FINANCIAL HIGHLIGHTS The Toro Company
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(Dollars in thousands, except per share data and number of stockholders)
Years ended October 31 1998 1997 % Change
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Net sales $ 1,110,434 $ 1,051,204 5.6%
Net earnings, before extraordinary loss* 4,090 36,508 (88.8)
Percent of net sales 0.4% 3.5%
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Dilutive net earnings per share of common
stock, before extraordinary loss* $ 0.31 $ 2.93 (89.4)
Dividends paid per share of common stock outstanding 0.48 0.48
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Return on:
Average stockholders' equity 1.6% 15.3%
Average invested capital 2.9 12.1
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AT YEAR END
Working capital $ 221,227 $ 234,211 (5.5)
Total assets 723,991 661,634 9.4
Total debt 228,424 219,015 4.3
Stockholders' equity 263,399 241,163 9.2
Book value per common share 20.63 19.79 4.2
Number of common stockholders 6,364 6,560 (3.0)
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See accompanying Notes to Consolidated Financial Statements.
*In 1997, the company recognized an extraordinary loss on the early retirement
of debt of $1,663,000 or $0.13 per dilutive share.
[GRAPH]
NET SALES
(DOLLARS IN MILLIONS)
95 $919.4
96 $930.9
97 $1,051.2
98 $1,110.4
[GRAPH]
NET EARNINGS
(DOLLARS IN MILLIONS)
95 $32.4
96 $36.4
97 $36.5*
98 $4.1
[GRAPH]
RETURN ON AVERAGE EQUITY
(PERCENT)
95 17.5%
96 18.0%
97 15.3%
98 1.6%
[GRAPH]
BOOK VALUE
(IN DOLLARS PER COMMON SHARE)
95 $15.69
96 $17.75
97 $19.79
98 $20.63
11
MANAGEMENTS DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Toro Company
RESULTS OF OPERATIONS
Results in fiscal 1998 were disappointing compared to fiscal 1997. Although Toro
recorded strong performances from its professional businesses, which now make up
65.7 percent of total consolidated sales, several events had a negative effect
on Toro's consumer business and the company as a whole. Toro had strong sales
and earnings growth from the commercial and irrigation businesses, and had
significant contributions from the acquisitions of Exmark Manufacturing Company
Incorporated (Exmark) in the landscape contractor market and GR Driplines,
Incorporated (Drip In) in the agricultural irrigation market. The growth of the
golf course market continued to be strong around the world, with the exception
of Asia, which contributed to the growth in the commercial and irrigation
businesses. Toro's consumer business struggled during the year, which resulted
in the adoption of a company-wide plan to improve profitability. The lack of
snow during the winter of 1997-1998 significantly lowered sales of the
profitable snowthrower line. Performance was also hampered by manufacturing
problems related to poor execution of the production transfer from Mound,
Minnesota to El Paso, Texas, which led to significant cost overruns for certain
consumer handheld electric products and certain irrigation products.
SUMMARY
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Years Ended October 31
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(Dollars in millions, except per share data) 1998 % Change 1997 % Change 1996
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Net sales $1,110.4 5.6% $1,051.2 12.9% $930.9
Cost of sales 726.1 9.5 663.2 12.6 589.2
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Gross profit 384.3 (1.0) 388.0 13.6 341.7
Gross profit percentage 34.6% (2.3) 36.9% 0.2 36.7%
Selling, general, and administrative expense 345.6 10.4 313.1 12.5 278.3
Restructuring and other unusual expense 15.0 478.5 2.6 - -
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Earnings from operations 23.7 (67.2) 72.3 14.0 63.4
Operating profit percentage 2.1% (4.8) 6.9% 0.1 6.8%
Interest expense (25.4) 27.8 (19.9) (46.4) (13.5)
Other income, net 8.5 7.3 7.9 23.6 10.3
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Earnings before income taxes and extraordinary loss 6.8 (88.8) 60.3 0.3 60.2
Provision for income taxes 2.7 (88.8) 23.8 0.3 23.8
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Net earnings before extraordinary loss 4.1 (88.8) 36.5 0.3 36.4
Extraordinary loss, net of income tax benefit of $1.1 - - 1.7 - -
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Net earnings $ 4.1 (88.3)% $ 34.8 (4.3)% $ 36.4
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Basic net earnings per share of common stock
before extraordinary loss $ 0.32 (89.4)% $ 3.02 0.7% $ 3.00
Extraordinary loss per share, net of income tax benefit - - 0.14 - -
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Basic net earnings per share of common stock $ 0.32 (88.9)% $ 2.88 (4.0)% $ 3.00
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Dilutive net earnings per share of common stock
before extraordinary loss $ 0.31 (89.4)% $ 2.93 1.0% $ 2.90
Extraordinary loss per share, net of income tax benefit - - 0.13 - -
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Dilutive net earnings per share of common stock $ 0.31 (88.9)% $ 2.80 (3.4)% $ 2.90
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NET SALES BY PRODUCT LINE
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(Dollars in millions) 1998 % Change 1997 % Change 1996
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Consumer $ 380.9 (16.8)% $ 458.1 (0.6)% $461.0
Commercial 451.3 31.0 344.6 7.0 322.0
Irrigation 278.2 12.0 248.5 68.0 147.9
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Total* $1,110.4 5.6% $1,051.2 12.9% $930.9
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*Includes international sales of $ 235.9 1.3% $ 232.8 33.6% $174.2
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12
In fiscal 1998, Toro's sales increased 5.6 percent, due to the incremental
revenue of Exmark and Drip In products. Net sales would have dropped slightly
without Exmark and Drip In products due to significantly lower levels of
shipments for consumer products, including snowthrowers, gas powered trimmers,
and riding products. Lower consumer shipments were partially offset by strong
sales of commercial equipment and irrigation products. Asia sales have also
dropped from 3.1 percent of total consolidated sales in fiscal 1997 to 1.7
percent in fiscal 1998 due to the political and economic instabilities in that
market.
In response to the challenges faced in fiscal 1998, Toro continues to
evaluate its business units and reinvest in opportunities and initiatives that
it believes will help sustain competitiveness and maintain a leadership
position. Toro implemented a profit improvement plan to reposition the consumer
business and improve overall company profitability and competitiveness. This
strategy included organizational changes in the consumer division;
decentralizing manufacturing and inventory management; initiating a multi-year
strategy for warehousing and transportation services with third party vendors;
the sale of the recycling equipment business; the restructuring of the
professional fertilizer business; and plant closings. The company expects
significant savings from the profit improvement plan by fiscal year 2000.
In conclusion, positive results in the professional sector were offset by
the disappointing results in the consumer business. Toro has embarked on a
company-wide profit improvement plan that it believes will reposition the
consumer business and make the company as a whole more competitive. This plan,
combined with a generally favorable outlook in professional markets, positions
Toro for significant improvement in fiscal 1999, although earnings per share are
not expected to reach fiscal 1997 levels.
NET SALES
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FISCAL 1998 COMPARED WITH FISCAL 1997
Effective November 1997, the company acquired Exmark, a leading manufacturer of
equipment for the professional landscape contractor industry. Effective February
1998, the company acquired Drip In, a manufacturer of agricultural
micro-irrigation products. These two acquisitions resulted in all of the
increase in fiscal 1998 sales.
Worldwide net sales in fiscal 1998 were $1,110.4 million compared to
$1,051.2 million in fiscal 1997, an increase of 5.6 percent. The following is a
discussion of sales by product lines:
CONSUMER - Net sales of worldwide consumer products in fiscal 1998 were
$380.9 million compared to $458.1 million in fiscal 1997, a decrease of 16.8
percent. Domestic snowthrower sales, which accounted for a significant
portion of this decrease, were down due to the lack of snow experienced
during the winter of 1997-1998. Shipments of domestic riding products were
also below fiscal 1997 levels as a result of lower than expected demand for a
new repositioned higher-priced garden tractor, along with increased
competition. Toro also discontinued selling gas powered trimmers to certain
home centers due to low product profitability. In addition, wet spring
weather experienced in key Sun Belt markets resulted in lower do-it-yourself
irrigation product sales. The company also discontinued certain low profit
margin Lawn Genie-Registered Trademark- irrigation products. Offsetting the
negative points was an increase in sales for walk power mowers, due mainly to
a favorable sales comparison to the previous spring, which was late and wet.
In fiscal 1998, Toro reduced the price of certain Toro-Registered Trademark-
brand walk power mowers. Management believes this strategy maintained market
share but did not increase market share as planned. Lawn-Boy-Registered
Trademark- also introduced its new DuraForce-TM- engine walk power mower,
which had a strong first year in the marketplace. Startup delays with the
DuraForce-TM- engine prevented Toro from fully capitalizing on the demand for
this low-emissions product. As part of the company's profit improvement plan,
the company introduced special marketing programs and reduced shipments of
certain consumer products in order to reduce consumer field inventories to
historically low levels.
International consumer sales were down slightly from fiscal 1997. The main
factor contributing to this decrease was lower Australian sales due to the
conversion of Australian denominated dollar sales into U.S. dollars at a
substantially lower exchange rate as a result of the currency movements in
fiscal 1998. Offsetting that factor were strong sales to the European market for
new diesel riding products introduced in fiscal 1998.
The company also believes that sales were lower as a result of a
continuing shift in consumer buying patterns throughout the industry from
brand specific purchases at dealer outlets to price and value conscious
purchases at hardware, home center, and mass retailers. Because the company
expects this trend to continue, the company announced that the
Toro-Registered Trademark- Recycler-Registered Trademark- walk power mower
will be sold in select home centers beginning in the spring of 1999. In
response to struggles of the consumer business in fiscal 1998, the company
plans to continue to take steps to reposition the business for a more
competitive and stronger performance in fiscal 1999 and beyond.
COMMERCIAL - Net sales of worldwide commercial products in fiscal 1998 were
$451.3 million compared to $344.6 million in fiscal 1997, a significant increase
of 31.0 percent. The increase was attributable to the addition of Exmark, new
product introductions in the landscape contractor market, and growth in the golf
course market. Despite strong competition, sales of equipment to golf courses
did well. International sales were down slightly due to weak sales in Asia,
which were partially offset by an increase in demand in the Canadian and
European market for golf course equipment and landscape contractor products. The
substantial sales increase of commercial products occurred despite aggressive
competition and Asian market weakness, and Toro believes it has maintained its
market leadership.
IRRIGATION - Net sales of worldwide irrigation products in fiscal 1998 were
$278.2 million compared to $248.5 million in fiscal 1997, an increase of 12.0
percent. The sales increase was driven by strong domestic golf irrigation
revenues, sales growth of worldwide agricultural irrigation products, and the
addition
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of sales from Drip In-Registered Trademark- agricultural micro-irrigation
products. Certain residential/commercial irrigation products rebounded well
during fiscal 1998, which also contributed to the strong sales increase.
International net sales increased from fiscal 1997 due to strong worldwide
agricultural irrigation and golf irrigation sales, except for the Asian
market.
FISCAL 1997 COMPARED WITH FISCAL 1996
In December 1996, the company acquired James Hardie Irrigation Group (Hardie)
from James Hardie Industries Limited of Australia (JHI Limited). Hardie was a
worldwide leader in production of irrigation systems for the residential and
commercial landscape markets, and the agricultural irrigation market.
Comparisons of fiscal 1997 to fiscal 1996 were significantly impacted by the
acquisition.
Worldwide net sales were $1,051.2 million in fiscal 1997 compared to $930.9
million in fiscal 1996, an increase of 12.9 percent. The following is a
discussion of sales by product lines:
CONSUMER - Net sales of worldwide consumer products were $458.1 million in
fiscal 1997 compared to $461.0 million in fiscal 1996, a decrease of 0.6
percent. Although retail demand for Toro-Registered Trademark- and
Lawn-Boy-Registered Trademark- walk power mowers increased slightly, sales to
dealers and distributors declined as their levels of field inventories were
managed down and they shifted their buying patterns to more closely reflect
retail demand. Sales of leaf blowers, Lawn-Boy-Registered Trademark- walk
power mowers, and electric trimmers to hardware, home center, and mass
retailers were very strong, partially offsetting the reduction in dealer and
distributor sales. This reflects a shift in consumer buying patterns from
brand specific purchases at dealer outlets to price and value conscious
purchases at hardware, home center, and mass retailers. Sales of
do-it-yourself irrigation did well in fiscal 1997. Consumer international
sales also increased primarily due to product penetration in newer markets
such as Eastern Europe.
COMMERCIAL - Net sales of worldwide commercial products were $344.6 million in
fiscal 1997 compared to $322.0 million in fiscal 1996, an increase of 7.0
percent. The increase in sales reflected the growth in the golf market as well
as the landscape contractor market. This was partially offset by reduced sales
for recycling equipment and commercial parts. Although competitors in the
commercial market aggressively pursued market share, the company believes it is
maintaining its leadership position. International sales were up 2.2 percent
although the strong U.S. dollar dampened growth in foreign golf projects,
especially in emerging markets.
IRRIGATION - Net sales of worldwide irrigation products in fiscal 1997 were
$248.5 million compared to $147.9 million in fiscal 1996, an increase of 68.0
percent. This increase was almost entirely attributable to the acquisition of
Hardie. Strong golf irrigation sales for the year were offset by sluggish sales
of residential/commercial irrigation products. International irrigation sales
were up 167.4 percent mainly due to the acquisition of Hardie. International
sales, without the incremental revenue from Hardie, were flat due principally to
the weakening of foreign currencies against the U.S. dollar. Many new golf
projects were postponed or cancelled as a result of weakened foreign economies.
GROSS PROFIT
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FISCAL 1998 COMPARED WITH FISCAL 1997
Gross profit was $384.3 million in fiscal 1998 compared to $388.0 million in
fiscal 1997, a decrease of 1.0 percent. As a percentage of net sales, gross
profit was 34.6 percent in fiscal 1998 compared to 36.9 percent in fiscal
1997. The decline was primarily due to manufacturing cost overruns related to
the poor execution of the production transfer from Mound, Minnesota to El
Paso, Texas, reduced sales of higher gross margin snowthrowers, and lower
pricing of Toro-Registered Trademark- brand walk power mowers due to
competitive pressures. For fiscal 1999, the company is focusing on cost
containment and supply chain management to partially offset the effects of
competitive pressures on gross profit margins.
FISCAL 1997 COMPARED WITH FISCAL 1996
Gross profit was $388.0 million in fiscal 1997 compared to $341.7 million in
fiscal 1996, an increase of 13.6 percent. As a percentage of net sales, gross
profit was 36.9 percent in fiscal 1997 compared to 36.7 percent in fiscal 1996.
The increase was due primarily to improved production efficiencies, partially
offset by the addition of Hardie products which carry somewhat lower gross
margins.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE (SG&A)
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FISCAL 1998 COMPARED WITH FISCAL 1997
SG&A expenses were $345.6 million in fiscal 1998 compared to $313.1 million in
fiscal 1997, an increase of 10.4 percent. As a percentage of net sales, SG&A
increased to 31.1 percent from 29.8 percent in fiscal 1997. The additions of
Exmark and Drip In contributed $17.8 million of incremental SG&A expense during
fiscal 1998. Without Exmark and Drip In, SG&A increased 2.1 percent as a
percentage of net sales due to higher costs of administrative expenses related
to information services and higher warranty expense. The warranty expense
increase was attributable to a change in the product mix. Sales of products with
overall higher warranty occurrence rates increased as compared to the prior
year. Special warranty reserves for product modifications also contributed to
the increase in fiscal 1998.
FISCAL 1997 COMPARED WITH FISCAL 1996
SG&A expenses were $313.1 million in fiscal 1997 compared to $278.3 million in
fiscal 1996, an increase of 12.5 percent. As a percentage of net sales, SG&A
decreased slightly from fiscal 1996. Hardie accounted for $34.8 million of the
increase. Increases in sales and marketing, warranty, and research and
development expenses were completely offset by lower administrative expense,
after the impact of Hardie, due to cost containment efforts initiated in the
second half of fiscal 1997. SG&A expense for distributor/dealer financing costs
were slightly below fiscal 1996.
14
RESTRUCTURING AND OTHER UNUSUAL EXPENSE
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FISCAL 1998 COMPARED WITH FISCAL 1997
Restructuring and other unusual expense was $15.0 million in fiscal 1998
compared to $2.6 million in fiscal 1997. The restructuring charge in fiscal 1998
consisted of $4.3 million for severance and asset write-down related to the
closure of two manufacturing facilities, and $1.4 million for other severance
costs. Other unusual expense consisted of $5.3 million representing an
impairment loss on the expected sale of the recycling equipment business and
portions of the professional fertilizer business, and $4.0 million for special
consumer marketing programs. These programs consist of rebates and co-op
advertising credits designed to reduce certain consumer field inventories to
historically low levels by providing incentives to increase retail sales in
preparation for potential changes in warehousing and transportation in fiscal
1999.
FISCAL 1997 COMPARED WITH FISCAL 1996
The $2.6 million restructuring and other unusual expense in fiscal 1997 related
to the closing of a manufacturing facility in Mound, Minnesota and relocation of
those operations to other company facilities throughout the U.S. The closure of
the manufacturing facilities is part of a long-term corporate strategy to reduce
costs.
INTEREST EXPENSE
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FISCAL 1998 COMPARED WITH FISCAL 1997
Interest expense was $25.4 million in fiscal 1998 compared to $19.9 million in
fiscal 1997, an increase of $5.5 million. Higher average working capital levels,
as a result of higher inventory, and incremental cash and debt required for the
acquisitions of Exmark and Drip In, contributed to the increase in interest
expense.
FISCAL 1997 COMPARED WITH FISCAL 1996
Interest expense was $19.9 million in fiscal 1997 compared to $13.5 million in
fiscal 1996, an increase of $6.4 million. The Hardie acquisition debt accounted
for approximately $7.1 million of interest expense. This was offset by
reductions in previously outstanding debt and related interest expense as cash
generated by operations was used to pay off debt. In addition, the company
redeemed higher rate debt by replacing 11% Debentures with lower rate debt
ranging from 7.125 percent to 7.80 percent during fiscal 1997.
OTHER INCOME, NET
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FISCAL 1998 COMPARED WITH FISCAL 1997
Other income, net, was $8.5 million in fiscal 1998 compared to $7.9 million in
fiscal 1997. The increase was mainly attributed to a favorable settlement of a
trade secret lawsuit.
FISCAL 1997 COMPARED WITH FISCAL 1996
Other income, net, totaled $7.9 million in fiscal 1997 compared to $10.3 million
in fiscal 1996. The reduction was primarily attributable to a favorable patent
infringement lawsuit settlement in fiscal 1996.
PROVISION FOR TAXES
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FISCAL 1998 COMPARED WITH FISCAL 1997
The effective tax rate for fiscal 1998 and fiscal 1997 was 39.5 percent. The
company has determined that it is not necessary to establish a valuation reserve
for deferred income tax benefit because it believes that the net deferred income
tax asset of $42.8 million will be principally realized through carrybacks to
taxable income in prior years, future reversals of existing taxable temporary
differences and, to a lesser extent, future taxable income.
FISCAL 1997 COMPARED WITH FISCAL 1996
The effective tax rate for fiscal 1997 and fiscal 1996 was 39.5 percent.
NET EARNINGS
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FISCAL 1998 COMPARED WITH FISCAL 1997
Net earnings were $4.1 million compared to $34.8 million in fiscal 1997 after
the effect of an extraordinary loss of $1.7 million on the early retirement of
debt in fiscal 1997. Dilutive earnings per share were $0.31 in fiscal 1998
compared to $2.80 after the extraordinary loss of $0.13 in fiscal 1997. Earnings
were down sharply from fiscal 1997 due to the significant decrease in consumer
sales, restructuring and other unusual expense of $15.0 million, and lower
operating margins due to manufacturing inefficiencies experienced in the
transition to the El Paso, Texas, facility as described previously.
FISCAL 1997 COMPARED WITH FISCAL 1996
Net earnings were $34.8 million after the effect of an extraordinary loss of
$1.7 million due to the early retirement of debt in fiscal 1997 compared to
$36.4 million in fiscal 1996. Net earnings before the extraordinary loss were
$36.5 million, a slight increase from fiscal 1996 net earnings. Dilutive
earnings per share before the effect of the extraordinary loss in fiscal 1997
were $2.93, up slightly from $2.90 of dilutive earnings per share in fiscal
1996.
Although Hardie contributed most of the sales increase in fiscal 1997,
Hardie resulted in a loss of $0.08 per dilutive share. Beginning in fiscal 1998,
Hardier operations were integrated into the company's irrigation business.
FINANCIAL POSITION
WORKING CAPITAL
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Working capital at October 31, 1998 was $221.2 million compared to $234.2
million at October 31, 1997, a decrease of 5.5 percent. The current ratio for
fiscal 1998 was 1.86 compared to 1.98 in fiscal 1997. Working capital as a
percent of sales was 19.9 percent in fiscal 1998 and 22.3 percent in fiscal
1997.
The decrease in working capital was due primarily to lower levels of
accounts receivable, and higher accounts payable and accrued liability balances,
offset by higher levels of inventory. The decrease in accounts receivable was
mainly attributable to the lower levels of consumer sales. The increase in
inventory and accounts payable was due to the acquisitions of Exmark and
15
Drip In, along with increased inventory balances for new products introduced
in fiscal 1998 in the landscape contractor business. The increase in accrued
liabilities was due to increased accruals for warranty, and restructuring and
other unusual expense.
LONG TERM ASSETS
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Long-term assets at October 31, 1998 were $244.6 million compared to $189.6
million at October 31, 1997, an increase of $55.0 million. Net property, plant,
and equipment increased $10.3 million due primarily to the acquisition of Exmark
and Drip In assets. Goodwill and other assets increased $42.1 million over
fiscal 1997 mainly as a result of the goodwill representing the excess purchase
price of Exmark and Drip In over the fair value of the net assets acquired.
CAPITAL STRUCTURE
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Long-term debt at October 31, 1998 was $197.4 million compared to $178.0 million
at October 31, 1997, an increase of $19.4 million. The increase in long-term
debt was a result of the issuance of additional debt and debt assumed in
connection with the acquisitions of Exmark and Drip In. The total debt to
capital ratio was 46.4 percent in fiscal 1998 compared to 47.6 percent in fiscal
1997. The decrease in debt to capital ratio was due to the reduction of working
capital as compared to fiscal 1997 as well as the increase in equity due to
stock issued for the Exmark acquisition.
Total capitalization at October 31, 1998 consisted of $197.4 million of
long-term debt, $31.0 million of short-term borrowings, and $263.4 million of
stockholders' equity.
LIQUIDITY AND CAPITAL RESOURCES
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CASH FLOW - Cash provided by operating activities decreased by $14.8 million
from fiscal 1997 due primarily to the decrease in net earnings. The increase in
inventory also contributed to the decline. However, lower levels of accounts
receivable and increased levels of accounts payable and accrued expenses
provided cash from operating activities.
Cash used in investing activities decreased significantly in fiscal 1998
from fiscal 1997 as the purchase price net of cash acquired for Hardie in fiscal
1997 of $118.0 million exceeded the net cash purchase price for Exmark and Drip
In, which was $17.2 million. In addition, property, plant, and equipment
expenditures were down comparatively because a majority of the corporate
facility expansion expenditures were incurred in fiscal 1997.
Cash provided by financing activities decreased primarily due to lower
borrowing needs in fiscal 1998 as compared to fiscal 1997 when debt was used
to finance the Hardie acquisition in fiscal 1997.
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 working
capital, capital additions, acquisitions, and potential stock repurchases.
CREDIT LINES AND OTHER CAPITAL RESOURCES - The company's seasonal U.S. working
capital requirements are funded with $237.0 million of committed and uncommitted
unsecured bank credit lines. The company also has bankers' acceptance agreements
under which an additional $40.0 million of credit lines are available. Average
borrowings under these lines were $143.2 million in fiscal 1998 and $149.6
million in fiscal 1997. The decrease in the average borrowings was mainly the
result of higher levels of average short-term borrowings in fiscal 1997 due to
the acquisition of Hardie in December 1996, which was financed with short-term
debt until June 1997. In addition, in fiscal 1998, the company's non-U.S.
operations maintained unsecured short-term lines of credit of $6.9 million. At
October 31, 1998, the company had $252.9 million of unutilized availability
under these credit lines.
The company's business is seasonal, with accounts receivable balances
historically increasing between January and April as a result of extended
payment terms made available to the company's customers, and decreasing between
May and August when payments become due. The company's peak borrowing usually
occurs between February and May. The seasonal working capital requirements are
financed primarily with short-term financing arrangements described above.
ACQUISITION FINANCING - The acquisitions of Exmark and Drip In were financed
through the issuance of shares of the company's common stock, issuance of
long-term debt to sellers, and short-term borrowings under the company's current
facilities. See Acquisitions and Strategic Alliances included in this MD&A, and
Business Acquisitions and Divestitures Footnote 2 in the Notes to the
Consolidated Financial Statements.
INFLATION
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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.
ACQUISITIONS AND STRATEGIC ALLIANCES
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In February 1998, the company completed the acquisition of Drip In. Drip In is a
manufacturer of agricultural micro-irrigation products headquartered in Madera,
California, which employs approximately 60 people.
In November 1997, the company acquired Exmark, a leading manufacturer of
equipment for the professional landscape contractor industry. Exmark is
headquartered in Beatrice, Nebraska and produces mid-sized walk power mowers and
zero-turning radius riding mowers for professional contractors. Exmark employs
approximately 280 people in a 164,000 square foot facility.
In September 1997, the company announced that it had acquired the
manufacturing, sales, and distribution rights to
16
Dingo-Registered Trademark- under which the company manufactures and sells
Dingo-Registered Trademark- landscape products under the Toro-Registered
Trademark- Sitework-TM- Systems brand name for the U.S. markets.
In December 1996, the company acquired Hardie from JHI Limited for $118.0
million in cash. The price was subsequently reduced by approximately $10 million
based on estimated equity used as the closing date purchase price. In addition,
the company entered into an arbitration process related to valuation and
accounting issues used in determining the purchase price of Hardie. This process
was completed on April 20, 1998 and resulted in an additional $1.8 million
reduction of the purchase price.
YEAR 2000 ISSUE
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During fiscal 1998, Toro continued its company-wide program to prepare the
company's computer systems for year 2000 compliance. The year 2000 issue relates
to computer systems that use the last two digits rather than all four to define
a year and whether such systems will properly and accurately process information
when the year changes to 2000. Incomplete or untimely resolution of year 2000
issues by the company, by its important suppliers and customers, by public
utility providers, or by governmental entities could have a material adverse
impact on the company's business, operations, or financial condition.
STATE OF READINESS - The company is nearing completion of its project to replace
core-business information systems with an Enterprise Resource Planning (ERP)
software package, which the company has been informed is year 2000 compliant.
The package includes software to support the company's facilities and business
units with the exception of two domestic subsidiaries and the company's European
facilities, which are believed to be year 2000 compliant. The ERP is expected to
be in place by mid-1999.
Toro has assessed its products and believes them to be year 2000 compliant
with the exception of six irrigation control systems. After testing is
completed, Toro will distribute year 2000 remediations by mid-1999.
Toro's year 2000 issues list, based on the company's initial assessment,
has over three hundred software and hardware items, the majority of which are
single-user, departmental or plant systems. The company continues to request
year 2000 compliance information from its software and hardware vendors and is
in the process of prioritizing business-critical systems that require testing.
The company also plans to test its ERP, payroll, and Product Data Management
(PDM) systems, even though the vendors claim the systems are year 2000
compliant.
Communications have been sent to Toro's customers (dealers and
distributors) informing them of the company's efforts and asking them to ensure
that their business operations will not be adversely impacted by year 2000
issues. Surveys have also been sent to the company's suppliers requesting
information on their year 2000 efforts. The company has also been communicating
with certain home centers and mass retailers about their readiness for the year
2000.
COSTS - Year 2000 costs through October 31, 1998 were approximately $1.3 million
and have been expensed as incurred. These costs include contractor support and
ERP implementation for the company's recently-acquired businesses. Costs
remaining that have been identified are estimated to be less than $2.0 million,
which include expenses for contract support, telephone system upgrades, software
modifications for irrigation systems, and business unit system upgrades. The
estimated cost of year 2000 modifications 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 remains 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 dealers,
distributors, home center and mass retailers, banks, and suppliers will be
compliant with the year 2000. The scope of Toro's year 2000 project does not
include ensuring public utility and governmental agency's readiness for the year
2000. Toro has little to no control over these institutions, thereby introducing
some level of risk in the company's ability to continue normal operations
through the turn of the century.
Testing remains to be performed to validate assumptions, which is planned
to continue through mid-1999. The company believes this timetable should allow
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 stage 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, including any year 2000
issues.
The company is also planning on performing complete, system-wide backups
on December 30 and 31, 1999 and is also discussing the possibility of
shutting down all systems so they are not actually running at the turn of the
century. Key information system personnel will also be on-site and on-call
for the month of January 2000 to deal with any problems that may occur.
With respect to non-compliant irrigation systems that have been identified,
the company intends to develop software modifications to correct the year 2000
problem and complete testing by mid-1999. The worst case scenario to make the
irrigation systems year 2000 compliant would be to replace the Toro manufactured
hardware and software systems, at a cost of approximately $2.0 million. However,
the company believes a simple software modification or a minor upgrade will make
the units compliant.
17
CURRENCY RISK MANAGEMENT
- --------------------------------------------------------------------------------
The company is exposed to foreign currency exchange risk arising from
transactions that are entered into during the normal course of business. To
mitigate the risk from foreign currency exchange rate fluctuations, the company
will generally enter into forward currency exchange contracts for the purchase
or sale of a currency. Decisions on whether to use forward currency exchange
contracts to hedge transactions exposed to foreign exchange rate changes are
made based on the amount of those exposures, by currency, and an assessment of
the near-term market value for each currency. These instruments used as hedges
are managed to reduce the risk associated with the exposure being hedged and are
designated as a hedge at the inception of the contract. Accordingly, changes in
market values of these hedge instruments are highly correlated with changes in
market values of underlying hedged items both at inception of the hedge and over
the life of the hedge contract. Gains and losses on foreign currency contracts
are recorded to the Consolidated Statements of Earnings. See Financial
Instruments Footnote 14 in the Notes to the Consolidated Financial Statements
for more detail.
EURO CURRENCY
- --------------------------------------------------------------------------------
Beginning in January 1999, the European Monetary Union (EMU) will enter into a
three-year transition phase during which a common currency called the euro will
be introduced in participating countries. Initially, this new currency will be
used for financial transactions, and progressively, it will replace the old
national currencies that will be withdrawn by July 2002. The transition to the
euro currency will involve changing budgetary, accounting, and fiscal systems in
companies and public administrations, as well as simultaneous handling of
parallel currencies and conversion of legacy data. Uncertainty exists as to the
effects the conversion to euro currency will have on the marketplace. One of the
largest unknowns for the company is the potential equalization of prices to
customers among countries and the resulting competitive impact on our
distributor partner sales and Toro sales, and market support given to its
distribution partners in those countries. The euro will make price differences
on goods in the various countries transparent to the consumer and make
comparisons much easier. The company at this time cannot estimate the effects of
the above items on its operations, cash flows, or financial conditions in future
periods.
The company continued its program to evaluate whether the company's
computer systems and programs will experience operational problems when the
euro is fully implemented. The company's European subsidiaries' financial
systems have completed initial testing and no problems were discovered for
their ability to function using the euro. These subsidiaries began disclosing
the euro value on each customer's invoice in January 1999. The company plans
to continue testing its computer systems in fiscal 1999 for additional euro
functionality. The risk is thought to be minimal as billing and banking
functions are already being performed in multiple currencies within these
entities. Further, the company is monitoring the rules and regulations as
they become known in order to make any changes to its computer programs that
are deemed necessary to comply. Although the company believes that it will be
able to accommodate any required euro currency changes in its computer
programs, there can be no assurance that once the final rules and regulations
are completed that the company's computer programs will contain all of the
necessary changes or meet all of the euro currency requirements. Based on its
evaluation to date, management currently believes that, while the company
will incur internal and external costs to adjust to the euro, such costs are
not expected to have a material impact on operations, cash flows or the
financial condition of the company and its subsidiaries, taken as a whole, in
future periods.
MARKET CONDITIONS AND OUTLOOK
- --------------------------------------------------------------------------------
Toro expects overall demand for its products to be good in fiscal 1999. New
products, new markets, and acquisitions over the past two years have helped Toro
maintain its leadership across many professional markets. Management believes
Toro is well positioned in the marketplace.
The professional markets in which Toro operates are generally healthy and
are expected to grow. The golf course industry continues to expand with new
course openings scheduled in the U.S. and abroad, except for Asia. Toro
continues to be the provider of choice for premium golf venues, such as the 1999
U.S. Open at Pinehurst, North Carolina, the 1999 Ryder Cup at The Country Club
in Brookline, Massachusetts, and the 2000 British Open at Old St. Andrews in
Scotland. Toro has also been named an official equipment and irrigation provider
for The First Tee, a project aimed at expanding opportunities for youth in the
game of golf. The sports market is also growing, driven by gender equity at the
collegiate and high school level, and a demand for better quality and safer turf
fields. Toro is expanding its popular Workman-Registered Trademark- vehicle into
the industrial sector, which is expected to become another market niche for this
product.
The landscaping industry is one of the fastest growing professional
markets, fueled by demographic and environmental trends. Professional and
residential customers continue to desire beautiful and eco-balanced landscapes,
and increasingly they demand contractor services to provide it. Toro is well
positioned in this market with equipment and irrigation products. Toro's dual
branding strategy of Exmark-Registered Trademark- and Toro-Registered
Trademark-, widely believed to be the top two premium brands in this market
based on size, number, quality of products, and distribution channels, provides
a strong market share. Toro's multi-branded irrigation strategy of
Toro-Registered Trademark-, Irritrol-Registered Trademark-, and Lawn
Genie-Registered Trademark-, likewise gives Toro a preeminent position, with
diversity in product lines and distribution, for a balanced approach to the
market.
The agricultural irrigation market has many opportunities for Toro as the
need grows for more arable land to feed the world's expanding population.
Although new to the company, Toro Agricultural Irrigation, and its recent
acquisition, Drip In, have operated in this industry for many years and bring a
growth business that is positioned to diversify Toro's overall professional
irrigation business.
18
Toro's consumer business struggled in fiscal 1998, but the profit
improvement plan has reduced costs and increased the likelihood for
profitability for the consumer business in fiscal 1999. An expanded
distribution strategy, providing certain Toro-Registered Trademark- brand
lawn mowers to 1,600 select home centers in fiscal 1999, is expected to
provide added sales momentum for the Toro-Registered Trademark- brand. Demand
for Lawn-Boy's-Registered Trademark- new DuraForce-TM- low-emission engine
lawn mowers, was strong in fiscal 1998, and is expected to continue into
fiscal 1999. Expanded distribution of Toro-Registered Trademark- electric
products is expected to add incremental sales to that product line. Another
environmentally sensitive product, a quieter version of Toro's powerful
electric leaf blower vacuum, was introduced in late fiscal 1998 and is
expected to have a positive market impact in fiscal 1999. Manufacturing
improvements at Toro's El Paso, Texas, plant are expected to provide better
margins than experienced in fiscal 1998. Toro's snowthrower business is
expected to be modest in fiscal 1999. Toro has planned conservatively for its
snowthrower business and will be utilizing a promotional program that ties
price discounts to snowfall levels. This promotional program is substantially
insured with a third party.
The international sector remains unpredictable entering the new year. Sales
to the Asian market will likely be down, but Asia accounted for less than 2
percent of overall revenues in fiscal 1998 and the expected decline is not
expected to have a material impact on the company's operations. The Latin
American market is also expected to be soft in fiscal 1999, but also accounts
for a small part of overall sales. The European, Canadian, and Australian
markets expect good performance in fiscal 1999, which should partially offset
struggling Asian and Latin American markets.
Overall, Toro is expecting a good year in fiscal 1999, while keeping a
cautionary eye on the weather, competition, and the world economic scene.
FORWARD-LOOKING STATEMENTS
- --------------------------------------------------------------------------------
This annual report contains not only historical information, but also
forward-looking statements regarding expectations for future company
performance. 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
political and economic uncertainty throughout the world; whether the announced
profit improvement plan will be successful; increased competition in the
company's businesses from competitors that have greater financial resources; the
cost of closing certain plants and selling certain business units; the success
of new marketing programs; continued deterioration in the company's markets in
Asia and softening in other international markets; 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; competitive implications and price transparencies related to the euro
conversion; changing buying patterns affecting the company's consumer business,
including but not limited to a trend away from purchases at dealer outlets to
price and value conscious purchases at hardware, home center, and mass
retailers; changes in distributor ownership; the company's expansion into
selected home center markets; the company's ability to integrate business
acquisitions and to manage alliances successfully; the addition of outside
providers for warehousing and transportation services; the company's ability to
develop and manufacture new and existing products profitably; market acceptance
of existing and new products; changes in distributors, dealers, home center or
mass retailers' purchasing practices; the company's ability to rationalize its
product lines and plant configurations; the ability to eliminate cost overruns
affecting selected consumer and irrigation products at the El Paso, Texas
facility; the company's ability to maintain good relations with its union
employees; and the ability to retain and hire quality employees.
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;
slower growth in the company's markets; financial market changes including
increases in interest rates and fluctuations in foreign exchange rates;
unanticipated problems or costs associated with the transition of European
currencies to the common euro currency; a slowing in housing starts or new golf
course starts; inability to raise prices of products due to market conditions;
changes in market demographics; actions of competitors; unanticipated problems
or costs associated with accommodation of the year 2000 in computer applications
or products; the inability of the company's suppliers, customers, creditors,
government agencies, public utility providers, and financial service
organizations to implement computer applications accommodating the year 2000;
seasonal factors in the company's industry; unforeseen litigation; government
action, including budget levels, regulation and legislation, primarily
legislation relating to the environment, commerce, infrastructure spending,
health, and safety; 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 further
information concerning the company and its businesses, including factors that
potentially could materially affect the company's financial results, is included
in the company's filings with the Securities and Exchange Commission.
19
SELECTED FINANCIAL DATA The Toro Company
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
3 Months
(Dollars and shares in Years Ended Ended Years Ended
thousands, except per share --------------------------------------------------------------------------------------------
data, number of employees and October 31 October 31 October 31 October 31 July 31 July 31
stockholders) 1998 (1) 1997 (2) 1996 1995 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
Net sales $1,110,434 $1,051,204 $930,909 $192,278 $932,853 $794,341
Net sales growth from
prior year(5) 5.6% 12.9% (0.2)% - 17.4% 16.1%
Gross profit percentage 34.6% 36.9% 36.7% 37.3% 35.9% 36.2%
Earnings from operations(3) $ 23,716 $ 72,347 $ 63,439 $ 6,655 $ 64,821 $ 42,582
Interest expense 25,428 19,900 13,590 2,532 11,902 13,562
Net earnings, before
extraordinary loss 4,090 36,508 36,409 3,997 36,667 22,230
Percentage of net sales 0.4% 3.5% 3.9% 2.1% 3.9% 2.8%
Net earnings(4) $ 4,090 $ 34,845 $ 36,409 $ 3,997 $ 36,667 $ 22,230
Basic earnings per share 0.32 2.88 3.00 0.33 2.92 1.78
Dilutive earnings per share(4) 0.31 2.80 2.90 0.32 2.81 1.71
Return on average common
stockholders' equity 1.6% 15.3% 18.0% 2.1% 20.7% 14.2%
SUMMARY OF FINANCIAL POSITION:
Current assets $ 479,437 $ 472,044 $405,001 $386,259 $381,610 $364,495
Current liabilities 258,210 237,833 207,857 221,173 212,659 188,712
Working capital 221,227 234,211 197,144 165,086 168,951 175,783
Total assets 723,991 661,634 496,877 472,653 468,315 443,639
Long-term debt 197,424 178,015 53,365 68,699 81,025 101,325
Stockholders' equity 263,399 241,163 213,567 190,892 185,471 168,652
Debt to capitalization ratio 46.4% 47.6% 30.7% 36.6% 35.8% 37.5%
OTHER STATISTICAL DATA:
Capital expenditures $ 33,893 $ 37,023 $ 21,389 $ 3,302 $ 28,162 $ 18,173
Depreciation and amortization
expense 38,240 30,878 18,170 3,590 17,240 18,839
Book value per common share 20.63 19.79 17.75 15.69 15.40 13.43
Dividends per common share .48 .48 .48 .12 .48 .48
Number of common shares
outstanding 12,770 12,189 12,032 12,168 12,040 12,561
Number of common stockholders 6,364 6,560 6,841 7,243 7,347 7,541
Market price range-
High $ 46 5/16 $ 43 3/4 $ 36 1/4 $ 32 1/4 $ 30 3/8 $ 30 1/2
Low 16 1/2 31 1/2 28 3/8 28 1/8 21 5/8 19 3/4
Average number of employees 4,695 4,309 3,610 3,638 3,626 3,434
- --------------------------------------------------------------------------------------------------------------------------
(1) The company's consolidated financial statements include results of
operations of Exmark from November 1, 1997 and Drip In from February 1,
1998, the dates of acquisition.
(2) The company's consolidated financial statements include results of
operations of the James Hardie Irrigation Group from December 1, 1996, the
date of acquisition.
(3) 1998 and 1997 earnings from operations includes restructuring and other
unusual expense of $15.0 million and $2.6 million, respectively.
(4) 1997 net earnings and earnings per share data includes the extraordinary
loss on early retirement of debt of $1,663,000, or $0.13 per dilutive
share.
(5) Sales growth from prior year for October 31, 1996 was compared to the year
ended July 31, 1995.
20
REPORT OF MANAGEMENT The Toro Company
The Stockholders and Board of Directors
The Toro Company:
Management is responsible for the integrity and objectivity of the financial
information included in this report. The financial statements have been prepared
in accordance with generally accepted accounting principles. Where necessary,
the financial statements reflect estimates based on management judgement.
Established accounting procedures and related systems of internal control
provide reasonable assurance that assets are safeguarded, transactions are
appropriately authorized and included in the financial records in all material
aspects, and that policies and procedures are implemented by qualified
personnel. This system of financial controls and procedures is reviewed,
modified, and improved as changes occur in business conditions and operations,
and as a result of suggestions from independent auditors.
Our independent auditors, KPMG Peat Marwick LLP, in their audit of The Toro
Company's consolidated financial statements, considered the internal control
structure of the company to gain a basic understanding of the accounting system
in order to design an effective and efficient audit approach, not for the
purpose of providing assurance on the system of internal control.
The Audit Committee, comprised of members of the Board of Directors who are
not employees of the company, meets periodically with the independent auditors
and management of the company to monitor the functioning of the accounting
control systems and discuss auditing and financial reporting matters. The Audit
Committee recommends the selection of the independent auditors, who are then
appointed by the board of directors, subject to ratification by the
shareholders.
The independent auditors conduct an independent audit of the consolidated
financial statements.
/s/ Kendrick B. Melrose
- ------------------------
Kendrick B. Melrose
Chairman of the Board and Chief Executive Officer
/s/ Stephen P. Wolfe
- ------------------------
Stephen P. Wolfe
Vice President Finance, Treasurer and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Stockholders and Board of Directors
The Toro Company:
We have audited the accompanying consolidated balance sheets of The Toro
Company and subsidiaries as of October 31, 1998 and 1997, and the related
consolidated statements of earnings and cash flows for each of the three years
in the period ended October 31, 1998. These consolidated financial statements
are the responsibility of the company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Toro
Company and subsidiaries as of October 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended October 31, 1998 in conformity with generally accepted accounting
principles.
KPMG Peat Marwick LLP
Minneapolis, Minnesota
December 11, 1998
21
CONSOLIDATED STATEMENTS OF EARNINGS The Toro Company
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data) Years ended October 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------
Net sales $1,110,434 $1,051,204 $930,909
Cost of sales 726,118 663,167 589,186
- -----------------------------------------------------------------------------------------------------------------------------
Gross profit 384,316 388,037 341,723
Selling, general, and administrative expense 345,558 313,090 278,284
Restructuring and other unusual expense 15,042 2,600 -
- -----------------------------------------------------------------------------------------------------------------------------
Earnings from operations 23,716 72,347 63,439
Interest expense (25,428) (19,900) (13,590)
Other income, net 8,473 7,897 10,331
- -----------------------------------------------------------------------------------------------------------------------------
Earnings before income taxes and extraordinary loss 6,761 60,344 60,180
Provision for income taxes 2,671 23,836 23,771
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings before extraordinary loss 4,090 36,508 36,409
Extraordinary loss, net of income tax benefit of $1,087 - 1,663 -
- -----------------------------------------------------------------------------------------------------------------------------
Net earnings $ 4,090 $ 34,845 $ 36,409
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Basic net earnings per share of common stock
before extraordinary loss $ 0.32 $ 3.02 $ 3.00
Extraordinary loss per share, net of income tax benefit - 0.14 -
- -----------------------------------------------------------------------------------------------------------------------------
Basic net earnings per share of common stock $ 0.32 $ 2.88 $ 3.00
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average number of common
shares outstanding 12,794 12,095 12,141
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Dilutive net earnings per share of common stock
before extraordinary loss $ 0.31 $ 2.93 $ 2.90
Extraordinary loss per share, net of income tax benefit - 0.13 -
- -----------------------------------------------------------------------------------------------------------------------------
Dilutive net earnings per share of common stock $ 0.31 $ 2.80 $ 2.90
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average number of common and assumed
conversion shares outstanding 13,198 12,466 12,555
- -----------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
22
CONSOLIDATED BALANCE SHEETS The Toro Company
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
(Dollars in thousands, except share amounts) October 31 1998 1997
- --------------------------------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 90 $ 8
Receivables:
Customers 246,504 255,318
Other 4,246 13,648
- --------------------------------------------------------------------------------------
Subtotal 250,750 268,966
Less allowance for doubtful accounts 9,324 9,832
- --------------------------------------------------------------------------------------
Total receivables 241,426 259,134
Inventories, net 184,306 160,122
Prepaid expenses and other current assets 14,618 10,454
Deferred income taxes 38,997 42,326
- --------------------------------------------------------------------------------------
Total current assets 479,437 472,044
- --------------------------------------------------------------------------------------
Property, plant, and equipment:
Land and land improvements 12,130 9,334
Buildings and leasehold improvements 85,392 67,627
Equipment 233,017 220,880
- --------------------------------------------------------------------------------------
Subtotal 330,539 297,841
Less accumulated depreciation 203,402 180,989
- --------------------------------------------------------------------------------------
Total property, plant and equipment 127,137 116,852
- --------------------------------------------------------------------------------------
Deferred income taxes 3,763 1,182
Goodwill and other assets 113,654 71,556
- --------------------------------------------------------------------------------------
Total assets $723,991 $661,634
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt $ 580 $ 365
Short-term borrowings 31,000 41,000
Accounts payable 65,273 58,397
Accrued warranties 46,344 40,792
Accrued marketing programs 28,946 22,691
Accrued compensation and benefit costs 36,344 32,552
Other accrued liabilities 49,723 42,036
- --------------------------------------------------------------------------------------
Total current liabilities 258,210 237,833
- --------------------------------------------------------------------------------------
Long-term debt, less current portion 196,844 177,650
Other long-term liabilities 5,538 4,988
Stockholders' equity:
Stock, par value $1.00, authorized 35,000,000 shares;
issued and outstanding 12,769,560 shares in 1998
(net of 738,495 treasury shares) and 12,189,244
shares in 1997 (net of 720,760 treasury shares) 12,770 12,189
Additional paid-in capital 56,546 31,371
Retained earnings 200,609 202,681
Foreign currency translation adjustment (6,526) (5,078)
- --------------------------------------------------------------------------------------
Total stockholders' equity 263,399 241,163
- --------------------------------------------------------------------------------------
Total liabilities and stockholders' equity $723,991 $661,634
- --------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
23
CONSOLIDATED STATEMENTS OF CASH FLOWS The Toro Company
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
(Dollars in thousands) Years ended October 31 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 4,090 $ 34,845 $ 36,409
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Extraordinary loss on early extinguishment of debt - 1,663 -
Provision for depreciation and amortization 38,240 30,878 18,170
Loss (gain) on disposal of property, plant, and equipment 789 573 (260)
Change in deferred income taxes 1,229 2,053 784
Tax benefits related to employee stock option transactions 491 2,611 1,490
Changes in operating assets and liabilities:
Net receivables 26,391 15,067 (40,821)
Inventories (12,755) 1,353 15,574
Prepaid expenses and other current assets (3,629) (6,595) (1,131)
Accounts payable and accrued expenses 14,248 1,425 2,218
- -------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 69,094 83,873 32,433
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant, and equipment (33,893) (37,023) (21,389)
Proceeds from disposal of property, plant, and equipment 3,956 1,163 543
Increase in other assets (929) (12,784) (857)
Acquisition of James Hardie Irrigation, net of cash acquired - (118,030) -
Other acquisitions, net of cash acquired (17,173) - -
- -------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (48,039) (166,674) (21,703)
- -------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of short-term borrowing (10,000) (2,627) (550)
Proceeds from issuance of long-term debt - 175,000 -
Repayments of long-term debt (3,808) (50,350) (15,334)
Payments of debt issue costs and prepayment penalty - (5,770) -
Decrease in other long-term liabilities (50) - -
Net payments for termination of interest rate swap agreements - (23,650) -
Proceeds from interest rate swap agreement - - 12,742
Proceeds from exercise of stock options 2,219 8,407 4,627
Purchases of common stock (1,724) (7,952) (13,339)
Dividends on common stock (6,162) (5,794) (5,834)
- -------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (19,525) 87,264 (17,688)
- -------------------------------------------------------------------------------------------------------------------
Foreign currency translation adjustment (1,448) (4,521) (678)
- -------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents 82 (58) (7,636)
Cash and cash equivalents at beginning of the fiscal year 8 66 7,702
- -------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the fiscal year $ 90 $ 8 $ 66
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
Supplemental disclosures of cash flow information:
Cash paid during the fiscal year for:
Interest $ 24,363 $ 16,829 $ 15,335
Income taxes 3,345 25,459 20,447
Stock issued in connection with an acquisition 24,770 - -
Debt issued in connection with an acquisition 15,761 - -
- -------------------------------------------------------------------------------------------------------------------
The financial statements should be read in conjunction with the Notes to
Consolidated Financial Statements.
24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Toro Company
1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA
- --------------------------------------------------------------------------------
BASIS OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of The
Toro Company and all wholly owned and majority-owned domestic and foreign
subsidiaries (the company). The company records its investment in each
unconsolidated affiliated company (20 to 50 percent ownership) at its related
equity in the net assets of such affiliate and other investments (less than 20
percent ownership) are recorded at cost. All material intercompany accounts and
transactions have been eliminated from the consolidated financial statements.
CASH AND CASH EQUIVALENTS
The company considers all highly liquid investments purchased with a maturity of
3 months or less to be cash equivalents. At October 31, 1998 and 1997, the
company had $12,951,000 and $4,598,000, respectively, included in trade payables
that represented the reclassification of outstanding checks in excess of related
bank balances.
INVENTORIES
The majority of all inventories are valued at the lower of cost or net
realizable value with cost determined by the last-in, first-out (LIFO) method.
Inventories at October 31 were as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Raw materials and work in process $ 97,248 $ 85,020
Finished goods 128,747 117,699
- --------------------------------------------------------------------------------
225,995 202,719
Less LIFO and other reserves 41,689 42,597
- --------------------------------------------------------------------------------
Total $184,306 $160,122
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PROPERTY AND DEPRECIATION
Property, plant, and equipment are carried at cost. The company provides for
depreciation of plant and equipment utilizing the straight-line method over the
estimated useful lives of the assets. Buildings, including leasehold
improvements, are generally depreciated over 10 to 45 years, and equipment over
3 to 7 years. Tooling costs are generally amortized over 3 to 5 years using the
units of production method. Expenditures for major renewals and betterments,
which substantially increase the useful lives of existing assets, are
capitalized, and maintenance and repairs are charged to operating expenses as
incurred. Software is expensed at the time of purchase. Interest is capitalized
during the construction period for significant capital projects. During the
years ended October 31, 1998 and 1997, the company capitalized $447,000 and
$500,000 of interest, respectively.
GOODWILL AND OTHER ASSETS
Goodwill is amortized on a straight-line basis over periods ranging from 3 to 20
years. Goodwill totaled $91,433,000 and $53,667,000 at October 31, 1998 and
1997, respectively, net of accumulated amortization of $19,368,000 at October
31, 1998 and $13,744,000 at October 31, 1997.
IMPAIRMENT OF LONG-LIVED ASSETS
The company reviews long-lived assets, including identifiable intangibles and
associated goodwill, for impairment when events or changes in circumstances
warrant such a review. An asset is deemed impaired and written down to its fair
value if expected associated undiscounted future cash flows are less than its
carrying value.
ACCRUED WARRANTIES
The company provides an accrual for estimated future warranty costs based upon
the historical relationship of warranty costs to sales by product line.
DERIVATIVES
Derivative financial instruments are used by the company to manage foreign
exchange risks. These financial exposures are managed in accordance with the
company's policies and procedures. The company does not hold or issue
derivative financial instruments for trading purposes.
Foreign exchange contracts are accounted for as hedges to the extent they
are designated as, and are effective as, hedges of firm foreign currency
commitments. Foreign currency exchange contract gains and losses are included in
other income, net on the Consolidated Statements of Earnings.
FOREIGN CURRENCY TRANSLATION AND TRANSACTIONS
The functional currency of the company's foreign operations is the applicable
local currency. The functional currency is translated into U.S. dollars for
balance sheet accounts using current exchange rates in effect at the balance
sheet date and for revenue and expense accounts using a weighted average
exchange rate during the period. The translation adjustments are deferred as a
separate component of stockholders' equity. Gains or losses resulting from
transactions denominated in foreign currencies are included in other income,
net.
25
STOCK-BASED COMPENSATION
SFAS No. 123, "Accounting for Stock-Based Compensation," requires companies
to measure employee stock compensation plans based on the fair value method
of accounting or to continue to apply APB No. 25, "Accounting for Stock
Issued to Employees," and provide pro forma footnote disclosures under the
fair value method in SFAS No. 123. The company continues to apply the
principals of APB No. 25 and has provided pro forma fair value disclosures in
Note 9.
ACCOUNTING FOR REVENUES
Revenue is recognized at the time products are shipped to customers.
ADVERTISING
General advertising expenditures and the related production are expensed in the
period in which costs are incurred or the first time advertising takes place.
Cooperative advertising represents expenditures for advertising costs that the
company reimburses customers for some or all of their advertising costs. These
obligations are accrued and expensed when the related revenues are recognized in
accordance with the program established for the various product lines.
Advertising costs were $36,055,000, $35,220,000, and $32,247,000 for the fiscal
years ended 1998, 1997, and 1996, respectively.
COST OF FINANCING DISTRIBUTOR/DEALER INVENTORY
As part of dealer agreements, the company enters into certain inventory
repurchase agreements with third party financing companies. The company records
sales when product is shipped to distributors, and the distributors then sell
product to dealers. The company has only repurchased immaterial amounts of
inventory from third party financing companies over the last three years. Any
expected inventory that would need to be repurchased has been provided for in
the allowance for doubtful accounts. The company was contingently liable to
repurchase $20,272,000 at October 31, 1998 and $9,438,000 at October 31, 1997 of
inventory relating to receivables under dealer financing arrangements.
Included in selling, general, and administrative expense are costs
associated with programs in which the company shares the expense of financing
distributor and dealer inventories. This charge represents interest for a
pre-established length of time at a predefined rate from a contract with a third
party financing source to finance dealer inventory purchases. These financing
arrangements are used by the company as a marketing tool to enable customers to
buy inventory. The financing costs for distributor and dealer inventories were
$10,499,000, $10,192,000, and $10,252,000 for the fiscal years ended 1998, 1997,
and 1996, respectively.
DISTRIBUTION
Included in selling, general, and administrative expense are costs associated
with changes in the company's independent distribution channels. These costs
were $510,000, $898,000, and $2,533,000 for the fiscal years ended 1998,
1997, and 1996, respectively. Those costs associated with business changes
are accrued on the basis of historical experience, while costs related to
specific changes to the company's independent distribution system are
recorded when authorized.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
basis. Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The company has reflected the necessary
deferred tax asset/liability in the accompanying balance sheets. Management
believes the future tax deductions will be realized principally through
carryback to taxable income in prior years, future reversals of existing taxable
temporary differences, and to a lesser extent, future taxable income.
NET EARNINGS PER SHARE
In 1998, the company adopted Statement of Financial Accounting Standards (SFAS)
No. 128, "Earnings per Share." SFAS No. 128 replaced the calculation of primary
and fully diluted earnings per share with basic and dilutive earnings per share.
Basic earnings per share is calculated using net earnings available to common
stockholders divided by the weighted average number of shares of common stock
outstanding during the year. Dilutive earnings per share is similar to basic
earnings per share except that the weighted average number of shares of common
stock outstanding is increased to include the number of additional shares of
common stock that would have been outstanding, such as stock to be issued upon
exercise of options. The treasury stock method is used to calculate the number
of dilutive shares, which reduces the gross number of dilutive shares by the
number of shares purchasable from the proceeds of the options assumed to be
exercised. All prior year earnings per share have been restated in accordance
with the provisions of SFAS 128. Adoption of SFAS 128 did not have a material
effect on the companys historical disclosure of earnings per share.
26
Reconciliations of basic and dilutive weighted average shares of common
stock outstanding are as follows:
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
Years ended October 31 1998 1997 1996
- ---------------------------------------------------------------------------
Weighted average number of
common shares outstanding 12,794,128 12,095,475 12,140,689
Assumed conversion of stock
options and contingently
issuable shares 403,548 371,007 414,026
- ---------------------------------------------------------------------------
Weighted average number of
common shares and assumed
conversion shares outstanding 13,197,676 12,466,482 12,554,715
- ---------------------------------------------------------------------------
- ---------------------------------------------------------------------------
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenue and expenses during the reporting period.Actual results could
differ from those estimates.
BASIS OF PRESENTATION
Certain amounts from prior years financial statements have been reclassified to
conform with the current year presentation.
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1998, the Financial Accounting Standards Board (FASB) issued
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 plans to adopt the new standard beginning with the first quarter of
fiscal year 2000, as required. The company is in the process of evaluating SFAS
133 and the impact on the company.
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 plans to adopt the SOP in the beginning of fiscal year
2000, as required. Costs incurred prior to the initial application of the SOP
will not be adjusted to conform with 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 beginning in the 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 companys
current disclosures.
2 BUSINESS ACQUISITIONS AND DIVESTITURES
- --------------------------------------------------------------------------------
On February 19, 1998, the company completed the acquisition of Drip In, which is
a manufacturer of agricultural micro-irrigation products headquartered in
Madera, California.
On November 25, 1997 the company completed the acquisition of Exmark, a
leading manufacturer of equipment for the professional landscape contractor
industry. In exchange for all of 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 the terms of the purchase agreement, the company
will be required to make contingent payments to Exmark 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 company expects to issue approximately 512,000 shares of
stock and pay approximately $1,800,000 of cash in January 1999 related to the
fiscal 1998 contingent payment.
Effective December 1, 1996 the company acquired Hardie from JHI Limited for
an adjusted price of $106.9 million.
27
The acquisitions described above were accounted for using the purchase
accounting method and, accordingly, the purchase price was allocated based on
the estimated fair values of assets acquired and liabilities assumed on the date
of acquisition. The excess purchase price over the estimated fair value of net
tangible assets acquired was recorded as goodwill, and is being amortized on a
straight-line basis over a 20 year period.
During the fourth quarter of fiscal 1998, Toro recognized a $1.8 million
impairment loss related to the restructuring of its professional fertilizer
business, including the expected sale of portions of this business.
During the third quarter of fiscal 1998, Toro recognized a $3.5 million
impairment loss related to the expected sale of its recycling equipment
business. On September 23, 1998, Toro entered into an agreement to sell this
business, which resulted in no additional loss.
3 SPECIAL CHARGES
- --------------------------------------------------------------------------------
During fiscal 1998, the company committed itself to a profit improvement plan to
make the company as a whole more competitive. The elements of this strategy
include broad organizational initiatives for profit improvement, organizational
changes in the consumer division, initiating a multi-year strategy for
warehousing and transportation services with third party vendors, product line
and business rationalizations, and reducing the number of manufacturing
facilities. The company recorded a charge of $15,042,000 for restructuring and
other unusual expenses. The restructuring charges of $5,770,000 consisted of
$4,359,000 for the severance and asset write-down related to the closure of two
manufacturing facilities and $1,411,000 for other severance costs. Other unusual
expenses consisted of $5,321,000 for the impairment loss related to the expected
sale of the recycling equipment business and portions of the professional
fertilizer business, and $3,951,000 for special marketing programs. These
programs consist of rebates and co-op advertising credits designed to reduce
certain consumer field inventories to historically low levels by providing
incentives to increase retail sales in preparation for potential changes in
warehousing and transportation in fiscal 1999. Restructuring and other unusual
expenses included approximately $8,600,000 of cash charges primarily related to
severance and marketing programs, and approximately $6,400,000 of non-cash
charges related to the write-down of assets.
During fiscal 1997, the company recorded a restructuring charge of
$2,600,000 for the severance and costs related to the closure of a manufacturing
facility.
At October 31, 1998, the company had $10,716,000 of restructuring and other
unusual expense remaining in other accrued liabilities. The company expects the
majority of these reserves to be utilized by the end of fiscal 1999.
4 OTHER INCOME, NET
- --------------------------------------------------------------------------------
Other income (expense) is as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest income $ 853 $1,129 $ 985
Gross finance
charge revenue 4,503 4,519 4,201
Royalties 1,815 1,870 2,582
Exchange rate losses (602) (328) (10)
Miscellaneous 1,904 707 2,573
- --------------------------------------------------------------------------------
Total $8,473 $7,897 $10,331
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5 SHORT-TERM CAPITAL RESOURCES
- --------------------------------------------------------------------------------
At October 31, 1998, the company had available committed and uncommitted
unsecured lines of credit with domestic banks in the aggregate of $237,000,000.
Most of these agreements require the company to pay a fee of 0.175 percent per
year on the available lines of credit, which is included in interest expense.
The company also has bankers' acceptance agreements under which an additional
$40.0 million of credit lines are available. The company's non-U.S. operations
maintain unsecured short-term lines of credit of $6,946,000. These facilities
bear interest at various rates depending on the rates in their respective
countries of operations.
The company had $31,000,000 outstanding at October 31, 1998 and $41,000,000
outstanding at October 31, 1997 under these lines of credit. The weighted
average interest rate on short-term borrowings outstanding at October 31, 1998
and 1997 was 5.64 percent and 5.95 percent, respectively.
Under the terms of the short-term debt agreements, the company is subject
to certain covenants. As of October 31, 1998, the company amended its U.S.
unsecured credit lines with its banks. The debt interest coverage covenant was
modified and the company is in compliance with all of its covenants at October
31, 1998.
28
6 LONG-TERM DEBT
- --------------------------------------------------------------------------------
A summary of long-term debt is as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands) October 31 1998 1997
- --------------------------------------------------------------------------------
Industrial Revenue Bond due June 1999-2004
with various interest rates $ 2,650 $ 3,015
7.000% Notes, due February 17, 2003 15,761 -
7.125% Notes, due June 15, 2007 75,000 75,000
Industrial Revenue Bond due
November 1, 2017 at 4.500% 3,600 -
7.800% Debentures, due June 15, 2027 100,000 100,000
Other 413 -
- --------------------------------------------------------------------------------
197,424 178,015
Less current portion 580 365
- --------------------------------------------------------------------------------
Long-term debt, less current portion $196,844 $177,650
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
In June 1997, the company issued $175.0 million of debt securities
consisting of $75.0 million of 7.125 percent coupon 10-year Notes and $100.0
million of 7.80 percent coupon 30-year Debentures. The proceeds from the debt
securities issued were used, in part, to repay short-term indebtedness, which
was primarily related to the acquisition of Hardie, and to redeem on August 1,
1997 the company's $50.0 million principal amount of 11% Sinking Fund
Debentures. The company paid a prepayment penalty of $2.8 million for the early
retirement of the 11% Debentures. This penalty is reported in the consolidated
statement of earnings as an extraordinary loss, net of the related income tax
benefit.
In connection with the issuance of the $175.0 million in long-term debt
securities, the company paid $23.7 million to terminate three forward-starting
interest rate swap agreements with notional amounts totaling $125.0 million.
These swap agreements had been entered into to reduce exposure to interest rate
risk prior to the issuance of the new long-term debt securities. At the
inception of one of the swap agreements, the company had received payments,which
were recorded as deferred income to be recognized as an adjustment to interest
expense over the term of the new debt securities. At the date the swaps were
terminated, this deferred income totaled $18.7 million. The excess termination
fees over the deferred income recorded has been deferred and is being recognized
as an adjustment to interest expense over the term of the new debt securities
issued.
Principal payments required on long-term debt in each of the next five
years ending October 31 are as follows: 1999, $580,000; 2000, $540,000; 2001,
$461,000; 2002, $473,000; 2003, $16,265,000; and after 2003, $179,105,000.
7 INCOME TAXES
- --------------------------------------------------------------------------------
A reconciliation of the statutory federal income tax rate to the company's
consolidated effective tax rate is summarized as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Years ended October 31 1998 1997 1996
- --------------------------------------------------------------------------------
Statutory federal income tax rate 35.0% 35.0% 35.0%
Increase (reduction) in income taxes
resulting from:
Benefits from foreign sales
corporation (17.6) (1.4) (0.8)
State and local income taxes,
net of federal income tax benefit 1.7 2.9 2.5
Effect of foreign source income (10.0) 0.9 -
Goodwill amortization 26.0 2.3 0.4
Other, net 4.4 (0.2) 2.4
- --------------------------------------------------------------------------------
Effective tax rate 39.5% 39.5% 39.5%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Components of the provision for income taxes are as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands)
Years ended October 31 1998 1997 1996
- --------------------------------------------------------------------------------
Current:
Federal $4,558 $15,985 $22,479
State 345 1,445 2,754
- --------------------------------------------------------------------------------
Current provision 4,903 17,430 25,233
- --------------------------------------------------------------------------------
Deferred:
Federal (2,060) 4,182 (1,051)
State (172) 1,137 (411)
- --------------------------------------------------------------------------------
Deferred provision (2,232) 5,319 (1,462)
- --------------------------------------------------------------------------------
Total provision for income taxes $2,671 $22,749 $23,771
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The tax effects of temporary differences that give rise to the net deferred
income tax assets at October 31, 1998 and 1997 are presented below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands) 1998 1997
- --------------------------------------------------------------------------------
Allowance for doubtful accounts $ 4,357 $ 5,070
Inventory items 3,435 4,228
Depreciation 3,763 2,201
Warranty reserves 16,944 15,028
Employee benefits 6,491 6,048
Other nondeductible accruals 7,770 10,933
- --------------------------------------------------------------------------------
Deferred income tax assets $42,760 $43,508
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
During the years ended October 31, 1998 and 1997, respectively, $491,000
and $2,611,000 was added to additional paid-in capital in accordance with
Accounting Principal Board Opinion 25 reflecting the permanent book to tax
difference in accounting for tax benefits related to employee stock option
transactions.
29
8 STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
Changes in the components of stockholders' equity during the fiscal years ended
1998, 1997, and 1996 were as follows:
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Foreign
Additional Currency
Common Paid-In Retained Translation
(Dollars in thousands) Stock Capital Earnings Adjustment Total
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1995 $12,168 $ 35,712 $142,891 $ 121 $190,892
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends paid on common stock ($0.48 per share) - - (5,834) - (5,834)
Issuance of 294,324 shares under stock option plans 294 4,333 - - 4,627
Purchase of 429,692 shares of common stock (430) (13,073) - - (13,503)
Foreign currency translation adjustment - - - (678) (678)
Tax benefits related to employee stock option transactions - 1,490 - - 1,490
Other - - 164 - 164
Net earnings - - 36,409 - 36,409
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1996 $12,032 $28,462 $173,630 $ (557) $213,567
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends paid on common stock ($0.48 per share) - - (5,794) - (5,794)
Issuance of 389,101 shares under stock option plans 389 8,018 - - 8,407
Purchase of 232,000 shares of common stock (232) (7,720) - - (7,952)
Foreign currency translation adjustment - - - (4,521) (4,521)
Tax benefits related to employee stock option transactions - 2,611 - - 2,611
Net earnings - - 34,845 - 34,845
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1997 $12,189 $ 31,371 $202,681 $(5,078) $241,163
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Dividends paid on common stock ($0.48 per share) - - (6,162) - (6,162)
Issuance of 82,386 shares under stock option plans 83 2,136 - - 2,219
Issuance of 598,051 shares of common stock for
acquisition of Exmark 598 24,172 - - 24,770
Purchase of 100,000 shares of common stock (100) (1,624) - - (1,724)
Foreign currency translation adjustment - - - (1,448) (1,448)
Tax benefits related to employee stock option transactions - 491 - - 491
Net earnings - - 4,090 - 4,090
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at October 31, 1998 $12,770 $56,546 $200,609 $(6,526) $263,399
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
Under the terms of a Rights Agreement effective May 20, 1998, each share of
the company's common stock entitles its holder to one preferred share purchase
right. Each right entitles the registered holder to purchase from the company
one one-hundredth of a share of Series B Junior Participating Voting Preferred
Stock, $1.00 par value at a price of $180 per one one-hundredth of a Preferred
Share. The rights become exercisable and tradable 10 days after a person or a
group acquires 15 percent or more, or makes an offer to acquire 15 percent or
more, of the company's outstanding common stock. At no time do the rights have
any voting power. The rights may be redeemed by the company for $0.01 per right
at any time prior to the time that a person or group has acquired beneficial
ownership of 15 percent or more of the common shares.
During November and December, 1998, Toro repurchased 152,600 shares of
stock in anticipation of shares to be issued in connection with a prior
acquisition as discussed in Footnote 2, Business Acquisitions and Divestitures.
9 STOCK OPTION PLANS
- --------------------------------------------------------------------------------
Under the company's stock option plans, certain employees and non-employee
directors have been granted options to purchase shares of common stock at prices
equal to the fair market value on the date the option was granted, except for
performance-based stock options discussed below. The stock options are generally
exercisable immediately, and expire five to ten years after the date of grant.
30
In connection with the acquisition of Drip In, the company granted Drip
In's former owner an option to purchase 80,000 shares of common stock at a price
based on the fair market value prior to the closing of the acquisition. The
option will vest on the seventh anniversary of grant, except that vesting will
be accelerated if certain performance goals are achieved. The option will expire
seven years after grant.
Performance-based stock options have been granted under the Continuous
Performance Award Plan (CPAP). The exercise price is an average of the closing
stock prices for the three months preceding the grant date. These options
generally vest upon the public release of fiscal year-end earnings for the last
year of the three year award term, and expire 90 days thereafter. Options
granted under this plan totaled 53,871, 40,474, and 36,768 in the fiscal years
ended 1998, 1997, and 1996, respectively. CPAP options cancelled were 26,607,
33,812, and 0 during the fiscal years ended 1998, 1997, and 1996, respectively.
The company applies APB Opinion No. 25 and related interpretations in
accounting for its stock options. Accordingly, no compensation expense has been
recognized for stock option grants, except with respect to performance-based
options. The company recognized compensation expense of $267,000, $545,000, and
$483,000 for the fiscal years ended 1998, 1997, and 1996, respectively. If the
company elected to recognize compensation expense consistent with the
methodology prescribed in SFAS 123, "Accounting for Stock-Based Compensation,"
the company's net income and dilutive earnings per share would have been as
follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands, except per share amounts)
Years ended October 31 1998 1997
- --------------------------------------------------------------------------------
Net income, as reported $4,090 $34,845
Pro forma net income 2,626 34,289
- --------------------------------------------------------------------------------
Dilutive earnings per share, as reported $ 0.31 $ 2.80
Pro forma dilutive earnings per share 0.20 2.75
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The fair value of stock options is estimated at the grant date using the
Black-Scholes option pricing model with the following weighted average
assumptions:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Years ended October 31 1998 1997
- --------------------------------------------------------------------------------
Risk-free interest rate 5.71% 5.75%
Expected life of option in years 3.9 3.1
Expected dividend yield 0.8% 1.5%
Expected stock volatility 21% 20%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The weighted average fair market value of options was estimated to be
$10.01 and $6.14 per share for the years ended October 31, 1998 and 1997,
respectively.
A summary of stock option activity under the plans described above is
presented below:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Weighted
Options available Options average
for grant outstanding exercise price
- --------------------------------------------------------------------------------
October 31, 1995 455,669 1,253,311 $20.56
- --------------------------------------------------------------------------------
Granted (48,768) 48,768 29.77
Exercised - (193,221) 18.85
Cancelled 1,000 (1,000) 29.13
Increase in options
available for grant 600,000 - -
- --------------------------------------------------------------------------------
October 31, 1996 1,007,901 1,107,858 21.25
- --------------------------------------------------------------------------------
Granted (251,620) 251,620 32.74
Exercised - (443,516) 21.93
Cancelled 33,812 (33,812) 24.49
- --------------------------------------------------------------------------------
October 31, 1997 790,093 882,150 24.06
- --------------------------------------------------------------------------------
Granted (397,882) 397,882 41.97
Increase in options
available for grant 80,000 - -
Exercised - (103,792) 25.37
Cancelled 62,869 (64,514) 31.55
- --------------------------------------------------------------------------------
October 31, 1998 535,080 1,111,726 $29.92
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The table below presents the number, weighted average remaining contractual
life, and weighted average exercise price for options outstanding at October 31,
1998:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Weighted
Weighted average
Number average remaining
Exercise price range of options exercise price contractual life
- --------------------------------------------------------------------------------
Options exercisable at
October 31, 1998:
$14.75 300,000 $14.75 7.1 years
$23.625 - $29.125 223,032 27.01 1.4 years
$31.75 - $36.375 156,108 33.84 3.0 years
$43.376 - $43.50 246,039 43.50 4.1 years
- --------------------------------------------------------------------------------
Total 925,179 $28.57 4.2 years
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Options not exercisable at
October 31, 1998:
$29.796 - $39.316 186,547 $36.58 3.5 years
- --------------------------------------------------------------------------------
Grand total 1,111,726 $29.92 4.1 years
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
On July 31, 1995, the company issued 17,467 shares of restricted stock and
17,467 performance units to the CEO under the terms of the Chief Executive
Officer Succession Plan. The value of each performance unit is equal to the fair
market value of a share of common stock. The restricted stock and performance
units vest based upon achievement of specified succession planning goals.
Dividends are paid with respect to the restricted stock and those shares may be
voted. Portions of the
31
restricted stock and performance unit awards will be forfeited if specified
goals are not achieved at various dates, ending on October 31, 2003 or
termination of employment. Compensation expense related to this plan was
$89,000, $350,000, and $254,000 for the fiscal years ended 1998, 1997, and 1996,
respectively.
10 EMPLOYEE BENEFIT PROGRAMS
- --------------------------------------------------------------------------------
The company maintains the following significant plans for eligible employees:
- The Toro Company Investment and Savings Plan
- The Toro Company Employee Stock Ownership Plan
The company's expenses under these plans were $11,245,000, $10,797,000, and
$9,476,000 for fiscal years ended 1998, 1997, and 1996, respectively.
In addition, the company and its subsidiaries have supplemental and other
retirement plans covering certain employees. The expense related to these plans
was not significant.
11 SEGMENT DATA
- --------------------------------------------------------------------------------
The company classifies its operations into one industry segment, outdoor
maintenance equipment. International sales were $235,940,000, $232,808,000, and
$174,249,000 for the fiscal years ended 1998, 1997, and 1996, respectively. Of
these amounts, export sales were $153,500,000, $161,836,000, and $140,919,000
for the years ended 1998, 1997, and 1996, respectively. Export sales by
geographic area were as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(Dollars in thousands)
Years ended October 31 1998 1997 1996
- --------------------------------------------------------------------------------
Europe $ 86,953 $ 79,515 $ 71,325
Canada 35,123 33,349 29,578
Pacific Rim 16,693 34,417 34,975
Other 14,731 14,555 5,041
- --------------------------------------------------------------------------------
Total export sales $153,500 $161,836 $140,919
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
12 LEASE COMMITMENTS
- --------------------------------------------------------------------------------
As of October 31, 1998, future minimum lease payments under capital leases
totaled $949,000. Total rental expense for operating leases was $11,962,000,
$12,467,000, and $11,048,000 for the fiscal years ended 1998, 1997, and 1996,
respectively. At October 31, 1998, future minimum lease payments under
noncancelable operating leases amounted to $15,703,000 as follows: 1999,
$7,270,000; 2000, $4,031,000; 2001, $2,647,000; 2002, $1,000,000; 2003,
$424,000; and beyond, $331,000.
13 COMMITMENTS AND CONTINGENT LIABILITIES
- --------------------------------------------------------------------------------
Debts incurred by certain distributors, aggregating $4,172,000 at October 31,
1998 and $5,600,000 at October 31, 1997, have been guaranteed by the company.
In the ordinary course of business, the company may become liable with
respect to pending and threatened litigation, tax, environmental, and other
matters. While the ultimate results of investigations, lawsuits, and claims
involving the company cannot be determined, management does not expect that
these matters will have a material adverse effect on the consolidated financial
position of the company.
14 FINANCIAL INSTRUMENTS
- --------------------------------------------------------------------------------
OFF-BALANCE SHEET RISK
Letters of credit are issued by the company during the ordinary course of
business, as required by certain vendor contracts, through major domestic banks.
As of October 31, 1998 and 1997, the company had $28,007,000 and $25,985,000,
respectively, in outstanding letters of credit.
CONCENTRATIONS OF CREDIT RISK
Financial instruments, which potentially subject the company to concentrations
of credit risk, consist principally of accounts receivable, which are
concentrated in a single business segment, outdoor maintenance equipment. The
credit risk associated with this segment is limited because of the large number
of customers in the company's customer base and their geographic dispersion.
FOREIGN CURRENCY INVESTMENTS
The company has entered into various foreign currency exchange contracts
designed to manage its exposure to exchange rate fluctuations on foreign
currency transactions. These instruments used as hedges are managed to reduce
the risk associated with the exposure being hedged and are designated as a hedge
at the inception of the contract. Accordingly, changes in market values of hedge
instruments must be highly correlated with changes in market values of
underlying hedged items both at inception of the hedge and over the life of the
hedge contract. Gains and losses on foreign currency contracts are recorded to
the Consolidated Statements of Earnings. The company also enters into forward
currency exchange contracts on behalf of certain distributors in order to cover
a portion of the payments owed by the distributor to the company. Any currency
losses incurred by the company are reimbursed by the distributor.
32
The following forward exchange contracts held by the company have maturity
dates in fiscal year 1999. All items are non-trading and stated in U.S. dollars.
The average contracted rate, notional amount, and fair value impact at October
31, 1998 were as follows:
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Average Fair Value
Dollars in thousands Contracted Notional Impact
(except average contracted rate) Rate Amount Gain (Loss)
- --------------------------------------------------------------------------------
Buy Australian dollar/Sell U $ .6368 $1,022.8 $(18.2)
Buy US $/Sell Australian dollar .6040 5,614.1 (206.9)
Buy US $/Sell Canadian dollar 1.5135 7,168.8 140.0
Buy German mark/Sell US $ 1.7808 2,948.2 251.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
FAIR VALUE
Estimated fair value amounts have been determined using available information
and appropriate valuation methodologies. Because considerable judgment is
required in developing the estimates of fair value, these estimates are not
necessarily indicative of the amounts that could be realized in a current market
exchange.
For cash and cash equivalents, receivables, and accounts payable, carrying
value is a reasonable estimate of fair value.
At October 31, 1998, the estimated fair value of long-term debt with fixed
interest rates was $182,273,000 compared to its carrying value of $197,424,000.
The fair value is estimated by discounting the projected cash flows using the
rate at which similar amounts of debt could currently be borrowed.
15 QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
Summarized quarterly financial data for fiscal 1998 and fiscal 1997 is as
follows:
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
FISCAL YEAR ENDED OCTOBER 31, 1998
---------------------------------------------------------
Quarter (Dollars in thousands, except per share data) FIRST SECOND THIRD FOURTH
- -----------------------------------------------------------------------------------------------------------------
Net sales $210,059 $379,686 $290,993 $229,696
Gross profit 73,052 132,949 101,280 77,035
Restructuring and other unusual expense - - 10,452 4,590
Net earnings (loss) (1,061) 20,053 (2,553) (12,349)
Basic net earnings (loss) per share (0.08) 1.56 (0.20) (0.96)
Dilutive net earnings (loss) per share (0.08) 1.53 (0.20) (0.96)
Dividends per share of common stock 0.12 0.12 0.12 0.12
Market price of common stock
High sales price 46 5/16 40 15/16 37 10/16 27 9/16
Low sales price 38 1/2 36 3/16 26 3/4 16 1/2
- ------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
Fiscal Year Ended October 31, 1997
---------------------------------------------------------
Quarter (Dollars in thousands, except per share data) First Second Third Fourth
- -----------------------------------------------------------------------------------------------------------------
Net sales $208,957 $352,203 $249,274 $240,770
Gross profit 75,227 125,117 92,395 95,298
Restructuring and other unusual expense - - - 2,600
Net earnings, before extraordinary loss 2,491 19,040 9,949 5,028
Net earnings 2,491 19,040 8,286 5,028
Basic net earnings per share, before extraordinary loss 0.21 1.58 0.82 0.41
Basic net earnings per share 0.21 1.58 0.69 0.41
Dilutive net earnings per share, before extraordinary loss 0.20 1.53 0.80 0.40
Dilutive net earnings per share 0.20 1.53 0.67 0.40
Dividends per share of common stock 0.12 0.12 0.12 0.12
Market price of common stock
High sales price 36 5/8 36 7/8 38 7/8 43 3/4
Low sales price 31 1/2 33 35 1/8 35 7/16
- -----------------------------------------------------------------------------------------------------------------
As of January 7, 1999, the company had 6,393 stockholders of record.
33
ELEVEN-YEAR SELECTED FINANCIAL DATA The Toro Company
- ------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data, number of employees and stockholders)
Years ended October 31(8) 1998 (1)(2) 1997 (4)(5) 1996
- ------------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
Net sales $1,110,400 $1,051,200 $930,900
Net sales growth from prior year 5.6% 12.9% 1.3%
Net earnings (loss), before extraordinary loss(3) $ 4,090 $ 36,500 $ 36,400
Percentage of net sales 0.4% 3.5% 3.9%
Net earnings (loss) $ 4,090 $ 34,845 $ 36,400
Dilutive earnings (loss) per share, before
extraordinary loss(3) 0.31 2.93 2.90
Return on average stockholders' equity 1.6% 15.3% 18.0%
SUMMARY OF FINANCIAL POSITION:
Current assets $ 479,400 $ 472,000 $405,000
Current liabilities 258,200 237,800 207,900
Working capital 221,200 234,200 197,100
Long-term debt, less current portion 196,800 177,700 53,000
Stockholders' equity 263,400 241,200 213,600
Debt to capitalization ratio 46.4% 47.6% 30.7%
OTHER STATISTICAL DATA:
Book value per share of common stock $ 20.63 $ 19.79 $ 17.75
Dividends per share of common stock 0.48 0.48 0.48
Number of shares of common stock
outstanding 12,770 12,189 12,032
Number of common stockholders(9) 6,364 6,560 6,841
Market price range -
High price $ 46 5/16 $ 43 3/4 $ 36 1/4
Low price 16 1/2 31 1/2 28 3/8
Average number of employees 4,695 4,309 3,610
- ------------------------------------------------------------------------------------------------------------
(1) Includes restructuring and other unusual expenses of $15.0 million in
fiscal 1998.
(2) The company's consolidated financial statements include results of
operations of Exmark from November 1, 1997 and Drip In from February 1,
1998, dates of acquisitions.
(3) 1997 net earnings and earnings per dilutive share after the extraordinary
loss on early retirement of debt of $1,663,000, or $0.13 per dilutive
share, were $34,845,000 and $2.80, respectively.
(4) The company's consolidated financial statements include results of
operations of the James Hardie Irrigation Group from December 1, 1996, the
date of acquisition.
(5) Includes restructuring and other unusual expense of $2.6 million in fiscal
1997.
(6) Includes restructuring costs of $24.9 million in fiscal 1992.
(7) The company's consolidated financial statements include results of
operations of LawnBoy Inc. from November 7, 1989, the date of acquisition.
(8) In 1995, the company changed its fiscal year end from July 31 to October
31. Therefore, actual date of the yearend for years prior to 1995 are
unaudited and were restated to include twelve months of data through the
Friday closest to October 31 for comparative purposes.
(9) Represents the number of stockholders at July 31 for the years starting in
1988 and ending in 1994.
34
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data, number of employees and stockholders)
Years ended October 31(8) 1995 1994 1993 1992 (6)
- ----------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
Net sales $919,400 $864,300 $706,600 $638,700
Net sales growth from prior year 6.4% 22.3% 10.6% (9.6)%
Net earnings (loss), before extraordinary loss(3) $ 32,400 $ 32,400 $ 15,300 $(21,700)
Percentage of net sales 3.5% 3.8% 2.2% (3.4)%
Net earnings (loss) $ 32,400 $ 32,400 $ 15,300 $(21,700)
Dilutive earnings (loss) per share, before
extraordinary loss(3) 2.50 2.49 1.22 (1.81)
Return on average stockholders' equity 17.5% 20.2% 11.4% (15.5)%
SUMMARY OF FINANCIAL POSITION:
Current assets $386,300 $373,400 $326,100 $324,200
Current liabilities 221,200 197,200 169,200 132,500
Working capital 165,100 176,200 156,900 191,700
Long-term debt, less current portion 53,400 70,400 87,300 147,900
Stockholders' equity 190,900 178,700 141,900 126,400
Debt to capitalization ratio 36.6% 33.8% 46.5% 56.5%
OTHER STATISTICAL DATA:
Book value per share of common stock $ 15.69 $ 14.05 $ 11.47 $ 10.50
Dividends per share of common stock 0.48 0.48 0.48 0.48
Number of shares of common stock
outstanding 12,168 12,720 12,370 12,041
Number of common stockholders(9) 7,243 7,541 7,968 8,386
Market price range -
High price $ 32 1/4 $ 30 1/2 $ 26 3/4 $ 17 1/2
Low price 25 5/8 20 7/8 14 1/8 11 3/8
Average number of employees 3,638 3,434 3,117 3,084
- ----------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------
(Dollars and shares in thousands, except per share data, number of employees and stockholders)
Years ended October 31(8) 1991 1990 (7) 1989 1988
- -------------------------------------------------------------------------------------------------------------------------
OPERATING RESULTS:
Net sales $706,200 $747,300 $639,200 $626,200
Net sales growth from prior year (5.5)% 16.9% 2.1% 13.5%
Net earnings (loss), before extraordinary loss(3) $ 9,100 $ 8,400 $ 20,000 $ 20,500
Percentage of net sales 1.3% 1.1% 3.1% 3.3%
Net earnings (loss) $ 9,100 $ 8,400 $ 20,000 $ 20,500
Dilutive earnings (loss) per share, before
extraordinary loss(3) 0.77 0.84 1.90 1.90
Return on average stockholders' equity 6.1% 6.8% 21.7% 26.1%
SUMMARY OF FINANCIAL POSITION:
Current assets $322,000 $306,800 $271,200 $296,400
Current liabilities 103,800 133,000 125,000 144,200
Working capital 218,200 173,800 146,200 152,200
Long-term debt, less current portion 154,100 125,300 95,600 112,200
Stockholders' equity 153,400 146,300 99,300 85,100
Debt to capitalization ratio 51.9% 54.3% 54.7% 65.0%
OTHER STATISTICAL DATA:
Book value per share of common stock $ 12.84 $ 12.34 $ 9.98 $ 8.46
Dividends per share of common stock 0.48 0.48 0.48 0.45
Number of shares of common stock
outstanding 11,950 11,859 9,946 10,059
Number of common stockholders(9) 8,503 7,706 7,527 6,802
Market price range -
High price $ 20 1/2 $ 30 $ 24 3/8 $ 24 7/8
Low price 11 12 17 7/8 11 1/8
Average number of employees 3,580 3,771 3,068 3,105
- -------------------------------------------------------------------------------------------------------------------------
(1) Includes restructuring and other unusual expenses of $15.0 million in
fiscal 1998.
(2) The company's consolidated financial statements include results of
operations of Exmark from November 1, 1997 and Drip In from February 1,
1998, dates of acquisitions.
(3) 1997 net earnings and earnings per dilutive share after the extraordinary
loss on early retirement of debt of $1,663,000, or $0.13 per dilutive
share, were $34,845,000 and $2.80, respectively.
(4) The company's consolidated financial statements include results of
operations of the James Hardie Irrigation Group from December 1, 1996, the
date of acquisition.
(5) Includes restructuring and other unusual expense of $2.6 million in fiscal
1997.
(6) Includes restructuring costs of $24.9 million in fiscal 1992.
(7) The company's consolidated financial statements include results of
operations of LawnBoy Inc. from November 7, 1989, the date of acquisition.
(8) In 1995, the company changed its fiscal year end from July 31 to October
31. Therefore, actual date of the yearend for years prior to 1995 are
unaudited and were restated to include twelve months of data through the
Friday closest to October 31 for comparative purposes.
(9) Represents the number of stockholders at July 31 for the years starting in
1988 and ending in 1994.
35
BOARD OF DIRECTORS
Ronald O. Baukol (C/E/N)
Executive Vice President
International Operations
3M
St. Paul, Minnesota
Robert C. Buhrmaster (A/E/N)
President and Chief Executive Officer
Jostens, Inc.
Minneapolis, Minnesota
Winslow H. Buxton (A/E/N)
Chairman, President and
Chief Executive Officer
Pentair, Inc.
St. Paul, Minnesota
Janet K. Cooper (A*/C)
Vice President, Treasurer
U.S. West
Denver, Colorado
Kendrick B. Melrose (E*/N**)
Chairman and Chief Executive Officer
The Toro Company
Alex A. Meyer (A/C)
Retired
Amana Refrigeration, Inc.
Amana, Iowa
Robert H. Nassau (C/N)
President and Chief Executive Officer
St. Raymond Wood Products Holding Limited
Boston, Massachusetts
Dale R. Olseth (A/C*/E)
Chairman and Chief Executive Officer
SurModics, Inc.
Minneapolis, Minnesota
Christopher A. Twomey (C/N)
President and Chief Executive Officer
Arctic Cat, Inc.
Thief River Falls, Minnesota
Edwin H. Wingate (A/E/N*)
Retired
Dayton Hudson Corporation
Minneapolis, Minnesota
(A) Audit Committee Member
(C) Compensation Committee Member
(E) Executive Committee Member
(N) Nominating Committee Member
* Committee Chairman
** Ex-officio Non-voting Member
OFFICERS
Kendrick B. Melrose
Chairman and Chief Executive Officer+
J. David McIntosh
Executive Vice President
Professional Businesses and International+
William D. Hughes
Vice President and General Manager
Consumer Business+
Steven P. Hansen
Vice President
Corporate Information Services
Dennis P. Himan
Vice President and General Manager
Landscape Contractor Businesses+
Michael J. Hoffman
Vice President and General Manager
Commercial Business+
Randy B. James
Vice President and Controller+
Stephen D. Keating
Assistant Treasurer, Investor Relations
Ram N. Kumar
Vice President, Distributor Development
and New Businesses
J. Lawrence McIntyre
Vice President, Secretary and General Counsel+
Karen M. Meyer
Vice President, Administration+
Richard W. Parod
Vice President and General Manager
Irrigation Business+
Richard R. Pollick
Vice President and General Manager
International Business+
N. Jeanne Ryan
Assistant Secretary
Stephen P. Wolfe
Vice President Finance, Treasurer and
Chief Financial Officer+
+Executive officers subject to Section 16
36
STOCKHOLDERS' INFORMATION
DIVIDENDS
Communications concerning transfer requirements, address changes, dividends and
lost certificates should be addressed to:
Shareholder Assistance
Norwest Bank Minnesota, N.A.
P.O. Box 64854
St. Paul, Minnesota 55164-0854
651-450-4064
1-800-468-9716
DIVIDEND REINVESTMENT
The company sponsors an Automatic Dividend Reinvestment Plan. For enrollment
information contact:
Investor Relations
The Toro Company
8111 Lyndale Avenue South
Bloomington, Minnesota 55420-1196
Inquiries about existing dividend reinvestment accounts should be addressed to:
Dividend Reinvestment Plan
The Toro Company
Norwest Bank Minnesota, N.A.
P.O. Box 64854
St. Paul, Minnesota 55164-0854
651-450-4064
1-800-468-9716
QUARTERLY INFORMATION
Quarterly earnings results are expected to be announced on the following dates:
First Quarter: February 23, 1999
Second Quarter: May 26, 1999
Third Quarter: August 25, 1999
Fourth Quarter: December 14, 1999
To obtain a copy of the quarterly financial results, contact:
Investor Relations
The Toro Company
8111 Lyndale Avenue South
Bloomington, Minnesota 55420
E-mail: invest@toro.com
Phone: 612-887-7141
FORM 10-K
THE ANNUAL REPORT ON FORM 10-K FILED WITH THE SECURITIES AND EXCHANGE COMMISSION
IS AVAILABLE WITHOUT CHARGE UPON WRITTEN REQUEST BY A STOCKHOLDER TO:
Investor Relations
The Toro Company
8111 Lyndale Avenue South
Bloomington, Minnesota 55420-1196
E-mail: invest@toro.com
STOCK LISTING
New York Stock Exchange (TTC)
ANNUAL MEETING
March 24, 1999, 3:00 p.m. (CST)
The Toro Company Corporate Offices
8111 Lyndale Avenue South
Bloomington, Minnesota 55420-1196
INTERNET ADDRESSES
www.toro.com
www.lawnboy.com
www.irritrolsystems.com
www.lawngenie.com
www.exmark.com
www.nsn.com
WORLDWIDE LOCATIONS
UNITED STATES
Abilene, Texas
Baraboo, Wisconsin
Beatrice, Nebraska
Bloomington, Minnesota
Dallas, Texas
El Cajon, California
El Paso, Texas
Evansville, Indiana
Laguna, California
Lakeville, Minnesota
Lincoln, Nebraska
Madera, California
Mountaintop, Pennsylvania
Oxford, Mississippi
Plymouth, Wisconsin
Riverside, California
Sanford, Florida
Shakopee, Minnesota
Tomah, Wisconsin
Windom, Minnesota
AROUND THE WORLD
Balcatta, Australia
Beverly, Australia
Braeside, Australia
Eagle Farm, Australia
Murray Bridge, Australia
Oevel, Belgium
Parramatta, Australia
Rome, Italy