The company accounts for its investment in Red Iron under the equity method of accounting. The company and TCFIF each contributed a specified amount of the estimated cash required to enable Red Iron to purchase the company’s inventory financing receivables and to provide financial support for Red Iron’s inventory financing programs. Red Iron borrows the remaining requisite estimated cash utilizing a $550$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 July 31, 2020, August 2, 2019, and October 31,
Under separate agreements between Red Iron and the dealers and distributors, Red Iron provides loans to the dealers and distributors for the advances paid by Red Iron to the company. The net amount of receivables financed for dealers and distributors under this arrangement for the nine months ended July 31, 2020 and August 2, 2019 and August 3, 2018 were $1,513.3$1,374.3 million and $1,525.3$1,513.3 million, respectively. As of July 31, 2019,2020, Red Iron’s total assets were $508.8$457.2 million and total liabilities were $453.0$407.0 million. The total amount of receivables due from Red Iron to the company as of July 31, 2020, August 2, 2019, and October 31, 2019 were $21.0 million, $32.5 million and $21.7 million, respectively.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation method with the assumptions noted in the table below.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 nine months of the following fiscal periods:
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 willcan be increased (up to 200 percent of target levels) or reduced (down to 0) 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 2018 was $59.58, and $65.40, respectively. NoNaN performance share awards were granted during the second or third quarters of fiscal 20192020 and 2018.
Under the 2010 plan, restricted stock unit awards are generally granted to certain employees that are not executive officers. Occasionally, restricted stock unit awards may be granted, including to executive officers, in connection with hiring, mid-year promotions, leadership transition, or retention. Restricted stock unit awards generally vest one-third each year over a three-year period, or vest in full on the three-year anniversary of the date of grant. Such awards may have performance-based rather than time-based vesting requirements. Compensation cost equal to the grant date fair value, which is equal to the closing price of the company’s common stock on the date of grant multiplied by the number of shares subject to the restricted stock unit awards, is recognized for these awards over the vesting period. The per share weighted-average fair value of restricted stock unit awards granted during the first nine months of fiscal 2020 and 2019 was $74.43 and 2018 was $66.00, and $63.47, respectively.
The components and activity of AOCL, net of tax, for the three and nine month periods ended July 31, 2020 and August 2, 2019 and August 3, 2018 were as follows:
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Foreign Currency Translation Adjustments | | Pension and Post-Retirement Benefits | | Cash Flow Hedging Derivative Instruments | | Total |
Balance as of Balance as of May 3, 2019 | | $ | 30,047 |
| | $ | 561 |
| | $ | (5,492 | ) | | $ | 25,116 |
|
Other comprehensive (income) loss before reclassifications | | 3,815 |
| | — |
| | (773 | ) | | 3,042 |
|
Amounts reclassified from AOCL | | — |
| | — |
| | (1,490 | ) | | (1,490 | ) |
Net current period other comprehensive (income) loss | | 3,815 |
| | — |
| | (2,263 | ) | | 1,552 |
|
Balance as of August 2, 2019 | | $ | 33,862 |
| | $ | 561 |
| | $ | (7,755 | ) | | $ | 26,668 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Foreign Currency Translation Adjustments | | Pension and Post-Retirement Benefits | | Cash Flow Hedging Derivative Instruments | | Total |
Balance as of May 1, 2020 | | $ | 36,916 | | | $ | 3,949 | | | $ | (7,163) | | | $ | 33,702 | |
Other comprehensive (income) loss before reclassifications | | (14,011) | | | — | | | 16,838 | | | 2,827 | |
Amounts reclassified from AOCL | | — | | | — | | | (1,953) | | | (1,953) | |
Net current period other comprehensive (income) loss | | (14,011) | | | 0 | | | 14,885 | | | 874 | |
Balance as of July 31, 2020 | | $ | 22,905 | | | $ | 3,949 | | | $ | 7,722 | | | $ | 34,576 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 (income) loss before reclassifications | | (8,120) | | | — | | | 17,529 | | | 9,409 | |
Amounts reclassified from AOCL | | — | | | (912) | | | (5,970) | | | (6,882) | |
Net current period other comprehensive (income) loss | | (8,120) | | | (912) | | | 11,559 | | | 2,527 | |
Balance as of July 31, 2020 | | $ | 22,905 | | | $ | 3,949 | | | $ | 7,722 | | | $ | 34,576 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Foreign Currency Translation Adjustments | | Pension and Post-Retirement Benefits | | Cash Flow Hedging Derivative Instruments | | Total |
Balance as of May 3, 2019 | | $ | 30,047 | | | $ | 561 | | | $ | (5,492) | | | $ | 25,116 | |
Other comprehensive (income) loss before reclassifications | | 3,815 | | | — | | | (773) | | | 3,042 | |
Amounts reclassified from AOCL | | — | | | — | | | (1,490) | | | (1,490) | |
Net current period other comprehensive (income) loss | | 3,815 | | | — | | | (2,263) | | | 1,552 | |
| | | | | | | | |
Balance as of August 2, 2019 | | $ | 33,862 | | | $ | 561 | | | $ | (7,755) | | | $ | 26,668 | |
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Foreign Currency Translation Adjustments | | Pension and Post-Retirement Benefits | | Cash Flow Hedging Derivative Instruments | | Total |
Balance as of October 31, 2018 | | $ | 29,711 |
| | $ | 561 |
| | $ | (6,335 | ) | | $ | 23,937 |
|
Other comprehensive loss before reclassifications | | 4,151 |
| | — |
| | 2,905 |
| | 7,056 |
|
Amounts reclassified from AOCL | | — |
| | — |
| | (4,325 | ) | | (4,325 | ) |
Net current period other comprehensive (income) loss | | 4,151 |
| | — |
| | (1,420 | ) | | 2,731 |
|
Balance as of August 2, 2019 | | $ | 33,862 |
| | $ | 561 |
| | $ | (7,755 | ) | | $ | 26,668 |
|
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Foreign Currency Translation Adjustments | | Pension and Post-Retirement Benefits | | Cash Flow Hedging Derivative Instruments | | Total |
Balance as of Balance as of May 4, 2018 | | $ | 19,094 |
| | $ | 1,681 |
| | $ | (176 | ) | | $ | 20,599 |
|
Other comprehensive (income) loss before reclassifications | | 4,373 |
| | (85 | ) | | (1,482 | ) | | 2,806 |
|
Amounts reclassified from AOCL | | — |
| | — |
| | 33 |
| | 33 |
|
Net current period other comprehensive (income) loss | | 4,373 |
| | (85 | ) | | (1,449 | ) | | 2,839 |
|
Balance as of August 3, 2018 | | $ | 23,467 |
| | $ | 1,596 |
| | $ | (1,625 | ) | | $ | 23,438 |
|
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Foreign Currency Translation Adjustments | | Pension and Post-Retirement Benefits | | Cash Flow Hedging Derivative Instruments | | Total |
Balance as of October 31, 2017 | | $ | 21,303 |
| | $ | 2,012 |
| | $ | 805 |
| | $ | 24,120 |
|
Other comprehensive (income) loss before reclassifications | | 2,164 |
| | — |
| | (5,302 | ) | | (3,138 | ) |
Amounts reclassified from AOCL | | — |
| | — |
| | 2,597 |
| | 2,597 |
|
Net current period other comprehensive (income) loss | | 2,164 |
| | — |
| | (2,705 | ) | | (541 | ) |
Reclassification due to the adoption of ASU 2018-02 | | — |
| | (416 | ) | | 275 |
| | (141 | ) |
Balance as of August 3, 2018 | | $ | 23,467 |
| | $ | 1,596 |
| | $ | (1,625 | ) | | $ | 23,438 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | Foreign Currency Translation Adjustments | | Pension and Post-Retirement Benefits | | Cash Flow Hedging Derivative Instruments | | Total |
Balance as of October 31, 2018 | | $ | 29,711 | | | $ | 561 | | | $ | (6,335) | | | $ | 23,937 | |
Other comprehensive loss before reclassifications | | 4,151 | | | — | | | 2,905 | | | 7,056 | |
Amounts reclassified from AOCL | | — | | | — | | | (4,325) | | | (4,325) | |
Net current period other comprehensive (income) loss | | 4,151 | | | — | | | (1,420) | | | 2,731 | |
Balance as of August 2, 2019 | | $ | 33,862 | | | $ | 561 | | | $ | (7,755) | | | $ | 26,668 | |
For additional information on the components reclassified from AOCL to the respective line items within net earnings for the company's cash flow hedging derivative instruments, refer to Note 16,17, Derivative Instruments and Hedging Activities.
Note 14 — Per Share Data
Reconciliations of basic and diluted weighted-average shares of common stock outstanding arewere as follows:
|
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(Shares in thousands) | | August 2, 2019 | | August 3, 2018 | | August 2, 2019 | | August 3, 2018 |
Basic | | |
| | |
| | | | |
Weighted-average number of shares of common stock | | 107,005 |
| | 105,751 |
| | 106,630 |
| | 106,457 |
|
Assumed issuance of contingent shares | | — |
| | — |
| | 14 |
| | 17 |
|
Weighted-average number of shares of common stock and assumed issuance of contingent shares | | 107,005 |
| | 105,751 |
| | 106,644 |
| | 106,474 |
|
| | | | | | | | |
Diluted | | |
| | |
| | |
| | |
|
Weighted-average number of shares of common stock and assumed issuance of contingent shares | | 107,005 |
| | 105,751 |
| | 106,644 |
| | 106,474 |
|
Effect of dilutive securities | | 1,248 |
| | 2,319 |
| | 1,380 |
| | 2,456 |
|
Weighted-average number of shares of common stock, assumed issuance of contingent shares, and effect of dilutive securities | | 108,253 |
| | 108,070 |
| | 108,024 |
| | 108,930 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
(Shares in thousands) | | July 31, 2020 | | August 2, 2019 | | July 31, 2020 | | August 2, 2019 |
Basic | | | | | | | | |
Weighted-average number of shares of common stock | | 107,710 | | | 107,005 | | | 107,547 | | | 106,630 | |
Assumed issuance of contingent shares | | 0 | | | 0 | | | 14 | | | 14 | |
Weighted-average number of shares of common stock and assumed issuance of contingent shares | | 107,710 | | | 107,005 | | | 107,561 | | | 106,644 | |
| | | | | | | | |
Diluted | | | | | | | | |
Weighted-average number of shares of common stock and assumed issuance of contingent shares | | 107,710 | | | 107,005 | | | 107,561 | | | 106,644 | |
Effect of dilutive securities | | 833 | | | 1,248 | | | 1,008 | | | 1,380 | |
Weighted-average number of shares of common stock, assumed issuance of contingent shares, and effect of dilutive securities | | 108,543 | | | 108,253 | | | 108,569 | | | 108,024 | |
Incremental shares from options and restricted stock units are computed under the treasury stock method. Options to purchase 378,850635,002 and 740,720378,850 shares of common stock during the third quarter of fiscal 20192020 and 2018,2019, respectively, were excluded from diluted net earnings per share because they were anti-dilutive. Options to purchase 865,648493,723 and 412,302865,648 shares of common stock during the first nine months of fiscal 20192020 and 2018,2019, respectively, were excluded from diluted net earnings per share because they were anti-dilutive.
Note 15 — Contingencies
Litigation
The company is party to litigation in the ordinary course of business. Such matters are generally subject to uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. Litigation occasionally involves claims for punitive, as well as compensatory damages arising out of the use of the company’s products. Although the company is self-insured to some extent, the company maintains insurance against certain product liability losses. The company is also subject to litigation and administrative and judicial proceedings with respect to claims involving asbestos and the discharge of hazardous substances into the environment. Some of these claims assert damages and liability for personal injury, remedial investigations or clean up and other costs and damages. The company is also typically involved in commercial disputes, employment disputes, and patent litigation cases in which it is asserting or defending against patent infringement claims. To prevent possible infringement of the company’s patents by others, the company periodically reviews competitors’ products. To avoid potential liability with respect to others’ patents, the company regularly reviews certain patents issued by the U.S. Patent and Trademark Office and foreign patent offices. Management believes these activities help minimize its risk of being a defendant in patent infringement litigation. The company is currently involved in patent litigation cases, including cases by or against competitors, where it is asserting and defending against claims of patent infringement. Such cases are at varying stages in the litigation process.
The company records a liability in its Condensed Consolidated Financial Statements for costs related to claims, including future legal costs, settlements and judgments, where the company has assessed that a loss is probable and an amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred. In the opinion of management, the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect its Consolidated Results of Operations, Financial Position, or Cash Flows.
Note 16 — Derivative InstrumentsThe 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 Hedging Activitieswarehouse 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. 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 | | Nine Months Ended |
(Dollars in thousands) | | July 31, 2020 | | July 31, 2020 |
Operating lease expense | | $ | 4,036 | | | $ | 14,253 | |
Short-term lease expense | | 876 | | | 2,204 | |
Variable lease expense | | 20 | | | 116 | |
Total lease expense | | $ | 4,932 | | | $ | 16,573 | |
The following table presents supplemental cash flow information related to the company's operating leases:
| | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(Dollars in thousands) | | July 31, 2020 | | July 31, 2020 |
Operating cash flows for amounts included in the measurement of lease liabilities | | $ | 3,683 | | | $ | 13,949 | |
Right-of-use assets obtained in exchange for lease obligations | | $ | 1,656 | | | $ | 18,698 | |
The following table presents other lease information related to the company's operating leases as of July 31, 2020:
| | | | | | | | |
(Dollars in thousands) | | July 31, 2020 |
Weighted-average remaining lease term of operating leases in years | | 7.2 |
Weighted-average discount rate of operating leases | | 2.80 | % |
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 July 31, 2020:
| | | | | | | | |
(Dollars in thousands) | | July 31, 2020 |
2020 (remaining) | | $ | 24,574 | |
2021 | | 17,822 | |
2022 | | 15,172 | |
2023 | | 12,102 | |
2024 | | 10,787 | |
Thereafter | | 33,468 | |
Total future minimum operating lease payments | | 113,925 | |
Less: imputed interest | | 28,991 | |
Present value of operating lease liabilities | | $ | 84,934 | |
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-managementrisk 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 and costs associated with foreign plant operations, andincluding 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 costs associated with foreign plant operations, including purchases from suppliers, are recorded in net sales and cost of sales, respectively. The maximum amount of time the company hedges its exposure to the variability in future cash flows for forecasted trade sales and purchases is two years. Results of cash flow hedges of intercompany loans are recorded in other income, net as an offset to the remeasurement of the foreign loan balance.
When it is determined that a derivative instrument is not, or has ceased to be, highly effective as a cash flow hedge, the company discontinues cash flow hedge accounting prospectively. The gain or loss on the dedesignated derivative instrument remains in AOCL and is reclassified to net earnings within the same Condensed Consolidated Statements of Earnings line item as the underlying exposure when the forecasted transaction affects net earnings. When the company discontinues cash flow hedge accounting because it is no longer probable, but it is still reasonably possible that the forecasted transaction will occur by the end of the originally expected period or within an additional two-month period of time thereafter, the gain or loss on the derivative instrument remains in AOCL and is reclassified to net earnings within the same Condensed Consolidated Statements of Earnings line item as the underlying exposure when the forecasted transaction affects net earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the
gains and losses that were in AOCL are immediately recognized in net earnings within other
income, net in the Condensed Consolidated Statements of Earnings. In all situations in which cash flow hedge accounting is discontinued and the derivative instrument remains outstanding, the company carries the derivative instrument at its fair value on the Condensed Consolidated Balance Sheets, recognizing future changes in the fair value within other income, net in the Condensed Consolidated Statements of Earnings.
As of August 2, 2019,July 31, 2020, the notional amount outstanding of forward contracts designated as cash flow hedging instruments was $250.3$265.0 million.
Derivatives Not Designated as Cash Flow Hedging Instruments
The company also enters into foreign currency contracts that include forward currency contracts to mitigate the remeasurement of specific assets and liabilities on the Condensed Consolidated Balance Sheets. These contracts are not designated as cash flow hedging instruments. Accordingly, changes in the fair value of hedges of recorded balance sheet positions, such as cash, receivables, payables, intercompany notes, and other various contractual claims to pay or receive foreign currencies other than the functional currency, are recognized immediately in other income, net, on the Condensed Consolidated Statements of Earnings together with the transaction gain or loss from the hedged balance sheet position.
The following table presents the fair value and location of the company’s derivative instruments on the Condensed Consolidated Balance Sheets:
|
| | | | | | | | | | | | |
(Dollars in thousands) | | August 2, 2019 | | August 3, 2018 | | October 31, 2018 |
Derivative assets: | | |
| | |
| | |
|
Derivatives designated as cash flow hedging instruments: | | |
| | |
| | |
|
Prepaid expenses and other current assets | | |
| | |
| | |
|
Forward currency contracts | | $ | 12,511 |
| | $ | 2,324 |
| | $ | 8,596 |
|
Derivatives not designated as cash flow hedging instruments: | | | | | | |
Prepaid expenses and other current assets | | | | | | |
Forward currency contracts | | 3,920 |
| | 869 |
| | 2,305 |
|
Total assets | | $ | 16,431 |
| | $ | 3,193 |
| | $ | 10,901 |
|
| | | | | | |
Derivative liabilities: | | | | | | |
Derivatives designated as cash flow hedging instruments: | | | | | | |
Accrued liabilities | | | | | | |
Forward currency contracts | | $ | — |
| | $ | — |
| | $ | — |
|
Derivatives not designated as cash flow hedging instruments: | | | | | | |
Accrued liabilities | | | | | | |
Forward currency contracts | | — |
| | — |
| | 13 |
|
Total liabilities | | $ | — |
| | $ | — |
| | $ | 13 |
|
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | July 31, 2020 | | August 2, 2019 | | October 31, 2019 |
Derivative assets: | | | | | | |
Derivatives designated as cash flow hedging instruments: | | | | | | |
Prepaid expenses and other current assets | | | | | | |
Forward currency contracts | | $ | (645) | | | $ | 12,511 | | | $ | 8,642 | |
Derivatives not designated as cash flow hedging instruments: | | | | | | |
Prepaid expenses and other current assets | | | | | | |
Forward currency contracts | | 753 | | | 3,920 | | | 2,256 | |
Total assets | | $ | 108 | | | $ | 16,431 | | | $ | 10,898 | |
| | | | | | |
Derivative liabilities: | | | | | | |
Derivatives designated as cash flow hedging instruments: | | | | | | |
Accrued liabilities | | | | | | |
Forward currency contracts | | $ | 5,248 | | | $ | 0 | | | $ | 0 | |
Derivatives not designated as cash flow hedging instruments: | | | | | | |
Accrued liabilities | | | | | | |
Forward currency contracts | | 849 | | | 0 | | | 9 | |
Total liabilities | | $ | 6,097 | | | $ | 0 | | | $ | 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 inon its Condensed Consolidated Balance Sheets.
The following table showspresents the effects of the master netting arrangements on the fair value of the company’s derivative instruments that are recorded inon the Condensed Consolidated Balance Sheets:
|
| | | | | | | | | | | | |
(Dollars in thousands) | | August 2, 2019 | | August 3, 2018 | | October 31, 2018 |
Derivative assets: | | | | | | |
Forward currency contracts: | | | | | | |
Gross amounts of recognized assets | | $ | 16,496 |
| | $ | 3,349 |
| | $ | 10,901 |
|
Gross liabilities offset in the Condensed Consolidated Balance Sheets | | (65 | ) | | (156 | ) | | — |
|
Net amounts of assets presented in the Condensed Consolidated Balance Sheets | | $ | 16,431 |
| | $ | 3,193 |
| | $ | 10,901 |
|
| | | | | | |
Derivative liabilities: | | | | | | |
Forward currency contracts: | | | | | | |
Gross amounts of recognized liabilities | | $ | — |
| | $ | — |
| | $ | (13 | ) |
Gross assets offset in the Condensed Consolidated Balance Sheets | | — |
| | — |
| | — |
|
Net amounts of liabilities presented in the Condensed Consolidated Balance Sheets | | $ | — |
| | $ | — |
| | $ | (13 | ) |
| | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | July 31, 2020 | | August 2, 2019 | | October 31, 2019 |
Derivative assets: | | | | | | |
Forward currency contracts: | | | | | | |
Gross amounts of recognized assets | | $ | 1,116 | | | $ | 16,496 | | | $ | 11,056 | |
Gross liabilities offset in the Condensed Consolidated Balance Sheets | | (1,008) | | | (65) | | | (158) | |
Net amounts of assets presented in the Condensed Consolidated Balance Sheets | | $ | 108 | | | $ | 16,431 | | | $ | 10,898 | |
| | | | | | |
Derivative liabilities: | | | | | | |
Forward currency contracts: | | | | | | |
Gross amounts of recognized liabilities | | $ | (6,465) | | | $ | 0 | | | $ | (9) | |
Gross assets offset in the Condensed Consolidated Balance Sheets | | 368 | | | 0 | | | 0 | |
Net amounts of liabilities presented in the Condensed Consolidated Balance Sheets | | $ | (6,097) | | | $ | 0 | | | $ | (9) | |
The following table presentstables 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 nine months ended July 31, 2020 and August 2, 20192019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | |
| | Gain Reclassified from AOCL into Earnings | | | | Gain (Loss) Recognized in OCI on Derivatives | | |
(Dollars in thousands) | | July 31, 2020 | | August 2, 2019 | | July 31, 2020 | | August 2, 2019 |
Derivatives designated as cash flow hedging instruments: | | | | | | | | |
Forward currency contracts: | | | | | | | | |
Net sales | | $ | 1,795 | | | $ | 1,350 | | | $ | (13,501) | | | $ | 2,022 | |
Cost of sales | | 158 | | | 140 | | | (1,384) | | | 241 | |
Total derivatives designated as cash flow hedging instruments | | $ | 1,953 | | | $ | 1,490 | | | $ | (14,885) | | | $ | 2,263 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | | | |
| | Gain Reclassified from AOCL into Earnings | | | | Gain (Loss) Recognized in OCI on Derivatives | | |
(Dollars in thousands) | | July 31, 2020 | | August 2, 2019 | | July 31, 2020 | | August 2, 2019 |
Derivatives designated as cash flow hedging instruments: | | | | | | | | |
Forward currency contracts: | | | | | | | | |
Net sales | | $ | 5,272 | | | $ | 3,828 | | | $ | (10,396) | | | $ | 1,307 | |
Cost of sales | | 698 | | | 497 | | | (1,163) | | | 113 | |
Total derivatives designated as cash flow hedging instruments | | $ | 5,970 | | | $ | 4,325 | | | $ | (11,559) | | | $ | 1,420 | |
For the third quarter and August 3, 2018:
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | Gain (Loss) Reclassified from AOCL into Earnings | | Gain Recognized in OCI on Derivatives |
(Dollars in thousands) | | August 2, 2019 | | August 3, 2018 | | August 2, 2019 | | August 3, 2018 |
Derivatives designated as cash flow hedging instruments: | | | | | | | | |
Forward currency contracts: | | | | | | | | |
Net sales | | $ | 1,350 |
| | $ | (170 | ) | | $ | 2,022 |
| | $ | 1,435 |
|
Cost of sales | | 140 |
| | 137 |
| | 241 |
| | 14 |
|
Total derivatives designated as cash flow hedging instruments | | $ | 1,490 |
| | $ | (33 | ) | | $ | 2,263 |
| | $ | 1,449 |
|
|
| | | | | | | | | | | | | | | | |
| | Nine Months Ended |
| | Gain (Loss) Reclassified from AOCL into Earnings | | Gain (Loss) Recognized in OCI on Derivatives |
(Dollars in thousands) | | August 2, 2019 | | August 3, 2018 | | August 2, 2019 | | August 3, 2018 |
Derivatives designated as cash flow hedging instruments: | | | | | | | | |
Forward currency contracts: | | | | | | | | |
Net sales | | $ | 3,828 |
| | $ | (3,207 | ) | | $ | 1,307 |
| | $ | 2,900 |
|
Cost of sales | | 497 |
| | 610 |
| | 113 |
| | (195 | ) |
Total derivatives designated as cash flow hedging instruments | | $ | 4,325 |
| | $ | (2,597 | ) | | $ | 1,420 |
| | $ | 2,705 |
|
Thefirst nine months of fiscal 2020, the company recognized immaterial gainsapproximately $0.6 million and $0.1 million of losses within other income, net on the Condensed Consolidated Statements of Earnings during the third quarter and first nine months of fiscal 2019 and 2018 due to the discontinuance of cash flow hedge accounting on certain forward currency contracts designated as cash flow hedging instruments as a result of the COVID-19 pandemic and its anticipated impact on the probability of realizing hedged forecasted transactions. For the third quarter and first nine 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 August 2, 2019,July 31, 2020, the company expects to reclassify approximately $7.3$6.1 million of gainslosses 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 Recognized in Earnings on Cash Flow Hedging Instruments | | | | | | |
(Dollars in thousands) | | July 31, 2020 | | | | August 2, 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 | | $ | 840,972 | | | $ | (546,398) | | | $ | 838,713 | | | $ | (572,732) | |
Gain on derivatives designated as cash flow hedging instruments: | | | | | | | | |
Forward currency contracts: | | | | | | | | |
Amount of gain reclassified from AOCL into earnings | | 1,795 | | | 158 | | | 1,350 | | | 140 | |
Gain on components excluded from effectiveness testing recognized in earnings based on changes in fair value | | $ | 191 | | | $ | 86 | | | $ | 1,262 | | | $ | 18 | |
|
| | | | | | | | | | | | | | | | |
| | Gain (Loss) Recognized in Earnings on Cash Flow Hedging Instruments |
(Dollars in thousands) | | August 2, 2019 | | August 3, 2018 |
Three Months Ended | | Net Sales | | Cost of Sales | | Net Sales | | Cost of Sales |
Condensed Consolidated Statements of Earnings income (expense) amounts in which the effects of cash flow hedging instruments are recorded | | $ | 838,713 |
| | $ | (572,732 | ) | | $ | 655,821 |
| | $ | (422,168 | ) |
Gain (loss) on derivatives designated as cash flow hedging instruments: | | | | | | | | |
Forward currency contracts: | | | | | | | | |
Amount of gain (loss) reclassified from AOCL into earnings | | 1,350 |
| | 140 |
| | (170 | ) | | 137 |
|
Gain (loss) on components excluded from effectiveness testing recognized in earnings based on changes in fair value | | $ | 1,262 |
| | $ | 18 |
| | $ | 132 |
| | $ | (92 | ) |
| | | | | | | | |
| | Gain (Loss) Recognized in Earnings on Cash Flow Hedging Instruments |
(Dollars in thousands) | | August 2, 2019 | | August 3, 2018 |
Nine Months Ended | | Net Sales | | Cost of Sales | | Net Sales | | Cost of Sales |
Condensed Consolidated Statements of Earnings income (expense) amounts in which the effects of cash flow hedging instruments are recorded | | $ | 2,403,705 |
| | $ | (1,600,809 | ) | | $ | 2,079,347 |
| | $ | (1,317,399 | ) |
Gain (loss) on derivatives designated as cash flow hedging instruments: | | | | | | | | |
Forward currency contracts: | | | | | | | | |
Amount of gain (loss) reclassified from AOCL into earnings | | 3,828 |
| | 497 |
| | (3,207 | ) | | 610 |
|
Gain (loss) on components excluded from effectiveness testing recognized in earnings based on changes in fair value | | $ | 3,579 |
| | $ | 34 |
| | $ | 31 |
| | $ | (210 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gain Recognized in Earnings on Cash Flow Hedging Instruments | | | | | | |
(Dollars in thousands) | | July 31, 2020 | | | | August 2, 2019 | | |
Nine Months Ended | | Net Sales | | Cost of Sales | | Net Sales | | Cost of Sales |
Condensed Consolidated Statements of Earnings income (expense) amounts in which the effects of cash flow hedging instruments are recorded | | $ | 2,537,853 | | | $ | (1,648,474) | | | $ | 2,403,705 | | | $ | (1,600,809) | |
Gain on derivatives designated as cash flow hedging instruments: | | | | | | | | |
Forward currency contracts: | | | | | | | | |
Amount of gain reclassified from AOCL into earnings | | 5,272 | | | 698 | | | 3,828 | | | 497 | |
Gain on components excluded from effectiveness testing recognized in earnings based on changes in fair value | | $ | 3,183 | | | $ | 231 | | | $ | 3,579 | | | $ | 34 | |
The following table presents the impact and location of derivative instruments on the Condensed Consolidated Statements of Earnings for the company’s derivatives not designated as cash flow hedging instruments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
(Dollars in thousands) | | July 31, 2020 | | August 2, 2019 | | July 31, 2020 | | August 2, 2019 |
Gain (loss) on derivatives not designated as cash flow hedging instruments | | | | | | | | |
Forward currency contracts: | | | | | | | | |
Other income, net | | $ | (7,093) | | | $ | (555) | | | $ | (5,316) | | | $ | 172 | |
Total gain (loss) on derivatives not designated as cash flow hedging instruments | | $ | (7,093) | | | $ | (555) | | | $ | (5,316) | | | $ | 172 | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
(Dollars in thousands) | | August 2, 2019 | | August 3, 2018 | | August 2, 2019 | | August 3, 2018 |
Gain (loss) on derivatives not designated as cash flow hedging instruments | | | | | | | | |
Forward currency contracts: | | | | | | | | |
Other income, net | | $ | (555 | ) | | $ | 2,111 |
| | $ | 172 |
| | $ | 1,495 |
|
Total gain (loss) on derivatives not designated as cash flow hedging instruments | | $ | (555 | ) | | $ | 2,111 |
| | $ | 172 |
| | $ | 1,495 |
|
Note 17 — Fair Value Measurements
| | | | | |
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 nine monthsmonth periods ended July 31, 2020 and August 2, 2019, and August 3, 2018, or the twelve months ended October 31, 2018.
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 July 31, 2020, August 2, 2019, August 3, 2018, and October 31, 2018,2019, according to the valuation technique utilized to determine their fair values:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | Fair Value Measurements Using Inputs Considered as: | | | | |
July 31, 2020 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
Forward currency contracts | | $ | 108 | | | $ | 0 | | | $ | 108 | | | $ | 0 | |
Total assets | | $ | 108 | | | $ | 0 | | | $ | 108 | | | $ | 0 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Forward currency contracts | | $ | 6,097 | | | $ | 0 | | | $ | 6,097 | | | $ | 0 | |
Total liabilities | | $ | 6,097 | | | $ | 0 | | | $ | 6,097 | | | $ | 0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | Fair Value Measurements Using Inputs Considered as: | | | | |
August 2, 2019 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | | | | | | | |
Forward currency contracts | | $ | 16,431 | | | $ | 0 | | | $ | 16,431 | | | $ | 0 | |
Total assets | | $ | 16,431 | | | $ | 0 | | | $ | 16,431 | | | $ | 0 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(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 | | | $ | 0 | | | $ | 10,898 | | | $ | 0 | |
Total assets | | $ | 10,898 | | | $ | 0 | | | $ | 10,898 | | | $ | 0 | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Forward currency contracts | | $ | 9 | | | $ | 0 | | | $ | 9 | | | $ | 0 | |
Total liabilities | | $ | 9 | | | $ | 0 | | | $ | 9 | | | $ | 0 | |
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | Fair Value Measurements Using Inputs Considered as: |
August 2, 2019 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | |
| | |
| | |
| | |
|
Forward currency contracts | | $ | 16,431 |
| | $ | — |
| | $ | 16,431 |
| | $ | — |
|
Total assets | | $ | 16,431 |
| | $ | — |
| | $ | 16,431 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | Fair Value Measurements Using Inputs Considered as: |
August 3, 2018 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | |
| | |
| | |
| | |
|
Forward currency contracts | | $ | 3,193 |
| | $ | — |
| | $ | 3,193 |
| | $ | — |
|
Total assets | | $ | 3,193 |
| | $ | — |
| | $ | 3,193 |
| | $ | — |
|
|
| | | | | | | | | | | | | | | | |
(Dollars in thousands) | | | | Fair Value Measurements Using Inputs Considered as: |
October 31, 2018 | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Assets: | | |
| | |
| | |
| | |
|
Forward currency contracts | | $ | 10,901 |
| | $ | — |
| | $ | 10,901 |
| | $ | — |
|
Total assets | | $ | 10,901 |
| | $ | — |
| | $ | 10,901 |
| | $ | — |
|
| | | | | | | | |
Liabilities: | | |
| | |
| | |
| | |
|
Forward currency contracts | | $ | 13 |
| | $ | — |
| | $ | 13 |
| | $ | — |
|
Total liabilities | | $ | 13 |
| | $ | — |
| | $ | 13 |
| | $ | — |
|
Non-recurringNonrecurring Fair Value Measurements
The company measures certain assets and liabilities at fair value on a non-recurringnonrecurring basis. Assets and liabilities that are measured at fair value on a nonrecurring basis include long-lived assets, goodwill, and indefinite-lived intangible assets, which would generally be recorded at fair value as a result of an impairment charge. Assets acquired and liabilities assumed as part of business combinations are measured at fair value. For additional information on the company's business combinations and the related non-recurringnonrecurring fair value measurement of the assets acquired and liabilities assumed, refer to Note 2, Business Combinations.
Other Fair Value Disclosures
The carrying valuesamounts 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 July 31, 2020 and October 31, 2019, the company's long-term debt included $424.0 million and $423.9 million, respectively, of gross fixed-rate debt that is not subject to variable interest rate fluctuations. The gross 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 July 31, 2020, the estimated gross fair value of long-term debt with fixed interest rates was $500.4 million compared to its gross carrying amount of $424.0 million. As of October 31, 2019, the estimated gross fair value of long-term debt with fixed interest rates was $493.8 million compared to its gross carrying amount of $423.9 million.
Note 18 — Subsequent Events
The company has evaluated all subsequent events and concluded that no subsequent events have occurred that would require recognition in the Condensed Consolidated Financial Statements or disclosure in the Notes to the Condensed Consolidated Financial Statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior fiscal year. Our MD&A is presented as follows:
•Company Overview
•Results of Operations
•Business Segments
•Financial Position
•Non-GAAP Financial Measures
•Critical Accounting Policies and Estimates
•Forward-Looking Information
This MD&A should be read in conjunction with the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2019. This discussion contains various "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and we refer readers to the section titled "Forward-Looking Information" located at the end of Part I, Item 2 of this report for more information.
WeNon-GAAP Financial Measures
Throughout this MD&A, we have provided non-GAAP financial measures, which are not calculated or presented in accordance with accounting principlesUnited States ("U.S.") generally accepted in the United Statesaccounting principles ("GAAP"), as information supplemental and in addition to the most directly comparable financial measures presented in this report that are calculated and presented in accordance with U.S. GAAP. We use these non-GAAP financial measures in making operating decisions because we believe these non-GAAP financial measures provide meaningful supplemental information regarding our core operational performance and provide us with a better understanding of how to allocate resources to both ongoing and prospective business initiatives. Additionally, these non-GAAP financial measures facilitate our internal comparisons to both our historical operating results and to our competitors' operating results by factoring out potential differences caused by charges not related to our regular, ongoing business, including, without limitation, non-cash charges, certain large and unpredictable charges, acquisitions and dispositions, legal settlements, and tax positions.
We believe that these non-GAAP financial measures, when considered in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with U.S. GAAP, provide investors with useful supplemental financial information to better understand our core operational performance. Reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A. These non-GAAP financial measures, however, should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the most directly comparable U.S. GAAP financial measures.measures and metrics. Further, these non-GAAP financial measures may differ from similar measures used by other companies.
This MD&A should be read in conjunction with the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2018. This discussion contains various "Forward-Looking Statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and we refer readers to the section titled "Forward-Looking Information" located at the end of Part I, Item 2 of this report for more information.
COMPANY OVERVIEW
The Toro Company ("Toro") is in the business of designing, manufacturing, and marketing professional turf maintenance equipment and services,services; turf irrigation systems,systems; landscaping equipment and lighting products,products; snow and ice management products,products; agricultural irrigation systems,systems; rental, specialty, and underground construction equipment,equipment; and residential yard and snow thrower products. We sell our products worldwide through a network of distributors, dealers, mass retailers, hardware retailers, equipment rental centers, home centers, as well as online (direct to end-users). We strive to provide innovative, well-built, and dependable products supported by an extensive service network. A significant portion of our net sales has historically been, and we expect will continue to be, attributable to new and enhanced products. We define new products as those introduced in the current and previous two fiscal years.
We classify our operations into two reportable business segments: Professional and Residential. Our remaining activities are presented as "Other" due to their insignificance. TheseSuch Other activities consist of earnings (loss) from our wholly-owned domestic distribution companies, corporate activities, and the elimination of intersegment revenues and expenses. Unless the context indicates otherwise, the terms "company," "TTC," "we," "our," or "us" refer to The Toro Company and its consolidated subsidiaries.
Business Combinations
Acquisition of Venture Products, Inc. ("Venture Products")
On April 1, 2019 ("closing date"),March 2, 2020, we completed the acquisition of Venture 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 our Professional segment and expanded our dealer network.
The acquisition of Venture Products was structured as a merger, pursuant to which a wholly-owned subsidiary of TTC merged with and into Venture Products, with Venture Products continuing as the Agreementsurviving entity and Plana wholly-owned subsidiary of Merger dated February 14, 2019 ("TTC. As a result of the merger, agreement")all of the outstanding equity securities of Venture Products were canceled and now only represent the right to receive the applicable cash consideration as described in the merger agreement. We also acquired from an affiliate of Venture Products the real estate used by Venture Products. As of the closing date of the transaction, we paid preliminary merger consideration of $165.9 million, 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 preliminary merger consideration was 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 as of the closing date. During the third quarter of fiscal 2020, we finalized the customary adjustments, which resulted in an aggregate merger consideration of $163.2 million. As a result, $4.5 million of the holdback set aside for such customary adjustments was released accordingly and the remaining holdback of $25.0 million is expected to expire by the end of the fourth quarter of fiscal 2021. We funded the cash payment with borrowings under our existing unsecured senior revolving credit facility. For additional information regarding the Venture Products acquisition and our unsecured senior revolving credit facility utilized to fund the aggregate consideration, refer to Note 2, Business Combinations, we completed our acquisitionand Note 6, Indebtedness, respectively, in the Notes to Condensed Consolidated Financial Statements included in Part I. Item 1 of this Quarterly Report on Form 10-Q.
Acquisition of The Charles Machine Works, Inc. ("CMW"),
On April 1, 2019, we completed our acquisition of CMW, a privately held Oklahoma corporation. CMW designs, manufactures, and sellsmarkets a range of professional products to serve the underground construction market, including horizontal directional drills, walk and ride trenchers, compact utility loaders,loaders/skid steers, vacuum excavators, asset locators, pipe rehabilitation solutions, and after-market tools. CMW provides innovative product offerings that broadenbroadened and strengthenstrengthened our Professional segment product portfolio and expandsexpanded our 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 Toro merged with and into CMW, with
CMW continuing as the surviving entity and a wholly-owned subsidiary of Toro. As a result of the merger, allclosing date of the outstanding equity securities of CMW were canceled and now only represent the right to receive the applicable consideration as described in the merger agreement. Thetransaction, we paid preliminary aggregate merger consideration wasof $679.3 million ("purchase price"), and remainsthat was subject to customary adjustments based on, among other things, the amount of actual cash, debt, and working capital in the business of CMW atas of the closing date. Such customaryDuring the fourth quarter of fiscal 2019, we finalized the adjustments, are expected to be completed during fiscal 2019.which resulted in an aggregate merger consideration of $685.0 million. We funded the preliminary purchase price for the acquisition by using a combination of cash proceeds from the issuance of borrowings under our unsecured senior term loan credit agreement and borrowings fromunder our unsecured senior revolving credit facility.
Subsequent to the acquisition date of April 1, 2019, CMW's results of operations are included within our Professional reportable segment within our Condensed Consolidated Financial Statements and had an incremental impact to our Professional reportable segment net sales and segment earnings for the first twelve months post acquisition. For the nine month period ended July 31, 2020, CMW's results of operations had an incremental impact on our Professional segment net sales and segment earnings of $291.8 million and $19.4 million, respectively. CMW's results of operations did not have an incremental impact to the results of operations of our Professional reportable segment for the three month period ended July 31, 2020. For additional information regarding the CMW acquisition and the financing agreements utilized to fund the purchase price, refer to Note 2, Business Combinations, and Note 6, Indebtedness, respectively, in the Notes to Condensed Consolidated Financial Statements included in Part 1.I. Item 1 of this Quarterly Report on Form 10-Q.
Impact of COVID-19 Pandemic
RESULTS OF OPERATIONS
Overview
Our net sales increased 27.9 percentIn March 2020, the World Health Organization declared the novel coronavirus ("COVID-19," "the pandemic," or "the virus") outbreak a global pandemic. The COVID-19 pandemic continues to spread throughout the U.S. and 15.6 percent forthe rest of the world and has negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets, and resulted in a global economic recession. COVID-19 caused government authorities around the world to implement stringent measures to attempt to help control the spread of the virus, including business shutdowns and curtailments, travel restrictions, prohibitions on group events and gatherings, quarantines, "shelter-in-place" and "stay-at-home" orders, curfews, social distancing, and other measures. Although many jurisdictions around the world have eased restrictions in an effort to reopen their economies and global economic activity has stabilized and begun to gradually recover, the adverse global economic impact of this pandemic has had a material impact on our business, customers, and suppliers and has caused many challenges, which began in the second quarter of fiscal 2020 and have continued throughout the third quarter and year-to-date periods of fiscal 2019, respectively,2020.
Our main focus from the beginning of the pandemic has been, and will continue to be, the health, safety, and well-being of our employees, customers, suppliers and communities around the world. In support of continuing our global manufacturing and business operations, we have adopted, and continue to adhere to, rigorous and meaningful safety measures recommended by the U.S. Centers for Disease Control and Prevention, World Health Organization, and federal, state, local, and foreign authorities in an effort to protect our employees, customers, suppliers, and communities. These important safety measures enacted at our facilities and other sites include, but are not limited to, implementing social distancing protocols such as the reconfiguration of manufacturing processes and other workspaces, instituting work from home arrangements for those employees that do not need to be physically present at our facilities and sites to perform their job responsibilities, suspending non-essential travel, extensively and frequently disinfecting our facilities and workspaces, suspending all non-essential visitors, and providing or accommodating the wearing of face coverings and other sanitary measures to those employees who must be physically present at our facilities and sites to perform their job responsibilities and where face coverings are required by local government mandates. We also adopted a special COVID-19 employee leave policy that provides two weeks of pay for employees who have contracted the virus, are involuntarily quarantined because of the virus, or are without work due to changes in our production schedules as a result of the virus. We expect to continue such safety measures until we determine that COVID-19 is adequately contained for purposes of our global manufacturing and business operations and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, suppliers, and communities.
We have continued to balance our safety-focused approach with our responsibility to meet the needs of our customers as we supply products that are critical to maintaining essential infrastructure globally, agricultural food production, and the enablement of safe areas for outdoor spaces. Government mandated measures providing for business shutdowns or curtailments generally excluded certain essential businesses and services, including businesses that manufacture and sell products that are considered essential to daily lives or otherwise operate in essential or critical sectors. Substantially all of our operations have been and continue to be considered essential under applicable government mandated orders relating to COVID-19 allowing us to continue our global manufacturing and business operations. While we continued manufacturing substantially all of our products and our facilities have remained operational, our manufacturing facilities continued to experience various degrees of manufacturing inefficiencies and intermittent partial or full facility closures as a result of reduced demand for products in certain of our Professional segment businesses, the reconfiguration of our manufacturing processes in order to implement and adhere to social distancing protocols and other safety measures, and government mandated business curtailment measures. Such manufacturing inefficiencies and intermittent partial or full facility closures adversely impacted our gross margins for the three and nine month periods ended July 31, 2020 and may continue to adversely impact our gross margins going forward. Additionally, as of the date of the filing of this report, we have not experienced any significant impacts to our global manufacturing operations due to disruptions in our global supply chain as a result of COVID-19. Although we regularly monitor the financial health of the companies in our supply chain, financial hardship or government mandated restrictions on our suppliers caused by COVID-19 could cause a disruption in our ability to procure the commodities, components, and parts required to manufacture our products. Ongoing communications continue with our suppliers in an attempt to identify and mitigate such risks and to proactively manage inventory levels of commodities, components, and parts to align with anticipated reduced levels of production as a result of softened demand for our products and other government actions. We currently expect our global manufacturing facilities to remain operational through the fourth quarter of fiscal 2020; however, such expectation is dependent upon future events and circumstances related to COVID-19, including, but not limited to, future government mandates and restrictions, demand for our products, and supply chain stability.
During the third quarter of fiscal 2020, we continued to experience softer demand from channel partners in certain of our Professional segment businesses. Most notably, our golf and grounds; rental, specialty, and underground construction; and landscape contractor businesses were affected by COVID-19. Reduced demand for our golf and grounds products continued as a result of the curtailment and closure of certain business activities for golf courses and municipalities across the globe resulting in lower overall revenues and budget constraints and a preference for repairs and deferrals over new equipment purchases. Our rental, specialty, and underground construction business continued to experience reduced demand as a result of curtailed investments by end-customers in the oil and gas and construction industries. The decrease in channel demand for our landscape contractor business was primarily due to channel partners aligning field inventory levels with the previously anticipated reduced retail demand from end-customers. However, through the third quarter of fiscal 2020, we experienced stronger than anticipated retail demand for our landscape contractor zero-turn riding mowers, resulting in decreased field inventory levels as compared to the same periodsperiod of fiscal 2018.2019. We currently expect the reduced demand in certain of our Professional segment businesses to continue throughout the remainder of fiscal 2020 considering the seasonality of our business and particularly if the global economy destabilizes or worsens. Contrary to the impact experienced in certain of our Professional segment businesses, our Residential segment continued to experience strong retail demand during the third quarter of fiscal 2020 for zero-turn riding mowers and walk power mowers, which we believe was partially due to the impacts of COVID-19 as end-customers experienced favorable weather conditions for property enhancement and maintenance activities in key regions of the globe and were subject to government mandated "shelter-in-place" and "stay-at-home" orders, among other reasons. While the strong retail demand experienced in our Residential segment is a positive event in light of COVID-19, the shift to a greater percentage
of Residential segment net sales as a percentage of consolidated net sales adversely impacted our gross margins for the three and nine month periods ended July 31, 2020 and we expect will continue to adversely impact our gross margins for the remainder of fiscal 2020.
In an effort to partially mitigate the anticipated adverse impacts of COVID-19 on our fiscal 2020 Results of Operations, Financial Position, or Cash Flows as a result of lower demand we have experienced in certain of our businesses, we have taken, and continue to take, meaningful cost reduction measures across our organization to align our costs with actual and anticipated lower sales volumes. These cost reduction measures include adjusting production levels within our manufacturing facilities to align with anticipated sales volumes; enacting tiered salary reductions and suspending merit-based salary increases and discretionary retirement fund contributions for the remainder of fiscal 2020; reducing discretionary spending; limiting hiring of new employees; and delaying, reducing, or eliminating purchased services and travel. Additionally, we have proactively managed our working capital through various measures, and we expect to continue to do so, including, but not limited to, refinancing outstanding borrowings on our unsecured senior revolving credit facility with the net proceeds from a new three year term loan for $190.0 million, which also added incremental liquidity; reducing capital expenditures; continuing the curtailment of share repurchases under our Board authorized repurchase plan; adjusting production levels within our manufacturing facilities to manage finished goods inventory levels to align with anticipated sales volumes; aligning receipts of commodities, components, and parts inventory with production levels; and monitoring and participating in government economic stabilization efforts and certain legislative provisions, such as deferring certain tax payments, as applicable. We currently expect to continue paying our quarterly cash dividend to shareholders for the remainder of fiscal 2020. As a result, our balance sheet and liquidity profile remained strong with available liquidity of approximately $992.1 million as of July 31, 2020, consisting of cash and cash equivalents of approximately $394.1 million and availability under our unsecured senior revolving credit facility of $598.0 million.
Significant uncertainty still exists concerning the duration of COVID-19. We intend to continue to monitor the situation and the guidance from global government authorities, as well as federal, state, local and foreign public health authorities, and may take additional meaningful actions based on their requirements and recommendations to attempt to protect the health and well-being of our employees, customers, suppliers, and communities. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan and cost reduction measures and such developments could occur rapidly. Given the many evolving COVID-19 related factors, risks, and challenges that could negatively impact our business, we withdrew our fiscal 2020 detailed financial guidance on March 30, 2020. Many of these uncertainties still remain and as a result, we are not in a position to provide detailed financial guidance for our fourth quarter or full year of fiscal 2020 at this time nor do we have the ability to accurately predict the level of impact of COVID-19 on our business and related Results of Operations, Financial Position, or Cash Flows. However, based on our current visibility on our fiscal 2020 fourth quarter as of the date of the filing of this report, we currently believe that continued year-over-year growth in the residential market is expected, but at a more moderate level than experienced during the first nine months of fiscal 2020. Professional markets should benefit from the gradual return to more normal buying patterns as customers' confidence in the economy increases. These positive trends will likely be somewhat offset by any remaining COVID-19 headwinds, such as budget constraints, the effects of social distancing restrictions, and regional variations in economic recovery. However, if the adverse impacts from COVID-19 continue for an extended period of time or worsen, our business and related Results of Operations, Financial Position, or Cash Flows could continue to be adversely impacted. Sustained adverse impacts to our business and certain suppliers or customers may also affect the future valuation of certain of our assets and therefore, may increase the likelihood of a charge related to an impairment, write-off, or reserve associated with such assets, including, but not limited to, goodwill, indefinite and finite-lived intangible assets, inventories, accounts receivable, deferred income taxes, and property, plant and equipment. Such a charge could be material to our future Results of Operations, Financial Position, or Cash Flows.
For additional information regarding risks associated with COVID-19, refer to the section titled "Forward-Looking Information" located at the end of Part I, Item 2 and the section titled "Risk Factors" located within Part II, Item 1A, of this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
Overview
Worldwide consolidated net sales for the third quarter of fiscal 2020 were $841.0 million, up 0.3 percent compared to $838.7 million in the third quarter of fiscal 2019. For the year-to-date period of fiscal 2020, worldwide consolidated net sales were $2,537.9 million, up 5.6 percent compared to $2,403.7 million from the same period in the prior fiscal year.
Professional segment net sales increased 40.3 percent for the third quarter comparison,of fiscal 2020 were $623.6 million, a decrease of 7.9 percent compared to $676.8 million in the third quarter of the prior fiscal year. This decrease was primarily due to the unfavorable impact of COVID-19 on the demand for products from certain of our Professional segment businesses, partially offset by incremental net sales as a result of our acquisition of CMW,Venture Products. For the year-over-year impactyear-to-date period of price increases across our product lines, and continued growth in our snow and ice management and Toro-branded rental and specialty construction businesses, partially offset by fewer shipments of our landscape contractor and irrigation products.fiscal 2020, Professional segment net sales increased 20.0were $1,879.4 million, an increase of 1.3 percent forcompared to $1,855.3 million in the year-to-date comparison, primarilyprior fiscal year comparable period. This increase was driven by incremental net sales as a result of our acquisitionacquisitions of CMW and Venture Products, substantially offset by the year-over-yearunfavorable impact of price increases across our product lines, and growth in our landscape contractor, snow and ice management, and Toro-branded rental and specialty construction businesses, partially offset by fewer shipmentsCOVID-19 on the demand for products from certain of our irrigation products.
Professional segment businesses.
Residential segment net sales decreased 11.0 percent for the third quarter comparison, mainlyof fiscal 2020 were $205.0 million, an increase of 38.3 percent compared to $148.2 million in the third quarter of the prior fiscal year. This increase was primarily due to decreased shipments ofstrong retail demand for zero-turn riding mowers and walk power mowers and Pope-branded irrigation products,our expanded mass retail channel, partially offset by decreased shipments of snow thrower products. For the year-over-year impactyear-to-date period of price increases across our product lines and strong channel demand for our consumer snow products.fiscal 2020, Residential segment net sales increased 0.8were $632.8 million, an increase of 20.4 percent forcompared to $525.5 million in the year-to-date comparison, primarily due to the year-over-year impact of price increases acrossprior fiscal year comparable period. This increase was mainly driven by our product linesexpanded mass retail channel and strong retail demand for our consumer snow productszero-turn riding mowers and walk power mowers, partially offset by reduceddecreased shipments of zero-turn riding mowers and Pope-branded irrigationsnow thrower products.
Net earnings for the third quarter of fiscal 20192020 were $89.0 million, or $0.82 per diluted share, compared to $60.6 million, compared to $79.0 millionor $0.56 per diluted share, for the third quarter of fiscal 2018. The decrease was primarily due to the unfavorable impact from purchase accounting adjustments and integration expenditures related to our CMW acquisition; increased commodity and tariff costs; and charges incurred for inventory write-downs, anticipated inventory retail support activities, and accelerated depreciation of fixed assets due to the wind down of our Toro-branded large horizontal directional drill and riding trencher product lines ("Toro underground wind down").2019. Net earningsearnings for the first nine months of fiscal 20192020 were $235.7$257.5 million, or $2.37 per diluted share, compared to reported net earnings of $232.9$235.7 million, or $2.18 per diluted share in the comparable fiscal 20182019 period. This increase was primarily due to the one-time impacts of the Tax Cuts and Jobs Act ("Tax Act") during the first nine months of fiscal 2018 and incremental earnings as a result of our acquisition of CMW, partially offset by the unfavorable impact from purchase accounting adjustments, transaction costs, and integration expenditures related to the CMW acquisition.
Adjusted non-GAAPNon-GAAP net earnings for the third quarter of fiscal 20192020 were $88.7 million, or $0.82 per diluted share, compared to $89.8 million, compared to $73.5 millionor $0.83 per diluted share, for the prior fiscal year comparative period, an increase of 22.2 percent. Adjusted non-GAAPperiod. Non-GAAP net earnings for the first nine months of fiscal 20192020 were $258.6 million, or $2.38 per diluted share, compared to $272.4 million, compared to adjusted non-GAAP net earnings of $255.9 millionor $2.52 per diluted share, in the comparable fiscal 2018 period, an increase of 6.5 percent. The primary factors contributing to the adjusted non-GAAP net earnings increases for the third quarter and year-to-date comparisons included incremental earnings as a result of our acquisition of CMW, improved net price realization driven by price increases across our product lines, productivity initiatives, the reduction in the U.S. federal corporate tax rate, and lower direct marketing and warehousing expense within our legacy businesses. These increases were partially offset by increased commodity and tariff costs, unfavorable product mix, and higher interest expense.2019 period. Reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A.
We increased our cash dividend for the third quarter of fiscal 20192020 by 12.511.1 percent to $0.225$0.25 per share compared to the $0.20$0.225 per share cash dividend paid in the third quarter of fiscal 2018.2019.
InventoryField inventory levels increased $256.1 million, or 70.3 percent,were lower as of the end of the third quarter of fiscal 2019, primarily due2020 compared to incremental inventories as a result of our acquisition of CMW, higher work in process inventory due to supply chain challenges, and higher finished goods inventory due to lower than forecasted sales in certain legacy Toro businesses and inventory availability initiatives, partially offset by the write-down of inventory due to the Toro underground wind down and the impact of foreign currency exchange rates. Accounts receivable increased $92.8 million, or 42.3 percent, primarily due to incremental receivables as a result of our acquisition of CMW, timing of sales across the Professional and Residential segments, and higher sales to customers not financed through our Red Iron joint venture, partially offset by the impact of foreign currency exchange rates. As of the end of the third quarter of fiscal 2019, field inventory levels were higher than the end of the third quarter of fiscal 2018, primarily as a result of higherreduced Professional segment field inventory due to incremental field inventory as a result of our acquisition of CMW and higher field inventory forin our landscape contractor zero-turn riding mowers driven by softbusiness as channel partners experienced stronger than anticipated retail demand.
demand throughout the cutting season, as well as decreased field inventory in our golf and grounds business as our channel partners aligned field inventory levels with anticipated retail demand for our products.
Three-Year Employee Initiative - "Vision 2020"
Our current multi-year employee initiative, "Vision 2020", which began with our 2018 fiscal year, focuses on driving profitable growth with an emphasis on innovation and serving our customers, which we believe will generate further momentum for the organization. Through the first two fiscal years of our Vision 2020 initiative, we have set specific internalfinancial goals, intended to help us drivewhich included organic revenue and operating earnings growth.
Organic Revenue Growth
We intend to pursue strategic growth After our transformational acquisition of CMW, we changed the focus of our existing businessesthird and product categories with an organic revenue goal to achieve at least five percent or more of organic revenue growth in each of the threefinal fiscal years of this initiative. For purposes of this goal, we define organic revenue growth as the increase in net sales, less net sales from acquisitions that occurred in the current fiscal year.
Operating Earnings
Additionally, as partyear of our Vision 2020 initiative growth goals, we have set anto a revised enterprise-wide performance goal of achieving non-GAAP operating earnings goal to increase operating earningsof $485.0 million. However, as a percentageresult of net salesCOVID-19 and its impact on our fiscal 2020 Results of Operations experienced to 15.5 percent or higher by the end ofdate, we do not expect to meet this enterprise-wide performance goal for fiscal 2020.
Net Sales
Worldwide consolidated net sales for the third quarter of fiscal 20192020 were $838.7$841.0 million, up 27.90.3 percent compared to $655.8$838.7 million in the third quarter of fiscal 2018. The net sales2019. This increase for the quarter comparison was primarily driven by strong retail demand for our Residential segment zero-turn riding mowers and walk power mowers largely due to a combination of favorable weather conditions in key regions, new and enhanced products, customer focus on the care of their homes due to COVID-19, and our expanded mass retail channel, as well as incremental Professional segment net sales as a result of our acquisition of CMW,Venture Products. The net sales increase was largely offset by reduced net sales in certain of our Professional segment businesses due to reduced demand from channel partners as a result of COVID-19. Within our Professional segment businesses, the year-over-year impactdecrease was primarily due to fewer shipments of price increasesgolf and grounds equipment as a result of the curtailment and closure of certain business activities for golf courses and municipalities across our product lines, strong channel demandthe globe resulting in lower overall revenues and budget constraints and a preference for
repairs and deferrals over new equipment purchases; reduced sales volumes for our Residentialrental, specialty, and Professional snowunderground construction equipment as a result of curtailed investments by end-customers in the oil and ice management equipment,gas and increasedconstruction industries; and fewer shipments of our Toro-branded rental and specialty construction equipment. These net sales increases were partially offset by reduced shipments of our Residential and Professionallandscape contractor zero-turn riding mowers due to softas our channel partners aligned field inventory levels with previously anticipated reduced retail demand lower sales of our irrigation products due to unfavorable weather conditions in key regions, and reducedfrom end-customers. Additionally, we experienced fewer shipments of our walk power mowers.
Residential snow thrower products during the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019.
For the year-to-date period of fiscal 2019,2020, worldwide consolidated net sales were $2,403.7$2,537.9 million, up 15.65.6 percent compared to $2,403.7 million from the same period in the prior fiscal year. The year-to-date net salesThis increase was primarily driven by incremental sales in our Professional segment as a result of our acquisitionacquisitions of CMW the year-over-year impactand Venture Products, incremental shipments of price increases acrossResidential segment zero-turn riding mowers and walk power mowers as a result of our product lines, strongexpanded mass retail channel, demand for our Residential and Professional snow and ice management equipment, growth in our Professional segment landscape contractor business, strong retail demand for ourResidential zero-turn riding mowers and walk power mowers and increased shipments of our Toro-branded rental and specialty construction equipment. These net sales increases were partially offset by fewer shipments of our irrigation productslargely due to unfavorablea combination of favorable weather conditions in key regions, new and lowerenhanced products, and customer focus on the care of their homes due to COVID-19. The net sales increase was largely offset by reduced net sales in certain of our ResidentialProfessional segment businesses due to reduced demand from channel partners as a result of COVID-19. Within our Professional segment businesses, the decrease was primarily due to fewer shipments of our landscape contractor zero-turn riding mowers dueas our channel partners aligned field inventory levels with previously anticipated reduced retail demand from end-customers; fewer shipments of golf and grounds equipment as a result of the curtailment and closure of certain business activities for golf courses and municipalities across the globe resulting in lower overall revenues and budget constraints and a preference for repairs and deferrals over new equipment purchases; and reduced sales volumes for our rental, specialty, and underground construction equipment as a result of curtailed investments by end-customers in the oil and gas and construction industries. Additionally, we experienced fewer shipments of Residential snow thrower products during the third quarter of fiscal 2020 compared to soft retail demand.
the third quarter of fiscal 2019.
Net sales in international markets increaseddecreased by 31.019.7 percent and 10.37.2 percent for the third quarter and year-to-date periods of fiscal 2019.2020, respectively. Changes in foreign currency exchange rates resulted in a decrease in our net sales of approximately $1.3$2.5 million and $11.9$7.5 million for the third quarter and year-to-date periods of fiscal 2019.2020, respectively. The net sales increasedecrease for the quarter comparison was mainly drivendue to the unfavorable impacts of COVID-19 resulting in decreased sales of golf and grounds equipment and rental, specialty, and underground construction equipment, partially offset by increased sales of our ag-irrigation products and Pope-branded irrigation products due to favorable weather conditions in key regions and incremental sales as a result of our acquisition of CMW and increased shipments of our Residential snow products due to strong channel demand, partially offset by lower sales of our irrigation products due to unfavorable weather in key regions.Venture Products. The net sales increasedecrease for the year-to-date periodcomparison was mainly due to the unfavorable impacts of fiscal 2019 was primarily due toCOVID-19 resulting in decreased sales of golf and grounds and irrigation equipment, walk power mowers, and Residential segment snow thrower products, partially offset by incremental sales as a result of our acquisitionacquisitions of CMW and increasedVenture Products and higher shipments of Residential snowour ag-irrigation products and walk power mowers, partially offset by lower sales of ourPope-branded irrigation products due to unfavorablefavorable weather conditions in key regions and fewer shipments of Residential segment zero-turn riding mowers.
regions.
The following table summarizes the major operating costs and other income as a percentage of net sales:
|
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | August 2, 2019 | | August 3, 2018 | | August 2, 2019 | | August 3, 2018 |
Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | | (68.3 | ) | | (64.4 | ) | | (66.6 | ) | | (63.4 | ) |
Gross profit | | 31.7 |
| | 35.6 |
| | 33.4 |
| | 36.6 |
|
Selling, general and administrative expense | | (22.9 | ) | | (21.4 | ) | | (21.7 | ) | | (20.7 | ) |
Operating earnings | | 8.8 |
| | 14.2 |
| | 11.7 |
| | 15.9 |
|
Interest expense | | (1.1 | ) | | (0.7 | ) | | (0.9 | ) | | (0.7 | ) |
Other income, net | | 0.8 |
| | 0.7 |
| | 0.8 |
| | 0.6 |
|
Provision for income taxes | | (1.3 | ) | | (2.2 | ) | | (1.8 | ) | | (4.6 | ) |
Net earnings | | 7.2 | % | | 12.0 | % | | 9.8 | % | | 11.2 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
| | July 31, 2020 | | August 2, 2019 | | July 31, 2020 | | August 2, 2019 |
Net sales | | 100.0 | % | | 100.0 | % | | 100.0 | % | | 100.0 | % |
Cost of sales | | (65.0) | | | (68.3) | | | (65.0) | | | (66.6) | |
Gross profit | | 35.0 | | | 31.7 | | | 35.0 | | | 33.4 | |
Selling, general and administrative expense | | (21.2) | | | (22.9) | | | (21.9) | | | (21.7) | |
Operating earnings | | 13.8 | | | 8.8 | | | 13.1 | | | 11.7 | |
Interest expense | | (1.0) | | | (1.1) | | | (1.0) | | | (0.9) | |
Other income, net | | 0.4 | | | 0.8 | | | 0.5 | | | 0.8 | |
Earnings before income taxes | | 13.2 | | | 8.5 | | | 12.6 | | | 11.6 | |
Provision for income taxes | | (2.6) | | | (1.3) | | | (2.5) | | | (1.8) | |
Net earnings | | 10.6 | % | | 7.2 | % | | 10.1 | % | | 9.8 | % |
Gross Profit and Gross Margin
As a percentage of net sales, grossGross profit for the third quarter of fiscal 20192020 was 31.7$294.6 million, up 10.8 percent a decrease of 390 basis points when compared to $266.0 million in the third quarter of fiscal 2018.2019. Gross margin was 35.0 percent for the third quarter of fiscal 2020 compared to 31.7 percent for the third quarter of fiscal 2019, an increase of 330 basis points. The decreaseincrease in gross margin for the third quarter comparison was primarily driven by the impact ofdecrease in the charges related to purchase accounting adjustments relatedfor the fiscal 2020 acquisition of Venture Products as compared to ourthe fiscal 2019 acquisition of CMW, favorable net price realization within our Professional segment due to fewer sales promotion activities and a revised floor plan financing rate structure as a result of the unfavorableamendments to certain agreements pertaining to our Red Iron joint venture ("Red Iron"), and the favorable impact of higher commodityproductivity and tariff costs on purchased raw materials and component parts, charges related to the Toro underground wind down, unfavorable product mix, and supply chain challenges resulting in manufacturing inefficiencies. These decreases weresynergy initiatives. The increase was partially offset by improved net price realization driven by price increases acrossunfavorable manufacturing variance due to manufacturing inefficiencies
as a result of the COVID-19-related reconfiguration of certain of our product lines, productivity initiatives, realized duty drawback credits on import tariffs,manufacturing processes in order to implement social distancing protocols within our facilities and lower freight costs driven by decreased industry demand. Gross profitadjusting production levels within our manufacturing facilities to align with anticipated sales volumes, as well as unfavorable mix primarily due to higher sales of Residential segment products as a percentage of total consolidated net salessales. Non-GAAP gross profit for the third quarter of fiscal 2019 year-to-date period2020 was 33.4$295.7 million, down 1.9 percent a decreasecompared to $301.3 million in the third quarter of 320 basis points when compared with the prior fiscal year comparative period. The decrease2019. Non-GAAP gross margin was 35.2 percent for the year-to-date comparison was primarily duethird quarter of fiscal 2020 compared to the unfavorable impact of higher commodity and tariff costs on purchased raw materials and component parts, the impact of purchase accounting adjustments related to our acquisition of CMW, charges related to the Toro underground wind down, unfavorable product mix, supply chain challenges and inclement weather resulting in manufacturing inefficiencies. These decreases were partially offset by improved net price realization driven by price increases across our product lines, as well as productivity initiatives.
Adjusted non-GAAP gross profit as a percentage of net sales excludes the impact of certain purchase accounting adjustments resulting from our acquisition of CMW, including the inventory fair value step-up amount and backlog intangible asset, as well as the impact of management actions, including the charges incurred for inventory write-downs, anticipated inventory retail support activities, and accelerated depreciation of fixed assets related to the Toro underground wind down. Adjusted non-GAAP gross profit as a percentage of net sales was 35.9 percent for the third quarter of fiscal 2019, compared to 35.6 percenta decrease of 70 basis points. The decrease in non-GAAP gross margin for the third quarter of fiscal 2018, an increase2020 was due to unfavorable manufacturing variance due to manufacturing inefficiencies as a result of 30 basis points. The increase for the third quarter comparison wasCOVID-19-related reconfiguration of certain of our manufacturing processes in order to implement social distancing protocols within our facilities and adjusting production levels within our manufacturing facilities to align with anticipated sales volumes, unfavorable mix primarily driven by improved net price realization driven by price increases across our product lines, productivity initiatives, realized duty drawback credits on import tariffs, and lower freight costs driven by decreased industry demand. These increases were partially offset by the unfavorable impactdue to higher sales of higher commodity and tariff costs on purchased raw materials and component parts, unfavorable product mix, and supply chain challenges resulting in manufacturing inefficiencies. Adjusted non-GAAP gross profitResidential segment products as a percentage of total consolidated net sales, and increased inventory reserves in one of our Professional segment businesses. The decrease was 35.3partially offset by favorable net price realization within our Professional segment due to fewer sales promotion activities and a revised floor plan financing rate structure as a result of the amendments to certain agreements pertaining to our Red Iron joint venture, as well as the favorable impact of productivity and synergy initiatives.
Gross profit for the year-to-date period of fiscal 2020 was $889.4 million, up 10.8 percent compared to $802.9 million in the same period of fiscal 2019. Gross margin was 35.0 percent for the year-to-date period of fiscal 20192020 compared to 36.633.4 percent for the same year-to-date period of fiscal 2019, an increase of 160 basis points. The increase in gross margin for the year-to-date comparison was primarily driven by the decrease in the charges related to purchase accounting adjustments for the fiscal 2020 acquisition of Venture Products as compared to the fiscal 2019 acquisition of CMW, the favorable impact of productivity and synergy initiatives, and favorable net price realization within our Professional segment due to fewer sales promotion activities and a revised floor plan financing rate structure as a result of the amendments to certain agreements pertaining to our Red Iron joint venture. These increases were partially offset by unfavorable mix primarily due to higher sales of Residential segment products as a percentage of total consolidated net sales and unfavorable manufacturing variance due to manufacturing inefficiencies as a result of COVID-19-related facilities closures, the reconfiguration of certain of our manufacturing processes in order to implement social distancing protocols within our facilities, and adjusting production levels within our manufacturing facilities to align with anticipated sales volumes. Non-GAAP gross profit for the year-to-date period of fiscal 2020 was $894.2 million, up 5.5 percent compared to $847.7 million in the same period of fiscal 2019. Non-GAAP gross margin was 35.2 percent for the year-to-date period of fiscal 2018,2020 compared to 35.3 percent for the same year-to-date period of fiscal 2019, a decrease of 13010 basis points. ThisThe decrease wasin non-GAAP gross margin is primarily due to unfavorable mix primarily due to higher sales of Residential segment products as a percentage of total consolidated net sales and unfavorable manufacturing variance due to manufacturing inefficiencies as a result of COVID-19-related facilities closures, the unfavorable impactreconfiguration of higher commoditycertain of our manufacturing processes in order to implement social distancing protocols within our facilities, and tariff costs on purchased raw materials and component parts, unfavorable product mix, and supply chain challenges and inclement weather resulting inadjusting production levels within our manufacturing inefficiencies. These decreases werefacilities to align with anticipated sales volumes. The decrease was partially offset by improvedthe favorable impact of productivity and synergy initiatives and favorable net price realization driven by price increases acrosswithin our product lines,Professional segment due to fewer sales promotion activities and a revised floor plan financing rate structure as well as productivity initiatives.a result of the amendments to certain agreements pertaining to our Red Iron joint venture.
Non-GAAP gross profit and non-GAAP gross margin exclude the impact of acquisition-related costs related to our acquisitions of Venture Products and CMW, including integration costs and charges incurred for the take-down of the inventory fair value step-up amounts resulting from purchase accounting adjustments in both acquisitions and the amortization of the backlog intangible asset resulting from purchase accounting adjustments for the CMW acquisition, and the impact of management actions, including charges incurred for inventory write-downs related to the Toro underground wind down. Reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A.
Selling, General, and Administrative ("SG&A") Expense
SG&A expense increased $51.3decreased $13.4 million, or 36.47.0 percent, for the third quarter of fiscal 20192020 and increased $89.3$35.3 million, or 20.76.8 percent, for the year-to-date period of fiscal 2019.2020. As a percentage of net sales, SG&A expense increased 150decreased 170 basis points for the third quarter of fiscal 20192020 and increased 10020 basis points for the year-to-date period of fiscal 2019.2020. The increasesdecrease in SG&A expense as a percentage of net sales for the third quarter comparison was primarily driven by decreased employee travel and salary costs as a result of safety and cost reduction measures implemented to mitigate the adverse impacts of COVID-19 and decreased transaction and integration costs incurred for the Venture Products acquisition in fiscal 2020 as compared to the CMW acquisition in fiscal 2019, partially offset by increased incentive compensation as a result of adjusted enterprise performance estimates. The increase in SG&A expense as a percentage of net sales for the year-to-date comparisons werecomparison was primarily due to incremental indirect marketing and engineering costs as a result of our acquisitionacquisitions of CMW resulting in incremental
administrative, indirect sales and marketing, engineering, warranty, and service expense; integration and acquisition-related expenditures, and higher amortization of other intangible assets. These increases wereVenture Products, partially offset by lower direct marketing and warehousing expense within our legacy businesses.decreased incentive compensation costs primarily as a result of the elimination of discretionary retirement fund contribution for fiscal 2020 as a proactive measure to mitigate the adverse impacts of COVID-19.
Interest Expense
Interest expense decreased $0.7 million for the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019. This decrease was driven by the reduction in LIBOR as a result of the impact of COVID-19 on the global capital markets, partially offset by increased interest expense incurred on higher average outstanding borrowings under our financing arrangements as a result of our acquisition of Venture Products. Interest expense increased $4.7 million for the year-to-date period of fiscal 2020 compared to the comparable period of fiscal 2019. This increase was due to increased interest expense incurred on higher average outstanding borrowings under our financing arrangements as a result of our acquisitions of CMW and Venture Products, partially offset by $4.3 million and $6.2 millionthe reduction in LIBOR as a result of the impact of COVID-19 on the global capital markets.
Other Income, Net
Other income, net for the third quarter and year-to-date periods of fiscal 2019, respectively. These increases were driven by interest expense incurred on higher outstanding borrowings to fund the purchase price for our acquisition of CMW.
Other Income, Net
Other income, net for the third quarter of fiscal 2019 increased $1.22020 decreased $3.0 million whenand $6.4 million, respectively, compared to the third quarter ofsame periods in fiscal 2018. This increase2019. The decrease for the third quarter comparison was primarily driven bydue to lower income from our Red Iron joint venture as a result of the amendments to certain agreements pertaining to the joint venture, the reduction in LIBOR, and lower sales volume, as well as a gain realized on the sale of a fixed asset and a favorable legal settlement partially offset by unfavorable foreign currency exchange rate fluctuations. Other income, netin fiscal 2019 that did not reoccur in fiscal 2020. The decrease for the year-to-date period of fiscal 2019 increased $4.2 million when compared to the year-to-date period of fiscal 2018. This increasecomparison was primarily due to higher earningslower income from our equity investment in Red Iron increasedjoint venture as a result of the amendments to certain agreements pertaining to the joint venture, the reduction in LIBOR, and lower sales volume; lower interest income on marketable securities, a gain realized on the sale of a fixed asset,securities; and a settlement charge incurred for the termination of our U.S. defined benefit pension plan, partially offset by the favorable legal settlement.
impact of foreign currency exchange rates.
Provision for Income Taxes
The effective tax rate for the third quarter and year-to-date periods of fiscal 20192020 was 19.8 percent and 19.2 percent, respectively, compared to 14.9 percent compared toand 15.3 percent in the third quarter of 2018. The decrease in the effective tax rate for the quarter comparison was primarily driven by the reduction in the U.S. federal corporate tax rate from a blended 23.3 percentsame periods in fiscal 20182019. These increases were due to 21.0 percent in fiscal 2019 under the Tax Act, partially offset by a lower benefit fromdiscrete tax benefits, including the excess tax deduction for share-based compensation. The effective tax rate for the year-to-date period of fiscal 2019 was 15.3 percent compared to 29.2 percent in the same period of fiscal 2018. The fiscal 2018 effective tax rate was significantly impacted by the enactment of the Tax Act for the year-to-date period of fiscal 2018, including the provisional remeasurement of deferred tax assets and liabilities, which resulted in a non-cash discrete tax charge of $19.3 million, and the provisional calculation of the deemed repatriation tax, which resulted in a discrete tax charge of $13.3 million. In addition to these one-time charges resulting from the Tax Act, the decrease in the effective tax rate was partially driven by the reduction in the U.S. federal corporate tax rate from a blended 23.3 percent in fiscal 2018 to 21.0 percent in fiscal 2019.
The adjusted non-GAAP effective tax rate excludes costs incurred related to our acquisition of CMW, including integration and transaction costs and certain purchase accounting adjustments; the impact of management actions, including the charges related to the Toro underground wind down; the tax benefit for the excess tax deduction for share-based compensation; and one-time charges incurred under the Tax Act. The adjusted non-GAAP effective tax rate for the third quarter of fiscal 20192020 was 18.120.9 percent, compared to an adjusteda non-GAAP effective tax rate of 21.218.1 percent in the same period last year.third quarter of fiscal 2019. The adjusted non-GAAP effective tax rate for the year-to-date period of fiscal 20192020 was 19.520.6 percent, compared to an adjusteda non-GAAP effective tax rate of 22.219.5 percent in the same period of fiscal 2018.2019. These year-over-year increases were due to discrete tax items. The decreases in the adjusted non-GAAP effective tax rate for the third quarter and year-to-date comparisons were driven by the reduction in the U.S. federal corporate tax rate from a blended 23.3 percent in fiscal 2018 to 21.0 percent in fiscal 2019 andexcludes the impact of acquisition-related costs related to our acquisitions of Venture Products and CMW, including transaction and integration costs and charges incurred related to certain purchase accounting adjustments; the inclusionimpact of CMW withindiscrete tax benefits recorded as excess tax deductions for share-based compensation; the consolidated effective tax rate.
impact of management actions, including charges incurred for inventory write-downs related to the Toro underground wind down; and one-time charges incurred under the Tax Cuts and Jobs Act. Reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures."
Net Earnings
Net earnings for the third quarter of fiscal 2020 were $89.0 million, or $0.82 per diluted share, compared to $60.6 million, or $0.56 per diluted share, for the third quarter of fiscal 2019. This increase was primarily driven by decreased purchase accounting charges and transaction and integration costs incurred for the fiscal 2020 acquisition of Venture Products as compared to the fiscal 2019 acquisition of CMW, favorable net price realization within our Professional segment, the favorable impact of productivity and synergy initiatives, and decreased employee employee travel and salary costs as a result of safety and cost reduction measures implemented to mitigate the adverse impacts of COVID-19. The net earnings increase was partially offset by unfavorable manufacturing variance due to manufacturing inefficiencies as a result of the COVID-19, unfavorable reportable segment mix, and increased incentive compensation as a result of adjusted enterprise performance estimates. Non-GAAP net earnings for the third quarter of fiscal 2020 were $88.7 million, or $0.82 per diluted share, compared to $89.8 million, or $0.83 per diluted share, for the third quarter of fiscal 2019, a decrease of 1.2 percent per diluted share. This decrease in non-GAAP net earnings was primarily due to unfavorable manufacturing variance due to manufacturing inefficiencies as a result of the COVID-19, unfavorable reportable segment mix, increased inventory reserves in one of our Professional segment businesses and increased incentive compensation as a result of adjusted enterprise performance estimates, partially offset by favorable net price realization within our Professional segment, the favorable impact of productivity and synergy initiatives, and decreased employee employee travel and salary costs as a result of safety and cost reduction measures implemented to mitigate the adverse impacts of COVID-19.
Net earnings for the first nine months of fiscal 2020 were $257.5 million, or $2.37 per diluted share, compared to $235.7 million, or $2.18 per diluted share, for the same period of fiscal 2019. This increase was primarily driven by decreased purchase accounting charges and transaction and integration costs incurred for the fiscal 2020 acquisition of Venture Products as compared to the fiscal 2019 acquisition of CMW, the favorable impact of productivity and synergy initiatives, favorable net price realization within our Professional segment, decreased incentive compensation costs as a result of diminished company
performance due to COVID-19, and the elimination of discretionary retirement fund contributions for fiscal 2020 as a proactive cost reduction measure to mitigate the adverse impacts of COVID-19. The net earnings increase was partially offset by unfavorable reportable segment mix, unfavorable manufacturing variance due to manufacturing inefficiencies as a result of the COVID-19, and incremental indirect marketing, engineering, and warranty costs as a result of our acquisitions of CMW and Venture Products. Non-GAAP net earnings for the first nine months of fiscal 2020 were $258.6 million, or $2.38 per diluted share, compared to $272.4 million, or $2.52 per diluted share for the same year-to-date period of fiscal 2019, a decrease of 5.6 percent per diluted share. The decrease in non-GAAP net earnings was primarily due to unfavorable reportable segment mix, unfavorable manufacturing variance due to manufacturing inefficiencies as a result of the COVID-19, and incremental indirect marketing, engineering, and warranty costs as a result of our acquisitions of CMW and Venture Products. The decrease was partially offset by the favorable impact of productivity and synergy initiatives, favorable net price realization within our Professional segment, decreased incentive compensation costs as a result of diminished company performance due to COVID-19, and the elimination of discretionary retirement fund contributions for fiscal 2020 as a proactive cost reduction measure to mitigate the adverse impacts of COVID-19.
Non-GAAP net earnings and non-GAAP net earnings per diluted share exclude the impact of acquisition-related costs related to our acquisitions of Venture Products and CMW, including transaction and integration costs and charges incurred related to certain purchase accounting adjustments; the impact of discrete tax benefits recorded as excess tax deductions for share-based compensation; the impact of management actions, including charges incurred for inventory write-downs related to the Toro underground wind down; and one-time charges incurred under the Tax Cuts and Jobs Act. Reconciliations of non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A.
Net Earnings
Net earnings for the third quarter of fiscal 2019 were $60.6 million, or $0.56 per diluted share, compared to $79.0 million, or $0.73 per diluted share, for the third quarter of fiscal 2018. The decrease in net earnings for the quarter comparison was primarily due to the unfavorable impact of purchase accounting adjustments and integration expenditures from our CMW acquisition, the unfavorable impact of higher commodity and tariff costs, charges related to the Toro underground wind down, unfavorable product mix, a lower benefit from the excess tax deduction for share-based compensation, and higher interest expense. These decreases were partially offset by incremental earnings as a result of our acquisition of CMW, improved net price realization driven by price increases across our product lines, productivity initiatives, realized duty drawback credits on import tariffs, the reduction in the U.S. federal corporate tax rate, and lower direct marketing and warehousing expense within our legacy businesses. Year-to-date net earnings in fiscal 2019 were $235.7 million, or $2.18 per diluted share, compared to $232.9 million, or $2.14 per diluted share, in the prior year comparative period. The increase in net earnings for the year-to-date period comparison was primarily due to the significant impact of the Tax Act on net earnings for the first nine months of fiscal 2018, incremental earnings as a result of our acquisition of CMW, improved net price realization driven by price increases across our product lines, the reduction in the U.S.
federal corporate tax rate, productivity initiatives, and lower direct marketing and warehousing expense within our legacy businesses. These increases were partially offset by the unfavorable impact of purchase accounting adjustments and integration and acquisition-related expenditures from our CMW acquisition, the unfavorable impact of higher commodity and tariff costs, unfavorable product mix, charges related to the Toro underground wind down, and higher interest expense.
Adjusted non-GAAP net earnings exclude costs incurred related to our acquisition of CMW, including integration and transaction costs and certain purchase accounting adjustments; the impact of management actions, including the charges related to the Toro underground wind down; the tax benefit for the excess tax deduction for share-based compensation; and one-time charges incurred under the Tax Act. Adjusted non-GAAP net earnings for the third quarter of fiscal 2019 were $89.8 million, or $0.83 per diluted share, compared to $73.5 million, or $0.68 per diluted share, for the third quarter of fiscal 2018, an increase of 22.1 percent per diluted share. The primary factors contributing to the adjusted non-GAAP net earnings increase for the third quarter comparison included incremental earnings as a result of our acquisition of CMW, improved net price realization driven by price increases across our product lines, productivity initiatives, realized duty drawback credits on import tariffs, the reduction in the U.S. federal corporate tax rate, and lower direct marketing and warehousing expense within our legacy businesses. These increases were partially offset by the unfavorable impact of commodity and tariff costs, unfavorable product mix, and higher interest expense. Adjusted non-GAAP net earnings for the year-to-date period of fiscal 2019 were $272.4 million, or $2.52 per diluted share, compared to $255.9 million, or $2.35 per diluted share, for the prior year comparable period, an increase of 7.2 percent per diluted share. The primary factors contributing to the adjusted non-GAAP net earnings increase for the year-to-date comparison included incremental earnings as a result of our acquisition of CMW, improved net price realization driven by price increases across our product lines, productivity initiatives, the reduction in the U.S. federal corporate tax rate, and lower direct marketing and warehousing expense within our legacy businesses. These increases were partially offset by the unfavorable impact of commodity and tariff costs, unfavorable product mix, and higher interest expense.
Reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A.
BUSINESS SEGMENTS
We operate in two reportable business segments: Professional and Residential. Segment earnings for our Professional and Residential segments are defined as earnings from operations plus other income, net. Our remaining activities are presented as "Other" due to their insignificance. Operating loss for our Other activities includes earnings (loss) from our wholly-owned domestic distribution companies, Red Iron joint venture, corporate activities, other income, and interest expense. Corporate activities include general corporate expenditures (finance, human resources, legal, information services, public relations, and similar activities) and other unallocated corporate assets and liabilities, such as corporate facilities and deferred tax assets and liabilities.
The following tables summarize net sales for our reportable business segments and Other activities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | |
(Dollars in thousands) | | July 31, 2020 | | August 2, 2019 | | $ Change | | % Change |
Professional | | $ | 623,615 | | | $ | 676,756 | | | $ | (53,141) | | | (7.9) | % |
Residential | | 204,961 | | | 148,234 | | | 56,727 | | | 38.3 | |
Other | | 12,396 | | | 13,723 | | | (1,327) | | | (9.7) | |
Total net sales* | | $ | 840,972 | | | $ | 838,713 | | | $ | 2,259 | | | 0.3 | % |
| | | | | | | | |
*Includes international net sales of: | | $ | 150,014 | | | $ | 186,710 | | | $ | (36,696) | | | (19.7) | % |
| | | | Three Months Ended | | | Nine Months Ended | |
(Dollars in thousands) | | August 2, 2019 | | August 3, 2018 | | $ Change | | % Change | (Dollars in thousands) | | July 31, 2020 | | August 2, 2019 | | $ Change | | % Change |
Professional | | $ | 676,756 |
| | $ | 482,494 |
| | $ | 194,262 |
| | 40.3 | % | Professional | | $ | 1,879,423 | | | $ | 1,855,268 | | | $ | 24,155 | | | 1.3 | % |
Residential | | 148,234 |
| | 166,513 |
| | (18,279 | ) | | (11.0 | ) | Residential | | 632,807 | | | 525,539 | | | 107,268 | | | 20.4 | |
Other | | 13,723 |
| | 6,814 |
| | 6,909 |
| | 101.4 |
| Other | | 25,623 | | | 22,898 | | | 2,725 | | | 11.9 | |
Total net sales* | | $ | 838,713 |
| | $ | 655,821 |
| | $ | 182,892 |
| | 27.9 | % | Total net sales* | | $ | 2,537,853 | | | $ | 2,403,705 | | | $ | 134,148 | | | 5.6 | % |
| | | | | | | | | |
*Includes international net sales of: | | $ | 186,710 |
| | $ | 142,534 |
| | $ | 44,176 |
| | 31.0 | % | *Includes international net sales of: | | $ | 508,001 | | | $ | 547,332 | | | $ | (39,331) | | | (7.2) | % |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended |
(Dollars in thousands) | | August 2, 2019 | | August 3, 2018 | | $ Change | | % Change |
Professional | | $ | 1,855,268 |
| | $ | 1,546,536 |
| | $ | 308,732 |
| | 20.0 | % |
Residential | | 525,539 |
| | 521,189 |
| | 4,350 |
| | 0.8 |
|
Other | | 22,898 |
| | 11,622 |
| | 11,276 |
| | 97.0 |
|
Total net sales* | | $ | 2,403,705 |
| | $ | 2,079,347 |
| | $ | 324,358 |
| | 15.6 | % |
| | | | | | | | |
*Includes international net sales of: | | $ | 547,332 |
| | $ | 496,403 |
| �� | $ | 50,929 |
| | 10.3 | % |
The following table summarizestables summarize segment earnings for our reportable business segments and operating (loss) for our Other activities:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | | | |
(Dollars in thousands) | | July 31, 2020 | | August 2, 2019 | | $ Change | | % Change |
Professional | | $ | 113,652 | | | $ | 81,592 | | | $ | 32,060 | | | 39.3 | % |
Residential | | 28,545 | | | 16,151 | | | 12,394 | | | 76.7 | |
Other | | (31,204) | | | (26,508) | | | (4,696) | | | (17.7) | |
Total segment earnings | | $ | 110,993 | | | $ | 71,235 | | | $ | 39,758 | | | 55.8 | % |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended |
(Dollars in thousands) | | August 2, 2019 | | August 3, 2018 | | $ Change | | % Change |
Professional | | $ | 81,592 |
| | $ | 97,716 |
| | $ | (16,124 | ) | | (16.5 | )% |
Residential | | 16,151 |
| | 16,002 |
| | 149 |
| | 0.9 |
|
Other | | (26,508 | ) | | (20,443 | ) | | (6,065 | ) | | (29.7 | ) |
Total segment earnings | | $ | 71,235 |
| | $ | 93,275 |
| | $ | (22,040 | ) | | (23.6 | )% |
|
| | | | | | | | | | | | | | | |
| | Nine Months Ended |
(Dollars in thousands) | | August 2, 2019 | | August 3, 2018 | | $ Change | | % Change |
Professional | | $ | 319,689 |
| | $ | 338,607 |
| | $ | (18,918 | ) | | (5.6 | )% |
Residential | | 51,253 |
| | 58,019 |
| | (6,766 | ) | | (11.7 | ) |
Other | | (92,507 | ) | | (67,800 | ) | | (24,707 | ) | | (36.4 | ) |
Total segment earnings | | $ | 278,435 |
| | $ | 328,826 |
| | $ | (50,391 | ) | | (15.3 | )% |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended | | | | | | |
(Dollars in thousands) | | July 31, 2020 | | August 2, 2019 | | $ Change | | % Change |
Professional | | $ | 322,385 | | | $ | 319,689 | | | $ | 2,696 | | | 0.8 | % |
Residential | | 87,233 | | | 51,253 | | | 35,980 | | | 70.2 | |
Other | | (91,115) | | | (92,507) | | | 1,392 | | | 1.5 | |
Total segment earnings | | $ | 318,503 | | | $ | 278,435 | | | $ | 40,068 | | | 14.4 | % |
Professional Segment
Segment Net Sales
Worldwide net sales for our Professional segment increased 40.3 percent and 20.0 percent for the third quarter and year-to-date periods of fiscal 2019, respectively, as2020 decreased 7.9 percent compared to the same periods inperiod of fiscal 2018.2019. The Professional segment net sales increasedecrease for the third quarter comparison was primarily drivendue reduced demand from channel partners as a result of COVID-19, which resulted in fewer shipments of golf and grounds equipment as a result of the curtailment and closure of certain business activities for golf courses and municipalities across the globe resulting in lower overall revenues and budget constraints and a preference for repairs and deferrals over new equipment purchases; reduced sales volumes for our rental, specialty, and underground construction equipment as a result of curtailed investments by end-customers in the oil and gas and construction industries; and fewer shipments of our landscape contractor zero-turn riding mowers as our channel partners aligned field inventory levels with previously anticipated reduced retail demand from end-customers. The net sales decrease was partially offset by incremental sales as a result of our acquisition of CMW,Venture Products.
Worldwide net sales for our Professional segment for the year-over-year impactyear-to-date period of price increases across our product lines, and continued growth in our snow and ice management and Toro-branded rental and specialty construction businessesfiscal 2020 increased 1.3 percent compared to the same period of fiscal 2019. The net sales increase for the year-to-date comparison was driven by channel demand. Theseincremental sales as a result of our acquisitions of CMW and Venture Products. The net sales increases were partiallyincrease was largely offset by reduced demand from channel partners as a result of COVID-19, which resulted in fewer shipments of our landscape contractor zero-turn riding mowers due to softas our channel partners aligned field inventory levels with previously anticipated reduced retail demand from end-customers; fewer shipments of golf and lower sales of our irrigation products driven by unfavorable weather conditions in key regions.
Professional segment net sales growth for the year-to-date period of fiscal 2019 was largely due to incremental salesgrounds equipment as a result of the curtailment and closure of certain business activities for golf courses and municipalities across the globe resulting in lower overall revenues and budget constraints and a preference for repairs and deferrals over new equipment purchases; and reduced sales volumes for our acquisitionrental, specialty, and underground construction equipment as a result of CMW,curtailed investments by end-customers in the year-over-year impact of price increases across our product lines,oil and growth in our landscape contractor, snowgas and ice management, and Toro-branded rental and specialty construction businesses driven by channel demand. These net sales increases were partially offset by fewer shipments of our irrigation products due to unfavorable weather conditions in key regions.
industries.
Segment Earnings
Professional segment earnings for the third quarter of fiscal 2019 decreased by 16.52020 increased 39.3 percent compared to the third quarter of fiscal 2018 and decreased to 12.1 percent from 20.3 percent when expressed as a percentage of net sales for the quarter comparison. For the year-to-date period of fiscal 2019, Professional segment earnings decreased by 5.6 percent compared to the same period in the prior fiscal year and decreased to 17.2 percent from 21.9 percent when expressed as a percentage of net sales for the year-to-date period comparison. As a percentage of net sales, the Professional segment earnings decreases for the third quarter and year-to-date comparisons were primarily due to our CMW acquisition resulting in the unfavorable impact of purchase accounting adjustments, higher amortization of intangible assets, and incremental administrative, indirect sales and marketing, and engineering expense; the unfavorable impact of higher commodity and tariff costs on purchased raw materials and component parts; charges related to the Toro underground wind down; unfavorable product mix; and supply chain challenges resulting in manufacturing inefficiencies. These decreases were partially offset by improved net price realization driven by price increases across our product lines, productivity initiatives, and lower direct marketing and warehousing expense within our legacy businesses.
Residential Segment
Segment Net Sales
Worldwide net sales for our Residential segment for the third quarter and year-to-date periods of fiscal 2019 decreased 11.0 percent and increased 0.8 percent, respectively, compared to the prior fiscal year periods. The Residential segment net sales decrease for the third quarter comparison was mainly due to decreased shipments of zero-turn riding mowers and walk power mowers due to soft retail demand and lower sales of Pope-branded irrigation products due to soft channel demand. These net sales decreases were partially offset by the year-over-year impact of price increases across our product lines and strong channel demand for our snow products driven by successful new product introductions.
The Residential segment net sales increase for the year-to-date comparison was primarily driven by the year-over-year impact of price increases across our product lines and strong retail demand for our snow products and walk power mowers. These net sales increases were partially offset by reduced shipments of zero-turn riding mowers due to soft retail demand and lower sales of our Pope-branded irrigation products due to unfavorable weather conditions and soft channel demand.
Segment Earnings
Residential segment earnings for the third quarter of fiscal 2019 increased 0.9 percent compared to the third quarter of fiscal 2018, and when expressed as a percentage of net sales, increased to 10.918.2 percent from 9.612.1 percent. As a percentage of net sales, the ResidentialProfessional segment earnings increase was mainly dueprimarily driven by decreased purchase accounting charges for the fiscal 2020 acquisition of Venture Products as compared to the year-over-year impactfiscal 2019 acquisition of CMW, favorable net price increases across our product lines, productivity initiatives, realized duty drawback credits on import tariffs,realization, lower commodity costs, and decreased advertising costs. These increases wereemployee travel costs as a result of safety and cost reduction measures to mitigate the adverse impacts of COVID-19. The increase was partially offset by the unfavorable impactproduct mix and unfavorable manufacturing variance due to manufacturing inefficiencies as a result of commodity costs on purchased components and raw materials, increased depreciation expense on fixed assets related to new products, and higher engineering costs related to new product development.
COVID-19.
For the year-to-date period of fiscal 2019, Residential2020, Professional segment earnings decreased 11.7increased by 0.8 percent compared to the same period in the prior fiscal year, and when expressed as a percentage of net sales, remained a constant 17.2 percent for both fiscal periods. The Professional segment earnings increase was primarily driven by decreased purchase accounting charges for the fiscal 2020 acquisition of Venture Products as compared to 9.8the fiscal 2019 acquisition of CMW, favorable net price realization, and the favorable impact of productivity and synergy initiatives, partially offset by unfavorable manufacturing variance due to manufacturing inefficiencies as a result of COVID-19 and incremental indirect marketing, administration, and engineering costs as a result of our acquisitions of CMW and Venture Products.
Residential Segment
Segment Net Sales
Worldwide net sales for our Residential segment for the third quarter of fiscal 2020 increased 38.3 percent compared to the same period of fiscal 2019. The Residential segment net sales increase for the third quarter comparison was mainly driven by strong retail demand for our zero-turn riding mowers and walk power mowers largely due to a combination of favorable weather conditions in key regions, new and enhanced products, customer focus on the care of their homes due to COVID-19, and our expanded mass retail channel. The increase was partially offset by decreased shipments of snow thrower products.
Worldwide net sales for our Residential segment for the year-to-date period of fiscal 2020 increased 20.4 percent compared to the same period of fiscal 2019. The Residential segment net sales increase for the year-to-date comparison was mainly driven by incremental shipments as a result of our expanded mass retail channel and strong retail demand for zero-turn riding mowers and walk power mowers largely due to a combination of favorable weather conditions in key regions, new and enhanced products, and customer focus on the care of their homes due to COVID-19. The increase was partially offset by decreased shipments of snow thrower products.
Segment Earnings
Residential segment earnings for the third quarter of fiscal 2020 increased 76.7 percent compared to the third quarter of fiscal 2019, and when expressed as a percentage of net sales, increased to 13.9 percent from 11.110.9 percent. For the year-to-date period of fiscal 2020, Residential segment net earnings increased 70.2 percent compared to the same period in the prior fiscal year, and when expressed as a percentage of net sales, increased to 13.8 percent from 9.8 percent. As a percentage of net sales, the Residential segment net earnings decrease was primarilyincreases for the third quarter and year-to-date comparisons were driven by the favorable impact of productivity and synergy initiatives and reduced SG&A expense as a percentage of net sales due to the unfavorable impactleveraging lower expense as a result of our COVID-19 safety and cost reduction measures over higher commodity and tariff costs on purchased components and raw materials, unfavorable product mix, increased depreciation expense on fixed assets related to new products, and higher engineering costs related to new product development. These decreases weresales volumes. The segment earnings as a percentage of net sales was partially offset by the year-over-year impactunfavorable manufacturing variance due to manufacturing inefficiencies as a result of price increases across ourCOVID-19 and unfavorable product lines, productivity initiatives, realized duty drawback credits on import tariffs, and decreased advertising costs.
mix.
Other Activities
Other Net Sales
Net sales for our Other activities include sales from our wholly-owned domestic distribution companies less sales from the Professional and Residential segments to the distribution companies. Net sales for our Other activities in the third quarter and year-to-date periods of fiscal 2019 increased2020 decreased by $6.9$1.3 million and $11.3 million, respectively, mainly duecompared to increasedthe third quarter of fiscal 2019. The net sales decrease for the third quarter comparison was the result of COVID-19, which led to reduced sales of our golfProfessional and grounds equipment throughResidential segment products by our wholly-owned domestic distribution companies drivendue to reduced retail demand. This decrease was partially offset by reduced intercompany sales eliminations for sales from our Professional and Residential segments to our wholly-owned domestic distribution companies as a result of soft retail demand. Net sales for our Other activities for the year-to-date period of fiscal 2020 increased $2.7 million compared to the same period in the prior fiscal year. The net sales increase for the year-to-date comparison was the result of COVID-19, which led to reduced intercompany sales eliminations for sales from our Professional and Residential segments to our wholly-owned domestic distribution companies as a result of reduced retail demand, partially offset by reduced sales of our Professional and Residential segment products by our acquisition of a Northeastern U.S.wholly-owned distribution company.
companies due to reduced retail demand.
Other Operating Loss
The operating loss for our Other activities increased $6.1$4.7 million for the third quarter of fiscal 2019,2020. The operating loss increase was primarily due to increased interest expense due to higher outstanding borrowings resulting from our CMW acquisition and integration costs related to our acquisition of CMW. These increases were partially offset by incremental earningsincentive compensation as a result of adjusted enterprise performance estimates and lower income from our Red Iron joint venture as a result of the amendments to certain agreements pertaining to the joint venture, the reduction in LIBOR, and lower sales volume, partially offset by decreased transaction and integration costs for the fiscal 2020 acquisition of a Northeastern U.S. distribution company.
Venture Products as compared to the fiscal 2019 acquisition of CMW, favorable healthcare costs, and decreased interest expense.
The operating loss for our Other segment loss increased $24.7activities decreased $1.4 million for the year-to-date period of fiscal 2019,2020. The operating loss decrease was primarily duedriven by decreased transaction and integration costs for the fiscal 2020 acquisition of Venture Products as compared to integration and transaction costs related to ourthe fiscal 2019 acquisition of CMW, and favorable healthcare costs, partially offset by increased interest expense due toincurred on higher average outstanding borrowings resultingunder our financing arrangements as a result of our acquisitions of CMW and Venture Products; lower income from our CMW acquisition,Red Iron joint venture as a result of the amendments to certain agreements pertaining to the joint venture, the reduction in LIBOR, and higher incentive compensation expense. These increases were partially offset by higher interest income on marketable securitieslower sales volume; and higher earnings froma settlement charge incurred for the termination of our equity investment in Red Iron.U.S. defined benefit pension plan.
FINANCIAL POSITION
Working Capital
Our working capital strategy continues to place emphasis on improving asset utilization with a focus on reducing the amount of working capital in the supply chain, adjusting production plans, and maintaining or improving order replenishment and service levels to end-users. Accounts receivable as of the end of the third quarter of fiscal 2020 decreased $17.6 million, or 5.6 percent, compared to the end of the third quarter of fiscal 2019, primarily due to COVID-19 resulting in lower sales to customers not financed under our wholesale financing agreements in our rental, specialty, and underground construction business and international markets, as well as a lower receivable from Red Iron due to lower sales financed under the joint venture near quarter-end. The decrease was partially offset by higher sales within the expanded mass retail channel of our Residential segment and incremental receivables as a result of our acquisition of Venture Products. Inventory levels were up $256.1$35.6 million, or 70.35.7 percent, as of the end of the third quarter of fiscal 20192020 compared to the end of the third quarter of fiscal 2018,2019, primarily due to incremental inventories as a result of our acquisition of CMW, higher workVenture Products, elevated inventories in process inventoryour Professional segment due to supply chain challenges,reduced sales as a result of decreased demand for our products due to COVID-19, and higher finished goods inventoryinventories in our Residential segment and our Professional segment snow and ice management business due to lower thananticipated production as a result of forecasted sales in certain legacy Toro businesses and inventory availability initiatives,demand. The increase was partially offset by reduced inventory in our rental, specialty, and underground construction business due to elevated fiscal 2019 inventory as a result of the write-down of inventory duestep-up purchase accounting adjustment related to the CMW acquisition and the remaining inventory related to the Toro underground wind down, andwhich has substantially been sold through as of the impactthird quarter of foreign currency exchange rates.fiscal 2020. Accounts receivablepayable decreased $35.9 million, or 11.8 percent, as of the end of the third quarter of fiscal 2019 increased $92.8 million, or 42.3 percent,2020 compared to the end of the third quarter of fiscal 2018, primarily2019, mainly due to decreased purchases of commodities, components, parts, and accessories due to the reduction in our production levels within our manufacturing facilities to align with reduced forecasted sales volumes as a result of COVID-19, partially offset by incremental receivablespayables as a result of our acquisition of CMW, timing of sales across the Professional and Residential segments, and higher sales to customers not financed through our Red Iron joint venture, partially offset by the impact of foreign currency exchange rates. Accounts payable increased $75.6 million, or 33.0 percent, as of the end of our third quarter of fiscal 2019 compared to the end of the third quarter of fiscal 2018, mainly due to incremental accounts payable as a result of our acquisition of CMW and negotiating more favorable payment terms with suppliers as a component of our working capital initiatives.
Venture Products.
Cash Flow
Cash provided by operating activities for the first nine months of fiscal 2020 was $305.9 million compared to $259.1 million for the first nine months of fiscal 2019. This increase was primarily due to less cash utilized for the purchase of commodities, components, parts, and accessories inventories due to the reduction in our production levels within our manufacturing facilities to align with reduced forecasted sales volumes as a result of COVID-19, as well as the cash benefit of lower accounts receivable due to COVID-19 resulting in lower sales to customers not financed under our wholesale financing agreements in our rental, specialty, and underground construction business and international markets, as well as a lower receivable from Red Iron due to lower sales financed under the joint venture near quarter-end. The increase was partially offset by a lower cash benefit from accounts payable than was experienced during the comparable period of fiscal 2019 due to decreased $0.3purchases of commodities, components, parts, and accessories inventories. Cash used in investing activities decreased $559.5 million during the first nine months of fiscal 2020 compared to the first nine months of fiscal 2018,2019. This decrease was primarily due to less cash utilized for purchasesthe acquisition of inventory, partially offset by higher net earnings and the take-down of the inventory purchase accounting adjustment related to our CMW acquisition. CashVenture Products in fiscal 2020 than was used in investing activities increased $654.6 million during the first nine months of fiscal 2019 compared to the first nine months of fiscal 2018, primarily due to more cash utilized for the acquisitions of CMW and a Northeastern U.S. distribution company during the first nine months ofin fiscal 2019, comparedas well as reduced cash investments in property, plant, and equipment as a result of the actions taken to the cash utilized for the acquisitionincrease our liquidity position in light of L.T. Rich Products, Inc.COVID-19 during the first nine months of fiscal 2018.2020. Cash provided by financing activities for the first nine months of fiscal 2019 increased $568.62020 decreased $220.6 million compared to cash used in financing activities for the first nine months of fiscal 2018,2019, mainly due to the issuance of indebtednesslower net borrowings under our term loan credit agreement and amounts drawn on our revolving credit facility during the second quarter of fiscal 2019 to fund the CMW acquisition, the issuance of our private placement senior notes during the third quarter of fiscal 2019, reduceddebt arrangements, lower cash utilized for purchases of Toro common stock compared to fiscal 2018, and higher cash providedproceeds from the exercise of stock options. These sources of cash were partially offset by moreoptions, and higher cash utilized for repayments of our outstanding indebtedness under our revolving credit facility and term loan credit agreement and more cash utilized for dividend paymentsdividends paid on shares of our common stock. The decrease in cash provided by financing activities was partially offset by reduced cash utilized for repurchases of our common stock compared tounder our Board authorized repurchase program in the first nine months of fiscal 2018.
2020.
Liquidity and Capital Resources
Our businesses are seasonally working capital intensive and require funding for purchases of raw materials used in production, replacement parts inventory, payroll and other administrative costs, capital expenditures, establishment of new facilities, expansion and renovation of existing facilities, as well as for financing receivables from customers that are not financed with Red Iron or other third-party financial institutions. Our accounts receivable balances historically increase between January and April as a result of typically higher sales volumes and extended payment terms made available to our customers, and typically decrease between May and December when payments are received.
We generally fund cash requirements for working capital needs, capital expenditures, acquisitions, investments, debt repayments, interest payments, quarterly cash dividend payments, and common stock repurchases, all as applicable, through cash provided by operating activities, availability under our existing senior unsecured revolving credit facility, and in certain instances, other forms of financing arrangements. Our senior unsecured revolving credit facility has been adequate for these purposes, although we have negotiated and completed additional financing arrangements as needed to allow us to complete acquisitions. Although there is uncertainty of the scope, duration, and severity of COVID-19 and its impact on our future results, we believe we are well-positioned to manage our business and have taken the appropriate actions during fiscal 2020 to
increase our liquidity position, including refinancing outstanding borrowings on our unsecured senior revolving credit facility with a new three year term loan for $190.0 million, which also added incremental liquidity; reducing capital expenditures; continuing the curtailment of share repurchases under our Board authorized repurchase program; and monitoring and participating in government economic stabilization efforts and certain legislative provisions, such as deferring certain tax payments, as applicable. As a result, we believe that our existing liquidity position, including the funds available through existing, and potential future, financing arrangements and forecasted cash flows will be sufficient to provide the necessary capital resources for our anticipated working capital needs, capital expenditures, investments, debt repayments, interest payments, quarterly cash dividend payments, and common stock repurchases, all as applicable, for at least the next twelve months. As of August 2, 2019,July 31, 2020, we had available liquidity of approximately $992.1 million, consisting of cash and short-term investmentscash equivalents of approximately $394.1 million, of which approximately $95.3 million was held by our foreign subsidiaries, were approximately $91.7and availability under our unsecured senior revolving credit facility of $598.0 million.
Indebtedness
As of July 31, 2020, we had $890.9 million of outstanding indebtedness that included $100.0 million of 7.8 percent debentures due June 15, 2027, $124.0 million of 6.625 percent senior notes due May 1, 2037, $100.0 million outstanding under our $200.0 million three year unsecured senior term loan facility, $180.0 million outstanding under our $300.0 million five year unsecured senior term loan facility, $190.0 million outstanding under our $190.0 million three year unsecured senior term loan facility, $100.0 million outstanding under our Series A Senior Notes, $100.0 million outstanding under our Series B Senior Notes, and no outstanding borrowings under our revolving credit facility. The July 31, 2020 outstanding indebtedness amounts were partially offset by debt issuance costs and deferred charges of $3.1 million related to our outstanding indebtedness. As of July 31, 2020, we have reclassified $108.9 million of the remaining outstanding principal balance under the $190.0 million term loan, net of the related proportionate share of debt issuance costs, to current portion of long-term debt within the Condensed Consolidated Balance Sheet. As of July 31, 2020, approximately $19.0 million of the $108.9 million that has been reclassified to current portion of long-term debt within the Condensed Consolidated Balance Sheets represents required quarterly amortization payments due within the next twelve months and the remaining $89.9 million represents the amount we intend to prepay utilizing anticipated cash flows from operations within the next twelve months.
As of August 2, 2019, we had $720.7 million of outstanding indebtedness that included $100.0 million of 7.8 percent debentures due June 15, 2027, $123.9 million of 6.625 percent senior notes due May 1, 2037, $100.0 million outstanding under our $200.0 million three year unsecured senior term loan facility, $200.0 million outstanding under our $300.0 million five year unsecured senior term loan facility, $100.0 million outstanding under our Series A Senior Notes, $100.0 million outstanding under our Series B Senior Notes, and no outstanding borrowings under our revolving credit facility. The August 2, 2019 outstanding indebtedness amounts were partially offset by debt issuance costs and deferred charges of $3.2 million related to our outstanding indebtedness.
Our domestic and non-U.S. operations maintained credit lines for import letters of credit in the aggregate amount of approximately $13.6 million and $13.2 million as of July 31, 2020 and August 2, 2019, respectively. We had $2.0 million and $3.3 million outstanding on such import letters of credit as of July 31, 2020 and August 2, 2019, respectively.
Revolving Credit Facility
Seasonal cash requirements are financed from operations, cash on hand, and with borrowings under our $600.0 million unsecured senior five-year revolving credit facility that expires in June 2023, as applicable. Included in our $600.0 million revolving credit facility is a $10.0 million sublimit for standby letters of credit and a $30.0 million sublimit for swingline loans. At our election, and with the approval of the named borrowers on the revolving credit facility and the election of the lenders to fund such increase, the aggregate maximum principal amount available under the facility may be increased by an amount up to $300.0 million. Funds are available under the revolving credit facility for working capital, capital expenditures, and other lawful corporate purposes, including, but not limited to, acquisitions and common stock repurchases, subject in each case to compliance with certain financial covenants described below.
Outstanding loans under the revolving credit facility (other than swingline loans), if applicable, bear interest at a variable rate generally based on LIBOR or an alternative variable rate based on the highest of the Bank of America prime rate, the federal funds rate or a rate generally based on LIBOR, in each case subject to an additional basis point spread that is calculated based on the better of the leverage ratio (as measured quarterly and defined as the ratio of total indebtedness to consolidated earnings before interest and taxes plus depreciation and amortization expense) and debt rating of Toro.TTC. Swingline loans under the revolving credit facility bear interest at a rate determined by the swingline lender or an alternative variable rate based on the highest of the Bank of America prime rate, the federal funds rate or a rate generally based on LIBOR, in each case subject to an additional basis point spread that is calculated based on the better of the leverage ratio and debt rating of Toro.TTC. Interest is payable quarterly in arrears. Our debt rating for long-term unsecured senior, non-credit enhanced debt was unchanged during the third quarter of fiscal 20192020 by Standard and Poor's Ratings Group at BBB and by Moody's Investors Service at Baa3. If our debt rating falls below investment grade and/or our leverage ratio rises above 1.50, the basis point spread we currently pay on
outstanding debt under the revolving credit facility would increase. However, the credit commitment could not be canceled by the banks based solely on a ratings downgrade. For the three month period ended July 31, 2020, no interest expense was incurred on our revolving credit facility as we did not have outstanding borrowings during such period. For the nine month period ended July 31, 2020, we incurred interest expense of approximately $0.8 million on the outstanding borrowings under our revolving credit facility. For the three and nine month periods ended August 2, 2019, we incurred interest expense of approximately $0.2 million and $1.9 million, respectively, on the outstanding borrowings under theour revolving credit facility. For the three and nine month periods ended August 3, 2018, we incurred interest expense of approximately $0.4 million on the outstanding borrowings under the revolving credit facility.
Our revolving credit facility contains customary covenants, including, without limitation, financial covenants, such as the maintenance of minimum interest coverage and maximum leverage ratios; and negative covenants, which among other things, limit disposition of assets, consolidations and mergers, restricted payments, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. Under the revolving credit facility, we are not limited in the amount for payments of cash dividends and common stock repurchases as long as, both before and after giving pro forma effect to such payments, our leverage ratio from the previous quarter compliance certificate is less than or equal to 3.5 (or, at our option (which we may exercise twice during the term of the facility) after certain acquisitions with aggregate consideration in excess of $75.0 million, for the first four quarters following the exercise of such option, is less than or equal to 4.0), provided that immediately after giving effect of any such proposed action, no default or event of default would exist. As of August 2, 2019,July 31, 2020, we were not limited in the amount for payments of cash dividends and common stock repurchases. We were in compliance with all covenants related to the credit agreement for our revolving credit facility as of August 2, 2019,July 31, 2020, and we expect to be in compliance with all covenants during the remainder of fiscal 2019.2020. If we were out of compliance with any covenant required by this credit agreement following the applicable cure period, the banks could terminate their commitments unless we could negotiate a covenant waiver from the banks. In addition, our long-term senior notes, debentures, term loan facilities, and any amounts outstanding under the revolving credit facility could become due and payable if we were unable to obtain a covenant waiver or refinance our borrowings under our credit agreement.
As of July 31, 2020, we had no outstanding borrowings under the revolving credit facility and $2.0 million outstanding under the sublimit for standby letters of credit, resulting in $598.0 million of unutilized availability under our revolving credit facility. As of August 2, 2019, we had no outstanding borrowings under the revolving credit facility but did haveand $1.9 million outstanding under the sublimit for standby letters of credit, resulting in $598.1 million of unutilized availability under ourthe revolving credit facility.
$500.0 Million Term Loan Credit Agreement
In March 2019, we entered into a term loan credit agreement with a syndicate of financial institutions for the purpose of partially funding the purchase price of our acquisition of CMW and the related fees and expenses incurred in connection with such acquisition. The term loan credit agreement provided for a $200.0 million three year unsecured senior term loan facility maturing on April 1, 2022 and a $300.0 million five year unsecured senior term loan facility maturing on April 1, 2024.2024 (collectively, the "$500.0 million term loan"). The funds under boththe $500.0 million term loan facilities were received on April 1, 2019 in connection with the closing of ourthe acquisition of CMW. There are no scheduled principal amortization payments prior to maturity on the $200.0 million three year unsecured senior term loan facility. For the $300.0 million five year unsecured senior term loan facility, we are required to make quarterly principal amortization payments of 2.5 percent of the original aggregate principal balance 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 our election at any time without penalty or premium. As of August 2, 2019,July 31, 2020, we have prepaid $100.0 million and $100.0$120.0 million against the outstanding principal balances of the $200.0 million three year unsecured senior term loan facility and $300.0 million five year unsecured senior term loan facility, respectively.
Outstanding borrowings under the $500.0 million term loan 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 $500.0 million term loan. Interest is payable quarterly in arrears. For the three and nine month periods ended July 31, 2020, we incurred interest expense of approximately $0.9 million and $4.3 million on the outstanding borrowings under the $500.0 million term loan, respectively. For the three and nine month periods ended August 2, 2019, we incurred interest expense of approximately $3.7 million and $5.3 million on the outstanding borrowings under the $500.0 million term loan.
The $500.0 million term loan credit agreement contains customary covenants, including, without limitation, financial covenants, generally consistent with those applicable under our revolving credit facility, such as the maintenance of minimum interest coverage and maximum leverage ratios; and negative covenants, which among other things, limit disposition of assets, consolidations and mergers, restricted payments, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. Under the $500.0 million term loan, we are not limited in the amount for payments of cash dividends and common stock repurchases as long as, both before and after giving pro forma effect to such payments, our leverage ratio from the previous quarter compliance certificate is less than or equal to 3.5 (or, at our option (which we may exercise twice during the term of the facility) after certain acquisitions with aggregate consideration in excess of
$75.0 million, for the first four quarters following the exercise of such option, is less than or equal to 4.0), provided that immediately after giving effect of any such proposed action, no default or event of default would exist. As of July 31, 2020, we were in compliance with all covenants related to our $500.0 million term loan and were not limited in the amount for payments of cash dividends and common stock repurchases. Additionally, we expect to be in compliance with all covenants related to our $500.0 million term loan during the remainder of fiscal 2020. If we were out of compliance with any covenant required by the $500.0 million term loan credit agreement following the applicable cure period, our term loan facilities, long-term senior notes, debentures, and any amounts outstanding under the revolving credit facility could become due and payable if we were unable to obtain a covenant waiver or refinance our borrowings under our $500.0 million term loan credit agreement.
$190.0 Million Term Loan Credit Agreement
On March 30, 2020, we entered into the $190.0 million term loan ("$190.0 million term loan") with certain financial institutions for the purpose of refinancing certain of our outstanding borrowings incurred in connection with the acquisition of Venture Products on March 2, 2020, as well as a precautionary measure to increase our 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.
Beginning with the last business day of March 2021, we are 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 our election at any time without penalty or premium. Amounts repaid or prepaid may not be reborrowed. As of July 31, 2020, there was $190.0 million of outstanding borrowings under the $190.0 million term loan and we have reclassified $108.9 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 of July 31, 2020, approximately $19.0 million of the $108.9 million that has been reclassified to current portion of long-term debt within the Condensed Consolidated Balance Sheets represents required quarterly amortization payments due within the next twelve months and the remaining $89.9 million represents the amount we intend to prepay 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 our revolving credit facility, such as the maintenance of minimum interest coverage and maximum leverage ratios; and negative covenants, which among other things, limit disposition of assets, consolidations and mergers, restricted payments, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. We were in compliance with all covenants related to ourthe $190.0 million term loan credit agreement as of August 2, 2019.July 31, 2020. Outstanding borrowings under the $190.0 million term loan credit
agreement bear interest at a variable rate generally based on LIBOR or an alternative variable rate based on the highestwith a minimum rate of the Bank of America prime rate, the federal funds rate, or a rate generally based on LIBOR, in each case0.75 percent, subject to an additional basis point spread as defined in the term credit loan credit agreement. Interest is payable quarterly in arrears. For the three and nine month periods ended August 2, 2019,July 31, 2020, we incurred interest expense of approximately $3.7$1.1 million and $5.3$1.5 million, respectively, on the outstanding borrowings under the $190.0 million term loan credit agreement.
loan.
3.81% Series A and 3.91% Series B Senior Notes
On April 30, 2019, we entered into a private placement note purchase agreement with certain purchasers pursuant to which we 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, we issued $100.0 million of the Series A Senior Notes and $100.0 million of the Series B Senior Notes pursuant to the private placement note purchase agreement. The Senior Notes are senior unsecured obligations of Toro.TTC. Interest on the Senior Notes is payable semiannually on the 15th day of June and December in each year, commencingyear. For the three and nine month periods ended July 31, 2020, we incurred interest expense of approximately $1.9 million and $5.8 million on December 15, 2019.the outstanding borrowings under the private placement note purchase agreement. For the three and nine month periods ended August 2, 2019,we incurred interest expense of approximately $0.8 million on the outstanding borrowings under the private placement note purchase agreement.
No principal is due on the Senior Notes prior to their stated due dates. We have the right to prepay all or a portion of either series of the Senior Notes in amounts equal to not less than 10.0 percent of the principal amount of the Senior Notes then outstanding upon notice to the holders of the series of Senior Notes being prepaid for 100%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 Senior Note,series, we have the right to prepay all of suchthe outstanding Senior Note of such series for 100%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, holders of thewe are required to offer to prepay all Senior Notes will have the right to require us to purchase such holder’s Senior Notes in cash at a purchase price equal to 100% offor the principal amount thereof plus accrued and unpaid interest, if any, to the date of repurchase. prepayment.
The private placement note purchase agreement contains customary representations and warranties of usTTC, as well as certain customary covenants, including, without limitation, financial covenants, such as the maintenance of minimum interest coverage and maximum leverage ratios, and other covenants, which, among other things, provide limitations on transactions with affiliates, mergers, consolidations and sales of assets, liens and priority debt. Under the private placement note purchase agreement, we are not limited in the amount for payments of cash dividends and common stock repurchases as long as, both before and after giving pro forma effect to such payments, our leverage ratio from the previous quarter compliance certificate is less than or equal to 3.5 (or, at our option (which we may exercise twice during the term of the facility) after certain acquisitions with aggregate consideration in excess of $75.0 million, for the first four quarters following the exercise of such option, is less than or equal to 4.0), provided that immediately after giving effect of any such proposed action, no default or event of default would exist. As of July 31, 2020, we were not limited in the amount for payments of cash dividends and stock repurchases. We were in compliance with all representations, warranties, and covenants related to the private placement note purchase agreement as of August 2, 2019.
Indebtedness
AsJuly 31, 2020 and we expect to be in compliance with all covenants during the remainder of August 2, 2019,fiscal 2020. If we had $720.7 millionwere out of outstanding indebtedness that included $100.0 million of 7.8 percent debentures due June 15, 2027, $123.9 million of 6.625 percentcompliance with any covenant required by this private placement note purchase agreement following the applicable cure period, our term loan facilities, long-term senior notes, due May 1, 2037, $100.0 milliondebentures, and any amounts outstanding under our $200.0 million three year unsecured senior term loanthe revolving credit facility $200.0 million outstanding underwould become due and payable if we were unable to obtain a covenant waiver or refinance our $300.0 million five year unsecured senior term loan facility, $100.0 million outstanding under our Series A Senior Notes, $100.0 million outstanding under our Series B Senior Notes, and no outstanding borrowings under our revolving credit facility. The August 2, 2019 outstanding indebtedness amounts were partially offset by debt issuance costs and deferred charges of $3.2 million related to our outstanding indebtedness. As of August 2, 2019, we have reclassified $99.9 million of the remaining outstanding principal balance under the term loan credit agreement, net of the related proportionate share of debt issuance costs, to current portion of long-term debt within the Condensed Consolidated Balance Sheets as we intend to prepay such amount utilizing cash flows from operations within the next twelve months. As of August 3, 2018, we had $312.5 million of outstanding indebtedness that included $100.0 million of 7.8 percent debentures due June 15, 2027, $123.8 million of 6.625 percent senior notes due May 1, 2037, and $91.0 million of outstanding borrowings under our revolving credit facility. The August 3, 2018 outstanding indebtedness amounts were partially offset by debt issuance costs and deferred charges of $2.4 million related to our outstanding indebtedness. As of August 3, 2018, the $91.0 million of outstanding borrowings under our revolving credit facility was classified as long-term debt within our Condensed Consolidated Balance Sheets.
Further, our domestic and non-U.S. operations maintained import letters of credit in the aggregate amount of approximately $13.2 million as of August 2, 2019. As of August 2, 2019, we had $3.3 million of outstanding on such letters of credit.
private placement note purchase agreement.
Cash Dividends
Our Board of Directors approved a cash dividend of $0.25 per share for the third quarter of fiscal 2020 that was paid on July 9, 2020. This was an increase of 11.1 percent over our cash dividend of $0.225 per share for the third quarter of fiscal 2019 that was paid on July 11, 2019. This was an increase of 12.5 percent overWe currently expect to continue paying our quarterly cash dividend of $0.20 per shareto shareholders for the third quarterremainder of fiscal 2018.
2020.
Share Repurchases
As a result of our acquisition of CMW on April 1, 2019, we curtailed repurchasing shares of our common stock during the third quarter of fiscal 2019. During the first nine months of fiscal 2019,2020, we repurchased 359,758curtailed repurchasing shares of our common stock in the open market under our Board authorized repurchase plan, thereby reducingprogram. In March 2020, we announced our total shares outstanding. Weintention to continue the curtailment of share repurchases as a prudent measure to enhance our liquidity position in response to COVID-19. As of July 31, 2020, we expect to curtailcontinue the curtailment of repurchasing shares of our common stock throughoutfor the remainder of fiscal 2019.
2020. The existing repurchase program remains authorized by our Board and has no expiration date. We may resume repurchasing shares of our common stock under the repurchase program in the future at any time, depending on our cash balance, debt repayments, market conditions, our anticipated working capital needs, and/or other factors.
Customer Financing Arrangements
Our customer financing arrangements are described in further detail within our most recently filed Annual Report on Form 10-K. There have been no material changes to our customer financing arrangements with the exception of the amendments to certain agreements pertaining to our Red Iron joint venture described in further detail within the section titled "Wholesale Financing" below.
Wholesale Financing
Our Red Iron joint venture with TCFIFTCF Inventory Finance, Inc. ("TCFIF"), a subsidiary of TCF National Bank, provides inventory financing to certain distributors and dealers of certain of our products in the U.S. that enables them to carry representative inventories of certain of our products. On December 20, 2019, during the first quarter of fiscal 2020, we 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 our 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 we 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 our products that are subject to exclusivity, inclusion of a two-year review period by us 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 we 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 us by our 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. 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 us. The net amount of receivables financed for dealers and distributors under this arrangement for the nine monthsmonth period ended July 31, 2020 and August 2, 2019 was $1,374.3 million and $1,513.3 million. million, respectively.
We also have floor plan financing agreements with other third-party financial institutions to provide floor plan financing to certain dealers and distributors not financed through Red Iron, which include agreements with third-party financial institutions as a result
in the U.S. and internationally in Australia. These third-party financing companiesfinancial institutions financed $308.3 million and $144.1 million of receivables for such dealers and distributors during the first nine months of fiscal 2019.month periods ended July 31, 2020 and August 2, 2019, respectively. As of July 31, 2020 and August 2, 2019, $175.6 million and $138.2 million of receivables financed by thethese third-party financing companies, excluding Red Iron, respectively, were outstanding. Our customer financing arrangements are described
We entered into a limited inventory repurchase agreement with Red Iron. Under the limited inventory repurchase agreement, we have agreed to repurchase products repossessed by Red Iron and TCF Commercial Finance Canada, Inc., up to a maximum aggregate amount of $7.5 million in further detail within our most recently filed Annual Report on Form 10-K. There have been no material changes to such arrangements, with the exception of the floor plan financing agreementsa calendar year. Additionally, as a result of our acquisition of CMW.
End-User Financing
Infloor plan financing agreements with the ordinary course of business,separate third-party financial institutions, we enterhave also entered into inventory repurchase agreements wherewith the separate third-party financial institutions, for which we provide recoursehave agreed to third-party finance companies in the event of defaultrepurchase products repossessed by the customerseparate third-party financial institutions. As of July 31, 2020, we were contingently liable to repurchase up to a maximum amount of $140.0 million of inventory related to receivables under these inventory repurchase agreements. Our financial exposure under these inventory repurchase agreements is limited to the difference between the amount paid to Red Iron or other third-party finance company. Our end-user financing arrangements are described in further detail within our most recently filed Annual Report on Form 10-K. Thereinstitutions for repurchases of inventory and the amount received upon any subsequent resale of the repossessed product. We have been no material changesrepurchased immaterial amounts of inventory pursuant to such arrangements withduring the exception of recourse agreements with third-party financing companies asnine month period ended July 31, 2020 and August 2, 2019. However, a resultdecline in retail sales or financial difficulties of our acquisitiondistributors or dealers could cause this situation to change and thereby require us to repurchase financed product, which could have an adverse effect on our Results of CMW. Our maximum exposure for credit collection under our recourse agreements as of August 2, 2019 was $14.5 million.
Operations, Financial Position, or Cash Flows.
Contractual Obligations
We are obligated to make future payments under various existing contracts, such as debt agreements, operating lease agreements, unconditional purchase obligations, and other long-term obligations. Our contractual obligations are described in further detail within our most recently filed Annual Report on Form 10-K. There have been no material changes to such contractual obligations, with the exception of outstanding borrowings under ourthe new $190.0 million term loan credit agreement resulting from our acquisition of CMW and the issuance of the Senior Notes under our private placement note purchase agreement asdescribed in further described withindetail in the section titled "Liquidity and Capital Resources" within this MD&A and the holdback associated with the Venture Products merger agreement described in further detail in the section titled "Company Overview" within this MD&A.
Off-Balance Sheet Arrangements
We have off-balance sheet arrangements relating to our operating lease agreements for certain property, plant, or equipment assets utilized in the normal course of business, such as buildings for manufacturing facilities, office space, distribution centers, and warehouse facilities; land for product testing sites; machinery and equipment for research and development activities, manufacturing and assembly processes, and administrative tasks; and vehicles for sales, marketing and distribution activities. We also have off-balance sheet arrangements with Red Iron, our joint venture with TCFIF, and other third-party financial institutions in which inventory receivables for certain dealers and distributors are financed by Red Iron or such other third-party financial institutions. Additionally, we use standby letters of credit under our revolving credit facility, import letters of credit, and surety bonds in the ordinary course of business to ensure the performance of contractual obligations, as required under certain contracts. Our off-balance sheet arrangements are described in further detail within our most recently filed Annual Report on Form 10-K. There have been no material changes to such off-balance sheet arrangements, with the exception of the agreements with third-party financial institutions to provide inventory financingamendments to certain distributors and dealers not financed throughagreements pertaining to our Red Iron resulting from our acquisition of CMW andjoint venture described in further detail within the section titled "Customer Financing Arrangements" within this MD&A."Wholesale Financing" above.
NON-GAAP FINANCIAL MEASURES
We have provided non-GAAP financial measures, which are not calculated or presented in accordance with U.S. GAAP, as information supplemental and in addition to the most directly comparable financial measures that are calculated and presented in accordance with U.S. GAAP. We use these non-GAAP financial measures in making operating decisions because we believe these non-GAAP financial measures provide meaningful supplemental information regarding our core operational performance and provide us with a better understanding of how to allocate resources to both ongoing and prospective business initiatives. Additionally, these non-GAAP financial measures facilitate our internal comparisons to both our historical operating results and to our competitors' operating results by factoring out potential differences caused by charges not related to our regular, ongoing business, including, without limitation, non-cash charges, certain large and unpredictable charges, acquisitions and dispositions, legal settlements, and tax positions. SuchWe believe that these non-GAAP financial measures, when considered in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with U.S. GAAP, provide investors with useful supplemental financial information to better understand our core operational performance. These non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the most directly comparable U.S. GAAP financial measures. The non-GAAP financial measures may differ from similar measures used by other companies.
The following table provides a reconciliation of financial measures calculated and reported in accordance with U.S. GAAP as well as adjustedto the most directly comparable non-GAAP financial measures for the three and nine month periods ended July 31, 2020 and August 2, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
(Dollars in thousands, except per share data) | | July 31, 2020 | | August 2, 2019 | | July 31, 2020 | | August 2, 2019 |
Gross profit | | $ | 294,574 | | | $ | 265,981 | | | $ | 889,379 | | | $ | 802,896 | |
Acquisition-related costs1 | | 1,087 | | | 26,172 | | | 3,950 | | | 35,691 | |
Management actions2 | | — | | | 9,117 | | | 857 | | | 9,117 | |
Non-GAAP gross profit | | $ | 295,661 | | | $ | 301,270 | | | $ | 894,186 | | | $ | 847,704 | |
| | | | | | | | |
Gross margin | | 35.0 | % | | 31.7 | % | | 35.0 | % | | 33.4 | % |
Acquisition-related costs1 | | 0.2 | % | | 3.1 | % | | 0.2 | % | | 1.5 | % |
Management actions2 | | — | % | | 1.1 | % | | — | % | | 0.4 | % |
Non-GAAP gross margin | | 35.2 | % | | 35.9 | % | | 35.2 | % | | 35.3 | % |
| | | | | | | | |
Operating earnings | | $ | 115,952 | | | $ | 73,944 | | | $ | 332,876 | | | $ | 281,723 | |
Acquisition-related costs1 | | 1,161 | | | 29,304 | | | 6,183 | | | 51,058 | |
Management actions2 | | — | | | 9,148 | | | 857 | | | 9,148 | |
Non-GAAP operating earnings | | $ | 117,113 | | | $ | 112,396 | | | $ | 339,916 | | | $ | 341,929 | |
| | | | | | | | |
Earnings before income taxes | | $ | 110,993 | | | $ | 71,235 | | | $ | 318,503 | | | $ | 278,435 | |
Acquisition-related costs1 | | 1,161 | | | 29,304 | | | 6,183 | | | 51,058 | |
Management actions2 | | — | | | 9,148 | | | 857 | | | 9,148 | |
Non-GAAP earnings before income taxes | | $ | 112,154 | | | $ | 109,687 | | | $ | 325,543 | | | $ | 338,641 | |
| | | | | | | | |
Net earnings | | $ | 88,968 | | | $ | 60,607 | | | $ | 257,505 | | | $ | 235,717 | |
Acquisition-related costs1 | | 924 | | | 23,953 | | | 4,922 | | | 41,814 | |
Management actions2 | | — | | | 7,351 | | | 682 | | | 7,351 | |
Tax impact of share-based compensation3 | | (1,173) | | | (1,200) | | | (4,550) | | | (11,518) | |
U.S. Tax Reform4 | | — | | | (926) | | | — | | | (926) | |
Non-GAAP net earnings | | $ | 88,719 | | | $ | 89,785 | | | $ | 258,559 | | | $ | 272,438 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended | | |
(Dollars in thousands, except per share data) | | July 31, 2020 | | August 2, 2019 | | July 31, 2020 | | August 2, 2019 |
Diluted EPS | | $ | 0.82 | | | $ | 0.56 | | | $ | 2.37 | | | $ | 2.18 | |
Acquisition-related costs1 | | 0.01 | | | 0.22 | | | 0.05 | | | 0.39 | |
Management actions2 | | — | | | 0.07 | | | — | | | 0.07 | |
Tax impact of share-based compensation3 | | (0.01) | | | (0.01) | | | (0.04) | | | (0.11) | |
U.S. Tax Reform4 | | — | | | (0.01) | | | — | | | (0.01) | |
Non-GAAP diluted EPS | | $ | 0.82 | | | $ | 0.83 | | | $ | 2.38 | | | $ | 2.52 | |
| | | | | | | | |
Effective tax rate | | 19.8 | % | | 14.9 | % | | 19.2 | % | | 15.3 | % |
Acquisition-related costs1 | | — | % | | (1.4) | % | | — | % | | (0.7) | % |
Management actions2 | | — | % | | 1.6 | % | | — | % | | 0.5 | % |
Tax impact of share-based compensation3 | | 1.1 | % | | 1.7 | % | | 1.4 | % | | 4.1 | % |
U.S. Tax Reform4 | | — | % | | 1.3 | % | | — | % | | 0.3 | % |
Non-GAAP effective tax rate | | 20.9 | % | | 18.1 | % | | 20.6 | % | | 19.5 | % |
1 On March 2, 2020, we completed the acquisition of Venture Products and on April 1, 2019, we completed the acquisition of CMW. For additional information regarding these acquisitions, refer to Note 2, Business Combinations, within the Notes to Condensed Consolidated Financial Statements included within Part I, Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q. Acquisition-related costs for the three month period ended July 31, 2020 represent integration costs and charges incurred for the take-down of the inventory fair value step-up amount resulting from purchase accounting adjustments related to the acquisition of Venture Products. Acquisition-related costs for the nine month period ended July 31, 2020 represent transaction costs incurred for our acquisition of Venture Products, as well as integration costs and charges incurred for the take-down of the inventory fair value step-up amounts resulting from purchase accounting adjustments related to the acquisitions of Venture Products and CMW. Acquisition-related costs for the three and nine month periods ended August 2, 2019 represent transaction and integration costs, as well as charges incurred for the take-down of the inventory fair value step-up amount and amortization of the backlog intangible asset resulting from purchase accounting adjustments related to our acquisition of CMW.
2 During the third quarter of fiscal 2019, we announced the wind down of our Toro-branded large horizontal directional drill and riding trencher product line ("Toro underground wind down"). Management actions for the nine month period ended July 31, 2020 represent inventory write-down charges incurred for the Toro underground wind down. No charges were incurred for the three month period ended July 31, 2020 related to the Toro underground wind down. Management actions for the three and nine month periods ended August 2, 2019 represent charges incurred for the write-down of inventory, inventory retail support activities, and accelerated depreciation on fixed assets related to the Toro underground wind down. For additional information regarding the Toro underground wind down, refer to Note 7, Management Actions, within the Notes to Condensed Consolidated Financial Statements included within Part 1, Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q.
3 In the first quarter of fiscal 2017, we adopted Accounting Standards Update No. 2016-09, Stock-based Compensation: Improvements to Employee Share-based Payment Accounting, which requires that any excess tax deduction for share-based compensation be immediately recorded within income tax expense. These amounts represent the discrete tax benefits recorded as excess tax deductions for share-based compensation during the three and nine month periods ended July 31, 2020 and August 3, 2018:2, 2019.
4 Signed into law on December 22, 2017, Public Law No. 115-97 ("Tax Act" or "U.S. Tax Reform"), reduced the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent, effective January 1, 2018. This reduction in rate required the re-measurement of our net deferred taxes as of the date of enactment. The Tax Act also imposed a one-time deemed repatriation tax on our historical undistributed earnings and profits of foreign affiliates. During the three and nine month periods ended August 2, 2019, we recorded a tax benefit of $0.9 million related to a prior year true-up of the Tax Act. The Tax Act did not impact our Results of Operations for the three and nine month periods ended July 31, 2020.
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | August 2, 2019 | | August 3, 2018 | | August 2, 2019 | | August 3, 2018 |
Gross profit | | $ | 265,981 |
| | $ | 233,653 |
| | $ | 802,896 |
| | $ | 761,948 |
|
Management actions1 | | 9,117 |
| | — |
| | 9,117 |
| | — |
|
Acquisition-related costs2 | | 26,172 |
| | — |
| | 35,691 |
| | — |
|
Adjusted non-GAAP gross profit | | $ | 301,270 |
| | $ | 233,653 |
| | $ | 847,704 |
| | $ | 761,948 |
|
| | | | | | | | |
Operating earnings | | $ | 73,944 |
| | $ | 92,894 |
| | $ | 281,723 |
| | $ | 330,089 |
|
Management actions1 | | 9,148 |
| | — |
| | 9,148 |
| | — |
|
Acquisition-related costs2 | | 29,304 |
| | — |
| | 51,058 |
| | — |
|
Adjusted non-GAAP operating earnings | | $ | 112,396 |
| | $ | 92,894 |
| | $ | 341,929 |
| | $ | 330,089 |
|
| | | | | | | | |
Earnings before income taxes | | $ | 71,235 |
| | $ | 93,275 |
| | $ | 278,435 |
| | $ | 328,826 |
|
Management actions1 | | 9,148 |
| | — |
| | 9,148 |
| | — |
|
Acquisition-related costs2 | | 29,304 |
| | — |
| | 51,058 |
| | — |
|
Adjusted non-GAAP earnings before income taxes | | $ | 109,687 |
| | $ | 93,275 |
| | $ | 338,641 |
| | $ | 328,826 |
|
| | | | | | | | |
Net earnings | | $ | 60,607 |
| | $ | 79,009 |
| | $ | 235,717 |
| | $ | 232,902 |
|
Management actions1 | | 7,351 |
| | — |
| | 7,351 |
| | — |
|
Acquisition-related costs2 | | 23,953 |
| | — |
| | 41,814 |
| | — |
|
Tax impact of share-based compensation3 | | (1,200 | ) | | (5,025 | ) | | (11,518 | ) | | (9,638 | ) |
U.S. Tax Reform4 | | (926 | ) | | (500 | ) | | (926 | ) | | 32,613 |
|
Adjusted non-GAAP net earnings | | $ | 89,785 |
| | $ | 73,484 |
| | $ | 272,438 |
| | $ | 255,877 |
|
| | | | | | | | |
Diluted EPS | | $ | 0.56 |
| | $ | 0.73 |
| | $ | 2.18 |
| | $ | 2.14 |
|
Management actions1 | | 0.07 |
| | — |
| | 0.07 |
| | — |
|
Acquisition-related costs2 | | 0.22 |
| | — |
| | 0.39 |
| | — |
|
Tax impact of share-based compensation3 | | (0.01 | ) | | (0.05 | ) | | (0.11 | ) | | (0.09 | ) |
U.S. Tax Reform4 | | (0.01 | ) | | — |
| | (0.01 | ) | | 0.30 |
|
Adjusted non-GAAP diluted EPS | | $ | 0.83 |
| | $ | 0.68 |
| | $ | 2.52 |
| | $ | 2.35 |
|
|
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended |
| | August 2, 2019 | | August 3, 2018 | | August 2, 2019 | | August 3, 2018 |
Effective tax rate | | 14.9 | % | | 15.3 | % | | 15.3 | % | | 29.2 | % |
Management actions1 | | 1.6 | % | | — | % | | 0.5 | % | | — | % |
Acquisition-related costs2 | | (1.4 | )% | | — | % | | (0.7 | )% | | — | % |
Tax impact of share-based compensation3 | | 1.7 | % | | 5.4 | % | | 4.1 | % | | 2.9 | % |
U.S. Tax Reform4 | | 1.3 | % | | 0.5 | % | | 0.3 | % | | (9.9 | )% |
Adjusted non-GAAP effective tax rate | | 18.1 | % | | 21.2 | % | | 19.5 | % | | 22.2 | % |
| |
| During the third quarter of fiscal 2019, we announced we will wind down our Toro-branded large horizontal directional drill and riding trencher product line. These amounts represent costs incurred in relation to such wind down and are primarily comprised of costs related to the write-down of inventory, anticipated inventory retail support activities, and accelerated depreciation on fixed assets during the three and nine month periods ended August 2, 2019. |
| |
2
| During the second quarter of fiscal 2019, we acquired CMW. These amounts represent integration and transaction costs, as well as the take-down of the inventory fair value step-up amount and amortization of the backlog intangible asset resulting from purchase accounting adjustments, related to our acquisition of CMW during the three and nine month periods ended August 2, 2019. |
| |
3
| In the first quarter of fiscal 2017, we adopted Accounting Standards Update No. 2016-09, Stock-based Compensation: Improvements to Employee Share-based Payment Accounting, which requires that any excess tax deduction for share-based compensation be immediately recorded within income tax expense. These amounts represent the discrete tax benefits recorded as excess tax deductions for share-based compensation during the three and nine month periods ended August 2, 2019 and August 3, 2018.
|
| |
4
| Signed into law on December 22, 2017, the Tax Act, reduced the U.S. federal corporate tax rate from 35.0 percent to 21.0 percent, effective January 1, 2018, resulting in a blended U.S. federal statutory tax rate of 23.3 percent for the fiscal year ended October 31, 2018. This reduction in rate required the re-measurement of our net deferred taxes as of the date of enactment. The Tax Act also imposed a one-time deemed repatriation tax on our historical undistributed earnings and profits of foreign affiliates. During the three and nine month periods ended August 2, 2019, we recorded a tax benefit of $0.9 million related to a prior year true-up of the Tax Act. During the three and nine month periods ended August 3, 2018, the remeasurement of our net deferred taxes and the one-time deemed repatriation tax resulted in a combined benefit of $0.5 million and a combined charge of $32.6 million. |
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no material changes to our critical accounting policies and estimates since our most recent Annual Report on Form 10-K for the fiscal year ended October 31, 2018.2019. Refer to Part II, Item 7, Management’s"Management’s Discussion and Analysis of Financial Condition and Results of OperationsOperations", and Part II, Item 8, Note 1, Summary of Significant Accounting Policies and Related Data, within our Annual Report on Form 10-K for the fiscal year ended October 31, 20182019 for a discussion of our critical accounting policies and estimates.
New Accounting Pronouncements to be Adopted
In FebruaryJune 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards UpdatesUpdate ("ASU") No. 2016-02, Leases, which, among other things, requires lessees to recognize most leases on-balance sheet. The standard requires the recognition of right-of-use assets ("ROU assets") and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP. The standard also requires a greater level of quantitative and qualitative disclosures regarding the nature of the entity’s leasing activities than were previously required under U.S. GAAP. In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842):Land Easement Practical Expedient for Transition to Topic 842, which provides an optional transition practical expedient to not evaluate existing or expired land easements under the amended lease guidance. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides an alternative transition method that permits an entity to use the effective date of ASU No. 2016-02 as the date of initial application through the recognition of a cumulative effect adjustment to the opening balance of retained earnings upon adoption. Consequently, an entity's reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with previous U.S. GAAP under ASC Topic 840, Leases. ASU No. 2016-02, as augmented by ASU No. 2018-01, ASU No. 2018-10, and ASU No. 2018-11 (the "amended guidance"), will become effective for us commencing in the first quarter of fiscal 2020.
In order to identify and evaluate the impact of the amended guidance on our Condensed Consolidated Financial Statements, Notes to Condensed Consolidated Financial Statements, business processes, internal controls, and information systems, we have established a cross-functional project management team. This cross-functional project management team is tasked with evaluating
the potential implications of the amended guidance, including compiling and analyzing existing explicit lease agreements, reviewing contractual agreements for embedded leases, determining the discount rate to be used in valuing ROU assets and lease liabilities under new and existing leases, and assessing the changes to our accounting policies, business processes, internal controls, and information systems that may be necessary to comply with the provisions and all applicable financial statement disclosures required by the amended guidance. At this point in our evaluation process, we have compiled and analyzed existing explicit lease agreements; reviewed contractual agreements for embedded leases; completed our assessment of our business and system requirements; selected and implemented our third-party lease accounting software solution; developed our business process for determining the discount rate to be utilized in valuing the ROU assets and lease liabilities for our operating leases; and evaluated the impact of the amended guidance on our accounting policies, business processes and procedures, and information systems. We are in the process of designing internal controls regarding the completeness and accuracy of our lease population and, where applicable, reviewing new or amended contractual agreements for leases, including embedded leases, through the adoption date of the amended guidance.
We will adopt the amended guidance on November 1, 2019, the first quarter of fiscal 2020, under the alternative cumulative effect transition method. Upon adoption, we will recognize ROU assets and corresponding lease liabilities for our operating lease agreements within our Condensed Consolidated Balance Sheets. We plan to elect the transition package of practical expedients permitted within the amended guidance, which among other things, allows us to carryforward the historical lease classification determined under previous GAAP. Additionally, we plan to elect the transition practical expedient to not reassess our accounting for land easements that exist as of the adoption of the amended guidance. We also plan to make an accounting policy election that will keep leases with an initial term of 12 months or less off of our Consolidated Balance Sheets, which will result in recognizing those lease payments in our Consolidated Statements of Earnings on a straight-line basis over the lease term. We do not plan to elect the practical expedient to use hindsight in determining the lease term and in assessing impairment of right-of-use assets. While our evaluation of the amended guidance and related implementation activities are ongoing and incomplete, based on the results of our evaluation process to date, we believe the adoption of the amended guidance will have a material impact on our Consolidated Balance Sheets, Notes to Consolidated Financial Statements, business processes, internal controls, and information systems. However, we do not believe the adoption of the amended guidance will have a material impact on our Consolidated Statements of Earnings and Consolidated Statements of Cash Flows.
In June 2016, the FASB issued ASU No. 2016-03,2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement approach for credit losses on financial assets measured on an amortized cost basis from an 'incurred loss' method to an 'expected loss' method. Such modification of the measurement approach for credit losses eliminates the requirement that a credit loss be considered probable, or incurred, to impact the valuation of a financial asset measured on an amortized cost basis. The amended guidance requires the measurement of expected credit losses to be based on relevant information, including historical experience, current conditions, and a reasonable and supportable forecast that affects the collectability of the related financial asset. This amendment will affect trade receivables, off-balance-sheet credit exposures, and any other financial assets not excluded from the scope of this amendment that have the contractual right to receive cash. The amended guidance will become effective for use commencing in the first quarter of fiscal 2021. We are currently evaluating the impact of this new standard on our Consolidated Financial Statements.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which expands the scope of ASC Topic 718 to include share-based payments granted to nonemployees in exchange for goods or services used or consumed in an entity's own operations and supersedes the guidance in ASC Topic 505-50. The amended guidance will become effective for us commencing in the first quarter of fiscal 2020. Early adoption is permitted but not prior to adopting ASC Topic 606, Revenue from Contracts with Customers. We are currently evaluating the impact of this new standard on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies themakes a number of changes to add, modify or remove certain disclosure requirements forof fair value measurements by removing, modifying, or adding certain disclosures.measurements. The amended guidance will become effective in the first quarter of fiscal 2021. Early adoption is permitted for any removed or modified disclosures. We are currently evaluating the impact of this new standard on our Consolidated Financial Statements.
In August 2018, the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans (Topic 715), which modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. The amended guidance will become effective in the first quarter of fiscal 2021. Early adoption is permitted. We are currently evaluating the impact of this new standard on our Consolidated Financial Statements.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. The amended guidance also clarifies and simplifies other aspects of the accounting for income taxes under Accounting Standards Codification Topic 740, Income Taxes. The amended guidance will become effective in the first quarter of fiscal 2022. Early adoption is permitted. We are currently evaluating the impact of this new standard on our Consolidated Financial Statements.
In January 2020, the FASB issued ASU No. 2020-01, Investments - Equity Securities (Topic 321), Investments - Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which clarified that before applying or upon discontinuing the equity method of accounting for an investment in equity securities, an entity should consider observable transactions that require it to apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. The amended guidance will become effective in the first quarter of fiscal 2022. Early adoption is permitted. We are currently evaluating the impact of this standard on our Consolidated Financial Statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden of accounting for reference rate reform due to the cessation of the London Interbank Offered Rate, commonly referred to as "LIBOR." The temporary guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, relationships, and transactions affected by reference rate reform if certain criteria are met. The provisions of the temporary optional guidance are only available until December 31, 2022, when the reference rate reform activity is expected to be substantially complete. When adopted, entities may apply the provisions as of the beginning of the reporting period when the election is made. We are currently evaluating the impact of this standard on our Consolidated Financial Statements and have yet to elect an adoption date.
We believe that all other recently issued accounting pronouncements from the FASB that we have not noted above will not have a material impact on our Consolidated Financial Statements or do not apply to our operations.
FORWARD-LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and that are subject to the safe harbor created by those sections. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on our web sites or otherwise. Statements that are not historical are forward-looking and reflect expectations and assumptions. Forward-looking statements are based on our current expectations of future events, and often can be identified in this report and elsewhere by using words such as "expect," "strive," "looking ahead," "outlook," "guidance," "forecast," "goal," "optimistic," "anticipate," "continue," "plan," "estimate," "project," "believe," "should," "could," "will," "would," "possible," "may," "likely," "intend," "can," "seek," "potential," "pro forma," or the negative thereof and similar expressions or future dates. Our forward-looking statements generally relate to our future performance, including our anticipated operating results, liquidity requirements, financial condition, and financial condition;anticipated impacts as a result of COVID-19; our business strategies and goals; the integration of CMW;each of the CMW and Venture Products acquisitions; and the effect of laws, rules, policies, regulations, tax reform, new accounting pronouncements, and outstanding litigation on our business and future performance.
Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or implied. The following are some of the factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements:
•Adverse economic conditions and outlook in the United States and in other countries in which we conduct business, including as a result of COVID-19, have adversely affected our net sales and earnings and could continue to adversely affect our net sales and earnings, which include but are not limited to business closures; slowdowns, suspensions or delays of production and commercial activity; recessionary conditions; slow or negative economic growth rates; slowdowns or reductions in levels of golf course activity, including food and beverage spending, development, renovation, and improvement; golf course closures; reduced governmental or municipal spending; reduced levels of home ownership, construction, and sales; home foreclosures; negative consumer confidence; reduced consumer spending levels; further increased unemployment rates; prolonged high unemployment rates; higher costs of commodities, components, parts, and accessories and/or transportation-related costs, including as a result of inflation, changing prices, tariffs, and/or duties; inflationary or deflationary pressures; reduced infrastructure spending; the impact of U.S. federal debt, state debt and sovereign debt defaults and austerity measures by certain European countries; slow down or reductions in levels of golf course development, renovation, and improvement; golf course closures; reduced levels of home ownership, construction, and sales; home foreclosures; negative consumer confidence; reduced consumer spending levels; increased unemployment rates; prolonged high unemployment rates; higher commodity and component costs and fuel prices; inflationary or deflationary pressures; reduced credit availability or unfavorable credit terms for our distributors, dealers, and end-user customers; higher short-term, mortgage, and other interest rates; reduced infrastructure spending; and general economic and political conditions and expectations.
•COVID-19 has directly and indirectly adversely impacted our business, financial condition and operating results and such adverse impact will likely continue, is highly uncertain and cannot be predicted, but has been and could continue to be material and is based on numerous factors, which include but are not limited to, the duration, scope, and severity of COVID-19; governmental, business and individual actions that have been, and continue to be, taken in response to COVID-19; the effect of COVID-19 on our dealers, distributors, mass retailers and other channel partners and customers, including reduced or constrained budgets and cash preservation efforts; our ability during COVID-19 to continue operations and/or adjust our production schedules; significant reductions or volatility in demand for one or more of our products or services and/or higher demand for moderately-priced products; the effect of COVID-19 on our suppliers and our ability to obtain commodities, components, parts, and accessories on a timely basis through our supply chain and at anticipated costs; logistics costs and challenges; costs incurred as a result of necessary actions and preparedness plans to help ensure the health and safety of our employees and continued operations; potential future restructuring, impairment or other charges; availability of employees, their ability to conduct work away from normal working locations and/or under revised work environment protocols, as well as the general willingness of employees to come to normal working locations and perform work; the impact of COVID-19 on the financial and credit markets and economic activity generally; our ability to access lending, capital markets, and other sources of liquidity when needed on reasonable terms or at all; our ability to comply with the financial covenants in our debt agreements if the material economic downturn as a result of COVID-19 results in substantially increased indebtedness and/or lower EBITDA for us; and the negative impacts as a result of the occurrence of a global or national recession, depression or other sustained adverse market event as a result of COVID-19.
•Our Professional segment net sales are dependent upon certain factors, many of which have been adversely impacted by COVID-19, including golf course revenues and the amount of investment in golf course renovations and improvements; the level of new golf course development and golf course closures; infrastructure improvements; demand for our products in the rental, specialty and underground construction markets, including those related to oil and gas construction activities; the extent to which property owners outsource their lawn care and snow and ice removal activities; residential and/or municipal commercial construction activity; continued acceptance of, and demand for, ag-irrigation solutions; the timing and occurrence of winter weather conditions; availability of cash or
credit to Professional segment customers on acceptable terms to finance new product purchases; and the amount of government and other customer revenues, budget, and spending levels for grounds maintenance or construction equipment.
•Increases in the cost, or disruption and/or shortages in the availability, of commodities, components, parts and accessories containing various materials that we purchase for use in our manufacturing process and end-products or to be sold as stand-alone end-products, such as steel, aluminum, petroleum and natural gas-based resins, linerboard, copper, lead, rubber, engines, transmissions, transaxles, hydraulics, electric motors, and other commodities, components, parts and accessories, including as a result of COVID-19, increased costs, increased tariffs, duties or other charges as a result of changes to U.S. or international trade policies or trade agreements, trade regulation and/or industry activity, or antidumping and countervailing duty petitions on certain products imported from foreign countries, including certain engines imported into the United States from China, or the inability of suppliers, including Briggs & Stratton a supplier of engines for certain of our products, that filed for Chapter 11 bankruptcy on July 20, 2020, to continue operations or otherwise remain in business as a result of COVID-19, financial difficulties, or otherwise, have affected our profit margins, operating results and businesses and could continue to result in declines in our profit margins, operating results and businesses.
•Our ability to manage our inventory levels to meet our customers' demand for our products is important for our business. Managing inventory levels in the current COVID-19 commercial environment is particularly difficult as a result of changes to production operations, locations and schedules as well as demand volatility. Such manufacturing inefficiencies have resulted in unfavorable manufacturing variances that have negatively impacted our financial results. If such manufacturing inefficiencies continue, we underestimate or overestimate both channel and retail demand for our products, are not able to manufacture product to fulfill customer demand, and/or do not produce or maintain appropriate inventory levels, our net sales, profit margins, net earnings, and/or working capital could be negatively impacted.
•Changes in the composition of, financial viability of, and/or the relationships with, our distribution channel customers could negatively impact our business and operating results.
•Our business and operating results are subject to the inventory management decisions of our distribution channel customers. Adjustments in the carrying amount of inventories by our distribution channel customers have impacted and may continue to impact our inventory management and working capital goals as well as operating results.
•Weather conditions, including unfavorable weather conditions exacerbated by global climate changes or otherwise, may reduce demand for some of our products and/or cause disruptions in our operations, including as a result of disruption in our supply chain, and adversely affect our net sales and operating results, or may affect the timing of demand for some of our products and/or our ability to manufacture product to fulfill customer demand, which may adversely affect net sales and operating results in subsequent periods.
•Fluctuations in foreign currency exchange rates have in the past affected our operating results and could continue to result in declines in our net sales and net earnings.
Increases in the cost, or disruption in the availability, of raw materials, components, parts and accessories containing various commodities that we purchase, such as steel, aluminum, petroleum and natural gas-based resins, linerboard, copper, lead, rubber, engines, transmissions, transaxles, hydraulics, electric motors, and other commodities and components, and increases in our other costs of doing business, such as transportation costs or increased tariffs, duties or other charges as a result of changes to U.S. or international trade policies or agreements have in the past affected our profit margins and businesses and could continue to result in declines in our profit margins and businesses.
Our Professional segment net sales are dependent upon certain factors, including golf course revenues and the amount of investment in golf course renovations and improvements; the level of new golf course development and golf course closures; the extent to which property owners outsource their lawn care and snow and ice removal activities; residential and commercial construction activity; continued acceptance of, and demand for, ag-irrigation solutions; the timing and occurrence of winter weather conditions; demand for our products in the rental, specialty and underground construction markets; availability of cash or credit to Professional segment customers on acceptable terms to finance new product purchases; and the amount of government revenues, budget, and spending levels for grounds maintenance equipment.
•Our Residential segment net sales are dependent upon continued operations of mass retailers, dealers, and home centers; consumers buying our products at dealers, mass retailers, dealers, and home centers, such as The Home Depot, Inc.;centers; the amount of product placement at mass retailers and home centers; consumer confidence and spending levels; changing buying patterns of customers; and the impact of significant sales or promotional events.
•Our financial performance, including our profit margins and net earnings, canhave been impacted and will continue to be impacted depending on the mix of products we sell during a given period, as our Professional segment products generally have higher profit margins than our Residential segment products. Similarly, within each segment, if we experience lower sales of products that generally carry higher profit margins, have impacted our financial performance, including profit margins and net earnings, and such financial performance could continue to be negatively impacted.
•We intend to grow our business in part through acquisitions including by our recently completed acquisition of CMW, and alliances, strong customer relations, and new joint ventures, investments, and partnerships, which could be risky and harm our business, reputation, financial condition, and operating results, particularly if we are not able to successfully integrate such acquisitions and alliances, joint ventures, investments, and partnerships.partnerships, such transactions result in disruption to our operations, we experience loss of key employees, customers, or channel partners, significant amounts of goodwill, other intangible assets, and/or long-lived assets incurred as a result of a transaction are subsequently written off, and other factors. If previous or future acquisitions do not produce the expected results or integration into our operations takes more time than expected, our business could be harmed. For example,
•As of July 31, 2020, we had goodwill of $424.2 million and other intangible assets of $413.3 million, including goodwill and other intangible assets from the Toro underground wind down is an integration activityCMW and Venture Products acquisitions, which together comprise 29.8 percent of our total assets as of July 31, 2020. These amounts are maintained in various reporting units. If we determine that our goodwill or other intangible assets recorded have become impaired, we will be required to record a charge resulting from the impairment. Impairment charges, including such charges that could arise as a result of the CMW acquisition and any delays or failures to complete the Toro underground wind down, failure to achieve any cost or revenue synergies expected from the Toro underground wind down or delays in the realization thereof, business disruption during the pendency of or following the Toro underground wind down, or unanticipated charges that may be incurred as a result of such activity could harm our business and operating results. In addition, we cannot guarantee previous or future acquisitions, alliances, joint ventures or partnerships will in fact produce any benefits.
Our ability to manage our inventory levels to meet our customers' demand for our products is important for our business. If we underestimate or overestimate both channel and retail demand for our products, are not able to manufacture product to fulfill customer demand, and/or do not produce or maintain appropriate inventory levels, our net sales, profit margins, net earnings, and/or working capitalCOVID-19 pandemic, could be negatively impacted.significant and could adversely affect our consolidated results of operations and financial position.
Our business and operating results are subject to the inventory management decisions
Changes in the composition of, financial viability of, and/or the relationships with, our distribution channel customers could negatively impact our business and operating results.
•We face intense competition in all of our product lines with numerous manufacturers, including from some competitors that have larger operations and greater financial resources than us. We may not be able to compete effectively against competitors’ actions, which could harm our business and operating results.
•A significant percentage of our consolidated net sales is generated outside of the United States, and we intend to continue to expand our international operations. Our international operations also require significant management attention and financial resources; expose us to difficulties presented by international economic, political, legal, regulatory, accounting, and business factors, including implications of withdrawal by the U.S. from, or revision to, international trade agreements, foreign trade or other policy changes between the U.S. and other countries, trade regulation and/or industry activity that favors domestic companies, including antidumping and countervailing duty petitions on certain products imported from foreign countries, including certain engines imported into the United States from China, pandemics and/or epidemics, including COVID-19, or weakened international economic conditions, or the United Kingdom’s process for exiting the European Union;conditions; and may not be successful or produce desired levels of net sales. In addition, a portion of our international net sales are financed by third parties. The termination of our agreements with these third parties, any material change to the terms of our agreements with these third parties or in the availability or terms of credit offered to our international customers by these third parties, or any delay in securing replacement credit sources, could adversely affect our sales and operating results.
•If we are unable to continue to enhance existing products, as well as develop and market new products, that respond to customer needs and preferences and achieve market acceptance, including by incorporating new, emerging and/or emergingdisruptive technologies that may become preferred by our customers, we may experience a decrease in demand for our products, and our net sales could be adversely affected.
•Any disruption, including as a result of natural or man-made disasters, inclement weather, including as a result of climate change-related events, work slowdowns, strikes, pandemics and/or epidemics, including COVID-19, protests and/or social unrest, or other events, at or in proximity to any of our facilities or in our manufacturing or other operations, or those of our distribution channel customers, mass retailers or home centers where our products are sold, or suppliers, or our inability to cost-effectively expand existing facilities, open and manage new facilities, and/or move production between manufacturing facilities could adversely affect our business and operating results.
•Our production labor needs fluctuate throughout the year and any failure by us to hire and/or retain a production labor force to adequately staff our manufacturing operations, perform service or warranty work, or other necessary activities or by our productionsuch labor force to adequately and safely perform their jobs could adversely affect our business, operating results, and reputation.
•Our labor force has been impacted by COVID-19 and such impact will likely continue, including as a result of global governmental, business and individual actions that have been, and continue to be, taken in response to COVID-19. Furthermore, we have incurred additional costs as a result of necessary actions and preparedness plans to help ensure the health and safety of our employees and continued operations, including remote working accommodations, enhanced cleaning processes, protocols designed to implement appropriate social distancing practices, and/or adoption of additional wage and benefit programs to assist employees.
•Management information systems are critical to our business. If our information systems or information security practices, or those of our business partners or third-party service providers, fail to adequately perform and/or protect sensitive or confidential information, or if we, our business partners, or third-party service providers experience an interruption in, or breach of, the operation of such systems or practices, including by theft, loss or damage from unauthorized access, security breaches, natural or man-made disasters, cyber attacks, computer viruses, malware, phishing, denial of service attacks, power loss or other disruptive events, our business, reputation, financial condition, and operating results could be adversely affected.
•Our reliance upon patents, trademark laws, and contractual provisions to protect our proprietary rights may not be sufficient to protect our intellectual property from others who may sell similar products. Our products may infringe the proprietary rights of others.
•Our business, properties, and products are subject to governmental policies and regulations, compliance with which compliance may require us to incur expenses or modify our products or operations and non-compliance with which may result in harm to our reputation and/or expose us to penalties. Governmental policies and regulations may also adversely affect the demand for some of our products and our operating results. In addition, changes in laws, policies, and regulations in the U.S. or other countries
in which we conduct business also may adversely affect our financial results, including as a result of, (i) adoption of laws and regulations to address COVID-19, (ii) taxation and tax policy changes, tax rate changes, new tax laws, new or revised tax law interpretations or guidance, including as a result of the Tax Act, (ii)(iii) changes to, or adoption of new, healthcare laws or regulations, or (iii)(iv) changes to U.S. or international policies or trade agreements or trade regulation and/or industry activity, including antidumping and countervailing duty petitions on certain products imported from foreign countries, including certain engines imported into the United States from China, that could result in additional duties or other charges on raw materials,commodities, components, parts or accessories we import.
•Changes in accounting or tax standards, policies, or assumptions in applying accounting or tax policies could adversely affect our financial statements, including our financial results and financial condition.
•Climate change legislation, regulations, or accords may adversely impact our operations.
•Costs of complying with the various environmental laws related to our ownership and/or lease of real property, such as clean-up costs and liabilities that may be associated with certain hazardous waste disposal activities, could adversely affect our financial condition and operating results.
•Legislative enactments could impact the competitive landscape within our markets and affect demand for our products.
•We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-corruption laws. The continued expansion of our international operations could increase the risk of violations of these laws in the future.
•We are subject to product quality issues, product liability claims, and other litigation from time to time that could adversely affect our business, reputation, operating results, or financial condition.
•If we are unable to retain our executive officers or other key employees, attract and retain other qualified personnel, or successfully implement executive officer, key employee or other qualified personnel transitions, we may not be able to meet strategic objectives and our business could suffer.
•We are dependent upon various floor planning programs to provide competitive inventory financing programs to certain distributors and dealers of our products. Any material change in the availability or terms of credit offered to our customers by such programs, challenges or delays in transferring new distributors and dealers from any business we might acquire or otherwise to such programs, or any termination or disruption of our various floor planning programs or any delay in securing replacement credit sources, could adversely affect our net sales and operating results.
•The terms of our credit arrangements and the indentures and other terms governing our senior notes and debentures could limit our ability to conduct our business, take advantage of business opportunities, and respond to changing business, market, and economic conditions. Additionally, we are subject to counterparty risk in our credit arrangements. If we are unable to comply with such terms, especially the financial covenants, our credit arrangements could be terminated and our senior notes, debentures, term loan facilities, and any amounts outstanding under our revolving credit facility could become due and payable.
•The addition of further leverage to our capital structure could result in a downgrade to our credit ratings in the future and the failure to maintain investment grade credit ratings could adversely affect our cost of funding and our liquidity by limiting the access to capital markets or the availability of funding from a variety of lenders.
•We are expanding and renovating our corporate and other facilities and could experience disruptions to our operations in connection with such efforts.
•We may not achieve our projected financial information or other business initiatives such as the goals of our "Vision 2020" initiative, in the time periods that we anticipate, or at all, which could have an adverse effect on our business, operating results and financial condition.
For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition, or operating results, see our most recently filed Annual Report on Form 10-K, Part I, Item 1A, "Risk Factors" and Part II, Item 1A, "Risk Factors" of this report.
All forward-looking statements included in this report are expressly qualified in their entirety by the foregoing cautionary statements. We caution readers not to place undue reliance on any forward-looking statement which speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, the risks described in our most recent Annual Report on Form 10-K, Part I, Item 1A, "Risk Factors" and Part II, Item 1A, "Risk Factors" of this report, as well as others that we may consider immaterial or do not anticipate at this time. The foregoing risks and uncertainties are not exclusive and further information concerning the company and our businesses, including factors that potentially could materially affect our financial results or condition, may emerge from time to time. We make no commitment to revise or update any forward-looking statements in order to reflect actual results, events or circumstances occurring or existing after the date any forward-looking statement is made, or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our future Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K we file with or furnish to the Securities and Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk stemming from changes in foreign currency exchange rates, interest rates, and commodity costs. We are also exposed to equity market risk pertaining to the trading price of our common stock. Changes in these factors could cause fluctuations in our earnings and cash flows. There have been no material changes to the market risk information regarding equity market risk included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2018.2019. Refer to Part II, Item 7A, Quantitative"Quantitative and Qualitative Disclosures about Market RiskRisk", within our Annual Report on Form 10-K for the fiscal year ended October 31, 20182019 for a complete discussion of our market risk. Refer below for further discussion on foreign currency exchange rate risk, interest rate risk, and commodity cost risk.
Foreign Currency Exchange Rate Risk
We are 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, costs associated with foreign plant operations, and purchases from suppliers. Our primary foreign 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, andas well as the Romanian New Leu against the Euro. We may also experience foreign currency exchange rate exposure as a result of the volatility and uncertainty that may arise as a result of the United Kingdom’s process for exiting the European Union. Because our products are manufactured or sourced primarily from the United StatesU.S. and Mexico, a stronger U.S. dollar and Mexican peso generally have a negative impact on our results from operations, while a weaker U.S. dollar and Mexican peso generally have a positive effect.
To reduce our exposure to foreign currency exchange rate risk, we actively manage the exposure of our 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. Our policy does not allow the use of derivative instruments for trading or speculative purposes. 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. Our worldwide foreign currency exchange rate exposures are reviewed monthly. The gains and losses on our derivative instruments offset the changes in values of the related underlying exposures. Therefore, changes in the values of our derivative instruments are highly correlated with changes in the market values of underlying hedged items both at inception and over the life of the derivative instrument.
Changes in the fair values of the spot rate component of outstanding, highly effective cash flow hedging instruments included in the assessment of hedge effectiveness are recorded in other comprehensive income within accumulated other comprehensive loss ("AOCL") on the 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. Certain derivative instruments we hold do not meet the cash flow hedge accounting criteria or have components that are excluded from cash flow hedge accounting; therefore, changes in their fair value are recorded in the Condensed Consolidated Statements of Earnings within the same line item as that of the underlying exposure. For additional information regarding our derivative instruments, see Note 1617, Derivative Instruments and Hedging Activities, in our Notes to Condensed Consolidated Financial Statements under the heading "Derivative Instruments and Hedging Activities" included in Item 1 of this Quarterly Report on Form 10-Q.
The foreign currency exchange contracts in the table below have maturity dates in fiscal 20192020 through fiscal 2022.2023. All items are non-trading and stated in U.S. dollars. As of August 2, 2019,July 31, 2020, the average contracted rate, notional amount, fair value, and the gain (loss) at fair value of outstanding derivative instruments were as follows:
|
| | | | | | | | | | | |
(Dollars in thousands, except average contracted rate) | | Average Contracted Rate | | Notional Amount | | Gain at Fair Value |
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 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(Dollars in thousands, except average contracted rate) | | Average Contracted Rate | | Notional Amount | | Fair Value | | Gain (Loss) at Fair Value |
Buy U.S. dollar/Sell Australian dollar | | 0.6965 | | | $ | 100,574 | | | $ | 97,392 | | | $ | (3,182) | |
Buy U.S. dollar/Sell Canadian dollar | | 1.3421 | | | 33,336 | | | 33,142 | | | (194) | |
Buy U.S. dollar/Sell Euro | | 1.1664 | | | 138,604 | | | 135,950 | | | (2,654) | |
Buy U.S. dollar/Sell British pound | | 1.3084 | | | 42,053 | | | 42,253 | | | 200 | |
Buy Mexican peso/Sell U.S. dollar | | 22.5774 | | | $ | 16,718 | | | $ | 16,559 | | | $ | (159) | |
| | | | | | | | |
Our net investment in foreign subsidiaries translated into U.S. dollars is not hedged. Any changes in foreign currency exchange rates would be reflected as a foreign currency translation adjustment, a component of AOCL in stockholders’ equity on the Condensed Consolidated Balance Sheets, and would not impact net earnings.
Interest Rate Risk
Our market risk on interest rates relates primarily to fluctuations in LIBOR-based interest rates on our revolving credit facility and term loan credit agreement,agreements, as well as the potential increase in the fair value of our fixed-rate long-term debt resulting from a potential decrease in interest rates. We generally do not use interest rate swaps to mitigate the impact of fluctuations in interest rates. Our indebtedness as of August 2, 2019July 31, 2020 includes $423.9$424.0 million of fixed rate debt that is not subject to variable interest rate fluctuations and $300.0$470.0 million of LIBOR-based borrowings under our term loan credit agreement. As of August 2, 2019, we did not have an outstanding balance on our LIBOR-based revolving credit facility.agreements. We have no earnings or cash flow exposure due to market risks on our fixed-rate long-term debt obligations.
Commodity Cost Risk
Most of the raw materials,commodities, components, parts, and partsaccessories used in our manufacturing process and end-products, or to be sold as standalone end-products, are exposed to commodity cost changes, including, for example, as a result of inflation, deflation, changing prices, tariffs, and/or duties. Our primary commodity cost exposures are with steel, aluminum, petroleum and natural gas-based resins, copper, lead, rubber, linerboard, and others.other materials, as well as components, such as engines, transmissions, transaxles, hydraulics, and electric motors, for use in our products. Our largest spend for commodities, components, parts, and accessories are generally for steel, engines, hydraulic components, transmissions, resin, aluminum, and electric motors, all of which we purchase from several suppliers around the world. We generally purchase commodities, components, parts, and componentsaccessories based upon market prices that are established with suppliers as part of the purchase process and generally attempt to obtain firm pricing from most of our suppliers for volumes consistent with planned production.
production and estimates of wholesale and retail demand for our products.
We strategically work to mitigate theany unfavorable impact as a result of inflation onchanges to the cost of commodities, components, parts, and componentsaccessories that affect our product lines. Historically, we have mitigated, and we currently expect that we would mitigate, any commodity, components, parts, and componentaccessories cost increases, in part, by collaborating with suppliers, reviewing alternative sourcing options, substituting materials, utilizing Lean methods, engaging in internal cost reduction efforts, utilizing tariff exclusions and duty drawback mechanisms, and increasing prices on some of our products, all as appropriate. Additionally, we enter into fixed-price contracts for future purchases of natural gas in the normal course of operations as a means to manage natural gas price risks. However, to the extent that commodity, components, parts, and componentaccessories costs increase, as a result of inflation, tariffs, duties, trade regulatory actions, industry actions or otherwise, including antidumping and countervailing duty petitions on certain products imported from foreign countries, including certain engines imported into the United States from China, and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, we may experience a decline in our gross margins to the extent we are not able to increase selling prices of our products or obtain manufacturing efficiencies to offset increases in commodity, components, parts, and componentaccessories costs. In the first nine months of fiscal 2019,2020, the average cost of commodities, components, parts, and components,accessories, including the impact of inflation and tariff costs, was higherlower compared to the first nine months of fiscal 2018.2019. We anticipate that the average cost for commodities, components, parts, and components,accessories, including the impact of inflation and tariff costs, for the remainder of fiscal 20192020 will be consistent withless than the average costs experienced during the fourth quartercomparable period of fiscal 2018.2019.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we are required to apply our judgment in evaluating the cost-benefit relationship of possible internal controls.
Our management evaluated, with the participation of our Chairman of the Board, President and Chief Executive Officer and Vice President, Treasurer and Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered inby this Quarterly Report on Form 10-Q. Based on that evaluation, our Chairman of the Board, President and Chief Executive Officer and Vice President, Treasurer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including ourthe Chairman of the Board, President and Chief Executive Officer and Vice President, Treasurer and Chief Financial Officer, as appropriate, to allow timely decisions regarding disclosure.required disclosures.
Changes in Internal Control Over Financial Reporting
Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of the design and operation of our internal control over financial reporting as of the end of the period covered in this Quarterly Report on Form 10-Q. With the exception ofOn March 2, 2020, we completed the acquisition of CMW noted below, there was no change in our internal control over financial reporting that occurredVenture Products and on April 1, 2019, during the three month period ended August 2, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
On April 1,second quarter of fiscal 2019, we completed the acquisition of CMW. Prior to this acquisition,these acquisitions, both Venture Products and CMW was awere privately-held companycompanies not subject to the Sarbanes-Oxley Act of 2002, the rules and regulations of the SEC, or other corporate governance requirements to which public companies may be subject. As part of our ongoing integration activities, we are in the process of incorporating internal controls over significant processes specific to CMW that we believe are appropriate and necessary to account for the acquisition and to consolidate and report our financial results. In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial reporting during the year of acquisition. As part of our ongoing integration activities, we are in the process of incorporating internal controls over significant processes specific to Venture Products and CMW that we believe are appropriate and necessary to account for the acquisitions and to consolidate and report our financial results. We expect to complete our integration activities related to internal control over financial reporting for Venture Products during fiscal 2021. As of the end of the third quarter of fiscal 2020, we have substantially completed our integration activities related to internal control over financial reporting for CMW. Accordingly, we expect to excludeinclude CMW from thewithin our assessment of internal control over financial reporting as of October 31, 2019.2020 but, as permitted by SEC rules, do not expect to include Venture Products within such assessment.
With the exception of integration activities in connection with the company's acquisitions of Venture Products and CMW, there was no change in our internal control over financial reporting that occurred during the three month period ended July 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are a party to litigation in the ordinary course of business. Litigation occasionally involves claims for punitive, as well as compensatory, damages arising out of the use of our products. Although we are self-insured to some extent, we maintain insurance against certain product liability losses. We are 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. We are also typically involved in commercial disputes, employment disputes, and patent litigation cases in the ordinary course of business. To prevent possible infringement of our patents by others, we periodically review competitors’ products. To avoid potential liability with respect to others’ patents, we regularly review certain patents issued by the United States Patent and Trademark Office and foreign patent offices. We believe these activities help us minimize our risk of being a defendant in patent infringement litigation. We are currently involved in patent litigation cases, including cases by or against competitors, where we are asserting and defending against claims of patent infringement. Such cases are at varying stages in the litigation process.
For a description of our material legal proceedings, see Note 15, Contingencies, in our Notes to Condensed Consolidated Financial Statements under the heading "Contingencies - Litigation""Litigation" included in Item 1 of this Quarterly Report on Form 10-Q, which is incorporated into this Part II. Item 1 by reference.
ITEM 1A. RISK FACTORS
We are affected by risks specific to us as well as factors that affect all businesses operating in a global market. The significant factors known to us that could materially adversely affect our business, financial condition, or operating results or could cause our actual results to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statement made in this report, are described in our most recently filed Annual Report on Form 10-K, (ItemPart I, Item 1A. Risk Factors)"Risk Factors". There has been no material change in those risk factors, with the exception of the addition of the following two new risk factor:factors:
COVID-19 materially adversely impacted our business, financial condition and operating results and will likely continue to adversely impact our business, financial condition and operating results and such impact could continue to be material.
COVID-19 created significant worldwide volatility, uncertainty and disruption. In particular, COVID-19 resulted in a substantial curtailment of business activities, a significant number of business closures, slowdowns, suspensions or delays of production and commercial activity, and weakened economic conditions, both in the United States and around the world. As such, COVID-19 has materially directly and indirectly adversely impacted us and such adverse impact will likely continue. However, the extent to which COVID-19 will continue to adversely impact our business, financial condition and operating results, which could continue to be material, will depend on numerous evolving factors, including:
•the duration of COVID-19;
•global governmental, business and individual actions that have been, and continue to be, taken in response to COVID-19, including business and travel restrictions, "stay-at-home" and "shelter-in-place" directives, quarantines, and slowdowns, suspensions or delays of commercial activity;
•the effect of COVID-19 on our dealers, distributors, mass retailers and other channel partners and customers, including their ability to remain open, continue to sell and service our products, pay for the products purchased from us, collect payment from their customers, adoption of reduced or experiencing constrained budgets, or enacting cash preservation efforts;
•our ability during COVID-19 to continue operations and/or adjust our production schedules, including by the temporary suspension of production activity mandated or otherwise made necessary by governmental authorities, as a result of current and anticipated weakened demand and/or production delays at certain of our facilities;
•continued reductions or volatility in demand for one or more of our products or services and/or higher demand for moderately-priced products;
•the effect of COVID-19 on our suppliers and our ability to continue to obtain commodities, components, parts, and accessories on a timely basis through our supply chain and at anticipated costs;
•logistics costs and challenges, including availability of transportation and at previously anticipated costs;
•costs incurred as a result of necessary actions and preparedness plans to help ensure the health and safety of our employees and continued operations, including remote working accommodations, enhanced cleaning processes, protocols designed to implement appropriate social distancing practices, and/or adoption of additional wage and benefit programs to assist employees;
•potential future restructuring, impairment or other charges;
•availability of employees, their ability to continue to conduct work away from normal working locations and/or under revised work environment protocols, as well as the general willingness of employees to come to normal working locations and perform work;
•our ability to establish and maintain appropriate estimates and assumptions used to prepare the Condensed Consolidated Financial Statements;
•the continued impact of COVID-19 on the financial and credit markets and economic activity generally;
•our ability to access lending, capital markets, and other sources of liquidity when needed on reasonable terms or at all;
•our ability to comply with the financial covenants in our debt agreements if the material economic downturn as a result of COVID-19 results in substantially increased indebtedness and/or lower EBITDA for us; and
•the continued exasperation of negative impacts as a result of the continuance of a global or national recession, depression or other sustained adverse market event as a result of COVID-19, including without limitation substantially reduced demand for our products.
In addition, the impacts from COVID-19 and efforts to contain it have heightened the risks in certain of the other risk factors described in our most recently filed Annual Report on Form 10-K, Part I, Item 1A. "Risk Factors".
Our recent acquisition of The Charles Machine Works,Venture Products, Inc. involves a number of risks, the occurrence of which could adversely affect our business, financial condition, and operating results.
On April 1, 2019, pursuant to the Agreement and Plan of Merger dated February 14, 2019 ("merger agreement"),March 2, 2020, we completed our acquisition of The Charles Machine Works, Inc. (“CMW”).Venture Products. The acquisition involves certain risks, the occurrence of which could adversely affect our business, financial condition, and operating results, including:
diversion of management's attention to integrate CMW’s operations;
disruption to our existing operations and plans or inability to effectively manage our expanded operations;
•failure, difficulties, or delays in securing, integrating, and assimilating information, financial systems, internal controls, operations, manufacturing processes, and products, or the distribution channel for CMW’sVenture Products' businesses and product lines;
•potential loss of key CMWVenture Products employees, suppliers, customers, distributors, or dealers or other adverse effects on existing business relationships with suppliers, customers, distributors, and dealers;
•adverse impact on overall profitability if our expanded operations do not achieve the growth prospects, net sales, earnings, cost or revenue synergies, or other financial results projected in our valuation models, or delays in the realization thereof or costs or charges incurredthereof;
•because we financed the acquisition and related transaction expenses with additional borrowings under our existing credit facility, our ability to achieve any revenue or cost synergies, including as a result of the Toro underground wind down or otherwise;
reallocation of amounts ofaccess additional capital from our other strategic initiatives;
thereunder may be limited and the increase in our leverage and debt service requirements as a result of amounts drawn on our unsecured term loan credit agreement and unsecured revolving credit facility to fund the purchase price of the acquisition, and the outstanding borrowings from the subsequent issuance of our private placement note purchase agreement, could restrict our ability to access additional capital when needed or to pursue other important elements of our business strategy;
•inaccurate assessment of undisclosed, contingent, or other liabilities, unanticipated costs associated with the acquisition, and despite the existence of representations, warranties, and indemnities in the merger agreement, and a representation and warranty insurance policy, an inability to recover or manage such liabilities and costs;
impacts as a result of purchase accounting adjustments, •incorrect estimates made in the accounting for the acquisition or the potential future write-off of significant amounts of goodwill, intangible assets, and/or other tangible assets if the CMWVenture Products business does not perform in the future as expected, or other potential financial accounting or reporting impacts;expected; and
•other factors mentioned in our recently filed Annual Report on Form 10-K, Part I,1, Item 1A, “Risk Factors”"Risk Factors".
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table sets forth information with respect to shares of ourthe company's common stock purchased by the company during each of the three fiscal months in our third quarter ended August July 31, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares (or Units) Purchased1,2 | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased As Part of Publicly Announced Plans or Programs1 | | Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs1 |
May 2, 2020 through May 29, 2020 | | — | | | $ | — | | | — | | | 7,042,256 | |
May 30, 2020 through July 3, 2020 | | — | | | — | | | — | | | 7,042,256 | |
July 4, 2020 through July 31, 2020 | | 1,704 | | | 64.92 | | | — | | | 7,042,256 | |
Total | | 1,704 | | | $ | 64.92 | | | — | | | |
1 On December 3, 2015, the company’s Board of Directors authorized the repurchase of 8,000,000 shares of the company’s common stock in open-market or privately negotiated transactions. On December 4, 2018, the company’s Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of the company’s common stock in open-market or privately negotiated transactions. This authorized stock repurchase program has no expiration date but may be terminated by the company’s Board of Directors at any time. No shares were repurchased under this authorized stock repurchase program during the company's fiscal third quarter of 2020 and 7,042,256 shares remained available to repurchase under this authorized stock repurchase program as of July 31, 2020.
2 2019:Includes 1,704 units (shares) of the company’s common stock purchased in open-market transactions at an average price of $64.92 per share on behalf of a rabbi trust formed to pay benefit obligations of the company to participants in deferred compensation plans. These 1,704 shares were not repurchased under the company’s authorized stock repurchase program described in footnote 1 above.
|
| | | | | | | | | | | | | |
Period | | Total Number of Shares (or Units) Purchased1,2,3 | | Average Price Paid per Share (or Unit) | | Total Number of Shares (or Units) Purchased As Part of Publicly Announced Plans or Programs1,2 | | Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs1,2 |
May 4, 2019 through May 31, 2019 | | — |
| | $ | — |
| | — |
| | 7,042,256 |
|
June 1, 2019 through June 28, 2019 | | — |
| | — |
| | — |
| | 7,042,256 |
|
June 29, 2019 through August 2, 2019 | | 1,310 |
| | 66.14 |
| | — |
| | 7,042,256 |
|
Total | | 1,310 |
| | $ | 66.14 |
| | — |
| | |
|
| |
1
| On December 3, 2015, the company’s Board of Directors authorized the repurchase of 8,000,000 shares of the company’s common stock in open-market or privately negotiated transactions. This program has no expiration date but may be terminated by the company’s Board of Directors at any time. No shares were repurchased under this program during the time period indicated above and 2,042,256 shares remained available to repurchase under this program as of August 2, 2019. |
| |
2
| On December 4, 2018, the company’s Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of the company’s common stock in open-market or privately negotiated transactions. This program has no expiration date but may be terminated by the company’s Board of Directors at any time. No shares were repurchased under this program during the time period indicated above and 5,000,000 shares remained available to repurchase under this program as of August 2, 2019. |
| |
3
| Includes 1,310 units (shares) of the company’s common stock purchased in open-market transactions at an average price of $66.14 per share on behalf of a rabbi trust formed to pay benefit obligations of the company to participants in deferred compensation plans. These 1,310 shares were not repurchased under the company’s repurchase programs described in footnotes 1 and 2 above. |
ITEM 6. EXHIBITS
|
| | | | | | | |
(a) | Exhibit No. | Description |
| | |
| 2.1 | Agreement and Plan of Merger dated as of February 14, 2019, by and among The Toro Company, The Charles Machine Works, Inc., Helix Company, Inc., and Agent 186 LLC as Shareholders’ Agent (incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated February 15,14, 2019, Commission File No. 1-8649). |
| | |
| 3.1 and 4.1 | |
| | |
| 3.2 and 4.2 | |
| | |
| 3.3 and 4.3 | |
| | |
| 4.4 | Indenture dated as of January 31, 1997, between RegistrantThe Toro Company and First National Trust Association, as Trustee, relating to The Toro Company’s 7.80% Debentures due June 15, 2027 (incorporated by reference to Exhibit 4(a) to Registrant’s Current Report on Form 8-K dated June 24, 1997, Commission File No. 1-8649). (Filed on paper - hyperlink is not required pursuant to Rule 105 of Regulation S-T). |
| | |
| 4.5 | |
| | |
| 4.6 | |
| | |
| 4.7 | |
| | |
| 31.1 | |
| | |
| 31.2 | |
| | |
| 32 | |
| | |
| 101 | The following financial information from The Toro Company’s Quarterly Report on Form 10-Q for the quarterly period ended August 2, 2019,July 31, 2020, filed with the SEC on September 5, 2019,3, 2020, formatted in Inline eXtensible Business Reporting Language (Inline XBRL): (i) Condensed Consolidated Statements of Earnings for the three and nine month periods ended July 31, 2020 and August 2, 2019, and August 3, 2018, (ii) Condensed Consolidated Statements of Comprehensive Income for the three and nine month periods ended July 31, 2020 and August 2, 2019, and August 3, 2018, (iii) Condensed Consolidated Balance Sheets as of July 31, 2020, August 2, 2019, August 3, 2018, and October 31, 2018,2019, (iv) Condensed Consolidated Statement of Cash Flows for the nine month periods ended July 31, 2020 and August 2, 2019, and August 3, 2018, (v) Condensed Consolidated Statements of Stockholders' Equity for the three and nine month periods ended July 31, 2020 and August 2, 2019, and August 3, 2018, and (vi) Notes to Condensed Consolidated Financial Statements (filed herewith). |
| | |
| 104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
THE TORO COMPANY
(Registrant)
|
| | | | | | | | | | |
Date: September 5, 20193, 2020 | By: | /s/ Renee J. Peterson | |
| | Renee J. Peterson | |
| | Vice President, Treasurer and Chief Financial Officer | |
| | (duly authorized officer, principal financial officer, and principal accounting officer) | |