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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 July 31, 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 August 31, 1998 was
12,867,614.
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THE TORO COMPANY
INDEX TO FORM 10-Q
Page Number
-----------
PART I. FINANCIAL INFORMATION:
ITEM 1. Condensed Consolidated Statements of Operations and
Retained Earnings -
Three and Nine Months Ended
July 31, 1998 and August 1, 1997..........................................3
Condensed Consolidated Balance Sheets -
July 31, 1998, August 1, 1997 and October 31, 1997........................4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended July 31, 1998 and August 1, 1997........................5
Notes to Condensed Consolidated Financial Statements........................6-7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................8-14
PART II. OTHER INFORMATION:
ITEM 5. Other Information...........................................................15
ITEM 6. Exhibits and Reports on Form 8-K...........................................15-16
Signatures..................................................................17
Exhibit 11 Computation of Earnings (Loss) Per Share of Common Stock.........18
2
PART I. ITEM 1. FINANCIAL INFORMATION
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
July 31, August 1, July 31, August 1,
1998 1997 1998 1997
------------- ----------- ------------- ------------
Net sales ......................................... $ 290,993 $ 249,274 $ 880,738 $ 810,434
Cost of sales ..................................... 189,713 156,879 573,457 517,695
------------- ----------- ------------- ------------
Gross profit ................................ 101,280 92,395 307,281 292,739
Selling, general and administrative expense ....... 89,532 73,626 256,431 231,255
Restructuring and other unusual expense ........... 10,452 - 10,452 -
------------- ----------- ------------- ------------
Earnings from operations .................... 1,296 18,769 40,398 61,484
Interest expense .................................. (6,650) (5,476) (19,366) (15,408)
Other income, net ................................. 1,135 3,151 6,140 5,957
------------- ----------- ------------- ------------
Earnings (loss) before income taxes ......... (4,219) 16,444 27,172 52,033
Provision (benefit) for income taxes .............. (1,666) 6,495 10,733 20,553
------------- ----------- ------------- ------------
Net earnings (loss) before extraordinary loss (2,553) 9,949 16,439 31,480
Extraordinary loss, net of income tax benefit of
$1,087 ...................................... - (1,663) - (1,663)
------------- ----------- ------------- ------------
Net earnings (loss) ......................... $ (2,553) $ 8,286 $ 16,439 $ 29,817
------------- ----------- ------------- ------------
------------- ----------- ------------- ------------
Retained earnings at beginning of period .......... $ 218,597 $ 192,276 $ 202,681 $ 173,630
Net earnings (loss) ............................... (2,553) 8,286 16,439 29,817
Dividends on common stock of $0.12, $0.12,
$0.36 and $0.36 per share, respectively ..... (1,543) (1,452) (4,619) (4,337)
------------- ----------- ------------- ------------
Retained earnings at end of period ................ $ 214,501 $ 199,110 $ 214,501 $ 199,110
------------- ----------- ------------- ------------
------------- ----------- ------------- ------------
Basic net earnings (loss) per share of common stock
before extraordinary loss ................... $ (0.20) $ 0.82 $ 1.28 $ 2.60
Extraordinary loss, net of income tax benefit ..... - (0.13) - (0.13)
------------- ----------- ------------- ------------
Basic net earnings (loss) per share of common
stock ....................................... $ (0.20) $ 0.69 $ 1.28 $ 2.47
------------- ----------- ------------- ------------
------------- ----------- ------------- ------------
Diluted net earnings (loss) per share of common
stock and common stock equivalents before
extraordinary loss ....................... $ (0.20) $ 0.80 $ 1.24 $ 2.53
Extraordinary loss, net of income tax benefit ..... - (0.13) - (0.13)
------------- ----------- ------------- ------------
Diluted net earnings (loss) per share of common
stock and common stock equivalents ....... $ (0.20) $ 0.67 $ 1.24 $ 2.40
------------- ----------- ------------- ------------
------------- ----------- ------------- ------------
See accompanying notes to condensed consolidated financial statements.
3
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
July 31, August 1, October 31,
1998 1997 1997
-------------- ------------- -------------
ASSETS
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Cash and cash equivalents ........................... $ 2,800 $ 4 $ 8
Receivables, net .................................... 328,628 308,234 259,134
Inventories ......................................... 202,999 161,825 160,122
Other current assets ................................ 52,069 39,285 52,780
-------------- ------------- -------------
Total current assets ......................... 586,496 509,348 472,044
-------------- ------------- -------------
Property, plant, and equipment ...................... 325,473 322,708 297,841
Less accumulated depreciation ................ 192,510 206,105 180,989
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132,963 116,603 116,852
Other assets ........................................ 113,904 79,019 72,738
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Total assets ................................. $ 833,363 $ 704,970 $ 661,634
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current portion of long-term debt ................... $ 684 $ 365 $ 365
Short-term borrowing ................................ 158,031 95,000 41,000
Accounts payable .................................... 30,505 46,531 58,397
Other accrued liabilities ........................... 161,581 146,358 138,071
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Total current liabilities .................... 350,801 288,254 237,833
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Long-term debt, less current portion ................ 196,947 177,650 177,650
Other long-term liabilities ......................... 6,625 5,399 4,988
Stockholders' equity:
Common stock par value $1.00,
authorized 35,000,000 shares; issued and
outstanding 12,867,614 shares at July 31,
1998 (net of 640,441 treasury shares),
12,112,310 shares at August 1, 1997
(net of 797,694 treasury shares), and
12,189,244 shares at October 31, 1997 (net
of 720,760 treasury shares) .................. 12,868 12,112 12,189
Additional paid-in capital ....................... 59,455 28,241 31,371
Retained earnings ................................ 214,501 199,110 202,681
Foreign currency translation adjustment .......... (7,834) (5,796) (5,078)
-------------- ------------- -------------
Total stockholders' equity ....................... 278,990 233,667 241,163
-------------- ------------- -------------
Total liabilities and stockholders' equity ... $ 833,363 $ 704,970 $ 661,634
-------------- ------------- -------------
-------------- ------------- -------------
See accompanying notes to condensed consolidated financial statements.
4
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Nine Months Ended
--------------------------------
July 31, August 1,
1998 1997
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Cash flows from operating activities:
Net earnings ............................................................. $ 16,439 $ 29,817
Adjustments to reconcile net earnings to net cash (used in) provided by
operating activities:
Extraordinary loss on early extinguishment of debt .................... - 1,663
Provision for depreciation and amortization ........................... 22,593 16,675
Loss (gain) on disposal of property, plant and equipment .............. 301 (70)
Deferred income taxes ................................................. (2,490) 1,528
Tax benefits related to employee stock option transactions ............ 1,815 1,224
Changes in operating assets and liabilities:
Receivables, net ................................................ (60,811) (43,488)
Inventories ..................................................... (31,448) (747)
Other current assets ............................................ 4,283 (3,606)
Accounts payable and accrued expenses ........................... (18,100) 8,009
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Net cash (used in) provided by operating activities ......... (67,418) 11,005
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Cash flows from investing activities:
Purchases of property, plant and equipment ............................ (24,514) (24,729)
Proceeds from asset disposals ......................................... 1,330 1,160
Decrease (increase) in other assets ................................... 1,362 (7,877)
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 ....................... (38,995) (149,476)
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Cash flows from financing activities:
Increase in short-term borrowing ...................................... 117,031 53,975
Proceeds from issuance of long-term debt .............................. - 175,000
Repayments of long-term debt .......................................... (3,601) (50,350)
Payments for termination of interest rate swaps ....................... - (23,650)
Payment of debt issue costs and prepayment penalty .................... - (5,625)
Increase in other long-term liabilities ............................... 972 -
Proceeds from exercise of stock options ............................... 2,176 6,587
Purchases of common stock ............................................. - (7,952)
Dividends on common stock ............................................. (4,619) (4,337)
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Net cash provided by financing activities ................... 111,959 143,648
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Foreign currency translation adjustment .................................. (2,754) (5,239)
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Net increase (decrease) in cash and cash equivalents ..................... 2,792 (62)
Cash and cash equivalents at beginning of period ......................... 8 66
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Cash and cash equivalents at end of period ............................... $ 2,800 $ 4
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See accompanying notes to condensed consolidated financial statements.
5
THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JULY 31, 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 nine months
ended July 31, 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 and financial information 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 July 31, 1998, and August 1, 1997, respectively. Under the
FIFO method, work-in-process inventories were $84,360,000 and $72,008,000
and finished goods inventories were $145,662,000 and $115,459,000 at July
31, 1998, and August 1, 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 $28.0 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.
On February 19, 1998, the company completed the acquisition of GR
Driplines, Inc. (Drip In) and various other assets. The acquisition was
accounted for using the purchase method of accounting.
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 $1.8 million reduction of the
purchase price.
6
RESTRUCTURING AND OTHER UNUSUAL EXPENSE
During the third quarter of fiscal 1998, the company recorded a charge of
$10.5 million for restructuring and other unusual expense. The
restructuring charges of $3.3 million consisted of $2.2 million for the
severance and asset write-down related to the closure of a manufacturing
facility and $1.1 million for other restructuring severance costs. Other
unusual expense consisted of $3.5 million for the expected loss related to
the sale of the recycling equipment division and $3.7 million for special
marketing programs consisting of rebates and co-op credits in order to
reduce certain consumer product field inventories to historically low
levels in preparation of a new distribution logistical program next fiscal
year.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and the Accounting
Standards Executive Committee issued Statement of Position (SOP) 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use."
SFAS 133 establishes new standards for recognizing all derivatives as
either assets or liabilities, and measuring those instruments at fair
value. The company will be required to adopt the new standard beginning
with the first quarter of fiscal year 2000; earlier application is
permitted. The adoption of SFAS 133 is not expected to have a material
impact on the company's consolidated financial statements.
SOP 98-1 provides guidance on accounting for the costs of computer software
developed or obtained for internal use and does not require additional
disclosures. The company will be required to adopt the SOP at the beginning
of fiscal year 2000; earlier application is permitted. Costs incurred prior
to the initial application of the SOP should not be adjusted to conform
with SOP 98-1. However, costs incurred for all projects in process at the
beginning of fiscal year 2000 should apply the provisions established in
SOP 98-1. The adoption of SOP 98-1 is not expected to have a material
impact on the company's consolidated financial statements.
During fiscal 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information."
SFAS 130 establishes standards for reporting and displaying the components
of comprehensive income and the accumulated balance of other comprehensive
income within total stockholders' equity. The company is required to adopt
SFAS 130 at the beginning of fiscal year 1999, with reclassification of
prior period information for comparative purposes. The adoption of SFAS 130
will require additional disclosures, but will not have a material impact on
the company's consolidated financial statements.
SFAS 131 requires disclosure of selected information about operating
segments including segment income, revenues, and asset data, as well as
descriptive information about how operating segments are determined and the
products and services provided by the segments. The company will be
required to adopt SFAS 131 beginning with its 1999 fiscal year-end annual
report. The company is in the process of evaluating SFAS 131 and the impact
on the company's current disclosures.
7
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 matters specific to the company and the markets it
serves. Particular risks and uncertainties facing the company at the present
include whether the announced profit improvement plan can be successfully
implemented and expected cost savings can be achieved; the cost of closing
certain plants and selling certain business units; the success of new
marketing programs; instability in many of the company's markets in Asia and
other parts of the world; 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; increased
emphasis on price and value affecting consumer buying patterns which affect
the company's consumer business; uncertainties inherent in modification of
distribution of consumer products from dealer outlets to hardware, home
centers, and mass merchant retailers; changes in distributor ownership;
increased competition in the company's businesses; the company's ability to
integrate recent business acquisitions and to manage alliances successfully;
changes in the company's distribution logistics; changes in distributor,
dealer or mass merchant purchasing practices; the company's ability to
rationalize its product lines and plant configurations; the company's ability
to negotiate expected covenant waivers with its banks; and continuing cost
overruns affecting manufacturing efficiencies for 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.
8
RESULTS OF OPERATIONS
The company has experienced poor results for the nine months ended July 31,
1998 compared to last year. The company has been affected by several events
outside its control. The lack of snow experienced this year negatively
impacted highly profitable snowthrower sales, the wet spring led to lower
irrigation sales in certain markets in the second quarter, and weakness in
Asia has affected commercial and irrigation golf related sales in that
market. The company also was affected by poor execution of the transfer of
manufacturing certain consumer product from its closed Mound, Minnesota
facility to its El Paso, Texas facility, which has resulted in significant
manufacturing inefficiencies. The company also had delays in manufacturing
the new Dura-Force(TM) Lawn Boy-Registered Trademark- walk power mower, which
did not allow the company to fully capitalize on the acceptance of the new
product. The company is focusing on improving the manufacturing efficiencies
at its El Paso plant and expects the majority of the issues to be resolved by
fiscal year-end. The company has begun a profit improvement plan noted below
to improve overall company profitability.
Third quarter net sales were $291.0 million versus $249.3 million last year,
an increase of 16.7 percent. Sales would have been up 8.8 percent without the
incremental revenue from the acquisitions of Exmark-Registered Trademark- and
Drip In. The increase in sales is due to a strong demand for professional
turf equipment and parts and certain irrigation products, and the newly
acquired Drip In and Exmark-Registered Trademark- products. The increase in
sales is also due to a shift of revenue from the second to the third quarter
for walk power mowers, which was partially caused by production delays in the
first and second quarters. The increase, however, was offset partially by a
planned reduction of sales of gas trimmers to certain home centers due to low
product profitability. Net loss for the quarter was $2.6 million versus net
income of $8.3 million for the same quarter in the previous year, and loss
per basic share was $0.20 versus net income of $0.67 per dilutive share last
year. The current period net loss was primarily due to restructuring and
other unusual expense of $10.5 million along with lower operating margins due
to manufacturing inefficiencies experienced at the El Paso facility. The
change in results for the prior comparable period was also affected by higher
interest expense resulting from higher levels of working capital and interest
on debt related to the current year's acquisitions.
Year-to-date net sales were $880.7 million versus $810.4 million last year,
an increase of 8.7 percent. Without the incremental revenue of
Exmark-Registered Trademark- and Drip In products, sales would have been up
only slightly. The increase in net sales without Exmark-Registered Trademark-
and Drip In products were due to strong sales of professional turf equipment
and irrigation products that were partially offset by the significantly lower
levels of shipments for consumer products including snowthrowers, gas powered
trimmers, and riding products. Net earnings were $16.4 million versus $29.8
million last year, 1.9 percent of net sales as compared to 3.7 percent of net
sales for the same period last year. The reasons for the nine-month decrease
in net earnings is due to the significant decrease in consumer sales and the
reasons noted for the third quarter decrease.
The company is in the process of implementing a profit improvement plan and
is formulating additional programs to reposition the consumer business and
make the company as a whole more competitive. The expected primary elements
of this strategy include decentralizing manufacturing and inventory
management, changes in distribution logistics to an outside provider, sale of
the recycling equipment division, and plant closings. The company expects
this program will result in restructuring and other unusual expense totaling
approximately $15.0 million in fiscal 1998, of which $10.5 million was
recorded in the third quarter. Approximately $3.0 to $4.5 million will be
expensed in the fourth quarter of fiscal 1998. The company is also reviewing
other programs, which could result in additional expense of $3.0 to $5.0
million in fiscal 1999. Due to the additional restructuring and other unusual
expense that will be recorded in the fourth quarter, in addition to the
reasons discussed below, the company expects a significant loss for the
fourth quarter. The expected savings from the profit improvement plan are
estimated to be $20.0 million by the end of fiscal 2000.
9
RESULTS OF OPERATIONS (CONTINUED)
The following table sets forth net sales by product line.
Three Months Ended
---------------------------------------------------------------
(Dollars in thousands) July 31, August 1,
1998 1997 $ Change % Change
------------ ------------- ------------ -----------
Consumer products ..................... $ 96,138 $ 93,471 $ 2,667 2.9%
Commercial products ................... 111,725 89,832 21,893 24.4%
Irrigation products ................... 83,130 65,971 17,159 26.0%
------------ ------------- ------------
Total * ........................... $290,993 $249,274 $ 41,719 16.7%
------------ ------------- ------------
------------ ------------- ------------
* Includes international sales of: .... $ 51,661 $ 48,972 $ 2,689 5.5%
Nine Months Ended
---------------------------------------------------------------
(Dollars in thousands) July 31, August 1,
1998 1997 $ Change % Change
------------ ------------- ------------ -----------
Consumer products .................... $293,855 $333,533 $(39,678) (11.9)%
Commercial products .................. 368,316 289,819 78,497 27.1%
Irrigation products .................. 218,567 187,082 31,485 16.8%
------------ ------------- ------------
Total * .......................... $880,738 $810,434 $ 70,304 8.7%
------------ ------------- ------------
------------ ------------- ------------
* Includes international sales of: ... $186,038 $184,952 $ 1,086 0.6%
CONSUMER PRODUCT SALES
Third quarter net sales of worldwide consumer products were $96.1 million
versus $93.5 million last year, an increase of 2.9 percent. The company
experienced strong shipments of the Lawn-Boy-Registered Trademark- walk power
mowers due to delays in production of the new Dura-Force-TM-
Lawn-Boy-Registered Trademark- product that shipped this quarter instead
of the second quarter. The Toro-Registered Trademark- branded walk power
mower also experienced strong third quarter sales compared to the same period
last year due to the prior year's weak spring sales. In addition, dealers are
purchasing product closer to retail demand, which management believes may be
causing sales to shift from the second to the third quarter. These increases
were offset by the planned reduction of sales of gas powered trimmers to
certain home centers and a reduction in snowthrower shipments due to
inventory carryover at the dealers from last winter.
Year-to-date net sales of worldwide consumer products were $293.9 million
versus $333.5 million last year, a decrease of 11.9 percent. Shipments were
down for riding products as a result of lower demand for a new garden tractor
priced higher than the prior year model and production delays for lawn
tractors. Do-it-yourself irrigation sales were below last year due to the wet
spring weather experienced this year and the discontinuance of several low
margin products. Gas powered trimmer sales were significantly below last year
as the company discontinued the product line in certain home centers due to
product profitability. International sales were below last year due to
product availability. The Canadian demand for the new Dura-Force-TM-
Lawn-Boy-Registered Trademark- walk power mowers could not be met due to
production delays. The company also believes that sales were lower as a
result of 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.
Because the company expects this trend to continue, the company recently
announced that certain Toro-Registered Trademark- branded walk power mowers
will be sold in certain home centers next fiscal year.
As of July 31, 1998, dealer snowthrower inventory is abnormally high due to
the lack of snow experienced during the company's first quarter. Sales for
snowthrower products are expected to be significantly below prior years'
levels in the fourth quarter of fiscal 1998.
10
COMMERCIAL PRODUCT SALES
Third quarter net sales of worldwide commercial products were $111.7 million
versus $89.8 million last year, an increase of 24.4 percent. Despite strong
competition, sales of equipment to golf courses did well, reflecting the
continued growth of the golf market. Sales were also strong for service parts
due to a new maintenance kit program. The acquisition of Exmark-Registered
Trademark- in November 1997 also significantly contributed to the sales
increase. However, Toro sales to the landscape contractor market were below
prior year, when the company conducted a strong marketing effort to sell
certain landscape contractor products. International sales were strong due to
an increase in demand in the European market for golf course equipment and
landscape contractor products, but were offset by weak sales in Asia.
Year-to-date net sales of worldwide commercial products were $368.3 million
versus $289.8 million last year, a significant increase of 27.1 percent. The
increase was mainly attributable to the addition of Exmark-Registered
Trademark- along with strong sales to the landscape contractor market due to
new product introductions and continued growth of sales to the golf market,
except Asia.
IRRIGATION PRODUCT SALES
Third quarter net sales of worldwide irrigation products were $83.1 million
versus $66.0 million last year, an increase of 26.0 percent. Strong domestic
golf revenues, the acquisition of Drip In, the growth of the worldwide
agricultural irrigation market, and the success of a new marketing program
for certain irrigation products contributed to the majority of the increase.
Year-to-date net sales of worldwide irrigation products were $218.6 million
versus $187.1 million last year, an increase of 16.8 percent. As mentioned 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. However, sales of certain
residential/commercial irrigation products decreased due to wet weather in
certain key markets during the spring of the current year.
GROSS PROFIT
Third quarter gross profit was $101.3 million versus $92.4 million last year,
an increase of 9.6 percent. As a percentage of net sales, gross profit margin
for the third quarter was 34.8 percent versus 37.1 percent last year. The
lower gross margin percentage was primarily due to manufacturing
inefficiencies at the El Paso facility related to certain consumer products
and lower pricing on the Toro-Registered Trademark- branded walk power mowers.
Year-to-date gross profit was $307.3 million versus $292.7 million last year.
As a percentage of net sales, year-to-date gross profit margin was 34.9
percent versus 36.1 percent last year. The decrease in gross margin
percentage was due to the same contributing factors as in the quarter
comparison with the addition of reduced sales of higher gross margin
snowthrowers.
Dealer snowthrower inventory is abnormally high at July 31, 1998 due to the
lack of snow experienced this past winter. Sales for snowthrower products are
expected to be significantly below prior years' levels in the fourth quarter
of fiscal 1998. Since snowthrowers tend to have a higher gross profit margin,
this is expected to cause a reduction of gross profit in the fourth quarter.
Also, continued inefficiencies in the manufacturing of certain consumer
products will put a downward pressure on gross margins.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
Third quarter selling, general and administrative expenses (SG&A) were $89.5
million versus $73.6 million last year, an increase of 21.6 percent. As a
percentage of net sales, SG&A increased to 30.8 percent from 29.5 percent for
the same quarter in fiscal 1997. The additions of Exmark-Registered
Trademark-and Drip In contributed $4.7 million of incremental SG&A expense
during the third quarter of fiscal 1998. Without Exmark-Registered Trademark-
and Drip In, SG&A increased 1.8 percent as a percent of net sales due to
higher costs of promotional programs and administrative expenses related to
information services.
Year-to-date SG&A expenses were $256.4 million versus $231.3 million last
year, an increase of $25.1 million. The increase was due to the same
contributing factors outlined above for the quarter with the addition of
higher warranty expense due to product mix from consumer to commercial
products and higher overall warranty accrual rates when compared to last year.
11
RESTRUCTURING AND OTHER UNUSUAL EXPENSE
Third quarter restructuring and other unusual expense was $10.5 million. The
restructuring charge consisted of $2.2 million for the severance and asset
write-down to the closure of a manufacturing facility and $1.1 million for
other restructuring severance costs. Other unusual expense consisted of $3.5
million for the expected loss on the sale of the recycling equipment division
and $3.7 million for special consumer marketing programs consisting of
rebates and co-op credits in order to reduce certain consumer field
inventories to historically low levels in the preparation for a new
distribution logistical program next year. Additional restructuring and other
unusual expense of $3.0 to $4.5 million are expected to be recorded in the
fourth quarter of fiscal 1998.
INTEREST EXPENSE
Third quarter interest expense was $6.7 million versus $5.5 million last
year, an increase of $1.2 million. Year-to-date interest expense was $19.4
million versus $15.4 million last year, an increase of $4.0 million. Higher
working capital levels as a result of higher inventory and accounts
receivable balances and incremental cash required for the acquisitions of
Exmark-Registered Trademark- and Drip In also contributed to the increase in
interest expense.
OTHER INCOME, NET
Third quarter other income, net, was $1.1 million versus $3.1 million last
year, a decrease of $2.0 million. In the prior period, the company received a
worker's compensation insurance refund, and the company experienced higher
currency losses in the current period. Year-to-date other income, net, was
$6.1 million versus $6.0 million last year.
FINANCIAL POSITION AS OF JULY 31, 1998
JULY 31, 1998 COMPARED TO AUGUST 1, 1997
Total assets at July 31, 1998 were $833.4 million versus $705.0 million on
August 1, 1997, an increase of $128.4 million. This increase is comprised of
approximately $77.0 million related to the acquisitions of Exmark-Registered
Trademark- and Drip In and various other changes discussed below. Net
accounts receivable increased by $20.4 million due to increased sales of
irrigation and landscape contractor products this year, and the addition of
Exmark-Registered Trademark- and Drip In receivables. Inventory also
increased $41.2 million due to lower than expected garden tractor sales,
higher levels of landscape contractor equipment, and the addition of
Exmark-Registered Trademark- and Drip In. Net property, plant, and equipment
rose $16.4 million due primarily to the acquisition of Exmark-Registered
Trademark- and Drip In, expansion of the corporate headquarters, plant
equipment additions, and new tooling projects. Other assets increased $34.9
million mainly as a result of the 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 $350.8 million versus $288.3 million last
year, an increase of $62.5 million. The majority of this increase was the
result of additional short-term borrowings of $63.0 million reflecting the
company's strategy of utilizing short-term borrowing to fund the company's
seasonal working capital needs and funding a portion of the cost of the
acquisitions of Exmark-Registered Trademark- and Drip In. Accounts payable
decreased $16.0 million due to the seasonal shut down of certain
manufacturing facilities during July 1998. Other accrued liabilities
increased $15.2 million, which reflects the restructuring and other unusual
expense accrual, additional warranty reserves, and higher marketing reserves.
Long-term debt increased $19.3 million as a result of the acquisitions of
Exmark-Registered Trademark- and Drip In.
12
FINANCIAL POSITION AS OF JULY 31, 1998 (CONTINUED)
JULY 31, 1998 COMPARED TO OCTOBER 31, 1997
Total assets at July 31, 1998 were $833.4 million versus $661.6 million at
October 31, 1997, an increase of $171.8 million. Accounts receivable
increased $69.5 million due to increased receivables from the acquisitions of
Exmark-Registered Trademark- and Drip In, the seasonal increase in accounts
receivable, and the increased sales of landscape contractor products earlier
this year. Inventory increased by $42.9 million due to lower than projected
sales of riding products and higher levels of landscape contractor products
from lower sales experienced in the third quarter this year along with new
product introductions. Net property, plant, and equipment increased $16.1
million due primarily to the acquisition of Exmark-Registered Trademark- and
Drip In along with the expansion of the corporate headquarters and plant
equipment additions. Other assets increased $41.2 million mainly 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 July 31, 1998 were $350.8 million versus $237.8
million at October 31, 1997, an increase $113.0 million. The majority of this
increase was short-term borrowing, which increased by $117.0 million
reflecting the company's strategy of utilizing short-term borrowing to fund
seasonal working capital needs and the funding of a portion of the costs of
the acquisitions of Exmark-Registered Trademark- and Drip In. Accounts
payable decreased $27.9 million due to the seasonal shut down of certain
manufacturing facilities during July 1998. Other accrued liabilities
increased by $23.5 million due to the accrual for restructuring and other
unusual expenses, higher warranty accruals, and higher sales and marketing
accruals. Long-term debt increased $19.3 million as a result of the funding
of a portion of the acquisitions of Exmark-Registered Trademark- and Drip In.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the first nine months of fiscal 1998
was primarily for the seasonal increase in accounts receivable and inventory.
A majority of the increase in inventory came from the consumer business
inventory levels for riding products due to lower than expected demand and
higher levels of landscape contractor products. Accounts payable has
decreased due to the seasonal shut down of certain facilities in July. 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.
Management believes that the combination of funds available through its
existing financing arrangements, coupled with forecasted cash flows, will
provide the necessary capital resources for the company's anticipated needs.
The company expects to be out of compliance with its debt interest coverage
covenant related to its short-term debt facility in the fourth quarter of
fiscal 1998. The company has begun discussions with its banks and anticipates
being able to obtain waivers for the expected non-compliance.
INFLATION
The company is subject to the effects of changing prices, however, the
company is not currently experiencing any material effects of rising costs.
The company attempts to deal with inflationary pressures through a
combination of internal cost reduction efforts and selected increases in
selling prices of certain products.
13
YEAR 2000 ISSUE
During 1998, the company has continued with its company-wide program to
prepare the company's systems for year 2000 compliance. The year 2000 issue
relates to computer systems that use two digits rather than four to define
the applicable year and whether such systems will properly process
information when the year changes to 2000.
STATE OF READINESS
The company is nearing completion of its project to replace all core-business
information systems with a year 2000 compliant Enterprise Resource Planning
(ERP) software package. The plan is that this software will support all the
company's facilities and business units by June 1999 with the exception of
the company's European facilities, which are believed to be year 2000
compliant.
Based upon the company's initial assessment, the product that the company
sells that contain embedded systems using date logic are irrigation control
systems. These products are currently undergoing testing and the majority of
them are year 2000 compliant. The testing is planned to be completed by June
1999.
The year 2000 issues list based on the company's initial assessment has over
three hundred software and hardware items of which the majority are
single-user, departmental or plant systems. The company continues to request
year 2000 compliance information from the vendors of their software and
hardware items and are in the process of prioritizing business-critical
systems that require testing. The company also plan to test our ERP, payroll,
and Product Data Management (PDM) systems even though the vendors claim they
are year 2000 compliant.
Communications have been sent to the company's customers (dealers and
distributors) informing them of the company's efforts and asking them to
ensure their business operations are not impacted. Surveys have also been
sent to all the company's suppliers requesting information on their year 2000
efforts. The company has also been communicating with certain home centers
and mass merchants about the company's readiness as well as theirs for the
year 2000.
COSTS
Costs through July 31, 1998 are approximately $1.0 million and have been
expensed as incurred. These costs to address the year 2000 issues include
contractor support and ERP implementation for recent acquisitions. Estimated
identified remaining costs are less than $1.0 million, which include expenses
for contract support, telephone system upgrades and business unit system
upgrades. The estimated cost of year 2000 issues is less than 10 percent of
the company's information system budget. No significant information system
projects have been deferred to accommodate the year 2000 issues.
RISKS
The company is currently undergoing the testing of its core-business
operating and financial systems and as such, the company is uncertain of the
risks the year 2000 will have on its business operations. Another area of
risk appears to be whether the company's business partners, including the
dealers, distributors, banks, and suppliers will be compliant.
Testing remains to be performed to validate assumptions, which is planned to
continue through June 1999. The company believes this should be enough time
to fix or replace any business critical problems discovered during the
testing phase.
CONTINGENCY PLANS
The company's contingency plans will evolve as the testing phase of the
business-critical systems and technologies is completed. The company is in
the early stages of defining a Business Resumption Plan, which will include
documented manual processes for critical business functions that could be
invoked for any type of business interruption, which would include any year
2000 issues.
Certain irrigation control systems discussed above that the company sells that
contain embedded date logic are currently undergoing testing, which is
estimated to be completed in June 1999. If the embedded systems are not year
2000 compliant, the worst case scenario is that the company would need to
replace the hardware and software of the systems, which would cost
approximately $1.0 to $2.0 million.
14
PART II. OTHER INFORMATION
Item 5. Other Information
Rule 14a-4 Notice of Deadline for Certain Stockholder Proposals
A stockholder who wishes to make a proposal for consideration at the
Annual Meeting of Stockholders expected to be held on March 11, 1999 (the
"1999 Annual Meeting"), but does not seek to include the proposal in the
company's proxy statement with respect to the meeting in accordance with Rule
14a-8 (a "non-14a-8 proposal"), must timely and properly notify the company
in accordance with the provisions of the company's Bylaws, but not later than
January 17, 1999 nor earlier than December 18, 1998. If a non-14a-8 proposal
is not timely and properly made in accordance with the procedures set forth
in the bylaws, the defective proposal shall not be brought before the meeting
and shall be disregarded. If the proposal were nonetheless brought before the
meeting and the chairman of the meeting did not exercise his power and duty
to declare that such a defective proposal be disregarded, the persons named
on the company's proxy card for the 1999 Annual Meeting would use their
discretionary voting with respect to such proposal.
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 toRegistrant'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).
10(iii)(a) Form of Employment Agreement in effect for certain
officers of Registrant, as amended.
10(iii)(b) 1992 Directors Stock Plan, as amended.
10(iii)(c) Annual Management Incentive Plan II for officers of
Registrant, as amended.
15
Item 6. Exhibits and Reports on Form 8-K (continued)
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.
10(iii)(f) 1993 Stock Option Plan, as amended.
10(iii)(g) Continuous Performance Award Plan, as amended.
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.
10(iii)(j) The Toro Company Deferred Compensation Plan for Officers, as
amended.
11 Computation of Earnings per Share of Common Stock and Common
Stock Equivalent (page 18 of this report).
27 Financial Data Schedule; electronic filing only.
(b) Reports on Form 8-K
A current Report on Form 8-K dated May 27, 1998 was filed to report the
Company's adoption of a Rights Agreement dated as of May 20, 1998 between the
company and Norwest Bank of Minnesota, National Association relating to
rights to purchase Series B Junior Participating Voting Preferred Stock.
16
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: September 11, 1998
17