The Toro Company — Fiscal 2017 Form 10-K
Business context and reporting period. Toro designs, manufactures, and markets professional turf and landscape equipment, irrigation systems, snow and ice management products, specialty construction equipment, and residential lawn and snow products. This annual report covers the fiscal year ended October 31, 2017; fiscal fourth-quarter results are also summarized below. Professional generated 72% of fiscal 2017 sales, Residential 27%, and Other 1%.
Financial performance
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Net sales | $2,505.2 million | $2,392.2 million | +4.7% |
| Gross margin | 36.8% | 36.6% | +20 bps |
| Operating earnings | $355.1 million | $334.4 million | +6.2% |
| Operating margin | 14.2% | 14.0% | +20 bps |
| Net earnings | $267.7 million | $231.0 million | +15.9% |
| Diluted EPS | $2.41 | $2.06 | +17.0% |
| Operating cash flow | $360.7 million | $384.3 million | −6.1% |
Gross-margin improvement reflected productivity, Lean initiatives, and a more favorable Professional segment mix, partly offset by higher steel and resin costs and freight. Net earnings benefited from improved sales and gross margin and a lower effective tax rate: 24.2% versus 30.1%. The fiscal 2017 rate included a $19.7 million discrete tax benefit from adopting stock-compensation accounting guidance.
Fiscal fourth quarter: Net sales were $488.6 million versus $468.4 million a year earlier; net earnings were $33.8 million versus $30.2 million; diluted EPS was $0.31 versus $0.27.
Segments and operating trends
- Professional: Sales rose 6.2% to $1,811.7 million; operating earnings increased 7.8% to $379.5 million and margin improved to 20.9% from 20.6%. Growth reflected golf and grounds, landscape contractor, rental and specialty construction, snow and ice, and the Perrot irrigation acquisition.
- Residential: Sales increased 0.6% to $673.2 million; operating earnings rose 1.4% to $74.7 million and margin was 11.1%. Higher Pope irrigation and snow-product sales were partly offset by weaker zero-turn riding mower shipments.
- International: Sales increased 5.6%; unfavorable currency reduced consolidated sales by approximately $3.3 million. International sales were 24.4% of total, compared with 24.2% in FY 2016.
Financial position, cash flow, and capital allocation
- Cash and cash equivalents were $310.3 million at year-end, up from $273.6 million. Total assets were $1,493.8 million and stockholders’ equity was $617.1 million.
- Long-term debt, including its current portion, was $331.9 million, down from $351.0 million. Debt-to-capitalization fell to 35.0% from 39.0%. Toro reported no short-term borrowings, $149.0 million of unused availability under its $150 million revolving facility, and compliance with its debt covenants.
- Operating cash flow was $360.7 million; capital expenditures were $58.3 million. Investing activities used $83.8 million, including $24.2 million for Perrot. Financing activities used $245.3 million, including $159.4 million of share repurchases and $75.8 million of dividends.
- Year-end receivables increased 12.1% and inventory increased 7.2% year over year, partly reflecting higher forecast Professional demand. Average net working capital as a share of sales improved to 13.8% from 15.9%.
- Fiscal 2017 dividends were $0.70 per share. The company announced a fiscal 2018 first-quarter dividend of $0.20 per share and expected to continue repurchases subject to market conditions.
Outlook, commentary, and notable items
- Management’s Vision 2020 initiative targets at least 5% organic revenue growth in each of the three fiscal years and an operating-earnings margin of at least 15.5% by FY 2020. These are company goals, not guaranteed results. The prior Destination PRIME initiative achieved a 14.2% operating margin, above its goal of more than 13%, but missed its annual 5% organic-growth goal in each of its three years; FY 2017 organic growth was 4.2%.
- FY 2018 capital expenditures were expected to be approximately $75 million. Management expected cash, forecast operating cash flows, and available financing to meet anticipated needs for at least the next 12 months.
- Management anticipated higher average commodity costs in FY 2018 than in FY 2017, following higher costs in FY 2017. Cost mitigation may include supplier actions, productivity, material substitution, and selective price increases.
- Seasonality and weather can materially affect demand, shipments, field inventories, and working-capital needs. Backlog was $83.5 million at October 31, 2017, down 9.6% year over year; Toro said it expected to fill it in early FY 2018 but cautioned backlog was not necessarily indicative of sales.
- The Home Depot accounted for approximately 10% of consolidated gross sales in FY 2017. Toro identified retailer placement and customer concentration, competition, foreign exchange, supplier availability, commodity costs, and dealer/distributor financing as risks.
- Red Iron financed $1,847.7 million of dealer and distributor receivables during FY 2017. Toro’s maximum contingent inventory repurchase exposure under financing arrangements was $10.7 million; maximum end-user credit-collection exposure under recourse arrangements was $6.6 million.
- The filing describes ordinary-course product, patent, commercial, employment, asbestos, and environmental matters. Management said the matters, individually or in aggregate, were not expected to materially affect results, financial position, or cash flows.
- After year-end, U.S. tax legislation was enacted on December 22, 2017, including a reduction in the federal corporate rate to 21% effective January 1, 2018. Toro was still evaluating the effects and expected one-time deferred-tax remeasurement and deemed-repatriation adjustments; amounts were not yet clear.
- The BOSS trade name was reclassified as indefinite-lived after management concluded it would be used for the foreseeable future. Toro found no impairment and estimated the change would reduce annual amortization by approximately $1.36 million in future years.
Most important facts for investors to verify
- Whether Professional segment growth, new-product demand, and the Vision 2020 targets are sustained, particularly given Residential’s modest sales growth and the prior initiative’s organic-growth shortfall.
- How much of FY 2017 earnings growth depended on the $19.7 million stock-compensation tax benefit, and the eventual accounting and cash-tax effects of the new tax law.
- Whether higher commodity and freight costs can be offset without weakening demand or margins, and how currency movements affect international results.
- Whether higher year-end receivables, inventory, and Professional field inventory convert to timely collections and end-user sales; monitor seasonal working-capital and cash-flow movements.
- Debt maturities and refinancing needs, covenant headroom, and the terms and continuity of Red Iron and other customer-financing programs.
- Concentration in The Home Depot, exposure to weather and seasonal demand, and any material developments in litigation, product-liability, environmental, or regulatory matters.