The Toro Company (NYSE: TTC) — Form 10-Q Summary
Reporting period: Fiscal third quarter ended July 29, 2022; comparisons are with the quarter ended July 30, 2021. Fiscal year-to-date figures cover the nine months ended July 29, 2022. Dollar amounts below are in millions unless noted.
Business context
Toro designs, manufactures, and sells professional turf and landscaping equipment, irrigation systems, snow and ice management products, construction equipment, and residential outdoor products. It reports Professional and Residential segments. The January 2022 acquisition of Intimidator, a commercial zero-turn mower maker, expanded the Professional segment.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,160.6 | $976.8 | $3,342.7 | $2,998.9 |
| Gross profit | $399.9 | $331.1 | $1,105.8 | $1,049.1 |
| Gross margin | 34.5% | 33.9% | 33.1% | 35.0% |
| Operating earnings | $163.0 | $121.9 | $425.3 | $444.1 |
| Net earnings | $125.2 | $96.3 | $325.8 | $349.8 |
| Diluted EPS | $1.19 | $0.89 | $3.08 | $3.21 |
| Operating margin | 14.0% | 12.5% | 12.7% | 14.8% |
Third-quarter sales rose 18.8%; management attributed growth mainly to pricing and Intimidator, partly offset by lower volumes in some product categories. Nine-month sales increased 11.5%. Q3 net earnings rose, while nine-month GAAP earnings fell; adjusted nine-month net earnings were $327.0 million, or $3.09 per diluted share, versus $333.0 million, or $3.06 per share, in the prior year. These adjusted figures are non-GAAP measures.
- Segments: Q3 Professional sales rose 23.3% to $886.2 million and earnings increased 35.9% to $166.2 million; margin was 18.8% versus 17.0%. Residential sales rose 7.1% to $270.0 million, but earnings declined 16.5% to $26.3 million; margin fell to 9.8% from 12.5%.
- Cash flow: Nine-month operating cash flow was $154.6 million, down from $477.1 million. Capital expenditures were $75.8 million; company-defined free cash flow was $78.8 million versus $429.2 million. The filing points to greater cash tied up in inventory and payments of liabilities outstanding at fiscal 2021 year-end.
- Liquidity and debt: Cash was $231.6 million at July 29, 2022, compared with $535.3 million a year earlier. Available liquidity was $763.3 million, including $531.7 million of revolving-credit availability. Total debt was $1,055.6 million, versus $691.6 million a year earlier; $65.0 million was classified as current and management intended to repay it within 12 months. The company reported compliance with its debt covenants.
- Capital returns: Nine-month dividends paid were $94.4 million and share repurchases were $110.0 million. The quarterly dividend increased 14.3% year over year to $0.30 per share.
Material changes and unusual items
Q3 gross margin improved 60 basis points as pricing and productivity gains more than offset higher material, freight, and manufacturing costs. For the first nine months, gross margin contracted 190 basis points as those cost pressures and Intimidator’s initially lower margins outweighed pricing and productivity. Inventory rose 41.1% year over year to $939.3 million, reflecting inflation, supply constraints, and the acquisition. Receivables increased 16.4% year over year.
Intimidator contributed $54.4 million of Q3 sales and $114.9 million of nine-month sales; its effect on segment earnings was described as immaterial. Purchase consideration was $399.8 million, with possible additional consideration of up to $15.0 million tied to qualifying tax changes; no liability was recorded because the contingency was not considered probable or estimable. The company also acquired assets of VSI, Tornado, and RCM during Q3; these acquisitions were described as immaterial.
Prior-year legal items affect comparisons: the nine-month 2021 period included a net favorable legal settlement, while Q3 2021 included a charge for other patent disputes. No litigation settlement amounts were recorded in the 2022 periods presented.
Outlook, commentary, and risks
Management said existing liquidity, financing availability, and forecast operating cash flows should cover anticipated needs for at least the next 12 months. It expected to continue quarterly dividends and share repurchases through the remainder of fiscal 2022, subject to cash needs, debt repayments, market conditions, and other factors. The filing does not provide a specific revenue or earnings forecast for the remainder of fiscal 2022.
Management reported continuing supply-chain pressure and expected commodity, component, freight, and manufacturing costs to remain higher than the comparable prior-year period for the rest of fiscal 2022. It cited product availability constraints, inflation, labor tightness, COVID-19-related uncertainty, foreign exchange, weather, and macroeconomic conditions among relevant risks. Sales into Russia and Belarus were discontinued; management did not expect this to materially affect results.
Other exposures include up to $79.9 million of potential inventory repurchases under certain third-party dealer financing arrangements; actual repurchases had been immaterial. The company stated that ordinary-course litigation was not expected to materially affect results, financial position, or cash flows. Intimidator integration and acquisition-related risks were added to the risk disclosures; related internal-control integration was expected to continue into fiscal 2023.
Important facts for investors to verify
- Whether price increases and productivity can continue to offset inflation, freight, and manufacturing costs, particularly as Q3 margin improvement contrasts with year-to-date margin contraction.
- Whether supply constraints ease and elevated inventory converts into sales and operating cash flow without increased discounting, obsolescence, or working-capital strain.
- Intimidator’s integration, future profitability, purchase accounting, and any contingent consideration of up to $15.0 million.
- Debt reduction plans, refinancing and variable-rate exposure, covenant compliance, and the sustainability of dividends and repurchases.
- Non-GAAP adjusted earnings comparisons and the effect of prior-year legal settlements on reported year-over-year results.