The Toro Company — Q1 Fiscal 2016 Form 10-Q
Reporting period: Three months ended January 29, 2016; comparisons are with the three months ended January 30, 2015. Toro designs, manufactures, and markets professional and residential outdoor equipment, turf irrigation systems, and related products. Results are seasonal, and the company cautions that this quarter should not be annualized.
Financial results
| Metric | Q1 FY2016 | Q1 FY2015 |
|---|---|---|
| Net sales | $486.4 million | $474.2 million |
| Gross profit / margin | $182.7 million / 37.6% | $169.0 million / 35.6% |
| Operating earnings / margin | $53.8 million / 11.1% | $44.4 million / 9.4% |
| Net earnings | $39.3 million | $31.0 million |
| Diluted EPS | $0.70 | $0.54 |
| Operating cash flow | $1.2 million | $(23.4) million |
| Capital expenditures | $10.7 million | $10.1 million |
Sales increased 2.6%; net earnings rose 26.9%. Gross margin expanded 200 basis points, while SG&A as a share of sales increased 30 basis points to 26.5%. Other income was $4.5 million, up from $2.3 million, and included a litigation settlement recovery, higher Red Iron joint-venture earnings, and a gain on the sale of the Northwestern U.S. distribution business. The filing does not quantify these individual items.
Segments and material changes
- Professional: Sales were $338.8 million, down 0.3%; segment earnings before tax were $61.6 million, up 10.7%. Landscape contractor and specialty construction demand helped offset weaker BOSS snow products and unfavorable currency effects.
- Residential: Sales were $144.3 million, up 7.1%; segment earnings before tax were $16.7 million, up 21.9%. Higher preseason zero-turn mower shipments and improved availability outweighed weaker snow-thrower and walk-mower sales.
- International: Sales fell 11.0%, with currency movements reducing consolidated sales by approximately $14 million.
- Margin improvement reflected the absence of prior-year BOSS inventory purchase-accounting charges, productivity gains, lower commodity costs, and improved price realization; currency effects partly offset these benefits.
Cash, debt, and liquidity
- Cash and equivalents were $118.1 million at quarter-end, versus $82.9 million a year earlier and $126.3 million at October 31, 2015. Cash decreased $8.1 million during the quarter.
- Quarter-end total debt was approximately $417.4 million, including $52.9 million of short-term debt. Long-term debt was $364.5 million, including a $120.3 million LIBOR-based term loan, fixed-rate notes and debentures, and a $20.0 million BOSS seller note.
- Under credit agreements, $96.6 million of availability remained after outstanding letters of credit. Toro reported covenant compliance and expected continued compliance for the rest of FY2016; it said dividend and repurchase payments were not restricted at quarter-end.
- Current assets were $805.1 million and current liabilities $550.4 million. Inventory was $422.0 million, up $57.6 million year over year; management attributed the increase to weather-related snow-product inventory and production timing ahead of anticipated demand.
- Operating cash flow improved by $24.6 million year over year, but remained modestly positive as seasonal inventory investment used $92.9 million of cash. Cash used in investing was $8.4 million, versus $208.2 million, which included the prior-year BOSS acquisition.
Outlook, risks, and unusual items
Toro did not provide specific full-year FY2016 revenue or earnings guidance in the supplied filing text. Its Destination PRIME initiative targets organic revenue growth of at least 5% annually, operating earnings above 13% of sales by FY2017, and average net working capital below 13% of sales by FY2017. Average net working capital was 16.4% of sales for the trailing twelve months, versus 15.5% a year earlier. Management planned to emphasize working-capital reduction and asset utilization for the remainder of FY2016, while maintaining order replenishment and service levels.
- Management anticipated average prices for some commodities and components to be slightly lower for the remainder of FY2016 than in FY2015.
- Weather can shift demand and materially affect snow-product sales; lack of snowfall had already reduced snow-thrower and BOSS sales.
- Foreign exchange was a significant headwind, particularly for international sales and reported results. Toro uses non-speculative currency hedges; its net investment in foreign subsidiaries is not hedged.
- Other key risks include demand and channel inventory, supply and commodity costs, competition, product quality and liability claims, international operations, and availability of dealer financing through Red Iron.
- Ordinary-course litigation includes product, environmental, commercial, employment, and patent matters. Management believed any related liability would not materially affect results, financial position, or cash flows.
- Toro completed the sale of its Northwestern U.S. distribution company in November 2015; the company described the divestiture as not material. It also paid the first $10 million principal installment on the BOSS seller note during the quarter.
- The quarterly dividend increased 20% to $0.30 per share. Toro repurchased 376,841 shares under its repurchase program for approximately $27.5 million in cash.
Most important facts for investors to verify
- Whether elevated inventory and field inventory convert to sell-through without discounting or further working-capital pressure.
- How weather, foreign exchange, and international demand affect subsequent-quarter sales and margins.
- Progress toward Destination PRIME’s FY2017 operating-margin and working-capital targets.
- Debt, covenant headroom, and seasonal liquidity needs, including the use of short-term borrowing.
- The repeatability of earnings contributions from the litigation recovery, divestiture gain, and Red Iron investment.