Toll Brothers, Inc.: Form 10-Q for the period ended Jul 31, 2023

This discussion and analysis is based on, should be read together with, and is qualified in its entirety by, the accompanying unaudited condensed consolidated financial statements and related notes, as well as our consolidated financial statements, notes thereto, and the related MD&A contained in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022 (“2022 Form 10-K”). It also should be read in conjunction with the disclosure under “Statement on Forward-Looking Information” and “Risk Factors” in this report and in our 2022 Form 10-K.

Unless otherwise stated in this report, net contracts signed represents a number or value equal to the gross number or value of contracts for the sale of homes signed during the relevant period, less the number or value of contracts canceled during the relevant period (irrespective of whether the contract was signed during the relevant period or in a prior period). Backlog consists of homes under contract but not yet delivered to our home buyers (“backlog”). Backlog conversion represents the percentage of homes delivered in the period from backlog at the beginning of the period (“backlog conversion”).

OVERVIEW

Our Business Environment and Current Outlook

In the three months ended July 31, 2023, home sales revenue increased 19% as compared to the three months ended July 31, 2022. In the quarter, we delivered 2,524 homes with an average delivered price of $1,059,700, as compared to 2,414 delivered homes at an average price of $934,700 in the third quarter of fiscal 2022. The increase in average delivered price and home sales revenues in the three months ended July 31, 2023 reflects the strong demand for our homes that existed through the first half of fiscal 2022, as many of the homes delivered in our third quarter of fiscal 2023 were contracted prior to the softening in demand that began in May 2022 and continued through the end of the 2022 calendar year.

Since January 2023, we have experienced an increase in demand as compared to the second half of the 2022 calendar year. In the three months ended July 31, 2023, we signed 2,245 net contracts with an aggregate value of $2.16 billion as compared to 1,266 net contracts with an aggregate value of $1.66 billion in the three months ended July 31, 2022. Net signed contracts increased 77% in units and 30% in dollars, respectively, on a year-over-year basis in the third quarter. Demand in the second half of calendar 2022 was negatively impacted by the steep increase in interest rates from January through November 2022, as well as uncertainty regarding the direction of the economy as a result of higher inflation, the rise in interest rates and other macro-economic conditions. During calendar year 2023, interest rates have been less volatile, allowing homebuyers time to absorb the higher rate environment. In addition, the new home market has benefited from very low levels of resale inventory on the market. As a result of these factors, demand for our homes since the start of calendar 2023 has significantly increased compared to the same period in 2022. Notwithstanding the year-over-year improvement in demand, it is difficult to predict the near-term direction of mortgage rates, which in recent weeks reached multi-decade highs, consumer confidence and the overall economy, and their potential impacts on demand for our homes. Over the long term, however, we believe that we will continue to benefit from strong housing market fundamentals, including demographic and migration trends and the overall shortage of homes for sale in the United States.

Our backlog at July 31, 2023 was 7,295 homes and $7.87 billion, down 32% in units and 30% in dollars as compared to our backlog at July 31, 2022. Although we have experienced modest improvements in build times (the time it takes from contract signing to delivery of the completed home) over the nine months ended July 31, 2023, build times remain extended due to the impacts of supply chain, labor and other disruptions that have impacted the construction industry in recent years.

Financial and Operational Highlights

In the three-month period ended July 31, 2023, we recognized $2.69 billion of revenues, consisting of $2.67 billion of home sales revenue and $13.0 million of land sales and other revenue, and net income of $414.8 million, as compared to $2.49 billion of revenues, consisting of $2.26 billion of home sales revenue and $238.5 million of land sales and other revenue, and net income of $273.5 million in the three-month period ended July 31, 2022.

In the three-month periods ended July 31, 2023 and 2022, the value of net contracts signed was $2.16 billion (2,245 homes) and $1.66 billion (1,266 homes), respectively.

In the nine-month period ended July 31, 2023, we recognized $6.97 billion of revenues, consisting of $6.91 billion of home sales revenues and $60.7 million of land sales and other revenues, and net income of $926.5 million, as compared to $6.56 billion of revenues, consisting of $6.13 billion of home sales revenues and $433.2 million of land sales and other revenues, and net income of $646.0 million in the nine-month period ended July 31, 2022.

In the nine-month periods ended July 31, 2023 and 2022, the value of net contracts signed was $5.89 billion (6,039 homes) and $7.75 billion (7,069 homes), respectively.

The value of our backlog at July 31, 2023 was $7.87 billion (7,295 homes), as compared to our backlog at July 31, 2022 of $11.19 billion (10,725 homes). Our backlog at October 31, 2022 was $8.87 billion (8,098 homes), as compared to backlog of $9.50 billion (10,302 homes) at October 31, 2021.

At July 31, 2023, we had $1.03 billion of cash and cash equivalents on hand and approximately $1.78 billion available under our $1.905 billion revolving credit facility. On February 14, 2023, we entered into a new $1.905 billion senior unsecured revolving credit facility that is scheduled to terminate on February 14, 2028 (the “New Revolving Credit Facility”), which replaced our existing $1.905 revolving credit facility. At July 31, 2023, we had no borrowings and we had approximately $121.0 million of outstanding letters of credit under the New Revolving Credit Facility. In addition, also on February 14, 2023, we entered into an amendment to the Term Loan Facility to extend the maturity date of $487.5 million of outstanding term loans to February 14, 2028, with $60.9 million due on November 1, 2026 and the remaining $101.6 million due on November 1, 2025.

At July 31, 2023, we owned or controlled through options approximately 70,200 home sites, as compared to approximately 76,000 at October 31, 2022; and approximately 80,900 at October 31, 2021. Of the approximately 70,200 total home sites that we owned or controlled through options at July 31, 2023, we owned approximately 35,200 and controlled approximately 35,000 through options. Of the 35,200 home sites owned, approximately 17,400 were substantially improved. In addition, as of July 31, 2023, we expect to purchase approximately 8,300 additional home sites over several years from certain of the joint ventures in which we have interests, at prices to be determined.

At July 31, 2023, we were selling from 345 communities, compared to 348 at October 31, 2022; and 332 at July 31, 2022.

At July 31, 2023, our total stockholders’ equity and our debt to total capitalization ratio were $6.69 billion and 0.30 to 1.00, respectively.

RESULTS OF OPERATIONS – OVERVIEW

The following table compares certain items in our Condensed Consolidated Statements of Operations and Comprehensive Income and other supplemental information for the three months and nine months ended July 31, 2023 and 2022 ($ amounts in millions, unless otherwise stated). For more information regarding results of operations by segment, see “Segments” in this MD&A.

Note: Due to rounding, amounts may not add. “Net contracts signed – value” is net of all cancellations that occurred in the period. It includes the value of each binding agreement of sale that was signed in the period, plus the value of all options that were selected during the period, regardless of when the initial agreement of sale related to such options was signed.

NM: Not meaningful

Home Sales Revenues and Home Sales Cost of Revenues

For the three months ended July 31, 2023 compared to the three months ended July 31, 2022

The increase in home sale revenues for the three months ended July 31, 2023, as compared to the three months ended July 31, 2022, was attributable to a 13% increase in the average price of homes delivered and a 5% increase in the number of homes delivered. The increase in the average delivered home price was mainly due to sales price increases as well as a shift in the number of homes delivered to more expensive areas and/or products, most notably in the Mid-Atlantic and Pacific regions. The increase in the number of homes delivered in the three months ended July 31, 2023 was primarily due to more deliveries of quick move-in (or “spec”) homes, coupled with a higher backlog conversion in the three months ended July 31, 2023 compared to the three months ended July 31, 2022, primarily as a result of improvement in build times. These factors are offset, in part, by a decrease in the number of homes in backlog at October 31, 2022, as compared to the number of homes in backlog at October 31, 2021, most significantly in the North and Mountain regions.

The decrease in home sales cost of revenues, as a percentage of home sales revenues, in the three months ended July 31, 2023, as compared to the three months ended July 31, 2022, was principally due to a shift in the mix of revenues to higher margin products/areas and sales price increases outpacing cost increases for homes delivered in the quarter. In addition, interest expense as a percentage of home sales revenues was lower in the fiscal 2023 period. In the three months ended July 31, 2023 and 2022, interest expense, as a percentage of home sales revenues, was 1.4% and 1.7%, respectively.

For the nine months ended July 31, 2023 compared to the nine months ended July 31, 2022

The increase in home sale revenues for the nine months ended July 31, 2023, as compared to the nine months ended July 31, 2022, was primarily attributable to an 11% increase in the average price of homes delivered. The increase in the average delivered home price was mainly due to sales price increases, as well as an increase in homes delivered in more expensive product types/geographic regions, most notably in the Mid-Atlantic and Pacific regions.

The decrease in home sales cost of revenues, as a percentage of home sales revenues, for the nine months ended July 31, 2023, as compared to the nine months ended July 31, 2022, was principally due to a shift in the mix of revenues to higher margin products/areas, sales price increases outpacing cost increases for homes delivered in the quarter, and lower interest expense as a percentage of home sales revenues, offset, in part, by higher inventory impairment charges in the fiscal 2023 period. In the nine months ended July 31, 2023 and 2022, interest expense, as a percentage of home sales revenues, was 1.4% and 1.8%, respectively.

Land Sales and Other Revenues and Land Sales and Other Cost of Revenues

Our revenues from land sales and other generally consist of the following: (1) land sales to joint ventures in which we retain an interest; (2) lot sales to third-party builders within our master-planned communities; (3) bulk sales to third parties of land we have decided no longer meets our development criteria; and (4) sales of commercial and retail properties generally located at our City Living buildings. Land sales to joint ventures in which we retain an interest are generally sold at our land basis and therefore little to no gross margin is earned on these sales. The increase in land sales and other cost of revenues as a percentage of land sales and other revenues was primarily due to $17.7 million of impairment charges recognized in the nine months ended July 31, 2023, in connection with planned land sales. There were no land sales and other impairment charges recognized in the three months ended July 31, 2023. This compares to $1.4 million and $6.6 million of land sales and other impairment charges recognized in the three months and nine months ended July 31, 2022, respectively.

Selling, General and Administrative Expenses (“SG&A”)

SG&A spending decreased by $3.9 million in the three-month period ended July 31, 2023, as compared to the three-month period ended July 31, 2022. As a percentage of home sales revenues, SG&A was 8.6% in the three months ended July 31, 2023, as compared to 10.3% in the three months ended July 31, 2022. The decrease in SG&A expenditures was due primarily to lower headcount and reduced costs from the impact of other fixed cost control measures, offset, in part, by higher commissions and marketing spend. The decrease in SG&A as a percentage of revenues was due to lower SG&A spending relative to the 19% increase in revenues.

SG&A spending decreased by $35.3 million in the fiscal 2023 nine-month period, as compared to the fiscal 2022 nine-month period. As a percentage of home sales revenues, SG&A was 9.7% in the fiscal 2023 period, as compared to 11.5% in the fiscal 2022 period. The dollar decrease in SG&A was primarily due to lower headcount, reduced commissions and marketing spend in the fiscal 2023 period, and the impact of other fixed cost control measures. The decrease in SG&A as a percentage of revenues was due to revenues increasing 13% year-over-year in the fiscal 2023 period, while SG&A spending decreased 5%.

Income from Unconsolidated Entities

We have investments in joint ventures to (i) develop land for the joint venture participants and for sale to outside builders (“Land Development Joint Ventures”); (ii) develop for-sale homes (“Home Building Joint Ventures”); (iii) develop luxury for-rent residential apartments and single family homes, commercial space, and a hotel (“Rental Property Joint Ventures”); and (iv) invest in distressed loans and real estate and provide financing and land banking to residential builders and developers for the acquisition and development of land and home sites (“Gibraltar Joint Ventures”).

We recognize our proportionate share of the earnings and losses from these unconsolidated entities. Many of our unconsolidated entities are land development projects, high-rise/mid-rise condominium construction projects, or for-rent apartment and for-rent single-family home projects, which do not generate revenues and earnings for a number of years during the development of the properties. Once development is complete for land development projects and high-rise/mid-rise condominium construction projects, these unconsolidated entities will generally, over a relatively short period of time, generate revenues and earnings until all of the assets of the entity are sold. Further, once for-rent apartments and for-rent single-family home projects are complete and stabilized, we may monetize a portion of these projects through a recapitalization or a sale of all or a portion of our ownership interest in the joint venture, generally resulting in an income-producing event. Because of the long development periods associated with these entities, the earnings recognized from these entities may vary significantly from quarter to quarter and year to year.

In the three-month period ended July 31, 2023, we recognized income from unconsolidated entities of $30.5 million as compared to income of $3.0 million in the prior year period. The increase was primarily due to a $35.0 million gain in the fiscal 2023 period related to a property sale by one of our Rental Property Joint Ventures, partially offset by losses by one of our Rental Property Joint Ventures that is currently in the development phase, and lower earnings from a Land Development Joint Venture due to reduced lot sales.

In the nine-month period ended July 31, 2023, we recognized income from unconsolidated entities of $20.8 million, as compared to income of $28.0 million in the prior year period. The decrease was primarily due to a $21.0 million gain in the fiscal 2022 period related to a property sale by one of our Rental Property Joint Ventures, higher losses by various Rental Property Joint Ventures that are currently in the development or lease-up phases, losses by two Home Building Joint Ventures that were formed during the three-months ended October 31, 2022, and lower earnings from a Land Development Joint Venture due to reduced lot sales in the fiscal 2023 period. These decreases are partially offset by a $35.0 million gain in the fiscal 2023 period related to a property sale by one of our Rental Property Joint Ventures.

Other Income – Net

The table below provides, for the periods indicated, the components of “Other income – net” (amounts in thousands):

The increase in interest income in the three and nine month periods ended July 31, 2023 was primarily due to higher interest rates.

The decrease in income from ancillary businesses in the three months ended July 31, 2023, as compared to the three months ended July 31, 2022, was mainly due to higher operating losses incurred in our apartment living operations.

The decrease in income from ancillary businesses in the nine months ended July 31, 2023 was mainly due to the fiscal 2022 period benefiting from the bulk sale of security monitoring accounts by our smart home technologies business, which resulted in a gain of $9.0 million. In addition, the fiscal 2023 period had lower income from our mortgage operations due to lower volume and reduced spreads and higher operating losses incurred in our apartment living operations.

The decreases in management fee income earned by our home building operations in the three and nine month periods ended July 31, 2023 were primarily related to a decrease in fees from certain of our Land Development Joint Ventures.

The gain on litigation settlements - net in nine months ended July 31, 2023 primarily relates to the settlement of an insurance claim. No similar gains occurred in the fiscal 2022 period.

The decreased loss in “other” in the nine month period ended July 31, 2023 was primarily due to a $1.6 million impairment charge recorded during the fiscal 2022 period in connection with a planned sale of a manufacturing facility and higher expense in the fiscal 2022 period related to our defined benefit retirement plans.

Income Before Income Taxes

For the three-month period ended July 31, 2023, we reported income before income taxes of $553.0 million, as compared to $366.0 million in the three-month period ended July 31, 2022.

For the nine-month period ended July 31, 2023, we reported income before income taxes of $1,237.4 million, as compared to $862.6 million in the three-month period ended July 31, 2022.

Income Tax Provision

In the three-month periods ended July 31, 2023 and July 31, 2022, we recognized income tax provisions of $138.2 million and $92.5 million, respectively. Based upon the federal statutory rate of 21.0% for the fiscal 2023 and 2022 periods, our federal tax provisions would have been $116.1 million and $76.8 million, in the three-month periods ended July 31, 2023 and 2022, respectively. The difference between the tax provisions recognized and the tax provision based on the federal statutory rate was mainly due to the provision for state income taxes and permanent differences, offset, in part, by excess tax benefits related to stock-based compensation.

We recognized income tax provisions of $310.9 million and $216.6 million in the nine-month periods ended July 31, 2023 and July 31, 2022, respectively. Based upon the federal statutory rate of 21.0% for the fiscal 2023 and 2022 periods, our federal tax provisions would have been $259.9 million and $181.1 million, in the nine-month periods ended July 31, 2023 and July 31, 2022, respectively. The difference between the tax provisions recognized and the tax provision based on the federal statutory rate was mainly due to the provision for state income taxes and permanent differences, offset, in part, by excess tax benefits related to stock-based compensation.

Contracts

In the three-month periods ended July 31, 2023 and 2022, the value of net contracts signed was $2.16 billion (2,245 homes) and $1.66 billion (1,266 homes), respectively. The aggregate value of net contracts signed increased $499.3 million, or 30.0%, in the three-month period ended July 31, 2023, as compared to the three-month period ended July 31, 2022. The increase in the aggregate value of net contracts signed was due to a 77.3% increase in the number of net contracts signed offset, in part, by a 26.7% decrease in the average value of each signed contract. The increase in the number of net contracts signed reflects an increase in demand compared to the prior year period. The decrease in the average value attributed to each signed contract is principally due to a shift in the number of contracts signed to less expensive areas and/or products and an increase in sales incentives. In addition, the average value attributed to each contract signed includes the value of each binding agreement of sale that was signed in the period, as well as the value of all options selected during the period, regardless of when the initial agreement of sale related to such options was signed. During the three-month period ended July 31, 2022 we signed 1,266 net contracts, a 60% decline compared to the prior year period. During the three-month periods ended April 30, 2022 and January 31, 2022, we signed 2,874 and 2,929 net contracts, respectively. As a result of the steep drop in signed contracts during the three-month period ended July 31, 2022, the average value attributed to each signed contract in such period includes an unusually large value related to option selections for homes purchased in prior periods.

In the nine-month periods ended July 31, 2023 and 2022, the value of net contracts signed was $5.89 billion (6,039 homes) and $7.75 billion (7,069 homes), respectively. The aggregate value of net contracts signed decreased $1.85 billion, or 23.9%, in the nine-month period ended July 31, 2023, as compared to the nine-month period ended July 31, 2022. The decrease in the aggregate value of net contracts signed was due to a 14.6% decrease in the number of net contracts signed and an 11.0% decrease in the average value attributed to each signed contract. The decrease in the number of net contracts signed reflects the stronger demand environment that existed for most of the nine-month period ended July 31, 2022. The decrease in the average value attributed to each signed contract is principally due to a shift in the number of contracts signed to less expensive areas and/or products and an increase in sales incentives.

Backlog

The value of our backlog at July 31, 2023 decreased 29.6% to $7.87 billion (7,295 homes), as compared to $11.19 billion (10,725 homes) at July 31, 2022. Our backlog at October 31, 2022 and 2021 was $8.87 billion (8,098 homes) and $9.50 billion (10,302 homes), respectively.

For more information regarding results of operations by segment, see “Segments” in this MD&A.

CAPITAL RESOURCES AND LIQUIDITY

Funding for our business has been, and continues to be, provided principally by cash flow from operating activities before inventory additions, credit arrangements with third parties, and the public capital markets.

Our cash flows from operations generally provide us with a significant source of liquidity. Our cash flows provided by operating activities, supplemented with our short-term borrowings and long-term debt, have been sufficient to fund our operations while allowing us to invest in activities that support the long-term growth of our Company. Our primary uses of cash include inventory additions in the form of land acquisitions and deposits to obtain control of land, land development, working capital to fund day-to-day operations, and investments in existing and future unconsolidated joint ventures. We may also use cash to fund capital expenditures such as investments in our information technology systems. From time to time we use some or all of the remaining available cash flow to repay debt, and to fund share repurchases and dividends on our common stock. We believe our sources of cash and liquidity will continue to be adequate to fund operations, finance our strategic operating initiatives, repay debt, fund our share repurchases and pay dividends for the foreseeable future.

At July 31, 2023, we had $1.03 billion of cash and cash equivalents on hand and approximately $1.78 billion available for borrowing under our revolving credit facility. On February 14, 2023, we entered into the $1.905 billion New Revolving Credit Facility with a syndicate of banks that is scheduled to mature on February 14, 2028. The New Revolving Credit Facility replaced the prior $1.905 revolving credit facility, which was terminated in connection with the execution of the new agreement. The New Revolving Credit Facility provides us with a committed borrowing capacity of $1.905 billion, which we have the ability to increase up to $3.0 billion with the consent of lenders. The terms of the New Revolving Credit Facility are substantially the same as the prior agreement, except that the LIBOR-based interest rate provisions have been replaced with SOFR-based provisions. Toll Brothers, Inc. and substantially all of its 100%-owned home building subsidiaries are guarantors of the borrower’s obligations under the New Revolving Credit Facility. Also on February 14, 2023, we entered into an amendment to the Term Loan Facility to extend the maturity date of $487.5 million of outstanding term loans to February 14, 2028, with $60.9 million due on November 1, 2026 and the remaining $101.6 million due on November 1, 2025.

Short-term Liquidity and Capital Resources

For at least the next twelve months, we expect our principal demand for funds will be for inventory additions in the form of land acquisition, deposits to control land and land development, operating expenses, including our general and administrative expenses, investments and funding of capital improvements, investments in existing and future unconsolidated joint ventures, community level debt repayment, common stock repurchases, and dividend payments. Demand for funds include interest and principal payments on current and future debt financing. We expect to meet our short-term liquidity requirements primarily through our cash and cash equivalents on hand and net cash flows provided by operations. Additional sources of funds include distributions from our unconsolidated joint ventures, borrowing capacity under our New Revolving Credit Facility, and borrowings from banks and other lenders.

Toll Brothers Mortgage Company (“TBMC”) has a mortgage warehousing agreement with a lender (the “Warehousing Agreement”) that provides funds for the origination of mortgage loans by TBMC. The agreement is scheduled to expire on March 30, 2024. While we intend to refinance the TBMC Warehousing Agreement prior to its maturity, there can be no assurances that it can be renewed or replaced on commercially reasonable terms upon its expiration. However, we believe we have adequate liquidity to meet TBMC’s anticipated financing needs.

We believe we will have sufficient liquidity available to fund our business needs, commitments and contractual obligations in a timely manner for the next twelve months. We may, however, seek additional financing to fund future growth or refinance our existing indebtedness through the debt capital markets, but we cannot be assured that such financing will be available on favorable terms, or at all.

Long-term Liquidity and Capital Resources

Beyond the next twelve months, our principal demands for funds will be for the payments of the principal amount of our long-term debt as it becomes due or matures, land purchases and inventory additions needed to grow our business, long-term capital investments and investments in unconsolidated joint ventures, common stock repurchases, and dividend payments.

Over the longer term, to the extent the sources of capital described above are insufficient to meet our needs, we may also conduct additional public offerings of our securities, refinance debt or dispose of certain assets to fund our operating activities and debt service. We expect these resources will be adequate to fund our ongoing operating activities as well as provide capital for investment in future land purchases and related development activities and future joint ventures.

Material Cash Requirements

We are a party to many agreements that include contractual obligations and commitments to make payments to third parties. These obligations impact our short-term and long-term liquidity and capital resource needs. Certain contractual obligations are reflected on the Condensed Consolidated Balance Sheet as of July 31, 2023, while others are considered future commitments. Our contractual obligations primarily consist of long-term debt and related interest payments, payments due on our mortgage company loan facility, purchase obligations related to expected acquisition of land under purchase agreements and land development agreements (many of which are secured by letters of credit or surety bonds), operating leases, and obligations under our deferred compensation plan, supplemental executive retirement plans, and 401(k) savings plans. We also enter into certain short-term lease commitments, commitments to fund our existing or future unconsolidated joint ventures, letters of credit and other purchase obligations in the normal course of business. For more information regarding our primary obligations, refer to Note 6, “Loans Payable, Senior Notes, and Mortgage Company Loan Facility,” and Note 14, “Commitments and Contingencies,” to the Condensed Consolidated Financial Statements for amounts outstanding as of July 31, 2023, related to debt and commitments and contingencies, respectively.

We also operate through a number of joint ventures and have undertaken various commitments as a result of those arrangements. At July 31, 2023, we had investments in these entities of $900.4 million and were committed to invest or advance up to an additional $345.4 million to these entities if they require additional funding. At July 31, 2023, we had agreed to terms for the acquisition of 313 home sites from three joint ventures for an estimated aggregate purchase price of $28.7 million. In addition, we expect to purchase approximately 8,300 additional home sites over a number of years from several joint ventures in which we have interests. The purchase price of these home sites will be determined at a future date.

The unconsolidated joint ventures in which we have investments generally finance their activities with a combination of partner equity and debt financing. In some instances, we and our joint venture partner have guaranteed debt of unconsolidated entities. These guarantees may include any or all of the following: (i) project completion guarantees, including any cost overruns; (ii) repayment guarantees, generally covering a percentage of the outstanding loan; (iii) carry cost guarantees, which cover costs such as interest, real estate taxes, and insurance; (iv) an environmental indemnity provided to the lender that holds the lender harmless from and against losses arising from the discharge of hazardous materials from the property and non-compliance with applicable environmental laws; and (v) indemnification of the lender from “bad boy acts” of the unconsolidated entity.

In these situations where we have joint and several guarantees with our joint venture partner, we generally seek to implement a reimbursement agreement with our partner that provides that neither party is responsible for more than its proportionate share or agreed-upon share of the guarantee; however, we are not always successful. In addition, if the joint venture partner does not have adequate financial resources to meet its obligations under such a reimbursement agreement, we may be liable for more than our proportionate share. We believe that, as of July 31, 2023, in the event we become legally obligated to perform under a guarantee of the obligation of an unconsolidated entity due to a triggering event, the collateral in such entity should be sufficient to repay all or a significant portion of the obligation. If it is not, we and our partners would need to contribute additional capital to the entity. At July 31, 2023, we had guaranteed the debt of certain unconsolidated entities that have loan commitments aggregating $3.18 billion, of which, if the full amount of the debt obligations were borrowed, we estimate $642.2 million to be our maximum exposure related to repayment and carry cost guarantees. At July 31, 2023, the unconsolidated entities had borrowed an aggregate of $1.51 billion, of which we estimate $509.8 million to be our maximum exposure related to repayment and carry cost guarantees. The terms of these guarantees generally range from 1 month to 3.9 years. These maximum exposure estimates do not take into account any recoveries from the underlying collateral or any reimbursement from our partners. Nor do they include any potential exposures related to project completion guarantees or the indemnities noted above, which are not estimable.

For more information regarding these joint ventures, see Note 4, “Investments in Unconsolidated Entities” in the Notes to Condensed Consolidated Financial Statements.

Debt Service Requirements

Our financing strategy is to ensure liquidity and access to capital markets, to maintain a balanced profile of debt maturities, and to manage our exposure to floating interest rate volatility.

Outside of the normal course of operations, one of our principal liquidity needs is the payment of principal and interest on outstanding indebtedness. We are required by the terms of certain loan documents to meet certain covenants, such as financial ratios and reporting requirements. As of July 31, 2023, we were in compliance with all such covenants and requirements on our term loan, credit facility and other loans payable. Refer to Note 6, “Loans Payable, Senior Notes, and Mortgage Company Loan Facility” in the Notes to the Condensed Consolidated Financial Statements.

Operating Activities

At July 31, 2023 and October 31, 2022, we had $1.03 billion and $1.35 billion, respectively, of cash and cash equivalents. Cash provided by operating activities during the nine-month period ended July 31, 2023 was $675.0 million. Cash provided by operating activities during the fiscal 2023 period was primarily related to net income (adjusted for stock-based compensation, impairments, depreciation and amortization, income and distributions of earnings from unconsolidated entities and deferred taxes); and mortgage loans sold, net of mortgage loans originated. This activity was offset, in part, by an increase in inventory; decreases in accounts payable and accrued expenses, current income taxes – net, and customer deposits – net; and an increase in receivables, prepaid expenses, and other assets.

Cash used in operating activities during the nine-month period ended July 31, 2022 was $246.6 million. Cash used in operating activities during the fiscal 2022 period was primarily related to an increase in inventory and an increase in current income taxes – net. This activity was offset, in part, by net income (adjusted for stock-based compensation, impairments, depreciation and amortization, and deferred taxes); mortgage loans sold, net of mortgage loans originated; an increase in customer deposits – net, an increase in accounts payable and accrued expenses and a decrease in receivables, prepaid expenses, and other assets.

Investing Activities

In the nine-month period ended July 31, 2023, cash used in investing activities was $133.6 million, which was primarily related to $162.6 million used to fund our investments in unconsolidated entities and $54.1 million used for the purchase of property and equipment. This activity was offset, in part, by $74.0 million of cash received as returns from our investments in unconsolidated entities and $9.0 million of cash proceeds from the sale of assets.

In the nine-month period ended July 31, 2022, cash used in investing activities was $94.9 million, which was primarily related to $176.6 million used to fund our investments in unconsolidated entities and $56.5 million used for the purchase of property

and equipment. This activity was offset, in part, by $109.6 million million of cash received as returns from our investments in unconsolidated entities and $28.3 million of cash proceeds from the sale of assets.

Financing Activities

We used $857.3 million of cash in financing activities in the nine-month period ended July 31, 2023, primarily for the redemption of $400.0 million of senior notes, payments of $190.6 million of loans payable, net of borrowings, the payment of dividends on our common stock of $69.1 million, the repurchase of $239.3 million of our common stock and payments of $5.3 million of debt issuance costs. This activity was offset, in part, by $47.1 million of proceeds related to stock-based benefit plans - net.

We used $946.3 million of cash in financing activities in the nine-month period ended July 31, 2022, primarily for the redemption of $409.9 million of senior notes; the repurchase of $383.9 million of our common stock; payments of $58.4 million of loans payable, net of borrowings, the payment of dividends on our common stock of $66.9 million and payments related to noncontrolling interest - net of $25.8 million.

CRITICAL ACCOUNTING ESTIMATES

As disclosed in our 2022 Form 10-K, our most critical accounting estimates relate to inventory, cost of revenue recognition, warranty and self-insurance, and investments in unconsolidated entities. Since October 31, 2022, there have been no material changes to those critical accounting estimates.

SUPPLEMENTAL GUARANTOR INFORMATION

At July 31, 2023, our 100%-owned subsidiary, Toll Brothers Finance Corp. (the “Subsidiary Issuer”), had issued and outstanding $1.60 billion aggregate principal amount of senior notes maturing on various dates between November 15, 2025 and November 1, 2029 (the “Senior Notes”). For further information regarding the Senior Notes, see Note 6 to our Consolidated Condensed Financial Statements under the caption “Senior Notes.”

The obligations of the Subsidiary Issuer to pay principal, premiums, if any, and interest are guaranteed jointly and severally on a senior basis by Toll Brothers, Inc. and substantially all of its 100%-owned home building subsidiaries (the “Guarantor Subsidiaries” and, together with us, the “Guarantors”). The guarantees are full and unconditional, and the Subsidiary Issuer and each of the Guarantor Subsidiaries are consolidated subsidiaries of Toll Brothers, Inc. Our non-home building subsidiaries and several of our home building subsidiaries (together, the “Non-Guarantor Subsidiaries”) do not guarantee the Senior Notes. The Subsidiary Issuer generates no operating revenues and does not have any independent operations other than the financing of our other subsidiaries by lending the proceeds of its public debt offerings, including the Senior Notes. Our home building operations are conducted almost entirely through the Guarantor Subsidiaries. Accordingly, the Subsidiary Issuer’s cash flow and ability to service the Senior Notes is dependent upon the earnings of the Company’s subsidiaries and the distribution of those earnings to the Subsidiary Issuer, whether by dividends, loans or otherwise. Holders of the Senior Notes have a direct claim only against the Subsidiary Issuer and the Guarantors. The obligations of the Guarantors under their guarantees will be limited as necessary to recognize certain defenses generally available to guarantors (including those that relate to fraudulent conveyance or transfer, voidable preference or similar laws affecting the rights of creditors generally) under applicable law.

The indentures under which the Senior Notes were issued provide that any of our subsidiaries that provide a guarantee of our obligations under the New Revolving Credit Facility will guarantee the Senior Notes. The indentures further provide that any Guarantor Subsidiary may be released from its guarantee so long as (i) no default or event of default exists or would result from release of such guarantee; (ii) the Guarantor Subsidiary being released has consolidated net worth of less than 5% of the Company’s consolidated net worth as of the end of our most recent fiscal quarter; (iii) the Guarantor Subsidiaries released from their guarantees in any fiscal year comprise in the aggregate less than 10% (or 15% if and to the extent necessary to permit the cure of a default) of our consolidated net worth as of the end of our most recent fiscal quarter; (iv) such release would not have a material adverse effect on ours and our subsidiaries’ home building business; and (v) the Guarantor Subsidiary is released from its guaranty under the New Revolving Credit Facility. If there are no guarantors under the New Revolving Credit Facility, all Guarantor Subsidiaries under the indentures will be released from their guarantees.

The following summarized financial information is presented for Toll Brothers, Inc., the Subsidiary Issuer, and the Guarantor Subsidiaries on a combined basis after intercompany transactions and balances have been eliminated among Toll Brothers, Inc., the Subsidiary Issuer and the Guarantor Subsidiaries, as well as their investment in, and equity in earnings from the Non-Guarantor Subsidiaries.

Summarized Balance Sheet Data (amounts in millions):

Summarized Statement of Operations Data (amounts in millions):

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SEGMENTS

We operate in the following five geographic segments, with current operations generally located in the states listed below:

• The North region: Connecticut, Delaware, Illinois, Massachusetts, Michigan, New Jersey, New York and Pennsylvania;
• The Mid-Atlantic region: Georgia, Maryland, North Carolina, Tennessee and Virginia;
• The South region: Florida, South Carolina and Texas;
• The Mountain region: Arizona, Colorado, Idaho, Nevada and Utah; and
• The Pacific region: California, Oregon and Washington.

At October 31, 2022, we concluded that our City Living operations were no longer a reportable operating segment, primarily due to their insignificance as a result of the change in structure and shift in strategy. Amounts reported in prior periods have been restated to conform to the fiscal 2023 presentation. The realignment did not have any impact on our consolidated financial position, results of operations, earnings per share or cash flows for the periods presented.

The tables below summarize information related to units delivered and revenues, net contracts signed, and income (loss) before income taxes, by segment, for the periods indicated, and information related to backlog, by segment, as of the dates indicated.

Units Delivered and Revenues:

35

Net Contracts Signed:

36

Backlog:

Income (Loss) Before Income Taxes ($ amounts in millions):

“Corporate and other” is comprised principally of general corporate expenses such as our executive offices; the corporate finance, accounting, audit, tax, human resources, risk management, information technology, marketing, and legal groups; interest income; income from certain of our ancillary businesses, including our apartment rental development business and our high-rise urban luxury condominium business; and income from our Rental Property Joint Ventures and Gibraltar Joint Ventures.

FISCAL 2023 COMPARED TO FISCAL 2022 (Restated)

North

The decreases in the number of homes delivered in the fiscal 2023 periods were mainly due to a decrease in the number of homes in backlog at October 31, 2022, as compared to the number of homes in backlog at October 31, 2021, offset, in part by higher backlog conversion and an increase in spec homes delivered. The increases in the average prices of homes delivered in the fiscal 2023 periods were primarily due to sales price increases and a shift in the number of homes delivered to more expensive areas and/or products.

The increase in the number of net contracts signed in the three-month fiscal 2023 period was primarily the result of an increase in demand compared to the fiscal 2022 period, offset, in part, by a decrease in the average number of selling communities. The decrease in the number of net contracts signed in the nine-month fiscal 2023 period was mainly due to a decrease in the average number of selling communities, as well as weaker demand in the first and second quarters of fiscal 2023. The decreases in the average value of each contract signed in the fiscal 2023 periods were mainly due to a shift in the number of contracts signed to less expensive areas and/or products and an increase in sales incentives.

The decrease in income before income taxes in the three-month fiscal 2023 period was attributable to lower earnings from decreased revenue and higher home sales cost of revenues, as a percentage of home sale revenues, offset, in part, by lower SG&A costs. The increase in home sales cost of revenues, as a percentage of home sales revenues, in the three-month fiscal 2023 period was primarily due to a shift in product mix/areas to lower-margin areas, offset, in part, by lower interest expense as a percentage of home sales revenues.

The decrease in income before income taxes in the nine-month fiscal 2023 period was attributable to lower earnings from decreased revenue and higher home sales cost of revenues, as a percentage of home sale revenues, offset, in part, by lower SG&A costs. The increase in home sales cost of revenues, as a percentage of home sales revenues, in the nine-month fiscal 2023 period was primarily due to a shift in product mix/areas to lower-margin areas, offset, in part, by lower interest expense as a percentage of home sales revenues. In addition, we recognized $2.7 million of land impairment charges during the nine-month fiscal 2023 period in connection with a planned land sale. We also recorded impairment charges of $1.4 million and $6.6 million related to office space within one of our Hoboken, New Jersey condominium projects in connection with a planned sale in the three-month and nine-month fiscal 2022 periods, respectively.

Mid-Atlantic

The decreases in the number of homes delivered in the three-month and nine-month fiscal 2023 periods were mainly due to a decrease in the number of homes in backlog at October 31, 2022, as compared to the number of homes in backlog at October 31, 2021, offset, in part, by higher backlog conversion, and an increase in spec homes delivered. The increases in the average price of homes delivered in the three-month and nine-month fiscal 2023 periods were primarily due to a shift in the number of homes delivered to more expensive areas and/or products and sales price increases.

The increases in the number of net contracts signed in the fiscal 2023 periods were mainly due to improved demand, particularly in the third quarter, partially offset by a decrease in the average number of selling communities. The decreases in the average value of each contract signed in the fiscal 2023 periods were mainly due to a shift in the number of contracts signed to less expensive areas and/or products and an increase in sales incentives.

The increase in income before income taxes in the three-month fiscal 2023 period was mainly due to higher earnings from increased revenue, lower home sales cost of revenues, as a percentage of home sales revenues, and lower SG&A costs. The decrease in home sales cost of revenues, as a percentage of home sales revenues, in the fiscal 2023 period was primarily due to a shift in product mix/areas to higher-margin areas and lower interest expense as a percentage of home sales revenues.

The increase in income before income taxes in the nine-month fiscal 2023 period was mainly due to lower home sales cost of revenues, as a percentage of home sales revenues and lower SG&A costs. The decrease in home sales cost of revenues, as a percentage of home sales revenues, in the nine-month fiscal 2023 period was primarily due to a shift in product mix/areas to higher-margin areas and lower interest expense as a percentage of home sales revenues. This decrease was offset, in part, by an increase in impairment charges in the nine-month fiscal 2023 period. In addition, we recognized a $10.3 million land impairment charge, included in land sales and other cost of revenues, during the nine-month fiscal 2023 period in connection with a planned land sale. No similar charges were recognized in the nine-month fiscal 2022 period.

South

The increases in the number of homes delivered in the fiscal 2023 periods were mainly due to an increase in the number of homes in backlog at October 31, 2022, as compared to the number of homes in backlog at October 31, 2021, an increase in spec homes delivered, and higher backlog conversion. The increases in the average prices of homes delivered in the fiscal 2023 periods were primarily due to sales price increases and a shift in the number of homes delivered to more expensive areas.

The increases in the number of net contracts signed in the fiscal 2023 periods were due principally to improved demand and an increase in the number of selling communities. The decreases in the average value of each contract signed in the fiscal 2023 periods were primarily due to a shift in the number of contracts signed to less expensive areas or product types and increased sales incentives.

The increases in income before income taxes in the fiscal 2023 periods were principally due to higher earnings from increased revenues and lower home sales cost of revenues, as a percentage of home sale revenues, offset, in part, by higher SG&A costs. The decreases in home sales cost of revenues, as a percentage of home sales revenues, in the fiscal 2023 periods were primarily due to a shift in product mix/areas to higher-margin areas, sales price increases and lower interest expense as a percentage of home sales revenues.

Mountain

The decreases in the number of homes delivered in the fiscal 2023 periods were mainly due to decreases in the number of homes in backlog at October 31, 2022, as compared to the number of homes in backlog at October 31, 2021, partially offset by higher backlog conversion and an increase in spec homes delivered in the fiscal 2023 periods. The increases in the average price of homes delivered in the fiscal 2023 periods were primarily due to sales price increases.

The increase in the number of net contracts signed in the three-month fiscal 2023 period was due principally to improved demand and an increase in the number of selling communities. The decrease in the average value of each contract signed in the three-month fiscal 2023 period was primarily due to a shift in the number of contracts signed to less expensive areas or product types and increased sales incentives.

The decreases in the number of net contracts signed in the nine-month fiscal 2023 period was primarily due to weaker demand in the first and second quarters of fiscal 2023, partially offset by an increase in the number of selling communities. The decrease in the average value of each contract signed in the fiscal 2023 period was mainly due to a shift in the number of contracts signed to less expensive areas or product types and increased sales incentives.

The increases in income before income taxes in the fiscal 2023 periods were due mainly to higher earnings from increased revenues in the fiscal 2023 period, lower home sales cost of revenues, as a percentage of home sale revenues and lower SG&A costs. The decreases in home sales cost of revenues, as a percentage of home sales revenues, in the fiscal 2023 periods were primarily due to a shift in product mix/areas to higher-margin areas and sales price increases. The nine-month fiscal 2023 period was also impacted by an increase in impairment charges.

Pacific

The increases in the number of homes delivered in the fiscal 2023 periods were mainly due to higher backlog conversion and an increase in spec homes delivered, offset, in part, by a lower number of homes in backlog at October 31, 2022, as compared to the number of homes in backlog at October 31, 2021. The increases in the average prices of homes delivered in the fiscal 2023 periods were primarily due to a shift in the number of homes delivered to more expensive areas and/or products and sales price increases.

The increase in the number of net contracts signed in the three-month fiscal 2023 period was due principally to improved demand and an increase in the number of selling communities. The decrease in the average value of each contract signed in the three-month fiscal 2023 period was primarily due to a shift in the number of contracts signed to less expensive areas or product types and increased sales incentives.

The decrease in the number of net contracts signed in the nine-month fiscal 2023 period was primarily due to weaker demand in the first and second quarters of fiscal 2023, partially offset by an increase in the number of selling communities in the fiscal 2023 period. The decrease in the average value of each contract signed in the nine-month fiscal 2023 period was primarily due to a shift in the number of contracts signed to less expensive areas or product types and increased sales incentives.

The increase in income before income taxes in the three-month fiscal 2023 period was mainly due to higher earnings from increased revenues in the fiscal 2023 period and lower home sales cost of revenues, as a percentage of home sales revenues, offset, in part, by higher SG&A costs on higher volume. The decrease in home sales cost of revenues, as a percentage of home sales revenues, was primarily due to a shift in product mix/areas to higher-margin areas and sales price increases, coupled with lower interest expense as a percentage of home sales revenues. Home sales cost of revenues, as a percentage of home sales revenues, was also impacted by decreased impairment charges in the 2023 period compared to the fiscal 2022 period.

The increase in income before income taxes in the nine-month fiscal 2023 period was mainly due to higher earnings from increased revenues in the fiscal 2023 period, lower home sales cost of revenues, as a percentage of home sales revenues and lower SG&A costs. This increase was offset, in part, by higher impairment charges in the 2023 period compared to the fiscal 2022 period, including a $2.2 million impairment charged recognized in land sales and other cost of revenues in connection with a planned land sale. No similar charges were recognized in the fiscal 2022 periods. The decrease in home sales cost of revenues, as a percentage of home sales revenues, was primarily due to a shift in product mix/areas to higher-margin areas and sales price increases, coupled with lower interest expense as a percentage of home sales revenues.

Corporate and Other

In the three months ended July 31, 2023 and 2022, loss before income taxes was $24.2 million and $52.3 million, respectively. The decrease in the loss before income taxes in the fiscal 2023 period was principally due to a $35.0 million gain recognized from a property sale by one of our Rental Property Joint Ventures in the fiscal 2023 period, increased interest income due to higher interest rates, lower SG&A costs and increased earnings from our high-rise urban luxury condominium operations. These decreases are offset, in part, by lower earnings from our mortgage company operations primarily due to reduced volume and increased competition resulting in decreased spreads, higher losses incurred by our Rental Property Joint Ventures, and higher losses incurred in our apartment living operations.

In the nine months ended July 31, 2023 and 2022, loss before income taxes was $113.6 million and $150.7 million, respectively. The decrease in the loss before income taxes in the fiscal 2023 period was principally due to a $35.0 million gain recognized from a property sale by one of our Rental Property Joint Ventures in the fiscal 2023 period, $27.7 million of gains from litigation settlements - net, recognized in the fiscal 2023 period, lower SG&A costs, and increased interest income due to higher interest rates. This decrease was offset, in part, by a $21.0 million gain recognized in the fiscal 2022 period related to a property sale by one of our Rental Property Joint Ventures, a $9.0 million gain related to the bulk sale of security monitoring accounts by our smart home technologies business during the fiscal 2022 period, lower earnings from our mortgage company operations primarily due to a decrease in volume, higher losses incurred by our Rental Property Joint Ventures, and higher losses incurred in our apartment living operations. In addition, we recognized a $2.5 million land impairment charge during the nine-month fiscal 2023 period in connection with a planned land sale.

AVAILABLE INFORMATION

Our principal Internet address is www.tollbrothers.com (http://www.tollbrothers.com), and our Investor Relations website is located at investors.tollbrothers.com. We make our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act available through our Investor Relations website, free of charge, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC.

We provide information about our business and financial performance, including our company overview, on our Investor Relations website. Additionally, we webcast our earnings calls and certain events we participate in with members of the investment community on our Investor Relations website. Corporate governance information, including our codes of ethics, corporate governance guidelines, and board committee charters, is also available on our Investor Relations website. The content of our websites is not incorporated by reference into this Quarterly Report on Form 10-Q or in any other report or document we file with the SEC, and any references to our websites are intended to be inactive textual references only.

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 value of the debt instrument, but do affect our earnings and cash flow. We generally do not have the obligation to prepay fixed-rate debt before maturity, and, as a result, interest rate risk and changes in fair value should not have a significant impact on our fixed-rate debt until we are required or elect to refinance it.

The table below sets forth, at July 31, 2023, our debt obligations by scheduled maturity, weighted-average interest rates, and estimated fair value (amounts in thousands):

(a) Based upon the amount of variable-rate debt outstanding at July 31, 2023, and holding the variable-rate debt balance constant, each 1% increase in interest rates would increase the interest incurred by us by approximately $7.2 million per year, without consideration of the Company’s interest rate swap transactions.

(b) In November 2020, we entered into five interest rate swap transactions to hedge $400.0 million of the Term Loan Facility, which is included in the variable-rate debt column in the table above. The interest rate swaps effectively fix the interest cost on the $400.0 million at 0.369% plus the spread set forth in the pricing schedule in the Term Loan Facility through October 2025. The spread was 1.15% as of July 31, 2023. These interest rate swaps were designated as cash flow hedges.

Any controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected; however, our disclosure controls and procedures are designed to provide reasonable assurance of achieving their objectives.

Our Chief Executive Officer and Chief Financial Officer, with the assistance of management, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act 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 provide reasonable assurance that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the 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.

We continue to implement a new enterprise resource planning (“ERP”) system that affects many of our financial processes and is expected to improve the efficiency and effectiveness of certain financial and business transaction processes, as well as the underlying systems environment. The new ERP system will be a significant component of our internal control over financial reporting. Other than the ERP system implementation noted above, there has not been any change in our internal control over financial reporting (as that term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our quarter ended July 31, 2023, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes in our risk factors as previously disclosed in Part I, Item 1A., “Risk Factors” in our 2022 Form 10-K.