Toll Brothers, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (“MD&A”) This discussion and analysis is based on, should be read together with, and is qualified in its entirety by, the Consolidated Financial Statements and Notes thereto in Item 15(a)1 of this Form 10-K, beginning at page F-1. It also should be read in conjunction with the disclosure under “Forward-Looking Statements” in Part I of this Form 10-K. When this report uses the words “we,” “us,” “our,” and the “Company,” they refer to Toll Brothers, Inc. and its subsidiaries, unless the context otherwise requires. References herein to fiscal year refer to our fiscal years ended or ending October 31. Unless otherwise stated in this report, net contracts signed represents a number or value equal to the gross number or value of contracts signed during the relevant period, less the number or value of contracts cancelled during the relevant period, which includes contracts that were signed during the relevant period and in prior periods. 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 We design, build, market, sell, and arrange financing for an array of luxury residential single-family detached, attached, master-planned, resort-style golf, and urban low-, mid-, and high-rise communities, principally on land we develop and improve, as we continue to pursue our strategy of broadening our product lines, price points and geographic footprint. We cater to luxury first-time, move-up, empty-nester, active-adult, and second-home buyers in the United States, as well as urban and suburban renters. We also design, build, market, and sell high-density, high-rise urban luxury condominiums with third-party joint venture partners. At October 31, 2023, we were operating in 24 states and in the District of Columbia. In the five years ended October 31, 2023, we delivered 46,701 homes from 931 communities, including 9,597 homes from 481 communities in fiscal 2023. At October 31, 2023, we had 930 communities in various stages of planning, development or operations containing approximately 70,700 home sites that we owned or controlled through options. We operate our own architectural, engineering, mortgage, title, land development, insurance, smart home technology and landscaping subsidiaries. We also develop master-planned and golf course communities as well as operate, in certain regions, our own lumber distribution, house component assembly and component manufacturing operations. In addition to our residential for-sale business, we also develop and operate for-rent apartments through joint ventures. See the section entitled “Toll Brothers Apartment Living/Toll Brothers Campus Living” below. We have investments in various unconsolidated entities, including our Land Development Joint Ventures, Home Building Joint Ventures, Rental Property Joint Ventures and Gibraltar Joint Ventures. Financial Highlights In fiscal 2023, we recognized $9.99 billion of revenues, consisting of $9.87 billion of home sales revenues and $128.9 million of land sales and other revenues, and net income of $1.37 billion, as compared to $10.28 billion of revenues, consisting of $9.71 billion of home sales revenues and $564.4 million of land sales and other revenues, and net income of $1.29 billion in fiscal 2022. In fiscal 2023 and 2022, the value of net contracts signed was $7.91 billion (8,077 homes) and $9.07 billion (8,255 homes), respectively. The value of our backlog at October 31, 2023 was $6.95 billion (6,578 homes), as compared to our backlog at October 31, 2022 of $8.87 billion (8,098 homes). At October 31, 2023, we had $1.30 billion of cash and cash equivalents and approximately $1.79 billion available for borrowing under our $1.905 billion revolving credit facility (the “New Revolving Credit Facility”), which matures in February 2028. At October 31, 2023, we had no outstanding borrowings under the New Revolving Credit Facility and had outstanding letters of credit of approximately $118.9 million. At October 31, 2023, our total equity and our debt to total capitalization ratio were $6.81 billion and 0.30 to 1.00, respectively. 23 Our Business Environment and Current Outlook Since January 2023, we have experienced solid demand for our homes as the housing market adjusted to a new environment following the steep and rapid rise in mortgage rates that occurred over the course of 2022. Despite mortgage rates that remain elevated, the market for new homes has been supported by very low levels of resale inventory on the market, favorable demographic trends, and a supply-demand imbalance resulting from the underproduction of homes for over a decade. In recent months, the 30-year fixed mortgage rate has declined from over 8.0% to approximately 7.25%, which we believe is also supportive of demand. However, the direction of mortgage rates and the overall economy is uncertain, and the extent to which demand may improve, or remain at current levels, is unclear. We believe we are well positioned to meet changing market conditions due to our strategies of expanding our product offerings, price points, and geographic footprint, balancing the mix of our built-to-order and quick move-in homes in inventory, and our focus on operational efficiency. Over the long term, we continue to believe that the housing market will benefit from strong fundamentals, including demographic trends, the age of the existing housing stock, and an overall shortage of homes in the United States. In addition, the disruptions in the supply chain for certain building materials and tightness in the labor market we experienced during the past two years have largely subsided, and our construction cycle times have improved. Competitive Landscape The home building business is highly competitive and fragmented. We compete with numerous home builders of varying sizes, ranging from local to national in scope, some of which have greater sales and financial resources than we do. Sales of existing homes, whether by a homeowner or by a financial institution that may have acquired a home through a foreclosure, also provide competition. We compete primarily based on price, location, design, quality, service, and reputation. We believe our financial stability, relative to many others in our industry, provides us with a competitive advantage. Land Acquisition and Development Our business is subject to many risks because of the extended length of time that it takes to obtain the necessary approvals on a property, complete the land improvements and community amenities, and build and deliver a home. We attempt to reduce some of these risks and improve our capital efficiency by utilizing one or more of the following methods: controlling land for future development through options, which enables us to obtain necessary governmental approvals before acquiring title to the land; commencing construction of a built-to-order home only after executing an agreement of sale and receiving a substantial down payment from the buyer; and using subcontractors to perform home and amenity construction and land development work on a fixed-price basis. During fiscal 2023 and 2022, we acquired control of approximately 4,200 and 5,700 home sites, respectively, net of options terminated and home sites sold. During fiscal 2023 and 2022, we forfeited control of over 4,000 and 9,000 lots, respectively, subject to land purchase agreements primarily because the planned community no longer met our development criteria. At October 31, 2023, we controlled approximately 70,700 home sites, as compared to approximately 76,000 home sites at October 31, 2022, and approximately 80,900 home sites at October 31, 2021. In addition, at October 31, 2023, we expect to purchase approximately 8,200 additional home sites from several Land Development Joint Ventures in which we have an interest, at prices not yet determined. Of the approximately 70,700 total home sites that we owned or controlled through options at October 31, 2023, we owned approximately 35,900 and controlled approximately 34,700 through options. Of the 70,700 home sites, approximately 17,100 were substantially improved. In addition, at October 31, 2023, our Land Development Joint Ventures owned approximately 25,800 home sites (including 332 home sites included in the 34,700 controlled through options). At October 31, 2023, we were selling from 370 communities, compared to 348 communities at October 31, 2022, and 340 communities at October 31, 2021. Customer Mortgage Financing We maintain relationships with a diversified group of mortgage financial institutions, many of which are among the largest in the industry. We believe that national, regional and community banks continue to recognize the long-term value in creating relationships with our home buyers, and these banks continue to provide these customers with financing. We believe that our home buyers generally are, and should continue to be, well-positioned to secure mortgages due to their typically lower loan-to-value ratios and attractive credit profiles, as compared to the average home buyer. 24 Toll Brothers Apartment Living/Toll Brothers Campus Living In addition to our residential for-sale business, we also develop and operate for-rent apartments generally through joint ventures. At October 31, 2023, we or joint ventures in which we have an interest, controlled 44 land parcels that are planned as for-rent apartment projects containing approximately 22,200 units. These projects, which are located in multiple metropolitan areas throughout the country, are being operated, are being developed, or will be developed with partners under the brand names Toll Brothers Apartment Living and Toll Brothers Campus Living. In fiscal 2023, two of our Rental Property Joint Ventures sold their assets to unrelated parties, resulting in aggregate gains of $106.2 million recognized by the joint ventures. From our investments in these joint ventures, we received cash and recognized gains of $50.9 million in fiscal 2023. In addition, in fiscal 2023, we sold our ownership interest in one of our Rental Property Joint Ventures and recognized a gain of $16.0 million. In fiscal 2022, one of our Rental Property Joint Ventures sold its assets to an unrelated party, resulting in a gain of $29.9 million recognized by the joint venture. From our investment in this joint venture, we received cash and recognized a gain of $21.0 million in fiscal 2022. The gains recognized from these sales are included in “Income from unconsolidated entities” in our Consolidated Statements of Operations and Comprehensive Income included in Item 15(a)1 of this Form 10-K. At October 31, 2023, we had approximately 3,400 units in for-rent apartment projects that were occupied or ready for occupancy, 3,400 units in the lease-up stage, 9,900 units in the design phase or under development, and 5,500 units in the planning stage. Of the 22,200 units at October 31, 2023, 14,500 were owned by joint ventures in which we have an interest; approximately 1,800 were owned by us; and 5,900 were under contract to be purchased by us. Contracts and Backlog The aggregate value of net sales contracts signed decreased 13% in fiscal 2023, as compared to fiscal 2022. The value of net sales contracts signed was $7.91 billion (8,077 homes) in fiscal 2023 and $9.07 billion (8,255 homes) in fiscal 2022. The decrease in the aggregate value of net contracts signed in fiscal 2023, as compared to fiscal 2022, was due to a 2% decrease in the number of net contracts signed and an 11% decrease in the average value of each contract signed. The decrease in the number of net contracts signed in fiscal 2023, as compared to fiscal 2022, reflects an overall moderation in demand as compared to the first half of the prior fiscal year primarily due to increases in mortgage rates that commenced in 2022. The decrease in average value attributed to each signed contracts signed in fiscal 2023 was principally due to a shift in the number of contracts signed to less expensive areas and/or products coupled with an increase in average sales incentives. 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. The value of our backlog at October 31, 2023, 2022, and 2021 was $6.95 billion (6,578 homes), $8.87 billion (8,098 homes), and $9.50 billion (10,302 homes), respectively. Approximately 96% of the homes in backlog at October 31, 2023 are expected to be delivered by October 31, 2024. The 22% decrease in the value of homes in backlog at October 31, 2023, as compared to October 31, 2022, was due to the delivery of more homes out of backlog than were added during fiscal 2023, and a decrease in the average value of each contract signed. For more information regarding revenues, net contracts signed, and backlog by geographic segment, see “Segments” in this MD&A. CRITICAL ACCOUNTING ESTIMATES U.S. generally accepted accounting principles (“GAAP”) require us to make estimates and assumptions that affect our reported amounts in the consolidated financial statements and accompanying notes. Our estimates are based on (i) currently known facts and circumstances, (ii) prior experience, (iii) assessments of probability, (iv) forecasted financial information, and (v) assumptions that management believes to be reasonable but that are inherently uncertain and unpredictable. We use our best judgment when measuring these estimates, and if warranted, obtain advice from external sources. On an ongoing basis, we review the accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumptions and estimates, and such differences could be material. In times of economic disruption when uncertainty regarding future economic conditions is heightened, these estimates and assumptions are subject to greater variability. For a discussion of all our significant accounting policies, including our critical accounting policies, refer to Note 1,“Significant Accounting Policies” of the Consolidated Financial Statements. We believe that the accounting estimates and assumptions described below involve significant subjectivity and judgment, and changes to such estimates or assumptions could have a material impact on our financial condition or operating results. Therefore, we consider an understanding of the variability and 25 judgment required in making these estimates and assumptions to be critical in fully understanding and evaluating our reported financial results. We believe the following critical accounting estimates reflect the more significant judgments and estimates used in the preparation of our consolidated financial statements. Inventory Inventory is stated at cost unless an impairment exists, in which case it is written down to fair value in accordance with GAAP. In addition to direct land acquisition, land development, and home construction costs, costs also include interest, real estate taxes, and direct overhead related to development and construction, which are capitalized to inventory during periods beginning with the commencement of development and ending with the completion of construction. Because our inventory is considered a long-lived asset under GAAP, we are required to regularly review the carrying value of each of our communities and write down the value of those communities when we believe the values are not recoverable. Operating Communities : When the profitability of an operating community deteriorates, the sales pace declines significantly, or some other factor indicates a possible impairment in the recoverability of the asset, the asset is reviewed for impairment by comparing the estimated future undiscounted cash flow for the community to its carrying value. If the estimated future undiscounted cash flow is less than the community’s carrying value, the carrying value is written down to its estimated fair value. Estimated fair value is primarily determined by discounting the estimated future cash flow of each community. The discount rate used in determining each asset’s fair value reflects inherent risks associated with the related estimated cash flows, as well as current risk-free rates available in the market and estimated market risk premiums. In estimating the future undiscounted cash flow of a community, we use various estimates such as (i) the expected sales pace in a community, based upon general economic conditions that will have a short-term or long-term impact on the market in which the community is located and on competition within the market, including the number of home sites available and pricing and incentives being offered in other communities owned by us or by other builders; (ii) the expected sales prices and sales incentives to be offered in a community; (iii) costs expended to date and expected to be incurred in the future, including, but not limited to, land and land development costs, home construction, interest, and overhead costs; (iv) alternative product offerings that may be offered in a community that will have an impact on sales pace, sales price, building cost, or the number of homes that can be built in a particular community; and (v) alternative uses for the property, such as the possibility of a sale of the entire community to another builder or the sale of individual home sites. Any impairment is charged to cost of home sales revenues in the period in which the impairment is determined. Future Communities : We evaluate all land held for future communities or future sections of operating communities, whether owned or optioned, to determine whether or not we expect to proceed with the development of the land as originally contemplated. This evaluation encompasses the same types of estimates used for operating communities described above, as well as an evaluation of the regulatory environment in which the land is located and the estimated probability of obtaining the necessary approvals, the estimated time and cost it will take to obtain those approvals, alternative land uses and the possible concessions that may be required to be given in order to obtain them. Concessions may include cash payments to fund improvements to public places such as parks and streets, dedication of a portion of the property for use by the public or as open space, or a reduction in the density or size of the homes to be built or commitment to build or fund certain dedicated workforce and affordable housing units. Based upon this review, we decide (i) as to land under contract to be purchased, whether the contract will likely be terminated or renegotiated, and (ii) as to land we own, whether the land will likely be developed as contemplated or in an alternative manner, or should be sold. We then further determine whether costs that have been capitalized to the community are recoverable or should be written off. The write-off is charged to cost of home sales revenues in the period in which the need for the write-off is determined. The estimates used in the determination of the estimated cash flows and fair value of both current and future communities are based on factors known to us at the time such estimates are made and our expectations of future operations and economic conditions. Should the estimates or expectations used in determining estimated fair value deteriorate in the future, we may be required to recognize additional impairment charges and write-offs related to current and future communities and such amounts could be material. We have not made any material changes in the accounting methodology we use to assess possible impairments during the past three fiscal years. 26 We recognized inventory impairment charges and the expensing of costs that we believed not to be recoverable in each of the three fiscal years ended October 31, 2023, 2022, and 2021, as shown in the table below (amounts in thousands): 2023 2022 2021 Land controlled for future communities $ 10,712 $ 13,051 $ 5,620 Land owned for future communities 1,493 19,690 19,805 Operating communities 18,501 — 1,110 $ 30,706 $ 32,741 $ 26,535 Cost of Revenue Recognition Cost of revenues from home sales are recognized at the time each home is delivered and title and possession are transferred to the buyer. For our standard attached and detached homes, land, land development, and related costs, both incurred and estimated to be incurred in the future, are amortized to the cost of homes closed based upon the total number of homes expected to be constructed in each community. Any changes resulting from a change in the estimated number of homes to be constructed or in the estimated costs subsequent to the commencement of delivery of homes are allocated to the remaining undelivered homes in the community. Home construction and related costs are charged to the cost of homes closed under the specific identification method. For our master-planned communities, the estimated land, common area development, and related costs, including the cost of golf courses, net of their estimated residual value, are allocated to individual communities within a master-planned community on a relative sales value basis. Any changes resulting from a change in the estimated number of homes to be constructed or in the estimated costs are allocated to the remaining home sites in each of the communities of the master-planned community. For high-rise/mid-rise projects, land, land development, construction, and related costs, both incurred and estimated to be incurred in the future, are generally amortized to the cost of units closed based upon an estimated relative sales value of the units closed to the total estimated sales value. Any changes resulting from a change in the estimated total costs or revenues of the project are allocated to the remaining units to be delivered. We rely on certain estimates to determine our construction and land development costs. Construction and land costs are comprised of direct and allocated costs, including estimated future costs. In determining these costs, we compile community budgets that are based on a variety of assumptions, including future construction schedules and costs to be incurred. Actual results can differ from budgeted amounts for various reasons, including construction delays, labor or material shortages, slower absorptions, increases in costs that have not yet been committed, changes in governmental requirements, or other unanticipated issues encountered during construction and development and other factors beyond our control. To address uncertainty in these budgets, we assess, update and revise community budgets on a regular basis, utilizing the most current information available to estimate home construction and land costs. We have not made any material changes in the methodology used in developing and revising community budgets over the past three fiscal years. Warranty and Self-Insurance Warranty: We provide all of our home buyers with a limited warranty as to workmanship and mechanical equipment. We also provide many of our home buyers with a limited 10-year warranty as to structural integrity. We accrue for expected warranty costs at the time each home is closed and title and possession are transferred to the home buyer. Warranty costs are accrued based upon historical experience related to product type, geographic location and other community specific factors. Adjustments to our warranty liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs. Over the past decade, we have had a significant number of warranty claims related primarily to homes built in Pennsylvania and Delaware. See Note 7, “Accrued Expenses” in Item 15(a)1 of this Form 10-K for additional information regarding these warranty charges. We have not made any material changes in our methodology or significant assumptions used to establish our warranty reserves during the past three fiscal years. Self-Insurance: We maintain, and require the majority of our subcontractors to maintain, general liability insurance (including construction defect and bodily injury coverage) and workers’ compensation insurance. These insurance policies protect us against a portion of our risk of loss from claims related to our home building activities, subject to certain self-insured retentions, deductibles and other coverage limits (“self-insured liability”). We also provide general liability insurance for our subcontractors in Arizona, California, Colorado, Nevada, Washington, and certain areas of Texas, where eligible subcontractors are enrolled as insureds under our general liability insurance policies in each community in which they perform work. For those enrolled subcontractors, we absorb their general liability associated with the work performed on our homes within the 27 applicable community as part of our overall general liability insurance and our self-insurance through our captive insurance subsidiary. We record expenses and liabilities based on the estimated costs required to cover our self-insured liability and the estimated costs of potential claims and claim adjustment expenses that are not covered by our insurance policies. These estimated costs are based on an analysis of our historical claims and industry data, and include an estimate of claims incurred but not yet reported (“IBNR”). We engage a third-party actuary that uses our historical claim and expense data, input from our internal legal and risk management groups, as well as industry data, to estimate our liabilities related to unpaid claims, IBNR associated with the risks that we are assuming for our self-insured liability and other required costs to administer current and expected claims. These estimates are subject to uncertainty due to a variety of factors, the most significant being the long period of time between the delivery of a home to a home buyer and when a structural warranty or construction defect claim is made, and the ultimate resolution of the claim. Though state regulations vary, construction defect claims are reported and resolved over a prolonged period of time, which can extend for 10 years or longer. As a result, the majority of the estimated liability relates to IBNR. Adjustments to our liabilities related to homes delivered in prior years are recorded in the period in which a change in our estimate occurs. The projection of losses related to these liabilities requires actuarial assumptions that are subject to variability due to uncertainties regarding construction defect claims relative to our markets and the types of product we build, insurance industry practices and legal or regulatory actions and/or interpretations, among other factors. Key assumptions used in these estimates include claim frequencies, severity and settlement patterns, which can occur over an extended period of time. In addition, changes in the frequency and severity of reported claims and the estimates to settle claims can impact the trends and assumptions used in the actuarial analysis, which could be material to our consolidated financial statements. Due to the degree of judgment required, and the potential for variability in these underlying assumptions, our actual future costs could differ from those estimated, and the difference could be material to our consolidated financial statements. We have not made any material changes in our methodology used to establish our self-insurance reserves during the past three fiscal years. Over the past three fiscal years adjustments to our estimates have not been material. Investments in Unconsolidated Entities We evaluate our investments in unconsolidated entities for indicators of impairment on a quarterly basis. A series of operating losses of an investee, the inability to recover our invested capital, or other factors may indicate that a loss in value of our investment in the unconsolidated entity has occurred. If a loss exists, we further review to determine if the loss is other than temporary, in which case we write down the investment to its estimated fair value. The amount of impairment recognized is the excess of the investment’s carrying amount over its estimated fair value. The evaluation of our investments in unconsolidated entities for other-than-temporary impairment entails a detailed cash flow analysis using many estimates, including but not limited to: (1) projected future distributions from the unconsolidated entities, (2) discount rates applied to the future distributions and (3) various other factors. For our unconsolidated entities that develop for-sale homes and condominiums these other factors include those that are similar to how we evaluate our inventory for impairment as described above, such as expected sales pace, expected sales price, and costs incurred and anticipated. For our unconsolidated entities that own, develop and manage for-rent residential apartments, these other factors may include rental trends, expected future expenses and cap rates. Our assumptions on the projected future distributions from unconsolidated entities are also dependent on market conditions, sufficiency of financing and capital and competition. We believe our assumptions on discount rates require significant judgment because the selection of the discount rate may significantly impact the estimated fair value of our investments in unconsolidated entities. A higher discount rate reduces the estimated fair value of our investments in unconsolidated entities, while a lower discount rate increases the estimated fair value of our investments in unconsolidated entities. During the year ended October 31, 2023, we utilized discount rates ranging from 10% to 18% in our valuations. Because of changes in economic conditions, actual results could differ materially from management’s assumptions and may require material valuation adjustments to our investments in unconsolidated entities to be recorded in the future. 28 RESULTS OF OPERATIONS The following table compares certain items in our Consolidated Statements of Operations and Comprehensive Income and other supplemental information for fiscal 2023 and 2022 ($ amounts in millions, unless otherwise stated). For more information regarding results of operations by operating segment, see “Segments” in this MD&A. Years ended October 31, 2023 2022 % Change Revenues: Home sales $ 9,866.0 $ 9,711.2 2 % Land sales and other 128.9 564.4 9,994.9 10,275.6 (3) % Cost of revenues: Home sales 7,207.3 7,237.4 — % Land sales and other 153.5 551.8 7,360.7 7,789.2 (6) % Selling, general and administrative 909.4 977.8 (7) % Income from operations 1,724.8 1,508.6 14 % Other: Income from unconsolidated entities 50.1 23.7 111 % Other income - net 67.5 171.4 (61) % Income before income taxes 1,842.4 1,703.7 8 % Income tax provision 470.3 417.2 13 % Net income $ 1,372.1 $ 1,286.5 7 % Supplemental information: Home sales cost of revenues as a percentage of home sales revenues 73.1 % 74.5 % Land sales and other cost of revenues as a percentage of land sales and other revenues 119.1 % 97.8 % SG&A as a percentage of home sales revenues 9.2 % 10.1 % Effective tax rate 25.5 % 24.5 % Deliveries – units 9,597 10,515 (9) % Deliveries – average sales price (in ‘000s) $ 1,028.0 $ 923.6 11 % Net contracts signed – value $ 7,907.8 $ 9,067.4 (13) % Net contracts signed – units 8,077 8,255 (2) % Net contracts signed – average sales price (in ‘000s) $ 979.1 $ 1,098.4 (11) % At October 31, 2023 2022 % Change Backlog – value $ 6,945.3 $ 8,874.1 (22) % Backlog – units 6,578 8,098 (19) % Backlog – average sales price (in ‘000s) $ 1,055.8 $ 1,095.8 (4) % 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 agreements of sale related to such options were signed. A discussion and analysis regarding Results of Operations and Analysis of Financial Condition for the year ended October 31, 2022, as compared to the year ended October 31, 2021, is included in Part II, Item 7, “MD&A” to our Annual Report on Form 10-K for the fiscal year ended October 31, 2022, filed with the SEC on December 19, 2022. 29 FISCAL 2023 COMPARED TO FISCAL 2022 Home Sales Revenues and Home Sales Cost of Revenues The increase in home sales revenues in fiscal 2023, as compared to fiscal 2022, was attributable to an 11% increase in the average price of the homes delivered, offset, in part, by a 9% decrease in the number of homes delivered. The increase in the average delivered home price was mainly due to our ability to raise prices in certain communities as well as an increase in homes delivered in more expensive product types/geographic regions. The decrease in the number of homes delivered in fiscal 2023, as compared to fiscal 2022, is principally 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 the number of quick move-in homes delivered in fiscal 2023. Home sales cost of revenues, as a percentage of homes sales revenues, in fiscal 2023 was 73.1%, as compared to 74.5% in fiscal 2022. The decrease in fiscal 2023 was principally due to a shift in the mix of revenues to higher margin products/areas, sales price increases outpacing cost increases, and lower interest expense as a percentage of home sales revenues. Interest cost in fiscal 2023 was $139.4 million or 1.4% of home sales revenues, as compared to $164.8 million or 1.7% of home sales revenues in fiscal 2022. We recognized inventory impairments and write-offs of $30.7 million, or 0.3% of home sales revenues, and $32.7 million, or 0.3% of home sales revenues, in fiscal 2023 and fiscal 2022, 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 land 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 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. In fiscal 2023, we sold three land parcels to newly formed Rental Property Joint Ventures in which we have an interest for approximately $44.2 million. In fiscal 2022, we sold nine land parcels to newly formed Rental Property Joint Ventures in which we have an interest for approximately $322.3 million. Minimal gains were recognized on these land sales to joint ventures. During fiscal 2023, we recorded impairment charges of $30.6 million in connection with planned land sales. In fiscal 2022, we recorded an impairment charge of $6.8 million related to office space associated with certain Hoboken, New Jersey condominium projects in connection with a planned sale. Selling, General and Administrative Expenses (“SG&A”) SG&A spending decreased by $68.3 million in fiscal 2023, as compared to fiscal 2022. As a percentage of home sales revenues, SG&A was 9.2% and 10.1% in fiscal 2023 and 2022, respectively. The dollar decrease in SG&A was primarily due to lower headcount and lower variable selling expense on a decreased number of homes delivered in fiscal 2023. In addition, fiscal 2022 includes a $10.0 million charge for a charitable contribution made to the Toll Brothers Foundation. The decrease in SG&A, as a percentage of home sales revenues, was primarily due to improved fixed cost leverage on lower headcount and reduced commission rates in fiscal 2023, as compared to fiscal 2022. Income from Unconsolidated Entities We recognize our proportionate share of the earnings and losses from the various unconsolidated entities in which we have an investment. Many of our unconsolidated entities are land development projects, high-rise/mid-rise condominium construction projects, or for-rent apartment projects and for-rent single-family home projects, which do not generate revenues and earnings for a number of years during the development of the property. 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, 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. For our Rental Property Joint Ventures specifically, these entities typically generate operating losses until the related property reaches stabilization. For the fiscal years 2023 and 2022, our earnings related to the Rental Property Joint Ventures include approximately $32.9 million and $17.5 million of our share of net operating losses incurred by these joint ventures, respectively, of which approximately $26.1 million and $21.7 million was our share of the depreciation expense recognized by these joint ventures, respectively. 30 The increase in income from unconsolidated entities to $50.1 million in fiscal 2023 from $23.7 million in fiscal 2022, was mainly due to $50.9 million of gains recognized related to property sales by two of our Rental Property Joint Ventures and a $16.0 million gain recognized as the result of the sale of our ownership interest in one of our Rental Property Joint Ventures in fiscal 2023. In the fiscal 2022 period, we recognized a $21.0 million gain related to a property sale by one of our Rental Property Joint Ventures, lower losses from our Rental Property Joint Ventures of approximately $14.2 million and increased earnings of approximately $7.2 million from our Land Development Joint Ventures due to lot sales. In addition, during the fiscal 2022 period, we recognized an other-than-temporary impairment charge on one of our investments in a Rental Property Joint Venture of $8.0 million. There were no similar other-than-temporary impairment charges in the fiscal 2023 period. Other Income - Net The table below provides the components of “Other Income – net” for the years ended October 31, 2023 and 2022 (amounts in thousands): 2023 2022 Interest income $ 35,133 $ 6,180 Income from ancillary businesses 2,846 24,668 Management fee income earned by home building operations 4,462 7,968 Gain on litigation settlements – net 27,683 141,234 Other (2,606) (8,673) Total other income – net $ 67,518 $ 171,377 The increase in interest income in fiscal 2023, as compared to fiscal 2022, was primarily due to higher interest rates. The decrease in income from ancillary businesses in fiscal 2023, as compared to fiscal 2022, was principally due to lower earnings from our mortgage operations due to lower volume and increased competition, as well as higher operating losses incurred in our apartment living operations. In addition, fiscal 2022 included a gain of $9.0 million related to the bulk sale of security monitoring accounts by our smart home technologies business. This was offset by higher income generated in fiscal 2023 from our high-rise urban luxury condominium business operations principally due to property sales of approximately $4.0 million. In fiscal 2023 and fiscal 2022, we also recognized $8.4 million and $0.3 million of write-offs related to previously incurred costs that we believed not to be recoverable in our apartment rental development business operations, respectively. In fiscal 2023, income from ancillary businesses included management fees earned on our apartment rental development, high-rise urban luxury condominium, and Gibraltar unconsolidated entities and operations totaling $34.7 million. In fiscal 2022, income from ancillary businesses included management fees earned on our apartment rental development and Gibraltar unconsolidated entities and operations totaling $25.9 million. Prior to fiscal 2023, management fees earned on our high-rise luxury condominium unconsolidated entities were included in “Management fees earned by home building operations” above. Management fee income earned by home building operations includes fees earned by our high-rise urban luxury condominium business and home building operations. The increase in fiscal 2023, as compared to fiscal 2022, was primarily related to a decrease in Joint Ventures to which we provide services. In fiscal 2022, we entered into a $192.5 million settlement agreement with Southern California Gas Company to resolve our claims associated with a natural gas leak that occurred from October 2015 through February 2016 at the Aliso Canyon underground storage facility located near certain of our communities in southern California. As a result, net of legal fees and expenses, we recorded a pre-tax gain of $148.4 million, of which $141.2 million was recorded in Other Income - net in our Consolidated Statements of Operations and Comprehensive Income in fiscal 2022. The remainder was recorded as an offset to previously incurred expenses. The gain on litigation settlements - net in fiscal 2023 primarily relates to the settlement of an insurance claim. Income Before Income Taxes In fiscal 2023, we reported income before income taxes of $1.84 billion, or 18.4% of revenues, as compared to $1.70 billion, or 16.6% of revenues in fiscal 2022. Income Tax Provision We recognized a $470.3 million income tax provision in fiscal 2023. Based upon the federal statutory rate of 21.0% for fiscal 2023, our federal tax provision would have been $386.9 million. The difference between the tax provision recognized and the tax provision based on the federal statutory rate was mainly due to the provision for state income taxes of $90.7 million and a $2.2 million increase in unrecognized tax benefits, offset, in part, by a benefit of $7.3 million from excess tax benefits related to 31 stock-based compensation, $2.8 million of other permanent differences, and a $2.3 million benefit of federal energy efficient home credits. We recognized a $417.2 million income tax provision in fiscal 2022. Based upon the federal statutory rate of 21.0% for fiscal 2022, our federal tax provision would have been $357.8 million. The difference between the tax provision recognized and the tax provision based on the federal statutory rate was mainly due to the provision for state income taxes of $75.5 million and $4.4 million of other permanent differences, offset, in part, by a $22.2 million benefit of federal energy efficient home credits; a benefit of $3.0 million from excess tax benefits related to stock-based compensation; and the reversal of $1.7 million of previously accrued tax provisions on uncertain tax positions that were no longer necessary due to the expiration of the statute of limitations. 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 October 31, 2023, we had $1.30 billion of cash and cash equivalents on hand and approximately $1.79 billion available for borrowing under our revolving credit facility. On February 14, 2023, we entered into a $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 billion 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, land development, home construction costs, and deposits to control land), 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. 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 32 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 Consolidated Balance Sheet as of October 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, 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 6, “Loans Payable, Senior Notes, and Mortgage Company Loan Facility,” and Note 15, “Commitments and Contingencies,” to the Consolidated Financial Statements included elsewhere in this Annual Report on Form 10-K for amounts outstanding as of October 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 October 31, 2023, we had investments in these entities of $959.0 million, and were committed to invest or advance up to an additional $400.8 million to these entities if they require additional funding. At October 31, 2023, we had agreed to terms for the acquisition of 332 home sites from three joint ventures for an estimated aggregate purchase price of $31.5 million. In addition, we expect to purchase approximately 8,200 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 October 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 October 31, 2023, we had guaranteed the debt of certain unconsolidated entities that have loan commitments aggregating $3.34 billion, of which, if the full amount of the debt obligations were borrowed, we estimate $688.0 million to be our maximum exposure related to repayment and carry cost guarantees. At October 31, 2023, the unconsolidated entities had borrowed an aggregate of $1.64 billion, of which we estimate $544.1 million to be our maximum exposure related to repayment and carry cost guarantees. The terms of these guarantees generally range from 1 month to 4.0 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 Consolidated Financial Statements in Item 15(a)1 of this Form 10-K. 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 October 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 33 Loan Facility” in the Notes to the Consolidated Financial Statements in Item 15(a)1 of this Form 10-K for additional information. Operating Activities Cash provided by operating activities during fiscal 2023 was $1.27 billion. Cash provided by operating activities was generated primarily from: (1) $1.37 billion of net income plus the following non-cash activities: $76.5 million of depreciation and amortization, $69.5 million of impairments and write-offs, $24.8 million of stock-based compensation, $38.3 million of cash received, net of income earned, from unconsolidated entities; and a net deferred tax benefit of $36.2 million and (2) $78.9 million in mortgage loan sales, net of originations. This activity was offset, in part, by a decrease of $162.6 million in current income taxes, net; an increase of $135.9 million in receivables, prepaid assets, and other assets; a decrease of $88.3 million in net customer deposits; a decrease of $23.7 million in accounts payable and accrued expenses; and an increase of $22.2 million in inventory. Cash provided by operating activities during fiscal 2022 was $986.8 million. Cash provided by operating activities was generated primarily from: (1) $1.29 billion of net income plus the following non-cash activities: $76.8 million of depreciation and amortization, $39.5 million of impairments and write-offs, $21.1 million of stock-based compensation, $8.6 million of cash received, net of income earned, from unconsolidated entities; offset by a net deferred tax benefit of $96.7 million and (2) an increase of $152.5 million in accounts payable and accrued expenses; an increase of $160.5 million in current income taxes, net; and an increase of $50.7 million in mortgage loan sales, net of originations. This activity was offset, in part, by an increase of $618.8 million in inventory, and a decrease of $95.0 million in receivables, prepaid assets, and other assets. Investing Activities Cash used in investing activities during fiscal 2023 was $150.6 million, primarily related to $216.4 million used to fund our investments in unconsolidated entities and $73.0 million for the purchase of property and equipment. This activity was offset, in part, by $112.7 million of cash received as returns from our investments in unconsolidated entities and $26.0 million of cash proceeds from the sale of assets, including ownership interests in unconsolidated entities. Cash used in investing activities during fiscal 2022 was $153.2 million, primarily related to $226.7 million used to fund our investments in unconsolidated entities and $71.7 million for the purchase of property and equipment. This activity was offset, in part, by $116.8 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 $1.17 billion of cash from financing activities in fiscal 2023, primarily for the repurchase of $561.6 million of our common stock; the redemption of $400.0 million of senior notes; payments of $160.3 million of loans payable, net of new borrowings; the payment of dividends on our common stock of $91.1 million and $5.4 million of payments for debt issuance costs. This activity was offset by $48.3 million of proceeds from stock-based benefit plans. We used $1.12 billion of cash from financing activities in fiscal 2022, primarily for the repurchase of $542.7 million of our common stock; the redemption of $409.9 million of senior notes; payments of $51.6 million of loans payable, net of new borrowings; the payment of dividends on our common stock of $88.9 million and payments related to noncontrolling interest - net of $25.8 million. INFLATION The long-term impact of inflation on us is manifested in increased costs for land, land development, construction, and overhead. We generally enter into contracts to acquire land a significant period of time before development and sales efforts begin. Accordingly, to the extent land acquisition costs are fixed, subsequent increases or decreases in the sales prices of homes will affect our profits. Because the sales price of each of our homes is fixed at the time a buyer enters into a contract to purchase a home and because we contract to sell a majority of our homes before we begin construction, any inflation of costs in excess of those anticipated may result in lower gross margins. We generally attempt to minimize that effect by entering into fixed-price contracts with our subcontractors and material suppliers for specified periods of time, which generally do not exceed one year. In general, housing demand is adversely affected by increases in interest rates and housing costs. Additionally, interest rates, the length of time that land remains in inventory, and the proportion of inventory that is financed affect our interest costs. If we are unable to raise sales prices enough to compensate for higher costs, or if mortgage rates increase significantly, affecting prospective buyers’ ability to adequately finance home purchases, our home sales revenues, gross margins, and net income could be adversely affected. Increases in sales prices, whether the result of inflation or demand, may affect the ability of prospective buyers to afford new homes. 34 SUPPLEMENTAL GUARANTOR INFORMATION At October 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 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. 35 Summarized Balance Sheet Data (amounts in millions) October 31, 2023 Assets Cash $ 1,137.4 Inventory $ 8,911.0 Amount due from Non-Guarantor Subsidiaries $ 660.1 Total assets $ 11,460.8 Liabilities & Stockholders' Equity Loans payable $ 1,091.6 Senior notes $ 1,596.2 Total liabilities $ 5,106.7 Stockholders' equity $ 6,354.1 Summarized Statement of Operations Data (amounts in millions) For the year ended October 31, 2023 Revenues $ 9,764.9 Cost of revenues $ 7,175.8 Selling, general and administrative $ 904.1 Income before income taxes $ 1,722.1 Net income $ 1,282.5 36 SEGMENTS We operate in five geographic segments, with current operations generally located in the states listed below: Eastern Region: • 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; Western Region: • The Mountain region: Arizona, Colorado, Idaho, Nevada and Utah; and • The Pacific region: California, Oregon and Washington. Our geographic reporting segments are consistent with how our chief operating decision makers are assessing operating performance and allocating capital. The following tables summarize information related to revenues, net contracts signed, and income (loss) before income taxes by segment for fiscal years 2023 and 2022. Information related to backlog and assets by segment at October 31, 2023 and 2022 has also been provided. Units Delivered and Revenues: Fiscal 2023 Compared to Fiscal 2022 Revenues ($ in millions) Units Delivered Average Delivered Price ($ in thousands) 2023 2022 % Change 2023 2022 % Change 2023 2022 % Change North $ 1,494.1 $ 1,853.7 (19) % 1,577 2,163 (27) % $ 947.4 $ 857.0 11 % Mid-Atlantic 1,175.3 1,149.0 2 % 1,067 1,222 (13) % $ 1,101.5 $ 940.3 17 % South 2,204.8 1,519.6 45 % 2,597 2,033 28 % $ 849.0 $ 747.5 14 % Mountain 2,660.7 2,747.8 (3) % 2,897 3,366 (14) % $ 918.4 $ 816.3 13 % Pacific 2,329.4 2,442.0 (5) % 1,459 1,731 (16) % $ 1,596.6 $ 1,410.7 13 % Total home building 9,864.3 9,712.1 2 % 9,597 10,515 (9) % $ 1,027.9 $ 923.6 11 % Other 1.7 (0.9) Total home sales revenue 9,866.0 9,711.2 2 % 9,597 10,515 (9) % $ 1,028.0 $ 923.6 11 % Land sales and other revenue 128.9 564.4 Total revenue $ 9,994.9 $ 10,275.6 Net Contracts Signed: Fiscal 2023 Compared to Fiscal 2022 Net Contract Value ($ in millions) Net Contracted Units Average Contracted Price ($ in thousands) 2023 2022 % Change 2023 2022 % Change 2023 2022 % Change North $ 1,336.9 $ 1,534.7 (13) % 1,411 1,596 (12) % $ 947.5 $ 961.6 (1) % Mid-Atlantic 1,165.5 1,105.4 5 % 1,170 1,012 16 % $ 996.2 $ 1,092.3 (9) % South 1,938.3 1,838.3 5 % 2,386 1,981 20 % $ 812.4 $ 928.0 (12) % Mountain 1,633.1 2,319.7 (30) % 1,950 2,292 (15) % $ 837.5 $ 1,012.1 (17) % Pacific 1,834.0 2,269.3 (19) % 1,160 1,374 (16) % $ 1,581.0 $ 1,651.6 (4) % Total consolidated $ 7,907.8 $ 9,067.4 (13) % 8,077 8,255 (2) % $ 979.1 $ 1,098.4 (11) % 37 Backlog at October 31: October 31, 2023 Compared to October 31, 2022 Backlog Value ($ in millions) Backlog Units Average Backlog Price ($ in thousands) 2023 2022 % Change 2023 2022 % Change 2023 2022 % Change North $ 964.1 $ 1,119.5 (14) % 956 1,122 (15) % $ 1,008.5 $ 997.8 1 % Mid-Atlantic 953.0 960.5 (1) % 945 842 12 % $ 1,008.4 $ 1,140.7 (12) % South 2,093.4 2,352.5 (11) % 2,312 2,523 (8) % $ 905.5 $ 932.4 (3) % Mountain 1,577.7 2,597.3 (39) % 1,577 2,524 (38) % $ 1,000.5 $ 1,029.0 (3) % Pacific 1,357.1 1,844.3 (26) % 788 1,087 (28) % $ 1,722.2 $ 1,696.7 2 % Total consolidated $ 6,945.3 $ 8,874.1 (22) % 6,578 8,098 (19) % $ 1,055.8 $ 1,095.8 (4) % Income (Loss) Before Income Taxes ($ amounts in millions): 2023 2022 % Change 2023 vs 2022 North $ 197.4 $ 280.8 (30) % Mid-Atlantic 243.5 189.5 28 % South 416.7 249.7 67 % Mountain 517.1 509.5 1 % Pacific 610.1 572.8 7 % Total home building 1,984.8 1,802.3 10 % Corporate and other (142.4) (98.6) (44) % Total consolidated $ 1,842.4 $ 1,703.7 8 % “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. Total Assets ($ amounts in millions): At October 31, 2023 2022 North $ 1,281.4 $ 1,465.0 Mid-Atlantic 1,323.4 1,049.0 South 2,399.1 2,137.6 Mountain 2,666.9 2,785.6 Pacific 2,175.8 2,174.1 Total home building 9,846.6 9,611.3 Corporate and other 2,680.4 2,677.4 Total consolidated $ 12,527.0 $ 12,288.7 “Corporate and other” is comprised principally of cash and cash equivalents, restricted cash, investments in our Rental Property Joint Ventures, expected recoveries from insurance carriers and suppliers, our Gibraltar investments and operations, manufacturing facilities, our apartment rental development and high-rise urban luxury condominium operations, and our mortgage and title subsidiaries. 38 A discussion and analysis regarding our Segments’ Results of Operations and Analysis of Financial Condition for the year ended October 31, 2022, as compared to the year ended October 31, 2021 is included in Part II, Item 7, “MD&A” to our Annual Report on Form 10-K for the fiscal year ended October 31, 2022, filed with the SEC on December 19, 2022. FISCAL 2023 COMPARED TO FISCAL 2022 North Year ended October 31, 2023 2022 % Change Units Delivered and Home Sales Revenues: Home sales revenues ($ in millions) $ 1,494.1 $ 1,853.7 (19) % Units delivered 1,577 2,163 (27) % Average delivered price ($ in thousands) $ 947.4 $ 857.0 11 % Net Contracts Signed: Net contract value ($ in millions) $ 1,336.9 $ 1,534.7 (13) % Net contracted units 1,411 1,596 (12) % Average contracted price ($ in thousands) $ 947.5 $ 961.6 (1) % Home sales cost of revenues as a percentage of home sales revenues 79.4 % 77.6 % Income before income taxes ($ in millions) $ 197.4 $ 280.8 (30) % Number of selling communities at October 31, 40 53 (25) % The decrease in the number of homes delivered in fiscal 2023 was 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, partially offset by higher backlog conversion and an increase in the number of quick move-in homes delivered in fiscal 2023. The increase in the average price of homes delivered in fiscal 2023 was principally due to sales price increases and a shift in the number of homes delivered to more expense areas and/or products. The decrease in the number of net contracts signed in fiscal 2023, as compared to fiscal 2022, was principally due to a decrease in the number of selling communities, offset, in part, by an increase in demand in fiscal 2023. The decrease in the average value of each contract signed in fiscal 2023, as compared to fiscal 2022, was mainly due to shifts in the number of contracts signed to less expensive areas and/or products and an increase in average sales incentives. The decrease in income before income taxes in fiscal 2023 was principally attributable to lower earnings from decreased revenues and higher home sales cost of revenues, as a percentage of home sales revenues , partially offset by decreased variable SG&A spend on lower revenues. The increase in home sales costs of revenues, as a percentage of home sale revenues, in fiscal 2023 was primarily due to a shift in product mix/areas to lower-margin areas, offset, in part, by lower interest costs as a percentage of home sales revenue and decreased inventory impairment charges. Inventory impairment charges were $0.7 million in fiscal 2023, as compared to $11.9 million in fiscal 2022. In fiscal 2022, we decided to sell a parcel in Philadelphia, Pennsylvania. In connection with this planned sale, we recognized an inventory impairment charge of $10.3 million. In addition, we recognized $15.6 million of land impairment charges, included in land sales and other cost of revenues in fiscal 2023 in connection with planned land sales compared to $6.8 million in fiscal 2022. 39 Mid-Atlantic Year ended October 31, 2023 2022 % Change Units Delivered and Home Sales Revenues: Home sales revenues ($ in millions) $ 1,175.3 $ 1,149.0 2 % Units delivered 1,067 1,222 (13) % Average delivered price ($ in thousands) $ 1,101.5 $ 940.3 17 % Net Contracts Signed: Net contract value ($ in millions) $ 1,165.5 $ 1,105.4 5 % Net contracted units 1,170 1,012 16 % Average contracted price ($ in thousands) $ 996.2 $ 1,092.3 (9) % Home sales cost of revenues as a percentage of home sales revenues 71.9 % 76.1 % Income before income taxes ($ in millions) $ 243.5 $ 189.5 28 % Number of selling communities at October 31, 43 40 8 % The decrease in the number of homes delivered in fiscal 2023, as compared to fiscal 2022, was 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, partially offset by a higher backlog conversion and an increase in the number of quick move-in homes delivered in fiscal 2023. The increase in the average delivered price in fiscal 2023 was primarily due a shift in the number of homes delivered to more expensive areas and/or products, as well as sales price increases. The increase in the number of net contracts signed in fiscal 2023, as compared to fiscal 2022, was principally due to an increase in the number of selling communities coupled with an increase in demand in fiscal 2023. The decrease in the average value of each contract signed in fiscal 2023 was primarily due to shifts in the number of contracts signed to less expensive areas and/or products, as well as an increase in average sales incentives in fiscal 2023. The increase in income before income taxes in fiscal 2023, as compared to fiscal 2022, was mainly due to higher earnings from increased revenues, coupled with lower home sales costs of revenues, as a percentage of home sale revenues and lower SG&A spend. The decrease in home sales costs of revenues, as a percentage of home sale revenues, in fiscal 2023 was primarily due to a shift in product mix/areas to higher-margin areas and lower interest costs as a percentage of home sales revenue, partially offset by higher inventory impairment charges. Inventory impairment charges were $15.9 million and $3.4 million in fiscal 2023 and 2022, respectively. In addition, we recognized a $10.3 million land impairment charge, included in land sales and other cost of revenues in fiscal 2023 in connection with a planned land sale. No similar charges were recognized in fiscal 2022. 40 South Year ended October 31, 2023 2022 % Change Units Delivered and Home Sales Revenues: Home sales revenues ($ in millions) $ 2,204.8 $ 1,519.6 45 % Units delivered 2,597 2,033 28 % Average delivered price ($ in thousands) $ 849.0 $ 747.5 14 % Net Contracts Signed: Net contract value ($ in millions) $ 1,938.3 $ 1,838.3 5 % Net contracted units 2,386 1,981 20 % Average contracted price ($ in thousands) $ 812.4 $ 928.0 (12) % Home sales cost of revenues as a percentage of home sales revenues 73.5 % 75.6 % Income before income taxes ($ in millions) $ 416.7 $ 249.7 67 % Number of selling communities at October 31, 115 99 16 % The increase in the number of homes delivered in fiscal 2023, as compared to fiscal 2022, was mainly due to a higher backlog conversion in fiscal 2023, 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, and an increase in the number of quick move-in homes delivered. The increase in the average delivered price in fiscal 2023 was primarily due to a shift in the number of homes delivered to more expensive areas and/or products, as well as sales price increases. The increase in the number of net contracts signed in fiscal 2023, as compared to fiscal 2022, was principally due to an increase in the number of selling communities in fiscal 2023. The decrease in the average value of each contract signed in the fiscal 2023 period was primarily due to a shift in the number of contracts signed to less expensive areas and/or products and an increase in average sales incentives in fiscal 2023. The increase in income before income taxes in fiscal 2023, as compared to fiscal 2022, was principally due to higher earnings from increased home sales revenues and lower home sales costs of revenues, as a percentage of home sales revenues, offset, in part, by higher SG&A costs resulting from increased sales volume. The decrease in home sales cost of revenues, as a percentage of home sales revenues, was mainly due to a shift in product mix/areas to higher-margin areas, lower interest costs as a percentage of home sales revenue and lower inventory impairment changes in fiscal 2023. Inventory impairment charges were $1.8 million and $3.4 million in fiscal 2023 and 2022, respectively. 41 Mountain Year ended October 31, 2023 2022 % Change Units Delivered and Home Sales Revenues: Home sales revenues ($ in millions) $ 2,660.7 $ 2,747.8 (3) % Units delivered 2,897 3,366 (14) % Average delivered price ($ in thousands) $ 918.4 $ 816.3 13 % Net Contracts Signed: Net contract value ($ in millions) $ 1,633.1 $ 2,319.7 (30) % Net contracted units 1,950 2,292 (15) % Average contracted price ($ in thousands) $ 837.5 $ 1,012.1 (17) % Home sales cost of revenues as a percentage of home sales revenues 74.0 % 74.6 % Income before income taxes ($ in millions) $ 517.1 $ 509.5 1 % Number of selling communities at October 31, 120 113 6 % The decrease in the number of homes delivered in fiscal 2023, as compared to fiscal 2022, was 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, partially offset by higher backlog conversion and an increase in the number of quick move-in homes delivered in fiscal 2023. The increase in the average price of homes delivered in fiscal 2023 was primarily due to a shift in the number of homes delivered to more expensive areas and/or products and sales price increases. The decrease in the number of net contracts signed in fiscal 2023, as compared to fiscal 2022, was principally due to a weakening in demand in fiscal 2023, offset, in part, by an increase in the number of selling communities. The decrease in the average value of each contract signed in fiscal 2023 was mainly due to shifts in the number of contracts signed to less expensive areas and/or products and an increase in average sales incentives. The increase in income before income taxes in fiscal 2023, as compared to fiscal 2022, was mainly due lower home sales cost of revenues, as a percentage of home sales revenues, and reduced SG&A resulting from decreased 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, partially offset by higher interest costs and inventory impairment charges. Inventory impairment charges were $5.7 million and $4.1 million in fiscal 2023 and 2022, respectively. 42 Pacific Year ended October 31, 2023 2022 % Change Units Delivered and Home Sales Revenues: Home sales revenues ($ in millions) $ 2,329.4 $ 2,442.0 (5) % Units delivered 1,459 1,731 (16) % Average delivered price ($ in thousands) $ 1,596.6 $ 1,410.7 13 % Net Contracts Signed: Net contract value ($ in millions) $ 1,834.0 $ 2,269.3 (19) % Net contracted units 1,160 1,374 (16) % Average contracted price ($ in thousands) $ 1,581.0 $ 1,651.6 (4) % Home sales cost of revenues as a percentage of home sales revenues 67.9 % 70.5 % Income before income taxes ($ in millions) 610.1 572.8 7 % Number of selling communities at October 31, 52 43 21 % The decrease in the number of homes delivered in fiscal 2023, as compared to fiscal 2022, was 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, partially offset by higher backlog conversion and an increase in the number of quick move-in homes delivered in fiscal 2023. The increase in the average price of homes delivered in fiscal 2023 was primarily due to increases in sales prices. The decrease in the number of net contracts signed in fiscal 2023, as compared to fiscal 2022, was principally due to a weakening in demand in fiscal 2023, partially offset by an increase in the number of selling communities. The decrease in the average value of each contract signed in fiscal 2023 was mainly due to a shift in the number of contracts signed in less expensive areas and an increase in average sales incentives. The increase in income before income taxes in fiscal 2023, as compared to fiscal 2022, was primarily due to lower home sales cost of revenues, as a percentage of home sales revenues, and reduced SG&A resulting from decreased 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, lower interest costs and a decrease in inventory impairment charges. Inventory impairment charges were $6.7 million and $10.0 million in fiscal 2023 and 2022, respectively. During the fourth quarter of fiscal 2022, we decided to sell a land parcel in California. In connection with this planned sale, we recognized an impairment charge of $5.6 million. In addition, we recognized a $2.2 million land impairment charge, included in land sales and other cost of revenues in fiscal 2023 in connection with a planned land sale. No similar charges were recognized in fiscal 2022. Corporate and Other In fiscal 2023 and 2022, loss before income taxes was $142.4 million and $98.6 million, respectively. The increase in the loss before income taxes in fiscal 2023 was principally attributable to a favorable litigation settlement in fiscal 2022. As a result of the settlement, net of legal fees and expenses, we recorded a pre-tax gain of $148.4 million, of which $141.2 million was recorded in Other Income - net in our Consolidated Statements of Operations and Comprehensive Income in fiscal 2022. The remainder was recorded as an offset to previously incurred expenses. Coincident with this settlement, we made a charitable contribution of $10.0 million to the Toll Brothers Foundation, which was recorded in Selling, general and administrative in our Consolidated Statements of Operations and Comprehensive Income in fiscal 2022. During fiscal 2022, we also recognized a $21.0 million gain related to a property sale by one of our Rental Property Joint Ventures and a $9.0 million gain related to the bulk sale of security monitoring accounts by our smart home technology business. In addition, fiscal 2023 was impacted by lower earnings from our mortgage and our apartment living operations and a $2.5 million land impairment charge, included in land sales and other cost of revenues, in connection with a planned land sale. These increases were offset by lower SG&A costs as a result of decreased headcount, $50.9 million in gain recognized from property sales by two of our Rental Property Joint Ventures, $27.7 million of gains from litigation settlements-net recognized, a $16.0 million gain as a result of the sale of our ownership interest in one of our Rental Property Joint Ventures and an increase in interest income due to higher interest rates in fiscal 2023. 43