The Toro Company — Q1 FY2018 Form 10-Q
Reporting period: Three months ended February 2, 2018; comparisons are with the three months ended February 3, 2017. Toro designs, manufactures, and markets professional and residential turf, landscaping, irrigation, snow and ice, and specialty equipment. Results are seasonal; management cautions that this quarter should not be annualized.
Financial performance
- Revenue: $548.2 million, up 6.3% from $515.8 million. Professional segment sales rose 8.6% to $403.7 million; Residential rose 1.5% to $142.5 million. International sales increased 11.8% to $146.8 million.
- Profit and margins: Gross profit was $204.2 million, up 5.6%; gross margin declined to 37.3% from 37.5%, reflecting higher commodity costs and unfavorable product mix, partly offset by favorable currency. Operating earnings rose 10.5% to $66.9 million; operating margin improved to 12.2% from 11.7%, as SG&A leverage offset gross-margin pressure.
- Net earnings: GAAP net earnings were $22.6 million, or $0.21 per diluted share, versus $45.0 million, or $0.41. The effective tax rate rose to 66.0% from 24.5%, primarily due to provisional Tax Act charges. Management’s non-GAAP adjusted net earnings were $52.1 million, or $0.48 per diluted share, up 30.0% from $40.1 million, or $0.37. These adjusted figures exclude specified tax items and are not GAAP measures.
- Cash flow: Operating cash flow was $8.1 million, down from $15.3 million, mainly because of inventory investment. Capital expenditures were $10.8 million; investing cash outflow was $10.8 million, compared with $35.5 million the prior year, which included the Perrot acquisition. Financing cash outflow was $88.1 million, including $50.1 million of share repurchases, $21.4 million of dividends, and $18.0 million of debt payments. Cash declined $90.5 million to $219.7 million.
- Liquidity and debt: Current assets were $900.8 million and current liabilities $572.5 million. Debt totaled approximately $315.5 million, including current maturities. Toro reported $151.1 million of unused credit availability after $8.6 million of letters of credit, no short-term borrowings under its listed lines, and compliance with credit covenants. Cash and short-term investments held by foreign subsidiaries were approximately $154.6 million.
Changes and business drivers
- Professional segment pre-tax earnings rose 11.4% to $75.9 million; segment margin increased to 18.8% from 18.3%. Strength in contractor mowers, golf and grounds, rental/construction equipment, and agricultural irrigation was partly offset by lower snow and ice product shipments.
- Residential segment pre-tax earnings fell 5.1% to $15.7 million; segment margin declined to 11.0% from 11.8%, due to higher warranty and marketing expense, lower gross margins, and unfavorable mix. Below-average snowfall weighed on snow-product and service-part sales.
- Inventory was $439.3 million, up 9.3% year over year, reflecting planned seasonal sales and currency effects. Receivables increased 8.1%; average days sales outstanding improved to 30.1 from 30.8 days. Average net working capital as a percentage of sales improved to 13.8% from 15.1%.
Outlook, risks, and unusual items
- Tax reform: The Tax Act generated provisional charges of $20.5 million for deferred-tax remeasurement and $12.6 million for deemed repatriation, partly offset by a $4.9 million benefit from the lower federal tax rate. The repatriation tax is payable over eight years. Accounting was incomplete at quarter-end, and final effects may differ.
- Management goals and outlook: Toro’s Vision 2020 initiative targets at least 5% annual organic revenue growth in each of three fiscal years and operating earnings of at least 15.5% of sales by fiscal 2020. These are goals, not quarterly or full-year guidance. Management expects some commodity and component costs to remain higher for the rest of FY2018 and cites supplier collaboration, cost reductions, and selective pricing as mitigations.
- Seasonality and risk: Weather and snowfall affect demand and timing; other stated risks include commodity costs, foreign exchange, product mix, channel inventory and financing, competition, and execution of growth initiatives. Currency movements increased quarterly sales by approximately $3.3 million. Toro uses derivatives to hedge exposures and does not use them for speculation.
- Contingencies: Toro is involved in ordinary-course litigation, including product liability, environmental, commercial, employment, and patent matters. Management stated that any loss, individually or in aggregate, is not expected to materially affect results, financial position, or cash flows. No subsequent events requiring disclosure were identified.
Important facts for investors to verify
- Whether subsequent filings refine the provisional Tax Act accounting and its effect on the effective tax rate and cash taxes.
- Whether seasonal demand, field inventory, and snowfall translate into sales without excess channel inventory or margin pressure.
- Whether commodity-cost increases and product mix continue to constrain gross margin, and whether management’s mitigation measures are effective.
- Operating cash generation and working-capital needs as inventory builds ahead of the selling season; liquidity and covenant headroom under the credit facilities.
- Progress toward Vision 2020 goals and developments in litigation, customer financing arrangements, and foreign-exchange exposures.