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

OVERVIEW

We design, manufacture, and market professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting, agricultural micro-irrigation systems, rental and construction equipment, and residential yard and snow removal products. We sell our products worldwide through a network of distributors, dealers, hardware retailers, home centers, mass retailers, and over the Internet. Our businesses are organized into three reportable business segments: Professional, Residential, and Distribution. Our Distribution segment, which consists of our company-owned domestic distributorships, has been combined with our corporate activities and is shown as "Other." We strive to provide innovative, well-built, and dependable products supported by an extensive service network. A significant portion of our revenues have historically been, and we expect will continue to be, attributable to new and enhanced products. We define new products as those introduced in the current and previous two fiscal years.

Summary of Fiscal 2012 Results

In fiscal 2012, we achieved record net sales and double digit net earnings growth. Our fiscal 2012 results included the following items of significance:

º •
º Net sales for fiscal 2012 increased by 4.0 percent compared to fiscal 2011 to a record of $1,958.7 million. This increase was primarily attributable to increased demand for our products largely resulting from the successful introduction of new and enhanced products that were well received by customers, as well as incremental sales of $22.1 million from acquisitions. However, a continuing sluggish economy in Europe hampered our international net sales in fiscal 2012 compared to fiscal 2011. º •
º Professional segment net sales, which represented 68 percent of our total consolidated net sales in fiscal 2012, grew 7.3 percent in fiscal 2012 compared to fiscal 2011. Shipments increased due to higher demand for most of our domestic professional segment products largely resulting from the successful introduction of new and enhanced products, strong demand for domestic golf and landscape contractor equipment, continued growth in the micro-irrigation market, and incremental sales of $22.1 million from acquisitions. º •
º In fiscal 2012, we completed three acquisitions within our professional segment to help us expand our presence in the rental and construction market and add to our golf product line-up. Specifically, we acquired a product line that includes vibratory plows, trenchers, and horizontal directional drills; a line of concrete and mortar mixers, material handlers, compaction equipment, and other concrete power tools; and a greens roller product line for the golf market. º •
º Our residential segment net sales were down by 2.6 percent in fiscal 2012 compared to fiscal 2011 due primarily from lower shipments of snow thrower products and service parts due to reduced demand resulting from the lack of snowfall during the 2011-2012 winter season. However, sales of walk power mowers, zero-turn radius riding mowers, and trimmers were up due to positive customer response to newly introduced products and favorable weather conditions that drove strong demand. º •
º International net sales for fiscal 2012 were down 5.6 percent compared to fiscal 2011 due mainly to lower sales in Europe as a result of continuing economic weakness and uncertainty in that region. In fiscal 2012, we began operations at our new micro-irrigation manufacturing facility in Romania for our water conserving drip irrigation products for agricultural markets. International net sales comprised 30.3 percent of our total consolidated net sales in fiscal 2012 compared to 32.3 percent in fiscal 2011 and 31.8 percent in fiscal 2010. º •
º Fiscal 2012 net earnings of $129.5 million rose 10.1 percent compared to fiscal 2011, and diluted net earnings per share increased 15.7 percent in fiscal 2012 to $2.14 compared to $1.85 in fiscal 2011. º •
º Gross margin was 34.4 percent in fiscal 2012, an increase of 60 basis points from 33.8 percent in fiscal 2011. Price increases on some products and manufacturing efficiencies from increased production and demand for our products contributed to the improvement in gross margin. However, higher average commodity prices and unfavorable product mix hindered our gross margin growth rate in fiscal 2012 as compared to fiscal 2011. º •
º Although selling, general, and administrative ("SG&A") expense was up 3.4 percent in fiscal 2012 compared to fiscal 2011, SG&A expense as a percentage of net sales in fiscal 2012 was down to 23.9 percent compared to 24.0 percent in fiscal 2011, reflecting further leveraging of our SG&A costs over higher sales volumes. º •
º Receivables decreased slightly by 0.5 percent as of the end of fiscal 2012 compared to the end of fiscal 2011. However, our inventory levels were up by 12.6 percent as of the end of fiscal 2012 compared to fiscal 2011 as we prebuilt inventory for anticipated higher demand before Tier 4 emission requirements go into effect, which impact our products having diesel engines with greater than 25 but less than 75 horsepower manufactured after January 1, 2013, as well as $12.6 million of incremental inventory from acquisitions as of the end of fiscal 2012. Average net working capital (accounts receivable plus inventory less trade payables) as a percent of net sales was 15.2 percent as of the end of fiscal 2012 compared to 15.0 percent as of the end of fiscal 2011. This increase was due mainly to higher average inventory levels in fiscal 2012 compared to fiscal 2011 as we prebuilt inventory in anticipation of strong demand for our products, mainly for products impacted by new Tier 4 emissions requirements, as well as incremental inventory from acquisitions. Our domestic field inventory levels were slightly higher as of the end of fiscal 2012 compared to the end of fiscal 2011 due in part to anticipated increase in retail demand. º •
º On May 24, 2012, our Board of Directors declared a two-for-one stock split of our common stock, effected in the form of a 100 percent stock dividend paid on June 29, 2012. This was our third stock split in the past ten fiscal years. Earnings and dividends declared per share and weighted average shares outstanding are presented in this report after the effect of the 100 percent stock dividend. The two-for-one stock split is also reflected in the share amounts in all periods presented in this report. º •
º We continued our history of paying quarterly cash dividends in fiscal 2012. We increased our fiscal 2012 quarterly cash dividend by 10 percent to $0.11 per share compared to our quarterly cash dividend in fiscal 2011 of $0.10 per share. º •
º Our stock repurchase program returned $92.7 million in cash to our shareholders during fiscal 2012, which reduced our number of shares outstanding. This reduction resulted in a benefit to our diluted net earnings per share of approximately $0.10 per share in fiscal 2012 compared to fiscal 2011.

Destination 2014

Our multi-year initiative, "Destination 2014," will take us to our centennial in 2014 and into our second century. This four-year initiative, which began with our 2011 fiscal year, is intended to focus our efforts on driving our legacy of excellence through building caring relationships and engaging in innovation. Through our Destination 2014 initiative, we strive to achieve our goals by pursuing a progression of annual milestones. Each fiscal year we set forth associated organic revenue growth, operating earnings, and employee engagement goals, such as continuous improvement projects with cross-functional collaboration, and we also strive to continue to focus on the progress we made through our previous initiatives, such as working capital.

Organic Revenue Growth. We intend to pursue strategic growth of our existing businesses and product categories with an annual organic revenue growth goal. One of our goals of our Destination 2014 initiative is to achieve $100 million in organic revenue growth in each of fiscal 2011, 2012, 2013, and 2014. We define organic revenue growth as the increase in net sales, less net sales from acquisitions that occurred in the prior twelve-month period. While we exceeded our organic revenue growth goal of $100 million for fiscal 2011, we fell short of achieving that goal in fiscal 2012.

Operating Earnings Growth. As part of our Destination 2014 growth goals, we have also set a bold earnings goal to raise operating earnings as a percentage of net sales to 12 percent by the end of fiscal 2014. In fiscal 2012 and 2011, we made progress towards this goal by achieving operating earnings as a percentage of net sales of 10.5 percent and 9.8 percent, respectively.

Outlook for Fiscal 2013

Our focus for fiscal 2013 is on generating customer demand for our innovative products, in spite of continuing economic uncertainty, particularly in the United States and Europe. We have taken, and continue to take, proactive measures with investments intended to help us gain market share and achieve strong financial results. We believe the key drivers for our fiscal 2013 financial performance will include, among many others, the following main factors:

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º We anticipate fiscal 2013 net sales in our professional segment to increase compared to fiscal 2012, led by anticipated continued growth in the worldwide micro-irrigation market for products that help our customers conserve the use of water as the need to become more efficient in water use is expected to drive demand for our products. We plan to continue to invest globally in new micro-irrigation products, manufacturing capacity, and infrastructure as we expect that products used for water conservation to be a long-term focus for us. We also anticipate higher sales of domestic golf and grounds equipment and landscape contractor equipment as we plan to introduce an array of innovative new products and expect customers to continue to replace aged inventory in fiscal 2013. As we continued to prepare for the phase-in of additional Tier 4 emission requirements affecting our products having diesel engines with greater than 25 but less than 75 horsepower manufactured after January 1, 2013 and sold in the U.S. and Canada, we prebuilt inventory in anticipation of higher demand before we implement expected price increases for our products subject to these regulations. Accordingly, we anticipate stronger demand prior to price increases going into effect for products subject to Tier 4 emission requirements, which is expected to result in higher sales volumes of our diesel engine products, mainly in the first quarter of fiscal 2013, than we have experienced in the past or expect to experience in the future. Additionally, we anticipate that our recent acquisitions in fiscal 2012 will expand our market presence in the rental and construction market and contribute incremental sales in fiscal 2013. º •
º We expect our residential segment net sales to increase slightly in fiscal 2013 compared to fiscal 2012 as we anticipate the domestic economy to continue its slow rate of recovery. We anticipate higher demand for our innovative zero-turn radius riding mowers in fiscal 2013 as we believe customers will continue to migrate to zero-turn radius mowers from lawn and garden tractors. We also anticipate new products, such as our new two-stage snow thrower products and extension of our lithium-ion battery-powered home solutions products, to be well received by customers in fiscal 2013. º •
º International markets will remain a focus for us to grow our revenues. However, as the European economic conditions remained weak in fiscal 2012, we anticipate uncertainty with the European economy to continue into fiscal 2013, which is expected to hamper our international net sales growth. We plan to continue investing in new products designed specifically for international markets and in infrastructure around the world, connecting us more closely to international customers and increasing our global presence. In fiscal 2012 we began operations at our new micro-irrigation manufacturing facility in Romania as we anticipate future worldwide market demand to increase for our water conserving drip irrigation products for agricultural markets, as previously discussed. A long-term goal is for international sales to comprise a larger percentage of our total consolidated net sales. º •
º During fiscal 2013, we anticipate our gross margin rate to improve compared to fiscal 2012 as we continue to focus on productivity improvements intended to reduce production costs while realizing greater efficiencies in our processes. In addition, we expect to increase prices on some of our products. º •
º We expect net earnings and diluted net earnings per share to be up in fiscal 2013 compared to fiscal 2012, driven mainly by our expectation of sales growth and an improvement in our gross margin rate, as well as an anticipated further reduction in our diluted shares outstanding due to repurchases of our common stock.

We will continue to keep a cautionary eye on the global economic environment, particularly in the United States and Europe, retail demand, field inventory levels, commodity prices, weather conditions, competitive actions, expenses, and other factors identified in Part I, Item 1A, "Risk Factors" of this report, which could cause our actual results to differ from our anticipated outlook.

RESULTS OF OPERATIONS

Fiscal 2012 net earnings were $129.5 million compared to $117.7 million in fiscal 2011, an increase of 10.1 percent. Fiscal 2012 diluted net earnings per share were $2.14, an increase of 15.7 percent from $1.85 per share in fiscal 2011. The primary factors contributing to the net earnings improvement were higher net sales, an increase in gross profit, leveraging of fixed SG&A costs over higher sales volumes, and a pre-tax charge of $4.7 million last fiscal year associated with a rework for a non-safety quality issue for our walk power mowers that was not duplicated this fiscal year. However, our tax rate in fiscal 2012 was higher compared to our tax rate in fiscal 2011 due to the expiration of the domestic research tax credit on December 31, 2011. Our net earnings per diluted share were also benefited by approximately $0.10 per share in fiscal 2012 compared to fiscal 2011 as a result of reduced shares outstanding from repurchases of our common stock.

Fiscal 2011 net earnings were $117.7 million compared to $93.2 million in fiscal 2010, an increase of 26.2 percent. Fiscal 2011 diluted net earnings per share were $1.85, an increase of 32.1 percent from $1.40 per share in fiscal 2010. The primary factors contributing to the net earnings improvement were sales growth in all of our businesses, leveraging of fixed SG&A costs over higher sales volumes, and a lower effective tax rate, somewhat offset by higher commodity and freight expense that negatively impacted our gross margin rate, as well as a pre-tax charge of $4.7 million during fiscal 2011 due to costs associated with a rework for a non-safety quality issue that affected a large number of our residential segment walk power mowers. In addition, our net earnings per diluted share were benefited by approximately $0.09 per share in fiscal 2011 compared to fiscal 2010 as a result of reduced shares outstanding from repurchases of our common stock.

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

              Fiscal years ended October 31    2012      2011      2010

              Net sales                         100.0 %   100.0 %   100.0 %
              Cost of sales                     (65.6 )   (66.2 )   (65.9 )

              Gross margin                       34.4      33.8      34.1
              SG&A expense                      (23.9 )   (24.0 )   (25.1 )

              Operating earnings                 10.5       9.8       9.0
              Interest expense                   (0.9 )    (0.9 )    (1.0 )
              Other income, net                   0.4       0.3       0.4
              Provision for income taxes         (3.4 )    (3.0 )    (2.9 )

              Net earnings                        6.6 %     6.2 %     5.5 %

Fiscal 2012 Compared With Fiscal 2011

Net Sales. Worldwide net sales in fiscal 2012 were $1,958.7 million compared to $1,884.0 million in fiscal 2011, an increase of 4.0 percent. This net sales improvement was attributable to the following factors:

º •
º Increased shipments of professional segment products largely resulting from the successful introduction of new and enhanced products that were well received by customers and resulted in increased sales, strong demand for domestic golf and landscape contractor equipment as customers replaced their aged inventory, continued acceptance and demand for our drip irrigation solutions for agricultural markets, and incremental sales of $22.1 million from acquisitions. Additionally, a weaker average U.S. dollar compared to other currencies in which we transact business accounted for approximately $2 million of our overall net sales increase. º •
º Higher shipments and demand of walk power mowers, zero-turn radius riding mowers, and trimmers in our residential segment due to positive customer response to newly introduced products and favorable weather conditions that drove strong demand. Additionally, sales of Pope products in Australia were up due to more favorable weather conditions in fiscal 2012 compared to fiscal 2011.

Somewhat offsetting those sales increases were:

º •
º A decline in overall residential segment net sales primarily from lower shipments of snow thrower products and service parts due to reduced demand resulting from the lack of snowfall during the 2011-2012 winter season.

Gross Margin. Gross margin represents gross profit (net sales less cost of sales) as a percentage of net sales. See Note 1 of the Notes to Consolidated Financial Statements, in the section entitled "Cost of Sales," for a description of expenses included in cost of sales. Gross margin increased by 60 basis points to 34.4 percent in fiscal 2012 from 33.8 percent in fiscal 2011. This improvement was mainly the result of the following factors:

º •
º Price increases on some of our products. º •
º Lower manufacturing costs from higher plant utilization, mainly related to increased production and demand for our products. º •
º Rework costs in fiscal 2011 for a non-safety quality issue that affected a large number of our residential segment walk power mowers that was not duplicated in fiscal 2012.

Somewhat offsetting those positive factors were:

º •
º Higher average prices paid for commodities in fiscal 2012 compared to fiscal 2011. º •
º Unfavorable product mix and lower gross margins on product sales from acquisitions in fiscal 2012 compared to fiscal 2011.

Selling, General, and Administrative Expense. SG&A expense increased $15.3 million, or 3.4 percent, in fiscal 2012 compared to fiscal 2011. See Note 1 of the Notes to Consolidated Financial Statements, in the section entitled "Selling, General, and Administrative Expense," for a description of expenses included in SG&A expense. SG&A expense rate represents SG&A expense as a percentage of net sales. SG&A expense rate in fiscal 2012 decreased by 10 basis points to 23.9 percent compared to 24.0 percent in fiscal 2011 due to fixed SG&A costs spread over higher sales volumes. However, the increase in SG&A expense of $15.3 million was driven mainly by the following factors:

º •
º Incremental costs from acquisitions of $7.2 million. º •
º Higher self-insured health care expenses mainly from unfavorable claims experience.

Somewhat offsetting those increases in SG&A expense were:

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º A decline in marketing expenses of $6.3 million due mainly to incentive programs last year that were not duplicated to the same degree this fiscal year. º •
º Lower incentive compensation expense of $4.2 million attributable to lower than planned financial results.

Interest Expense. Interest expense for fiscal 2012 slightly decreased by 0.4 percent compared to fiscal 2011 as a result of lower average debt levels.

Other Income, Net. Other income, net consists mainly of our proportionate share of income or losses from equity investments (affiliates), currency exchange rate gains and losses, litigation settlements and recoveries, interest income, and retail financing revenue. Other income for fiscal 2012 was $7.6 million compared to $7.3 million in fiscal 2011, an increase of $0.3 million, or 3.4 percent. This increase in other income, net was due mainly to an increase in income from our equity investment in Red Iron, somewhat offset by lower interest income in fiscal 2012 compared to fiscal 2011.

Provision for Income Taxes. The effective tax rate for fiscal 2012 was 34.0 percent compared to 32.7 percent in fiscal 2011. The increase in the effective tax rate was primarily the result of the expiration of the domestic research tax credit on December 31, 2011.

We anticipate our tax rate for fiscal 2013 to be slightly lower than our fiscal 2012 tax rate.

Fiscal 2011 Compared With Fiscal 2010

Net Sales. Worldwide net sales in fiscal 2011 were $1,884.0 million compared to $1,690.4 million in fiscal 2010, an increase of 11.5 percent. This net sales improvement was primarily driven by:

º •
º Higher shipments of worldwide professional segment products largely resulting from the successful introduction of new products that were well received by customers and resulted in increased sales, strong worldwide demand for golf equipment and irrigation systems, additional manufacturing capacity that increased production and enabled higher sales of our water conserving products for agricultural markets to meet increased worldwide demand, particularly in Eastern Europe, and incremental sales of $19 million from acquisitions. º •
º An increase in residential segment net sales attributable to strong demand for snow thrower products as our channel partners purchased product to fill depleted field inventory levels for the 2011-2012 snow season following strong sales from heavy snow falls during the 2010-2011 snow season, as well as additional product placement. In addition, riding product sales increased primarily from positive customer acceptance for our new line of zero-turn radius riding mowers. However, sales of walk power mowers and electric blowers were down due mainly to unfavorable weather conditions. º •
º An increase in international net sales in for both our professional and residential segments due to increased demand primarily from improved market conditions in our key international regions and the successful introduction of new products that were well received by customers. Additionally, a weaker average U.S. dollar compared to other currencies in which we transact business accounted for approximately $21 million of our net sales increase.

Gross Margin. Gross margin decreased by 30 basis points to 33.8 percent in fiscal 2011 from 34.1 percent in fiscal 2010. This decline was mainly the result of the following factors:

º •
º Higher average prices paid for commodities in fiscal 2011 compared to fiscal 2010. º •
º An increase in freight expense due to higher fuel prices.

Somewhat offsetting those negative factors were:

º •
º Lower manufacturing costs from higher plant utilization, mainly related to increased demand for our products. º •
º Favorable product mix from increased sales of products that carry higher average gross margins.

Selling, General, and Administrative Expense. SG&A expense increased $27.0 million, or 6.4 percent, from fiscal 2010. SG&A expense rate in fiscal 2011 decreased 110 basis points to 24.0 percent compared to 25.1 percent in fiscal 2010 due to fixed SG&A costs spread over higher sales volumes and lower product liability expense of nearly $5 million due to favorable claims experience in fiscal 2011. However, marketing expenses increased by $19 million in fiscal 2011 compared to fiscal 2010 due to higher sales volumes and incentive programs designed to promote sales growth.

Interest Expense. Interest expense for fiscal 2011 slightly decreased by 0.8 percent compared to fiscal 2010 as a result of lower average debt levels.

Other Income, Net. Other income, net for fiscal 2011 was $7.3 million compared to $7.1 million in fiscal 2010, an increase of $0.2 million, or 2.7 percent. This increase in other income, net was due mainly to an increase in income from affiliates, somewhat offset by higher foreign currency exchange rate losses in fiscal 2011 compared to fiscal 2010.

Provision for Income Taxes. The effective tax rate for fiscal 2011 was 32.7 percent compared to 34.0 percent in fiscal 2010. The decrease in the effective tax rate was primarily the result of the retroactive reenactment of the domestic research tax credit in fiscal 2011.

PERFORMANCE BY BUSINESS SEGMENT

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

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