Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

 

FORM 10-Q

 

x

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended August 1, 2014

 

o

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Transition Period from            to           

 

THE TORO COMPANY

(Exact name of registrant as specified in its charter)

 

Delaware

 

1-8649

 

41-0580470

(State of Incorporation)

 

(Commission File Number)

 

(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 o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

The number of shares of common stock outstanding as of August 26, 2014 was 55,669,415.

 

 

 



Table of Contents

 

THE TORO COMPANY

INDEX TO FORM 10-Q

 

 

 

 

Page
Number

 

 

 

 

PART I.

FINANCIAL INFORMATION:

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

Condensed Consolidated Statements of Earnings (Unaudited) — Three and Nine Months Ended August 1, 2014 and August 2, 2013

 

3

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited) — Three and Nine Months Ended August 1, 2014 and August 2, 2013

 

3

 

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) — August 1, 2014, August 2, 2013, and October 31, 2013

 

4

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) — Nine Months Ended August 1, 2014 and August 2, 2013

 

5

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

 

6-16

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

16-26

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

 

26-27

 

 

 

 

Item 4.

Controls and Procedures

 

27

 

 

 

 

PART II.

OTHER INFORMATION:

 

 

 

 

 

 

Item 1.

Legal Proceedings

 

27

 

 

 

 

Item 1A.

Risk Factors

 

28

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

28

 

 

 

 

Item 6.

Exhibits

 

29

 

 

 

 

 

Signatures

 

30

 

2



Table of Contents

 

PART I.  FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings (Unaudited)

(Dollars and shares in thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

August 1,

 

August 2,

 

August 1,

 

August 2,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net sales

 

$

567,540

 

$

509,918

 

$

1,758,551

 

$

1,659,065

 

Cost of sales

 

365,460

 

331,887

 

1,128,417

 

1,062,916

 

Gross profit

 

202,080

 

178,031

 

630,134

 

596,149

 

Selling, general, and administrative expense

 

130,043

 

119,451

 

386,620

 

373,894

 

Operating earnings

 

72,037

 

58,580

 

243,514

 

222,255

 

Interest expense

 

(3,629

)

(3,909

)

(11,065

)

(12,307

)

Other income, net

 

2,390

 

2,982

 

6,220

 

7,420

 

Earnings before income taxes

 

70,798

 

57,653

 

238,669

 

217,368

 

Provision for income taxes

 

20,785

 

17,556

 

75,701

 

67,473

 

Net earnings

 

$

50,013

 

$

40,097

 

$

162,968

 

$

149,895

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings per share of common stock

 

$

0.89

 

$

0.70

 

$

2.88

 

$

2.58

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share of common stock

 

$

0.87

 

$

0.68

 

$

2.82

 

$

2.53

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares of common stock outstanding — Basic

 

55,965

 

57,653

 

56,494

 

58,091

 

 

 

 

 

 

 

 

 

 

 

Weighted-average number of shares of common stock outstanding — Diluted

 

57,320

 

58,913

 

57,800

 

59,266

 

 

THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

August 1,

 

August 2,

 

August 1,

 

August 2,

 

 

 

2014

 

2013

 

2014

 

2013

 

Net earnings

 

$

50,013

 

$

40,097

 

$

162,968

 

$

149,895

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(620

)

(5,583

)

541

 

(5,037

)

Derivative instruments, net of tax of $531, $(37), $891, and $596, respectively

 

446

 

(128

)

1,036

 

546

 

Other comprehensive (loss) income

 

(174

)

(5,711

)

1,577

 

(4,491

)

Comprehensive income

 

$

49,839

 

$

34,386

 

$

164,545

 

$

145,404

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except per share data)

 

 

 

August 1,

 

August 2,

 

October 31,

 

 

 

2014

 

2013

 

2013

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

177,894

 

$

161,180

 

$

182,993

 

Receivables, net

 

215,595

 

202,148

 

157,171

 

Inventories, net

 

293,761

 

258,929

 

240,089

 

Prepaid expenses and other current assets

 

33,764

 

27,426

 

33,258

 

Deferred income taxes

 

38,735

 

62,324

 

39,756

 

Total current assets

 

759,749

 

712,007

 

653,267

 

 

 

 

 

 

 

 

 

Property, plant, and equipment

 

770,758

 

710,825

 

721,504

 

Less accumulated depreciation

 

567,930

 

530,882

 

536,408

 

 

 

202,828

 

179,943

 

185,096

 

 

 

 

 

 

 

 

 

Long-term deferred income taxes

 

25,951

 

98

 

 

Other assets

 

22,226

 

19,351

 

44,163

 

Goodwill

 

91,812

 

91,951

 

91,914

 

Other intangible assets, net

 

25,261

 

27,780

 

28,308

 

Total assets

 

$

1,127,827

 

$

1,031,130

 

$

1,002,748

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

140

 

$

 

$

 

Short-term debt

 

1,134

 

 

 

Accounts payable

 

168,956

 

124,244

 

136,158

 

Accrued liabilities

 

289,519

 

284,702

 

252,687

 

Total current liabilities

 

459,749

 

408,946

 

388,845

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

223,800

 

223,528

 

223,544

 

Deferred revenue

 

11,102

 

10,547

 

10,899

 

Deferred income taxes

 

5,969

 

2,898

 

5,969

 

Other long-term liabilities

 

14,474

 

6,592

 

14,753

 

 

 

 

 

 

 

 

 

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 175,000,000 shares; issued and outstanding 55,705,894 shares as of August 1, 2014, 57,142,923 shares as of August 2, 2013, and 56,788,723 shares as of October 31, 2013

 

55,706

 

57,143

 

56,789

 

Retained earnings

 

368,020

 

335,941

 

314,519

 

Accumulated other comprehensive loss

 

(10,993

)

(14,465

)

(12,570

)

Total stockholders’ equity

 

412,733

 

378,619

 

358,738

 

Total liabilities and stockholders’ equity

 

$

1,127,827

 

$

1,031,130

 

$

1,002,748

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

Nine Months Ended

 

 

 

August 1,

 

August 2,

 

 

 

2014

 

2013

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

162,968

 

$

149,895

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Non-cash income from finance affiliate

 

(5,598

)

(5,658

)

Provision for depreciation and amortization

 

38,104

 

39,204

 

Stock-based compensation expense

 

8,478

 

7,927

 

(Increase) decrease in deferred income taxes

 

(43

)

183

 

Other

 

2

 

28

 

Changes in operating assets and liabilities, net of effect of acquisition:

 

 

 

 

 

Receivables, net

 

(59,774

)

(56,762

)

Inventories, net

 

(53,716

)

(12,048

)

Prepaid expenses and other assets

 

1,167

 

(1,539

)

Accounts payable, accrued liabilities, deferred revenue, and other long-term liabilities

 

72,625

 

36,910

 

Net cash provided by operating activities

 

164,213

 

158,140

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant, and equipment

 

(53,228

)

(34,390

)

Proceeds from asset disposals

 

161

 

344

 

Distributions from finance affiliate, net

 

2,324

 

2,977

 

Acquisition, net of cash acquired

 

(715

)

 

Net cash used in investing activities

 

(51,458

)

(31,069

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Increase in (repayments of) short-term debt

 

300

 

(415

)

Increase in (repayments of) long-term debt

 

18

 

(1,769

)

Excess tax benefits from stock-based awards

 

8,536

 

5,196

 

Proceeds from exercise of stock options

 

6,813

 

8,146

 

Purchases of Toro common stock

 

(100,507

)

(76,003

)

Dividends paid on Toro common stock

 

(33,871

)

(24,453

)

Net cash used in financing activities

 

(118,711

)

(89,298

)

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

857

 

(2,449

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(5,099

)

35,324

 

Cash and cash equivalents as of the beginning of the fiscal period

 

182,993

 

125,856

 

Cash and cash equivalents as of the end of the fiscal period

 

$

177,894

 

$

161,180

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

THE TORO COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

August 1, 2014

 

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 U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. Unless the context indicates otherwise, the terms “company” and “Toro” refer to The Toro Company and its consolidated 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 results of operations. Since the company’s business is seasonal, operating results for the nine months ended August 1, 2014 cannot be annualized to determine the expected results for the fiscal year ending October 31, 2014.

 

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 calendar month 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, 2013. The policies described in that report are used for preparing quarterly reports.

 

New Accounting Pronouncement Adopted

 

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-11, Disclosures about Offsetting Assets and Liabilities. ASU No. 2011-11 requires entities to disclose gross and net information about both instruments and transactions eligible for offset in the statement of financial position and those subject to an agreement similar to a master netting arrangement, including derivatives and other financial securities arrangements. The company adopted this guidance in the first quarter of fiscal 2014, as required. The adoption of this guidance did not have a material impact on the company’s consolidated financial statements.

 

Acquisition

 

During the first quarter of fiscal 2014, the company completed the acquisition of certain assets of a quality value-priced line of outdoor lighting fixtures and accessories for the landscape lighting market. The acquisition was accounted for as a business combination and was immaterial based on the company’s consolidated financial condition and results of operations.

 

Accounting Policies

 

In preparing the consolidated financial statements in conformity with U.S. GAAP, management must make decisions that impact the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures, including disclosures of contingent assets and liabilities. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Estimates are used in determining, among other items, sales promotions and incentives accruals, incentive compensation accruals, inventory valuation, warranty reserves, earnout liabilities, allowance for doubtful accounts, pension and postretirement accruals, self-insurance accruals, useful lives for tangible and intangible assets, and future cash flows associated with impairment testing for goodwill and other long-lived assets. These estimates and assumptions are based on management’s best estimates and judgments at the time they are made. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with certainty, actual amounts could differ significantly from those estimated at the time the consolidated financial statements are prepared. Changes in those estimates will be reflected in the consolidated financial statements in future periods.

 

6



Table of Contents

 

Stock-Based Compensation

 

Stock Option Awards

 

Under the company’s incentive plan, stock options are granted with an exercise price equal to the closing price of the company’s common stock on the date of grant, as reported by the New York Stock Exchange. Options are generally granted to executive officers, other employees, and non-employee members of the company’s Board of Directors on an annual basis in the first quarter of the company’s fiscal year. Options generally vest one-third each year over a three-year period and have a ten-year term. Other options granted to certain non-officer employees vest in full on the three-year anniversary of the date of grant and have a ten-year term. Compensation expense equal to the grant date fair value is recognized for these awards over the vesting period. Stock options granted to officers and other employees are subject to accelerated expensing if the option holder meets the retirement definition set forth in the plan. In that case, the fair value of the options is expensed in the fiscal year of grant because the option holder must be employed as of the end of the fiscal year in which the options are granted in order for the options to continue to vest following retirement. Similarly, if a non-employee director has served on the company’s Board of Directors for ten full fiscal years or more, the awards vest immediately upon retirement, and therefore, the fair value of the options granted is fully expensed on the date of the grant.

 

The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation method with the assumptions noted in the table below. The expected life is a significant assumption as it determines the period for which the risk-free interest rate, volatility, and dividend yield must be applied. The expected life is the average length of time in which officers, other employees, and non-employee directors are expected to exercise their stock options, which is primarily based on historical experience. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Expected volatilities are based on the movement of the company’s common stock over the most recent historical period equivalent to the expected life of the option. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate over the expected life at the time of grant. Dividend yield is estimated over the expected life based on the company’s historical cash dividends paid, expected future cash dividends and dividend yield, and expected changes in the company’s stock price.

 

The following table illustrates the assumptions for options granted in the following fiscal periods.

 

 

 

Fiscal 2014

 

Fiscal 2013

Expected life of option in years

 

6

 

6

Expected volatility

 

34.28% - 34.42%

 

35.18% - 35.19%

Weighted-average volatility

 

34.29%

 

35.19%

Risk-free interest rate

 

1.92%

 

0.88%

Expected dividend yield

 

1.25% - 1.27%

 

1.04% - 1.07%

Weighted-average dividend yield

 

1.25%

 

1.07%

Grant date per share weighted-average fair value

 

$18.69

 

$13.03

 

Performance Share Awards

 

The company grants performance share awards to executive officers and other employees under which they are entitled to receive shares of the company’s common stock contingent on the achievement of performance goals of the company and businesses of the company, which are generally measured over a three-year period. The number of shares of common stock a participant receives will be increased (up to 200 percent of target levels) or reduced (down to zero) based on the level of achievement of performance goals and vest at the end of a three-year period. Performance share awards are generally granted on an annual basis in the first quarter of the company’s fiscal year. Compensation expense is recognized for these awards on a straight-line basis over the vesting period based on the per share fair value as of the date of grant and the probability of achieving each performance goal. The per share fair value of performance share awards granted during the first nine months of fiscal 2014 and 2013 was $59.31 and $42.06, respectively. No performance share awards were granted during the third quarter of fiscal 2014 or 2013.

 

Restricted Stock and Restricted Stock Unit Awards

 

Under the company’s incentive plan, restricted stock and restricted stock unit awards are generally granted to certain non-officer employees. Occasionally, restricted stock or restricted stock unit awards may be granted, including to officers, in connection with hiring, mid-year promotions, leadership transition, or retention. Restricted stock and restricted stock unit awards generally vest one-third each year over a three-year period, or vest in full on the three-year anniversary of the date of grant. Such awards may have performance-based rather than time-based vesting requirements. Compensation expense equal to the grant date fair value, which is equal to the closing price of the company’s common stock on the date of grant multiplied by the number of shares subject to the restricted stock and restricted stock unit awards, is recognized for these awards over the vesting period. The per share weighted-average fair value of restricted stock and restricted stock unit awards granted during the first nine months of fiscal 2014 and 2013 was $63.09 and $46.22, respectively.

 

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Table of Contents

 

Per Share Data

 

Reconciliations of basic and diluted weighted-average shares of common stock outstanding are as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

August 1,

 

August 2,

 

August 1,

 

August 2,

 

(Shares in thousands)

 

2014

 

2013

 

2014

 

2013

 

Basic

 

 

 

 

 

 

 

 

 

Weighted-average number of shares of common stock

 

55,965

 

57,653

 

56,477

 

58,059

 

Assumed issuance of contingent shares

 

 

 

17

 

32

 

Weighted-average number of shares of common stock and assumed issuance of contingent shares

 

55,965

 

57,653

 

56,494

 

58,091

 

Diluted

 

 

 

 

 

 

 

 

 

Weighted-average number of shares of common stock and assumed issuance of contingent shares

 

55,965

 

57,653

 

56,494

 

58,091

 

Effect of dilutive securities

 

1,355

 

1,260

 

1,306

 

1,175

 

Weighted-average number of shares of common stock, assumed issuance of contingent shares, and effect of dilutive securities

 

57,320

 

58,913

 

57,800

 

59,266

 

 

Incremental shares from options, restricted stock, and restricted stock units are computed by the treasury stock method. Options, restricted stock, and restricted stock units of 153,651 and 204,461 shares during the third quarter of fiscal 2014 and 2013, respectively, were excluded from the diluted net earnings per share because they were anti-dilutive. For the year-to-date periods through the third quarter of fiscal 2014 and 2013, options, restricted stock, and restricted stock units of 239,058 and 328,703 shares, respectively, were excluded from the diluted net earnings per share because they were anti-dilutive.

 

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 and first-in, first-out (“FIFO”) method for all other inventories. The company establishes a reserve for excess, slow-moving, and obsolete inventory that is equal to the difference between the cost and estimated net realizable value for that inventory. These reserves are based on a review and comparison of current inventory levels to the planned production, as well as planned and historical sales of the inventory.

 

Inventories were as follows:

 

 

 

August 1,

 

August 2,

 

October 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

Raw materials and work in process

 

$

88,140

 

$

80,176

 

$

87,668

 

Finished goods and service parts

 

270,996

 

242,560

 

217,796

 

Total FIFO value

 

359,136

 

322,736

 

305,464

 

Less: adjustment to LIFO value

 

65,375

 

63,807

 

65,375

 

Total

 

$

293,761

 

$

258,929

 

$

240,089

 

 

Goodwill

 

The changes in the net carrying amount of goodwill for the first nine months of fiscal 2014 were as follows:

 

 

 

Professional

 

Residential

 

 

 

(Dollars in thousands)

 

Segment

 

Segment

 

Total

 

Balance as of October 31, 2013

 

$

80,962

 

$

10,952

 

$

91,914

 

Translation adjustments

 

(36

)

(66

)

(102

)

Balance as of August 1, 2014

 

$

80,926

 

$

10,886

 

$

91,812

 

 

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Table of Contents

 

Other Intangible Assets

 

The components of other intangible assets were as follows:

 

(Dollars in thousands)
August 1, 2014

 

Estimated
Life (Years)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Patents

 

1.5-13

 

$

10,705

 

$

(8,838

)

$

1,867

 

Non-compete agreements

 

1.5-10

 

7,041

 

(5,118

)

1,923

 

Customer-related

 

1.5-13

 

8,711

 

(5,364

)

3,347

 

Developed technology

 

1.5-10

 

28,873

 

(16,055

)

12,818

 

Trade names

 

1.5-5

 

1,515

 

(1,090

)

425

 

Other

 

 

 

800

 

(800

)

 

Total amortizable

 

 

 

57,645

 

(37,265

)

20,380

 

Non-amortizable - trade names

 

 

 

4,881

 

 

4,881

 

Total other intangible assets, net

 

 

 

$

62,526

 

$

(37,265

)

$

25,261

 

 

October 31, 2013

 

Estimated
Life (Years)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Patents

 

1.5-13

 

$

10,213

 

$

(8,537

)

$

1,676

 

Non-compete agreements

 

1.5-10

 

6,849

 

(4,488

)

2,361

 

Customer-related

 

1.5-13

 

8,654

 

(4,660

)

3,994

 

Developed technology

 

1.5-10

 

28,224

 

(13,478

)

14,746

 

Trade names

 

1.5-5

 

1,515

 

(865

)

650

 

Other

 

 

 

800

 

(800

)

 

Total amortizable

 

 

 

56,255

 

(32,828

)

23,427

 

Non-amortizable - trade names

 

 

 

4,881

 

 

4,881

 

Total other intangible assets, net

 

 

 

$

61,136

 

$

(32,828

)

$

28,308

 

 

Amortization expense for intangible assets during the first nine months of fiscal 2014 was $4.5 million. Estimated amortization expense for the remainder of fiscal 2014 and succeeding fiscal years is as follows: fiscal 2014 (remainder), $1.5 million; fiscal 2015, $5.6 million; fiscal 2016, $5.1 million; fiscal 2017, $4.2 million; fiscal 2018, $2.1 million; fiscal 2019, $1.2 million; and after fiscal 2019, $0.7 million.

 

Investment in Joint Venture

 

In fiscal 2009, the company and TCF Inventory Finance, Inc. (“TCFIF”), a subsidiary of TCF National Bank, established Red Iron Acceptance, LLC (“Red Iron”), a joint venture in the form of a Delaware limited liability company that provides inventory financing, including floor plan and open account receivable financing, to distributors and dealers of the company’s products in the U.S. and to select distributors of the company’s products in Canada. Additionally, in connection with the joint venture, the company and an affiliate of TCFIF entered into an arrangement to provide inventory financing to dealers of the company’s products in Canada. In fiscal 2012, the company and TCFIF entered into amendments to certain of the agreements pertaining to Red Iron, among other things, to extend the initial term of Red Iron until October 31, 2017, subject to unlimited automatic two-year extensions thereafter. Either the company or TCFIF may elect not to extend the initial term or any subsequent term by giving one-year notice to the other party of its intention not to extend the term.

 

The company owns 45 percent of Red Iron and TCFIF owns 55 percent of Red Iron. The company accounts for its investment in Red Iron under the equity method of accounting. Each of the company and TCFIF contributed a specified amount of the estimated cash required to enable Red Iron to purchase the company’s inventory financing receivables and to provide financial support for Red Iron’s inventory financing programs. Red Iron borrows the remaining requisite estimated cash utilizing a $450 million secured revolving credit facility established under a credit agreement between Red Iron and TCFIF. The company’s total investment in Red Iron as of August 1, 2014 was $16.6 million. The company has not guaranteed the outstanding indebtedness of Red Iron. The company has agreed to repurchase products repossessed by Red Iron and the TCFIF Canadian affiliate, up to a maximum aggregate amount of $7.5 million in a calendar year. In addition, the company has provided recourse to Red Iron for certain outstanding receivables, which amounted to a maximum amount of $0.4 million as of August 1, 2014.

 

Under the repurchase agreement between Red Iron and the company, Red Iron provides financing for certain dealers and distributors. These transactions are structured as an advance in the form of a payment by Red Iron to the company on behalf of a distributor or dealer with respect to invoices financed by Red Iron. These payments extinguish the obligation of the dealer or

 

9



Table of Contents

 

distributor to make payment to the company under the terms of the applicable invoice. Under separate agreements between Red Iron and the dealers and distributors, Red Iron provides loans to the dealers and distributors for the advances paid by Red Iron to the company. The net amount of new receivables financed for dealers and distributors under this arrangement for the nine months ended August 1, 2014 and August 2, 2013 was $1,019.3 million and $962.5 million, respectively.

 

As of July 31, 2014, Red Iron’s total assets were $332.9 million and total liabilities were $296.1 million.

 

Warranty Guarantees

 

The company’s products are warranted to ensure customer confidence in design, workmanship, and overall quality. Warranty coverage is for specified periods of time and on select products’ hours of usage, and generally covers parts, labor, and other expenses for non-maintenance repairs. Warranty coverage generally does not cover operator abuse or improper use. An authorized company distributor or dealer must perform warranty work. Distributors and dealers submit claims for warranty reimbursement and are credited for the cost of repairs, labor, and other expenses as long as the repairs meet prescribed standards. Warranty expense is accrued at the time of sale based on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, and other minor factors. Special warranty reserves are also accrued for major rework campaigns. The company sells extended warranty coverage on select products for a prescribed period after the factory warranty period expires.

 

Warranty provisions, claims, and changes in estimates for the first nine months of fiscal 2014 and 2013 were as follows:

 

 

 

Nine Months Ended

 

 

 

August 1,

 

August 2,

 

(Dollars in thousands)

 

2014

 

2013

 

Beginning balance

 

$

72,177

 

$

69,848

 

Warranty provisions

 

34,078

 

33,875

 

Warranty claims

 

(25,052

)

(24,624

)

Changes in estimates

 

(1,510

)

(1,928

)

Ending balance

 

$

79,693

 

$

77,171

 

 

Stockholders’ Equity

 

Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss (“AOCL”), net of tax, are as follows:

 

 

 

August 1,

 

August 2,

 

October 31,

 

(Dollars in thousands)

 

2014

 

2013

 

2013

 

Foreign currency translation adjustments

 

$

7,166

 

$

10,496

 

$

7,778

 

Pension and post-retirement benefits

 

3,754

 

4,304

 

3,683

 

Derivative instruments

 

73

 

(335

)

1,109

 

Total accumulated other comprehensive loss

 

$

10,993

 

$

14,465

 

$

12,570

 

 

The components and activity of AOCL are as follows:

 

(Dollars in thousands) 

 

Foreign
Currency
Translation
Adjustments

 

Pension and
Post-retirement
Benefits

 

Derivative
Instruments

 

Total

 

Balance as of October 31, 2013

 

$

7,778

 

$

3,683

 

$

1,109

 

$

12,570

 

Other comprehensive (income) loss before reclassifications

 

(612

)

71

 

450

 

(91

)

Amounts reclassified from AOCL

 

 

 

(1,486

)

(1,486

)

Net current period other comprehensive (income) loss

 

$

(612

)

$

71

 

$

(1,036

)

$

(1,577

)

Balance as of August 1, 2014

 

$

7,166

 

$

3,754

 

$

73

 

$

10,993

 

 

10



Table of Contents

 

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 Distribution segment, which consists of company-owned domestic distributorships, has been combined with the company’s corporate activities and elimination of intersegment revenues and expenses that is shown as “Other” in the following tables due to the insignificance of the segment.

 

The following table shows the summarized financial information concerning the company’s reportable segments:

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Three months ended August 1, 2014

 

Professional

 

Residential

 

Other

 

Total

 

Net sales

 

$

384,678

 

$

175,717

 

$

7,145

 

$

567,540

 

Intersegment gross sales

 

11,964

 

128

 

(12,092

)

 

Earnings (loss) before income taxes

 

74,835

 

18,698

 

(22,735

)

70,798

 

 

Three months ended August 2, 2013

 

Professional

 

Residential

 

Other

 

Total

 

Net sales

 

$

343,866

 

$

155,452

 

$

10,600

 

$

509,918

 

Intersegment gross sales

 

7,628

 

149

 

(7,777

)

 

Earnings (loss) before income taxes

 

60,508

 

15,070

 

(17,925

)

57,653

 

 

Nine months ended August 1, 2014

 

Professional

 

Residential

 

Other

 

Total

 

Net sales

 

$

1,208,707

 

$

533,664

 

$

6,180

 

$

1,758,551

 

Intersegment gross sales

 

31,878

 

378

 

(32,256

)

 

Earnings (loss) before income taxes

 

244,665

 

60,654

 

(66,650

)

238,669

 

Total assets

 

616,305

 

186,079

 

325,443

 

1,127,827

 

 

Nine months ended August 2, 2013

 

Professional

 

Residential

 

Other

 

Total

 

Net sales

 

$

1,169,446

 

$

477,789

 

$

11,830

 

$

1,659,065

 

Intersegment gross sales

 

34,401

 

354

 

(34,755

)

 

Earnings (loss) before income taxes

 

233,521

 

51,903

 

(68,056

)

217,368

 

Total assets

 

573,089

 

177,495

 

280,546

 

1,031,130

 

 

The following table summarizes the components of the loss before income taxes included in “Other” shown above:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

August 1,

 

August 2,

 

August 1,

 

August 2,

 

(Dollars in thousands)

 

2014

 

2013

 

2014

 

2013

 

Corporate expenses

 

$

(22,101

)

$

(18,985

)

$

(62,448

)

$

(61,304

)

Interest expense, net

 

(3,629

)

(3,909

)

(11,065

)

(12,307

)

Other

 

2,995

 

4,969

 

6,863

 

5,555

 

Total

 

$

(22,735

)

$

(17,925

)

$

(66,650

)

$

(68,056

)

 

11



Table of Contents

 

Derivative Instruments and Hedging Activities

 

The company is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as sales to third party customers, sales and loans to wholly owned foreign subsidiaries, foreign plant operations, and purchases from suppliers. The company actively manages the exposure of its foreign currency exchange rate 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. The company’s hedging activities primarily involve the use of forward currency contracts and cross currency swaps that are intended to offset intercompany loan exposures. The company uses derivative instruments only in an attempt to limit underlying exposure from foreign currency exchange rate fluctuations and to minimize earnings and cash flow volatility associated with foreign currency exchange rate changes. Decisions on whether to use such contracts are primarily based on the amount of exposure to the currency involved and an assessment of the near-term market value for each currency. The company’s policy does not allow the use of derivatives for trading or speculative purposes. The company also has made an accounting policy election to use the portfolio exception with respect to measuring counterparty credit risk for derivative instruments, and to measure the fair value of a portfolio of financial assets and financial liabilities on the basis of the net open risk position with each counterparty. The company’s primary foreign currency exchange rate exposures are with the Euro, the Australian dollar, the Canadian dollar, the British pound, the Mexican peso, the Japanese yen, the Chinese Renminbi, and the Romanian New Leu against the U.S. dollar, as well as the Romanian New Leu against the Euro.

 

Cash flow hedges. The company recognizes all derivative instruments as either assets or liabilities at fair value on the consolidated balance sheet and formally documents relationships between cash flow hedging instruments and hedged transactions, as well as its risk-management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives to the forecasted transactions, such as sales to third parties and foreign plant operations. Changes in fair values of outstanding cash flow hedge derivatives, except the ineffective portion, are recorded in other comprehensive income (“OCI”), until net earnings is affected by the variability of cash flows of the hedged transaction. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in net earnings. The consolidated statements of earnings classification of effective hedge results is the same as that of the underlying exposure. Results of hedges of sales and foreign plant operations are recorded in net sales and cost of sales, respectively, when the underlying hedged transaction affects net earnings. The maximum amount of time the company hedges its exposure to the variability in future cash flows for forecasted trade sales and purchases is two years. Results of hedges of intercompany loans are recorded in other income, net as an offset to the remeasurement of the foreign loan balance.

 

The company formally assesses, at a hedge’s inception and on an ongoing basis, whether the derivatives that are designated as hedges have been highly effective in offsetting changes in the cash flows of the hedged transactions and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not, or has ceased to be, highly effective as a hedge, the company discontinues hedge accounting prospectively. When the company discontinues hedge accounting because it is no longer probable, but it is still reasonably possible that the forecasted transaction will occur by the end of the originally expected period or within an additional two-month period of time thereafter, the gain or loss on the derivative remains in AOCL and is reclassified to net earnings when the forecasted transaction affects net earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were in AOCL are recognized immediately in net earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the company carries the derivative at its fair value on the consolidated balance sheets, recognizing future changes in the fair value in other income, net. For the third quarter and year-to-date periods of fiscal 2014, there were immaterial losses on contracts reclassified into earnings as a result of the discontinuance of cash flow hedges. As of August 1, 2014 and August 2, 2013, the notional amount outstanding of forward contracts designated as cash flow hedges was $108.6 million and $80.4 million, respectively. Additionally, as of August 1, 2014, the company had one cross currency interest rate swap instrument outstanding for a fixed pay notional of 36.6 million Romanian New Leu and receive floating notional of 8.5 million Euro.

 

Derivatives not designated as hedging instruments. The company also enters into foreign currency contracts that include forward currency contracts and cross currency swaps to mitigate the remeasurement of specific assets and liabilities on the consolidated balance sheet. These contracts are not designated as hedging instruments. Accordingly, changes in the fair value of hedges of recorded balance sheet positions, such as cash, receivables, payables, intercompany notes, and other various contractual claims to pay or receive foreign currencies other than the functional currency, are recognized immediately in other income, net, on the consolidated statements of earnings together with the transaction gain or loss from the hedged balance sheet position.

 

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Table of Contents

 

The following table presents the fair value of the company’s derivatives and consolidated balance sheet location.

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

August 1, 2014

 

August 2, 2013

 

August 1, 2014

 

August 2, 2013

 

 

 

Balance

 

 

 

Balance

 

 

 

Balance

 

 

 

Balance

 

 

 

 

 

Sheet

 

Fair

 

Sheet

 

Fair

 

Sheet

 

Fair

 

Sheet

 

Fair

 

(Dollars in thousands)

 

Location

 

Value

 

Location

 

Value

 

Location

 

Value

 

Location

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

Prepaid expenses

 

$

1,263

 

Prepaid expenses

 

$

796

 

Accrued liabilities

 

$

62

 

Accrued liabilities

 

$

178

 

Cross currency contract

 

Prepaid expenses

 

 

Prepaid expenses

 

 

Accrued liabilities

 

701

 

Accrued liabilities

 

428

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

Prepaid expenses

 

261

 

Prepaid expenses

 

2,305

 

Accrued liabilities

 

412

 

Accrued liabilities

 

178

 

Cross currency contract

 

Prepaid expenses

 

61

 

Prepaid expenses

 

83

 

Accrued liabilities

 

 

Accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Derivatives

 

 

 

$

1,585

 

 

 

$

3,184

 

 

 

$

1,175

 

 

 

$

784

 

 

The following table presents the impact of derivative instruments on the consolidated statements of earnings for the company’s derivatives designated as cash flow hedging instruments for the three and nine months ended August 1, 2014 and August 2, 2013, respectively.

 

 

 

 

 

 

 

 

 

Location of Gain (Loss)

 

Gain (Loss)

 

 

 

 

 

Location of Gain

 

 

 

Recognized in Income

 

Recognized in Income

 

 

 

Gain (Loss)

 

(Loss) Reclassified

 

Gain (Loss)

 

on Derivatives

 

on Derivatives

 

 

 

Recognized in OCI on

 

from AOCL

 

Reclassified from

 

(Ineffective Portion

 

(Ineffective Portion and

 

 

 

Derivatives

 

into Income

 

AOCL into Income

 

and excluded from

 

Excluded from

 

 

 

(Effective Portion)

 

(Effective Portion)

 

(Effective Portion)

 

Effectiveness Testing)

 

Effectiveness Testing)

 

(Dollars in thousands)

 

August 1,

 

August 2,

 

 

 

August 1,

 

August 2,

 

 

 

August 1,

 

August 2,

 

For the three months ended

 

2014

 

2013

 

 

 

2014

 

2013

 

 

 

2014

 

2013

 

Forward currency contracts

 

$

952

 

$

459

 

Net sales

 

$

(369

)

$

(114

)

Other income, net

 

$

(63

)

$

5

 

Forward currency contracts

 

(216

)

(491

)

Cost of sales

 

61

 

185

 

 

 

 

 

 

 

Cross currency contracts

 

(292

)

(97

)

Other income, net

 

(212

)

126

 

 

 

 

 

 

 

Total

 

$

444

 

$

(129

)

 

 

$

(520

)

$

197

 

 

 

 

 

 

 

 

 

 

August 1,

 

August 2,

 

 

 

August 1,

 

August 2,

 

 

 

August 1,

 

August 2,

 

For the nine months ended

 

2014

 

2013

 

 

 

2014

 

2013

 

 

 

2014

 

2013

 

Forward currency contracts

 

$

1,694

 

$

1,133

 

Net sales

 

$

(1,140

)

$

(1,456

)

Other income, net

 

$

(204

)

$

706

 

Forward currency contracts

 

(333

)

110

 

Cost of sales

 

93

 

426

 

 

 

 

 

 

 

Cross currency contracts

 

(330

)

(702

)

Other income, net

 

(439

)

(713

)

 

 

 

 

 

 

Total

 

$

1,031

 

$

541

 

 

 

$

(1,486

)

$

(1,743

)

 

 

 

 

 

 

 

As of August 1, 2014, the company expects to reclassify approximately $0.5 million of gains from AOCL to earnings during the next twelve months.

 

The following table presents the impact of derivative instruments on the consolidated statements of earnings for the company’s derivatives not designated as hedging instruments.

 

 

 

 

 

Gain (Loss) Recognized in Net Earnings

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

Location of Gain (Loss)

 

August 1,

 

August 2,

 

August 1,

 

August 2,

 

(Dollars in thousands)

 

Recognized in Net Earnings

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

Other income, net

 

$

2,474

 

$

3,227

 

$

(553

)

$

2,267

 

Cross currency contracts

 

Other income, net

 

421

 

(100

)

181

 

(281

)

 

 

 

 

$

2,895

 

$

3,127

 

$

(372

)

$

1,986

 

 

13



Table of Contents

 

The company entered into an International Swap Dealers Association (“ISDA”) Master Agreement with each counterparty that permits the net settlement of amounts owed under their respective contracts. The ISDA Master Agreement is an industry standardized contract that governs all derivative contracts entered into between the company and the respective counterparty. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable or receivable for contracts due on the same date or in the same currency for similar types of derivative transactions. The company records the fair value of its derivative contracts at the net amount in its consolidated balance sheets.

 

The following tables show the effects of the master netting arrangements on the fair value of the company’s derivative contracts that are recorded in the consolidated balance sheets:

 

 

 

Assets

 

Liabilities

 

 

 

Gross Amounts

 

Gross Liabilities

 

Net Amounts

 

Gross Amounts

 

Gross Assets

 

Net Amounts of

 

(Dollars in thousands)

 

of Recognized

 

Offset in the

 

of Assets Presented

 

of Recognized

 

offset in the

 

Liabilities Presented

 

August 1, 2014

 

Assets

 

Balance Sheet

 

in the Balance Sheet

 

Liabilities

 

Balance Sheet

 

in the Balance Sheet

 

Forward currency contracts

 

$

1,572

 

(48

)

$

1,524

 

$

(560

)

$

86

 

$

(474

)

Cross currency contracts

 

61

 

 

61

 

(701

)

 

(701

)

 

 

$

1,633

 

$

(48

)

$

1,585

 

$

(1,261

)

$

86

 

$

(1,175

)

 

 

 

Assets

 

Liabilities

 

 

 

Gross Amounts

 

Gross Liabilities

 

Net Amounts

 

Gross Amounts

 

Gross Assets

 

Net Amounts of

 

(Dollars in thousands)

 

of Recognized

 

Offset in the

 

of Assets Presented

 

of Recognized

 

offset in the

 

Liabilities Presented

 

August 2, 2013

 

Assets

 

Balance Sheet

 

in the Balance Sheet

 

Liabilities

 

Balance Sheet

 

in the Balance Sheet

 

Forward currency contracts

 

$

3,272

 

(171

)

$

3,101

 

$

(356

)

$

 

$

(356

)

Cross currency contracts

 

83

 

 

83

 

(428

)

 

(428

)

 

 

$

3,355

 

$

(171

)

$

3,184

 

$

(784

)

$

 

$

(784

)

 

Fair Value Measurements

 

The company categorizes its assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Estimates of fair value for financial assets and financial liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value, and requires certain disclosures. The framework discusses valuation techniques such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:

 

Level 1 — Unadjusted quoted prices in active markets for identical assets or liabilities.

 

Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 — Unobservable inputs reflecting management’s assumptions about the inputs used in pricing the asset or liability.

 

Cash balances are valued at their carrying amounts in the consolidated balance sheets, which are reasonable estimates of their fair value due to their short-term nature. Forward currency contracts are valued based on observable market transactions of forward currency prices and spot currency rates as of the reporting date. The fair value of cross currency contracts is determined using discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs such as interest rates and foreign currency exchange rates. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, such as collateral postings, thresholds, mutual puts, and guarantees, are incorporated in the fair values to account for potential nonperformance risk. The unfunded deferred compensation liability is primarily subject to changes in fixed-income investment contracts based on current yields. For accounts receivable and accounts payable, carrying amounts are a reasonable estimate of fair value given their short-term nature.

 

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Assets and liabilities measured at fair value on a recurring basis, as of August 1, 2014, August 2, 2013, and October 31, 2013 are summarized below:

 

(Dollars in thousands) 

 

 

 

 

 

 

 

 

 

August 1, 2014

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

177,894

 

$

177,894

 

$

 

 

Forward currency contracts

 

1,524

 

 

1,524

 

 

Cross currency contracts

 

61

 

 

61

 

 

Total assets

 

$

179,479

 

$

177,894

 

$

1,585

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

$

474

 

 

$

474

 

 

Cross currency contracts

 

701

 

 

701

 

 

Deferred compensation liabilities

 

2,290

 

 

2,290

 

 

Total liabilities

 

$

3,465

 

 

$

3,465

 

 

 

August 2, 2013

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

161,180

 

$

161,180

 

$

 

 

Forward currency contracts

 

3,101

 

 

3,101

 

 

Cross currency contracts

 

83

 

 

83

 

 

Total assets

 

$

164,364

 

$

161,180

 

$

3,184

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

$

356

 

 

$

356

 

 

Cross currency contracts

 

428

 

 

428

 

 

Deferred compensation liabilities

 

2,982

 

 

2,982

 

 

Total liabilities

 

$

3,766

 

 

$

3,766

 

 

 

October 31, 2013

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

182,993

 

$

182,993

 

$

 

 

Forward currency contracts

 

1,266

 

 

1,266

 

 

Total assets

 

$

184,259

 

$

182,993

 

$

1,266

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

$

1,931

 

 

$

1,931

 

 

Cross currency contracts

 

443

 

 

443

 

 

Deferred compensation liabilities

 

2,777

 

 

2,777

 

 

Total liabilities

 

$

5,151

 

 

$

5,151

 

 

 

There were no transfers between Level 1 and Level 2 during the three and nine months ended August 1, 2014 and August 2, 2013, or the twelve months ended October 31, 2013.

 

Contingencies - Litigation

 

The company is party to litigation in the ordinary course of business. Such matters are generally subject to uncertainties and outcomes that are not predictable with assurance and that may not be known for extended periods of time. Litigation occasionally involves claims for punitive, as well as compensatory, damages arising out of the use of the company’s products. Although the company is self-insured to some extent, the company maintains insurance against certain product liability losses. The company is also subject to litigation and administrative and judicial proceedings with respect to claims involving asbestos and the discharge of hazardous substances into the environment. Some of these claims assert damages and liability for personal injury, remedial investigations or clean up and other costs and damages. The company is also typically involved in commercial disputes, employment disputes, and patent litigation cases in which it is asserting or defending against patent infringement claims. To prevent possible infringement of the company’s patents by others, the company periodically reviews competitors’ products. To avoid potential liability with respect to others’ patents, the company regularly reviews certain patents issued by the United States Patent and Trademark Office and foreign patent offices. Management believes these activities help minimize its risk of being a defendant in patent infringement litigation. The company records a liability in its consolidated financial statements for costs related to claims, including future legal costs, settlements and judgments, where the company has assessed

 

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that a loss is probable and an amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred. Management believes the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect its consolidated results of operations, financial position, or cash flows.

 

Item 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

 

Nature of Operations

 

The Toro Company is in the business of designing, manufacturing, and marketing professional turf maintenance equipment and services, landscaping equipment and lighting, turf irrigation systems, agricultural micro-irrigation systems, rental and construction equipment, and residential yard and snow removal products. We sell our products worldwide through a network of distributors, dealers, hardware retailers, home centers, mass retailers, and over the Internet. Our businesses are organized into three reportable business segments: Professional, Residential, and Distribution. Our Distribution segment, which consists of our company-owned domestic distributorships, has been combined with our corporate activities and is shown as “Other.” We strive to provide innovative, well-built, and dependable products supported by an extensive service network. A significant portion of our revenues has historically been, and we expect will continue to be, attributable to new and enhanced products. We define new products as those introduced in the current and previous two fiscal years.

 

This Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) should be read in conjunction with the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2013. This discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and we refer readers to the section titled “Forward-Looking Information” located at the end of Part I, Item 2 of this report for more information.

 

RESULTS OF OPERATIONS

 

Overview

 

For the third quarter of fiscal 2014, we achieved net sales and net earnings growth of 11.3 percent and 24.7 percent, respectively, compared to the third quarter of fiscal 2013. For year-to-date of fiscal 2014, net sales and net earnings increased 6.0 percent and 8.7 percent, respectively, compared to the same period in the prior fiscal year. Professional segment sales increased 11.9 percent in the third quarter of fiscal 2014 compared to the same period in fiscal 2013 as a result of strong demand for golf and grounds equipment and irrigation products, including the successful introduction of new products, increased sales of landscape contractor equipment, and higher sales of micro-irrigation products from continued growth and demand. Additionally, professional segment sales benefited in the fiscal 2014 third quarter comparison as sales of certain large turf products subject to the Tier 4 diesel engine emission requirements returned to sales volumes we experienced before the Tier 4 requirements were adopted. We experienced low sales of products that were subject to Tier 4 requirements in the third quarter of fiscal 2013 as a result of strong demand we experienced in the first quarter of fiscal 2013 as customers purchased products in advance of then anticipated price increases for such products subject to Tier 4 requirements that were manufactured after January 1, 2013. For the year-to-date period of fiscal 2014 compared to the same period last fiscal year, professional segment net sales increased 3.4 percent due mainly to strong demand for landscape contractor equipment, higher sales of micro-irrigation products, and increased sales of rental and construction equipment. Residential segment sales were up 13.0 percent and 11.7 percent for our third quarter and year-to-date periods of fiscal 2014, respectively, compared to the same periods in the prior fiscal year. These sales increases were driven by strong preseason shipments of snow thrower products due to low field inventory levels and anticipated higher retail demand following strong sales from heavy snow falls during the 2013/2014 snow season, which also benefited our snow thrower sales for the year-to-date comparison. In addition, higher shipments and demand for our zero turn riding mowers contributed to our residential segment net sales growth for both the third quarter and year-to-date periods of fiscal 2014 compared to the same periods last fiscal year. However, sales in Australia for both the third quarter and year-to-date comparisons were down primarily due to unfavorable weather conditions and foreign currency exchange rate changes.

 

Our net earnings growth in the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 resulted primarily from increased sales, leveraging fixed SG&A costs over higher sales volumes, an improvement in our gross margin rate, and a decline in our effective tax rate. For the year-to-date period of fiscal 2014 compared to the same period in the prior fiscal year, our net earnings growth was attributable to increased sales, leveraging fixed SG&A costs over higher sales volumes, and a decrease in interest expense, partially offset by an increase in our effective tax rate.

 

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Our overall financial condition remains strong. Inventory levels increased $34.8 million, or 13.5 percent, as of the end of the third quarter of fiscal 2014 compared to the end of the third quarter of fiscal 2013 as we built inventory in anticipation of strong demand, including for some products impacted by the continued phase-in of applicable Tier 4 diesel engine emission requirements. Our receivables increased by $13.4 million, or 6.7 percent, as of the end of the third quarter of fiscal 2014 compared to the end of the third quarter of fiscal 2013 due to higher sales volumes, and accounts payable increased $44.7 million, or 36.0 percent, as of the end of our third quarter of fiscal 2014 compared to the same period last fiscal year due to recent purchases as we anticipate strong product demand in the fourth quarter of fiscal 2014. We also increased our third quarter cash dividend by 42.9 percent to $0.20 per share compared to the $0.14 per share cash dividend paid in the third quarter of fiscal 2013.

 

Our multi-year initiative, “Destination 2014,” which began with our 2011 fiscal year, has taken us to our centennial in 2014 and into our second century. This is our final year of this four-year initiative, which is intended to focus our efforts on driving our legacy of excellence through building caring relationships and engaging in innovation. Through our Destination 2014 initiative financial goals, we strive to achieve $100 million in organic revenue growth each fiscal year and 12 percent operating earnings as a percentage of net sales by the end of fiscal 2014. We define organic revenue growth as the increase in net sales, less net sales from acquisitions that occurred in the current fiscal year.

 

Net Earnings

 

Net earnings for the third quarter of fiscal 2014 were $50.0 million, or $0.87 per diluted share, compared to $40.1 million, or $0.68 per diluted share, for the third quarter of fiscal 2013, resulting in a net earnings per diluted share increase of 27.9 percent. Year-to-date net earnings in fiscal 2014 were $163.0 million, or $2.82 per diluted share, compared to $149.9 million, or $2.53 per diluted share, in the same comparable period last fiscal year, resulting in a net earnings per diluted share increase of 11.5 percent. The primary factors contributing to our earnings improvements were leveraging SG&A costs over higher sales volumes, an improvement in our gross margin rate for the third quarter comparison, a decline in interest expense, and a lower effective tax rate for the third quarter comparison, as described previously. In addition, third quarter and year-to-date fiscal 2014 net earnings per diluted share were benefited by approximately $0.02 per share and $0.07 per share, respectively, compared to the same periods in fiscal 2013, as a result of reduced shares outstanding from repurchases of our common stock.

 

The following table summarizes the major operating costs and other income as a percentage of net sales:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

August 1,
2014

 

August 2,
2013

 

August 1,
2014

 

August 2,
2013

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of sales

 

(64.4

)

(65.1

)

(64.2

)

(64.1

)

Gross margin

 

35.6

 

34.9

 

35.8

 

35.9

 

SG&A expense

 

(22.9

)

(23.4

)

(22.0

)

(22.5

)

Operating earnings

 

12.7

 

11.5

 

13.8

 

13.4

 

Interest expense

 

(0.6

)

(0.8

)

(0.6

)

(0.7

)

Other income, net

 

0.4

 

0.6

 

0.4

 

0.4

 

Provision for income taxes

 

(3.7

)

(3.4

)

(4.3

)

(4.1

)

Net earnings

 

8.8

%

7.9

%

9.3

%

9.0

%

 

Net Sales

 

Worldwide consolidated net sales for the third quarter of fiscal 2014 were $567.5 million, up 11.3 percent compared to the third quarter of fiscal 2013. For the year-to-date period of fiscal 2014, net sales were $1,758.6 million, up 6.0 percent from the same period in the prior fiscal year. Worldwide professional segment net sales were up 11.9 percent and 3.4 percent for the third quarter and year-to-date periods of fiscal 2014, respectively, compared to the same periods in the prior fiscal year. Professional segment sales for the third quarter comparison were positively impacted from strong demand for golf and grounds equipment and irrigation products, including the successful introduction of new products, increased sales of landscape contractor equipment, and higher sales of micro-irrigation products from continued growth and demand. Additionally, professional segment sales benefited in the fiscal 2014 third quarter comparison as sales of certain large turf products subject to the Tier 4 diesel engine emission requirements returned to sales volumes we experienced before the Tier 4 requirements were adopted, as previously discussed. For the year-to-date period of fiscal 2014 compared to the same period last fiscal year, professional segment sales increased 3.4 percent due mainly to strong demand for landscape contractor equipment, higher sales of micro-irrigation products, and increased sales of rental and construction equipment.

 

Residential segment net sales were up 13.0 percent and 11.7 percent for the third quarter and year-to-date periods of fiscal 2014, respectively, compared to the same periods in the prior fiscal year. These sales increases were primarily driven by strong

 

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preseason shipments of snow thrower products due to low field inventory levels and anticipated higher retail demand following strong sales from heavy snow falls during the 2013/2014 snow season, which also benefited our snow thrower sales for the year-to-date comparison. In addition, higher shipments and demand for our zero turn riding mowers, including our enhanced products, contributed to our residential segment net sales growth for both the third quarter and year-to-date periods of fiscal 2014 compared to the same periods last fiscal year. However, sales in Australia were down in both the third quarter and year-to-date periods of fiscal 2014 compared to the same periods last fiscal year primarily due to unfavorable weather conditions that reduced demand, as well as unfavorable foreign currency exchange rate fluctuations.

 

Net sales for our other segment were down $3.5 million for the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 due to increased sales of professional segment products to our company-owned distribution companies that were eliminated in our other segment. However, for the year-to-date period of fiscal 2014 compared to the same period last fiscal year, other segment net sales were up $4.4 million due to a reduction of sales that were eliminated for shipments to our company-owned distribution companies as a result of strong professional segment net sales last fiscal year in the first quarter that did not occur this year, mainly for products subject to the Tier 4 diesel engine requirements, as previously discussed. Additionally, sales were up for our company-owned distribution companies that benefited our other segment net sales.

 

International net sales were slightly up, by 2.1 percent and 1.1 percent, for the third quarter and year-to-date periods of fiscal 2014, respectively, compared to the same periods in the prior fiscal year. Changes in currency exchange rates resulted in a benefit to our net sales of approximately $1.1 million for the third quarter of fiscal 2014. However, for the year-to-date period of fiscal 2014, changes in exchange rates resulted in a reduction to our net sales of approximately $4.2 million.

 

For both the third quarter and year-to-date periods of fiscal 2014 as compared to the same periods last fiscal year, retail demand increased for our innovative product offerings. Field inventory levels as of the end of the third quarter of fiscal 2014 were up in relation to our year-to-date sales growth as compared to the end of the same period in the prior fiscal year due to anticipated continued demand for our products in the fourth quarter of fiscal 2014 and expansion of new markets.

 

Gross Profit

 

As a percentage of net sales, gross profit for the third quarter of fiscal 2014 increased 70 basis points to 35.6 percent compared to 34.9 percent in the third quarter of fiscal 2013. The gross profit improvement was primarily due to favorable product mix from increased sales of products that carry higher average gross margins, improved price realization, and production efficiencies mainly from cost reduction efforts. These increases were partially offset by higher commodity prices, namely for steel and resins, and a supplier component rework issue that impacted certain walk power mowers. Gross profit as a percent of net sales for the year-to-date period of fiscal 2014 decreased slightly, by 10 basis points, to 35.8 percent compared to 35.9 percent for the year-to-date period of fiscal 2013. This decrease resulted from a lower proportion of professional segment sales that carry higher average gross margins than our residential segment, higher commodity prices, unfavorable currency exchange rate fluctuations, and a supplier component rework issue, as mentioned above. This decrease was partially offset by improved price realization and production efficiencies mainly from cost reduction efforts.

 

Selling, General, and Administrative Expense

 

SG&A expense increased $10.6 million, or 8.9 percent, for the third quarter of fiscal 2014 compared to the third quarter of fiscal 2013 and increased $12.7 million, or 3.4 percent, for the year-to-date period of fiscal 2014 compared to the year-to-date period of fiscal 2013. As a percentage of net sales, SG&A expense decreased 50 basis points for both the third quarter and year-to-date periods of fiscal 2014 as compared to the same periods in the prior fiscal year. These decreases as a percentage of net sales were largely due to leveraging SG&A expense over higher sales volumes and a decline in warranty expense resulting from favorable claims experience, somewhat offset by an increase in marketing expense, investments in engineering and new product development, higher incentive compensation expense from improved financial performance, as well as incremental SG&A costs from prior acquisitions of $1.1 million for the third quarter of fiscal 2014 and $2.9 million for the year-to-date period of fiscal 2014.

 

Interest Expense

 

Interest expense for the third quarter and year-to-date periods of fiscal 2014 decreased by 7.2 percent and 10.1 percent, respectively, compared to the same periods last fiscal year due to higher capitalized interest from capital projects.

 

Other Income, Net

 

Other income, net for the third quarter and year-to-date periods of fiscal 2014 decreased $0.6 million and $1.2 million, respectively, compared to the same periods last fiscal year primarily due to an increase in foreign currency exchange rate losses.

 

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Provision for Income Taxes

 

The effective tax rate for the third quarter of fiscal 2014 was 29.4 percent compared to 30.5 percent in the third quarter of 2013. This decline was mainly due to a discrete benefit relating to the change in tax accounting method filed which had the effect of recouping basis for previously disposed assets. The effective tax rate for the year-to-date periods of fiscal 2014 and 2013 was 31.7 percent and 31.0 percent, respectively. The increase in the effective tax rate for the year-to-date period was primarily the result of the benefit we received in the first quarter of fiscal 2013 from the retroactive reinstatement of the domestic research tax credit, which expired on December 31, 2013, which was partially offset by a discrete benefit relating to the change in tax accounting method filed in the third quarter of fiscal 2014, as previously discussed.

 

BUSINESS SEGMENTS

 

As described previously, we operate in three reportable business segments: Professional, Residential, and Distribution. Our Distribution segment, which consists of our company-owned domestic distributorships, has been combined with our corporate activities and elimination of intersegment revenues and expenses that is shown as “Other” in the following tables. Operating earnings for our Professional and Residential segments are defined as operating earnings plus other income, net. Operating loss for “Other” includes operating earnings (loss), corporate activities, other income, net, and interest expense.

 

The following table summarizes net sales by segment:

 

 

 

Three Months Ended

 

 

 

August 1,

 

August 2,

 

 

 

 

 

(Dollars in thousands)

 

2014

 

2013

 

$ Change

 

% Change

 

Professional

 

$

384,678

 

$

343,866

 

$

40,812

 

11.9

%

Residential

 

175,717

 

155,452

 

20,265

 

13.0

 

Other

 

7,145

 

10,600

 

(3,455

)

(32.6

)

Total*

 

$

567,540

 

$

509,918

 

$

57,622

 

11.3

%

 

 

 

 

 

 

 

 

 

 

* Includes international sales of:

 

$

141,649

 

$

138,718

 

$

2,931

 

2.1

%

 

 

 

Nine Months Ended

 

 

 

August 1,

 

August 2,

 

 

 

 

 

(Dollars in thousands)

 

2014

 

2013

 

$ Change

 

% Change

 

Professional

 

$

1,208,707

 

$

1,169,446

 

$

39,261

 

3.4

%

Residential

 

533,664

 

477,789

 

55,875

 

11.7

 

Other

 

16,180

 

11,830

 

4,350

 

36.8

 

Total*

 

$

1,758,551

 

$

1,659,065

 

$

99,486

 

6.0

%

 

 

 

 

 

 

 

 

 

 

* Includes international sales of:

 

$

498,029

 

$

492,371

 

$

5,658

 

1.1

%

 

The following table summarizes segment earnings (loss) before income taxes:

 

 

 

Three Months Ended

 

 

 

August 1,

 

August 2,

 

 

 

 

 

(Dollars in thousands)

 

2014

 

2013

 

$ Change

 

% Change

 

Professional

 

$

74,835

 

$

60,508

 

$

14,327

 

23.7

%

Residential

 

18,698

 

15,070

 

3,628

 

24.1

 

Other

 

(22,735

)

(17,925

)

(4,810

)

(26.8

)

Total

 

$

70,798

 

$

57,653

 

$

13,145

 

22.8

%

 

 

 

Nine Months Ended

 

 

 

August 1,

 

August 2,

 

 

 

 

 

(Dollars in thousands)

 

2014

 

2013