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Toro Co. (TTC - Snapshot Report) reported record earnings per share of 53 cents in the first quarter of 2013, up 61% from 33 cents earned in the year ago quarter and up 23% from the Zacks Consensus Estimate of 43 cents. Reported earnings were also well above management guidance of 40 cents to 45 cents per share. The outperformance was led by strong channel demand for large turf equipment and continued growth of micro irrigation sales. 
 
Operational Update
 
Sales increased 5% year over year to a record $444.7 million but fell short of the Zacks Consensus Estimate of $462 million. The improvement was mainly driven by the Professional segment, which helped offset the decline in the Residential segment.
 
Gross profit increased 13% year over year to $166 million with gross margin expanding 270 basis points to 37.3%. Selling, general and administrative expenses increased 6% year over year to $119 million. Operating income rose 36% year over year to $46.2 million in the quarter with operating margin expanding 240 basis points to 10.4% in the quarter.
 
Segment Performance
 
Professional: Sales for the segment increased 16% year over year to $329 million in the quarter. The segment’s operating profit increased 43% to $60.4 million. The segment witnessed higher demand for large turf equipment in the domestic market. The successful launch of products acquired from Astec Underground Inc., a wholly-owned subsidiary of Astec Industries, Inc. (ASTE - Analyst Report) and Stone Construction acquisitions, also led to the outperformance in the quarter. Toro utilized the increased capacity to meet the steadily growing demand for micro-irrigation systems. However, international sales were weak in the quarter.
 
Residential: The segment reported sales of $120 million, down 12% year over year, affected by weak demand for snow products due to unseasonable winter weather in North America. Operating income dropped 4% to $12.1 million.  
 
Financial Position
 
Cash and cash equivalents were $60.8 million as of Feb 1, 2013, down from the $71.8 million as of Feb 3, 2012. Cash flow used in operating activities during the quarter was $23.5 million compared with $16.3 million in the prior-year quarter. As of Feb 1, 2013, the debt-to-capitalization ratio improved to 41.7% from 46.5% as of Feb 3, 2012.
 
Toro also announced that it has entered into an agreement to acquire a Chinese micro-irrigation company. The acquisition is subject to applicable regulatory approval and other customary closing conditions. This acquisition will help strengthen the company’s presence in China, a critical growth market.
 
Outlook
 
For fiscal 2013, Toro affirmed its revenue growth expectation of around 4% to 5%. The company, however, raised its earnings per share guidance to $2.40 to $2.45 from the previous range of $2.35 to $2.40 to reflect the benefit of tax rate improvement. For the second quarter, net earnings are expected to be around $1.20 per share.
 
Our Take
 
Toro will continue to benefit from the strong performance of the golf industry. Recent snowfall across the company’s primary snow markets, including the record-breaking blizzard that struck the Northeast will provide a boost to autumn pre-season snow product sales. Furthermore, Toro’s new product offerings and newly Toro-branded products from Astec and Stone Construction acquisitions from 2012 are being received well by consumers. The company currently retains a short term Zacks Rank #3 (Hold).
 
Bloomington, Minn-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. 
 
Peer Performance
 
Lincoln Electric Holdings Inc. (LECO - Analyst Report) reported fourth-quarter 2012 earnings of 79 cents per share, up 16% from 68 cents in the year-earlier quarter and ahead of the Zacks Consensus Estimate of 74 cents.
 
Snap-on Incorporated (SNA - Analyst Report) announced fourth-quarter 2012 earnings per share of $1.43, above the Zacks Consensus Estimate of $1.37 and the prior-year quarter’s earnings of $1.27.

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