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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended February 1, 2002 Commission File Number 1-8649
---------------- ------
THE TORO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 41-0580470
(State of Incorporation) (I.R.S. Employer Identification Number)
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420
TELEPHONE NUMBER: (952) 888-8801
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--------- --------
The number of shares of Common Stock outstanding as of March 1, 2002 was
12,342,867.
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THE TORO COMPANY
INDEX TO FORM 10-Q
Page Number
-----------
PART I. FINANCIAL INFORMATION:
ITEM 1. Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended February 1, 2002 and February 2, 2001.........................3
Condensed Consolidated Balance Sheets (Unaudited) -
February 1, 2002, February 2, 2001 and October 31, 2001..........................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended February 1, 2002 and February 2, 2001.........................5
Notes to Condensed Consolidated Financial Statements (Unaudited).................6-11
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................................12-22
PART II. OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K.................................................23-24
Signatures........................................................................25
2
PART I. ITEM 1. FINANCIAL INFORMATION
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(DOLLARS AND SHARES IN THOUSANDS, EXCEPT PER-SHARE DATA)
Three Months Ended
--------------------------------------
February 1, February 2,
2002 2001
----------------- ---------------
Net sales..........................................................$ 277,915 $ 280,350
Cost of sales...................................................... 182,608 188,969
----------------- ---------------
Gross profit................................................... 95,307 91,381
Selling, general, and administrative expense....................... 89,012 87,618
Restructuring and other expense (income)........................... 9,953 (679)
----------------- ---------------
(Loss) earnings from operations................................ (3,658) 4,442
Interest expense................................................... (5,320) (5,276)
Other income, net.................................................. 1,334 2,903
----------------- ---------------
(Loss) earnings before income taxes and cumulative effect
of change in accounting principle.......................... (7,644) 2,069
Benefit (provision) for income taxes............................... 2,523 (765)
----------------- ---------------
Net (loss) earnings before cumulative effect of change in
accounting principle........................................ (5,121) 1,304
Cumulative effect of change in accounting principle, net of
income tax benefit of $509....................................... (24,614) --
----------------- ---------------
Net (loss) earnings........................................$ (29,735) $ 1,304
================= ===============
Basic net (loss) earnings per share of common stock, before
cumulative effect of change in accounting principle..............$ (0.41) $ 0.10
Cumulative effect of change in accounting principle, net of
income tax benefit............................................... (1.97) --
---------------- ---------------
Basic net (loss) earnings per share of common stock................$ (2.38) $ 0.10
================ ===============
Dilutive net (loss) earnings per share of common stock, before
cumulative effect of change in accounting principle..............$ (0.41) $ 0.10
Cumulative effect of change in accounting principle, net of
income tax benefit............................................... (1.97) --
---------------- ----------------
Dilutive net (loss) earnings per share of common stock.............$ (2.38) $ 0.10
================ ===============
Weighted average number of shares of common stock outstanding -
Basic........................................................... 12,500 12,753
Weighted average number of shares of common stock outstanding -
Dilutive....................................................... 12,500 13,062
See accompanying notes to condensed consolidated financial statements.
3
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
February 1, February 2, October 31,
2002 2001 2001
-------------- -------------- --------------
ASSETS
Cash and cash equivalents.................................$ 46 $ 636 $ 12,876
Receivables, net.......................................... 302,189 306,497 271,677
Inventories, net.......................................... 274,524 252,233 234,661
Prepaid expenses and other current assets................. 17,415 9,925 11,052
Deferred income taxes..................................... 34,261 43,912 33,927
-------------- ------------- ---------------
Total current assets................................ 628,435 613,203 564,193
-------------- ------------- ---------------
Property, plant, and equipment............................ 410,387 387,500 401,943
Less accumulated depreciation....................... 265,942 251,608 259,698
-------------- ------------- ---------------
144,445 135,892 142,245
Deferred income taxes..................................... 9,721 9,883 9,721
Other assets.............................................. 14,794 12,675 11,983
Goodwill.................................................. 77,805 106,927 102,924
Other intangible assets................................... 2,347 5,051 4,608
-------------- ------------- ---------------
Total assets........................................$ 877,547 $ 883,631 $ 835,674
============== ============= ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt.........................$ 513 $ 21 $ 513
Short-term debt........................................... 113,938 113,398 34,413
Accounts payable.......................................... 75,656 75,792 77,549
Accrued liabilities....................................... 172,744 170,930 180,092
-------------- ------------- ---------------
Total current liabilities........................... 362,851 360,141 292,567
-------------- ------------- ---------------
Long-term debt, less current portion...................... 194,553 194,453 194,565
Other long-term liabilities............................... 7,091 6,855 7,149
Stockholders' equity:
Preferred stock, par value $1.00, authorized 1,000,000
voting and 850,000 non voting shares, none issued
and outstanding -- -- --
Common stock par value $1.00, authorized 35,000,000
shares, issued and outstanding 12,278,570 shares at
February 1, 2002 (net of 1,229,485 treasury shares),
12,624,351 shares at February 2, 2001 (net of 883,704
treasury shares), and 12,266,045 shares at October
31, 2001 (net of 1,242,010 treasury shares).......... 12,279 12,624 12,266
Additional paid-in capital............................. 32,208 51,905 29,048
Retained earnings...................................... 281,831 268,503 313,067
Accumulated comprehensive loss......................... (13,266) (10,850) (12,988)
-------------- ------------- ---------------
Total stockholders' equity.......................... 313,052 322,182 341,393
-------------- ------------- ---------------
Total liabilities and stockholders' equity..........$ 877,547 $ 883,631 $ 835,674
============== ============= ===============
See accompanying notes to condensed consolidated financial statements.
4
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Three Months Ended
---------------------------------------
February 1, February 2,
2002 2001
----------------- ----------------
Cash flows from operating activities:
Net (loss) earnings.............................................$ (29,735) $ 1,304
Adjustments to reconcile net (loss) earnings to net cash
used in operating activities:
Cumulative effect of change in accounting principle........... 24,614 --
Noncash asset impairment write-off............................ 4,163 --
Provision for depreciation and amortization................... 7,336 7,843
Write-down of investments..................................... -- 778
Gain on disposal of property, plant, and equipment............ (10) (33)
Increase in deferred income taxes............................. (34) (4,198)
Tax benefits related to employee stock option transactions.... -- 81
Changes in operating assets and liabilities:
Receivables, net.......................................... (30,512) (42,965)
Inventories, net.......................................... (39,863) (54,107)
Prepaid expenses and other current assets................. (6,209) 2,261
Accounts payable and accrued liabilities.................. (7,846) (312)
---------------- ---------------
Net cash used in operating activities................. (78,396) (89,348)
---------------- ---------------
Cash flows from investing activities:
Purchases of property, plant, and equipment................... (9,245) (8,063)
Proceeds from asset disposals................................. 62 2,065
Decrease in investment in affiliates.......................... -- 50
Increase in other assets...................................... (2,426) (1,154)
Acquisition, net of cash acquired............................. -- (6,189)
---------------- ---------------
Net cash used in investing activities................. (11,609) (13,291)
---------------- ---------------
Cash flows from financing activities:
Increase in short-term debt................................... 79,525 101,811
Repayments of long-term debt.................................. (12) (21)
(Decrease) increase in other long-term liabilities............ (57) 32
Proceeds from exercise of stock options....................... 661 1,253
Purchases of common stock..................................... (1,415) (146)
Dividends on common stock..................................... (1,501) (1,529)
---------------- ---------------
Net cash provided by financing activities............. 77,201 101,400
---------------- ---------------
Foreign currency translation adjustment......................... (26) 897
---------------- ---------------
Net decrease in cash and cash equivalents....................... (12,830) (342)
Cash and cash equivalents at beginning of period................ 12,876 978
---------------- ---------------
Cash and cash equivalents at end of period......................$ 46 $ 636
================ ===============
See accompanying notes to condensed consolidated financial statements.
5
THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
FEBRUARY 1, 2002
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and do not include all
the information and notes required by accounting principles generally accepted
in the United States of America for complete financial statements. Unless the
context indicates otherwise, the terms "company" and "Toro" refer to The Toro
Company and its subsidiaries. In the opinion of management, the unaudited
condensed consolidated financial statements include all adjustments, consisting
primarily of recurring accruals, considered necessary for a fair presentation of
the financial position and the results of operations. Since the company's
business is seasonal, operating results for the three months ended February 1,
2002 are not indicative of the results that may be expected for the fiscal year
ending October 31, 2002. Certain amounts from prior period's financial
statements have been reclassified to conform to this period's presentation.
The company's fiscal year ends on October 31, and quarterly results are reported
based on three month periods that generally end on the Friday closest to the
quarter end. For comparative purposes, however; the company's second and third
quarters always include exactly 13 weeks of results so that the quarter end date
for these two quarters is not necessarily the Friday closest to the quarter end.
For further information, refer to the consolidated financial statements and
notes included in the company's Annual Report on Form 10-K for the fiscal year
ended October 31, 2001. The policies described in that report are used for
preparing quarterly reports.
Accounting Policies
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, management must
make a variety of decisions which impact the reported amounts and the related
disclosures. Such decisions include the selection of appropriate accounting
principles to be applied and assumptions on which to base accounting estimates.
In reaching such decisions, management makes judgments based on its
understanding and analysis of the relevant circumstances. Note 1 to the
consolidated financial statements in the company's Annual Report on Form 10-K
provides a summary of the significant accounting policies followed in the
preparation of the financial statements. Other footnotes in the company's Annual
Report on Form 10-K describe various elements of the financial statements and
the assumptions made in determining specific amounts. While actual results could
differ from those estimated at the time of preparation of the consolidated
financial statements, management is committed to preparing financial statements
which incorporate accounting policies, assumptions, and estimates that promote
the representational faithfulness, verifiability, neutrality, and transparency
of the accounting information included in the consolidated financial statements.
Inventories
Inventories are valued at the lower of cost or net realizable value, with cost
determined by the last-in, first-out (LIFO) method for most inventories.
Inventories were as follows:
(Dollars in thousands) February 1, February 2, October 31,
2002 2001 2001
------------ ----------- -----------
Raw materials and work in process..........$ 69,335 $ 79,820 $ 70,458
Finished goods and service parts........... 250,678 215,318 207,231
----------- ----------- -----------
320,013 295,138 277,689
Less: LIFO................................. 29,264 27,861 29,264
Other reserves.................... 16,225 15,044 13,764
----------- ----------- -----------
Total..................................$ 274,524 $ 252,233 $ 234,661
=========== =========== ===========
6
Restructuring and Other Expense (Income)
In the first quarter of fiscal 2002, the company announced plans to close its
Evansville, Indiana and Riverside, California manufacturing facilities during
fiscal 2002. Approximately 500 employees will be terminated in connection with
closing these manufacturing facilities and related office staff reductions. As
of February 1, 2002, 23 employees have been terminated. In addition, the company
will incur ongoing costs after the facilities are closed and until they are
sold, which is captioned in "other" below. These actions are part of Toro's
overall long-term strategy to reduce production costs and improve long-term
competitiveness. The company also incurred a charge for asset impairment related
to write-downs of patents and non-compete agreements during the first quarter of
fiscal 2002.
The following is an analysis of the company's restructuring and other expense
reserve accounts:
(Dollars in thousands) Asset Severance
Impairment & Benefits Other Total
---------- ------------- --------- ---------
Balance as of October 31, 2001...................$ 200 $ -- $ 45 $ 245
Initial charge................................... 4,163 3,527 2,263 9,953
Utilization...................................... (2,038) (285) (2) (2,325)
----------- ----------- --------- ---------
Balance at February 1, 2002......................$ 2,325 $ 3,242 $ 2,306 $ 7,873
=========== =========== ========= =========
The company expects a majority of the reserve will be utilized by October 31,
2002.
Cumulative Effect of Change in Accounting Principle
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standard (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires the
purchase method of accounting be used for all business combinations initiated
after June 30, 2001. SFAS No. 141 also provides new criteria in the
determination of intangible assets, including goodwill acquired in a business
combination, and expands financial disclosures concerning business combinations
consummated after June 30, 2001. SFAS No. 142 requires that goodwill and
intangible assets with indefinite useful lives no longer be amortized but
instead tested for impairment at least annually at the reporting unit level
using a two-step impairment test. The application of SFAS No. 141 did not affect
previously reported amounts included in goodwill and other intangible assets for
the company.
Effective November 1, 2001, the company adopted SFAS No. 142. SFAS No. 142
provides a six-month transitional period from the effective date of adoption for
the company to perform an assessment of whether there is an indication that
goodwill is impaired. To the extent that an indication of impairment exists, the
company must perform a second test to measure the amount of the impairment. The
company tested for impairment of its reporting units by comparing fair value to
carrying value. Fair value was determined using a discounted cash flow and cost
methodology. The company employed a third-party appraisal firm in determining
the fair value of its agricultural irrigation reporting unit. This evaluation
indicated that all the goodwill recorded for several acquisitions in the
agricultural irrigation market was impaired. The performance of these acquired
businesses has not met management's original expectations. This is mainly due to
lower than anticipated growth rates in the drip line market, which has resulted
in lower industry-wide pricing and margins on product sales. Accordingly,
noncash impairment charges on adoption of SFAS No. 142 of $24.6 million, net of
income tax benefit of $.5 million, were recognized as a cumulative effect of
change in accounting principle for the quarter ended February 1, 2002.
Impairment adjustments recognized after adoption, if any, generally are required
to be recognized as operating expenses, captioned in selling, general, and
administrative expense.
7
Comprehensive (Loss) Income
Comprehensive (loss) income and the components of other comprehensive income
(loss) for the three months ended were as follows:
Three Months Ended
----------------------------
(Dollars in thousands) February 1, February 2,
2002 2001
----------- -----------
Net (loss) earnings.........................$ (29,735) $ 1,304
Other comprehensive income (loss):
Foreign currency translation............. (26) 897
Unrealized loss on derivative instruments (252) (129)
----------- -----------
Comprehensive (loss) income.................$ (30,013) $ 2,072
=========== ===========
Per Share Data
Reconciliations of basic and dilutive weighted average shares of common stock
outstanding are as follows:
Basic February 1, February 2,
- ----- 2002 2001
(Shares in thousands) ----------- -----------
Weighted average number of shares of common
stock outstanding.......................... 12,470 12,717
Assumed issuance of contingent shares ........... 30 36
----------- -----------
Weighted average number of shares of common stock
and assumed issuance of contingent shares.. 12,500 12,753
=========== ===========
Dilutive February 1, February 2,
- -------- 2002 2001
(Shares in thousands) ----------- ------------
Weighted average number of shares of common stock
and assumed issuance of contingent shares.. 12,500 12,753
Assumed conversion of stock options.............. -- 309
----------- -----------
Weighted average number of shares of common stock,
assumed issuance of contingent shares, and
assumed conversion of stock options........ 12,500 13,062
=========== ===========
8
Segment Data
The presentation of segment information reflects the manner in which management
organizes segments for making operating decisions and assessing performance. On
this basis, the company has determined it has three reportable business
segments: Professional, Residential, and Distribution. The other segment
consists of corporate activities, including corporate financing activities and
elimination of intersegment revenues and expenses.
The following table shows the summarized financial information concerning the
company's reportable segments:
(Dollars in thousands)
Three months ended February 1, 2002 Professional(1) Residential(2) Distribution Other Total
- ----------------------------------- ------------ ----------- ------------ ---------- --------
Net sales.........................................$175,765 $92,216 $24,229 $(14,295) $277,915
Intersegment gross sales.......................... 15,667 1,250 -- (16,917) --
Earnings (loss) before income taxes............... 9,080 7,706 (2,087) (22,343) (7,644)
Total assets...................................... 448,704 170,099 53,978 204,766 877,547
Three months ended February 2, 2001
- -----------------------------------
Net sales.........................................$183,614 $89,327 $18,232 $(10,823) $280,350
Intersegment gross sales.......................... 12,533 951 -- (13,484) --
Earnings (loss) before income taxes............... 18,071 6,492 (2,580) (19,914) 2,069
Total assets...................................... 472,757 145,249 39,151 226,474 883,631
- ----------
(1) Includes restructuring and other expense of $10.0 million in fiscal 2002.
(2) Includes restructuring and other expense (income) of $(0.7) million in
fiscal 2001.
The following table presents the details of the other segment earnings (loss)
before income taxes:
Three Months Ended
-----------------------------
(Dollars in thousands) February 1, February 2,
2002 2001
----------- ------------
Corporate expenses.................................$(21,249) $(18,421)
Finance charge revenue............................. 1,068 1,321
Elimination of corporate financing expense......... 2,615 2,679
Interest expense, net.............................. (5,320) (5,276)
Other income (expenses)............................ 543 (217)
-------- --------
Total..............................................$(22,343) $(19,914)
======== ========
9
Goodwill
As described previously, the company adopted SFAS No. 142 as of November 1,
2001. The following table reflects the consolidated results adjusted as though
the adoption of SFAS No. 142 occurred as of the beginning of the three month
period ended February 2, 2001:
Three Months Ended
---------------------------
(Dollars in thousands) February 1, February 2,
2002 2001
------------ -----------
Net (loss) earnings:
As reported.................................$ (29,735) $ 1,304
Goodwill amortization, net of tax........... -- 1,443
----------- -----------
Adjusted net (loss) earnings................$ (29,735) $ 2,747
=========== ===========
Basic net (loss) earnings per share:
As reported.................................$ (2.38) $ 0.10
Goodwill amortization....................... -- 0.11
----------- -----------
Adjusted basic net (loss) earnings per share$ (2.38) $ 0.21
=========== ===========
Diluted net (loss) earnings per share:
As reported.................................$ (2.38) $ 0.10
Goodwill amortization....................... -- 0.11
----------- -----------
Adjusted diluted net (loss) earnings per
share....................................$ (2.38) $ 0.21
=========== ===========
The changes in the net carrying amount of goodwill for the first quarter of
fiscal 2002 were as follows:
(Dollars in thousands) Professional Residential
Segment Segment Total
------------ ----------- -----------
Balance as of October 31, 2001.............$ 94,050 $ 8,874 $ 102,924
Impairment charge ......................... (25,123) -- (25,123)
Translation adjustment..................... 1 3 4
----------- ----------- -----------
Balance as of February 1, 2002.............$ 68,928 $ 8,877 $ 77,805
=========== =========== ===========
Other Intangible Assets
During the first quarter of fiscal 2002, the company determined that the patents
and non-compete agreements related to the agricultural irrigation market were
impaired. This impairment charge of $2.0 million was recognized as part of
restructuring and other expense during the first quarter of fiscal 2002.
The components of other amortizable intangible assets were as follows:
February 1, 2002 October 3, 2001
---------------------------------- ------------------------------
(Dollars in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Patents............................................ $ 6,104 $(4,341) $ 7,104 $(4,501)
Non-compete agreements............................. 800 (276) 3,183 (1,285)
Other.............................................. 800 (740) 1,197 (1,090)
-------- ------- -------- -------
Total.............................................. $ 7,704 $(5,357) $ 11,484 $(6,876)
======== ======= ======== =======
Total other intangible assets, net................. $ 2,347 $ 4,608
======== ========
Amortization expense for intangible assets during the first quarter of fiscal
2002 was $0.2 million. Estimated amortization expense for the remainder of
fiscal 2002 and succeeding fiscal years are as follows ($ in thousands): 2002
(remainder), $447; 2003, $479; 2004, $357; 2005, $337; 2006, $337; 2007, $182
and beyond 2008, $208.
10
Derivative Instruments and Hedging Activities
The company uses derivative instruments to manage exposure to foreign currency.
Toro uses derivatives only in an attempt to limit underlying exposure to
currency fluctuations, and not for trading purposes. The company maintains a
record of each hedging instrument and the items it hedges, as well as the
risk-management objective and strategy for undertaking the particular hedge. The
company assesses, both at the hedge's inception and on an ongoing basis, whether
the derivatives that are used in hedging transactions are highly effective in
offsetting changes in cash flows of the hedged item.
The company enters into foreign currency exchange contracts to hedge the risk
from forecasted settlement in local currencies of trade sales. These contracts
are designated as cash flow hedges with the fair value recorded in accumulated
comprehensive income (loss) and as a hedge asset or liability in prepaid
expenses or accrued liabilities, as applicable. Once the forecasted transaction
has been recognized as a sale and a related asset recorded in the balance sheet,
the related fair value of the derivative hedge contract is reclassified from
accumulated comprehensive income (loss) into earnings. During the quarter ended
February 1, 2002, the amount of adjustments to earnings for such cash flow
hedges was immaterial. At February 1, 2002, the amount of such contracts
outstanding was $17.3 million. The unrecognized after-tax gain portion of the
fair value of the contracts recorded in accumulated comprehensive income (loss)
at February 1, 2002 was $0.2 million.
The company enters into foreign currency exchange contracts to hedge the risk
from forecasted settlement in local currencies of trade purchases. These
contracts are designated as cash flow hedges with the fair value recorded in
accumulated comprehensive income (loss) and as a hedge asset or liability in
prepaid expenses or accrued liabilities, as applicable. Once the forecasted
transaction has been recognized as a purchase and a related liability recorded
in the balance sheet, the related fair value of the derivative hedge contract is
reclassified from accumulated comprehensive income (loss) into earnings. During
the quarter ended February 1, 2002, the amount of adjustments to earnings for
such cash flow hedges was immaterial. At February 1, 2002, the amount of such
contracts outstanding was $8.0 million. The unrecognized after-tax loss portion
of the fair value of the contracts recorded in accumulated comprehensive income
(loss) at February 1, 2002 was $0.3 million.
The company also enters into foreign currency exchange contracts to hedge the
risk from forecasted settlement in local currencies of intercompany sales. Some
of these transactions and other foreign currency exchange contracts do not meet
the accounting rules established under SFAS No. 133 of recording the
unrecognized after-tax gain or loss portion of the fair value of the contracts
in accumulated comprehensive income (loss). Therefore, the related fair value of
the derivative hedge contract is recognized in earnings.
New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." This statement addresses the diverse accounting practices for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The company plans to adopt the provisions of
SFAS No. 143 during the first quarter of fiscal 2003, as required. Management
expects that the adoption of SFAS No. 143 will not have a material impact on the
company's financial statements.
In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." This statement establishes a single accounting
model for the impairment or disposal of long-lived assets. The company plans to
adopt the provisions of SFAS No. 144 during the first quarter of fiscal 2003, as
required. Management expects that the adoption of SFAS No. 144 will not have a
material impact on the company's financial statements.
11
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
Safe Harbor Statement. This Quarterly Report on Form 10-Q contains not only
historical information, but also forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. Statements that are not historical are forward-looking and
reflect expectations about future company performance. In addition,
forward-looking statements may be made orally or in press releases, conferences,
reports, on Toro's worldwide web site, or otherwise, in the future by or on
behalf of the company. When used by or on behalf of the company, the words
"expect", "anticipate", "estimate", "believe", "intend", and similar expressions
generally identify forward-looking statements.
Forward-looking statements involve risks and uncertainties. These uncertainties
include factors that affect all businesses operating in a global market, as well
as matters specific to the company and the markets it serves. Particular risks
and uncertainties that could affect the company's overall financial position
include the continuing slowdown in the global and domestic economy that began in
late 2000; additional economic uncertainty created by the threat of continued
terrorist acts and war, which may result in further reductions in consumer
spending, including spending for travel and golf, and heightened security for
import and export shipments of components and finished goods; the effect of the
economic slowdown on Toro's customers' ability to pay amounts owed to Toro;
continued weakness in consumer confidence and related effects of a recession;
weakness in retail sales; inability to achieve earnings growth in fiscal 2002
(excluding the effect of the change in reporting goodwill and announced
restructuring plans) above fiscal 2001; inability to increase fiscal 2002
revenue above fiscal 2001; inability to achieve goals of the "5 by Five" profit
improvement program, which means achieving an after tax return on sales of five
percent by fiscal 2003; the company's ability to develop and manufacture new and
existing products based on anticipated investments in manufacturing capacity and
engineering; market acceptance of existing and new products relative to
expectations and based on current commitments to fund advertising and
promotions; increased competition in the company's businesses from competitors
that have greater financial resources, including competitive pricing pressures;
financial viability of some distributors and dealers; the company's ability to
acquire, develop, and integrate new businesses and manage alliances
successfully; changes in distributor ownership; changes in distributors',
dealers', home centers', or mass retailers' purchasing practices, especially
elimination or reduction of shelf space for Toro's products; the company's
ability to cost-effectively expand existing, open new, move production between,
and close manufacturing facilities; the company's ability to manage costs and
capacity constraints at its manufacturing facilities; the company's ability to
manage inventory levels and fully realize recorded inventory value; the impact
of unexpected trends in warranty claims or unknown product defects; the ability
to retain and hire quality employees; threatened or pending litigation on
matters relating to patent infringement, employment, and commercial disputes;
and the impact of new accounting standards.
Particular risks and uncertainties facing the company's professional segment at
the present include a continued slowdown in both global and domestic economic
growth that has been important to the growth of the company's professional
businesses, including the golf and landscape contractor markets; the degree of
success related to the announced restructuring and plant consolidations; a
continued slowdown in new golf course construction or existing golf course
renovations; a decline in the growth rate in the number of new golfers, which
slows new golf course construction; a reported decline in rounds of golf due to
the economic slowdown and the continued threat of terrorist acts that have
negatively impacted the tourism industry, which could delay investments by golf
courses in new equipment and irrigation systems; a potential slowdown in new
home construction; a potential slowdown in the trend to outsource lawn
maintenance to landscape contractors; the financial impact of direct-to-dealer
distribution changes related to the Sitework Systems product line; challenges of
establishing new dealers for the Sitework Systems product line; and the degree
of success in the agricultural irrigation market for cost reduction efforts and
management changes.
12
Particular risks and uncertainties facing the company's residential segment at
the present time include inflationary pressures and slower economic growth; a
decline in consumer confidence; a decline in retail sales; a weaker than
expected market response to new products and potential sales decline for
existing product categories; degree of financial success related to the new
moderate- priced walk power mowers and related capital investments for a new
production facility to satisfy expected increase in demand for this product and
the increased dependence on The Home Depot as a customer; changing buying
patterns, including but not limited to a trend away from purchases at dealer
outlets to price and value sensitive purchases at hardware retailers, home
centers, and mass retailers; loss of, or a significant reduction in, sales
through a significant distribution channel or customer, particularly as the
company's residential segment is more dependent on home center sales; and a
potential slowdown in home sales.
Particular risks and uncertainties facing the company's international business
at the present include weak economic conditions in the European market;
heightened security for import and export shipments of components or finished
goods, including delays at border crossings, especially with Mexico; the cost of
price support provided to international customers and suppliers; internal and
external conflicts in or between foreign countries and the economic recession in
other countries; currency fluctuations of the dollar against the euro, Japanese
yen, Australian dollar, British pound, Canadian dollar, and Mexican peso;
competitive implications and price transparencies related to the new euro
currency; and tax law changes.
Particular risks and uncertainties facing the company's distribution segment at
the present include inflationary pressures and slower economic growth; a decline
in consumer confidence; a decline in retail sales; viability of dealers; degree
of success related to operation restructuring, including technology and facility
investments in the distribution companies; ability to capture national account
business; purchasing practices of national accounts; a continued slowdown in new
golf course construction or existing golf course renovations; a decline in
rounds of golf following the September 11 events that has negatively impacted
the tourism industry and potential related equipment and irrigation product
purchases by golf resorts; successful integration of acquired distribution
companies; impact of Toro pricing on some product lines sold through the
distribution companies; ability to successfully implement a just-in-time
inventory initiative; and unforeseen product quality problems.
In addition, the company is subject to risks and uncertainties facing its
industry in general, including changes in business, financial, and political
conditions and the economy in general in both foreign and domestic markets; the
uncertainty of the economic effect from terrorists' actions and the war on
terrorism; weather conditions affecting demand, including warm winters and wet
or cold spring and dry summer weather; unanticipated problems or costs
associated with the transition of European legacy currencies to the common euro
currency; a slowing in housing starts or new golf course starts; inability to
raise prices of products due to market conditions; changes in market
demographics; actions of competitors; seasonal factors in the company's
industry; unforeseen litigation; government action, including budget levels,
regulation, and legislation, primarily legislation relating to the environment,
commerce, infrastructure spending, health, and safety; availability of raw
materials and unforeseen price fluctuations for commodity raw materials; and the
company's ability to maintain good relations with its employees.
The company wishes to caution readers not to place undue reliance on any
forward-looking statement and to recognize that the statements are predictions
of future results, which may not occur as anticipated. Actual results could
differ materially from those anticipated in the forward-looking statements and
from historical results, due to the risks and uncertainties described above, as
well as others not now anticipated. The foregoing statements are not exclusive
and further information concerning the company and its businesses, including
factors that potentially could materially affect the company's financial
results, may emerge from time to time. Toro assumes no obligation to update
forward-looking statements to reflect actual results or changes in factors or
assumptions affecting such forward-looking statements.
13
RESULTS OF OPERATIONS
First quarter net sales were $277.9 million compared to $280.4 million last
year, a slight decrease of 0.9 percent. Worldwide sales for the professional
segment were down 4.3 percent compared to last year's first quarter due
primarily to customers reluctance to place orders because of uncertain economic
conditions and Toro's efforts to manage field inventory levels. Residential
segment sales for the first quarter were up by 3.2 percent compared to last year
due partially to initial stocking and early season shipments of the new
moderate-priced line of Toro walk power mowers. Distribution segment sales were
also higher than in last year's first quarter due to the addition of revenues of
a distribution company acquired in fiscal 2001, which also contributed to the
unfavorable change in the other segment due to the sales elimination increase.
International sales were down 8.2 percent compared to last year due in part to
reduced demand from the European region. Disregarding currency effects,
international sales declined 6.5 percent.
The following table summarizes net sales by segment:
Three Months Ended
--------------------------------------------------------------
(Dollars in thousands) February 1, February 2,
2002 2001 $ Change % Change
------------- ----------- ----------- ---------
Professional.....................................$ 175,765 $ 183,614 $ (7,849) (4.3)%
Residential...................................... 92,216 89,327 2,889 3.2
Distribution..................................... 24,229 18,232 5,997 32.9
Other............................................ (14,295) (10,823) (3,472) (32.1)
----------- ----------- -----------
Total *......................................$ 277,915 $ 280,350 $ (2,435) (0.9)%
=========== =========== ===========
* Includes international sales of:...............$ 63,095 $ 68,733 $ (5,638) (8.2)%
First quarter net loss for fiscal 2002 was $29.7 million, which includes a
cumulative effect of change in accounting principle of $24.6 million for the
goodwill write-off related to the adoption of SFAS No. 142 as well as
restructuring and other expense of $10.0 million. Dilutive net earnings per
share before cumulative effect of change in accounting principle and excluding
restructuring and other expense (income) as well as goodwill amortization in the
first quarter of fiscal 2001, were $0.12 for the first quarter of fiscal 2002,
compared to $0.18 in the first quarter of fiscal 2001. This decline was
primarily due to higher bad debt expense and lower other income, net due to
lower levels of foreign currency exchange rate gains.
The following table summarizes the changes in net (loss) earnings and dilutive
earnings per share data, net of tax effect:
Three Months Ended
----------------------------------------------------------------
February 1, 2002 February 2, 2001
----------------------------- -------------------------------
Dollars Dilutive per Dollars Dilutive per
(in thousands) Common Share (in thousands) Common Share
------------- ------------ -------------- ------------
Net (loss) earnings................................ $(29,735) $ (2.38) $ 1,304 $ 0.10
Add (subtract):
Cumulative effect of change in accounting principle 24,614 1.97 -- --
Restructuring and other expense (income)......... 6,668 0.53 (447) (0.03)
Goodwill amortization expense.................... -- -- 1,443 0.11
-------- ------- ------- ----------
Adjusted earnings before cumulative effect of
change in accounting principle, restructuring
and other expense (income), and goodwill
amortization expense ........................... $ 1,547 $ 0.12 $ 2,300 $ 0.18
======== ========= ======= ==========
14
Professional Segment Net Sales
Net sales for the worldwide professional segment were down 4.3 percent compared
to the first quarter of fiscal 2001. Worldwide shipments of commercial
equipment, landscape contractor mowing equipment, and Toro brand irrigation
systems were down mainly due to customers reluctance to place orders because of
uncertain economic conditions and Toro's efforts to manage field inventory
levels. However, Irritrol and agricultural irrigation product sales were up
compared to last year due to lower Irritrol field inventory levels entering
fiscal 2002 as well as higher international sales for agricultural irrigation
products. Sitework Systems shipments were also higher than last year due to the
addition of sales from new dealers in fiscal 2002, and because sales for the
same quarter in fiscal 2001 were lower due to product returns related to the
distribution change to dealer-direct.
Residential Segment Net Sales
Net sales for the worldwide residential segment in the first quarter of fiscal
2002 were $92.2 million compared to $89.3 million in the first quarter of fiscal
2001, an increase of 3.2 percent. Walk power mower shipments led this increase
due to the initial stocking and early season sales of the new moderate-priced
line of Toro walk power mowers. Sales of electric blowers and trimmers as well
as retail irrigation products were also higher compared to the first quarter of
fiscal 2001 due to the warm fall weather in most markets that extended the
selling season. Offsetting those increases to some degree were lower worldwide
shipments of riding products due to products manufactured for a third party as
well as lower sales for other riding product lines due to continued weak
economic conditions for higher-priced products.
Distribution Segment Net Sales
Net sales for the distribution segment in the first quarter of fiscal 2002 were
$24.2 million compared to $18.2 million in the first quarter of fiscal 2001, an
increase of 32.9 percent. This increase was due to the addition of sales from a
distribution company acquired in fiscal 2001.
Other Segment Net Sales
Net sales for the other segment includes the elimination of sales from the
professional and residential segments to the distribution segment, and
elimination of the professional and residential segment's floor plan interest
costs from the Toro Credit Company. The other segment net sales elimination for
the first quarter of fiscal 2002 was $14.3 million compared to $10.8 million in
the first quarter of fiscal 2001. This increase was mainly due to the additional
sales elimination for a distribution company acquired in fiscal 2001.
Gross Profit
First quarter gross profit was $95.3 million compared to $91.4 million last
year, an increase of 4.3 percent. As a percentage of net sales, gross profit for
the first quarter of fiscal 2002 was 34.3 percent compared to 32.6 percent in
the first quarter of fiscal 2001. This increase was due to cost reduction
efforts, favorable change in the Japanese yen exchange rate with the U.S.
dollar, lower resin costs for irrigation products, as well as positive results
from lower material costs as part of the company's "5 by Five" program
initiatives. International gross profit also improved due to lower currency
support costs in fiscal 2002 compared to fiscal 2001. Somewhat offsetting those
positive factors were higher manufacturing costs due to lower plant utilization.
Selling, General, and Administrative Expense
First quarter selling, general, and administrative expense (SG&A) was $89.0
million compared to $87.6 million in the same period last year, an increase of
1.6 percent. SG&A for fiscal 2001 included goodwill amortization expense of $2.1
million, which is not reflected in SG&A costs in fiscal 2002 due to the adoption
of SFAS No. 142 described previously. Excluding goodwill amortization expense
for the first quarter of fiscal 2001, SG&A as a percentage of net sales was 32.0
percent in the first quarter of fiscal 2002 compared to 30.5 percent in the
first quarter of fiscal 2001. SG&A costs were up mainly due to higher bad debt
expense due to collection uncertainty for some customers and increased incentive
compensation expense.
15
Restructuring and Other Expense (Income)
Restructuring and other expense for the first quarter of fiscal 2002 was $10.0
million. In the first quarter of fiscal 2002, the company announced plans to
close its Evansville, Indiana and Riverside, California manufacturing facilities
during fiscal 2002. These actions are part of Toro's overall long-term strategy
to reduce production costs and improve long-term competitiveness. The closure of
these facilities resulted in a pre-tax restructuring and other expense charge of
$8.0 million. In the first quarter of fiscal 2002, the company also incurred a
$2.0 million charge for asset impairment related to write-offs of patents and
non-compete agreements in the agricultural irrigation business. Toro evaluated
the recoverability of some acquired intangible assets as part of the adoption of
SFAS No. 142 and determined the acquired patents and non-compete agreements in
the agricultural irrigation business had no future value due to changes in this
business. During the first quarter of fiscal 2001, the company had restructuring
and other unusual income of $0.7 million. This income related to the reversal of
the remaining accrual for closing of the Sardis, Mississippi facility, which was
sold during the first quarter of fiscal 2001.
Interest Expense
First quarter interest expense of $5.3 million was comparable to last year.
Other Income, Net
First quarter other income, net, was $1.3 million compared to $2.9 million in
the same period last year, a decrease of 54 percent. The decrease was due to
lower levels of currency exchange rate gains, higher litigation costs, and lower
finance charge revenue. This decline was somewhat offset by lower amounts of
investment write-downs and higher royalty income in fiscal 2002 compared to
fiscal 2001.
Operating Earnings (Loss) by Segment
Operating earnings (loss) by segment is defined as earnings (loss) from
operations plus other income, net for the professional, residential, and
distribution segments. The other segment operating loss consists of corporate
activities, including corporate financing activities, other income, net, and
interest expense.
Professional Segment Operating Earnings
Operating earnings before restructuring and other expense for the worldwide
professional segment in the first quarter of fiscal 2002 was $19.0 million
compared to $18.1 million last year, an increase of 5.3 percent. As a percentage
of net sales, first quarter fiscal 2002 operating earnings before restructuring
and other expense was 10.8 percent compared to 9.8 percent from last year's
comparable quarter. Gross margin as a percent of sales rose 1.1 percent, mainly
from cost reduction efforts, favorable change in the Japanese yen exchange rate
with the U.S. dollar, lower resin costs for irrigation products, as well as
positive results from lower material costs as part of the company's "5 by Five"
program initiatives, somewhat offset by higher manufacturing costs due to lower
plant utilization. SG&A costs as a percent of professional segment sales were
slightly lower by 0.2 percent due to the exclusion of goodwill amortization
expense in the first quarter of fiscal 2002.
Residential Segment Operating Earnings
Operating earnings before restructuring and other income for the worldwide
residential segment in the first quarter of fiscal 2002 was $7.7 million
compared to $5.8 million in the first quarter of fiscal 2001, an increase of
32.6 percent. As a percentage of net sales, residential segment operating
margins increased to 8.4 percent from 6.5 percent for the same quarter in fiscal
2001. Gross margin as a percent of sales improved 1.6 percent, mainly for the
international residential segment, due to lower costs for currency support in
fiscal 2002 compared to fiscal 2001. However, domestic residential segment gross
margins were down compared to the first quarter of fiscal 2001 due to lower
margins for the new moderate-priced line of walk power mowers and higher
manufacturing costs. SG&A costs were lower by 0.7 percent as a percentage of
residential segment sales due to leveraging fixed SG&A costs over higher sales
volumes.
16
Operating Earnings (Loss) by Segment (continued)
Distribution Segment Operating Losses
Operating losses for the distribution segment in the first quarter of fiscal
2002 were $2.1 million compared to $2.6 million for the first quarter of fiscal
2001. The 19.1 percent improvement was due to lower levels of expenses for
facility moving costs for two company-owned distributors in fiscal 2002 compared
to fiscal 2001.
Other Segment Operating Losses
Operating losses for the other segment in the first quarter of fiscal 2002 were
$22.3 million compared to $19.9 million for last year's comparable quarter.
Corporate SG&A expense increased mainly due to higher bad debt expense and
profit sharing and incentive compensation expenses.
Provision for Income Taxes
The effective tax rate for the first quarter of fiscal 2002 was 33.0 percent
compared to 37.0 percent for the first quarter of fiscal 2001. The decrease was
mainly due to the adoption of SFAS No. 142 that eliminated goodwill amortization
expense beginning in the first quarter of fiscal 2002, of which most was not
deductible for tax purposes. The tax rate also decreased due to increased
benefits from foreign tax strategies related to Toro's foreign sales
corporation.
Cumulative Effect of Change in Accounting Principle
In connection with the adoption of SFAS No. 142, the company performed an
evaluation of goodwill as of November 1, 2001. The results of the evaluation
indicated that goodwill related to the agricultural irrigation reporting unit
was impaired. The performance of this reporting unit has not met management's
original expectations, mainly due to lower than anticipated growth rates in the
drip line market. This has resulted in lower industry-wide pricing and margins
on product sales. The company measured the amount of impairment based on a
comparison of the fair value to its carrying value. Accordingly, the company
recognized a $24.6 million non-cash charge, net of income tax benefit of $0.5
million, as a cumulative effect of change in accounting principle for the
write-off of goodwill for the agricultural irrigation reporting unit. The
results of this unit are reflected in the professional segment of the company.
The company expects the performance of the agricultural irrigation business will
improve over the next few years as a result of cost reduction efforts and
strengthened management. The company is still committed to this business.
Financial Position as of February 1, 2002
February 1, 2002 compared to February 2, 2001
Total assets at February 1, 2002 were $877.5 million compared to $883.6 million
on February 2, 2001, a decrease of 0.7 percent. Net accounts receivable
decreased 1.4 percent from last year. The addition of a distribution company
acquired in the second half of fiscal 2001 added $3.4 million of net incremental
receivables. The overall decrease of net accounts receivable was attributed from
lower sales volumes and higher bad debt reserves. Inventory increased 8.8
percent from last year. The addition of a new distribution company acquired in
the second half of fiscal 2001 added $4.5 million of net incremental inventory.
The overall inventory increase was also due to prebuilding landscape contractor
and some residential segment products due to manufacturing capacity constraints
and anticipated increase in demand for the new line of moderate-priced lawn
mowers. Net property, plant, and equipment increased 6.3 percent due to higher
amounts of capital additions in comparison to depreciation expense. Goodwill and
other intangible assets decreased $31.8 million mainly due to the goodwill and
other intangible asset write-offs for the agricultural irrigation business as
part of the adoption of SFAS No. 142. In addition amortization expense of
goodwill and other intangible assets in fiscal 2001 also contributed to the
decrease in goodwill and other intangible assets.
Total current liabilities were $362.9 million compared to $360.1 million last
year, an increase of 0.8 percent. This slight increase was mainly due to higher
accrued liabilities for deferred compensation.
17
Financial Position as of February 1, 2002 (continued)
February 1, 2002 compared to October 31, 2001
Total assets at February 1, 2002 were $877.5 million compared to $835.7 million
at October 31, 2001, an increase of 5.0 percent. Net accounts receivable
increased $30.5 million from October 31, 2001 due to the seasonal increase in
accounts receivable, which historically occurs between January and April.
Inventory increased by $39.9 million due to the normal seasonal buildup of
inventory in the first quarter plus prebuilding of inventory as a result of
manufacturing capacity constraints. Goodwill and other intangible assets
decreased $27.4 million due to the goodwill and other intangible asset
write-offs for the agricultural irrigation business as part of the adoption of
SFAS No. 142.
Total current liabilities at February 1, 2002 were $362.9 million compared to
$292.6 million at October 31, 2001, an increase of 24.0 percent. The increase
was the result of additional short-term debt of $79.5 million, reflecting the
company's strategy of utilizing short-term debt to fund seasonal working capital
needs, which are historically highest in the winter and spring months. Accrued
liabilities decreased $7.3 million primarily as a result of the payment of
accrued profit sharing and related incentive compensation accruals. However, the
decrease was somewhat offset by additional accruals for restructuring and other
expense described previously during the first quarter of fiscal 2002.
Critical Accounting Policies
Accounts and Notes Receivable Valuation
The company establishes a reserve for specific accounts and notes receivables
that are believed to be uncollectable as well as an estimate of uncollectable
receivables. The company evaluates past collection history, current financial
conditions of key customers, and economic conditions when establishing an
allowance for doubtful accounts every quarter. Portions of the accounts
receivable are supported by a security interest in product held by customers,
which minimizes Toro's collection exposure. A deterioration in the financial
condition of any key customer or a significant continued slow down in the
economy could have a material negative impact on the company's ability to
collect a portion of the accounts and notes receivable. Management believes it
has properly reserved for potential uncollectable receivables at February 1,
2002.
Inventory Valuation
The company establishes a reserve for excess and obsolete inventory. The reserve
is based on a review of the expected selling price of inventory each quarter.
Toro's inventory is not exposed to rapid technological changes. However,
valuation of inventory can be affected by significant redesign of existing
products. The company has programs in place that it believes can facilitate
sales of products that will be significantly redesigned for the next model year.
The company manufactures products in advance of the selling season. As a result,
Toro could have higher than planned inventory levels if demand declines
significantly from anticipated levels. The majority of the company's products do
not change from year to year, so that excess inventory from one year is usually
sold for at least cost in the next fiscal year. Management believes it has
established an adequate reserve for excess and obsolete inventory as of February
1, 2002.
Warranty Reserves
The company establishes a reserve for future warranty claims at the time of sale
based on historical claims experience by product line. The company also
establishes reserves for special rework campaigns for known major product
modifications. In general, warranties tend to be for six months to ten years,
and cover all parts and labor for non-maintenance repairs and wear items,
provided operator abuse, improper use, or negligence did not necessitate the
repair. Actual claims could be materially higher than the reserve accrued at the
time of sale due both to the long warranty period offered by the company and to
the possibility that actual claims could be higher than the reserve if a
significant manufacturing or design defect is not discovered until after the
product is delivered to customers.
Management believes that analysis of historical trends and knowledge of
potential manufacturing or design problems provides sufficient information to
establish an estimate for warranty claims at the time of sale. Management
believes it has sufficiently reserved for future warranty claims as of February
1, 2002.
18
Liquidity and Capital Resources
Cash used in operating activities for the first three months of fiscal 2002 was
$11.0 million, or 12.3 percent lower than the first three months in fiscal 2001,
primarily due to a slower rate of increase in working capital, mainly for
receivables and inventory, and deferred tax assets as compared to the prior
year's comparable period. Cash used in investing activities was lower by $1.7
million, or 12.7 percent when compared with the first quarter of fiscal 2001,
during which the company paid $6.2 million, net of cash acquired for Goossen.
This decline was slightly offset by an increase in purchases of property, plant,
and equipment and other assets for the first three months of fiscal 2002
compared to the same time period in fiscal 2001. Cash provided by financing
activities was lower by $24.2 million because the company borrowed less
short-term debt during the first quarter of fiscal 2002 compared to the first
quarter of fiscal 2001. In addition, Toro was able to use cash on hand at
October 31, 2001, which was higher compared to cash on hand at October 31, 2000,
for operating and investing activities in the first quarter of fiscal 2002.
The company entered into new agreements (Working Capital Agreements) with its
banks during February 2002 to fund its seasonal working capital requirements.
The Working Capital Agreements provide $250.0 million of committed unsecured
bank credit lines. Under these Working Capital Agreements, the company can also
borrow in currencies other than U.S. dollars. Interest expense on these credit
lines is based on LIBOR plus a basis point spread defined in the Working Capital
Agreements, which increased in the new agreements. However, the company
anticipates lower interest expense in fiscal 2002 compared to fiscal 2001 due to
lower average LIBOR rates. The company's non-U.S. operations and a domestic
subsidiary also maintain unsecured short-term lines of credit of approximately
$10 million. These facilities bear interest at various rates depending on the
rates in their respective countries of operation. The company also has a letter
of credit subfacility as part of the above Working Capital Agreements. The
company's business is seasonal, with peak borrowing under the agreements
described above generally occurring between February and May each year.
Significant financial covenants in the Working Capital Agreements relate to
interest coverage and debt to total capitalization ratios. The company was in
compliance with all covenants related to the Working Capital Agreements at
February 1, 2002. If the company was out of compliance with any debt covenant
required by the Working Capital Agreements, the banks could terminate their
commitments unless Toro could negotiate a covenant waiver from the banks. In
addition, the company's long-term public notes and debentures could become due
and payable if the company was unable to obtain a covenant waiver or refinance
its short-term debt under its Working Capital Agreements. If the company's
credit rating falls below investment grade, the interest rate it currently pays
on outstanding debt on the Working Capital Agreements would rise, but the credit
commitments could not be cancelled by the banks based only on a ratings
downgrade.
Management believes that the combination of funds available through its existing
Working Capital Agreements, coupled with forecasted cash flows, will provide the
necessary capital resources for the company's anticipated working capital,
capital additions, acquisitions, and stock repurchases during the next twelve
months.
Contractual Obligations and Commercial Commitments
The following information is presented as of October 31, 2001, and there has
been no material change in this information.
(Dollars in thousands) Due in Fiscal
-------------------------------------------------------------------------------
Obligation 2002 2003 2004 2005 2006 After 2006 Total
- ---------- ---- ---- ---- ---- ---- ---------- -----
Long-term debt.................$ 513 $15,830 $ 44 $ 45 $ 46 $178,600 $195,078
Capital lease obligation....... 92 -- -- -- -- -- 92
Operating leases............... 9,523 7,220 5,075 3,676 2,527 5,761 33,782
------- ------- ------ ------ ------ -------- --------
Total cash obligations.........$10,128 $23,050 $5,119 $3,721 $2,573 $184,361 $228,952
======= ======= ====== ====== ====== ======== ========
The company also has approximately $20 million outstanding letters of credit at
any given time as required by certain vendor contracts. The company also has
guaranteed debts incurred by business partners, aggregating $401,000 as of
October 31, 2001.
19
Customer Financing
Wholesale Financing
Toro Credit Company (TCC), a wholly owned finance subsidiary of the company,
provides financing for selected products manufactured by Toro to Toro's North
American distributors and approximately 250 domestic dealers. Independent Toro
and Exmark distributors and dealers that do not finance through TCC generally
finance their inventories with third party financing companies.
TCC and other third party finance companies purchase selected receivables from
Toro and its distributors and dealers for extended periods, which enables those
customers to carry representative inventories of equipment. Down payments are
not required and, depending on the finance program for each product line,
finance charges are either incurred by Toro, shared between Toro and the
distributor or dealer, or paid by the distributor or dealer. A security interest
is retained in the distributors' and dealers' inventories, and periodic physical
checks are made of those inventories. Under the terms of the sales to
distributors and dealers, finance charges are charged to distributors and
dealers on outstanding balances, from the earlier of the date when product is
sold to a customer, or the expiration of company-supported finance terms granted
at the time of sale to the distributor or dealer, until payment is received by
the third party finance company. Rates are generally fixed or based on prime
rate plus a fixed percentage based on whether the financing is for a distributor
or dealer. Rates may also vary based on the product that is financed.
Distributors and dealers cannot cancel purchases after goods are shipped and are
responsible for payment even if the equipment is not sold to retail customers.
A significant third party financing company has purchased $302.5 million of
domestic receivables of Toro financed products during the last twelve months.
The outstanding receivable balance owed from the company's domestic distributors
and dealers to a significant third party financing company was $113.9 million at
February 1, 2002. The company also enters into limited inventory repurchase
agreements with third party financing companies. At February 1, 2002, the
company was contingently liable to repurchase up to $3.7 million of inventory
related to receivables under these financing arrangements. The company has
repurchased only immaterial amounts of inventory from third party financing
companies over the past three years. However, an adverse change in retail sales
could cause this situation to change and thereby require Toro to repurchase
financed product.
In the normal course of business, the company has arrangements with other third
party finance companies to provide wholesale financing services to our
distribution partners. None of these other arrangements has any material
financial involvement required by the company, except for the arrangement
discussed above.
End-User Financing
During February 2002, the company entered into an agreement with a third party
financing company to provide lease financing options to domestic golf course and
some grounds equipment customers. The purpose of the agreement is a sales and
marketing tool to give end-users of the company's products alternative financing
options when purchasing Toro product. Under the terms of this agreement, the
company could be contingently liable for a portion of the credit collection and
residual realization risk on the underlying equipment for leasing transactions
financed under this program. Under a provision of this agreement, if Toro
maintains an investment grade credit rating, the company is not required to
provide any collateral. If the company's credit rating falls below investment
grade, Toro would be required to provide collateral in the form of a letter of
credit, up to $5.0 million.
In the normal course of business, Toro has arrangements with other financial
institutions to provide various forms of financing options to end customers.
None of these other arrangements has any material financial involvement required
by the company.
Inflation
The company is subject to the effects of inflation and changing prices. In
management's opinion, changes in net sales and net earnings that have resulted
from inflation and changing prices have not been material during the periods
presented. However, there is no assurance that inflation will not materially
affect the company in the future.
20
Outlook
Historically, net sales and earnings for the first quarter of Toro's fiscal year
are lower than other quarters, so that results for the first quarter of fiscal
2002 are not necessarily an indicator of spring season sales trends. The company
anticipates good growth for the professional segment as Toro introduces new
products and programs, including new financing solutions for golf courses,
municipalities, and sports fields to acquire irrigation systems and maintenance
equipment. Management also expects growth in fiscal 2002 for the residential
segment driven primarily by the introduction of the new line of moderate-priced
Toro brand walk power mowers sold at The Home Depot and Toro dealer networks. In
addition, continued benefits from "5 by Five" programs are also expected to
improve fiscal 2002 results. Management expects growth in the single digits in
fiscal 2002 over fiscal 2001, and double digit earnings growth in fiscal 2002
over fiscal 2001, before cumulative effect of accounting change, restructuring
and other expense and exclusion of goodwill amortization, while keeping a
cautionary eye on the weather and world economies.
Quantitative and Qualitative Disclosures about Market Risk
Toro is exposed to market risk stemming from changes in foreign currency
exchange rates, interest rates, and commodity prices. Changes in these factors
could cause fluctuations in the company's net earnings and cash flows. In the
normal course of business, Toro actively manages the exposure of certain market
risks by entering into various hedging transactions, authorized under company
policies that place controls on these activities. The company's hedging
transactions involve the use of a variety of derivative instruments. Toro uses
derivatives only in an attempt to limit underlying exposure to currency
fluctuations, and not for trading purposes.
Foreign Currency Exchange Rate Risk
The company is exposed to foreign currency exchange rate risk arising from
transactions in the normal course of business. Toro is subject to risk from
sales and loans to wholly owned subsidiaries as well as sales to third party
customers, purchases from suppliers, and bank lines of credit with creditors
denominated in foreign currencies. The company manages foreign currency exchange
rate exposure from anticipated sales, accounts receivable, intercompany loans,
anticipated purchases, and credit obligations through the use of naturally
occurring offsetting positions (borrowing in local currency) and foreign
currency exchange contracts. Foreign currency exchange contracts to hedge
forecasted transactions are designated as cash flow hedges with the fair value
recorded in accumulated comprehensive income (loss) and as a hedge asset or
liability as applicable. Once the forecasted transaction has been recognized as
a sale or purchase and a related asset or liability recorded on the balance
sheet, the related fair value of the derivative hedge contract is reclassified
from accumulated comprehensive income (loss) into earnings. The related amounts
payable to, or receivable from, the contract counter parties are included in
accrued liabilities or prepaid expenses and other current assets.
The following foreign currency exchange contracts held by the company have
maturity dates in fiscal 2002. All items are non-trading and stated in U.S.
dollars. Certain derivative instruments the company enters into do not meet the
hedging criteria of SFAS No. 133, therefore, the fair value impact is recorded
in other income, net. The average contracted rate, notional amount, value of
derivative instrument in accumulated comprehensive income (loss), and fair value
of derivative instrument in other income, net at February 1, 2002 were as
follows:
- ---------------------------------------------------------------------------------------------------
VALUE IN
AVERAGE ACCUMULATED FAIR VALUE
CONTRACTED NOTIONAL COMPREHENSIVE IMPACT
RATE AMOUNT INCOME (LOSS) GAIN (LOSS)
DOLLARS IN THOUSANDS
===================================================================================================
Buy US dollar/Sell Australian dollar .5187 $ 14,935.5 $ 246.2 $ 189.1
- ---------------------------------------------------------------------------------------------------
Buy US dollar/Sell Canadian dollar 1.5679 6,154.6 89.0 (2.8)
- ---------------------------------------------------------------------------------------------------
Buy Australian dollar/Sell US dollar .5053 3,839.9 -- 0.6
- ---------------------------------------------------------------------------------------------------
Buy British pound/Sell US dollar 1.3773 798.8 16.1 3.5
- ---------------------------------------------------------------------------------------------------
Buy Euro/Sell US dollar .8614 2,842.8 (3.4) 6.9
- ---------------------------------------------------------------------------------------------------
Buy Japanese yen/Sell US dollar 117.8696 5,769.1 (525.1) (97.6)
- ---------------------------------------------------------------------------------------------------
Buy Mexican peso/Sell US dollar 9.7883 6,334.3 -- 245.2
- ---------------------------------------------------------------------------------------------------
21
Quantitative and Qualitative Disclosures about Market Risk (continued)
Interest Rate Risk
The company is exposed to interest rate risk arising from transactions that are
entered into during the normal course of business. The company's short-term debt
rates are dependent upon the LIBOR rate plus an additional percentage based on
the company's current borrowing level. See the company's most recent annual
report filed on Form 10-K (Item 7). There has been no material change in this
information.
Commodities
Some raw materials used in the company's products are exposed to commodity price
changes. Toro manages some of this risk by using long-term agreements with some
vendors. The primary commodity price exposures are with aluminum, steel, and
plastic resin.
Euro Currency
On January 1, 2002, a new common currency known as the euro replaced old
national currencies of 11 European countries. Toro's European subsidiaries have
converted to a new euro-compliant Enterprise Resource Planning (ERP) system.
This new system enables both subsidiaries to report financial transactions and
fiscal reports in the euro. Costs of converting to these systems was immaterial
compared to the company's overall operating expenses.
Uncertainty continues as to what the effects of conversion to the euro will have
on the market place, especially the effects on individual consumers. One
anticipated effect will be more transparent price differences on goods in
European countries. Significant issues for Toro arising from the transition are
price competition on Toro distributor and Toro direct sales, and the possible
need for and cost of price support for Toro distributors in the European Union.
Current concerns include volatility in the rate of exchange between the euro and
the U.S. dollar, and the lack of diversification of currencies in Europe with
the introduction of the euro. The company currently invoices most international
export shipments in U.S. dollars, however, it is analyzing the effects of
invoicing in some foreign currencies, and the euro is among those currencies
being considered.
Based on evaluation to date, management currently believes that while the
company will continue to incur internal and external costs to adjust to the euro
directly, such costs are not expected to have a significant impact on
operations, cash flows, or the financial condition of the company and its
subsidiaries taken as a whole in future periods.
Related Party Transactions
The company has entered into related party transactions. Toro sells product to a
distribution company that is owned in part by an executive officer of Toro. This
executive officer is currently on temporary assignment at Toro and will return
to the distributorship upon completion of his assignment. In addition, Toro also
sells products to companies whose executive officers are members of Toro's Board
of Directors. The company believes the transactions described above between Toro
and related parties are at arms-length and not material to the consolidated
financial results of the company.
22
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
3(i) and 4(a) Restated Certificate of Incorporation of Registrant (incorporated
by reference to Exhibit 3(i) and 4(a) to Registrant's Annual
Report on Form 10-K for the fiscal year ended October 31, 2001).
3(ii) and 4(b) Bylaws of Registrant (incorporated by reference to Exhibit 3(ii)
and 4(d) to Registrant's Quarterly Report on Form 10-Q for the
quarter ended August 3, 2001).
4(e) Specimen form of Common Stock certificate (incorporated by
reference to Exhibit 4(c) to Registrant's Registration Statement
on Form S-8, Registration No. 2-94417).
4(f) Rights Agreement dated as of May 20, 1998, between Registrant and
Wells Fargo Bank Minnesota, National Association relating to
rights to purchase Series B Junior Participating Voting Preferred
Stock, as amended (incorporated by reference to Registrant's
Current Report on Form 8-K dated May 27, 1998, Commission File
No. 1-8649).
4(g) Indenture dated as of January 31, 1997, between Registrant and
First National Trust Association, as Trustee, relating to the
Registrant's 7.125% Notes due June 15, 2007 and its 7.80%
Debentures due June 15, 2027 (incorporated by reference to
Exhibit 4(a) to Registrant's Current Report on Form 8-K for June
24, 1997, Commission File No. 1-8649).
10(a) Form of Employment Agreement in effect for executive officers of
Registrant (incorporated by reference to Exhibit 10(a) to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 30, 1999).*
10(b) The Toro Company Directors Stock Plan (incorporated by reference
to Exhibit 10(b) to Registrant's Quarterly Report on Form 10-Q
for the quarter ended April 28, 2000).*
10(c) The Toro Company Annual Management Incentive Plan II for officers
of Registrant (incorporated by reference to Exhibit 10(c) to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 28, 2000).*
10(d) The Toro Company 1989 Stock Option Plan (incorporated by
reference to Exhibit 10(e) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 30, 1999).*
10(e) The Toro Company 1993 Stock Option Plan (incorporated by
reference to Exhibit 10(f) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 30, 1999).*
10(f) The Toro Company Performance Share Plan (incorporated by
reference to Exhibit 10(f) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 30, 1999).*
10(g) The Toro Company 2000 Stock Option Plan (incorporated by
reference to Exhibit 10(g) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended April 28, 2000).*
10(h) The Toro Company Supplemental Management Retirement Plan
(incorporated by reference to Exhibit 10(h) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended April 28,
2000).*
10(i) The Toro Company Supplemental Retirement Plan (incorporated by
reference to Exhibit 10(i) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 30, 1999).*
10(j) The Toro Company Chief Executive Officer Incentive Award
Agreement (incorporated by reference to Exhibit 10(k) to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
April 28, 2000).*
23
10(k) The Toro Company Deferred Compensation Plan for Officers
(incorporated by reference to Exhibit 10(k) to Registrant's
Quarterly Report on Form 10-Q for the quarter ended July 28,
2000).*
10(l) The Toro Company Deferred Compensation Plan for Non-Employee
Directors (incorporated by reference to Exhibit 10(l) to
Registrant's Quarterly Report on Form 10-Q for the quarter ended
July 28, 2000).*
10(m) The Toro Company 2000 Directors Stock Plan (incorporated by
reference to Exhibit 10(m) to Registrant's Quarterly Report on
Form 10-Q for the quarter ended July 28, 2000).*
*Management contract or compensatory plan or arrangement required to be filed as
an exhibit to this Quarterly Report on Form 10-Q pursuant to Item 14(c).
(b) Reports on Form 8-K
None.
24
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TORO COMPANY
(Registrant)
By /s/ Stephen P. Wolfe
------------------------------------
Stephen P. Wolfe
Vice President Finance,
Treasurer and Chief Financial
Officer (principal financial officer)
Date: March 18, 2002
25
