The Toro Company (NYSE: TTC) — Q2 FY2023 Form 10-Q
Business context and period. The filing covers the 13-week second quarter ended May 5, 2023, and the six months ended that date; comparative periods ended April 29, 2022. Toro designs and sells professional and residential turf, irrigation, landscaping, snow and ice, and construction equipment. Results are unaudited, and management cautions that seasonality makes the six-month results unsuitable for annualization.
Financial performance
- Q2 revenue: $1.339 billion, up 7.2% year over year, driven by higher volume and net price realization. Six-month revenue was $2.488 billion, up 14.0%, reflecting volume, pricing, and Intimidator acquisition contribution.
- Profit and margins: Q2 gross profit was $479.7 million and gross margin 35.8%, versus $405.4 million and 32.4% a year earlier. Operating earnings were $218.8 million (16.3% margin), versus $170.6 million (13.7%). Net earnings were $167.5 million; diluted EPS was $1.59, versus $131.1 million and $1.24. Six-month net earnings were $274.3 million and diluted EPS $2.60, versus $200.6 million and $1.89.
- Segments: Q2 Professional sales rose 15.4% to $1.069 billion and segment earnings rose 37.6% to $227.5 million; margin expanded to 21.3% from 17.9%. Residential sales fell 16.8% to $265.8 million and segment earnings fell 38.7% to $22.7 million; margin declined to 8.6% from 11.6%.
- Cash flow and investment: Six-month operating cash flow was $61.6 million, versus $42.9 million. Capital spending was $70.1 million; after $7.1 million of insurance proceeds, reported free cash flow was negative $1.3 million, versus positive $6.9 million. Investing cash outflow was $62.7 million, compared with $438.9 million in the prior period, which included the Intimidator acquisition.
- Liquidity and debt: Cash was $151.3 million. Total debt was $1.041 billion net of issuance costs (about $1.045 billion principal); $50 million was drawn on the revolving facility, leaving $547.4 million available. Reported available liquidity was $698.7 million. The company reported compliance with debt covenants and expects liquidity to meet needs for at least the next 12 months.
- Other metrics: Inventory was $1.127 billion, up 26.4% year over year. Q2 interest expense was $14.7 million, versus $8.0 million. The effective tax rate was 20.6% in Q2 and 19.8% for the first six months. Dividends and share repurchases returned $95.4 million to shareholders during the first half.
Material changes versus prior comparable periods
- Professional performance and consolidated gross margins improved, primarily from pricing, favorable mix, productivity, and sales leverage; higher material and manufacturing costs partly offset these gains.
- Residential sales and earnings weakened, mainly on lower volume; higher marketing and manufacturing costs also pressured margins.
- SG&A rose 11.1% in Q2 and 17.3% year to date; as a share of sales it increased 0.8 and 0.6 percentage points, respectively. Higher marketing and warranty costs were cited.
- Higher average rates increased interest expense; year-to-date expense also reflected higher average borrowings. Other income increased, largely from Red Iron joint-venture income and derivative effects.
- Inventory increased amid supply constraints, inflation-driven higher inventory values, production increases, and softer consumer retail demand. Field inventory was higher than at the prior-year quarter-end; backlog was higher than at FY2022 year-end, reflecting Professional demand, supply constraints, and seasonality.
Outlook, risks, and unusual items
- The filing provides no specific full-year revenue or EPS guidance in the supplied text. Management expects to continue quarterly dividends and anticipates share repurchases during the remainder of FY2023, subject to cash, debt, working-capital needs, share price, market conditions, and other factors.
- Management cited continuing supply-chain and component availability challenges, inflation and commodity costs, tight labor markets, higher interest rates, foreign-exchange exposure, and macroeconomic uncertainty. Weather and lower consumer demand may affect Residential products; weaker dealer or distributor finances or retail sales could increase inventory-repurchase exposure.
- Inventory repurchase commitments could reach $111.1 million for financed inventory, compared with $85.6 million a year earlier; the company said its exposure is limited to the repurchase cost less resale proceeds and that repurchases to date were immaterial. Ordinary-course litigation includes product liability, environmental/asbestos, commercial, employment, and patent matters; management did not expect these matters to materially affect results, financial position, or cash flows.
- Intimidator contributed $49.6 million to six-month Professional sales; its earnings impact was immaterial. The May 9, 2023 acquisition of assets of a U.S. construction equipment dealer was also described as immaterial. Integration of Intimidator’s internal controls was expected to be completed during FY2023.
- Non-GAAP adjusted Q2 diluted EPS was $1.58 versus $1.25; six-month adjusted diluted EPS was $2.56 versus $1.91. These measures exclude specified acquisition-related costs and discrete stock-compensation tax effects; consider them alongside GAAP results.
Important facts for investors to verify
- Whether Professional growth and margin gains persist, and whether Residential volume recovers.
- Inventory levels, dealer sell-through, backlog conversion, and the potential cash-flow impact of working capital.
- Floating-rate debt exposure, interest expense, debt maturities, and continuing covenant compliance.
- Whether pricing and productivity continue to offset material, manufacturing, marketing, and warranty costs.
- Progress on Intimidator control integration and the scale of any inventory-repurchase, litigation, or other contingent obligations.