The Toro Company (NYSE: TTC) — Q1 FY2021 Form 10-Q
Reporting period: Three months ended January 29, 2021; comparison is with the three months ended January 31, 2020. The company designs, manufactures, and markets professional turf, irrigation, landscape, snow and ice, construction, and residential outdoor equipment. Results are seasonal and management cautions that the quarter should not be annualized.
Financial highlights
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $873.0 million | $767.5 million |
| Gross profit / margin | $315.0 million / 36.1% | $288.1 million / 37.5% |
| Operating earnings | $141.5 million | $91.1 million |
| Net earnings | $111.3 million | $70.1 million |
| Diluted EPS | $1.02 | $0.65 |
| Operating cash flow | $95.0 million provided | $23.3 million used |
- Sales increased 13.7%. Professional segment sales rose 9.3% to $650.2 million; Residential rose 31.3% to $217.7 million.
- Gross margin contracted 140 basis points, mainly from manufacturing cost pressures and unfavorable product mix; productivity, synergies, and pricing partly offset these effects.
- SG&A fell $23.4 million to $173.6 million, or 19.9% of sales versus 25.6%, helped by higher sales, lower COVID-related travel and marketing costs, and a favorable legal settlement.
- Reported diluted EPS includes the settlement benefit. Non-GAAP net earnings were $93.2 million and non-GAAP diluted EPS was $0.85, versus $69.7 million and $0.64 a year earlier. The company’s non-GAAP adjustments include the litigation settlement and share-based compensation tax benefits; these measures are not GAAP substitutes.
Financial position and capital
- At January 29, 2021, cash and cash equivalents were $433.4 million; total debt was $701.3 million, including $10.0 million current and $691.4 million long-term. Cash less debt was approximately $268.0 million net debt.
- Available liquidity was approximately $1.03 billion: $433.4 million cash plus $597.5 million unused revolving-credit availability. The $600 million revolver matures in June 2023; no borrowings were outstanding.
- Current assets were $1.457 billion and current liabilities $819.5 million. Inventory was $675.3 million, down 8.6% from the prior-year quarter.
- Operating cash flow improved by $118.3 million year over year, reflecting higher earnings and less cash used for inventory purchases. Investing activities used $2.1 million; financing activities used $143.0 million, including $90.0 million of debt repayments, $31.4 million of share repurchases, and $28.4 million of dividends.
- The quarterly dividend increased 5% to $0.2625 per share. Management expected to continue quarterly dividends and share repurchases during the rest of FY2021, subject to cash needs, debt repayments, market conditions, and other factors.
Changes, outlook, risks, and unusual items
- Sales growth reflected strong demand for landscape-contractor mowers, residential snow products and battery-powered products, plus incremental sales from the March 2020 acquisition of Venture Products (Ventrac). Lower underground-construction demand and golf and grounds shipment timing partly offset growth.
- In January 2021, the company received a $33.65 million settlement from Briggs & Stratton in longstanding patent litigation. After an approximately 50% contingent legal fee, the company recorded a net benefit of $17.1 million in SG&A. This was a material contributor to reported earnings; management’s non-GAAP reconciliation excludes it.
- The company completed the sale of its Northeastern U.S. distribution business in November 2020; it described the divestiture as not material. It also repaid the remaining $90 million balance of a separate term loan during the quarter.
- Management said operations remained open, but COVID-19-related uncertainty and manufacturing inefficiencies pressured gross margin. It expected greater supply-chain disruption in Q2 FY2021 due to insufficient component availability and anticipated higher average commodity and component costs for the remainder of FY2021 than in the comparable prior-year period.
- No quantified full-year earnings or sales guidance is provided in the filing text. Management said liquidity should be sufficient for anticipated needs for at least 12 months, while warning that prolonged or worsening COVID-19 effects, supply constraints, demand changes, product mix, weather, input costs, and foreign exchange could affect results.
- Dealer and distributor inventory financing creates contingent repurchase exposure: up to $111.2 million of inventory under third-party arrangements at quarter-end. The company states its exposure is generally the loss, if any, between repurchase cost and resale proceeds; repurchases in the quarter were immaterial.
- Management reported ordinary-course litigation, including product, environmental, commercial, employment, and patent matters, and said the amounts, if any, were not expected to materially affect results, financial position, or cash flows. The filing also notes that Venture Products’ internal-control integration was in progress, with completion expected during FY2021.
Key facts for investors to verify
- How much of reported earnings and EPS growth is attributable to the one-time net litigation settlement versus ongoing operations.
- Whether supply constraints, manufacturing inefficiencies, and rising input costs persist or further pressure margins.
- Whether strong retail demand is sustained and how channel inventory levels and segment/product mix evolve.
- Debt repayment plans, covenant compliance, and continued capacity for dividends and repurchases alongside seasonal working-capital needs.
- Potential exposure under dealer-financing repurchase arrangements and progress integrating Venture Products’ financial controls.