The Toro Company: Fiscal 2011 Form 10-K
Reporting period: Fiscal year ended October 31, 2011. This is an annual filing, not a standalone fourth-quarter report. Amounts below are in U.S. dollars; financial figures are rounded to millions unless stated otherwise.
Business context
Toro designs, manufactures, and markets professional turf and landscape equipment, irrigation and micro-irrigation systems, landscaping products, and residential lawn and snow-removal products. Fiscal 2011 sales were 66% Professional, 33% Residential, and 1% Other. Sales outside the United States were 32.3% of consolidated sales.
Financial performance and position
| Metric | Fiscal 2011 | Fiscal 2010 |
|---|---|---|
| Net sales | $1,884.0 million | $1,690.4 million |
| Gross profit / margin | $636.6 million / 33.8% | $576.4 million / 34.1% |
| Operating earnings / margin | $184.5 million / 9.8% | $151.3 million / 9.0% |
| Net earnings / net margin | $117.7 million / 6.2% | $93.2 million / 5.5% |
| Diluted earnings per share | $3.70 | $2.79 |
| Cash from operating activities | $113.9 million | $193.5 million |
| Capital expenditures | $57.4 million | $48.7 million |
| Cash and cash equivalents at year-end | $80.9 million | $177.4 million |
| Long-term debt, including current portion | $227.2 million | $225.5 million |
| Stockholders’ equity | $266.8 million | $275.8 million |
Operating cash flow fell 41.2%, primarily reflecting inventory-related cash use and lower accounts payable versus the prior year. Inventory was $223.0 million, up 14.7% from year-end 2010; average inventory turnover declined to 5.14 from 5.90. The debt-to-capitalization ratio rose to 46.0% from 45.1%.
Toro reported $150 million available under a revolving credit facility expiring in July 2015, with $148.8 million of unutilized availability reported at year-end. There was no material short-term borrowing under its credit lines, and the company reported compliance with debt covenants. Fiscal 2011 dividends were $0.80 per share; share repurchases totaled $130.0 million.
Changes versus the prior year
- Sales increased 11.5%; management attributed growth to demand across both principal segments, new products, improved professional-market conditions, acquisitions contributing about $19 million, and approximately $21 million from currency effects.
- Professional sales increased 14.2% to $1,239.1 million; segment operating earnings rose to $205.0 million, or 16.5% of sales, from $173.8 million, or 16.0%.
- Residential sales increased 5.8% to $623.9 million, but operating earnings declined 6.1% to $54.4 million; segment margin fell to 8.7% from 9.8%.
- Gross margin contracted 30 basis points as higher commodity and freight costs and a mower rework partly offset improved plant utilization and a greater professional-sales mix. SG&A as a share of sales improved to 24.0% from 25.1%.
- The effective tax rate declined to 32.7% from 34.0%, helped by retroactive renewal of the domestic research tax credit. Average diluted shares declined, contributing to per-share earnings growth.
Outlook, risks, and notable items
For fiscal 2012, management expected Professional sales to increase, Residential sales to increase slightly, gross margin to improve, and net earnings and diluted EPS to rise versus fiscal 2011. It anticipated average inventory to decline and working capital as a percentage of sales to decrease. These are directional expectations; the filing does not provide a specific consolidated sales or EPS forecast.
Management expected commodity costs to remain higher and planned cost reductions and selected price increases to mitigate them. It also anticipated a higher tax rate as the research tax credit expired. The company expected continued investment in international markets and water-conserving products; fiscal 2012 capital expenditures were planned at approximately $45 million. Under its Destination 2014 initiative, Toro set an annual organic revenue growth goal of $100 million through 2014 and a goal of 12% operating earnings as a share of sales by fiscal 2014; it said it exceeded the fiscal 2011 organic-growth goal.
- A $4.7 million pre-tax charge related to rework of residential walk mowers for a non-safety quality issue reduced fiscal 2011 results.
- Key uncertainties include global economic conditions, weather, commodity and freight costs, customer and dealer credit, foreign exchange, competition, and reliance on major retailers. Home Depot represented approximately 11% of fiscal 2011 consolidated gross sales.
- New Tier 4 diesel-engine emission requirements were expected to raise development costs and may require significant price increases. Management anticipated some customers might accelerate purchases before those increases.
- Year-end order backlog was $85.2 million, down 11.5% year over year; management attributed the decline mainly to timing of professional stocking orders and golf-project backlog, and expected the existing backlog to be filled early in fiscal 2012.
- The company disclosed a Canadian lawnmower horsepower-labeling class action for which it could not assess the potential material effect. It said the U.S. settlement’s expected costs were covered by prior accruals and were not expected to materially affect consolidated results or financial condition.
The independent auditor expressed an unqualified opinion on the financial statements and internal controls; management and the auditor concluded internal control over financial reporting was effective as of October 31, 2011.
Investor facts to verify
- Whether the expected fiscal 2012 sales, margin, earnings, and inventory improvements materialized, especially given economic and weather sensitivity.
- Whether inventory levels and operating cash flow recovered after the year-end inventory build and fiscal 2011 cash-flow decline.
- The actual impact of higher commodity costs, freight, price increases, and Tier 4 compliance on margins, demand, and customer purchasing timing.
- Developments in the Canadian horsepower-labeling litigation, product-quality claims, and warranty reserves.
- Customer concentration, dealer financing and potential inventory-repurchase exposure, and remaining capacity under credit facilities and share-repurchase authorizations.