The Toro Company (NYSE: TTC) — Q2 FY2021 Form 10-Q
Reporting period: Second quarter and six months ended April 30, 2021; comparisons are with periods ended May 1, 2020. The company designs, manufactures, and markets professional turf, irrigation, landscaping, construction, snow and ice, and residential outdoor equipment. Results are seasonal, and management cautions that the six-month results should not be annualized.
Key financial metrics
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $1,149.1 million | $929.4 million | $2,022.1 million | $1,696.9 million |
| Gross profit / margin | $403.0 million / 35.1% | $306.7 million / 33.0% | $718.0 million / 35.5% | $594.8 million / 35.1% |
| Operating earnings | $180.7 million | $125.8 million | $322.2 million | $216.9 million |
| Net earnings | $142.2 million | $98.4 million | $253.5 million | $168.5 million |
| Diluted EPS | $1.31 | $0.91 | $2.32 | $1.55 |
- Margins and costs: Q2 gross margin improved 210 basis points; six-month margin improved 40 basis points. Management cited better productivity as prior-year COVID-related factory disruptions eased, price increases, and favorable mix, partly offset by higher commodity costs. Q2 SG&A was $222.2 million; six-month SG&A was $395.8 million. The effective tax rate was 19.8% for Q2 and 19.0% year to date.
- Cash flow: Six-month operating cash flow was $318.6 million, versus $70.9 million a year earlier. Capital expenditures were $26.2 million, yielding company-defined non-GAAP free cash flow of $292.4 million and conversion of 115.4% of net earnings. The filing attributes the cash-flow improvement partly to earnings, timing of accrued-liability payments, and lower inventory cash use.
- Liquidity and debt: At April 30, cash was $497.6 million and available liquidity was $1,094.5 million, including $596.9 million of revolver availability. Total debt was approximately $691.5 million, including $100.0 million classified as current. The company prepaid $90.0 million of one term loan and $10.0 million of another during the first half; it reported compliance with financing covenants.
- Balance sheet: Total assets were $2,996.1 million; current assets were $1,559.5 million and current liabilities were $988.9 million. Inventory was $628.8 million, down from $714.2 million at May 1, 2020.
Material changes versus the prior comparable period
- Q2 sales increased 23.6%; six-month sales rose 19.2%. Professional segment sales increased 25.3% in Q2 and 17.7% year to date; Residential sales increased 20.2% and 24.5%, respectively.
- Demand strengthened across golf equipment and irrigation, landscape contractor equipment, rental and specialty construction, and residential mowers and battery-powered products. Snow thrower sales also benefited from favorable winter conditions and retail placement. Underground construction sales were constrained by product availability and soft oil-and-gas demand.
- International sales grew 40.4% in Q2 and 24.9% year to date; currency movements added approximately $7.9 million and $10.4 million, respectively.
- Professional segment earnings rose 57.3% in Q2 and 36.0% year to date; Residential segment earnings rose 23.9% and 33.1%. Stronger Professional mix supported consolidated gross margin, while the company cautioned that a higher Residential mix can pressure margins.
- The company received a $33.65 million patent-litigation settlement in January 2021 and recorded the gain less approximately 50% counsel fees as a $17.1 million net benefit in first-quarter SG&A. This nonrecurring item benefited six-month GAAP results and is excluded from the company’s non-GAAP measures.
Outlook, management commentary, and risks
- The filing provides no specific full-year sales or earnings guidance. Management increased expected FY2021 capital expenditures from approximately $115 million to $130 million, citing technology investment and capacity for anticipated growth. It expected to continue quarterly dividends and share repurchases, subject to cash needs, debt repayment, market conditions, and other factors.
- Management reported strong customer demand but lower field inventories and product availability constraints. It expected greater supply-chain disruption for the remainder of FY2021, including difficulty obtaining certain components, and anticipated significantly higher commodity, component, and related costs than in the comparable prior-year period. Inflation and sourcing constraints could pressure margins and limit production flexibility.
- COVID-19’s future effects remained uncertain. Potential impacts include demand changes, supplier and labor disruption, operating inefficiencies, and impairment or valuation charges. Weather, product mix, foreign exchange, competition, and the ability to introduce successful products are additional risks.
- Inventory repurchase arrangements create contingent exposure of up to $103.4 million for certain third-party-financed dealer inventory; the company’s actual exposure is generally the difference between repurchase cost and subsequent resale proceeds. It also has a limited Red Iron repurchase commitment capped at $7.5 million per calendar year. Management described ordinary-course litigation and said related liabilities, if any, were not expected to materially affect results, financial position, or cash flows.
- The company reported effective disclosure controls. It was still integrating Venture Products’ internal controls and expected to include the acquisition in its year-end FY2021 internal-control assessment.
Most important facts for investors to verify
- Whether supply-chain constraints, product availability, and elevated input costs persist and affect sales, production, or gross margins.
- How much of the reported earnings and cash-flow growth reflects durable operating performance versus prior-year COVID disruption, working-capital timing, and the one-time litigation settlement.
- Progress against the revised $130 million capital expenditure plan and the company’s capacity and inventory position relative to demand.
- Debt repayment and liquidity needs, covenant compliance, and the scale of share repurchases and dividends relative to cash generation.
- Developments in contingent dealer-inventory repurchase exposure, litigation, and the integration of acquired businesses.