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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the Quarterly Period Ended February 2, 2001 Commission File Number 1-8649
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THE TORO COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 41-0580470
------------------------ ---------------------------------------
(State of Incorporation) (I.R.S. Employer Identification Number)
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420
TELEPHONE NUMBER: (952) 888-8801
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(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The number of shares of Common Stock outstanding as of March 2, 2001 was
12,701,837.
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THE TORO COMPANY
INDEX TO FORM 10-Q
Page Number
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PART I. FINANCIAL INFORMATION:
ITEM 1. Condensed Consolidated Statements of Earnings (Unaudited) -
Three Months Ended February 2, 2001 and January 28, 2000...................... 3
Condensed Consolidated Balance Sheets (Unaudited) -
February 2, 2001, January 28, 2000 and October 31, 2000....................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended February 2, 2001 and January 28, 2000...................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)................ 6-9
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................................. 10-17
PART II. OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K................................................ 18-19
Signatures...................................................................... 20
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PART I. ITEM 1. FINANCIAL INFORMATION
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER-SHARE DATA)
Three Months Ended
--------------------------------------
February 2, January 28,
2001 2000
----------------- ---------------
Net sales..........................................................$ 283,512 $ 280,239
Cost of sales...................................................... 182,339 180,300
----------------- ---------------
Gross profit................................................... 101,173 99,939
Selling, general, and administrative expense....................... 97,410 94,000
Restructuring and other unusual income............................. (679) --
---------------- ---------------
Earnings from operations....................................... 4,442 5,939
Interest expense................................................... (5,276) (5,757)
Other income, net.................................................. 2,903 1,279
----------------- ---------------
Earnings before income taxes................................... 2,069 1,461
Provision for income taxes......................................... 765 548
----------------- ---------------
Net earnings...................................................$ 1,304 $ 913
================= ===============
Basic net earnings per share of common stock.......................$ 0.10 $ 0.07
================= ===============
Dilutive net earnings per share of common stock....................$ 0.10 $ 0.07
================= ===============
Weighted average number of shares of common stock outstanding -
Basic........................................................... 12,753 12,921
Weighted average number of shares of common stock outstanding -
Dilutive....................................................... 13,062 13,211
See accompanying notes to condensed consolidated financial statements.
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THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
February 2, January 28, October 31,
2001 2000 2000
-------------- ------------- ---------------
ASSETS
Cash and cash equivalents.................................$ 636 $ 354 $ 978
Receivables, net.......................................... 306,497 313,720 262,484
Inventories, net.......................................... 252,233 250,079 194,926
Prepaid expenses and other current assets................. 9,925 7,659 12,065
Deferred income taxes..................................... 43,912 40,806 39,714
-------------- ------------- ---------------
Total current assets................................ 613,203 612,618 510,167
-------------- ------------- ---------------
Property, plant, and equipment............................ 387,500 361,828 383,497
Less accumulated depreciation....................... 251,608 234,395 250,645
-------------- ------------- ---------------
135,892 127,433 132,852
Deferred income taxes..................................... 9,883 8,876 9,883
Goodwill and other assets................................. 124,653 133,415 126,488
-------------- ------------- ---------------
Total assets........................................$ 883,631 $ 882,342 $ 779,390
============== ============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt.........................$ 21 $ 669 $ 38
Short-term debt........................................... 113,398 161,430 11,587
Accounts payable.......................................... 75,792 62,067 65,340
Other accrued liabilities................................. 170,930 170,829 183,927
-------------- ------------- ---------------
Total current liabilities........................... 360,141 394,995 260,892
-------------- ------------- ---------------
Long-term debt, less current portion...................... 194,453 195,584 194,457
Other long-term liabilities............................... 6,855 6,380 6,823
Stockholders' equity:
Stock par value $1.00, authorized 35,000,000 shares;
issued and outstanding 12,624,351 shares at
February 2, 2001 (net of 883,704 treasury shares),
12,714,219 shares at January 28, 2000 (net of
793,836 treasury shares), and 12,569,194 shares
at October 31, 2000 (net of 938,861 treasury shares) 12,624 12,714 12,569
Additional paid-in capital............................. 51,905 51,552 47,540
Retained earnings...................................... 268,503 228,925 268,727
Accumulated other comprehensive loss................... (10,850) (7,808) (11,618)
-------------- ------------- ---------------
Total stockholders' equity.......................... 322,182 285,383 317,218
-------------- ------------- ---------------
Total liabilities and stockholders' equity..........$ 883,631 $ 882,342 $ 779,390
============== ============= ===============
See accompanying notes to condensed consolidated financial statements.
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THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Three Months Ended
--------------------------------------
February 2, January 28,
2001 2000
---------------- ---------------
Cash flows from operating activities:
Net earnings....................................................$ 1,304 $ 913
Adjustments to reconcile net earnings to net cash
used in operating activities:
Provision for depreciation and amortization................... 7,843 8,271
Write-down of investments..................................... 778 --
Gain on disposal of property, plant, and equipment............ (33) (3)
(Increase) decrease in deferred income taxes.................. (4,198) 86
Tax benefits related to employee stock option transactions.... 81 --
Changes in operating assets and liabilities:
Receivables, net.......................................... (42,965) (52,867)
Inventories, net.......................................... (54,107) (38,487)
Prepaid expenses and other current assets................. 2,261 (1,532)
Accounts payable and other accrued expenses............... (312) (11,240)
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Net cash used in operating activities................. (89,348) (94,859)
---------------- ---------------
Cash flows from investing activities:
Purchases of property, plant, and equipment................... (8,063) (8,853)
Proceeds from asset disposals................................. 2,065 74
Decrease in investment in affiliates.......................... 50 128
Increase in other assets...................................... (1,154) (2,945)
Acquisition, net of cash acquired............................. (6,189) --
---------------- ---------------
Net cash used in investing activities................. (13,291) (11,596)
---------------- ---------------
Cash flows from financing activities:
Increase in short-term debt................................... 101,811 103,167
Repayments of long-term debt.................................. (21) (87)
Increase in other long-term liabilities....................... 32 205
Proceeds from exercise of stock options....................... 1,253 626
Purchases of common stock..................................... (146) (7,515)
Dividends on common stock..................................... (1,529) (1,520)
---------------- ---------------
Net cash provided by financing activities............. 101,400 94,876
---------------- ---------------
Foreign currency translation adjustment......................... 897 (27)
---------------- ---------------
Net decrease in cash and cash equivalents....................... (342) (11,606)
Cash and cash equivalents at beginning of period................ 978 11,960
---------------- ---------------
Cash and cash equivalents at end of period......................$ 636 $ 354
================ ===============
See accompanying notes to condensed consolidated financial statements.
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THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FEBRUARY 2, 2001
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
the information and notes required by accounting principles generally accepted
in the United States of America for complete financial statements. Unless the
context indicates otherwise, the terms "company" and "Toro" refer to The Toro
Company and its subsidiaries. In the opinion of management, the unaudited
condensed consolidated financial statements include all adjustments, consisting
primarily of recurring accruals, considered necessary for a fair presentation of
the financial position and the results of operations. Since the company's
business is seasonal, operating results for the three months ended February 2,
2001 are not necessarily indicative of the results that may be expected for the
fiscal year ending October 31, 2001. Certain amounts from prior period's
financial statements have been reclassified to conform to this period's
presentation.
The company's fiscal year ends on October 31, and quarterly results are reported
every three months generally on the Friday closest to the quarter end. For
comparative purposes, the company's second and third quarters always reflect 13
weeks of results, therefore, the quarter end date is not necessarily the Friday
closest to the quarter end.
For further information, refer to the consolidated financial statements and
notes included in the company's Annual Report on Form 10-K for the fiscal year
ended October 31, 2000. The policies described in that report are used for
preparing quarterly reports.
New Accounting Pronouncements
The Emerging Issues Task Force (EITF) has issued the final version of EITF No.
00-10, "Accounting for Shipping and Handling Fees and Costs," and EITF No.
00-14, "Accounting for Certain Sales Incentives."
EITF No. 00-10 provides guidance regarding shipping and handling costs incurred
for selling goods, and the income statement classification of amounts charged to
customers for shipping and handling as well as costs incurred related to
shipping and handling. EITF No. 00-10 will be effective for the company in the
fourth quarter of fiscal 2001. The company is currently evaluating the impact of
EITF No. 00-10 regarding income statement classification.
EITF No. 00-14 provides guidance regarding accounting for sales incentives
offered to customers, and the proper income statement classification. EITF No.
00-14 will be effective for the company in the third quarter of fiscal 2001. The
company is currently evaluating the impact of EITF No. 00-14 regarding income
statement classification.
In December 1999, the Securities and Exchange Commission (SEC) staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 summarizes certain SEC staff views in applying accounting
principles generally accepted in the United States of America to revenue
recognition in financial statements. SAB 101 will be effective for the company
in the fourth quarter of fiscal 2001. Toro is currently evaluating the impact of
SAB 101 on its financial condition and results of operations.
During fiscal 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS
133 establishes new standards for recognizing all derivatives as either assets
or liabilities, and measuring those instruments at fair value. If the derivative
is designated as a fair value hedge, the change in the fair value of the
derivative and of the hedged item attributable to the hedged risk are recognized
in earnings. If the derivative is designated as a cash flow hedge, the effective
portions of changes in the fair value of the derivative are recorded in
accumulated other comprehensive income (loss) and are recognized in earnings
when the hedged item affects earnings. Ineffective portions of changes in the
fair value of cash flow hedges are recognized in earnings. The company adopted
the new standard on the first day of fiscal year 2001. The adoption of SFAS 133
did not have a significant impact on the company's financial condition or
results of operations.
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Derivative Financial Instruments
The company uses derivative instruments to manage exposures to foreign currency.
Toro uses derivatives only in an attempt to limit underlying exposure to
currency fluctuations, and not for trading purposes.
The company enters into forward foreign exchange contracts to hedge the risk
from forecasted settlement in local currencies of trade sales. These contracts
are designated as cash flow hedges with the fair value recorded in accumulated
other comprehensive income (loss) and as a hedge asset or liability as
applicable. Once the forecasted transaction has been recognized as a sale and a
related asset recorded in the balance sheet, the related fair value of the
derivative hedge contract is reclassified from accumulated other comprehensive
income (loss) into earnings. During the quarter ended February 2, 2001, the
amount of adjustments to earnings for such cash flow hedges was immaterial. At
February 2, 2001, the amount of such forward contracts outstanding was
$7,166,472. The unrecognized after-tax gain portion of the fair value of the
contracts recorded in accumulated other comprehensive income (loss) at February
2, 2001 was $120,644.
The company enters into forward foreign exchange contracts to hedge the risk
from forecasted settlement in local currencies of trade purchases. These
contracts are designated as cash flow hedges with the fair value recorded in
accumulated other comprehensive income (loss) and as a hedge asset or liability
as applicable. Once the forecasted transaction has been recognized as a purchase
and a related liability recorded in the balance sheet, the related fair value of
the derivative hedge contract is reclassified from accumulated other
comprehensive income (loss) into earnings. During the quarter ended February 2,
2001, the amount of adjustments to earnings for such cash flow hedges was
immaterial. At February 2, 2001, the amount of such forward contracts
outstanding was $6,196,242. The unrecognized after-tax loss portion of the fair
value of the contracts recorded in accumulated other comprehensive income (loss)
at February 2, 2001 was $249,126.
The company enters into forward foreign exchange contracts to hedge the risk
from forecasted settlement in local currencies of intercompany sales. These
transactions and other forward foreign exchange contracts do not meet the
accounting rules established under SFAS 133 of recording the unrecognized
after-tax gain or loss portion of the fair value of the contracts in accumulated
other comprehensive income (loss). Therefore, the related fair value of the
derivative hedge contract is recognized in earnings.
Inventories
Inventories are valued at the lower of cost or net realizable value with cost
determined by the last-in, first-out (LIFO) method for most inventories.
Inventories were as follows:
(Dollars in thousands) February 2, January 28, October 31,
2001 2000 2000
----------- ----------- -----------
Raw materials and work in process..........$ 117,393 $ 115,432 $ 101,784
Finished goods............................. 177,745 180,527 132,526
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295,138 295,959 234,310
Less LIFO and other reserves............... 42,905 45,880 39,384
----------- ----------- -----------
Total..................................$ 252,233 $ 250,079 $ 194,926
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Restructuring and Other Unusual Income
At February 2, 2001, the company had $0.3 million of restructuring and other
unusual expense remaining in other accrued liabilities. The company has utilized
$0.3 million of these reserves since October 31, 2000 and reversed $0.7 million
into restructuring and other unusual income related to the remaining accrual for
the Sardis, Mississippi facility that was sold during the first quarter of
fiscal 2001. The company expects the majority of the remaining reserve to be
utilized when the Murray Bridge, Australia facility is sold.
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Comprehensive Income
Comprehensive income and the components of other comprehensive income (loss) for
the three months ended were as follows:
Three Months Ended
----------------------------
(Dollars in thousands) February 2, January 28,
2001 2000
----------- -----------
Net earnings................................$ 1,304 $ 913
Other comprehensive income (loss):
Foreign currency translation............. 897 (27)
Derivative instruments................... (129) --
----------- -----------
Comprehensive income........................$ 2,072 $ 886
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Net Earnings Per Share
Reconciliations of basic and dilutive weighted average shares of common stock
outstanding are as follows:
Basic February 2, January 28,
- ----- 2001 2000
(Shares in thousands) ----------- -----------
Weighted average number of shares of common
stock outstanding.......................... 12,717 12,669
Assumed issuance of contingent shares ........... 36 252
----------- -----------
Weighted average number of shares of common
stock and assumed issuance of contingent
shares.................................... 12,753 12,921
=========== ===========
Dilutive February 2, January 28,
- -------- 2001 2000
(Shares in thousands) ----------- -----------
Weighted average number of shares of common stock
and assumed issuance of contingent shares.. 12,753 12,921
Assumed conversion of stock options.............. 309 290
----------- -----------
Weighted average number of shares of common stock,
assumed issuance of contingent shares, and
assumed conversion of stock options........ 13,062 13,211
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Segment Data
The presentation of segment information reflects the manner in which management
organizes segments for making operating decisions and assessing performance. On
this basis, the company has determined it has two reportable business segments:
professional and residential. The other segment consists of company-owned
distributor operations in the United States and corporate activities, including
corporate financing activities and elimination of intersegment revenues and
expenses.
The following table shows the summarized financial information concerning the
company's reportable segments:
(Dollars in thousands)
Three months ended February 2, 2001: Professional Residential(1) Other Total
- ------------------------------------ ------------ -------------- -------- --------
Net sales.................................................. $186,445 $92,625 $ 4,442 $283,512
Intersegment net sales..................................... 12,533 951 (13,484) --
Earnings (loss) before income taxes........................ 18,071 6,492 (22,494) 2,069
Total assets............................................... 472,757 145,249 265,625 883,631
Three months ended January 28, 2000:
- ------------------------------------
Net sales.................................................. $185,891 $96,819 $ (2,471) $280,239
Intersegment net sales..................................... 12,508 3,650 (16,158) --
Earnings (loss) before income taxes........................ 18,059 5,915 (22,513) 1,461
Total assets............................................... 462,226 162,068 258,048 882,342
The following table presents the details of the other segment earnings (loss)
before income taxes:
(Dollars in thousands) February 2, January 28,
Three months ended 2001 2000
- ------------------ ------------- -----------
Corporate expenses......................................... $ (18,421) $(17,622)
Finance charge revenue..................................... 1,321 1,317
Elimination of corporate financing expense................. 2,679 3,219
Interest expense, net...................................... (5,276) (5,757)
Other...................................................... (2,797) (3,670)
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Total...................................................... $(22,494) $(22,513)
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Business Acquisition
During the first quarter of fiscal 2001, Toro acquired certain operating assets
of Goossen Industries, Inc. (Goossen), a turf equipment manufacturer located in
Beatrice, Nebraska. The facility acquired will add manufacturing capacity for
the company and expand its line of debris management equipment.
- ----------
(1) Includes restructuring and other unusual income of $0.7 million for the
three months ended February 2, 2001.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. In addition, forward-looking statements may be made orally
or in press releases, conferences, reports, over the Internet, or otherwise, in
the future by or on behalf of the company. When used by or on behalf of the
company, the words "expect", "anticipate", "estimate", "believe", "intend", and
similar expressions generally identify forward-looking statements.
Forward-looking statements involve risks and uncertainties. These uncertainties
include factors that affect all businesses operating in a global market, as well
as matters specific to the company and the markets it serves. Particular risks
and uncertainties that could affect the company's overall financial position at
the present include the threat of a slow down in the global and domestic
economy; the reported decline in consumer confidence; the reported weakness in
retail sales; inability to achieve earnings growth in fiscal 2001 of 12 to 15
percent above fiscal 2000; inability to achieve revenue growth in fiscal 2001 of
8 to 10 percent above fiscal 2000; inability to achieve gross margin in fiscal
2001 of 37 to 38 percent; inability to keep growth of operating expenses in
fiscal 2001 at 7 to 10 percent, in dollars, above fiscal 2000; inability to
maintain tax rate of 37 percent in fiscal 2001; higher average short-term debt
costs due to the company's reliance on short-term debt, especially at a time
when anticipated working capital needs are higher; inability to achieve goals of
the announced "5 by Five" profit improvement program; rising energy costs; the
company's ability to develop and manufacture new and existing products based on
anticipated investments in manufacturing capacity and engineering; market
acceptance of existing and new products relative to expectations and based on
current commitments to fund advertising and promotions; the company's ability to
acquire, develop, and integrate new businesses and manage alliances
successfully; the degree of success in implementing a distribution initiative
designed to develop a new distribution model; increased competition in the
company's businesses from competitors that have greater financial resources,
including competitive pricing pressures; impact of the Internet and e-commerce
on the company's business; changes in distributor ownership; financial viability
of some distributors; unforeseen difficulties in the implementation of
strategies to use outside providers for warehousing and transportation services;
changes in distributors', dealers', home centers', or mass retailers' purchasing
practices, especially elimination of shelf space for Toro's products; the
company's ability to cost-effectively expand existing manufacturing facilities;
the company's ability to manage costs and capacity constraints at its
manufacturing facilities; the ability to retain and hire quality employees;
threatened or pending litigation on matters relating to patent infringement and
commercial disputes; and the impact of new accounting standards.
Particular risks and uncertainties facing the company's professional segment at
the present include inflationary pressures and potentially slower economic
growth that has been important to the growth of the company's professional
businesses, including golf, agricultural irrigation, and landscape contractor
markets; product quality problems in the development and production of
irrigation products; delays in key new irrigation product introductions; the
degree of success related to reorganization and management changes in the
irrigation and agricultural irrigation areas; increasing oil prices that raise
the cost of resin used in irrigation and agricultural irrigation products; a
slow down in new golf course construction or existing golf course renovations; a
decline in the growth rate in the number of new golfers, which slows new golf
course construction; a slow down in new home construction; and the financial
impact of direct-to-dealer distribution changes related to the Sitework Systems
product line.
Particular risks and uncertainties facing the company's residential segment at
the present include inflationary pressures and potentially slower economic
growth; a decline in consumer confidence; a decline in retail sales; changing
buying patterns, including but not limited to a trend away from purchases at
dealer outlets to price and value sensitive purchases at hardware retailers,
home centers, and mass retailers; loss of, or a significant reduction in, sales
through a significant distribution channel or customer, particularly as the
company's residential segment becomes more dependent on home center sales; a
slowdown in home sales; and the company's expansion into selected home center
markets and the potential decline of sales on other product lines and
distribution channels.
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Particular risks and uncertainties facing the company's international business
at the present include socio-economic conditions in some international markets;
tax law changes in Mexico; currency fluctuations of the dollar against the Euro
and Australian dollar; the cost of currency support provided to international
customers to compensate for weak currencies compared to the U.S. dollar; and
competitive implications and price transparencies related to the Euro
conversion.
In addition, the company is subject to risks and uncertainties facing its
industry in general, including changes in business, financial, and political
conditions and the economy in general in both foreign and domestic markets;
weather conditions affecting demand, including warm winters and wet or cold
spring and dry summer weather; unanticipated problems or costs associated with
the transition of European currencies to the common euro currency; a slowing in
housing starts or new golf course starts; inability to raise prices of products
due to market conditions; changes in market demographics; actions of
competitors; seasonal factors in the company's industry; unforeseen litigation;
government action, including budget levels, regulation, and legislation,
primarily legislation relating to the environment, commerce, infrastructure
spending, health, and safety; availability of raw materials; and the company's
ability to maintain good relations with its employees.
The company wishes to caution readers not to place undue reliance on any
forward-looking statement and to recognize that the statements are predictions
of future results, which may not occur as anticipated. Actual results could
differ materially from those anticipated in the forward-looking statements and
from historical results, due to the risks and uncertainties described above, as
well as others not now anticipated. The foregoing statements are not exclusive
and further information concerning the company and its businesses, including
factors that potentially could materially affect the company's financial
results, may emerge from time to time. Toro assumes no obligation to update
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
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RESULTS OF OPERATIONS
First quarter net sales were $283.5 million compared to $280.2 million last
year, an increase of 1.2 percent. Worldwide sales for the professional segment
rose 0.3 percent over last year's first quarter. Sales of landscape contractor
mowing equipment increased significantly due to continued strong retail demand
in that market. However, sales were down for the Sitework Systems product line
and residential/commercial irrigation products. Residential segment sales were
also down by 4.3 percent compared to last year's first quarter performance.
Slower snowthrower, walk power mower, and home solutions product sales were the
main contributors to this decrease. Other segment net sales increased
substantially due to contributions from two additional company-owned
distributors and a change in shipping patterns to Toro-owned distributors to
later in the fiscal year. International sales also did well with a 6.0 percent
increase over last year. Disregarding currency effects, international sales
increased 11.5 percent.
First quarter net earnings were $1.3 million compared to $0.9 million for the
same quarter in fiscal 2000, an increase of 42.8 percent. Excluding
restructuring and other unusual income, the current year first quarter net
earnings would have been $0.9 million. Dilutive net earnings per share for the
quarter was $0.10, which included restructuring and other unusual income of
$0.03 per dilutive share, compared to $0.07 per dilutive share for the same
quarter in the previous year. Operating earnings for the professional segment
rose modestly. Factoring out restructuring and other unusual income of $0.7
million in the residential segment, operating profits were slightly down.
The following table summarizes net sales by segment:
Three Months Ended
-----------------------------------------------------------
(Dollars in thousands) February 2, January 28,
2001 2000 $ Change % Change
----------- ----------- ----------- --------
Professional.....................................$ 186,445 $ 185,891 $ 554 0.3%
Residential...................................... 92,625 96,819 (4,194) (4.3)
Other............................................ 4,442 (2,471) 6,913 N/M
----------- ----------- -----------
Total *......................................$ 283,512 $ 280,239 $ 3,273 1.2%
=========== =========== ===========
* Includes international sales of:...............$ 72,031 $ 67,935 $ 4,096 6.0%
Professional Segment Net Sales
Net sales for the worldwide professional segment rose 0.3 percent in the first
quarter of fiscal 2001. The landscape contractor market for mowing equipment
continues to show significant growth, with good volume increases for the Exmark
and Toro brands. International sales to the golf and grounds maintenance market
also continued to perform well due to a positive reception of new products.
However, domestic sales to the golf and grounds maintenance market were slightly
down due to continuing efforts to ship product closer to retail demand.
Residential/commercial irrigation systems sales were down from last year, mainly
for the Irritrol brand, due to high field inventory levels entering fiscal 2001
and compared to abnormally high shipments in the prior year comparable quarter.
Sitework Systems sales decreased from last year due to a change to dealer-direct
distribution that resulted in returned product from some distributors.
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Residential Segment Net Sales
Net sales for the worldwide residential segment in the first quarter of fiscal
2001 were $92.6 million compared to $96.8 million in the first quarter of fiscal
2000, a decrease of 4.3 percent. The decline was primarily the result of the
comparison with abnormally high sales of domestic snowthrower products in the
first quarter of fiscal 2000 resulting from a shift in shipments from the fourth
quarter of fiscal 1999 to the first quarter of fiscal 2000. In addition, field
inventory levels were higher entering fiscal 2001. Domestic Toro walk power
mower sales were also down for the quarter due to shipping product closer to the
selling season in the second quarter resulting from customers efforts at
reducing financing costs associated with field inventory levels. Home solutions
product sales declined from last year due to delays in production of a new
redesigned electric blower pushing sales into the second quarter of fiscal 2001.
Do-it-yourself irrigation sales also decreased over the prior year's first
quarter due to lost placement at some home centers. Offsetting these decreases
to some degree were higher worldwide volume shipments of riding products due to
the introduction of the new Toro(R) TimeCutter(TM) Z mower and products
manufactured for a third party. International sales of walk power mowers were
also up from last year on a comparative basis because late production in the
first quarter of fiscal 2000 delayed shipments into the later part of fiscal
2000.
Field inventory levels are lower than in the comparable quarter of fiscal 2000
for all residential segment product lines. The heavy snowfalls during the winter
of 2000-2001 throughout the Snow Belt resulted in significantly higher retail
sales, leaving low field inventory levels for snowthrower products. Therefore,
the company anticipates higher snowthrower sales in fiscal 2001 compared to
fiscal 2000.
Other Segment Net Sales
The other segment showed positive net sales of $4.4 million in the first quarter
of fiscal 2001 compared to negative net sales of $2.5 million in the first
quarter of fiscal 2000. Net sales in this segment include sales from Toro's
wholly owned distribution companies less sales from the professional and
residential segments to those distribution companies. The sales increase was due
to the addition of sales from two company-owned distributors acquired in fiscal
2000 and a change in shipping patterns closer to retail demand.
Gross Profit
First quarter gross profit was $101.2 million compared to $99.9 million last
year, an increase of 1.2 percent. As a percentage of net sales, gross profit for
the first quarter was even with last year at 35.7 percent.
Selling, General, and Administrative Expense
First quarter selling, general, and administrative expense (SG&A) was $97.4
million compared to $94.0 million in the same period last year, an increase of
$3.4 million. As a percentage of net sales, SG&A increased to 34.4 percent from
33.5 percent for the same quarter in fiscal 2000. Two company-owned distribution
companies acquired after the first quarter last year added $1.5 million of
incremental SG&A expense. The increase as a percent of sales was also due to
higher levels of currency support for international sales and higher incentive
compensation costs.
Restructuring and Other Unusual Income
First quarter restructuring and other unusual income was $0.7 million, which
increased income for the residential segment. This income relates to the
reversal of the remaining accrual for closing of the Sardis, Mississippi
facility, which was sold during the first quarter of fiscal 2001.
Interest Expense
First quarter interest expense was $5.3 million compared to $5.8 million in the
same period last year, a decrease of 8.4 percent. This decrease was primarily
due to lower levels of short-term debt as a result of improved asset management
and the use of earnings from the past 12 months to pay down debt.
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Other Income, Net
First quarter other income, net, was $2.9 million compared to $1.3 million in
the same period last year, an increase of $1.6 million. The increase was due to
higher levels of currency gains and increased royalty income, somewhat offset by
a write-down of investments and legal expense related to a commercial dispute.
Operating Earnings (Loss) by Segment
Operating earnings (loss) by segment is defined as earnings (loss) from
operations plus other income, net for the residential and professional segments.
The other segment operating loss includes earnings (loss) from operations,
corporate activities, other income, net, and interest expense.
Professional Segment Operating Earnings
Operating earnings for the worldwide professional segment in the first quarter
of fiscal 2001 was even with last year at $18.1 million or 9.7 percent as a
percentage of net sales. Gross margin as a percent of sales fell 0.6 percent
mainly due to increased costs for resin and higher manufacturing costs for
irrigation products. SG&A costs as a percent of sales were lower by 0.2 percent
due to lower marketing expenses, somewhat offset by higher levels of currency
support. Other income, net also increased due to higher levels of currency gains
in the first quarter of fiscal 2001 compared to the first quarter of fiscal
2000.
Residential Segment Operating Earnings
Operating earnings for the worldwide residential segment in the first quarter of
fiscal 2001 were $6.5 million compared to $5.9 million in the first quarter of
fiscal 2000, an increase of 9.8 percent. As a percentage of net sales,
residential segment operating margins increased to 7.0 percent from 6.1 percent
for the same quarter in fiscal 2000. Gross margin as a percent of sales improved
0.5 percent due to increased sales of higher margin products and lower costs for
certain product lines. SG&A costs were higher by 0.6 percent as a percentage of
sales due mainly to higher costs for currency support, but the increase was
somewhat offset by lower marketing and warranty expenses. Restructuring and
other unusual income of $0.7 million contributed to the residential segment
operating profit improvement. Other income, net also increased due to higher
levels of currency gains in the first quarter of fiscal 2001 compared to the
first quarter of fiscal 2000.
Other Segment Operating Losses
Operating losses for the other segment in the first quarter of fiscal 2001 were
even with last year at $22.5 million. Corporate SG&A costs increased due to
higher insurance and consulting costs. In addition, operating losses at the
company-owned distributors were higher this quarter compared to the same quarter
in fiscal 2000. Offsetting those increases was a decline in interest expense,
reduced spending for information services, and a lower amount of elimination of
gross profit related to lower inventory levels at company-owned distributors.
Provision for Income Taxes
The effective tax rate for the first quarter of fiscal 2001 was 37.0 percent
compared to 37.5 percent for the first quarter of fiscal 2000.
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Financial Position as of February 2, 2001
February 2, 2001 compared to January 28, 2000
Total assets at February 2, 2001 were $883.6 million compared to $882.3 million
on January 28, 2000, an increase of $1.3 million. Net accounts receivable
decreased $7.2 million from last year, mainly for Toro Credit Company
receivables that were down due to decreased levels of commercial equipment and
snowthrower receivables related to strong retail demand. Inventory increased
slightly by $2.2 million from last year. The addition of Goossen and a new
distribution company acquired in late fiscal 2000 added $3.7 million of net
incremental inventory. Net property, plant, and equipment increased $8.5 million
due to higher amounts of capital additions in comparison to depreciation
expense. Goodwill and other assets decreased $8.8 million primarily as a result
of valuation charges for the company's investments in a technology company and a
distribution company as well as amortization of goodwill and intangible assets.
Total current liabilities were $360.1 million compared to $395.0 million last
year, a decrease of $34.9 million. Short-term debt decreased $48.0 million due
mainly to higher levels of accounts payable and equity. Accounts payable was
higher by $13.7 million due to the company's efforts to increase days in
accounts payable.
February 2, 2001 compared to October 31, 2000
Total assets at February 2, 2001 were $883.6 million compared to $779.4 million
at October 31, 2000, an increase of $104.2 million. Net accounts receivable
increased $44.0 million from October 31, 2000 due to the seasonal increase in
accounts receivable, which historically occurs between January and April.
Inventory increased by $57.3 million due to the normal seasonal buildup of
inventory in the first quarter plus prebuilding of inventory as a result of
manufacturing capacity constraints. Goodwill and other assets decreased $1.8
million primarily as a result of valuation charges for the company's investments
in a technology company and a distribution company as well as amortization of
goodwill and intangible assets during the first quarter of fiscal 2001.
Total current liabilities at February 2, 2001 were $360.1 million compared to
$260.9 million at October 31, 2000, an increase of $99.2 million. The increase
was the result of additional short-term debt of $101.8 million, reflecting the
company's strategy of utilizing short-term debt to fund seasonal working capital
needs. These requirements are historically greatest in the winter and spring
months. Accounts payable increased $10.5 million compared to October 31, 2000
due to the company's efforts to increase days in accounts payable. Other accrued
liabilities decreased $13.0 million primarily as a result of the payment of
accrued profit sharing and related incentive compensation accruals.
Liquidity and Capital Resources
Cash used in operating activities for the first three months of fiscal 2001 was
$5.5 million lower than the first three months in fiscal 2000 primarily due to a
lower change in working capital as compared to the prior period, somewhat offset
by an increase in deferred tax assets. Cash used in investing activities
increased $1.7 million due to the purchase price net of cash acquired for
Goossen, slightly offset by proceeds received for the sale of the Sardis,
Mississippi facility. Cash provided by financing activities was higher by $6.5
million due to a reduction in stock repurchases, slightly offset by lower levels
of short-term debt borrowing during the first quarter of fiscal 2001 compared to
the first quarter of fiscal 2000. In addition, cash on hand at October 31, 1999,
which was high due to fiscal year end occurring on a Sunday when cash received
on Saturday could not be utilized to pay down short-term debt until fiscal 2000,
was used for operating and investing activities in the first quarter of fiscal
2000.
The company's U.S. seasonal working capital requirements are funded with $292.0
million of committed unsecured bank credit lines. In addition, the company's
non-U.S. operations maintain unsecured short-term lines of credit of
approximately $16.0 million. The company also has banker's acceptance agreements
under which an additional $40.0 million of credit lines are available. The
company's business is seasonal, with peak borrowing under the working capital
lines described above generally occurring between February and May each year.
Management believes that the combination of funds available through its existing
or anticipated financing arrangements, coupled with forecasted cash flows, will
provide the necessary capital resources for the company's anticipated working
capital, capital additions, acquisitions, and stock repurchases during the
current fiscal year.
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Euro Currency
The European Monetary Union (EMU) is in the last full year of a three-year
transition phase during which a common currency (the "euro") was introduced in
participating countries. This new currency is being used for financial
transactions and will progressively replace the old national currencies, which
are to be withdrawn by July 2002. During the transition to the euro, companies
and public administrations have been changing budgetary, accounting,
contractual, and fiscal systems while using parallel currencies and converting
legacy data. Uncertainty continues as to what effects the conversion to the euro
will have on the marketplace. One anticipated effect will be more transparent
price differences on goods in European countries.
Significant issues for the company arising from the transition are price
competition on Toro distributor and Toro direct sales, and the possible need for
and cost of currency support for Toro distributors in the European Union.
Current concerns include currency swings and instability in the rate of exchange
between the euro and the U.S. dollar, and the lack of diversification of
currencies in Europe with the introduction of the euro.
The company is planning to convert to a new operating business system for its
European subsidiaries, which has delayed plans to begin parallel reporting with
the current functional currency of the European subsidiaries and euros to the
second half of fiscal 2001. Beginning in fiscal 2002, these European
subsidiaries are expected to be fully transitioned from their legacy currencies
to the euro, reflecting euros on invoices to customers and using euro for
statutory reporting.
Based on evaluation to date, management currently believes that while the
company will incur internal and external costs to adjust to the euro indirectly,
such costs are not expected to have a significant impact on operations, cash
flows, or the financial condition of the company and its subsidiaries taken as a
whole in future periods.
Inflation
The company is subject to the effects of changing prices. In the first quarter
of fiscal 2001, the company continued to experience inflationary pressures for
purchases of general commodities. The company is attempting to deal with these
inflationary pressures by actively pursuing internal cost reduction efforts and
slight price increases. However, no significant price increases are planned for
fiscal 2001 because of competitive pressures.
Quantitative and Qualitative Disclosures about Market Risk
Toro is exposed to market risk stemming from changes in foreign exchange rates,
interest rates, and commodity prices. Changes in these factors could cause
fluctuations in the company's net earnings and cash flows. In the normal course
of business, Toro actively manages the exposure of certain market risks by
entering into various hedging transactions, authorized under company policies
that place controls on these activities. The company's hedging transactions
involve the use of a variety of derivative instruments. Toro uses derivatives
only in an attempt to limit underlying exposure to currency fluctuations, and
not for trading purposes.
Foreign Exchange Risk
Toro is subject to risk from sales and loans to wholly owned subsidiaries as
well as sales to, purchases from, and bank lines of credit with, third party
customers, suppliers, and creditors, respectively, denominated in foreign
currencies. The company manages foreign exchange rate exposure from anticipated
sales, accounts receivable, intercompany loans, anticipated purchases, credit
obligations through the use of naturally occurring offsetting positions
(borrowing in local currency) and forward and swap foreign exchange contracts.
Forward foreign exchange contracts to hedge forecasted transactions are
designated as cash flow hedges with the fair value recorded in accumulated other
comprehensive income (loss) and as a hedge asset or liability as applicable.
Once the forecasted transaction has been recognized as a sale or purchase and a
related asset or liability recorded on the balance sheet, the related fair value
of the derivative hedge contract is reclassified from accumulated other
comprehensive income (loss) into earnings. The related amounts payable to, or
receivable from, the contract counter parties are included in other accrued
liabilities or prepaid expenses and other current assets.
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Quantitative and Qualitative Disclosures about Market Risk (continued)
The following forward exchange contracts held by the company have maturity dates
in fiscal year 2001. All items are non-trading and stated in U.S. dollars.
Certain derivative instruments the company enters into do not meet the hedging
criteria of SFAS 133, therefore, the fair value impact is recorded in other
income, net. The average contracted rate, notional amount, value of derivative
instrument in accumulated other comprehensive loss, and fair value of derivative
instrument in other income, net at February 2, 2001 were as follows:
- --------------------------------------- ------------- ------------- ---------------- --------------
VALUE IN
ACCUMULATED
AVERAGE OTHER FAIR VALUE
CONTRACTED NOTIONAL COMPREHENSIVE IMPACT
DOLLARS IN THOUSANDS RATE AMOUNT INCOME (LOSS) GAIN (LOSS)
======================================= ============= ============= ================ ==============
Buy US dollar/Sell Australian dollar .5966 $ 10,112.5 -- $ 795.6
- --------------------------------------- ------------- ------------- ---------------- --------------
Buy US dollar/Sell Canadian dollar 1.4582 7,166.5 $ 191.5 --
- --------------------------------------- ------------- ------------- ---------------- --------------
Buy US dollar/Sell Euro .8834 1,766.7 -- (105.9)
- --------------------------------------- ------------- ------------- ---------------- --------------
Buy US dollar/Sell Mexican peso 9.9670 100.3 -- (2.9)
- --------------------------------------- ------------- ------------- ---------------- --------------
Buy Australian dollar/Sell US dollar .5518 7,985.3 -- (42.3)
- --------------------------------------- ------------- ------------- ---------------- --------------
Buy Euro/Sell US dollar .9371 2,811.3 -- (9.6)
- --------------------------------------- ------------- ------------- ---------------- --------------
Buy Japanese yen/Sell US dollar 106.5718 6,737.2 (395.4) (86.3)
- --------------------------------------- ------------- ------------- ---------------- --------------
Buy Mexican peso/Sell US dollar 10.0000 1,050.0 -- (3.1)
- --------------------------------------- ------------- ------------- ---------------- --------------
Interest Rate Risk
The company is exposed to interest rate risk arising from transactions that are
entered into during the normal course of business. The company's short-term debt
rates are dependent upon the LIBOR rate plus an additional percentage based on
the company's current borrowing level. See the company's most recent annual
report filed on Form 10-K (Item 7A). There has been no material change in this
information.
Commodities
Certain raw materials used in the company's products are exposed to commodity
price changes. Toro manages this risk by using long-term agreements with some
vendors. The primary commodity price exposures are with aluminum, steel, and
plastic resin.
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PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
3(i)(a) and 4(a) Certificate of Incorporation of Registrant (incorporated by reference to
Exhibit 4.2 to Registrant's Registration Statement on Form S-3, Registration
No. 33-16125).
3(i)(b) and 4(b) Certificate of Amendment to Certificate of Incorporation of Registrant
dated December 9, 1986 (incorporated by reference to Exhibit 3 to
Registrant's Auarterly Report on Form 10-Q for the quarter ended January
30, 1987, Commission File No. 1-8649).
3(i)(c) and 4(c) Certificate of Designation to Certificate of Incorporation of Registrant
dated May 28, 1998 (incorporated by reference to Exhibit (1)(A) to
Registrant's Current Report on Form 8-K dated May 27, 1998).
3(ii) and 4(d) Bylaws of Registrant (incorporated by reference to Exhibit 3(ii) and 4(d) to
Registrant's Quarterly Report on Form 10-Q for the quarter ended April 30,
1999).
4(e) Specimen form of Common Stock certificate (incorporated by reference to
Exhibit 4(c) to Registrant's Registration Statement on Form S-8, Registration
No. 2-94417).
4(f) Rights Agreement dated as of May 20, 1998, between Registrant and Wells Fargo
Bank Minnesota, National Association relating to rights to purchase Series B
Junior Participating Voting Preferred Stock, as amended (incorporated by
reference to Registrant's Current Report on Form 8-K dated May 27, 1998,
Commission File No. 1-8649).
4(g) Indenture dated as of January 31, 1997, between Registrant and First National
Trust Association, as Trustee, relating to the Registrant's 7.125% Notes due
June 15, 2007 and its 7.80% Debentures due June 15, 2027 (incorporated by
reference to Exhibit 4(a) to Registrant's Current Report on Form 8-K for June
24, 1997, Commission File No. 1-8649).
10(a) Form of Employment Agreement in effect for executive officers of Registrant
(incorporated by reference to Exhibit 10(a) to Registrant's Quarterly Report
on Form 10-Q for the quarter ended July 30, 1999).*
10(b) The Toro Company Directors Stock Plan (incorporated by reference to Exhibit
10(b) to Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 28, 2000).*
10(c) The Toro Company Annual Management Incentive Plan II for officers of
Registrant (incorporated by reference to Exhibit 10(c) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 28, 2000).*
10(d) The Toro Company 1989 Stock Option Plan (incorporated by reference to Exhibit
10(e) to Registrant's Quarterly Report on Form 10-Q for the quarter ended July
30, 1999).*
10(e) The Toro Company 1993 Stock Option Plan (incorporated by reference to Exhibit
10(f) to Registrant's Quarterly Report on Form 10-Q for the quarter ended July
30, 1999).*
10(f) The Toro Company Performance Share Plan (incorporated by reference to Exhibit
10(f) to Registrant's Quarterly Report on Form 10-Q for the quarter ended July
30, 1999).*
10(g) The Toro Company 2000 Stock Option Plan (incorporated by reference to Exhibit
10(g) to Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 28, 2000).*
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10(h) The Toro Company Supplemental Management Retirement Plan (incorporated by
reference to Exhibit 10(h) to Registrant's Quarterly Report on Form 10-Q for
the quarter ended July 30, 1999).*
10(i) The Toro Company Supplemental Retirement Plan (incorporated by reference to
Exhibit 10(i) to Registrant's Quarterly Report on Form 10-Q for the quarter
ended July 30, 1999).*
10(j) Chief Executive Officer Incentive Award Agreement (incorporated by reference
to Exhibit 10(k) to Registrant's Quarterly Report on Form 10-Q for the quarter
ended April 28, 2000).*
10(k) The Toro Company Deferred Compensation Plan for Officers (incorporated by
reference to Exhibit 10(k) to Registrant's Quarterly Report on Form 10-Q for
the quarter ended July 28, 2000).*
10(l) The Toro Company Deferred Compensation Plan for Non-Employee Directors
(incorporated by reference to Exhibit 10(l) to Registrant's Quarterly Report
on Form 10-Q for the quarter ended July 28, 2000).*
*Management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Quarterly Report on Form 10-Q pursuant to Item 14(c).
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TORO COMPANY
(Registrant)
By /s/ Stephen P. Wolfe
--------------------------------------
Stephen P. Wolfe
Vice President Finance,
Treasurer and Chief Financial Officer
(principal financial officer)
Date: March 19, 2001
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