The Toro Company: Q2 FY2014 Form 10-Q
Reporting period: Second quarter and six months ended May 2, 2014; comparisons are to the periods ended May 3, 2013. Amounts below are in U.S. dollars and rounded to millions unless stated otherwise. Toro designs, manufactures, and markets professional and residential outdoor equipment, irrigation products, and related services. Results are seasonal and the company cautions that first-half results should not be annualized.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Net sales | $745.0m | $704.5m | $1,191.0m | $1,149.1m |
| Gross profit / margin | $264.5m / 35.5% | $252.3m / 35.8% | $428.1m / 35.9% | $418.1m / 36.4% |
| Operating earnings / margin | $130.9m / 17.6% | $117.5m / 16.7% | $171.5m / 14.4% | $163.7m / 14.3% |
| Net earnings | $87.1m | $78.4m | $113.0m | $109.8m |
| Diluted EPS | $1.51 | $1.32 | $1.95 | $1.85 |
| Operating cash flow | Not separately provided for the quarter | $77.9m | $36.6m |
Q2 sales rose 5.8% and net earnings rose 11.1%; six-month sales increased 3.6% and net earnings 2.9%. Q2 diluted EPS increased 14.4%, including an estimated $0.04 per-share benefit from share repurchases; the six-month comparison benefited by about $0.05 per share. Gross margin contracted 30 basis points in Q2 and 50 basis points year to date, while operating margin improved as SG&A was leveraged over higher sales.
Segments and drivers
- Professional: Q2 sales increased 6.5% to $528.6m and pretax earnings rose 9.0% to $122.4m. Six-month sales were essentially flat at $824.0m and pretax earnings declined 1.8% to $169.8m. Contractor equipment, micro-irrigation, rental/construction products, and golf and irrigation offerings supported sales; prior-year Tier 4-related demand and unfavorable weather weighed on the year-to-date comparison.
- Residential: Q2 sales increased 4.5% to $210.4m, but pretax earnings fell 3.5% to $23.8m. Six-month sales rose 11.0% to $357.9m and pretax earnings increased 13.9% to $42.0m. Zero-turn mowers, electric products, and first-quarter snow-thrower sales helped; commodity costs, a supplier rework issue, currency, and Australian conditions pressured Q2 results.
- Other: Includes corporate activities and distribution-related items. Its pretax loss narrowed to $17.1m in Q2 and $43.9m for six months, primarily on lower health-care costs and interest expense.
Balance sheet, liquidity, and capital allocation
At May 2, 2014, cash was $129.9m, current assets $814.4m, and current liabilities $538.6m. Long-term debt was $223.9m, with a further $0.1m current portion. Stockholders’ equity was $385.6m. Cash declined $53.1m from fiscal year-end, despite higher first-half operating cash flow, reflecting investing and financing uses.
Six-month investing cash use was $38.2m, including $32.7m of capital expenditures; financing cash use was $93.7m, including $81.7m of share repurchases and $22.7m of dividends. The company reported no short-term borrowings under its credit facilities, $8.9m of letters of credit, and $153.4m of unused availability. It was in covenant compliance and expected to remain so for the rest of FY2014. The $150m revolving facility expires in July 2015; long-term debt ratings were BBB from S&P and Baa3 from Moody’s.
Management said liquidity should be adequate for at least the next twelve months. Planned FY2014 capital expenditures were approximately $65m–$70m. The quarterly dividend increased 42.9% year over year, to $0.20 per share. The company repurchased 617,820 shares under its public program during Q2 at an average $63.93 per share; 3,042,418 shares remained authorized for repurchase at quarter-end.
Management outlook, risks, and contingencies
- Management’s Destination 2014 initiative set goals of $100m in annual organic revenue growth and a 12% operating-earnings-to-sales ratio by FY2014 year-end. The filing does not provide a specific full-year earnings or sales forecast. Management planned to focus on customer demand, retail sales, and aligning production with expected shipments.
- Management anticipated limited commodity inflationary pressure for the rest of FY2014, but expected average commodity and component prices to remain above FY2013 levels. Higher steel and resin costs and unfavorable currency had already reduced gross margins; price increases and cost reductions partly offset them.
- Key uncertainties include weather and seasonal demand, economic and consumer conditions, commodity and component costs, competition, foreign exchange, product quality, international operations, Tier 4 engine compliance, and access to dealer financing. International currency movements reduced sales by approximately $1.1m in Q2 and $5.2m year to date.
- Professional-product warranty expense included increased costs from rework campaigns; a supplier component rework issue also affected certain residential walk mowers. The warranty liability was $83.0m at May 2, versus $78.1m a year earlier.
- Ordinary-course litigation includes product-liability, asbestos/environmental, commercial, employment, and patent matters. Management believed any resulting liability would not materially affect consolidated results, financial position, or cash flows. Red Iron-related commitments include product repurchases capped at $7.5m per calendar year and recourse on certain receivables of up to $0.5m; Toro stated it had not guaranteed Red Iron’s outstanding debt.
- The quarter included an immaterial acquisition of outdoor-lighting assets. Adoption of new offsetting-disclosure guidance had no material financial-statement impact. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether second-half demand and the company’s Destination 2014 targets were achieved, given seasonality and the absence of specific full-year earnings guidance in this filing.
- Whether gross-margin pressure from commodities, currency, product mix, and warranty/rework costs persisted or eased.
- Cash conversion and working-capital trends, especially receivables, inventory, and the increase in accounts payable; first-half operating cash flow benefited from working-capital movements.
- Capital spending, repurchases, and dividends relative to cash generation, liquidity availability, and revolving-credit covenant headroom.
- Developments in litigation, warranty claims, Red Iron dealer financing, Tier 4 compliance, and other risks described in the filing.