The Toro Company — Q1 Fiscal 2015 Form 10-Q
Reporting period: Three months ended January 30, 2015; comparable period ended January 31, 2014. The company cautions that its seasonal first-quarter results should not be annualized.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $474.2 million | $446.0 million | +6.3% |
| Gross profit / margin | $169.0 million / 35.6% | $163.5 million / 36.7% | Margin down 110 bps |
| Operating earnings | $44.4 million | $40.6 million | +9.4% |
| Net earnings | $31.0 million | $25.9 million | +19.6% |
| Diluted EPS | $0.54 | $0.44 | +22.7% |
| Cash from operations | $(23.4) million | $(12.6) million | Cash use increased |
| Cash and cash equivalents | $82.9 million | $104.0 million | At period end |
SG&A was $124.6 million, up 1.4%, but declined to 26.2% of sales from 27.6%. The effective tax rate fell to 26.3% from 33.2%, primarily reflecting the retroactive reenactment of the domestic research tax credit. Interest expense rose to $4.7 million from $3.8 million, mainly due to acquisition-related borrowings.
Segments and material changes
- Professional: Sales rose 15.0% to $339.7 million, including $28.7 million from BOSS. Segment earnings before taxes increased 17.3% to $55.7 million. Growth in golf, grounds, and landscape contractor equipment was partly offset by lower micro-irrigation sales and currency effects.
- Residential: Sales fell 8.7% to $134.7 million; earnings before taxes declined 24.3% to $13.7 million. Delayed zero-turn mower shipments, product mix, currency, and higher freight weighed on results. New mower products were expected to ship in Q2.
- International: Sales decreased 5.5% to $142.9 million; unfavorable exchange rates reduced total quarterly sales by approximately $5.1 million.
- Margins and earnings: Lower gross margin, principally from currency and BOSS inventory purchase-accounting charges, was outweighed by sales growth, lower SG&A as a percentage of sales, and the lower tax rate.
Acquisition, cash flow, debt, and liquidity
Toro acquired substantially all assets of BOSS, a professional snow and ice management business, on November 14, 2014. Preliminary consideration was $229.2 million: $198.0 million cash and a note with $31.2 million fair value. BOSS contributed $28.7 million of sales and had an immaterial impact on quarterly net earnings. The preliminary purchase-price allocation included $103.1 million goodwill and $107.7 million intangible assets; valuations were unfinished and could be adjusted, affecting future depreciation and amortization.
Investing activities used $208.2 million, including $197.8 million net cash for acquisitions. Operating activities used $23.4 million, reflecting seasonal working-capital needs and increases in receivables and inventory. Financing activities provided $2.4 million. Cash declined from $314.9 million at October 31, 2014 to $82.9 million at quarter end.
At January 30, 2015, the balance sheet showed $364.7 million long-term debt, including current maturities, plus $47.0 million short-term debt. Management separately reported $385.0 million outstanding long-term debt, including the $30.0 million BOSS seller note at a $31.2 million fair value. The $150.0 million revolving credit facility had $102.9 million unutilized availability after $12.1 million of letters of credit. Toro reported compliance with debt covenants and expected to remain compliant through FY2015. Management believed available cash, financing, and forecast cash flows would support needs for at least the next 12 months.
Inventory was $364.4 million, up 19.5% from the prior-year quarter, due to Tier 4-related products, BOSS inventory, production timing, and advance component purchases amid West Coast port disruptions. Average net working capital as a percentage of sales improved to 15.5% from 16.3% year over year.
Outlook, risks, and unusual items
- The three-year “Destination PRIME” initiative targets organic revenue growth of at least 5% each fiscal year, operating earnings above 13% of sales by FY2017, and average net working capital below 13% of sales by FY2017. These are initiative goals, not specific FY2015 quarterly guidance.
- Management said average prices paid for some commodities and components were slightly lower in Q1 and anticipated some prices to remain slightly lower for the rest of FY2015 than in FY2014.
- Key risks include seasonal demand and weather, foreign-exchange movements, supply and port disruptions, Tier 4 engine availability and costs, channel inventory, acquisition integration, customer financing availability, and compliance with debt covenants.
- The company faces ordinary-course product liability, environmental, asbestos, commercial, employment, and patent matters. Management believed any resulting liability would not materially affect results, financial position, or cash flows.
- Toro increased its quarterly dividend 25% to $0.25 per share. It repurchased 231,493 shares under its public program during the quarter; cash purchases of Toro stock totaled $14.7 million.
Key facts for investors to verify
- Final BOSS purchase accounting, including acquired intangible values, useful lives, and the resulting amortization and margin effects.
- Whether delayed Residential mower production converted to shipments in Q2 as expected, and whether segment demand and margins recovered.
- Inventory growth, Tier 4-related stock, and supplier or port disruptions relative to sell-through and working-capital goals.
- Cash generation and debt trends after the acquisition, including availability under the revolver and continued covenant compliance.
- Progress toward Destination PRIME targets and the sensitivity of results to currency, weather, commodity costs, and customer financing.