The Toro Company Reports Record Results for the Second-Quarter of Fiscal 2023

Driven by Strong Professional Segment Performance and Continued Production Improvements 

• Record second-quarter net sales of $1.34 billion, up 7% year over year
• Record second-quarter reported diluted EPS of $1.59, up 28% year over year
• Record second-quarter *adjusted diluted EPS of $1.58, up 26% year over year
• Full-year fiscal 2023 net sales and *adjusted diluted EPS guidance ranges narrowed

The Toro Company (NYSE: TTC) today reported results for its fiscal second-quarter ended May 5, 2023.

“We continued our strong momentum in the second quarter, and delivered record top and bottom-line results,” said Richard M. Olson, chairman and chief executive officer. “These results were driven by our professional segment, where continued demand, operational execution, and supply chain improvements drove broad sales volume gains and increased profitability. In our residential segment, sales volume and earnings were pressured by unfavorable weather patterns and macroeconomic factors. Once again, the strength of our diversified portfolio, growing scale, and disciplined team drove positive results overall.”

SECOND-QUARTER FISCAL 2023 SEGMENT RESULTS

Professional Segment

• Professional segment net sales for the second quarter were $1,068.7 million, up 15.4% from $925.8 million in the same period last year. The increase was primarily driven by higher shipments of products broadly across the segment, with notable strength for construction, and golf and grounds products, and net price realization.

• Professional segment earnings for the second quarter were $227.5 million, up 37.6% from $165.4 million in the same period last year, and when expressed as a percentage of net sales, 21.3%, up from 17.9% in the prior-year period. The increase was primarily due to net price realization, favorable product mix, productivity improvements, and net sales leverage, partially offset by higher material and manufacturing costs.

Residential Segment

• Residential segment net sales for the second quarter were $265.8 million, down 16.8% from $319.7 million in the same period last year. The decrease was primarily driven by lower shipments of products broadly across the segment, partially offset by net price realization.

• Residential segment earnings for the second quarter were $22.7 million, down 38.7% from $37.1 million in the same period last year, and when expressed as a percentage of net sales, 8.6%, down from 11.6% in the prior-year period. The decrease was primarily driven by lower sales volume, higher marketing expense, and higher manufacturing costs, partially offset by net price realization, and lower freight costs.

OPERATING RESULTS

Gross margin and *adjusted gross margin were both 35.8%, compared with 32.4% and 32.5%, respectively, for the same prior-year period. The increase in gross margin was primarily due to net price realization, favorable product mix, and productivity improvements, partially offset by higher material and manufacturing costs.

SG&A expense as a percentage of net sales for the second quarter was 19.5%, compared with 18.7% in the prior-year period. The increase was primarily due to higher marketing expense, partially offset by net sales leverage.

Operating earnings as a percentage of net sales were 16.3% for the second quarter, compared with 13.7% in the same prior-year period. *Adjusted operating earnings as a percentage of net sales for the second quarter were 16.3%, compared with 13.8% in the same prior-year period.

Interest expense was $14.7 million for the second quarter, up $6.7 million. This increase was primarily driven by higher average interest rates.

The reported effective tax rate for the second quarter was 20.6%, flat with 20.6% in the same prior year period. The *adjusted effective tax rate for the second quarter was 21.1% compared with 20.8% in the same prior year period.

OUTLOOK

“We enter the second half of fiscal 2023 with continuing strong demand and substantial order backlog for our professional segment products in construction, and golf and grounds markets, as well as indications of a steadily improving supply chain,” said Olson. “We expect this will drive our performance in the second half, with a continuation of improved production rates for key categories as we focus on optimizing output to better serve our customers. Even with production improvements, given the pace of new orders we expect our backlog level to remain elevated throughout and beyond this fiscal year. For the residential segment, we expect sales volume in the second half to be challenged by macroeconomic uncertainty and consumer spending patterns, and to also reflect the impact of the unfavorable weather year to date. Importantly, we expect the benefits from this segment’s refreshed product lineup, expanded channel, and strong brand to continue to drive competitive advantage for the long term.

“We have a long track record of managing through economic cycles and weather patterns with agility and resiliency, bolstered by our leadership in attractive end markets and our ability to leverage innovation and synergies across our broad portfolio. These factors, along with our talented team and best-in-class distribution and service networks, give us confidence in our ability to execute well through a range of possible macroeconomic outcomes for the remainder of the year and beyond. We believe we are well positioned to enhance our market leadership and deliver value for all stakeholders now and into the future, guided by our enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering people."

For fiscal 2023, management is narrowing guidance, and now expects net sales growth in the range of 7% to 8% and *adjusted diluted EPS in the range of $4.70 to $4.80. The estimated *adjusted diluted EPS range excludes the tax benefits recorded as excess tax deductions for stock compensation. This updated guidance is based on current visibility in this evolving and dynamic macro environment, and reflects expectations for continued strong demand across key professional segment markets, reduced volume for solutions geared to homeowners, and continued operational execution. This guidance also assumes steady supply chain improvement, the return to a more typical distribution of quarterly sales, and more normalized weather patterns for the remainder of the year.

*Non-GAAP financial measure. Please refer to the “Use of Non-GAAP Financial Information” for details regarding these measures, as well as the tables provided for a reconciliation of historical non-GAAP financial measures to the most comparable GAAP measures.

LIVE CONFERENCE CALL

June 8, 2023 at 10:00 a.m. CDT

www.thetorocompany.com/invest

The Toro Company will conduct its earnings call and webcast for investors beginning at 10:00 a.m. CDT on June 8, 2023. The webcast will be available at www.thetorocompany.com/invest. Webcast participants will need to complete a brief registration form and should allocate extra time before the webcast begins to register and, if necessary, install audio software.

About The Toro Company

The Toro Company (NYSE: TTC) is a leading worldwide provider of innovative solutions for the outdoor environment including turf and landscape maintenance, snow and ice management, underground utility construction, rental and specialty construction, and irrigation and outdoor lighting solutions. With net sales of $4.5 billion in fiscal 2022, The Toro Company’s global presence extends to more than 125 countries through a family of brands that includes Toro, Ditch Witch, Exmark, Spartan Mowers, BOSS Snowplow, Ventrac, American Augers, Trencor, Pope, Subsite Electronics, HammerHead, Radius HDD, Perrot, Hayter, Unique Lighting Systems, Irritrol, and Lawn-Boy. Through constant innovation and caring relationships built on trust and integrity, The Toro Company and its family of brands have built a legacy of excellence by helping customers work on golf courses, sports fields, construction sites, public green spaces, commercial and residential properties and agricultural operations. For more information, visit www.thetorocompany.com.

Use of Non-GAAP Financial Information

This press release and our related earnings call reference certain non-GAAP financial measures, which are not calculated or presented in accordance with U.S. GAAP, as information supplemental and in addition to the most directly comparable financial measures calculated and presented in accordance with U.S. GAAP. The non-GAAP financial measures included within this press release and our related earnings call that are utilized as measures of our operating performance consist of gross profit, gross margin, operating earnings, earnings before income taxes, net earnings, diluted EPS, and the effective tax rate, each as adjusted. The non-GAAP financial measures included within this press release and our related earnings call that are utilized as measures of our liquidity consist of free cash flow and free cash flow conversion percentage.

The Toro Company uses these non-GAAP financial measures in making operating decisions and assessing liquidity because it believes these non-GAAP financial measures provide meaningful supplemental information regarding core operational performance and cash flows, as a measure of the company's liquidity, and provide the company with a better understanding of how to allocate resources to both ongoing and prospective business initiatives. Additionally, these non-GAAP financial measures facilitate the company's internal comparisons for both historical operating results and competitors' operating results by factoring out potential differences caused by charges and benefits not related to its regular, ongoing business, including, without limitation, certain non-cash, large, and/or unpredictable charges and benefits; acquisitions and dispositions; legal judgments, settlements, or other matters; and tax positions. The company believes that these non-GAAP financial measures, when considered in conjunction with the financial measures prepared in accordance with U.S. GAAP, provide investors with useful supplemental financial information to better understand its core operational performance and cash flows.

Reconciliations of historical non-GAAP financial measures to the most comparable U.S. GAAP financial measures are included in the financial tables contained in this press release. These non-GAAP financial measures, however, should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the U.S. GAAP financial measures included within this press release and the company’s related earnings call. These non-GAAP financial measures may differ from similar measures used by other companies.

The Toro Company does not provide a quantitative reconciliation of the company’s projected range for adjusted diluted EPS for fiscal 2023 to diluted EPS, which is the most directly comparable GAAP measure, in reliance on the unreasonable efforts exception provided under Item 10(e)(1)(i)(B) of Regulation S-K. The company’s adjusted diluted EPS guidance for fiscal 2023 excludes certain items that are inherently uncertain and difficult to predict, including certain non-cash, large and/or unpredictable charges and benefits; acquisitions and dispositions; legal judgments, settlements, or other matters; and tax positions. Due to the uncertainty of the amount or timing of these future excluded items, management does not forecast them for internal use and therefore cannot create a quantitative adjusted diluted EPS for fiscal 2023 to diluted EPS reconciliation without unreasonable efforts. A quantitative reconciliation of adjusted diluted EPS for fiscal 2023 to diluted EPS would imply a degree of precision and certainty as to these future items that does not exist and could be confusing to investors. From a qualitative perspective, it is anticipated that the differences between adjusted diluted EPS for fiscal 2023 to diluted EPS will consist of items similar to those described in the financial tables later in this release, including, for example and without limitation, certain non-cash, large, and/or unpredictable charges and benefits; acquisitions and dispositions; legal judgments, settlements, or other matters; and tax positions. The timing and amount of any of these excluded items could significantly impact the company’s diluted EPS for a particular period.

Forward-Looking Statements

This news release contains forward-looking statements, which are being made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are based on management’s current assumptions and expectations of future events, and often can be identified by words such as “expect,” “strive,” “looking ahead,” “outlook,” “guidance,” “forecast,” “goal,” “optimistic,” “encourage,” “anticipate,” “continue,” “plan,” “estimate,” “project,” “target,” “improve,” “believe,” “become,” “should,” “could,” “will,” “would,” “possible,” “promise,” “may,” “likely,” “intend,” “can,” “seek,” “pursue,” “potential,” “pro forma,” variations of such words or the negative thereof, and similar expressions or future dates. Forward-looking statements involve risks and uncertainties that could cause actual events and results to differ materially from those projected or implied. Forward-looking statements in this release include the company’s fiscal 2023 financial guidance, and expectations for strong demand across key professional markets, normalized seasonal demand patterns for residential and landscape contractor solutions and continued operational execution, as well as supply chain improvement throughout the year, with a return to a more typical distribution of quarterly sales. Particular risks and uncertainties that may affect the company’s operating results or financial position include: adverse worldwide economic conditions, including inflationary pressures; disruption at or in proximity to its facilities or in its manufacturing or other operations, or those in its distribution channel customers, mass retailers or home centers where its products are sold, or suppliers; fluctuations in the cost and availability of commodities, components, parts, and accessories, including steel, engines, hydraulics and resins; COVID-19 related factors, risks and challenges; the effect of abnormal weather patterns; the effect of natural disasters, social unrest, war and global pandemics; the level of growth or contraction in its key markets; customer, government and municipal revenue, budget, spending levels and cash conservation efforts; loss of any substantial customer; inventory adjustments or changes in purchasing patterns by customers; the company’s ability to develop and achieve market acceptance for new products; increased competition; the risks attendant to international relations, operations and markets; foreign currency exchange rate fluctuations; financial viability of and/or relationships with the company’s distribution channel partners; risks associated with acquisitions and dispositions, including the company's acquisition of Intimidator Group; impairment of goodwill or other intangible assets; impacts of any restructuring activities; management of alliances or joint ventures, including Red Iron Acceptance, LLC; impact of laws, regulations and standards, consumer product safety, accounting, taxation, trade, tariffs and/or antidumping and countervailing duties petitions, healthcare, and environmental, health and safety matters; unforeseen product quality problems; loss of or changes in executive management or key employees; the occurrence of litigation or claims, including those involving intellectual property or product liability matters; impact of increased scrutiny on its environmental, social, and governance practices; and other risks and uncertainties described in the company’s most recent annual report on Form 10-K, subsequent quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission. The company makes no commitment to revise or update any forward-looking statements in order to reflect events or circumstances occurring or existing after the date any forward-looking statement is made.

(Financial tables follow)

THE TORO COMPANY AND SUBSIDIARIES

Reconciliation of Non-GAAP Financial Measures (Unaudited)

(Dollars in thousands, except per-share data)

The following table provides a reconciliation of the non-GAAP financial performance measures used in this press release and our related earnings call to the most directly comparable measures calculated and reported in accordance with U.S. GAAP for the six month periods ended May 5, 2023 and April 29, 2022:

Reconciliation of Non-GAAP Liquidity Measures

The company defines free cash flow as net cash provided by operating activities less purchases of property, plant and equipment, net of proceeds from insurance claim. Free cash flow conversion percentage represents free cash flow as a percentage of net earnings. The company considers free cash flow and free cash flow conversion percentage to be non-GAAP liquidity measures that provide useful information to management and investors about the company's ability to convert net earnings into cash resources that can be used to pursue opportunities to enhance shareholder value, fund ongoing and prospective business initiatives, and strengthen the company's Consolidated Balance Sheets, after reinvesting in necessary capital expenditures required to maintain and grow the company's business.

The following table provides a reconciliation of non-GAAP free cash flow and free cash flow conversion percentage to net cash provided by operating activities, which is the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP, for the six month periods ended May 5, 2023 and April 29, 2022:

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The Toro Company continued its strong momentum in the second quarter and delivered record top- and bottom-line results. Demand remained strong across the professional segment with notable strength in the construction, and golf and grounds markets.