TORO CO annual report, FY2014

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The Toro Company — FY2014 Form 10-K

Reporting period: Fiscal year ended October 31, 2014; the filing also presents fourth-quarter results. Toro designs, manufactures, and markets professional turf and landscape equipment, irrigation and lighting products, specialty construction equipment, and residential lawn and snow products. Professional accounted for 68% of FY2014 sales, Residential 31%, and Other 1%.

Financial performance

  • Revenue: Record net sales of $2.173 billion, up 6.4% from $2.041 billion in FY2013. Professional sales rose 3.7% to $1.478 billion; Residential sales increased 13.1% to $672.4 million.
  • Profit and margins: Gross profit was $773.3 million; gross margin was 35.6%, up 10 basis points. Operating earnings rose 14.1% to $263.2 million, with operating margin of 12.1% versus 11.3%. Net earnings increased 12.3% to $173.9 million; diluted EPS rose 15.3% to $3.02. The effective tax rate was 32.2%, compared with 31.7%.
  • Fourth quarter: Net sales were $414.1 million versus $382.4 million a year earlier; net earnings were $10.9 million versus $5.0 million; diluted EPS was $0.19 versus $0.08.
  • Cash flow: Operating cash flow was $182.4 million, down from $221.9 million. Capital expenditures were $71.1 million; cash used in investing activities was $65.7 million. Cash and cash equivalents rose to $314.9 million from $183.0 million, supported in part by borrowing ahead of the BOSS acquisition.
  • Liquidity and debt: Total debt was approximately $374.8 million, including $20.8 million short-term debt and $354.0 million long-term debt, versus $223.5 million long-term debt and no short-term debt in FY2013. Debt-to-capitalization increased to 47.8% from 38.4%. The $150 million revolving credit facility had $128.7 million of unutilized availability reported at year-end; Toro stated it was compliant with covenants.
  • Shareholder returns: Repurchased $101.7 million of shares and paid $45.0 million in dividends. Quarterly dividends rose to $0.20 per share from $0.14; the board later announced a FY2015 first-quarter dividend of $0.25.

Material changes versus FY2013

  • Sales growth reflected strong snow-thrower demand after heavy snowfall, landscape contractor equipment, micro-irrigation, residential zero-turn mowers, product introductions, and improved pricing. Foreign exchange reduced sales by approximately $5 million; international sales rose 1.2% and represented 28.7% of total sales, down from 30.1%.
  • Gross margin improved slightly: pricing and productivity gains were partly offset by unfavorable mix and currency, higher commodity costs, and a supplier component rework issue affecting certain walk power mowers.
  • Operating cash flow fell 17.8%, mainly due to working-capital use, particularly higher inventory. Year-end inventory increased $34.5 million, or 14.4%, from FY2013.
  • The Home Depot represented approximately 11% of gross sales, compared with 10% in FY2013. Order backlog increased 49.8% to $136.5 million, primarily due to professional products and snow thrower demand; Toro expected to fill it early in FY2015.

Outlook, commentary, risks and unusual items

  • FY2015 outlook: Management expected sales to increase in both segments and net earnings and diluted EPS to rise, supported by sales growth and SG&A leverage. It expected gross margin to decline slightly, mainly due to purchase-accounting effects from BOSS, and average working capital as a percentage of sales to increase slightly. Toro did not provide specific FY2015 revenue or EPS guidance in the text.
  • Strategic goals: The new three-year Destination PRIME initiative targets at least 5% annual organic revenue growth, operating earnings of at least 13% of sales by FY2017, and average net working capital of 13% or less of sales by FY2017.
  • BOSS acquisition: Closed November 14, 2014, after year-end, for $227.9 million, subject to post-closing adjustments; consideration included $197.9 million cash and a $30.0 million long-term note. Toro obtained a $130 million term loan and had $20 million of short-term debt associated with funding the transaction. Purchase accounting was incomplete when the filing was prepared.
  • Other notable factors: FY2014 other income declined to $8.7 million from $12.3 million, partly because FY2013 included a $3.0 million litigation recovery. Higher commodity prices and a supplier rework issue constrained margins. Management anticipated slightly higher commodity costs in FY2015.
  • Principal risks: Weather-driven and seasonal demand; economic conditions and customer credit; commodity and component availability and costs; concentration in The Home Depot; competitive pressures; foreign exchange and international-market exposure; regulatory and Tier 4 emissions requirements; product liability, warranty, and litigation; acquisition integration; and reliance on dealer financing through Red Iron. Toro reported ongoing litigation but said management did not expect these matters, individually or in aggregate, to materially affect results, financial position, or cash flows. It also disclosed environmental cleanup matters it did not expect to be material.

Investor facts to verify

  • Whether snow-thrower demand and the larger FY2014 Residential contribution persist after the unusually heavy 2013–2014 snow season.
  • Actual BOSS integration, purchase-accounting effects, acquired-business performance, and resulting debt and margin trends.
  • Inventory conversion and operating cash flow, given the 14.4% year-end inventory increase and lower FY2014 operating cash flow.
  • Progress toward Destination PRIME targets and whether FY2015 sales and earnings growth offset expected margin pressure.
  • Exposure to The Home Depot, dealer financing and repurchase obligations, commodity costs, foreign exchange, and emissions-related pricing or compliance costs.