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A World of
Opportunities
The Toro Company
2008 Annual Report

Table of contents

  • Page 1
    The Toro Company 2008 Annual Report Opportunities A World of

  • Page 2
    ...to help customers care for golf courses, sports fields, public green spaces, commercial and residential grounds, and agricultural fields. Over the years, we have strengthened our position as a leading worldwide provider of turf and landscape maintenance equipment, and precision irrigation systems...

  • Page 3
    ... in precision irrigation and water management through advanced technologies and initiatives to attract new business. Execute on our disciplined and comprehensive approach to strategic acquisitions to grow our business for the future. â- â- â- â- â- â- â- â- International sales as...

  • Page 4
    ... of annual revenue attributable to new products. The year was also punctuated with the 10th anniversary of our Center for Advanced Turf Technology (CATT). This dedicated team of engineers and agronomists keeps us at the forefront of anticipating customer needs by offering creative solutions to...

  • Page 5
    ... a machine that delivers the quickness of a zeroturn mower with the mobility of a walk-behind, which means they are built for productivity. These stand-on units achieve one simple goal - a quality job, done fast. Recently named the 2008 New Product of the Year by the Irrigation Association, Toro...

  • Page 6
    ...surface drip irrigation systems to help growers save water and improve crop yields. Fiscal 2008 Net Sales by Market Residential: 30% Lawn & Garden: 26% Feature-rich and dependable products include zeroturn radius riding mowers, walk-behind mowers, irrigation solutions and hand-held equipment. Snow...

  • Page 7
    ... to ensure that the company's business is conducted with the highest standards. To view our Code of Conduct, Corporate Governance Guidelines and Board committee charters, visit the Investor Information section of our website, www.thetorocompany.com. Board of Directors Robert C. Buhrmaster * Retired...

  • Page 8
    ... Reinvestment Plan Wells Fargo Shareowner Services P.O. Box 64856 St. Paul, Minnesota 55164-0856 651-450-4064 1-800-468-9716 Investor Inquiries Individual shareholders may direct any questions to 888-237-3054, or [email protected]. The Toro Company 8111 Lyndale Avenue South Bloomington, MN 55420...

  • Page 9
    ... the closing price of the Common Stock on May 2, 2008, the last business day of the registrant's most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $1.5 billion. The number of shares of Common Stock outstanding as of December 12, 2008 was 35...

  • Page 10
    ... Officers of the Registrant ...3 11 17 18 18 19 20 PART II ITEM 5. ITEM 6. ITEM 7. ITEM 7A. ITEM 8. Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities ...The Toro Company Common Stock Comparative Performance Graph ...Selected Financial...

  • Page 11
    ... trademarks of Toroா, Exmarkா, Irritrolா, Hayterா, Popeா, Lawn-Boyா, and Lawn Genieா, most of which are registered in the United States and/or in the principal foreign countries where we market such products. This report also contains trademarks, trade names, and service marks that are...

  • Page 12
    ... equipment. We also manufacture and market underground irrigation systems, including sprinkler heads, controllers, and electric, battery-operated, and hydraulic valves. Our golf course irrigation systems are designed to use computerized management systems and a variety of technologies to help...

  • Page 13
    ... solutions equipment by offering a complete line of pruners, loppers, debris management equipment, and accessories. Retail Irrigation Products. We design and market retail irrigation products under the Toro and Lawn Genie brand names. In Australia, we also design and market underground and hose-end...

  • Page 14
    ... invest in tooling for new products and manufacturing equipment. engines, hydraulic components, transmissions, plastic resin, and electric motors purchased from several suppliers around the world. Service and Warranty Our products are warranted to ensure customer confidence in design, workmanship...

  • Page 15
    ... foreign distributors, as well as a large number of outdoor power equipment dealers, hardware retailers, home centers, and mass retailers in more than 90 countries worldwide. Residential products, such as walk power mowers, riding products, and snow throwers, are sold to distributors, including Toro...

  • Page 16
    ... Toroா, Exmarkா, Irritrolா, Hayterா, Popeா, Lawn-Boyா, and Lawn Genieா products. We advertise our residential products during appropriate seasons throughout the year on television, radio, in print, and via the Internet. Professional products are advertised in print and through direct...

  • Page 17
    ... party financing company to provide financing programs under a private label program in the U.S. This program, offered primarily to Toro and Exmark dealers, provides end-user customers a revolving line of credit for Toro and Exmark products, parts, and services. Distributor Financing. Occasionally...

  • Page 18
    .... We have filed with the New York Stock Exchange (NYSE) the CEO certification regarding our compliance with the NYSE's corporate governance listing standards as required by NYSE Rule 303A.12(a) on March 14, 2008. Forward-Looking Statements This Annual Report on Form 10-K contains, or incorporates...

  • Page 19
    ... segment products are sold by distributors or dealers, or directly to government customers, rental companies, and professional users engaged in maintaining and creating landscapes, such as golf courses, sports fields, municipal properties, and residential and commercial landscapes. Accordingly...

  • Page 20
    ... 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, some which have...

  • Page 21
    ... business and operating results. • difficulties in managing and staffing international operations and increases in infrastructure costs including legal, tax, accounting, and information technology; • the imposition of additional U.S. and foreign governmental controls or regulations; new trade...

  • Page 22
    ...worldwide credit markets. The failure of one or more counterparties to our foreign currency exchange rate contracts to fulfill their obligations to us could adversely affect our operating results. We manufacture our products at and distribute our products from several locations in the United States...

  • Page 23
    ... third party financing company to provide financing programs under a private label program offered primarily to Toro, Lawn-Boy, and Exmark dealers that provides our end-user customers a revolving line of credit for Toro and Exmark products, parts, and services. The availability of financing by third...

  • Page 24
    ...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 25
    ... higher than those currently being paid, make other distributions to our shareholders or redeem shares of our common stock. These provisions may limit our ability to conduct our business, take advantage of business opportunities, and respond to changing business, market, and economic conditions...

  • Page 26
    ... Owned Leased Products Manufactured / Use Corporate headquarters, warehouse, and test facility Components for professional and residential products, distribution center Professional and residential parts distribution center Professional and residential products Professional products and warehouse...

  • Page 27
    ...Textron alleges that we willfully infringe certain claims of three Textron patents by selling our Groundsmasterா commercial mowers. Textron seeks damages for our past sales and an injunction against future infringement. In August and November 2005, we answered the complaint, asserting defenses and...

  • Page 28
    ... served as Managing Director, Exmark. Vice President, Finance and Chief Financial Officer since February 2006. From June 1997 to January 2006, he served as Vice President Finance, Treasurer and Chief Financial Officer. Richard W. Rodier 48, General Manager, Landscape Contractor Business - Toro Mark...

  • Page 29
    PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES Toro common stock is listed 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 ...

  • Page 30
    ... The Black & Decker Corporation, Briggs & Stratton Corporation, Caterpillar Inc., Crane Co., Cummins Engine Company, Inc., Deere & Company, Dover Corporation, Flowserve Corporation, General Cable Corporation, Harsco Corporation, Illinois Tool Works Inc., International Game Technology, ITT Industries...

  • Page 31
    ... OVERVIEW We design, manufacture, and market professional turf maintenance equipment and services, turf and agricultural micro-irrigation systems, landscaping equipment, and residential yard and irrigation products worldwide. We sell our products through a network of distributors, dealers, hardware...

  • Page 32
    ... annual revenue growth goal of our GrowLean initiative. However, we are investing in new product development, marketing, distribution, and other strategies to help build market share and strengthen our brands worldwide. At the same time, we are pursuing targeted acquisitions using a disciplined...

  • Page 33
    ... increase our market share by enhancing our product offering with innovative new and improved products. For example, in fiscal 2009 we plan to increase our product offering of landscape contractor equipment with a next generation line of zero-turn radius riding mowers and GrandStandீ premium stand...

  • Page 34
    ... for our products in international markets, particularly in the golf market, and the successful introduction of new products. • A weaker U.S. dollar during most of fiscal 2008 compared to other currencies in which we transact business accounted for approximately $28 million of our sales growth...

  • Page 35
    ... of snow fall in 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...

  • Page 36
    ... in the sports fields and grounds markets resulted in higher equipment product sales, as well as the success of new products introduced within the past two years. Somewhat offsetting those positive factors were lower shipments of landscape contractor equipment due mainly to efforts to reduce field...

  • Page 37
    ...snow thrower product sales in North America due to heavy snow falls during the winter season of 2007-2008 and low field inventory levels entering the upcoming 2008-2009 winter season. • Continued strong demand in international markets, mainly for riding products and Pope products sold in Australia...

  • Page 38
    ...sales at a company-owned distributor. Operating Loss. Operating loss for the other segment in fiscal 2008 increased by 5.6 percent compared to fiscal 2007. This loss increase was primarily attributable to foreign currency exchange rate losses in fiscal 2008 compared to foreign currency exchange rate...

  • Page 39
    ... was a 25 percent increase over our cash dividend of $0.12 per share paid each quarter in fiscal 2007. 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, capital...

  • Page 40
    ... during fiscal 2008 by Standard and Poor's Ratings Group at BBB- and by Moody's Investors Service at Baa3. 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...

  • Page 41
    ... financing company to provide lease-financing options to golf course and sports fields and grounds equipment customers in the United States and Europe. The purpose of these agreements is to increase sales by giving buyers of our products alternative financing options when purchasing our products...

  • Page 42
    ... of Southern Green's versatile line of Soil Relieverா aerators helps grow our offering of highly-productive turf cultivation equipment and provides entry into a new product category for our golf course and sports field markets. In fiscal 2008, we also completed the purchase of Turf Guard wireless...

  • Page 43
    ... products sold to distributors, volume discounts, retail financing support, floor planning, cooperative advertising, commissions, and other sales discounts and promotional programs. The estimates for sales promotion and incentive costs are based on the terms of the arrangements with customers...

  • Page 44
    ... 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 are manufactured...

  • Page 45
    ... are 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...

  • Page 46
    ... 31, 2008. /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 procedures is included in Part II, Item 9A, ''Controls and Procedures...

  • Page 47
    ... statements and financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan...

  • Page 48
    ... Selling, general, and administrative expense Earnings from operations Interest expense Other income, net Earnings before income taxes Provision for income taxes Net earnings Basic net earnings per share of common stock Diluted net earnings per share of common stock Weighted-average number of shares...

  • Page 49
    ...-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 Other long-term liabilities Stockholders' equity: Preferred stock, par value...

  • Page 50
    ... 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 in cash and cash equivalents Cash and cash equivalents as of the beginning of the fiscal year Cash and cash equivalents as of the end...

  • Page 51
    ... 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 52
    ...Property, plant, and equipment are carried at cost. The company provides for depreciation of plant and equipment utilizing the straight-line method over the estimated useful lives of the assets. Buildings, including leasehold improvements, are generally depreciated over 10 to 45 years, and equipment...

  • Page 53
    ...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 54
    ... used by the company as a marketing tool to assist customers to buy inventory. The financing costs for distributor and dealer inventories were $12,597, $13,559, and $13,952 for the fiscal years ended October 31, 2008, 2007, and 2006, respectively. Sales Promotions and Incentives At the time of sale...

  • Page 55
    ... time advertising takes place. Cooperative advertising represents expenditures for shared advertising costs that the company reimburses to customers. These obligations are accrued and expensed when the related revenues are recognized in accordance with the programs established for various product...

  • Page 56
    .... The acquisition of Southern Green's versatile line of Soil Relieverா aerators helps grow Toro's offering of highly-productive turf cultivation equipment and provides entry into a new product category for its golf course and sports field markets. The purchase price was $4,900, with $3,430...

  • Page 57
    ..., the company completed the purchase of certain assets and assumed certain liabilities of Allen Hover Mower. Allen Hover Mower sells walk power mowers worldwide for the golf course and grounds maintenance markets that are specifically designed to perform well on steep inclines. The purchase price of...

  • Page 58
    ...) to purchase the number of shares of common stock of Toro having a market value of twice the exercise price of the right. During the term of the Rights Agreement, the Board of Directors was permitted to redeem the rights for $0.0025 per right at any time before a person or group acquired beneficial...

  • Page 59
    ...,020 $192,754 During the fiscal years ended October 31, 2008, 2007, and 2006, respectively, $3,522, $13,775, and $13,131 was added to stockholders' equity reflecting the permanent book to tax difference in accounting for tax benefits related to employee stock-based award transactions. Included in...

  • Page 60
    ... company's stock option plans, certain employees and non-employee directors have been granted options to purchase shares of the company's common stock at prices equal to the fair market value of the company's common stock on the date the option was granted, as reported by the New York Stock Exchange...

  • Page 61
    ... years ended October 31, 2008, 2007, and 2006, respectively. The company also sponsors a plan that provides health-care benefits to eligible employees upon retirement, up to age 65. The health-care benefit plan is contributory with retiree contributions Assumed trend rates for health-care costs...

  • Page 62
    ... service cost (credit) $ (32) 75 Total $ 159 (118) During the first quarter of fiscal 2007, the company began to offer participants in the company's deferred compensation plans the option to invest their deferred compensation in multiple investment options. At the same time, the company elected...

  • Page 63
    ...commercial landscapes, as well as directly to government customers and rental companies. The residential segment consists of walk power mowers, riding mowers, snow throwers, homeowner-installed irrigation systems, replacement parts, and electrical home solutions products, including trimmers, blowers...

  • Page 64
    ... October 31, 2008, the company had $3,136 of noncancelable purchase commitments with some suppliers for materials and supplies as part of the normal course of business. Total rental expense for operating leases was $20,428, $19,677, and $19,448 for the fiscal years ended October 31, 2008, 2007, and...

  • Page 65
    ..., 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 (USPTO) and foreign patent offices. Management believes these activities help...

  • Page 66
    ... principally of accounts receivable that are concentrated in two business segments: professional and residential 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...

  • Page 67
    ... internal controls. The company's management evaluated, with the participation of the company's Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of the company's disclosure controls and procedures as of the end of the period covered by this Annual...

  • Page 68
    ... report on Form 10-Q for the quarterly period ended August 1, 2008. The company has a Code of Ethics for its CEO and Senior Financial Officers, a copy of which is posted on the company's web site at www.thetorocompany.com (select the ''Investor Information'' link and then the ''Corporate Governance...

  • Page 69
    ... consolidated financial statements of The Toro Company and its subsidiaries are included in Part II, Item 8, ''Financial Statements and Supplementary Data'' of this report: • Management's Report on Internal Control over Financial Reporting. • Report of Independent Registered Public Accounting...

  • Page 70
    ... of Nonqualified Stock Option Agreement between The Toro Company and its Officers and other employees (filed herewith).* 10.22 Form of Performance Share Award Agreement (incorporated by reference to Exhibit 10(t) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 2007...

  • Page 71
    ...to Exhibit 10(s) to Registrant's Annual Report on Form 10-K for the fiscal year ended October 31, 2005). 10.29 Amendment No. 2 to Credit Agreement dated as of January 10, 2007, among The Toro Company, Toro Credit Company, Toro Manufacturing LLC, Exmark Manufacturing Company Incorporated, and certain...

  • Page 72
    ... marketing programs 1 Deductions2 $207,788 200,165 187,850 2 Provision consists of rebates, cooperative advertising, floor planning costs, commissions, and other promotional program expenses. The expense of each program is either classified as a reduction of net sales or as a component of selling...

  • Page 73
    ..., thereunto duly authorized. THE TORO COMPANY (Registrant) /s/ Stephen P. Wolfe Stephen P. Wolfe Vice President, Finance and Chief Financial Officer By Dated: December 22, 2008 Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by...

  • Page 74
    ...TORO COMPANY AND SUBSIDIARIES Computation of Ratio of Earnings to Fixed Charges (Not Covered by Independent Auditors' Report) 10/31/2008 10/31/2007 10/31/2006 10/31/2005 10/31/2004 Earnings before income taxes Plus...,237,000 7.96 Interest expense Rentals (interest expense) Total fixed charges...

  • Page 75
    ... 12, 2008. Name State or Other Jurisdiction of Incorporation Percentage of Voting Securities Owned Exmark Manufacturing Company Incorporated Hayter Holdings Limited Hayter Limited The Holiman Company, Inc. Irritrol Systems Europe, S.r.L. Irritrol Systems Europe Productions, S.r.L. MTI Distributing...

  • Page 76
    ... statement schedule for each of the years in the three year period ended October 31, 2008, and the effectiveness of internal control over financial reporting as of October 31, 2008, which report is included in the Annual Report on Form 10-K of The Toro Company. /s/ KPMG LLP Minneapolis, Minnesota...

  • Page 77
    ... not material, that involves management or other employees who have a significant role in the registrant' s internal control over financial reporting. Date: December 22, 2008 /s/ Michael J. Hoffman Michael J. Hoffman Chairman of the Board, President and Chief Executive Officer (Principal Executive...

  • Page 78
    ... 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 22, 2008 /s/ Stephen P. Wolfe Stephen P. Wolfe Vice President, Finance and Chief Financial Officer (Principal Financial Officer)

  • Page 79
    ...fiscal year ended October 31, 2008 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Michael J. Hoffman, Chairman of the Board, President and Chief Executive Officer of the Company, and Stephen P. Wolfe, Vice President, Finance and Chief Financial Officer of...