The Toro Company (NYSE: TTC) — Q2 2022 Form 10-Q
Reporting period: Fiscal second quarter and first six months ended April 29, 2022; comparisons are with the corresponding fiscal 2021 periods. Dollar amounts are in U.S. dollars.
Business context
Toro designs, manufactures and sells professional turf and landscape equipment, irrigation systems, underground construction equipment, and residential outdoor products. It reports Professional and Residential segments. Strong customer demand continued, but supply constraints, inflation and manufacturing inefficiencies limited production and pressured margins.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1,249.5 million | $1,149.1 million | $2,182.1 million | $2,022.1 million |
| Gross margin | 32.4% | 35.1% | 32.3% | 35.5% |
| Operating earnings | $170.6 million | $180.7 million | $262.2 million | $322.2 million |
| Net earnings | $131.1 million | $142.2 million | $200.6 million | $253.5 million |
| Diluted EPS | $1.24 | $1.31 | $1.89 | $2.32 |
- Q2 sales increased 8.7%; six-month sales rose 7.9%. Price realization and the Intimidator acquisition contributed, partly offset by lower volumes and product availability constraints.
- Gross margin fell 270 basis points in Q2 and 320 basis points year to date, principally from higher material, freight and manufacturing costs. Price increases and productivity efforts partly offset these pressures.
- Q2 net earnings declined 7.8% and diluted EPS declined 5.3%; six-month net earnings declined 20.8% and diluted EPS declined 18.5%. The year-to-date comparison also reflects a favorable net patent-litigation settlement recognized in fiscal 2021 that did not recur.
- Q2 Professional sales grew 11.8%, while segment earnings decreased 1.1%; Residential sales grew 1.5%, while segment earnings decreased 19.3%. Year-to-date segment earnings declined 8.9% for Professional and 11.8% for Residential.
- Operating cash flow for the first six months was $42.9 million, versus $318.6 million a year earlier. Capital expenditures were $36.0 million, producing company-defined non-GAAP free cash flow of $6.9 million versus $292.4 million.
Financial position and capital allocation
- At April 29, 2022, cash was $263.2 million; inventory was $891.7 million, up 41.8% year over year, and receivables were $439.3 million, up 12.3%. Management attributed inventory growth to supply-chain constraints, inflation and the acquisition.
- Total debt was $1.091 billion, including $100 million classified as current because the company intends to repay that amount within twelve months. Cash and available revolving-credit capacity brought reported available liquidity to $659.7 million; undrawn revolver availability was $396.5 million.
- Debt increased to fund the $400.5 million Intimidator acquisition. The company borrowed $200 million under a new term loan due April 2027 and had $200 million outstanding under its revolving facility. It reported compliance with debt covenants.
- Cash dividends paid in the first six months totaled $63.0 million; the quarterly dividend was increased 14.3% to $0.30 per share. The company also repurchased $75.0 million of stock in the period and said it expected to continue dividends and repurchases, subject to cash needs, debt repayment and market conditions.
Outlook, risks and unusual items
- Management said it expected significantly higher commodity, component, freight and tariff costs to continue through the remainder of fiscal 2022. It also expected ongoing supply-chain disruption; the filing provides no numerical full-year earnings or sales guidance.
- Management cited strong demand but noted field inventories were lower than a year earlier, particularly in Professional, because demand exceeded production capacity. Residential field inventories were approaching historical levels. The company cautioned that seasonality and conditions prevent annualizing first-half results.
- In January 2022, Toro acquired Intimidator, adding $60.5 million of sales through April 29. Preliminary purchase accounting included $160.8 million of goodwill and $184.2 million of intangible assets. Up to $15 million of additional consideration may be payable if specified tax changes qualify; no liability was recorded because the contingency was not probable or estimable.
- Toro discontinued sales in Russia and Belarus during Q2 and did not expect a material financial impact. It identified COVID-19-related supply disruption, inflation, labor constraints, currency movements, weather, and acquisition integration as risks.
- Potential dealer-financing inventory repurchases were capped at $85.6 million under certain third-party arrangements as of April 29; actual repurchases had been immaterial. The company stated ordinary-course litigation liabilities, if any, were not expected to materially affect results, financial position or cash flows.
- Intimidator integration includes incorporating relevant internal controls; Toro expected to complete this work during fiscal 2023 and said it did not expect to include Intimidator in its fiscal 2022 year-end internal-control assessment.
Important facts for investors to verify
- Whether pricing and productivity can offset continued inflation, freight costs and supply-related manufacturing inefficiencies without further margin erosion.
- Whether supply availability improves enough to convert elevated raw-material and work-in-process inventory into finished goods and cash.
- Intimidator integration, acquired-asset valuations, expected synergies, and any final purchase-price adjustments or contingent consideration.
- Cash generation and the company’s ability to repay the planned $100 million current debt amount while sustaining dividends and repurchases.
- Dealer and distributor financial health, including the potential exposure from inventory repurchase arrangements and low channel inventories.