Toll Brothers, Inc. (NYSE:TOL) on Tuesday reported a second-quarter profit of $89.1 million, or $0.51 per share, beating Wall Street estimates by a nickel, up from $67.9 million, or $0.37 per share, in last year's quarter. Toll Brothers shares soared on the news, up 8.4% in heavy trading a half hour before session's close.

Among the highlights:

  • Pre-tax income was $140.4 million, compared to pre-tax income of $86.5 million in FY 2015's second quarter. Second quarter FY 2016 included write-downs of $6.4 million, compared to $12.2 million in FY 2015's second quarter.
  • Revenues of $1.12 billion and home building deliveries of 1,304 units increased 31% in dollars and 9% in units, compared to FY 2015's second quarter. The average price of homes delivered was $855,500, compared to $713,500 in FY 2015's second quarter.
  • Net signed contracts of $1.65 billion and 1,993 units rose 3% in dollars and 3% in units, compared to FY 2015's second quarter. The average price of net signed contracts was $825,500, compared to $826,300 in FY 2015's second quarter.
  • Backlog of $4.19 billion and 4,940 units rose 20% in dollars and 13% in units, compared to FY 2015's second-quarter-end backlog. At second-quarter end, the average price of homes in backlog was $848,600, compared to $793,800 at FY 2015's second-quarter end.
  • Gross margin, excluding interest and write-downs, was 25.7%, compared to 25.3% in FY 2015's second quarter.
  • SG&A as a percentage of revenue was 11.5%, compared to 12.6% in FY 2015's second quarter.
  • Income from operations was 10.5% of revenue, compared to 7.8% of revenue in FY 2015's second quarter.
  • Other income and Income from unconsolidated entities totaled $23.8 million, compared to $20.1 million in FY 2015's second quarter.
  • The Company ended its second quarter with 299 selling communities, compared to 291 at FY 2016's first-quarter end, and 269 at FY 2015's second-quarter end.
  • At FY 2016's second-quarter end, the Company had approximately 45,400 lots owned and optioned, compared to approximately 43,800 one quarter earlier and 45,000 one year ago.
  • The Company ended its FY 2016 second quarter with $423.2 million in cash and marketable securities, compared to $336.2 million at 2016's first-quarter end and $542.2 million at FY 2015's second-quarter end.
  • At FY 2016's second-quarter end, the Company had $840.2 million available under its $1.035 billion credit facility. On May 19, 2016, the Company replaced this facility with a new $1.215 billion credit facility that matures in May 2021.

Stock buyback program and guidance:

  • During the second quarter of FY 2016, the Company repurchased approximately 2.9 million shares of its common stock at an average price of $27.27 per share for a total purchase price of approximately $80.1 million. Additionally, in its third quarter to-date, the Company has repurchased approximately 1.8 million shares at an average price of $26.50 for a total purchase price of approximately $47.3 million. Cumulatively, since the start of its FY 2015 fourth quarter, the Company has purchased approximately 10.9 million shares at an average price of $29.95 per share for a total purchase price of approximately $327.7 million.
  • Effective May 23, 2016, the Board of Directors authorized the repurchase of 20 million shares of Toll Brothers common stock and terminated the prior share repurchase program.
  • In updating its guidance, the Company now expects to deliver between 5,800 and 6,300 homes in FY 2016 at an average price range of $820,000 to $850,000, compared to 5,525 deliveries in FY 2015 at an average price of $755,000. This translates to projected revenues of between $4.76 billion and $5.36 billion in FY 2016, compared to $4.17 billion in FY 2015.
  • The Company continues to project a full FY 2016 gross margin, excluding interest and write-downs, of between 25.8% and 26.2%. Interest in cost of sales is projected to be approximately 3.2% for FY 2016, compared to 3.4% in FY 2015.

Executive commentary:
Douglas C. Yearley, Jr., Toll Brothers' chief executive officer, stated: "Our revenues this quarter were up 31%, compared to last year while pre-tax income rose 62% and net income rose 31%. Improvements in gross margin, SG&A leverage and pre-tax margin contributed to a significant earnings jump this quarter.

"Our contracts this quarter rose 3% in both dollars and units compared to one year ago. This modest growth was achieved despite a decline of 93 units in California contracts compared to one year ago. We believe the California market is still strong. Both Southern and Northern California were among our top 5 regions in contracts per community this quarter. Our drop in California contracts reflects a temporary lack of inventory for sale; strategic price increases we have implemented to meter out sales in communities with large backlogs; and the lingering impact on our Porter Ranch community of a leak from a nearby natural gas storage facility, which appears to be heading toward a positive resolution.

"We saw strength across much of the rest of the West including Denver, Seattle, Reno and Las Vegas. Back East, New Jersey, Northern Virginia, Maryland and Pennsylvania also enjoyed solid growth. And contracts in our wholly owned New York City Living communities were up 26% in dollars and 18% in units this quarter compared to one year ago.

"Through the first three weeks of our third quarter, our contracts, on a gross basis, were basically flat compared to one year ago, while our non-binding reservation deposits were up about 25%.

"Toll Apartment Living continues to exceed expectations. We have approximately 7,200 units completed or in development, nearly all of which are in the metro Boston to Washington, D.C. corridor. Our stabilized properties currently average 96% occupancy. We intend to expand this business nationally in both urban and suburban markets.

"Toll Apartment Living is one of a number of businesses that augment our home building operations. These also include our City Living and Gibraltar Capital joint ventures, land sales to other builders in several master planned communities, Westminster Title, Westminster Security, Toll Golf Management, and several other businesses.

"Other income and Income from unconsolidated entities now represent approximately 15% of our annual pre-tax bottom line. With this contribution, our backlog up 20% at the end of the second quarter, more inventory coming on line in California, and a generally positive climate for housing in most of our markets, we are optimistic about our future."

Martin P. Connor, Toll Brothers' chief financial officer, stated: "We have successfully brought a number of initiatives to fruition recently. In April, we announced that our Gibraltar Capital and Asset Management subsidiary had entered into a joint venture with a large institutional investor to provide builders and developers with land banking and joint venture capital. The venture, which will be managed by Gibraltar, has a total of $400 million of funding commitments: 75% from the institutional investor and 25% from Toll Brothers. Last week we completed a new $1.215 billion 18-bank credit facility that matures in May 2021, which represents an extension and expansion of our previous facility.

"Since the start of FY 2015's fourth quarter, we have purchased over $327 million, or 10.9 million shares, of our stock. And effective yesterday, our Board of Directors reset the authorization to repurchase up to 20 million shares.

"Subject to the caveats in our Statement on Forward-Looking Information included in this release, we offer the following limited guidance. We estimate unit backlog conversion for the third quarter at 30%. We are narrowing our previous full fiscal year guidance and now expect to deliver between 5,800 and 6,300 homes in FY 2016. We now believe the average price of deliveries for the full FY 2016 will be between $820,000 and $850,000 per home. We reiterate our expected gross margin (pre-interest and pre-impairment) for the full FY 2016 to be approximately 25.8% to 26.2%. We are updating our SG&A guidance to approximately 10.4% of revenues and our interest in cost of sales guidance to approximately 3.2% of revenues."

Robert I. Toll, executive chairman, stated: "We continue to believe the drivers are in place to sustain the current housing market's slow but steady growth. Interest rates remain low, the job picture continues to improve, home equity values are rising, supply remains constrained and the industry is still not building enough homes to meet the demand that current demographics imply are needed. Last week The Wall Street Journal cited a U.S. Census report that indicated suburban populations are on the rise, which is supportive of the new home market. Another U.S. Census report last Tuesday noted that single family housing permits had risen by 8% in April from one year ago. As millennials mature, studies indicate that their appetite for home ownership is consistent with past generations, which is encouraging for our industry."