The Toro Company (TTC) — Q2 FY2019 Form 10-Q
Reporting period: Three and six months ended May 3, 2019; comparisons are with the periods ended May 4, 2018. Toro designs, manufactures, and sells professional and residential outdoor equipment, irrigation systems, and related products. Results are seasonal, so first-half results should not be annualized.
Financial performance
| Metric | Q2 FY2019 | Q2 FY2018 | First half FY2019 | First half FY2018 |
|---|---|---|---|---|
| Net sales | $962.0 million | $875.3 million | $1,565.0 million | $1,423.5 million |
| Gross profit | $321.3 million | $324.1 million | $536.9 million | $528.3 million |
| Gross margin | 33.4% | 37.0% | 34.3% | 37.1% |
| Operating earnings | $137.7 million | $170.3 million | $207.8 million | $237.2 million |
| Net earnings | $115.6 million | $131.3 million | $175.1 million | $153.9 million |
| Diluted EPS | $1.07 | $1.21 | $1.62 | $1.41 |
- Q2 sales rose 9.9%; Professional segment sales increased 9.6% and Residential sales 9.4%. First-half sales also rose 9.9%, with Professional up 10.8% and Residential up 6.4%.
- Q2 operating margin fell to 14.3% from 19.5%; first-half operating margin fell to 13.3% from 16.7%. Toro cited acquisition costs and purchase-accounting amortization, higher commodity and tariff costs, unfavorable product mix, supply-chain and weather-related manufacturing inefficiencies, freight costs, and foreign-exchange effects.
- Q2 GAAP net earnings declined despite higher sales. First-half earnings increased partly because the prior-year period included $33.1 million of Tax Act charges. Adjusted non-GAAP net earnings were $126.0 million for Q2, down from $130.3 million, and $182.7 million for the first half, roughly flat with $182.4 million. These measures exclude specified items and are not GAAP.
- Operating cash flow for the first half was $164.0 million, versus $138.4 million. Capital expenditures were $33.4 million. Investing cash outflow was $725.5 million, primarily reflecting the CMW acquisition; financing provided $453.5 million, including acquisition-related borrowings. Cash ended at $180.1 million, down from $289.1 million at fiscal year-end.
- At May 3, total debt, net of issuance costs, was $811.1 million, compared with $312.3 million a year earlier. Cash was $180.1 million. The company had $508.1 million of unused revolving-credit availability and reported compliance with debt covenants. The $90.0 million revolver balance was classified as current because Toro intended to repay it within 12 months.
Material developments, outlook, and risks
- CMW acquisition: Toro completed its acquisition of The Charles Machine Works on April 1 for preliminary consideration of $679.6 million, subject to customary adjustments. CMW adds underground-construction equipment and expands the Professional segment. Preliminary purchase accounting included $145.5 million of goodwill and $233.0 million of intangible assets; valuations remained subject to finalization. Toro recorded acquisition transaction and integration costs and purchase-accounting charges. The company reported $70.9 million of CMW sales and a $4.1 million segment loss for the periods presented, including a $9.5 million purchase-accounting charge.
- The acquisition was funded with $500 million of new term loans and revolver borrowings. Toro also agreed to issue $200 million of private-placement senior notes, but had not issued them as of May 3; issuance was subject to customary closing conditions.
- Management’s “Vision 2020” internal goals include organic revenue growth of at least 5% in each of the three initiative years and an operating-earnings margin of at least 15.5% by fiscal 2020. These are goals, not formal quarterly guidance. Management expected some commodity and component costs to remain higher for the rest of FY2019 and said pricing and cost initiatives were intended to help offset them.
- Management said available financing and forecast cash flows should support anticipated needs for at least the next 12 months. The company increased its quarterly dividend 12.5% to $0.225 per share and expected to curtail share repurchases for the remainder of FY2019.
- Principal operating risks include weather and supply-chain disruption, commodity and tariff costs, foreign-exchange movements, product mix, dealer financing availability, and successful integration of CMW. The filing identifies potential acquisition-related integration, leverage, valuation, and goodwill/intangible-asset impairment risks. Ordinary-course litigation includes product liability, environmental, commercial, employment, and patent matters; management did not expect these matters to materially affect results, financial position, or cash flows.
- A $45.8 million gain from CMW retiree medical plan amendments appears in the unaudited pro forma acquisition information, not as a separately identified item in Toro’s reported results. The filing also says the upcoming lease-accounting standard is expected to materially affect the balance sheet, but not earnings or cash flows.
Most important facts for investors to verify
- Whether CMW delivers expected growth and synergies, and whether final purchase-price allocations or acquisition adjustments materially change reported assets, earnings, or goodwill.
- Whether margin pressure from commodities, tariffs, product mix, freight, weather, and production constraints eases, and how much pricing offsets those costs.
- Debt repayment plans, variable-rate exposure, covenant headroom, and the status and terms of the proposed $200 million senior-note issuance.
- Working-capital trends, particularly receivables, acquired and seasonal inventory, and field inventory levels, given the seasonal business and supply-chain challenges.
- Reconciliation of GAAP and adjusted results, including acquisition-related charges, tax benefits, and the pro forma retiree-plan gain.