net cash used in investing activities -- -- 59,193 1,125 -- 60,318
-------- -------- ---------- -------- -------- ----------
Cash flow from financing activities:
Proceeds from loans payable .............. 239,992 546,329 786,321
Principal payments of loans payable ...... (510,312) (565,735) 16,327 (1,059,720)
Proceeds from issuance of senior notes ... 293,597 293,597
Redemption of senior subordinated notes .. (100,000) (100,000)
Proceeds from stock based benefit plans .. 40,640 40,640
Purchase of treasury stock ............... (31,112) (31,112)
-------- -------- ---------- -------- -------- ----------
Net cash provided by (used in)
financing activities................ 9,528 293,597 (370,320) (19,406) 16,327 (70,274)
-------- -------- ---------- -------- -------- ----------
Net decrease in cash and cash equivalents . -- -- 28,601 11,512 -- 40,113
Cash and cash equivalents, beginning of
period................................... 456,836 8,998 465,834
-------- -------- ---------- -------- -------- ----------
Cash and cash equivalents, end of period .. -- -- 485,437 20,510 -- 505,947
======== ======== ========== ======== ======== ==========
18
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED JULY 31, 2004
(AMOUNTS IN THOUSANDS) (UNAUDITED)
TOLL NON-
BROTHERS, SUBSIDIARY GUARANTOR GUARANTOR
INC. ISSUER SUBSIDIARIES SUBSIDIARIES ELIMINATIONS CONSOLIDATED
--------- ---------- ------------ ------------ ------------ ------------
Cash flow from operating activities:
Net income ............................... 228,537 228,550 3,488 (232,038) 228,537
Adjustments to reconcile net income to
net
cash used in operating activities:
Depreciation and amortization........... 320 8,943 1,968 11,231
Equity earnings in unconsolidated
entities .............................. (6,945) (6,945)
Deferred tax provision.................. 12,113 12,113
Provision for inventory write-offs...... 2,441 2,441
Write-off of unamortized debt issuance
costs ................................. 1,322 1,322
Changes in operating assets and
liabilities:
Increase in inventory ................. (727,775) (890) (728,665)
Origination of mortgage loans ......... (516,397) (516,397)
Sale of mortgage loans 482,968 482,968
(Increase) decrease in receivables,
prepaid expenses and other assets.... (280,844) (302,272) 291,994 (16,624) 239,834 (67,912)
Increase in customer deposits ......... 110,998 110,998
Increase in accounts payable and
accrued expenses..................... 21,589 4,520 103,143 17,795 (7,796) 139,251
Increase (decrease) in current income
taxes payable........................ 26,678 (592) 26,086
-------- -------- ---------- -------- -------- ----------
Net cash provided by (used in)
operating activities................ 8,073 (297,432) 12,671 (28,284) -- (304,972)
-------- -------- ---------- -------- -------- ----------
Cash flow from investing activities:
Purchase of property and equipment, net .. (11,942) (1,601) (13,543)
Purchase of marketable securities ........ (1,568,142) (1,568,142)
Sale of marketable securities ............ 1,752,753 1,752,753
Investments in and advances to
unconsolidated entities................. (60,792) (60,792)
Distributions from unconsolidated
entities................................. 23,588 23,588
-------- -------- ---------- -------- -------- ----------
Net cash provided by (used in)
investing activities................ -- -- 135,465 (1,601) -- 133,864
-------- -------- ---------- -------- -------- ----------
Cash flow from financing activities:
Proceeds from loans payable .............. 240,800 452,607 693,407
Principal payments of loans payable ...... (263,749) (420,635) (684,384)
Proceeds from issuance of senior notes ... 297,432 297,432
Redemption of senior subordinated notes .. (170,000) (170,000)
Proceeds from stock based benefit plans .. 12,065 12,065
Purchase of treasury stock ............... (20,138) (20,138)
-------- -------- ---------- -------- -------- ----------
Net cash provided by (used in)
financing activities................ (8,073) 297,432 (192,949) 31,972 -- 128,382
-------- -------- ---------- -------- -------- ----------
Net (decrease) increase in cash and cash
equivalents.............................. -- -- (44,813) 2,087 -- (42,726)
Cash and cash equivalents, beginning of
period................................... 226,331 8,175 234,506
-------- -------- ---------- -------- -------- ----------
Cash and cash equivalents, end of period .. -- -- 181,518 10,262 -- 191,780
======== ======== ========== ======== ======== ==========
19
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Revenues for the nine-month and three-month periods ended July 31, 2005
increased by 57% and 54%, respectively, compared to the comparable periods of
fiscal 2004. Net income for the nine-month and three-month periods ended
July 31, 2005 increased by 117% and 103%, respectively, compared to the
comparable periods of fiscal 2004. In addition, our backlog, homes under
contract but not yet delivered, at July 31, 2005, of $6.43 billion (9,490
homes) was up by 48% over our backlog at July 31, 2004. We believe backlog is
a useful predictor of future results because for each home included in
backlog, we have a binding, signed agreement of sale with a non-refundable
cash deposit averaging approximately 7% of the purchase price from our buyer,
and over the next nine to twelve months we expect to deliver many of the homes
in backlog and recognize the revenues and related income. We expect that the
total number of homes closed for fiscal 2005 will be between 8,562 and 8,662
homes, with an average delivered price between $655,000 and $658,500. We
estimate that net income will increase by approximately 80% in fiscal 2005 as
compared to fiscal 2004. We also believe that, due to the continuing strong
demand for our homes, a recovering economy, our diversified offerings in the
luxury move-up, active-adult, and empty-nester urban and suburban niches, and
our growing portfolio of well-positioned communities in upscale markets,
fiscal 2006 will be another record year.
Geographic and product diversification, access to lower-cost capital, a
versatile and abundant home mortgage market and improving demographics are
promoting strong and steady demand for those builders who can control land and
persevere through the increasingly difficult regulatory approval process. This
evolution in our industry favors the large, publicly traded home building
companies with the capital and expertise to control home sites and gain market
share. We currently own or control more than 79,500 home sites in 48 markets
we consider to be affluent, a substantial number of which sites already have
the approvals necessary for development. We believe that as the approval
process becomes more difficult, and as the political pressure from no-growth
proponents increases, our expertise in taking land through the approval
process and our already approved land positions should allow us to continue to
grow for a number of years to come.
Because of the length of time that it takes to obtain the necessary
approvals on a property, complete the land improvements on it, and deliver a
home after a home buyer signs an agreement of sale, we are subject to many
risks. We attempt to reduce our risks by: controlling land for future
development through options whenever possible, thus allowing us to obtain the
necessary governmental approvals before acquiring title to the land; generally
commencing construction of a home only after executing an agreement of sale
with a buyer; and using subcontractors to perform home construction and land
development work on a fixed-price basis.
Our revenues have grown on average over 20% per year in the last decade. We
have funded this growth through the reinvestment of profits, bank borrowings
and capital market transactions. At July 31, 2005, we had $505.9 million of
cash and cash equivalents and approximately $930.9 million available under our
bank revolving credit facility which extends to July 15, 2009. In addition, a
significant portion of our debt does not mature until 2011 and beyond, which
we believe gives us a stable financial platform on which to grow. In June
2005, we issued $300 million of 5.15% Senior Notes due 2015. The proceeds from
this offering were used to redeem all of our $100 million of 8% Senior
Subordinated Notes due 2009 and to repay a portion of our $222.5 million bank
term loan which was repaid in full on June 3, 2005. With these resources, our
strong cash flow from operations before inventory growth, and our history of
success in accessing the public debt markets, we believe we have the resources
available to continue to grow in fiscal 2005 and beyond.
CRITICAL ACCOUNTING POLICIES
We believe the following are our critical accounting policies that require
more significant judgments and estimates when we prepare our consolidated
financial statements.
20
INVENTORY
Inventory is stated at the lower of cost or fair value in accordance with
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
("SFAS 144"). In addition to direct acquisition, land development and home
construction costs, costs include interest, real estate taxes and direct
overhead costs related to development and construction, which are capitalized
to inventories during the period beginning with the commencement of
development and ending with the completion of construction.
It takes approximately four to five years to fully develop, sell and deliver
all the homes in one of our typical communities. Longer or shorter time
periods are possible depending on the number of home sites in a community. Our
master planned communities, consisting of several smaller communities, may
take up to 10 years or more to complete. Because our inventory is considered a
long-lived asset under U.S. generally accepted accounting principles, we are
required to review the carrying value of each of our communities and write
down the value of those communities for which we believe the values are not
recoverable. When the profitability of a current community deteriorates, the
sales pace declines significantly or some other factor indicates a possible
impairment in the recoverability of the asset, we evaluate the property in
accordance with the guidelines of SFAS No. 144. If this evaluation indicates
that an impairment loss should be recognized, we charge cost of sales for the
estimated impairment loss in the period determined.
In addition, we review all land held for future communities or future
sections of current communities, whether owned or under contract, to determine
whether or not we expect to proceed with the development of the land as
planned. Based upon this review, we decide: (a) as to land that is under a
purchase contract but not owned, whether the contract will likely be
terminated or renegotiated and (b) as to land we own, whether the land will
likely be developed as contemplated or in an alternative manner, or should be
sold. We then further determine which costs that have been capitalized to the
property are recoverable and which costs should be written off. We recognized
$3.7 million and $1.2 million in write-offs of costs related to current and
future communities in the nine-month and three-month periods ended July 31,
2005, respectively, as compared to $2.4 million and $1.2 million in the
comparable periods of fiscal 2004.
INCOME RECOGNITION
Revenues and cost of sales are recorded at the time each home or home site
is delivered and title and possession are transferred to the buyer.
Land, land development and related costs, both incurred and estimated to be
incurred in the future, are amortized to the cost of homes closed based upon
the total number of homes to be constructed in each community. Any changes to
the estimated costs subsequent to the commencement of delivery of homes are
allocated to the remaining undelivered homes in the community. Home
construction and related costs are charged to the cost of homes closed under
the specific identification method.
The estimated land, common area development and related costs of master
planned communities, including the cost of golf courses, net of their
estimated residual value, are allocated to individual communities within a
master planned community on a relative sales value basis. Any change in the
estimated cost is allocated to the remaining lots in each of the communities
of the master planned community.
USE OF ESTIMATES
In the ordinary course of doing business, we must make estimates and
judgments that affect decisions on how we operate and the reported amounts of
assets, liabilities, revenues and expenses. These estimates include, but are
not limited to, those related to the recognition of income and expenses,
impairment of assets, estimates of future improvement and amenity costs,
capitalization of costs to inventory, provisions for litigation, insurance and
warranty costs, and income taxes. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable
under the circumstances. On an ongoing basis, we evaluate and adjust our
estimates based on the information currently available. Actual results may
differ from these estimates and assumptions or conditions.
21
OFF-BALANCE SHEET ARRANGEMENTS
We have investments in and advances to several joint ventures and to Toll
Brothers Realty Trust Group (the "Trust"). At July 31, 2005, we had
investments in and advances to these unconsolidated entities of $126.6
million, were committed to invest or advance an additional $48.8 million to
these entities if needed and had guaranteed approximately $162.2 million of
these entities' indebtedness and/or loan commitments. See Note 3 to the
Condensed Consolidated Financial Statements, "Investments in and Advances to
Unconsolidated Entities" for more information regarding these entities. Our
total commitment to these entities is not material to our financial condition.
Investments in 20%-to-50% owned entities are accounted for using the equity
method. Investments in less than 20%-owned entities are accounted for on the
cost method.
RESULTS OF OPERATIONS
The following table sets forth, for the nine-month and three-month periods
ended July 31, 2005 and 2004, a comparison of certain income statement items
related to our operations (amounts in millions):
NINE MONTHS ENDED JULY 31, THREE MONTHS ENDED JULY 31,
-------------------------------- --------------------------------
2005 2004 2005 2004
-------------- -------------- -------------- --------------
$ % $ % $ % $ %
------- ---- ------- ---- ------- ---- ------- ----
Home sales
Revenues ................................................ 3,751.6 2,395.2 1,536.5 991.3
Cost of sales ........................................... 2,539.9 67.7% 1,716.5 71.7% 1,023.7 66.6% 709.5 71.6%
Land sales
Revenues ................................................ 21.6 20.9 10.6 12.9
Cost of sales ........................................... 15.7 72.7% 14.3 68.4% 9.6 90.8% 7.5 58.0%
Equity earnings in
unconsolidated entities ................................. 9.5 6.9 4.2 5.6
Interest and other ....................................... 26.6 7.5 10.6 3.4
Total revenues ........................................... 3,809.3 2,430.5 1,561.9 1,013.1
Selling, general and
administrative expenses* ................................ 349.7 9.2% 270.2 11.1% 126.3 8.1% 103.6 10.2%
Interest expense* ........................................ 85.5 2.2% 60.0 2.5% 35.6 2.3% 24.2 2.4%
Expenses related to early
retirement of debt* ..................................... 4.1 0.1% 8.2 0.3% 4.1 0.3% 0.5 0.0%
Total costs and expenses* ................................ 2,994.9 78.6% 2,069.2 85.1% 1,199.3 76.8% 845.3 83.4%
Income before income taxes* .............................. 814.4 21.4% 361.3 14.9% 362.6 23.2% 167.8 16.6%
Income taxes ............................................. 318.6 132.8 147.1 61.8
Net income* .............................................. 495.9 13.0% 228.5 9.4% 215.5 13.8% 106.0 10.5%
- ---------------
* Percentages are based on total revenues.
Note: Amounts may not add due to rounding.
HOME SALES
Home sales revenues for the nine-monthand three-month periods ended July 31,
2005 were higher than those for the comparable periods of 2004 by
approximately $1.36 billion, or 57%, and $545.2 million, or 55%, respectively.
The increase in the nine-month period was attributable to a 37% increase in
the number of homes delivered and a 14% increase in the average price of the
homes delivered. The increase in the three-month period was attributable to a
37% increase in the number of homes delivered and a 13% increase in the
average price of the homes delivered. The increase in the average price of the
homes delivered in the fiscal 2005 periods was the result of increased selling
prices and a shift in the location of homes delivered to more expensive areas.
The increase in the number of homes delivered in the fiscal 2005 periods was
primarily due to the higher backlog of homes at October 31, 2004 as compared
to October 31, 2003, which was primarily the result of a 42% increase in the
number of new contracts signed in fiscal 2004 over fiscal 2003.
22
The value of new sales contracts signed in the nine months ended July 31,
2005 was $5.56 billion (8,100 homes), a 35% increase over the $4.11 billion
(6,436 homes) value of new sales contracts signed in the comparable period of
fiscal 2004. The value of new sales contracts signed in the three months ended
July 31, 2005 was $1.92 billion (2,746 homes), a 19% increase over the $1.61
billion (2,329 homes) value of new sales contracts signed in the comparable
period of fiscal 2004. The increase in the nine-month period was attributable
to a 26% increase in the number of new contracts signed and an 8% increase in
the average value of each contract, due primarily to the location and size of
homes sold and increases in base selling prices. The increase in the
three-month period was attributable to an 18% increase in the number of new
contracts signed and a 1% increase in the average value of each contract, due
primarily to increases in base selling prices, offset, in part, by a shift in
product type sold to less expensive attached and age-qualified products. The
increase in the number of new contracts signed is attributable to the
continued demand for our product and an increase in the number of communities
from which we are selling. At July 31, 2005, we were selling from 230
communities compared to 210 communities at July 31, 2004 and 220 communities
at October 31, 2004. We expect to be selling from approximately 237
communities at October 31, 2005.
We believe that the demand for our product is attributable to an increase in
the number of affluent households, the maturation of the baby boom generation,
a constricted supply of available new home sites, attractive mortgage rates
and the belief of potential customers that the purchase of a home is a stable
investment in the recent period of economic uncertainty. At July 31, 2005, we
had over 79,500 home sites under our control nationwide in markets we consider
to be affluent.
At July 31, 2005, our backlog of homes under contract was $6.43 billion
(9,490 homes), 48% higher than the $4.35 billion (6,856 homes) backlog at
July 31, 2004. The increase in backlog at July 31, 2005 compared to the
backlog at July 31, 2004 is primarily attributable to a higher backlog at
October 31, 2004 as compared to the backlog at October 31, 2003, a 7% increase
in the value and a 38% increase in the number of new contracts signed in the
first nine months of fiscal 2005 as compared to the comparable period of
fiscal 2004 and the backlog of homes acquired in the acquisition of the
Orlando division of Landstar Homes, offset, in part, by an increase in the
number of homes delivered in the first nine months of fiscal 2005 compared to
the comparable period of fiscal 2004. Based on the size and the expected
delivery dates of our current backlog, we believe that we will deliver between
8,562 and 8,662 homes in fiscal 2005 and that the average delivered price of
those homes will be between $655,000 and $658,500.
Home costs as a percentage of home sales revenues decreased by 400 basis
points (4.0%) and 500 basis points in the nine-month and three-month periods
ended July 31, 2005, respectively, compared to the comparable periods of
fiscal 2004. The decreases were largely the result of selling prices
increasing at a greater rate than costs, as well as from efficiencies realized
from the increased number of homes delivered. For the full 2005 fiscal year,
we expect that home costs as a percentage of home sales revenues will decrease
by between 365 basis points and 375 basis points compared to the full 2004
fiscal year due to selling prices continuing to increase at a greater rate
than costs, as well as from efficiencies realized from the increase in the
number of homes to be delivered in fiscal 2005 as compared to fiscal 2004.
LAND SALES
We are developing several communities in which we sell a portion of the land
to other entities. The amount of land sales and the profitability of such
sales will vary from quarter to quarter depending upon the timing of the
delivery of the specific land parcels sold. Land sales were $21.6 million for
the nine months ended July 31, 2005 and $10.6 million for the three months
ended July 31, 2005. For the nine-month and three-month periods ended July 31,
2004, land sales were $20.9 million and $12.9 million, respectively. For the
full 2005 fiscal year, land sales are expected to be approximately $31.6
million, compared to $22.5 million in fiscal 2004. Cost of land sales is
expected to be approximately 75% of land sales revenues in fiscal 2005, as
compared to approximately 70% in fiscal 2004.
EQUITY EARNINGS IN UNCONSOLIDATED ENTITIES
We are a participant in several joint ventures and in the Trust. We
recognize our proportionate share of the earnings from these entities, except
for earnings on home sites purchased by the Company from these joint ventures.
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
23
these entities. Earnings from these entities will vary significantly from
quarter to quarter depending on the level of activity of each entity during
the period. For the nine months ended July 31, 2005, we recognized $9.5
million of earnings from unconsolidated entities as compared to $6.9 million
in the comparable period of fiscal 2004. For the three months ended July 31,
2005, we recognized $4.2 million of earnings from unconsolidated entities as
compared to $5.6 million in the comparable period of fiscal 2004. For the full
2005 fiscal year, we expect to realize approximately $19.5 million of earnings
from our investments in the joint ventures and the Trust compared to $15.7
million in fiscal 2004.
INTEREST AND OTHER INCOME
For the nine months ended July 31, 2005, interest and other income was $26.6
million, an increase of $19.1 million from the $7.5 million recognized in the
comparable period of fiscal 2004. For the three months ended July 31, 2005,
interest and other income was $10.6 million, an increase of $7.2 million from
the $3.4 million recognized in the comparable period of fiscal 2004. These
increases were primarily the result of higher interest income and higher
income realized from our ancillary businesses in the fiscal 2005 periods. For
the full 2005 fiscal year, we expect interest and other income to be
approximately $35.6 million compared to $15.4 million in fiscal 2004.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES ("SG&A")
SG&A spending increased by $79.6 million or 29% in the nine-month period
ended July 31, 2005 and by $22.7 million, or 22%, in the three-month period
ended July 31, 2005, compared to the comparable periods of fiscal 2004. The
increased spending was principally due to the costs incurred to support the
increased levels of construction and sales activity in the fiscal 2005 periods
as compared to the comparable periods of fiscal 2004 and the continued costs
incurred in the search for new land to replace the home sites that were sold
during the period and to expand our land position to enable us to grow in the
future. For the full 2005 fiscal year, we expect that SG&A as a percentage of
revenues will decrease between 109 basis points and 119 basis points compared
to the full 2004 fiscal year.
INTEREST EXPENSE
We determine interest expense on a specific lot-by-lot basis for our home
building operations and on a parcel-by-parcel basis for land sales. As a
percentage of total revenues, interest expense varies depending on many
factors, including the period of time that we owned the land, the length of
time that the homes delivered during the period were under construction, and
the interest rates and the amount of debt carried by us in proportion to the
amount of our inventory during those periods.
Interest expense as a percentage of revenues was approximately 2.2% and 2.3%
of revenues in the nine-month and three-month periods of fiscal 2005,
respectively, compared to 2.5% and 2.4% in the comparable periods of fiscal
2004 For the full 2005 fiscal year, we expect interest expense as a percentage
of total revenues to be approximately 2.25% as compared to 2.4% in fiscal
2004.
INCOME BEFORE INCOME TAXES
For the nine-month period ended July 31, 2005, income before income taxes
was $814.4 million, an increase of 125% over the $361.3 million earned in the
comparable period of fiscal 2004. For the three-month period ended July 31,
2005, income before income taxes was $362.6 million, an increase of 116% over
the $167.8 million earned in the comparable period of fiscal 2004.
INCOME TAXES
Income taxes were provided at an effective rate of 39.1% and 40.6% for the
nine-month and three-month periods ended July 31, 2005, respectively. For the
nine-month and three-month periods of fiscal 2004, income taxes were provided
at an effective rate of 36.7% and 36.8%, respectively. The difference in rates
in fiscal 2005 compared to the comparable periods of fiscal 2004 was due
primarily to a change in our estimated combined federal and state income tax
rate before providing for the effect of permanent book-tax differences ("Base
Rate") for the fiscal 2005 periods and the impact of recalculating our net
deferred tax liability using
24
the new Base Rate. The change in the Base Rate was due to the combination of
changes in tax legislation and regulations and an expected shift in income to
states with higher tax rates in fiscal 2005. See Note 8 to the Condensed
Consolidated Financial Statements, "Income Taxes" for additional information
regarding the change in the income tax rates and the impact on the financial
statements. For the three-month period ended October 31, 2005, we expect that
the effective tax rate will be approximately 39.1%.
CAPITAL RESOURCES AND LIQUIDITY
We fund our operations principally from cash flow from operating activities,
unsecured bank borrowings and the public debt and equity markets.
In general, cash flow from operating activities assumes that as each home is
delivered we will purchase a home site to replace it. Because we own several
years' supply of home sites, we do not need to buy home sites immediately to
replace the ones delivered. Accordingly, we believe that cash flow from
operating activities before inventory additions is currently a better gauge of
liquidity.
Cash flow from operating activities, before inventory additions, has
improved as operating results have improved. One of the main factors that
determine cash flow from operating activities, before inventory additions, is
the level of revenues from the delivery of homes and land sales. We anticipate
that cash flow from operating activities, before inventory additions, will
continue to be strong in fiscal 2005 due to the expected increase in home
deliveries in fiscal 2005, as compared to fiscal 2004. We expect that our
inventory will continue to increase and we are currently negotiating and
searching for additional opportunities to obtain control of land for future
communities. At July 31, 2005, we had commitments to acquire land totaling
approximately $3.59 billion, of which approximately $267.1 million had been
paid or deposited. See Note 12 to the Condensed Consolidated Financial
Statements, "Commitments and Contingencies" for more information concerning
these commitments. We have used our cash flow from operating activities,
before inventory additions, bank borrowings and the proceeds of public debt
and equity offerings to: acquire additional land for new communities; fund
additional expenditures for land development; fund construction costs needed
to meet the requirements of our increased backlog and the increasing number of
communities in which we are offering homes for sale; repurchase our stock; and
repay debt.
We generally do not begin construction of a home until we have a signed
contract with the home buyer. Because of the significant amount of time
between the time a home buyer enters into a contract to purchase a home and
the time that the home is built and delivered, we believe we can estimate,
with reasonable accuracy, the number of homes we will deliver in the next 9 to
12 months. Should our business decline significantly, our inventory would
decrease as we complete and deliver the homes under construction but do not
commence construction of as many new homes, resulting in a temporary increase
in our cash flow from operations. In addition, under such circumstances, we
might delay or curtail our acquisition of additional land, which would further
reduce our inventory levels and cash needs.
In June 2005, we issued $300 million of 5.15% Senior Notes due 2015. We used
the net proceeds from the issuance of the notes to redeem all of our $100
million Senior Subordinated Notes due 2009 and the remainder to repay a
portion of our $222.5 million bank term loan which was repaid in full on
June 3, 2005. We recognized a charge of approximately $4.1 million related to
the redemption of the notes and repayment of the bank term loan in our quarter
ended July 31, 2005.
We have a $1.2 billion bank credit facility which extends to July 15, 2009.
At July 31, 2005, we did not have any borrowings under the facility and had
approximately $269.1 million of letters of credit outstanding under it.
We believe that we will be able to continue to fund our expected growth and
meet our contractual obligations through a combination of existing cash
resources, cash flow from operating activities, our existing sources of credit
and the public debt markets.
INFLATION
The long-term impact of inflation on us is manifested in increased costs for
land, land development, construction and overhead, as well as in increased
sales prices of our homes. We generally contract for land significantly before
development and sales efforts begin. Accordingly, to the extent land
acquisition costs are
25
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.
OVERVIEW OF FISCAL 2006
In fiscal 2006, we expect unit deliveries to be between 10,200 and 10,600
homes and the average delivered home price to be approximately $665,000. This
estimated delivery price reflects a change in the mix of homes delivered in
fiscal 2006 compared to fiscal 2005. We expect that approximately 21% of the
homes to be delivered in fiscal 2006 to be lower priced multi-family homes as
compared to 17% in fiscal 2005 and that we will also see a greater number of
deliveries from smaller, lower-priced single-family home communities in 2006
as compared to 2005. This change in mix of homes delivered in fiscal 2006 will
not be uniform over the individual quarters of the year. For the quarter
ending January 31, 2006, deliveries are expected to be between 1,900 and 2,100
homes with an average delivered home price of approximately $640,000. In
addition, we expect net income to increase by approximately 20% in fiscal 2006
as compared to fiscal 2005.
HOUSING DATA
($ IN MILLIONS)
NINE MONTHS ENDED JULY 31,
CLOSINGS ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
- --------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT, MA, NH, NJ, NY, RI) .......................................................... 793 655 447.6 379.1
Mid-Atlantic (DE, MD, PA, VA) ............................................................... 2,308 1,555 1,400.0 789.9
Midwest (IL, MI, OH) ........................................................................ 414 307 256.8 174.0
Southeast (FL, NC, SC, TN) .................................................................. 588 518 328.7 243.0
Southwest (AZ, CO, NV, TX) .................................................................. 914 544 584.0 313.9
West (CA) ................................................................................... 795 653 734.5 495.3
----- ----- ------- -------
Total consolidated entities............................................................... 5,812 4,232 3,751.6 2,395.2
Unconsolidated entities................................................................... 207 41 90.5 15.5
----- ----- ------- -------
6,019 4,273 3,842.1 2,410.7
===== ===== ======= =======
NINE MONTHS ENDED JULY 31,
NEW CONTRACTS ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
- --------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT, MA, NH, NJ, NY, RI) .......................................................... 1,273 774 814.5 455.8
Mid-Atlantic (DE, MD, PA, VA) ............................................................... 2,702 2,186 1,778.5 1,273.5
Midwest (IL, MI, OH) ........................................................................ 473 471 330.8 289.9
Southeast (FL, NC, SC, TN) .................................................................. 1,450 803 827.7 446.3
Southwest (AZ, CO, NV, TX) .................................................................. 1,489 1,113 1,049.4 691.8
West (CA) ................................................................................... 713 1,089 762.9 951.8
----- ----- ------- -------
Total consolidated entities............................................................... 8,100 6,436 5,563.8 4,109.1
Unconsolidated entities................................................................... 270 198 164.1 82.2
----- ----- ------- -------
8,370 6,634 5,727.9 4,191.3
===== ===== ======= =======
26
AT JULY 31
BACKLOG ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
- --------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT, MA, NH, NJ, NY, RI) .......................................................... 1,508 1,051 966.5 596.1
Mid-Atlantic (DE, MD, PA, VA) ............................................................... 2,639 2,305 1,750.8 1,320.6
Midwest (IL, MI, OH) ........................................................................ 505 458 358.3 279.2
Southeast (FL, NC, SC) ...................................................................... 2,081 696 1,150.1 421.5
Southwest (AZ, CO, NV, TX) .................................................................. 1,926 1,278 1,315.1 774.7
West (CA) ................................................................................... 831 1,068 893.0 953.7
----- ----- ------- -------
Total consolidated entities............................................................... 9,490 6,856 6,433.8 4,345.8
Unconsolidated entities................................................................... 237 172 149.4 71.4
----- ----- ------- -------
9,727 7,028 6,583.2 4,417.2
===== ===== ======= =======
THREE MONTHS ENDED JULY 31,
CLOSINGS ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
- --------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT, MA, NH, NJ, NY, RI) .......................................................... 310 256 184.0 149.8
Mid-Atlantic (DE, MD, PA, VA) ............................................................... 886 616 554.4 314.4
Midwest (IL, MI, OH) ........................................................................ 178 136 110.7 74.4
Southeast (FL, NC, SC) ...................................................................... 236 205 139.0 97.9
Southwest (AZ, CO, NV, TX) .................................................................. 361 205 239.2 124.7
West (CA) ................................................................................... 339 266 309.2 230.1
----- ----- ------- -------
Total consolidated entities............................................................... 2,310 1,684 1,536.5 991.3
Unconsolidated entities................................................................... 57 30 25.7 12.1
----- ----- ------- -------
2,367 1,714 1,562.2 1,003.4
===== ===== ======= =======
THREE MONTHS ENDED JULY 31,
NEW CONTRACTS ----------------------------------
2005 2004 2005 2004
----- ----- ------- -------
REGION UNITS UNITS $ $
- --------------------------------------------------------------------------------------------- ----- ----- ------- -------
Northeast (CT, MA, NH, NJ, NY, RI) .......................................................... 459 270 295.1 155.4
Mid-Atlantic (DE, MD, PA, VA) ............................................................... 758 748 522.9 473.8
Midwest (IL, MI, OH) ........................................................................ 149 164 108.4 105.9
Southeast (FL, NC, SC) ...................................................................... 606 361 360.0 229.5
Southwest (AZ, CO, NV, TX) .................................................................. 544 455 391.6 300.0
West (CA) ................................................................................... 230 331 238.2 341.6
----- ----- ------- -------
Total consolidated entities............................................................... 2,746 2,329 1,916.2 1,606.2
Unconsolidated entities................................................................... 111 188 63.4 79.1
----- ----- ------- -------
2,857 2,517 1,979.6 1,685.3
===== ===== ======= =======
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.
27
The table below sets forth, at July 31, 2005, our debt obligations by
scheduled maturity, weighted-
average interest rates and estimated fair value (amounts in thousands):
VARIABLE-RATE DEBT
FIXED-RATE DEBT (1)(2)
--------------------------- ------------------------
WEIGHTED WEIGHTED
FISCAL YEAR OF AVERAGE AVERAGE
EXPECTED MATURITY AMOUNT INTEREST RATE AMOUNT INTEREST RATE
- ------------------------------------------------------------------------ ----------- ------------- -------- -------------
2005 ................................................................... $ 31,032 7.68% $ 72,149 4.54%
2006 ................................................................... 52,427 5.79% 150 2.40%
2007 ................................................................... 55,505 6.77% 150 2.40%
2008 ................................................................... 5,403 6.02% 150 2.40%
2009 ................................................................... 3,178 6.34% 150 2.40%
2010 ................................................................... 800 10.00% 150 2.40%
Thereafter ............................................................. 1,500,000 6.31% 3,560 2.40%
Discount ............................................................... (10,257)
---------- --------
Total................................................................ $1,638,088 6.34% $76,459 4.42%
========== ========
Fair value at
July 31, 2005 .......................................................... $1,690,323 $ 76,459
========== ========
- ---------------
(1) At July 31, 2005, we had a $1.2 billion unsecured revolving credit facility
with a group of 30 banks which extends to July 2009. At July 31, 2005, we
had no borrowings and approximately $269.1 million of letters of credit
outstanding under the facility. At July 31, 2005, interest was payable on
borrowings under this facility at .625% (subject to adjustment based upon
our debt rating and leverage ratios) above the Eurodollar rate or at other
specified variable rates as selected by us from time to time.
(2) One of our subsidiaries has a $125 million line of credit with three banks
to fund mortgage originations. The line is due within 90 days of demand by
the banks and bears interest at the banks' overnight rate plus an agreed
upon margin. At July 31, 2005, the subsidiary had $72.1 million outstanding
under the line at an average interest rate of 4.54 %. Borrowings under this
line are included in the 2005 fiscal year maturities.
Based upon the amount of variable-rate debt outstanding at July 31, 2005 and
holding the variable-rate debt balance constant, each percentage point
increase in interest rates would increase our interest costs by approximately
$.8 million per year.
ITEM 4. CONTROLS AND PROCEDURES
A control system, no matter how well conceived and operated, can provide
only reasonable, not absolute, assurance that the objectives of the control
system are met. Further, the design of a control system must reflect the fact
that there are resource constraints and the benefits of controls must be
considered relative to costs. Because of the inherent limitations in all
control systems, no evaluation of controls can provide absolute assurance that
all control issues and instances of fraud, if any, within our company have
been detected. Because of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
Our chief executive officer and chief financial officer, with the assistance
of management, evaluated the effectiveness of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended) as of the end of the period covered by this report (the
"Evaluation Date"). Based on that evaluation, our chief executive officer and
chief financial officer concluded that, as of the Evaluation Date, our
disclosure controls and procedures were effective to ensure that information
that is required to be disclosed in our reports under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported
within the time periods specified in the SEC's rules and forms, and that such
information is accumulated and communicated to management, including our chief
executive officer and chief financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
28
There has not been any change in our internal control over financial
reporting during our quarter ended July 31, 2005 that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are involved in various claims and litigation arising principally in the
ordinary course of business. We believe that the disposition of these matters
will not have a material adverse effect on our business or our financial
condition. There are no proceedings required to be disclosed pursuant to Item
103 of Regulation S-K.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three months ended July 31, 2005, we repurchased the following
shares of our common stock (amounts in thousands, except per share amounts):
MAXIMUM
TOTAL NUMBER NUMBER
OF SHARES OF SHARES
PURCHASED AS THAT MAY
TOTAL AVERAGE PART OF A YET BE
NUMBER OF PRICE PUBLICLY PURCHASED
SHARES PAID PER ANNOUNCED UNDER THE
PERIOD PURCHASED (1)(2) SHARE (1) PLAN OR PROGRAM (1) PLAN OR PROGRAM (1)(3)
- --------------------------------------------------- ---------------- --------- ------------------- ----------------------
May 1, 2005 to May 31, 2005 ....................... 4 40.21 4 17,722
June 1, 2005 to June 30, 2005 ..................... 9 48.50 4 17,718
July 1, 2005 to July 31, 2005 ..................... 2 54.87 1 17,717
-- -
Total........................................... 15 47.32 9
-- -
- ---------------
(1) On June 9, 2005, our Board of Directors declared a two-for-one split of our
common stock in the form of a stock dividend to stockholders of record on
June 21, 2005. The additional shares of stock were distributed as of the
close of business on July 8, 2005. All share and per share information has
been restated to reflect this split.
(2) Pursuant to the provisions of our stock option plans, participants are
permitted to use the value of our common stock that they own to pay for the
exercise of options. During the three months ended July 31, 2005, we
received 6,284 shares with an average fair market value per share of $49.72
for the exercise of stock options. These shares are included in the table
above.
(3) 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 did not repurchase any of our equity
securities.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
(a) Effective September 8, 2005, our Certificate of Incorporation was
restated to integrate and restate, but not further amend our Restated
Certificate of Incorporation, dated July 1, 1986, and all amendments
thereto.
(b) None
29
ITEM 6. EXHIBITS
3.1* Second Restated Certificate of Incorporation dated September 8,
2005.
4.1* Ninth Supplemental Indenture dated as of June 6, 2005 by and
among the parties listed on Schedule A thereto, and J.P. Morgan
Trust Company, National Association, as successor Trustee.
4.2 Authorizing Resolutions relating to the $300,000,000 Principal
Amount of Toll Brothers Finance Corp.'s 5.15% Senior Notes due 2015
Guaranteed on a Senior Basis by Toll Brothers, Inc. and certain of
its subsidiaries is hereby incorporated by reference to Exhibit 4.1
of the Registrant's Form 8-K filed with the Commission on June 8,
2005.
4.3 Registration Rights Agreement dated as of June 3, 2005 by and among
Toll Brothers Finance Corp., Toll Brothers, Inc., Citigroup
Global Markets Inc., and each of the Initial Purchasers named on
Schedule A attached thereto is hereby incorporated by reference to
Exhibit 4.2 of the Registrant's Form 8-K filed with the Commission
on June 8, 2005.
31.1* Certification of Robert I. Toll pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2* Certification of Joel H. Rassman pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
32.1* Certification of Robert I. Toll pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2* Certification of Joel H. Rassman pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
- ---------------
* Filed electronically herewith.
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOLL BROTHERS, INC.
(Registrant)
Date: September 8, 2005 By: Joel H. Rassman
-----------------------
Joel H. Rassman
Executive Vice
President,
Treasurer and Chief
Financial Officer
(Principal Financial
Officer)
Date: September 8, 2005 By: Joseph R. Sicree
-----------------------
Joseph R. Sicree
Vice President --
Chief Accounting
Officer
(Principal Accounting
Officer)
31