The Toro Company (NYSE: TTC) — FY2018 Form 10-K
Reporting period: Fiscal year ended October 31, 2018. The filing also reports fourth-quarter results; this is an annual report, not a standalone quarterly filing.
Business context
Toro designs, manufactures, and sells professional turf and landscape equipment, irrigation and lighting systems, snow and ice management products, specialty construction equipment, and residential lawn and snow products. Fiscal 2018 sales were 74% Professional, 25% Residential, and 1% Other. The company operates worldwide; 24.6% of sales were outside the U.S.
Financial performance and position
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2,618.7 million | $2,505.2 million |
| Gross margin | 35.9% | 36.8% |
| Operating earnings / margin | $373.1 million / 14.2% | $355.1 million / 14.2% |
| Net earnings | $271.9 million | $267.7 million |
| Diluted EPS | $2.50 | $2.41 |
| Operating cash flow | $364.8 million | $360.7 million |
| Cash and equivalents at year-end | $289.1 million | $310.3 million |
| Long-term debt, including current portion | $312.5 million | $331.9 million |
| Debt-to-capitalization | 31.8% | 35.0% |
Capital expenditures were $90.1 million, up from $58.3 million. Toro returned capital through $160.4 million of share repurchases and $85.0 million of dividends; the annual dividend was $0.80 per share. The company ended the year with $507.5 million of unused availability on its $600 million revolving credit facility and reported compliance with its covenants. Average net working capital was 13.7% of sales versus 13.8% a year earlier.
Fourth-quarter sales were $539.3 million versus $488.6 million; net earnings were $39.0 million versus $33.8 million, and diluted EPS was $0.36 versus $0.31.
Material changes versus prior year
- Sales increased 4.5%, led by Professional segment growth of 7.5%; Residential sales fell 2.8%, principally because of unfavorable weather during key selling seasons.
- Professional operating earnings rose to $399.8 million, but segment margin declined to 20.5% from 20.9%. Residential operating earnings declined to $64.8 million, with margin falling to 9.9% from 11.1%.
- Consolidated gross margin decreased 90 basis points. Higher commodity and freight costs, supply challenges, and import tariffs outweighed productivity, pricing, currency, and favorable segment-mix benefits. SG&A as a share of sales fell 90 basis points to 21.7%.
- Reported net earnings rose only 1.6%, in part because of $32.7 million in Tax Act charges: $19.3 million from deferred-tax remeasurement and $13.4 million of deemed repatriation tax. Management’s non-GAAP adjusted net earnings were $290.1 million, up 17.0%; adjusted diluted EPS was $2.67, up 19.7%. These are company-defined non-GAAP measures.
- Toro acquired substantially all assets of L.T. Rich in March 2018, adding professional spreader/sprayers, aerators, and snow-management products. The acquisition was described as immaterial to consolidated results.
Outlook, risks, and contingencies
- Under its Vision 2020 initiative, Toro targets at least 5% organic revenue growth in each of three fiscal years and operating earnings of at least 15.5% of sales by FY2020. FY2018 organic growth was 3.7% and operating margin was 14.2%, both below those targets.
- FY2019 capital expenditures were expected to be approximately $85 million. Management anticipated higher average commodity and component costs in FY2019 than in FY2018 and cited tariffs and supply constraints as cost and production risks.
- Management stated that forecast cash flows and existing financing arrangements should meet anticipated needs for at least 12 months. No specific FY2019 revenue or EPS guidance is provided in the supplied filing text.
- Key exposures include weather-driven demand and seasonality, economic and construction conditions, commodity inflation and tariffs, supplier and labor availability, foreign exchange, competition, retailer placement and channel inventories, and reliance on dealer financing through Red Iron.
- Potential obligations include up to $10.5 million of inventory repurchase exposure under financing arrangements and $6.7 million of customer lease-payment recourse exposure. Toro reported ordinary-course product, environmental, commercial, employment, and patent litigation; management did not expect these matters, individually or collectively, to materially affect results, financial position, or cash flows.
- The company expects adoption of the new lease standard in FY2020 to materially affect its balance sheet, but not materially affect earnings or cash flows. It completed its FY2018 Tax Act accounting but noted that some provisions would take effect in FY2019 and the overall impact was not yet fully concluded.
Important facts for investors to verify
- Whether Professional growth and Residential recovery support Vision 2020 targets, and whether FY2019 demand and channel inventory remain healthy.
- Whether higher materials, freight, tariff, and labor costs can be offset without weakening margins or demand.
- The ongoing effects of Tax Act provisions, including future tax inclusions and the eight-year deemed-repatriation payments.
- Debt, revolving-facility covenant headroom, cash needs for seasonal working capital, and capital-return plans; the board authorized an additional 5 million share repurchases after year-end.
- Whether acquisition integration, litigation, product warranty claims, supplier constraints, and the FY2020 lease-accounting transition create material costs or changes in reported metrics.
The independent auditor issued an unqualified opinion on the financial statements and internal control over financial reporting; management and the auditor concluded internal controls were effective as of October 31, 2018.