The Toro Company (NYSE: TTC) — Q3 FY2023 Form 10-Q
Reporting period: Fiscal third quarter and first nine months ended August 4, 2023; comparisons are with the periods ended July 29, 2022. Amounts below are in U.S. dollars.
Financial performance
- Q3 revenue: $1.082 billion, down 6.8% year over year. Nine-month revenue: $3.570 billion, up 6.8%.
- Q3 gross profit and margin: $372.4 million and 34.4%, versus $399.9 million and 34.5%. Nine-month gross profit was $1.248 billion, with a 35.0% margin versus 33.1%.
- Q3 operating result: $19.1 million loss, including $151.3 million in non-cash impairment charges; operating margin was (1.8%). Adjusted operating earnings were $132.2 million, or a 12.2% margin. Nine-month operating earnings were $336.2 million, versus $425.3 million; adjusted operating margin was 13.7%, versus 12.8%.
- Q3 net result: $15.0 million loss, or $(0.14) per diluted share, versus earnings of $125.2 million, or $1.19 per diluted share. Adjusted net earnings were $99.4 million, or $0.95 per diluted share. Nine-month net earnings were $259.4 million, or $2.46 per diluted share, versus $325.8 million, or $3.08; adjusted net earnings were $369.4 million, or $3.50 per diluted share.
- Cash flow: Nine-month operating cash flow was $154.7 million, approximately unchanged year over year. Capital expenditures were $105.7 million; free cash flow, as defined by the company, was $56.1 million versus $78.8 million. Cash and equivalents were $147.9 million at quarter-end, down from $231.6 million a year earlier.
- Debt and liquidity: Long-term debt was $1.061 billion, compared with $990.8 million at October 31, 2022. Available liquidity was $675.3 million, including $147.9 million of cash and $527.4 million available under the revolving facility. The company reported compliance with debt covenants and expects available resources and forecast cash flows to cover anticipated needs for at least 12 months.
- Shareholder returns: Nine-month dividends paid were $106.5 million and share repurchases were $60.0 million. The quarterly dividend increased 13.3% to $0.34 per share.
Material changes and segment trends
- Professional: Q3 sales rose 1.1% to $896.3 million, while nine-month sales increased 14.5% to $2.846 billion. Q3 segment earnings fell to $13.0 million, primarily reflecting the Intimidator impairment and higher material and manufacturing costs. Nine-month earnings declined 9.5% to $384.6 million.
- Residential: Q3 sales fell 35.1% to $175.3 million; nine-month sales fell 16.5% to $705.8 million. Lower shipments, weaker homeowner demand and unfavorable product mix reduced segment earnings.
- The company recorded impairment charges of $18.0 million for the indefinite-lived Spartan trade name and $133.3 million for Intimidator goodwill. The charges followed weaker-than-expected Intimidator results and lower projected future cash flows. A $36.7 million tax benefit was associated with the charges.
- Q3 gross margin was nearly flat year over year: higher material costs were largely offset by lower freight expense. Nine-month margin improved mainly on price realization and productivity, partly offset by material costs.
Outlook, commentary and risks
- The filing provides no clear numerical full-year revenue or earnings guidance. Management said it expects to continue quarterly dividends and anticipates share repurchases during the remainder of FY2023, subject to cash needs, market conditions and other factors.
- Field inventory was higher year over year, reflecting channel replenishment and lower-than-expected homeowner demand. Backlog was slightly lower than at fiscal year-end, but remained significantly above what the company considers normal, particularly for underground and specialty construction and golf and grounds products.
- Management cited seasonality, hot and dry weather, higher interest rates, economic uncertainty and post-pandemic consumer spending shifts as factors affecting demand. Other risks include supply-chain and commodity costs, dealer and distributor financial health, foreign exchange, and the ability to realize acquisition benefits.
- Potential inventory repurchase obligations under dealer-financing arrangements totaled up to $118.8 million at quarter-end; actual repurchases during the first nine months were immaterial. Management stated that ordinary-course litigation is not expected to materially affect consolidated results, financial position or cash flows.
- Management concluded disclosure controls were effective. Integration of Intimidator’s internal controls was ongoing, with completion expected during FY2023.
Key facts for investors to verify
- Whether Residential demand and channel inventory stabilize, and whether Professional growth offsets weakness in homeowner-focused products.
- The assumptions behind the Intimidator impairment valuation and the possibility of further impairments; remaining Intimidator goodwill was $30.5 million.
- Whether working-capital needs, capital spending and cash conversion improve, given lower free cash flow and reduced cash balances.
- Debt levels, interest expense and liquidity availability, along with potential exposure under dealer inventory repurchase commitments.
- How reported GAAP results compare with adjusted results, which exclude specified items and are non-GAAP measures.