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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 August 3, 2001
Commission File Number 1-8649
THE TORO COMPANY
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(Exact name of registrant as specified in its charter)
DELAWARE 41-0580470
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(State of Incorporation) (I.R.S. Employer Identification Number)
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420
TELEPHONE NUMBER: (952) 888-8801
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(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The number of shares of Common Stock outstanding as of August 31, 2001 was
12,496,603.
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THE TORO COMPANY
INDEX TO FORM 10-Q
Page Number
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PART I. FINANCIAL INFORMATION:
ITEM 1. Condensed Consolidated Statements of Earnings (Unaudited) -
Three and Nine Months Ended August 3, 2001 and July 28, 2000............... 3
Condensed Consolidated Balance Sheets (Unaudited) -
August 3, 2001, July 28, 2000 and October 31, 2000......................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended August 3, 2001 and July 28, 2000......................... 5
Notes to Condensed Consolidated Financial Statements (Unaudited)............. 6-10
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................................... 11-20
PART II. OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K............................................. 21-22
Signatures................................................................... 23
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PART I. ITEM 1. FINANCIAL INFORMATION
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
------------------------------- -----------------------------
August 3, July 28, August 3, July 28,
2001 2000 2001 2000
------------- --------------- ------------- -------------
Net sales........................................$ 329,811 $ 345,166 $ 1,076,813 $ 1,067,204
Cost of sales.................................... 203,599 211,879 679,468 672,029
------------- -------------- ------------- -------------
Gross profit............................... 126,212 133,287 397,345 395,175
Selling, general, and administrative expenses.... 96,221 101,867 308,006 304,585
Restructuring and other unusual income........... -- -- (679) --
------------- -------------- ------------- -------------
Earnings from operations................... 29,991 31,420 90,018 90,590
Interest expense................................. (6,177) (7,651) (17,890) (21,060)
Other income, net................................ 3,062 2,329 4,526 748
------------- -------------- ------------- -------------
Earnings before income taxes............... 26,876 26,098 76,654 70,278
Provision for income taxes....................... 9,944 9,656 28,362 26,003
------------- -------------- ------------- -------------
Net earnings...............................$ 16,932 $ 16,442 $ 48,292 $ 44,275
============= ============== ============= =============
Basic net earnings per share of common stock.....$ 1.34 $ 1.29 $ 3.79 $ 3.46
============= ============== ============= =============
Dilutive net earnings per share of common stock..$ 1.30 $ 1.26 $ 3.68 $ 3.39
============= ============== ============= =============
Weighted average number of shares of common stock
outstanding - Basic....................... 12,644 12,745 12,741 12,799
Weighted average number of shares of common stock
outstanding - Dilutive.................... 13,009 13,071 13,108 13,079
See accompanying notes to condensed consolidated financial statements.
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THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
August 3, July 28, October 31,
2001 2000 2000
-------------- ------------- ---------------
ASSETS
Cash and cash equivalents.................................$ 90 $ 65 $ 978
Receivables, net.......................................... 335,697 368,134 262,484
Inventories, net.......................................... 245,569 213,461 194,926
Prepaid expenses and other current assets................. 10,544 10,905 12,065
Deferred income taxes..................................... 45,000 40,638 39,714
-------------- ------------- ---------------
Total current assets................................ 636,900 633,203 510,167
-------------- ------------- ---------------
Property, plant, and equipment............................ 394,721 372,639 383,497
Less accumulated depreciation....................... 256,576 244,457 250,645
-------------- ------------- ---------------
138,145 128,182 132,852
Deferred income taxes..................................... 9,883 8,876 9,883
Goodwill and other assets................................. 123,800 127,736 126,488
-------------- ------------- ---------------
Total assets........................................$ 908,728 $ 897,997 $ 779,390
============== ============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt.........................$ 471 $ 485 $ 38
Short-term debt........................................... 94,384 121,775 11,587
Accounts payable.......................................... 56,096 43,544 65,340
Accrued liabilities....................................... 205,481 205,430 183,927
-------------- ------------- ---------------
Total current liabilities........................... 356,432 371,234 260,892
-------------- ------------- ---------------
Long-term debt, less current portion...................... 194,431 195,198 194,457
Other long-term liabilities............................... 7,263 6,919 6,823
Stockholders' equity:
Preferred stock, par value $1.00, authorized
1,000,000 voting and 1,000,000 non-voting shares,
none issued and outstanding -- -- --
Common stock, par value $1.00, authorized 35,000,000
shares; issued and outstanding 12,466,373 shares at
August 3, 2001 (net of 1,041,682 treasury shares),
12,721,596 shares at July 28, 2000 (net of 786,459
treasury shares), and 12,569,194 shares at October
31, 2000 (net of 938,861 treasury shares)........... 12,466 12,721 12,569
Additional paid-in capital............................... 37,365 52,044 47,540
Retained earnings........................................ 312,414 269,231 268,727
Accumulated other comprehensive loss..................... (11,643) (9,350) (11,618)
-------------- ------------- ---------------
Total stockholders' equity.......................... 350,602 324,646 317,218
-------------- ------------- ---------------
Total liabilities and stockholders' equity..........$ 908,728 $ 897,997 $ 779,390
============== ============= ===============
See accompanying notes to condensed consolidated financial statements.
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THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Nine Months Ended
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August 3, July 28,
2001 2000
----------------- ----------------
Cash flows from operating activities:
Net earnings....................................................$ 48,292 $ 44,275
Adjustments to reconcile net earnings to net cash used
in operating activities:
Provision for depreciation and amortization................... 26,508 28,199
Write-down of investments..................................... 1,778 1,097
Gain on disposal of property, plant, and equipment............ (46) (86)
(Increase) decrease of deferred income taxes.................. (5,286) 254
Tax benefits related to employee stock option transactions.... 4,501 854
Changes in operating assets and liabilities:
Receivables, net.......................................... (79,558) (107,281)
Inventories, net.......................................... (36,792) (1,869)
Prepaid expenses and other current assets................. 2,147 (4,778)
Accounts payable and accrued liabilities.................. 13,187 4,945
---------------- ---------------
Net cash used in operating activities................. (25,269) (34,390)
---------------- ---------------
Cash flows from investing activities:
Purchases of property, plant, and equipment................... (23,376) (26,143)
Proceeds from asset disposals................................. 2,181 1,480
Decrease (increase) in investment in affiliates............... 154 (685)
Increase in other assets...................................... (3,027) (2,381)
Acquisitions, net of cash acquired............................ (8,549) --
---------------- ---------------
Net cash used in investing activities................. (32,617) (27,729)
---------------- ---------------
Cash flows from financing activities:
Increase in short-term debt................................... 79,190 63,512
Repayments of long-term debt.................................. (64) (657)
Increase in other long-term liabilities....................... 440 744
Proceeds from exercise of stock options....................... 15,548 3,629
Purchases of common stock..................................... (33,559) (10,859)
Dividends on common stock..................................... (4,605) (4,576)
---------------- ---------------
Net cash provided by financing activities............. 56,950 51,793
---------------- ---------------
Foreign currency translation adjustment......................... 48 (1,569)
---------------- ---------------
Net decrease in cash and cash equivalents....................... (888) (11,895)
Cash and cash equivalents at beginning of period................ 978 11,960
---------------- ---------------
Cash and cash equivalents at end of period......................$ 90 $ 65
================ ===============
See accompanying notes to condensed consolidated financial statements.
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THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AUGUST 3, 2001
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
the information and notes required by accounting principles generally accepted
in the United States of America for complete financial statements. Unless the
context indicates otherwise, the terms "company" and "Toro" refer to The Toro
Company and its subsidiaries. In the opinion of management, the unaudited
condensed consolidated financial statements include all adjustments, consisting
primarily of recurring accruals, considered necessary for a fair presentation of
the financial position and the results of operations. Since the company's
business is seasonal, operating results for the nine months ended August 3, 2001
are not indicative of the results that may be expected for the fiscal year
ending October 31, 2001. Certain amounts from prior period's financial
statements have been reclassified to conform to this period's presentation.
The company's fiscal year ends on October 31, and quarterly results are reported
every three months generally on the Friday closest to the quarter end. For
comparative purposes, the company's second and third quarters always reflect 13
weeks of results, therefore, the quarter end date is not necessarily the Friday
closest to the quarter end.
For further information, refer to the consolidated financial statements and
notes included in the company's Annual Report on Form 10-K for the fiscal year
ended October 31, 2000. The policies described in that report are used for
preparing quarterly reports.
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) August 3, July 28, October 31,
2001 2000 2000
----------- ------------ -----------
Raw materials and work in process..........$ 71,439 $ 60,260 $ 66,175
Finished goods and service parts........... 215,246 195,810 168,135
----------- ----------- -----------
286,685 256,070 234,310
Less LIFO and other reserves............... 41,116 42,609 39,384
----------- ----------- -----------
Total $ 245,569 $ 213,461 $ 194,926
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Restructuring and Other Unusual Income
At August 3, 2001, the company had $0.3 million of restructuring and other
unusual expense remaining in accrued liabilities. The company has utilized $0.3
million of the original reserve since October 31, 2000 and reversed $0.7 million
into restructuring and other unusual income related to the remaining accrual for
the Sardis, Mississippi facility that was sold during the first quarter of
fiscal 2001. The company expects the majority of the remaining reserve to be
utilized when the Murray Bridge, Australia facility is sold.
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Comprehensive Income
Comprehensive income and the components of other comprehensive (loss) income
were as follows:
Three Months Ended Nine Months Ended
---------------------------- -------------------------
(Dollars in thousands) August 3, July 28, August 3, July 28,
2001 2000 2001 2000
----------- ----------- ---------- ----------
Net earnings................................$ 16,932 $ 16,442 $ 48,292 $ 44,275
Other comprehensive (loss) income:
Foreign currency translation............. (59) 282 48 (1,569)
Derivative instruments................... (75) -- (73) --
----------- ----------- ---------- ----------
Comprehensive income........................$ 16,798 $ 16,724 $ 48,267 $ 42,706
=========== =========== ========== ==========
Net Earnings Per Share
Reconciliations of basic and dilutive weighted average shares of common stock
outstanding were as follows:
Three Months Ended Nine Months Ended
Basic ---------------------------- -------------------------
(Shares in thousands) August 3, July 28, August 3, July 28,
2001 2000 2001 2000
----------- ----------- ---------- ----------
Weighted average number of shares of common
stock outstanding.......................... 12,644 12,745 12,729 12,716
Assumed issuance of contingent shares ........... -- -- 12 83
----------- ----------- --------- ----------
Weighted average number of shares of common stock
and assumed issuance of contingent shares.. 12,644 12,745 12,741 12,799
=========== =========== ========= ==========
Dilutive
(Shares in thousands)
Weighted average number of shares of common stock
and assumed issuance of contingent shares.. 12,644 12,745 12,741 12,799
Assumed conversion of stock options.............. 365 326 367 280
----------- ----------- --------- ----------
Weighted average number of shares of common stock,
assumed issuance of contingent shares, and
assumed conversion of stock options........ 13,009 13,071 13,108 13,079
=========== =========== ========= ==========
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Segment Data
As a result of the acquisition of a southwestern-based distribution company,
that acquisition has increased revenues to a level that requires the
distribution segment to be reported separately. The company will report its
domestic distribution companies as a separate segment beginning in the third
quarter of fiscal 2001.
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.
The following table shows the summarized financial information concerning the
company's reportable segments:
(Dollars in thousands)
Three months ended August 3, 2001: Professional Residential Distribution Other Total
------------ ----------- ------------ -------- --------
Net sales...................................... $224,992 $88,052 $43,452 $(26,685) $329,811
Intersegment net sales......................... 24,736 1,946 (26,682) -- --
Earnings (loss) before income taxes............ 37,702 5,100 192 (16,118) 26,876
Three months ended July 28, 2000:
Net sales...................................... $235,662 $94,553 $41,376 $(26,425) $345,166
Intersegment net sales......................... 23,498 2,927 (26,425) -- --
Earnings (loss) before income taxes............ 36,398 5,400 2,190 (17,890) 26,098
(Dollars in thousands)
Nine months ended August 3, 2001: Professional Residential Distribution Other Total
------------ ----------- ------------ --------- ----------
Net sales...................................... $710,054 $340,831 $103,956 $(78,028) $1,076,813
Intersegment net sales......................... 69,923 7,802 (77,725) -- --
Earnings (loss) before income taxes............ 105,259 29,973 (1,117) (57,461) 76,654
Total assets................................... 478,447 129,966 68,960 231,355 908,728
Nine months ended July 28, 2000:
Net sales...................................... $693,967 $349,759 $97,341 $(73,863) $1,067,204
Intersegment net sales......................... 61,651 12,212 (73,863) -- --
Earnings (loss) before income taxes............ 96,735 26,760 3,191 (56,408) 70,278
Total assets................................... 473,996 141,100 52,586 230,315 897,997
The following table presents the details of the other segment earnings (loss)
before income taxes:
Three Months Ended Nine Months Ended
---------------------------- ----------------------------
(Dollars in thousands) August 3, July 28, August 3, July 28,
2001 2000 2001 2000
----------- ----------- ---------- ----------
Corporate expenses............................... $(16,781) $(17,565) $(53,077) $(50,748)
Finance charge revenue........................... 1,278 1,184 4,287 3,921
Elimination of corporate financing expense....... 4,825 5,521 12,055 13,921
Interest expense, net............................ (6,177) (7,651) (17,890) (21,060)
Other............................................ 737 621 (2,836) (2,442)
-------- -------- -------- --------
Total............................................ $(16,118) $(17,890) $(57,461) $(56,408)
======== ======== ======== ========
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Derivative Financial Instruments
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 enters into forward foreign exchange contracts to hedge the risk
from forecasted settlement in local currencies of trade sales. These contracts
are designated as cash flow hedges with the fair value recorded in accumulated
other comprehensive income (loss) and as a hedge asset or liability as
applicable. Once the forecasted transaction has been recognized as a sale and a
related asset recorded in the balance sheet, the related fair value of the
derivative hedge contract is reclassified from accumulated other comprehensive
income (loss) into earnings. During the quarter ended August 3, 2001, the amount
of adjustments to earnings for such cash flow hedges was immaterial. At August
3, 2001, the amount of such forward contracts outstanding was $8,604,467. The
unrecognized after-tax gain portion of the fair value of the contracts recorded
in accumulated other comprehensive income (loss) at August 3, 2001 was $89,001.
The company enters into forward foreign exchange contracts to hedge the risk
from forecasted settlement in local currencies of trade purchases. These
contracts are designated as cash flow hedges with the fair value recorded in
accumulated other comprehensive income (loss) and as a hedge asset or liability
as applicable. Once the forecasted transaction has been recognized as a purchase
and a related liability recorded in the balance sheet, the related fair value of
the derivative hedge contract is reclassified from accumulated other
comprehensive income (loss) into earnings. During the quarter ended August 3,
2001, the amount of adjustments to earnings for such cash flow hedges was
immaterial. At August 3, 2001, the amount of such forward contracts outstanding
was $14,159,414. The unrecognized after-tax loss portion of the fair value of
the contracts recorded in accumulated other comprehensive income (loss) at
August 3, 2001 was $162,315.
The company enters into forward foreign exchange contracts to hedge the risk
from forecasted settlement in local currencies of intercompany sales. These
transactions and other forward foreign exchange contracts do not meet the
accounting rules established under SFAS 133 of recording the unrecognized
after-tax gain or loss portion of the fair value of the contracts in accumulated
other comprehensive income (loss). Therefore, the related fair value of the
derivative hedge contract is recognized in earnings.
New Accounting Pronouncements
In July, 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 requires that the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001, and use of the pooling-of-interests method will be
prohibited. SFAS No. 141 also provides new criteria to determine whether an
acquired intangible asset should be recognized separately from goodwill. SFAS
No. 142 will require 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 company will
adopt SFAS No. 142 on November 1, 2001. The company is currently in the process
of determining the impact of these pronouncements on its financial position and
results of operations related to valuation of goodwill and other intangible
assets. Any impairment resulting from initial application of the statements will
be recorded as a cumulative effect of accounting change during the first six
months of fiscal 2002. The company has made a preliminary assessment related to
the effect of no longer amortizing goodwill. If SFAS No. 142 had been effective
as of November 1, 2000, the company's net earnings per dilutive share would have
been approximately $1.42 to $1.47 for the third quarter of fiscal 2001 and
approximately $4.13 to $4.18 for the first nine months of fiscal 2001.
The Emerging Issues Task Force (EITF) has issued the final versions of EITF No.
00-10, "Accounting for Shipping and Handling Fees and Costs," EITF No. 00-14,
"Accounting for Certain Sales Incentives," and EITF No. 00-25 "Vendor Income
Statement Characterization of Consideration Paid to a Reseller of the Vendor's
Products."
EITF No. 00-10 provides guidance regarding shipping and handling costs incurred
for selling goods, and the income statement classification of amounts charged to
customers for shipping and handling as well as costs incurred related to
shipping and handling. EITF No. 00-10 will be effective for the company in the
fourth quarter of fiscal 2001. Toro currently reports freight revenue and
freight costs related to selling goods as part of net sales. Therefore, the
company expects the reclassification of freight costs incurred for shipping and
handling goods to customers to increase both net sales and cost of goods sold.
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New Accounting Pronouncements (continued)
EITF No. 00-14 provides guidance regarding accounting for sales incentives
offered to customers, and the proper income statement classification. The
company plans to adopt EITF No. 00-14 in the fourth quarter of fiscal 2001. The
company expects to reclassify costs incurred related to EITF No. 00-14 from
selling, general, and administrative expense to net sales, which will reduce
both amounts.
EITF No. 00-25 provides guidance whether consideration from a vendor to a
customer is an adjustment of the selling prices and, therefore, should be
deducted from revenue in the income statement or a cost incurred for assets or
services and, therefore, should be included as a cost or an expense in the
income statement. The company plans to adopt EITF No. 00-25 in the fourth
quarter of fiscal 2001. The company expects to reclassify certain costs
including floor plan interest, currency support, and certain cooperative
marketing programs from selling, general, and administrative expense to net
sales, which will reduce both amounts.
In December 1999, the Securities and Exchange Commission (SEC) staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 summarizes certain SEC staff views in applying accounting
principles generally accepted in the United States of America to revenue
recognition in financial statements. SAB 101 will be effective for the company
in the fourth quarter of fiscal 2001. Toro is currently evaluating the impact of
SAB 101 on its financial condition and results of operations.
Acquisitions
During the third quarter of fiscal 2001, Toro completed two immaterial
acquisitions, which included Electronic Industrial Controls, Inc. (EICON), a
provider of innovative computer control systems for the irrigation industry,
located in Englewood, Colorado and a southwestern-based distribution company.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Safe Harbor Statement under the Private Securities Litigation Reform Act of
1995: This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. In addition, forward-looking statements may be made orally
or in press releases, conferences, reports, over the Internet, or otherwise, in
the future by or on behalf of the company. When used by or on behalf of the
company, the words "expect", "anticipate", "estimate", "believe", "intend", and
similar expressions generally identify forward-looking statements.
Forward-looking statements involve risks and uncertainties. These uncertainties
include factors that affect all businesses operating in a global market, as well
as matters specific to the company and the markets it serves. Particular risks
and uncertainties that could affect the company's overall financial position
include the continuing slow down in the global and domestic economy; the
continued decline in consumer confidence and possibility of a recession;
weakness in retail sales; inability to achieve earnings growth in fiscal 2001 of
12 to 15 percent above fiscal 2000; inability to achieve double digit earnings
growth in fiscal 2002 (excluding the effect of the change in reporting goodwill)
above fiscal 2001; inability to maintain revenue at fiscal 2000 level in fiscal
2001; inability to grow revenue in the single digits in fiscal 2002 above fiscal
2001; inability to achieve gross margin in fiscal 2001 of 37 to 38 percent;
inability to keep growth of operating expenses in fiscal 2001 at 5 to 9 percent,
in dollars, above fiscal 2000; inability to maintain a tax rate of 37 percent in
fiscal 2001; inability to achieve goals of the "5 by Five" profit improvement
program, which includes achieving an after tax return on sales of 5 percent by
fiscal 2003; rising energy costs; the company's ability to develop and
manufacture new and existing products based on anticipated investments in
manufacturing capacity and engineering; market acceptance of existing and new
products relative to expectations and based on current commitments to fund
advertising and promotions; the company's ability to acquire, develop, and
integrate new businesses and manage alliances successfully; the degree of
success in implementing a distribution initiative designed to develop a new
distribution model; increased competition in the company's businesses from
competitors that have greater financial resources, including competitive pricing
pressures; impact of the Internet and e-commerce on the company's business and
distribution channels; changes in distributor ownership; financial viability of
some distributors and dealers; unforeseen difficulties in the implementation of
strategies to use outside providers for warehousing and transportation services;
changes in distributors', dealers', home centers', or mass retailers' purchasing
practices, especially elimination of shelf space for Toro's products; the
company's ability to cost-effectively expand existing and open new manufacturing
facilities; the company's ability to manage costs and capacity constraints at
its manufacturing facilities; the company's ability to rationalize its product
lines and plant configurations, including closing manufacturing facilities; the
ability to retain and hire quality employees; threatened or pending litigation
on matters relating to patent infringement and commercial disputes; and the
impact of new accounting standards, including possible impairment charges
related to intangible assets and elimination of goodwill amortization related to
SFAS No. 142.
Particular risks and uncertainties facing the company's professional segment at
the present include inflationary pressures and a slow down in both global and
domestic economic growth that has been important to the growth of the company's
professional businesses, including the golf and landscape contractor markets;
product quality problems in the development and production of irrigation
products and other product lines, including potential loss of market share;
delays in key new irrigation product introductions; the degree of success
related to reorganization and management changes in the irrigation and
agricultural irrigation areas; increasing oil prices that raise the cost of
resin used in irrigation and agricultural irrigation products; a continued slow
down in new golf course construction or existing golf course renovations; a
decline in the growth rate in the number of new golfers, which slows new golf
course construction; a reported decline in rounds of golf, which delays
investments by golf courses for new equipment and irrigation systems; a slow
down in new home construction; the financial impact of direct-to-dealer
distribution changes related to the Sitework Systems product line; and
challenges of establishing new dealers for the Sitework Systems product line.
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Particular risks and uncertainties facing the company's residential segment at
the present include inflationary pressures and slower economic growth; a decline
in consumer confidence; a decline in retail sales; market response to new
products and potential sales decline of other existing product categories; the
successful manufacturing alliance with third parties; 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; a slowdown in home
sales; and the company's expansion into selected home center markets and the
potential decline of sales on other product lines and distribution channels.
Particular risks and uncertainties facing the company's international business
at the present include weak economic conditions in the European market;
socio-economic conditions in some international markets, which include euro
conversion affecting 12 countries, internal and external conflicts between
foreign countries, and continuing economic crisis in Japan; tax law changes in
Mexico; currency fluctuations of the dollar against the euro, Japanese yen, and
Australian dollar; the cost of currency support provided to international
customers to compensate for weak currencies compared to the U.S. dollar; and
competitive implications and price transparencies related to the euro
conversion.
Particular risks and uncertainties facing the company's distribution segment at
the present include inflationary pressures and slower economic growth; a decline
in consumer confidence; 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 continued slow down in
new golf course construction or existing golf course renovations; successful
integration of acquired distribution companies; ability to hire quality service
technicians; impact of Toro pricing on some product lines sold through the
distribution companies; ability to successfully implement a just-in-time
inventory initiative; and the ability to rationalize product lines.
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 affect from terrorists actions; weather conditions
affecting demand, including warm winters and wet or cold spring and dry summer
weather; unanticipated problems or costs associated with the transition of
European currencies to the common euro currency; a slowing in housing starts or
new golf course starts; inability to raise prices of products due to market
conditions; changes in market demographics; actions of competitors; seasonal
factors in the company's industry; unforeseen litigation; government action,
including budget levels, regulation, and legislation, primarily legislation
relating to the environment, commerce, infrastructure spending, health, and
safety; availability of raw materials; and the company's ability to maintain
good relations with its employees.
The company wishes to caution readers not to place undue reliance on any
forward-looking statement and to recognize that the statements are predictions
of future results, which may not occur as anticipated. Actual results could
differ materially from those anticipated in the forward-looking statements and
from historical results, due to the risks and uncertainties described above, as
well as others not now anticipated. The foregoing statements are not exclusive
and further information concerning the company and its businesses, including
factors that potentially could materially affect the company's financial
results, may emerge from time to time. Toro assumes no obligation to update
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
12
13
RESULTS OF OPERATIONS
Toro's results for the third quarter of fiscal 2001 were mixed, with a
profitability increase of 3.0 percent despite a decline in sales of 4.4 percent.
Fiscal 2001 third quarter net sales were $329.8 million compared to $345.2
million for the third quarter of fiscal 2000. Year-to-date net sales were
$1,076.8 million compared to $1,067.2 million last year, a slight increase of
0.9 percent. Worldwide sales for the professional segment declined 4.5 percent
compared to last year's third quarter, but rose 2.3 percent year-to-date.
Worldwide sales for the residential segment decreased 6.9 percent compared to
last year's third quarter and 2.6 percent for the year. The distribution segment
sales were up 5.0 percent for the quarter and 6.8 percent for the year due to
the addition of sales from two newly acquired distribution companies.
International sales were down 16.2 percent for the quarter and 2.7 percent
year-to-date; disregarding currency effects, international sales decreased 13.3
percent for the quarter, but increased slightly by 0.9 percent for the first
nine months of fiscal 2001. The weak economy and unfavorable weather conditions
have contributed to the sales decline, although the decline was somewhat offset
by continued growth in landscape contractor market sales and positive acceptance
of new professional and residential segment products.
Net earnings increased 3.0 percent to $16.9 million from $16.4 million for the
same quarter in fiscal 2000, and dilutive earnings per share for the quarter
rose 3.2 percent to $1.30 from $1.26 in fiscal 2000 third quarter. Year-to-date
net earnings were $48.3 million compared to $44.3 million last year, an increase
of 9.1 percent, and dilutive earnings per share for the year were $3.68 compared
to $3.39 last year. Excluding restructuring and other unusual income,
year-to-date net earnings would have been $47.9 million and dilutive earnings
per share would have been $3.65. Reduced interest expense and higher levels of
other income, net were the main contributors to the earnings improvement.
The following table summarizes net sales by segment:
Three Months Ended
--------------------------------------------------------------
(Dollars in thousands) August 3, July 28,
2001 2000 $ Change % Change
----------- ------------ ------------ ----------
Professional.....................................$ 224,992 $ 235,662 $ (10,670) (4.5)%
Residential...................................... 88,052 94,553 (6,501) (6.9)
Distribution..................................... 43,452 41,376 2,076 5.0
Other............................................ (26,685) (26,425) (260) (1.0)
----------- ----------- ----------- ------
Total *......................................$ 329,811 $ 345,166 $ (15,355) (4.4)%
=========== =========== =========== ======
* Includes international sales of................$ 54,711 $ 65,291 $ (10,580) (16.2)%
Nine Months Ended
--------------------------------------------------------------
(Dollars in thousands) August 3, July 28,
2001 2000 $ Change % Change
----------- ------------ ------------ ----------
Professional.....................................$ 710,054 $ 693,967 $ 16,087 2.3%
Residential...................................... 340,831 349,759 (8,928) (2.6)
Distribution..................................... 103,956 97,341 6,615 6.8
Other............................................ (78,028) (73,863) (4,165) (5.6)
----------- ----------- ----------- ---------
Total *......................................$ 1,076,813 $ 1,067,204 $ 9,609 0.9%
=========== =========== =========== =========
* Includes international sales of................$ 215,113 $ 221,178 $ (6,065) (2.7)%
13
14
Professional Segment Net Sales
Net sales for the worldwide professional segment in the third quarter of fiscal
2001 were $225.0 million compared to $235.7 million in the third quarter of
fiscal 2000, a decrease of 4.5 percent. A weaker economy, unfavorable weather
conditions, and a slow down in new golf course construction had a negative
effect on sales to the golf market worldwide for equipment and irrigation
systems. Sales were also lower for residential/commercial irrigation products
due to unfavorable weather and economic conditions. International sales, mainly
in Europe, were also negatively affected by the weak economy and unfavorable
weather conditions. Sitework Systems shipments declined compared to last year's
third quarter due to challenges in setting up a new dealer channel. Somewhat
offsetting those declines were good volume increases for both Exmark and Toro
brands due to the continued growth of the landscape contractor market and
acceptance of new products. Shipments of newly introduced commercial equipment
also had a positive impact for the quarter.
Net sales for the worldwide professional segment in the first nine months of
fiscal 2001 were $710.1 million compared to $694.0 million last year, an
increase of 2.3 percent. The worldwide landscape contractor market led this
increase with higher sales volumes of mowing equipment for both Exmark and Toro
brands. Commercial equipment sales were also up for the year due to the addition
of sales from Goossen Industries, Inc. (Goossen) and the introduction of new
products, despite a decline in sales for the golf market. Somewhat offsetting
those increases were significantly lower sales for golf and
residential/commercial irrigation products due to the same reasons noted in the
quarter comparison as well as high field inventory levels entering fiscal 2001
for the Irritrol brand. Sitework Systems product line sales were also down for
the year due to the same reasons mentioned in the quarter comparison as well as
a change to dealer-direct distribution that resulted in returned product from
some distributors. Despite this distribution change, retail volume sales have
increased compared to last year for the Sitework Systems product line.
Residential Segment Net Sales
Net sales for the worldwide residential segment in the third quarter of fiscal
2001 were $88.1 million compared to $94.6 million in the third quarter of fiscal
2000, a decrease of 6.9 percent. Worldwide shipments of walk power mowers led
this decrease due to cold and wet spring weather in most markets as well as weak
economic conditions and a slow down in consumer spending. International
shipments of walk power mowers and riding products were also down due mainly to
the weak economy and unfavorable weather conditions in Europe. Offsetting those
declines were strong riding product sales, mainly for new products, which
include the Toro(R) TimeCutter(TM) Z mower and the Toro Twister(R) utility
vehicle. However, other riding product shipments were down due to unfavorable
weather conditions and the weak economy as well as a shift of sales away from
existing product lines to the new Toro(R) TimeCutter(TM) Z mower. Electric
blower sales were up for the quarter due to the introduction of a new product
that shipped in the third quarter of fiscal 2001. Do-it-yourself irrigation
product sales also increased for the quarter due to dry weather experienced
during the third quarter in key markets and the release of watering bans in the
Southeast region, somewhat offset by lost placement at some home centers.
Snowthrower shipments were significantly up for the quarter due to low field
inventory levels and dealer's fulfillment of presold units.
Year-to-date net sales for the worldwide residential segment in fiscal 2001 were
$340.8 million compared to $349.8 million last year, a decrease of 2.6 percent.
Despite strong initial shipments of new products, sales were down for most
product categories. Snowthrower product sales were down due to the comparison to
abnormally high sales in the first quarter of fiscal 2000 resulting from a shift
in shipments from the fourth quarter of fiscal 1999 to the first quarter of
fiscal 2000. Shipments of walk power mowers and riding products were also down
due to the same contributing factors mentioned in the quarter comparison.
Do-it-yourself irrigation sales declined for the year due mainly to lost
placement at some home centers. Offsetting those decreases was an increase of
home solutions product sales, mainly electric trimmers, due to placement
expansion at some mass retailers. In fiscal 2001, the residential segment
experienced a decrease in sales as a result of customers' asset management
efforts to reduce field inventory levels and related financing costs.
Field inventory levels were lower than in the comparable quarter of fiscal 2000
for most residential segment product lines, and are expected to be lower at the
end of fiscal 2001 as compared to October 31, 2000. The heavy snowfalls during
the winter of 2000-2001 throughout the Snow Belt resulted in significantly
higher retail sales of snowthrower products, leaving low field inventory levels.
Therefore, the company anticipates significantly higher snowthrower sales in the
fourth quarter of fiscal 2001 compared to fiscal 2000.
14
15
Distribution Segment Net Sales
Net sales for the distribution segment in the third quarter of fiscal 2001 were
$43.5 million compared to $41.4 million in the third quarter of fiscal 2000, an
increase of 5.0 percent. The sales increase was due to the addition of sales for
two newly acquired distribution companies in fiscal 2001, which added $8.6
million of incremental net sales for the third quarter of fiscal 2001. Factoring
out sales from these two acquisitions, sales for the distribution segment would
have been down $6.5 million or 15.6 percent compared to the third quarter of
fiscal 2000. This decline was due to lower sales related to the weak economy and
unfavorable weather conditions, which has reduced the number of golf course
projects.
Year-to-date net sales for the distribution segment in fiscal 2001 were $104.0
million compared to $97.3 million last year, an increase of 6.8 percent. The
sales increase was due to the addition of sales for two newly acquired
distribution companies in fiscal 2001, which added $11.2 million of incremental
net sales for the first nine months of fiscal 2001. Factoring out sales from
these two acquisitions, sales for the distribution segment would have been down
$4.5 million or 4.7 percent. This decline was due to the same contributing
factors mentioned in the quarter comparison.
Other Segment Net Sales
Net sales in this segment include the elimination of sales from the professional
and residential segments to the distribution segment. The other segment sales
elimination in the third quarter of fiscal 2001 were $(26.7) million compared to
$(26.4) million in the third quarter of fiscal 2000.
Year-to-date sales elimination in fiscal 2001 was $(78.0) million compared to
$(73.9) million last year, an increase of $4.1 million. This increase was due to
the addition of two company-owned distributors in fiscal 2001.
Gross Profit
Third quarter gross profit was $126.2 million compared to $133.3 million last
year, a decrease of 5.3 percent. As a percentage of net sales, gross profit for
the third quarter of fiscal 2001 was 38.3 percent compared to 38.6 percent for
the third quarter of fiscal 2000. This decline was due to the elimination of
gross profit previously recorded with respect to sales of Toro products to a
southwestern-based distributor, which was acquired in the third quarter of
fiscal 2001. The decline was also a result of lower sales of high margin
products, somewhat offset by lower levels of tooling amortization expense due to
fully amortized tooling.
Year-to-date gross profit was $397.3 million compared to $395.2 million last
year, an increase of 0.5 percent. As a percentage of net sales, gross profit for
the first nine months of fiscal 2001 was 36.9 percent compared to 37.0 percent
for the first nine months of fiscal 2000. This decline as a percentage of net
sales for the year was mainly due to the same contributing factors mentioned in
the quarter comparison.
Selling, General, and Administrative Expense
Third quarter selling, general, and administrative expense (SG&A) was $96.2
million compared to $101.9 million last year, a decrease of 5.5 percent. As a
percentage of net sales, SG&A decreased slightly to 29.2 percent from 29.5
percent for the same quarter in fiscal 2000. Acquisitions added approximately
$1.9 million of incremental SG&A expense for the third quarter of fiscal 2001.
SG&A expense was down due to lower warranty expense resulting from favorable
claims experience for the residential segment as well as lower special warranty
reserves for product modifications when compared to higher expenses in the third
quarter of fiscal 2000 for the professional segment. Incentive compensation
costs were also down for the third quarter comparison and marketing costs were
lower due to expense reduction efforts. Somewhat offsetting these decreases was
higher costs for currency support for international sales.
Year-to-date SG&A expense was $308.0 million compared to $304.6 million last
year, a slight increase of 1.1 percent. As a percentage of net sales, SG&A
expense increased slightly to 28.6 percent from 28.5 percent last year.
Acquisitions added approximately $3.8 million of incremental SG&A expense for
the first nine months of fiscal 2001. The increase in SG&A costs was due to
higher levels of currency support for international sales and higher incentive
compensation costs recorded in the first half of fiscal 2001. Offsetting those
increases were lower warranty and marketing costs due to the same factors
mentioned in the quarter comparison.
15
16
Restructuring and Other Unusual Income
Year-to-date restructuring and other unusual income was $0.7 million, which
increased income for the residential segment. This income derived from the
reversal of the remaining accrual for closing of the Sardis, Mississippi
facility, which was sold during the first quarter of fiscal 2001.
Interest Expense
Third quarter interest expense was $6.2 million compared to $7.7 million last
year, a decrease of 19.3 percent. This decrease was primarily due to lower
levels of short-term debt as a result of improved asset management, the use of
earnings from the past 12 months to pay down debt, and lower interest rates.
Year-to-date interest expense was $17.9 million compared to $21.1 million last
year, a decrease of 15.1 percent. This decrease in interest expense for the year
was due to the same contributing factors as in the quarter comparison.
Other Income, Net
Third quarter other income, net, was $3.1 million compared to $2.3 million last
year, an increase of $0.8 million. This improvement was due to higher finance
charge revenue and an insurance recovery, somewhat offset by lower levels of
exchange rate currency gains.
Year-to-date other income, net, was $4.5 million compared to $0.7 million last
year, an increase of $3.8 million. This increase was due to lower levels of
exchange rate currency losses compared to the first nine months of last year,
increased royalty income, and an insurance recovery, but was somewhat offset by
an increase in write-downs of investments.
Operating Earnings (Loss) by Segment
Operating earnings (loss) by segment is defined as earnings (loss) from
operations plus other income, 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 third quarter
of fiscal 2001 were $37.7 million compared to $36.4 million in the third quarter
of fiscal 2000, an increase of 3.6 percent. As a percentage of net sales,
professional segment operating margins increased to 16.8 percent from 15.4
percent for the same quarter in fiscal 2000. This profit improvement was mainly
due to lower SG&A costs as a percent of sales, which declined 1.7 percent due
primarily to lower marketing costs and warranty expenses. This was somewhat
offset by lower levels of currency gains. Gross margins were even with last year
at 39.4 percent for the third quarter.
Year-to-date operating earnings for the worldwide professional segment in fiscal
2001 were $105.3 million compared to $96.7 million last year, an increase of 8.8
percent. As a percentage of net sales, professional segment operating margins
increased to 14.8 percent from 13.9 percent last year. This increase was due to
higher sales volumes, mainly for landscape contractor equipment. A 1.2 percent
reduction in SG&A costs as a percent of sales also contributed to this
improvement and was due to the same reasons mentioned in the quarter comparison,
but the reduction was somewhat offset by higher costs for currency support.
Lower levels of currency losses also contributed to the increase in profits.
However, gross margins were lower as a percentage of sales by 0.5 percent.
16
17
Residential Segment Operating Earnings
Operating earnings for the worldwide residential segment in the third quarter of
fiscal 2001 were $5.1 million compared to $5.4 million in the third quarter of
fiscal 2000, a decrease of 5.6 percent. As a percentage of net sales,
residential segment operating margins increased to 5.8 percent from 5.7 percent
over the same quarter in fiscal 2000. Gross margin rose 1.1 percent as a
percentage of net sales due to increased sales of higher margin products,
continued cost reduction efforts, and lower amounts of tooling amortization
expense due to fully amortized tooling. SG&A expense as a percentage of net
sales was higher by 0.5 percent mainly due to lower sales volumes.
Year-to-date operating earnings for the worldwide residential segment in fiscal
2001 were $30.0 million compared to $26.8 million last year, an increase of 12.0
percent. As a percentage of net sales, residential segment operating margins
increased to 8.8 percent from 7.7 percent last year. Gross margin increased 1.0
percent as a percentage of sales due to the same contributing factors mentioned
in the quarter comparison. Restructuring and other unusual income of $0.7
million this year also contributed to the improvement in operating earnings.
SG&A costs as a percentage of sales were also slightly lower than last year by
0.1 percent.
Distribution Segment Operating Earnings (Losses)
Operating earnings for the distribution segment in the third quarter of fiscal
2001 were $0.2 million compared to $2.2 million in the third quarter of fiscal
2000, a decrease of $2.0 million. This profit decline was attributable to higher
SG&A costs, mainly due to the acquisition of two distribution companies that
added $1.8 million of incremental SG&A costs and restructuring of these
operations. Gross margins were slightly lower by 0.1 percent for the quarter.
The distribution segment fiscal 2001 year-to-date results were $1.1 million of
operating losses compared to $3.2 million of operating earnings last year, an
unfavorable change of $4.3 million. Gross margin decreased as a percentage of
sales by 0.4 percent due to lower sales of high margin product lines. SG&A costs
were also higher for the year due to the acquisitions of two distribution
companies that added $2.3 million of incremental SG&A costs. SG&A expense was
also higher due to investments and operational restructuring in these
distribution companies.
Other Segment Operating Losses
Operating losses for the other segment in the third quarter of fiscal 2001 were
$16.1 million compared to a loss of $17.9 million in the third quarter of fiscal
2000, an improvement of $1.8 million. The improvement was due to lower interest
costs, reduced corporate expenses, and increased other income, somewhat offset
by higher gross profit reversal related to the acquisition of a
southwestern-based distribution company mentioned previously.
Year-to-date operating losses for the other segment in fiscal 2001 were $57.5
million compared to losses of $56.4 million in fiscal 2000, an unfavorable
change of $1.1 million. The loss increase was due to higher corporate expenses,
mainly for incentive compensation expenses, legal costs, and bad debt expense.
In addition, gross profit reversal related to the acquisition of a
southwestern-based distribution company also contributed to this loss increase
for the year. These negative factors were slightly offset by lower interest
costs and higher other income.
Provision for Income Taxes
The effective tax rate for the first nine months of fiscal 2001 and fiscal 2000
was 37.0 percent.
17
18
Financial Position as of August 3, 2001
August 3, 2001 compared to July 28, 2000
Total assets at August 3, 2001 were $908.7 million compared to $898.0 million on
July 28, 2000, an increase of $10.7 million. Net accounts receivable decreased
by $32.4 million. Acquisitions added $8.4 million of incremental net
receivables. The decline in accounts receivable was mainly due to lower sales
volumes and improved collection efforts. Inventory increased $32.1 million.
Acquisitions added $11.4 million of incremental net inventory. This inventory
increase was mainly due to the sales shortfall, prebuilding of inventory, and
early purchases of work-in-process compared to last year. Net property, plant,
and equipment increased $10.0 million due to higher amounts of capital additions
in comparison to depreciation expense as well as the addition of property,
plant, and equipment related to the acquisitions. Goodwill and other assets
decreased $3.9 million primarily as a result of valuation charges for the
company's investment in a technology company and a distribution company as well
as amortization of goodwill and intangible assets.
Total current liabilities at August 3, 2001 were $356.4 million compared to
$371.2 million at July 28, 2000, a decrease of $14.8 million. Short-term debt
decreased by $27.4 million due to higher levels of accounts payable, net
earnings, and lower amounts of accounts receivable, somewhat offset by higher
levels inventory. Accounts payable increased by $12.6 million due to the
company's efforts to increase the number of days outstanding in accounts payable
by renegotiating payment terms with vendors.
August 3, 2001 compared to October 31, 2000
Total assets at August 3, 2001 were $908.7 million compared to $779.4 million at
October 31, 2000, an increase of $129.3 million. Net accounts receivable
increased $73.2 million from October 31, 2000 due to the normal seasonal
increase in accounts receivable. Inventory increased by $50.6 million due to the
normal seasonal buildup of inventory, plus prebuilding of inventory and early
purchases of work-in-process inventory. In addition, acquisitions added $11.4
million of incremental net inventory. Net property, plant, and equipment
increased $5.3 million due to higher amounts of capital additions in comparison
to depreciation expense. Goodwill and other assets decreased $2.7 million
primarily as a result of valuation charges for the company's investment in a
technology company and a distribution company as well as amortization of
goodwill and intangible assets during the first nine months of fiscal 2001.
Total current liabilities at August 3, 2001 were $356.4 million compared to
$260.9 million at October 31, 2000, an increase of $95.5 million. This increase
was the result of additional short-term debt of $82.8 million, reflecting the
company's strategy of utilizing short-term debt to fund seasonal working capital
needs. Accounts payable decreased by $9.2 million due to the timing of payments,
somewhat offset by the company's efforts to extend its payment terms as
described above. Accrued liabilities increased by $21.6 million due mainly to
higher accruals for warranty, income tax, and currency support costs as well as
higher accruals for various seasonal sales and marketing programs.
Outlook
Toro anticipates the weakened economy and unfavorable weather conditions to
continue through the remainder of fiscal 2001, and sales are expected to be
relatively flat compared to fiscal 2000. In fiscal 2002, the company is
estimating revenue to be up in the single digits from fiscal 2001. On a positive
note, the company anticipates to achieve earnings growth of 12 to 15 percent in
fiscal 2001 above fiscal 2000. In fiscal 2002, Toro is estimating that earnings
will grow in the double digits over fiscal 2001, excluding the effect of the
change in reporting goodwill. Toro also anticipates gross margin at 37 to 38
percent for fiscal 2001 and growth of operating expenses in fiscal 2001 at 5 to
9 percent, in dollars, above fiscal 2000. The tax rate is expected to remain at
37.0 percent for the remainder of fiscal 2001.
18
19
Liquidity and Capital Resources
Cash used in operating activities for the first nine months of fiscal 2001 was
$9.1 million lower than the first nine months in fiscal 2000 primarily due to a
decrease in accounts receivable, higher levels of accounts payable, and an
increase in net earnings, somewhat offset by an increase in inventory. Cash used
in investing activities increased $4.9 million due to the purchase price, net of
cash acquired, for Goossen and EICON, slightly offset by reduced purchases of
property, plant, and equipment compared to last year. Cash provided by financing
activities was higher by $5.2 million due to a higher increase of short-term
debt for the first nine months of fiscal 2001 compared to the first nine months
of fiscal 2000 and proceeds from stock option exercises, somewhat offset by
higher amounts of common stock repurchases. In addition, cash on hand at October
31, 1999, which was high due to the fiscal year end occurring on a Sunday when
cash received on Saturday could not be utilized to pay down short-term debt
until fiscal 2000, was used for operating and investing activities in the first
quarter of fiscal 2000.
The company's U.S. seasonal working capital requirements are funded with $289.0
million of committed unsecured bank credit lines. In addition, the company's
non-U.S. operations maintain unsecured short-term lines of credit of
approximately $16.0 million. The company also has banker's acceptance agreements
under which an additional $40.0 million of credit lines are available. The
company's business is seasonal, with peak borrowing under the working capital
lines described above generally occurring between February and May each year.
Management believes that the combination of funds available through its existing
or anticipated financing arrangements, coupled with forecasted cash flows, will
provide the necessary capital resources for the company's anticipated working
capital, capital additions, acquisitions, and stock repurchases through fiscal
2002.
Inflation
The company is subject to the effects of changing prices. During the first nine
months of fiscal 2001, the company continued to experience inflationary
pressures for purchases of general commodities. The company is attempting to
deal with these inflationary pressures by actively pursuing internal cost
reduction efforts and through slight price increases. No significant price
increases are planned for fiscal 2001 because of competitive pressures.
Euro Currency
The European Monetary Union (EMU) is in the last few months of a three-year
transition phase during which a common currency (the "euro") was introduced in
participating countries. This new currency is being used for financial
transactions and on January 1, 2002 will replace the old national currencies,
which must be withdrawn by July 2002. During the transition to the euro,
companies and public administrations have been changing budgetary, accounting,
contractual, and fiscal systems while using parallel currencies and converting
legacy data. Uncertainty continues as to what effects the conversion to the euro
will have on the marketplace, especially the effects on individual consumers.
One anticipated effect will be more transparent price differences on goods in
European countries.
Significant issues for the company arising from the transition are price
competition on Toro distributor and Toro direct sales, and the possible need for
and cost of currency support for Toro distributors in the European Union.
Current concerns include currency swings and instability in the rate of exchange
between the euro and the U.S. dollar, and the lack of diversification of
currencies in Europe with the introduction of the euro. The company currently
invoices international export shipments in U.S. dollars, however, it is
analyzing the effects of invoicing in foreign currencies, and the euro would be
among those currencies considered.
One of the company's European subsidiaries commenced using a new Enterprise
Resource Planning (ERP) system in May 2001, without any major negative impact on
its operations, which is euro compliant. The company's other European subsidiary
is converting to the same ERP system. This new system will enable both
subsidiaries to report financial transactions and fiscal reports in the euro for
fiscal 2002. The cost of converting to these systems has been immaterial
compared to the company's overall operating expenses.
Based on evaluation to date, management currently believes that while the
company will incur internal and external costs to adjust to the euro indirectly,
such costs are not expected to have a significant impact on operations, cash
flows, or the financial condition of the company and its subsidiaries taken as a
whole in future periods.
19
20
Quantitative and Qualitative Disclosures about Market Risk
Toro is exposed to market risk stemming from changes in foreign exchange rates,
interest rates, and commodity prices. Changes in these factors could cause
fluctuations in the company's net earnings and cash flows. In the normal course
of business, Toro actively manages the exposure of certain market risks by
entering into various hedging transactions, authorized under company policies
that place controls on these activities. The company's hedging transactions
involve the use of a variety of derivative instruments. Toro uses derivatives
only in an attempt to limit underlying exposure to currency fluctuations, and
not for trading purposes.
Foreign Exchange Risk
Toro is subject to risk from sales and loans to wholly owned subsidiaries as
well as sales to, purchases from, and bank lines of credit with, third party
customers, suppliers, and creditors, respectively, denominated in foreign
currencies. The company manages foreign exchange rate exposure from anticipated
sales, accounts receivable, intercompany loans, anticipated purchases, credit
obligations through the use of naturally occurring offsetting positions
(borrowing in local currency) and forward and swap foreign exchange contracts.
Forward foreign exchange contracts to hedge forecasted transactions are
designated as cash flow hedges with the fair value recorded in accumulated other
comprehensive income (loss) and as a hedge asset or liability as applicable.
Once the forecasted transaction has been recognized as a sale or purchase and a
related asset or liability recorded on the balance sheet, the related fair value
of the derivative hedge contract is reclassified from accumulated other
comprehensive income (loss) into earnings. The related amounts payable to, or
receivable from, the contract counter parties are included in other accrued
liabilities or prepaid expenses and other current assets.
The following forward exchange contracts held by the company have maturity dates
in fiscal year 2001 and 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 133, therefore, the fair value impact is recorded in
other income, net. The average contracted rate, notional amount, pre-tax value
of derivative instruments in accumulated other comprehensive loss, and fair
value of derivative instruments in other income, net at August 3, 2001 were as
follows:
---------------------------------------------------------------------------------------------------
VALUE IN
ACCUMULATED
AVERAGE OTHER FAIR VALUE
CONTRACTED NOTIONAL COMPREHENSIVE IMPACT
DOLLARS IN THOUSANDS RATE AMOUNT INCOME (LOSS) GAIN (LOSS)
===================================================================================================
Buy US dollar/Sell Australian dollar .5182 $ 15,120.0 $ 46.4 $ 54.1
---------------------------------------------------------------------------------------------------
Buy US dollar/Sell Canadian dollar 1.4543 2,544.2 93.2 40.6
---------------------------------------------------------------------------------------------------
Buy Australian dollar/Sell US dollar .5183 10,966.1 -- (7.9)
---------------------------------------------------------------------------------------------------
Buy Canadian dollar/Sell US dollar 1.5478 355.4 1.7 1.1
---------------------------------------------------------------------------------------------------
Buy British pound/Sell US dollar 1.3881 1,492.2 36.1 (.1)
---------------------------------------------------------------------------------------------------
Buy Euro/Sell US dollar .8731 7,857.9 56.5 (3.2)
---------------------------------------------------------------------------------------------------
Buy Japanese yen/Sell US dollar 117.4345 10,644.2 (350.3) (71.6)
---------------------------------------------------------------------------------------------------
Buy Mexican peso/Sell US dollar 9.8007 2,066.2 -- 15.1
---------------------------------------------------------------------------------------------------
Interest Rate Risk
The company is exposed to interest rate risk arising from transactions that are
entered into during the normal course of business. The company's short-term debt
rates are dependent upon the LIBOR rate plus an additional percentage based on
the company's current borrowing level. See the company's most recent annual
report filed on Form 10-K (Item 7A). There has been no material change in that
information.
Commodities
Certain raw materials used in the company's products are exposed to commodity
price changes. Toro manages this risk by using long-term agreements with some
vendors. The primary commodity price exposures are with aluminum, steel, and
plastic resin.
20
21
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
3(i)(a) and 4(a) Certificate of Incorporation of Registrant (incorporated
by reference to Exhibit 4.2 to Registrant's Registration
Statement on Form S-3, Registration No. 33-16125).
3(i)(b) and 4(b) Certificate of Amendment to Certificate of
Incorporation of Registrant dated December 9, 1986
(incorporated by reference to Exhibit 3 to Registrant's
Quarterly Report on Form 10-Q for the quarter ended January
30, 1987, Commission File No. 1-8649).
3(i)(c) and 4(c) Certificate of Designation to Certificate of
Incorporation of Registrant dated May 28, 1998
(incorporated by reference to Exhibit (1)(A) to
Registrant's Current Report on Form 8-K dated May 27,
1998).
3(ii) and 4(d) Bylaws of Registrant, as amended.
4(e) Specimen form of Common Stock certificate (incorporated
by reference to Exhibit 4(c) to Registrant's
Registration Statement on Form S-8, Registration No.
2-94417).
4(f) Rights Agreement dated as of May 20, 1998, between
Registrant and Wells Fargo Bank Minnesota, National
Association relating to rights to purchase Series B
Junior Participating Voting Preferred Stock, as amended
(incorporated by reference to Registrant's Current
Report on Form 8-K dated May 27, 1998, Commission File
No. 1-8649).
4(g) Indenture dated as of January 31, 1997, between
Registrant and First National Trust Association, as
Trustee, relating to the Registrant's 7.125% Notes due
June 15, 2007 and its 7.80% Debentures due June 15, 2027
(incorporated by reference to Exhibit 4(a) to
Registrant's Current Report on Form 8-K for June 24,
1997, Commission File No. 1-8649).
10(a) Form of Employment Agreement in effect for executive
officers of Registrant (incorporated by reference to
Exhibit 10(a) to Registrant's Quarterly Report on Form
10-Q for the quarter ended July 30, 1999).*
10(b) The Toro Company Directors Stock Plan (incorporated by
reference to Exhibit 10(b) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended April 28,
2000).*
10(c) The Toro Company Annual Management Incentive Plan II for
officers of Registrant (incorporated by reference to
Exhibit 10(c) to Registrant's Quarterly Report on Form
10-Q for the quarter ended April 28, 2000).*
10(d) The Toro Company 1989 Stock Option Plan (incorporated by
reference to Exhibit 10(e) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 30,
1999).*
10(e) The Toro Company 1993 Stock Option Plan (incorporated by
reference to Exhibit 10(f) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 30,
1999).*
10(f) The Toro Company Performance Share Plan (incorporated by
reference to Exhibit 10(f) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 30,
1999).*
10(g) The Toro Company 2000 Stock Option Plan (incorporated by
reference to Exhibit 10(g) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended April 28,
2000).*
10(h) The Toro Company Supplemental Management Retirement Plan
(incorporated by reference to Exhibit 10(h) to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 30, 1999).*
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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(l) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended May 4, 2001).*
----------
*
* Management contract or compensatory plan or arrangement required to be
filed as an exhibit to this Quarterly Report on Form 10-Q pursuant to Item
14(c).
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TORO COMPANY
(Registrant)
By /s/ Stephen P. Wolfe
--------------------------------------
Stephen P. Wolfe
Vice President, Finance
Treasurer and Chief Financial Officer
(principal financial officer)
Date: September 17, 2001
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