Toro 2007 Annual Report Download - page 40

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Other Income, Net. Other income, net for fiscal 2006 increased
$2.3 million compared to fiscal 2005. This increase was due mainly
to the following factors:
• Currency exchange rate gains in fiscal 2006 compared to
currency exchange rate losses in fiscal 2005.
• Higher litigation settlement recoveries.
• A loss on the sale of a business in fiscal 2005.
Provision for Income Taxes. The effective tax rate for fiscal
2006 remained unchanged at 33.0 percent compared to fiscal
2005.
PERFORMANCE BY BUSINESS SEGMENT
As more fully described in Note 11 of the notes to consolidated
financial statements, we operate in two reportable business seg-
ments: professional and residential. A third reportable segment
called “other” consists of company-owned distributor operations in
the United States, corporate activities, and financing functions.
Operating earnings for each of our two business segments is
defined as earnings from operations plus other income, net.
Operating loss for the “other” segment includes earnings (loss)
from domestic wholly owned distribution company operations,
corporate activities, including corporate financing activities, other
income, and interest expense.
The following information provides perspective on our business
segments’ net sales and operating results.
Professional
Professional segment net sales represented 68 percent, 67 per-
cent, and 64 percent of consolidated net sales for fiscal 2007,
2006, and 2005, respectively. The following table shows the
professional segment net sales, operating earnings, and operating
earnings as a percent of net sales.
(Dollars in millions)
Fiscal years ended October 31 2007 2006 2005
Net sales $ 1,270.5 $ 1,224.8 $ 1,145.4
% change from prior year 3.7 % 6.9% 11.3%
Operating earnings $ 254.2 $ 227.7 $ 207.4
As a percent of net sales 20.0 % 18.6% 18.1%
Net Sales. Worldwide net sales for the professional segment in
fiscal 2007 were up 3.7 percent compared to fiscal 2006 primarily
as a result of the following factors:
• Higher international net sales as a result of continued strong
demand and growth in international markets, particularly in the
golf market, as well as a weaker U.S. dollar compared to the
other worldwide currencies in which we transact business.
• Strong worldwide demand and growth in the sports fields and
grounds markets that resulted in higher equipment product
sales.
• The success of new products introduced within the past two
years.
• Additional sales from the acquisition of Rain Master.
Somewhat offsetting those positive factors were:
• Lower shipments of landscape contractor equipment due mainly
to efforts to reduce field inventory levels, which were lower as of
the end of fiscal 2007 compared to the end of fiscal 2006, mod-
erated by the successful introduction of new products.
Worldwide net sales for the professional segment in fiscal 2006
were up 6.9 percent compared to fiscal 2005. Worldwide ship-
ments of most 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 equip-
ment and irrigation product sales. International professional
segment net sales were up significantly due to strong demand in
the golf market and the acquisition of Hayter.
Looking ahead, net sales for the professional segment are ex-
pected to increase in fiscal 2008 compared to fiscal 2007 as we
expect new products to be well received and to increase our
market share, and we anticipate continued growth in international
markets as well as the incremental impact of additional sales from
the acquisition of Rain Master.
Operating Earnings. Operating earnings for the professional
segment in fiscal 2007 increased 11.6 percent compared to fiscal
2006. Expressed as a percentage of net sales, professional seg-
ment operating margins increased to 20.0 percent compared to
18.6 percent in fiscal 2006. The following factors impacted profes-
sional segment operating earnings:
• Higher gross margins in fiscal 2007 compared to fiscal 2006
due to increased sales of higher margin products, price in-
creases on some products, continued cost reduction efforts,
including benefits from past and continuing profit improvement
initiatives, and a weaker U.S. dollar compared to most other
worldwide currencies in which we transact business. However,
higher manufacturing costs from lower plant utilization some-
what tempered the increase in gross margins and operating
earnings.
• SG&A expense rate was higher in fiscal 2007 compared to 2006
due to increased investments in engineering and marketing,
somewhat offset by a decline in warranty expense.
Operating earnings for the professional segment in fiscal 2006
increased 9.8 percent compared to fiscal 2005. Expressed as a
percentage of net sales, professional segment operating margins
increased to 18.6 percent in fiscal 2006 compared to 18.1 percent
in fiscal 2005. The operating profit improvement was due mainly to
higher gross margins as a result of cost reduction efforts from
profit improvement initiatives, price increases on some products,
and increased sales of higher margin products, somewhat offset
by higher commodity costs and freight expense. Higher SG&A