Adjusted non-GAAP gross margin excludes the impact of certain purchase accounting adjustments resulting from our acquisition of CMW, including charges incurred for the take-down of the inventory fair value step-up amount and amortization of the backlog intangible asset, as well as the impact of management actions, including the charges incurred for inventory write-downs, anticipated inventory retail support activities, and accelerated depreciation of fixed assets related to the Toro underground wind down and restructuring charges incurred for our corporate restructuring event. Please refer to the section titled "Non-GAAP Financial Measures" within this MD&A for reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported GAAP financial measures.
Selling, General and Administrative Expense
SG&A expense increased $155.0 million, or 27.3 percent, in fiscal 2019 compared to fiscal 2018. See Note 1, Summary of Significant Accounting Policies and Related Data, of the Notes to Consolidated Financial Statements, in the section entitled "Selling, General, and Administrative Expense," included in Part II, Item 8, "Financial Statements and Supplementary Data" of this report for a description of expenses included in SG&A expense. SG&A expense rate represents SG&A expense as a percentage of net sales. The SG&A expense rate in fiscal 2019 was 23.0 percent compared to 21.7 percent in fiscal 2018, an unfavorable increase of 130 basis points. As a percentage of net sales, our SG&A expense rate increase was primarily due to the following factors:
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|
•
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the acquisition of CMW, which resulted in incremental administrative, indirect sales and marketing, engineering, warranty, and service expense; integration and acquisition-related expenditures, and higher amortization of other intangible assets;
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|
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•
|
increased warranty costs in certain of our legacy businesses; and
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|
|
•
|
increased engineering expense for new product development in our legacy businesses.
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These unfavorable SG&A expense rate factors were partially offset by decreased direct marketing expense in our legacy businesses.
Interest Expense
Interest expense for fiscal 2019 increased $9.7 million, or 51.0 percent, compared to fiscal 2018. This increase was driven by interest expense incurred on higher outstanding borrowings incurred to fund the purchase price for our acquisition of CMW.
Other Income, Net
Other income, net consists mainly of our proportionate share of income or losses from our Red Iron joint venture, realized currency exchange rate gains and losses, litigation settlements and/or recoveries, interest income, dividend income, gains or losses recognized on actuarial valuation changes for our pension and post-retirement plans, retail financing revenue, and other miscellaneous income. Refer to Note 16, Other Income, Net, of the Notes to Consolidated Financial Statements,
included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information regarding the components of other income, net.
Other income, net for fiscal 2019 was $25.9 million compared to $18.4 million in fiscal 2018, an increase of $7.5 million. The increase in other income, net was primarily due to the following factors:
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•
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realized gain on actuarial valuation changes for our pension and post-retirement plans of $6.8 million and
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•
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higher earnings from our equity investment in Red Iron of $0.8 million.
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These increases were partially offset by the following factors:
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•
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increased legal expense, net of litigation recoveries, of $1.0 million and
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•
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the loss on the sale of a used underground construction equipment business of $0.9 million.
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Provision for Income Taxes
The effective tax rate for fiscal 2019 was 14.9 percent compared to 27.0 percent in fiscal 2018. The effective tax rate was significantly impacted by the enactment of the Tax Act during fiscal 2018, including the remeasurement of deferred tax assets and liabilities, which resulted in a non-cash discrete tax charge of $19.3 million, and the calculation of the deemed repatriation tax, which resulted in a discrete tax charge of $13.4 million, payable over eight years. In addition to these one-time charges resulting from the Tax Act, the decrease in the effective tax rate was partially driven by the reduction in the U.S. federal corporate tax rate from a blended rate of 23.3 percent in fiscal 2018 to a rate of 21.0 percent in fiscal 2019. See Note 8, Income Taxes, of the Notes to Consolidated Financial Statements, included in Part II, Item 8, "Financial Statements and Supplementary Data" of this report for further discussion the impacts on US Tax Reform.
The adjusted non-GAAP effective tax rate for fiscal 2019 was 19.3 percent, compared to an adjusted non-GAAP effective tax rate of 22.1 percent in fiscal 2018. The decrease in the adjusted non-GAAP effective tax rate was primarily driven by the reduction in the U.S. federal corporate tax rate from a blended rate of 23.3 percent in fiscal 2018 to a rate of 21.0 percent in fiscal 2019.
The adjusted non-GAAP effective tax rate excludes costs incurred related to our acquisition of CMW, including integration and transaction costs and certain purchase accounting adjustments; the impact of management actions, including the charges related to the Toro underground wind down, our corporate restructuring event, and the divestiture of a used underground construction equipment business; the tax benefit for the excess tax deduction for share-based compensation; and one-time charges incurred under the Tax Act. Please refer to the section titled "Non-GAAP Financial Measures" within this MD&A for reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported GAAP financial measures.
Net Earnings
Fiscal 2019 net earnings were $274.0 million compared to $271.9 million in fiscal 2018, an increase of 0.8 percent. Fiscal 2019 diluted net earnings per share were $2.53, an increase of 1.2 percent from $2.50 per diluted share in fiscal 2018. The net earnings increase for fiscal 2019 was primarily due to the following factors:
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•
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the significant impact of the one-time charges as a result of the Tax Act on our fiscal 2018 net earnings,
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•
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incremental earnings as a result of our acquisition of CMW,
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•
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improved net price realization driven by price increases across our product lines,
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•
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the reduction in the U.S federal corporate tax rate from a blended rate of 23.3 percent in fiscal 2018 to a rate of 21.0 percent in fiscal 2019,
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•
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productivity initiatives related to commodities and component parts sourcing, and
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•
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the realized gain on actuarial valuation changes for our pension and post-retirement plans.
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These increases to net earnings were partially offset by the following factors:
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•
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the unfavorable impact of purchase accounting adjustments and integration and acquisition-related expenditures from our CMW acquisition,
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•
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higher commodity and tariff costs on purchased raw materials and component parts,
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•
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unfavorable product mix,
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•
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charges related to the Toro underground wind down,
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•
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higher interest expense incurred on outstanding indebtedness, and
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•
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charges related to our corporate restructuring event.
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Non-GAAP adjusted net earnings for fiscal 2019 were $324.3 million, or $3.00 per diluted share, compared to $290.1 million, or $2.67 per diluted share, in fiscal 2018, an increase of 12.4 percent per diluted share. The non-GAAP adjusted net earnings increase for fiscal 2019 was primarily due to the following factors:
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•
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incremental earnings as a result of our acquisition of CMW,
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•
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improved net price realization driven by price increases across our product lines,
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•
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the reduction in the U.S federal corporate tax rate from blended rate of 23.3 percent in fiscal 2018 to a rate of 21.0 percent in fiscal 2019,
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•
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productivity initiatives related to commodities and component parts sourcing, and
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•
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the realized gain on actuarial valuation changes for our pension and post-retirement plans.
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These increases to adjusted non-GAAP net earnings were partially offset by the following factors:
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•
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higher commodity and tariff costs on purchased raw materials and component parts,
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•
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unfavorable product mix, and
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•
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higher interest expense incurred on outstanding indebtedness.
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Adjusted net earnings excludes costs incurred related to our acquisition of CMW, including integration and transaction costs and certain purchase accounting adjustments; the impact of management actions, including the charges related to the Toro underground wind down, our corporate restructuring event, and the divestiture of a used underground construction equipment business; the tax benefit for the excess tax deduction for share-based compensation; and one-time charges incurred under the Tax Act. Please refer to the section titled "Non-GAAP Financial Measures" within this MD&A for reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported GAAP financial measures.
Commodity Cost Changes
Commodities, components, parts, and accessories purchased for use in our manufacturing process and end-products or to be sold as standalone end-products are subject to the effects of inflation, deflation, changing prices, tariffs, and/or duties. During fiscal 2019, the average cost of commodities, components, parts, and accessories purchased, including the impact of inflation and tariff costs, were higher compared to the average cost of commodities, components, parts, and accessories purchased in fiscal 2018. The increase in the average cost of commodities, components, parts, and accessories had an unfavorable impact on our gross margins during fiscal 2019 as compared to fiscal 2018.
We strategically work to mitigate any unfavorable impact as a result of changes in the cost of commodities, components, parts, and accessories that affect our product lines; as a result, we anticipate the costs associated with commodity, components, parts, and accessories in fiscal 2020 to be slightly lower than the average cost of commodities, components, parts, and accessories purchased during fiscal 2019. Historically, we have mitigated, and we currently expect that we would mitigate, any commodity, components, parts, and accessories cost increases, in part, by collaborating with suppliers, reviewing alternative sourcing options, substituting materials, utilizing Lean methods, engaging in internal cost reduction efforts, utilizing tariff exclusions and duty drawback mechanisms, and increasing prices on some of our products, all as appropriate. Further information regarding commodity cost risk is presented in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of this Annual Report on Form 10-K in the section entitled "Commodity Cost Risk".
The following factors impacted our working capital during fiscal 2019:
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•
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Average net receivables increased by 23.6 percent in fiscal 2019 compared to fiscal 2018, primarily due to incremental net receivables as a result of our acquisition of CMW. Our average days outstanding for receivables increased to 30.9 days in fiscal 2019 compared to 29.9 days in fiscal 2018.
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•
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Average net inventories increased by 38.6 percent in fiscal 2019 compared to fiscal 2018. Inventory levels as of the end of fiscal 2019 compared to the end of fiscal 2018 were up by $293.4 million, or 81.9 percent, primarily due to incremental net inventory as a result of our acquisition of CMW, as well as higher net inventory balances in our legacy businesses due to lower than forecasted sales in our Professional segment driven by soft retail demand and build-ahead for fiscal 2020 new product introductions in our Residential segment.
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•
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Average accounts payable increased by 21.7 percent in fiscal 2019 compared to fiscal 2018, mainly due to incremental accounts payable as a result of our acquisition of CMW and negotiating more favorable payment terms with suppliers as a component of our working capital initiatives.
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Cash Flow
Cash flows provided by/(used in) operating, investing, and financing activities during the past three fiscal years are shown in the following table:
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(Dollars in millions)
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Cash Provided by/(Used in)
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Fiscal Years Ended October 31
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2019
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|
2018
|
|
2017
|
Operating activities
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$
|
337.4
|
|
|
$
|
364.8
|
|
|
$
|
360.7
|
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Investing activities
|
|
(772.9
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)
|
|
(127.9
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)
|
|
(83.8
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)
|
Financing activities
|
|
299.5
|
|
|
(252.1
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)
|
|
(245.3
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)
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Effect of exchange rates on cash
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|
(1.2
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)
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|
(5.9
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)
|
|
5.0
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|
Net increase/(decrease) in cash and cash equivalents
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|
(137.3
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)
|
|
(21.1
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)
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|
36.7
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Cash and cash equivalents as of fiscal year end
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|
$
|
151.8
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|
|
$
|
289.1
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|
|
$
|
310.3
|
|
Cash Flows from Operating Activities
Our primary source of funds is cash generated from operations. In fiscal 2019, cash provided by operating activities decreased by $27.4 million, or 7.5 percent, from fiscal 2018. This decrease was mainly driven by more cash utilized for purchases of inventory and a lower year-over-year cash source benefit from extending payment terms with vendors as a component of our working capital initiatives. Somewhat offsetting this decrease was higher net earnings, which includes the unfavorable non-cash take-down of the CMW inventory purchase accounting step-up amount, and lower cash utilized for prepaid taxes.
Cash Flows from Investing Activities
Capital expenditures and acquisitions are a significant use of our capital resources. These investments are intended to enable sales growth in new and expanding markets, help us meet
product demand, and increase our manufacturing efficiencies and capacity. Cash used in investing activities in fiscal 2019 increased by $645.0 million from fiscal 2018 mainly due to more cash utilized for our acquisitions of CMW and a Northeastern U.S. distribution company in fiscal 2019 than the cash utilized for the acquisition of L.T. Rich in fiscal 2018, partially offset by cash proceeds from the sale of a used underground construction equipment business.
Cash Flows from Financing Activities
Cash provided by financing activities in fiscal 2019 was $299.5 million compared to $252.1 million of cash used in financing activities in fiscal 2018, an increase of $551.6 million. This increase in cash provided by financing activities was mainly due to the cash proceeds as the result of the issuance of indebtedness under our term loan credit agreement and amounts drawn on our revolving credit facility to fund the CMW acquisition and the issuance of our private placement senior notes, reduced cash utilized for purchases of Toro common stock compared to fiscal 2018, and higher cash provided from the exercise of stock options. These sources of cash were partially offset by more cash utilized for repayments of our outstanding indebtedness under our revolving credit facility and term loan credit agreement and more cash utilized for dividend payments on shares of our common stock compared to fiscal 2018.
Cash and Cash Equivalents
Cash and cash equivalents as of the end of fiscal 2019 decreased by $137.3 million compared to the end of fiscal 2018.
As of October 31, 2019, cash and cash equivalents held by our foreign subsidiaries were approximately $97.5 million. We consider that $17.2 million of cash and cash equivalents held by our foreign subsidiaries are intended to be indefinitely reinvested. Should these cash and cash equivalents be distributed in the future in the form of dividends or otherwise, we may be subject to foreign withholding taxes, state income taxes, and/or additional federal taxes for currency fluctuations. As of October 31, 2019, the unrecognized deferred tax liabilities for temporary differences related to our investment in non-U.S. subsidiaries, and any withholding, state, or additional federal taxes upon any future repatriation, are not material and have not been recorded.
Capital Expenditures
Fiscal 2019 capital expenditures of $92.9 million were $2.8 million higher than fiscal 2018. This increase was mainly attributable to incremental capital expenditures as a result of our acquisition of CMW, as well as continued investment in our facilities, new product tooling, productivity improvements in our manufacturing and distribution processes, and continued replacement of production equipment. Capital expenditures for fiscal 2020 are expected to be approximately $100.0 million as we plan to continue to invest in our facilities, new product tooling, productivity improvements in our manufacturing and distribution processes, and continued replacement of production equipment.
Other Long-Term Assets
Other long-term assets as of October 31, 2019 were $1,207.7 million compared to $676.3 million as of October 31, 2018, an increase of $531.3 million. This increase was driven mainly by our acquisition of CMW, which resulted in significant increases in other intangible assets; property, plant and equipment; and goodwill. In addition, our other long-term assets increased as a result of purchases of property, plant, and equipment in our legacy businesses. These increases to other long-term assets were partially offset by amortization of intangible assets and the reclassification of our long-term deferred tax assets to long-term deferred tax liabilities as a result of our acquisition of CMW.
Included in other long-term assets as of October 31, 2019 was goodwill in the amount of $362.3 million. Based on our annual goodwill impairment analysis, we determined there was no impairment of goodwill during fiscal 2019 for any of our reporting units as the fair values of the reporting units exceeded their carrying values, including goodwill.
Liquidity and Capital Resources
Our businesses are seasonally working capital intensive and require funding for purchases of raw materials used in production, replacement parts inventory, payroll and other administrative costs, capital expenditures, establishment of new facilities, expansion and renovation of existing facilities, as well as for financing receivables from customers that are not financed with Red Iron or other third-party financial institutions. Our accounts receivable balances historically increase between January and April as a result of typically higher sales volumes and extended payment terms made available to our customers, and typically decrease between May and December when payments are received. We believe that the funds available through existing, and potential future, financing arrangements and forecasted cash flows will be sufficient to provide the necessary capital resources for our anticipated working capital needs, capital expenditures, investments, debt repayments, quarterly cash dividend payments, and common stock repurchases, all as applicable, for at least the next twelve months.
Indebtedness
As of October 31, 2019, we had $700.8 million of outstanding indebtedness that included $100.0 million of 7.8 percent debentures due June 15, 2027, $123.9 million of 6.625 percent senior notes due May 1, 2037, $100.0 million under our $200.0 million three year unsecured senior term loan facility, $180.0 million under our $300.0 million five year unsecured senior term loan facility, $100.0 million of 3.81 percent Series A Senior Notes, $100.0 million of 3.91 percent Series B Senior Notes, and no outstanding borrowings under our revolving credit facility. The October 31, 2019 outstanding indebtedness amounts were partially offset by debt issuance costs and deferred charges of $3.1 million related to our outstanding indebtedness. As of October 31, 2019, we have reclassified $79.9 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 we intend to prepay such amount utilizing cash flows from operations within the next twelve months.
As of October 31, 2018, we had $312.5 million of outstanding indebtedness that included $100.0 million of 7.8 percent debentures due June 15, 2027, $123.9 million of 6.625 percent senior notes due May 1, 2037, and $91.0 million of outstanding borrowings under our revolving credit facility. The October 31, 2018 outstanding indebtedness amounts were partially offset by debt issuance costs and deferred charges of $2.3 million related to our outstanding indebtedness. As of October 31, 2018, the $91.0 million of outstanding borrowings under our revolving credit facility was classified as long-term debt within our Condensed Consolidated Balance Sheets.
Revolving Credit Facility
Seasonal cash requirements are financed from operations, cash on hand, and with borrowings under our $600.0 million unsecured senior five-year revolving credit facility that expires in June 2023. Included in our $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 our 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.
Outstanding loans under the revolving credit facility (other than swingline loans), if applicable, 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 that is calculated based on the better of the leverage ratio (as measured quarterly and defined as the ratio of total indebtedness to consolidated earnings before interest and taxes plus depreciation and amortization expense) and debt rating of Toro. 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 that is calculated based on the better of the leverage ratio and debt rating of Toro. Interest is payable quarterly in arrears. Our debt rating for long-term unsecured senior, non-credit enhanced debt was unchanged during the fourth quarter of fiscal 2019 by Standard and Poor's Ratings Group at BBB and by Moody's Investors Service at Baa3. If our debt rating falls below investment grade and/or our leverage ratio rises above 1.50, the basis point spread applicable in determining the interest payable on our outstanding debt under the revolving credit facility could increase. However, the credit commitment could not be
canceled by the banks based solely on a ratings downgrade. For the fiscal years ended October 31, 2019 and October 31, 2018, we incurred interest expense of approximately $1.9 million and $1.3 million, respectively, on outstanding borrowings under the revolving credit facility.
Our 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. Under the revolving credit facility, we are not limited in the amount for payments of cash dividends and common stock repurchases as long as, both before and after giving pro forma effect to such payments, our leverage ratio from the previous quarter compliance certificate is less than or equal to 3.5 (or, at our option (which we may exercise twice during the term of the facility) after certain acquisitions with aggregate consideration in excess of $75.0 million, for the first four quarters following the exercise of such option, is less than or equal to 4.0), provided that immediately after giving effect to any such proposed action, no default or event of default would exist. As of October 31, 2019, we were not limited in the amount for payments of cash dividends and common stock repurchases. We were in compliance with all covenants related to the credit agreement for our revolving credit facility as of October 31, 2019, and we expect to be in compliance with all covenants during fiscal 2020. If we were out of compliance with any covenant required by this credit agreement following the applicable cure period, the banks could terminate their commitments unless we could negotiate a covenant waiver from the banks. In addition, our long-term senior notes, debentures, term loan facilities, and any amounts outstanding under the revolving credit facility could become due and payable if we were unable to obtain a covenant waiver or refinance our borrowings under our revolving credit facility.
As of October 31, 2019, we had no borrowings under the revolving credit facility but did have $1.9 million outstanding under the sublimit for standby letters of credit, resulting in $598.1 million of unutilized availability under our revolving credit facility. As of October 31, 2018, we had $91.0 million of outstanding borrowings under the revolving credit facility and $1.5 million outstanding under the sublimit for standby letters of credit, resulting in $507.5 million of unutilized availability under our revolving credit facility.
Term Loan Credit Agreement
In March 2019, we entered into a term loan credit agreement with a syndicate of financial institutions for the purpose of partially funding the purchase price of our 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 our 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, we are required to make quarterly principal amortization payments of 2.5 percent of the original 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 principal payments are required during the first three and one quarter (3.25) years of the $300.0 million five year unsecured senior term loan facility. The term loan facilities may be prepaid and terminated at our election at any time without penalty or premium. As of October 31, 2019, we have prepaid $100.0 million and $120.0 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.
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 loan credit agreement. Interest is payable quarterly in arrears. For the fiscal year ended October 31, 2019, we incurred interest expense of approximately $7.5 million on the outstanding borrowings under the term loan credit agreement.
The term loan credit agreement contains customary covenants, including, without limitation, financial covenants generally consistent with those applicable under our revolving credit facility, 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. Under the term loan credit agreement, we are not limited in the amount for payments of cash dividends and common stock repurchases as long as, both before and after giving pro forma effect to such payments, our leverage ratio from the previous quarter compliance certificate is less than or equal to 3.5 (or, at our option (which we may exercise twice during the term of the facility) after certain acquisitions with aggregate consideration in excess of $75.0 million, for the first four quarters following the exercise of such option, is less than or equal to 4.0), provided that immediately after giving effect of any such proposed action, no default or event of default would exist. As of October 31, 2019, we were not limited in the amount for payments of cash dividends and common stock repurchases. We were in compliance with all covenants related to our term loan credit agreement as of October 31, 2019. If we were out of compliance with any covenant required by this term loan credit agreement following the applicable cure period, our term loan facilities, long-term senior notes, debentures, and any amounts outstanding under the revolving credit facility could
become due and payable if we were unable to obtain a covenant waiver or refinance our borrowings under our credit agreement.
3.81% Series A and 3.91% Series B Senior Notes
On April 30, 2019, we entered into a private placement note purchase agreement with certain purchasers ("holders") pursuant to which we agreed to issue and sell an aggregate principal amount of $100.0 million of 3.81 percent Series A Senior Notes due June 15, 2029 ("Series A Senior Notes") and $100.0 million of 3.91 percent 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, we 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 Toro.
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 fiscal year ended October 31, 2019, we incurred interest expense of approximately $2.6 million on the outstanding borrowings under the private placement note purchase agreement. No principal is due on the Senior Notes prior to their stated due dates.
We have the right to prepay all or a portion of either series of the Senior Notes in amounts equal to not less than 10.0 percent of the principal amount of the Senior Notes then outstanding upon notice to the holders of the series of Senior Notes being prepaid for 100.0 percent 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 series, we have the right to prepay all of the outstanding Senior Note of such series for 100.0 percent 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, we are required to offer to prepay all Senior Notes for the principal amount thereof plus accrued and unpaid interest, if any, to the date of prepayment.
The private placement note purchase agreement contains customary representations and warranties of Toro, 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. Under the private placement note purchase agreement, we are not limited in the amount for payments of cash dividends and common stock repurchases as long as, both before and after giving pro forma effect to such payments, our leverage ratio from the previous quarter compliance certificate is less than or equal to 3.5 (or, at our option (which we may exercise twice during the term of the facility) after certain acquisitions with aggregate consideration in excess of $75.0 million, for the first four quarters following the exercise of such option, is less than or equal to 4.0), provided that immediately after giving effect of any such proposed action,
no default or event of default would exist. As of October 31, 2019, we were not limited in the amount for payments of cash dividends and stock repurchases. We were in compliance with all covenants related to the private placement note purchase agreement as of October 31, 2019 and we expect to be in compliance with all covenants during fiscal 2020. If we were out of compliance with any covenant required by this private placement note purchase agreement following the applicable cure period, our term loan facilities, long-term senior notes, debentures, and any amounts outstanding under the revolving credit facility would become due and payable if we were unable to obtain a covenant waiver or refinance our borrowings under our private placement note purchase agreement.
Capital Structure
The following table details the components of our total capitalization and debt-to-capitalization ratio:
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|
|
|
|
|
|
|
|
|
(Dollars in millions)
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
Long-term debt, including current portion
|
|
$
|
700.8
|
|
|
$
|
312.5
|
|
Stockholders' equity
|
|
$
|
859.6
|
|
|
$
|
668.9
|
|
Debt-to-capitalization ratio
|
|
44.9
|
%
|
|
31.8
|
%
|
Our debt-to-capitalization ratio increased in fiscal 2019 compared to fiscal 2018 primarily due to an increase in long-term debt driven by the issuance of indebtedness under our term loan credit agreement and amounts drawn on our revolving credit facility to fund the CMW acquisition and the issuance of our private placement senior notes, partially offset by repayments of outstanding borrowings on our revolving credit facility and term loan credit agreement. Stockholders' equity also increased in fiscal 2019 compared to fiscal 2018 primarily due to increased net earnings, reduced purchases of Toro common stock, and increased exercises of stock options, partially offset by increased cash dividend payments on shares of our common stock.
Cash Dividends
In each quarter of fiscal 2019, our Board of Directors declared a common stock cash dividend of $0.225 per share, which was a 12.5 percent increase over our common stock cash dividend of $0.20 per share paid each quarter in fiscal 2018. On December 3, 2019, our Board of Directors increased our fiscal 2020 first quarter common stock cash dividend by 11.1 percent to $0.25 per share from the quarterly common stock cash dividend of $0.225 per share paid in the first quarter of fiscal 2019. Future common stock cash dividends will depend upon our financial condition, capital requirements, results of operations, and other factors deemed relevant by our Board of Directors.
Share Repurchases
During fiscal 2019, we curtailed repurchasing shares of our common stock under our Board authorized stock repurchase program after our fiscal 2019 first quarter, as we focused on repaying the outstanding borrowings issued to fund the purchase price for our acquisition of CMW. As of October 31,
2019, 7,042,256 shares remained available for repurchase under our Board authorized stock repurchase program. Our Board authorized stock repurchase program provides shares for use in connection with our equity compensation plans. We expect to repurchase shares of our common stock in fiscal 2020, depending on market conditions and other factors.
The following table provides information with respect to repurchases of our common stock during the past three fiscal years:
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|
|
|
|
|
|
|
|
|
|
|
(Dollars in millions, except share and per share data)
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|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Shares of Board authorized common stock purchased
|
|
359,758
|
|
|
2,579,864
|
|
|
2,710,837
|
|
Cost to repurchase common stock
|
|
$
|
20.0
|
|
|
$
|
160.4
|
|
|
$
|
159.4
|
|
Average price paid per share
|
|
$
|
55.71
|
|
|
$
|
62.19
|
|
|
$
|
58.78
|
|
Customer Financing Arrangements
Wholesale Financing
We are party to a joint venture with TCFIF, established as Red Iron, the primary purpose of which is to provide inventory financing to certain distributors and dealers of certain of our products in the U.S. that enables them to carry representative inventories of our products. In addition, TCFCFC provides inventory financing to dealers of certain of our products in Canada. Under these financing arrangements, down payments are not required and, depending on the finance program for each product line, finance charges are incurred by us, shared between us and the distributor and/or the dealer, or paid by the distributor or dealer. Red Iron retains a security interest in the distributors' and dealers' financed inventories, and those inventories are monitored regularly. Financing terms to the distributors and dealers require payment as the equipment, which secures the indebtedness, is sold to customers or when payment terms become due, whichever occurs first. Rates are generally indexed to LIBOR plus a fixed percentage that differs based on whether the financing is for a distributor or dealer. Rates may also vary based on the product that is financed. Red Iron financed $1,924.9 million of new receivables for dealers and distributors during fiscal 2019, of which $486.8 million of net receivables were outstanding as of October 31, 2019.
We also have floor plan financing agreements with other third-party financial institutions to provide floor plan financing to certain dealers not financed through Red Iron, which include agreements with third-party financial institutions in the U.S. and internationally as a result of our acquisition of CMW and in Australia. These third-party financing companies financed $235.4 million of receivables for such dealers and distributors during fiscal 2019, of which $148.4 million was outstanding as of October 31, 2019.
We entered into a limited inventory repurchase agreement with Red Iron. Under such limited inventory repurchase agreement agreement, we have agreed to repurchase products repossessed by Red Iron and TCFCFC, up to a maximum aggregate amount of $7.5 million in a calendar year. Additionally, as a result of
our financing agreements with the separate third-party financial institutions, we have also entered into inventory repurchase agreements with the separate third-party financial institutions, for which we have agreed to repurchase products repossessed by the separate third-party financial institutions. As of October 31, 2019, we were contingently liable to repurchase up to a maximum amount of $133.4 million of inventory related to receivables under these inventory repurchase agreements. Our financial exposure under these inventory repurchase agreements is limited to the difference between the amount paid to Red Iron or other third-party financing institutions for repurchases of inventory and the amount received upon any subsequent resale of the repossessed product. We have repurchased immaterial amounts of inventory pursuant to such arrangements over the past three fiscal years. However, a decline in retail sales or financial difficulties of our distributors or dealers could cause this situation to change and thereby require us to repurchase financed product, which could have an adverse effect on our operating results.
We continue to provide financing in the form of open account terms to home centers and mass retailers; general line irrigation dealers; international distributors and dealers other than the Canadian distributors and dealers to whom Red Iron or other third-party financing institutions provide financing arrangements; ag-irrigation dealers and distributors; government customers; and rental companies.
End-User Financing
We have agreements with third-party financing companies to provide lease-financing options to golf course, sports fields and grounds equipment and underground construction equipment customers in the U.S., Canada, Australia, and select countries in Europe. The purpose of these agreements is to provide end-users of our products alternative financing options when purchasing our products. We have no material contingent liabilities for residual value or credit collection risk under these agreements with third-party financing companies.
From time to time, we enter into agreements where we provide recourse to third-party finance companies in the event of default by the customer for lease payments to the third-party finance company. Our maximum exposure for credit collection under those arrangements as of October 31, 2019 was $10.1 million.
Termination or any material change to the terms of our end-user financing arrangements, availability of credit for our customers, including any delay in securing replacement credit sources, or significant financed product repurchase requirements could have a material adverse impact on our future operating results.
Contractual Obligations
We are obligated to make future payments under various existing contracts, such as debt agreements, operating lease agreements, unconditional purchase obligations, and other long-term obligations. The following table summarizes our contractual obligations as of October 31, 2019:
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|
|
|
|
(Dollars in millions)
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|
Payments Due by Period
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Contractual Obligations
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|
Total
|
|
Less Than 1 Year
|
|
1-3 Years
|
|
3-5 Years
|
|
More Than 5 Years
|
Long-term debt1
|
|
$
|
705.0
|
|
|
$
|
—
|
|
|
$
|
115.0
|
|
|
$
|
165.0
|
|
|
$
|
425.0
|
|
Interest payments2
|
|
309.2
|
|
|
31.9
|
|
|
62.6
|
|
|
53.8
|
|
|
160.9
|
|
Purchase obligations3
|
|
24.8
|
|
|
24.5
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
Operating leases4
|
|
83.0
|
|
|
17.1
|
|
|
28.6
|
|
|
18.6
|
|
|
18.7
|
|
Other5
|
|
15.3
|
|
|
6.0
|
|
|
8.1
|
|
|
0.6
|
|
|
0.6
|
|
Total
|
|
$
|
1,137.3
|
|
|
$
|
79.5
|
|
|
$
|
214.6
|
|
|
$
|
238.0
|
|
|
$
|
605.2
|
|
|
|
1
|
Principal payments based on the maturity dates defined in our long-term debt agreements.
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|
|
2
|
Interest payments for outstanding long-term debt obligations. Interest on variable rate debt was calculated using the interest rate as of October 31, 2019.
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|
|
3
|
Purchase obligations represent contracts or firm commitments for the purchase of commodities, components, parts, and accessories, as well as contracts or firm commitments to purchase property, plant, and equipment, as applicable.
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|
|
4
|
Operating lease obligations represent contracts that convey our right to use certain property, plant, or equipment assets in exchange for consideration and do not include payments to property owners covering real estate taxes and common area maintenance.
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|
|
5
|
Payment obligations for corporate information technology software and services, as well as other miscellaneous contractual obligations.
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In addition to the contractual obligations described in the preceding table, we may be obligated for additional net cash outflows related to $2.5 million of unrecognized tax benefits, including interest and penalties. The payment and timing of any such payments is affected by the ultimate resolution of the tax years that are under audit or remain subject to examination by the relevant taxing authorities.
Off-Balance Sheet Arrangements
We have off-balance sheet arrangements relating to our operating lease agreements for certain property, plant, or equipment assets utilized in the normal course of business, such as buildings for manufacturing facilities, office space, distribution centers, and warehouse facilities; land for product testing sites; machinery and equipment for research and development activities, manufacturing and assembly processes, and administrative tasks; and vehicles for sales, marketing and distribution activities. Refer to the section titled "Contractual Obligations" within this MD&A for our future payment obligations under our operating lease agreements.
We also have off-balance sheet arrangements with Red Iron, our joint venture with TCFIF, TCFCFC, and other third-party financial institutions in which inventory receivables for certain dealers and distributors are financed by Red Iron, TCFCFC, or the other third-party financial institutions. Additional information regarding such agreements is disclosed within the section titled "Wholesale Financing" included in Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 11, Investment in Joint Venture, and Note 12, Commitments and Contingent Liabilities, of the Notes to Consolidated Financial Statements included in Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Additionally, we use standby letters of credit under our revolving credit facility, import letters of credit, and surety bonds in the ordinary course of business to ensure the performance of contractual obligations, as required under certain contracts. As of October 31, 2019, we had $10.0 million of maximum availability and $1.9 million outstanding under the sublimit for standby letters of credit under our revolving credit facility. As of October 31, 2019, we had $13.3 million of maximum availability and $4.7 million in outstanding import letters of credit issued. As of October 31, 2019, we did not have an outstanding balance on our surety bonds.
Market Risk
Due to the nature and scope of our operations, we are subject to exposures that arise from fluctuations in interest rates, foreign currency exchange rates, and commodity costs. We are also exposed to equity market risk pertaining to the trading price of our common stock. Additional information regarding such market risks is disclosed in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk," and Note 13, Financial Instruments, of the Notes to Consolidated Financial Statements within Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
In preparing our Consolidated Financial Statements in conformity with U.S. GAAP, we must make decisions that impact the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of the relevant circumstances, historical experience, and actuarial and other independent external third-party specialist valuations, when applicable. Actual amounts could differ from those estimated at the time the Consolidated Financial Statements are prepared.
Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements. Some of those significant accounting policies require us to make difficult, subjective, or complex judgments or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highly uncertain at the time the accounting estimate is made, and (ii) different estimates reasonably could have been used, or changes in the estimate that are reasonably likely to occur from period to period may have a material impact on the presentation of our financial condition, changes in financial condition, or results of operations. Our critical accounting policies and estimates include the following:
Warranty Reserve
Warranty coverage on our products is generally for specified periods of time and on select products' hours of usage, and generally covers parts, labor, and other expenses for non-maintenance repairs. Warranty coverage generally does not cover operator abuse or improper use. At the time of sale, we accrue a warranty reserve by product line for estimated costs in connection with future warranty claims. We also establish reserves for major rework campaigns. The amount of our warranty reserves is based primarily on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of claims to sales, and the historical length of time between the sale and resulting warranty claim. We periodically assess the adequacy of our warranty reserves based on changes in these factors and record any necessary adjustments if actual claim experience indicates that adjustments are necessary. Actual claims could be higher or lower than amounts estimated, as the number and value of warranty claims can vary due to such factors as performance of new products, significant manufacturing or design defects not discovered until after the product is delivered to customers, product failure rates, and higher or lower than expected service costs for a repair. We believe that analysis of historical trends and knowledge of potential manufacturing or design problems provide sufficient information to establish a reasonable estimate for warranty claims at the time of sale. However, since we cannot predict with certainty future warranty claims or costs associated with servicing those claims, our actual warranty costs may differ
from our estimates. An unexpected increase in warranty claims or in the costs associated with servicing those claims would result in an increase in our warranty accrual and a decrease in our net earnings.
Sales Promotions and Incentives
At the time of sale, we record an estimate for sales promotion and incentive costs. Our estimates of sales promotion and incentive costs are based on the terms of the arrangements with customers, historical payment experience, field inventory levels, volume purchases, and expectations for changes in relevant trends in the future. The expense of each program is classified as a reduction from gross sales or as a component of selling, general and administrative expense, depending on the nature of the respective program.
Examples of significant sales promotions and incentive programs in which the related expense is classified as a reduction from gross sales are as follows:
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|
•
|
Off-Invoice Discounts: Our costs for off-invoice discounts represent a reduction in the selling price of our products given at the time of sale.
|
|
|
•
|
Rebate Programs: Our rebate programs are generally based on claims submitted from either our direct customers or end-users of our products, depending upon the program. The amount of the rebate varies based on the specific program and is either a dollar amount or a percentage of the purchase price and can also be based on actual retail price as compared to our selling price.
|
|
|
•
|
Incentive Discounts: Our costs for incentive discount programs are based on our customers’ purchase or retail sales goals of certain quantities or mixes of product during a specified time period, which are tracked on an annual or quarterly basis depending on the program.
|
|
|
•
|
Financing Programs: Our financing programs, consist of wholesale floor plan financing and end-user retail financing. Costs incurred for wholesale floor plan financing programs represent financing costs associated with programs under which we pay a portion of the interest cost to finance distributor and dealer inventories through third-party financing arrangements for a specific period of time. End-user retail financing is similar to floor planning with the difference being that retail financing programs are offered to end-user customers under which we pay a portion of interest costs on behalf of end-users for financing purchases of our equipment.
|
|
|
•
|
Commissions Paid to Service Home Centers: We pay commissions to representative agencies to service home centers to ensure appropriate store sets for all Toro product. This estimated expense is recorded at point of sale. In addition, Toro dealers are paid a commission to set up and deliver riding product purchased at certain home centers.
|
Examples of significant sales promotions and incentive programs in which the related expense is classified as a component of selling, general, and administrative expense are as follows:
|
|
•
|
Commissions Paid to Distributors and Dealers: For certain products, we use a distribution network of dealers and distributors that purchase and take possession of products for sale to the end customer. In addition, we have dealers and distributors that act as sales agents for us on certain products using a direct-selling type model. Under this direct-selling type model, our network of distributors and dealers facilitates a sale directly to the dealer or end-user customer on our behalf. Commissions to distributors and dealers in these instances represent commission payments to sales agents that are also our customers.
|
|
|
•
|
Cooperative Advertising: Cooperative advertising programs are based on advertising costs incurred by distributors and dealers for promoting our products. We support a portion of those advertising costs in which claims are submitted by the distributor or dealer along with evidence of the advertising material procured/produced and evidence of the cost incurred in the form of third-party invoices or receipts.
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Estimates for sales promotion and incentive costs are based on the terms of the arrangements with customers, historical payment experience, field inventory levels, volume purchases, and expectations for changes in relevant trends in the future. Actual results may differ from these estimates if competitive factors dictate the need to enhance or reduce sales promotion and incentive accruals or if customer usage and field inventory levels vary from historical trends. Adjustments to sales promotions and incentive accruals are made from time to time as actual usage becomes known in order to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized, but are tested at least annually for impairment and whenever events or changes in circumstances indicate that impairment may have occurred. We test goodwill for impairment at the reporting unit level and test indefinite-lived intangible assets for impairment at the individual indefinite-lived intangible asset or asset group level, as appropriate. Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived intangible assets, but the income approach is utilized for both to determine fair value when a quantitative analysis is required. Under the income approach, we calculate the fair value of our reporting units and indefinite-lived intangible assets using the present value of future cash flows. Assumptions utilized in determining fair value under the income approach, such as forecasted growth rates and weighted-average cost of capital ("WACC"), are consistent with internal projections and operating plans. Materially different assumptions regarding future performance of our businesses or a different WACC rate could result in impairment losses.
Individual indefinite-lived intangible assets, or asset groups, are tested for impairment by comparing the carrying amounts of the respective asset, or asset group, to its estimated fair value. Our estimate of the fair value for an indefinite-lived intangible asset, or asset group, uses projected revenues from our forecasting process, assumed royalty rates, and a discount rate. If the fair value of the indefinite-lived intangible asset, or asset group, is less than its carrying value, an impairment loss is recognized in an amount equal to the excess.
In conducting our goodwill impairment test, we may elect to first perform a qualitative assessment to determine whether changes in events or circumstances since our most recent quantitative test for goodwill impairment indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. However, we have an unconditional option to bypass the qualitative assessment for any reporting unit and proceed directly to performing the quantitative analysis. If elected, in conducting the initial qualitative assessment, we analyze actual and projected growth trends for net sales, gross margin, and earnings for each reporting unit, as well as historical versus planned performance. Additionally, each reporting unit is assessed for critical areas that may impact its business, including macroeconomic conditions, market-related exposures, competitive changes, new or discontinued products, changes in key personnel, or any other potential risks to projected financial results. All assumptions used in the qualitative assessment require significant judgment. If, after evaluating the weight of the changes in events and circumstances, both positive and negative, we conclude that an impairment may exist, a quantitative test for goodwill impairment is performed.
If performed due to identified impairment indicators under the qualitative assessment, the duration of time since the most recent quantitative goodwill impairment test, or our election to bypass the qualitative assessment and move directly to the quantitative analysis, the quantitative goodwill impairment test is a one-step process. In performing the quantitative analysis, we compare the carrying value of a reporting unit, including goodwill, to its fair value. The carrying amount of each reporting unit is determined based on the amount of equity required for the reporting unit's activities, considering the specific assets and liabilities of the reporting unit. We do not assign corporate assets and liabilities to reporting units that do not relate to the operations of the reporting unit or are not considered in determining the fair value of the reporting unit. Our estimate of the fair value of our reporting units utilizes various inputs and assumptions, including projected operating results and growth rates from our forecasting process, applicable tax rates and a WACC rate. Where available, and as appropriate, comparable market multiples and our company's market capitalization are also used to corroborate the results of the discounted cash flow models. If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge would be recognized for the amount by which the carrying value of the
reporting unit exceeds the its fair value, not to exceed the total amount of goodwill allocated to that reporting unit.
Inventory Valuation
We value our inventories at the lower of the cost of inventory or net realizable value, with cost determined by either the first-in, first-out method for most U.S. inventories or the last-in, first-out or average cost methods for all other inventories. We establish reserves for excess, slow moving, and obsolete inventory based on inventory levels, expected product life, and forecasted sales demand. Valuation of inventory can also be affected by significant redesign of existing products or replacement of an existing product by an entirely new generation product. In assessing the ultimate realization of inventories, we are required to make judgments as to future demand requirements compared with inventory levels. Reserve requirements are developed according to our projected demand requirements based on historical demand, competitive factors, and technological and product life cycle changes. It is possible that an increase in our reserve may be required in the future if there is a significant decline in demand for our products and we do not adjust our production schedule accordingly.
Though management considers reserve balances adequate and proper, changes in economic conditions in specific markets in which we operate could have an effect on the reserve balances required for excess, slow moving and obsolete inventory.
Business Combinations
We account for the acquisition of a business in accordance with the accounting standards codification guidance for business combinations, whereby the total consideration transferred is allocated to the assets acquired and liabilities assumed, including amounts attributable to non-controlling interests, when applicable, based on their respective estimated fair values as of the date of acquisition. Goodwill represents the excess of consideration transferred over the estimated fair value of the net assets acquired in a business combination.
Assigning estimated fair values to the assets acquired and liabilities assumed requires the use of significant estimates, judgments, inputs, and assumptions regarding the fair value of intangibles assets that are separately identifiable from goodwill, inventory, and property, plant, and equipment. Such significant estimates, judgments, inputs, and assumptions include, when applicable, the selection of an appropriate valuation method depending on the nature of the respective asset, such as the income approach, the market or sales comparison approach, or the cost approach; estimating future cash flows based on projected revenues and/or margins that we expect to generate subsequent to an acquisition; applying an appropriate discount rate to estimate the present value of those projected cash flows we expect to generate subsequent to an acquisition; selecting an appropriate royalty rate or estimating a customer attrition or technological obsolescence factor where necessary and appropriate given the nature of the respective asset; assigning the appropriate contributory asset charge where needed; determining an appropriate useful life and the related depreciation or amortization method for the respective asset;
and assessing the accuracy and completeness of other historical financial metrics of the acquiree used as standalone inputs or as the basis for determining estimated projected inputs such as margins, customer attrition, and costs to hold and sell product.
In determining the estimated fair value of intangible assets that are separately identifiable from goodwill, we typically utilize the income approach, which discounts the projected future cash flows using an appropriate discount rate that reflects the risks associated with the projected cash flows. However, in certain instances, particularly in relation to developed technology or patents, we may utilize the cost approach depending on the nature of the respective intangible asset and the recency of the development or procurement of such technology. In determining the estimated fair value of acquired inventory, we typically utilize the cost approach for raw materials and the sales comparison approach for work in process, finished goods, and service parts. In determining the estimated fair value of acquired property, plant, and equipment, we typically utilize the sales comparison approach or the cost approach depending on the nature of the respective asset and the recency of the construction or procurement of such asset.
Estimated fair values of intangible assets that are separately identifiable from goodwill, inventory, and property, plant, and equipment are based on available historical information, future expectations, and assumptions determined to be reasonable but are inherently uncertain with respect to future events, including economic conditions, competition, the useful life of the acquired assets and other factors. We may refine the estimated fair values of assets acquired and liabilities assumed, if necessary, over a period not to exceed one year from the date of acquisition by taking into consideration new information that, if known at the date of acquisition, would have affected the estimated fair values ascribed to the assets acquired and liabilities assumed. Estimates that are sensitive include judgments as to whether information gathered during the measurement period relate to information that was not yet available or whether subsequent developments have occurred that indicate the recognition of other asset or liabilities should be recorded within net earnings. The judgments made in determining the estimated fair value assigned to assets acquired and liabilities assumed, as well as the estimated useful life and depreciation or amortization method of each asset, can materially impact the net earnings of the periods subsequent to an acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. During the measurement period, any purchase price allocation changes that impact the carrying value of goodwill will affect any measurement of goodwill impairment taken during the measurement period, if applicable.
Recent Accounting Pronouncements
For information regarding recent accounting pronouncements, refer to Note 1, Summary of Significant Accounting Policies and Related Data, in our Notes to Consolidated Financial Statements in the sections entitled "New Accounting Pronouncements Adopted" and "New Accounting
commodity cost exposures are with steel, aluminum, petroleum and natural gas-based resins, copper, lead, rubber, linerboard, and others. We generally purchase commodities, components, parts, and accessories based upon market prices that are established with suppliers as part of the purchase process and generally attempt to obtain firm pricing from most of our suppliers for volumes consistent with planned production and estimates of wholesale and retail demand for our products.
We strategically work to mitigate any unfavorable impact as a result of changes to the cost of commodities, components, parts, and accessories that affect our product lines. Historically, we have mitigated, and we currently expect that we would mitigate, any commodity, components, parts, and accessories cost increases, in part, by collaborating with suppliers, reviewing alternative sourcing options, substituting materials, utilizing Lean methods, engaging in internal cost reduction efforts, utilizing tariff exclusions and duty drawback mechanisms, and increasing prices on some of our products, all as appropriate. Additionally, we enter into fixed-price contracts for future purchases of natural gas in the normal course of operations as a means to manage natural gas price risks. However, to the extent that commodity and component costs increase, as a result of inflation, tariffs, duties, or otherwise, and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, we may experience a decline in our gross margins to the extent we are not able to increase selling prices of our products or obtain manufacturing efficiencies to offset increases in commodity, component, parts, and accessories costs. In fiscal 2019, the average cost of commodities, components, parts, and accessories purchased, including the impact of inflation and tariff costs, was higher compared to the average cost of commodities, components, parts, and accessories purchased in fiscal 2018.
Further information regarding changing costs of commodities is presented in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K in the section entitled "Inflation".
Equity Market Risk
The trading price volatility of our common stock impacts compensation expense related to our stock-based compensation plans. Refer to Note 9, Stock-Based Compensation Plans, in the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information regarding our stock-based compensation plans.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining an adequate system of internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934, as amended, for The Toro Company and its subsidiaries. This system of internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States.
The company's system of internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements, and even when determined to be effective, can only provide reasonable assurance with respect to financial statement preparation and presentation. In addition, projection of any evaluation of the effectiveness of internal control over financial reporting to future periods is subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management, with the participation of the company's Chairman of the Board, President and Chief Executive Officer and Vice President, Treasurer and Chief Financial Officer, evaluated the effectiveness of the company's internal control over financial reporting as of October 31, 2019. In making this evaluation, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on this assessment, management concluded that the company's internal control over financial reporting was effective as of October 31, 2019. As permitted by guidance issued by the SEC, management excluded from its assessment of its system of internal control over financial reporting the operations of The Charles Machine Works, Inc., which was acquired on April 1, 2019 and accounted for approximately 35.0 percent of consolidated total assets and 14.8 percent of consolidated net sales of The Toro Company as of October 31, 2019.
Our internal control over financial reporting as of October 31, 2019, has been audited by KPMG LLP, an independent registered public accounting firm, as stated in their report, which is included herein.
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/s/ Richard M. Olson
|
|
|
Chairman of the Board, President and Chief Executive Officer
|
|
|
/s/ Renee J. Peterson
|
|
|
Vice President, Treasurer and Chief Financial Officer
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|
December 20, 2019
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|
Further discussion of the company's internal controls and procedures is included in Part II, Item 9A, "Controls and Procedures" of this report.
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
The Toro Company:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of The Toro Company and subsidiaries (the Company) as of October 31, 2019 and 2018, the related consolidated statements of earnings, comprehensive income, stockholders’ equity, and cash flows for each of the years in the three-year period ended October 31, 2019, and the related notes and financial statement schedule listed in 15 (a) 2 (collectively, the consolidated financial statements). We also have audited the Company’s internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of October 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the three-year period ended October 31, 2019, in conformity with U.S. generally accepted accounting principles. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Management excluded from its assessment of its system of internal control over financial reporting the operations of The Charles Machine Works, Inc. (”CMW”), which was acquired on April 1, 2019 and accounted for approximately 35.0 percent of total assets and 14.8 percent of net sales included in the consolidated financial statements of the Company as of and for the year ended October 31, 2019. Our audit of internal control over financial reporting of the Company also excluded an evaluation of the internal control over financial reporting of CMW.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s consolidated financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Evaluation of the Acquisition Date Fair Value of Customer-related and Trade Name Intangible Assets
As discussed in Note 2 to the consolidated financial statements, on April 1, 2019, the Company acquired CMW in a business combination. As a result of the transaction, the Company acquired customer-related and trade name intangible assets with acquisition date fair values of $130.8 million and $108.9 million, respectively.
We identified the evaluation of the acquisition date fair values of the customer-related and trade name intangible assets as a critical audit matter. Testing the assumptions regarding future revenue growth rates, attrition rates, future earnings before interest, taxes, depreciation and amortization (EBITDA), and discount rates, which were used to determine the fair values, involved a high degree of subjectivity. In addition, the fair values of these intangible assets were challenging to test due to the sensitivity of the fair value determination to changes in these assumptions.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s acquisition-date valuation process, including controls over the development of the relevant assumptions as listed above. We performed sensitivity analyses over the relevant assumptions to assess the impact of changes in those assumptions on the Company’s determination of the fair value of the intangible assets. We evaluated the Company’s revenue growth rates by comparing them to historical results and those of the Company’s peers and industry reports. To assess the Company’s attrition rates, we compared the Company’s estimates of attrition to CMW’s historical customer attrition data. We also compared the Company’s estimates of future EBITDA to CMW’s historical actual results. In addition, we involved valuation professionals with specialized skills and knowledge, who assisted in:
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|
•
|
Evaluating the Company’s discount rates, by comparing them against a discount rate range that was independently developed using publicly available market data for comparable entities; and
|
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|
•
|
Developing an estimate of the fair values of the customer-related and trade name intangible assets acquired using the Company’s cash flow and revenue forecasts, respectively, and an independently developed discount rate and compared the results of our estimates to the Company’s fair value estimates.
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Evaluation of Accrued Sales Promotions and Incentives
As reported in the balance sheet and as further discussed in Note 1 to the consolidated financial statements, the Company recorded an accrual of $103.4 million for sales promotions and incentives as of October 31, 2019. At the time of sale, the Company records an estimate for sales promotion and incentive costs. The Company’s estimates for sales promotion and incentive costs are based on the terms of the arrangements with customers, historical payment experience, field inventory levels, volume purchases, and expectations for changes in relevant trends in the future.
We identified the evaluation of accrued sales promotions and incentives as a critical audit matter. A high degree of auditor judgment was required to evaluate the Company’s expectations for changes in relevant trends in the future that were used to develop the estimate. Historical experience was an input used to develop expectations for changes in relevant trends in the future. Changes in the expected future trends could have a significant impact to the accrual for sales promotions and incentives.
The primary procedures we performed to address this critical audit matter included the following. We tested certain internal controls over the Company’s sales promotions and incentives process, including controls over the evaluation of the inputs described above. We evaluated the Company’s ability to accurately estimate the sales promotions and incentives accruals through retrospective comparison of historic accruals with subsequent payments. We developed an independent expectation of the Company’s accrual considering historical experience and current year field inventory levels. Additionally, we tested sales promotion and incentives paid subsequent to the balance sheet date by tracing a sample of payments to underlying documentation including program term sheets to evaluate the accrual estimate.
/s/ KPMG LLP
We have served as the Company’s auditor since 1928.
Minneapolis, Minnesota
December 20, 2019
THE TORO COMPANY AND SUBSIDIARIES
Consolidated Statements of Earnings
(Dollars and shares in thousands, except per share data)
|
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|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Net sales
|
|
$
|
3,138,084
|
|
|
$
|
2,618,650
|
|
|
$
|
2,505,176
|
|
Cost of sales
|
|
2,090,121
|
|
|
1,677,639
|
|
|
1,584,339
|
|
Gross profit
|
|
1,047,963
|
|
|
941,011
|
|
|
920,837
|
|
Selling, general and administrative expense
|
|
722,934
|
|
|
567,926
|
|
|
565,727
|
|
Operating earnings
|
|
325,029
|
|
|
373,085
|
|
|
355,110
|
|
Interest expense
|
|
(28,835
|
)
|
|
(19,096
|
)
|
|
(19,113
|
)
|
Other income, net
|
|
25,939
|
|
|
18,408
|
|
|
17,187
|
|
Earnings before income taxes
|
|
322,133
|
|
|
372,397
|
|
|
353,184
|
|
Provision for income taxes
|
|
48,150
|
|
|
100,458
|
|
|
85,467
|
|
Net earnings
|
|
$
|
273,983
|
|
|
$
|
271,939
|
|
|
$
|
267,717
|
|
|
|
|
|
|
|
|
Basic net earnings per share of common stock
|
|
$
|
2.57
|
|
|
$
|
2.56
|
|
|
$
|
2.47
|
|
|
|
|
|
|
|
|
Diluted net earnings per share of common stock
|
|
$
|
2.53
|
|
|
$
|
2.50
|
|
|
$
|
2.41
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock outstanding – Basic
|
|
106,773
|
|
|
106,369
|
|
|
108,312
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock outstanding – Diluted
|
|
108,090
|
|
|
108,657
|
|
|
111,252
|
|
The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements.
THE TORO COMPANY AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Dollars in thousands)
|
|
|
|
|
|
|
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|
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|
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Fiscal Years Ended October 31
|
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2019
|
|
2018
|
|
2017
|
Net earnings
|
|
$
|
273,983
|
|
|
$
|
271,939
|
|
|
$
|
267,717
|
|
Other comprehensive income (loss), net of tax:
|
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|
|
|
|
|
|
|
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Foreign currency translation adjustments, net of tax of $(16), $(222), and $0, respectively
|
|
(1,314
|
)
|
|
(8,408
|
)
|
|
10,127
|
|
Derivative instruments, net of tax of $(862), $2,899, and $(1,123), respectively
|
|
(2,498
|
)
|
|
7,415
|
|
|
(158
|
)
|
Pension and retiree medical benefits, net of tax of $(1,305), $254, and $2,536, respectively
|
|
(4,300
|
)
|
|
1,035
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|
|
4,347
|
|
Other comprehensive income (loss), net of tax
|
|
(8,112
|
)
|
|
42
|
|
|
14,316
|
|
Comprehensive income
|
|
$
|
265,871
|
|
|
$
|
271,981
|
|
|
$
|
282,033
|
|
The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements.
THE TORO COMPANY AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except per share data)
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|
|
|
|
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October 31
|
|
2019
|
|
2018
|
ASSETS
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
151,828
|
|
|
$
|
289,124
|
|
Receivables, net:
|
|
|
|
|
|
|
Customers, net of allowances (2019 - $3,270; 2018 - $2,228)
|
|
242,196
|
|
|
185,128
|
|
Other
|
|
26,572
|
|
|
8,050
|
|
Total receivables, net
|
|
268,768
|
|
|
193,178
|
|
Inventories, net
|
|
651,663
|
|
|
358,259
|
|
Prepaid expenses and other current assets
|
|
50,632
|
|
|
54,076
|
|
Total current assets
|
|
1,122,891
|
|
|
894,637
|
|
Property, plant and equipment, net
|
|
437,317
|
|
|
271,459
|
|
Deferred income taxes
|
|
6,251
|
|
|
38,252
|
|
Goodwill
|
|
362,253
|
|
|
225,290
|
|
Other intangible assets, net
|
|
352,374
|
|
|
105,649
|
|
Other assets
|
|
49,461
|
|
|
35,697
|
|
Total assets
|
|
$
|
2,330,547
|
|
|
$
|
1,570,984
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
Current portion of long-term debt
|
|
$
|
79,914
|
|
|
$
|
—
|
|
Accounts payable
|
|
319,230
|
|
|
256,575
|
|
Accrued liabilities:
|
|
|
|
|
|
|
Warranty
|
|
96,604
|
|
|
76,214
|
|
Advertising and marketing programs
|
|
103,417
|
|
|
89,450
|
|
Compensation and benefit costs
|
|
76,862
|
|
|
50,850
|
|
Insurance
|
|
11,164
|
|
|
7,909
|
|
Interest
|
|
9,903
|
|
|
7,249
|
|
Other
|
|
59,876
|
|
|
44,388
|
|
Total current liabilities
|
|
756,970
|
|
|
532,635
|
|
Long-term debt, less current portion
|
|
620,899
|
|
|
312,549
|
|
Deferred income taxes
|
|
50,579
|
|
|
1,397
|
|
Other long-term liabilities
|
|
42,521
|
|
|
55,487
|
|
Stockholders' equity:
|
|
|
|
|
|
|
Preferred stock, par value $1.00 per share, authorized 1,000,000 voting and 850,000 non-voting shares, none issued and outstanding
|
|
—
|
|
|
—
|
|
Common stock, par value $1.00 per share, authorized 175,000,000 shares; issued and outstanding 106,742,082 shares as of October 31, 2019 and 105,600,652 shares as of October 31, 2018
|
|
106,742
|
|
|
105,601
|
|
Retained earnings
|
|
784,885
|
|
|
587,252
|
|
Accumulated other comprehensive loss
|
|
(32,049
|
)
|
|
(23,937
|
)
|
Total stockholders' equity
|
|
859,578
|
|
|
668,916
|
|
Total liabilities and stockholders' equity
|
|
$
|
2,330,547
|
|
|
$
|
1,570,984
|
|
The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements.
THE TORO COMPANY AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net earnings
|
|
$
|
273,983
|
|
|
$
|
271,939
|
|
|
$
|
267,717
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Non-cash income from finance affiliate
|
|
(11,948
|
)
|
|
(11,143
|
)
|
|
(9,960
|
)
|
Distributions from finance affiliate, net
|
|
10,343
|
|
|
9,228
|
|
|
8,050
|
|
Depreciation of property, plant and equipment
|
|
69,314
|
|
|
53,484
|
|
|
54,679
|
|
Amortization of other intangible assets
|
|
18,384
|
|
|
7,793
|
|
|
10,307
|
|
Fair value step-up adjustment to acquired inventory
|
|
39,368
|
|
|
—
|
|
|
—
|
|
Stock-based compensation expense
|
|
13,429
|
|
|
12,161
|
|
|
13,517
|
|
Deferred income taxes
|
|
(6,190
|
)
|
|
25,255
|
|
|
(6,887
|
)
|
Other
|
|
6,357
|
|
|
507
|
|
|
202
|
|
Changes in operating assets and liabilities, net of effect of acquisitions:
|
|
|
|
|
|
|
|
|
|
Receivables, net
|
|
(11,042
|
)
|
|
(10,365
|
)
|
|
(17,701
|
)
|
Inventories, net
|
|
(104,832
|
)
|
|
(29,770
|
)
|
|
(15,611
|
)
|
Prepaid expenses and other assets
|
|
9,747
|
|
|
(11,744
|
)
|
|
(3,424
|
)
|
Accounts payable, accrued liabilities, deferred revenue and other long-term liabilities
|
|
30,458
|
|
|
47,460
|
|
|
59,859
|
|
Net cash provided by operating activities
|
|
337,371
|
|
|
364,805
|
|
|
360,748
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant and equipment
|
|
(92,881
|
)
|
|
(90,124
|
)
|
|
(58,276
|
)
|
Proceeds from asset disposals
|
|
4,669
|
|
|
151
|
|
|
199
|
|
Proceeds from sale of a business
|
|
12,941
|
|
|
—
|
|
|
—
|
|
Investments in unconsolidated entities
|
|
(200
|
)
|
|
(6,750
|
)
|
|
(1,500
|
)
|
Acquisitions, net of cash acquired
|
|
(697,471
|
)
|
|
(31,202
|
)
|
|
(24,181
|
)
|
Net cash used in investing activities
|
|
(772,942
|
)
|
|
(127,925
|
)
|
|
(83,758
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Borrowings under debt arrangements
|
|
900,000
|
|
|
—
|
|
|
—
|
|
Repayments under debt arrangements
|
|
(511,000
|
)
|
|
(19,757
|
)
|
|
(19,136
|
)
|
Proceeds from exercise of stock options
|
|
29,336
|
|
|
17,243
|
|
|
10,274
|
|
Payments of withholding taxes for stock awards
|
|
(2,662
|
)
|
|
(4,095
|
)
|
|
(1,294
|
)
|
Purchases of Toro common stock
|
|
(20,043
|
)
|
|
(160,435
|
)
|
|
(159,354
|
)
|
Dividends paid on Toro common stock
|
|
(96,133
|
)
|
|
(85,031
|
)
|
|
(75,758
|
)
|
Net cash provided by (used in) financing activities
|
|
299,498
|
|
|
(252,075
|
)
|
|
(245,268
|
)
|
|
|
|
|
|
|
|
Effect of exchange rates on cash and cash equivalents
|
|
(1,223
|
)
|
|
(5,937
|
)
|
|
4,979
|
|
Net (decrease) increase in cash and cash equivalents
|
|
(137,296
|
)
|
|
(21,132
|
)
|
|
36,701
|
|
Cash and cash equivalents as of the beginning of the fiscal period
|
|
289,124
|
|
|
310,256
|
|
|
273,555
|
|
Cash and cash equivalents as of the end of the fiscal period
|
|
$
|
151,828
|
|
|
$
|
289,124
|
|
|
$
|
310,256
|
|
|
|
|
|
|
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
Cash paid during the fiscal year for:
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$
|
30,167
|
|
|
$
|
19,979
|
|
|
$
|
19,457
|
|
Income taxes
|
|
$
|
54,738
|
|
|
$
|
75,805
|
|
|
$
|
97,057
|
|
The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements.
THE TORO COMPANY AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock
|
|
Retained
Earnings
|
|
Accumulated Other
Comprehensive Loss
|
|
Total Stockholders'
Equity
|
Balance as of October 31, 2016
|
|
$
|
108,427
|
|
|
$
|
480,044
|
|
|
$
|
(38,436
|
)
|
|
$
|
550,035
|
|
Cash dividends paid on common stock - $0.70 per share
|
|
—
|
|
|
(75,758
|
)
|
|
—
|
|
|
(75,758
|
)
|
Issuance of 1,185,601 shares for stock options exercised and restricted stock units vested
|
|
1,186
|
|
|
8,268
|
|
|
—
|
|
|
9,454
|
|
Stock-based compensation expense
|
|
—
|
|
|
13,517
|
|
|
—
|
|
|
13,517
|
|
Contribution of stock to a deferred compensation trust
|
|
—
|
|
|
820
|
|
|
—
|
|
|
820
|
|
Purchase of 2,730,022 shares of common stock
|
|
(2,730
|
)
|
|
(157,918
|
)
|
|
—
|
|
|
(160,648
|
)
|
Cumulative effect adjustment ASU 2016-16
|
|
—
|
|
|
(2,361
|
)
|
|
—
|
|
|
(2,361
|
)
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
14,316
|
|
|
14,316
|
|
Net earnings
|
|
—
|
|
|
267,717
|
|
|
—
|
|
|
267,717
|
|
Balance as of October 31, 2017
|
|
106,883
|
|
|
534,329
|
|
|
(24,120
|
)
|
|
617,092
|
|
Cash dividends paid on common stock - $0.80 per share
|
|
—
|
|
|
(85,031
|
)
|
|
—
|
|
|
(85,031
|
)
|
Issuance of 1,495,367 shares for stock options exercised and restricted stock units vested
|
|
1,496
|
|
|
14,310
|
|
|
—
|
|
|
15,806
|
|
Stock-based compensation expense
|
|
—
|
|
|
12,161
|
|
|
—
|
|
|
12,161
|
|
Contribution of stock to a deferred compensation trust
|
|
—
|
|
|
1,437
|
|
|
—
|
|
|
1,437
|
|
Purchase of 2,777,687 shares of common stock
|
|
(2,778
|
)
|
|
(161,752
|
)
|
|
—
|
|
|
(164,530
|
)
|
Reclassification due to the adoption of ASU 2018-02
|
|
—
|
|
|
(141
|
)
|
|
141
|
|
|
—
|
|
Other comprehensive income
|
|
—
|
|
|
—
|
|
|
42
|
|
|
42
|
|
Net earnings
|
|
—
|
|
|
271,939
|
|
|
—
|
|
|
271,939
|
|
Balance as of October 31, 2018
|
|
105,601
|
|
|
587,252
|
|
|
(23,937
|
)
|
|
668,916
|
|
Cash dividends paid on common stock - $0.90 per share
|
|
—
|
|
|
(96,133
|
)
|
|
—
|
|
|
(96,133
|
)
|
Issuance of 1,544,962 shares for stock options exercised and restricted stock units vested
|
|
1,545
|
|
|
26,387
|
|
|
—
|
|
|
27,932
|
|
Stock-based compensation expense
|
|
—
|
|
|
13,429
|
|
|
—
|
|
|
13,429
|
|
Contribution of stock to a deferred compensation trust
|
|
—
|
|
|
1,404
|
|
|
—
|
|
|
1,404
|
|
Purchase of 403,532 shares of common stock
|
|
(404
|
)
|
|
(22,301
|
)
|
|
—
|
|
|
(22,705
|
)
|
Cumulative transition adjustment due to the adoption of ASU 2014-09
|
|
—
|
|
|
864
|
|
|
—
|
|
|
864
|
|
Other comprehensive loss
|
|
—
|
|
|
—
|
|
|
(8,112
|
)
|
|
(8,112
|
)
|
Net earnings
|
|
—
|
|
|
273,983
|
|
|
—
|
|
|
273,983
|
|
Balance as of October 31, 2019
|
|
$
|
106,742
|
|
|
$
|
784,885
|
|
|
$
|
(32,049
|
)
|
|
$
|
859,578
|
|
The financial statements should be read in conjunction with the Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
• THE TORO COMPANY AND SUBSIDIARIES •
|
|
|
1
|
Summary of Significant Accounting Policies and Related Data
|
Basis of Presentation and Consolidation
The accompanying Consolidated Financial Statements include the accounts of The Toro Company and its wholly-owned subsidiaries (the "company" or "Toro"). The company uses the equity method to account for equity investments in unconsolidated entities over which it has the ability to exercise significant influence over operating and financial policies. Consolidated net earnings include the company's share of the net earnings (losses) of these equity method investments. Equity investments in unconsolidated entities that the company does not control and for which it does not have the ability to exercise significant influence over operating and financial policies are recorded at cost, less impairment, as applicable, within the Consolidated Balance Sheets. All intercompany accounts and transactions have been eliminated from the Consolidated Financial Statements.
Accounting Estimates
In preparing the Consolidated Financial Statements in conformity with United States ("U.S.") generally accepted accounting principles ("GAAP"), management must make decisions that impact the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures, including disclosures of contingent assets and liabilities. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Estimates are used in determining, among other items, sales 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 Consolidated Financial
Statements are prepared. Changes in those estimates will be reflected in the Consolidated Financial Statements in future periods.
Business Combinations
The company accounts for the acquisition of a business in accordance with the accounting standards codification guidance for business combinations, whereby the total consideration transferred is allocated to the assets acquired and liabilities assumed, including amounts attributable to non-controlling interests, when applicable, based on their respective estimated fair values as of the date of acquisition. Goodwill represents the excess of consideration transferred over the estimated fair value of the net assets acquired in a business combination.
Assigning estimated fair values to the assets acquired and liabilities assumed requires the use of significant estimates, judgments, inputs, and assumptions regarding the fair value of the assets acquired and liabilities assumed. Estimated fair values of assets acquired and liabilities assumed are based on available historical information, future expectations, and assumptions determined to be reasonable but are inherently uncertain with respect to future events, including economic conditions, competition, the useful life of the acquired assets and other factors. The company may refine the estimated fair values of assets acquired and liabilities assumed, if necessary, over a period not to exceed one year from the date of acquisition by taking into consideration new information that, if known at the date of acquisition, would have affected the estimated fair values ascribed to the assets acquired and liabilities assumed. The judgments made in determining the estimated fair value assigned to assets acquired and liabilities assumed, as well as the estimated useful life and depreciation or amortization method of each asset, can materially impact the net earnings of the periods subsequent to the acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. During the measurement period, any purchase price allocation changes that impact the carrying value of goodwill affects any measurement of goodwill impairment taken during the measurement period, if applicable. Refer to Note 2, Business Combinations, for additional information regarding the company's accounting for recent business combinations.
Cash and Cash Equivalents
The company considers all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value. As of October 31, 2019 and 2018, cash and cash equivalents held by the company's foreign subsidiaries were approximately $97.5 million and $104.3 million, respectively.
Receivables
The company's financial exposure to collection of accounts receivable is primarily reduced due to its Red Iron Acceptance, LLC ("Red Iron") joint venture with TCF Inventory Finance, Inc. ("TCFIF"), as further discussed in Note 11, Investment in Joint Venture. The company also has floor plan financing agreements with separate third-party financial institutions to provide inventory financing to certain dealers not financed through Red Iron, which include agreements with third-party financial institutions as a result of the company's acquisition of The Charles Machine Works, Inc. ("CMW"). For receivables not serviced through Red Iron or other third-party floor plan financing agreements, the company grants credit to customers in the normal course of business and performs on-going credit evaluations of customers. Receivables are recorded at original carrying amount less estimated allowance for doubtful accounts.
Allowance for Doubtful Accounts
The company estimates the balance of allowance for doubtful accounts by analyzing the age of accounts and notes receivable balances and applying historical write-off trend rates. The company also estimates separately, specific customer balances when it is deemed probable that the balance is uncollectible. Account balances are charged off against the allowance when all collection efforts have been exhausted.
Inventory Valuations
Inventories are valued at the lower of cost or net realizable value, with cost determined by the first-in, first-out ("FIFO") method for 54.0 percent and 31.0 percent of total inventories as of October 31, 2019 and 2018, respectively. The last-in, first-out ("LIFO") and average cost methods are used for all other inventories. The company's percentage of inventories valued under the FIFO method of accounting increased as a result of the company's acquisition of CMW on April 1, 2019. During fiscal 2019 and fiscal 2018, LIFO layers were not materially reduced. Additionally, 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.
Inventories, net were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31
|
|
2019
|
|
2018
|
Raw materials and work in process
|
|
$
|
179,967
|
|
|
$
|
115,280
|
|
Finished goods and service parts
|
|
553,767
|
|
|
315,179
|
|
Total FIFO value
|
|
733,734
|
|
|
430,459
|
|
Less: adjustment to LIFO value
|
|
82,071
|
|
|
72,200
|
|
Total inventories, net
|
|
$
|
651,663
|
|
|
$
|
358,259
|
|
Property and Depreciation
Property, plant and equipment 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 website 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. During the fiscal years ended October 31, 2019, 2018, and 2017, the company capitalized $1.3 million, $0.9 million, and $0.3 million of interest, respectively.
Property, plant and equipment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31
|
|
2019
|
|
2018
|
Land and land improvements
|
|
$
|
55,613
|
|
|
$
|
39,607
|
|
Buildings and leasehold improvements
|
|
276,556
|
|
|
209,686
|
|
Machinery and equipment
|
|
453,314
|
|
|
349,550
|
|
Tooling
|
|
226,870
|
|
|
211,756
|
|
Computer hardware and software
|
|
94,409
|
|
|
83,338
|
|
Construction in process
|
|
34,937
|
|
|
35,044
|
|
Subtotal
|
|
1,141,699
|
|
|
928,981
|
|
Less: accumulated depreciation
|
|
704,382
|
|
|
657,522
|
|
Total property, plant, and equipment, net
|
|
$
|
437,317
|
|
|
$
|
271,459
|
|
During fiscal years 2019, 2018, and 2017, the company recorded depreciation expense of $69.3 million, $53.5 million, and $54.7 million, respectively.
Goodwill and Indefinite-Lived Intangible Assets
Goodwill represents the cost of business combinations in excess of the fair values assigned to identifiable net assets acquired. Goodwill is assigned to reporting units based upon the expected benefit of the synergies of the acquisition. Goodwill and certain trade names, which are considered to have indefinite lives, are not amortized; however, the company reviews them for impairment annually during the fourth quarter of each fiscal year or more frequently if changes in circumstances or the occurrence of events indicate that the fair value may not be recoverable.
During the fourth quarter of fiscal 2019, the company performed its annual goodwill impairment test. In performing the annual goodwill impairment test, the company first reviewed its reporting units and determined that it has ten reporting units, which are the same as its ten operating segments. Eight reporting units contain goodwill on their respective balance sheets. Next, the company elected to bypass the qualitative assessment and move directly to the quantitative goodwill impairment analysis. In performing the quantitative goodwill impairment analysis, the company compared the
carrying value of each reporting unit, including goodwill, to its fair value. The carrying value of each reporting unit was determined based on the amount of equity required for the reporting unit's activities, considering the specific assets and liabilities of the reporting unit. The company did not assign corporate assets and liabilities that do not relate to the operations of the reporting unit, or are not considered in determining the fair value of the reporting unit, to the reporting units. The company's estimate of the respective fair values of its reporting units was determined under the income approach, which utilized various inputs and assumptions, including projected operating results and growth rates from the company's forecasting process, applicable tax rates, and a weighted-average cost of capital rate. Where available, and as appropriate, comparable market multiples and the company's market capitalization were also utilized to corroborate the results of the discounted cash flow models under the income approach. Based on the quantitative goodwill impairment analysis, the company determined there was no impairment of goodwill during fiscal 2019 for any of its reporting units as the fair values of the reporting units exceeded their carrying values, including goodwill. Further, no impairment of goodwill was recorded during fiscal years 2018 and 2017.
During the fourth quarter of fiscal 2019, the company also performed a quantitative impairment analysis for its indefinite-lived intangible assets, which consist of certain trade names. The company's estimate of the fair values of its trade names are based on a discounted cash flow model, which utilized various inputs and assumptions, including: projected revenues from the company's forecasting process; assumed royalty rates that could be payable if the company did not own the trade name; and a discount rate. Based on this quantitative impairment analysis, which was also performed in prior fiscal years, the company concluded its indefinite-lived intangible assets were not impaired during fiscal 2019, 2018, or 2017.
Other Long-Lived Assets
Other long-lived assets consist of property, plant, and equipment; capitalized implementation costs for hosted cloud-computing arrangements; and definite-lived intangible assets. The company's definite-lived intangible assets are identifiable assets that were acquired as a result of business combinations and primarily consist of patents, non-compete agreements, customer relationships and lists, backlog, trade names, and developed technology and are amortized on a straight-line basis over periods ranging from one to 20 years.
The company reviews other long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset, or asset group, may not be recoverable. Asset groups have identifiable cash flows and are largely independent of other asset groups. An impairment loss is recognized when estimated undiscounted future cash flows from the operation or disposition of the asset group are less than the carrying amount of the asset group. Measurement of an impairment loss is based on the excess of the carrying amount of the asset group over its fair value. Fair value is measured using a discounted cash flow model or independent appraisals,
as appropriate. Based on the company's impairment analysis for other long-lived assets, the company did not have any impairment losses for fiscal 2019, 2018 and 2017.
For other long-lived assets to be abandoned, the company tests for potential impairment. If the company commits to a plan to abandon or dispose of an other long-lived asset before the end of its previously estimated useful life, depreciation or amortization estimates are revised.
Accounts Payable
The company has a service agreement with a third-party financial institution to provide a web-based platform that facilitates participating suppliers' ability to finance payment obligations from the company with the third-party financial institution. Participating suppliers may, at their sole discretion, make offers to finance one or more payment obligations of the company prior to their scheduled due dates at a discounted price to the third-party financial institution. The company's obligations to its suppliers, including amounts due and scheduled payment dates, are not affected by suppliers' decisions to finance amounts under this arrangement. As of October 31, 2019 and 2018, $46.7 million and $33.0 million, respectively, of the company's outstanding payment obligations had been placed on the accounts payable web-based platform.
Insurance
The company is self-insured for certain losses relating to employee medical, dental, workers' compensation and certain product liability claims. Specific stop loss coverages are provided for catastrophic claims in order to limit exposure to significant claims. Losses and claims are charged to net earnings when it is probable a loss has been incurred and the amount can be reasonably estimated. Self-insured liabilities are based on a number of factors, including historical claims experience, an estimate of claims incurred but not reported, demographic and severity factors, and utilizing valuations provided by independent third-party actuaries.
Accrued Warranties
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. 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.
The company recognizes expense and provides an accrual for estimated future warranty costs at the time of sale and also establishes accruals for major rework campaigns. Warranty accruals are based primarily on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of claims to sales and the historical length of time between the sale and resulting warranty claim. The company periodically assesses the adequacy of its warranty accruals based on changes in these factors and records any necessary adjustments if actual claims experience indicates that adjustments are necessary.
The changes in accrued warranties were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
Beginning balance
|
|
$
|
76,214
|
|
|
$
|
74,155
|
|
Warranty provisions
|
|
57,277
|
|
|
49,160
|
|
Acquisitions
|
|
18,418
|
|
|
—
|
|
Warranty claims
|
|
(58,878
|
)
|
|
(45,662
|
)
|
Changes in estimates
|
|
3,573
|
|
|
(1,439
|
)
|
Ending balance
|
|
$
|
96,604
|
|
|
$
|
76,214
|
|
Derivatives
Derivative instruments, consisting primarily of forward currency contracts, are used to hedge most foreign currency transactions, including forecasted sales and purchases denominated in foreign currencies. All derivative instruments are recognized on the Consolidated Balance Sheets at fair value as either assets or liabilities. If the derivative instrument is designated as a cash flow hedging instrument, 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 accumulated other comprehensive loss (“AOCL”) on the Consolidated Balance Sheets and are subsequently reclassified to net earnings within the 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. Derivatives that are not designated as cash flow hedging instruments are adjusted to fair value through other income, net, on the Consolidated Statements of Earnings.
Foreign Currency Translation and Transactions
The functional currency of the company's foreign operations is generally the applicable local currency. The functional currency is translated into U.S. dollars for balance sheet accounts using current exchange rates in effect as of the balance sheet date and for revenue and expense accounts using a weighted-average exchange rate during the fiscal year. The translation adjustments are deferred as a component of other comprehensive income within the Consolidated Statements of Comprehensive Income and the Consolidated Statements of Stockholders' Equity. Gains or losses resulting from transactions denominated in foreign
currencies are included in other income, net in the Consolidated Statements of Earnings.
Income Taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years that those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income tax expense in the period that includes the enactment date. A valuation allowance is provided when, in management's judgment, it is more likely than not that some portion or all of the deferred tax asset will not be realized. The company has reflected the necessary deferred tax assets and liabilities in the accompanying Consolidated Balance Sheets. Management believes the future tax deductions will be realized principally through future taxable income, future reversals of existing taxable temporary differences, and carryback to taxable income in prior years.
The company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50 percent likely to be realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The company also records interest and penalties related to unrecognized tax benefits within income tax expense.
Revenue Recognition
The company's primary source of revenue is generated through the sale of equipment and irrigation products and services to its customers, which primarily consist of a worldwide network of distributors, dealers, mass retailers, hardware retailers, home centers, as well as online (direct to end-users). 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 variable consideration, consisting primarily of 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.
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 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 value of consignment inventory as of October 31, 2019 and 2018 was $19.9 million and $22.7 million, respectively.
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.
Sales Promotions and Incentives
At the time of sale, the company records an estimate for sales promotion and incentive costs. The company's estimates of sales promotion and incentive costs are based on the terms of the arrangements with customers, historical payment experience, field inventory levels, volume purchases, and expectations for changes in relevant trends in the future. The expense of each program is classified as a reduction from gross sales or as a component of selling, general and administrative expense, depending on the nature of the respective program.
Examples of significant sales promotions and incentive programs in which the related expense is classified as a reduction from gross sales are as follows:
|
|
•
|
Off-Invoice Discounts: The company's costs for off-invoice discounts represent a reduction in the selling price of its products given at the time of sale.
|
|
|
•
|
Rebate Programs: The company's rebate programs are generally based on claims submitted from either its direct customers or end-users of its products, depending upon the
|
program. The amount of the rebate varies based on the specific program and is either a dollar amount or a percentage of the purchase price and can also be based on actual retail price as compared to the company's selling price.
|
|
•
|
Incentive Discounts: The company's costs for incentive discount programs are based on its customers’ purchase or retail sales goals of certain quantities or mixes of product during a specified time period, which are tracked on an annual or quarterly basis depending on the program.
|
|
|
•
|
Financing Programs: The company's financing programs, consist of wholesale floor plan financing and end-user retail financing. Costs incurred for wholesale floor plan financing programs represent financing costs associated with programs under which the company pays a portion of the interest cost to finance distributor and dealer inventories through third-party financing arrangements for a specific period of time. End-user retail financing is similar to floor planning with the difference being that retail financing programs are offered to end-user customers under which the company pays a portion of interest costs on behalf of end-users for financing purchases of the company's equipment.
|
|
|
•
|
Commissions Paid to Service Home Centers: The company pays commissions to representative agencies to service home center customers to ensure appropriate store sets for all Toro product. This estimated expense is recorded at point of sale. In addition, Toro dealers are paid a commission to set up and deliver riding product purchased at certain home centers.
|
Examples of significant sales promotions and incentive programs in which the related expense is classified as a component of selling, general, and administrative expense are as follows:
|
|
•
|
Commissions Paid to Distributors and Dealers: For certain products, the company uses a distribution network of dealers and distributors that purchase and take possession of products for sale to the end customer. In addition, the company has dealers and distributors that act as sales agents for it on certain products using a direct-selling type model. Under this direct-selling type model, the company's network of distributors and dealers facilitates a sale directly to the dealer or end-user customer on its behalf. Commissions to distributors and dealers in these instances represent commission payments to sales agents that are also its customers.
|
|
|
•
|
Cooperative Advertising: Cooperative advertising programs are based on advertising costs incurred by distributors and dealers for promoting the company's products. The company supports a portion of those advertising costs in which claims are submitted by the distributor or dealer along with evidence of the advertising material procured/produced and evidence of the cost incurred in the form of third-party invoices or receipts.
|
Cost of Sales
Cost of sales is primarily comprised of direct materials and supplies consumed to manufacture the company's products, as well as manufacturing labor and direct overhead expense necessary to convert direct materials and supplies into finished product. Cost of sales also includes inbound freight costs for direct materials and supplies, outbound freight costs for shipping products to customers, obsolescence expense, cost of services provided, and cash discounts on payments to vendors.
Selling, General and Administrative Expense
Selling, general, and administrative expense is primarily comprised of payroll and benefits costs, occupancy and operating costs of distribution and corporate facilities, warranty expense, depreciation and amortization expense on non-manufacturing tangible and intangible assets, advertising and marketing expenses, selling expenses, engineering and research costs, information systems costs, incentive and profit sharing expense, and other miscellaneous administrative costs, such as legal costs for internal and outside services that are expensed as incurred.
Cost of Financing Distributor and Dealer Inventory
Red Iron and separate third-party financial institutions provide inventory financing for certain distributors and dealers of the company. These financing arrangements are used by the company to assist customers in financing inventory and are structured as an advance in the form of a payment by Red Iron or the separate third-party financial institution to the company on behalf of a distributor or dealer with respect to invoices financed by Red Iron or the separate third-party financial institution. These payments extinguish the obligation of the dealer or distributor to make payment to the company under the terms of the applicable invoice.
Included as a reduction to gross sales are costs associated with programs under which the company shares the expense of financing distributor and dealer inventories, referred to as floor plan expenses. This charge represents interest for a pre-established length of time based on a predefined rate from a contract with Red Iron or the a separate third-party financial institution to finance distributor and dealer inventory purchases. The financing costs for distributor and dealer inventories were $44.5 million, $37.1 million, and $30.1 million for the fiscal years ended October 31, 2019, 2018 and 2017, respectively.
Advertising
General advertising expenditures are expensed the first time advertising takes place. Production costs associated with advertising are expensed in the period incurred. Cooperative advertising represents expenditures for shared advertising costs that the company reimburses to customers and is classified as a component of selling, general and administrative expense. These obligations are accrued and expensed when the related revenues are recognized in accordance with the programs established for various product lines. Advertising costs were $43.5 million, $46.4 million, and $43.0 million for the fiscal years ended October 31, 2019, 2018, and 2017, respectively.
Engineering and Research
The company's engineering and research costs are expensed as incurred and are primarily incurred in connection with the development of new products that may have additional applications or represent extensions of existing product lines, improvements to existing products, and cost reduction efforts. Costs incurred for engineering and research activities were $109.1 million, $83.5 million, and $80.4 million for the fiscal years ended October 31, 2019, 2018, and 2017, respectively.
Stock-Based Compensation
The company's stock-based compensation awards are generally granted to executive officers, other employees, and non-employee members of the company's Board of Directors, and include performance share awards that are contingent on the achievement of performance goals of the company, non-qualified stock options, and restricted stock units. Generally, compensation expense equal to the grant date fair value is recognized for these awards over the vesting period and is classified in selling, general and administrative expense. Stock options granted to executive officers and other employees are subject to accelerated expensing if the option holder meets the retirement definition set forth in The Toro Company Amended and Restated 2010 Equity and Incentive Plan, as amended and restated (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.
Net Earnings Per Share
Basic net earnings per share is calculated using net earnings available to common stockholders divided by the weighted-average number of shares of common stock outstanding during the year plus the assumed issuance of contingent shares. Diluted net earnings per share is similar to basic net earnings per share except that the weighted-average number of shares of common stock outstanding plus the assumed issuance of contingent shares is increased to include the number of additional shares of common stock that would have been outstanding assuming the issuance of all potentially dilutive shares, such as common stock to be issued upon exercise of options, contingently issuable shares, and restricted stock units.
Reconciliations of basic and diluted weighted-average shares of common stock outstanding are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Basic
|
|
|
|
|
|
|
Weighted-average number of shares of common stock
|
|
106,762
|
|
|
106,356
|
|
|
108,299
|
|
Assumed issuance of contingent shares
|
|
11
|
|
|
13
|
|
|
13
|
|
Weighted-average number of shares of common stock and assumed issuance of contingent shares
|
|
106,773
|
|
|
106,369
|
|
|
108,312
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock and assumed issuance of contingent shares
|
|
106,773
|
|
|
106,369
|
|
|
108,312
|
|
Effect of dilutive securities
|
|
1,317
|
|
|
2,288
|
|
|
2,940
|
|
Weighted-average number of shares of common stock, assumed issuance of contingent shares, and effect of dilutive securities
|
|
108,090
|
|
|
108,657
|
|
|
111,252
|
|
Incremental shares from options and restricted stock units are computed by the treasury stock method. Options for the purchase of 716,343, 424,089, and 353,897 shares of common stock during fiscal 2019, 2018, and 2017, respectively, were excluded from the computation of diluted net earnings per share because they were anti-dilutive.
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 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 fiscal year ended October 31, 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 March 2017, the FASB issued ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715), which requires entities to disaggregate and present separately the current service cost component from the other components of net periodic benefit cost within the income statement. The amended guidance was adopted in the first quarter of fiscal 2019 and did not have a material impact on the company's Consolidated Financial Statements.
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 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 was effective immediately during the company's third quarter of fiscal 2019
and did not have a material impact on the company's Consolidated Financial Statements.
New Accounting Pronouncements Not Yet Adopted
In February 2016, the FASB issued ASU No. 2016-02, Leases, which, among other things, requires lessees to recognize most leases on-balance sheet. The standard requires the recognition of right-of-use assets ("ROU assets") and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. The standard also requires a greater level of quantitative and qualitative disclosures regarding the nature of the entity’s leasing activities than were previously required under U.S. GAAP. In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which provides an optional transition practical expedient to not evaluate existing or expired land easements under the amended lease guidance. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides an alternative transition method that permits an entity to use the effective date of ASU No. 2016-02 as the date of initial application through the recognition of a cumulative effect adjustment to the opening balance of retained earnings upon adoption. Consequently, an entity's reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with previous U.S. GAAP under ASC Topic 840, Leases. ASU No. 2016-02, as augmented by ASU No. 2018-01, ASU No. 2018-10, and ASU No. 2018-11 (the "amended guidance"), will become effective for the company in the first quarter of fiscal 2020.
In order to identify and evaluate the impact of the amended guidance on the company's Consolidated Financial Statements, Notes to Consolidated Financial Statements, business processes, internal controls, and information systems, the company established a cross-functional project management team. This cross-functional project management team is tasked with evaluating the potential implications of the amended guidance, including compiling and analyzing existing explicit lease agreements, reviewing contractual agreements for embedded leases, determining the discount rate to be used in valuing ROU assets and lease liabilities under new and existing leases, and assessing the changes to the company's accounting policies, business processes, internal controls, and information systems that may be necessary to comply with the provisions and all applicable financial statement disclosures required by the amended guidance. As of October 31, 2019, the company's cross-functional project management team has completed its evaluation process, whereby it has compiled and analyzed existing explicit lease agreements; reviewed contractual agreements for embedded leases; completed its assessment of the company's business and system requirements; selected and implemented the company's third-party lease accounting software solution; developed the company's business process for determining the discount rate to be utilized in valuing the
ROU assets and lease liabilities for the company's operating leases; evaluated the impact of the amended guidance on the company's accounting policies, business processes and procedures, and information systems; designed internal controls regarding the completeness and accuracy of the company's lease population and, where applicable, reviewed new or amended contractual agreements for leases, including embedded leases, through the adoption date of the amended guidance.
The company will adopt the amended guidance on November 1, 2019, the first quarter of fiscal 2020, under the alternative cumulative effect transition method. The company will elect the transition package of practical expedients permitted within the amended guidance, which among other things, allows the company to carryforward the historical lease classification determined under previous U.S. GAAP. Additionally, the company will elect the transition practical expedient to not reassess the company's accounting for land easements that exist as of the adoption of the amended guidance. The company will also make an accounting policy election that will keep leases with an initial term of 12 months or less off of its Consolidated Balance Sheets, which will result in recognizing those lease payments in its Consolidated Statements of Earnings on a straight-line basis over the lease term. The company will not elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use assets.
Upon adoption, the company estimates it will recognize $77.1 million of ROU assets and $76.0 million of corresponding lease liabilities within its Consolidated Balance Sheets related to the company's operating lease agreements that convey our right to direct the use of, and obtain substantially all of the economic benefits from, the identified asset for a defined period of time in exchange for consideration. Changes in the company's lease population may impact these estimated amounts. Based on the results of the company's evaluation process, the company believes the adoption of the amended guidance will have a material impact on its Consolidated Balance Sheets and Notes to Consolidated Financial Statements. However, the company does not believe the adoption of the amended guidance will have a material impact on its Consolidated Statements of Earnings, Consolidated Statements of Cash Flows, business processes, internal controls, and information systems.
In June 2016, the FASB issued ASU No. 2016-03, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement approach for credit losses on financial assets measured on an amortized cost basis from an 'incurred loss' method to an 'expected loss' method. Such modification of the measurement approach for credit losses eliminates the requirement that a credit loss be considered probable, or incurred, to impact the valuation of a financial asset measured on an amortized cost basis. The amended guidance requires the measurement of expected credit losses to be based on relevant information, including historical experience, current conditions, and a reasonable and supportable forecast that affects the collectability of the related financial asset. This amendment will affect trade receivables, off-balance-sheet
credit exposures, and any other financial assets not excluded from the scope of this amendment that have the contractual right to receive cash. The amended guidance will become effective in the first quarter of fiscal 2021. The company is currently evaluating the impact of this new standard on its Consolidated Financial Statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of ASC Topic 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity's own operations and supersedes the guidance in ASC Topic 505-50. The amended guidance will become effective in the first quarter of fiscal 2020 and will not have a material impact on the company's Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements by removing, modifying, or adding certain disclosures. The amended guidance will become effective in the first quarter of fiscal 2021. Early adoption is permitted for any removed or modified disclosures. The company is currently evaluating the impact of this new standard on its Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans (Topic 715), which modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. The amended guidance will become effective in the first quarter of fiscal 2021. Early adoption is permitted. The company is currently evaluating the impact of this new standard on its Consolidated Financial Statements.
The company believes that all other recently issued accounting pronouncements from the FASB that the company has not noted above, will not have a material impact on its Consolidated Financial Statements or do not apply to its operations.
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 markets a range of professional products to serve the underground construction market, including horizontal directional drills, walk and ride trenchers, compact utility loaders/skid steers, vacuum excavators, asset locators, pipe rehabilitation solutions, and after-market tools. CMW provides innovative product offerings that broadened and strengthened the company's Professional segment product portfolio and expanded 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. At the closing date, we paid preliminary merger consideration of $679.3 million that was 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. During the fourth quarter of fiscal 2019, we finalized such customary adjustments that resulted in an additional $5.7 million of merger consideration being paid and an aggregate merger consideration of $685.0 million ("purchase price"). The company funded the 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 $10.2 million of acquisition-related transaction costs during the fiscal year ended October 31, 2019. These acquisition-related transaction costs are recorded within selling, general and administrative expense within the Consolidated Statements of Earnings.
Purchase Price Allocation
The company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the total purchase price was allocated to the acquired net tangible and intangible assets of CMW based on their estimated fair values as of the closing date. As of October 31, 2019, the company has substantially completed its process for measuring the fair values of the assets acquired and liabilities assumed based on information available as of the closing date, with the exception of the company's valuation of income taxes as the company requires additional information to finalize its valuation of income taxes. Thus, the preliminary measurements of fair value reflected for income taxes are
subject to change as additional information becomes available and as additional analysis is performed. The company expects to finalize its preliminary valuation of income taxes 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 purchase price to the fair values assigned to the CMW assets acquired and liabilities assumed. These fair values are based on internal company and independent external third-party valuations (in thousands):
|
|
|
|
|
|
|
|
April 1, 2019
|
Cash and cash equivalents
|
|
$
|
16,341
|
|
Receivables
|
|
65,674
|
|
Inventories
|
|
241,429
|
|
Prepaid expenses and other current assets
|
|
9,218
|
|
Property, plant and equipment
|
|
142,779
|
|
Goodwill
|
|
135,521
|
|
Other intangible assets
|
|
264,190
|
|
Other long-term assets
|
|
7,971
|
|
Accounts payable
|
|
(36,655
|
)
|
Accrued liabilities
|
|
(52,258
|
)
|
Deferred income tax liabilities
|
|
(86,231
|
)
|
Other long-term liabilities
|
|
(6,665
|
)
|
Total fair value of net assets acquired
|
|
701,314
|
|
Less: cash and cash equivalents acquired
|
|
(16,341
|
)
|
Total purchase price
|
|
$
|
684,973
|
|
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, components, parts, and accessories, 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 $350.3 million as of October 31, 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 as of October 31, 2019 as a result of purchase accounting adjustments due to finalizing certain inputs and assumptions related to the fair value calculations of other intangible assets, deferred income tax liabilities, warranty accruals, and inventories. Such purchase accounting adjustments did not have a material impact on the company's Consolidated Statements of Earnings for the fiscal year ended October 31, 2019.
Other Intangible Assets Acquired
The allocation of the purchase price to the net assets acquired resulted in the recognition of $264.2 million of other intangible assets as of the closing date. The fair values of the acquired trade name, customer-related, developed technology and
backlog intangible assets were determined 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 fair values of the trade names were determined 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 fair values of the customer-related, developed technology, and backlog intangible assets were determined using the excess earnings method and were based on the expected operating cash flows attributable to the respective other intangible asset, which were determined by deducting expected economic costs, including operating expenses and contributory asset charges, from revenue expected to be generated from the respective other intangible asset. The useful lives of the other intangible assets were determined based on the period of expected cash flows used to measure the 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 fair values of the other intangible assets acquired on the closing date, related accumulated amortization from the closing date through October 31, 2019, and weighted-average useful lives were as follows (in thousands, except weighted-average useful life):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-Average Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
Customer-related
|
|
18.3
|
|
$
|
130,800
|
|
|
$
|
(4,981
|
)
|
|
$
|
125,819
|
|
Developed technology
|
|
7.8
|
|
20,900
|
|
|
(2,019
|
)
|
|
18,881
|
|
Trade names
|
|
20.0
|
|
5,200
|
|
|
(152
|
)
|
|
5,048
|
|
Backlog
|
|
0.5
|
|
3,590
|
|
|
(3,590
|
)
|
|
—
|
|
Total amortizable
|
|
16.6
|
|
160,490
|
|
|
(10,742
|
)
|
|
149,748
|
|
Non-amortizable - trade names
|
|
|
|
103,700
|
|
|
—
|
|
|
103,700
|
|
Total other intangible assets, net
|
|
|
|
$
|
264,190
|
|
|
$
|
(10,742
|
)
|
|
$
|
253,448
|
|
Amortization expense for the definite-lived intangible assets resulting from the acquisition of CMW for the fiscal year ended October 31, 2019 was $10.7 million. Estimated amortization expense for the succeeding fiscal years is as follows: fiscal 2020, $12.6 million; fiscal 2021, $12.6 million; fiscal 2022, $11.5 million; fiscal 2023, $10.1 million; fiscal 2024, $9.4 million; and after fiscal 2024, $93.5 million.
Results of Operations
CMW's results of operations have been included within the Professional segment in the company's Consolidated Financial Statements from the closing date. During the fiscal year ended October 31, 2019, the company recognized $465.2 million of net sales and $5.4 million of segment loss from CMW's operations. Segment loss for the fiscal year ended October 31, 2019 includes charges of $43.0 million, 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 fiscal years ended October 31, 2019 and October 31, 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 purchase price allocations and useful lives; include the pro forma impact of the depreciation of property, plant, and equipment based on the purchase price allocations and 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 unaudited pro forma financial information for fiscal 2019 and 2018 (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2019
|
|
October 31, 2018
|
Net sales
|
|
$
|
3,437,335
|
|
|
$
|
3,332,636
|
|
Net earnings1
|
|
363,452
|
|
|
276,722
|
|
Basic net earnings per share of common stock
|
|
3.40
|
|
|
2.60
|
|
Diluted net earnings per share of common stock1
|
|
$
|
3.36
|
|
|
$
|
2.55
|
|
|
|
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 fiscal year ended October 31, 2019. The impact on diluted net earnings per share of common stock for the fiscal year ended October 31, 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 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. As of October 31, 2019, the company has finalized the purchase accounting for this acquisition. This acquisition was immaterial based on the company's Consolidated Financial Condition and Results of Operations.
Regnerbau Calw GmbH
Effective January 1, 2017, during the first quarter of fiscal 2017, the company completed the acquisition of all the outstanding shares of Regnerbau Calw GmbH ("Perrot"), a privately held manufacturer of professional irrigation equipment. The addition of these products broadened and strengthened the company's irrigation solutions for the sport, agricultural, and industrial markets. The acquisition was funded with existing foreign cash and cash equivalents. 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.
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 identified ten operating segments and has aggregated certain of those segments into two reportable segments: Professional and Residential. The aggregation of the company's segments is based on the 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.
The Professional business segment consists of turf and landscape equipment; rental, specialty, and underground construction equipment; snow and ice management equipment; and irrigation products. Turf and landscape equipment products include sports fields and grounds maintenance equipment, golf course mowing and maintenance equipment, landscape contractor mowing equipment, landscape creation and renovation equipment, and other maintenance equipment. Rental, specialty, and underground construction equipment products include horizontal directional drills, walk and ride trenchers, compact utility loaders/skid steers, vacuum excavators, stump grinders, turf renovation products, asset locators, pipe rehabilitation solutions, materials handling equipment, and other after-market tools. Snow and ice management equipment products include snowplows, salt and sand spreaders, and related parts and accessories for light and medium duty trucks, utility task vehicles, skid steers, and front-end loaders. Irrigation products consist of sprinkler heads, electric and hydraulic valves, controllers, computer irrigation central control systems, coupling systems, and ag-irrigation drip tape and hose products, as well as professionally installed lighting products offered through distributors and landscape contractors that also purchase irrigation products. Professional business segment products are sold mainly through a network of distributors and dealers to professional users engaged in maintaining golf courses, sports fields, municipal properties, agricultural fields, residential and commercial landscapes, and removing snow and ice, as well as directly to government customers, rental companies, and large retailers.
The Residential business segment consists of walk power mowers, riding mowers, snow throwers, replacement parts, and home solutions products, including trimmers, blowers, blower-vacuums, and underground, hose, and hose-end retail irrigation products sold in Australia and New Zealand. Residential business segment products are sold to homeowners through a network of distributors and dealers, and through a broad array of home centers, hardware retailers, and mass retailers, as well as online.
The company's 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. Corporate activities include general corporate expenditures (finance, human resources, legal, information services, public relations, business development, and similar activities) and other unallocated corporate assets and liabilities, such as corporate facilities and deferred tax assets and liabilities.
The accounting policies of the segments are the same as those described in the summary of significant accounting policies in Note 1, Summary of Significant Accounting Policies and Related Data. The company evaluates the performance of its Professional and Residential business segment results based on earnings from operations plus other income, net. The business segment's operating profits or losses include direct costs incurred at the segment's operating level plus allocated expenses, such as profit sharing and manufacturing expenses. The allocated expenses represent costs that these operations would have incurred otherwise, but do not include general corporate expenses, interest expense, and income taxes. Operating loss for the company's Other activities includes earnings (loss) from the company's domestic wholly-owned distribution companies, corporate activities, other income, and interest expense. The company accounts for intersegment gross sales at current market prices.
The following tables present summarized financial information concerning the company's reportable segments and Other activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31, 2019
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Net sales
|
|
$
|
2,443,448
|
|
|
$
|
661,274
|
|
|
$
|
33,362
|
|
|
$
|
3,138,084
|
|
Intersegment gross sales (eliminations)
|
|
59,453
|
|
|
310
|
|
|
(59,763
|
)
|
|
—
|
|
Earnings (loss) before income taxes
|
|
380,914
|
|
|
65,151
|
|
|
(123,932
|
)
|
|
322,133
|
|
Total assets
|
|
1,592,065
|
|
|
430,495
|
|
|
307,987
|
|
|
2,330,547
|
|
Capital expenditures
|
|
57,246
|
|
|
16,970
|
|
|
18,665
|
|
|
92,881
|
|
Depreciation and amortization
|
|
$
|
63,885
|
|
|
$
|
11,897
|
|
|
$
|
11,916
|
|
|
$
|
87,698
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31, 2018
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Net sales
|
|
$
|
1,946,999
|
|
|
$
|
654,413
|
|
|
$
|
17,238
|
|
|
$
|
2,618,650
|
|
Intersegment gross sales (eliminations)
|
|
29,798
|
|
|
312
|
|
|
(30,110
|
)
|
|
—
|
|
Earnings (loss) before income taxes
|
|
399,806
|
|
|
64,807
|
|
|
(92,216
|
)
|
|
372,397
|
|
Total assets
|
|
916,106
|
|
|
199,273
|
|
|
455,605
|
|
|
1,570,984
|
|
Capital expenditures
|
|
58,109
|
|
|
16,014
|
|
|
16,001
|
|
|
90,124
|
|
Depreciation and amortization
|
|
$
|
38,585
|
|
|
$
|
9,999
|
|
|
$
|
12,693
|
|
|
$
|
61,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31, 2017
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Net sales
|
|
$
|
1,811,705
|
|
|
$
|
673,247
|
|
|
$
|
20,224
|
|
|
$
|
2,505,176
|
|
Intersegment gross sales (eliminations)
|
|
27,893
|
|
|
332
|
|
|
(28,225
|
)
|
|
—
|
|
Earnings (loss) before income taxes
|
|
379,496
|
|
|
74,704
|
|
|
(101,016
|
)
|
|
353,184
|
|
Total assets
|
|
836,600
|
|
|
189,578
|
|
|
467,609
|
|
|
1,493,787
|
|
Capital expenditures
|
|
29,786
|
|
|
10,605
|
|
|
17,885
|
|
|
58,276
|
|
Depreciation and amortization
|
|
$
|
41,313
|
|
|
$
|
10,308
|
|
|
$
|
13,365
|
|
|
$
|
64,986
|
|
During fiscal 2019 and fiscal 2018 , no customer accounted for 10 percent or more of total consolidated gross sales. Sales to one customer in the Residential segment accounted for 10.0 percent of total consolidated gross sales in fiscal 2017.
The following table presents the details of operating loss before income taxes for the company's Other activities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Corporate expenses
|
|
$
|
(124,422
|
)
|
|
$
|
(92,541
|
)
|
|
$
|
(100,928
|
)
|
Interest expense
|
|
(28,835
|
)
|
|
(19,096
|
)
|
|
(19,113
|
)
|
Other income
|
|
29,325
|
|
|
19,421
|
|
|
19,025
|
|
Total operating loss
|
|
$
|
(123,932
|
)
|
|
$
|
(92,216
|
)
|
|
$
|
(101,016
|
)
|
The following table presents net sales for groups of similar products and services (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Equipment
|
|
$
|
2,747,935
|
|
|
$
|
2,210,047
|
|
|
$
|
2,060,354
|
|
Irrigation and lighting
|
|
390,149
|
|
|
408,603
|
|
|
444,822
|
|
Total net sales
|
|
$
|
3,138,084
|
|
|
$
|
2,618,650
|
|
|
$
|
2,505,176
|
|
The following geographic area data includes net sales based on product shipment destination and long-lived assets, which consist of net property, plant, and equipment, and is based on physical location in addition to allocated capital tooling from U.S. plant facilities (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
United
States
|
|
Foreign
Countries
|
|
Total
|
2019
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,413,153
|
|
|
$
|
724,931
|
|
|
$
|
3,138,084
|
|
Long-lived assets
|
|
$
|
395,937
|
|
|
$
|
41,380
|
|
|
$
|
437,317
|
|
2018
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,975,562
|
|
|
$
|
643,088
|
|
|
$
|
2,618,650
|
|
Long-lived assets
|
|
$
|
230,246
|
|
|
$
|
41,213
|
|
|
$
|
271,459
|
|
2017
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
1,893,249
|
|
|
$
|
611,927
|
|
|
$
|
2,505,176
|
|
Long-lived assets
|
|
$
|
194,338
|
|
|
$
|
40,892
|
|
|
$
|
235,230
|
|
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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31, 2019
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Revenue by product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
2,097,965
|
|
|
$
|
628,521
|
|
|
$
|
21,449
|
|
|
$
|
2,747,935
|
|
Irrigation
|
|
345,483
|
|
|
32,753
|
|
|
11,913
|
|
|
390,149
|
|
Total net sales
|
|
$
|
2,443,448
|
|
|
$
|
661,274
|
|
|
$
|
33,362
|
|
|
$
|
3,138,084
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic market:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,853,054
|
|
|
$
|
526,737
|
|
|
$
|
33,362
|
|
|
$
|
2,413,153
|
|
Foreign Countries
|
|
590,394
|
|
|
134,537
|
|
|
—
|
|
|
724,931
|
|
Total net sales
|
|
$
|
2,443,448
|
|
|
$
|
661,274
|
|
|
$
|
33,362
|
|
|
$
|
3,138,084
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31, 2018
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Revenue by product type:
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
1,582,024
|
|
|
$
|
617,827
|
|
|
$
|
10,196
|
|
|
$
|
2,210,047
|
|
Irrigation
|
|
364,975
|
|
|
36,586
|
|
|
7,042
|
|
|
408,603
|
|
Total net sales
|
|
$
|
1,946,999
|
|
|
$
|
654,413
|
|
|
$
|
17,238
|
|
|
$
|
2,618,650
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic market:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
1,441,815
|
|
|
$
|
516,509
|
|
|
$
|
17,238
|
|
|
$
|
1,975,562
|
|
Foreign Countries
|
|
505,184
|
|
|
137,904
|
|
|
—
|
|
|
643,088
|
|
Total net sales
|
|
$
|
1,946,999
|
|
|
$
|
654,413
|
|
|
$
|
17,238
|
|
|
$
|
2,618,650
|
|
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.
Red Iron 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 each financial institution 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 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 Consolidated Balance Sheets and the right-of-return asset in prepaid expenses and other current assets in the 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 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 October 31, 2019 and October 31, 2018, $22.0 million and $14.0 million, respectively, of deferred 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 Consolidated Balance Sheets. The increase in the October 31, 2019 balance as compared to the October 31, 2018 balance is primarily related to the company's acquisition of CMW on April 1, 2019, which resulted in the assumption of $7.0 million of deferred revenue contract liabilities related to separately priced extended warranty contracts, service contracts, and non-refundable customer deposits. For the fiscal year ended October 31, 2019, the company recognized $5.8 million of the October 31, 2018 deferred revenue balance and $4.4 million of the April 1, 2019 assumed deferred revenue balance related to the CMW acquisition within net sales in the Consolidated Statements of Earnings. The company expects to recognize approximately $10.6 million of the October 31, 2019 deferred revenue balance within net sales in the Consolidated Statements of Earnings in fiscal 2020 and $11.4 million thereafter.
|
|
|
5
|
Goodwill and Other Intangible Assets
|
The company's acquisition of CMW on April 1, 2019 resulted in the recognition of $135.5 million and $264.2 million of goodwill and other intangible assets, respectively, within the company's Professional segment. 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 fiscal 2019 and 2018 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
Balance as of October 31, 2017
|
|
$
|
194,464
|
|
|
$
|
10,565
|
|
|
$
|
—
|
|
|
$
|
205,029
|
|
Goodwill acquired
|
|
20,739
|
|
|
—
|
|
|
—
|
|
|
20,739
|
|
Translation adjustments
|
|
(376
|
)
|
|
(102
|
)
|
|
—
|
|
|
(478
|
)
|
Balance as of October 31, 2018
|
|
214,827
|
|
|
10,463
|
|
|
—
|
|
|
225,290
|
|
Goodwill acquired
|
|
135,524
|
|
|
—
|
|
|
1,534
|
|
|
137,058
|
|
Translation adjustments
|
|
(101
|
)
|
|
6
|
|
|
—
|
|
|
(95
|
)
|
Balance as of October 31, 2019
|
|
$
|
350,250
|
|
|
$
|
10,469
|
|
|
$
|
1,534
|
|
|
$
|
362,253
|
|
Other Intangible Assets
The components of other intangible assets were as follows (in thousands, except for weighted-average useful life amounts):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2019
|
|
Weighted-Average Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
Patents
|
|
9.9
|
|
$
|
18,230
|
|
|
$
|
(13,102
|
)
|
|
$
|
5,128
|
|
Non-compete agreements
|
|
5.5
|
|
6,868
|
|
|
(6,786
|
)
|
|
82
|
|
Customer-related
|
|
18.4
|
|
220,390
|
|
|
(33,547
|
)
|
|
186,843
|
|
Developed technology
|
|
7.6
|
|
51,911
|
|
|
(31,289
|
)
|
|
20,622
|
|
Trade names
|
|
15.4
|
|
7,496
|
|
|
(2,109
|
)
|
|
5,387
|
|
Backlog and other
|
|
0.6
|
|
4,390
|
|
|
(4,390
|
)
|
|
—
|
|
Total amortizable
|
|
15.5
|
|
309,285
|
|
|
(91,223
|
)
|
|
218,062
|
|
Non-amortizable - trade names
|
|
|
|
134,312
|
|
|
—
|
|
|
134,312
|
|
Total other intangible assets, net
|
|
|
|
$
|
443,597
|
|
|
$
|
(91,223
|
)
|
|
$
|
352,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2018
|
|
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 for the fiscal years ended October 31, 2019, 2018, and 2017 was $18.4 million, $7.3 million, and $9.9 million, respectively. Estimated amortization expense for the succeeding fiscal years is as follows: 2020, $18.7 million; 2021, $18.3 million; 2022, $17.1 million; 2023, $15.3 million; 2024, $14.3 million; and after 2024, $134.4 million.
The following is a summary of the company's indebtedness (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31
|
|
2019
|
|
2018
|
Revolving credit facility
|
|
$
|
—
|
|
|
$
|
91,000
|
|
$200 million term loan
|
|
100,000
|
|
|
—
|
|
$300 million term loan
|
|
180,000
|
|
|
—
|
|
3.81% series A senior notes
|
|
100,000
|
|
|
—
|
|
3.91% series B senior notes
|
|
100,000
|
|
|
—
|
|
7.800% debentures
|
|
100,000
|
|
|
100,000
|
|
6.625% senior notes
|
|
123,916
|
|
|
123,854
|
|
Less: unamortized discounts, debt issuance costs, and deferred charges
|
|
(3,103
|
)
|
|
(2,305
|
)
|
Total long-term debt
|
|
700,813
|
|
|
312,549
|
|
Less: current portion of long-term debt
|
|
79,914
|
|
|
—
|
|
Long-term debt, less current portion
|
|
$
|
620,899
|
|
|
$
|
312,549
|
|
Principal payments required on the company's outstanding indebtedness in each of the next five fiscal years, based on the maturity dates defined within the company's debt arrangements indebtedness, are as follows: fiscal 2020, $0.0 million; fiscal 2021, $0.0 million; fiscal 2022, $115.0 million; fiscal 2023, $30.0 million; fiscal 2024, $135.0 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 Consolidated Balance Sheets, regardless of whether the company has any outstanding borrowings on the revolving credit facility.
As of October 31, 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. Typically, the company's revolving credit facility is classified as long-term debt within the company's 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 Consolidated Balance Sheets. As of October 31, 2018, the $91.0 million of outstanding borrowings under the company's revolving credit facility was classified as long-term debt within the company's 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 October 31, 2019 and October 31, 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, if applicable, 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 fiscal years ended October 31, 2019 and October 31, 2018, the company incurred interest expense of approximately $1.9 million and $1.3 million, respectively. For the fiscal year ended October 31, 2017, the company did not incur interest expense under the revolving credit facility that was in place at that time.
Term Loan Credit Agreement
In March 2019, the company entered into a term loan 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 principal 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 principal payments are required during the first three and one quarter (3.25) 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 October 31, 2019, the company has prepaid $100.0 million and $120.0 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 $79.9 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 Consolidated Balance Sheets as the company intends to prepay such amount utilizing cash flows from operations within the next twelve months. Thus, as of October 31, 2019, there were $100.0 million and $180.0 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 Consolidated Balance Sheets.
The term loan credit agreement contains customary covenants, including, without limitation, financial covenants generally consistent with those applicable under our revolving credit facility, 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 October 31, 2019. Outstanding borrowings under the term loan credit agreement bear interest at a variable rate based on LIBOR or an alternative variable rate, subject to an additional basis point spread as defined in the term credit loan agreement. Interest is payable quarterly in arrears. For the fiscal year ended October 31, 2019, the company incurred interest expense of approximately $7.5 million 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 percent Series A Senior Notes due June 15, 2029 ("Series A Senior Notes") and $100.0 million of 3.91 percent 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 October 31, 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 either series of the Senior Notes in an amount equal to not less than 10.0 percent of the principal amount of the Senior Notes then outstanding upon notice to the holders of the series of Senior Notes being prepaid for 100.0 percent 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 series, the company has the right to prepay all of the outstanding Senior Note or each series for 100.0 percent 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, we are required to prepay all of the Senior Notes for the principal amount thereof plus accrued and unpaid interest, if any, to the date of prepayment.
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 October 31, 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 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 fiscal year ended October 31, 2019, the company incurred interest expense of approximately $2.6 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.
Interest on the debentures is payable semiannually on the 15th day of June and December in each year. For the fiscal years ended October 31, 2019, 2018 and 2017, the company incurred interest expense of approximately $7.9 million, $8.0 million and $8.0 million, respectively.
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 fees and direct debt issue 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 101.0 percent of the principal amount of the senior notes plus accrued and unpaid interest to the date of repurchase.
Interest on the senior notes is payable semiannually on the 1st day of May and November in each year. For each of the fiscal years ended October 31, 2019, 2018 and 2017, the company incurred interest expense of approximately $8.4 million.
Toro Underground Wind Down
On August 1, 2019, during the company's fiscal 2019 third quarter, the company announced a plan to wind down the company's Toro-branded large 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 fiscal year ended October 31, 2019, the company recorded $8.8 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 Consolidated Statements of Earnings as a result of the Toro underground wind down. Additionally, the company recorded $1.2 million of pre-tax charges related to anticipated inventory retail support activities within net sales in the Consolidated Statements of Earnings for the fiscal year ended October 31, 2019. As of October 31, 2019, the company had a remaining accrual balance of $0.9 million related to the anticipated inventory retail support activities within accrued liabilities in the Consolidated Balance Sheets. The remainder of the estimated pre-tax charges are anticipated to be primarily comprised of costs related to the write-down of future component parts inventory purchases to finalize assembly of the company's remaining Toro-branded large 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.
Corporate Restructuring
During the fourth quarter of fiscal 2019, the company incurred corporate restructuring charges related to employee severance costs as the company focuses on aligning the company's operations in the most strategic and cost-effective structure subsequent to the company's acquisition of CMW. As a result of such corporate restructuring, the company recorded pre-tax charges of $0.6 million within cost of sales and pre-tax charges of $6.0 million within selling, general and administrative expense in the Consolidated Statements of Earnings during fiscal 2019. The company does not expect to incur additional charges in fiscal 2020 related to this corporate restructuring event.
Divestiture
During the fourth quarter of fiscal 2019, the company divested of a used underground construction equipment business, which was acquired as a result of the company's acquisition of CMW. Such divestiture was immaterial based on the company's Consolidated Financial Condition and Results of Operations.
Earnings before income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Earnings before income taxes:
|
|
|
|
|
|
|
|
|
|
U.S.
|
|
$
|
283,730
|
|
|
$
|
333,136
|
|
|
$
|
307,136
|
|
Foreign
|
|
38,403
|
|
|
39,261
|
|
|
46,048
|
|
Total earnings before income taxes
|
|
$
|
322,133
|
|
|
$
|
372,397
|
|
|
$
|
353,184
|
|
A reconciliation of the statutory federal income tax rate to the company's consolidated effective tax rate is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Statutory federal income tax rate
|
|
21.0
|
%
|
|
23.3
|
%
|
|
35.0
|
%
|
Excess deduction for stock compensation
|
|
(3.7
|
)
|
|
(3.5
|
)
|
|
(5.3
|
)
|
Domestic manufacturer's deduction
|
|
0.1
|
|
|
(0.9
|
)
|
|
(1.2
|
)
|
State and local income taxes, net of federal benefit
|
|
1.1
|
|
|
1.3
|
|
|
0.5
|
|
Foreign operations
|
|
(0.3
|
)
|
|
(0.5
|
)
|
|
(2.3
|
)
|
Federal research tax credit
|
|
(1.5
|
)
|
|
(1.2
|
)
|
|
(1.5
|
)
|
Foreign-derived intangible income
|
|
(1.3
|
)
|
|
—
|
|
|
—
|
|
Remeasurement of deferred tax assets and liabilities
|
|
(0.1
|
)
|
|
5.2
|
|
|
—
|
|
Deemed repatriation tax
|
|
(0.2
|
)
|
|
3.6
|
|
|
—
|
|
Other, net
|
|
(0.2
|
)
|
|
(0.3
|
)
|
|
(1.0
|
)
|
Consolidated effective tax rate
|
|
14.9
|
%
|
|
27.0
|
%
|
|
24.2
|
%
|
On December 22, 2017, the U.S. enacted Public Law No. 115-97 ("Tax Act"), originally introduced as the Tax Cuts and Jobs Act, which significantly modified the Internal Revenue Code. The Tax Act reduced the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent, created a territorial-type tax system with an exemption for foreign dividends, and imposed a one-time deemed repatriation tax on a U.S. company's historical undistributed earnings and profits of foreign affiliates. The tax rate change was effective January 1, 2018, which resulted in a blended statutory tax rate of 23.3 percent for the fiscal year ended October 31, 2018. The reduced tax rate of 21.0 percent was applicable to the fiscal year ended October 31, 2019. Among other provisions, the Tax Act also increased expensing for certain business assets, created new taxes on certain foreign sourced earnings, provided an incentive on specified export activities, adopted limitations on business interest expense deductions, repealed deductions for income attributable to domestic production activities, and added other anti-base erosion rules.
As of October 31, 2018, the company completed the accounting for the effects of the Tax Act. The company recorded tax expense of $19.3 million for the remeasurement of deferred tax assets and liabilities, and tax expense of $13.4 million for the one-time transition tax on deemed repatriation tax of its non-U.S. subsidiaries. Included with the company's provision for income taxes within the Consolidated Statements of Earnings for the fiscal year ended October 31, 2019 are final immaterial adjustments related to the Tax Act, including a tax benefit of $0.3 million for the remeasurement of deferred tax assets and liabilities and a tax benefit of $0.7 million for the deemed repatriation.
The Global Intangible Low-Taxed Income ("GILTI") provisions under the Tax Act requires the company to include in its U.S. income tax return any foreign subsidiary earnings in excess of an allowable return on the foreign subsidiary’s tangible assets. Under U.S. GAAP, the company is allowed to
make an accounting policy election of either (1) treating taxes due on future U.S. inclusions in taxable income related to GILTI as a current period expense when incurred (“period cost method”) or (2) factoring such amounts into the company’s measurement of its deferred taxes (“deferred method”).The company has elected the period cost method and therefore, has recorded additional income tax expense, net of offsetting foreign tax credits, in the amount of $1.0 million as a result of GILTI for the fiscal year ended October 31, 2019, which is included within foreign operations in the company's reconciliation of the statutory federal income tax rate to the company's consolidated effective tax rate above.
The Foreign-Derived Intangible Income (“FDII”) provisions of the Tax Act provide an incentive to domestic corporations in the form of a lower tax rate on income derived from tangible and intangible products and services in foreign markets. This lower tax rate is accomplished through an additional tax deduction based on a percentage of qualifying sales. The FDII deduction provided the company an additional tax benefit of $4.2 million in the fiscal year ended October 31, 2019.
Components of the company's provision for income taxes were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Current provision:
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
37,415
|
|
|
$
|
64,375
|
|
|
$
|
83,091
|
|
State
|
|
7,495
|
|
|
6,192
|
|
|
3,036
|
|
Foreign
|
|
6,846
|
|
|
7,087
|
|
|
8,166
|
|
Total current provision
|
|
$
|
51,756
|
|
|
$
|
77,654
|
|
|
$
|
94,293
|
|
Deferred provision (benefit):
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(37
|
)
|
|
$
|
22,074
|
|
|
$
|
(8,774
|
)
|
State
|
|
(3,205
|
)
|
|
308
|
|
|
(101
|
)
|
Foreign
|
|
(364
|
)
|
|
422
|
|
|
49
|
|
Total deferred provision (benefit)
|
|
(3,606
|
)
|
|
22,804
|
|
|
(8,826
|
)
|
Total provision for income taxes
|
|
$
|
48,150
|
|
|
$
|
100,458
|
|
|
$
|
85,467
|
|
The tax effects of temporary differences that give rise to deferred income tax (liabilities) assets, net, are presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
October 31
|
|
2019
|
|
2018
|
Deferred income tax assets:
|
|
|
|
|
|
|
Compensation and benefits
|
|
$
|
27,969
|
|
|
$
|
24,315
|
|
Warranty and insurance
|
|
25,788
|
|
|
19,037
|
|
Advertising and sales allowance
|
|
8,866
|
|
|
7,650
|
|
Inventory
|
|
4,005
|
|
|
2,742
|
|
Other
|
|
8,745
|
|
|
5,047
|
|
Valuation allowance
|
|
(3,199
|
)
|
|
(1,178
|
)
|
Total deferred income tax assets
|
|
$
|
72,174
|
|
|
$
|
57,613
|
|
Deferred income tax liabilities:
|
|
|
|
|
Depreciation
|
|
$
|
(40,964
|
)
|
|
$
|
(12,381
|
)
|
Amortization
|
|
(75,538
|
)
|
|
(8,377
|
)
|
Total deferred income tax liabilities
|
|
(116,502
|
)
|
|
(20,758
|
)
|
Deferred income tax (liabilities) assets, net
|
|
$
|
(44,328
|
)
|
|
$
|
36,855
|
|
The net change in the total valuation allowance between the fiscal years ended October 31, 2019 and 2018 was an increase of $2.0 million, including $1.7 million related to deferred tax assets recorded as a result of the company's purchase accounting for the CMW acquisition related to branch foreign tax credits, as well as future capital loss carryforwards determined not to be realizable. The change in valuation allowance also included loss and credit carryforwards that are expected to expire prior to utilization. As of October 31, 2019, the company had net operating loss carryforwards of approximately $3.4 million in foreign jurisdictions, which are comprised of $2.8 million that do not expire and $0.6 million that expire between fiscal 2020 and fiscal 2028. The company also had domestic credit carryforwards of $1.0 million that expires between fiscal 2029 and fiscal 2034.
The company considers that $17.2 million of undistributed earnings of its foreign operations are intended to be indefinitely reinvested. Should these earnings be distributed in the future in the form of dividends or otherwise, the company may be subject to foreign withholding taxes, state income taxes, and/or additional federal taxes for currency fluctuations. As of October 31, 2019, the unrecognized deferred tax liabilities for temporary differences related to the company’s investment in non-U.S. subsidiaries, and any withholding, state, or additional federal taxes upon any future repatriation, are expected to be immaterial and have not been recorded.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
Unrecognized tax benefits as of October 31, 2018
|
|
$
|
2,345
|
|
Increase as a result of tax positions taken during a prior period
|
|
149
|
|
Increase as a result of tax positions taken during the current period
|
|
467
|
|
Decrease relating to settlements with taxing authorities
|
|
(215
|
)
|
Reductions as a result of statute of limitations lapses
|
|
(73
|
)
|
Unrecognized tax benefits as of October 31, 2019
|
|
$
|
2,673
|
|
The company recognizes interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes within the Consolidated Statements of Earnings. In addition to the liability of $2.7 million for unrecognized tax benefits as of October 31, 2019, the company had an amount of $0.5 million of accrued interest and penalties. Included in the balance of unrecognized tax benefits as of October 31, 2019 are potential benefits of $2.5 million that, if recognized, would affect the effective tax rate from continuing operations.
The company and its wholly owned subsidiaries file income tax returns in the U.S. federal jurisdiction, and numerous state and foreign jurisdictions. With few exceptions, the company is no longer subject to U.S. federal, state and local, and foreign income tax examinations by tax authorities for taxable years before fiscal 2015. The Internal Revenue Service completed an audit of fiscal 2014 through fiscal 2017, with no material adjustments to tax expense or unrecognized tax benefits. The company is also under audit in certain state jurisdictions and expects various statutes of limitation to expire during the next
12 months. Due to the uncertainty related to the response of taxing authorities, a range of outcomes cannot be reasonably estimated at this time.
|
|
|
9
|
Stock-Based Compensation Plans
|
The company maintains the 2010 plan for executive officers, other employees, and non-employee members of the company's Board of Directors. The 2010 plan allows the company to grant equity-based compensation awards, including stock options, restricted stock units, restricted stock, and performance share awards. The number of unissued shares of common stock available for future equity-based grants under the 2010 plan was 4,358,384 as of October 31, 2019. Shares of common stock issued upon exercise or settlement of stock options, restricted stock units, and performance shares are issued from treasury shares.
Compensation costs related to stock-based awards were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Unrestricted common stock awards
|
|
$
|
592
|
|
|
$
|
530
|
|
|
$
|
538
|
|
Stock option awards
|
|
6,537
|
|
|
5,006
|
|
|
5,496
|
|
Restricted stock units
|
|
3,230
|
|
|
2,997
|
|
|
2,300
|
|
Performance share awards
|
|
3,070
|
|
|
3,628
|
|
|
5,183
|
|
Total compensation cost for stock-based awards
|
|
$
|
13,429
|
|
|
$
|
12,161
|
|
|
$
|
13,517
|
|
Related tax benefit from stock-based awards
|
|
$
|
3,200
|
|
|
$
|
2,905
|
|
|
$
|
5,001
|
|
Unrestricted Common Stock Awards
During fiscal 2019, 2018, and 2017, 10,090, 8,388, and 11,412 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 and are recorded in selling, general and administrative expense in the Consolidated Statements of Earnings.
Stock Option Awards
Under 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 expensing 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.
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 Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Expected life of option in years
|
|
6.31
|
|
|
6.04
|
|
|
6.02
|
|
Expected stock price volatility
|
|
19.83
|
%
|
|
20.58
|
%
|
|
22.15
|
%
|
Risk-free interest rate
|
|
2.77
|
%
|
|
2.21
|
%
|
|
2.03
|
%
|
Expected dividend yield
|
|
1.18
|
%
|
|
0.97
|
%
|
|
1.01
|
%
|
Per share weighted-average fair value at date of grant
|
|
$
|
12.83
|
|
|
$
|
14.25
|
|
|
$
|
12.55
|
|
The table below presents stock option activity for fiscal 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock Option
Awards
|
|
Weighted-Average Exercise Price
|
|
Weighted-Average
Contractual Life (years)
|
|
Aggregate Intrinsic
Value (in thousands)
|
Outstanding as of October 31, 2018
|
|
3,738,604
|
|
|
$
|
34.01
|
|
|
5.0
|
|
$
|
87,470
|
|
Granted
|
|
507,028
|
|
|
58.62
|
|
|
|
|
|
|
Exercised
|
|
(1,388,044
|
)
|
|
21.66
|
|
|
|
|
|
Canceled/forfeited
|
|
(9,468
|
)
|
|
55.24
|
|
|
|
|
|
|
Outstanding as of October 31, 2019
|
|
2,848,120
|
|
|
$
|
44.34
|
|
|
5.7
|
|
$
|
93,392
|
|
Exercisable as of October 31, 2019
|
|
1,861,173
|
|
|
$
|
35.98
|
|
|
4.4
|
|
$
|
76,592
|
|
As of October 31, 2019, there was $3.8 million of total unrecognized compensation cost related to unvested stock options. That cost is expected to be recognized over a weighted-average period of 1.84 years.
The table below presents the total market value of stock options exercised and the total intrinsic value of options exercised during the following fiscal years (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Market value of stock options exercised
|
|
$
|
92,352
|
|
|
$
|
70,775
|
|
|
$
|
58,976
|
|
Intrinsic value of options exercised1
|
|
$
|
62,288
|
|
|
$
|
53,778
|
|
|
$
|
48,017
|
|
|
|
1
|
Intrinsic value is calculated as the amount by which the stock price at exercise date exceeded the option exercise price.
|
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.
Factors related to the company's restricted stock unit awards are as follows (in thousands, except per award data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Weighted-average per award fair value at date of grant
|
|
$
|
66.26
|
|
|
$
|
63.24
|
|
|
$
|
66.09
|
|
Fair value of restricted stock units vested
|
|
$
|
3,083
|
|
|
$
|
4,888
|
|
|
$
|
3,604
|
|
The table below summarizes the activity during fiscal 2019 for unvested restricted stock units:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
|
|
Weighted-Average Fair Value at Date
of Grant
|
Unvested as of October 31, 2018
|
|
99,554
|
|
|
$
|
59.15
|
|
Granted
|
|
76,496
|
|
|
66.26
|
|
Vested
|
|
(47,357
|
)
|
|
54.38
|
|
Forfeited
|
|
(4,226
|
)
|
|
58.94
|
|
Unvested as of October 31, 2019
|
|
124,467
|
|
|
$
|
65.30
|
|
As of October 31, 2019, there was $4.8 million of total unrecognized compensation cost related to unvested restricted stock units. That cost is expected to be recognized over a weighted-average period of 2.25 years.
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 can 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.
Factors related to the company's performance share awards are as follows (in thousands, except per award data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Weighted-average per award fair value at date of grant
|
|
$
|
59.58
|
|
|
$
|
65.40
|
|
|
$
|
54.52
|
|
Fair value of performance share awards vested
|
|
$
|
6,300
|
|
|
$
|
8,419
|
|
|
$
|
7,018
|
|
The table below summarizes the activity during fiscal 2019 for unvested performance share awards:
|
|
|
|
|
|
|
|
|
|
|
Performance
Shares
|
|
Weighted-Average Fair Value at Date of Grant
|
Unvested as of October 31, 2018
|
|
221,392
|
|
|
$
|
50.96
|
|
Granted
|
|
69,600
|
|
|
59.58
|
|
Vested
|
|
(91,803
|
)
|
|
38.89
|
|
Canceled/forfeited
|
|
(6,335
|
)
|
|
61.34
|
|
Unvested as of October 31, 2019
|
|
192,854
|
|
|
$
|
59.47
|
|
As of October 31, 2019, there was $4.3 million of total unrecognized compensation cost related to unvested performance share awards. That cost is expected to be recognized over a weighted-average period of 1.86 years.
Stock Repurchase Program
On December 3, 2015, the company's Board of Directors authorized the repurchase of 8,000,000 shares of the company's common stock in open-market or in privately negotiated transactions. On December 4, 2018, the company's Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of common stock in open-market or in privately negotiated transactions under the authorized stock repurchase program. This authorized stock repurchase program has no expiration date but may be terminated by the Board at any time.
During fiscal 2019, 2018, and 2017, the company paid $20.0 million, $160.4 million, and $159.4 million to repurchase an aggregate of 359,758 shares, 2,579,864 shares, and 2,710,837 shares, respectively, under the authorized stock repurchase program. As a result of the company's acquisition of CMW on April 1, 2019, the company curtailed the repurchase of shares of its common stock under the authorized stock repurchase program during the company's fiscal 2019 second, third, and fourth quarters. As of October 31, 2019, 7,042,256 shares remained authorized by the company's Board of Directors for repurchase. The authorized stock repurchase program does not include shares of the company's common stock surrendered by employees to satisfy minimum tax withholding obligations upon vesting of certain equity securities granted under the company's stock-based compensation plans.
Treasury Shares
As of October 31, 2019, the company had a total of 21,385,919 treasury shares at a cost of $1,374.0 million. As of October 31, 2018, the company had a total of 22,527,348 treasury shares at a cost of $1,448.4 million.
Accumulated Other Comprehensive Loss
Components of AOCL, net of tax, within the Consolidated Statements of Stockholders' Equity are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31
|
|
2019
|
|
2018
|
|
2017
|
Foreign currency translation adjustments
|
|
$
|
31,025
|
|
|
$
|
29,711
|
|
|
$
|
21,303
|
|
Pension and post-retirement benefits
|
|
4,861
|
|
|
561
|
|
|
2,012
|
|
Cash flow derivative instruments
|
|
(3,837
|
)
|
|
(6,335
|
)
|
|
805
|
|
Total accumulated other comprehensive loss
|
|
$
|
32,049
|
|
|
$
|
23,937
|
|
|
$
|
24,120
|
|
The components and activity of AOCL are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Post-Retirement Benefits
|
|
Cash Flow Derivative Instruments
|
|
Total
|
Balance as of October 31, 2018
|
|
$
|
29,711
|
|
|
$
|
561
|
|
|
$
|
(6,335
|
)
|
|
$
|
23,937
|
|
Other comprehensive (income) loss before reclassifications
|
|
1,314
|
|
|
4,300
|
|
|
(4,048
|
)
|
|
1,566
|
|
Amounts reclassified from AOCL
|
|
—
|
|
|
—
|
|
|
6,546
|
|
|
6,546
|
|
Net current period other comprehensive loss
|
|
1,314
|
|
|
4,300
|
|
|
2,498
|
|
|
8,112
|
|
Balance as of October 31, 2019
|
|
$
|
31,025
|
|
|
$
|
4,861
|
|
|
$
|
(3,837
|
)
|
|
$
|
32,049
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Translation Adjustments
|
|
Pension and Post-Retirement Benefits
|
|
Cash Flow Derivative Instruments
|
|
Total
|
Balance as of October 31, 2017
|
|
$
|
21,303
|
|
|
$
|
2,012
|
|
|
$
|
805
|
|
|
$
|
24,120
|
|
Other comprehensive (income) loss before reclassifications
|
|
8,408
|
|
|
(1,035
|
)
|
|
(5,489
|
)
|
|
1,884
|
|
Amounts reclassified from AOCL
|
|
—
|
|
|
—
|
|
|
(1,926
|
)
|
|
(1,926
|
)
|
Net current period other comprehensive (income) loss
|
|
8,408
|
|
|
(1,035
|
)
|
|
(7,415
|
)
|
|
(42
|
)
|
Reclassification due to the adoption of ASU 2018-02
|
|
—
|
|
|
(416
|
)
|
|
275
|
|
|
(141
|
)
|
Balance as of October 31, 2018
|
|
$
|
29,711
|
|
|
$
|
561
|
|
|
$
|
(6,335
|
)
|
|
$
|
23,937
|
|
For additional information on the components of AOCL associated with pension and post-retirement benefits refer to Note 15, Employee Retirement Plans. For additional information on the components reclassified from AOCL to the respective line items in net earnings for derivative instruments refer to Note 13, Financial Instruments.
|
|
|
11
|
Investment in Joint Venture
|
In fiscal 2009, the company and TCFIF, a subsidiary of TCF National Bank, established Red Iron, a joint venture in the form of a Delaware limited liability company that primarily provides inventory financing to certain distributors and dealers of the company’s products in the U.S. Under a separate arrangement, TCF Commercial Finance Canada, Inc. ("TCFCFC") provides inventory financing to dealers of the company's products in Canada. 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 $550.0 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 October 31, 2019 and 2018 was $24.1 million and $22.5 million, respectively. The company has not guaranteed the outstanding indebtedness of Red Iron.
Under the financing 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. The company also entered into a limited inventory repurchase agreement with Red Iron and TCFCFC. Under such limited inventory repurchase agreement, the company has agreed to repurchase products repossessed by Red Iron and TCFCFC, up to a maximum aggregate amount of $7.5 million in a calendar year. The company's financial exposure under this repurchase agreement is limited to the difference between the amount paid to Red Iron and TCFCFC for repurchases of repossessed product and the amount received upon the subsequent resale of the repossessed product. The company has repurchased immaterial amounts of inventory under this repurchase agreement for the fiscal years ended October 31, 2019, 2018, and 2017.
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 during fiscal 2019, 2018, and 2017 was $1,924.9 million, $1,959.7 million, and $1,847.7
million, respectively. The total amount of receivables due from Red Iron to the company as of October 31, 2019 and 2018 were $21.7 million and $21.4 million, respectively.
Summarized financial information for Red Iron is presented as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Twelve Months Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Revenue
|
|
$
|
47,569
|
|
|
$
|
42,051
|
|
|
$
|
35,158
|
|
Interest and operating expenses, net
|
|
(21,011
|
)
|
|
(17,288
|
)
|
|
(13,030
|
)
|
Net income
|
|
$
|
26,558
|
|
|
$
|
24,763
|
|
|
$
|
22,128
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31
|
|
2019
|
|
2018
|
Finance receivables, net
|
|
$
|
486,834
|
|
|
$
|
446,138
|
|
Other assets
|
|
3,733
|
|
|
3,449
|
|
Total assets
|
|
$
|
490,567
|
|
|
$
|
449,587
|
|
|
|
|
|
|
Notes payable
|
|
$
|
419,308
|
|
|
$
|
378,128
|
|
Other liabilities
|
|
17,594
|
|
|
21,366
|
|
Partners' capital
|
|
53,665
|
|
|
50,093
|
|
Total liabilities and partners' capital
|
|
$
|
490,567
|
|
|
$
|
449,587
|
|
|
|
|
12
|
Commitments and Contingent Liabilities
|
Leases
The company enters into contracts for operating lease agreements for certain property, plant, or equipment assets in the normal course of business, such as buildings for manufacturing facilities, office space, distribution centers, and warehouse facilities; land for product testing sites; machinery and equipment for research and development activities, manufacturing and assembly processes, and administrative tasks; and vehicles for sales, marketing and distribution activities. Total rental expense for operating leases was $34.1 million, $27.4 million and $27.9 million for the fiscal years ended October 31, 2019, 2018 and 2017, respectively. As of October 31, 2019, future minimum lease payments under noncancelable operating leases amounted to $83.1 million as follows: fiscal 2020, $17.1 million; fiscal 2021, $15.8 million; fiscal 2022, $12.8 million; fiscal 2023, $9.8 million; fiscal 2024, $8.9 million; and after fiscal 2024, $18.7 million.
Customer Financing Arrangements
Wholesale Financing
The company is party to a joint venture with TCFIF established as Red Iron to provide wholesale financing to certain dealers and distributors of certain of the company's products. Refer to Note 11, Investment in Joint Venture for additional information related to Red Iron. Financing agreements are also in place with separate third-party financial institutions to provide financing to certain dealers not financed through Red Iron, including those in Australia and as a result of the company's acquisition of CMW. These separate third-party financial institutions purchased $235.4 million of receivables from the company during fiscal 2019. As of October 31, 2019, $148.4 million of
receivables financed by these separate third-party financial institutions, excluding Red Iron, was outstanding. During fiscal 2018, $29.8 million of receivables were purchased from the company by these third-party financial institutions and $13.0 million of receivables was outstanding as of October 31, 2018. The increase in financing activity with these institutions is a result of the company's acquisition of CMW. For additional information on the acquisition of CMW, refer to Note 2, Business Combinations.
Additionally, as a result of the company's financing agreements with the separate third-party financial institutions, the company also entered into inventory repurchase agreements with the separate third-party financial institutions. Under such inventory repurchase agreements, the company has agreed to repurchase products repossessed by the separate third-party financial institutions. As of October 31, 2019, the company was contingently liable to repurchase up to a maximum amount of $125.9 million of inventory related to receivables under these inventory repurchase agreements. The company's financial exposure under these repurchase agreements is limited to the difference between the amount paid to the separate third-party financial institutions for repurchases of repossessed product and the amount received upon the subsequent resale of the repossessed product. The company has repurchased immaterial amounts of inventory under these repurchase agreements for the fiscal years ended October 31, 2019, 2018, and 2017.
End-User Financing
The company has agreements with third-party financing companies to provide lease-financing options to golf course, sports fields and grounds equipment and underground construction customers in the U.S., Canada, Australia, and select countries in Europe. The company has no material contingent liabilities for residual value or credit collection risk under these agreements with third-party financing companies.
From time to time, the company enters into agreements where it provides recourse to third-party finance companies in the event of default by the customer for lease payments to the third-party finance company. The company's maximum exposure for credit collection as of October 31, 2019 was $10.1 million.
Purchase Commitments
As of October 31, 2019, the company had $22.8 million of noncancelable purchase commitments with certain of the company's suppliers for commodities and supplies as part of the normal course of business. The company also entered into commitments for machinery and equipment purchases to support renovation efforts at its Plymouth, Wisconsin distribution center and certain international facilities. As of October 31, 2019, the amount of the remaining obligation under these commitments was $1.9 million.
Letters of Credit
The company has access to an unsecured senior five-year revolving credit facility that, among other things, includes a $10.0 million sublimit for standby letters of credit. As of October 31, 2019 and October 31, 2018, the company had $1.9
million and $1.5 million outstanding under the sublimit for standby letters of credit, respectively. Refer to Note 6, Indebtedness, for additional information related to the company's revolving credit facility.
The company's domestic and non-U.S. operations maintain import letters of credit during the normal course of business, as required by some vendor contracts. Collectively, these import letters of credit had a maximum availability of $13.3 million and $13.5 million as of October 31, 2019 and October 31, 2018, respectively. As of October 31, 2019 and October 31, 2018, the company had $4.7 million and $6.7 million, respectively, in outstanding import letters of credit.
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 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.
Concentrations of Credit Risk
Financial instruments, which potentially subject the company to concentrations of credit risk, consist principally of accounts receivable and derivative instruments. Accounts receivable balances are concentrated in the Professional and Residential business segments. The credit risk associated with these business segments is limited because of the large number of customers in the company's customer base and their geographic dispersion, except for the Residential segment, which has historically had significant sales to The Home Depot. The credit risk associated with the company's derivative instruments is limited as the company enters into derivative instruments with multiple counterparties that are highly rated financial institutions.
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 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 Consolidated Balance Sheets and are subsequently reclassified to net earnings within the 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 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 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 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 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 Consolidated Balance Sheets, recognizing future changes in the fair value within other income, net in the Consolidated Statements of Earnings.
As of October 31, 2019, the notional amount outstanding of forward contracts designated as cash flow hedging instruments was $244.6 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 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 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 Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
Fair Value as of October 31
|
|
2019
|
|
2018
|
Derivative assets:
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
8,642
|
|
|
$
|
8,596
|
|
Derivatives not designated as cash flow hedging instruments:
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
Forward currency contracts
|
|
2,256
|
|
|
2,305
|
|
Total assets
|
|
$
|
10,898
|
|
|
$
|
10,901
|
|
Derivative liabilities:
|
|
|
|
|
|
|
Derivatives not designated as cash flow hedging instruments:
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
9
|
|
|
$
|
13
|
|
Total liabilities
|
|
$
|
9
|
|
|
$
|
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 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 Consolidated Balance Sheets (in thousands):
|
|
|
|
|
|
|
|
|
|
Fair Value as of October 31
|
|
2019
|
|
2018
|
Derivative assets:
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
Gross amounts of recognized assets
|
|
$
|
11,056
|
|
|
$
|
10,901
|
|
Gross liabilities offset in the Consolidated Balance Sheets
|
|
(158
|
)
|
|
—
|
|
Net amounts of assets presented in the Consolidated Balance Sheets
|
|
$
|
10,898
|
|
|
$
|
10,901
|
|
Derivative liabilities:
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
Gross amounts of recognized liabilities
|
|
$
|
(9
|
)
|
|
$
|
(13
|
)
|
Gross assets offset in the Consolidated Balance Sheets
|
|
—
|
|
|
—
|
|
Net amounts of liabilities presented in the Consolidated Balance Sheets
|
|
$
|
(9
|
)
|
|
$
|
(13
|
)
|
The following table presents the impact and location of the amounts reclassified from AOCL into net earnings on the Consolidated Statements of Earnings and the impact of derivative instruments on the Consolidated Statements of Comprehensive Income for the company's derivatives designated as cash flow hedging instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Reclassified from AOCL into Income
|
|
Gain (Loss) Recognized in OCI on Derivatives
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
5,732
|
|
|
$
|
(2,914
|
)
|
|
$
|
(2,268
|
)
|
|
$
|
7,008
|
|
Cost of sales
|
|
814
|
|
|
988
|
|
|
(230
|
)
|
|
132
|
|
Total derivatives designated as cash flow hedging instruments
|
|
$
|
6,546
|
|
|
$
|
(1,926
|
)
|
|
$
|
(2,498
|
)
|
|
$
|
7,140
|
|
During fiscal 2019 and 2018, the company recognized immaterial gains within other income, net due to the discontinuance of cash flow hedge accounting on forward currency contracts designated as cash flow hedging instruments. As of October 31, 2019, the company expects to reclassify approximately $4.0 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 Consolidated Statements of Earnings for the company’s derivatives designated as cash flow hedging instruments and the related components excluded from hedge effectiveness testing (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Gain Recognized in Earnings on Cash Flow Hedging Instruments
|
Fiscal Year Ended
October 31, 2019
|
|
Net Sales
|
|
Cost of Sales
|
Total Consolidated Statements of Earnings income (expense) amounts in which the effects of cash flow hedging instruments are recorded
|
|
$
|
3,138,084
|
|
|
$
|
(2,090,121
|
)
|
Gain on derivatives designated as cash flow hedging instruments:
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
Amount of gain reclassified from AOCL into earnings
|
|
5,732
|
|
|
814
|
|
Gain on components excluded from effectiveness testing recognized in earnings based on changes in fair value
|
|
$
|
5,358
|
|
|
$
|
135
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Earnings on Cash Flow Hedging Instruments
|
Fiscal Year Ended
October 31, 2018
|
|
Net Sales
|
|
Cost of Sales
|
Total Consolidated Statements of Earnings income (expense) amounts in which the effects of cash flow hedging instruments are recorded
|
|
$
|
2,618,650
|
|
|
$
|
(1,677,639
|
)
|
Gain (loss) on derivatives designated as cash flow hedging instruments:
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
Amount of gain (loss) reclassified from AOCL into earnings
|
|
(2,914
|
)
|
|
988
|
|
Gain (loss) on components excluded from effectiveness testing recognized in earnings based on changes in fair value
|
|
$
|
490
|
|
|
$
|
(369
|
)
|
The following table presents the impact and location of derivative instruments on the Consolidated Statements of Earnings for the company’s derivatives not designated as cash flow hedging instruments (in thousands):
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
Gain (loss) on derivative instruments not designated as cash flow hedging instruments:
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
Other income, net
|
|
$
|
(2,087
|
)
|
|
$
|
2,930
|
|
Total gain (loss) on derivatives not designated as cash flow hedging instruments
|
|
$
|
(2,087
|
)
|
|
$
|
2,930
|
|
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 fiscal years ended October 31, 2019 and 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 October 31, 2019 and 2018, according to the valuation technique utilized to determine their fair values (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using Inputs Considered as:
|
October 31, 2019
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
10,898
|
|
|
$
|
—
|
|
|
$
|
10,898
|
|
|
$
|
—
|
|
Total assets
|
|
$
|
10,898
|
|
|
$
|
—
|
|
|
$
|
10,898
|
|
|
$
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
Total liabilities
|
|
$
|
9
|
|
|
$
|
—
|
|
|
$
|
9
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
$
|
—
|
|
Nonrecurring 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.
Included in long-term debt is $423.9 million of fixed rate debt that is not subject to variable interest rate fluctuations. The fair value of such long-term debt is determined using Level 2 inputs by discounting the projected cash flows based on quoted market rates at which similar amounts of debt could currently be borrowed. As of October 31, 2019, the estimated fair value of long-term debt with fixed interest rates was $493.8 million compared to its carrying amount of $423.9 million. As of October 31, 2018, the estimated fair value of long-term debt with fixed interest rates was $260.5 million compared to its carrying amount of $221.5 million. For additional information regarding long-term debt with fixed interest rates, refer to Note 6, Indebtedness.
|
|
|
15
|
Employee Retirement Plans
|
Defined Contribution Plans
The company maintains The Toro Company Investment, Savings, and Employee Stock Ownership Plan for eligible employees. The company's expenses under this plan were $23.4 million, $18.8 million, and $17.9 million for the fiscal years ended October 31, 2019, 2018, and 2017, respectively. The increase in expense for the year ended October 31, 2019, as compared to the year ended October 31, 2018, was primarily
due to the company's acquisition of CMW during the company's fiscal 2019 second quarter. Refer to Note 2, Business Combinations, for additional information regarding the company's acquisition of CMW.
Defined Benefit Plans
The company has defined benefit, supplemental, and other retirement plans covering certain employees in the U.S. and the United Kingdom ("retirement plans"). The projected benefit obligation and accumulated benefit obligation of the retirement plans were $39.5 million and $36.3 million, as of October 31, 2019 and 2018, respectively. The net liability amount recognized in the Consolidated Balance Sheets for the retirement plans was $1.4 million and $5.1 million as of October 31, 2019, respectively. The fair value of the retirement plans assets as of October 31, 2019 and 2018 was $38.0 million and $33.2 million, respectively. The net funded status of these plans as of October 31, 2019 and 2018 was underfunded at $1.5 million and $3.1 million, respectively.
Service costs of these plans are presented in selling, general and administrative expense within the Consolidated Statements of Earnings. Non-service cost components of net periodic benefit cost (income), including realized gains or losses as a result of changes in actuarial valuation assumptions, are presented in other income, net within the Consolidated Statements of Earnings. The company recognized income of $6.6 million for the fiscal year ended October 31, 2019 and recognized expense of $0.2 million and $1.5 million for the fiscal years ended October 31, 2018 and 2017, respectively, within the Consolidated Statements of Earnings for the retirement plans.
Amounts recognized in AOCL consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
Defined Benefit
Pension Plans
|
|
Post-Retirement
Benefit Plan
|
|
Total
|
2019
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
4,861
|
|
|
$
|
—
|
|
|
$
|
4,861
|
|
Accumulated other comprehensive loss
|
|
$
|
4,861
|
|
|
$
|
—
|
|
|
$
|
4,861
|
|
2018
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
|
$
|
4,632
|
|
|
$
|
(4,071
|
)
|
|
$
|
561
|
|
Accumulated other comprehensive loss (income)
|
|
$
|
4,632
|
|
|
$
|
(4,071
|
)
|
|
$
|
561
|
|
The following amounts are included within AOCL as of October 31, 2019 and are expected to be recognized as components of net periodic benefit (income) cost during fiscal 2020 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2019
|
|
Defined Benefit
Pension Plans
|
|
Post-Retirement
Benefit Plan
|
|
Total
|
Net actuarial gain
|
|
$
|
(139
|
)
|
|
$
|
—
|
|
|
$
|
(139
|
)
|
Total net periodic benefit income
|
|
$
|
(139
|
)
|
|
$
|
—
|
|
|
$
|
(139
|
)
|
Amounts recognized in net periodic benefit cost (income) and other comprehensive loss (income) consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31
|
|
Defined Benefit
Pension Plans
|
|
Post-Retirement
Benefit Plan
|
|
Total
|
2019
|
|
|
|
|
|
|
|
|
|
Net actuarial loss (gain)
|
|
$
|
154
|
|
|
$
|
(1,138
|
)
|
|
$
|
(984
|
)
|
Amortization of unrecognized actuarial gain
|
|
71
|
|
|
5,213
|
|
|
5,284
|
|
Total recognized in other comprehensive income
|
|
$
|
225
|
|
|
$
|
4,075
|
|
|
$
|
4,300
|
|
Total recognized in net periodic benefit cost (income) and other comprehensive loss (income)
|
|
$
|
396
|
|
|
$
|
(2,653
|
)
|
|
$
|
(2,257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended October 31
|
|
Defined Benefit
Pension Plans
|
|
Post-Retirement
Benefit Plan
|
|
Total
|
2018
|
|
|
|
|
|
|
|
|
|
Net actuarial (gain)
|
|
$
|
(277
|
)
|
|
$
|
(745
|
)
|
|
$
|
(1,022
|
)
|
Amortization of unrecognized actuarial gain (loss)
|
|
(300
|
)
|
|
287
|
|
|
(13
|
)
|
Total recognized in other comprehensive income
|
|
$
|
(577
|
)
|
|
$
|
(458
|
)
|
|
$
|
(1,035
|
)
|
Total recognized in net periodic benefit cost (income) and other comprehensive loss (income)
|
|
$
|
106
|
|
|
$
|
(1,322
|
)
|
|
$
|
(1,216
|
)
|
The company has omitted the remaining disclosures for its retirement plans as the company deems these retirement plans to be immaterial to its Consolidated Financial Statements.
Other income (expense) is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended October 31
|
|
2019
|
|
2018
|
|
2017
|
Interest income
|
|
$
|
2,753
|
|
|
$
|
2,463
|
|
|
$
|
1,359
|
|
Retail financing revenue
|
|
1,178
|
|
|
1,232
|
|
|
1,097
|
|
Foreign currency exchange rate gain
|
|
1,558
|
|
|
1,127
|
|
|
1,543
|
|
Loss on asset disposals
|
|
(484
|
)
|
|
—
|
|
|
—
|
|
Non-cash income from finance affiliate
|
|
11,948
|
|
|
11,143
|
|
|
9,960
|
|
Litigation settlements, net of recoveries
|
|
(1,659
|
)
|
|
(700
|
)
|
|
(65
|
)
|
Net periodic benefit income on defined benefit pension and post-retirement plans
|
|
6,822
|
|
|
—
|
|
|
—
|
|
Miscellaneous
|
|
3,823
|
|
|
3,143
|
|
|
3,293
|
|
Total other income, net
|
|
$
|
25,939
|
|
|
$
|
18,408
|
|
|
$
|
17,187
|
|
On December 20, 2019, Toro (or one of Toro’s wholly owned subsidiaries), TCFIF (or one of TCFIF’s wholly owned subsidiaries or affiliates), and Red Iron amended certain agreements pertaining to the Red Iron joint venture, including: (i) a Third Amendment to Agreement to Form Joint Venture between Toro and TCFIF (“JV Amendment”); (ii) a Fifth Amendment to Limited Liability Company Agreement of Red Iron Acceptance, LLC between Red Iron Holding Corporation, a wholly owned subsidiary of Toro (“Red Iron Holding”), and TCFIF Joint Venture I, LLC, a wholly owned subsidiary of TCFIF (“TCFIF JV I”) (“LLC Amendment”); (iii) a Third Amendment to Credit and Security Agreement between TCFIF, as lender, and Red Iron, as borrower (“Credit Agreement Amendment”); and (iv) a First Amendment to Fourth Amended and Restated Program and Repurchase Agreement between Toro and Red Iron (“Program and Repurchase Agreement Amendment”).
The purpose of these amendments is, among other things, to: (i) adjust certain rates under the floor plan financing rate structure charged to Toro’s distributors and dealers participating in financing arrangements through the Red Iron joint venture; (ii) extend the term of Red Iron from October 31, 2024 to October 31, 2026, subject to two-year extensions thereafter unless either party provides written notice to the other party of non-renewal at least one year prior to the end of the then-current term; (iii) amend certain exclusivity-related provisions, including the definition of Toro products that are subject to exclusivity, inclusion of a two-year review period by Toro for products acquired in future acquisitions to assess, without a commitment to exclusivity, the potential benefits and detriments of including such acquired products under the Red Iron financing arrangement, and the pro-rata payback over a five-year period of the exclusivity incentive payment Toro received from TCFIF in 2016 (the “2016 Exclusivity Payment”); (iv) extend the maturity date of the revolving credit facility used by Red Iron primarily to finance the acquisition of inventory from Toro and its affiliates by its distributors and dealers from October 31, 2024 to October 31, 2026 and to increase the amount available under such revolving credit facility from $550 million to $625 million; and (v) memorialize certain other non-material amendments. For additional information regarding Toro’s Red Iron joint venture, refer to Note 11, Investment in Joint Venture.
The company has evaluated all additional subsequent events and concluded that no subsequent events have occurred that would require recognition in the Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements.
|
|
|
18
|
Quarterly Financial Data (Unaudited)
|
Summarized quarterly financial data for fiscal 2019 and 2018 are as follows (dollars in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
Fiscal Year Ended October 31, 2019
|
|
First
|
|
Second2
|
|
Third2
|
|
Fourth
|
Net sales
|
|
$
|
602,956
|
|
|
$
|
962,036
|
|
|
$
|
838,713
|
|
|
$
|
734,379
|
|
Gross profit
|
|
215,617
|
|
|
321,298
|
|
|
265,981
|
|
|
245,067
|
|
Net earnings
|
|
59,540
|
|
|
115,570
|
|
|
60,607
|
|
|
38,266
|
|
Basic net earnings per share1
|
|
0.56
|
|
|
1.08
|
|
|
0.57
|
|
|
0.36
|
|
Diluted net earnings per share1
|
|
$
|
0.55
|
|
|
$
|
1.07
|
|
|
$
|
0.56
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter
|
Fiscal Year Ended October 31, 2018
|
|
First
|
|
Second
|
|
Third
|
|
Fourth
|
Net sales
|
|
$
|
548,246
|
|
|
$
|
875,280
|
|
|
$
|
655,821
|
|
|
$
|
539,303
|
|
Gross profit
|
|
204,239
|
|
|
324,056
|
|
|
233,653
|
|
|
179,063
|
|
Net earnings
|
|
22,604
|
|
|
131,289
|
|
|
79,009
|
|
|
39,037
|
|
Basic net earnings per share1
|
|
0.21
|
|
|
1.23
|
|
|
0.75
|
|
|
0.37
|
|
Diluted net earnings per share1
|
|
$
|
0.21
|
|
|
$
|
1.21
|
|
|
$
|
0.73
|
|
|
$
|
0.36
|
|
|
|
1
|
Basic and diluted net earnings per share amounts may not equal the full year total due to changes in the number of weighted-average shares of common stock outstanding during the periods and rounding.
|
|
|
2
|
During fiscal 2019, CMW's financial position, results of operations, and cash flows were reported on a calendar month end. Accordingly, April 30, 2019 and July 31, 2019 were the calendar quarterly period end dates closest to the company's quarterly fiscal periods ended May 3, 2019 and August 2, 2019, respectively. This reporting period difference did not have material impact on the company's Consolidated Results of Operations during the company's second and third fiscal quarters. For the company's fiscal 2019 fourth quarter, the reporting period end for both CMW and the company was October 31, 2019.
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
The company maintains disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to provide reasonable assurance that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In
designing and evaluating its disclosure controls and procedures, the company recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply judgment in evaluating the cost-benefit relationship of possible internal controls.
The company's management evaluated, with the participation of the company's Chairman of the Board, President and Chief Executive Officer and Vice President, Treasurer and Chief Financial Officer, the effectiveness of the design and operation of the company's disclosure controls and procedures as of the end of the period covered by this Annual Report on Form 10-K. Based on that evaluation, the company's Chairman of the Board, President and Chief Executive Officer and Vice President, Treasurer and Chief Financial Officer concluded that the company's disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that information required to be disclosed in its Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC's rules and forms, and that such information relating to the company and its consolidated subsidiaries is accumulated and communicated to management, including the Chairman of the Board, President and Chief Executive Officer and Vice President, Treasurer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures.
Evaluation of Internal Control Over Financial Reporting
The company's management report on internal control over financial reporting is included in this Annual Report on Form 10-K within Part II, Item 8, "Financial Statements and Supplementary Data" under the caption "Management's Report on Internal Control over Financial Reporting." The report of KPMG LLP, the company's independent registered public accounting firm, regarding the effectiveness of the company's internal control over financial reporting is included in this Annual Report on Form 10-K within Part II, Item 8, "Financial Statements and Supplementary Data" under the caption "Report of Independent Registered Public Accounting Firm." With the exception of integration activities in connection with the company's acquisition of CMW, there was no change in the company's internal control over financial reporting that occurred during the company's fourth fiscal quarter ended October 31, 2019 that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting.
On April 1, 2019, the company completed its acquisition of CMW. Prior to this acquisition, CMW was a privately-held company not subject to the Sarbanes-Oxley Act of 2002, the rules and regulations of the SEC, or other corporate governance requirements to which public companies may be subject. As of and for the fiscal year ended October 31, 2019, CMW accounted for approximately 35.0 percent of consolidated total assets and 14.8 percent of consolidated net sales of the company.
As part of the company's ongoing integration activities, the company is in the process of incorporating internal controls
over significant processes specific to CMW that the company believes are appropriate and necessary to account for the acquisition and to consolidate and report the company's financial results. In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial reporting during the year of acquisition. Accordingly, the company has excluded CMW from the company's assessment of internal control over financial reporting as of October 31, 2019 as the company's integration activities are ongoing and incomplete. Refer to the company's management report on internal control over financial reporting included in this Annual Report on Form 10-K within Part II, Item 8, "Financial Statements and Supplementary Data" under the caption "Management's Report on Internal Control over Financial Reporting" for additional information.
ITEM 9B. OTHER INFORMATION
On December 20, 2019, Toro (or one of Toro’s wholly owned subsidiaries), TCFIF (or one of TCFIF’s wholly owned subsidiaries or affiliates), and Red Iron amended certain agreements pertaining to the Red Iron joint venture, including: (i) a Third Amendment to Agreement to Form Joint Venture between Toro and TCFIF (“JV Amendment”); (ii) a Fifth Amendment to Limited Liability Company Agreement of Red Iron Acceptance, LLC between Red Iron Holding Corporation, a wholly owned subsidiary of Toro (“Red Iron Holding”), and TCFIF Joint Venture I, LLC, a wholly owned subsidiary of TCFIF (“TCFIF JV I”) (“LLC Amendment”); (iii) a Third Amendment to Credit and Security Agreement between TCFIF, as lender, and Red Iron, as borrower (“Credit Agreement Amendment”); and (iv) a First Amendment to Fourth Amended and Restated Program and Repurchase Agreement between Toro and Red Iron (“Program and Repurchase Agreement Amendment”).
The purpose of these amendments is, among other things, to: (i) adjust certain rates under the floor plan financing rate structure charged to Toro’s distributors and dealers participating in financing arrangements through the Red Iron joint venture; (ii) extend the term of Red Iron from October 31, 2024 to October 31, 2026, subject to two-year extensions thereafter unless either party provides written notice to the other party of non-renewal at least one year prior to the end of the then-current term; (iii) amend certain exclusivity-related provisions, including the definition of Toro products that are subject to exclusivity, inclusion of a two-year review period by Toro for products acquired in future acquisitions to assess, without a commitment to exclusivity, the potential benefits and detriments of including such acquired products under the Red Iron financing arrangement, and the pro-rata payback over a five-year period of the exclusivity incentive payment Toro received from TCFIF in 2016 (the “2016 Exclusivity Payment”); (iv) extend the maturity date of the revolving credit facility used by Red Iron primarily to finance the acquisition of inventory from Toro and its affiliates by its distributors and dealers from October 31, 2024 to October 31, 2026 and to increase the amount available under such revolving credit facility from $550 million to $625 million; and (v) memorialize
certain other non-material amendments. Toro expects that the amendments will result in higher net sales and lower other income from Toro’s equity investment in Red Iron within Toro's Consolidated Statements of Earnings, primarily due to (a) Toro reflecting the anticipated price realization in net sales as a result of the revised rate structure and (b) Toro no longer recognizing the 2016 Exclusivity Payment in other income, net.
Toro plans to file copies of the JV Amendment, LLC Amendment, Credit Agreement Amendment, and Program and Repurchase Agreement Amendment to its Quarterly Report on Form 10-Q for the period ending January 31, 2020. For additional information regarding Toro’s Red Iron joint venture, refer to Note 11, Investment in Joint Venture, in the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.