The Toro pany(TTC) - 2019 Q4 - Annual Report

Part I Business The Toro Company designs and markets turf, irrigation, and construction products, expanding its Professional segment with the $685 million CMW acquisition in fiscal 2019 Fiscal 2019 Net Sales by Segment | Segment | Percentage of Consolidated Net Sales (%) | | :--- | :--- | | Professional | 77.8% | | Residential | 21.1% | | Other | 1.1% | - On April 1, 2019, the company completed its acquisition of The Charles Machine Works, Inc. (CMW) for an aggregate merger consideration of $685.0 million, broadening the Professional segment's product portfolio with offerings for the underground construction market[14] - International net sales accounted for 23.1% of total consolidated net sales for fiscal 2019, a slight decrease from 24.6% in fiscal 2018[41] - The company's backlog of orders increased by 44.6% to $112.5 million as of October 31, 2019, from $77.8 million a year prior, primarily due to the CMW acquisition[76] Risk Factors The company faces significant risks from macroeconomic conditions, financial fluctuations, operational challenges including acquisition integration, intense competition, and regulatory compliance - Adverse economic conditions in the U.S. and other countries can negatively impact demand for the company's products, affecting net sales and earnings[89] - Weather conditions, such as drought or low snowfall, can significantly reduce demand for certain products like mowing equipment, irrigation systems, and snow throwers[90][91] - The recent CMW acquisition involves numerous risks, including difficulties in integration, potential loss of key personnel or customers, and the risk that projected synergies and financial results may not be achieved[106] - Changes to international trade policies, agreements, or the imposition of tariffs could result in additional charges on commodities and components, adversely affecting profit margins[95][124] Unresolved Staff Comments The company reports no unresolved staff comments - None[168] Properties The company utilizes 8.3 million square feet of global facility space, an increase primarily due to the CMW acquisition, with facilities deemed sufficient for fiscal 2020 production - The company utilizes approximately 8.3 million square feet of facility space worldwide as of October 31, 2019, an increase from 6.5 million square feet at the end of fiscal 2018, mainly due to the CMW acquisition[171] - Significant facilities are located across the U.S., Mexico, Australia, Europe (United Kingdom, Italy, Romania, Germany, Poland), and China[170] Legal Proceedings The company is involved in various ordinary course litigation, including product liability and environmental claims, which management does not expect to materially impact its financial position - The company is a party to litigation in the ordinary course of business, including product liability, environmental, commercial, employment, and patent disputes[174][541] - Management believes that the amount of liability, if any, from these matters will not materially affect the company's financial condition or results of operations[542] Mine Safety Disclosures This item is not applicable to the company - Not applicable[175] Information About Our Executive Officers This section lists the company's executive officers as of December 13, 2019, including Chairman, President, and CEO Richard M. Olson and CFO Renee J. Peterson - Richard M. Olson serves as Chairman of the Board, President, and Chief Executive Officer[178] - Renee J. Peterson serves as Vice President, Treasurer, and Chief Financial Officer[178] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's common stock trades on the NYSE, increased its quarterly dividend by 12.5% in fiscal 2019, and its five-year total shareholder return significantly outperformed benchmarks - The quarterly cash dividend was increased by 12.5% in fiscal 2019 to $0.225 per share from $0.20 per share in fiscal 2018[180] - As of October 31, 2019, 7,042,256 shares remained available for repurchase under the company's authorized stock repurchase program, with no shares repurchased in the fourth quarter of fiscal 2019[184] 5-Year Cumulative Total Return Comparison | Period Ended 10/31/2019 | The Toro Company ($) | S&P 500 ($) | Peer Group ($) | | :--- | :--- | :--- | :--- | | Total Return | $267.18 | $166.81 | $169.20 | Selected Financial Data This section summarizes five years of financial data, showing net sales growth from $2.39 billion to $3.14 billion and increased assets and debt due to the CMW acquisition Selected Financial Data (2015-2019) | Fiscal Year Ended Oct 31 | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net Sales ($M) | $3,138.1 | $2,618.7 | $2,505.2 | $2,392.2 | $2,390.9 | | Net Earnings ($M) | $274.0 | $271.9 | $267.7 | $231.0 | $201.6 | | Diluted EPS ($) | $2.53 | $2.50 | $2.41 | $2.06 | $1.78 | | Total Assets ($M) | $2,330.5 | $1,571.0 | $1,493.8 | $1,384.6 | $1,300.4 | | Long-term Debt ($M) | $700.8 | $312.5 | $331.9 | $351.0 | $374.7 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Fiscal 2019 net sales increased 19.8% to $3.14 billion, driven by the CMW acquisition, while gross margin declined due to acquisition accounting and higher costs, significantly impacting the balance sheet Fiscal 2019 vs. 2018 Performance | Metric | Fiscal 2019 | Fiscal 2018 | % Change | | :--- | :--- | :--- | :--- | | Net Sales ($M) | $3,138.1 | $2,618.7 | +19.8% | | Gross Margin (%) | 33.4% | 35.9% | -250 bps | | Operating Earnings ($M) | $325.0 | $373.1 | -12.9% | | Net Earnings ($M) | $274.0 | $271.9 | +0.8% | | Diluted EPS ($) | $2.53 | $2.50 | +1.2% | - The decrease in gross margin was mainly due to the impact of purchase accounting from the CMW acquisition, higher commodity and tariff costs, unfavorable product mix, and manufacturing inefficiencies[208][211] - The Professional segment's net sales grew 25.5% to $2.44 billion, largely due to the CMW acquisition, though its operating margin fell to 15.6% from 20.5% due to acquisition-related costs and other pressures[227][229] - The company's debt-to-capitalization ratio increased to 44.9% from 31.8% at the end of fiscal 2019, primarily due to increased debt to fund the CMW acquisition[268] Quantitative and Qualitative Disclosures about Market Risk The company faces market risks from foreign currency fluctuations, interest rates on variable-rate debt, and commodity costs, which are managed through various strategies - The company is exposed to foreign currency exchange rate risk, with primary exposures to the Euro, Australian dollar, Canadian dollar, British pound, and Mexican peso, using forward currency contracts to hedge these risks[314][315] - Interest rate risk primarily relates to LIBOR-based rates on its revolving credit facility and $280.0 million of borrowings under its term loan credit agreement[317][318] - The company faces commodity cost risk from materials such as steel, aluminum, and petroleum-based resins, with average costs, including tariffs, higher in fiscal 2019 than in fiscal 2018[319][321] Financial Statements and Supplementary Data This section presents the fiscal 2019 consolidated financial statements, with management and KPMG affirming effective internal controls, excluding CMW, and highlights increased net sales and assets due to the CMW acquisition - Management's report on internal control over financial reporting concluded that the company's controls were effective as of October 31, 2019, but excluded the operations of The Charles Machine Works, Inc. (CMW), acquired on April 1, 2019[329] - The independent auditor, KPMG LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting, with the audit of internal controls also excluded CMW[335][336] Consolidated Statement of Earnings Highlights (Fiscal Year 2019) | Metric | Amount (in thousands) | | :--- | :--- | | Net Sales | $3,138,084 | | Gross Profit | $1,047,963 | | Operating Earnings | $325,029 | | Net Earnings | $273,983 | | Diluted EPS | $2.53 | Consolidated Balance Sheet Highlights (As of Oct 31, 2019) | Metric | Amount (in thousands) | | :--- | :--- | | Total Current Assets | $1,122,891 | | Total Assets | $2,330,547 | | Total Current Liabilities | $756,970 | | Long-term Debt | $620,899 | | Total Stockholders' Equity | $859,578 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting and financial disclosure - None[584] Controls and Procedures Management concluded the company's disclosure controls and internal controls were effective as of October 31, 2019, excluding the newly acquired CMW from the internal control assessment - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of October 31, 2019[587] - The assessment of internal control over financial reporting excluded the recently acquired CMW, which accounted for approximately 35.0% of consolidated total assets and 14.8% of consolidated net sales[589][592] Other Information Post-fiscal year-end, the company amended its Red Iron joint venture agreements, extending its term and increasing its revolving credit facility to $625 million - On December 20, 2019, the company amended agreements for its Red Iron financing joint venture[593] - Key amendments include extending the term of the joint venture to October 31, 2026, and increasing its revolving credit facility to $625 million[594] Part III Directors, Executive Officers and Corporate Governance Information on directors, executive officers, and corporate governance is incorporated by reference from the company's 2020 Proxy Statement - Information required by this item is incorporated by reference from the company's proxy statement for its 2020 Annual Meeting of Shareholders[599] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's 2020 Proxy Statement - Information required by this item is incorporated by reference from the company's proxy statement for its 2020 Annual Meeting of Shareholders[601] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information on security ownership of beneficial owners, management, and related stockholder matters is incorporated by reference from the company's 2020 Proxy Statement - Information required by this item is incorporated by reference from the company's proxy statement for its 2020 Annual Meeting of Shareholders[602] Certain Relationships and Related Transactions, and Director Independence Information on certain relationships, related transactions, and director independence is incorporated by reference from the company's 2020 Proxy Statement - Information required by this item is incorporated by reference from the company's proxy statement for its 2020 Annual Meeting of Shareholders[603] Principal Accounting Fees and Services Information on principal accounting fees and services is incorporated by reference from the company's 2020 Proxy Statement - Information required by this item is incorporated by reference from the company's proxy statement for its 2020 Annual Meeting of Shareholders[604] Part IV Exhibits, Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report, including key agreements and compensation plans - This item lists all financial statements, schedules, and exhibits filed with the annual report[607] Form 10-K Summary The company indicates there is no Form 10-K summary - None[616]