The Toro Company (NYSE: TTC) — FY2022 Form 10-K
Reporting period: Fiscal year ended October 31, 2022. This is an annual filing, not a standalone fourth-quarter report. Amounts below are in U.S. dollars.
Business context and financial performance
Toro designs, manufactures, and sells professional turf and landscaping equipment, irrigation systems, underground construction equipment, snow and ice products, and residential outdoor power equipment. Professional generated 76.0% of FY2022 sales; Residential generated 23.7%.
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $4,514.7 million | $3,959.6 million |
| Gross margin | 33.3% | 33.8% |
| Operating earnings | $575.7 million | $518.3 million |
| Net earnings | $443.3 million | $409.9 million |
| Diluted EPS | $4.20 | $3.78 |
| Operating cash flow | $297.2 million | $555.5 million |
| Capital expenditures | $143.5 million | $104.0 million |
| Free cash flow | $153.7 million | $451.5 million |
Sales rose 14.0%, primarily from net price realization and the Intimidator acquisition. Gross margin fell 50 basis points as higher material, freight, and manufacturing costs, and Intimidator’s lower initial margin, outweighed pricing and productivity gains. Net margin was 9.8%, versus 10.4% in FY2021. Interest expense increased to $35.7 million from $28.7 million; the effective tax rate increased to 19.8% from 18.0%.
Professional sales increased 17.1% to $3,429.6 million; segment earnings increased 15.1% to $584.0 million, with segment margin declining to 17.0% from 17.3%. Residential sales increased 5.8% to $1,068.6 million, while segment earnings fell 7.2% to $112.7 million and margin declined to 10.5% from 12.0%.
Financial position, liquidity, and capital allocation
At October 31, 2022, cash was $188.3 million, total assets were $3,556.0 million, and stockholders’ equity was $1,351.7 million. Long-term debt was $990.8 million, up from $691.2 million; debt-to-capitalization increased to 42.3% from 37.5%. The company had no revolver borrowings and reported $596.9 million of available capacity on its $600 million revolving credit facility. Total available liquidity was $785.2 million. Management stated liquidity was expected to be sufficient for anticipated needs for at least the next 12 months; the company reported compliance with debt covenants.
Operating cash flow declined 46.5%, mainly because of increased cash tied up in inventory and payments of prior-year liabilities. Inventory rose to $1,051.1 million from $738.2 million; average inventory turnover fell to 3.3 from 3.9. The company paid $125.7 million in dividends and repurchased $140.0 million of shares, returning $265.7 million to shareholders. The quarterly dividend increased to $0.30 per share in FY2022; the board later set the FY2023 first-quarter dividend at $0.34.
Material changes, outlook, and notable items
- Intimidator acquisition: Acquired January 13, 2022 for $399.8 million, funded with cash and borrowing. It contributed $183.8 million of FY2022 sales. Up to $15 million of additional contingent consideration was possible; no liability was recorded at year-end because the contingency was not considered probable.
- Demand and backlog: Year-end order backlog was approximately $2,309.1 million, versus $1,575.9 million. The company expected most of it to ship in FY2023, subject to supply constraints, customer issues, and potential cancellations.
- Management goal and investment: The “Drive for Five” initiative targets more than $5 billion in sales through organic growth by the end of FY2024. Planned FY2023 capital expenditures were $150–$170 million. The filing does not provide a specific FY2023 earnings or sales-growth forecast.
- Costs and supply: FY2022 faced supply-chain disruptions, constrained component availability, labor challenges, and higher material, freight, and manufacturing costs. Management expected FY2023 commodity and component costs, including inflation and tariffs, to be slightly higher than FY2022 levels.
- Other unusual items: FY2021 included a net favorable patent-litigation settlement impact; it did not recur in FY2022. Beginning in FY2022’s second quarter, Toro discontinued sales to Russia and Belarus; the company said the effect was not material.
- Key risks and contingencies: Weather and climate, economic and consumer demand, supply-chain availability, inflation, product mix, foreign exchange, interest rates, regulation and emissions rules, competition, and customer/dealer financing may affect results. Potential inventory repurchase exposure under dealer financing agreements was up to $80.0 million; actual repurchases had been immaterial. The company disclosed ongoing litigation and environmental matters but did not expect them, individually or together, to materially affect results or financial position.
- Controls and audit: Management and KPMG concluded internal control over financial reporting was effective. Intimidator, representing 12.2% of assets and 4.1% of sales, was excluded from the year-end control assessment while integration continued; completion was expected in FY2023. KPMG identified sales-promotion accrual estimates and Intimidator acquired-intangible valuations as critical audit matters.
Important facts for investors to verify
- Whether backlog converts to sales in FY2023, and how much is delayed or cancelled amid continuing supply constraints.
- Whether pricing and productivity can offset cost inflation and restore margins, especially in Residential and following Intimidator’s integration.
- Whether inventory growth moderates and operating cash flow and free cash flow recover from FY2022 levels.
- Debt repayment, variable-rate borrowing costs, covenant headroom, and continued availability of dealer and customer financing.
- Progress on Intimidator integration and internal controls, and whether contingent consideration or acquisition-related valuation changes arise.
- How the FY2024 $5 billion sales goal and planned FY2023 capital spending develop; the filing does not establish a specific FY2023 earnings forecast.