The Toro Company — Q1 FY2014 Form 10-Q
Reporting period: Three months ended January 31, 2014; comparisons are with the three months ended February 1, 2013. Toro designs, manufactures, and markets professional turf, landscaping, irrigation, construction, and residential outdoor equipment. Results are seasonal, and management cautions that first-quarter results should not be annualized or treated as an indicator of spring sales.
Key financial results
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $446.0 million | $444.7 million | Up 0.3% |
| Gross profit / margin | $163.5 million / 36.7% | $165.8 million / 37.3% | Margin down 60 bps |
| Operating earnings / margin | $40.6 million / 9.1% | $46.2 million / 10.4% | Earnings down 12.1% |
| Net earnings | $25.9 million | $31.4 million | Down 17.6% |
| Diluted EPS | $0.44 | $0.53 | Down 17.0% |
| Cash used in operating activities | $12.6 million | $23.5 million | Use decreased $10.9 million |
Net earnings declined primarily with lower gross margin, higher selling, general and administrative expense, and a higher effective tax rate. The tax rate was 33.2%, versus 27.7%, largely because the prior-year quarter benefited from retroactive reinstatement of the domestic research tax credit. Share repurchases reduced diluted EPS by less than it otherwise would have; management estimated an approximately $0.01 per-share benefit.
Segments and operating drivers
- Professional: Sales fell 10.2% to $295.5 million and segment earnings before tax fell 21.9% to $47.5 million. The comparison reflected unusually strong prior-year demand ahead of Tier 4 diesel-emissions requirements; lower volume, product rework warranty expense, and fixed costs pressured margins.
- Residential: Sales rose 22.0% to $147.6 million and segment earnings before tax rose 49.2% to $18.1 million, driven mainly by snow-thrower demand amid heavy North American snowfall and higher preseason mower shipments. Australian sales were adversely affected by currency.
- International: Sales increased 6.8% to $151.3 million, although foreign-exchange movements reduced consolidated sales by approximately $4.1 million.
Financial position, liquidity, and capital allocation
- At January 31, 2014, cash was $104.0 million; total debt was approximately $224.0 million, including $0.1 million current and $223.8 million long-term. Toro reported no short-term borrowings under its credit facilities.
- Current assets were $682.9 million and current liabilities $443.4 million. Inventory was $304.9 million, down 9.2% year over year; receivables were $199.8 million, up 10.8%.
- Operating cash use was seasonal. Investing cash use was $20.2 million, including $18.1 million of property, plant, and equipment purchases. Financing cash use was $45.6 million, including $42.0 million of stock repurchases and $11.4 million of dividends. Cash declined $79.0 million from October 31, 2013.
- The $150 million revolving credit facility had $148.6 million of aggregate unused availability, including the effect of $13.0 million in letters of credit. Toro said it was compliant with covenants and expected to remain compliant during FY2014; its long-term ratings were BBB from S&P and Baa3 from Moody’s.
- The quarterly dividend increased 42.9% to $0.20 per share. Toro repurchased 682,824 shares under its public program for an average $61.23 per share during the quarter.
Outlook, risks, and unusual items
- No specific full-year revenue or earnings forecast is provided. Toro’s stated Destination 2014 goals were $100 million of organic revenue growth each fiscal year and a 12% operating-earnings margin by FY2014; these are goals, not a reaffirmed forecast in this filing.
- Management planned approximately $70 million of FY2014 capital expenditures, including product tooling, equipment, and facility projects. It said available cash, operating cash flow, and financing arrangements should cover anticipated needs for at least the next 12 months.
- Management cited weather, economic conditions, retail and dealer demand, field inventory, commodity costs, competition, currency movements, and execution of Tier 4 compliance plans as important uncertainties. Commodity and component prices were slightly higher year over year; limited inflationary pressure was anticipated for the remainder of FY2014.
- Higher warranty expense included rework campaigns for certain professional products. Toro recorded a $2.3 million increase from changes in warranty estimates during the quarter; the warranty liability was $75.6 million at period-end.
- Toro completed an immaterial acquisition of assets for a value-priced landscape-lighting product line. It also disclosed ordinary-course litigation, including product liability, environmental, asbestos, commercial, employment, and patent matters; management did not expect these matters, individually or collectively, to materially affect results, financial position, or cash flows.
- Red Iron, Toro’s 45%-owned dealer-financing joint venture, had $315.3 million in assets and $279.8 million in liabilities. Toro had not guaranteed its debt, but had a product-repurchase commitment capped at $7.5 million per calendar year and maximum recourse of $0.4 million for certain receivables.
Important facts for investors to verify
- Whether spring-season demand, snowfall-driven residential sales, and dealer inventories support subsequent-quarter sales after the unusually strong prior-year Tier 4 comparison.
- Whether professional-segment volume and margins recover, and whether rework campaigns lead to further warranty costs or reserve changes.
- How working-capital movements, planned capital spending, repurchases, and dividends affect cash and liquidity through the seasonal peak.
- Whether the research tax credit is reinstated and how tax-rate changes, foreign exchange, and commodity costs affect FY2014 results.
- Progress against Destination 2014 goals and any material changes in litigation, Red Iron financing availability, or credit-covenant compliance.