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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JANUARY 31, 2003
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
------ -------
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
------ -------
The number of shares of Common Stock outstanding as of February 28, 2003 was
12,234,788.
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THE TORO COMPANY
INDEX TO FORM 10-Q
Page Number
-----------
PART I. FINANCIAL INFORMATION:
ITEM 1. Financial Statements
Condensed Consolidated Statements of Operations (Unaudited) -
Three Months Ended January 31, 2003 and February 1, 2002...........3
Condensed Consolidated Balance Sheets (Unaudited) -
January 31, 2003 and February 1, 2002..............................4
Condensed Consolidated Statements of Cash Flows (Unaudited) -
Three Months Ended January 31, 2003 and February 1, 2002...........5
Notes to Condensed Consolidated Financial Statements (Unaudited).....6-10
ITEM 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................11-18
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk...........19-20
ITEM 4. Controls and Procedures...............................................20
PART II. OTHER INFORMATION:
ITEM 6. Exhibits and Reports on Form 8-K......................................21
Signatures and Certifications........................................22-24
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
--------------------------------------
January 31, February 1,
2003 2002
------------- -------------
Net sales ......................................................................$ 295,962 $ 277,915
Cost of sales .................................................................. 190,381 182,608
------------- -------------
Gross profit ............................................................... 105,581 95,307
Selling, general, and administrative expense ................................... 95,864 89,012
Restructuring and other expense ................................................ - 9,953
------------- -------------
Earnings (loss) from operations ............................................ 9,717 (3,658)
Interest expense ............................................................... (4,092) (5,320)
Other income, net .............................................................. 4,795 1,334
------------- -------------
Earnings (loss) before income taxes and cumulative effect of change
in accounting principle ................................................ 10,420 (7,644)
(Provision) benefit for income taxes ........................................... (3,439) 2,523
------------- -------------
Net earnings (loss) before cumulative effect of change in
accounting principle ................................................... 6,981 (5,121)
Cumulative effect of change in accounting principle, net of
income tax benefit of $509 ................................................... - (24,614)
------------- -------------
Net earnings (loss) ....................................................$ 6,981 $ (29,735)
============= =============
Basic net earnings (loss) per share of common stock, before
cumulative effect of change in accounting principle ..........................$ 0.56 $ (0.41)
Cumulative effect of change in accounting principle, net of
income tax benefit ........................................................... - (1.97)
------------- -------------
Basic net earnings (loss) per share of common stock ............................$ 0.56 $ (2.38)
============= =============
Diluted net earnings (loss) per share of common stock, before
cumulative effect of change in accounting principle ..........................$ 0.54 $ (0.41)
Cumulative effect of change in accounting principle, net of
income tax benefit ........................................................... - (1.97)
------------- -------------
Diluted net earnings (loss) per share of common stock ..........................$ 0.54 $ (2.38)
============= =============
Weighted average number of shares of common stock outstanding -
Basic ...................................................................... 12,461 12,500
Weighted average number of shares of common stock outstanding -
Dilutive ................................................................... 12,922 12,500
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)
January 31, February 1,
2003 2002
------------- -------------
ASSETS
- ------
Cash and cash equivalents .................................................... $ 87 $ 46
Receivables, net ............................................................. 311,892 302,189
Inventories, net ............................................................. 267,376 274,524
Prepaid expenses and other current assets .................................... 11,689 17,415
Deferred income taxes ........................................................ 39,474 34,261
------------ ------------
Total current assets ................................................. 630,518 628,435
------------ ------------
Property, plant, and equipment ............................................... 449,040 410,387
Less accumulated depreciation ........................................ 289,566 265,942
------------ ------------
159,474 144,445
Deferred income taxes ........................................................ 4,196 9,721
Other assets ................................................................. 14,253 14,794
Goodwill ..................................................................... 77,891 77,805
Other intangible assets ...................................................... 1,769 2,347
------------ ------------
Total assets ......................................................... $ 888,101 $ 877,547
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
Current portion of long-term debt ............................................ $ 15,846 $ 513
Short-term debt .............................................................. 25,024 113,938
Accounts payable ............................................................. 90,397 75,656
Accrued liabilities .......................................................... 194,917 172,744
------------ ------------
Total current liabilities ............................................ 326,184 362,851
------------ ------------
Long-term debt, less current portion ......................................... 178,724 194,553
Other long-term liabilities .................................................. 8,259 7,091
Stockholders' equity:
Preferred stock, par value $1.00 per share, authorized 1,000,000
voting and 850,000 non voting shares, none issued and outstanding - -
Common stock par value $1.00 per share, authorized 35,000,000 shares, issued
and outstanding 12,218,531 shares as of January 31, 2003 (net of 1,289,524
treasury shares) and 12,278,570 shares as of February 1, 2002 (net of
1,229,485 treasury shares).............................................. 12,219 12,279
Additional paid-in capital................................................. 28,083 32,208
Retained earnings.......................................................... 347,845 281,831
Accumulated comprehensive loss............................................. (13,213) (13,266)
------------ ------------
Total stockholders' equity............................................ 374,934 313,052
------------ ------------
Total liabilities and stockholders' equity............................ $ 888,101 $ 877,547
============ ============
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
------------------------------------
January 31, February 1,
2003 2002
------------- -------------
Cash flows from operating activities:
Net earnings (loss) ......................................................... $ 6,981 $ (29,735)
Adjustments to reconcile net earnings (loss) to net cash
used in operating activities:
Cumulative effect of change in accounting principle ...................... - 24,614
Non-cash asset impairment write-off ...................................... - 4,163
Provision for depreciation and amortization .............................. 7,310 7,336
Gain on disposal of property, plant, and equipment ....................... (4) (10)
Increase in deferred income taxes ........................................ (752) (334)
Changes in operating assets and liabilities:
Receivables, net .................................................... (52,399) (30,512)
Inventories, net .................................................... (48,213) (39,863)
Prepaid expenses and other current assets ........................... (1,322) (6,209)
Accounts payable and accrued liabilities ............................ 13,257 (7,846)
------------- -------------
Net cash used in operating activities ........................... (75,142) (78,396)
------------- -------------
Cash flows from investing activities:
Purchases of property, plant, and equipment .............................. (11,451) (9,245)
Proceeds from asset disposals ............................................ 31 62
Decrease in investment in affiliates ..................................... 1,000 -
Increase in other assets ................................................. (2,147) (2,426)
Proceeds from sale of business ........................................... 1,016 -
------------- -------------
Net cash used in investing activities ........................... (11,551) (11,609)
------------- -------------
Cash flows from financing activities:
Increase in short-term debt .............................................. 23,868 79,525
Repayments of long-term debt ............................................. (11) (12)
Decrease in other long-term liabilities .................................. (85) (57)
Proceeds from exercise of stock options .................................. 1,693 661
Purchases of common stock ................................................ (598) (1,415)
Dividends on common stock ................................................ (1,495) (1,501)
------------- -------------
Net cash provided by financing activities ....................... 23,372 77,201
------------- -------------
Foreign currency translation adjustment ..................................... 592 (26)
------------- -------------
Net decrease in cash and cash equivalents ................................... (62,729) (12,830)
Cash and cash equivalents as of the beginning of the period ................. 62,816 12,876
------------- -------------
Cash and cash equivalents as of the end of the period ....................... $ 87 $ 46
============= =============
See accompanying notes to condensed consolidated financial statements.
5
THE TORO COMPANY AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JANUARY 31, 2003
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 January 31,
2003 cannot be annualized to determine the expected results for the fiscal year
ending October 31, 2003. 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, 2002. 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 decisions which impact the reported amounts and the related disclosures.
Such decisions include the selection of the appropriate accounting principles to
be applied and the assumptions on which to base accounting estimates. In
reaching such decisions, management applies judgments based on its understanding
and analysis of the relevant circumstances, historical experience, and actuarial
valuations. Actual amounts could differ from those estimated at the time the
consolidated financial statements are prepared. 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.
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) January 31, February 1,
2003 2002
------------- -------------
Raw materials and work in process....................$ 74,834 $ 69,335
Finished goods and service parts..................... 233,973 250,678
------------- -------------
308,807 320,013
Less: LIFO........................................... 26,903 29,264
Other reserves....................................... 14,528 16,225
------------- -------------
Total.............................................$ 267,376 $ 274,524
============= =============
6
Restructuring and Other Expense
In fiscal 2002, the company announced plans to close its Riverside, California
manufacturing operations and its Evansville, Indiana and Madera, California
manufacturing facilities. Approximately 550 job positions and related staff
reductions will be lost in connection with closing these operations. As of
January 31, 2003, of the 550 job position reductions, 441 have been eliminated.
In addition, the company will incur ongoing costs after the facilities are
closed and until they are sold, which is captioned in "other" below. These
actions are part of Toro's overall long-term strategy to reduce production costs
and improve long-term competitiveness. The company also incurred a charge for
asset impairment related to write-downs of patents and non-compete agreements
during the first quarter of fiscal 2002.
The following is an analysis of the company's restructuring and other expense
reserve accounts:
(Dollars in thousands) Severance
& Benefits Other Total
---------- ----- -----
Balance as of October 31, 2002..............................$ 1,865 $ 872 $ 2,737
Utilization................................................. 1,331 25 1,356
------------- ------------- --------
Balance as of January 31, 2003..............................$ 534 $ 847 $ 1,381
============= ============= ========
The company expects a majority of the remaining accruals to be utilized during
fiscal 2003.
Comprehensive Income (Loss)
Comprehensive income (loss) and the components of other comprehensive income
(loss) for the three months ended were as follows:
Three Months Ended
---------------------------------
(Dollars in thousands) January 31, February 1,
2003 2002
------------- -------------
Net earnings (loss)...................................$ 6,981 $ (29,735)
Other comprehensive income (loss):
Cumulative translation adjustments................. 592 (26)
Unrealized loss on derivative instruments.......... (1,202) (252)
------------- -------------
Comprehensive income (loss)...........................$ 6,371 $ (30,013)
============= =============
Per Share Data
Reconciliations of basic and dilutive weighted average shares of common stock
outstanding are as follows:
(Shares in thousands) January 31, February 1,
Basic 2003 2002
- ----- ------------- -------------
Weighted average number of shares of common
stock outstanding.................................... 12,440 12,470
Assumed issuance of contingent shares ...................... 21 30
------------- -------------
Weighted average number of shares of common stock
and assumed issuance of contingent shares............ 12,461 12,500
============= =============
Dilutive
- --------
Weighted average number of shares of common stock
and assumed issuance of contingent shares............ 12,461 12,500
Assumed conversion of stock options......................... 461 -
------------- -------------
Weighted average number of shares of common stock,
assumed issuance of contingent shares, and
assumed conversion of stock options.................. 12,922 12,500
============= =============
7
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 January 31, 2003 Professional(1) Residential Distribution Other Total
- ----------------------------------- ------------- ----------- ------------ ----- -----
Net sales....................................................$..193,444 $94,665 $18,600 $(10,747) $295,962
Intersegment gross sales..................................... 12,044 843 - (12,887) -
Earnings (loss) before income taxes.......................... 27,756 8,661 (3,358) (22,639) 10,420
Total assets................................................. 449,869 193,068 36,158 209,006 888,101
Three months ended February 1, 2002
- -----------------------------------
Net sales....................................................$ 175,765 $92,216 $24,229 $(14,295) $277,915
Intersegment gross sales..................................... 15,667 1,250 - (16,917) -
Earnings (loss) before income taxes
and accounting change...................................... 9,080 7,706 (2,087) (22,343) (7,644)
Total assets................................................. 448,704 170,099 53,978 204,766 877,547
(1) Includes restructuring and other expense of $10.0 million in fiscal 2002.
The following table presents the details of the other segment earnings (loss)
before income taxes:
Three Months Ended
----------------------------------
(Dollars in thousands) January 31, February 1,
2003 2002
---------- ----------
Corporate expenses............................................$ (23,757) $ (21,249)
Finance charge revenue........................................ 848 1,068
Elimination of corporate financing expense.................... 2,332 2,615
Interest expense, net......................................... (4,092) (5,320)
Other income.................................................. 2,030 543
---------- ----------
Total.........................................................$ (22,639) $ (22,343)
========== ==========
Goodwill
The changes in the net carrying amount of goodwill for the first quarter of
fiscal 2003 were as follows:
(Dollars in thousands) Professional Residential
Segment Segment Total
------------- ------------- --------------
Balance as of October 31, 2002.......................$ 68,942 $ 8,913 $ 77,855
Translation adjustment............................... 10 26 36
------------- ------------- --------------
Balance as of January 31, 2003.......................$ 68,952 $ 8,939 $ 77,891
============= ============= ==============
8
Other Intangible Assets
The components of other amortizable intangible assets were as follows:
January 31, 2003 February 1, 2002
----------------------------------- ----------------------------------
(Dollars in thousands) Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ----------- -------------- -----------
Patents...................................................$ 6,104 $(4,688) $6,104 $(4,341)
Non-compete agreements.................................... 800 (447) 800 (276)
Other..................................................... 800 (800) 800 (740)
---------- ------- ------ -------
Total.....................................................$ 7,704 $(5,935) $7,704 $(5,357)
========== ======= ====== =======
Total other intangible assets, net........................$ 1,769 $2,347
========== ======
Amortization expense for intangible assets during the first quarter of fiscal
2003 was $136,000. Estimated amortization expense for the remainder of fiscal
2003 and succeeding fiscal years is as follows: 2003 (remainder), $343,000;
2004, $357,000; 2005, $337,000; 2006, $337,000; 2007, $182,000; 2008, $131,000
and after 2008, $82,000.
Warranty Guarantees
The company's products are warranted to the end-user to ensure end-user
confidence in design, workmanship, and overall quality. Warranty lengths vary by
product line, ranging from a period of six months to seven years, and cover
parts, labor, and other expenses for non-maintenance repairs, provided operator
abuse, improper use, or negligence did not necessitate the repair. An authorized
distributor or dealer must perform warranty work and submit claims for warranty
reimbursement, which the company pays as long as the repairs meet prescribed
standards. Warranty expense is accrued at the time of sale based on historical
claims experience by individual product lines. Special warranty reserves are
also accrued for special rework campaigns for known major product modifications.
The company also offers additional warranty coverage on select products when the
factory warranty period expires.
Warranty provisions, claims, and changes in estimates for the three-month
periods ended were as follows:
(Dollars in Thousands) Beginning Warranty Warranty Changes in Ending
Three Months Ended Balance Provisions Claims Estimates Balance
- ------------------------------------------------------------------------------------------------------------------------
January 31, 2003 $53,590 $7,784 $ (9,243) $811 $52,942
February 1, 2002 $57,882 $7,097 $ (11,173) $252 $54,058
9
Derivative Instruments and Hedging Activities
The company uses derivative instruments to assist in the management of exposure
to currency exchange rates. Toro uses derivatives only in an attempt to limit
underlying exposure to currency fluctuations, and not for trading purposes. The
company documents all relations between hedging instruments and the hedged
items, as well as its risk-management objective and strategy for undertaking
various hedge transactions. 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 and 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 sale or inventory purchase and a related
asset or liability recorded in the balance sheet, the related fair value of the
derivative hedge contract is reclassified from accumulated other comprehensive
income (loss) into earnings. During the quarter ended January 31, 2003, the
amount of losses reclassified to earnings for such cash flow hedges was $1.0
million. As of January 31, 2003, the amount of such contracts outstanding was
$66.1 million. The unrecognized after-tax loss portion of the fair value of the
contracts recorded in accumulated comprehensive loss as of January 31, 2003 was
$1.6 million.
The company also enters into other foreign currency exchange contracts. These
contracts are intended to hedge intercompany financing transactions and other
activities that are not subject to the accounting criteria of Statement of
Financial Accounting Standard (SFAS) No. 133; therefore, changes in fair value
of these instruments are recorded in other income, net.
New Accounting Pronouncements
SFAS No. 143, "Accounting for Asset Retirement Obligations" addresses the
diverse accounting practices for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
company adopted this standard on November 1, 2002, which did not have a material
impact on the company's financial statements.
SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets"
establishes a single accounting model for the impairment or disposal of
long-lived assets. The company adopted this standard on November 1, 2002, which
did not have a material impact on the company's financial statements.
SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities"
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
establishes that fair value is the objective for initial measurement of the
liability. The company will apply the provisions of SFAS No. 146 for exit or
disposal activities initiated after December 31, 2002, as required.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others." This interpretation elaborates disclosure requirements
for obligations by a guarantor under certain guarantees. This interpretation
also requires a guarantor to recognize, at the inception of a guarantee, a
liability for the fair value of an obligation undertaken in issuing a guarantee.
The company will apply the initial recognition and measurement provisions of
Interpretation No. 45 to guarantees issued or modified after December 31, 2002,
as required. The company has adopted the disclosure requirements in this
Interpretation during the first quarter of fiscal 2003, as required.
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
AND FINANCIAL CONDITION
NATURE OF OPERATIONS
The principal business of The Toro Company and its wholly owned and
majority-owned domestic and foreign subsidiaries ("Toro" or "the company") is
the development, manufacturing, and selling of outdoor beautification equipment
and systems used in the residential and professional markets. Our products are
sold through a network of distributors, dealers, hardware retailers, home
centers, mass retailers, and through Internet retailers.
FINANCIAL TRENDS
Throughout these financial sections, you will read about both recurring and
one-time transactions or events. One-time or significant transactions in the
current and prior period discussed in this Management's Discussion and Analysis
include the cumulative effect of change in accounting principle in the first
quarter of fiscal 2002, restructuring and other expense during fiscal 2002, and
a gain resulting from a legal settlement in the first quarter of fiscal 2003.
These one-time or significant transactions result from unique facts and
circumstances that likely will not recur with similar materiality or impact on
continuing operations. While these items are important in understanding and
evaluating financial results and trends, other transactions or events such as
those discussed later in this Management's Discussion and Analysis may also have
a material impact. A complete understanding of these transactions is necessary
in order to estimate the likelihood that these trends will continue.
ACCOUNTING POLICIES AND CRITICAL ACCOUNTING ESTIMATES
In preparing the consolidated financial statements in conformity with accounting
principles generally accepted in the United States of America, we must make
decisions which impact the reported amounts and the related disclosures. Such
decisions include the selection of the appropriate accounting principles to be
applied and the assumptions on which to base accounting estimates. In reaching
such decisions, we apply judgment based on our understanding and analysis of the
relevant circumstances, historical experience, and actuarial valuations. Actual
amounts could differ from those estimated at the time the consolidated financial
statements are prepared.
Our significant accounting policies are described in Note 1 to the consolidated
financial statements included in our Annual Report on Form 10-K for the fiscal
year ended October 31, 2002. Not all of these significant accounting policies
require us to make difficult subjective or complex judgments or estimates.
However, we believe the following accounting policies, which require some of the
more significant judgments and estimates used in the preparation of the
consolidated financial statements, could be deemed to be critical within the
Securities and Exchange Commission's (SEC) proposed rules related to critical
accounting policy disclosure.
Warranty Reserve. We establish a reserve for future warranty claims at the time
of sale based on historical claims experience by product line. We also establish
reserves for special rework campaigns for known major product modifications.
Warranty coverage ranges from a period of six months to seven years, and cover
parts, labor, and other expenses for non-maintenance repairs, 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 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. We believe
that analysis of historical trends and knowledge of potential manufacturing or
design problems provide sufficient information to establish a reasonable
estimate for warranty claims at the time of sale.
Accounts and Notes Receivable Valuation. We establish a reserve for specific
accounts and notes receivable that we believe are uncollectible, as well as an
estimate of uncollectible receivables not specifically known. Each quarter, we
evaluate past collection history, the age of the receivable, current financial
conditions of key customers, and economic conditions when establishing an
allowance for doubtful accounts. Portions of the accounts receivable are
protected by a security interest in products held by customers, which minimizes
our collection exposure. A deterioration in the financial condition of any key
customer or a significant continued slow down in the economy could have a
material negative impact on our ability to collect a portion or all of the
accounts and notes receivable. Therefore, our reserve for uncollectible
receivables could potentially be under estimated.
11
RESULTS OF OPERATIONS
Net Earnings (Loss)
First quarter net earnings were $7.0 million or $0.54 per diluted share compared
to a net loss of $29.7 million or $2.38 per diluted share last year. Results
last year included the following two one-time items: a cumulative effect of
change in accounting principle that reduced net earnings by $24.6 million for
the goodwill write-off related to the adoption of SFAS No. 142, "Goodwill and
Other Intangible Assets;" and restructuring and other expense of $10.0 million
($6.7 million net of tax). Diluted net earnings per share for the first quarter
of fiscal 2003 were $0.54 compared to $0.12 for the first quarter of fiscal 2002
after excluding these one-time items. This significant adjusted net earnings
increase resulted partly from a gain for a legal settlement that added $0.16 per
diluted share in fiscal 2003. In addition, higher sales volumes and an increase
in gross margins resulting from our "5 by Five" profit improvement initiatives
also contributed to the earnings growth.
The following table summarizes the one-time changes in net earnings (loss) and
diluted earnings per share data, net of tax effect:
Three Months Ended
------------------------------------------------------------------------
January 31, 2003 February 1, 2002
---------------------------------- -----------------------------------
Dollars Diluted per Dollars Diluted per
(in thousands) Common Share (in thousands) Common Share
-------------- ------------ -------------- ------------
Net earnings (loss) as reported...............................$ 6,981 $ 0.54 $(29,735) $ (2.38)
Add:
Cumulative effect of change in accounting principle......... - - 24,614 1.97
Restructuring and other expense ............................ - - 6,668 0.53
---------- --------- -------- ----------
Adjusted net earnings.........................................$ 6,981 $ 0.54 $ 1,547 $ 0.12
========== ========= ======== ==========
Net Sales
Worldwide consolidated net sales for the first quarter of fiscal 2003 were up
6.5 percent compared to last year's first quarter due primarily to acceptance of
new professional segment product introductions as well as lower field inventory
levels and a stronger order position entering fiscal 2003 as compared to
entering fiscal 2002. Also, early season shipments of Toro walk power mowers and
initial stocking shipments of the new TimeCutter Z mower in the residential
segment contributed to the sales growth. However, distribution segment sales
were lower compared to last year's first quarter due to the sale of a
distribution company during the first quarter of fiscal 2003, which also
contributed to the favorable change in the other segment due to the sales
elimination decrease. International sales were up 6.9 percent compared to last
year driven primarily by new product introductions and favorable currency
exchange rates. Disregarding currency effects, international sales increased 3.3
percent.
Gross Profit
Gross profit for the first quarter of fiscal 2003 increased 10.8 percent
compared to last year's first quarter. As a percentage of net sales, gross
profit for the first quarter of fiscal 2003 was 35.7 percent compared to 34.3
percent in the first quarter of fiscal 2002. The increase was the result of the
following factors: (i) cost reduction efforts that included moving production to
lower cost facilities; (ii) profit improvement strategies as part of our ongoing
"5 by Five" initiatives; (iii) increased sales of higher-margin products; (iv)
lower manufacturing costs from increased plant utilization as a result of
reduced excess manufacturing capacity, mainly related to the closure of two
facilities and increased demand for our products; and (v) favorable foreign
currency exchange rates compared to the U.S. dollar.
Selling, General, and Administrative Expense
Selling, general, and administrative expense (SG&A) for the first quarter of
fiscal 2003 increased 7.7 percent compared to the same period last year. SG&A as
a percentage of net sales was 32.4 percent in the first quarter of fiscal 2003
compared to 32.0 percent in the first quarter of fiscal 2002. The increase was
due mainly to: (i) higher incentive compensation expense; (ii) increased
warranty costs for known product modifications; and (iii) higher information
service spending.
12
Restructuring and Other Expense
In the first quarter of fiscal 2003, there were no charges for restructuring and
other expense. In the first quarter of fiscal 2002, we incurred $10.0 million of
restructuring and other expense. The closure of two manufacturing facilities
resulted in a pre-tax restructuring and other expense charge of $8.0 million. In
addition, we 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. Based on our evaluation of the recoverability of some acquired
intangible assets, we determined that the acquired patents and non-compete
agreements in the agricultural irrigation business had no future value due to
changes in this business.
Interest Expense
Interest expense for the first quarter of fiscal 2003 decreased 23.1 percent
compared to the first quarter of fiscal 2002, due primarily to lower levels of
short-term debt.
Other Income, Net
Other income, net for the first quarter of fiscal 2003 was $4.8 million compared
to $1.3 million in the same period last year. The increase was due primarily to
a gain from a legal settlement.
Provision for Income Taxes
The effective tax rate for the first quarter of fiscal 2003 remained unchanged
at 33.0 percent compared to the first quarter of fiscal 2002.
Cumulative Effect of Change in Accounting Principle
In connection with the adoption of SFAS No. 142 in the first quarter of fiscal
2002, we performed an evaluation of goodwill. 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 our original
expectations, mainly due to lower than anticipated growth rates in the drip line
market. This is a result of lower industry-wide pricing and margins on product
sales. We measured the amount of impairment based on a comparison of the fair
value of the reporting unit to its carrying value. Accordingly, we 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.
BUSINESS SEGMENTS
As described previously, we operate in three reportable segments; professional,
residential, and distribution. A fourth segment called "other" consists of
corporate and financing functions. 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.
The following table summarizes net sales by segment:
Three Months Ended
-------------------------------------------------------------
(Dollars in thousands) January 31, February 1,
2003 2002 $ Change % Change
---------- ---------- ----------- ----------
Professional................................................$ 193,444 $ 175,765 $ 17,679 10.1%
Residential................................................. 94,665 92,216 2,449 2.7
Distribution................................................ 18,600 24,229 (5,629) (23.2)
Other....................................................... (10,747) (14,295) 3,548 24.8
---------- ---------- -----------
Total *.................................................$ 295,962 $ 277,915 $ 18,047 6.5%
========== ========== ===========
* Includes international sales of:..........................$ 67,456 $ 63,095 $ 4,361 6.9%
13
Professional
Net Sales. Worldwide net sales for the professional segment in the first quarter
of fiscal 2003 were up 10.1 percent compared to the first quarter of fiscal
2002. Worldwide shipments of most product lines were up due to the success of
introducing new products as well as lower field inventory levels and a stronger
order position entering fiscal 2003 as compared to entering fiscal 2002.
Operating Earnings. Adjusted to exclude restructuring and other expense for
comparable purposes, operating earnings for the professional segment were $27.8
million in the first quarter of fiscal 2003 compared to $19.0 million in the
first quarter of fiscal 2002, an increase of 45.8 percent. Expressed as a
percentage of net sales, professional segment operating margins increased to
14.3 percent compared to 10.8 percent in the first quarter of fiscal 2002. The
increase was due mainly to higher gross margins as a result of the same factors
discussed previously in the Gross Profit section. In addition, a gain resulting
from a legal settlement also contributed to the profit improvement.
Residential
Net Sales. Worldwide net sales for the residential segment in the first quarter
of fiscal 2003 were up 2.7 percent compared to the first quarter of fiscal 2002.
Shipments of Toro walk power mowers led this increase due to the continued
success of the moderate-priced line of walk power mowers. In addition, some walk
power mower shipments were accelerated into the first quarter this year to
support a retail promotional program that began in February. Sales of Pope
retail irrigation products sold in Australia also increased due to dry weather
conditions. Riding product sales were also up due to initial stocking orders for
the new TimeCutter Z mower. However, shipments of other riding product lines
were down due to continued strong competition and consumer preference for
lower-priced units. Electric blower product sales were also down due to the cold
fall weather in most markets this year that reduced retail demand compared to
the warm fall weather last year that extended the selling season into the first
quarter of fiscal 2002. Snowthrower product shipments were also lower compared
to last year's first quarter due to lack of snowfall in the midwestern market.
Operating Earnings. Operating earnings for the residential segment increased
12.4 percent in the first quarter of fiscal 2003 compared to the first quarter
of fiscal 2002. Expressed as a percentage of net sales, residential segment
operating margins increased to 9.1 percent compared to 8.4 percent in the first
quarter of fiscal 2002. The increase was due mainly to higher gross margins as a
result of the same factors discussed previously in the Gross Profit section.
Somewhat offsetting the profit improvement were slightly higher SG&A costs.
Distribution
Net Sales. Worldwide net sales for the distribution segment in the first quarter
of fiscal 2003 were down 23.2 percent compared to the first quarter of fiscal
2002. This sales decline was primarily the result of selling one of the
previously owned distributorships effective December 31, 2002. In addition,
sales at the other company-owned distributors were down for the quarter
comparison due to continued weak economic conditions and timing of golf
projects. In the second quarter of fiscal 2003, Toro expects to purchase the
assets of a southeastern-based distributor.
Operating Losses. Operating losses for the distribution segment were $3.4
million in the first quarter of fiscal 2003 compared to $2.1 million in the
first quarter of fiscal 2002. This loss increase was due to lower sales volumes
as well as selling one of the previously owned distributorships effective
December 31, 2002.
Other
Net Sales. Net sales for the other segment include the elimination of sales from
the professional and residential segments to the distribution segment.
Professional and residential segment shipments to the company-owned distribution
companies are eliminated in the other segment because consolidated results
reflect those sales in the distribution segment after products are sold by the
company-owned distributorships. In addition, elimination of the professional and
residential segments' floor plan interest costs from Toro Credit Company are
also included in this segment. The other segment net sales elimination decreased
24.8 percent, reflecting lower amount of shipments to the distribution companies
mainly as a result of selling one of the previously owned distributorships as
discussed above.
14
Operating Losses. Operating losses for the other segment were up slightly
compared to the first quarter of fiscal 2002. This loss increase was due to
higher incentive compensation expenses and information service spending somewhat
offset by lower interest expense.
15
FINANCIAL POSITION
Working Capital
During the first quarter of fiscal 2003, emphasis continued on improving asset
management and reducing average short-term debt. Average working capital for the
first three months of fiscal 2003 was $296.7 million compared to $264.4 million
for the first three months of fiscal 2002. The increase of 12.2 percent was due
to lower average short-term debt somewhat offset by lower average inventory and
higher payables and other accrued liabilities. Based on the last twelve months
ending January 31, 2003, inventory turns were up 9.9 percent compared to the
twelve months ending February 1, 2002. This improvement was the result of lower
average inventory levels from improved asset management. In addition, average
days outstanding for receivables improved to 84 days based on the last twelve
months ending January 31, 2003 compared to 88 days based on the last twelve
months ending February 1, 2002. This decrease was due to a higher proportion of
sales that have shorter payment terms.
Liquidity and Capital Resources
Our businesses are working capital intensive and require funding for purchases
of production and replacement parts inventory, capital expenditures, expansion
and upgrading of existing facilities, as well as for financing receivables from
customers. We believe that cash generated from operations, together with our
fixed rate long-term debt, short- and medium-term bank credit lines, and cash on
hand, provide us with adequate liquidity to meet our operating requirements. We
believe that the combination of funds available through existing or anticipated
financing arrangements, coupled with forecasted cash flows, will provide the
necessary capital resources for our anticipated working capital, capital
additions, long-term debt repayments, and stock repurchases for the next twelve
months.
Cash Flow. Cash used in operating activities for the first three months of
fiscal 2003 was 4.2 percent lower than the first three months in fiscal 2002,
due primarily to higher earnings before non-cash expenses and higher levels of
payables and accruals compared to the prior year's comparable period due to the
timing of some profit sharing and incentive compensation payments. Cash used in
investing activities was slightly lower compared to the first quarter of fiscal
2002. Purchases of property, plant, and equipment were higher for the first
three months of fiscal 2003 compared to the same time period in fiscal 2002,
which was offset by proceeds from an investment and sale of a previously owned
distribution company. Cash provided by financing activities was lower by $53.8
million because the company borrowed less short-term debt during the first
quarter of fiscal 2003 compared to the first quarter of fiscal 2002.
Credit Lines and Other Capital Resources. Under Working Capital Agreements with
various banks, our U.S. seasonal working capital requirements are funded with a
$175.0 million medium-term committed unsecured bank credit line, which expires
in February 2005. During the first quarter of fiscal 2003, we also had a $75.0
million short-term committed unsecured credit line that expired in February
2003. During the second quarter of fiscal 2003, we expect to replace the expired
agreement with a new secured line of credit that is expected to reduce our
interest costs. Under these Working Capital Agreements, we 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. In addition, our non-U.S. operations and a domestic subsidiary also
maintain unsecured short-term lines of credit of approximately $9 million. These
facilities bear interest at various rates depending on the rates in their
respective countries of operation. We also have a letter of credit subfacility
as part of the above Working Capital Agreements. Average borrowings were $10.0
million in the first quarter of fiscal 2003 compared to $76.2 million in the
first quarter of fiscal 2002. The decrease in average short-term debt resulted
primarily from the use of cash earnings to pay for working capital requirements
and higher levels of payables and accruals. Our business is seasonal, with peak
borrowing generally occurring between February and May each year.
16
Significant financial covenants in the Working Capital Agreements are interest
coverage and debt to total capitalization ratios. The company was in compliance
with all covenants related to the Working Capital Agreements as of January 31,
2003. 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- and
medium-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. Our debt rating for long-term unsecured senior, non-credit enhanced
debt has been unchanged for the first quarter of fiscal 2003 by Standard and
Poor's Ratings Group at BBB- and by Moody's Investors Service at Baa3.
Inflation
We are subject to the effects of inflation and changing prices. In our 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 us in the
future. We attempt to deal with these inflationary pressures by actively
pursuing internal cost reduction efforts and introducing slight price increases.
Outlook
Historically, net sales and earnings for the first quarter of our fiscal year
are lower than other quarters, so that results for the first quarter of fiscal
2003 are not necessarily an indicator of spring season sales trends. We
anticipate good growth for the professional segment as we introduce new
products. We also expect growth in fiscal 2003 for the residential segment
driven primarily by the continued success of the new line of moderate-priced
Toro brand walk power mowers. In addition, continued benefits from "5 by Five"
programs are expected to improve fiscal 2003 results. We expect an improvement
in sales growth in fiscal 2003 compared to the sales growth in fiscal 2002, and
low double-digit diluted earnings per share growth before one-time transactions
in fiscal 2003 over fiscal 2002, while keeping a cautionary eye on the
challenging and uncertain world economies and geopolitical conditions.
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 our future performance. In addition, forward-looking
statements may be made orally or in press releases, conferences, reports, on our
worldwide web site, or otherwise, in the future by or on our behalf. When used
by or on our behalf, the words "expect", "looking ahead", "anticipate",
"estimate", "believe", "could", "will", "may", "should", "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 us. The following are some of the factors that could
cause our financial condition to differ materially from what we have anticipated
in our forward-looking statements:
- - Continued threat of terrorist acts and war, which may result in heightened
security and higher costs for import and export shipments of components or
finished goods, and contraction of the U.S. and worldwide economies.
- - Changes in global and domestic economies, including but not limited to
further slowing in growth, slow down in home sales, rise in interest rates
and oil costs, inflation, unemployment, and weaker consumer confidence, which
could have a negative impact on our financial results.
- - Increased competition, including competitive pricing pressures, new product
introductions, and financing programs offered by both domestic and foreign
companies.
- - Weather conditions that reduce demand for our products.
- - Ability to acquire, develop, and integrate new businesses and manage
alliances successfully, both of which are important to our revenue growth.
- - Our ability to achieve sales growth and low double-digit diluted earnings per
share growth in fiscal 2003.
17
- - Our ability to achieve goals of the "5 by Five" profit improvement program,
which is intended to improve after-tax return on sales.
- - Market acceptance of new products as well as sales generated from these new
products relative to expectations, based on existing and anticipated
investments in manufacturing capacity and commitments to fund advertising,
marketing, promotional programs, and research and development.
- - Unforeseen inventory adjustments or changes in purchasing patterns by our
customers, which could reduce sales and necessitate lowering manufacturing
volumes, or increase inventory above acceptable levels.
- - Market acceptance of existing products based on our commitment to develop and
improve existing product lines.
- - Unforeseen product quality problems in the development and production of new
and existing products, which could result in loss of market share and higher
warranty expense.
- - Degree of success in restructuring and plant consolidation, including our
ability to cost-effectively expand existing, open new, move production
between, and close manufacturing facilities.
- - Continued slow growth rate in new golf course construction or existing golf
course renovations.
- - Changing buying patterns, including but not limited to, a trend away from
purchases at dealer outlets to price and value sensitive purchases at
hardware retailers, home centers, and mass retailers.
- - Increased dependence on The Home Depot as a customer for the residential
segment.
- - Elimination or reduction of shelf space for our products at retailers.
- - Reduced government spending for grounds maintenance equipment due to reduced
tax revenue and tighter government budgets.
- - Financial viability of some distributors and dealers, changes in distributor
ownership, success in partnering with new dealers, and our customers' ability
to pay amounts owed to us.
- - Changes in laws and regulations, including changes in accounting standards;
taxation changes, including tax rate changes, new tax laws, revised tax law
interpretations, or the repeal of the foreign export benefit; imposition of
new tariffs on commodities such as steel; and environmental laws.
- - Changes in cost of raw materials, including higher oil prices.
- - The effects of litigation, including threatened or pending litigation, on
matters relating to patent infringement, employment, and commercial disputes.
- - Adverse changes in currency exchange rates or raw material commodity prices,
and the costs we incur in providing price support to international customers
and suppliers.
We wish to caution readers not to place undue reliance on any forward-looking
statement 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 our businesses, including factors
that potentially could materially affect our financial results or condition, may
emerge from time to time. We assume no obligation to update forward-looking
statements to reflect actual results or changes in factors or assumptions
affecting such forward-looking statements.
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk stemming from changes in foreign currency exchange
rates, interest rates, and commodity prices. Changes in these factors could
cause fluctuations in our net earnings and cash flows. In the normal course of
business, we actively manage the exposure of foreign currency market risk by
entering into various hedging instruments, authorized under company policies
that place controls on these activities, with counterparties that are highly
rated financial institutions. Our hedging activities involve the use of a
variety of derivative financial instruments. We use derivatives only in an
attempt to limit underlying exposure from currency fluctuations and to minimize
earnings and cash volatility associated with foreign exchange rate changes, and
not for trading purposes. Our market risk on interest rates relates primarily to
short-term debt and the potential increase in fair value of long-term debt
resulting from a potential decrease in interest rates. However, we do not have a
cash flow or earnings exposure due to market risks on long-term debt. See
further discussions on these market risks below.
Foreign Currency Exchange Rate Risk. We are exposed to foreign currency exchange
rate risk arising from transactions in the normal course of business, such as
sales and loans to wholly owned subsidiaries as well as sales to third party
customers, purchases from suppliers, and bank lines of credit with creditors
denominated in foreign currencies. Because our products are manufactured or
sourced primarily from the United States, a stronger U.S. dollar generally has a
negative impact on results from operations outside the United States while a
weaker dollar generally has a positive effect. Our primary exchange rate
exposure is with the euro, the Japanese yen, the Australian dollar, the Canadian
dollar, the British pound, and the Mexican peso against the U.S. dollar.
We enter into various contracts, principally forward contracts that change in
value as foreign exchange rates change, to protect the value of existing foreign
currency assets, liabilities, anticipated sales, and probable commitments.
Decisions on whether to use such contracts are made based on the amount of
exposures to the currency involved, and an assessment of the near-term market
value for each currency. The gains and losses on these contracts offset changes
in the value of the related exposures. Therefore, changes in market values of
these hedge instruments are highly correlated with changes in market values of
underlying hedged items both at inception of the hedge and over the life of the
hedge contract. During the quarter ended January 31, 2003, the amount of losses
reclassified to earnings for cash flow hedges was $1.0 million.
The following foreign currency exchange contracts held by us have maturity dates
in fiscal 2003. All items are non-trading and stated in U.S. dollars. Some
derivative instruments we enter into do not meet the hedging criteria of SFAS
No. 133; therefore, changes in fair value are recorded in other income, net. The
average contracted rate, notional amount, pre-tax value of derivative
instruments in accumulated comprehensive income (loss), and fair value impact of
derivative instruments in other income, net as of January 31, 2003 were as
follows:
VALUE IN
AVERAGE ACCUMULATED FAIR VALUE
DOLLARS IN THOUSANDS CONTRACTED NOTIONAL COMPREHENSIVE IMPACT
(EXCEPT AVERAGE CONTRACTED RATE) RATE AMOUNT INCOME (LOSS) GAIN (LOSS)
====================================================================================================
Buy US dollar/Sell Australian dollar 0.5672 $ 25,510.4 $ (141.8) $ (625.5)
Buy US dollar/Sell Canadian dollar 1.5662 6,113.4 (116.2) (26.3)
Buy US dollar/Sell Euro 1.0153 49,142.2 (1,391.1) (1,676.4)
Buy US dollar/Sell Mexican peso 10.8800 725.6 3.9 -
Buy Australian dollar/Sell US dollar 0.5899 1,563.1 - (1.2)
Buy British pound/Sell US dollar 1.4572 400.7 34.2 13.8
Buy Euro/Sell US dollar 1.0860 1,954.8 - (4.5)
Buy Japanese yen/Sell US dollar 121.0356 5,886.7 90.5 61.2
Buy Mexican peso/Sell US dollar 10.3110 10,115.5 (807.1) -
19
Interest Rate Risk. We are exposed to interest rate risk arising from
transactions that are entered into during the normal course of business. Our
short- and medium-term debt rates are dependent upon the LIBOR rate plus an
additional percentage based on our current borrowing level. See our most recent
Annual Report filed on Form 10-K (Item 7A). There has been no material change in
this information.
Commodity Price Risk. Some raw materials used in our products are exposed to
commodity price changes. We manage some of this risk by using a combination of
short-term and long-term agreements with some vendors. The primary commodity
price exposures are with aluminum, steel, and plastic resin.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The company's principal executive officer and principal financial officer, after
evaluating the effectiveness of the company's disclosure controls and procedures
(as defined in Exchange Act Rules 13a-14(c) and 15d-14(c)) as of a date within
90 days before the filing date of this report, have concluded that, as of such
date the company's disclosure controls and procedures were effective to ensure
that material information relating to the company and its consolidated
subsidiaries would be made known to them by others within those entities.
Changes in Internal Controls
There were no significant changes in our internal controls or in other factors
that could significantly affect those internal controls subsequent to the date
of their evaluation, nor were there any significant deficiencies or material
weaknesses in our internal controls. As a result, no significant corrective
actions were required or undertaken.
20
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
3(i) and 4(a) Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3(i) and 4(a) to
Registrant's Annual Report on Form 10-K for the fiscal
year ended October 31, 2001).
3(ii) and 4(b) Bylaws of Registrant (incorporated by reference to
Exhibit 3(ii) and 4(d) to Registrant's Quarterly
Report on Form 10-Q for the quarter ended August 3,
2001).
4(c) Specimen form of Common Stock certificate
(incorporated by reference to Exhibit 4(c) to
Registrant's Registration Statement on Form S-8,
Registration No. 2-94417).
4(d) Rights Agreement dated as of May 20, 1998, between
Registrant and Wells Fargo Bank Minnesota, National
Association relating to rights to purchase Series B
Junior Participating Voting Preferred Stock, as
amended (incorporated by reference to Registrant's
Current Report on Form 8-K dated May 27, 1998,
Commission File No. 1-8649).
4(e) Indenture dated as of January 31, 1997, between
Registrant and First National Trust Association, as
Trustee, relating to the Registrant's 7.125% Notes due
June 15, 2007 and its 7.80% Debentures due June 15,
2027 (incorporated by reference to Exhibit 4(a) to
Registrant's Current Report on Form 8-K for June 24,
1997, Commission File No. 1-8649).
99(a) Section 906 Certification of Chief Executive Officer.
99(b) Section 906 Certification of Chief Financial Officer.
(b) Reports on Form 8-K
None.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE TORO COMPANY
(Registrant)
Date: March 11, 2003 By /s/ Stephen P. Wolfe
-----------------------------------------
Stephen P. Wolfe
Vice President Finance,
Treasurer and Chief Financial Officer
(duly authorized officer and
principal financial officer)
22
CERTIFICATIONS
I, Kendrick B. Melrose, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Toro Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 11, 2003
/s/ Kendrick B. Melrose
- -----------------------
Kendrick B. Melrose
Chairman and Chief Executive Officer
(Principal Executive Officer)
23
I, Stephen P. Wolfe, certify that:
1. I have reviewed this quarterly report on Form 10-Q of The Toro Company;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness
of the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether there were significant changes in internal controls or
in other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 11, 2003
/s/ Stephen P. Wolfe
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Stephen P. Wolfe
Vice President, Finance
Treasurer and Chief Financial Officer
(Principal Financial Officer)
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