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 April 29, 2016

 

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 the registrant’s common stock outstanding as of May 27, 2016 was 55,032,963.

 

 

 



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 Six Months Ended April 29, 2016 and May 1, 2015

3

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income (Unaudited) — Three and Six Months Ended April 29, 2016 and May 1, 2015

3

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) — April 29, 2016, May 1, 2015, and October 31, 2015

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) — Six Months Ended April 29, 2016 and May 1, 2015

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6-17

 

 

 

Item 2.

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

17-28

 

 

 

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

28-29

 

 

 

Item 4.

Controls and Procedures

30

 

 

 

PART II.

OTHER INFORMATION:

 

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

Item 1A.

Risk Factors

30

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 6.

Exhibits

32

 

 

 

 

Signatures

33

 

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

 

Six Months Ended

 

 

 

April 29,

 

May 1,

 

April 29,

 

May 1,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net sales

 

$

836,441

 

$

826,242

 

$

1,322,839

 

$

1,300,453

 

Cost of sales

 

533,254

 

544,270

 

836,998

 

849,482

 

Gross profit

 

303,187

 

281,972

 

485,841

 

450,971

 

Selling, general, and administrative expense

 

148,097

 

143,517

 

276,912

 

268,094

 

Operating earnings

 

155,090

 

138,455

 

208,929

 

182,877

 

Interest expense

 

(4,721

)

(4,768

)

(9,375

)

(9,484

)

Other income, net

 

3,873

 

2,450

 

8,385

 

4,717

 

Earnings before income taxes

 

154,242

 

136,137

 

207,939

 

178,110

 

Provision for income taxes

 

48,561

 

42,374

 

62,997

 

53,397

 

Net earnings

 

$

105,681

 

$

93,763

 

$

144,942

 

$

124,713

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings per share of common stock

 

$

1.92

 

$

1.68

 

$

2.64

 

$

2.23

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share of common stock

 

$

1.89

 

$

1.64

 

$

2.58

 

$

2.18

 

 

 

 

 

 

 

 

 

 

 

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

 

54,904

 

55,864

 

54,959

 

55,954

 

 

 

 

 

 

 

 

 

 

 

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

 

55,986

 

57,073

 

56,077

 

57,157

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 29,

 

May 1,

 

April 29,

 

May 1,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net earnings

 

$

105,681

 

$

93,763

 

$

144,942

 

$

124,713

 

Other comprehensive (loss) income, net of tax:

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

5,741

 

1,012

 

950

 

(7,114

)

Derivative instruments, net of tax of $(2,042), $(2,598), $(1,653), and $(148), respectively

 

(1,533

)

(4,117

)

(2,592

)

(1,339

)

Other comprehensive (loss) income

 

4,208

 

(3,105

)

(1,642

)

(8,453

)

Comprehensive income

 

$

109,889

 

$

90,658

 

$

143,300

 

$

116,260

 

 

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)

 

 

 

April 29,

 

May 1,

 

October 31,

 

 

 

2016

 

2015

 

2015

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

174,639

 

$

109,295

 

$

126,275

 

Receivables, net

 

329,837

 

351,602

 

177,013

 

Inventories, net

 

369,070

 

341,440

 

334,514

 

Prepaid expenses and other current assets

 

36,683

 

38,210

 

34,782

 

Deferred income taxes

 

39,878

 

43,202

 

38,095

 

Total current assets

 

950,107

 

883,749

 

710,679

 

 

 

 

 

 

 

 

 

Property, plant, and equipment, gross

 

824,214

 

790,568

 

804,598

 

Less accumulated depreciation

 

602,145

 

570,627

 

579,603

 

Property, plant, and equipment, net

 

222,069

 

219,941

 

224,995

 

 

 

 

 

 

 

 

 

Long-term deferred income taxes

 

28,535

 

26,416

 

28,568

 

Other assets

 

33,102

 

29,625

 

24,873

 

Goodwill

 

195,358

 

194,854

 

195,533

 

Other intangible assets, net

 

113,570

 

124,542

 

119,010

 

Total assets

 

$

1,542,741

 

$

1,479,127

 

$

1,303,658

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

23,286

 

$

23,444

 

$

23,134

 

Short-term debt

 

 

24,900

 

222

 

Accounts payable

 

260,504

 

256,391

 

152,017

 

Accrued liabilities

 

316,811

 

314,505

 

268,361

 

Total current liabilities

 

600,601

 

619,240

 

443,734

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

337,909

 

361,428

 

354,818

 

Deferred revenue

 

11,565

 

11,244

 

11,365

 

Other long-term liabilities

 

30,058

 

24,211

 

31,576

 

 

 

 

 

 

 

 

 

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 54,759,683 shares as of April 29, 2016, 55,264,659 shares as of May 1, 2015, and 54,650,916 shares as of October 31, 2015

 

54,760

 

55,265

 

54,651

 

Retained earnings

 

539,333

 

431,897

 

437,357

 

Accumulated other comprehensive loss

 

(31,485

)

(24,158

)

(29,843

)

Total stockholders’ equity

 

562,608

 

463,004

 

462,165

 

Total liabilities and stockholders’ equity

 

$

1,542,741

 

$

1,479,127

 

$

1,303,658

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

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Table of Contents

 

THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

 

Six Months Ended

 

 

 

April 29,

 

May 1,

 

 

 

2016

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

144,942

 

$

124,713

 

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

 

 

 

 

 

Non-cash income from finance affiliate

 

(4,551

)

(3,709

)

Provision for depreciation, amortization, and impairment loss

 

31,526

 

30,613

 

Stock-based compensation expense

 

5,197

 

5,090

 

Decrease/(increase) in deferred income taxes

 

253

 

(1,107

)

Other

 

(464

)

(47

)

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

 

 

 

 

 

Receivables, net

 

(150,072

)

(193,552

)

Inventories, net

 

(37,418

)

(56,099

)

Prepaid expenses and other assets

 

(91

)

(5,168

)

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

 

147,832

 

194,514

 

Net cash provided by/(used in) operating activities

 

137,154

 

95,248

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant, and equipment

 

(22,622

)

(27,261

)

Proceeds from asset disposals

 

203

 

57

 

Contributions to finance affiliate, net

 

(2,865

)

(4,512

)

Proceeds from sale of business

 

1,500

 

 

Acquisition, net of cash acquired

 

 

(198,329

)

Net cash provided by/(used in) investing activities

 

(23,784

)

(230,045

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Repayments of short-term debt

 

(1,161

)

(1,283

)

(Repayments of)/increase in long-term debt

 

(16,788

)

(276

)

Excess tax benefits from stock-based awards

 

11,285

 

5,057

 

Proceeds from exercise of stock options

 

14,684

 

5,168

 

Purchases of Toro common stock

 

(41,018

)

(49,323

)

Dividends paid on Toro common stock

 

(33,005

)

(27,975

)

Net cash provided by/(used in) financing activities

 

(66,003

)

(68,632

)

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

997

 

(2,149

)

 

 

 

 

 

 

Net increase/(decrease) in cash and cash equivalents

 

48,364

 

(205,578

)

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

 

126,275

 

314,873

 

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

 

$

174,639

 

$

109,295

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Debt issued in connection with an acquisition

 

$

 

$

31,161

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

5



Table of Contents

 

THE TORO COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)

April 29, 2016

 

Note 1 — 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 six months ended April 29, 2016 cannot be annualized to determine the expected results for the fiscal year ending October 31, 2016.

 

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, 2015. The policies described in that report are used for preparing quarterly reports.

 

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, earn-out 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.

 

Note 2 — Divestiture

 

On November 27, 2015, in the first quarter of fiscal 2016, the company completed the sale of its Northwestern U.S. distribution company. The divestiture was not material based on the company’s consolidated financial condition and results of operations.

 

Note 3 — 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. The initial term of Red Iron will continue 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. 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.

 

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Table of Contents

 

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. The company and TCFIF each 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 April 29, 2016 was $26.4 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 $0.7 million as of April 29, 2016.

 

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 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 six months ended April 30, 2016 and April 30, 2015 was $932.7 million and $711.9 million, respectively.

 

As of April 30, 2016, Red Iron’s total assets were $524.3 million and total liabilities were $465.1 million.

 

Note 4 — 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:

 

 

 

April 29,

 

May 1,

 

October 31,

 

(Dollars in thousands)

 

2016

 

2015

 

2015

 

Raw materials and work in process

 

$

100,739

 

$

117,451

 

$

107,086

 

Finished goods and service parts

 

332,371

 

291,484

 

291,468

 

Total FIFO value

 

433,110

 

408,935

 

398,554

 

Less: adjustment to LIFO value

 

64,040

 

67,495

 

64,040

 

Total inventories, net

 

$

369,070

 

$

341,440

 

$

334,514

 

 

Note 5 — Goodwill and Other Intangible Assets

 

The changes in the net carrying amount of goodwill for the first six months of fiscal 2016 were as follows:

 

 

 

Professional

 

Residential

 

 

 

(Dollars in thousands)

 

Segment

 

Segment

 

Total

 

Balance as of October 31, 2015

 

$

184,766

 

$

10,767

 

$

195,533

 

Translation adjustments

 

(110

)

(65

)

(175

)

Balance as of April 29, 2016

 

$

184,656

 

$

10,702

 

$

195,358

 

 

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Table of Contents

 

The components of other intangible assets were as follows:

 

(Dollars in thousands)

 

Weighted-average

 

Gross Carrying

 

Accumulated

 

 

 

April 29, 2016

 

Life (Years)

 

Amount

 

Amortization

 

Net

 

Patents

 

9.9

 

$

15,175

 

$

(10,524

)

$

4,651

 

Non-compete agreements

 

5.5

 

6,907

 

(6,474

)

433

 

Customer-related

 

19.1

 

84,528

 

(12,482

)

72,046

 

Developed technology

 

7.6

 

28,757

 

(22,152

)

6,605

 

Trade names

 

19.2

 

28,715

 

(3,555

)

25,160

 

Other

 

 

 

800

 

(800

)

 

Total amortizable

 

 

 

164,882

 

(55,987

)

108,895

 

Non-amortizable - trade names

 

 

 

4,675

 

 

4,675

 

Total other intangible assets, net

 

 

 

$

169,557

 

$

(55,987

)

$

113,570

 

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

Weighted-average

 

Gross Carrying

 

Accumulated

 

 

 

October 31, 2015

 

Life (Years)

 

Amount

 

Amortization

 

Net

 

Patents

 

9.9

 

$

15,191

 

$

(10,175

)

$

5,016

 

Non-compete agreements

 

5.5

 

6,922

 

(6,206

)

716

 

Customer-related

 

19.1

 

84,599

 

(10,316

)

74,283

 

Developed technology

 

7.6

 

28,804

 

(20,530

)

8,274

 

Trade names

 

19.2

 

28,715

 

(2,825

)

25,890

 

Other

 

 

 

800

 

(800

)

 

Total amortizable

 

 

 

165,031

 

(50,852

)

114,179

 

Non-amortizable - trade names

 

 

 

4,831

 

 

4,831

 

Total other intangible assets, net

 

 

 

$

169,862

 

$

(50,852

)

$

119,010

 

 

During the second quarter of fiscal 2015, the company determined certain amortizable intangible assets were impaired based on its assessment that the carrying amount may not be recovered. Based on the company’s impairment analysis, the company wrote down $1.4 million of other intangible assets.

 

Amortization expense for intangible assets during the first six months of fiscal 2016 was $5.6 million, compared to $5.3 million for the same period last fiscal year. Estimated amortization expense for the remainder of fiscal 2016 and succeeding fiscal years is as follows: fiscal 2016 (remainder), $5.1 million; fiscal 2017, $9.4 million; fiscal 2018, $7.4 million; fiscal 2019, $6.6 million; fiscal 2020, $6.0 million; fiscal 2021, $5.6 million; and after fiscal 2021, $68.8 million.

 

Note 6 — Stockholders’ Equity

 

Accumulated Other Comprehensive Loss

 

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

 

 

 

April 29,

 

May 1,

 

October 31,

 

(Dollars in thousands)

 

2016

 

2015

 

2015

 

Foreign currency translation adjustments

 

$

23,581

 

$

19,751

 

$

24,328

 

Pension and post-retirement benefits

 

5,183

 

5,165

 

5,386

 

Derivative instruments

 

2,721

 

(758

)

129

 

Total accumulated other comprehensive loss

 

$

31,485

 

$

24,158

 

$

29,843

 

 

8



Table of Contents

 

The components and activity of AOCL for the first six months of fiscal 2016 are as follows:

 

(Dollars in thousands)

 

Foreign Currency
Translation
Adjustments

 

Pension and
Postretirement
Benefits

 

Cash Flow
Derivative
Instruments

 

Total

 

Balance as of October 31, 2015

 

$

24,328

 

$

5,386

 

$

129

 

$

29,843

 

Other comprehensive loss (income) before reclassifications

 

(747

)

(203

)

1,684

 

734

 

Amounts reclassified from AOCL

 

 

 

908

 

908

 

Net current period other comprehensive (income) loss

 

(747

)

(203

)

2,592

 

1,642

 

Balance as of April 29, 2016

 

$

23,581

 

$

5,183

 

$

2,721

 

$

31,485

 

 

The components and activity of AOCL for the first six months of fiscal 2015 are as follows:

 

(Dollars in thousands)

 

Foreign Currency
Translation
Adjustments

 

Pension and
Postretirement
Benefits

 

Cash Flow
Derivative
Instruments

 

Total

 

Balance as of October 31, 2014

 

$

12,536

 

$

5,266

 

$

(2,097

)

$

15,705

 

Other comprehensive loss (income) before reclassifications

 

7,215

 

(101

)

(5,393

)

1,721

 

Amounts reclassified from AOCL

 

 

 

6,732

 

6,732

 

Net current period other comprehensive (income) loss

 

7,215

 

(101

)

1,339

 

8,453

 

Balance as of May 1, 2015

 

$

19,751

 

$

5,165

 

$

(758

)

$

24,158

 

 

Note 7 — Stock-Based Compensation

 

Stock Option Awards

 

Under The Toro Company Amended and Restated 2010 Equity and Incentive Plan, as amended (the “2010 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 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 generally recognized for these awards over the vesting period. Stock options granted to executive officers and other employees are subject to accelerated expensing if the option holder meets the retirement definition set forth in the 2010 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 executive 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.

 

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Table of Contents

 

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

 

 

 

Fiscal 2016

 

Fiscal 2015

 

Expected life of option in years

 

5.98

 

5.95

 

Expected stock price volatility

 

24.06%

 

29.67%

 

Risk-free interest rate

 

1.81%

 

1.61%

 

Expected dividend yield

 

1.24%

 

1.29%

 

Grant date per share weighted-average fair value

 

$17.58

 

$16.81

 

 

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 quarter of each of fiscal 2016 and 2015 was $77.77 and $65.68, respectively. No performance share awards were granted during the second quarter of fiscal 2016 or 2015.

 

Restricted Stock and Restricted Stock Unit Awards

 

Under the 2010 plan, restricted stock and restricted stock unit awards are generally granted to certain employees that are not executive officers. Occasionally, restricted stock or restricted stock unit awards may be granted, including to executive 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 six months of fiscal 2016 and 2015 was $77.34 and $63.60, respectively.

 

Note 8 — Per Share Data

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 29,

 

May 1,

 

April 29,

 

May 1,

 

(Shares in thousands)

 

2016

 

2015

 

2016

 

2015

 

Basic

 

 

 

 

 

 

 

 

 

Weighted-average number of shares of common stock

 

54,904

 

55,864

 

54,940

 

55,931

 

Assumed issuance of contingent shares

 

 

 

19

 

23

 

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

 

54,904

 

55,864

 

54,959

 

55,954

 

Diluted

 

 

 

 

 

 

 

 

 

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

 

54,904

 

55,864

 

54,959

 

55,954

 

Effect of dilutive securities

 

1,082

 

1,209

 

1,118

 

1,203

 

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

 

55,986

 

57,073

 

56,077

 

57,157

 

 

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Table of Contents

 

Incremental shares from options, restricted stock, and restricted stock units are computed by the treasury stock method. Options to purchase 278,317 and 268,298 shares of common stock during the second quarter of fiscal 2016 and 2015, respectively, were excluded from the diluted net earnings per share because they were anti-dilutive. For the year-to-date periods through the second quarter of fiscal 2016 and 2015, options to purchase 245,752 and 247,379 shares of common stock, respectively, were excluded from the diluted net earnings per share because they were anti-dilutive.

 

Note 9 — 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 our company-owned domestic distributorship, 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 April 29, 2016

 

Professional

 

Residential

 

Other

 

Total

 

Net sales

 

$

595,209

 

$

238,231

 

$

3,001

 

$

836,441

 

Intersegment gross sales

 

12,249

 

129

 

(12,378

)

 

Earnings (loss) before income taxes

 

141,623

 

34,988

 

(22,369

)

154,242

 

 

 

 

 

 

 

 

 

 

 

Three months ended May 1, 2015

 

Professional

 

Residential

 

Other

 

Total

 

Net sales

 

$

552,774

 

$

267,867

 

$

5,601

 

$

826,242

 

Intersegment gross sales

 

17,766

 

104

 

(17,870

)

 

Earnings (loss) before income taxes

 

120,815

 

34,838

 

(19,516

)

136,137

 

 

 

 

 

 

 

 

 

 

 

Six months ended April 29, 2016

 

Professional

 

Residential

 

Other

 

Total

 

Net sales

 

$

934,045

 

$

382,515

 

$

6,279

 

$

1,322,839

 

Intersegment gross sales

 

17,966

 

197

 

(18,163

)

 

Earnings (loss) before income taxes

 

203,215

 

51,727

 

(47,003

)

207,939

 

Total assets

 

890,577

 

301,907

 

350,257

 

1,542,741

 

 

 

 

 

 

 

 

 

 

 

Six months ended May 1, 2015

 

Professional

 

Residential

 

Other

 

Total

 

Net sales

 

$

892,480

 

$

402,610

 

$

5,363

 

$

1,300,453

 

Intersegment gross sales

 

28,286

 

188

 

(28,474

)

 

Earnings (loss) before income taxes

 

176,474

 

48,565

 

(46,929

)

178,110

 

Total assets

 

919,135

 

261,835

 

298,157

 

1,479,127

 

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 29,

 

May 1,

 

April 29,

 

May 1,

 

(Dollars in thousands)

 

2016

 

2015

 

2016

 

2015

 

Corporate expenses

 

$

(23,584

)

$

(19,475

)

$

(48,367

)

$

(41,445

)

Interest expense, net

 

(4,721

)

(4,768

)

(9,375

)

(9,484

)

Other

 

5,936

 

4,727

 

10,739

 

4,000

 

Total

 

$

(22,369

)

$

(19,516

)

$

(47,003

)

$

(46,929

)

 

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Table of Contents

 

Note 10 — Contingencies — Litigation

 

The company is party to litigation in the ordinary course of business. Such matters are generally subject to uncertainties and to 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 is currently involved in patent litigation cases, including cases by or against competitors, where it is asserting and defending against claims of patent infringement. Such cases are at varying stages in the litigation process. 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 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. In the opinion of management, 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.

 

Note 11 — 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 six months of fiscal 2016 and 2015 were as follows:

 

 

 

Six Months Ended

 

 

 

April 29,

 

May 1,

 

(Dollars in thousands)

 

2016

 

2015

 

Beginning balance

 

$

70,734

 

$

71,080

 

Warranty provisions

 

25,804

 

23,763

 

Warranty claims

 

(16,702

)

(14,992

)

Changes in estimates

 

(178

)

549

 

Ending balance

 

$

79,658

 

$

80,400

 

 

Note 12 — 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,

 

12



Table of Contents

 

as well as 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 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 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, foreign plant operations, and purchases from suppliers. 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 second quarter and year-to-date periods of fiscal 2016, there were immaterial losses on forward contracts reclassified into earnings as a result of the discontinuance of cash flow hedges. During the second quarter of fiscal 2016, the company accelerated the reclassification of a cross currency interest rate swap loss of $0.2 million in AOCL to earnings as a result of hedged forecasted transactions becoming probable not to occur. As of April 29, 2016 and May 1, 2015, the notional amount outstanding of forward contracts designated as cash flow hedges was $60.5 million and $101.8 million, respectively. Additionally, as of April 29, 2016 and May 1, 2015, 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 Euros.

 

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.

 

 

 

Fair Value at

 

Fair Value at

 

Fair Value at

 

(Dollars in thousands)

 

April 29, 2016

 

May 1, 2015

 

October 31, 2015

 

Asset Derivatives

 

 

 

 

 

 

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

 

 

 

 

 

Forward currency contracts

 

$

(154

)

$

2,865

 

$

2,102

 

Cross currency contract

 

88

 

 

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

 

 

 

 

 

Forward currency contracts

 

194

 

4,965

 

1,071

 

Cross currency contract

 

1,847

 

2,070

 

2,136

 

Total Assets

 

$

1,975

 

$

9,900

 

$

5,309

 

Liability Derivatives

 

 

 

 

 

 

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

 

 

Accrued liabilities

 

 

 

 

 

 

 

Forward currency contracts

 

$

3,070

 

$

1,427

 

$

1,363

 

Cross currency contract

 

 

319

 

134

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

 

 

Accrued liabilities

 

 

 

 

 

 

 

Forward currency contracts

 

683

 

(442

)

348

 

Cross currency contract

 

 

 

 

Total Liabilities

 

$

3,753

 

$

1,304

 

$

1,845

 

 

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 six months ended April 29, 2016 and May 1, 2015, respectively.

 

 

 

Effective Portion

 

Ineffective Portion and excluded from Effectiveness Testing

 

 

 

Gain (Loss)
Recognized in OCI on
Derivatives

 

Location of Gain (Loss)
Reclassified from AOCL
into Income

 

Gain (Loss) Reclassified
from AOCL into Income

 

Location of Gain (Loss)
Recognized in Income on
Derivatives

 

Gain (Loss) Recognized
in Income on Derivatives

 

(Dollars in thousands)

 

April 29,

 

May 1,

 

 

 

April 29,

 

May 1,

 

 

 

April 29,

 

May 1,

 

For the three months ended

 

2016

 

2015

 

 

 

2016

 

2015

 

 

 

2016

 

2015

 

Forward currency contracts

 

$

(3,195

)

$

(4,474

)

Net sales

 

$

921

 

$

5,926

 

Other income, net

 

$

243

 

$

56

 

Forward currency contracts

 

1,439

 

202

 

Cost of sales

 

(685

)

(678

)

 

 

 

 

 

 

Cross currency contracts

 

221

 

154

 

Other income, net

 

(222

)

(194

)

 

 

 

 

 

 

Total derivatives designated as cash flow hedges

 

$

(1,535

)

$

(4,118

)

Total

 

$

14

 

$

5,054

 

Total

 

$

243

 

$

56

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 29,

 

May 1,

 

 

 

April 29,

 

May 1,

 

 

 

April 29,

 

May 1,

 

For the six months ended

 

2016

 

2015

 

 

 

2016

 

2015

 

 

 

2016

 

2015

 

Forward currency contracts

 

$

(2,630

)

$

(296

)

Net sales

 

$

2,001

 

$

7,930

 

Other income, net

 

$

231

 

$

283

 

Forward currency contracts

 

(220

)

(1,182

)

Cost of sales

 

(999

)

(991

)

 

 

 

 

 

 

Cross currency contracts

 

255

 

136

 

Other income, net

 

(94

)

(207

)

 

 

 

 

 

 

Total derivatives designated as cash flow hedges

 

$

(2,595

)

$

(1,342

)

Total

 

$

908

 

$

6,732

 

Total

 

$

231

 

$

283

 

 

As of April 29, 2016, the company expects to reclassify approximately $0.3 million of losses from AOCL to earnings during the next twelve months.

 

14



Table of Contents

 

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

 

 

 

Location of Gain

 

Three Months Ended

 

Six Months Ended

 

 

 

(Loss) Recognized in

 

April 29,

 

May 1,

 

April 29,

 

May 1,

 

(Dollars in thousands)

 

Net Earnings

 

2016

 

2015

 

2016

 

2015

 

Forward currency contracts

 

Other income, net

 

$

(2,678

)

$

3,089

 

$

(1,341

)

$

11,350

 

Cross currency contracts

 

Other income, net

 

(313

)

167

 

(183

)

1,302

 

Total derivatives not designated as hedges

 

 

 

$

(2,991

)

$

3,256

 

$

(1,524

)

$

12,652

 

 

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:

 

(Dollars in thousands)

 

April 29, 2016

 

May 1, 2015

 

October 31, 2015

 

Assets

 

 

 

 

 

 

 

Forward currency contracts

 

 

 

 

 

 

 

Gross Amounts of Recognized Assets

 

$

194

 

$

8,370

 

$

3,380

 

Gross Liabilities Offset in the Balance Sheets

 

(154

)

(540

)

(207

)

Net Amounts of Assets Presented in the Balance Sheets

 

40

 

7,830

 

3,173

 

Cross currency contracts

 

 

 

 

 

 

 

Gross Amounts of Recognized Assets

 

1,935

 

2,070

 

2,136

 

Gross Liabilities Offset in the Balance Sheets

 

 

 

 

Net Amounts of Assets Presented in the Balance Sheets

 

1,935

 

2,070

 

2,136

 

Total Assets

 

$

1,975

 

$

9,900

 

$

5,309

 

Liabilities

 

 

 

 

 

 

 

Forward currency contracts

 

 

 

 

 

 

 

Gross Amounts of Recognized Liabilities

 

$

(3,807

)

$

(1,741

)

$

(1,711

)

Gross Assets Offset in the Balance Sheets

 

54

 

756

 

 

Net Amounts of Liabilities Presented in the Balance Sheets

 

(3,753

)

(985

)

(1,711

)

Cross currency contracts

 

 

 

 

 

 

 

Gross Amounts of Recognized Liabilities

 

 

(319

)

(134

)

Gross Assets Offset in the Balance Sheets

 

 

 

 

Net Amounts of Liabilities Presented in the Balance Sheets

 

 

(319

)

(134

)

Total Liabilities

 

$

(3,753

)

$

(1,304

)

$

(1,845

)

 

Note 13 — 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

 

15



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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.

 

Assets and liabilities measured at fair value on a recurring basis, as of April 29, 2016, May 1, 2015, and October 31, 2015 are summarized below:

 

(Dollars in thousands)

 

 

 

Fair Value Measurements Using Inputs Considered as:

 

April 29, 2016

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

174,639

 

$

174,639

 

$

 

$

 

Forward currency contracts

 

40

 

 

40

 

 

Cross currency contracts

 

1,935

 

 

1,935

 

 

Total Assets

 

$

176,614

 

$

174,639

 

$

1,975

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

$

3,753

 

$

 

$

3,753

 

$

 

Cross currency contracts

 

 

 

 

 

Deferred compensation liabilities

 

1,400

 

 

1,400

 

 

Total Liabilities

 

$

5,153

 

$

 

$

5,153

 

$

 

 

(Dollars in thousands)

 

 

 

Fair Value Measurements Using Inputs Considered as:

 

May 1, 2015

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

109,295

 

$

109,295

 

$

 

$

 

Forward currency contracts

 

7,830

 

 

7,830

 

 

Cross currency contracts

 

2,070

 

 

2,070

 

 

Total Assets

 

$

119,195

 

$

109,295

 

$

9,900

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

$

985

 

$

 

$

985

 

$

 

Cross currency contracts

 

319

 

 

319

 

 

Deferred compensation liabilities

 

1,896

 

 

1,896

 

 

Total Liabilities

 

$

3,200

 

$

 

$

3,200

 

$

 

 

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Table of Contents

 

(Dollars in thousands)

 

 

 

Fair Value Measurements Using Inputs Considered as:

 

October 31, 2015

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

126,275

 

$

126,275

 

$

 

$

 

Forward currency contracts

 

3,173

 

 

3,173

 

 

Cross currency contracts

 

2,136

 

 

2,136

 

 

Total Assets

 

$

131,584

 

$

126,275

 

$

5,309

 

$

 

Liabilities:

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

$

1,711

 

$

 

$

1,711

 

$

 

Cross currency contracts

 

134

 

 

134

 

 

Deferred compensation liabilities

 

1,652

 

 

1,652

 

 

Total Liabilities

 

$

3,497

 

$

 

$

3,497

 

$

 

 

There were no transfers between Level 1 and Level 2 during the three and six months ended April 29, 2016 and May 1, 2015, or the twelve months ended October 31, 2015.

 

Note 14 — Related Party Transaction

 

On November 14, 2014, during the first quarter of fiscal 2015, the company acquired substantially all of the assets (excluding accounts receivable) of the BOSS® professional snow and ice management business of privately held Northern Star Industries, Inc. The purchase price included a cash payment and issuance of an unsecured promissory note in the aggregate principal amount of $30 million. Under the terms of the note, interest will accrue at the rate of 4.0% per year and principal payments of $10 million each, together with accrued interest, will be payable on the first, second, and third anniversaries of the closing date of the acquisition, subject to certain conditions. Effective as of the closing of the acquisition on November 14, 2014 and through May 31, 2016, the company employed David J. Brule II, who is also a minority shareholder of Northern Star Industries, Inc., as an executive officer of the company.

 

Note 15 — Subsequent Events

 

On May 17, 2016, the company’s Board of Directors authorized the retirement of 14,000,440 treasury shares, and the retired shares are included in the company’s pool of authorized and unissued shares of common stock.

 

The company evaluated all subsequent events and concluded that no additional subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity and certain other factors that may affect our future results. Unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior fiscal year. Our MD&A is presented in six sections:

 

·                  Company Overview

·                  Results of Operations

·                  Business Segments

·                  Financial Condition

·                  Critical Accounting Policies and Estimates

·                  Forward-Looking Information

 

This 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, 2015. This discussion contains various “Forward-Looking Statements” within the meaning of

 

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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.

 

COMPANY OVERVIEW

 

The Toro Company is in the business of designing, manufacturing, and marketing professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting, snow and ice management products, agricultural micro-irrigation systems, rental and specialty construction equipment, and residential yard and snow thrower products. We sell our products worldwide through a network of distributors, dealers, hardware retailers, home centers, mass retailers, and online.

 

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.

 

RESULTS OF OPERATIONS

 

Overview

 

For the second quarter of fiscal 2016, our net sales increased 1.2 percent with a net earnings increase of 12.7 percent, each as compared to the second quarter of fiscal 2015. Year-to-date fiscal 2016 net earnings increased 16.2 percent compared to the same period in the prior fiscal year on a net sales increase of 1.7 percent. Professional segment net sales increased 7.7 percent and 4.7 percent for our second quarter and year-to-date periods of fiscal 2016, respectively, primarily due to strong demand for our landscape contractor products, higher shipments of golf and grounds equipment, and continued growth in our specialty construction business. Residential segment net sales were down 11.1 percent and 5.0 percent for our second quarter and year-to-date periods of fiscal 2016, respectively, primarily due to lower sales of our zero-turn radius riding mowers and decreased demand of our snow products, partially offset by increased sales of walk power mowers.

 

Changes in foreign currency exchange rates resulted in a reduction of our net sales of approximately $9.9 million and $23.6 million for the second quarter and year-to-date periods of fiscal 2016, respectively. Field inventory levels were up as of the end of the second quarter of fiscal 2016 compared to the end of the second quarter of fiscal 2015, primarily due to forecasted retail demand in the second half of fiscal 2016 and anticipated strong sales of new products.

 

Our net earnings growth in the second quarter and year-to-date periods of fiscal 2016 was primarily attributable to gross margin increases of 210 basis points and 200 basis points, respectively. Gross margin increases were partially offset by increases in our selling, general and administrative (“SG&A”) expenses as a percentage of net sales.

 

We increased our second quarter cash dividend by 20 percent to $0.30 per share compared to the $0.25 per share quarterly cash dividend paid in the second quarter of fiscal 2015.

 

Inventory levels increased $27.6 million, or 8.1 percent, as of the end of the second quarter of fiscal 2016 due to higher inventory levels of zero-turn riding mowers and snow products in our Residential segment and higher inventory levels of our BOSS® snow and ice management equipment in our Professional segment. Receivables decreased $21.8 million, or 6.2 percent, largely due to additional customers financing receivables with Red Iron. Field inventory levels were up as of the end of the second quarter of fiscal 2016, primarily due to higher Professional segment field inventory levels in anticipation of strong retail demand in fiscal 2016.

 

Our multi-year initiative, “Destination PRIME,” which began with our 2015 fiscal year, continues our journey into our second century. This is our second year of this three-year initiative, which is intended to help us drive revenue and earnings growth and further improve productivity, while also continuing our century-long commitment to innovation, relationships, and excellence. Through our Destination PRIME initiative, we strive to achieve our goals by pursuing a progression of annual milestones. Our organic revenue growth goal is to achieve five percent or more of organic revenue growth each fiscal year during this initiative. We define organic revenue growth as the increase in net sales, less net sales from acquisitions that occurred in the current fiscal year. Our operating earnings goal is to raise operating earnings as a percentage of net sales to more than 13 percent by the end of fiscal 2017. Additionally, our working capital goal is to drive down average net working capital as a percentage of net sales to

 

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less than 13 percent by the end of fiscal 2017. We define average net working capital as accounts receivable plus inventory less trade payables as a percentage of net sales for a twelve month period.

 

Net Sales

 

Worldwide consolidated net sales for the second quarter of fiscal 2016 were $836.4 million, up 1.2 percent compared to the second quarter of fiscal 2015. For the year-to-date period of fiscal 2016, net sales were $1,322.8 million, up 1.7 percent from the same period in the prior fiscal year. Sales for both the second quarter and year-to-date fiscal 2016 periods increased primarily due to strong Professional segment market demand for our innovative product offerings and the successful introduction of new products. Partially offsetting these sales increases for the same fiscal 2016 period comparisons were decreased sales for our Residential segment due to variable weather conditions and channel demand pulled forward in the first quarter of fiscal 2016 driven by supply issues last year.

 

International net sales were up 0.5 percent for the second quarter of fiscal 2016, due to increased Professional segment sales in both Europe and Australia, partially offset by unfavorable foreign currency exchange rates. Additionally, year-to-date fiscal 2016 international net sales were down 4.3 percent, primarily due to unfavorable foreign currency exchange rates.

 

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

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

April 29,

 

May 1,

 

April 29,

 

May 1,

 

 

 

2016

 

2015

 

2016

 

2015

 

Net sales

 

100.0

%

100.0

%

100.0

%

100.0

%

Cost of sales

 

(63.8

)

(65.9

)

(63.3

)

(65.3

)

Gross margin

 

36.2

 

34.1

 

36.7

 

34.7

 

SG&A expense

 

(17.7

)

(17.3

)

(20.9

)

(20.6

)

Operating earnings

 

18.5

 

16.8

 

15.8

 

14.1

 

Interest expense

 

(0.6

)

(0.6

)

(0.7

)

(0.7

)

Other income, net

 

0.5

 

0.3

 

0.6

 

0.3

 

Provision for income taxes

 

(5.8

)

(5.2

)

(4.7

)

(4.1

)

Net earnings

 

12.6

%

11.3

%

11.0

%

9.6

%

 

Gross Profit

 

As a percentage of net sales, gross profit for the second quarter of fiscal 2016 increased 210 basis points to 36.2 percent compared to 34.1 percent in the second quarter of fiscal 2015. Gross profit as a percent of net sales for the year-to-date period of fiscal 2016 increased 200 basis points to 36.7 percent compared to 34.7 percent for the year-to-date period of fiscal 2015. The increase for the second quarter fiscal 2016 comparison was primarily due to lower commodity prices, productivity improvements, price realization, and favorable product mix, as we saw a higher proportion of Professional segment sales that generally carry higher average gross margins than our Residential segment. For the year-to-date period comparison, our gross profit increase was also primarily attributable to lower commodity prices, productivity improvements, price realization, and favorable product mix, along with the purchase accounting impact of the incremental charge for the sale of inventory that was written-up to fair value related to the acquisition of the BOSS business in fiscal 2015 that was not repeated this fiscal year. These gross profit increases for both the second quarter and year-to-date fiscal 2016 periods were partially offset by unfavorable changes in foreign currency exchange rates.

 

Selling, General, and Administrative Expense

 

SG&A expense increased $4.6 million, or 3.2 percent, for the second quarter of fiscal 2016, and increased $8.8 million, or 3.3 percent, for the year-to-date period of fiscal 2016. As a percentage of net sales, SG&A expense increased 40 basis points and 30 basis points for the second quarter and year-to-date periods of fiscal 2016, respectively. These increases as a percentage of net sales were largely due to increased self-insured benefit accruals influenced by the timing of certain claims and increased warehousing expenses due to higher inventory levels.

 

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Interest Expense

 

Interest expense for the second quarter and year-to-date periods of fiscal 2016 decreased slightly, by 1.0 percent and 1.1 percent, respectively, due to repayments of long-term debt.

 

Other Income, Net

 

Other income, net for the second quarter and year-to-date periods of fiscal 2016 increased $1.4 million and $3.7 million, respectively, compared to the same periods last fiscal year. These increases were primarily due to foreign currency exchange rate gains for the second quarter fiscal 2016 comparison and higher earnings from our equity investment in Red Iron, recovery from a litigation settlement, foreign currency exchange rate gains, and a gain on the sale of our Northwestern U.S. distribution company for the year-to-date fiscal 2016 period comparison.

 

Provision for Income Taxes

 

The effective tax rate for the second quarter of fiscal 2016 was 31.5 percent compared to 31.1 percent in the second quarter of 2015. The increase was mainly due to the one-time benefit of reversing a valuation allowance in fiscal 2015. The effective tax rate for the year-to-date periods of fiscal 2016 and 2015 was 30.3 percent and 30.0 percent, respectively. The increase in the effective tax rate for the year-to-date comparison was primarily the result of a similar research credit extension benefit year over year, but higher pre-tax income in fiscal 2016.

 

Net Earnings

 

Net earnings for the second quarter of fiscal 2016 were $105.7 million, or $1.89 per diluted share, compared to $93.8 million, or $1.64 per diluted share, for the second quarter of fiscal 2015, resulting in a net earnings per diluted share increase of 15.2 percent. Year-to-date net earnings in fiscal 2016 were $144.9 million, or $2.58 per diluted share, compared to $124.7 million, or $2.18 per diluted share, in the same comparable period last fiscal year, resulting in a net earnings per diluted share increase of 18.3 percent. The primary factors contributing to the net earnings increase included higher net sales, an increase in our gross margin rate, and recovery for a litigation settlement, partially offset by higher SG&A expense. In addition, as a result of reduced shares outstanding from repurchases of our common stock, second quarter and year-to-date fiscal 2016 net earnings per diluted share were benefited by approximately $0.04 per share and $0.05 per share, respectively.

 

BUSINESS SEGMENTS

 

We operate in three reportable business segments: Professional, Residential, and Distribution. Our Distribution segment, which consists of our company-owned domestic distributorship, 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

 

 

 

April 29,

 

May 1,

 

 

 

 

 

(Dollars in thousands)

 

2016

 

2015

 

$ Change

 

% Change

 

Professional

 

$

595,209

 

$

552,774

 

$

42,435

 

7.7

%

Residential

 

238,231

 

267,867

 

(29,636

)

(11.1

)%

Other

 

3,001

 

5,601

 

(2,600

)

(46.4

)%

Total*

 

$

836,441

 

$

826,242

 

$

10,199

 

1.2

%

 

 

 

 

 

 

 

 

 

 

* Includes international sales of:

 

$

196,338

 

$

195,384

 

$

954

 

0.5

%

 

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Table of Contents

 

 

 

Six Months Ended

 

 

 

April 29,

 

May 1,

 

 

 

 

 

(Dollars in thousands)

 

2016

 

2015

 

$ Change

 

% Change

 

Professional

 

$

934,045

 

$

892,480

 

$

41,565

 

4.7

%

Residential

 

382,515

 

402,610

 

(20,095

)

(5.0

)%

Other

 

6,279

 

5,363

 

916

 

17.1

%

Total*

 

$

1,322,839

 

$

1,300,453

 

$

22,386

 

1.7

%

 

 

 

 

 

 

 

 

 

 

* Includes international sales of:

 

$

323,584

 

$

338,285

 

$

(14,701

)

(4.3

)%

 

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

 

 

 

Three Months Ended

 

 

 

April 29,

 

May 1,

 

 

 

 

 

(Dollars in thousands)

 

2016

 

2015

 

$ Change

 

% Change

 

Professional

 

$

141,623

 

$

120,815

 

$

20,808

 

17.2

%

Residential

 

34,988

 

34,838

 

150

 

0.4

%

Other

 

(22,369

)

(19,516

)

(2,853

)

(14.6

)%

Total

 

$

154,242

 

$

136,137

 

$

18,105

 

13.3

%

 

 

 

Six Months Ended

 

 

 

April 29,

 

May 1,

 

 

 

 

 

(Dollars in thousands)

 

2016

 

2015

 

$ Change

 

% Change

 

Professional

 

$

203,215

 

$

176,474

 

$

26,741

 

15.2

%

Residential

 

51,727

 

48,565

 

3,162

 

6.5

%

Other

 

(47,003

)

(46,929

)

(74

)

(0.2

)%

Total

 

$

207,939

 

$

178,110

 

$

29,829

 

16.7

%

 

Professional Segment

 

Net Sales. Worldwide net sales for the Professional segment in the second quarter and year-to-date periods of fiscal 2016 increased 7.7 percent and 4.7 percent, respectively. Sales and market demand of landscape contractor equipment were strong for the second quarter and year-to-date periods of fiscal 2016 as contractors continued to value our turf management and productivity-enhancing product offerings. Professional segment sales were also positively impacted by increased shipments of our golf and grounds equipment primarily due to demand for our innovative product offerings and the successful introduction of new products. Continued growth in our specialty construction business also increased our Professional segment sales primarily due to strong demand of our new Dingo® TX 1000 compact utility loader. Sales growth for the second quarter of fiscal 2016 comparison was slightly offset by lower irrigation sales primarily due to timing of retailer inventory management programs; in addition, sales growth in both the second quarter and year-to-date periods of fiscal 2016 were hampered by the impact of unfavorable foreign currency exchange rate fluctuations.

 

Operating Earnings. Operating earnings for the Professional segment in the second quarter of fiscal 2016 increased by 17.2 percent compared to the second quarter of fiscal 2015 and increased to 23.8 percent as a percentage of net sales in the second quarter of fiscal 2016 compared to 21.9 percent in the second quarter of fiscal 2015. These increases were primarily due to higher gross margins from lower commodity prices, productivity improvements, and price realization, partially offset by unfavorable foreign currency exchange rates. For the year-to-date period of fiscal 2016, Professional segment operating earnings increased by 15.2 percent compared to the same period in the prior fiscal year and increased to 21.8 percent as a percentage of net sales for the year-to-date period of fiscal 2016 compared to 19.8 percent in the same period last fiscal year. These increases were primarily due to higher gross margins from the impact of lower commodity prices, productivity improvements, price realization, and the purchase accounting impact of the incremental charge for the sale of inventory that was written-up to fair value related to the acquisition of the BOSS business in fiscal 2015 that was not repeated this fiscal year. These gross margin increases were partially offset by unfavorable foreign currency exchange rate fluctuations.

 

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Table of Contents

 

Residential Segment

 

Net Sales. Worldwide net sales for the Residential segment in the second quarter and year-to-date periods of fiscal 2016 decreased 11.1 percent and 5.0 percent, respectively. These sales decreases were driven by lower sales of our zero-turn radius riding mowers primarily due to variable spring weather conditions, channel demand pulled forward into the first quarter of fiscal 2016 due to supply issues in the prior fiscal year, and low snowfalls early in fiscal 2016 that affected demand for our residential snow products. These decreases were partially offset by higher sales of walk power mowers driven by demand for new products including our all-wheel-drive and SMARTSTOW® mowers.

 

Operating Earnings. Operating earnings for the Residential segment in the second quarter and year-to-date periods of fiscal 2016 increased 0.4 percent and 6.5 percent, respectively. Expressed as a percentage of net sales, Residential segment operating margin increased to 14.7 percent from 13.0 percent in the second quarter of fiscal 2015, and fiscal 2016 year-to-date Residential segment operating margin increased to 13.5 percent compared to 12.1 percent in the same period last fiscal year. The operating earnings increase for the second quarter and year-to-date comparisons was primarily due to higher gross margins from lower commodity prices, productivity improvements, and price realization, partially offset by unfavorable foreign currency exchange rates.

 

Other Segment

 

Net Sales. Net sales for the Other segment include sales from our wholly owned domestic distribution companies less sales from the Professional and Residential segments to those distribution companies. The Other segment net sales for the second quarter of fiscal 2016 decreased by $2.6 million compared to the second quarter of fiscal 2015, mainly due to decreased sales as a result of the sale of our Northwestern U.S. distribution company early in the first quarter of fiscal 2016. For the year-to-date period of fiscal 2016, the Other segment net sales increased $0.9 million compared to the same period in the prior fiscal year. This increase was primarily due to a decrease in sales that are eliminated for shipments to our company-owned distribution companies as a result of the sale of our Northwestern U.S. distribution company.

 

Operating Loss. Operating loss for the Other segment in the second quarter and year-to-date periods of fiscal 2016 increased $2.9 million and $0.1 million, respectively. The increase in operating loss for the second quarter fiscal 2016 comparison was primarily attributable to increased self-insured benefit accruals influenced by the timing of claims. The slight increase in operating loss for the year-to-date fiscal 2016 period comparison was primarily attributable to increased self-insured benefit accruals influenced by the timing of certain claims, partially offset by higher earnings from our equity investment in Red Iron, recovery from a litigation settlement, and a gain on the sale of our Northwestern U.S. distribution company.

 

FINANCIAL POSITION

 

Working Capital

 

During the remainder of fiscal 2016, we plan to place an increased emphasis on improving asset utilization with a focus on reducing the amount of working capital in the supply chain, adjusting production plans, and maintaining or improving order replenishment and service levels to end users. Our average net working capital as a percentage of net sales for the twelve months ended April 29, 2016, was 16.6 percent compared to 15.6 percent for the twelve months ended May 1, 2015.

 

Inventory levels were up $27.6 million, or 8.1 percent, as of the end of the second quarter of fiscal 2016 compared to the end of the second quarter of fiscal 2015 due to higher snow thrower inventory levels from unfavorable weather conditions and zero-turn riding mowers that were built in anticipation of demand after manufacturing supply challenges that we experienced in the prior fiscal year. Receivables as of the end of the second quarter of fiscal 2016 decreased $21.8 million, or 6.2 percent, compared to the end of the second quarter of fiscal 2015 primarily as a result of additional customers financing receivables with Red Iron. Our average days sales outstanding for receivables decreased to 32.9 days based on sales for the last twelve months ended April 29, 2016, compared to 34.3 days for the twelve months ended May 1, 2015. In addition, accounts payable increased as of the end of our second quarter of fiscal 2016 compared to the end of the second quarter of fiscal 2015 by $4.1 million, or 1.6 percent, due to recent purchases of commodities and components.

 

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Liquidity and Capital Resources

 

Our businesses are seasonally working capital intensive and require funding for purchases of raw materials used in production, replacement parts inventory, payroll and other administrative costs, capital expenditures, establishment of new facilities, expansion and renovation of existing facilities, as well as for financing receivables from customers that are not financed with Red Iron. We believe that anticipated cash generated from operations, together with our long-term debt, bank credit lines, and cash on hand, will provide us with adequate liquidity to meet our anticipated operating requirements. We believe that the funds available through existing financing arrangements and forecasted cash flows will be sufficient to provide the necessary capital resources for our anticipated working capital needs, capital expenditures, investments, debt repayments, quarterly cash dividend payments, and stock repurchases for at least the next twelve months.

 

Our Board of Directors approved a cash dividend of $0.30 per share for the second quarter of fiscal 2016 that was paid on April 12, 2016. This was an increase of 20 percent over our cash dividend of $0.25 per share for the second quarter of fiscal 2015.

 

Cash Flow. We historically use more operating cash in the first half of our fiscal year than the second half of our fiscal year due to the seasonality of our business. Cash provided by operating activities for the first six months of fiscal 2016 increased $41.9 million, or 44.0 percent, compared to the first six months of fiscal 2015. This six month comparison change was due mainly to higher net earnings, a decrease in accounts receivable from additional customers financing receivables with Red Iron, and a decrease in cash used in inventory due to high inventory levels at the start of fiscal 2016, partially offset by a decrease in accounts payable due to process improvement initiatives. Cash used for investing activities decreased $206.3 million during the first six months of fiscal 2016 compared to the first six months of fiscal 2015 due to cash utilized for the acquisition of the BOSS business in the first quarter of fiscal 2015. Cash used for financing activities for the first six months of fiscal 2016 decreased $2.6 million compared to the first six months of fiscal 2015 mainly due to lower amounts of cash utilized for share repurchases, the favorable change in excess tax benefits from stock-based awards and proceeds from stock options exercised due to rising share prices. These decreas