Markets

Toll Brothers' 10-Q Shows a Few Cracks the Foundation

By David Phillips

Updated on: September 16, 2008 / 10:15 AM EDT / MoneyWatch

In the third-quarter ended July 31, continued weak demand for new homes forced Toll Brothers to write down $146.2 million in lost value of land and unsold homes. The balance sheet at the nation's leading builder of luxury homes remains strong, with more than $1.5 billion in cash and access to about $1.3 billion under its bank credit facility. Net debt-to-capital at 18 percent stood at its lowest level ever.

Nonetheless, the recent 10-Q filed with the SEC on September 9 suggests a prolonged slump in the housing market could lead to renewed risk of inventory writedowns . On July 31, the company held approximately $4.5 billion in land and lots either completed or under construction.

To its credit, Toll Brothers had its lowest contract cancellation rate (195 homes) in more than two years. If the current crisis on Wall Street spreads to Main Street, however, potential sales could evaporate along with consumer confidence and success in finding affordable mortgage loans.

The filing also reveals an understated contingency exposure:

At July 31, 2008, the Company had agreements of sale outstanding to deliver 2,592 homes with an aggregate sales value of $1.75 billion, of which the Company has recognized $4.3 million of revenues with regard to a portion of such homes accounted for using the percentage of completion accounting method.

Generous buyer incentives, such as current one-dollar option specials, could lead to higher-than-expected construction costs, resulting in a lower profit margin on some of the $1.75 billion in aforementioned sales (contracted under the percentage of completion accounting method employed by the company).