The Toro Company: Q3 FY2012 Form 10-Q
Reporting period: Third quarter and first nine months of fiscal 2012, ended August 3, 2012. Toro designs, manufactures, and markets professional turf and irrigation equipment, landscaping and light-construction equipment, and residential lawn and snow products. Results are unaudited; the company cautions that seasonal nine-month results should not be annualized.
Financial results
| Metric | Q3 FY2012 | Q3 FY2011 | First 9 months FY2012 | First 9 months FY2011 |
|---|---|---|---|---|
| Net sales | $504.1 million | $501.0 million | $1,619.4 million | $1,515.9 million |
| Gross profit | $178.1 million | $167.7 million | $560.2 million | $517.9 million |
| Operating earnings | $61.0 million | $54.7 million | $201.5 million | $175.3 million |
| Net earnings | $40.5 million | $35.1 million | $129.3 million | $112.6 million |
| Diluted EPS | $0.67 | $0.55 | $2.13 | $1.76 |
| Gross margin | 35.3% | 33.5% | 34.6% | 34.2% |
| Operating margin | 12.1% | 10.9% | 12.5% | 11.6% |
| Net margin | 8.0% | 7.0% | 8.0% | 7.4% |
Q3 sales increased 0.6% and net earnings increased 15.6% year over year; nine-month sales and earnings rose 6.8% and 14.8%, respectively. EPS comparisons reflect the two-for-one stock split effective June 29, 2012.
- Cash flow: Nine-month operating cash flow was $165.4 million, versus $71.8 million a year earlier. Investing used $35.9 million and financing used $64.5 million. Cash increased $62.2 million to $143.1 million.
- Liquidity and debt: Current assets were $661.7 million and current liabilities $404.8 million. Long-term debt, including current portion, totaled $225.3 million; cash exceeded reported debt by about $82.3 million. No short-term debt was outstanding under credit facilities; $144.1 million of credit availability remained, after $12.2 million of letters of credit.
- Capital returns: Nine-month share repurchases were $67.4 million and dividends paid were $19.7 million. The Q3 dividend was raised 10% to $0.11 per share, split-adjusted.
Changes and operating drivers
- Professional-segment sales increased 4.4% in Q3 and 7.7% year to date, supported by new products, pricing, golf and landscape-contractor demand, micro-irrigation, and acquisitions. Q3 segment earnings rose 9.6%.
- Residential sales fell 7.9% in Q3, despite being up 5.2% year to date. Lower snow-thrower shipments followed the prior winter’s lack of snowfall and elevated field inventories; drought also weakened Q3 riding-product demand.
- International sales declined 9.2% in Q3 and 1.5% year to date, primarily due to weakness and uncertainty in Europe. Currency movements reduced Q3 sales by about $3.3 million.
- Gross-margin improvement reflected pricing, product mix, manufacturing efficiencies, and the absence of a prior-year $4.5 million charge for a non-safety walk-mower rework. Higher commodity costs and lower acquisition-product margins partly offset gains. Q3 SG&A rose 3.7%, including higher self-insured health costs and acquisition expenses.
- Three product-line acquisitions were completed during FY2012 for aggregate consideration of $11.1 million; management described them as immaterial to consolidated results.
Outlook, risks, and unusual items
- Management does not expect to achieve its Destination 2014 goal of at least $100 million in annual organic revenue growth in FY2012, citing U.S. drought and economic issues, particularly in Europe. It anticipates Q4 sales will be negatively affected by declining dealer and field inventories versus the prior-year quarter.
- The company expects FY2012 ending inventory to be higher than FY2011, partly due to prebuilding ahead of Tier 4 emissions requirements and anticipated product price increases. Management also expected commodity and component prices to remain higher for the rest of FY2012.
- Management said operating cash, cash on hand, and financing arrangements should cover expected needs for at least 12 months. It reported compliance with credit covenants and expected continued compliance through FY2012. Moody’s rating was Baa3; S&P raised its rating from BBB- to BBB in April 2012.
- Key risks include weather-driven demand and inventory swings, global economic weakness, commodities and supply availability, foreign exchange, competition, product quality and liability, Tier 4 compliance and customer buying shifts, and availability of dealer financing through the Red Iron joint venture.
- The U.S. lawnmower-horsepower labeling settlement was final, and management did not expect a material adverse effect. A related Canadian class action remained under evaluation; an unfavorable outcome could be material in a particular period, but the company could not assess its overall effect.
- The two-for-one stock split was distributed June 29, 2012. The Red Iron joint venture term was extended to October 31, 2017, subject to automatic extensions. The filing reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Q4 dealer inventory reductions and weather-related demand weakness materially affect shipments, particularly residential and snow products.
- Whether the FY2012 inventory build for Tier 4 products converts into demand as expected, and how pricing and compliance costs affect margins.
- Whether commodity-cost pressure, Europe weakness, and foreign-exchange movements persist or worsen.
- Whether operating cash flow and liquidity remain adequate through seasonal working-capital needs, planned investment, dividends, and repurchases.
- Developments in the Canadian labeling litigation, warranty claims and estimates, and Red Iron dealer-financing exposure.