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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended April 30, 1999
Commission File Number 1-8649
THE TORO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 41-0580470
(State of Incorporation) (I.R.S. Employer Identification Number)
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420
TELEPHONE NUMBER: (612) 888-8801
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
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The number of shares of Common Stock outstanding as of May 28, 1999 was
12,933,253.
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THE TORO COMPANY
INDEX TO FORM 10-Q
Page Number
-----------
PART I. FINANCIAL INFORMATION:
Item 1. Condensed Consolidated Statements of Earnings (Unaudited) -
Three and Six Months Ended April 30, 1999 and May 1, 1998.........................................3
Condensed Consolidated Balance Sheets (Unaudited) -
April 30, 1999, May 1, 1998 and October 31, 1998..................................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Six Months Ended April 30, 1999 and May 1, 1998...................................................5
Notes to Condensed Consolidated Financial Statements (Unaudited).....................................6-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..................................................................9-16
PART II. OTHER INFORMATION:
Item 4. Submission of Matters to a Vote of Security Holders..................................................17
Item 6. Exhibits and Reports on Form 8-K....................................................................17-18
Signatures...........................................................................................19
2
PART I. ITEM 1. FINANCIAL INFORMATION
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER-SHARE DATA)
Three Months Ended Six Months Ended
------------------------------- -------------------------------
April 30, May 1, April 30, May 1,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Net sales..................................................$ 433,108 $ 379,686 $ 683,869 $ 589,745
Cost of sales.............................................. 280,255 246,737 443,072 383,744
-------------- -------------- -------------- --------------
Gross profit........................................ 152,853 132,949 240,797 206,001
Selling, general, and administrative expenses.............. 106,775 95,034 189,136 166,898
-------------- -------------- -------------- --------------
Earnings from operations............................ 46,078 37,915 51,661 39,103
Interest expense........................................... (6,697) (6,911) (11,727) (12,716)
Other income, net.......................................... 78 2,141 863 5,004
-------------- -------------- -------------- --------------
Earnings before income taxes........................ 39,459 33,145 40,797 31,391
Provision for income taxes................................. 15,369 13,092 15,911 12,399
-------------- -------------- -------------- --------------
Net earnings........................................$ 24,090 $ 20,053 $ 24,886 $ 18,992
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Basic net earnings per share of common stock...............$ 1.86 $ 1.56 $ 1.91 $ 1.49
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Diluted net earnings per share of common stock.............$ 1.83 $ 1.53 $ 1.88 $ 1.45
-------------- -------------- -------------- --------------
-------------- -------------- -------------- --------------
Weighted average number of shares of common stock
outstanding and assumed issuance of
contingent shares................................... 12,922 12,836 13,030 12,736
Weighted average number of shares of common stock
outstanding, assumed issuance of contingent
shares, and assumed conversion of options
outstanding......................................... 13,163 13,149 13,241 13,082
See accompanying notes to condensed consolidated financial statements.
3
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
April 30, May 1, October 31,
1999 1998 1998
---------------- ----------------- -----------------
ASSETS
Cash and cash equivalents.............................................$ 3,341 $ 640 $ 90
Receivables, net...................................................... 439,423 440,435 241,426
Inventories, net...................................................... 185,699 212,425 184,306
Prepaid expenses and other current assets............................. 8,869 8,275 14,618
Deferred income taxes................................................. 38,526 45,243 38,997
---------------- ----------------- -----------------
Total current assets.......................................... 675,858 707,018 479,437
---------------- ----------------- -----------------
Property, plant, and equipment........................................ 336,990 318,977 330,539
Less accumulated depreciation................................. 214,916 188,226 203,402
---------------- ----------------- -----------------
122,074 130,751 127,137
Deferred income taxes................................................. 3,786 1,182 3,763
Goodwill and other assets............................................. 129,506 113,227 113,654
---------------- ----------------- -----------------
Total assets..................................................$ 931,224 $ 952,178 $ 723,991
---------------- ----------------- -----------------
---------------- ----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt.....................................$ 624 $ 1,839 $ 580
Short-term debt....................................................... 183,909 236,632 31,000
Accounts payable...................................................... 57,965 69,408 65,273
Accrued liabilities................................................... 197,908 155,825 161,357
---------------- ----------------- -----------------
Total current liabilities..................................... 440,406 463,704 258,210
---------------- ----------------- -----------------
Long-term debt, less current portion.................................. 196,758 198,251 196,844
Other long-term liabilities........................................... 5,938 6,610 5,538
Stockholders' equity:
Common stock, par value $1.00, authorized 35,000,000 shares;
issued and outstanding 12,916,010 shares at April 30,
1999 (net of 592,045 treasury shares), 12,841,273
shares at May 1, 1998 (net of 666,782 treasury shares),
and 12,769,560 shares at October 31, 1998 (net of
738,495 treasury shares)...................................... 12,916 12,841 12,770
Additional paid-in capital........................................... 58,904 58,958 56,546
Retained earnings.................................................... 222,425 218,597 200,609
Foreign currency translation adjustment.............................. (6,123) (6,783) (6,526)
---------------- ----------------- -----------------
Total stockholders' equity.................................... 288,122 283,613 263,399
---------------- ----------------- -----------------
Total liabilities and stockholders' equity....................$ 931,224 $ 952,178 $ 723,991
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See accompanying notes to condensed consolidated financial statements.
4
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Six Months Ended
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April 30, May 1,
1999 1998
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Cash flows from operating activities:
Net earnings...................................................................$ 24,886 $ 18,992
Adjustments to reconcile net earnings to net cash
used in operating activities:
Provision for depreciation and amortization................................. 17,838 16,054
Loss on disposal of property, plant, and equipment.......................... 207 295
Deferred income taxes....................................................... 910 (2,632)
Tax benefits related to employee stock option transactions.................. 198 1,815
Changes in operating assets and liabilities:
Receivables, net....................................................... (197,997) (172,618)
Inventories, net....................................................... (1,393) (40,874)
Prepaid expenses and other current assets.............................. 5,311 2,977
Accounts payable and accrued expenses.................................. 30,346 15,047
------------------- ------------------
Net cash used in operating activities.............................. (119,694) (160,944)
------------------- ------------------
Cash flows from investing activities:
Purchases of property, plant, and equipment................................. (10,286) (17,783)
Proceeds from asset disposals............................................... 240 1,325
(Increase) decrease in investment in affiliates............................. (4,908) 117
(Increase) decrease in other assets......................................... (1,814) 2,770
Acquisitions, net of cash acquired.......................................... - (17,173)
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Net cash used in investing activities.............................. (16,768) (30,744)
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Cash flows from financing activities:
Increase in short-term debt................................................. 152,909 195,632
Repayments of long-term debt................................................ (156) (1,142)
Increase in other long-term liabilities..................................... 376 956
Proceeds from exercise of stock options..................................... 1,272 1,655
Purchases of common stock................................................... (12,021) -
Dividends on common stock................................................... (3,070) (3,076)
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Net cash provided by financing activities.......................... 139,310 194,025
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Foreign currency translation adjustment........................................ 403 (1,705)
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Net increase in cash and cash equivalents...................................... 3,251 632
Cash and cash equivalents at beginning of period............................... 90 8
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Cash and cash equivalents at end of period.....................................$ 3,341 $ 640
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See accompanying notes to condensed consolidated financial statements.
5
THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
APRIL 30, 1999
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all the information and notes required by generally accepted accounting
principles for complete financial statements. Unless the context indicates
otherwise, the terms "company" and "Toro" refer to The Toro Company and its
subsidiaries. In the opinion of management, the unaudited condensed consolidated
financial statements include all adjustments, consisting primarily of recurring
accruals, considered necessary for a fair presentation of the financial position
and the results of operations. Since the company's business is seasonal,
operating results for the six months ended April 30, 1999 are not necessarily
indicative of the results that may be expected for the fiscal year ending
October 31, 1999. Certain amounts from prior period's financial statements have
been reclassified to conform to this period's presentation.
For further information, refer to the consolidated financial statements and
notes included in the company's Annual Report on Form 10-K for the year ended
October 31, 1998. The policies described in that report are used for
preparing quarterly reports.
INVENTORIES
The majority of inventories are valued at the lower of cost or net
realizable value with cost determined by the last-in, first-out (LIFO) method.
Inventories were as follows:
(Dollars in thousands) April 30, May 1,
1999 1998
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Raw materials and work in process....................$ 76,045 $ 83,564
Finished goods....................................... 155,762 170,035
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231,807 253,599
Less LIFO and other reserves......................... 46,108 41,174
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Total $ 185,699 $ 212,425
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RESTRUCTURING AND OTHER UNUSUAL EXPENSE
At April 30, 1999, the company had $3.9 million of restructuring and other
unusual expense remaining in accrued liabilities. The company has utilized
$6.8 million of these reserves since October 31, 1998. The company expects
the majority of these reserves to be utilized by the end of fiscal 1999.
6
COMPREHENSIVE INCOME
Comprehensive income is comprised of two components: net earnings and other
comprehensive income (loss). Other comprehensive income (loss) refers to
revenues, expenses, gains, and losses that under generally accepted
accounting principles are recorded as an element of stockholders' equity and
are excluded from net earnings. Toro's other comprehensive income (loss) is
comprised of foreign currency translation adjustments from certain foreign
subsidiaries.
The components of comprehensive income (loss) were as follows:
Three Months Ended Six Months Ended
----------------------------------- -------------------------------
(Dollars in thousands) April 30, May 1, April 30, May 1,
1999 1998 1999 1998
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Net earnings..........................................$ 24,090 $ 20,053 $ 24,886 $ 18,992
Other comprehensive income (loss)..................... 563 (695) 403 (1,705)
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Comprehensive income..................................$ 24,653 $ 19,358 $ 25,289 $ 17,287
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NET EARNINGS PER SHARE
Reconciliation of basic and dilutive weighted average shares of common stock
outstanding is as follows:
Three Months Ended Six Months Ended
--------------------------------- -------------------------------
April 30, May 1, April 30, May 1,
1999 1998 1999 1998
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BASIC
(Shares in thousands)
Weighted average number of shares of common
stock outstanding.................................... 12,922 12,836 12,775 12,736
Assumed issuance of contingent shares ...................... - - 255 -
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Weighted average number of shares of common stock
and assumed issuance of contingent shares............ 12,922 12,836 13,030 12,736
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DILUTIVE
(Shares in thousands)
Weighted average number of shares of common stock
and assumed issuance of contingent shares............ 12,922 12,836 13,030 12,736
Assumed conversion of stock options......................... 241 313 211 346
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Weighted average number of shares of common stock,
assumed issuance of contingent shares, and
assumed conversion of options outstanding............ 13,163 13,149 13,241 13,082
--------------- -------------- -------------- -------------
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BUSINESS ACQUISITIONS
On May 20, 1999, the company completed the purchase of its Minnesota
distributor. This company distributes Toro consumer, commercial, landscape
contractor, and irrigation products in several Midwestern states.
During the second quarter of fiscal 1999, Toro completed the purchase of the
assets of Multi-Core Aerators Limited, a distributor of large turf aeration
equipment. The purchase of Multi-Core Aerators augments Toro's full-line of turf
aeration equipment and is expected to have an immediate appeal to the company's
customer base.
During the second quarter of fiscal 1999, Toro completed the sale of all the
components of its professional fertilizer businesses.
7
NEW ACCOUNTING PRONOUNCEMENTS
During fiscal 1998, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 133, "Accounting for
Derivative Instruments and Hedging Activities," and the Accounting Standards
Executive Committee issued Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use."
SFAS 133 establishes new standards for recognizing all derivatives as either
assets or liabilities, and measuring those instruments at fair value. The
company plans to adopt the new standard beginning with the first quarter of
fiscal year 2001, 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 first quarter of fiscal
year 2000, as required. Costs incurred prior to the initial application of the
SOP will not be adjusted to conform to 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. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS 131 requires disclosure of
selected information about operating segments including segment income,
revenues, and asset data, as well as descriptive information about how operating
segments are determined and the products and services provided by the segments.
The company will be required to adopt SFAS 131 beginning with its 1999 fiscal
year-end annual report. The company is in the process of evaluating SFAS 131 and
the impact on the company's current disclosures.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. In addition, forward-looking statements may be made orally
or in press releases, conferences, reports, or otherwise, in the future by or on
behalf of the company.
Statements that are not historical are forward looking. When used by or on
behalf of the company, the words "expect", "anticipate", "believe", "intend",
and similar expressions generally identify forward-looking statements.
Forward-looking statements involve risks and uncertainties. These
uncertainties include factors that affect all businesses operating in a
global market, as well as matters specific to the company and the markets it
serves. Particular risks and uncertainties facing the company at the present
include continued political and economic uncertainty throughout the world;
inflationary pressures; whether the profit improvement plan will continue to
be successful; increased competition in the company's businesses from
competitors that have greater financial resources; soft markets in certain
international markets, including Asia, Latin America, and Europe; the
continuing strong dollar which increases the cost of the company's products
in foreign markets, including Europe, 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; successful implementation of strategies to
use 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 manage costs at its manufacturing facilities; the
company's ability to obtain resources, including engines, from its suppliers
on a timely basis in order to meet consumer demands; 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;
threatened or real inflationary pressures; 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 raw 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, may emerge
from time to time. It is not possible for management to predict all risk factors
or to assess the impact of such risk factors on the company's business.
9
RESULTS OF OPERATIONS
Second quarter net sales were $433.1 million compared to $379.7 million for
the second quarter of fiscal 1998, an increase of 14.1 percent. Net earnings
were $24.1 million compared to $20.1 million for the same quarter in the
previous year, and diluted earnings per share for the quarter were $1.83
compared to $1.53 for the last comparable quarter. Sales were strong for
consumer products due to a positive reaction to the introduction of the new
Toro Personal Pace-Registered Tradmark- walk power mower and initial
distribution of Toro-Registered Tradmark- brand lawn mowers through certain
home centers. Sales to professional markets also did well due to the
continued North American and European growth of the golf business, strong
demand in the landscape contractor market, and a positive reaction to new
commercial product introductions. International sales were up due to good
sales to the European and Canadian markets for golf equipment and irrigation
products, offset somewhat by soft irrigation sales in Australia. The company
is currently in the process of reevaluating its business structure in
Australia. The increase in net earnings and dilutive earnings per share was
due mainly to the significant increase in sales and controlling expenses.
Year-to-date net sales were $683.9 million compared to $589.7 million last
year, an increase of 16.0 percent. Net earnings were $24.9 million compared
to $19.0 million last year, an increase of 31.0 percent, and dilutive
earnings per share for the year were $1.88 compared to $1.45 last year. Sales
were strong for consumer products due to a positive reaction to the
introduction of new products, distribution of Toro-Registered Tradmark- brand
lawn mowers through home centers, and timing of snowthrower shipments. Sales
to the professional markets also did well due to the continued worldwide
growth of the golf business, strong demand in the landscape contractor
market, and the addition of Drip In products beginning in the second quarter
of fiscal 1998. International sales also increased over the prior year due to
the reasons noted above for the quarter plus the addition of Drip In in the
agricultural irrigation market. The increase in net earnings and dilutive
earnings per share was due mainly to the significant increase in net sales as
described and controlling expenses.
The following table sets forth net sales by product line.
Three Months Ended
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(Dollars in thousands) April 30, May 1,
1999 1998 $ Change % Change
------------- ------------- ----------- -----------
Consumer products...........................................$ 164,432 $ 143,071 $ 21,361 14.9%
Commercial products......................................... 185,862 158,424 27,438 17.3
Irrigation products......................................... 82,814 78,191 4,623 5.9
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Total *.................................................$ 433,108 $ 379,686 $ 53,422 14.1%
------------- ------------- -----------
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* Includes international sales of...........................$ 85,416 $ 79,205 $ 6,211 7.8%
Six Months Ended
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(Dollars in thousands) April 30, May 1,
1999 1998 $ Change % Change
------------- ------------- ----------- -----------
Consumer products...........................................$ 257,725 $ 208,317 $ 49,408 23.7%
Commercial products......................................... 294,169 256,591 37,578 14.6
Irrigation products......................................... 131,975 124,837 7,138 5.7
------------- ------------- -----------
Total *.................................................$ 683,869 $ 589,745 $ 94,124 16.0%
------------- ------------- -----------
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* Includes international sales of...........................$ 143,886 $ 134,377 $ 9,509 7.1%
10
CONSUMER PRODUCT SALES
Second quarter net sales of worldwide consumer products were $164.4 million
compared to $143.1 million in the second quarter of fiscal 1998, an increase
of 14.9 percent. Sales of Toro-Registered Tradmark- brand walk power mowers
were up significantly from last comparable quarter due to the positive
reception of the new Toro Personal Pace-Registered Tradmark- lawn mower and
the addition of sales through 1,500 home center outlets, a new distribution
channel for the Toro-Registered Tradmark- brand walk power mowers. Offsetting
this increase were lower sales for Lawn-Boy-Registered Tradmark- walk power
mowers because shipments in the second quarter of fiscal 1998 were heavier
than normal due to late production in fiscal 1998. Shipments of riding
products increased for the quarter due to new marketing programs for garden
tractors and a shift of shipping patterns that more closely reflects retail
demand. Do-it-yourself irrigation product sales were also up from the last
comparable quarter due to dry weather in key Sun Belt markets, better
availability of product, and more shelf space at select home centers.
International sales were down compared to the second quarter of fiscal 1998
because of a decline in Australian irrigation sales due to wet weather.
Year-to-date net sales of worldwide consumer products were $257.7 million
compared to $208.3 million last year, an increase of 23.7 percent. Sales to
home centers, a new distribution channel for the Toro-Registered Tradmark-
brand walk power mowers, contributed to the sales increase, as did strong
sales to Toro's traditional dealers. Shipments for riding products, primarily
lawn tractors, increased slightly for the period due to a shift of shipping
patterns that more closely reflects retail demand. Year-to-date sales of
snowthrowers were also higher than last year due to the timing of shipments
from the fourth quarter of fiscal 1998 to the first quarter of fiscal 1999.
Do-it-yourself irrigation product sales were also up due to dry weather in
key Sun Belt markets, better availability of product, and more shelf space at
select home centers. Sales of electric appliance products, including trimmers
and blower vacuums, also did well for the year due to the warm fall weather
that extended the selling season into the first quarter of fiscal 1999 as
well as sales to new mass retail outlets for electric trimmers and blowers.
Offsetting these positive factors were lower international sales as noted
above in the quarter comparison.
Field inventory levels were down for domestic consumer products at Toro's
distributors and dealers. This reduction was a result of heavy snowfall in
certain key markets during the winter of 1998-1999 and Toro's special one-time
marketing programs introduced in the fall of 1998 designed to reduce field
inventory levels for riding and walk power mower products. Management believes
that the reduction of snowthrower domestic field inventories positions Toro for
higher snowthrower sales in the fourth quarter of fiscal 1999 and the first
quarter of fiscal 2000 as compared to the fourth quarter of fiscal 1998 and the
first quarter of fiscal 1999.
COMMERCIAL PRODUCT SALES
Second quarter net sales of worldwide commercial products were $185.9 million
compared to $158.4 million in the second quarter of fiscal 1998, an increase
of 17.3 percent. The sales increase was largely a result of growth in the
landscape contractor market as well as acceptance of new products introduced
last year. Sales for the Toro-Registered Tradmark- Sitework-TM- Systems were
up significantly from the second quarter of fiscal 1998 due to the greater
market acceptance of this product. Worldwide sales of golf course equipment
did well for both new and replacement equipment. Commercial product sales
also did well for the quarter due to the introduction of new products. In
addition, international commercial sales were up for the quarter due to
strong demand for golf equipment in Europe and Canada as well as market
acceptance of new products. Offsetting these increases were weak
international sales for landscape contractor products.
Year-to-date net sales of worldwide commercial products were $294.2 million
compared to $256.6 million last year, an increase of 14.6 percent. The six-month
increase in sales reflects the same factors contributing to the second quarter
increase. In addition, retail sales have also been strong for the year for
commercial and landscape contractor products.
11
IRRIGATION PRODUCT SALES
Second quarter net sales of worldwide irrigation products were $82.8 million
compared to $78.2 million in the second quarter of fiscal 1998, an increase
of 5.9 percent. Worldwide golf revenues and Irritrol-Registered Tradmark-
Systems sales contributed most of this increase. Irritrol-Registered
Tradmark- Systems sales were significantly above the last comparable quarter
for fiscal 1998 due to better, drier weather this year. Toro
residential/commercial irrigation sales were slightly below fiscal 1998
levels due to product availability caused by delays in manufacturing.
International sales were up from the same quarter in fiscal 1998 due to
strong golf irrigation sales and strong sales of Irritrol-Registered
Tradmark- residential/commercial product.
Year-to-date net sales of worldwide irrigation products were $132.0 million
compared to $124.8 million last year, an increase of 5.7 percent. As
mentioned above in the quarter comparison, strong golf irrigation revenues
and Irritrol-Registered Tradmark- residential/commercial product sales
contributed to the increase as did the addition of sales from Drip In, which
was acquired in the second quarter of fiscal 1998. Offsetting those increases
were lower sales for Toro residential/commercial irrigation products due to
the same reasons as noted above.
GROSS PROFIT
Second quarter gross profit was $152.9 million compared to $132.9 million
last year, an increase of 15.0 percent. As a percent of net sales, gross
profit for the second quarter was 35.3 percent compared to 35.0 percent last
year. The increase in gross profit resulted primarily from higher margins
for the consumer product line due to price increases for certain products and
improved manufacturing efficiencies due to plant closures. This increase was
partially offset by the gross margin reversal resulting from the purchase of
Toro's Minnesota based distributor.
Year-to-date gross profit was $240.8 million compared to $206.0 million last
year, an increase of 16.9 percent. As a percent of net sales, year-to-date
gross profit was 35.2 percent compared to 34.9 percent last year. The
increase in gross margins was due to the same contributing factors as in the
quarter comparison.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES
Second quarter selling, general, and administrative expenses (SG&A) were
$106.8 million compared to $95.0 million last year, an increase of 12.4
percent. However, as a percent of net sales, SG&A decreased slightly to 24.7
percent from 25.0 percent for the same quarter in fiscal 1998. The dollar
increase is mainly due to increases for direct marketing expenses,
warehousing costs, and warranty expenses due to higher sales levels.
Incentive compensation expenses were also higher due to improved financial
performance of the company in the second quarter of fiscal 1999.
Year-to-date SG&A expenses were $189.1 million compared to $166.9 million
last year, an increase of 13.3 percent. However, as a percent of net sales,
SG&A decreased slightly to 27.7 percent from 28.3 percent last year. The
dollar increase is mainly due to increases for direct marketing expenses,
warehousing costs, and warranty expenses due to higher sales levels.
Incentive compensation expenses were also higher due to improved financial
performance of the company. Information systems costs were higher due to the
continued implementation of an enterprise-wide software system.
INTEREST EXPENSE
Second quarter interest expense was $6.7 million compared to $6.9 million
last year, a slight decrease of $.2 million.
Year-to-date interest expense was $11.7 million compared to $12.7 million
last year, a decrease of $1.0 million. This decline is due to lower
borrowing levels compared to last year as a result of improved asset
management, primarily inventory and accounts receivable.
12
OTHER INCOME, NET
Second quarter other income, net, was $.1 million compared to $2.1 million last
year, a decrease of $2.0 million. The decrease was due to higher amounts of
currency losses in fiscal 1999, and recoveries of previously written off notes
receivables in the second quarter of fiscal 1998.
Year-to-date other income, net, was $.9 million compared to $5.0 million last
year, a decrease of $4.1 million. In addition to the reasons mentioned in the
quarter comparison, the decrease was due to a favorable settlement of a trade
secret lawsuit in fiscal 1998.
PROVISION FOR INCOME TAXES
The effective tax rate for the quarter was 38.9 percent and the year-to-date was
39.0 percent compared to 39.5 percent last quarter and year. The decline in the
tax rate is due to an increase in benefits received from the company's foreign
sales corporation.
FINANCIAL POSITION AS OF APRIL 30, 1999
APRIL 30, 1999 COMPARED TO MAY 1, 1998
Total assets at April 30, 1999 were $931.2 million compared to $952.2
million on May 1, 1998, a decrease of $21.0 million. Net accounts receivable
decreased slightly by $1.0 million. However, net receivables increased for most
product lines due to increased sales volumes, which was offset by the collection
of a receivable from James Hardie Irrigation Limited (Hardie) in May 1998.
Inventory decreased $26.7 million due to the closing of two manufacturing
facilities that reduced work-in-process inventory and lower levels of consumer
inventory due to strong sales for the year and improved efforts at inventory
management. Net property, plant, and equipment declined $8.7 million due to
higher amounts of depreciation expense in comparison to capital additions.
Goodwill and other assets increased $16.3 million mainly as a result of a
contingent payment made in the first quarter of fiscal 1999, in connection with
the company's acquisition of Exmark in fiscal 1998.
Total current liabilities at April 30, 1999 were $440.4 million compared to
$463.7 million on May 1, 1998, a decrease of $23.3 million. Short-term debt
decreased by $52.7 million as a result of better asset management. Accounts
payable decreased by $11.4 million due to timing of inventory purchases and
payments. Offsetting those decreases was an increase in accrued liabilities of
$42.1 million as a result of higher warranty and marketing accruals due to
higher sales levels.
APRIL 30, 1999 COMPARED TO OCTOBER 31, 1998
Total assets at April 30, 1999 were $931.2 million compared to $724.0 million at
October 31, 1998, an increase of $207.2 million. Net accounts receivable
increased $198.0 million from October 31, 1998 due to the seasonal increase in
accounts receivable, which historically occurs between January and April.
Goodwill and other assets increased $15.9 million mainly as a result of the
Exmark contingent payment.
Total current liabilities at April 30, 1999 were $440.4 million compared to
$258.2 million at October 31, 1998, an increase of $182.2 million. The majority
of this increase was the result of additional short-term debt of $152.9 million,
reflecting the company's strategy of utilizing short-term borrowing to fund the
company's seasonal working capital needs. These requirements are historically
greatest in the winter and spring months. Accounts payable increased $7.3
million due to the timing of inventory purchases and payments. Accrued
liabilities increased $36.6 million as a result of higher warranty accruals and
accruals for various seasonal sales and marketing programs, which are at their
peak during the spring selling season.
13
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the first six months of fiscal 1999 was
primarily for the seasonal increase in accounts receivable, partially offset by
increases in accrued liabilities and net earnings. On December 30, 1998, the
company entered into an agreement for an additional credit line with its
domestic banks, which increased its committed bank credit line to $260 million
from $160 million and eliminated its $70 million uncommitted bank credit line.
The company's domestic and international working capital needs are funded with
approximately $290 million of committed unsecured bank credit lines. The company
also has banker's acceptance financing agreements under which an additional $40
million is available. The company's business is seasonal, with peak borrowing
under the working capital lines described above generally occurring between
February and May each year.
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 its anticipated working capital, capital
additions, acquisitions, and stock repurchases.
INFLATION
The company is subject to the effects of changing prices. However, the company
is not currently experiencing any material effects of rising costs. The company
attempts to deal with inflationary pressures through a combination of internal
cost reduction efforts and selected increases in selling prices of certain
products.
YEAR 2000 COMPLIANCE
During the second quarter of fiscal 1999, 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 provided by a vendor that has certified it is year 2000
compliant. The final stage of the conversion to the ERP package is expected to
be in place by the fourth quarter of fiscal 1999 (before October 31, 1999). The
package includes software to support the company's facilities and business units
with the exception of five domestic subsidiaries and business units and the
company's European subsidiaries, which are believed to be year 2000 compliant.
The company is in the process of testing these non-ERP systems and updating any
non-compliant systems.
Toro has assessed its products and believes them to be year 2000 compliant with
the exception of six irrigation control systems. Testing of these systems has
been completed and software remediations are expected to be available by the end
of June 1999.
Toro's year 2000 issues list has over three hundred software and hardware items,
the majority of which are single-user, departmental or plant systems. The
company is in the testing phase for the following business-critical systems:
ERP, payroll, product data management, all non-ERP core-business information
systems, and associated infrastructure and support technologies. After delays
experienced in the first quarter of fiscal 1999, the company has received vendor
claimed compliant versions of their products. The company has also increased its
resources for internal programming, and is currently back on schedule in the
testing phase, which is expected to be completed by mid-1999. The current plan
is to complete the de-installation from the non-compliant year 2000 mainframe
computer by the fourth quarter of fiscal 1999.
14
YEAR 2000 COMPLIANCE (CONTINUED)
Communications have been sent to all of Toro's customers 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
all of the company's production suppliers requesting information on their year
2000 efforts. Based on the surveys returned, the company's customers and key
suppliers are either year 2000 compliant or are working on the issue with plans
to be year 2000 compliant before the turn of the century.
COSTS - Year 2000 costs through April 30, 1999 were approximately $2.0 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 $1.5 million,
which include expenses for contractor support, telephone system upgrades,
software modifications for irrigation systems, and business unit system
upgrades. The estimated cost of year 2000 adaptation is less than 15 percent of
the company's information systems budget. No significant information systems
project has been deferred to accommodate the year 2000 issues.
RISKS - The company is continuing to test its core-business operating and
financial systems and remains uncertain of the risks the year 2000 will have on
its business operations. In addition, the company remains uncertain about
whether the company's business partners, including dealers, distributors, home
centers, mass retailers, banks, and suppliers will be year 2000 compliant. The
company is particularly concerned about international customers and suppliers
due to their late testing target dates. 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 at and for the weeks immediately after the turn of the century.
Testing is under way to validate assumptions, which is planned to be completed
by the third quarter of fiscal 1999. The company believes this timetable should
allow enough time to fix or replace any internal business-critical problems
discovered during the testing phase.
The most reasonably likely worst-case scenarios revolve around failures
experienced by entities outside the control of the company such as local
electric utilities, telecommunication vendors, customers, suppliers, and
governmental services. The effects of these scenarios vary with the severity and
duration of any failure.
CONTINGENCY PLANS - The company's contingency plans will continue to 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 current timetable is to have a draft of procedures completed by
the third quarter of fiscal 1999 for most corporate critical business functions.
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 is developing software modifications to correct the year 2000 problem,
which are expected to be available to customers by the end of June 1999. In most
cases, the company believes that simple software modifications should make the
units year 2000 compliant. In some cases, the company is recommending that
customers replace their older non-compliant systems with newer, functionally
enhanced compliant systems.
15
EURO CURRENCY
Beginning in January 1999, the European Monetary Union (EMU) entered 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, contracts, 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 primary unknowns for the company is the potential
equalization of prices to customers among countries and the resulting
competitive impact on Toro distributor sales and Toro direct sales, and
financial support given to distributors in those countries. The euro will make
price differences on goods in the various countries transparent to the customer
and make comparisons much easier. The company recently formed a group to review
this issue and develop a strategy by late-1999. The company does not have
sufficient experience with the new currency to predict whether price
transparency will affect its operations, cash flows, or financial condition 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 in 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
company believes the risk to be minimal, as billing and banking functions are
already being performed in multiple currencies within these entities.
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.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY
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 April 30,
1999 were as follows:
- ----------------------------------------------- ---------------- ----------------- ----------------
AVERAGE FAIR VALUE
DOLLARS IN THOUSANDS CONTRACTED NOTIONAL IMPACT
(EXCEPT AVERAGE CONTRACTED RATE) RATE AMOUNT GAIN (LOSS)
- ----------------------------------------------- ---------------- ----------------- ----------------
Buy Australian dollar/Sell US dollar .6422 $ 6,084.2 $ 139.1
- ----------------------------------------------- ---------------- ----------------- ----------------
Buy US dollar/Sell Australian dollar .6092 4,906.1 (423.1)
- ----------------------------------------------- ---------------- ----------------- ----------------
Buy Belgium franc/Sell US dollar 38.0030 1,846.7 (5.9)
- ----------------------------------------------- ---------------- ----------------- ----------------
Buy US dollar/Sell Canadian dollar 1.5121 4,530.1 (164.5)
- ----------------------------------------------- ---------------- ----------------- ----------------
Buy German mark/Sell US dollar 1.7773 1,941.1 (69.4)
- ----------------------------------------------- ---------------- ----------------- ----------------
Buy US dollar/Sell German mark 1.7424 1,262.6 70.5
- ----------------------------------------------- ---------------- ----------------- ----------------
DEBT FINANCING
The company is exposed to interest rate risk arising from transactions that are
entered into during the normal course of business. The company's short-term debt
borrowing rates are dependent upon the LIBOR rate plus an additional percentage
based on the company's current borrowing level. See the company's Annual Report
filed on Form 10-K for the fiscal year ended October 31, 1998 (Item 7A) for
additional information. There has been no material change in the information
contained in that report.
16
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The Annual Meeting of Stockholders was held on March 24, 1999.
(b) The results of the stockholder votes were as follows:
Broker
For Against Abstain Non-Votes
--- ------- ------- ---------
1. Election of Directors
Ronald O. Baukol 10,575,465 248,207 0 0
Alex A. Meyer 10,540,258 283,414 0 0
Dale R. Olseth 10,550,709 272,963 0 0
2. Approval of Amendment of Annual
Management Incentive Plan II. 9,486,417 990,625 277,011 69,618
3. Approval of Adoption of The Toro Company
Performance Share Plan. 9,813,559 789,688 220,425 0
4. Approval of Selection of
Independent Auditors. 10,580,442 132,109 111,120 0
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3(i)(a) and 4(a) Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 4.2 to
Registrant's Registration Statement on Form S-3,
Registration No. 33-16125).
3(i)(b) and 4(b) Certificate of Amendment to Certificate of
Incorporation of Registrant dated December 9, 1986
(incorporated by reference to Exhibit 3 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 30, 1987, Commission File No.
1-8649).
3(i)(c) and 4(c) Certificate of Designation to Certificate of
Incorporation of Registrant dated May 28, 1998
(incorporated by reference to Exhibit (1)(A) to
Registrants' Current Report on Form 8-K dated May 27,
1998).
3(ii) and 4(d) Bylaws of Registrant, as amended.
4(e) Specimen form of Common Stock certificate
(incorporated by reference to Exhibit 4(c) to
Registrant's Registration Statement on Form S-8,
Registration No. 2-94417).
4(f) Rights Agreement dated as of May 20, 1998, between
Registrant and Norwest Bank Minnesota, National
Association relating to rights to purchase Series B
Junior Participating Voting Preferred Stock, as
amended (incorporated by reference to Registrant's
Current Report on Form 8-K dated May 27, 1998,
Commission File No. 1-8649).
4(g) Indenture as dated as of January 31, 1997, between
Registrant and First National Trust Association, as
Trustee, relating to the Registrant's 7.125% Notes due
June 15, 2007 and its 7.80% Debentures due June 15,
2027 (incorporated by reference to Exhibit 4(a) to
Registrant's Current Report on Form 8-K for June 24,
1997, Commission File No. 1-8649).
17
Item 6. Exhibits and Reports on Form 8-K (continued)
10(a) Form of Employment Agreement in effect for certain
officers of Registrant (incorporated by reference
Exhibit 10(iii)(a) to Registrant's Quarterly Report
on Form 10-Q for the quarter ended May 1, 1998).*
10(b) Directors Stock Plan, as amended (incorporated by
reference to Exhibit 10(b) to Registrant's Annual
Report on Form 10-K for the fiscal year ended October
31, 1998).*
10(c) Annual Management Incentive Plan II for officers of
Registrant, as amended (incorporated by reference to
Exhibits 10(c) to Registrant's Annual Report on Form
10-K for the fiscal year ended October 31, 1998).*
10(d) 1985 Incentive Stock Option Plan (incorporated by
reference to Exhibit 10(b) to Registrant's Annual
Report on Form 10-K for the fiscal year ended July 31,
1993).*
10(e) 1989 Stock Option Plan, as amended (incorporated by
reference to Exhibit 10(e) to Registrant's Annual
Report on Form 10-K for the fiscal year ended October
31, 1998).*
10(f) 1993 Stock Option Plan, as amended (incorporated by
reference to Exhibit 10(f) to Registrant's Annual
Report on Form 10-K for the fiscal year ended October
31, 1998).*
10(g) The Toro Company Performance Share Plan (incorporated
by reference to Exhibit B to Registrant's Proxy
Statement dated February 5, 1999).*
10(h) The Toro Company Supplemental Management Retirement
Plan, as amended.*
10(i) The Toro Company Supplement Retirement Plan.*
10(j) Chief Executive Officer Succession Incentive Agreement
dated as of July 31, 1995 (incorporated by reference
to Exhibit 10(iii)(i) to Registrant's Quarterly Report
on Form 10-Q for the quarter ended July 31, 1998).*
10(k) The Toro Company Deferred Compensation Plan for
Officers (incorporated by reference to Exhibit 10(j)
to Registrant's Quarterly Report on Form 10-Q for the
quarter ended January 29, 1999).*
10(l) The Toro Company Deferred Compensation Plan for
Non-Employee Directors (incorporated by reference to
Exhibits 10(k) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended January 29, 1999).*
27 Supplemental Data Schedule; electronic filing only.
*Management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Quarterly Report on Form 10-Q pursuant to Item 14(c).
(b) Reports on Form 8-K
None.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TORO COMPANY
(Registrant)
By /s/ Stephen P. Wolfe
--------------------------------
Stephen P. Wolfe
Vice President, Finance
Chief Financial Officer
(principal financial officer)
Date: June 14, 1999
19