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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 1, 1998 Commission File Number 1-8649
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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: (612) 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 29, 1998 was
12,843,461.
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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 and
Retained Earnings (Unaudited) -
Three and Six Months Ended
May 1, 1998 and May 2, 1997. . . . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Balance Sheets (Unaudited) -
May 1, 1998, May 2, 1997 and October 31, 1997. . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended May 1, 1998 and May 2, 1997 . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements (Unaudited) . . . . . . . 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . . . . . . . . . . . .7-12
PART II. OTHER INFORMATION:
ITEM 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . .13
ITEM 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . 13-14
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .15
Exhibit 11 Computation of Earnings Per Common Share . . . . . . . . . . . . .16
2
PART I. ITEM 1. FINANCIAL INFORMATION
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
Three Months Ended Six Months Ended
------------------------ -----------------------
May 1, May 2, May 1, May 2,
1998 1997 1998 1997
--------- --------- --------- ---------
Net sales . . . . . . . . . . . . . . . . . . $ 379,686 $ 352,203 $ 589,745 $ 561,160
Cost of sales. . . . . . . . . . . . . . . . . . 246,737 227,086 383,744 360,816
--------- --------- --------- ---------
Gross profit. . . . . . . . . . . . . . . . 132,949 125,117 206,001 200,344
Selling, general and administrative
expense . . . . . . . . . . . . . . . . . . 95,034 89,160 166,898 157,629
--------- --------- --------- ---------
Earnings from operations. . . . . . . . . . 37,915 35,957 39,103 42,715
Interest expense . . . . . . . . . . . . . . . . 6,911 6,085 12,716 9,932
Other income, net. . . . . . . . . . . . . . . . (2,141) (1,600) (5,004) (2,806)
--------- --------- --------- ---------
Earnings before income taxes. . . . . . . . 33,145 31,472 31,391 35,589
Provision for income taxes . . . . . . . . . . . 13,092 12,432 12,399 14,058
--------- --------- --------- ---------
Net earnings. . . . . . . . . . . . . . . . $ 20,053 $ 19,040 $ 18,992 $ 21,531
--------- --------- --------- ---------
--------- --------- --------- ---------
Retained earnings at beginning of period . . . . $ 200,085 $ 174,671 $ 202,681 $ 173,630
Dividends on common stock of $0.12, $0.12,
$0.24 and $0.24 per share, respectively . . (1,541) (1,435) (3,076) (2,885)
--------- --------- --------- ---------
Retained earnings at end of period . . . . . . . $ 218,597 $ 192,276 $ 218,597 $ 192,276
--------- --------- --------- ---------
--------- --------- --------- ---------
Basic net earnings per share of common stock . . $1.56 $1.58 $1.49 $1.78
--------- --------- --------- ---------
--------- --------- --------- ---------
Diluted net earnings per share of common stock and
common stock equivalents. . . . . . . . . . $1.53 $1.53 $1.45 $1.73
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements.
3
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
May 1, May 2, October 31,
1998 1997 1997
---------- ---------- -----------
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . $ 640 $ 5,593 $ 8
Receivables, net . . . . . . . . . . . . . . . . . . . 440,435 412,725 259,134
Inventories. . . . . . . . . . . . . . . . . . . . . . 212,425 159,014 160,122
Other current assets . . . . . . . . . . . . . . . . . 53,518 34,429 52,780
---------- ---------- ----------
Total current assets. . . . . . . . . . . . . . . 707,018 611,761 472,044
---------- ---------- ----------
Property, plant and equipment. . . . . . . . . . . . . 318,977 319,010 297,841
Less accumulated depreciation . . . . . . . . . . 188,226 203,859 180,989
---------- ---------- ----------
130,751 115,151 116,852
Other assets . . . . . . . . . . . . . . . . . . . . . 114,409 73,102 72,738
---------- ---------- ----------
Total assets. . . . . . . . . . . . . . . . . . . $ 952,178 $ 800,014 $ 661,634
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt. . . . . . . . . . . $ 1,839 $ 350 $ 365
Short-term borrowing . . . . . . . . . . . . . . . . . 236,632 278,000 41,000
Accounts payable . . . . . . . . . . . . . . . . . . . 69,408 57,064 58,397
Other accrued liabilities. . . . . . . . . . . . . . . 155,825 160,252 138,071
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Total current liabilities . . . . . . . . . . . . 463,704 495,666 237,833
---------- ---------- ----------
Long-term debt, less current portion . . . . . . . . . 198,251 53,015 177,650
Other long-term liabilities. . . . . . . . . . . . . . 6,610 23,591 4,988
Common stockholders' equity:
Common stock par value $1.00,
authorized 35,000,000 shares; issued and
outstanding 12,841,273 shares at May 1,
1998 (net of 666,782 treasury shares),
11,979,539 shares at May 2, 1997
(net of 930,465 treasury shares), and
12,189,244 shares at October 31, 1997 (net
of 720,760 treasury shares) . . . . . . . . . . . 12,841 11,980 12,189
Additional paid-in capital. . . . . . . . . . . . . . 58,958 26,309 31,371
Retained earnings . . . . . . . . . . . . . . . . . . 218,597 192,276 202,681
Foreign currency translation adjustment . . . . . . . (6,783) (2,823) (5,078)
---------- ---------- ----------
Total common stockholders' equity . . . . . . . . 283,613 227,742 241,163
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Total liabilities and common stockholders' equity $ 952,178 $ 800,014 $ 661,634
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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
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May 1, May 2,
1998 1997
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Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 18,992 $ 21,531
Adjustments to reconcile net earnings to net cash
used in operating activities:
Provision for depreciation and amortization . . . . . . . . . . . 16,054 10,521
Loss (gain) on disposal of property, plant and equipment. . . . . 295 (65)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . (2,632) 1,529
Tax benefits related to employee stock option transactions. . . . 1,815 1,766
Changes in operating assets and liabilities:
Receivables, net. . . . . . . . . . . . . . . . . . . . . . . . (172,618) (147,979)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . (40,874) 2,063
Other current assets. . . . . . . . . . . . . . . . . . . . . . 2,977 1,250
Accounts payable and accrued expenses . . . . . . . . . . . . . 15,047 30,942
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Net cash used in operating activities. . . . . . . . . . . (160,944) (78,442)
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Cash flows from investing activities:
Purchases of property, plant and equipment. . . . . . . . . . . . (17,783) (17,143)
Proceeds from asset disposals . . . . . . . . . . . . . . . . . . 1,325 227
Decrease (increase) in other assets . . . . . . . . . . . . . . . 2,887 (9,685)
Acquisition of James Hardie Irrigation, net of cash acquired. . . - (118,030)
Other acquisitions, net of cash acquired. . . . . . . . . . . . . (17,173) -
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Net cash used in investing activities . . . . . . . . . . (30,744) (144,631)
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Cash flows from financing activities:
Increase in short-term borrowing. . . . . . . . . . . . . . . . . 195,632 236,975
Repayments of long-term debt. . . . . . . . . . . . . . . . . . . (1,142) (243)
Increase in other long-term liabilities . . . . . . . . . . . . . 956 990
Proceeds from sale of common stock. . . . . . . . . . . . . . . . 1,655 3,981
Purchases of common stock . . . . . . . . . . . . . . . . . . . . - (7,952)
Dividends on common stock . . . . . . . . . . . . . . . . . . . . (3,076) (2,885)
----------- -----------
Net cash provided by financing activities. . . . . . . . . 194,025 230,866
----------- -----------
Foreign currency translation adjustment. . . . . . . . . . . . . . . (1,705) (2,266)
----------- -----------
Net increase in cash and cash equivalents. . . . . . . . . . . . . . 632 5,527
Cash and cash equivalents at beginning of period . . . . . . . . . . 8 66
----------- -----------
Cash and cash equivalents at end of period . . . . . . . . . . . . . $ 640 $ 5,593
----------- -----------
----------- -----------
See accompanying notes to condensed consolidated financial statements.
5
THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
MAY 1, 1998
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 generally
accepted accounting principles for complete financial statements.
Unless the context indicates otherwise, the term's "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 1, 1998 are not
necessarily indicative of the results that may be expected for the year
ended October 31, 1998. Certain amounts from prior period's financial
statements have been reclassified to conform to this period's
presentation.
For further information, refer to the consolidated financial statements
and notes included in the company's Annual Report on Form 10-K for the
year ended October 31, 1997. The policies described in that report are
used for preparing quarterly reports.
INVENTORIES
The majority of inventories are valued at the lower of cost or net
realizable value with cost determined by the last-in, first-out (LIFO)
method. Had the first-in, first-out (FIFO) method of cost determination
been used, inventories would have been $27,023,000 and $25,642,000
higher than reported at May 1, 1998, and May 2, 1997, respectively.
Under the FIFO method, work-in-process inventories were $102,479,000 and
$79,736,000 and finished goods inventories were $136,969,000 and
$104,920,000 at May 1, 1998, and May 2, 1997, respectively.
BUSINESS ACQUISITIONS
On November 25, 1997, the Company completed the acquisition of Exmark
Manufacturing Company Incorporated (Exmark). In exchange for all the
capital stock of Exmark, the company issued 598,051 shares of its common
stock and paid approximately $5.5 million in cash. In addition, under
terms of the purchase agreement, the Company will be required to make
contingent payments to Exmark's former shareholders if Exmark's
post-acquisition earnings and sales growth from November 1, 1997 through
October 31, 1999 exceed minimum levels established in the purchase
agreement. The maximum amount of these contingent payments is $28
million. Contingent payments will be paid with a combination of cash
and the Company's common stock. The acquisition is accounted for using
the purchase method of accounting. The transaction was not material to
the results of operations reported for the period ended May 1, 1998.
On February 19, 1998, the Company completed the acquisition of GR
Driplines, Inc. (Drip In) and various other assets. The acquisition is
accounted for using the purchase method of accounting. The transaction
was not material to the results of operations reported for the period
ended May 1, 1998.
The Company and James Hardie Irrigation Limited (Hardie) entered into an
arbitration process related to the valuation and accounting issues used
in determining the purchase price of Hardie. This process was completed on
April 20, 1998 resulting in a further reduction of the purchase price of
$1.8 million.
6
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 in the future by or on behalf of the company.
Statements that are not historical are forward-looking. When used by or on
behalf of the Company, the words "expect", "anticipate", "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 matter specific to the Company and the markets it serves. Particular risks
and uncertainties facing the Company at the present includes political and
economic uncertainty; whether an announced profit improvement plan can be
successfully implemented; instability in many of the company's markets in Asia;
the strong dollar which increases the cost of the Company's products in foreign
markets resulting in cancellation of planned projects and limiting the company's
ability to increase prices; changing buying patterns affecting the company's
consumer business from dealer outlets to price and value conscious purchases
from hardware, home centers, and mass merchant retailers; increased competition
in the Company's businesses; the Company's ability to integrate business
acquisitions and to manage alliances successfully; changes in distributor,
dealer or mass merchant purchasing practices; the company's ability to
rationalize its product lines and plant configurations; and continuing
production delays affecting selected consumer products.
In addition, the Company is subject to risks and uncertainties facing its
industry in general, including changes in business and political conditions, and
the economy in general in both foreign and domestic markets; weather conditions
affecting demand, including warm winters and wet spring and summer weather; lack
of growth in the Company's markets; financial market changes including increases
in interest rates and fluctuations in foreign exchange rates; 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; unanticipated problems or costs associated with implementation by
the Company of computer applications that will accommodate the year 2000; the
inability of the Company's suppliers, customers, creditors and financial service
organizations to implement computer applications accommodating the year 2000;
the Company's ability to develop, manufacture and sell both new and existing
products profitably; 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 and health and safety; labor relations; and availability
of materials.
The Company wishes to caution readers not to place undo reliance on any
forward-looking statement and to recognize that the statements are not
predictions of actual future results. 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 are in
addition to other factors discussed elsewhere in the Company's filings with the
Securities and Exchange Commission. The Company undertakes no obligation to
update any forward-looking statements to reflect events or circumstances after
the date on which such statement is made, or to reflect the occurrence of
unanticipated events.
7
RESULTS OF OPERATIONS
Second quarter net sales were $379.7 million versus $352.2 million last year, an
increase of 7.8%. Net earnings were $20.1 million versus $19.0 million for the
same quarter in the previous year, and diluted earnings per share for the
quarter were unchanged from last year at $1.53 per share. Sales would have been
down slightly without the incremental revenue from the acquisitions of
Exmark-Registered Trademark- and Drip In. The increase in net earnings was due
to strong demand for the professional turf equipment products, golf irrigation
products, worldwide agricultural irrigation products, and the acquisitions of
Drip In and Exmark-Registered Trademark-. The increase, however, was offset
partially by lower consumer sales due to less than expected demand for garden
tractors, residential/commercial and do-it-yourself irrigation products, and
production delays for lawn tractors and the Dura-Force-TM- Lawn Boy-Registered
Trademark- walk power mowers.
Year-to-date net sales were $589.7 million versus $561.2 million last year, an
increase of 5.1%. Without the incremental revenue of Exmark-Registered
Trademark- and Drip In, sales would have been down slightly. The decline in net
sales without Exmark-Registered Trademark- and Drip In was due to weak consumer
sales of snowthrowers and riding products, and production delays related to the
redesign of a portion of the Lawn Boy-Registered Trademark- lawn mower product
line that delayed the shipment of lawn mower product during the first quarter of
fiscal 1998. Net earnings for the six months ended May 1, 1998 were $19.0
million versus $21.5 million last year, 3.2% of net sales as compared to 3.8% of
net sales for the same period last year. Diluted earnings per share for the six
months ended May 1, 1998 were $1.45 versus $1.73 for the same period last year.
Lower operating margins from consumer sales and higher interest expense due to
higher borrowing levels contributed to the decline in net earnings.
The Company is in the process of formulating a profit improvement program to
reposition the consumer business and make the Company as a whole more
competitive. The expected primary elements of this strategy include broad
organizational initiatives for profit improvement, distribution and logistic
changes, product line and business rationalizations, and future plant
reconfigurations. The Company expects this program will result in restructuring
and other one-time charges totaling less than $20 million, of which
approximately $9-12 million of that will be charged in the second half of fiscal
1998. The expected savings are estimated to be at least $20 million by the end
of fiscal 2000.
The following table sets forth-net sales by product line.
Three Months Ended
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(Dollars in thousands) May 1, May 2,
1998 1997 $ Change % Change
---------- ---------- ---------- --------
Consumer products. . . . . . . . . . . . . $ 140,273 $ 152,623 $ (12,350) (8.1%)
Commercial products. . . . . . . . . . . . 158,424 122,030 36,394 29.8
Irrigation products. . . . . . . . . . . . 80,989 77,550 3,439 4.4
---------- ---------- ----------
Total * . . . . . . . . . . . . . . . $ 379,686 $ 352,203 $ 27,483 7.8%
---------- ---------- ----------
---------- ---------- ----------
* Includes international sales of. . . . . $ 79,205 $ 81,954 $ (2,749) (3.4%)
Six Months Ended
----------------------------------------------------------
(Dollars in thousands) May 1, May 2,
1998 1997 $ Change % Change
---------- ---------- ---------- --------
Consumer products. . . . . . . . . . . . . $ 197,717 $ 240,062 $ (42,345) (17.6%)
Commercial products. . . . . . . . . . . . 256,591 199,987 56,604 28.3
Irrigation products. . . . . . . . . . . . 135,437 121,111 14,326 11.8
---------- ---------- ----------
Total * . . . . . . . . . . . . . . . $ 589,745 $ 561,160 $ 28,585 5.1%
---------- ---------- ----------
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* Includes international sales of: . . . . $ 134,377 $ 135,980 $ (1,603) (1.2%)
8
CONSUMER PRODUCT SALES
Second quarter net sales of worldwide consumer products were $140.3 million
versus $152.6 million last year, a decline of 8.1%. Although the early spring
season boosted retail demand in most product categories, sales of riding
products, gas-powered trimmers and do-it-yourself irrigation were down for the
quarter. International sales were down from last year as a result of product
availability for the new Dura-Force-TM- Lawn Boy-Registered Trademark- walk
power mowers due to late production in the first quarter of fiscal 1998. Lower
than expected demand for garden tractors due to high levels of competition and
production delays for lawn tractors resulted in the decrease of revenues from
riding products. The wet spring weather in the key markets for do-it-yourself
irrigation product also contributed to the decrease in sales. On the other hand,
sales of walk power mowers were up indicating early acceptance of this year's
reduced pricing on the Toro branded product and acceptance for the new
Dura-Force-TM- Lawn Boy-Registered Trademark- product.
Year-to-date net sales of worldwide consumer products were $197.7 million versus
$240.1 million last year, a decrease of 17.7%. The lack of snowfall in certain
parts of the country during the winter season caused a significant reduction in
snowthrower sales, predominately in the first quarter. In addition to the
reasons mentioned above in the quarter comparison, the Company's redesign of
certain portions of its lawn mower product line led to a delay of product
shipment. The Company also continues to experience a shift in consumer buying
patterns from brand specific purchases from dealer outlets to price and value
conscious purchases from hardware, home centers, and mass merchant retailers, a
trend throughout the industry.
COMMERCIAL PRODUCT SALES
Second quarter net sales of worldwide commercial products were $158.4 million
versus $122.0 million last year, an increase of 29.8%. The sales increase was
largely a result of the sales growth in the landscape contractor market due to
the introduction of new products and the acquisition of Exmark in November 1997.
Sales of equipment to domestic golf courses did well, reflecting the continued
growth of the golf market. On the other hand, international commercial sales
decreased from last year due to the continued weakness in certain foreign
economies, particularly in Asia where many golf projects have been postponed or
cancelled and to the strength of the dollar against many other currencies, which
makes the Company's products more expensive to foreign purchasers.
Year-to-date net sales of worldwide commercial products were $256.6 million
versus $200.0 million last year, a significant increase of 28.3%. The reasons
for the six-month increase in sales parallel the contributing factors for the
second quarter increase.
IRRIGATION PRODUCT SALES
Second quarter net sales of worldwide irrigation products were $81.0 million
versus $77.6 million last year, an increase of 4.4%. Strong domestic golf
revenues, the acquisition of Drip In during the second quarter, and the growth
of the worldwide agricultural irrigation market contributed to the majority of
the increase. International sales were up from the previous quarter due to an
increase in agricultural irrigation product sales as well as strong turf
irrigation revenues in Australia which is experiencing very dry weather.
However, sales of residential/commercial irrigation products have decreased from
the previous quarter due to the wet weather in certain key markets.
Year-to-date net sales of worldwide irrigation products were $135.4 million
versus $121.1 million last year, an increase of 11.8%. As mentioned above in
the quarter comparison, strong golf irrigation revenues and worldwide
agricultural irrigation revenues contributed to the increase as did the addition
of sales from Drip In following its acquisition in the second quarter, however,
residential/commercial irrigation products decreased due to the wet weather in
certain key markets.
9
GROSS PROFIT
Second quarter gross profit was $132.9 million versus $125.1 million last year,
an increase of 6.2%. As a percent of sales, gross profit for the second quarter
was 35.0% versus 35.5% last year. The lower gross margin was primarily due to
lower pricing on Toro-Registered Trademark- branded walk power mowers and plant
inefficiencies in the El Paso facility related to certain consumer products.
Also contributing to the decline of gross profit margin was the addition of
Exmark-Registered Trademark- products, for which gross margins are lower than
historical Toro-Registered Trademark- product margins.
Year-to-date gross profit was $206.0 million versus $200.3 million last year.
As a percentage of sales, year-to-date gross profit was 34.9% versus 35.7% last
year. The decrease in gross margins was due to the same contributing factors as
in the quarter comparison with the additional contributing factor of reduced
sales in the first quarter of higher gross margin snowthrower sales.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Second quarter selling, general and administrative expenses (SG&A) were $95.0
million versus $89.2 million last year, an increase of 6.5%. However, as a
percent of sales, SG&A decreased slightly to 25.0% from 25.3% for the same
quarter in fiscal 1997. The additions of Exmark-Registered Trademark- and Drip
In contributed to $4.8 million of incremental SG&A expense during the second
quarter of fiscal 1998. Without Exmark-Registered Trademark- and Drip In, SG&A
increased .2% as a percent of sales due to higher warranty expense as a result
of a change in the sales mix to commercial products where historical warranty
rates are generally higher on average.
Year-to-date SG&A expenses were $166.9 million versus $157.6 million last year,
an increase of $9.3 million. The increase was due mainly to the acquisitions of
Exmark-Registered Trademark- and Drip In, increased warranty expense, and
increased costs for information systems. Without Exmark-Registered Trademark-
and Drip In, SG&A expenses increased $0.8 million and .9% as a percentage of
sales.
INTEREST EXPENSE
Second quarter interest expense was $6.9 million versus $6.1 million last year,
an increase of $.8 million. Year-to-date interest expense was $12.7 million
versus $9.9 million last year, an increase of $2.8 million. Higher working
capital levels as a result of higher inventory and accounts receivable balances
represented the majority of the increase. Incremental cash required for the
acquisitions of Exmark-Registered Trademark- and Drip In also contributed to the
increase in interest expense.
OTHER INCOME, NET
Second quarter other income, net, was $2.1 million versus $1.6 million last
year. In the prior period, the Company had recorded a $.5 million expense
related to an unfavorable legal settlement. Year-to-date other income, net, was
$5.0 million versus $2.8 million last year. The increase of $2.2 million was
due to a favorable patent infringement settlement and recoveries of a note
receivable previously written off.
10
FINANCIAL POSITION AS OF MAY 1, 1998
MAY 1, 1998 COMPARED TO MAY 2, 1997
Total assets at May 1, 1998 were $952.2 million versus $800.0 million on May 2,
1997, an increase of $152.2 million. This increase is comprised of
approximately $81.3 million related to the acquisitions of Exmark-Registered
Trademark- and Drip In and various other changes discussed below. Net accounts
receivable increased by $27.7 million due to increased sales of landscape
contractor equipment that receives extended terms and agricultural irrigation
product partially offset by lower levels of sales on consumer products.
Exmark-Registered Trademark- and Drip In also contributed to the increase with
$11.1 million in additional receivables. Inventory also increased $53.4 million
due to lower than expected garden tractor sales, higher levels of residual snow
product due to the warm winter and production delays in the El Paso facility
that increased work-in-process inventory levels. Net property, plant, and
equipment rose $15.6 million primarily due to the acquisition of
Exmark-Registered Trademark- and Drip In, corporate headquarters expansion and
new tooling projects. Other assets increased $41.3 million as a result of
capitalization of the excess purchase price of Exmark-Registered Trademark- and
Drip In over the fair value of the assets acquired.
Total current liabilities were $463.7 million versus $495.7 million last year, a
decrease of $32.0 million. The majority of this decrease was in short-term
borrowing, which decreased by $41.4 million from the prior quarter due primarily
to the issuance of long-term debt during the third quarter of fiscal 1997. The
refinancing of the short-term debt was partially offset by increases in working
capital needs to fund increases in accounts receivable and inventory. Accounts
payable increased $12.3 million due to higher levels of inventory as compared to
the prior period. Other accrued liabilities decreased $4.5 million as a result
of adjusting Hardie related accruals partially offset by higher warranty
accruals. Long-term debt increased $145.2 million as a result of the issuance
of $175.0 million of debt securities that were used to redeem $50.0 million of
11% debentures, refinancing of short-term debt in connection with the Hardie
acquisition, and long-term debt issued or assumed related to the Drip In
acquisition. Other long-term liabilities decreased $17.0 million as a result of
terminating an interest rate swap agreement associated with the issuance of
long-term debt in fiscal 1997.
May 1, 1998 COMPARED TO OCTOBER 31, 1997
Total assets at May 1, 1998 were $952.2 million versus $661.6 million at October
31, 1997, an increase of $290.6 million. Accounts receivable increased $181.3
million from October 31, 1997 due to increased receivables from the acquisitions
of Exmark-Registered Trademark- and Drip In and the seasonal increase in account
receivables. Inventory increased by $52.3 million due to lower than projected
consumer sales of riding and snow products and production delays in the El Paso
facility. Net property, plant and equipment increased $13.9 million due
primarily to the acquisition of Exmark-Registered Trademark- and Drip In along
with the expansion of the corporate headquarters. Other assets increased $41.7
million as a result of the excess purchase price of Exmark-Registered Trademark-
and Drip In over the fair value of the net assets acquired.
Total current liabilities at May 1, 1998 were $463.7 million versus $237.8
million at October 31, 1997, an increase of $225.9 million. The majority of
this increase was the result of additional short-term borrowings of $195.6
million, reflecting the Company's strategy of utilizing short-term borrowing to
fund the company's seasonal working capital needs. Accounts payable increased
$11.0 million compared to October 31, 1997 due to the timing of inventory
purchases that related to the higher levels of inventory. Other accrued
liabilities increased $17.8 million as a result of higher warranty accruals and
accruals for various seasonal sales and marketing programs which are at their
peak during the spring selling season. Long-term debt increased $20.6 million
due to long-term debt issued or assumed related to the acquisitions of
Exmark-Registered Trademark- and Drip In.
11
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the first six months of fiscal 1998 was
primarily for the seasonal increase in accounts receivable and inventory. The
Company's working capital needs are funded with $230.0 million of unsecured bank
credit lines. The Company also has banker's acceptance financing agreements
under which an additional $40.0 million is 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.
In February 1998, the company completed the acquisition of Drip In. The Company
financed the cash portion of the acquisition price of approximately $10.6
million by using the Company's unsecured bank credit lines.
Management believes that the combination of funds available through its existing
financing arrangements, coupled with forecasted cash flows, will provide the
capital resources for its anticipated needs.
INFLATION
The company is subject to the effects of changing prices. The Company has been
able to deal successfully with inflationary pressures through a combination of
internal cost reduction efforts and selected increases in selling prices of
products.
YEAR 2000 COMPLIANCE
The Company is in the process of implementing a year 2000 compliant
enterprise-wide information system. This process was initiated in 1995 and is
currently operational in many locations within the Company. This implementation
is expected to be largely completed early fiscal 1999. The Company has also
completed an assessment project, which addresses those other significant systems
that may have year 2000 compliance issues. The Company is addressing issues
raised by this analysis.
Year 2000 related costs are being expensed as incurred. The costs expected to
be incurred during the remainder of fiscal 1998 and during fiscal 1999 that
relate exclusively to addressing the year 2000 issues are expected to be
immaterial to the Company.
The Company presently believes that with the implementation of the new system
and modifications to existing software, year 2000 compliance will not pose a
significant operational issue for the company. However, if these modifications
and conversions are not completed on a timely basis, including implementation by
its business partners, year 2000 compliance may have a material impact on the
operations of the Company.
12
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 18, 1998.
(b) The results of the stockholder votes were as follows:
Broker
------
For Against Abstain Non-Votes
--- ------- ------- ---------
1. Election of Directors
Robert H. Buhrmaster 10,405,406 254,009 - -
Winslow H. Buxton 10,361,994 297,421 - -
Robert. H. Nassau 10,400,827 258,588 - -
Christopher A. Twomey 10,364,761 294,654 - -
2. Approval of Selection of Independent Auditors 10,398,545 184,701 76,169 -
3. Approval of Amendment of Annual
Management Incentive Plan II to add a stock
retention feature 9,344,282 1,005,842 267,406 41,885
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
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, Commission File No. 1-8649).
3(ii) and 4(d) Bylaws of Registrant (incorporated by reference to
Exhibit 3.3 to Registrant's Annual Report on Form 10-K
for the year ended July 31, 1991, Commission File No.
1-8649).
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 Norwest 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).
13
Item 6. Exhibits and Reports on Form 8-K (continued)
10(iii)(a) Form of Employment Agreement in effect for certain
officers of Registrant (incorporated by reference
Exhibit 10(b) to Registrant's Annual Report on Form
10-K for the fiscal year ended July 31, 1995).
10(iii)(b) 1992 Directors Stock Plan, as amended (incorporated by
reference to Exhibit 10(iii)(b) to Registrant's Annual
Report on Form 10-K for the year ended October 31,
1996).
10(iii)(c) Annual Management Incentive Plan II for officers of
Registrant (incorporated by reference to Exhibit A to
Registrant's Proxy Statement dated February 2, 1998).
10(iii)(d) 1985 Incentive Stock Option Plan, as amended
(incorporated by reference Exhibit 10(b) to
Registrant's Annual Report on Form 10-K for the year
ended July 31, 1993).
10(iii)(e) 1989 Stock Option Plan, as amended (incorporated by
reference to Exhibit 10(iii)(e) to Registrant's Annual
Report on Form 10-K for the year ended October 31,
1997).
10(iii)(f) 1993 Stock Option Plan, as amended (incorporated by
reference to Exhibit 10(iii)(f) to Registrant's Annual
Report on Form 10-K for the year ended October 31,
1997).
10(iii)(g) Continuous Performance Award Plan, as amended
(incorporated by reference Exhibit 10(iii)(g) to
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1996).
10(iii)(h) The Toro Company Supplemental Management Retirement
Plan (incorporated by reference Exhibit 10(iii)(h) to
Registrant's Annual Report on Form 10-K for the year
ended October 31, 1996).
10(iii)(i) Chief Executive Officer Succession Incentive Agreement
dated as of July 31, 1995, as amended (incorporated by
reference to Exhibit 10(iii)(i) to Registrant's Annual
Report on Form 10-K for the year ended October 31, 1997
10(iii)(j) The Toro Company Deferred Compensation Plan for
Officers.
11 Computation of Earnings per Share of Common Stock and
Common Stock Equivalent (page 16 of this report).
27 Financial Data Schedule; electronic filing only.
14
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
Chief Financial Officer
(principal financial officer)
Date: June 15, 1998
15