FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
THE TORO COMPANY
Delaware
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1-8649 | 41-0580470 | ||
(State of incorporation)
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(Commission File Number) | (I.R.S. Employer Identification Number) |
8111 Lyndale Avenue South
(Address, including zip code, and telephone number, including area code, of registrants principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
|
Name of Each Exchange on Which Registered | |
Common Stock, par value $1.00 per share
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New York Stock Exchange | |
Preferred Share Purchase Rights
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New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
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 and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). Yes x No o
The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing price of the Common Stock on May 2, 2003, the last business day of the registrants most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $938,501,869.
The number of shares of Common Stock outstanding as of January 7, 2004 was 24,277,301.
Documents Incorporated by Reference
Portions of the registrants Proxy Statement for the Annual Meeting of Stockholders to be held March 12, 2004 are incorporated by reference into Part III.
THE TORO COMPANY
Description | Page Numbers | |||||
PART I
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ITEM 1.
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Business
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3-9 | ||||
ITEM 2.
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Properties
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10 | ||||
ITEM 3.
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Legal Proceedings
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10 | ||||
ITEM 4.
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Submission of Matters to a Vote of Security
Holders
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10 | ||||
Executive Officers of the Registrant
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11 | |||||
PART II
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||||||
ITEM 5.
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Market for Registrants Common Equity and
Related Stockholder Matters
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12 | ||||
ITEM 6.
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Selected Financial Data
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12 | ||||
ITEM 7.
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Managements Discussion and Analysis of
Financial Condition and Results of Operations
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13-21 | ||||
ITEM 7A.
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Quantitative and Qualitative Disclosures about
Market Risk
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22 | ||||
ITEM 8.
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Financial Statements and Supplementary Data
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|||||
Independent Auditors Report
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23 | |||||
Consolidated Statements of Earnings
for the fiscal years ended October 31, 2003, 2002, and 2001 |
24 | |||||
Consolidated Balance Sheets
as of October 31, 2003 and 2002 |
25 | |||||
Consolidated Statements of Cash Flows
for the fiscal years ended October 31, 2003, 2002, and 2001 |
26 | |||||
Consolidated Statements of Stockholders
Equity
for the fiscal years ended October 31, 2003, 2002, and 2001 |
27 | |||||
Notes to Consolidated Financial Statements
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28-40 | |||||
ITEM 9.
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Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
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40 | ||||
ITEM 9A.
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Controls and Procedures
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41 | ||||
PART III
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||||||
ITEM 10.
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Directors and Executive Officers of the Registrant
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41 | ||||
ITEM 11.
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Executive Compensation
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41 | ||||
ITEM 12.
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Security Ownership of Certain Beneficial Owners
and Management
and Related Stockholder Matters |
41 | ||||
ITEM 13.
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Certain Relationships and Related Transactions
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41 | ||||
ITEM 14.
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Principal Accountant Fees and Services
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41 | ||||
PART IV
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||||||
ITEM 15.
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Exhibits, Financial Statement Schedules, and
Reports on Form 8-K
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42-44 | ||||
Signatures
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45 |
2
Introduction
Business Strategy
Products by Market
Professional We design professional turf products and market them worldwide through a network of distributors and dealers as well as directly to governmental customers. Products are sold by distributors and dealers to professional users engaged in maintaining and creating landscapes such as golf courses, sports fields, municipal properties, and residential and commercial landscapes. Professional turf maintenance equipment marketed under the Toro brand name is our oldest product line, which began in 1921 with tractor-towed mowers for golf courses. Today, we have expanded product lines to include products designed for large turf areas such as golf courses, schools, parks, cemeteries, sports fields, industrial sites, apartments, and townhouse complexes.
Landscape Contractor Market. Products for the landscape contractor market include zero-turning radius riding mowers, 21-inch heavy-duty walk behind mowers, mid-size walk behind mowers, and compact utility loaders. These products are sold through distributors and dealers, and are also available through rental centers to individuals and companies who maintain and create residential and commercial landscapes on behalf of property owners. We market products to landscape contractors under the Toro and Exmark brands. In fiscal 2003, we introduced new lines of Toro and Exmark mowers, including the Toro 500 Series zero-turning radius riding mowers and the Exmark Lazer® Z CT series of riding mowers.
3
Grounds Maintenance Market. Products for the grounds maintenance market include riding rotary units with cutting decks ranging from 52 inches to 16 feet, aerators, attachments, and debris management products, which include versatile debris vacuums, blowers and sweepers. Other products include multipurpose vehicles, such as the Workman®, which can be used for turf maintenance, towing, and industrial hauling. These products are sold through distributors, who then sell to owners and/or managers of sports fields, municipal and institutional properties, cemeteries, and facilities such as airports and corporate headquarters.
Residential/ Commercial Irrigation Market. Turf irrigation products marketed under the Toro and Irritrol Systems brand names include sprinkler heads, brass and plastic valves, and electric and hydraulic control devices designed to be used in residential and commercial turf irrigation systems. These products are professionally installed in new systems and can also be used to replace or retrofit existing systems. Most of the product line is designed for underground irrigation systems. Electric and hydraulic controllers activate valves and sprinkler heads in a typical irrigation system. In fiscal 2003, we acquired R & D Engineering, a provider of patented wireless rain and freeze switches for the residential/commercial irrigation market.
Golf Course Market. Products for the golf course market include large reel and rotary riding products for fairway, rough and trim cutting; riding and walking mowers for putting greens and specialty areas; turf sprayer equipment, utility vehicles, turf aerators, and bunker maintenance equipment. We also manufacture and market underground irrigation systems including sprinkler heads and controllers that activate electric, battery-operated, or hydraulic valves. Our professional irrigation systems are designed to use computerized management systems and a variety of technologies to help customers manage water use.
Agricultural Irrigation Market. Products for the agricultural irrigation market include irrigation emission devices that regulate the flow of drip irrigation, including Blue Stripe polyethylene tubing, Aqua-TraXX irrigation tape, and Drip In® drip line, all used in low water volume agricultural applications. These products are sold through dealers who then sell to growers for use primarily in vegetable fields, fruit and nut orchards, and vineyards.
Residential We market our residential products to homeowners through a variety of distribution channels, including dealers, hardware retailers, home centers, mass retailers, and over the Internet. These products are sold mainly in North America, Europe, Asia, and Australia, with the exception of snow removal products, which are sold primarily in North America and Europe.
Walk Power Mower Products. We have manufactured walk power mowers for residential use since 1939. We manufacture and market numerous models under our brand names Toro and Lawn-Boy. Models differ as to cutting width, type of starter mechanism, mulching and bagging attachments, cast aluminum or steel decks, controls, and power sources, and are either self-propelled or push mowers. Some Toro brand lawn mowers are backed by our Guaranteed To Start program.
Riding Products. We manufacture and market riding products under the Toro brand name. Riding mowers and tractors range from a 12 horsepower lawn tractor model with a 32-inch deck to a 23 horsepower diesel engine garden tractor model with a 60-inch deck. Many models are available with a variety of decks and accessories. Recycler® cutting decks are available on some models. Models can be equipped with manual or hydrostatic transmissions. In recent years, we introduced a new line of riding products, the TimeCutter® zero-turning radius riding mowers. In fiscal 2003, we introduced a smaller, lighter-weight version of the TimeCutter ZX. We also manufacture riding mower products plus attachments for a third party under a private label agreement.
Home Solutions Products. We design and market electrical products under the Toro brand name. These products include electric and cordless flexible line grass and cordless hedge trimmers, electric blowers, and electric blower vacuums. In fiscal 2003, we introduced a new line of both corded and cordless electric trimmers.
Retail Irrigation Products. We design and market retail irrigation products under the Toro and Lawn Genie brand names. In Australia, we also design and market retail irrigation products under the Pope brand name. These products are designed for homeowner installation and include sprinkler heads, plastic valves, and electronic and mechanical timers. We also design and market landscape drip systems primarily for residential landscapes and gardens.
Snow Removal Products. We manufacture and market a range of electric and gas single-stage and gas two-stage snowthrower models under the Toro and Lawn-Boy brand names. Single-stage snowthrowers, developed and first introduced in 1965, are walk behind units with lightweight two-cycle gasoline engines, most of which we manufacture. Most gas single-stage and electric motor snowthrower models include Power Curve® snowthrower technology for general residential use. Two-stage snowthrowers are designed for relatively large areas of deep, heavy snowfalls and use two- and four-cycle engines ranging from seven to 13 horsepower. We also manufacture and market a hybrid model of single- and two-stage snowthrower technology that is self-propelling, providing the operational ease of a single-stage snowthrower with the power of a two-stage unit. In fiscal 2003, we introduced a new line of two-stage snowthrower models featuring the Power Max auger system and the Quick Stick chute control.
Financial Information About Foreign and Domestic Operations
4
Manufacturing and Production
Engineering and Research
Sources and Availability of Raw Materials
Service and Warranty
5
Product Liability
Patents
Seasonality
Fiscal 2003 | Fiscal 2002 | |||||||||||||||
Net | Operating | Net | Operating | |||||||||||||
Quarter | Sales | Earnings | Sales | Earnings | ||||||||||||
First
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20 | % | 9 | % | 20 | % | (9 | )% | ||||||||
Second
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33 | 51 | 34 | 64 | ||||||||||||
Third
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26 | 33 | 27 | 37 | ||||||||||||
Fourth
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21 | 7 | 19 | 8 | ||||||||||||
Effects of Weather
Distribution and Marketing
6
Customers
Backlog of Orders
Competition
Environmental Matters and Other Governmental Regulation
7
Customer Financing
End-User Financing During fiscal 2002, we 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 agreement is a sales and marketing tool to give end-user buyers of our products alternative financing options when purchasing our products.
Distributor Financing We enter into long-term loan and equity investment agreements with some distributors. These transactions are used for expansion of the distributors businesses, acquisitions, refinancing working capital agreements, or ownership changes.
Employees
Available Information
Forward-Looking Statements
8
| Changes in global and domestic economies, including but not limited to slow growth rate, slow down in home sales, rise in interest rates, inflation, unemployment, and weaker consumer confidence, which could have a negative impact on our financial results. |
| Continued threat of terrorist acts and war, which may result in heightened security and higher costs for import and export shipments of components or finished goods, and contraction of the U.S. and worldwide economies. |
| Our ability to achieve goals of the 6 + 8: Teamwork to the Top initiative, which is intended to increase our after-tax return on sales to 6 percent or better and grow revenues at an average rate of 8 percent or better by the end of fiscal 2006. |
| Increased competition, including competitive pricing pressures, new product introductions, and financing programs offered by both domestic and foreign companies. |
| Weather conditions that reduce or increase demand for our products. |
| Our ability to acquire, develop, and integrate new businesses and manage alliances successfully, both of which are important to our revenue growth. |
| Our ability to achieve projected sales and earnings growth. |
| Market acceptance of new products as well as sales generated from these new products relative to expectations, based on existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs, and research and development. |
| Elimination or reduction of shelf space for our products at retailers. |
| Unforeseen inventory adjustments or changes in purchasing patterns by our customers, which could reduce sales and necessitate lowering manufacturing volumes, or increase inventory above acceptable levels. |
| Changes in our relationship with and terms from third party financing sources utilized by our customers. |
| Unforeseen product quality problems in the development and production of new and existing products, which could result in loss of market share, reduced sales, and higher warranty expense. |
| Degree of success in restructuring and plant consolidation, including our ability to cost-effectively expand existing, move production between, and close manufacturing facilities. |
| Continued slow growth rate in new golf course construction or existing golf course renovations. |
| 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. |
| Increased dependence on The Home Depot, Inc. as a customer for the residential segment. |
| Reduced government spending for grounds maintenance equipment due to reduced tax revenue and tighter government budgets. |
| Financial viability of some distributors and dealers, changes in distributor ownership, our success in partnering with new dealers, and our customers ability to pay amounts owed to us. |
| Changes in laws and regulations, including changes in accounting standards; taxation changes, including tax rate changes, new tax laws, revised tax law interpretations, or the repeal of the foreign export benefit; changes in tariffs on commodities such as steel; and environmental laws. |
| Fluctuations in the cost and availability of raw materials and the ability to maintain favorable supplier arrangements and relationships. |
| The effects of litigation, including threatened or pending litigation, on matters relating to patent infringement, employment, and commercial disputes. |
| Adverse changes in currency exchange rates or raw material commodity prices, and the costs we incur in providing price support to international customers and suppliers. |
We wish to caution readers not to place undue reliance on any forward-looking statement which speaks only as of the date made and to recognize that forward-looking 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 that we may consider immaterial or do not anticipate at this time. The foregoing risks and uncertainties are not exclusive and further information concerning the company and our businesses, including factors that potentially could materially affect our financial results or condition, may emerge from time to time. We assume no obligation to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our quarterly reports on Form 10-Q and current reports on Form 8-K we file with or furnish to the Securities and Exchange Commission.
9
ITEM 2. | PROPERTIES |
We utilize manufacturing, distribution, warehouse, and office facilities, which as of October 31, 2003 totaled approximately 5.3 million square feet of space. We also utilize 20.34 acres of land in California as a testing facility and 16.3 acres of land in Nebraska as a parking and testing facility. Plant utilization varies during the year depending on the production cycle. We consider each of our current facilities in use to be in good operating condition and adequate for its present use. Management believes we have sufficient manufacturing capacity for fiscal 2004. The following schedule outlines our significant facilities by location, ownership, and function as of October 31, 2003:
Location | Ownership | Products Manufactured/Use | ||
Bloomington, MN
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Owned/ Leased | Corporate headquarters, warehouse, and test facility | ||
El Paso, TX
|
Owned/ Leased | Professional and residential products and distribution center | ||
Juarez, Mexico
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Leased | Professional and residential products | ||
Plymouth, WI
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Owned | Professional and residential parts distribution center | ||
Tomah, WI
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Owned/ Leased | Professional and residential products and warehouse | ||
Windom, MN
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Owned/ Leased | Residential and professional components and products and warehouse | ||
Baraboo, WI
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Leased | Professional and residential finished goods distribution center | ||
Lakeville, MN
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Leased | Professional and residential finished goods distribution center | ||
Beatrice, NE
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Owned | Professional products, office | ||
Riverside, CA
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Owned/ Leased | Office and test facility | ||
Lincoln, NE
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Leased | Professional products warehouse | ||
Shakopee, MN
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Owned | Components for professional and residential products | ||
Beverley, Australia
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Owned | Professional products, office and finished goods distribution center | ||
El Cajon, CA
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Owned | Professional and residential products and warehouse, office | ||
Mound, MN
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Leased | Warehouse and residential service center | ||
Oxford, MS*
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Owned/ Leased | Components for professional and residential products | ||
Brooklyn Center, MN
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Leased | Distribution facility | ||
Capena, Italy
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Leased | Distribution facility | ||
Atlanta, GA
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Leased | Distribution facility | ||
Oevel, Belgium
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Owned | Distribution facility | ||
Hazelwood, MO
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Leased | Distribution facility | ||
Madera, CA*
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Owned | Professional and residential products and warehouse | ||
Goodyear, AZ
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Leased | Distribution facility | ||
Braeside, Australia
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Leased | Distribution facility | ||
Itasca, IL
|
Leased | Distribution facility | ||
Fiano Romano, Italy
|
Owned | Professional products and warehouse, office | ||
* | Toro-owned facilities that are available for sale or subleasing. |
We are a party to litigation in the ordinary course of business. Litigation occasionally involves claims for punitive as well as compensatory damages arising out of use of our products. We are also subject to administrative proceedings with respect to claims involving the discharge of hazardous substances into the environment. Some of these claims assert damages and liability for remedial investigations and clean up costs. Management believes that amounts that may be awarded or assessed in connection with these matters will not have a material effect on our financial position. Further, we maintain insurance against some product liability losses.
ITEM 4. | SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS |
No matters were submitted to a vote of security holders during the fourth quarter of fiscal 2003.
10
Name, Age, and Position with the Company | Business Experience During the Last Five or More Years | |
Kendrick B. Melrose 63, Chairman and Chief Executive Officer |
Chairman of the Board since December 1987 and Chief Executive Officer since December 1983. | |
William E. Brown, Jr. 42, Vice President and General Manager, Commercial Business |
Vice President and General Manager, Commercial Business since February 2003. From September 2000 to January 2003, he served as General Manager, Landscape Contractor Business. From September 1998 to August 2000, he served as Managing Director, Landscape Contractor Business. | |
Philip A. Burkart 42, Vice President and General Manager, Irrigation Business |
Vice President and General Manager, Irrigation Business since February 2003. From November 2000 to January 2003, he served as Vice President and General Manager, International Business. From October 1999 to October 2000, he served as Managing Director, International Business. From September 1997 to October 1999, he was Director of Marketing, International Business. | |
Michael D. Drazan 46, Vice President, Corporate Information Services |
Vice President, Corporate Information Services since March 2000. From October 1995 to March 2000, he served as Manager, Food Sector Information Technology for infrastructure and applications at Cargill, Incorporated, an international marketer, processor and distributor of agricultural, food, financial and industrial products and services. | |
Timothy A. Ford 42, Group Vice President |
Group Vice President, Commercial and Irrigation Businesses, Corporate Accounts, and Distributor Businesses since November 2002. From February 2002 to October 2002, he served as Vice President and General Manager, Commercial Business, Corporate Accounts and Distributor Business Development. From August 2001 to January 2002, he served as Vice President and General Manager, Commercial Business. From January 1998 to July 2001, he held various executive positions at Honeywell International, a diversified technology and manufacturing company, in the Home and Building Control division, that included responsibilities for marketing, operations, and merger integration planning. | |
Dennis P. Himan 59, Vice President and General Manager, International Business |
Vice President and General Manager, International Business since February 2003. From January 2002 to January 2003, he served as Vice President and General Manager, Exmark Landscape Contractor Business. From August 1998 to December 2001, he served as Vice President and General Manager, Landscape Contractor Business. | |
Michael J. Hoffman 48, Group Vice President |
Group Vice President, Consumer, Exmark, Landscape Contractor and International Businesses since November 2002. From May 2001 to October 2002, he served as Group Vice President, Consumer and Landscape Contractor Businesses. From May 2000 to May 2001, he served as Vice President and General Manager, Consumer Business. From November 1997 to April 2000, he served as Vice President and General Manager, Commercial Business. | |
Randy B. James 60, Vice President and Controller |
Vice President and Controller since December 1988. | |
J. Lawrence McIntyre 61, Vice President, Secretary and General Counsel |
Vice President, Secretary and General Counsel since July 1993. | |
Sandra J. Meurlot 55, Vice President, Operations |
Vice President, Operations since November 2002. From September 2000 to February 2001, she served as Vice President/ OMC and President, Boat Group at Outboard Marine Corporation, a manufacturer and marketer of marine engines, boats, and accessories. From August 1999 to September 2000, she served as Senior Vice President, Manufacturing at Outboard Marine Corporation. | |
Karen M. Meyer 54, Vice President, Administration |
Vice President, Administration since August 1998. | |
Stephen P. Wolfe 55, Vice President Finance, Treasurer and Chief Financial Officer |
Vice President Finance, Treasurer and Chief Financial Officer since June 1997. | |
11
ITEM 5. | MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS |
Toro Common Stock is listed for trading on the New York Stock Exchange and trades under the symbol TTC. The high, low, and last sales prices for Toro Common Stock and cash dividends paid for each of the quarterly periods for fiscal 2003 and 2002 were as follows:
Fiscal year ended | |||||||||||||||||
October 31, 20031 | First | Second | Third | Fourth | |||||||||||||
Market price per share of
common stock |
|||||||||||||||||
High sales price
|
$ | 34.15 | $ | 38.25 | $ | 43.43 | $ | 50.41 | |||||||||
Low sales price
|
30.36 | 30.15 | 35.50 | 37.78 | |||||||||||||
Last sales price
|
31.51 | 38.21 | 39.35 | 49.70 | |||||||||||||
Cash dividends per share of
common stock2 |
0.06 | 0.06 | 0.06 | 0.06 | |||||||||||||
1 | Per share data and sales prices have been adjusted for all periods presented to reflect a two-for-one stock split effective April 1, 2003. |
2 | Future cash dividends will depend upon the companys financial condition, capital requirements, results of operations, and other factors deemed relevant by its board of directors. |
Fiscal year ended | |||||||||||||||||
October 31, 20021 | First | Second | Third | Fourth | |||||||||||||
Market price per share of
common stock |
|||||||||||||||||
High sales price
|
$ | 24.60 | $ | 31.38 | $ | 30.00 | $ | 32.11 | |||||||||
Low sales price
|
20.96 | 24.12 | 23.15 | 24.35 | |||||||||||||
Last sales price
|
24.46 | 29.00 | 24.75 | 31.93 | |||||||||||||
Cash dividends per share of
common stock2 |
0.06 | 0.06 | 0.06 | 0.06 | |||||||||||||
Common Stock 50,000,000 shares authorized, $1.00 par value, 24,388,999 and 24,342,474 shares outstanding as of October 31, 2003 and 2002, respectively.
Preferred Stock 1,000,000 voting shares authorized and 850,000 non-voting shares authorized, $1.00 par value, no shares outstanding.
As of January 7, 2004, Toro had approximately 5,167 stockholders of record.
(Dollars in thousands, except per share data) | ||||||||||||||||||||
Fiscal years ended October 31 | 2003 | 2002 | 2001 | 2000 | 1999 | |||||||||||||||
Net sales
|
$ | 1,496,588 | $ | 1,399,273 | $ | 1,353,083 | $ | 1,338,974 | $ | 1,279,706 | ||||||||||
Gross profit percentage
|
35.8 | % | 34.7 | % | 34.0 | % | 34.6 | % | 34.1 | % | ||||||||||
Earnings from
operations1
|
$ | 129,268 | $ | 100,576 | $ | 94,633 | $ | 97,205 | $ | 74,785 | ||||||||||
Interest expense
|
16,285 | 19,747 | 22,003 | 26,414 | 23,810 | |||||||||||||||
Earnings before accounting
change1
|
81,620 | 59,931 | 50,448 | 45,285 | 35,059 | |||||||||||||||
Percentage of net sales
|
5.5 | % | 4.3 | % | 3.7 | % | 3.4 | % | 2.7 | % | ||||||||||
Net
earnings1,2
|
$ | 81,620 | $ | 35,317 | $ | 50,448 | $ | 45,285 | $ | 35,059 | ||||||||||
Basic net earnings per
share1,2,3
|
3.26 | 1.41 | 1.99 | 1.78 | 1.36 | |||||||||||||||
Diluted net earnings per
share1,2,3
|
3.12 | 1.37 | 1.93 | 1.74 | 1.32 | |||||||||||||||
Return on average stockholders
equity1,2
|
20.3 | % | 10.0 | % | 15.3 | % | 15.2 | % | 12.9 | % | ||||||||||
Total assets
|
$ | 927,432 | $ | 846,140 | $ | 835,674 | $ | 779,390 | $ | 787,178 | ||||||||||
Long-term debt, including current
portion
|
178,921 | 194,581 | 195,078 | 194,495 | 196,237 | |||||||||||||||
Stockholders equity
|
437,202 | 365,290 | 341,393 | 317,218 | 279,663 | |||||||||||||||
Debt to capitalization ratio
|
29.3 | % | 34.9 | % | 40.2 | % | 39.4 | % | 47.5 | % | ||||||||||
Cash dividends per share of common
stock3
|
$ | .24 | $ | .24 | $ | .24 | $ | .24 | $ | .24 | ||||||||||
1 | Fiscal 2003, 2002, 2001, and 1999 earnings from operations include net restructuring and other expense (income) of $1.8 million, $8.4 million, ($0.7) million, and $1.7 million, respectively. |
2 | Fiscal 2002 net earnings and basic and diluted net earnings per share data include the cumulative effect of change in accounting principle of $24.6 million, $0.98 per basic share, and $0.95 per diluted share. |
3 | Per share data has been adjusted for all fiscal years presented to reflect a two-for-one stock split effective April 1, 2003. |
12
ITEM 7. | MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The Toro Company is in the business of designing, manufacturing, and marketing professional turf maintenance equipment, turf and agricultural irrigation systems, landscaping equipment, and residential yard products worldwide. Our emphasis is to provide well-built, dependable, and innovative products supported by an extensive service network. A significant portion of our revenues is historically attributable to new and enhanced products, and we will aggressively invest in product development and brand building as we begin our new initiative, 6 + 8: Teamwork to the Top.
Organization of Financial Information
Significant Transactions and Financial Trends
RESULTS OF OPERATIONS
Overview
Net Earnings
13
Fiscal 2003 Compared With Fiscal 2002
Gross Profit. Gross profit as a percentage of net sales increased 1.1 percentage points from 34.7 percent in fiscal 2002 to 35.8 percent in fiscal 2003. This increase was mainly the result of: (i) cost reduction efforts that included reducing raw material costs and moving production to facilities with lower operating costs; (ii) lower manufacturing costs from increased plant utilization as a result of reduced excess manufacturing capacity, mainly related to the closure of three facilities and increased demand for our products; (iii) a reduction of the gross profit elimination percentage due to a change in estimate applied to the ending Toro inventory value at our company-owned distributors; and (iv) the lower cost of the U.S. dollar to our foreign customers. Somewhat offsetting those positive factors were: (i) higher inbound freight costs as we moved some of our production to Juarez, Mexico and (ii) an impairment charge for automation equipment that will no longer be used.
Selling, General, and Administrative Expense (SG&A). SG&A expense increased 7.5 percent from last year. SG&A expense as a percentage of net sales increased slightly to 27.0 percent in fiscal 2003 compared to 26.9 percent in fiscal 2002. These increases were primarily due to the following factors: (i) higher administrative expenses, mainly from increased investments in information systems and distributor changes; (ii) increased marketing expense tied to higher sales; (iii) higher incentive compensation costs due to successful achievement of financial performance which incentive compensation is based; and (iv) higher warranty expense due to higher sales volumes and changes in estimates.
Restructuring and Other Expense (Income). Restructuring and other expense for fiscal 2003 was $1.8 million compared to $8.4 million in fiscal 2002. During fiscal 2003, we announced plans to close our two-cycle engine manufacturing facility located in Oxford, Mississippi that resulted in a pre-tax restructuring and other expense charge of $2.3 million. See Item 1, Environmental Matters and Other Governmental Regulation section for additional information. We also recorded a benefit of $0.2 million for the reversal of the remaining accrual for closing a facility in Australia, which was sold during fiscal 2003.
Interest Expense. Interest expense for fiscal 2003 declined 17.5 percent compared to fiscal 2002 due primarily to lower levels of average debt, as we continue to use earnings to pay down debt.
Other Income, Net. Other income, net for fiscal 2003 increased $2.0 million or 32.9 percent compared to fiscal 2002. This increase was due mainly to the following factors: (i) proceeds from a legal settlement and (ii) insurance recoveries. These positive factors were somewhat offset by: (i) higher levels of currency exchange rate losses; (ii) lower levels of finance charge revenue; and (iii) reduced royalty income.
Provision for Income Taxes. The effective tax rate for fiscal 2003 was 32.5 percent compared to 33.0 percent in fiscal 2002, before a one-time federal tax refund of $1.8 million in fiscal 2002. Including the one-time federal tax refund, the effective tax rate was 31.0 percent for fiscal 2002. The decrease was due mainly to additional federal tax credits received in fiscal 2003.
14
Fiscal 2002 Compared with Fiscal 2001
Gross Profit. Gross profit as a percentage of net sales was 34.7 percent in fiscal 2002 compared to 34.0 percent in fiscal 2001. This increase was mainly the result of: (i) cost reduction efforts that included moving production to lower cost facilities and (ii) lower material costs resulting from our 5 by Five program initiatives. Somewhat offsetting those positive factors were: (i) a higher proportion of sales of the new line of Toro walk power mowers; (ii) higher manufacturing costs from lower plant utilization as we curtailed production levels in response to lower professional segment sales and to implement managements efforts to reduce both customers and our inventory levels; (iii) higher floor plan expenses; and (iv) elimination of gross profit previously recorded with respect to sales of Toro products to a distributor that was experiencing financial difficulties and eventually acquired during fiscal 2003.
Selling, General, and Administrative Expense (SG&A). Adjusted to exclude goodwill amortization, SG&A expense increased 5.2 percent from the prior year. Factoring out the acquisition of a distribution company in fiscal 2001 and excluding goodwill amortization for the purpose of comparison, SG&A expense as a percentage of net sales was 26.8 percent in fiscal 2002 and 26.4 percent in fiscal 2001. This increase was due to the following factors: (i) higher bad debt expense; (ii) higher incentive compensation costs; (iii) increased legal and information service spending; and (iv) rising insurance costs.
Restructuring and Other Expense (Income). Restructuring and other expense for fiscal 2002 was $8.4 million, as previously mentioned. During fiscal 2001, we had pre-tax restructuring and other income of $0.7 million. This income was derived from the reversal of the remaining accrual for closing of the Sardis, Mississippi facility, which was sold in fiscal 2001.
Interest Expense. Interest expense for fiscal 2002 declined 10.3 percent compared to fiscal 2001 due primarily to lower levels of short-term debt as a result of using prior years earnings to pay down debt, improved asset management during the second half of fiscal 2002, and lower interest rates.
Other Income, Net. Other income, net for fiscal 2002 declined $1.5 million or 19.8 percent compared to fiscal 2001. This decrease was due to the following factors: (i) lower levels of finance charge revenue; (ii) lower currency exchange rate gains; (iii) increased litigation expense; and (iv) lower levels of insurance recoveries. Somewhat offsetting those negative factors were: (i) increased gains on the disposal of property, plant, and equipment, mainly on the sale of one of our owned facilities located in Riverside, California; (ii) lower levels of valuation charges for investments; and (iii) higher royalty income.
Provision for Income Taxes. The effective tax rate for fiscal 2002 was 33.0 percent compared to 37.0 percent in fiscal 2001, before a one-time federal tax refund of $1.8 million in fiscal 2002. Including the one-time federal tax refund, the effective tax rate was 31.0 percent for fiscal 2002. The decrease was due mainly to the adoption of SFAS No. 142 that eliminated goodwill amortization expense as of the beginning of fiscal 2002. Most of the goodwill amortization was not deductible for tax purposes. The tax rate decrease was also due to increased benefits from foreign tax strategies related to our foreign sales corporation. The one-time federal tax refund of $1.8 million related to our foreign sales corporation from prior fiscal years.
Cumulative Effect of Change in Accounting Principle. In connection with the adoption of SFAS No. 142, we performed an evaluation of goodwill as of November 1, 2001. The results of this evaluation indicated that goodwill related to the agricultural irrigation reporting unit was impaired. We therefore 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 in fiscal 2002.
Business Segments
Professional
15
Operating Earnings. Operating earnings for the professional segment were $146.8 million in fiscal 2003 compared to $111.7 million in fiscal 2002, an increase of 31.4 percent. Expressed as a percentage of net sales, professional segment operating margins increased to 15.8 percent compared to 13.0 percent in fiscal 2002. However, fiscal 2002 operating earnings were reduced by pre-tax restructuring and other expense of $8.4 million. The operating profit improvement was due mainly to higher gross margins as a result of benefits from our 5 by Five initiatives and slightly lower SG&A expense as a percentage of net sales due to leveraging the fixed SG&A portion over higher sales volumes. In addition, proceeds from a legal settlement contributed to the profit improvement. Somewhat offsetting the increase in operating earnings was an impairment charge for automation equipment discussed previously.
Residential
Operating Earnings. Operating earnings for the residential segment increased 6.8 percent in fiscal 2003 compared to fiscal 2002. Expressed as a percentage of net sales, residential segment operating margins slightly increased to 11.0 percent compared to 10.9 percent in fiscal 2002. Fiscal 2003 operating earnings were negatively affected by a restructuring and other expense charge of $2.2 million mainly related to the announced closure of our two-cycle engine manufacturing facility. On a positive note, higher gross margins contributed to fiscal 2003 operating earnings.
16
Distribution
Operating (Losses) Earnings. Operating losses for the distribution segment in fiscal 2003 were $0.5 million compared to operating earnings of $2.3 million in fiscal 2002, an unfavorable change of $2.8 million. This unfavorable change in operating earnings was due mainly to the divestiture of a previously owned distributorship.
Other
Operating loss. Operating loss for the other segment in fiscal 2003 was up 2.2 percent compared to fiscal 2002. This loss increase was due to higher incentive compensation expenses, rising insurance costs, and increased investments in information systems and distributor changes. Somewhat offsetting the operating loss increase were lower interest expense, higher litigation recovery, and a reduction of the gross profit elimination percentage due to a change in estimate applied to the ending Toro inventory value at our company-owned distributors.
17
FINANCIAL CONDITION
Working Capital
(Dollars in millions) | ||||||||
Fiscal years ended October 31 | 2003 | 2002 | ||||||
Average cash and cash equivalents
|
$ | 32.3 | $ | 14.9 | ||||
Average short-term debt
|
36.8 | 65.5 | ||||||
Average inventories, net
|
258.3 | 244.6 | ||||||
Average receivables, net
|
343.4 | 324.6 | ||||||
Average days receivables outstanding
|
84 | 85 | ||||||
Inventory turnover
|
3.72 | x | 3.74 | x | ||||
Long-Term Assets
Capital Structure
(Dollars in millions) | ||||||||
Fiscal years ended October 31 | 2003 | 2002 | ||||||
Short-term debt
|
$ | 2.1 | $ | 1.2 | ||||
Long-term debt, including current
portion
|
178.9 | 194.6 | ||||||
Stockholders equity
|
437.2 | 365.3 | ||||||
Debt to capitalization ratio
|
29.3 | % | 34.9 | % | ||||
Stock Split. On March 20, 2003, our Board of Directors declared a two-for-one split of our common stock, effected in the form of a 100 percent stock dividend issued to stockholders of record as of April 1, 2003 and paid on April 14, 2003. As a result of this action, approximately 12.5 million shares were issued. Par value of the common stock remains at $1.00 per share and accordingly, approximately $12.5 million was transferred from additional paid-in capital to common stock. All references to the number of common shares and per common share amounts have been adjusted to give retroactive effect to the stock split for all periods presented.
Liquidity and Capital Resources
Cash Flow. Our primary source of funds is cash generated from operations. In fiscal 2003, cash provided by operating activities decreased by 19.0 percent from fiscal 2002. This decline was due to higher receivable and inventory levels described previously, somewhat offset by higher cash-related earnings in fiscal 2003 compared to fiscal 2002. In addition, fiscal 2002 cash generated from operations was unusually high as a result of significantly lower levels of receivables and inventories in fiscal 2002 compared to fiscal 2001.
18
Credit Lines and Other Capital Resources. The seasonality of production and shipments causes working capital requirements to fluctuate during the year. Our U.S. seasonal working capital requirements are funded with a $175.0 million medium-term committed unsecured bank credit line with various banks, which expires in February 2005. In fiscal 2003, we also entered into a new $75.0 million secured credit line backed by a multi-year credit agreement, which is expected to reduce our interest costs. Interest expense on these credit lines is determined from a LIBOR or commercial paper rate plus a basis point spread defined in the credit agreements. In addition, our non-U.S. operations and a domestic subsidiary also maintain unsecured short-term lines of credit of approximately $10.9 million. These facilities bear interest at various rates depending on the rates in their respective countries of operation. We also have a letter of credit subfacility as part of our credit agreements. As of October 31, 2003, we had $258.8 million of unutilized availability under our credit agreements.
Share Repurchase Plan. Our Board of Directors has authorized us to repurchase up to 2,000,000 shares of Toro common stock, which was doubled from the original 1,000,000 shares authorized for repurchase as a result of the stock split effective April 1, 2003. As of October 31, 2003, 464,947 shares remained authorized for repurchase. This repurchase program provides shares for use in connection with acquisitions and equity compensation plans so that even with the issuance of shares under those plans, the number of outstanding shares remains relatively constant and the impact on net earnings per share of issuing such shares is minimal.
Off-Balance Sheet Arrangements and Contractual Obligations
Wholesale Financing. Toro Credit Company (TCC), a wholly owned financing subsidiary, provides financing for our North American Toro distributors and approximately 200 domestic dealers for select products that we manufacture. Independent North American Toro and Exmark distributors and dealers that do not finance through TCC generally finance their inventories with third party financing companies.
19
End-User Financing. During fiscal 2002, we 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 our products alternative financing options when purchasing our products. Under the terms of this agreement, we 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. Our maximum exposure for credit collection and residual value as of October 31, 2003 was $3.4 million. We have established a reserve for our estimated exposure related to this program.
Distributor Financing. We enter into long-term loan and equity investment agreements with some distributors. These transactions are used for expansion of the distributors businesses, acquisitions, refinancing working capital agreements, or to facilitate ownership changes. As of October 31, 2003, we have loaned and/or invested $4.4 million in several distribution companies. This amount is included in other current- and long-term assets on the consolidated balance sheet.
Purchase Commitments. We have purchase commitments with some suppliers for materials and supplies as part of the normal course of business. There are a limited number of supply contracts that contain penalty provisions for either early termination or failure to purchase contracted quantities. We do not expect potential payments under these provisions to materially affect our results of operations or financial condition. This conclusion is based upon reasonably likely outcomes assumed by reference to historical experience and current business plans.
Contractual Obligations. The following table summarizes our contractual obligations as of October 31, 2003:
Payments Due By Period | ||||||||||||||||||||
(Dollars in thousands) | Less Than | 1-3 | 3-5 | After 5 | ||||||||||||||||
Contractual Obligation | 1 Year | Years | Years | Years | Total | |||||||||||||||
Long-term debt
|
$ 3,830 | $ | 91 | $ | 75,000 | $ | 100,000 | $ | 178,921 | |||||||||||
Purchase obligations
|
4,228 | | | | 4,228 | |||||||||||||||
Operating leases
|
13,474 | 19,975 | 11,687 | 2,995 | 48,131 | |||||||||||||||
Currency contracts
|
24,066 | | | | 24,066 | |||||||||||||||
Total
|
$45,598 | $ | 20,066 | $ | 86,687 | $ | 102,995 | $ | 255,346 | |||||||||||
Inflation
Market Risk
Acquisitions and Divestiture
20
Critical Accounting Policies and Estimates
Warranty Reserve. Warranty coverage on our products ranges from a period of six months to seven years, and covers parts, labor, and other expenses for non-maintenance repairs, provided operator abuse, improper use or negligence did not necessitate the repair. We accrue at the time of sale by product line a warranty reserve for estimated costs in connection with future warranty claims. We also establish reserves for major rework campaigns. The amount of our warranty reserves is based on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, and other factors. We periodically assess the adequacy of our warranty reserves based on changes in these factors and record any necessary adjustments if actual claim experience indicates that adjustments are necessary. Actual claims could be higher or lower than amounts estimated, as the amount and value of warranty claims are subject to variation, including performance of new products, significant manufacturing or design defects not discovered until after the product is delivered to customers, product failure rates, higher than expected service costs for a repair, and other similar factors. We believe that analysis of historical trends and knowledge of potential manufacturing or design problems provide sufficient information to establish a reasonable estimate for warranty claims at the time of sale. An unexpected increase in warranty claims or in the costs associated with servicing those claims would result in an increase in our warranty accrual and a decrease in our net earnings.
Accounts and Notes Receivable Valuation. We value accounts and notes receivable, net of an allowance for doubtful accounts. Each quarter, we estimate our ability to collect outstanding receivables and establish an allowance for doubtful accounts. In doing so, we evaluate the age of our receivables, past collection history, current financial conditions of key customers, and economic conditions. Based on this evaluation, we establish a reserve for specific accounts and notes receivable that we believe are uncollectible, as well as an estimate of uncollectible receivables not specifically known. Portions of our accounts receivable are protected by a security interest in products held by customers, which minimizes our collection exposure. A deterioration in the financial condition of any key customer or a significant slow down in the economy could have a material negative impact on our ability to collect a portion or all of the accounts and notes receivable. We believe that analysis of historical trends and current knowledge of potential collection problems provides us sufficient information to establish a reasonable estimate for an allowance for doubtful accounts. However, since we cannot predict with certainty future changes in the financial stability of our customers, our actual future losses from uncollectible accounts may differ from our estimates. In the event we determined that a smaller or larger uncollectible accounts reserve was appropriate, we would record a credit or charge to selling, general, and administrative expense in the period in which we made such a determination.
New Accounting Pronouncements to Be Adopted
21
ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
We are 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 our net earnings and cash flows. In the normal course of business, we actively manage the exposure of foreign currency market risk by entering into various hedging instruments, authorized under company policies that place controls on these activities, with counterparties that are highly rated financial institutions. Our hedging activities involve the use of a variety of derivative financial instruments. We use derivatives only in an attempt to limit underlying exposure from currency fluctuations and to minimize earnings and cash volatility associated with foreign exchange rate changes, and not for trading purposes. Our market risk on interest rates relates primarily to short-term debt and the potential increase in fair value of long-term debt resulting from a potential decrease in interest rates. However, we do not have a cash flow or earnings exposure due to market risks on long-term debt. See further discussions on these market risks below.
Foreign Currency Exchange Rate Risk. We are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as 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. Because our products are manufactured or sourced primarily from the United States, a stronger U.S. dollar generally has a negative impact on results from operations outside the United States while a weaker dollar generally has a positive effect. Our primary exchange rate exposure is with the euro, the Japanese yen, the Australian dollar, the Canadian dollar, the British pound, and the Mexican peso against the U.S. dollar.
Value in | ||||||||||||||||
Average | AOCL | Fair Value | ||||||||||||||
Dollars in thousands | Contracted | Notional | Income | Impact | ||||||||||||
(except average contracted rate) | Rate | Amount | (Loss) | Gain(Loss) | ||||||||||||
Buy U.S. $/Sell Canadian dollar
|
1.4084 | $ | 6,585.6 | $ | (313.6 | ) | $ (78.8 | ) | ||||||||
Buy U.S. $/Sell Australian
dollar
|
0.6610 | 40,786.3 | (1,133.9 | ) | (1,189.0 | ) | ||||||||||
Buy U.S. $/Sell Euro
|
1.1261 | 73,729.0 | (1,810.6 | ) | 41.6 | |||||||||||
Buy Australian dollar/ Sell U.S.$
|
0.6569 | 1,231.6 | | 94.7 | ||||||||||||
Buy British pound/ Sell U.S.$
|
1.6418 | 574.6 | 10.5 | 3.5 | ||||||||||||
Buy Euro/ Sell U.S.$
|
1.1672 | 933.7 | | (7.5 | ) | |||||||||||
Buy Japanese yen/ Sell U.S.$
|
117.2474 | 6,652.6 | 402.9 | 78.5 | ||||||||||||
Buy Mexican peso/ Sell U.S.$
|
10.9043 | 14,673.1 | (440.4 | ) | | |||||||||||
Interest Rate Risk. Our interest rate exposure results from short-term rates, primarily LIBOR-based debt from commercial banks. We currently do not use interest rate swaps to mitigate the impact of fluctuations in interest rates. As of October 31, 2003, our financial liabilities with exposure to changes in interest rates consisted mainly of $2.1 million of short-term debt outstanding. Assuming a hypothetical increase of one percent (100 basis points) in short-term interest rates, with all other variables remaining constant including the average balance of short-term debt outstanding during fiscal 2003, interest expense would have increased $0.4 million in fiscal 2003. Included in long-term debt is $178.9 million of fixed-rate debt, which is not subject to variable interest rate fluctuations. As a result, we have no earnings or cash flow exposure due to market risks on our long-term debt obligations. As of October 31, 2003, the estimated fair value of long-term debt with fixed interest rates was $196.7 million compared to its carrying value of $178.9 million. The fair value is estimated by discounting the projected cash flows using the rate at which similar amounts of debt could currently be borrowed.
Commodities. Some raw materials used in our products are exposed to commodity price changes. We manage some of this risk by using a combination of short- and long-term agreements with some vendors. The primary commodity price exposures are with aluminum, steel, and plastic resin.
22
The Stockholders and Board of Directors
We have audited the accompanying consolidated balance sheets of The Toro Company and its subsidiaries as of October 31, 2003 and 2002, and the related consolidated statements of earnings, cash flows, and stockholders equity for each of the years in the three year period ended October 31, 2003. Our audits also included the financial statement schedule listed in Item 15(a). These consolidated financial statements and schedule are the responsibility of the companys management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.
Minneapolis, Minnesota
23
(Dollars and shares in thousands, except per share data) Fiscal years ended October 31 | 2003 | 2002 | 2001 | ||||||||||
Net sales
|
$ | 1,496,588 | $ | 1,399,273 | $ | 1,353,083 | |||||||
Cost of sales
|
961,129 | 914,010 | 892,845 | ||||||||||
Gross profit
|
535,459 | 485,263 | 460,238 | ||||||||||
Selling, general, and administrative
expense
|
404,365 | 376,278 | 366,284 | ||||||||||
Restructuring and other expense
(income)
|
1,826 | 8,409 | (679 | ) | |||||||||
Earnings from operations
|
129,268 | 100,576 | 94,633 | ||||||||||
Interest expense
|
(16,285 | ) | (19,747 | ) | (22,003 | ) | |||||||
Other income, net
|
7,935 | 5,970 | 7,447 | ||||||||||
Earnings before income taxes and cumulative
effect of change in accounting principle
|
120,918 | 86,799 | 80,077 | ||||||||||
Provision for income taxes
|
39,298 | 26,868 | 29,629 | ||||||||||
Earnings before cumulative effect of change in
accounting principle
|
81,620 | 59,931 | 50,448 | ||||||||||
Cumulative effect of change in accounting
principle,
net of income tax benefit of $509 |
| (24,614 | ) | | |||||||||
Net earnings
|
$ | 81,620 | $ | 35,317 | $ | 50,448 | |||||||
Basic net earnings per share of common stock,
before cumulative effect of change in accounting
principle
|
$ | 3.26 | $ | 2.39 | $ | 1.99 | |||||||
Cumulative effect of change in accounting
principle, net of income tax benefit
|
| (0.98 | ) | | |||||||||
Basic net earnings per share of common
stock
|
$ | 3.26 | $ | 1.41 | $ | 1.99 | |||||||
Diluted net earnings per share of common
stock, before cumulative effect of change in accounting
principle
|
$ | 3.12 | $ | 2.32 | $ | 1.93 | |||||||
Cumulative effect of change in accounting
principle, net of income tax benefit
|
| (0.95 | ) | | |||||||||
Diluted net earnings per share of common
stock
|
$ | 3.12 | $ | 1.37 | $ | 1.93 | |||||||
Weighted average number of shares of common
stock outstanding
|
|||||||||||||
Basic
|
24,998 | 25,050 | 25,400 | ||||||||||
Weighted average number of shares of common
stock outstanding
|
|||||||||||||
Dilutive
|
26,149 | 25,873 | 26,134 | ||||||||||
The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements.
24
(Dollars in thousands, except per share data) October 31 | 2003 | 2002 | |||||||||
ASSETS
|
|||||||||||
Cash and cash equivalents
|
$ | 110,287 | $ | 62,816 | |||||||
Receivables, net:
|
|||||||||||
Customers (net of $2,421 as of
October 31, 2003 and $7,209 as of October 31, 2002 for
allowance for doubtful accounts)
|
273,584 | 250,093 | |||||||||
Other
|
6,540 | 5,646 | |||||||||
Total receivables, net
|
280,124 | 255,739 | |||||||||
Inventories, net
|
228,909 | 224,367 | |||||||||
Prepaid expenses and other current
assets
|
12,484 | 10,497 | |||||||||
Deferred income taxes
|
42,111 | 38,722 | |||||||||
Total current assets
|
673,915 | 592,141 | |||||||||
Property, plant, and equipment, net
|
159,116 | 156,779 | |||||||||
Deferred income taxes
|
1,181 | 4,196 | |||||||||
Other assets
|
12,353 | 13,264 | |||||||||
Goodwill
|
78,013 | 77,855 | |||||||||
Other intangible assets, net
|
2,854 | 1,905 | |||||||||
Total assets
|
$ | 927,432 | $ | 846,140 | |||||||
LIABILITIES AND STOCKHOLDERS
EQUITY
|
|||||||||||
Current portion of long-term debt
|
$ | 3,830 | $ | 15,825 | |||||||
Short-term debt
|
2,138 | 1,156 | |||||||||
Accounts payable
|
73,976 | 86,180 | |||||||||
Accrued liabilities:
|
|||||||||||
Accrued warranties
|
59,372 | 53,590 | |||||||||
Accrued advertising and marketing
programs
|
38,107 | 34,373 | |||||||||
Accrued compensation and benefit
costs
|
83,908 | 65,011 | |||||||||
Other
|
41,805 | 37,615 | |||||||||
Total current liabilities
|
303,136 | 293,750 | |||||||||
Long-term debt, less current portion
|
175,091 | 178,756 | |||||||||
Deferred revenue and other long-term
liabilities
|
12,003 | 8,344 | |||||||||
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
50,000,000 shares, issued and outstanding
24,388,999 shares as of October 31, 2003 (net of
2,627,111 treasury shares) and 24,342,474 shares as of
October 31, 2002 (net of 2,673,636 treasury
shares)
|
24,389 | 24,342 | |||||||||
Additional paid-in capital
|
7,658 | 11,193 | |||||||||
Retained earnings
|
417,973 | 342,358 | |||||||||
Accumulated other comprehensive loss
|
(12,818 | ) | (12,603 | ) | |||||||
Total stockholders equity
|
437,202 | 365,290 | |||||||||
Total liabilities and stockholders
equity
|
$ | 927,432 | $ | 846,140 | |||||||
The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements.
25
(Dollars in thousands) Fiscal years ended October 31 | 2003 | 2002 | 2001 | ||||||||||||
CASH FLOWS FROM OPERATING
ACTIVITIES:
|
|||||||||||||||
Net earnings
|
$ | 81,620 | $ | 35,317 | $ | 50,448 | |||||||||
Adjustments to reconcile net earnings to net
cash provided by operating activities:
|
|||||||||||||||
Cumulative effect of change in accounting
principle
|
| 24,614 | | ||||||||||||
Non-cash asset impairment write-off
|
6,814 | 4,099 | | ||||||||||||
Provision for depreciation and
amortization
|
33,173 | 30,932 | 37,171 | ||||||||||||
Write-down of investments
|
| | 1,926 | ||||||||||||
Loss (gain) on disposal of property,
plant, and equipment
|
273 | (856 | ) | (56 | ) | ||||||||||
(Increase) decrease in deferred income
taxes
|
(374 | ) | 730 | 6,706 | |||||||||||
Tax benefits related to employee stock option
transactions
|
2,642 | 1,508 | 4,841 | ||||||||||||
Changes in operating assets and
liabilities:
|
|||||||||||||||
Receivables, net
|
(23,789 | ) | 15,938 | (15,538 | ) | ||||||||||
Inventories, net
|
(2,471 | ) | 10,294 | (25,884 | ) | ||||||||||
Prepaid expenses and other assets
|
(2,152 | ) | 32 | 1,700 | |||||||||||
Accounts payable, accrued expenses, and
deferred revenue
|
21,665 | 22,364 | 9,382 | ||||||||||||
Net cash provided by operating
activities
|
117,401 | 144,972 | 70,696 | ||||||||||||
CASH FLOWS FROM INVESTING
ACTIVITIES:
|
|||||||||||||||
Purchases of property, plant, and
equipment
|
(44,663 | ) | (46,031 | ) | (35,662 | ) | |||||||||
Proceeds from disposal of property, plant, and
equipment
|
2,009 | 2,964 | 2,298 | ||||||||||||
Decrease in investments in
affiliates
|
1,000 | | 154 | ||||||||||||
Decrease (increase) in other assets
|
115 | (2,362 | ) | (3,001 | ) | ||||||||||
Proceeds from sale of business
|
1,016 | | | ||||||||||||
Acquisitions, net of cash acquired
|
(1,244 | ) | | (8,549 | ) | ||||||||||
Net cash used in investing
activities
|
(41,767 | ) | (45,429 | ) | (44,760 | ) | |||||||||
CASH FLOWS FROM FINANCING
ACTIVITIES:
|
|||||||||||||||
Increase (repayments) of short-term
debt
|
982 | (33,257 | ) | 19,219 | |||||||||||
(Repayments) issuance of long-term
debt
|
(15,846 | ) | (497 | ) | 112 | ||||||||||
Increase (decrease) in other long-term
liabilities
|
167 | 118 | (178 | ) | |||||||||||
Proceeds from exercise of stock
options
|
8,923 | 12,941 | 17,285 | ||||||||||||
Purchases of common stock
|
(18,726 | ) | (24,155 | ) | (44,153 | ) | |||||||||
Dividends on common stock
|
(6,005 | ) | (6,026 | ) | (6,108 | ) | |||||||||
Net cash used in financing
activities
|
(30,505 | ) | (50,876 | ) | (13,823 | ) | |||||||||
Foreign currency translation
adjustment
|
2,342 | 1,273 | (215 | ) | |||||||||||
Net increase in cash and cash
equivalents
|
47,471 | 49,940 | 11,898 | ||||||||||||
Cash and cash equivalents as of the beginning
of the fiscal year
|
62,816 | 12,876 | 978 | ||||||||||||
Cash and cash equivalents as of the end of the
fiscal year
|
$ | 110,287 | $ | 62,816 | $ | 12,876 | |||||||||
Supplemental disclosures of cash flow
information:
|
|||||||||||||||
Cash paid during the fiscal year
for:
|
|||||||||||||||
Interest
|
$ | 17,176 | $ | 19,647 | $ | 22,545 | |||||||||
Income taxes
|
31,681 | 22,252 | 18,006 | ||||||||||||
Stock issued in connection with stock
compensation plans
|
3,672 | 3,927 | 3,232 | ||||||||||||
Debt issued in connection with an
acquisition
|
186 | | 450 | ||||||||||||
The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements.
26
Accumulated | ||||||||||||||||||||||||
Additional | Other | Total | Comprehensive | |||||||||||||||||||||
Common | Paid-In | Retained | Comprehensive | Stockholders | Income | |||||||||||||||||||
(Dollars in thousands) | Stock | Capital | Earnings | Loss | Equity | (Loss) | ||||||||||||||||||
Balance as of October 31, 2000
|
$ | 25,138 | $ | 34,971 | $ | 268,727 | $ | (11,618 | ) | $ | 317,218 | |||||||||||||
Cash dividends paid on common stock
|
| | (6,108 | ) | | (6,108 | ) | |||||||||||||||||
Issuance of 1,433,748 shares under stock
compensation plans
|
1,434 | 16,478 | | | 17,912 | |||||||||||||||||||
Contribution of stock to a deferred compensation
trust
|
| 2,605 | | | 2,605 | |||||||||||||||||||
Purchase of 2,040,820 shares of common stock
|
(2,041 | ) | (42,112 | ) | | | (44,153 | ) | ||||||||||||||||
Tax benefits related to employee stock option
transactions
|
| 4,841 | | | 4,841 | |||||||||||||||||||
Minimum pension liability adjustment, net of tax
|
| | | (1,288 | ) | (1,288 | ) | (1,288 | ) | |||||||||||||||
Foreign currency translation adjustments
|
| | | (215 | ) | (215 | ) | (215 | ) | |||||||||||||||
Unrealized gain on derivative instruments, net of
tax
|
| | | 133 | 133 | 133 | ||||||||||||||||||
Net earnings
|
| | 50,448 | | 50,448 | 50,448 | ||||||||||||||||||
Total comprehensive income
|
$ | 49,078 | ||||||||||||||||||||||
Balance as of October 31, 2001
|
$ | 24,531 | $ | 16,783 | $ | 313,067 | $ | (12,988 | ) | $ | 341,393 | |||||||||||||
Cash dividends paid on common stock
|
| | (6,026 | ) | | (6,026 | ) | |||||||||||||||||
Issuance of 711,024 shares under stock
compensation plans
|
711 | 13,412 | | | 14,123 | |||||||||||||||||||
Contribution of stock to a deferred compensation
trust
|
| 2,745 | | | 2,745 | |||||||||||||||||||
Purchase of 900,640 shares of common stock
|
(900 | ) | (23,255 | ) | | | (24,155 | ) | ||||||||||||||||
Tax benefits related to employee stock option
transactions
|
| 1,508 | | | 1,508 | |||||||||||||||||||
Minimum pension liability adjustment, net of tax
|
| | | (397 | ) | (397 | ) | (397 | ) | |||||||||||||||
Foreign currency translation adjustments
|
| | | 1,273 | 1,273 | 1,273 | ||||||||||||||||||
Unrealized loss on derivative instruments, net of
tax
|
| | | (491 | ) | (491 | ) | (491 | ) | |||||||||||||||
Net earnings
|
| | 35,317 | | 35,317 | 35,317 | ||||||||||||||||||
Total comprehensive income
|
$ | 35,702 | ||||||||||||||||||||||
Balance as of October 31, 2002
|
$ | 24,342 | $ | 11,193 | $ | 342,358 | $ | (12,603 | ) | $ | 365,290 | |||||||||||||
Cash dividends paid on common stock
|
| | (6,005 | ) | | (6,005 | ) | |||||||||||||||||
Issuance of 480,220 shares under stock
compensation plans
|
480 | 9,433 | | | 9,913 | |||||||||||||||||||
Contribution of stock to a deferred
compensation trust
|
| 2,683 | | | 2,683 | |||||||||||||||||||
Purchase of 433,345 shares of common
stock
|
(433 | ) | (18,293 | ) | | | (18,726 | ) | ||||||||||||||||
Tax benefits related to employee stock option
transactions
|
| 2,642 | | | 2,642 | |||||||||||||||||||
Minimum pension liability adjustment, net of
tax
|
| | | (730 | ) | (730 | ) | (730 | ) | |||||||||||||||
Foreign currency translation
adjustments
|
| | | 2,342 | 2,342 | 2,342 | ||||||||||||||||||
Unrealized loss on derivative instruments, net
of tax
|
| | | (1,827 | ) | (1,827 | ) | (1,827 | ) | |||||||||||||||
Net earnings
|
| | 81,620 | | 81,620 | 81,620 | ||||||||||||||||||
Total comprehensive income
|
$ | 81,405 | ||||||||||||||||||||||
Balance as of October 31, 2003
|
$ | 24,389 | $ | 7,658 | $ | 417,973 | $ | (12,818 | ) | $ | 437,202 | |||||||||||||
The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements.
27
1 |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA |
Nature of Operations
Basis of Consolidation
Accounting Estimates
Reclassifications
Cash and Cash Equivalents
Receivables
Inventories
(Dollars in thousands) | 2003 | 2002 | ||||||
Raw materials and work in progress
|
$ | 67,753 | $ | 68,296 | ||||
Finished goods and service parts
|
208,176 | 198,860 | ||||||
275,929 | 267,156 | |||||||
Less: LIFO
|
32,151 | 26,903 | ||||||
Other
reserves
|
14,869 | 15,886 | ||||||
Total
|
$ | 228,909 | $ | 224,367 | ||||
Property and Depreciation
(Dollars in thousands) | 2003 | 2002 | ||||||
Land and land improvements
|
$ | 14,603 | $ | 13,723 | ||||
Buildings and leasehold improvements
|
95,501 | 93,218 | ||||||
Equipment
|
359,820 | 333,773 | ||||||
Subtotal
|
469,924 | 440,714 | ||||||
Less accumulated depreciation
|
310,808 | 283,935 | ||||||
Total property, plant, and equipment,
net
|
$ | 159,116 | $ | 156,779 | ||||
Goodwill and Other Intangible Assets
28
Impairment of Long-Lived and Intangible Assets
Accrued Warranties
(Dollars in thousands) | ||||||||
Fiscal years ended October 31 | 2003 | 2002 | ||||||
Beginning Balance
|
$ | 53,590 | $ | 57,882 | ||||
Warranty provisions
|
40,142 | 38,751 | ||||||
Warranty claims
|
(40,285 | ) | (47,334 | ) | ||||
Change in estimates
|
5,925 | 4,291 | ||||||
Ending Balance
|
$ | 59,372 | $ | 53,590 | ||||
Insurance
Derivatives
Foreign Currency Translation and Transactions
Income Taxes
Revenue Recognition
29
Cost of Financing Distributor/ Dealer Inventory
Advertising
Stock-Based Compensation
(Dollars in thousands) | |||||||||||||
Fiscal years ended October 31 | 2003 | 2002 | 2001 | ||||||||||
Net earnings, as reported
|
$ | 81,620 | $ | 35,317 | $ | 50,448 | |||||||
Add: Stock-based employee compensation costs,
net of tax, included in net earnings
|
5,882 | 3,373 | 2,402 | ||||||||||
Deduct: Stock-based employee compensation
costs, net of tax, if fair value method had been
applied
|
(6,432 | ) | (6,152 | ) | (4,959 | ) | |||||||
Pro forma net earnings
|
$ | 81,070 | $ | 32,538 | $ | 47,891 | |||||||
Net earnings per share data:
|
|||||||||||||
As reported Basic
|
$ | 3.26 | $ | 1.41 | $ | 1.99 | |||||||
Pro forma Basic
|
3.24 | 1.28 | 1.91 | ||||||||||
As reported Diluted
|
3.12 | 1.37 | 1.93 | ||||||||||
Pro forma Diluted
|
3.12 | 1.27 | 1.85 | ||||||||||
Fiscal years ended October 31 | 2003 | 2002 | 2001 | |||||||||
Risk-free interest rate
|
3.00 | % | 3.92 | % | 5.33 | % | ||||||
Expected life of option in years
|
5.76 | 5.78 | 4.89 | |||||||||
Expected dividend yield
|
0.52 | % | 0.76 | % | 1.02 | % | ||||||
Expected stock volatility
|
28.13 | % | 28.86 | % | 31.39 | % | ||||||
Net Earnings Per Share Calculation
30
BASIC
(Shares in thousands) | ||||||||||||
Fiscal years ended October 31 | 2003 | 2002 | 2001 | |||||||||
Weighted average number of shares of common
stock
|
24,988 | 25,035 | 25,382 | |||||||||
Assumed issuance of contingent
shares
|
10 | 15 | 18 | |||||||||
Weighted average number of shares of common
stock and assumed issuance of contingent shares
|
24,998 | 25,050 | 25,400 | |||||||||
DILUTIVE
(Shares in thousands) | ||||||||||||
Fiscal years ended October 31 | 2003 | 2002 | 2001 | |||||||||
Weighted average number of shares of common
stock and assumed issuance of contingent shares
|
24,998 | 25,050 | 25,400 | |||||||||
Assumed conversion of stock options,
contingently issuable shares, and assumed issuance of restricted
shares
|
1,151 | 823 | 734 | |||||||||
Weighted average number of shares of common
stock, assumed issuance of contingent and restricted shares,
contingently issuable shares, and assumed conversion of options
outstanding
|
26,149 | 25,873 | 26,134 | |||||||||
New Accounting Pronouncements
31
(Dollars in thousands, | ||||||||||||
except per share data) | ||||||||||||
Fiscal years ended October 31 | 2003 | 2002 | 2001 | |||||||||
Net earnings:
|
||||||||||||
As reported
|
$ | 81,620 | $ | 35,317 | $ | 50,448 | ||||||
Goodwill amortization,
net of tax
|
| | 8,073 | |||||||||
Adjusted net
earnings
|
$ | 81,620 | $ | 35,317 | $ | 58,521 | ||||||
Basic earnings per share:
|
||||||||||||
As reported
|
$ | 3.26 | $ | 1.41 | $ | 1.99 | ||||||
Goodwill amortization,
net of tax
|
| | 0.32 | |||||||||
Adjusted basic
earnings per share
|
$ | 3.26 | $ | 1.41 | $ | 2.31 | ||||||
Diluted earnings per share:
|
||||||||||||
As reported
|
$ | 3.12 | $ | 1.37 | $ | 1.93 | ||||||
Goodwill amortization,
net of tax
|
| | 0.31 | |||||||||
Adjusted diluted
earnings per share
|
$ | 3.12 | $ | 1.37 | $ | 2.24 | ||||||
2 |
BUSINESS ACQUISITIONS, DIVESTITURE, AND INVESTMENT IN AFFILIATE |
In fiscal 2003, Toro completed the purchase of R & D Engineering, a company in the business of patented wireless rain and freeze switches for residential irrigation systems. The company also acquired a southeastern-based U.S. distributing company. These acquisitions were immaterial based on the companys consolidated financial position and results of operations. Effective December 31, 2002, the company sold a previously owned distributorship.
3 |
RESTRUCTURING AND OTHER EXPENSE |
In fiscal 2003, the company announced plans to close its two-cycle engine manufacturing facility located in Oxford, Mississippi, which will cease operations in fiscal 2004. Approximately 115 job positions and related staff reductions will be lost in connection with closing this facility. In fiscal 2002, the company announced plans to close its Riverside, California manufacturing operations and its Evansville, Indiana and Madera, California manufacturing facilities. Approximately 550 job positions and related office staff reductions were expected to be lost in connection with closing these operations. As of October 31, 2003, of the 550 job position reductions, 543 had 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 Toros 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. In addition, asset impairment charges also include the write-down of facilities and equipment related to the closure of the aforementioned manufacturing operations.
Asset | Severance | |||||||||||||||
(Dollars in thousands) | Impairment | & Benefits | Other | Total | ||||||||||||
Balance as of October 31, 2001
|
$ | | $ | | $ | 45 | $ | 45 | ||||||||
Initial charge
|
4,698 | 3,761 | 2,726 | 11,185 | ||||||||||||
Changes in estimates
|
(599 | ) | (362 | ) | (1,815 | ) | (2,776 | ) | ||||||||
Utilization
|
(4,099 | ) | (1,534 | ) | (84 | ) | (5,717 | ) | ||||||||
Balance as of October 31, 2002
|
$ | | $ | 1,865 | $ | 872 | $ | 2,737 | ||||||||
Initial charge
|
901 | 763 | 5 | 1,669 | ||||||||||||
Changes in estimates
|
374 | 92 | (309 | ) | 157 | |||||||||||
Utilization
|
(1,275 | ) | (1,890 | ) | (73 | ) | (3,238 | ) | ||||||||
Balance as of October 31, 2003
|
$ | | $ | 830 | $ | 495 | $ | 1,325 | ||||||||
4 |
OTHER INCOME, NET |
Other income (expense) is as follows:
(Dollars in thousands) | ||||||||||||
Fiscal years ended October 31 | 2003 | 2002 | 2001 | |||||||||
Interest income
|
$ | 613 | $ | 1,345 | $ | 818 | ||||||
Gross finance charge revenue
|
2,665 | 3,664 | 5,144 | |||||||||
Royalty and licensing income
|
1,243 | 1,802 | 1,452 | |||||||||
Foreign currency (losses) gains
|
(1,070 | ) | 101 | 887 | ||||||||
Insurance recovery, net
|
1,302 | | 1,886 | |||||||||
Valuation recovery (charges)
for investments |
| 395 | (1,926 | ) | ||||||||
Litigation recovery (settlement)
|
3,171 | (1,780 | ) | (1,073 | ) | |||||||
Miscellaneous
|
11 | 443 | 259 | |||||||||
Total
|
$ | 7,935 | $ | 5,970 | $ | 7,447 | ||||||
5 |
GOODWILL AND OTHER INTANGIBLE ASSETS |
Goodwill The changes in the net carrying amount of goodwill for fiscal 2003 were as follows:
Professional | Residential | |||||||||||
(Dollars in thousands) | Segment | Segment | Total | |||||||||
Balance as of October 31, 2002
|
$68,942 | $8,913 | $ | 77,855 | ||||||||
Translation adjustment
|
43 | 115 | 158 | |||||||||
Balance as of October 31, 2003
|
$68,985 | $9,028 | $ | 78,013 | ||||||||
Other Intangible Assets Total other intangible assets, net as of October 31, 2003 and 2002 were $2,854,000 and $1,905,000, respectively. During fiscal 2003, the company recorded some amortizable intangible assets related to the acquisition of R & D Engineering previously mentioned.
32
(Dollars in thousands) | Gross Carrying | Accumulated | ||||||
October 31, 2003 | Amount | Amortization | ||||||
Patents
|
$ | 6,553 | $ | (4,931 | ) | |||
Non-compete agreements
|
1,000 | (593 | ) | |||||
Other
|
1,700 | (875 | ) | |||||
Total
|
$ | 9,253 | $ | (6,399 | ) | |||
(Dollars in thousands) | Gross Carrying | Accumulated | ||||||
October 31, 2002 | Amount | Amortization | ||||||
Patents
|
$ | 6,104 | $ | (4,609 | ) | |||
Non-compete agreements
|
800 | (405 | ) | |||||
Other
|
800 | (785 | ) | |||||
Total
|
$ | 7,704 | $ | (5,799 | ) | |||
6 |
SHORT-TERM CAPITAL RESOURCES |
As of October 31, 2003, the company had available medium-term committed unsecured lines of credit with various domestic banks in the aggregate of $178,000,000. The company also has a $75,000,000 line of credit backed by a multi-year credit agreement, which is secured by certain domestic receivables. Interest expense on these credit lines is determined from a LIBOR or commercial paper rate plus a basis point spread defined in the credit agreements. Most of these agreements also require the company to pay a fee of 0.200 0.225 percent per year on the available lines of credit, which is included in interest expense. The companys non-U.S. operations maintain unsecured short-term lines of credit of $7,939,000. These facilities bear interest at various rates depending on the rates in their respective countries of operation. The company had $2,138,000 outstanding as of October 31, 2003 and $1,156,000 outstanding as of October 31, 2002 under these lines of credit, which included 600,000 Australian dollar and 36,000 euro denominated short-term debt outstanding as of October 31, 2003 and 1,900,000 Australian dollar and 103,000 euro denominated short-term debt outstanding as of October 31, 2002. The weighted average interest rate on short-term debt outstanding as of October 31, 2003 and 2002 was 2.73 percent and 4.74 percent, respectively. The company was in compliance with all covenants related to the lines of credit described above as of October 31, 2003.
7 |
LONG-TERM DEBT |
A summary of long-term debt is as follows:
(Dollars in thousands) October 31 | 2003 | 2002 | |||||||
7.000% Notes, due February 17,
2003
|
$ | | $ | 15,761 | |||||
7.125% Notes, due June 15,
2007
|
75,000 | 75,000 | |||||||
Industrial Revenue Bond due
|
|||||||||
November 1, 2017
|
3,600 | 3,600 | |||||||
7.800% Debentures, due June 15,
2027
|
100,000 | 100,000 | |||||||
Other
|
321 | 220 | |||||||
178,921 | 194,581 | ||||||||
Less current portion
|
3,830 | 15,825 | |||||||
Long-term debt, less current portion
|
$ | 175,091 | $ | 178,756 | |||||
8 |
STOCKHOLDERS EQUITY |
Stock repurchase program The companys Board of Directors has authorized the cumulative repurchase of up to 2,000,000 shares of the companys common stock, which was doubled from the original 1,000,000 shares authorized for repurchase as a result of the stock split effective April 1, 2003. During fiscal 2003, Toro paid $18,726,000 to repurchase 433,345 shares. As of October 31, 2003, 464,947 shares remained authorized for repurchase.
Shareholder rights plan Under the terms of a Rights Agreement dated as of May 20, 1998 between Toro and Wells Fargo Bank Minnesota, National Association (the successor to Norwest Bank Minnesota, National Association), each share of the companys common stock entitles its holder to one preferred share purchase right. These rights become exercisable only if a person or group acquires, or announces a tender offer that would result in, ownership of 15 percent or more of Toros common stock. Each
33
Stock Split On March 20, 2003, the companys Board of Directors declared a two-for-one split of the companys common stock, effected in the form of a 100 percent stock dividend issued to stockholders of record as of April 1, 2003 and paid on April 14, 2003. As a result of this action, approximately 12.5 million shares were issued. Par value of the common stock remains at $1.00 per share and accordingly, approximately $12.5 million was transferred from additional paid-in capital to common stock. All references to the number of common shares and per common share amounts have been adjusted to give retroactive effect to the stock split for all periods presented.
9 |
INCOME TAXES |
A reconciliation of the statutory federal income tax rate to the companys consolidated effective tax rate is summarized as follows:
Fiscal years ended October 31 | 2003 | 2002 | 2001 | |||||||||
Statutory federal income tax rate
|
35.0 | % | 35.0 | % | 35.0 | % | ||||||
Increase (reduction) in income taxes
resulting from:
|
||||||||||||
Benefits from export incentives
|
(1.6 | ) | (1.7 | ) | (2.2 | ) | ||||||
Refund related to prior years foreign
sales corporation
|
| (2.0 | ) | | ||||||||
State and local income taxes, net of federal
income tax benefit
|
1.1 | 1.2 | 1.3 | |||||||||
Effect of foreign source income
|
(0.6 | ) | (0.4 | ) | (1.0 | ) | ||||||
Goodwill and other amortization
|
0.1 | 0.1 | 2.8 | |||||||||
Other, net
|
(1.5 | ) | (1.2 | ) | 1.1 | |||||||
Consolidated effective tax rate
|
32.5 | % | 31.0 | % | 37.0 | % | ||||||
(Dollars in thousands) | |||||||||||||
Fiscal years ended October 31 | 2003 | 2002 | 2001 | ||||||||||
Provision for income taxes:
|
|||||||||||||
Current
|
|||||||||||||
Federal
|
$ | 34,470 | $ | 22,789 | $ | 22,187 | |||||||
State
|
1,812 | 1,588 | 1,002 | ||||||||||
Non-U.S.
|
1,449 | 694 | 196 | ||||||||||
Current provision
|
$ | 37,731 | $ | 25,071 | $ | 23,385 | |||||||
Deferred
|
|||||||||||||
Federal
|
$ | 1,719 | $ | 1,357 | $ | 5,434 | |||||||
State
|
218 | (27 | ) | 641 | |||||||||
Non-U.S.
|
(370 | ) | 467 | 169 | |||||||||
Deferred provision
|
1,567 | 1,797 | 6,244 | ||||||||||
Total provision for income taxes
|
$ | 39,298 | $ | 26,868 | $ | 29,629 | |||||||
(Dollars in thousands) | |||||||||||||
Fiscal years ended October 31 | 2003 | 2002 | 2001 | ||||||||||
Earnings before income taxes and accounting
change:
|
|||||||||||||
U.S.
|
$ | 116,442 | $ | 82,407 | $ | 77,472 | |||||||
Non-U.S.
|
4,476 | 4,392 | 2,605 | ||||||||||
Total
|
$ | 120,918 | $ | 86,799 | $ | 80,077 | |||||||
(Dollars in thousands) | ||||||||
Fiscal years ended October 31 | 2003 | 2002 | ||||||
Allowance for doubtful accounts
|
$ | 3,043 | $ | 3,576 | ||||
Inventory items
|
2,617 | 4,515 | ||||||
Depreciation
|
(284 | ) | 3,366 | |||||
Warranty reserves
|
5,030 | 3,940 | ||||||
Employee benefits
|
14,269 | 12,426 | ||||||
Other nondeductible accruals
|
18,617 | 15,095 | ||||||
Deferred income tax assets, net
|
$ | 43,292 | $ | 42,918 | ||||
10 |
STOCK-BASED COMPENSATION PLANS |
Under the companys stock option plans, certain employees and non-employee directors have been granted options to purchase shares of common stock at prices equal to fair market value on the date the option was granted. Options granted through fiscal 2003 are generally exercisable immediately, and expire five to ten years after the date of grant.
34
Weighted | ||||||||
average | ||||||||
Options | exercise | |||||||
outstanding | price | |||||||
2001
|
||||||||
Outstanding as of the beginning of the year
|
2,900,008 | $ | 14.49 | |||||
Granted
|
741,212 | 17.52 | ||||||
Exercised
|
(1,379,044 | ) | 12.27 | |||||
Cancelled
|
(56,390 | ) | 16.58 | |||||
Outstanding as of October 31, 2001
|
2,205,786 | $ | 16.84 | |||||
Exercisable as of October 31, 2001
|
1,604,786 | $ | 17.05 | |||||
2002
|
||||||||
Outstanding as of the beginning of the year
|
2,205,786 | $ | 16.84 | |||||
Granted
|
659,548 | 23.56 | ||||||
Exercised
|
(653,530 | ) | 19.54 | |||||
Cancelled
|
(52,000 | ) | 15.97 | |||||
Outstanding as of October 31, 2002
|
2,159,804 | $ | 18.10 | |||||
Exercisable as of October 31, 2002
|
1,591,804 | $ | 18.60 | |||||
2003
|
||||||||
Outstanding as of the beginning of the
year
|
2,159,804 | $ | 18.10 | |||||
Granted
|
553,000 | 32.40 | ||||||
Exercised
|
(442,744 | ) | 19.70 | |||||
Cancelled
|
(32,000 | ) | 15.97 | |||||
Outstanding as of October 31,
2003
|
2,238,060 | $ | 21.30 | |||||
Exercisable as of October 31,
2003
|
1,702,060 | $ | 22.77 | |||||
Weighted | ||||||||||||
Weighted | average | |||||||||||
average | remaining | |||||||||||
Number of | exercise | contractual | ||||||||||
Exercise price range | options | price | life | |||||||||
$12.4688 $18.8125
|
1,218,454 | $ | 15.90 | 4.3 years | ||||||||
$21.2750 $27.8650
|
522,496 | 23.33 | 5.6 years | |||||||||
$32.2750 $40.4200
|
497,110 | 32.41 | 6.5 years | |||||||||
Total
|
2,238,060 | $ | 21.30 | 5.1 years | ||||||||
35
11 |
EMPLOYEE BENEFIT PROGRAMS AND POSTRETIREMENT BENEFIT PLANS |
The company maintains The Toro Company Investment, Savings and Employee Stock Ownership Plan for eligible employees. The companys expenses under this plan were $13,493,000, $12,660,000, and $12,300,000 for the fiscal years ended October 31, 2003, 2002, and 2001, respectively.
(Dollars in thousands) | |||||||||
Fiscal years ended October 31 | 2003 | 2002 | |||||||
Projected Benefit Obligation
|
|||||||||
Beginning obligations
|
$ | 6,462 | $ | 3,443 | |||||
Service cost
|
388 | 193 | |||||||
Interest cost
|
427 | 246 | |||||||
Actuarial loss
|
7,764 | 2,900 | |||||||
Benefits paid
|
(308 | ) | (320 | ) | |||||
Ending Obligations
|
$ | 14,733 | $ | 6,462 | |||||
Funded Status of Plan
|
$ | (14,733 | ) | $ | (6,462 | ) | |||
Unrecognized actuarial loss
|
11,812 | 4,310 | |||||||
Net Amount Recognized
|
$ | (2,921 | ) | $ | (2,152 | ) | |||
Fiscal years ended October 31 | 2003 | 2002 | ||||||
Discount rate used to determine year-end
obligation
|
6.00 | % | 6.75 | % | ||||
Discount rate used to determine fiscal year
expense
|
6.75 | % | 7.50 | % | ||||
Annual increase in cost of benefits
|
10.00 | % | 18.00 | % | ||||
(Dollars in thousands) | ||||||||||||
Fiscal years ended October 31 | 2003 | 2002 | 2001 | |||||||||
Service cost
|
$ | 388 | $ | 193 | $ | 154 | ||||||
Interest cost
|
427 | 246 | 257 | |||||||||
Amortization of losses
|
262 | 80 | 93 | |||||||||
Net expense
|
$ | 1,077 | $ | 519 | $ | 504 | ||||||
12 |
SEGMENT DATA |
Toro develops, manufactures, and sells a wide variety of turf maintenance products used in the professional and residential markets. The companys principal businesses are based on Toros ability to provide comprehensive, integrated solutions that create, maintain, enhance, and conserve beautiful and functional landscapes. The companys reportable segments are strategic business units that offer different products and services and are managed separately based on fundamental differences in their operations.
Reportable Segments
36
The following table shows the summarized financial information concerning the companys reportable segments:
(Dollars in thousands) | ||||||||||||||||||||
Fiscal years ended October 31 | Professional1 | Residential2 | Distribution | Other | Total | |||||||||||||||
2003
|
||||||||||||||||||||
Net sales
|
$ | 929,434 | $ | 506,466 | $ | 133,957 | $ | (73,269 | ) | $ | 1,496,588 | |||||||||
Intersegment gross sales
|
81,421 | 7,985 | | (89,406 | ) | | ||||||||||||||
Earnings (loss) before income taxes
|
146,756 | 55,460 | (505 | ) | (80,793 | ) | 120,918 | |||||||||||||
Total assets
|
412,361 | 180,767 | 46,232 | 288,072 | 927,432 | |||||||||||||||
Capital expenditures
|
23,838 | 12,759 | 413 | 7,653 | 44,663 | |||||||||||||||
Depreciation and amortization
|
16,196 | 7,816 | 636 | 8,525 | 33,173 | |||||||||||||||
2002
|
||||||||||||||||||||
Net sales
|
$ | 862,294 | $ | 474,333 | $ | 158,935 | $ | (96,289 | ) | $ | 1,399,273 | |||||||||
Intersegment gross sales
|
99,553 | 10,764 | | (110,317 | ) | | ||||||||||||||
Earnings (loss) before income taxes and
accounting change
|
111,709 | 51,916 | 2,251 | (79,077 | ) | 86,799 | ||||||||||||||
Total assets
|
399,024 | 162,442 | 51,823 | 232,851 | 846,140 | |||||||||||||||
Capital expenditures
|
21,240 | 17,789 | 685 | 6,317 | 46,031 | |||||||||||||||
Depreciation and amortization
|
16,860 | 6,559 | 537 | 6,976 | 30,932 | |||||||||||||||
2001
|
||||||||||||||||||||
Net sales
|
$ | 858,855 | $ | 432,176 | $ | 146,642 | $ | (84,590 | ) | $ | 1,353,083 | |||||||||
Intersegment gross sales
|
90,068 | 10,445 | | (100,513 | ) | | ||||||||||||||
Earnings (loss) before income taxes
|
106,600 | 41,904 | (361 | ) | (68,066 | ) | 80,077 | |||||||||||||
Total assets
|
430,637 | 142,361 | 61,836 | 200,840 | 835,674 | |||||||||||||||
Capital expenditures
|
16,828 | 12,422 | 971 | 5,441 | 35,662 | |||||||||||||||
Depreciation and amortization
|
24,980 | 5,779 | 981 | 5,431 | 37,171 | |||||||||||||||
1 | Includes restructuring and other income of $0.4 million in fiscal 2003 and restructuring and other expense of $8.4 million in fiscal 2002. |
2 | Includes restructuring and other expense of $2.2 million in fiscal 2003 and restructuring and other income of $0.7 million in fiscal 2001. |
The following table presents the details of the other segment earnings (loss) before income taxes:
(Dollars in thousands) | ||||||||||||
Fiscal years ended October 31 | 2003 | 2002 | 2001 | |||||||||
Corporate expenses
|
$ | (88,789 | ) | $ | (77,414 | ) | $ | (67,465 | ) | |||
Interest expense, net
|
(16,285 | ) | (19,747 | ) | (22,003 | ) | ||||||
Finance charge revenue
|
2,665 | 3,664 | 5,144 | |||||||||
Elimination of corporate financing
expense
|
15,095 | 14,712 | 15,923 | |||||||||
Other income (expenses)
|
6,521 | (292 | ) | 335 | ||||||||
Total
|
$ | (80,793 | ) | $ | (79,077 | ) | $ | (68,066 | ) | |||
Geographic Data
(Dollars in thousands) | United | Foreign | ||||||||||
Fiscal years ended October 31 | States | Countries | Total | |||||||||
2003
|
||||||||||||
Net sales
|
$ | 1,207,590 | $ | 288,998 | $ | 1,496,588 | ||||||
Net property, plant, and equipment
|
135,826 | 23,290 | 159,116 | |||||||||
2002
|
||||||||||||
Net sales
|
$ | 1,137,670 | $ | 261,603 | $ | 1,399,273 | ||||||
Net property, plant, and equipment
|
137,309 | 19,470 | 156,779 | |||||||||
2001
|
||||||||||||
Net sales
|
$ | 1,100,255 | $ | 252,828 | $ | 1,353,083 | ||||||
Net property, plant, and equipment
|
132,678 | 9,567 | 142,245 | |||||||||
37
13 |
COMMITMENTS AND CONTINGENT LIABILITIES |
Leases
Customer Financing
End-User Financing During fiscal 2002, Toro entered into an agreement with a third party financing company to provide lease-financing options to domestic golf course and some grounds equipment customers. 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 under this program. The companys maximum exposure for credit collection and residual value as of October 31, 2003 was $3,415,000. The company has established a reserve for the estimated exposure related to this program.
Purchase Commitments
Letters of Credit
Litigation
14 |
FINANCIAL INSTRUMENTS |
Concentrations of Credit Risk
Derivative Instruments and Hedging Activities
38
Fair Value
15 |
QUARTERLY FINANCIAL DATA (unaudited) |
Summarized quarterly financial data for fiscal 2003 and fiscal 2002 are as follows:
Fiscal year ended | ||||||||||||||||
October 31, 2003 | ||||||||||||||||
(Dollars in thousands, | ||||||||||||||||
except per share data) | ||||||||||||||||
Quarter | First | Second1 | Third2 | Fourth3 | ||||||||||||
Net sales
|
$ | 295,962 | $ | 495,840 | $ | 394,524 | $ | 310,262 | ||||||||
Gross profit
|
105,581 | 175,632 | 146,950 | 107,296 | ||||||||||||
Net earnings
|
6,981 | 41,971 | 27,044 | 5,624 | ||||||||||||
Basic net earnings per share
|
0.28 | 1.68 | 1.08 | 0.22 | ||||||||||||
Diluted net earnings per share
|
0.27 | 1.61 | 1.03 | 0.21 | ||||||||||||
1 | Includes restructuring and other income of $0.2 million. |
2 | Includes restructuring and other expense of $1.7 million. |
3 | Includes restructuring and other expense of $0.3 million. |
Fiscal year ended | ||||||||||||||||
October 31, 2002 | ||||||||||||||||
(Dollars in thousands, | ||||||||||||||||
except per share data) | ||||||||||||||||
Quarter | First1,2 | Second | Third | Fourth3 | ||||||||||||
Net sales
|
$ | 277,915 | $ | 470,314 | $ | 375,632 | $ | 275,412 | ||||||||
Gross profit
|
95,307 | 162,052 | 128,939 | 98,964 | ||||||||||||
Earnings (loss) before accounting change
|
(5,121 | ) | 38,138 | 21,922 | 4,992 | |||||||||||
Net earnings (loss)
|
(29,735 | ) | 38,138 | 21,922 | 4,992 | |||||||||||
Basic net earnings (loss) per share before
accounting change
|
(0.20 | ) | 1.51 | 0.87 | 0.20 | |||||||||||
Basic net earnings (loss) per share
|
(1.19 | ) | 1.51 | 0.87 | 0.20 | |||||||||||
Diluted net earnings (loss) per share before
accounting change
|
(0.20 | ) | 1.46 | 0.84 | 0.19 | |||||||||||
Diluted net earnings (loss) per share
|
(1.19 | ) | 1.46 | 0.84 | 0.19 | |||||||||||
1 | Includes non-cash impairment charges of $24.6 million, net of income tax benefit of $0.5 million, recognized as a cumulative effect of change in accounting principle. |
2 | Includes restructuring and other expense of $9.9 million. |
3 | Includes restructuring and other income of $1.5 million. |
39
16 |
ELEVEN-YEAR FINANCIAL DATA (unaudited) |
(Dollars and shares in millions, except per share data) | |||||||||||||||||||||||||||||||||||||||||||||
Fiscal years ended October 311,8 | 2003 | 2002 | 2001 | 2000 | 1999 | 19984 | 19977 | 1996 | 1995 | 1994 | 1993 | ||||||||||||||||||||||||||||||||||
OPERATING RESULTS:
|
|||||||||||||||||||||||||||||||||||||||||||||
Net sales2
|
$ | 1,496.6 | $ | 1,399.3 | $ | 1,353.1 | $ | 1,339.0 | $ | 1,279.7 | $ | 1,111.3 | $ | 1,052.8 | $ | 930.9 | $ | 919.4 | $ | 864.3 | $ | 706.6 | |||||||||||||||||||||||
Net sales growth from prior year
|
7.0 | % | 3.4 | % | 1.1 | % | 4.6 | % | 15.1 | % | 5.6 | % | 13.1 | % | 1.3 | % | 6.4 | % | 22.3 | % | 10.6 | % | |||||||||||||||||||||||
Earnings, before accounting change
3,5,6
|
$ | 81.6 | $ | 59.9 | $ | 50.4 | $ | 45.3 | $ | 35.1 | $ | 4.1 | $ | 34.8 | $ | 36.4 | $ | 32.4 | $ | 32.4 | $ | 15.3 | |||||||||||||||||||||||
Percentage of net sales
|
5.5 | % | 4.3 | % | 3.7 | % | 3.4 | % | 2.7 | % | 0.4 | % | 3.3 | % | 3.9 | % | 3.5 | % | 3.8 | % | 2.2 | % | |||||||||||||||||||||||
Net earnings3
|
$ | 81.6 | $ | 35.3 | $ | 50.4 | $ | 45.3 | $ | 35.1 | $ | 4.1 | $ | 34.8 | $ | 36.4 | $ | 32.4 | $ | 32.4 | $ | 15.3 | |||||||||||||||||||||||
Diluted net earnings per share, before
accounting change3,5,6
|
3.12 | 2.32 | 1.93 | 1.74 | 1.32 | 0.16 | 1.40 | 1.45 | 1.25 | 1.25 | 0.61 | ||||||||||||||||||||||||||||||||||
Return on average stockholders
equity
|
20.3 | % | 10.0 | % | 15.3 | % | 15.2 | % | 12.9 | % | 1.6 | % | 15.3 | % | 18.0 | % | 17.5 | % | 20.2 | % | 11.4 | % | |||||||||||||||||||||||
SUMMARY OF FINANCIAL POSITION:
|
|||||||||||||||||||||||||||||||||||||||||||||
Working capital
|
$ | 370.8 | $ | 298.4 | $ | 271.6 | $ | 249.3 | $ | 225.9 | $ | 221.2 | $ | 234.2 | $ | 197.1 | $ | 165.1 | $ | 176.2 | $ | 156.9 | |||||||||||||||||||||||
Long-term debt, less current portion
|
175.1 | 178.8 | 194.6 | 194.5 | 195.6 | 196.8 | 177.7 | 53.0 | 53.4 | 70.4 | 87.3 | ||||||||||||||||||||||||||||||||||
Stockholders equity
|
437.2 | 365.3 | 341.4 | 317.2 | 279.7 | 263.4 | 241.2 | 213.6 | 190.9 | 178.7 | 141.9 | ||||||||||||||||||||||||||||||||||
Debt to capitalization ratio
|
29.3 | % | 34.9 | % | 40.2 | % | 39.4 | % | 47.5 | % | 46.4 | % | 47.6 | % | 30.7 | % | 36.6 | % | 33.8 | % | 46.5 | % | |||||||||||||||||||||||
OTHER STATISTICAL DATA:
|
|||||||||||||||||||||||||||||||||||||||||||||
Book value per share of common stock
|
17.93 | 15.01 | 13.92 | 12.62 | 11.13 | 10.32 | 9.90 | 8.88 | 7.85 | 7.03 | 5.74 | ||||||||||||||||||||||||||||||||||
Cash dividends per share of common
stock
|
0.24 | 0.24 | 0.24 | 0.24 | 0.24 | 0.24 | 0.24 | 0.24 | 0.24 | 0.24 | 0.24 | ||||||||||||||||||||||||||||||||||
Market price range
|
|||||||||||||||||||||||||||||||||||||||||||||
High price
|
50.41 | 32.11 | 25.00 | 19.000 | 19.7500 | 23.1563 | 21.88 | 18.125 | 16.125 | 15.250 | 13.375 | ||||||||||||||||||||||||||||||||||
Low price
|
30.15 | 20.96 | 16.38 | 14.063 | 11.0938 | 8.2500 | 15.75 | 14.188 | 12.813 | 10.438 | 7.063 | ||||||||||||||||||||||||||||||||||
Average number of employees
|
5,367 | 5,395 | 5,380 | 5,040 | 4,923 | 4,695 | 4,309 | 3,610 | 3,638 | 3,434 | 3,117 | ||||||||||||||||||||||||||||||||||
1 | In 1995, the company changed its fiscal year end from July 31 to October 31. Therefore, the year-ends prior to 1996 are unaudited and were restated to include twelve months of data through the Friday closest to October 31 for comparative purposes. |
2 | The adoption of Emerging Issues Task Force issues 00-10, 00-14, and 00-25 resulted in a (decrease) increase of net sales for fiscal 2001, 2000, 1999, 1998, and 1997 by ($5.2) million, $2.1 million, $4.7 million, $0.9 million, and $1.6 million, respectively. 1996 and prior years have not been restated. |
3 | 2003, 2002, 2001, 1999, 1998, and 1997, includes net restructuring and other expense (income) of $1.8 million, $8.4 million, ($0.7) million, $1.7 million, $15.0 million, and $2.6 million, respectively. |
4 | The companys consolidated financial statements include results of operations of Exmark from November 1, 1997 and Drip In from February 1, 1998, dates of acquisition. |
5 | 2002 net earnings and diluted net earnings per share after cumulative effect of change in accounting principle of $24.6 million, or $0.95 per diluted share, were $35.3 million and $1.37, respectively. |
6 | 1997 net earnings and diluted net earnings per share includes a loss on the early retirement of debt of $1.7 million, or $0.07 per diluted share. |
7 | The companys consolidated financial statements include results of operations of the James Hardie Irrigation Group from December 1, 1996, the date of acquisition. |
8 | Per share data has been adjusted for all fiscal years presented to reflect a two-for-one stock split effective April 1, 2003. |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
40
ITEM 9A. | CONTROLS AND PROCEDURES |
The company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commissions rules and forms and that such information is accumulated and communicated to the companys management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. The companys management evaluated, with the participation of the companys Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the companys disclosure controls and procedures as of the end of the period covered in this Annual Report on Form 10-K. Based on that evaluation, the companys Chief Executive Officer and Chief Financial Officer concluded that the companys disclosure controls and procedures were effective as of the end of such period. There was no change in the companys internal control over financial reporting that occurred during the companys fiscal fourth quarter ended October 31, 2003 that has materially affected, or is reasonably likely to materially affect, the companys internal control over financial reporting.
ITEM 10. | DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT |
See Executive Officers of the Registrant in Part I of this report for information regarding the executive officers of the company, which is incorporated by reference in this section.
ITEM 11. | EXECUTIVE COMPENSATION |
Information concerning executive compensation and other information required by Item 11 of Part III of this report is incorporated herein by reference to information to be contained under the caption Executive Compensation and Proposal One Election of Directors Board Compensation in the companys Proxy Statement to be filed with the Securities and Exchange Commission with respect to the next annual meeting of stockholders, which involves the election of directors or, if such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, such information will be filed as part of an amendment to this Form 10-K not later than the end of the 120-day period.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Information regarding the security ownership of certain beneficial owners and management of the company, equity compensation plan information, and other information required by Item 12 of Part III of this report is incorporated herein by reference to information to be contained under the captions Stock Ownership and Executive Compensation Equity Compensation Plan Information in the companys Proxy Statement to be filed with the Securities and Exchange Commission with respect to the next annual meeting of stockholders, which involves the election of directors or, if such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, such information will be filed as part of an amendment to this Form 10-K not later than the end of the 120-day period.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS |
None.
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES |
Information regarding the companys independent auditor fees and services and other information required by Item 14 of Part III of this report is incorporated herein by reference to information to be contained under the captions Proposal Two Ratify Selection of Independent Auditor Audit, Audit-Related, Tax and Other Fees and Proposal Two Ratify Selection of Independent Auditor Auditor Fees Pre-approval Policy in the companys Proxy Statement to be filed with the Securities and Exchange Commission with respect to the next annual meeting of stockholders, which involves the election of directors or, if such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, such information will be filed as part of an amendment to this Form 10-K not later than the end of the 120-day period.
41
ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K |
(a) 1. List of Financial Statements
| Independent Auditors Report |
| Consolidated Statements of Earnings for the fiscal years ended October 31, 2003, 2002, and 2001 |
| Consolidated Balance Sheets as of October 31, 2003 and 2002 |
| Consolidated Statements of Cash Flows for the fiscal years ended October 31, 2003, 2002, and 2001 |
| Consolidated Statements of Stockholders Equity for the fiscal years ended October 31, 2003, 2002, and 2001 |
| Notes to Consolidated Financial Statements |
(a) 2. List of Financial Statement Schedules
| Schedule II Valuation and Qualifying Accounts |
All other schedules are omitted because the required information is inapplicable or the information is presented in the consolidated financial statements or related notes.
(a) 3. List of Exhibits
Exhibit Number Description
3(ii) and 4(b) Bylaws of Registrant (incorporated by reference to Exhibit 4(c) to Registrants Current Report on Form 8-K dated May 28, 2003, Commission File No. 1-8649).
4(c) Specimen form of Common Stock certificate (incorporated by reference to Exhibit 4(c) to Registrants 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 Registrants Current Report on Form 8-K dated May 27, 1998, Commission File No. 1-8649).
4(e) Certificate of Adjusted Purchase Price or Number of Shares dated April 14, 2003 filed by Registrant with Wells Fargo Bank Minnesota, N.A., as Rights Agent, in connection with Rights Agreement dated as of May 20, 1998 (incorporated by reference to Exhibit 2 to Registrants Amendment No. 1 to Registration Statement on Form 8-A/A dated April 14, 2003, Commission File No. 1-8649).
4(f) Indenture dated as of January 31, 1997, between Registrant and First National Trust Association, as Trustee, relating to the Registrants 7.125% Notes due June 15, 2007 and its 7.80% Debentures due June 15, 2027 (incorporated by reference to Exhibit 4(a) to Registrants 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 Registrants 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 Registrants 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 Registrants Proxy Statement on Form DEF 14A filed with the Commission on January 31, 2002).*
10(d) The Toro Company 1993 Stock Option Plan (incorporated by reference to Exhibit 10(f) to Registrants Quarterly Report on Form 10-Q for the quarter ended July 30, 1999).*
10(e) The Toro Company Performance Share Plan (incorporated by reference to the appendix to Registrants Proxy Statement on Form DEF 14A filed with the Commission on January 31, 2002).*
10(f) The Toro Company 2000 Stock Option Plan (incorporated by reference to the appendix to Registrants Proxy Statement on Form DEF 14A filed with the Commission on January 31, 2002).*
10(g) The Toro Company Supplemental Management Retirement Plan (incorporated by reference to Exhibit 10(h) to Registrants Quarterly Report on Form 10-Q for the quarter ended April 28, 2000).*
10(h) The Toro Company Supplemental Retirement Plan (incorporated by reference to Exhibit 10(i) to Registrants Quarterly Report on Form 10-Q for the quarter ended July 30, 1999).*
10(i) The Toro Company Chief Executive Officer Succession Incentive Award Agreement (incorporated by reference to Exhibit 10(j) to Registrants Quarterly Report on Form 10-Q for the quarter ended August 2, 2002).*
10(j) The Toro Company Deferred Compensation Plan for Officers (incorporated by reference to Exhibit 10(k) to Registrants Annual Report on Form 10-K for the fiscal year ended October 31, 2002).*
42
10(k) The Toro Company Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 10(l) to Registrants Quarterly Report on Form 10-Q for the quarter ended July 28, 2000).*
10(l) The Toro Company 2000 Directors Stock Plan (incorporated by reference to Exhibit 10(m) to Registrants Quarterly Report on Form 10-Q for the quarter ended July 28, 2000).*
10(m) Multi-Year Credit Agreement dated as of February 22, 2002, by and among The Toro Company and Toro Credit Company, the borrowers and other obligated parties named therein, Bank of America, N.A. as Administrative Agent, U.S. Bank National Association and Suntrust Bank as co-syndication agents, Harris Trust and Savings Bank and Wells Fargo Bank, National Association as co-documentation agents, and Banc of America Securities LLC as sole lead arranger and sole book manager (incorporated by reference to Exhibit 10(n) to Registrants Quarterly Report on Form 10-Q for the quarter ended August 1, 2003).
10(n) Amendment No. 1 to Multi-Year Credit Agreement dated as of December 11, 2002, by and among The Toro Company and Toro Credit Company, the borrowers, Toro Manufacturing LLC, Bank of America, N.A. as Administrative Agent, and each of the Banks as defined in the Multi-Year Credit Agreement dated as of February 22, 2002 (incorporated by reference to Exhibit 10(o) to Registrants Quarterly Report on Form 10-Q for the quarter ended August 1, 2003).
10(o) Amendment No. 2 to Multi-Year Credit Agreement dated as of July 9, 2003, by and among The Toro Company and Toro Credit Company, the borrowers, Exmark Manufacturing Company Incorporated, Bank of America, N.A. as Administrative Agent, and each of the Banks as defined in the Multi-Year Credit Agreement dated as of February 22, 2002 (incorporated by reference to Exhibit 10(p) to Registrants Quarterly Report on Form 10-Q for the quarter ended August 1, 2003).
10(p) Loan Agreement dated as of July 9, 2003 among Toro Receivables Company, as borrower, and The Toro Company, as servicer, and Three Pillars Funding Corporation, as lender, and Suntrust Capital Markets, Inc., as administrator (incorporated by reference to Exhibit 10(p) to Registrants Quarterly Report on Form 10-Q for the quarter ended August 1, 2003).
12 Computation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of Registrant
23 Independent Auditors Consent
31(a) Certification Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).
31(b) Certification Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002).
32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(c). |
(b) Reports on Form 8-K
(c) Exhibits
(d) Financial Statement Schedules
43
Balance as of | Charged to | Balance as of | ||||||||||||||||||
the beginning | costs and | the end of | ||||||||||||||||||
Description | of the fiscal year | expenses1 | Other2 | Deductions3 | the fiscal year | |||||||||||||||
Fiscal year ended October 31,
2003
|
||||||||||||||||||||
Allowance for doubtful accounts and notes
receivable reserves
|
$ | 7,209,000 | $ | 1,347,000 | $ | (249,000 | ) | $ | 5,886,000 | $ | 2,421,000 | |||||||||
Fiscal year ended October 31, 2002
|
||||||||||||||||||||
Allowance for doubtful accounts and notes
receivable reserves
|
$ | 5,105,000 | $ | 4,702,000 | | $ | 2,598,000 | $ | 7,209,000 | |||||||||||
Fiscal year ended October 31, 2001
|
||||||||||||||||||||
Allowance for doubtful accounts and notes
receivable reserves
|
$ | 6,908,000 | $ | 1,548,000 | $ | 104,000 | $ | 3,455,000 | $ | 5,105,000 | ||||||||||
1 | Provision, net of recoveries. |
2 | Addition (reduction) to allowance for doubtful accounts due to acquisitions and divestiture. |
3 | Uncollectible accounts charged off. |
Balance as of | Charged to | Balance as of | ||||||||||||||
the beginning | costs and | the end of | ||||||||||||||
Description | of the fiscal year | expenses1 | Deductions2 | the fiscal year | ||||||||||||
Fiscal year ended October 31,
2003
|
||||||||||||||||
Accrued warranties
|
$ | 53,590,000 | $ | 46,067,000 | $ | 40,285,000 | $ | 59,372,000 | ||||||||
Fiscal year ended October 31, 2002
|
||||||||||||||||
Accrued warranties
|
$ | 57,882,000 | $ | 43,042,000 | $ | 47,334,000 | $ | 53,590,000 | ||||||||
Fiscal year ended October 31, 2001
|
||||||||||||||||
Accrued warranties
|
$ | 55,985,000 | $ | 43,418,000 | $ | 41,521,000 | $ | 57,882,000 | ||||||||
1 | Provision, net of recoveries. |
2 | Warranty claims processed. |
44
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE TORO COMPANY (Registrant) |
||||||
By
|
/s/ Stephen P. Wolfe | Dated: January 12, 2004 | ||||
Stephen P. Wolfe Vice President Finance Treasurer and Chief Financial Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature | Title | Date | ||||
/s/ Kendrick B. Melrose Kendrick B. Melrose |
Chairman, Chief Executive Officer and Director (principal executive officer) |
January 12, 2004 | ||||
/s/ Stephen P. Wolfe Stephen P. Wolfe |
Vice President Finance, Treasurer and Chief Financial Officer (principal financial officer) |
January 12, 2004 | ||||
/s/ Randy B. James Randy B. James |
Vice President, Controller (principal accounting officer) |
January 12, 2004 | ||||
/s/ Ronald O. Baukol Ronald O. Baukol |
Director | January 12, 2004 | ||||
/s/ Robert C. Buhrmaster Robert C. Buhrmaster |
Director | January 12, 2004 | ||||
/s/ Winslow H. Buxton Winslow H. Buxton |
Director | January 12, 2004 | ||||
/s/ Janet K. Cooper Janet K. Cooper |
Director | January 12, 2004 | ||||
/s/ Katherine J. Harless Katherine J. Harless |
Director | January 12, 2004 | ||||
/s/ Robert H. Nassau Robert H. Nassau |
Director | January 12, 2004 | ||||
/s/ Dale R. Olseth Dale R. Olseth |
Director | January 12, 2004 | ||||
/s/ Gregg W. Steinhafel Gregg W. Steinhafel |
Director | January 12, 2004 | ||||
/s/ Christopher A. Twomey Christopher A. Twomey |
Director | January 12, 2004 | ||||
/s/ Edwin H. Wingate Edwin H. Wingate |
Director | January 12, 2004 |
45
EXHIBIT 12
THE TORO COMPANY AND SUBSIDIARIES
Computation of Ratio of Earnings to Fixed Charges
(Not Covered by Independent Auditors Report)
10/31/2003 | 10/31/2002 | 10/31/2001 | 10/31/2000 | 10/31/1999 | |||||||||||||||||
Earnings before income taxes and cumulative
effect of change in accounting principle |
$ | 120,918,000 | $ | 86,799,000 | $ | 80,077,000 | $ | 71,882,000 | $ | 57,473,000 | |||||||||||
Plus: Fixed charges |
22,251,000 | 25,324,000 | 27,313,000 | 31,103,000 | 28,242,000 | ||||||||||||||||
Earnings available to cover
fixed charges |
$ | 143,169,000 | $ | 112,123,000 | $ | 107,390,000 | $ | 102,985,000 | $ | 85,715,000 | |||||||||||
Ratio of earnings to fixed charges |
6.43 | 4.43 | 3.93 | 3.31 | 3.04 | ||||||||||||||||
Interest Expense |
$ | 16,285,000 | $ | 19,747,000 | $ | 22,003,000 | $ | 26,414,000 | $ | 23,810,000 | |||||||||||
Rentals (Interest Expense) |
5,966,000 | 5,577,000 | 5,310,000 | 4,689,000 | 4,432,000 | ||||||||||||||||
Total fixed charges |
$ | 22,251,000 | $ | 25,324,000 | $ | 27,313,000 | $ | 31,103,000 | $ | 28,242,000 | |||||||||||
EXHIBIT 21
THE TORO COMPANY AND SUBSIDIARIES
Subsidiaries of Registrant
The following are significant subsidiaries of The Toro Company as of January 7, 2004.
State or Other Jurisdiction | Percentage of Voting | |||||
Name | of Incorporation | Securities Owned | ||||
Electronic Industrial Controls, Inc. | Colorado | 100 |
% |
|||
Exmark Manufacturing Company Incorporated | Nebraska | 100 |
% |
|||
Irritrol Systems Europe, S.r.L | Italy | 100 |
% |
|||
MTI Distributing, Inc. | Minnesota | 100 |
% |
|||
Red Iron Insurance, Limited | Bermuda | 100 |
% |
|||
Simpson Norton Corporation | Minnesota | 100 |
% |
|||
Toro Australia Pty. Limited | Australia | 100 |
% |
|||
Toro Credit Company | Minnesota | 100 |
% |
|||
Toro Europe BVBA | Belgium | 100 |
% |
|||
Toro Factoring Company Limited | Guernsey | 100 |
% |
|||
Toro Finance Company | California | 100 |
% |
|||
Toro Foreign Sales Corporation | Barbados | 100 |
% |
|||
Toro LLC | Delaware | 100 |
% |
|||
Toro Mexico Holdings, LLC | Minnesota | 100 |
% |
|||
Toro International Company | Minnesota | 100 |
% |
|||
Toro Manufacturing LLC | Delaware | 100 |
% |
|||
Toro Purchasing Company | Minnesota | 100 |
% |
|||
Toro Receivables Company | Minnesota | 100 |
% |
|||
Toro Sales Company | Minnesota | 100 |
% |
|||
Toro Warranty Company | Minnesota | 100 |
% |
|||
Turf Care Equipment Supply Co. | Minnesota | 100 |
% |
|||
Turf Professionals Equipment Company | Minnesota | 100 |
% |
EXHIBIT 23
Independent Auditors Consent
The Board of Directors
The Toro Company:
We consent to incorporation by reference in the Registration Statements (Nos. 333-03505, 33-03509, 333-44879, 333-36166, 333-47260, 333-57198, 333-89262, 333-89260, and 333-100004) on Form S-8 of The Toro Company of our report dated December 8, 2003, relating to the consolidated balance sheets of The Toro Company and subsidiaries as of October 31, 2003 and 2002, and the related consolidated statements of earnings, cash flows, and changes in stockholders equity and related financial statement schedule for each of the years in the three year period ended October 31, 2003, which report is included in the annual report on Form 10-K of The Toro Company.
/s/ KPMG LLP
Minneapolis, Minnesota
January 14, 2004
Exhibit 31(a)
Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Kendrick B. Melrose, certify that:
1. I have reviewed this annual report on Form 10-K of The Toro Company;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: January 12, 2004
/s/ Kendrick B. Melrose
Kendrick B. Melrose
Chairman and Chief Executive Officer
(Principal Executive Officer)
Exhibit 31(b)
Certification pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Stephen P. Wolfe, certify that:
1. I have reviewed this annual report on Form 10-K of The Toro Company;
2. Based on my knowledge, this 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 report;
3. Based on my knowledge, the financial statements, and other financial information included in this 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 the report;
4. The registrants other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
b) | Evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
c) | Disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fourth fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. The registrants other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions):
a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: January 12, 2004
/s/ Stephen P. Wolfe
Stephen P. Wolfe
Vice President, Finance
Treasurer and Chief Financial Officer
(Principal Financial Officer)
Exhibit 32
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 Annual Report of The Toro Company (the Company) on Form 10-K for the fiscal year ending October 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the Report), we, Kendrick B. Melrose, Chairman and Chief Executive Officer of the Company, and 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/ Kendrick B. Melrose
Kendrick B. Melrose
Chairman and Chief Executive Officer
January 12, 2004
/s/ Stephen P. Wolfe
Stephen P. Wolfe
Vice President-Finance,
Treasurer and Chief Financial Officer
January 12, 2004
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.