The Toro Company — Q3 2013 Form 10-Q
Reporting period: Third quarter ended August 2, 2013; comparisons are with the quarter ended August 3, 2012. The filing also reports the first nine months of fiscal 2013. Toro designs, manufactures, and markets professional turf, landscape, irrigation, rental and construction, and residential lawn and snow-removal products. Results are seasonal; management cautions that nine-month results should not be annualized.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $509.9 million | $504.1 million | $1,659.1 million | $1,619.4 million |
| Gross profit | $178.0 million | $178.1 million | $596.1 million | $560.2 million |
| Operating earnings | $58.6 million | $61.0 million | $222.3 million | $201.5 million |
| Net earnings | $40.1 million | $40.5 million | $149.9 million | $129.3 million |
| Diluted EPS | $0.68 | $0.67 | $2.53 | $2.13 |
| Gross margin | 34.9% | 35.3% | 35.9% | 34.6% |
| Operating margin | 11.5% | 12.1% | 13.4% | 12.5% |
| Net margin | 7.9% | 8.0% | 9.0% | 8.0% |
Cash flow, nine months: Operating cash flow was $158.1 million, versus $165.4 million; capital expenditures were $34.4 million, versus $28.2 million. Cash used in investing was $31.1 million and cash used in financing was $89.3 million. Cash increased $35.3 million to $161.2 million. Toro repurchased $76.0 million of shares and paid $24.5 million in dividends.
Balance sheet and liquidity, August 2, 2013: Cash was $161.2 million; current assets were $712.0 million and current liabilities $408.9 million. Long-term debt was $223.5 million, with no current portion or short-term borrowings outstanding. The $150 million revolving credit facility had $148.2 million of unutilized availability after letters of credit. Toro reported covenant compliance and expected to remain compliant through the rest of fiscal 2013.
Changes and drivers
- Q3 sales rose 1.2%, while net earnings declined slightly; diluted EPS increased 1.5%, aided by lower shares outstanding from repurchases. For the nine months, sales rose 2.4%, net earnings 15.9%, and diluted EPS 18.8%.
- Q3 Professional segment sales fell 4.8% and earnings before tax fell 14.2%, partly reflecting earlier shipments ahead of Tier 4 diesel-emissions price changes. Nine-month Professional sales increased 6.2% and segment earnings before tax increased 10.5%.
- Residential sales rose 14.4% in Q3, helped by improved weather and demand for lawn products, but were down 5.5% year to date due to weak preseason snow-thrower demand, limited snowfall, and adverse spring weather.
- Nine-month gross margin improved 130 basis points, reflecting pricing, cost reductions, slightly lower commodity costs, and a higher share of Professional sales. Q3 gross margin declined 40 basis points, mainly because of a less favorable product mix.
- SG&A rose 4.2% year to date, faster than sales, due to marketing, engineering, warehousing, higher inventory-related costs, and acquisition-related expense. The effective tax rate fell to 31.0% from 33.3% year to date, primarily due to retroactive reenactment of the domestic R&D tax credit.
Outlook, risks, and unusual items
- Management described nine-month results as solid and was cautiously optimistic about the remainder of fiscal 2013. Its Destination 2014 goals include $100 million of annual organic revenue growth and a 12% operating-earnings margin by fiscal 2014; these are objectives, not updated guidance.
- Management emphasized demand generation, retail sales, production aligned with expected shipments, and reducing working capital. Inventory was 10.3% higher year over year; receivables were up 2.6%, and days sales outstanding increased to 36 from 34.1. Average net working capital was 16.9% of sales versus 14.8%.
- Management expected commodity and component prices to be slightly lower for the remainder of fiscal 2013, but noted no assurance. Key uncertainties include weather and retail demand, economic conditions, commodity costs, currencies, competition, customer financing, and Tier 4 compliance and purchasing patterns. Tier 4-related early buying boosted Q1 and affected Q2/Q3 comparisons.
- A proposed acquisition of a Chinese micro-irrigation company, announced in January 2013, remained subject to approvals and other closing conditions; Toro expected a fiscal-year-end closing.
- Ordinary-course legal matters include product liability, environmental and asbestos claims, commercial and patent disputes. A Canadian lawnmower horsepower-marketing class action seeks unspecified relief; management did not then expect a material adverse effect on annual results or financial condition, but an unfavorable outcome could materially affect a particular period.
- Toro’s Red Iron inventory-finance joint venture had a $450 million secured revolving facility. Toro’s investment was $15.2 million and it had not guaranteed Red Iron’s debt; product repurchase commitments were capped at $7.5 million per calendar year, with $0.4 million maximum recourse for specified receivables.
- Disclosure controls were assessed as effective; the filing reported no material change in internal control over financial reporting during the quarter. Management reported no material change in the risk factors from its latest 10-K.
Investor verification priorities
- Confirm whether Q4 and full-year results reflected the timing shift in Tier 4-related purchases, weather-driven demand, and the company’s inventory-reduction plans.
- Track Professional and Residential segment sales and margins, including whether nine-month gross-margin gains persisted despite higher SG&A.
- Assess cash conversion and working-capital trends, especially inventory, receivables, and days sales outstanding, against seasonal patterns.
- Verify the Chinese acquisition’s closing status, consideration, and financial contribution; the filing does not provide a purchase price.
- Monitor the Canadian litigation, warranty reserve movements, credit-facility covenant headroom, and planned dividends and repurchases.