The Toro Company — Q1 FY2011 Form 10-Q
Reporting period: Three months ended January 28, 2011; comparative period ended January 29, 2010. Toro designs, manufactures, and markets professional turf and irrigation products, landscaping equipment, and residential lawn and snow products. The business is seasonal, and management cautions that first-quarter results are not indicative of full-year results.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Net sales | $383.2 million | $331.4 million | +15.6% |
| Gross profit | $136.6 million | $116.4 million | +17.4% |
| Gross margin | 35.7% | 35.1% | +0.6 percentage points |
| Operating earnings | $27.2 million | $19.8 million | +37.4% |
| Net earnings | $17.3 million | $10.9 million | +58.3% |
| Diluted EPS | $0.53 | $0.32 | +65.6% |
| Operating cash flow | $(31.4) million | $(10.5) million | Cash use increased |
SG&A rose 13.3% to $109.4 million but declined to 28.6% of sales from 29.2%. Management attributed improved earnings to higher sales volumes, better gross margin, higher other income, and a lower effective tax rate; share repurchases added approximately $0.03 to diluted EPS year over year.
Segments and material changes
- Professional: Sales rose 21.4% to $258.3 million; pretax segment earnings increased 46.9% to $37.9 million. Strength reflected golf equipment, irrigation, landscape contractor equipment, new products, and increased demand.
- Residential: Sales rose 5.6% to $123.3 million, but pretax segment earnings fell 15.3% to $11.4 million. Product mix, commodity costs, and warranty provisions weighed on margins; snow-thrower demand benefited from heavy snowfall.
- Other: Pretax loss widened 9.0% to $24.8 million, including corporate costs and interest.
- The effective tax rate declined to 29.3% from 33.6%, primarily due to retroactive reenactment of the federal research and development tax credit.
Financial position, liquidity, and capital allocation
At January 28, 2011, cash was $94.4 million, down from $177.4 million at fiscal year-end and $158.2 million a year earlier. Current assets were $578.7 million and current liabilities $387.4 million. Total debt was approximately $227.8 million, comprising $2.7 million current and $225.1 million long-term; cash exceeded operating cash needs seasonally, but cash was materially lower year over year.
Inventory was $239.7 million, up 25.5% year over year as Toro built stock for expected demand. Receivables increased 2.3%; management reported average days sales outstanding of 38 versus 61 a year earlier, partly reflecting financing through Red Iron. Operating cash use increased mainly because of inventory growth. Investing cash use was $19.6 million, including $12.1 million for acquisitions. Financing cash use was $31.3 million, including $29.8 million of share repurchases and $6.4 million of dividends.
Toro reported $183.3 million of unused credit availability and no borrowings under its $175 million revolving facility at quarter-end; $10.4 million of standby letters of credit were outstanding. The facility expires in January 2012, and Toro said it intends to amend or replace it before then. Toro was in covenant compliance and expected to remain so during FY2011. Long-term debt ratings were BBB- at S&P and Baa3 at Moody’s.
Outlook, risks, and unusual items
- Destination 2014 sets goals of $100 million in organic revenue growth each fiscal year and a 12% operating margin by FY2014; these are management goals, not near-term quarterly guidance.
- Management expected higher commodity and component prices for the remainder of FY2011 and cited fuel and freight costs, weather, retail demand, economic recovery, competition, and customer credit as uncertainties. It planned cost actions and selective product price increases.
- Toro expected to begin construction in 2011 of a Romanian micro-irrigation facility, with production anticipated in late 2011.
- Toro acquired most assets and assumed certain liabilities of Unique Lighting Systems on January 17, 2011. Estimated consideration was $19.1 million, including cash, a long-term note, and potential earnout; the acquisition was described as immaterial to consolidated results and financial condition.
- The U.S. lawnmower horsepower-labeling settlement became final after objectors dismissed appeals in February 2011; expected costs were covered by prior accruals, with no material adverse effect expected. A related Canadian class action remained under evaluation; management could not assess its potential material effect.
- Other principal exposures include seasonality and weather, commodity and currency movements, reliance on retailers and dealer financing (including Red Iron), product quality and litigation, and execution of the Romania facility and acquisitions.
Important facts for investors to verify
- Whether inventory prebuilding converts into spring and summer sales without excess stock or discounting.
- Whether commodity, fuel, freight, and warranty costs constrain margins, particularly in Residential.
- Cash conversion and liquidity through the peak selling season, including the timing of credit-facility renewal.
- Progress toward Destination 2014 goals and the Romania facility’s cost, schedule, and customer demand.
- Potential exposure from the Canadian mower litigation and the terms or availability of dealer financing through Red Iron.