Toro reports fiscal Q3 earnings; residential sales skyrocket

The Toro Company today reported results for its fiscal third-quarter and year-to-date periods ended July 31, 2020.

“We continued to deliver on our strategic business priorities of accelerating profitable growth, driving productivity and operational excellence and empowering people,” said Richard M. Olson, chairman and chief executive officer. “We reported top-line growth in a challenging environment, primarily due to the continued strength of our residential segment as favorable weather, our new product lineup and stay-at-home trends drove robust demand in the mass and dealer channels. Incremental sales from our Venture Products acquisition also contributed to third-quarter growth. Additionally, we were encouraged by improved demand for our professional segment products, driven by greater business confidence and increased home investments.

“We are deeply grateful for the extraordinary efforts and resiliency of our entire team, which enabled us to deliver these results. Our dedicated people continue to live our brand promise and provide innovative solutions that meet our customers’ needs,” concluded Olson.

THIRD-QUARTER AND YEAR-TO-DATE FISCAL 2020 FINANCIAL HIGHLIGHTS

  • Net sales of $841.0 million, up 0.3% from $838.7 million in the third quarter of fiscal 2019; year-to-date fiscal 2020 net sales were $2.54 billion, up 5.6% from $2.40 billion in the same prior-year period.
  • Net earnings of $89.0 million, up 46.8% from $60.6 million in the third quarter of fiscal 2019; adjusted net earnings of $88.7 million, down 1.2% from $89.8 million in the third quarter of fiscal 2019.
  • Year-to-date fiscal 2020 net earnings of $257.5 million, up 9.2% from $235.7 million in the same prior-year period; adjusted net earnings of $258.6 million, down 5.1% from $272.4 million in the first nine months of fiscal 2019.
  • Reported EPS of $0.82 per diluted share, up 46.4% from $0.56 per diluted share in the third quarter of fiscal 2019; adjusted EPS of $0.82 per diluted share, down 1.2% from $0.83 per diluted share in the third quarter of fiscal 2019.
  • Year-to-date fiscal 2020 reported EPS of $2.37 per diluted share, up 8.7% from $2.18 per diluted share in the same prior-year period; adjusted EPS of $2.38 per diluted share, down 5.6% from $2.52 per diluted share in the first nine months of fiscal 2019.
  • As of July 31, 2020, the company had ample liquidity of $992 million, including cash and cash equivalents of $394 million and availability under its revolving credit facility of $598 million.

OUTLOOK

“Our diverse portfolio of businesses positions us to drive growth as end markets normalize. We are delivering on our long-standing principles of innovation, strong customer relationships, and sustained value creation through disciplined capital allocation. We are enthusiastic about the future given our innovation pipeline and the proven ability of the team to adapt and perform successfully in these dynamic times,” concluded Olson.

The company previously withdrew its financial guidance, which it is not reinstating at this time. However, based on current visibility, and with an understanding of the uncertain nature of the economic environment, it is providing the following assumptions for the fiscal 2020 fourth quarter. Continued year-over-year growth in the residential market is expected, but at a more moderate level. Professional markets should benefit from the gradual return to more normal buying patterns as customers’ confidence in the economy increases. These positive trends will likely be somewhat offset by remaining COVID-19 headwinds, such as budget constraints, the effects of social distancing restrictions and regional variations in economic recovery. Although precision is difficult in this environment, if these assumptions hold true, the company anticipates that fiscal 2020 fourth-quarter adjusted EPS would be similar to that of its fiscal 2019 fourth quarter, on higher net sales.

THIRD-QUARTER SEGMENT RESULTS

Professional Segment

Professional segment net sales for the third quarter were $623.6 million, down 7.9% compared with $676.8 million in the same period last year, primarily due to reduced channel demand as a result of COVID-19 related impacts, which led to fewer shipments of golf and grounds equipment, reduced sales of rental, specialty and underground construction equipment, and fewer shipments of landscape contractor zero-turn riding mowers. The net sales decrease was partially offset by incremental sales as a result of the company’s acquisition of Venture Products.

For the first nine months of fiscal 2020, professional segment net sales were $1.88 billion, up 1.3% from $1.86 billion in the same period last year. The net sales increase was primarily driven by incremental sales from the Charles Machine Works and Venture Products acquisitions, partially offset by reduced channel demand as a result of COVID-19, which led to fewer shipments of landscape contractor zero-turn riding mowers, fewer shipments of golf and grounds equipment, and reduced sales of rental, specialty and underground construction equipment.

Professional segment earnings for the third quarter were $113.7 million, up 39.3% compared with $81.6 million in the same period last year, and when expressed as a percentage of net sales, increased 610 basis points to 18.2% from 12.1%. This increase was primarily due to lower non-recurring acquisition-related charges as compared to the prior-year period, favorable net price realization and lower commodity costs. The increase was partially offset by unfavorable product mix and COVID-19 related manufacturing inefficiencies.

Year to date, professional segment earnings were $322.4 million, an increase of 0.8% compared with the same period in the prior fiscal year. Professional segment earnings as a percentage of net sales remained a constant 17.2% for both fiscal periods. The professional segment earnings increase was primarily driven by lower non-recurring acquisition-related charges as compared to the prior-year period, favorable net price realization, and productivity and synergy initiatives. This increase was partially offset by COVID-19 related manufacturing inefficiencies and higher SG&A expenses as a result of the Charles Machine Works and Venture Products acquisitions.

Residential Segment

Residential segment net sales for the third quarter were $205.0 million, up 38.3% compared with $148.2 million in the same period last year. The net sales increase was primarily due to strong retail demand for zero-turn riding and walk power mowers and the company’s expanded mass retail channel.

For the first nine months of fiscal 2020, residential segment net sales were $632.8 million, up 20.4% compared with $525.5 million in the same period last year. This increase was mainly driven by incremental shipments as a result of the company’s expanded mass retail channel, and strong retail demand for zero-turn riding and walk power mowers.

Residential segment earnings for the third quarter were $28.5 million, up 76.7% compared with $16.2 million in the same period last year, and when expressed as a percentage of net sales, increased 300 basis points to 13.9% from 10.9%. For the first nine months of fiscal 2020, residential segment earnings increased 70.2% to $87.2 million, and when expressed as a percentage of net sales, increased 400 basis points to 13.8% from 9.8%. For both periods, this increase was primarily driven by productivity and synergy initiatives and SG&A leverage, which was partially offset by COVID-19 related manufacturing inefficiencies and unfavorable product mix.

OPERATING RESULTS

Gross margin for the third-quarter was 35.0%, up 330 basis points compared with 31.7% for the same prior-year period, primarily driven by the decrease in acquisition-related charges as compared to the prior-year period, favorable net price realization in the company’s professional segment and productivity and synergy initiatives. Adjusted gross margin for the third quarter was 35.2%, down 70 basis points compared with 35.9% for the same prior-year period. The decrease in adjusted gross margin was primarily driven by COVID-19 related manufacturing inefficiencies, unfavorable mix due to higher sales of residential products and increased inventory reserves in one of the company’s professional segment businesses. This decrease was partially offset by favorable net price realization in the company’s professional segment, and productivity and synergy initiatives.

For the first nine months of fiscal 2020, gross margin was 35.0%, up 160 basis points compared with 33.4% for the same prior-year period. The increase in gross margin was primarily driven by the decrease in acquisition-related charges as compared to the prior-year period, productivity and synergy initiatives, and favorable net price realization in the professional segment. This increase was partially offset by unfavorable mix due to higher sales of residential products and COVID-19 related manufacturing inefficiencies. Adjusted gross margin for the first nine months was 35.2%, down 10 basis points compared with 35.3% for the same prior-year period.

The decrease in adjusted gross margin was primarily driven by unfavorable mix due to higher sales of residential products and COVID-19 related manufacturing inefficiencies. This decrease was partially offset by productivity and synergy initiatives, and favorable net price realization in the professional segment.

Selling, general and administrative (SG&A) expense as a percentage of sales for the third quarter decreased 170 basis points to 21.2% from 22.9% in the prior-year period. The decrease in SG&A expense as a percentage of sales was primarily due to lower travel and meeting expenses, acquisition-related costs, and employee salaries. This was partially offset by increased incentive compensation expense. For the first nine months of fiscal 2020, SG&A expense as a percentage of sales was 21.9%, up 20 basis points from 21.7% in the prior-year period.

Operating earnings as a percentage of net sales increased 500 basis points to 13.8% for the third quarter. Adjusted operating earnings as a percentage of net sales increased 50 basis points to 13.9% for the third quarter. For the first nine months of fiscal 2020, operating earnings as a percentage of net sales were 13.1% compared with 11.7% in the year-ago period. Adjusted operating earnings as a percentage of net sales for the first nine months of fiscal 2020 were 13.4% compared with 14.2% in the year-ago period.

Interest expense decreased $0.7 million for the third quarter and increased $4.7 million for the year-to-date period of fiscal 2020, each compared with the year-ago periods.

The effective tax rate for the third quarter was 19.8% compared with 14.9% for the third quarter of fiscal 2019, driven by a lower tax benefit related to the excess tax deduction for share-based compensation. The adjusted effective tax rate for the third quarter was 20.9% compared with 18.1% for the third quarter of fiscal 2019, driven by one-time discrete items. For the first nine months of fiscal 2020, the effective tax rate was 19.2% compared with 15.3% for the first nine months of fiscal 2019. The *adjusted effective tax rate for the first nine months of fiscal 2020 was 20.6% versus 19.5% in the first nine months of fiscal 2019.

Working capital at the end of the third quarter was up compared with the end of the third-quarter of the prior fiscal year, primarily driven by an increase in inventory and a reduction in accounts payable, partially offset by a reduction in accounts receivable.

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