UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended ~~July 29, 2005~~February 3, 2006

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

Telephone number: (952) 888-8801

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

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

Xý

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, ~~(as defined~~or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange ~~Act).~~Act.

~~Yes~~

XLarge accelerated filer ý

NoAccelerated filer o

Non-accelerated filer o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso

The number of shares of Common Stock outstanding as of ~~August 26, 2005~~March 3, 2006 was ~~42,056,056.~~42,633,551.

THE TORO COMPANY

INDEX TO FORM 10-Q

		~~Page Number~~
	Page Number
PART I.	FINANCIAL INFORMATION:

Item 1.	Financial Statements
	Condensed Consolidated Statements of Earnings (Unaudited) -
	Three ~~and Nine~~ Months Ended ~~July 29,~~February 3, 2006 and January 28, 2005 ~~and July 30, 2004~~	3

	Condensed Consolidated Balance Sheets (Unaudited) - ~~July 29,~~
	February 3, 2006, January 28, 2005, ~~July 30, 2004,~~ and October 31, ~~2004~~2005	4

	Condensed Consolidated Statements of Cash Flows (Unaudited) - ~~Nine~~
	Three Months Ended ~~July 29,~~February 3, 2006 and January 28, 2005 ~~and July 30, 2004~~	5

	Notes to Condensed Consolidated Financial Statements (Unaudited)	~~6-12~~6-11

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	~~13-22~~11-18

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2318-19

Item 4.	Controls and Procedures	2419

PART II.	OTHER INFORMATION:

Item 1.	Legal Proceedings	2420

Item 1A.	Risk Factors	20

Item 2.	~~Unregistered Sales~~Changes in Securities, Use of Proceeds, and Issuer Purchases of Equity Securities ~~and Use of Proceeds~~	25

~~Item 5.~~	~~Other Information~~	2521

Item 6.	Exhibits	2622

	Signatures	2723

PART I. ~~ITEM~~

Item 1. FINANCIAL INFORMATION

THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings (Unaudited)

(Dollars and shares in thousands, except per share data)

Three Months Ended

Nine Months Ended

July 29,

July 30,

July 29,

July 30,

2005

2004

2005

2004

Net sales

$
466,942

$
454,044

$
1,442,296

$
1,315,644

Cost of sales

303,681

289,842

940,729

839,953

Gross profit

163,261

164,202

501,567

475,691

Selling, general, and administrative expense

108,595

111,468

330,376

324,630

Earnings from operations

54,666

52,734

171,191

151,061

Interest expense

(4,820
)
(3,893
)
(13,453
)
(11,477
)
Other income, net

642

1,533

2,725

3,307

Earnings before income taxes

50,488

50,374

160,463

142,891

Provision for income taxes

16,111

16,161

52,953

47,154

Net earnings

$
34,377

$
34,213

$
107,510

$
95,737

Basic net earnings per share of common stock

$
0.77

$
0.70

$
2.38

$
1.94

Diluted net earnings per share of common stock

$
0.74

$
0.66

$
2.29

$
1.84

Weighted average number of shares of common stock outstanding – Basic

44,494

48,738

45,121

49,396

Weighted average number of shares of common stock outstanding – Dilutive

46,438

51,587

46,966

52,043

~~Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective March 28, 2005.~~

Three Months Ended

February 3,

January 28,

2006

2005

Net sales

$
369,640

$
346,913

Cost of sales

237,766

225,250

Gross profit

131,874

121,663

Selling, general, and administrative expense

107,205

102,239

Earnings from operations

24,669

19,424

Interest expense

(4,243
)
(3,760
)
Other income, net

886

1,141

Earnings before income taxes

21,312

16,805

Provision for income taxes

7,033

5,629

Net earnings

$
14,279

$
11,176

Basic net earnings per share of common stock

$
0.33

$
0.24

Diluted net earnings per share of common stock

$
0.32

$
0.23

Weighted average number of shares of common stock outstanding — Basic

43,608

46,136

Weighted average number of shares of common stock outstanding — Diluted

44,959

47,758

See accompanying notes to condensed consolidated financial statements.

3

THE TORO COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share data)

July 29,

July 30,

October 31,

2005

2004

2004

ASSETS

Cash and cash equivalents

$
34,665

$
34,022

$
90,756

Receivables, net

399,883

381,329

285,736

Inventories, net

235,146

217,357

227,200

Prepaid expenses and other current assets

14,142

13,968

16,931

Deferred income taxes

57,526

49,103

44,552

Total current assets

741,362

695,779

665,175

Property, plant, and equipment

495,674

468,104

476,117

Less accumulated depreciation

328,784

303,253

311,452

166,890

164,851

164,665

Deferred income taxes

39

1,181

-

Other assets

17,161

18,581

18,652

Goodwill

81,475

78,004

78,055

Other intangible assets, net

5,611

2,357

2,200

Total assets

$
1,012,538

$
960,753

$
928,747

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current portion of long-term debt

$
45

$
44

$
45

Short-term debt

54,509

3,146

1,099

Accounts payable

75,964

68,245

87,147

Accrued liabilities

273,435

256,392

227,279

Total current liabilities

403,953

327,827

315,570

Long-term debt, less current portion

175,012

175,058

175,046

Long-term deferred income taxes

3,837

-

3,837

Deferred revenue and other long-term liabilities

14,806

12,747

13,475

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 100,000,000 shares, issued and outstanding 42,652,756 shares as of July 29, 2005 (net of 11,379,464 treasury shares), 45,925,558 shares as of July 30, 2004 (net of 8,106,662 treasury shares), and 45,036,658 shares as of October 31, 2004 (net of 8,995,562 treasury shares)

42,653

45,926

45,037

Retained earnings

383,692

410,493

386,924

Accumulated other comprehensive loss

(11,415
)
(11,298
)
(11,142
)
Total stockholders’ equity

414,930

445,121

420,819

Total liabilities and stockholders’ equity

$
1,012,538

$
960,753

$
928,747

~~Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective March 28, 2005.~~

February 3,

January 28,

October 31,

2006

2005

2005

ASSETS

Cash and cash equivalents

$
19,744

$
7,467

$
41,402

Receivables, net

313,157

312,984

295,683

Inventories, net

295,687

276,364

235,347

Prepaid expenses and other current assets

18,049

14,756

16,084

Deferred income taxes

70,251

54,662

58,558

Total current assets

716,888

666,233

647,074

Property, plant, and equipment

514,232

479,901

506,884

Less accumulated depreciation

349,154

319,183

339,607

165,078

160,718

167,277

Deferred income taxes

—

39

—

Other assets

12,036

21,465

15,737

Goodwill

81,208

78,082

81,197

Other intangible assets, net

5,249

2,043

5,452

Total assets

$
980,459

$
928,580

$
916,737

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current portion of long-term debt

$
35

$
45

$
46

Short-term debt

51,900

62,162

325

Accounts payable

95,213

90,459

87,952

Accrued liabilities

256,605

235,683

252,879

Total current liabilities

403,753

388,349

341,202

Long-term debt, less current portion

175,000

175,035

175,000

Long-term deferred income taxes

872

3,837

872

Deferred revenue and other long-term liabilities

9,423

8,166

9,629

Stockholders’ equity:

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

—

—

—

Common stock, par value $1.00 per share, authorized 100,000,000 shares, issued and outstanding 42,561,238 shares as of February 3, 2006 (net of 11,470,982 treasury shares), 43,257,212 shares as of January 28, 2005 (net of 10,775,008 treasury shares), and 41,898,463 shares as of October 31, 2005 (net of 12,133,757 treasury shares)

42,561

43,258

41,899

Retained earnings

360,336

320,054

359,716

Accumulated other comprehensive loss

(11,486
)
(10,119
)
(11,581
)
Total stockholders’ equity

391,411

353,193

390,034

Total liabilities and stockholders’ equity

$
980,459

$
928,580

$
916,737

See accompanying notes to condensed consolidated financial statements.

4

THE TORO COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)

Nine Months Ended

Three Months Ended

July 29,

July 30,

February 3,

January 28,

2005

2004

2006

2005

Cash flows from operating activities:

Net earnings

$
107,510

$
95,737

$
14,279

$
11,176

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

Non-cash asset recovery

-

(415
)
Adjustments to reconcile net earnings to net cash used in operating activities:

Equity losses from an investment

510

538

359

201

Provision for depreciation and amortization

30,110

25,398

10,534

9,429

Gain on disposal of property, plant, and equipment

(339
)
(254
)

(29
)
(205
)
Stock-based compensation expense

7,284

6,892

2,510

2,498

Increase in deferred income taxes

(13,146
)
(7,021
)

(11,679
)
(1,674
)
Changes in operating assets and liabilities, net of acquisition:

Changes in operating assets and liabilities:

Receivables, net

(91,979
)
(107,990
)

(17,599
)
(28,371
)
Inventories, net

(767
)
11,787

(60,085
)
(53,832
)
Prepaid expenses and other current assets

2,897

(1,194
)
Prepaid expenses and other assets

(2,270
)
2,877

Accounts payable, accrued expenses, and deferred revenue

25,764

50,343

10,652

3,123

Net cash provided by operating activities

67,844

73,821

Net cash used in operating activities

(53,328
)
(54,778
)

Cash flows from investing activities:

Purchases of property, plant, and equipment

(24,294
)
(31,185
)

(8,026
)
(7,319
)
Proceeds from disposal of property, plant, and equipment

2,447

1,833

Increase in investment in affiliates

(197
)
(1,278
)
Decrease in other assets

158

285

Proceeds from asset disposals

126

2,191

Decrease (increase) in other assets

3,118

(3,224
)
Proceeds from sale of a business

765

-

—

765

Acquisition, net of cash acquired

(35,285
)
-

Net cash used in investing activities

(56,406
)
(30,345
)

(4,782
)
(7,587
)

Cash flows from financing activities:

Increase in short-term debt

53,374

1,047

51,575

61,023

Repayments of long-term debt

(34
)
(3,819
)

(11
)
(11
)
Excess tax benefits from share-based arrangements

5,665

8,087

Excess tax benefits from stock-based awards

12,275

1,709

Proceeds from exercise of stock options

7,609

12,018

4,101

2,950

Purchases of Toro common stock

(125,093
)
(132,234
)

(27,587
)
(83,763
)
Dividends paid on Toro common stock

(8,151
)
(4,443
)

(3,923
)
(2,793
)
Net cash used in financing activities

(66,630
)
(119,344
)
Net cash provided by (used in) financing activities

36,430

(20,885
)

Effect of exchange rates on cash

(899
)
(397
)

22

(39
)

Net decrease in cash and cash equivalents

(56,091
)
(76,265
)

(21,658
)
(83,289
)
Cash and cash equivalents as of the beginning of the period

90,756

110,287

41,402

90,756

Cash and cash equivalents as of the end of the period

$
34,665

$
34,022

$
19,744

$
7,467

See accompanying notes to condensed consolidated financial statements.

5

THE TORO COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
~~July 29, 2005~~February 3, 2006
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by accounting principles generally accepted in the United States of America for complete financial statements. Unless the context indicates otherwise, the terms “company” and “Toro” refer to The Toro Company and its subsidiaries. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting primarily of recurring accruals, considered necessary for a fair presentation of the financial position and the results of operations. Since the company’s business is seasonal, operating results for the ~~nine~~three months ended ~~July 29, 2005~~February 3, 2006 cannot be annualized to determine the expected results for the fiscal year ending October 31, ~~2005.~~2006. Certain amounts from prior period’s financial statements have been reclassified to conform to this period’s presentation.
The company’s fiscal year ends on October 31, and quarterly results are reported based on three month periods that generally end on the Friday closest to the quarter end. For comparative purposes, however, the company’s second and third quarters always include exactly 13 weeks of results so that the quarter end date for these two quarters is not necessarily the Friday closest to the quarter end.
For further information, refer to the consolidated financial statements and notes included in the company’s Annual Report on Form 10-K for the fiscal year ended October 31, ~~2004.~~2005. The policies described in that report are used for preparing quarterly reports.

Accounting Policies

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, management must make decisions that impact the reported amounts and the 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, management applies judgments based on its 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. Note 1 to the consolidated financial statements in the company’s most recent Annual Report on Form 10-K provides a summary of the significant accounting policies followed in the preparation of the financial statements. Other footnotes to the consolidated financial statements in the company’s ~~most recent~~ Annual Report on Form 10-K describe various elements of the financial statements and the assumptions made in determining specific amounts.

~~Stock Split~~
On March 15, 2005, the company’s Board of Directors declared a two-for-one stock split of the company’s common stock, effected in the form of a 100 percent stock dividend paid on April 12, 2005. As a result of this action, approximately 21.7 million shares were issued to stockholders of record as of March 28, 2005. Par value of the common stock remains at $1.00 per share and accordingly, approximately $21.7 million was transferred from retained earnings to common stock. All references to the number of common shares and per common share amounts have been adjusted to give retroactive effect to the stock split for all periods presented.
~~Acquisition~~
On February 8, 2005, the company completed the acquisition of certain assets and assumed certain liabilities of Hayter Limited (Hayter). Hayter designs, manufactures, and markets residential and professional turf maintenance equipment primarily for the United Kingdom market, with expected additional net sales to Toro of approximately $35 million for fiscal 2005. If the acquisition of Hayter would have been consummated as of November 1, 2004, the expected impact on Toro’s net sales would have been an increase of approximately $50 million for fiscal 2005. The preliminary purchase price was approximately $35 million, which was paid in cash, and included $31 million of current assets; $10.6 million of property, plant, and equipment; $7.6 million of intangible assets; and $13.8 million of assumed liabilities. The purchase price has been allocated to the identifiable assets acquired and liabilities assumed based on preliminary estimates of their fair values, with the excess purchase price recorded as goodwill. The purchase price should be finalized during the fourth quarter of fiscal 2005, with any necessary adjustments based on settlement of the final working capital statement to be recorded at that time. See note sections entitled “Goodwill” and “Other Intangible Assets” for further details related to the acquired intangible assets.
6

Comprehensive Income

Comprehensive income and the components of other comprehensive income (loss) were as follows:

Three Months Ended

Three Months Ended

Nine Months Ended

February 3,

January 28,

(Dollars in thousands)

July 29,

July 30,

July 29,

July 30,

2006

2005

2005

2004

2005

2004

Net earnings

$
34,377

$
34,213

$
107,510

$
95,737

$
14,279

$
11,176

Other comprehensive income (loss):

Cumulative translation adjustments

(2,881
)
(319
)
(2,063
)
(414
)

431

553

Unrealized gain on derivative instruments

482

324

1,790

1,934

Unrealized (loss) gain on derivative instruments, net of taxes

(336
)
470

Comprehensive income

$
31,978

$
34,218

$
107,237

$
97,257

$
14,374

$
12,199

6

Stock-Based Compensation

~~Effective November 1, 2004, the~~The company ~~adopted~~accounts for stock-based compensation awards in accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123 (Revised 2004), “Share-Based Payment.” The company adopted the provisions of SFAS No. 123R using the modified prospective application, which applies to new awards granted, unvested awards as of the date of adoption, and to awards modified, repurchased or cancelled after the date of adoption. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services through share-based payment transactions. SFAS No. 123R requires a public entity to measure the cost of employee services received in exchange for the award of equity instruments based on the fair value of the award as of the date of grant. The company had previously accounted for stock-based compensation under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” (APB No. 25), and related Interpretations.
During the first quarter of fiscal ~~2005,~~2006, option awards were granted with an exercise price equal to the market price of the company’s common stock as of the date of grant. For certain non-officer employees, the ~~2005~~ options vest after two years from the date of grant and have a five-year contractual term. ~~This was the first time the two-year vesting was required for options granted to the non-officer employee group.~~ Other options granted during the first quarter of fiscal ~~2005~~2006 vest one-third each year over a three year period and have a ten-year contractual term. ~~No stock-based~~Compensation expense equal to the grant date fair value is recognized for these awards ~~were granted during~~over the ~~second and third quarters of fiscal 2005.~~
vesting period. The company also issues Performance Shares to key employees. Under the provisions of APB No. 25, the change in value of these Performance Shares (based on the change in Toro’s stock price) was recognized in the financial statements and the cost of the award was expensed over the vesting period. Under the provisions of SFAS No. 123R, theThe company determines the fair value of these Performance Shares as of the date of grant and recognizes the expense over the vesting period.
~~The following table illustrates the effect on net earnings and net earnings per share if the company had applied the fair value recognition provisions of SFAS No. 123R~~ Total compensation expense for these awards was $2.1 million for the ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2004 compared to the actual data reported~~2006 and $2.0 million for the ~~third~~first quarter ~~and year-to-date period~~ of fiscal 2005.

Three Months Ended

Nine Months Ended

(Dollars in thousands, except per share data)

July 29,

July 30,

July 29,

July 30,

2005

2004

2005

2004

Net earnings, as reported

$
34,377

$
34,213

$
107,510

$
95,737

Stock-based compensation cost, net of tax, included in net earnings as reported

1,597

4,504

4,738

8,500

Stock-based compensation cost, net of tax, if fair value method had been applied

(1,597
)
(1,576
)
(4,738
)
(5,961
)
Pro forma net earnings as if fair-value method had been applied

$
34,377

$
37,141

$
107,510

$
98,276

Net earnings per share data:

As reported - Basic

$
0.77

$
0.70

$
2.38

$
1.94

Pro forma - Basic

$
0.77

$
0.76

$
2.38

$
1.99

As reported - Diluted

$
0.74

$
0.66

$
2.29

$
1.84

Pro forma – Diluted

$
0.74

$
0.72

$
2.29

$
1.89

~~Per share data has been adjusted for all periods presented to reflect a two-for-one stock split effective March 28, 2005.~~
7

The fair value of each share-based option is estimated on the date of grant using a Black-Scholes valuation method that uses the assumptions noted in the following table. The expected life is a significant assumption as it determines the period for which the risk-free interest rate, volatility, and dividend yield must be applied. The expected life is the average length of time over which the employee groups will exercise their options, which is based on historical experience with similar grants. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Expected volatilities are based on the movement of the company’s stock ~~price~~ over the most recent historical period equivalent to the expected life of the option. The risk-free rate for periods within the contractual life of the option is based on the U.S. Treasury rate over the expected life at the time of grant. Dividend yield is estimated over the expected life based on the company’s dividend policy, historical dividends paid, expected increase in future cash dividends, and expected increase in the company’s stock price. The following table illustrates the assumptions for options granted in the following fiscal ~~years.~~periods.

Three Months Ended

Fiscal 2005

Fiscal 2004

February 3, 2006

January 28, 2005

Expected life of option in years

3 - 7

3 - 9

2.5 - 6.5

3 - 7

Expected volatility

25.87% - 30.41%

27.60% - 27.84%

25.26% - 26.96%

25.87% - 30.41%

Weighted-average volatility

28.04%

27.72%

26.12%

28.04%

Risk-free rate

3.22% - 4.04%

2.04% - 4.10%

Risk-free interest rate

4.399% - 4.526%

3.22% - 4.04%

Expected dividend yield

0.18% - 0.25%

0.26% - 0.39%

0.65% - 0.70%

0.18% - 0.25%

Weighted-average dividend yield

0.22%

0.32%

0.67%

0.22%

The weighted-average fair value of options granted during the first ~~fiscal quarter~~quarters of fiscal 2006 and 2005 was $10.90 and ~~2004 was~~ $11.14, ~~and $7.69,~~ respectively. The fair value of Performance Shares granted during the first ~~fiscal quarter of fiscal 2005 and 2004 was $37.02 and $24.16, respectively. No options or Performance Shares were granted during the second and third~~ quarters of fiscal 2006 and 2005 was $41.44 and ~~2004.~~$37.02, respectively.
The following table illustrates the effect on the company’s earnings, net earnings, and basic and diluted net earnings per share if the company had applied the provisions of APB No. 25 and related interpretations instead of SFAS No. 123R in accounting for stock-based awards.
(Dollars in thousands, except per share data)

Increase (decrease)

Three months ended

impact of adopting

July 29, 2005

As Reported (1)

Pro Forma (2)

SFAS No. 123R

Earnings from operations

$
54,666

$
54,830

$
(164
)
Earnings before income taxes

50,488

50,652

(164
)
Net earnings

34,377

34,465

(88
)
Basic net earnings per share

0.77

0.77

-

Diluted net earnings per share

0.74

0.74

-

Nine months ended
July 29, 2005

Earnings from operations

$
171,191

$
166,976

$
4,215

Earnings before income taxes

160,463

156,248

4,215

Net earnings

107,510

104,686

2,824

Basic net earnings per share

2.38

2.32

0.06

Diluted net earnings per share

2.29

2.22

0.07

Net cash provided by (used in):

Operating activities

67,844

73,509

(5,665
)
Financing activities

(66,630
)
(72,295
)
5,665

~~(1)   As reported reflects the application of the provisions of SFAS No. 123R.~~
~~(2)   Pro forma assumes the application of the provisions of APB No. 25.~~
~~Per share data has been adjusted for all periods presented to reflect a two-for-one stock split effective March 28, 2005.~~
8

Inventories

Inventories are valued at the lower of cost or net realizable value, with cost determined by the last-in, first-out (LIFO) method for most inventories and first-in, first-out (FIFO) for all other inventories. The company establishes a reserve for excess, slow-moving, and obsolete inventory that is based on the difference between the cost and estimated market value for that inventory. These reserves are based on a review and comparison of current inventory levels to the planned production as well as planned and historical sales ~~history~~ of the inventory.

Inventories were as follows:

February 3,

January 28,

October 31,

(Dollars in thousands)
(Dollars in thousands)

July 29,

July 30,

October 31,

2006

2005

2005

2005

2004

2004

Raw materials and work in process
Raw materials and work in process

$
60,559

$
64,455

$
64,169

$
66,913

$
72,909

$
61,824

Finished goods and service parts
Finished goods and service parts

227,890

203,082

210,141

287,289

251,808

231,772

288,449

267,537

274,310

354,202

324,717

293,596

Less:
LIFO

30,227

32,151

30,227

Other reserves

23,076

18,029

16,883

Less: LIFO

40,011

30,227

40,011

Other reserves

18,504

18,126

18,238

Total
Total

$
235,146

$
217,357

$
227,200

$
295,687

$
276,364

$
235,347

7

Per Share Data

Reconciliations of basic and ~~dilutive~~diluted weighted average ~~number of~~ shares of common stock outstanding were as follows:

Three Months Ended

Nine Months Ended

February 3,

January 28,

(Shares in thousands)

July 29,

July 30,

July 29,

July 30,

2006

2005

Basic

2005

2004

2005

2004

Weighted average number of shares of common stock

44,494

48,738

45,073

49,367

43,459

45,992

Assumed issuance of contingent shares

-

-

48

29

149

144

Weighted average number of shares of common stock and assumed issuance of contingent shares

44,494

48,738

45,121

49,396

43,608

46,136

Dilutive

Diluted

Weighted average number of shares of common stock and assumed issuance of contingent shares

44,494

48,738

45,121

49,396

43,608

46,136

Effect of dilutive securities

1,944

2,849

1,845

2,647

1,351

1,622

Weighted average number of shares of common stock, assumed issuance of contingent shares, and effect of dilutive securities

46,438

51,587

46,966

52,043

44,959

47,758

Shares for all periods presented have been adjusted to reflect a two-for-one stock split effective March 28, 2005.

Segment Data

The presentation of segment information reflects the manner in which management organizes segments for making operating decisions and assessing performance. On this basis, the company has determined it has two reportable business segments: Professional and Residential. The Other segment consists of company-owned distributor operations in the United States and corporate activities, including corporate financing activities and elimination of intersegment revenues and expenses. Effective the beginning of fiscal 2005, the company combined the Distribution segment with the Other segment because the company-owned distributorships that comprised the former Distribution segment do not meet the quantitative thresholds for separate reporting as an operating segment for all periods presented. Prior periods have been reclassified to conform to the current period presentation.
9

The following table shows the summarized financial information concerning the company’s reportable segments:

(Dollars in thousands)

Three months ended July 29, 2005

Professional

Residential

Other

Total

Net sales

$302,517

$148,590

$15,835

$466,942

Intersegment gross sales

13,618

1,472

(15,090
)
-

Earnings (loss) before income taxes

59,894

10,096

(19,502
)
50,488

Three months ended February 3, 2006

Professional

Residential

Other

Total

(Dollars in thousands)

Three months ended July 30, 2004

Net sales

$287,928

$144,227

$21,889

$454,044

Intersegment gross sales

26,711

2,873

(29,584
)
-

Earnings (loss) before income taxes

54,326

17,635

(21,587
)
50,374

Nine months ended July 29, 2005

Professional

Residential

Other

Total

Net sales

$936,799

$472,188

$33,309

$1,442,296

$
253,605

$
108,185

$
7,850

$
369,640

Intersegment gross sales

41,681

6,045

(47,726
)
-

7,590

670

(8,260
)
—

Earnings (loss) before income taxes

183,382

43,493

(66,412
)
160,463

41,660

5,149

(25,497
)
21,312

Total assets

480,771

219,594

312,173

1,012,538

498,768

215,803

265,888

980,459

Nine months ended July 30, 2004

Net sales

$834,130

$436,952

$44,562

$1,315,644

Intersegment gross sales

72,706

6,958

(79,664
)
-

Earnings (loss) before income taxes

154,479

52,691

(64,279
)
142,891

Total assets

459,486

182,542

318,725

960,753

Three months ended January 28, 2005

Professional

Residential

Other

Total

Net sales

$
245,230

$
95,876

$
5,807

$
346,913

Intersegment gross sales

9,897

689

(10,586
)
—

Earnings (loss) before income taxes

38,865

4,434

(26,494
)
16,805

Total assets

451,636

214,636

262,308

928,580

The following table presents the details of the Other segment earnings (loss) before income taxes:

Three Months Ended

Three Months Ended

Nine Months Ended

February 3,

January 28,

(Dollars in thousands)

July 29,

July 30,

July 29,

July 30,

2006

2005

2005

2004

2005

2004

Corporate expenses

$(20,960
)
$(27,130
)
$(68,843
)
$(72,616
)

$
(25,257
)
$
(25,947
)
Finance charge revenue

701

788

2,283

2,498

701

658

Elimination of corporate financing expense

5,296

4,605

13,793

12,046

3,481

2,974

Interest expense, net

(4,820
)
(3,893
)
(13,453
)
(11,477
)

(4,243
)
(3,760
)
Distribution

1,134

2,255

412

1,685

Other

(853
)
1,788

(604
)
3,585

(179
)
(419
)
Total

$(19,502
)
$(21,587
)
$(66,412
)
$(64,279
)

$
(25,497
)
$
(26,494
)
8

Goodwill

The changes in the net carrying amount of goodwill for the first ~~nine months~~quarter of fiscal ~~2005~~2006 were as follows:

(Dollars in thousands)

Professional

Residential

Segment

Segment

Total

Balance as of October 31, 2004

$
68,996

$
9,059

$
78,055

Goodwill acquired during the fiscal year

1,798

1,916

3,714

Translation adjustment

77

(371
)
(294
)
Balance as of July 29, 2005

$
70,871

$
10,604

$
81,475

Professional

Residential

(Dollars in thousands)

Segment

Segment

Total

Balance as of October 31, 2005

$
70,801

$
10,396

$
81,197

Translation adjustment

5

6

11

Balance as of February 3, 2006

$
70,806

$
10,402

$
81,208

Other Intangible Assets
As a result of the company’s acquisition of Hayter, as previously discussed, the company acquired $2.6 million of non-amortizable intangible assets related to the Hayter brand name. The company also acquired $1.3 million of amortizable customer related intangible assets with an estimated life of 10 years.
10

The components of other amortizable intangible assets were as follows:

February 3, 2006

October 31, 2005

July 29, 2005

October 31, 2004

Gross Carrying

Accumulated

Gross Carrying

Accumulated

(Dollars in thousands)

Gross Carrying

Accumulated

Gross Carrying

Accumulated

Amount

Amortization

Amount

Amortization

Amount

Amortization

Amount

Amortization

Patents

$
6,553

$
(5,534
)
$
6,553

$
(5,275
)

$
6,553

$
(5,706
)
$
6,553

$
(5,620
)
Non-compete agreements

1,000

(799
)
1,000

(723
)

1,000

(844
)
1,000

(821
)
Customer related

1,221

(61
)
-

-

1,242

(124
)
1,239

(93
)
Other

2,000

(1,215
)
1,700

(1,055
)

2,000

(1,355
)
2,000

(1,285
)
Total

$
10,774

$
(7,609
)
$
9,253

$
(7,053
)

$
10,795

$
(8,029
)
$
10,792

$
(7,819
)
Total other amortizable intangible assets, net

$
3,165

$
2,200

Total other intangible assets, net

$
2,766

$
2,973

Amortization expense for intangible assets during the first ~~nine months~~quarter of fiscal ~~2005~~2006 was ~~$920,000.~~$210,000. Estimated amortization expense for the remainder of fiscal ~~2005~~2006 and succeeding fiscal years is as follows: ~~2005~~2006 (remainder), ~~$144,000; 2006, $830,000;~~$620,000; 2007, $637,000; 2008, $461,000; 2009, $251,000; 2010, ~~$174,000~~$174,000; 2011, $174,000; and after ~~2010, $668,000.~~2011, $449,000.
The company also had $2.5 million of non-amortizable intangible assets related to the Hayter brand name.

Warranty Guarantees

The company’s products are warranted to ensure customer confidence in design, workmanship, and overall quality. Warranty coverage ranges from a period of six months to seven years, and generally covers parts, labor, and other expenses for non-maintenance repairs, provided operator abuse, improper use, or negligence did not necessitate the repair. An authorized Toro distributor or dealer must perform warranty work. Distributors, dealers, and contractors submit claims for warranty reimbursement and are credited for the cost of repairs, labor, and other expenses as long as the repairs meet 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. The company also sells additional warranty coverage on select products when the factory warranty period expires.

Warranty provisions, claims, and changes in estimates for the ~~first nine-month~~three-month periods in fiscal ~~2005~~2006 and ~~2004~~2005 were as follows:

(Dollars in Thousands)

Beginning

Warranty

Warranty

Changes in

Ending

Nine Months Ended

Balance

Provisions

Claims

Estimates

Balance

July 29, 2005

   $60,988

   $33,175

$(27,257)

$      (11
)
$66,895

July 30, 2004

   $59,372

   $34,066

$(26,128)

$(2,647
)
$64,663

Beginning

Warranty

Warranty

Changes in

Ending

Three Months Ended

Balance

Provisions

Claims

Estimates

Balance

(Dollars in thousands)

February 3, 2006

$
61,385

$
7,983

$
(7,647
)
$
(884
)
$
60,837

January 28, 2005

$
60,988

$
7,848

$
(9,594
)
$
54

$
59,296

9

Postretirement Benefit Plans

The following table presents the components of net periodic benefit costs:

Three Months Ended

Three Months Ended

Nine Months Ended

February 3,

January 28,

(Dollars in thousands)

July 29,

July 30,

July 29,

July 30,

2006

2005

2005

2004

2005

2004

Service cost

$
132

$
237

$
394

$
712

$
95

$
131

Interest cost

127

218

383

654

128

128

Prior service cost

(49
)
-

(145
)
-

(48
)
(48
)
Amortization of losses

84

178

250

534

68

83

Net expense

$
294

$
633

$
882

$
1,900

$
243

$
294

As of ~~July 29, 2005,~~February 3, 2006, approximately ~~$404,000~~$90,000 of contributions had been made. The company presently expects to contribute a total of ~~$550,000~~$500,000 to its postretirement health-care benefit plan in fiscal ~~2005.~~2006.
The company maintains The Toro Company Investment, Savings and Employee Stock Ownership Plan for eligible employees. The company’s expenses under this plan were ~~$4.0 million and $11.7~~$4.1 million for the ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2005, respectively,~~2006 and ~~$3.6 million and $10.2~~$3.7 million for the ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2004, respectively.~~2005.
The company assumed a liability of approximately $5.4 million for Hayter’s defined benefit pension plan. Estimated contributions and expense for fiscal 2005 for the plan are deemed immaterial to the company’s consolidated financial results.
11

Derivative Instruments and Hedging Activities

The company uses derivative instruments to assist in the management of exposure to currency exchange rates. The company uses derivative instruments only to limit underlying exposure to currency fluctuations, and not for trading purposes. The company documents relationships between hedging instruments and the hedged items, as well as its risk-management objective and strategy for undertaking various hedge transactions. The company assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of the hedged item.
The company enters into foreign currency exchange contracts to hedge the risk from forecasted settlements in local currencies of trade sales and purchases. These contracts are designated as cash flow hedges ~~with the~~and are reported at fair value ~~recorded in accumulated other comprehensive income (loss) and~~ as a hedge asset or liability in prepaid expenses or accrued liabilities, as applicable. Changes in the fair value of these contracts are reported in accumulated other comprehensive income (loss) until the hedged transaction occurs. Once the forecasted transaction has been recognized as a sale or inventory purchase and a related asset or liability recorded in the balance sheet, the related fair value of the derivative hedge contract is reclassified from accumulated other comprehensive income (loss) into earnings. During the three ~~and nine~~ months ended ~~July 29, 2005,~~February 3, 2006, the amount of gains ~~(losses)~~ reclassified to earnings for such cash flow hedges was ~~$0.2 million and $(2.0) million, respectively.~~$0.5 million. For the ~~nine~~three months ended ~~July 29, 2005,~~February 3, 2006, the ~~losses~~gains treated as ~~a reduction of~~an addition to net sales for contracts to hedge trade sales were ~~$3.0~~$0.4 million and the gains treated as a reduction of cost of sales for contracts to hedge inventory purchases were ~~$1.0~~$0.1 million. As of ~~July 29, 2005,~~February 3, 2006, the notional amount of such contracts outstanding was ~~$31.6~~$80.8 million. The unrecognized after-tax gain portion of the fair value of the contracts recorded in accumulated other comprehensive ~~gain~~loss as of ~~July 29, 2005~~February 3, 2006 was ~~$0.4~~$0.2 million.
The company also enters into other foreign currency exchange contracts. These contracts are intended to hedge intercompany financing transactions and other activities and are not designed as hedging instruments under the accounting criteria of SFAS No. 133; therefore, changes in fair value of these instruments are recorded in other income, net.

Contingencies

On June 3, 2004, eight individuals who claim to have purchased lawnmowers in Illinois and Minnesota filed a lawsuit (Ronnie Phillips et al. v. Sears Roebuck Corporation et. al., No.04-L-334 (20th Judicial Circuit, St., Clair County, IL)) against the company and eight other defendants alleging that the horsepower labels on the products the plaintiffs purchased were inaccurate. The plaintiffs seek certification of a class of all persons in the United States who, beginning January 1, 1995 through the present, purchased a lawnmower containing a two stroke or four stroke gas combustible engine up to 20 horsepower that was manufactured or sold by the defendants. The complaint seeks an injunction, unspecified compensatory and punitive damages, and attorneys’ fees. No answers have been entered in the case, and there has been no formal discovery. A number of procedural motions have been filed by the defendants, but have not yet been decided. On April 20, 2005, the court issued a stay of discovery and procedural matters to permit the parties to engage in settlement discussions. An attempt at mediation in October 2005 was unsuccessful, and the company expects the stay of procedural matters to be lifted so that various procedural motions may be determined. Management continues to evaluate this ~~lawsuit. The company~~lawsuit and is unable to reasonably estimate the likelihood of loss or the amount or range of potential loss that could result from this ~~litigation, and therefore~~litigation. Therefore, an accrual has not been established ~~a reserve~~ for any potential loss in connection with this lawsuit. The company is also unable to assess at
10

this time whether the lawsuit will have a material adverse effect on its annual consolidated operating results or financial ~~condition.~~condition, although an unfavorable resolution could be material to the company’s operating results for a particular period.
In the ordinary course of business, in addition to that described above, the company may become liable with respect to pending and threatened ~~claims or~~ litigation for product liability, tax, patent, environmental, and other matters. While the ultimate results of current claims, investigations, and lawsuits involving the company are unknown at this time, management believes that, except for the lawsuit discussed above, the outcomes of these cases are unlikely to have a material adverse effect on the consolidated operating results or financial ~~condition~~position of the company.

12Accounting Pronouncements Adopted

In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of FASB Statement No. 143. FASB Interpretation No. 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing and (or) method of settlement are conditional on a future event. We adopted provisions of FASB Interpretation No. 47 on November 1, 2005, as required, and the adoption of this Interpretation had an immaterial impact on our consolidated results of operations or financial condition.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. We adopted the provisions of SFAS No. 151 on November 1, 2005, as required, which had an immaterial impact on our consolidated results of operations.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Nature of Operations

The Toro Company is in the business of designing, manufacturing, and marketing professional turf maintenance equipment and services, turf and ~~agricultural~~micro irrigation systems, landscaping equipment, and residential yard products worldwide. Our products are sold through a network of distributors, dealers, hardware retailers, home centers, mass retailers, and over the Internet, mainly through Internet retailers. Our businesses are organized into two segments: professional and residential. A third segment called “other” consists of domestic distribution companies and corporate activities. Our emphasis is to provide well-built, dependable, and innovative products supported by an extensive service network. A significant portion of our revenues has historically been attributable to new and enhanced products. As we ~~continue with~~enter our final year of our “6 + 8” profitability and growth initiative, we expect to continue to invest in growth strategies directed at ~~higher than historical levels.~~underserved markets, such as accelerating our growth in international markets. The goals of this initiative are to achieve a consistent after-tax return on net sales of 6 percent or more and grow revenues at an average rate of 8 percent or more over the three-year period ending October 31, 2006.

RESULTS OF OPERATIONS
Overview

~~Third~~Our results for the first quarter of fiscal ~~2005~~2006 were strong with net sales ~~increased 2.8~~growth of 6.6 percent and a double digit net earnings ~~slightly increased by 0.5~~growth rate of 27.8 percent compared to the ~~third~~first quarter of fiscal ~~2004. Fiscal 2005 third quarter diluted net earnings per share increased 12.1 percent compared to the third quarter~~2005. Sales were up in all of ~~fiscal 2004~~our segments, led by significant international sales growth as a result of our share repurchase program. Year-to-date net earnings for fiscal 2005 rose 12.3 percent compared to the same period last fiscal year on a year-to-date net sales growth rate of 9.6 percent. Factoring out the effect of our southeastern-based distributorship sold in October 2004, our southwestern-based distributorship sold in November 2004, and the additional sales from our acquisition of Hayter Limited (Hayter), net sales were up 2.0 percent and 9.9 percent for the third quarter and year-to-date period of fiscal 2005, respectively, from the same comparable periods in the prior fiscal year. International net sales increased 33.6 percent for the third quarter and 32.6 percent for the year-to-date period of fiscal 2005 compared to the same periods in the prior fiscal year as a result of the following factors: (i) additional sales from Hayter; (ii)continued strong demand, ~~and~~ introduction of new products, ~~particularly~~and the addition of Hayter Limited, which we acquired in February 2005. Hayter accounted for slightly more than half of our total net sales growth for the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005. Net earnings increased significantly, and as a percentage of net sales rose from 3.2 percent in the ~~golf market; (iii) select price increases~~first quarter of fiscal 2005 to 3.9 percent in the first quarter of fiscal 2006. Higher gross margins and ~~favorable currency rates;~~continued leveraging of selling, general, and ~~(iv) increased shipments in emerging markets. Professional segment net sales were up as a result of new product introductions,~~administrative expenses contributed to the additional sales from Hayter, and select price increases. Residential segment net sales also increased as we introduced new products with expanded placement at key retailers and realized the additional sales from Hayter. As part of our “6 + 8” initiative, we are investing in growth strategies directed at underserved markets, such as revitalizing the Lawn-Boy brand with new products and accelerating our growth in international markets, as evidenced by our acquisition of Hayter. Gross margins are expected to continue to be hampered by higher commodity prices; however, we continue to work to mitigate the impact of higher commodity costs through internal cost reduction efforts from past and continuing initiatives driven by our emphasis on lean manufacturing methods and select price increases.earnings improvement. Our financial condition remains strong ~~which has allowed us to pay a quarterly~~with only modest increases in receivables and inventory levels. We also increased our first quarter cash dividend ~~in the third quarter of fiscal 2005 that was double~~by 50 percent compared to the quarterly cash dividend we paid in the ~~third~~first quarter of fiscal ~~2004, and has allowed us to continue to repurchase shares of our common stock.~~2005.
~~Although our~~
Our fiscal ~~2005 third~~2006 first quarter results were ~~not as~~ strong, ~~as the first half of the fiscal year,~~and we are optimistic that ~~our~~ results for the full fiscal year of ~~2005~~2006 will ~~meet our expectations. Net~~end strong. However, as net sales ~~are currently expected to grow at an annual rate of 7 to 9 percent in fiscal 2005~~ and ~~diluted net~~ earnings ~~per share are currently expected to grow at an annual rate of 16 to 18 percent over fiscal 2004, which includes~~for the ~~impact of adopting SFAS No. 123R as of the beginning of fiscal 2005 and the acquisition of Hayter during the second~~first quarter of our fiscal ~~2005.~~year are typically lower than other quarters, the results of our first quarter are not necessarily an indicator of spring season sales trends, which are still ahead. We continue ~~however,~~ to keep a cautionary eye on the ~~world~~domestic and global economies, weather, field inventory levels, ~~retail demand,~~ commodity prices, ~~competition,~~competitive actions, and other factors identified below under the heading “Forward-Looking Information,” which could cause our actual results to differ from our outlook. In particular, we recognize that unfavorable weather conditions in our key geographic markets for landscape contractor equipment had an adverse effect on our third quarter fiscal 2005 retail demand, which has in turn resulted in higher than anticipated field inventory levels, which could have a negative impact on our fourth quarter fiscal 2005 net sales. We expect these higher field inventory levels to return to our anticipated levels by fiscal year end.
11

Net Earnings

~~Net earnings for the third~~First quarter of fiscal ~~2005~~2006 net earnings were ~~$34.4~~$14.3 million or ~~$0.74~~$0.32 per diluted share compared to ~~$34.2~~$11.2 million or ~~$0.66~~$0.23 per diluted share for the ~~third~~first quarter of fiscal ~~2004,~~2005, a net earnings increase of 0.5 percent. Year-to-date net earnings in fiscal 2005 were $107.5 million or $2.29 per diluted share compared to $95.7 million or $1.84 per diluted share for the same period in fiscal 2004, a net earnings increase of 12.327.8 percent. The primary factors contributing to ~~the year-to-date net earnings~~this increase were higher sales volumes, ~~lower incentive compensation expense,~~an increase in gross margins, and improved leveraging of ~~other~~ selling, general,
13

and administrative ~~expense, somewhat offset by lower gross profit as a percentage of net sales and higher interest expense.~~costs. In addition, ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2005~~2006 diluted ~~net~~ earnings per share were benefited by approximately ~~$0.07~~$0.02 per share ~~and $0.22 per share, respectively,~~ compared to the ~~same periods in~~first quarter of fiscal ~~2004~~2005 as a result of reduced shares outstanding due to our significant Toro common stock repurchases ~~during the past fourteen months.~~last fiscal year.
Effective November 1, 2004, we adopted the provisions of SFAS No. 123R, as previously discussed. However, if we had applied the provisions of SFAS No. 123R during the third quarter and year-to-date period of fiscal 2004, diluted net earnings per share would have increased by $0.06 per share to $0.72 per share for the third quarter of fiscal 2004 and would have increased by $0.05 per share to $1.89 per share for the year-to-date period of fiscal 2004. The pro forma fiscal 2004 third quarter diluted net earnings per share increase of $0.06 per share resulted from higher incentive compensation expense recognized under the provisions of APB No. 25 for our Performance Share Plan in fiscal 2004, which was the result of the increase in Toro’s stock price during the third quarter of fiscal 2004 and increased incentive compensation expense due to improved financial performance. See note entitled “Stock-Based Compensation” to our condensed consolidated financial statements for further details.
The following table summarizes the major ~~captions of our condensed consolidated statement of earnings~~operating costs and other income as a percentage of net sales:

Three Months Ended

Nine Months Ended

Three Months Ended

July 29,

July 30,

July 29,

July 30,

February 3,

January 28,

2005

2004

2005

2004

2006

2005

Net sales

100.0
%
100.0
%
100.0
%
100.0
%

100.0
%
100.0
%
Cost of sales

65.0

63.8

65.2

63.8

(64.3
)
(64.9
)
Gross profit

35.0

36.2

34.8

36.2

35.7

35.1

Selling, general, and administrative expense

(23.2
)
(24.6
)
(22.9
)
(24.7
)

(29.0
)
(29.5
)
Interest expense

(1.0
)
(0.9
)
(0.9
)
(0.9
)

(1.1
)
(1.1
)
Other income, net

0.1

0.4

0.2

0.3

0.2

0.3

Provision for income taxes

(3.5
)
(3.6
)
(3.7
)
(3.6
)

(1.9
)
(1.6
)
Net earnings

7.4
%
7.5
%
7.5
%
7.3
%

3.9
%
3.2
%

Net Sales

Worldwide consolidated net sales for the ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2005~~2006 were up ~~2.8~~6.6 percent ~~and 9.6 percent, respectively, from the same periods in the prior~~compared to last fiscal ~~year.~~year’s first quarter. Factoring out the effect of ~~our southeastern-based distributorship sold in October 2004, our southwestern-based distributorship sold in November 2004, and~~ the additional sales from our acquisition of Hayter in February 2005, net sales ~~for the third quarter and year-to-date period of~~increased 3.1 percent over last fiscal 2005 increased 2.0 percent and 9.9 percent, respectively, from the same periods in the prior fiscal year. The net sales increase was led by strong international sales that were up by 33.6 percent for the third quarter and 32.6 percent for the nine-month period over the same periods in the prior fiscal year. Factoring out the additional sales from the acquisition of Hayter, international netyear’s first quarter. International sales for the ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2005~~2006 were up ~~19.9~~significantly, increasing by 33.9 percent compared to the first quarter of fiscal 2005. International sales were strong in both the professional and ~~21.8 percent, respectively, from the same periods~~residential segments as a result of continued growth in ~~the prior fiscal year, driven primarily by the following factors: (i) strong~~ demand ~~and~~in international markets, introduction of new products, ~~particularly~~and improved availability of some products. However, sales of professional segment products in the ~~golf market; (ii) select price increases; (iii) a weaker~~ U.S. ~~dollar;~~were down, mainly for commercial and (iv) increased shipments in emerging markets. Favorable currency rates contributed approximately 0.9 percent of the overall sales growth for the third quarter of fiscal 2005 and 1.1 percent of the sales growth for the first nine months of fiscal 2005. Professional segment net sales also contributed to the net sales growth as a result of the success of introducing new products within the past two years and price increases introduced on some products. During the third quarter of fiscal 2005, retail demand for domesticExmark landscape contractor equipment, ~~was down compared~~due to ~~the third quarter of fiscal 2004 primarily because of drought conditions in key markets. This has resulted in higher than expected~~efforts to ship product closer to retail demand and reduce field inventory ~~levels, which could have an adverse impact on our fourth quarter fiscal 2005 net sales. Residential~~levels. Sales of residential segment products in the U.S. were also down due to lower shipments of Lawn-Boy products due to initial stocking shipments and expanded placement last year for new products. Other segment net sales were ~~slightly~~ up for the ~~third~~first quarter of fiscal 2005 compared to the third quarter of fiscal 2004 due to the following factors: (i) incremental sales of Hayter; (ii) the additional placement related to the introduction of new Lawn-Boy products in the home center distribution channel; and (iii) higher shipments of snow thrower productscomparison due to strong ~~preseason demand. Those increases were offset by lower shipments of Toro brand of walk power mowers and riding products. The other segment net~~ sales ~~were down for the third quarter and year-to-date period of fiscal 2005 compared to the same periods last fiscal year due mainly to the sale of the two distribution companies, as previously mentioned.~~at a company-owned distributorship.
14

Gross Profit

Gross profit for the ~~third~~first quarter of fiscal ~~2005 decreased slightly by 0.6~~2006 increased 8.4 percent compared to the ~~third~~first quarter of fiscal ~~2004; however fiscal 2005 year-to-date gross profit increased 5.4 percent compared to the same period last fiscal year due to higher net sales.~~2005. As a percentage of net sales, gross profit for the ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2005~~2006 was ~~35.0~~35.7 percent ~~and 34.8 percent, respectively,~~ compared to ~~36.2~~35.1 percent ~~for both~~in the ~~third~~first quarter ~~and year-to-date periods~~ of fiscal ~~2004. Those decreases~~2005. The increase in gross profit as a percentage of net sales ~~were~~was the result of the following factors: (i) higher costs for steel, resin, and other commodities and (ii) the Hayter acquisition that negatively impacted gross margins due to the purchase accounting effect of recording the fair value of the inventory acquired as the inventory was sold. Somewhat offsetting these negative factors were: (i) price increases introduced on some ~~products;~~products to help mitigate the impact of higher commodity costs during the past two years; (ii) cost reduction efforts, including benefits from past and continuing profit improvement initiatives; and (iii) a change in the method of distribution of Exmark products to shipping directly to dealers in certain markets. Somewhat offsetting those positive factors were (i) increased outbound freight costs due to higher fuel costs and increased demand for transportation; (ii) higher tooling costs for new products introduced during the past two years; and (iii) the addition of Hayter sales that carry lower ~~manufacturing costs from increased plant utilization for~~margins than the ~~year-to-date comparison; and (iv) favorable foreign currency exchange rates compared to the U.S. dollar.~~company total.

Selling, General, and Administrative Expense

Selling, general, and administrative expense (SG&A) ~~in dollars decreased~~ for the ~~third~~first quarter of fiscal ~~2005~~2006 increased by ~~2.6~~4.9 percent ~~compared to the third quarter of fiscal 2004; however, SG&A expense in dollars increased 1.8 percent for the year-to-date period of fiscal 2005~~ compared to the same period last fiscal year. However, SG&A as a percentage of net sales ~~for~~declined to 29.0 percent in the ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2005 was 23.2 percent and 22.9 percent, respectively,~~2006 compared to ~~24.6~~29.5 percent ~~and 24.7 percent for~~in the ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2004, respectively. Those decreases~~2005. The decrease in SG&A expense as a percentage of net sales ~~were~~was due primarily to ~~lower incentive compensation expense, as previously described. In addition,~~leveraging the ~~year-to-date decrease was also the result~~fixed portion of ~~leveraging fixed~~ SG&A costs over higher sales ~~volumes.~~volumes as well as: (i) reduced warranty expense due to lower costs related to a reimbursement received from a vendor for a special product modification and lower claims experience and (ii) lower administrative expenses. Somewhat offsetting those decreases were: (i) higher administrative expenses, mainly from continued investments in information systems, increased costs related to Sarbanes-Oxley Act of 2002 compliance, and higher bad debt expense due mainly to the effect of collecting receivables in fiscal 2004 that were previously written off; and (ii) increased investments in engineering and information systems as part of our “6 + 8” ~~initiative.~~initiative and (ii) higher incentive compensation expense.
12

Interest Expense

Interest expense for the ~~third~~first quarter ~~and year-to-date period~~of fiscal 2006 increased by 12.8 percent compared to the first quarter of fiscal 2005 ~~increased by 23.8 percent and 17.2 percent, respectively, from the same periods in the prior fiscal year. Those increases were~~ due ~~primarily~~ to higher ~~levels of~~average interest rates on our short-term ~~debt as a result of increased cash used for stock repurchases and the acquisition of Hayter, as well as higher interest rates.~~debt.

Other Income, Net

Other income, net for the ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2005~~2006 was ~~$0.6 million and $2.7 million, respectively. These amounts represent decreases of~~ $0.9 million ~~and $0.6~~compared to $1.1 million ~~respectively, from~~for the same ~~periods in the prior~~period last fiscal ~~year.~~year, a decline of 22.3 percent. The ~~third fiscal quarter decline~~decrease was due primarily to ~~higher currency exchange rate losses. The year-to-date decrease was due to~~lower interest income as a ~~loss from the sale~~result of ~~a distributorship, somewhat offset by lower litigation settlement expense.~~decreased invested funds.

Provision for Income Taxes

The effective tax rate for the ~~third~~first quarter of fiscal ~~2005~~2006 was ~~31.9~~33.0 percent compared to ~~33.0~~33.5 percent ~~for~~in the ~~year-to-date period~~first quarter of fiscal 2005. The ~~tax rate for the third quarter of fiscal 2004 was 32.1 percent and 33.0 percent for the year-to-date period of fiscal 2004. The~~ decline in the effective tax rate ~~in the third quarter of fiscal 2005~~ was due to ~~increased~~a reduction in the tax ~~benefits related to foreign export sales.~~on international operations.

BUSINESS SEGMENTS

As described previously, we operate in two reportable business segments: professional and residential. A third reportable segment called “other” consists of company-owned domestic ~~company-owned~~ distributorships, corporate activities, and financing functions. Operating earnings ~~(loss)~~ for each of our two business segments is defined as earnings ~~(loss)~~ from operations plus other income, net. Effective the beginning of fiscal 2005, we combined our former distribution segment with the other segment because our distribution segment no longer met the quantitative thresholds for separate reporting as an operating segment for all periods presented. Prior periods have been reclassified to conform to the current period presentation. Operating loss for our third “other” segment includes earnings (loss) from operations, corporate activities, including corporate financing activities, other income, net, and interest expense.
15

The following table summarizes net sales by segment:

Three Months Ended

(Dollars in thousands)

July 29,

July 30,

2005

2004

$ Change

% Change

Professional

$
302,517

$
287,928

$
14,589

5.1
%
Residential

148,590

144,227

4,363

3.0

Other

15,835

21,889

(6,054
)
(27.7
)
Total *

$
466,942

$
454,044

$
12,898

2.8
%
* Includes international net sales of:

$
108,407

$
81,135

$
27,272

33.6
%

Three Months Ended

Nine Months Ended

February 3,

January 28,

(Dollars in thousands)

July 29,

July 30,

2006

2005

$ Change

% Change

2005

2004

$ Change

% Change

Professional

$
936,799

$
834,130

$
102,669

12.3
%

$
253,605

$
245,230

$
8,375

3.4
%
Residential

472,188

436,952

35,236

8.1

108,185

95,876

12,309

12.8

Other

33,309

44,562

(11,253
)
(25.3
)

7,850

5,807

2,043

35.2

Total *

$
1,442,296

$
1,315,644

$
126,652

9.6
%

$
369,640

$
346,913

$
22,727

6.6
%
* Includes international net sales of:

$
355,782

$
268,286

$
87,496

32.6
%
* Includes international sales of:
$
120,059
$
89,653
$
30,406
33.9
%

The following table summarizes operating earnings (loss) by segment:

Three Months Ended

(Dollars in thousands)

July 29,

July 30,

2005

2004

$ Change

% Change

Professional

$
59,894

$
54,326

$
5,568

10.2
%
Residential

10,096

17,635

(7,539
)
(42.8
)
Other

(19,502
)
(21,587
)
2,085

9.7

Total

$
50,488

$
50,374

$
114

0.2
%

Three Months Ended

Nine Months Ended

February 3,

January 28,

(Dollars in thousands)

July 29,

July 30,

2006

2005

$ Change

% Change

2005

2004

$ Change

% Change

Professional

$
183,382

$
154,479

$
28,903

18.7
%

$
41,660

$
38,865

$
2,795

7.2
%
Residential

43,493

52,691

(9,198
)
(17.5
)

5,149

4,434

715

16.1

Other

(66,412
)
(64,279
)
(2,133
)
(3.3
)

(25,497
)
(26,494
)
997

3.8

Total

$
160,463

$
142,891

$
17,572

12.3
%

$
21,312

$
16,805

$
4,507

26.8
%

Professional
Net Sales. Worldwide net sales for the professional segment in the ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2005~~2006 were up ~~5.1~~3.4 percent ~~and 12.3 percent, respectively,~~ compared to the ~~same periods last~~first quarter of fiscal ~~year. Factoring out~~2005. This increase was led by strong international sales, which were up 25.9 percent for the professional segment for the first quarter comparison, due to continued demand in the international markets, the success of new products introduced within the past two years, improved availability of some products, and the additional sales from the ~~acquisition~~Hayter acquisition. Shipments of ~~Hayter, professional segment net sales for the third quarter~~domestic commercial and year-to-date period of fiscal 2005 were up 3.5 percent and 10.9 percent, respectively, compared to the same periods last fiscal year. Worldwide professional segment net sales were up due to the following factors: (i) the success of introducing new products within the past two years; (ii) strong demand in the international golf market; and (iii) price increases introduced on some products. Excluding the additional sales from the acquisition of Hayter, international professional segment net sales in the third quarter and year-to-date period of fiscal 2005 increased 19.6 percent and 18.8 percent, respectively, compared to the same periods in the prior fiscal year due to the same reasons mentioned above, as well as the benefits of a weaker U.S. dollar. Field inventory levels forExmark landscape contractor equipment were ~~higher than anticipated as of~~down for the ~~end of the third~~first quarter ~~of fiscal 2005 as a result of lower~~comparison due mainly to efforts to ship product closer to retail demand during the third quarter of fiscal 2005 compared to the third quarter of fiscal 2004 due to drought conditions in key markets, which could have a negative impact on our fourth quarter of fiscal 2005 net sales. We expect these higherand reduce field inventory ~~levels to return to our anticipated levels by fiscal year end.~~levels.

16

Operating ~~Earnings.~~Earnings. Operating earnings for the professional segment were $41.7 million in the ~~third~~first quarter ~~and year-to-date period~~of fiscal 2006 compared to $38.9 million in the first quarter of fiscal 2005, ~~increased 10.2 percent and 18.7 percent, respectively, compared to the same periods last fiscal year.~~an increase of 7.2 percent. Expressed as a percentage of net sales, professional segment operating margins increased to ~~19.8~~16.4 percent compared to ~~18.9~~15.8 percent in the ~~third~~first quarter of fiscal ~~2004. Fiscal 2005 year-to-date professional segment operating margins increased to 19.6 percent compared to 18.5 percent in the same period last fiscal year. The~~2005.
13

This profit improvement was the result of ~~lower~~higher gross margins in the first quarter of fiscal 2006 compared to the first quarter of fiscal 2005 due to the same factors discussed previously in the Gross Profit section above. Somewhat offsetting the operating earnings improvement was an increase in SG&A expense, as a percentage of net sales due to leveraging the fixed portion of SG&A costs over higher sales volumes. Gross margins also rose as a result of cost reduction efforts from profit improvement initiatives, lower manufacturing costsprimarily from increased ~~plant utilization,~~investments in engineering and ~~price increases introduced on some products, somewhat offset by higher steel and other commodity costs and lower gross margins from the acquisition~~marketing as part of ~~Hayter.~~our “6 + 8” initiative.

Residential

Net Sales. Worldwide net sales for the residential segment in the ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2005~~2006 were up by ~~3.0~~12.8 percent ~~and 8.1 percent, respectively,~~ compared to the ~~same periods last~~first quarter of fiscal ~~year. Factoring out~~2005. This increase was led by strong international sales due to continued demand in the international markets, the success of new products introduced within the past two years, and the additional sales from the ~~acquisition of~~ Hayter residential segment net sales for the third quarter of fiscal 2005 were down by 1.6 percent compared to the third quarter of fiscal 2004; however, net sales for the year-to-date period of fiscal 2005 were up 4.1 percent compared to the same period last fiscal year. Excluding Hayter, the third quarter residential segment net sales decline was due to lower domesticacquisition. Domestic shipments of ~~walk power mowers as a result of unfavorable weather conditions and lower domestic riding product shipments due to continued strong competition. In addition,~~ Toro brand walk power mower shipments were down for the third quarter and year-to-date periods of fiscal 2005 compared to the same periods last fiscal year due to a shift of sales to the new line of Lawn-Boy walk power mowers. Shipments of Lawn-Boy walk power mowers were up ~~for~~due mainly to a key mass customer ordering product earlier than last year. Electric blower sales also increased due to the ~~third quarter~~warm fall weather that extended the selling season and ~~year-to-date comparisons~~expanded placement at a key retailer. Somewhat offsetting those increases were lower Lawn-Boy walk power mower sales due mainly to initial stocking shipments last year as a result of ~~expanded product~~additional store placement in the home center distribution ~~channel. Increased snow thrower product shipments also contributed to~~channel and the third quarter and year-to-date net sales increase due to strong preseason demand as a result of heavy snowfalls in key markets during the 2004-2005 winter season that depleted field inventory levels as well as the successful introduction of new products. ~~Retail irrigation~~Riding product ~~sales~~shipments were ~~slightly up for~~also down from the ~~third~~comparative quarter ~~comparison but down for the year-to-date period of fiscal 2005 primarily~~ due to unfavorable weather conditions in key domestic markets. Excluding the additional sales from the acquisition of Hayter, international residential segment net sales in the third quarter and year-to-date period of fiscal 2005 increased by 22.5 percent and 32.6 percent, respectively, compared to the same periods in the prior fiscal year due to the successful introduction of new products and a weaker U.S. dollar.continued strong competition.

Operating Earnings. Operating earnings for the residential segment increased 16.1 percent in the ~~third~~first quarter ~~and year-to-date period~~ of fiscal ~~2005 decreased 42.8 percent and 17.5 percent, respectively,~~2006 compared to the ~~same periods last~~first quarter of fiscal ~~year.~~2005. Expressed as a percentage of net sales, residential segment operating margins ~~decreased~~increased to ~~6.8~~4.8 percent compared to ~~12.2~~4.6 percent in the ~~third~~first quarter of fiscal ~~2004, and fiscal 2005 year-to-date residential segment operating margins decreased to 9.2 percent compared to 12.1 percent last fiscal year. The profit decline~~2005. This increase was due mainly to ~~lower~~higher gross margins as a result of higher costs for commodities combined with minimal price increases as a result of competitive conditions, lower gross margins from Hayter, and higher SG&A expense. However, fiscal 2005 year-to-datedue to the same factors discussed previously in the Gross Profit section above. In addition, SG&A expense as a percentage of net sales ~~was lower compared~~slightly decreased due to leveraging the ~~same period last fiscal year due mainly to leveraging~~fixed portion of SG&A costs over higher sales ~~volumes and reduced warranty costs.~~volumes.

Other

Net Sales. Net sales for the other segment include sales from our wholly owned domestic distribution companies less sales from the professional and residential segments to those distribution companies. In addition, elimination of the professional and residential segments’ floor plan interest costs from Toro Credit Company are also included in this segment. The other segment net sales ~~declined for~~increased $2.0 million or 35.2 percent in the ~~third~~first quarter ~~and year-to-date period~~of fiscal 2006 compared to the first quarter of fiscal 2005 ~~by 27.7 percent and 25.3 percent, respectively, compared to the same periods last year~~ due to ~~the sale of the two distribution companies, as previously mentioned.~~increased sales at a company-owned distributorship.

Operating ~~Losses.~~Losses. Operating losses for the other segment were down $1.0 million or 3.8 percent for the ~~third~~first quarter of fiscal ~~2005 by $2.1 million or 9.7 percent~~2006 compared to the ~~third~~first quarter of fiscal ~~2004. However, operating losses for the year-to-date period of fiscal 2005 were up by $2.1 million or 3.3 percent compared to last year. The third quarter~~2005. This loss decrease was due ~~primarily~~ to lower ~~incentive compensation expense, as previously described. The year-to-date loss increase was due to the following factors: (i) higher~~ administrative costs ~~mainly from continued investments in information systems, increased Sarbanes-Oxley compliance costs,~~ and ~~higher bad debt expense due to the effect of collecting receivables in fiscal 2004 that were previously written off; (ii) an increase in interest expense; and (iii)~~ lower operating ~~earnings from~~losses at the ~~domestic company owned distributors. Somewhat offsetting those negative factors was lower incentive compensation expense, as previously described.~~company-owned distributorships, somewhat offset by higher interest expense.
17

FINANCIAL POSITION

Working Capital

During the first ~~nine months~~quarter of fiscal ~~2005,~~2006, our financial condition remained strong, and emphasis continued on improving asset management. Average working capital for the first ~~nine~~three months of fiscal 2006 was $306.5 million compared to $312.0 million for the first three months of fiscal 2005, ~~was $315.2 million compared to $374.2 million for the first nine months of fiscal 2004. The~~a slight decrease of 15.8 percent was due to higher average short-term debt, lower average cash and cash equivalents, and higher average accounts payables and accrued liabilities, somewhat offset by higher average accounts receivable. The primary factor contributing to the higher average short-term debt and lower average cash and cash equivalents levels was our continued emphasis on repurchasing shares of our common stock during fiscal 2005 and our purchase of Hayter.1.8 percent. Average receivables for the first ~~nine~~three months of fiscal ~~2005 increased~~2006 slightly decreased by ~~10.1~~0.1 percent compared to the first ~~nine~~three months of fiscal ~~2004~~2005 on a ~~net~~ sales increase of ~~9.6~~6.6 percent. Factoring out the incremental average receivables for Hayter, average receivables were ~~up 7.3~~down 4.8 percent. Our average days sales outstanding for receivables improved to 71.4 days based on sales for the last twelve months ended July 29, 2005, compared to 77.1 days for the twelve months ended July 30, 2004. Average inventory levels slightly increased by ~~5.6~~3.3 percent for the first ~~nine~~three months of fiscal 2006 compared to the first three months of fiscal 2005, ~~compared to the first nine months of fiscal 2004; however, factoring out the incremental~~and average ~~inventories for Hayter, average inventory levels were slightly up by 2.5 percent. Average~~ inventory turnover improved ~~7.4~~2.1 percent for the last twelve months ended ~~July 29, 2005~~February 3, 2006 compared to the last twelve months ended ~~July 30, 2004.~~January 28, 2005. Factoring out the incremental average inventory for Hayter, average inventory was down slightly (1.4 percent) for the first three months of fiscal 2006 compared to the first three months of fiscal 2005. These improvements reflect our continuing efforts to improve asset utilization.

Liquidity and Capital Resources

Our businesses are seasonally working capital intensive and require funding for purchases of raw materials used in production, replacement parts inventory, capital expenditures, expansion and upgrading of existing facilities, as well as for financing receivables from customers. We believe that cash generated from operations, together with our fixed rate long-term debt, bank credit lines, and cash on hand, will provide us with adequate liquidity to meet our operating requirements. We believe that the funds available through existing or anticipated financing arrangements and forecasted cash flows, will be sufficient to provide the
14

necessary capital resources for our anticipated working capital, capital expenditures, acquisitions, debt repayments, dividend payments, and stock repurchases for at least the next twelve months.
Our Board of Directors approved a cash dividend of ~~$0.06~~$0.09 per share for the ~~third~~first quarter of fiscal ~~2005~~2006 paid on ~~July~~January 12, ~~2005, as adjusted to reflect a two-for-one stock split effective March 28, 2005,~~2006, which was an increase over our cash dividend of ~~$0.03~~$0.06 per share for the ~~third~~first quarter of fiscal ~~2004.~~2005.

Cash Flow. Our first fiscal quarter historically uses more operating cash than other quarters due to the seasonality of our business. Cash ~~provided by~~used in operating activities for the first ~~nine~~three months of fiscal ~~2005~~2006 was ~~8.1~~2.6 percent lower than the first ~~nine~~three months of fiscal ~~2004~~2005 due primarily to higher earnings, a lower increase in receivables, and a higher increase in accounts payable and accrued liabilities, ~~and~~somewhat offset by a higher increase in inventory levels and deferred taxes for the first ~~nine~~three months of fiscal ~~2005~~2006 compared to the first ~~nine~~three months of fiscal ~~2004, somewhat offset by higher earnings and a lower increase in accounts receivable.~~2005. Cash used in investing activities was ~~higher~~lower by ~~$26.1~~$2.8 million compared to the first ~~nine months~~quarter of fiscal ~~2004,~~2005, due mainly to cash ~~utilized for~~payments received on notes receivable. In the ~~purchase~~first quarter of ~~Hayter, somewhat offset by lower purchases of property, plant, and equipment. Cash used in~~fiscal 2006, we generated $36.4 million cash from financing activities, whereas in the first quarter of fiscal 2005, we used $20.9 million of cash for financing activities. This change of $57.3 million was due to lower ~~by $52.7 million~~levels of our common stock repurchased and an increase in tax benefits for stock-based awards in the first quarter of fiscal 2006 compared to the first ~~nine months~~quarter of fiscal 2004. This change was due to a decrease in cash used to repurchase shares of our common stock during the first nine months of fiscal 2005 compared to the first nine months of fiscal 2004, offset by a higher increase in short-term debt.2005.

Credit Lines and Other Capital ~~Resources.~~Resources. Our business is seasonal, with accounts receivable balances historically increasing between January and April as a result of higher sales volumes and extended payment terms made available to our customers, and decreasing between May and December when payments are received. The seasonality of production and shipments causes our working capital requirements to fluctuate during the year. Our peak borrowing usually occurs between February and May. Seasonal cash requirements are financed from operations and with short- and medium-term financing arrangements, including a $175.0 million unsecured senior five-year revolving credit facility, which expires in ~~September 2009.~~October 2010. We also have a $75.0 million secured credit line backed by a multi-year credit agreement, expiring in July 2006, which is renewable annually. Interest expense on these credit lines is determined based on a LIBOR or commercial paper rate plus a basis point spread defined in the credit agreements. In addition, our non-U.S. operations and a domestic subsidiary also maintain unsecured short-term lines of credit of approximately ~~$16.6~~$12 million. These facilities bear interest at various rates depending on the rates in their respective countries of operation. We also have a letter of credit subfacility as part of our credit agreements. Average short-term debt was ~~$81.3~~$22.0 million in the first ~~nine months~~quarter of fiscal ~~2005~~2006 compared to ~~$7.2~~$22.3 million in the first ~~nine months~~quarter of fiscal ~~2004, an increase~~2005, a slight decrease of ~~$74.1 million. This increase was primarily attributable to shares of our common stock repurchased during the past fourteen months and the purchase of Hayter.~~1.5 percent. As of ~~July 29, 2005,~~February 3, 2006, we had ~~$212.0~~$210.0 million of unutilized availability under our credit agreements.
18

Significant financial covenants in our credit agreements are interest coverage and debt to capitalization ratios. We were in compliance with all covenants related to our credit agreements as of ~~July 29, 2005,~~February 3, 2006, and expect to be in compliance with all covenants during ~~the remainder of~~ fiscal ~~2005.~~2006. If we were out of compliance with any covenant required by our credit agreements, the banks could terminate their commitments unless we could negotiate a covenant waiver from the banks. In addition, our long-term public notes and debentures could become due and payable if we were unable to obtain a covenant waiver or refinance our medium-term debt under our credit agreements. If our credit rating falls below investment grade, the interest rate we currently pay on outstanding debt under the credit agreements would increase, but the credit commitments could not be cancelled by the banks based only on a ratings downgrade. Our debt rating for long-term unsecured senior, non-credit enhanced debt ~~was~~has been unchanged for the ~~third~~first quarter of fiscal ~~2005~~2006 by Standard and Poor’s Ratings Group at BBB- and by Moody’s Investors Service at Baa3.

Off-Balance Sheet Arrangements and Contractual Obligations

Our off-balance sheet arrangements generally relate to customer financing activities, inventory purchase commitments, operating lease commitments, and currency contracts. See our most recently filed Annual Report on Form 10-K for further details regarding our off-balance sheet arrangements and contractual obligations.
~~In the third quarter of fiscal 2005, we entered into an agreement to sell certain accounts receivable and notes to a third party. The total amount of receivables and notes outstanding under~~ There has been no material change in this ~~agreement may not exceed $10.0 million at any time.~~information.

Inflation

We are subject to the effects of inflation and changing prices. In the first ~~nine months~~quarter of fiscal ~~2005,~~2006, average prices paid for ~~steel,~~ fuel, petroleum-based resins, and other commodities were higher compared to the first ~~nine months~~quarter of fiscal ~~2004,~~2005, which resulted in a negative impact on our gross margin and net earnings. We expect this trend ~~of increased costs for commodities~~ to continue for the remainder of fiscal ~~2005, except for steel prices, which are expected~~2006. We will continue to ~~be similar to prices paid during the fourth quarter of last fiscal year. We are attempting~~attempt to mitigate the impact of these anticipated increases in commodity ~~price increases as well as~~prices and other inflationary pressures by actively pursuing internal cost reduction ~~efforts. In addition, we also introduced~~efforts, introduce moderate price increases on some products, ~~in fiscal 2005.~~and vendor negotiations.
15

Critical Accounting Policies and Estimates

In preparing the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America, we must make decisions which 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 to the consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended October 31, ~~2004.~~2005. 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 estimates that are reasonably likely to occur from period to period would 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 ranges from a period of six months to seven years, and covers parts, labor, and other expenses for non-maintenance repairs, provided operator abuse, improper use or negligence did not necessitate the repair. 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 upon approval. The amount of our warranty reserves is based primarily on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of claims to sales, and the historical length of time between the sale and resulting warranty claim. We periodically assess the adequacy of our warranty reserves based on changes in these factors and record any necessary adjustments if actual claim experience indicates that adjustments are necessary. Actual claims could be higher or lower than amounts estimated, as the amount and value of warranty claims are subject to variation ~~based on~~of such factors as performance of new products, significant manufacturing or design defects not discovered until after the product is delivered to
19

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 ~~charge to selling, general, and administrative expense.~~decrease in our net earnings. The accrual for future estimated warranty claims was ~~$66.9~~$60.8 million as of ~~July 29, 2005~~February 3, 2006 compared to ~~$64.7~~$59.3 million as of ~~July 30, 2004.~~January 28, 2005.

Accounts and Notes Receivable Valuation. We value accounts and notes receivable, net of an allowance for doubtful accounts. Each quarter, we ~~prepare an analysis of~~estimate 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. Portions of our accounts receivable are protected by a security interest in products held by customers, which minimizes our collection exposure. A deterioration in the financial condition of any key customer or a significant slow down in the economy could have a material negative impact on our ability to collect a portion or all of the accounts and notes receivable. We believe that an analysis of historical trends and our current knowledge of potential collection problems 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, 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 selling, general, and administrative expense in the period that we made such a determination. As of ~~July 29, 2005,~~February 3, 2006, we had ~~$2.3~~$2.6 million reserved against our accounts and notes receivable compared to ~~$3.2~~$2.3 million as of ~~July 30, 2004.~~
~~New Accounting Pronouncements To Be Adopted~~
In March 2005, the FASB issued Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations,” an interpretation of FASB Statement No. 143. FASB Interpretation No. 47 clarifies the timing of liability recognition for legal obligations associated with the retirement of tangible long-lived assets when the timing and (or) method of settlement are conditional on a future event. We will adopt provisions of FASB Interpretation No. 47 on November 1, 2005, as required, and we do not expect the adoption of this Interpretation to have a material impact to our consolidated results of operations or financial condition.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs,” which amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that the allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. We are currently evaluating the provisions of SFAS No. 151 and will adopt it on November 1, 2005, as required. We do not expect that the adoption of SFAS No. 151 will have an impact on our future fiscal year results; however, we expect that our results between quarterly periods will be impacted due to a change in the timing of recording certain manufacturing costs. We expect our adoption of SFAS No. 151 to result in net earnings increasing in the first and fourth fiscal quarters of fiscal 2006, and decreasing in the second and third fiscal quarters of fiscal 2006 compared to comparable quarters of fiscalJanuary 28, 2005.

2016

Forward-Looking Information

This Quarterly Report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, 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 Internet web sites, or otherwise. Statements that are not historical are forward-looking and reflect expectations and assumptions. We try to identify forward-looking statements in this report and elsewhere by using words such as “expect”, “looking ahead”, “plan”, “anticipate”, “estimate”, “believe”, “should”, “may”, “intend”, and similar expressions. Our forward-looking statements generally relate to our future performance, including our anticipated operating results and liquidity requirements, our business strategies and goals, and the effect of laws, rules, regulations, and new accounting pronouncements and outstanding litigation on our business, operating results, and financial condition.
Forward-looking statements involve risks and uncertainties. These risks and uncertainties include factors that affect all businesses operating in a global market as well as matters specific to Toro. The following are some of the factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements:
•    ~~Changes~~Weather conditions may reduce demand for some of our products and adversely affect our net sales.
•Increases in ~~global~~the cost and availability of raw materials and components that we purchase and increases in our other costs of doing business, such as transportation costs, may adversely affect our profit margins and business.
•Our professional segment net sales are dependent upon the level of growth in the residential and commercial construction markets, growth of homeowners’ outsourcing lawn care, the amount of investment in golf course renovations and improvements, new golf course development, and the amount of government spending.
•Our residential segment net sales are dependent upon the amount of shelf space retailers assign to our products, changing buying patterns of customers, and The Home Depot, Inc. as a major customer.
•A significant percentage of our consolidated net sales is generated outside of the United States, and we intend to continue to expand our international business. 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.
•Fluctuations in foreign currency exchange rates could result in declines in our reported net sales and net earnings.
•We intend to grow our business in part through additional acquisitions, alliances, and joint venture arrangements, which are risky and could harm our business.
•If we are unable to smoothly transition leadership roles and responsibilities, 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.
•We rely on our management information systems for inventory management, distribution, and other functions. If our information systems fail to adequately perform these functions or if we experience an interruption in their operation, our business and operating results could be adversely affected.
•A significant portion of our net sales are financed by third parties. Some Toro dealers and Exmark distributors and dealers finance their inventories with third party financing sources. 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 customers by these third parties, or any delay in securing replacement credit sources, could adversely affect our sales and operating results.
•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.
•We manufacture our products at and distribute our products from several locations in the United States and internationally. Any disruption at any of these facilities or our inability to cost-effectively expand existing and move production between manufacturing facilities could adversely affect our business and operating results.
•Our business is subject to a number of other factors that may adversely affect our operating results, financial condition, or business, such as changes in domestic and global economies, including but not limited to slow growth rate, slow down in home sales, rise in interest rates, inflation, unemployment, weaker consumer confidence, ~~political instability in international markets,~~ and currency exchange ~~rates, which could have a negative impact on our financial results.~~
~~•    Fluctuations~~rates; natural disasters that may result in ~~the cost and availability~~shortages of raw materials, ~~such as steel, fuel, petroleum-based resins, and other commodities, and increased dependence on suppliers and our ability to maintain favorable supplier arrangements and relationships.~~
•    Our ability to achieve goals of the “6 + 8: Teamwork to the Top” initiative that is intended to achieve a consistent after-tax return on sales of 6 percent or more and grow revenues at an average annual rate of 8 percent or more over the three-year period ending October 31, 2006.
~~•    Our ability to achieve projected net sales and earnings growth for fiscal 2005.~~
•    Our ability to implement lean manufacturing and other productivity improvement initiatives and price increases on some of our products, which are intended to improve gross margins, offset a portion of rising raw material costs, and provide investment funding for new products and services.
~~•    Increased dependence on The Home Depot, Inc. as a customer for the residential segment.~~
•    Our ability to develop and introduce new products in a timely manner and market acceptance of new products as well as sales generated from these new products relative to expectations, based on existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs, and research and development.
•    Our ability to acquire, develop, integrate new businesses and acquisitions, and manage alliances and joint venture arrangements successfully, both of which are important to our revenue growth.
~~•    Weather conditions that reduce demand for our products.~~
•    Increased competition, including competitive pricing pressures, new competitors entering the markets we serve, potential loss of market share, acquisitions by competitors, new product introductions, and financing programs offered by both domestic and foreign companies.
•    Changing buying patterns, including but not limited to, a trend away from purchases at dealer outlets to price and value sensitive purchases at hardware retailers, home centers, and mass retailers.
~~•    Rising transportation costs as a result of~~ higher fuel costs, ~~capacity issues~~and an increase in ~~the transportation industry, and government regulation that limits the hours of service and increases fuel consumption.~~
~~•    Our ability to smoothly transition leadership roles and responsibilities.~~
~~•    Changes in our relationship with and terms from third party financing sources utilized by our customers.~~
•    Continued 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, and contraction of the U.S. and worldwide economies.
~~•    Elimination or reduction of shelf space for our products at retailers.~~
•    Unforeseen inventory adjustments or changes in purchasing patterns by our customers, which could reduce sales and necessitate lowering manufacturing volumes, or increase inventory above acceptable levels.
~~•    Unforeseen product quality problems in the development and production of new and existing products that could result in loss of market share, reduced sales, and higher warranty expense.~~
~~•    Degree of success in plant consolidation, including our ability to cost-effectively expand existing and move production between manufacturing facilities.~~
21

~~•    Government restrictions placed on water usage as well as water availability.~~
~~•    The level of growth in the new golf course construction market and amount of investments in course renovations and improvements.~~
~~•    Reduced government spending for grounds maintenance equipment due to reduced tax revenue, increasing expenses, and tighter government budgets.~~
~~•    Financial~~insurance premiums; financial viability of some distributors and dealers, changes in distributor ownership, our success in partnering with new dealers, and our customers’ ability to pay amounts owed to ~~us.~~us; and continued threat of terrorist acts and war that may result in heightened
17

security and higher costs for import and export shipments of components or finished goods, reduced leisure travel, and contraction of the U.S. and world economies.
•    ~~Changes~~If we are unable to continue to enhance existing products and develop and market new products that respond to customer needs and achieve market acceptance, we may experience a decrease in ~~laws~~demand for our products, and ~~regulations,~~our business could suffer.
•We face intense competition in all of our product lines, including changes in accounting standards; taxation changes, including tax rate changes, new tax laws, revised tax law interpretations; foreign laws, including export and other trade restrictions and changes in duties and tariffs; and environmental laws.
~~•    The effect on~~some competitors that have greater resources than us. We may not be able to compete effectively against competitors’ actions, which could harm our business and operating results.
•Our business, properties, and products are subject to governmental regulation with which compliance may require us to incur expenses or modify our ~~consolidated~~products or operations and may expose us to penalties for non-compliance. Governmental regulation may also adversely affect the demand for some of our products and our operating results.
•We are subject to product liability claims, product quality issues, and other litigation from time to time that could adversely affect our operating results or financial ~~condition as a result of the pending litigation against the company and others in~~condition.
For more information regarding these risks, see our ~~industry that challenges engine horsepower ratings of lawnmower products, of which the company is currently unable to assess whether the litigation would have a material adverse effect~~most recent filed Annual Report on ~~the company’s consolidated operating results or financial condition.~~
~~•    The effects of other litigation, including threatened or pending litigation, on matters relating to patent infringement, employment, and commercial disputes.~~Form 10-K.

We wish to 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 above, as well as others that we may consider immaterial or do not anticipate at this time. The foregoing risks and uncertainties are not exclusive and further information concerning the company and our businesses, including factors that potentially could materially affect our financial results or condition, may emerge from time to time. We assume 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 we file with or furnish to the Securities and Exchange Commission.
22

Item 3. QUANTITATIVE AND ~~QUALITATIVE~~QUALITIATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk stemming from changes in foreign currency exchange rates, interest rates, and commodity prices. Changes in these factors could cause fluctuations in our net earnings and cash flows. See further discussions on these market risks below.

Foreign Currency Exchange Rate Risk. In the normal course of business, we actively manage the exposure to foreign currency market risk by entering into various hedging instruments, authorized under company policies that place controls on these activities, with counterparties that are highly rated financial institutions. Our hedging activities involve the use of a variety of derivative financial instruments. We use derivative instruments only in an attempt to limit underlying exposure from currency fluctuations and to minimize earnings and cash flow volatility associated with foreign 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 and loans to wholly owned subsidiaries as well as sales to third party customers, purchases from suppliers, and bank lines of credit with creditors denominated in foreign currencies. Because our products are manufactured or sourced primarily from the United States, a stronger U.S. dollar generally has a negative impact on results from operations outside the United States while a weaker dollar generally has a positive effect. Our primary exchange rate exposures are with the Euro, the ~~Japanese yen, the~~ Australian dollar, the Canadian dollar, the British pound, and the Mexican peso against the U.S. dollar.

We enter into various contracts, principally forward contracts that change in value as foreign 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 the value of the related exposures. Therefore, changes in market 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. During the three ~~and nine~~ months ended ~~July 29, 2005,~~February 3, 2006, the amount of gains ~~(losses)~~ reclassified to earnings for such cash flow hedges was ~~$0.2 million and $(2.0) million, respectively.~~$0.5 million. For the ~~nine~~three months ended ~~July 29, 2005,~~February 3, 2006, the ~~losses~~gains treated as ~~a reduction of~~an addition to net sales for contracts to hedge trade sales were ~~$3.0~~$0.4 million and the gains treated as a reduction of cost of sales for contracts to hedge inventory purchases were ~~$1.0~~$0.1 million.
The following foreign currency exchange contracts held by us have maturity dates in fiscal ~~2005.~~2006. All items are non-trading and stated in U.S. dollars. Some derivative instruments we enter into do not meet the hedging criteria of SFAS No. 133, “Accounting
18

for Derivative Instruments and Hedging Activities;” therefore, changes in their 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 July 29, 2005~~for the three months ended February 3, 2006 were as follows:

Dollars in thousands
(except average contracted rate)

Average
Contracted
Rate

Notional
Amount

Value in
Accumulated
Other
Comprehensive
Income (Loss)

Fair Value
Impact
Gain (Loss)

Average
Contracted
Rate

Notional
Amount

Value in
AOCL
Income (Loss)

Fair Value
Impact
Gain (Loss)

Buy US dollar/Sell Australian dollar

0.7550

$23,865.2

$
-

$
(111.8
)

0.7446

$
41,193.6

$
(87.0
)
$
(201.0
)
Buy US dollar/Sell Canadian dollar

0.8097

323.9

-

0.1

0.8430

5,724.2

(241.7
)
(51.4
)
Buy US dollar/Sell Euro

1.2241

43,565.1

(50.6
)
553.9

1.2161

93,448.3

385.1

315.1

Buy US dollar/Sell British pound

1.7420

13,065.0

-

(15.8
)

1.7783

21,873.1

—

55.3

Buy Euro/Sell US dollar

1.2675

1,204.1

4.7

(57.1
)
Buy Japanese yen/Sell US dollar

106.7873

1,638.8

(20.1
)
(56.4
)
Buy British pound/Sell US dollar

1.7440

261.6

-

0.1

Buy Mexican peso/Sell US dollar

11.9800

5,550.9

629.1

-

Buy Australian dollar/Sell US dollar

0.7539

527.7

—

(1.1
)
Buy Euro/Sell U.S. dollar

1.2088

483.5

—

(0.4
)
Buy British pound/Sell U.S. dollar

1.7741

1,774.1

—

(0.6
)
Buy Mexican peso/Sell U.S. dollar

10.8523

11,334.0

278.9

(135.7
)

Interest Rate Risk.We are exposed to interest rate risk arising from transactions that are entered into during the normal course of business. Our short-term debt rates are dependent upon a LIBOR or commercial paper rate plus a basis point spread defined in our credit agreements. See our most recently filed Annual Report on Form 10-K (Item 7A). There has been no material change in this information.

Commodity Price Risk. . Some raw materials used in our products are exposed to commodity price changes. We manage some of this risk by using a combination of short- and long-term agreements with some vendors. The primary commodity price exposures are with steel, aluminum, ~~fuel, petroleum-based resins,~~ plastic resin, and linerboard. Further information regarding ~~our risk exposure~~rising prices for ~~commodity price changes~~commodities is presented in Item 2, section entitled “Inflation.”

23We utilize well-defined financial contracts in the normal course of operations as a means to manage certain commodity price risks. The majority of these contracts are fixed-price contracts for future purchases of natural gas, which meet the definition of “normal purchases and normal sales” and therefore, are not considered derivative instruments for accounting purposes.

Item 4. CONTROLS AND PROCEDURES

~~The company maintains~~We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e) ~~under the Securities Exchange Act of 1934, as amended)~~) that are designed to reasonably ensure that information required to be disclosed by ~~the company~~us in the reports ~~it files~~we file or ~~submits~~submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to ~~the company’s~~our management, including ~~its~~our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we ~~necessarily~~ are required to apply our judgment in evaluating the cost-benefit relationship of possible ~~controls and procedures. The company’s~~internal controls. Our management evaluated, with the participation of ~~the company’s~~our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of ~~the company’s~~our disclosure controls and procedures as of the end of the period covered in this Quarterly Report on Form 10-Q. Based on that evaluation, ~~the company’s~~our Chief Executive Officer and Chief Financial Officer concluded that ~~the company’s~~our disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that material information relating to ~~Toro~~our company and ~~its~~our consolidated subsidiaries is made known to management, including ~~the~~our Chief Executive Officer and Chief Financial Officer, particularly during the period when our periodic reports are being prepared. There was no change in ~~the company’s~~our internal control over financial reporting that occurred during ~~the company’s~~our fiscal ~~third~~first quarter ended ~~July 29, 2005~~February 3, 2006 that has materially affected, or is reasonably likely to materially affect, ~~the company’s~~our internal control over financial reporting.
19

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

On June 3, 2004, eight individuals who claim to have purchased lawnmowers in Illinois and Minnesota filed a lawsuit (Ronnie Phillips et al. v. Sears Roebuck Corporation et. al., No.04-L-334 (20th Judicial Circuit, St., Clair County, IL)) against the company and eight other defendants alleging that the horsepower labels on the products the plaintiffs purchased were inaccurate. The plaintiffs seek certification of a class of all persons in the United States who, beginning January 1, 1995 through the present, purchased a lawnmower containing a two stroke or four stroke gas combustible engine up to 20 horsepower that was manufactured or sold by the defendants. The complaint seeks an injunction, unspecified compensatory and punitive damages, and attorneys’ fees. No answers have been entered in the case, and there has been no formal discovery. A number of procedural motions have been filed by the defendants, but have not yet been decided. On April 20, 2005, the court issued a stay of discovery and procedural matters to permit the parties to engage in settlement discussions. An attempt at mediation in October 2005 was unsuccessful, and the company expects the stay of procedural matters to be lifted so that various procedural motions may be determined. Management continues to evaluate this ~~lawsuit. The company~~lawsuit and is unable to reasonably estimate the likelihood of loss or the amount or range of potential loss that could result from this ~~litigation, and therefore~~litigation. Therefore, an accrual has not been established ~~a reserve~~ for any potential loss in connection with this lawsuit. The company is also unable to assess at this time whether the lawsuit will have a material adverse effect on its annual consolidated operating results or financial ~~condition.~~condition, although an unfavorable resolution could be material to the company’s operating results for a particular period.
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 use of our products. We are also subject to administrative proceedings with respect to claims involving the discharge of hazardous substances into the environment. Some of these claims assert damages and liability for remedial investigations and clean up costs. We are also typically involved in commercial disputes, employment disputes, and patent litigation cases in the ordinary course of business, both as a plaintiff and as a defendant. While the ultimate results of the current cases are unknown at this time, management believes that, except for the lawsuit discussed above, the outcomes of these cases are unlikely to have a material adverse effect on our consolidated operating results or financial position. Further, we maintain insurance against some product liability losses.

24Item 1A. RISK FACTORS
We are affected by risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition, or operating results are described in our most recently filed Annual Report on Form 10-K (Item 1A). There has been no material change in those risk factors.
20

Item 2. ~~UNREGISTERED SALES~~CHANGES IN SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES ~~AND USE OF PROCEEDS~~

The following table shows our ~~third~~first quarter of fiscal ~~2005~~2006 stock repurchase ~~activity.~~activity:

Total Number of

Maximum Number

Shares Purchased

of Shares that May

As Part of Publicly

Yet Be Purchased

Total Number of

Average Price

Announced Plans

Under the Plans or

Period

Shares Purchased
(1)(2)
Paid per Share

or Programs

Programs (1)(2)

April 30, 2005 through
May 27, 2005

241,489

$42.05

241,489

1,183,605

May 28, 2005 through
June 24, 2005

150,700

41.22

150,700

1,032,905

June 25, 2005 through
July 29, 2005

380,660
(3)
38.84

378,400

2,654,505

Total

772,849

$40.31

770,589

Total Number of

Maximum Number

Shares Purchased

of Shares that May

As Part of Publicly

Yet Be Purchased

Total Number of

Average Price

Announced Plans

Under the Plans or

Period

Shares Purchased (1)

Paid per Share

or Programs

Programs (1)

November 1, 2005 through December 2, 2005

238,200

$
37.68

238,200

1,607,989

December 3, 2005 through December 30, 2005

44,349

41.45

44,349

1,563,640

December 31, 2005 through February 3, 2006

384,137
(2)
44.08

380,755

1,182,885

Total

666,686

$
41.62

663,304

(1)          On ~~September 30, 2004,~~July 19, 2005, the company’s Board of Directors authorized the repurchase of ~~up to~~ 2,000,000 shares of the company’s common stock in open-market ~~transactions~~ or in privately negotiated transactions. This program has no expiration date but may be terminated by the company’s Board of Directors at any time. The company purchased ~~770,589~~663,304 shares during the periods indicated above under this ~~program.~~
~~(2) On July 19, 2005, the company’s Board of Directors authorized the repurchase of up to an additional 2,000,000~~program, including 398,697 shares ~~of the company’s common stock in open-market transactions or in privately negotiated transactions. This program has no expiration date but may be terminated~~repurchased by the ~~company’s Board~~company from current or former employees in connection with the payment of ~~Directors at any time. The company did not purchase shares during the periods indicated above under this program.~~withholding taxes.
~~(3)~~
(2)          Includes ~~2,260~~3,382 units (shares) of the company’s common stock purchased in open-market transactions at an average price of ~~$38.61~~$46.20 per share on behalf of a rabbi trust formed to pay benefit obligations of the company to participants in deferred compensation plans. These ~~2,260~~3,382 shares were not repurchased under the company’s repurchase ~~programs~~program described in ~~footnotes~~footnote (1) ~~and (2)~~ above.

~~Item 5. OTHER INFORMATION~~
On July 19, 2005, Toro’s Board of Directors terminated Toro’s Officer Stock Purchase Policy, which was originally approved by Toro’s Board of Directors on September 16, 1999. Pursuant to the terms of Toro’s former Officer Stock Purchase Policy, if Toro had an approved share repurchase plan and was ready to be in the market repurchasing shares of its common stock, officers of Toro could request that Toro purchase shares of their Toro common stock at a purchase price equal to the reported New York Stock Exchange closing price on the day of the transaction (or the price on the day before, if the officer had informed Toro before the market opened on any given day the he or she desired to sell Toro shares).
2521

Item 6. EXHIBITS

(a)
Exhibits

3(i) and 4(a)

The Toro Company Amended and Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3(i) and 4(a) to Registrant’s Current Report on Form 8-K dated March 15, 2005, Commission File No. 1-8649).

3(ii) and 4(b)

~~The Toro Company~~ Bylaws of Registrant (incorporated by reference to Exhibit ~~3(ii) and 4(b)~~3 to Registrant’s Current Report on Form 8-K dated ~~March 15,~~November 30, 2005, Commission File No. 1-8649).

4(c)

Specimen ~~form~~Form of Common Stock ~~certificate~~Certificate (incorporated by reference to Exhibit 4(c) to Registrant’s Annual Report on Form 10-K ~~for fiscal year ended~~dated October 31, ~~2004, Commission File No. 1-8649)~~2004).

4(d)

Rights Agreement dated as of May 20, 1998, between Registrant and Wells Fargo Bank Minnesota, National Association relating to rights to purchase Series B Junior Participating Voting Preferred Stock, as amended (incorporated by reference to Registrant’s Current Report on Form 8-K dated May 27, 1998, Commission File No. 1-8649).

4(e)

Certificate of Adjusted Purchase Price or Number of Shares dated April 14, 2003 filed by Registrant with Wells Fargo Bank Minnesota, N.A., as Rights Agent, in connection with Rights Agreement dated as of May 20, 1998 (incorporated by reference to Exhibit 2 to Registrant’s Amendment No. 1 to Registration Statement on Form 8-A/A dated April 14, 2003, Commission File No. 1-8649).

4(f)

Certificate of Adjusted Purchase Price or Number of Shares dated April 12, 2005 filed by Registrant with Wells Fargo Bank Minnesota, N.A., as Rights Agent, in connection with Rights Agreement dated as of May 20, 1998 (incorporated by reference to Exhibit 2 to Registrant’s Amendment No. 2 to Registration Statement on Form 8-A/A dated March 21, 2005, Commission File No. 1-8649).

4(g)

Indenture dated as of January 31, 1997, between Registrant and First National Trust Association, as Trustee, relating to the Registrant’s 7.125% Notes due June 15, 2007 and its 7.80% Debentures due June 15, 2027 (incorporated by reference to Exhibit 4(a) to Registrant’s Current Report on Form 8-K for June 24, 1997, Commission File No. 1-8649).

10(a)
Post-Retirement Consulting and Noncompetition Agreement dated as of December 31, 2005 between The Toro Company and Kendrick B. Melrose (incorporated by reference to Exhibit 1 to Registrant’s Current Report on Form 8-K dated December 31, 2005, Commission File No. 1-8649).
10(b)
The Toro Company Performance Share Plan (incorporated by reference to Exhibit 1 to Registrant’s Current Report on Form 8-K dated February 16, 2006, Commission File No. 1-8649).
10(c)
Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 1 to Registrant’s Current Report on Form 8-K dated November 30, 2005, Commission File No. 1-8649).
10(d)
Form of Performance Share Award Agreement (incorporated by reference to Exhibit 2 to Registrant’s Current Report on Form 8-K dated November 30, 2005, Commission File No. 1-8649).
31(a)

Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002) (filed herewith).

31(b)

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002) (filed herewith).

32

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002 (furnished herewith).

2622

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned ~~hereunto~~thereunto duly authorized.

THE TORO COMPANY
(Registrant)
Date: March 13, 2006
By
/s/ Stephen P. Wolfe

~~(Registrant)~~
~~Date: September 2, 2005~~
By
~~/s/ Stephen P. Wolfe~~
Stephen P. Wolfe

Vice President Finance

~~Treasurer~~ and Chief Financial Officer

~~(duly~~ (duly authorized officer and principal financial officer)

2723

	Three Months Ended						Nine Months Ended
	July 29,			July 30,			July 29,			July 30,
	2005			2004			2005			2004

Net sales	$	466,942		$	454,044		$	1,442,296		$	1,315,644
Cost of sales	303,681			289,842			940,729			839,953
Gross profit	163,261			164,202			501,567			475,691
Selling, general, and administrative expense	108,595			111,468			330,376			324,630
Earnings from operations	54,666			52,734			171,191			151,061
Interest expense	(4,820		)	(3,893		)	(13,453		)	(11,477		)
Other income, net	642			1,533			2,725			3,307
Earnings before income taxes	50,488			50,374			160,463			142,891
Provision for income taxes	16,111			16,161			52,953			47,154
Net earnings	$	34,377		$	34,213		$	107,510		$	95,737

Basic net earnings per share of common stock	$	0.77		$	0.70		$	2.38		$	1.94

Diluted net earnings per share of common stock	$	0.74		$	0.66		$	2.29		$	1.84


Weighted average number of shares of common stock outstanding – Basic	44,494			48,738			45,121			49,396

Weighted average number of shares of common stock outstanding – Dilutive	46,438			51,587			46,966			52,043

	Three Months Ended
	February 3,			January 28,
	2006			2005

Net sales	$	369,640		$	346,913
Cost of sales	237,766			225,250
Gross profit	131,874			121,663
Selling, general, and administrative expense	107,205			102,239
Earnings from operations	24,669			19,424
Interest expense	(4,243		)	(3,760		)
Other income, net	886			1,141
Earnings before income taxes	21,312			16,805
Provision for income taxes	7,033			5,629
Net earnings	$	14,279		$	11,176

Basic net earnings per share of common stock	$	0.33		$	0.24

Diluted net earnings per share of common stock	$	0.32		$	0.23

Weighted average number of shares of common stock outstanding — Basic	43,608			46,136

Weighted average number of shares of common stock outstanding — Diluted	44,959			47,758

	July 29,			July 30,			October 31,
	2005			2004			2004
ASSETS
Cash and cash equivalents	$	34,665		$	34,022		$	90,756
Receivables, net	399,883			381,329			285,736
Inventories, net	235,146			217,357			227,200
Prepaid expenses and other current assets	14,142			13,968			16,931
Deferred income taxes	57,526			49,103			44,552
Total current assets	741,362			695,779			665,175

Property, plant, and equipment	495,674			468,104			476,117
Less accumulated depreciation	328,784			303,253			311,452
	166,890			164,851			164,665

Deferred income taxes	39			1,181			-
Other assets	17,161			18,581			18,652
Goodwill	81,475			78,004			78,055
Other intangible assets, net	5,611			2,357			2,200
Total assets	$	1,012,538		$	960,753		$	928,747

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current portion of long-term debt	$	45		$	44		$	45
Short-term debt	54,509			3,146			1,099
Accounts payable	75,964			68,245			87,147
Accrued liabilities	273,435			256,392			227,279
Total current liabilities	403,953			327,827			315,570

Long-term debt, less current portion	175,012			175,058			175,046
Long-term deferred income taxes	3,837			-			3,837
Deferred revenue and other long-term liabilities	14,806			12,747			13,475

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 100,000,000 shares, issued and outstanding 42,652,756 shares as of July 29, 2005 (net of 11,379,464 treasury shares), 45,925,558 shares as of July 30, 2004 (net of 8,106,662 treasury shares), and 45,036,658 shares as of October 31, 2004 (net of 8,995,562 treasury shares)	42,653			45,926			45,037
Retained earnings	383,692			410,493			386,924
Accumulated other comprehensive loss	(11,415		)	(11,298		)	(11,142		)
Total stockholders’ equity	414,930			445,121			420,819
Total liabilities and stockholders’ equity	$	1,012,538		$	960,753		$	928,747

	February 3,			January 28,			October 31,
	2006			2005			2005
ASSETS
Cash and cash equivalents	$	19,744		$	7,467		$	41,402
Receivables, net	313,157			312,984			295,683
Inventories, net	295,687			276,364			235,347
Prepaid expenses and other current assets	18,049			14,756			16,084
Deferred income taxes	70,251			54,662			58,558
Total current assets	716,888			666,233			647,074

Property, plant, and equipment	514,232			479,901			506,884
Less accumulated depreciation	349,154			319,183			339,607
	165,078			160,718			167,277

Deferred income taxes	—			39			—
Other assets	12,036			21,465			15,737
Goodwill	81,208			78,082			81,197
Other intangible assets, net	5,249			2,043			5,452
Total assets	$	980,459		$	928,580		$	916,737

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current portion of long-term debt	$	35		$	45		$	46
Short-term debt	51,900			62,162			325
Accounts payable	95,213			90,459			87,952
Accrued liabilities	256,605			235,683			252,879
Total current liabilities	403,753			388,349			341,202

Long-term debt, less current portion	175,000			175,035			175,000
Long-term deferred income taxes	872			3,837			872
Deferred revenue and other long-term liabilities	9,423			8,166			9,629

Stockholders’ equity:
Preferred stock, par value $1.00 per share, authorized 1,000,000 voting and 850,000 non-voting shares, none issued and outstanding	—			—			—
Common stock, par value $1.00 per share, authorized 100,000,000 shares, issued and outstanding 42,561,238 shares as of February 3, 2006 (net of 11,470,982 treasury shares), 43,257,212 shares as of January 28, 2005 (net of 10,775,008 treasury shares), and 41,898,463 shares as of October 31, 2005 (net of 12,133,757 treasury shares)	42,561			43,258			41,899
Retained earnings	360,336			320,054			359,716
Accumulated other comprehensive loss	(11,486		)	(10,119		)	(11,581		)
Total stockholders’ equity	391,411			353,193			390,034
Total liabilities and stockholders’ equity	$	980,459		$	928,580		$	916,737

	Three Months Ended						Nine Months Ended
(Dollars in thousands, except per share data)	July 29,			July 30,			July 29,			July 30,
	2005			2004			2005			2004
Net earnings, as reported	$	34,377		$	34,213		$	107,510		$	95,737
Stock-based compensation cost, net of tax, included in net earnings as reported	1,597			4,504			4,738			8,500
Stock-based compensation cost, net of tax, if fair value method had been applied	(1,597		)	(1,576		)	(4,738		)	(5,961		)
Pro forma net earnings as if fair-value method had been applied	$	34,377		$	37,141		$	107,510		$	98,276
Net earnings per share data:
As reported - Basic	$	0.77		$	0.70		$	2.38		$	1.94
Pro forma - Basic	$	0.77		$	0.76		$	2.38		$	1.99
As reported - Diluted	$	0.74		$	0.66		$	2.29		$	1.84
Pro forma – Diluted	$	0.74		$	0.72		$	2.29		$	1.89

			Three Months Ended
	Fiscal 2005	Fiscal 2004	February 3, 2006	January 28, 2005
Expected life of option in years	3 - 7	3 - 9	2.5 - 6.5	3 - 7
Expected volatility	25.87% - 30.41%	27.60% - 27.84%	25.26% - 26.96%	25.87% - 30.41%
Weighted-average volatility	28.04%	27.72%	26.12%	28.04%
Risk-free rate	3.22% - 4.04%	2.04% - 4.10%
Risk-free interest rate			4.399% - 4.526%	3.22% - 4.04%
Expected dividend yield	0.18% - 0.25%	0.26% - 0.39%	0.65% - 0.70%	0.18% - 0.25%
Weighted-average dividend yield	0.22%	0.32%	0.67%	0.22%

(Dollars in thousands, except per share data)							Increase (decrease)
Three months ended							impact of adopting
July 29, 2005	As Reported (1)			Pro Forma (2)			SFAS No. 123R
Earnings from operations	$	54,666		$	54,830		$	(164	)
Earnings before income taxes	50,488			50,652			(164		)
Net earnings	34,377			34,465			(88		)
Basic net earnings per share	0.77			0.77			-
Diluted net earnings per share	0.74			0.74			-

Nine months ended July 29, 2005
Earnings from operations	$	171,191		$	166,976		$	4,215
Earnings before income taxes	160,463			156,248			4,215
Net earnings	107,510			104,686			2,824
Basic net earnings per share	2.38			2.32			0.06
Diluted net earnings per share	2.29			2.22			0.07
Net cash provided by (used in):
Operating activities	67,844			73,509			(5,665		)
Financing activities	(66,630		)	(72,295		)	5,665

(Dollars in thousands)
Three months ended July 29, 2005	Professional	Residential	Other		Total
Net sales	$302,517	$148,590	$15,835		$466,942
Intersegment gross sales	13,618	1,472	(15,090	)	-
Earnings (loss) before income taxes	59,894	10,096	(19,502	)	50,488
Three months ended February 3, 2006						Professional		Residential		Other			Total
								(Dollars in thousands)
Three months ended July 30, 2004
Net sales	$287,928	$144,227	$21,889		$454,044
Intersegment gross sales	26,711	2,873	(29,584	)	-
Earnings (loss) before income taxes	54,326	17,635	(21,587	)	50,374

Nine months ended July 29, 2005	Professional	Residential	Other		Total
Net sales	$936,799	$472,188	$33,309		$1,442,296	$	253,605	$	108,185	$	7,850		$	369,640
Intersegment gross sales	41,681	6,045	(47,726	)	-	7,590		670		(8,260		)	—
Earnings (loss) before income taxes	183,382	43,493	(66,412	)	160,463	41,660		5,149		(25,497		)	21,312
Total assets	480,771	219,594	312,173		1,012,538	498,768		215,803		265,888			980,459

Nine months ended July 30, 2004
Net sales	$834,130	$436,952	$44,562		$1,315,644
Intersegment gross sales	72,706	6,958	(79,664	)	-
Earnings (loss) before income taxes	154,479	52,691	(64,279	)	142,891
Total assets	459,486	182,542	318,725		960,753

Three months ended January 28, 2005	Professional		Residential		Other			Total
Net sales	$	245,230	$	95,876	$	5,807		$	346,913
Intersegment gross sales	9,897		689		(10,586		)	—
Earnings (loss) before income taxes	38,865		4,434		(26,494		)	16,805
Total assets	451,636		214,636		262,308			928,580

											February 3, 2006					October 31, 2005
	July 29, 2005					October 31, 2004					Gross Carrying		Accumulated			Gross Carrying		Accumulated
(Dollars in thousands)	Gross Carrying		Accumulated			Gross Carrying		Accumulated			Amount		Amortization			Amount		Amortization
	Amount		Amortization			Amount		Amortization
Patents	$	6,553	$	(5,534	)	$	6,553	$	(5,275	)	$	6,553	$	(5,706	)	$	6,553	$	(5,620	)
Non-compete agreements	1,000		(799		)	1,000		(723		)	1,000		(844		)	1,000		(821		)
Customer related	1,221		(61		)	-		-			1,242		(124		)	1,239		(93		)
Other	2,000		(1,215		)	1,700		(1,055		)	2,000		(1,355		)	2,000		(1,285		)
Total	$	10,774	$	(7,609	)	$	9,253	$	(7,053	)	$	10,795	$	(8,029	)	$	10,792	$	(7,819	)
Total other amortizable intangible assets, net	$	3,165				$	2,200

Total other intangible assets, net											$	2,766				$	2,973

(Dollars in Thousands)	Beginning	Warranty	Warranty	Changes in		Ending
Nine Months Ended	Balance	Provisions	Claims	Estimates		Balance
July 29, 2005	$60,988	$33,175	$(27,257)	$ (11	)	$66,895

July 30, 2004	$59,372	$34,066	$(26,128)	$(2,647	)	$64,663

	Beginning		Warranty		Warranty			Changes in			Ending
Three Months Ended	Balance		Provisions		Claims			Estimates			Balance
	(Dollars in thousands)
February 3, 2006	$	61,385	$	7,983	$	(7,647	)	$	(884	)	$	60,837

January 28, 2005	$	60,988	$	7,848	$	(9,594	)	$	54		$	59,296

Dollars in thousands (except average contracted rate)	Average Contracted Rate	Notional Amount	Value in Accumulated Other Comprehensive Income (Loss)			Fair Value Impact Gain (Loss)			Average Contracted Rate	Notional Amount		Value in AOCL Income (Loss)			Fair Value Impact Gain (Loss)
Buy US dollar/Sell Australian dollar	0.7550	$23,865.2	$	-		$	(111.8	)	0.7446	$	41,193.6	$	(87.0	)	$	(201.0	)
Buy US dollar/Sell Canadian dollar	0.8097	323.9	-			0.1			0.8430	5,724.2		(241.7		)	(51.4		)
Buy US dollar/Sell Euro	1.2241	43,565.1	(50.6		)	553.9			1.2161	93,448.3		385.1			315.1
Buy US dollar/Sell British pound	1.7420	13,065.0	-			(15.8		)	1.7783	21,873.1		—			55.3
Buy Euro/Sell US dollar	1.2675	1,204.1	4.7			(57.1		)
Buy Japanese yen/Sell US dollar	106.7873	1,638.8	(20.1		)	(56.4		)
Buy British pound/Sell US dollar	1.7440	261.6	-			0.1
Buy Mexican peso/Sell US dollar	11.9800	5,550.9	629.1			-
Buy Australian dollar/Sell US dollar									0.7539	527.7		—			(1.1		)
Buy Euro/Sell U.S. dollar									1.2088	483.5		—			(0.4		)
Buy British pound/Sell U.S. dollar									1.7741	1,774.1		—			(0.6		)
Buy Mexican peso/Sell U.S. dollar									10.8523	11,334.0		278.9			(135.7		)

						Total Number of			Maximum Number
						Shares Purchased			of Shares that May
						As Part of Publicly			Yet Be Purchased
	Total Number of			Average Price		Announced Plans			Under the Plans or
Period	Shares Purchased		(1)(2)	Paid per Share		or Programs			Programs (1)(2)

April 30, 2005 through May 27, 2005	241,489			$42.05		241,489			1,183,605

May 28, 2005 through June 24, 2005	150,700			41.22		150,700			1,032,905

June 25, 2005 through July 29, 2005		380,660	(3)		38.84		378,400	2,654,505

Total		772,849			$40.31		770,589

					Total Number of	Maximum Number
					Shares Purchased	of Shares that May
					As Part of Publicly	Yet Be Purchased
	Total Number of		Average Price		Announced Plans	Under the Plans or
Period	Shares Purchased (1)		Paid per Share		or Programs	Programs (1)

November 1, 2005 through December 2, 2005	238,200		$	37.68	238,200	1,607,989

December 3, 2005 through December 30, 2005	44,349		41.45		44,349	1,563,640

December 31, 2005 through February 3, 2006	384,137	(2)	44.08		380,755	1,182,885

Total	666,686		$	41.62	663,304

(a)	Exhibits

	3(i) and 4(a)	The Toro Company Amended and Restated Certificate of Incorporation of Registrant (incorporated by reference to Exhibit 3(i) and 4(a) to Registrant’s Current Report on Form 8-K dated March 15, 2005, Commission File No. 1-8649).

	3(ii) and 4(b)	~~The Toro Company~~ Bylaws of Registrant (incorporated by reference to Exhibit ~~3(ii) and 4(b)~~3 to Registrant’s Current Report on Form 8-K dated ~~March 15,~~November 30, 2005, Commission File No. 1-8649).

	4(c)	Specimen ~~form~~Form of Common Stock ~~certificate~~Certificate (incorporated by reference to Exhibit 4(c) to Registrant’s Annual Report on Form 10-K ~~for fiscal year ended~~dated October 31, ~~2004, Commission File No. 1-8649)~~2004).

	4(d)	Rights Agreement dated as of May 20, 1998, between Registrant and Wells Fargo Bank Minnesota, National Association relating to rights to purchase Series B Junior Participating Voting Preferred Stock, as amended (incorporated by reference to Registrant’s Current Report on Form 8-K dated May 27, 1998, Commission File No. 1-8649).

	4(e)	Certificate of Adjusted Purchase Price or Number of Shares dated April 14, 2003 filed by Registrant with Wells Fargo Bank Minnesota, N.A., as Rights Agent, in connection with Rights Agreement dated as of May 20, 1998 (incorporated by reference to Exhibit 2 to Registrant’s Amendment No. 1 to Registration Statement on Form 8-A/A dated April 14, 2003, Commission File No. 1-8649).

	4(f)	Certificate of Adjusted Purchase Price or Number of Shares dated April 12, 2005 filed by Registrant with Wells Fargo Bank Minnesota, N.A., as Rights Agent, in connection with Rights Agreement dated as of May 20, 1998 (incorporated by reference to Exhibit 2 to Registrant’s Amendment No. 2 to Registration Statement on Form 8-A/A dated March 21, 2005, Commission File No. 1-8649).

	4(g)	Indenture dated as of January 31, 1997, between Registrant and First National Trust Association, as Trustee, relating to the Registrant’s 7.125% Notes due June 15, 2007 and its 7.80% Debentures due June 15, 2027 (incorporated by reference to Exhibit 4(a) to Registrant’s Current Report on Form 8-K for June 24, 1997, Commission File No. 1-8649).

	10(a)	Post-Retirement Consulting and Noncompetition Agreement dated as of December 31, 2005 between The Toro Company and Kendrick B. Melrose (incorporated by reference to Exhibit 1 to Registrant’s Current Report on Form 8-K dated December 31, 2005, Commission File No. 1-8649).

	10(b)	The Toro Company Performance Share Plan (incorporated by reference to Exhibit 1 to Registrant’s Current Report on Form 8-K dated February 16, 2006, Commission File No. 1-8649).

	10(c)	Form of Nonqualified Stock Option Agreement (incorporated by reference to Exhibit 1 to Registrant’s Current Report on Form 8-K dated November 30, 2005, Commission File No. 1-8649).

	10(d)	Form of Performance Share Award Agreement (incorporated by reference to Exhibit 2 to Registrant’s Current Report on Form 8-K dated November 30, 2005, Commission File No. 1-8649).

	31(a)	Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002) (filed herewith).

	31(b)	Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002) (filed herewith).

	32	Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of ~~2002.~~2002 (furnished herewith).