The Toro Company — Form 10-Q Summary
Reporting period: Second quarter ended May 1, 2015; fiscal year-to-date covers six months. Toro designs, manufactures, and markets professional and residential turf, irrigation, landscaping, construction, and related products. Results are seasonal; management cautions that first-half results should not be annualized.
Financial results
Amounts below are in millions, except per-share data and percentages.
| Metric | Three months ended May 1, 2015 | Change vs. 2014 | Six months ended May 1, 2015 | Change vs. 2014 |
|---|---|---|---|---|
| Net sales | $826.2 | +10.9% | $1,300.5 | +9.2% |
| Gross profit / margin | $282.0 / 34.1% | Margin −1.4 pts | $451.0 / 34.7% | Margin −1.2 pts |
| Operating earnings | $138.5 | +5.8% | $182.9 | +6.7% |
| Net earnings | $93.8 | +7.7% | $124.7 | +10.4% |
| Diluted EPS | $1.64 | +8.6% | $2.18 | +11.8% |
| Operating margin | 16.8% | 17.6% prior year | 14.1% | 14.4% prior year |
- For the six months, operating cash flow was $95.2 million, versus $77.9 million a year earlier. Capital expenditures were $27.3 million; acquisition spending was $198.3 million. Investing cash outflow was $230.0 million and financing cash outflow was $68.6 million.
- Cash and equivalents were $109.3 million at May 1, 2015, down from $314.9 million at October 31, 2014. Current assets were $883.7 million and current liabilities $619.2 million.
- Debt totaled approximately $409.8 million at May 1, including $384.9 million in long-term debt and $24.9 million in short-term debt. Interest expense rose 29.4% in the quarter and 27.5% year to date, primarily due to BOSS acquisition financing.
- Stockholders’ equity was $463.0 million. The company paid a quarterly dividend of $0.25 per share, 25% above the prior-year quarter, and repurchased $49.3 million of shares during the first half.
Changes and operating drivers
- Residential sales rose 27.3% for the quarter and 12.5% year to date, led by demand and expanded placement for new riding and walk mowers. Segment pretax earnings increased 46.2% and 15.8%, respectively.
- Professional sales increased 4.6% for the quarter and 8.3% year to date. BOSS contributed $16.6 million and $45.3 million of sales, respectively. Professional segment pretax earnings fell 1.3% in the quarter but rose 3.9% year to date.
- International sales declined 4.7% in the quarter and 5.1% year to date. Currency movements reduced sales by approximately $13.6 million and $18.7 million, respectively.
- Gross margin pressure reflected unfavorable currency, a higher mix of lower-margin residential sales, and, year to date, purchase-accounting charges on BOSS inventory. SG&A declined as a share of sales due to volume leverage and lower incentive compensation.
Outlook, risks, and unusual items
- Management goals: The three-year “Destination PRIME” initiative targets organic revenue growth of at least 5% annually, operating earnings above 13% of sales by fiscal 2017, and average net working capital below 13% of sales by fiscal 2017. Current average net working capital was 15.6%, versus 15.5% a year earlier. These are goals, not specific fiscal 2015 earnings guidance.
- Management said cash from operations, existing credit facilities, long-term debt, and cash on hand should support expected needs for at least the next 12 months. It expected compliance with debt covenants through the rest of fiscal 2015; the company reported compliance at quarter-end.
- BOSS was acquired in November 2014 for $229.5 million, funded with cash, a $130 million term loan, and other borrowing. The acquisition added counter-seasonal snow and ice products; its reported contribution to net earnings was immaterial. Acquisition accounting added $103.0 million of goodwill and $107.7 million of intangible assets. Toro recorded a $1.4 million intangible-asset impairment in the quarter.
- Key risks include weather and seasonal demand, foreign exchange, economic conditions and customer financing, commodity and component costs, competition, acquisition integration, product quality and liability, and debt covenant compliance. Toro uses currency hedges and does not use derivatives for speculation.
- Toro is involved in ordinary-course litigation, including product liability, asbestos/environmental, commercial, employment, and patent matters. Management stated that any liability was not expected to materially affect results, financial position, or cash flows. No additional material subsequent events were reported.
Important facts for investors to verify
- Whether residential demand and retail product placement remain strong, and whether field inventory levels convert to end-user sales.
- Whether margin pressure from foreign exchange, product mix, and BOSS purchase accounting eases, and how BOSS integration and profitability progress.
- Whether working capital improves toward the company’s fiscal 2017 goal, given rising receivables and inventory and lower cash balances.
- Debt, interest costs, covenant headroom, and availability under credit facilities as seasonal funding needs change.
- Exposure to currency movements, litigation and warranty claims, and the company’s ability to achieve its stated Destination PRIME goals.