The Toro Company (NYSE: TTC) — FY2019 Form 10-K
Reporting period: Fiscal year ended October 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; fourth-quarter figures are noted below. Toro designs, manufactures, and markets professional turf, landscape, irrigation, snow and ice, underground construction, and residential outdoor equipment. Its reportable segments are Professional and Residential.
Financial performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $3,138.1 million | $2,618.7 million |
| Gross margin | 33.4% | 35.9% |
| Operating earnings | $325.0 million | $373.1 million |
| Net earnings | $274.0 million | $271.9 million |
| Diluted EPS | $2.53 | $2.50 |
| Cash from operations | $337.4 million | $364.8 million |
| Capital expenditures | $92.9 million | $90.1 million |
- Sales increased 19.8%, driven chiefly by the April 2019 acquisition of The Charles Machine Works (CMW), price increases, and stronger demand for snow and ice products. CMW contributed $465.2 million of sales from acquisition through year-end.
- Professional segment sales rose 25.5% to $2,443.4 million; operating earnings fell to $380.9 million from $399.8 million. Residential sales rose 1.0% to $661.3 million; operating earnings were $65.2 million, nearly flat year over year.
- Operating margin declined to 10.4% from 14.2%. Gross margin pressure reflected higher commodity and tariff costs, unfavorable mix, supply-chain and weather-related inefficiencies, CMW purchase-accounting charges, and costs of winding down selected Toro-branded underground products. SG&A was 23.0% of sales versus 21.7%.
- Reported net earnings increased 0.8% and diluted EPS increased 1.2%. The comparison benefited from prior-year Tax Act charges; adjusted non-GAAP net earnings were $324.3 million, up 11.8%, and adjusted diluted EPS was $3.00 versus $2.67. These adjusted measures exclude specified acquisition, restructuring, wind-down, and tax items.
- Fourth-quarter sales were $734.4 million versus $539.3 million; net earnings were $38.3 million versus $39.0 million, and diluted EPS was $0.35 versus $0.36.
Cash, debt, and liquidity
- Cash and cash equivalents were $151.8 million at year-end, down from $289.1 million. Current assets were $1,122.9 million and current liabilities were $757.0 million.
- Long-term debt, including its current portion, was $700.8 million, compared with $312.5 million a year earlier. Debt-to-capitalization increased to 44.9% from 31.8%, principally to finance CMW. Toro reported no revolver borrowings and $598.1 million of unused availability under its $600 million facility; it was in covenant compliance.
- Operating cash flow declined 7.5%, largely due to greater cash use for inventory. Inventory was $651.7 million, up 81.9% year over year, partly from CMW and partly from higher legacy inventory, including soft retail demand for professional zero-turn mowers.
- Management said available financing and forecast cash flows should cover anticipated working capital, capital spending, investment, debt repayment, and dividends for at least the next 12 months.
Material changes, outlook, and risks
- Toro acquired CMW for approximately $685.0 million, expanding its underground construction portfolio. CMW generated a $5.4 million segment loss in the included period, including $43.0 million of inventory step-up and backlog-amortization charges.
- Toro expects approximately $100 million of FY2020 capital expenditures and anticipated slightly lower average commodity, component, and parts costs than in FY2019. Management expected year-end backlog to be filled in early FY2020; backlog was $112.5 million versus $77.8 million, partly due to CMW and partly offset by reduced orders in some businesses.
- For the final year of its Vision 2020 initiative, Toro set an enterprise-wide goal of $485 million in adjusted operating earnings. This is a management goal, not a guarantee of results.
- The Toro-branded large horizontal directional drill and riding trencher wind-down was expected to finish by the end of FY2020. Toro recorded $10.0 million of related pretax charges in FY2019 and expected the remaining costs largely by FY2020 year-end. A separate corporate restructuring generated $6.6 million of pretax charges; no further FY2020 charges for that event were expected.
- Key risks include acquisition integration and purchase-accounting estimates, higher leverage and interest expense, tariffs and input costs, supply and labor disruptions, weather and seasonal demand, elevated channel inventory, foreign-exchange movements, competition, and regulatory and product-liability exposure. Toro disclosed ongoing patent litigation and environmental matters, but management did not expect these matters to materially affect results, financial position, or cash flows.
- The auditor issued an unqualified opinion on the financial statements and internal controls. Toro excluded CMW, which represented approximately 35% of consolidated assets and 14.8% of sales, from its FY2019 internal-control assessment while integration work continued.
Important facts for investors to verify
- Whether CMW delivers the expected growth and cost synergies, and whether integration and wind-down costs remain within expectations.
- Whether inventory and field-stock levels normalize, particularly given soft demand for professional zero-turn mowers and the planned product transitions.
- How margins respond to input costs, tariffs, pricing, product mix, and manufacturing efficiency; review reported and adjusted results separately.
- Debt repayment progress, interest costs, covenant headroom, and the effect of the higher leverage following the CMW acquisition.
- Whether the $485 million adjusted operating-earnings goal and FY2020 outlook are achieved; compare management’s adjusted measures with GAAP results.
- Potential exposure under dealer-inventory repurchase agreements: Toro disclosed contingent obligations of up to $133.4 million, with actual historical repurchases described as immaterial.