The Toro Company — Q2 FY2012 Form 10-Q
Reporting period: Quarter ended May 4, 2012; comparisons are with the quarter ended April 29, 2011. The six-month period also ended May 4, 2012. Toro’s business is seasonal, so first-half results should not be annualized.
Financial performance
| Metric | Q2 FY2012 | Q2 FY2011 | Six months FY2012 | Six months FY2011 |
|---|---|---|---|---|
| Net sales | $691.5 million | $631.6 million | $1,115.3 million | $1,014.8 million |
| Operating earnings | $106.5 million | $93.4 million | $140.5 million | $120.6 million |
| Net earnings | $68.8 million | $60.3 million | $88.7 million | $77.5 million |
| Diluted EPS | $2.26 | $1.88 | $2.91 | $2.41 |
Q2 sales rose 9.5% and net earnings rose 14.2%; first-half sales increased 9.9% and net earnings 14.5%. Q2 gross margin was 34.0%, up 20 basis points year over year; first-half gross margin was 34.3%, down 20 basis points. Operating margin was 15.4% for Q2 and 12.6% for the first half, compared with 14.8% and 11.9%, respectively. Higher volume and SG&A leverage supported earnings; higher tax expense partly offset the benefit. Share repurchases contributed about $0.11 to Q2 and $0.16 to first-half diluted EPS versus prior-year periods.
Segments: Q2 Professional sales increased 9.0% to $455.9 million and pretax earnings increased 15.3% to $98.7 million. Residential sales rose 10.6% to $231.9 million, while pretax earnings rose 7.5% to $28.5 million. Professional and Residential first-half sales increased 9.3% and 11.0%, respectively.
Cash flow, balance sheet and liquidity
- First-half operating cash flow was $89.5 million, versus $17.9 million a year earlier. Investing used $35.0 million, including $21.9 million of capital expenditures and $9.7 million for acquisitions; financing used $51.7 million, including $56.1 million of share repurchases and $13.2 million of dividends.
- Cash was $82.6 million at May 4, 2012. Total debt was approximately $225.6 million, implying net debt of approximately $143.0 million. Current assets were $691.7 million and current liabilities $476.7 million.
- Toro reported $146.8 million of unused availability under its credit agreements, with no short-term borrowings under its credit facilities and $9.4 million of outstanding letters of credit. It reported compliance with credit covenants and expected continued compliance during FY2012.
- Compared with April 29, 2011, receivables were down 2.0% and inventory down 3.5%, despite higher sales. However, average net working capital as a percentage of trailing-year sales increased to 14.9% from 13.6%.
Changes, outlook and risks
- Management described first-half results as solid and was optimistic that FY2012 would end positively, without providing full-year numerical earnings or sales guidance. Its Destination 2014 goals include at least $100 million of annual organic revenue growth and a 12% operating earnings margin by FY2014.
- Favorable early spring weather, replacement demand for golf equipment, new products, price increases and improved domestic demand supported sales. Acquisitions contributed $7.5 million of first-half Professional sales. European golf and grounds shipments weakened, and limited winter snowfall reduced snow thrower demand.
- Management anticipated lower snow thrower shipments in the second half of FY2012 because of weak winter demand and elevated field inventories. It expected commodity and component prices to remain higher for the rest of FY2012, with mitigation through sourcing, cost actions and selected price increases.
- Key risks include weather and seasonality, economic weakness—particularly in Europe—commodity and component costs, retailer and dealer demand and credit access, currency movements, competition, product quality and liability, and execution of acquisitions and regulatory engine-emissions requirements.
- The U.S. lawnmower horsepower-labeling settlement was final; management did not expect a material adverse effect based on existing accruals. A related Canadian class action remained under evaluation, and management could not assess whether an unfavorable outcome would be material.
- Three product-line acquisitions were completed in FY2012 for an aggregate purchase price of $11.1 million and were described as immaterial to consolidated results. On June 6, 2012, Toro and TCFIF amended Red Iron agreements, extending the joint venture’s initial term to October 31, 2017, subject to automatic extensions.
- The board declared a two-for-one stock split, to be distributed June 29, 2012 to shareholders of record June 15, 2012. The Q2 dividend was $0.22 per share, up 10% year over year.
Investor verification priorities
- Check whether expected second-half snow thrower weakness and elevated field inventories affected subsequent shipments and margins.
- Track commodity-cost trends, pricing actions and gross-margin performance, especially the contrast between Q2 improvement and first-half decline.
- Verify conversion of seasonal working capital into cash and continued access to credit while maintaining covenant compliance.
- Review Red Iron’s amended terms and ongoing dealer-financing availability, as well as the status and potential exposure of the Canadian class action.
- Compare subsequent results with Destination 2014 goals; the filing gives targets but no specific FY2012 numerical forecast.