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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 January 28, 2000 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
------- -------
The number of shares of Common Stock outstanding as of February 29, 2000 was
12,695,119.
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<PAGE>
THE TORO COMPANY
INDEX TO FORM 10-Q
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
PART I. FINANCIAL INFORMATION:
ITEM 1. Condensed Consolidated Statements of Earnings (Unaudited) -
Three Months Ended January 28, 2000 and January 29, 1999..........3
Condensed Consolidated Balance Sheets (Unaudited) -
January 28, 2000, January 29, 1999 and October 31, 1999...........4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended January 28, 2000 and January 29, 1999..........5
Notes to Condensed Consolidated Financial Statements (Unaudited).....6-8
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................9-15
PART II. OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K....................................16-17
Signatures...........................................................18
</TABLE>
2
<PAGE>
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)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------
January 28, January 29,
2000 1999
-------------------- ------------------
<S> <C> <C>
Net sales.........................................................................$ 280,239 $ 250,761
Cost of sales..................................................................... 180,300 162,817
-------------------- ------------------
Gross profit.................................................................. 99,939 87,944
Selling, general, and administrative expense...................................... 94,000 82,361
-------------------- ------------------
Earnings from operations...................................................... 5,939 5,583
Interest expense.................................................................. (5,757) (5,029)
Other income, net................................................................. 1,279 784
-------------------- -------------------
Earnings before income taxes.................................................. 1,461 1,338
Provision for income taxes........................................................ 548 542
-------------------- -------------------
Net earnings..................................................................$ 913 $ 796
==================== ==================
Basic net earnings per share of common stock......................................$ 0.07 $ 0.06
==================== ===================
Dilutive net earnings per share of common stock...................................$ 0.07 $ 0.06
==================== ==================
Weighted average number of shares of common stock outstanding -
Basic......................................................................... 12,921 13,139
Weighted average number of shares of common stock outstanding -
Dilutive...................................................................... 13,211 13,321
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE>
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
January 28, January 29, October 31,
2000 1999 1999
----------------- ----------------- ------------------
<S> <C> <C> <C>
ASSETS
Cash and cash equivalents..........................................$ 354 $ 95 $ 11,960
Receivables, net................................................... 313,720 287,772 268,344
Inventories, net................................................... 250,079 216,730 204,430
Prepaid expenses and other current assets.......................... 11,110 17,036 6,116
Deferred income taxes.............................................. 40,806 38,460 40,892
----------------- ----------------- ------------------
Total current assets....................................... 616,069 560,093 531,742
----------------- ----------------- ------------------
Property, plant, and equipment..................................... 361,828 333,908 353,808
Less accumulated depreciation.............................. 234,395 208,217 229,636
----------------- ----------------- ------------------
127,433 125,691 124,172
Deferred income taxes.............................................. 8,876 3,786 8,876
Goodwill and other assets.......................................... 133,415 128,563 122,388
----------------- ----------------- ------------------
Total assets...............................................$ 885,793 $ 818,133 $ 787,178
================= ================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt..................................$ 669 $ 715 $ 637
Short-term debt.................................................... 161,430 140,385 56,461
Accounts payable................................................... 61,622 61,248 65,543
Other accrued liabilities.......................................... 174,725 147,051 183,164
----------------- ----------------- ------------------
Total current liabilities.................................. 398,446 349,399 305,805
----------------- ----------------- ------------------
Long-term debt, less current portion............................... 195,584 196,796 195,600
Other long-term liabilities........................................ 6,380 5,590 6,110
Stockholders' equity:
Stock par value $1.00, authorized 35,000,000 shares; issued and
outstanding 12,714,219 shares at January 28, 2000 (net of
793,836 treasury shares), 12,960,334 shares at January 29,
1999 (net of 547,721 treasury shares), and 12,569,309 shares
at October 31, 1999 (net of 938,746 treasury shares)....... 12,714 12,960 12,569
Additional paid-in capital...................................... 51,552 60,190 45,343
Retained earnings............................................... 228,925 199,884 229,532
Accumulated comprehensive loss.................................. (7,808) (6,686) (7,781)
----------------- ----------------- ------------------
Total stockholders' equity................................. 285,383 266,348 279,663
----------------- ----------------- ------------------
Total liabilities and stockholders' equity.................$ 885,793 $ 818,133 $ 787,178
================= ================= ==================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
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THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------------------
January 28, January 29,
2000 1999
------------------- -------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings................................................................. $ 913 $ 796
Adjustments to reconcile net earnings to net cash used in operating
activities:
Provision for depreciation and amortization................................. 8,271 7,890
Gain on disposal of property, plant, and equipment.......................... (3) (106)
Deferred income taxes....................................................... 86 976
Changes in operating assets and liabilities:
Receivables, net....................................................... (52,867) (46,346)
Inventories, net....................................................... (38,487) (32,424)
Prepaid expenses and other current assets.............................. (4,983) (2,856)
Accounts payable and accrued expenses.................................. (7,789) (18,076)
------------------- -------------------
Net cash used in operating activities.............................. (94,859) (90,146)
------------------- -------------------
Cash flows from investing activities:
Purchases of property, plant, and equipment................................. (8,853) (4,958)
Proceeds from asset disposals............................................... 74 340
Decrease (increase) in investment in affiliates............................. 128 (2,939)
Increase in other assets.................................................... (2,945) (776)
------------------- -------------------
Net cash used in investing activities.............................. (11,596) (8,333)
------------------- -------------------
Cash flows from financing activities:
Increase in short-term debt................................................. 103,167 109,385
Repayments of long-term debt................................................ (87) (27)
Increase in other long-term liabilities..................................... 205 28
Proceeds from exercise of stock options..................................... 626 909
Purchases of common stock................................................... (7,515) (10,130)
Dividends on common stock................................................... (1,520) (1,521)
------------------- -------------------
Net cash provided by financing activities.......................... 94,876 98,644
------------------- -------------------
Foreign currency translation adjustment........................................ (27) (160)
------------------- -------------------
Net (decrease) increase in cash and cash equivalents........................... (11,606) 5
Cash and cash equivalents at beginning of period............................... 11,960 90
------------------- -------------------
Cash and cash equivalents at end of period.....................................$ 354 $ 95
=================== ===================
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE>
THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 28, 2000
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 three months ended January 28, 2000 are not necessarily
indicative of the results that may be expected for the fiscal year ending
October 31, 2000. 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 fiscal year
ended October 31, 1999. 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 for most
inventories.
Inventories were as follows:
<TABLE>
<CAPTION>
(Dollars in thousands) January 28, January 29,
2000 1999
------------- -------------
<S> <C> <C>
Raw materials and work in process....................$ 115,432 $ 105,225
Finished goods....................................... 180,527 157,316
------------- -------------
295,959 262,541
Less LIFO and other reserves......................... 45,880 45,811
------------- -------------
Total.............................................$ 250,079 $ 216,730
============= =============
</TABLE>
RESTRUCTURING AND OTHER UNUSUAL EXPENSE
At January 28, 2000, the company had $2.0 million of restructuring and other
unusual expense remaining in other accrued liabilities. The company has utilized
$.3 million of these reserves since October 31, 1999. The company expects the
majority of these reserves to be utilized during fiscal 2000, except for
reserves related to closed facilities available for sale.
6
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COMPREHENSIVE INCOME
Comprehensive income is comprised of two components: net earnings and other
comprehensive loss. Other comprehensive loss refers to revenues, expenses,
gains, and losses that under generally accepted accounting principles are
recorded as an element of stockholders' equity and are excluded from net
earnings. Toro's other comprehensive loss is comprised of foreign currency
translation adjustments from certain foreign subsidiaries.
The components of comprehensive income were as follows:
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------
(Dollars in thousands) January 28, January 29,
2000 1999
------------- -------------
<S> <C> <C>
Net earnings..........................................$ 913 $ 796
Other comprehensive loss.............................. (27) (160)
------------- -------------
Comprehensive income..................................$ 886 $ 636
============= =============
</TABLE>
NET EARNINGS PER SHARE
Reconciliations of basic and dilutive weighted average shares of common stock
outstanding are as follows:
<TABLE>
<CAPTION>
BASIC January 28, January 29,
(Shares in thousands) 2000 1999
------------- -------------
<S> <C> <C>
Weighted average number of shares of common
stock outstanding.................................... 12,669 12,627
Assumed issuance of contingent shares ...................... 252 512
------------- -------------
Weighted average number of shares of common stock
and assumed issuance of contingent shares............ 12,921 13,139
============= =============
DILUTIVE January 28, January 29,
(Shares in thousands) 2000 1999
------------- -------------
Weighted average number of shares of common stock
and assumed issuance of contingent shares............ 12,921 13,139
Assumed conversion of stock options......................... 290 182
------------- -------------
Weighted average number of shares of common stock,
assumed issuance of contingent shares, and
assumed conversion of stock options.................. 13,211 13,321
============= =============
</TABLE>
BUSINESS ACQUISITIONS
Under the terms of the purchase agreement with Exmark dated November 25, 1997,
the company was required to make contingent payments to the former Exmark
stockholders if Exmark's post-acquisition earnings and sales growth from
November 1, 1997 through October 31, 1999 exceeded minimum levels established in
the purchase agreement. The maximum value of those contingent payments was $28.0
million. The company issued 309,309 shares of Toro Common Stock valued at $10.5
million and paid $1.6 million of cash in January 2000 related to the fiscal 1999
contingent payment. No further amounts will be due under this agreement.
Effective December 1999, Toro completed the purchase of a midwestern-based
distributor, and the company now owns four distribution companies. The newly
acquired company distributes outdoor beautification equipment and systems to the
professional and residential markets.
7
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SEGMENT DATA
The presentation of segment information reflects the manner in which management
organizes segments for making operating decisions and assessing performance. On
this basis, the company has determined it has two reportable business segments:
Professional and Residential. The other segment consists of company-owned
distributor operations and corporate activities, including corporate financing
activities and elimination of intersegment revenues and expenses.
The following table shows the summarized financial information concerning the
company's reportable segments:
<TABLE>
<CAPTION>
(Dollars in thousands)
THREE MONTHS ENDED JANUARY 28, 2000: Professional Residential Other Total
------------ ----------- ----- -----
<S> <C> <C> <C> <C>
Net sales $185,891 $96,819 $ (2,471) $280,239
Intersegment net sales 12,508 3,650 (16,158) -
Earnings (loss) before income taxes 18,059 5,915 (22,513) 1,461
Total assets 462,412 165,333 258,048 885,793
THREE MONTHS ENDED JANUARY 29, 1999:
Net sales $156,785 $93,638 $ 338 $250,761
Intersegment net sales 5,330 562 (5,892) -
Earnings (loss) before income taxes 14,596 4,556 (17,814) 1,338
Total assets 410,051 181,775 226,307 818,133
</TABLE>
The following table presents the details of the other segment earnings (loss)
before income taxes:
<TABLE>
<CAPTION>
(Dollars in thousands) January 28, January 29,
THREE MONTHS ENDED 2000 1999
----------- ------------
<S> <C> <C>
Corporate expenses $(17,622) $(15,617)
Finance charge revenue 1,317 1,064
Elimination of corporate
financing expense 3,219 2,569
Interest expense, net (5,757) (5,029)
Other (3,670) (801)
----------- ------------
Total $(22,513) $(17,814)
----------- ------------
----------- ------------
</TABLE>
NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission (SEC) staff issued
Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements"
(SAB 101). SAB 101 summarizes certain of the SEC staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. SAB 101 will be effective for the company in the first quarter of
fiscal 2001. Toro is currently evaluating the impact of SAB 101 on its financial
condition and results of operations.
During fiscal 1998, the Financial Accounting Standards Board (FASB) issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities." 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 its impact
on the company.
8
<PAGE>
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, on the company's website 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," "estimate," "believe,"
"intend," and similar expressions generally identify forward-looking statements.
Forward-looking statements involve risks and uncertainties. These uncertainties
include factors that affect all businesses operating in a global market, as well
as matters specific to the company and the markets it serves. Particular risks
and uncertainties facing the company at the present include inflationary
pressures and rising interest rates that could slow the economic growth that has
been important to the growth of the company's professional businesses, including
golf, agricultural irrigation, and landscape contractor markets; higher average
short-term debt costs for anticipated higher working capital needs; project
delays due to inclement weather conditions; the company's ability to develop and
manufacture new and existing products based on anticipated investments in
manufacturing capacity and engineering; market acceptance of existing and new
products relative to expectations and based on current commitments to fund
advertising and promotions; the company's ability to acquire, develop, and
integrate new businesses and manage alliances successfully; success of a
distribution initiative designed to develop a distribution model; increased
competition in the company's businesses from competitors that have greater
financial resources, including competitive pricing pressures; changing buying
patterns affecting the company's residential segment, including but not limited
to a trend away from purchases at dealer outlets to price and value sensitive
purchases at hardware stores, home centers, and mass retailers; potential impact
of the Internet and e-commerce on the company's business; changes in distributor
ownership; loss of, or a significant reduction in, sales through a significant
distribution channel as the company's residential segment becomes more dependent
on home center sales; the company's expansion into selected home center markets
and effects on other product lines; unforeseen difficulties in the
implementation of strategies to use outside providers for warehousing and
transportation services; changes in distributors', dealers', home centers', or
mass retailers' purchasing practices; the company's ability to cost-effectively
open new, and expand existing, manufacturing facilities; the company's ability
to manage costs and capacity constraints at its manufacturing facilities;
socio-economic conditions in certain international markets; the degree of
success from restructuring actions undertaken at the Australian subsidiary; the
continuing relative strength of the dollar against certain currencies, which
increases the cost of the company's products in foreign markets and impairs its
ability to increase prices; the decline of the U.S dollar against the Japanese
yen, which increases costs of certain inventory components that in turn could
negatively affect gross margins; competitive implications and price
transparencies related to the euro conversion; whether the 1998 profit
improvement plan will continue to be successful in reducing costs and improving
margins and use of assets; the ability to retain and hire quality employees; the
impact of new accounting standards; and threatened or pending litigation on
matters relating to patent infringement.
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; rising interest
rates; weather conditions affecting demand, including warm winters and wet
spring and dry summer weather; unanticipated problems or costs associated with
the transition of European currencies to the common euro currency; a slowing in
housing starts or new golf course starts; inability to raise prices of products
due to market conditions; changes in market demographics; actions of
competitors; seasonal factors in the company's industry; unforeseen litigation;
government action, including budget levels, regulation, and legislation,
primarily legislation relating to the environment, commerce, infrastructure
spending, health, and safety; availability of raw materials; and the company's
ability to maintain good relations with its union employees.
The company wishes to caution readers not to place undue 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
<PAGE>
RESULTS OF OPERATIONS
Toro's first quarter results in the new century showed a solid performance for
both the professional and residential segments. The momentum gained in fiscal
1999 has continued into fiscal 2000 as shown by increases in both sales and
profitability, which positions the company for a potentially strong fiscal year.
First quarter net sales were $280.2 million compared to $250.8 million last
year, an increase of 11.8 percent. Worldwide sales for the professional segment
grew 18.6 percent over last year's first quarter. Sales of golf and grounds
mowing equipment, residential/commercial irrigation systems, and landscape
contractor equipment led this significant increase with new innovative product
introductions over the past year combined with overall strong retail demand.
Sales were also up for the international market, mainly in Europe. The
residential segment sales grew a modest 3.4 percent over last year's strong
first quarter performance. Snowthrowers, riding products, and do-it-yourself
irrigation sales drove this increase. Even sales of walk power mowers were up
slightly despite the comparison to last year's significant gains, but the home
solutions product category was down due to the elimination of sales from the
non-performing outdoor lighting business, which was sold in fiscal 1999.
First quarter net earnings were $0.9 million compared to $0.8 million for the
same quarter in the previous year, an increase of 14.7 percent. Dilutive net
earnings per share for the quarter was $0.07 compared to $0.06 per dilutive
share for the same quarter in the previous year. Operating earnings for both the
professional and residential segments rose substantially, led by increased sales
levels, improved gross margin percentage for the residential segment, and
leveraged selling, general, and administrative costs as a percent of sales on
higher sales volumes for the professional segment. Offsetting this improvement
were higher operating losses for the other segment reflecting continued
investments in technology and three additional company-owned distributors.
Overall, the businesses are making solid progress in their pursuit of continuous
improvement and profitability growth, and this combined with investments made
over the last couple of years, sets the foundation for a healthy outlook into
2000.
<TABLE>
<CAPTION>
The following table summarizes net sales by segment:
Three Months Ended
----------------------------------------------------------------------
(Dollars in thousands) January 28, January 29,
2000 1999 $ Change % Change
------------- ------------- -------------- -----------
<S> <C> <C> <C> <C>
Professional................................................$ 185,891 $ 156,785 $ 29,106 18.6%
Residential................................................. 96,819 93,638 3,181 3.4
Other....................................................... (2,471) 338 (2,809) N/M
------------- ------------- --------------
Total *.................................................$ 280,239 $ 250,761 $ 29,478 11.8%
============= ============= ==============
* Includes international sales of:..........................$ 67,714 $ 58,470 $ 9,244 15.8%
</TABLE>
PROFESSIONAL SEGMENT NET SALES
Net sales for the worldwide professional segment in the first quarter of fiscal
2000 were $185.9 million compared to $156.8 million in the first quarter of
fiscal 1999, an increase of 18.6 percent. The landscape contractor market
continues to show significant growth, with good volume increases for the Exmark
and Dingo brands. The golf and grounds maintenance markets also continued to
perform well with increases for equipment product sales due to the ongoing
positive reception of products introduced over the last couple of years as well
as continued strong retail demand. International sales of golf and grounds
maintenance equipment were also up, mainly in Europe, due to strong retail
demand and distributors purchasing product earlier in the fiscal year compared
to last year. The dual brands of Toro and Irritrol residential/commercial
irrigation system sales posted very strong increases due to better product
availability this quarter compared to last fiscal year. Offsetting those
increases were weak sales of dripline agricultural irrigation products resulting
from aggressive pricing pressures from competition. Golf irrigation system sales
were also down due to inclement weather in the domestic southeast markets that
delayed golf construction projects.
10
<PAGE>
RESIDENTIAL SEGMENT NET SALES
Net sales for the worldwide residential segment in the first quarter of fiscal
2000 were $96.8 million compared to $93.6 million in the first quarter of fiscal
1999, an increase of 3.4 percent. Snowthrower product sales led this increase
due to historically low field inventory levels entering the 1999-2000 winter
season and a shift in shipments from the fourth quarter of fiscal 1999 to the
first quarter of fiscal 2000. Riding product sales were also up, mainly for
products manufactured for a third party. Domestic do-it-yourself irrigation
sales also increased over the prior year's first quarter due to better product
availability, expanded outlets and placement at home centers, and the addition
of micro-irrigation products introduced for the residential gardener. Offsetting
these increases to some degree were lower do-it-yourself irrigation product
sales in Australia due to wet weather conditions in that market. Sales of walk
power mowers were up over a strong prior year that included initial stocking
orders from home centers. Offsetting these increases were lower sales for the
home solutions category due to the divestiture of the non-performing outdoor
lighting business.
OTHER SEGMENT NET SALES
The other segment showed negative net sales of $2.5 million in the first quarter
of fiscal 2000 compared to positive net sales of $.3 million in the first
quarter of fiscal 1999. Net sales in this segment include sales from Toro's
wholly owned distribution companies less sales from the professional and
residential segments to those distribution companies. The sales decrease was due
to the cyclical nature of the distribution business where sales are relatively
low in the first fiscal quarter. These businesses also normally increase
inventory levels during the first and second fiscal quarters in anticipation of
the busy selling season, which usually occurs in the second and third quarters
of Toro's fiscal year. Toro owned four of these distribution companies in the
current quarter, but owned only one during the first quarter of fiscal 1999.
GROSS PROFIT
First quarter gross profit was $99.9 million compared to $87.9 million last
year, an increase of 13.6 percent. As a percentage of net sales, gross profit
for the first quarter was 35.7 percent compared to 35.1 percent last year. The
improvement in gross margins resulted from increased sales of higher margin
products. Additional gross profit contribution from the distribution companies
was offset by the increased elimination of gross profit previously recorded with
respect to sales of Toro products to company-owned distributors due to higher
levels of Toro inventory carried at the company-owned distributors.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
First quarter selling, general, and administrative expense (SG&A) was $94.0
million compared to $82.4 million in the same period last year, an increase of
$11.6 million. As a percentage of net sales, SG&A increased to 33.5 percent from
32.8 percent for the same quarter in fiscal 1999. The addition of three
distribution companies acquired last year added $2.9 million of incremental SG&A
expense. The increase as a percent of sales was due to higher levels of spending
for marketing as well as higher costs for warranty, information services, and
distribution changes.
INTEREST EXPENSE
First quarter interest expense was $5.8 million compared to $5.0 million in the
same period last year, an increase of 14.5 percent. This increase was primarily
due to higher levels of short-term debt as well as higher interest rates
compared to the same period in the prior year. Management expects this trend to
continue through fiscal 2000 as interest rates are projected to rise and average
short-term debt is planned to be higher than fiscal 1999 due to anticipated
higher inventory levels and capital additions planned for fiscal 2000.
OTHER INCOME, NET
First quarter other income, net, was $1.3 million compared to $0.8 million in
the same period last year, an increase of $0.5 million. The increase was due to
lower levels of currency losses compared to last year and higher levels of
finance charge revenue.
11
<PAGE>
OPERATING EARNINGS (LOSS) BY SEGMENT
Operating earnings (loss) by segment is defined as earnings (loss) from
operations plus other income, net for the residential and professional segments.
The other segment operating loss includes earnings (loss) from operations,
corporate activities, other income, net, and interest expense.
PROFESSIONAL SEGMENT OPERATING EARNINGS
Operating earnings for the worldwide professional segment in the first quarter
of fiscal 2000 were $18.1 million compared to $14.6 million in the first quarter
of fiscal 1999, an increase of 23.7 percent. As a percentage of net sales,
professional segment operating margins increased to 9.7 percent from 9.3 percent
for the same quarter in fiscal 1999, led by higher sales levels. Gross margin as
a percent of sales fell 0.6 percent mainly due to increased costs for resin that
have not been recaptured with price increases in irrigation products. SG&A costs
as a percent of sales were lower by 0.9 percent due to leveraging SG&A costs on
higher sales volumes.
RESIDENTIAL SEGMENT OPERATING EARNINGS
Operating earnings for the worldwide residential segment in the first quarter of
fiscal 2000 were $5.9 million compared to $4.6 million in the first quarter of
fiscal 1999, an increase of 29.8 percent. As a percentage of net sales,
residential segment operating margins increased to 6.1 percent from 4.9 percent
for the same quarter in fiscal 1999. Increased sales of higher margin products
as well as lower costs for certain product lines contributed to the sales growth
and a 1.5 percent increase in gross margin as a percent of sales. The
elimination of the low-margin outdoor lighting business product sales also
helped to improve gross margins. This was slightly offset by higher SG&A costs
as a percentage of sales due mainly to higher costs for marketing efforts and
programs.
OTHER SEGMENT OPERATING LOSSES
Operating losses for the other segment in the first quarter of fiscal 2000 were
$22.5 million compared to losses of $17.8 million in the first quarter of fiscal
1999, an increase of 26.4 percent. The loss increase was due to higher gross
profit elimination related to higher levels of Toro inventory at the
company-owned distributors, higher levels of operating losses for the
company-owned distributors, of which three were acquired during the last year,
higher interest costs, increased spending for information services and Internet
projects, and distribution changes.
PROVISION FOR INCOME TAXES
The effective tax rate for the first quarter of fiscal 2000 was 37.5 percent
compared to 40.5 percent for the first quarter of fiscal 1999. The decrease was
due to benefits from foreign tax strategies and tax minimization projects
implemented in fiscal 1999.
12
<PAGE>
FINANCIAL POSITION AS OF JANUARY 28, 2000
JANUARY 28, 2000 COMPARED TO JANUARY 29, 1999
Total assets at January 28, 2000 were $885.8 million compared to $818.1 million
on January 29, 1999, an increase of $67.7 million. Net accounts receivable
increased $25.9 million over last year, due mainly for Toro Credit Company (TCC)
and international receivables, and slightly offset by lower residential segment
receivables. TCC receivables were up due to increased levels of commercial
equipment and snowthrower receivables driven by higher sales volumes, which are
often financed by TCC. International receivables were also up due to higher
sales volumes as well as extended terms given to European customers and slow
paying accounts in Australia. Inventory also increased $33.3 million from last
year. The three newly acquired distribution companies added $13.4 million of net
incremental inventory. Finished goods inventory was higher due to prebuilding of
inventory to counter anticipated capacity limitations at certain manufacturing
facilities for products during the peak selling season. Goodwill and other
assets increased $4.9 million primarily as a result of the Exmark contingent
payment made during the current quarter.
Total current liabilities were $398.4 million compared to $349.4 million last
year, an increase of $49.0 million. Short-term debt increased $21.0 million due
to higher levels of receivables and inventory as well as funding repurchases of
Common Stock on the open market. Other accrued liabilities increased $27.7
million as a result of higher accruals for warranty, sales and marketing
programs, and incentive accruals.
JANUARY 28, 2000 COMPARED TO OCTOBER 31, 1999
Total assets at January 28, 2000 were $885.8 million compared to $787.2 million
at October 31, 1999, an increase of $98.6 million. Net accounts receivable
increased $45.4 million from October 31, 1999 due to the seasonal increase in
accounts receivable, which historically occurs between January and April.
Inventory increased by $45.6 million due to the normal seasonal buildup of
inventory in the first quarter plus prebuilding of inventory parts and certain
products for the professional segment due to manufacturing capacity constraints
that would otherwise occur if manufacturing was scheduled for traditional
periods. Goodwill and other assets increased $11.0 million as a result of the
Exmark contingent payment.
Total current liabilities at January 28, 2000 were $398.4 million compared to
$305.8 million at October 31, 1999, an increase of $92.6 million. The increase
was the result of additional short-term debt of $105.0 million, reflecting the
company's strategy of utilizing short-term debt to fund seasonal working capital
needs. These requirements are historically greatest in the winter and spring
months. Accounts payable decreased $3.9 million compared to October 31, 1999 due
to the timing of inventory purchases and payments. Other accrued liabilities
decreased $8.4 million primarily as a result of the payment of accrued profit
sharing and related incentive accruals.
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the first three months of fiscal 2000 was
$4.7 million higher than the first three months in fiscal 1999 primarily due to
a higher change in working capital as compared to the prior period. Cash used in
investing activities increased $3.3 million due to higher purchases of property,
plant, and equipment during the first quarter of fiscal 2000 compared to the
prior year's first quarter. Cash provided by financing activities was lower by
$3.7 million due to lower levels of short-term debt during the first quarter of
fiscal 2000 compared to the first quarter of fiscal 1999. The cash used in
operating and investing activities was funded with the cash on hand at October
31, 1999.
The company's U.S. seasonal working capital requirements are funded with $267.0
million of committed unsecured bank credit lines. In addition, the company's
non-U.S. operations maintain unsecured short-term lines of credit of
approximately $19.0 million, and one European subsidiary has an uncommitted
credit line of approximately $3.0 million. The company also has banker's
acceptance agreements under which an additional $40.0 million of credit lines
are available. The company's business is seasonal, with peak borrowing under the
working capital lines described above generally occurring between February and
May each year.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
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 stock repurchases.
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 is
being introduced in participating countries. Initially, this new currency is
being 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, contractual, 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 the euro currency will have on the
marketplace, including more transparent price differences on goods in European
countries.
One of the issues for the company is the competitive impact on Toro distributor
sales and Toro direct sales, and financial support given to distributors in the
countries in the European Union (EU). The company recently discussed a potential
euro list price strategy with a majority of its European distribution affected
by this change, and current concerns with the euro include currency swings and
instability. The company is also researching how other companies are planning on
incorporating euros into their international business operations. Beginning in
December 1999, Toro implemented euro hedging plans that consolidate the net cash
flow from its European subsidiaries.
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' have completed initial testing
of their financial systems and no problems concerning their ability to function
using the euro were discovered. These subsidiaries began disclosing the euro
value on each customer's invoice in January 1999, and have continued with that
process into fiscal 2000. The current plan is to begin parallel reporting with
the current functional currency of the European subsidiary and euros in 2000.
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 significant impact on operations, cash flows, or the
financial condition of the company and its subsidiaries, taken as a whole, in
future periods.
YEAR 2000
Prior to January 1, 2000, there was a great deal of concern about the ability of
computers to adequately recognize the year 2000 in the two-digit date fields
commonly used to define a year. At the date of this report, the company has not
yet experienced any material problems related to the year 2000. The company does
not have any formal ongoing monitoring activities related to any year 2000
issues since problems discovered were minor, corrected on a timely basis, and
caused no major disruption to the company's business operations. The company has
not become aware of any significant year 2000 issues affecting the company's
major customers or suppliers. The company also has not received any material
complaints regarding any year 2000 issues related to its products.
Year 2000 related costs through February 23, 2000 were approximately $2.5
million and expensed as incurred. These costs included contractor support,
implementation of an Enterprise Resource Planning (ERP) software package for the
company's recently acquired businesses, telephone system upgrades, software
modifications for irrigation systems, and business unit system upgrades. The
company does not anticipate any further material costs.
INFLATION
The company is subject to the effects of changing prices. In the first quarter
of fiscal 2000, the company began experiencing some signs of inflationary
pressures for purchases of general commodities. The company is attempting to
deal with these inflationary pressures by actively pursuing internal cost
reduction efforts.
14
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FOREIGN CURRENCY
The following forward exchange contracts held by the company have maturity dates
in fiscal year 2000 and 2001. All items are non-trading and stated in U.S.
dollars. The average contracted rate, notional amount, and fair value impact at
January 28, 2000 were as follows:
<TABLE>
<CAPTION>
AVERAGE FAIR VALUE
CONTRACTED NOTIONAL IMPACT
DOLLARS IN THOUSANDS RATE AMOUNT GAIN (LOSS)
- ----------------------------------------------- ---------------- ----------------- ----------------
<S> <C> <C> <C>
Buy US dollar/Sell Australian dollar .6513 $ 8,353.7 $ 239.6
Buy US dollar/Sell British pound 1.6065 1,478.0 (15.5)
Buy US dollar/Sell Canadian dollar 1.4678 9,623.5 (211.9)
Buy US dollar/Sell Euro 1.0148 3,323.4 .8
Buy Australian dollar/Sell US dollar .6415 573.8 12.4
Buy Euro/Sell US dollar 1.0022 2,705.9 56.2
Buy German mark/Sell US dollar 1.84014 1,195.6 (90.1)
Buy Japanese yen/Sell US dollar 114.0696 4,734.0 398.7
Buy Mexican peso/Sell US dollar 9.5235 52.5 (.4)
</TABLE>
INTEREST RATE RISK
The company is exposed to interest rate risk arising from transactions that are
entered into during the normal course of business. The company's short-term debt
rates are dependent upon the LIBOR rate plus an additional percentage based on
the company's current borrowing level. See the company's most recent annual
report filed on Form 10-K (Item 7A). There has been no material change in this
information.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
3(i)(a) and 4(a) Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 4.2 to Registrant's Registration
Statement on Form S-3, Registration No. 33-16125).
3(i)(b) and 4(b) Certificate of Amendment to Certificate of Incorporation of
Registrant dated December 9, 1986 (incorporated by reference
to Exhibit 3 to Registrant's Quarterly Report on Form 10-Q
for the quarter ended January 30, 1987, Commission File No.
1-8649).
3(i)(c) and 4(c) Certificate of Designation to Certificate of Incorporation
of Registrant dated May 28, 1998 (incorporated by reference
to Exhibit (1)(A) to Registrant's Current Report on Form 8-K
dated May 27, 1998).
3(ii) and 4(d) Bylaws of Registrant (incorporated by reference to Exhibit
3(ii) and 4(d) to Registrant's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1999).
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).
10(a) Form of Employment Agreement in effect for certain officers
of Registrant (incorporated by reference to Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended July 30, 1999).*
10(b) The Toro Company Directors Stock Plan (incorporated by
reference to Exhibit 10(b) to Registrant's Quarterly Report
on Form 10-Q for the quarter ended July 30, 1999).*
10(c) The Toro Company Annual Management Incentive Plan II for
officers of Registrant (incorporated by reference to Exhibit
10(c) to Registrant's Quarterly Report on Form 10-Q for the
quarter ended July 30, 1999).*
10(d) The Toro Company 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) The Toro Company 1989 Stock Option Plan (incorporated by
reference to Exhibit 10(e) to Registrant's Quarterly Report
on Form 10-Q for the quarter ended July 30, 1999).*
10(f) The Toro Company 1993 Stock Option Plan (incorporated by
reference to Exhibit 10(f) to Registrant's Quarterly Report
on Form 10-Q for the quarter ended July 30, 1999).*
10(g) The Toro Company Performance Share Plan (incorporated by
reference to Exhibit 10(f) to Registrant's Quarterly Report
on Form 10-Q for the quarter ended July 30, 1999).*
16
<PAGE>
10(h) The Toro Company Supplemental Management Retirement Plan
(incorporated by reference to Exhibit 10(h) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 30,
1999).*
10(i) The Toro Company Supplemental Retirement Plan (incorporated
by reference to Exhibit 10(i) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 30, 1999).*
10(j) Chief Executive Officer Incentive Award Agreement
(incorporated by reference to Exhibit 10(j) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 30,
1999).*
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 Exhibit 10(k) to
Registrant's Quarterly Report on Form 10-Q for the quarter
ended January 29, 1999).*
*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.
17
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TORO COMPANY
(Registrant)
By /s/ Stephen P. Wolfe
-----------------------------
Stephen P. Wolfe
Vice President Finance,
Treasurer and Chief Financial Officer
(principal financial officer)
Date: March 13, 2000
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONDENSED
CONSOLIDATED STATEMENTS OF EARNINGS AND CONDENSED CONSOLIDATED BALANCE SHEETS,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-START> NOV-01-1999
<PERIOD-END> JAN-28-2000
<CASH> 354
<SECURITIES> 0
<RECEIVABLES> 313,720<F5>
<ALLOWANCES> 0<F4>
<INVENTORY> 250,079
<CURRENT-ASSETS> 616,069
<PP&E> 361,828
<DEPRECIATION> 234,395
<TOTAL-ASSETS> 885,793
<CURRENT-LIABILITIES> 398,446
<BONDS> 196,253<F1>
0
0
<COMMON> 12,714<F2>
<OTHER-SE> 272,669
<TOTAL-LIABILITY-AND-EQUITY> 885,793
<SALES> 280,239
<TOTAL-REVENUES> 280,239
<CGS> 180,300
<TOTAL-COSTS> 94,000
<OTHER-EXPENSES> 1,279<F3>
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 5,757
<INCOME-PRETAX> 1,461
<INCOME-TAX> 548
<INCOME-CONTINUING> 913
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 913
<EPS-BASIC> 0.07
<EPS-DILUTED> 0.07
<FN>
<F1>Total long term debt.
<F2>Does not include additional paid-in-capital.
<F3>Other income, net.
<F4>Not included in quarterly financial information.
<F5>Total net receivables.
</FN>
</TABLE>
