The Toro Company — FY2015 Form 10-K
Reporting period: Fiscal year ended October 31, 2015. This is an annual report, not a standalone fourth-quarter filing. Toro designs, manufactures, and markets professional turf, irrigation, landscape, construction, snow-management, and residential outdoor equipment. Professional represented 69% of sales, Residential 30%, and Other 1%.
Financial performance and position
| Metric | FY2015 | FY2014 |
|---|---|---|
| Net sales | $2,390.9 million | $2,172.7 million |
| Gross margin | 35.0% | 35.6% |
| Operating earnings | $299.1 million; 12.5% margin | $263.2 million; 12.1% margin |
| Net earnings | $201.6 million | $173.9 million |
| Diluted EPS | $3.55 | $3.02 |
| Cash from operating activities | $236.9 million | $182.4 million |
| Capital expenditures | $56.4 million | $71.1 million |
| Cash and cash equivalents at year-end | $126.3 million | $314.9 million |
| Long-term debt, including current portion | $378.0 million | $354.0 million |
| Debt-to-capitalization ratio | 45.0% | 47.8% |
Fourth quarter: Net sales were $480.8 million and net earnings were $23.6 million; diluted EPS was $0.42. FY2014 fourth-quarter figures were $414.1 million, $10.9 million, and $0.19, respectively.
Segments: Professional sales rose 11.0% to $1,639.7 million, with operating earnings of $308.0 million and an 18.8% margin. Residential sales increased 7.9% to $725.7 million; operating earnings were $85.0 million and margin was 11.7%. Other segment operating loss widened to $101.9 million from $96.8 million.
Liquidity and capital returns: Year-end current assets were $710.7 million and current liabilities $443.7 million. Toro had $147.2 million of unused availability under its credit agreements and was in compliance with covenants. Operating cash flow improved, while cash declined largely following acquisition spending, debt repayments, dividends, and repurchases. Fiscal 2015 dividends were $1.00 per share; share repurchases totaled approximately $107 million. The board later raised the quarterly dividend to $0.30 and authorized up to 4 million additional repurchases.
Material changes and unusual items
- Sales grew 10.0%, including $128.5 million of incremental sales from the November 2014 BOSS acquisition. Organic revenue growth was 4.1%, below the company’s 5% annual Destination PRIME goal.
- Unfavorable currency movements reduced reported sales by approximately $47 million. International sales fell 1.9% and comprised 25.5% of total sales, compared with 28.7% in FY2014.
- Gross margin fell 60 basis points, principally from currency impacts and BOSS purchase-accounting charges on inventory. Improved pricing and the absence of a prior-year mower component rework partly offset the decline.
- SG&A increased 5.2% in dollars but declined 100 basis points as a share of sales to 22.5%, reflecting expense leverage. Interest expense rose $3.3 million, primarily due to BOSS-related borrowing.
- The $229.5 million BOSS purchase added $103.0 million of goodwill and $107.7 million of identifiable intangibles. BOSS contributed $128.5 million of sales and had an immaterial impact on FY2015 net earnings. A $30 million, 4% note was issued to the former owner; an executive hire had a minority-shareholder relationship with that seller.
- Inventory rose 21.8% year over year; average net working capital was 16.0% of sales versus 15.1%. Management cited BOSS, seasonal snow-thrower stock, and earlier builds of selected products.
Outlook, risks, and contingencies
Management expected FY2016 net earnings and diluted EPS to increase, driven by anticipated sales growth, improved gross margin, SG&A leverage, and continued share repurchases. Professional sales were expected to rise; Residential sales were expected to be similar to FY2015. International sales were expected to be slightly higher absent further currency deterioration. Management anticipated lower average inventory and working capital, and planned approximately $70 million of FY2016 capital expenditures. These are expectations, not guarantees.
Destination PRIME targets at least 5% annual organic revenue growth, operating earnings of at least 13% of sales by FY2017, and average net working capital at or below 13% of sales by FY2017. FY2015 operating margin was 12.5%, and working capital was 16.0%.
Key risks include weather and snow variability; foreign exchange exposure; dependence on The Home Depot, which accounted for approximately 11% of gross sales; competitive and demand conditions across golf, construction, irrigation, and consumer markets; commodity and supplier availability; acquisition integration; inventory and seasonal working-capital management; regulation, including engine-emissions requirements; and reliance on dealer financing through Red Iron. The filing reports patent, product-liability, environmental, and other litigation, but management did not expect these matters, individually or in aggregate, to materially affect results, financial position, or cash flows. Potential inventory repurchase obligations under financing arrangements were approximately $10.0 million; maximum end-user financing credit-collection exposure was $4.6 million.
The independent auditor gave an unqualified opinion on the financial statements and internal controls. Management and the auditor excluded BOSS from the FY2015 internal-control assessment because it was recently acquired; BOSS represented approximately 19% of consolidated assets and 5% of sales.
Investor verification priorities
- Assess whether FY2016 sales, earnings, margin, and working-capital expectations were achieved, especially against the Destination PRIME targets.
- Track BOSS integration, profitability, acquisition-related debt repayment, and the value and amortization of acquired goodwill and intangibles.
- Examine inventory growth, retail and dealer field inventories, seasonal demand, and the planned working-capital reduction.
- Evaluate currency sensitivity and whether pricing, sourcing, and hedging offset foreign-exchange and commodity pressures.
- Review debt maturities, variable-rate exposure, covenant headroom, and the contingent financing repurchase and collection exposures.
- Monitor The Home Depot concentration, litigation and environmental matters, and the scope of internal-control testing following the BOSS acquisition.