The Toro Company — Q2 2018 Form 10-Q
Business context and period: Toro designs, manufactures, and markets professional and residential turf, landscaping, irrigation, snow and ice, and specialty construction products. This unaudited report covers the three and six months ended May 4, 2018; comparisons are with the corresponding periods ended May 5, 2017. Results are seasonal and the six-month figures should not be annualized.
Financial results and key metrics
| Metric | Three months ended May 4, 2018 | Six months ended May 4, 2018 |
|---|---|---|
| Net sales | $875.3 million, up 0.3% | $1,423.5 million, up 2.5% |
| Gross profit / margin | $324.1 million / 37.0% | $528.3 million / 37.1% |
| Operating earnings / margin | $170.3 million / 19.5% | $237.2 million / 16.7% |
| Net earnings | $131.3 million; diluted EPS $1.21 | $153.9 million; diluted EPS $1.41 |
| Adjusted net earnings (non-GAAP) | $130.3 million; adjusted diluted EPS $1.20 | $182.4 million; adjusted diluted EPS $1.68 |
| Operating cash flow | Not separately reported for the quarter | $138.4 million, versus $167.7 million |
Quarterly net earnings rose from $120.5 million and diluted EPS from $1.08 in the prior year. Six-month reported net earnings declined from $165.5 million, while adjusted net earnings increased from $149.5 million. Gross margin improved 80 basis points for the quarter and 40 basis points year to date; operating margin increased 130 and 90 basis points, respectively.
Balance sheet and liquidity at May 4, 2018: Cash and equivalents were $206.1 million; current assets $978.2 million and current liabilities $652.4 million. Total debt was approximately $312.3 million, including $13.0 million current debt. Toro reported $151.8 million of unused availability under credit agreements, with $4.2 million of letters of credit outstanding. It stated that existing financing and forecast cash flows should cover anticipated needs for at least 12 months. The company was in covenant compliance and expected to remain compliant through fiscal 2018.
Six-month investing cash outflow was $66.9 million, including $35.4 million of capital spending and $31.2 million for acquisitions. Financing cash outflow was $176.8 million, including $116.5 million of share repurchases, $42.7 million of dividends, and $20.2 million of long-term debt payments. Cash declined by $104.2 million from fiscal year-end. The quarterly dividend increased 14.3% to $0.20 per share.
Material changes and business drivers
- Professional: Sales increased 8.1% in the quarter and 8.3% year to date; segment earnings increased 10.7% and 10.9%. Drivers included contractor mower demand and new products, golf and grounds growth, rental and specialty construction demand, irrigation shipments, snow and ice products, and the L.T. Rich acquisition.
- Residential: Sales declined 17.8% in the quarter and 11.0% year to date; segment earnings declined 24.9% and 18.6%. Management cited unfavorable spring weather, earlier channel purchases, lower mower sales, and below-average early-season snowfall. Product mix and higher commodity costs also pressured margins.
- Quarterly gross-margin improvement reflected segment mix, foreign exchange, improved Professional pricing, and cost reductions, partly offset by higher commodity costs. SG&A declined as a percentage of sales, aided by lower incentive compensation.
- Inventory was $394.8 million, up $53.2 million or 15.6% from May 2017, largely due to weaker-than-expected sales amid unfavorable spring weather and currency effects. Management also reported higher field inventory, including softer Residential retail demand.
Outlook, risks, and unusual items
- Toro set Vision 2020 goals of at least 5% organic revenue growth in each of fiscal 2018–2020 and operating earnings of at least 15.5% of sales by fiscal 2020. These are stated goals, not a specific near-term earnings forecast. Management anticipated some commodity and component costs would remain higher for the rest of fiscal 2018 and cited pricing and cost-control actions as mitigation.
- Tax reform materially affected year-to-date GAAP results: provisional charges included $20.5 million for deferred-tax remeasurement and $12.6 million for deemed repatriation tax, partly offset by the lower federal tax rate. The repatriation tax is payable over eight years. Toro had not completed its accounting for the Tax Act, so actual impacts may differ. The filing’s adjusted results exclude specified tax items and are non-GAAP measures.
- Weather, consumer and channel demand, product and segment mix, commodity and transportation costs, currency movements, competition, acquisitions, inventory management, and dealer financing availability are principal risks. Toro uses foreign-currency derivatives for hedging, not speculation; $70.0 million notional of forward contracts was designated as cash-flow hedges.
- The company reported ordinary-course litigation, including patent, product-liability, asbestos, and environmental matters; management did not expect these matters, individually or collectively, to materially affect results, financial position, or cash flows. No material change in previously disclosed risk factors was reported.
- Toro acquired substantially all assets of L.T. Rich Products on March 19, 2018; purchase accounting was not final at the reporting date. The acquisition broadened Professional segment offerings.
Important facts for investors to verify
- Whether elevated inventory and channel stock normalize as weather and seasonal demand evolve, particularly in Residential products.
- Whether Professional segment growth and margin gains can offset ongoing Residential weakness and higher input costs.
- Final Tax Act accounting and the effect of tax items on future reported earnings versus management’s non-GAAP adjusted measures.
- Progress toward Vision 2020 targets, including organic growth and the 15.5% operating-earnings margin goal.
- Cash conversion, capital spending, buybacks, dividend commitments, and debt repayment capacity given seasonal working-capital demands.
- Integration and final purchase accounting for L.T. Rich, along with any developments in litigation or dealer-financing arrangements.