The Toro pany(TTC) - 2019 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis for The Toro Company ITEM 1. FINANCIAL STATEMENTS This section presents the unaudited condensed consolidated financial statements, including earnings, balance sheets, cash flows, and equity, with detailed notes on accounting policies and business segments Condensed Consolidated Statements of Earnings (Unaudited) This statement provides the company's net sales, gross profit, operating earnings, and net earnings for the specified periods | Metric | Three Months Ended Aug 2, 2019 ($ thousands) | Three Months Ended Aug 3, 2018 ($ thousands) | Nine Months Ended Aug 2, 2019 ($ thousands) | Nine Months Ended Aug 3, 2018 ($ thousands) | | :--------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net sales | 838,713 | 655,821 | 2,403,705 | 2,079,347 | | Gross profit | 265,981 | 233,653 | 802,896 | 761,948 | | Operating earnings | 73,944 | 92,894 | 281,723 | 330,089 | | Net earnings | 60,607 | 79,009 | 235,717 | 232,902 | | Basic net earnings per share | 0.57 | 0.75 | 2.21 | 2.19 | | Diluted net earnings per share | 0.56 | 0.73 | 2.18 | 2.14 | Condensed Consolidated Statements of Comprehensive Income (Unaudited) This statement details the company's net earnings and other comprehensive income (loss) components, leading to total comprehensive income for the periods | Metric | Three Months Ended Aug 2, 2019 ($ thousands) | Three Months Ended Aug 3, 2018 ($ thousands) | Nine Months Ended Aug 2, 2019 ($ thousands) | Nine Months Ended Aug 3, 2018 ($ thousands) | | :--------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | :------------------------------------------- | | Net earnings | 60,607 | 79,009 | 235,717 | 232,902 | | Other comprehensive income (loss) | (1,552) | (2,839) | (2,731) | 541 | | Comprehensive income | 59,055 | 76,170 | 232,986 | 233,443 | Condensed Consolidated Balance Sheets (Unaudited) This statement presents the company's financial position, including total assets, liabilities, and stockholders' equity at specific dates | Metric | Aug 2, 2019 ($ thousands) | Aug 3, 2018 ($ thousands) | Oct 31, 2018 ($ thousands) | | :--------------------------------- | :------------------------ | :------------------------ | :------------------------- | | Total current assets | 1,130,403 | 873,024 | 894,637 | | Total assets | 2,309,733 | 1,534,757 | 1,570,984 | | Total current liabilities | 756,403 | 511,675 | 532,635 | | Long-term debt, less current portion | 620,804 | 312,481 | 312,549 | | Total stockholders' equity | 843,822 | 650,244 | 668,916 | Condensed Consolidated Statements of Cash Flows (Unaudited) This statement outlines the cash flows from operating, investing, and financing activities for the nine-month periods | Metric | Nine Months Ended Aug 2, 2019 ($ thousands) | Nine Months Ended Aug 3, 2018 ($ thousands) | | :--------------------------------- | :------------------------------------------ | :------------------------------------------ | | Net cash provided by operating activities | 259,113 | 259,369 | | Net cash used in investing activities | (744,137) | (89,557) | | Net cash provided by (used in) financing activities | 339,798 | (228,765) | | Net decrease in cash and cash equivalents | (145,807) | (59,385) | | Cash and cash equivalents as of the end of the fiscal period | 143,317 | 250,871 | Condensed Consolidated Statements of Stockholders' Equity (Unaudited) This statement details changes in the company's total stockholders' equity, including net earnings and cash dividends, between reporting dates | Metric | Balance as of May 3, 2019 ($ thousands) | Balance as of August 2, 2019 ($ thousands) | | :--------------------------------- | :-------------------------------------- | :--------------------------------------- | | Total Stockholders' Equity | 805,277 | 843,822 | | Net earnings | - | 60,607 | | Cash dividends paid on common stock | (24,079) | - | | Other comprehensive loss | - | (1,552) | Notes to Condensed Consolidated Financial Statements (Unaudited) This section provides detailed explanations and disclosures supporting the unaudited condensed consolidated financial statements Note 1 — Basis of Presentation These unaudited financial statements are prepared under Form 10-Q and U.S. GAAP, incorporating the CMW acquisition and management's estimates - The company adopted ASU 2014-09 (Revenue from Contracts with Customers) effective November 1, 2018, using the modified retrospective method, which did not materially impact revenue recognition or other financial statement line items for the three and nine months ended August 2, 2019[21][22] - The company completed the acquisition of The Charles Machine Works, Inc. (CMW) on April 1, 2019, with CMW's financial results included from the closing date, and its reporting period ending July 31, 2019, for the fiscal third quarter[17] Note 2 — Business Combinations This note details the April 1, 2019, acquisition of The Charles Machine Works, Inc. (CMW) for $679.3 million, expanding the Professional segment - The Toro Company acquired The Charles Machine Works, Inc. (CMW) on April 1, 2019, for a preliminary purchase price of $679.3 million, funded by unsecured senior term loan credit and revolving credit facilities[25][26] Preliminary Purchase Price Allocation for CMW (April 1, 2019) | Asset/Liability | Amount ($ thousands) | | :------------------------ | :------------------- | | Cash and cash equivalents | 16,341 | | Receivables | 65,674 | | Inventories | 242,594 | | Property, plant and equipment | 142,405 | | Goodwill | 154,040 | | Other intangible assets | 227,280 | | Accounts payable | (36,655) | | Accrued liabilities | (46,866) | | Deferred income tax liabilities | (79,628) | | Total purchase price | 679,324 | - Goodwill from the CMW acquisition, primarily attributable to workforce value, brand reputation, growth opportunities, and expected synergies, increased the Professional segment goodwill to $368.6 million as of August 2, 2019[28] CMW Contribution to Operations (Three and Nine Months Ended August 2, 2019) | Period | Net Sales ($ millions) | Segment Loss ($ millions) | | :--------------------------------- | :--------------------- | :------------------------ | | Three Months Ended August 2, 2019 | 199.6 | 8.4 | | Nine Months Ended August 2, 2019 | 270.5 | 12.5 | - The company also completed immaterial acquisitions of a Northeastern U.S. distribution company (November 30, 2018) and L.T. Rich Products, Inc. (March 19, 2018), which broadened its Professional segment portfolio[35][36] Note 3 — Segment Data The company operates in Professional and Residential segments, with net sales and earnings disaggregated by these categories and an "Other" group Net Sales by Segment (Three Months Ended) | Segment | Aug 2, 2019 ($ thousands) | Aug 3, 2018 ($ thousands) | | :---------- | :------------------------ | :------------------------ | | Professional | 676,756 | 482,494 | | Residential | 148,234 | 166,513 | | Other | 13,723 | 6,814 | | Total | 838,713 | 655,821 | Net Sales by Segment (Nine Months Ended) | Segment | Aug 2, 2019 ($ thousands) | Aug 3, 2018 ($ thousands) | | :---------- | :------------------------ | :------------------------ | | Professional | 1,855,268 | 1,546,536 | | Residential | 525,539 | 521,189 | | Other | 22,898 | 11,622 | | Total | 2,403,705 | 2,079,347 | Earnings (Loss) Before Income Taxes by Segment (Three Months Ended) | Segment | Aug 2, 2019 ($ thousands) | Aug 3, 2018 ($ thousands) | | :---------- | :------------------------ | :------------------------ | | Professional | 81,592 | 97,716 | | Residential | 16,151 | 16,002 | | Other | (26,508) | (20,443) | | Total | 71,235 | 93,275 | Earnings (Loss) Before Income Taxes by Segment (Nine Months Ended) | Segment | Aug 2, 2019 ($ thousands) | Aug 3, 2018 ($ thousands) | | :---------- | :------------------------ | :------------------------ | | Professional | 319,689 | 338,607 | | Residential | 51,253 | 58,019 | | Other | (92,507) | (67,800) | | Total | 278,435 | 328,826 | Note 4 — Revenue Revenue is recognized upon product or service transfer, with net sales disaggregated by product type and geographic market, and contract liabilities detailed - Revenue is recognized when control of products or services is transferred, with variable consideration (rebates, incentives, returns) estimated and recorded as a reduction to revenue at the time of initial sale[40][46] Net Sales by Product Type and Geographic Market (Three Months Ended August 2, 2019) | Category | Professional ($ thousands) | Residential ($ thousands) | Other ($ thousands) | Total ($ thousands) | | :---------------- | :------------------------- | :------------------------ | :------------------ | :------------------ | | Product Type: | | | | | | Equipment | 582,932 | 143,814 | 8,983 | 735,729 | | Irrigation | 93,824 | 4,420 | 4,740 | 102,984 | | Geographic Market: | | | | | | United States | 515,437 | 122,843 | 13,723 | 652,003 | | Foreign Countries | 161,319 | 25,391 | — | 186,710 | Net Sales by Product Type and Geographic Market (Nine Months Ended August 2, 2019) | Category | Professional ($ thousands) | Residential ($ thousands) | Other ($ thousands) | Total ($ thousands) | | :---------------- | :------------------------- | :------------------------ | :------------------ | :------------------ | | Product Type: | | | | | | Equipment | 1,588,581 | 502,780 | 13,613 | 2,104,974 | | Irrigation | 266,687 | 22,759 | 9,285 | 298,731 | | Geographic Market: | | | | | | United States | 1,409,954 | 423,521 | 22,898 | 1,856,373 | | Foreign Countries | 445,314 | 102,018 | — | 547,332 | - Contract liabilities (deferred revenue) for extended warranties, service contracts, and non-refundable customer deposits totaled $23.1 million as of August 2, 2019, up from $14.0 million as of October 31, 2018, with an additional $7.0 million assumed from the CMW acquisition[50][51] Note 5 — Goodwill and Other Intangible Assets The CMW acquisition significantly increased goodwill and other intangible assets, leading to higher amortization expense in fiscal 2019 - Goodwill increased by $155.6 million to $380.5 million as of August 2, 2019, primarily due to the CMW acquisition ($154.0 million), increasing the Professional segment's goodwill to $368.6 million[53][54] Other Intangible Assets, Net (August 2, 2019) | Type | Weighted Average Useful Life (years) | Gross Carrying Amount ($ thousands) | Accumulated Amortization ($ thousands) | Net ($ thousands) | | :-------------------- | :--------------------------------- | :---------------------------------- | :------------------------------------- | :---------------- | | Patents | 9.9 | 18,242 | (12,916) | 5,326 | | Non-compete agreements | 5.5 | 6,879 | (6,792) | 87 | | Customer-related | 18.3 | 195,223 | (29,479) | 165,744 | | Developed technology | 7.6 | 50,279 | (30,203) | 20,076 | | Trade names | 15.5 | 7,590 | (2,004) | 5,586 | | Backlog and other | 0.6 | 7,380 | (5,187) | 2,193 | | Non-amortizable - trade names | - | 120,874 | — | 120,874 | | Total | - | 406,467 | (86,581) | 319,886 | - Amortization expense for definite-lived intangible assets was $7.4 million for the third quarter of fiscal 2019 (up from $1.8 million in Q3 2018) and $12.9 million for the first nine months of fiscal 2019 (up from $5.4 million in 9M 2018)[56] Note 6 — Indebtedness The company's indebtedness significantly increased to $720.7 million due to new term loans and senior notes issued for the CMW acquisition Summary of Indebtedness ($ thousands) | Debt Type | August 2, 2019 | August 3, 2018 | October 31, 2018 | | :--------------------------------- | :------------- | :------------- | :--------------- | | Revolving credit facility | — | 91,000 | 91,000 | | $200 million term loan | 100,000 | — | — | | $300 million term loan | 200,000 | — | — | | 3.81% series A senior notes | 100,000 | — | — | | 3.91% series B senior notes | 100,000 | — | — | | 7.800% debentures | 100,000 | 100,000 | 100,000 | | 6.625% senior notes | 123,900 | 123,838 | 123,854 | | Total indebtedness, net | 720,681 | 312,481 | 312,549 | - The company entered into a $200 million three-year unsecured senior term loan and a $300 million five-year unsecured senior term loan in March 2019, and issued $200 million in 3.81% Series A and 3.91% Series B Senior Notes in June 2019, primarily to fund the CMW acquisition[63][68] - As of August 2, 2019, the company had prepaid $100 million on each term loan facility and reclassified $99.9 million of the remaining term loan balance to current portion of long-term debt, intending to prepay it within 12 months[64] - Interest expense increased significantly due to higher borrowings, with approximately $3.7 million for the three months and $5.3 million for the nine months ended August 2, 2019, from the term loan credit agreement, and $0.8 million from the Senior Notes for the three and nine months ended August 2, 2019[67][72] Note 7 — Management Actions The company initiated a wind-down of certain Toro-branded underground construction products, incurring $10.0 million to $13.0 million in pretax charges - The company initiated a 'Toro underground wind down' strategy for its large horizontal directional drill and riding trencher product categories, expecting $10.0 million to $13.0 million in total pretax charges[75] - For the three and nine months ended August 2, 2019, $7.2 million in pre-tax charges were recorded for inventory write-downs and accelerated depreciation, and $1.9 million for anticipated inventory retail support activities, related to the wind down[75] Note 8 — Inventories Inventories, primarily valued using LIFO, increased to $620.6 million, significantly impacted by the $242.6 million addition from the CMW acquisition - Inventories are valued at the lower of cost or net realizable value, with cost determined by the LIFO method for most inventories[77] - The CMW acquisition on April 1, 2019, added $242.6 million of inventory based on preliminary fair value adjustments[78] Inventories, Net ($ thousands) | Category | August 2, 2019 | August 3, 2018 | October 31, 2018 | | :-------------------------- | :------------- | :------------- | :--------------- | | Raw materials and work in process | 174,348 | 105,239 | 115,280 | | Finished goods and service parts | 518,465 | 326,059 | 315,179 | | Total FIFO value | 692,813 | 431,298 | 430,459 | | Less: adjustment to LIFO value | 72,201 | 66,801 | 72,200 | | Total inventories, net | 620,612 | 364,497 | 358,259 | Note 9 — Property and Depreciation Property, plant, and equipment, depreciated using the straight-line method, increased to $426.4 million, including $142.4 million from the CMW acquisition - Property, plant, and equipment are depreciated using the straight-line method over estimated useful lives (e.g., buildings 10-40 years, machinery 2-15 years)[80] - The CMW acquisition on April 1, 2019, included $142.4 million of acquired property, plant, and equipment[81] Property, Plant and Equipment, Net ($ thousands) | Category | August 2, 2019 | August 3, 2018 | October 31, 2018 | | :--------------------------------- | :------------- | :------------- | :--------------- | | Gross property, plant, and equipment | 1,122,150 | 915,667 | 928,981 | | Less: accumulated depreciation | 695,735 | 666,165 | 657,522 | | Property, plant, and equipment, net | 426,415 | 249,502 | 271,459 | Note 10 — Warranty Guarantees Warranty expense is accrued at sale, with total accrued warranties increasing to $94.6 million, including $14.3 million from acquisitions - Warranty expense is accrued at the time of sale based on estimated number of products, historical costs, claim trends, and other factors[83] Changes in Accrued Warranties ($ thousands) | Metric | Three Months Ended Aug 2, 2019 | Three Months Ended Aug 3, 2018 | Nine Months Ended Aug 2, 2019 | Nine Months Ended Aug 3, 2018 | | :---------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Beginning balance | 95,752 | 84,268 | 76,214 | 74,155 | | Provisions | 14,232 | 12,038 | 42,734 | 39,827 | | Acquisitions | — | — | 14,272 | — | | Claims | (17,514) | (13,071) | (39,685) | (31,787) | | Changes in estimates | 2,096 | (40) | 1,031 | 1,000 | | Ending balance | 94,566 | 83,195 | 94,566 | 83,195 | Note 11 — Investment in Joint Venture The company holds a 45% equity interest in Red Iron Acceptance, LLC, a joint venture providing inventory financing to dealers and distributors - The company owns 45% of Red Iron Acceptance, LLC, a joint venture with TCFIF, which provides inventory financing to dealers and distributors[85][86] - The company's total investment in Red Iron was $25.1 million as of August 2, 2019[86] - Red Iron financed $1,513.3 million in receivables for dealers and distributors during the nine months ended August 2, 2019[88] Note 12 — Stock-Based Compensation Stock-based compensation costs totaled $10.3 million for the nine months ended August 2, 2019, covering various equity awards Total Compensation Cost for Stock-Based Awards ($ thousands) | Award Type | Three Months Ended Aug 2, 2019 | Three Months Ended Aug 3, 2018 | Nine Months Ended Aug 2, 2019 | Nine Months Ended Aug 3, 2018 | | :-------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Unrestricted common stock awards | — | — | 592 | 530 | | Stock option awards | 1,678 | 1,310 | 4,841 | 3,725 | | Performance share awards | 666 | 1,047 | 2,483 | 2,012 | | Restricted stock unit awards | 890 | 666 | 2,342 | 2,321 | | Total | 3,234 | 3,023 | 10,258 | 8,588 | Weighted-Average Valuation Assumptions for Stock Options | Assumption | Fiscal 2019 | Fiscal 2018 | | :-------------------------- | :---------- | :---------- | | Expected life of option in years | 6.31 | 6.04 | | Expected stock price volatility | 19.83% | 20.58% | | Risk-free interest rate | 2.77% | 2.21% | | Expected dividend yield | 1.18% | 0.97% | | Per share weighted-average fair value at date of grant | $12.83 | $14.25 | Note 13 — Stockholders' Equity This note details the components and activity of accumulated other comprehensive loss, primarily from foreign currency translation and derivatives Components of Accumulated Other Comprehensive Loss (AOCL) ($ thousands) | Component | August 2, 2019 | August 3, 2018 | October 31, 2018 | | :--------------------------------- | :------------- | :------------- | :--------------- | | Foreign currency translation adjustments | 33,862 | 23,467 | 29,711 | | Pension and post-retirement benefits | 561 | 1,596 | 561 | | Cash flow derivative instruments | (7,755) | (1,625) | (6,335) | | Total accumulated other comprehensive loss | 26,668 | 23,438 | 23,937 | Note 14 — Per Share Data This section reconciles basic and diluted weighted-average shares outstanding, noting anti-dilutive stock options excluded from EPS calculations Weighted-Average Shares of Common Stock Outstanding (thousands) | Share Type | Three Months Ended Aug 2, 2019 | Three Months Ended Aug 3, 2018 | Nine Months Ended Aug 2, 2019 | Nine Months Ended Aug 3, 2018 | | :--------------------------------- | :----------------------------- | :----------------------------- | :---------------------------- | :---------------------------- | | Basic | 107,005 | 105,751 | 106,630 | 106,457 | | Diluted | 108,253 | 108,070 | 108,024 | 108,930 | - Options to purchase 378,850 shares (Q3 2019) and 865,648 shares (9M 2019) were excluded from diluted net earnings per share calculations because they were anti-dilutive[99] Note 15 — Contingencies The company is involved in various litigation, including product liability and environmental claims, with management expecting no material financial impact - The company is involved in various litigation, including product liability, environmental claims, commercial disputes, employment disputes, and patent infringement cases[100] - Liabilities for claims are recorded when a loss is probable and reasonably estimable, with management believing current litigation will not materially affect financial results[101] Note 16 — Derivative Instruments and Hedging Activities The company uses forward currency contracts to manage foreign currency risk, with fair value changes recorded in OCI or net earnings - The company uses forward currency contracts to hedge foreign currency exchange rate risk, primarily for the Euro, Australian dollar, Canadian dollar, British pound, Mexican peso, Japanese yen, Chinese Renminbi, and Romanian New Leu[102][104] - As of August 2, 2019, the notional amount outstanding of forward contracts designated as cash flow hedging instruments was $250.3 million[110] Fair Value of Derivative Assets ($ thousands) | Category | August 2, 2019 | August 3, 2018 | October 31, 2018 | | :--------------------------------- | :------------- | :------------- | :--------------- | | Cash flow hedging instruments | 12,511 | 2,324 | 8,596 | | Not designated as cash flow hedging instruments | 3,920 | 869 | 2,305 | | Total assets | 16,431 | 3,193 | 10,901 | - The company expects to reclassify approximately $7.3 million of gains from AOCL to earnings during the next twelve months[113] Note 17 — Fair Value Measurements Financial assets and liabilities are categorized into a three-level fair value hierarchy, with derivative instruments measured at fair value using Level 2 inputs - The company uses a three-level fair value hierarchy (Level 1: quoted prices in active markets; Level 2: observable inputs other than Level 1; Level 3: unobservable inputs)[115][116][117] - Forward currency contracts are measured at fair value on a recurring basis using Level 2 inputs[118] Fair Value Measurements of Forward Currency Contracts (Assets) ($ thousands) | Date | Fair Value | Level 1 | Level 2 | Level 3 | | :---------------- | :--------- | :------ | :------ | :------ | | August 2, 2019 | 16,431 | — | 16,431 | — | | August 3, 2018 | 3,193 | — | 3,193 | — | | October 31, 2018 | 10,901 | — | 10,901 | — | Note 18 — Subsequent Events The company has evaluated all subsequent events and found no items requiring recognition or disclosure in the financial statements - No subsequent events requiring recognition or disclosure have occurred[122] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section provides management's analysis of the company's financial condition, operational results, liquidity, and future outlook, including the impact of the CMW acquisition Company Overview The Toro Company designs, manufactures, and markets a broad range of professional and residential equipment, with operations classified into two reportable segments - The Toro Company designs, manufactures, and markets professional turf maintenance, irrigation, landscaping, snow/ice management, agricultural irrigation, rental, specialty, underground construction equipment, and residential yard/snow thrower products globally[128] - Operations are classified into two reportable segments: Professional and Residential, with 'Other' activities including domestic distribution companies and corporate functions[129] - The acquisition of The Charles Machine Works, Inc. (CMW) on April 1, 2019, for $679.3 million, expanded the Professional segment's product portfolio in the underground construction market[130][131] Results of Operations This section details the company's consolidated net sales and net earnings performance, highlighting the impact of the CMW acquisition and other operational factors Consolidated Net Sales and Net Earnings Performance | Metric | Three Months Ended Aug 2, 2019 | Three Months Ended Aug 3, 2018 | % Change (YoY) | Nine Months Ended Aug 2, 2019 | Nine Months Ended Aug 3, 2018 | % Change (YoY) | | :--------------------------------- | :----------------------------- | :----------------------------- | :------------- | :---------------------------- | :---------------------------- | :------------- | | Net sales | $838.7 million | $655.8 million | 27.9% | $2,403.7 million | $2,079.3 million | 15.6% | | Net earnings (GAAP) | $60.6 million | $79.0 million | (23.3)% | $235.7 million | $232.9 million | 1.2% | | Diluted EPS (GAAP) | $0.56 | $0.73 | (23.2)% | $2.18 | $2.14 | 1.9% | | Adjusted non-GAAP net earnings | $89.8 million | $73.5 million | 22.2% | $272.4 million | $255.9 million | 6.5% | | Adjusted non-GAAP diluted EPS | $0.83 | $0.68 | 22.1% | $2.52 | $2.35 | 7.2% | - GAAP net earnings decreased in Q3 2019 primarily due to purchase accounting adjustments and integration expenditures from the CMW acquisition, increased commodity and tariff costs, and charges from the Toro underground wind down[135][156] - Adjusted non-GAAP net earnings increased due to incremental earnings from the CMW acquisition, improved net price realization, productivity initiatives, lower U.S. federal corporate tax rate, and reduced direct marketing and warehousing expenses[136][158] Gross Profit as a Percentage of Net Sales | Period | GAAP Gross Profit % | Adjusted non-GAAP Gross Profit % | | :--------------------------------- | :------------------ | :------------------------------- | | Three Months Ended Aug 2, 2019 | 31.7% | 35.9% | | Three Months Ended Aug 3, 2018 | 35.6% | 35.6% | | Nine Months Ended Aug 2, 2019 | 33.4% | 35.3% | | Nine Months Ended Aug 3, 2018 | 36.6% | 36.6% | - GAAP gross profit percentage decreased due to CMW acquisition purchase accounting adjustments, higher commodity and tariff costs, Toro underground wind down charges, unfavorable product mix, and manufacturing inefficiencies[146] - Interest expense increased by $4.3 million (Q3) and $6.2 million (9M) due to higher borrowings for the CMW acquisition[151] - The effective tax rate for 9M 2019 was 15.3%, down from 29.2% in 9M 2018, primarily due to the reduction in the U.S. federal corporate tax rate and one-time charges from the Tax Cuts and Jobs Act in 2018[153] Business Segments This section analyzes the net sales and earnings performance of the Professional and Residential segments, along with the "Other" activities Segment Net Sales Growth (YoY % Change) | Segment | Three Months Ended Aug 2, 2019 | Nine Months Ended Aug 2, 2019 | | :---------- | :----------------------------- | :---------------------------- | | Professional | 40.3% | 20.0% | | Residential | (11.0)% | 0.8% | | Other | 101.4% | 97.0% | - Professional segment net sales growth was primarily driven by the CMW acquisition, price increases, and growth in snow/ice management and rental/specialty construction, partially offset by lower landscape contractor mowers and irrigation products[133][163][164] - Residential segment net sales decreased in Q3 due to lower shipments of zero-turn riding mowers, walk power mowers, and Pope-branded irrigation products, but increased year-to-date due to price increases and strong snow product/walk power mower demand[134][167][168] Segment Earnings (Loss) Before Income Taxes Growth (YoY % Change) | Segment | Three Months Ended Aug 2, 2019 | Nine Months Ended Aug 2, 2019 | | :---------- | :----------------------------- | :---------------------------- | | Professional | (16.5)% | (5.6)% | | Residential | 0.9% | (11.7)% | | Other | (29.7)% | (36.4)% | - Professional segment earnings decreased due to CMW acquisition impacts (purchase accounting, amortization, administrative expenses), higher commodity/tariff costs, Toro underground wind down charges, and unfavorable product mix[165] - Residential segment earnings increased in Q3 due to price increases, productivity, duty drawback credits, and lower advertising, but decreased year-to-date due to higher commodity/tariff costs, unfavorable product mix, and increased depreciation/engineering for new products[169][170] - Other activities' operating loss increased due to higher interest expense from CMW acquisition borrowings and integration costs[172][173] Financial Position This section discusses changes in the company's balance sheet items, cash flows, indebtedness, and capital allocation strategies - Inventory levels increased by $256.1 million (70.3%) as of Q3 fiscal 2019, primarily due to the CMW acquisition, higher work-in-process due to supply chain challenges, and increased finished goods inventory[138][174] - Accounts receivable increased by $92.8 million (42.3%) due to the CMW acquisition, sales timing, and higher sales to non-Red Iron financed customers[138][174] - Cash provided by operating activities for the first nine months of fiscal 2019 decreased slightly by $0.3 million, while cash used in investing activities increased by $654.6 million, mainly due to the CMW acquisition[175] - Cash provided by financing activities increased by $568.6 million, driven by new debt issuances (term loans, senior notes) for the CMW acquisition and reduced common stock repurchases[175] - The company's total outstanding indebtedness was $720.7 million as of August 2, 2019, including new term loans and senior notes, with $598.1 million of unutilized availability under its revolving credit facility[180][186] - The Board of Directors approved a 12.5% increase in the cash dividend to $0.225 per share for Q3 fiscal 2019[137][188] - Share repurchases were curtailed in Q3 fiscal 2019 due to the CMW acquisition; 359,758 shares were repurchased in the first nine months of fiscal 2019[189] Non-GAAP Financial Measures The company provides non-GAAP financial measures to offer supplemental information on core operational performance, excluding specific non-recurring or non-cash items - The company provides non-GAAP financial measures to offer supplemental information on core operational performance, excluding non-cash charges, large unpredictable charges, acquisitions/dispositions, legal settlements, and tax positions[194] Reconciliation of GAAP to Adjusted Non-GAAP Financial Measures (Three Months Ended) | Metric | GAAP (Aug 2, 2019) | Adjustments | Adjusted Non-GAAP (Aug 2, 2019) | GAAP (Aug 3, 2018) | Adjustments | Adjusted Non-GAAP (Aug 3, 2018) | | :--------------------------------- | :----------------- | :---------- | :------------------------------ | :----------------- | :---------- | :------------------------------ | | Gross profit ($ thousands) | 265,981 | 35,289 | 301,270 | 233,653 | — | 233,653 | | Operating earnings ($ thousands) | 73,944 | 38,452 | 112,396 | 92,894 | — | 92,894 | | Net earnings ($ thousands) | 60,607 | 29,188 | 89,785 | 79,009 | (5,525) | 73,484 | | Diluted EPS | 0.56 | 0.27 | 0.83 | 0.73 | (0.05) | 0.68 | | Effective tax rate | 14.9% | 3.2% | 18.1% | 15.3% | 5.9% | 21.2% | Reconciliation of GAAP to Adjusted Non-GAAP Financial Measures (Nine Months Ended) | Metric | GAAP (Aug 2, 2019) | Adjustments | Adjusted Non-GAAP (Aug 2, 2019) | GAAP (Aug 3, 2018) | Adjustments | Adjusted Non-GAAP (Aug 3, 2018) | | :--------------------------------- | :----------------- | :---------- | :------------------------------ | :----------------- | :---------- | :------------------------------ | | Gross profit ($ thousands) | 802,896 | 44,808 | 847,704 | 761,948 | — | 761,948 | | Operating earnings ($ thousands) | 281,723 | 60,206 | 341,929 | 330,089 | — | 330,089 | | Net earnings ($ thousands) | 235,717 | 36,731 | 272,438 | 232,902 | 22,975 | 255,877 | | Diluted EPS | 2.18 | 0.34 | 2.52 | 2.14 | 0.21 | 2.35 | | Effective tax rate | 15.3% | 4.2% | 19.5% | 29.2% | (7.0)% | 22.2% | Critical Accounting Policies and Estimates This section confirms no material changes to critical accounting policies and discusses the upcoming adoption of new accounting pronouncements - No material changes to critical accounting policies and estimates since the fiscal year ended October 31, 2018[197] - The company will adopt ASU No. 2016-02, Leases, in Q1 fiscal 2020, which will materially impact the Consolidated Balance Sheets by recognizing right-of-use assets and lease liabilities for operating leases, but not materially impact the Consolidated Statements of Earnings and Cash Flows[198][201] - The company is evaluating the impact of new accounting pronouncements: ASU No. 2016-03 (Credit Losses, effective Q1 fiscal 2021), ASU No. 2018-07 (Nonemployee Share-Based Payment Accounting, effective Q1 fiscal 2020), ASU No. 2018-13 (Fair Value Measurement Disclosures, effective Q1 fiscal 2021), and ASU No. 2018-14 (Defined Benefit Plans Disclosures, effective Q1 fiscal 2021)[202][203][204][205] Forward-Looking Information This section contains forward-looking statements about future performance, liquidity, and business strategies, highlighting key risks and uncertainties - The report contains forward-looking statements regarding future performance, liquidity, financial condition, business strategies, CMW integration, and the effect of laws/regulations[207] - Key risks include adverse economic conditions, weather, foreign currency fluctuations, increased raw material/tariff costs, dependence on segment-specific factors, product mix, acquisition integration risks (e.g., CMW, Toro underground wind down), inventory management, competition, international operations, product innovation, operational disruptions, labor needs, information system security, intellectual property, governmental regulations, accounting changes, and debt covenants[208][210][211] - The company cautions readers not to place undue reliance on forward-looking statements, as actual results may differ materially due to various risks and uncertainties[213] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The company is exposed to market risks from foreign currency exchange rates, interest rates, and commodity costs, which are managed through various strategies including derivatives - The company is exposed to market risks from foreign currency exchange rates, interest rates, and commodity costs[214] - Foreign currency exchange rate risk is managed using derivative instruments (forward currency contracts) to hedge exposures in currencies like Euro, AUD, CAD, GBP, MXN, JPY, CNY, and RON[215][216] Outstanding Foreign Currency Exchange Contracts (August 2, 2019) | Currency Pair | Average Contracted Rate | Notional Amount ($ thousands) | Gain at Fair Value ($ thousands) | | :-------------------------- | :---------------------- | :---------------------------- | :------------------------------- | | Buy U.S. dollar/Sell Australian dollar | 0.7269 | 102,489.6 | 5,129.7 | | Buy U.S. dollar/Sell Canadian dollar | 1.3107 | 32,440.0 | 99.4 | | Buy U.S. dollar/Sell Euro | 1.2059 | 134,502.0 | 7,562.9 | | Buy U.S. dollar/Sell British pound | 1.3428 | 43,774.8 | 3,528.8 | | Buy Mexican peso/Sell U.S. dollar | 20.9456 | 1,432.3 | 110.6 | - Interest rate risk primarily relates to LIBOR-based interest rates on the revolving credit facility and term loan credit agreement; as of August 2, 2019, $300.0 million of debt was LIBOR-based, with no outstanding balance on the revolving credit facility[219] - Commodity cost risk, primarily for steel, aluminum, and petroleum-based resins, is mitigated through firm pricing, alternative sourcing, material substitution, and price increases[220][221] ITEM 4. CONTROLS AND PROCEDURES Management concluded that disclosure controls and procedures were effective, with no material changes in internal control over financial reporting, excluding the CMW acquisition - The CEO and CFO concluded that disclosure controls and procedures were effective as of August 2, 2019, providing reasonable assurance for timely and accurate financial reporting[223] - No material changes in internal control over financial reporting occurred during the three months ended August 2, 2019, except for the ongoing integration of CMW[224] - The acquisition of CMW, a previously privately-held company, is excluded from the assessment of internal control over financial reporting as of October 31, 2019, due to ongoing integration activities[225] PART II. OTHER INFORMATION This section provides additional information beyond the financial statements, including legal proceedings, risk factors, equity security sales, and exhibits ITEM 1. LEGAL PROCEEDINGS The company is involved in various legal proceedings, including product liability and environmental claims, which management expects will not materially affect financial results - The company is a party to litigation in the ordinary course of business, including claims for product liability, asbestos, hazardous substances, commercial disputes, employment disputes, and patent infringement[228] - Management believes that the amount of liability, if any, from these legal matters will not materially affect the company's Consolidated Results of Operations, Financial Position, or Cash Flows[229] ITEM 1A. RISK FACTORS This section outlines specific risks, including new factors related to the CMW acquisition such as integration challenges, operational disruption, and increased leverage - No material changes to risk factors from the most recently filed Annual Report on Form 10-K, except for the addition of risks related to the CMW acquisition[230] - Risks associated with the CMW acquisition include diversion of management's attention, operational disruption, integration challenges, potential loss of key employees/partners, failure to achieve expected synergies, capital reallocation, increased leverage, inaccurate liability assessments, and purchase accounting impacts[231][232] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS The company curtailed share repurchases in Q3 fiscal 2019 due to the CMW acquisition, with a remaining authorization for 7,042,256 shares - Share repurchases were curtailed during Q3 fiscal 2019 due to the CMW acquisition[189][233] Common Stock Purchases (Q3 Fiscal 2019) | Period | Total Number of Shares Purchased | Average Price Paid per Share | | :--------------------------------- | :----------------------------- | :--------------------------- | | May 4, 2019 through May 31, 2019 | — | $ — | | June 1, 2019 through June 28, 2019 | — | — | | June 29, 2019 through August 2, 2019 | 1,310 | $66.14 | | Total | 1,310 | $66.14 | - As of August 2, 2019, 7,042,256 shares remained available for repurchase under Board-authorized plans[233][234] ITEM 6. EXHIBITS This section lists the exhibits filed with the Form 10-Q, including the CMW merger agreement, debt instruments, and CEO/CFO certifications - Exhibits include the CMW merger agreement, Restated Certificate of Incorporation, Amended and Restated Bylaws, various debt indentures (7.80% Debentures, 6.625% Notes), CEO/CFO certifications, and financial information in Inline XBRL format[238] Signatures The report is formally signed by Renee J. Peterson, Vice President, Treasurer, and Chief Financial Officer, on September 5, 2019 - The report was signed by Renee J. Peterson, Vice President, Treasurer and Chief Financial Officer, on September 5, 2019[242]