The Toro Company — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended July 30, 2010; comparisons are to the corresponding 2009 periods. Toro designs, manufactures, and markets professional turf and irrigation equipment, landscaping equipment, and residential lawn and snow products.
Financial performance
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net sales | $458.9 million | $394.9 million | $1,353.1 million | $1,234.9 million |
| Gross profit | $161.6 million | $133.8 million | $465.4 million | $413.3 million |
| Earnings from operations | $53.8 million | $39.6 million | $145.7 million | $112.3 million |
| Net earnings | $33.4 million | $19.8 million | $90.0 million | $63.4 million |
| Diluted EPS | $1.01 | $0.54 | $2.66 | $1.73 |
| Operating cash flow | — | $157.4 million | $119.0 million |
- Q3 sales rose 16.2% and net earnings rose 69.0%; nine-month sales increased 9.6% and net earnings increased 42.0%.
- Gross margin improved to 35.2% from 33.9% in Q3 and to 34.4% from 33.5% year to date. Net margin was 7.3% versus 5.0% in Q3 and 6.7% versus 5.1% year to date.
- Q3 effective tax rate was 35.7%, compared with 36.6%; nine-month rate was 34.4%, compared with 34.9%.
- Cash and cash equivalents were $163.4 million at July 30, 2010, down from $187.8 million at October 31, 2009. Total debt was approximately $228.3 million, including current and long-term debt. Toro reported $245 million of unused credit availability and compliance with its credit covenants.
- Nine-month investing cash outflow was $40.8 million, including $32.7 million of capital expenditures and $3.6 million for acquisitions. Financing cash outflow was $138.5 million, including $135.3 million of share repurchases and $18.0 million of dividends. Cash declined $24.4 million during the period.
Changes and business drivers
- Professional-segment sales rose 21.8% in Q3 and 9.9% year to date; pretax segment earnings increased 58.9% and 23.5%, respectively. Management cited stronger demand, new products, improved product availability, golf-course spending, and lower field inventories.
- Residential sales increased 7.6% in Q3 and 11.0% year to date. Q3 segment earnings were nearly flat, down 0.5%, while year-to-date earnings increased 53.1%. Demand benefited from riding products, favorable weather, and prior-season snowfalls.
- Overall earnings benefited from higher volume, improved product mix and manufacturing utilization, cost reductions, and lower SG&A as a percentage of sales. Higher incentive compensation, marketing, warranty, warehousing, and freight costs partly offset these gains.
- Other income was $2.4 million in Q3 versus expense of $4.0 million a year earlier. Management attributed the improvement largely to prior-year legal costs not repeated and income from the Red Iron financing joint venture.
- Receivables were 37% below the prior-year quarter-end, mainly reflecting sales of receivables to Red Iron. Average days sales outstanding improved to 42 from 67; average inventory turnover improved 22.6%. Average net working capital as a share of sales was 15.4% for the trailing 12 months.
Outlook, risks, and contingencies
- Management said it was generally optimistic that Q3 momentum would continue and expected to achieve its fiscal 2010 target of after-tax profit equal to 5% of net sales. It cautioned that results depend on economic recovery, retail demand, field inventory, weather, commodity costs, and competition. The filing notes the business is seasonal and nine-month results should not be annualized.
- Management expected commodity prices to be slightly higher in fiscal Q4 than a year earlier; it planned to address cost pressures through sourcing, cost-reduction measures, vendor negotiations, and selective pricing.
- Key risks include economic and consumer conditions, weather, commodity and transportation costs, foreign exchange, competition, product quality and innovation, customer financing availability, international operations, and reliance on major retail customers and the Red Iron joint venture.
- U.S. lawnmower horsepower-labeling class-action settlements were approved by the court in August 2010 but were appealed. Management said the settlement costs were consistent with prior accruals and would not be material if final; an adverse outcome or unresolved Canadian litigation could affect results, potentially materially in a particular period.
- Red Iron purchased $627.0 million of Toro receivables in the first nine months. Toro held a 45% interest, had not guaranteed Red Iron’s debt, and had limited product-repurchase and receivables-recourse commitments. The filing reports a $7.5 million annual cap on specified repossessed-product repurchases and $0.7 million of recourse exposure at quarter-end.
Investor verification points
- Whether sales and margin improvements persist, particularly in professional products, and whether residential segment profitability recovers.
- Whether Toro achieves its fiscal 2010 5% after-tax margin target and how Q4 seasonality, weather, retail demand, and commodity prices affect results.
- Cash generation and working-capital trends, including the ongoing effect and risks of receivable sales and customer financing through Red Iron.
- Progress and final resolution of the U.S. appeal and Canadian horsepower-labeling litigation.
- Capital allocation and liquidity after substantial share repurchases, while monitoring debt, credit availability, and covenant compliance.