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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 May 3, 2002 Commission File Number 1-8649
------------ ------
THE TORO COMPANY
(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
(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 May 31, 2002 was
12,467,890.
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THE TORO COMPANY
INDEX TO FORM 10-Q
Page Number
-----------
PART I. FINANCIAL INFORMATION:
ITEM 1. Condensed Consolidated Statements of Earnings (Unaudited) -
Three and Six Months Ended May 3, 2002 and May 4, 2001............................................3
Condensed Consolidated Balance Sheets (Unaudited) -
May 3, 2002, May 4, 2001 and October 31, 2001.....................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended May 3, 2002 and May 4, 2001......................................................5
Notes to Condensed Consolidated Financial Statements (Unaudited)....................................6-11
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................................12-25
PART II. OTHER INFORMATION:
ITEM 4. Submission of Matters to a Vote of Security Holders..................................................26
ITEM 6. Exhibits and Reports on Form 8-K....................................................................26-27
Signatures...........................................................................................28
2
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 Six Months Ended
------------------------------- ------------------------------
May 3, May 4, May 3, May 4,
2002 2001 2002 2001
-------------- -------------- -------------- -------------
Net sales..................................................$ 470,314 $ 459,613 $ 748,229 $ 739,963
Cost of sales.............................................. 308,262 302,583 490,870 491,552
-------------- -------------- -------------- -------------
Gross profit........................................... 162,052 157,030 257,359 248,411
Selling, general, and administrative expense............... 104,265 101,445 193,277 189,063
Restructuring and other expense (income)................... - - 9,953 (679)
-------------- -------------- -------------- -------------
Earnings from operations............................... 57,787 55,585 54,129 60,027
Interest expense........................................... (5,248) (6,437) (10,568) (11,713)
Other income (expense), net................................ 1,734 (1,439) 3,068 1,464
-------------- -------------- -------------- -------------
Earnings before income taxes and cumulative
effect of change in accounting principle............ 54,273 47,709 46,629 49,778
Provision for income taxes................................. 16,135 17,652 13,612 18,418
-------------- -------------- -------------- -------------
Earnings before cumulative effect of
change in accounting principle.................... 38,138 30,057 33,017 31,360
Cumulative effect of change in accounting principle,
net of income tax benefit of $509...................... - - (24,614) -
-------------- -------------- -------------- -------------
Net earnings........................................$ 38,138 $ 30,057 $ 8,403 $ 31,360
============== ============== ============== =============
Basic net earnings per share of common stock, before
cumulative effect of change in accounting principle....$ 3.03 $ 2.34 2.63 $ 2.45
Cumulative effect change in accounting principle,
net of income tax benefit.............................. - - (1.96) -
-------------- -------------- -------------- -------------
Basic net earnings per share of common stock...............$ 3.03 $ 2.34 $ .67 $ 2.45
============== ============== ============== =============
Dilutive net earnings per share of common stock, before
cumulative effect of change in accounting principle....$ 2.91 $ 2.28 $ 2.56 $ 2.38
Cumulative effect of change in accounting principle,
net of income tax benefit.............................. - - (1.91) -
-------------- ------------- -------------- -------------
Dilutive net earnings per share of common stock............$ 2.91 $ 2.28 $ 0.65 2.38
============== ============= ============== =============
Weighted average number of shares of common stock
outstanding - Basic................................. 12,597 12,827 12,548 12,789
Weighted average number of shares of common stock
outstanding - Dilutive.............................. 13,093 13,205 12,919 13,150
See accompanying notes to condensed consolidated financial statements.
3
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
May 3, May 4, October 31,
2002 2001 2001
-------------- -------------- ---------------
ASSETS
- ------
Cash and cash equivalents.............................................$ 62 $ 1,191 $ 12,876
Receivables, net...................................................... 463,886 458,822 271,677
Inventories, net...................................................... 235,366 239,443 234,661
Prepaid expenses and other current assets............................. 9,259 8,812 11,052
Deferred income taxes................................................. 39,200 44,960 33,927
-------------- -------------- ---------------
Total current assets.......................................... 747,773 753,228 564,193
-------------- -------------- ---------------
Property, plant, and equipment........................................ 423,253 387,495 401,943
Less accumulated depreciation................................. 272,733 249,983 259,698
-------------- -------------- ---------------
150,520 137,512 142,245
Deferred income taxes................................................. 9,721 9,883 9,721
Other assets.......................................................... 14,481 12,694 11,983
Goodwill.............................................................. 77,839 104,802 102,924
Other intangible assets............................................... 2,186 4,809 4,608
-------------- -------------- ---------------
Total assets..................................................$ 1,002,520 $ 1,022,928 $ 835,674
============== ============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current portion of long-term debt.....................................$ 16,274 $ 21 $ 513
Short-term debt....................................................... 130,238 178,189 34,413
Accounts payable...................................................... 90,170 77,131 77,549
Accrued liabilities................................................... 221,852 227,345 180,092
-------------- -------------- ---------------
Total current liabilities..................................... 458,534 482,686 292,567
-------------- -------------- ---------------
Long-term debt, less current portion.................................. 178,781 194,432 194,565
Other long-term liabilities........................................... 7,221 7,022 7,149
Stockholders' equity:
Preferred stock, par value $1.00, authorized 1,000,000 voting
and 850,000 non-voting shares, none issued and outstanding.... - - -
Common stock, par value $1.00, authorized 35,000,000 shares,
issued and outstanding 12,464,085 shares at May 3, 2002 (net
of 1,043,970 treasury shares), 12,540,204 shares at May 4,
2001 (net of 967,851 treasury shares), and 12,266,045 shares
at October 31, 2001 (net of 1,242,010 treasury shares)........ 12,464 12,540 12,266
Additional paid-in capital........................................... 39,459 40,762 29,048
Retained earnings.................................................... 318,453 296,995 313,067
Accumulated other comprehensive loss................................. (12,392) (11,509) (12,988)
-------------- -------------- ---------------
Total stockholders' equity.................................... 357,984 338,788 341,393
-------------- -------------- ---------------
Total liabilities and stockholders' equity....................$ 1,002,520 $ 1,022,928 $ 835,674
============== ============== ===============
See accompanying notes to condensed consolidated financial statements.
4
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Six Months Ended
----------------------------------------
May 3, May 4,
2002 2001
---------------- ----------------
Cash flows from operating activities:
Net earnings ..................................................................$ 8,403 $ 31,360
Adjustments to reconcile net earnings to net cash
used in operating activities:
Cumulative effect of change in accounting principle......................... 24,614 -
Noncash asset impairment write-off.......................................... 4,163 -
Provision for depreciation and amortization................................. 14,067 16,672
Write-down of investments................................................... - 1,778
Gain on disposal of property, plant, and equipment.......................... (27) (51)
Increase in deferred income taxes........................................... (5,274) (5,246)
Tax benefits related to employee stock option transactions.................. 1,245 4,501
Changes in operating assets and liabilities:
Receivables, net....................................................... (192,209) (195,290)
Inventories, net....................................................... (705) (41,317)
Prepaid expenses and other current assets.............................. 1,549 3,409
Accounts payable and accrued liabilities............................... 56,214 56,608
--------------- ---------------
Net cash used in operating activities.............................. (87,960) (127,576)
--------------- ---------------
Cash flows from investing activities:
Purchases of property, plant, and equipment................................. (20,914) (16,122)
Proceeds from asset disposals............................................... 141 2,098
Decrease in investment in affiliates........................................ - 141
Increase in other assets.................................................... (3,185) (1,372)
Acquisition, net of cash acquired........................................... - (6,189)
--------------- ---------------
Net cash used in investing activities.............................. (23,958) (21,444)
--------------- ---------------
Cash flows from financing activities:
Increase in short-term debt................................................. 95,825 166,602
Repayments of long-term debt................................................ (23) (42)
Increase in other long-term liabilities..................................... 72 199
Proceeds from exercise of stock options..................................... 10,748 14,586
Purchases of common stock................................................... (5,311) (29,126)
Dividends on common stock................................................... (3,017) (3,093)
--------------- ---------------
Net cash provided by financing activities.......................... 98,294 149,126
--------------- ---------------
Foreign currency translation adjustment........................................ 810 107
--------------- ---------------
Net (decrease) increase in cash and cash equivalents........................... (12,814) 213
Cash and cash equivalents at beginning of period............................... 12,876 978
--------------- ---------------
Cash and cash equivalents at end of period.....................................$ 62 $ 1,191
=============== ===============
See accompanying notes to condensed consolidated financial statements.
5
THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MAY 3, 2002
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 six months ended May 3, 2002 are
not indicative of the results that may be expected for the fiscal year ending
October 31, 2002. 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
based on three month periods that generally end on the Friday closest to the
quarter end. For comparative purposes, however; the company's second and third
quarters always include exactly 13 weeks of results so that the quarter end date
for these two quarters 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, 2001. The policies described in that report are used for
preparing quarterly reports.
Accounting Policies
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management must
make a variety of decisions which impact the reported amounts and the related
disclosures. Such decisions include the selection of appropriate accounting
principles to be applied and assumptions on which to base accounting estimates.
In reaching such decisions, management makes judgments based on its
understanding and analysis of the relevant circumstances. Note 1 to the
consolidated financial statements in the company's Annual Report on Form 10-K
provides a summary of the significant accounting policies followed in the
preparation of the financial statements. Other footnotes in the company's Annual
Report on Form 10-K describe various elements of the financial statements and
the assumptions made in determining specific amounts. While actual results could
differ from those estimated at the time of preparation of the consolidated
financial statements, management is committed to preparing financial statements
which incorporate accounting policies, assumptions, and estimates that promote
the representational faithfulness, verifiability, neutrality, and transparency
of the accounting information included in the consolidated financial statements.
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) May 3, May 4, October 31,
2002 2001 2001
------------- ------------- -------------
Raw materials and work in process....................$ 72,305 $ 77,503 $ 70,458
Finished goods and service parts..................... 208,289 203,666 207,231
------------- ------------- -------------
280,594 281,169 277,689
Less: LIFO........................................... 29,264 27,861 29,264
Other reserves................................. 15,964 13,865 13,764
------------- ------------- -------------
Total ...............................................$ 235,366 $ 239,443 $ 234,661
============= ============= =============
6
Restructuring and Other Expense (Income)
In the first quarter of fiscal 2002, the company announced plans to close its
Evansville, Indiana and Riverside, California manufacturing facilities during
fiscal 2002. Approximately 500 employees will be terminated in connection with
closing these manufacturing facilities and related office staff reductions. As
of May 3, 2002, 27 employees have been terminated. In addition, the company will
incur ongoing costs after the facilities are closed and until they are sold,
which is captioned in "other" below. These actions are part of Toro's overall
long-term strategy to reduce production costs and improve long-term
competitiveness. The company also incurred a charge for asset impairment related
to write-downs of patents and non-compete agreements during the first quarter of
fiscal 2002.
The following is an analysis of the company's restructuring and other expense
reserve accounts:
(Dollars in thousands) Asset Severance
Impairment & Benefits Other Total
------------- ------------- ----------- -----------
Balance as of October 31, 2001..............................$ 200 $ - $ 45 $ 245
Initial charge.............................................. 4,163 3,527 2,263 9,953
Utilization................................................. (2,032) (410) - (2,442)
------------- ------------- ----------- -----------
Balance at May 3, 2002......................................$ 2,331 $ 3,117 $ 2,308 $ 7,756
============= ============= =========== ===========
The company expects a majority of the reserve will be utilized by October 31,
2002.
Cumulative Effect of Change in Accounting Principle
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 141 also provides new criteria in the
determination of intangible assets, including goodwill acquired in a business
combination, and expands financial disclosures concerning business combinations
consummated after June 30, 2001. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized but
instead tested for impairment at least annually at the reporting unit level
using a two-step impairment test. The application of SFAS No. 141 did not affect
previously reported amounts included in goodwill and other intangible assets for
the company.
Effective November 1, 2001, the company adopted SFAS No. 142. SFAS No. 142
provides a six-month transitional period from the effective date of adoption for
the company to perform an assessment of whether there is an indication that
goodwill is impaired. To the extent that an indication of impairment exists, the
company must perform a second test to measure the amount of the impairment. The
company tested for impairment of its reporting units by comparing fair value to
carrying value. Fair value was determined using a discounted cash flow and cost
methodology. The company employed a third-party appraisal firm in determining
the fair value of its agricultural irrigation reporting unit. This evaluation
indicated that all the goodwill recorded for several acquisitions in the
agricultural irrigation market was impaired. The performance of these acquired
businesses has not met management's original expectations. This is mainly due to
lower than anticipated growth rates in the drip line market, which has resulted
in lower industry-wide pricing and margins on product sales. Accordingly,
noncash impairment charges on adoption of SFAS No. 142 of $24.6 million, net of
income tax benefit of $.5 million, were recognized as a cumulative effect of
change in accounting principle in the first quarter ended February 1, 2002.
Impairment adjustments recognized after adoption, if any, generally are required
to be recognized as operating expenses, captioned in selling, general, and
administrative expense.
7
Comprehensive Income
Comprehensive income and the components of other comprehensive income (loss)
were as follows:
Three Months Ended Six Months Ended
---------------------------- -----------------------------
(Dollars in thousands) May 3, May 4, May 3, May 4,
2002 2001 2002 2001
---------- ---------- ----------- ----------
Net earnings............................................$ 38,138 $ 30,057 $ 8,403 $ 31,360
Other comprehensive income (loss):
Foreign currency translation......................... 836 (790) 810 107
Unrealized gain (loss) on derivative instruments..... 38 131 (214) 2
---------- ---------- ----------- ----------
Comprehensive income...................................$ 39,012 $ 29,398 $ 8,999 $ 31,469
========== ========== =========== ==========
Net Earnings Per Share
Reconciliations of basic and dilutive weighted average shares of common stock
outstanding were as follows:
Three Months Ended Six Months Ended
Basic ---------------------------- ----------------------------
- ----- May 3, May 4, May 3, May 4,
(Shares in thousands) 2002 2001 2002 2001
---------- ---------- ----------- ----------
Weighted average number of shares of common
stock outstanding.................................... 12,597 12,827 12,533 12,771
Assumed issuance of contingent shares ...................... - - 15 18
---------- ---------- ----------- ----------
Weighted average number of shares of common stock
and assumed issuance of contingent shares............ 12,597 12,827 12,548 12,789
========== ========== =========== ==========
Three Months Ended Six Months Ended
Dilutive ---------------------------- ----------------------------
- -------- May 3, May 4, May 3, May 4,
(Shares in thousands) 2002 2001 2002 2001
---------- ---------- ----------- ----------
Weighted average number of shares of common stock
and assumed issuance of contingent shares............ 12,597 12,827 12,548 12,789
Assumed conversion of stock options ........................ 496 378 371 361
---------- ---------- ----------- ----------
Weighted average number of shares of common stock,
assumed issuance of contingent shares,
and assumed conversion of stock options.............. 13,093 13,205 12,919 13,150
========== ========== =========== ==========
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 three reportable business
segments: Professional, Residential, and Distribution. The other segment
consists of corporate activities, including corporate financing activities and
elimination of intersegment revenues and expenses.
8
Segment Data (continued)
The following table shows the summarized financial information concerning the
company's reportable segments:
(Dollars in thousands)
Three months ended May 3, 2002 Professional Residential Distribution Other Total
- ------------------------------ ------------- ----------- ------------ --------- ---------
Net sales....................................................$ 290,201 $169,735 $44,144 $(33,766) $ 470,314
Intersegment gross sales..................................... 31,373 6,471 - (37,844) -
Earnings (loss) before income taxes.......................... 53,217 20,071 1,736 (20,751) 54,273
Three months ended May 4, 2001
- ------------------------------
Net sales....................................................$ 294,771 $155,551 $42,281 $(32,990) $ 459,613
Intersegment gross sales..................................... 32,660 4,905 - (37,565) -
Earnings (loss) before income taxes.......................... 49,485 18,381 1,271 (21,428) 47,709
Six months ended May 3, 2002 Professional(1) Residential(2) Distribution Other Total
- ---------------------------- --------------- -------------- ------------ --------- ---------
Net sales....................................................$ 465,966 $261,951 $68,373 $(48,061) $ 748,229
Intersegment gross sales..................................... 47,040 7,721 - (54,761) -
Earnings (loss) before income taxes.......................... 62,297 27,777 (351) (43,094) 46,629
Total assets................................................. 488,136 201,120 69,450 243,814 1,002,520
Six months ended May 4, 2001
- ----------------------------
Net sales....................................................$ 478,385 $244,878 $60,513 $(43,813) $ 739,963
Intersegment gross sales..................................... 45,193 5,856 - (51,049) -
Earnings (loss) before income taxes.......................... 67,556 24,873 (1,309) (41,342) 49,778
Total assets................................................. 513,934 156,698 58,458 293,838 1,022,928
(1) Includes restructuring and other expense of $10.0 million in fiscal 2002.
(2) Includes restructuring and other expense (income) of $(0.7) million in
fiscal 2001.
The following table presents the details of the other segment earnings (loss)
before income taxes:
Three Months Ended Six Months Ended
------------------------------- ----------------------------
(Dollars in thousands) May 3, May 4, May 3, May 4,
2002 2001 2002 2001
---------- ---------- ---------- ----------
Corporate expenses............................................ $(18,268) $(17,936) $(39,517) $(36,357)
Finance charge revenue........................................ 1,249 1,689 2,317 3,010
Elimination of corporate financing expense.................... 4,423 4,551 7,038 7,230
Interest expense, net......................................... (5,248) (6,437) (10,568) (11,713)
Other expense................................................. (2,907) (3,295) (2,364) (3,512)
-------- -------- -------- --------
Total......................................................... $(20,751) $(21,428) $(43,094) $(41,342)
======== ======== ======== ========
9
Goodwill
As described previously, the company adopted SFAS No. 142 as of November 1,
2001. The following table reflects the consolidated results adjusted as though
the adoption of SFAS No. 142 occurred as of the beginning of the six month
period ended May 4, 2001:
Three Months Ended Six Months Ended
----------------------------- ------------------------------
(Dollars in thousands, except per share data) May 3, May 4, May 3, May 4,
2002 2001 2002 2001
------------- ------------ -------------- -------------
Net earnings:
As reported...........................................$ 38,138 $ 30,057 $ 8,403 $ 31,360
Goodwill amortization, net of tax..................... - 2,813 - 4,256
------------- ------------ ------------- -------------
Adjusted net earnings.................................$ 38,138 $ 32,870 $ 8,403 $ 35,616
============= ============ ============= =============
Basic net earnings per share:
As reported...........................................$ 3.03 $ 2.34 $ 0.67 $ 2.45
Goodwill amortization, net of tax..................... - 0.22 - 0.33
------------- ------------ ------------- -------------
Adjusted basic net earnings per share.................$ 3.03 $ 2.56 $ 0.67 $ 2.78
============= ============ ============= =============
Diluted net earnings per share:
As reported...........................................$ 2.91 $ 2.28 $ 0.65 $ 2.38
Goodwill amortization, net of tax..................... - 0.21 - 0.32
------------- ------------ ------------- -------------
Adjusted diluted net earnings per share...............$ 2.91 $ 2.49 $ 0.65 $ 2.70
============= ============ ============= =============
The changes in the net carrying amount of goodwill for the first six months of
fiscal 2002 were as follows:
(Dollars in thousands) Professional Residential
Segment Segment Total
------------- ------------- --------------
Balance as of October 31, 2001.......................$ 94,050 $ 8,874 $ 102,924
Impairment charge ................................... (25,123) - (25,123)
Translation adjustment............................... 11 27 38
------------- ------------- --------------
Balance as of May 3, 2002............................$ 68,938 $ 8,901 $ 77,839
============= ============= ==============
Other Intangible Assets
During the first quarter of fiscal 2002, the company determined that the patents
and non-compete agreements related to the agricultural irrigation market were
impaired. This impairment charge of $2.0 million was recognized as part of
restructuring and other expense during the first quarter of fiscal 2002.
The components of other amortizable intangible assets were as follows:
May 3, 2002 October 31, 2001
-------------------------------- --------------------------------
(Dollars in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- -------------
Patents..................................................... $ 6,104 $ (4,444) $ 7,104 $ (4,501)
Non-compete agreements...................................... 800 (319) 3,183 (1,285)
Other....................................................... 800 (755) 1,197 (1,090)
---------- ---------- ------------ -----------
Total....................................................... $ 7,704 $ (5,518) $ 11,484 $ (6,876)
========== =========== ============ ===========
Total other intangible assets, net.......................... $ 2,186 $ 4,608
========== ============
Amortization expense for intangible assets during the first six months of fiscal
2002 was $0.4 million. Estimated amortization expense for the remainder of
fiscal 2002 and succeeding fiscal years are as follows ($ in thousands): 2002
(remainder), $286; 2003, $479; 2004, $357; 2005, $337; 2006, $337; 2007, $182
and beyond 2008, $208.
10
Derivative Instruments and Hedging Activities
The company uses derivative instruments to manage exposure to foreign currency.
Toro uses derivatives only in an attempt to limit underlying exposure to
currency fluctuations, and not for trading purposes. The company maintains a
record of each hedging instrument and the items it hedges, as well as the
risk-management objective and strategy for undertaking the particular hedge. The
company assesses, both at the hedge's inception and on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of the hedged item.
The company enters into foreign currency 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
comprehensive income (loss) and as a hedge asset or liability in prepaid
expenses or accrued liabilities, 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 comprehensive income (loss) into earnings. During the quarter ended
May 3, 2002, the amount of adjustments to earnings for such cash flow hedges was
immaterial. At May 3, 2002, the amount of such contracts outstanding was $9.2
million. The unrecognized after-tax loss portion of the fair value of the
contracts recorded in accumulated comprehensive income (loss) at May 3, 2002 was
immaterial.
The company enters into foreign currency 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 comprehensive income (loss) and as a hedge asset or liability in
prepaid expenses or accrued liabilities, 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 comprehensive income (loss) into earnings. During
the quarter ended May 3, 2002, the amount of adjustments to earnings for such
cash flow hedges was immaterial. At May 3, 2002, the amount of such contracts
outstanding was $3.0 million. The unrecognized after-tax loss portion of the
fair value of the contracts recorded in accumulated comprehensive income (loss)
at May 3, 2002 was immaterial.
The company also enters into foreign currency exchange contracts to hedge the
risk from forecasted settlement in local currencies of intercompany sales. Some
of these transactions and other foreign currency exchange contracts do not meet
the accounting rules established under SFAS No. 133 of recording the
unrecognized after-tax gain or loss portion of the fair value of the contracts
in accumulated comprehensive income (loss). Therefore, the related fair value of
the derivative hedge contract is recognized in earnings.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses the diverse accounting practices for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The company plans to adopt the provisions of
SFAS No. 143 during the first quarter of fiscal 2003, as required. Management
expects that the adoption of SFAS No. 143 will not have a material impact on the
company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement establishes a single accounting
model for the impairment or disposal of long-lived assets. The company plans to
adopt the provisions of SFAS No. 144 during the first quarter of fiscal 2003, as
required. Management expects that the adoption of SFAS No. 144 will not have a
material impact on the company's financial statements.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Safe Harbor Statement. This Quarterly Report on Form 10-Q contains not only
historical information, but also 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. Statements that are not historical are forward-looking and
reflect expectations about future company performance. In addition,
forward-looking statements may be made orally or in press releases, conferences,
reports, on Toro's worldwide web site, 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
include slower growth in the global and domestic economies; economic uncertainty
created by the threat of terrorist acts and war, which may result in reductions
in consumer spending, including spending for travel and golf, and heightened
security for import and export shipments of components and finished goods; the
company's customers' ability to pay amounts owed to Toro; inability to achieve
earnings growth in fiscal 2002 (excluding the effect of the change in reporting
goodwill and announced restructuring plans) above fiscal 2001; inability to
increase fiscal 2002 revenue above fiscal 2001; inability to achieve goals of
the "5 by Five" profit improvement program, which means achieving an after-tax
return on sales of five percent by fiscal 2003; 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; increased competition in the company's businesses
from competitors that have greater financial resources, including competitive
pricing pressures; financial viability of some distributors and dealers; the
company's ability to acquire, develop, and integrate new businesses and manage
alliances successfully; changes in distributor ownership; changes in
distributors', dealers', home centers', or mass retailers' purchasing practices,
especially elimination or reduction of shelf space for Toro's products; the
company's ability to cost-effectively expand existing, open new, move production
between, and close manufacturing facilities; the company's ability to manage
costs and capacity constraints at its manufacturing facilities; the company's
ability to manage inventory levels and fully realize recorded inventory value;
the impact of unexpected trends in warranty claims or unknown product defects;
the ability to retain and hire quality employees; threatened or pending
litigation on matters relating to patent infringement, employment, and
commercial disputes; the impact of new accounting standards; and the risk that
these uncertainties could affect the impact of critical accounting policies and
estimates.
Particular risks and uncertainties facing the company's professional segment at
the present include slower growth in both global and domestic economies that has
been important to the growth of the company's professional businesses, including
the golf and landscape contractor markets; management of field inventory levels;
market acceptance of new products; unforeseen product quality problems; the
degree of success related to the announced restructuring and plant
consolidations; a slower growth rate in new golf course construction or existing
golf course renovations; a slower growth rate in the number of new golfers,
which slows new golf course construction; a potential slowdown in new home
construction; a potential slowdown in the trend to outsource lawn maintenance to
landscape contractors; challenges of establishing new dealers for the Sitework
Systems product line; and the degree of success in reducing costs and management
changes in the agricultural irrigation market business.
12
Particular risks and uncertainties facing the company's residential segment at
the present time include inflationary pressures and slower economic growth; a
decline in consumer spending for higher-priced products; a decline in retail
sales; a weaker than expected market response to new products and potential
sales decline for existing product categories; unforeseen product quality
problems; degree of financial success related to the new moderate-priced walk
power mowers and related capital investments for a new production facility to
satisfy expected increase in demand for this product and the increased
dependence on The Home Depot as a customer; 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 is more dependent on home center sales; and a potential slowdown in home
sales.
Particular risks and uncertainties facing the company's international business
at the present include weak economic conditions in the European market;
heightened security for import and export shipments of components or finished
goods, including delays at border crossings, especially with Mexico; the cost of
price support provided to international customers and suppliers; internal and
external conflicts in or between foreign countries and economic recession in
countries that are markets for Toro; currency fluctuations of the dollar against
the euro, Japanese yen, Australian dollar, British pound, Canadian dollar, and
Mexican peso; and tax law changes.
Particular risks and uncertainties facing the company's distribution segment at
the present include inflationary pressures and slower economic growth; a decline
in retail sales; viability of dealers; degree of success related to operation
restructuring, including technology and facility investments in the distribution
companies; ability to capture national account business; purchasing practices of
national accounts; a slower growth rate in new golf course construction or
existing golf course renovations; successful integration of acquired
distribution companies; impact of Toro pricing on some product lines sold
through the distribution companies; ability to successfully implement a
just-in-time inventory initiative; and unforeseen product quality problems.
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; the
uncertainty of the economic effect from terrorists' actions and the war on
terrorism; weather conditions affecting demand, including warm winters and wet
or cold spring and dry summer weather; 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; imposition
of new tariffs on commodities, such as steel; availability of raw materials and
unforeseen price fluctuations for commodity 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.
13
RESULTS OF OPERATIONS
Second quarter net sales were $470.3 million compared to $459.6 million last
year, an increase of 2.3 percent. Year-to-date net sales were up slightly by 1.1
percent. Residential segment net sales, led by initial stocking and positive
reaction to the new moderate-priced line of Toro walk power mowers, contributed
to the increase. Worldwide sales for the professional segment were down for the
second quarter and year-to-date compared to last year due primarily to Toro's as
well as customers' efforts to reduce field inventory levels. Distribution
segment sales were higher than last year due to the addition of revenues of a
distribution company acquired in the second half of fiscal 2001, which also
contributed to the unfavorable change in the other segment due to the sales
elimination increase. International sales were up for the second quarter due in
part to stronger than expected demand in the Asian golf market during the second
quarter. However, international net sales are down for the year due to economic
uncertainties in foreign markets. Disregarding currency effects, international
sales were up 4.0 percent for the second quarter and down slightly year-to-date
by 0.9 percent.
The following table summarizes net sales by segment:
Three Months Ended
-------------------------------------------------------------------
(Dollars in thousands) May 3, May 4,
2002 2001 $ Change % Change
------------- ------------- -------------- -------------
Professional................................................$ 290,201 $ 294,771 $ (4,570) (1.6)%
Residential................................................. 169,735 155,551 14,184 9.1
Distribution................................................ 44,144 42,281 1,863 4.4
Other....................................................... (33,766) (32,990) (776) (2.4)
------------- ------------- --------------
Total *.................................................$ 470,314 $ 459,613 $ 10,701 2.3%
============= ============= ==============
* Includes international net sales of:......................$ 86,279 $ 83,651 $ 2,628 3.1%
============= ============= ==============
Six Months Ended
--------------------------------------------------------------------
(Dollars in thousands) May 3, May 4,
2002 2001 $ Change % Change
------------- ------------- -------------- -------------
Professional................................................$ 465,966 $ 478,385 $ (12,419) (2.6)%
Residential................................................. 261,951 244,878 17,073 7.0
Distribution................................................ 68,373 60,513 7,860 13.0
Other....................................................... (48,061) (43,813) (4,248) (9.7)
------------- ------------- --------------
Total *.................................................$ 748,229 $ 739,963 $ 8,266 1.1%
============= ============= ==============
* Includes international net sales of:......................$ 149,374 $ 152,384 $ (3,010) (2.0)%
============= ============= ==============
Second quarter net earnings for fiscal 2002 were $36.4 million before a one-time
tax refund of $1.8 million compared to $32.9 million in the second quarter of
fiscal 2001, which excludes goodwill amortization. This increase of 10.6 percent
was due primarily to higher sales, an improvement in gross profit margins, lower
interest expense, and an increase in other income, net, somewhat offset by an
increase in warranty expense. Year-to-date net earnings in fiscal 2002 were $8.4
million, which includes a cumulative effect of change in accounting principle of
$24.6 million for the goodwill write-off related to the adoption of SFAS No. 142
as well as restructuring and other expense of $10.0 million and a one-time tax
refund of $1.8 million. Dilutive net earnings per share before cumulative effect
of change in accounting principle, restructuring and other expense (income), a
one-time tax refund and excluding goodwill amortization for the first six months
of fiscal 2001, were $2.93 in the first six months of fiscal 2002 compared to
$2.67 in the first six months of fiscal 2001, an increase of 9.7 percent. The
increase was due to the same reasons as in the quarter comparison.
14
The following table summarizes the changes in net earnings and dilutive earnings
per share data, net of tax effect:
Three Months Ended
------------------------------------------------------------------------
May 3, 2002 May 4, 2001
---------------------------------- ---------------------------------
Dollars Dilutive per Dollars Dilutive per
(in thousands) Common Share (in thousands) Common Share
------------- ------------ -------------- ------------
Net earnings..................................................$ 38,138 $ 2.91 $ 30,057 $ 2.28
Add (subtract):
Goodwill amortization expense............................... - - 2,813 0.21
One-time tax refund......................................... (1,775) (0.13) - -
---------- -------- -------- ----------
Adjusted earnings before goodwill amortization expense
and one-time tax refund ....................................$ 36,363 $ 2.78 $ 32,870 $ 2.49
========== ======== ======== ==========
Six Months Ended
------------------------------------------------------------------------
May 3, 2002 May 4, 2001
--------------------------------- ---------------------------------
Dollars Dilutive per Dollars Dilutive per
(in thousands) Common Share (in thousands) Common Share
-------------- ------------ -------------- ------------
Net earnings..................................................$ 8,403 $ 0.65 $ 31,360 $ 2.38
Add (subtract):
Cumulative effect of change in accounting principle......... 24,614 1.91 - -
Restructuring and other expense (income).................... 6,668 0.51 (447) (0.03)
Goodwill amortization expense............................... - - 4,256 0.32
One-time tax refund......................................... (1,775) (0.14) - -
---------- -------- -------- --------
Adjusted earnings before cumulative effect of change in
accounting principle, restructuring and other expense
(income), goodwill amortization expense, and one-time tax
refund......................................................$ 37,910 $ 2.93 $ 35,169 $ 2.67
========== ========= ======== =========
Professional Segment Net Sales
Net sales for the worldwide professional segment in the second quarter of fiscal
2002 were down 1.6 percent compared to the second quarter of fiscal 2001. A
decline in shipments of landscape contractor mowing equipment led this decrease
as a result of Toro's as well as customers' efforts to reduce field inventory
levels and the late spring weather. Sitework Systems shipments were also down
compared to the second quarter of last year due to transitioning to new dealers
in key markets. Worldwide agricultural irrigation sales also declined in the
second quarter compared to 2001 due to lower demand for drip line products.
However, commercial equipment and irrigation product sales were up compared to
last year's second quarter due to lower field inventory levels entering fiscal
2002 as well as the successful introduction of new products. International sales
were also up for the second quarter comparison by 4.3 percent due in part to
stronger than expected demand in the Asian golf market.
Net sales for the worldwide professional segment in the first six months of
fiscal 2002 were down 2.6 percent compared to the first six months of fiscal
2001. The decline in shipments of landscape contractor mowing equipment led this
decrease due to the same factors mentioned in the quarter comparison above.
Commercial equipment sales were up slightly for the year, and irrigation product
sales also increased compared to last year mainly due to lower field inventory
levels entering fiscal 2002. Sitework Systems and agricultural irrigation
product sales were also slightly up for the year-to-date comparison.
15
Residential Segment Net Sales
Net sales for the worldwide residential segment in the second quarter of fiscal
2002 increased 9.1 percent compared to the second quarter of fiscal 2001. Walk
power mower shipments led this increase due to initial stocking and positive
reaction to the new moderate-priced line of Toro walk power mowers sold at The
Home Depot and through the Toro dealer network. Sales of retail irrigation
products were also higher compared to the second quarter of fiscal 2001 due to
additional regional placement with a key customer. Offsetting those increases to
some degree were lower worldwide shipments of riding products due to continued
weak economic conditions that has resulted in lower sales of higher-priced
products. In addition, the comparison with last year is more difficult because
of initial stocking shipments in 2001 for new riding products, such as the Toro
Timecutter(TM) Z mower and the Toro Twister(TM) utility vehicle. Sales of
electric blowers and trimmers were also down due to the cold spring weather,
field inventory reduction efforts by Toro's customers, and a decline in
shipments to a mass customer as a result of credit line restrictions. Lawn-Boy
walk power mower shipments also declined due to lost placement for the 4 cycle
engine models as well as a shift in consumer spending to the new moderate-priced
line of Toro walk power mowers.
Net sales for the worldwide residential segment in the first six months of
fiscal 2002 increased 7.0 percent compared to the first six months of fiscal
2001. The increase was due to the same contributing factors mentioned in the
above quarter comparison, except that sales of electric blowers were up for the
year-to-date comparison due to warm fall weather that extended the selling
season into the first quarter of fiscal 2002 and higher snowthrower shipments
due to low field inventory levels entering the 2001/2002 winter season.
International sales were down compared to last year due to high field inventory
levels of walk power mowers and riding products, somewhat offset by increased
sales of retail irrigation products in Australia due to favorable weather
conditions.
Distribution Segment Net Sales
Net sales for the distribution segment in the second quarter of fiscal 2002
increased 4.4 percent compared to the second quarter of fiscal 2001. The
increase was due to the addition of sales from a distribution company acquired
in the third quarter of fiscal 2001. This increase was partially offset by lower
sales at two company-owned distributors located in the midwest and southern
United States regions as a result of unfavorable weather conditions that have
negatively affected shipments to the golf market.
Net sales for the distribution segment in the first six months of fiscal 2002
increased 13.0 percent compared to the first six months of fiscal 2001. The
change was due to the same contributing factors mentioned in the quarter
comparison above.
Other Segment Net Sales
Net sales for the other segment includes the elimination of sales from the
professional and residential segments to the distribution segment, and
elimination of the professional and residential segments' floor plan interest
costs from the Toro Credit Company. The other segment net sales elimination in
the second quarter of fiscal 2002 increased 2.4 percent compared to the second
quarter of fiscal 2001. This increase was mainly due to the additional sales
elimination for a distribution company acquired in the third quarter of fiscal
2001.
Year-to-date net sales elimination for the other segment in fiscal 2002
increased 9.7 percent compared to last year. This increase was mainly due to the
additional sales elimination for a distribution company acquired in the third
quarter of fiscal 2001.
Gross Profit
Second quarter gross profit in fiscal 2002 was up 3.2 percent compared to the
second quarter of fiscal 2001. As a percentage of net sales, gross profit in the
second quarter of fiscal 2002 was 34.5 percent compared to 34.2 percent in the
second quarter of fiscal 2001. This increase was due to cost reduction efforts,
lower resin costs for irrigation products, as well as positive results from
lower material costs as part of the company's "5 by Five" program initiatives.
International gross profit also improved due to lower currency support costs in
fiscal 2002 compared to fiscal 2001. Somewhat offsetting those positive factors
were higher manufacturing costs due to lower plant utilization.
Year-to-date gross profit was up 3.6 percent compared to last year. As a
percentage of net sales, year-to-date gross profit in fiscal 2002 was 34.4
percent compared to 33.6 percent last year. This improvement was the result of
the same reasons mentioned in the above quarter comparison.
16
Selling, General, and Administrative Expense
Second quarter selling, general, and administrative expense (SG&A) increased 2.8
percent compared to the second quarter of fiscal 2001. SG&A for the second
quarter of fiscal 2001 included goodwill amortization expense of $2.1 million,
which is not reflected in SG&A costs in fiscal 2002 due to the adoption of SFAS
No. 142 described previously. Excluding goodwill amortization expense for the
second quarter of fiscal 2001, SG&A as a percentage of net sales was 22.2
percent in the second quarter of fiscal 2002 compared to 21.6 percent in the
second quarter of fiscal 2001. SG&A costs were up mainly due to higher warranty
expense related to special reserves for known product modifications for both
professional and residential segment products. The acquisition of a distribution
company in the third quarter of fiscal 2001 also added approximately $1.3
million of incremental SG&A expense.
Year-to-date SG&A expense increased 2.2 percent compared to last year. SG&A for
fiscal 2001 included goodwill amortization expense of $4.2 million, which is not
reflected in SG&A costs in fiscal 2002 due to the adoption of SFAS No. 142
described previously. Excluding goodwill amortization expense for fiscal 2001,
SG&A as a percentage of net sales was 25.8 percent in the first six months of
fiscal 2002 compared to 25.0 percent in the first six months of fiscal 2001. The
increase was due to the same contributing factors mentioned in the above quarter
comparison plus higher bad debt expense due to collection uncertainty for some
customers and increased incentive compensation expense. The acquisition of a
distribution company in the third quarter of fiscal 2001 also added
approximately $2.7 million of incremental SG&A expense in the first six months
of fiscal 2002.
Restructuring and Other Expense (Income)
Year-to-date restructuring and other expense for fiscal 2002 was $10.0 million.
In the first quarter of fiscal 2002, the company announced plans to close its
Evansville, Indiana and Riverside, California manufacturing facilities during
fiscal 2002. These actions are part of Toro's overall long-term strategy to
reduce production costs and improve long-term competitiveness. The closure of
these facilities resulted in a pre-tax restructuring and other expense charge of
$8.0 million. In the first quarter of fiscal 2002, the company also incurred a
$2.0 million charge for asset impairment related to write-offs of patents and
non-compete agreements in the agricultural irrigation business. Toro also
evaluated the recoverability of some acquired intangible assets and determined
the acquired patents and non-compete agreements in the agricultural irrigation
business had no future value due to changes in this business. During the first
quarter of fiscal 2001, the company had restructuring and other unusual income
of $0.7 million. This income related to the reversal of an accrual remaining for
closing of the Sardis, Mississippi facility, which was sold during the first
quarter of fiscal 2001.
Interest Expense
Second quarter interest expense in fiscal 2002 declined 18.5 percent compared to
the second quarter of fiscal 2001. This decrease was primarily due to lower
levels of short-term debt as a result of using prior years' earnings to pay down
debt as well as lower interest rates.
Year-to-date interest expense in fiscal 2002 declined 9.8 percent compared to
last year. This decrease in interest expense for the year was due to the same
contributing factors as in the quarter comparison.
Other Income (Expense), Net
Second quarter other income, net, in fiscal 2002 was $1.7 million compared to
other expense, net of $1.4 million in the second quarter of fiscal 2001, a
favorable change of $3.1 million. This favorable variance was due to lower
currency exchange rate losses and lower write-downs of investments, somewhat
offset by a decline in finance charge revenue.
Year-to-date other income, net, was $3.1 million compared to $1.5 million last
year, a favorable change of $1.6 million. This favorable variance was due to the
same reasons mentioned in the above quarter comparison.
17
Operating Earnings (Loss) by Segment
Operating earnings (loss) by segment is defined as earnings (loss) from
operations plus other income (expense), net for the professional, residential,
and distribution segments. The other segment operating loss consists of
corporate activities, including corporate financing activities, other income,
net, and interest expense.
Professional Segment Operating Earnings
Operating earnings for the worldwide professional segment in the second quarter
of fiscal 2002 were $53.2 million compared to $49.5 million last year, an
increase of 7.5 percent. As a percentage of net sales, second quarter fiscal
2002 operating earnings were 18.3 percent compared to 16.8 percent in last
year's comparable quarter. Gross margin as a percentage of net sales rose 1.8
percent, mainly from cost reduction efforts, lower resin costs for irrigation
products, as well as positive results from lower material costs as part of the
company's "5 by Five" program initiatives, somewhat offset by higher
manufacturing costs due to lower plant utilization. SG&A costs as a percent of
professional segment sales were higher by 0.6 percent due to increased warranty
expense, partially offset by lower costs related to the exclusion of goodwill
amortization expense in the second quarter of fiscal 2002. Other income, net for
the professional segment was also higher contributing to the profit improvement
due to lower write-off of investments and currency exchange rate losses.
Year-to-date operating earnings before restructuring and other expense for the
worldwide professional segment in fiscal 2002 was $72.3 million compared to
$67.6 million last year, an increase of 6.9 percent. As a percentage of net
sales, professional segment operating margins increased to 15.5 percent from
14.1 percent last year. The reasons for the increase are the same as in the
quarter comparison.
Residential Segment Operating Earnings
Operating earnings for the worldwide residential segment in the second quarter
of fiscal 2002 were $20.1 million compared to $18.4 million in the second
quarter of fiscal 2001, an increase of 9.2 percent. As a percentage of net
sales, residential segment operating margins were even with the prior year's
comparable quarter at 11.8 percent. Gross margin fell 1.3 percent as a
percentage of net sales due to lower margins for the new moderate-priced line of
walk power mowers and higher manufacturing costs, partially offset by lower
costs for currency support in fiscal 2002 compared to fiscal 2001. SG&A costs
were lower by 0.9 percent as a percentage of residential segment sales due to
leveraging fixed SG&A costs over higher sales volumes, somewhat offset by higher
warranty expense. Other income, net for the residential segment was also higher
due to lower currency exchange rate losses.
Year-to-date operating earnings before restructuring and other income for the
worldwide residential segment in fiscal 2002 was $27.8 million compared to $24.2
million last year, an increase of 14.8 percent. As a percentage of net sales,
residential segment operating margins increased to 10.6 percent from 9.9 percent
last year. The reasons for the increase are the same as in the quarter
comparison.
Distribution Segment Operating Earnings (Loss)
Operating earnings for the distribution segment in the second quarter of fiscal
2002 were $1.7 million compared to $1.3 million for the second quarter of fiscal
2001. The 36.6 percent improvement was mainly due to operating improvement at
one of the company-owned distributorships.
Year-to-date operating losses for the distribution segment in fiscal 2002 were
$0.4 million compared to $1.3 million last year. The $0.9 million improvement
was mainly due to operating improvement at one of the company-owned
distributorships.
18
Other Segment Operating Losses
Operating losses for the other segment in the second quarter of fiscal 2002 were
$20.8 million compared to losses of $21.4 million in the second quarter of
fiscal 2001, a favorable change of 3.2 percent. This improvement was due to
lower interest expense and an increase in other income, net related to lower
write-off of investments and currency exchange rate losses.
Year-to-date operating losses for the other segment in fiscal 2002 were $43.1
million compared to losses of $41.3 million in fiscal 2001, an unfavorable
change of 4.2 percent. This loss increase was due to higher bad debt expense and
incentive compensation costs, slightly offset by lower interest expense.
Provision for Income Taxes
The effective tax rate in the second quarter and six months of fiscal 2002 was
33.0 percent compared to 37.0 percent in the second quarter and first six months
of fiscal 2001 before a one-time federal tax refund of $1.8 million. The
decrease was mainly due to the adoption of SFAS No. 142 that eliminated goodwill
amortization expense beginning in the first quarter of fiscal 2002, of which
most was not deductible for tax purposes. The tax rate also decreased due to
increased benefits from foreign tax strategies related to Toro's foreign sales
corporation. In the second quarter of fiscal 2002, Toro received a one-time
federal tax refund related to the company's foreign sales corporation for prior
fiscal years.
Cumulative Effect of Change in Accounting Principle
In connection with the adoption of SFAS No. 142, the company performed an
evaluation of goodwill as of November 1, 2001. The results of the evaluation
indicated that goodwill related to the agricultural irrigation reporting unit
was impaired. The performance of this reporting unit had not met management's
original expectations, mainly due to lower than anticipated growth rates in the
drip line market. This resulted in lower industry-wide pricing and margins on
product sales. The company measured the amount of impairment based on a
comparison of the fair value to its carrying value. Accordingly, the company
recognized a $24.6 million non-cash charge, net of income tax benefit of $0.5
million, as a cumulative effect of change in accounting principle for the
write-off of goodwill for the agricultural irrigation reporting unit. The
results of this unit are reflected in the professional segment of the company.
The company is still committed to the agricultural irrigation business and
expects the performance of this business to improve over the next few years as a
result of cost reduction efforts and strengthened management. The company is
still committed to this business.
Financial Position as of May 3, 2002
May 3, 2002 compared to May 4, 2001
Total assets at May 3, 2002 were $1,002.5 million compared to $1,022.9 million
on May 4, 2001, a decrease of $20.4 million. Net accounts receivable increased
by $5.1 million or 1.1 percent, which is approximately equivalent to the
year-to-date sales increase. Inventory decreased $4.1 million or 1.7 percent.
The addition of a new distribution company acquired in the third quarter of
fiscal 2001 added $4.8 million of incremental net inventory. The inventory
decrease was mainly due to improved asset management and reduced production for
some professional segment products. Net property, plant, and equipment increased
$13.0 million due to higher amounts of capital additions in comparison to
depreciation expense, mainly for plant expansion in Mexico and at the Beatrice,
Nebraska facility. Goodwill and other intangible assets decreased $29.6 million
mainly due to the goodwill and other intangible asset write-offs for the
agricultural irrigation business as part of the adoption of SFAS No. 142. In
addition, amortization expense of goodwill and other intangible assets in fiscal
2001 also contributed to the decrease in goodwill and other intangible assets.
Total current liabilities at May 3, 2002 were $458.5 million compared to $482.7
million at May 4, 2001, a decrease of 5.0 percent. Short-term debt decreased by
$48.0 million mainly due to using prior years' earnings to pay down short-term
debt as well as higher levels of accounts payable. Accounts payable increased by
$13.0 million due to the company's efforts to extend its payment terms. Accrued
liabilities decreased by $5.5 million mainly due to a decrease in income tax and
marketing accruals.
19
Financial Position as of May 3, 2002 (continued)
May 3, 2002 compared to October 31, 2001
Total assets at May 3, 2002 were $1,002.5 million compared to $835.7 million at
October 31, 2001, an increase of $166.8 million. Net accounts receivable
increased $192.2 million from October 31, 2001 due to the seasonal increase in
accounts receivable, which historically occurs between January and April.
Inventory slightly increased by $0.7 million. Net property, plant, and equipment
increased $8.3 million due to higher amounts of capital additions in comparison
to depreciation expense mainly for plant expansion in Mexico and at the
Beatrice, Nebraska facility. Goodwill and other intangible assets decreased
$27.5 million mainly due to the goodwill and other intangible asset write-offs
for the agricultural irrigation business as previously discussed.
Total current liabilities at May 3, 2002 were $458.5 million compared to $292.6
million at October 31, 2001, an increase of $166.0 million. This increase was
the result of additional short-term debt of $95.8 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 by $12.6 million due to the company's efforts
to extend its payment terms. Accrued liabilities also increased by $41.8 million
due mainly to higher accruals for warranty, income tax, and restructuring and
other expense as well as higher accruals for various seasonal sales and
marketing programs, which are at their peak during the spring selling season.
Critical Accounting Estimates
The Securities and Exchange Commission (SEC) recently issued proposed guidance
for disclosure of critical accounting policies. The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. The company plans to adopt the disclosure
requirements regarding critical accounting policies once the final rules are
required to be adopted.
Toro's significant accounting policies are described in Note 1 to the
consolidated financial statements in the company's Annual Report on Form 10-K.
Not all of these significant accounting policies require management to make
difficult subjective or complex judgments or estimates. However, management
believes the following accounting policies, which require more significant
judgments and estimates used in the preparation of our consolidated financial
statements, could be deemed to be critical within the SEC definition.
Accounts and Notes Receivable Valuation
The company establishes a reserve for specific accounts and notes receivables
that are believed to be uncollectable as well as an estimate of uncollectable
receivables. The company evaluates past collection history, current financial
conditions of key customers, and economic conditions when establishing an
allowance for doubtful accounts every quarter. Portions of the accounts
receivable are supported by a security interest in product held by customers,
which minimizes Toro's collection exposure. A deterioration in the financial
condition of any key customer or a significant continued slow down in the
economy could have a material negative impact on the company's ability to
collect a portion of the accounts and notes receivable. Management believes it
has properly reserved for potential uncollectable receivables at May 3, 2002.
Inventory Valuation
The company establishes a reserve for excess and obsolete inventory. The reserve
is based on a review of the expected selling price of inventory each quarter.
Toro's inventory is not exposed to rapid technological changes. However,
valuation of inventory can be affected by significant redesign of existing
products. The company has programs in place that it believes can facilitate
sales of products that will be significantly redesigned for the next model year.
The company manufactures products in advance of the selling season. As a result,
Toro could have higher than planned inventory levels if demand declines
significantly from anticipated levels. The majority of the company's products do
not change from year to year, so that excess inventory from one year is usually
sold for at least cost in the next fiscal year. Management believes it has
established an adequate reserve for excess and obsolete inventory as of May 3,
2002.
20
Critical Accounting Estimates (continued)
Warranty Reserves
The company establishes a reserve for future warranty claims at the time of sale
based on historical claims experience by product line. The company also
establishes reserves for special rework campaigns for known major product
modifications. In general, warranties tend to be for six months to ten years,
and cover all parts and labor for non-maintenance repairs and wear items,
provided operator abuse, improper use, or negligence did not necessitate the
repair. Actual claims could be materially higher than the reserve accrued at the
time of sale due both to the long warranty period offered by the company and to
the possibility that actual claims could be higher than the reserve if a
significant manufacturing or design defect is not discovered until after the
product is delivered to customers.
Management believes that analysis of historical trends and knowledge of
potential manufacturing or design problems provides sufficient information to
establish an estimate for warranty claims at the time of sale. Management
believes it has sufficiently reserved for future warranty claims as of May 3,
2002.
Liquidity and Capital Resources
Cash used in operating activities for the first six months of fiscal 2002 was
$39.6 million, or 31.1 percent lower than the first six months in fiscal 2001,
primarily due to a slower rate of increase in working capital, mainly for
inventory, as compared to the prior year's comparable period. Cash used in
investing activities was higher by $2.5 million, or 11.7 percent when compared
with the first six months of fiscal 2001, during which the company paid $6.2
million, net of cash acquired for Goossen Industries, Inc. Higher levels of
purchases of property, plant, and equipment and other assets in the first six
months of fiscal 2002 compared to the same time period in fiscal 2001 also
contributed to the increase. Cash provided by financing activities was lower by
$50.8 million because the company borrowed less short-term debt during the first
six months of fiscal 2002 compared to the first six months of fiscal 2001. In
addition, Toro was able to use cash on hand at October 31, 2001, which was
higher compared to cash on hand at October 31, 2000, for operating and investing
activities in the first quarter of fiscal 2002.
The company entered into new agreements (Working Capital Agreements) with its
banks during February 2002 to fund its seasonal working capital requirements.
The Working Capital Agreements provide $250.0 million of committed unsecured
bank credit lines. Under these Working Capital Agreements, the company can also
borrow in currencies other than U.S. dollars. Interest expense on these credit
lines is based on LIBOR plus a basis point spread defined in the Working Capital
Agreements, which increased in the new agreements. However, the company
anticipates lower interest expense in fiscal 2002 compared to fiscal 2001 due to
lower average LIBOR rates and lower average borrowing levels. The company's
non-U.S. operations and a domestic subsidiary also maintain unsecured short-term
lines of credit of approximately $10 million. These facilities bear interest at
various rates depending on the rates in their respective countries of operation.
The company also has a letter of credit subfacility as part of the above Working
Capital Agreements. The company's business is seasonal, with peak borrowing
under the agreements described above generally occurring between February and
May each year. Significant financial covenants in the Working Capital Agreements
relate to interest coverage and debt to total capitalization ratios. The company
was in compliance with all covenants related to the Working Capital Agreements
at May 3, 2002. If the company was out of compliance with any debt covenant
required by the Working Capital Agreements, the banks could terminate their
commitments unless Toro could negotiate a covenant waiver from the banks. In
addition, the company's long-term public notes and debentures could become due
and payable if the company was unable to obtain a covenant waiver or refinance
its short-term debt under its Working Capital Agreements. If the company's
credit rating falls below investment grade, the interest rate it currently pays
on outstanding debt on the Working Capital Agreements would rise, but the credit
commitments could not be cancelled by the banks based only on a ratings
downgrade.
Management believes that the combination of funds available through its existing
Working Capital Agreements, 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 next twelve
months.
21
Contractual Obligations and Commercial Commitments
The following information is presented as of October 31, 2001, and there has
been no material change in this information.
(Dollars in thousands) Due in Fiscal
----------------------------------------------------------------------------------------------
Obligation 2002 2003 2004 2005 2006 After 2006 Total
- ---------- ---------- ---------- ---------- --------- ---------- ---------- ----------
Long-term debt........................$ 513 $ 15,830 $ 44 $ 45 $ 46 $ 178,600 $ 195,078
Capital lease obligation.............. 92 - - - - - 92
Operating leases...................... 9,523 7,220 5,075 3,676 2,527 5,761 33,782
---------- ---------- ---------- --------- ---------- ---------- ----------
Total cash obligations................$ 10,128 $ 23,050 $ 5,119 $ 3,721 $ 2,573 $ 184,361 $ 228,952
========== ========== ========== ========= ========== ========== ==========
The company also has approximately $20 million in outstanding letters of credit
at any given time as required by certain vendor contracts. The company also has
guaranteed debts incurred by business partners, aggregating $1.4 million as of
May 3, 2002.
Customer Financing
Wholesale Financing
Toro Credit Company (TCC), a wholly owned finance subsidiary of the company,
provides financing for selected products manufactured by Toro to Toro's North
American distributors and approximately 250 domestic dealers. Independent Toro
and Exmark distributors and dealers that do not finance through TCC generally
finance their inventories with third party financing companies.
TCC and other third party finance companies purchase selected receivables from
Toro and its distributors and dealers for extended periods, which enables those
customers to carry representative inventories of equipment. Down payments are
not required and, depending on the finance program for each product line,
finance charges are either incurred by Toro, shared between Toro and the
distributor or dealer, or paid by the distributor or dealer. A security interest
is retained in the distributors' and dealers' inventories, and periodic physical
checks are made of those inventories. Under the terms of the sales to
distributors and dealers, finance charges are charged to distributors and
dealers on outstanding balances, from the earlier of the date when product is
sold to a customer, or the expiration of company-supported finance terms granted
at the time of sale to the distributor or dealer, until payment is received by
the third party finance company. Rates are generally fixed or based on prime
rate plus a fixed percentage depending on whether the financing is for a
distributor or dealer. Rates may also vary based on the product that is
financed. Distributors and dealers cannot cancel purchases after goods are
shipped and are responsible for payment even if the equipment is not sold to
retail customers.
Third party financing companies purchased $359.9 million of domestic receivables
of Toro financed products during the last twelve months. The outstanding
receivable balance owed from the company's domestic distributors and dealers to
third party financing companies was $165.2 million at May 3, 2002. The company
also enters into limited inventory repurchase agreements with third party
financing companies. At May 3, 2002, the company was contingently liable to
repurchase up to $3.7 million of inventory related to receivables under these
financing arrangements. The company has repurchased only immaterial amounts of
inventory from third party financing companies over the past few years. However,
an adverse change in retail sales could cause this situation to change and
thereby require Toro to repurchase financed product.
In the normal course of business, the company's international operations have
arrangements with other third party finance companies to provide wholesale
financing services. None of these arrangements has any material financial
involvement required by the company.
22
Customer Financing (continued)
End-User Financing
During February 2002, the company entered into an agreement with a third party
financing company to provide lease financing options to domestic golf course and
some grounds equipment customers. The purpose of the agreement is a sales and
marketing tool to give end-users of the company's products alternative financing
options when purchasing Toro product. Under the terms of this agreement, the
company could be contingently liable for a portion of the credit collection and
residual realization risk on the underlying equipment for leasing transactions
financed under this program. Under a provision of this agreement, if Toro
maintains an investment grade credit rating, the company is not required to
provide any collateral. If the company's credit rating falls below investment
grade, Toro would be required to provide collateral in the form of a letter of
credit, up to $5.0 million.
In the normal course of business, Toro has arrangements with other financial
institutions to provide various forms of financing options to end customers.
None of these other arrangements has any material financial involvement required
by the company.
Distributor Financing
The company enters into long-term loan and equity investment agreements with
some distribution partners. These transactions are used for expansion of the
distribution partners' businesses, acquisitions, refinancing working capital
agreements, or ownership changes. As of May 3, 2002, Toro had borrowed and/or
invested $7.5 million in some distribution companies, which is included in other
long-term assets on the consolidated balance sheet.
Inflation
The company is subject to the effects of inflation and changing prices. In
management's opinion, changes in net sales and net earnings that have resulted
from inflation and changing prices have not been material during the periods
presented. However, there is no assurance that inflation will not materially
affect the company in the future.
Outlook
The company anticipates sales growth in the second half of fiscal 2002 for the
professional segment as Toro introduces new products and programs, including new
financing solutions for golf courses, municipalities, and sports fields to
acquire irrigation systems and maintenance equipment. However, sales in the
landscape contractor market are anticipated to be lower than projected in fiscal
2002 due to the sales shortfall in the first six months of fiscal 2002 that is
not expected to be fully recovered in the remaining second half of the year due
to field inventory management efforts. Management expects sales growth in fiscal
2002 for the residential segment to be driven primarily by the new line of
moderate-priced Toro brand walk power mowers sold at The Home Depot and Toro
dealer networks. In addition, continued benefits from "5 by Five" programs are
also expected to improve fiscal 2002 earnings. Management expects sales growth
in the single digits in fiscal 2002 over fiscal 2001, and double digit earnings
growth in fiscal 2002 over fiscal 2001, before cumulative effect of accounting
change, restructuring and other expense and exclusion of goodwill amortization,
while keeping a cautionary eye on the weather and world economies.
23
Quantitative and Qualitative Disclosures about Market Risk
Toro is exposed to market risk stemming from changes in foreign currency
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 Currency Exchange Rate Risk
The company is exposed to foreign currency exchange rate risk arising from
transactions in the normal course of business. Toro is subject to risk from
sales and loans to wholly owned subsidiaries as well as sales to third party
customers, purchases from suppliers, and bank lines of credit with creditors
denominated in foreign currencies. The company manages foreign currency exchange
rate exposure from anticipated sales, accounts receivable, intercompany loans,
anticipated purchases, and credit obligations through the use of naturally
occurring offsetting positions (borrowing in local currency) and foreign
currency exchange contracts. Foreign currency exchange contracts to hedge
forecasted transactions are designated as cash flow hedges with the fair value
recorded in accumulated 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 comprehensive income (loss) into earnings. The related amounts
payable to, or receivable from, the contract counter parties are included in
accrued liabilities or prepaid expenses and other current assets.
The following foreign currency exchange contracts held by the company have
maturity dates in fiscal 2002. 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 No. 133, therefore, the fair value impact is recorded
in other income, net. The average contracted rate, notional amount, value of
derivative instrument in accumulated comprehensive income (loss), and fair value
of derivative instrument in other income, net at May 3, 2002 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 .5188 $ 7,235.6 $ (27.5) $ (161.0)
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy US dollar/Sell Canadian dollar 1.5661 4,054.6 (5.4) (3.5)
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy US dollar/Sell Euro .8961 2,778.0 (6.1) (4.3)
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy Australian dollar/Sell US dollar .5150 2,475.9 (0.6) 101.2
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy British pound/Sell US dollar 1.3745 137.5 - 8.9
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy Canadian dollar/Sell US dollar .6413 192.4 - (0.3)
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy Euro/Sell US dollar .8834 5,565.3 24.1 86.9
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy Japanese yen/Sell US dollar 120.8032 3,600.9 (154.4) (39.8)
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy Mexican peso/Sell US dollar 9.9114 4,288.0 - 174.9
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy Swiss franc/Sell US dollar 1.7035 797.2 49.3 -
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
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
Some raw materials used in the company's products are exposed to commodity price
changes. Toro manages some of this risk by using long-term agreements with some
vendors. The primary commodity price exposures are with aluminum, steel, and
plastic resin.
24
Related Party Transactions
The company has entered into related party transactions. Toro sells product to a
distribution company that is owned in part by an executive officer of Toro. This
executive officer is currently on temporary assignment at Toro and will return
to the distributorship upon completion of his assignment. In addition, Toro also
sells products to companies whose executive officers are members of Toro's Board
of Directors. The company believes the transactions described above between Toro
and related parties are at arms-length and not material to the consolidated
financial results of the company.
25
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on March 14, 2002.
(b) The results of the stockholder votes were as follows:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
1. Election of Directors
Ronald O. Baukol 9,726,173 1,323,938 0 0
Katherine J. Harless 10,306,567 743,543 0 0
Dale R. Olseth 10,002,933 1,047,177 0 0
2. Approval of amendment of The Toro Company
Annual Management Incentive Plan II. 10,020,593 886,465 143,053 0
3. Approval of amendment of The Toro Company
Performance Share Plan. 7,992,445 1,884,578 108,919 1,064,168
4. Approval of amendment of The Toro Company 2000 Stock
Option Plan. 8,211,184 1,673,968 100,791 1,064,168
5. Approval of Selection of Independent
Auditors for Fiscal 2002. 10,781,203 209,760 59,146 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3(i) and 4(a) Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3(i) and 4(a) to
Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 2001).
3(ii) and 4(b) 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 August 3, 2001).
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).*
26
10(c) The Toro Company Annual Management Incentive Plan II for officers of Registrant (incorporated by reference
to the appendix to Registrant's Proxy Statement on Form DEF 14A for the fiscal year ended October 31,
2001).*
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 the appendix to Registrant's Proxy
Statement on Form DEF 14A for the fiscal year ended October 31, 2001).*
10(g) The Toro Company 2000 Stock Option Plan (incorporated by reference to the appendix to Registrant's Proxy
Statement on Form DEF 14A for the fiscal year ended October 31, 2001).*
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 April 28, 2000).*
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) The Toro Company 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).*
10(m) The Toro Company 2000 Directors Stock Plan (incorporated by reference to Exhibit 10(m) 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.
27
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: June 17, 2002
28