OVERVIEW
The Toro Company is in the business of designing, manufacturing, and marketing professional turf maintenance equipment and services, turf and agricultural irrigation systems, landscaping equipment, and residential yard products worldwide. Our products are sold through a network of distributors, dealers, hardware retailers, home centers, mass retailers, and over the Internet, mainly through Internet retailers. Our businesses are organized into three segments: professional, residential, and distribution. A fourth segment called “other” consists of corporate and financing activities. Our emphasis is to provide well-built, dependable, and innovative products supported by an extensive service network. A significant portion of our revenues has historically been attributable to new and enhanced products.
Financial Overview
| (Dollars in thousands) | 2004 vs. 2003 | |||||||||||
| Fiscal years ended October 31 | 2004 | 2003 | % change | |||||||||
Professional | $ | 1,028,941 | $ | 929,434 | 10.7 | % | ||||||
Residential | 554,334 | 506,466 | 9.5 | |||||||||
Distribution | 152,234 | 133,957 | 13.6 | |||||||||
Other | (83,001 | ) | (73,269 | ) | (13.3 | ) | ||||||
Total net sales | $ | 1,652,508 | $ | 1,496,588 | 10.4 | % | ||||||
Our financial condition remains strong with lower average debt levels due to lower average inventory levels and higher earnings compared to the prior fiscal year, offset by only a modest increase in average receivables. This has allowed us to reinvest in product development, brand building, and new technologies.
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Initiative Accelerating our Future
Lean/ No Waste.The mindset of driving change and process improvement developed with our prior “5 by Five” initiative during fiscal years 2000 through 2003 has continued with this new initiative that is linked to applying “Lean” methods in our manufacturing plants and offices. Throughout the organization, we are rethinking our business and manufacturing processes to improve our efficiency and responsiveness. Employees are engaged in cross-functional teams to take a fresh look at their jobs and processes to eliminate waste and unnecessary steps that do not add value while delivering measurable gains in productivity, throughput, and quality.
Investing in Growth.At the same time, we recognize the need to drive stronger revenue growth through accelerated investments in innovative products and services, product branding, new technologies, and expansion in current and new markets. We are redirecting a portion of our Lean/ No Waste savings to finding new and better solutions that address customer problems to create market differentiation, generate higher margins, and build strong and unique brands. As sales increase, we will continue to reinvest in research and development to sustain our legacy of market leadership.
Strengthening Culture.We are taking steps to continue to strengthen our long-standing cultural values that are designed to maximize our organizational effectiveness and creativity, with particular emphasis on teamwork and partnership, communication, job requirements, and customer responsiveness. We recognize that the collective contributions, energy, and commitment of our employees are the key factors in our success. Therefore, we will continue to invest in education, surveys, focus groups, and other methods to ensure all employees are engaged in a mindset of continuous improvement that will deliver sustainable results.
Leadership Transition
Significant Transactions and Financial Trends
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RESULTS OF OPERATIONS
Overview
Net Earnings
| Fiscal years ended October 31 | 2004 | 2003 | 2002 | |||||||||
Net sales | 100.0 | % | 100.0 | % | 100.0 | % | ||||||
Cost of sales | 64.1 | 64.2 | 65.3 | |||||||||
Gross profit | 35.9 | 35.8 | 34.7 | |||||||||
Selling, general, and administrative expense | (25.9 | ) | (27.2 | ) | (27.0 | ) | ||||||
Restructuring and other expense | – | (0.1 | ) | (0.6 | ) | |||||||
Interest expense | (0.9 | ) | (1.1 | ) | (1.4 | ) | ||||||
Other income, net | 0.2 | 0.7 | 0.5 | |||||||||
Provision for income taxes | (3.1 | ) | (2.6 | ) | (1.9 | ) | ||||||
Earnings before accounting change | 6.2 | % | 5.5 | % | 4.3 | % | ||||||
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Fiscal 2004 Compared With Fiscal 2003
| • | Market acceptance of new products introduced within the past two years across many product lines. |
| • | Continued increase in demand for landscape contractor equipment as a result of continued market growth and acceptance of new products. |
| • | Favorable currency rates that contributed approximately 1 percent of the sales growth for fiscal 2004. International sales grew 18.1 percent driven primarily by a weaker U.S. dollar and new product introductions. Disregarding currency effects, international sales were up 12.0 percent for fiscal 2004. |
| • | Higher distribution segment sales as a result of strong demand and improving economic conditions. |
Gross Profit.Gross profit as a percentage of net sales increased slightly by 0.1 percentage point from 35.8 percent in fiscal 2003 to 35.9 percent in fiscal 2004. This improvement was mainly the result of the following factors:
| • | Cost reduction efforts, including ongoing benefits from past and continuing profit improvement initiatives, as well as moving production to facilities with lower operating costs. |
| • | Lower manufacturing costs from increased plant utilization as a result of reduced excess manufacturing capacity, mainly related to increased demand for our products. |
| • | Higher international gross margins as a result of the weaker U.S. dollar. |
| • | Fiscal 2003 gross margins were negatively impacted by an impairment charge for automation equipment that was no longer used and subsequently disposed. |
| • | Rising steel and other commodity prices. |
| • | Increased outbound freight costs due to higher fuel costs and increased demand for transportation. |
Selling, General, and Administrative Expense (SG&A).SG&A expense increased 5.4 percent from fiscal 2003. SG&A expense as a percentage of net sales decreased to 25.9 percent in fiscal 2004 compared to sales growth27.2 percent in fiscal 2003. DilutedThe decrease in SG&A expense as a percentage of net earnings aresales was due primarily
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| • | A decline in bad debt expense due mainly to a recovery of a previously written off note receivable. |
| • | Costs for distributor changes in fiscal 2003 that did not occur in fiscal 2004. |
| • | Reduced warranty expense due mainly to lower claims experience on certain product lines. |
| • | Lower warehousing expenses due to consolidation and the reduction of the number of warehousing facilities utilized. |
| • | Increased investments in engineering, marketing, and information systems as part of our “6 + 8” initiative. |
| • | Higher incentive compensation costs due to the significant improvement in our financial performance, on which incentive compensation is based. In addition, the increase in Toro’s stock price during fiscal 2004 also contributed to higher compensation expense for our Performance Share Plan. See Note 10 of the notes to consolidated financial statements for additional information. |
Restructuring and Other (Income) Expense.Restructuring and other income for fiscal 2004 was $0.7 million compared to restructuring and other expense of $1.8 million in fiscal 2003. During fiscal 2003, we announced plans to close our two-cycle engine manufacturing facility located in Oxford, Mississippi that resulted in a pre-tax restructuring and other expense charge of $2.3 million. See Item 1, Environmental Matters and Other Governmental Regulation section for additional information. On April 30, 2004, we ceased operations at that facility. During fiscal 2004, we realized a low double-digitnet benefit of $0.2 million mainly as a result of selling assets that were previously identified for disposal in connection with the closure of this facility. We also realized a net benefit of $0.4 million due to the reversal of an impairment write down for the Madera, California facility in anticipation of the sale of that facility, which was sold during the first quarter of fiscal 2005 for a gain.
Interest Expense.Interest expense for fiscal 2004 declined 4.7 percent compared to fiscal 2003 due primarily to lower average debt levels as we continued to use earnings to finance operating activities and pay down debt.
Other Income, Net.Other income, net consists mainly of interest income, financing income, royalty income, litigation settlements and recovery, currency exchange rate overgains and losses, and equity losses from investments. Other income, net for fiscal 2004 decreased $6.7 million compared to fiscal 2003. This decrease was due mainly to the following factors:
| • | Litigation expense incurred in fiscal 2004. However, during fiscal 2003, we received proceeds from a legal settlement and insurance recoveries. |
| • | Equity losses incurred from an investment and a loss recognized for the sale of a business in fiscal 2004. |
Provision for Income Taxes.The effective tax rate for fiscal 2004 was 33.0 percent compared to 32.5 percent in fiscal 2003. The increase was due mainly to an increase in tax reserves for certain state and international issues, partially offset by a reduction in the tax on international operations.
Fiscal 2003 Compared With Fiscal 2002
| • | Market acceptance of new product introductions across many product lines. |
| • | Favorable currency rates that contributed approximately 1 percent of the sales growth for fiscal 2003. International sales grew 10.5 percent driven primarily by a weaker U.S. dollar, making our products less expensive in foreign currencies. Disregarding currency effects, international sales were up 3.7 percent for fiscal 2003 principally due to new product introductions. |
Gross Profit.Gross profit as a percentage of net sales increased 1.1 percentage points from 34.7 percent in fiscal 2002 to 35.8 percent in fiscal 2003. This increase was mainly the result of: (i) cost reduction efforts that included reducing raw material costs and moving production to facilities with lower operating costs; (ii) lower manufacturing costs from increased plant utilization as a result of reduced excess manufacturing capacity, mainly related to the closure of three facilities and increased demand for our products; (iii) a reduction of the gross profit elimination percentage due to a change in estimate applied to the ending Toro inventory value at our company-owned distributors; and (iv) the lower cost of the U.S. dollar to our foreign customers.
| • | Cost reduction efforts that included reducing raw material costs and moving production to facilities with lower operating costs. |
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| • | Lower manufacturing costs from increased plant utilization due to reduced excess manufacturing capacity, mainly related to the closure of three facilities and increased demand for our products. |
| • | A reduction of the gross profit elimination percentage due to a change in estimate applied to the ending Toro inventory value at our company-owned distributors. |
| • | Higher international gross margins as a result of the weaker U.S. dollar. |
| • | Higher inbound freight costs as we moved some of our production to Juarez, Mexico. |
| • | An impairment charge for automation equipment no longer used and subsequently disposed. |
Selling, General, and Administrative Expense (SG&A).SG&A expense increased 7.57.6 percent from last year.in fiscal 2003 compared to fiscal 2002. SG&A expense as a percentage of net sales increased slightly to 27.027.2 percent in fiscal 2003 compared to 26.927.0 percent in fiscal 2002. These increases were due primarily due to the following factors: (i) higher administrative expenses, mainly from increased investments in information systems and distributor changes; (ii) increased marketing expense tied to higher sales; (iii) higher incentive compensation costs due to successful achievement of financial performance which incentive compensation is based; and (iv) higher warranty expense due to higher sales volumes and changes in estimates.
| • | Higher administrative expenses, mainly from increased investments in information systems and distributor changes. |
| • | Increased marketing expense tied to higher sales. |
| • | Higher incentive compensation costs due to successful achievement of financial goals, on which incentive compensation is based. |
| • | Higher warranty expense due to higher sales volumes and changes in estimates. |
Restructuring and Other Expense (Income).Expense.Restructuring and other expense for fiscal 2003 was $1.8 million compared to $8.4 million in fiscal 2002. During fiscal 2003, we announced plans to close our two-cycle engine manufacturing facility located in Oxford, Mississippi that resulted in a pre-tax restructuring and other expense charge of $2.3 million. See Item 1, Environmental Matters and Other Governmental Regulation section for additional information. We also recorded a benefit of $0.2 million for the reversal of the remaining accrual for closing a facility in Australia, which was sold during fiscal 2003.
Interest Expense.Interest expense for fiscal 2003 declined 17.5 percent compared to fiscal 2002 due primarily to lower levels of average debt levels as we continuecontinued to use earnings to pay down debt.
Other Income, Net.Other income, net for fiscal 2003 increased $2.0$2.6 million or 32.934.7 percent compared to fiscal 2002. This increase was due mainly to the following factors: (i) proceeds from a legal settlement and (ii) insurance recoveries. These positive factors were somewhat offset by: (i)by higher levels of currency exchange rate losses; (ii)losses, lower levels of finance charge revenue;revenue, and (iii) reduced royalty income.
Provision for Income Taxes.The effective tax rate for fiscal 2003 was 32.5 percent compared to 33.0 percent in fiscal 2002, before a one-time federal tax refund of $1.8 million in fiscal 2002. Including the one-time federal tax refund, the effective tax rate was 31.0 percent for fiscal 2002. The decrease was due mainly to additional federal tax credits received in fiscal 2003.
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Fiscal 2002 Compared with Fiscal 2001
Gross Profit. Gross profit as a percentage of net sales was 34.7 percent in fiscal 2002 compared to 34.0 percent in fiscal 2001. This increase was mainly the result of: (i) cost reduction efforts that included moving production to lower cost facilities and (ii) lower material costs resulting from our “5 by Five” program initiatives. Somewhat offsetting those positive factors were: (i) a higher proportion of sales of the new line of Toro walk power mowers; (ii) higher manufacturing costs from lower plant utilization as we curtailed production levels in response to lower professional segment sales and to implement management’s efforts to reduce both customers’ and our inventory levels; (iii) higher floor plan expenses; and (iv) elimination of gross profit previously recorded with respect to sales of Toro products to a distributor that was experiencing financial difficulties and eventually acquired during fiscal 2003.
Selling, General, and Administrative Expense (SG&A). Adjusted to exclude goodwill amortization, SG&A expense increased 5.2 percent from the prior year. Factoring out the acquisition of a distribution company in fiscal 2001 and excluding goodwill amortization for the purpose of comparison, SG&A expense as a percentage of net sales was 26.8 percent in fiscal 2002 and 26.4 percent in fiscal 2001. This increase was due to the following factors: (i) higher bad debt expense; (ii) higher incentive compensation costs; (iii) increased legal and information service spending; and (iv) rising insurance costs.
Restructuring and Other Expense (Income). Restructuring and other expense for fiscal 2002 was $8.4 million, as previously mentioned. During fiscal 2001, we had pre-tax restructuring and other income of $0.7 million. This income was derived from the reversal of the remaining accrual for closing of the Sardis, Mississippi facility, which was sold in fiscal 2001.
Interest Expense. Interest expense for fiscal 2002 declined 10.3 percent compared to fiscal 2001 due primarily to lower levels of short-term debt as a result of using prior years’ earnings to pay down debt, improved asset management during the second half of fiscal 2002, and lower interest rates.
Other Income, Net. Other income, net for fiscal 2002 declined $1.5 million or 19.8 percent compared to fiscal 2001. This decrease was due to the following factors: (i) lower levels of finance charge revenue; (ii) lower currency exchange rate gains; (iii) increased litigation expense; and (iv) lower levels of insurance recoveries. Somewhat offsetting those negative factors were: (i) increased gains on the disposal of property, plant, and equipment, mainly on the sale of one of our owned facilities located in Riverside, California; (ii) lower levels of valuation charges for investments; and (iii) higher royalty income.
Provision for Income Taxes. The effective tax rate for fiscal 2002 was 33.0 percent compared to 37.0 percent in fiscal 2001, before a one-time federal tax refund of $1.8 million in fiscal 2002. Including the one-time federal tax refund, the effective tax rate was 31.0 percent for fiscal 2002. The decrease was due mainly to the adoption of SFAS No. 142 that eliminated goodwill amortization expense as of the beginning of fiscal 2002. Most of the goodwill amortization was not deductible for tax purposes. The tax rate decrease was also due to increased benefits from foreign tax strategies related to our foreign sales corporation. The one-time federal tax refund of $1.8 million related to our foreign sales corporation from prior fiscal years.
Cumulative Effect of Change in Accounting Principle.In connection with the adoption of SFAS No. 142, we performed an evaluation of goodwill as of November 1, 2001. The results of this evaluation indicated that goodwill related to the agricultural irrigation reporting unit was impaired. We therefore recognized a $24.6 million non-cash charge, net of income tax benefit of $0.5 million, as a cumulative effect of change in accounting principle in fiscal 2002.
Business Segments
As more fully described in Note 12 of the notes to consolidated financial statements, we operate in three reportable segments;business segments: professional, residential, and distribution. A fourth reportable segment called “other” consists of corporate and financing functions. Operating earnings (loss) by segmentfor each of our three business segments is defined as earnings (loss) from operations plus other income, net,net. Operating losses for the professional, residential, and distribution segments. The otherour fourth “other” segment operating loss consists of corporate activities, including corporate financing activities, other income, net, and interest expense.
Professional –
| (Dollars in millions) | |||||||||||||
| Fiscal years ended October 31 | 2004 | 2003 | 2002 | ||||||||||
Net sales | $ | 1,028.9 | $ | 929.4 | $ | 862.3 | |||||||
Operating earnings | 173.1 | 146.8 | 111.7 | ||||||||||
As a percent of net sales | 16.8 | % | 15.8 | % | 13.0 | % | |||||||
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Net Sales.Worldwide net sales for the professional segment in fiscal 2004 were up 10.7 percent compared to fiscal 2003 as a result of the following factors:
| • | Worldwide shipments of most product lines were up driven primarily by our success of introducing new products within the past two years. |
| • | Continued increase in demand for landscape contractor equipment as a result of the growing market and our customers’ acceptance of new products. |
| • | International sales were up significantly due to strong demand and the successful introduction of new products as well as a weaker U.S. dollar. |
| • | Overall improving economic conditions have resulted in strong retail demand in most of our businesses. |
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Operating Earnings.Operating earnings for the professional segment were $146.8 millionin fiscal 2004 increased 18.0 percent compared to fiscal 2003. Expressed as a percentage of net sales, professional segment operating margins increased to 16.8 percent compared to 15.8 percent in fiscal 2003. The following factors impacted professional segment operating earnings:
| • | Lower SG&A expense as a percentage of net sales contributed to the operating earnings improvement as we leveraged the fixed portion of SG&A costs over higher sales volumes and reduced warranty expense. |
| • | Gross margin rose slightly in fiscal 2004 compared to fiscal 2003 due to the same reasons discussed previously in the Gross Profit section. |
| • | Somewhat offsetting the operating earnings improvement was lower other income in fiscal 2004 as we received a gain from a legal settlement in fiscal 2003. |
Residential –
| (Dollars in millions) | |||||||||||||
| Fiscal years ended October 31 | 2004 | 2003 | 2002 | ||||||||||
Net sales | $ | 554.3 | $ | 506.5 | $ | 474.3 | |||||||
Operating earnings | 61.8 | 55.5 | 51.9 | ||||||||||
As a percent of net sales | 11.1 | % | 11.0 | % | 10.9 | % | |||||||
Net Sales.Worldwide net sales for the residential segment in fiscal 2004 were up 9.5 percent compared to fiscal 2003 as a result of the following factors:
| • | Snow thrower sales were up due to customer acceptance of new products and strong demand as a result of heavy snowfalls in key markets during the 2003-2004 winter season that depleted field inventory levels. |
| • | Strong shipments of walk power mowers driven by the introduction of new models as well as strong retail demand. |
| • | Home solutions product shipments increased as a result of additional shelf placement and new product introductions. |
| • | Riding product sales were slightly higher due to initial stocking shipments of new products sold under a private label. However, other riding product sales declined due to continued strong competition. |
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| • | International sales benefited from a weaker U.S. dollar as well as strong sales of Pope products in Australia and increased sales of snow throwers, home solutions, and walk power mower products. |
Operating Earnings.Operating earnings for the residential segment in fiscal 2004 increased 6.811.4 percent compared to fiscal 2003. Expressed as a percentage of net sales, residential segment operating margins slightly increased to 11.1 percent compared to 11.0 percent in fiscal 2003. The following factors impacted residential segment operating earnings:
| • | Lower SG&A expense as a percentage of net sales contributed to the operating earnings improvement as we leveraged the fixed portion of SG&A costs over higher sales volumes. |
| • | Somewhat offsetting the operating earnings improvement was lower gross margin as a result of rising steel and other commodity costs and increased freight expense. |
| • | In addition, fiscal 2003 operating earnings were negatively affected by a restructuring and other expense charge of $2.2 million mainly related to the closure of our two-cycle engine manufacturing facility. |
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Distribution
| (Dollars in millions) | ||||||||||||
| Fiscal years ended October 31 | 2004 | 2003 | 2002 | |||||||||
Net sales | $ | 152.2 | $ | 134.0 | $ | 158.9 | ||||||
Operating earnings (loss) | 2.2 | �� | (0.5 | ) | 2.3 | |||||||
Net Sales.Net sales for the distribution segment in fiscal 2004 increased 13.6 percent compared to fiscal 20032003. The sales increase was due primarily to strong demand for commercial equipment and irrigation products as we continue to experience benefits generated by “5 by Five” initiatives in addition to expecteda result of improving economic conditions, higher sales volumes.
Distribution –of snow thrower products, and the addition of sales from a southeastern-based distributorship acquired during fiscal 2003. Factoring out sales from the acquired distributorship and a distribution company sold effective December 31, 2002, sales increased 12.9 percent compared to fiscal 2003.
Operating Earnings (Losses) Earnings..Operating earnings for the distribution segment in fiscal 2004 were $2.2 million compared to operating losses of $0.5 million in fiscal 2003. This favorable change in operating earnings was due mainly to higher sales volumes and operating improvements at the company-owned distributorships.
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Other –
Operating loss.
FINANCIAL CONDITION Working Capital Average short-term debt decreased in fiscal Capital Expenditures and Other Long-Term Assets 21 Capital Structure Total debt to capitalization ratio Liquidity and Capital Resources Cash Flow Cash Cash Flows Used in Cash Flows Used in Credit Lines and Other Capital 22 Share Repurchase Plan Off-Balance Sheet Arrangements and Contractual Obligations Wholesale Financing.Toro Credit Company (TCC), a wholly owned financing subsidiary, provides financing for our North American Toro distributors and approximately 200 domestic dealers for select products that we manufacture. Independent North American Toro and Exmark distributors and dealers that do not finance through TCC generally finance their inventories with third party financing companies. 23 End-User Financing. Distributor Financing.We enter into long-term loan Purchase Commitments.We have purchase commitments with some suppliers for materials and supplies as part of the normal course of business. There are a limited number of supply contracts that contain penalty provisions for Contractual Obligations.The following table summarizes our contractual obligations as of October 31, As of October 31, Market Risk 24 Investment in Affiliate and Divestiture Critical Accounting Policies and Estimates Warranty Reserve.Warranty coverage on our products ranges from a period of six months to seven years, and covers parts, labor, and other expenses for non-maintenance repairs, provided operator abuse, improper use or negligence did not necessitate the repair. Accounts and Notes Receivable Valuation.We value accounts and notes receivable, net of an allowance for doubtful accounts. Each quarter, we estimate our ability to collect outstanding receivables 25 New Accounting Pronouncements to We are exposed to market risk stemming from changes in foreign currency exchange rates, interest rates, and commodity prices. We are also exposed to equity market risk pertaining to the trading price of our common stock. Changes in these factors could cause fluctuations in our net earnings and cash flows. See further discussions on these market risks below. Foreign Currency Exchange Rate Risk.In the normal course of business, we actively manage the exposure of our foreign currency market risk by entering into various hedging instruments, authorized under company policies that place controls on these activities, with counterparties that are highly rated financial institutions. Our hedging activities involve the use of a variety of derivative financial instruments. We use 26 Our net investment in foreign subsidiaries translated into U.S. dollars is not hedged. Any changes in foreign currency exchange rates would be reflected as a foreign currency translation adjustment, a component of accumulated other comprehensive loss in stockholders’ equity, and would not Interest Rate Risk.Our market risk on interest 27 Report of Independent The Stockholders and Board of Directors We have audited the accompanying consolidated balance sheets of The Toro Company and Minneapolis, Minnesota The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements. The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements. The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements. The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements. Basis of Consolidation Accounting Estimates Reclassifications Cash and Cash Equivalents Receivables Inventories Property and Depreciation During fiscal years 2004, 2003, and 2002, the company recorded depreciation expense of $34,959,000, $33,054,000, and $29,733,000, respectively. Goodwill and Other Intangible Assets 33 Impairment of Long-Lived and Intangible Assets Accrued Warranties Insurance Derivatives Foreign Currency Translation and Transactions Income Taxes Revenue Recognition 34 Cost of Financing Distributor/ Dealer Inventory Advertising Stock-Based Compensation The fair value of stock options is estimated as of the grant date using the Black-Scholes option pricing model with the following weighted average assumptions for options granted in the following fiscal years: The weighted average fair market value of options issued for the fiscal years ended October 31, 2004, 2003, 35 Net Earnings Per Share Calculation BASIC DILUTIVE New Accounting Pronouncements In fiscal 2004, Toro made an equity investment in a start-up technology company that produces innovative irrigation controllers designed to conserve water usage. In fiscal 2003, Toro completed the purchase of R & D Engineering, a company in the business of designing patented wireless rain and freeze switches for residential irrigation systems. The company also acquired a southeastern-based U.S. distributing In fiscal 2003, the company announced plans to close its two-cycle engine manufacturing facility located in Oxford, Mississippi, which Other income (expense) is as follows: Goodwill – 37 Other Intangible Assets – As of October 31, A summary of long-term debt is as follows: Stock repurchase program – 38 Shareholder rights plan –Under the terms of a Rights Agreement dated as of May 20, 1998 between Toro and Wells Fargo Bank, Stock A reconciliation of the statutory federal income tax rate to the company’s consolidated effective tax rate is summarized as follows: 39 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 fair market value of the company’s common stock on the date the option was granted. Options granted through fiscal 40 The company maintains The Toro Company Investment, Savings and Employee Stock Ownership Plan for eligible employees. The company’s expenses under this plan were $14,200,000, $13,493,000, 41 Toro develops, manufactures, and sells a wide variety of turf maintenance products used in the professional and residential markets. The company’s principal businesses are based on Toro’s ability to provide comprehensive, integrated solutions that create, maintain, enhance, and conserve beautiful and functional landscapes. The company’s reportable segments are strategic business units that offer different products and services and are managed separately based on fundamental differences in their operations. Reportable Segments 42 The following table shows The following table presents the details of the other segment earnings (loss) before income taxes: Geographic Data Leases Customer Financing 43 End-User Financing – Purchase Commitments Letters of Credit Litigation Concentrations of Credit Risk Derivative Instruments and Hedging Activities 44 Fair Value Summarized quarterly financial data for fiscal None. The company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. None. See “Executive Officers of the Registrant” in Part I of this report for information regarding the executive officers of the company, which is incorporated by reference in this section. Information concerning executive compensation and other information required by Item 11 of Part III of this report is incorporated herein by reference to information to be contained under the caption “Executive Compensation” and “Proposal One – Election of Directors – Board Compensation” in the company’s Proxy Statement to be filed with the Securities and Exchange Commission with respect to the next annual meeting of stockholders, which involves the election of directors or, if such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, such information will be filed as part of an amendment to this Form 10-K not later than the end of the 120-day period. Information regarding the security ownership of certain beneficial owners and management of the company, equity compensation plan information, and other information required by Item 12 of Part III of this report is incorporated herein by reference to information to be contained under the captions “Stock Ownership” and “Executive Compensation – Equity Compensation Plan Information” in the company’s Proxy Statement to be filed with the Securities and Exchange Commission with respect to the next annual meeting of stockholders, which involves the election of directors or, if such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, such information will be filed as part of an amendment to this Form 10-K not later than the end of the 120-day period. 47 Information regarding the company’s independent auditor fees and services and other information required by Item 14 of Part III of this report is incorporated herein by reference to information to be contained under the captions “Proposal Two – Ratify Selection of Independent Auditor – Audit, Audit-Related, Tax and Other Fees” and “Proposal Two – Ratify Selection of Independent Auditor – Auditor Fees Pre-approval Policy” in the company’s Proxy Statement to be filed with the Securities and Exchange Commission with respect to the next annual meeting of stockholders, which involves the election of directors or, if such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, such information will be filed as part of an amendment to this Form 10-K not later than (a) 1. List of Financial Statements (a) 2. List of Financial Statement Schedules All other schedules are omitted because the required information is inapplicable or the information is presented in the consolidated financial statements or related notes. (a) 3. List of Exhibits Exhibit Number Description 3(ii) and 4(b) Bylaws of Registrant (incorporated by reference to Exhibit 4(c) to Registrant’s Current Report on Form 8-K dated May 28, 2003, Commission File No. 1-8649). 4(c) Specimen form of The Toro Company Common Stock 4(d) 4(e) Certificate of Adjusted Purchase Price or Number of Shares dated April 14, 2003 filed by Registrant with Wells Fargo Bank Minnesota, N.A., as Rights Agent, in connection with Rights Agreement dated as of May 20, 1998 (incorporated by reference to Exhibit 2 to Registrant’s Amendment No. 1 to Registration Statement on Form 8-A/A dated April 14, 2003, Commission File No. 1-8649). 4(f) Indenture dated as of January 31, 1997, between Registrant and First National Trust Association, as Trustee, relating to the Registrant’s 7.125% Notes due June 15, 2007 and its 7.80% Debentures due June 15, 2027 (incorporated by reference to Exhibit 4(a) to Registrant’s Current Report on Form 8-K for June 24, 1997, Commission File No. 1-8649). 10(a) Form of Employment Agreement in effect for executive officers of Registrant (incorporated by reference to Exhibit 10(a) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 30, 1999).* 48 10(b) Offer letter dated October 14, 2004 between The Toro Company and Michael J. Hoffman (incorporated by reference to Exhibit 10.39 to Registrant’s Current Report on Form 8-K dated October 14, 2004, Commission File No. 1-8649).* 10(c) The Toro Company Directors Stock Plan (incorporated by reference to Exhibit 10(b) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 28, 2000).* 10(j) The Toro Company Supplemental Retirement Plan (incorporated by reference to Exhibit 10(i) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 30, 1999).* 10(o) Form of Stock Option Agreement between The Toro Company and its non-employee directors (incorporated by reference to Exhibit 10(q) Form of Performance Share Award Agreement between The Toro Company and its officers (incorporated by reference to Exhibit 3 to Registrant’s Current Report on Form 8-K dated December 2, 2004, Commission File No. 1-8649).* 10(r) Credit Agreement dated as of 12 Computation of Ratio of Earnings to Fixed Charges 21 Subsidiaries of Registrant 23 Consent of Independent 49 31(a) Certification Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002). 31(b) Certification Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002). 32 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) THE TORO COMPANY AND SUBSIDIARIES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.Operating loss.2003 that did not occur in fiscal 2004.werewas lower interest expense, higher litigation recovery, and a reduction of the gross profit elimination percentage due to a change in estimate applied to the ending Toro inventory value at our company-owned distributors. Operating loss for the other segment in fiscal 2002 increased 16.2 percent compared to fiscal 2001. This unfavorable change was due to higher incentive compensation, increased bad debt expense, higher legal costs, rising insurance costs, and higher information service spending, although the increases were somewhat offset by a decline in interest expense.17strong.strong with continued emphasis on improving asset management. Our average working capital for fiscal 20032004 was $339.0$364.3 million compared to $282.6$339.0 million in fiscal 2002,2003, an increase of 20.07.5 percent. This increase was due mainly to higher average current assets and lower average short-term debt and higher average cash and cash equivalents, somewhat offset by higher average accrued liabilities in fiscal 20032004 compared to fiscal 2002.2003 as a result of increased average incentive and sales-based marketing accruals.performance:performance. (Dollars in millions) (Dollars in millions) (Dollars in millions) Fiscal years ended October 31 2003 2002 2004 2003 $ 32.3 $ 14.9 $ 57.5 $ 32.3 36.8 65.5 6.1 36.8 258.3 244.6 246.6 258.3 343.4 324.6 349.1 343.4 84 85 77 84 3.72 x 3.74 x 4.30 x 3.72 x 20032004 compared to fiscal 20022003 primarily because we used cash generated from earnings to pay down debt, which also resulted in higher average cash and cash equivalents in fiscal 20032004 compared to fiscal 2002.2003. The increase in average receivables, net was due primarily to higher sales volumes and higher foreign currency exchange rates as a result of the weaker U.S. dollar. However, averageAverage days outstanding for receivables improved to 77 days in fiscal 2004 compared to 84 days in fiscal 2003 compared to 85 days in fiscal 2002 due primarily to a higher proportion of sales that have shorter payment terms.increased 5.6decreased 4.6 percent and average inventory turnover was down slightlyimproved in fiscal 20032004 compared to fiscal 2002.2003. This unfavorablefavorable change was a result of prebuilding some residential segment products together with lowerdriven by higher than expectedanticipated sales during fiscal 2003. In addition, fiscal 2002 averagevolumes and efforts to improve inventory levels were unusually low as we worked to reduce our professional segment inventory levels through production cuts as well as greater than expected demand for the walk power mower line introduced in fiscal 2002, which resulted in our decision to prebuild product for fiscal 2003. Higher foreign currency exchange rates also contributed to the higher average inventory levels in fiscal 2003 compared to fiscal 2002.turnover.20042005 will increase compared to fiscal 20032004 due to higher planned sales volumes. However, weWe anticipate both average days outstanding for receivables and average inventory turnover to slightly improve in fiscal 20042005 compared to fiscal 20032004 as we continue efforts to improve asset utilization.Long-term assets as of October 31, 2003 were $253.5 million compared to $254.0 million as of October 31, 2002. Net property, plant, and equipment increased by 1.53.5 percent in fiscal 2004 compared to fiscal 2003. However, capital expenditures were 5.7 percent lower in fiscal 2004 compared to fiscal 2003. This decline was due primarily to higher spending on production equipment. Goodwillequipment and other assets slightly increased fromtooling expenditures in fiscal 2002 due mainly to2003 for new products we introduced within the acquisition of R & D Engineering, a provider of patented wireless rain and freeze switches for residential irrigation systems.20042005 are planned to be slightlyapproximately $5 to $10 million higher than fiscal 2004 as we continue to invest in information service technology, manufacturing equipment, and tooling for new products.the renovationan increase of net property, plant, and expansion of some facilities.equipment and long-term loans refinanced from account receivable balances discussed previously.ratios:ratios. (Dollars in millions) (Dollars in millions) (Dollars in millions) Fiscal years ended October 31 2003 2002 2004 2003 $ 2.1 $ 1.2 $ 1.1 $ 2.1 178.9 194.6 175.1 178.9 437.2 365.3 395.6 437.2 29.3 % 34.9 % 30.8 % 29.3 % The totalimprovementwas slightly worse in fiscal 20032004 compared to fiscal 2002 was2003 due mainly to lower debta decrease in stockholders’ equity as cash-related earnings were used to pay down debt.Stock Split. On March 20, 2003, our Boarda result of Directors declared a two-for-one splitsignificantly higher amounts of shares of our common stock effectedwe repurchased in the form of a 100 percent stock dividend issuedfiscal 2004 compared to stockholders of record as of April 1, 2003 and paid on April 14,fiscal 2003. As a result of this action, approximately 12.5 million shares were issued. Par value of the common stock remains at $1.00 per share and accordingly, approximately $12.5 million was transferred from additional paid-in capital to common stock. All references to the number of common shares and per common share amounts have been adjusted to give retroactive effect to the stock split for all periods presented. and replacement parts inventory, capital expenditures, expansion and upgrading of existing facilities, as well as for financing receivables from customers. We believe that cash generated from operations, together with our fixed rate long-term debt, bank credit lines, and cash on hand, will provide us with adequate liquidity to meet our operating requirements. We believe that the combination of funds available through existing or anticipated financing arrangements, coupled with forecasted cash flows, will be sufficient to provide the necessary capital resources for our anticipated working capital, capital expenditures, debt repayments, dividend payments, and stock repurchases for at least the next twelve months.next fiscal year.following table. Cash Provided by (Used In) (Dollars in millions) Fiscal years ended October 31 2004 2003 2002 $ 185.1 $ 118.6 $ 145.5 (38.3 ) (40.5 ) (44.4 ) (166.2 ) (30.7 ) (51.1 ) (0.1 ) 0.1 (0.1 ) $ (19.5 ) $ 47.5 $ 49.9 $ 90.8 $ 110.3 $ 62.8 Flow.Flows Provided by Operating Activities.Our primary source of funds is cash generated from operations. In fiscal 2003,2004, cash provided by operating activities decreasedincreased significantly by 19.056.1 percent from fiscal 2002.2003. This declineimprovement was due primarily to higher earnings, a lower increase in accounts receivable, and inventory levels described previously, somewhat offset by higher cash-related earnings in fiscal 2003 compared to fiscal 2002.accrued liabilities, mainly incentive and marketing accruals. In addition, fiscal 2002an increase of tax benefits related to stock option transactions also contributed to the improvement of cash generated from operations was unusually high as a result of significantly lower levels of receivables and inventoriesflows provided by operating activities.fiscal 2002 compared to fiscal 2001.Investing Activities.188.15.4 percent due mainly to a lower level of purchases of property, plant, and equipment in fiscal 20032004 compared to fiscal 2002. In addition, we received proceeds from an investment and the sale of a previously owned distribution company. This was somewhat offset by cash used for the acquisition of R & D Engineering, a company2003, as discussed previously.the business of patented wireless rain and freeze switches for residential irrigation systems.40.0 percent lowersignificantly higher by $135.5 million in fiscal 2003 compared to fiscal 2002 due to higher levels of short-term debt repayments during fiscal 20022004 compared to fiscal 2003. This was somewhat offsetprimarily driven by higher repayments of long-term debtincreased funds used to purchase our common stock for $169.8 million in fiscal 20032004 compared to $18.7 million in fiscal 2002.Resources.ResourcesU.S. seasonal working capitalpeak borrowing usually occurs between February and May. Seasonal cash requirements are fundedfinanced from operations and with short- and medium-term financing arrangements, including a $175.0 million medium-term committed unsecured banksenior five-year revolving credit line with various banks,facility, which expires in February 2005. In fiscal 2003, weSeptember 2009. We also entered intohave a new $75.0 million secured credit line backed by a multi-year credit agreement, expiring in July 2006, which is expected to reduce our interest costs.renewable annually. Interest expense on these credit lines is determined frombased on a LIBOR or commercial paper rate plus a basis point spread defined in the credit agreements. In addition, our non-U.S. operations and a domestic subsidiary also maintain unsecured short-term lines of credit of approximately $10.9$15.8 million. These facilities bear interest at various rates depending on the rates in their respective countries of operation. We also have a letter of credit subfacility as part of our credit agreements. Average short-term debt was $6.1 million in fiscal 2004 compared to $36.8 million in fiscal 2003, a decrease of $30.7 million. This decline was primarily attributable to our use of cash generated from earnings to pay down debt and finance operating activities. As of October 31, 2003,2004, we had $258.8$264.7 million of unutilized availability under our credit agreements. total capitalization ratios. We were in compliance with all covenants related to our credit agreements as of October 31, 2003,2004, and expect to be in compliance with all2004.2005. Our credit agreements require compliance with all of the covenants defined in the agreements. However, ifIf we were out of compliance with any debt covenant required by our credit agreements, the banks could terminate their commitments unless we could negotiate a covenant waiver from the banks. In addition, our long-term public notes and debentures could become due and payable if we were unable to obtain a covenant waiver or refinance our medium-term debt under our credit agreements. If our credit rating falls below investment grade, the interest rate we currently pay on outstanding debt on the credit agreements would increase, but the credit commitments could not be cancelled by the banks based only on a ratings downgrade. Our debt rating for long-term unsecured senior, non-credit enhanced debt has been unchanged for the past fiscal year by Standard and Poor’s Ratings Group at BBB- and by Moody’s Investors Service at Baa3. Our business is seasonal, with accounts receivable balances historically increasing between January and AprilDuring fiscal 2004, we increased our emphasis on repurchasing shares of our common stock as a resultmeans of higher sales volumesutilizing excess cash and extended payment terms made available toreducing our customers, and decreasing between May and December when payments are received. Our peak borrowing usually occurs between February and May. Seasonal cash requirements are financed from operations and with short- and medium-term financing arrangements described above.Share Repurchase Plan.Our Board of Directors has authorized us toshares outstanding. In addition, our repurchase up to 2,000,000 shares of Toro common stock, which was doubled from the original 1,000,000 shares authorized for repurchase as a result of the stock split effective April 1, 2003. As of October 31, 2003, 464,947 shares remained authorized for repurchase. This repurchase program providesprograms provide shares for use in connection with acquisitions andour equity compensation plans so that even withcompensation. In order to accomplish this, our Board of Directors authorized the issuancerepurchase of shares under those plans,of our common stock during fiscal 2004 as follows:• In March 2004, our Board of Directors authorized the repurchase of 1,000,000 shares of our common stock in open-market or private transactions. • In May 2004, our Board of Directors authorized the repurchase of up to an additional 2,000,000 shares, bringing the total number of shares that can be repurchased in open-market transactions, tender offers, private purchases or other transactions to 3,000,000. • In September 2004, the Board of Directors authorized the repurchase of up to an additional 1,000,000 shares of our common stock in open-market transactions or privately negotiated purchases. numberabove repurchase authorizations have no expiration dates but may be terminated by our Board of outstandingDirectors at anytime. As of October 31, 2004, 1,884,497 shares remains relatively constant and the impact on net earningsremained authorized for repurchase. We anticipate repurchasing a significant portion of these shares during fiscal 2005.issuing such shares is minimal. In fiscal 2003, we repurchased 433,345 shares ofour common stock onduring the open market for $18.7 million at an average price of $43.22 per share. Inpast three fiscal 2002, we repurchased 900,640 shares of common stock on the open market for $24.2 million at an average price of $26.83 per share. In fiscal 2001, we repurchased 2,040,820 shares for $44.2 million at an average price of $21.64 per share.years. (Dollars in millions, except for per share data) Fiscal years ended October 31 2004 2003 2002 2,635,407 433,345 900,640 $ 169.8 $ 18.7 $ 24.2 64.44 43.22 26.83 table of contractual obligations table below. Moreover, it is not our normal policy to issue guarantees to third parties.financefinancing companies purchase selected receivables from us and our distributors and dealers for extended periods whichthat assists those customersour distributors and dealers to carry representative inventories of equipment.products. Down payments are not required and, depending on the finance program for each product line, finance charges are incurred by us, shared between us and the distributor or dealer, or paid by the distributor or dealer. We retain a security interest in the distributors’ and dealers’ inventories, and make periodic physical checks of those inventories. Under the sales terms to distributors and dealers, finance charges are chargedapplied to distributors and dealers on outstanding balances from the earlier of the date when product is sold to a customer, or the expiration of company-supported finance terms granted at the time of sale, to the distributor or dealer, until payment is received by TCC or the third party finance company. Rates are generally fixed or based on the19$401.0$431.0 million of receivables of our financed products during fiscal 2003.2004. The outstanding receivable balance owed from our distributors and dealers to third party financing companies was $142.6$152.9 million on2003.2004. Our maximum exposure for credit recourse with a third party financing company related to receivables under these financing arrangements was $0.6 million as of October 31, 2003.2004. We also enter into limited inventory repurchase agreements with third party financing companies. As of October 31, 2003,2004, we were contingently liable to repurchase up to $3.7 million of inventory related to receivables under these financing arrangements. We have repurchased only immaterial amounts of inventory from third party financing companies over the past three years. However, a decline in retail sales could cause this situation to change and thereby require us to repurchase financed product.During fiscal 2002, we entered intoWe have an agreement with a third party financing company to provide lease-financing options to domestic golf course and some grounds equipment customers. The purpose of the agreement is ato increase sales and marketing tool to giveby giving end-user buyers of our products alternative financing options when purchasing our products. Under the terms of this agreement, we could be contingently liable for a portion of the credit collection and residual realizationvalue risk on the underlying equipment for leasing transactions financed under this program. Our maximum exposure for credit collection and residual value as of October 31, 20032004 was $3.4$7.2 million. We have established a reserve for our estimated exposure related to this program.20032004 was $1.0$1.9 million. None of these other arrangements require any additional material financial involvement by us. and equity investment agreements with some distributors. These transactions are used for expansion of the distributors’ businesses, acquisitions, refinancing working capital agreements, or to facilitate ownership changes. As of October 31, 2004 and 2003, we have loaned and/or invested $4.4$11.8 million and $6.3 million, respectively, in several distribution companies. The increase of $5.5 million was mainly the result of account receivable balances refinanced to long-term loans for a distributor. This amount is included in other current- and long-term assets on the consolidated balance sheet.sheets. During the first quarter of fiscal 2004, we refinanced $10.5 million of accounts receivable balances to long-term loans. The purpose of this transaction was to facilitate a recapitalization of a distributor’s business. either early termination or failure to purchase contracted quantities. We do not expect potential payments under these provisions to materially affect our results of operations or financial condition. This conclusion is based upon reasonably likely outcomes assumed by reference to historical experience and current business plans.2003:2004: Payments Due By Period Payments Due By Period (Dollars in thousands) Less Than 1-3 3-5 After 5 Less Than 1-3 3-5 After 5 Contractual Obligation 1 Year Years Years Years Total 1 Year Years Years Years Total $ 3,830 $ 91 $ 75,000 $ 100,000 $ 178,921 $ 45 $ 75,046 $ — $ 100,000 $ 175,091 4,228 — — — 4,228 1,782 — — — 1,782 13,474 19,975 11,687 2,995 48,131 13,980 21,501 9,568 1,154 46,203 24,066 — — — 24,066 23,213 — — — 23,213 $45,598 $ 20,066 $ 86,687 $ 102,995 $ 255,346 $ 39,020 $ 96,547 $ 9,568 $ 101,154 $ 246,289 2003,2004, we also had $16.2$10.9 million in outstanding letters of credit issued during the normal course of business, as required by some vendor contracts.InflationWe are subject to the effects of inflation and changing prices. In our opinion, changes in net sales and net earnings that have resulted from inflation and changing prices have not been material during the fiscal years presented. However, there is no assurance that inflation will not materially affect us in the future. We attempt to deal with these inflationary pressures by actively pursuing internal cost reduction efforts and introducing slight price increases.the netting opportunities that exist. For the remaining exposures, our risk management policy is to hedge exposure ofto certain risks by entering into various hedging instruments to minimize market risk. We are also exposed to equity market risk pertaining to the trading price of our stock. Additional information is presented in Item 7A, Quantitative and Qualitative Disclosures about Market Risk, and Note 14 of the notes to consolidated financial statements.AcquisitionsInflation2003,2004, we entered into a joint venture agreement with a leading engine manufacturer to source two-cycle snow thrower engines for us and other customers. We have determined that this new entity is a variable interest entity under the provisions of Financial Accounting Standards Board (FASB) Interpretation No. 46R, “Consolidation of Variable Interest Entities” (FIN 46R). We have determined that we are not required to consolidate the entity because we are not the primary beneficiary. During fiscal 2004, no material transactions were recorded in this joint venture.purchasesale of R & D Engineering, a provider of patented wireless rain and freeze switches for residential irrigation systems. We also acquired aour southeastern-based U.S. distributor and sold a distributorship, duringwhich was acquired in fiscal 2003. During the first quarter of fiscal 2005, we also completed the sale of our southwestern-based U.S. distribution company.20theour consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we must make decisions whichthat impact the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of the relevant circumstances, historical experience, and actuarial valuations. Actual amounts could differ from those estimated at the time the consolidated financial statements are prepared.Not allSome of thesethose significant accounting policies require us to make difficult subjective or complex judgments or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and (ii) different estimates that reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period, would have a material impact on the presentation of theour financial condition, changes in financial condition or results of operation.operations. Our critical accounting estimates include the following:We accrue atAt the time of sale, we accrue a warranty reserve by product line a warranty reserve for estimated costs in connection with future warranty claims. We also establish reserves for major rework campaigns.campaigns upon approval. The amount of our warranty reserves is based primarily on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of claims to sales, and the historical length of time between the sale and resulting warranty claim, and other factors.claim. We periodically assess the adequacy of our warranty reserves based on changes in these factors and record any necessary adjustments if actual claim experience indicates that adjustments are necessary. Actual claims could be higher or lower than amounts estimated, as the amount and value of warranty claims are subject to variation includingof such factors as performance of new products, significant manufacturing or design defects not discovered until after the product is delivered to customers, product failure rates, and higher or lower than expected service costs for a repair, and other similar factors.repair. We believe that analysis of historical trends and knowledge of potential manufacturing or design problems provide sufficient information to establish a reasonable estimate for warranty claims at the time of sale. However, since we cannot predict with certainty future warranty claims or costs associated with servicing those claims, our actual warranty costs may differ from our estimates. An unexpected increase in warranty claims or in the costs associated with servicing those claims would result in an increase in our warranty accrual and a decrease in our net earnings. As of October 31, 2004, we had $61.0 million accrued related to future estimated warranty claims.and establishthat provides a basis for an allowance estimate for doubtful accounts. In doing so, we evaluate the age of our receivables, past collection history, current financial conditions of key customers, and economic conditions. Based on this evaluation, we establish a reserve for specific accounts and notes receivable that we believe are uncollectible, as well as an estimate of uncollectible receivables not specifically known. Portions of our accounts receivable are protected by a security interest in products held by customers, which minimizes our collection exposure. A deterioration in the financial condition of any key customer or a significant slow down in the economy could have a material negative impact on our ability to collect a portion or all of the accounts and notes receivable. We believe that an analysis of historical trends and our current knowledge of potential collection problems providesprovide 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, our actual future losses from uncollectible accounts may differ from our estimates. In the event we determined that a smaller or larger uncollectible accounts reserve wasis appropriate, we would record ain whichthat we made such a determination. As of October 31, 2004, we had $2.2 million reserved against our accounts and notes receivable.Bebe AdoptedJanuary 2003,November 2004, the Financial Accounting Standards Board (FASB)FASB issued FASB InterpretationSFAS No. 46, “Consolidation151, “Inventory Costs,” which amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of Variable Interest Entities” (FIN 46), whichidle facility expense, freight, handling costs, and wasted material. This Statement requires an entitythat those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires allocation of fixed production overheads to consolidate a variable interest entity if it is designated as the primary beneficiarycosts of that entity even ifconversion be based on the entity does not have a majority of voting interests. A variable interest entity is generally defined as an entity where its equity is inadequate to finance its activities or where the ownersnormal capacity of the entity lack the risk and rewards of ownership. The provisions of this statement apply at inception for any entity created after January 31, 2003. For an entity created before February 1, 2003, the provisions of this interpretation must be applied as of the beginning of the first interim or annual period ending after December 15, 2003.production facilities. We are currently evaluating the effects of adopting the provisions of FIN 46.SFAS No. 151 and will adopt it on November 1, 2005, as required.21ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK derivativesderivative instruments only in an attempt to limit underlying exposure from currency fluctuations and to minimize earnings and cash volatility associated with foreign currency exchange rate changes, and not for trading purposes. Our market risk on interest rates relates primarily to short-term debt and the potential increase in fair value of long-term debt resulting from a potential decrease in interest rates. However, we do not have a cash flow or earnings exposure due to market risks on long-term debt. See further discussions on these market risks below.Foreign Currency Exchange Rate Risk.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, purchases from suppliers, and bank lines of credit with creditors denominated in foreign currencies. Because our products are manufactured or sourced primarily from the United States, a stronger U.S. dollar generally has a negative impact on results from operations outside the United States while a weaker dollar generally has a positive effect. Our primary exchange rate exposure is with the euro,Euro, the Japanese yen, the Australian dollar, the Canadian dollar, the British pound, and the Mexican peso against the U.S. dollar.2003,2004, the amount of losses reclassified to earnings for such cash flow hedges was $4.6$7.1 million.2004.2005. All items are non-trading and stated in U.S. dollars. Some derivative instruments we enter into do not meet the hedging criteria of SFAS No. 133;133, “Accounting for Derivative Instruments and Hedging Activities;” therefore, changes in fair value are recorded in other income, net. The average contracted rate, notional amount, pre-tax value of derivative instruments in accumulated other comprehensive loss (AOCL), and fair value impact of derivative instruments in other income, net as of and for the fiscal year ended October 31, 20032004 were as follows: Value in Average AOCL Fair Value Dollars in thousands Contracted Notional Income Impact (except average contracted rate) Rate Amount (Loss) Gain(Loss) 1.4084 $ 6,585.6 $ (313.6 ) $ (78.8 ) 0.6610 40,786.3 (1,133.9 ) (1,189.0 ) 1.1261 73,729.0 (1,810.6 ) 41.6 0.6569 1,231.6 – 94.7 1.6418 574.6 10.5 3.5 1.1672 933.7 – (7.5 ) 117.2474 6,652.6 402.9 78.5 10.9043 14,673.1 (440.4 ) – Value in Fair Value Dollars in thousands Average AOCL Impact (except average Contracted Notional Income Gain contracted rate) Rate Amount (Loss) (Loss) 0.7398 $ 6,247.9 $ (597.5 ) $ (72.2 ) 0.7233 36,306.0 78.7 (1,097.0 ) 1.2385 80,319.7 (1,870.2 ) (836.8 ) 0.7471 4,803.1 (33.8 ) 2.0 1.7914 1,191.3 15.6 3.3 108.0643 7,310.5 192.5 23.1 12.0108 9,907.7 87.4 – reduce reportedimpact net earnings.rate exposure results fromrates relates primarily to LIBOR-based short-term rates, primarily LIBOR-based debt from commercial banks.banks as well as the potential increase in fair value of long-term debt resulting from a potential decrease in interest rates. However, we do not have a cash flow or earnings exposure due to market risks on long-term debt. We currently do not use interest rate swaps to mitigate the impact of fluctuations in interest rates. As of October 31, 2003,2004, our financial liabilities with exposure to changes in interest rates consisted mainly of $2.1$1.1 million of short-term debt outstanding. Assuming a hypothetical increase of one percent (100 basis points) in short-term interest rates, with all other variables remaining constant including the average balance of short-term debt outstanding during fiscal 2003,2004, interest expense would have increased $0.4$0.1 million in fiscal 2003.2004. Included in long-term debt is $178.9$175.1 million of fixed-rate debt whichthat is not subject to variable interest rate fluctuations. As a result, we have no earnings or cash flow exposure due to market risks on our long-term debt obligations. As of October 31, 2003,2004, the estimated fair value of long-term debt with fixed interest rates was $196.7$189.7 million compared to its carrying value of $178.9$175.1 million. The fair value is estimated by discounting the projected cash flows using the rate at whichthat similar amounts of debt could currently be borrowed.Commodities.Commodity Risk.Some raw materials used in our products are exposed to commodity price changes. We manage some of this risk by using a combination of short- and long-term agreements with some vendors. The primary commodity price exposures are with steel, aluminum, plastic resin, and linerboard. Further information regarding rising prices for steel and plastic resin.other commodities is presented in Item 7, section entitled “Inflation.”22Equity Price Risk.The trading price of Toro common stock impacts compensation expense related to our stock-based compensation plans for our Performance Share Plan. As the price of Toro common stock rises, our compensation expense for our Performance Share Plan increases. Our exposure to equity price risk will be substantially reduced after we adopt the provisions of SFAS No. 123. Additional information is presented in Item 7, section entitled “New Accounting Pronouncements to be Adopted.” Further information is also presented in Note 10 to our consolidated financial statements regarding our stock-based compensation plans.Auditors’ Report
The Toro Company:its subsidiaries as of October 31, 20032004 and 2002,2003, and the related consolidated statements of earnings, cash flows, and stockholders’ equity for each of the years in the three year period ended October 31, 2003.2004. Our audits also included the financial statement schedule listed in Item 15(a). 2. These consolidated financial statements and schedule are the responsibility of the company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.auditingthe standards generally accepted inof the United States of America.Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.its subsidiaries as of October 31, 20032004 and 2002,2003, and the results of their operations and their cash flows for each of the years in the three year period ended October 31, 20032004 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.StandardStandards No. 142, “Goodwill and Other Intangible Assets”,Assets,” on November 1, 2001.
8, 20036, 20042328 (Dollars and shares in thousands, except per share data) Fiscal years ended October 31 (Dollars and shares in thousands, except per share data) Fiscal years ended October 31 2003 2002 2001 (Dollars and shares in thousands, except per share data) Fiscal years ended October 31 2004 2003 2002 �� $ 1,496,588 $ 1,399,273 $ 1,353,083 $ 1,652,508 $ 1,496,588 $ 1,399,273 961,129 914,010 892,845 1,059,438 961,129 914,010 535,459 485,263 460,238 593,070 535,459 485,263 404,365 376,278 366,284 428,527 406,639 377,889 1,826 8,409 (679 ) (682 ) 1,826 8,409 129,268 100,576 94,633 165,225 126,994 98,965 (16,285 ) (19,747 ) (22,003 ) (15,523 ) (16,285 ) (19,747 ) 7,935 5,970 7,447 3,531 10,209 7,581 120,918 86,799 80,077 153,233 120,918 86,799 39,298 26,868 29,629 50,567 39,298 26,868 81,620 59,931 50,448 102,666 81,620 59,931
net of income tax benefit of $509
net of income tax benefit of $509 – (24,614 ) –
benefit of $509 – – (24,614 ) $ 81,620 $ 35,317 $ 50,448 $ 102,666 $ 81,620 $ 35,317 $ 3.26 $ 2.39 $ 1.99 $ 4.21 $ 3.26 $ 2.39 – (0.98 ) – – – (0.98 ) $ 3.26 $ 1.41 $ 1.99 $ 4.21 $ 3.26 $ 1.41 $ 3.12 $ 2.32 $ 1.93 $ 4.04 $ 3.12 $ 2.32 – (0.95 ) – – – (0.95 ) $ 3.12 $ 1.37 $ 1.93 $ 4.04 $ 3.12 $ 1.37
Basic
Basic 24,364 24,998 25,050
Dilutive
Dilutive 25,383 26,149 25,873 24,998 25,050 25,400 26,149 25,873 26,134 2429 (Dollars in thousands, except per share data) October 31 (Dollars in thousands, except per share data) October 31 2003 2002 (Dollars in thousands, except per share data) October 31 2004 2003 $ 90,756 $ 110,287 $ 110,287 $ 62,816 280,969 273,584 273,584 250,093 4,767 6,540 6,540 5,646 285,736 280,124 280,124 255,739 227,200 228,909 228,909 224,367 16,931 12,484 12,484 10,497 44,552 42,111 42,111 38,722 665,175 673,915 673,915 592,141 164,665 159,116 159,116 156,779 – 1,181 1,181 4,196 18,652 12,353 12,353 13,264 78,055 78,013 78,013 77,855 2,200 2,854 2,854 1,905 $ 928,747 $ 927,432 $ 927,432 $ 846,140 $ 3,830 $ 15,825 $ 45 $ 3,830 2,138 1,156 1,099 2,138 73,976 86,180 87,147 73,976 59,372 53,590 60,988 59,372 38,107 34,373 41,973 38,107 83,908 65,011 100,306 83,908 41,805 37,615 49,217 41,805 303,136 293,750 340,775 303,136 175,091 178,756 175,046 175,091 12,003 8,344 3,837 – 13,475 12,003 – – 24,389 24,342 – – 7,658 11,193 22,518 24,389 417,973 342,358 – 7,658 (12,818 ) (12,603 ) 384,238 417,973 (11,142 ) (12,818 ) 437,202 365,290 395,614 437,202 $ 927,432 $ 846,140 $ 928,747 $ 927,432 2530 (Dollars in thousands) Fiscal years ended October 31 (Dollars in thousands) Fiscal years ended October 31 2003 2002 2001 (Dollars in thousands) Fiscal years ended October 31 2004 2003 2002 $ 81,620 $ 35,317 $ 50,448 $ 102,666 $ 81,620 $ 35,317 – 24,614 – – – 24,614 6,814 4,099 – (726 ) 6,814 4,099 33,173 30,932 37,171 36,093 34,136 30,878 – – 1,926 781 – – 273 (856 ) (56 ) (216 ) 259 (885 ) (374 ) 730 6,706 2,758 137 917 2,642 1,508 4,841 9,857 2,642 1,508 (23,789 ) 15,938 (15,538 ) (10,717 ) (27,953 ) 14,534 (2,471 ) 10,294 (25,884 ) (310 ) 3,746 12,360 (2,152 ) 32 1,700 (4,392 ) (1,901 ) 114 21,665 22,364 9,382 49,354 19,126 22,051 117,401 144,972 70,696 185,148 118,626 145,507 (44,663 ) (46,031 ) (35,662 ) (40,812 ) (43,265 ) (45,609 ) 2,009 2,964 2,298 2,098 1,702 3,479 1,000 – 154 (1,278 ) 1,000 – 115 (2,362 ) (3,001 ) 1,118 308 (2,286 ) 1,016 – – 578 1,016 – (1,244 ) – (8,549 ) – (1,244 ) – (41,767 ) (45,429 ) (44,760 ) (38,296 ) (40,483 ) (44,416 ) 982 (33,257 ) 19,219 (1,039 ) 883 (33,365 ) (15,846 ) (497 ) 112 (3,830 ) (15,846 ) (497 ) 167 118 (178 ) 14,307 8,923 12,941 8,923 12,941 17,285 (169,821 ) (18,726 ) (24,155 ) (18,726 ) (24,155 ) (44,153 ) (5,839 ) (6,005 ) (6,026 ) (6,005 ) (6,026 ) (6,108 ) (166,222 ) (30,771 ) (51,102 ) (30,505 ) (50,876 ) (13,823 ) (161 ) 99 (49 ) 2,342 1,273 (215 ) 47,471 49,940 11,898 (19,531 ) 47,471 49,940 62,816 12,876 978 110,287 62,816 12,876 $ 110,287 $ 62,816 $ 12,876 $ 90,756 $ 110,287 $ 62,816 $ 17,176 $ 19,647 $ 22,545 $ 15,714 $ 17,176 $ 19,647 31,681 22,252 18,006 46,933 31,681 22,252 3,672 3,927 3,232 5,567 3,672 3,927 186 – 450 6,439 – – – 186 – 2631 Accumulated Accumulated Additional Other Total Comprehensive Additional Other Total Comprehensive Common Paid-In Retained Comprehensive Stockholders’ Income Common Paid-In Retained Comprehensive Stockholders’ Income (Dollars in thousands) Stock Capital Earnings Loss Equity (Loss) Stock Capital Earnings Loss Equity (Loss) Balance as of October 31, 2000 $ 25,138 $ 34,971 $ 268,727 $ (11,618 ) $ 317,218 Cash dividends paid on common stock – – (6,108 ) – (6,108 ) Issuance of 1,433,748 shares under stock compensation plans 1,434 16,478 – – 17,912 Contribution of stock to a deferred compensation trust – 2,605 – – 2,605 Purchase of 2,040,820 shares of common stock (2,041 ) (42,112 ) – – (44,153 ) Tax benefits related to employee stock option transactions – 4,841 – – 4,841 Minimum pension liability adjustment, net of tax – – – (1,288 ) (1,288 ) (1,288 ) Foreign currency translation adjustments – – – (215 ) (215 ) (215 ) Unrealized gain on derivative instruments, net of tax – – – 133 133 133 Net earnings – – 50,448 – 50,448 50,448 Total comprehensive income $ 49,078 Balance as of October 31, 2001 $ 24,531 $ 16,783 $ 313,067 $ (12,988 ) $ 341,393 $ 24,531 $ 16,783 $ 313,067 $ (12,988 ) $ 341,393 Cash dividends paid on common stock – – (6,026 ) – (6,026 ) – – (6,026 ) – (6,026 ) Issuance of 711,024 shares under stock compensation plans 711 13,412 – – 14,123 711 13,412 – – 14,123 Contribution of stock to a deferred compensation trust – 2,745 – – 2,745 – 2,745 – – 2,745 Purchase of 900,640 shares of common stock (900 ) (23,255 ) – – (24,155 ) (900 ) (23,255 ) – – (24,155 ) Tax benefits related to employee stock option transactions – 1,508 – – 1,508 – 1,508 – – 1,508 Minimum pension liability adjustment, net of tax – – – (397 ) (397 ) (397 ) – – – (397 ) (397 ) (397 ) Foreign currency translation adjustments – – – 1,273 1,273 1,273 – – – 1,273 1,273 1,273 Unrealized loss on derivative instruments, net of tax – – – (491 ) (491 ) (491 ) – – – (491 ) (491 ) (491 ) Net earnings – – 35,317 – 35,317 35,317 – – 35,317 – 35,317 35,317 Total comprehensive income $ 35,702 $ 35,702 Balance as of October 31, 2002 $ 24,342 $ 11,193 $ 342,358 $ (12,603 ) $ 365,290 $ 24,342 $ 11,193 $ 342,358 $ (12,603 ) $ 365,290 – – (6,005 ) – (6,005 ) – – (6,005 ) – (6,005 ) 480 9,433 – – 9,913 480 9,433 – – 9,913 – 2,683 – – 2,683 – 2,683 – – 2,683 (433 ) (18,293 ) – – (18,726 ) (433 ) (18,293 ) – – (18,726 ) – 2,642 – – 2,642 – 2,642 – – 2,642 – – – (730 ) (730 ) (730 ) – – – (730 ) (730 ) (730 ) – – – 2,342 2,342 2,342 – – – 2,342 2,342 2,342 – – – (1,827 ) (1,827 ) (1,827 ) – – – (1,827 ) (1,827 ) (1,827 ) – – 81,620 – 81,620 81,620 – – 81,620 – 81,620 81,620 $ 81,405 $ 81,405 $ 24,389 $ 7,658 $ 417,973 $ (12,818 ) $ 437,202 $ 24,389 $ 7,658 $ 417,973 $ (12,818 ) $ 437,202 (16 ) (461 ) (5,362 ) – (5,839 ) 780 15,597 – – 16,377 – 3,496 – – 3,496 (2,635 ) (36,147 ) (131,039 ) – (169,821 ) – 9,857 – – 9,857 – – – 156 156 156 – – – 771 771 771 – – – 749 749 749 – – 102,666 – 102,666 102,666 $ 104,342 $ 22,518 $ – $ 384,238 $ (11,142 ) $ 395,614 27321
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATANature of OperationsThe principal business of The Toro Company and its wholly owned and majority-owned domestic and foreign subsidiaries (“Toro” or “the company”) is the development, manufacturing, and selling of outdoor beautification equipment and systems used in the residential and professional markets. Toro products are sold through a network of distributors, dealers, hardware retailers, home centers, mass retailers, and over the Internet, mainly through Internet retailers.Other investments (less than 20 percent ownership)The principles of Financial Accounting Standards Board (FASB) Interpretation No. 46R “Consolidation of Variable Interest Entities” (FIN 46R) and Accounting Research Bulletin (ARB) No. 51, “Consolidated Financial Statements” are recorded at cost.considered when determining whether an entity is subject to consolidation. All material intercompany accounts and transactions have been eliminated from the consolidated financial statements.potentialestimated uncollectible accounts. (Dollars in thousands) 2003 2002 2004 2003 $ 67,753 $ 68,296 $ 64,169 $ 67,753 208,176 198,860 210,141 208,176 275,929 267,156 274,310 275,929 32,151 26,903 30,227 32,151 14,869 15,886 16,883 14,869 $ 228,909 $ 224,367 $ 227,200 $ 228,909 2002, and 2001,2002, the company capitalized $446,000, $493,000, $458,000, and $817,000$458,000 of interest, respectively. (Dollars in thousands) 2003 2002 2004 2003 $ 14,603 $ 13,723 $ 16,936 $ 14,603 95,501 93,218 105,655 95,501 359,820 333,773 353,526 359,820 469,924 440,714 476,117 469,924 310,808 283,935 311,452 310,808 $ 159,116 $ 156,779 $ 164,665 $ 159,116 StandardStandards (SFAS) No. 142 “Goodwill and Other Intangible Assets.” This statement eliminates the amortization of goodwill and intangible assets with indefinite lives and instead requiresandthat are amortized on a straight-line basis over periods ranging from 3 to 12 years.282003,2004, no goodwill was deemed impaired. In the fourth quarter of fiscal 2003, the company recorded a pre-tax impairment charge of $5.4 million for automation equipment as a result of its decision to no longer use the equipment for production of some professional segment products. In fiscal 2002, the company determined that goodwill, patents, and non-compete agreements related to the agricultural irrigation market were impaired. See section “New Accounting Pronouncements” in this Note 1 for more details regarding this goodwill impairment charge. (Dollars in thousands) (Dollars in thousands) (Dollars in thousands) Fiscal years ended October 31 2003 2002 2004 2003 $ 53,590 $ 57,882 $ 59,372 $ 53,590 40,142 38,751 42,304 40,142 (40,285 ) (47,334 ) (42,494 ) (40,285 ) 5,925 4,291 1,806 5,925 $ 59,372 $ 53,590 $ 60,988 $ 59,372 derivativesderivative is recorded to a separate component of stockholders’ equity, captioned accumulated other comprehensive loss, and recognized in earnings when the hedged item affects earnings. Derivatives that do not meet the accounting requirements for a hedge are adjusted to fair value through other income, net on the Consolidated Statements of Earnings.in whichthat those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The company has reflected the necessary deferred tax assets and liabilities in the accompanying balance sheets. Management believes the future tax deductions will be realized principally through carryback to taxable income in prior years, future reversals of existing taxable temporary differences, and future taxable income.ProvisionA provision is made at the time the related revenue is recognized for estimated product returns, cost of product warranties, floor plan costs, price protection, and other salesrevenuesrevenue billed to customers areis included in net sales, and expenses incurred for shipping products to customers are included in cost of sales.29 only immaterial amounts of inventory from third party financing companies over the last three fiscal years. However, an adverse change in retail sales could cause this situation to change and thereby require Toro to repurchase financed product. Any expected cost of repurchasing inventory has been provided for in the allowance for doubtful accounts. See Note 13 for additional information regarding the company’s repurchase arrangements.inunder which the company shares the expense of financing distributor and dealer inventories, referred to as floor plan expenses. This charge represents interest for a pre-established length of time based on a predefinedpre-defined rate from a contract with a third party financing source to finance distributor 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 $10,521,000, $9,405,000, $10,981,000, and $9,204,000$10,981,000 for the fiscal years ended October 31, 2004, 2003, 2002, and 2001,2002, respectively.in whichthat costs are incurred or the first 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 program established for various product lines. Advertising costs were $38,115,000, $37,279,000, $39,306,000, and $32,477,000$39,306,000 for the fiscal years ended October 31, 2004, 2003, 2002, and 2001,2002, respectively.towith the provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB No. 25). This method defines cost for stock-based compensation as the excess of the stock’s market value at the time of grant over the amount that the employee is required to pay. The company adopted the disclosure-only provisions of SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”. SFAS No. 148 amends the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 123 requires companies to measure employee stock compensation plansgrants based on the fair value method of accounting. Had stock-based compensation costs been recorded at fair value consistent with the provisions of SFAS No. 123, net earnings and net earnings per share would have been reduced to the following pro forma amounts: (Dollars in thousands) (Dollars in thousands) (Dollars in thousands) Fiscal years ended October 31 Fiscal years ended October 31 2003 2002 2001 Fiscal years ended October 31 2004 2003 2002 $ 81,620 $ 35,317 $ 50,448 $ 102,666 $ 81,620 $ 35,317 5,882 3,373 2,402 10,097 5,882 3,373 (6,432 ) (6,152 ) (4,959 ) (7,020 ) (6,432 ) (6,157 ) $ 81,070 $ 32,538 $ 47,891 $ 105,743 $ 81,070 $ 32,533 $ 3.26 $ 1.41 $ 1.99 $ 4.21 $ 3.26 $ 1.41 3.24 1.28 1.91 4.34 3.24 1.30 3.12 1.37 1.93 4.04 3.12 1.37 3.12 1.27 1.85 4.17 3.10 1.26 Fiscal years ended October 31 2003 2002 2001 2004 2003 2002 3.00 % 3.92 % 5.33 % 3.05 % 3.00 % 3.92 % 5.76 5.78 4.89 5.94 5.76 5.78 0.52 % 0.76 % 1.02 % 0.32 % 0.52 % 0.76 % 28.13 % 28.86 % 31.39 % 27.72 % 28.13 % 28.86 % 2002, and 20012002 was estimated to be $15.37, $9.91, $7.49, and $5.60$7.49 per share, respectively. The weighted average fair market value of Performance Shares amortized in the fiscal years ended October 31, 2004, 2003, 2002, and 20012002 was estimated to be $32.84, $25.06, $20.10, and $14.99$20.10 per share, respectively.30 (Shares in thousands) (Shares in thousands) (Shares in thousands) Fiscal years ended October 31 2003 2002 2001 2004 2003 2002 24,988 25,035 25,382 24,353 24,988 25,035 10 15 18 11 10 15 24,998 25,050 25,400 24,364 24,998 25,050 (Shares in thousands) Fiscal years ended October 31 2003 2002 2001 24,998 25,050 25,400 1,151 823 734 26,149 25,873 26,134 (Shares in thousands) Fiscal years ended October 31 2004 2003 2002 24,364 24,998 25,050 1,019 1,151 823 25,383 26,149 25,873 JanuaryNovember 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. The company is currently evaluating the provisions of SFAS No. 151 and will it adopt on November 1, 2005, as required.Financial Accounting Standards Board (FASB)FASB issued FASB InterpretationFIN No. 46,46R, “Consolidation of Variable Interest Entities” (FIN 46),Entities,” which requires an entity to consolidate a variable interest entity if it is designated as the primary beneficiary of that entity even if the entity does not have a majority of voting interests. A variable interest entity is generally defined as an entity where its equity is inadequate to finance its activities or where the owners of the entity lack the risk and rewards of ownership. The provisions of this statement apply at inception for any entity created after January 31, 2003. For an entity created before February 1, 2003, the provisions of this interpretation must be applied as of the beginning of the first interim or annual period ending after December 15, 2003. We are currently evaluating the effects of adoptingcompany evaluated the provisions of FIN 46. OnNo. 46R during the first dayfiscal quarter of fiscal 2003,2004, as required, and determined that the company adopted two new accounting standards, SFAS No. 143, “Accounting for Asset Retirement Obligations” and SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” The adoption of these new accounting standards did not have aany material impact oninterest entities and did not have any variable interest entities that require consolidation into the company’s consolidated financial statements. During the third quarter of fiscal 2004, the company entered into a joint venture agreement with a leading engine manufacturer to source two-cycle snow thrower engines for Toro and other customers. The company has determined that this new entity is a variable interest entity under the provisions of FIN 46. The company has determined that it is not required to consolidate the entity because Toro is not the primary beneficiary. During fiscal 2004, no material transactions were recorded in this joint venture.July 2002,December 2003, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.132 (revised 2003), “Employers’ Disclosures about Pensions and Other Postretirement Benefits,” SFASamendments of FASB Statements No. 146 requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The company applied the provisions of SFAS No. 146 for exit87, 88, and disposal activities initiated after December 31, 2002, as required. In November 2002, the FASB issued Interpretation No. 45 (FIN 45), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” FIN 45 elaborates on the106. This statement added certain disclosure requirements for obligations by a guarantor under certain guarantees, as well as requiring the recording of certain guarantees issued or modified after December 31, 2002. The company adopted the disclosure requirements of FIN 45 during the first quarter of fiscal 2003, as required. In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transitionabout pension and Disclosure.” SFAS No. 148 provides companies with alternative methods of transition to the fair value based method of accounting for stock-based compensation. The company uses the intrinsic value method of accounting, and has not elected the fair value based method of accounting. SFAS No. 148 also requires certain pro forma disclosures related to stock-based compensationother postretirement benefit plans, which are presented in interim financial information. The company adopted the pro forma disclosures of SFAS No. 148 during the second quarter of fiscal 2003, as required. In the fourth quarter of fiscal 2003, the company adopted Emerging Issues Task Force Issue No. 00-21 (EITF No. 00-21), “Revenue Arrangements with Multiple Deliverables.” EITF No. 00-21 addresses certain aspects of accounting by a vendor for arrangements under which multiple revenue-generating activities are performed as well as how to determine whether an arrangement involving multiple deliverables contains more than one unit of accounting. The adoption of EITF No. 00-21 did not have a material impact on the company’s consolidated financial statements in fiscal 2003.Note 11.level using a two-step impairment test.level. Effective November 1, 2001, the company adopted SFAS No. 142. The company tested for impairment of its reporting units by comparing fair value to carrying value. Fair value was determined using a discounted cash flow and cost methodology. An evaluation of the fair value of ourthe company’s agricultural irrigation reporting unit indicated that all the goodwill recorded for acquisitions in the agricultural irrigation market was impaired. The performance of these acquired businesses has not met management’s original expectations. This is due mainly to lower than anticipated growth rates in the drip line market, which has resulted in lower industry-wide pricing and margins on product sales. Accordingly, non-cash impairment charges on adoption of SFAS No. 142 of $24.6 million, net of income tax benefit of $0.5 million, were recognized as a cumulative effect of change in accounting principle in the first quarter of fiscal 2002.3136 The following table adjusts net earnings and earning per share for the adoption of SFAS No. 142: (Dollars in thousands, except per share data) Fiscal years ended October 31 2003 2002 2001 $ 81,620 $ 35,317 $ 50,448 – – 8,073 $ 81,620 $ 35,317 $ 58,521 $ 3.26 $ 1.41 $ 1.99 – – 0.32 $ 3.26 $ 1.41 $ 2.31 $ 3.12 $ 1.37 $ 1.93 – – 0.31 $ 3.12 $ 1.37 $ 2.24 2
BUSINESS ACQUISITIONS DIVESTITURE, AND INVESTMENT IN AFFILIATEDIVESTITUREScompany.company during fiscal 2003, and subsequently sold it during fiscal 2004. Effective December 31, 2002, the company also sold a previously owned distributorship. These acquisitions, investment, and divestitures were immaterial based on the company’s consolidated financial position and results of operations. Effective December 31, 2002,sold a previously owned distributorship. In fiscal 1999, Toro became an equity partner in ProShot Golf, Inc. andcompleted the sale of its successor companies (ProShot). ProShot is a provider of information and communication products to the golf industry. Toro has fully written off this investment and reserved for all financial debt guarantees. Toro recorded valuation charges of $2,828,000 in fiscal 2001 related to the write-down of this investment and related bad debt expense.southwestern-based distribution company.3
RESTRUCTURING AND OTHER EXPENSEACTIVITIESwill ceaseceased operations in fiscalon April 30, 2004. Approximately 115 job positions and related staff reductions will be lostwere eliminated in connection with closing this facility. In fiscal 2002, the company announced plans to close its Riverside, California manufacturing operations and its Evansville, Indiana and Madera, California manufacturing facilities. Approximately 550 job positions and related office staff reductions were expected to be lostmade in connection with closing these operations. As of October 31, 2003, of the 550 job position reductions, 543 had been eliminated. In addition, the company will incur ongoing costs after the facilities are closed and until they are sold, which is captioned in “other” below. These actions are part of Toro’s overall long-term strategy to reduce production costs and improve long-term competitiveness. The company also incurred a charge for assetwill incur ongoing costs until the facilities are sold. Asset impairment related to write-downs of patents and non-compete agreements during the first quarter of fiscal 2002. In addition, asset impairment charges also include the write-down of facilities and equipment related to the closure of the aforementioned manufacturing operations. In fiscal 2004, the company realized a net benefit of $0.4 million for the reversal of an impairment write down for the held-for-sale Madera, California facility that was sold during the first quarter of fiscal 2005 for a gain.accounts:accounts. Asset Severance Asset Severance (Dollars in thousands) Impairment & Benefits Other Total Impairment & Benefits Other Total Balance as of October 31, 2001 $ – $ – $ 45 $ 45 Initial charge 4,698 3,761 2,726 11,185 Changes in estimates (599 ) (362 ) (1,815 ) (2,776 ) Utilization (4,099 ) (1,534 ) (84 ) (5,717 ) Balance as of October 31, 2002 $ – $ 1,865 $ 872 $ 2,737 $ – $ 1,865 $ 872 $ 2,737 901 763 5 1,669 901 763 5 1,669 374 92 (309 ) 157 626 106 (575 ) 157 (1,275 ) (1,890 ) (73 ) (3,238 ) (1,527 ) (1,890 ) (73 ) (3,490 ) $ – $ 830 $ 495 $ 1,325 $ – $ 844 $ 229 $ 1,073 (413 ) (177 ) (92 ) (682 ) 413 (650 ) (126 ) (363 ) $ – $ 17 $ 11 $ 28 the majority of the remaining reserve to be utilized by the secondend of the first quarter of fiscal 2004.2005.4
OTHER INCOME, NET (Dollars in thousands) (Dollars in thousands) (Dollars in thousands) Fiscal years ended October 31 2003 2002 2001 2004 2003 2002 $ 613 $ 1,345 $ 818 $ 1,132 $ 613 $ 1,345 2,665 3,664 5,144 3,266 2,665 3,664 1,770 1,232 286 1,243 1,802 1,452 992 1,243 1,802 (1,070 ) 101 887 (1,198 ) (1,070 ) 101 1,302 – 1,886 – 1,302 –
for investments – 395 (1,926 ) 3,171 (1,780 ) (1,073 ) (853 ) 567 – (781 ) – – (1,400 ) 3,171 (1,780 ) 11 443 259 603 486 2,163 $ 7,935 $ 5,970 $ 7,447 $ 3,531 $ 10,209 $ 7,581 5
GOODWILL AND OTHER INTANGIBLE ASSETS – The changes in the net carrying amount of goodwill for fiscal 20032004 were as follows: Professional Residential Professional Residential (Dollars in thousands) Segment Segment Total Segment Segment Total Balance as of October 31, 2002 $68,942 $8,913 $ 77,855 Balance as of October 31, 2003 $ 68,985 $ 9,028 $ 78,013 Translation adjustment 43 115 158 11 31 42 $68,985 $9,028 $ 78,013 $ 68,996 $ 9,059 $ 78,055 – Total other intangible assets, net as of October 31, 2004 and 2003 were $2,200,000 and 2002 were $2,854,000, and $1,905,000, respectively. During fiscal 2003, the company recorded some amortizable intangible assets related to the acquisition of R & D Engineering previously mentioned.32 (Dollars in thousands) Gross Carrying Accumulated Gross Carrying Accumulated October 31, 2003 Amount Amortization October 31, 2004 Amount Amortization $ 6,553 $ (4,931 ) $ 6,553 $ (5,275 ) 1,000 (593 ) 1,000 (723 ) 1,700 (875 ) 1,700 (1,055 ) $ 9,253 $ (6,399 ) $ 9,253 $ (7,053 ) (Dollars in thousands) Gross Carrying Accumulated Gross Carrying Accumulated October 31, 2002 Amount Amortization October 31, 2003 Amount Amortization Patents $ 6,104 $ (4,609 ) $ 6,553 $ (4,931 ) Non-compete agreements 800 (405 ) 1,000 (593 ) Other 800 (785 ) 1,700 (875 ) Total $ 7,704 $ (5,799 ) $ 9,253 $ (6,399 ) 2001 was $653,000, $601,000, $670,000, and $929,000,$670,000, respectively. Estimated amortization expense for the succeeding fiscal years is as follows: 2004, $648,000; 2005, $628,000; 2006, $601,000; 2007, $407,000; 2008, $281,000; 2009, $121,000; and after 2008, $289,000.2009, $162,000.6
SHORT-TERM CAPITAL RESOURCES2003,2004, the company had available medium-term committeda $175.0 million unsecured lines ofsenior five-year revolving credit with various domestic banksfacility, which expires in the aggregate of $178,000,000.September 2009. The company also has a $75,000,000$75.0 million secured credit line of credit backed by a multi-year credit agreement, expiring in July 2006, which is renewable annually. This credit line is secured by certain domestic receivables. Interest expense on these credit lines is determined from a LIBOR or commercial paper rate plus a basis point spread defined in the credit agreements. Most of these agreements also require the company to pay a fee of 0.200 – 0.225 percent per year on the available lines of credit, which is included in interest expense. The company’s non-U.S. operations and a domestic subsidiary maintain unsecured short-term lines of credit of $7,939,000.$1,592,000. These facilities bear interest at various rates depending on the rates in their respective countries of operation. The company had $1,099,000 outstanding as of October 31, 2004 and $2,138,000 outstanding as of October 31, 2003 and $1,156,000 outstanding as of October 31, 2002 under these lines of credit, which included 600,000 Australian dollar and 36,000 euroEuro denominated short-term debt outstanding as of October 31, 2003 and 1,900,000 Australian dollar and 103,000 euro denominated short-term debt outstanding as of October 31, 2002.2003. The weighted average interest rate on short-term debt outstanding as of October 31, 2004 and 2003 and 2002 was 2.732.10 percent and 4.742.73 percent, respectively. The company was in compliance with all covenants related to the lines of credit described above as of October 31, 2003.7
LONG-TERM DEBT (Dollars in thousands) October 31 (Dollars in thousands) October 31 2003 2002 2004 2003 $ – $ 15,761 75,000 75,000 $ 75,000 $ 75,000 3,600 3,600 – 3,600 100,000 100,000 100,000 100,000 321 220 91 321 178,921 194,581 175,091 178,921 3,830 15,825 45 3,830 $ 175,091 $ 178,756 $ 175,046 $ 175,091 In fiscal 2004, theThe industrial revenue bond for $3.6 million due November 1, 2017 was called and subsequently paid in the first quarter of fiscal 2004.whichthat were recorded as deferred income to be recognized as an adjustment to interest expense over the term of the new debt securities. As of the date the swaps were terminated, this deferred income totaled $18.7 million. The excess termination fees over the deferred income recorded has been deferred and is being recognized as an adjustment to interest expense over the term of the new debt securities issued.2004, $3,830,000; 2005, $45,000; 2006, $46,000; 2007, $75,000,000; 2008, $0; and after 2008,2009, $100,000,000.8
STOCKHOLDERS’ EQUITYTheIn March 2004, the company’s Board of Directors has authorized the cumulative repurchase of up to 2,000,0001,000,000 shares of the company’s common stock, which was doubled fromstock. In May 2004, the originalBoard of Directors authorized an additional 2,000,000 shares for repurchase. In September 2004, the Board of Directors authorized an additional 1,000,000 shares authorized for repurchase, as a resultbringing the total maximum number of the stock split effective April 1, 2003.shares to 4,000,000. During fiscal 2003,2004, Toro paid $18,726,000$169.8 million to repurchase 433,3452,635,407 shares. As of October 31, 2003, 464,9472004, 1,884,497 shares remained authorized for repurchase. Minnesota, National Association (the successor to Norwest Bank Minnesota, 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 a tender offer that would result in, ownership of 15 percent or more of Toro’s common stock. Each33Splitsplit –On March 20, 2003, the company’s Board of Directors declared a two-for-one split of the company’s common stock, effected in the form of a 100 percent stock dividend issued to stockholders of record as of April 1, 2003 and paid on April 14, 2003. As a result of this action, approximately 12.5 million shares were issued. Par value of the common stock remains at $1.00 per share and accordingly, approximately $12.5 million was transferred from additional paid-in capital to common stock. All references to the number of common shares and per common share amounts have been adjusted to give retroactive effect to the stock split for all periods presented.9
INCOME TAXES Fiscal years ended October 31 2003 2002 2001 2004 2003 2002 35.0 % 35.0 % 35.0 % 35.0 % 35.0 % 35.0 % (1.6 ) (1.7 ) (2.2 ) (1.6 ) (1.6 ) (1.7 ) – (2.0 ) – – – (2.0 ) 1.1 1.2 1.3 0.9 1.1 1.2 (0.6 ) (0.4 ) (1.0 ) (1.9 ) (0.6 ) (0.4 ) 0.1 0.1 2.8 (1.5 ) (1.2 ) 1.1 0.6 (1.4 ) (1.1 ) 32.5 % 31.0 % 37.0 % 33.0 % 32.5 % 31.0 % (Dollars in thousands) (Dollars in thousands) (Dollars in thousands) Fiscal years ended October 31 Fiscal years ended October 31 2003 2002 2001 Fiscal years ended October 31 2004 2003 2002 $ 34,470 $ 22,789 $ 22,187 $ 47,894 $ 34,470 $ 22,789 1,812 1,588 1,002 2,401 1,812 1,588 1,449 694 196 1,287 1,449 694 $ 37,731 $ 25,071 $ 23,385 $ 51,582 $ 37,731 $ 25,071 $ 1,719 $ 1,357 $ 5,434 $ (106 ) $ 1,719 $ 1,357 218 (27 ) 641 (304 ) 218 (27 ) (370 ) 467 169 (605 ) (370 ) 467 1,567 1,797 6,244 (1,015 ) 1,567 1,797 $ 39,298 $ 26,868 $ 29,629 $ 50,567 $ 39,298 $ 26,868 carryfowardscarryforwards of approximately $11.0$2.9 million in foreign jurisdictions with unlimited expiration. (Dollars in thousands) (Dollars in thousands) (Dollars in thousands) Fiscal years ended October 31 Fiscal years ended October 31 2003 2002 2001 Fiscal years ended October 31 2004 2003 2002 $ 116,442 $ 82,407 $ 77,472 $ 142,982 $ 116,442 $ 82,407 4,476 4,392 2,605 10,251 4,476 4,392 $ 120,918 $ 86,799 $ 80,077 $ 153,233 $ 120,918 $ 86,799 (Dollars in thousands) (Dollars in thousands) (Dollars in thousands) Fiscal years ended October 31 2003 2002 2004 2003 $ 3,043 $ 3,576 $ 1,697 $ 3,043 2,617 4,515 (1,062 ) 2,617 (284 ) 3,366 (3,837 ) (284 ) 5,030 3,940 4,885 5,030 14,269 12,426 16,773 14,269 18,617 15,095 22,259 18,617 $ 43,292 $ 42,918 $ 40,715 $ 43,292 2001, respectively, $2,642,000, $1,508,000, and $4,841,000$1,580,000 was added to additional paid-in capital in accordance with APB No. 25 reflecting the permanent book to tax difference in accounting for tax benefits related to employee stock option transactions.10
STOCK-BASED COMPENSATION PLANS20032004 are generally exercisable immediately or become exercisable over three years, and expire five to ten years after the date of grant.342003, 913,3812004, 628,261 shares were available for future grants under The Toro Company 2000 Stock Option Plan, 11,9979,882 shares were available for future grants under The Toro Company Directors Stock Plan, and 140,000120,000 shares were available for future grants under The Toro Company 2000 Directors Stock Plan. There were no shares available for future grants under The Toro Company 1993 Stock Option Plan. Weighted Weighted average average Options exercise Options exercise outstanding price Outstanding price 2001 Outstanding as of the beginning of the year 2,900,008 $ 14.49 Granted 741,212 17.52 Exercised (1,379,044 ) 12.27 Cancelled (56,390 ) 16.58 Outstanding as of October 31, 2001 2,205,786 $ 16.84 Exercisable as of October 31, 2001 1,604,786 $ 17.05 2002 Outstanding as of the beginning of the year 2,205,786 $ 16.84 2,205,786 $ 16.84 Granted 659,548 23.56 659,548 23.56 Exercised (653,530 ) 19.54 (653,530 ) 19.54 Cancelled (52,000 ) 15.97 (52,000 ) 15.97 Outstanding as of October 31, 2002 2,159,804 $ 18.10 2,159,804 $ 18.10 Exercisable as of October 31, 2002 1,591,804 $ 18.60 1,591,804 $ 18.60 2,159,804 $ 18.10 2,159,804 $ 18.10 553,000 32.40 553,000 32.40 (442,744 ) 19.70 (442,744 ) 19.70 (32,000 ) 15.97 (32,000 ) 15.97 2,238,060 $ 21.30 2,238,060 $ 21.30 1,702,060 $ 22.77 1,702,060 $ 22.77 2,238,060 $ 21.30 332,800 48.46 (733,453 ) 19.26 1,837,407 $ 27.04 1,669,207 $ 24.92 2003:2004: Weighted Weighted Weighted average Weighted average average remaining average remaining Number of exercise contractual Number of exercise contractual Exercise price range options price life options price life $12.4688 – $18.8125 1,218,454 $ 15.90 4.3 years 661,005 $ 15.92 4.3 years $21.2750 – $27.8650 522,496 23.33 5.6 years 433,390 23.36 5.1 years $32.2750 – $40.4200 497,110 32.41 6.5 years 434,402 32.38 5.8 years $48.3200 – $50.7000 308,610 48.47 6.7 years 2,238,060 $ 21.30 5.1 years 1,837,407 $ 27.04 5.2 years Common Stockcommon stock or deferred Common Stockcommon stock units, contingent on the achievement of performance goals of the company, generally over a three-year period. The number of shares of Common Stockcommon stock authorized for issuance under this plan is 2,000,000. The number of shares of common stock a participant receives will be increased (up to 200 percent of target levels) or reduced (down to zero) based on the level of achievement of performance goals. In fiscal 2004, 2003, 2002, and 2001,2002, the company granted 140,600, 229,800, 265,200, and 318,800265,200 Performance Shares, respectively, that vested over one- to three-year periods. The participants earned 178,766, 115,202, 113,762, and 165,394113,762 Performance Shares in fiscal 2004, 2003, 2002, and 2001,2002, respectively. The company recognized compensation expense related to this plan of $16,027,000, $9,337,000, $5,604,000, and $3,812,000$5,604,000 during the fiscal years ended October 31, 2004, 2003, 2002, and 2001,2002, respectively.(annual incentive plan), which includes a Common Stockcommon stock acquisition and retention feature (Stock Retention Award). If the Compensation Committee of the Board of Directors grants a Stock Retention Award, the recipient may elect to convert up to 50 percent of a cash bonus award into Common Stock,common stock, or defer up to 50 percent of the cash bonus through The Toro Company Deferred Compensation Plan forCommon Stock.common stock. In either case, the participant would receive additional compensation in the form of one additional share or unit of Common Stockcommon stock for every two shares or units acquired upon conversion. These matching shares or units vest in increments of 25 percent of the total number of matching shares or units as of the end of each of the second, third, fourth, and fifth years after the date the shares are issued or units are credited. Compensation expense related to this plan was $3,732,000, $2,326,000, $2,273,000, and $1,587,000$2,273,000 for fiscal years ended October 31, 2004, 2003, 2002, and 2001,2002, respectively. No matching awards were granted with respect to fiscal 2004, 2003, 2002, or 2001.and 2002.1995.1994. The value of each performance unit is equal to the fair market value of a share of common stock. The restricted stock and performance units vest based upon achievement of specified succession planning goals. Dividends are paid with respect to the restricted stock and the35$730,000, and $439,000$730,000 for the fiscal years ended October 31, 2004, 2003, 2002, and 2001,2002, respectively. 24,454 shares and 24,454 performance units remain unvested as of October 31, 2003.2004.11
EMPLOYEE BENEFIT PROGRAMS AND POSTRETIREMENT BENEFIT PLANS$12,660,000, and $12,300,000$12,660,000 for the fiscal years ended October 31, 2004, 2003, 2002, and 2001,2002, respectively. (Dollars in thousands) (Dollars in thousands) (Dollars in thousands) Fiscal years ended October 31 Fiscal years ended October 31 2003 2002 Fiscal years ended October 31 2004 2003 $ 6,462 $ 3,443 $ 14,733 $ 6,462 388 193 950 388 427 246 871 427 7,764 2,900 (1,981 ) – (308 ) (320 ) (4,986 ) 7,764 (427 ) (308 ) $ 14,733 $ 6,462 $ 9,160 $ 14,733 $ (14,733 ) $ (6,462 ) $ (9,160 ) $ (14,733 ) 11,812 4,310 (1,981 ) – 6,115 11,812 $ (2,921 ) $ (2,152 ) $ (5,026 ) $ (2,921 ) ending obligation increase fromcompany amended its health-care benefit plan as of the end of fiscal 20022004 to reduce benefits offered to certain eligible employees over a transition period. This modification did not result in any financial impact for the company during fiscal 2003 was the result of a significant change in assumption related to higher level of participants receiving benefits under the plan due to a higher than anticipated early retirement rate.2004. Fiscal years ended October 31 2003 2002 2004 2003 6.00 % 6.75 % 5.75 % 6.00 % 6.75 % 7.50 % 6.00 % 6.75 % 10.00 % 18.00 % 11.00 % 10.00 % increase to 12 percent in fiscal 2004 and then decrease gradually in future years, reaching an ultimate rate of 4.55 percent in fiscal 2010.2011. (Dollars in thousands) (Dollars in thousands) (Dollars in thousands) Fiscal years ended October 31 2003 2002 2001 2004 2003 2002 $ 388 $ 193 $ 154 $ 950 $ 388 $ 193 427 246 257 871 427 246 262 80 93 712 262 80 $ 1,077 $ 519 $ 504 $ 2,533 $ 1,077 $ 519 20032004 would increase by $1,637,000. If the health-care cost trend rate decreased by 1 percentage point, the postretirement benefit obligation as of October 31, 20032004 would decrease by $1,353,000.results.position.12
SEGMENT DATAsnowthrowers,snow throwers, homeowner-installed irrigation systems, replacement parts, and electricelectrical home solutions products, including trimmers, blowers, and blower vacuums. These products are sold to homeowners through a network of distributors and dealers, and through a broad array of hardware retailers, home centers, and mass retailers as well as over the Internet.36 four company-owned domestic distributor operations. These distribution companies sell Toro and non-Toro professional and residential products directly to dealers, retailers, and end-user customers.whichthat these operations would have incurred otherwise, but do not include general corporate expenses, interest expense, and income taxes. The company accounts for intersegment gross sales at current market prices. the summarized financial information concerning the company’s reportable segments: (Dollars in thousands) (Dollars in thousands) (Dollars in thousands) Fiscal years ended October 31 Professional1 Residential2 Distribution Other Total Professional1 Residential2 Distribution Other Total $ 1,028,941 $ 554,334 $ 152,234 $ (83,001 ) $ 1,652,508 89,893 8,999 – (98,892 ) – 173,111 61,777 2,203 (83,858 ) 153,233 419,000 187,860 35,195 286,692 928,747 25,772 5,802 455 8,783 40,812 17,641 8,027 792 9,633 36,093 $ 929,434 $ 506,466 $ 133,957 $ (73,269 ) $ 1,496,588 $ 929,434 $ 506,466 $ 133,957 $ (73,269 ) $ 1,496,588 81,421 7,985 – (89,406 ) – 81,421 7,985 – (89,406 ) – 146,756 55,460 (505 ) (80,793 ) 120,918 146,756 55,460 (505 ) (80,793 ) 120,918 412,361 180,767 46,232 288,072 927,432 412,361 180,767 46,232 288,072 927,432 23,838 12,759 413 7,653 44,663 22,440 12,759 413 7,653 43,265 16,196 7,816 636 8,525 33,173 17,159 7,816 636 8,525 34,136 2002 Net sales $ 862,294 $ 474,333 $ 158,935 $ (96,289 ) $ 1,399,273 $ 862,294 $ 474,333 $ 158,935 $ (96,289 ) $ 1,399,273 Intersegment gross sales 99,553 10,764 – (110,317 ) – 99,553 10,764 – (110,317 ) – Earnings (loss) before income taxes and accounting change 111,709 51,916 2,251 (79,077 ) 86,799 111,709 51,916 2,251 (79,077 ) 86,799 Total assets 399,024 162,442 51,823 232,851 846,140 399,024 162,442 51,823 232,851 846,140 Capital expenditures 21,240 17,789 685 6,317 46,031 20,818 17,789 685 6,317 45,609 Depreciation and amortization 16,860 6,559 537 6,976 30,932 16,806 6,559 537 6,976 30,878 2001 Net sales $ 858,855 $ 432,176 $ 146,642 $ (84,590 ) $ 1,353,083 Intersegment gross sales 90,068 10,445 – (100,513 ) – Earnings (loss) before income taxes 106,600 41,904 (361 ) (68,066 ) 80,077 Total assets 430,637 142,361 61,836 200,840 835,674 Capital expenditures 16,828 12,422 971 5,441 35,662 Depreciation and amortization 24,980 5,779 981 5,431 37,171 1 Includes restructuring and other income of $0.6 million and $0.4 million in fiscal 2004 and fiscal 2003, andrespectively. Includes restructuring and other expense of $8.4 million in fiscal 2002.2 Includes restructuring and other income of $0.1 million in fiscal 2004 and restructuring and other expense of $2.2 million in fiscal 2003 and restructuring and other income of $0.7 million in fiscal 2001.2003. (Dollars in thousands) (Dollars in thousands) (Dollars in thousands) Fiscal years ended October 31 2003 2002 2001 2004 2003 2002 $ (88,789 ) $ (77,414 ) $ (67,465 ) $ (96,062 ) $ (91,063 ) $ (79,025 ) (16,285 ) (19,747 ) (22,003 ) (15,523 ) (16,285 ) (19,747 ) 2,665 3,664 5,144 3,266 2,665 3,664 15,095 14,712 15,923 16,005 15,095 14,712 6,521 (292 ) 335 8,456 8,795 1,319 $ (80,793 ) $ (79,077 ) $ (68,066 ) $ (83,858 ) $ (80,793 ) $ (79,077 ) There were no sales over 10 percent of consolidated net sales to any single customer in fiscal 2001. (Dollars in thousands) United Foreign United Foreign Fiscal years ended October 31 States Countries Total States Countries Total $ 1,311,148 $ 341,360 $ 1,652,508 139,831 24,834 164,665 $ 1,207,590 $ 288,998 $ 1,496,588 $ 1,207,590 $ 288,998 $ 1,496,588 135,826 23,290 159,116 135,826 23,290 159,116 2002 Net sales $ 1,137,670 $ 261,603 $ 1,399,273 $ 1,137,670 $ 261,603 $ 1,399,273 Net property, plant, and equipment 137,309 19,470 156,779 137,309 19,470 156,779 2001 Net sales $ 1,100,255 $ 252,828 $ 1,353,083 Net property, plant, and equipment 132,678 9,567 142,245 3713
COMMITMENTS AND CONTINGENT LIABILITIESAs of October 31, 2003, totalTotal rental expense for operating leases was $19,446,000, $17,899,000, $16,732,000, and $15,933,000$16,732,000 for the fiscal years ended October 31, 2004, 2003, 2002, and 2001,2002, respectively. As of October 31, 2003,2004, future minimum lease payments under noncancelable operating leases amounted to $48,131,000$46,203,000 as follows: 2004, $13,474,000; 2005, $11,142,000;$13,980,000; 2006, $8,833,000;$12,232,000; 2007, $6,407,000;$9,269,000; 2008, $5,280,000;$6,963,000; 2009, $2,605,000; and after 2008, $2,995,000.2009, $1,154,000.$401,002,000$430,954,000 of receivables of the company’s financed products during fiscal 2003.2004. The outstanding receivable balance owed from the company’s distributors and dealers to third party financing companies was $142,554,000$152,910,000 on October 31, 2003.2004. The company’s maximum exposure for credit recourse with a third party financing company related to receivables under these financing arrangements was $550,000 as of October 31, 2003.2004. Toro also enters into limited inventory repurchase agreements with third party financing companies. As of October 31, 2003,2004, the company was contingently liable to$3,728,000$3,745,000 of inventory related to receivables under these financing arrangements. Toro has repurchased only immaterial amounts of inventory from third party financing companies over the last three years.During fiscal 2002, Toro entered intoThe company has an agreement with a third party financing company to provide lease-financing options to domestic golf course and somesports fields and grounds equipment customers. Under the terms of this agreement, the company could be contingently liable for a portion of the credit collection and residual realization risk on the underlying equipment for leasing transactions under this program. The company’s maximum exposure for credit collection and residual value as of October 31, 20032004 was $3,415,000.$7,155,000. The company has established a reserve for the estimated exposure related to this program.company-owned distributorshipswholly-owned subsidiaries also guarantee the residual value at the end of leases with third party financing companies for product sold to customers. The amount of this potential contingent liability as of October 31, 2004 and 2003 was $965,000.$1,940,000 and $2,185,000, respectively.2003,2004, the company had $4,228,000$1,782,000 of purchase commitments with some suppliers for materials and supplies as part of the normal course of business. There are a limited number of supply contracts that contain penalty provisions for either early termination or failure to purchase contracted quantities. The company does not expect potential payments under these provisions to materially affecteffect its results of operations or financial condition.20032004 and 2002,2003, the company had $16,211,000$10,941,000 and $12,159,000,$16,211,000, respectively, in outstanding letters of credit.company.company, except for the lawsuit discussed below.commercial disputes and where it is defending against charges of infringement and commercial disputes.infringement. While the ultimate results of the current cases are unknown at this time, management believes that the outcome of these cases is unlikely to have a materially adverse effect on the consolidated financial results of the company.14
FINANCIAL INSTRUMENTSwhichthat are concentrated in three business segments;segments: professional, residential, and distribution 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.currency.currency exchange rates. Toro uses derivativesderivative instruments only in an attempt to limit underlying exposure from currency rate fluctuations, and not for trading purposes.relationsrelationships between hedging38derivativesderivative instruments that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item.income (loss)loss and as a hedge asset or liability in prepaid expenses or accrued liabilities, as applicable. Once the forecasted transaction has been recognized as a sale or inventory purchase and a related asset or liability recorded in the balance sheet, the related fair value of the derivative hedge contract is reclassified from accumulated other comprehensive income (loss)loss to earnings. During fiscal 2004, 2003, 2002, and 2001,2002, the amount of losses reclassified to earnings for such cash flow hedges was $7,149,000, $4,574,000, $513,000, and $1,063,000,$513,000, respectively. As of October 31, 2003,2004, the amount of such contracts outstanding was $95,995,000.$98,613,000. The unrecognized after-tax loss portion of the fair value of the contracts recorded in accumulated other comprehensive loss as of October 31, 20032004 was $2,185,000.$1,437,000.133;133, “Accounting for Derivative Instruments and Hedging Activities,” therefore, changes in fair value of these instruments are recorded in other income, net.20032004 and 20022003 was a net liability of $3,963,000$4,108,000 and $996,000,$3,963,000, respectively. As of October 31, 2002, the estimated fair value of long-term debt with fixed interest rates was $204,227,000 compared to its carrying value of $194,581,000. The fair value is estimated by discounting the projected cash flows using the rate at which similar amounts of debt could currently be borrowed.15
QUARTERLY FINANCIAL DATA(unaudited)20032004 and fiscal 20022003 are as follows: Fiscal year ended Fiscal year ended Fiscal year ended October 31, 2003 October 31, 2004 October 31, 2004 (Dollars in thousands, (Dollars in thousands, (Dollars in thousands, except per share data) except per share data) except per share data) Quarter First Second1 Third2 Fourth3 First Second Third Fourth $ 295,962 $ 495,840 $ 394,524 $ 310,262 $ 313,573 $ 548,027 $ 454,044 $ 336,864 105,581 175,632 146,950 107,296 112,610 198,879 164,202 117,379 6,981 41,971 27,044 5,624 9,325 52,199 34,213 6,929 0.28 1.68 1.08 0.22 0.27 1.61 1.03 0.21 0.37 2.10 1.40 0.30 0.36 2.00 1.33 0.28 1 Includes restructuringNet earnings per share amounts do not sum to equal full year total due to changes in the number of shares outstanding during the periods and other income of $0.2 million.2Includes restructuring and other expense of $1.7 million.3Includes restructuring and other expense of $0.3 million.rounding. Fiscal year ended October 31, 2002 (Dollars in thousands, except per share data) Quarter First1,2 Second Third Fourth3 Net sales $ 277,915 $ 470,314 $ 375,632 $ 275,412 Gross profit 95,307 162,052 128,939 98,964 Earnings (loss) before accounting change (5,121 ) 38,138 21,922 4,992 Net earnings (loss) (29,735 ) 38,138 21,922 4,992 Basic net earnings (loss) per share before accounting change (0.20 ) 1.51 0.87 0.20 Basic net earnings (loss) per share (1.19 ) 1.51 0.87 0.20 Diluted net earnings (loss) per share before accounting change (0.20 ) 1.46 0.84 0.19 Diluted net earnings (loss) per share (1.19 ) 1.46 0.84 0.19 Fiscal year ended October 31, 2003 (Dollars in thousands, except per share data) Quarter First Second Third Fourth Net sales $ 295,962 $ 495,840 $ 394,524 $ 310,262 Gross profit 105,581 175,632 146,950 107,296 Net earnings 6,981 41,971 27,044 5,624 Basic net earnings per share 0.28 1.68 1.08 0.22 Diluted net earnings per share 0.27 1.61 1.03 0.21 1Includes non-cash impairment charges of $24.6 million, net of income tax benefit of $0.5 million, recognized as a cumulative effect of change in accounting principle.2Includes restructuring and other expense of $9.9 million.3Includes restructuring and other income of $1.5 million.394516
ELEVEN-YEAR FINANCIAL DATA (unaudited) (Dollars and shares in millions, except per share data) (Dollars and shares in millions, except per share data) (Dollars and shares in millions, except per share data) Fiscal years ended October 311,8 Fiscal years ended October 311,8 2003 2002 2001 2000 1999 19984 19977 1996 1995 1994 1993 Fiscal years ended October 311,8 2004 2003 2002 2001 2000 1999 19984 19977 1996 1995 1994 $ 1,496.6 $ 1,399.3 $ 1,353.1 $ 1,339.0 $ 1,279.7 $ 1,111.3 $ 1,052.8 $ 930.9 $ 919.4 $ 864.3 $ 706.6 $ 1,652.5 $ 1,496.6 $ 1,399.3 $ 1,353.1 $ 1,339.0 $ 1,279.7 $ 1,111.3 $ 1,052.8 $ 930.9 $ 919.4 $ 864.3 7.0 % 3.4 % 1.1 % 4.6 % 15.1 % 5.6 % 13.1 % 1.3 % 6.4 % 22.3 % 10.6 % 10.4 % 7.0 % 3.4 % 1.1 % 4.6 % 15.1 % 5.6 % 13.1 % 1.3 % 6.4 % 22.3 % $ 81.6 $ 59.9 $ 50.4 $ 45.3 $ 35.1 $ 4.1 $ 34.8 $ 36.4 $ 32.4 $ 32.4 $ 15.3 $ 102.7 $ 81.6 $ 59.9 $ 50.4 $ 45.3 $ 35.1 $ 4.1 $ 34.8 $ 36.4 $ 32.4 $ 32.4 5.5 % 4.3 % 3.7 % 3.4 % 2.7 % 0.4 % 3.3 % 3.9 % 3.5 % 3.8 % 2.2 % 6.2 % 5.5 % 4.3 % 3.7 % 3.4 % 2.7 % 0.4 % 3.3 % 3.9 % 3.5 % 3.8 % $ 81.6 $ 35.3 $ 50.4 $ 45.3 $ 35.1 $ 4.1 $ 34.8 $ 36.4 $ 32.4 $ 32.4 $ 15.3 $ 102.7 $ 81.6 $ 35.3 $ 50.4 $ 45.3 $ 35.1 $ 4.1 $ 34.8 $ 36.4 $ 32.4 $ 32.4 3.12 2.32 1.93 1.74 1.32 0.16 1.40 1.45 1.25 1.25 0.61 4.04 3.12 2.32 1.93 1.74 1.32 0.16 1.40 1.45 1.25 1.25 20.3 % 10.0 % 15.3 % 15.2 % 12.9 % 1.6 % 15.3 % 18.0 % 17.5 % 20.2 % 11.4 % 24.7 % 20.3 % 10.0 % 15.3 % 15.2 % 12.9 % 1.6 % 15.3 % 18.0 % 17.5 % 20.2 % $ 370.8 $ 298.4 $ 271.6 $ 249.3 $ 225.9 $ 221.2 $ 234.2 $ 197.1 $ 165.1 $ 176.2 $ 156.9 $ 324.4 $ 370.8 $ 298.4 $ 271.6 $ 249.3 $ 225.9 $ 221.2 $ 234.2 $ 197.1 $ 165.1 $ 176.2 175.1 178.8 194.6 194.5 195.6 196.8 177.7 53.0 53.4 70.4 87.3 175.0 175.1 178.8 194.6 194.5 195.6 196.8 177.7 53.0 53.4 70.4 437.2 365.3 341.4 317.2 279.7 263.4 241.2 213.6 190.9 178.7 141.9 395.6 437.2 365.3 341.4 317.2 279.7 263.4 241.2 213.6 190.9 178.7 29.3 % 34.9 % 40.2 % 39.4 % 47.5 % 46.4 % 47.6 % 30.7 % 36.6 % 33.8 % 46.5 % 30.8 % 29.3 % 34.9 % 40.2 % 39.4 % 47.5 % 46.4 % 47.6 % 30.7 % 36.6 % 33.8 % 17.93 15.01 13.92 12.62 11.13 10.32 9.90 8.88 7.85 7.03 5.74 17.12 17.93 15.01 13.92 12.62 11.13 10.32 9.90 8.88 7.85 7.03 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 0.24 50.41 32.11 25.00 19.000 19.7500 23.1563 21.88 18.125 16.125 15.250 13.375 71.65 50.41 32.11 25.00 19.000 19.7500 23.1563 21.88 18.125 16.125 15.250 30.15 20.96 16.38 14.063 11.0938 8.2500 15.75 14.188 12.813 10.438 7.063 44.45 30.15 20.96 16.38 14.063 11.0938 8.2500 15.75 14.188 12.813 10.438 5,367 5,395 5,380 5,040 4,923 4,695 4,309 3,610 3,638 3,434 3,117 5,164 5,367 5,395 5,380 5,040 4,923 4,695 4,309 3,610 3,638 3,434 1 In 1995, the company changed its fiscal year end from July 31 to October 31. Therefore, the year-end’s prior to 1996 arewere derived from unaudited and were restated to includeamounts reflecting twelve months of data through the Friday closest to October 31 for comparative purposes.2 The adoption of Emerging Issues Task Force issues 00-10, 00-14, and 00-25 resulted in a (decrease) increase of net sales for fiscal 2001, 2000, 1999, 1998, and 1997 by ($5.2)$(5.2) million, $2.1 million, $4.7 million, $0.9 million, and $1.6 million, respectively. 1996 and prior years have not been restated.3 Fiscal 2004, 2003, 2002, 2001, 1999, 1998, and 1997, includes net restructuring and other (income) expense (income) of $(0.7) million, $1.8 million, $8.4 million, ($0.7)$(0.7) million, $1.7 million, $15.0 million, and $2.6 million, respectively.4 The company’s consolidated financial statements include results of operations of Exmark from November 1, 1997 and Drip In from February 1, 1998, dates of acquisition. 5 Fiscal 2002 net earnings and diluted net earnings per share after cumulative effect of change in accounting principle of $24.6 million, or $0.95 per diluted share, were $35.3 million and $1.37, respectively. 6 Fiscal 1997 net earnings and diluted net earnings per share includes a loss on the early retirement of debt of $1.7 million, or $0.07 per diluted share. 7 The company’s consolidated financial statements include results of operations of the James Hardie Irrigation Group from December 1, 1996, the date of acquisition. 8 Per share data has been adjusted for all fiscal years presented to reflect a two-for-one stock split effective April 1, 2003. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE 4046ITEM 9A. CONTROLS AND PROCEDURES fourth quarter ended October 31, 20032004 that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.ITEM 9B. OTHER INFORMATION ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Directors”Directors Continuing in Office”, “Section 16(a) Beneficial Ownership Reporting Compliance”, and “Corporate Governance – Code of Conduct and Code of Ethics for the CEO and Senior Financial Officers”, in the company’s Proxy Statement to be filed with the Securities and Exchange Commission with respect to the next annual meeting of stockholders, which involves the election of directors or, if such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, such information will be filed as part of an amendment to this Form 10-K not later than the end of the 120-day period.ITEM 11. EXECUTIVE COMPENSATION ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None.Information concerning certain relationships and related transactions required by Item 13 of Part III of this report is incorporated herein by reference to information to be contained under the caption “Certain Relationships and Related Transactions”, in the company’s Proxy Statement to be filed with the Securities and Exchange Commission with respect to the next annual meeting of stockholders, which involves the election of directors or, if such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, such information will be filed as part of an amendment to this Form 10-K not later than the end of the 120-day period.ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES the end of the 120-day period.41ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K• Report of Independent Auditors’ ReportRegistered Public Accounting Firm• Consolidated Statements of Earnings for the fiscal years ended October 31, 2004, 2003, 2002, and 20012002• Consolidated Balance Sheets as of October 31, 20032004 and 20022003• Consolidated Statements of Cash Flows for the fiscal years ended October 31, 2004, 2003, 2002, and 20012002• Consolidated Statements of Stockholders’ Equity for the fiscal years ended October 31, 2004, 2003, 2002, and 20012002• Notes to Consolidated Financial Statements • Schedule II — Valuation and Qualifying Accounts certificate (incorporated by reference to Exhibit 4(c) to Registrant’s Registration Statement on Form S-8, Registration No. 2-94417).certificate.��Rights Agreement dated as of May 20, 1998, between Registrant and Wells Fargo Bank Minnesota, National Association relating to rights to purchase Series B Junior Participating Voting Preferred Stock, as amended (incorporated by reference to Registrant’s Current Report on Form 8-K dated May 27, 1998, Commission File No. 1-8649).10(c)10(d) The Toro Company Annual Management Incentive Plan II for officers of Registrant (incorporated by reference to the appendix to Registrant’s Proxy Statement on Form DEF 14A filed with the Commission on January 31, 2002).*10(d)10(e) The Toro Company 1993 Stock Option Plan (incorporated by reference to Exhibit 10(f) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 30, 1999).*10(e)10(f) The Toro Company Performance Share Plan (incorporated by reference to the appendix to Registrant’s Proxy Statement on Form DEF 14A filed with the Commission on January 31, 2002).*10(f)10(g) The Toro Company 2000 Stock Option Plan (incorporated by reference to the appendix to Registrant’s Proxy Statement on Form DEF 14A filed with the Commission on January 31, 2002).*10(g)10(h) The Toro Company Supplemental Management Retirement Plan (incorporated by reference to Exhibit 10(h) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended April 28, 2000).*10(h)10(i) Amendment to The Toro Company Supplemental Management Retirement Plan (incorporated by reference to Exhibit 10(c) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 30, 2004).*10(i)10(k) The Toro Company Chief Executive Officer Succession Incentive Award Agreement (incorporated by reference to Exhibit 10(j) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 2, 2002).*10(j)10(l) The Toro Company Deferred Compensation Plan for Officers (incorporated by reference to Exhibit 10(k) to Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2002).*4210(k)10(m) The Toro Company Deferred Compensation Plan for Non-Employee Directors (incorporated by reference to Exhibit 10(l) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended July 28, 2000).*10(l)10(n) The Toro Company 2000 Directors Stock Plan, as amended.*10(m)1 to Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarter ended July 28, 2000)8-K dated November 1, 2004, Commission File No. 1-8649).*10(m)10(p) Multi-YearForm of Stock Option Agreement between The Toro Company and its officers (incorporated by reference to Exhibit 2 to Registrant’s Current Report on Form 8-K dated December 2, 2004, Commission File No. 1-8649).*February 22, 2002, by andSeptember 8, 2004, among The Toro Company, and Toro Credit Company, Toro Manufacturing Company, Incorporated, and certain subsidiaries, as Borrowers, the borrowers and other obligated parties named therein,lenders from time to time party thereto, Bank of America, N.A., as Administrative Agent, U.S. Bank National AssociationSwing Line Lender and Suntrust Bank as co-syndication agents, Harris Trust and Savings Bank and Wells Fargo Bank, National Association as co-documentation agents, and BancLetter of America Securities LLC as sole lead arranger and sole book managerCredit Issuer (incorporated by reference to Exhibit 10(n)10(a) to Registrant’s QuarterlyCurrent Report on Form 10-Q for the quarter ended August 1, 2003)8-K dated September 8, 2004, Commission File No. 1-8649).10(n) Amendment No. 1 to Multi-Year Credit Agreement dated as of December 11, 2002, by and among The Toro Company and Toro Credit Company, the borrowers, Toro Manufacturing LLC, Bank of America, N.A. as Administrative Agent, and each of the Banks as defined in the Multi-Year Credit Agreement dated as of February 22, 2002 (incorporated by reference to Exhibit 10(o) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2003).10(o) Amendment No. 2 to Multi-Year Credit Agreement dated as of July 9, 2003, by and among The Toro Company and Toro Credit Company, the borrowers, Exmark Manufacturing Company Incorporated, Bank of America, N.A. as Administrative Agent, and each of the Banks as defined in the Multi-Year Credit Agreement dated as of February 22, 2002 (incorporated by reference to Exhibit 10(p) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2003).10(p)10(s) Loan Agreement dated as of July 9, 2003 among Toro Receivables Company, as borrower, and The Toro Company, as servicer, and Three Pillars Funding Corporation, as lender, and Suntrust Capital Markets, Inc., as administrator (incorporated by reference to Exhibit 10(p) to Registrant’s Quarterly Report on Form 10-Q for the quarter ended August 1, 2003).Auditors’ ConsentRegistered Public Accounting Firm* Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Annual Report on Form 10-K pursuant to Item 15(c). Reports on Form 8-KDuring the fiscal quarter ended October 31, 2003, Toro furnished a Current Report on Form 8-K dated August 26, 2003 pursuant to Item 12 that attached a press release announcing Toro’s financial results for the fiscal quarter ended August 1, 2003.(c) Exhibits(d)(c) Financial Statement Schedules43 Balance as of Charged to Balance as of Balance as of Charged to Balance as of the beginning costs and the end of the beginning costs and the end of Description of the fiscal year expenses1 Other2 Deductions3 the fiscal year of the fiscal year expensesa Otherb Deductionsc the fiscal year $ 2,421,000 $ 698,000 – $ 924,000 $ 2,195,000 $ 7,209,000 $ 1,347,000 $ (249,000 ) $ 5,886,000 $ 2,421,000 $ 7,209,000 $ 1,347,000 $ (249,000 ) $ 5,886,000 $ 2,421,000 Fiscal year ended October 31, 2002 Allowance for doubtful accounts and notes receivable reserves $ 5,105,000 $ 4,702,000 – $ 2,598,000 $ 7,209,000 $ 5,105,000 $ 4,702,000 – $ 2,598,000 $ 7,209,000 Fiscal year ended October 31, 2001 Allowance for doubtful accounts and notes receivable reserves $ 6,908,000 $ 1,548,000 $ 104,000 $ 3,455,000 $ 5,105,000 1a Provision, net of recoveries.Provision. 2b Addition (reduction) to allowance for doubtful accounts due to acquisitions and divestiture.divestitures. 3c Uncollectible accounts charged off. Balance as of Charged to Balance as of the beginning costs and the end of Description of the fiscal year expenses1 Deductions2 the fiscal year $ 53,590,000 $ 46,067,000 $ 40,285,000 $ 59,372,000 Fiscal year ended October 31, 2002 Accrued warranties $ 57,882,000 $ 43,042,000 $ 47,334,000 $ 53,590,000 Fiscal year ended October 31, 2001 Accrued warranties $ 55,985,000 $ 43,418,000 $ 41,521,000 $ 57,882,000 1Provision, net of recoveries.2Warranty claims processed.4450 THE TORO COMPANY
(Registrant) By /s/ Stephen P. Wolfe Dated: January 12,December 20, 2004 Stephen P. Wolfe
Vice President – Finance Treasurer
and Chief Financial Officer Signature Title Date /s/ Kendrick B. Melrose
Kendrick B. Melrose Chairman, Chief Executive
Officer and Director
(principal executive officer) January 12,December 20, 2004 /s/ Stephen P. Wolfe
Stephen P. Wolfe Vice President – Finance, Treasurer
and Chief Financial Officer
(principal financial officer) January 12,December 20, 2004 /s/ Randy B. James
Randy B. James Vice President, Controller
(principal accounting officer) January 12,December 20, 2004 /s/ Ronald O. Baukol
Ronald O. Baukol Director January 12,December 20, 2004 /s/ Robert C. Buhrmaster
Robert C. Buhrmaster Director January 12,December 20, 2004 /s/ Winslow H. Buxton
Winslow H. Buxton Director January 12,December 20, 2004 /s/ Janet K. Cooper
Janet K. Cooper Director January 12,December 20, 2004 /s/ Katherine J. Harless
Katherine J. Harless Director January 12,December 20, 2004 /s/ Robert H. Nassau
Robert H. Nassau Director January 12,December 20, 2004 /s/ Dale R. Olseth
Dale R. Olseth Director January 12,December 20, 2004 /s/ Gregg W. Steinhafel
Gregg W. Steinhafel Director January 12,December 20, 2004 /s/ Christopher A. Twomey
Christopher A. Twomey Director January 12,December 20, 2004 /s/ Edwin H. Wingate
Edwin H. Wingate Director January 12,December 20, 20044551