The Toro Company — Q1 FY2019 10-Q
Reporting period: Three months ended February 1, 2019; comparisons are with the three months ended February 2, 2018. Toro designs, manufactures, and markets professional and residential outdoor equipment, irrigation systems, and related products. The company notes its business is seasonal, so first-quarter results should not be annualized.
Financial performance
| Metric | Q1 FY2019 | Q1 FY2018 | Change / context |
|---|---|---|---|
| Net sales | $603.0 million | $548.2 million | Up 10.0% |
| Gross profit | $215.6 million | $204.2 million | Gross margin 35.8%, down 1.5 percentage points |
| Operating earnings | $70.1 million | $66.9 million | Operating margin 11.6%, versus 12.2% |
| Net earnings | $59.5 million | $22.6 million | Prior-year result included $33.1 million of one-time Tax Act charges |
| Diluted EPS | $0.55 | $0.21 | Adjusted diluted EPS was $0.51 versus $0.48 |
| Operating cash flow | $26.0 million | $8.1 million | Higher earnings and inventory-management benefits |
Adjusted net earnings, a non-GAAP measure, were $55.2 million versus $52.1 million, up 5.8%. The reported effective tax rate was 15.0%, compared with 66.0% in the prior-year quarter, primarily reflecting the prior-year one-time Tax Act charges. Adjusted effective tax rates were 21.2% and 21.5%, respectively.
Cash and cash equivalents were $250.0 million at quarter-end. Long-term debt was $312.6 million, including $91.0 million drawn on the revolving facility. The $600 million facility had $507.5 million of unused availability; Toro reported compliance with its debt covenants. Cash declined $39.2 million during the quarter. Investing cash outflow was $26.8 million, including $12.5 million for an acquisition and $14.2 million of capital expenditures; financing cash outflow was $38.3 million, including $23.9 million of dividends and $20.0 million of share repurchases.
Changes and operating context
- Professional segment sales rose 12.7% to $455.0 million; segment earnings increased 15.9% to $88.0 million. Growth reflected channel demand, product launches, pricing, snow-product shipments, and L.T. Rich products.
- Residential sales rose 1.9% to $145.2 million, while segment earnings fell 16.8% to $13.1 million. Lower margin reflected commodity and tariff costs and product mix.
- International sales declined 3.6% to $141.5 million. Foreign exchange reduced sales by approximately $2.1 million.
- Gross margin was pressured by higher commodity and tariff costs, unfavorable Professional product mix, and the accounting impact of a small Northeastern U.S. distribution acquisition. Pricing and productivity initiatives partly offset these pressures.
- Inventory was $416.7 million, down 5.2% from a year earlier; receivables rose 13.5%, mainly due to sales timing. Average net working capital as a percentage of sales improved to 13.5% from 13.8%.
Outlook, risks, and notable items
- Toro’s internal Vision 2020 goals call for at least 5% organic revenue growth in each of fiscal 2018–2020 and an operating-earnings margin of at least 15.5% by fiscal 2020. These are company goals, not formal quarterly guidance.
- On February 14, 2019, Toro agreed to acquire The Charles Machine Works for $700 million in cash, subject to adjustments. It expected to fund the purchase and expenses with cash and debt and anticipated closing before fiscal Q3-end, subject to remaining conditions, including German regulatory approval. Toro said it expected to curtail share repurchases for the remainder of FY2019 and renew its focus on debt repayment after closing.
- Management anticipated higher average commodity and component costs for the remainder of FY2019 versus FY2018, with mitigation through sourcing, productivity measures, and pricing where appropriate. Weather, foreign exchange, tariffs, product mix, channel inventory, and acquisition execution are additional risks.
- Ordinary-course litigation includes product liability, environmental, commercial, employment, and patent matters. Management stated that any related liability was not expected to materially affect results, financial position, or cash flows.
- Revenue standard ASC 606 was adopted in Q1 FY2019; management reported no material effect on revenue or other financial-statement line items. The company expected the lease standard, effective in FY2020, to materially affect the balance sheet, but not earnings or cash flows.
Investor verification priorities
- Assess underlying earnings growth excluding the prior-year Tax Act charges and the current-year share-based compensation tax benefit; review the company’s non-GAAP reconciliations.
- Track whether pricing and productivity can offset commodity, tariff, and mix pressure on margins, particularly in Residential.
- Verify CMW closing conditions, financing terms, integration costs, and the resulting leverage and debt-repayment trajectory.
- Monitor seasonal working-capital needs, receivables and channel inventory, and the availability of the revolving facility.
- Compare subsequent results with Vision 2020 goals while accounting for seasonality and the filing’s identified weather, currency, and demand risks.