Write-Downs Push Toll Loss to $111.4 Million

Toll Brothers, Horsham, Pa. (NYSE:TOL) Thursday before market open reported a net loss of $111.4 million (-$0.68 per diluted share) for its fiscal fourth quarter ended Oct. 31 on $85.5 million of impairments, a charge of $11.6 million related to early retirement of debt and a $14.6 million non-cash expense for deferred tax asset valuation allowances.

Without the write-downs and charges, the loss would have been $9.6 million.The loss exceeded analyst expectations of a shortfall of $0.46 per share. It exceeded the loss for the comparable quarter last year, which was $78.8 million, (-$0.49 per diluted share), which included $175.9 million of non-cash pre-tax inventory and other write-downs and an $11.1 million charge to deferred tax assets.

For fiscal 2009, Toll reported a net loss of $755.8 million (-$4.68 per diluted share), including inventory and other write-downs of $476.7 million, a charge of $13.7 million related to the early retirement of debt and a$458.3 million expense for deferred tax asset valuation allowances.Excluding the write-downs, the full-year pre-tax loss was $6.1 million.

Shares of Toll were down more than 3.5% at $18.77 in pre-market trading Thursday and were trading down nearly 5% at $18.52 at 10:15 a.m.

During the quarter, home-building revenue slid 30% to $486.6 million during the quarter as deliveries fell 20% to 860. As previously reported, new orders were up sharply, with 765 units sold for a total of $430.8 million, an increase of 42% in units and 62% in dollars compared to last year's quarter and up 17% and 18% from the same quarter in 2007. The increases came despite a cut in active communities from 290 during last year's quarter to215 this year. The cancellation rate (current-quarter cancellations divided by current-quarter signed contracts) was 6.9% in the quarter, equivalent to pre-downturn historical norms.

Average fourth-quarter net signed contracts of 3.56 units per community were nearly double the 1.86 achieved in last years quarter but were still well off the company's 20-year fourth-quarter average of 6.16.

The average value per unit of gross contracts signed, cancellations and net contracts signed in the quarter was $562,000, $546,000 and $563,000, respectively, compared to $549,000, $704,000 and $535,000 in the previous quarter and $583,000, $786,000 and $495,000 in the year-ago quarter.

Fourth-quarter-end backlog of 1,531 units and $874.8 million declined 25% in units and 34% in dollars, compared to 2008's fiscal fourth quarter, which will negatively impact revenue going into 2010.

Toll's joint ventures delivered homes with a value of $11.8 million for the quarter, down from $42.7 million in the comparable quarter last year.

"We are entering the fifth year of this severe housing recession. Last year at this time, Lehman Brothers had recently collapsed, paralyzing the financial markets," said Robert I. Toll, chairman and CEO. "Now, one year later, after massive government intervention, the debate about the economy and the housing industry seems no longer to be focused on whether we have seen the bottom, but rather, when and how quickly the economy and the housing market will recover."

Still, he added, while "our declining cancellation rate and improved pace of contract signings provide some signs of recovery ... a number of factors continue to weigh on the housing market." Among them, he said, were unemployment and the 25% of existing home owners whose homes are worth less than their mortgage balances, making it difficult to sell and move up into a Toll home.

"The choppiness in demand that began after Labor Day, following a stronger period from late March through late August, has continued," Toll said. "This is consistent with recent weaker economic news. Since the holiday season is not typically the busiest time to be purchasing or selling homes, we suspect the housing market may be following seasonal buying patterns."

The company ended the quarter and the fiscal year with $1.8 billion in cash and another $101 million in marketable Treasury securities on its balance sheet and a net-debt-to-capital ratio of 7.4%, the lowest ever for the company. Toll's SG&A for the quarter was down 12.7% to $85.4 million.

At fiscal year end, Toll had 31,900 lots owned and optioned, compared to approximately 35,400 in the previous quarter and approximately 39,800 at the end of the 2008 fiscal year. Lot count peaked at approximately 91,200 midway through the 2006 fiscal year. Community count by quarter's end was down to 200 from an average of 215 during the entire quarter.

CFO Joel Rassman offered limited guidance for fiscal 2010. He said the company expects to deliver between 2,000 and 2,750 homes at an average price of between $540,000 and $560,000 per home, both down from the 2009 fiscal year, which will raise the cost of sales. He said Toll expects SG&A to fall in dollars during 2010 but rise as a percentage of revenue.

Toll expects to collect a $161.8 million income tax refund against 2007 in fiscal 2010.

CEO Toll said he expected further consolidation in the home-building industry and that Toll would gain market share. "Many of the small- and mid-sized private builders, who historically have been our primary competitors in the luxury niche, are facing serious capital constraints, among other problems, and are either hobbled or no longer in business. The other major public home building companies remain focused primarily on the lower end of the housing market, rather than on the luxury niche."

He added, "In the past few months, we have been seeing and competing for a greater number of attractive land acquisition opportunities from financial institutions and other sellers. With our strong cash position, our record low net-debt-to-capital ratio and our demonstrated access to liquidity, we believe we can take advantage of opportunities that arise from the current state of distress in our industry."