Shares of Toro Co. (TTC) edged up 0.38% as the company reported a 14% increase in its earnings to a record $1.51 in its second-quarter fiscal 2014 (ended May 2, 2014) results on May 22. Earnings were ahead of the Zacks Consensus Estimate of $1.45 as well as management’s guidance of $1.45 to $1.50 per share.
Operational Update
Sales increased 6% year over year to a second-quarter record of $745 million, beating the Zacks Consensus Estimate of $728 million. The year-over-year growth was led by strong demand for professional segment products.
Cost of sales rose to $480 million from $452 million in the year-ago quarter. Gross profit increased 5% year over year to $264 million. However, gross margin contracted 30 basis points (bps) year over year to 35.5%, due to unfavorable currency exchange rates and higher commodity costs. These were partly offset by realized pricing.
Selling, general, and administrative expenses declined 1% year over year to $133.7 million, primarily driven by lower administrative expenses, including health care costs, partially offset by higher incentive expenses. Operating profit increased 11% year over year to $131 million. Operating margin expanded 90 bps year over year to 17.6%.
Segmental Performance
Professional: Net sales from this segment increased 10% year over year to $528 million, primarily due to an increase in sales of landscape maintenance equipment, golf equipment and irrigation products. Global micro irrigation sales also increased with continued demand for more efficient solutions for agriculture and construction; and rental equipment sales grew on channel demand for Toro branded products. These were partly offset by lower sales of professional products in international markets. The Professional segment posted earnings of $122 million, up 9% from the prior-year quarter.
Residential: This segment reported sales of $210.4 million, up 4% year over year. The increase was attributable to a rise in domestic retail demand for residential zero turn mowing products, as customers continued to transition to this mowing platform. Demand was strong for walk power mowers on the International front, while electric blowers and trimmers were in demand in domestic markets. However, lower shipments of domestic walk power mowers and decreased sales in Australia due to unfavorable currency exchange and weather conditions were a deterring factor. The residential segment’s earnings came in at $23.8 million, down 3% year over year.
Financial Update
Toro ended the quarter with cash and cash equivalents of $130 million, as against $80.3 million at the end of the year-ago quarter. Cash from operations during the quarter was $78 million versus $37 million in the prior-year quarter.
Long-term debt was $224 million as of May 2, 2014, flat compared with $223.5 million as of May 3, 2013. The debt-to-capitalization ratio contracted 10 bps to 36.7% as of May 2, 2014 from 37.5% as of May 3, 2013.
Outlook
For full-year 2014, Toro maintained its revenue growth guidance of 5–6%. The company also reiterated its net earnings guidance for the year in the range of $2.90–$2.95 per share. For the third quarter of fiscal 2014, Toro expects net earnings to be about 80 cents per share.
Our Take
Golf course development is progressing along with improvement in the housing and construction sector. Moreover, consistent focus on enhancing shareholders’ value and exploitation of acquisition opportunities will bolster growth.
Toro will continue to benefit from global food demand and increased water use restrictions which will drive the need for more efficient irrigation solutions. Furthermore, recent investments in the micro irrigation business will facilitate expansion of the company’s global footprint. However, foreign exchange volatility along with social and political unrest remains headwinds.
Bloomington, MN-based Toro is a worldwide provider of turf and landscape maintenance equipment as well as irrigation solutions for golf courses, sports fields, public green spaces, commercial and residential properties as well as agricultural fields. The company operates through two segments: Professional and Residential.
Toro currently carries a short-term Zacks Rank #3 (Hold).
However, some better-ranked stocks in same sector include Gibraltar Industries, Inc. (ROCK), Simpson Manufacturing Co., Inc. (SSD), Snap-on Inc. (SNA). While Gibraltar Industries and Simpson Manufacturing sport a Zacks Rank #1 (Strong Buy), Snap-on carries a Zacks Rank #2 (Buy).
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