The Toro Company (NYSE: TTC) — Q3 FY2019 Form 10-Q
Reporting period: Three and nine months ended August 2, 2019, compared with the periods ended August 3, 2018. Fiscal year ends October 31. Amounts below are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context and reporting period
Toro designs and sells professional turf, irrigation, landscaping, snow and ice, underground construction, and residential outdoor equipment. It reports Professional and Residential segments, plus Other activities. The April 1, 2019 acquisition of The Charles Machine Works (CMW), for preliminary consideration of $679.3 million, expanded the Professional segment into underground construction. CMW contributed $199.6 million of Q3 sales and $270.5 million for the nine-month period, so reported growth is not directly comparable with the prior year.
Key financial metrics
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $838.7 | $655.8 | $2,403.7 | $2,079.3 |
| Gross profit / margin | $266.0 / 31.7% | $233.7 / 35.6% | $802.9 / 33.4% | $761.9 / 36.6% |
| Operating earnings / margin | $73.9 / 8.8% | $92.9 / 14.2% | $281.7 / 11.7% | $330.1 / 15.9% |
| Net earnings | $60.6 | $79.0 | $235.7 | $232.9 |
| Diluted EPS | $0.56 | $0.73 | $2.18 | $2.14 |
| Interest expense | $9.0 | $4.7 | $20.4 | $14.2 |
For the first nine months, operating cash flow was $259.1 million, versus $259.4 million. Capital expenditures were $56.8 million, implying approximate operating-cash-flow-less-capex of $202.3 million. Cash and equivalents were $143.3 million at August 2, 2019. Total debt, net of issuance costs, was $720.7 million; the company reported $598.1 million of unused revolving-credit availability. Current assets were $1,130.4 million and current liabilities $756.4 million.
Material changes versus the prior comparable periods
- Q3 sales rose 27.9%, primarily from CMW, pricing, and demand for snow and ice products and Toro-branded rental and specialty construction equipment. Professional sales increased 40.3%; Residential sales declined 11.0%.
- Nine-month sales rose 15.6%; Professional sales increased 20.0% and Residential sales 0.8%.
- Q3 GAAP net earnings fell to $60.6 million from $79.0 million; nine-month earnings increased slightly to $235.7 million from $232.9 million. The prior-year nine-month comparison included $32.6 million of net Tax Act-related charges.
- Margins contracted in both comparisons. Management cited CMW purchase-accounting charges, higher commodity and tariff costs, unfavorable mix, supply-chain and weather-related manufacturing inefficiencies, and Toro underground wind-down costs. Price increases and productivity initiatives partly offset these pressures.
- Adjusted non-GAAP net earnings were $89.8 million for Q3, versus $73.5 million, and $272.4 million for nine months, versus $255.9 million. These exclude specified acquisition, management-action, tax, and other items and should be considered alongside GAAP results.
- Debt increased substantially to fund CMW. Inventory was $620.6 million, up $256.1 million (70.3%) year over year, and receivables were $312.2 million, up $92.8 million (42.3%), reflecting acquisition effects as well as working-capital and sales timing factors.
Outlook, management commentary, risks, and unusual items
- Management’s Vision 2020 internal goals are at least 5% organic revenue growth in each of the initiative’s three fiscal years and operating earnings of at least 15.5% of sales by FY2020. These are stated goals, not a specific quarterly or full-year earnings forecast.
- Management said available financing and forecast cash flows should cover anticipated needs for at least the next 12 months. It intended to prepay approximately $99.9 million of term debt from operating cash flow within 12 months and expected to curtail share repurchases for the rest of FY2019.
- The company expects average commodity and component costs for the remainder of FY2019, including inflation and tariff effects, to be consistent with the average experienced in Q4 FY2018. It identified weather, soft retail demand, tariffs and input costs, supply-chain challenges, inventory management, and acquisition integration as risks to results.
- On August 1, 2019, Toro announced it would wind down its Toro-branded large horizontal directional drill and riding trencher product categories. It expects $10 million to $13 million of pretax charges, substantially all by the end of FY2020; $9.1 million had been recorded through Q3, including inventory-related charges and accelerated depreciation.
- CMW’s preliminary purchase-price allocation remains subject to adjustment. CMW reported a segment loss of $8.4 million in Q3 and $12.5 million since acquisition; these figures include purchase-accounting effects. Management cited integration execution, expected synergies, increased debt service, and possible impairment or other purchase-accounting impacts among acquisition risks.
- Management stated that ordinary-course litigation, including patent, product-liability, asbestos, and environmental matters, was not expected to materially affect results, financial position, or cash flows. Disclosure controls were deemed effective; CMW was excluded from the FY2019 internal-control assessment under the permitted acquisition-year approach.
Important facts for investors to verify
- Whether CMW integration, anticipated synergies, and final purchase accounting support the acquisition’s expected returns.
- Whether elevated inventories and receivables reflect appropriate demand planning and convert to sales and cash without discounting or additional working-capital pressure.
- Progress, remaining costs, and business effects of the underground product wind-down.
- Debt repayment, interest costs, covenant compliance, and the company’s liquidity as seasonal cash needs change.
- Whether price increases and productivity gains can offset tariffs, commodity costs, unfavorable product mix, and manufacturing inefficiencies.
- How reported GAAP performance compares with adjusted non-GAAP measures, including the adjustments excluded from those measures.