The Toro Company (NYSE: TTC) — Q1 fiscal 2023 Form 10-Q
Business context and period: The filing covers the three months ended February 3, 2023, compared with the three months ended January 28, 2022. Toro designs, manufactures, and sells professional and residential outdoor equipment, irrigation systems, and related products. Results are seasonal; management cautions that this quarter should not be annualized.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $1,148.8 million | $932.7 million |
| Gross profit / margin | $395.9 million / 34.5% | $300.5 million / 32.2% |
| Operating earnings / margin | $136.4 million / 11.9% | $91.6 million / 9.8% |
| Net earnings | $106.9 million | $69.5 million |
| Diluted EPS | $1.01 | $0.66 |
| Operating cash flow | $(68.8) million | $(90.0) million |
| Free cash flow (non-GAAP) | $(91.1) million | $(101.9) million |
| Cash and cash equivalents | $174.0 million | $193.0 million |
| Long-term debt, net of issuance costs | $1,091.0 million | $991.4 million |
Sales increased 23.2%; net earnings rose 53.0% and diluted EPS rose from $0.66 to $1.01. Adjusted net earnings were $103.6 million, or $0.98 per diluted share, versus $69.7 million, or $0.66, in the prior-year quarter. Adjusted measures are non-GAAP. Gross margin expanded 230 basis points, primarily on pricing and productivity, partly offset by higher material, freight, and manufacturing costs. The effective tax rate was 18.6%, down from 20.2%, primarily because of higher excess tax benefits from stock compensation.
Segments: Professional sales rose 30.9% to $880.7 million and segment earnings rose 54.5% to $144.1 million; margin increased to 16.4% from 13.9%. Residential sales rose 3.6% to $264.6 million and earnings rose 19.1% to $37.8 million; margin increased to 14.3% from 12.4%. Professional growth reflected higher shipments, pricing, and Intimidator acquisition revenue; Residential growth reflected pricing and zero-turn mower shipments, partly offset by lower snow-product shipments.
Financial position and liquidity
Cash from operations remained negative, but cash used was lower year over year, mainly due to higher earnings, partly offset by inventory investment. Investing cash use was $22.0 million, compared with $413.4 million in the prior-year quarter, which included the Intimidator acquisition. Financing provided $74.4 million, including $100 million of net borrowings.
At February 3, 2023, total liquidity was $670.9 million: $174.0 million cash and $496.9 million of unused revolving-credit availability. Debt was $1,091.0 million carrying value; outstanding borrowings included $100 million on the revolving facility and $470 million of variable-rate term loans. The company reported covenant compliance. Inventory was $1,131.4 million, up 36.0% year over year, reflecting inflation, constrained component supply, and efforts to maintain production and meet anticipated demand.
Changes, outlook, and risks
- Intimidator contributed $49.6 million of incremental Professional sales in the quarter; its effect on segment earnings was immaterial. The acquisition had closed in January 2022.
- Management cited continued strong demand and a slightly higher order backlog than at the end of Q4 FY2022. No numeric full-year revenue or earnings guidance is provided in the supplied filing text.
- Management said it expects commodity, component, and parts costs for the remainder of FY2023 to be similar to the comparable prior-year period. It expects to continue quarterly dividends and anticipates possible share repurchases during the rest of FY2023, subject to cash, debt, working-capital needs, market conditions, and other factors.
- The quarterly dividend increased 13.3% to $0.34 per share. No shares were repurchased under the authorized repurchase programs during the quarter; 7,526,606 shares remained authorized. A small purchase of 1,127 shares was for a deferred-compensation trust, not the programs.
- Key exposures include economic weakness, inflation and supply-chain disruption, labor constraints, weather, competition, foreign-exchange and interest-rate movements, and commodity costs. Inventory repurchase commitments could reach $79.4 million; management warned dealer or distributor financial difficulties or weaker retail sales could increase repurchases. Management said pending litigation was not expected to materially affect results, financial position, or cash flows.
- Disclosure controls were reported effective. Intimidator financial-control integration remained in progress, with completion expected during FY2023. A Group Vice President’s retirement date was changed to April 14, 2023.
Most important facts for investors to verify
- Whether sales growth and margin expansion persist after pricing and acquisition contributions, and as costs and product mix change.
- Whether elevated inventory converts into sales and operating cash flow without excess or obsolete stock.
- Debt, borrowing costs, and liquidity trends, including exposure to variable interest rates.
- Dealer and distributor health, order backlog, and potential inventory repurchase exposure.
- Any subsequent full-year guidance, material risk developments, or changes in the Intimidator integration and control timeline.