Record Year for Toro (DE) (HMC) (TTC)

Toro Co. (TTC) reported break-even results in the fourth quarter of 2012, in line with the Zacks Consensus Estimate but compared unfavorably with 8 cents per share earned in the year-ago quarter. Fourth quarter results were affected by the reduced demand for snow products due to last winter's paltry snowfall, which restrained consumers to buy equipment for this season. The warm, dry start to winter this year further aggravated the situation.

Operational Update

Sales declined 8% year over year to $339 million, falling short of the Zacks Consensus Estimate of $350 million. The decline in the Residential segment offset the increase in the Professional segment.

Gross profit decreased 10% year over year to $226 million with gross margin contracting 100 basis points to 33.3%. Selling, general and administrative expenses decreased 1% year over year to $109 million. Operating income plunged 55% year over year to $4.1 million in the quarter with operating margin contracted130 basis points to 1.2% in the quarter.

Segment Performance

Professional: Sales for the segment increased 6% year over year to $228.6 million in the quarter. The segment’s operating profit increased 21% to $20.7 million.

Residential: The segment reported sales of $102 million, down 29% year over year, affected by weak snow thrower sales. Operating income dropped 43% to $6.7 million with operating margin contracting 170 basis points to 6.6%.

Fiscal 2012 Performance

Despite a lackluster fourth quarter, Toro reported record earnings per share of $1.85 in fiscal 2012, up 16% from $2.14 in the prior year and ahead of the Zacks Consensus Estimate by a cent. Sales increased 4% year over year to a record $1.96 billion. Successful introduction of new products and accretive acquisitions helped grow its positions in golf equipment, landscape contractor and grounds, micro irrigation and residential mowing, which fully offset weak snow thrower sales, leading to the improvement in results.

Financial Position

Toro Co. ended the year with cash and cash equivalents of $126 million, up from the $81 million at the end fiscal 2011. Cash flow from operating activities during the year improved to $186 million from $114 million in the prior-year comparable period. As of fiscal 2012 end, the debt-to-capitalization ratio improved to 42% from 46% as of fiscal 2011 end.

Outlook

For fiscal 2013, Toro Co. envisions revenue growth of around 4% to 5% and net earnings in the range of $2.35 to $2.40 per share. For the first quarter, net earnings are expected to lie within 40 cents to 45 cents per share, positively impacted by anticipated accelerated purchases of diesel products ahead of the Tier 4 price change.

Our Take

Toro Co. will continue to benefit from the strong performance of the golf industry. As the number of golf grounds continues to grow, increased revenues from the courses will positively impact the company’s future capital budgets.

With weather forecasts indicating normal snowfall this season, it is expected that Toro’s new snow product offerings will be received well by consumers. The outlook also looks positive for the landscape contractor business as large acreage owners are replacing their ageing line and garden tractors with Toro’s latest commercial-grade zero turn equipment. However, the company currently retains a Zacks #2 Rank (short-term Buy rating).

Bloomington, Minnesota-based Toro Co. is a worldwide provider of turf and landscape maintenance equipment, and irrigation solutions, to help customers care for golf courses, sports fields, public green spaces, commercial and residential properties, and agricultural fields. The company operates through its two segments- Professional and Residential. Deere & Company (DE) and Honda Motor Co., Ltd. (HMC) are the peers of Toro Co.