The Toro Company — Form 10-Q Summary
Business context and reporting period
Quarterly period ended August 3, 2018; the filing compares the third quarter and first nine months of fiscal 2018 with the corresponding 2017 periods. Toro designs, manufactures, and markets professional turf, irrigation, landscaping, snow and ice, construction, and residential outdoor equipment. Its reportable segments are Professional and Residential; Distribution is combined with corporate activities and reported as Other. Results are seasonal, and management cautions that nine-month results should not be annualized.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $655.8 million | $627.9 million | $2,079.3 million | $2,016.5 million |
| Gross profit | $233.7 million | $226.8 million | $761.9 million | $736.6 million |
| Gross margin | 35.6% | 36.1% | 36.6% | 36.5% |
| Operating earnings | $92.9 million | $87.8 million | $330.1 million | $307.7 million |
| Net earnings | $79.0 million | $68.4 million | $232.9 million | $233.9 million |
| Diluted EPS | $0.73 | $0.61 | $2.14 | $2.10 |
- Q3 sales rose 4.4% and net earnings rose 15.5%; nine-month sales rose 3.1%, while reported net earnings declined slightly. Management’s non-GAAP adjusted net earnings were $73.5 million for Q3 (up 12.2%) and $255.9 million year to date (up 19.0%). These adjusted measures exclude specified tax items and share-based compensation tax benefits.
- Operating margin was 14.2% for Q3 versus 14.0%, and 15.9% year to date versus 15.3%. SG&A as a share of sales improved in both comparisons. Q3 gross margin fell 50 basis points, mainly because of commodity and freight costs, manufacturing supply challenges, and sales mix; year-to-date gross margin rose 10 basis points.
- Operating cash flow for the first nine months was $259.4 million, compared with $276.6 million. Capital expenditures were $51.9 million; investing cash outflow was $89.6 million. Financing cash outflow was $228.8 million, including $151.5 million of share repurchases and $63.8 million of dividends. Cash declined $59.4 million from fiscal year-end to $250.9 million.
- At August 3, cash was $250.9 million; current assets were $873.0 million and current liabilities $511.7 million. Long-term debt was $312.5 million, including $91.0 million drawn on the revolving facility. The new unsecured five-year revolver provides $600 million of capacity, with $516.7 million of reported unused availability under the facility and import letter-of-credit arrangements. Toro reported covenant compliance and said it expected available funding and forecast cash flows to cover needs for at least 12 months.
- Quarterly dividend increased 14.3% to $0.20 per share. Nine-month weighted-average diluted shares fell to 108.9 million from 111.5 million; management estimated repurchases benefited diluted EPS by about $0.02 in Q3 and $0.05 year to date.
Material changes and segment performance
- Professional sales increased 3.0% in Q3 and 6.6% year to date. Growth reflected landscape-contractor mowers, L.T. Rich products, construction equipment, and other product and channel demand. Professional earnings rose 0.4% in Q3 and 7.6% year to date; Q3 segment earnings margin declined to 20.3% from 20.8%.
- Residential sales rose 9.5% in Q3, supported by mower demand and product introductions, but declined 5.4% year to date, reflecting weak early-season snowfall and unfavorable spring weather. Residential earnings increased 40.9% in Q3 but fell 7.9% year to date.
- Foreign exchange added approximately $2.0 million to Q3 sales and $15.2 million to year-to-date sales. Inventory increased 4.4% year over year, principally due to work in process, manufacturing supply challenges, and planned production. Accounts payable increased 8.3%, partly reflecting more favorable supplier payment terms.
- Toro acquired substantially all assets of L.T. Rich Products in March 2018; purchase accounting remained provisional at quarter-end. The acquisition expanded Professional-segment offerings.
Outlook, commentary, risks, and unusual items
- Vision 2020 goals are at least 5% organic revenue growth in each of fiscal 2018–2020 and operating earnings of at least 15.5% of sales by fiscal 2020. These are stated goals, not a specific near-term earnings forecast.
- Management anticipated higher average costs for some commodities and components for the rest of fiscal 2018 versus fiscal 2017. It cited supplier collaboration, sourcing and materials alternatives, productivity measures, cost reductions, and selective price increases as mitigants. Unfavorable commodity, freight, and manufacturing supply costs were already pressuring Q3 margins.
- Tax reform materially affected reported results. Nine-month GAAP tax expense included provisional charges of $19.3 million for deferred-tax remeasurement and $13.3 million for deemed repatriation tax, partly offset by tax-rate reduction benefits. The deemed repatriation tax is payable over eight years. Toro had not completed its tax reform accounting, and final effects could differ from estimates.
- Risks highlighted include weather-driven demand and order timing, commodity and freight costs, foreign exchange, customer and dealer financing availability, competition, product quality and litigation, acquisition integration, supply and labor disruptions, cybersecurity, regulation and trade policy, and compliance with debt covenants. Toro disclosed ongoing litigation, including patent matters and claims involving asbestos and environmental issues; management believed any resulting liability would not materially affect results, financial position, or cash flows.
- Foreign-exchange hedging included $243.5 million notional of designated cash-flow hedges. The company does not use derivatives for speculative trading. Subsequent events requiring disclosure were not identified; disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Track whether the provisional Tax Act accounting is finalized and how tax charges, benefits, and cash tax payments evolve.
- Assess whether Professional growth and Residential recovery can offset weather-sensitive demand and whether Vision 2020 goals remain achievable.
- Monitor gross-margin effects from commodities, freight, product mix, and manufacturing supply challenges, alongside pricing and productivity offsets.
- Review cash generation against capital spending, acquisition activity, dividends, and substantial repurchases; confirm revolver availability and covenant headroom.
- Follow L.T. Rich integration and the effects of higher inventory and supplier payment terms on working capital.
- Consider the possible effects of litigation, regulation, trade changes, foreign exchange, and dealer financing arrangements, including the Red Iron joint venture.