BLOOMINGTON, Minn. – The Toro Co. today reported record fiscal second quarter net earnings of $62 million, or $1.33 per diluted share, on net sales of $628.4 million for the quarter ended April 29, 2005. In the comparable fiscal 2004 period, the company reported net earnings of $52.2 million, or $1 per diluted share, on net sales of $548 million.
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For the six months ended April 29, 2005, Toro reported net earnings of $73.1 million, or $1.55 per diluted share, on net sales of $975.4 million compared with net earnings of $61.5 million, or $1.18 per diluted share, on net sales of $861.6 million in the first six months of fiscal 2004.
Earnings per share figures for all periods reported have been adjusted to reflect the effects of a 2-for-1 stock split effective March 28, 2005.
Kendrick Melrose, The Toro Co.'s executive chairman, said strong shipments of both professional and residential products, especially in international markets, were responsible for the 14.7-percent increase in second quarter net sales. Excluding the effects of Hayter Ltd., a U.K.-based manufacturer of residential and commercial mowing equipment, which Toro acquired in February 2005, net sales would have increased 11.4 percent. International sales increased 41.1 percent compared with the fiscal 2004 second quarter as a result of strong international demand and contributions from Hayter.
"We continued to realize impressive results from our leadership position in the professional segment markets, where demand from landscape contractor, golf course and other commercial customers remained strong," said Melrose. "Moreover, international sales increased from growth in the residential and golf markets, a host of innovative products introduced across several markets, and the relative weakness of the U.S. dollar."
Melrose noted that, as in the company's fiscal 2005 first quarter, net earnings for the second quarter benefited from double-digit revenue growth and the leveraging of selling, general and administrative expense (SG&A) resulting, in part, from substantial progress on the company's "No Waste" profitability improvement initiative.
SEGMENT RESULTS.
Professional. Compared with the prior year, fiscal 2005 second quarter professional segment sales increased 14.9 percent to $389.1 million. For the second consecutive year, volume increased in nearly all product categories. In addition, net sales for the 2005 second quarter included contributions from Hayter's professional products.
"Equipment sales to the landscape contractor market continued to be robust as our landscape contractor customers remained optimistic about the year and are investing in new equipment," said Michael Hoffman, chief executive officer. "Domestically, we are seeing healthy retail demand for golf and grounds maintenance equipment resulting in strong shipments and market share growth. In our international markets, golf course renovation and improvement projects as well as new course construction helped drive increased demand."
Professional segment earnings for the fiscal 2005 second quarter totaled $84.6 million, up 18 percent from $71.7 million in last year's second quarter. The increase resulted primarily from higher sales in the quarter and expense leveraging.
For the year to date, professional segment earnings totaled $123.5 million on net sales of $634.3 million compared with earnings of $100.2 million on net sales of $546.2 million in last year's first six months.
Residential. Residential segment sales for the second quarter totaled $227.7 million, up 16.9 percent compared with last year's second quarter. Strong shipments of both Toro® and Lawn-Boy® brand walk power mowers and contributions from Hayter were the primary sources of sales growth in the quarter and more than offset the decline in retail irrigation and riding mower sales compared with last year's second quarter. "Our expanded presence and innovative offerings of the Toro and Lawn-Boy brands in large retailers and dealers have resulted in strong sales growth for us," said Hoffman.
Residential segment earnings for the fiscal 2005 second quarter increased to $29 million from $26.7 million last year, which was less than expected due to increases in commodity costs. For the year to date, Residential segment earnings totaled $33.4 million on net sales of $323.6 million compared with earnings of $35.1 million on net sales of $292.7 million for the same period last year.
REVIEW OF OPERATIONS. Gross margin for the second quarter was 34.5 percent compared with 36.3 percent for last year's quarter. The decline in gross margin resulted primarily from purchase accounting adjustments due to the Hayter acquisition, and increased costs for steel, fuel and petroleum-based resins. The impact of these higher costs was partially offset by price increases and continued cost reductions, resulting from the company's lean manufacturing initiatives and favorable foreign currency exchange effects.
In contrast, the reduction in SG&A expense as a percent of sales more than offset the decline in gross margin. SG&A declined to 19 percent as a percentage of net sales compared with 21.4 percent in the same period last year. As in the fiscal 2005 first quarter, the improvement resulted primarily from expense leveraging from the company's "No Waste" initiative. "While we were not able to completely offset commodity cost increases by our strong lean manufacturing initiative, we were very pleased to see that our profit improvement efforts below the gross margin line are now paying off," said Hoffman.
Interest expense for the second quarter totaled $4.9 million compared with $3.7 million in the same period last year.
Accounts receivable at the end of the second quarter totaled $544.9 million, up 12.4 percent, but less than the 14.7 percent increase in net sales. Quarter-ending inventory totaled $256.9 million, up only 7.7 percent compared with the end of the fiscal 2004 second quarter. The increases in the quarter-ending accounts receivable and inventories resulted primarily from higher foreign exchange rates and the Hayter acquisition completed early in the fiscal 2005 second quarter.
BUSINESS OUTLOOK. Commenting on Toro's outlook for the rest of 2005, Melrose cautioned that sales to homeowners during most of the second quarter were below the company's expectations, due to unfavorable weather in the U.S. market. "Reorder volume for residential products in our fiscal third quarter will likely be adversely affected," said Melrose. "If the remainder of the spring retail season does not return to more favorable weather soon, our third quarter earnings target will be at risk. Nonetheless, on the assumption of normal weather patterns resuming for the balance of the season, we are raising our earnings outlook for fiscal 2005 modestly."
Melrose said he is confident Toro will report another strong year as it continues to focus on its "6+8" profit improvement and growth initiative, international expansion strategies and the development and introduction of innovative new products. "Our performance to date reflects our continuing commitment to industry-leading quality and innovation and our focused application of lean manufacturing and 'no-waste' principles," said Melrose. "As we assimilate the year's positive and negative prospects, we now expect net earnings per diluted share for fiscal 2005 to exceed last year's record levels by 15 to 18 percent. Due to the uncertainty of the second quarter's retail effect on the third quarter's shipment levels, we are maintaining our sales growth guidance of 9 to 11 percent."