Notes to Condensed Consolidated Financial Statements (Unaudited)
May 1, 2020
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by United States ("U.S.") generally accepted accounting principles ("GAAP") for complete financial statements. Unless the context indicates otherwise, the terms "company," "TTC," "we," "our," or "us" refer to The Toro Company and its consolidated subsidiaries. All intercompany accounts and transactions have been eliminated from the unaudited Condensed Consolidated Financial Statements.
In the opinion of management, the unaudited Condensed Consolidated Financial Statements include all adjustments, consisting primarily of recurring accruals, considered necessary for the fair presentation of the company's Consolidated Financial Position, Results of Operations, and Cash Flows for the periods presented. Since the company’s business is seasonal, operating results for the six months ended May 1, 2020 cannot be annualized to determine the expected results for the fiscal year ending October 31, 2020.
The company’s fiscal year ends on October 31, and quarterly results are reported based on three-month periods that generally end on the Friday closest to the quarter end. For comparative purposes, however, the company’s second and third quarters always include exactly 13 weeks of results so that the quarter end date for these two quarters is not necessarily the Friday closest to the calendar month end.
The company completed its acquisition of The Charles Machine Works, Inc. ("CMW") on April 1, 2019. CMW's financial position, results of operations, and cash flows were historically reported based on a calendar month end. The company aligned the quarterly periods of CMW with the company's quarterly fiscal periods during fiscal 2020. For the second quarter of fiscal 2019, April 30, 2019 was the period end closest to the company's fiscal second quarter ended May 3, 2019. This reporting period difference did not have a significant impact on the Consolidated Financial Position, Results of Operations, and Cash Flows of the company as of and for the three and six month periods ended May 3, 2019. Refer to Note 2, Business Combinations, for additional information regarding the company's acquisition of CMW.
For further information regarding the company's basis of presentation, refer to the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in the company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2019. The policies described in that report are used for preparing the company's quarterly reports on Form 10-Q.
Impact of COVID-19 Pandemic
In March 2020, the World Health Organization declared the novel coronavirus ("COVID-19") outbreak a global pandemic. The global outbreak of COVID-19 has negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets, and has resulted in an economic slowdown. COVID-19 has had a material impact on the company and the future broader implications of the COVID-19 pandemic on the company remain uncertain and will depend on certain future developments, including the duration, scope, and severity of the pandemic; its impact on the company's employees, customers, and suppliers; and the range of government mandated restrictions and other measures. This uncertainty could have an impact on accounting estimates and assumptions utilized to prepare the Condensed Consolidated Financial Statements in future reporting periods, which could result in a material adverse impact to the company's Consolidated Financial Position, Results of Operations, and Cash Flows.
Accounting Policies and Estimates
In preparing the Condensed Consolidated Financial Statements in conformity with U.S. GAAP, management must make decisions that impact the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures, including disclosures of contingent assets and liabilities. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Estimates are used in determining, among other items, sales promotion and incentive accruals, incentive compensation accruals, income tax accruals, legal accruals, inventory valuation and reserves, warranty reserves, allowance for doubtful accounts, pension and post-retirement accruals, self-insurance accruals, useful lives for tangible and finite-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 and current 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 economic environment. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with certainty, including those impacted by the COVID-19 pandemic, actual amounts could differ significantly from those estimated at the time the Condensed Consolidated Financial Statements are prepared.
New Accounting Pronouncements Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which, among other things, requires lessees to recognize most leases on-balance sheet. The standard requires the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under legacy accounting guidance at Accounting Standards Codification ("ASC") Topic 840, Leases. 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"), was adopted by the company on November 1, 2019, the first quarter of fiscal 2020, under the modified retrospective transition method with no cumulative-effect adjustment to beginning retained earnings within the Condensed Consolidated Balance Sheet as of such date. Under such transition method, the company elected the following practical expedients:
|
|
|
|
•
|
The transition package of practical expedients, which among other things, allows the company to carryforward the historical lease classification determined under previous U.S. GAAP.
|
|
|
|
|
•
|
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 short-term lease exemption to not record right-of-use assets and lease liabilities on the Condensed Consolidated Balance Sheet for leases with an initial lease term of 12 months or less, which has resulted in recognizing the lease payments related to such leases within the company's Condensed Consolidated Statements of Earnings on a straight-line basis over the lease term.
|
The company did not elect the transition practical expedient to use hindsight in determining the lease term and in assessing the impairment of right-of-use assets.
Upon adoption of the amended guidance, the company recorded $78.1 million of right-of-use assets and $77.1 million of corresponding lease liabilities within the Condensed Consolidated Balance Sheet as of November 1, 2019. The adoption of the standard did not have a material impact on the company's Condensed Consolidated Statements of Earnings, Condensed Consolidated Statements of Cash Flows, business processes, internal controls, and information systems. As permitted under the amended guidance, prior period amounts were not restated, but are and will continue to be reported under the legacy accounting guidance that was in effect for the respective prior periods.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which amends ASC 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The standard requires that most of the guidance related to stock compensation granted to employees be followed for nonemployees, including the measurement date, valuation approach, and performance conditions. The amended guidance was adopted in the first quarter of fiscal 2020 and did not have a material impact on the company's Condensed Consolidated Financial Statements.
Venture Products, Inc. ("Venture Products")
On March 2, 2020 ("Venture Products closing date"), pursuant to an Agreement and Plan of Merger ("Venture Products merger agreement") and an agreement to purchase the real property used by Venture Products ("Venture Products purchase agreement") both dated January 20, 2020, the company completed its acquisition of Venture Products, a privately held Ohio corporation and
the manufacturer of Ventrac-branded products. Venture Products designs, manufactures, and markets articulating turf, landscape, and snow and ice management equipment for grounds, landscape contractor, golf, municipal, and rural acreage customers and provides innovative product offerings that broadened and strengthened the company's Professional segment and expanded its dealer network.
The Venture Products transaction was structured as a merger, pursuant to which a wholly-owned subsidiary of the company merged with and into Venture Products, with Venture Products 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 Venture Products were canceled and now only represent the right to receive the applicable consideration as described in the Venture Products merger agreement. The Venture Products purchase agreement was with an affiliate of Venture Products and was for the real estate used by Venture Products. The aggregate preliminary consideration was $165.9 million ("Venture Products purchase price"), which consisted of a cash payment of $136.4 million and a $29.5 million holdback to satisfy any indemnification or certain other obligations of Venture Products to TTC. The aggregate preliminary consideration remains subject to certain customary adjustments based on, among other things, the amount of actual cash, debt, and working capital in the business of Venture Products at the Venture Products closing date. Such customary adjustments are expected to be completed during fiscal 2020. The holdback is expected to expire during the company's fourth quarter of fiscal 2021. The company funded the cash payment with borrowings under its existing unsecured senior revolving credit facility. For additional information regarding the company's unsecured senior revolving credit facility utilized to fund the Venture Products purchase price, refer to Note 6, Indebtedness. As a result of the acquisition, the company incurred approximately $0.3 million and $0.6 million of acquisition-related transaction costs during the three and six month periods ended May 1, 2020, respectively. These acquisition-related transaction costs are recorded within selling, general and administrative expense within the Condensed Consolidated Statements of Earnings.
Preliminary Venture Products Purchase Price Allocation
The company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the aggregate preliminary Venture Products purchase price was allocated to the acquired net tangible and intangible assets of Venture Products based on their fair values as of the Venture Products closing date. As of May 1, 2020, 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 Venture Products 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 preliminary Venture Products purchase price as soon as practicable, but no later than one year from the closing date of the acquisition, as required.
The following table summarizes the allocation of the preliminary Venture Products purchase price to the fair values assigned to the Venture Products assets acquired and liabilities assumed. These fair values are based on internal company and independent external third-party valuations and are subject to change as certain asset and liability valuations are finalized:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
March 2, 2020
|
|
Cash and cash equivalents
|
|
$
|
3,476
|
|
|
Receivables
|
|
6,342
|
|
|
Inventories
|
|
23,000
|
|
|
Prepaid expenses and other current assets
|
|
239
|
|
|
Property, plant and equipment
|
|
26,976
|
|
|
Goodwill
|
|
65,185
|
|
|
Other intangible assets
|
|
75,300
|
|
|
Accounts payable
|
|
(4,075
|
)
|
|
Accrued liabilities
|
|
(6,186
|
)
|
|
Deferred income tax liabilities
|
|
(20,850
|
)
|
|
Total fair value of net assets acquired
|
|
169,407
|
|
|
Less: cash and cash equivalents acquired
|
|
(3,476
|
)
|
|
Total preliminary Venture Products purchase price
|
|
$
|
165,931
|
|
The goodwill recognized is primarily attributable to the value of the workforce, the reputation of Venture Products, expected future cash flows, and expected synergies, including customer and dealer growth opportunities and integrating and expanding existing product lines. Key areas of expected cost synergies include increased purchasing power for commodities, components, parts, and accessories, and supply chain consolidation. The goodwill resulting from the acquisition of Venture Products was recognized
within the company's Professional segment and is the primary driver for the increase in the company's Professional segment goodwill to $414.3 million as of May 1, 2020 from $350.3 million as of October 31, 2019. Goodwill is non-deductible for tax purposes.
Other Intangible Assets Acquired
The allocation of the preliminary Venture Products purchase price to the net assets acquired resulted in the recognition of $75.3 million of other intangible assets as of the Venture Products closing date. The fair values of the acquired trade name and customer-related 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 value of the trade name was 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 value of the customer-related intangible asset was determined using the excess earnings method and was based on the expected operating cash flows attributable to the customer-related 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 customer-related intangible asset. The useful lives of the trade name and customer-related intangible assets were determined based on the period of expected cash flows used to measure the fair value of the respective 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 Venture Products closing date, related accumulated amortization from the Venture Products closing date through May 1, 2020, and weighted-average useful lives were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Weighted-Average Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Finite-lived - customer-related
|
|
16.0
|
|
$
|
19,100
|
|
|
$
|
(199
|
)
|
|
$
|
18,901
|
|
|
Indefinite-lived - trade name
|
|
|
|
56,200
|
|
|
—
|
|
|
56,200
|
|
|
Total other intangible assets, net
|
|
|
|
$
|
75,300
|
|
|
$
|
(199
|
)
|
|
$
|
75,101
|
|
Amortization expense for the finite-lived intangible assets resulting from the acquisition of Venture Products for the three and six months periods ended May 1, 2020 was $0.2 million. Estimated amortization expense for the remainder of fiscal 2020 and succeeding fiscal years is as follows: fiscal 2020 (remainder), $0.6 million; fiscal 2021, $1.2 million; fiscal 2022, $1.2 million; fiscal 2023, $1.2 million; fiscal 2024, $1.2 million; fiscal 2025, $1.2 million; and after fiscal 2025, $12.3 million.
Results of Operations
Venture Product's results of operations are included within the company's Professional reportable segment in the company's Condensed Consolidated Financial Statements from the Venture Products closing date. During the three and six month periods ended May 1, 2020, the company recognized $11.2 million of net sales from Venture Product's operations. Venture Product's operations had an immaterial impact on Professional segment earnings for the three and six month periods ended May 1, 2020. Unaudited pro forma financial information is not disclosed as the Venture Products acquisition was not considered material to the company's Consolidated Results of Operations.
The Charles Machine Works, Inc.
On April 1, 2019 ("CMW closing date"), pursuant to the Agreement and Plan of Merger dated February 14, 2019 ("CMW 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 CMW merger agreement. At the CMW closing date, the company 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 CMW closing date. During the fourth quarter of fiscal 2019, the company finalized such cash, debt and working capital adjustments and these adjustments resulted in an aggregate merger consideration of $685.0 million ("CMW purchase price"). The company funded the CMW purchase price by using a combination of cash proceeds from the issuance of borrowings under the company's unsecured senior term loan credit agreement and borrowings
under the company's unsecured senior revolving credit facility. For additional information regarding the financing agreements utilized to fund the CMW purchase price, refer to Note 6, Indebtedness. As a result of the acquisition, the company incurred approximately $10.2 million of acquisition-related transaction costs, all of which were incurred during the fiscal year ended October 31, 2019 and recorded within selling, general and administrative expense within the Consolidated Statements of Earnings for such fiscal period. During the three and six month periods ended May 3, 2019, the company recorded acquisition-related transaction costs of $8.0 million and $9.7 million, respectively.
CMW Purchase Price Allocation
The company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the total CMW purchase price was allocated to the acquired net tangible and intangible assets of CMW based on their fair values as of the CMW closing date. As of May 1, 2020, the company had completed its process for measuring the fair values of the assets acquired and liabilities assumed based on information available as of the CMW closing date.
The following table summarizes the allocation of the CMW 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:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
April 1, 2019
|
|
Cash and cash equivalents
|
|
$
|
16,341
|
|
|
Receivables
|
|
65,674
|
|
|
Inventories
|
|
241,429
|
|
|
Prepaid expenses and other current assets
|
|
8,050
|
|
|
Property, plant and equipment
|
|
142,779
|
|
|
Goodwill
|
|
134,657
|
|
|
Other intangible assets
|
|
264,190
|
|
|
Other long-term assets
|
|
7,971
|
|
|
Accounts payable
|
|
(35,892
|
)
|
|
Accrued liabilities
|
|
(51,943
|
)
|
|
Deferred income tax liabilities
|
|
(85,277
|
)
|
|
Other long-term liabilities
|
|
(6,665
|
)
|
|
Total fair value of net assets acquired
|
|
701,314
|
|
|
Less: cash and cash equivalents acquired
|
|
(16,341
|
)
|
|
Total CMW 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. During the second quarter of fiscal 2020, the company completed its valuation of income taxes to finalize the CMW purchase price allocation, which resulted in a decrease to the carrying amount of goodwill of $0.9 million from the amounts reported within the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2019. Goodwill is mostly non-deductible for tax purposes.
Other Intangible Assets Acquired
The allocation of the CMW purchase price to the net assets acquired resulted in the recognition of $264.2 million of other intangible assets as of the CMW 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 respective 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 assets. 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 CMW closing date, related accumulated amortization from the CMW closing date through May 1, 2020, and weighted-average useful lives were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Weighted-Average Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Customer-related
|
|
18.3
|
|
$
|
130,800
|
|
|
$
|
(9,405
|
)
|
|
$
|
121,395
|
|
|
Developed technology
|
|
7.8
|
|
20,900
|
|
|
(3,750
|
)
|
|
17,150
|
|
|
Trade names
|
|
20.0
|
|
5,200
|
|
|
(282
|
)
|
|
4,918
|
|
|
Backlog
|
|
0.5
|
|
3,590
|
|
|
(3,590
|
)
|
|
—
|
|
|
Total finite-lived
|
|
16.6
|
|
160,490
|
|
|
(17,027
|
)
|
|
143,463
|
|
|
Indefinite-lived - trade names
|
|
|
|
103,700
|
|
|
—
|
|
|
103,700
|
|
|
Total other intangible assets, net
|
|
|
|
$
|
264,190
|
|
|
$
|
(17,027
|
)
|
|
$
|
247,163
|
|
Amortization expense for the finite-lived intangible assets resulting from the acquisition of CMW for the three and six month periods ended May 1, 2020 was $3.1 million and $6.3 million, respectively. Estimated amortization expense for the remainder of fiscal 2020 and succeeding fiscal years is as follows: fiscal 2020 (remainder), $6.3 million; fiscal 2021, $12.6 million; fiscal 2022, $11.5 million; fiscal 2023, $10.1 million; fiscal 2024, $9.4 million; fiscal 2025, $7.7 million; and after fiscal 2025, $85.9 million.
Results of Operations
CMW's results of operations are included within the company's Professional reportable segment in the company's Condensed Consolidated Financial Statements and the net sales and segment loss amounts for the three and six month periods ended May 3, 2019 reflect one month of CMW's results subsequent to the April 1, 2019 acquisition date. During the three month periods ended May 1, 2020 and May 3, 2019, the company recognized $177.6 million and $70.9 million of net sales from CMW's operations, respectively. During the three month periods ended May 1, 2020 and May 3, 2019, the company recognized $18.6 million of segment earnings and $4.1 million of segment loss from CMW's operations, respectively. During the six month periods ended May 1, 2020 and May 3, 2019, the company recognized $338.5 million and $70.9 million of net sales from CMW's operations. During the six month periods ended May 1, 2020 and May 3, 2019, the company recognized $28.0 million of segment earnings and $4.1 million of segment loss from CMW's operations, respectively.
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. These Other activities consist of the company's wholly-owned domestic distribution companies, the company's corporate activities, and the elimination of intersegment revenues and expenses.
The following tables present summarized financial information concerning the company’s reportable segments and Other activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 1, 2020
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
|
Net sales
|
|
$
|
661,087
|
|
|
$
|
261,998
|
|
|
$
|
6,313
|
|
|
$
|
929,398
|
|
|
Intersegment gross sales (eliminations)
|
|
16,642
|
|
|
34
|
|
|
(16,676
|
)
|
|
—
|
|
|
Earnings (loss) before income taxes
|
|
$
|
106,259
|
|
|
$
|
37,122
|
|
|
$
|
(22,010
|
)
|
|
$
|
121,371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 1, 2020
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
|
Net sales
|
|
$
|
1,255,808
|
|
|
$
|
427,846
|
|
|
$
|
13,227
|
|
|
$
|
1,696,881
|
|
|
Intersegment gross sales (eliminations)
|
|
25,413
|
|
|
61
|
|
|
(25,474
|
)
|
|
—
|
|
|
Earnings (loss) before income taxes
|
|
208,733
|
|
|
58,688
|
|
|
(59,911
|
)
|
|
207,510
|
|
|
Total assets
|
|
$
|
2,052,529
|
|
|
$
|
328,068
|
|
|
$
|
430,878
|
|
|
$
|
2,811,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 3, 2019
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
|
Net sales
|
|
$
|
723,506
|
|
|
$
|
232,147
|
|
|
$
|
6,383
|
|
|
$
|
962,036
|
|
|
Intersegment gross sales (eliminations)
|
|
23,716
|
|
|
80
|
|
|
(23,796
|
)
|
|
—
|
|
|
Earnings (loss) before income taxes
|
|
$
|
150,119
|
|
|
$
|
22,030
|
|
|
$
|
(34,969
|
)
|
|
$
|
137,180
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 3, 2019
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
|
Net sales
|
|
$
|
1,178,512
|
|
|
$
|
377,305
|
|
|
$
|
9,175
|
|
|
$
|
1,564,992
|
|
|
Intersegment gross sales (eliminations)
|
|
37,325
|
|
|
179
|
|
|
(37,504
|
)
|
|
—
|
|
|
Earnings (loss) before income taxes
|
|
238,097
|
|
|
35,102
|
|
|
(65,999
|
)
|
|
207,200
|
|
|
Total assets
|
|
$
|
1,848,351
|
|
|
$
|
271,224
|
|
|
$
|
346,425
|
|
|
$
|
2,466,000
|
|
The following table presents the details of operating loss before income taxes for the company's Other activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
May 1, 2020
|
|
May 3, 2019
|
|
Corporate expenses
|
|
$
|
(15,441
|
)
|
|
$
|
(34,357
|
)
|
|
$
|
(47,883
|
)
|
|
$
|
(62,671
|
)
|
|
Interest expense
|
|
(8,659
|
)
|
|
(6,694
|
)
|
|
(16,815
|
)
|
|
(11,436
|
)
|
|
Earnings from wholly-owned domestic distribution companies and other income, net
|
|
2,090
|
|
|
6,082
|
|
|
4,787
|
|
|
8,108
|
|
|
Total operating loss
|
|
$
|
(22,010
|
)
|
|
$
|
(34,969
|
)
|
|
$
|
(59,911
|
)
|
|
$
|
(65,999
|
)
|
The company enters into contracts with its customers for the sale of products or rendering of services in the ordinary course of business. A contract with commercial substance exists at the time the company receives and accepts a purchase order under a sales contract with a customer. The company recognizes revenue when, or as, performance obligations under the terms of a contract with its customer are satisfied, which occurs with the transfer of control of product or services. Control is typically transferred to the customer at the time a product is shipped, or in the case of certain agreements, when a product is delivered or as services are rendered. Revenue is recognized based on the transaction price, which is measured as the amount of consideration the company expects to receive in exchange for transferring product or rendering services pursuant to the terms of the contract with a customer. The amount of consideration the company receives and the revenue the company recognizes varies with changes in sales promotions and incentives offered to customers, as well as anticipated product returns. A provision is made at the time revenue is recognized as a reduction of the transaction price for expected product returns, rebates, floor plan costs, and other sales promotion and incentive expenses. If a contract contains more than one performance obligation, the transaction price is allocated to each performance obligation based on the relative standalone selling price of the respective promised good or service. The company does not recognize revenue in situations where collectability from the customer is not probable, and defers the recognition of revenue until collection is probable or payment is received and performance obligations are satisfied.
Freight and shipping revenue billed to customers concurrent with revenue producing activities is included within revenue and the cost for freight and shipping is recognized as an expense within cost of sales when control has transferred to the customer. Shipping and handling activities that occur after control of the related products is transferred are treated as a fulfillment activity rather than a promised service, and therefore, are not considered a performance obligation. Sales, use, value-added, and other excise taxes the company collects concurrent with revenue producing activities are excluded from revenue. Incremental costs of obtaining a contract for which the performance obligations will be satisfied within the next twelve months are expensed as incurred. Incidental items, including goods or services, that are immaterial in the context of the contract are recognized as expense when incurred. Additionally, the company has elected not to disclose the balance of unfulfilled performance obligations for contracts with a contractual term of twelve months or less.
The following tables disaggregate the company's reportable segment net sales by major product type and geographic market (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 1, 2020
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
|
Revenue by product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
569,143
|
|
|
$
|
257,400
|
|
|
$
|
3,835
|
|
|
$
|
830,378
|
|
|
Irrigation
|
|
91,944
|
|
|
4,598
|
|
|
2,478
|
|
|
99,020
|
|
|
Total net sales
|
|
$
|
661,087
|
|
|
$
|
261,998
|
|
|
$
|
6,313
|
|
|
$
|
929,398
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic market:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
509,277
|
|
|
$
|
231,764
|
|
|
$
|
6,313
|
|
|
$
|
747,354
|
|
|
Foreign Countries
|
|
151,810
|
|
|
30,234
|
|
|
—
|
|
|
182,044
|
|
|
Total net sales
|
|
$
|
661,087
|
|
|
$
|
261,998
|
|
|
$
|
6,313
|
|
|
$
|
929,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 1, 2020
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
|
Revenue by product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
1,093,052
|
|
|
$
|
409,858
|
|
|
$
|
9,360
|
|
|
$
|
1,512,270
|
|
|
Irrigation
|
|
162,756
|
|
|
17,988
|
|
|
3,867
|
|
|
184,611
|
|
|
Total net sales
|
|
$
|
1,255,808
|
|
|
$
|
427,846
|
|
|
$
|
13,227
|
|
|
$
|
1,696,881
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic market:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
963,565
|
|
|
$
|
362,102
|
|
|
$
|
13,227
|
|
|
$
|
1,338,894
|
|
|
Foreign Countries
|
|
292,243
|
|
|
65,744
|
|
|
—
|
|
|
357,987
|
|
|
Total net sales
|
|
$
|
1,255,808
|
|
|
$
|
427,846
|
|
|
$
|
13,227
|
|
|
$
|
1,696,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 3, 2019
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
|
Revenue by product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
618,099
|
|
|
$
|
225,456
|
|
|
$
|
2,661
|
|
|
$
|
846,216
|
|
|
Irrigation
|
|
105,407
|
|
|
6,691
|
|
|
3,722
|
|
|
115,820
|
|
|
Total net sales
|
|
$
|
723,506
|
|
|
$
|
232,147
|
|
|
$
|
6,383
|
|
|
$
|
962,036
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic market:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
546,413
|
|
|
$
|
190,163
|
|
|
$
|
6,383
|
|
|
$
|
742,959
|
|
|
Foreign Countries
|
|
177,093
|
|
|
41,984
|
|
|
—
|
|
|
219,077
|
|
|
Total net sales
|
|
$
|
723,506
|
|
|
$
|
232,147
|
|
|
$
|
6,383
|
|
|
$
|
962,036
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended May 3, 2019
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
|
Revenue by product type:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment
|
|
$
|
1,005,649
|
|
|
$
|
358,966
|
|
|
$
|
4,630
|
|
|
$
|
1,369,245
|
|
|
Irrigation
|
|
172,863
|
|
|
18,339
|
|
|
4,545
|
|
|
195,747
|
|
|
Total net sales
|
|
$
|
1,178,512
|
|
|
$
|
377,305
|
|
|
$
|
9,175
|
|
|
$
|
1,564,992
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue by geographic market:
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
894,517
|
|
|
$
|
300,678
|
|
|
$
|
9,175
|
|
|
$
|
1,204,370
|
|
|
Foreign Countries
|
|
283,995
|
|
|
76,627
|
|
|
—
|
|
|
360,622
|
|
|
Total net sales
|
|
$
|
1,178,512
|
|
|
$
|
377,305
|
|
|
$
|
9,175
|
|
|
$
|
1,564,992
|
|
Contract Liabilities
Contract liabilities relate to deferred revenue recognized for cash consideration received at contract inception in advance of the company's performance under the respective 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 contract 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 May 1, 2020 and October 31, 2019, $21.6 million and $22.0 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 Condensed Consolidated Balance Sheets. For the three and six months ended May 1, 2020, the company recognized $2.9 million and $6.4 million, respectively, of the October 31, 2019 deferred revenue balance within net sales in the Condensed Consolidated Statements of Earnings. The company expects to recognize approximately $4.2 million of the October 31, 2019 deferred revenue amount within net sales throughout the remainder of fiscal 2020, $6.4 million in fiscal 2021, and $5.0 million thereafter.
|
|
|
|
|
|
5
|
Goodwill and Other Intangible Assets, Net
|
The company's acquisition of Venture Products on March 2, 2020 resulted in the recognition of $65.2 million and $75.3 million of preliminary goodwill and other intangible assets, respectively. For additional information on the company's acquisition of Venture Products, refer to Note 2, Business Combinations.
Goodwill
The changes in the carrying amount of goodwill by reportable segment for the first six months of fiscal 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Professional
|
|
Residential
|
|
Other
|
|
Total
|
|
Balance as of October 31, 2019
|
|
$
|
350,250
|
|
|
$
|
10,469
|
|
|
$
|
1,534
|
|
|
$
|
362,253
|
|
|
Goodwill acquired
|
|
65,185
|
|
|
—
|
|
|
—
|
|
|
65,185
|
|
|
Purchase price allocation adjustment
|
|
(866
|
)
|
|
—
|
|
|
—
|
|
|
(866
|
)
|
|
Translation adjustments
|
|
(318
|
)
|
|
(79
|
)
|
|
—
|
|
|
(397
|
)
|
|
Balance as of May 1, 2020
|
|
$
|
414,251
|
|
|
$
|
10,390
|
|
|
$
|
1,534
|
|
|
$
|
426,175
|
|
Other Intangible Assets, Net
The components of other intangible assets, net as of May 1, 2020 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Weighted-Average Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Patents
|
|
9.9
|
|
$
|
18,227
|
|
|
$
|
(13,494
|
)
|
|
$
|
4,733
|
|
|
Non-compete agreements
|
|
5.5
|
|
6,865
|
|
|
(6,794
|
)
|
|
71
|
|
|
Customer-related
|
|
18.2
|
|
239,383
|
|
|
(40,555
|
)
|
|
198,828
|
|
|
Developed technology
|
|
7.6
|
|
51,854
|
|
|
(33,199
|
)
|
|
18,655
|
|
|
Trade names
|
|
15.4
|
|
7,476
|
|
|
(2,304
|
)
|
|
5,172
|
|
|
Backlog and other
|
|
0.6
|
|
4,390
|
|
|
(4,390
|
)
|
|
—
|
|
|
Total finite-lived
|
|
15.5
|
|
328,195
|
|
|
(100,736
|
)
|
|
227,459
|
|
|
Indefinite-lived - trade names
|
|
|
|
190,427
|
|
|
—
|
|
|
190,427
|
|
|
Total other intangible assets, net
|
|
|
|
$
|
518,622
|
|
|
$
|
(100,736
|
)
|
|
$
|
417,886
|
|
The components of other intangible assets, net as of May 3, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Weighted-Average Useful Life
|
|
Gross Carrying Amount
|
|
Accumulated Amortization
|
|
Net
|
|
Patents
|
|
9.9
|
|
$
|
18,254
|
|
|
$
|
(12,728
|
)
|
|
$
|
5,526
|
|
|
Non-compete agreements
|
|
5.5
|
|
6,889
|
|
|
(6,797
|
)
|
|
92
|
|
|
Customer-related
|
|
18.3
|
|
201,022
|
|
|
(26,719
|
)
|
|
174,303
|
|
|
Developed technology
|
|
7.6
|
|
50,338
|
|
|
(29,292
|
)
|
|
21,046
|
|
|
Trade names
|
|
15.5
|
|
7,599
|
|
|
(1,903
|
)
|
|
5,696
|
|
|
Other
|
|
0.6
|
|
7,380
|
|
|
(1,897
|
)
|
|
5,483
|
|
|
Total finite-lived
|
|
15.1
|
|
291,482
|
|
|
(79,336
|
)
|
|
212,146
|
|
|
Indefinite-lived - trade names
|
|
|
|
121,031
|
|
|
—
|
|
|
121,031
|
|
|
Total other intangible assets, net
|
|
|
|
$
|
412,513
|
|
|
$
|
(79,336
|
)
|
|
$
|
333,177
|
|
The components of other intangible assets, net as of October 31, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
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
|
|
|
Other
|
|
0.6
|
|
4,390
|
|
|
(4,390
|
)
|
|
—
|
|
|
Total finite-lived
|
|
15.5
|
|
309,285
|
|
|
(91,223
|
)
|
|
218,062
|
|
|
Indefinite-lived - trade names
|
|
|
|
134,312
|
|
|
—
|
|
|
134,312
|
|
|
Total other intangible assets, net
|
|
|
|
$
|
443,597
|
|
|
$
|
(91,223
|
)
|
|
$
|
352,374
|
|
Amortization expense for finite-lived intangible assets during the second quarter of fiscal 2020 and fiscal 2019 was $4.9 million and $3.7 million, respectively. Amortization expense for finite-lived intangible assets during the first six months of fiscal 2020 and 2019 was $9.6 million and $5.5 million, respectively. Estimated amortization expense for the remainder of fiscal 2020 and succeeding fiscal years is as follows: fiscal 2020 (remainder), $9.9 million; fiscal 2021, $19.5 million; fiscal 2022, $18.2 million; fiscal 2023, $16.5 million; fiscal 2024, $15.4 million; fiscal 2025, $13.8 million; and after fiscal 2025, $134.2 million.
The following is a summary of the company's indebtedness:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
October 31, 2019
|
|
Revolving credit facility
|
|
$
|
—
|
|
|
$
|
90,000
|
|
|
$
|
—
|
|
|
$200 million term loan
|
|
100,000
|
|
|
200,000
|
|
|
100,000
|
|
|
$300 million term loan
|
|
180,000
|
|
|
300,000
|
|
|
180,000
|
|
|
$190 million term loan
|
|
190,000
|
|
|
—
|
|
|
—
|
|
|
3.81% series A senior notes
|
|
100,000
|
|
|
—
|
|
|
100,000
|
|
|
3.91% series B senior notes
|
|
100,000
|
|
|
—
|
|
|
100,000
|
|
|
7.800% debentures
|
|
100,000
|
|
|
100,000
|
|
|
100,000
|
|
|
6.625% senior notes
|
|
123,947
|
|
|
123,885
|
|
|
123,916
|
|
|
Less: unamortized discounts, debt issuance costs, and deferred charges
|
|
(3,171
|
)
|
|
(2,806
|
)
|
|
(3,103
|
)
|
|
Total long-term debt
|
|
890,776
|
|
|
811,079
|
|
|
700,813
|
|
|
Less: current portion of long-term debt
|
|
99,868
|
|
|
90,000
|
|
|
79,914
|
|
|
Long-term debt, less current portion
|
|
$
|
790,908
|
|
|
$
|
721,079
|
|
|
$
|
620,899
|
|
Principal payments required on the company's outstanding indebtedness, based on the maturity dates defined within the company's debt arrangements, for the remainder of fiscal 2020 and succeeding five fiscal years are as follows: fiscal 2020 (remainder), $0.0 million; fiscal 2021, $28.5 million; fiscal 2022, $161.3 million; fiscal 2023, $127.2 million; fiscal 2024, $153.0 million; fiscal 2025, $0.0 million; and after fiscal 2025, $425.0 million.
Revolving Credit Facility
The company has an unsecured senior five-year revolving credit facility with a borrowing capacity of $600.0 million that 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 revolving credit facility during June 2018, the company incurred approximately $1.9 million of debt issuance costs, which are being amortized over the life of the revolving credit facility under the straight-line method as the results obtained
are not materially different from those that would result from the use of the effective interest method. The company classifies the debt issuance costs related to its revolving credit facility within other assets on the Condensed Consolidated Balance Sheets, regardless of whether the company has any outstanding borrowings on the revolving credit facility.
As of May 1, 2020, 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 May 3, 2019, the company had $90.0 million outstanding under the revolving credit facility, $1.9 million outstanding under the sublimit for standby letters of credit, and $508.1 million of unutilized availability under 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. Typically, the company's revolving credit facility is classified as long-term debt within the company's Condensed Consolidated Balance Sheets as the company has the ability to extend the outstanding borrowings under the revolving credit facility for the full-term of the facility. However, if the company intends to repay a portion of the outstanding balance under the revolving credit facility within the next twelve months, the company reclassifies that portion of outstanding borrowings under the revolving credit facility to current portion of long-term debt within the Condensed Consolidated Balance Sheets. As of May 1, 2020 and October 31, 2019, no outstanding borrowings under the company's revolving credit facility were classified as current portion of long-term debt within the Condensed Consolidated Balance Sheets. As of May 3, 2019, the $90.0 million of outstanding borrowings under the company's revolving credit facility was classified as long-term debt within the company's Condensed Consolidated Balance Sheets.
The company's revolving credit facility contains customary covenants, including, without limitation, financial covenants, such as the maintenance of minimum interest coverage and maximum leverage ratios; and negative covenants, which among other things, limit disposition of assets, consolidations and mergers, restricted payments, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. The company was in compliance with all covenants related to the credit agreement for the company's revolving credit facility as of May 1, 2020, May 3, 2019, and October 31, 2019.
Outstanding loans under the revolving credit facility, if applicable, other than swingline loans, bear interest at a variable rate generally based on LIBOR or an alternative variable rate based on the highest of the Bank of America prime rate, the federal funds rate or a rate generally based on LIBOR, in each case subject to an additional basis point spread as defined in the credit agreement. Swingline loans under the revolving credit facility bear interest at a rate determined by the swingline lender or an alternative variable rate based on the highest of the Bank of America prime rate, the federal funds rate or a rate generally based on LIBOR, in each case subject to an additional basis point spread as defined in the credit agreement. Interest is payable quarterly in arrears. For the three and six month periods ended May 1, 2020, the company incurred interest expense of approximately $0.7 million and $0.8 million, respectively, under the revolving credit facility. For the three and six month periods ended May 3, 2019, the company incurred interest expense of approximately $1.0 million and $1.8 million, respectively, under the revolving credit facility.
$500.0 Million Term Loan Credit Agreement
In March 2019, the company entered into a term loan credit agreement with a syndicate of financial institutions for the purpose of partially funding the purchase price of the company's acquisition of CMW and the related fees and expenses incurred in connection with such acquisition. The term loan credit agreement provided for a $200.0 million three year unsecured senior term loan facility maturing on April 1, 2022 and a $300.0 million five year unsecured senior term loan facility maturing on April 1, 2024 (collectively, the "$500.0 million term loan"). The funds under the $500.0 million term loan 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 original aggregate principal balance reduced by any applicable prepayments 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 May 1, 2020, the company had 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. Thus, as of May 1, 2020, there were $100.0 million and $180.0 million of outstanding borrowings under the $500.0 million term loan 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 $500.0 million term loan 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 $500.0 million term loan on the company's Condensed Consolidated Balance Sheets.
The $500.0 million term loan contains customary covenants, including, without limitation, financial covenants generally consistent with those applicable under the company's 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 $500.0 million term loan as of May 1, 2020. Outstanding borrowings under the $500.0 million term loan 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 $500.0 million loan credit agreement. Interest is payable quarterly in arrears. For the three and six month periods ended May 1, 2020, the company incurred interest expense of approximately $1.5 million and $3.4 million, respectively, on the outstanding borrowings under the $500.0 million term loan. For the three and six month periods ended May 3, 2019, the company incurred interest expense of approximately $1.6 million on the outstanding borrowings under the $500.0 million term loan.
$190.0 Million Term Loan Credit Agreement
On March 30, 2020, the company entered into a term loan credit agreement ("$190.0 million term loan") with certain financial institutions for the purpose of refinancing certain of its outstanding borrowings incurred in connection with the company's acquisition of Venture Products on March 2, 2020, as well as a precautionary measure to increase the company's liquidity and preserve financial flexibility in light of the current uncertainty in the global financial and commercial markets as a result of COVID-19. The $190.0 million term loan provided for a $190.0 million three year unsecured senior term loan facility maturing on June 19, 2023. In connection with the company's entry into the $190.0 million term loan, the company incurred immaterial debt issuance costs, which are being deferred and amortized over the life of the $190.0 million term loan and are netted against the outstanding borrowings under the $190.0 million term loan on the company's Condensed Consolidated Balance Sheets.
Beginning with the last business day of March 2021, the company is required to make quarterly amortization payments on the $190.0 million term loan equal to 5.0% for the first four payments and 7.5% thereafter of the original aggregate principal amount reduced by any applicable prepayments. The $190.0 million term loan may be prepaid and terminated at the company's election at any time without penalty or premium. Amounts repaid or prepaid may not be reborrowed. As of May 1, 2020, there was $190.0 million of outstanding borrowings under the $190.0 million term loan and the company has reclassified $99.9 million of the remaining outstanding principal balance under the $190.0 million term loan, net of the related proportionate share of deferred debt issuance costs, to current portion of long-term debt within the Condensed Consolidated Balance Sheets as the company intends to prepay such amount utilizing anticipated cash flows from operations within the next twelve months.
The $190.0 million term loan contains customary covenants, including, without limitation, financial covenants generally consistent with those applicable under the company's 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 $190.0 million term loan as of May 1, 2020. Outstanding borrowings under the$190.0 million term loan bear interest at a variable rate based on LIBOR or an alternative variable rate with a minimum rate of 0.75 percent, subject to an additional basis point spread as defined in the term credit loan agreement. Interest is payable quarterly in arrears. For the three and six month periods ended May 1, 2020, the company incurred interest expense of approximately $0.4 million on the outstanding borrowings under the $190.0 million term loan.
3.81% Series A and 3.91% Series B Senior Notes
On April 30, 2019, the company entered into a private placement note purchase agreement with certain purchasers ("holders") pursuant to which the company agreed to issue and sell an aggregate principal amount of $100.0 million of 3.81% Series A Senior Notes due June 15, 2029 ("Series A Senior Notes") and $100.0 million of 3.91% Series B Senior Notes due June 15, 2031 ("Series B Senior Notes" and together with the Series A Senior Notes, the "Senior Notes"). On June 27, 2019, the company issued $100.0 million of the Series A Senior Notes and $100.0 million of the Series B Senior Notes pursuant to the private placement note purchase agreement. The Senior Notes are senior unsecured obligations of the company.
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 Notes 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, the company is 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 May 1, 2020.
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 Notes 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 Notes on the company's Condensed Consolidated Balance Sheets.
Interest on the Senior Notes is payable semiannually on the 15th day of June and December in each year. For the three and six month periods ended May 1, 2020, the company incurred interest expense of approximately $1.9 million and $3.9 million, respectively, on the outstanding borrowings under the private placement note purchase agreement relating to the Senior Notes.
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 three and six month periods ended May 1, 2020 and May 3, 2019, the company incurred interest expense of approximately $2.0 million and $4.0 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 fee and direct debt issuance costs of $1.5 million associated with the issuance of these senior notes are being amortized over the term of the notes using the straight-line method as the results obtained are not materially different from those that would result from the use of the effective interest method. Although the coupon rate of the senior notes is 6.625 percent, the effective interest rate is 6.741 percent after taking into account the issuance discount. The senior notes are unsecured senior obligations of the company and rank equally with the company's other unsecured and unsubordinated indebtedness. The indentures under which the senior notes were issued contain customary covenants and event of default provisions. The company may redeem some or all of the senior notes at any time at the greater of the full principal amount of the senior notes being redeemed or the present value of the remaining scheduled payments of principal and interest discounted to the redemption date on a semi-annual basis at the treasury rate plus 30 basis points, plus, in both cases, accrued and unpaid interest. In the event of the occurrence of both (i) a change of control of the company, and (ii) a downgrade of the notes below an investment grade rating by both Moody's Investors Service, Inc. and Standard & Poor's Ratings Services within a specified period, the company would be required to make an offer to purchase the senior notes at a price equal to 101 percent of the principal amount of the senior notes plus accrued and unpaid interest to the date of repurchase. Interest on the senior notes is payable semiannually on the 1st day of May and November in each year. For the three and six month periods ended May 1, 2020 and May 3, 2019, the company incurred interest expense of approximately $2.1 million and $4.2 million, respectively.
On August 1, 2019, during the company's fiscal 2019 third quarter, the company announced a plan to wind down its Toro-branded large directional drill and riding trencher product categories within its Professional segment product portfolio ("Toro underground wind down"). As of May 1, 2020, the company continues to expect to incur total pretax charges of approximately $10.0 million to $11.0 million related to the Toro underground wind down. The majority of such charges have already been incurred and substantially all remaining anticipated costs are expected to be incurred by the end of fiscal 2020. For the three and six month periods ended May 1, 2020, the company incurred $0.9 million of pre-tax charges related to inventory write-downs to net realizable value. During fiscal 2019, the company recorded pre-tax charges of $10.0 million as a result of the Toro underground wind down related to inventory write-downs to net realizable value, accelerated depreciation on fixed assets that will no longer be used, and
anticipated inventory retail support activities. As of May 1, 2020, the company had a remaining accrual balance of $0.9 million related to the anticipated inventory retail support activities within accrued liabilities in the Condensed Consolidated Balance Sheet. 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.
Inventories are valued at the lower of cost or net realizable value, with cost determined by the first-in, first-out ("FIFO") method for a majority of the company's inventories and the last-in, first-out ("LIFO") and average cost methods for all other inventories. The company establishes a reserve for excess, slow-moving, and obsolete inventory that is equal to the difference between the cost and estimated net realizable value for that inventory. These reserves are based on a review and comparison of current inventory levels to planned production, as well as planned and historical sales of the inventory.
On March 2, 2020, with the acquisition of Venture Products, the company acquired $23.0 million of inventory, based on preliminary fair value purchase accounting adjustments. For additional information on the company's acquisition of Venture Products, refer to Note 2, Business Combinations.
Inventories were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
October 31, 2019
|
|
Raw materials and work in process
|
|
$
|
198,807
|
|
|
$
|
186,065
|
|
|
$
|
179,967
|
|
|
Finished goods and service parts
|
|
597,431
|
|
|
497,467
|
|
|
553,767
|
|
|
Total FIFO value
|
|
796,238
|
|
|
683,532
|
|
|
733,734
|
|
|
Less: adjustment to LIFO value
|
|
82,071
|
|
|
72,201
|
|
|
82,071
|
|
|
Total inventories, net
|
|
$
|
714,167
|
|
|
$
|
611,331
|
|
|
$
|
651,663
|
|
|
|
|
|
|
|
9
|
Property and Depreciation
|
Property, plant, and equipment assets are carried at cost less accumulated depreciation. The company provides for depreciation of property, plant, and equipment utilizing the straight-line method over the estimated useful lives of the assets. Buildings, land improvements, 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.
On March 2, 2020, with the acquisition of Venture Products, the company acquired $27.0 million of property, plant, and equipment, based on preliminary fair value purchase accounting adjustments. For additional information on the company's acquisition of Venture Products, refer to Note 2, Business Combinations.
Property, plant and equipment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
October 31, 2019
|
|
Land and land improvements
|
|
$
|
55,298
|
|
|
$
|
53,123
|
|
|
$
|
55,613
|
|
|
Buildings and leasehold improvements
|
|
287,303
|
|
|
263,103
|
|
|
276,556
|
|
|
Machinery and equipment
|
|
466,388
|
|
|
421,927
|
|
|
453,314
|
|
|
Tooling
|
|
216,177
|
|
|
223,621
|
|
|
226,870
|
|
|
Computer hardware and software
|
|
94,026
|
|
|
91,353
|
|
|
94,409
|
|
|
Construction in process
|
|
71,309
|
|
|
55,851
|
|
|
34,937
|
|
|
Property, plant, and equipment, gross
|
|
1,190,501
|
|
|
1,108,978
|
|
|
1,141,699
|
|
|
Less: accumulated depreciation
|
|
736,740
|
|
|
683,597
|
|
|
704,382
|
|
|
Property, plant, and equipment, net
|
|
$
|
453,761
|
|
|
$
|
425,381
|
|
|
$
|
437,317
|
|
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. For additional information on the contract liabilities associated with the company's separately priced extended warranties, refer to Note 4, Revenue.
The changes in accrued warranties were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
May 1, 2020
|
|
May 3, 2019
|
|
Beginning balance
|
|
$
|
96,623
|
|
|
$
|
76,745
|
|
|
$
|
96,604
|
|
|
$
|
76,214
|
|
|
Provisions
|
|
17,072
|
|
|
17,946
|
|
|
31,103
|
|
|
28,502
|
|
|
Acquisitions
|
|
2,557
|
|
|
14,272
|
|
|
2,557
|
|
|
14,272
|
|
|
Claims
|
|
(16,927
|
)
|
|
(11,356
|
)
|
|
(31,630
|
)
|
|
(22,171
|
)
|
|
Changes in estimates
|
|
3,559
|
|
|
(1,855
|
)
|
|
4,250
|
|
|
(1,065
|
)
|
|
Ending balance
|
|
$
|
102,884
|
|
|
$
|
95,752
|
|
|
$
|
102,884
|
|
|
$
|
95,752
|
|
|
|
|
|
|
|
11
|
Investment in Finance Affiliate
|
In fiscal 2009, the company and TCF Inventory Finance, Inc. ("TCFIF"), a subsidiary of TCF National Bank, established the Red Iron joint venture to primarily provide inventory financing to certain distributors and dealers of certain of the company’s products in the U.S. Under such joint venture, the company owns 45 percent of Red Iron and TCFIF owns 55 percent of Red Iron. Under a separate agreement, TCF Commercial Finance Canada, Inc. ("TCFCFC") provides inventory financing to dealers of the company's products in Canada. On December 20, 2019, during the first quarter of fiscal 2020, the company amended certain agreements pertaining to the Red Iron joint venture. The purpose of these amendments was, among other things, to: (i) adjust certain rates under the floor plan financing rate structure charged to the company’s distributors and dealers participating in financing arrangements through the Red Iron joint venture; (ii) extend the term of the Red Iron joint venture from October 31, 2024 to October 31, 2026, subject to two-year extensions thereafter unless either the company or TCFIF 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 the company's products that are subject to exclusivity, inclusion of a two-year review period by the company 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 the company received from TCFIF in 2016; (iv) extend the maturity date of the revolving credit facility used by Red Iron primarily to finance the acquisition of inventory from the company 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.
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 $625.0 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 May 1, 2020, May 3, 2019, and October 31, 2019 was $27.8 million, $30.1 million, and $24.1 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 has 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 limited inventory 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 limited inventory repurchase agreement for the six months ended May 1, 2020 and May 3, 2019.
Under separate agreements between Red Iron and the dealers and distributors, Red Iron provides loans to the dealers and distributors for the advances paid by Red Iron to the company. The net amount of receivables financed for dealers and distributors under this arrangement for the six months ended May 1, 2020 and May 3, 2019 were $886.4 million and $1,031.3 million, respectively. As of May 1, 2020, Red Iron’s total assets were $555.0 million and total liabilities were $493.1 million. The total amount of receivables due from Red Iron to the company as of May 1, 2020, May 3, 2019, and October 31, 2019 were $23.3 million, $38.7 million and $21.7 million, respectively.
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|
|
|
|
12
|
Stock-Based Compensation
|
Compensation costs related to stock-based awards were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
May 1, 2020
|
|
May 3, 2019
|
|
Unrestricted common stock awards
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
693
|
|
|
$
|
592
|
|
|
Stock option awards
|
|
2,316
|
|
|
1,328
|
|
|
4,094
|
|
|
3,163
|
|
|
Performance share awards
|
|
(1,885
|
)
|
|
1,014
|
|
|
(1,338
|
)
|
|
1,818
|
|
|
Restricted stock unit awards
|
|
976
|
|
|
759
|
|
|
1,918
|
|
|
1,452
|
|
|
Total compensation cost for stock-based awards
|
|
$
|
1,407
|
|
|
$
|
3,101
|
|
|
$
|
5,367
|
|
|
$
|
7,025
|
|
During the second quarter of fiscal 2020, in response to COVID-19 and its impact on the company's Consolidated Financial Position, Results of Operations, and Cash Flows, the probability of achieving the company's performance goals was revised. Such revision impacted the company's performance share awards, which resulted in a reduction in the cumulative expense recorded for such awards within selling, general and administrative expense in the Condensed Consolidated Statements of Earnings for the three and six month periods ended May 1, 2020.
Unrestricted Common Stock Awards
During the first six months of fiscal years 2020 and 2019, 8,920 and 10,090 shares, respectively, of fully vested unrestricted common stock awards were granted to certain members of the company's Board of Directors as a component of their compensation for their service on the Board of Directors and are recorded in selling, general and administrative expense in the Condensed Consolidated Statements of Earnings. No shares of fully vested unrestricted common stock awards were granted during the second quarter of fiscal years 2020 and 2019.
Stock Option Awards
Under The Toro Company Amended and Restated 2010 Equity and Incentive Plan, as amended and restated (the "2010 plan"), stock options are granted with an exercise price equal to the closing price of the company’s common stock on the date of grant, as reported by the New York Stock Exchange. Options are generally granted to executive officers, other employees, and non-employee members of the company’s Board of Directors on an annual basis in the first quarter of the company’s fiscal year. Options generally vest one-third each year over a three-year period and have a ten-year term. Other options granted to certain employees vest in full on the three-year anniversary of the date of grant and have a ten-year term. Compensation cost equal to the grant date fair value is generally recognized for these awards over the vesting period. Stock options granted to executive officers and other employees are subject to accelerated vesting if the option holder meets the retirement definition set forth in the 2010 plan. In that case, the fair value of the options is expensed in the fiscal year of grant because generally, if the option holder is employed as of the end of the fiscal year in which the options are granted, such options will not be forfeited but continue to vest according to their schedule following retirement. Similarly, if a non-employee director has served on the company’s Board of Directors for ten full
fiscal years or more, the awards vest immediately upon retirement, and therefore, the fair value of the options granted is fully expensed on the date of the grant.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation method. 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 first six months of the following fiscal periods:
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2020
|
|
Fiscal 2019
|
|
Expected life of option in years
|
|
6.31
|
|
6.31
|
|
Expected stock price volatility
|
|
19.38%
|
|
19.84%
|
|
Risk-free interest rate
|
|
1.79%
|
|
2.77%
|
|
Expected dividend yield
|
|
0.98%
|
|
1.18%
|
|
Per share weighted-average fair value at date of grant
|
|
$15.36
|
|
$12.82
|
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. The per share weighted-average fair value of performance share awards granted during the first quarter of fiscal 2020 and 2019 was $77.33 and $59.58, respectively. No performance share awards were granted during the second quarter of fiscal 2020 and 2019.
Restricted Stock Unit Awards
Under the 2010 plan, restricted stock unit awards are generally granted to certain employees that are not executive officers. Occasionally, restricted stock unit awards may be granted, including to executive officers, in connection with hiring, mid-year promotions, leadership transition, or retention. Restricted stock unit awards generally vest one-third each year over a three-year period, or vest in full on the three-year anniversary of the date of grant. Such awards may have performance-based rather than time-based vesting requirements. Compensation cost equal to the grant date fair value, which is equal to the closing price of the company’s common stock on the date of grant multiplied by the number of shares subject to the restricted stock unit awards, is recognized for these awards over the vesting period. The per share weighted-average fair value of restricted stock unit awards granted during the first six months of fiscal 2020 and 2019 was $76.12 and $64.75, respectively.
Accumulated Other Comprehensive Loss
Components of accumulated other comprehensive loss ("AOCL"), net of tax, within the Condensed Consolidated Statements of Stockholders' Equity were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
October 31, 2019
|
|
Foreign currency translation adjustments
|
|
$
|
36,916
|
|
|
$
|
30,047
|
|
|
$
|
31,025
|
|
|
Pension and post-retirement benefits
|
|
3,949
|
|
|
561
|
|
|
4,861
|
|
|
Cash flow derivative instruments
|
|
(7,163
|
)
|
|
(5,492
|
)
|
|
(3,837
|
)
|
|
Total accumulated other comprehensive loss
|
|
$
|
33,702
|
|
|
$
|
25,116
|
|
|
$
|
32,049
|
|
The components and activity of AOCL, net of tax, for the three and six month periods ended May 1, 2020 and May 3, 2019 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Pension and
Post-Retirement
Benefits
|
|
Cash Flow Hedging Derivative Instruments
|
|
Total
|
|
Balance as of January 31, 2020
|
|
$
|
31,749
|
|
|
$
|
4,861
|
|
|
$
|
(4,489
|
)
|
|
$
|
32,121
|
|
|
Other comprehensive (income) loss before reclassifications
|
|
5,167
|
|
|
—
|
|
|
(194
|
)
|
|
4,973
|
|
|
Amounts reclassified from AOCL
|
|
—
|
|
|
(912
|
)
|
|
(2,480
|
)
|
|
(3,392
|
)
|
|
Net current period other comprehensive (income) loss
|
|
5,167
|
|
|
(912
|
)
|
|
(2,674
|
)
|
|
1,581
|
|
|
Balance as of May 1, 2020
|
|
$
|
36,916
|
|
|
$
|
3,949
|
|
|
$
|
(7,163
|
)
|
|
$
|
33,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Pension and
Post-Retirement
Benefits
|
|
Cash Flow Hedging Derivative Instruments
|
|
Total
|
|
Balance as of October 31, 2019
|
|
$
|
31,025
|
|
|
$
|
4,861
|
|
|
$
|
(3,837
|
)
|
|
$
|
32,049
|
|
|
Other comprehensive loss before reclassifications
|
|
5,891
|
|
|
—
|
|
|
691
|
|
|
6,582
|
|
|
Amounts reclassified from AOCL
|
|
—
|
|
|
(912
|
)
|
|
(4,017
|
)
|
|
(4,929
|
)
|
|
Net current period other comprehensive (income) loss
|
|
5,891
|
|
|
(912
|
)
|
|
(3,326
|
)
|
|
1,653
|
|
|
Balance as of May 1, 2020
|
|
$
|
36,916
|
|
|
$
|
3,949
|
|
|
$
|
(7,163
|
)
|
|
$
|
33,702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Pension and
Post-Retirement
Benefits
|
|
Cash Flow Hedging Derivative Instruments
|
|
Total
|
|
Balance as of February 1, 2019
|
|
$
|
26,280
|
|
|
$
|
561
|
|
|
$
|
(2,326
|
)
|
|
$
|
24,515
|
|
|
Other comprehensive (income) loss before reclassifications
|
|
3,767
|
|
|
—
|
|
|
(1,812
|
)
|
|
1,955
|
|
|
Amounts reclassified from AOCL
|
|
—
|
|
|
—
|
|
|
(1,354
|
)
|
|
(1,354
|
)
|
|
Net current period other comprehensive (income) loss
|
|
3,767
|
|
|
—
|
|
|
(3,166
|
)
|
|
601
|
|
|
Balance as of May 3, 2019
|
|
$
|
30,047
|
|
|
$
|
561
|
|
|
$
|
(5,492
|
)
|
|
$
|
25,116
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
Foreign
Currency
Translation
Adjustments
|
|
Pension and
Post-Retirement
Benefits
|
|
Cash Flow Hedging Derivative Instruments
|
|
Total
|
|
Balance as of October 31, 2018
|
|
$
|
29,711
|
|
|
$
|
561
|
|
|
$
|
(6,335
|
)
|
|
$
|
23,937
|
|
|
Other comprehensive loss before reclassifications
|
|
336
|
|
|
—
|
|
|
3,678
|
|
|
4,014
|
|
|
Amounts reclassified from AOCL
|
|
—
|
|
|
—
|
|
|
(2,835
|
)
|
|
(2,835
|
)
|
|
Net current period other comprehensive loss
|
|
336
|
|
|
—
|
|
|
843
|
|
|
1,179
|
|
|
Balance as of May 3, 2019
|
|
$
|
30,047
|
|
|
$
|
561
|
|
|
$
|
(5,492
|
)
|
|
$
|
25,116
|
|
For additional information on the components reclassified from AOCL to the respective line items within net earnings for the company's cash flow hedging derivative instruments, refer to Note 17, Derivative Instruments and Hedging Activities.
Reconciliations of basic and diluted weighted-average shares of common stock outstanding were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
(Shares in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
May 1, 2020
|
|
May 3, 2019
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock
|
|
107,552
|
|
|
106,679
|
|
|
107,466
|
|
|
106,445
|
|
|
Assumed issuance of contingent shares
|
|
—
|
|
|
—
|
|
|
21
|
|
|
21
|
|
|
Weighted-average number of shares of common stock and assumed issuance of contingent shares
|
|
107,552
|
|
|
106,679
|
|
|
107,487
|
|
|
106,466
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average number of shares of common stock and assumed issuance of contingent shares
|
|
107,552
|
|
|
106,679
|
|
|
107,487
|
|
|
106,466
|
|
|
Effect of dilutive securities
|
|
948
|
|
|
1,328
|
|
|
1,094
|
|
|
1,443
|
|
|
Weighted-average number of shares of common stock, assumed issuance of contingent shares, and effect of dilutive securities
|
|
108,500
|
|
|
108,007
|
|
|
108,581
|
|
|
107,909
|
|
Incremental shares from options and restricted stock units are computed under the treasury stock method. Options to purchase 615,344 and 757,083 shares of common stock during the second quarter of fiscal 2020 and 2019, respectively, were excluded from diluted net earnings per share because they were anti-dilutive. Options to purchase 442,321 and 837,936 shares of common stock during the first six months of fiscal 2020 and 2019, respectively, were excluded from diluted net earnings per share because they were anti-dilutive.
Litigation
The company is party to litigation in the ordinary course of business. Such matters are generally subject to uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. Litigation occasionally involves claims for punitive, as well as compensatory damages arising out of the use of the company’s products. Although the company is self-insured to some extent, the company maintains insurance against certain product liability losses. The company is also subject to litigation and administrative and judicial proceedings with respect to claims involving asbestos and the discharge of hazardous substances into the environment. Some of these claims assert damages and liability for personal injury, remedial investigations or clean up and other costs and damages. The company is also typically involved in commercial disputes, employment disputes, and patent litigation cases in which it is asserting or defending against patent infringement claims. To prevent possible infringement of the company’s patents by others, the company periodically reviews competitors’ products. To avoid potential liability with respect to others’ patents, the company regularly reviews certain patents issued by the U.S. Patent and Trademark Office and foreign patent offices. Management believes these activities help minimize its risk of being a defendant in patent infringement litigation. The company is currently involved in patent litigation cases, including cases by or against competitors, where it is asserting and defending against claims of patent infringement. Such cases are at varying stages in the litigation process.
The company records a liability in its Condensed Consolidated Financial Statements for costs related to claims, including future legal costs, settlements and judgments, where the company has assessed that a loss is probable and an amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred. In the opinion of management, the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect its Consolidated Results of Operations, Financial Position, or Cash Flows.
The company enters into contracts that are, or contain, 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, service, marketing, and distribution activities. Contracts that explicitly or implicitly relate to property, plant, and equipment are assessed at inception to determine if the contract is, or contains, a lease. Such contracts for operating lease agreements convey the company's right to direct the use of, and obtain substantially all of the economic benefits from, an identified asset for a defined period of time in exchange for consideration.
The lease term begins and is determined upon lease commencement, which is the point in time when the company takes possession of the identified asset, and includes all non-cancelable periods. Additionally, the lease term may also include options to extend or terminate the lease when it is reasonably certain that such options will be exercised after considering all relevant economic and financial factors. Options to extend or terminate a lease are generally exercisable at the company's sole discretion, subject to any required minimum notification period and/or other contractual terms as defined within the respective lease agreement, as applicable. The company's renewal options generally range from extended terms of two to ten years. Certain leases also include options to purchase the identified asset. Lease expense for the company's operating leases is recognized on a straight-line basis over the lease term and is recorded within cost of sales or selling, general and administrative expense within the Condensed Consolidated Statements of Earnings as dictated by the nature and use of the underlying asset. The company does not recognize right-of-use assets and lease liabilities, but does recognize expense on a straight-line basis, for short-term operating leases which have a lease term of 12 months or less and do not include an option to purchase the underlying asset.
Lease payments are determined at lease commencement and represent fixed lease payments as defined within the respective lease agreement or, in the case of certain lease agreements, variable lease payments that are measured as of the lease commencement date based on the prevailing index or market rate. Future adjustments to variable lease payments are defined and scheduled within the respective lease agreement and are determined based upon the prevailing market or index rate at the time of the adjustment relative to the market or index rate determined at lease commencement. Certain other lease agreements contain variable lease payments that are determined based upon actual utilization of the identified asset. Such future adjustments to variable lease payments and variable lease payments based upon actual utilization of the identified asset are not included within the determination of lease payments at commencement but rather, are recorded as variable lease expense in the period in which the variable lease cost is incurred. Additionally, the company's operating leases generally do not include material residual value guarantees. The company has operating leases with both lease components and non-lease components. For all underlying asset classes, the company accounts for lease components separately from non-lease components based on the relative market value of each component. Non-lease components typically consist of common area maintenance, utilities, and/or other repairs and maintenance services. The costs related to non-lease components are not included within the determination of lease payments at commencement.
Right-of-use assets represent the company's right to use an underlying asset throughout the lease term and lease liabilities represent the company's obligation to make lease payments arising from the lease agreement. The company accounts for operating lease liabilities at lease commencement and on an ongoing basis as the present value of the minimum remaining lease payments under the respective lease term. Minimum remaining lease payments are discounted to present value based on the rate implicit in the operating lease agreement or the estimated incremental borrowing rate at lease commencement if the rate implicit in the lease is not readily determinable. Generally, the estimated incremental borrowing rate is used as the rate implicit in the lease is not readily determinable. The estimated incremental borrowing rate represents the rate of interest that the company would have to pay to borrow on a general and unsecured collateralized basis over a similar term, an amount equal to the lease payments in a similar economic environment. The company determines the estimated incremental borrowing rate at lease commencement based on available information at such time, including lease term, lease currency, and geographical market. Right-of-use assets are measured as the amount of the corresponding operating lease liability for the respective operating lease agreement, adjusted for prepaid or accrued lease payments, the remaining balance of any lease incentives received, unamortized initial direct costs, and impairment of the operating lease right-of-use asset, as applicable.
The following table presents the lease expense incurred on the company’s operating, short-term, and variable leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 1, 2020
|
|
Operating lease expense
|
|
$
|
5,383
|
|
|
$
|
10,217
|
|
|
Short-term lease expense
|
|
646
|
|
|
1,328
|
|
|
Variable lease expense
|
|
59
|
|
|
96
|
|
|
Total lease expense
|
|
$
|
6,088
|
|
|
$
|
11,641
|
|
The following table presents supplemental cash flow information related to the company's operating leases:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 1, 2020
|
|
Operating cash flows for amounts included in the measurement of lease liabilities
|
|
$
|
5,525
|
|
|
$
|
10,266
|
|
|
Right-of-use assets obtained in exchange for lease obligations
|
|
$
|
10,909
|
|
|
$
|
17,042
|
|
The following table presents other lease information related to the company's operating leases as of May 1, 2020:
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
Weighted-average remaining lease term of operating leases in years
|
|
7.4
|
|
|
Weighted-average discount rate of operating leases
|
|
2.81
|
%
|
The following table reconciles the total undiscounted future cash flows based on the anticipated future minimum operating lease payments by fiscal year for the company's operating leases to the present value of operating lease liabilities recorded within the Condensed Consolidated Balance Sheets as of May 1, 2020:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
2020 (remaining)
|
|
$
|
24,263
|
|
|
2021
|
|
17,253
|
|
|
2022
|
|
14,698
|
|
|
2023
|
|
11,761
|
|
|
2024
|
|
10,569
|
|
|
Thereafter
|
|
33,394
|
|
|
Total future minimum operating lease payments
|
|
111,938
|
|
|
Less: imputed interest
|
|
25,698
|
|
|
Present value of operating lease liabilities
|
|
$
|
86,240
|
|
The following table presents future minimum operating lease payments by respective fiscal year for non-cancelable operating leases under the legacy lease accounting guidance at ASC Topic 840, Leases, as of October 31, 2019:
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
October 31, 2019
|
|
2020
|
|
$
|
17,135
|
|
|
2021
|
|
15,764
|
|
|
2022
|
|
12,806
|
|
|
2023
|
|
9,772
|
|
|
2024
|
|
8,863
|
|
|
Thereafter
|
|
18,732
|
|
|
Total future minimum lease payments
|
|
$
|
83,072
|
|
|
|
|
|
|
|
17
|
Derivative Instruments and Hedging Activities
|
Risk Management Objective of Using Derivatives
The company is exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as sales to third-party customers, sales and loans to wholly-owned foreign subsidiaries, foreign plant operations, and purchases from suppliers. The company’s primary currency exchange rate exposures are with the Euro, the Australian dollar, the Canadian dollar, the British pound, the Mexican peso, the Japanese yen, the Chinese Renminbi, and the Romanian New Leu against the U.S. dollar, as well as the Romanian New Leu against the Euro.
To reduce its exposure to foreign currency exchange rate risk, the company actively manages the exposure of its foreign currency exchange rate risk by entering into various derivative instruments to hedge against such risk, authorized under company policies that place controls on these hedging activities, with counterparties that are highly rated financial institutions. The company’s policy does not allow the use of derivative instruments for trading or speculative purposes. The company has also made an accounting policy election to use the portfolio exception with respect to measuring counterparty credit risk for derivative instruments, and to measure the fair value of a portfolio of financial assets and financial liabilities on the basis of the net open risk position with each counterparty.
The company’s hedging activities primarily involve the use of forward currency contracts to hedge most foreign currency transactions, including forecasted sales and purchases denominated in foreign currencies. The company uses derivative instruments only in an attempt to limit underlying exposure from foreign currency exchange rate fluctuations and to minimize earnings and cash flow volatility associated with foreign currency exchange rate fluctuations. Decisions on whether to use such derivative instruments are primarily based on the amount of exposure to the currency involved and an assessment of the near-term market value for each currency.
The company recognizes all derivative instruments at fair value on the Condensed Consolidated Balance Sheets as either assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as a cash flow hedging instrument.
Cash Flow Hedging Instruments
The company formally documents relationships between cash flow hedging instruments and the related hedged transactions, as well as its risk-management objective and strategy for undertaking cash flow hedging instruments. This process includes linking all cash flow hedging instruments to the forecasted transactions, such as sales to third parties, foreign plant operations, and purchases from suppliers. At the cash flow hedge’s inception and on an ongoing basis, the company formally assesses whether the cash flow hedging instruments have been highly effective in offsetting changes in the cash flows of the hedged transactions and whether those cash flow hedging instruments may be expected to remain highly effective in future periods.
Changes in the fair values of the spot rate component of outstanding, highly effective cash flow hedging instruments included in the assessment of hedge effectiveness are recorded in other comprehensive income within AOCL on the Condensed Consolidated Balance Sheets and are subsequently reclassified to net earnings within the Condensed Consolidated Statements of Earnings during the same period in which the cash flows of the underlying hedged transaction affect net earnings. Changes in the fair values of hedge components excluded from the assessment of effectiveness are recognized immediately in net earnings under the mark-to-market approach. The classification of gains or losses recognized on cash flow hedging instruments and excluded components within the Condensed Consolidated Statements of Earnings is the same as that of the underlying exposure. Results of cash flow hedging instruments, and the related excluded components, of sales and foreign plant operations are recorded in net sales and cost of sales, respectively. The maximum amount of time the company hedges its exposure to the variability in future cash flows for forecasted trade sales and purchases is two years. Results of cash flow hedges of intercompany loans are recorded in other income, net as an offset to the remeasurement of the foreign loan balance.
When it is determined that a derivative instrument is not, or has ceased to be, highly effective as a cash flow hedge, the company discontinues cash flow hedge accounting prospectively. The gain or loss on the dedesignated derivative instrument remains in AOCL and is reclassified to net earnings within the same Condensed Consolidated Statements of Earnings line item as the underlying exposure when the forecasted transaction affects net earnings. When the company discontinues cash flow hedge accounting because it is no longer probable, but it is still reasonably possible that the forecasted transaction will occur by the end of the originally expected period or within an additional two-month period of time thereafter, the gain or loss on the derivative instrument remains in AOCL and is reclassified to net earnings within the same Condensed Consolidated Statements of Earnings line item as the underlying exposure when the forecasted transaction affects net earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were in AOCL are immediately recognized in net earnings within other income, net in the Condensed Consolidated Statements of Earnings. In all situations in which cash flow hedge accounting is discontinued and the derivative
instrument remains outstanding, the company carries the derivative instrument at its fair value on the Condensed Consolidated Balance Sheets, recognizing future changes in the fair value within other income, net in the Condensed Consolidated Statements of Earnings.
As of May 1, 2020, the notional amount outstanding of forward contracts designated as cash flow hedging instruments was $248.6 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 Condensed Consolidated Balance Sheets. These contracts are not designated as cash flow hedging instruments. Accordingly, changes in the fair value of hedges of recorded balance sheet positions, such as cash, receivables, payables, intercompany notes, and other various contractual claims to pay or receive foreign currencies other than the functional currency, are recognized immediately in other income, net, on the Condensed Consolidated Statements of Earnings together with the transaction gain or loss from the hedged balance sheet position.
The following table presents the fair value and location of the company’s derivative instruments on the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
October 31, 2019
|
|
Derivative assets:
|
|
|
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
13,303
|
|
|
$
|
8,980
|
|
|
$
|
8,642
|
|
|
Derivatives not designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
7,270
|
|
|
3,881
|
|
|
2,256
|
|
|
Total assets
|
|
$
|
20,573
|
|
|
$
|
12,861
|
|
|
$
|
10,898
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Derivatives not designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
Accrued liabilities
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
259
|
|
|
3
|
|
|
9
|
|
|
Total liabilities
|
|
$
|
259
|
|
|
$
|
3
|
|
|
$
|
9
|
|
The company entered into an International Swap Dealers Association ("ISDA") Master Agreement with each counterparty that permits the net settlement of amounts owed under their respective contracts. The ISDA Master Agreement is an industry standardized contract that governs all derivative contracts entered into between the company and the respective counterparty. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable or receivable for contracts due on the same date or in the same currency for similar types of derivative transactions. The company records the fair value of its derivative instruments at the net amount in its Condensed Consolidated Balance Sheets.
The following table presents the effects of the master netting arrangements on the fair value of the company’s derivative instruments that are recorded in the Condensed Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
October 31, 2019
|
|
Derivative assets:
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
Gross amounts of recognized assets
|
|
$
|
20,662
|
|
|
$
|
12,861
|
|
|
$
|
11,056
|
|
|
Gross liabilities offset in the Condensed Consolidated Balance Sheets
|
|
(89
|
)
|
|
—
|
|
|
(158
|
)
|
|
Net amounts of assets presented in the Condensed Consolidated Balance Sheets
|
|
$
|
20,573
|
|
|
$
|
12,861
|
|
|
$
|
10,898
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities:
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
Gross amounts of recognized liabilities
|
|
$
|
(259
|
)
|
|
$
|
(3
|
)
|
|
$
|
(9
|
)
|
|
Gross assets offset in the Condensed Consolidated Balance Sheets
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Net amounts of liabilities presented in the Condensed Consolidated Balance Sheets
|
|
$
|
(259
|
)
|
|
$
|
(3
|
)
|
|
$
|
(9
|
)
|
The following tables present the impact and location of the amounts reclassified from AOCL into net earnings on the Condensed Consolidated Statements of Earnings and the impact of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the company's derivatives designated as cash flow hedging instruments for the three and six months ended May 1, 2020 and May 3, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
Gain Reclassified from AOCL into Earnings
|
|
Gain Recognized in OCI on Derivatives
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
May 1, 2020
|
|
May 3, 2019
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
2,272
|
|
|
$
|
1,240
|
|
|
$
|
2,521
|
|
|
$
|
2,766
|
|
|
Cost of sales
|
|
208
|
|
|
114
|
|
|
153
|
|
|
400
|
|
|
Total derivatives designated as cash flow hedging instruments
|
|
$
|
2,480
|
|
|
$
|
1,354
|
|
|
$
|
2,674
|
|
|
$
|
3,166
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
|
Gain Reclassified from AOCL into Earnings
|
|
Gain (Loss) Recognized in OCI on Derivatives
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
May 1, 2020
|
|
May 3, 2019
|
|
Derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
3,477
|
|
|
$
|
2,478
|
|
|
$
|
3,105
|
|
|
$
|
(715
|
)
|
|
Cost of sales
|
|
540
|
|
|
357
|
|
|
221
|
|
|
(128
|
)
|
|
Total derivatives designated as cash flow hedging instruments
|
|
$
|
4,017
|
|
|
$
|
2,835
|
|
|
$
|
3,326
|
|
|
$
|
(843
|
)
|
For the second quarter and first six months of fiscal 2020, the company recognized approximately $0.5 million of gains within other income, net on the Condensed Consolidated Statements of Earnings due to the discontinuance of cash flow hedge accounting on certain forward currency contracts designated as cash flow hedging instruments as a result of the COVID-19 pandemic and its impact to the probability of realizing hedged forecasted transactions. For the second quarter and first six months of fiscal 2019, the company did not discontinue cash flow hedge accounting on any forward currency contracts designated as cash flow hedging instruments. As of May 1, 2020, the company expects to reclassify approximately $6.8 million of gains from AOCL to earnings during the next twelve months.
The following tables present the impact and location of derivative instruments on the Condensed Consolidated Statements of Earnings for the company’s derivatives designated as cash flow hedging instruments and the related components excluded from effectiveness testing:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in Earnings on Cash Flow Hedging Instruments
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
Three Months Ended
|
|
Net Sales
|
|
Cost of Sales
|
|
Net Sales
|
|
Cost of Sales
|
|
Condensed Consolidated Statements of Earnings income (expense) amounts in which the effects of cash flow hedging instruments are recorded
|
|
$
|
929,398
|
|
|
$
|
(622,681
|
)
|
|
$
|
962,036
|
|
|
$
|
(640,738
|
)
|
|
Gain (loss) on derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
|
|
Amount of gain reclassified from AOCL into earnings
|
|
2,272
|
|
|
208
|
|
|
1,240
|
|
|
114
|
|
|
Gain (loss) on components excluded from effectiveness testing recognized in earnings based on changes in fair value
|
|
$
|
2,332
|
|
|
$
|
134
|
|
|
$
|
1,094
|
|
|
$
|
(46
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain Recognized in Earnings on Cash Flow Hedging Instruments
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
Six Months Ended
|
|
Net Sales
|
|
Cost of Sales
|
|
Net Sales
|
|
Cost of Sales
|
|
Condensed Consolidated Statements of Earnings income (expense) amounts in which the effects of cash flow hedging instruments are recorded
|
|
$
|
1,696,881
|
|
|
$
|
(1,102,076
|
)
|
|
$
|
1,564,992
|
|
|
$
|
(1,028,077
|
)
|
|
Gain on derivatives designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
|
|
Amount of gain reclassified from AOCL into earnings
|
|
3,477
|
|
|
540
|
|
|
2,478
|
|
|
357
|
|
|
Gain on components excluded from effectiveness testing recognized in earnings based on changes in fair value
|
|
$
|
2,992
|
|
|
$
|
145
|
|
|
$
|
2,317
|
|
|
$
|
16
|
|
The following table presents the impact and location of derivative instruments on the Condensed Consolidated Statements of Earnings for the company’s derivatives not designated as cash flow hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
(Dollars in thousands)
|
|
May 1, 2020
|
|
May 3, 2019
|
|
May 1, 2020
|
|
May 3, 2019
|
|
Gain on derivatives not designated as cash flow hedging instruments
|
|
|
|
|
|
|
|
|
|
Forward currency contracts:
|
|
|
|
|
|
|
|
|
|
Other income, net
|
|
$
|
1,557
|
|
|
$
|
1,790
|
|
|
$
|
1,777
|
|
|
$
|
727
|
|
|
Total gain on derivatives not designated as cash flow hedging instruments
|
|
$
|
1,557
|
|
|
$
|
1,790
|
|
|
$
|
1,777
|
|
|
$
|
727
|
|
|
|
|
|
|
|
18
|
Fair Value Measurements
|
The company categorizes its assets and liabilities into one of three levels based on the assumptions (inputs) used in valuing the asset or liability. Estimates of fair value for financial assets and financial liabilities are based on the framework established in the accounting guidance for fair value measurements. The framework defines fair value, provides guidance for measuring fair value, and requires certain disclosures. The framework discusses valuation techniques such as the market approach (comparable market prices), the income approach (present value of future income or cash flows), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The framework utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 provides the most reliable measure of fair value, while Level 3 generally requires significant management judgment. The three levels are defined as follows:
Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
Level 2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities in active markets; quoted prices for identical assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3: Unobservable inputs reflecting management’s assumptions about the inputs used in pricing the asset or liability.
Recurring Fair Value Measurements
The company's derivative instruments consist of forward currency contracts that are measured at fair value on a recurring basis. The fair value of such forward currency contracts is determined based on observable market transactions of forward currency prices and spot currency rates as of the reporting date. There were no transfers between the levels of the fair value hierarchy during the three and six month periods ended May 1, 2020 and May 3, 2019, or the twelve months ended October 31, 2019.
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 May 1, 2020, May 3, 2019, and October 31, 2019, according to the valuation technique utilized to determine their fair values:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Fair Value Measurements Using Inputs Considered as:
|
|
May 1, 2020
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
20,573
|
|
|
$
|
—
|
|
|
$
|
20,573
|
|
|
$
|
—
|
|
|
Total assets
|
|
$
|
20,573
|
|
|
$
|
—
|
|
|
$
|
20,573
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
259
|
|
|
$
|
—
|
|
|
$
|
259
|
|
|
$
|
—
|
|
|
Total liabilities
|
|
$
|
259
|
|
|
$
|
—
|
|
|
$
|
259
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands)
|
|
|
|
Fair Value Measurements Using Inputs Considered as:
|
|
May 3, 2019
|
|
Fair Value
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
12,861
|
|
|
$
|
—
|
|
|
$
|
12,861
|
|
|
$
|
—
|
|
|
Total assets
|
|
$
|
12,861
|
|
|
$
|
—
|
|
|
$
|
12,861
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Forward currency contracts
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
Total liabilities
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Dollars 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
|
|
|
$
|
—
|
|
Nonrecurring Fair Value Measurements
The company measures certain assets and liabilities at fair value on a nonrecurring 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 nonrecurring fair value measurement of the assets acquired and liabilities assumed, refer to Note 2, Business Combinations.
Other Fair Value Disclosures
The carrying amounts 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.
As of May 1, 2020 and October 31, 2019, the company's long-term debt included $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 May 1, 2020, the estimated fair value of long-term debt with fixed interest rates was $476.3 million compared to its carrying amount of $423.9 million. 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.
The company has evaluated all subsequent events and concluded that no subsequent events have occurred that would require recognition in the Condensed Consolidated Financial Statements or disclosure in the Notes to the Condensed Consolidated Financial Statements.