The Toro Company (NYSE: TTC) — Q3 FY2021 Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2021, ended July 30, 2021. Comparisons are with the periods ended July 31, 2020. Toro designs, manufactures, and sells equipment and systems for professional and residential turf care, landscaping, irrigation, snow and ice management, and construction.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $976.8 million | $841.0 million | $2,998.9 million | $2,537.9 million |
| Gross margin | 33.9% | 35.0% | 35.0% | 35.0% |
| Operating earnings | $121.9 million | $116.0 million | $444.1 million | $332.9 million |
| Net earnings | $96.3 million | $89.0 million | $349.8 million | $257.5 million |
| Diluted EPS | $0.89 | $0.82 | $3.21 | $2.37 |
Q3 sales grew 16.2%; nine-month sales grew 18.2%. Nine-month net earnings increased 35.8%. Q3 diluted EPS rose 8.5%, while nine-month diluted EPS rose 35.4%.
Segments: Q3 Professional sales rose 15.2% to $718.5 million and Residential sales rose 23.0% to $252.1 million. Nine-month segment sales increased 16.9% and 24.0%, respectively. Q3 segment earnings increased 7.6% in Professional and 10.5% in Residential; margins declined in both segments amid cost inflation.
Margins and drivers: Q3 gross margin fell 110 basis points year over year, primarily due to higher commodity, component, and freight costs, partly offset by pricing and productivity. Nine-month gross margin was unchanged at 35.0%; pricing, productivity, and mix largely offset cost inflation. SG&A was 21.4% of Q3 sales versus 21.2% a year earlier, but improved to 20.2% of nine-month sales from 21.9%.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $477.1 million, up from $305.9 million. Capital expenditures were $48.0 million; company-defined non-GAAP free cash flow was $429.2 million versus $259.2 million.
- Cash and equivalents were $535.3 million at July 30, 2021. Available liquidity, including $596.9 million of revolver availability, was $1.132 billion.
- Total debt was $691.6 million, down from $890.9 million a year earlier. The company prepaid $90 million on a term loan and $10 million on another term loan during the first nine months. $104.2 million was classified as current debt, including a $100 million term loan due April 2022.
- Nine-month financing cash use was $351.2 million, including $177.2 million for share repurchases and $84.7 million in dividends. The quarterly dividend increased 5% to $0.2625 per share.
- Inventories were $665.6 million. Accounts payable rose to $411.4 million from $268.7 million at the prior-year quarter-end; management cited spending normalization and invoice-payment timing.
Material changes, outlook, and risks
- Demand was strong across many Professional and Residential product lines, supported by contractor and retail demand, golf course investment, new products, and price increases. International sales rose 27.8% in Q3 and 25.8% year to date.
- Supply constraints limited production and product availability, including in underground construction equipment. Toro expected supply disruptions to worsen during the rest of FY2021, with suppliers sometimes unable to meet commodity and component requirements.
- Management reported ongoing inflation in commodities, components, and freight, expected to continue through the balance of FY2021 and pressure margins. The filing provides no specific full-year revenue or earnings guidance. Management said liquidity should cover anticipated needs for at least 12 months.
- Planned FY2021 capital expenditures increased to approximately $130 million from $115 million, reflecting technology and capacity investments. Toro expected to continue quarterly dividends and share repurchases, subject to cash needs, debt repayments, market conditions, and other factors.
- COVID-19 and potential variants, supply-chain disruption, inflation, demand changes, labor availability, weather, foreign exchange, and customer financing are among the stated risks. Results are seasonal and management cautioned that nine-month results should not be annualized.
- Unusual legal items: Toro received a $33.65 million settlement in January 2021 in the Exmark-Briggs & Stratton patent case and recorded the gain net of a customary legal fee of approximately 50% of the settlement. A separate Q3 patent-dispute settlement charge of $5.75 million was recorded. Nine-month non-GAAP reconciliation removes net litigation gains of $11.325 million.
- Management stated it was in compliance with debt covenants. The filing describes contingent inventory repurchase obligations of up to $93.8 million under certain third-party financing arrangements; actual repurchases during the period were immaterial.
Important facts for investors to verify
- Whether supply constraints and inflation ease or further limit shipments and gross margins.
- How much of sales growth reflects sustainable end-market demand versus price increases, channel replenishment, and acquisition contribution.
- Upcoming debt maturities and repayment capacity, particularly the $100 million term loan due April 2022.
- The net and nonrecurring effects of litigation settlements when assessing earnings and non-GAAP comparisons.
- Whether Toro delivers the announced $130 million FY2021 capital expenditure plan while maintaining liquidity, dividends, and repurchases.