The Toro Co. Sees Strong Q3 Growth

BLOOMINGTON, Minn – The Toro Co. today reported record net earnings of $34.2 million, or $1.33 per diluted share, on net sales of $454 million for its fiscal 2004 third quarter ended July 30, 2004. This is compared to the same time last year when net earnings were $27 million, or $1.03 per diluted share on net sales of $394.5 million.

For the nine months ended July 30, 2004, Toro reported net earnings of $95.7 million, or $3.68 per diluted share, on net sales of $1,315.6 million. In the comparable fiscal 2003 period, Toro reported net earnings of $76.0 million, or $2.92 per diluted share, on net sales of $1,186.3 million.

Kendrick B. Melrose, The Toro Co. chairman and chief executive officer, says the strong third quarter results keep the company on track to deliver the best full year financial performance in its history. “During our third quarter, we continued to generate healthy sales growth in all segments,” Melrose says. “And, as in our second quarter, we converted strong volume growth into even stronger earnings growth by continuing to focus on overall operating effectiveness, productivity improvement through lean manufacturing initiatives, expense reductions through our ‘no waste’ programs and focused asset management. Our year-to-date gross margin remained above last year’s rate despite continued increases in steel and rising transportation and other commodity costs.”

Melrose said third quarter sales exceeded expectations in most business categories, reflecting increased demand in a recovering economy and brand strength in Toro’s principal markets. “During the third quarter, shipments were particularly strong in our landscape contractor, commercial, and international businesses,” said Melrose. “In addition, our lean manufacturing and no-waste initiatives are clearly boosting profitability.”

SEGMENT RESULTS
Segment data is provided in the table following the “Condensed Consolidated Statement of Earnings.”

Professional
For the third quarter, professional segment sales increased 17.9 percent to $287.9 million. As in the prior quarter, segment sales increased in nearly all product categories, although irrigation product sales fell short of the company’s expectations.

Professional segment earnings for the third quarter were $54.3 million, up 28.6 percent from the fiscal 2003 third quarter which benefited from leveraging of expenses.

Residential
Residential segment sales for the third quarter totaled $144.2 million, up 11.8 percent from the prior year third quarter. Product categories with the strongest period-over-period sales growth included snow throwers and electric products.

Residential segment earnings for the third quarter totaled $17.6 million, up 33.5 percent from $13.2 million in the prior year period. The improvement in third quarter profitability in this segment was largely due to reduced expenses and a prior year restructuring charge of $1.7 million.

Distribution
Worldwide distribution segment sales for the third quarter totaled $47.1 million, up 9.4 percent compared with last year’s third quarter. Distribution segment earnings for the third quarter were $2.3 million, flat with the comparable prior-year period.

REVIEW OF OPERATIONS
Gross margin for the third quarter was 36.2 percent compared with 37.2 percent for the same period last year. “The margin decline was primarily the result of increases in costs for steel, other commodities and transportation, which were partially offset through our ongoing cost management and productivity improvement efforts,” Melrose says.

Selling, general and administrative (SG&A) expenses for the third quarter were 24.6 percent of net sales, down from 25.8 percent in the fiscal 2003 third quarter. Continued expense leveraging and reductions more than countered increases in incentive expenses as well as additional expenses related to ongoing new product development and other growth initiatives.

Interest expense for the third quarter was $3.9 million, down from $4.2 million in the comparable year-ago period as a result of lower average debt and improved asset management.

The company’s balance sheet continued to strengthen from increased earnings and effective working capital management. Net inventories at the end of the third quarter were $217.4 million, down nearly 8 percent from the end of the fiscal 2003 third quarter. Accounts receivable at the end of the third quarter totaled $381.3 million, up only 2.2 percent, significantly less than the consolidated net sales increase of 15.1 percent.

BUSINESS OUTLOOK
“Our strong performance through the first nine months of fiscal 2004 should continue through the year’s final quarter and into fiscal 2005,” Melrose says. “We expect our lean/no waste initiatives to yield strong profitability improvement for this year as well as fiscal 2005. Moreover, we believe continued investments in key growth initiatives will help ensure our sales growth outperforms the market. Lastly, we fully expect to complete the year with a solid balance sheet, strong operating cash flow, and low inventories in the field.” The company expects to report fiscal 2004 net earnings per diluted share in the range of $3.82 to $3.90, excluding the effects of the previously announced share repurchase program, on sales growth of 9 to 10 percent.

The Toro Co. will conduct a conference call and webcast for investors beginning at 10:00 a.m. Central Time (CDT) on August 24, 2004. The webcast will be available at http://www.streetevents.com/ or at http://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, download and install audio software.