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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

ý    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended October 31, 2015

      o    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from         to         

THE TORO COMPANY
(Exact name of registrant as specified in its charter)

Delaware   1-8649   41-0580470
(State of incorporation)   (Commission File Number)   (I.R.S. Employer Identification Number)

8111 Lyndale Avenue South
Bloomington, Minnesota 55420-1196
Telephone number: (952) 888-8801

(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)



Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class
 
Name of Each Exchange on Which Registered

Common Stock, par value $1.00 per share

  New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ý No o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý No o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý   Accelerated filer o   Non-accelerated filer o   Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No ý

The aggregate market value of the voting common stock held by non-affiliates of the registrant, based on the closing price of the common stock on May 1, 2015, the last business day of the registrant's most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $3.8 billion.

The number of shares of common stock outstanding as of December 11, 2015 was 54,742,172.

Documents Incorporated by Reference

Portions of the registrant's Proxy Statement for the 2016 Annual Meeting of Shareholders expected to be held March 15, 2016 are incorporated by reference into Part III.


Table of Contents

THE TORO COMPANY
FORM 10-K
TABLE OF CONTENTS

    Description   Page Number

PART I

 

 

   

ITEM 1.

 

Business

 
3-12

ITEM 1A.

 

Risk Factors

  12-23

ITEM 1B.

 

Unresolved Staff Comments

  23

ITEM 2.

 

Properties

  24

ITEM 3.

 

Legal Proceedings

  24

ITEM 4.

 

Mine Safety Disclosures

  24

 

Executive Officers of the Registrant

  25

PART II

 

 

 
 

ITEM 5.

 

Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities

 
26

 

The Toro Company Common Stock Comparative Performance Graph

  27

ITEM 6.

 

Selected Financial Data

  28

ITEM 7.

 

Management's Discussion and Analysis of Financial Condition and Results of Operations

  28-42

ITEM 7A.

 

Quantitative and Qualitative Disclosures about Market Risk

  42-43

ITEM 8.

 

Financial Statements and Supplementary Data

  44

 

Management's Report on Internal Control over Financial Reporting

  44

 

Report of Independent Registered Public Accounting Firm

  45

 

Consolidated Statements of Earnings for the fiscal years ended October 31, 2015, 2014, and 2013

  46

 

Consolidated Statements of Comprehensive Income for the fiscal years ended October 31, 2015, 2014, and 2013

  46

 

Consolidated Balance Sheets as of October 31, 2015 and 2014

  47

 

Consolidated Statements of Cash Flows for the fiscal years ended October 31, 2015, 2014, and 2013

  48

 

Consolidated Statements of Stockholders' Equity for the fiscal years ended October 31, 2015, 2014, and 2013

  49

 

Notes to Consolidated Financial Statements

  50-69

ITEM 9.

 

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

  70

ITEM 9A.

 

Controls and Procedures

  70

ITEM 9B.

 

Other Information

  70

PART III

 

 

 
 

ITEM 10.

 

Directors, Executive Officers and Corporate Governance

 
70-71

ITEM 11.

 

Executive Compensation

  71

ITEM 12.

 

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

  71

ITEM 13.

 

Certain Relationships and Related Transactions, and Director Independence

  71

ITEM 14.

 

Principal Accountant Fees and Services

  71

PART IV

 

 

 
 

ITEM 15.

 

Exhibits, Financial Statement Schedules

 
71-75

 

Signatures

  76

2


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PART I

ITEM 1.   BUSINESS

Introduction

The Toro Company was incorporated in Minnesota in 1935 as a successor to a business founded in 1914 and reincorporated in Delaware in 1983. Unless the context indicates otherwise, the terms "company," "Toro," "we," "us," and "our" refer to The Toro Company and its consolidated subsidiaries. Our executive offices are located at 8111 Lyndale Avenue South, Bloomington, Minnesota, 55420-1196, and our telephone number is (952) 888-8801. Our web site for corporate and investor information is www.thetorocompany.com, which also contains links to our branded product sites. The information contained on our web sites or connected to our web sites is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report.

   We design, manufacture, and market professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting, agricultural micro-irrigation systems, rental and specialty construction equipment, and residential yard and snow thrower products. With our acquisition of the BOSS® professional snow and ice management business in the first quarter of fiscal 2015, we also design, manufacture, and market professional snow and ice management products. We produced our first mower for golf course use in 1921 when we mounted five reel mowers on a Toro tractor, and we introduced our first lawn mower for residential use in 1935. We have continued to enhance our product lines over the more than 100 years we have been in business. We classify our operations into three reportable business segments: Professional, Residential, and Distribution. Our Distribution segment, which consists of our company-owned domestic distributorships, has been combined with our corporate activities and is shown as "Other." Net sales of our three reportable segments accounted for the following percentages of our consolidated net sales for fiscal 2015: Professional, 69 percent; Residential, 30 percent; and Other, 1 percent.

   Our products are advertised and sold at the retail level under the primary trademarks of Toro®, Exmark®, BOSS®, Irritrol®, Hayter®, Pope®, Unique Lighting Systems®, and Lawn-Boy® most of which are registered in the United States and/or in the primary countries outside the United States where we market such products. This report also contains trademarks, trade names, and service marks that are owned by other persons or entities, such as The Home Depot, Inc. ("The Home Depot").

   We emphasize quality and innovation in our products, customer service, manufacturing, and marketing. We strive to provide well-built, dependable products supported by an extensive service network. We have committed funding for research, development, and engineering in order to improve and enhance existing products and develop new products. Through these efforts, we seek to be responsive to trends that may affect our target markets now and in the future. A significant portion of our revenues has historically been, and we expect will continue to be, attributable to new and enhanced products. We define new products as those introduced in the current and previous two fiscal years. We plan to continue to pursue targeted acquisitions using a disciplined approach that adds value while supplementing our existing brands and product portfolio.

   Our purpose is to help our customers enrich the beauty, productivity, and sustainability of the land. Our vision is to be the most trusted leader in solutions for the outdoor environment. Every day. Everywhere. Our mission, or how we strive to make our vision a reality and what we intend to accomplish, is to deliver superior innovation and to deliver superior customer care.

Products by Market

We strive to be a leader in adapting advanced technologies to products and services that provide solutions for turf care maintenance, landscapes, agricultural fields, specialty construction, snow and ice management, and residential demands. The following is a summary of our products, by market, for the Professional segment and our products for the Residential segment:

Professional – We design professional turf, landscape, specialty construction, and agricultural products and market them worldwide through a network of distributors and dealers, as well as directly to government customers, rental companies, and large retailers. With our acquisition of BOSS, we also design and manufacture a broad line of professional snow and ice removal equipment and market them through a network of distributors and dealers. These channel partners then sell our products primarily to professional users engaged in creating and renovating landscapes; irrigating turf and agricultural fields; installing, repairing, and replacing underground utilities; maintaining turf, such as golf courses, sports fields, municipal properties, and residential and commercial landscapes; and managing snow and ice.

Golf Market.   Products for the golf course market include large reel and rotary riding products for fairway, rough, and trim cutting; riding and walking mowers for putting greens and specialty areas; greens rollers; turf sprayer equipment; utility vehicles; aeration equipment; and bunker maintenance equipment. In fiscal 2015, we introduced the Reelmaster® 5010-H, a fairway mower with a hybrid drive system featuring PowerMatch™ Technology that is designed to deliver power and fuel-efficient performance. In addition, in fiscal 2015, we began offering a new, all-improved, all-season safety cab for the Toro Groundsmaster® with productivity-enhancing features that are intended to provide safety and comfort.

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   We also manufacture and market underground irrigation systems for the golf course market, including sprinkler heads, controllers, turf sensors, and electric, battery-operated, and hydraulic valves. These irrigation systems are designed to use computerized management systems and a variety of other technologies to help customers manage their consumption of water. Several of our golf course sprinklers are equipped with a unique TruJectory™ feature that provides an adjustable angle of nozzle trajectory, as well as enhanced water distribution control. Our Network VP® Satellite combines modular flexibility, ease of use, and increased control in a single controller with programming to the individual station level that supports station-based flow management. Our Turf Guard® wireless soil monitoring systems are designed to measure and communicate soil moisture, salinity, and temperature through sensors to a user's software. Our R Series™ conversion assemblies enable the upgrade of select competitive sprinklers to our technologies, such as the above-mentioned TruJectory™ or ratcheting riser. Our INFINITY® Series golf course sprinklers with the Smart Access® feature are designed to provide easy access to critical components of the sprinkler without needing to dig. Our popular Lynx® central control system allows superintendents to control the irrigation of their course from a web-enabled device, or via our National Support Network, which provides remote troubleshooting. In 2015, we released Version 4.0 of the Lynx® system which includes features intended to help users ensure that critical operating system data reflects the functionality of the actual pipe and sprinkler hardware in the field.

   Additionally, we manufacture and market Twilight™ golf lighting products that include a collection of LED-powered cup lights and removable lighting fixtures designed to illuminate putting greens during club events or special functions.

Landscape Contractor Equipment Market.   We market products to landscape contractors under the Toro and Exmark brands. Products for the landscape contractor market include zero-turn radius riding mowers, heavy-duty walk behind mowers, mid-size walk behind mowers, stand-on mowers, and turf renovation and tree care equipment. We also offer some products with electronic fuel injection engine options, which provide improved fuel efficiency and lower emissions. In fiscal 2015, we enhanced our line of zero-turn mowers with a suspension system that provides a suspended operator platform and isolates the operator from the rest of the machine. Along with adjustable shocks, this design is intended to reduce impacts, bumps, and vibrations for a more comfortable ride. During fiscal 2015, we introduced a new line of utility terrain vehicles ("UTVs") intended to help with jobs on demanding terrain. In fiscal 2015, we also launched a new stand-on spreader/sprayer for turf application with Lean-to-Steer technology that is intended to allow the operator flexibility to control motion and make adjustments during application.

Sports Fields and Grounds Equipment Market.   Products for the sports fields and grounds market include riding rotary and reel mowers and attachments, aerators, and debris management products, which include versatile debris vacuums, blowers, and sweepers. Other products include infield grooming equipment and multipurpose vehicles, such as the Toro Workman®, that can be used for turf maintenance, towing, and industrial hauling. These products are sold through distributors, who then sell to owners and/or managers of sports fields, governmental properties, and residential and commercial landscapes, as well as directly to government customers.

Residential/Commercial Irrigation and Lighting Market.   Turf irrigation products marketed under the Toro and Irritrol brands include rotors; sprinkler bodies and nozzles; plastic, brass, and hydraulic valves; drip tubing and subsurface irrigation; electric control devices; and wired and wireless rain, freeze, climate, and soil sensors. These products are designed for use in residential and commercial turf irrigation applications and can be installed into new systems or used to replace or retrofit existing systems. Most of the product lines are designed for professionally installed, underground automatic irrigation. Electric controllers activate valves and sprinklers in a typical irrigation system. Both the Toro and Irritrol brands have achieved Environmental Protection Agency ("EPA") WaterSense certification for numerous irrigation controller families and models. Our Irritrol Climate Logic® smart device automatically adjusts irrigation system watering times based on real-time weather data from an on-site sensor combined with historical averages, while our award-winning Toro Precision™ Soil Sensor wirelessly transmits soil moisture content to an irrigation controller and signals whether or not watering is needed. Our Precision™ Spray Nozzles & Precision™ Soil Sensor are intended to deliver an optimum precipitation rate and superior distribution uniformity, resulting in the use of less water without affecting the health of landscapes. The EVOLUTION® controller is an intuitive, menu-based controller family that offers computer programming, lighting control, multiple soil sensors, smart add-ons, and downloadable updates through a USB device. The T5 Rotor with RapidSet® technology allows convenient arc adjustment with no tools, as well as a built-in clutch to protect gear damage.

   Our retail irrigation products are designed for homeowner installation and include sprinkler heads, valves, timers, sensors, and drip irrigation systems. The XTRA SMART® ECXTRA™ sprinkler timer and its intuitive, online Scheduling Advisor™ recommends the proper watering schedule based on the local weather, plant type, and sprinkler type.

   We manufacture and market lighting products under the Unique Lighting Systems® brand name consisting of a line of high quality, professionally installed lighting fixtures and transformers for residential and commercial landscapes. Our lighting product line is offered through distributors and landscape contractors that also

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purchase our irrigation products. The LIGHT LOGIC™ remote control system provides operators with wireless scene control for landscape lighting and can upgrade existing systems with expanded control. In fiscal 2015, we introduced the Elements™ Series outdoor lighting products that offer a blend of high-quality materials and styling to match the natural environment in which it is placed.

Snow and Ice Management Market.   During the first quarter of fiscal 2015, we acquired the BOSS professional snow and ice management business. Products for the snow and ice management market are marketed mainly in North America under the BOSS brand and include snowplows, salt and sand spreaders, and related parts and accessories for light and medium duty trucks, all terrain vehicles ("ATVs"), UTVs, skid steers, and front-end loaders. These products are mainly sold through distributors and dealers, who then sell to end-users that primarily are the same customers as those in our landscape contractor and grounds equipment markets, such as contractors, municipalities, and other governmental entities.

Rental and Specialty Construction Market.   Our compact utility loaders are the cornerstone products for our Toro Sitework Systems business, which are designed to improve the efficiency in creation and renovation of landscapes. We offer over 35 attachments for our compact utility loaders, including trenchers, augers, vibratory plows, and backhoes.

   Products for the rental market include compact utility loaders, walk-behind trenchers, stump grinders, and turf renovation products, many of which are also sold to landscape contractors. We also have a line of rental products that feature concrete and mortar mixers, material handlers, compaction equipment, and other concrete power tools. In fiscal 2015, we introduced the Dingo® TX 1000, which features a higher operating capacity and greater reach height that allows attachments to clear the side of dumpsters or trucks. We also expanded our masonry lineup with the launch of the UltraMix™ Mortar Mixer, featuring a patented paddle design and symmetrical drum designed to create a smooth mix while reducing mixing time.

Underground Construction Market.   We manufacture a line of directional drills and riding trenchers used to bury utilities underground. These products are used to install water, gas, electric, and telecommunication distribution systems. Our underground products are used by specialty contractors worldwide.

Micro-Irrigation Market.   Products for the micro-irrigation market include products that regulate the flow of water for drip irrigation, including Aqua-Traxx® PBX drip tape, Neptune® flat emitter dripline, Blue Stripe® polyethylene tubing, BlueLine® drip line, and NGE® emitters, all used in agriculture, mining, and landscape applications. Global food demand and increased water use restrictions have continued to drive the need for more efficient irrigation solutions for agriculture, including our Aqua-Traxx® FC (flow control) drip tape that allows growers to achieve water uniformity while retaining flexibility to adjust system flow rates when needed. In addition to these core products, we offer a full complement of control devices and connection options to complete the system, including a software package used to help design drip irrigation systems. These products are sold mainly through dealers and distributors who then sell to end-users for use primarily in vegetable fields, fruit and nut orchards, vineyards, landscapes, and mines.

Residential – We market our residential products to homeowners through a variety of distribution channels, including outdoor power equipment distributors and dealers, hardware retailers, home centers, mass retailers, and over the Internet. These products are sold mainly in North America, Europe, and Australia, with the exception of snow thrower products that are sold primarily in North America and Europe. We also license our trademark on certain home solutions products as a means of expanding our brand presence.

Walk Power Mower Products.   We manufacture and market numerous walk power mower models under our Toro and Lawn-Boy brand names, as well as the Hayter brand in the United Kingdom. Models differ as to cutting width, type of starter mechanism, method of grass clipping discharge, deck type, operational controls, and power sources, and are either self-propelled or push mowers. We also offer a line of rear-roller walk power mowers, a design that provides a striped finish, for the United Kingdom market. In fiscal 2015, we introduced the new Toro® Recycler® all-wheel drive lawnmower that delivers power to all four wheels, which is designed to make it easier to climb hills and power through rough terrain. The enhanced traction and maneuverability are paired with Toro's Personal Pace® self-propel system.

Riding Products.   We manufacture and market riding products under the Toro brand name. Riding products primarily consist of zero-turn radius mowers that are designed to save homeowners time by using superior maneuverability to cut around obstacles more quickly and easily than tractor technology. Our TimeCutter® SS and TimeCutter® MX zero-turn radius mowers are equipped with our Smart Speed® control system, which is designed to allow the operator to choose different ground speed ranges with the flip of a lever without changing the blade or engine speed. We also sell direct-collect riding mowers that are manufactured and sold in the European market. Many models of our riding products are available with a variety of engines, decks, transmissions, and accessories. In fiscal 2015, we introduced the Toro TimeCutter® SW Series zero-turn radius riding mowers. These new models combine the maneuverability and time-savings of a zero-turn mower with the familiar ease of a steering wheel and speed control pedal. These mowers also feature the SmartPark™ braking system, which sets the parking brake and turns off the cutting blades when the operator steps off the mower, all while keeping the engine running.

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Home Solutions Products.   We design and market home solutions products under the Toro and Pope brand names, including yard tools such as electric, gas, and cordless grass trimmers; electric and cordless hedge trimmers; and electric, gas, and cordless blower-vacuums. In Australia, we also design and market garden product offerings, such as underground and hose-end retail irrigation products under the Pope brand name. In fiscal 2015, we introduced the Ultra Blower Vac and UltraPlus Blower Vac, which is three machines in one; a powerful blower, high speed vacuum, and leaf shredder that features a metal impeller and an infinite variable speed air flow.

Snow Thrower Products.   We manufacture and market a range of gas-powered single-stage and two-stage snow thrower models, as well as a range of electric snow thrower models. Single-stage snow throwers are walk behind units with lightweight four-cycle gasoline engines. Most single-stage snow thrower models include Power Curve® snow thrower technology, and some feature our Quick Shoot™ control system that is designed to enable operators to quickly change snow-throwing direction. Our pivoting scraper is designed to keep the rotor in constant contact with the pavement. Our two-stage snow throwers are generally designed for relatively large areas of deep and heavy snow. Our two-stage snow throwers include a line of models featuring our patented Anti-Clogging System and Quick Stick® chute control technology. Our electric snow throwers are lightweight and ideal for clearing up to six inches of snow from decks, steps, sidewalks, and small driveways. In fiscal 2015, we introduced the Toro SnowMaster™ snow thrower, which features auger technology designed to increase efficiency by clearing more snow per minute.

Financial Information about International Operations and Business Segments

We currently manufacture our products in the United States ("U.S."), Mexico, Australia, the United Kingdom, Italy, Romania, and China for sale throughout the world. We maintain sales offices in the United States, Belgium, the United Kingdom, Australia, Singapore, Japan, China, Italy, Korea, and Germany. New product development is pursued primarily in the United States. Our net sales outside the U.S. were 25.5 percent, 28.7 percent, and 30.1 percent of total consolidated net sales for fiscal 2015, 2014, and 2013, respectively.

   A portion of our cash flow is derived from sales and purchases denominated in foreign currencies. To reduce the uncertainty of foreign currency exchange rate movements on these sales and purchase commitments, we enter into foreign currency exchange contracts for select transactions. For additional information regarding our foreign currency exchange contracts, see Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" of this report. For additional financial information regarding our international operations and geographical areas, and each of our three reportable business segments, see Note 12 of the Notes to Consolidated Financial Statements, in the section entitled "Segment Data," included in Part II, Item 8, "Financial Statements and Supplementary Data" of this report.

Engineering and Research

We are committed to an ongoing engineering program dedicated to developing innovative new products and improvements in the quality and performance of existing products. However, a focus on innovation also carries certain risks that new technology could be slow to be accepted or not accepted by the marketplace. We attempt to mitigate these risks through our focus on and commitment to understanding our customers' needs and requirements. We invest time upfront with customers, using "Voice of the Customer" tools, to help us develop innovative products that are intended to meet or exceed customer expectations. We use Design for Manufacturing and Assembly ("DFM/A") tools to ensure early manufacturing involvement in new product designs intended to reduce production costs. DFM/A focuses on reducing the number of parts required to assemble new products, as well as designing products to move more efficiently through the manufacturing process. We strive to make improvements to our new product development system as part of our continuing focus on Lean methods to shorten development time, reduce costs, and improve quality.

   Our engineering expenses are primarily incurred in connection with the development of new products that may have additional applications or represent extensions of existing product lines, improvements to existing products, and cost reduction efforts. Our expenditures for engineering and research were $73.6 million (3.1 percent of net sales) in fiscal 2015, $69.7 million (3.2 percent of net sales) in fiscal 2014, and $64.6 million (3.2 percent of net sales) in fiscal 2013.

Manufacturing and Production

We have strategically identified specific core manufacturing competencies for vertical integration, such as injection molding, extrusion, welding, painting, machining, and aluminum die casting, and have chosen outside vendors to provide other services. We design component parts in cooperation with our vendors, contract with them for the development of tooling, and then enter into agreements with these vendors to purchase component parts manufactured using the tooling. In addition, our vendors regularly test new technologies to be applied in the design and production of component parts. Manufacturing operations include robotic and computer-automated equipment intended to speed production, reduce costs, and improve the quality, fit, and finish of our products. Operations are also designed to be flexible enough to accommodate product design changes that are necessary to respond to market conditions and changing customer requirements.

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   In order to utilize our manufacturing facilities and technology more effectively, we pursue continuous improvements in our manufacturing processes with the use of Lean methods that are intended to streamline work and eliminate waste. We spend considerable effort to reduce manufacturing costs through Lean methods and process improvement, product and platform design, application of advanced technologies, enhanced environmental management systems, safety improvements, and improved supply-chain management. We also have some agreements with other third party manufacturers to manufacture products on our behalf.

   Our professional products are manufactured throughout the year. Our residential lawn and garden products are also generally manufactured throughout the year. However, our residential snow thrower products are manufactured in the summer and fall months but may be extended into the winter months, depending upon demand. Our products are tested in conditions and locations similar to those in which they are used. We use computer-aided design and manufacturing systems to shorten the time between initial concept and final production. DFM/A principles are used throughout the product development process to optimize product quality and cost.

   Our production levels and inventory management goals are based on estimates of retail demand for our products, taking into account production capacity, timing of shipments, and field inventory levels. Our production system utilizes Kanban, supplier pull, and build-to-order methodologies in our manufacturing facilities, as appropriate, for the business units they support in order to better align the production of our products to meet customer demand. We believe this has resulted in improved service levels for our participating suppliers, distributors, and dealers.

   We periodically shut down production at our manufacturing facilities in order to allow for maintenance, rearrangement, capital equipment installation, and as needed, to adjust for market demand. Capital expenditures for fiscal 2016 are planned to be approximately $70 million as we continue the renovation of our original corporate facility located in Bloomington, Minnesota to accommodate additional expansion needs for our product development and test capacities. Additionally, we plan to invest in new product tooling, new technology in production processes and equipment, replacement production equipment, and investments in new and existing facilities.

Raw Materials

We purchase raw materials such as steel, aluminum, petroleum and natural gas-based resins, linerboard, and other commodities, and components, such as engines, transmissions, transaxles, hydraulics, and electric motors, for use in our products. In addition, we are a purchaser of components and parts containing various commodities, including steel, aluminum, copper, lead, rubber, and others that are integrated into our end products. During fiscal 2015, we experienced slightly lower average commodity prices compared to the average prices paid for commodities in fiscal 2014. We anticipate commodity prices in fiscal 2016 to be equivalent to average prices paid for commodities during fiscal 2015. Historically, we have mitigated, and we currently expect that we would mitigate, commodity cost increases, if any, in part, by collaborating with suppliers, reviewing alternative sourcing options, substituting materials, engaging in internal cost reduction efforts, and increasing prices on some of our products, all as appropriate.

   Most of the raw materials and components used in our products are affected by commodity cost pressures, are commercially available from a number of sources, and are in adequate supply. However, certain of our components are sourced from single suppliers. In fiscal 2015, we experienced no significant work stoppages because of shortages of raw materials or commodities. The highest raw material and component costs are generally for steel, engines, hydraulic components, transmissions, plastic resin, and electric motors, all of which we purchase from several suppliers around the world.

Service and Warranty

Our products are warranted to ensure customer confidence in design, workmanship, and overall quality. Warranty coverage is generally for specified periods of time and on select products' hours of usage, and generally covers parts, labor, and other expenses for non-maintenance repairs. Warranty coverage generally does not cover operator abuse or improper use. An authorized company distributor or dealer must perform warranty work. Distributors and dealers submit claims for warranty reimbursement and are credited for the cost of repairs, labor, and other expenses as long as the repairs meet our prescribed standards. Warranty expense is accrued at the time of sale based 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, the historical length of time between the sale and resulting warranty claim, and other minor factors. Special warranty reserves are also accrued for major rework campaigns. Service support outside of the warranty period is provided by authorized distributors and dealers at the customer's expense. We sell extended warranty coverage on select products for a prescribed period after the original warranty period expires.

Product Liability

We have rigorous product safety standards and continually work to improve the safety and reliability of our products. We monitor for accidents and possible claims and establish liability estimates based on internal evaluations of the merits of individual claims. We purchase insurance coverage for catastrophic product liability claims for incidents that exceed our self-insured retention levels.

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Patents and Trademarks

We own patents, trademarks, and trade secrets related to our products in the U.S. and certain countries outside the U.S. in which we conduct business. We expect to apply for future patents and trademarks, as appropriate, in connection with the development of innovative new products, services, and enhancements. Although we believe that, in the aggregate, our patents are valuable, and patent protection is beneficial to our business and competitive positioning, our patent protection will not necessarily deter or prevent competitors from attempting to develop similar products. We are not materially dependent on any one or more of our patents. However, certain Toro trademarks that contribute to our identity and the recognition of our products and services, including the Toro® name and logo, are an integral part of our business.

   We regularly review certain patents issued by the United States Patent and Trademark Office ("USPTO") and international patent offices to help avoid potential liability with respect to others' patents. Additionally, we periodically review competitors' products to prevent possible infringement of our patents by others. We believe these activities help us minimize our risk of being a defendant in patent infringement litigation. We are currently involved in patent litigation cases where we are asserting our patents against competitors and defending against patent infringement assertions by others. Such cases are at varying stages in the litigation process.

   Similarly, we periodically monitor various trademark registers and the market to prevent infringement of and damage to our trademarks by others. From time to time, we are involved in trademark oppositions where we are asserting our trademarks against third parties who are attempting to establish rights in trademarks that are confusingly similar to ours. We believe these activities help minimize risk of harm to our trademarks, and help maintain distinct products and services that we believe are well regarded in the marketplace.

Seasonality

Sales of our residential products, which accounted for 30 percent of total consolidated net sales in fiscal 2015, are seasonal, with sales of lawn and garden products occurring primarily between February and June, depending upon seasonal weather conditions and demand for our products. Sales of snow thrower products occur primarily between July and January, depending upon prior season snow falls, preseason demand, and product availability. Opposite seasons in global markets in which we sell our products somewhat moderate this seasonality of our residential product sales. Seasonality of professional product sales also exists but is tempered because the selling season in the Southern U.S. and our markets in the Southern hemisphere continue for a longer portion of the year than in Northern regions of the world. The addition of the BOSS business added a portfolio of counter-seasonal products to our professional segment with our sales of snowplows and salt and sand spreaders occurring primarily between April and December, which also resulted in a greater variability of sales volumes due to dependency on snow falls for these products.

   Overall, our worldwide sales levels are historically highest in our fiscal second quarter and retail demand is generally highest in our fiscal third quarter. Typically, our accounts receivable balances increase between January and April because of higher sales volumes and extended payment terms made available to our customers. Accounts receivable balances typically decrease between May and December when payments are received. Our financing requirements are subject to variations due to seasonal changes in working capital levels, which typically increase in the first half of our fiscal year and decrease in the second half of our fiscal year. Seasonal cash requirements of our business are financed from a combination of cash balances, cash flows from operations, and short-term borrowings under our credit facilities.

   The following table shows total consolidated net sales and net earnings for each fiscal quarter as a percentage of the total fiscal year.

   

  Fiscal 2015     Fiscal 2014    

Quarter

    Net
Sales
    Net
Earnings
    Net
Sales
    Net
Earnings
 

First

    20 %   15 %   21 %   15 %

Second

    35     47     34     50  

Third

    25     26     26     29  

Fourth

    20     12     19     6  

Effects of Weather

From time to time, weather conditions in particular geographic regions or markets may adversely or positively affect sales of some of our products and field inventory levels and result in a negative or positive impact on our future net sales. If the percentage of our net sales from outside the U.S. increases, our dependency on weather in any one part of the world decreases. Nonetheless, weather conditions could materially affect our future net sales.

Working Capital

Our businesses are seasonally working capital intensive and require funding for purchases of raw materials used in production; replacement parts inventory; payroll and other administrative costs; capital expenditures; establishment of new facilities; expansion, renovation, and upgrading of existing facilities; as well as for financing receivables from customers that are not financed with Red Iron Acceptance, LLC ("Red Iron"), our joint venture with TCF Inventory Finance, Inc. ("TCFIF"). We fund our operations through a combination of cash and cash equivalents, cash flows from operations, short-term borrowings under our credit facilities, and

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long-term debt. Cash management is centralized, and intercompany financing is used, wherever possible, to provide working capital to wholly owned subsidiaries as needed. In addition, our credit facilities are available for additional working capital needs, acquisitions, or other investment opportunities.

Distribution and Marketing

We market the majority of our products through approximately 35 domestic and 110 international distributors, as well as a large number of outdoor power equipment dealers, irrigation dealers and distributors, hardware retailers, home centers, and mass retailers in more than 90 countries worldwide. We also added an extensive distribution network mainly in North America with our acquisition of the BOSS professional snow and ice management business.

   Professional products are sold to distributors/dealers primarily for resale to golf courses, sports fields, industrial facilities, contractors, and government customers, and in some markets for resale to dealers. We also sell some professional segment products directly to government customers, rental companies, and agricultural irrigation dealers, as well as to end-users in certain international markets. Select residential/commercial irrigation and lighting products are sold to professional irrigation and lighting distributors/dealers, and certain retail irrigation products are sold directly to home centers. Products for the rental and specialty construction market are sold directly to dealers and rental companies. Toro and Exmark landscape contractor products are also sold directly to dealers in certain regions of North America. BOSS snow and ice management products are sold to distributors and dealers for resale to contractors.

   Residential products, such as walk power mowers, riding products, and snow throwers, are generally sold directly to home centers, dealers, hardware retailers, and mass retailers. In certain markets, these same products are sold to distributors for resale to hardware retailers and dealers. Home solutions products are primarily sold directly to home centers, mass retailers, and hardware retailers. We also sell select residential products over the Internet. Internationally, residential products are sold directly to dealers and mass merchandisers in Australia, Canada, and select countries in Europe. In most other countries, residential products are mainly sold to distributors for resale to dealers and mass retailers.

   During fiscal 2015, we owned two domestic distribution companies. Our primary purposes in owning domestic distributorships are to facilitate ownership transfers while improving operations and to test and deploy new strategies and business practices that could be replicated by our independent distributors. On November 27, 2015, in our first quarter of fiscal 2016, we completed the sale of our Northwestern U.S. distribution company.

   Our distribution systems are intended to assure quality of sales and market presence, as well as to provide effective after-purchase service and support. We believe our distribution network provides a competitive advantage in marketing and selling our products, in part, because our primary distribution network is focused on selling and marketing our products, and because of the long-term relationships they have established and experienced personnel they utilize to deliver high levels of customer satisfaction.

   Our current marketing strategy is to maintain distinct brands and brand identification for Toro®, Exmark®, BOSS®, Irritrol®, Hayter®, Pope®, Unique Lighting Systems®, and Lawn-Boy® products.

   Across our brands, we market our professional and residential products during the appropriate season through multiple channels, including television, radio, print, direct mail, email, digital and online media, and social media. Most of our advertising and marketing efforts emphasize our brands, products, features, and other valuable trademarks. Advertising is purchased by us, through our agency partners, as well as through cooperative programs with distributors, dealers, and retailers.

Customers

Overall, we believe that in the long-term we are not dependent on any single customer; however, the Residential segment of our business is dependent on The Home Depot as a customer, which accounted for approximately 11 percent of our total consolidated gross sales in fiscal 2015 and 2014. While the loss of any substantial customer, including The Home Depot, could have a material adverse short-term impact on our business, we believe that our diverse distribution channels and customer base should reduce the long-term impact of any such loss.

Backlog of Orders

Our backlog of orders is dependent upon when customers place orders and is not necessarily an indicator of our expected results for our fiscal 2016 net sales. The approximate backlog of orders as of October 31, 2015 and 2014 was $106.7 million and $136.5 million, respectively, a decrease of 21.9 percent. This decrease was primarily due to strong orders as of the end of last fiscal year for our professional segment products subject to the continued phase-in of Tier 4 diesel engine emission requirements before we implemented price increases for products subject to these regulations, and such orders were not repeated this fiscal year. We expect the existing backlog of orders will be filled in early fiscal 2016.

Competition

Our products are sold in highly competitive markets throughout the world. The principal competitive factors in our markets are product innovation, quality and reliability, pricing, product support and customer service, warranty, brand awareness, reputation, distribution, shelf space, and financing options. We believe we offer total solutions and full service packages with high quality products that have the latest technology and design innovations. In addition, by selling our products through a network of distributors, dealers, hardware retailers, home centers, and mass retailers, we offer comprehensive service support during and after the warranty period. We compete in many product lines with numerous manufacturers, some of

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which have substantially larger operations and financial resources than us. We believe that we have a competitive advantage because we manufacture a broad range of product lines, we are committed to product innovation and customer service, we have a strong history in and focus on maintaining turf and landscapes, and our distribution channels position us well to compete in various markets.

   Internationally, our residential segment products face more competition because many foreign competitors design, manufacture, and market products in their respective countries. We experience this competition primarily in Europe. In addition, fluctuations in the value of the U.S. dollar affect the price of our products in foreign markets, thereby impacting their competitiveness. We provide pricing support, as needed, to foreign customers to remain competitive in international markets.

Environmental Matters and Other Governmental Regulation

We are subject to numerous international, federal, state, and other governmental laws, rules, and regulations relating to, among others, climate change; emissions to air and discharges to water; restrictions placed on water usage and water availability; product and associated packaging; use of certain chemicals; restricted substances, including "conflict minerals" disclosure rules; import and export compliance, including country of origin certification requirements; worker and product user health and safety; energy efficiency; product life-cycles; outdoor noise laws; and the generation, use, handling, labeling, collection, management, storage, transportation, treatment, and disposal of hazardous substances, wastes, and other regulated materials. For example:

The United States EPA, the California Air Resources Board, and similar regulators in other U.S. states and foreign jurisdictions in which we sell our products have phased in, or are phasing in, emission regulations setting maximum emission standards for certain equipment. Specifically, the EPA adopted increasingly stringent engine emission regulations, including Tier 4 emission requirements applicable to diesel engines in specified horsepower ranges that are used in some of our products. China also has similar regulations, and similar emission regulations are also being considered in other markets in which we sell our products, such as the European Union ("EU").
The United States federal government, several U.S. states, and certain international jurisdictions in which we sell our products, including the EU and each of its member states, have implemented one or more of the following: (i) product life-cycle laws, rules, or regulations, which are intended to reduce waste and environmental and human health impact, and require manufacturers to label, collect, dispose, and recycle certain products, including some of our products, at the end of their useful life, including the Waste Electrical and Electronic Equipment ("WEEE") directive, which mandates the labeling, collection, and disposal of specified waste electrical and electronic equipment; (ii) the Restriction on the use of Hazardous Substances ("RoHS") directive or similar substance level laws, rules, or regulations, which restrict the use of several specified hazardous materials in the manufacture of specific types of electrical and electronic equipment; (iii) the Registration, Evaluation, Authorization and Restriction of Chemicals ("REACH") directive or similar substance level laws, rules, or regulations that require notification of use of certain chemicals, or ban or restrict the use of certain chemicals; (iv) country of origin laws, rules, or regulations, which require certification of the geographic origin of our finished goods products and/or components used in our products through documentation and/or physical markings, as applicable; (v) energy efficiency laws, rules, or regulations, which are intended to reduce the use and inefficiencies associated with energy and natural resource consumption and require specified efficiency ratings and capabilities for certain products; and (vi) outdoor noise laws, which are intended to reduce noise emissions in the environment from outdoor equipment.
Our products, when used by residential customers, may be subject to various federal, state, and international laws, rules, and regulations that are designed to protect consumers, including rules and regulations of the United States Consumer Product Safety Commission.

   Although we believe that we are in substantial compliance with currently applicable laws, rules, and regulations, we are unable to predict the ultimate impact of adopted or future laws, rules, and regulations on our business. Such laws, rules, or regulations may cause us to incur significant expenses to achieve or maintain compliance, may require us to modify our products, may adversely affect the price of or demand for some of our products, and may ultimately affect the way we conduct our operations. Failure to comply with these current or future laws, rules, or regulations could result in harm to our reputation and/or could lead to fines and other penalties, including restrictions on the importation of our products into, or the sale of our products in, one or more jurisdictions until compliance is achieved.

   We are also involved in the evaluation and clean-up of a limited number of properties currently and previously owned. We do not expect that these matters will have a material adverse effect on our consolidated financial position or results of operations.

Customer Financing

Wholesale Financing.   We are party to a joint venture with TCFIF, a subsidiary of TCF National Bank, established as Red Iron. The purpose of Red Iron is to provide inventory financing, including floor plan and open account receivable financing, to distributors and dealers of our products in the U.S. and select distributors of our products in Canada. Under a separate arrangement, TCF Commercial Finance Canada, Inc. ("TCFCFC") provides inventory financing to dealers of our products in Canada. In late fiscal 2015, Red Iron also began providing inventory financing to a

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majority of our BOSS distributors and dealers. Under these financing arrangements, 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 and/or the dealer, or paid by the distributor or dealer. Red Iron retains a security interest in the distributors' and dealers' financed inventories, and those inventories are monitored regularly. Floor plan terms to the distributors and dealers require payment as the equipment, which secures the indebtedness, is sold to customers or when payment terms become due, whichever occurs first. Rates are generally indexed to LIBOR plus a fixed percentage that differs based on whether the financing is for a distributor or dealer. Rates may also vary based on the product that is financed.

   We continue to provide financing in the form of open account terms directly to home centers and mass retailers; general line irrigation dealers; international distributors and dealers other than the Canadian distributors and dealers to whom Red Iron provides financing arrangements; micro-irrigation dealers and distributors; government customers; rental companies; and a limited number of BOSS dealers. Some independent international dealers continue to finance their products with third party sources.

End-User Financing.   We have agreements with third party financing companies to provide lease-financing options to golf course and sports fields and grounds equipment customers in the U.S and select countries in Europe. The purpose of these agreements is to increase sales by giving buyers of our products alternative financing options when purchasing our products.

   We also have agreements with third party financing companies to provide financing programs under both generic and private label programs in the U.S. and Canada. These programs, offered primarily to Toro and Exmark dealers, provide end-user customers revolving and installment lines of credit for Toro and Exmark products, parts, and services.

Distributor Financing.   Occasionally, we enter into long-term loan agreements with some distributors. These transactions are used for expansion of the distributors' businesses, acquisitions, refinancing working capital agreements, or ownership transitions. As of October 31, 2015, we had an outstanding note receivable from one distributor company in the aggregate amount of $1.0 million.

Employees

During fiscal 2015, we employed an average of 6,682 employees. The total number of employees as of October 31, 2015 was 6,874. We consider our employee relations to be good. As of October 31, 2015, four collective bargaining agreements, including a new agreement we entered into during fiscal 2015 as a result of the acquisition of the BOSS business, each expire in October 2016, October 2017, March 2018, and May 2018, and cover approximately 18 percent of our total employees.

Available Information

We are a U.S. public reporting company under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and file reports, proxy statements, and other information with the Securities and Exchange Commission ("SEC"). Copies of these reports, proxy statements, and other information can be inspected and copied at the SEC's Public Reference Room at 100 F Street N.E., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Because we make filings to the SEC electronically, you may also access this information from the SEC's home page on the Internet at http://www.sec.gov.

   We make available, free of charge on our web site www.thetorocompany.com (select the "Investor Information" link and then the "Financials" link), our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on Schedule 14A, Section 16 reports, amendments to those reports, and other documents filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information contained on our web site or connected to our web site is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report.

Forward-Looking Statements

This Annual Report on Form 10-K contains, or incorporates by reference, not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E of the Exchange Act, and that are subject to the safe harbor created by those sections. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on our web sites or otherwise. Statements that are not historical are forward-looking and reflect expectations and assumptions. Forward-looking statements are based on our current expectations of future events, and often can be identified in this report and elsewhere by using words such as "expect," "strive," "looking ahead," "outlook," "guidance," "forecast," "goal," "optimistic," "anticipate," "continue," "plan," "estimate," "project," "believe," "should," "could," "can," "will," "would," "possible," "may," "likely," "intend," "seek," and similar expressions or future dates. Our forward-looking statements generally relate to our future performance, including our anticipated operating results, liquidity requirements, and financial condition; our business strategies and goals; and the effect of laws, rules, regulations, new accounting pronouncements, and outstanding litigation on our business and future performance.

   Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected

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or implied. The most significant factors known to us that could materially adversely affect our business, reputation, operations, industry, financial position, or future financial performance are described below in Part I, Item 1A, "Risk Factors." We caution readers not to place undue reliance on any forward-looking statement which speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described elsewhere in this report, including in Part I, Item 1A, "Risk Factors," as well as others that we may consider immaterial or do not anticipate at this time. The risks and uncertainties described in this report, including in Part I, Item 1A, "Risk Factors," are not exclusive and further information concerning our company and our businesses, including factors that potentially could materially affect our operating results or financial condition, may emerge from time to time.

   We undertake no obligation to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our future Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we file with or furnish to the SEC.

ITEM 1A.   RISK FACTORS

The following are significant factors known to us that could materially adversely affect our business, reputation, operating results, industry, financial condition, or future financial performance.

If economic conditions and outlook in the United States and in other countries in which we conduct business do not continue to improve or if they worsen, our net sales and earnings could be adversely affected.

Economic conditions and outlook in the U.S. and in other countries in which we conduct business can impact demand for our products and, ultimately, our net sales and earnings. These include, but are not limited to, recessionary conditions; slow or negative economic growth rates; the impact of U.S. federal debt, state debt, and sovereign debt defaults and austerity measures by certain European countries; slow down or reductions in levels of golf course development, renovation, and improvement; golf course closures; reduced levels of home ownership, construction, and sales; home foreclosures; negative consumer confidence; reduced consumer spending levels resulting from tax increases or other factors; prolonged high unemployment rates; higher commodity and components costs and fuel prices; inflationary or deflationary pressures; reduced credit availability or unfavorable credit terms for our distributors, dealers, and end-user customers; higher short-term, mortgage, and other interest rates; and general economic and political conditions and expectations. In the past, some of these factors have caused our distributors, dealers, and end-user customers to reduce spending and delay or forego purchases of our products, which have had an adverse effect on our net sales and earnings. If economic conditions and outlook in the U.S. and in other countries in which we conduct business do not continue to improve, or if they worsen, our net sales and earnings could be adversely affected in the future.

Weather conditions may reduce demand for some of our products and adversely affect our net sales or otherwise adversely affect our operating results.

From time to time, weather conditions in a particular geographic region may adversely affect sales, demand, and field inventory levels of some of our products. For example, in the past, drought conditions have had an adverse effect on sales of certain mowing equipment products, unusually rainy weather or severe drought conditions that result in watering bans have had an adverse effect on sales of our irrigation products, and lower snow fall accumulations in key markets have had an adverse effect on sales of our snow thrower products and may have an adverse effect on sales of products of our BOSS professional snow and ice management business. Similarly, adverse weather conditions in one season may negatively impact customer purchasing patterns and our net sales for some of our products in another season. For example, lower snow fall accumulations may result in lower winter season revenues for landscape contractor professionals, causing such customers to forego or postpone spring purchases of our mowing products. To the extent that unfavorable weather conditions are exacerbated by global climate change or otherwise, our sales and operating results may be affected to a greater degree than we have previously experienced.

Fluctuations in foreign currency exchange rates could continue to result in declines in our reported net sales and net earnings.

Because the functional currency of most of our foreign operations is the applicable local currency, and because our financial reporting currency is the U.S. dollar, preparation of our consolidated financial statements requires that we translate the assets, liabilities, expenses, and revenues of our foreign operations into U.S. dollars at applicable exchange rates. Accordingly, 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. Our reported net sales and net earnings are subject to fluctuations in foreign currency exchange rates and have already affected our operating results and could continue to result in declines in our reported net sales and net

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earnings. Because our products are manufactured or sourced primarily from the U.S. and Mexico, a stronger U.S. dollar and Mexican peso generally have a negative impact on our operating results, while a weaker dollar and peso generally have a positive effect. In addition, currency exchange rate fluctuations may affect the comparative prices between products we sell and products our foreign competitors sell in the same market, which may adversely affect demand for our products. Substantial exchange rate fluctuations as a result of the strengthening of the U.S. dollar or otherwise, may have an adverse effect on our operating results, financial condition, and cash flows, as well as the comparability of our consolidated financial statements between reporting periods. Our primary foreign currency exchange rate exposure is with the Euro, the Australian dollar, the Canadian dollar, the British pound, the Mexican peso, the Japanese yen, the Chinese Renminbi, and the Romanian New Leu against the U.S. dollar, as well as the Romanian New Leu against the Euro. While we actively manage the exposure of our foreign currency market risk in the normal course of business by entering into various foreign exchange contracts, these instruments involve risks and may not effectively limit our underlying exposure from foreign currency exchange rate fluctuations or minimize our net earnings and cash volatility associated with foreign currency exchange rate changes. Further, a number of financial institutions similar to those that serve as counterparties to our foreign exchange contracts were adversely affected by unprecedented distress in the worldwide credit markets during the past few years. The failure of one or more counterparties to our foreign currency exchange rate contracts to fulfill their obligations to us could adversely affect our operating results.

Increases in the cost of raw materials and components that we purchase and/or increases in our other costs of doing business, such as transportation costs, may adversely affect our profit margins and businesses.

We purchase raw materials such as steel, aluminum, petroleum and natural gas-based resins, linerboard, and other commodities, and components, such as engines, transmissions, transaxles, hydraulics, and electric motors, for use in our products. In addition, we are a purchaser of components and parts containing various commodities, including steel, aluminum, copper, lead, rubber, and others that are integrated into our end products. To the extent that commodity prices increase and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, increases in the cost of such raw materials and components and parts may adversely affect our profit margins if we are unable to pass along to our customers these cost increases in the form of price increases or otherwise reduce our cost of goods sold. In addition, increases in other costs of doing business may also adversely affect our profit margins and businesses. For example, an increase in fuel costs may result in an increase in our transportation costs, which also could adversely affect our operating results and businesses. Historically, we have mitigated cost increases, in part, by collaborating with suppliers, reviewing alternative sourcing options, substituting materials, engaging in internal cost reduction efforts, and increasing prices on some of our products, all as appropriate. However, we may not be able to fully offset such increased costs in the future. Further, if our price increases are not accepted by our customers and the market, our net sales, profit margins, earnings, and market share could be adversely affected.

Disruption in the availability of raw materials and components used in our products may adversely affect our business.

Although most of the raw materials and components used in our products are generally commercially available from a number of sources and in adequate supply, certain components are sourced from single suppliers. Any disruption in the availability of raw materials and components used in our products, our inability to timely or otherwise obtain substitutes for such items, or any deterioration in our relationships with or the financial viability of our suppliers, could adversely affect our business.

Our professional segment net sales are dependent upon certain factors, including golf course revenues and the amount of investment in golf course renovations and improvements; the level of new golf course development and golf course closures; the level of homeowners who outsource their lawn care; the level of residential and commercial construction; acceptance of and demand for micro-irrigation solutions for agricultural markets; the integration of the BOSS business into our professional segment; the demand for our products in the rental and specialty construction market; the availability of cash or credit to professional segment customers on acceptable terms to finance new product purchases; and the amount of government revenues, budget, and spending levels for grounds maintenance equipment.

Our professional segment products are sold by distributors or dealers, or directly to government customers, rental companies, and professional users engaged in maintaining and creating properties and landscapes, such as golf courses, sports fields, residential and commercial properties and landscapes, and governmental and municipal properties. Accordingly, our professional segment net sales are impacted by golf course revenues and the amount of investment in golf course renovations and improvements; the level of new golf course development and golf course closures; the level of homeowners who outsource their lawn care; acceptance of and demand for micro-irrigation solutions for agricultural markets; the integration of the BOSS business into our professional segment; the demand for our products in the rental and specialty construction market; the level of residential and commercial construction; availability of cash or credit on acceptable terms to finance new

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product purchases; and the amount of government spending for new grounds maintenance equipment. Among other things, any one or a combination of the following factors could have an adverse effect on our professional segment net sales:

reduced levels of investment in golf course renovations and improvements and new golf course development; reduced number of golf rounds played at public and private golf courses resulting in reduced revenue for such golf courses; decreased membership at private golf courses resulting in reduced revenue and, in certain cases, financial difficulties for such golf courses; and increased number of golf course closures, any one of which or any combination of which could result in a decrease in spending and demand for our products;
reduced consumer and business spending, causing homeowners and landscape contractor professionals to forego or postpone purchases of our products;
low or reduced levels of commercial and residential construction, resulting in a decrease in demand for our products;
a decline in acceptance of and demand for micro-irrigation solutions for agricultural markets and our products in the rental and specialty construction market; and
reduced tax revenue, increased governmental expenses in other areas, tighter government budgets and government deficits, generally resulting in reduced government spending for grounds maintenance equipment.

Our residential segment net sales are dependent upon consumers buying our residential segment products at dealers, mass retailers, and home centers, such as The Home Depot, Inc., the amount of product placement at mass retailers and home centers; consumer confidence and spending levels, and changing buying patterns of customers.

The elimination or reduction of shelf space assigned to our residential products or other changes to the placement of our products by mass retailers and home centers, such as The Home Depot, could adversely affect our residential segment net sales. Our residential segment net sales also are dependent upon buying patterns of customers. For example, as consumers purchase products at home centers and mass retailers that offer broader and lower price points than dealers, we have experienced increased demand and sales of our residential segment products purchased at mass retailers and home centers. The Home Depot is a substantial customer of ours, which accounted for approximately 10 to 11 percent of our total consolidated gross sales in each of fiscal 2015, 2014, and 2013. We believe that our diverse distribution channels and customer base should reduce the long-term impact on us if we were to lose The Home Depot or any other substantial customer. However, the loss of any substantial customer, a significant reduction in sales to The Home Depot or other customers, or our inability to maintain adequate product placement at retailers and home centers or our inability to respond to future changes in buying patterns of customers or new distribution channels could have a material adverse impact on our business and operating results. Changing buying patterns of customers could also result in reduced sales of one or more of our residential segment products, resulting in increased inventory levels.

Changes in our product mix impact our financial performance, including profit margins and net earnings.

Our professional segment products generally have higher profit margins than our residential segment products. Our financial performance, including our profit margins and net earnings, can be impacted depending on the mix of products we sell during a given period. For example, if we experience lower sales of our professional segment products that generally carry higher profit margins than our residential segment products, our financial performance, including profit margins and net earnings, could be negatively impacted.

We intend to grow our business through acquisitions and alliances, stronger customer relations, and new joint ventures and partnerships, which could be risky and may harm our business, reputation, financial condition, and operating results.

One of our growth strategies is to drive growth in our businesses and accelerate opportunities to expand our global presence through targeted acquisitions and alliances, stronger customer relations, and new joint ventures and partnerships that add value while supplementing our existing brands and product portfolio. Our ability to grow through acquisitions will depend, in part, on the availability of suitable candidates at acceptable prices, terms, and conditions, our ability to compete effectively for acquisition candidates, and the availability of capital and personnel to complete such acquisitions and run the acquired business effectively. Any acquisition, alliance, joint venture, or partnership could impair our business, financial condition, reputation, and operating results. The benefits of an acquisition, such as our acquisition of the BOSS business, or new alliance, joint venture, or partnership may take more time than expected to develop or integrate into our operations, and we cannot guarantee that previous or future acquisitions, alliances, joint ventures, or partnerships will, in fact, produce any benefits. Such acquisitions, alliances, joint ventures, and partnerships may involve a number of risks, including:

diversion of management's attention;
disruption to our existing operations and plans;
inability to effectively manage our expanded operations;
difficulties or delays in integrating and assimilating information and financial systems, operations, and products of an acquired business or other business venture or in realizing projected efficiencies, growth prospects, cost savings, and synergies;

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inability to successfully integrate or develop a distribution channel for acquired product lines;
potential loss of key employees, customers, distributors, or dealers of the acquired businesses or adverse effects on existing business relationships with suppliers, customers, distributors, and dealers;
delays or challenges in transitioning distributors and dealers of acquired businesses to using our Red Iron financing joint venture with TCFIF;
violation of any non-compete agreement by any key employee of an acquired business;
adverse impact on overall profitability if our expanded operations do not achieve the financial results projected in our valuation models;
reallocation of amounts of capital from other operating initiatives and/or an increase in our leverage and debt service requirements to pay acquisition purchase prices or other business venture investment costs, which could in turn restrict our ability to access additional capital when needed or pursue other important elements of our business strategy;
failure by acquired businesses or other business ventures to comply with applicable international, federal, and state product safety or other regulatory standards;
infringement by acquired businesses or other business venture of intellectual property rights of others;
inaccurate assessment of additional post-acquisition or business venture investments, undisclosed, contingent or other liabilities or problems, unanticipated costs associated with an acquisition or other business venture, and an inability to recover or manage such liabilities and costs; and
incorrect estimates made in the accounting for acquisitions, incurrence of non-recurring charges, and write-off of significant amounts of goodwill or other assets that could adversely affect our operating results.

   In addition, effective internal controls are necessary for us to provide reliable and accurate financial reports and to effectively prevent fraud. The integration of acquired businesses may result in our systems and controls becoming increasingly complex and more difficult to manage. We devote significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act of 2002. However, we cannot be certain that these measures will ensure that we design, implement, and maintain adequate control over our financial processes and reporting in the future, especially in the context of acquisitions of other businesses. Any difficulties in the assimilation of acquired businesses into our control system could harm our operating results or cause us to fail to meet our financial reporting obligations. Also, some acquisitions may require the consent of the lenders under our credit agreements. We cannot predict whether such approvals would be forthcoming or the terms on which the lenders would approve such acquisitions. These risks, among others, could be heightened if we complete a large acquisition or other business venture or multiple transactions within a relatively short period of time.

If we underestimate or overestimate demand for our products and do not maintain appropriate inventory levels, our net sales and/or working capital could be negatively impacted.

Our ability to manage our inventory levels to meet our customer's demand for our products is important for our business. For example, our residential lawn and garden products are generally manufactured throughout the year and our residential snow thrower products are manufactured in the summer and fall months but may be extended into the winter months, depending upon demand. However, our production levels and inventory management goals for our residential segment products are based on estimates of retail demand for our products, taking into account production capacity, timing of shipments, and field inventory levels. If we overestimate or underestimate demand for any of our products during a given season, we may not maintain appropriate inventory levels, which could negatively impact our net sales or working capital, hinder our ability to meet customer demand, or cause us to incur excess and obsolete inventory charges.

Our business and operating results are subject to the inventory management decisions of our distribution channel customers.

We sell many of our products through various distribution channels and are subject to risks relating to their inventory management decisions and operational and sourcing practices. Our distribution channel customers carry inventories of our products as part of their ongoing operations and adjust those inventories based on their assessments of future needs. Such adjustments may impact our inventory management and working capital goals as well as operating results. If the inventory levels of our distribution channel customers are higher than they desire, they may postpone product purchases from us, which could cause our sales to be lower than the end-user demand for our products and negatively impact our inventory management and working capital goals as well as our operating results. Similarly, our results could be negatively impacted through the loss of sales if our distribution channel customers do not maintain field inventory levels sufficient to meet end-user demand.

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We face intense competition in all of our product lines with numerous manufacturers, including some that have larger operations and financial resources than us. We may not be able to compete effectively against competitors' actions, which could harm our business and operating results.

Our products are sold in highly competitive markets throughout the world. Principal competitive factors in our markets include product innovation, quality and reliability, pricing, product support and customer service, warranty, brand awareness, reputation, distribution, product placement and shelf space, and financing options. We compete in many product lines with numerous manufacturers, some of which have substantially larger operations and financial resources than us. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer preferences, or devote greater resources to the development, promotion, and sale of their products than we can. In addition, competition could increase if new companies enter the market, existing competitors consolidate their operations or if existing competitors expand their product lines or intensify efforts within existing product lines. Our current products, products under development, and our ability to develop new and improved products may be insufficient to enable us to compete effectively with our competitors. Internationally, our residential segment products typically face more competition because many foreign competitors design, manufacture, and market products in their respective countries. We experience this competition primarily in Europe. In addition, fluctuations in the value of the U.S. dollar may affect the price of our products in foreign markets, thereby impacting their competitiveness. We may not be able to compete effectively against competitors' actions, which may include the movement by competitors with manufacturing operations to low cost countries for significant cost and price reductions, and could harm our business and operating results.

A significant percentage of our consolidated net sales are generated outside of the United States, a portion of which are financed by third parties, and we intend to continue to expand our international operations. Our international operations require significant management attention and financial resources, expose us to difficulties presented by international economic, political, legal, accounting, and business factors, and may not be successful or produce desired levels of net sales.

We currently manufacture our products in the U.S., Mexico, Australia, the United Kingdom, Italy, Romania, and China for sale throughout the world. We maintain sales offices in the United States, Belgium, the United Kingdom, Australia, Singapore, Japan, China, Italy, Korea, and Germany. Our net sales outside the U.S. were 25.5 percent, 28.7 percent, and 30.1 percent of our total consolidated net sales for fiscal 2015, 2014, and 2013, respectively. International markets have been, and will continue to be, a focus for us for revenue growth. We believe many opportunities exist in the international markets, and over time, we intend for international net sales to comprise a larger percentage of our total consolidated net sales. Several factors, including weakened international economic conditions or the impact of sovereign debt defaults by certain European countries, could adversely affect our international net sales. Additionally, the expansion of our existing international operations and entry into additional international markets require significant management attention and financial resources. Many of the countries in which we manufacture or sell our products, or otherwise have an international presence are, to some degree, subject to political, economic, and/or social instability, including drug cartel-related violence, which may disrupt our production activities and maquiladora operations based in Juarez, Mexico. Our international operations expose us and our representatives, agents, and distributors to risks inherent in operating in foreign jurisdictions. These risks include:

increased costs of customizing products for foreign countries;
difficulties in managing and staffing international operations and increases in infrastructure costs including legal, tax, accounting, and information technology;
the imposition of additional U.S. and foreign governmental controls or regulations; new or enhanced trade restrictions and restrictions on the activities of foreign agents, representatives, and distributors; and the imposition or increases in import and export licensing and other compliance requirements, customs duties and tariffs, import and export quotas and other trade restrictions, license obligations, and other non-tariff barriers to trade;
the imposition of U.S. and/or international sanctions against a country, company, person, or entity with whom we do business that would restrict or prohibit our business with the sanctioned country, company, person, or entity;
international pricing pressures;
laws and business practices favoring local companies;
adverse currency exchange rate fluctuations;
longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
higher tax rates and potentially adverse tax consequences, including restrictions on repatriating earnings;
fluctuations in our operating performance based on our geographic mix of sales;
transportation delays and interruptions;
national and international conflicts, including terrorist acts;
difficulties in enforcing or defending intellectual property rights; and
multiple, changing, and often inconsistent enforcement of laws, rules, and regulations, including rules relating to environmental, health, and safety matters.

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   Our international operations may not produce desired levels of net sales or, among other things one or more of the factors listed above may harm our business and operating results. Any material decrease in our international sales or profitability could also adversely impact our operating results.

   In addition, a portion of our international net sales are financed by third parties. The termination of our agreements with these third parties, any material change to the terms of our agreements with these third parties or in the availability or terms of credit offered to our international customers by these third parties, or any delay in securing replacement credit sources, could adversely affect our sales and operating results.

If we are unable to continue to enhance existing products, as well as develop and market new products, that respond to customer needs and preferences and achieve market acceptance, we may experience a decrease in demand for our products, and our net sales, which have historically benefited from sales of new products, may be adversely affected.

One of our growth strategies is to develop innovative, customer-valued products to generate revenue growth. In the past, our sales from new products, which we define as those introduced in the current and previous two fiscal years, have represented a significant component of our net sales and are expected to continue to represent a significant component of our future net sales. We may not be able to compete as effectively with our competitors, and ultimately satisfy the needs and preferences of our customers, unless we can continue to enhance existing products and develop new innovative products for the markets in which we compete. Product development requires significant financial, technological, and other resources. Product improvements and new product introductions also require significant research, planning, design, development, engineering, and testing at the technological, product, and manufacturing process levels and we may not be able to timely develop and introduce product improvements or new products. Our competitors' new products may beat our products to market, be higher quality or more reliable, be more effective with more features and/or less expensive than our products, obtain better market acceptance, or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful net sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs, and research and development.

We manufacture our products at, and distribute our products from, several locations in the U.S. and internationally. Any disruption at any of these facilities or our inability to cost-effectively expand existing, open and manage new, and/or move production between manufacturing facilities could adversely affect our business and operating results.

We currently manufacture most of our products at ten locations in the U.S., two locations in Mexico, and one location in each of Australia, Italy, the United Kingdom, Romania, and China. We also have several locations that serve as distribution centers, warehouses, test labs, and corporate offices. In addition, we have agreements with other third-party manufacturers to manufacture products on our behalf. These facilities may be affected by natural or man-made disasters and other external events, including drug cartel-related violence that may disrupt our production activities and maquiladora operations based in Juarez, Mexico. In the event that one of our manufacturing facilities was affected by a disaster or other event, we could be forced to shift production to one of our other manufacturing facilities. Although we maintain insurance for damage to our property and disruption of our business from casualties, such insurance may not be sufficient to cover all of our potential losses. Any disruption in our manufacturing capacity could have an adverse impact on our ability to produce sufficient inventory of our products or may require us to incur additional expenses in order to produce sufficient inventory, and therefore, may adversely affect our net sales and operating results. Any disruption or delay at our manufacturing facilities, including a work slowdown, strike, or similar action at any one of our facilities operating under a collective bargaining agreement, or the failure to renew or enter into new collective bargaining agreements, including four that each expire in October 2016, October 2017, March 2018, and May 2018, could impair our ability to meet the demands of our customers, and our customers may cancel orders or purchase products from our competitors, which could adversely affect our business and operating results.

   Our operating results may also be adversely affected if we are unable to cost-effectively open and manage new manufacturing and distribution facilities, and move production between such facilities as needed from time to time. For example, if our micro-irrigation facility in China, which was acquired and opened in order to support anticipated growth of our micro-irrigation business and enable future capacity expansion, does not produce the anticipated manufacturing or operational efficiencies, or if the micro-irrigation products produced at this facility are not accepted into new geographic markets at expected levels, we may not recover our investment in the new facility and our operating results may be adversely affected.

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Our production employee population fluctuates during the year, with an increase in the number of our production employees, some of which may be new to our manufacturing processes, during periods of peak manufacturing activity and any failure by such production employees to adequately perform their jobs or our inability to properly train such production employees could adversely affect our business, operating results, and reputation.

Our production employee population fluctuations during the year. In order to adequately staff our manufacturing operations, our production employee population increases during periods of peak manufacturing activity. Production employees that we hire during such periods of peak manufacturing activity may not have the same level of training, competency, experience, or commitment as our other production employees. In addition, from time to time, we may not have access to a sufficient number of experienced and competent production employees on a cost-effective basis. If we are unable to adequately staff our manufacturing operations, particularly during periods of peak manufacturing activity, if our production employees are not adequately trained or do not adhere to protocols we have established to create a safe workplace, our business, operating results, and reputation could suffer.

Management information systems are critical to our business. If our management information systems or those of our business partners or third party service providers fail to adequately perform, or if we, our business partners, or third party service providers experience an interruption in their operation, our business, reputation, financial condition, and operating results could be adversely affected.

We have many management information systems that are critical to our business, some of which are managed by third parties. These management information systems are used to record, process, summarize, transmit, and store electronic information, and to manage or support a variety of business processes and activities, including, among other things, our accounting and financial functions, including maintaining our internal controls; our manufacturing and supply chain processes; and the data related to our research and development efforts. The failure of our management information systems or those of our business partners or third party service providers to perform properly, or difficulties encountered in the development of new systems or the upgrade of existing systems, could disrupt our business and harm our reputation, which may result in decreased sales, increased overhead costs, excess or obsolete inventory, and product shortages, causing our business, reputation, financial condition, and operating results to suffer. Although we take steps to secure our management information systems and any access provided by our business partners or third party service providers, including our computer systems, intranet and internet sites, email and other telecommunications and data networks, the security measures we have implemented may not be effective and our systems may be vulnerable to theft, loss, damage, and interruption from a number of potential sources and events, including unauthorized access or security breaches, natural or man-made disasters, cyber attacks, computer viruses, power loss, or other disruptive events. Information technology security threats are increasing in frequency and sophistication. Cyber attacks may be random, coordinated, or targeted, including sophisticated computer crime threats. These threats pose a risk to the security of our systems and networks, and those of our business partners and third party service providers, and to the confidentiality, availability, and integrity of our data. Our business, reputation, operating results, and financial condition could be adversely affected if, as a result of a significant cyber event or otherwise, our operations are disrupted or shutdown; our confidential, proprietary information is stolen or disclosed; our intranet and internet sites are compromised; data is manipulated or destroyed; we incur costs or are required to pay fines in connection with stolen customer, employee, or other confidential information; we must dedicate significant resources to system repairs or increase cyber security protection; or we otherwise incur significant litigation or other costs.

Our reliance upon patents, trademark laws, and contractual provisions to protect our proprietary rights may not be sufficient to protect our intellectual property from others who may sell similar products. Our products may infringe the proprietary rights of others.

We hold patents relating to various aspects of our products and believe that proprietary technical know-how is important to our business and their loss could have a material adverse effect on our business and operating results. Proprietary rights relating to our products are protected from unauthorized use by third parties only to the extent that they are covered by valid and enforceable patents or are maintained in confidence as trade secrets. We cannot be certain that we will be issued any patents from any pending or future patent applications owned by or licensed to us, or that the claims allowed under any issued patents will be sufficiently broad to protect our technology. In the absence of enforceable patent protection, we may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know-how. Others may initiate litigation to challenge the validity of our patents, or allege that we infringe their patents, or they may use their resources to design comparable products that do not infringe our patents. We may incur substantial costs if our competitors or others initiate litigation to challenge the validity of our patents, or allege that we infringe their patents, or if we initiate any proceedings to protect our proprietary rights. If the outcome of any such litigation is unfavorable to us, our business, operating results, and financial condition could be adversely affected. We also cannot be certain that our products or technologies have not infringed

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or will not infringe the proprietary rights of others. Any such infringement could cause third parties, including our competitors, to bring claims against us, resulting in significant costs, possible damages and substantial uncertainty. We could also be forced to develop an alternative that could be costly and time-consuming, or acquire a license, which we might not be able to do on terms favorable to us, or at all.

   We also rely on trade secrets and proprietary know-how that we seek to protect, in part, by confidentiality agreements with our employees, suppliers, and consultants. These agreements may be breached, and we may not have adequate remedies for any such breach. Even if these confidentiality agreements are not breached, our trade secrets may otherwise become known or be independently developed by competitors.

Our business, properties, and products are subject to governmental regulation with which compliance may require us to incur expenses, or modify our products or operations, and non-compliance may result in harm to our reputation and/or expose us to penalties. Governmental regulation may also adversely affect the demand for some of our products and our operating results.

Our business, properties, and products are subject to numerous international, federal, state, and other governmental laws, rules, and regulations relating to, among other things; climate change; emissions to air and discharges to water; restrictions placed on water usage and water availability; product and associated packaging; use of certain chemicals; restricted substances, including "conflict minerals" disclosure rules; import and export compliance, including country of origin certification requirements; worker and product user health and safety; energy efficiency; product life-cycles; outdoor noise laws; and the generation, use, handling, labeling, collection, management, storage, transportation, treatment, and disposal of hazardous substances, wastes, and other regulated materials. In addition, our business is subject to numerous international, federal, state, and other governmental laws, rules, and regulations that, while not having a direct impact on our products or operations, may adversely affect our operating results, including, (i) taxation and tax policy changes, tax rate changes, new tax laws, or revised tax law interpretations, which individually or in combination may cause our effective tax rate to increase or, (ii) new, recently enacted, or revised healthcare laws or regulations, such as the Patient Protection and Affordable Care Act, which may cause us to incur higher employee healthcare and related costs. Although we believe that we are in substantial compliance with currently applicable laws, rules, and regulations, we are unable to predict the ultimate impact of adopted or future laws, rules, and regulations on our business, properties, or products. Any of these laws, rules, or regulations may cause us to incur significant expenses to achieve or maintain compliance, require us to modify our products, adversely affect the price of or demand for some of our products, and ultimately affect the way we conduct our operations. Failure to comply with any of these laws, rules, or regulations could result in harm to our reputation and/or could lead to fines and other penalties, including restrictions on the importation of our products into, and the sale of our products in, one or more jurisdictions until compliance is achieved. In addition, our competitors may adopt strategies with respect to regulatory compliance that differ significantly from our strategies. This may have the effect of changing customer preferences and our markets in ways that we did not anticipate which may adversely affect market demand for our products and, ultimately, our net sales and financial results.

Increasingly stringent engine emission regulations could impact our ability to sell certain of our products into the market and appropriately price certain of our products, which could negatively affect our competitive position and financial results.

The EPA adopted increasingly stringent engine emission regulations, including Tier 4 emission requirements applicable to diesel engines in specified horsepower ranges that are used in some of our products. We have implemented plans to achieve substantial compliance with Tier 4 diesel engine emission requirements for most of the horsepower categories affected and are implementing plans for other horsepower categories as other Tier 4 products are phased in. These plans are subject to many variables including, among others, the ability of our suppliers to provide compliant engines on a timely basis or our ability to meet our production schedule. If we are unable to successfully execute such plans, our ability to sell our products into the market may be inhibited, which could adversely affect our competitive position and financial results. To the extent in which we cover or partially offset costs related to research, development, engineering, and other expenses to design Tier 4 diesel engine compliant products in the form of price increases to our customers, we may experience lower market demand for our products that may, ultimately, adversely affect our profit margins, net sales, and overall financial results. Alternatively, if our competitors implement different strategies with respect to compliance with Tier 4 requirements that, either in the short term or over the long term, enable them to limit price increases, introduce product modifications that gain widespread market acceptance, or otherwise changing customer preferences and buying patterns in ways that we do not currently anticipate, we may experience lower market demand for our products that may, ultimately, adversely affect our net sales, profit margins, and overall financial results.

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Climate change and climate change regulations may adversely impact our operations.

There is growing concern from members of the scientific community and the general public that an increase in global average temperatures due to emissions of greenhouse gases ("GHG") and other human activities have or will cause significant changes in weather patterns and increase the frequency and severity of natural disasters. We are currently subject to rules limiting emissions and other climate related rules and regulations in certain jurisdictions where we operate. In addition, we may become subject to additional legislation and regulation regarding climate change, and compliance with any new rules could be difficult and costly. Concerned parties, such as legislators, regulators, and non-governmental organizations, are considering ways to reduce GHG emissions. Foreign, federal, state, and local regulatory and legislative bodies have proposed various legislative and regulatory measures relating to climate change, regulating GHG emissions, and energy policies. If such legislation is enacted, we could incur increased energy, environmental, and other costs and capital expenditures to comply with the limitations. Due to uncertainty in the regulatory and legislative processes, as well as the scope of such requirements and initiatives, we cannot currently determine the effect such legislation and regulation may have on our products and operations.

The costs of complying with the various environmental laws related to our ownership and/or lease of real property, such as clean-up costs and liability that may be associated with certain hazardous waste disposal activities, could adversely affect our financial condition and operating results.

Because we own and lease real property, various environmental laws may impose liability on us for the costs of cleaning up and responding to hazardous substances that may have been released on our property, including releases unknown to us. These environmental laws and regulations could also require us to pay for environmental remediation and response costs at third-party locations where we disposed of or recycled hazardous substances. We are currently involved in the evaluation and clean-up of a limited number of properties we either currently or previously owned. Although we do not expect that these current matters will have a material adverse effect on our financial position or operating results, our future costs of complying with the various environmental requirements, as they now exist or may be altered in the future, could adversely affect our financial condition and operating results.

Legislative enactments could impact the competitive landscape within our markets and affect demand for our products.

Various legislative proposals, if enacted, could put us in a competitively advantaged or disadvantaged position and affect customer demand for our products relative to the product offerings of our competitors. For example, any fiscal-stimulus or other legislative enactment that inordinately impacts the lawn and garden, outdoor power equipment, or irrigation industries generally by promoting the purchase, such as through customer rebate or other incentive programs, of certain types of mowing, snow and ice management or irrigation equipment or other products that we sell, could impact us positively or negatively, depending on whether we manufacture products that meet the specified legislative criteria, including in areas such as fuel efficiency, alternative energy or water usage, or if, as a result of such legislation, customers perceive our product offerings to be relatively more or less attractive than our competitors' product offerings. We cannot currently predict whether any such legislation will be enacted, what any such legislation's specific terms and conditions would encompass, how any such legislation would impact the competitive landscape within our markets, or how, if at all, any such legislation might ultimately affect customer demand for our products or our operating results.

We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws.

The U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making certain improper payments for the purpose of obtaining or retaining business. The continued expansion of our international operations could increase the risk of violations of these laws in the future. Significant violations of these laws, or allegations of such violations, could harm our reputation, could disrupt our business, and could result in significant fines and penalties that could have a material adverse effect on our results of operations or financial condition.

We are required to comply with the "conflict minerals" rules promulgated by the SEC, which impose costs on us and could raise reputational and other risks.

As required under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the SEC adopted rules regarding disclosure of the use of certain minerals, known as "conflict minerals," which are mined from the Democratic Republic of the Congo and adjoining countries, as well as procedures regarding manufacturers' efforts to discover the origin of such minerals and metals produced from those minerals. These conflict minerals are commonly referred to as "3TG" and include tin, tantalum, tungsten, and gold.

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We have, and we expect that we will continue to, incur additional costs and expenses, which may be significant in order to comply with these rules, including for (i) due diligence to determine whether conflict minerals are necessary to the functionality or production of any of our products and, if so, verify the sources of such conflict minerals; and (ii) any changes that we may desire to make to our products, processes, or sources of supply as a result of such diligence and verification activities. Since our supply chain is complex, ultimately we may not be able to sufficiently verify the origin of the conflict minerals used in our products through the due diligence procedures that we implement, which may adversely affect our reputation with our customers, shareholders, and other stakeholders. In such event, we may also face difficulties in satisfying customers who require that all of our products are certified as conflict mineral free. If we are not able to meet such requirements, customers may choose not to purchase our products, which could adversely affect our sales and the value of portions of our inventory. Further, there may be only a limited number of suppliers offering conflict free minerals and, as a result, we cannot be sure that we will be able to obtain metals, if necessary, from such suppliers in sufficient quantities or at competitive prices. Any one or a combination of these various factors could harm our business, reduce market demand for our products, and adversely affect our profit margins, net sales, and overall financial results.

We are subject to product liability claims, product quality issues, and other litigation from time to time that could adversely affect our business, reputation, operating results or financial condition.

The manufacture, sale, and use of our products expose us to significant risks associated with product liability claims. If a product liability claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, and it is ultimately determined that we are liable, our business could suffer. While we believe that we appropriately instruct our customers on the proper usage of our products, we cannot ensure that they will implement our instructions accurately or completely. If our products are defective or used incorrectly by our customers, injury may result and this could give rise to product liability claims against us or adversely affect our brand image or reputation. Any losses that we may suffer from any liability claims, and the effect that any product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business, reputation, and operating results. Product defects can occur through our own product development, design, and manufacturing processes or through our reliance on third parties for certain component design and manufacturing activities. Some of our products or product improvements were developed relatively recently and defects or risks that we have not yet identified, such as unanticipated use of our products, may give rise to product liability claims. Additionally, we could experience a material design, testing, or manufacturing failure in our products, a quality system failure, failures in our products and other challenges that are associated with our inability to properly manage changes in the suppliers and components that we use in our products, insufficient testing procedures, other safety issues, or heightened regulatory scrutiny that could warrant a recall of some of our products. A recall of some of our products could also result in increased product liability claims. Unforeseen product quality problems in the development and production of new and existing products could also result in loss of market share, reduced sales, rework costs, and higher warranty expense.

   We are also subject to other litigation from time to time that could adversely affect our business, reputation, operating results or financial condition.

If we are unable to retain our key employees, and attract and retain other qualified personnel, we may not be able to meet strategic objectives and our business could suffer.

Our ability to meet our strategic objectives and otherwise grow our business will depend to a significant extent on the continued contributions of our leadership team. Our future success will also depend in large part on our ability to identify, attract, and retain other highly qualified managerial, technical, sales and marketing, operations, and customer service personnel. Competition for these individuals is intense, and we may not succeed in identifying, attracting, or retaining qualified personnel. The loss or interruption of services of any of our key personnel, the inability to identify, attract, or retain qualified personnel in the future, delays in hiring qualified personnel, or any employee work slowdowns, strikes, or similar actions could make it difficult for us to conduct and manage our business and meet key objectives, which could harm our business, financial condition, and operating results.

As a result of our Red Iron Acceptance LLC financing joint venture with TCFIF, we are dependent upon the joint venture to provide competitive inventory financing programs, including floor plan and open account receivable financing, to certain distributors and dealers of our products. Any material change in the availability or terms of credit offered to our customers by the joint venture, challenges or delays in transferring new distributors and dealers from any business we might acquire or otherwise to this financing platform, any termination or disruption of our joint venture relationship or any delay in securing replacement credit sources could adversely affect our net sales and operating results.

We are a party to a financing joint venture with TCFIF for the purpose of providing reliable, competitive financing to our distributors and dealers in the U.S. and select distributors of our products

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in Canada to support their businesses and increase our net sales, as well as to free up our working capital for our other strategic purposes. As a result, we are dependent upon the joint venture for our inventory financing programs, including floor plan and open account receivable financing. Additionally, we are dependent upon TCFCFC to provide inventory financing to dealers of our products in Canada.

   The availability of financing from our joint venture or otherwise will be affected by many factors, including, among others, the overall credit markets, the credit worthiness of our dealers and distributors, and regulations that may affect TCFIF, as the majority owner of the joint venture and a subsidiary of TCF National Bank, a national banking association. Any material change in the availability or terms of credit offered to our customers by the joint venture, challenges or delays in transferring new distributors and dealers from any business we might acquire or otherwise to this financing platform, any termination or disruption of our joint venture relationship or any delay in securing replacement credit sources could adversely affect our sales and operating results.

The terms of our credit arrangements and the indentures governing our senior notes and debentures could limit our ability to conduct our business, take advantage of business opportunities and respond to changing business, market, and economic conditions. Additionally, we are subject to counterparty risk in our credit arrangements.

Our credit arrangements and the indentures governing our 6.625% senior notes and 7.800% debentures include a number of financial and operating restrictions. For example, our credit arrangements contain financial covenants that, among other things, require us to maintain a minimum interest coverage ratio and a maximum debt to earnings ratio. Our credit arrangements and/or indentures also contain provisions that restrict our ability, subject to specified exceptions, to, among other things:

make loans and investments, including acquisitions and transactions with affiliates;
create liens or other encumbrances on our assets;
dispose of assets;
enter into contingent obligations;
engage in mergers or consolidations; and
pay dividends that are significantly higher than those currently being paid, make other distributions to our shareholders, or redeem shares of our common stock.

   These provisions may limit our ability to conduct our business, take advantage of business opportunities, and respond to changing business, market, and economic conditions. In addition, they may place us at a competitive disadvantage relative to other companies that may be subject to fewer, if any, restrictions or may otherwise adversely affect our business. Transactions that we may view as important opportunities, such as significant acquisitions, may be subject to the consent of the lenders under our credit arrangements, which consent may be withheld or granted subject to conditions specified at the time that may affect the attractiveness or viability of the transaction.

   Although we have in place a $150 million revolving credit facility that does not expire until October 2019, market deterioration or other factors could jeopardize the counterparty obligations of one or more of the banks participating in our revolving credit facility, which could have an adverse effect on our business if we are not able to replace such revolving credit facility or find other sources of liquidity on acceptable terms.

If we are unable to comply with the terms of our credit arrangements and indentures, especially the financial covenants, our credit arrangements could be terminated and our senior notes, debentures, term loan, and any amounts outstanding under our revolving credit facility could become due and payable.

We cannot assure you that we will be able to comply with all of the terms of our credit arrangements and indentures, especially the financial covenants. Our ability to comply with such terms depends on the success of our business and our operating results. Various risks, uncertainties, and events beyond our control could affect our ability to comply with the terms of our credit arrangements and/or indentures. If we were out of compliance with any covenant required by our credit arrangements following any applicable cure periods, the banks could terminate their commitments unless we could negotiate a covenant waiver. The banks could condition such waiver on amendments to the terms of our credit arrangements that may be unfavorable to us. In addition, our 6.625% senior notes, 7.800% debentures, term loan, and any amounts outstanding under our revolving credit facility could become due and payable if we were unable to obtain a covenant waiver or refinance our medium-term debt under our credit arrangements. If our credit rating falls below investment grade and/or our average debt to earnings before interest, tax, depreciation, and amortization ("EBITDA") ratio rises above 1.50, the interest rate we currently pay on outstanding debt under our credit arrangements would increase, which could adversely affect our operating results.

We are expanding and renovating our corporate facilities and could experience disruptions to our operations in connection with such efforts.

We are expanding and renovating our corporate facilities, driven by our need to expand the space available for our product development and test capacities, as well as our need for additional information technology and office space. These expansion efforts included the construction of a new corporate facility that was completed in fiscal 2014, and we are renovating our original corporate facility located in Bloomington, Minnesota to accommodate expansion needs of our product development and test capacities. We

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financed, and expect to continue to finance, such efforts with cash on hand and cash from operating activities. The expansion and renovation of our corporate facilities entails risks that could cause disruption in the operations of our business. Such risks include potential interruption in data flow; unforeseen construction, scheduling, engineering, environmental, or geological problems; and unanticipated cost increases.

Our business is subject to a number of other miscellaneous risks that may adversely affect our operating results, financial condition, or business.

Other miscellaneous risks that could affect our business include:

our ability to achieve the revenue growth, operating earnings, and working capital goals of our "Destination PRIME" initiative;
natural or man-made disasters or global pandemics, which may result in shortages of raw materials and components, higher fuel and commodity costs, delays in shipments to customers, and increases in insurance premiums;
financial viability of distributors and dealers, changes in distributor ownership, changes in channel distribution of our products, relationships with our distribution channel partners, our success in partnering with new dealers, and our customers' ability to pay amounts owed to us;
a decline in retail sales or financial difficulties of our distributors or dealers, which could cause us to repurchase financed product; and
the threat of terrorist acts and war, which may result in heightened security and higher costs for import and export shipments of components or finished goods, reduced leisure travel, and contraction of the U.S. and worldwide economies.

ITEM 1B.   UNRESOLVED STAFF COMMENTS

None.

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ITEM 2.   PROPERTIES

As of October 31, 2015, we utilized manufacturing, distribution, warehouse, and office facilities totaling approximately 6.3 million square feet of space worldwide. We also had approximately 72 acres of excess land in Wisconsin adjacent to a distribution center, 70 acres of land in Minnesota utilized as a testing and storage facility, and 21 acres of land in California used as a testing site. Plant utilization varies during the year depending on the production cycle. We consider each of our current facilities to be in good operating condition. Management believes we have sufficient manufacturing capacity for fiscal 2016, although strategies for future operational growth are currently being assessed. We are expanding and renovating our corporate facilities located in Bloomington, Minnesota, which included the construction of a 75,000 square foot facility that was completed in fiscal 2014 and renovation of our original corporate facility that began in fiscal 2015 to accommodate additional expansion needs for our product development and test capacities. Our significant facilities are listed below by location, ownership, and function as of October 31, 2015:

Location
  Ownership
  Products Manufactured / Use
Bloomington, MN   Owned/Leased   Corporate headquarters, warehouse, and test lab
El Paso, TX   Owned/Leased   Components for professional and residential products, warehouse and distribution center
Ankeny, IA   Leased   Residential and professional distribution center
Juarez, Mexico   Leased   Professional and residential products
Plymouth, WI   Owned   Professional and residential parts distribution center
Tomah, WI   Owned/Leased   Professional products and distribution center
Windom, MN   Owned/Leased   Residential and professional products and warehouse
Beatrice, NE   Owned/Leased   Professional products, test facility, and office
Iron Mountain, MI   Owned   Professional products, distribution facility, and office
Riverside, CA   Owned/Leased   Professional products, test facility, distribution center, and office
Xiamen City, China   Leased   Professional products, distribution center, and office
Braeside, Australia   Leased   Distribution center, service area, and office
Hertfordshire, United Kingdom   Owned   Professional and residential products, distribution center, test lab, and office
Ploiesti, Romania   Owned   Professional products, distribution center, test lab, and office
Shakopee, MN   Owned   Components for professional and residential products
Beverley, Australia   Owned   Professional products, distribution center, service area, and office
Baraboo, WI   Leased   Professional and residential distribution center
El Cajon, CA   Owned/Leased   Professional and residential products, distribution center, test lab, and office
Brooklyn Center, MN   Leased   Distribution facility, service area, and office
Capena, Italy   Leased   Distribution center
Fresno, CA   Leased   Professional products warehouse
Sanford, FL   Leased   Professional products and distribution center
Kent, WA   Leased   Distribution facility, service area, and office
Fiano Romano, Italy   Owned/Leased   Professional products, distribution center, and office
St. Louis, MO   Leased   Distribution facility, service area, and office
Oevel, Belgium   Owned   Distribution center, service area, and office
Abilene, TX   Leased   Office, professional products, and service center

ITEM 3.   LEGAL PROCEEDINGS

We are a party to litigation in the ordinary course of business. Litigation occasionally involves claims for punitive, as well as compensatory, damages arising out of the use of our products. Although we are self-insured to some extent, we maintain insurance against certain product liability losses. We are also subject to litigation, administrative, and judicial proceedings with respect to claims involving asbestos and the discharge of hazardous substances into the environment. Some of these claims assert damages and liability for personal injury, remedial investigations or clean-up, and other costs and damages. We are also typically involved in commercial disputes, employment disputes, and patent litigation cases in the ordinary course of business. To prevent possible infringement of our patents by others, we periodically review competitors' products. To avoid potential liability with respect to others' patents, we regularly review certain patents issued by the USPTO and foreign patent offices. We believe these activities help us minimize our risk of being a defendant in patent infringement litigation. We are currently involved in patent litigation cases, including cases by or against competitors, where we are asserting and defending against claims of patent infringement. Such cases are at varying stages in the litigation process.

   For a description of our material legal proceedings, see Note 13 of the Notes to Consolidated Financial Statements under the heading "Commitments and Contingent Liabilities – Litigation" included in Item 8, Financial Statements and Supplementary Data of this Annual Report on Form 10-K, which is incorporated into this Item 3 by reference.

ITEM 4.   MINE SAFETY DISCLOSURES

Not applicable.

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EXECUTIVE OFFICERS OF THE REGISTRANT

The list below identifies those persons designated by our Board of Directors as executive officers of the company. The list sets forth each such person's age and position with the company as of December 16, 2015, as well as other positions held by them for at least the last five years. There are no family relationships between any director, executive officer, or person nominated to become a director or executive officer of the company. There are no arrangements or understandings between any executive officer and any other person pursuant to which he or she was selected as an officer of the company.

Name, Age, and Position with the Company
  Business Experience during the Last Five or More Years
Michael J. Hoffman
60, Chairman of the Board and Chief Executive Officer
  Chairman of the Board since March 2006 and Chief Executive Officer since March 2005. He served as President from October 2004 to September 2015.
Richard M. Olson
51, President and Chief Operating Officer
  President and Chief Operating Officer since September 2015. From June 2014 to August 2015, he served as Group Vice President, International Business, Global Micro-Irrigation Business, and Distributor Development. From March 2013 to May 2014, he served as Vice President, International Business. From March 2012 to March 2013, he served as Vice President, Exmark. From September 2010 to March 2012, he served as General Manager, Exmark.
David H. Alkire
53, Vice President, Residential and Landscape Contractor Businesses
  Vice President, Residential and Landscape Contractor Businesses since November 2014. From June 2012 to October 2014, he served as General Manager, Residential and Landscape Contractor Businesses. From March 2011 to May 2012, he served as Director of Sourcing. From November 2004 to February 2011, he served as Director of Marketing, Residential Business.
Judy L. Altmaier
54, Vice President, Exmark
  Vice President, Exmark since June 2013. From October 2011 to June 2013, she served as Vice President, Operations and Quality Management. From October 2009 to October 2011, she served as Vice President, Operations.
William E. Brown, Jr.
54, Group Vice President, Commercial and Irrigation Businesses
  Group Vice President, Commercial and Irrigation Businesses since March 2013. He also assumed responsibility of the BOSS business in November 2014. From March 2012 to March 2013, he served as Group Vice President, International and Commercial Businesses. From August 2010 to March 2012, he served as Vice President, International Business.
David J. Brule II
47, President, BOSS
  President, BOSS since November 2014. From 1997 to November 2014, he served as President, BOSS Snowplow Division, Corporate Secretary, Treasurer and Director of Northern Star Industries, Inc., a privately held relay and control panel manufacturer and previous owner of BOSS.
Philip A. Burkart
53, Vice President, Irrigation and Lighting Businesses
  Vice President, Irrigation and Lighting Businesses since January 2011. From November 2006 to December 2010, he served as Vice President, Irrigation Business.
Amy E. Dahl
41, Vice President, Human Resources
  Vice President, Human Resources since April 2015. From June 2013 to March 2015, she served as Managing Director, Corporate Communications and Investor Relations. From July 2012 to June 2013, she served as Assistant General Counsel and Assistant Secretary. From November 2008 to July 2012, she served as Director, Corporate Counsel.
Timothy P. Dordell
53, Vice President, Secretary and General Counsel
  Vice President, Secretary and General Counsel since May 2007.
Michael D. Drazan
58, Vice President, Global Micro-Irrigation Business
  Vice President, Global Micro-Irrigation Business since March 2012. From February 2009 to March 2012, he served as Vice President, Contractor Business and Chief Information Officer, which included responsibility for our Exmark and Sitework Systems Businesses and our Information Services function. In September 2010, he also assumed responsibility for our Micro-Irrigation Business and Corporate Accounts.
Blake M. Grams
48, Vice President, Global Operations
  Vice President, Global Operations since June 2013. From December 2008 to June 2013, he served as Vice President, Corporate Controller.
Michael J. Happe
44, Group Vice President, Residential and Contractor Businesses
  Group Vice President, Residential and Contractor Businesses since March 2012, which includes responsibility for our Residential and Landscape Contractor – Toro, Exmark, and Sitework Systems businesses. From August 2010 to March 2012, he served as Vice President, Residential and Landscape Contractor Businesses. On December 16, 2015, Mr. Happe provided the company with notice of his resignation, which is effective January 1, 2016. Mr. Happe is leaving the company to become President and CEO, and a member of the board of directors, of Winnebago Industries, Inc. (NYSE: WGO).
Thomas J. Larson
58, Vice President, Corporate Controller
  Vice President, Corporate Controller since June 2013. From December 2008 to June 2013, he served as Vice President, Treasurer. He retained the office of Treasurer until July 2013.
Renee J. Peterson
54, Vice President, Treasurer and Chief Financial Officer
  Vice President, Treasurer and Chief Financial Officer since July 2013. From August 2011 to July 2013, she served as Vice President, Finance and Chief Financial Officer. In March 2012, she also assumed responsibility for our Information Services function. From July 2009 to August 2011, she served as Vice President – Finance and Planning for the Truck and Automotive Segments of Eaton Corporation, a diversified industrial manufacturer.
Darren L. Redetzke
51, Vice President, International Business
  Vice President, International Business since April 2015. From August 2010 to April 2015, he served as Vice President, Commercial Business.
Kurt D. Svendsen
49, Vice President, Information Services
  Vice President, Information Services since June 2013. From September 2011 to June 2013, he served as Managing Director, Corporate Communications and Investor Relations. From August 2010 to September 2011, he served as Director, Investor and Public Relations.

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PART II

ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Our common stock is listed for trading on the New York Stock Exchange and trades under the symbol "TTC." The high, low, and last sales prices for our common stock and cash dividends paid for each of the quarterly periods for fiscal 2015 and 2014 were as follows:

Fiscal year ended
October 31, 2015

    First     Second     Third     Fourth
 

Market price per share of common stock

                         

High sales price

  $ 67.47   $ 70.28   $ 70.59   $ 75.83  

Low sales price

    60.20     64.62     66.03     66.55  

Last sales price

    64.91     67.90     68.33     75.27  

Cash dividends per share of common stock1

    0.25     0.25     0.25     0.25  

 

Fiscal year ended
October 31, 2014

    First     Second     Third     Fourth
 

Market price per share of common stock

                         

High sales price

  $ 65.31   $ 67.35   $ 66.30   $ 63.19  

Low sales price

    56.96     61.48     58.91     55.77  

Last sales price

    63.36     64.33     59.16     61.73  

Cash dividends per share of common stock1

    0.20     0.20     0.20     0.20  
1
Future cash dividends will depend upon our financial condition, capital requirements, results of operations, and other factors deemed relevant by our Board of Directors. Restrictions on our ability to pay dividends are disclosed in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 6 of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data."

Common Stock – 175,000,000 shares authorized, $1.00 par value, as of October 31, 2015 and 2014. 54,650,916 and 55,678,419 shares outstanding as of October 31, 2015 and 2014, respectively.

Preferred Stock – 1,000,000 voting shares and 850,000 non-voting shares authorized, $1.00 par value, no shares outstanding.

Shareholders – As of December 11, 2015, we had approximately 3,298 shareholders of record.

Purchases of Equity Securities – The following table sets forth information with respect to shares of our common stock purchased by the company during each of the three fiscal months in our fourth quarter ended October 31, 2015.

Period

    Total
Number of
Shares
Purchased1,2
    Average
Price
Paid Per
Share
    Total
Number of
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs1
    Maximum
Number of
Shares that
May Yet be
Purchased
Under the
Plans or
Programs1
 

August 1, 2015
through
August 28, 2015

    42,200   $ 68.60     42,200     1,343,188  

August 29, 2015
through
September 25, 2015

    100,739     70.79     100,739     1,242,449  

September 26, 2015
through
October 31, 2015

    84,122     71.52     83,135     1,159,314  

Total

    227,061   $ 70.65     226,074        
1
On December 11, 2012, our Board of Directors authorized the repurchase of 5,000,000 shares of our common stock in open-market or in privately negotiated transactions. This program has no expiration date but may be terminated by our Board of Directors at any time.
2
Includes 987 units (shares) of our common stock purchased in open-market transactions at an average price of $74.39 per share on behalf of a rabbi trust formed to pay benefit obligations to participants in deferred compensation plans. These 987 shares were not repurchased under our repurchase program, described in footnote 1 above.

On December 3, 2015, our Board of Directors authorized the repurchase of up to an additional 4,000,000 shares of our common stock in open-market or in privately negotiated transactions. This repurchase program has no expiration date but may be terminated by our Board of Directors at any time.

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The Toro Company Common Stock Comparative Performance Graph

The information contained in The Toro Company Common Stock Comparative Performance Graph section shall not be deemed to be "soliciting material" or "filed" or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically request that it be treated as soliciting material or incorporate it by reference into a document filed under the Securities Act or the Exchange Act.

The following graph and table depict the cumulative total shareholder return (assuming reinvestment of dividends) on $100 invested in each of Toro common stock, the S&P 500 Index, and an industry peer group for the five-year period from October 31, 2010 through October 31, 2015.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among The Toro Company, the S&P 500 Index,
and a Peer Group

GRAPHIC

                          *$100 invested on 10/31/2010 in stock or index, including reinvestment of dividends.

                          Fiscal year ending October 31.

Fiscal year ending October 31

    2010     2011     2012     2013     2014     2015
 

The Toro Company

  $ 100.00   $ 96.53   $ 152.76   $ 215.81   $ 228.94   $ 283.32  

S&P 500

    100.00     108.09     124.52     158.36     185.71     195.37  

Peer Group

    100.00     108.77     116.67     144.64     161.55     141.26  

The industry peer group is based on the companies previously included in the Fortune 500 Industrial and Farm Equipment Index, which was discontinued after 2002 and currently includes: AGCO Corporation, The Alpine Group, Briggs & Stratton Corporation, Caterpillar Inc., Crane Co., Cummins Inc., Deere & Company, Dover Corporation, Flowserve Corporation, General Cable Corporation, Harsco Corporation, Illinois Tool Works Inc., International Game Technology, ITT Corporation, Kennametal Inc., Lennox International Inc., NACCO Industries, Inc., Parker-Hannifin Corporation, Pentair Ltd., Snap-On Inc., Teleflex Inc., Terex Corporation, The Timken Company, and Walter Energy Inc. The following two companies previously included in the peer group have been eliminated from the peer group entirely due to their acquisition during fiscal 2015: Pall Corporation and Tecumseh Products Company.

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ITEM 6.   SELECTED FINANCIAL DATA

The following table presents our selected financial data for each of the fiscal years in the five-year period ended October 31, 2015. The table should be read in conjunction with Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.

   
(Dollars in thousands, except per share data)
Fiscal years ended October 31
    20151     2014     2013     2012     2011  
   
OPERATING RESULTS:                                

Net sales

  $ 2,390,875   $ 2,172,691   $ 2,041,431   $ 1,958,690   $ 1,883,953  

Net sales growth from prior year

    10.0 %   6.4 %   4.2 %   4.0 %   11.5 %

Gross profit as a percentage of net sales

    35.0 %   35.6 %   35.5 %   34.4 %   33.8 %

Selling, general, and administrative expense as a percentage of net sales

    22.5 %   23.5 %   24.2 %   23.9 %   24.0 %

Operating earnings

  $ 299,114   $ 263,157   $ 230,662   $ 205,613   $ 184,487  

As a percentage of net sales

    12.5 %   12.1 %   11.3 %   10.5 %   9.8 %

Net earnings

  $ 201,591   $ 173,870   $ 154,845   $ 129,541   $ 117,658  

As a percentage of net sales

    8.4 %   8.0 %   7.6 %   6.6 %   6.2 %
Basic net earnings per share2   $ 3.63   $ 3.09   $ 2.67   $ 2.18   $ 1.88  
Diluted net earnings per share2     3.55     3.02     2.62     2.14     1.85  
Return on average stockholders' equity     44.7 %   45.3 %   46.1 %   44.7 %   43.4 %
SUMMARY OF FINANCIAL POSITION:                                

Total assets

  $ 1,303,658   $ 1,192,415   $ 1,002,748   $ 935,199   $ 870,663  

Average net working capital as a percentage of net sales3

    16.0 %   15.1 %   16.6 %   15.2 %   15.0 %

Long-term debt, including current portion

  $ 377,952   $ 353,956   $ 223,544   $ 225,340   $ 227,156  

Stockholders' equity

    462,165     408,727     358,738     312,402     266,767  

Debt-to-capitalization ratio

    45.0 %   47.8 %   38.4 %   41.9 %   46.0 %
CASH FLOW DATA:                                

Cash provided by operating activities

  $ 236,869   $ 182,365   $ 221,876   $ 185,798   $ 113,877  

Repurchases of Toro common stock

    106,964     103,039     99,587     93,395     129,955  

Cash dividends per share of Toro common stock2

    1.00     0.80     0.56     0.44     0.40  
OTHER STATISTICAL DATA:                                

Market price range –

                               

High sales price2

  $ 75.83   $ 67.35   $ 59.50   $ 42.36   $ 34.22  

Low sales price2

    60.20     55.77     40.25     25.89     22.53  

Average number of employees

    6,682     5,979     5,002     5,066     4,947  
1
The company's consolidated financial statements include results of the BOSS business from November 14, 2014, the date of acquisition.
2
Per share data and sales prices have been adjusted for all periods presented to reflect the impact of the company's two-for-one stock split effective June 29, 2012.
3
Average net working capital is defined as monthly average accounts receivable plus inventory less trade payables.

ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis ("MD&A") provides material historical and prospective disclosures intended to enable investors and other readers to assess our financial condition and results of operations. Statements that are not historical are forward-looking and involve risks and uncertainties, including those discussed in Part I, Item 1A, "Risk Factors" and elsewhere in this report. These risks could cause our actual results to differ materially from any future performance suggested below.

OVERVIEW

We design, manufacture, and market professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting, agricultural micro-irrigation systems, rental and specialty construction equipment, and residential yard and snow thrower products. Beginning in fiscal 2015 with our acquisition of BOSS®, we also design, manufacture, and market professional snow and ice management products. We sell our products worldwide through a network of distributors, dealers, hardware retailers, home centers, mass retailers, and over the Internet. Our businesses are organized into three reportable business segments: Professional, Residential, and Distribution. Our Distribution segment, which consists of our company-owned domestic distributorships, has been combined with our corporate activities and is shown as "Other." We strive to provide innovative, well-built, and dependable products supported by an extensive service network. A

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significant portion of our revenues has historically been, and we expect will continue to be, attributable to new and enhanced products. We define new products as those introduced in the current and previous two fiscal years.

Summary of Fiscal 2015 Results

In fiscal 2015, we achieved record net sales of $2,390.9 million and net earnings growth of 15.9 percent. Our fiscal 2015 results included the following items of significance:

On November 14, 2014, during the first quarter of fiscal 2015, we acquired substantially all of the assets of the BOSS professional snow and ice management business of privately held Northern Star Industries, Inc. BOSS designs, manufactures, markets, and sells a broad line of snowplows, salt and sand spreaders, and related parts and accessories for light and medium duty trucks, ATVs, UTVs, skid steers, and front-end loaders. Through this acquisition, we added another professional contractor brand; a portfolio of counter-seasonal equipment; manufacturing and distribution facilities located in Iron Mountain, Michigan; and a distribution network for these products.
Net sales for fiscal 2015 increased by 10.0 percent compared to fiscal 2014 to a record of $2,390.9 million. The acquisition of the BOSS business resulted in incremental net sales of $128.5 million for fiscal 2015. Additionally, the sales increase was primarily attributable to the successful introduction of new and enhanced products and increased sales of landscape contractor equipment and specialty construction products, partially offset by lower irrigation product sales. Unfavorable foreign currency exchange rate fluctuations decreased our net sales by approximately $47 million for fiscal 2015.
Professional segment net sales, which represented 69 percent of our total consolidated net sales in fiscal 2015, grew 11.0 percent in fiscal 2015 compared to fiscal 2014. The acquisition of the BOSS business resulted in incremental net sales of $128.5 million for fiscal 2015 for the professional segment. Shipments also increased due to the successful introduction of new and enhanced products, and continued growth and demand for our landscape contractor and specialty equipment products. However, sales of irrigation products were down primarily due to unfavorable weather conditions in key markets.
Our residential segment net sales increased 7.9 percent in fiscal 2015 compared to fiscal 2014 primarily due to strong shipments and demand for our newly introduced zero-turn radius riding and walk power mower products and expanded product placement. However, residential segment net sales in Australia were down due to unfavorable foreign currency exchange rate changes.
International net sales for fiscal 2015 decreased by 1.9 percent compared to fiscal 2014 due to changes in foreign currency exchange rates that reduced our total net sales by approximately $47 million in fiscal 2015. International net sales comprised 25.5 percent of our total consolidated net sales in fiscal 2015 compared to 28.7 percent in fiscal 2014 and 30.1 percent in fiscal 2013. These declines were primarily the result of foreign currency exchange rate changes. In addition, we experienced a decline in fiscal 2015 due to the acquisition of the BOSS business as such products are sold primarily in domestic markets.
Fiscal 2015 net earnings of $201.6 million increased 15.9 percent compared to fiscal 2014, and diluted net earnings per share increased 17.5 percent to $3.55 in fiscal 2015 compared to $3.02 in fiscal 2014.
Gross margin was 35.0 percent in fiscal 2015, a decrease of 60 basis points from 35.6 percent in fiscal 2014. This decline was mainly the result of unfavorable foreign currency exchange rate changes.
Although selling, general, and administrative ("SG&A") expense was up 5.2 percent in fiscal 2015 compared to fiscal 2014, SG&A expense as a percentage of net sales in fiscal 2015 was down 100 basis points to 22.5 percent compared to 23.5 percent in fiscal 2014, reflecting further leveraging of our SG&A costs over higher sales volumes.
Receivables increased by 11.9 percent as of the end of fiscal 2015 compared to the end of fiscal 2014 as a result of higher sales volumes and incremental receivables from the acquisition of the BOSS business. Our inventory levels were up by 21.8 percent as of the end of fiscal 2015 compared to the end of fiscal 2014 mainly due to incremental inventory from the acquisition of the BOSS business, higher snow thrower product inventory, and increased inventory levels of certain residential segment and landscape contractor equipment products. Additionally, average inventory levels during fiscal 2015 compared to fiscal 2014 were up as we built inventory in anticipation of strong demand for new products, including products impacted by the continued phase-in of applicable Tier 4 diesel engine emission requirements and other regulations in Europe, as well as incremental inventory from the acquisition of the BOSS business. Average net working capital (accounts receivable plus inventory less trade payables) as a percent of net sales was 16.0 percent as of the end of fiscal 2015 compared to 15.1 percent as of the end of fiscal 2014. Our domestic field inventory levels were up as of the end of fiscal 2015 compared to the end of fiscal 2014 due, in part, to strong shipments of new products and anticipated retail demand for our products in fiscal 2016.
We continued our history of paying quarterly cash dividends in fiscal 2015. We increased our fiscal 2015 quarterly cash dividend by 25 percent to $0.25 per share compared to our quarterly cash dividend in fiscal 2014 of $0.20 per share.
Our stock repurchase program returned $107 million to our shareholders during fiscal 2015, which reduced our number of shares outstanding. This reduction resulted in a benefit to our diluted net earnings per share of $0.05 per share in fiscal 2015 compared to fiscal 2014.

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Destination PRIME

Our current multi-year initiative, "Destination PRIME," began our journey into our second century. Similar to our previous Destination 2014 initiative, this three-year initiative is intended to help us drive revenue and earnings growth and further improve productivity, while also continuing our century-long commitment to innovation, relationships, and excellence. Through our Destination PRIME initiative, we will strive to achieve our goals by pursuing a progression of milestones for organic revenue growth, operating earnings, and working capital.

Organic Revenue Growth.   We intend to pursue strategic growth of our existing businesses and product categories with an annual organic revenue growth goal. The organic revenue growth goal of our Destination PRIME initiative is to achieve at least five percent organic revenue growth each fiscal year of this initiative. We define organic revenue growth as the increase in net sales, less net sales from acquisitions that occurred in the prior twelve-month period. In fiscal 2015, we fell short of this goal by achieving 4.1 percent organic revenue growth.

Operating Earnings Growth.   The operating earnings goal is to raise operating earnings as a percentage of net sales to 13 percent or higher by the end of fiscal 2017. In fiscal 2015, we made progress towards this goal as we realized 12.5 percent of operating earnings as a percentage of net sales.

Working Capital.   The working capital goal of our Destination PRIME initiative is to drive down average net working capital as a percentage of net sales to 13 percent or lower by the end of fiscal 2017. In fiscal 2015, our average net working capital as a percentage of net sales was 16.0 percent.

Outlook for Fiscal 2016

As we move into fiscal 2016, we intend to build on the positive momentum from fiscal 2015 and continue with our commitment to providing an array of innovative products and services to customers around the world. We expect to focus on capitalizing market opportunities and driving profitability with investments aimed at generating customer demand and gaining market share. We believe our fiscal 2016 financial performance will include, among many others, the following main factors:

We anticipate fiscal 2016 net sales in our professional segment to increase compared to fiscal 2015 due, in part, to the momentum of demand generated by the positive reception of our landscape contractor equipment products introduced in fiscal 2015, as well as continued growth in the landscape contractor market. We also expect continued growth in the rental equipment market and strong demand for new rental and specialty construction equipment products. Sales in the golf and grounds and irrigation markets are expected to slightly increase in fiscal 2016 as compared to fiscal 2015, as we also anticipate continued positive customer response generated from new products. Precision irrigation products remain a long-term focus for us as continued market growth and demand for efficient watering solutions is expected to drive demand for our products. We expect our increased manufacturing capacity and infrastructure that expanded our market presence for micro-irrigation products to contribute to our anticipated sales growth of micro-irrigation products in fiscal 2016. We also expect our residential segment net sales in fiscal 2016 to be similar to our sales volumes in fiscal 2015 as we anticipate positive momentum to continue in fiscal 2016 from new products released in fiscal 2015.
We intend to continue to focus on our international markets to grow revenues, and our long-term goal is for our international sales to comprise a larger percentage of our total consolidated net sales. We plan to continue investing in new products with a worldwide focus and leverage our infrastructure around the world, connecting us more closely to our customers and increasing our global presence. However, uncertainty with the economies of key international markets is expected to linger into fiscal 2016, which may hamper our international net sales growth. We expect international net sales to be slightly up in fiscal 2016 compared to fiscal 2015 unless foreign currency exchange rates further decline, which could adversely affect our international net sales in fiscal 2016.
We expect net earnings and diluted net earnings per share to be up in fiscal 2016 compared to fiscal 2015, driven mainly by our anticipated sales growth, improvement in our gross margin rate, and continued leveraging of our SG&A costs. Additionally, we anticipate a further reduction in our diluted shares outstanding due to anticipated continued repurchases of our common stock.
As announced on December 3, 2015, our Board of Directors increased our fiscal 2016 first quarter cash dividend by 20 percent to $0.30 per share compared to the quarterly cash dividend paid in the first quarter of fiscal 2015 and authorized the repurchase of up to an additional 4,000,000 shares of our common stock in open-market or in privately negotiated transactions.
In fiscal 2015, our average net working capital was higher than our expectations. Therefore, in fiscal 2016, we plan to place increased emphasis on improving asset utilization with a focus on reducing the amount of working capital in the supply chain. We anticipate our average net working capital as a percentage of net sales in fiscal 2016 to decrease as compared to fiscal 2015, in part, as we continue to transition certain receivables to our Red Iron joint venture. Additionally, we also anticipate average inventory levels to be lower in fiscal 2016 compared to fiscal 2015.

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RESULTS OF OPERATIONS

Fiscal 2015 net earnings were $201.6 million compared to $173.9 million in fiscal 2014, an increase of 15.9 percent. Fiscal 2015 diluted net earnings per share were $3.55, an increase of 17.5 percent from $3.02 per share in fiscal 2014. The primary factors contributing to the net earnings improvement were higher net sales, leveraging fixed SG&A costs over higher sales volumes, and a decrease in our effective tax rate. However, these improvements were partially offset by a decline in our gross margin rate and an increase in interest expense. Our net earnings per diluted share were also benefited by $0.05 per share in fiscal 2015 compared to fiscal 2014 as a result of reduced shares outstanding from repurchases of our common stock.

   Fiscal 2014 net earnings were $173.9 million compared to $154.8 million in fiscal 2013, an increase of 12.3 percent. Fiscal 2014 diluted net earnings per share were $3.02, an increase of 15.3 percent from $2.62 per share in fiscal 2013. The primary factors contributing to the net earnings improvement were higher net sales, a slight increase in gross profit, and leveraging fixed SG&A costs over higher sales volumes. However, these increases were partially offset by a reduction in other income and a higher effective tax rate. Our net earnings per diluted share were also benefited by $0.08 per share in fiscal 2014 compared to fiscal 2013 as a result of reduced shares outstanding from repurchases of our common stock.

   The following table summarizes our results of operations as a percentage of our consolidated net sales.

   

Fiscal years ended October 31

    2015     2014     2013  
   

Net sales

    100.0 %   100.0 %   100.0 %

Cost of sales

    (65.0 )   (64.4 )   (64.5 )

Gross margin

    35.0     35.6     35.5  

SG&A expense

    (22.5 )   (23.5 )   (24.2 )

Operating earnings

    12.5     12.1     11.3  

Interest expense

    (0.8 )   (0.7 )   (0.8 )

Other income, net

    0.4     0.4     0.6  

Provision for income taxes

    (3.7 )   (3.8 )   (3.5 )

Net earnings

    8.4 %   8.0 %   7.6 %

Fiscal 2015 Compared With Fiscal 2014

Net Sales.   Worldwide net sales in fiscal 2015 were $2,390.9 million compared to $2,172.7 million in fiscal 2014, an increase of 10.0 percent. This net sales change was attributable to the following factors:

Increased sales of professional segment products driven by the acquisition of the BOSS business resulted in incremental net sales of $128.5 million for fiscal 2015. In addition, our professional segment net sales were positively impacted by higher shipments of landscape contractor and specialty equipment products due to continued market growth and increased demand for our innovative product offerings and newly introduced products. However, sales of irrigation products were down primarily due to unfavorable weather conditions in key markets, and sales of micro-irrigation products were lower due to unfavorable foreign currency exchange rates and continued adverse political and economic conditions in key international markets.
Increased sales of residential segment products due to strong shipments and demand for our newly introduced zero-turn radius riding and walk power mower products and expanded product placement. However, residential segment net sales in Australia were down due to unfavorable foreign currency exchange rate changes.
Our overall net sales in international markets slightly decreased by 1.9 percent in fiscal 2015 compared to fiscal 2014 due to unfavorable foreign currency exchange rate fluctuations that reduced our total net sales by approximately $47 million in fiscal 2015.

Gross Margin.   Gross margin represents gross profit (net sales less cost of sales) as a percentage of net sales. See Note 1 of the Notes to Consolidated Financial Statements, in the section entitled "Cost of Sales," for a description of expenses included in cost of sales. Gross margin decreased by 60 basis points to 35.0 percent in fiscal 2015 from 35.6 percent in fiscal 2014. This decline was mainly the result of the following factors:

Unfavorable foreign currency exchange rate movements.
Purchase accounting impact of the incremental charge for the sale of inventory that was written-up to fair value as a result of the acquisition of the BOSS business.

Somewhat offsetting those negative factors were:

Improved price realization.
Costs for a supplier component rework issue that impacted certain walk power mowers in fiscal 2014 that was not repeated in fiscal 2015.

Selling, General, and Administrative Expense.   SG&A expense increased $26.7 million, or 5.2 percent, in fiscal 2015 compared to fiscal 2014. See Note 1 of the Notes to Consolidated Financial Statements, in the section entitled "Selling, General, and Administrative Expense," for a description of expenses included in SG&A expense. SG&A expense rate represents SG&A expense as a percentage of net sales. SG&A expense rate in fiscal 2015 decreased 100 basis points to 22.5 percent compared to 23.5 percent in fiscal 2014 due to fixed SG&A costs spread over higher sales volumes. However, the increase in SG&A expense of $26.7 million was driven mainly by the following factors:

Incremental SG&A expense of $19 million from the BOSS business.
Increased administrative expenses of $7 million.
Continued investments in engineering and new product development that resulted in higher expense of $2 million.

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Interest Expense.   Interest expense for fiscal 2015 increased $3.3 million compared to fiscal 2014 due to higher levels of debt as a result of borrowings that were used to pay the purchase price for the BOSS business.

Other Income, Net.   Other income, net consists mainly of our proportionate share of income or losses from equity investments (affiliates), currency exchange rate gains and losses, litigation settlements and recoveries, interest income, and retail financing revenue. Other income for fiscal 2015 was $10.7 million compared to $8.7 million in fiscal 2014, an increase of $2.0 million. This increase in other income, net was primarily due to higher earnings from our equity investment in Red Iron of $1.1 million and lower foreign currency exchange rate losses of $0.7 million in fiscal 2015 compared to fiscal 2014.

Provision for Income Taxes.   The effective tax rate for fiscal 2015 was 30.7 percent compared to 32.2 percent in fiscal 2014. The decrease in the effective tax rate was attributable to the benefit in the first quarter of fiscal 2015 for the retroactive re-enactment of the federal research credit for calendar 2014 and higher earnings in lower tax jurisdictions.

   Based on information available as of this filing, including the permanent extension of the federal research credit, we anticipate our fiscal 2016 tax rate to be slightly lower than our fiscal 2015 tax rate.

Fiscal 2014 Compared With Fiscal 2013

Net Sales.   Worldwide net sales in fiscal 2014 were $2,172.7 million compared to $2,041.4 million in fiscal 2013, an increase of 6.4 percent. This net sales improvement was attributable to the following factors:

Increased sales of professional segment products due to strong demand for landscape contractor equipment, demand for our drip irrigation solutions in agricultural markets, and the successful introduction of new and enhanced products that were well received by customers, including products in the golf market and rental and specialty construction equipment market. Additionally, improved price realization, as well as incremental sales from acquisitions of $2.8 million, contributed to our net sales growth in fiscal 2014.
Increased sales of residential segment products due to strong shipments and demand for snow thrower products and parts as a result of heavy snow falls during the 2013-2014 snow season in key markets and strong preseason demand for the 2014-2015 snow season. Additionally, higher shipments and demand for our zero-turn radius riding mowers and increased sales of electric trimmers and blowers contributed to our sales growth. However, residential segment net sales in Australia were down due to unfavorable weather conditions and foreign currency exchange rate changes.
Our overall net sales in international markets slightly increased by 1.2 percent in fiscal 2014 compared to fiscal 2013. However, changes in foreign currency exchange rates reduced our total net sales by approximately $5 million in fiscal 2014.

Gross Margin.   Gross margin slightly increased by 10 basis points to 35.6 percent in fiscal 2014 from 35.5 percent in fiscal 2013. This improvement was mainly the result of the following factors:

Improved price realization.
Cost reduction efforts from productivity and process improvement initiatives.

   Somewhat offsetting those positive factors were:

Lower proportion of professional segment sales that carry higher average gross margins than our residential segment.
Unfavorable foreign currency exchange rate movements.
Slightly higher prices paid for commodities in fiscal 2014 compared to fiscal 2013, mainly for steel and resins.
Costs for a supplier component rework issue that impacted certain walk power mowers.

Selling, General, and Administrative Expense.   SG&A expense increased $16.0 million, or 3.2 percent, in fiscal 2014 compared to fiscal 2013. SG&A expense rate in fiscal 2014 decreased 70 basis points to 23.5 percent compared to 24.2 percent in fiscal 2013 due to fixed SG&A costs spread over higher sales volumes. However, the increase in SG&A expense of $16.0 million was driven mainly by the following factors:

Increased sales and marketing expense of $6 million.
Investments in engineering and new product development that resulted in higher expense of $5 million.
Higher incentive compensation expense of $4 million as a result of improved financial performance.
Incremental costs from acquisitions of approximately $2 million.

   Somewhat offsetting those increases in SG&A expense was a decline in product liability expense of $2 million from favorable claims experience.

Interest Expense.   Interest expense for fiscal 2014 decreased by 4.8 percent compared to fiscal 2013 as a result of higher capitalized interest from capital projects.

Other Income, Net.   Other income for fiscal 2014 was $8.7 million compared to $12.3 million in fiscal 2013, a decrease of $3.5 million. This decrease in other income, net was primarily due to recovery for a litigation settlement of $3 million in fiscal 2013 that was not duplicated in fiscal 2014 and higher foreign currency exchange rate losses of $0.3 million in fiscal 2014 compared to fiscal 2013.

Provision for Income Taxes.   The effective tax rate for fiscal 2014 was 32.2 percent compared to 31.7 percent in fiscal 2013. The increase in the effective tax rate was attributable to the benefit in fiscal 2013 for the retroactive reenactment of the domestic research tax credit, which expired on December 31, 2013. This

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increase was partially offset by a discrete benefit relating to the change in tax accounting method filed that allowed us to recoup basis for previously disposed assets and changes in the mix of international earnings.

PERFORMANCE BY BUSINESS SEGMENT

As more fully described in Note 12 of the Notes to Consolidated Financial Statements, we operate in three reportable business segments: Professional, Residential, and Distribution. Our Distribution segment, which consists of our company-owned domestic distributorships, has been combined with our corporate activities and is shown as "Other." Operating earnings for our Professional and Residential segments are defined as earnings from operations plus other income, net. Operating loss for the Other segment includes earnings (loss) from our wholly owned domestic distribution companies, corporate activities, other income, and interest expense.

   The following information provides perspective on our business segments' net sales and operating results.

Professional

Professional segment net sales represented 69 percent of consolidated net sales for fiscal 2015, 68 percent for fiscal 2014, and 70 percent for fiscal 2013. The following table shows the professional segment net sales, operating earnings, and operating earnings as a percent of net sales.

   
(Dollars in millions)
Fiscal years ended October 31
    2015     2014     2013  
   
Net sales   $ 1,639.7   $ 1,477.6   $ 1,425.3  

% change from prior year

    11.0 %   3.7 %   7.2 %
Operating earnings   $ 308.0   $ 276.3   $ 254.4  

As a percent of net sales

    18.8 %   18.7 %   17.9 %

Net Sales.   Worldwide net sales for the professional segment in fiscal 2015 were up by 11.0 percent compared to fiscal 2014 primarily as a result of the following factors:

Incremental sales from the acquisition of the BOSS business of $128.5 million.
Higher shipments of landscape contractor equipment, including new and enhanced products, as contractors continued to invest in turf maintenance equipment.
Increased sales driven by strong demand and market growth for rental and specialty construction equipment, as well as positive customer response for new products we introduced in that market.

   Somewhat offsetting those positive factors were:

Unfavorable foreign currency exchange rate fluctuations.
A decline in sales of irrigation products due to unfavorable weather conditions in key markets.
Lower sales of micro-irrigation products due to unfavorable foreign currency exchange rate fluctuations and continued adverse political and economic conditions in key international markets.

   Our domestic field inventory levels of our professional segment products were higher as of the end of fiscal 2015 compared to the end of fiscal 2014 due, in part, to strong sales from new product introductions and anticipated retail demand.

   Worldwide net sales for the professional segment in fiscal 2014 were up by 3.7 percent compared to fiscal 2013 primarily as a result of the following factors:

Strong sales and demand for landscape contractor equipment, including new and enhanced products, as contractors invested in turf maintenance equipment.
Higher global sales of our micro-irrigation products from market growth and demand for more efficient watering solutions for agriculture.
Increased golf product sales mainly due to the successful introduction of new and enhanced products, such as our new INFINITY® sprinklers, that were well received by customers, as well as new international golf course projects.
Increased sales and demand for rental and specialty construction equipment, including products that we introduced under the Toro brand.
Improved price realization and incremental sales of $2.8 million from acquisitions.

Operating Earnings.   Operating earnings for the professional segment in fiscal 2015 increased 11.5 percent compared to fiscal 2014 primarily due to higher sales volumes. Expressed as a percentage of net sales, professional segment operating margins slightly increased by 10 basis points to 18.8 percent in fiscal 2015 compared to 18.7 percent in fiscal 2014. The following factors impacted professional segment operating earnings as a percentage of net sales for fiscal 2015:

Lower gross margin in fiscal 2015 compared to fiscal 2014 mainly due to unfavorable foreign currency exchange rate movements and the purchase accounting impact for the acquisition of the BOSS business, as previously discussed.
A decline in SG&A expense rate in fiscal 2015 compared to fiscal 2014 due to further leveraging fixed SG&A costs over higher sales volumes.

   Operating earnings for the professional segment in fiscal 2014 increased 8.6 percent compared to fiscal 2013 primarily due to higher sales volumes and an improvement in gross margin. Expressed as a percentage of net sales, professional segment operating margins increased 80 basis points to 18.7 percent in fiscal 2014 compared to 17.9 percent in fiscal 2013. The following factors impacted professional segment operating earnings as a percentage of net sales for fiscal 2014:

Higher gross margin in fiscal 2014 compared to fiscal 2013 as a result of improved price realization and cost reduction efforts.

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A decline in SG&A expense rate in fiscal 2014 compared to fiscal 2013 due to leveraging fixed SG&A costs over higher sales volumes.

Residential

Residential segment net sales represented 30 percent of consolidated net sales for fiscal 2015, 31 percent for fiscal 2014, and 29 percent for fiscal 2013. The following table shows the residential segment net sales, operating earnings, and operating earnings as a percent of net sales.

   
(Dollars in millions)
Fiscal years ended October 31
    2015     2014     2013  
Net sales   $ 725.7   $ 672.4   $ 594.4  

% change from prior year

    7.9 %   13.1 %   (2.1 )%
Operating earnings   $ 85.0   $ 76.9   $ 62.0  

As a percent of net sales

    11.7 %   11.4 %   10.4 %

Net Sales.   Worldwide net sales for the residential segment in fiscal 2015 were up by 7.9 percent compared to fiscal 2014 primarily as a result of the following factors:

Increased shipments driven by strong retail demand and additional product placement for our new platform of zero-turn radius riding mowers.
Higher sales of walk power mowers due to enhanced product placement and increased demand for our product offerings, including our new all-wheel drive model.

   Somewhat offsetting the increase in residential segment net sales was a decline in sales in Australia from unfavorable foreign currency exchange rate fluctuations.

   Our domestic field inventory levels of our residential segment products were higher as of the end of fiscal 2015 compared to the end of fiscal 2014 due to the introduction of new products and anticipated retail demand for those new products. Additionally, field inventory levels of snow thrower products were up as a result of anticipated strong retail demand for the 2015-2016 winter season.

   Worldwide net sales for the residential segment in fiscal 2014 were up by 13.1 percent compared to fiscal 2013 primarily as a result of the following factors:

Strong shipments and demand for snow thrower products and parts as a result of heavy snow falls during the 2013-2014 snow season in key markets and strong preseason demand for the 2014-2015 snow season.
Increased sales and demand of zero-turn radius riding products, including our enhanced products, as customers continued to transition to this mowing platform.
Higher sales of electric handheld products due to additional product placement at mass retailers and favorable weather conditions.
A slight increase in sales of walk power mowers due to the positive customer response to new products and expanded product placement for certain models, which was partially offset by the late arrival of spring weather conditions and a supplier-related rework that hampered sales in fiscal 2014.

   Somewhat offsetting the increase in residential segment net sales was a decline in sales in Australia from unfavorable weather conditions, as well as unfavorable foreign currency exchange rate fluctuations.

Operating Earnings.   Operating earnings for the residential segment in fiscal 2015 increased 10.5 percent compared to fiscal 2014. Expressed as a percentage of net sales, residential segment operating margins increased 30 basis points to 11.7 percent in fiscal 2015 compared to 11.4 percent in fiscal 2014. The following factors impacted residential segment operating earnings:

Lower gross margins primarily from unfavorable foreign currency exchange rate fluctuations and increased manufacturing expenses.
Lower SG&A expense rate attributable to further leveraging of fixed SG&A costs over higher sales volumes.

   Operating earnings for the residential segment in fiscal 2014 increased 24.0 percent compared to fiscal 2013. Expressed as a percentage of net sales, residential segment operating margins increased 100 basis points to 11.4 percent in fiscal 2014 compared to 10.4 percent in fiscal 2013. The following factors impacted residential segment operating earnings:

Slightly lower gross margins from higher commodity prices and costs related to a supplier component rework issue in fiscal 2014, partially offset by production efficiencies on increased sales volumes.
Lower SG&A expense rate attributable to leveraging fixed SG&A costs over higher sales volumes.

Other

Other segment net sales, which includes our company-owned domestic distributors, represented 1 percent of consolidated net sales for each of fiscal 2015, 2014, and 2013. The following table shows the other segment net sales and operating losses.

   
(Dollars in millions)
Fiscal years ended October 31
    2015     2014     2013
 
Net sales   $ 25.5   $ 22.7   $ 21.8  

% change from prior year

    12.6 %   4.2 %   0.0 %
Operating losses   $ (101.9 ) $ (96.8 ) $ (89.7 )

Net Sales.   Net sales for the other segment includes sales from our wholly owned domestic distribution companies less sales from the professional and residential segments to those distribution companies. The other segment net sales in fiscal 2015 were up by $2.8 million compared to fiscal 2014 due to higher sales volumes driven by strong demand for golf and grounds equipment at our company-owned distribution companies.

   The other segment net sales in fiscal 2014 were up by $0.9 million compared to fiscal 2013 due to higher sales volumes at our company-owned distribution companies.

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Operating Loss.   Operating loss for the other segment in fiscal 2015 increased by 5.3 percent compared to fiscal 2014. This loss increase was primarily attributable to an increase in interest expense and higher administrative expenses.

   Operating loss for the other segment in fiscal 2014 increased by 7.8 percent compared to fiscal 2013. This loss increase was primarily attributable to higher incentive compensation expense, higher foreign currency exchange rate losses, and recovery for a litigation settlement in fiscal 2013 that was not duplicated in fiscal 2014.

FINANCIAL CONDITION

Working Capital

During fiscal 2015, our average net working capital (accounts receivable plus inventory less trade payables) as a percentage of net sales increased primarily from higher average inventory levels. As of the end of fiscal 2015, our average net working capital increased to 16.0 percent compared to 15.1 percent as of the end of fiscal 2014.

   The following table highlights several key measures of our working capital performance.

   
(Dollars in millions)
Fiscal years ended October 31
    2015     2014  
Average cash and cash equivalents   $ 108.7   $ 156.9  
Average receivables, net     219.9     208.1  
Average inventories, net     356.2     306.2  
Average accounts payable     193.9     185.2  
Average days outstanding for receivables     33.6     35.0  
Average inventory turnover (times)     4.36     4.57  

The following factors impacted our working capital:

Average net receivables increased by 5.7 percent in fiscal 2015 compared to fiscal 2014 as a result of higher sales volumes and incremental receivables from the acquisition of the BOSS business. Our average days outstanding for receivables decreased to 33.6 days in fiscal 2015 compared to 35.0 days in fiscal 2014.
Average inventories increased by 16.3 percent in fiscal 2015 compared to fiscal 2014. Inventory levels as of the end of fiscal 2015 compared to the end of fiscal 2014 were up by $59.9 million, or 21.8 percent, due to incremental inventory of $17.2 million from the acquisition of the BOSS business, higher inventory levels of snow thrower products in anticipation of strong seasonal demand, and increased inventory of certain residential segment mowers and landscape contractor equipment as we built product earlier compared to last fiscal year.
Average accounts payable increased by 4.7 percent in fiscal 2015 compared to fiscal 2014 mainly due to higher volume of purchases from increased sales and demand in fiscal 2015 compared to fiscal 2014.

   In fiscal 2016, we plan to place increased emphasis on improving asset utilization with a focus on reducing the amount of working capital in the supply chain. We anticipate our average net working capital as a percentage of net sales in fiscal 2016 to decrease as compared to fiscal 2015 as we continue to transition certain receivables to our Red Iron joint venture. Additionally, we also anticipate average inventory levels to be lower in fiscal 2016 compared to fiscal 2015 due to expected improvements in our supply chain from increased focus and efforts on reducing working capital.

Capital Expenditures and
Other Long-Term Assets

Fiscal 2015 capital expenditures of $56.4 million were lower by $14.8 million compared to fiscal 2014. This decrease was primarily attributable to the construction in fiscal 2014 for our expanded new corporate facility located in Bloomington, Minnesota, partially offset by capital expenditures in fiscal 2015 for the renovation of our original corporate facility to accommodate additional expansion needs for our product development and test capacities. Capital expenditures for fiscal 2016 are planned to be approximately $70 million as we expect to continue the renovation of our original corporate facility to accommodate additional expansion needs for our product development and test capacities. During fiscal 2016, we also plan to invest in new product tooling, new technology in production processes and equipment, replacement production equipment, and investments in new and existing facilities.

   Long-term assets as of October 31, 2015 were $593.0 million compared to $368.4 million as of October 31, 2014, an increase of $224.6 million. This increase was mainly attributable to the addition of intangible assets and goodwill from the acquisition of the BOSS business. Included in long-term assets as of October 31, 2015 was goodwill in the amount of $195.5 million. Based on our annual impairment analysis, we determined there was no goodwill impairment for any of our reporting units as their related fair values were substantially in excess of their carrying values.

Cash Flow

Cash flows provided by (used in) operating, investing, and financing activities during the past three fiscal years are shown in the following table.

(Dollars in millions)

  Cash Provided by
(Used in)
 
 

Fiscal years ended October 31

    2015     2014     2013
 

Operating activities

  $ 236.9   $ 182.4   $ 221.9  

Investing activities

    (250.3 )   (65.7 )   (44.8 )

Financing activities

    (173.4 )   17.0     (118.3 )

Effect of exchange rates on cash

    (1.8 )   (1.8 )   (1.7 )

Net cash (decrease) increase

  $ (188.6 ) $ 131.9   $ 57.1  

Cash and cash equivalents as of fiscal year end

  $ 126.3   $ 314.9   $ 183.0  

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Cash Flows From Operating Activities.   Our primary source of funds is cash generated from operations. In fiscal 2015, cash provided by operating activities increased $54.5 million, or 29.9 percent, from fiscal 2014. This increase was mainly due to higher net earnings and a smaller increase in working capital needs, as well as higher accounts payable and accrued liabilities as of the end of fiscal 2015 compared to fiscal 2014.

   In fiscal 2014, cash provided by operating activities decreased $39.5 million, or 17.8 percent, from fiscal 2013. This decrease was due to cash utilized for increased working capital needs, mainly as a result of an increase in inventory levels and a decline in accounts payable, partially offset by higher net earnings.

Cash Flows From Investing Activities.   Capital expenditures and acquisitions are a significant use of our capital resources. These investments are intended to enable sales growth in new and expanding markets, help us to meet product demand, and increase our manufacturing efficiencies and capacity. Cash used in investing activities in fiscal 2015 increased $184.6 million from fiscal 2014 due to cash utilized for the acquisition of the BOSS business, partially offset by lower purchases of property, plant, and equipment.

   Cash used in investing activities in fiscal 2014 increased $20.9 million, or 46.7 percent, from fiscal 2013 mainly due to higher purchases of property, plant, and equipment, including our corporate facility, as previously discussed.

Cash Flows From Financing Activities.   Cash used in financing activities in fiscal 2015 was $173.4 million compared to cash provided by financing activities of $17.0 million in fiscal 2014. The increase in cash used in financing activities was mainly due to repayments of debt in fiscal 2015 compared to cash received from borrowings of debt in fiscal 2014. Additionally, an increase in cash dividends paid on our common stock and higher amounts of cash utilized for stock repurchases in fiscal 2015 compared to fiscal 2014 contributed to our increase in cash used in financing activities.

   Cash provided by financing activities was $17.0 million in fiscal 2014 compared to cash used in financing activities of $118.3 million in fiscal 2013. The increase in cash provided by financing activities included an increase in short-term and long-term debt, partially offset by higher amounts of cash paid for dividends and stock repurchases in fiscal 2014 compared to fiscal 2013.

Cash and Cash Equivalents.   Cash and cash equivalents as of the end of fiscal 2015 were lower by $188.6 million compared to the end of fiscal 2014. In late fiscal 2014, our cash balances reflected the borrowings under our revolving credit facility, including $130.0 million of additional cash received under a term loan that was utilized for the purchase of the BOSS business early in the first quarter of fiscal 2015.

Liquidity and Capital Resources

Our businesses are seasonally working capital intensive and require funding for purchases of raw materials used in production, replacement parts inventory, payroll and other administrative costs, capital expenditures, establishment of new facilities, expansion and renovation of existing facilities, as well as for financing receivables from customers that are not financed with Red Iron. Our accounts receivable balances historically increase between January and April as a result of typically higher sales volumes and extended payment terms made available to our customers, and typically decrease between May and December when payments are received. We believe that the funds available through existing financing arrangements and forecasted cash flows will be sufficient to provide the necessary capital resources for our anticipated working capital needs, capital expenditures, investments, debt repayments, quarterly cash dividend payments, and stock repurchases for at least the next twelve months. As of October 31, 2015, cash and short-term investments held by our foreign subsidiaries that are not available to fund domestic operations unless repatriated were $61.3 million. We currently do not intend to repatriate this cash held by our foreign subsidiaries; however, if circumstances changed and these funds were needed for our U.S. operations, we would be required to accrue and pay U.S. taxes to repatriate these funds. Determination of the unrecognized deferred tax liability related to these earnings is not practicable because of the complexities with its hypothetical calculation.

   Seasonal cash requirements are financed from operations, cash on hand, and with short-term financing arrangements, including our $150.0 million unsecured senior five-year revolving credit facility that expires in October 2019. Included in our $150.0 million revolving credit facility is a $20.0 million sublimit for standby letters of credit and a $20.0 million sublimit for swingline loans. At our election, and with the approval of the named borrowers on the revolving credit facility, the aggregate maximum principal amount available under the facility may be increased by an amount up to $100.0 million in aggregate. Funds are available under the revolving credit facility for working capital, capital expenditures, and other lawful purposes, including, but not limited to, acquisitions and stock repurchases. Interest expense on this credit line is determined based on a LIBOR rate (or other rates quoted by the Administrative Agent, Bank of America, N.A.) plus a basis point spread defined in the credit agreement. In addition, our non-U.S. operations maintain unsecured short-term lines of credit in the aggregate amount of approximately $11.1 million. These facilities bear interest at various rates depending on the rates in their respective countries of operation. As of October 31, 2015, we had no outstanding short-term debt under these lines of credit compared to $20.8 million outstanding short-term debt as of October 31, 2014. Our short-term debt outstanding as of October 31, 2014 was due to borrowings under our credit facility for cash required to close the acquisition of the BOSS business early in the first quarter of fiscal 2015. As of October 31, 2015, we had $13.9 million of outstanding

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letters of credit and $147.2 million of unutilized availability under our credit agreements.

   Additionally, as of October 31, 2015, we had $378.0 million outstanding in long-term debt that includes $100 million in aggregate principal amount of 7.8% debentures due June 15, 2027, $125.0 million in aggregate principal amount of 6.625% senior notes due May 1, 2037, $30.0 million in aggregate principal amount due to the former owners of the BOSS business, and $123.5 million in an outstanding term loan. The term loan bears interest based on a LIBOR rate (or other rates quoted by the Administrative Agent, Bank of America, N.A.) plus a basis point spread defined in the credit agreement. The term loan can be repaid in part or in full at any time without penalty, but in any event must be paid in full by October 2019.

   Our revolving and term loan credit facility contains standard covenants, including, without limitation, financial covenants, such as the maintenance of minimum interest coverage and maximum debt to earnings ratios; and negative covenants, which among other things, limit loans and investments, disposition of assets, consolidations and mergers, transactions with affiliates, restricted payments, contingent obligations, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. Under the revolving credit facility, we are not limited in the amount for payments of cash dividends and stock repurchases as long as our debt to EBITDA ratio from the previous quarter compliance certificate is less than or equal to 3.25, provided that immediately after giving effect of any such proposed action, no default or event of default would exist. As of October 31, 2015, we were not limited in the amount for payments of cash dividends and stock repurchases. We were in compliance with all covenants related to our credit agreement for our revolving credit facility as of October 31, 2015, and we expect to be in compliance with all covenants during fiscal 2016. If we were out of compliance with any debt covenant required by this credit agreement following the applicable cure period, the banks could terminate their commitments unless we could negotiate a covenant waiver from the banks. In addition, our long-term senior notes, debentures, term loan, and any amounts outstanding under the revolving credit facility could become due and payable if we were unable to obtain a covenant waiver or refinance our short-term debt under our credit agreement. If our credit rating falls below investment grade and/or our average debt to EBITDA ratio rises above 1.50, the basis point spread over LIBOR (or other rates quoted by the Administrative Agent, Bank of America, N.A.) we currently pay on outstanding debt under the credit agreement would increase. However, the credit commitment could not be cancelled by the banks based solely on a ratings downgrade. Our debt rating for long-term unsecured senior, non-credit enhanced debt was unchanged during fiscal 2015 by Standard and Poor's Ratings Group at BBB and by Moody's Investors Service at Baa3.

Capital Structure

The following table details the components of our total capitalization and debt-to-capitalization ratio.

(Dollars in millions)
October 31

    2015     2014
 

Short-term debt

  $ 0.2   $ 20.8  

Long-term debt, including current portion

    378.0     354.0  

Stockholders' equity

    462.2     408.7  

Debt-to-capitalization ratio

    45.0 %   47.8 %

   Our debt-to-capitalization ratio decreased in fiscal 2015 compared to fiscal 2014 mainly due to an increase in stockholders' equity from higher net earnings partially offset by an increase in dividends paid and repurchases of our common stock in fiscal 2015 as compared to fiscal 2014.

Cash Dividends

Each quarter in fiscal 2015, our Board of Directors declared a cash dividend of $0.25 per share, which was a 25 percent increase over our cash dividend of $0.20 per share paid each quarter in fiscal 2014. As announced on December 3, 2015, our Board of Directors increased our fiscal 2016 first quarter cash dividend by 20 percent to $0.30 per share from the quarterly cash dividend paid in the first quarter of fiscal 2015.

Share Repurchase Plan

During fiscal 2015, we continued repurchasing shares of our common stock in the open market, thereby reducing our shares outstanding. In addition, our repurchase program provided shares for use in connection with our equity compensation plans. As of October 31, 2015, 1,159,314 shares remained available for repurchase under our Board authorization. We expect to continue repurchasing shares of our common stock in fiscal 2016, depending upon market conditions.

   As announced on December 3, 2015, our Board of Directors authorized the repurchase of up to an additional 4,000,000 shares of our common stock in open-market or in privately negotiated transactions. This repurchase program has no expiration date but may be terminated by the Board at any time.

   The following table provides information with respect to repurchases of our common stock during the past three fiscal years.

(Dollars in millions, except per share data)

                   

Fiscal years ended October 31

    2015     2014     2013
 

Shares of common stock purchased1

    1,561,179     1,622,569     2,131,615  

Cost to repurchase common stock

  $ 106.0   $ 101.7   $ 98.8  

Average price paid per share

  $ 67.87   $ 62.66   $ 46.37  
1
Does not include shares of our common stock surrendered by employees to satisfy minimum tax withholding obligations upon vesting of restricted stock granted under our stock-based compensation plans.

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Customer Financing Arrangements

Wholesale Financing.   We are party to a joint venture with TCFIF, established as Red Iron, the purpose of which is to provide inventory financing, including floor plan and open account receivable financing, to distributors and dealers of our products in the U.S. and select distributors of our products in Canada that enables them to carry representative inventories of our products. Under a separate arrangement, TCFCFC provides inventory financing to dealers of our products in Canada. In late fiscal 2015, Red Iron also began providing inventory financing to a majority of our BOSS distributors and dealers. Under these financing arrangements, 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 and/or the dealer, or paid by the distributor or dealer. Red Iron retains a security interest in the distributors' and dealers' financed inventories, and those inventories are monitored regularly. Floor plan terms to the distributors and dealers require payment as the equipment, which secures the indebtedness, is sold to customers or when payment terms become due, whichever occurs first. Rates are generally indexed to LIBOR plus a fixed percentage that differs based on whether the financing is for a distributor or dealer. Rates may also vary based on the product that is financed. Red Iron financed $1,430.9 million of new receivables for dealers and distributors during fiscal 2015, of which $367.2 million was outstanding as of October 31, 2015.

   Some independent international dealers continue to finance their products with a third party financing company. This third party financing company purchased $25.0 million of receivables from us during fiscal 2015, of which $10.6 million was outstanding as of October 31, 2015.

   We also enter into limited inventory repurchase agreements with third party financing companies and Red Iron for receivables financed by them. As of October 31, 2015, we were contingently liable to repurchase up to a maximum amount of $10.0 million of inventory related to receivables under these financing arrangements. We have repurchased immaterial amounts of inventory from third party financing companies and Red Iron over the past three fiscal years. However, a decline in retail sales or financial difficulties of our distributors or dealers could cause this situation to change and thereby require us to repurchase financed product up to but not exceeding our limited obligation, which could have an adverse effect on our operating results.

   We continue to provide financing in the form of open account terms to home centers and mass retailers; general line irrigation dealers; international distributors and dealers other than the Canadian distributors and dealers to whom Red Iron provides financing arrangements; micro-irrigation dealers and distributors; government customers; rental companies; and a limited number of BOSS dealers.

End-User Financing.   We have agreements with third party financing companies to provide lease-financing options to golf course and sports fields and grounds equipment customers in the U.S. and select countries in Europe. The purpose of these agreements is to increase sales by giving buyers of our products alternative financing options when purchasing our products. We have no contingent liabilities for residual value or credit collection risk under these agreements with third party financing companies.

   From time to time, we enter into agreements where we provide recourse to third party finance companies in the event of default by the customer for lease payments to the third party finance company. Our maximum exposure for credit collection under those arrangements as of October 31, 2015 was $4.6 million.

   Termination or any material change to the terms of our end-user financing arrangements, availability of credit for our customers, including any delay in securing replacement credit sources, or significant financed product repurchase requirements could have a material adverse impact on our future operating results.

Distributor Financing.   From time to time, we enter into long-term loan agreements with some distributors. These transactions are used for expansion of the distributors' businesses, acquisitions, refinancing working capital agreements, or facilitation of ownership changes. As of October 31, 2015, we had an outstanding note receivable in the amount of $1.0 million, which is included in other current and long-term assets on our consolidated balance sheet.

Off-Balance Sheet Arrangements and
Contractual Obligations

The following table summarizes our contractual obligations as of October 31, 2015.

  Payments Due By Period    

(Dollars in thousands)
Contractual Obligation

    Less Than
1 Year
    1-3
Years
    3-5
Years
    More than
5 Years
    Total
 

Long-term debt1

  $ 23,110   $ 46,070   $ 84,500   $ 225,000   $ 378,680  

Interest payments2

    19,131     36,438     33,398     188,292     277,259  

Deferred compensation arrangements3

    517     1,035     86         1,638  

Purchase obligations4

    4,663                 4,663  

Operating leases5

    13,956     18,439     13,177     32,113     77,685  

Other6

    5,285                 5,285  

Total

  $ 66,662   $ 101,982   $ 131,161   $ 445,405   $ 745,210  
1
Principal payments in accordance with our credit facilities and long-term debt agreements.
2
Interest payments for outstanding long-term debt obligations. Interest on variable rate debt was calculated using the interest rate as of October 31, 2015.
3
The unfunded deferred compensation arrangements, covering certain retired management employees, consist primarily of salary and bonus deferrals under our deferred compensation plans. Our estimated distributions in the contractual obligations table are based upon a number of assumptions including termination dates and participant elections.
4
Purchase obligations represent contracts or commitments for the purchase of raw materials.
5
Operating lease obligations do not include payments to property owners covering real estate taxes and common area maintenance.
6
Payment obligation in connection with the renovation of our original corporate facility located at Bloomington, Minnesota.

   As of October 31, 2015, we also had $16.2 million in outstanding letters of credit issued, including standby letters of credit, during

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the normal course of business, as required by some vendor contracts. In addition to the contractual obligations described in the foregoing table, we may be obligated for additional net cash outflows related to $5.6 million of unrecognized tax benefits, including interest and penalties. The payment and timing of any such payments is affected by the ultimate resolution of the tax years that are under audit or remain subject to examination by the relevant taxing authorities.

Market Risk

Due to the nature and scope of our operations, we are subject to exposures that arise from fluctuations in interest rates, foreign currency exchange rates, and commodity prices. We are also exposed to equity market risk pertaining to the trading price of our common stock. Additional information is presented in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," and Note 14 of the Notes to Consolidated Financial Statements.

Inflation

We are subject to the effects of inflation, deflation, and changing prices. During fiscal 2015, we experienced slightly lower average commodity prices compared to the average prices paid for commodities in fiscal 2014. We intend to continue to closely follow prices of commodities and components that affect our product lines, and we anticipate average prices paid for some commodities and components to be equivalent in fiscal 2016 as compared to fiscal 2015. Historically, we have mitigated, and we expect that we would continue to mitigate, commodity price increases, if any, in part, by collaborating with suppliers, reviewing alternative sourcing options, substituting materials, engaging in internal cost reduction efforts, and increasing prices on some of our products, all as appropriate.

Acquisitions and Divestiture

On November 14, 2014, during the first quarter of fiscal 2015, we acquired substantially all of the assets of the BOSS professional snow and ice management business of privately held Northern Star Industries, Inc. BOSS designs, manufactures, markets, and sells a broad line of snowplows, salt and sand spreaders, and related parts and accessories for light and medium duty trucks, ATVs, UTVs, skid steers, and front-end loaders. The purchase price of this acquisition was $229.5 million.

   On November 27, 2013, during the first quarter of fiscal 2014, we completed the acquisition of certain assets of a quality value-priced line of outdoor lighting fixtures for the landscape lighting market. The purchase price of this acquisition was $1.2 million.

   On September 30, 2013, during the fourth quarter of fiscal 2013, we completed the acquisition of certain assets and assumed certain liabilities for a company in China that manufactures water-efficient drip irrigation products, sprinklers, emitters, and filters for agriculture, landscaping, and green house production. The purchase price of this acquisition was $3.5 million.

   These acquisitions were deemed immaterial based on our consolidated financial condition and results of operations and all acquisitions were accounted for as business combinations.

   On November 27, 2015, in our first quarter of fiscal 2016, we completed the sale of our Northwestern U.S. distribution company.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our consolidated financial statements in conformity with U.S. generally accepted accounting principles ("GAAP"), we must make decisions that 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.

   Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements. Some of those 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 reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period may have a material impact on the presentation of our financial condition, changes in financial condition, or results of operations. Our critical accounting estimates include the following:

Warranty Reserve.   Warranty coverage on our products is generally for specified periods of time and on select products' hours of usage, and generally covers parts, labor, and other expenses for non-maintenance repairs. Warranty coverage generally does not cover operator abuse or improper use. At the time of sale, we accrue a warranty reserve by product line for estimated costs in connection with future warranty claims. We also establish reserves for major rework campaigns. 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. 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 number and value of warranty claims can vary due to such factors as performance of new products, significant manufacturing or design defects not discovered until after the product is

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delivered to customers, product failure rates, and higher or lower than expected service costs for a 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.

Sales Promotions and Incentives.   At the time of sale to a customer, we record an estimate for sales promotion and incentive costs that are classified as a reduction from gross sales or as a component of SG&A expense. Examples of sales promotion and incentive programs include off-invoice discounts, rebate programs, volume discounts, retail financing support, commissions, and other sales discounts and promotional programs. The estimates for sales promotion and incentive costs are based on the terms of the arrangements with customers, historical payment experience, field inventory levels, volume purchases, and expectations for changes in relevant trends in the future. Actual results may differ from these estimates if competitive factors dictate the need to enhance or reduce sales promotion and incentive accruals or if customer usage and field inventory levels vary from historical trends. Adjustments to sales promotions and incentive accruals are made from time to time as actual usage becomes known in order to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date.

Goodwill and Other Intangibles.   Identifiable intangible assets are amortized over their useful lives, unless the useful life is determined to be indefinite. The useful life of an identifiable intangible asset is based on an analysis of several factors, including contractual, regulatory or legal obligations, demand, competition, and industry trends. Goodwill and indefinite-life intangible assets are not amortized, but are tested at least annually for impairment and whenever events or changes in circumstances indicate that impairment may have occurred.

   Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-life intangible assets, and the income approach is utilized for both. We test goodwill for impairment at the reporting unit level. Under the income approach, we calculate the fair value of our reporting units and indefinite-life intangible assets using the present value of future cash flows. Individual indefinite-life intangible assets are tested by comparing the book values of each asset to the estimated fair value. Our estimate of fair value for indefinite-life intangible assets uses projected revenues from our forecasting process, assumed royalty rates, and a discount rate. Assumptions used in our impairment evaluations, such as forecasted growth rates and cost of capital, are consistent with internal projections and operating plans. Materially different assumptions regarding future performance of our businesses or a different weighted-average cost of capital could result in impairment losses or additional amortization expense.

   In conducting the goodwill impairment test, we first perform a qualitative assessment to determine whether it is more likely than not the fair value of any reporting unit is less than its carrying amount. If we conclude that this is the case, a two-step quantitative test for goodwill impairment is performed. In conducting the initial qualitative assessment, we analyze actual and projected growth trends for net sales, gross margin, and earnings for each reporting unit, as well as historical versus planned performance. Additionally, each reporting unit assesses critical areas that may impact its business, including macroeconomic conditions, market-related exposures, competitive changes, new or discontinued products, changes in key personnel, or any other potential risks to projected financial results. All assumptions used in the qualitative assessment require significant judgment.

   If performed due to impairment indicators or the amount of time since the last analysis, the quantitative goodwill impairment test is a two-step process. First, we compare the carrying value of a reporting unit, including goodwill, to its fair value. The fair value of each reporting unit is estimated using a discounted cash flow model. Where available, and as appropriate, comparable market multiples and our company's market capitalization are also used to corroborate the results of the discounted cash flow models. If the first step indicates the carrying value exceeds the fair value of the reporting unit, then a second step must be completed in order to determine the amount of goodwill impairment that should be recorded. In the second step, the implied fair value of the reporting unit's goodwill is determined by allocating the reporting unit's fair value to all of its assets and liabilities other than goodwill. The implied fair value of the goodwill that results from the application of this second step is then compared to the carrying amount of the goodwill and an impairment charge is recorded for the difference.

Inventory Valuation.   We value our inventories at the lower of the cost of inventory or net realizable value, with cost determined by either the last-in, first-out ("LIFO") method for most U.S. inventories or the first-in, first-out ("FIFO") method for all other inventories. We establish reserves for excess, slow moving, and obsolete inventory based on inventory levels, expected product life, and forecasted sales demand. Valuation of inventory can also be affected by significant redesign of existing products or replacement of an existing product by an entirely new generation product. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements compared with inventory levels. Reserve requirements are developed according to our projected demand requirements based on historical demand, competitive factors, and technological and product life cycle changes. It is possible that an increase in our reserve may be required in the future if there is a significant decline in demand for

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our products and we do not adjust our production schedule accordingly.

   We also record a reserve for inventory shrinkage. Our inventory shrinkage reserve represents anticipated physical inventory losses that are recorded based on historical loss trends, ongoing cycle-count and periodic testing adjustments, and inventory levels.

   Though management considers reserve balances adequate and proper, changes in economic conditions in specific markets in which we operate could have an effect on the reserve balances required.

Accounts and Notes Receivable Valuation.   We value accounts and notes receivable net of an allowance for doubtful accounts. Each fiscal quarter, we prepare an analysis of our ability to collect outstanding receivables that 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. Deterioration in the financial condition of any key customer, inability of customers to obtain bank credit lines, or a significant slow-down in the economy could have a material negative impact on our ability to collect accounts and notes receivable. We believe that an analysis of historical trends and our current knowledge of potential collection problems provide us with sufficient information to establish a reasonable estimate for an allowance for doubtful accounts. However, since we cannot predict with certainty future changes in the financial stability of our customers or in the general economy, 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 is appropriate, we would record a credit or charge to SG&A expense in the period that we made such a determination.

New Accounting Pronouncements to be Adopted

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers that updates the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity's contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606) , which deferred the effective date of this standard by one year. We expect to adopt this guidance on November 1, 2018, as required, based on the new effective date. The guidance permits the use of either a retrospective or cumulative effect transition method. We have not yet selected a transition method and are currently evaluating the impact of the amended guidance on our existing revenue recognition policies and procedures.

   In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810), which amends certain requirements for determining whether a variable interest entity must be consolidated. The amended guidance will become effective for us commencing in the first quarter of fiscal 2017. Early adoption is permitted. We anticipate the adoption of this guidance will not have a material impact on our consolidated financial position.

   In April 2015, the FASB issued ASU No. 2015-03, Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. The amended guidance will become effective for us commencing in the first quarter of fiscal 2017. Early adoption is permitted. We anticipate the adoption of this guidance will not have a material impact on our consolidated financial position.

   In April 2015, the FASB issued ASU No. 2015-05, Customer's Accounting for Fees Paid in a Cloud Computing Arrangement. This amended guidance requires customers to determine whether or not an arrangement contains a software license element. If the arrangement contains a software element, the related fees paid should be accounted for as an acquisition of a software license. If the arrangement does not contain a software license, it is accounted for as a service contract. The amended guidance will become effective for us commencing in the first quarter of fiscal 2017. Early adoption is permitted. We anticipate the adoption of this guidance will not have a material impact on our consolidated financial statements.

   In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This amended guidance changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The amended guidance will become effective for us commencing in the first quarter of fiscal 2018. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.

   In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes. This amended guidance requires an entity to present deferred tax assets and liabilities as noncurrent in the statement of financial position. The amended guidance will become effective for us commencing in the first quarter of fiscal 2018. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.

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   No other new accounting pronouncement that has been issued but not yet effective for us during fiscal 2015 has had or is expected to have a material impact on our consolidated financial statements.

ITEM 7A.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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 earnings and cash flows. See further discussion 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 exchange rate 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 primarily the use of forward currency contracts. We also utilize cross currency swaps to offset intercompany loan exposures. We use derivative instruments only in an attempt to limit underlying exposure from currency fluctuations and to minimize earnings and cash flow volatility associated with foreign currency exchange rate changes and not for trading purposes. We are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as sales to third party customers, sales and loans to wholly owned foreign subsidiaries, foreign plant operations, and purchases from suppliers. Because our products are manufactured or sourced primarily from the U.S. and Mexico, a stronger U.S. dollar and Mexican peso generally have a negative impact on our results from operations, while a weaker dollar and peso generally have a positive effect. Our primary foreign currency exchange rate exposures are with the Euro, the Australian dollar, the Canadian dollar, the British pound, the Mexican peso, the Japanese yen, the Chinese Renminbi, and the Romanian New Leu against the U.S. dollar, as well as the Romanian New Leu against the Euro.

   We enter into various contracts, primarily forward contracts that change in value as foreign currency exchange rates change, to protect the value of existing foreign currency assets, liabilities, anticipated sales, and probable commitments. Decisions on whether to use such contracts are made based on the amount of exposures to the currency involved and an assessment of the near-term market value for each currency. Worldwide foreign currency exchange rate exposures are reviewed monthly. The gains and losses on these contracts offset changes in values of the related exposures. Therefore, changes in values of these hedge instruments are highly correlated with changes in market values of underlying hedged items both at inception of the hedge and over the life of the hedge contract. Further information regarding gains and losses on our derivative instruments is presented in Note 14 of the Notes to Consolidated Financial Statements.

   The following foreign currency exchange contracts held by us have maturity dates in fiscal 2016 and 2017. All items are non-trading and stated in U.S. dollars. Some derivative instruments we enter into do not meet cash flow hedge accounting criteria; 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, 2015 were as follows:

Dollars in thousands
(except average contracted rate)

    Average
Contracted
Rate
    Notional
Amount
    Value in
AOCL
Income
(Loss)
    Fair Value
Impact
Gain
(Loss)
 

Buy U.S. $/Sell Australian dollar

    0.7491   $ 8,274.8   $ 1,150.0   $ 2,837.4  

Buy U.S. $/Sell Canadian dollar

    1.2432     9,531.7     537.6     5,269.5  

Buy U.S. $/Sell Euro

    1.1346     65,773.3     1,068.2     8,937.1  

Buy U.S. $/Sell British pound

    1.5292     20,337.7     62.8     495.9  

Buy Euro/ Sell U.S. $

    1.1006     7,723.1         2,136.3  

Buy Mexican peso/Sell U.S. $

    15.5614     13,752.0     (1,533.4 )   (3,032.4 )

Buy Euro/Sell Romanian New Leu

    4.4360     9,358.6     (255.4 )   133.9  

   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 impact net earnings.

Interest Rate Risk.   Our market risk on interest rates relates primarily to LIBOR-based short-term debt and a term loan from commercial banks, as well as the potential increase in fair value of our fixed-rate long-term debt resulting from a potential decrease in interest rates. We generally do not use interest rate swaps to mitigate the impact of fluctuations in interest rates. Included in long-term debt is $223.8 million of fixed-rate debt that is not subject to variable interest rate fluctuations, a fixed-rate promissory note for the principal amount of $30.0 million issued to the former owners of the BOSS business that was recorded at fair value of $31.2 million, and a $123.5 million LIBOR-based term loan, which is subject to market risk based on changes in LIBOR rates. We have no earnings or cash flow exposure due to market risks on our fixed-rate long-term debt obligations. As of October 31, 2015, the estimated fair value of long-term debt with fixed interest rates was $298.5 million compared to its carrying amount of $254.5 million. Market risk for fixed-rate, long-term debt is estimated as the potential increase in fair value, resulting from a hypothetical 10 percent decrease in interest rates, and amounts to approximately $15.1 million. The fair value is estimated by discounting the projected cash flows using the rate that similar amounts and terms of debt could currently be borrowed.

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Commodity Risk.   We are subject to market risk from fluctuating market prices of certain purchased commodity raw materials including steel, aluminum, petroleum and natural gas-based resins, and linerboard. In addition, we are a purchaser of components and parts containing various commodities, including steel, aluminum, copper, lead, rubber, and others that are integrated into our end products. While such materials are typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We generally buy these commodities and components based upon market prices that are established with the vendor as part of the purchase process. We generally attempt to obtain firm pricing from most of our suppliers for volumes consistent with planned production. To the extent that commodity prices increase and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, we may experience a decline in our gross margins to the extent we are not able to increase selling prices of our products or obtain manufacturing efficiencies to offset increases in commodity costs. Further information regarding rising prices for commodities is presented in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this report in the section entitled "Inflation." We enter into fixed-price contracts for future purchases of natural gas in the normal course of operations as a means to manage natural gas price risks. In fiscal 2015, our manufacturing facilities entered into these fixed-price contracts for approximately 50 percent of their monthly-anticipated usage.

Equity Price Risk.   The trading price volatility of our common stock impacts compensation expense related to our stock-based compensation plans. Further information is presented in Note 10 of the Notes to Consolidated Financial Statements regarding our stock-based compensation plans.

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ITEM 8.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Management's Report on Internal Control over Financial Reporting

Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, for The Toro Company and its subsidiaries. This system is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. generally accepted accounting principles.

   The company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

   Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. In addition, projection of any evaluation of the effectiveness of internal control over financial reporting to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree or compliance with the policies or procedures may deteriorate.

   Management, with the participation of the company's Chairman of the Board and Chief Executive Officer and Vice President, Treasurer and Chief Financial Officer, evaluated the effectiveness of the company's internal control over financial reporting as of October 31, 2015. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment, management concluded that the company's internal control over financial reporting was effective as of October 31, 2015. Our internal control over financial reporting as of October 31, 2015, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included herein.

   In the first quarter of 2015, the company acquired substantially all of the assets of the BOSS professional snow and ice management business of privately held Northern Star Industries, Inc. BOSS represented approximately 19 percent of the company's total consolidated assets and 5 percent of the company's consolidated net sales as of and for the fiscal year ended October 31, 2015. As the acquisition occurred in the first quarter of 2015, the scope of management's assessment of the effectiveness of internal control over financial reporting does not include BOSS. This exclusion is in accordance with the SEC's general guidance that an assessment of a recently acquired business may be omitted from the company's scope in the year of acquisition.

     
     
/s/ Michael J. Hoffman

Chairman of the Board and Chief Executive Officer
   
     
/s/ Renee J. Peterson

Vice President, Treasurer and Chief Financial Officer
   

   

Further discussion of the Company's internal controls and procedures is included in Part II, Item 9A, "Controls and Procedures" of this report.

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Report of Independent Registered Public Accounting Firm

The Stockholders and Board of Directors
The Toro Company:

We have audited the accompanying consolidated balance sheets of The Toro Company and subsidiaries (the Company) as of October 31, 2015 and 2014 and the related consolidated statements of earnings, comprehensive income, stockholders' equity, and cash flows for each of the fiscal years in the three-year period ended October 31, 2015. In connection with our audits of the consolidated financial statements, we have audited the financial statement schedule listed in Item 15(a) 2. We also have audited The Toro Company's internal control over financial reporting as of October 31, 2015 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Toro Company's management is responsible for these consolidated financial statements and the identified financial statement schedule, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedule and an opinion on the Company's internal control over financial reporting based on our audits.

   We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the consolidated financial statements and financial statement schedule included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

   A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

   Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with the policies or procedures may deteriorate.

   In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Toro Company and subsidiaries as of October 31, 2015 and 2014 and the results of their operations and their cash flows for each of the fiscal years in the three-year period ended October 31, 2015, in conformity with U.S. generally accepted accounting principles. In our opinion, the identified 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. Also in our opinion, The Toro Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2015 based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

   The Toro Company acquired substantially all of the assets of the BOSS professional snow and ice management business of privately held Northern Star Industries, Inc. during the first quarter of fiscal 2015, and management excluded from its assessment of the effectiveness of internal control over financial reporting as of October 31, 2015, BOSS's internal control over financial reporting associated with approximately 19 percent of total assets and 5 percent of net sales in the consolidated financial statements of The Toro Company and subsidiaries as of and for the fiscal year ended October 31, 2015. Our audit of internal control over financial reporting of The Toro Company and subsidiaries also excluded an evaluation of the internal control over financial reporting of the BOSS business.

LOGO

Minneapolis, Minnesota
December 23, 2015

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CONSOLIDATED STATEMENTS OF EARNINGS

(Dollars and shares in thousands, except per share data) Fiscal years ended October 31

    2015     2014     2013
 

Net sales

  $ 2,390,875   $ 2,172,691   $ 2,041,431  

Cost of sales

    1,554,940     1,399,420     1,316,634  

Gross profit

    835,935     773,271     724,797  

Selling, general, and administrative expense

    536,821     510,114     494,135  

Operating earnings

    299,114     263,157     230,662  

Interest expense

    (18,757 )   (15,426 )   (16,210 )

Other income, net

    10,674     8,714     12,261  

Earnings before income taxes

    291,031     256,445     226,713  

Provision for income taxes

    89,440     82,575     71,868  

Net earnings

  $ 201,591   $ 173,870   $ 154,845  

Basic net earnings per share of common stock

  $ 3.63   $ 3.09   $ 2.67  

Diluted net earnings per share of common stock

  $ 3.55   $ 3.02   $ 2.62  

Weighted-average number of shares of common stock outstanding – Basic

    55,565     56,359     57,922  

Weighted-average number of shares of common stock outstanding – Diluted

    56,757     57,628     59,105  

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands) Fiscal years ended October 31

    2015     2014     2013
 

Net earnings

  $ 201,591   $ 173,870   $ 154,845  

Other comprehensive (loss) income, net of tax:

                   

Foreign currency translation adjustments, net of tax of $(51), $(34), and $247, respectively

    (11,792 )   (4,758 )   (2,342 )

Pension and retiree medical benefits, net of tax of $299, $10, and $904, respectively

    (120 )   (1,583 )   645  

Derivative instruments, net of tax of $(933), $2,350, and $(261), respectively

    (2,226 )   3,206     (899 )

Other comprehensive loss, net

    (14,138 )   (3,135 )   (2,596 )

Comprehensive income

  $ 187,453   $ 170,735   $ 152,249  

The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements

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CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except per share data) October 31

    2015     2014
 

ASSETS

             

Cash and cash equivalents

  $ 126,275   $ 314,873  

Receivables, net:

             

Customers (net of $1,378 and $1,481, respectively, for allowance for doubtful accounts)

    171,172     151,479  

Other

    5,841     6,679  

Total receivables, net

    177,013     158,158  

Inventories, net

    334,514     274,603  

Prepaid expenses and other current assets

    34,782     33,580  

Deferred income taxes

    38,095     42,822  

Total current assets

    710,679     824,036  

Property, plant, and equipment, net

    224,995     205,195  

Long-term deferred income taxes

    28,568     26,075  

Goodwill

    195,533     91,851  

Other intangible assets, net

    119,010     23,829  

Other assets

    24,873     21,429  

Total assets

  $ 1,303,658   $ 1,192,415  

LIABILITIES AND STOCKHOLDERS' EQUITY

             

Current portion of long-term debt

  $ 23,134   $ 6,640  

Short-term debt

    222     20,818  

Accounts payable

    152,017     124,271  

Accrued liabilities:

             

Warranty

    70,734     71,080  

Advertising and marketing programs

    76,689     66,169  

Compensation and benefit costs

    56,269     59,724  

Insurance

    6,814     6,960  

Income taxes

    4,275     4,699  

Other

    53,580     40,059  

Total current liabilities

    443,734     400,420  

Long-term debt, less current portion

    354,818     347,316  

Deferred revenue

    11,365     10,947  

Deferred income taxes

    7      

Other long-term liabilities

    31,569     25,005  

Stockholders' equity:

             

Preferred stock, par value $1.00, authorized 1,000,000 voting and 850,000 non-voting shares; none issued and outstanding

         

Common stock, par value $1.00, authorized 175,000,000 shares; issued and outstanding 54,650,916 shares as of October 31, 2015 and 55,678,419 shares as of October 31, 2014

    54,651     55,678  

Retained earnings

    437,357     368,754  

Accumulated other comprehensive loss

    (29,843 )   (15,705 )

Total stockholders' equity

    462,165     408,727  

Total liabilities and stockholders' equity

  $ 1,303,658   $ 1,192,415  

The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands) Fiscal years ended October 31

    2015     2014     2013
 

CASH FLOWS FROM OPERATING ACTIVITIES:

                   

Net earnings

  $ 201,591   $ 173,870   $ 154,845  

Adjustments to reconcile net earnings to net cash provided by operating activities:

                   

Provision for depreciation, amortization, and impairment losses

    63,143     53,138     54,134  

Noncash income from finance affiliate

    (8,353 )   (7,262 )   (7,097 )

Decrease (increase) in deferred income taxes

    200     (4,700 )   149  

Stock-based compensation expense

    10,836     11,291     10,237  

Other

    (128 )   28     10  

Changes in operating assets and liabilities, net of effect of acquisitions:

                   

Receivables, net

    (25,647 )   (5,042 )   (11,912 )

Inventories, net

    (52,656 )   (37,183 )   9,373  

Prepaid expenses and other assets

    (607 )   (3,245 )   (6,825 )

Accounts payable, accrued liabilities, deferred revenue, and other long-term liabilities

    48,490     1,470     18,962  

Net cash provided by operating activities

    236,869     182,365     221,876  

CASH FLOWS FROM INVESTING ACTIVITIES:

                   

Purchases of property, plant, and equipment

    (56,374 )   (71,138 )   (49,427 )

Proceeds from asset disposals

    179     479     413  

Distributions from finance affiliate, net

    4,264     5,672     6,342  

Acquisitions, net of cash acquired

    (198,329 )   (715 )   (2,101 )

Net cash used in investing activities

    (250,260 )   (65,702 )   (44,773 )

CASH FLOWS FROM FINANCING ACTIVITIES:

                   

(Repayments of) increase in short-term debt

    (21,283 )   19,498     (415 )

(Repayments of) increase in long-term debt

    (7,227 )   129,557     (1,739 )

Excess tax benefits from stock-based awards

    8,459     8,857     6,134  

Proceeds from exercise of stock options

    9,203     7,192     9,808  

Purchases of Toro common stock

    (106,964 )   (103,039 )   (99,587 )

Dividends paid on Toro common stock

    (55,549 )   (45,048 )   (32,499 )

Net cash (used in) provided by financing activities

    (173,361 )   17,017     (118,298 )

Effect of exchange rates on cash and cash equivalents

    (1,846 )   (1,800 )   (1,668 )

Net (decrease) increase in cash and cash equivalents

    (188,598 )   131,880     57,137  

Cash and cash equivalents as of the beginning of the fiscal year

    314,873     182,993     125,856  

Cash and cash equivalents as of the end of the fiscal year

  $ 126,275   $ 314,873   $ 182,993  

Supplemental disclosures of cash flow information:

                   

Cash paid during the fiscal year for:

                   

Interest

  $ 18,133   $ 16,925   $ 17,054  

Income taxes

    77,043     76,325     76,186  

Shares issued in connection with stock-based compensation plans

    7,705     6,619     6,629  

Payment obligations issued in connection with acquisitions

    31,161     420     1,395  

The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements.

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CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(Dollars in thousands, except per share data)

    Common
Stock
    Retained
Earnings
    Accumulated
Other
Comprehensive
Loss
    Total
Stockholders'
Equity
 

Balance as of October 31, 2012

  $ 58,266   $ 264,110   $ (9,974 ) $ 312,402  

Cash dividends paid on common stock – $0.56 per share

        (32,499 )       (32,499 )

Issuance of 669,426 shares for stock options exercised and restricted stock vested

    670     7,667         8,337  

Stock-based compensation expense

        10,237         10,237  

Contribution of stock to a deferred compensation trust

        1,466         1,466  

Purchase of 2,147,185 shares of common stock

    (2,147 )   (97,441 )       (99,588 )

Excess tax benefits from stock-based awards

        6,134         6,134  

Other comprehensive loss

            (2,596 )   (2,596 )

Net earnings

        154,845         154,845  

Balance as of October 31, 2013

  $ 56,789   $ 314,519   $ (12,570 ) $ 358,738  

Cash dividends paid on common stock – $0.80 per share

        (45,048 )       (45,048 )

Issuance of 532,692 shares for stock options exercised and restricted stock vested

    533     4,979         5,512  

Stock-based compensation expense

        11,291         11,291  

Contribution of stock to a deferred compensation trust

        1,681         1,681  

Purchase of 1,644,230 shares of common stock

    (1,644 )   (101,395 )       (103,039 )

Excess tax benefits from stock-based awards

        8,857         8,857  

Other comprehensive loss

            (3,135 )   (3,135 )

Net earnings

        173,870         173,870  

Balance as of October 31, 2014

  $ 55,678   $ 368,754   $ (15,705 ) $ 408,727  

Cash dividends paid on common stock – $1.00 per share

        (55,549 )       (55,549 )

Issuance of 548,486 shares for stock options exercised and restricted stock vested

    549     7,687         8,236  

Stock-based compensation expense

        10,836         10,836  

Contribution of stock to a deferred compensation trust

        967         967  

Purchase of 1,575,989 shares of common stock

    (1,576 )   (105,388 )       (106,964 )

Excess tax benefits from stock-based awards

        8,459         8,459  

Other comprehensive loss

            (14,138 )   (14,138 )

Net earnings

        201,591         201,591  

Balance as of October 31, 2015

  $ 54,651   $ 437,357   $ (29,843 ) $ 462,165  

The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share data)

1   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND RELATED DATA

Basis of Presentation and Consolidation

The accompanying consolidated financial statements include the accounts of the company and its wholly owned subsidiaries. The company uses the equity method to account for investments over which it has the ability to exercise significant influence over operating and financial policies. Consolidated net earnings include the company's share of the net earnings (losses) of these companies. The cost method is used to account for investments in companies that the company does not control and for which it does not have the ability to exercise significant influence over operating and financial policies. These investments are recorded at cost. All intercompany accounts and transactions have been eliminated from the consolidated financial statements.

Accounting Estimates

In preparing the consolidated financial statements in conformity with United States ("U.S.") generally accepted accounting principles ("GAAP"), management must make decisions that impact the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures, including disclosures of contingent assets and liabilities. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Estimates are used in determining, among other items, sales promotions and incentives accruals, incentive compensation accruals, inventory valuation, warranty reserves, earnout liabilities, allowance for doubtful accounts, pension and postretirement accruals, self-insurance accruals, useful lives for tangible and intangible assets, and future cash flows associated with impairment testing for goodwill and other long-lived assets. These estimates and assumptions are based on management's best estimates and judgments at the time they are made. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with certainty, actual amounts could differ significantly from those estimated at the time the consolidated financial statements are prepared. Changes in those estimates will be reflected in the consolidated financial statements in future periods.

Reclassifications

Certain amounts from prior years' Consolidated Statements of Stockholders' Equity and Notes to Consolidated Financial Statements have been reclassified to conform to the current year presentation. The reclassifications had no impact on the results of operations as previously reported.

Cash and Cash Equivalents

The company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents and are stated at cost, which approximates fair value. As of October 31, 2015, cash and short-term investments held by the company's foreign subsidiaries that are not available to fund domestic operations unless repatriated were $61,272.

Receivables

The company's financial exposure to collection of accounts receivable is reduced due to its Red Iron Acceptance, LLC ("Red Iron") joint venture with TCF Inventory Finance, Inc. ("TCFIF"), as further discussed in Note 3. For receivables not serviced through Red Iron, the company grants credit to customers in the normal course of business and performs on-going credit evaluations of customers. Receivables are recorded at original carrying amount less reserves for estimated uncollectible accounts, as described below.

Allowance for Doubtful Accounts

The company estimates the balance of allowance for doubtful accounts by analyzing the age of accounts and notes receivable balances and applying historical write-off trend rates. The company also estimates separately specific customer balances when it is deemed probable that the balance is uncollectible. Account balances are charged off against the allowance when all collection efforts have been exhausted.

Inventory Valuations

Inventories are valued at the lower of cost or net realizable value, with cost determined by the last-in, first-out ("LIFO") method for a majority of the company's inventories. The first-in, first-out ("FIFO") method is used for all other inventories, constituting 26 and 28 percent of total inventories as of October 31, 2015 and 2014, respectively. The company establishes a reserve for excess, slow-moving, and obsolete inventory that is equal to the difference between the cost and estimated net realizable value for that inventory. These reserves are based on a review and comparison of current inventory levels to planned production, as well as planned and historical sales of the inventory. During fiscal 2015 and 2014,

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LIFO layers were reduced, which resulted in charging lower inventory costs prevailing in previous years to cost of sales, thus reducing cost of sales by $1,348 and $65, respectively.

   Inventories as of October 31 were as follows:

   

    2015     2014  

Raw materials and work in progress

  $ 107,086   $ 95,144  

Finished goods and service parts

    291,468