Outdoor environments equipment manufacturer The Toro Company (TTC -0.55%) watched the market perform landscape maintenance on its stock chart Wednesday, as shares slumped 6.4% following the release of fiscal fourth-quarter 2019 earnings. Shareholders were disappointed with the company's top line, which barely budged after removing the effects of a major acquisition from earlier in the year. Let's walk through the quarter below, keeping in mind that all comparative numbers are presented against those of the prior-year quarter.
Toro results: The big-picture numbers
| Metric | Q4 2019 | Q4 2018 | Change |
|---|---|---|---|
| Revenue | $734.4 million | $539.3 million | 36.2% |
| Net income | $38.3 million | $39.4 million | (2.8%) |
| Diluted earnings per share | $0.35 | $0.36 | (2.8%) |
Data source: The Toro Company.
Critical details from the quarter
Image source: Getty Images.
- The company's top-line gain was driven almost entirely by the April 2019 acquisition of Charles Machine Works (CMW), an underground pipes and cables specialist known for underground construction brands such as "Ditch Witch."
- Toro's professional segment increased revenue by 46.9%. The segment's top line dipped by 1.7%, after removing $194.7 million in revenue contributed from CMW.
- Residential segment revenue advanced by 1.9% to $135.7 million, which management attributed to strength in snow thrower sales and the introduction of new products. This momentum was partially absorbed by lower-than-expected sales of zero-turn riding and walk-powered mowers.
- Gross margin rose 20 basis points, as pricing power and productivity gains were partially offset due to purchase accounting adjustments and transaction costs related to the CMW acquisition.
- Operating margin decreased by 210 basis points to 5.9%, a result of higher selling, general, and administrative (SG&A) expense driven by the CMW purchase.
Management's perspective on results
In Toro's earnings press release, CEO Richard Olson summarized an eventful year for the organization:
We concluded fiscal 2019 by exceeding the $3 billion revenue milestone and delivering strong gross margin and revenue growth momentum heading into fiscal 2020. The year was marked by record results, the transformational acquisition of Charles Machine Works and strong demand for snow and ice management products in our professional and residential segments. New product introductions contributed to our growth, such as the stand-on BOSS Snowrator, the redesigned Power Clear snow thrower and the Flex-Force lithium-ion battery-powered products with all season capability.
Investors were understandably fixated on Toro's lack of organic growth in yesterday's report, and some may have used the results as an excuse to realize outsize profits: Even after the sell-off, Toro shares are up 37% year to date.
But as CEO Olson alludes to above, the company is rolling out products from its latest innovation cycle even as it's diversified into an entirely new market through the CMW transaction. In the next few years, Toro will utilize its distribution network to steadily increase CMW's underground construction revenue, while realizing at least $30 million in cumulative cost synergies. Thus, longer-term advocates of this manufacturing investment are probably safe in holding on to their shares.
Looking toward fiscal 2020
Toro's management advised investors on Wednesday to expect adjusted, diluted earnings per share (EPS) of $0.58 in the first quarter of fiscal 2020. For the entire fiscal year, the company expects to generate revenue of $3.6 billion, which will outpace fiscal 2019's top line of $3.1 billion, as Toro will have the benefit of including CMW on its books for a full year. As for earnings, 2020 adjusted EPS is anticipated to fall between $3.33 and $3.40 per share. At the midpoint of the range, this will represent an improvement of roughly 12% over the $3 in adjusted, diluted EPS Toro earned in fiscal 2019.
