Table of Contents


ttc0203201710q.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549

FORM 10-Q
ý

xQuarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended January 29, 2016February 3, 2017

oTransition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Transition Period fromto

THE TORO COMPANY

(Exact name of registrant as specified in its charter)

Delaware

1-8649

41-0580470

Delaware1-864941-0580470
(State of Incorporation)

(Commission File Number)

(I.R.S. Employer Identification Number)

8111 Lyndale Avenue South

Bloomington, Minnesota 55420

Telephone number:Number: (952) 888-8801

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  xý  No  o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  xý  No  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer x

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  xý

The number of shares of the registrant’s common stock outstanding as of February 23, 2016March 1, 2017 was 54,451,695.

107,582,096.




Table of Contents


THE TORO COMPANY

INDEX TO FORM 10-Q

Page
Number

PART I.

FINANCIAL INFORMATION:

Page Number

6-15

16-25

25-26

26-27

27

27

27-28

28

29



PART I.  FINANCIAL INFORMATION

Item

ITEM 1. FINANCIAL STATEMENTS

THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Earnings (Unaudited)

(Dollars and shares in thousands, except per share data)

 

 

Three Months Ended

 

 

 

January 29,

 

January 30,

 

 

 

2016

 

2015

 

Net sales

 

$

486,398

 

$

474,211

 

Cost of sales

 

303,744

 

305,212

 

Gross profit

 

182,654

 

168,999

 

Selling, general, and administrative expense

 

128,815

 

124,577

 

Operating earnings

 

53,839

 

44,422

 

Interest expense

 

(4,654

)

(4,716

)

Other income, net

 

4,512

 

2,267

 

Earnings before income taxes

 

53,697

 

41,973

 

Provision for income taxes

 

14,436

 

11,023

 

Net earnings

 

$

39,261

 

$

30,950

 

 

 

 

 

 

 

Basic net earnings per share of common stock

 

$

0.71

 

$

0.55

 

 

 

 

 

 

 

Diluted net earnings per share of common stock

 

$

0.70

 

$

0.54

 

 

 

 

 

 

 

Weighted-average number of shares of common stock outstanding — Basic

 

55,014

 

56,043

 

 

 

 

 

 

 

Weighted-average number of shares of common stock outstanding — Diluted

 

56,163

 

57,242

 

  Three Months Ended
  February 3,
2017
 January 29,
2016
Net sales $515,839
 $486,398
Cost of sales 322,359
 303,744
Gross profit 193,480
 182,654
Selling, general, and administrative expense 132,910
 128,815
Operating earnings 60,570
 53,839
Interest expense (4,883) (4,654)
Other income, net 3,866
 4,512
Earnings before income taxes 59,553
 53,697
Provision for income taxes 14,563
 14,436
Net earnings 44,990
 39,261
     
Basic net earnings per share of common stock $0.41
 $0.36
     
Diluted net earnings per share of common stock $0.41
 $0.35
     
Weighted-average number of shares of common stock outstanding — Basic 108,627
 110,029
     
Weighted-average number of shares of common stock outstanding — Diluted 110,774
 112,326

Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective September 16, 2016.

See accompanying Notes to Condensed Consolidated Financial Statements.


THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

 

 

Three Months Ended

 

 

 

January 29,

 

January 30,

 

 

 

2016

 

2015

 

Net earnings

 

$

39,261

 

$

30,950

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

Foreign currency translation adjustments

 

(4,791

)

(8,126

)

Derivative instruments, net of tax of $338 and $2,450, respectively

 

(1,059

)

2,778

 

Other comprehensive loss

 

(5,850

)

(5,348

)

Comprehensive income

 

$

33,411

 

$

25,602

 

  Three Months Ended
  February 3,
2017
 January 29,
2016
Net earnings $44,990
 $39,261
Other comprehensive income (loss) , net of tax:  
  
Foreign currency translation adjustments 117
 (4,791)
Derivative instruments, net of tax of $285 and $338, respectively 221
 (1,059)
Other comprehensive income (loss) 338
 (5,850)
Comprehensive income $45,328
 $33,411

See accompanying notesNotes to condensed consolidated financial statements.

Condensed Consolidated Financial Statements.



THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Balance Sheets (Unaudited)

(Dollars in thousands, except per share data)

 

 

January 29,

 

January 30,

 

October 31,

 

 

 

2016

 

2015

 

2015

 

ASSETS

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

118,140

 

$

82,914

 

$

126,275

 

Receivables, net

 

190,297

 

205,287

 

177,013

 

Inventories, net

 

422,036

 

364,390

 

334,514

 

Prepaid expenses and other current assets

 

36,983

 

41,084

 

34,782

 

Deferred income taxes

 

37,633

 

40,414

 

38,095

 

Total current assets

 

805,089

 

734,089

 

710,679

 

 

 

 

 

 

 

 

 

Property, plant, and equipment

 

811,222

 

777,116

 

804,598

 

Less accumulated depreciation

 

589,699

 

562,333

 

579,603

 

 

 

221,523

 

214,783

 

224,995

 

 

 

 

 

 

 

 

 

Long-term deferred income taxes

 

28,367

 

25,629

 

28,568

 

Other assets

 

27,510

 

24,029

 

24,873

 

Goodwill

 

195,222

 

194,934

 

195,533

 

Other intangible assets, net

 

116,123

 

128,704

 

119,010

 

Total assets

 

$

1,393,834

 

$

1,322,168

 

$

1,303,658

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

Current portion of long-term debt

 

$

23,398

 

$

20,340

 

$

23,134

 

Short-term debt

 

52,912

 

47,000

 

222

 

Accounts payable

 

211,216

 

195,569

 

152,017

 

Accrued liabilities

 

262,888

 

245,299

 

268,361

 

Total current liabilities

 

550,414

 

508,208

 

443,734

 

 

 

 

 

 

 

 

 

Long-term debt, less current portion

 

341,127

 

364,662

 

354,818

 

Deferred revenue

 

11,246

 

10,812

 

11,365

 

Other long-term liabilities

 

31,118

 

24,646

 

31,576

 

 

 

 

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

 

 

Preferred stock, par value $1.00 per share, authorized 1,000,000 voting and 850,000 non-voting shares, none issued and outstanding

 

 

 

 

Common stock, par value $1.00 per share, authorized 175,000,000 shares; issued and outstanding 54,482,554 shares as of January 29, 2016, 55,646,389 shares as of January 30, 2015, and 54,650,916 shares as of October 31, 2015

 

54,483

 

55,646

 

54,651

 

Retained earnings

 

441,139

 

379,247

 

437,357

 

Accumulated other comprehensive loss

 

(35,693

)

(21,053

)

(29,843

)

Total stockholders’ equity

 

459,929

 

413,840

 

462,165

 

Total liabilities and stockholders’ equity

 

$

1,393,834

 

$

1,322,168

 

$

1,303,658

 


  February 3,
2017
 January 29,
2016
 October 31,
2016
ASSETS  
�� 
  
Cash and cash equivalents $158,893
 $118,140
 $273,555
Receivables, net 183,850
 190,297
 163,265
Inventories, net 402,103
 422,036
 307,034
Prepaid expenses and other current assets 36,470
 36,983
 35,155
Total current assets 781,316
 767,456
 779,009
       
Property, plant, and equipment, gross 855,826
 811,222
 838,036
Less accumulated depreciation 628,909
 589,699
 615,998
Property, plant, and equipment, net 226,917
 221,523
 222,038
       
Long-term deferred income taxes 56,864
 66,000
 57,228
Other assets 25,788
 24,352
 23,422
Goodwill 201,246
 195,222
 194,782
Other intangible assets, net 110,782
 116,123
 108,093
Total assets $1,402,913
 $1,390,676
 $1,384,572
       
LIABILITIES AND STOCKHOLDERS’ EQUITY  
  
  
Current portion of long-term debt $22,960
 $23,398
 $22,484
Short-term debt 
 52,912
 
Accounts payable 232,440
 211,216
 174,668
Accrued liabilities 263,724
 262,888
 266,687
Total current liabilities 519,124
 550,414
 463,839
       
Long-term debt, less current portion 315,314
 337,969
 328,477
Deferred revenue 25,172
 11,246
 11,830
Other long-term liabilities 30,267
 31,118
 30,391
       
Stockholders’ equity:  
  
  
Preferred stock, par value $1.00 per share, authorized 1,000,000 voting and 850,000 non-voting shares, none issued and outstanding 
 
 
Common stock, par value $1.00 per share, authorized 175,000,000 shares; issued and outstanding 107,575,440 shares as of February 3, 2017, 108,965,108 shares as of January 29, 2016, and 108,427,393 shares as of October 31, 2016 107,575
 108,965
 108,427
Retained earnings 443,559
 386,657
 480,044
Accumulated other comprehensive loss (38,098) (35,693) (38,436)
Total stockholders’ equity 513,036
 459,929
 550,035
Total liabilities and stockholders’ equity $1,402,913
 $1,390,676
 $1,384,572

Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective September 16, 2016.

See accompanying notesNotes to condensed consolidated financial statements.

Condensed Consolidated Financial Statements.



THE TORO COMPANY AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

 

 

Three Months Ended

 

 

 

January 29,

 

January 30,

 

 

 

2016

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

Net earnings

 

$

39,261

 

$

30,950

 

Adjustments to reconcile net earnings to net cash provided by (used in) operating activities:

 

 

 

 

 

Non-cash income from finance affiliate

 

(1,878

)

(1,460

)

Provision for depreciation and amortization, and impairment loss

 

15,741

 

14,849

 

Stock-based compensation expense

 

2,477

 

2,684

 

Increase in deferred income taxes

 

 

(152

)

Other

 

(464

)

(21

)

Changes in operating assets and liabilities, net of effect of acquisitions:

 

 

 

 

 

Receivables, net

 

(12,614

)

(50,390

)

Inventories, net

 

(92,918

)

(80,283

)

Prepaid expenses and other assets

 

(4,584

)

(4,745

)

Accounts payable, accrued liabilities, deferred revenue, and other long-term liabilities

 

56,219

 

65,177

 

Net cash provided by (used in) operating activities

 

1,240

 

(23,391

)

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

Purchases of property, plant, and equipment

 

(10,680

)

(10,099

)

Proceeds from asset disposals

 

60

 

23

 

Distributions from (contributions to) finance affiliate, net

 

765

 

(385

)

Proceeds from sale of a business

 

1,500

 

 

Acquisition, net of cash acquired

 

 

(197,782

)

Net cash used in investing activities

 

(8,355

)

(208,243

)

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

Increase in short-term debt

 

51,789

 

25,717

 

Repayments of long-term debt

 

(13,442

)

(130

)

Excess tax benefits from stock-based awards

 

3,362

 

3,140

 

Proceeds from exercise of stock options

 

2,495

 

2,379

 

Purchases of Toro common stock

 

(27,485

)

(14,678

)

Dividends paid on Toro common stock

 

(16,496

)

(14,014

)

Net cash provided by financing activities

 

223

 

2,414

 

 

 

 

 

 

 

Effect of exchange rates on cash and cash equivalents

 

(1,243

)

(2,739

)

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

(8,135

)

(231,959

)

Cash and cash equivalents as of the beginning of the fiscal period

 

126,275

 

314,873

 

Cash and cash equivalents as of the end of the fiscal period

 

$

118,140

 

$

82,914

 

 

 

 

 

 

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Debt issued in connection with an acquisition

 

$

 

$

31,161

 

  Three Months Ended
  February 3,
2017
 January 29,
2016
Cash flows from operating activities:  
  
Net earnings $44,990
 $39,261
Adjustments to reconcile net earnings to net cash provided by operating activities:  
  
Non-cash income from finance affiliate (1,943) (1,878)
Provision for depreciation, amortization, and impairment loss 16,516
 15,741
Stock-based compensation expense 3,618
 2,477
Decrease in deferred income taxes 393
 
Other (98) (464)
Changes in operating assets and liabilities, net of effect of acquisitions:  
  
Receivables, net (19,380) (12,614)
Inventories, net (90,560) (92,918)
Prepaid expenses and other assets (4,272) (4,655)
Accounts payable, accrued liabilities, deferred revenue, and other long-term liabilities 66,128
 59,581
Net cash provided by operating activities 15,392
 4,531
     
Cash flows from investing activities:  
  
Purchases of property, plant, and equipment (11,620) (10,680)
Proceeds from asset disposals 
 60
Distributions from finance affiliate, net (98) 765
Proceeds from sale of a business 
 1,500
Acquisition, net of cash acquired (23,882) 
Net cash (used in) investing activities (35,600) (8,355)
     
Cash flows from financing activities:  
  
Increase in short-term debt 
 51,789
Repayments of long-term debt (12,702) (13,371)
Proceeds from exercise of stock options 3,128
 2,495
Purchases of Toro common stock (67,718) (27,485)
Dividends paid on Toro common stock (18,994) (16,496)
Net cash (used in) financing activities (96,286) (3,068)
     
Effect of exchange rates on cash and cash equivalents 1,832
 (1,243)
     
Net (decrease) in cash and cash equivalents (114,662) (8,135)
Cash and cash equivalents as of the beginning of the fiscal period 273,555
 126,275
Cash and cash equivalents as of the end of the fiscal period $158,893
 $118,140

See accompanying notesNotes to condensed consolidated financial statements.

Condensed Consolidated Financial Statements.



THE TORO COMPANY AND SUBSIDIARIES

Notes to Condensed Consolidated Financial Statements (Unaudited)
February 3, 2017

January 29, 2016

Note 1 — Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete financial statements. Unless the context indicates otherwise, the terms “company” and “Toro” refer to The Toro Company and its consolidated subsidiaries. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments, consisting primarily of recurring accruals, considered necessary for a fair presentation of the financial position and results of operations. Since the company’s business is seasonal, operating results for the three months ended January 29, 2016February 3, 2017, cannot be annualized to determine the expected results for the fiscal year ending October 31, 2016.

2017.

The company’s fiscal year ends on October 31, and quarterly results are reported based on three-month periods that generally end on the Friday closest to the quarter end. For comparative purposes, however, the company’s second and third quarters always include exactly 13 weeks of results so that the quarter end date for these two quarters is not necessarily the Friday closest to the calendar month end.

For further information, refer to the consolidated financial statements and notes included in the company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2015.2016. The policies described in that report are used for preparing quarterly reports.

Accounting Policies

In preparing the consolidated financial statements in conformity with U.S. GAAP, management must make decisions that impact the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures, including disclosures of contingent assets and liabilities. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Estimates are used in determining, among other items, sales promotionspromotion and incentivesincentive accruals, incentive compensation accruals, inventory valuation, warranty reserves, earn-out liabilities, allowance for doubtful accounts, pension and postretirement accruals, self-insurance accruals, useful lives for tangible and intangible assets, and future cash flows associated with impairment testing for goodwill and other long-lived assets. These estimates and assumptions are based on management’s best estimates and judgments at the time they are made. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with certainty, actual amounts could differ significantly from those estimated at the time the consolidated financial statements are prepared. Changes in those estimates will be reflected in the consolidated financial statements in future periods.


New Accounting Pronouncements Adopted

DivestitureIn April 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2015-03,

On November 27, 2015,Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This amended guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. This amended guidance was retrospectively adopted in the first quarter of fiscal 2017. Prior periods have been retrospectively adjusted for the adoption of this amended guidance and are reclassified in the consolidated balance sheets presentation as a direct deduction from the carrying amount of the related debt liability. The adoption of this guidance did not have a material impact on the company's consolidated financial statements.


In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This amended guidance requires customers to determine whether or not an arrangement contains a software license element. If the arrangement contains a software element, the related fees paid should be accounted for as an acquisition of a software license. If the arrangement does not contain a software license, it is accounted for as a service contract. This amended guidance was adopted in the first quarter of fiscal 2017. The adoption of this guidance did not have an impact on the company's consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Stock-based Compensation: Improvements to Employee Share-based Payment Accounting. This amended guidance simplifies several aspects of the accounting for share-based payment transactions, including the accounting for income taxes, forfeitures, statutory tax withholding requirements, and statement of cash flow classification. The company elected to early adopt this amended guidance effective November 1, 2016, which is the first quarter of fiscal 2017.

The impact of the early adoption resulted in the following:

The company recorded a discrete tax benefit of $4.9 million related to the excess tax benefit on share-based awards within income tax expense for the three months ended February 3, 2017. Prior to the adoption of this standard, these tax benefits were included in additional paid-in capital on the consolidated balance sheets. Adoption of this standard could add increased volatility to the company's provision for income taxes mainly due to timing of stock option exercises, vesting of restricted stock units and common stock price.
The company elected not to change its policy on accounting for forfeitures and will continue to estimate a requisite forfeiture rate.
The company has elected to change its policy on tax withholding requirements and will allow participants to withhold up to the maximum statutory rate prospectively on new awards. As of November 1, 2016, the company did not have any outstanding liabilities on awards which would require a cumulative-effect adjustment to retained earnings.
The company no longer presents the cash received from excess tax benefits within cash flows from financing activities as this benefit is now reflected within cash flows from operating activities in the consolidated statements of cash flows. The company elected to apply this change retrospectively and the change resulted in a $4.9 million and $3.4 million increase in cash flows from operating activities for the three months ended February 3, 2017 and January 29, 2016, respectively.

In October 2016, the FASB issued ASU No. 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This amended guidance removes the prohibition against the immediate recognition of the current and deferred tax effects of intra-entity transfers of assets other than inventory. This amended guidance was early adopted in the first quarter of fiscal 2017 using a modified retrospective basis. The company recorded a cumulative effect adjustment to the beginning balance of its retained earnings in the first quarter of fiscal 2017 for remaining unamortized deferred tax expense of intra-entity transfers of fixed assets totaling $2.4 million.

Note 2 — Acquisition

Effective January 1, 2017, during the first quarter of fiscal 2017, the company completed the saleacquisition of its Northwestern U.S. distribution company.all the outstanding shares of Regnerbau Calw GmbH (Perrot), a privately held manufacturer of professional irrigation equipment. The divestitureaddition of these products broadens and strengthens the company's irrigation solutions for the sport, agricultural, and industrial markets. The acquisition was funded with existing foreign cash and cash equivalents.

The purchase price of this acquisition was allocated to the identifiable assets acquired and liabilities assumed based on estimates of their fair value, with the excess purchase price recorded as goodwill. As of February 3, 2017, the company has not materialyet finalized the purchase accounting for the acquisition, but expects to finalize such purchase accounting in fiscal 2017. This acquisition was immaterial based on the company’scompany's consolidated financial condition and results of operations.


Note 3 — Investment in Joint Venture

In fiscal 2009, the company and TCF Inventory Finance, Inc. (“TCFIF”), a subsidiary of TCF National Bank, established Red Iron Acceptance, LLC (“Red Iron”), a joint venture in the form of a Delaware limited liability company that primarily provides inventory financing to certain distributors and dealers of the company’s products in the U.S. On November 29, 2016, the company entered into amended agreements for its Red Iron joint venture with TCFIF. As a result, the amended term of Red Iron will continue until October 31, 2024, subject to two-year extensions thereafter. Either the company or TCFIF may elect not to extend the amended term or any subsequent term by giving one-year written notice to the other party.

The company owns 45 percent of Red Iron and TCFIF owns 55 percent of Red Iron. The company accounts for its investment in Red Iron under the equity method of accounting. The company and TCFIF each contributed a specified amount of the estimated cash required to enable Red Iron to purchase the company’s inventory financing receivables and to provide financial support for Red Iron’s inventory financing programs. Red Iron borrows the remaining requisite estimated cash utilizing a $550 million secured revolving credit facility established under a credit agreement between Red Iron and TCFIF. The company’s total investment in Red Iron as of February 3, 2017 was $20.8 million. The company has not guaranteed the outstanding indebtedness of Red Iron. The company has agreed to repurchase products repossessed by Red Iron and the TCFIF Canadian affiliate, up to a maximum aggregate amount of $7.5 million in a calendar year.

Under the repurchase agreement between Red Iron and the company, Red Iron provides financing for certain dealers and distributors. These transactions are structured as an advance in the form of a payment by Red Iron to the company on behalf of a distributor or dealer with respect to invoices financed by Red Iron. These payments extinguish the obligation of the dealer or distributor to make payment to the company under the terms of the applicable invoice. Under separate agreements between Red Iron and the

dealers and distributors, Red Iron provides loans to the dealers and distributors for the advances paid by Red Iron to the company. The net amount of receivables financed for dealers and distributors under this arrangement for the three months ended February 3, 2017 and January 29, 2016 was $375.0 million and $336.1 million, respectively.

As of January 31, 2017, Red Iron’s total assets were $403.0 million and total liabilities were $356.9 million.

Note 4 — Inventories

Inventories are valued at the lower of cost or net realizable value, with cost determined by the last-in, first-out (“LIFO”) method for most inventories and first-in, first-out (“FIFO”) method for all other inventories. The company establishes a reserve for excess, slow-moving, and obsolete inventory that is equal to the difference between the cost and estimated net realizable value for that inventory. These reserves are based on a review and comparison of current inventory levels to the planned production, as well as planned and historical sales of the inventory.

Inventories were as follows:
  February 3,
2017
 January 29,
2016
 October 31,
2016
(Dollars in thousands)   
Raw materials and work in process $107,170
 $115,373
 $90,463
Finished goods and service parts 353,290
 370,703
 274,929
Total FIFO value 460,460
 486,076
 365,392
Less: adjustment to LIFO value 58,357
 64,040
 58,358
Total inventories, net $402,103
 $422,036
 $307,034
Note 5 — Goodwill and Other Intangible Assets

The changes in the net carrying amount of goodwill for the first three months of fiscal 2017 were as follows:
(Dollars in thousands) Professional Segment Residential Segment Total
Balance as of October 31, 2016 $184,338
 $10,444
 $194,782
Goodwill acquired 6,151
 
 6,151
Translation adjustments 268
 45
 313
Balance as of February 3, 2017 $190,757
 $10,489
 $201,246

The components of other intangible assets as of February 3, 2017 were as follows:
(Dollars in thousands) Gross Carrying Amount Accumulated Amortization Net
Patents $15,142
 $(11,040) $4,102
Non-compete agreements 6,879
 (6,742) 137
Customer-related 87,285
 (15,517) 71,768
Developed technology 30,058
 (24,519) 5,539
Trade names 29,469
 (4,575) 24,894
Other 800
 (800) 
Total amortizable 169,633
 (63,193) 106,440
Non-amortizable - trade names 4,342
 
 4,342
Total other intangible assets, net $173,975
 $(63,193) $110,782









The components of other intangible assets as of October 31, 2016 were as follows:
(Dollars in thousands) Gross Carrying Amount Accumulated Amortization Net
Patents $15,151
 $(10,866) $4,285
Non-compete agreements 6,886
 (6,681) 205
Customer-related 84,353
 (14,434) 69,919
Developed technology 28,648
 (23,712) 4,936
Trade names 28,715
 (4,235) 24,480
Other 800
 (800) 
Total amortizable 164,553
 (60,728) 103,825
Non-amortizable - trade names 4,268
 
 4,268
Total other intangible assets, net $168,821
 $(60,728) $108,093

Amortization expense for intangible assets during the first three months of fiscal 2017 was $2.4 million, compared to $3.2 million for the same period last fiscal year. Estimated amortization expense for the remainder of fiscal 2017 and succeeding fiscal years is as follows: fiscal 2017 (remainder), $7.5 million; fiscal 2018, $8.0 million; fiscal 2019, $7.1 million; fiscal 2020, $6.5 million; fiscal 2021, $6.1 million; fiscal 2022, $6.0 million; and after fiscal 2022, $65.2 million.
Note 6 — Stockholders’ Equity

Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss (“AOCL”), net of tax, are as follows:
  February 3,
2017
 January 29,
2016
 October 31,
2016
(Dollars in thousands)   
Foreign currency translation adjustments $31,177
 $29,393
 $31,430
Pension and post-retirement benefits 6,495
 5,112
 6,359
Derivative instruments 426
 1,188
 647
Total accumulated other comprehensive loss $38,098
 $35,693
 $38,436

The components and activity of AOCL for the first three months of fiscal 2017 are as follows:
(Dollars in thousands) 
Foreign Currency
Translation
Adjustments
 
Pension and
Postretirement
Benefits
 
Cash Flow
Derivative
Instruments
 Total
Balance as of October 31, 2016 $31,430
 $6,359
 $647
 $38,436
Other comprehensive loss (income) before reclassifications (253) 136
 102
 (15)
Amounts reclassified from AOCL 
 
 (323) (323)
Net current period other comprehensive loss (income) (253) 136
 (221) (338)
Balance as of February 3, 2017 $31,177
 $6,495
 $426
 $38,098

The components and activity of AOCL for the first three months of fiscal 2016 are as follows:
(Dollars in thousands) 
Foreign Currency
Translation
Adjustments
 
Pension and
Postretirement
Benefits
 
Cash Flow
Derivative
Instruments
 Total
Balance as of October 31, 2015 $24,328
 $5,386
 $129
 $29,843
Other comprehensive loss (income) before reclassifications 5,065
 (274) 165
 4,956
Amounts reclassified from AOCL 
 
 894
 894
Net current period other comprehensive loss (income) 5,065
 (274) 1,059
 5,850
Balance as of January 29, 2016 $29,393
 $5,112
 $1,188
 $35,693


Note 7 — Stock-Based Compensation


Stock Option Awards


Under The Toro Company Amended and Restated 2010 Equity and Incentive Plan, as amended and restated (the “2010 plan”), stock options are granted with an exercise price equal to the closing price of the company’s common stock on the date of grant, as reported by the New York Stock Exchange. Options are generally granted to executive officers, other employees, and non-employee members of the company’s Board of Directors on an annual basis in the first quarter of the company’s fiscal year. Options generally vest one-third each year over a three-year period and have a ten-year term. Other options granted to certain employees vest in full on the three-year anniversary of the date of grant and have a ten-year term. Compensation expense equal to the grant date fair value is generally recognized for these awards over the vesting period. Stock options granted to executive officers and other employees are subject to accelerated expensing if the option holder meets the retirement definition set forth in the 2010 plan. In that case, the fair value of the options is expensed in the fiscal year of grant because generally the option holder must be employed as of the end of the fiscal year in which the options are granted in order for the options to continue to vest following retirement. Similarly, if a non-employee director has served on the company’s Board of Directors for ten full fiscal years or more, the awards vest immediately upon retirement, and therefore, the fair value of the options granted is fully expensed on the date of the grant.


The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation method with the assumptions noted in the table below. The expected life is a significant assumption as it determines the period for which the risk-free interest rate, 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 experience. Separate groups of employees and non-employee directors that have similar historical exercise behavior are considered separately for valuation purposes. Expected volatilities are based on the 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 following table illustrates the weighted-average valuation assumptions for options granted in the following fiscal periods.

 

 

Fiscal 2016

 

Fiscal 2015

 

Expected life of option in years

 

5.98

 

5.94

 

Expected stock price volatility

 

24.06%

 

29.66%

 

Risk-free interest rate

 

1.81%

 

1.61%

 

Expected dividend yield

 

1.24%

 

1.29%

 

Grant date per share weighted-average fair value

 

$17.58

 

$16.81

 

periods:

  Fiscal 2017 Fiscal 2016
Expected life of option in years 6.02 5.98
Expected stock price volatility 22.15% 24.06%
Risk-free interest rate 2.03% 1.81%
Expected dividend yield 1.01% 1.24%
Weighted-average fair value at date of grant $12.55 $8.79

Performance Share Awards

The


Under the 2010 Plan, the company grants performance share awards to executive officers and other employees under which they are entitled to receive shares of the company’s common stock contingent on the achievement of performance goals of the company and businesses of the company, which are generally measured over a three-year period. The number of shares of common stock a participant receives will be increased (up to 200 percent of target levels) or reduced (down to zero) based on the level of achievement of performance goals and 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 expense 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 fair value of performance share awards granted during the first quarterthree months of each of fiscal 2017 and 2016 was $54.52 and 2015 was $77.77 and $65.68,$38.89, respectively.


Restricted Stock and Restricted Stock UnitAwards


Under the 2010 plan, restricted stock and restricted stock unit awards are generally granted to certain employees that are not executive officers. Occasionally, restricted stock or restricted stock unit awards may be granted, including to executive officers, in connection with hiring, mid-year promotions, leadership transition, or retention. Restricted stock and 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 expense 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 and restricted stock unit awards, is recognized for these awards over the vesting period. The

per share weighted-average fair value of restricted stock and restricted stock unit awards granted during the first quarterthree months of fiscal 2017 and 2016 was $56.67 and 2015 was $77.24 and $62.62,$38.62, respectively.


Note 8 — Per Share Data


Reconciliations of basic and diluted weighted-average shares of common stock outstanding are as follows:

 

 

Three Months Ended

 

 

 

January 29,

 

January 30,

 

(Shares in thousands)

 

2016

 

2015

 

Basic

 

 

 

 

 

Weighted-average number of shares of common stock

 

54,977

 

55,997

 

Assumed issuance of contingent shares

 

37

 

46

 

Weighted-average number of shares of common stock and assumed issuance of contingent shares

 

55,014

 

56,043

 

Diluted

 

 

 

 

 

Weighted-average number of shares of common stock and assumed issuance of contingent shares

 

55,014

 

56,043

 

Effect of dilutive securities

 

1,149

 

1,199

 

Weighted-average number of shares of common stock, assumed issuance of contingent shares, and effect of dilutive securities

 

56,163

 

57,242

 

  Three Months Ended
  February 3,
2017
 January 29,
2016
(Shares in thousands)  
Basic  
  
Weighted-average number of shares of common stock 108,585
 109,955
Assumed issuance of contingent shares 42
 74
Weighted-average number of shares of common stock and assumed issuance of contingent shares 108,627
 110,029
Diluted  
  
Weighted-average number of shares of common stock and assumed issuance of contingent shares 108,627
 110,029
Effect of dilutive securities 2,147
 2,297
Weighted-average number of shares of common stock, assumed issuance of contingent shares, and effect of dilutive securities 110,774
 112,326

Shares and per share data have been adjusted for all periods presented to reflect a two-for-one stock split effective September 16, 2016.

Incremental shares from options restricted stock, and restricted stock units are computed by the treasury stock method. Options to purchase 199,281317,757 and 198,770398,562 shares of common stock during the first quarterthree months of fiscal 20162017 and 2015,2016, respectively, were excluded from the computation of diluted net earnings per share because they were anti-dilutive.

Inventories

Inventories are valued at the lower of cost or net realizable value, with cost determined by the last-in, first-out (“LIFO”) method for most inventories and first-in, first-out (“FIFO”) method for all other inventories. The company establishes a reserve for excess, slow-moving, and obsolete inventory that is equal to the difference between the cost and estimated net realizable value for that inventory. These reserves are based on a review and comparison of current inventory levels to the planned production, as well as planned and historical sales of the inventory.

Inventories were as follows:

 

 

January 29,

 

January 30,

 

October 31,

 

(Dollars in thousands)

 

2016

 

2015

 

2015

 

Raw materials and work in process

 

$

115,373

 

$

123,677

 

$

107,086

 

Finished goods and service parts

 

370,703

 

308,208

 

291,468

 

Total FIFO value

 

486,076

 

431,885

 

398,554

 

Less: adjustment to LIFO value

 

64,040

 

67,495

 

64,040

 

Total

 

$

422,036

 

$

364,390

 

$

334,514

 

Goodwill

The changes in the net carrying amount of goodwill for the first quarter of fiscal 2016 were as follows:

 

 

Professional

 

Residential

 

 

 

(Dollars in thousands)

 

Segment

 

Segment

 

Total

 

Balance as of October 31, 2015

 

$

184,766

 

$

10,767

 

$

195,533

 

Translation adjustments

 

(168

)

(143

)

(311

)

Balance as of January 29, 2016

 

$

184,598

 

$

10,624

 

$

195,222

 

Other Intangible Assets

The components of other intangible assets were as follows:

(Dollars in thousands)
January 29, 2016

 

Weighted-average
Life (Years)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Patents

 

9.9

 

$

15,167

 

$

(10,334

)

$

4,833

 

Non-compete agreements

 

5.5

 

6,901

 

(6,326

)

575

 

Customer-related

 

19.1

 

84,502

 

(11,346

)

73,156

 

Developed technology

 

7.6

 

28,739

 

(21,300

)

7,439

 

Trade names

 

19.2

 

28,715

 

(3,215

)

25,500

 

Other

 

 

 

800

 

(800

)

 

Total amortizable

 

 

 

164,824

 

(53,321

)

111,503

 

Non-amortizable - trade names

 

 

 

4,620

 

 

4,620

 

Total other intangible assets, net

 

 

 

$

169,444

 

$

(53,321

)

$

116,123

 


October 31, 2015

 

Weighted-average
Life (Years)

 

Gross Carrying
Amount

 

Accumulated
Amortization

 

Net

 

Patents

 

9.9

 

$

15,191

 

$

(10,175

)

$

5,016

 

Non-compete agreements

 

5.5

 

6,922

 

(6,206

)

716

 

Customer-related

 

19.1

 

84,599

 

(10,316

)

74,283

 

Developed technology

 

7.6

 

28,804

 

(20,530

)

8,274

 

Trade names

 

19.2

 

28,715

 

(2,825

)

25,890

 

Other

 

 

 

800

 

(800

)

 

Total amortizable

 

 

 

165,031

 

(50,852

)

114,179

 

Non-amortizable - trade names

 

 

 

4,831

 

 

4,831

 

Total other intangible assets, net

 

 

 

$

169,862

 

$

(50,852

)

$

119,010

 

Amortization expense for intangible assets during the first quarter of fiscal 2016 was $3.2 million. Estimated amortization expense for the remainder of fiscal 2016 and succeeding fiscal years is as follows: fiscal 2016 (remainder), $7.7 million; fiscal 2017, $9.5 million; fiscal 2018, $7.4 million; fiscal 2019, $6.6 million; fiscal 2020, $6.0 million; fiscal 2021, $5.6 million; and after fiscal 2021, $68.7 million.

Investment in Joint Venture

In fiscal 2009, the company and TCF Inventory Finance, Inc. (“TCFIF”), a subsidiary of TCF National Bank, established Red Iron Acceptance, LLC (“Red Iron”), a joint venture in the form of a Delaware limited liability company that provides inventory financing, including floor plan and open account receivable financing, to distributors and dealers of the company’s products in the U.S. and to select distributors of the company’s products in Canada. The initial term of Red Iron will continue until October 31, 2017, subject to unlimited automatic two-year extensions thereafter. Either the company or TCFIF may elect not to extend the initial term or any subsequent term by giving one-year notice to the other party. Additionally, in connection with the joint venture, the company and an affiliate of TCFIF entered into an arrangement to provide inventory financing to dealers of the company’s products in Canada.

The company owns 45 percent of Red Iron and TCFIF owns 55 percent of Red Iron. The company accounts for its investment in Red Iron under the equity method of accounting. Each of the company and TCFIF 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 $450 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 January 29, 2016 was $20.1 million. The company has not guaranteed the outstanding indebtedness of Red Iron. The company has agreed to repurchase products repossessed by Red Iron and the TCFIF Canadian affiliate, up to a maximum aggregate amount of $7.5 million in a calendar year. In addition, the company has provided recourse to Red Iron for certain outstanding receivables, which amounted to a maximum amount of $0.6 million as of January 29, 2016.

Under the repurchase agreement between Red Iron and the company, Red Iron provides financing for certain dealers and distributors. These transactions are structured as an advance in the form of a payment by Red Iron to the company on behalf of a distributor or dealer with respect to invoices financed by Red Iron. These payments extinguish the obligation of the dealer or distributor to make payment to the company under the terms of the applicable invoice. Under separate agreements between Red Iron and the dealers and distributors, Red Iron provides loans to the dealers and distributors for the advances paid by Red Iron to the company. The net amount of new receivables financed for dealers and distributors under this arrangement for the three months ended January 29, 2016 and January 30, 2015 was $336.1 million and $239.2 million, respectively.

As of January 29, 2016, Red Iron’s total assets were $399.4 million and total liabilities were $354.8 million.


Warranty Guarantees

The company’s products are warranted to ensure customer confidence in design, workmanship, and overall quality. Warranty coverage is for specified periods of time and on select products’ hours of usage, and generally covers parts, labor, and other expenses for non-maintenance repairs. Warranty coverage generally does not cover operator abuse or improper use. An authorized company distributor or dealer must perform warranty work. Distributors and dealers submit claims for warranty reimbursement and are credited for the cost of repairs, labor, and other expenses as long as the repairs meet prescribed standards. Warranty expense is accrued at the time of sale based on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, and other minor factors. Special warranty reserves are also accrued for major rework campaigns. The company sells extended warranty coverage on select products for a prescribed period after the factory warranty period expires.

Warranty provisions, claims, and changes in estimates for the first quarter of each of fiscal 2016 and 2015 were as follows:

 

 

Three Months Ended

 

 

 

January 29,

 

January 30,

 

(Dollars in thousands)

 

2016

 

2015

 

Beginning balance

 

$

70,734

 

$

71,080

 

Warranty provisions

 

8,940

 

8,420

 

Warranty claims

 

(8,527

)

(8,572

)

Addition from an acquisition

 

 

786

 

Ending balance

 

$

71,147

 

$

71,714

 

Note 9 — Segment Data


The presentation of segment information reflects the manner in which management organizes segments for making operating decisions and assessing performance. On this basis, the company has determined it has three reportable business segments: Professional, Residential, and Distribution. The Distribution segment, which consists of ourthe company-owned domestic distributorship, has been combined with the company’s corporate activities and elimination of intersegment revenues and expenses that is shown as “Other” in the following tables due to the insignificance of the segment.


The following table shows the summarized financial information concerning the company’s reportable segments:

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Three months ended January 29, 2016

 

Professional

 

Residential

 

Other

 

Total

 

Net sales

 

$

338,836

 

$

144,284

 

$

3,278

 

$

486,398

 

Intersegment gross sales

 

5,717

 

68

 

(5,785

)

 

Earnings (loss) before income taxes

 

61,592

 

16,739

 

(24,634

)

53,697

 

Total assets

 

854,106

 

263,407

 

276,321

 

1,393,834

 

Three months ended January 30, 2015

 

Professional

 

Residential

 

Other

 

Total

 

Net sales

 

$

339,706

 

$

134,743

 

$

(238

)

$

474,211

 

Intersegment gross sales

 

10,520

 

84

 

(10,604

)

 

Earnings (loss) before income taxes

 

55,659

 

13,727

 

(27,413

)

41,973

 

Total assets

 

866,760

 

214,652

 

240,756

 

1,322,168

 

(Dollars in thousands)        
Three months ended February 3, 2017 Professional Residential Other Total
Net sales $371,809
 $140,390
 $3,640
 $515,839
Intersegment gross sales 4,556
 74
 (4,630) 
Earnings (loss) before income taxes 68,166
 16,558
 (25,171) 59,553
Total assets 854,384
 243,145
 305,384
 1,402,913
(Dollars in thousands)        
Three months ended January 29, 2016 Professional Residential Other Total
Net sales $338,836
 $144,284
 $3,278
 $486,398
Intersegment gross sales 5,717
 68
 (5,785) 
Earnings (loss) before income taxes 61,592
 16,739
 (24,634) 53,697
Total assets 854,106
 263,407
 273,163
 1,390,676







The following table summarizes the components of the loss before income taxes included in “Other” shown above:

 

 

Three Months Ended

 

 

 

January 29,

 

January 30,

 

(Dollars in thousands)

 

2016

 

2015

 

Corporate expenses

 

$

(24,783

)

$

(21,970

)

Interest expense

 

(4,654

)

(4,716

)

Other

 

4,803

 

(727

)

Total

 

$

(24,634

)

$

(27,413

)

Stockholders’ Equity

Accumulated Other Comprehensive Loss

Components of accumulated other comprehensive loss (“AOCL”), net of tax, are as follows:

 

 

January 29,

 

January 30,

 

October 31,

 

(Dollars in thousands)

 

2016

 

2015

 

2015

 

Foreign currency translation adjustments

 

$

29,393

 

$

20,818

 

$

24,328

 

Pension and postretirement benefits

 

5,112

 

5,110

 

5,386

 

Derivative instruments

 

1,188

 

(4,875

)

129

 

Total accumulated other comprehensive loss

 

$

35,693

 

$

21,053

 

$

29,843

 

  Three Months Ended
  February 3,
2017
 January 29,
2016
(Dollars in thousands)  
Corporate expenses $(23,961) $(24,783)
Interest expense, net (4,883) (4,654)
Other 3,673
 4,803
Total $(25,171) $(24,634)

The components and activity of AOCL for the first three months of fiscal 2016 are as follows:

(Dollars in thousands)

 

Foreign
Currency
Translation
Adjustments

 

Pension and
Postretirement
Benefits

 

Cash Flow
Derivative
Instruments

 

Total

 

Balance as of October 31, 2015

 

$

24,328

 

$

5,386

 

$

129

 

$

29,843

 

Other comprehensive loss before reclassifications

 

5,065

 

(274

)

165

 

4,956

 

Amounts reclassified from AOCL

 

 

 

894

 

894

 

Net current period other comprehensive loss (income)

 

$

5,065

 

$

(274

)

$

1,059

 

$

5,850

 

Balance as of January 29, 2016

 

$

29,393

 

$

5,112

 

$

1,188

 

$

35,693

 

The components and activity of AOCL for the first three months of fiscal 2015 are as follows:

(Dollars in thousands) 

 

Foreign
Currency
Translation
Adjustments

 

Pension and
Postretirement
Benefits

 

Cash Flow
Derivative
Instruments

 

Total

 

Balance as of October 31, 2014

 

$

12,536

 

$

5,266

 

$

(2,097

)

$

15,705

 

Other comprehensive loss before reclassifications

 

8,282

 

(156

)

(4,456

)

3,670

 

Amounts reclassified from AOCL

 

 

 

1,678

 

1,678

 

Net current period other comprehensive loss (income)

 

$

8,282

 

$

(156

)

$

(2,778

)

$

5,348

 

Balance as of January 30, 2015

 

$

20,818

 

$

5,110

 

$

(4,875

)

$

21,053

 

Derivative Instruments and Hedging Activities

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 actively manages the exposure of its foreign currency exchange rate market risk by entering into various hedging instruments, authorized under company policies that place controls on these activities, with counterparties that are highly rated financial institutions. The company’s hedging activities primarily involve the use of forward currency contracts, as well as cross currency swaps that are intended to offset intercompany loan exposures. 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 changes. Decisions on whether to use such contracts 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’s policy does not allow the use of derivatives for trading or speculative purposes. The company 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 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.

Cash flow hedges. The company recognizes all derivative instruments as either assets or liabilities at fair value on the consolidated balance sheet and formally documents relationships between cash flow hedging instruments and hedged transactions, as well as its risk-management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives to the forecasted transactions, such as sales to third parties, foreign plant operations, and purchases from suppliers. Changes in fair values of outstanding cash flow hedge derivatives, except the ineffective portion, are recorded in other comprehensive income (“OCI”), until net earnings is affected by the variability of cash flows of the hedged transaction. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in net earnings. The consolidated statement of earnings classification of effective hedge results is the same as that of the underlying exposure. Results of hedges of sales are recorded in net sales, and foreign plant operations and purchases of suppliers are recorded in cost of sales when the underlying hedged transaction affects net earnings. 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 hedges of intercompany loans are recorded in other income, net as an offset to the remeasurement of the foreign loan balance.

The company formally assesses, at a hedge’s inception and on an ongoing basis, whether the derivatives that are designated as hedges have been highly effective in offsetting changes in the cash flows of the hedged transactions and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not, or has ceased to be, highly effective as a hedge, the company discontinues hedge accounting prospectively. When the company discontinues 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 remains in AOCL and is reclassified to net earnings 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 recognized immediately in net earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the company carries the derivative at its fair value on the consolidated balance sheet, recognizing future changes in the fair value in other income, net. For the first quarter of fiscal 2016, there were no gains or losses on contracts reclassified into earnings as a result of the discontinuance of cash flow hedges. As of January 29, 2016, the notional amount outstanding of forward contracts designated as cash flow hedges was $131.4 million. Additionally, the company has one cross currency interest rate swap instrument outstanding as of January 29, 2016 for a fixed pay notional of 36.6 million Romanian New Leu and receive floating notional of 8.5 million Euros.

Derivatives not designated as hedging instruments. The company also enters into foreign currency contracts that include forward currency contracts and cross currency swaps to mitigate the remeasurement of specific assets and liabilities on the consolidated balance sheet. These contracts are not designated as hedging instruments. Accordingly, changes in the fair value of hedges of recorded balance sheet positions, such as cash, receivables, payables, intercompany notes, and other various contractual claims to pay or receive foreign currencies other than the functional currency, are recognized immediately in other income, net, on the consolidated statements of earnings together with the transaction gain or loss from the hedged balance sheet position.

The following table presents the fair value of the company’s derivatives and consolidated balance sheet location.

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

January 29, 2016

 

January 30, 2015

 

January 29, 2016

 

January 30, 2015

 

 

 

Balance

 

 

 

Balance

 

 

 

Balance

 

 

 

Balance

 

 

 

 

 

Sheet

 

Fair

 

Sheet

 

Fair

 

Sheet

 

Fair

 

Sheet

 

Fair

 

(Dollars in thousands)

 

Location

 

Value

 

Location

 

Value

 

Location

 

Value

 

Location

 

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

Prepaid expenses

 

$

3,393

 

Prepaid expenses

 

$

9,125

 

Accrued liabilities

 

$

2,967

 

Accrued liabilities

 

$

 

Cross currency contract

 

Prepaid expenses

 

142

 

Prepaid expenses

 

 

Accrued liabilities

 

 

Accrued liabilities

 

440

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Derivatives Not Designated as Hedging Instruments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

Prepaid expenses

 

1,347

 

Prepaid expenses

 

4,901

 

Accrued liabilities

 

235

 

Accrued liabilities

 

 

Cross currency contract

 

Prepaid expenses

 

2,218

 

Prepaid expenses

 

1,930

 

Accrued liabilities

 

 

Accrued liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Derivatives

 

 

 

$

7,100

 

 

 

$

15,956

 

 

 

$

3,202

 

 

 

$

440

 

The following table presents the impact of derivative instruments on the consolidated statements of earnings for the company’s derivatives designated as cash flow hedging instruments for the three months ended January 29, 2016 and January 30, 2015, respectively.

 

 

 

 

 

 

 

 

Location of Gain (Loss)

 

Gain (Loss)

 

 

 

 

 

Location of Gain

 

 

 

Recognized in Income

 

Recognized in Income

 

 

 

Gain (Loss)

 

(Loss) Reclassified

 

Gain (Loss)

 

on Derivatives

 

on Derivatives

 

 

 

Recognized in OCI on

 

from AOCL

 

Reclassified from

 

(Ineffective Portion

 

(Ineffective Portion and

 

 

 

Derivatives

 

into Income

 

AOCL into Income

 

and excluded from

 

Excluded from

 

 

 

(Effective Portion)

 

(Effective Portion)

 

(Effective Portion)

 

Effectiveness Testing)

 

Effectiveness Testing)

 

(Dollars in thousands)

 

January 29,

 

January 30,

 

 

 

January 29,

 

January 30,

 

 

 

January 29,

 

January 30,

 

For the three months ended

 

2016

 

2015

 

 

 

2016

 

2015

 

 

 

2016

 

2015

 

Forward currency contracts

 

$

565

 

$

4,178

 

Net sales

 

$

1,080

 

$

2,004

 

Other income, net

 

$

(12

)

$

227

 

Forward currency contracts

 

(1,659

)

(1,384

)

Cost of sales

 

(314

)

(313

)

 

 

 

 

 

 

Cross currency contracts

 

34

 

(18

)

Other income, net

 

128

 

(13

)

 

 

 

 

 

 

Total

 

$

(1,060

)

$

2,776

 

 

 

$

894

 

$

1,678

 

 

 

 

 

 

 

As of January 29, 2016, the company expects to reclassify approximately $0.7 million of gains from AOCL to earnings during the next twelve months.

The following table presents the impact of derivative instruments on the consolidated statements of earnings for the company’s derivatives not designated as hedging instruments.

 

 

 

 

Gain (Loss) Recognized in Net Earnings

 

 

 

 

 

Three Months Ended

 

 

 

Location of Gain (Loss)

 

January 29,

 

January 30,

 

(Dollars in thousands)

 

Recognized in Net Earnings

 

2016

 

2015

 

Forward currency contracts

 

Other income, net

 

$

1,337

 

$

8,261

 

Cross currency contracts

 

Other income, net

 

130

 

1,135

 

 

 

 

 

$

1,467

 

$

9,396

 

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 contracts at the net amount in its consolidated balance sheets.

The following tables show the effects of the master netting arrangements on the fair value of the company’s derivative contracts that are recorded in the consolidated balance sheets:

 

 

Assets

 

Liabilities

 

 

 

Gross Amounts

 

Gross Liabilities

 

Net Amounts

 

Gross Amounts

 

Gross Assets

 

Net Amounts of

 

(Dollars in thousands)

 

of Recognized

 

Offset in the

 

of Assets Presented

 

of Recognized

 

offset in the

 

Liabilities Presented

 

January 29, 2016

 

Assets

 

Balance Sheet

 

in the Balance Sheet

 

Liabilities

 

Balance Sheet

 

in the Balance Sheet

 

Forward currency contracts

 

$

4,740

 

$

 

$

4,740

 

$

(3,202

)

$

 

$

(3,202

)

Cross currency contracts

 

2,360

 

 

2,360

 

 

 

 

 

 

$

7,100

 

$

 

$

7,100

 

$

(3,202

)

$

 

$

(3,202

)

 

 

Assets

 

Liabilities

 

 

 

Gross Amounts

 

Gross Liabilities

 

Net Amounts

 

Gross Amounts

 

Gross Assets

 

Net Amounts of

 

(Dollars in thousands)

 

of Recognized

 

Offset in the

 

of Assets Presented

 

of Recognized

 

offset in the

 

Liabilities Presented

 

January 30, 2015

 

Assets

 

Balance Sheet

 

in the Balance Sheet

 

Liabilities

 

Balance Sheet

 

in the Balance Sheet

 

Forward currency contracts

 

$

15,781

 

$

(1,755

)

$

14,026

 

$

 

$

 

$

 

Cross currency contracts

 

1,930

 

 

1,930

 

(440

)

 

(440

)

 

 

$

17,711

 

$

(1,755

)

$

15,956

 

$

(440

)

$

 

$

(440

)

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 flow), 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

Note 10Unadjusted 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.

Cash balances are valued at their carrying amounts in the consolidated balance sheets, which are reasonable estimates of their fair value due to their short-term nature. Forward currency contracts are valued based on observable market transactions of forward currency prices and spot currency rates as of the reporting date. The fair value of cross currency contracts is determined using discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of

the derivatives, including the period to maturity, and uses observable market-based inputs such as interest rates and foreign currency exchange rates. In addition, credit valuation adjustments, which consider the impact of any credit enhancements to the contracts, such as collateral postings, thresholds, mutual puts, and guarantees, are incorporated in the fair values to account for potential nonperformance risk. The unfunded deferred compensation liability is primarily subject to changes in fixed-income investment contracts based on current yields. For accounts receivable and accounts payable, carrying amounts are a reasonable estimate of fair value given their short-term nature.

Assets and liabilities measured at fair value on a recurring basis, as of January 29, 2016, January 30, 2015, and October 31, 2015 are summarized below:

(Dollars in thousands) 

 

 

 

 

 

 

 

 

 

January 29, 2016

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

118,140

 

$

118,140

 

$

 

 

Forward currency contracts

 

4,740

 

 

4,740

 

 

Cross currency contracts

 

2,360

 

 

2,360

 

 

Total assets

 

$

125,240

 

$

118,140

 

$

7,100

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

$

3,202

 

 

$

3,202

 

 

Deferred compensation liabilities

 

1,524

 

 

1,524

 

 

Total liabilities

 

$

4,726

 

 

$

4,726

 

 

January 30, 2015

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

82,914

 

$

82,914

 

$

 

 

Forward currency contracts

 

14,026

 

 

14,026

 

 

Cross currency contracts

 

1,930

 

 

1,930

 

 

 

Total assets

 

$

98,870

 

$

82,914

 

$

15,956

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Cross currency contracts

 

$

440

 

 

$

440

 

 

Deferred compensation liabilities

 

2,016

 

 

2,016

 

 

Total liabilities

 

$

2,456

 

 

$

2,456

 

 

October 31, 2015

 

Fair Value

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

126,275

 

$

126,275

 

$

 

 

Forward currency contracts

 

3,173

 

 

3,173

 

 

Cross currency contracts

 

2,136

 

 

2,136

 

 

Total assets

 

$

131,584

 

$

126,275

 

$

5,309

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Forward currency contracts

 

$

1,711

 

 

$

1,711

 

 

Cross currency contracts

 

134

 

 

134

 

 

Deferred compensation liabilities

 

1,652

 

 

1,652

 

 

Total liabilities

 

$

3,497

 

 

$

3,497

 

 

There were no transfers between Level 1 and Level 2 during the three months ended January 29, 2016, January 30, 2015, or the twelve months ended October 31, 2015.

ContingenciesContingencies — 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 United States Patent and Trademark Office and foreign patent offices. Management believes these activities help minimize its risk of being a defendant in patent infringement litigation. The company is currently involved in patent litigation cases, including cases by or against competitors, where it is asserting and defending against claims of patent infringement. Such cases are at varying stages in the litigation process. The company records a liability in its consolidated financial statements for costs related to claims, including future legal costs, settlements and judgments, where the company has assessed that a loss is probable and an amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred. In the opinion of management, the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect its consolidated results of operations, financial position, or cash flows.


Note 11 — Warranty Guarantees

The company’s products are warranted to ensure customer confidence in design, workmanship, and overall quality. Warranty coverage is generally for specified periods of time and on select products’ hours of usage, and generally covers parts, labor, and other expenses for non-maintenance repairs. Warranty coverage generally does not cover operator abuse or improper use. An authorized company distributor or dealer must perform warranty work. Distributors and dealers submit claims for warranty reimbursement and are credited for the cost of repairs, labor, and other expenses as long as the repairs meet the company's prescribed standards. Warranty expense is accrued at the time of sale based on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, and other minor factors. Special warranty reserves are also accrued for major rework campaigns. Service support outside of the warranty period is provided by authorized distributors and dealers at the customer's expense. The company sells extended warranty coverage on select products for a prescribed period after the original warranty period expires.











Warranty provisions, claims, and changes in estimates for the first three months of fiscal 2017 and 2016 were as follows:
  Three Months Ended
  February 3,
2017
 January 29,
2016
(Dollars in thousands)  
Beginning balance $72,158
 $70,734
Warranty provisions 9,615
 8,940
Warranty claims (9,794) (8,527)
Changes in estimates 594
 
Ending balance $72,573
 $71,147

Note 12 — Derivative Instruments and Hedging Activities

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 actively manages the exposure of its foreign currency exchange rate market risk by entering into various hedging instruments, authorized under company policies that place controls on these activities, with counterparties that are highly rated financial institutions. The company’s hedging activities primarily involves the use of forward currency contracts, that are intended to offset intercompany loan exposures. The company may also utilize cross currency swaps to offset intercompany loan exposures. 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 contracts 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’s policy does not allow the use of derivatives for trading or speculative purposes. The company 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 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.

Related Party TransactionCash flow hedges.

On November 14, 2014, during The company recognizes all derivative instruments as either assets or liabilities at fair value on the consolidated balance sheet and formally documents relationships between cash flow hedging instruments and hedged transactions, as well as its risk-management objective and strategy for undertaking hedge transactions. This process includes linking all derivatives to the forecasted transactions, such as sales to third parties, foreign plant operations, and purchases from suppliers. Changes in fair values of outstanding cash flow hedge derivatives, except the ineffective portion, are recorded in other comprehensive income (“OCI”), until net earnings is affected by the variability of cash flows of the hedged transaction. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in net earnings. The consolidated statements of earnings classification of effective hedge results is the same as that of the underlying exposure. Results of hedges of sales and foreign plant operations are recorded in net sales and cost of sales, respectively, when the underlying hedged transaction affects net earnings. 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 hedges of intercompany loans are recorded in other income, net as an offset to the remeasurement of the foreign loan balance.


The company formally assesses, at a hedge’s inception and on an ongoing basis, whether the derivatives that are designated as hedges have been highly effective in offsetting changes in the cash flows of the hedged transactions and whether those derivatives may be expected to remain highly effective in future periods. When it is determined that a derivative is not, or has ceased to be, highly effective as a hedge, the company discontinues hedge accounting prospectively. When the company discontinues 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 remains in AOCL and is reclassified to net earnings 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 recognized immediately in net earnings. In all situations in which hedge accounting is discontinued and the derivative remains outstanding, the company carries the derivative at its fair value on the consolidated balance sheets, recognizing future changes in the fair value in other income, net.  For the first quarter of fiscal 2015,2017, there were immaterial losses on forward contracts reclassified into earnings as a result of the discontinuance of cash flow hedges. As of February 3, 2017, the notional amount outstanding of forward contracts designated as cash flow hedges was $104.2 million.

Derivatives not designated as hedging instruments. The company also enters into foreign currency contracts that include forward currency contracts to mitigate the remeasurement of specific assets and liabilities on the consolidated balance sheet. These contracts are not designated as hedging instruments. Accordingly, changes in the fair value of hedges of recorded balance sheet positions, such as cash, receivables, payables, intercompany notes, and other various contractual claims to pay or receive foreign currencies other than the functional currency, are recognized immediately in other income, net, on the consolidated statements of earnings together with the transaction gain or loss from the hedged balance sheet position.

The following table presents the fair value of the company’s derivatives and consolidated balance sheet location.
  Fair Value at Fair Value at Fair Value at
(Dollars in thousands) February 3, 2017 January 29, 2016 October 31, 2016
Asset Derivatives  
  
  
Derivatives Designated as Hedging Instruments  
  
  
Prepaid expenses and other current assets  
  
  
Forward currency contracts $1,552
 $3,393
 $1,535
Cross currency contract 
 142
 
Derivatives Not Designated as Hedging Instruments  
  
  
Prepaid expenses and other current assets  
  
  
Forward currency contracts 795
 1,347
 432
Cross currency contract 
 2,218
 
Total Assets $2,347
 $7,100
 $1,967
Liability Derivatives  
  
  
Derivatives Designated as Hedging Instruments  
  
  
Accrued liabilities  
  
  
Forward currency contracts $1,363
 $2,967
 $973
Derivatives Not Designated as Hedging Instruments  
  
  
Accrued liabilities  
  
  
Forward currency contracts 141
 235
 792
Total Liabilities $1,504
 $3,202
 $1,765

The following table presents the impact of derivative instruments on the consolidated statements of earnings for the company’s derivatives designated as cash flow hedging instruments for the three months ended February 3, 2017 and January 29, 2016, respectively.
  Effective Portion 
Ineffective Portion and excluded from 
Effectiveness Testing
  
Gain (Loss) 
Recognized in OCI on
Derivatives
 
Location of Gain (Loss)
Reclassified from 
AOCL into Income
 
Gain (Loss) Reclassified 
from AOCL into Income
 
Location of Gain 
(Loss) Recognized in 
Income on Derivatives
 
Gain (Loss) Recognized 
in Income on Derivatives
(Dollars in thousands) February 3,
2017
 January 29,
2016
   February 3,
2017
 January 29,
2016
   February 3,
2017
 January 29,
2016
For the three months ended          
Forward currency contracts $(372) $565
 Net sales $439
 $1,080
 Other income, net $397
 $(12)
Forward currency contracts (152) (1,659) Cost of sales (762) (314)    
  
Cross currency contracts 
 34
 Other income, net 
 128
    
  
Total derivatives designated as cash flow hedges $(524) $(1,060) Total $(323) $894
 Total $397
 $(12)

As of February 3, 2017, the company acquiredexpects to reclassify approximately $0.3 million of losses from AOCL to earnings during the next twelve months.








The following table presents the gain/(loss) of derivative instruments on the consolidated statements of earnings for the company’s derivatives not designated as hedging instruments.
    Three Months Ended
  Location of Gain (Loss)  February 3,
2017
 January 29,
2016
(Dollars in thousands)   
Forward currency contracts Other income, net $1,144
 $1,337
Cross currency contracts Other income, net 
 130
Total derivatives not designated as hedges   $1,144
 $1,467

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 contracts at the net amount in its consolidated balance sheets.

The following table shows the effects of the master netting arrangements on the fair value of the company’s derivative contracts that are recorded in the consolidated balance sheets:
(Dollars in thousands) February 3, 2017 January 29, 2016 October 31, 2016
Assets  
  
  
Forward currency contracts  
  
  
Gross Amounts of Recognized Assets $2,347
 $4,740
 $2,264
Gross Liabilities Offset in the Balance Sheets 
 
 (297)
Net Amounts of Assets Presented in the Balance Sheets 2,347
 4,740
 1,967
Cross currency contracts  
  
  
Gross Amounts of Recognized Assets 
 2,360
 
Net Amounts of Assets Presented in the Balance Sheets 
 2,360
 
Total Assets $2,347
 $7,100
 $1,967
Liabilities  
  
  
Forward currency contracts  
  
  
Gross Amounts of Recognized Liabilities $(1,614) $(3,202) $(1,765)
Gross Assets Offset in the Balance Sheets 110
 
 
Net Amounts of Liabilities Presented in the Balance Sheets (1,504) (3,202) (1,765)
Total Liabilities $(1,504) $(3,202) $(1,765)

Note 13 — 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 flow), 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 allthe full term of the assets (excluding accounts receivable)or liabilities.
Level 3: Unobservable inputs reflecting management’s assumptions about the inputs used in pricing the asset or liability.

Cash balances are valued at their carrying amounts in the consolidated balance sheets, which are reasonable estimates of their fair value due to their short-term nature. Forward currency contracts are valued based on observable market transactions of forward currency prices and spot currency rates as of the BOSS® professional snow and ice management businessreporting date. The fair value of privately held Northern Star Industries, Inc. The purchase price included across currency contracts is determined using discounted cash payment and issuanceflow analysis on the expected cash flows of an unsecured promissory note ineach derivative. This analysis reflects the aggregate principal amount of $30 million. Under thecontractual terms of the note,derivatives, including the period to maturity, and uses observable market-based inputs such as interest will accrue atrates and foreign currency exchange rates. In addition, credit valuation adjustments, which consider the rateimpact of 4.0% per yearany credit enhancements to the contracts, such as collateral postings, thresholds, mutual puts, and principal payments of $10 million each, together with accrued interest, will be payable onguarantees, are incorporated in the first, second, and third anniversaries of the closing date of the acquisition,fair values to account for potential nonperformance risk. The unfunded deferred compensation liability is primarily subject to certain conditions. Effectivechanges in fixed-income investment contracts based on current yields. For accounts receivable and accounts payable, carrying amounts are a reasonable estimate of fair value given their short-term nature.
Assets and liabilities measured at fair value on a recurring basis, as of February 3, 2017, January 29, 2016, and October 31, 2016 are summarized below:
(Dollars in thousands)   Fair Value Measurements Using Inputs Considered as:
February 3, 2017 Fair Value Level 1 Level 2 Level 3
Assets:  
  
  
  
Cash and cash equivalents $158,893
 $158,893
 $
 $
Forward currency contracts 2,347
 
 2,347
 
Total Assets $161,240
 $158,893
 $2,347
 $
Liabilities:  
  
  
  
Forward currency contracts $1,504
 $
 $1,504
 $
Deferred compensation liabilities 1,017
 
 1,017
 
Total Liabilities $2,521
 $
 $2,521
 $
(Dollars in thousands)   Fair Value Measurements Using Inputs Considered as:
January 29, 2016 Fair Value Level 1 Level 2 Level 3
Assets:  
  
  
  
Cash and cash equivalents $118,140
 $118,140
 $
 $
Forward currency contracts 4,740
 
 4,740
 
Cross currency contracts 2,360
 
 2,360
 
Total Assets $125,240
 $118,140
 $7,100
 $
Liabilities:  
  
  
  
Forward currency contracts $3,202
 $
 $3,202
 $
Deferred compensation liabilities 1,524
 
 1,524
 
Total Liabilities $4,726
 $
 $4,726
 $
(Dollars in thousands)   Fair Value Measurements Using Inputs Considered as:
October 31, 2016 Fair Value Level 1 Level 2 Level 3
Assets:  
  
  
  
Cash and cash equivalents $273,555
 $273,555
 $
 $
Forward currency contracts 1,967
 
 1,967
 
Total Assets $275,522
 $273,555
 $1,967
 $
Liabilities:  
  
  
  
Forward currency contracts $1,765
 $
 $1,765
 $
Deferred compensation liabilities 1,149
 
 1,149
 
Total Liabilities $2,914
 $
 $2,914
 $

There were no transfers between Level 1 and Level 2 during the closing ofthree months ended February 3, 2017 and January 29, 2016, or the acquisition on Novembertwelve months ended October 31, 2016.


Note 14 2014, the company hired David J. Brule II, who is also a minority shareholder of Northern Star Industries, Inc., as an executive officer of the company. During the first quarter of fiscal 2016, the first principal payment of $10 million plus interest was paid in accordance with the terms of the note.

Subsequent Events


The company evaluated all subsequent events and concluded that no subsequent events have occurred that would require recognition in the consolidated financial statements or disclosure in the notes to the consolidated financial statements.



Item

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 in six sections:

·

NatureCompany Overview

·Results of Operations

·Business Segments
·Financial Position
·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, 2016. 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 is in the business of designing, manufacturing, and marketing professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow and ice management products, agricultural micro-irrigation systems, rental and specialty construction equipment, and residential yard and snow thrower products. We sell our products worldwide through a network of distributors, dealers, hardware retailers, home centers, mass retailers, and over the Internet. Our businesses are organized into three reportable business segments: Professional, Residential, and Distribution. Our Distribution segment, which consists of our company-owned domestic distributorship, has been combined with our corporate activities and is shown as “Other.” online.

We strive to provide innovative, well-built, and dependable products supported by an extensive service network. A significant portion of our revenues 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.

This Management’s Discussion Shares and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the MD&A included in Part II, Item 7 of our Annual Report on Form 10-Kper share data have been adjusted for the fiscal year ended October 31, 2015. This discussion contains various “Forward-Looking Statements” within the meaning of the Private Securities Litigation Reform Act of 1995 and we refer readersall periods presented to the section titled “Forward-Looking Information” located at the end of Part I, Item 2 of this report for more information.

reflect a two-for-one stock split effective September 16, 2016.


RESULTS OF OPERATIONS


Overview


For the first quarter of fiscal 2016,2017, our net sales were up 2.6increased 6.1 percent with a net earnings increase of 14.6 percent, each as compared to the first quarter of fiscal 2015. Residential2016. Professional segment net sales increased 7.1 percent, driven by strong demand and higher preseason shipments of zero-turn radius riding mowers due to improved product availability. The sales increase in our residential segment was partially offset by lower sales of snow thrower products due to a lack of snow fall in key markets in the first quarter of fiscal 2016, as well as a decline in shipments of walk power mowers. Professional segment net sales decreased slightly by 0.3 percent due to unfavorable foreign currency exchange rates, which was also the main contributing factor for a decline in international sales of golf and grounds equipment for the first quarter comparison. Additionally, BOSS sales decreased due to a lack of snow fall in key markets in the first quarter of fiscal 2016. These decreases were offset by continued growth and demand for our landscape contractor and specialty construction equipment products due primarily to our new and innovative product offerings. Additionally, overall international net sales were down 11.0 percent for the fiscal first quarter comparison mainly due to unfavorable currency exchange rates.

Our net earnings increased 26.99.7 percent for the first quarter of fiscal 2016 compared2017, primarily due to new product releases in our landscape contractor business, increased demand for our professional snow and ice management products, along with continued growth in our golf and grounds, micro-irrigation, and specialty construction businesses.  Residential segment net sales were down 2.7 percent for the first quarter of fiscal 2015. Our gross margin rate increased 200 basis points, which was2017, primarily due to zero-turn radius riding mowers returning to a more normal shipment pattern, partially offset by an increasehigher demand of residential snow products.


Changes in foreign currency exchange rates resulted in a reduction of our net sales of approximately $3.7 million for the first quarter of fiscal 2017.


Our net earnings growth in the first quarter of fiscal 2017 was primarily attributable to leveraging our selling, general and administrative (“SG&A”) expenses over higher sales volumes, which resulted in a reduction of SG&A expense as a percentage of net sales of 3070 basis points. Additionally, an increase in other income contributed to our improvement in net earnings.

points for the first quarter comparison.


We increased our first quarter of fiscal 2017 cash dividend by 2016.7 percent to $0.30$0.175 per share compared to the $0.25$0.15 per share quarterly cash dividend paid in the first quarter of fiscal 2015.

2016. 


Inventory levels increased $57.6decreased $19.9 million, or 15.84.7 percent, as of the end of the first quarter of fiscal 2016 compared2017 due primarily to the end ofbetter inventory control initiatives during the first quarter of fiscal 2015 due to higher snow thrower and BOSS inventory levels as a result of unfavorable weather conditions, as well as increased residential segment riding products and landscape contractor inventory due to the timing of production in anticipation of strong demand this fiscal year.2017. Receivables decreased $15.0$6.4 million, or 7.33.4 percent, largely due to additional customers financing receivables with Red Irontiming of sales for the first quarter comparison. Field inventory levels were up slightly as of the end of the first quarter of fiscal 2016 compared to the end of the first quarter of fiscal 2015. Field inventory levels were also up as of the end of the first quarter of fiscal 2016 compared to the end of the first quarter of fiscal 2015 primarily2017, due to higher field inventory levelsstrong demand and anticipated increased sales of residential snow thrower and ridingnew products as well as higher landscape contractor field inventory levels in anticipation of strong retail demand in fiscal 2016.

we move into our key selling season.


Our current multi-year initiative, “Destination PRIME,” which began with our 2015 fiscal year, continues our journey into our second century. This is our secondfinal year of this three-year initiative, which is intended to help us drive revenue and earnings growth and further improve productivity, while also continuing our century-long commitment to innovation, relationships, and excellence. Through our Destination PRIME initiative, we intend to strive to achieve our goals by pursuing a progression of annual milestones. Our organic revenue growth goal is to achieve five percent or more of organic revenue growth each fiscal year during this initiative. We define organic revenue growth as the increase in net sales, less net sales from acquisitions that occurred in the current fiscal year. Our operating earnings goal is to raise operating earnings as a percentage of net sales to more than 13 percent by the end of fiscal 2017. Additionally, our working capital goal is to drive down average net working capital as

a percentage of net sales to less than 13 percent or less by the end of fiscal 2017. We define average net working capital as net accounts receivable plus net inventory less trade payablesaccounts payable as a percentage of net sales for a twelve month period.

Net Earnings

Net earnings for the first quarter of fiscal 2016 were $39.3 million, or $0.70 per diluted share, compared to $31.0 million, or $0.54 per diluted share, for the first quarter of fiscal 2015, resulting in a net earnings per diluted share increase of 29.6 percent. The primary factors contributing to the net earnings increase included higher net sales, an increase in our gross margin rate, and recovery for a litigation settlement, partially offset by higher SG&A expense. Our fiscal 2016 first quarter diluted net earnings per share were benefited by approximately $0.01 per share compared to fiscal 2015 first quarter diluted net earnings per share as a result of reduced shares outstanding from repurchases of our common stock.

The following table summarizes our results of operations as a percentage of our net sales:

 

 

Three Months Ended

 

 

 

January 29,

 

January 30,

 

 

 

2016

 

2015

 

Net sales

 

100.0

%

100.0

%

Cost of sales

 

(62.4

)

(64.4

)

Gross margin

 

37.6

 

35.6

 

SG&A expense

 

(26.5

)

(26.2

)

Operating earnings

 

11.1

 

9.4

 

Interest expense

 

(1.0

)

(1.0

)

Other income, net

 

1.0

 

0.4

 

Provision for income taxes

 

(3.0

)

(2.3

)

Net earnings

 

8.1

%

6.5

%


Net Sales


Worldwide consolidated net sales for the first quarter of fiscal 20162017 were $486.4$515.8 million, up 6.1 percent compared to $474.2$486.4 million in the first quarter of fiscal 2015, an2016. This increase was driven primarily by new product releases of 2.6 percent.Professional segment landscape contractor equipment, favorable snowfalls and icy weather conditions which increased demand of Professional segment snow and ice management products and Residential segment snow thrower products, and continued growth in our golf and grounds, micro-irrigation, and specialty construction businesses. This increase in net sales increasedwas partially offset by 7.1 percentlower Residential segment shipments of zero-turn radius riding mowers, as shipments returned to a more normal pattern in the first quarter of fiscal 2017 compared to the first quarter of fiscal 2015 due to higher preseason shipments of zero-turn radius riding mowers as a result of improved product availability after production delays from supply inefficiencies negatively affected sales in fiscal 2015 and such production delays were not repeated in fiscal 2016. Partially offsetting the residential segment sales increase were lower sales of snow thrower products due to a lack of snow fall during the first quarter of fiscal 2016, a decrease in shipments of walk power mowers, and unfavorable currency exchange rates. Professional segment net sales in the first quarter of fiscal 2016 slightly decreased by 0.3 percent compared to the first quarter of fiscal 2015 due to unfavorable foreign currency exchange rates, which was also the main contributing factor for a decline in international sales of golf and grounds equipment for the first quarter comparison. Additionally, BOSS sales declined due to lower snow falls in key markets in the first quarter of fiscal 2016. However, these decreases were offset by continued growth and demand for our landscape contractor equipment and higher sales of specialty construction equipment driven by strong demand for new products we introduced. Net sales for our other segment were up $3.5 million due to a decrease in sales that are eliminated for shipments to our company-owned distribution companies as a result of the sale of our Northwestern U.S. distribution company early in the first quarter of fiscal 2016. Our overall international

International net sales were down 11.0up 3.1 percent primarily from unfavorable foreign currency exchange rate fluctuations that resulted in a decline of approximately $14 million of our overall net sales for the first quarter of fiscal 2016 compared2017, mainly due to new project wins for our golf business, as well as growth of our micro-irrigation business. This increase was partially offset by unfavorable foreign currency exchange rate fluctuations.

The following table summarizes the first quartermajor operating costs and other income as a percentage of fiscal 2015.

net sales:

  Three Months Ended
  February 3,
2017
 January 29,
2016
Net sales 100.0% 100.0%
Cost of sales 62.5
 62.4
Gross margin 37.5
 37.6
SG&A expense 25.8
 26.5
Operating earnings 11.7
 11.1
Interest expense (0.9) (1.0)
Other income, net 0.7
 0.9
Provision for income taxes 2.8
 2.9
Net earnings 8.7% 8.1%

Gross Profit


As a percentage of net sales, gross profit for the first quarter of fiscal 2016 increased 2002017 decreased 10 basis points to 37.637.5 percent compared to 35.637.6 percent in the first quarter of fiscal 2015. This increase2016. The decrease for the first quarter fiscal 2017 comparison was primarily attributabledue to the purchase accounting impact of the incremental charge for the sale of inventory that was written-up to fair value related to the acquisition of the BOSS business in fiscal 2015, productivity improvements, lowerunfavorable foreign currency exchange rate fluctuations and higher commodity prices, and improved price realization. These increases were partially offset by unfavorable currency exchange rate fluctuations.

productivity improvements and segment mix.


Selling, General, and Administrative Expense


SG&A expense increased $4.1 million, or 3.2 percent, for the first quarter of fiscal 2016 increased $4.2 million, or 3.4 percent, compared to the same period last fiscal year.2017. As a percentage of net sales, SG&A expense decreased 70 basis points for the first quarter of fiscal 2017. The decrease as a percentage of net sales increased 30 basis points to 26.5 percent infor the first quarter of fiscal 2016 compared to 26.2 percent in the first quarter of fiscal 2015. This increasecomparison was primarily due to the leveraging of expenses over higher employee incentive compensation expense, increased expenses for advertising, and higher warehousing costs from increased inventory levels.

sales volumes.


Interest Expense


Interest expense for the first quarter of fiscal 2016 decreased2017 increased slightly by 1.3 percent compared to the first quarter of fiscal 2015 due to repayments of long-term debt.

$0.2 million.


Other Income, Net


Other income, net for the first quarter of fiscal 2016 was $4.52017 decreased $0.6 million compared to $2.3 million for the same period last fiscal year, an increase of $2.2 million.year. The increasedecrease for the first quarter comparison was primarily due to a prior year litigation recovery from a litigation settlement, higher earnings from our equity investment in Red Iron, and a gain on the sale of our Northwestern U.S. distribution company.

company in the first quarter of fiscal 2016. 


Provision for Income Taxes


The effective tax rate for the first quarter of fiscal 20162017 was 26.924.5 percent compared to 26.326.9 percent in the first quarter of fiscal 2015.2016. The increasedecrease was primarily driven by the adoption of ASU 2016-09 Stock-based Compensation in the first quarter quarter of fiscal 2017, which resulted in a discrete tax ratebenefit of $4.9 million related to stock-based compensation. The favorable impact of this benefit was partially offset by the resultretroactive reenactment of a slightly lower rate benefit from the federaldomestic research tax credit extension year over year dueof $2.3 million in the prior year.

Net Earnings

Net earnings for the first quarter of fiscal 2017 were $45.0 million, or $0.41 per diluted share, compared to higher pre-tax earnings in$39.3 million, or $0.35 per diluted share, for the first quarter of fiscal 2016, as comparedresulting in a net earnings per diluted share increase of 17.1 percent. The primary factors contributing to the net earnings increase for the first quarter comparison included increased net sales, a decrease in our SG&A expense as a percentage of net sales, and a lower effective tax rate.  In addition, as a result of reduced shares outstanding from repurchases of our common stock, first quarter fiscal 2015.

2017 net earnings per diluted share were benefited by approximately $0.01 per share.


BUSINESS SEGMENTS


We operate in three reportable business segments: Professional, Residential, and Distribution. Our Distribution segment, which consists of our company-owned domestic distributorship, has been combined with our corporate activities and elimination of intersegment revenues and expenses that is shown as “Other” in the following tables. Operating earnings for our Professional and Residential segments are defined as operating earnings plus other income, net. Operating loss for “Other” includes operating earnings (loss), corporate activities, other income, net, and interest expense.


The following table summarizes net sales by segment:

 

 

Three Months Ended

 

 

 

January 29,

 

January 30,

 

 

 

 

 

(Dollars in thousands)

 

2016

 

2015

 

$ Change

 

% Change

 

Professional

 

$

338,836

 

$

339,706

 

$

(870

)

(0.3

)%

Residential

 

144,284

 

134,743

 

9,541

 

7.1

 

Other

 

3,278

 

(238

)

3,516

 

NM

 

Total*

 

$

486,398

 

$

474,211

 

$

12,187

 

2.6

%

 

 

 

 

 

 

 

 

 

 

* Includes international sales of:

 

$

127,246

 

$

142,901

 

$

(15,655

)

(11.0

)%

  Three Months Ended
(Dollars in thousands) February 3, 2017 January 29, 2016 $ Change % Change
Professional $371,809
 $338,836
 $32,973
 9.7 %
Residential 140,390
 144,284
 (3,894) (2.7)%
Other 3,640
 3,278
 362
 11.0 %
Total* $515,839
 $486,398
 $29,441
 6.1 %
         
* Includes international sales of: $131,242
 $127,246
 $3,996
 3.1 %







The following table summarizes segment earnings (loss) before income taxes:

 

 

Three Months Ended

 

 

 

January 29,

 

January 30,

 

 

 

 

 

(Dollars in thousands)

 

2016

 

2015

 

$ Change

 

% Change

 

Professional

 

$

61,592

 

$

55,659

 

$

5,933

 

10.7

%

Residential

 

16,739

 

13,727

 

3,012

 

21.9

 

Other

 

(24,634

)

(27,413

)

2,779

 

10.1

 

Total

 

$

53,697

 

$

41,973

 

$

11,724

 

27.9

%

  Three Months Ended
(Dollars in thousands) February 3, 2017 January 29, 2016 $ Change % Change
Professional $68,166
 $61,592
 $6,574
 10.7 %
Residential 16,558
 16,739
 (181) (1.1)%
Other (25,171) (24,634) (537) (2.2)%
Total $59,553
 $53,697
 $5,856
 10.9 %

Professional

Segment


Net Sales. Worldwide net sales for the professionalour Professional segment in the first quarter of fiscal 20162017 increased 9.7 percent. Professional segment net sales were positively impacted by the release of new products in our landscape contractor business, including the Toro-branded TITAN® HD and the Exmark-branded Radius® zero-turn radius riding mowers. We also experienced increased demand for our BOSS® snow and ice management products driven by more favorable snowfalls and icy weather conditions in many of our key markets. Additionally, we saw higher growth in our golf and grounds business with increased shipments of our GTX utility vehicle, as well as the success of our Aqua-Traxx® micro-irrigation tape products with flow control and our specialty construction compact utility loaders. This net sales increase for the first quarter of fiscal 2017 was slightly down 0.3offset by the impact of unfavorable foreign currency exchange rate fluctuations.

Operating Earnings. Operating earnings for the Professional segment in the first quarter of fiscal 2017 increased by 10.7 percent compared to the first quarter of fiscal 2015 mainly due2016, and increased slightly to unfavorable foreign currency exchange rates fluctuations, which was also the main contributing factor for18.3 percent as a decline in internationalpercentage of net sales of golf and grounds equipment for the first quarter comparison. Sales of BOSS products decreased for the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015 due to a lack of snow fall in key markets in the first quarter of fiscal 2016. Partially offsetting these negative factors for professional segment net sales for the first quarter comparison were higher sales of landscape contractor equipment due primarily to continued growth and demand for our innovative product offerings and newly introduced products as contractors continued to invest in equipment for the upcoming spring and summer season. Sales of specialty construction equipment products were also up for the first quarter of fiscal 20162017 compared to the same period last fiscal year due primarily to demand for our new product offerings and continued growth of the rental market. Field inventory levels of professional segment products were higher as of the end of the first quarter of fiscal 2016 compared to the end of the first quarter of fiscal 2015 due primarily to strong preseason shipments of landscape contractor equipment in anticipation of retail demand in fiscal 2016.

Operating Earnings. Operating earnings for the professional segment were $61.6 million in the first quarter of fiscal 2016 compared to $55.7 million in the first quarter of fiscal 2015, an increase of 10.7 percent. Expressed as a percentage of net sales, professional segment operating margin increased to 18.2 percent in the first quarter of fiscal 2016 compared2016. This increase was primarily due to 16.4 percent in the first quarter of fiscal 2015. These profit increases in operating earnings and margin were drivenleveraging SG&A expenses over higher sales volumes, but was partially offset by higherlower gross margins in the first quarter of fiscal 2016 compared to the same period last fiscal year mainly due to the purchase accounting impact of the incremental charge for the sale of inventory that was written-up to fair value related to the acquisition of the BOSS business in fiscal 2015 that was not repeated this fiscal quarter, productivity improvements, lower commodity prices, and improved price realization, slightly offset by unfavorable foreign currency exchange rate fluctuations. SG&A expense as a percentage of net sales increased due tofluctuations and slightly higher fixed SG&A costs over flat sales volumes.

commodity prices.


Residential

Segment


Net Sales. Worldwide net sales for the residentialResidential segment in the first quarter of fiscal 2016 were up 7.1 percent compared to2017 decreased 2.7 percent. The sales decrease in the first quarter of fiscal 2015. This sales increasecomparison was primarily attributable to higher preseason shipments ofimpacted by a shift in demand for zero-turn radius riding mowers along with improved product availability after production delays from supply inefficiencies that negatively impacted saleswas experienced in fiscal 2015 and such production delays were not repeated in fiscal 2016. Partially offsetting the increase was lower sales of snow thrower products duecomparable period last year. Demand for zero-turn radius riding mowers returned to a lack of snow fall in key markets during the first quarter of fiscal 2016. Lower shipments of walk power mowers and unfavorable currency exchange rates also dampened the residential segment sales increasemore normal shipment pattern in the first quarter of fiscal 20162017. This decrease in net sales was partially offset by increased demand of our snow products due to more favorable snowfalls across the Midwest and increased shipments of our walk power mowers in southern climates of the U.S, when compared to the same period last fiscalprior year. Field inventory levels of residential segment products were up as of the end of the first quarter of fiscal 2016 compared to the end of the first quarter of fiscal 2015 due to strong preseason demand for zero-turn radius riding mowers from improved product availability and influenced, in part, by last year’s supply inefficiencies, as well as higher inventory levels of snow throwers.


Operating Earnings.Earnings. Operating earnings for the residentialResidential segment were $16.7 million in the first quarter of fiscal 2016 compared to $13.7 million in the first quarter of fiscal 2015, an increase of 21.92017 decreased 1.1 percent. Expressed as a percentage of net sales, residentialResidential segment operating marginsearnings increased to 11.8 percent from 11.6 percent inwhen compared to the first quarter of fiscal 2016 compared to 10.2 percent in2016. The operating earnings decrease for the first quarter of fiscal 2015. These increases in operating earnings and margincomparison was primarily driven by higher SG&A expenses, which were primarily attributablepartially offset by higher gross margins. Gross margins increased for the quarter comparison, mainly due to gross profit increases from lower commodity prices and freight costs, slightlyproductivity improvements, partially offset by unfavorable changes in foreign currency exchange rates. Leveraging SG&A costs overrate fluctuations and slightly higher sales volumes also contributed to the improvement in operating earnings and margin for the residential segment.

commodity prices.


Other

Segment


Net Sales.Sales. Net sales for the otherOther segment include sales from our wholly owned domestic distribution companiescompany less sales from the professionalProfessional and residentialResidential segments to thosethe distribution companies.company. The otherOther segment net sales in the first quarter of fiscal 2017 increased $3.5 millionslightly by $0.4 million.

Operating Loss. Operating loss for the Other segment for the first quarter of fiscal 2016 compared to2017 increased $0.5 million. The increase in operating loss for the first quarter of fiscal 2015 due2017 comparison was primarily attributable to a decrease in sales that are eliminated for shipments to our company-owned distribution companies as a result of the sale of our Northwestern U.S. distribution company early in the first quarter of fiscal 2016.

Operating Loss. Operating loss for the other segment was down by $2.8 million, or 10.1 percent, for the first quarter of fiscal 2016 compared to the first quarter of fiscal 2015. The lower operating loss was primarily attributable to recovery from a litigation settlement, higher earnings from our equity investment in Red Iron, and a gain on the sale of our Northwestern U.S. distribution company.

FINANCIAL POSITION


Working Capital


During the remainder of fiscal 2016,2017, we plan to place an increasedcontinued 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. Our average net working capital as a percentage of net sales for the twelve months ended January 29, 2016February 3, 2017, was 16.415.1 percent compared to 15.516.4 percent for the twelve months ended January 30, 2015.

29, 2016. We calculate our average net working capital as net receivables plus net inventories, less accounts payable for a twelve month period as percentage of rolling twelve month net sales.


Inventory levels were up $57.6down $19.9 million, or 15.84.7 percent, as of the end of the first quarter of fiscal 20162017 compared to the end of the first quarter of fiscal 20152016 due primarily to higher snow throwerinventory control initiatives centered on production management, increased emphasis on finished goods inventory and BOSS inventory levels from unfavorable weather conditions. Residential riding products and landscape contractor equipment inventory levels were also up due primarilyimproved monitoring of product replenishment to the timing of production in anticipation of strong demand this fiscal year.our end users. Receivables as of the end of the first quarter of fiscal 20162017 decreased $15.0$6.4 million, or 7.33.4 percent, compared to the end of the first quarter of fiscal 2015 as a result2016 primarily due to timing of additional customers financing receivablessales for channels not financed with Red Iron. Our average days sales outstanding for receivables decreased to 33.430.8 days based on sales for the last twelve months ended January 29, 2016,February 3, 2017, compared to 34.833.4 days for the twelve months ended January 30, 2015.29, 2016. In addition, accounts payable increased as of the end of our first quarter of fiscal 20162017 compared to the end of the first quarter of fiscal 2015,2016 by $15.6$21.2 million, or 8.010.0 percent, due to working capital initiatives and increased purchases of commodities and components.


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. We believe that anticipated cash generated from operations, together with our long-term debt, bank credit lines, and cash on hand, will provide us with adequate liquidity to meet our anticipated operating requirements. We believe that the funds available through existing financing arrangements and forecasted cash flows will be sufficient to provide the necessary capital resources for our anticipated working capital needs, capital expenditures, investments, debt repayments, quarterly cash dividend payments, and stock repurchases for at least the next twelve months.

As of February 3, 2017, cash and short-term investments held by our foreign subsidiaries was approximately $98.4 million.  


Our Board of Directors approved a cash dividend of $0.30$0.175 per share for the first quarter of fiscal 20162017 that was paid on January 11, 2016.12, 2017. This was an increase of 2016.7 percent over our cash dividend of $0.25$0.15 per share for the first quarter of fiscal 2015.

2016.


Cash Flow.Flow We historically have used more operating cash in the first quarter compared to other fiscal quarters due to the seasonality of our business.. Cash provided by operating activities for the first three months of fiscal 2016 was $1.22017 increased $10.9 million compared to cash used in operating activities in the first three months of fiscal 2015 of $23.4 million, an improvement of $24.6 million.2016. This three month comparison change was mainly due mainly to a decrease in accounts receivable and higher net earnings, partially offset by a higher increase in inventory levelsimproved working capital. Cash used for investing activities increased $27.2 million during the first quarter comparison. Cash used in investing activities for the first quarterthree months of fiscal 2016 decreased $199.9 million2017 compared to the first quarterthree months of fiscal 20152016, primarily due to cash utilized for thean acquisition of the BOSS business in the first quarter of fiscal 2015.2017. Cash provided byused for financing activities for the first quarterthree months of fiscal 2016 decreased $2.22017 increased $93.2 million compared to the first quarterthree months of fiscal 2015 as a result of repayments of long-term debt2016 mainly due to more cash used for common stock repurchases and an increase in cash utilized for share repurchases,common stock dividends paid, partially offset by additional borrowings offiscal 2016 short-term debt.

borrowings.


Credit Lines and Other Capital Resources. Our businesses are seasonal, with accounts receivable balances historically increasing between January and April as a result of typically higher sales volumes and extended payment terms made available to our customers, and typically decreasing between May and December when payments are received. The seasonality of production and shipments causes our working capital requirements to fluctuate during the year. Seasonal cash requirements are financed from operations, cash on hand, and with short-term financing arrangements, including our $150.0 million unsecured senior five-year revolving credit facility that expires in October 2019. Included in our $150.0 million revolving credit facility is a $20.0 million sublimit for standby letters of credit and a $20.0 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 $100.0 million in aggregate. Funds are available under the revolving credit facility for working capital, capital expenditures, and other lawful purposes, including, but not limited to, acquisitions and stock repurchases. Interest expense on this credit line is determined based on a LIBOR rate (or other rates quoted by the Administrative Agent, Bank of America, N.A.) plus a basis point spread defined in the credit agreement. In addition, our non-U.S. operations maintain short-term lines of credit in the aggregate amount of approximately $10.9$9.1 million. These facilities bear interest at various rates depending on the rates in their respective countries of operation. As of January 29, 2016,February 3, 2017, we had $52.9 millionno outstanding short-term debt under these lines of credit compared to $47.0$52.9 million outstanding short-term debt as of January 30, 2015.29, 2016.  As of January 29, 2016,February 3, 2017, we had $11.4$6.8 million of outstanding letters of credit and $96.6$152.3 million of unutilized availability under our credit agreements.


As of January 29, 2016,February 3, 2017, we had $364.5$338.3 million outstanding in long-term debt that includes $100.0 million in aggregate principal amount of 7.8% debentures due June 15, 2027, $125.0$123.7 million in aggregate principal amount of 6.625% senior notes due

May 1, 2037,, and a $120.3$107.3 million term loan.loan, and partially offsetting debt issuance costs and deferred charges of $2.9 million related to our outstanding long-term debt. The term loan bears interest


based on a LIBOR rate (or other rates quoted by the Administrative Agent, Bank of America, N.A.) plus a basis point spread defined in the credit agreement. The term loan can be repaid in part or in full at any time without penalty, but in any event must be paid in full by October 2019. We also have outstanding $20.0$10.2 million in aggregate principala note due to the former owners of the BOSS business.


Our revolving and term loan credit facility contains standard covenants, including, without limitation, financial covenants, such as the maintenance of minimum interest coverage and maximum debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”) ratios; and negative covenants, which among other things, limit loans and investments, disposition of assets, consolidations and mergers, transactions with affiliates, restricted payments, contingent obligations, 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 our debt to earnings before interest, taxes, depreciation, and amortization (“EBITDA”)EBITDA ratio from the previous quarter compliance certificate is less than or equal to 3.25, provided that immediately after giving effect of any such proposed action, no default or event of default would exist. As of January 29, 2016,February 3, 2017, we were not limited in the amount for payments of cash dividends and stock repurchases. We were in compliance with all covenants related to our credit agreement for our revolving credit facility as of January 29, 2016,February 3, 2017, and we expect to be in compliance with all covenants during the remainder of fiscal 2016.2017. If we were out of compliance with any debt 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, 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 short-term debt under our credit agreement. If our credit rating falls below investment grade and/or our average debt to EBITDA ratio rises above 1.50, the basis point spread over LIBOR (or other rates quoted by the Administrative Agent, Bank of America, N.A.) we currently pay on outstanding debt under the credit agreement would increase. However, the credit commitment could not be cancelled by the banks based solely on a ratings downgrade. Our debt rating for long-term unsecured senior, non-credit enhanced debt was unchanged during the first quarter of fiscal 20162017 by Standard and Poor’s Ratings Group at BBB and by Moody’s Investors Service at Baa3.


Customer Financing Arrangements and Contractual Obligations


Our Red Iron joint venture with TCFIF provides inventory financing including floor plan and open accounts receivable financing, to certain distributors and dealers of our products in the U.S. and to select distributors of our products in Canada to enable our distributors and dealers tothat enables them carry representative inventories of our products. Some independent international dealers continue to finance their products with a third party finance company. This third party financing company purchased $8.1$7.4 million of receivables from us during the first quarterthree months of fiscal 2016.2017. As of January 29, 2016, $11.8February 3, 2017, $11.1 million of receivables financed by a third party financing company, excluding Red Iron, were outstanding. See our most recently filed Annual Report on Form 10-K for further details regarding our customer financing arrangements and contractual obligations.


Inflation


We are subject to the effects of inflation, deflation, and changing prices. In the first quarterthree months of fiscal 2016,2017, average prices paid for commodities and components we purchase were slightly lowerhigher compared to the average prices paid for commodities and components in the first quarterthree months of fiscal 2015.2016. We intend to continue to closely follow prices of commodities and components that affect our product lines, and we anticipate average prices paid for some commodities and components to be slightly lowerhigher for the remainder of fiscal 20162017 as compared to fiscal 2015.2016. Historically, we have mitigated, and we currently expect to continue to mitigate, commodity price increases, in part, by collaborating with suppliers, reviewing alternative sourcing options, substituting materials, engaging in internal cost reduction efforts, and increasing prices on some of our products, all as appropriate.

Critical Accounting Policies and Estimates


CRITICAL ACCOUNTING POLICIES AND ESTIMATES

See our most recent Annual Report on Form 10-K for the fiscal year ended October 31, 20152016 for a discussion of our critical accounting policies.


New Accounting Pronouncements to be Adopted


In May 2014, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)ASU No. 2014-09, Revenue from Contracts with Customersthat updates the principles for recognizing revenue. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. The guidance also requires enhanced disclosures regarding the nature, amount, timing, and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), which deferred the effective date of this standard by one year. We expect to adopt this guidance on November 1, 2018, as required, based

on the new effective date. The guidance permits the use of either a


retrospective or cumulative effect transition method. We have not yet selected a transition method andbut plan to select a transition method no later than the fourth quarter of fiscal 2017. We are currently evaluatingassessing our contracts with customers and related financial disclosures to evaluate the impact of the amended guidance on our existing revenue recognition policies and procedures.

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810), which amends certain requirements for determining whether a variable interest entity must be consolidated. The amended guidance will become effective for us commencing in the first quarter of fiscal 2017. Early adoption is permitted. We anticipate the adoption of this guidance will not have a material impact on our consolidated financial position.

In April 2015, the FASB issued ASU No. 2015-03, Interest—Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. This guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability. The amended guidance will become effective for us commencing in the first quarter of fiscal 2017. Early adoption is permitted. We anticipate the adoption of this guidance will not have a material impact on our consolidated financial position.

In April 2015, the FASB issued ASU No. 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. This amended guidance requires customers to determine whether or not an arrangement contains a software license element. If the arrangement contains a software element, the related fees paid should be accounted for as an acquisition of a software license. If the arrangement does not contain a software license, it is accounted for as a service contract. The amended guidance will become effective for us commencing in the first quarter of fiscal 2017. Early adoption is permitted. We anticipate the adoption of this guidance will not have a material impact on our consolidated financial statements.


In July 2015, the FASB issued ASU No. 2015-11,Inventory (Topic 330): Simplifying the Measurement of Inventory. This amended guidance changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value. The amended guidance will become effective for us commencing in the first quarter of fiscal 2018. Early adoption is permitted. We are currently evaluating the impact of this amended guidance on our consolidated financial statements.


In November 2015,February 2016, the FASB issued ASU No. 2015-172016-02, Leases, Income Taxes (Topic 740): Balance Sheet Classificationwhich, among other things, requires lessees to recognize most leases on-balance sheet.  The standard requires the recognition of Deferred Taxes. This amended guidance requires an entity to present deferred taxlease assets and lease liabilities by lessees for those leases classified as noncurrent in the statement of financial position.operating leases under previous GAAP. The amended guidance will become effective for us commencing in the first quarter of fiscal 2018.2020. Entities are required to use a modified retrospective approach, with early adoption permitted. We are reviewing the revised guidance and assessing the impact on our consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which amends guidance on the classification of certain cash receipts and payments in the statement of cash flows. The amended guidance will become effective for us commencing in the first quarter of fiscal 2019. Early adoption is permitted. We are currently evaluating the impact of this amended guidancenew standard on our consolidated financial statements.

No new accounting pronouncement that has been


In January 2017, the FASB issued but not yetASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business in Accounting Standards Codification 805. The amended guidance will become effective for us duringcommencing in the first quarter of fiscal 2016 has had or2019. Early adoption is expected topermitted. We are currently evaluating the impact of this new standard.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies the accounting for goodwill impairments by eliminating step 2 from the goodwill impairment test. The amended guidance will become effective for us commencing in the first quarter of fiscal 2021. We are currently evaluating the impact of this new standard.

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.

Forward-Looking Information

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, and financial condition; our business strategies and goals; and the effect of laws, rules, regulations, 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:

·            Economic


Adverse economic conditions and outlook in the United States and in other countries in which we conduct business could adversely affect our net sales and earnings, which include but are not limited to recessionary conditions; slow or negative economic growth rates; 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 resulting from tax increases or other factors; 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; and general economic and political conditions and expectations.

·

Weather conditions, including unfavorable weather conditions exacerbated by global climate changes or otherwise, may reduce demand for some of our products and adversely affect our net sales and operating results, or may affect the timing of demand for some of our products and may adversely affect net sales and operating results in subsequent periods.

·

Fluctuations in foreign currency exchange rates have already affected our operating results and could continue to result in declines in our reported net sales and net earnings.

·

Increases in the cost, or disruption in the availability, of raw materials, components, and parts 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.

·costs or increased tariffs, duties or other charges as a result of changes to international trade agreements may adversely affect our profit margins and business.

Our professionalProfessional 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 level of homeownersproperty owners who outsource their lawn care;care and snow and ice removal activities; the level of residential and commercial construction; continued acceptance of and demand for micro-irrigation solutions for agricultural markets; the integrationtiming and occurrence of the BOSS business into our professional segment;winter weather conditions; demand for our products in the rental and specialty construction market; availability of cash or credit to professionalProfessional 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 residentialResidential segment net sales are dependent upon consumers buying our products at dealers, mass retailers, and home centers, such as The Home Depot, Inc.,; the amount of product placement at mass retailers and home centers; consumer confidence and spending levels, and changing buying patterns of customers.

·

Changes in our product mix impact our financial performance, including profit margins and net earnings, as our professionalProfessional segment products generally have higher profit margins than our residentialResidential segment products.

·

We intend to grow our business in part through acquisitions and alliances, strongerstrong customer relations, and new joint ventures and partnerships, all of which arecould be risky and could harm our business reputation, financial condition, and operating results, particularly if we are not able to successfully integrate such acquisitions and alliances, joint ventures, and partnerships. 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. 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 customer’scustomers' demand for our products is important for our business. If we underestimate or overestimate demand for our products and do not maintain appropriate inventory levels, our net sales and/or working capital could be negatively impacted.

·

Our business and operating results are subject to the inventory management decisions of our distribution channel customers. Any adjustments in the carrying amount of inventories by our distribution channel customers may impact our inventory management and working capital goals as well as operating results.

·

We face intense competition in all of our product lines with numerous manufacturers, including from some competitors that have larger operations and 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 are 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,resources; expose us to difficulties presented by international economic, political, legal, regulatory, accounting, and business factors;factors, including implications of withdrawal by the U.S. from, or revision to, international trade agreements, foreign policy changes between the U.S. and other countries, weakened international economic conditions, or the United Kingdom’s process for exiting the European Union; 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 and develop and market new products that respond to customer needs and preferences and achieve market acceptance, or if we experience unforeseen product quality or other problems in the development, production, or use of new and existing products, we may experience a decrease in demand for our products, and our net sales and business could suffer.

·

We manufacture our products at and distribute our products from several locations in the United States and internationally. Any disruption at any of these facilities 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 employee population fluctuates duringlabor needs fluctuate throughout the year, with ana sharp increase in the number of our production employees,staff, some of which may be new to our manufacturing processes and safety protocols, during periods of peak manufacturing activity and any failure by suchour production employeeslabor force to adequately and safely perform their jobs or our inability to properly train such production employees could adversely affect our business, operating results, and reputation.

·

Management information systems are critical to our business. If our information systems or those of our business partners or third party service providers fail to adequately perform, or if we, our business partners or third party service providers experience an interruption in their operation, including by theft, loss or damage from unauthorized access, security breaches, natural or man-made disasters, cyber attacks, computer viruses, phishing, 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 regulation with which compliance may require us to incur expenses or modify our products or operations and non-compliance may result in harm to our reputation and/or expose us to penalties. Governmental regulation may also adversely affect the demand for some of our products and our operating results. In addition, changes in laws and regulations in the U.S. or other countries in which we conduct business also may adversely affect our operating results, including, (i) taxation and tax policy changes, tax rate changes, new tax laws, revised tax law interpretations, which individually or in combination may cause our effective tax rate to increase, or (ii) healthcare laws or regulations, such as the Patient Protection and Affordable Care Act, which may cause us to incur higher employee healthcare and other costs.

·costs, or (iii) changes to international trade agreements that could result in additional duties or other charges on raw materials, whole goods or components we import.

Climate change and climate change regulations 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 liability 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 required to comply with “conflict minerals” rules promulgated by the SEC, which has imposed costs on us and raisedcould raise reputational and other risks. We have, and we expect that we will continue to, incur additional costs and expenses, which may be significant in order to comply with these rules. Since our supply chain is complex, ultimately we may not be able to sufficiently verify the origin of the conflict minerals used in our products through the due diligence procedures that we implement or we may identify through our due diligence procedures that some or all of the conflict minerals in our products are sourced from covered regions, which may adversely affect our reputation with our customers, shareholders, and other stakeholders.

·

We are subject to product liability claims, product quality issues, 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, and 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.

·

As a result of our Red Iron joint venture, we are dependent upon the joint venture to provide competitive inventory financing programs including floor plan and open account receivable financing, to certain distributors and dealers of our products. Any material change in the availability or terms of credit offered to our customers by the joint venture, challenges or delays in transferring new distributors and dealers from any business we might acquire to this financing platform, any termination or disruption of our joint venture relationship 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 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 the terms of our credit arrangements and indentures, especially the financial covenants, our credit arrangements could be terminated and our senior notes, debentures, term loan, and any amounts outstanding under our revolving credit facility could become due and payable.

·

We are expanding and renovating our corporate facilities and could experience disruptions to our operations in connection with such efforts.

·

Our business is subject to a number of other factors that may adversely affect our operating results, financial condition, or business, such as: our ability to achieve the revenue growth, operating earnings, and working capital goals of our “Destination PRIME” initiative;initiative or any quarterly financial guidance; natural or man-made disasters or global pandemics that may result in shortages of raw materials and components, higher fuel and commodity costs, delays in shipments to customers, and increases in insurance premiums; financial viability of our distributors and dealers, changes in distributor

ownership, changes in channel distribution of our products, relationships with our distribution channel partners, our success in partnering with new dealers, and our customers’ ability to pay amounts owed to us; a decline in retail sales or financial difficulties of our distributors or dealers, which would cause us to repurchase financed product; new or revised accounting standards, including standards related to stock-based compensation and revenue recognition; and the threat of terrorist acts and war that may result in heightened security and higher costs for import and export shipments of components or finished goods, reduced leisure travel, and contraction of the U.S. and world economies.


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.”


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,” 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 undertakemake no obligationcommitment 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

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 prices. 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. See further discussion on these market risks below. See our most recently filedrecent Annual Report on Form 10-K for discussion on equity market risk.


Foreign Currency Exchange Rate Risk.Risk. In the normal course of business, we actively manage the exposure of our foreign currency exchange rate market risk by entering into various hedging instruments, authorized under company policies that place controls on these activities, with counterparties that are highly rated financial institutions. Our hedging activities involve primarily the use of forward currency contracts. We may also utilize cross currency swaps to offset intercompany loan exposures. We use derivative instruments only in an attempt to limit underlying exposure from currency fluctuations and to minimize earnings and cash flow volatility associated with foreign currency exchange rate changesfluctuations and not for trading purposes. 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, foreign plant operations, and purchases from suppliers. Because our products are manufactured or sourced primarily from the U.S.United States and Mexico, a stronger U.S. dollar and Mexican peso generally have a negative impact on our results from operations, while a weaker dollar and peso generally have a positive effect. 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, as well asand the Romanian New Leu against the Euro.

Euro, including 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.


We enter into various contracts, primarily forward contracts that change in value as foreign currency exchange rates change,fluctuate, to protect the value of existing foreign currency assets, liabilities, anticipated sales, and probable commitments. Decisions on whether to use such contracts are made based on the amount of exposures to the currency involved and an assessment of the near-term market value for each currency. Worldwide foreign currency exchange rate exposures are reviewed monthly. The gains and losses on these contracts offset changes in values of the related exposures. Therefore, changes in values of these hedge instruments are highly correlated with changes in market values of underlying hedged items both at inception of the hedge and over the life of the hedge contract. Additional information regarding gains and losses on our derivative instruments is presented in the Notes to Condensed Consolidated Financial Statements (Unaudited) in Item 1 of this Quarterly Report on Form 10-Q, in the sectionNote 12 entitled “Derivative Instruments and Hedging Activities.”



The following foreign currency exchange contracts held by us have maturity dates in fiscal 20162017 and 2017.2018. All items are non-trading and stated in U.S. dollars. Some derivative instruments we enter into do not meet the cash flow hedging criteria; therefore, changes in fair value are recorded in other income, net.

The average contracted rate, notional amount, pre-tax value of derivative instruments in accumulated other comprehensive loss, and fair value impact of derivative instruments in other income, net as of and for the fiscal period ended January 29, 2016February 3, 2017 were as follows:

Dollars in thousands
(except average contracted rate)

 

Average
Contracted
Rate

 

Notional
Amount

 

Value in
Accumulated
Other
Comprehensive
Income (Loss)

 

Fair Value
Impact
(Loss) Gain

 

Buy US dollar/Sell Australian dollar

 

0.7163

 

$

44,461.2

 

$

1,038.4

 

$

937.5

 

Buy US dollar/Sell Canadian dollar

 

1.3304

 

15,145.3

 

905.3

 

17.7

 

Buy US dollar/Sell Euro

 

1.1186

 

86,326.2

 

1,171.8

 

1,177.9

 

Buy US dollar/Sell British pound

 

1.4453

 

25,437.9

 

633.7

 

443.6

 

Buy Euro/Sell US dollar

 

1.0894

 

7,802.2

 

 

2,217.6

 

Buy Mexican peso/Sell US dollar

 

16.5241

 

21,967.9

 

(3,216.6

)

(665.5

)

Buy Euro/Sell Romanian New Leu

 

4.5411

 

9,260.0

 

(221.1

)

(141.7

)

(Dollars in thousands, except average
contracted rate)
 
Average
Contracted
Rate
 
Notional
Amount
 
Value in Accumulated
Other Comprehensive
Income (Loss)
 
Fair Value
Impact (Loss)
Gain
Buy US dollar/Sell Australian dollar 0.7478
 41,817.7
 14.9
 (676.1)
Buy US dollar/Sell Canadian dollar 1.3008
 6,342.4
 18.1
 82.8
Buy US dollar/Sell Euro 1.1178
 67,334.4
 1,312.9
 1,537.1
Buy US dollar/Sell British pound 1.2928
 38,345.9
 311.0
 484.5
Buy Mexican peso/Sell US dollar 20.1013
 21,035.9
 (1,345.7) (620.1)

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 accumulated other comprehensive loss in stockholders’ equity, and would not impact net earnings.


Interest Rate Risk.Risk. Our market risk on interest rates relates primarily to LIBOR-based short-term debt and a term loan from commercial banks, as well as the potential increase in fair value of our fixed-rate long-term debt resulting from a potential decrease in interest rates. Included in long-term debt is $223.8 million of fixed-rate debt that is not subject to variable interest rate fluctuations, a fixed-rate promissory note for the principal amount of $20.0 million issued to the former owners of the BOSS business, and a $120.3 million LIBOR-based term loan, which is subject to market risk based on changes in LIBOR rates. We have no earnings or cash flow exposure due to market risks on our fixed-rate long-term debt obligations. We generally do not use interest rate swaps to mitigate the impact of fluctuations in interest rates. See our most recently filed Annual Report on Form 10-K (Item 7A Quantitative and Qualitative Disclosures about Market Risk). There has been no material change in this information.


Commodity Price RiskRisk.. Some raw materials used in our products are exposed to commodity price changes. The primary commodity price exposures are with steel, aluminum, petroleum and natural gas-based resins, and linerboard. In addition, we are a purchaser of components and parts containing various commodities, including steel, aluminum, copper, lead, rubber, and others that are integrated into our end products. Further information regarding rising prices for commodities is presented in Item 2 of this Quarterly Report on Form 10-Q, in the section entitled “Inflation.”


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.


Item

ITEM 4.  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 Chief Executive Officer 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 in this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer 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 our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding disclosure. There was no change in our internal control over financial

reporting that occurred during our fiscalfirst quarter ended January 29, 2016February 3, 2017 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



PART II.  OTHER INFORMATION

Item

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 USPTO 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 10 in our Notes to Condensed Consolidated Financial Statements under the heading Contingencies“Contingencies - 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

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 (Item 1A. Risk Factors). There has been no material change in those risk factors.


Item

ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


The following table shows our first quarter of fiscal 20162017 stock repurchase activity:

Period

 

Total Number of
Shares (or Units)
Purchased (1,2,3)

 

Average
Price
Paid per
Share
(or Unit)

 

Total Number of
Shares (or Units)
Purchased
As Part of Publicly
Announced Plans
or Programs (1)

 

Maximum Number
of Shares (or Units)
that May
Yet Be Purchased
Under the Plans or
Programs (1)

 

 

 

 

 

 

 

 

 

 

 

November  1, 2015 through November 27, 2015

 

 

$

 

 

1,159,314

 

 

 

 

 

 

 

 

 

 

 

November 28, 2015 through January 1, 2016

 

172,971

 

76.06

 

172,971

 

4,986,343

 

 

 

 

 

 

 

 

 

 

 

January 2, 2016 through January 29, 2016

 

205,289

 

68.47

 

203,870

 

4,782,473

 

 

 

 

 

 

 

 

 

 

 

Total

 

378,260

 

$

71.94

 

376,841

 

 

 

activity.

Period 
Total Number of
Shares (or
Units)
Purchased
(1,2)
 
Average
Price Paid
per Share
(or Unit)
 
Total Number of Shares
(or Units) Purchased As
Part of Publicly
Announced Plans or
Programs (1,2)
 
Maximum Number of
Shares (or Units) that
May Yet Be Purchased
Under the Plans or
Programs (1,2)
November 1, 2016 through December 2, 2016 296,400
 $48.22
 296,400
 7,396,315
December 3, 2016 through December 30, 2016 445,661
 55.90
 445,661
 6,950,654
December 31, 2016 through February 3, 2017 493,883
 57.42
 492,124
 6,458,530
Total 1,235,944
 54.67
 1,234,185
  

(1)On December 11, 2012,3, 2015, the company’s Board of Directors authorized the repurchase of 5,000,000an additional 8,000,000 shares of the company’s common stock in open-market or in privately negotiated transactions. This program has no expiration date but may be terminated by the company’s Board of Directors at any time. The company repurchased 376,8411,234,185 shares during the period indicated above under this program and 782,4736,458,530 shares remain available to repurchase under this program.


(2)         On December 3, 2015, the company’s Board of Directors authorized the repurchase of an additional 4,000,000 shares of the company’s common stock in open-market or in 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.

(3)Includes 1,4191,759 units (shares) of the company’s common stock purchased in open-market transactions at an average price of $68.45$56.34 per share on behalf of a rabbi trust formed to pay benefit obligations of the company to participants in deferred compensation plans. These 1,4191,759 shares were not repurchased under the company’s repurchase program described in footnotes 1 and 2 above.



ItemITEM 6.  EXHIBITS

(a)

Exhibits

(a)

Exhibit No.

Description
2.1 (1)Second Amendment to Agreement to Form Joint Venture dated November 29, 2016 by and between The Toro Company and TCF Inventory Finance, Inc. (incorporated by reference to Exhibit 2.1 to Registrant’s Current Report on Form 8-K dated November 29, 2016, Commission File No. 1-8649).*
2.2 (1)Third Amendment to Limited Liability Company Agreement of Red Iron Acceptance, LLC dated November 29, 2016 by and between Red Iron Holding Corporation and TCFIF Joint Venture I, LLC (incorporated by reference to Exhibit 2.2 to Registrant’s Current Report on Form 8-K dated November 29, 2016, Commission File No. 1-8649).*
2.3 (1)Fourth Amended and Restated Program and Repurchase Agreement dated as of November 29, 2016 by and between The Toro Company and Red Iron Acceptance, LLC (incorporated by reference to Exhibit 2.3 to Registrant’s Current Report on Form 8-K dated November 29, 2016, Commission File No. 1-8649).
3.1 and 4.1

Restated Certificate of Incorporation of The Toro Company (incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated June 17, 2008, Commission File No. 1-8649).

3.2 and 4.2

Certificate of Amendment to Restated Certificate of Incorporation of The Toro Company (incorporated by reference to Exhibit 3.1 to Registrant’s Current Report on Form 8-K dated March 13,12, 2013, Commission File No. 1-8649).

3.3 and 4.3

Amended and Restated Bylaws of The Toro Company (incorporated by reference to Exhibit 3.23.1 to Registrant’s Current Report on Form 8-K dated June 17, 2008,July 19, 2016, Commission File No. 1-8649).

4.4

Specimen Form of Common Stock Certificate (incorporated by reference to Exhibit 4(c) to Registrant’s Quarterly Report on Form 10-Q for the fiscal quarter ended August 1, 2008, Commission File No. 1-8649).

4.5

Indenture dated as of January 31, 1997, between Registrant 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).

4.6

Indenture dated as of April 20, 2007, between Registrant and The Bank of New York Trust Company, N.A., as Trustee, relating to The Toro Company’s 6.625% Notes due May 1, 2037 (incorporated by reference to Exhibit 4.3 to Registrant’s Registration Statement on Form S-3 filed with the Securities and Exchange Commission on April 23, 2007, Registration No. 333-142282).

4.7

First Supplemental Indenture dated as of April 26, 2007, between Registrant and The Bank of New York Trust Company, N.A., as Trustee, relating to The Toro Company’s 6.625% Notes due May 1, 2037 (incorporated by reference to Exhibit 4.1 to Registrant’s Current Report on Form 8-K dated April 23, 2007, Commission File No. 1-8649).

4.8

Form of The Toro Company 6.625% Note due May 1, 2037 (incorporated by reference to Exhibit 4.2 to Registrant’s Current Report on Form 8-K dated April 23, 2007, Commission File No. 1-8649).

31.1

10.1

The Toro Company Amended and Restated 2010 Equity and Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.1 to Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2016, Commission File No. 1-8649).

10.2Form of Nonemployee Director Stock Option Agreement between The Toro Company and its Non-Employee Directors under The Toro Company Amended and Restated 2010 Equity and Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.11 to Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2016, Commission File No. 1-8649).

10.3Form of Nonqualified Stock Option Agreement between The Toro Company and its officers and other employees under The Toro Company Amended and Restated 2010 Equity and Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.14 to Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2016, Commission File No. 1-8649).
10.4Form of Performance Share Award Agreement between The Toro Company and its officers and other employees under The Toro Company Amended and Restated 2010 Equity and Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.17 to Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2016, Commission File No. 1-8649).
10.5Form of Annual Performance Award Agreement between The Toro Company and its officers and other employees under The Toro Company Amended and Restated 2010 Equity and Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.18 to Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2016, Commission File No. 1-8649).
10.6Form of Restricted Stock Award Agreement between The Toro Company and its officers and other employees under The Toro Company Amended and Restated 2010 Equity and Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.19 to Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2016, Commission File No. 1-8649).
10.7Form of Restricted Stock Unit Award Agreement between The Toro Company and its officers and other employees under The Toro Company Amended and Restated 2010 Equity and Incentive Plan, as amended and restated (incorporated by reference to Exhibit 10.21 to Registrant’s Annual Report on Form 10-K for the fiscal year ended October 31, 2016, Commission File No. 1-8649).
10.8The Toro Company Supplemental Benefit Plan, Amended and Restated Effective January 1, 2017 (filed herewith).
10.9The Toro Company Deferred Compensation Plan, Amended and Restated Effective January 1, 2017 (filed herewith).
10.10The Toro Company Deferred Compensation Plan for Officers, Amended and Restated Effective January 1, 2017 (filed herewith).
10.11The Toro Company Deferred Compensation Plan for Non-Employee Directors, Amended and Restated Effective January 1, 2017 (filed herewith).
10.12Second Amendment to Credit and Security Agreement dated November 29, 2016 by and between Red Iron Acceptance, LLC and TCF Inventory Finance, Inc. (incorporated by reference to Exhibit 10.1 to Registrant’s Current Report on Form 8-K dated November 29, 2016, Commission File No. 1-8649).
31.1Certification of Chief Executive Officer Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002) (filed herewith).

31.2

Certification of Chief Financial Officer Pursuant to Rule 13a-14(a) (Section 302 of the Sarbanes-Oxley Act of 2002) (filed herewith).

32

Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished herewith).


101

101
The following financial information from The Toro Company’s Quarterly Report on Form 10-Q for the quarterly period ended January 29, 2016,February 3, 2017, filed with the SEC on March 2, 2016,8, 2017, formatted in eXtensible Business Reporting Language (XBRL): (i) Condensed Consolidated Statements of Earnings for the three-month periods ended February 3, 2017 and January 29, 2016, and January 30, 2015, (ii) Condensed Consolidated Statements of Comprehensive Income for the three-month periods ended February 3, 2017 and January 29, 2016, and January 30, 2015, (iii) Condensed Consolidated Balance Sheets as of February 3, 2017, January 29, 2016, January 30, 2015, and October 31, 2015,2016, (iv) Condensed Consolidated Statement of Cash Flows for the three-month periods ended February 3, 2017 and January 29, 2016, and January 30, 2015, and (v) Notes to Condensed Consolidated Financial Statements (filed herewith).

(1) Portions of this exhibit have been redacted and are subject to an order granting confidential treatment under the Securities Exchange Act of 1934, as amended (File No. 001-08649, CF # 34521). The redacted material was filed separately with the Securities and Exchange Commission.
* All exhibits and schedules to this exhibit have been omitted pursuant to Item 601(b)(2) of Regulation S-K. Toro will furnish the omitted exhibits and schedules to the Securities and Exchange Commission upon request by the Securities and Exchange Commission.

SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, the registrantRegistrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.


THE TORO COMPANY

(Registrant)


Date: March 2, 2016

8, 2017

By

By:

/s/ Renee J. Peterson

Renee J. Peterson

Vice President, Treasurer

and Chief Financial Officer

(duly authorized officer and principal financial officer)

29




32