Toll Brothers, Inc.: Form 10-Q for the period ended Apr 30, 2024

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, 2023 (“2023 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 2023 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

Although mortgage rates have remained elevated compared to the years preceding the Federal Reserve’s latest rate-hiking cycle, demand for new homes remained solid in the second quarter of fiscal 2024. We attribute the strength in demand to a resilient economy, favorable demographic trends and the continued imbalance in the supply and demand of for-sale homes, which has been caused by both the persistent underproduction of homes relative to household formations and by very low levels of resale inventory on the market. In addition, because we focus on the luxury segment of the market, our home buyers are generally more affluent than the average consumer and tend to be less sensitive to the affordability pressures caused by higher mortgage rates. In the three months ended April 30, 2024, we signed 3,041 net contracts with an aggregate value of $2.94 billion as compared to 2,333 net contracts with an aggregate value of $2.28 billion in the three months ended April 30, 2023. Year-over-year, net signed contracts increased 30% in units and 29% in dollars, respectively, in the second quarter of fiscal 2024. This increase in the number and value of net signed contracts reflects both the solid demand environment for new homes and the year-over-year increase in the number of communities from which we were selling during the quarter. At the end of the second quarter of fiscal 2024, we were selling from 386 communities, a 10% increase compared to the 350 communities in operation at the end of the second quarter of fiscal 2023. While it is difficult to predict the near-term impact on home demand of changes in the economy, including the impact of changes in mortgage rates, inflation expectations and consumer sentiment, over the longer term we continue to believe that the market for new homes will benefit from strong housing market fundamentals.

In the three months ended April 30, 2024, home sales revenue increased 6% as compared to the three months ended April 30, 2023. In the quarter, we delivered 2,641 homes with an average delivered price of $1,002,300, as compared to 2,492 delivered homes at an average price of $999,200 in the second quarter of fiscal 2023. The year-over-year increase in the number of homes delivered was partially a result of improvements in our cycle times, as supply chain and labor disruptions have largely normalized, the year-over-year increase in the number of communities we were operating from during the second quarter of fiscal 2024, and a higher backlog conversion ratio. While most of our homes have historically been sold on a build-to-order basis, where we do not begin construction of the home until we have a signed contract with a customer, in recent quarters, we have increased the number of quick move-in homes (or “spec” homes) in our inventory, which are homes started without a signed agreement with a customer. In the second quarter of fiscal 2024, 54% of net signed contracts were spec homes and the remainder were build-to-order. Spec homes allow us to compete more effectively with existing homes available in the market, especially for homebuyers that wish to take delivery within a short time frame. We sell our spec homes at various stages of construction and determine how many such homes to offer within each community based on local market factors, our current and planned sales pace and construction cadence for the community.

Financial and Operational Highlights

In the three-month period ended April 30, 2024, we recognized $2.84 billion of revenues, consisting of $2.65 billion of home sales revenue and $190.5 million of land sales and other revenue, and net income of $481.6 million, as compared to $2.51 billion of revenues, consisting of $2.49 billion of home sales revenue and $16.9 million of land sales and other revenue, and net income of $320.2 million in the three-month period ended April 30, 2023. Land sales and other revenue and net income in the fiscal 2024 period included $185.0 million and $124.1 million, respectively, related to the sale of a single parcel of land in northern Virginia to a commercial developer.

In the three-month periods ended April 30, 2024 and 2023, the value of net contracts signed was $2.94 billion (3,041 homes) and $2.28 billion (2,333 homes), respectively.

In the six-month period ended April 30, 2024, we recognized $4.79 billion of revenues, consisting of $4.58 billion of home sales revenues and $206.5 million of land sales and other revenues, and net income of $721.2 million, as compared to $4.29 billion of revenues, consisting of $4.24 billion of home sales revenues and $47.6 million of land sales and other revenues, and net income of $511.7 million in the six-month period ended April 30, 2023.

In the six-month periods ended April 30, 2024 and 2023, the value of net contracts signed was $5.01 billion (5,083 homes) and $3.73 billion (3,794 homes), respectively.

The value of our backlog at April 30, 2024 was $7.38 billion (7,093 homes), as compared to our backlog at April 30, 2023 of $8.38 billion (7,574 homes). Our backlog at October 31, 2023 was $6.95 billion (6,578 homes), as compared to backlog of $8.87 billion (8,098 homes) at October 31, 2022.

At April 30, 2024, we had $1.03 billion of cash and cash equivalents on hand and approximately $1.74 billion available under our $1.905 billion revolving credit facility (the “Revolving Credit Facility”). At April 30, 2024, we had no borrowings and we had approximately $170.0 million of outstanding letters of credit under the Revolving Credit Facility.

At April 30, 2024, we owned or controlled through options approximately 71,800 home sites, as compared to approximately 70,700 at October 31, 2023; and approximately 76,000 at October 31, 2022. Of the approximately 71,800 total home sites that we owned or controlled through options at April 30, 2024, we owned approximately 37,000 and controlled approximately 34,800 through options. Of the 37,000 home sites owned, approximately 18,500 were substantially improved. In addition, as of April 30, 2024, we expect to purchase approximately 8,400 additional home sites over several years from certain of the joint ventures in which we have interests, at prices to be determined.

At April 30, 2024, we were selling from 386 communities, compared to 370 at October 31, 2023; and 350 at April 30, 2023.

At April 30, 2024, our total stockholders’ equity and our debt to total capitalization ratio were $7.31 billion and 0.28 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 six months ended April 30, 2024 and 2023 ($ amounts in millions, unless otherwise stated). For more information regarding results of operations by segment, see “Segments” in this MD&A.

NM: Not meaningful.

Note: Due to rounding, amounts may not add. Net contracts signed information presented above is net of all cancellations that occurred in the period. “Net contracts signed - value” 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.

Home Sales Revenues and Home Sales Cost of Revenues

Three months ended April 30, 2024 compared to the three months ended April 30, 2023

The increase in home sale revenues for the three months ended April 30, 2024, as compared to the three months ended April 30, 2023, was primarily attributable to a 6% increase in the number of homes delivered. The increase in the number of homes delivered in the three months ended April 30, 2024 was primarily due to more deliveries of spec homes, coupled with a higher backlog conversion in the three months ended April 30, 2024 compared to the three months ended April 30, 2023, primarily as a result of improvement in build times. These factors were offset, in part, by a decrease in the number of homes in backlog at October 31, 2023, as compared to the number of homes in backlog at October 31, 2022, most significantly in the Mountain and Pacific regions.

The increase in home sales cost of revenues, as a percentage of home sales revenues, in the three months ended April 30, 2024, as compared to the three months ended April 30, 2023, was principally due to a higher inventory impairment charges in the fiscal 2024 period.

Six months ended April 30, 2024 compared to the six months ended April 30, 2023

The increase in home sale revenues for the six months ended April 30, 2024, as compared to the six months ended April 30, 2023, was primarily attributable to a 6% increase in the number of homes delivered and a 2% increase in the average price of homes delivered. The increase in the number of homes delivered in the six months ended April 30, 2024 was primarily due to more deliveries of spec homes, coupled with a higher backlog conversion in the six months ended April 30, 2024 compared to the six months ended April 30, 2023, 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, 2023, as compared to the number of homes in backlog at October 31, 2022, most significantly in the Mountain and Pacific regions. 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 Pacific region.

The decrease in home sales cost of revenues, as a percentage of home sales revenues, for the six months ended April 30, 2024, as compared to the six months ended April 30, 2023, 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, and lower interest expense as a percentage of home sales revenues, offset, in part, by higher inventory impairment charges in the fiscal 2024 period. In the six months ended April 30, 2024 and 2023, interest expense, as a percentage of home sales revenues, was 1.3% and 1.5%, 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; (4) sales of land parcels to third parties (typically because there is a superior economic use of the property); and (5) sales of commercial and retail properties generally located at our

urban luxury condominium communities. 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 revenues during the three and six months ended April 30, 2024 compared to the three and six months ended April 30, 2023 was primarily due to the sale of a land parcel to a commercial developer for net cash proceeds of $180.7 million which resulted in a pre-tax gain of $175.2 million. The increase in land sales and other cost of revenues as a percentage of land sales and other revenues was also positively impacted by lower impairment charges in the fiscal 2024 periods. We recognized $0.6 million of impairment charges in each of the three and six month periods ended April 30, 2024, in connection with planned land sales. This compares to $4.7 million and $17.7 million of land sales and other impairment charges recognized in the three and six months ended April 30, 2023, respectively.

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

SG&A expenditures increased by $10.2 million in the three-month period ended April 30, 2024, as compared to the three-month period ended April 30, 2023. As a percentage of home sales revenues, SG&A expense was 9.0% in the three months ended April 30, 2024, as compared to 9.1% in the three months ended April 30, 2023. The dollar increase in SG&A expenditures was due primarily to higher commissions and marketing spend from greater sales volume and increased community count. The decrease in SG&A expense as a percentage of revenues was due to a relatively lower increase in SG&A expenditures compared to the 6% increase in revenues.

SG&A expenditures increased by $28.7 million in the fiscal 2024 six-month period, as compared to the fiscal 2023 six-month period. As a percentage of home sales revenues, SG&A expense was 10.2% in the fiscal 2024 period, as compared to 10.4% in the fiscal 2023 period. The dollar increase in SG&A expenditures was primarily due to higher commissions and marketing spend from greater sales volume and increased community count. The decrease in SG&A expense as a percentage of revenues was due to revenues increasing 8% year-over-year in the fiscal 2024 period, while SG&A expenditures increased 7%.

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 April 30, 2024, we recognized income from unconsolidated entities of $5.9 million as compared to a loss of $5.3 million in the prior year period. The increase was primarily due a $21.0 million gain in the fiscal 2024 period related to our share of the gain from a property sale by one of our Rental Property Joint Ventures. This increase was offset, in part, by higher losses by various Rental Property Joint Ventures that are currently in the development or lease-up phase, losses incurred by two Home Building Joint Ventures, and lower earnings from a Land Development Joint Venture due to reduced volume of sales.

In the six-month period ended April 30, 2024, we recognized a loss from unconsolidated entities of $3.3 million, as compared to a loss of $9.7 million in the prior year period. The decrease in losses was primarily due a $21.0 million gain in the fiscal 2024 period related to our share of the gain from a property sale by one of our Rental Property Joint Ventures. This increase was offset, in part, by higher losses by various Rental Property Joint Ventures that are currently in the development or lease-up phase, losses incurred by two Home Building Joint Ventures, and lower earnings from a Land Development Joint Venture due to reduced volume of sales.

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 six month and three month periods ended April 30, 2024 was primarily due to higher interest rates on invested cash balances.

The increases in income from ancillary businesses in the three and six month periods ended April 30, 2024, were mainly due to a $4.4 million gain from a bulk sale of security monitoring accounts by our smart home technology business. In addition, the fiscal 2024 periods benefited from higher income from our mortgage and title operations due to increased volume. These increases were offset, in part, by higher operating losses incurred in our apartment living operations. Our apartment living operations were also impacted by $5.0 million of write-offs related to previously incurred costs that we believed not to be recoverable in three-month and six-month periods ended April 30, 2024, compared to $0.4 million in the three-month and six-month periods ended April 30, 2023.

The increases in management fee income earned by our home building operations in the three month and six month periods ended April 30, 2024 were primarily related to an increase in fees from certain of our Rental Property Joint Ventures.

The gain on litigation settlements - net in six months ended April 30, 2023 primarily relates to the settlement of an insurance claim. No similar gains occurred in the fiscal 2024 period.

The increases in “other” in the three month and six month periods ended April 30, 2024 were primarily due to a $5.0 gain recognized related to an investment we held in a privately held company which sold substantially all of its assets to a third party during the period.

Income Before Income Taxes

For the three-month period ended April 30, 2024, we reported income before income taxes of $649.8 million, as compared to $430.6 million in the three-month period ended April 30, 2023.

For the six-month period ended April 30, 2024, we reported income before income taxes of $960.9 million, as compared to $684.4 million in the six-month period ended April 30, 2023.

Income Tax Provision

In the three-month periods ended April 30, 2024 and April 30, 2023, we recognized income tax provisions of $168.2 million and $110.4 million, respectively. Based upon the federal statutory rate of 21.0% for the fiscal 2024 and 2023 periods, our federal tax provisions would have been $136.5 million and $90.4 million, in the three-month periods ended April 30, 2024 and 2023, 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 $239.8 million and $172.6 million in the six-month periods ended April 30, 2024 and April 30, 2023, respectively. Based upon the federal statutory rate of 21.0% for the fiscal 2024 and 2023 periods, our federal tax provisions would have been $201.8 million and $143.7 million, in the six-month periods ended April 30, 2024 and April 30, 2023, 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 April 30, 2024 and 2023, the value of net contracts signed was $2.94 billion (3,041 homes) and $2.28 billion (2,333 homes), respectively. The aggregate value of net contracts signed increased $665.7 million, or 29.3%, in the three-month period ended April 30, 2024, as compared to the three-month period ended April 30, 2023. The increase in the aggregate value of net contracts signed was due to a 30.3% increase in the number of net contracts signed offset, in part, by a 0.8% decrease in the average value of each signed contract. The increase in the number of net contracts signed reflects both the solid demand environment for new homes and the year-over-year increase in the number of communities from which we were operating during the period. The average value of each signed contract in the three-months ended April 30, 2024 was essentially flat compared to the prior year period.

In the six-month periods ended April 30, 2024 and 2023, the value of net contracts signed was $5.01 billion (5,083 homes) and $3.73 billion (3,794 homes), respectively. The aggregate value of net contracts signed increased $1.28 billion, or 34.2%, in the six-month period ended April 30, 2024, as compared to the six-month period ended April 30, 2023. The increase in the aggregate value of net contracts signed was due to a 34.0% increase in the number of net contracts signed and an 0.2% increase in the average value attributed to each signed contract. The increase in the number of net contracts signed reflects both the solid the solid demand environment and the year-over-year increase in the number of communities from which we were operating during the period. The average value of each signed contract in the six-months ended April 30, 2024 was essentially flat compared to the prior year period.

Backlog

The value of our backlog at April 30, 2024 decreased 12% to $7.38 billion (7,093 homes), as compared to $8.38 billion (7,574 homes) at April 30, 2023. Our backlog at October 31, 2023 and 2022 was $6.95 billion (6,578 homes) and $8.87 billion (8,098 homes), respectively. The decrease in the value of our backlog at April 30, 2024 as compared to April 30, 2023, is due to a 6% decrease in the number of homes in backlog and a 6% decrease in the average contracted price per home. These decreases are primarily attributable to spec homes representing a larger portion of our net signed contracts and homes delivered.

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. We also use cash to pay dividends on our common stock and may from time to time repay debt and make share repurchases with cash flows from operations and other sources. 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 April 30, 2024, we had $1.03 billion of cash and cash equivalents on hand and approximately $1.74 billion available for borrowing under our Revolving Credit Facility. The 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, and is scheduled to mature on February 14, 2028. Toll Brothers, Inc. and substantially all of its 100%-owned home building subsidiaries are guarantors of the borrower’s obligations under the Revolving Credit Facility. We are also a party to a $650.0 million unsecured Term Loan Facility of which $487.5 million matures on February 14, 2028, $60.9 million matures on November 1, 2026 and the remaining $101.6 million matures on November 1, 2025.

Short-term Liquidity and Capital Resources

For the next twelve months, we expect our principal demand for funds will be for inventory additions (in the form of land acquisition, land development, home construction costs, and deposits to control land, which could occur directly or indirectly through builder acquisitions), operating expenses, including our general and administrative expenses, investments and funding of capital improvements, investments in existing and future unconsolidated joint ventures, repayment of community-level borrowings, 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 Revolving Credit Facility, and other borrowings from banks and other lenders.

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 (which could occur directly or indirectly through builder acquisitions), 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 April 30, 2024, 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, obligations under our deferred compensation plan, and obligations under our supplemental executive retirement 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 5, “Loans Payable, Senior Notes, and Mortgage Company Loan Facility,” and Note 13, “Commitments and Contingencies,” in the Notes to the Condensed Consolidated Financial Statements for amounts outstanding as of April 30, 2024, 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 April 30, 2024, we had investments in these entities of $1.00 billion and were committed to invest or advance up to an additional $319.4 million to these entities if they require additional funding. At April 30, 2024, we had agreed to terms for the acquisition of 369 home sites from four joint ventures for an estimated aggregate purchase price of $31.5 million. We also expect to purchase approximately 8,400 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 April 30, 2024, 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 April 30, 2024, we had guaranteed the debt of certain unconsolidated entities that have loan commitments aggregating $3.22 billion, of which, if the full amount of the debt obligations were borrowed, we estimate $694.8 million to be our maximum exposure related to repayment and carry cost guarantees. At April 30, 2024, the unconsolidated entities had borrowed an aggregate of $2.00 billion, of which we estimate $590.6 million to be our maximum exposure related to repayment and carry cost guarantees. The terms of these guarantees generally range from 1 month to 3.5 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 3, “Investments in Unconsolidated Entities” in the Notes to the 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 April 30, 2024, we were in compliance with all such covenants and requirements on our term loan, credit facility and other loans payable. Refer to Note 5, “Loans Payable, Senior Notes, and Mortgage Company Loan Facility” in the Notes to the Condensed Consolidated Financial Statements.

Operating Activities

At April 30, 2024 and October 31, 2023, we had $1.03 billion and $1.30 billion, respectively, of cash and cash equivalents. Cash provided by operating activities during the six-month period ended April 30, 2024 was $152.0 million. Cash provided by operating activities during the fiscal 2024 period was primarily related to net income (adjusted for stock-based compensation, depreciation and amortization, losses and distributions of earnings from unconsolidated entities, deferred taxes, impairments and gain on sale of assets); increases in accounts payable and accrued expenses, and current income taxes – net. This activity was offset, in part, by an increase in inventory; mortgage loans originated, net of mortgage loans sold, a decrease in customer deposits – net; and an increase in receivables, prepaid expenses, and other assets.

At April 30, 2023 and October 31, 2022, we had $761.9 million and $1.35 billion, respectively, of cash and cash equivalents. Cash provided by operating activities during the six-month period ended April 30, 2023 was $145.6 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); mortgage loans sold, net of mortgage loans originated; and a decrease in receivables, prepaid expenses, and other assets. This activity was offset, in part, an increase in inventory, a decrease in accounts payable and accrued expenses, a decrease in current income taxes - net and a decrease in customer deposits – net.

Investing Activities

In the six-month period ended April 30, 2024, cash used in investing activities was $100.7 million, which was primarily related to $99.6 million used to fund our investments in unconsolidated entities and $29.7 million used for the purchase of property and equipment. This activity was offset, in part, by $29.3 million of cash received as returns from our investments in unconsolidated entities.

In the six-month period ended April 30, 2023, cash used in investing activities was $99.2 million, which was primarily related to $117.2 million used to fund our investments in unconsolidated entities and $39.5 million used for the purchase of property and equipment. This activity was offset, in part, by $48.6 million of cash received as returns from our investments in unconsolidated entities and $9.0 million of cash proceeds from the sale of assets.

Financing Activities

We used $308.2 million of cash in financing activities in the six-month period ended April 30, 2024, primarily for the repurchase of $180.1 million of our common stock, the payments of $77.7 million of loans payable, net of borrowings, the payment of dividends on our common stock of $47.1 million, and $3.5 million of payments related to stock-based benefit plans - net.

We used $635.3 million of cash in financing activities in the six-month period ended April 30, 2023, primarily for the redemption of $400.0 million of senior notes, payments of $118.9 million of loans payable, net of borrowings, the payment of dividends on our common stock of $46.3 million the repurchase of $93.1 million of our common stock and payments of $5.3 million of debt issuance costs. This activity was offset, in part, by $28.3 million of proceeds related to stock-based benefit plans - net.

CRITICAL ACCOUNTING ESTIMATES

As disclosed in our 2023 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, 2023, there have been no material changes to those critical accounting estimates.

SUPPLEMENTAL GUARANTOR INFORMATION

At April 30, 2024, 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 5, “Loans Payable, Senior Notes and Mortgage Company Loan Facility” in the Notes to the 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 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 Revolving Credit Facility. If there are no guarantors under the 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.

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:

Note: Due to rounding, amounts may not add.

Net Contracts Signed:

Backlog:

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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 operations; and income from our Rental Property Joint Ventures and Gibraltar Joint Ventures.

FISCAL 2024 COMPARED TO FISCAL 2023

North

The decreases in the number of homes delivered in the fiscal 2024 periods were mainly due to a decrease in the number of homes in backlog at October 31, 2023, as compared to the number of homes in backlog at October 31, 2022 offset, in part, by an increase in spec homes delivered. The increases in the average prices of homes delivered in the fiscal 2024 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 increases in the number of net contracts signed in the fiscal 2024 periods compared to the prior year periods were due to increased demand being offset by a decrease in the average number of selling communities. The increases in the average value of each contract signed in the fiscal 2024 periods were mainly due to a shift in the number of contracts signed to more expensive areas and/or products and a decrease in sales incentives.

The increase in income before income taxes in the three-month fiscal 2024 period was attributable to lower home sales cost of revenues, as a percentage of home sale revenues and lower SG&A costs, offset, in part, by lower earnings from decreased revenue. The decrease in home sales cost of revenues, as a percentage of home sales revenues, in the three-month fiscal 2024 period was primarily due to a shift in product mix/areas to higher-margin areas and by lower interest expense as a percentage of home sales revenues.

The decrease in income before income taxes in the six-month fiscal 2024 period was attributable to lower earnings from decreased revenue, offset, in part, by lower home sales cost of revenues, as a percentage of home sale revenues, and lower SG&A costs. The decrease in home sales cost of revenues, as a percentage of home sales revenues, in the six-month fiscal 2024 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. In addition, we recognized $2.7 million of land impairment charges during the six-month fiscal 2023 period in connection with a planned land sale. No similar charge was recognized in the six-month fiscal 2024 period.

Mid-Atlantic

The increases in the number of homes delivered in the fiscal 2024 periods were mainly due to an increase in the number of homes in backlog at October 31, 2023, as compared to the number of homes in backlog at October 31, 2022, higher backlog conversion, and an increase in spec homes delivered. The decreases in the average price of homes delivered in the fiscal 2024 periods were primarily due to a shift in the number of homes delivered to less expensive areas and/or products, as well as an increase in the number of spec homes delivered.

The increases in the number of net contracts signed in the fiscal 2024 periods were mainly due to the increase in the average number of selling communities. The decreases in the average value of each contract signed in the fiscal 2024 periods were mainly due to a shift in the number of contracts signed to less expensive areas and/or products.

The increases in income before income taxes in the fiscal 2024 periods were mainly due to the sale of a land parcel to a commercial developer that resulted in a pre-tax gain of $175.2 million during the three and six months ended April 30, 2024. In addition, income before income taxes in the fiscal 2024 periods benefited from higher earnings from increased revenue, lower home sales cost of revenues, as a percentage of home sales revenues, offset, in part, by higher SG&A costs. The decrease in home sales cost of revenues, as a percentage of home sales revenues, in the fiscal 2024 period was primarily due to a shift in product mix/areas to higher-margin areas. In addition, the six-month fiscal 2023 was impacted by a $10.3 million land impairment charge, included in land sales and other cost of revenues, which was recognized in connection with a planned land sale. No similar charge was recognized in the six-month fiscal 2024 period.

South

The increases in the number of homes delivered in the fiscal 2024 periods were mainly due to an increase in spec homes delivered and higher backlog conversion, offset, in part, by a decrease in the number of homes in backlog at October 31, 2023, as compared to the number of homes in backlog at October 31, 2022. The increases in the average price of homes delivered in the fiscal 2024 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 2024 periods were due principally to an increase in the average number of selling communities, offset, in part by lower demand. The increases in the average value of each contract signed in the fiscal 2024 periods were primarily due to a shift in the number of contracts signed to more expensive areas or product types.

The increases in income before income taxes in the fiscal 2024 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 decrease in home sales cost of revenues, as a percentage of home sales revenues, in the fiscal 2024 period was 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 2024 periods were mainly due to a decrease in the number of homes in backlog at October 31, 2023, as compared to the number of homes in backlog at October 31, 2022, partially offset by higher backlog conversion and an increase in spec homes delivered in the fiscal 2024 periods. The average price of homes delivered in the three-month fiscal 2024 period was essentially flat compared to the three-month fiscal 2023 period. The increase in the average price of homes delivered in the six-month fiscal 2024 period was primarily due to a shift in the number of contracts delivered to more expensive areas or product types.

The increases in the number of net contracts signed in the fiscal 2024 periods were primarily due to improved demand and an increase in the number of selling communities. The increases in the average value of each contract signed in the fiscal 2024 periods were mainly due to a shift in the number of contracts signed to more expensive areas or product types.

The decreases in income before income taxes in the fiscal 2024 periods were due mainly to lower earnings from decreased revenues in the fiscal 2024 periods and higher home sales cost of revenues, as a percentage of home sale revenues. The increases in home sales cost of revenues, as a percentage of home sales revenues, in the fiscal 2024 periods were primarily due to a shift in product mix/areas to lower-margin areas. The fiscal 2024 periods were also impacted by higher inventory impairment charges, principally due to $24.9 million impairment charge associated with one master-planned community.

Pacific

The increases in the number of homes delivered in the fiscal 2024 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, 2023, as compared to the number of homes in backlog at October 31, 2022. The average price of homes delivered in the three-month fiscal 2024 period was essentially flat compared to the prior year period. The increase in the average price of homes delivered in the six-month fiscal 2024 period was 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 2024 periods were primarily due to improved demand, offset, in part, by a decrease in the number of selling communities in the fiscal 2024 periods. The decreases in the average value of each contract signed in the fiscal 2024 periods were primarily due to a shift in the number of contracts signed to less expensive areas or product types, offset, in part, by decreased sales incentives.

The increase in income before income taxes in the three-month fiscal 2024 period was mainly due to higher earnings from increased revenues in the fiscal 2024 period and lower land impairment charges. We recognized a $2.2 million land impairment charge, included in land sales and other cost of revenues, during the three-month fiscal 2023 period in connection with a planned land sale. No similar charge was recognized in the fiscal 2024 period. These increases were offset, in part, by higher home sales cost of revenues, as a percentage of home sales revenues, and higher SG&A costs. The increase in home sales cost of revenues, as a percentage of home sales revenues, 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 increase in income before income taxes in the six-month fiscal 2024 period was mainly due to higher earnings from increased revenues, lower home sales cost of revenues, as a percentage of home sales revenues, and lower land impairment charges. 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 lower interest expense as a percentage of home sales revenues. We recognized a $2.2 million land impairment charge, included in land sales and other cost of revenues, during the six-month fiscal 2023 period in connection with a planned land sale. No similar charge was recognized in the fiscal 2024 period. These increases were offset, in part, by higher SG&A costs.

Corporate and Other

In the three months ended April 30, 2024 and 2023, loss before income taxes was $35.5 million and $64.8 million, respectively. The decrease in the loss before income taxes in the fiscal 2024 period was principally due a $21.0 million gain in the fiscal 2024 period related to our share of the gain from a property sale by one of our Rental Property Joint Ventures, a $5.0 million gain recognized from an investment we held in a privately held company that sold substantially all of its assets to a third party during the period, a $4.4 million gain from a bulk sale of security monitoring accounts by our smart home technology business, an increase in interest income and higher earnings from our mortgage company operations primarily due to increased volume. These increases were offset, in part, by higher losses by various Rental Property Joint Ventures that are currently in the development or lease-up phase, losses incurred by two Home Building Joint Ventures, and higher operating losses incurred in our apartment living operations. In addition, we recognized a $2.5 million land impairment charge during the three-month fiscal 2023 period in connection with a planned land sale. No similar charge was recognized during the three-month fiscal 2024 period.

In the six months ended April 30, 2024 and 2023, loss before income taxes was $89.0 million and $89.4 million, respectively. The decrease in the loss before income taxes in the fiscal 2024 period was principally due a $21.0 million gain in the fiscal 2024 period related to our share of the gain from a property sale by one of our Rental Property Joint Ventures, a $5.0 million gain recognized from an investment we held in a privately held company that sold substantially all of its assets to a third party during the period, a $4.4 million gain from a bulk sale of security monitoring accounts by our smart home technology business, an increase in interest income and higher earnings from our mortgage company operations primarily due to increased volume. These increases were offset, in part, by $27.7 million of gains from litigation settlements - net, recognized in the fiscal 2023 period, which did not recur in the 2024 period, higher losses by various Rental Property Joint Ventures that are currently in the development or lease-up phase, losses incurred by two Home Building Joint Ventures, higher operating losses incurred in our apartment living operations and higher SG&A costs. The increase in SG&A costs in the fiscal 2024 period was primarily due to compensation and benefit increases. In addition, we recognized a $2.5 million land impairment charge during the six-month fiscal 2023 period in connection with a planned land sale. No similar charge was recognized during the six-month fiscal 2024 period.

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 April 30, 2024, 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 April 30, 2024, and holding the variable-rate debt balance constant, each 1% increase in interest rates would increase the interest incurred by us by approximately $8.7 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 $650.0 million 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 April 30, 2024. 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.

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 April 30, 2024, 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 2023 Form 10-K.