The Toro Company — Q2 FY2017 Form 10-Q
Reporting period: Quarter and six months ended May 5, 2017; comparisons are with the periods ended April 29, 2016. Toro designs, manufactures, and markets professional and residential turf, landscaping, irrigation, snow and ice, and related equipment. Its business is seasonal, so first-half results should not be annualized.
Financial performance
| Metric | Q2 FY2017 | Q2 FY2016 | Six months FY2017 | Six months FY2016 |
|---|---|---|---|---|
| Net sales | $872.8 million | $836.4 million | $1,388.6 million | $1,322.8 million |
| Gross margin | 36.2% | 36.2% | 36.7% | 36.7% |
| Operating earnings | $159.3 million | $155.1 million | $219.9 million | $208.9 million |
| Net earnings | $120.5 million | $105.7 million | $165.5 million | $144.9 million |
| Diluted EPS | $1.08 | $0.94 | $1.48 | $1.29 |
| Operating cash flow | Not separately stated | Not separately stated | $170.4 million | $148.4 million |
- Q2 sales rose 4.3% and net earnings rose 14.0%; first-half sales rose 5.0% and net earnings rose 14.2%. Diluted EPS increased 14.9% for the quarter and 14.7% year to date.
- SG&A rose 6.0% in Q2, faster than sales, increasing to 18.0% of sales from 17.7%. First-half SG&A rose 4.7% and remained 20.9% of sales.
- Effective tax rates fell to 23.9% from 31.5% for Q2 and to 24.1% from 30.3% year to date. Adoption of stock-compensation accounting guidance generated discrete tax benefits of $11.0 million for Q2 and $15.9 million year to date.
Segments and material changes
- Professional: Q2 sales increased 2.6% to $610.9 million and pretax segment earnings rose 5.2% to $149.0 million. First-half sales increased 5.2% to $982.7 million and pretax earnings rose 6.9% to $217.2 million. Golf, rental and specialty construction demand contributed; Q2 landscape-contractor mower shipments were lower, partly due to timing of new products.
- Residential: Q2 sales increased 8.4% to $258.1 million, while pretax segment earnings were nearly flat at $35.0 million. First-half sales rose 4.2% to $398.5 million, while earnings edged down 0.2% to $51.6 million. New mower releases and walk-power mower demand supported sales; a product warranty issue, commodity costs and freight costs pressured profitability.
- Foreign exchange reduced sales by approximately $3.0 million in Q2 and $6.4 million year to date. International sales nevertheless increased 2.7% and 2.9%, respectively.
- Gross margin was unchanged: productivity improvements offset higher commodity costs and product mix effects. Q2 operating margin declined to 18.2% from 18.5%; the first-half rate was 15.8% in both periods.
Cash, debt and liquidity
- At May 5, 2017, cash was $265.2 million, current assets $976.6 million and current liabilities $622.4 million. Inventories were $341.6 million, down 7.4% year over year; receivables were $328.5 million.
- Total long-term debt, including its current portion, was approximately $335.1 million; short-term debt was $0.8 million. Cash exceeded total reported debt by approximately $70.1 million. Toro reported $153.4 million of unused availability under credit agreements and $5.5 million of outstanding letters of credit.
- First-half operating cash flow was $170.4 million. Investing activities used $49.2 million, including $24.2 million for the Perrot acquisition and $22.3 million for capital expenditures. Financing activities used $129.8 million, including $85.0 million for share repurchases and $37.9 million for dividends. Cash declined $8.4 million from fiscal year-end.
- Management said cash, operating cash flow and available financing should cover anticipated needs for at least the next 12 months. The company was in compliance with debt covenants and expected to remain compliant through the rest of FY2017. Credit ratings were unchanged at BBB from S&P and Baa3 from Moody’s.
Outlook, risks and unusual items
- No specific full-year sales or EPS forecast is provided. The final year of the three-year Destination PRIME initiative targets at least 5% annual organic revenue growth, operating earnings above 13% of sales, and average net working capital at or below 13% of sales by fiscal year-end. Average net working capital was 14.4% for the twelve months ended May 5, 2017, versus 16.6% a year earlier.
- Management anticipated slightly higher average commodity and component prices for the remainder of FY2017 versus FY2016, and cited mitigation through sourcing, productivity, cost reduction and selective pricing. The company also expected the stock-compensation accounting change to continue benefiting its FY2017 tax rate, but noted that it can create tax-rate variability.
- Toro acquired Perrot, a professional irrigation-equipment manufacturer, effective January 1, 2017, using existing foreign cash. Purchase accounting was not final as of May 5; the acquisition was described as immaterial to consolidated results and financial condition.
- Key exposures include seasonal and weather-driven demand, commodity and freight costs, foreign exchange, competition, product quality and warranty claims, dealer financing availability, inventory management, and execution/integration of acquisitions. The filing identifies ordinary-course litigation, including patent, product liability, asbestos and environmental matters; management did not expect the matters, individually or in aggregate, to materially affect results, financial position or cash flows.
- There was no material change to previously disclosed risk factors. Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much earnings growth persists after the sizable discrete tax benefits from stock-based compensation.
- Whether Residential warranty costs and higher commodity and freight expenses continue to weigh on segment margins.
- Progress toward Destination PRIME’s year-end operating-margin and working-capital goals, given the reported 14.4% working-capital measure.
- Perrot’s finalized purchase accounting and subsequent contribution to revenue and earnings.
- Seasonal cash needs, share repurchases and dividends relative to cash generation and debt-covenant headroom.