FINANCIAL HIGHLIGHTS
Strong Growth Continues at Toro
CONTENTS
Letter to Stockholders 2
Review of Operations 4
Eleven-Year Selected 12
Financial Data
Management's Discussion 14
and Analysis
Financial Statements 19
Notes to Consolidated 22
Financial Statements
Directors, Officers and 29
Stockholder Information
TORO DELIVERED RECORD SALES AND A 71 PERCENT EARNINGS INCREASE DURING 1994 WHILE
ALSO INVESTING HEAVILY FOR THE FUTURE IN KEY ELEMENTS OF THE OPERATION. MOMENTUM
CONTINUES TO BUILD INDICATING ANOTHER GOOD YEAR IN 1995.
EXPANDED AND ENHANCED DISTRIBUTION CHANNELS BROUGHT TORO CLOSER TO ITS CUSTOMERS
AND IMPROVED THE COMPETITIVE POSITION OF ITS PRODUCT LINES.
AGGRESSIVE ADVERTISING AND MARKETING PROGRAMS REINFORCED TORO'S BRAND EQUITY.
AGGRESSIVE RESEARCH AND DEVELOPMENT INVESTMENTS CONTINUED TO TRANSLATE TRENDS
AND CUSTOMER NEEDS INTO MARKET-LEADING NEW PRODUCTS.
TORO'S BALANCE SHEET CONTINUED TO STRENGTHEN AS THE COMPANY REDUCED LONG-TERM
DEBT BY $37 MILLION DURING THE YEAR.
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(Dollars in thousands, except per-share data)
Years ended July 31 1994 1993 % Change
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Net sales $794,341 $684,324 16.1%
Net earnings 22,230 13,040 70.5
Percent of net sales 2.8% 1.9%
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Net earnings per share of common stock and
common stock equivalent $1.71 $1.05 62.9
Dividends per share of common stock outstanding 0.48 0.48
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Return on:
Beginning common stockholders' equity 15.4% 9.8%
Average common stockholders' equity 14.2 9.4
Average invested capital 10.8 7.8
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AT YEAR END
Working capital $175,783 $193,870 (9.3)
Total assets 443,639 419,203 5.8
Total debt 101,325 137,970 (26.6)
Common stockholders' equity 168,652 144,601 16.6
Book value per common share 13.43 11.78 14.0
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Number of common stockholders 7,541 7,968 (5.4)
Average number of employees 3,434 3,117 10.2
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See accompanying notes to consolidated financial statements.
The Toro Company 1994 Annual Report 1
THE TORO COMPANY
Eleven-Year Selected Financial Data
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(Dollars in thousands, except per-share data)
Years ended July 31 1994 1993 1992* 1991 1990**
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OPERATING DATA:
Net sales $794,341 $684,324 $643,748 $718,105 $750,931
EARNINGS:
Net earnings (loss) 22,230 13,040 (23,753) 9,700 16,558
Percent of sales 2.8% 1.9% (3.7)% 1.4% 2.2%
Per share of common stock and
common stock equivalent $ 1.71 $ 1.05 $ (1.98) $ 0.81 $ 1.55
DIVIDENDS:
On common stock outstanding 5,993 5,824 5,753 5,700 4,797
Per share of common stock outstanding 0.48 0.48 0.48 0.48 0.48
RETURN ON:
Beginning common stockholders' equity 15.4% 9.8% (14.8)% 6.4% 16.4%
Average common stockholders' equity 14.2% 9.4% (16.2)% 6.4% 14.4%
SUMMARY OF FINANCIAL POSITION:
Current assets $364,495 $344,130 $332,517 $318,753 $320,204
Current liabilities 188,712 150,260 122,087 107,981 130,452
Working capital 175,783 193,870 210,430 210,772 189,752
Non-current assets 79,144 75,073 88,793 96,551 103,347
Total assets 443,639 419,203 421,310 415,304 423,551
Non-current liabilities, excluding long-term debt 5,250 1,372 2,509 1,469 6,112
CAPITALIZATION:
Long-term debt, less current portion 81,025 122,970 164,100 145,295 134,400
Redeemable preferred stock -- -- -- -- --
Common stockholders' equity 168,652 144,601 132,614 160,559 152,587
Total capitalization 249,677 267,571 296,714 305,854 286,987
Book value per common share 13.43 11.78 11.01 13.48 12.92
STOCK DATA:
Number of shares of common stock
outstanding (in thousands) 12,561 12,270 12,042 11,913 11,814
Number of common stockholders 7,541 7,968 8,386 8,503 7,706
Low price $ 19 3/4 $ 11 3/8 $ 12 1/8 $ 11 $ 20 1/2
High price 30 1/2 21 7/8 17 1/2 24 1/4 30
Close price 22 5/8 19 3/4 13 15 3/4 24 1/4
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<FN>
*Includes restructuring costs of $24.9 million, or $1.41 per share.
**The company's consolidated financial statements include results of
operations of Lawn-Boy Inc. from November 7, 1989, the date of acquisition.
***The company's consolidated financial statements include results of
operations of Wheel Horse Products, Inc. from December 19, 1986, the date of
acquisition.
12 The Toro Company 1994 Annual Report
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(Dollars in thousands, except per-share data)
Years ended July 31 1989 1988 1987*** 1986 1985 1984
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OPERATING DATA:
Net sales $643,566 $609,205 $521,123 $406,664 $336,813 $280,249
EARNINGS:
Net earnings (loss) 22,096 20,048 17,032 15,491 13,224 8,306
Percent of sales 3.4% 3.3% 3.3% 3.8% 3.9% 3.0%
Per share of common stock and
common stock equivalent $ 2.10 $ 1.84 $ 1.52 $ 1.34 $ 1.11 $ 0.65
DIVIDENDS:
On common stock outstanding 4,793 4,410 3,599 2,942 2,034 334
Per share of common stock outstanding 0.48 0.43 0.35 0.28 0.20 0.03
RETURN ON:
Beginning common stockholders' equity 25.8% 26.3% 25.1% 20.4% 19.3% 12.4%
Average common stockholders' equity 23.8% 24.4% 24.0% 23.1% 17.4% 11.8%
SUMMARY OF FINANCIAL POSITION:
Current assets $266,176 $262,638 $245,574 $195,635 $186,678 $183,446
Current liabilities 123,377 126,796 102,913 89,382 69,713 52,658
Working capital 142,799 135,842 142,661 106,253 116,965 130,788
Non-current assets 59,807 57,430 53,970 32,930 29,452 29,365
Total assets 325,983 320,068 299,544 228,565 216,130 212,811
Non-current liabilities, excluding long-term debt 2,329 2,887 3,273 2,432 3,922 3,849
CAPITALIZATION:
Long-term debt, less current portion 96,730 99,347 110,903 63,198 61,935 81,526
Redeemable preferred stock 6,000 9,000 10,500 10,500 10,500 14,829
Common stockholders' equity 97,547 82,038 71,957 63,053 70,060 59,949
Total capitalization 200,277 190,385 193,360 136,751 142,495 156,304
Book value per common share 9.85 8.16 7.01 6.06 6.84 5.97
STOCK DATA:
Number of shares of common stock
outstanding (in thousands) 9,902 10,049 10,272 10,401 10,245 10,041
Number of common stockholders 7,527 6,802 5,587 3,821 4,288 4,136
Low price $ 17 $ 11 1/8 $ 14 $ 10 3/8 $ 6 5/8 $ 6
High price 22 7/8 24 7/8 22 1/4 19 1/2 11 3/8 8 1/8
Close price 21 1/2 19 1/4 19 5/8 18 3/4 10 1/2 6 2/3
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The Toro Company 1994 Annual Report 13
THE TORO COMPANY
Management's Discussion and Analysis of Financial Condition and Results of
Operations
Results of Operations
The company's product, distribution and operational strategies continued to
drive the sales and earnings growth in 1994. Worldwide net sales rose to $794.3
million, a 16.1% increase from the $684.3 million in 1993. Net earnings for 1994
were $22.2 million compared to $13.0 million in 1993.
The table below summarizes operating results included in the Consolidated
Statements of Operations for 1994, 1993 and 1992. A discussion of the changes
follows the table.
SUMMARY
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(Dollars in millions except per share data)
Years ended July 31 1994 % Change 1993 % Change 1992
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Net sales $794.3 16.1% $684.3 6.3% $643.7
Cost of sales 506.8 13.8 445.5 6.3 419.1
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Gross profit 287.5 20.4 238.8 6.3 224.6
Selling, general and
administrative expense 244.9 20.4 203.4 (8.9) 223.2
Restructuring expense -- -- -- -- 24.9
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Earnings (loss) from
operations 42.6 20.3 35.4 -- (23.5)
Interest expense 13.6 (20.9) 17.2 (8.0) 18.7
Other income, net (8.0) 158.1 (3.1) (57.5) (7.3)
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Earnings (loss) before
income taxes 37.0 73.7 21.3 -- (34.9)
Provision (benefit) for
income taxes 14.8 78.3 8.3 -- (11.1)
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Net earnings (loss) $ 22.2 70.8% $ 13.0 --% $(23.8)
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Net earnings (loss)
per common and common
share equivalent* $1.71 62.9% $1.05 --% $(1.98)
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<FN>
*Loss per share calculations for fiscal 1992 are based on weighted average
common shares outstanding, excluding common stock equivalents due to their
anti-dilutive effect.
SALES
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Net Sales (Dollars in millions)
Years ended July 31 1994 % Change 1993 % Change 1992
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Consumer $425.8 26.0% $338.0 2.6% $329.3
Commercial 253.2 8.0 234.5 9.2 214.7
Irrigation 115.3 3.1 111.8 12.1 99.7
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Total* $794.3 16.1% $684.3 6.3% $643.7
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*Includes International
sales of $130.1 0.5% $129.4 (2.1)% $132.2
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<FN>
Certain prior year sales amounts have been reclassified to reflect the current
year presentation.
FISCAL 1994 COMPARED TO FISCAL 1993
Worldwide sales increased $110.0 million to $794.3 million with increases in all
product lines.
CONSUMER PRODUCTS
Worldwide consumer sales rose 26.0% to $425.8 million in 1994. Consumer product
sales represented 53.6% and 49.4% of consolidated sales for 1994 and 1993,
respectively. International sales included in consumer product sales increased
$4.4 million from the previous year.
There were strong performances in all consumer products. The new lawn and
garden tractor lines were well accepted and all snow products sold out. Lawn-
Boy-R- walk power mowers were successful because of new product offerings and
lower retail price points. Increased sales of electric appliance products
including blowers, trimmers and low-voltage lighting were primarily the result
of product improvements and retail pricing strategies.
COMMERCIAL PRODUCTS
Worldwide commercial sales increased $18.7 million over the prior year. Domestic
sales rose 11.8%, while international sales declined 1.5%. The domestic increase
is attributed to strong golf and commercial turf markets. The improved economy
had a positive impact on municipalities and other tax-supported customers as
these entities continued to purchase more efficient, labor-saving equipment.
Golf sales continued to be strong because of new course openings as well as
existing courses updating their maintenance equipment. ProLine-R- sales
strengthened compared to the prior year as a result of the improved economy
combined with increased market share. Sluggish economies in Europe and Japan had
a slightly negative impact on international sales.
IRRIGATION PRODUCTS
Worldwide irrigation sales rose 3.1% to $115.3 million in 1994. Domestic
irrigation sales increased $3.6 million over 1993 while international irrigation
sales decreased $0.1 million. During 1994, the company reorganized irrigation
distribution to better respond to customer needs.
14 The Toro Company 1994 Annual Report
INTERNATIONAL MARKETS
International sales are included in the preceding net sales table. International
sales have increased 0.5% to $130.1 million in 1994. The majority of the
international sales increase was because of the change from a two-step
distribution system to a direct distribution system in Canada which resulted in
volume increases. Increases in the Pacific Rim were related to the expansion of
the golf market. These increases were offset by a decline in European sales
because of the continuing weak economy.
FISCAL 1993 COMPARED TO FISCAL 1992
Worldwide net sales increased $40.6 million to $684.3 million with increases in
all product lines.
CONSUMER PRODUCTS
Worldwide consumer sales increased $8.7 million to $338.0 million in 1993.
Consumer sales represented 49.4% and 51.2% of consolidated sales for 1993 and
1992, respectively. Domestic sales increased 4.2%, while international sales
decreased 7.6%. International sales included in consumer sales were down $3.4
million from the previous year.
The largest sales growth occurred in Lawn-Boy-R- walk power mowers. This
growth was the result of expanded distribution in the mass merchant channel and
reduced pricing levels on new product introductions.
COMMERCIAL PRODUCTS
Worldwide commercial sales increased $19.8 million to $234.5 million in 1993.
Domestic sales rose 10.0%, while international sales rose 7.4%. The increase is
attributed to new product introductions, especially the Workman-R- vehicle line,
which was well received and sold out early in the year. Also, overall sales
increased over the prior year because of an improving economy which had a
positive impact on municipalities and other tax-supported customers as these
entities purchased more efficient, labor-saving equipment.
ProLine-R- sales increased because of the introduction of new and improved
products, and continued growth in the professional lawn service industry.
Golf sales were strong as courses updated their maintenance equipment.
IRRIGATION PRODUCTS
Worldwide irrigation sales increased $12.1 million to $111.8 million in 1993.
Domestic sales increased $16.1 million over 1992 while international sales
declined $4.0 million. The domestic sales increase was the result of unusually
low distributor and dealer inventory levels at the beginning of the year, new
product introductions, expanded distribution in the mass merchant channel and
favorable economic conditions in several key markets.
INTERNATIONAL MARKETS
International sales are included in the preceding net sales table. International
sales decreased 2.1% to $129.4 million in 1993 primarily because of a
strengthened U.S. dollar in the Canadian and European markets. Irrigation sales
suffered the greatest decline because of weak economies in the company's key
markets which had a negative impact on new golf course construction. Consumer
sales were down because of the weak economies in key markets and competitive
pressures from locally manufactured brands. Commercial sales were ahead of the
prior year by $4.8 million principally because of new product introductions.
COST TRENDS AND PROFIT MARGINS
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Margins (Percent of net sales)
Years ended July 31 1994 1993 1992
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Gross profit 36.2% 34.9% 34.9%
Operating profit (loss) 5.4 5.2 (3.7)
Pretax earnings (loss) 4.7 3.1 (5.4)
Net earnings (loss) 2.8 1.9 (3.7)
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FISCAL 1994 COMPARED TO FISCAL 1993
Gross profit for 1994 increased 20.4% to $287.5 million over the 1993 amount of
$238.8 million because of a combination of increased sales, improved plant
utilization and improved inventory controls.
FISCAL 1993 COMPARED TO FISCAL 1992
Gross profit for 1993 increased 6.3% to $238.8 million over the 1992 amount of
$224.6 million principally because of increased sales and improved manufacturing
efficiencies. 1993 gross profit as a percent of sales did not change from the
prior year. However, excluding the prior year's LIFO benefit, gross profit as a
percent of sales for 1992 would have been 34.0%.
1993 gross profit improved as a result of the restructuring initiatives
implemented in 1992. Specifically, consolidation of certain manufacturing
functions and lower spending levels resulted in increased plant utilization
which lowered the break-even point.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (SG&A)
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SG&A Expense (Dollars in millions)
% of % of % of
Net Net Net
Years ended July 31 1994 Sales 1993 Sales 1992 Sales
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Administrative $ 80.3 10.0% $ 73.0 10.7% $ 64.8 10.1%
Sales and marketing 96.1 12.1 71.2 10.4 90.0 14.0
Warranty 29.0 3.7 26.3 3.8 28.0 4.3
Distributor/dealer
financing
(floor plan) 8.6 1.1 7.6 1.1 13.5 2.1
Research and
development 30.9 3.9 25.3 3.7 26.9 4.2
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Total $244.9 30.8% $203.4 29.7% $223.2 34.7%
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The Toro Company 1994 Annual Report 15
FISCAL 1994 COMPARED TO FISCAL 1993
SG&A expense was up $41.5 million from 1993 and as a percent of sales, SG&A
expense was 30.8% for 1994 compared with 29.7% for 1993.
The increase in administrative expense of $7.3 million consisted of the
start up cost of the company's recycling equipment division (debris), increased
investment in information systems technology, the cost associated with the
realignment of the irrigation manufacturing operations in Riverside, California
and distributor marketing support for the company's product lines. These
increases were offset by a reduction in employee performance based incentives,
product liability and group health insurance costs.
Sales and marketing expense was up $24.9 million from the prior year. As a
percent of net sales, sales and marketing expense was 12.1%, up from 10.4% in
1993. This increase reflects the company's increased sales volume, additional
marketing personnel and an increase in brand advertising and market research.
Warranty expense increased by $2.7 million and as a percent of sales was
3.7% as compared to 3.8% in 1993. The $2.7 million increase relates to increased
sales volume and charges for a lawn tractor component modification, a walk power
mower gas tank issue and a walk power mower brake issue.
Distributor/dealer financing (floor plan) expense represents the cost
incurred by the company to share the costs of financing dealer and distributor
inventory. This expense was up $1.0 million in 1994 because of the sales
increase, which was offset partially by lower field inventory levels held by
dealers.
Research and development expense was up $5.6 million from 1993 primarily
because of the addition of personnel to support new product development and
enhancements to existing products.
FISCAL 1993 COMPARED TO FISCAL 1992
SG&A expense was down $19.8 million from 1992. As a percent of sales, SG&A
expense was 29.7% for 1993 compared to 34.7% for 1992. The decrease in SG&A
expense was attributable to cost control and restructuring initiatives
implemented in 1992.
The increase in administrative expense of $8.2 million was primarily the
result of increased employee incentives which were based on the company's
performance, costs incurred to enhance the company's distribution channels and
the resumption of contributions to the company's Employee Stock Ownership Plan
(ESOP). These expenses were not incurred in 1992.
Sales and marketing expense was down $18.8 million from the prior year. As
a percent of net sales, sales and marketing expense was 10.4%, down from the
14.0% for 1992. This decline reflected the results of actions implemented by the
company to lower costs through the realignment of the consumer and irrigation
divisions and changes in marketing and distribution strategies.
Warranty expense was down slightly from the amounts incurred in 1992 and as
a percent of net sales was 3.8% in 1993, down from 4.3% in 1992. The change was
the result of ongoing quality improvements and prior year quality issues on
specific consumer and irrigation products corrected in 1992.
Distributor/dealer financing (floor plan) expense was down $5.9 million in
1993 because of the following: the company was shipping closer to the selling
season resulting in a reduced financing period; lower field inventory levels
held by dealers and distributors throughout the year; and a decline in interest
rates.
Research and development expense was down $1.6 million from 1992. This
decrease was because the majority of the costs to develop the Workman-R- vehicle
line were incurred in 1992 and also because of the efficiencies gained through
cost control measures implemented with the realignment of the consumer division.
RESTRUCTURING EXPENSE IN FISCAL 1992
In the second quarter of 1992, the company recorded restructuring expenses of
$15.0 million ($10.2 million after-tax) related to consolidation of consumer
product manufacturing, marketing and administrative operations. The charge
covered costs for plant closings, workforce reductions, discontinued products
and other related costs.
In addition, the company incurred restructuring expenses in the fourth
quarter of 1992 of $9.9 million ($6.7 million after-tax) related to the
facility closing of a consumer riding products manufacturing plant, an
irrigation controller assembly operation and a satellite distribution center.
This restructuring was part of the company's plan to increase its
competitiveness and profitability by consolidating manufacturing and
warehousing activities.
INTEREST EXPENSE
FISCAL 1994 COMPARED TO FISCAL 1993
Interest expense for 1994 was down $3.6 million from the $17.2 million reported
for 1993. This decline was primarily the result of calling $24.9 million of
outstanding debt in July 1993 and a lower interest rate on short-term borrowing.
FISCAL 1993 COMPARED TO FISCAL 1992
Interest expense for 1993 was down $1.5 million from the $18.7 million reported
for 1992. This decline was primarily the result of decreased short-term
borrowing levels and lower short-term interest rates during the year. Short-term
borrowing was down from 1992 because of the company's focus on asset management
and improving working capital.
16 The Toro Company 1994 Annual Report
OTHER INCOME, NET
FISCAL 1994 COMPARED TO FISCAL 1993
Other income, net was $4.9 million greater than the $3.1 million reported in
1993. This increase was principally the result of the settlement of a patent
infringement lawsuit and a lawsuit relating to the purchase of Lawn-Boy,-R- Inc.
The majority of the other income, net was finance revenue from dealers and
distributors of $4.2 million which was earned by the Toro Credit Company (TCC),
a consolidated finance subsidiary of The Toro Company (see footnote 13 regarding
TCC).
FISCAL 1993 COMPARED TO FISCAL 1992
Other income, net was $4.2 million less than the $7.3 million reported in 1992.
The decrease was principally because of losses incurred in the start-up of a
fertilizer joint venture investment, foreign currency exchange losses and
reduced royalty fees related to a one-time settlement of a paid-up license
received in 1992 related to a patent lawsuit. The majority of the other income,
net was finance revenue from dealers and distributors of $4.4 million which was
earned by the Toro Credit Company (TCC), a consolidated finance subsidiary of
The Toro Company (see footnote 13 regarding TCC).
PROVISION (BENEFIT) FOR TAXES
FISCAL 1994 COMPARED TO FISCAL 1993
The effective tax rate increased to 40.0% of pretax earnings in 1994 from 38.9%
of pretax earnings in 1993. The increase was the result of an increase in the
effective tax rate on reversing timing differences and the effect of state
income taxes. Effective August 1, 1992, the company adopted Financial Accounting
Standards No. 109 and has reflected a deferred tax asset/liability on the
accompanying balance sheets. The net deferred tax asset is $26.0 million which
is principally the result of timing differences on warranty reserves, the
provision for bad debts and distributor reserves (see footnote 4) accrued for
financial statement purposes which are not deductible for tax purposes. The
total future tax deductions related to the net deferred tax asset total $90.0
million, and management believes these will be realized during periods in which
the company will generate sufficient taxable income. Including the available tax
carry back history of the company, the company will be required to generate book
and taxable income of $7.0 million to support the net deferred tax asset
reflected on the balance sheet. The company anticipates the effective tax rate
in 1995 to continue at 40%.
FISCAL 1993 COMPARED TO FISCAL 1992
The effective tax rate increased to 38.9% of pretax earnings in 1993 from 31.9%
of pretax losses in 1992. The profitable environment normalized the tax rate of
38.9% for federal and state income taxes. Effective August 1, 1992, the company
adopted Financial Accounting Standards No. 109 "Accounting for Income Taxes"
(FAS 109). The net deferred tax asset resulted primarily from warranty reserves
and restructuring charges for which a tax deduction was not yet available.
NET EARNINGS (LOSS)
FISCAL 1994 COMPARED TO FISCAL 1993
Net earnings for 1994 was $22.2 million or $1.71 per share, as compared to net
earnings of $13.0 million or $1.05 per share in 1993. The improved earnings was
principally the result of increased sales and improved gross margin which were
partially offset by investments in new products, manufacturing and distribution
enhancements.
FISCAL 1993 COMPARED TO FISCAL 1992
Net earnings for 1993 was $13.0 million or $1.05 per share, a significant
increase over the net loss of $23.8 million or $1.98 loss per share in 1992. The
earnings improvement was principally the result of increased sales, the
company's restructuring efforts initiated during 1992 and lower interest costs.
LIQUIDITY AND CAPITAL RESOURCES
The company continues to improve its balance sheet by focusing on debt reduction
and closely aligning working capital needs with the best available financing
alternatives. This was demonstrated by the continued reduction of long-term debt
by $36.7 million in 1994.
FUNDS FROM OPERATIONS
Cash flows from operations decreased $44.3 million from 1993. The majority of
this decrease was the result of increased inventories in anticipation of strong
fall demand and increased accounts receivable because of the sales growth. These
increases were offset by the increase in accounts payable and accrued expenses
and the increase in cash flows from operating earnings.
CASH FLOW FROM OPERATIONS
- - - - --------------------------------------------------------------------------------
89 90 91 92 93 94
- - - - --------------------------------------------------------------------------------
(Millions) $17.8 $(0.4) $43.9 $40.9 $72.1 $27.8
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The Toro Company 1994 Annual Report 17
ASSETS
Total assets as of July 31, 1994, were $443.6 million, up $24.4 million from
1993. The largest increase occurred in inventory which was up $40.0 million from
the prior year. This increase was principally the result of ending 1994 with
higher inventories in anticipation of strong fall demand for most products. In
addition, deferred income taxes and other assets increased over the prior year.
These increases were offset by a decrease in cash and cash equivalents which
declined $25.6 million to $36.2 million as a result of improved cash management
combined with the repayment of $40.6 million in long-term debt.
WORKING CAPITAL
Working capital at July 31, 1994, was $175.8 million, a decrease of $18.1
million from the $193.9 million reported in 1993. The current ratio for 1994 was
1.9 versus 2.3 in 1993. Working capital as a percent of sales was 22.1% in 1994
compared to 28.3% in 1993.
The changes listed above result from current assets increasing $20.4
million while current liabilities increased $38.5 million. The majority of the
increase in current liabilities was the result of an increase in accounts
payable, accrued marketing programs and an accrual for the costs necessary to
implement the company's distribution strategies.
CAPITAL STRUCTURE
Long-term debt includes:
- - - - - $50.0 million of 11% sinking fund debentures, due August 2017 with sinking
fund payments after 1998:
- - - - - $2.3 million of variable rate industrial revenue bonds, due annually August
1995 through August 2009:
- - - - - $4.0 million variable rate industrial revenue bond, due annually June 1995
through June 2004:
- - - - - $45.0 million of subordinated and senior notes, due September 1994 through
August 1996 bearing interest rates of 7.38% to 9.57%.
TOTAL DEBT
- - - - --------------------------------------------------------------------------------
89 90 91 92 93 94
- - - - --------------------------------------------------------------------------------
(Millions) $114.4 $154.5 $155.3 $164.1 $138.0 $101.3
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CAPITALIZATION
- - - - --------------------------------------------------------------------------------
89 90 91 92 93 94
- - - - --------------------------------------------------------------------------------
(Millions) $200.3 $287.0 $305.9 $296.7 $267.6 $249.7
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Total debt at July 31, 1994, was $101.3 million, down $36.7 million from
$138.0 million at July 31, 1993. Of this balance $20.3 million is current. The
amount of total long-term debt attributable to Toro Credit Company, the
company's consolidated finance subsidiary, was $45.0 million at July 31, 1994,
compared to $60.0 million at July 31, 1993.
During 1994 the company made scheduled payments on maturing debt of $40.6
million. The total debt to total capital ratio decreased from 48.8% in 1993 to
37.5% in 1994. This decrease was the result of lower debt levels and an
increased equity position as a result of current year earnings and the annual
payment of the company's Employee Stock Ownership Plan (ESOP) receivable.
Total capitalization at July 31, 1994, consisted of $81.0 million of long-
term debt and $168.7 million in stockholders' equity.
CREDIT LINES AND OTHER CAPITAL RESOURCES
The company's seasonal working capital requirements are funded with $100.0
million of unsecured bank credit lines. Average borrowings under these lines
were $12.9 million in 1994. There were no aggregate outstanding borrowings on
these lines at July 31, 1994. In 1993, the company had $120.0 million of
unsecured bank credit lines. Average borrowings under these lines were $10.6
million in 1993. There were no aggregate outstanding borrowings on these lines
at July 31, 1993. The increase in average borrowing was the result of the
reduction in long-term debt.
Additionally, the company's resources included two bankers' acceptance
financing agreements totaling $40.0 million in 1994 and one bankers' acceptance
financing agreement of $20.0 million in 1993. The company had no amounts
outstanding under these agreements at July 31, 1994, and July 31, 1993.
SUMMARY
The Toro Company's long-term initiatives contributed to the financial growth in
1994. In addition, significant investments in key areas strengthened the
company's competitiveness. Sales increased as a result of product improvements,
the improved economy, pricing strategies and an increased focus on brand
advertising. The company's balance sheet was strengthened through the reduction
of long-term debt and solid asset management.
The company anticipates that 1995's results will continue the trends
established in 1994 and position the company to deliver sustainable future
growth.
18 The Toro Company 1994 Annual Report
THE TORO COMPANY
Independent Auditors' Report
The Stockholders and Board of Directors
The Toro Company:
We have audited the accompanying consolidated balance sheets of The Toro Company
and subsidiaries as of July 31, 1994 and 1993, and the related consolidated
statements of operations and cash flows for each of the years in the three-year
period ended July 31, 1994. These consolidated financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Toro
Company and subsidiaries as of July 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the years in the three-year period
ended July 31, 1994 in conformity with generally accepted accounting principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 8, 1994
THE TORO COMPANY
Consolidated Statements of Operations
- - - - --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data)
Years ended July 31 1994 1993 1992
- - - - --------------------------------------------------------------------------------
Net sales $794,341 $684,324 $643,748
Cost of sales 506,816 445,495 419,138
- - - - --------------------------------------------------------------------------------
Gross profit 287,525 238,829 224,610
Selling, general and administrative expense 244,943 203,377 223,166
Restructuring expense -- -- 24,900
- - - - --------------------------------------------------------------------------------
Earnings (loss) from operations 42,582 35,452 (23,456)
Interest expense 13,562 17,150 18,726
Other income, net (8,030) (3,053) (7,279)
- - - - --------------------------------------------------------------------------------
Earnings (loss) before income taxes 37,050 21,355 (34,903)
Provision (benefit) for income taxes 14,820 8,315 (11,150)
- - - - --------------------------------------------------------------------------------
Net earnings (loss) $ 22,230 $ 13,040 $(23,753)
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
Net earnings (loss) per share of common
stock and common stock equivalent $ 1.71 $ 1.05 $ (1.98)
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
The Toro Company 1994 Annual Report 19
THE TORO COMPANY
Consolidated Balance Sheets
- - - - --------------------------------------------------------------------------------
(Dollars in thousands, except per-share data) July 31 1994 1993
- - - - --------------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 36,231 $ 61,793
Receivables:
Customers 185,620 180,927
Other 5,765 5,025
- - - - --------------------------------------------------------------------------------
Subtotal 191,385 185,952
Less allowance for doubtful accounts 7,702 5,589
- - - - --------------------------------------------------------------------------------
Total receivables 183,683 180,363
- - - - --------------------------------------------------------------------------------
Inventories 118,764 78,708
Prepaid expenses 1,111 4,476
Deferred income tax benefits 24,706 18,790
- - - - --------------------------------------------------------------------------------
Total current assets 364,495 344,130
- - - - --------------------------------------------------------------------------------
Property, plant and equipment:
Land and land improvements 5,516 4,478
Buildings and leasehold improvements 42,359 41,548
Equipment 137,603 127,371
- - - - --------------------------------------------------------------------------------
Subtotal 185,478 173,397
Less accumulated depreciation and amortization 126,635 113,428
- - - - --------------------------------------------------------------------------------
Total property, plant and equipment 58,843 59,969
Deferred income taxes 1,296 --
Other assets 19,005 15,104
- - - - --------------------------------------------------------------------------------
Total assets $443,639 $419,203
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 20,300 $ 15,000
Accounts payable 37,035 28,786
Accrued warranty 32,476 26,995
Accrued marketing programs 29,290 20,552
Accrued restructuring 5,083 9,637
Accrued payroll 5,542 4,994
Other accrued liabilities 55,482 42,472
Accrued income taxes 3,504 1,824
- - - - --------------------------------------------------------------------------------
Total current liabilities 188,712 150,260
- - - - --------------------------------------------------------------------------------
Deferred income taxes -- 1,372
Long-term debt, less current portion 81,025 122,970
Deferred income 5,250 --
Common stockholder's equity:
Common stock, par value $1.00, authorized
35,000,000 shares; issued and outstanding
12,561,204 shares in 1994 (net of 76,153
treasury shares) and 12,270,404 shares in
1993 (net of 307,469 treasury shares) 12,561 12,270
Additional paid-in capital 49,420 44,898
Retained earnings 109,688 93,451
Foreign currency translation adjustment (405) (795)
- - - - --------------------------------------------------------------------------------
Subtotal 171,264 149,824
Receivable from ESOP (2,612) (5,223)
- - - - --------------------------------------------------------------------------------
Total common stockholders' equity 168,652 144,601
- - - - --------------------------------------------------------------------------------
Total liabilities and common stockholders' equity $443,639 $419,203
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
20 The Toro Company 1994 Annual Report
THE TORO COMPANY
Consolidated Statements of Cash Flows
- - - - --------------------------------------------------------------------------------
(Dollars in thousands) Years ended July 31 1994 1993 1992
- - - - --------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 22,230 $ 13,040 $(23,753)
Adjustments to reconcile net earnings
(loss) to net cash provided by
operating activities:
Provision for depreciation and amortization 18,839 19,245 21,971
Loss on disposal of property, plant
and equipment 1,265 1,230 1,037
Deferred income taxes (2,668) (1,547) (13,263)
Tax benefits related to employee
stock option transactions 953 -- --
Changes in operating assets and
liabilities:
Net receivables (3,320) 28,199 21,376
Inventories (40,056) (4,583) 9,174
Prepaid expenses and deferred
income tax benefits (2,551) 3,396 (4,057)
Accounts payable and accrued expenses 31,472 11,438 28,025
Accrued income taxes 1,680 1,714 413
- - - - --------------------------------------------------------------------------------
Net cash provided by operating
activities 27,844 72,132 40,923
- - - - --------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (18,173) (11,397) (13,687)
Proceeds from asset disposals 267 2,323 220
(Increase) decrease in other assets (4,973) 2,319 (1,603)
- - - - --------------------------------------------------------------------------------
Net cash used in investing activities (22,879) (6,755) (15,250)
- - - - --------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Decrease in sale of receivables -- (1,892) (21,809)
Proceeds from issuance of long-term debt 4,000 -- 20,000
Repayments of long-term debt (40,645) (26,130) (11,195)
Proceeds from deferred income 5,250 -- --
Proceeds from exercise of stock options 6,144 3,771 2,355
Purchases of common stock (2,284) (816) (794)
Dividends on common stock (5,993) (5,824) (5,753)
Repayments from ESOP 2,611 2,611 --
- - - - --------------------------------------------------------------------------------
Net cash used in financing activities (30,917) (28,280) (17,196)
- - - - --------------------------------------------------------------------------------
FOREIGN CURRENCY TRANSLATION ADJUSTMENT 390 (795) _
Net increase (decrease) in cash (25,562) 36,302 8,477
Cash and cash equivalents at
beginning of year 61,793 25,491 17,014
- - - - --------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 36,231 $ 61,793 $ 25,491
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
Supplemental disclosures of
cash flow information:
Cash paid during the year for:
Interest $ 14,092 $ 17,138 $ 22,245
Income taxes 19,498 8,148 1,548
- - - - --------------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
The Toro Company 1994 Annual Report 21
THE TORO COMPANY
Notes to Consolidated Financial Statements
1 Summary of Significant Accounting Policies
and Related Data
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of The
Toro Company and all of its domestic and foreign subsidiaries (the company).
Investments in 50% or less owned companies are accounted for by the equity
method. The accounts of foreign subsidiaries, which are not material, have been
adjusted to conform to U.S. accounting principles and practices and have been
converted to appropriate U.S. dollar equivalents. All material intercompany
accounts and transactions have been eliminated from the consolidated financial
statements.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments purchased with a maturity of
three months or less to be cash equivalents.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
The provision for doubtful accounts included in selling, general and
administrative expense was $3,032,000 in 1994, $2,500,000 in 1993 and $4,083,000
in 1992.
INVENTORIES
The majority of all inventories are valued at the lower of cost or net
realizable value with cost determined by the last-in, first-out (LIFO) method.
Had the first-in, first-out (FIFO) method of cost determination been used,
inventories would have been $19,204,000 and $17,221,000 higher than reported at
July 31, 1994 and 1993, respectively. Using the FIFO method, inventories were
$63,473,000 and $51,252,000 of work-in-process and $74,495,000 and $44,677,000
of finished goods at July 31, 1994 and 1993, respectively. During 1992 the
company liquidated certain LIFO inventory quantities carried at lower costs
prevailing in prior years. The effect was to reduce the 1992 net loss by
$4,120,000 or $0.34 per common share.
PROPERTY AND DEPRECIATION
Property, plant and equipment are carried at cost. The company provides for
depreciation of plant and equipment utilizing the straight-line method over the
estimated useful lives of the assets. Buildings, including leasehold
improvements, are generally depreciated over 10 to 45 years and equipment over 3
to 7 years. Tooling costs are generally amortized using the units of production
basis. Expenditures for major renewals and betterments which substantially
increase the useful lives of existing assets are capitalized, and maintenance
and repairs are charged to operating expenses as incurred. The cost and related
accumulated depreciation of all plant and equipment disposed of are removed from
the accounts, and any gain or loss from such disposal is included in current
period earnings.
ACCRUED WARRANTY
The company provides an accrual for estimated future warranty costs based upon
the historical relationship of warranty costs to sales.
DEFERRED INCOME
An interest rate exchange agreement was entered into primarily as a hedge
against interest costs on long-term debt. The net interest differential to be
received or paid and the $5,250,000 deferred income will be recognized,
commencing August 1, 1997, over the term of the agreement as an adjustment to
interest expense.
FOREIGN CURRENCY TRANSLATION
The functional currency of the company's foreign operations is the applicable
local currency. The functional currency is translated into U.S. dollars in
accordance with Statement of Financial Accounting Standards No. 52, "Foreign
Currency Translation" which is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the period. The
gains or losses resulting from such translations are included in stockholders'
equity. Gains or losses resulting from foreign currency transactions are
included in other income, net.
ACCOUNTING FOR REVENUES
Revenue is recognized at the time products are shipped to distributors, dealers
or direct accounts.
COST OF FINANCING DISTRIBUTOR/DEALER INVENTORY (FLOOR PLAN)
Included in selling, general and administrative expense are costs associated
with various programs in which the company shares costs of financing distributor
and dealer inventories. These costs of $8,587,000 in 1994, $7,606,000 in 1993
and $13,483,000 in 1992 are charged against operations as incurred.
RESEARCH AND DEVELOPMENT
Expenditures for research and development, including engineering, of $30,864,000
in 1994, $25,293,000 in 1993 and $26,932,000 in 1992 are charged against
operations as incurred.
DISTRIBUTION
Included in selling, general and administrative expense are costs associated
with changes to the company's distribution channels. These costs were $4,300,000
in 1994 and $4,500,000 in 1993. Costs for distribution changes were not
separately identified in 1992. Those costs associated with business changes are
accrued on the basis of historical experience, while costs related to specific
changes to the company's distribution system are recorded when authorized.
22 The Toro Company 1994 Annual Report
INCOME TAXES
Effective August 1, 1992, the company adopted Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes," (FAS 109) which requires a
change from the deferred method of accounting for income taxes of APB Opinion 11
to the asset and liability method of accounting for income taxes. Under the new
method, deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. Under Statement 109, the
effect on deferred tax assets and liabilities of a change in tax rates
is recognized in income in the period that includes the enactment date. Adoption
of Statement 109 had an immaterial effect on the company's 1992 consolidated
statement of operations. The company has reflected the necessary deferred tax
asset/liability in the accompanying balance sheets. Management believes the
future tax deductions will be realized in periods in which the company will
generate sufficient taxable income to realize the benefit of the tax deductions.
EARNINGS (LOSS) PER SHARE OF COMMON STOCK AND COMMON STOCK EQUIVALENT
Earnings (loss) per share of common stock and common stock equivalent are
computed by dividing net earnings (loss) by the weighted average number of
common shares and common stock equivalents outstanding during the respective
periods. Common stock equivalents include potentially dilutive stock options.
These shares are included under the treasury stock method using the average
market price of the company's stock during each period. The effect of full
dilution using the year-end price of the company's shares is immaterial. Loss
per share calculations for 1992 are based on weighted average common shares
outstanding excluding common stock equivalents due to their anti-dilutive
affect.
RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2 Short-term Capital Resources
At July 31, 1994, the company had available unsecured lines of credit with five
banks in the aggregate of $100,000,000. The terms of these agreements require
the company to pay a fee of 1/4 percent per year on the available lines of
credit. This fee is recorded by the company as interest expense. The company had
no amounts outstanding under these lines at July 31, 1994, and 1993.
In addition, the company's capital resources include two $20,000,000
bankers' acceptance financing agreements in 1994 and one $20,000,000 bankers'
acceptance financing agreement in 1993. The company had no amounts outstanding
under these agreements at July 31, 1994, and 1993.
3 Long-term Debt
A summary of long-term debt is as follows:
- - - - --------------------------------------------------------------------------------
(Dollars in thousands) July 31 1994 1993
- - - - --------------------------------------------------------------------------------
11% Sinking Fund Debentures due annually
August 1998-2017 $ 50,000 $ 50,000
Industrial Revenue Bonds due annually
August 1995-2009 with various interest rates 2,325 2,970
Industrial Revenue Bond due annually
June 1995-2004 with various interest rates 4,000 --
10.0% senior note due September 1993 -- 15,000
9.0% senior notes due August 1994,
paid July 1994 -- 25,000
9.4% senior notes due September 1994 10,000 10,000
9.45% senior note due February 1995 10,000 10,000
7.38% senior note due August 1995 10,000 10,000
9.57% senior note due January 1996 5,000 5,000
9.53% senior note due August 1996 10,000 10,000
- - - - --------------------------------------------------------------------------------
101,325 137,970
Less current portion 20,300 15,000
- - - - --------------------------------------------------------------------------------
Long-term debt, less current portion $ 81,025 $122,970
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
The weighted average interest rate on long-term debt for 1994 was 9.8
percent (9.8 percent in 1993 and 9.9 percent in 1992) based upon actual interest
expense of $12,236,000 in 1994 ($16,118,000 in 1993 and $16,248,000 in 1992),
including commitment and facility fees and weighted average long-term debt
outstanding of $125,388,000 in 1994 ($164,107,000 in 1993 and $164,876,000 in
1992).
During the year the company entered into an interest rate exchange
agreement with a bank to preserve the value of the call option included in the
$50,000,000, 11%, long-term sinking fund notes due August 1, 1998-2017, and to
realize the benefit of current interest rates. As a result of this agreement the
company received $5,250,000 which is recorded as deferred income on the
consolidated balance sheets. In return, the company is obligated to pay 10.25%
on a notational amount of $50,000,000 from August 1, 1997 through July 31, 2002
and the company will receive payments based on a floating rate equal to the
London Interbank Offered Rate (LIBOR) on the notational amount of $50,000,000
for the same period.
The Toro Company 1994 Annual Report 23
Under the terms of the long-term debt agreements and the interest rate
exchange agreement, the company is subject to certain covenants. At July 31,
1994, the company was in compliance with all such covenants.
The terms of certain agreements of the Toro Credit Company restrict the
payment of dividends and loans or advances to the parent company. Toro Credit
retained earnings of approximately $22,192,000 were available for dividends to
its parent at July 31, 1994.
Principal payments required on long-term debt in each of the next five
years ending July 31 are as follows: 1995, $20,300,000; 1996, $16,090,000; 1997,
$10,460,000; 1998, $485,000; 1999, $515,000; and after 1999, $53,475,000.
4 Income Taxes
A reconciliation of the statutory federal income tax rate to the company's
effective tax rate is summarized as follows:
- - - - --------------------------------------------------------------------------------
Years ended July 31 1994 1993 1992
- - - - --------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 34.0% (34.0)%
Increase (reduction) in income taxes
resulting from:
Benefits from foreign sales
corporation (1.6) (1.7) (0.3)
State and local income taxes, net
of federal income tax benefit 2.4 1.9 1.7
Effect of foreign source income 1.3 0.5 0.2
Other, net 2.9 4.2 0.5
- - - - --------------------------------------------------------------------------------
Consolidated effective tax rate 40.0% 38.9% (31.9)%
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
Components of the provision (benefit) for income taxes are as follows:
- - - - --------------------------------------------------------------------------------
(Dollars in thousands)
Years ended July 31 1994 1993 1992
- - - - --------------------------------------------------------------------------------
Current:
Federal $18,487 $ 8,986 $ 1,233
State 2,610 876 880
- - - - --------------------------------------------------------------------------------
21,097 9,862 2,113
- - - - --------------------------------------------------------------------------------
Deferred:
Federal (5,059) (1,288) (13,263)
State (1,218) (259) --
- - - - --------------------------------------------------------------------------------
(6,277) (1,547) (13,263)
- - - - --------------------------------------------------------------------------------
Provision (benefit) for income taxes $14,820 $ 8,315 $(11,150)
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to the deferred
assets and deferred liabilities at July 31, 1994, and 1993 are presented below.
- - - - --------------------------------------------------------------------------------
(Dollars in thousands)
Years ended July 31 1994 1993
- - - - --------------------------------------------------------------------------------
Inventory reserves $ (902) $(1,649)
Depreciation expense 1,296 (1,372)
Warranty reserves 12,688 9,859
Provision for doubtful accounts 3,256 3,265
Distributor reserves 2,858 2,148
Uniform capitalization 2,310 1,213
Restructuring expense 1,965 3,691
Accrued retirement 1,820 1,600
Other 711 (1,337)
- - - - --------------------------------------------------------------------------------
Consolidated deferred income tax assets and (liabilities) $26,002 $17,418
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
The significant components of deferred income tax expense for the year
ended July 31, 1992, resulting from timing differences in the recognition of
income and expense for income tax and financial reporting purposes are as
follows:
- - - - --------------------------------------------------------------------------------
(Dollars in thousands)
Year ended July 31 1992
- - - - --------------------------------------------------------------------------------
Accrued warranty costs $ (1,962)
Addition to allowance for doubtful accounts (1,430)
Accrued expenses (836)
Depreciation (2,261)
Restructuring accruals (6,290)
Other (484)
- - - - --------------------------------------------------------------------------------
Provision for deferred income taxes $(13,263)
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
During the year ended July 31, 1994, $953,000 was added to additional paid-
in capital in accordance with "Accounting Principal Board" opinion 25 reflecting
the permanent book to tax difference in accounting for tax benefits related to
employee stock option transactions.
24 The Toro Company 1994 Annual Report
5 Stockholders' Equity
Changes in common stock, additional paid-in capital, retained earnings,
receivable from ESOP and foreign currency translation adjustment during fiscal
years ended July 31, 1994, 1993 and 1992 were as follows:
- - - - ----------------------------------------------------------------------------------------------------------------
Foreign
Additional Receivable Currency
Common Paid-in Retained from Translation
(Dollars in thousands) Stock Capital Earnings ESOP Adjustment
- - - - ----------------------------------------------------------------------------------------------------------------
Balance at July 31, 1991 $11,913 $40,739 $115,741 $(7,834) $ --
Common dividends paid ($0.48 per share) -- -- (5,753) -- --
Issuance of 178,848 shares under stock
option plans 179 2,176 -- -- --
Purchase of 50,269 common shares (50) (744) -- -- --
Net loss -- -- (23,753) -- --
- - - - ----------------------------------------------------------------------------------------------------------------
Balance at July 31, 1992 12,042 42,171 86,235 (7,834) --
- - - - ----------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------
Common dividends paid ($0.48 per share) -- -- (5,824) -- --
Issuance of 272,149 shares under stock
option plans 272 3,499 -- -- --
Purchase of 43,242 common shares (44) (772) -- -- --
Payment received from ESOP -- -- -- 2,611 --
Foreign currency translation adjustment -- -- -- -- (795)
Net earnings -- -- 13,040 -- --
- - - - ----------------------------------------------------------------------------------------------------------------
Balance at July 31, 1993 12,270 44,898 93,451 (5,223) (795)
- - - - ----------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------
Common dividends paid ($0.48 per share) -- -- (5,993) -- --
Issuance of 388,558 shares under stock
option plans 388 5,756 -- -- --
Purchase of 97,758 common shares (97) (2,187) -- -- --
Payment received from ESOP -- -- -- 2,611 --
Foreign currency translation adjustment -- -- -- -- 390
Tax benefits related to employee
stock option transactions -- 953 -- -- --
Net earnings -- -- 22,230 -- --
- - - - ----------------------------------------------------------------------------------------------------------------
Balance at July 31, 1994 $12,561 $49,420 $109,688 $(2,612) $(405)
- - - - ----------------------------------------------------------------------------------------------------------------
- - - - ----------------------------------------------------------------------------------------------------------------
Under the terms of a Preferred Stock Rights Agreement established June 14,
1988, each share of the company's common stock entitles its holder to one
preferred share purchase right. Each right entitles the registered holder to
purchase from the company one one-hundredth of a share of Series B Junior
Participating Voting Preferred Stock, $1.00 par value at a price of $85 per one
one-hundredth of a Preferred Share. The rights become exercisable and tradable
10 days after a person or a group acquires 20% or more, or makes an offer to
acquire 20% or more, of the company's outstanding common stock. At no time do
the rights have any voting power. The rights may be redeemed by the company for
$0.01 per right at any time prior to the time that a person or group has
acquired beneficial ownership of 20% or more of the common shares.
6 Stock Option Plans
Incentive stock options and non-qualified options may be granted under the terms
of the 1985 Incentive Stock Option Plan, the 1989 Stock Option Plan and the 1993
Stock Option Plan (the "Plans"). Each incentive stock option is granted at an
exercise price equal to 100% of the fair market value of the common stock on the
date of the grant. The exercise price of a non-qualified stock option may be
determined by the Compensation Committee of the Board of Directors, but may not
be less than 50% of the fair market value of the common stock on the date of
grant. Stock options granted under the Plans may be exercised in whole or in
part from time to time, not later than 10 years from the date of grant or other
period, as specified in the option agreement. Most stock options are subject to
cancellation upon termination of the optionee's employment. However, some non-
qualified options granted under the Plans can be exercised for up to four years
after retirement, at or after age 60, but not beyond the date the option
originally expires. During 1992, the stockholders voted to increase the shares
reserved for future stock option grants under the 1989 plan by 500,000 shares.
During 1994, the stockholders approved the 1993 Stock Option Plan authorizing a
reserve of 1,000,000 shares for future stock option grants. Stock option
transactions are summarized as follows:
- - - - --------------------------------------------------------------------------------
Years ended July 31 1994 1993 1992
- - - - --------------------------------------------------------------------------------
Outstanding at beginning of year 1,421,923 1,329,069 922,590
Granted 264,217 418,200 822,414
Excercised or cancelled (426,631) (325,346) (415,935)
- - - - --------------------------------------------------------------------------------
Outstanding at end of year 1,259,509 1,421,923 1,329,069
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
Price range of granted options $18.75--25.50 $10.90--19.75 $11.70--16.39
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
Shares reserved for granting
future stock options:
Beginning of year 136,642 497,060 595,447
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
End of year 923,240 136,642 497,060
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
Options exercisable at end
of year 765,510 941,090 874,642
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
Price range of exercisable
options $10.70--25.875 $10.70--22.50 $10.10--22.50
- - - - --------------------------------------------------------------------------------
- - - - --------------------------------------------------------------------------------
The options outstanding at July 31, 1994, were granted in 1990, (77,013
shares); 1991, (154,754 shares); 1992, (502,077 shares); 1993, (271,563 shares);
and 1994, (254,102 shares).
The Toro Company 1994 Annual Report 25
7 Employee Benefit Programs
The company has an Employee Stock Ownership Plan (ESOP) which covers
substantially all employees. The ESOP currently owns 1,260,000 common shares
which represents 10.03% of Toro's outstanding common stock. The Plan is a
leveraged ESOP which means funds were borrowed to purchase the shares. The
company's contributions to the Plan, net of dividends, were $2,929,000 in 1994,
$3,085,000 in 1993 and $467,000 in 1992. Principal payments of ESOP debt were
$2,611,000 in 1994, $2,611,000 in 1993 and $0 in 1992. Interest incurred on ESOP
debt and interest received by the company was $512,000 in 1994, $774,000 in 1993
and $786,000 in 1992. Dividends on the ESOP shares used for debt service by the
ESOP were $195,000 in 1994, $300,000 in 1993 and $319,000 in 1992. The expenses
recognized related to the ESOP were $2,416,000 in 1994, $2,311,000 in 1993 and
$0 in 1992. At July 31, 1994, the ESOP indebtedness to the company, which bears
an interest rate of 10% and is due in 1995, was $2,612,000 and has been shown as
a reduction of common stockholders' equity in the consolidated balance sheets.
Contributions to employees' profit sharing plans which cover substantially
all employees of the company and its subsidiaries were $4,150,000 in 1994,
$4,254,000 in 1993 and $3,277,000 in 1992. Such amounts are based upon annual
earnings before income taxes and minimum contributions required under the plans.
Under the company's matching stock plan, a total of 1,000,000 shares of
common stock may be acquired by employees through payroll deductions and
employer matching contributions pursuant to the plan. Contributions were
$485,000 in 1994, $510,000 in 1993 and $224,000 in 1992.
In addition, the company and its subsidiaries have supplemental and other
retirement plans covering certain employees. Pension expense under these plans
in 1994, 1993 and 1992 was not significant.
8 Segment Data
The company classifies its operations into one industry segment,
yard maintenance equipment. International sales were $130,053,000,
$129,422,000 and $132,154,000 for 1994, 1993 and 1992, respectively. Of these
amounts, export sales were $109,344,000, $111,263,000 and $109,076,000 for 1994,
1993 and 1992, respectively. Export sales by geographic area are as follows:
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(Dollars in thousands)
Years ended July 31 1994 1993 1992
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Europe $ 48,976 $ 53,992 $ 52,867
Canada 28,039 26,573 25,326
Pacific Rim 27,535 26,208 26,343
Other 4,794 4,490 4,540
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Total export sales $109,344 $111,263 $109,076
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Sales to any particular customer were not significant.
9 Lease Commitments
Minimum lease commitments in future years under noncancelable operating leases
are as follows: 1995, $3,211,000; 1996, $1,908,000; 1997, $1,196,000; 1998,
$481,000; 1999, $450,000 and after 1999, $1,430,000.
Total lease expense was as follows:
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(Dollars in thousands)
Years ended July 31 1994 1993 1992
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Warehouse and office space $2,198 $1,800 $2,199
Trucks and autos 2,039 1,024 1,240
Equipment 3,044 3,154 4,142
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Total $7,281 $5,978 $7,581
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10 Commitments and Contingent Liabilities
Certain receivables have been sold to financial institutions. Under these
arrangements, the company acts as agent for collections and/or was contingently
liable for $659,000 at July 31, 1994, and $644,000 at July 31, 1993. The company
was also contingently liable to repurchase $5,222,000 at July 31, 1994 and
$8,535,000 at July 31, 1993, of inventory relating to receivables under dealer
financing (floor plan) arrangements. Additionally, debts incurred by
distributors, aggregating $1,486,000 at July 31, 1994, and $3,278,000 at July
31, 1993, have been guaranteed by the company.
At July 31, 1994, the company had contracts maturing at various dates to
purchase $8,372,000 in foreign currency (845,000,000 yen) and to sell
$10,153,000 in foreign currency (13,000,000 Deutschemarks and 2,825,000 Canadian
Dollars) at the spot rate on the maturity dates.
26 The Toro Company 1994 Annual Report
In the ordinary course of business, the company may become liable with
respect to pending and threatened litigation, taxes and environmental and other
matters. While the ultimate results of investigations, lawsuits and claims
involving the company cannot be determined, management does not expect that
these matters will have a material adverse effect on the consolidated financial
position of the company.
11 Financial Instruments
OFF-BALANCE SHEET RISK
Letters of credit are issued by the company during the ordinary course of
business, as required by certain vendor contracts, through major domestic banks.
As of July 31, 1994, and 1993, the company had $16,872,000 and $11,876,000,
respectively, in outstanding letters of credit.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the company to concentrations of
credit risk consist principally of accounts receivable which are concentrated in
the lawn and turf care business sector. The credit risk associated with this
sector is limited because of the large number of customers in the company's
customer base and their geographic dispersion. Generally, the company does not
require collateral or other security to support customer receivables.
FAIR VALUE
The following disclosure of the estimated fair value of financial instruments is
made in accordance with the requirements of FAS Statement 107 "Disclosures about
Fair Value of Financial Instruments." Estimated fair value amounts have been
determined using available information and appropriate valuation methodologies.
Because considerable judgement is required in developing the estimates of fair
value, these estimates are not necessarily indicative of the amounts that could
be realized in a current market exchange.
The carrying and estimated fair values of the company's financial
instruments at July 31, 1994, are as follows:
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Carrying Estimated
(Dollars in millions) Value Fair Value
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Long-term debt $101,325 $105,107
Deferred income (interest rate exchange agreement) 5,250 3,928
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For cash and cash equivalents, receivables, and accounts payable, carrying
value is a reasonable estimate of fair value.
For long-term debt with fixed interest rates, fair value is estimated
by discounting the projected cash flows using the rate at which similar amounts
could currently be borrowed.
The fair value of the 11% sinking fund debentures represents the amount the
company would pay to redeem the notes based on the terms of the debenture.
The estimated fair value of the deferred income represents the cost to
terminate the interest rate exchange agreement, had management elected to do so,
which would have resulted in a gain of approximately $1,300,000.
12 Restructuring Expense
In 1992, the company recognized $24,900,000 of restructuring charges (after-tax
effect of $16,900,000 or $1.41 per share) related to the consolidations of its
consumer products manufacturing, marketing and administrative operations, its
irrigation manufacturing operations and its distribution facilities. The charges
included costs for plant and office closings, workforce reductions, inventory
obsolescence and other related costs.
13 Consolidated Finance Subsidiary --
Toro Credit Company
Toro Credit Company is a consolidated finance subsidiary of the company and
operates primarily in the finance industry with wholesale financing of
distributor and dealer inventories under various financing (floor plan)
arrangements and other programs.
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(Dollars in thousands)
Years ended July 31 1994 1993 1992
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SUMMARY OF EARNINGS
Finance revenues $17,436 $17,060 $17,702
Expenses:
Operating 2,068 1,841 1,659
Interest 4,737 5,879 6,279
Foreign currency exchange
net losses 96 31 37
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Total expenses 6,901 7,751 7,975
Earnings before income taxes 10,535 9,309 9,727
Provision for income taxes 3,669 3,310 3,049
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Net earnings $ 6,866 $ 5,999 $ 6,678
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(Dollars in thousands)
Years ended July 31 1994 1993
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Summary Balance Sheets
ASSETS
Cash and cash equivalents $ 4,394 $ 18,602
Receivables-net 99,932 94,628
Other receivables and assets 1,377 1,510
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Total assets $105,703 $114,740
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LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt $ 20,000 $ 15,000
Other liabilities 7,994 8,897
Long-term debt, less current portion 25,000 45,000
Shareholders' equity 52,709 45,843
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Total liabilities and shareholders' equity $105,703 $114,740
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The Toro Company 1994 Annual Report 27
Of the finance revenues presented previously, $13,272,000 in 1994,
$12,659,000 in 1993 and $13,314,000 in 1992 represent transactions with TCC's
parent company, The Toro Company, which are eliminated in consolidation. The
remaining finance revenues of $4,164,000 in 1994, $4,401,000 in 1993 and
$4,388,000 in 1992 are included in other income, net in The Toro Company's
Consolidated Statements of Operations. The expenses and balance sheet items (net
of eliminations) are included in the Consolidated Statements of Operations and
Consolidated Balance Sheets under the corresponding classifications.
14 Quarterly Financial Data (unaudited)
Summarized quarterly financial data for 1994 and 1993 is as follows:
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(Dollars in thousands except per-share data)
Quarter First Second Third Fourth
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1994
Net sales $135,761 $189,413 $276,476 $192,691
Gross profit 49,035 66,587 97,689 74,214
Net earnings (loss) (1,895) 4,477 15,637 4,011
Net earnings (loss) per share
of common stock and common
stock equivalent (0.15) 0.35 1.19 0.31
Dividends per common share 0.12 0.12 0.12 0.12
Market price of common stock
High bid 26 3/4 28 30 1/2 26 3/4
Low bid 19 3/4 23 5/8 25 20 7/8
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1993
Net sales $113,443 $153,172 $241,347 $176,362
Gross profit 38,889 53,709 83,794 62,437
Net earnings (loss) (4,135) 1,816 12,742 2,617
Net earnings (loss) per
share of common stock and
common stock equivalent (0.34) 0.15 1.01 0.21
Dividends per common share 0.12 0.12 0.12 0.12
Market price of common stock
High bid 15 1/4 19 3/8 21 7/8 20 1/4
Low bid 11 3/8 14 1/8 18 16 3/4
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28 The Toro Company 1994 Annual Report