The Toro Company (NYSE: TTC) — Q2 FY2024 Form 10-Q
Reporting period: Three and six months ended May 3, 2024; filed June 6, 2024. Toro designs, manufactures and sells professional and residential outdoor equipment, irrigation systems and related products. Results are seasonal, and the company cautions that first-half results should not be annualized.
Financial performance
- Q2 revenue: $1.349 billion, up 0.7% year over year. First-half revenue was $2.351 billion, down 5.5%.
- Q2 profitability: Gross profit was $453.0 million; gross margin fell to 33.6% from 35.8%. Operating earnings were $187.6 million, down from $218.8 million. Net earnings were $144.8 million, or $1.38 diluted EPS, versus $167.5 million, or $1.59.
- First-half profitability: Gross profit was $797.5 million and operating earnings were $276.2 million. Net earnings were $209.7 million, or $2.00 diluted EPS, versus $274.3 million, or $2.60. Gross margin was 33.9%, down from 35.2%.
- Drivers and expenses: Management attributed lower gross margins to product mix and higher material and manufacturing costs, partly offset by productivity improvements. Q2 interest expense increased $2.0 million to $16.7 million, primarily reflecting higher average borrowings and rates.
- Cash flow: First-half operating cash flow was $135.1 million, compared with $61.7 million. Capital spending was $39.5 million, producing company-defined free cash flow of $95.6 million versus negative $1.3 million. The improvement in operating cash flow was mainly due to favorable working-capital fluctuations, partly offset by lower earnings.
- Liquidity and debt: Cash was $188.8 million; total debt was $1.017 billion, including $13.5 million classified as current. Revolver availability was $572.3 million, giving reported available liquidity of $761.1 million. The company said it was compliant with debt covenants and expects available resources and forecast cash flows to meet needs for at least 12 months.
- Working capital: Receivables were $623.1 million, up $161.1 million year over year, primarily due to increased mass-channel shipments and payment terms. Inventory was $1.105 billion, down 2.0% year over year.
Segments and changes versus prior year
- Professional: Q2 sales declined 5.9% to $1.006 billion; segment earnings fell 16.2% to $190.7 million and margin declined to 19.0% from 21.3%. Lower zero-turn mower shipments were partly offset by growth in underground and specialty construction and golf and grounds products. First-half sales fell 9.6% and earnings fell 18.3%.
- Residential: Q2 sales rose 26.3% to $335.6 million; segment earnings increased 59.0% to $36.1 million and margin rose to 10.8% from 8.6%. Growth was driven primarily by mass-channel shipments. First-half sales rose 8.5%, while earnings declined 1.5%.
- Q2 revenue growth in Residential was offset by Professional weakness. For the first half, lower Professional shipments drove the consolidated revenue decline. International sales fell 3.0% in Q2 and 9.3% in the first half.
- Consolidated Q2 gross margin declined 220 basis points; first-half gross margin declined 130 basis points. SG&A was broadly flat in dollars year to date, but rose as a share of sales due mainly to lower sales volume.
Outlook, commentary and risks
- No specific consolidated revenue or EPS guidance for FY2024 is provided in the supplied filing text. Toro said it expects to continue quarterly dividends and share repurchases through the remainder of FY2024, subject to cash needs, market conditions and other factors.
- The multi-year AMP productivity initiative targets at least $100 million in annualized cost savings by FY2027, with some savings intended for reinvestment in innovation and growth. Q2 and first-half AMP costs were $4.4 million and $8.3 million, respectively; these were excluded from adjusted results.
- Dealer field inventory was slightly lower year over year, while backlog was lower than at FY2023 year-end following improved manufacturing output. Management said backlog remained significantly above its normal level, particularly for underground and specialty construction and golf and grounds products, where demand continued to exceed production.
- Key risks include economic and consumer-demand weakness, weather and seasonality, supply and component costs, labor availability, channel inventory and customer financing, foreign exchange and interest rates, commodity costs, competition, and execution of AMP and other initiatives.
- Inventory repurchase commitments were capped at $7.5 million annually under specified Red Iron and HCFC arrangements; exposure under other agreements was up to $30.3 million at May 3, 2024. Repurchases during the first half were immaterial. A deterioration in dealer finances or retail sales could increase required repurchases.
- Management said ordinary-course litigation, including product liability, environmental, asbestos, commercial, employment and patent matters, was not expected to materially affect results, financial position or cash flows. No material change in disclosed risk factors was reported.
Important facts for investors to verify
- Whether Professional-segment demand and margins stabilize, and whether elevated backlog converts to shipments without weakening demand or pricing.
- Whether Residential mass-channel sales and improved Q2 margins persist, and how channel inventory and payment terms affect receivables and cash conversion.
- Progress, timing, cash costs and realized savings from AMP, including the basis for excluding related costs from adjusted results.
- Drivers of gross-margin pressure, particularly product mix and material and manufacturing costs, and the extent to which productivity gains or pricing offset them.
- Debt maturity, variable-rate exposure, revolver availability and compliance with covenants, alongside the potential cash impact of dealer-financing repurchase commitments.
- Reconcile and assess non-GAAP adjusted earnings and free cash flow alongside GAAP results; adjusted Q2 EPS was $1.40 versus $1.58, and first-half adjusted EPS was $2.04 versus $2.56.