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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 August 2, 2002 Commission File Number 1-8649
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THE TORO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 41-0580470
(State of Incorporation) (I.R.S. Employer Identification Number)
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420
TELEPHONE NUMBER: (952) 888-8801
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
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The number of shares of Common Stock outstanding as of August 30, 2002 was
12,181,705.
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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 Nine Months Ended August 2, 2002 and August 3, 2001.....................................3
Condensed Consolidated Balance Sheets (Unaudited) -
August 2, 2002, August 3, 2001 and October 31, 2001...............................................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended August 2, 2002 and August 3, 2001...............................................5
Notes to Condensed Consolidated Financial Statements (Unaudited)....................................6-11
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................................12-26
ITEM 4. Controls and Procedures..............................................................................26
PART II. OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K....................................................................27-28
Signatures...........................................................................................29
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 Nine Months Ended
----------------------------------- -----------------------------------
August 2, August 3, August 2, August 3,
2002 2001 2002 2001
---------------- ---------------- ---------------- ---------------
Net sales..................................................$ 375,632 $ 329,744 $ 1,123,861 $ 1,069,707
Cost of sales.............................................. 246,693 211,638 737,562 703,190
---------------- ---------------- ---------------- ---------------
Gross profit........................................... 128,939 118,106 386,299 366,517
Selling, general, and administrative expense............... 92,412 88,115 285,689 277,178
Restructuring and other expense (income)................... - - 9,953 (679)
---------------- ---------------- ---------------- ---------------
Earnings from operations............................... 36,527 29,991 90,657 90,018
Interest expense........................................... (4,656) (6,177) (15,224) (17,890)
Other income, net.......................................... 848 3,062 3,916 4,526
---------------- ---------------- ---------------- ---------------
Earnings before income taxes and cumulative
effect of change in accounting principle............ 32,719 26,876 79,349 76,654
Provision for income taxes................................. 10,797 9,944 24,410 28,362
---------------- ---------------- ---------------- ---------------
Earnings before cumulative effect of
change in accounting principle.................... 21,922 16,932 54,939 48,292
Cumulative effect of change in accounting principle,
net of income tax benefit of $509...................... - - (24,614) -
---------------- ---------------- ---------------- ---------------
Net earnings........................................$ 21,922 $ 16,932 $ 30,325 $ 48,292
================ ================ ================= ================
Basic net earnings per share of common stock, before
cumulative effect of change in accounting principle....$ 1.74 $ 1.34 $ 4.37 $ 3.79
Cumulative effect change in accounting principle,
net of income tax benefit.............................. - - (1.96) -
----------------- --------------- ---------------- ----------------
Basic net earnings per share of common stock...............$ 1.74 $ 1.34 $ 2.41 $ 3.79
================= =============== ================ ================
Diluted net earnings per share of common stock, before
cumulative effect of change in accounting principle....$ 1.68 $ 1.30 $ 4.24 $ 3.68
Cumulative effect of change in accounting principle,
net of income tax benefit.............................. - - (1.90) -
----------------- -------------- ---------------- ----------------
Diluted net earnings per share of common stock.............$ 1.68 $ 1.30 $ 2.34 $ 3.68
================= ============== ================ ================
Weighted average number of shares of common stock
outstanding - Basic................................. 12,609 12,644 12,568 12,741
Weighted average number of shares of common stock
outstanding - Dilutive.............................. 13,049 13,009 12,960 13,108
See accompanying notes to condensed consolidated financial statements.
3
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
August 2, August 3, October 31,
2002 2001 2001
----------------- ----------------- -------------------
ASSETS
Cash and cash equivalents.............................................$ 6 $ 90 $ 12,876
Receivables, net...................................................... 341,891 335,697 271,677
Inventories, net...................................................... 209,320 245,569 234,661
Prepaid expenses and other current assets............................. 10,832 10,544 11,052
Deferred income taxes................................................. 36,477 45,000 33,927
----------------- ----------------- -------------------
Total current assets.......................................... 598,526 636,900 564,193
----------------- ----------------- ------------------
Property, plant, and equipment........................................ 432,416 394,721 401,943
Less accumulated depreciation................................. 277,901 256,576 259,698
----------------- ----------------- ------------------
154,515 138,145 142,245
Deferred income taxes................................................. 9,721 9,883 9,721
Other assets.......................................................... 14,021 13,787 11,983
Goodwill.............................................................. 77,842 105,153 102,924
Other intangible assets............................................... 2,045 4,860 4,608
----------------- ----------------- ------------------
Total assets..................................................$ 856,670 $ 908,728 $ 835,674
================= ================= ==================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt.....................................$ 15,824 $ 471 $ 513
Short-term debt....................................................... 8,011 94,384 34,413
Accounts payable...................................................... 67,099 56,096 77,549
Accrued liabilities................................................... 216,523 205,481 180,092
----------------- ----------------- ------------------
Total current liabilities..................................... 307,457 356,432 292,567
----------------- ----------------- ------------------
Long-term debt, less current portion.................................. 178,768 194,431 194,565
Other long-term liabilities........................................... 7,429 7,263 7,149
Stockholders' equity:
Preferred stock, par value $1.00, authorized 1,000,000 voting
and 850,000 non-voting shares, none issued and outstanding.... - - -
Common stock, par value $1.00, authorized 35,000,000 shares, issued
and outstanding 12,172,834 shares at August 2, 2002 (net of
1,335,221 treasury shares), 12,466,373 shares at August 3,
2001 (net of 1,041,682 treasury shares), and 12,266,045
shares at October 31, 2001 (net of 1,242,010 treasury shares). 12,173 12,466 12,266
Additional paid-in capital........................................... 23,757 37,365 29,048
Retained earnings.................................................... 338,853 312,414 313,067
Accumulated other comprehensive loss................................. (11,767) (11,643) (12,988)
----------------- ----------------- ------------------
Total stockholders' equity.................................... 363,016 350,602 341,393
----------------- ----------------- ------------------
Total liabilities and stockholders' equity....................$ 856,670 $ 908,728 $ 835,674
================= ================= ==================
See accompanying notes to condensed consolidated financial statements.
4
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Nine Months Ended
------------------------------------------------
August 2, August 3,
2002 2001
------------------- ---------------------
Cash flows from operating activities:
Net earnings...................................................................$ 30,325 $ 48,292
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Cumulative effect of change in accounting principle......................... 24,614 -
Noncash asset impairment write-off.......................................... 4,163 -
Provision for depreciation and amortization................................. 20,609 26,508
Write-down of investments................................................... - 1,778
Gain on disposal of property, plant, and equipment.......................... (718) (46)
Increase in deferred income taxes........................................... (2,550) (5,286)
Tax benefits related to employee stock option transactions.................. 1,420 4,501
Changes in operating assets and liabilities:
Receivables, net....................................................... (70,214) (79,558)
Inventories, net....................................................... 25,341 (36,792)
Prepaid expenses and other current assets.............................. 257 2,147
Accounts payable and accrued liabilities............................... 28,431 13,187
------------------- -------------------
Net cash provided by (used in) operating activities................ 61,678 (25,269)
------------------- -------------------
Cash flows from investing activities:
Purchases of property, plant, and equipment................................. (32,866) (23,376)
Proceeds from asset disposals............................................... 2,055 2,181
Decrease in investment in affiliates........................................ - 154
Increase in other assets.................................................... (2,847) (3,027)
Acquisitions, net of cash acquired.......................................... - (8,549)
------------------- -------------------
Net cash used in investing activities.............................. (33,658) (32,617)
------------------- -------------------
Cash flows from financing activities:
(Decrease) increase in short-term debt...................................... (26,402) 79,190
Repayments of long-term debt................................................ (486) (64)
Increase in other long-term liabilities..................................... 280 440
Proceeds from exercise of stock options..................................... 11,827 15,548
Purchases of common stock................................................... (22,558) (33,559)
Dividends on common stock................................................... (4,538) (4,605)
------------------- -------------------
Net cash (used in) provided by financing activities................ (41,877) 56,950
------------------- -------------------
Foreign currency translation adjustment........................................ 987 48
------------------- -------------------
Net decrease in cash and cash equivalents...................................... (12,870) (888)
Cash and cash equivalents at beginning of period............................... 12,876 978
------------------- -------------------
Cash and cash equivalents at end of period.....................................$ 6 $ 90
=================== ===================
See accompanying notes to condensed consolidated financial statements.
5
THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AUGUST 2, 2002
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 accounting principles generally accepted
in the United States of America 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 nine months ended August 2, 2002
cannot be annualized to determine the expected results for the fiscal year
ending October 31, 2002. Certain amounts from prior period's financial
statements have been reclassified to conform to this period's presentation.
The company's fiscal year ends on October 31, and quarterly results are reported
based on three-month periods that generally end on the Friday closest to the
quarter end. For comparative purposes, however; the company's second and third
quarters always include exactly 13 weeks of results so that the quarter end date
for these two quarters is not necessarily the Friday closest to the quarter end.
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, 2001. The policies described in that report are used for
preparing quarterly reports.
Accounting Policies
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management must
make a variety of decisions which impact the reported amounts and the related
disclosures. Such decisions include the selection of appropriate accounting
principles to be applied and assumptions on which to base accounting estimates.
In reaching such decisions, management makes judgments based on its
understanding and analysis of the relevant circumstances. Note 1 to the
consolidated financial statements in the company's Fiscal 2001 Annual Report on
Form 10-K provides a summary of the significant accounting policies followed in
the preparation of the financial statements. Other footnotes in the company's
Annual Report on Form 10-K describe various elements of the financial statements
and the assumptions made in determining specific amounts. While actual results
could differ from those estimated at the time of preparation of the consolidated
financial statements, management is committed to preparing financial statements
which incorporate accounting policies, assumptions, and estimates that promote
the representational faithfulness, verifiability, neutrality, and transparency
of the accounting information included in the consolidated financial statements.
Inventories
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:
(Dollars in thousands) August 2, August 3 October 31,
2002 2001 2001
------------- ------------- --------------
Raw materials and work in process....................$ 63,256 $ 71,439 $ 70,458
Finished goods and service parts..................... 191,823 215,246 207,231
------------- ------------- --------------
255,079 286,685 277,689
Less: LIFO........................................... 29,264 27,861 29,264
Other reserves................................. 16,495 13,255 13,764
------------- ------------- --------------
Total ...............................................$ 209,320 $ 245,569 $ 234,661
============= ============= ==============
6
Restructuring and Other Expense (Income)
In the first quarter of fiscal 2002, the company announced plans to close its
Evansville, Indiana and Riverside, California manufacturing facilities during
fiscal 2002. Approximately 500 job positions will be lost in connection with
closing the Evansville, Indiana and Riverside, California manufacturing
facilities and related office staff reductions. As of August 2, 2002, of the 500
job position reductions, 161 have been eliminated. In addition, the company will
incur ongoing costs after the facilities are closed and until they are sold,
which is captioned in "other" below. These actions are part of Toro's overall
long-term strategy to reduce production costs and improve long-term
competitiveness. The company also incurred a charge for asset impairment related
to write-downs of patents and non-compete agreements during the first quarter of
fiscal 2002.
The following is an analysis of the company's restructuring and other expense
reserve accounts:
(Dollars in thousands) Asset Severance
Impairment & Benefits Other Total
------------- ------------- ------------ -----------
Balance as of October 31, 2001..............................$ 200 $ - 45 245
Initial charge.............................................. 4,163 3,527 2,263 9,953
Utilization................................................. (2,495) (818) (10) (3,323)
------------- ------------- ----------- -----------
Balance at August 2, 2002...................................$ 1,868 $ 2,709 $ 2,298 $ 6,875
============= ============= =========== ===========
The company expects a majority of the reserve will be utilized by October 31,
2002.
Cumulative Effect of Change in Accounting Principle
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 141 also provides new criteria in the
determination of intangible assets, including goodwill acquired in a business
combination, and expands financial disclosures concerning business combinations
consummated after June 30, 2001. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized but
instead tested for impairment at least annually at the reporting unit level
using a two-step impairment test. The application of SFAS No. 141 did not affect
previously reported amounts included in goodwill and other intangible assets for
the company.
Effective November 1, 2001, the company adopted SFAS No. 142. SFAS No. 142
provides a six-month transitional period from the effective date of adoption for
the company to perform an assessment of whether there is an indication that
goodwill is impaired. To the extent that an indication of impairment exists, the
company must perform a second test to measure the amount of the impairment. The
company tested for impairment of its reporting units by comparing fair value to
carrying value. Fair value was determined using a discounted cash flow and cost
methodology. The company employed a third-party appraisal firm in determining
the fair value of its agricultural irrigation reporting unit. This evaluation
indicated that all the goodwill recorded for several acquisitions in the
agricultural irrigation market was impaired. The performance of these acquired
businesses has not met management's original expectations. This is mainly due to
lower than anticipated growth rates in the drip line market, which has resulted
in lower industry-wide pricing and margins on product sales. Accordingly,
noncash impairment charges on adoption of SFAS No. 142 of $24.6 million, net of
income tax benefit of $.5 million, were recognized as a cumulative effect of
change in accounting principle in the first quarter ended February 1, 2002.
Impairment adjustments recognized after adoption, if any, generally are required
to be recognized as operating expenses, captioned in selling, general, and
administrative expense.
7
Comprehensive Income
Comprehensive income and the components of other comprehensive income (loss)
were as follows:
Three Months Ended Nine Months Ended
-------------------------------- ----------------------------------
(Dollars in thousands) August 2, August 3, August 2, August 3,
2002 2001 2002 2001
------------- ------------- -------------- --------------
Net earnings............................................$ 21,922 $ 16,932 $ 30,325 $ 48,292
Other comprehensive income (loss):
Foreign currency translation......................... 177 (59) 987 48
Unrealized gain (loss) on derivative instruments..... 448 (75) 234 (73)
------------- ------------- -------------- --------------
Comprehensive income...................................$ 22,547 $ 16,798 $ 31,546 $ 48,267
============= ============= ============== ==============
Net Earnings Per Share
Reconciliations of basic and dilutive weighted average shares of common stock
outstanding were as follows:
Three Months Ended Nine Months Ended
-------------------------------- ----------------------------------
August 2, August 3, August 2, August 3,
2002 2001 2002 2001
------------- ------------- -------------- -------------
Basic
- -----
(Shares in thousands)
Weighted average number of shares of common
stock outstanding.................................... 12,609 12,644 12,558 12,729
Assumed issuance of contingent shares ...................... - - 10 12
------------- ------------- -------------- -------------
Weighted average number of shares of common stock
and assumed issuance of contingent shares............ 12,609 12,644 12,568 12,741
============= ============= ============== =============
Three Months Ended Nine Months Ended
-------------------------------- ----------------------------------
August 2, August 3, August 2, August 3,
2002 2001 2002 2001
------------- ------------- -------------- -------------
Dilutive
- --------
(Shares in thousands)
Weighted average number of shares of common stock
and assumed issuance of contingent shares............ 12,609 12,644 12,568 12,741
Assumed conversion of stock options ........................ 440 365 392 367
------------- ------------- -------------- -------------
Weighted average number of shares of common stock,
assumed issuance of contingent shares,
and assumed conversion of stock options.............. 13,049 13,009 12,960 13,108
============= ============= ============== =============
8
Segment Data
The presentation of segment information reflects the manner in which management
organizes segments for making strategic operating decisions and assessing
performance. On this basis, the company has determined it has three reportable
business segments: Professional, Residential, and Distribution. The other
segment consists of 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:
(Dollars in thousands)
Three months ended August 2, 2002 Professional Residential Distribution Other Total
- --------------------------------- ------------ ----------- ------------ -------- ----------
Net sales....................................................$ 235,301 $119,907 $50,452 $(30,028) $375,632
Intersegment gross sales..................................... 31,551 2,711 - (34,262) -
Earnings (loss) before income taxes.......................... 34,822 12,161 2,311 (16,575) 32,719
Three months ended August 3, 2001
- ---------------------------------
Net sales....................................................$ 222,569 $85,460 $43,575 $(21,860) $329,744
Intersegment gross sales..................................... 24,736 1,946 - (26,682) -
Earnings (loss) before income taxes.......................... 37,702 5,100 192 (16,118) 26,876
Nine months ended August 2, 2002 Professional(1) Residential(2) Distribution Other Total
- -------------------------------- ------------ ----------- ------------ ---------- ----------
Net sales....................................................$ 701,267 $381,858 $118,825 $(78,089) $1,123,861
Intersegment gross sales..................................... 78,591 10,432 - (89,023) -
Earnings (loss) before income taxes.......................... 97,119 39,938 1,961 (59,669) 79,349
Total assets................................................. 440,844 155,823 66,173 193,830 856,670
Nine months ended August 3, 2001
- --------------------------------
Net sales....................................................$ 700,954 $330,338 $104,088 $(65,673) $1,069,707
Intersegment gross sales..................................... 69,923 7,802 - (77,725) -
Earnings (loss) before income taxes.......................... 105,259 29,973 (1,117) (57,461) 76,654
Total assets................................................. 478,447 129,966 68,960 231,355 908,728
(1) Includes restructuring and other expense of $10.0 million in fiscal 2002.
(2) Includes restructuring and other expense (income) of $(0.7) million in
fiscal 2001.
The following table presents the details of the other segment earnings (loss)
before income taxes:
Three Months Ended Nine Months Ended
------------------------------- ---------------------------
(Dollars in thousands) August 2, August 3, August 2, August 3,
2002 2001 2002 2001
-------- --------- --------- ---------
Corporate expenses............................................ $(17,254) $(16,781) $(56,771) $(53,138)
Finance charge revenue........................................ 735 1,278 3,052 4,288
Elimination of corporate financing expense.................... 4,415 4,825 11,453 12,055
Interest expense, net......................................... (4,656) (6,177) (15,224) (17,890)
Other income (expense)........................................ 185 737 (2,179) (2,776)
-------- -------- -------- --------
Total......................................................... $(16,575) $(16,118) $(59,669) $(57,461)
======== ======== ======== ========
9
Goodwill
As described previously, the company adopted SFAS No. 142 as of November 1,
2001. Fiscal 2001 results ending October 31, 2001 would have been $0.62 per
diluted share higher if the provisions of SFAS No. 142 would have been adopted
as of November 1, 2000. The following table reflects the consolidated results
adjusted as though the adoption of SFAS No. 142 occurred as of the beginning of
the nine month period ended August 3, 2001:
Three Months Ended Nine Months Ended
-------------------------------- --------------------------------
(Dollars in thousands, except per share data) August 2, August 3, August 2, August 3,
2002 2001 2002 2001
------------- ------------- -------------- -------------
Net earnings:
As reported...........................................$ 21,922 $ 16,932 $ 30,325 $ 48,292
Goodwill amortization, net of tax..................... - 2,248 - 6,504
------------- ------------- -------------- -------------
Adjusted net earnings.................................$ 21,922 $ 19,180 $ 30,325 $ 54,796
============= ============= ============== =============
Basic net earnings per share:
As reported...........................................$ 1.74 $ 1.34 $ 2.41 $ 3.79
Goodwill amortization, net of tax..................... - 0.18 - 0.51
------------- ------------ -------------- -------------
Adjusted basic net earnings per share.................$ 1.74 $ 1.52 $ 2.41 $ 4.30
============= ============ ============== =============
Diluted net earnings per share:
As reported...........................................$ 1.68 $ 1.30 $ 2.34 $ 3.68
Goodwill amortization, net of tax..................... - 0.17 - 0.50
------------- ------------ -------------- -------------
Adjusted diluted net earnings per share...............$ 1.68 $ 1.47 $ 2.34 $ 4.18
============= ============ ============== =============
The changes in the net carrying amount of goodwill for the first nine months of
fiscal 2002 were as follows:
(Dollars in thousands) Professional Residential
Segment Segment Total
------------- ------------- --------------
Balance as of October 31, 2001.......................$ 94,050 $ 8,874 $ 102,924
Impairment charge ................................... (25,123) - (25,123)
Translation adjustment............................... 12 29 41
------------- ------------- --------------
Balance as of August 2, 2002.........................$ 68,939 $ 8,903 $ 77,842
============= ============= ==============
Other Intangible Assets
During the first quarter of fiscal 2002, the company determined that the patents
and non-compete agreements related to the agricultural irrigation market were
impaired. This impairment charge of $2.0 million was recognized as part of
restructuring and other expense during the first quarter of fiscal 2002.
The components of other amortizable intangible assets were as follows:
August 2, 2002 October 31, 2001
---------------------------------- --------------------------------
(Dollars in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ ------------ ------------
Patents..................................................... $ 6,104 $ (4,527) $ 7,104 $ (4,501)
Non-compete agreements...................................... 800 (362) 3,183 (1,285)
Other....................................................... 800 (770) 1,197 (1,090)
---------- ---------- ------------ -----------
Total....................................................... $ 7,704 $ (5,659) $ 11,484 $ (6,876)
========== =========== ============ ===========
Total other intangible assets, net.......................... $ 2,045 $ 4,608
========== ============
Amortization expense for intangible assets during the first nine months of
fiscal 2002 was $0.5 million. Estimated amortization expense for the remainder
of fiscal 2002 and succeeding fiscal years are as follows ($ in thousands):
remainder of 2002, $146; 2003, $479; 2004, $357; 2005, $337; 2006, $337; 2007,
$182 and beyond 2008, $207.
10
Derivative Instruments and Hedging Activities
The company uses derivative instruments to manage exposure to foreign currency.
Toro uses derivatives only in an attempt to limit underlying exposure to
currency fluctuations, and not for trading purposes. The company maintains a
record of each hedging instrument and the items it hedges, as well as the
risk-management objective and strategy for undertaking the particular hedge. The
company assesses, both at the hedge's inception and on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of the hedged item.
The company enters into foreign currency exchange contracts to hedge the risk
from forecasted settlement in local currencies of trade sales. These contracts
are designated as cash flow hedges with the fair value recorded in accumulated
comprehensive income (loss) and as a hedge asset or liability in prepaid
expenses or accrued liabilities, as applicable. Once the forecasted transaction
has been recognized as a sale and a related asset recorded in the balance sheet,
the related fair value of the derivative hedge contract is reclassified from
accumulated comprehensive income (loss) into earnings. During the quarter ended
August 2, 2002, the amount of adjustments to earnings for such cash flow hedges
was immaterial. At August 2, 2002, the amount of such contracts outstanding was
$22.4 million. The unrecognized after-tax gain portion of the fair value of the
contracts recorded in accumulated comprehensive income (loss) at August 2, 2002
was immaterial.
The company enters into foreign currency exchange contracts to hedge the risk
from forecasted settlement in local currencies of trade purchases. These
contracts are designated as cash flow hedges with the fair value recorded in
accumulated comprehensive income (loss) and as a hedge asset or liability in
prepaid expenses or accrued liabilities, as applicable. Once the forecasted
transaction has been recognized as a purchase and a related liability recorded
in the balance sheet, the related fair value of the derivative hedge contract is
reclassified from accumulated comprehensive income (loss) into earnings. During
the quarter ended August 2, 2002, the amount of adjustments to earnings for such
cash flow hedges was immaterial. At August 2, 2002, the amount of such contracts
outstanding was $15.0 million. The unrecognized after-tax gain portion of the
fair value of the contracts recorded in accumulated comprehensive income (loss)
at August 2, 2002 was immaterial.
The company also enters into foreign currency exchange contracts to hedge the
risk from forecasted settlement in local currencies. Some of these transactions
and other foreign currency exchange contracts do not meet the accounting rules
established under SFAS No. 133 of recording the unrecognized after-tax gain or
loss portion of the fair value of the contracts in accumulated comprehensive
income (loss). Therefore, the related fair value of the derivative hedge
contract is recognized in earnings.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses the diverse accounting practices for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The company plans to adopt the provisions of
SFAS No. 143 during the first quarter of fiscal 2003, as required. Management
expects that the adoption of SFAS No. 143 will not have a material impact on the
company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement establishes a single accounting
model for the impairment or disposal of long-lived assets. The company plans to
adopt the provisions of SFAS No. 144 during the first quarter of fiscal 2003, as
required. Management expects that the adoption of SFAS No. 144 will not have a
material impact on the company's financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This statement requires that a liability for
a cost associated with an exit or disposal activity be recognized when the
liability is incurred. This statement also establishes that fair value is the
objective for initial measurement of the liability. The company plans to adopt
the provisions of SFAS No. 146 for exit or disposal activities initiated after
December 31, 2002, as required. Management expects that the adoption of SFAS No.
146 will not have a material impact on the company's financial statements.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Safe Harbor Statement. This Quarterly Report on Form 10-Q contains not only
historical information, but also 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. Statements that are not historical are forward-looking and
reflect expectations about future company performance. In addition,
forward-looking statements may be made orally or in press releases, conferences,
reports, on Toro's worldwide web site, or otherwise, in the future by or on
behalf of the company. 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. The company is
subject to risks and uncertainties facing its industry in general, including
changes in business, financial, and political conditions and the economy in
general in both foreign and domestic markets; the uncertainty of the economic
effect of the war on terrorism; weather conditions affecting demand, including
warm winters and wet or cold spring and dry summer weather; 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, safety, and tax law changes, such as repeal of the foreign sales
corporation benefit; imposition of new tariffs on commodities, such as steel;
availability of raw materials and unforeseen price fluctuations for commodity
raw materials; and the company's ability to maintain good relations with its
employees.
In addition, the company is subject to risks and uncertainties 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 that could
affect the company's overall financial position include further slowing of
growth in the global and domestic economies; economic uncertainty created by the
threat of terrorist acts and war, which may result in reductions in consumer
spending, including spending for travel and golf; heightened security which
could slow import and export of components and finished goods and increase
costs; the company's customers' ability to pay amounts owed to Toro; inability
to achieve goals of the "5 by Five" profit improvement program, which is
intended to result in an after-tax return on sales of five percent by the end of
fiscal 2003; the company's ability to develop and manufacture new and existing
products based on anticipated investments in manufacturing capacity and
engineering; market acceptance of new products relative to expectations and
based on current commitments to fund advertising and promotions; market
acceptance of existing products based on the company's current commitment to
develop, improve, and market existing product lines; increased competition in
the company's businesses from competitors that have greater financial resources,
including competitive pricing pressures; financial viability of some
distributors and dealers; the company's ability to acquire, develop, and
integrate new businesses and manage alliances successfully; changes in
distributor ownership; changes in distributors', dealers', home centers', or
mass retailers' purchasing practices, especially elimination or reduction of
shelf space for Toro's products; the company's ability to cost-effectively
expand existing, open new, move production between, and close manufacturing
facilities; the company's ability to manage costs and capacity constraints at
its manufacturing facilities; the company's ability to manage inventory levels
and fully realize recorded inventory value; the impact of unexpected
developments in warranty claims or unknown product defects; the ability to
retain and hire quality employees; threatened or pending litigation on matters
relating to patent infringement, employment, and commercial disputes; impact of
new accounting standards; and the risk that these uncertainties could affect the
impact of critical accounting policies and estimates.
12
Particular risks and uncertainties facing the company's professional segment at
the present include slower growth in both global and domestic economies that has
been important to the growth of the company's professional businesses, including
the golf and landscape contractor markets; customer's management of their
inventory levels which could reduce their purchases and negatively impact the
company's sales; decline in retail demand; customer's ordering closer to retail
demand, which shifted sales from the first six months to the third quarter;
market acceptance of new products, which is important to revenue growth;
unforeseen quality problems in the development and production of new and
existing products, which could result in loss of market share; whether Toro is
successful in restructuring and plant consolidation; slowing in the growth rate
in new golf course construction or existing golf course renovations; a slower
growth rate in the number of new golfers, which leads to less new golf course
construction; a potential slowdown in new home construction; a potential
slowdown in the trend to outsource lawn maintenance to landscape contractors;
challenges of establishing new dealers for the Sitework Systems product line;
and the degree of success in reducing costs and achieving benefits from
management changes in the agricultural irrigation business.
Particular risks and uncertainties facing the company's residential segment at
the present time include inflationary pressures and the risk of a return to a
recession; a decline in consumer spending for higher-priced products; further
decline in consumer confidence; a weaker than expected market response to new or
existing products; a decline in sales of existing products resulting from Toro's
introduction of new products; unforeseen product quality problems; degree of
financial success related to the new moderate-priced walk power mowers and the
cost of capital investments for the new production facility to satisfy expected
increase in demand for this product; increased dependence on The Home Depot as a
customer; changing buying patterns, including but not limited to, a trend away
from purchases at dealer outlets to price and value sensitive purchases at
hardware retailers, home centers, and mass retailers; loss of, or a significant
reduction in, sales through a significant distribution channel or customer,
particularly because the company's residential segment has become more dependent
on home center sales; and a potential slowdown in home sales.
Particular risks and uncertainties facing the company's international business
at the present include weak economic conditions in the European market;
customer's ordering closer to retail demand, which shifted sales from the first
six months to the third quarter; heightened security for import and export
shipments of components or finished goods, including delays at border crossings;
the cost of price support provided to international customers and suppliers;
internal and external conflicts in or between foreign countries and economic
recession in countries that are markets for Toro; currency fluctuations of the
dollar against the euro, Japanese yen, Australian dollar, British pound,
Canadian dollar, and Mexican peso; and tax law and duty changes.
Particular risks and uncertainties facing the company's distribution segment at
the present include inflationary pressures and slower economic growth; a decline
in retail sales; viability of Toro dealers as customers; degree of success
related to restructuring, including investments in technology and facilities for
the distribution companies; ability to capture national account business, which
purchases products, mainly for golf courses and landscape contractors; changes
in purchasing practices of national accounts; a slower growth rate in new golf
course construction or existing golf course renovations; degree of success in
integrating acquired distribution companies; impact of Toro pricing that reduces
gross profit on some product lines sold through the distribution companies;
ability to successfully implement a just-in-time inventory initiative; and
unforeseen product quality problems.
The company wishes to caution readers not to place undue reliance on any
forward-looking statement and to recognize that the statements are predictions
of future results, which may not occur as anticipated. 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. Toro assumes no obligation to update
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
13
RESULTS OF OPERATIONS
Third quarter net sales were $375.6 million compared to $329.7 million last
year, an increase of 13.9 percent. Year-to-date net sales were up by 5.1
percent. Residential segment net sales contributed significantly to the increase
in the quarter and first nine months, primarily because of positive reaction to
the new moderate-priced line of Toro walk power mowers. Worldwide sales for the
professional segment were also up for the third quarter and slightly up
year-to-date compared to last year, which reflects distribution customers
ordering closer to retail demand that shifted Toro sales from the first six
months of fiscal 2002 to the third quarter, as well as positive acceptance of
new product introductions. Distribution segment sales were higher for the third
quarter due to increased demand for professional equipment, irrigation systems,
and residential products. Distribution segment sales were up year-to-date
compared to last year due to the addition of revenues of a distribution company
acquired in the third quarter of 2001. The other segment net sales reflect the
elimination of sales from Toro's professional and residential segments to the
distribution segment. The unfavorable change in the other segment net sales
reflects Toro's increase in shipments to the distribution segment. International
sales increased in the third quarter and slightly year-to-date compared to last
year due in part to stronger than expected demand in the Asian golf market and
distribution customers ordering closer to retail demand. Disregarding currency
effects, international sales were up 11.1 percent for the third quarter and up
year-to-date by 2.2 percent.
The following table summarizes net sales by segment:
Three Months Ended
-----------------------------------------------------------------------
(Dollars in thousands) August 2, August 3,
2002 2001 $ Change % Change
------------- ------------- -------------- --------
Professional................................................$ 235,301 $ 222,569 $ 12,732 5.7%
Residential................................................. 119,907 85,460 34,447 40.3
Distribution................................................ 50,452 43,575 6,877 15.8
Other....................................................... (30,028) (21,860) (8,168) (37.4)
------------- ------------- --------------
Total *.................................................$ 375,632 $ 329,744 $ 45,888 13.9%
============= ============= ==============
* Includes international net sales of:......................$ 60,024 $ 52,786 $ 7,238 13.7%
============= ============= ==============
Nine Months Ended
-----------------------------------------------------------------------
(Dollars in thousands) August 2, August 3,
2002 2001 $ Change % Change
------------- ------------- -------------- --------
Professional................................................$ 701,267 $ 700,954 $ 313 0.0%
Residential................................................. 381,858 330,338 51,520 15.6
Distribution................................................ 118,825 104,088 14,737 14.2
Other....................................................... (78,089) (65,673) (12,416) (18.9)
------------- ------------- --------------
Total *.................................................$ 1,123,861 $ 1,069,707 $ 54,154 5.1%
============= ============= ==============
* Includes international net sales of:......................$ 209,398 $ 205,170 $ 4,228 2.1%
============= ============= ==============
14
Third quarter net earnings for fiscal 2002 were $21.9 million compared to $19.2
million in the third quarter of fiscal 2001, which did not include goodwill
amortization. This 14.3 percent increase was due primarily to higher sales;
lower selling, general, and administrative costs as a percentage of net sales;
and a decline in interest expense. The increase was somewhat offset by lower
gross margins and other income, net. Year-to-date net earnings in fiscal 2002
were $30.3 million. Results for the first nine months included the following
three one-time items: a cumulative effect of change in accounting principle of
$24.6 million for the goodwill write-off related to the adoption of SFAS No.
142; restructuring and other expense of $10.0 million; and a tax refund of $1.8
million. Adjusted to exclude these items, diluted net earnings per share for the
first nine months of fiscal 2002 were $4.62. In the comparable fiscal 2001
period, results included $.7 million of restructuring and other income and $6.5
million of goodwill amortization, net of tax. Adjusted to exclude these items,
diluted net earnings per share for the first nine months of fiscal 2001 were
$4.15. The adjusted diluted net earnings per share increase of 11.3 percent was
mainly due to higher sales volumes, lower interest costs, and slightly more
favorable gross margins.
The following table summarizes the one-time changes in net earnings and diluted
earnings per share data, net of tax effect:
Three Months Ended
----------------------------------------------------------------------
August 2, 2002 August 3, 2001
------------------------------- --------------------------------
Diluted Diluted
Dollars per Dollars per
(in thousands) Common Share (in thousands) Common Share
-------------- ------------ -------------- ------------
Net earnings.................................................. $ 21,922 $ 1.68 $ 16,932 $ 1.30
Add:
Goodwill amortization expense............................... - - 2,248 0.17
---------- ------- -------- ------
Adjusted earnings before goodwill amortization expense........ $ 21,922 $ 1.68 $ 19,180 $ 1.47
========== ====== ======== ======
Nine Months Ended
----------------------------------------------------------------------
August 2, 2002 August 3, 2001
------------------------------- --------------------------------
Diluted Diluted
Dollars per Dollars per
(in thousands) Common Share (in thousands) Common Share
-------------- ------------ -------------- ------------
Net earnings................................................. .$ 30,325 $ 2.34 $ 48,292 $ 3.68
Add (subtract):
Cumulative effect of change in accounting principle......... 24,614 1.90 - -
Restructuring and other expense (income).................... 6,668 0.52 (447) (0.03)
Goodwill amortization expense............................... - - 6,504 0.50
One-time tax refund......................................... (1,775) (0.14) - -
---------- ------ -------- ------
Adjusted earnings before cumulative effect of change in
accounting principle, restructuring and other expense
(income), goodwill amortization expense, and one-time
tax refund.................................................. $ 59,832 $ 4.62 $ 54,349 $ 4.15
========== ====== ======== ======
Professional Segment Net Sales
Net sales for the worldwide professional segment in the third quarter of fiscal
2002 were up 5.7 percent compared to the third quarter of fiscal 2001. An
increase in shipments of Toro brand landscape contractor mowing equipment
contributed to this improvement because customers ordered product closer to
retail demand, which shifted Toro sales from the first six months of fiscal 2002
to the third quarter. Sitework Systems shipments were also up compared to the
third quarter of last year due to the addition of sales to new dealers.
Irrigation product sales were also higher, mainly for golf irrigation products,
due to favorable weather conditions and because last year's third quarter sales
were abnormally low. International sales were up significantly for the quarter
due to the successful introduction of new products, stronger than expected
demand in the Asian golf market, and distribution customers' ordering closer to
retail demand, which shifted Toro sales from the first six months of fiscal 2002
to the third quarter.
15
Professional Segment Net Sales (continued)
Net sales for the worldwide professional segment in the first nine months of
fiscal 2002 were up slightly compared to the first nine months of fiscal 2001.
Commercial equipment sales were up slightly for the year, and irrigation product
sales also increased compared to last year mainly due to lower field inventory
levels entering fiscal 2002 and favorable weather conditions. Sitework Systems
shipments and international sales were also up for the year due to the same
reasons mentioned in the quarter comparison. Worldwide agricultural irrigation
product sales were also up slightly year-to-date compared to last year. Somewhat
offsetting those increases was a decline in shipments of landscape contractor
mowing equipment year-to-date compared to last year, as Toro and its customers
attempted to reduce field inventory levels and as a result of the late spring
weather. In the fourth quarter of fiscal 2001, retail demand for landscape
contractor equipment unexpectedly declined as a result of the September 11
events, dry weather conditions, and the economic recession. Toro, however, did
not reduce shipments of landscape contractor equipment before the end of fiscal
2001 due to the unexpected decline in retail demand. This resulted in higher
than planned field inventory levels entering fiscal 2002. The company took steps
in the first six months of fiscal 2002 to lower field inventory levels by
reducing shipments to customers and cutting manufacturing production. On a
positive note, retail demand has increased for the first nine months of fiscal
2002 compared to the first nine months of fiscal 2001 for landscape contractor
equipment.
Residential Segment Net Sales
Net sales for the worldwide residential segment in the third quarter of fiscal
2002 increased 40.3 percent compared to the third quarter of fiscal 2001. Walk
power mower shipments led this increase due to positive reaction to the new
moderate-priced line of Toro walk power mowers sold at The Home Depot and
through the Toro dealer network. Sales of retail irrigation products were also
higher compared to the third quarter of fiscal 2001 due to additional regional
shelf space with a key customer and new product introductions. Electric trimmer
sales also increased compared to the third quarter of fiscal 2001 due to timing
of shipments closer to retail demand. Offsetting those increases to some degree
were lower worldwide shipments of riding products due to continued weak economic
conditions that has resulted in lower sales of higher-priced products as well as
consumer preference for lower-priced units. Shipments of snowthrower products
were down significantly compared to the third quarter of last year because
abnormally strong demand in the third quarter of fiscal 2001 resulted in low
field inventory levels entering the 2001-2002 winter season. However, a milder
2001-2002 snow season resulted in higher field inventory levels entering the
2002-2003 winter season, thus reducing shipments for the third quarter of fiscal
2002 compared to the third quarter of fiscal 2001. As a result of higher
snowthrower field inventory levels, Toro expects lower sales of snowthrower
products in the fourth quarter of fiscal 2002 compared to the fourth quarter of
fiscal 2001.
Net sales for the worldwide residential segment in the first nine months of
fiscal 2002 increased 15.6 percent compared to the same period in fiscal 2001.
The increase was due to the same contributing factors mentioned in the above
quarter comparison, and to higher walk power mower shipments up year-to-date,
due to initial stocking orders for the new moderate-priced line of Toro walk
power mowers in the first half of fiscal 2002. Sales of electric blowers were
also up for the year-to-date comparison due to warm fall weather that extended
the selling season into the first quarter of fiscal 2002. The percentage
increase was diminished somewhat because sales in fiscal 2001 were unusually
high because of initial stocking shipments for new riding products, such as the
Toro Timecutter(TM) Z mower and the Toro Twister(TM) utility vehicle. Lawn-Boy
walk power mower shipments declined for the year-to-date comparison as result of
lost shelf space at a home center customer for the 4 cycle engine models.
Shipments of snowthrower products were also down for the same reasons mentioned
in the above quarter comparison. International sales were down compared to last
year because high levels of field inventory for walk power mowers and riding
products reduced Toro shipments in fiscal 2002, somewhat offset by increased
sales of retail irrigation products in Australia due to favorable weather
conditions.
Distribution Segment Net Sales
Net sales for the distribution segment in the third quarter of fiscal 2002
increased 15.8 percent compared to the third quarter of fiscal 2001. Increased
demand for landscape contractor equipment, commercial golf and grounds
equipment, irrigation systems, and residential segment products contributed to
the sales improvement.
Net sales for the distribution segment in the first nine months of fiscal 2002
increased 14.2 percent compared to the first nine months of fiscal 2001. The
change was mainly due to the addition of sales from a distribution company
acquired in the third quarter of fiscal 2001.
16
Other Segment Net Sales
Net sales for the other segment includes the elimination of sales from the
professional and residential segments to the distribution segment. Shipments
from the professional and residential segments to the Toro-owned distribution
companies are eliminated because consolidated results reflect those sales after
products are sold by those company-owned distributorships. In addition,
elimination of the professional and residential segments' floor plan interest
costs from the Toro Credit Company is also included in this segment. The other
segment net sales elimination in the third quarter of fiscal 2002 increased 37.4
percent compared to the third quarter of fiscal 2001. This increase was due to
increased shipments from the professional and residential segments to the
Toro-owned distribution companies.
Year-to-date net sales elimination for the other segment in fiscal 2002
increased 18.9 percent compared to last year. This increase was mainly due to
the additional sales elimination for a distribution company acquired in the
third quarter of fiscal 2001.
Gross Profit
Third quarter gross profit in fiscal 2002 was up 9.2 percent compared to the
third quarter of fiscal 2001, but as a percentage of net sales declined to 34.3
percent compared to 35.8 percent in the third quarter of fiscal 2001. This
decline in gross margin was due to a higher proportion of sales of lower margin
products, mainly the new moderate-priced Toro walk power mowers. In addition,
gross margins were lower due to higher manufacturing costs from lower plant
utilization as a result of management's efforts to reduce Toro's and customers
inventory levels, mainly for the professional segment. Floor plan expenses were
also higher due to accruing costs at the time of sale. Somewhat offsetting those
negative factors were lower material costs resulting from the company's "5 by
Five" program initiatives.
Year-to-date gross profit was up 5.4 percent compared to last year, but as a
percentage of net sales, year-to-date gross profit in fiscal 2002 increased to
34.4 percent compared to 34.3 percent last year. This slight gross margin
improvement was due to cost reduction efforts and lower material costs, but was
somewhat offset by higher manufacturing costs and increased shipments of lower
margin products.
Selling, General, and Administrative Expense
Third quarter selling, general, and administrative expense (SG&A) increased 4.9
percent compared to the third quarter of fiscal 2001. SG&A for the third quarter
of fiscal 2001 included goodwill amortization expense of $2.2 million, which is
not reflected in SG&A costs in fiscal 2002 due to the adoption of SFAS No. 142
described previously. Excluding goodwill amortization expense for the third
quarter of fiscal 2001, SG&A as a percentage of net sales was 24.6 percent in
the third quarter of fiscal 2002 compared to 26.1 percent in the third quarter
of fiscal 2001. SG&A costs as a percentage of net sales were down mainly because
fixed expenses were spread over higher sales volumes, but the decline was offset
somewhat by higher warranty expense, from special reserves for known product
issues, as well as higher incentive compensation costs.
Year-to-date SG&A expense increased 3.1 percent compared to last year. SG&A for
fiscal 2001 included goodwill amortization expense of $6.4 million, which is not
reflected in SG&A costs in fiscal 2002 due to the adoption of SFAS No. 142
described previously. Excluding goodwill amortization expense for fiscal 2001,
SG&A as a percentage of net sales was 25.4 percent in the first nine months of
fiscal 2002 compared to 25.3 percent in the first nine months of fiscal 2001.
The acquisition of a distribution company in the third quarter of fiscal 2001
added approximately $3.1 million of incremental SG&A expense in the first nine
months of fiscal 2002. This increase was also due to higher bad debt, warranty,
and incentive compensation expense, offset by lower marketing costs.
17
Restructuring and Other Expense (Income)
Year-to-date restructuring and other expense for fiscal 2002 was $10.0 million.
In the first quarter of fiscal 2002, the company announced plans to close its
Evansville, Indiana and Riverside, California manufacturing facilities during
fiscal 2002. These actions are part of Toro's overall long-term strategy to
reduce production costs and improve long-term competitiveness. Closing these
facilities resulted in a pre-tax restructuring and other expense charge of $8.0
million. In the first quarter of fiscal 2002, the company also incurred a $2.0
million charge for asset impairment related to the write-off of patents and
non-compete agreements in the agricultural irrigation business. Toro also
evaluated the recoverability of some acquired intangible assets and determined
the acquired patents and non-compete agreements in the agricultural irrigation
business had no future value due to changes in this business. During the first
quarter of fiscal 2001, the company had restructuring and other unusual income
of $0.7 million from the reversal of an accrual remaining for closing of the
Sardis, Mississippi facility, which was sold during the first quarter of fiscal
2001.
Interest Expense
Third quarter interest expense in fiscal 2002 declined 24.6 percent compared to
the third quarter of fiscal 2001. This decrease was primarily due to lower
levels of short-term debt as a result of using prior periods' earnings to pay
down debt, improved asset management in the third quarter of fiscal 2002, and
lower interest rates.
Year-to-date interest expense in fiscal 2002 declined 14.9 percent compared to
last year due to the same contributing factors as in the quarter comparison.
Other Income, Net
Third quarter other income, net, in fiscal 2002 was $0.8 million compared to
$3.1 million in the third quarter of fiscal 2001, an unfavorable change of $2.3
million. This unfavorable variance was due to higher currency exchange rate
losses, higher litigation expense, lower finance charge revenue, and lower
levels of insurance recoveries. Somewhat offsetting those declines in other
income, net was a recovery of notes receivable previously written off and
increased gains on the disposal of property, plant, and equipment, mainly for a
gain on the sale of one of the owned facilities located in Riverside,
California.
Year-to-date other income, net, was $3.9 million compared to $4.5 million last
year, a decline of 13.5 percent. This decrease was due to the same contributing
factors mentioned in the quarter comparison. Somewhat offsetting those declines
in other income, net was a recovery of notes receivable previously written off,
increased gains on the disposal of property, plant, and equipment, mainly for a
gain on the sale of one of the owned facilities located in Riverside,
California, lower levels of valuation charges for investments, and higher
royalty income.
18
Operating Earnings (Loss) by Segment
Operating earnings (loss) by segment is defined as earnings (loss) from
operations plus other income, net for the professional, residential, and
distribution segments. The other segment operating loss consists of corporate
activities, including corporate financing activities, other income, net, and
interest expense.
Professional Segment Operating Earnings
Operating earnings for the worldwide professional segment in the third quarter
of fiscal 2002 were $34.8 million compared to $37.7 million last year, a
decrease of 7.6 percent. As a percentage of net sales, third quarter fiscal 2002
operating earnings were 14.8 percent compared to 16.9 percent in last year's
comparable quarter. Gross margin as a percentage of net sales fell 2.3 percent,
mainly from higher manufacturing costs and higher floor plan expenses, somewhat
offset by positive results from lower material costs. SG&A costs as a percentage
of professional segment net sales were slightly higher by 0.2 percent due to
increased warranty expense, partially offset by lower costs related to the
exclusion of goodwill amortization expense in the third quarter of fiscal 2002.
Somewhat offsetting the operating profit decline was a favorable change of other
income, net related from a gain on the sale of one of the owned facilities
located in Riverside, California.
Year-to-date operating earnings before restructuring and other expense for the
worldwide professional segment in fiscal 2002 were $107.1 million compared to
$105.3 million last year, an increase of 1.7 percent. As a percentage of net
sales, professional segment operating margins increased to 15.3 percent from
15.0 percent last year. Gross margin as a percentage of net sales rose 0.4
percent, mainly from cost reduction efforts and lower material costs, somewhat
offset by higher manufacturing costs. SG&A costs as a percentage of professional
segment net sales were higher by 0.3 percent due to increased warranty expense,
partially offset by lower costs related to the exclusion of goodwill
amortization expense in fiscal 2002.
Residential Segment Operating Earnings
Operating earnings for the worldwide residential segment in the third quarter of
fiscal 2002 were $12.2 million compared to $5.1 million in the third quarter of
fiscal 2001, a significant increase of 138.5 percent. As a percentage of net
sales, third quarter fiscal 2002 operating earnings were 10.1 percent compared
to 6.0 percent in last year's comparable quarter. Gross margin fell 1.3 percent
as a percentage of net sales due to lower margins for the new moderate-priced
walk power mowers, higher manufacturing costs and increased floor plan expense,
partially offset by lower costs for currency support in fiscal 2002 compared to
fiscal 2001. SG&A costs were lower by 5.5 percent as a percentage of residential
segment net sales mainly due to leveraging fixed SG&A costs over higher sales
volumes.
Year-to-date operating earnings before restructuring and other income for the
worldwide residential segment in fiscal 2002 were $39.9 million compared to
$29.3 million last year, an increase of 36.3 percent. As a percentage of net
sales, residential segment operating margins increased to 10.5 percent from 8.9
percent last year. The reasons for the increase are the same as in the quarter
comparison.
Distribution Segment Operating Earnings (Loss)
Operating earnings for the distribution segment in the third quarter of fiscal
2002 were $2.3 million compared to $.2 million for the third quarter of fiscal
2001. This substantial improvement was mainly due to higher sales volumes and
cost reductions at some of the company-owned distributorships.
Year-to-date operating results for the distribution segment in fiscal 2002 were
$2.0 million earnings compared to a $1.1 million loss last year. The $3.1
million improvement was mainly due to operating improvements at the
company-owned distributorships.
19
Operating Earnings (Loss) by Segment (continued)
Other Segment Operating Losses
Operating losses for the other segment in the third quarter of fiscal 2002 were
$16.6 million compared to losses of $16.1 million in the third quarter of fiscal
2001, an unfavorable change of 2.8 percent. This loss increase was due to higher
incentive compensation, lower other income, net, somewhat offset by a decline in
interest expense and lower elimination of gross profit. The third quarter of
fiscal 2001 reflected the elimination of gross profit previously recorded with
respect to Toro sales to a distribution company acquired in the third quarter of
fiscal 2001.
Year-to-date operating losses for the other segment in fiscal 2002 were $59.7
million compared to losses of $57.5 million in fiscal 2001, an unfavorable
change of 3.8 percent. This loss increase was due to the same factors mentioned
in the quarter comparison. In addition, bad debt expense was higher for the
first nine months of fiscal 2002 compared to the first nine months of fiscal
2001.
Provision for Income Taxes
The effective tax rate in the third quarter and the first nine months of fiscal
2002 was 33.0 percent compared to 37.0 percent in the third quarter and first
nine months of fiscal 2001, before a one-time federal tax refund of $1.8 million
in fiscal 2002. The decrease was mainly due to the adoption of SFAS No. 142 that
eliminated goodwill amortization expense beginning in the first quarter of
fiscal 2002. Most of the goodwill amortization was not deductible for tax
purposes. The tax rate also decreased due to increased benefits from foreign tax
strategies related to Toro's foreign sales corporation. In the second quarter of
fiscal 2002, Toro received a one-time federal tax refund of $1.8 million related
to the company's foreign sales corporation for prior fiscal years.
Cumulative Effect of Change in Accounting Principle
In connection with the adoption of SFAS No. 142, the company performed an
evaluation of goodwill as of November 1, 2001. The results of the evaluation
indicated that goodwill related to the agricultural irrigation reporting unit
was impaired. The performance of this reporting unit had not met management's
original expectations, mainly due to lower than anticipated growth rates in the
drip line market. This resulted in lower industry-wide pricing and margins on
product sales. The company measured the amount of impairment based on a
comparison of the fair value to its carrying value. Accordingly, the company
recognized a $24.6 million non-cash charge, net of income tax benefit of $0.5
million, as a cumulative effect of change in accounting principle for the
write-off of goodwill for the agricultural irrigation reporting unit. The
results of this unit are reflected in professional segment results.
Financial Position as of August 2, 2002
August 2, 2002 compared to August 3, 2001
Total assets on August 2, 2002 were $856.7 million compared to $908.7 million on
August 3, 2001, a decrease of 5.7 percent. Net accounts receivable increased by
$6.2 million or 1.8 percent, due to the increase in sales. Inventory decreased
$36.2 million or 14.8 percent mainly due to the increase in sales, improved
asset management, and reduced production of some professional segment products.
Net property, plant, and equipment increased $16.4 million due to higher amounts
of capital additions in comparison to depreciation expense, mainly for plant
expansion in Mexico and at the Beatrice, Nebraska facility. Goodwill and other
intangible assets decreased $30.1 million mainly due to the goodwill and other
intangible asset write-offs in the agricultural irrigation business as part of
the adoption of SFAS No. 142. In addition, amortization expense of goodwill and
other intangible assets in fiscal 2001 also contributed to the decrease in
goodwill and other intangible assets.
Total current liabilities on August 2, 2002 were $307.5 million compared to
$356.4 million at August 3, 2001, a decrease of 13.7 percent. Short-term debt
decreased by $86.4 million mainly due to using earnings to pay down short-term
debt as well as higher levels of accounts payable and lower levels of inventory.
Accounts payable increased by $11.0 million due to the company's efforts to
extend its payment terms. Accrued liabilities also increased by $11.0 million
mainly due to higher accruals for restructuring and warranty reserves.
20
Financial Position as of August 2, 2002 (continued)
August 2, 2002 compared to October 31, 2001
Total assets on August 2, 2002 were $856.7 million compared to $835.7 million at
October 31, 2001, an increase of 2.5 percent. Net accounts receivable increased
$70.2 million from October 31, 2001 due to the seasonal increase in accounts
receivable. Inventory declined by $25.3 million due to the increase in sales,
improved asset management, and reduced production of some professional segment
products. Net property, plant, and equipment increased $12.3 million due to
higher amounts of capital additions in comparison to depreciation expense mainly
for plant expansion in Mexico and at the Beatrice, Nebraska facility. Goodwill
and other intangible assets decreased $27.6 million mainly due to the goodwill
and other intangible asset write-offs in the agricultural irrigation business as
previously discussed.
Total current liabilities on August 2, 2002 were $307.5 million compared to
$292.6 million at October 31, 2001, an increase of 5.1 percent. This increase
was due to higher accrued liabilities, mainly for warranty reserves;
restructuring reserves; and higher accruals for various seasonal sales and
marketing programs. Somewhat offsetting the increase was lower short-term debt
due to using earnings to pay down short-term debt as well as lower levels of
inventory. Accounts payable also decreased by $10.5 million mainly due to timing
of payments as well as lower inventory levels.
Critical Accounting Estimates
The Securities and Exchange Commission (SEC) recently issued proposed guidance
for disclosure of critical accounting policies. The SEC defines "critical
accounting policies" as those that require application of management's most
difficult, subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently uncertain and may
change in subsequent periods. The company plans to adopt the disclosure
requirements regarding critical accounting policies when the SEC issues its
final rules.
Toro's significant accounting policies are described in Note 1 to the
consolidated financial statements in the company's Fiscal 2001 Annual Report on
Form 10-K. Not all of these significant accounting policies require management
to make difficult subjective or complex judgments or estimates. However,
management believes the following accounting policies, which require more
significant judgments and estimates used in the preparation of our consolidated
financial statements, could be deemed to be critical within the proposed
definition.
Accounts and Notes Receivable Valuation
The company establishes a reserve for specific accounts and notes receivables
that are believed to be uncollectable as well as an estimate of uncollectable
receivables. Each quarter, the company evaluates past collection history,
current financial conditions of key customers, and economic conditions when
establishing an allowance for doubtful accounts. Portions of the accounts
receivable are supported by a security interest in product held by customers,
which minimizes Toro's collection exposure. A deterioration in the financial
condition of any key customer or a significant continued slow down in the
economy could have a material negative impact on the company's ability to
collect a portion of the accounts and notes receivable. Management believes it
has adequately reserved for potential uncollectable receivables as of August 2,
2002.
Inventory Valuation
The company establishes a reserve for excess and obsolete inventory. Each
quarter, the reserve is based on a review of the expected selling price of
inventory. Toro's inventory is not exposed to rapid technological changes.
However, valuation of inventory can be affected by significant redesign of
existing products. The company typically utilizes marketing programs that it
believes can facilitate sales of products that will be significantly redesigned
for the next model year.
The company manufactures products in advance of the selling season. As a result,
Toro could have higher than planned inventory levels if demand declines
significantly from anticipated levels. The majority of the company's products do
not change from year to year, so that excess inventory from one year is usually
sold for at least cost in the next fiscal year. Management believes it has
established an adequate reserve for excess and obsolete inventory as of August
2, 2002.
21
Critical Accounting Estimates (continued)
Warranty Reserves
The company establishes a reserve for future warranty claims at the time of sale
based on historical claims experience by product line. The company also
establishes reserves for special rework campaigns for known major product
issues. In general, warranties tend to be for six months to seven years, and
cover all parts and labor for non-maintenance repairs and wear items, provided
operator abuse, improper use, or negligence did not necessitate the repair.
Actual claims could be materially higher than the reserve accrued at the time of
sale due both to the long warranty period offered by the company and to the
possibility that actual claims could be higher than the reserve if a significant
manufacturing or design defect is not discovered until after the product is
delivered to customers.
Management believes that its analysis of historical trends and knowledge of
potential manufacturing or design problems provide sufficient information to
establish an estimate for warranty claims at the time of sale. Management
believes it has adequately reserved for future warranty claims as of August 2,
2002.
Liquidity and Capital Resources
Cash provided by operating activities for the first nine months of fiscal 2002
was $61.7 million and compared favorably to $25.3 million of cash used in
operating activities for the first nine months in fiscal 2001. This improvement
of $86.9 million was due to higher earnings before non-cash expenses and a lower
rate of increase in working capital, mainly for inventory, as compared to the
prior year's comparable period. Cash used in investing activities was higher by
$1.0 million, or 3.2 percent, when compared with the first nine months of fiscal
2001, during which the company paid $8.5 million, net of cash acquired for
Goossen Industries, Inc. and Electronic Industrial Controls, Inc. Higher levels
of property, plant, and equipment purchases and other assets in the first nine
months of fiscal 2002 compared to the same time period in fiscal 2001
contributed to the increase. Cash used in financing activities for the first
nine months of fiscal 2002 was $41.9 million compared to $57.0 million of cash
provided by financing activities for the first nine months of fiscal 2001. This
favorable change of $98.8 million was because the company borrowed less
short-term debt during the first nine months of fiscal 2002 compared to the
first nine months of fiscal 2001. In addition, Toro was able to use cash on hand
at October 31, 2001, which was higher compared to cash on hand at October 31,
2000, for operating and investing activities in the first quarter of fiscal
2002.
The company entered into new agreements (Working Capital Agreements) with its
banks during February 2002 to fund its seasonal working capital requirements.
The Working Capital Agreements provide $250.0 million of committed unsecured
bank credit lines. Under these Working Capital Agreements, the company can also
borrow in currencies other than U.S. dollars. Interest expense on these credit
lines is based on LIBOR plus a basis point spread defined in the Working Capital
Agreements, which increased in the new agreements. However, the company
anticipates lower interest expense in fiscal 2002 compared to fiscal 2001 due to
lower average LIBOR rates and lower average borrowing levels. The company's
non-U.S. operations and a domestic subsidiary also maintain unsecured short-term
lines of credit of approximately $10 million. These facilities bear interest at
various rates depending on the rates in their respective countries of operation.
The company also has a letter of credit subfacility as part of the above Working
Capital Agreements. The company's business is seasonal, with peak borrowing
under the agreements described above generally occurring between February and
May each year. Significant financial covenants in the Working Capital Agreements
relate to interest coverage and debt to total capitalization ratios. The company
was in compliance with all covenants related to the Working Capital Agreements
at August 2, 2002. If the company was out of compliance with any debt covenant
required by the Working Capital Agreements, the banks could terminate their
commitments unless Toro could negotiate a covenant waiver from the banks. In
addition, the company's long-term public notes and debentures could become due
and payable if the company was unable to obtain a covenant waiver or refinance
its short-term debt under its Working Capital Agreements. If the company's
credit rating falls below investment grade, the interest rate it currently pays
on outstanding debt on the Working Capital Agreements would rise, but the credit
commitments could not be cancelled by the banks based only on a ratings
downgrade.
Management believes that the combination of funds available through its existing
Working Capital Agreements, coupled with forecasted cash flows, will provide the
necessary capital resources for the company's anticipated working capital,
capital additions, long-term debt repayments, and stock repurchases during the
next twelve months.
22
Contractual Obligations and Commercial Commitments
The following information is presented as of October 31, 2001, and there has
been no material change in this information.
(Dollars in thousands) Due in Fiscal
----------------------------------------------------------------------------------------------
Obligation 2002 2003 2004 2005 2006 After 2006 Total
- ---------- ---------- ---------- ---------- --------- ---------- ---------- -----------
Long-term debt........................$ 513 $ 15,830 $ 44 $ 45 $ 46 $ 178,600 $ 195,078
Capital lease obligation.............. 92 - - - - - 92
Operating leases...................... 9,523 7,220 5,075 3,676 2,527 5,761 33,782
---------- ---------- ---------- --------- ---------- ---------- -----------
Total cash obligations................$ 10,128 $ 23,050 $ 5,119 $ 3,721 $ 2,573 $ 184,361 $ 228,952
========== ========== ========== ========= ========== ========== ===========
The company also has approximately $20 million in outstanding letters of credit
at any given time as required by certain vendor contracts. The company also has
guaranteed debts incurred by business partners, aggregating $1.3 million as of
August 2, 2002.
Customer Financing
Wholesale Financing
Toro Credit Company (TCC), a wholly owned finance subsidiary of the company,
provides financing for selected products manufactured by Toro to Toro's North
American distributors and approximately 250 domestic dealers. Independent Toro
and Exmark distributors and dealers that do not finance through TCC generally
finance their inventories with third party financing companies.
TCC and other third party finance companies purchase selected receivables from
Toro and its distributors and dealers for extended periods, which enables those
customers to carry representative inventories of equipment. Downpayments are not
required and, depending on the finance program for each product line, finance
charges are either incurred by Toro, shared between Toro and the distributor or
dealer, or paid by the distributor or dealer. A security interest is retained in
the distributors' and dealers' inventories, and periodic physical checks are
made of those inventories. Under the terms of the sales to distributors and
dealers, finance charges are charged to distributors and dealers on outstanding
balances, from the earlier of the date when product is sold to a customer, or
the expiration of company-supported finance terms granted at the time of sale to
the distributor or dealer, until payment is received by the third party finance
company. Rates are generally fixed or based on prime rate plus a fixed
percentage depending on whether the financing is for a distributor or dealer.
Rates may also vary based on the product that is financed. Distributors and
dealers cannot cancel purchases after goods are shipped and are responsible for
payment even if the equipment is not sold to retail customers.
Third party financing companies purchased $373 million of receivables of Toro
financed products during the last twelve months. The outstanding receivable
balance owed from the company's distributors and dealers to third party
financing companies was $124.6 million on August 2, 2002. The company also
enters into limited inventory repurchase agreements with third party financing
companies. As of August 2, 2002, the company was contingently liable to
repurchase up to $3.7 million of inventory related to receivables under these
financing arrangements. The company has repurchased only immaterial amounts of
inventory from third party financing companies over the past few years. However,
an adverse change in retail sales could cause this situation to change and
thereby require Toro to repurchase financed product.
23
End-User Financing
During February 2002, the company entered into an agreement with a third party
financing company to provide lease-financing options to domestic golf course and
some grounds equipment customers. The purpose of the agreement is a sales and
marketing tool to give end-user buyers of the company's products alternative
financing options when purchasing Toro product. Under the terms of this
agreement, the company could be contingently liable for a portion of the credit
collection and residual realization risk on the underlying equipment for leasing
transactions financed under this program. Under a provision of this agreement,
if Toro maintains an investment grade credit rating, the company is not required
to provide any collateral. If the company's credit rating falls below investment
grade, Toro would be required to provide collateral in the form of a letter of
credit, up to $5.0 million.
In the normal course of business, Toro has arrangements with other financial
institutions to provide various forms of financing options to end customers.
None of these other arrangements requires any material financial involvement by
the company.
Distributor Financing
The company enters into long-term loan and equity investment agreements with
some distribution partners. These transactions are used for expansion of the
distribution partners' businesses, acquisitions, refinancing working capital
agreements, or ownership changes. As of August 2, 2002, Toro has loaned and/or
invested $7.5 million in some distribution companies. This amount is included in
other long-term assets on the consolidated balance sheet.
Inflation
The company is subject to the effects of inflation and changing prices. In
management's opinion, changes in net sales and net earnings that have resulted
from inflation and changing prices have not been material during the periods
presented. However, there is no assurance that inflation will not materially
affect the company in the future. The company attempts to deal with inflationary
pressures by actively pursuing internal cost reduction efforts and introducing
modest price increases.
Outlook
The company anticipates sales in the fourth quarter fiscal 2002 to be even with
or slightly down from the fourth quarter of fiscal 2001. Sales for the
professional segment are expected to be even in the fourth quarter of fiscal
2002 compared to the fourth quarter of fiscal 2001 due to continued inventory
management efforts. Sales in the residential segment are expected to be down for
snowthrower products in the fourth quarter compared to the fourth quarter of
fiscal 2001 due to high field inventory levels entering the 2002-2003 winter
season. This anticipated decrease may be offset by higher sales for the new line
of Toro walk power mowers. In addition, continued benefits from "5 by Five"
programs are expected to continue to improve fiscal 2002 earnings compared to
fiscal 2001. Management expects sales growth in the low single digits in fiscal
2002 over fiscal 2001, and diluted earnings per share to reach $4.85 to $4.90 in
fiscal 2002, before cumulative effect of accounting change, restructuring and
other expense, and a one-time tax refund.
24
Quantitative and Qualitative Disclosures about Market Risk
Toro is exposed to market risk stemming from changes in foreign currency
exchange rates, interest rates, and commodity prices. Changes in these factors
could cause fluctuations in the company's net earnings and cash flows. In the
normal course of business, Toro actively manages its exposure to some market
risks by entering into various hedging transactions, authorized under company
policies that place controls on these activities. The company's hedging
transactions involve the use of a variety of derivative instruments. Toro uses
derivatives only to attempt to limit underlying exposure to currency
fluctuations, and not for trading purposes.
Foreign Currency Exchange Rate Risk
The company is exposed to foreign currency exchange rate risk arising from
transactions in the normal course of business. Toro is subject to risk from
sales and loans to wholly owned subsidiaries as well as sales to third party
customers, purchases from suppliers, and bank lines of credit with creditors
denominated in foreign currencies. The company manages foreign currency exchange
rate exposure from anticipated sales, accounts receivable, intercompany loans,
anticipated purchases, and credit obligations through the use of naturally
occurring offsetting positions (borrowing in local currency) and foreign
currency exchange contracts. Foreign currency exchange contracts to hedge
forecasted transactions are designated as cash flow hedges with the fair value
recorded in accumulated comprehensive income (loss) and as a hedge asset or
liability as applicable. Once the forecasted transaction has been recognized as
a sale or purchase and a related asset or liability recorded on the balance
sheet, the related fair value of the derivative hedge contract is reclassified
from accumulated comprehensive income (loss) into earnings. The related amounts
payable to, or receivable from, the contract counter parties are included in
accrued liabilities or prepaid expenses and other current assets.
The following foreign currency exchange contracts held by the company have
maturity dates in fiscal 2002 and 2003. All items are non-trading and stated in
U.S. dollars. Certain derivative instruments the company enters into do not meet
the hedging criteria of SFAS No. 133. Therefore, the fair value impact is
recorded in other income, net. The average contracted rate, notional amount,
value of derivative instrument in accumulated comprehensive income (loss), and
fair value of derivative instrument in other income, net at August 2, 2002 were
as follows:
- ------------------------------------------------------------------------------------------------------------------------
VALUE IN
AVERAGE ACCUMULATED OTHER FAIR VALUE
CONTRACTED NOTIONAL COMPREHENSIVE IMPACT
DOLLARS IN THOUSANDS RATE AMOUNT INCOME (LOSS) GAIN (LOSS)
=============================================== ================ ================= =================== =================
Buy US dollar/Sell Australian dollar .5424 22,856.6 259.5 (205.7)
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy US dollar/Sell Canadian dollar 1.5619 7,634.8 156.7 5.5
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy US dollar/Sell Euro .9870 33,310.0 (181.0) 518.9
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy Australian dollar/Sell US dollar .5413 297.7 - 1.7
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy British pound/Sell US dollar 1.4572 400.7 21.0 -
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy Euro/Sell US dollar .9396 2,442.8 (0.9) 175.7
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy Japanese yen/Sell US dollar 121.8021 7,348.0 225.5 (17.4)
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy Mexican peso/Sell US dollar 10.1260 6,517.7 (55.6) -
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
Buy Swiss franc/Sell US dollar 1.7035 797.2 122.3 -
- ----------------------------------------------- ---------------- ----------------- ------------------- -----------------
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 Fiscal 2001 Annual
Report on Form 10-K (Item 7A). There has been no material change in this
information.
Commodities
Some raw materials used in the company's products are exposed to commodity price
changes. Toro manages some of this risk by using long-term agreements with some
vendors. The primary commodity price exposures are with aluminum, steel, and
plastic resin.
25
Related Party Transactions
The company has entered into related party transactions. Toro sells product to a
distribution company that is owned in part by an executive officer of Toro. This
executive officer is currently on temporary assignment at Toro and will return
to the distributorship upon completion of his assignment. In addition, Toro also
sells products to companies whose executive officers are members of Toro's Board
of Directors. The company believes the transactions described above between Toro
and related parties are at arms-length and not material to the consolidated
financial results of the company.
ITEM 4. CONTROLS AND PROCEDURES
Changes in Internal Controls
Toro has had accounting procedures and related systems of internal control in
place for many years. They are intended to provide reasonable assurance that
assets are safeguarded, transactions are appropriately authorized and included
in the financial records in all material aspects, and that policies and
procedures are implemented and performed by qualified personnel. The company's
internal audit department periodically conducts reviews of financial internal
controls and reports the results to management and the audit committee. Based on
these reviews, the company takes corrective action that may be necessary with
regard to deficiencies and weaknesses in internal controls. For the quarter
ended August 2, 2002, there have been no significant changes in internal
controls or other factors that could significantly affect these controls, and
the company has not identified any significant weaknesses in internal controls.
26
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3(i) and 4(a) Restated Certificate of Incorporation of
Registrant (incorporated by reference to Exhibit 3(i)
and 4(a) to Registrant's Annual Report on Form 10-K
for the fiscal year ended October 31, 2001).
3(ii) and 4(b) 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 August 3, 2001).
4(c) 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(d) Rights Agreement dated as of May 20, 1998, between Registrant and
Wells Fargo 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(e) Indenture dated as of January 31, 1997, between Registrant and First
National Trust Association, as Trustee, relating to the Registrant's
7.125% Notes due June 15, 2007 and its 7.80% Debentures due June 15,
2027 (incorporated by reference to Exhibit 4(a) to Registrant's
Current Report on Form 8-K for June 24, 1997, Commission File No.
1-8649).
10(a) Form of Employment Agreement in effect for executive 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 April 28, 2000).*
10(c) The Toro Company Annual Management Incentive Plan II for officers of
Registrant (incorporated by reference to the appendix to Registrant's
Proxy Statement on Form DEF 14A for the fiscal year ended October 31,
2001).*
10(d) 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(e) 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(f) The Toro Company Performance Share Plan (incorporated by reference to
the appendix to Registrant's Proxy Statement on Form DEF 14A for the
fiscal year ended October 31, 2001).*
10(g) The Toro Company 2000 Stock Option Plan (incorporated by reference to
the appendix to Registrant's Proxy Statement on Form DEF 14A for the
fiscal year ended October 31, 2001).*
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 April 28, 2000).*
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).*
27
10(j) The Toro Company Chief Executive Officer Succession Incentive Award
Agreement.
10(k) The Toro Company Deferred Compensation Plan for Officers
(incorporated by reference to Exhibit 10(k) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended July 28, 2000).*
10(l) The Toro Company Deferred Compensation Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10(l) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 28, 2000).*
10(m) The Toro Company 2000 Directors Stock Plan (incorporated by reference
to Exhibit 10(m) to Registrant's Quarterly Report on Form 10-Q for
the quarter ended July 28, 2000).*
99.1 SEC Order Certification of Chief Executive Officer.
99.2 SEC Order Certification of Chief Financial Officer.
99.3 Section 906 Certification of Chief Executive Officer.
99.4 Section 906 Certification of Chief Financial Officer.
*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.
28
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)
Date: September 13, 2002 By /s/ Stephen P. Wolfe
---------------------------------
Stephen P. Wolfe
Vice President, Finance
Treasurer and Chief Financial Officer
(Principal Financial Officer)
CERTIFICATIONS
I, Kendrick B. Melrose, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Toro Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
/s/ Kendrick B. Melrose
-------------------------------------
Kendrick B. Melrose
Chairman and Chief Executive Officer
(Principal Executive Officer)
September 13, 2002
I, Stephen P. Wolfe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Toro Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report.
/s/ Stephen P. Wolfe
-------------------------------------
Stephen P. Wolfe
Vice President, Finance
Treasurer and Chief Financial Officer
(Principal Financial Officer)
September 13, 2002
29
Exhibit 10(j)
THE TORO COMPANY
CHIEF EXECUTIVE OFFICER SUCCESSION INCENTIVE AWARD AGREEMENT
AGREEMENT ("Agreement") dated as of July 31, 1995, as amended July 31,
1997, July 31,1998 and July 18, 2002, by and between The Toro Company, a
Delaware corporation (the "Company"), and Kendrick B. Melrose, its Chief
Executive Officer ("Mr. Melrose"), pursuant to which The Toro Company Chief
Executive Officer Succession Plan (the "Plan") is implemented.
1. GRANT OF AWARD.
a. GRANT OF RESTRICTED STOCK. The Company hereby grants to Mr. Melrose
the number of whole shares of Common Stock having an aggregate fair market value
of $500,000 on July 31, 1995 (the "Restricted Stock"), subject to forfeiture or
reduction of the number of shares in the event performance goals set forth in
Subsection 2.a.i(A) (the "Performance Goals") are not achieved and to the other
terms and conditions of the Plan; provided however that in the event the fair
market value of the Common Stock on the date of vesting of the Restricted Stock
is less than the fair market value on July 31, 1995, the Company shall make an
aggregate payment to Mr. Melrose of the difference between the fair market value
on the date of vesting of the Restricted Stock and the fair market value on July
31, 1995. Fair market value shall mean the closing price of the Common Stock on
the New York Stock Exchange as reported in The Wall Street Journal.
b. GRANT OF PERFORMANCE UNITS AND ANNUITY PURCHASE. Subject to the
terms and conditions of the Plan and this Agreement, the Company hereby grants
to Mr. Melrose performance units equal to the number of whole shares of Common
Stock having an aggregate fair market value of $500,000 on July 31, 1995 (the
"Performance Units"), which Performance Units shall be subject to forfeiture or
reduction in the event the Performance Goals set forth in the Plan and in
Subsection 2.a.i(A) hereof are not achieved and to the other terms and
conditions of the Plan and this Agreement. Each Performance Unit shall have a
value equal to the fair market value of one share of Common Stock, from time to
time, provided however that the value shall not be less than the fair market
value of one share of Common Stock on July 31, 1995. Performance Units shall be
evidenced by this Agreement. An amount equal to the aggregate value of the
Performance Units remaining at the date of Mr. Melrose's retirement, after
forfeiture, if any, shall be utilized by the Company to purchase a retirement
annuity payable to Mr. Melrose until his 75th birthday, or to his estate or
beneficiaries, and for no other purpose, subject to the condition that Mr.
Melrose enter into and comply with the terms and conditions of a noncompetition
agreement, in accordance with Subsections 1.c. and 2.b. hereof.
c. POST-RETIREMENT CONSULTING AND NONCOMPETITION AGREEMENT. Subject to
the terms and conditions of the Plan and this Agreement, the Company shall enter
into a post-retirement consulting and noncompetition agreement with Mr. Melrose,
providing for the payment of an aggregate amount of up to $500,000, which amount
shall be adjusted not less than once annually to reflect increases in the
consumer price index and which may be utilized to pay expenses of office and
support services for Mr. Melrose for a period of five years following the date
of his retirement.
2. TERMS, CONDITIONS AND RESTRICTIONS.
a. RESTRICTED STOCK AND PERFORMANCE UNIT PERFORMANCE GOAL RESTRICTIONS.
The obligation of the Company to deliver certificates representing the
Restricted Stock granted hereunder and to utilize the aggregate value of the
Performance Units to purchase a retirement annuity shall be subject to the
terms, conditions and restrictions set forth in this Subsection 2.a.
i. VESTING OF RESTRICTED STOCK AND PERFORMANCE UNITS. Mr.
Melrose's right to receive the Restricted Stock and the value of the Performance
Units shall be subject to the vesting requirements set forth in this Subsection
2.a.i. and to the achievement by Mr. Melrose of the Performance Goals set forth
in Subsection 2.a.i.(A) hereof not later than the last day of the period
specified to achieve such performance (the "Restricted Period"). Upon
achievement of a Performance Goal within an applicable Restricted Period, the
restrictions shall lapse with respect to the specified portion of Restricted
Stock, which specified portion shall vest and become nonforfeitable. Upon
achievement of a Performance Goal within an applicable Restricted Period, the
restrictions shall lapse with respect to the specified portion of Performance
Units, which specified portion shall vest and become nonforfeitable, subject to
the further condition that Mr. Melrose enter into and comply with the terms and
conditions of a noncompetition agreement in accordance with Subsections 1.c and
2.b. If Mr. Melrose does not enter into a noncompetition agreement or does not
comply with the terms and conditions of such a noncompetition agreement, then
Mr. Melrose shall forfeit the value of the Performance Units or, if a retirement
annuity has been acquired by the Company, the retirement annuity.
(A) The following table sets forth the
Performance Goals, the schedule for
achievement of each Performance Goal and the
portion of Restricted Stock and Performance
Units in which rights vest upon such
achievement.
Performance Goal Restricted Period Portion of Portion of
to be Achieved (July 31, 1995 Shares of Re- Performance
through earlier of stricted Stock Units to
date shown or to Vest Upon Vest Upon
Goal Achievement) Achievement Achievement
Goal 1:
CEO and senior management
succession plan developed
and progress towards fulfill-
ment of the plan, approved
by Board of Directors October 31, 1999 15% 15%
2
Goal 2:
Potential CEO successor
identified with approval
of Board of Directors
and continued development
of senior management team October 31, 2000 15% 15%
Goal 3:
CEO successor who was
identified and developed
by Mr. Melrose is elected
as CEO by Board of
Directors October 31, 2005 70% 70%
(B) Early Selection of Successor. Notwithstanding any other
provision of the Plan, in the event that the Board of
Directors elects as Mr. Melrose's successor the
individual identified and developed by Mr. Melrose, and
such successor is in place as chief executive officer
of the Company and Mr. Melrose elects to retire prior
to the last day of the final Restricted Period, but no
earlier than July 31, 1997, all Restricted Stock and
Performance Units shall vest in full and become
nonforfeitable, subject to the condition with respect
to the Performance Units that Mr. Melrose enter into
and comply with the terms and conditions of a
noncompetition agreement in accordance with Subsection
2.b.
(C) The Special CEO Succession Subcommittee of the
Compensation Committee of the Board of Directors (the
"Committee") shall be responsible for certifying in
writing to the Company that an applicable Performance
Goal has been met by Mr. Melrose prior to release and
delivery of certificates representing the shares of
Restricted Stock or payment of the value of Performance
Units for the purchase of a retirement annuity to Mr.
Melrose.
(D) The terms of this Agreement are not intended to, and do
not, impose on Mr. Melrose a mandatory retirement date
not otherwise applicable to employees of the Company
generally, and Mr. Melrose shall not be obligated to
retire as an officer of the Company in order to obtain
the benefits of this Agreement.
ii. LIMITS ON TRANSFER OF RESTRICTED STOCK AND PERFORMANCE
UNITS. Shares of the Restricted Stock which have not vested in accordance with
the provisions of Subsection 2.a.i. hereof may not be sold, transferred,
pledged, assigned or otherwise encumbered. Performance Units may not be sold,
transferred, pledged, assigned or otherwise encumbered at any time and the value
of Performance Units may be utilized only for the purpose of purchasing the
retirement annuity referred to the Subsection 1.b. hereof.
3
iii. TERMINATION, DEATH OR DISABILITY. In the event that the
Board of Directors terminates Mr. Melrose's employment other than for cause (as
defined in Subsection 2.c. hereof) and elects as Mr. Melrose's successor a chief
executive officer who was identified and developed by Mr. Melrose, or in the
event of the termination of Mr. Melrose's employment due to his death or
disability, then all shares of Restricted Stock and Performance Units shall
automatically vest in full, notwithstanding that Mr. Melrose does not enter into
a noncompetition agreement in accordance with Subsections 1.c. and 2.b., and
shall become nonforfeitable in the fiscal year following the year of the date of
such event, and on the first day that such vesting would not cause the
compensation to be deemed compensation with respect to the prior fiscal year.
b. POST-RETIREMENT CONSULTING AND NONCOMPETITION AGREEMENT. The
Company's agreement to pay any amount in connection with post-retirement
consulting services to be provided by Mr. Melrose and its payment of the value
of Performance Units for the purchase of a retirement annuity payable to Mr.
Melrose pursuant to Subsection 1.b. shall be subject to and in consideration of
Mr. Melrose's execution of an agreement not to compete with the Company by
serving as an employee or member of the board of directors of or consultant to
Rainbird, Jacobson or John Deere, or any successor thereof or similar competitor
of the Company for a period of five years following the date of Mr. Melrose's
retirement as Chief Executive Officer. The Company's agreement to pay any amount
in connection with post-retirement consulting services to be provided by Mr.
Melrose shall be subject to his agreement to provide consulting services to the
Company for a period of five years following the date of his retirement;
provided however that Mr. Melrose may elect to terminate the consulting
agreement, but not the agreement not to compete, in which event any balance of
the $500,000 amount referred to in Subsection 1.c. not then expended for Mr.
Melrose's benefit shall be paid to Mr. Melrose over the remainder of the five
year period. Mr. Melrose shall not have any right to receive payments pursuant
to Subsection 1.c. or this Subsection 2.b. until and unless he shall have
executed an agreement not to compete with the Company and delivered a fully
executed copy thereof to the Company, and otherwise complied with the then
applicable terms and conditions of the Plan, except as provided in Subsection
2.a.iii.
c. TERMINATION OF EMPLOYMENT. Except as otherwise provided by
Subsection 2.a. hereof, if Mr. Melrose resigns his employment with the Company
or if his employment is terminated by the Board of Directors for cause during
any Restricted Period, all shares of Restricted Stock and all Performance Units
then subject to restrictions and all other rights under this Plan shall be
forfeited by Mr. Melrose and the Restricted Stock shall be reacquired by the
Company. For purposes of this Agreement, "Cause" shall mean: (i) the willful and
continued failure of Mr. Melrose to perform substantially his duties with the
Company or one of its affiliates (other than any such failure resulting from
incapacity due to physical or mental illness), after a written demand for
substantial performance is delivered to Mr. Melrose by the Board of Directors of
the Company which specifically identifies the manner in which the Board of
Directors believes that Mr. Melrose has not substantially performed his duties,
or (ii) the willful engaging by Mr. Melrose in illegal conduct or gross
misconduct which is materially and demonstrably injurious to the Company.
4
For purposes of this provision, no act or failure to act, on the part of Mr.
Melrose, shall be considered "willful" unless it is done, or omitted to be done,
by Mr. Melrose in bad faith or without reasonable belief that Mr. Melrose's
action or omission was in the best interests of the Company. Any act, or failure
to act, based upon authority given pursuant to a resolution duly adopted by the
Board of Directors or upon the instructions of a senior officer of the Company
or based upon the advice of counsel for the Company shall be conclusively
presumed to be done, or omitted to be done, by Mr. Melrose in good faith and in
the best interests of the Company. The cessation of employment of Mr. Melrose
shall not be deemed to be for Cause unless and until there shall have been
delivered to Mr. Melrose a copy of a resolution duly adopted by the affirmative
vote of not less than three quarters of the entire membership of the Board at a
meeting of the Board of Directors called and held for such purpose (after
reasonable notice is provided to Mr. Melrose and Mr. Melrose is given an
opportunity, together with counsel, to be heard before the Board of Directors),
finding that, in the good faith opinion of the Board of Directors, Mr. Melrose
is guilty of the conduct described in Subsection 2.c.(i) or (ii) above, and
specifying the particulars thereof in detail.
d. STOCK CERTIFICATES.
i. ISSUANCE. The Company shall issue a stock certificate or
certificates representing the shares of Restricted Stock granted hereunder. Such
certificates shall be registered in Mr. Melrose's name and shall bear an
appropriate legend referring to the terms, conditions and restrictions
applicable to the grant, substantially in the following form:
The transferability of this certificate and the shares of
stock represented hereby are subject to the terms and
conditions (including forfeiture) of the Chief Executive
Officer Succession Incentive Plan and an agreement entered
into between the registered owner and The Toro Company. Copies
of the plan and agreement are on file in the offices of The
Toro Company, 8111 Lyndale Avenue South, Bloomington,
Minnesota 55420.
ii. ESCROW. Certificates representing the Restricted Stock
shall be physically held by the Company or its nominee during any Restricted
Period, and the Company may require, as a condition of the grant, that Mr.
Melrose shall have delivered a stock power, endorsed in blank, with respect to
any shares of the Restricted Stock. Upon the achievement of the Performance
Goals with respect to any shares of Restricted Stock, as certified to by the
Committee, the Company shall cause the certificate representing such shares of
Restricted Stock to be removed from escrow and delivered to the Company for
reissuance and delivery of Common Stock in the name of Mr. Melrose. If any
shares of Restricted Stock are to be forfeited, certificates representing such
shares shall be delivered to the Company for reissuance in its name or
cancellation and Mr. Melrose shall have no further interest in such stock.
5
iii. LAPSE OF RESTRICTIONS. When the Performance Goals set
forth in Subsection 2.a.i.(A) have been achieved with respect to any portion of
the shares of the Restricted Stock, the Company shall deliver to Mr. Melrose or
his legal representative, beneficiary or heir not later than 60 days thereafter
a certificate or certificates representing the Common Stock without the legend
referred to in Subsection 2.d.i. hereof. The number of shares of Common Stock to
be released shall be the same number as to which the Performance Goals have been
achieved in accordance with Subsection 2.a.i.(A).
e. RIGHTS AS STOCKHOLDER.
i. RIGHT TO VOTE AND DIVIDENDS. Except as provided in Section
1 and this Section 2, Mr. Melrose shall have, with respect to the shares of
Restricted Stock, all of the rights of a stockholder of the Company, including
the right to vote the shares and the right to receive cash dividends with
respect to the shares.
ii. ADJUSTMENTS. In the event of any merger, reorganization,
consolidation, recapitalization, stock dividend, stock split or other change in
corporate structure affecting the Common Stock, the Committee shall make such
substitution or adjustment in the aggregate number of shares of Common Stock
reserved for issuance hereunder or in the number of shares outstanding as
Restricted Stock or in the number of Performance Units, as may be determined to
be appropriate by the Committee, acting in its sole discretion, provided that
the number of shares or Performance Units shall always be a whole number.
f. CHANGE IN CONTROL. In the event of a Change of Control of the
Company as hereinafter defined, whether or not approved by the Board of
Directors, all shares of Restricted Stock shall immediately fully vest and be
freely transferable.
Change of Control means:
i. The acquisition by any individual, entity or group (within
the meaning of Section 13(d)(3) or 14(d)(2) of the Exchange Act) (a "Person") of
beneficial ownership (within the meaning of Rule 13d-3 under the Exchange Act)
of 15% or more of either (A) the then-outstanding shares of Common Stock of the
Company (the "Outstanding Company Common Stock") or (B) the combined voting
power of the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding Company Voting
Securities"); provided, however, that for purposes of this subsection i., the
following acquisitions shall not constitute a Change of Control: (A) any
acquisition directly from the Company, (B) any acquisition by the Company, (C)
any acquisition by any employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the Company, or (D)
any acquisition by any corporation pursuant to a transaction that complies with
clauses (A), (B) and (C) of subsection iii. of this Subsection 2.f.; or
ii. Individuals who, as of the date hereof, constitute the
Board of Directors of the Company (the "Incumbent Board") cease for any reason
to constitute at least a majority of the Board; provided, however, that any
individual becoming a director subsequent to the date hereof whose election, or
nomination for election by the Company's stockholders, was approved by a vote of
at least a majority of the directors then comprising the Incumbent Board shall
be considered as though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose initial assumption of
office occurs as a result of an actual or threatened election contest with
respect to the election or removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a Person other than the
Board; or
6
iii. Consummation of a reorganization, merger or consolidation
of the Company or sale or other disposition of all or substantially all of the
assets of the Company or the acquisition by the Company of assets or stock of
another entity (a "Business Combination"), in each case, unless, following such
Business Combination, (A) all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately prior
to such Business Combination beneficially own, directly or indirectly, more than
50% of, respectively, the then-outstanding shares of common stock and the
combined voting power of the then-outstanding voting securities entitled to vote
generally in the election of directors, as the case may be, of the corporation
resulting from such Business Combination (including, without limitation, a
corporation which as a result of such transaction owns the Company or all or
substantially all of the Company's assets either directly or through one or more
subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be, (B) no
Person (excluding any corporation resulting from such Business Combination or
any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or
indirectly, 15% or more of, respectively, the then-outstanding shares of common
stock of the corporation resulting from such Business Combination, or the
combined voting power of the then-outstanding voting securities of such
corporation except to the extent that such ownership existed prior to the
Business Combination and (C) at least a majority of the members of the board of
directors of the corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of the initial
agreement, or of the action of the Board, providing for such Business
Combination; or
iv. Approval by the stockholders of the Company of a complete
liquidation or dissolution of the Company.
3. WITHHOLDING TAXES. The Company shall have the right to deduct from any
settlement made hereunder any federal, state or local taxes of any kind,
including FICA and related taxes, required by law to be withheld with respect to
the vesting of rights to receive or payment of remuneration or to take such
other action as may be necessary in the opinion of the Company to satisfy all
obligations for the payment of such taxes. If Common Stock is withheld or
surrendered to satisfy tax withholding, such stock shall be valued at its fair
market value as of the date such Common Stock is withheld or surrendered or the
obligation to pay such taxes becomes fixed.
7
4. REGISTRATION RIGHTS. Mr. Melrose shall have the right to require that the
Company promptly take all necessary steps to register or qualify the Restricted
Stock, or Common Stock issued upon vesting of the Restricted Stock, under the
Securities Act of 1933, as amended, and the securities laws of such states as
Mr. Melrose may reasonably request. The Company shall keep effective and
maintain any registration, qualification, notification or approval for such
period as is reasonably necessary for Mr. Melrose to dispose of the Restricted
Stock or Common Stock and from time to time shall amend or supplement the
prospectus used in connection therewith to the extent necessary in order to
comply with applicable law. The Company shall bear all fees, costs and expenses
of such registration, qualification, notification or approval.
5. COMPLIANCE WITH RULE 16B-3 AND SECTION 162(m). The grants of Restricted Stock
and Performance Units made under this Agreement and the remuneration to be paid
to Mr. Melrose as a consequence of the grants are intended to comply with all
applicable conditions of Rule 16b-3 under the Securities Exchange Act of 1934
and to avoid the loss of the deduction referred to in paragraph (1) of Section
162(m) of the Internal Revenue Code of 1986, as amended.
6. EMPLOYMENT. Nothing in this Agreement shall interfere with or limit in any
way the right of the Company to terminate Mr. Melrose's employment at any time,
with the Company or any subsidiary of the Company, or shall confer upon Mr.
Melrose any right to continue in the employ of the Company.
7. NONEXCLUSIVITY OF THE PLAN. Neither the adoption of the Plan by the Board nor
the submission of the Plan to stockholders for approval shall be construed to
limit the power of the Board or the Committee to adopt such other incentive
arrangements as either may deem desirable, including without limitation, the
award of stock and cash awards otherwise than under the Plan, or to set
compensation and retirement benefits and make such awards to Mr. Melrose as
either may deem desirable.
8. EXCLUSION FROM PENSION, PROFIT SHARING AND OTHER BENEFIT CALCULATIONS. By
acceptance of the award made by this Agreement, Mr. Melrose agrees that the
award or vesting of Restricted Stock and Performance Units constitute special
incentive compensation that is not taken into account as "salary" or
"compensation" or "bonus" in determining the amount of any payment under any
pension, retirement or profit sharing plan of the Company or any subsidiary. Mr.
Melrose agrees further that such award shall not be taken into account in
determining the amount of any life insurance coverage, short or long-term
disability coverage or any other pay-based benefit provided by the Company or
any subsidiary.
9. AMENDMENT. This Agreement may be amended, modified or terminated from time to
time, provided however that no amendment may be adopted without the approval of
the stockholders of the Company if such amendment requires stockholder approval
pursuant to Rule 16b-3 or Section 162(m), and no amendment, modification or
termination may be adopted without the written agreement of Mr. Melrose if such
amendment, modification or termination would adversely affect his rights.
Subject to the foregoing and the requirements of Section 162(m), the Board may,
in accordance with the recommendation of the Committee and without further
action on the part of stockholders of the Company or the consent of Mr. Melrose,
amend the Agreement to preserve the employer deduction under Section 162(m).
8
10. GOVERNING LAW. This Agreement and the awards granted hereunder shall be
construed, administered and governed in all respects under and by the applicable
laws of the State of Delaware, without giving effect to principles of conflicts
of laws.
11. SUCCESSORS. Except as otherwise provided in this Agreement shall be binding
upon and inure to the benefit of the Company, its successors and assigns and Mr.
Melrose, his beneficiaries, heirs, executors, administrators and legal
representatives.
9
IN WITNESS WHEREOF, the Agreement has been executed and delivered by
the Company as of the 18th day of July, 2002.
THE TORO COMPANY
/s/ J. Lawrence McIntyre
-----------------------------------
Title: Vice President & Secretary
I hereby agree to the terms and conditions of this Chief Executive
Officer Succession Incentive Award Agreement, as amended.
KENDRICK B. MELROSE
/s/ Kendrick B. Melrose
-----------------------------------
10
EXHIBIT 99.1
STATEMENT UNDER OATH OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL
OFFICER REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS
I, Kendrick B. Melrose, state and attest that:
(1) To the best of my knowledge, based upon a review of the covered
reports of The Toro Company, and, except as corrected or supplemented
in a subsequent covered report:
o no covered report contained an untrue statement of a material
fact as of the end of the period covered by such report (or in
the case of a report on Form 8-K or definitive proxy materials,
as of the date on which it was filed); and
o no covered report omitted to state a material fact necessary to
make the statements in the covered report, in light of the
circumstances under which they were made, not misleading as of
the end of the period covered by such report (or in the case of a
report on Form 8-K or definitive proxy materials, as of the date
on which it was filed).
(2) I have reviewed the contents of this statement with The Toro Company's
audit committee.
(3) In this statement under oath, each of the following, if filed on or
before the date of this statement, is a "covered report":
o Annual Report on Form 10-K for the Fiscal Year Ended October 31,
2001 of The Toro Company;
o all reports on Form 10-Q, all reports on Form 8-K and all
definitive proxy materials of The Toro Company filed with the
Commission subsequent to the filing of the Form 10-K identified
above; and
o any amendments to any of the foregoing.
/s/ Kendrick B. Melrose Subscribed and sworn to
----------------------------- before me this 10th day of
Kendrick B. Melrose September, 2002.
Principal Executive Officer
September 10, 2002 /s/ J. Lawrence McIntyre
--------------------------
Notary Public
My commission Expires:
1/31/2005
EXHIBIT 99.2
STATEMENT UNDER OATH OF PRINCIPAL EXECUTIVE OFFICER AND PRINCIPAL FINANCIAL
OFFICER REGARDING FACTS AND CIRCUMSTANCES RELATING TO EXCHANGE ACT FILINGS
I, Stephen P. Wolfe, state and attest that:
(1) To the best of my knowledge, based upon a review of the covered
reports of The Toro Company, and, except as corrected or supplemented
in a subsequent covered report:
o no covered report contained an untrue statement of a material
fact as of the end of the period covered by such report (or in
the case of a report on Form 8-K or definitive proxy materials,
as of the date on which it was filed); and
o no covered report omitted to state a material fact necessary to
make the statements in the covered report, in light of the
circumstances under which they were made, not misleading as of
the end of the period covered by such report (or in the case of a
report on Form 8-K or definitive proxy materials, as of the date
on which it was filed).
(2) I have reviewed the contents of this statement with The Toro Company's
audit committee.
(3) In this statement under oath, each of the following, if filed on or
before the date of this statement, is a "covered report":
o Annual Report on Form 10-K for the Fiscal Year Ended October 31,
2001 of The Toro Company;
o all reports on Form 10-Q, all reports on Form 8-K and all
definitive proxy materials of The Toro Company filed with the
Commission subsequent to the filing of the Form 10-K identified
above; and
o any amendments to any of the foregoing.
/s/ Stephen P. Wolfe Subscribed and sworn to
------------------------------- before me this 10th day of
Stephen P. Wolfe September, 2002.
Principal Financial Officer
September 10, 2002 /s/ J. Lawrence McIntyre
--------------------------
Notary Public
My commission Expires:
1/31/2005
Exhibit 99.3
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Toro Company (the "Company") on
Form 10-Q for the quarterly period ending August 2, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I,
Kendrick B. Melrose, Chairman and Chief Executive Officer of the Company,
certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Kendrick B. Melrose
- ------------------------------------------------
Kendrick B. Melrose
Chairman and Chief Executive Officer
September 13, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
Exhibit 99.4
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of The Toro Company (the "Company") on
Form 10-Q for the quarterly period ending August 2, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the "Report"), I, Stephen
P. Wolfe, Vice President-Finance, Treasurer and Chief Financial Officer of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations
of the Company.
/s/ Stephen P. Wolfe
- -------------------------------------------------
Stephen P. Wolfe
Vice President-Finance,
Treasurer and Chief Financial Officer
September 13, 2002
This certification accompanies the Report pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the
Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
