The Toro pany(TTC) - 2020 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements for The Toro Company, including statements of earnings, balance sheets, cash flows, and detailed notes Item 1. Financial Statements This section presents the unaudited condensed consolidated financial statements for The Toro Company for the quarterly period ended July 31, 2020 Condensed Consolidated Statements of Earnings For Q3 2020, net sales remained flat at $841.0 million, while net earnings significantly increased to $89.0 million from $60.6 million year-over-year Condensed Consolidated Statements of Earnings (Unaudited) | (In thousands, except per share data) | Three Months Ended July 31, 2020 | Three Months Ended August 2, 2019 | Nine Months Ended July 31, 2020 | Nine Months Ended August 2, 2019 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $840,972 | $838,713 | $2,537,853 | $2,403,705 | | Gross profit | $294,574 | $265,981 | $889,379 | $802,896 | | Operating earnings | $115,952 | $73,944 | $332,876 | $281,723 | | Net earnings | $88,968 | $60,607 | $257,505 | $235,717 | | Diluted net earnings per share | $0.82 | $0.56 | $2.37 | $2.18 | Condensed Consolidated Balance Sheets As of July 31, 2020, total assets increased to $2.81 billion from $2.31 billion a year prior, driven by higher cash and acquisitions Condensed Consolidated Balance Sheets (Unaudited) | (In thousands) | July 31, 2020 | August 2, 2019 | October 31, 2019 | | :--- | :--- | :--- | :--- | | Total current assets | $1,384,246 | $1,130,403 | $1,122,891 | | Total assets | $2,813,863 | $2,309,733 | $2,330,547 | | Total current liabilities | $797,112 | $756,403 | $756,970 | | Total liabilities | $1,759,831 | $1,465,911 | $1,470,969 | | Total stockholders' equity | $1,054,032 | $843,822 | $859,578 | Condensed Consolidated Statements of Cash Flows For the nine months ended July 31, 2020, net cash from operating activities increased to $305.9 million, with cash at period-end reaching $394.1 million Condensed Consolidated Statements of Cash Flows (Unaudited) | (In thousands) | Nine Months Ended July 31, 2020 | Nine Months Ended August 2, 2019 | | :--- | :--- | :--- | | Net cash provided by operating activities | $305,876 | $259,113 | | Net cash used in investing activities | ($184,648) | ($744,137) | | Net cash provided by financing activities | $119,154 | $339,798 | | Net increase (decrease) in cash | $242,313 | ($145,807) | | Cash and cash equivalents at end of period | $394,141 | $143,317 | Notes to Condensed Consolidated Financial Statements These notes provide detailed explanations for the financial statements, covering accounting policies, acquisitions, segment data, and the impact of COVID-19 - The COVID-19 pandemic has materially impacted the company, creating uncertainty that could affect future accounting estimates, financial position, and results of operations[19] - The company adopted the new lease accounting standard (ASU 2016-02) on November 1, 2019, recognizing $78.1 million of right-of-use assets and $77.1 million of lease liabilities[22][23][25] - On March 2, 2020, the company acquired Venture Products for $163.2 million, funded by borrowings, to strengthen the Professional segment[27][28][29] - On April 1, 2019, the company acquired The Charles Machine Works, Inc. (CMW) for $685.0 million to broaden its Professional segment product portfolio[36][37][38] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) This section provides management's perspective on the company's financial performance, condition, and the impact of COVID-19 and recent acquisitions Company Overview The Toro Company designs, manufactures, and markets products for professional and residential customers, with recent acquisitions and significant COVID-19 impacts - The company's main focus during the COVID-19 pandemic has been employee health and safety, leading to rigorous safety measures like social distancing and remote work[140] - COVID-19 caused manufacturing inefficiencies and intermittent facility closures, adversely impacting gross margins, with softer demand in the Professional segment but strong retail demand in the Residential segment[141][142] - To mitigate COVID-19's financial impact, the company implemented cost reduction measures, including salary reductions, spending cuts, and a hiring freeze, while managing working capital[144] - Due to ongoing COVID-19 uncertainty, the company withdrew its fiscal 2020 financial guidance and does not expect to meet its "Vision 2020" operating earnings goal of $485.0 million[145][155] Results of Operations For Q3 2020, consolidated net sales were flat at $841.0 million, while YTD sales grew 5.6% to $2.54 billion, driven by acquisitions and strong Residential demand Key Operating Metrics as a Percentage of Net Sales | | Three Months Ended July 31, 2020 | Three Months Ended August 2, 2019 | Nine Months Ended July 31, 2020 | Nine Months Ended August 2, 2019 | | :--- | :--- | :--- | :--- | :--- | | Gross profit | 35.0% | 31.7% | 35.0% | 33.4% | | Operating earnings | 13.8% | 8.8% | 13.1% | 11.7% | | Net earnings | 10.6% | 7.2% | 10.1% | 9.8% | - Q3 2020 gross margin increased by 330 basis points to 35.0%, driven by lower purchase accounting charges, favorable net price realization, and productivity initiatives, partially offset by COVID-19 related manufacturing variances and product mix[161] - SG&A expense decreased 7.0% in Q3 2020, primarily due to COVID-19 related cost reduction measures and lower acquisition-related costs[165] - The effective tax rate for Q3 2020 was 19.8%, up from 14.9% in Q3 2019, due to lower discrete tax benefits, including from share-based compensation[168] Business Segments The Professional segment saw a 7.9% sales decline in Q3 2020, while the Residential segment experienced a significant 38.3% sales increase Net Sales by Segment (Q3) | (In thousands) | July 31, 2020 | August 2, 2019 | % Change | | :--- | :--- | :--- | :--- | | Professional | $623,615 | $676,756 | (7.9)% | | Residential | $204,961 | $148,234 | 38.3% | Segment Earnings (Q3) | (In thousands) | July 31, 2020 | August 2, 2019 | % Change | | :--- | :--- | :--- | :--- | | Professional | $113,652 | $81,592 | 39.3% | | Residential | $28,545 | $16,151 | 76.7% | - Professional segment sales decreased in Q3 due to reduced demand from channel partners in golf, rental, and construction markets as a result of COVID-19, partially offset by the Venture Products acquisition[177] - Residential segment sales surged in Q3 due to strong retail demand for mowers, driven by favorable weather, new products, customer focus on home care during COVID-19, and an expanded mass retail channel[181] Financial Position The company maintained a strong financial position with available liquidity of $992.1 million as of July 31, 2020, and improved cash from operations - Working capital changes reflect COVID-19 impacts: accounts receivable decreased 5.6% year-over-year due to lower sales in certain professional channels, while inventory increased 5.7% year-over-year due to acquisitions and reduced demand in the Professional segment[187] - Cash provided by operating activities increased to $305.9 million for the first nine months of fiscal 2020, up from $259.1 million in the prior year, mainly due to better management of inventory purchases and accounts receivable[188] - The company enhanced its liquidity position in response to COVID-19 by refinancing debt with a new $190.0 million term loan, reducing capital expenditures, and curtailing share repurchases, with total available liquidity of approximately $992.1 million as of July 31, 2020[191][144] - The company amended its Red Iron joint venture agreement, extending the term to 2026 and increasing the credit facility to $625 million[213] Non-GAAP Financial Measures The company provides non-GAAP financial measures to offer supplemental information on its core operational performance by excluding certain non-recurring items - Non-GAAP measures are used by management to make operating decisions and facilitate internal and competitor comparisons by excluding charges not related to regular, ongoing business[220] Reconciliation of GAAP to Non-GAAP Net Earnings (Q3) | (In thousands) | Three Months Ended July 31, 2020 | Three Months Ended August 2, 2019 | | :--- | :--- | :--- | | Net earnings (GAAP) | $88,968 | $60,607 | | Acquisition-related costs | $924 | $23,953 | | Management actions | $0 | $7,351 | | Tax impact of share-based compensation | ($1,173) | ($1,200) | | U.S. Tax Reform | $0 | ($926) | | Non-GAAP net earnings | $88,719 | $89,785 | Item 3. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from foreign currency exchange rates, interest rates, and commodity costs, which are actively managed - The company actively manages foreign currency exchange rate risk (exposures to EUR, AUD, CAD, etc.) by using derivative instruments, primarily forward currency contracts, to hedge transactions[243][244] - As of July 31, 2020, the company had $470.0 million of LIBOR-based variable-rate debt and $424.0 million of fixed-rate debt, exposing it to fluctuations in interest rates[247] - The company faces commodity cost risk for materials like steel, aluminum, and engines, mitigating this through supplier collaboration, alternative sourcing, and price adjustments, with expected lower average costs for the remainder of fiscal 2020[248][249] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of July 31, 2020, with ongoing integration of internal controls for recent acquisitions - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of the end of the quarter[251] - The company is integrating internal controls for the Venture Products acquisition (expected completion in fiscal 2021) and has substantially completed the integration for the CMW acquisition, which will be included in the year-end assessment[252][253] PART II. OTHER INFORMATION This section covers legal proceedings, updated risk factors, equity security sales, and exhibits filed with the Form 10-Q Item 1. Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, which management believes will not materially affect its financial condition - The company is party to ordinary course litigation, including claims related to product liability, asbestos, environmental issues, and patents, with management not expecting these proceedings to materially affect its financial results[256] Item 1A. Risk Factors This section highlights two new risk factors: the material adverse impacts of the COVID-19 pandemic and challenges associated with the Venture Products acquisition - A new risk factor details the material adverse impact of COVID-19, which has caused significant volatility, disruption, and weakened economic conditions, affecting demand, supply chains, and operations[258][259] - A new risk factor was added concerning the acquisition of Venture Products, highlighting risks such as integration challenges, potential loss of key employees or customers, and the financial burden of increased debt[262] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q3 2020, the company did not repurchase shares under its publicly announced program, with a small number purchased for deferred compensation plans Issuer Purchases of Equity Securities (Q3 2020) | Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased As Part of Publicly Announced Plans | Maximum Number of Shares that May Yet Be Purchased Under the Plans | | :--- | :--- | :--- | :--- | :--- | | May 2 - May 29, 2020 | — | $ — | — | 7,042,256 | | May 30 - July 3, 2020 | — | $ — | — | 7,042,256 | | July 4 - July 31, 2020 | 1,704 | $64.92 | — | 7,042,256 | | Total | 1,704 | $64.92 | — | | - No shares were repurchased under the company's authorized stock repurchase program during the third quarter of fiscal 2020[263] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including CEO and CFO certifications and financial statements in Inline XBRL format - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Act Sections 302 and 906[266] - Financial statements and notes are provided in Inline eXtensible Business Reporting Language (Inline XBRL) format[266] Signatures The report is duly signed on September 3, 2020, by Renee J. Peterson, Vice President, Treasurer and Chief Financial Officer - The Form 10-Q was signed on September 3, 2020, by the company's CFO, Renee J. Peterson[268][270]