The Toro Company — Q3 Fiscal 2015 Form 10-Q
Reporting period: Three and nine months ended July 31, 2015; comparisons are with the periods ended August 1, 2014. Toro designs, manufactures, and markets professional and residential outdoor equipment, irrigation systems, and related products. Fiscal results are seasonal and should not be annualized.
Financial results
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net sales | $609.6 million | $567.5 million | $1,910.1 million | $1,758.6 million |
| Gross margin | 35.5% | 35.6% | 34.9% | 35.8% |
| Operating earnings | $79.4 million | $72.0 million | $262.3 million | $243.5 million |
| Net earnings | $53.3 million | $50.0 million | $178.0 million | $163.0 million |
| Diluted EPS | $0.94 | $0.87 | $3.13 | $2.82 |
- Q3 sales increased 7.4% and net earnings increased 6.6%; diluted EPS rose 8.0%. Nine-month sales and net earnings increased 8.6% and 9.2%, respectively; diluted EPS rose 11.0%.
- Q3 operating margin was 13.0%, versus 12.7%; nine-month operating margin was 13.7%, versus 13.8%. Net margin was 8.7% for Q3 and 9.3% year to date, compared with 8.8% and 9.3%.
- Operating cash flow for the nine months was $168.0 million, compared with $164.2 million. Investing activities used $233.9 million, including $198.3 million for the BOSS acquisition; capital expenditures were $37.5 million. Financing activities used $136.5 million, including $91.0 million for share repurchases and $41.8 million for dividends.
- At July 31, cash was $110.3 million. Debt was approximately $386.5 million, comprising $381.3 million of long-term debt including its current portion, and $5.2 million of short-term debt. The $150 million revolving facility had $146.6 million of unutilized availability; Toro reported covenant compliance.
- Current assets were $771.4 million and current liabilities $499.0 million. Inventory was $350.2 million, up 19.2% from the prior-year quarter-end; management attributed the increase partly to anticipated product demand and BOSS inventory.
Material changes and management commentary
- The November 2014 acquisition of BOSS added professional snow and ice products. It contributed $37.1 million of Q3 sales and $82.4 million year to date, with an immaterial net earnings impact. Purchase price was $229.5 million, funded with cash, a $130 million term loan, and a note issued to former owners.
- Professional segment sales grew 9.7% in Q3 and 8.8% year to date; Residential sales were nearly flat in Q3 (+0.1%) and rose 8.4% year to date. New mower products and BOSS supported growth. Weather-related irrigation weakness, currency headwinds, and lower snow-thrower preseason shipments weighed on results.
- Foreign currency movements reduced sales by approximately $11 million in Q3 and $30 million year to date. International sales fell 3.5% and 4.6%, respectively.
- Gross margin declined year to date, primarily from currency effects and acquisition-related fair-value inventory charges. SG&A declined as a percentage of sales due to scale and lower marketing expense; interest expense rose with acquisition-related borrowing.
- Q3 effective tax rate was 31.3%, up from 29.4%, mainly because a prior-year discrete tax benefit did not recur. The nine-month rate declined to 30.4% from 31.7%, partly reflecting the retroactive research tax credit.
Outlook, risks, and unusual items
- Toro’s three-year “Destination PRIME” initiative targets organic revenue growth of at least 5% annually, operating earnings above 13% of sales by fiscal 2017, and average net working capital below 13% of sales by fiscal 2017. These are strategic goals, not specific fiscal 2015 guidance.
- Management stated that operating cash flow, debt facilities, and cash on hand should provide adequate liquidity for at least the next 12 months, including anticipated working capital, capital expenditures, debt repayments, dividends, and repurchases. Management also expected lower average prices for some commodities and components for the remainder of fiscal 2015 than in fiscal 2014.
- Key risks include seasonality and weather-driven demand, foreign exchange movements, commodity and component costs and availability, channel inventory and customer financing, competition, and successful integration of BOSS. Debt covenants could become consequential if breached; Toro reported compliance and expected continued compliance for the rest of fiscal 2015.
- Ordinary-course litigation includes product liability, environmental and asbestos-related matters, commercial and employment disputes, and patent cases. Management believed any potential liability would not materially affect results, financial position, or cash flows.
- Q2 included a $1.4 million impairment of intangible assets. The filing reports no subsequent events requiring recognition or disclosure and no material change in risk factors.
Important facts for investors to verify
- How much of sales and earnings growth was organic versus attributable to BOSS, and whether BOSS integration delivers expected benefits.
- Whether elevated inventory converts to sales as anticipated, particularly residential and snow-thrower products, and how working capital tracks against the initiative’s target.
- The persistence of currency effects, weather-related demand shifts, and margin pressure, including the impact of acquisition accounting.
- Debt repayment, interest costs, liquidity headroom, and ongoing compliance with credit agreement covenants.
- Progress toward Destination PRIME goals; the filing does not provide specific full-year fiscal 2015 sales or earnings guidance.