Notes to Condensed Consolidated Financial Statements (Unaudited)
August 2, 2019
Note 1 — 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 United States ("U.S.") generally accepted accounting principles ("GAAP") for complete financial statements. Unless the context indicates otherwise, the terms "company," "Toro," "we," "our," or "us" refer to The Toro Company and its consolidated subsidiaries. All intercompany accounts and transactions have been eliminated from the unaudited Condensed Consolidated Financial Statements.
In the opinion of management, the unaudited Condensed Consolidated Financial Statements include all adjustments, consisting primarily of recurring accruals, considered necessary for the fair presentation of the company's Consolidated Financial Position, Results of Operations, and Cash Flows for the periods presented. Since the company’s business is seasonal, operating results for the nine months ended August 2, 2019 cannot be annualized to determine the expected results for the fiscal year ending October 31, 2019.
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 calendar month end.
The company completed its acquisition of The Charles Machine Works, Inc. ("CMW") on April 1, 2019. CMW's financial position, results of operations, and cash flows are reported based on a calendar month end; and accordingly, July 31, 2019 was the period end closest to the company's fiscal third quarter ended August 2, 2019. This reporting period difference did not have a significant impact on the Consolidated Financial Position, Results of Operations, and Cash Flows of the company as of and for the three and nine month periods ended August 2, 2019. Refer to Note 2, Business Combinations, for additional information regarding the company's acquisition of CMW.
For further information regarding the company's basis of presentation, refer to the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in the company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2018. The policies described in that report are used for preparing quarterly reports.
Accounting Policies
In preparing the Condensed Consolidated Financial Statements in conformity with U.S. GAAP, management must make decisions that impact the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures, including disclosures of contingent assets and liabilities. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Estimates are used in determining, among other items, sales promotion and incentive accruals, incentive compensation accruals, income tax accruals, inventory valuation, warranty reserves, allowance for doubtful accounts, pension and post-retirement accruals, self-insurance accruals, useful lives for tangible and definite-lived intangible assets, future cash flows associated with impairment testing for goodwill, indefinite-lived intangible assets and other long-lived assets, and valuations of the assets acquired and liabilities assumed in a business combination, when applicable. These estimates and assumptions are based on management’s best estimates and judgments at the time they are made and are generally derived from management's understanding and analysis of the relevant circumstances, historical experience, and actuarial and other independent external third-party specialist valuations, when applicable. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with certainty, actual amounts could differ significantly from those estimated at the time the Condensed Consolidated Financial Statements are prepared.
New Accounting Pronouncements Adopted
In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Updates ("ASU") No. 2014-09, Revenue from Contracts with Customers that updates the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which deferred the effective date of this standard by one year. The company adopted ASU 2014-09 effective November 1, 2018, during the first quarter of fiscal 2019, using the modified retrospective method of adoption, which was applied to all contracts for which the company's performance obligations were not completed as of October 31, 2018. In adopting ASU 2014-09, the company elected the following allowable exemptions or practical expedients:
|
|
•
|
Portfolio approach practical expedient relative to the estimation of variable consideration.
|
|
|
•
|
Shipping and handling practical expedient to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities.
|
|
|
•
|
Costs of obtaining a contract practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset is one year or less.
|
|
|
•
|
Immaterial goods or services practical expedient to not assess whether promised goods or services are performance obligations if they are immaterial in the context of the contract with the customer.
|
|
|
•
|
Sales taxes practical expedient to exclude sales taxes and other similar taxes from the transaction price.
|
|
|
•
|
Exemption to not disclose the unfulfilled performance obligation balance for contracts with an original length of one year or less.
|
Upon adoption of ASU 2014-09, the company recognized an immaterial transition adjustment within the company's fiscal 2019 beginning retained earnings balance on the Condensed Consolidated Balance Sheets for the cumulative effect of the change in accounting standard. Results for reporting periods beginning after November 1, 2018 are presented under the guidelines of Accounting Standards Codification ("ASC") 606, Revenue from Contracts with Customers, while prior reporting period amounts have not been adjusted and continue to be reported under ASC 605, Revenue Recognition. The adoption of ASU 2014-09 did not materially impact the amount of revenue recognized or any other financial statement line item as of and for the three and nine months ended August 2, 2019. Additionally, the company identified and implemented the appropriate changes to its business processes, information systems, and internal controls to support the preparation of financial information, which did not materially affect the company's internal controls over financial reporting. Refer to Note 4, Revenue, for the additional disclosures required under ASC 606.
In May 2017, the FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, which provides guidance on the types of changes to the terms or conditions of share-based payment awards to which an entity would be required to apply modification accounting under Topic 718. The amended guidance was adopted in the first quarter of fiscal 2019 and did not have a material impact on the company's Condensed Consolidated Financial Statements.
In July 2019, the FASB issued ASU No. 2019-07, Codification Updates to SEC Sections - Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates, which aligns the guidance in various SEC sections of the FASB ASC with the requirements of certain already effective SEC final rules. ASU 2019-07 is effective immediately during the company's third quarter of fiscal 2019 and did not have a material impact on the company's Condensed Consolidated Financial Statements.
Note 2 — Business Combinations
The Charles Machine Works, Inc.
On April 1, 2019 ("closing date"), pursuant to the Agreement and Plan of Merger dated February 14, 2019 ("merger agreement"), the company completed the acquisition of CMW, a privately held Oklahoma corporation. CMW designs, manufactures, and sells a range of professional products to serve the underground construction market, including horizontal directional drills, walk and ride trenchers, utility loaders, vacuum excavators, asset locators, pipe rehabilitation solutions, and after-market tools. CMW provides innovative product offerings that broaden and strengthen the company's Professional segment product portfolio and expands its dealer network, while also providing a complementary geographic manufacturing footprint. The transaction was structured as a merger, pursuant to which a wholly-owned subsidiary of the company merged with and into CMW, with CMW continuing as the surviving entity and a wholly-owned subsidiary of the company. As a result of the merger, all of the outstanding
equity securities of CMW were canceled and now only represent the right to receive the applicable consideration as described in the merger agreement. The preliminary aggregate merger consideration was $679.3 million ("purchase price"), and remains subject to customary adjustments based on, among other things, the amount of actual cash, debt and working capital in the business of CMW at the closing date. Such customary adjustments are expected to be completed during fiscal 2019. The company funded the preliminary purchase price for the acquisition by using a combination of cash proceeds from the issuance of borrowings under the company's unsecured senior term loan credit agreement and borrowings from the company's unsecured senior revolving credit facility. For additional information regarding the financing agreements utilized to fund the purchase price, refer to Note 6, Indebtedness. The company has incurred approximately $0.5 million and $10.2 million of acquisition-related transaction costs during the three and nine month periods ended August 2, 2019, respectively. These acquisition-related transaction costs are recorded within selling, general and administrative expense within the Condensed Consolidated Statements of Earnings.
Preliminary Purchase Price Allocation
The company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the total preliminary purchase price was allocated to the acquired net tangible and intangible assets of CMW based on their fair values as of the closing date. The company believes that the information available as of the closing date provides a reasonable basis for estimating the fair values of the assets acquired and liabilities assumed; however, the company is continuing to finalize these amounts, particularly with respect to income taxes and valuations of inventories, fixed assets, and intangible assets. Thus, the preliminary measurements of fair value reflected are subject to change as additional information becomes available and as additional analysis is performed. The company expects to finalize the valuation and complete the allocation of the purchase price as soon as practicable, but no later than one year from the closing date of the acquisition, as required.
The following table summarizes the allocation of the preliminary purchase price to the values assigned to the CMW assets acquired and liabilities assumed. These values are based on internal company and independent external third-party valuations and are subject to change as certain asset and liability valuations are finalized:
|
|
|
|
|
|
(Dollars in thousands)
|
|
April 1, 2019
|
Cash and cash equivalents
|
|
$
|
16,341
|
|
Receivables
|
|
65,674
|
|
Inventories
|
|
242,594
|
|
Prepaid expenses and other current assets
|
|
9,218
|
|
Property, plant and equipment
|
|
142,405
|
|
Goodwill
|
|
154,040
|
|
Other intangible assets
|
|
227,280
|
|
Other long-term assets
|
|
7,971
|
|
Accounts payable
|
|
(36,655
|
)
|
Accrued liabilities
|
|
(46,866
|
)
|
Deferred income tax liabilities
|
|
(79,628
|
)
|
Other long-term liabilities
|
|
(6,709
|
)
|
Total fair value of net assets acquired
|
|
695,665
|
|
Less: cash and cash equivalents acquired
|
|
(16,341
|
)
|
Total purchase price
|
|
$
|
679,324
|
|
The goodwill recognized is primarily attributable to the value of the workforce, the reputation of CMW and its family of brands, customer and dealer growth opportunities, and expected synergies. Key areas of expected cost synergies include increased purchasing power for commodities and component parts, supply chain consolidation, and administrative efficiencies. The goodwill resulting from the acquisition of CMW was recognized within the company's Professional segment and increased Professional segment goodwill to $368.6 million as of August 2, 2019 from $214.8 million as of October 31, 2018. Goodwill is expected to be mostly non-deductible for tax purposes. As permitted under the accounting standards codification guidance for business combinations, the company recorded a change in the carrying amount of goodwill for the three months ended August 2, 2019 as a result of purchase accounting adjustments primarily related to changes in the preliminary fair value calculations of acquired trade name intangible assets of $5.7 million, other long-term assets of $5.0 million, and deferred income tax liabilities of $4.1 million. Such purchase accounting adjustments did not have a material impact on the company's Condensed Consolidated Statements of Earnings for the three and nine month periods ended August 2, 2019.
Other Intangible Assets Acquired
The allocation of the preliminary purchase price to the net assets acquired resulted in the recognition of $227.3 million of other intangible assets as of the closing date. The preliminary fair values of the acquired trade name, customer-related, developed technology and backlog intangible assets were estimated using the income approach. Under the income approach, an intangible asset's fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. The preliminary fair values of the trade names were estimated using the relief from royalty method, which is based on the hypothetical royalty stream that would be received if the company were to license the trade name and was based on expected future revenues. The preliminary fair values of the customer-related, developed technology, and backlog intangible assets were determined using the excess earnings method. The preliminary fair values of such other intangible assets under the excess earnings method are based on the expected operating cash flows attributable to the respective other intangible asset, which were estimated by deducting economic costs, including operating expenses and contributory asset charges, from revenue expected to be generated from the respective other intangible asset. The preliminary useful lives of the intangible assets were determined based on the period of expected cash flows used to measure the preliminary fair value of the intangible assets adjusted as appropriate for entity-specific factors including legal, regulatory, contractual, competitive, economic, and/or other factors that may limit the useful life of the respective intangible asset.
The preliminary fair values of the other intangible assets acquired on the closing date, related accumulated amortization from the closing date through August 2, 2019, and preliminary weighted-average useful lives were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Weighted-Average Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
Customer-related
|
|
18.2
|
|
$
|
105,700
|
|
|
$
|
(2,180
|
)
|
|
$
|
103,520
|
|
Developed technology
|
|
7.7
|
|
19,300
|
|
|
(1,064
|
)
|
|
18,236
|
|
Trade names
|
|
20.0
|
|
5,300
|
|
|
(88
|
)
|
|
5,212
|
|
Backlog
|
|
0.5
|
|
6,580
|
|
|
(4,387
|
)
|
|
2,193
|
|
Total amortizable
|
|
15.9
|
|
136,880
|
|
|
(7,719
|
)
|
|
129,161
|
|
Non-amortizable - trade names
|
|
|
|
90,400
|
|
|
—
|
|
|
90,400
|
|
Total other intangible assets, net
|
|
|
|
$
|
227,280
|
|
|
$
|
(7,719
|
)
|
|
$
|
219,561
|
|
Amortization expense for the definite-lived intangible assets resulting from the acquisition of CMW for the three and nine month periods ended August 2, 2019 was $5.8 million and $7.7 million, respectively. Estimated amortization expense for the remainder of fiscal 2019 and succeeding fiscal years is as follows: fiscal 2019 (remainder), $4.7 million; fiscal 2020, $10.0 million; fiscal 2021, $10.0 million; fiscal 2022, $9.4 million; fiscal 2023, $8.5 million; fiscal 2024, $8.1 million; and after fiscal 2024, $78.5 million.
Results of Operations
CMW's results of operations have been included within the Professional segment in the company's Condensed Consolidated Financial Statements from the closing date. During the three month period ended August 2, 2019, the company recognized $199.6 million and $8.4 million of net sales and segment loss from CMW's operations, respectively. During the nine month period ended August 2, 2019, the company recognized $270.5 million and $12.5 million of net sales and segment loss from CMW's operations, respectively. Segment loss for the three and nine month periods ended August 2, 2019 includes charges of $26.2 million and $35.7 million, respectively, for the take-down of the inventory fair value step-up amount and amortization of the backlog intangible asset resulting from purchase accounting adjustments.
Unaudited Pro Forma Financial Information
Unaudited pro forma financial information has been prepared as if the acquisition had taken place on November 1, 2017 and has been prepared for comparative purposes only. The unaudited pro forma financial information is not necessarily indicative of the results that would have been achieved had the acquisition actually taken place on November 1, 2017 and the unaudited pro forma financial information does not purport to be indicative of future Consolidated Results of Operations. The unaudited pro forma financial information does not reflect any synergies, operating efficiencies, and/or cost savings that may be realized from the integration of the acquisition. The unaudited pro forma results for the three and nine month periods ended August 2, 2019 and August 3, 2018 have been adjusted to exclude the pro forma impact of the take-down of the inventory fair value step-up amount
and amortization of the backlog intangible asset; include the pro forma impact of amortization of other intangible assets, excluding backlog, based on the estimated purchase price allocations and estimated useful lives; include the pro forma impact of the depreciation of property, plant, and equipment based on the estimated purchase price allocations and estimated useful lives; include the pro forma impact of additional interest expense relating to the acquisition; exclude the pro forma impact of transaction costs incurred by the company directly attributable to the acquisition; and include the pro forma tax effect of both earnings before income taxes and the pro forma adjustments.
The following table presents the unaudited pro forma financial information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands, except per share data)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
August 2, 2019
|
|
August 3, 2018
|
Net sales
|
|
$
|
838,713
|
|
|
$
|
854,314
|
|
|
$
|
2,702,956
|
|
|
$
|
2,603,850
|
|
Net earnings1
|
|
87,180
|
|
|
85,647
|
|
|
320,740
|
|
|
237,935
|
|
Basic net earnings per share of common stock
|
|
0.81
|
|
|
0.81
|
|
|
3.01
|
|
|
2.23
|
|
Diluted net earnings per share of common stock1
|
|
$
|
0.81
|
|
|
$
|
0.79
|
|
|
$
|
2.97
|
|
|
$
|
2.18
|
|
|
|
1
|
On January 1, 2019, CMW amended its retiree medical plans so that no employee hired, or rehired, after that date would be eligible for such retiree medical plans. CMW further amended its retiree medical plans on February 14, 2019 so that no employee who terminates employment after February 14, 2019 is eligible to participate in the retiree medical plans and to terminate its retiree medical plans effective December 31, 2019. The amendments and resulting termination of CMW's retiree medical plans resulted in a gain of approximately $45.8 million. This gain is reflected within net earnings in the unaudited pro forma financial information for the nine month period ended August 2, 2019. The impact on diluted net earnings per share of common stock for the nine month period ended August 2, 2019 was $0.42 per diluted share of common stock.
|
Northeastern U.S. Distribution Company
Effective November 30, 2018, during the first quarter of fiscal 2019, the company completed the acquisition of substantially all of the assets of, and assumed certain liabilities of, a Northeastern U.S. distribution company. The purchase price of this acquisition was allocated to the identifiable assets acquired and liabilities assumed based on estimates of their fair value, with the excess purchase price recorded as goodwill. This acquisition was immaterial based on the company's Consolidated Financial Condition and Results of Operations. Additional purchase accounting disclosures have been omitted given the immateriality of this acquisition in relation to the company's Consolidated Financial Condition and Results of Operations.
L.T. Rich Products, Inc.
Effective March 19, 2018, during the second quarter of fiscal 2018, the company completed the acquisition of substantially all of the assets of, and assumed certain liabilities of, L.T. Rich Products, Inc., a manufacturer of professional zero-turn spreader/sprayers, aerators, and snow and ice management equipment. The addition of these products has broadened and strengthened the company’s Professional segment solutions for landscape contractors and grounds professionals. The purchase price of this acquisition was allocated to the identifiable assets acquired and liabilities assumed based on estimates of their fair value, with the excess purchase price recorded as goodwill. This acquisition was immaterial based on the company's Consolidated Financial Condition and Results of Operations. Additional purchase accounting disclosures have been omitted given the immateriality of this acquisition in relation to the company's Consolidated Financial Condition and Results of Operations.
Note 3 — Segment Data
The company's businesses are organized, managed, and internally grouped into segments based on similarities in products and services. Segment selection is based on the manner in which management organizes segments for making operating and investment decisions and assessing performance. The company has determined it has ten operating segments and has aggregated certain of those operating segments into two reportable segments: Professional and Residential. The aggregation of the company's operating segments is based on the operating segments having the following similarities: economic characteristics, types of products and services, types of production processes, type or class of customers, and method of distribution. The company's remaining activities are presented as "Other" due to their insignificance. These Other activities consist of the company's wholly-owned domestic distribution companies, the company's corporate activities, and the elimination of intersegment revenues and expenses.
The following tables present the summarized financial information concerning the company’s reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Three Months Ended August 2, 2019
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Net sales
|
|
$
|
676,756
|
|
|
$
|
148,234
|
|
|
$
|
13,723
|
|
|
$
|
838,713
|
|
Intersegment gross sales (eliminations)
|
|
13,779
|
|
|
78
|
|
|
(13,857
|
)
|
|
—
|
|
Earnings (loss) before income taxes
|
|
$
|
81,592
|
|
|
$
|
16,151
|
|
|
$
|
(26,508
|
)
|
|
$
|
71,235
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Nine Months Ended August 2, 2019
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Net sales
|
|
$
|
1,855,268
|
|
|
$
|
525,539
|
|
|
$
|
22,898
|
|
|
$
|
2,403,705
|
|
Intersegment gross sales (eliminations)
|
|
51,104
|
|
|
257
|
|
|
(51,361
|
)
|
|
—
|
|
Earnings (loss) before income taxes
|
|
319,689
|
|
|
51,253
|
|
|
(92,507
|
)
|
|
278,435
|
|
Total assets
|
|
$
|
1,784,707
|
|
|
$
|
218,528
|
|
|
$
|
306,498
|
|
|
$
|
2,309,733
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Three Months Ended August 3, 2018
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Net sales
|
|
$
|
482,494
|
|
|
$
|
166,513
|
|
|
$
|
6,814
|
|
|
$
|
655,821
|
|
Intersegment gross sales (eliminations)
|
|
6,772
|
|
|
90
|
|
|
(6,862
|
)
|
|
—
|
|
Earnings (loss) before income taxes
|
|
$
|
97,716
|
|
|
$
|
16,002
|
|
|
$
|
(20,443
|
)
|
|
$
|
93,275
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
Nine Months Ended August 3, 2018
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Net sales
|
|
$
|
1,546,536
|
|
|
$
|
521,189
|
|
|
$
|
11,622
|
|
|
$
|
2,079,347
|
|
Intersegment gross sales (eliminations)
|
|
23,894
|
|
|
253
|
|
|
(24,147
|
)
|
|
—
|
|
Earnings (loss) before income taxes
|
|
338,607
|
|
|
58,019
|
|
|
(67,800
|
)
|
|
328,826
|
|
Total assets
|
|
$
|
919,800
|
|
|
$
|
207,930
|
|
|
$
|
407,027
|
|
|
$
|
1,534,757
|
|
The following table presents the details of operating loss before income taxes for the company's Other activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
August 2, 2019
|
|
August 3, 2018
|
Corporate expenses
|
|
$
|
(26,287
|
)
|
|
$
|
(21,597
|
)
|
|
$
|
(88,958
|
)
|
|
$
|
(67,094
|
)
|
Interest expense
|
|
(9,004
|
)
|
|
(4,676
|
)
|
|
(20,440
|
)
|
|
(14,214
|
)
|
Other income
|
|
8,783
|
|
|
5,830
|
|
|
16,891
|
|
|
13,508
|
|
Total operating loss
|
|
$
|
(26,508
|
)
|
|
$
|
(20,443
|
)
|
|
$
|
(92,507
|
)
|
|
$
|
(67,800
|
)
|
Note 4 — Revenue
The company enters into contracts with its customers for the sale of products or rendering of services in the ordinary course of business. A contract with commercial substance exists at the time the company receives and accepts a purchase order under a sales contract with a customer. The company recognizes revenue when, or as, performance obligations under the terms of a contract with its customer are satisfied, which occurs with the transfer of control of product or services. Control is typically transferred to the customer at the time a product is shipped, or in the case of certain agreements, when a product is delivered or as services are rendered. Revenue is recognized based on the transaction price, which is measured as the amount of consideration the company expects to receive in exchange for transferring product or rendering services pursuant to the terms of the contract with a customer. The amount of consideration the company receives and the revenue the company recognizes varies with changes in sales promotions and incentives offered to customers, as well as anticipated product returns. A provision is made at the time revenue is recognized as a reduction of the transaction price for expected product returns, rebates, floor plan costs, and other sales promotion and incentive expenses. If a contract contains more than one performance obligation, the transaction price is allocated to each performance obligation based on the relative standalone selling price of the respective promised good or service. The company does not recognize revenue in situations where collectability from the customer is not probable, and defers the recognition of revenue until collection is probable or payment is received and performance obligations are satisfied.
Freight and shipping revenue billed to customers concurrent with revenue producing activities is included within revenue and the cost for freight and shipping is recognized as an expense within cost of sales when control has transferred to the customer. Shipping and handling activities that occur after control of the related products is transferred are treated as a fulfillment activity rather than a promised service, and therefore, are not considered a performance obligation. Sales, use, value-added, and other excise taxes the company collects concurrent with revenue producing activities are excluded from revenue. Incremental costs of obtaining a contract for which the performance obligations will be satisfied within the next twelve months are expensed as incurred. Incidental items, including goods or services, that are immaterial in the context of the contract are recognized as expense when incurred. Additionally, the company has elected not to disclose the balance of unfulfilled performance obligations for contracts with a contractual term of twelve months or less.
The following tables disaggregate the company's reportable segment net sales by major product type and geographic market (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 2, 2019
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Revenue by product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
582,932
|
|
|
$
|
143,814
|
|
|
$
|
8,983
|
|
|
$
|
735,729
|
|
Irrigation
|
|
93,824
|
|
|
4,420
|
|
|
4,740
|
|
|
102,984
|
|
Total net sales
|
|
$
|
676,756
|
|
|
$
|
148,234
|
|
|
$
|
13,723
|
|
|
$
|
838,713
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic market:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
515,437
|
|
|
$
|
122,843
|
|
|
$
|
13,723
|
|
|
$
|
652,003
|
|
Foreign Countries
|
|
161,319
|
|
|
25,391
|
|
|
—
|
|
|
186,710
|
|
Total net sales
|
|
$
|
676,756
|
|
|
$
|
148,234
|
|
|
$
|
13,723
|
|
|
$
|
838,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 2, 2019
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Revenue by product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
1,588,581
|
|
|
$
|
502,780
|
|
|
$
|
13,613
|
|
|
$
|
2,104,974
|
|
Irrigation
|
|
266,687
|
|
|
22,759
|
|
|
9,285
|
|
|
298,731
|
|
Total net sales
|
|
$
|
1,855,268
|
|
|
$
|
525,539
|
|
|
$
|
22,898
|
|
|
$
|
2,403,705
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic market:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,409,954
|
|
|
$
|
423,521
|
|
|
$
|
22,898
|
|
|
$
|
1,856,373
|
|
Foreign Countries
|
|
445,314
|
|
|
102,018
|
|
|
—
|
|
|
547,332
|
|
Total net sales
|
|
$
|
1,855,268
|
|
|
$
|
525,539
|
|
|
$
|
22,898
|
|
|
$
|
2,403,705
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 3, 2018
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Revenue by product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
383,082
|
|
|
$
|
161,396
|
|
|
$
|
3,820
|
|
|
$
|
548,298
|
|
Irrigation
|
|
99,412
|
|
|
5,117
|
|
|
2,994
|
|
|
107,523
|
|
Total net sales
|
|
$
|
482,494
|
|
|
$
|
166,513
|
|
|
$
|
6,814
|
|
|
$
|
655,821
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic market:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
364,681
|
|
|
$
|
141,792
|
|
|
$
|
6,814
|
|
|
$
|
513,287
|
|
Foreign Countries
|
|
117,813
|
|
|
24,721
|
|
|
—
|
|
|
142,534
|
|
Total net sales
|
|
$
|
482,494
|
|
|
$
|
166,513
|
|
|
$
|
6,814
|
|
|
$
|
655,821
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended August 3, 2018
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Revenue by product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
1,265,792
|
|
|
$
|
494,635
|
|
|
$
|
6,576
|
|
|
$
|
1,767,003
|
|
Irrigation
|
|
280,744
|
|
|
26,554
|
|
|
5,046
|
|
|
312,344
|
|
Total net sales
|
|
$
|
1,546,536
|
|
|
$
|
521,189
|
|
|
$
|
11,622
|
|
|
$
|
2,079,347
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic market:
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,155,388
|
|
|
$
|
415,934
|
|
|
$
|
11,622
|
|
|
$
|
1,582,944
|
|
Foreign Countries
|
|
391,148
|
|
|
105,255
|
|
|
—
|
|
|
496,403
|
|
Total net sales
|
|
$
|
1,546,536
|
|
|
$
|
521,189
|
|
|
$
|
11,622
|
|
|
$
|
2,079,347
|
|
Product Revenue
The company's product revenues are generated through sales of manufactured equipment and irrigation products, including related replacement parts and accessories. For the majority of the company's products, control is transferred and revenue is recognized when the product is shipped from the company's manufacturing facilities or distribution centers to the company's customers, which primarily consist of distributors, dealers, and mass retailers. In certain situations, the company transfers control and recognizes revenue when delivery to the customer has occurred. Additionally, the company ships some of its products to a key retailer's distribution centers on a consignment basis. The company retains control of its products stored at the key retailer's distribution centers. As the company's products are removed from the distribution centers by the key retailer and shipped to the key retailer's stores, control is transferred from the company to the key retailer. At that time, the company invoices the key retailer and recognizes revenue for these consignment transactions. The company does not offer a right of return for products shipped to the key retailer's stores from the distribution centers.
The company and TCF Inventory Finance, Inc. ("TCFIF"), a subsidiary of TCF National Bank, established Red Iron Acceptance, LLC ("Red Iron"), a joint venture that primarily provides inventory financing to certain dealers and distributors of the company's equipment and irrigation products. The company also has floor plan financing arrangements with separate third-party financial institutions to provide floor plan financing to certain dealers not financed through Red Iron. When product sales are financed by Red Iron or other third-party financial institutions, the transactions are structured as an advance in the form of a payment to the company on behalf of a dealer or distributor with respect to invoices financed by the financial institutions. These payments extinguish the obligation of such dealer or distributor to make payment to the company under the terms of the applicable invoice. Under a separate agreement between the financial institutions and such dealer or distributor, the financial institution provides a loan to such dealer or distributor for the advances paid by the financial institutions to the company. The company's sales of product to customers that do not elect to finance purchases through Red Iron or the third-party financial institutions are generally on open account with terms that generally approximate 30 to 120 days and the resulting receivables are included within receivables, net on the Condensed Consolidated Balance Sheets.
Product revenue is recognized based on the transaction price, which is measured as the amount of consideration the company expects to receive in exchange for transferring control of a product to a customer. When determining the transaction price, the company estimates variable consideration by applying the portfolio approach practical expedient under ASC 606. The primary sources of variable consideration for the company are rebate programs, volume incentive programs, floor plan and retail financing programs, cash discounts, and product returns. These sales promotions and incentives are recorded as a reduction to revenue at the time of the initial sale. The company estimates variable consideration related to equipment and irrigation products sold under
its sales promotion and incentive programs using the expected value method, which is based on sales terms with customers, historical experience, field inventory levels, volume purchases, and known changes in relevant trends. There are no material instances where variable consideration is constrained and not recorded at the initial time of sale. Additionally, the company may offer to its customers the right to return eligible equipment and irrigation products, replacement parts, and accessories. Returns are recorded as a reduction to revenue based on anticipated sales returns estimated from sales terms, historical experience, and trend analysis. The company records obligations for returns within accrued liabilities in the Condensed Consolidated Balance Sheets and the right-of-return asset in prepaid expenses and other current assets in the Condensed Consolidated Balance Sheets. The refund liability and right-of-return asset are remeasured for changes in the estimate at each reporting date with a corresponding adjustment to net sales and cost of sales within the Condensed Consolidated Statements of Earnings.
Service Revenue
In certain cases, the company renders service contracts to customers, which typically range from 12 to 36 months. The company receives payment at the inception of the service contract and recognizes revenue over the term of the agreement in proportion to the costs expected to be incurred in satisfying the performance obligations under the service contract.
Warranty Revenue
In addition to the standard warranties offered by the company on its equipment and irrigation products intended to provide assurance that the product will function as expected, the company also sells separately priced extended warranty coverage on select products for a prescribed period after the standard warranty period expires, which typically range from 12 to 24 months. The company receives payment at the inception of the separately priced extended warranty contract and recognizes revenue over the term of the agreement in proportion to the costs expected to be incurred in satisfying the performance obligations under the separately priced extended warranty contract.
Contract Liabilities
Contract liabilities relate to deferred revenue recognized for payments received at contract inception in advance of the company's performance under the contract and generally relate to the sale of separately priced extended warranty contracts, service contracts, and non-refundable customer deposits. The company recognizes revenue over the term of the agreement in proportion to the costs expected to be incurred in satisfying the performance obligations under the separately priced extended warranty and service contracts. For non-refundable customer deposits, the company recognizes revenue as of the point in time in which the performance obligation has been satisfied under the contract with the customer, which typically occurs upon change in control at the time a product is shipped. As of August 2, 2019 and October 31, 2018, $23.1 million and $14.0 million, respectively, of unearned revenue associated with outstanding separately priced extended warranty contracts, service contracts, and non-refundable customer deposits was reported within accrued liabilities and other long-term liabilities in the Condensed Consolidated Balance Sheets. For the three and nine months ended August 2, 2019, the company recognized $1.4 million and $4.6 million of the October 31, 2018 unearned revenue balance within net sales in the Condensed Consolidated Statements of Earnings. The company expects to recognize approximately $1.2 million of the October 31, 2018 unearned amount within net sales throughout the remainder of fiscal 2019, $4.3 million in fiscal 2020, and $3.9 million thereafter.
As a result of the company's acquisition of CMW on April 1, 2019, the company assumed $7.0 million of contract liabilities related to separately priced extended warranty contracts, service contracts, and non-refundable customer deposits. For the three and nine months ended August 2, 2019, the company recognized $2.2 million and $3.9 million of the April 1, 2019 assumed unearned revenue balance related to the CMW acquisition within net sales in the Condensed Consolidated Statements of Earnings. The company expects to recognize approximately $0.5 million of the unearned amount of the April 1, 2019 assumed unearned revenue balance related to the CMW acquisition within net sales throughout the remainder of fiscal 2019, $1.8 million in fiscal 2020, and $0.8 million thereafter. For additional information on the company's acquisition of CMW, refer to Note 2, Business Combinations.
Note 5 — Goodwill and Other Intangible Assets
The company's acquisition of CMW on April 1, 2019 resulted in the recognition of $154.0 million and $227.3 million of preliminary goodwill and other intangible assets, respectively. For additional information on the company's acquisition of CMW, refer to Note 2, Business Combinations.
Goodwill
The changes in the carrying amount of goodwill by reportable segment for the first nine months of fiscal 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Balance as of October 31, 2018
|
|
$
|
214,827
|
|
|
$
|
10,463
|
|
|
$
|
—
|
|
|
$
|
225,290
|
|
Goodwill acquired
|
|
154,040
|
|
|
—
|
|
|
1,534
|
|
|
155,574
|
|
Translation adjustments
|
|
(276
|
)
|
|
(85
|
)
|
|
—
|
|
|
(361
|
)
|
Balance as of August 2, 2019
|
|
$
|
368,591
|
|
|
$
|
10,378
|
|
|
$
|
1,534
|
|
|
$
|
380,503
|
|
Other Intangible Assets
The components of other intangible assets as of August 2, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Weighted-Average Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
Patents
|
|
9.9
|
|
$
|
18,242
|
|
|
$
|
(12,916
|
)
|
|
$
|
5,326
|
|
Non-compete agreements
|
|
5.5
|
|
6,879
|
|
|
(6,792
|
)
|
|
87
|
|
Customer-related
|
|
18.3
|
|
195,223
|
|
|
(29,479
|
)
|
|
165,744
|
|
Developed technology
|
|
7.6
|
|
50,279
|
|
|
(30,203
|
)
|
|
20,076
|
|
Trade names
|
|
15.5
|
|
7,590
|
|
|
(2,004
|
)
|
|
5,586
|
|
Backlog and other
|
|
0.6
|
|
7,380
|
|
|
(5,187
|
)
|
|
2,193
|
|
Total amortizable
|
|
15.0
|
|
285,593
|
|
|
(86,581
|
)
|
|
199,012
|
|
Non-amortizable - trade names
|
|
|
|
120,874
|
|
|
—
|
|
|
120,874
|
|
Total other intangible assets, net
|
|
|
|
$
|
406,467
|
|
|
$
|
(86,581
|
)
|
|
$
|
319,886
|
|
The components of other intangible assets as of August 3, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Weighted-Average Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
Patents
|
|
9.9
|
|
$
|
18,247
|
|
|
$
|
(12,103
|
)
|
|
$
|
6,144
|
|
Non-compete agreements
|
|
5.5
|
|
6,883
|
|
|
(6,776
|
)
|
|
107
|
|
Customer-related
|
|
18.5
|
|
89,745
|
|
|
(22,444
|
)
|
|
67,301
|
|
Developed technology
|
|
7.6
|
|
31,097
|
|
|
(28,165
|
)
|
|
2,932
|
|
Trade names
|
|
5.0
|
|
2,331
|
|
|
(1,760
|
)
|
|
571
|
|
Other
|
|
1.0
|
|
800
|
|
|
(800
|
)
|
|
—
|
|
Total amortizable
|
|
14.3
|
|
149,103
|
|
|
(72,048
|
)
|
|
77,055
|
|
Non-amortizable - trade names
|
|
|
|
30,645
|
|
|
—
|
|
|
30,645
|
|
Total other intangible assets, net
|
|
|
|
$
|
179,748
|
|
|
$
|
(72,048
|
)
|
|
$
|
107,700
|
|
The components of other intangible assets as of October 31, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Weighted-Average Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
Patents
|
|
9.9
|
|
$
|
18,235
|
|
|
$
|
(12,297
|
)
|
|
$
|
5,938
|
|
Non-compete agreements
|
|
5.5
|
|
6,872
|
|
|
(6,771
|
)
|
|
101
|
|
Customer-related
|
|
18.5
|
|
89,622
|
|
|
(23,653
|
)
|
|
65,969
|
|
Developed technology
|
|
7.6
|
|
31,029
|
|
|
(28,471
|
)
|
|
2,558
|
|
Trade names
|
|
5.0
|
|
2,307
|
|
|
(1,805
|
)
|
|
502
|
|
Other
|
|
1.0
|
|
800
|
|
|
(800
|
)
|
|
—
|
|
Total amortizable
|
|
14.3
|
|
148,865
|
|
|
(73,797
|
)
|
|
75,068
|
|
Non-amortizable - trade names
|
|
|
|
30,581
|
|
|
—
|
|
|
30,581
|
|
Total other intangible assets, net
|
|
|
|
$
|
179,446
|
|
|
$
|
(73,797
|
)
|
|
$
|
105,649
|
|
Amortization expense for definite-lived intangible assets during the third quarter of fiscal 2019 and fiscal 2018 was $7.4 million and $1.8 million, respectively. Amortization expense for definite-lived intangible assets during the first nine months of fiscal 2019 and 2018 was $12.9 million and $5.4 million, respectively. Estimated amortization expense for the remainder of fiscal 2019 and succeeding fiscal years is as follows: fiscal 2019 (remainder), $6.3 million; fiscal 2020, $16.1 million; fiscal 2021, $15.7 million; fiscal 2022, $15.0 million; fiscal 2023, $13.6 million; fiscal 2024, $13.0 million; and after fiscal 2024, $119.3 million.
Note 6 — Indebtedness
The following is a summary of the company's indebtedness:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
October 31, 2018
|
Revolving credit facility
|
|
$
|
—
|
|
|
$
|
91,000
|
|
|
$
|
91,000
|
|
$200 million term loan
|
|
100,000
|
|
|
—
|
|
|
—
|
|
$300 million term loan
|
|
200,000
|
|
|
—
|
|
|
—
|
|
3.81% series A senior notes
|
|
100,000
|
|
|
—
|
|
|
—
|
|
3.91% series B senior notes
|
|
100,000
|
|
|
—
|
|
|
—
|
|
7.800% debentures
|
|
100,000
|
|
|
100,000
|
|
|
100,000
|
|
6.625% senior notes
|
|
123,900
|
|
|
123,838
|
|
|
123,854
|
|
Less: unamortized discounts, debt issuance costs and deferred charges
|
|
(3,219
|
)
|
|
(2,357
|
)
|
|
(2,305
|
)
|
Total indebtedness, net
|
|
720,681
|
|
|
312,481
|
|
|
312,549
|
|
Less: current portion of long-term debt
|
|
(99,877
|
)
|
|
—
|
|
|
—
|
|
Long-term debt, less current portion
|
|
$
|
620,804
|
|
|
$
|
312,481
|
|
|
$
|
312,549
|
|
Principal payments required on the company's outstanding indebtedness, based on the maturity dates defined within the company's debt arrangements, for the remainder of fiscal 2019 and succeeding five fiscal years are as follows: fiscal 2019 (remainder), $0.0 million; fiscal 2020, $0.0 million; fiscal 2021, $0.0 million; fiscal 2022, $115.0 million; fiscal 2023, $30.0 million; fiscal 2024, $155.0 million; and after fiscal 2024, $425.0 million.
Revolving Credit Facility
In June 2018, the company replaced its prior revolving credit facility and term loan, which were scheduled to mature in October 2019, with an unsecured senior five-year revolving credit facility that, among other things, increased the company's borrowing capacity to $600.0 million, from $150.0 million, and expires in June 2023. Included in the company's $600.0 million revolving credit facility is a $10.0 million sublimit for standby letters of credit and a $30.0 million sublimit for swingline loans. At the company's election, and with the approval of the named borrowers on the revolving credit facility and the election of the lenders to fund such increase, the aggregate maximum principal amount available under the facility may be increased by an amount up to $300.0 million. Funds are available under the revolving credit facility for working capital, capital expenditures, and other lawful corporate purposes, including, but not limited to, acquisitions and common stock repurchases, subject in each case to compliance
with certain financial covenants described below. In connection with the entry into the new revolving credit facility during June 2018, the company incurred approximately $1.9 million of debt issuance costs, which are being amortized over the life of the revolving credit facility under the straight-line method as the results obtained are not materially different from those that would result from the use of the effective interest method. The company classifies the debt issuance costs related to its revolving credit facility within other assets on the Condensed Consolidated Balance Sheets, regardless of whether the company has any outstanding borrowings on the revolving credit facility.
As of August 2, 2019, the company had no borrowings under the revolving credit facility but did have $1.9 million outstanding under the sublimit for standby letters of credit, which resulted in $598.1 million of unutilized availability under the revolving credit facility. As of October 31, 2018, the company had $91.0 million outstanding under the revolving credit facility, $1.5 million outstanding under the sublimit for standby letters of credit, and $507.5 million of unutilized availability under the revolving credit facility. As of August 3, 2018, the company had $91.0 million outstanding under the revolving credit facility, $1.6 million outstanding under the sublimit for standby letters of credit, and $507.4 million of unutilized availability under the revolving credit facility. Typically, the company's revolving credit facility is classified as long-term debt within the company's Condensed Consolidated Balance Sheets as the company has the ability to extend the outstanding borrowings under the revolving credit facility for the full-term of the facility. However, if the company intends to repay a portion of the outstanding balance under the revolving credit facility within the next twelve months, the company reclassifies that portion of outstanding borrowings under the revolving credit facility to current portion of long-term debt within the Condensed Consolidated Balance Sheets. As of October 31, 2018 and August 3, 2018, the $91.0 million of outstanding borrowings under the company's revolving credit facility for each respective period was classified as long-term debt within the company's Condensed Consolidated Balance Sheets.
The company's revolving credit facility contains customary covenants, including, without limitation, financial covenants, such as the maintenance of minimum interest coverage and maximum leverage ratios; and negative covenants, which among other things, limit disposition of assets, consolidations and mergers, restricted payments, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The company was in compliance with all covenants related to the credit agreement for the company's revolving credit facility as of August 2, 2019, October 31, 2018, and August 3, 2018.
Outstanding loans under the revolving credit facility, if applicable, other than swingline loans, bear interest at a variable rate generally based on LIBOR or an alternative variable rate based on the highest of the Bank of America prime rate, the federal funds rate or a rate generally based on LIBOR, in each case subject to an additional basis point spread as defined in the credit agreement. Swingline loans under the revolving credit facility bear interest at a rate determined by the swingline lender or an alternative variable rate based on the highest of the Bank of America prime rate, the federal funds rate or a rate generally based on LIBOR, in each case subject to an additional basis point spread as defined in the credit agreement. Interest is payable quarterly in arrears. For the three and nine month periods ended August 2, 2019, the company incurred interest expense of approximately $0.2 million and $1.9 million on the outstanding borrowings of the revolving credit facility. For the three and nine month periods ended August 3, 2018, the company incurred interest expense of approximately $0.4 million on the outstanding borrowings of the revolving credit facility.
Term Loan Credit Agreement
In March 2019, the company entered into a term loan credit agreement with a syndicate of financial institutions for the purpose of partially funding the purchase price of the company's acquisition of CMW and the related fees and expenses incurred in connection with such acquisition. The term loan credit agreement provided for a $200.0 million three year unsecured senior term loan facility maturing on April 1, 2022 and a $300.0 million five year unsecured senior term loan facility maturing on April 1, 2024. The funds under both term loan facilities were received on April 1, 2019 in connection with the closing of the company's acquisition of CMW. There are no scheduled principal amortization payments prior to maturity on the $200.0 million three year unsecured senior term loan facility. For the $300.0 million five year unsecured senior term loan facility, the company is required to make quarterly amortization payments of 2.5 percent of the aggregate principal balance beginning with the last business day of the thirteenth calendar quarter ending after April 1, 2019, with the remainder of the unpaid principal balance due at maturity. No payments are required during the first three years of the $300.0 million five year unsecured senior term loan facility. The term loan facilities may be prepaid and terminated at the company's election at any time without penalty or premium.
As of August 2, 2019, the company has prepaid $100.0 million and $100.0 million against the outstanding principal balances of the $200.0 million three year unsecured senior term loan facility and $300.0 million five year unsecured senior term loan facility, respectively, and has reclassified $99.9 million of the remaining outstanding principal balance under the term loan credit agreement, net of the related proportionate share of debt issuance costs, to current portion of long-term debt within the Condensed Consolidated Balance Sheets as the company intends to prepay such amount utilizing cash flows from operations within the next twelve months. Thus, as of August 2, 2019, there were $100.0 million and $200.0 million of outstanding borrowings under the term loan credit
agreement for the $200.0 million three year unsecured senior term loan facility and the $300.0 million five year unsecured senior term loan facility, respectively.
In connection with the company's entry into the term loan credit agreement in March 2019, the company incurred approximately $0.6 million of debt issuance costs, which are being amortized over the life of the respective term loans under the straight-line method as the results obtained are not materially different from those that would result from the use of the effective interest method. Unamortized deferred debt issuance costs are netted against the outstanding borrowings under the term loan credit agreement on the company's Condensed Consolidated Balance Sheets.
The term loan credit agreement contains customary covenants, including, without limitation, financial covenants, such as the maintenance of minimum interest coverage and maximum leverage ratios; and negative covenants, which among other things, limit disposition of assets, consolidations and mergers, restricted payments, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The company was in compliance with all covenants related to the company's term loan credit agreement as of August 2, 2019. Outstanding borrowings under the term loan credit agreement bear interest at a variable rate generally based on LIBOR or an alternative variable rate, based on the highest of the Bank of America prime rate, the federal funds rate, or a rate generally based on LIBOR, in each case subject to an additional basis point spread as defined in the term credit loan agreement. Interest is payable quarterly in arrears. For the three and nine month periods ended August 2, 2019, the company incurred interest expense of approximately $3.7 million and $5.3 million, respectively, on the outstanding borrowings under the term loan credit agreement.
3.81% Series A and 3.91% Series B Senior Notes
On April 30, 2019, the company entered into a private placement note purchase agreement with certain purchasers ("holders") pursuant to which the company agreed to issue and sell an aggregate principal amount of $100.0 million of 3.81% Series A Senior Notes due June 15, 2029 ("Series A Senior Notes") and $100.0 million of 3.91% Series B Senior Notes due June 15, 2031 ("Series B Senior Notes" and together with the Series A Senior Notes, the "Senior Notes"). On June 27, 2019, the company issued $100.0 million of the Series A Senior Notes and $100.0 million of the Series B Senior Notes pursuant to the private placement note purchase agreement. The Senior Notes are senior unsecured obligations of the company. As of August 2, 2019, there was $200.0 million of outstanding borrowings under the private placement note purchase agreement, including $100.0 million of outstanding borrowings under the Series A Senior Notes and $100.0 million of outstanding borrowings under the Series B Senior Notes.
The company has the right to prepay all or a portion of the Senior Notes upon notice to the holders for 100% of the principal amount prepaid, plus a make-whole premium, as set forth in the private placement note purchase agreement, plus accrued and unpaid interest, if any, to the date of prepayment. In addition, at any time on or after the date that is 90 days prior to the maturity date of the respective Senior Note, the company has the right to prepay all of such Senior Note for 100% of the principal amount so prepaid, plus accrued and unpaid interest, if any, to the date of prepayment. Upon the occurrence of certain change of control events, holders of the Senior Notes will have the right to require that the company purchase such holder’s Senior Notes in cash at a purchase price equal to 100% of the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase.
The private placement note purchase agreement contains customary representations and warranties of the company, as well as certain customary covenants, including, without limitation, financial covenants, such as the maintenance of minimum interest coverage and maximum leverage ratios, and other covenants, which, among other things, provide limitations on transactions with affiliates, mergers, consolidations and sales of assets, liens and priority debt. The company was in compliance with all representations, warranties, and covenants related to the private placement note purchase agreement as of August 2, 2019.
In connection with the company's issuance of the Senior Notes in June 2019, the company incurred approximately $0.7 million of debt issuance costs, which are being amortized over the life of the respective Senior Note under the straight-line method as the results obtained are not materially different from those that would result from the use of the effective interest method. Unamortized deferred debt issuance costs are netted against the outstanding borrowings under the respective Senior Note on the company's Condensed Consolidated Balance Sheets.
Interest on the Senior Notes is payable semiannually on the 15th day of June and December in each year, commencing on December 15, 2019. For the three and nine month periods ended August 2, 2019, the company incurred interest expense of approximately $0.8 million on the outstanding borrowings under the private placement note purchase agreement.
7.8% Debentures
In June 1997, the company issued $175.0 million of debt securities consisting of $75.0 million of 7.125 percent coupon 10-year notes and $100.0 million of 7.8 percent coupon 30-year debentures. The $75.0 million of 7.125 percent coupon 10-year notes were repaid at maturity during fiscal 2007. In connection with the issuance of $175.0 million in long-term debt securities, the company paid $23.7 million to terminate three forward-starting interest rate swap agreements with notional amounts totaling $125.0 million. These swap agreements had been entered into to reduce exposure to interest rate risk prior to the issuance of the new long-term debt securities. As of the inception of one of the swap agreements, the company had received payments that were recorded as deferred income to be recognized as an adjustment to interest expense over the term of the new debt securities. As of the date the swaps were terminated, this deferred income totaled $18.7 million. The excess termination fees over the deferred income recorded was deferred and is being recognized as an adjustment to interest expense over the term of the debt securities issued.
6.625% Senior Notes
On April 26, 2007, the company issued $125.0 million in aggregate principal amount of 6.625 percent senior notes due May 1, 2037 and priced at 98.513 percent of par value. The resulting discount of $1.9 million and the underwriting fee and direct debt issuance costs of $1.5 million associated with the issuance of these senior notes are being amortized over the term of the notes using the straight-line method as the results obtained are not materially different from those that would result from the use of the effective interest method. Although the coupon rate of the senior notes is 6.625 percent, the effective interest rate is 6.741 percent after taking into account the issuance discount. Interest on the senior notes is payable semi-annually on May 1 and November 1 of each year. The senior notes are unsecured senior obligations of the company and rank equally with the company's other unsecured and unsubordinated indebtedness. The indentures under which the senior notes were issued contain customary covenants and event of default provisions. The company may redeem some or all of the senior notes at any time at the greater of the full principal amount of the senior notes being redeemed or the present value of the remaining scheduled payments of principal and interest discounted to the redemption date on a semi-annual basis at the treasury rate plus 30 basis points, plus, in both cases, accrued and unpaid interest. In the event of the occurrence of both (i) a change of control of the company, and (ii) a downgrade of the notes below an investment grade rating by both Moody's Investors Service, Inc. and Standard & Poor's Ratings Services within a specified period, the company would be required to make an offer to purchase the senior notes at a price equal to 101 percent of the principal amount of the senior notes plus accrued and unpaid interest to the date of repurchase.
Note 7 — Management Actions
On August 1, 2019, the company announced a new underground construction business strategy that includes a plan to wind down its Toro-branded large horizontal directional drill and riding trencher product categories within its Professional segment product portfolio ("Toro underground wind down"). The company expects to incur total pretax charges of approximately $10.0 million to $13.0 million related to the Toro underground wind down. For the three and nine month periods ended August 2, 2019, the company recorded $7.2 million of pre-tax charges related to inventory write-downs to net realizable value and accelerated depreciation on fixed assets that will no longer be used within cost of sales in the Condensed Consolidated Statements of Earnings as a result of the Toro underground wind down. Additionally, the company recorded $1.9 million of pre-tax charges related to anticipated inventory retail support activities within net sales in the Condensed Consolidated Statements of Earnings for the three and nine month periods ended August 2, 2019 and has recorded a corresponding liability related to the anticipated inventory retail support activities within accrued liabilities in the Condensed Consolidated Balance Sheets as of August 2, 2019. The remainder of the estimated pre-tax charges are anticipated to be primarily comprised of costs related to the write-down of future component part inventory purchases to finalize assembly of the company's remaining Toro-branded large horizontal directional drill and riding trencher inventory. Substantially all costs related to the Toro underground wind down are expected to be incurred by the end of fiscal 2020.
Note 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 a majority of the company's inventories and the first-in, first-out ("FIFO") and average cost methods for all other inventories. The company establishes a reserve for excess, slow-moving, and obsolete inventory that is equal to the difference between the cost and estimated net realizable value for that inventory. These reserves are based on a review and comparison of current inventory levels to planned production, as well as planned and historical sales of the inventory.
On April 1, 2019, with the acquisition of CMW, the company acquired $242.6 million of inventory, based on preliminary fair value purchase accounting adjustments. For additional information on the company's acquisition of CMW, refer to Note 2, Business Combinations.
Inventories were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
October 31, 2018
|
Raw materials and work in process
|
|
$
|
174,348
|
|
|
$
|
105,239
|
|
|
$
|
115,280
|
|
Finished goods and service parts
|
|
518,465
|
|
|
326,059
|
|
|
315,179
|
|
Total FIFO value
|
|
692,813
|
|
|
431,298
|
|
|
430,459
|
|
Less: adjustment to LIFO value
|
|
72,201
|
|
|
66,801
|
|
|
72,200
|
|
Total inventories, net
|
|
$
|
620,612
|
|
|
$
|
364,497
|
|
|
$
|
358,259
|
|
Note 9 — Property and Depreciation
Property, plant, and equipment assets are carried at cost less accumulated depreciation. The company provides for depreciation of property, plant and equipment utilizing the straight-line method over the estimated useful lives of the assets. Buildings and leasehold improvements are generally depreciated over 10 to 40 years, machinery and equipment are generally depreciated over two to 15 years, tooling is generally depreciated over three to five years, and computer hardware and software and web site development costs are generally depreciated over two to five years. Expenditures for major renewals and improvements, which substantially increase the useful lives of existing assets, are capitalized, and expenditures for general maintenance and repairs are charged to operating expenses as incurred. Interest is capitalized during the construction period for significant capital projects.
On April 1, 2019, with the acquisition of CMW, the company acquired $142.4 million of property, plant, and equipment, based on preliminary fair value purchase accounting adjustments. For additional information on the company's acquisition of CMW, refer to Note 2, Business Combinations.
Property, plant and equipment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
October 31, 2018
|
Land and land improvements
|
|
$
|
55,786
|
|
|
$
|
38,117
|
|
|
$
|
39,607
|
|
Buildings and leasehold improvements
|
|
259,928
|
|
|
195,791
|
|
|
209,686
|
|
Machinery and equipment
|
|
420,262
|
|
|
342,294
|
|
|
349,550
|
|
Tooling
|
|
224,230
|
|
|
208,098
|
|
|
211,756
|
|
Computer hardware and software
|
|
91,577
|
|
|
90,070
|
|
|
83,338
|
|
Construction in Process
|
|
70,367
|
|
|
41,297
|
|
|
35,044
|
|
Gross property, plant, and equipment
|
|
1,122,150
|
|
|
915,667
|
|
|
928,981
|
|
Less: accumulated depreciation
|
|
695,735
|
|
|
666,165
|
|
|
657,522
|
|
Property, plant, and equipment, net
|
|
$
|
426,415
|
|
|
$
|
249,502
|
|
|
$
|
271,459
|
|
Note 10 — Warranty Guarantees
The company’s products are warranted to provide assurance that the product will function as expected and to ensure customer confidence in design, workmanship, and overall quality. Warranty coverage is generally provided for specified periods of time and on select products’ hours of usage, and generally covers parts, labor, and other expenses for non-maintenance repairs. Warranty coverage generally does not cover operator abuse or improper use. An authorized company distributor or dealer must perform warranty work. Distributors and dealers submit claims for warranty reimbursement and are credited for the cost of repairs, labor, and other expenses as long as the repairs meet the company's prescribed standards. Warranty expense is accrued at the time of sale based on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, and other minor factors. Special warranty reserves are also accrued for major rework campaigns. Service support outside of the warranty period is provided by authorized distributors and dealers at the customer's expense. In addition to the standard warranties offered by the company on its products, the company also sells separately priced extended warranty coverage on select products for a prescribed period after the original warranty period expires. For additional information on the contract liabilities associated with the company's separately priced extended warranties, refer to Note 4, Revenue.
The changes in accrued warranties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
August 2, 2019
|
|
August 3, 2018
|
Beginning balance
|
|
$
|
95,752
|
|
|
$
|
84,268
|
|
|
$
|
76,214
|
|
|
$
|
74,155
|
|
Provisions
|
|
14,232
|
|
|
12,038
|
|
|
42,734
|
|
|
39,827
|
|
Acquisitions
|
|
—
|
|
|
—
|
|
|
14,272
|
|
|
—
|
|
Claims
|
|
(17,514
|
)
|
|
(13,071
|
)
|
|
(39,685
|
)
|
|
(31,787
|
)
|
Changes in estimates
|
|
2,096
|
|
|
(40
|
)
|
|
1,031
|
|
|
1,000
|
|
Ending balance
|
|
$
|
94,566
|
|
|
$
|
83,195
|
|
|
$
|
94,566
|
|
|
$
|
83,195
|
|
Note 11 — Investment in Joint Venture
In fiscal 2009, the company and TCFIF established Red Iron to primarily provide inventory financing to certain distributors and dealers of the company’s products in the U.S. On November 29, 2016, during the first quarter of fiscal 2017, the company entered into amended agreements for its Red Iron joint venture with TCFIF. As a result, the amended term of Red Iron will continue until October 31, 2024, subject to two-year extensions thereafter. Either the company or TCFIF may elect not to extend the amended term, or any subsequent term, by giving one-year written notice to the other party.
The company owns 45 percent of Red Iron and TCFIF owns 55 percent of Red Iron. The company accounts for its investment in Red Iron under the equity method of accounting. The company and TCFIF each contributed a specified amount of the estimated cash required to enable Red Iron to purchase the company’s inventory financing receivables and to provide financial support for Red Iron’s inventory financing programs. Red Iron borrows the remaining requisite estimated cash utilizing a $550 million secured revolving credit facility established under a credit agreement between Red Iron and TCFIF. The company’s total investment in Red Iron as of August 2, 2019 was $25.1 million. The company has not guaranteed the outstanding indebtedness of Red Iron.
The company has agreed to repurchase products repossessed by Red Iron and the TCFIF Canadian affiliate, up to a maximum aggregate amount of $7.5 million in a calendar year. Under the repurchase agreement between Red Iron and the company, Red Iron provides financing for certain dealers and distributors. These transactions are structured as an advance in the form of a payment by Red Iron to the company on behalf of a distributor or dealer with respect to invoices financed by Red Iron. These payments extinguish the obligation of the dealer or distributor to make payment to the company under the terms of the applicable invoice.
Under separate agreements between Red Iron and the dealers and distributors, Red Iron provides loans to the dealers and distributors for the advances paid by Red Iron to the company. The net amount of receivables financed for dealers and distributors under this arrangement for the nine months ended August 2, 2019 and August 3, 2018 were $1,513.3 million and $1,525.3 million, respectively. As of July 31, 2019, Red Iron’s total assets were $508.8 million and total liabilities were $453.0 million.
Note 12 — Stock-Based Compensation
Compensation costs related to stock-based awards were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
August 2, 2019
|
|
August 3, 2018
|
Unrestricted common stock awards
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
592
|
|
|
$
|
530
|
|
Stock option awards
|
|
1,678
|
|
|
1,310
|
|
|
4,841
|
|
|
3,725
|
|
Performance share awards
|
|
666
|
|
|
1,047
|
|
|
2,483
|
|
|
2,012
|
|
Restricted stock unit awards
|
|
890
|
|
|
666
|
|
|
2,342
|
|
|
2,321
|
|
Total compensation cost for stock-based awards
|
|
$
|
3,234
|
|
|
$
|
3,023
|
|
|
$
|
10,258
|
|
|
$
|
8,588
|
|
Unrestricted Common Stock Awards
During the first nine months of fiscal years 2019 and 2018, 10,090 and 8,388 shares, respectively, of fully vested unrestricted common stock awards were granted to certain members of the company's Board of Directors as a component of their compensation for their service on the Board of Directors and are recorded in selling, general and administrative expense in the Condensed Consolidated Statements of Earnings. No shares of fully vested unrestricted common stock awards were granted during the third quarter of fiscal years 2019 and 2018.
Stock Option Awards
Under The Toro Company Amended and Restated 2010 Equity and Incentive Plan, as amended and restated (the "2010 plan"), stock options are granted with an exercise price equal to the closing price of the company’s common stock on the date of grant, as reported by the New York Stock Exchange. Options are generally granted to executive officers, other employees, and non-employee members of the company’s Board of Directors on an annual basis in the first quarter of the company’s fiscal year. Options generally vest one-third each year over a three-year period and have a ten-year term. Other options granted to certain employees vest in full on the three-year anniversary of the date of grant and have a ten-year term. Compensation cost equal to the grant date fair value is generally recognized for these awards over the vesting period. Stock options granted to executive officers and other employees are subject to accelerated vesting if the option holder meets the retirement definition set forth in the 2010 plan. In that case, the fair value of the options is expensed in the fiscal year of grant because generally the option holder must be employed as of the end of the fiscal year in which the options are granted in order for the options to continue to vest following retirement. Similarly, if a non-employee director has served on the company’s Board of Directors for ten full fiscal years or more, the awards vest immediately upon retirement, and therefore, the fair value of the options granted is fully expensed on the date of the grant.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation method with the assumptions noted in the table below. The expected life is a significant assumption as it determines the period for which the risk-free interest rate, stock price volatility, and dividend yield must be applied. The expected life is the average length of time in which executive officers, other employees, and non-employee directors are expected to exercise their stock options, which is primarily based on historical exercise experience. The company groups executive officers and non-employee directors for valuation purposes based on similar historical exercise behavior. Expected stock price volatilities are based on the daily movement of the company’s common stock over the most recent historical period equivalent to the expected life of the option. The risk-free interest 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 historical cash dividends paid, expected future cash dividends and dividend yield, and expected changes in the company’s stock price.
The table below illustrates the weighted-average valuation assumptions for options granted in the following fiscal periods:
|
|
|
|
|
|
|
|
Fiscal 2019
|
|
Fiscal 2018
|
Expected life of option in years
|
|
6.31
|
|
6.04
|
Expected stock price volatility
|
|
19.83%
|
|
20.58%
|
Risk-free interest rate
|
|
2.77%
|
|
2.21%
|
Expected dividend yield
|
|
1.18%
|
|
0.97%
|
Per share weighted-average fair value at date of grant
|
|
$12.83
|
|
$14.25
|
Performance Share Awards
Under the 2010 plan, the company grants performance share awards to executive officers and other employees under which they are entitled to receive shares of the company’s common stock contingent on the achievement of performance goals of the company and businesses of the company, which are generally measured over a three-year period. The number of shares of common stock a participant receives will be increased (up to 200 percent of target levels) or reduced (down to zero) based on the level of achievement of performance goals and will vest at the end of a three-year period. Performance share awards are generally granted on an annual basis in the first quarter of the company’s fiscal year. Compensation cost is recognized for these awards on a straight-line basis over the vesting period based on the per share fair value as of the date of grant and the probability of achieving each performance goal. The per share weighted-average fair value of performance share awards granted during the first quarter of fiscal 2019 and 2018 was $59.58 and $65.40, respectively. No performance share awards were granted during the second or third quarters of fiscal 2019 and 2018.
Restricted Stock Unit Awards
Under the 2010 plan, restricted stock unit awards are generally granted to certain employees that are not executive officers. Occasionally, restricted stock unit awards may be granted, including to executive officers, in connection with hiring, mid-year promotions, leadership transition, or retention. Restricted stock unit awards generally vest one-third each year over a three-year period, or vest in full on the three-year anniversary of the date of grant. Such awards may have performance-based rather than time-based vesting requirements. Compensation cost equal to the grant date fair value, which is equal to the closing price of the company’s common stock on the date of grant multiplied by the number of shares subject to the restricted stock unit awards, is recognized for these awards over the vesting period. The per share weighted-average fair value of restricted stock unit awards granted during the first nine months of fiscal 2019 and 2018 was $66.00 and $63.47, respectively.
Note 13 — Stockholders’ Equity
Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss ("AOCL"), net of tax, were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
October 31, 2018
|
Foreign currency translation adjustments
|
|
$
|
33,862
|
|
|
$
|
23,467
|
|
|
$
|
29,711
|
|
Pension and post-retirement benefits
|
|
561
|
|
|
1,596
|
|
|
561
|
|
Cash flow derivative instruments
|
|
(7,755
|
)
|
|
(1,625
|
)
|
|
(6,335
|
)
|
Total accumulated other comprehensive loss
|
|
$
|
26,668
|
|
|
$
|
23,438
|
|
|
$
|
23,937
|
|
The components and activity of AOCL for the three and nine month periods ended August 2, 2019 and August 3, 2018 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Pension and
Post-Retirement
Benefits
|
|
Cash Flow Hedging Derivative Instruments
|
|
Total
|
Balance as of Balance as of May 3, 2019
|
|
$
|
30,047
|
|
|
$
|
561
|
|
|
$
|
(5,492
|
)
|
|
$
|
25,116
|
|
Other comprehensive (income) loss before reclassifications
|
|
3,815
|
|
|
—
|
|
|
(773
|
)
|
|
3,042
|
|
Amounts reclassified from AOCL
|
|
—
|
|
|
—
|
|
|
(1,490
|
)
|
|
(1,490
|
)
|
Net current period other comprehensive (income) loss
|
|
3,815
|
|
|
—
|
|
|
(2,263
|
)
|
|
1,552
|
|
Balance as of August 2, 2019
|
|
$
|
33,862
|
|
|
$
|
561
|
|
|
$
|
(7,755
|
)
|
|
$
|
26,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Pension and
Post-Retirement
Benefits
|
|
Cash Flow Hedging Derivative Instruments
|
|
Total
|
Balance as of October 31, 2018
|
|
$
|
29,711
|
|
|
$
|
561
|
|
|
$
|
(6,335
|
)
|
|
$
|
23,937
|
|
Other comprehensive loss before reclassifications
|
|
4,151
|
|
|
—
|
|
|
2,905
|
|
|
7,056
|
|
Amounts reclassified from AOCL
|
|
—
|
|
|
—
|
|
|
(4,325
|
)
|
|
(4,325
|
)
|
Net current period other comprehensive (income) loss
|
|
4,151
|
|
|
—
|
|
|
(1,420
|
)
|
|
2,731
|
|
Balance as of August 2, 2019
|
|
$
|
33,862
|
|
|
$
|
561
|
|
|
$
|
(7,755
|
)
|
|
$
|
26,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Pension and
Post-Retirement
Benefits
|
|
Cash Flow Hedging Derivative Instruments
|
|
Total
|
Balance as of Balance as of May 4, 2018
|
|
$
|
19,094
|
|
|
$
|
1,681
|
|
|
$
|
(176
|
)
|
|
$
|
20,599
|
|
Other comprehensive (income) loss before reclassifications
|
|
4,373
|
|
|
(85
|
)
|
|
(1,482
|
)
|
|
2,806
|
|
Amounts reclassified from AOCL
|
|
—
|
|
|
—
|
|
|
33
|
|
|
33
|
|
Net current period other comprehensive (income) loss
|
|
4,373
|
|
|
(85
|
)
|
|
(1,449
|
)
|
|
2,839
|
|
Balance as of August 3, 2018
|
|
$
|
23,467
|
|
|
$
|
1,596
|
|
|
$
|
(1,625
|
)
|
|
$
|
23,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Pension and
Post-Retirement
Benefits
|
|
Cash Flow Hedging Derivative Instruments
|
|
Total
|
Balance as of October 31, 2017
|
|
$
|
21,303
|
|
|
$
|
2,012
|
|
|
$
|
805
|
|
|
$
|
24,120
|
|
Other comprehensive (income) loss before reclassifications
|
|
2,164
|
|
|
—
|
|
|
(5,302
|
)
|
|
(3,138
|
)
|
Amounts reclassified from AOCL
|
|
—
|
|
|
—
|
|
|
2,597
|
|
|
2,597
|
|
Net current period other comprehensive (income) loss
|
|
2,164
|
|
|
—
|
|
|
(2,705
|
)
|
|
(541
|
)
|
Reclassification due to the adoption of ASU 2018-02
|
|
—
|
|
|
(416
|
)
|
|
275
|
|
|
(141
|
)
|
Balance as of August 3, 2018
|
|
$
|
23,467
|
|
|
$
|
1,596
|
|
|
$
|
(1,625
|
)
|
|
$
|
23,438
|
|
For additional information on the components reclassified from AOCL to the respective line items within net earnings for the company's cash flow hedging derivative instruments, refer to Note 16, Derivative Instruments and Hedging Activities.
Note 14 — Per Share Data
Reconciliations of basic and diluted weighted-average shares of common stock outstanding are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Shares in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
August 2, 2019
|
|
August 3, 2018
|
Basic
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock
|
|
107,005
|
|
|
105,751
|
|
|
106,630
|
|
|
106,457
|
|
Assumed issuance of contingent shares
|
|
—
|
|
|
—
|
|
|
14
|
|
|
17
|
|
Weighted-average number of shares of common stock and assumed issuance of contingent shares
|
|
107,005
|
|
|
105,751
|
|
|
106,644
|
|
|
106,474
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock and assumed issuance of contingent shares
|
|
107,005
|
|
|
105,751
|
|
|
106,644
|
|
|
106,474
|
|
Effect of dilutive securities
|
|
1,248
|
|
|
2,319
|
|
|
1,380
|
|
|
2,456
|
|
Weighted-average number of shares of common stock, assumed issuance of contingent shares, and effect of dilutive securities
|
|
108,253
|
|
|
108,070
|
|
|
108,024
|
|
|
108,930
|
|
Incremental shares from options and restricted stock units are computed under the treasury stock method. Options to purchase 378,850 and 740,720 shares of common stock during the third quarter of fiscal 2019 and 2018, respectively, were excluded from diluted net earnings per share because they were anti-dilutive. Options to purchase 865,648 and 412,302 shares of common stock during the first nine months of fiscal 2019 and 2018, respectively, were excluded from diluted net earnings per share because they were anti-dilutive.
Note 15 — Contingencies
Litigation
The company is party to litigation in the ordinary course of business. Such matters are generally subject to uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. Litigation occasionally involves claims for punitive, as well as compensatory damages arising out of the use of the company’s products. Although the company is self-insured to some extent, the company maintains insurance against certain product liability losses. The company is also subject to litigation and administrative and judicial proceedings with respect to claims involving asbestos and the discharge of hazardous substances into the environment. Some of these claims assert damages and liability for personal injury, remedial investigations or clean up and other costs and damages. The company is also typically involved in commercial disputes, employment disputes, and patent litigation cases in which it is asserting or defending against patent infringement claims. To prevent possible infringement of the company’s patents by others, the company periodically reviews competitors’ products. To avoid potential liability with respect to others’ patents, the company regularly reviews certain patents issued by the U.S. Patent and Trademark Office and foreign patent offices. Management believes these activities help minimize its risk of being a defendant in patent infringement litigation. The company is currently involved in patent litigation cases, including cases by or against competitors, where it is asserting and defending against claims of patent infringement. Such cases are at varying stages in the litigation process.
The company records a liability in its Condensed Consolidated Financial Statements for costs related to claims, including future legal costs, settlements and judgments, where the company has assessed that a loss is probable and an amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred. In the opinion of management, the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect its Consolidated Results of Operations, Financial Position, or Cash Flows.
Note 16 — Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The company is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as sales to third-party customers, sales and loans to wholly-owned foreign subsidiaries, foreign plant operations, and purchases from suppliers. The company’s primary currency exchange rate exposures are with the Euro, the Australian dollar, the Canadian dollar, the British pound, the Mexican peso, the Japanese yen, the Chinese Renminbi, and the Romanian New Leu against the U.S. dollar, as well as the Romanian New Leu against the Euro.
To reduce its exposure to foreign currency exchange rate risk, the company actively manages the exposure of its foreign currency exchange rate risk by entering into various derivative instruments to hedge against such risk, authorized under company policies that place controls on these hedging activities, with counterparties that are highly rated financial institutions. The company’s policy does not allow the use of derivative instruments for trading or speculative purposes. The company has also made an accounting policy election to use the portfolio exception with respect to measuring counterparty credit risk for derivative instruments, and to measure the fair value of a portfolio of financial assets and financial liabilities on the basis of the net open risk position with each counterparty.
The company’s hedging activities primarily involve the use of forward currency contracts to hedge most foreign currency transactions, including forecasted sales and purchases denominated in foreign currencies. The company uses derivative instruments only in an attempt to limit underlying exposure from foreign currency exchange rate fluctuations and to minimize earnings and cash flow volatility associated with foreign currency exchange rate fluctuations. Decisions on whether to use such derivative instruments are primarily based on the amount of exposure to the currency involved and an assessment of the near-term market value for each currency.
The company recognizes all derivative instruments at fair value on the Condensed Consolidated Balance Sheets as either assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as a cash flow hedging instrument.
Cash Flow Hedging Instruments
The company formally documents relationships between cash flow hedging instruments and the related hedged transactions, as well as its risk-management objective and strategy for undertaking cash flow hedging instruments. This process includes linking all cash flow hedging instruments to the forecasted transactions, such as sales to third parties, foreign plant operations, and purchases from suppliers. At the cash flow hedge’s inception and on an ongoing basis, the company formally assesses whether the cash flow hedging instruments have been highly effective in offsetting changes in the cash flows of the hedged transactions and whether those cash flow hedging instruments may be expected to remain highly effective in future periods.
Changes in the fair values of the spot rate component of outstanding, highly effective cash flow hedging instruments included in the assessment of hedge effectiveness are recorded in other comprehensive income within AOCL on the Condensed Consolidated Balance Sheets and are subsequently reclassified to net earnings within the Condensed Consolidated Statements of Earnings during the same period in which the cash flows of the underlying hedged transaction affect net earnings. Changes in the fair values of hedge components excluded from the assessment of effectiveness are recognized immediately in net earnings under the mark-to-market approach. The classification of gains or losses recognized on cash flow hedging instruments and excluded components within the Condensed Consolidated Statements of Earnings is the same as that of the underlying exposure. Results of cash flow hedging instruments, and the related excluded components, of sales and foreign plant operations are recorded in net sales and cost of sales, respectively. The maximum amount of time the company hedges its exposure to the variability in future cash flows for forecasted trade sales and purchases is two years. Results of cash flow hedges of intercompany loans are recorded in other income, net as an offset to the remeasurement of the foreign loan balance.
When it is determined that a derivative instrument is not, or has ceased to be, highly effective as a cash flow hedge, the company discontinues cash flow hedge accounting prospectively. The gain or loss on the dedesignated derivative instrument remains in AOCL and is reclassified to net earnings within the same Condensed Consolidated Statements of Earnings line item as the underlying exposure when the forecasted transaction affects net earnings. When the company discontinues cash flow hedge accounting because it is no longer probable, but it is still reasonably possible that the forecasted transaction will occur by the end of the originally expected period or within an additional two-month period of time thereafter, the gain or loss on the derivative instrument remains in AOCL and is reclassified to net earnings within the same Condensed Consolidated Statements of Earnings line item as the underlying exposure when the forecasted transaction affects net earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the
gains and losses that were in AOCL are immediately recognized in net earnings within other income, net in the Condensed Consolidated Statements of Earnings. In all situations in which cash flow hedge accounting is discontinued and the derivative instrument remains outstanding, the company carries the derivative instrument at its fair value on the Condensed Consolidated Balance Sheets, recognizing future changes in the fair value within other income, net in the Condensed Consolidated Statements of Earnings.
As of August 2, 2019, the notional amount outstanding of forward contracts designated as cash flow hedging instruments was $250.3 million.
Derivatives Not Designated as Cash Flow Hedging Instruments
The company also enters into foreign currency contracts that include forward currency contracts to mitigate the remeasurement of specific assets and liabilities on the Condensed Consolidated Balance Sheets. These contracts are not designated as cash flow hedging instruments. Accordingly, changes in the fair value of hedges of recorded balance sheet positions, such as cash, receivables, payables, intercompany notes, and other various contractual claims to pay or receive foreign currencies other than the functional currency, are recognized immediately in other income, net, on the Condensed Consolidated Statements of Earnings together with the transaction gain or loss from the hedged balance sheet position.
The following table presents the fair value and location of the company’s derivative instruments on the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
October 31, 2018
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
12,511
|
|
|
$
|
2,324
|
|
|
$
|
8,596
|
|
Derivatives not designated as cash flow hedging instruments:
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
Forward currency contracts
|
|
3,920
|
|
|
869
|
|
|
2,305
|
|
Total assets
|
|
$
|
16,431
|
|
|
$
|
3,193
|
|
|
$
|
10,901
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Derivatives not designated as cash flow hedging instruments:
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
|
|
Forward currency contracts
|
|
—
|
|
|
—
|
|
|
13
|
|
Total liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
13
|
|
The company entered into an International Swap Dealers Association ("ISDA") Master Agreement with each counterparty that permits the net settlement of amounts owed under their respective contracts. The ISDA Master Agreement is an industry standardized contract that governs all derivative contracts entered into between the company and the respective counterparty. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable or receivable for contracts due on the same date or in the same currency for similar types of derivative transactions. The company records the fair value of its derivative instruments at the net amount in its Condensed Consolidated Balance Sheets.
The following table shows the effects of the master netting arrangements on the fair value of the company’s derivative instruments that are recorded in the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
October 31, 2018
|
Derivative assets:
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
Gross amounts of recognized assets
|
|
$
|
16,496
|
|
|
$
|
3,349
|
|
|
$
|
10,901
|
|
Gross liabilities offset in the Condensed Consolidated Balance Sheets
|
|
(65
|
)
|
|
(156
|
)
|
|
—
|
|
Net amounts of assets presented in the Condensed Consolidated Balance Sheets
|
|
$
|
16,431
|
|
|
$
|
3,193
|
|
|
$
|
10,901
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
Gross amounts of recognized liabilities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
Gross assets offset in the Condensed Consolidated Balance Sheets
|
|
—
|
|
|
—
|
|
|
—
|
|
Net amounts of liabilities presented in the Condensed Consolidated Balance Sheets
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
The following table presents the impact and location of the amounts reclassified from AOCL into net earnings on the Condensed Consolidated Statements of Earnings and the impact of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the company's derivatives designated as cash flow hedging instruments for the three and nine months ended August 2, 2019 and August 3, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Gain (Loss) Reclassified from AOCL into Earnings
|
|
Gain Recognized in OCI on Derivatives
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
August 2, 2019
|
|
August 3, 2018
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,350
|
|
|
$
|
(170
|
)
|
|
$
|
2,022
|
|
|
$
|
1,435
|
|
Cost of sales
|
|
140
|
|
|
137
|
|
|
241
|
|
|
14
|
|
Total derivatives designated as cash flow hedging instruments
|
|
$
|
1,490
|
|
|
$
|
(33
|
)
|
|
$
|
2,263
|
|
|
$
|
1,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended
|
|
|
Gain (Loss) Reclassified from AOCL into Earnings
|
|
Gain (Loss) Recognized in OCI on Derivatives
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
August 2, 2019
|
|
August 3, 2018
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,828
|
|
|
$
|
(3,207
|
)
|
|
$
|
1,307
|
|
|
$
|
2,900
|
|
Cost of sales
|
|
497
|
|
|
610
|
|
|
113
|
|
|
(195
|
)
|
Total derivatives designated as cash flow hedging instruments
|
|
$
|
4,325
|
|
|
$
|
(2,597
|
)
|
|
$
|
1,420
|
|
|
$
|
2,705
|
|
The company recognized immaterial gains within other income, net on the Condensed Consolidated Statements of Earnings during the third quarter and first nine months of fiscal 2019 and 2018 due to the discontinuance of cash flow hedge accounting on certain forward currency contracts designated as cash flow hedging instruments. As of August 2, 2019, the company expects to reclassify approximately $7.3 million of gains from AOCL to earnings during the next twelve months.
The following tables present the impact and location of derivative instruments on the Condensed Consolidated Statements of Earnings for the company’s derivatives designated as cash flow hedging instruments and the related components excluded from effectiveness testing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Earnings on Cash Flow Hedging Instruments
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
Three Months Ended
|
|
Net Sales
|
|
Cost of Sales
|
|
Net Sales
|
|
Cost of Sales
|
Condensed Consolidated Statements of Earnings income (expense) amounts in which the effects of cash flow hedging instruments are recorded
|
|
$
|
838,713
|
|
|
$
|
(572,732
|
)
|
|
$
|
655,821
|
|
|
$
|
(422,168
|
)
|
Gain (loss) on derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from AOCL into earnings
|
|
1,350
|
|
|
140
|
|
|
(170
|
)
|
|
137
|
|
Gain (loss) on components excluded from effectiveness testing recognized in earnings based on changes in fair value
|
|
$
|
1,262
|
|
|
$
|
18
|
|
|
$
|
132
|
|
|
$
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Earnings on Cash Flow Hedging Instruments
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
Nine Months Ended
|
|
Net Sales
|
|
Cost of Sales
|
|
Net Sales
|
|
Cost of Sales
|
Condensed Consolidated Statements of Earnings income (expense) amounts in which the effects of cash flow hedging instruments are recorded
|
|
$
|
2,403,705
|
|
|
$
|
(1,600,809
|
)
|
|
$
|
2,079,347
|
|
|
$
|
(1,317,399
|
)
|
Gain (loss) on derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
|
Amount of gain (loss) reclassified from AOCL into earnings
|
|
3,828
|
|
|
497
|
|
|
(3,207
|
)
|
|
610
|
|
Gain (loss) on components excluded from effectiveness testing recognized in earnings based on changes in fair value
|
|
$
|
3,579
|
|
|
$
|
34
|
|
|
$
|
31
|
|
|
$
|
(210
|
)
|
The following table presents the impact and location of derivative instruments on the Condensed Consolidated Statements of Earnings for the company’s derivatives not designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Nine Months Ended
|
(Dollars in thousands)
|
|
August 2, 2019
|
|
August 3, 2018
|
|
August 2, 2019
|
|
August 3, 2018
|
Gain (loss) on derivatives not designated as cash flow hedging instruments
|
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
|
Other income, net
|
|
$
|
(555
|
)
|
|
$
|
2,111
|
|
|
$
|
172
|
|
|
$
|
1,495
|
|
Total gain (loss) on derivatives not designated as cash flow hedging instruments
|
|
$
|
(555
|
)
|
|
$
|
2,111
|
|
|
$
|
172
|
|
|
$
|
1,495
|
|
Note 17 — Fair Value Measurements
The company categorizes its assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Estimates of fair value for financial assets and financial liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value, and requires certain disclosures. The framework discusses valuation techniques such as the market approach (comparable market prices), the income approach (present value of future income or cash flows), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs reflecting management’s assumptions about the inputs used in pricing the asset or liability.
Recurring Fair Value Measurements
The company's derivative instruments consist of forward currency contracts that are measured at fair value on a recurring basis. The fair value of forward currency contracts is determined based on observable market transactions of forward currency prices and spot currency rates as of the reporting date. There were no transfers between the levels of the fair value hierarchy during the three and nine months ended August 2, 2019 and August 3, 2018, or the twelve months ended October 31, 2018.
The following tables present, by level within the fair value hierarchy, the company's financial assets and liabilities that are measured at fair value on a recurring basis as of August 2, 2019, August 3, 2018, and October 31, 2018, according to the valuation technique utilized to determine their fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Fair Value Measurements Using Inputs Considered as:
|
August 2, 2019
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
16,431
|
|
|
$
|
—
|
|
|
$
|
16,431
|
|
|
$
|
—
|
|
Total assets
|
|
$
|
16,431
|
|
|
$
|
—
|
|
|
$
|
16,431
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Fair Value Measurements Using Inputs Considered as:
|
August 3, 2018
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
3,193
|
|
|
$
|
—
|
|
|
$
|
3,193
|
|
|
$
|
—
|
|
Total assets
|
|
$
|
3,193
|
|
|
$
|
—
|
|
|
$
|
3,193
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Fair Value Measurements Using Inputs Considered as:
|
October 31, 2018
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
10,901
|
|
|
$
|
—
|
|
|
$
|
10,901
|
|
|
$
|
—
|
|
Total assets
|
|
$
|
10,901
|
|
|
$
|
—
|
|
|
$
|
10,901
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
Total liabilities
|
|
$
|
13
|
|
|
$
|
—
|
|
|
$
|
13
|
|
|
$
|
—
|
|
Non-recurring Fair Value Measurements
The company measures certain assets and liabilities at fair value on a non-recurring basis. Assets and liabilities that are measured at fair value on a nonrecurring basis include long-lived assets, goodwill and indefinite-lived intangible assets, which would generally be recorded at fair value as a result of an impairment charge. Assets acquired and liabilities assumed as part of business combinations are measured at fair value. For additional information on the company's business combinations and the related non-recurring fair value measurement of the assets acquired and liabilities assumed, refer to Note 2, Business Combinations.
Other Fair Value Disclosures
The carrying values of the company's short-term financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and short-term debt, including current maturities of long-term debt, when applicable, approximate their fair values due to their short-term nature.
Note 18 — Subsequent Events
The company has evaluated all subsequent events and concluded that no subsequent events have occurred that would require recognition in the Condensed Consolidated Financial Statements or disclosure in the Notes to the Condensed Consolidated Financial Statements.