The Toro Company — Q1 FY2012 10-Q
Reporting period: Three months ended February 3, 2012, compared with the three months ended January 28, 2011. Toro designs, manufactures, and markets professional turf and irrigation products, landscaping equipment, and residential lawn and snow products. Results are seasonal; management cautions that first-quarter results should not be annualized or treated as an indicator of spring sales.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Net sales | $423.8 million | $383.2 million | +10.6% |
| Gross profit / margin | $146.7 million / 34.6% | $136.6 million / 35.7% | Margin down 1.1 percentage points |
| Operating earnings / margin | $34.0 million / 8.0% | $27.2 million / 7.1% | +25.1%; margin up 0.9 points |
| Net earnings | $19.9 million | $17.3 million | +15.3% |
| Diluted EPS | $0.65 | $0.53 | +22.6% |
| Operating cash flow | $(16.3) million | $(31.3) million | $14.9 million less cash used |
| Cash and cash equivalents | $71.8 million | $94.4 million | Down $22.6 million year over year |
| Total debt, including current portion and short-term debt | $250.8 million | $227.8 million | Up $23.0 million year over year |
SG&A was $112.6 million, or 26.6% of sales, compared with $109.4 million, or 28.6%. Interest expense rose to $4.4 million from $4.1 million. The effective tax rate increased to 33.8% from 29.3%, primarily because the federal research tax credit expired at the end of 2011; the prior-year quarter benefited from its reinstatement and retroactive application.
Segments and material changes
- Professional: Sales rose 9.9% to $283.8 million; pretax segment earnings increased 11.0% to $42.1 million. Demand for golf and landscape contractor equipment, new products, micro-irrigation, pricing, and acquisitions contributed.
- Residential: Sales rose 11.6% to $137.6 million; pretax segment earnings increased 10.9% to $12.6 million. Early mower orders and stronger Australian sales helped, while low snowfall reduced snow-thrower and service-parts shipments. Residential field inventories were higher.
- Consolidated growth was supported by volume, pricing, acquisitions, and approximately $2.5 million of favorable foreign-exchange impact on sales. Gross margin declined mainly because of product mix, higher freight, and commodity costs.
- Inventory was $272.5 million, up 13.7% year over year; management cited additional engine purchases for production planning and pricing efficiencies. Receivables rose 2.5%, while days sales outstanding improved to 36 from 37. Average net working capital as a percentage of trailing-twelve-month sales increased to 15.1% from 13.5%.
Cash, debt, and liquidity
Operating activities used $16.3 million, reflecting seasonal working-capital needs, including a $50.0 million increase in inventory and a $27.9 million increase in receivables. Investing activities used $14.3 million, including $13.8 million of capital spending and $0.6 million for an acquisition. Financing activities provided $22.3 million, principally from a $25.0 million increase in short-term debt; the company also paid $6.6 million of dividends and repurchased $4.9 million of stock. Cash ended the quarter at $71.8 million.
Toro reported $25.0 million of short-term borrowings, $12.3 million of outstanding letters of credit, and $127.6 million of unused availability under credit agreements. Its $150 million unsecured revolving facility expires in July 2015, with potential capacity increases subject to approval. The company said it was compliant with its covenants and expected to remain compliant through FY2012; it believed available funding and forecast cash flows would meet needs for at least the next twelve months. Long-term debt ratings were BBB- at S&P and Baa3 at Moody’s.
Outlook, risks, and unusual items
- No specific FY2012 revenue or earnings forecast is provided. The multi-year Destination 2014 initiative targets $100 million of organic revenue growth each fiscal year and a 12% operating earnings margin by FY2014.
- Management described the financial condition as strong but emphasized caution around global economic conditions, retail demand, dealer inventories, weather, competition, expenses, and commodity prices. It expected commodity and component costs to remain higher for the rest of FY2012 and cited vendor negotiations, sourcing alternatives, cost reductions, and selective price increases as mitigations.
- Results were affected by weak winter snowfall, favorable early-season mower demand, higher input and freight costs, and the research-credit expiration. Management noted that Q1 is typically the company’s lowest-sales period and is not necessarily indicative of spring trends.
- A $0.7 million acquisition of assets and assumed liabilities for a professional product line was completed in December 2011 and deemed immaterial.
- Product-horsepower labeling litigation in the United States was settled and became final in February 2011; management said expected settlement costs were covered by prior accruals and did not expect a material adverse effect. Canadian related litigation remained under evaluation; the company could not assess whether an unfavorable outcome would materially affect annual results, though it could be material in a particular period.
- Other cited risks include weather, economic weakness, commodity and fuel costs, foreign exchange, customer access to financing, competition, product quality and liability claims, Tier 4 emissions compliance, international operations, and credit-covenant compliance. Management reported no material change in previously disclosed risk factors.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether early mower demand converts to sustained spring-season shipments, and whether elevated residential field inventories and total inventory are worked down.
- Whether gross-margin pressure from product mix, freight, and commodity prices is offset by pricing and cost actions.
- Whether operating cash generation improves as seasonal working-capital investment reverses, and how short-term borrowing evolves.
- Whether Toro remains within credit covenants and maintains access to dealer financing through Red Iron and other providers.
- Developments in the Canadian horsepower-labeling litigation and the potential financial impact of other product, environmental, or patent claims.
- Progress toward Destination 2014 goals; the filing provides targets but no specific FY2012 earnings or sales guidance.