This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior fiscal year. Our MD&A is presented as follows: •Company Overview •Results of Operations •Business Segments •Financial Position •Non-GAAP Financial Measures •Critical Accounting Policies and Estimates •Forward-Looking Information This MD&A should be read in conjunction with the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 . This discussion contains various "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and we refer readers to the section titled "Forward-Looking Information" located at the end of Part I, Item 2 of this report for more information. Non-GAAP Financial Measures Throughout this MD&A, we have provided non-GAAP financial measures, which are not calculated or presented in accordance withUnited States ("U.S.") generally accepted accounting principles ("GAAP"), as information supplemental and in addition to the most directly comparable financial measures presented in this report that are calculated and presented in accordance withU.S. GAAP. We use these non-GAAP financial measures in making operating decisions because we believe these non-GAAP financial measures provide meaningful supplemental information regarding our core operational performance and provide us with a better understanding of how to allocate resources to both ongoing and prospective business initiatives. Additionally, these non-GAAP financial measures facilitate our internal comparisons to both our historical operating results and to our competitors' operating results by factoring out potential differences caused by charges not related to our regular, ongoing business, including, without limitation, non-cash charges, certain large and unpredictable charges, acquisitions and dispositions, legal settlements, and tax positions. We believe that these non-GAAP financial measures, when considered in conjunction with our Condensed Consolidated Financial Statements prepared in accordance withU.S. GAAP, provide investors with useful supplemental financial information to better understand our core operational performance. Reconciliations of non-GAAP financial measures to the most directly comparable reportedU.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A. These non-GAAP financial measures, however, should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the most directly comparableU.S. GAAP financial measures and metrics. Further, these non-GAAP financial measures may differ from similar measures used by other companies. COMPANY OVERVIEWThe 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 irrigation systems; rental, specialty, and underground construction equipment; and residential yard and snow thrower products. We sell our products worldwide through a network of distributors, dealers, mass retailers, hardware retailers, equipment rental centers, home centers, as well as online (direct to end-users). We strive to provide innovative, well-built, and dependable products supported by an extensive service network. A significant portion of our net sales has historically been, and we expect will continue to be, attributable to new and enhanced products. We define new products as those introduced in the current and previous two fiscal years. We classify our operations into two reportable business segments: Professional and Residential. Our remaining activities are presented as "Other" due to their insignificance. Such Other activities consist of earnings (loss) from our wholly-owned domestic distribution companies, corporate activities, and the elimination of intersegment revenues and expenses. Unless the context indicates otherwise, the terms "company," "TTC," "we," "our," or "us" refer toThe Toro Company and its consolidated subsidiaries. Business Combinations Acquisition ofVenture Products, Inc. ("Venture Products") OnMarch 2, 2020 , we completed the acquisition ofVenture Products .Venture Products designs, manufactures, and markets articulating turf, landscape, and snow and ice management equipment for grounds, landscape contractor, golf, municipal, and rural 34
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acreage customers and provides innovative product offerings that broadened and strengthened our Professional segment and expanded our dealer network. The acquisition ofVenture Products was structured as a merger, pursuant to which a wholly-owned subsidiary of TTC merged with and intoVenture Products , withVenture Products continuing as the surviving entity and a wholly-owned subsidiary of TTC. As a result of the merger, all of the outstanding equity securities ofVenture Products were canceled and now only represent the right to receive the applicable cash consideration as described in the merger agreement. We also acquired from an affiliate ofVenture Products the real estate used byVenture Products . The aggregate preliminary consideration forVenture Products and the real estate was$165.9 million , which consisted of a cash payment of$136.4 million and a$29.5 million holdback to satisfy any indemnification or certain other obligations ofVenture Products to TTC. The aggregate preliminary consideration remains subject to certain customary adjustments based on, among other things, the amount of actual cash, debt, and working capital in the business ofVenture Products as of closing date. These adjustments are expected to be completed during fiscal 2020. The holdback is expected to expire by the end of the fourth quarter of fiscal 2021. We funded the cash payment with borrowings under our existing unsecured senior revolving credit facility. For additional information regarding theVenture Products acquisition and our unsecured senior revolving credit facility utilized to fund the aggregate preliminary consideration, refer to Note 2, Business Combinations, and Note 6, Indebtedness, respectively, in the Notes to Condensed Consolidated Financial Statements included in Part I. Item 1 of this Quarterly Report on Form 10-Q. Acquisition ofThe Charles Machine Works, Inc. ("CMW") OnApril 1, 2019 , we completed our acquisition of CMW, a privately heldOklahoma corporation. CMW designs, manufactures, and markets a range of professional products to serve the underground construction market, including horizontal directional drills, walk and ride trenchers, compact utility loaders/skid steers, vacuum excavators, asset locators, pipe rehabilitation solutions, and after-market tools. CMW provides innovative product offerings that broadened and strengthened our Professional segment product portfolio and expanded our dealer network, while also providing a complementary geographic manufacturing footprint. As of the closing date of the transaction, we paid preliminary merger consideration of$679.3 million that was subject to customary adjustments based on, among other things, the amount of actual cash, debt, and working capital in the business of CMW as of the closing date. During the fourth quarter of fiscal 2019, we finalized the adjustments, which resulted in an aggregate merger consideration of$685.0 million . We funded the purchase price for the acquisition by using a combination of cash proceeds from the issuance of borrowings under our unsecured senior term loan credit agreement and borrowings under our unsecured senior revolving credit facility. For additional information regarding the CMW acquisition and the financing agreements utilized to fund the purchase price, refer to Note 2, Business Combinations, and Note 6, Indebtedness, respectively, in the Notes to Condensed Consolidated Financial Statements included in Part I. Item 1 of this Quarterly Report on Form 10-Q. Impact of COVID-19 Pandemic InMarch 2020 , theWorld Health Organization declared the novel coronavirus ("COVID-19" or "the virus") outbreak a global pandemic. The COVID-19 pandemic has negatively impacted the global economy, disrupted global supply chains, created significant volatility and disruption in financial markets, and has resulted in a global economic slowdown. COVID-19 has resulted in government authorities around the world implementing stringent measures to attempt to help control the spread of the virus, including business shutdowns and curtailments, travel restrictions, prohibitions on group events and gatherings, quarantines, "shelter-in-place" and "stay-at-home" orders, curfews, social distancing, and other measures. The global economic impact of this pandemic has had a material impact on our business, customers, and suppliers and has caused many challenges, which began in the second quarter of fiscal 2020 and steadily increased as the second quarter progressed. As the events surrounding COVID-19 continued to unfold during the second quarter of fiscal 2020, our main focus was, and will continue to be, the health, safety, and wellbeing of our employees, customers, suppliers and communities around the world. In support of continuing our global manufacturing operations, we have adopted rigorous and meaningful safety measures recommended by theU.S. Centers for Disease Control and Prevention ,World Health Organization , and federal, state, local, and foreign authorities to protect our employees, customers, suppliers, and communities. These important safety measures enacted at our facilities and other sites include, but are not limited to, implementing social distancing protocols such as the reconfiguration of manufacturing processes and other workspaces, instituting working from home arrangements for those employees that do not need to be physically present at our facilities and sites to perform their job responsibilities, suspending non-essential travel, extensively and frequently disinfecting our facilities and workspaces, suspending all non-essential visitors, and providing or accommodating the wearing of face coverings and other sanitary measures to those employeeswho must be physically present at our facilities and sites to perform their job responsibilities. We also adopted a special COVID-19 employee leave policy that provides two weeks of pay for employeeswho have contracted the virus, are involuntarily quarantined because of the virus, or are without work due to changes in our production schedules as a result of the virus. We expect to continue such safety measures until we determine that COVID-19 is adequately contained for purposes of our operations and we may take further actions as government authorities require or recommend or as we determine to be in the best interests of our employees, customers, suppliers, and communities. 35
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We have been balancing our safety-focused approach with our responsibility to meet the needs of our customers as we supply them with products that are critical to maintaining essential infrastructure globally, agricultural food production, and the enablement of safe areas for outdoor spaces. Government mandated measures providing for business shutdowns or curtailments generally exclude certain essential businesses and services, including businesses that manufacture and sell products that are considered essential to daily lives or otherwise operate in essential or critical sectors. Substantially all of our operations are considered essential under applicable government mandated orders relating to COVID-19 allowing us to continue our global manufacturing and other operations. While we have been able to continue manufacturing substantially all of our products and our facilities have remained operational, we have experienced intermittent partial or full facility closures, reduced levels of production at certain facilities, and manufacturing inefficiencies as a result of these government mandated measures, reduced demand for products in certain of our businesses, and the reconfiguration of certain of our manufacturing processes in order to implement social distancing protocols within our facilities. We have not yet experienced any significant impacts to our global manufacturing operations due to disruptions in our global supply chain as a result of COVID-19. Although we regularly monitor the financial health of the companies in our supply chain, financial hardship or government mandated restrictions on our suppliers caused by COVID-19 could cause a disruption in our ability to procure the commodities, components, and parts required to manufacture our products. Ongoing communications continue with our suppliers in an attempt to identify and mitigate such risks and to proactively manage inventory levels of commodities, components, and parts to align with anticipated reduced levels of production as a result of softened demand for our products and other government actions. While domestic and/or international governmental measures may be modified or extended, we currently expect that our global manufacturing facilities will remain operational, although operating at reduced production capacity at certain of our facilities, during the remainder of fiscal 2020. However, such expectation is dependent upon, among other things, future governmental actions and demand for our products, the stability of our global supply chain, and the ability of carriers to transport procured commodities, components, and parts to our facilities and transport our products to our customers. As a result of the global economic slowdown caused by the COVID-19 pandemic, inmid-March 2020 , we began experiencing softened demand in certain of our businesses. Within our Professional segment, the majority of our businesses were adversely impacted during our fiscal 2020 second quarter due to reduced demand from channel partners and end-customers. Most notably, our golf and grounds; irrigation; landscape contractor; and rental, specialty, and underground construction businesses were particularly affected by COVID-19. Demand for our golf and grounds and irrigation products decreased as a result of the curtailment and closure of certain business activities for golf courses and municipalities across the globe resulting in lower overall revenues and budget constraints and a preference for repairs and deferrals over new equipment purchases. The decrease in demand for our landscape contractor business was primarily due to channel partners aligning field inventory levels with reduced retail demand from end-customers. Our rental, specialty, and underground construction business experienced reduced demand as a result of curtailed investments by end-customers in the oil and gas and construction industries. We currently expect this reduced demand in our Professional segment business to continue, particularly if adverse economic and recessionary conditions continue or worsen. Contrary to the impact experienced in the majority of our Professional segment businesses, our Residential segment experienced strong retail demand during the second quarter of fiscal 2020 for zero-turn riding mowers and walk power mowers partially due to the impacts of COVID-19 as, among other reasons, end-customers were subject to government mandated "shelter-in-place" and "stay-at-home" orders and experienced favorable spring weather conditions for property enhancement and maintenance activities in key regions of the globe. While the strong retail demand experienced in our Residential segment is a positive event in light of COVID-19, the shift to a greater percentage of Residential segment net sales as a percentage of consolidated net sales adversely impacted our gross margins for the for the three and six month periods endedMay 1, 2020 and we expect will continue to adversely impact our gross margins. In an effort to partially mitigate the anticipated adverse impacts of COVID-19 on our fiscal 2020 Results of Operations, Financial Position, or Cash Flows as a result of lower demand we have experienced in certain of our businesses, we have taken and continue to take meaningful cost reduction measures across our organization to align our costs with anticipated lower sales volumes. These cost reduction measures include reducing production levels within our manufacturing facilities to align with anticipated reduced sales volumes; enacting tiered salary reductions and suspending merit-based salary increases and discretionary retirement fund contributions for the remainder of fiscal 2020; reducing discretionary spending; freezing the hiring of new employees; and delaying, reducing, or eliminating purchased services and travel. Additionally, we have proactively managed our working capital through various measures, and we expect to continue to do so, including, but not limited to, refinancing outstanding borrowings on our unsecured senior revolving credit facility with the net proceeds from a new three year term loan for$190.0 million , which also added incremental liquidity; reducing capital expenditures; continuing the curtailment of share repurchases under our Board authorized repurchase plan; reducing production levels within our manufacturing facilities to manage finished goods inventory levels to align with lower sales volumes; deferring receipts of commodities, components, and parts inventory to align with reduced production levels; and monitoring and participating in government economic stabilization efforts and certain legislative provisions, such as deferring certain tax payments, as applicable. We currently expect to continue paying our quarterly cash dividend to shareholders for the remainder of fiscal 2020. As a result of proactively managing our working capital and monitoring government economic stabilization efforts, our balance sheet and liquidity profile remains strong with available liquidity of approximately$798.1 million as ofMay 1, 2020 , consisting of cash and cash equivalents of approximately$200.0 million and availability under our unsecured senior revolving credit facility of$598.1 million . 36
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Significant uncertainty still exists concerning the anticipated future magnitude of the impact and duration of COVID-19. We intend to continue to monitor the rapidly evolving situation and the guidance from global government authorities, as well as federal, state, local and foreign public health authorities, and may take additional meaningful actions based on their requirements and recommendations to attempt to protect the health and wellbeing of our employees, customers, suppliers, and communities. In these circumstances, there may be developments outside our control requiring us to adjust our operating plan and cost reduction measures and such developments could occur rapidly. Given the many evolving COVID-19 related factors, risks, and challenges that could negatively impact our business, we withdrew our fiscal 2020 detailed financial guidance onMarch 30, 2020 . Many of these uncertainties still remain and as a result, we are not in a position to provide detailed financial guidance for our third quarter or full year of fiscal 2020 at this time nor do we have the ability to predict the level of impact of COVID-19 on our business and related Results of Operations, Financial Position, or Cash Flows. We currently believe that the current market trends will continue throughout the remainder of our fiscal year, including customer budget constraints and cash preservation and a preference for repairs and deferrals over new equipment purchases in our Professional segment, as well as higher demand in our Residential segment. We expect that the third quarter of fiscal 2020 will be the most challenging quarter for our business with the most significant year-over-year net sales and diluted earnings per share declines experienced and we currently expect negative year-over-year fourth quarter net sales and diluted earnings per share growth. However, if adverse impacts from COVID-19 continue for an extended period of time or worsen, our business and related Results of Operations, Financial Position, or Cash Flows could continue to be adversely impacted. Sustained adverse impacts to our business and certain suppliers or customers may also affect the future valuation of certain of our assets and therefore, may increase the likelihood of a charge related to an impairment, write-off, or reserve associated with such assets, including, but not limited to, goodwill, indefinite and finite-lived intangible assets, inventories, accounts receivable, deferred income taxes, and property, plant and equipment. Such a charge could be material to our future Results of Operations, Financial Position, or Cash Flows. For additional information regarding risks associated with COVID-19, refer to the section titled "Forward-Looking Information" located at the end of Part I, Item 2 and the section titled "Risk Factors" located within Part II, Item 1A, of this Quarterly Report on Form 10-Q. RESULTS OF OPERATIONS Overview Worldwide consolidated net sales for the second quarter of fiscal 2020 were$929.4 million , down 3.4 percent compared to$962.0 million in the second quarter of fiscal 2019. For the year-to-date period of fiscal 2020, worldwide consolidated net sales were$1,696.9 million , up 8.4 percent compared to$1,565.0 million from the same period in the prior fiscal year. Professional segment net sales for the second quarter of fiscal 2020 were$661.1 million , a decrease of 8.6 percent compared to$723.5 million in the second quarter of the prior fiscal year. This decrease was primarily due to the unfavorable impact of COVID-19 on our Professional businesses, partially offset by incremental net sales as a result of our acquisitions of CMW andVenture Products . For the year-to-date period of fiscal 2020, Professional segment net sales were$1,255.8 million , an increase of 6.6 percent compared to$1,178.5 million in the prior fiscal year comparable period. This increase was driven by incremental net sales as a result of our acquisitions of CMW andVenture Products , partially offset by the unfavorable impact of COVID-19 on our Professional businesses. Residential segment net sales for the second quarter of fiscal 2020 were$262.0 million , an increase of 12.9 percent compared to$232.1 million in the second quarter of the prior fiscal year. For the year-to-date period of fiscal 2020, Residential segment net sales were$427.8 million , an increase of 13.4 percent compared to$377.3 million in the prior fiscal year comparable period. These increases were mainly driven by incremental sales to our expanded mass retail channel and strong retail demand driven by favorable weather conditions in key regions, new and enhanced products, and government mandated "shelter-in-place" and "stay-at-home" orders. Net earnings for the second quarter of fiscal 2020 were$98.4 million , or$0.91 per diluted share, compared to$115.6 million , or$1.07 per diluted share, for the second quarter of fiscal 2019. Net earnings for the first six months of fiscal 2020 were$168.5 million , or$1.55 per diluted share, compared to net earnings of$175.1 million , or$1.62 per diluted share in the comparable fiscal 2019 period. Non-GAAP net earnings for the second quarter of fiscal 2020 were$100.2 million , or$0.92 per diluted share, compared to$126.0 million , or$1.17 per diluted share, for the prior fiscal year comparative period, a decrease of 21.4 percent per diluted share. Non-GAAP net earnings for the first six months of fiscal 2020 were$169.8 million , or$1.56 per diluted share, compared to$182.7 million , or$1.69 per diluted share, in the comparable fiscal 2019 period, a decrease of 7.7 percent per diluted share. Reconciliations of non-GAAP financial measures to the most directly comparable reportedU.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A. We increased our cash dividend for the second quarter of fiscal 2020 by 11.1 percent to$0.25 per share compared to the$0.225 per share cash dividend paid in the second quarter of fiscal 2019. 37
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Field inventory levels were slightly higher as of the end of the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019, primarily as a result of higher Residential segment field inventory due to shipments into our expanded mass retail channel and incremental field inventories within our Professional segment as a result of the acquisition ofVenture Products , partially offset by reduced field inventories in our golf and grounds and landscape contractor businesses as our channel partners aligned field inventory levels with anticipated retail demand for our products. Three-Year Employee Initiative - "Vision 2020" Our current multi-year employee initiative, "Vision 2020", which began with our 2018 fiscal year, focuses on driving profitable growth with an emphasis on innovation and serving our customers, which we believe will generate further momentum for the organization. Through the first two fiscal years of our Vision 2020 initiative, we set specific financial goals, which included organic revenue and operating earnings growth. After our transformational acquisition of CMW, we changed the focus of our third and final fiscal year of our Vision 2020 initiative to a revised enterprise-wide performance goal of achieving non-GAAP operating earnings of$485.0 million . However, as a result of COVID-19 and its impact on our fiscal 2020 Results of Operations experienced to date, we do not expect to meet this enterprise-wide performance goal for fiscal 2020.Net Sales Worldwide consolidated net sales for the second quarter of fiscal 2020 were$929.4 million , down 3.4 percent compared to$962.0 million in the second quarter of fiscal 2019. This decrease was primarily the result of reduced net sales in the majority of our Professional segment businesses due to reduced demand from channel partners and end-customers as a result of COVID-19. Within our Professional segment businesses, the decrease was primarily due to fewer shipments of golf and grounds equipment and irrigation products as a result of the curtailment and closure of certain business activities for golf courses and municipalities across the globe resulting in lower overall revenues and budget constraints and a preference for repairs and deferrals over new equipment purchases; fewer shipments of our landscape contractor zero-turn riding mowers as our channel partners aligned field inventory levels with reduced retail demand for our products; and reduced sales of our rental, specialty, and underground construction equipment as a result of the global economic slowdown experienced during our fiscal 2020 second quarter that unfavorably impacted the oil and gas and construction industries. These net sales decreases were partially offset by incremental sales in our Professional segment as a result of our acquisitions of CMW andVenture Products , as well as an increase in net sales in our Residential segment driven by incremental shipments of zero-turn riding mowers and walk power mowers as a result of our expanded mass retail channel and strong retail demand driven by favorable spring weather conditions in key regions, new and enhanced products, and government mandated "shelter-in-place" and "stay-at-home" orders. For the year-to-date period of fiscal 2020, worldwide consolidated net sales were$1,696.9 million , up 8.4 percent compared to$1,565.0 million from the same period in the prior fiscal year. This increase was primarily driven by incremental sales in our Professional segment as a result of our acquisitions of CMW andVenture Products , as well as an increase in net sales in our Residential segment driven by incremental shipments of zero-turn riding mowers and walk power mowers as a result of our expanded mass retail channel and strong retail demand driven by favorable spring weather conditions in key regions, new and enhanced products, and government mandated "shelter-in-place" and "stay-at-home" orders. These increases were partially offset by reductions in net sales for the majority of our Professional segment businesses due to reduced demand from channel partners and end-customers as a result of COVID-19. Within our Professional segment businesses, the decrease was primarily due to fewer shipments of golf and grounds equipment and irrigation products as a result of the curtailment and closure of certain business activities for golf courses and municipalities across the globe resulting in lower overall revenues and budget constraints and a preference for repairs and deferrals over new equipment purchases; fewer shipments of our landscape contractor zero-turn riding mowers as our channel partners aligned field inventory levels with reduced retail demand for our products; and reduced sales volumes for our rental, specialty, and underground construction equipment as a result of the global economic slowdown experienced during our fiscal 2020 second quarter that unfavorably impacted the oil and gas and construction industries. Net sales in international markets decreased by 16.9 percent and 0.7 percent for the second quarter and year-to-date periods of fiscal 2020, respectively. Changes in foreign currency exchange rates resulted in a decrease in our net sales of approximately$5.4 million and$4.9 million for the second quarter and year-to-date periods of fiscal 2020, respectively. The net sales decrease for the quarter comparison was mainly due to decreased sales of golf and grounds and irrigation equipment, walk-power mowers, zero-turn riding mowers, and Pope-branded irrigation products as a result of COVID-19 related government mandated business curtailment measures in key global regions, partially offset by incremental sales as a result of our acquisitions of CMW andVenture Products and higher shipments of our ag-irrigation products due to favorable weather conditions in key regions. The net sales decrease for the year-to-date comparison was mainly due to decreased sales of golf and grounds and irrigation equipment, zero-turn riding mowers, and walk power mowers as a result of COVID-19 related government mandated business curtailment measures in key global regions, partially offset by incremental sales as a result of our acquisitions of CMW andVenture Products and higher shipments of our ag-irrigation products due to favorable weather conditions in key regions. 38
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The following table summarizes the major operating costs and other income as a percentage of net sales: Three Months Ended Six Months Ended May 1, 2020 May 3, 2019 May 1, 2020 May 3, 2019 Net sales 100.0 % 100.0 % 100.0 % 100.0 % Cost of sales (67.0 ) (66.6 ) (64.9 ) (65.7 ) Gross profit 33.0 33.4 35.1 34.3 Selling, general and administrative expense (19.5 ) (19.1 ) (22.3 ) (21.0 ) Operating earnings 13.5 14.3 12.8 13.3 Interest expense (0.9 ) (0.7 ) (1.0 ) (0.7 ) Other income, net 0.5 0.7 0.4 0.6 Earnings before income taxes 13.1 14.3 12.2 13.2 Provision for income taxes (2.5 ) (2.3 ) (2.3 ) (2.0 ) Net earnings 10.6 % 12.0 % 9.9 % 11.2 % Gross Profit and Gross Margin Gross profit for the second quarter of fiscal 2020 was$306.7 million , down 4.5 percent compared to$321.3 million in the second quarter of fiscal 2019. Gross margin for the second quarter of fiscal 2020 was 33.0 percent, a decrease of 40 basis points when compared to the second quarter of fiscal 2019. The decrease in gross margin for the second quarter comparison was primarily due to unfavorable manufacturing variance due to production downtime and manufacturing inefficiencies as a result of COVID-19-related facilities closures and the reconfiguration of certain of our manufacturing processes in order to implement social distancing protocols within our facilities and unfavorable product mix primarily due to higher sales of Residential segment products as a percentage of total consolidated net sales, partially offset by the favorable impact of strategic productivity and synergy initiatives, favorable net price realization within our Professional segment due to fewer sales promotion activities as a result of reduced demand and a revised floor plan financing rate structure as a result of the amendments to certain agreements pertaining to our Red Iron joint venture, and lower costs of commodities and tariffs. Non-GAAP gross profit for the second quarter of fiscal 2020 was$310.0 million , down 6.3 percent compared to$330.8 million in the second quarter of fiscal 2019. Non-GAAP gross margin was 33.4 percent for the second quarter of fiscal 2020 compared to 34.4 percent for the second quarter of fiscal 2019, a decrease of 100 basis points. The decrease in non-GAAP gross margin is a result of the same factors noted above for the decrease to gross margin for the second quarter of fiscal 2020, as well as decreased acquisition-related costs for the fiscal 2020 acquisition ofVenture Products as compared to the fiscal 2019 acquisition of CMW, partially offset by the incremental adjustment for management actions related to inventory write-down charges for the wind down of our Toro-branded large horizontal directional drill and riding trencher product line ("Toro underground wind down"). Gross profit for the year-to-date period of fiscal 2020 was$594.8 million , up 10.8 percent compared to$536.9 million in the same period of fiscal 2019. Gross margin for the year-to-date period of fiscal 2020 was 35.1 percent, an increase of 80 basis points when compared to the same period of fiscal 2019. The increase in gross margin for the year-to-date comparison was primarily due to the favorable impact of strategic productivity and synergy initiatives, favorable net price realization within our Professional segment due to fewer sales promotion activities as a result of reduced demand and a revised floor plan financing rate structure as a result of the amendments to certain agreements pertaining to our Red Iron joint venture, and lower costs of commodities and tariffs. The gross margin increase was partially offset by unfavorable manufacturing variance due to production downtime and manufacturing inefficiencies as a result of COVID-19-related facilities closures and the reconfiguration of certain of our manufacturing processes in order to implement social distancing protocols within our facilities and unfavorable product mix primarily due to higher sales of Residential segment products as a percentage of total consolidated net sales. Non-GAAP gross profit for the year-to-date period of fiscal 2020 was$598.5 million , up 9.5 percent compared to$546.4 million in the same period of fiscal 2019. Non-GAAP gross margin was 35.3 percent for the year-to-date period of fiscal 2020 compared to 34.9 percent for the same year-to-date period of fiscal 2019, an increase of 40 basis points. The increase in non-GAAP gross margin is a result of the same factors noted above for the increase to gross margin for the year-to-date period of fiscal 2020, as well as the adjustment for management actions related to inventory write-down charges for the Toro underground wind down, partially offset by a decrease in acquisition-related costs for the fiscal 2020 acquisition ofVenture Products as compared to the fiscal 2019 acquisition of CMW. Non-GAAP gross profit and non-GAAP gross margin exclude the impact of acquisition-related costs related to our acquisitions ofVenture Products and CMW, including charges incurred for the take-down of the inventory fair value step up amounts resulting from purchase accounting adjustments in both acquisitions and the amortization of the backlog intangible asset resulting from purchase accounting adjustments for the CMW acquisition, and the impact of management actions, including charges incurred for inventory write-downs related to the Toro underground wind down. Reconciliations of non-GAAP financial measures to the most directly comparable reportedU.S. GAAP financial measures are included in the section titled "Non-GAAP Financial 39
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Measures" within this MD&A. Selling, General, and Administrative Expense SG&A expense decreased$2.7 million , or 1.4 percent, for the second quarter of fiscal 2020 and increased$48.7 million , or 14.8 percent, for the year-to-date period of fiscal 2020. As a percentage of net sales, SG&A expense increased 40 basis points for the second quarter of fiscal 2020 and increased 130 basis points for the year-to-date period of fiscal 2020. The increase in SG&A expense as a percentage of net sales for the second quarter comparison was primarily due to incremental engineering, marketing, and service costs as a result of our acquisitions of CMW andVenture Products and higher warranty expense, partially offset by decreased incentive compensation costs as a result of diminished company performance due to COVID-19 and reduced transaction and integration costs incurred for theVenture Products acquisition in fiscal 2020 as compared to the transaction and integration costs incurred for the CMW acquisition in fiscal 2019. The increase in SG&A expense as a percentage of net sales for the year-to-date comparison was primarily due to incremental administrative, marketing, engineering, and service costs as a result of our acquisitions of CMW andVenture Products and higher warranty expense, partially offset by decreased incentive compensation costs as a result of diminished company performance due to COVID-19 and reduced transaction and integration costs incurred for theVenture Products acquisition in fiscal 2020 as compared to the transaction and integration costs incurred for the CMW acquisition in fiscal 2019. Interest Expense Interest expense increased$2.0 million and$5.4 million for the second quarter and year-to-date periods of fiscal 2020 compared to the comparable periods of fiscal 2019. These increases were due to increased interest expense incurred on higher average outstanding borrowings under our financing arrangements as a result of our acquisitions of CMW andVenture Products . Other Income, Net Other income, net for the second quarter and year-to-date periods of fiscal 2020 decreased$1.9 million and$3.5 million , respectively, compared to the same periods in fiscal 2019. The decrease for the second quarter comparison was primarily due to a settlement charge incurred for the termination of ourU.S. defined benefit pension plan, lower income from our Red Iron joint venture as a result of the amendments to certain agreements pertaining to the joint venture and lower sales volume, and lower interest income on marketable securities, partially offset the favorable impact of foreign currency exchange rates. The decrease for the year-to-date comparison was primarily due to lower income from our Red Iron joint venture as a result of the amendments to certain agreements pertaining to the joint venture and lower sales volume, lower interest income on marketable securities, and a settlement charge incurred for the termination of ourU.S. defined benefit pension plan, partially offset by the favorable impact of foreign currency exchange rates. Provision for Income Taxes The effective tax rate for the second quarter and year-to-date periods of fiscal 2020 was 18.9 percent and 18.8 percent, respectively, compared to 15.8 percent and 15.5 percent in the same periods in fiscal 2019. These increases were due to a lower discrete tax benefit for the excess tax deduction for share-based compensation. The non-GAAP effective tax rate for the second quarter of fiscal 2020 was 20.0 percent, compared to a non-GAAP effective tax rate of 19.9 percent in the second quarter of fiscal 2019. The non-GAAP effective tax rate for the year-to-date period of fiscal 2020 was 20.4 percent, compared to a non-GAAP effective tax rate of 20.2 percent in the same period of fiscal 2019. The non-GAAP effective tax rate excludes the impact of acquisition-related costs related to our acquisitions ofVenture Products and CMW, including transaction and integration costs and charges incurred related to certain purchase accounting adjustments; the impact of discrete tax benefits recorded as excess tax deductions for share-based compensation; and the impact of management actions, including charges incurred for inventory write-downs related to the Toro underground wind down. Reconciliations of non-GAAP financial measures to the most directly comparable reportedU.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures." Net Earnings Net earnings for the second quarter of fiscal 2020 were$98.4 million , or$0.91 per diluted share, compared to$115.6 million , or$1.07 per diluted share, for the second quarter of fiscal 2019. This decrease was primarily due to reduced gross margins largely as a result of unfavorable manufacturing variance due to production downtime and manufacturing inefficiencies as a result of COVID-19-related facilities closures and the reconfiguration of certain of our manufacturing processes in order to implement social distancing protocols within our facilities, a lower discrete tax benefit for the excess tax deduction for share-based compensation, and increased interest expense due to higher average outstanding borrowings under our financing arrangements. The net earnings decrease was partially offset by the favorable impact of strategic productivity and synergy initiatives on gross margins, decreased incentive compensation costs, and reduced transaction and integration costs incurred for theVenture Products acquisition in fiscal 2020 as compared to the transaction and integration costs incurred for the CMW acquisition in fiscal 2019. Non-GAAP net earnings for the second quarter of fiscal 2020 were$100.2 million , or$0.92 per diluted share, compared to$126.0 40
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million, or$1.17 per diluted share, for the second quarter of fiscal 2019, a decrease of 21.4 percent per diluted share. This decrease was primarily due to decreased gross margins largely as a result of unfavorable manufacturing variance due to production downtime and manufacturing inefficiencies as a result of COVID-19-related facilities closures and the reconfiguration of certain of our manufacturing processes in order to implement social distancing protocols within our facilities, and increased interest expense due to higher average outstanding borrowings under our financing arrangements, partially offset by the favorable impact of strategic productivity and synergy initiatives on gross margins and decreased incentive compensation costs. Net earnings for the first six months of fiscal 2020 were$168.5 million , or$1.55 per diluted share, compared to$175.1 million , or$1.62 per diluted share, for the same period of fiscal 2019. This decrease was primarily due to incremental administrative, marketing, engineering, and service costs as a result of our acquisitions of CMW andVenture Products , higher warranty expense, a lower discrete tax benefit for the excess tax deduction for share-based compensation, and increased interest expense due to higher average outstanding borrowings under our financing arrangements, partially offset by the favorable impact of strategic productivity and synergy initiatives, decreased incentive compensation costs, and reduced transaction and integration costs incurred for theVenture Products acquisition in fiscal 2020 as compared to the transaction and integration costs incurred for the CMW acquisition in fiscal 2019. Non-GAAP net earnings for the first six months of fiscal 2020 were$169.8 million , or$1.56 per diluted share, compared to$182.7 million , or$1.69 per diluted share for the same year-to-date period of fiscal 2019, a decrease of 7.7 percent per diluted share. This decrease was primarily due to incremental administrative, marketing, engineering, and service costs as a result of our acquisitions of CMW andVenture Products , higher warranty expense, and increased interest expense due to higher average outstanding borrowings under our financing arrangements, partially offset by the favorable impact of strategic productivity and synergy initiatives and decreased incentive compensation costs. Non-GAAP net earnings and non-GAAP net earnings per diluted share exclude the impact of acquisition-related costs related to our acquisitions ofVenture Products and CMW, including transaction and integration costs and charges incurred related to certain purchase accounting adjustments; the impact of discrete tax benefits recorded as excess tax deductions for share-based compensation; and the impact of management actions, including charges incurred for inventory write-downs related to the Toro underground wind down. Reconciliations of non-GAAP financial measures to the most directly comparable reportedU.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A. BUSINESS SEGMENTS We operate in two reportable business segments: Professional and Residential. Segment earnings for our Professional and Residential segments are defined as earnings from operations plus other income, net. Our remaining activities are presented as "Other" due to their insignificance. Operating loss for our Other activities includes earnings (loss) from our wholly-owned domestic distribution companies, Red Iron joint venture, corporate activities, other income, and interest expense. Corporate activities include general corporate expenditures (finance, human resources, legal, information services, public relations, and similar activities) and other unallocated corporate assets and liabilities, such as corporate facilities and deferred tax assets and liabilities. The following tables summarize net sales for our reportable business segments and Other activities: Three Months Ended (Dollars in thousands) May 1, 2020 May 3, 2019 $ Change % Change Professional$ 661,087 $ 723,506 $ (62,419 ) (8.6 )% Residential 261,998 232,147 29,851 12.9 Other 6,313 6,383 (70 ) (1.1 ) Total net sales*$ 929,398 $ 962,036 $ (32,638 ) (3.4 )% *Includes international net sales of:$ 182,044 $ 219,077 $ (37,033 ) (16.9 )% Six Months Ended (Dollars in thousands) May 1, 2020 May 3, 2019 $ Change % Change Professional$ 1,255,808 $ 1,178,512 $ 77,296 6.6 % Residential 427,846 377,305 50,541 13.4 Other 13,227 9,175 4,052 44.2 Total net sales*$ 1,696,881 $ 1,564,992 $ 131,889 8.4 %
*Includes international net sales of:
(2,635 ) (0.7 )% 41
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The following tables summarize segment earnings for our reportable business segments and operating (loss) for our Other activities:
Three Months Ended (Dollars in thousands) May 1, 2020 May 3, 2019 $ Change % Change Professional$ 106,259 $ 150,119 $ (43,860 ) (29.2 )% Residential 37,122 22,030 15,092 68.5 Other (22,010 ) (34,969 ) 12,959 37.1 Total segment earnings$ 121,371 $ 137,180 $ (15,809 ) (11.5 )% Six Months Ended (Dollars in thousands) May 1, 2020 May 3, 2019 $ Change % Change Professional$ 208,733 $ 238,097 $ (29,364 ) (12.3 )% Residential 58,688 35,102 23,586 67.2 Other (59,911 ) (65,999 ) 6,088 9.2
Total segment earnings
Professional Segment SegmentNet Sales Worldwide net sales for our Professional segment for the second quarter of fiscal 2020 decreased 8.6 percent compared to the same period of fiscal 2019. The net sales decrease for the second quarter comparison was primarily the result of COVID-19 and its impact on retail demand for our Professional segment products. The proliferation of COVID-19 throughout the second quarter of fiscal 2020 resulted in fewer shipments of golf and grounds equipment and irrigation products as a result of the curtailment and closure of certain business activities for golf courses and municipalities across the globe resulting in lower overall revenues and budget constraints and a preference for repairs and deferrals over new equipment purchases; fewer shipments of our landscape contractor zero-turn riding mowers as our channel partners aligned field inventory levels with reduced retail demand for our products; and reduced sales volumes for our rental, specialty, and underground construction equipment as a result of the global economic slowdown experienced during our fiscal 2020 second quarter that unfavorably impacted the oil and gas and construction industries. The net sales decrease was partially offset by incremental sales as a result of our acquisitions of CMW andVenture Products . Worldwide net sales for our Professional segment for the year-to-date period of fiscal 2020 increased 6.6 percent compared to the same period of fiscal 2019. The net sales increase for the year-to-date comparison was driven by incremental sales as a result of our acquisitions of CMW andVenture Products . The net sales increase was largely offset by COVID-19 and its impact on retail demand for our Professional segment products, which resulted in fewer shipment of our landscape contractor zero-turn riding mowers as our channel partners aligned field inventory levels with reduced retail demand for our products; fewer shipments of golf and grounds equipment and irrigation products as a result of the curtailment and closure of certain business activities for golf courses and municipalities across the globe resulting in lower overall revenues and budget constraints and a preference for repairs and deferrals over new equipment purchases; and reduced sales volumes for our rental, specialty, and underground construction equipment as a result of the global economic slowdown experienced during our fiscal 2020 second quarter that unfavorably impacted the oil and gas and construction industries. Segment Earnings Professional segment earnings for the second quarter of fiscal 2020 decreased 29.2 percent compared to the second quarter of fiscal 2019, and when expressed as a percentage of net sales, decreased to 16.1 percent from 20.7 percent. As a percentage of net sales, the Professional segment earnings decrease was primarily due to unfavorable manufacturing variance due to production downtime and manufacturing inefficiencies as a result of COVID-19-related facilities closures and the reconfiguration of certain of our manufacturing processes in order to implement social distancing protocols within our facilities; incremental marketing, engineering, administrative and service costs as a result of our acquisitions of CMW andVenture Products ; higher warranty expense; unfavorable product mix due to incremental sales of lower margin product, and additional inventory write-down charges incurred related to the Toro underground wind down. The segment earnings decrease was partially offset by favorable net price realization due to fewer sales promotion activities as a result of reduced demand attributed to the COVID-19 pandemic and a revised floor plan financing rate structure as a result of the amendments to certain agreements pertaining to our Red Iron joint venture, the favorable impact of strategic productivity and synergy initiatives, lower costs of commodities and tariffs, and decreased incentive compensation costs due to diminished performance as a result of COVID-19. For the year-to-date period of fiscal 2020, Professional segment earnings decreased by 12.3 percent compared to the same period in the prior fiscal year, and when expressed as a percentage of net sales, decreased to 16.6 percent from 20.2 percent. As a percentage 42
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of net sales, the Professional segment earnings decrease was primarily due to unfavorable manufacturing variance due to production downtime and manufacturing inefficiencies as a result of COVID-19-related facilities closures and the reconfiguration of certain of our manufacturing processes in order to implement social distancing protocols within our facilities; incremental administrative, marketing, engineering, and service costs as a result of our acquisitions of CMW andVenture Products ; and unfavorable product mix due to incremental sales of lower margin product as a result of our CMW acquisition. The segment earnings decrease was partially offset by the favorable impact of strategic productivity and synergy initiatives, favorable net price realization due to fewer sales promotion activities as a result of reduced demand attributed to the COVID-19 pandemic and a revised floor plan financing rate structure as a result of the amendments to certain agreements pertaining to our Red Iron joint venture, and lower commodity and tariff costs. Residential Segment SegmentNet Sales Worldwide net sales for our Residential segment for the second quarter and year-to-date periods of fiscal 2020 increased 12.9 percent and 13.4 percent, respectively, compared to the same periods of fiscal 2019. The Residential segment net sales increases for the second quarter and year-to-date comparisons were mainly driven by incremental shipments of zero-turn riding mowers and walk power mowers as a result of our expanded mass retail channel and strong retail demand driven by favorable spring weather conditions in key regions, new and enhanced products, and government mandated "shelter-in-place" and "stay-at-home" orders. Segment Earnings Residential segment earnings for the second quarter of fiscal 2020 increased 68.5 percent compared to the second quarter of fiscal 2019, and when expressed as a percentage of net sales, increased to 14.2 percent from 9.5 percent. For the year-to-date period of fiscal 2020, Residential segment net earnings increased 67.2 percent compared to the same period in the prior fiscal year, and when expressed as a percentage of net sales, increased to 13.7 percent from 9.3 percent. As a percentage of net sales, the Residential segment net earnings increases for the second quarter and year-to-date comparisons were driven by the favorable impact of strategic productivity and synergy initiatives, lower commodity and tariff costs, reductions in freight costs as a result of cost reduction initiatives and lower fuel prices, and reduced SG&A expense as a percentage of net sales due to leveraging expense over higher sales volumes. The segment earnings increases for both comparisons were partially offset by unfavorable manufacturing variance due to production downtime and manufacturing inefficiencies as a result of COVID-19-related facilities closures and the reconfiguration of certain of our manufacturing processes in order to implement social distancing protocols within our facilities, as well as higher warranty expense. Other Activities OtherNet Sales Net sales for our Other activities include sales from our wholly-owned domestic distribution companies less sales from the Professional and Residential segments to the distribution companies. Net sales for our Other activities in the second quarter of fiscal 2020 decreased by$0.1 million compared to the second quarter of fiscal 2019. The net sales decrease for the second quarter comparison was the result of COVID-19, which led to reduced sales of our Professional and Residential segment products by our wholly-owned domestic distribution companies due to reduced retail demand. This decrease was largely offset by reduced intercompany sales eliminations for sales from our Professional and Residential segments to our wholly-owned domestic distribution companies as a result of reduced retail demand. Net sales for our Other activities for the year-to-date period of fiscal 2020 increased$4.1 million compared to the same period in the prior fiscal year. The net sales increase for the year-to-date comparison was also the result of COVID-19, which led to reduced intercompany sales eliminations for sales from our Professional and Residential segments to our wholly-owned domestic distribution companies as a result of reduced retail demand. This increase was partially offset by reduced sales by our wholly-owned distribution companies due to reduced retail demand. Other Operating Loss The operating loss for our Other activities decreased$13.0 million for the second quarter of fiscal 2020. The operating loss decrease was primarily driven by reduced transaction and integration costs incurred for the acquisition ofVenture Products in fiscal 2020 as compared to the acquisition of CMW in fiscal 2019 and decreased incentive compensation costs as a result of diminished company performance due to COVID-19. The operating loss decrease was partially offset by increased interest expense due to higher average outstanding borrowings under our financing arrangements, a settlement charge incurred for the termination of ourU.S. defined benefit pension plan, lower income from our Red Iron joint venture as a result of the amendments to certain agreements pertaining to the joint venture, and lower interest income on marketable securities. The operating loss for our Other activities decreased$6.1 million for the year-to-date period of fiscal 2020. The operating loss decrease was primarily driven by reduced transaction and integration costs incurred for the acquisition ofVenture Products in fiscal 2020 as compared to the acquisition of CMW in fiscal 2019, decreased incentive compensation costs as a result of diminished 43
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company performance due to COVID-19, and reduced intercompany sales eliminations for sales from our Professional and Residential segments to our wholly-owned domestic distribution companies as a result of reduced retail demand. The operating loss decrease was partially offset by increased interest expense due to higher average outstanding borrowings under our financing arrangements, lower income from our Red Iron joint venture as a result of the amendments to certain agreements pertaining to the joint venture, lower interest income on marketable securities, and a settlement charge incurred for the termination of ourU.S. defined benefit pension plan. FINANCIAL POSITION Working Capital Our working capital strategy continues to place emphasis on improving asset utilization with a focus on reducing the amount of working capital in the supply chain, adjusting production plans, and maintaining or improving order replenishment and service levels to end-users. Accounts receivable as of the end of the second quarter of fiscal 2020 decreased$28.1 million , or 6.6 percent, compared to the end of the second quarter of fiscal 2019, primarily due to lower sales near quarter-end driven by reduced demand as a result of COVID-19 and the impact of foreign currency exchange rates, partially offset by higher sales within the expanded mass retail channel of our Residential segment and incremental receivables as a result of our acquisition ofVenture Products . Inventory levels were up$102.8 million , or 16.8 percent, as of the end of the second quarter of fiscal 2020 compared to the end of the second quarter of fiscal 2019, primarily due to COVID-19 resulting in elevated finished goods inventories in our Professional segment due to reduced sales as a result of decreased demand for our products, higher raw materials and work in process inventories as a result of production downtime due to facilities closures and production inefficiencies as a result of social distancing protocols, and incremental inventories as a result of our acquisition ofVenture Products . The inventory increase was partially offset by reduced CMW inventories in fiscal 2020 as a result of the fiscal 2019 purchase accounting adjustments to record CMW's inventories at fair value and the impact of foreign currency exchange rates. Accounts payable decreased$64.3 million , or 16.4 percent, as of the end of the second quarter of fiscal 2020 compared to the end of the second quarter of fiscal 2019, mainly due to decreased purchases of commodities, components, parts, and accessories due to the reduction in our production levels within our manufacturing facilities to align with reduced sales volumes as a result of COVID-19, partially offset by incremental payables as a result of our acquisition ofVenture Products . Cash Flow Cash provided by operating activities for the first six months of fiscal 2020 was$70.9 million compared to$164.0 million for the first six months of fiscal 2019. This decrease was primarily due to the impacts of COVID-19, including a lower cash benefit from accounts payable than was experienced during fiscal 2019 within our historically working capital intensive second quarter as a result of lower purchases of raw materials inventory, as well as higher amounts of cash used for finished goods inventories as a result of reduced demand for our products. The decrease was partially offset by the cash benefit of lower accounts receivable as a result of reduced demand for our products as a result of COVID-19. Cash used in investing activities decreased$562.0 million during the first six months of fiscal 2020 compared to the first six months of fiscal 2019. This decrease was primarily due to less cash utilized for the acquisition ofVenture Products in fiscal 2020 than was used for the acquisitions of CMW and aNortheastern U.S. distribution company in fiscal 2019, as well as reduced cash investments in property, plant, and equipment as a result of the actions taken to improve our liquidity position in light of COVID-19 during fiscal 2020. Cash provided by financing activities for the first six months of fiscal 2020 decreased$310.4 million compared to the first six months of fiscal 2019, mainly due to lower net borrowings under our debt arrangements, and lower cash proceeds from the exercise of stock options in the first six months of fiscal 2020. The decrease in cash provided by financing activities was partially offset by reduced cash utilized for purchases of TTC common stock in the first six months of fiscal 2020. Liquidity and Capital Resources Our businesses are seasonally working capital intensive and require funding for purchases of raw materials used in production, replacement parts inventory, payroll and other administrative costs, capital expenditures, establishment of new facilities, expansion and renovation of existing facilities, as well as for financing receivables from customers that are not financed with Red Iron or other third-party financial institutions. Our accounts receivable balances historically increase between January and April as a result of typically higher sales volumes and extended payment terms made available to our customers, and typically decrease between May and December when payments are received. We generally fund cash requirements for working capital needs, capital expenditures, acquisitions, investments, debt repayments, interest payments, quarterly cash dividend payments, and common stock repurchases, all as applicable, through cash provided by operating activities, availability under our existing senior unsecured revolving credit facility, and in certain instances, other forms of financing arrangements. Our senior unsecured revolving credit facility has been adequate for these purposes, although we have negotiated and completed additional financing arrangements as needed to allow us to complete acquisitions. Although there is uncertainty of the scope, duration, and severity of COVID-19 and its impact to our future results, we believe we are well-positioned to manage our business and have taken the appropriate actions to maintain and improve our liquidity position, including refinancing outstanding borrowings on our unsecured senior revolving credit facility with a new three year term loan agreement for$190.0 44
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million, which also added incremental liquidity; reducing capital expenditures; continuing the curtailment of share repurchases under our Board authorized repurchase program; and monitoring and participating in government economic stabilization efforts and certain legislative provisions, such as deferring certain tax payments, as applicable. As a result, we believe that our existing liquidity position, including the funds available through existing, and potential future, financing arrangements and forecasted cash flows will be sufficient to provide the necessary capital resources for our anticipated working capital needs, capital expenditures, investments, debt repayments, interest payments, quarterly cash dividend payments, and common stock repurchases, all as applicable, for at least the next twelve months. As ofMay 1, 2020 , we had available liquidity of approximately$798.1 million , consisting of cash and cash equivalents of approximately$200.0 million , of which approximately$83.8 million was held by our foreign subsidiaries, and availability under our unsecured senior revolving credit facility of$598.1 million . Indebtedness As ofMay 1, 2020 , we had$890.8 million of outstanding indebtedness that included$100.0 million of 7.8 percent debentures dueJune 15, 2027 ,$123.9 million of 6.625 percent senior notes dueMay 1, 2037 ,$100.0 million outstanding under our$200.0 million three year unsecured senior term loan facility,$180.0 million outstanding under our$300.0 million five year unsecured senior term loan facility,$190.0 million outstanding under our$190.0 million three year unsecured senior term loan facility,$100.0 million outstanding under our Series A Senior Notes,$100.0 million outstanding under our Series B Senior Notes, and no outstanding borrowings under our revolving credit facility. TheMay 1, 2020 outstanding indebtedness amounts were partially offset by debt issuance costs and deferred charges of$3.1 million related to our outstanding indebtedness. As ofMay 1, 2020 , we have reclassified$99.9 million of the remaining outstanding principal balance under the$190.0 million term loan, net of the related proportionate share of debt issuance costs, to current portion of long-term debt within the Condensed Consolidated Balance Sheet as of such date as we intend to prepay such amounts utilizing cash flows from operations within the next twelve months. As ofMay 3, 2019 , we had$811.1 million of outstanding indebtedness that was classified as long-term debt within our Condensed Consolidated Balance Sheet as of such date and included$100.0 million of 7.8 percent debentures dueJune 15, 2027 ,$123.9 million of 6.625 percent senior notes dueMay 1, 2037 ,$200.0 million outstanding under our$200.0 million three year unsecured senior term loan facility,$300.0 million outstanding under our$300.0 million five year unsecured senior term loan facility, and$90.0 million of outstanding borrowings under our revolving credit facility. TheMay 3, 2019 outstanding indebtedness amounts were partially offset by debt issuance costs and deferred charges of$2.8 million related to our outstanding indebtedness. Our domestic and non-U.S. operations maintained credit lines for import letters of credit in the aggregate amount of approximately$10.2 million and$13.4 million as ofMay 1, 2020 andMay 3, 2019 , respectively. We had$2.2 million and$2.0 million outstanding on such import letters of credit as ofMay 1, 2020 andMay 3, 2019 , respectively. Revolving Credit Facility Seasonal cash requirements are financed from operations, cash on hand, and with borrowings under our$600.0 million unsecured senior five-year revolving credit facility that expires inJune 2023 , as applicable. Included in our$600.0 million revolving credit facility is a$10.0 million sublimit for standby letters of credit and a$30.0 million sublimit for swingline loans. At our election, and with the approval of the named borrowers on the revolving credit facility and the election of the lenders to fund such increase, the aggregate maximum principal amount available under the facility may be increased by an amount up to$300.0 million . Funds are available under the revolving credit facility for working capital, capital expenditures, and other lawful corporate purposes, including, but not limited to, acquisitions and common stock repurchases, subject in each case to compliance with certain financial covenants described below. Outstanding loans under the revolving credit facility (other than swingline loans), if applicable, bear interest at a variable rate generally based on LIBOR or an alternative variable rate based on the highest of theBank of America prime rate, the federal funds rate or a rate generally based on LIBOR, in each case subject to an additional basis point spread that is calculated based on the better of the leverage ratio (as measured quarterly and defined as the ratio of total indebtedness to consolidated earnings before interest and taxes plus depreciation and amortization expense) and debt rating of TTC. Swingline loans under the revolving credit facility bear interest at a rate determined by the swingline lender or an alternative variable rate based on the highest of theBank of America prime rate, the federal funds rate or a rate generally based on LIBOR, in each case subject to an additional basis point spread that is calculated based on the better of the leverage ratio and debt rating of TTC. Interest is payable quarterly in arrears. Our debt rating for long-term unsecured senior, non-credit enhanced debt was unchanged during the second quarter of fiscal 2020 by Standard and Poor'sRatings Group at BBB and by Moody's Investors Service at Baa3. If our debt rating falls below investment grade and/or our leverage ratio rises above 1.50, the basis point spread we currently pay on outstanding debt under the revolving credit facility would increase. However, the credit commitment could not be canceled by the banks based solely on a ratings downgrade. For the three and six month periods endedMay 1, 2020 , we incurred interest expense of approximately$0.7 million and$0.8 million , respectively, on the outstanding borrowings under our revolving credit facility. For the three and six month periods endedMay 3, 2019 , we incurred interest expense of approximately$1.0 million and$1.8 million , respectively, on the outstanding borrowings under our revolving credit facility. 45
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Our revolving credit facility contains customary covenants, including, without limitation, financial covenants, such as the maintenance of minimum interest coverage and maximum leverage ratios; and negative covenants, which among other things, limit disposition of assets, consolidations and mergers, restricted payments, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. Under the revolving credit facility, we are not limited in the amount for payments of cash dividends and common stock repurchases as long as, both before and after giving pro forma effect to such payments, our leverage ratio from the previous quarter compliance certificate is less than or equal to 3.5 (or, at our option (which we may exercise twice during the term of the facility) after certain acquisitions with aggregate consideration in excess of$75.0 million , for the first four quarters following the exercise of such option, is less than or equal to 4.0), provided that immediately after giving effect of any such proposed action, no default or event of default would exist. As ofMay 1, 2020 , we were not limited in the amount for payments of cash dividends and common stock repurchases. We were in compliance with all covenants related to the credit agreement for our revolving credit facility as ofMay 1, 2020 , and we expect to be in compliance with all covenants during the remainder of fiscal 2020. If we were out of compliance with any covenant required by this credit agreement following the applicable cure period, the banks could terminate their commitments unless we could negotiate a covenant waiver from the banks. In addition, our long-term senior notes, debentures, term loan facilities, and any amounts outstanding under the revolving credit facility could become due and payable if we were unable to obtain a covenant waiver or refinance our borrowings under our credit agreement. As ofMay 1, 2020 , we had no outstanding borrowings under the revolving credit facility and$1.9 million outstanding under the sublimit for standby letters of credit, resulting in$598.1 million of unutilized availability under our revolving credit facility. As ofMay 3, 2019 , we had$90.0 million outstanding under the revolving credit facility and$1.9 million outstanding under the sublimit for standby letters of credit, resulting in$508.1 million of unutilized availability under the revolving credit facility.$500.0 Million Term Loan Credit Agreement InMarch 2019 , we entered into a term loan credit agreement with a syndicate of financial institutions for the purpose of partially funding the purchase price of our acquisition of CMW and the related fees and expenses incurred in connection with such acquisition. The term loan credit agreement provided for a$200.0 million three year unsecured senior term loan facility maturing onApril 1, 2022 and a$300.0 million five year unsecured senior term loan facility maturing onApril 1, 2024 (collectively, the "$500.0 million term loan"). The funds under the$500.0 million term loan were received onApril 1, 2019 in connection with the closing of the acquisition of CMW. There are no scheduled principal amortization payments prior to maturity on the$200.0 million three year unsecured senior term loan facility. For the$300.0 million five year unsecured senior term loan facility, we are required to make quarterly principal amortization payments of 2.5 percent of the original aggregate principal balance reduced by any applicable prepayments beginning with the last business day of the thirteenth calendar quarter ending afterApril 1, 2019 , with the remainder of the unpaid principal balance due at maturity. No principal payments are required during the first three and one-quarter (3.25) years of the$300.0 million five year unsecured senior term loan facility. The term loan facilities may be prepaid and terminated at our election at any time without penalty or premium. As ofMay 1, 2020 , we have prepaid$100.0 million and$120.0 million against the outstanding principal balances of the$200.0 million three year unsecured senior term loan facility and$300.0 million five year unsecured senior term loan facility, respectively. Outstanding borrowings under the$500.0 million term loan bear interest at a variable rate generally based on LIBOR or an alternative variable rate, based on the highest of theBank of America prime rate, the federal funds rate, or a rate generally based on LIBOR, in each case subject to an additional basis point spread as defined in the$500.0 million term loan. Interest is payable quarterly in arrears. For the three and six month periods endedMay 1, 2020 , we incurred interest expense of approximately$1.5 million and$3.4 million on the outstanding borrowings under the$500.0 million term loan, respectively. For the three and six month periods endedMay 3, 2019 , we incurred interest expense of approximately$1.6 million on the outstanding borrowings under the$500.0 million term loan. The$500.0 million term loan contains customary covenants, including, without limitation, financial covenants, generally consistent with those applicable under our revolving credit facility, such as the maintenance of minimum interest coverage and maximum leverage ratios; and negative covenants, which among other things, limit disposition of assets, consolidations and mergers, restricted payments, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. Under the$500.0 million term loan, we are not limited in the amount for payments of cash dividends and common stock repurchases as long as, both before and after giving pro forma effect to such payments, our leverage ratio from the previous quarter compliance certificate is less than or equal to 3.5 (or, at our option (which we may exercise twice during the term of the facility) after certain acquisitions with aggregate consideration in excess of$75.0 million , for the first four quarters following the exercise of such option, is less than or equal to 4.0), provided that immediately after giving effect of any such proposed action, no default or event of default would exist. As ofMay 1, 2020 , we were in compliance with all covenants related to our$500.0 million term loan and were not limited in the amount for payments of cash dividends and common stock repurchases. Additionally, we expect to be in compliance with all covenants related to our$500.0 million term loan during the remainder of fiscal 2020. If we were out of compliance with any covenant required by the$500.0 million term loan credit agreement following the applicable cure period, our term loan facilities, long-term senior notes, debentures, and any amounts outstanding 46
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under the revolving credit facility could become due and payable if we were unable to obtain a covenant waiver or refinance our borrowings under our$500.0 million term loan credit agreement.$190.0 Million Term Loan Credit Agreement OnMarch 30, 2020 , we entered into the$190.0 million term loan ("$190.0 million term loan") with certain financial institutions for the purpose of refinancing certain of our outstanding borrowings incurred in connection with the acquisition ofVenture Products onMarch 2, 2020 , as well as a precautionary measure to increase our liquidity and preserve financial flexibility in light of the current uncertainty in the global financial and commercial markets as a result of COVID-19. The$190.0 million term loan provided for a$190.0 million three year unsecured senior term loan facility maturing onJune 19, 2023 . Beginning with the last business day ofMarch 2021 , we are required to make quarterly amortization payments on the$190.0 million term loan equal to 5.0% for the first four payments and 7.5% thereafter of the original aggregate principal amount reduced by any applicable prepayments. The$190.0 million term loan may be prepaid and terminated at our election at any time without penalty or premium. Amounts repaid or prepaid may not be reborrowed. As ofMay 1, 2020 , there was$190.0 million of outstanding borrowings under the$190.0 million term loan and we have reclassified$99.9 million of the remaining outstanding principal balance under the$190.0 million term loan, net of the related proportionate share of deferred debt issuance costs, to current portion of long-term debt within the Condensed Consolidated Balance Sheets as we intend to prepay such amount utilizing anticipated cash flows from operations within the next twelve months. The$190.0 million term loan contains customary covenants, including, without limitation, financial covenants generally consistent with those applicable under the our revolving credit facility, such as the maintenance of minimum interest coverage and maximum leverage ratios; and negative covenants, which among other things, limit disposition of assets, consolidations and mergers, restricted payments, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. We were in compliance with all covenants related to the$190.0 million term loan as ofMay 1, 2020 . Outstanding borrowings under the$190.0 million term loan bear interest at a variable rate based on LIBOR or an alternative variable rate with a minimum rate of 0.75 percent, subject to an additional basis point spread as defined in the term credit loan agreement. Interest is payable quarterly in arrears. For the three and six month periods endedMay 1, 2020 , we incurred interest expense of approximately$0.4 million on the outstanding borrowings under the$190.0 million term loan. 3.81% Series A and 3.91% Series B Senior Notes OnApril 30, 2019 , we entered into a private placement note purchase agreement with certain purchasers pursuant to which we agreed to issue and sell an aggregate principal amount of$100.0 million of 3.81% Series A Senior Notes dueJune 15, 2029 ("Series A Senior Notes") and$100.0 million of 3.91% Series B Senior Notes dueJune 15, 2031 ("Series B Senior Notes" and together with the Series A Senior Notes, the "Senior Notes"). OnJune 27, 2019 , we issued$100.0 million of the Series A Senior Notes and$100.0 million of the Series B Senior Notes pursuant to the private placement note purchase agreement. The Senior Notes are senior unsecured obligations of TTC. Interest on the Senior Notes is payable semiannually on the 15th day of June and December in each year. For the three and six month periods endedMay 1, 2020 , we incurred interest expense of approximately$1.9 million and$3.9 million on the outstanding borrowings under the private placement note purchase agreement. No principal is due on the Senior Notes prior to their stated due dates. We have the right to prepay all or a portion of either series of the Senior Notes in amounts equal to not less than 10.0 percent of the principal amount of the Senior Notes then outstanding upon notice to the holders of the series of Senior Notes being prepaid for 100.0 percent of the principal amount prepaid, plus a make-whole premium, as set forth in the private placement note purchase agreement, plus accrued and unpaid interest, if any, to the date of prepayment. In addition, at any time on or after the date that is 90 days prior to the maturity date of the respective series, we have the right to prepay all of the outstanding Senior Note of such series for 100.0 percent of the principal amount so prepaid, plus accrued and unpaid interest, if any, to the date of prepayment. Upon the occurrence of certain change of control events, we are required to offer to prepay all Senior Notes for the principal amount thereof plus accrued and unpaid interest, if any, to the date of prepayment. The private placement note purchase agreement contains customary representations and warranties of TTC, as well as certain customary covenants, including, without limitation, financial covenants, such as the maintenance of minimum interest coverage and maximum leverage ratios, and other covenants, which, among other things, provide limitations on transactions with affiliates, mergers, consolidations and sales of assets, liens and priority debt. Under the private placement note purchase agreement, we are not limited in the amount for payments of cash dividends and common stock repurchases as long as, both before and after giving pro forma effect to such payments, our leverage ratio from the previous quarter compliance certificate is less than or equal to 3.5 (or, at our option (which we may exercise twice during the term of the facility) after certain acquisitions with aggregate consideration in excess of$75.0 million , for the first four quarters following the exercise of such option, is less than or equal to 4.0), provided that immediately after giving effect of any such proposed action, no default or event of default would exist. As ofMay 1, 2020 , we were not limited in the amount for payments of cash dividends and stock repurchases. We were in compliance with all covenants related to the private placement note purchase agreement as ofMay 1, 2020 and we expect to be in compliance with all covenants during the remainder of fiscal 2020. If we were out of compliance with any covenant required by this private placement note 47
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purchase agreement following the applicable cure period, our term loan facilities, long-term senior notes, debentures, and any amounts outstanding under the revolving credit facility would become due and payable if we were unable to obtain a covenant waiver or refinance our borrowings under our private placement note purchase agreement. Cash Dividends Our Board of Directors approved a cash dividend of$0.25 per share for the second quarter of fiscal 2020 that was paid onApril 9, 2020 . This was an increase of 11.1 percent over our cash dividend of$0.225 per share for the second quarter of fiscal 2019. We currently expect to continue paying our quarterly cash dividend to shareholders for the remainder of fiscal 2020. Share Repurchases During the first six months of fiscal 2020, we curtailed repurchasing shares of our common stock in the open market under our Board authorized repurchase program. InMarch 2020 , we announced our intention to continue the curtailment of share repurchases as a prudent measure to enhance our liquidity position in response to COVID-19. As ofMay 1, 2020 , we expect to continue curtailing repurchasing shares of our common stock for the remainder of fiscal 2020. The existing repurchase program remains authorized by our Board and has no expiration date. We may resume repurchasing shares of our common stock under the program in the future at any time, depending on our cash balance, debt repayments, market conditions, our working capital needs, and/or other factors. Customer Financing Arrangements Our customer financing arrangements are described in further detail within our most recently filed Annual Report on Form 10-K. There have been no material changes to our customer financing arrangements with the exception of the amendments to certain agreements pertaining to our Red Iron joint venture described in further detail within the section titled "Wholesale Financing" below. Wholesale Financing Our Red Iron joint venture withTCF Inventory Finance, Inc. ("TCFIF"), a subsidiary ofTCF National Bank , provides inventory financing to certain distributors and dealers of certain of our products in theU.S. that enables them to carry representative inventories of certain of our products. OnDecember 20, 2019 , during the first quarter of fiscal 2020, we amended certain agreements pertaining to the Red Iron joint venture. The purpose of these amendments was, among other things, to: (i) adjust certain rates under the floor plan financing rate structure charged to our distributors and dealers participating in financing arrangements through the Red Iron joint venture; (ii) extend the term of the Red Iron joint venture fromOctober 31, 2024 toOctober 31, 2026 , subject to two-year extensions thereafter unless either we or TCFIF provides written notice to the other party of non-renewal at least one year prior to the end of the then-current term; (iii) amend certain exclusivity-related provisions, including the definition of our products that are subject to exclusivity, inclusion of a two-year review period by us for products acquired in future acquisitions to assess, without a commitment to exclusivity, the potential benefits and detriments of including such acquired products under the Red Iron financing arrangement, and the pro-rata payback over a five-year period of the exclusivity incentive payment we received from TCFIF in 2016; (iv) extend the maturity date of the revolving credit facility used by Red Iron primarily to finance the acquisition of inventory from us by our distributors and dealers fromOctober 31, 2024 toOctober 31, 2026 and to increase the amount available under such revolving credit facility from$550 million to$625 million ; and (v) memorialize certain other non-material amendments. Under separate agreements between Red Iron and the dealers and distributors, Red Iron provides loans to the dealers and distributors for the advances paid by Red Iron to us. The net amount of receivables financed for dealers and distributors under this arrangement for the six month period endedMay 1, 2020 andMay 3, 2019 was$886.4 million and$1,031.3 million , respectively. We also have floor plan financing agreements with other third-party financial institutions to provide floor plan financing to certain dealers and distributors not financed through Red Iron, which include agreements with third-party financial institutions in theU.S. and internationally inAustralia . These third-party financial institutions financed$173.9 million and$46.3 million of receivables for such dealers and distributors during the six month periods endedMay 1, 2020 andMay 3, 2019 , respectively. As ofMay 1, 2020 andMay 3, 2019 ,$203.6 million and$159.1 million of receivables financed by the third-party financing companies, excluding Red Iron, respectively, were outstanding. We entered into a limited inventory repurchase agreement with Red Iron. Under the limited inventory repurchase agreement, we have agreed to repurchase products repossessed by Red Iron and TCFCFC, up to a maximum aggregate amount of$7.5 million in a calendar year. Additionally, as a result of our floor plan financing agreements with the separate third-party financial institutions, we have also entered into inventory repurchase agreements with the separate third-party financial institutions, for which we have agreed to repurchase products repossessed by the separate third-party financial institutions. As ofMay 1, 2020 , we were contingently liable to repurchase up to a maximum amount of$145.6 million of inventory related to receivables under these inventory repurchase agreements. Our financial exposure under these inventory repurchase agreements is limited to the difference between the amount paid to Red Iron or other third-party financing institutions for repurchases of inventory and the amount received upon any subsequent resale of the repossessed product. We have repurchased immaterial amounts of inventory pursuant to such arrangements during the six month period endedMay 1, 2020 andMay 3, 2019 . However, a decline in retail sales or financial difficulties of our 48
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distributors or dealers could cause this situation to change and thereby require us to repurchase financed product, which could have an adverse effect on our Results of Operations, Financial Position, or Cash Flows. Contractual Obligations We are obligated to make future payments under various existing contracts, such as debt agreements, operating lease agreements, unconditional purchase obligations, and other long-term obligations. Our contractual obligations are described in further detail within our most recently filed Annual Report on Form 10-K. There have been no material changes to such contractual obligations, with the exception of the new$190.0 million term loan described in further detail in the section titled "Liquidity and Capital Resources" within this MD&A and the holdback associated with theVenture Products merger agreement described in further detail in the section titled "Company Overview" within this MD&A. Off-Balance Sheet Arrangements We have off-balance sheet arrangements with Red Iron, our joint venture with TCFIF, and other third-party financial institutions in which inventory receivables for certain dealers and distributors are financed by Red Iron or other third-party financial institutions. Additionally, we use standby letters of credit under our revolving credit facility, import letters of credit, and surety bonds in the ordinary course of business to ensure the performance of contractual obligations, as required under certain contracts. Our off-balance sheet arrangements are described in further detail within our most recently filed Annual Report on Form 10-K. There have been no material changes to such off-balance sheet arrangements, with the exception of the amendments to certain agreements pertaining to our Red Iron joint venture described in further detail within the section titled "Wholesale Financing" above. NON-GAAP FINANCIAL MEASURES We have provided non-GAAP financial measures, which are not calculated or presented in accordance withU.S. GAAP, as information supplemental and in addition to the most directly comparable financial measures that are calculated and presented in accordance withU.S. GAAP. We use these non-GAAP financial measures in making operating decisions because we believe these non-GAAP financial measures provide meaningful supplemental information regarding our core operational performance and provide us with a better understanding of how to allocate resources to both ongoing and prospective business initiatives. Additionally, these non-GAAP financial measures facilitate our internal comparisons to both our historical operating results and to our competitors' operating results by factoring out potential differences caused by charges not related to our regular, ongoing business, including, without limitation, non-cash charges, certain large and unpredictable charges, acquisitions and dispositions, legal settlements, and tax positions.We believe that these non-GAAP financial measures, when considered in conjunction with our Condensed Consolidated Financial Statements prepared in accordance withU.S. GAAP, provide investors with useful supplemental financial information to better understand our core operational performance. These non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the most directly comparableU.S. GAAP financial measures. The non-GAAP financial measures may differ from similar measures used by other companies. The following table provides a reconciliation of financial measures calculated and reported in accordance withU.S. GAAP to the most directly comparable non-GAAP financial measures for the three and six month periods endedMay 1, 2020 andMay 3, 2019 : Three Months Ended Six Months Ended (Dollars in thousands, except per share data) May 1, 2020 May 3, 2019 May 1, 2020 May 3, 2019 Gross profit$ 306,717 $ 321,298 $ 594,805 $ 536,915 Acquisition-related costs1 2,393 9,519 2,863 9,519 Management actions2 857 - 857 - Non-GAAP gross profit$ 309,967 $ 330,817 $
598,525
Gross margin 33.0 % 33.4 % 35.1 % 34.3 % Acquisition-related costs1 0.3 % 1.0 % 0.1 % 0.6 % Management actions2 0.1 % - % 0.1 % - % Non-GAAP gross margin 33.4 % 34.4 % 35.3 % 34.9 % Operating earnings$ 125,795 $ 137,725 $ 216,924 $ 207,779 Acquisition-related costs1 3,004 20,107 5,022 21,754 Management actions2 857 - 857 - Non-GAAP operating earnings$ 129,656 $ 157,832 $ 222,803 $ 229,533 49
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Three Months Ended Six Months Ended (Dollars in thousands, except per share data) May 1, 2020 May 3, 2019 May 1, 2020 May 3, 2019 Earnings before income taxes$ 121,371 $ 137,180 $ 207,510 $ 207,200 Acquisition-related costs1 3,004 20,107 5,022 21,754 Management actions2 857 - 857 - Non-GAAP earnings before income taxes$ 125,232 $ 157,287 $ 213,389 $ 228,954 Net earnings$ 98,446 $ 115,570 $ 168,537 $ 175,110 Acquisition-related costs1 2,365 16,352 3,998 17,862 Management actions2 682 - 682 - Tax impact of share-based compensation3 (1,342 ) (5,957 ) (3,377 ) (10,318 ) Non-GAAP net earnings$ 100,151 $ 125,965 $ 169,840 $ 182,654 Diluted EPS$ 0.91 $ 1.07 $ 1.55 $ 1.62 Acquisition-related costs1 0.02 0.15 0.04 0.17 Tax impact of share-based compensation3 (0.01 ) (0.05 ) (0.03 ) (0.10 ) Non-GAAP diluted EPS$ 0.92 $ 1.17 $ 1.56 $ 1.69 Effective tax rate 18.9 % 15.8 % 18.8 % 15.5 % Acquisition-related costs1 - % (0.2 )% - % (0.3 )% Tax impact of share-based compensation3 1.1 % 4.3 % 1.6 % 5.0 % Non-GAAP effective tax rate 20.0 % 19.9 % 20.4 % 20.2 % 1 OnMarch 2, 2020 , we completed the acquisition ofVenture Products and onApril 1, 2019 , we completed the acquisition of CMW. For additional information regarding these acquisitions, refer to Note 2, Business
Combinations, within the Notes to Condensed Consolidated Financial Statements
included within Part I, Item 1, "Financial Statements" of this Quarterly
Report on Form 10-Q. Acquisition-related costs for the three and six month
periods ended
acquisition of
incurred for the take-down of the inventory fair value step-up amounts
resulting from purchase accounting adjustments related to the acquisitions of
month periods ended
as well as charges incurred for the take-down of the inventory fair value
step-up amount and amortization of the backlog intangible asset resulting
from purchase accounting adjustments related to our acquisition of CMW.
2 During the third quarter of fiscal 2019, we announced the wind down of our
Toro-branded large horizontal directional drill and riding trencher product
line ("Toro underground wind down"). Management actions represent inventory
write-down charges incurred during the three and six month periods ended
regarding the Toro underground wind down, refer to Note 7, Management
Actions, within the Notes to Condensed Consolidated Financial Statements
included within Part 1, Item 1, "Financial Statements" of this Quarterly
Report on Form 10-Q.
3 In the first quarter of fiscal 2017, we adopted Accounting Standards Update
No. 2016-09, Stock-based Compensation: Improvements to Employee Share-based
Payment Accounting, which requires that any excess tax deduction for
share-based compensation be immediately recorded within income tax expense.
These amounts represent the discrete tax benefits recorded as excess tax
deductions for share-based compensation during the three and six month periods endedMay 1, 2020 andMay 3, 2019 . 50
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CRITICAL ACCOUNTING POLICIES AND ESTIMATES There have been no material changes to our critical accounting policies and estimates since our most recent Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 . Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations", and Part II, Item 8, Note 1, Summary of Significant Accounting Policies and Related Data, within our Annual Report on Form 10-K for the fiscal year endedOctober 31, 2019 for a discussion of our critical accounting policies and estimates. New Accounting Pronouncements to be Adopted InJune 2016 , theFinancial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-03, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement approach for credit losses on financial assets measured on an amortized cost basis from an 'incurred loss' method to an 'expected loss' method. Such modification of the measurement approach for credit losses eliminates the requirement that a credit loss be considered probable, or incurred, to impact the valuation of a financial asset measured on an amortized cost basis. The amended guidance requires the measurement of expected credit losses to be based on relevant information, including historical experience, current conditions, and a reasonable and supportable forecast that affects the collectability of the related financial asset. This amendment will affect trade receivables, off-balance-sheet credit exposures, and any other financial assets not excluded from the scope of this amendment that have the contractual right to receive cash. The amended guidance will become effective in the first quarter of fiscal 2021. We are currently evaluating the impact of this new standard on our Consolidated Financial Statements. InAugust 2018 , the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) - Changes to the Disclosure Requirements for Fair Value Measurement, which makes a number of changes to add, modify or remove certain disclosure requirements of fair value measurements. The amended guidance will become effective in the first quarter of fiscal 2021. Early adoption is permitted for any removed or modified disclosures. We are currently evaluating the impact of this new standard on our Consolidated Financial Statements. InAugust 2018 , the FASB issued ASU No. 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans (Topic 715), which modifies the disclosure requirements for defined benefit pension plans and other post-retirement plans. The amended guidance will become effective in the first quarter of fiscal 2021. Early adoption is permitted. We are currently evaluating the impact of this new standard on our Consolidated Financial Statements. InDecember 2019 , the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period, and the recognition of deferred tax liabilities for outside basis differences. The amended guidance also clarifies and simplifies other aspects of the accounting for income taxes under Accounting Standards Codification Topic 740, Income Taxes. The amended guidance will become effective in the first quarter of fiscal 2022. Early adoption is permitted. We are currently evaluating the impact of this new standard on our Consolidated Financial Statements. InJanuary 2020 , the FASB issued ASU No. 2020-01, Investments -Equity Securities (Topic 321), Investments -Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815), which clarified that before applying or upon discontinuing the equity method of accounting for an investment in equity securities, an entity should consider observable transactions that require it to apply or discontinue the equity method of accounting for the purposes of applying the fair value measurement alternative. The amended guidance will become effective in the first quarter of fiscal 2022. Early adoption is permitted. We are currently evaluating the impact of this standard on our Consolidated Financial Statements. InMarch 2020 , the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to ease the potential burden of accounting for reference rate reform due to the cessation of the London Interbank Offered Rate, commonly referred to as "LIBOR." The temporary guidance provides optional expedients and exceptions for applyingU.S. GAAP to contracts, relationships, and transactions affected by reference rate reform if certain criteria are met. The provisions of the temporary optional guidance are only available untilDecember 31, 2022 , when the reference rate reform activity is expected to be substantially complete. When adopted, entities may apply the provisions as of the beginning of the reporting period when the election is made. We are currently evaluating the impact of this standard on our Consolidated Financial Statements and have yet to elect an adoption date. We believe that all other recently issued accounting pronouncements from the FASB that we have not noted above, will not have a material impact on our Consolidated Financial Statements or do not apply to our operations. 51
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FORWARD-LOOKING INFORMATION This Quarterly Report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended ("Securities Act"), and Section 21E under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and that are subject to the safe harbor created by those sections. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on our web sites or otherwise. Statements that are not historical are forward-looking and reflect expectations and assumptions. Forward-looking statements are based on our current expectations of future events, and often can be identified in this report and elsewhere by using words such as "expect," "strive," "looking ahead," "outlook," "guidance," "forecast," "goal," "optimistic," "anticipate," "continue," "plan," "estimate," "project," "believe," "should," "could," "will," "would," "possible," "may," "likely," "intend," "can," "seek," "potential," "pro forma," or the negative thereof and similar expressions or future dates. Our forward-looking statements generally relate to our future performance, including our anticipated operating results, liquidity requirements, financial condition, and anticipated impacts as a result of COVID-19; our business strategies and goals; the integration of each of the CMW andVenture Products acquisitions; and the effect of laws, rules, policies, regulations, tax reform, new accounting pronouncements, and outstanding litigation on our business and future performance. Forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those projected or implied. The following are some of the factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements: • Adverse economic conditions and outlook inthe United States and in other
countries in which we conduct business, including as a result of COVID-19,
have adversely affected our net sales and earnings and could continue to
adversely affect our net sales and earnings, which include but are not limited to business closures; slowdowns, suspensions or delays of production and commercial activity; recessionary conditions; slow or negative economic growth rates; slow down or reductions in levels of golf
course development, renovation, and improvement; golf course closures;
reduced governmental or municipal spending; reduced levels of home
ownership, construction, and sales; home foreclosures; negative consumer
confidence; reduced consumer spending levels; increased unemployment
rates; prolonged high unemployment rates; higher costs of commodities,
components, parts, and accessories and/or transportation-related costs,
including as a result of inflation, changing prices, tariffs, and/or
duties; inflationary or deflationary pressures; reduced infrastructure
spending; the impact of
defaults and austerity measures by certain European countries; 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.
• COVID-19 has directly and indirectly adversely impacted our business,
financial condition and operating results and such adverse impact will
likely continue, is highly uncertain and cannot be predicted, but has been
and could continue to be material and is based on numerous factors, which include but are not limited to, the duration, scope, and severity of COVID-19; governmental, business and individual actions that have been,
and continue to be, taken in response to COVID-19; the effect of COVID-19
on our dealers, distributors, mass retailers and other channel partners
and customers, including reduced or constrained budgets and cash
preservation efforts; our ability during COVID-19 to continue operations
and/or adjust our production schedules; significant reductions or
volatility in demand for one or more of our products or services and/or
higher demand for moderately-priced products; the effect of COVID-19 on
our suppliers and our ability to obtain commodities, components, parts,
and accessories on a timely basis through our supply chain and at anticipated costs; logistics costs and challenges; costs incurred as a result of necessary actions and preparedness plans to help ensure the
health and safety of our employees and continued operations; potential
future restructuring, impairment or other charges; availability of
employees, their ability to conduct work away from normal working
locations and/or under revised work environment protocols, as well as the
general willingness of employees to come to and perform work; the impact
of COVID-19 on the financial and credit markets and economic activity
generally; our ability to access lending, capital markets, and other
sources of liquidity when needed on reasonable terms or at all; our
ability to comply with the financial covenants in our debt agreements if
the material economic downturn as a result of COVID-19 results in
substantially increased indebtedness and/or lower EBITDA for us; and the
exasperation of negative impacts as a result of the occurrence of a global
or national recession, depression or other sustained adverse market event
as a result of COVID-19.
• Our Professional segment net sales are dependent upon certain factors,
many of which have been adversely impacted by COVID-19, including golf
course revenues and the amount of investment in golf course renovations
and improvements; the level of new golf course development and golf course
closures; infrastructure improvements; demand for our products in the
rental, specialty and underground construction markets, including those
related to oil and gas construction activities; the extent to which
property owners outsource their lawn care and snow and ice removal
activities; residential and/or municipal commercial construction activity;
continued acceptance of, and demand for, ag-irrigation solutions; the timing and occurrence of winter weather conditions; availability of cash or credit to Professional segment customers on acceptable 52
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terms to finance new product purchases; and the amount of government and other customer revenues, budget, and spending levels for grounds maintenance or construction equipment. • Increases in the cost, or disruption and/or shortages in the availability,
of commodities, components, parts and accessories containing various
materials that we purchase for use in our manufacturing process and
end-products or to be sold as stand-alone end-products, such as steel,
aluminum, petroleum and natural gas-based resins, linerboard, copper,
lead, rubber, engines, transmissions, transaxles, hydraulics, electric
motors, and other commodities, components, parts and accessories,
including as a result of COVID-19, increased costs, increased tariffs,
duties or other charges as a result of changes to
trade policies or trade agreements, trade regulation and/or industry
activity, or antidumping and countervailing duty petitions on certain
products imported from foreign countries, or inability of suppliers to
continue operations or otherwise remain in business as a result of
COVID-19, financial difficulties, or otherwise, have affected our profit
margins, operating results and businesses and could continue to result in
declines in our profit margins, operating results and businesses.
• Our ability to manage our inventory levels to meet our customers' demand
for our products is important for our business. Managing inventory levels
in the current COVID-19 commercial environment is particularly difficult
as a result of changes to production operations, locations and schedules
as well as demand volatility. If we underestimate or overestimate both
channel and retail demand for our products, are not able to manufacture
product to fulfill customer demand, and/or do not produce or maintain
appropriate inventory levels, our net sales, profit margins, net earnings,
and/or working capital could be negatively impacted. • Changes in the composition of, financial viability of, and/or the
relationships with, our distribution channel customers could negatively
impact our business and operating results.
• Our business and operating results are subject to the inventory management
decisions of our distribution channel customers. 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.
• Weather conditions, including unfavorable weather conditions exacerbated
by global climate changes or otherwise, may reduce demand for some of our
products and/or cause disruptions in our operations, including as a result
of disruption in our supply chain, and adversely affect our net sales and
operating results, or may affect the timing of demand for some of our
products and/or our ability to manufacture product to fulfill customer
demand, which may adversely affect net sales and operating results in subsequent periods.
• Fluctuations in foreign currency exchange rates have in the past affected
our operating results and could continue to result in declines in our net
sales and net earnings.
• Our Residential segment net sales are dependent upon continued operations
of mass retailers, dealers, and home centers; consumers buying our
products at mass retailers, dealers, and home centers; the amount of
product placement at mass retailers and home centers; consumer confidence
and spending levels; changing buying patterns of customers; and the impact
of significant sales or promotional events.
• Our financial performance, including our profit margins and net earnings,
can be impacted depending on the mix of products we sell during a given
period, as our Professional segment products generally have higher profit
margins than our Residential segment products. Similarly, within each
segment, if we experience lower sales of products that generally carry
higher profit margins, our financial performance, including profit margins
and net earnings, could be negatively impacted.
• We intend to grow our business in part through acquisitions and alliances,
strong customer relations, and new joint ventures, investments, and
partnerships, which could be risky and harm our business, reputation,
financial condition, and operating results, particularly if we are not able to successfully integrate such acquisitions and alliances, joint ventures, investments, and partnerships, such transactions result in disruption to our operations, we experience loss of key employees, customers, or channel partners, significant amounts of goodwill, other intangible assets, and/or long-lived assets incurred as a result of a
transaction are subsequently written off, and other factors. If previous
or future acquisitions do not produce the expected results or integration
into our operations takes more time than expected, our business could be
harmed.
• As of
assets of
total assets as of
reporting units, including goodwill and other intangible assets from the
CMW and
or other intangible assets recorded have become impaired, we will be
required to record a charge resulting from the impairment. Impairment
charges, including such charges that could arise as a result of the COVID-19 pandemic, could be significant and could adversely affect our consolidated results of operations and financial position.
• We face intense competition in all of our product lines with numerous
manufacturers, including some that have larger operations and greater
financial resources than us. We may not be able to compete effectively
against competitors' actions, which could harm our business and operating
results.
• A significant percentage of our consolidated net sales is generated
outside ofthe United States , and we intend to continue to expand our international operations. Our international operations also require significant management attention and financial resources; expose us to difficulties presented by international economic, political, legal, regulatory, accounting, 53
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and business factors, including implications of withdrawal by theU.S. from, or revision to, international trade agreements, foreign trade or other policy changes between theU.S. and other countries, trade regulation and/or industry activity that favors domestic companies, including antidumping and countervailing duty petitions on certain products imported from foreign countries, pandemics and/or epidemics, including COVID-19, or weakened international economic conditions; and may not be successful or produce desired levels of net sales. In addition, a portion of our international net sales are financed by third parties. The termination of our agreements with these third parties, any material change to the terms of our agreements with these third parties or in the availability or terms of credit offered to our international customers by these third parties, or any delay in securing replacement credit sources, could adversely affect our sales and operating results. • If we are unable to continue to enhance existing products, as well as
develop and market new products, that respond to customer needs and
preferences and achieve market acceptance, including by incorporating new,
emerging and/or disruptive technologies that may become preferred by our customers, we may experience a decrease in demand for our products, and our net sales could be adversely affected.
• Any disruption, including as a result of natural or man-made disasters,
inclement weather, including as a result of climate change-related events,
work slowdowns, strikes, pandemics and/or epidemics, including COVID-19,
protests and/or social unrest, or other events, at or in proximity to any
of our facilities or in our manufacturing or other operations, or those of
our distribution channel customers, mass retailers or home centers where
our products are sold, or suppliers, or our inability to cost-effectively
expand existing facilities, open and manage new facilities, and/or move
production between manufacturing facilities could adversely affect our
business and operating results.
• Our labor needs fluctuate throughout the year and any failure by us to
hire and/or retain a labor force to adequately staff manufacturing
operations, perform service or warranty work, or other necessary
activities or by such labor force to adequately and safely perform their
jobs could adversely affect our business, operating results, and reputation.
• Our labor force has been impacted by COVID-19 and such impact will likely
continue, including as a result of governmental, business and individual
actions that have been, and continue to be, taken in response to COVID-19.
Furthermore, we have incurred additional costs as a result of necessary
actions and preparedness plans to help ensure the health and safety of our
employees and continued operations, including remote working accommodations, enhanced cleaning processes, protocols designed to implement appropriate social distancing practices, and/or adoption of additional wage and benefit programs to assist employees. • Management information systems are critical to our business. If our information systems or information security practices, or those of our
business partners or third-party service providers, fail to adequately
perform and/or protect sensitive or confidential information, or if we, our business partners, or third-party service providers experience an
interruption in, or breach of, the operation of such systems or practices,
including by theft, loss or damage from unauthorized access, security
breaches, natural or man-made disasters, cyber attacks, computer viruses,
malware, phishing, denial of service attacks, power loss or other disruptive events, our business, reputation, financial condition, and operating results could be adversely affected.
• Our reliance upon patents, trademark laws, and contractual provisions to
protect our proprietary rights may not be sufficient to protect our intellectual property from otherswho may sell similar products. Our products may infringe the proprietary rights of others. • Our business, properties, and products are subject to governmental
policies and regulations 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 policies and regulations may also adversely affect the demand
for some of our products and our operating results. In addition, changes
in laws, policies, and regulations in the
we conduct business also may adversely affect our financial results,
including as a result of, (i) adoption of laws and regulations to address
COVID-19, (ii) taxation and tax policy changes, tax rate changes, new tax
laws, new or revised tax law interpretations or guidance, including as a
result of the Tax Act, (iii) changes to, or adoption of new, healthcare
laws or regulations, or (iv) changes to
trade agreements or trade regulation and/or industry activity, including
antidumping and countervailing duty petitions on certain products imported
from foreign countries, that could result in additional duties or other charges on commodities, components, parts or accessories we import. • Changes in accounting or tax standards, policies, or assumptions in
applying accounting or tax policies could adversely affect our financial
statements, including our financial results and financial condition.
• Climate change legislation, regulations, or accords may adversely impact
our operations. • Costs of complying with the various environmental laws related to our ownership and/or lease of real property, such as clean-up costs and
liabilities that may be associated with certain hazardous waste disposal
activities, could adversely affect our financial condition and operating
results.
• Legislative enactments could impact the competitive landscape within our
markets and affect demand for our products.
• We operate in many different jurisdictions and we could be adversely
affected by violations of theU.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. 54
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• We are subject to product quality issues, product liability claims, and
other litigation from time to time that could adversely affect our business, reputation, operating results, or financial condition.
• If we are unable to retain our executive officers or other key employees,
attract and retain other qualified personnel, or successfully implement
executive officer, key employee or other qualified personnel transitions,
we may not be able to meet strategic objectives and our business could
suffer. • We are dependent upon various floor planning programs to provide competitive inventory financing programs to certain distributors and
dealers of our products. Any material change in the availability or terms
of credit offered to our customers by such programs, challenges or delays
in transferring new distributors and dealers from any business we might
acquire or otherwise to such programs, or any termination or disruption of
our various floor planning programs or any delay in securing replacement
credit sources, could adversely affect our net sales and operating results.
• The terms of our credit arrangements and the indentures and other terms
governing our senior notes and debentures could limit our ability to conduct our business, take advantage of business opportunities, and respond to changing business, market, and economic conditions. Additionally, we are subject to counterparty risk in our credit arrangements. If we are unable to comply with such terms, especially the financial covenants, our credit arrangements could be terminated and our senior notes, debentures, term loan facilities, and any amounts outstanding under our revolving credit facility could become due and payable.
• The addition of further leverage to our capital structure could result in
a downgrade to our credit ratings in the future and the failure to
maintain investment grade credit ratings could adversely affect our cost
of funding and our liquidity by limiting the access to capital markets or
the availability of funding from a variety of lenders. • We are expanding and renovating our corporate and other facilities and could experience disruptions to our operations in connection with such efforts.
• We may not achieve our projected financial information or other business
initiatives in the time periods that we anticipate, or at all, which could
have an adverse effect on our business, operating results and financial
condition.
For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition, or operating results, see our most recently filed Annual Report on Form 10-K, Part I, Item 1A, "Risk Factors" and Part II, Item 1A, "Risk Factors" of this report. All forward-looking statements included in this report are expressly qualified in their entirety by the foregoing cautionary statements. We caution readers not to place undue reliance on any forward-looking statement which speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, the risks described in our most recent Annual Report on Form 10-K, Part I, Item 1A, "Risk Factors" and Part II, Item 1A, "Risk Factors" of this report, as well as others that we may consider immaterial or do not anticipate at this time. The foregoing risks and uncertainties are not exclusive and further information concerning the company and our businesses, including factors that potentially could materially affect our financial results or condition, may emerge from time to time. We make no commitment to revise or update any forward-looking statements in order to reflect actual results, events or circumstances occurring or existing after the date any forward-looking statement is made, or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our future Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K we file with or furnish to theSecurities and Exchange Commission .
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