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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended August 1, 1997 Commission File Number 1-8649
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THE TORO COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 41-0580470
(State of Incorporation) (I.R.S. Employer Identification Number)
8111 LYNDALE AVENUE SOUTH
BLOOMINGTON, MINNESOTA 55420
TELEPHONE NUMBER: (612) 888-8801
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
------ -------
The number of shares of Common Stock outstanding as of August 29, 1997 was
12,115,415.
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THE TORO COMPANY
INDEX TO FORM 10-Q
Page Number
-----------
PART I. FINANCIAL INFORMATION:
Condensed Consolidated Statements of Earnings and
Retained Earnings -
Three and Nine Months Ended
August 1, 1997 and August 2, 1996. . . . . . . . . . . . . . .3
Condensed Consolidated Balance Sheets -
August 1, 1997, August 2, 1996 and October 31, 1996. . . . . .4
Condensed Consolidated Statements of Cash Flows -
Nine Months Ended August 1, 1997 and August 2, 1996. . . . . .5
Notes to Condensed Consolidated Financial Statements. . . . . .6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . .10-14
PART II. OTHER INFORMATION:
Item 6 Exhibits and Reports on Form 8-K. . . . . . . . . . . . 15
Exhibit 11 Computation of Earnings Per Common Share. . . . . . 16
2
PART I. FINANCIAL INFORMATION
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
Three Months Ended Nine Months Ended
------------------------ ------------------------
August 1, August 2, August 1, August 2,
1997 1996 1997 1996
--------- --------- --------- ---------
Net sales. . . . . . . . . . . . . . . . . . . . . . . $ 249,274 $ 232,565 $ 810,434 $ 732,712
Cost of sales. . . . . . . . . . . . . . . . . . . . . 156,879 146,681 517,695 466,689
--------- --------- --------- ---------
Gross profit . . . . . . . . . . . . . . . . . . . . 92,395 85,884 292,739 266,023
Selling, general and administrative
expense. . . . . . . . . . . . . . . . . . . . . . . 73,626 72,909 231,255 210,273
--------- --------- --------- ---------
Earnings from operations . . . . . . . . . . . . . . 18,769 12,975 61,484 55,750
Interest expense . . . . . . . . . . . . . . . . . . . 5,476 3,755 15,408 10,858
Other income, net. . . . . . . . . . . . . . . . . . . (3,151) (1,489) (5,957) (7,642)
--------- --------- --------- ---------
Earnings before income taxes . . . . . . . . . . . . 16,444 10,709 52,033 52,534
Provision for income taxes . . . . . . . . . . . . . . 6,495 4,244 20,553 20,751
--------- --------- --------- ---------
Net earnings before extraordinary loss . . . . . . . 9,949 6,465 31,480 31,783
Extraordinary loss, net of income tax benefit of
$1,087 . . . . . . . . . . . . . . . . . . . . . . . (1,663) - (1,663) -
--------- --------- --------- ---------
Net earnings . . . . . . . . . . . . . . . . . . . . $ 8,286 $ 6,465 $ 29,817 $ 31,783
--------- --------- --------- ---------
--------- --------- --------- ---------
Retained earnings at beginning of period . . . . . . . 192,276 165,274 173,630 142,891
Other . . . . . . . . . . . . . . . . . . . . . . . . - 164 - 164
Dividends on common stock of $0.12, $0.12,
$0.36 and $0.36 per share, respectively. . . . . . . (1,452) (1,458) (4,337) (4,393)
--------- --------- --------- ---------
Retained earnings at end of period . . . . . . . . . . $ 199,110 $ 170,445 $ 199,110 $ 170,445
--------- --------- --------- ---------
--------- --------- --------- ---------
Net earnings per share of common stock and
common stock equivalent before extraordinary
loss . . . . . . . . . . . . . . . . . . . . . . . . .80 .52 2.53 2.52
Extraordinary loss, net of income tax benefit. . . . . (.13) - (.13) -
--------- --------- --------- ---------
Net earnings per share of common stock and
common stock equivalent. . . . . . . . . . . . . . . $ .67 $ .52 $ 2.40 $ 2.52
--------- --------- --------- ---------
--------- --------- --------- ---------
Net earnings per share of common stock and
common stock equivalent -
assuming full dilution before extraordinary
loss . . . . . . . . . . . . . . . . . . . . . . . . .80 .52 2.52 2.52
Extraordinary loss, net of income tax benefit. . . . . (.13) - (.13) -
--------- --------- --------- ---------
Net earnings per share of common stock and
common stock equivalent -
assuming full dilution . . . . . . . . . . . . . . . $ .67 $ .52 $ 2.39 $ 2.52
--------- --------- --------- ---------
--------- --------- --------- ---------
See accompanying notes to condensed consolidated financial statements.
3
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(DOLLARS IN THOUSANDS)
August 1, August 2, October 31,
1997 1996 1996
---------- ----------- ------------
ASSETS
Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . $ 4 $ 1,151 $ 66
Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . 308,234 265,772 239,637
Inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . 161,825 143,339 130,288
Other current assets . . . . . . . . . . . . . . . . . . . . . . 39,285 34,370 35,010
-------- -------- --------
Total current assets. . . . . . . . . . . . . . . . . . . . 509,348 444,632 405,001
-------- -------- --------
Property, plant and equipment. . . . . . . . . . . . . . . . . . 322,708 220,443 229,080
Less accumulated depreciation and amortization. . . . . . . 206,105 151,626 155,270
-------- -------- --------
116,603 68,817 73,810
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . 79,019 18,481 18,066
-------- -------- --------
Total assets. . . . . . . . . . . . . . . . . . . . . . . . $704,970 $531,930 $496,877
-------- -------- --------
-------- -------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current portion of long-term debt. . . . . . . . . . . . . . . . $ 365 $ 373 $ 350
Short-term borrowing . . . . . . . . . . . . . . . . . . . . . . 95,000 83,600 41,025
Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . 46,531 26,160 43,524
Other accrued liabilities. . . . . . . . . . . . . . . . . . . . 146,358 136,603 122,958
-------- -------- --------
Total current liabilities . . . . . . . . . . . . . . . . . 288,254 246,736 207,857
-------- -------- --------
Long-term debt, less current portion . . . . . . . . . . . . . . 177,650 53,046 53,015
Other long-term liabilities. . . . . . . . . . . . . . . . . . . 5,399 22,586 22,438
Common stockholders' equity:
Common stock par value $1.00,
authorized 35,000,000 shares; issued and
outstanding 12,112,310 shares at August 1,
1997 (net of 797,694 treasury shares),
11,990,873 shares at August 2, 1996
(net of 919,131 treasury shares), and
12,032,143 shares at October 31, 1996 (net
of 877,861 treasury shares) . . . . . . . . . . . . . . . . 12,112 11,991 12,032
Additional paid-in capital. . . . . . . . . . . . . . . . . . 28,241 27,817 28,462
Retained earnings . . . . . . . . . . . . . . . . . . . . . . 199,110 170,445 173,630
Foreign currency translation adjustment . . . . . . . . . . . (5,796) (691) (557)
-------- -------- --------
Total common stockholders' equity . . . . . . . . . . . . . . 233,667 209,562 213,567
-------- -------- --------
Total liabilities and common stockholders' equity . . . . . $704,970 $531,930 $496,877
-------- -------- --------
-------- -------- --------
See accompanying notes to condensed consolidated financial statements.
4
THE TORO COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN THOUSANDS)
Nine Months Ended
-------------------------
August 1, August 2,
1997 1996
----------- ----------
Cash flows from operating activities:
Net earnings. . .. . . . . . . . . . . . . . . . . . . . . . . . $ 29,817 $ 31,783
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Extraordinary loss on early extinguishment of debt . . . . . . 1,663 -
Provision for depreciation and amortization. . . . . . . . . . 16,675 13,228
Gain on disposal of property, plant and equipment. . . . . . . (70) (176)
Deferred income taxes. . . . . . . . . . . . . . . . . . . . . 1,528 -
Tax benefits related to employee stock option
transactions . . . . . . . . . . . . . . . . . . . . . . . . 1,224 1,490
Changes in operating assets and liabilities:
Receivables, net. . . . . . . . . . . . . . . . . . . . . . (43,488) (66,956)
Inventories . . . . . . . . . . . . . . . . . . . . . . . . (747) 2,523
Other current assets. . . . . . . . . . . . . . . . . . . . (3,606) (491)
Accounts payable and accrued expenses . . . . . . . . . . . 7,601 (1,502)
--------- ---------
Net cash provided by (used in) operating
activities . . . . . . . . . . . . . . . . . . . . . . . 10,597 (20,101)
--------- ---------
Cash flows from investing activities:
Purchases of property, plant and equipment . . . . . . . . . . (24,729) (11,655)
Proceeds from asset disposals. . . . . . . . . . . . . . . . . 1,160 439
Change in other assets/liabilities . . . . . . . . . . . . . . (7,877) (2,740)
Acquisition of James Hardie Irrigation, net of
cash acquired . . . . . . . . . . . . . . . . . . . . . . . (117,622) -
--------- ---------
Net cash used in investing activities . . . . . . . . . . (149,068) (13,956)
--------- ---------
Cash flows from financing activities:
Increase in short-term borrowing . . . . . . . . . . . . . . . 53,975 42,025
Proceeds from issuance of long-term debt . . . . . . . . . . . 175,000 -
Repayments of long-term debt . . . . . . . . . . . . . . . . . (50,350) (15,280)
Payment of debt issue costs and prepayment penalty . . . . . . (5,625) -
Payments for termination of interest rate swaps. . . . . . . . (23,650) -
Proceeds from forward-starting interest rate swap. . . . . . . - 15,363
Proceeds from sale of common stock . . . . . . . . . . . . . . 6,587 3,673
Purchases of common stock. . . . . . . . . . . . . . . . . . . (7,952) (13,071)
Dividends on common stock. . . . . . . . . . . . . . . . . . . (4,337) (4,393)
--------- ---------
Net cash provided by financing activities . . . . . . . . 143,648 28,317
--------- ---------
Foreign currency translation adjustment. . . . . . . . . . . . . (5,239) (811)
--------- ---------
Net decrease in cash and cash equivalents. . . . . . . . . . . . (62) (6,551)
Cash and cash equivalents at beginning of period . . . . . . . . 66 7,702
--------- ---------
Cash and cash equivalents at end of period . . . . . . . . . . . $ 4 $ 1,151
--------- ---------
--------- ---------
See accompanying notes to condensed consolidated financial statements.
5
THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
AUGUST 1, 1997
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with the instructions to Form 10-Q and do not
include all the information and notes required by generally accepted
accounting principles for complete financial statements. Unless the
context indicates otherwise, the terms "company" and "Toro" refer to The
Toro Company and its subsidiaries. In the opinion of management, the
unaudited condensed consolidated financial statements include all
adjustments, consisting primarily of recurring accruals, considered
necessary for a fair presentation of the financial position and the results
of operations. Since the company's business is seasonal, operating results
for the nine months ended August 1, 1997 are not necessarily indicative of
the results that may be expected for the year ended October 31, 1997.
For further information, refer to the consolidated financial statements and
notes included in the company's Annual Report on Form 10-K for the year
ended October 31, 1996. The policies described in that report are used for
preparing quarterly reports.
INVENTORIES
The majority of inventories are valued at the lower of net realizable value
or cost with cost determined by the last-in, first-out (LIFO) method. Had
the first-in, first-out (FIFO) method of cost determination been used,
inventories would have been $25,642,000 and $24,841,000 higher than
reported at August 1, 1997, and August 2, 1996, respectively. Under the
FIFO method, work-in-process inventories were $72,008,000 and $68,952,000
and finished goods inventories were $115,459,000 and $99,228,000 at
August 1, 1997, and August 2, 1996, respectively.
LONG-TERM DEBT
In June 1997, the company issued $175.0 million of debt securities
consisting of $75.0 million of 7.125 % coupon 10-year Notes and $100.0
million of 7.80 % 30-year Debentures. The proceeds from the debt
securities issued were used in part to repay short-term indebtedness, which
was primarily related to the acquisition of the James Hardie Irrigation
Group, and to redeem on August 1, 1997, the company's $50.0 million
principal amount of 11 % Sinking Fund Debentures. The company paid a
prepayment penalty of approximately $2.8 million for the early retirement
of the Debentures. This penalty is reported in the condensed consolidated
statement of earnings as an extraordinary loss, net of the related income
tax benefit.
In connection with the issuance of the $175.0 million in long-term debt
securities, the company paid $23.7 million to terminate three
forward-starting interest rate swap agreements with notational amounts
totaling $125.0 million. These swap agreements had been entered into to
reduce exposure to interest rate risk prior to the issuance of the new
long-term debt securities. At the inception of one of the swap agreements,
the company had received payments which were recorded as deferred income to
be recognized as an adjustment to interest expense over the term of the new
debt securities. At the date the swaps were terminated, this deferred
income totaled $18.7 million. The excess of the termination fees over the
deferred income recorded has been deferred and is being recognized as an
adjustment to interest expense over the term of the new debt securities
issued.
6
DERIVATIVE FINANCIAL INSTRUMENTS
A portion of the company's sales and purchases are denominated in foreign
currencies. The company enters into forward exchange and range forward
option contracts to reduce exposure to foreign currency exchange risk.
These contracts are designated to hedge firm anticipated foreign currency
transactions. Gains and losses on foreign currency contracts are deferred
and recognized upon settlement of the underlying hedged transaction.
As discussed under the "Long-term Debt" caption in these notes to the
condensed consolidated financial statements, the company entered into
interest rate exchange or swap agreements to hedge interest rate exposure
on the anticipated issuance of new long-term debt securities. The net loss
on these swap agreements has been deferred and is being amortized as an
adjustment to interest expense over the term of the debt securities. In
June 1997, the company terminated all of its outstanding interest rate
exchange agreements upon the issuance of the new long-term debt
securities.
BUSINESS ACQUISITIONS
Effective December 1, 1996, The Toro Company acquired the James Hardie
Irrigation Group ("Hardie") from James Hardie Industries Limited under an
agreement dated September 18, 1996. The initial purchase price pursuant to
the agreement was estimated to be $131,500,000. The purchase price was
subsequently adjusted to $119,125,000 based on estimated, unaudited
aggregate shareholders' equity of Hardie on December 1, 1996, subject to
further adjustment based on final audit results.
Based on the financial statements of Hardie as of the acquisition date,
shareholders' equity at the acquisition date was approximately $10,545,000
less than the estimated equity used as the closing date purchase price, and
this $10,545,000 is to be returned from James Hardie Industries Limited to
Toro. In addition, under the procedures established in the purchase
agreement, Toro has delivered a letter of objections to James Hardie
Industries Limited related to the valuation of assets, accounting methods
applied, estimates used and other items. The resolution of these
objections may result in an additional reduction of the purchase price.
The acquisition is accounted for using the purchase accounting method and,
accordingly, the adjusted purchase price of $108,580,000 has initially been
allocated based on the estimated fair values of assets acquired and
liabilities assumed on the date of acquisition. The excess of the purchase
price over the estimated fair value of net tangible assets acquired has
been recorded as goodwill and is being amortized on a straight-line basis
over 20 years. Any additional reductions in the purchase price as a result
of resolution of the objections discussed in the preceding paragraph will
result in a reduction of goodwill and/or other net assets. The related
effect of these adjustments on the Consolidated Statement of Earnings of
The Toro Company is not expected to be material.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the company and Hardie as if the
acquisition had occurred at the beginning of fiscal 1996, with pro forma
adjustments to give effect to amortization of goodwill, interest expense on
acquisition debt and certain other adjustments, together with the related
income tax effects.
Three Months Ended Nine Months Ended
------------------ -----------------
Aug 1, Aug 2, Aug 1, Aug 2,
(Dollars in thousands, except per share data) 1997 1996 1997 1996
---------------------------------------------------------
Net sales $ 249,274 $ 267,774 $ 824,600 $ 842,793
Net earnings before extraordinary loss 9,949 5,634 29,783 28,283
Extraordinary loss, net of income tax benefit (1,663) - (1,663) -
----------- ---------- ----------- ----------
Net earnings $ 8,286 $ 5,634 $ 28,120 $ 28,283
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
Primary earnings per share before extraordinary loss $ 0.80 $ 0.45 $ 2.39 $ 2.24
Extraordinary loss, net of income tax benefit (0.13) - (0.13) -
----------- ---------- ----------- ----------
Primary earnings per share $ 0.67 $ 0.45 $ 2.26 $ 2.24
----------- ---------- ----------- ----------
----------- ---------- ----------- ----------
7
BUSINESS ACQUISITIONS (CONTINUED)
On June 4, 1997, the company announced that it had signed a letter of
intent to acquire Exmark Manufacturing Company, Inc., a leading
manufacturer of equipment for the professional landscape contractor
industry. Exmark is headquartered in Beatrice, Nebraska, and produces
mid-sized walk-behind mowers and zero-turning-radius riding mowers for
professional contractors. Exmark employs approximately 190 people in a
164,000 square foot facility and had sales of $38.4 million for the fiscal
year ended August 31, 1996. Consummation of the acquisition is subject to
preparation and execution of a definitive agreement, approval by Exmark's
shareholders and regulatory approvals. Management believes that the
consideration to be paid by the company will not have a material impact on
the financial condition of the company.
NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share," which establishes new standards for computing and presenting
earnings per share information. The company will be required to adopt the
new standard beginning in the first quarter of fiscal 1998; earlier
application is not permitted. Prior period information is required to be
restated to conform with the requirements of the new standard. Pro forma
earnings per share for the three and nine month periods ended August 1,
1997 and August 2, 1996 as computed under SFAS No. 128 are as follows:
Pro forma EPS Pro forma EPS
Three months ended Nine months ended
-----------------------------------------------------
August 1, August 2, August 1, August 2,
1997 1996 1997 1996
-----------------------------------------------------
Basic earnings per share, before extraordinary loss $ 0.83 $ 0.53 $ 2.61 $ 2.61
Extraordinary loss, net of income tax benefit (0.14) - (0.14) -
------ ------ ------ ------
Basic earnings per share $ 0.69 $ 0.53 $ 2.47 $ 2.61
------ ------ ------ ------
------ ------ ------ ------
Diluted earnings per share, before extraordinary loss $ 0.80 $ 0.52 $ 2.53 $ 2.52
Extraordinary loss, net of income tax benefit (0.13) - (0.13) -
------ ------ ------ ------
Diluted earnings per share $ 0.67 $ 0.52 $ 2.40 $ 2.52
------ ------ ------ ------
------ ------ ------ ------
8
NEW ACCOUNTING PRONOUNCEMENTS (CONTINUED)
Also in February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129, "Disclosure of Information about Capital Structure,"
(SFAS 129) which consolidates existing requirements regarding capital
structure. SFAS 129 will be required to be adopted in the first quarter of
fiscal 1998, and is not expected to have a material impact on the company's
current capital structure disclosures.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, " Reporting Comprehensive Income," (SFAS 130) and Statement of
Financial Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information," (SFAS 131).
SFAS 130 establishes standards for reporting and displaying the components
of comprehensive income and the accumulated balance of other comprehensive
income within total stockholders' equity. The company is required to adopt
SFAS 130 beginning in the second quarter of fiscal 1998, with
reclassification of prior period information for comparative purposes
required. The adoption of SFAS 130 will require additional disclosures,
but is not expected to have a material impact on the company's consolidated
financial statements.
SFAS 131 requires disclosure of selected information about operating
segments including segment income, revenues and asset data, as well as
descriptive information about how operating segments are determined and the
products and services provided by the segments. Generally, financial
information will be required to be reported on the same basis that it is
used internally for evaluating segment performance and deciding how to
allocate resources to segments. The company will be required to adopt SFAS
131 beginning with its 1999 fiscal year end annual report. The adoption of
SFAS 131 will require additional disclosures but is not expected to have a
material impact on the company's consolidated financial statements.
9
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD-LOOKING INFORMATION
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This report contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. In addition, forward-looking statements may be made
orally in the future by or on behalf of the company.
Forward-looking statements involve risks and uncertainties, including, but
not limited to, changes in business conditions and the economy in general in
both foreign and domestic markets; weather conditions affecting demand;
seasonal factors affecting the company's industry; lack of growth in the
company's markets; litigation; financial market changes including interest
rates and foreign exchange rates; trend factors including housing starts, new
golf course starts and market demographics; government actions including
budget levels, regulation, and legislation, primarily legislation relating to
the environment, commerce and infrastructure, and health and safety; labor
relations; availability of materials; actions of competitors; ability to
integrate acquisitions; and the company's ability to profitably develop,
manufacture and sell both new and existing products. Actual results could
differ materially from those projected in the forward-looking statements as a
result of these risk factors, and should not be relied upon as a prediction
of actual future results. Further, Toro undertakes no obligation to update
any forward-looking statement to reflect events or circumstances after the
date on which such statement is made, or to reflect the occurrence of
unanticipated events.
RESULTS OF OPERATIONS
Third quarter net earnings before the effect of an extraordinary loss rose
53.9% to $9.9 million from the net earnings of $6.5 million for the same
period in the previous year. Earnings per share before the effect of an
extraordinary loss for the third quarter improved 53.8% to $0.80 from $0.52
in the previous period. An extraordinary loss on the prepayment of $50.0
million of 11% Debentures was recognized in the third quarter of fiscal 1997,
reducing net earnings for the third quarter to $8.3 million or $0.67 per
share. The prepayment was part of an overall debt restructuring (See
"Liquidity and Capital Resources"). Net sales increased from $232.6 million
in the third quarter of 1996 to $249.3 million in the third quarter of 1997,
as a result of factors discussed in the following paragraphs.
For the nine months ended August 1, 1997 net sales increased from the same
period in 1996 by $77.7 million or 10.6%. Net earnings before the extraordinary
loss for the nine months ended August 1, 1997 were $31.5 million as compared to
$31.8 million for the same period last year.
In both fiscal 1996 and 1997 the spring mowing season was late and wet in many
key markets. In fiscal 1997 these unpredictable weather patterns heightened a
conservative buying attitude among dealers and distributors. The company
continues to focus on more efficient asset management, the integration of the
Hardie acquisition, and other new strategic alliances and acquisitions to
promote further diversification and growth.
The following table sets forth net sales by product line.
Three Months Ended
-------------------------------------
(Dollars in thousands) August 1, August 2,
1997 1996 $ CHANGE % CHANGE
--------- ---------- -------- --------
Consumer products. . . . . . . . . . $ 81,888 $102,290 $(20,402) (19.9)%
Commercial products. . . . . . . . . 89,832 84,828 5,004 5.9
Irrigation products. . . . . . . . . 77,554 45,447 32,107 70.6
-------- -------- --------
Total *. . . . . . . . . . . . . $249,274 $232,565 $ 16,709 7.2%
-------- -------- --------
-------- -------- --------
* Includes international sales of: . $ 48,972 $ 43,238 $ 5,734 13.3%
10
Nine Months Ended
-------------------------------------
(Dollars in thousands) August 1, August 2,
1997 1996 $ Change % Change
--------- ---------- -------- --------
Consumer products. . . . . . . . . . $303,443 $342,722 $(39,279) (11.5)%
Commercial products. . . . . . . . . 289,819 271,684 18,135 6.7
Irrigation products. . . . . . . . . 217,172 118,306 98,866 83.6
-------- -------- --------
Total *. . . . . . . . . . . . $810,434 $732,712 $ 77,722 10.6%
-------- -------- --------
-------- -------- --------
* Includes international sales of: $184,952 $146,996 $ 37,956 25.8%
CONSUMER PRODUCT SALES
Worldwide net sales of consumer products for the three and nine months ended
August 1, 1997 declined by $20.4 million and $39.3 million, respectively,
compared to the same periods in the previous year. Early season snowthrower
sales in the third quarter of fiscal 1996 were unusually high as dealers
replenished abnormally low inventory levels. This, combined with lower than
expected sales of mowing products due to poor weather conditions and
conservative buying patterns among dealers caused a decline in consumer product
sales for the three and nine month periods as compared to the previous year.
International consumer product net sales for the three months ended August 1,
1997 increased from $11.5 million to $12.6 million and from $45.8 million to
$49.4 million for the nine months ended August 1, 1997 as new products were
introduced in both Europe and Canada.
COMMERCIAL PRODUCT SALES
Worldwide commercial product net sales for the three months ended August 1,
1997 were $89.8 million compared to $84.8 million in the same period in the
prior year. Net sales for the nine months ended August 1, 1997 increased by
6.7% to $289.8 million compared to $271.7 million in the same period in the
prior year. Despite strong competition, sales of equipment to golf courses
did well, reflecting the continued growth of the golf market. Several new
product introductions in the second quarter also reinforced sales.
International commercial product net sales decreased to $17.6 million for the
three months ended August 1, 1997 from $23.9 million in the prior year due to
continued inclement weather in Europe. Net sales were flat at $79.8 million
for the nine months ended August 1, 1997. Sales weakened due to generally
weak economic conditions in Europe.
IRRIGATION PRODUCT SALES
Worldwide irrigation product net sales rose 70.6% from $45.4 million in the
same three month period last year to $77.6 million in the current year. Net
sales for the nine months ended August 1, 1997 were $217.2 million compared
to $118.3 million in the same period in the prior year. This increase is
almost entirely attributable to the acquisition of Hardie.
International irrigation product net sales, excluding Hardie sales, increased
by 8.4% for the third quarter and 4.1% for the first nine months of fiscal
1997, as compared to the corresponding period in the prior year.
11
GROSS PROFIT
Gross profit was $92.4 million and $292.7 million for the three and nine months
ended August 1, 1997, respectively, an increase of $6.5 million and $26.7
million from the three and nine months ended August 2, 1996, respectively. As a
percent of sales, gross profit for the three month period ended August 1, 1997
was 37.1% compared with 36.9% for the same period in 1996 and 36.1% for the nine
months ended August 1, 1997 versus 36.3% for the same period in 1996. The lower
gross margin for the nine month period was primarily due to the effect of lower
margins contributed by Hardie product sales. For the three month period, the
impact of lower Hardie gross margins was offset by production efficiencies.
Selling, General and Administrative Expense
(Dollars in millions)
3 Months 3 Months 9 Months 9 Months
Ended Ended Ended Ended
- ------------------------------------------------------------------------------------------------------------------------------
Aug 1, % of Net Aug 2, % of Net Aug 1, % of Net Aug 2, % of Net
S G & A 1997 Sales 1996 Sales 1997 Sales 1996 Sales
- ------------------------------------------------------------------------------------------------------------------------------
Administrative $ 23.8 9.5% $ 25.6 11.0% $ 74.4 9.2% $69.7 9.5%
Sales and Marketing 22.4 9.0 22.8 9.8 78.7 9.7 67.5 9.2
Warranty 9.0 3.6 7.3 3.1 23.6 2.9 24.7 3.4
Distributor/Dealer
Financing 2.8 1.1 2.7 1.2 8.2 1.0 7.9 1.1
Research and
Development 8.8 3.5 8.3 3.6 25.7 3.2 22.9 3.1
Warehousing 4.7 1.9 3.9 1.7 13.7 1.7 11.6 1.6
Service/Quality
Assurance 2.1 0.9 2.3 0.9 7.0 0.8 6.0 0.8
--- --- --- --- --- --- --- ---
Total $ 73.6 29.5% $ 72.9 31.3% $231.3 28.5% $ 210.3 28.7%
Selling, general and administrative expense (SG&A) for the three months ended
August 1, 1997 increased $0.7 million from the prior year, and as a percent of
sales decreased to 29.5% from 31.3% for the same period in fiscal 1996. Hardie
added $8.3 million in SG&A expense during the third quarter of fiscal 1997.
SG&A expense for the nine months ended August 1, 1997 increased $21.0 million
from the prior year, including Hardie's SG&A expense of $24.3 million, and as a
percent of sales decreased to 28.5% from 28.7% for the same period in fiscal
1996. Administrative expenses, net of Hardie, decreased $4.8 million for the
quarter and $3.0 million for the nine months ended August 1, 1997 due mainly to
cost containment efforts. Sales and marketing expenses, net of Hardie,
decreased by $3.4 million for the quarter due to both reduced sales and
reductions in spending for marketing programs and increased $1.7 million for the
nine months ended August 1, 1997 due primarily to increased promotional costs of
new products for the landscape contractor group. Warranty expense, net of
Hardie, increased $1.4 million for the quarter due to an adjustment to the
warranty accrual rate based upon higher than anticipated claims and decreased
$2.3 million for the nine months ended August 1, 1997 due primarily to reduced
consumer product sales. Research and development, net of Hardie, was flat for
both the three month and the nine month periods ended August 1, 1997.
Service/quality assurance, net of Hardie, declined due to lower sales volume in
this three month period in fiscal 1997 versus the same period in fiscal 1996.
Warehousing expenses, net of Hardie, were flat for the three month period and
down slightly for the nine month period. Distributor/dealer financing was flat
as compared to the same period in fiscal 1996.
12
FINANCIAL POSITION AS OF AUGUST 1, 1997
August 1, 1997 COMPARED TO OCTOBER 31, 1996
Total assets at August 1, 1997 were $705.0 million, up $208.1 million from
October 31, 1996. Hardie accounted for approximately $149.1 million of this
increase. Net accounts receivable, net of Hardie, increased by $22.4 million
from October 31, 1996. Historically, the highest sales volumes and receivables
occur starting in March and ending in May. The accounts receivable balance
declines over the following months as payments under the company's extended
payment plans become due. Inventory, net of Hardie, increased by $6.1 million
primarily as a result of the normal buildup of consumer snow products
manufactured in the third quarter of the year. Net property, plant and
equipment increased from $73.8 million to $116.6 million due to the addition of
Hardie net property, plant and equipment of $29.5 million, the expansion of the
corporate headquarters and various tooling projects. Other assets, net of the
effect of the Hardie acquisition, increased due to the acquisition of marketing
rights to a central irrigation system for the large turf irrigation market, and
capitalized costs related to the issuance of public debt securities(See
"Liquidity and Capital Resources").
Total current liabilities of $288.3 million at August 1, 1997 increased $80.4
million compared with current liabilities at October 31, 1996. The majority of
this increase was the result of additional short-term borrowings of $54.0
million reflecting the company's strategy of utilizing short-term borrowing to
fund the company's seasonal working capital needs. Long-term debt increased
from October 31, 1996 to August 1, 1997 as a result of the issuance of $175.0
million of debt securities which were used to redeem $50.0 million of 11%
Debentures and as long-term funding for the purchase of Hardie. Other accrued
liabilities increased primarily as a result of expenses related to the
acquisition of Hardie. Other long-term liabilities decreased by approximately
$17.0 million due primarily to the termination of a forward-starting interest
rate contract initiated as a hedge against interest rate fluctuations prior to
the issuance of $175.0 million in public debt securities during the third
quarter of fiscal 1997.
AUGUST 1, 1997 COMPARED TO AUGUST 2, 1996
Total assets at August 1, 1997 were $705.0 million, up $173.0 million from
August 2, 1996. Of this increase, Hardie accounted for $149.1 million. Cash,
net of Hardie, decreased from the prior period as the result of improved asset
management policies. Accounts receivable, net, increased by $42.5 million, with
$46.2 million in net receivables attributable to Hardie. Inventory balances,
net of Hardie inventories of approximately $25.5 million, declined by $7.0
million due to asset management strategies which match production more closely
with retail demand and result in lower overall inventory levels. Both accounts
receivable and inventory were also impacted by reduced sales in this current
quarter as compared to the prior quarter, net of Hardie. Net property, plant
and equipment, increased by approximately $47.8 million, with $29.5 million of
this increase related to Hardie and the remaining increase related to the
corporate headquarters expansion and tooling projects. Other assets increased
by $60.5 million with Hardie accounting for $45.9 million. The remainder of the
increase was the result of the purchase of patents, the purchase of property for
possible future corporate expansion, and those additions in the current fiscal
year identified above.
Total current liabilities of $288.3 million at August 1, 1997 increased $41.5
million compared with current liabilities at August 2, 1996. Short-term
borrowing increased by $11.4 million over the prior year due primarily to the
financing of working capital needs of Hardie and payables and accruals of
Hardie. Other accrued liabilities increased by $9.8 million, primarily as a
result of expenses related to the Hardie acquisition and Hardie accrued
liabilities acquired. Long-term debt and other long-term liabilities increased
over the prior period as identified above.
13
LIQUIDITY AND CAPITAL RESOURCES
The primary use of cash during the first nine months of fiscal 1997 was
$117.6 million used for the acquisition of Hardie. The purchase price was
initially funded with temporary bank debt. The company issued $175.0 million
of long-term debt securities in June 1997 and used a portion of the net
proceeds received from the sale of the securities to repay short-term
indebtedness to banks. The balance of the net proceeds was used to redeem
the company's $50.0 million principal amount of outstanding 11% Sinking Fund
Debentures. In connection with the issuance of the $175.0 million in
long-term debt securities, the company paid $23.7 million to terminate three
forward-starting interest rate swap agreements with notational amounts
totaling $125.0 million. These swap agreements had been entered into to
reduce interest rate risk prior to the issuance of the new long-term debt
securities. At the inception of one of the swap agreements, the company had
received payments which were recorded as deferred income to be recognized as
an adjustment to interest expense over the term of the new debt securities.
At the date the swaps were terminated, this deferred income totaled $18.7
million. The excess of the termination fees over the deferred income
recorded has been deferred and is being recognized as an adjustment to
interest expense over the term of the new debt securities issued.
Cash used in operating activities for the first nine months of fiscal 1997
was primarily for the seasonal increase in accounts receivable. The
company's working capital needs are funded with $190.0 million of unsecured
bank credit lines. The company also has banker's acceptance financing
agreements under which an additional $40.0 million is available. The
company's business is seasonal, with peak borrowing under these working
capital lines generally occurring between February and May each year.
Management believes that the combination of funds available through its
existing financing arrangements, coupled with forecasted cash flows, will
provide the capital resources for its anticipated needs.
INFLATION
The company is subject to the effects of changing prices. The company has,
however, generally been able to pass along inflationary increases in its
costs by increasing the prices of its products.
14
PART II. OTHER INFORMATION
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibit 11 Computation of Earnings per Common Share
(b) Exhibit 27 Financial Data Schedule
Summarized financial data; electronic filing only.
(c) Reports on Form 8-K
On February 18, 1997, the company filed Amendment No. 1 to its Current
Report on Form 8-K dated December 16, 1996 on Form 8-K/A providing
financial information for the business acquired and pro forma
financial information related to the acquisition of the James Hardie
Irrigation Group.
On June 6, 1997, the company filed Amendment No. 2 to its Current
Report on Form 8-K dated December 16, 1996 on Form 8-K/A providing
financial information for the business acquired and pro forma
financial information related to the acquisition of the James Hardie
Irrigation Group which supersedes the information provided in
Amendment No. 1 referenced in the previous paragraph.
On June 27, 1997, the company filed its Current Report on Form 8-K
dated June 24, 1997 reporting the closing of its public offering of
$175.0 million of Notes and Debentures.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TORO COMPANY
(Registrant)
By /s/ Stephen P. Wolfe
---------------------------
Stephen P. Wolfe
Vice President, Finance
Chief Financial Officer
(principal financial officer)
Date: September 10, 1997
15
Exhibit 11
THE TORO COMPANY AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE DATA)
Three Months Ended Nine Months Ended
--------------------------- ---------------------------
August 1, August 2, August 1, August 2,
1997 1996 1997 1996
------------ ------------ ------------ ------------
Net earnings before extraordinary loss . . . . . . . . . . $ 9,949 $ 6,465 $ 31,480 $ 31,783
Extraordinary loss, net of income tax benefit of
$1,087 . . . . . . . . . . . . . . . . . . . . . . . . . (1,663) - (1,663) -
------------ ------------ ------------ -----------
Net earnings . . . . . . . . . . . . . . . . . . . . . . . $ 8,286 $ 6,465 $ 29,817 $ 31,783
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
Primary:
Shares of common stock and common
stock equivalents:
Weighted average number of common shares
outstanding . . . . . . . . . . . . . . . . . . . 12,078,431 12,108,554 12,079,763 12,183,841
Dilutive effect of outstanding
stock options (1). . . . . . . . . . . . . . . . 342,662 398,235 368,049 424,403
------------ ------------ ------------ -----------
12,421,093 12,506,789 12,447,812 12,608,244
------------ ------------ ------------ -----------
Net earnings per share of common stock
and common stock equivalent before
extraordinary loss,. . . . . . . . . . . . . . . $ 0.80 $ 0.52 $ 2.53 $ 2.52
Extraordinary loss, net of income tax benefit . . . (0.13) - (0.13) -
------------ ------------ ------------ ------------
Net earnings per share of common stock
and common stock equivalent . . . . . . . . . . $ 0.67 $ 0.52 $ 2.40 $ 2.52
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Fully Diluted:
Shares of common stock and common
stock equivalents:
Weighted average number of common shares
outstanding. . . . . . . . . . . . . . . . . . . 12,078,431 12,108,554 12,079,763 12,183,841
Dilutive effect of outstanding
stock options (2). . . . . . . . . . . . . . . . 344,100 398,235 396,994 424,403
------------ ------------ ------------ -----------
12,422,531 12,506,789 12,476,757 12,608,244
------------ ------------ ------------ -----------
Net earnings per share of common stock
and common stock equivalent before
extraordinary loss. . . . . . . . . . . . . . . $ 0.80 $ 0.52 $ 2.52 $ 2.52
Extraordinary loss, net of income tax benefit . . . (0.13) - (0.13) -
------------ ------------ ------------ -----------
Net earnings per share of common stock
and common stock equivalent. . . . . . . . . . $ 0.67 $ 0.52 $ 2.39 $ 2.52
------------ ------------ ------------ -----------
------------ ------------ ------------ -----------
1) Outstanding stock options and options exercised in the current period are
converted to common stock equivalents by the treasury stock method using
the average market price of the company's stock during each period.
2) Outstanding stock options and options exercised in the current period are
converted to common stock equivalents by the treasury stock method using
the greater of the average market price or the period-end market price of
the company's stock during each period.
16
5
1,000
9-MOS
OCT-31-1997
NOV-01-1996
AUG-01-1997
4
0
308,234
0
161,825
509,348
322,708
206,105
704,970
288,254
178,015
0
0
12,112
221,555
704,970
249,274
249,274
156,879
73,626
(3,151)
0
5,476
16,444
6,495
9,949
0
(1,663)
0
8,286
.67
.67
TOTAL LONG-TERM DEBT.
DOES NOT INCLUDE ADDITIONAL PAID-IN-CAPITAL.
OTHER INCOME-NET.
NOT INCLUDED IN QUARTERLY FINANCIAL INFORMATION.
TOTAL NET RECEIVABLES.
