Toro 2007 Annual Report Download

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The Toro Company
2007 Annual Report
AWorld of
Opportunities

Table of contents

  • Page 1
    The Toro Company 2007 Annual Report Opportunities AWorld of

  • Page 2
    ... for building turf expertise and driving innovation has resulted in products and services to help our customers care for golf courses, sports fields, residential lawns, public grounds and agricultural fields. • We are headquartered in Bloomington, Minnesota, with manufacturing, engineering, sales...

  • Page 3
    ... Irrigation Systems to broaden our product retail partners to drive market share improvements. • Accelerate international revenue growth. • Improve working capital and asset management by expanding offering as water scarcity becomes more critical around the world. Lean pull systems to better...

  • Page 4
    ... at competitive prices. For this, we trust The Toro Company. They give customers confidence in their purchases while ensuring great results. This is demonstrated not only by Toro's dependable equipment, but also in the way they support the longterm success of the game. With rapid international golf...

  • Page 5
    ...scal 2007 to drive change in the right direction - like growing the international revenue part of our portfolio, strengthening our position with zero-turn radius mowing products, acquiring an irrigation technology company, and increasing consumer market share with dealers and a leading home center...

  • Page 6
    ... as a market leader in the United Kingdom." The Toro Company's international business accounted for 29 percent of total company revenue in fiscal 2007. Chris Cox Farmer Cox Valley View Farms Long Island, Kansas "We installed our first subsurface drip irrigation system more than nine years ago...

  • Page 7
    ... and commercial grounds. Residential 30% Lawn & Garden: 27% High-performing products include zero-turn radius riding mowers, walk-behind mowers, irrigation solutions and hand-held equipment. Snow: 3% A complete line of rugged, dependable, and powerful gas and electric products that get right...

  • Page 8
    ... has cut our mowing time in half. This gives us more time to spend fishing and enjoying the outdoors. Not to mention, we're always receiving comments from neighbors about how great our lawn looks." Customers surveyed estimate time savings of 40 to 60 percent using a zero-turn radius riding mower...

  • Page 9
    ...we experienced strong retail demand for riding products. A key success was the new generation of high-performance zero-turn-radius Toro ® TimeCutter ® Z's at dealers and a leading home center retailer. As homeowners are replacing their traditional lawn and garden tractors with Z's, we're investing...

  • Page 10
    ... and related markets. The outlook is favorable for expanding our international business, particularly in regions where new golf course construction is strong. We plan to further increase investments in research and new product development and explore high-potential markets like precision irrigation...

  • Page 11
    ... years. All officers, management employees and certain other designated employees are required to annually certify compliance with our Code of Conduct to ensure that Toro's business is conducted with the highest standards. For more information on our corporate governance practices and Board...

  • Page 12
    ... www.thetorocompany.com/Investor Information. Stock Listing New York Stock Exchange (TTC) Annual Meeting March 11, 2008, 1:30 p.m. (CST) The Toro Company Corporate Offices 8111 Lyndale Avenue South Bloomington, Minnesota 55420-1196 Investor Inquiries Individual shareholders may direct any questions...

  • Page 13
    ... the closing price of the Common Stock on May 4, 2007, the last business day of the registrant's most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $2.1 billion. The number of shares of Common Stock outstanding as of December 13, 2007 was 38...

  • Page 14
    ... and Financial Disclosure...Controls and Procedures ...Other Information ... PART III ITEM 10. ITEM 11. ITEM 12. ITEM 13. ITEM 14. Directors, Executive Officers and Corporate Governance...Executive Compensation ...Security Ownership of Certain Beneficial Owners and Management and Related Stockholder...

  • Page 15
    ... part of this report. We design, manufacture, and market professional turf maintenance equipment and services, turf and micro irrigation systems, landscaping equipment, and residential yard products. We produced our first mower for golf course use in 1921 when we mounted five reel mowers on a Toro...

  • Page 16
    ... Toro Quick Attachment System that enables attachment changes without the use of tools. Residential/Commercial Irrigation Market. Turf irrigation products we market under multiple brands include sprinkler heads, brass and plastic valves, and electric and hydraulic control devices designed to be used...

  • Page 17
    ... and sprinkler. We also design and market drip irrigation systems for residential landscapes and gardens. Gas Snow Removal Products. We manufacture and market a range of gas-powered single-stage and two-stage snow thrower models under multiple brands. Single-stage snow throwers are walk behind units...

  • Page 18
    ... lawn and garden products are also generally manufactured throughout the year. However, our residential snow removal equipment products are generally manufactured in the summer and fall months. Our products are tested in conditions and locations similar to those in which they are used. We use...

  • Page 19
    ..., including Toro-owned distributors, for resale to retail dealers throughout the United States. Walk power mowers, snow throwers, and riding products are also sold directly to dealers, hardware retailers, home centers, and mass retailers. Home solutions products and retail irrigation products are...

  • Page 20
    ... products directly to retail dealers and customers in the United States and a majority of their revenues are derived from Toro-manufactured products. Our distribution systems are intended to assure quality of sales and market presence, as well as effective after-purchase service and support...

  • Page 21
    ... financing company to provide lease-financing options to golf course and sports fields and grounds equipment customers and micro-irrigation customers in North America, Europe, and Australia. The purpose of these agreements is to increase sales by giving buyers of our products alternative financing...

  • Page 22
    ... the CEO and Senior Financial Officers, a Code of Conduct for all employees, and a Board of Directors Business Ethics Policy Statement. Copies of these documents are posted on our website at www.thetorocompany.com (select the "Investor Information" link and then the "Corporate Governance" link). If...

  • Page 23
    ...lawn care, the amount of investment in golf course renovations and improvements, new golf course development, golf course closures, and the amount of government spending. Our professional segment products are sold by distributors or dealers, or sold directly to government customers, rental companies...

  • Page 24
    ...Principal competitive factors in our markets include pricing, product innovation, quality and reliability, product support and customer service, warranty, brand awareness, reputation, distribution, shelf space, and financing options. We compete in all of our product lines with numerous manufacturers...

  • Page 25
    ... certain liabilities of Hayter Limited, a company located in the United Kingdom that designs, manufactures, and markets residential and professional turf maintenance equipment, primarily for the United Kingdom market. We believe many opportunities exist in the international markets, and our goal...

  • Page 26
    ...systems to effectively manage accounting and financial functions, manage manufacturing and supply chain processes, and maintain our research and development data. The failure of our management information systems to perform properly could disrupt our business and product development and could result...

  • Page 27
    ... party financing companies to provide financing options to golf course and sports fields and grounds equipment customers and micro-irrigation customers in North America and Europe. The purpose of these agreements is to increase our net sales by giving buyers of our products alternative financing...

  • Page 28
    ...the continued contributions of our senior management team. Our future success will also depend in large part on our ability to identify, attract, and retain other highly qualified managerial, technical, sales and marketing, and customer service personnel. Competition for these individuals is intense...

  • Page 29
    ..., or any employee work slowdowns, strikes, or similar actions could make it difficult for us to conduct and manage our business and meet key objectives, which could harm our business, financial condition, and operating results. The terms of our credit arrangements and the indentures governing our...

  • Page 30
    ...be in good operating condition and adequate for its present use. Management believes we have sufficient manufacturing capacity for fiscal 2008. The following schedule outlines our significant facilities by location, ownership, and function as of October 31, 2007: Location Bloomington, MN El Paso, TX...

  • Page 31
    ... District Court against the company for patent infringement. Textron alleges that we willfully infringe certain claims of three Textron patents by selling our Groundsmaster® commercial mowers. Textron seeks damages for our past sales and an injunction against future infringement. In August and...

  • Page 32
    ... Manager, International Business Richard W. Rodier 47, General Manager, Landscape Contractor Business - Toro Mark B. Stinson 42, General Manager, Exmark Stephen P. Wolfe 59, Vice President, Finance and Chief Financial Officer There are no family relationships between any director, executive officer...

  • Page 33
    ... for trading on the New York Stock Exchange and trades under the symbol "TTC." The high, low, and last sales prices for Toro common stock and cash dividends paid for each of the quarterly periods for fiscal 2007 and 2006 were as follows: Fiscal year ended October 31, 2007 Market price per share of...

  • Page 34
    ... Inc., Tecumseh Products Company, Teleflex, Terex Corporation, Timken Company, and Walter Industries Inc. Companies removed from the Index were Unova, Inc., York International Corporation, and Stewart & Stevenson Services, Inc. Publication of the Fortune 500 Industrial and Farm Equipment Index was...

  • Page 35
    ...OVERVIEW We design, manufacture, and market professional turf maintenance equipment and services, turf and micro irrigation systems, landscaping equipment, and residential yard products worldwide. We sell our products through a network of distributors, dealers, hardware retailers, home centers, mass...

  • Page 36
    ... TimeCutter Z Series zero-turning radius riding mowers and enhanced walk power mower products were not enough to offset the decline in snow thrower sales as a result of the lack of snow fall in key markets during the 2006-2007 winter season. • Fiscal 2007 net earnings increased 10.3 percent...

  • Page 37
    ...to our business. These conditions continue to be a concern for us as we enter fiscal 2008. However, we are anticipating continued growth in the zero-turning radius riding mower market from the traditional riding tractor mowers and we expect the new products we introduced in fiscal 2007 will continue...

  • Page 38
    ... key markets during the winter season of 2006-2007, which was partially offset by an increase of riding and walk power mower product shipments as we introduced new innovative and enhanced products that were well received by consumers. • Lower landscape contractor equipment product sales due mainly...

  • Page 39
    ...mainly to less favorable financial results for our long-term incentive plans. • Leveraging the fixed portion of SG&A costs over higher sales volumes. Somewhat offsetting those decreases were: • Increased investments in engineering, marketing, service, and information systems. • Higher warranty...

  • Page 40
    ... product lines increased due to the successful introduction of new products and price increases introduced on some products. In addition, strong worldwide demand in the golf and sports fields and grounds markets resulted in higher equipment and irrigation product sales. International professional...

  • Page 41
    ... new models and expanded product placement at a key retailer. International residential segment sales also increased due to new product introductions, higher snow thrower product shipments due to heavy snow falls in Europe Other (Dollars in millions) Fiscal years ended October 31 Net sales % change...

  • Page 42
    ... common stock repurchases in fiscal 2007 compared to fiscal 2006 as well as an increase in long-term debt discussed below. Liquidity and Capital Resources Our businesses are seasonally working capital intensive and require funding for purchases of raw materials used in production, replacement parts...

  • Page 43
    ... in the first quarter of fiscal 2007. Credit Lines and Other Capital Resources Our business is seasonal, with accounts receivable balances historically increasing between January and April as a result of higher sales volumes and extended payment terms made available to our customers, and decreasing...

  • Page 44
    ... the earlier of the date when product is sold to a customer, or the expiration of companysupported finance terms granted at the time of sale, until payment is received by TCC or the third party finance company. Rates are generally fixed or based on the prime rate plus a fixed percentage depending on...

  • Page 45
    ...party financing company to provide lease-financing options to golf course and sports fields and grounds equipment customers in North America, Europe, and Australia. The purpose of these agreements is to increase sales by giving buyers of our products alternative financing options when purchasing our...

  • Page 46
    ... 2007, we also completed the purchase of certain assets and assumed certain liabilities of Allen Hover Mower. Allen Hover Mower sells walk power mowers worldwide that are specifically designed to perform well on steep inclines for the golf course and grounds maintenance market, with annual sales...

  • Page 47
    ... current knowledge of potential collection problems provide us with sufficient information to establish a reasonable estimate for an allowance for doubtful accounts. However, since we cannot predict with certainty future changes in the financial stability of our customers or in the general economy...

  • Page 48
    ... 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 and loans to wholly owned subsidiaries as well as sales to third party customers and purchases from suppliers. Because our products...

  • Page 49
    ... not able to increase selling prices of our products or obtain manufacturing efficiencies to offset increases in commodity costs. Further information regarding rising prices for commodities is presented in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of...

  • Page 50
    ...'s internal control over financial reporting was effective as of October 31, 2007. /s/ Michael J. Hoffman Chairman of the Board, President, and Chief Executive Officer /s/ Stephen P. Wolfe Vice President, Finance and Chief Financial Officer Further discussion of the Company's internal controls and...

  • Page 51
    ... considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. It is also our opinion, The Toro Company maintained, in all material respects, effective internal control over financial reporting as...

  • Page 52
    CONSOLIDATED STATEMENTS OF EARNINGS (Dollars and shares in thousands, except per share data) Fiscal years ended October 31 2007 2006 2005 Net sales Cost of sales Gross profit Selling, general, and administrative expense Earnings from operations Interest expense Other income, net Earnings before ...

  • Page 53
    ...EQUITY Current portion of long-term debt Short-term debt Accounts payable Accrued liabilities: Warranty Advertising and marketing programs Compensation and benefit costs Income taxes Other Total current liabilities Long-term debt, less current portion Deferred revenue and other long-term liabilities...

  • Page 54
    ...of costs Repayments of long-term debt Excess tax benefits from stock-based awards Proceeds from exercise of stock options Purchases of Toro common stock Dividends paid on Toro common stock Net cash used in financing activities Effect of exchange rates on cash Net increase (decrease) in cash and cash...

  • Page 55
    ... shares under stock-based compensation plans Contribution of stock to a deferred compensation trust Purchase of 3,342,729 shares of common stock Excess tax benefits from stock options Adjustment related to adoption of SFAS No. 158, net of tax Minimum pension liability adjustment, net of tax Foreign...

  • Page 56
    ... depreciated over 10 to 45 years, and equipment over 3 to 7 years. Tooling costs are generally depreciated over 3 to 5 years using the straight-line method. Software and web site development costs are generally amortized over 2 to 5 years utilizing the straight-line method. Expenditures for major...

  • Page 57
    ...the company's foreign operations is the applicable local currency. The functional currency is translated into U.S. dollars for balance sheet accounts using current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during...

  • Page 58
    ... from the retailer's distribution centers to their stores. A provision is made at the time the related revenue is recognized for estimated product returns, cost of product warranties, floor plan costs, rebates, and other sales promotional expenses. Sales, use, value-added, and other excise taxes...

  • Page 59
    ... measurement of the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award as of the date of grant. The company's stock-based compensation awards include performance shares issued to key employees that are contingent on the achievement...

  • Page 60
    ... 2007, the company completed the purchase of certain assets and assumed certain liabilities of Allen Hover Mower. Allen Hover Mower sells walk power mowers worldwide that are specifically designed to perform well on steep inclines for the golf course and grounds maintenance market, with annual sales...

  • Page 61
    ...of 7.125% notes on the maturity date of June 15, 2007 as well as for general corporate purposes. In connection with the issuance in June 1997 of the $175,000 in long-term debt securities, the company paid $23,688 to terminate three forward-starting interest rate swap agreements with notional amounts...

  • Page 62
    ...Under the terms of a Rights Agreement dated as of May 20, 1998 between Toro and Wells Fargo Bank, National Association, each share of the company's common stock entitles its holder to one preferred share purchase right. These rights become exercisable only if a person or group acquires, or announces...

  • Page 63
    ... life in years 9 STOCK-BASED COMPENSATION PLANS Under the company's stock option plans, certain employees and non-employee directors have been granted options to purchase shares of common stock at prices equal to the fair market value of the company's common stock on the date the option...

  • Page 64
    ... rate used to determine fiscal year expense Annual increase in cost of benefits 2007 2006 5.75% 5.75% 5.75% 5.75% 9.0% 10.0% On July 31, 1995, the company issued 68,968 shares of restricted stock and 68,968 performance units to its former Chief Executive Officer under the terms of The Toro Company...

  • Page 65
    ... Turf equipment products include sports fields and grounds maintenance equipment, golf course mowing and maintenance equipment, landscape contractor mowing equipment, landscape creation equipment, and other maintenance equipment. Irrigation products consist of sprinkler heads, electric and hydraulic...

  • Page 66
    ... consists of walk power mowers, riding mowers, snow throwers, homeowner-installed irrigation systems, replacement parts, and electrical home solutions products, including trimmers, blowers, and blower-vacuums. These products are sold to homeowners through a network of distributors and dealers, and...

  • Page 67
    ... after 2012, $82. End-User Financing - The company has agreements with a third party financing company to provide lease-financing options to golf course and sports fields and grounds equipment customers in North America, Europe, and Australia. During fiscal 2007, the company entered into an amended...

  • Page 68
    ... markets for outdoor landscape equipment and systems. The credit risk associated with these segments is limited because of the large number of customers in the company's customer base and their geographic dispersion, except for the residential segment that has significant sales to The Home Depot...

  • Page 69
    ... Hedging Activities The company uses derivative instruments to manage exposure to foreign currency exchange rates. Toro uses derivative instruments only in an attempt to limit underlying exposure from currency rate fluctuations, and not for trading purposes. The company documents all relationships...

  • Page 70
    ...fourth fiscal quarter ended October 31, 2007 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 71
    ... Voting Preferred Stock, as amended (incorporated by reference to Exhibit 1 to Registrant's Current Report on Form 8-K dated May 20, 1998, Commission File No. 1-8649). 4(e) Certificate of Adjusted Purchase Price or Number of Shares dated April 14, 2003 filed by The Toro Company with Wells...

  • Page 72
    ...-Employee Directors (incorporated by reference to Exhibit 10(j) to Registrant's Quarterly Report on Form 10-Q for the quarter ended February 2, 2007).* 10(p) The Toro Company 2000 Directors Stock Plan (incorporated by reference to Exhibit 2 to Registrant's Current Report on Form 8-K dated September...

  • Page 73
    ... Exhibit 1.1 to Registrant's Current Report on Form 8-K dated April 23, 2007, Commission File No. 1-8649). 10(cc) Asset Purchase Agreement, dated as of February 8, 2005, by and among Editland Limited, Toro Hayter (Guernsey) Limited, Hayter Limited, and The Toro Company (incorporated by reference to...

  • Page 74
    ...October 31, 2006 Accrued advertising and marketing programs 48,367 189,607 187,850 - 50,124 Fiscal year ended October 31, 2005 Accrued advertising and marketing programs 41,973 174,106 168,301 589 48,367 1 Provision consists of rebates, cooperative advertising, floor planning costs, commissions, and...

  • Page 75
    ...undersigned, thereunto duly authorized. THE TORO COMPANY (Registrant) /s/ Stephen P. Wolfe Stephen P. Wolfe Vice President, Finance and Chief Financial Officer By Dated: December 21, 2007 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the...

  • Page 76
    ...TORO COMPANY AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges (Not Covered by Independent Auditors' Report) 10/31/2007 10/31/2006 10/31/2005 10/31/2004 10/31/2003 Earnings before income taxes Plus...,169,000 6.43 Interest expense Rentals (interest expense) Total fixed charges...

  • Page 77
    ...Systems Europe, S.r.L. Irritrol Systems Europe Productions, S.r.L. MTI Distributing, Inc. Rain Master Irrigation Systems, Inc. Red Iron Insurance, Limited The Shop Toro Company Toro Australia Pty. Limited Toro Australia Group Sales Pty. Ltd Toro Briggs & Stratton LLC Toro Credit Company Toro Company...

  • Page 78
    Toro Sales Company Toro Servicios, S. de R.L. de C.V. Toro Warranty Company Toro World Trade GmbH Tover Overseas, B.V Tover Overseas I C.V. Turf Professionals Equipment Company Minnesota Mexico Minnesota Switzerland Netherlands Netherlands Minnesota 100% 100% 100% 100% 100% 100% 100%

  • Page 79
    ...and related financial statement schedule for each of the years in the three year period ended October 31, 2007, and the effectiveness of internal control over financial reporting as of October 31, 2007, which report is included in the annual report on Form 10-K of The Toro Company. Our report refers...

  • Page 80
    ...or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 21, 2007 /s/ Michael J. Hoffman Michael J. Hoffman Chairman of the Board, President and Chief Executive Officer (Principal Executive...

  • Page 81
    ... or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: December 21, 2007 /s/ Stephen P. Wolfe Stephen P. Wolfe Vice President, Finance and Chief Financial Officer (Principal Financial Officer)

  • Page 82
    ...The Toro Company (the "Company") on Form 10-K for the fiscal year ended October 31, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Michael J. Hoffman, President and Chief Executive Officer of the Company, and Stephen P. Wolfe, Vice President, Finance...

  • Page 83
    ... ("Employee" or "you") and The Toro Company, a Delaware corporation ("Toro" or "we"), to set forth the terms and conditions of a Performance Share Award granted to you by the Compensation and Human Resources Committee of the Board of Directors of Toro (the "Committee") pursuant to The Toro Company...

  • Page 84
    ... Term completed at the date of such event, with proration based on full fiscal years only and no shares to be delivered for partial fiscal years. "Retirement" means termination of employment with the Company at age 55 or older and with a number of years of service to the Company that, when added...

  • Page 85
    ..., purchase of assets or otherwise, all or substantially all of Toro's assets and business. In the event of your death, any shares of Common Stock to which you may become entitled will be delivered to your heirs or personal representative in accordance with the terms of the Plan. Governing Law...

  • Page 86
    ... WHEREOF, this Performance Share Award Agreement has been executed and delivered by Toro on the terms and conditions set forth above. THE TORO COMPANY Its: Chairman, President and CEO I hereby agree to the terms and conditions of this Performance Share Award Agreement as a condition to the grant...