Toro 2014 Annual Report Download

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BUILDING
OUR NEXT CENTURY ON
INNOVATION
THE TORO COMPANY
2014 Annual Report

Table of contents

  • Page 1
    THE TORO COMPANY 2014 Annual Report BUILDING OUR NEXT CENTURY ON INNOVATION

  • Page 2
    Toro® TimeCutter® SW Series zero-turn tractors create an entirely new mowing experience, providing the time-savings of a zero-turn mower to customers who prefer a steering wheel. t BOSS™ DXT V-Plows feature an innovative design that combine a best-in-class trip edge with full moldboard trip ...

  • Page 3
    ... year caused rounds played to be down early, but favorable summer and fall conditions increased play and helped to grow overall course revenues. On the international scene, new golf course development continued to progress in key markets with customers favoring our irrigation and equipment offerings...

  • Page 4
    ... zero-turn riding mowers, as more consumers transition to that riding platform from traditional lawn tractors, and fall clean-up activity helped to drive sales of our electric blowers. We believe that we are well-poised for fiscal 2015 with a strong line-up of new products and expanded product...

  • Page 5
    ...and engineering investments to new product development. As a result, in the years ahead, we look forward to delivering an even greater number of innovative products that help provide needed solutions for our customers. Finally, as famed author Mark Twain is credited with saying, "if you stand still...

  • Page 6
    ...F'10 F'11 F'12 F'13 F'14 Revenue by market Professional 68% Landscape & Grounds 36% Golf 25% Ag Irrigation 7% Revenue by geographical location United States 71% International 29% Europe, Middle East & Africa 13% Australia/New Zealand 6% Canada/Latin America 6% Asia 4% Residential 31% Other 1%

  • Page 7
    ... the closing price of the common stock on May 2, 2014, the last business day of the registrant's most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $3.6 billion. The number of shares of common stock outstanding as of December 12, 2014 was 55...

  • Page 8
    ...Market Risk ...Financial Statements and Supplementary Data ...Management's Report on Internal Control over Financial Reporting ...Report of Independent Registered Public Accounting Firm ...Consolidated Statements of Earnings for the fiscal years ended October 31, 2014, 2013, and 2012 ...Consolidated...

  • Page 9
    ..., landscape, specialty construction, and agricultural products and market them worldwide through a network of distributors and dealers, as well as directly to government customers, rental companies, and large retailers. With our recent acquisition of BOSS, we also design and manufacture a broad line...

  • Page 10
    ... and commercial landscapes, as well as directly to government customers. Residential/Commercial Irrigation and Lighting Market. Turf irrigation products marketed under the Toro and Irritrol brands include rotors; sprinkler bodies and nozzles; plastic, brass, and hydraulic valves; drip tubing...

  • Page 11
    ...of snow thrower products that are sold primarily in North America and Europe. We also license our trademark on certain home solutions products as a means of expanding our brand presence. Walk Power Mower Products. We manufacture and market numerous walk power mower models under our Toro and Lawn-Boy...

  • Page 12
    ...in fiscal 2014, we launched a line of Lawn-Boy 21Љ walk power mowers that are sold at The Home Depot. Riding Products. We manufacture and market riding products under the Toro brand name. Riding products primarily consist of zero-turn radius mowers that are designed to save homeowners time by using...

  • Page 13
    ... for fiscal 2015 are planned to be approximately $75 million as we expect to continue to invest in new product tooling, new technology in production processes and equipment, replacement production equipment, as well as renovations of our original corporate facility located in Bloomington, Minnesota...

  • Page 14
    ... 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...

  • Page 15
    ... retail irrigation products are sold directly to home centers. Products for the rental and specialty construction market are sold directly to dealers and rental companies. Toro and Exmark landscape contractor products are also sold directly to dealers in certain regions of North America. BOSS snow...

  • Page 16
    ...latest technology and design innovations. In addition, by selling our products through a network of distributors, dealers, hardware retailers, home centers, and mass retailers, we offer comprehensive service support during and after the warranty period. We compete in many product lines with numerous...

  • Page 17
    ... terms directly to home centers and mass retailers; general line irrigation dealers; international distributors and dealers other than the Canadian distributors and dealers to whom Red Iron provides financing arrangements; micro-irrigation dealers and distributors; government customers; rental...

  • Page 18
    ... the SEC's home page on the Internet at http://www.sec.gov. We make available, free of charge on our web site www.thetorocompany.com (select the ''Investor Information'' link and then the ''Financials'' link), our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form...

  • Page 19
    ... the level of new golf course development and golf course closures; the level of homeowners who outsource their lawn care; the level of residential and commercial construction; acceptance of and demand for micro-irrigation solutions for agricultural markets; the integration of the BOSS business into...

  • Page 20
    ... of the BOSS business into our professional portfolio; the demand for our products in the rental and specialty construction market; the level of residential and commercial construction; availability of cash or credit on acceptable terms to finance new product purchases; and the amount of government...

  • Page 21
    ..., pricing, product support and customer service, warranty, brand awareness, reputation, distribution, product placement and shelf space, and financing options. We compete in many product lines with numerous manufacturers, some of which have substantially larger operations and financial resources...

  • Page 22
    ...; • inability to successfully integrate or develop a distribution channel for acquired product lines; • potential loss of key employees, customers, distributors or dealers of the acquired businesses or adverse effects on existing business relationships with suppliers, customers, distributors and...

  • Page 23
    ... our operating results. In addition, effective internal controls are necessary for us to provide reliable and accurate financial reports and to effectively prevent fraud. The integration of acquired businesses may result in our systems and controls becoming increasingly complex and more difficult to...

  • Page 24
    ... new manufacturing and distribution facilities, and move production between such facilities as needed from time to time. In fiscal 2013, we acquired a company and began operations at a new micro-irrigation facility in China in order to support anticipated growth of our micro-irrigation business...

  • Page 25
    ... position and financial results. To the extent in which we are able to implement price increases to cover or partially offset costs related to research, development, engineering, and other expenses to design Tier 4 diesel engine compliant products in the form of price increases to our customers, and...

  • Page 26
    ... things, our accounting and financial functions, including maintaining our internal controls; our manufacturing and supply chain processes; and the data related to our research and development efforts. The failure of our management information systems or those of our business partners or third party...

  • Page 27
    ... our business, reputation, financial condition, and operating results to suffer. Although we take steps to secure our management information systems and any access provided by our business partners or third party service providers, including our computer systems, intranet and internet sites, email...

  • Page 28
    in Canada to support their businesses and increase our net sales, as well as to free up our working capital for our other strategic purposes. As a result, we are dependent upon the joint venture for our inventory financing programs, including floor plan and open account receivable financing. ...

  • Page 29
    included the construction of a new corporate facility that was completed in fiscal 2014, and we plan to renovate our original corporate facility located in Bloomington, Minnesota in fiscal 2015 to accommodate expansion needs of our product development and test capacities. We financed, and expect to ...

  • Page 30
    ... assessed. We are expanding and renovating our corporate facilities located in Bloomington, Minnesota, which included the construction of a new 75,000 square foot facility that was completed in fiscal 2014 and renovation of our original corporate facility in fiscal 2015 to accommodate additional...

  • Page 31
    ...President, Contractor Business and Chief Information Officer, which included responsibility for our Exmark and Sitework Systems Businesses and our Information Services function. In September 2010, he also assumed responsibility for our Micro-Irrigation Business and Corporate Accounts. Vice President...

  • Page 32
    ... for trading on the New York Stock Exchange and trades under the symbol ''TTC.'' The high, low, and last sales prices for our common stock and cash dividends paid for each of the quarterly periods for fiscal 2014 and 2013 were as follows: Fiscal year ended October 31, 2014 Market price per share of...

  • Page 33
    ... 10/31/2012 10/31/2013 10/31/2014 The Toro Company S&P 500 Peer Group 12DEC201423535613 *$100 invested on 10/31/2009 in stock or index, including reinvestment of dividends. Fiscal year ending October 31. Fiscal year ending October 31 The Toro Company S&P 500 Peer Group 2009 $100.00 100.00 100.00...

  • Page 34
    ... equipment and services, turf irrigation systems, landscaping equipment and lighting, agricultural micro-irrigation systems, rental and specialty construction equipment, and residential yard and snow thrower products. Beginning in fiscal 2015 with our recent acquisition of BOSSா, we also design...

  • Page 35
    ... demand of snow thrower products, increased sales of landscape contractor equipment, continued market growth and demand for our micro-irrigation products, higher shipments and demand for our residential zero-turn riding mowers, the successful introduction of new and enhanced products, improved price...

  • Page 36
    ... of Toro walk power mowers and a new line of riding products to be well received by customers, as well as increased product placement at a key retailer to drive sales growth for our residential segment in fiscal 2015. However, as we benefited from heavy snow falls during the 2013-2014 winter...

  • Page 37
    ... landscape contractor equipment, continued acceptance and demand for our drip irrigation solutions in agricultural markets, and the successful introduction of new and enhanced products that were well received by customers, including products in the golf market and rental and specialty construction...

  • Page 38
    ..., mainly landscape contractor equipment, the successful introduction of new and enhanced products that were well received by customers, acceptance and demand for our drip irrigation solutions in agricultural markets, and golf renovation projects that drove demand for our golf irrigation systems...

  • Page 39
    ... products, such as our new INFINITYா sprinklers, that were well received by customers, as well as new international golf course projects. • Increased sales and demand for rental and specialty construction equipment, including products that we introduced under the Toro brand. • Improved price...

  • Page 40
    ... rental and specialty construction market from broadening our customer base as part of our acquisitions in fiscal 2012, improved market conditions, and new product introductions. • Incremental sales of $6.4 million from acquisitions. • Increased sales of golf and grounds equipment and irrigation...

  • Page 41
    ... irrigation products in Australia as a result of dry weather conditions in that region. • Higher shipments and demand of zero-turn radius riding mowers and handheld trimmer and blower products due to positive customer response to newly introduced and enhanced products, as well as favorable fall...

  • Page 42
    ... compared to fiscal 2013. This increase was primarily attributable to capital expenditures for the construction of our expanded new corporate facility located in Bloomington, Minnesota, new product tooling, and replacement production equipment. Capital expenditures for fiscal 2015 are planned to be...

  • Page 43
    ... under a term loan in anticipation of cash required to close the acquisition of the BOSS business early in the first quarter of fiscal 2015. Liquidity and Capital Resources Our businesses are seasonally working capital intensive and require funding for purchases of raw materials used in production...

  • Page 44
    ... provides information with respect to repurchases of our common stock during the past three fiscal years. (Dollars in millions, except per share data) Fiscal years ended October 31 Shares of common stock purchased Cost to repurchase common stock Average price paid per share 1 1 2014 2013 2012...

  • Page 45
    ... terms to home centers and mass retailers; general line irrigation dealers; international distributors and dealers other than the Canadian distributors and dealers to whom Red Iron provides financing arrangements; micro-irrigation dealers and distributors; government customers; and rental companies...

  • Page 46
    ... irrigation products, sprinklers, emitters, and filters for agriculture, landscaping, and green house production. The purchase price of this acquisition was $3.5 million. On April 25, 2012, during the second quarter of fiscal 2012, we completed the acquisition of certain assets for an equipment line...

  • Page 47
    ..., each reporting unit assesses critical areas that may impact its business, including macroeconomic conditions, market related exposures, competitive changes, new or discontinued products, changes in key personnel, or any other potential risks to projected financial results. All assumptions used in...

  • Page 48
    ... with foreign currency exchange rate changes and not for trading purposes. We are 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...

  • Page 49
    ... Rate Risk. Our market risk on interest rates relates primarily to LIBOR-based short-term debt and a term loan from commercial banks, as well as the potential increase in fair value of our fixed-rate long-term debt resulting from a potential decrease in interest rates. We generally do not use...

  • Page 50
    ... of the Board, President, and Chief Executive Officer and Vice President, Treasurer and Chief Financial Officer, evaluated the effectiveness of the company's internal control over financial reporting as of October 31, 2014. In making this evaluation, management used the criteria set forth by the...

  • Page 51
    ... consolidated balance sheets of The Toro Company and subsidiaries as of October 31, 2014 and 2013 and the related consolidated statements of earnings, comprehensive income, stockholders' equity, and cash flows for each of the fiscal years in the three-year period ended October 31, 2014. In...

  • Page 52
    ...-average number of shares of common stock outstanding - Basic Weighted-average number of shares of common stock outstanding - Diluted CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in thousands) Fiscal years ended October 31 2014 $173,870 (4,758) (1,583) 3,206 (3,135) $170,735 2013 $154...

  • Page 53
    ... Goodwill Other intangible assets, net Other assets Total assets LIABILITIES AND STOCKHOLDERS' EQUITY Current portion of long-term debt Short-term debt Accounts payable Accrued liabilities: Warranty Advertising and marketing programs Compensation and benefit costs Insurance Income taxes Other Total...

  • Page 54
    ... acquired Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES: Increase in (repayments of) short-term debt Increase in (repayments of) long-term debt Excess tax benefits from stock-based awards Proceeds from exercise of stock options Purchases of Toro common stock Dividends...

  • Page 55
    ... of 532,692 shares under stock-based compensation plans Contribution of stock to a deferred compensation trust Purchase of 1,644,230 shares of common stock Excess tax benefits from stock-based awards Other comprehensive loss Net earnings Balance as of October 31, 2014 The financial statements should...

  • Page 56
    ... value for that inventory. These reserves are based on a review and comparison of current inventory levels to planned production, as well as planned and historical sales of the inventory. During fiscal 2014 and 2013, LIFO layers were reduced. This reduction resulted in charging lower inventory costs...

  • Page 57
    ... the fiscal years ended October 31, 2014, 2013, and 2012, the company capitalized $1,710, $722, and $256 of interest, respectively. Property, plant, and equipment as of October 31 was as follows: 2014 Land and land improvements Buildings and leasehold improvements Machinery and equipment Tooling...

  • Page 58
    ... follows: Fiscal years ended October 31 Beginning balance Warranty provisions Warranty claims Changes in estimates Ending balance 2014 $ 72,177 41,608 (38,568) (4,137) $ 71,080 2013 $ 69,848 41,067 (35,529) (3,209) $ 72,177 Accounts Payable The company has a customer-managed service agreement with...

  • Page 59
    ... operating costs of distribution and corporate facilities, warranty expense, depreciation and amortization expense on non-manufacturing assets, advertising and marketing expenses, selling expenses, engineering and research costs, information systems costs, incentive and profit sharing expense, and...

  • Page 60
    ... and dealer inventory purchases. These financing arrangements are used by the company as a marketing tool to assist customers to buy inventory. The financing costs for distributor and dealer inventories were $21,080, $19,729, and $19,492 for the fiscal years ended October 31, 2014, 2013, and 2012...

  • Page 61
    ..., and sells a broad line of snowplows, salt and sand spreaders, and related parts and accessories for light and medium duty trucks, all terrain vehicles, utility terrain vehicles, skid steers, and front-end loaders. Through this acquisition, the company added another professional contractor brand...

  • Page 62
    ... 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 select distributors of the company's products in Canada. The initial term will continue until...

  • Page 63
    ...301 from October 31, 2014 compared to October 31, 2013 was the result of intangible assets acquired from a company, disclosed in Note 2, and changes in foreign currency exchange rates. Amortization expense for intangible assets for the fiscal years ended October 31, 2014, 2013, and 2012 was $6,002...

  • Page 64
    ...date on a semi-annual basis at the treasury rate plus 30 basis points, plus, in both cases, accrued and unpaid interest. In the event of the occurrence of both (i) a change of control of the company, and (ii) a downgrade of the notes below an investment grade rating by both Moody's Investors Service...

  • Page 65
    ...,204 $226,713 2012 $189,206 7,056 $196,262 During the fiscal years ended October 31, 2014, 2013, and 2012, respectively, $8,857, $6,134, and $9,017 was added to stockholders' equity reflecting the permanent book to tax difference in accounting for tax benefits related to employee stock-based award...

  • Page 66
    ... 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...

  • Page 67
    ... period. The company granted restricted stock and restricted stock units during the following fiscal years as follows: Fiscal years ended October 31 2014 $63.05 1,890 2013 $46.10 1,207 2012 $33.61 967 The fair value of each stock option is estimated on the date of grant using the Black-Scholes...

  • Page 68
    ... 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...

  • Page 69
    ... and lighting products consist of sprinkler heads, electric and hydraulic valves, controllers, computer irrigation central control systems, and micro-irrigation drip tape and hose products, as well as professionally installed lighting products offered through distributors and landscape contractors...

  • Page 70
    ... of $9,369 of inventory related to receivables under these financing arrangements. The The following table presents net sales for groups of similar products and services: Fiscal years ended October 31 Equipment Irrigation and lighting Total 2014 $1,765,845 406,846 $2,172,691 2013 $1,649,489 391,942...

  • Page 71
    ...suppliers for materials and supplies as part of the normal course of business. The company also entered into a construction agreement for the renovation of its original corporate facility located at Bloomington, Minnesota, to accommodate needs for expansion of product development and test capacities...

  • Page 72
    ... which hedge accounting is discontinued and the derivative remains outstanding, the company carries the derivative at its fair value on the consolidated balance sheet, recognizing future changes in the fair value in other income, net. For the fiscal years ended October 31, 2014 and 2013, there were...

  • Page 73
    ... Fiscal Year Ended Location of Gain (Loss) Recognized in Net Earnings Forward currency contracts Cross currency contracts Total Other income, net Other income, net October 31, 2014 $3,555 951 $4,506 October 31, 2013 $(1,402) (483) $(1,885) The company entered into an International Swap Dealers...

  • Page 74
    ... in the Balance Sheet $(1,931) (443) $(2,374) October 31, 2013 Forward currency contracts Cross currency contracts Total During the second quarter of fiscal 2007, the company entered into three treasury lock agreements based on a 30-year U.S. Treasury security with a principal balance of $30...

  • Page 75
    ... Level 3 $6,861 $ 9 536 2,141 $2,686 On November 14, 2014, subsequent to fiscal 2014 year end and during the first quarter of fiscal 2015, the company acquired the BOSS professional snow and ice management business from privately held Northern Star Industries, Inc. Further information regarding...

  • Page 76
    ...fourth fiscal quarter ended October 31, 2014 that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting. ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Information on...

  • Page 77
    ...Internal Control over Financial Reporting. • Report of Independent Registered Public Accounting Firm. • Consolidated Statements of Earnings for the fiscal years ended October 31, 2014, 2013, and 2012. • Consolidated Statements of Comprehensive Income for the fiscal years ended October 31, 2014...

  • Page 78
    ... Corporation and TCFIF Joint Venture I, LLC (incorporated by reference to Exhibit 2.2 to Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended May 4, 2012, Commission File No. 1-8649).** 2.6 Receivable Purchase Agreement by and among Toro Credit Company, as Seller, The Toro Company...

  • Page 79
    ...to Registrant's Current Report on Form 8-K dated January 15, 2008, Commission File No. 1-8649).* 10.7 The Toro Company 2000 Stock Option Plan (As Amended December 3, 2008) (incorporated by reference to Exhibit 10.5 to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 2008...

  • Page 80
    ...'s Annual Report on Form 10-K for the fiscal year ended October 31, 2006, Commission File No. 1-8649).* 10.24 The Toro Company Change in Control Severance Compensation Policy and attached Form of Release (incorporated by reference to Exhibit 10.1 to Registrant's Current Report on Form 8-K dated...

  • Page 81
    ...THE TORO COMPANY AND SUBSIDIARIES Valuation and Qualifying Accounts Balance as of the beginning of the fiscal year $3,425 3,733 2,040 Charged to costs and expenses1 $ (79) 123 2,160 Balance as of the end of the fiscal year $1,481 3,425 3,733 (Dollars in thousands) Fiscal year ended October 31, 2014...

  • Page 82
    ... and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date Dated: December 22, 2014...

  • Page 83
    Intentionally left blank

  • Page 84
    ... and Chief Operating Officer The Mosaic Company Judy L. Altmaier Vice President, Exmark Richard M. Olson Group Vice President, International Business, Global Micro-Irrigation Business and Distributor Development Gary L. Ellis Executive Vice President and Chief Financial Officer Medtronic...

  • Page 85
    Elements™ Series By Unique Lighting Systems® offers a high-quality outdoor lighting solution with advanced alloy construction and authentic styling designed to be durable, flexible and easy to install. p Toro® Four-Wheel Drive Utility Vehicles provide hardworking hauling and towing capabilities...

  • Page 86
    The Toro Company 8111 Lyndale Avenue South Bloomington, MN 55420-1196 952-888-8801 www.thetorocompany.com