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10-Q: TORO CO

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(EDGAR Online via COMTEX) -- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our Condensed Consolidated Financial Statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Unless the context indicates otherwise, the terms "company," "TTC," "we," "our," or "us" refer to The Toro Company and its consolidated subsidiaries. This MD&A should be read in conjunction with the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2021. Unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior fiscal year. Our MD&A is presented as follows:

Company Overview

This discussion contains various "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and we refer readers to the section titled "Cautionary Note Regarding Forward-Looking Statements" located at the beginning of this Quarterly Report on Form 10-Q for more information.

Non-GAAP Financial Measures

Throughout this MD&A, we have provided financial measures that are not calculated or presented in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") ("non-GAAP financial measures"), as information supplemental and in addition to the most directly comparable financial measures presented in this Quarterly Report on Form 10-Q that are calculated and presented in accordance with U.S. GAAP. We believe that these non-GAAP financial measures, when considered in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with U.S. GAAP, provide investors with useful supplemental financial information to better understand our core operational performance and cash flows. 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 most directly comparable U.S. GAAP financial measures. Reconciliations of non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A.

COMPANY OVERVIEW

The Toro Company is in the business of designing, manufacturing, marketing, and selling professional turf maintenance equipment and services; turf irrigation systems; landscaping equipment and lighting products; snow and ice management products; ag-irrigation systems; rental, specialty, and underground construction equipment; and residential yard and snow thrower products. Our purpose is to help our customers enrich the beauty, productivity, and sustainability of the land. Sustainability is the foundation of our enterprise strategic priorities of accelerating growth, driving productivity and operational excellence, and empowering our people. Our focus on alternative power, smart connected, and autonomous solutions, as well as our continued efforts to address sustainability-focused matters, including environmental, social, and governance priorities, are embedded as part of our "Sustainability Endures" initiative.

We sell our products worldwide through a network of distributors, dealers, mass retailers, hardware retailers, equipment rental centers, home centers, as well as online (direct to end-users). We strive to provide innovative, well-built, and dependable products supported by an extensive service network. A significant portion of our net sales has historically been, and we expect will continue to be, attributable to new and enhanced products. We define new products as those introduced in the current and previous two fiscal years. We classify our operations into two reportable business segments: Professional and Residential. Our remaining activities are presented as "Other" due to their insignificance, as described in greater detail within the section titled "Business Segments" in this MD&A.

Acquisition of Intimidator Group

On January 13, 2022, during the first quarter of fiscal 2022, we acquired the privately-held Intimidator Group ("Intimidator"). Intimidator primarily designs, manufactures, markets, and sells a commercial-grade line of zero-turn mowers under the Spartan Mowers brand, which are intended to provide innovative turf management solutions to landscape contractors and other customers who require a commercial-grade solution. The acquisition of Intimidator broadened our Professional reportable segment and expanded our manufacturing footprint and dealer network. The aggregate preliminary cash consideration was $398.9 million ("purchase price") and remains subject to certain customary adjustments based on, among other things, the amount of actual cash, debt, and working capital in the business of Intimidator at the closing date. Such customary adjustments are expected to be completed during fiscal 2022. Additionally, the aggregate preliminary cash consideration remains subject to

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contingent consideration through the end of calendar year 2022, in the event of certain qualifying tax changes. As a result, we could be subject to additional cash purchase consideration for an amount not to exceed $15.0 million and remittance of such contingent consideration, if required, is due by March 15, 2023. As of January 28, 2022, no liability was recorded within the Condensed Consolidated Balance Sheets for the contingent consideration as the contingency is not probable or estimable. We funded the preliminary purchase price with borrowings under our existing unsecured senior revolving credit facility and cash provided by operating activities. Intimidator's results of operations are included within our Professional reportable segment in our Condensed Consolidated Financial Statements from the closing date and had an immaterial impact on our Professional reportable segment net sales and segment earnings for the three month period ended January 28, 2022. For additional information regarding the acquisition, refer to Note 2, Business Combination, in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

Impact of COVID-19 Pandemic

In March 2020, the World Health Organization declared the novel coronavirus ("COVID-19," "virus," or "the pandemic") outbreak a global pandemic. COVID-19 has negatively impacted public health and portions of the global economy, significantly disrupted global supply chains, and created volatility in financial markets. Our main focus from the onset of the pandemic has been, and will continue to be, the health, safety, and well-being of our employees, customers, suppliers and communities around the world. In support of continuing our global manufacturing and business operations, we have adopted, and continue to adhere to, certain rigorous and meaningful safety measures recommended by the U.S. Centers for Disease Control and Prevention, World Health Organization, and federal, state, local, and foreign authorities in an effort to protect our employees, customers, suppliers, and communities. In addition to our vigilant safety measures, we have also maintained our focus on our responsibility to meet the needs of our customers as we supply products that are critical to maintaining essential global infrastructure, agricultural food production, and the enablement of safe areas for outdoor spaces. Our ability to meet the needs of our customers has been challenged by the adverse impact of COVID-19 on the global supply chain. Although we regularly monitor the adequacy of the supply of commodities, components, parts, and accessories and the financial health of the companies in our supply chain, and use alternative suppliers when necessary and available, financial hardship and/or government mandated restrictions on our suppliers caused by COVID-19, insufficient demand planning, and/or the inability of companies throughout our supply chain to deliver on supply commitments, requirements, and/or demands as a result of COVID-19 or otherwise, has and could continue to cause a disruption in our ability to procure the commodities, components, and parts required to manufacture our products. Ongoing communication and prioritization continues with our suppliers in an attempt to identify and mitigate such risks and to proactively manage inventory levels of commodities, components, and parts to align with anticipated demand for our products and other government actions.

The continuing implications of COVID-19 on our business and manufacturing operations remain uncertain and will depend on certain future developments, including any adverse impact due to additional variants of the virus; its impact on market demand for our products; its impact on the global supply chain; its impact on our employees, customers, and suppliers; the range of government mandated restrictions and other measures; and the success of the COVID-19 vaccines against the virus and related variants. As a result, the ultimate impact on our future business and manufacturing operations, as well as results of operations, financial position, and cash flows as a result of COVID-19 is unknown at this time. We continue to monitor the situation and the guidance from global government authorities, as well as federal, state, local and foreign public health authorities, and may take additional meaningful actions based on their requirements and recommendations in an attempt to protect the health and well-being of our employees, customers, suppliers, and communities. In these circumstances, there may be developments outside our control requiring us to adjust our operating plans and implement appropriate cost reduction measures. If the adverse impacts from COVID-19 continue or worsen beyond expectations, our business and related results of operations, financial position, or cash flows could be adversely impacted. Any sustained adverse impacts to our business, the industries in which we operate, market demand for our products, and/or certain suppliers or customers may also affect the future valuation of certain of our assets, and therefore, may increase the likelihood of a charge related to an impairment, write-off, valuation adjustment, allowance, or reserve associated with such assets, including, but not limited to, goodwill, indefinite and finite-lived intangible assets, inventories, accounts receivable, deferred income taxes, right-of-use assets, and property, plant and equipment. Such a charge could be material to our future results of operations, financial position, or cash flows. For additional information regarding risks associated with COVID-19, refer to the section titled "Cautionary Note Regarding Forward-Looking Statements" located at the beginning of this Quarterly Report on Form 10-Q and also refer to Part I, Item 1A, "Risk Factors", within our Annual Report on Form 10-K for the fiscal year ended October 31, 2021.

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RESULTS OF OPERATIONS

Overview

During the first quarter of fiscal 2022, we continued to experience the strong demand environment across both our Professional and Residential segments and we realized favorable impacts to both our net sales and gross margins as a result of our strategic pricing actions across our product lines. For the first quarter of fiscal 2022, our sales cadence was driven more by our ability to produce product than historical demand patterns and seasonality. While the strong demand environment and favorable net price realization positively impacted our results of operations, we continued to experience headwinds associated with the challenging inflationary and supply chain environment that adversely impacted our gross margins for the first quarter of fiscal 2022. More specifically, we experienced a greater degree of inflationary cost pressures on commodity and component parts during the first quarter of fiscal 2022 as compared to the first quarter of fiscal 2021. Additionally, we continued to experience significant supply chain disruption during the first quarter of fiscal 2022 as compared to the first quarter of fiscal 2021, which resulted in challenging conditions for sourcing adequate amounts of certain commodity and component parts inventory and, in certain cases, limited the ability of our suppliers to meet our commodity and component parts demand requirements. We intend to continue our historical practice of prudently managing expenses and adjusting production levels as needed to align with anticipated sales volumes and availability of commodity and component parts inventories, while also prioritizing our productivity initiatives and other investments that support long-term sustainable growth across our businesses. However, given our current expectation of continuing supply chain disruptions, our ability to effectively and efficiently adjust production levels as needed may be limited.

Consolidated net sales for the first quarter of fiscal 2022 were $932.7 million, up 6.8 percent compared to $873.0 million in the first quarter of fiscal 2021. Professional segment net sales for the first quarter of fiscal 2022 were $672.9 million, an increase of 3.5 percent compared to $650.2 million in the first quarter of the prior fiscal year. Residential segment net sales for the first quarter of fiscal 2022 were $255.4 million, an increase of 17.3 percent compared to $217.7 million in the first quarter of the prior fiscal year.

Net earnings for the first quarter of fiscal 2022 were $69.5 million, or $0.66 per diluted share, compared to $111.3 million, or $1.02 per diluted share, for the first quarter of fiscal 2021. Non-GAAP net earnings for the first quarter of fiscal 2022 were $69.7 million, or $0.66 per diluted share, compared to $93.2 million, or $0.85 per diluted share, for the first quarter of fiscal 2021. Reconciliations of non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A.

We continued our history of paying quarterly cash dividends and increased our cash dividend for the first quarter of fiscal 2022 by 14.3 percent to $0.30 per share compared to $0.2625 per share paid in the first quarter of fiscal 2021. We also continued repurchasing shares of our common stock under our Board authorized repurchase plan during the first quarter of fiscal 2022. As a result of the combination of quarterly cash dividends and share repurchases, we returned $106.5 million of cash to our shareholders during the first quarter of fiscal 2022.

Field inventory levels were lower as of the end of the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021 across the majority of our businesses as a result of continued strong retail demand for our products that has exceeded our ability to produce certain products, most notably for Professional segment rental, specialty, and underground construction equipment and landscape contractor zero-turn riding mowers. The field inventory decrease was partially offset by higher levels of Residential segment zero-turn riding mower and walk power mower field inventory due to strong demand from channel partners ahead of their key selling seasons and our ability to produce product to meet the demand.

Net Sales

Consolidated net sales for the first quarter of fiscal 2022 were $932.7 million, up 6.8 percent compared to $873.0 million in the first quarter of fiscal 2021. This net sales increase was primarily driven by price increases across both Professional and Residential segment product lines, as well as increased shipments of Residential segment zero-turn riding mowers and walk power mowers ahead of our key selling season driven by continued strong demand. The increase in net sales was partially offset by supply chain challenges limiting product availability for Professional segment landscape contractor zero-turn riding mowers and golf and grounds products.

Net sales in international markets increased by $3.3 million for the first quarter fiscal 2022 compared to the first quarter of fiscal 2021. Changes in foreign currency exchange rates resulted in a decrease in our net sales of approximately $1.0 million for the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. The international net sales increase for the quarter comparison was mainly driven by price increases across our product lines and increased shipments of Residential segment zero-turn riding mowers and Professional segment ag-irrigation products due to strong demand, partially offset by supply chain challenges limiting product availability for golf and grounds products and underground construction equipment.

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The following table summarizes our results of operations as a percentage of consolidated net sales:







                                                                    Three Months Ended
                                                          January 28, 2022       January 29, 2021
        Net sales                                                   100.0  %              100.0  %
        Cost of sales                                               (67.8)                (63.9)
        Gross profit                                                 32.2                  36.1
        Selling, general and administrative expense                 (22.4)                (19.9)
        Operating earnings                                            9.8                  16.2
        Interest expense                                             (0.8)                 (0.9)
        Other income, net                                             0.3                   0.3
        Earnings before income taxes                                  9.3                  15.6
        Provision for income taxes                                   (1.8)                 (2.9)
        Net earnings                                                  7.5  %               12.7  %
        


Gross Profit and Gross Margin

Gross profit for the first quarter of fiscal 2022 was $300.5 million, down 4.6 percent compared to $315.0 million in the first quarter of fiscal 2021. Gross margin was 32.2 percent for the first quarter of fiscal 2022 compared to 36.1 percent for the first quarter of fiscal 2021, a decrease of 390 basis points. The decrease in gross margin for the first quarter comparison was primarily due to the macroeconomic inflationary environment resulting in higher commodity and component parts costs, unfavorable manufacturing variance due to supply chain challenges, and unfavorable product mix. The gross margin decrease was partially offset by improved net price realization as a result of price increases across our product lines and productivity improvements.

Selling, General, and Administrative ("SG&A") Expense

SG&A expense increased $35.3 million, or 20.3 percent, for the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. As a percentage of net sales, SG&A expense increased 250 basis points for the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. The increase in SG&A expense as a percentage of net sales for the first quarter comparison was primarily due to a favorable net legal settlement with BGG that was recognized in fiscal 2021 and did not repeat in fiscal 2022, higher engineering expense for continued investments in new product development, and increased sales and marketing costs as trade show and other travel-related business practices continue to gradually return to pre-pandemic levels.

Interest Expense

Interest expense decreased $0.5 million for the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021. This decrease was driven by lower average outstanding borrowings under our debt arrangements and lower average interest rates.

Other Income, Net

Other income, net for the first quarter of fiscal 2022 increased $0.7 million compared to the first quarter of fiscal 2021, primarily due to the favorable impact of foreign currency exchange rate fluctuations.

Provision for Income Taxes

The effective tax rate for the first quarter of fiscal 2022 was 20.2 percent compared to 18.1 percent in the first quarter of fiscal 2021. The increase in the effective tax rate was primarily driven by lower discrete tax benefits recorded as excess tax deductions for stock-based compensation. The non-GAAP effective tax rate for the first quarter of fiscal 2022 was 20.9 percent, compared to a non-GAAP effective tax rate of 21.5 percent in the first quarter of fiscal 2021. Reconciliations of non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures."

Net Earnings

Net earnings for the first quarter of fiscal 2022 were $69.5 million, or $0.66 per diluted share, compared to $111.3 million, or $1.02 per diluted share, for the first quarter of fiscal 2021, a decrease of 35.3 percent per diluted share. The decrease was primarily due to the macroeconomic inflationary environment resulting in higher commodity and component parts costs, unfavorable manufacturing variance and product mix, and a favorable net legal settlement with BGG that was recognized in fiscal 2021 and did not repeat. The decrease was partially offset by improved net price realization as a result of price increases across our product lines.

Non-GAAP net earnings for the first quarter of fiscal 2022 were $69.7 million, or $0.66 per diluted share, compared to $93.2 million, or $0.85 per diluted share, for the first quarter of fiscal 2021, a decrease of 22.4 percent per diluted share. The decrease

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was primarily due to the macroeconomic inflationary environment resulting in higher commodity and component parts costs, as well as unfavorable manufacturing variance and product mix. The decrease was partially offset by improved net price realization as a result of price increases across our product lines. Reconciliations of non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures."

BUSINESS SEGMENTS

We operate in two reportable business segments: Professional and Residential. Segment earnings for our Professional and Residential segments are defined as earnings from operations plus other income, net. Our remaining activities are presented as "Other" due to their insignificance. Operating loss for our Other activities included earnings (loss) from our wholly-owned domestic distribution company, Red Iron joint venture, corporate activities, other income, and interest expense. Corporate activities include general corporate expenditures, such as finance, human resources, legal, information services, public relations, and similar activities, as well as other unallocated corporate assets and liabilities, such as corporate facilities and deferred tax assets and liabilities. The following tables summarize net sales for our reportable business segments and Other activities:







                                                                                                           Three Months Ended
                                                                         January 28,         January 29,             Dollar
        (Dollars in thousands)                                              2022                2021              Value Change              Percentage Change
        Professional                                                    $  672,885          $  650,223          $       22,662                             3.5  %
        Residential                                                        255,402             217,700                  37,702                            17.3
        Other                                                                4,363               5,063                    (700)                          (13.8)
        Total net sales*                                                $  932,650          $  872,986          $       59,664                             6.8  %
        *Includes international net sales of:                           $  194,986          $  191,681          $        3,305                             1.7  %
        


The following tables summarize segment earnings for our reportable business segments and operating (loss) for our Other activities:







                                                                                                           Three Months Ended
                                                                         January 28,         January 29,             Dollar
        (Dollars in thousands)                                              2022                2021              Value Change              Percentage Change
        Professional                                                    $   93,272          $  116,816          $      (23,544)                          (20.2) %
        Residential                                                         31,760              32,108                    (348)                           (1.1)
        Other                                                              (37,885)            (13,098)                (24,787)                         (189.2)
        Total segment earnings                                          $   87,147          $  135,826          $      (48,679)                          (35.8) %
        Professional Segment
        


Segment Net Sales

Net sales for our Professional segment for the first quarter of fiscal 2022 increased 3.5 percent compared to the first quarter of fiscal 2021. The increase was primarily due to price increases across our Professional segment product lines, as well as growth in our irrigation and ag-irrigation businesses driven by product availability and strong demand. The increase in Professional segment net sales was partially offset by supply chain challenges limiting product availability for landscape contractor zero-turn riding mowers and golf and grounds products.

Segment Earnings

Professional segment earnings for the first quarter of fiscal 2022 decreased 20.2 percent compared to the first quarter of fiscal 2021, and when expressed as a percentage of net sales, decreased to 13.9 percent from 18.0 percent. As a percentage of net sales, the Professional segment earnings decrease for the first quarter comparison was primarily due to the macroeconomic inflationary environment resulting in higher commodity and component parts costs, unfavorable manufacturing variance due to supply chain challenges, higher engineering expense for continued investments in new product development, and increased sales and marketing costs as trade show and other travel-related business practices continue to gradually return to pre-pandemic levels. The Professional segment earnings decrease was partially offset by improved net price realization as a result of price increases across our Professional segment product lines.

Residential Segment

Segment Net Sales

Net sales for our Residential segment for the first quarter of fiscal 2022 increased 17.3 percent compared to the first quarter of fiscal 2021. The Residential segment net sales increase for the first quarter comparison was mainly driven by price increases

. . .

Mar 03, 2022

COMTEX_403447156/2041/2022-03-03T12:17:05

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