EXHIBIT 13
FINANCIAL HIGHLIGHTS
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(Dollars in thousands, except per share data)
Years ended July 31 1995 1994 % Change
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Net sales $932,853 $794,341 17.4%
Net earnings 36,667 22,230 64.9
Percent of net sales 3.9% 2.8%
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Net earnings per share of common stock and
common stock equivalent $2.81 $1.71 64.3
Dividends paid per share of
common stock outstanding 0.48 0.48
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Return on:
Beginning common stockholders' equity 21.7% 15.4%
Average common stockholders' equity 20.7 14.2
Average invested capital 15.4 10.8
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AT YEAR END
Working capital $168,951 $175,783 (3.9)
Total assets 468,315 443,639 5.6
Total debt 103,560 101,325 2.2
Common stockholders' equity 185,471 168,652 10.0
Book value per common share 15.40 13.43 14.7
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Number of common stockholders 7,347 7,541 (2.6)
Average number of employees 3,626 3,434 5.6
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See accompanying notes to consolidated financial statements.
EDGAR REPRESENTATION OF NET SALES GRAPH
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In Millions
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95 $932.9
94 794.3
93 684.3
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EDGAR REPRESENTATION OF NET EARNINGS GRAPH
- - ------------------------------
In Millions
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95 $36.7
94 22.2
93 13.0
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EDGAR REPRESENTATION OF BOOK VALUE PER SHARE GRAPH
- - ------------------------------
In Dollars
- - ------------------------------
95 $15.40
94 13.43
93 11.78
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The Toro Company 1995 Annual Report 1
ELEVEN-YEAR SELECTED FINANCIAL DATA * THE TORO COMPANY
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(Dollars in thousands, except per share data)
Years ended July 31 1995 1994 1993 1992*
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OPERATING DATA:
Net sales $932,853 $794,341 $684,324 $643,748
EARNINGS:
Net earnings (loss) 36,667 22,230 13,040 (23,753)
Percent of sales 3.9% 2.8% 1.9% (3.7)%
Per share of common stock and
common stock equivalent $ 2.81 $ 1.71 $ 1.05 $ (1.98)
DIVIDENDS:
On common stock outstanding 6,002 5,993 5,824 5,753
Per share of common stock
outstanding 0.48 0.48 0.48 0.48
RETURN ON:
Beginning common stockholders'
equity 21.7% 15.4% 9.8% (14.8)%
Average common stockholders'
equity 20.7% 14.2% 9.4% (16.2)%
SUMMARY OF FINANCIAL POSITION:
Current assets $381,610 $364,495 $344,130 $332,517
Current liabilities 212,659 188,712 150,260 122,087
Working capital 168,951 175,783 193,870 210,430
Non-current assets 86,705 79,144 75,073 88,793
Total assets 468,315 443,639 419,203 421,310
Non-current liabilities, excluding
long-term debt 5,250 5,250 1,372 2,509
CAPITALIZATION:
Long-term debt, less current
portion 64,935 81,025 122,970 164,100
Redeemable preferred stock -- -- -- --
Common stockholders' equity 185,471 168,652 144,601 132,614
Total capitalization 250,406 249,677 267,571 296,714
Book value per common share 15.40 13.43 11.78 11.01
STOCK DATA:
Number of shares of common stock
outstanding (in thousands) 12,040 12,561 12,270 12,042
Number of common stockholders 7,347 7,541 7,968 8,386
Low price $ 21 5/8 $ 19 3/4 $ 11 3/8 $ 12 1/8
High price 30 3/8 30 1/2 21 7/8 17 1/2
Close price 28 5/8 22 5/8 19 3/4 13
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*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 1995 Annual Report
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(Dollars in thousands, except per share data)
Years ended July 31 1991 1990 1989 1988 1987*** 1986 1985
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OPERATING DATA:
Net sales $718,105 $750,931 $643,566 $609,205 $521,123 $406,664 $336,813
EARNINGS:
Net earnings (loss) 9,700 16,558 22,096 20,048 17,032 15,491 13,224
Percent of sales 1.4% 2.2% 3.4% 3.3% 3.3% 3.8% 3.9%
Per share of common stock and
common stock equivalent $ 0.81 $ 1.55 $ 2.10 $ 1.84 $ 1.52 $ 1.34 $ 1.11
DIVIDENDS:
On common stock outstanding 5,700 4,797 4,793 4,410 3,599 2,942 2,034
Per share of common stock
outstanding 0.48 0.48 0.48 0.43 0.35 0.28 0.20
RETURN ON:
Beginning common stockholders'
equity 6.4% 16.4% 25.8% 26.3% 25.1% 20.4% 19.3%
Average common stockholders'
equity 6.4% 14.4% 23.8% 24.4% 24.0% 23.1% 17.4%
SUMMARY OF FINANCIAL POSITION:
Current assets $318,753 $320,204 $266,176 262,638 $245,574 $195,635 $186,678
Current liabilities 107,981 130,452 123,377 126,796 102,913 89,382 69,713
Working capital 210,772 189,752 142,799 135,842 142,661 106,253 116,965
Non-current assets 96,551 103,347 59,807 57,430 53,970 32,930 29,452
Total assets 415,304 423,551 325,983 320,068 299,544 228,565 216,130
Non-current liabilities, excluding
long-term debt 1,469 6,112 2,329 2,887 3,273 2,432 3,922
CAPITALIZATION:
Long-term debt, less current
portion 145,295 134,400 96,730 99,347 110,903 63,198 61,935
Redeemable preferred stock -- -- 6,000 9,000 10,500 10,500 10,500
Common stockholders' equity 160,559 152,587 97,547 82,038 71,957 63,053 70,060
Total capitalization 305,854 286,987 200,277 190,385 193,360 136,751 142,495
Book value per common share 13.48 12.92 9.85 8.16 7.01 6.06 6.84
STOCK DATA:
Number of shares of common stock
outstanding (in thousands) 11,913 11,814 9,902 10,049 10,272 10,401 10,245
Number of common stockholders 8,503 7,706 7,527 6,802 5,587 3,821 4,288
Low price $ 11 $ 20 1/2 $ 17 $ 11 1/8 $ 14 $ 10 3/8 $ 6 5/8
High price 24 1/4 30 22 7/8 24 7/8 22 1/4 19 1/2 11 3/8
Close price 15 3/4 24 1/4 21 1/2 19 1/4 19 5/8 18 3/4 10 1/2
- - -------------------------------------------------------------------------------------------------------------------------
The Toro Company 1995 Annual Report 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS * THE TORO COMPANY
RESULTS OF OPERATIONS
The company continued to execute operational strategies in 1995 resulting in
increased net sales and earnings. Worldwide net sales rose to $932.9 million, a
17.4% increase from $794.3 million in 1994. Net earnings for 1995 were $36.7
million compared with $22.2 million in 1994.
The table below summarizes operating results included in the Consolidated
Statements of Earnings for 1995, 1994, and 1993.
SUMMARY
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(Dollars in millions
except per share data)
Years ended July 31 1995 % CHANGE 1994 % Change 1993
- - ------------------------------------------------------------------------------
Net sales $932.9 17.4% $794.3 16.1% $684.3
Cost of sales 598.3 18.1 506.8 13.8 445.5
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Gross profit 334.6 16.4 287.5 20.4 238.8
Selling, general and
administrative expense 269.8 10.2 244.9 20.4 203.4
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Earnings from operations 64.8 52.1 42.6 20.3 35.4
Interest expense 11.9 (12.5) 13.6 (20.9) 17.2
Other income, net (8.2) 2.5 (8.0) 158.1 (3.1)
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Earnings before income
taxes 61.1 65.1 37.0 73.7 21.3
Provision for income taxes 24.4 64.9 14.8 78.3 8.3
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Net earnings $36.7 64.9% $22.2 70.8% $13.0
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Net earnings per share
of common stock and
common stock equivalent $2.81 64.3% $1.71 62.9% $1.05
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SALES
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Net Sales
(Dollars in millions
Years ended July 31 1995 % CHANGE 1994 % Change 1993
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Consumer $488.1 14.6% $425.8 26.0% $338.0
Commercial 305.3 20.6 253.2 8.0 234.5
Irrigation 139.5 21.0 115.3 3.1 111.8
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Total* $932.9 17.4% $794.3 16.1% $684.3
- - ------------------------------------------------------------------------------
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*Includes international
sales of $152.4 17.1% $130.1 0.5% $129.4
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FISCAL 1995 COMPARED WITH FISCAL 1994
Worldwide sales increased $138.6 million to $932.9 million with increases in all
product lines.
- - - CONSUMER
Worldwide consumer product sales rose 14.6% to $488.1 million in 1995.
Consumer product sales represented 52.3% and 53.6% of consolidated net sales
for 1995 and 1994, respectively. International sales included in consumer
product sales increased $5.6 million from the prior year.
Exceptional sales of snow removal equipment as well as increased sales of
riding products and Toro brand walk power mowers contributed to the increase
over the prior year. This increase was offset partially by a decline in
Lawn-Boy-Registration Mark walk power mower sales as a result of reduced
shipments in response to a delayed spring season as well as actions to reduce
excess retail inventory.
- - - COMMERCIAL
Worldwide commercial product sales increased $52.1 million over the prior
year. International sales included in commercial product sales increased $9.0
million from the prior year.
Sales were strong in both the golf and municipal markets because of new
golf course openings and increased spending in the municipal market. Sales of
equipment to landscape contractors as well as increased sales of recycling
equipment products in 1995 also contributed to the increase.
- - - IRRIGATION
Worldwide irrigation product sales increased 21.0% to $139.5 million in 1995.
International sales included in irrigation product sales increased $6.0
million.
Increased sales of irrigation products in the golf industry as well as an
improved market share for do-it-yourself products contributed to the sales
increase. The company's change to direct distribution to irrigation product
wholesale dealers in the California and Texas markets, made in 1994 to better
respond to customer needs, has been favorably received in the marketplace.
Improved international economies and weather conditions have also resulted in
increased sales.
14 The Toro Company 1995 Annual Report
- - - INTERNATIONAL MARKETS
International sales are included in the preceding net sales table.
International sales increased 17.1% to $152.4 million in 1995. Sales in
Canada have improved over the prior year because of the strengthened economy.
The drought in Australia has curtailed sales slightly, but was offset by
increased sales in Europe because of the weak U.S. Dollar.
FISCAL 1994 COMPARED WITH FISCAL 1993
Worldwide sales increased $110.0 million to $794.3 million with increases in
all product lines.
- - - CONSUMER
Worldwide consumer product 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-Registration Mark 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
Worldwide commercial product sales increased $18.7 million over the prior
year. Domestic sales rose 11.8%, while international sales declined 1.5%. The
domestic increase was 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 sales strengthened compared with 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
Worldwide irrigation product 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.
- - - INTERNATIONAL MARKETS
International sales are included in the preceding net sales table.
International sales 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 weak economy.
COST TRENDS AND PROFIT MARGINS
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Margins (Percent of net sales)
Years ended July 31 1995 1994 1993
- - ------------------------------------------------------------------------------
Gross profit 35.9% 36.2% 34.9%
Operating profit 6.9 5.4 5.2
Pretax earnings 6.5 4.7 3.1
Net earnings 3.9 2.8 1.9
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FISCAL 1995 COMPARED WITH FISCAL 1994
Gross profit of $334.6 million increased 16.4% over the $287.5 million in
1994. As a percent of net sales, gross profit decreased slightly to 35.9% for
1995 compared with 36.2% in 1994. The percentage decrease resulted from the
mix of product sales and increased costs of raw materials. Gross profit
increased $47.1 million to $334.6 million. This was the result of the
increased sales volume which was offset by the items mentioned above.
Operating profit has improved from the prior year by $22.2 million because
of improved operating leverage as a result of increased sales.
FISCAL 1994 COMPARED WITH 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.
The Toro Company 1995 Annual Report 15
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE (SG&A)
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- - --------------------------------------------------------------------------------------
SG&A Expense % OF % of % of
(Dollars in millions) NET Net Net
Years ended July 31 1995 SALES 1994 Sales 1993 Sales
- - --------------------------------------------------------------------------------------
Administrative $ 89.5 9.6% $ 80.3 10.0% $ 73.0 10.7%
Sales and marketing 106.6 11.4 96.1 12.1 71.2 10.4
Warranty 31.0 3.3 29.0 3.7 26.3 3.8
Distributor/dealer financing 9.7 1.0 8.6 1.1 7.6 1.1
Research and development 33.0 3.6 30.9 3.9 25.3 3.7
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Total $269.8 28.9% $244.9 30.8% $203.4 29.7%
- - --------------------------------------------------------------------------------------
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FISCAL 1995 COMPARED WITH FISCAL 1994
SG&A expense was up $24.9 million from 1994 and was 28.9% of net sales in
1995 compared with 30.8% in 1994. The decline as a percent of sales was the
result of improved leverage and solid expense control.
The increase in administrative expense of $9.2 million occurred
principally as a result of a company-wide initiative to replace existing
information systems, increased payouts in various employee incentive and
profit sharing plans, the addition of a joint venture with a distributor, the
addition of dealer direct financing through Toro Credit Company, and
distribution support.
Sales and marketing expense was up $10.5 million from the prior year. As a
percent of net sales, sales and marketing was 11.4%, a decrease from 12.1% in
1994. The dollar increase reflected the company's increased sales volume as
well as an increase in brand advertising.
Warranty expense increased by $2.0 million and as a percent of net sales
was 3.3% in 1995 compared with 3.7% in 1994. The $2.0 million increase was
primarily the result of increased sales volume, and new product introductions.
Distributor/dealer financing expense represents the cost incurred by the
company to contract with a third party financing source to finance dealer
inventory purchases. The $9.7 million charge reflected in SG&A represents
credit facility origination costs and interest charges for a pre-established
length of time. Interest is charged at market rates based on prime plus a
negotiated mark-up. These financing arrangements are used by the company as a
marketing tool to enable customers to buy inventory. This expense increased
$1.1 million in 1995 because of the increased sales volume and was offset
partially by the reduction of third party financing expense which was taken
on through the addition of dealer direct financing through Toro Credit Company.
Research and development expense was up $2.1 million primarily as the
result of continued investment in product innovation.
FISCAL 1994 COMPARED WITH 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 product area, 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 reflected 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 with 3.8% in 1993. The $2.7 million increase related 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 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.
INTEREST EXPENSE
FISCAL 1995 COMPARED WITH FISCAL 1994
Interest expense for 1995 decreased to $11.9 million from the $13.6 million
reported in 1994 as the result of the company's continued reduction in
long-term debt and utilization of short-term borrowing at lower interest rates.
FISCAL 1994 COMPARED WITH 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.
16 The Toro Company 1995 Annual Report
OTHER INCOME, NET
FISCAL 1995 COMPARED WITH FISCAL 1994
Other income, net was $0.2 million greater than the $8.0 million reported in
1994. Excluding the effect of two lawsuit settlements and the sale of the
portable heater business in the prior year, other income increased because of
gains on fixed asset disposals versus losses in the prior year, favorable
foreign currency activity, and income resulting from joint venture activity.
FISCAL 1994 COMPARED WITH 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, 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).
PROVISION FOR TAXES
FISCAL 1995 COMPARED WITH FISCAL 1994
The effective tax rate remained at 40% of pretax earnings in 1995. In
accordance with Financial Accounting Standards No. 109, the company has
determined that it is not necessary to establish a valuation reserve for the
deferred income tax benefit because it is more likely than not that the net
deferred income tax benefit of $30.9 million will be principally realized
through carry back to taxable income in prior years, and future reversals of
existing taxable temporary differences, and, to a lesser extent, future
taxable income.
FISCAL 1994 COMPARED WITH 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 was $26.0
million which was 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.
NET EARNINGS
FISCAL 1995 COMPARED WITH FISCAL 1994
Net earnings for 1995 was $36.7 million or $2.81 per share, as compared with
net earnings of $22.2 million or $1.71 per share in 1994. The increase in
earnings was primarily the result of increased sales, improved operating
leverage, and cost control measures such as lower borrowing costs.
FISCAL 1994 COMPARED WITH FISCAL 1993
Net earnings for 1994 was $22.2 million or $1.71 per share, as compared with
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 distri-bution enhancements.
LIQUIDITY AND CAPITAL RESOURCES
The company continued to strengthen its balance sheet in 1995 by focusing on
cash management strategies such as the continued reduction of long-term debt
and the utilization of short-term borrowing instruments that offer lower
interest rates.
CASH FLOW
CASH PROVIDED BY OPERATING ACTIVITIES:
The majority of cash provided by operating activities was the result of
changes in accounts payable and accrued expenses and increased accounts
receivable attributed to sales growth and the initiation of dealer direct
financing through Toro Credit Company. This was partially offset by a slower
rate of inventory growth and the increase in earnings.
CASH USED IN INVESTING ACTIVITIES:
Purchases of property plant and equipment reflect the initial purchase of
tooling components used to manufacture new products, an addition to the
Windom, Minnesota manufacturing plant, costs to re-open the Sardis,
Mississippi manufacturing plant, the acquisition of a majority-owned
subsidiary, and a variety of expenditures to improve and modernize the
manufacturing plants.
CASH USED IN FINANCING ACTIVITIES:
The majority of the cash used in financing activities was used for the
purchase of the company's stock and repayment of long-term debt. The company
purchased the stock to take advantage of market conditions and will utilize
the shares in the future for employee incentive and option plans. The
significant cash source was the increase in short-term borrowing which was
used for the items described above.
ASSETS
Total assets as of July 31, 1995, were $468.3 million, up $24.7 million from
1994. The majority of the increase was from accounts receivable because of
the increase in sales and the addition of dealer direct financing as well as
an increase in property, plant and equipment. These increases were offset by
a decrease in cash and cash equivalents because of the repayment of $20.3
million in long-term debt and continued effective cash management.
The Toro Company 1995 Annual Report 17
WORKING CAPITAL
Working capital at July 31, 1995 was $169.0 million, a decrease of $6.8
million from the $175.8 million reported in 1994. The current ratio for 1995
was 1.8 compared with 1.9 in 1994. Working capital as a percent of net sales
was 18.1% in 1995 versus 22.1% in 1994.
The changes listed above result from current assets increasing $17.1
million while current liabilities increased $23.9 million. The majority of
the increase in current liabilities was short-term borrowing of $22.5 million
as the result of the company's acquisition of its common stock.
The Company acquired $26.2 million in Toro stock in 1995 to take advantage
of market conditions. The stock acquired will be used for a variety of
company purposes.
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:
- - - $3.7 million variable rate industrial revenue bond, due annually June 1996
through June 2004:
- - - $25.0 million of subordinated and senior notes, due August 1995 through August
1996 bearing interest rates of 7.38% to 9.57%.
Total long-term debt at July 31, 1995, was $81.0 million, down $20.3
million from $101.3 million at July 31, 1994. Of this balance $16.1 million
is current. The amount of total long-term debt attributable to Toro Credit
Company, the company's consolidated finance subsidiary, was $25.0 million at
July 31, 1995, compared to $45.0 million at July 31, 1994.
EDGAR REPRESENTATION OF TOTAL DEBT GRAPH
- - ------------------------------
In Millions
- - ------------------------------
95 $103.6
94 101.3
93 138.0
92 164.1
91 155.3
90 154.5
- - ------------------------------
Total debt at July 31, 1995, was $103.6 million, up $2.3 million from
$101.3 million at July 31, 1994. The total debt to total capital ratio
decreased from 37.5% in 1994 to 35.8% in 1995 as the result of increased
short-term borrowing offset by an increase in current year earnings and the
payment of the company's Employee Stock Ownership Plan (ESOP) receivable.
Total capitalization at July 31, 1995, consisted of $64.9 million of
long-term debt and $185.5 million of stockholders' equity.
CREDIT LINES AND OTHER CAPITAL RESOURCES
The company's seasonal working capital requirements are funded with $103.5
million of unsecured bank credit lines. Average borrowings under these lines
were $31.5 million in 1995 and $12.9 million in 1994. The company had $22.5
million outstanding at July 31, 1995, and no outstanding borrowings under
these lines at July 31, 1994. The increase in average borrowing was the
result of the reduction in long-term debt, the addition of dealer direct
financing through Toro Credit Company, and the investment in the company's
stock.
Additionally, the company's resources included two bankers' acceptance
financing agreements totaling $40.0 million. The company had $2.3 million and
no amount outstanding under these agreements at July 31, 1995, and 1994,
respectively.
SUMMARY
Continued growth in sales and successful cash management strategies
contributed to the increase in net earnings in 1995. Sales increased as the
result of product introductions and modifications, improved economies and
weather conditions, continued product line expansion, and market growth. Net
earnings increased because of the growth in sales and effective cost controls
by management. Strategic cash management and the continued reduction of
long-term debt strengthened the balance sheet in 1995.
EDGAR REPRESENTATION OF CAPITALIZATION GRAPH
- - ------------------------------
In Millions
- - ------------------------------
95 $250.4
94 249.7
93 267.6
92 296.7
91 305.9
90 287.0
- - ------------------------------
18 The Toro Company 1995 Annual Report
INDEPENDENT AUDITORS' REPORT * THE TORO COMPANY
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, 1995 and 1994, and the related
consolidated statements of earnings and cash flows for each of the years in
the three-year period ended July 31, 1995. 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, 1995 and 1994, and the results of
their operations and their cash flows for each of the years in the three-year
period ended July 31, 1995 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
September 7, 1995
CONSOLIDATED STATEMENTS OF EARNINGS * THE TORO COMPANY
- - ---------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------
(Dollars in thousands, except per share data)
Years ended July 31 1995 1994 1993
- - ---------------------------------------------------------------------------------------
Net sales $932,853 $794,341 $684,324
Cost of sales 598,275 506,816 445,495
- - ---------------------------------------------------------------------------------------
Gross profit 334,578 287,525 238,829
Selling, general and administrative expense 269,757 244,943 203,377
- - ---------------------------------------------------------------------------------------
Earnings from operations 64,821 42,582 35,452
Interest expense 11,902 13,562 17,150
Other income, net (8,193) (8,030) (3,053)
- - ---------------------------------------------------------------------------------------
Earnings before income taxes 61,112 37,050 21,355
Provision for income taxes 24,445 14,820 8,315
- - ---------------------------------------------------------------------------------------
Net earnings $ 36,667 $ 22,230 $ 13,040
- - ---------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------
Net earnings per share of common stock
and common stock equivalent $ 2.81 $ 1.71 $ 1.05
- - ---------------------------------------------------------------------------------------
- - ---------------------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
The Toro Company 1995 Annual Report 19
CONSOLIDATED BALANCE SHEETS * THE TORO COMPANY
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
(Dollars in thousands, except per share data)
July 31 1995 1994
- - -----------------------------------------------------------------------------
ASSETS
Current assets:
Cash and cash equivalents $ 11,924 $36,231
Receivables:
Customers 210,090 185,620
Other 7,378 5,765
- - -----------------------------------------------------------------------------
Subtotal 217,468 191,385
Less allowance for doubtful accounts 7,343 7,702
- - -----------------------------------------------------------------------------
Total receivables 210,125 183,683
- - -----------------------------------------------------------------------------
Inventories 123,720 118,764
Prepaid expenses 7,527 1,111
Deferred income tax benefits 28,314 24,706
- - -----------------------------------------------------------------------------
Total current assets 381,610 364,495
- - -----------------------------------------------------------------------------
Property, plant and equipment:
Land and land improvements 6,143 5,516
Buildings and leasehold improvements 45,447 42,359
Equipment 157,031 137,603
- - -----------------------------------------------------------------------------
Subtotal 208,621 185,478
Less accumulated depreciation and
amortization 138,550 126,635
- - -----------------------------------------------------------------------------
Total property, plant and equipment 70,071 58,843
- - -----------------------------------------------------------------------------
Deferred income taxes 2,578 1,296
Other assets 14,056 19,005
- - -----------------------------------------------------------------------------
Total assets $468,315 $443,639
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt $ 16,090 $ 20,300
Short-term borrowing 22,535 --
Accounts payable 41,072 37,035
Accrued warranty 37,493 32,476
Accrued marketing programs 26,145 29,290
Other accrued liabilities 69,324 69,611
- - -----------------------------------------------------------------------------
Total current liabilities 212,659 188,712
- - -----------------------------------------------------------------------------
Long-term debt, less current portion 64,935 81,025
Deferred income 5,250 5,250
Common stockholders' equity:
Common stock, par value $1.00, authorized
35,000,000 shares; issued and outstanding
12,039,776 shares in 1995 (net of 802,549
treasury shares) and 12,561,204 shares in
1994 (net of 76,153 treasury shares) 12,040 12,561
Additional paid-in capital 33,145 49,420
Retained earnings 140,353 109,688
Foreign currency translation adjustment (67) (405)
- - -----------------------------------------------------------------------------
Subtotal 185,471 171,264
Receivable from ESOP -- (2,612)
- - -----------------------------------------------------------------------------
Total common stockholders' equity 185,471 168,652
- - -----------------------------------------------------------------------------
Total liabilities and common
stockholders' equity $468,315 $443,639
- - -----------------------------------------------------------------------------
- - -----------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
20 The Toro Company 1995 Annual Report
CONSOLIDATED STATEMENTS OF CASH FLOWS * THE TORO COMPANY
- - ----------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------
(Dollars in thousands) Years ended July 31 1995 1994 1993
- - ----------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $36,667 $22,230 $ 13,040
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Provision for depreciation and amortization 17,240 18,839 19,245
(Gain) loss on disposal of property, plant
and equipment (135) 1,265 1,230
Deferred income taxes (1,282) (2,668) (1,547)
Tax benefits related to employee stock option
transactions 1,178 953 --
Changes in operating assets and liabilities:
Net receivables (28,773) (3,320) 28,199
Inventories (4,956) (40,056) (4,583)
Prepaid expenses and deferred income tax
benefits (10,024) (2,551) 3,396
Accounts payable and accrued expenses 5,622 33,152 13,152
- - ----------------------------------------------------------------------------------------
Net cash provided by operating activities 15,537 27,844 72,132
- - ----------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and equipment (28,162) (18,173) (11,397)
Proceeds from asset disposals 843 267 2,323
(Increase) decrease in other assets 3,935 (4,973) 2,319
- - ----------------------------------------------------------------------------------------
Net cash used in investing activities (23,384) (22,879) (6,755)
- - ----------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Increase (decrease) in sale of receivables 2,331 -- (1,892)
Increase in short-term borrowing 22,535 -- --
Proceeds from issuance of long-term debt -- 4,000 --
Repayments of long-term debt (20,300) (40,645) (26,130)
Proceeds from deferred income -- 5,250 --
Proceeds from exercise of stock options 8,251 6,144 3,771
Purchases of common stock (26,225) (2,284) (816)
Dividends on common stock (6,002) (5,993) (5,824)
Repayments from ESOP 2,612 2,611 2,611
- - ----------------------------------------------------------------------------------------
Net cash used in financing activities (16,798) (30,917) (28,280)
- - ----------------------------------------------------------------------------------------
Foreign currency translation adjustment 338 390 (795)
Net increase (decrease) in cash and cash equivalents (24,307) (25,562) 36,302
Cash and cash equivalents at beginning of year 36,231 61,793 25,491
- - ----------------------------------------------------------------------------------------
Cash and cash equivalents at end of year $ 11,924 $ 36,231 $ 61,793
- - ----------------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 9,567 $ 14,092 $ 17,138
Income taxes 34,936 19,498 8,148
- - ----------------------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
The Toro Company 1995 Annual Report 21
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS * THE TORO COMPANY
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 wholly-owned and majority-owned 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 translated 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 $1,543,000 in 1995, $3,032,000 in 1994, and
$2,500,000 in 1993.
- - - 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 $24,730,000 and $19,204,000 higher than
reported at July 31, 1995, and 1994, respectively. Under the FIFO method,
work-in-process inventories were $68,683,000 and $63,473,000 and finished
goods inventories were $79,767,000 and $74,495,000 at July 31, 1995, and
1994, respectively.
- - - 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 method. 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.
Software is expensed at the time of purchase. 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 mass merchandisers.
- - - COST OF FINANCING DISTRIBUTOR/DEALER INVENTORY
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 $9,675,000 in 1995,
$8,587,000 in 1994, and $7,606,000 in 1993 are charged against operations as
incurred.
- - - RESEARCH AND DEVELOPMENT
Expenditures for research and development, including engineering, of
$33,022,000 in 1995, $30,864,000 in 1994, and $25,293,000 in 1993 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
$3,400,000 in 1995, $4,300,000 in 1994, and $4,500,000 in 1993. 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 1995 Annual Report
- - - INCOME TAXES
In compliance with Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes," (FAS 109), 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. 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. 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.
- - - NET EARNINGS PER SHARE OF COMMON STOCK AND
COMMON STOCK EQUIVALENT
Net earnings per share of common stock and common stock equiv-alent are
computed by dividing net earnings 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 stock is immaterial.
- - - RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform with the current
year presentation.
2 SHORT-TERM CAPITAL RESOURCES
At July 31, 1995, the company had available unsecured lines of credit with
six banks in the aggregate of $103,500,000. Most 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 $22,535,000 outstanding at July 31, 1995, and no amount outstanding at
July 31, 1994. The weighted average interest rate on short-term borrowing for
1995 was 7.7% (6.5% in 1994 and 8.1% in 1993). Interest expense was
$2,498,000 in 1995 ($822,000 in 1994 and $920,000 in 1993), including
facility fees. The weighted average short-term borrowing was $32,335,000 in
1995 ($12,755,000 in 1994 and $11,384,000 in 1993).
In addition, the company's capital resources include two $20,000,000
bankers' acceptance financing agreements in 1995 and 1994. The company had
$2,331,000 outstanding under these agreements at July 31, 1995, and no amount
outstanding at July 31, 1994.
3 LONG-TERM DEBT
A summary of long-term debt is as follows:
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
(Dollars in thousands) July 31 1995 1994
- - --------------------------------------------------------------------------
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 2,325
Industrial Revenue Bond due annually
June 1996-2004 with various interest rates 3,700 4,000
9.4% senior notes due September 1994 -- 10,000
9.45% senior note due February 1995 -- 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
- - --------------------------------------------------------------------------
81,025 101,325
Less current portion 16,090 20,300
- - --------------------------------------------------------------------------
Long-term debt, less current portion $64,935 $ 81,025
- - --------------------------------------------------------------------------
- - --------------------------------------------------------------------------
The weighted average interest rate on long-term debt for 1995 was 9.9
percent (9.8 percent in 1994 and 1993). Interest expense was $8,673,000 in
1995 ($12,236,000 in 1994 and $16,118,000 in 1993), including commitment and
facility fees. The weighted average long-term debt outstanding was
$87,330,000 in 1995 ($125,388,000 in 1994 and $164,107,000 in 1993).
During 1994 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 debentures due August 1, 1998-2017,
and to benefit from favorable 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 and will be amortized to interest
expense over the term of the interest rate exchange agreement. 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.
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,
1995, the company was in compliance with all such covenants.
The terms of certain agreements of Toro Credit Company restrict the
payment of dividends and loans or advances to the parent company. Of the Toro
Credit Company retained earnings of $52,932,000, $28,769,000 were available
for distribution to its parent at July 31, 1995.
Principal payments required on long-term debt in each of the next five
years ending July 31 are as follows: 1996, $16,090,000; 1997, $10,460,000;
1998, $485,000; 1999, $515,000; 2000, $545,000; and after 2000, $52,930,000.
The Toro Company 1995 Annual Report 23
4 INCOME TAXES
A reconciliation of the statutory federal income tax rate to the company's
consolidated effective tax rate is summarized as follows:
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
Years ended July 31 1995 1994 1993
- - ----------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 34.0%
Increase (reduction) in income taxes
resulting from:
Benefits from foreign sales corporation (0.8) (1.6) (1.7)
State and local income taxes, net of
federal income tax benefit 2.4 2.4 1.9
Effect of foreign source income 0.5 1.3 0.5
Other, net 2.9 2.9 4.2
- - ----------------------------------------------------------------------------------
Consolidated effective tax rate 40.0% 40.0% 38.9%
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
Components of the provision for income taxes are as follows:
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
(Dollars in thousands)
Years ended July 31 1995 1994 1993
- - ----------------------------------------------------------------------------------
Current:
Federal $24,878 $18,487 $8,986
State 2,942 2,610 876
- - ----------------------------------------------------------------------------------
Current provision 27,820 21,097 9,862
- - ----------------------------------------------------------------------------------
Deferred:
Federal (2,689) (5,059) (1,288)
State (686) (1,218) (259)
- - ----------------------------------------------------------------------------------
Deferred provision (3,375) (6,277) (1,547)
- - ----------------------------------------------------------------------------------
Total provision for income taxes $24,445 $14,820 $8,315
- - ----------------------------------------------------------------------------------
- - ----------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to the net
deferred tax assets at July 31, 1995, and 1994 are presented below.
- - --------------------------------------------------------------------
- - --------------------------------------------------------------------
(Dollars in thousands)
Years ended July 31 1995 1994
- - --------------------------------------------------------------------
Allowance for doubtful accounts $ 3,971 $ 3,256
Inventory reserves 103 (902)
Uniform capitalization 2,251 2,310
Depreciation 2,578 1,296
Warranty reserves 13,694 12,688
Marketing programs 2,486 1,249
Distributor reserves 2,275 2,858
Restructuring reserves 1,430 1,965
Accrued retirement 1,961 1,820
Other 143 (538)
- - --------------------------------------------------------------------
Consolidated deferred income tax assets $30,892 $26,002
- - --------------------------------------------------------------------
- - --------------------------------------------------------------------
During the year ended July 31, 1995, and 1994, respectively, $1,178,000
and $953,000 were 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 1995 Annual Report
5 COMMON STOCKHOLDERS' EQUITY
Changes in the components of common stockholders' equity during fiscal years
ended July 31, 1995, 1994, and 1993 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, 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)
- - --------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------
Common dividends paid ($0.48 per share) -- -- (6,002) -- --
Issuance of 444,783 shares under stock
option plans 445 7,806 -- -- --
Purchase of 965,757 common shares (966) (25,259) -- -- --
Payment received from ESOP -- -- -- 2,612 --
Foreign currency translation adjustment -- -- -- -- 338
Tax benefits related to employee stock option
transactions -- 1,178 -- -- --
Net earnings -- -- 36,667 -- --
- - --------------------------------------------------------------------------------------------------------
Balance at July 31, 1995 $12,040 $ 33,145 $140,353 $ 0 $ (67)
- - --------------------------------------------------------------------------------------------------------
- - --------------------------------------------------------------------------------------------------------
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.
The Toro Company 1995 Annual Report 25
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 1995 1994 1993
- - -----------------------------------------------------------------------------------
Outstanding at beginning of year 1,259,509 1,421,923 1,329,069
Granted 323,474 264,217 418,200
Exercised or cancelled (416,404) (426,631) (325,346)
- - -----------------------------------------------------------------------------------
Outstanding at end of year 1,166,579 1,259,509 1,421,923
- - -----------------------------------------------------------------------------------
Price range of granted options $23.625-29.50 $18.75-25.50 $10.90-19.75
- - -----------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------
Shares reserved for granting future
stock options:
July 31, 621,738 923,240 136,642
- - -----------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------
Options exercisable at end of year 780,169 765,510 941,090
- - -----------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------
Price range of exercisable options $10.70-29.50 $10.70-25.875 $10.70-22.50
- - -----------------------------------------------------------------------------------
- - -----------------------------------------------------------------------------------
The options outstanding at July 31, 1995, were granted in 1991, (31,502
shares); 1992, (413,920 shares); 1993, (166,668 shares); 1994, (275,351
shares); and 1995, (279,138 shares).
7 EMPLOYEE BENEFIT PROGRAMS
The company has an Employee Stock Ownership Plan (ESOP) which covers
substantially all employees. Funding of the ESOP was completed on July 31,
1995. The Plan was a leveraged ESOP which means funds were borrowed to
purchase the shares. The company's contributions to the Plan, net of
dividends, were $2,762,000 in 1995, $2,929,000 in 1994, and $3,085,000 in
1993. Principal payments of ESOP debt were $2,612,000 in 1995, $2,611,000 in
1994, and $2,611,000 in 1993. Interest incurred on ESOP debt and interest
received by the company was $258,000 in 1995, $512,000 in 1994, and $774,000
in 1993. Dividends on the ESOP shares used for debt service by the ESOP were
$107,000 in 1995, $195,000 in 1994, and $300,000 in 1993. The expenses
recognized related to the ESOP were $2,504,000 in 1995, $2,417,000 in 1994,
and $2,311,000 in 1993. At July 31, 1995, the ESOP indebtedness to the
company was paid in full.
Contributions to employees' profit sharing plans which cover substantially
all employees of the company and its subsidiaries were $4,100,000 in 1995,
$4,150,000 in 1994, and $4,254,000 in 1993. Such amounts are based upon
annual earnings before income taxes and minimum contributions required under
the plans.
Under the company's matching stock plan, shares of common stock may be
acquired by employees through payroll deductions and employer matching
contributions pursuant to the plan. Contributions were $660,000 in 1995,
$485,000 in 1994, and $510,000 in 1993.
In addition, the company and its subsidiaries have supplemental and other
retirement plans covering certain employees. Pension expense under these
plans in 1995, 1994, and 1993 was not significant.
Effective August 1, 1995, the company has adopted a new employee benefit
program which replaces the ESOP, profit sharing, and matching stock plans.
The program includes: The Employee Stock Ownership Plan and The Toro
Investment Fund under which eligible employees receive a pre-established
percentage of salary in either stock or cash. In addition, the company has
established the Toro 401(k) Employee Savings and Toro Matching Plan which
provides eligible employees the opportunity to contribute to various mutual
funds with a pre-determined company match up to a maximum of two percent of
annual salary.
8 SEGMENT DATA
The company classifies its operations into one industry segment, yard
maintenance equipment. International sales were $152,409,000, $130,053,000,
and $129,422,000 for 1995, 1994, and 1993, respectively. Of these amounts,
export sales were $126,560,000, $109,344,000, and $111,263,000 for 1995,
1994, and 1993, respectively. Export sales by geographic area are as follows:
- - ---------------------------------------------------------------------
- - ---------------------------------------------------------------------
(Dollars in thousands)
Years ended July 31 1995 1994 1993
- - ---------------------------------------------------------------------
Europe $ 60,239 $ 48,976 $ 53,992
Canada 31,921 28,039 26,573
Pacific Rim 28,979 27,535 26,208
Other 5,421 4,794 4,490
- - ---------------------------------------------------------------------
Total export sales $126,560 $109,344 $111,263
- - ---------------------------------------------------------------------
- - ---------------------------------------------------------------------
Sales to any particular customer were not significant.
26 The Toro Company 1995 Annual Report
9 LEASE COMMITMENTS
Minimum lease commitments in future years under noncancelable operating
leases are as follows: 1996, $5,423,000; 1997, $4,262,000; 1998, $2,624,000;
1999, $1,910,000; 2000, $1,117,000; and after 2000, $2,621,000.
Total lease expense was as follows:
- - ---------------------------------------------------------------------
- - ---------------------------------------------------------------------
(Dollars in thousands)
Years ended July 31 1995 1994 1993
- - ---------------------------------------------------------------------
Warehouse and office space $3,360 $2,198 $1,800
Trucks and autos 1,890 2,039 1,024
Equipment 3,721 3,044 3,154
- - ---------------------------------------------------------------------
Total $8,971 $7,281 $5,978
- - ---------------------------------------------------------------------
- - ---------------------------------------------------------------------
10 COMMITMENTS AND CONTINGENT LIABILITIES
Certain receivables are sold to financial institutions. Under these
arrangements, the company acts as agent for collections and was contingently
liable to repurchase receivables of $1,429,000 at July 31, 1995, and $659,000
at July 31, 1994. The company was also contingently liable to repurchase
$5,220,000 at July 31, 1995 and $5,222,000 at July 31, 1994, of inventory
relating to receivables under dealer financing arrangements. Additionally,
debts incurred by certain distributors, aggregating $1,268,000 at July 31,
1995, and $1,486,000 at July 31, 1994, have been guaranteed by the company.
In the ordinary course of business, the company may become liable with
respect to pending and threatened litigation, taxes, 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, 1995, and 1994, the company had $24,212,000 and
$16,872,000, 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 company's business segment, yard maintenance equipment.
The credit risk associated with this segment is limited because of the large
number of customers in the company's customer base and their geographic
dispersion.
- - - FOREIGN CURRENCY INVESTMENTS
A portion of the company's cash flow is derived from sales and purchases
denominated in foreign currencies. To reduce the uncertainty of foreign
currency exchange rate movements on these sales and purchase commitments, the
company enters into forward exchange and range forward option contracts.
These contracts are designed to hedge firm anticipated foreign currency
transactions.
At July 31, 1995, the company had contracts maturing at various dates to
purchase $11,209,000 in foreign currencies and to sell $20,817,000 in foreign
currencies at the spot rate. In addition, the company had range forward
options of $3,246,000 at July 31, 1995.
Changes in the market value of the foreign currency instruments are
recognized in the financial statements upon settlement of the hedged
transaction.
- - - 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, 1995, are as follows:
- - ------------------------------------------------------------------------------
- - ------------------------------------------------------------------------------
Carrying Estimated
(Dollars in millions) Value Fair Value
- - ------------------------------------------------------------------------------
Long-term debt $81,025 $90,295
Deferred income (interest rate exchange agreement) 5,250 6,543
- - ------------------------------------------------------------------------------
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 loss of approximately $1,300,000.
The Toro Company 1995 Annual Report 27
12 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 arrangements and
other programs.
- - ---------------------------------------------------------------------
- - ---------------------------------------------------------------------
(Dollars in thousands)
Years ended July 31 1995 1994 1993
- - ---------------------------------------------------------------------
SUMMARY OF EARNINGS
Finance revenues $21,259 $17,436 $17,060
Expenses:
Operating 3,428 2,068 1,841
Interest 4,902 4,737 5,879
Foreign currency exchange net
(gains) losses (37) 96 31
- - ---------------------------------------------------------------------
Total expenses 8,293 6,901 7,751
Earnings before income taxes 12,966 10,535 9,309
Provision for income taxes 4,744 3,669 3,310
- - ---------------------------------------------------------------------
Net earnings $ 8,222 $ 6,866 $ 5,999
- - ---------------------------------------------------------------------
- - ---------------------------------------------------------------------
- - ---------------------------------------------------------------------
- - ---------------------------------------------------------------------
(Dollars in thousands)
Years ended July 31 1994 1993
- - ---------------------------------------------------------------------
SUMMARY BALANCE SHEETS
ASSETS
Cash and cash equivalents $ 3,048 $ 4,394
Receivables-net 119,204 99,932
Other receivables and assets 1,915 1,377
- - ---------------------------------------------------------------------
Total assets $124,167 $105,703
- - ---------------------------------------------------------------------
- - ---------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current portion of long-term debt $ 15,000 $ 20,000
Other liabilities 38,235 7,994
Long-term debt, less current portion 10,000 25,000
Shareholders' equity 60,932 52,709
- - ---------------------------------------------------------------------
Total liabilities and shareholders' equity $124,167 $105,703
- - ---------------------------------------------------------------------
- - ---------------------------------------------------------------------
Of the finance revenues presented previously, $17,114,000 in 1995,
$13,272,000 in 1994, and $12,659,000 in 1993 represent transactions with Toro
Credit Company's parent company, The Toro Company, which are eliminated in
consolidation. The remaining finance revenues of $4,145,000 in 1995,
$4,164,000 in 1994, and $4,401,000 in 1993 are included in other income, in
The Toro Company's Consolidated Statements of Earnings. The expenses and
balance sheet items (net of eliminations) are included in the Consolidated
Statements of Earnings and Consolidated Balance Sheets under the
corresponding classifications.
13 QUARTERLY FINANCIAL DATA (unaudited)
Summarized quarterly financial data for 1995 and 1994 is as follows:
- - -------------------------------------------------------------------------------------------
(Dollars in thousands except per share data)
Quarter First Second Third Fourth
- - -------------------------------------------------------------------------------------------
1995
Net sales $205,704 $213,950 $310,613 $202,586
Gross profit 76,065 76,068 107,342 75,103
Net earnings 8,302 6,799 17,539 4,027
Net earnings per share of
common stock and common
stock equivalent 0.64 0.51 1.32 0.32
Dividends per common share 0.12 0.12 0.12 0.12
Market price of common stock
High bid 29 7/8 29 3/8 30 3/8 29 7/8
Low bid 21 5/8 26 27 1/2 25 5/8
- - -------------------------------------------------------------------------------------------
1994
Net sales $135,761 $189,413 $276,476 $192,691
Gross profit 49,035 66,587 97,689 74,214
Net earnings (1,895) 4,477 15,637 4,011
Net earnings 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
- - --------------------------------------------------------------------------------------
28 The Toro Company 1995 Annual Report