The Toro Company (NYSE: TTC) — Q2 2020 Form 10-Q
Reporting period: Second quarter ended May 1, 2020; six-month year-to-date period ended the same date. Fiscal year ends October 31. Results are seasonal and the company cautions that six-month results should not be annualized.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Net sales | $929.4 million | $962.0 million | $1,696.9 million | $1,565.0 million |
| Gross profit / margin | $306.7 million / 33.0% | $321.3 million / 33.4% | $594.8 million / 35.1% | $536.9 million / 34.3% |
| Operating earnings | $125.8 million | $137.7 million | $216.9 million | $207.8 million |
| Net earnings | $98.4 million | $115.6 million | $168.5 million | $175.1 million |
| Diluted EPS | $0.91 | $1.07 | $1.55 | $1.62 |
| Operating cash flow | Not separately stated for quarter | Not separately stated for quarter | $70.9 million | $164.0 million |
Q2 sales declined 3.4%, net earnings declined 14.8%, and diluted EPS declined 15.0% year over year. For the first six months, sales increased 8.4%, while net earnings fell 3.8% and diluted EPS fell 4.3%. Higher year-to-date sales primarily reflected acquisitions and Residential growth.
Q2 gross margin declined 40 basis points; year-to-date gross margin increased 80 basis points. Reported operating margin was 13.5% for Q2 and 12.8% year to date. Net margin was 10.6% and 9.9%, respectively.
Segments and material changes
- Professional: Q2 sales were $661.1 million, down 8.6%; segment earnings were $106.3 million, down 29.2%, with earnings margin declining to 16.1% from 20.7%. Year-to-date sales rose 6.6% to $1,255.8 million, but earnings declined 12.3% to $208.7 million.
- Residential: Q2 sales rose 12.9% to $262.0 million; segment earnings increased 68.5% to $37.1 million. Year-to-date sales rose 13.4% to $427.8 million and earnings increased 67.2% to $58.7 million. Demand for mowers benefited from favorable spring weather, expanded mass-retail distribution, and stay-at-home measures.
- Professional demand weakened in golf and grounds, irrigation, landscape contracting, rental, and underground construction. Residential strength shifted the sales mix toward lower-margin products, weighing on consolidated gross margin.
Financial position, debt, and liquidity
- At May 1, 2020, cash and cash equivalents were $200.0 million; total assets were $2.81 billion; and stockholders’ equity was $985.0 million.
- Total debt was $890.8 million, including $99.9 million classified as current. Debt was $811.1 million at May 3, 2019. Interest expense was $8.7 million for Q2 and $16.8 million year to date.
- Management reported available liquidity of approximately $798.1 million: $200.0 million cash plus $598.1 million available under its $600 million revolving facility. No revolving-facility borrowings were outstanding; $1.9 million was reserved for letters of credit.
- Current assets were $1.37 billion and current liabilities $855.7 million. Inventory was $714.2 million, up from $611.3 million a year earlier; management cited reduced demand, production disruption, and the Venture Products acquisition.
- Operating cash flow for the first six months fell to $70.9 million, mainly reflecting working-capital effects, including inventory cash use and a lower accounts-payable cash benefit. Capital spending was $27.2 million. Investing cash outflow was $163.6 million, including $136.4 million for the Venture Products acquisition.
- A new $190 million three-year term loan was entered into in March 2020 to refinance acquisition-related borrowings and bolster liquidity. The company said it was in compliance with debt covenants.
Outlook, management commentary, and risks
- Management withdrew detailed fiscal 2020 financial guidance on March 30, 2020 and said it could not provide detailed Q3 or full-year guidance because of COVID-19 uncertainty. It expected Q3 to be the most challenging quarter, with the largest year-over-year declines in sales and diluted EPS, and anticipated negative year-over-year sales and EPS growth in Q4.
- Management expected softer Professional demand, including customer budget constraints and preferences for repairs and deferred purchases, alongside stronger Residential demand. It expected manufacturing facilities to remain operational, though some at reduced capacity, during the remainder of fiscal 2020, subject to demand, government actions, and supply-chain conditions.
- Cost and liquidity actions included production adjustments, salary reductions, hiring and discretionary-spending controls, lower capital spending, working-capital management, and continued curtailment of share repurchases. The company expected to continue its quarterly dividend for the remainder of fiscal 2020.
- COVID-19 caused intermittent facility closures, reduced production, and manufacturing inefficiencies. Management said it had not yet experienced significant supply-chain disruption, but warned supplier or transport constraints could emerge. The pandemic could also prompt impairment, write-off, or reserve charges on goodwill, intangibles, inventory, receivables, deferred taxes, or property and equipment.
- The March 2020 Venture Products acquisition had preliminary consideration of $165.9 million, including a $29.5 million holdback, and contributed $11.2 million in sales in the reported quarter and six-month period; its earnings impact was described as immaterial. Purchase-price allocation and customary adjustments remained subject to completion.
- The company continued its wind-down of Toro-branded large directional drills and riding trenchers. It expected total pretax charges of approximately $10–$11 million; $0.9 million of charges were recorded in the first half of fiscal 2020, with most remaining costs expected by fiscal year-end.
- Other notable items included a pension-plan termination settlement charge and a COVID-related revision to performance-goal probabilities that reduced stock-compensation expense. The Q2 dividend was increased 11.1% to $0.25 per share.
- Management identified ordinary-course litigation, including product, environmental, commercial, employment, and patent matters, and said any related liability was not expected to materially affect results, financial position, or cash flows.
Important facts for investors to verify
- How much Professional demand and margin pressure persisted after the quarter, and whether Residential demand remained strong.
- Whether inventory levels and operating cash flow normalized as production and customer demand changed.
- Whether management’s Q3 and Q4 directional outlook proved accurate; no detailed fiscal 2020 guidance was provided.
- Final Venture Products purchase-price adjustments, integration progress, and realization of anticipated synergies.
- Debt repayment plans, covenant headroom, and continued availability of revolving credit amid pandemic-related uncertainty.
- Whether COVID-19 effects, acquisition performance, or other developments triggered material impairment, warranty, inventory, or credit-loss charges.