Toro 2007 Annual Report Download - page 37

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inefficiency throughout our entire organization. We believe we now
have a strong foundation on which to elevate our internal use of
Lean tools while expanding them externally to our suppliers and
distribution partners. The profitability goal within our “GrowLean”
initiative is to achieve a consistent after-tax return on sales of 7
percent or more over the three-year period ending October 31,
2009. To accomplish this, we plan to continue to employ Lean
methods, such as Value Stream Mapping, to identify and eliminate
constraints and barriers within and across our businesses and
functions. In addition, we plan to fine-tune enterprise-wide sys-
tems, such as Design for Manufacturing and Assembly, to deliver
products more competitively and efficiently. In the first year of our
“GrowLean” initiative, our after-tax return on sales was 7.6 percent.
Improving Asset Management. In our quest to become an
integrated Lean enterprise, we are placing additional emphasis on
asset management. This is an endeavor that we believe will
fundamentally change the way we do business, and we are in the
early stages of this journey. Our long-term goal within our
“GrowLean” initiative is to reduce average net working capital as a
percent of net sales below 20 percent, or in the “teens.” We define
net working capital as accounts receivable plus inventory less
trade payables. In fiscal 2007, our average net working capital as a
percentage of net sales was 29.4 percent.
We have begun to reduce inventory everywhere in the system –
within our plants and warehouses as well as at our distributors.
Throughout the supply chain, we expect to reduce our costs as
more of our products use the same components and we locate and
negotiate better supplier agreements to only purchase what we
need. In fiscal 2007, we continued to roll-out a pull-based produc-
tion system that we plan to implement in all of our plants. The pull
model is based on customer demand that trigger replenishment
cycles throughout the supply chain. As manufacturing is then
better synchronized with customer demand, we expect significant
inventory reductions at our production facilities, somewhat tem-
pered by the seasonal nature of our business. We expect that our
focus on asset management will improve customer satisfaction by
delivering the right products to the right distributor or dealer – at
just the right time – to meet current demand.
Outlook for Fiscal 2008
Overall, fiscal 2007 was a good year and we believe we are in a
position for yet another good year in fiscal 2008. We believe the
key drivers for our anticipated growth in fiscal 2008 will include,
among many others, these main factors:
• International markets will continue to be a focus for us to grow
our revenues as we plan to continue to invest in new products
designed specifically for international markets and customers.
Many opportunities exist abroad, especially in the golf market,
and our goal is for international sales to comprise a larger per-
centage of our total consolidated net sales.
• We anticipate continued success in our product innovation
efforts and customer acceptance of our new products.
Consistent with our focus on asset management, our overall
field inventory levels are within our expectations, and field
inventory levels for landscape contractor equipment are down
as of October 31, 2007 compared to October 31, 2006.
• We anticipate growth in our professional segment as we plan to
increase our market share by enhancing our product offering
with innovative new and improved products. For example, in
fiscal 2008 we plan to increase our product offering of precision
irrigation products designed to conserve water usage.
• Fiscal 2007 was a challenging year for our residential segment
as weather and economic conditions were unfavorable 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 prod-
ucts we introduced in fiscal 2007 will continue to be well
received by our customers in fiscal 2008.
• During fiscal 2007, we again experienced rising costs for com-
modities, and anticipate commodity costs to continue to
increase in fiscal 2008. These rising costs are expected to im-
pede our gross margin growth rate in fiscal 2008 compared to
fiscal 2007, as we anticipate that increased worldwide demand
and other factors will drive commodity prices higher. We have
made significant progress using Lean methods and principles,
and we plan to continue this focus as part of our “GrowLean”
initiative to offset these rising costs and implement select price
increases on some products.
• Cash flows provided from operations are expected to improve in
fiscal 2008 compared to fiscal 2007 as we plan to continue our
focus on improving asset utilization as part of our GrowLean
initiative. We intend to reinvest this additional cash generated
back into our businesses through investments in product devel-
opment, brand building, share repurchases, and acquisitions.
We will continue to keep a cautionary eye on the world economies,
retail demand, field inventory levels, commodity prices, weather,
competitive actions, and other factors identified in Part I, Item 1A,
“Risk Factors” of this report, which could cause our actual results
to differ from our anticipated outlook.
RESULTS OF OPERATIONS
Fiscal 2007 net earnings were $142.4 million compared to $129.1
million in fiscal 2006, an increase of 10.3 percent. Fiscal 2007
diluted net earnings per share were $3.40, an increase of 16.8
percent over $2.91 per share in fiscal 2006. The primary factors
contributing to the net earnings increase were higher net sales and
an increase in gross margins, somewhat offset by higher selling,
general, and administrative expenses, and an increase in our
effective tax rate. In addition, our share repurchase program