The Toro Company (TTC) — Q3 2020 Form 10-Q
Reporting period: Fiscal third quarter and nine months ended July 31, 2020; comparisons are with the periods ended August 2, 2019. Toro designs, manufactures, and markets professional and residential outdoor equipment, irrigation systems, and related products. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $841.0 million | $838.7 million | $2,537.9 million | $2,403.7 million |
| Gross profit / margin | $294.6 million / 35.0% | $266.0 million / 31.7% | $889.4 million / 35.0% | $802.9 million / 33.4% |
| Operating earnings / margin | $116.0 million / 13.8% | $73.9 million / 8.8% | $332.9 million / 13.1% | $281.7 million / 11.7% |
| Net earnings | $89.0 million | $60.6 million | $257.5 million | $235.7 million |
| Diluted EPS | $0.82 | $0.56 | $2.37 | $2.18 |
- Q3 sales increased 0.3%; nine-month sales rose 5.6%. GAAP net earnings increased 46.8% in Q3 and 9.2% year to date.
- Non-GAAP diluted EPS was $0.82 in Q3 versus $0.83, and $2.38 for nine months versus $2.52. Non-GAAP results exclude specified acquisition costs, management actions, and tax items; assess these alongside GAAP figures.
- Q3 Professional sales fell 7.9% to $623.6 million, while Residential sales increased 38.3% to $205.0 million. For nine months, Professional sales rose 1.3% to $1,879.4 million and Residential sales rose 20.4% to $632.8 million.
- Q3 segment earnings were $113.7 million for Professional (+39.3%) and $28.5 million for Residential (+76.7%). Nine-month segment earnings were $322.4 million for Professional (+0.8%) and $87.2 million for Residential (+70.2%).
- Operating cash flow for nine months was $305.9 million, versus $259.1 million. Capital expenditures were $46.6 million, compared with $56.8 million. Cash and cash equivalents rose to $394.1 million from $151.8 million at October 31, 2019.
- At July 31, 2020, total debt was $890.9 million, including $108.9 million classified as current. Toro reported $782.0 million of long-term debt, excluding current maturities. Its $600 million revolving facility had no borrowings and $598.0 million available after letters of credit. Reported total available liquidity was $992.1 million.
- Total current assets were $1,384.2 million and current liabilities were $797.1 million. The filing reports compliance with debt covenants. The $190 million term loan included $108.9 million classified as current; Toro intended to repay $89.9 million of that amount from anticipated operating cash flow within 12 months, in addition to required amortization.
Changes, outlook, and risks
- Drivers and comparability: Residential mower demand and the expanded mass-retail channel supported growth; Professional demand weakened in golf and grounds, rental, specialty, underground construction, and landscape contractor markets. The 2020 results include Venture Products, acquired March 2, 2020. Toro also said CMW contributed an incremental $291.8 million of Professional sales and $19.4 million of segment earnings during the nine-month period. Prior-year acquisition-related purchase-accounting charges were substantially higher, boosting the apparent GAAP comparison; Q3 non-GAAP EPS declined.
- Margins and costs: Favorable pricing, productivity, and lower acquisition-related charges supported GAAP gross margin. COVID-related facility changes, production adjustments, manufacturing inefficiencies, and a greater Residential sales mix weighed on margins. Lower travel and other cost controls reduced Q3 SG&A.
- COVID-19 and outlook: Toro withdrew fiscal 2020 detailed guidance on March 30 and did not provide full-year or Q4 financial guidance. Management expected continued Residential growth in Q4, but at a more moderate pace, and anticipated some recovery in Professional buying patterns; budget constraints, social-distancing effects, and uneven economic recovery remained offsets. The filing says the duration and effects of the pandemic remain uncertain and could materially affect results, cash flows, operations, and asset valuations.
- Liquidity actions and shareholder returns: Toro took a $190 million three-year term loan partly to refinance acquisition-related borrowing and preserve liquidity, reduced capital spending, curtailed share repurchases, and implemented cost controls. It expected to continue its quarterly dividend for the remainder of fiscal 2020. The Q3 dividend was $0.25 per share, up from $0.225 a year earlier.
- Other items and exposures: Toro expected $10–$11 million of total pretax charges from winding down Toro-branded large directional drills and riding trenchers; most had already been incurred, with substantially all remaining costs expected by fiscal year-end. It disclosed ordinary-course litigation, including patent, product liability, asbestos, and environmental matters, but management did not expect these matters to materially affect results, financial position, or cash flows. Inventory repurchase arrangements with third-party financiers created contingent exposure of up to $140 million; actual repurchases during the period were immaterial. The filing also identifies supplier, commodity, foreign-exchange, interest-rate, and goodwill/intangible-asset impairment risks.
Investor verification points
- Check whether Residential demand and retail sell-through persist, and whether Professional markets recover as expected.
- Track COVID-related production inefficiencies, product mix, inventory levels, and margin trends; distinguish GAAP improvement from acquisition-related comparison effects.
- Verify the timing and funding of the planned term-loan prepayments, debt reduction, and continued dividend payments.
- Monitor acquisition integration and performance, particularly Venture Products, and assess the substantial goodwill and intangible-asset balances for impairment risk.
- Review customer/dealer financing and inventory repurchase exposure, supplier stability, and any material changes in litigation or contingencies.