The Toro Company (NYSE: TTC) — FY2020 Form 10-K
Reporting period: Fiscal year ended October 31, 2020. The filing is an annual report, not a standalone quarterly filing; fourth-quarter results are also summarized below. Amounts are in U.S. dollars.
Business context
Toro designs, manufactures, and markets professional turf and landscape equipment, irrigation systems, underground construction equipment, snow and ice management products, and residential lawn and snow products. Fiscal 2020 sales were 74.7% Professional and 24.3% Residential. The company acquired Venture Products for approximately $163.2 million in March 2020; its products added Ventrac-branded turf, landscape, and snow equipment to the Professional segment. Fiscal 2020 also included a full year of CMW results following its 2019 acquisition.
Financial results and liquidity
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $3,378.8 million | $3,138.1 million |
| Gross margin | 35.2% | 33.4% |
| Operating earnings | $426.4 million | $325.0 million |
| Net earnings | $329.7 million | $274.0 million |
| Diluted EPS | $3.03 | $2.53 |
| Operating cash flow | $539.4 million | $337.4 million |
Sales increased 7.7%; GAAP net earnings rose 20.3%. Non-GAAP net earnings were $327.7 million versus $324.3 million, and non-GAAP diluted EPS was $3.02 versus $3.00. These are company-defined non-GAAP measures and exclude specified acquisition, management-action, and tax items. The effective tax rate increased to 19.0% from 14.9%.
Fourth-quarter sales were $841.0 million, versus $734.4 million in FY2019 Q4; net earnings were $72.2 million versus $38.3 million, and diluted EPS was $0.66 versus $0.35.
At year-end, cash and equivalents were $479.9 million and total debt was $791.1 million, including $99.9 million classified as current. The company reported $597.5 million of unused revolving-credit capacity and total available liquidity of $1,077.4 million. Its debt-to-capitalization ratio was 41.5%, down from 44.9%. It generated $539.4 million from operations, used $216.1 million in investing activities, and had $78.1 million of capital expenditures. Working capital averaged 20.2% of sales, up from 16.3%.
Dividends paid totaled $107.7 million, or $1.00 per share for the year. The quarterly dividend was increased to $0.2625 for FY2021 Q1. Share repurchases were curtailed to preserve liquidity and repay debt.
Material changes and management commentary
- Professional segment sales rose 3.3% to $2,523.5 million and segment earnings increased 12.0% to $426.6 million. Residential sales rose 24.1% to $820.7 million and segment earnings increased 74.5% to $113.7 million.
- Residential mower demand strengthened, supported by new products, expanded mass-retail distribution, favorable weather in key regions, and increased home-care activity during the pandemic. Professional golf and grounds, construction, and early-year landscape-contractor demand were affected by COVID-19 disruptions and customer spending constraints.
- Gross-margin improvement reflected productivity and synergies, lower acquisition-related purchase-accounting charges, and favorable Professional-segment pricing. Higher Residential sales mix and COVID-related manufacturing inefficiencies partly offset these benefits. Management expects the Residential mix to remain a gross-margin headwind in FY2021.
- Operating cash flow increased substantially, partly because inventory purchases were lower than demand in the fourth quarter. Year-end backlog rose to $370.9 million from $112.5 million; the company expected to fill the existing backlog early in FY2021. Management cautions that backlog is not necessarily an indicator of expected sales.
Outlook, risks, and unusual items
The one-year FY2021 “Power Forward” employee initiative sets enterprise goals of $3.7 billion in net sales and $485 million in non-GAAP operating earnings. These are goals, not a guarantee of results. Capital expenditures were expected to be approximately $115 million in FY2021. Management anticipated higher commodity and component costs than in FY2020 and expected reduced demand in certain Professional businesses to continue, while noting significant uncertainty about the pandemic and its effects.
Principal risks include COVID-19-related demand changes, factory interruptions and labor availability; supply-chain and commodity-cost pressures; weather; product mix and competition; dealer and distributor financial health and access to floor-plan financing; acquisition integration; foreign currency exposure; and debt covenant and refinancing risks. The company was in compliance with debt covenants at year-end and expected to remain compliant in FY2021. Its $600 million revolving credit facility matures in June 2023.
After year-end, Exmark agreed to settle patent litigation for $33.65 million, subject to final, nonappealable bankruptcy-court approval. The settlement had been approved by the bankruptcy court but was not final and nonappealable when the 10-K was filed. Legal fees could reduce proceeds by up to 50%; no gain or related fee liability was recorded in FY2020.
The financial statements received an unqualified audit opinion. Management and the auditor reported effective internal control over financial reporting, but excluded Venture Products from the year-end controls assessment while integration continued.
Important facts for investors to verify
- Whether FY2021 sales and non-GAAP operating-earnings goals are achieved, and how the company reconciles non-GAAP measures to GAAP.
- Whether backlog converts to shipments and revenue, particularly as Professional demand, dealer inventories, and production capacity normalize.
- Whether Residential-heavy sales mix, manufacturing efficiency, warranty costs, and higher input costs affect margins.
- Debt repayment progress, liquidity, covenant compliance, and the company’s capacity to fund dividends and planned capital expenditures.
- Final receipt and net proceeds from the Exmark settlement, and completion of Venture Products’ financial-control integration.