The Toro Company (NYSE: TTC) — Q1 FY2020 Form 10-Q
Reporting period: Three months ended January 31, 2020; comparable period ended February 1, 2019. The company notes that its business is seasonal and quarterly results should not be annualized.
Business context
Toro designs, manufactures, and markets professional turf, irrigation, landscaping, snow and ice, underground construction, and residential outdoor equipment. It reports Professional and Residential segments. Results include the acquired Charles Machine Works (CMW), whose underground construction products expanded the Professional portfolio.
Financial results
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $767.5 million | $603.0 million | +27.3% |
| Gross profit / margin | $288.1 million / 37.5% | $215.6 million / 35.8% | Margin +170 bps |
| Operating earnings / margin | $91.1 million / 11.9% | $70.1 million / 11.6% | +30.1% |
| Net earnings | $70.1 million | $59.5 million | +17.7% |
| Diluted EPS | $0.65 | $0.55 | +18.2% |
| Operating cash flow | $(23.3) million | $26.0 million | Decrease of $49.3 million |
Management reported adjusted non-GAAP net earnings of $69.7 million, or $0.64 per diluted share, up 20.8% per share. Adjusted non-GAAP gross margin was 37.6%, versus 35.8%. These are supplemental measures, not GAAP results.
- Sales by segment: Professional $594.7 million, up 30.7%; Residential $165.8 million, up 14.3%.
- Segment earnings: Professional $102.5 million, up 16.5%, but its margin fell to 17.2% from 19.3%; Residential $21.6 million, up 65.0%, with margin rising to 13.0% from 9.0%.
- Cash and working capital: Cash and equivalents were $108.9 million at quarter-end. Inventories were $739.0 million, up $322.3 million year over year; receivables were $321.2 million, up $95.7 million.
- Debt and liquidity: Total debt was $714.9 million, compared with $312.6 million a year earlier. The $600 million revolving facility had $14.0 million drawn and $584.1 million of unused availability. Toro reported compliance with debt covenants.
- Dividends: The quarterly dividend increased 11.1% to $0.25 per share; $26.9 million was paid during the quarter.
Material changes and drivers
- Sales growth primarily reflected CMW contributions, improved pricing, strong early-season snow and ice product shipments, and incremental Residential mower shipments through an expanded mass-retail channel. CMW contributed $160.9 million in sales and $9.4 million in segment earnings in the quarter.
- Gross margin improved with productivity and synergy initiatives, price realization, lower freight, commodity and tariff costs, and revised Red Iron floor-plan financing rates. Lower-margin CMW product mix partly offset those benefits.
- SG&A rose 35.3%, faster than sales, reflecting CMW costs, intangible amortization, integration spending, and higher engineering and indirect selling expenses. Interest expense increased $3.4 million, mainly because of acquisition-related borrowing.
- Operating cash flow turned negative, chiefly due to seasonal inventory purchases and higher receivables, including receivables associated with a new mass-retail partner. Investing cash outflow was $11.8 million; financing cash outflow was $7.5 million.
Outlook, risks, and unusual items
- Goal: Toro’s final year of its Vision 2020 initiative had a revised enterprise-wide goal of $485 million in adjusted non-GAAP operating earnings. The filing does not provide a clear formal full-year FY2020 earnings or revenue forecast. Management anticipated average commodity, component, parts, and accessory costs for the remainder of FY2020 to be below the comparable prior-year period.
- Venture Products: Toro reported completing the Ventrac manufacturer acquisition after quarter-end, for preliminary consideration of $163.4 million, funded with revolver borrowings. The agreement described total consideration of $167.5 million before customary adjustments. The filing gives March 2, 2020 as the closing date in its acquisition disclosures but March 20 in one risk-factor passage; investors should verify the correct date.
- Acquisition and integration: CMW-related goodwill and intangible assets increase impairment exposure; CMW internal-control integration was ongoing, with completion expected in Q2 FY2020. Toro also expected approximately $10–11 million of total pre-tax charges for winding down Toro-branded large directional drills and riding trenchers, substantially all by fiscal year-end; $0.9 million remained accrued.
- Risk factors: Seasonality, weather and demand shifts, channel inventory, economic conditions, foreign exchange, input costs and tariffs, customer financing availability, acquisition integration, leverage, and litigation could affect results. COVID-19 was expressly identified as a potential source of disruption and cost pressure; the filing does not report a quantified Q1 impact.
- Other items: Operating cash flow and inventory were affected by seasonal working-capital needs. Adoption of lease accounting added $78.1 million of right-of-use assets and $77.1 million of lease liabilities at adoption, with no material earnings or cash-flow impact. Management said ordinary-course litigation was not expected to materially affect results or financial position.
Important facts for investors to verify
- How much of revenue and earnings growth is organic versus attributable to CMW, and whether acquisition synergies offset lower-margin product mix and added overhead.
- Whether elevated inventory and receivables convert to cash through the seasonal selling cycle, particularly given soft demand noted for some mower products.
- Debt repayment progress and liquidity after the Venture Products acquisition, including the impact of further revolver borrowing and interest costs.
- The timing and expected costs of Toro’s underground product wind-down, and the final Venture Products purchase accounting and consideration.
- The March 2 versus March 20 Venture Products closing-date discrepancy and the final purchase price after adjustments.
- Potential effects of weather, COVID-19-related disruption, commodity and tariff changes, and dealer financing conditions on subsequent quarters.