• Strength of Charles Machine Works drives third quarter sales increase of 27.9 percent to $838.7 million
• On track to achieve acquisition integration and synergy targets
• Reported quarterly EPS of $0.56; adjusted quarterly EPS of $0.83
• Full-year adjusted EPS guidance narrowed to about $2.92 to $3.00 from about $2.90 to $3.00

BLOOMINGTON, Minn. — The Toro Company (NYSE: TTC) today reported net earnings of $60.6 million, or $0.56 per share, on a net sales increase of 27.9 percent to $838.7 million for its third quarter ended August 2, 2019. In the comparable fiscal 2018 period, the company delivered net earnings of $79.0 million, or $0.73 per share, on net sales of $655.8 million. Adjusted 2019 third quarter net earnings were $89.8 million, or $0.83 per share, compared to adjusted net earnings of $73.5 million, or $0.68 per share in the comparable 2018 period, an increase of 22.1 percent.

For the first nine months, Toro reported net earnings of $235.7 million, or $2.18 per share, on a net sales increase of 15.6 percent to $2,403.7 million. For the first nine months, adjusted net earnings were $272.4 million, or $2.52 per share, compared to adjusted net earnings of $255.9 million, or $2.35 per share, in the comparable 2018 period, an increase of 7.2 percent. Please see the tables for a reconciliation of financial measures calculated and reported in accordance with GAAP, as well as adjusted non-GAAP financial measures.

"Third quarter revenue growth was driven by the addition of the Charles Machine Works portfolio as integration continues to progress as planned," said Richard M. Olson, Toro's chairman and chief executive officer. "The entire team has been collaboratively working to optimize the combined enterprise, with a focus on consistent execution, an unwavering commitment to innovation and a focus on customer relationships. I am proud of our team's progress to date."

"As mentioned earlier this month, we have launched a new strategy for our underground businesses, which will enable us to satisfy customer needs more effectively, while also capturing manufacturing and operational efficiencies. This is one example of many, where we have been able to move quickly and decisively to eliminate redundancies and align priorities. Integration continues to go well, and we are encouraged by the progress we have made since we announced the acquisition earlier this year.”

“As anticipated, we are seeing gross margin improvement in the second half of the fiscal year and we expect that positive momentum to continue in the months ahead. Commodity costs have begun to moderate and we have been able to achieve strategic pricing realization. Additionally, prudent expense management contributed to the favorable quarterly results."

"We are encouraged by preseason snow shipments already taking place. Both our residential and BOSS® snow and ice management businesses are well-positioned with exciting new product lineups. As we look ahead, we are mindful of challenging weather conditions and the trade policy environment the entire market is experiencing. In addition, as we proactively manage inventory levels, we expect to experience some unfavorable manufacturing variance in the fourth quarter. For these reasons, we are modifying our full-year revenue guidance and narrowing the bottom end of our full-year adjusted net EPS range to reflect the solid performance we have achieved year-to-date, while holding the top of the range to reflect the variables we have outlined."

For the full-year, we now expect revenue to exceed $3.1 billion and we have narrowed our adjusted net earnings per share guidance to about $2.92 to $3.00 from about $2.90 to $3.00.

SEGMENT RESULTS

Professional

• Professional segment net sales for the third quarter were $676.8 million, up 40.3 percent from $482.5 million last year. For the first nine months, professional segment net sales were $1,855.3 million, up 20.0 percent from the comparable 2018 period. For the quarter, the addition of Charles Machine Works and growth in our BOSS, rental and specialty construction businesses, all contributed to the results. Somewhat offsetting the growth for the quarter, were lower shipments of landscape contractor and irrigation products, due to poor weather conditions in key regions. For the first nine months, the addition of Charles Machine Works, as well as growth in our landscape contractor and BOSS businesses, drove the positive results. Somewhat offsetting the growth in the period, were lower shipments of irrigation products, due to poor weather conditions in key regions.

• Professional segment earnings for the third quarter were $81.6 million, down 16.5 percent from $97.7 million in the same period last year. Professional segment earnings for the first nine months were $319.7 million, down 5.6 percent from $338.6 million compared to the same period last year. The segment earnings for both periods reflect the impact of purchase accounting adjustments related to the acquisition of Charles Machine Works, as well as charges incurred as a result of the wind down of the Toro-branded large horizontal directional drill and riding trencher product lines.

Residential

• Residential segment net sales for the third quarter were $148.2 million, down 11.0 percent from $166.5 million last year. For the first nine months, residential segment net sales were $525.5 million, up 0.8 percent from $521.2 million last year. For the quarter, strong pre-season snow thrower shipments were more than offset by soft zero-turn riding and walk power mower sales, which contributed to the revenue decline. For the first nine months, higher sales of snow product and walk power mowers drove the slight revenue increase, somewhat offset by lower shipments of zero-turn riding mower products for the period.

• Residential segment earnings for the third quarter were $16.2 million, up 0.9 percent from $16.0 million in the comparable period last year. Residential segment earnings for the first nine months were $51.3 million, down 11.7 percent from $58.0 million in the same period last year. The increase for the quarter was driven by favorable price realization and productivity efforts. For the first nine months, the decline was largely due to the unfavorable impacts of tariff and trade-related cost increases, partially offset by net price realization and productivity initiatives.

OPERATING RESULTS

Reported gross margin for the third quarter was 31.7 percent, a decrease of 390 basis points compared to the prior year. Adjusted gross margin for the third quarter was 35.9 percent, an increase of 30 basis points compared to last year. For the first nine months, reported gross margin was 33.4 percent, a decrease of 320 basis points over the prior year. Adjusted gross margin for the first nine months was 35.3 percent, a decrease of 130 basis points compared to last year. For both periods, increased inflation and tariff-related costs and product mix contributed to the reported gross margin decline, partially offset by pricing and productivity improvements.

Selling, general and administrative (SG&A) expense as a percent of sales for the third quarter was 22.9 percent, an increase of 150 basis points from the same period last year. For the first nine months, SG&A expense as a percent of sales was 21.7 percent, an increase of 100 basis points. For both periods, acquisition integration and one-time transaction costs contributed to the increases compared to the respective periods last year.

Third quarter reported operating earnings as a percent of sales were 8.8 percent, a decrease of 540 basis points compared to 14.2 percent in the same period last year. Adjusted operating earnings for the third quarter were 13.4 percent, a decrease of 80 basis points compared to 14.2 percent last year. For the first nine months, reported operating earnings as a percent of sales were 11.7 percent, a decrease of 420 basis points compared to 15.9 percent last year. For the first nine months, adjusted operating earnings as a percent of sales were 14.2 percent compared to 15.9 percent, a decrease of 170 basis points compared to the prior year.

The effective tax rate for the third quarter was 14.9 percent, compared to 15.3 percent for the third quarter of last year. The adjusted tax rate for the third quarter was 18.1 percent, compared to 21.2 percent last year. For the first nine months, the reported tax rate was 15.3 percent, down from 29.2 percent in the comparable period. The adjusted tax rate for the first nine months was 19.5 percent, compared to 22.2 percent for the same period last year. The company now expects its full-year adjusted effective tax rate to be about 20.0 percent.

Accounts receivable at the end of the third quarter were $312.2 million, up 42.3 percent from last year. Net inventories were $620.6 million, up 70.3 percent from last year. Trade payables were $304.7 million, up 33.0 percent from the comparable period last year. These increases were largely due to the acquisition of Charles Machine Works.