The Toro Company (NYSE: TTC) — Q1 FY2024 10-Q
Reporting period: Three months ended February 2, 2024; comparisons are with the three months ended February 3, 2023. Toro’s fiscal year ends October 31. The company cautions that seasonal results should not be annualized.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $1,001.9 million | $1,148.8 million | Down 12.8% |
| Gross profit / margin | $344.5 million / 34.4% | $395.9 million / 34.5% | Gross profit down 13.0%; margin down 0.1 percentage point |
| Operating earnings / margin | $88.6 million / 8.8% | $136.4 million / 11.9% | Down 35.0% |
| Net earnings | $64.9 million | $106.9 million | Down 39.3% |
| Diluted EPS | $0.62 | $1.01 | Down $0.39 |
| Cash used in operating activities | $92.2 million | $68.9 million | Outflow increased $23.3 million |
| Capital expenditures | $19.1 million | $29.3 million | Down $10.2 million |
Adjusted net earnings were $66.5 million, or $0.64 per diluted share, versus $103.6 million, or $0.98, a 34.7% decline in adjusted diluted EPS. Adjusted results exclude $3.9 million of AMP productivity initiative costs, net of tax, and adjust for stock-based compensation tax impacts; the prior-year comparison included acquisition-related costs.
Gross margin was nearly flat: unfavorable Residential product mix was mostly offset by favorable Professional mix. Lower sales volume drove a higher SG&A ratio, which rose to 25.6% of sales from 22.6%. Interest expense rose $2.1 million to $16.2 million, reflecting higher average rates and borrowings. The effective tax rate was 19.0%, versus 18.6%.
Segments and operating trends
- Professional: Sales fell 14.1% to $756.5 million; segment earnings fell 21.7% to $112.8 million. Segment margin declined to 14.9% from 16.4%. Lower shipments of zero-turn mowers and snow and ice products were partly offset by underground and specialty construction and golf and grounds products.
- Residential: Sales fell 9.3% to $240.1 million; segment earnings fell 37.8% to $23.5 million. Segment margin declined to 9.8% from 14.3%, primarily due to product mix. Lower snow-product and zero-turn mower shipments were partly offset by walk-power mowers and portable power products.
- International sales declined 16.5% to $205.0 million. Foreign exchange increased reported sales by approximately $0.8 million.
- Field inventories were higher year over year, particularly for certain lawn care and snow and ice products. Backlog remained significantly above what the company considers normal, especially for underground and specialty construction and golf and grounds products, where demand continued to exceed production.
Financial position and liquidity
- Cash and cash equivalents were $198.5 million at February 2, 2024. Total debt was $1,186.6 million, including $6.8 million current; debt was $1,091.0 million a year earlier. Cash increased $5.4 million during the quarter, supported by $114.1 million of financing cash flow, including $155.0 million of net revolving-facility borrowings.
- Management reported available liquidity of $600.9 million: $198.5 million cash and $402.4 million available on the revolving credit facility. The company was in compliance with debt covenants and expects liquidity and forecast operating cash flows to cover anticipated needs for at least 12 months.
- Current assets were $1,966.5 million and current liabilities were $921.9 million. Receivables were $489.1 million, up 29.6% year over year; inventories were $1,177.1 million, up 4.0%; accounts payable declined 11.2% to $421.8 million.
- Dividends paid were $0.36 per share, up from $0.34. The company said it expects to continue quarterly dividends for the remainder of FY2024. It made no repurchases under its authorized repurchase programs during the quarter and said repurchases may resume depending on cash, debt, working capital, share price, and other factors.
Outlook, risks, and notable items
- The AMP multi-year productivity initiative, announced in December 2023, targets at least $100 million in annualized cost savings by FY2027. A portion is intended to be reinvested in innovation and long-term growth. Q1 charges were $3.9 million, primarily third-party consulting costs.
- The filing provides no clear numerical full-year FY2024 revenue or earnings guidance. Management emphasizes uncertainty from seasonality, weather, macroeconomic conditions, demand, inventory levels, and production capacity.
- Key disclosed risks include adverse economic conditions and consumer or channel spending, weather and climate impacts, supply and commodity costs, inventory management, labor availability, foreign exchange and interest rates, competition, product quality and litigation, cybersecurity, and execution of acquisitions and the AMP initiative.
- Dealer and distributor financing involves contingent inventory repurchase obligations of up to $28.7 million at quarter-end. Repurchases during the quarter were immaterial; management warns that weaker retail sales or dealer financial difficulties could increase this exposure.
- Management said ordinary-course litigation liabilities, if any, are not expected to materially affect results, financial position, or cash flows. No material change to previously disclosed risk factors was reported. Disclosure controls were considered effective.
Important facts for investors to verify
- Whether shipment declines and elevated field inventory normalize, and whether unusually high backlog converts to sales as production catches up.
- Whether Professional and especially Residential segment margins recover from lower volume and unfavorable mix.
- Progress toward AMP’s $100 million annualized savings target by FY2027, including implementation costs and realized savings.
- Operating cash generation and working-capital trends, particularly receivables and finished-goods inventory.
- Debt, interest costs, revolving-credit availability, and potential exposure from dealer financing and inventory repurchase commitments.