The Toro Company — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2011, ended April 29, 2011. Toro designs, manufactures, and markets professional turf and irrigation products, landscaping equipment, and residential lawn and snow products. Results are seasonal; the six-month period should not be annualized.
Key financial results
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Net sales | $631.6 million | $562.8 million | $1,014.8 million | $894.2 million |
| Operating earnings | $93.4 million | $72.1 million | $120.6 million | $91.9 million |
| Net earnings | $60.3 million | $45.7 million | $77.5 million | $56.6 million |
| Diluted EPS | $1.88 | $1.34 | $2.41 | $1.65 |
| Gross margin | 33.8% | 33.3% | 34.5% | 34.0% |
| Net margin | 9.5% | 8.1% | 7.6% | 6.3% |
For Q2, sales increased 12.2%, net earnings 32.0%, and diluted EPS 40.3%. Year-to-date sales increased 13.5%, net earnings 37.0%, and diluted EPS 46.1%. Higher volume, improved gross margin, SG&A leverage, and a lower year-to-date effective tax rate supported earnings. Share repurchases added approximately $0.12 to Q2 and $0.14 to year-to-date diluted EPS compared with the prior-year periods.
- Segment performance: Professional sales rose 19.7% in Q2 and 20.3% year to date; Q2 segment earnings increased 26.6%. Residential sales slipped 0.2% in Q2 but rose 1.9% year to date; year-to-date segment earnings fell 1.6%, partly due to special product-modification warranty provisions. Cool, wet weather weighed on walk mower sales.
- Cash flow: First-half operating cash flow was $17.7 million, versus $80.8 million a year earlier, chiefly reflecting higher receivables and inventory. Investing used $42.2 million, including $25.9 million of capital expenditures and $12.1 million for acquisitions. Financing used $47.7 million, including $46.7 million of share repurchases and $12.7 million of dividends, partly offset by option proceeds.
- Balance sheet and liquidity: Cash was $106.9 million, down from $177.4 million at October 31, 2010. Inventory was $259.8 million, up from $194.4 million at fiscal year-end and 49% above the prior-year quarter-end; management attributed the increase to prebuilding for anticipated demand and availability, as well as weather-related residential weakness. Total debt was approximately $227.4 million: $2.5 million current long-term debt, $0.1 million short-term debt, and $224.9 million long-term debt. Toro reported $183.8 million of unused availability under credit agreements and said it expected adequate liquidity for at least 12 months.
- Margins and taxes: Gross margin improved 50 basis points in both comparison periods, supported by a greater professional-sales mix and better plant utilization; higher freight and commodity costs partly offset the improvement. The effective tax rate was 33.4% in Q2 and 32.6% year to date, with the year-to-date decrease primarily reflecting the retroactive federal R&D tax-credit extension.
Outlook, commentary, and risks
Management described Q2 momentum as positive and said it currently believed Toro would achieve its fiscal 2011 goal of $100 million in organic revenue growth. The Destination 2014 initiative targets $100 million of organic revenue growth in each fiscal year from 2011 through 2014 and a 12% operating-earnings margin by the end of fiscal 2014. Management said it would align production with expected shipments and continue monitoring economic recovery, retail demand, channel inventory, weather, competition, and costs. These are goals and expectations, not a guarantee of results.
- Commodity and component prices, fuel and freight costs were higher; management anticipated higher commodity and component prices for the rest of FY2011 and cited vendor negotiations, sourcing, cost reductions, material substitutions, and selective price increases as mitigations.
- Seasonality and weather can materially affect demand and working capital. Management cited economic conditions, consumer and dealer credit, golf and construction activity, competition, foreign-exchange movements, and dependence on retail placement and major customers among the risks.
- The $175 million unsecured revolving credit facility expires in January 2012; Toro said it intended to replace it before expiry. It reported compliance with covenants and expected continued compliance through FY2011. Long-term debt ratings were BBB- (S&P) and Baa3 (Moody’s).
- Toro completed its acquisition of most assets and assumed certain liabilities of Unique Lighting Systems in January 2011. Estimated consideration was $19.1 million, including cash, a long-term note, and contingent earnout; the company described the acquisition as immaterial to consolidated results and financial condition.
- The U.S. lawnmower horsepower-labeling class-action settlement became final after objectors dismissed their appeals; management did not expect a material adverse effect from the settlement. Related Canadian class-action litigation remained under evaluation, and management could not assess its potential material effect.
- Foreign-currency derivatives reduced volatility but produced losses on non-designated contracts recognized in other income: $9.5 million for the first six months of FY2011. Toro anticipated reclassifying approximately $3.7 million of accumulated hedge losses into earnings over the next 12 months.
Important facts for investors to verify
- Whether elevated inventory converts into sales as anticipated, particularly given weather-sensitive residential demand.
- How commodity, component, fuel, and freight inflation affects gross margins and whether planned mitigations are effective.
- Progress toward the FY2011 organic-growth goal and the longer-term Destination 2014 targets.
- Replacement of the revolving credit facility before its January 2012 expiry, and ongoing covenant compliance.
- Developments in the Canadian horsepower-labeling litigation, warranty costs, and the timing and earnings effect of hedge-loss reclassifications.