THE TORO COMPANY
This Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") is intended to provide a reader of our financial statements
with a narrative from the perspective of management on our financial condition,
results of operations, liquidity, and certain other factors that may affect our
future results. Unless expressly stated otherwise, the comparisons presented in
this MD&A refer to the same period in the prior fiscal year. Our MD&A is
presented as follows:
•Company Overview
•Results of Operations
•Business Segments
•Financial Position
•Non-GAAP Financial Measures
•Critical Accounting Policies and Estimates
•Forward-Looking Information
This MD&A should be read in conjunction with the MD&A included in Part II, Item
7 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2019 .
This discussion contains various "forward-looking statements" within the meaning
of the Private Securities Litigation Reform Act of 1995 and we refer readers to
the section titled "Forward-Looking Information" located at the end of
Part I, Item 2 of this report for more information.
Non-GAAP Financial Measures
Throughout this MD&A, we have provided non-GAAP financial measures, which are
not calculated or presented in accordance with United 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 with U.S. GAAP. We use
these non-GAAP financial measures in making operating decisions because we
believe these non-GAAP financial measures provide meaningful supplemental
information regarding our core operational performance and provide us with a
better understanding of how to allocate resources to both ongoing and
prospective business initiatives. Additionally, these non-GAAP financial
measures facilitate our internal comparisons to both our historical operating
results and to our competitors' operating results by factoring out potential
differences caused by charges not related to our regular, ongoing business,
including, without limitation, non-cash charges, certain large and unpredictable
charges, acquisitions and dispositions, legal settlements, and tax positions.
We believe that these non-GAAP financial measures, when considered in
conjunction with our Condensed Consolidated Financial Statements prepared in
accordance with U.S. GAAP, provide investors with useful supplemental financial
information to better understand our core operational performance.
Reconciliations of non-GAAP financial measures to the most directly comparable
reported U.S. GAAP financial measures are included in the section titled
"Non-GAAP Financial Measures" within this MD&A. These non-GAAP financial
measures, however, should not be considered superior to, as a substitute for, or
as an alternative to, and should be considered in conjunction with, the most
directly comparable U.S. GAAP financial measures and metrics. Further, these
non-GAAP financial measures may differ from similar measures used by other
companies.
COMPANY OVERVIEW
The Toro Company is in the business of designing, manufacturing, and marketing
professional turf maintenance equipment and services; turf irrigation systems;
landscaping equipment and lighting products; snow and ice management products;
agricultural 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 to The Toro
Company and its consolidated subsidiaries.
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Business Combinations
Acquisition of Venture Products, Inc. ("Venture Products")
On March 2, 2020 , we completed the acquisition of Venture Products . Venture
Products designs, manufactures, and markets articulating turf, landscape, and
snow and ice management equipment for grounds, landscape contractor, golf,
municipal, and rural acreage customers and provides innovative product offerings
that broadened and strengthened our Professional segment and expanded our dealer
network.
The acquisition of Venture Products was structured as a merger, pursuant to
which a wholly-owned subsidiary of TTC merged with and into Venture Products ,
with Venture Products continuing as the surviving entity and a wholly-owned
subsidiary of TTC. As a result of the merger, all of the outstanding equity
securities of Venture Products were canceled and now only represent the right to
receive the applicable cash consideration as described in the merger agreement.
We also acquired from an affiliate of Venture Products the real estate used by
Venture Products . As of the closing date of the transaction, we paid preliminary
merger consideration of $165.9 million , which consisted of a cash payment of
$136.4 million and a $29.5 million holdback to satisfy any indemnification or
certain other obligations of Venture Products to TTC. The preliminary merger
consideration was subject to certain customary adjustments based on, among other
things, the amount of actual cash, debt, and working capital in the business of
Venture Products as of the closing date. During the third quarter of fiscal
2020, we finalized the customary adjustments, which resulted in an aggregate
merger consideration of $163.2 million . As a result, $4.5 million of the
holdback set aside for such customary adjustments was released accordingly and
the remaining holdback of $25.0 million is expected to expire by the end of the
fourth quarter of fiscal 2021. We funded the cash payment with borrowings under
our existing unsecured senior revolving credit facility. For additional
information regarding the Venture Products acquisition and our unsecured senior
revolving credit facility utilized to fund the aggregate consideration, refer to
Note 2, Business Combinations, 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 of The Charles Machine Works, Inc. ("CMW")
On April 1, 2019 , we completed our acquisition of CMW, a privately held Oklahoma
corporation. CMW designs, manufactures, and 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.
Subsequent to the acquisition date of April 1, 2019 , CMW's results of operations
are included within our Professional reportable segment within our Condensed
Consolidated Financial Statements and had an incremental impact to our
Professional reportable segment net sales and segment earnings for the first
twelve months post acquisition. For the nine month period ended July 31, 2020 ,
CMW's results of operations had an incremental impact on our Professional
segment net sales and segment earnings of $291.8 million and $19.4 million ,
respectively. CMW's results of operations did not have an incremental impact to
the results of operations of our Professional reportable segment for the three
month period ended July 31, 2020 . For additional information regarding the CMW
acquisition and the financing agreements utilized to fund the purchase price,
refer to Note 2, Business Combinations, and Note 6, Indebtedness, respectively,
in the Notes to Condensed Consolidated Financial Statements included in Part I.
Item 1 of this Quarterly Report on Form 10-Q.
Impact of COVID-19 Pandemic
In March 2020 , the World Health Organization declared the novel coronavirus
("COVID-19," "the pandemic," or "the virus") outbreak a global pandemic. The
COVID-19 pandemic continues to spread throughout the U.S. and the rest of the
world and has negatively impacted the global economy, disrupted global supply
chains, created significant volatility and disruption in financial markets, and
resulted in a global economic recession. COVID-19 caused government authorities
around the world to implement stringent measures to attempt to help control the
spread of the virus, including business shutdowns and curtailments, travel
restrictions, prohibitions on group events and gatherings, quarantines,
"shelter-in-place" and "stay-at-home" orders, curfews, social distancing, and
other measures. Although many jurisdictions around the world have eased
restrictions in an effort to reopen their economies and global economic activity
has stabilized and begun to gradually recover, the adverse global economic
impact of this pandemic has had a material impact on our business, customers,
and suppliers and has caused many challenges, which began in the second quarter
of fiscal 2020 and have continued throughout the third quarter of fiscal 2020.
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Our main focus from the beginning of the pandemic has been, and will continue to
be, the health, safety, and well-being of our employees, customers, suppliers
and communities around the world. In support of continuing our global
manufacturing and business operations, we have adopted, and continue to adhere
to, rigorous and meaningful safety measures recommended by the U.S. Centers for
Disease Control and Prevention , World Health Organization , and federal, state,
local, and foreign authorities in an effort to protect our employees, customers,
suppliers, and communities. These important safety measures enacted at our
facilities and other sites include, but are not limited to, implementing social
distancing protocols such as the reconfiguration of manufacturing processes and
other workspaces, instituting work from home arrangements for those employees
that do not need to be physically present at our facilities and sites to perform
their job responsibilities, suspending non-essential travel, extensively and
frequently disinfecting our facilities and workspaces, suspending all
non-essential visitors, and providing or accommodating the wearing of face
coverings and other sanitary measures to those employees who must be physically
present at our facilities and sites to perform their job responsibilities and
where face coverings are required by local government mandates. We also adopted
a special COVID-19 employee leave policy that provides two weeks of pay for
employees who have contracted the virus, are involuntarily quarantined because
of the virus, or are without work due to changes in our production schedules as
a result of the virus. We expect to continue such safety measures until we
determine that COVID-19 is adequately contained for purposes of our global
manufacturing and business operations and we may take further actions as
government authorities require or recommend or as we determine to be in the best
interests of our employees, customers, suppliers, and communities.
We have continued to balance our safety-focused approach with our responsibility
to meet the needs of our customers as we supply products that are critical to
maintaining essential infrastructure globally, agricultural food production, and
the enablement of safe areas for outdoor spaces. Government mandated measures
providing for business shutdowns or curtailments generally excluded certain
essential businesses and services, including businesses that manufacture and
sell products that are considered essential to daily lives or otherwise operate
in essential or critical sectors. Substantially all of our operations have been
and continue to be considered essential under applicable government mandated
orders relating to COVID-19 allowing us to continue our global manufacturing and
business operations. While we continued manufacturing substantially all of our
products and our facilities have remained operational, our manufacturing
facilities continued to experience various degrees of manufacturing
inefficiencies and intermittent partial or full facility closures as a result of
reduced demand for products in certain of our Professional segment businesses,
the reconfiguration of our manufacturing processes in order to implement and
adhere to social distancing protocols and other safety measures, and government
mandated business curtailment measures. Such manufacturing inefficiencies and
intermittent partial or full facility closures adversely impacted our gross
margins for the three and nine month periods ended July 31, 2020 and may
continue to adversely impact our gross margins going forward. Additionally, as
of the date of the filing of this report, we have not experienced any
significant impacts to our global manufacturing operations due to disruptions in
our global supply chain as a result of COVID-19. Although we regularly monitor
the financial health of the companies in our supply chain, financial hardship or
government mandated restrictions on our suppliers caused by COVID-19 could cause
a disruption in our ability to procure the commodities, components, and parts
required to manufacture our products. Ongoing communications continue with our
suppliers in an attempt to identify and mitigate such risks and to proactively
manage inventory levels of commodities, components, and parts to align with
anticipated reduced levels of production as a result of softened demand for our
products and other government actions. We currently expect our global
manufacturing facilities to remain operational through the fourth quarter of
fiscal 2020; however, such expectation is dependent upon future events and
circumstances related to COVID-19, including, but not limited to, future
government mandates and restrictions, demand for our products, and supply chain
stability.
During the third quarter of fiscal 2020, we continued to experience softer
demand from channel partners in certain of our Professional segment businesses.
Most notably, our golf and grounds; rental, specialty, and underground
construction; and landscape contractor businesses were affected by COVID-19.
Reduced demand for our golf and grounds products continued as a result of the
curtailment and closure of certain business activities for golf courses and
municipalities across the globe resulting in lower overall revenues and budget
constraints and a preference for repairs and deferrals over new equipment
purchases. Our rental, specialty, and underground construction business
continued to experience reduced demand as a result of curtailed investments by
end-customers in the oil and gas and construction industries. The decrease in
channel demand for our landscape contractor business was primarily due to
channel partners aligning field inventory levels with the previously anticipated
reduced retail demand from end-customers. However, through the third quarter of
fiscal 2020, we experienced stronger than anticipated retail demand for our
landscape contractor zero-turn riding mowers, resulting in decreased field
inventory levels as compared to the same period of fiscal 2019. We currently
expect the reduced demand in certain of our Professional segment businesses to
continue throughout the remainder of fiscal 2020 considering the seasonality of
our business and particularly if the global economy destabilizes or worsens.
Contrary to the impact experienced in certain of our Professional segment
businesses, our Residential segment continued to experience strong retail demand
during the third quarter of fiscal 2020 for zero-turn riding mowers and walk
power mowers, which we believe was partially due to the impacts of COVID-19 as
end-customers experienced favorable weather conditions for property enhancement
and maintenance activities in key regions of the globe and were subject to
government mandated "shelter-in-place" and "stay-at-home" orders, among other
reasons. While the strong retail demand experienced in our Residential segment
is a positive event in light of COVID-19, the shift to a greater percentage
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of Residential segment net sales as a percentage of consolidated net sales
adversely impacted our gross margins for the three and nine month periods ended
July 31, 2020 and we expect will continue to adversely impact our gross margins
for the remainder of fiscal 2020.
In an effort to partially mitigate the anticipated adverse impacts of COVID-19
on our fiscal 2020 Results of Operations, Financial Position, or Cash Flows as a
result of lower demand we have experienced in certain of our businesses, we have
taken, and continue to take, meaningful cost reduction measures across our
organization to align our costs with actual and anticipated lower sales volumes.
These cost reduction measures include adjusting production levels within our
manufacturing facilities to align with anticipated sales volumes; enacting
tiered salary reductions and suspending merit-based salary increases and
discretionary retirement fund contributions for the remainder of fiscal 2020;
reducing discretionary spending; limiting hiring of new employees; and delaying,
reducing, or eliminating purchased services and travel. Additionally, we have
proactively managed our working capital through various measures, and we expect
to continue to do so, including, but not limited to, refinancing outstanding
borrowings on our unsecured senior revolving credit facility with the net
proceeds from a new three year term loan for $190.0 million , which also added
incremental liquidity; reducing capital expenditures; continuing the curtailment
of share repurchases under our Board authorized repurchase plan; adjusting
production levels within our manufacturing facilities to manage finished goods
inventory levels to align with anticipated sales volumes; aligning receipts of
commodities, components, and parts inventory with production levels; and
monitoring and participating in government economic stabilization efforts and
certain legislative provisions, such as deferring certain tax payments, as
applicable. We currently expect to continue paying our quarterly cash dividend
to shareholders for the remainder of fiscal 2020. As a result, our balance sheet
and liquidity profile remained strong with available liquidity of approximately
$992.1 million as of July 31, 2020 , consisting of cash and cash equivalents of
approximately $394.1 million and availability under our unsecured senior
revolving credit facility of $598.0 million .
Significant uncertainty still exists concerning the duration of COVID-19. We
intend to continue to monitor the situation and the guidance from global
government authorities, as well as federal, state, local and foreign public
health authorities, and may take additional meaningful actions based on their
requirements and recommendations to attempt to protect the health and well-being
of our employees, customers, suppliers, and communities. In these circumstances,
there may be developments outside our control requiring us to adjust our
operating plan and cost reduction measures and such developments could occur
rapidly. Given the many evolving COVID-19 related factors, risks, and challenges
that could negatively impact our business, we withdrew our fiscal 2020 detailed
financial guidance on March 30, 2020 . Many of these uncertainties still remain
and as a result, we are not in a position to provide detailed financial guidance
for our fourth quarter or full year of fiscal 2020 at this time nor do we have
the ability to accurately predict the level of impact of COVID-19 on our
business and related Results of Operations, Financial Position, or Cash Flows.
However, based on our current visibility on our fiscal 2020 fourth quarter as of
the date of the filing of this report, we currently believe that continued
year-over-year growth in the residential market is expected, but at a more
moderate level than experienced during the first nine months of fiscal 2020.
Professional markets should benefit from the gradual return to more normal
buying patterns as customers' confidence in the economy increases. These
positive trends will likely be somewhat offset by any remaining COVID-19
headwinds, such as budget constraints, the effects of social distancing
restrictions, and regional variations in economic recovery. However, if the
adverse impacts from COVID-19 continue for an extended period of time or worsen,
our business and related Results of Operations, Financial Position, or Cash
Flows could continue to be adversely impacted. Sustained adverse impacts to our
business and certain suppliers or customers may also affect the future valuation
of certain of our assets and therefore, may increase the likelihood of a charge
related to an impairment, write-off, or reserve associated with such assets,
including, but not limited to, goodwill, indefinite and finite-lived intangible
assets, inventories, accounts receivable, deferred income taxes, and property,
plant and equipment. Such a charge could be material to our future Results of
Operations, Financial Position, or Cash Flows.
For additional information regarding risks associated with COVID-19, refer to
the section titled "Forward-Looking Information" located at the end of
Part I, Item 2 and the section titled "Risk Factors" located within Part II,
Item 1A, of this Quarterly Report on Form 10-Q.
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RESULTS OF OPERATIONS
Overview
Worldwide consolidated net sales for the third quarter of fiscal 2020 were
$841.0 million , up 0.3 percent compared to $838.7 million in the third quarter
of fiscal 2019. For the year-to-date period of fiscal 2020, worldwide
consolidated net sales were $2,537.9 million , up 5.6 percent compared to
$2,403.7 million from the same period in the prior fiscal year.
Professional segment net sales for the third quarter of fiscal 2020 were $623.6
million , a decrease of 7.9 percent compared to $676.8 million in the third
quarter of the prior fiscal year. This decrease was primarily due to the
unfavorable impact of COVID-19 on the demand for products from certain of our
Professional segment businesses, partially offset by incremental net sales as a
result of our acquisition of Venture Products . For the year-to-date period of
fiscal 2020, Professional segment net sales were $1,879.4 million , an increase
of 1.3 percent compared to $1,855.3 million in the prior fiscal year comparable
period. This increase was driven by incremental net sales as a result of our
acquisitions of CMW and Venture Products , substantially offset by the
unfavorable impact of COVID-19 on the demand for products from certain of our
Professional segment businesses.
Residential segment net sales for the third quarter of fiscal 2020 were $205.0
million , an increase of 38.3 percent compared to $148.2 million in the third
quarter of the prior fiscal year. This increase was primarily due to strong
retail demand for zero-turn riding mowers and walk power mowers and our expanded
mass retail channel, partially offset by decreased shipments of snow thrower
products. For the year-to-date period of fiscal 2020, Residential segment net
sales were $632.8 million , an increase of 20.4 percent compared to $525.5
million in the prior fiscal year comparable period. This increase was mainly
driven by our expanded mass retail channel and strong retail demand for
zero-turn riding mowers and walk power mowers, partially offset by decreased
shipments of snow thrower products.
Net earnings for the third quarter of fiscal 2020 were $89.0 million , or $0.82
per diluted share, compared to $60.6 million , or $0.56 per diluted share, for
the third quarter of fiscal 2019. Net earnings for the first nine months of
fiscal 2020 were $257.5 million , or $2.37 per diluted share, compared to net
earnings of $235.7 million , or $2.18 per diluted share in the comparable fiscal
2019 period.
Non-GAAP net earnings for the third quarter of fiscal 2020 were $88.7 million ,
or $0.82 per diluted share, compared to $89.8 million , or $0.83 per diluted
share, for the prior fiscal year comparative period. Non-GAAP net earnings for
the first nine months of fiscal 2020 were $258.6 million , or $2.38 per diluted
share, compared to $272.4 million , or $2.52 per diluted share, in the comparable
fiscal 2019 period. Reconciliations of non-GAAP financial measures to the most
directly comparable reported U.S. GAAP financial measures are included in the
section titled "Non-GAAP Financial Measures" within this MD&A.
We increased our cash dividend for the third 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 third quarter of fiscal 2019.
Field inventory levels were lower as of the end of the third quarter of fiscal
2020 compared to the third quarter of fiscal 2019, primarily as a result of
reduced Professional segment field inventory in our landscape contractor
business as channel partners experienced stronger than anticipated retail demand
throughout the cutting season, as well as decreased field inventory in our golf
and grounds business as our channel partners aligned field inventory levels with
anticipated retail demand for our products.
Three-Year Employee Initiative - "Vision 2020"
Our current multi-year employee initiative, "Vision 2020", which began with our
2018 fiscal year, focuses on driving profitable growth with an emphasis on
innovation and serving our customers, which we believe will generate further
momentum for the organization. Through the first two fiscal years of our Vision
2020 initiative, we 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 third quarter of fiscal 2020 were
$841.0 million , up 0.3 percent compared to $838.7 million in the third quarter
of fiscal 2019. This increase was primarily driven by strong retail demand for
our Residential segment zero-turn riding mowers and walk power mowers largely
due to a combination of favorable weather conditions in key regions, new and
enhanced products, customer focus on the care of their homes due to COVID-19,
and our expanded mass retail channel, as well as incremental Professional
segment net sales as a result of our acquisition of Venture Products . The net
sales increase was largely offset by reduced net sales in certain of our
Professional segment businesses due to reduced demand from channel partners as a
result of COVID-19. Within our Professional segment businesses, the decrease was
primarily due to fewer shipments of golf and grounds equipment as a result of
the curtailment and closure of certain business activities for golf courses and
municipalities across the globe resulting in lower overall revenues and budget
constraints and a preference for
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repairs and deferrals over new equipment purchases; reduced sales volumes for
our rental, specialty, and underground construction equipment as a result of
curtailed investments by end-customers in the oil and gas and construction
industries; and fewer shipments of our landscape contractor zero-turn riding
mowers as our channel partners aligned field inventory levels with previously
anticipated reduced retail demand from end-customers. Additionally, we
experienced fewer shipments of Residential snow thrower products during the
third quarter of fiscal 2020 compared to the third quarter of fiscal 2019.
For the year-to-date period of fiscal 2020, worldwide consolidated net sales
were $2,537.9 million , up 5.6 percent compared to $2,403.7 million from the same
period in the prior fiscal year. This increase was primarily driven by
incremental sales in our Professional segment as a result of our acquisitions of
CMW and Venture Products , incremental shipments of Residential segment zero-turn
riding mowers and walk power mowers as a result of our expanded mass retail
channel, and strong retail demand for Residential zero-turn riding mowers and
walk power mowers largely due to a combination of favorable weather conditions
in key regions, new and enhanced products, and customer focus on the care of
their homes due to COVID-19. The net sales increase was largely offset by
reduced net sales in certain of our Professional segment businesses due to
reduced demand from channel partners as a result of COVID-19. Within our
Professional segment businesses, the decrease was primarily due to fewer
shipments of our landscape contractor zero-turn riding mowers as our channel
partners aligned field inventory levels with previously anticipated reduced
retail demand from end-customers; fewer shipments of golf and grounds equipment
as a result of the curtailment and closure of certain business activities for
golf courses and municipalities across the globe resulting in lower overall
revenues and budget constraints and a preference for repairs and deferrals over
new equipment purchases; and reduced sales volumes for our rental, specialty,
and underground construction equipment as a result of curtailed investments by
end-customers in the oil and gas and construction industries. Additionally, we
experienced fewer shipments of Residential snow thrower products during the
third quarter of fiscal 2020 compared to the third quarter of fiscal 2019.
Net sales in international markets decreased by 19.7 percent and 7.2 percent for
the third 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 $2.5 million and $7.5 million for the third quarter and
year-to-date periods of fiscal 2020, respectively. The net sales decrease for
the quarter comparison was mainly due to the unfavorable impacts of COVID-19
resulting in decreased sales of golf and grounds equipment and rental,
specialty, and underground construction equipment, partially offset by increased
sales of our ag-irrigation products and Pope-branded irrigation products due to
favorable weather conditions in key regions and incremental sales as a result of
our acquisition of Venture Products . The net sales decrease for the year-to-date
comparison was mainly due to the unfavorable impacts of COVID-19 resulting in
decreased sales of golf and grounds and irrigation equipment, walk power mowers,
and Residential segment snow thrower products, partially offset by incremental
sales as a result of our acquisitions of CMW and Venture Products and higher
shipments of our ag-irrigation products and Pope-branded irrigation products due
to favorable weather conditions in key regions.
The following table summarizes the major operating costs and other income as a
percentage of net sales:
Three Months Ended Nine Months Ended
July 31, 2020 August 2, 2019 July 31, 2020 August 2, 2019
Net sales 100.0 % 100.0 % 100.0 % 100.0 %
Cost of sales (65.0) (68.3) (65.0) (66.6)
Gross profit 35.0 31.7 35.0 33.4
Selling, general and administrative expense (21.2) (22.9) (21.9) (21.7)
Operating earnings 13.8 8.8 13.1 11.7
Interest expense (1.0) (1.1) (1.0) (0.9)
Other income, net 0.4 0.8 0.5 0.8
Earnings before income taxes 13.2 8.5 12.6 11.6
Provision for income taxes (2.6) (1.3) (2.5) (1.8)
Net earnings 10.6 % 7.2 % 10.1 % 9.8 %
Gross Profit and Gross Margin
Gross profit for the third quarter of fiscal 2020 was $294.6 million , up 10.8
percent compared to $266.0 million in the third quarter of fiscal 2019. Gross
margin was 35.0 percent for the third quarter of fiscal 2020 compared to 31.7
percent for the third quarter of fiscal 2019, an increase of 330 basis points.
The increase in gross margin for the third quarter comparison was primarily
driven by the decrease in the charges related to purchase accounting adjustments
for the fiscal 2020 acquisition of Venture Products as compared to the fiscal
2019 acquisition of CMW, favorable net price realization within our Professional
segment due to fewer sales promotion activities and a revised floor plan
financing rate structure as a result of the amendments to certain agreements
pertaining to our Red Iron joint venture ("Red Iron"), and the favorable impact
of productivity and synergy initiatives. The increase was partially offset by
unfavorable manufacturing variance due to manufacturing inefficiencies
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as a result of the COVID-19-related reconfiguration of certain of our
manufacturing processes in order to implement social distancing protocols within
our facilities and adjusting production levels within our manufacturing
facilities to align with anticipated sales volumes, as well as unfavorable mix
primarily due to higher sales of Residential segment products as a percentage of
total consolidated net sales. Non-GAAP gross profit for the third quarter of
fiscal 2020 was $295.7 million , down 1.9 percent compared to $301.3 million in
the third quarter of fiscal 2019. Non-GAAP gross margin was 35.2 percent for the
third quarter of fiscal 2020 compared to 35.9 percent for the third quarter of
fiscal 2019, a decrease of 70 basis points. The decrease in non-GAAP gross
margin for the third quarter of fiscal 2020 was due to unfavorable manufacturing
variance due to manufacturing inefficiencies as a result of the COVID-19-related
reconfiguration of certain of our manufacturing processes in order to implement
social distancing protocols within our facilities and adjusting production
levels within our manufacturing facilities to align with anticipated sales
volumes, unfavorable mix primarily due to higher sales of Residential segment
products as a percentage of total consolidated net sales, and increased
inventory reserves in one of our Professional segment businesses. The decrease
was partially offset by favorable net price realization within our Professional
segment due to fewer sales promotion activities and a revised floor plan
financing rate structure as a result of the amendments to certain agreements
pertaining to our Red Iron joint venture, as well as the favorable impact of
productivity and synergy initiatives.
Gross profit for the year-to-date period of fiscal 2020 was $889.4 million , up
10.8 percent compared to $802.9 million in the same period of fiscal 2019. Gross
margin was 35.0 percent for the year-to-date period of fiscal 2020 compared to
33.4 percent for the same year-to-date period of fiscal 2019, an increase of 160
basis points. The increase in gross margin for the year-to-date comparison was
primarily driven by the decrease in the charges related to purchase accounting
adjustments for the fiscal 2020 acquisition of Venture Products as compared to
the fiscal 2019 acquisition of CMW, the favorable impact of productivity and
synergy initiatives, and favorable net price realization within our Professional
segment due to fewer sales promotion activities and a revised floor plan
financing rate structure as a result of the amendments to certain agreements
pertaining to our Red Iron joint venture. These increases were partially offset
by unfavorable mix primarily due to higher sales of Residential segment products
as a percentage of total consolidated net sales and unfavorable manufacturing
variance due to manufacturing inefficiencies as a result of COVID-19-related
facilities closures, the reconfiguration of certain of our manufacturing
processes in order to implement social distancing protocols within our
facilities, and adjusting production levels within our manufacturing facilities
to align with anticipated sales volumes. Non-GAAP gross profit for the
year-to-date period of fiscal 2020 was $894.2 million , up 5.5 percent compared
to $847.7 million in the same period of fiscal 2019. Non-GAAP gross margin was
35.2 percent for the year-to-date period of fiscal 2020 compared to 35.3 percent
for the same year-to-date period of fiscal 2019, a decrease of 10 basis points.
The decrease in non-GAAP gross margin is primarily due to unfavorable mix
primarily due to higher sales of Residential segment products as a percentage of
total consolidated net sales and unfavorable manufacturing variance due to
manufacturing inefficiencies as a result of COVID-19-related facilities
closures, the reconfiguration of certain of our manufacturing processes in order
to implement social distancing protocols within our facilities, and adjusting
production levels within our manufacturing facilities to align with anticipated
sales volumes. The decrease was partially offset by the favorable impact of
productivity and synergy initiatives and favorable net price realization within
our Professional segment due to fewer sales promotion activities and a revised
floor plan financing rate structure as a result of the amendments to certain
agreements pertaining to our Red Iron joint venture.
Non-GAAP gross profit and non-GAAP gross margin exclude the impact of
acquisition-related costs related to our acquisitions of Venture Products and
CMW, including integration costs and charges incurred for the take-down of the
inventory fair value step-up amounts resulting from purchase accounting
adjustments in both acquisitions and the amortization of the backlog intangible
asset resulting from purchase accounting adjustments for the CMW acquisition,
and the impact of management actions, including charges incurred for inventory
write-downs related to the Toro underground wind down. Reconciliations of
non-GAAP financial measures to the most directly comparable reported U.S. GAAP
financial measures are included in the section titled "Non-GAAP Financial
Measures" within this MD&A.
Selling, General, and Administrative ("SG&A") Expense
SG&A expense decreased $13.4 million , or 7.0 percent, for the third quarter of
fiscal 2020 and increased $35.3 million , or 6.8 percent, for the year-to-date
period of fiscal 2020. As a percentage of net sales, SG&A expense decreased 170
basis points for the third quarter of fiscal 2020 and increased 20 basis points
for the year-to-date period of fiscal 2020. The decrease in SG&A expense as a
percentage of net sales for the third quarter comparison was primarily driven by
decreased employee travel and salary costs as a result of safety and cost
reduction measures implemented to mitigate the adverse impacts of COVID-19 and
decreased transaction and integration costs incurred for the Venture Products
acquisition in fiscal 2020 as compared to the CMW acquisition in fiscal 2019,
partially offset by increased incentive compensation as a result of adjusted
enterprise performance estimates. The increase in SG&A expense as a percentage
of net sales for the year-to-date comparison was primarily due to incremental
indirect marketing and engineering costs as a result of our acquisitions of CMW
and Venture Products , partially offset by decreased incentive compensation costs
primarily as a result of the elimination of discretionary retirement fund
contribution for fiscal 2020 as a proactive measure to mitigate the adverse
impacts of COVID-19.
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Interest Expense
Interest expense decreased $0.7 million for the third quarter of fiscal 2020
compared to the third quarter of fiscal 2019. This decrease was driven by the
reduction in LIBOR as a result of the impact of COVID-19 on the global capital
markets, partially offset by increased interest expense incurred on higher
average outstanding borrowings under our financing arrangements as a result of
our acquisition of Venture Products . Interest expense increased $4.7 million for
the year-to-date period of fiscal 2020 compared to the comparable period of
fiscal 2019. This increase was due to increased interest expense incurred on
higher average outstanding borrowings under our financing arrangements as a
result of our acquisitions of CMW and Venture Products , partially offset by the
reduction in LIBOR as a result of the impact of COVID-19 on the global capital
markets.
Other Income, Net
Other income, net for the third quarter and year-to-date periods of fiscal 2020
decreased $3.0 million and $6.4 million , respectively, compared to the same
periods in fiscal 2019. The decrease for the third quarter 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, the reduction
in LIBOR, and lower sales volume, as well as a gain realized on the sale of a
fixed asset and a favorable legal settlement in fiscal 2019 that did not reoccur
in fiscal 2020. 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, the reduction in LIBOR, and
lower sales volume; lower interest income on marketable securities; and a
settlement charge incurred for the termination of our U.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 third quarter and year-to-date periods of fiscal
2020 was 19.8 percent and 19.2 percent, respectively, compared to 14.9 percent
and 15.3 percent in the same periods in fiscal 2019. These increases were due to
lower discrete tax benefits, including the excess tax deduction for share-based
compensation.
The non-GAAP effective tax rate for the third quarter of fiscal 2020 was 20.9
percent, compared to a non-GAAP effective tax rate of 18.1 percent in the third
quarter of fiscal 2019. The non-GAAP effective tax rate for the year-to-date
period of fiscal 2020 was 20.6 percent, compared to a non-GAAP effective tax
rate of 19.5 percent in the same period of fiscal 2019. These year-over-year
increases were due to discrete tax items. The non-GAAP effective tax rate
excludes the impact of acquisition-related costs related to our acquisitions of
Venture Products and CMW, including transaction and integration costs and
charges incurred related to certain purchase accounting adjustments; the impact
of discrete tax benefits recorded as excess tax deductions for share-based
compensation; the impact of management actions, including charges incurred for
inventory write-downs related to the Toro underground wind down; and one-time
charges incurred under the Tax Cuts and Jobs Act. Reconciliations of non-GAAP
financial measures to the most directly comparable reported U.S. GAAP financial
measures are included in the section titled "Non-GAAP Financial Measures."
Net Earnings
Net earnings for the third quarter of fiscal 2020 were $89.0 million , or $0.82
per diluted share, compared to $60.6 million , or $0.56 per diluted share, for
the third quarter of fiscal 2019. This increase was primarily driven by
decreased purchase accounting charges and transaction and integration costs
incurred for the fiscal 2020 acquisition of Venture Products as compared to the
fiscal 2019 acquisition of CMW, favorable net price realization within our
Professional segment, the favorable impact of productivity and synergy
initiatives, and decreased employee employee travel and salary costs as a result
of safety and cost reduction measures implemented to mitigate the adverse
impacts of COVID-19. The net earnings increase was partially offset by
unfavorable manufacturing variance due to manufacturing inefficiencies as a
result of the COVID-19, unfavorable reportable segment mix, and increased
incentive compensation as a result of adjusted enterprise performance estimates.
Non-GAAP net earnings for the third quarter of fiscal 2020 were $88.7 million ,
or $0.82 per diluted share, compared to $89.8 million , or $0.83 per diluted
share, for the third quarter of fiscal 2019, a decrease of 1.2 percent per
diluted share. This decrease in non-GAAP net earnings was primarily due to
unfavorable manufacturing variance due to manufacturing inefficiencies as a
result of the COVID-19, unfavorable reportable segment mix, increased inventory
reserves in one of our Professional segment businesses and increased incentive
compensation as a result of adjusted enterprise performance estimates, partially
offset by favorable net price realization within our Professional segment, the
favorable impact of productivity and synergy initiatives, and decreased employee
employee travel and salary costs as a result of safety and cost reduction
measures implemented to mitigate the adverse impacts of COVID-19.
Net earnings for the first nine months of fiscal 2020 were $257.5 million , or
$2.37 per diluted share, compared to $235.7 million , or $2.18 per diluted share,
for the same period of fiscal 2019. This increase was primarily driven by
decreased purchase accounting charges and transaction and integration costs
incurred for the fiscal 2020 acquisition of Venture Products as compared to the
fiscal 2019 acquisition of CMW, the favorable impact of productivity and synergy
initiatives, favorable net price realization within our Professional segment,
decreased incentive compensation costs as a result of diminished company
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performance due to COVID-19, and the elimination of discretionary retirement
fund contributions for fiscal 2020 as a proactive cost reduction measure to
mitigate the adverse impacts of COVID-19. The net earnings increase was
partially offset by unfavorable reportable segment mix, unfavorable
manufacturing variance due to manufacturing inefficiencies as a result of the
COVID-19, and incremental indirect marketing, engineering, and warranty costs as
a result of our acquisitions of CMW and Venture Products . Non-GAAP net earnings
for the first nine months of fiscal 2020 were $258.6 million , or $2.38 per
diluted share, compared to $272.4 million , or $2.52 per diluted share for the
same year-to-date period of fiscal 2019, a decrease of 5.6 percent per diluted
share. The decrease in non-GAAP net earnings was primarily due to unfavorable
reportable segment mix, unfavorable manufacturing variance due to manufacturing
inefficiencies as a result of the COVID-19, and incremental indirect marketing,
engineering, and warranty costs as a result of our acquisitions of CMW and
Venture Products . The decrease was partially offset by the favorable impact of
productivity and synergy initiatives, favorable net price realization within our
Professional segment, decreased incentive compensation costs as a result of
diminished company performance due to COVID-19, and the elimination of
discretionary retirement fund contributions for fiscal 2020 as a proactive cost
reduction measure to mitigate the adverse impacts of COVID-19.
Non-GAAP net earnings and non-GAAP net earnings per diluted share exclude the
impact of acquisition-related costs related to our acquisitions of Venture
Products and CMW, including transaction and integration costs and charges
incurred related to certain purchase accounting adjustments; the impact of
discrete tax benefits recorded as excess tax deductions for share-based
compensation; the impact of management actions, including charges incurred for
inventory write-downs related to the Toro underground wind down; and one-time
charges incurred under the Tax Cuts and Jobs Act. Reconciliations of non-GAAP
financial measures to the most directly comparable reported U.S. GAAP financial
measures are included in the section titled "Non-GAAP Financial Measures" within
this MD&A.
BUSINESS SEGMENTS
We operate in two reportable business segments: Professional and Residential.
Segment earnings for our Professional and Residential segments are defined as
earnings from operations plus other income, net. Our remaining activities are
presented as "Other" due to their insignificance. Operating loss for our Other
activities includes earnings (loss) from our wholly-owned domestic distribution
companies, Red Iron joint venture, corporate activities, other income, and
interest expense. Corporate activities include general corporate expenditures
(finance, human resources, legal, information services, public relations, and
similar activities) and other unallocated corporate assets and liabilities, such
as corporate facilities and deferred tax assets and liabilities.
The following tables summarize net sales for our reportable business segments
and Other activities:
Three Months Ended
(Dollars in thousands) July 31, 2020 August 2, 2019 $ Change % Change
Professional $ 623,615 $ 676,756 $ (53,141) (7.9) %
Residential 204,961 148,234 56,727 38.3
Other 12,396 13,723 (1,327) (9.7)
Total net sales* $ 840,972 $ 838,713 $ 2,259 0.3 %
*Includes international net sales of: $ 150,014 $ 186,710 $ (36,696) (19.7) %
Nine Months Ended
(Dollars in thousands) July 31, 2020 August 2, 2019 $ Change % Change
Professional $ 1,879,423 $ 1,855,268 $ 24,155 1.3 %
Residential 632,807 525,539 107,268 20.4
Other 25,623 22,898 2,725 11.9
Total net sales* $ 2,537,853 $ 2,403,705 $ 134,148 5.6 %
*Includes international net sales of: $ 508,001 $ 547,332 $ (39,331) (7.2) %
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Table of Contents The following tables summarize segment earnings for our reportable business segments and operating (loss) for our Other activities:
Three Months Ended
(Dollars in thousands) July 31, 2020 August 2, 2019 $ Change % Change
Professional $ 113,652 $ 81,592 $ 32,060 39.3 %
Residential 28,545 16,151 12,394 76.7
Other (31,204) (26,508) (4,696) (17.7)
Total segment earnings $ 110,993 $ 71,235 $ 39,758 55.8 %
Nine Months Ended
(Dollars in thousands) July 31, 2020 August 2, 2019 $ Change % Change
Professional $ 322,385 $ 319,689 $ 2,696 0.8 %
Residential 87,233 51,253 35,980 70.2
Other (91,115) (92,507) 1,392 1.5
Total segment earnings $ 318,503 $ 278,435 $ 40,068 14.4 %
Professional Segment
Segment Net Sales
Worldwide net sales for our Professional segment for the third quarter of fiscal
2020 decreased 7.9 percent compared to the same period of fiscal 2019. The net
sales decrease for the third quarter comparison was primarily due reduced demand
from channel partners as a result of COVID-19, which resulted in fewer shipments
of golf and grounds equipment as a result of the curtailment and closure of
certain business activities for golf courses and municipalities across the globe
resulting in lower overall revenues and budget constraints and a preference for
repairs and deferrals over new equipment purchases; reduced sales volumes for
our rental, specialty, and underground construction equipment as a result of
curtailed investments by end-customers in the oil and gas and construction
industries; and fewer shipments of our landscape contractor zero-turn riding
mowers as our channel partners aligned field inventory levels with previously
anticipated reduced retail demand from end-customers. The net sales decrease was
partially offset by incremental sales as a result of our acquisition of Venture
Products .
Worldwide net sales for our Professional segment for the year-to-date period of
fiscal 2020 increased 1.3 percent compared to the same period of fiscal 2019.
The net sales increase for the year-to-date comparison was driven by incremental
sales as a result of our acquisitions of CMW and Venture Products . The net sales
increase was largely offset by reduced demand from channel partners as a result
of COVID-19, which resulted in fewer shipments of our landscape contractor
zero-turn riding mowers as our channel partners aligned field inventory levels
with previously anticipated reduced retail demand from end-customers; fewer
shipments of golf and grounds equipment as a result of the curtailment and
closure of certain business activities for golf courses and municipalities
across the globe resulting in lower overall revenues and budget constraints and
a preference for repairs and deferrals over new equipment purchases; and reduced
sales volumes for our rental, specialty, and underground construction equipment
as a result of curtailed investments by end-customers in the oil and gas and
construction industries.
Segment Earnings
Professional segment earnings for the third quarter of fiscal 2020 increased
39.3 percent compared to the third quarter of fiscal 2019, and when expressed as
a percentage of net sales, increased to 18.2 percent from 12.1 percent. As a
percentage of net sales, the Professional segment earnings increase was
primarily driven by decreased purchase accounting charges for the fiscal 2020
acquisition of Venture Products as compared to the fiscal 2019 acquisition of
CMW, favorable net price realization, lower commodity costs, and decreased
employee travel costs as a result of safety and cost reduction measures to
mitigate the adverse impacts of COVID-19. The increase was partially offset by
unfavorable product mix and unfavorable manufacturing variance due to
manufacturing inefficiencies as a result of COVID-19.
For the year-to-date period of fiscal 2020, Professional segment earnings
increased by 0.8 percent compared to the same period in the prior fiscal year,
and when expressed as a percentage of net sales, remained a constant 17.2
percent for both fiscal periods. The Professional segment earnings increase was
primarily driven by decreased purchase accounting charges for the fiscal 2020
acquisition of Venture Products as compared to the fiscal 2019 acquisition of
CMW, favorable net price realization, and the favorable impact of productivity
and synergy initiatives, partially offset by unfavorable manufacturing variance
due to manufacturing inefficiencies as a result of COVID-19 and incremental
indirect marketing, administration, and engineering costs as a result of our
acquisitions of CMW and Venture Products .
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Residential Segment
Segment Net Sales
Worldwide net sales for our Residential segment for the third quarter of fiscal
2020 increased 38.3 percent compared to the same period of fiscal 2019. The
Residential segment net sales increase for the third quarter comparison was
mainly driven by strong retail demand for our zero-turn riding mowers and walk
power mowers largely due to a combination of favorable weather conditions in key
regions, new and enhanced products, customer focus on the care of their homes
due to COVID-19, and our expanded mass retail channel. The increase was
partially offset by decreased shipments of snow thrower products.
Worldwide net sales for our Residential segment for the year-to-date period of
fiscal 2020 increased 20.4 percent compared to the same period of fiscal 2019.
The Residential segment net sales increase for the year-to-date comparison was
mainly driven by incremental shipments as a result of our expanded mass retail
channel and strong retail demand for zero-turn riding mowers and walk power
mowers largely due to a combination of favorable weather conditions in key
regions, new and enhanced products, and customer focus on the care of their
homes due to COVID-19. The increase was partially offset by decreased shipments
of snow thrower products.
Segment Earnings
Residential segment earnings for the third quarter of fiscal 2020 increased 76.7
percent compared to the third quarter of fiscal 2019, and when expressed as a
percentage of net sales, increased to 13.9 percent from 10.9 percent. For the
year-to-date period of fiscal 2020, Residential segment net earnings increased
70.2 percent compared to the same period in the prior fiscal year, and when
expressed as a percentage of net sales, increased to 13.8 percent from 9.8
percent. As a percentage of net sales, the Residential segment net earnings
increases for the third quarter and year-to-date comparisons were driven by the
favorable impact of productivity and synergy initiatives and reduced SG&A
expense as a percentage of net sales due to leveraging lower expense as a result
of our COVID-19 safety and cost reduction measures over higher sales volumes.
The segment earnings as a percentage of net sales was partially offset by
unfavorable manufacturing variance due to manufacturing inefficiencies as a
result of COVID-19 and unfavorable product mix.
Other Activities
Other Net Sales
Net sales for our Other activities include sales from our wholly-owned domestic
distribution companies less sales from the Professional and Residential segments
to the distribution companies. Net sales for our Other activities in the third
quarter of fiscal 2020 decreased by $1.3 million compared to the third quarter
of fiscal 2019. The net sales decrease for the third quarter comparison was the
result of COVID-19, which led to reduced sales of our Professional and
Residential segment products by our wholly-owned domestic distribution companies
due to reduced retail demand. This decrease was partially offset by reduced
intercompany sales eliminations for sales from our Professional and Residential
segments to our wholly-owned domestic distribution companies as a result of soft
retail demand. Net sales for our Other activities for the year-to-date period of
fiscal 2020 increased $2.7 million compared to the same period in the prior
fiscal year. The net sales increase for the year-to-date comparison was the
result of COVID-19, which led to reduced intercompany sales eliminations for
sales from our Professional and Residential segments to our wholly-owned
domestic distribution companies as a result of reduced retail demand, partially
offset by reduced sales of our Professional and Residential segment products by
our wholly-owned distribution companies due to reduced retail demand.
Other Operating Loss
The operating loss for our Other activities increased $4.7 million for the third
quarter of fiscal 2020. The operating loss increase was primarily due to
increased incentive compensation as a result of adjusted enterprise performance
estimates and lower income from our Red Iron joint venture as a result of the
amendments to certain agreements pertaining to the joint venture, the reduction
in LIBOR, and lower sales volume, partially offset by decreased transaction and
integration costs for the fiscal 2020 acquisition of Venture Products as
compared to the fiscal 2019 acquisition of CMW, favorable healthcare costs, and
decreased interest expense.
The operating loss for our Other activities decreased $1.4 million for the
year-to-date period of fiscal 2020. The operating loss decrease was primarily
driven by decreased transaction and integration costs for the fiscal 2020
acquisition of Venture Products as compared to the fiscal 2019 acquisition of
CMW, and favorable healthcare costs, partially offset by increased interest
expense incurred on higher average outstanding borrowings under our financing
arrangements as a result of our acquisitions of CMW and Venture Products ; lower
income from our Red Iron joint venture as a result of the amendments to certain
agreements pertaining to the joint venture, the reduction in LIBOR, and lower
sales volume; and a settlement charge incurred for the termination of our U.S.
defined benefit pension plan.
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FINANCIAL POSITION
Working Capital
Our working capital strategy continues to place emphasis on improving asset
utilization with a focus on reducing the amount of working capital in the supply
chain, adjusting production plans, and maintaining or improving order
replenishment and service levels to end-users. Accounts receivable as of the end
of the third quarter of fiscal 2020 decreased $17.6 million , or 5.6 percent,
compared to the end of the third quarter of fiscal 2019, primarily due to
COVID-19 resulting in lower sales to customers not financed under our wholesale
financing agreements in our rental, specialty, and underground construction
business and international markets, as well as a lower receivable from Red Iron
due to lower sales financed under the joint venture near quarter-end. The
decrease was partially offset by higher sales within the expanded mass retail
channel of our Residential segment and incremental receivables as a result of
our acquisition of Venture Products . Inventory levels were up $35.6 million , or
5.7 percent, as of the end of the third quarter of fiscal 2020 compared to the
end of the third quarter of fiscal 2019, primarily due to incremental
inventories as a result of our acquisition of Venture Products , elevated
inventories in our Professional segment due to reduced sales as a result of
decreased demand for our products due to COVID-19, and higher inventories in our
Residential segment and our Professional segment snow and ice management
business due to anticipated production as a result of forecasted demand. The
increase was partially offset by reduced inventory in our rental, specialty, and
underground construction business due to elevated fiscal 2019 inventory as a
result of the inventory step-up purchase accounting adjustment related to the
CMW acquisition and the remaining inventory related to the Toro underground wind
down, which has substantially been sold through as of the third quarter of
fiscal 2020. Accounts payable decreased $35.9 million , or 11.8 percent, as of
the end of the third quarter of fiscal 2020 compared to the end of the third
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 forecasted sales
volumes as a result of COVID-19, partially offset by incremental payables as a
result of our acquisition of Venture Products .
Cash Flow
Cash provided by operating activities for the first nine months of fiscal 2020
was $305.9 million compared to $259.1 million for the first nine months of
fiscal 2019. This increase was primarily due to less cash utilized for the
purchase of commodities, components, parts, and accessories inventories due to
the reduction in our production levels within our manufacturing facilities to
align with reduced forecasted sales volumes as a result of COVID-19, as well as
the cash benefit of lower accounts receivable due to COVID-19 resulting in lower
sales to customers not financed under our wholesale financing agreements in our
rental, specialty, and underground construction business and international
markets, as well as a lower receivable from Red Iron due to lower sales financed
under the joint venture near quarter-end. The increase was partially offset by a
lower cash benefit from accounts payable than was experienced during the
comparable period of fiscal 2019 due to decreased purchases of commodities,
components, parts, and accessories inventories. Cash used in investing
activities decreased $559.5 million during the first nine months of fiscal 2020
compared to the first nine months of fiscal 2019. This decrease was primarily
due to less cash utilized for the acquisition of Venture Products in fiscal 2020
than was used for the acquisitions of CMW and a Northeastern 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 increase our liquidity
position in light of COVID-19 during fiscal 2020. Cash provided by financing
activities for the first nine months of fiscal 2020 decreased $220.6 million
compared to the first nine months of fiscal 2019, mainly due to lower net
borrowings under our debt arrangements, lower cash proceeds from the exercise of
stock options, and higher cash utilized for dividends paid on shares of our
common stock. The decrease in cash provided by financing activities was
partially offset by reduced cash utilized for repurchases of our common stock
under our Board authorized repurchase program in the first nine 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 on our future results, we believe we are
well-positioned to manage our business and have taken the appropriate actions
during fiscal 2020 to
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increase our liquidity position, including refinancing outstanding borrowings on
our unsecured senior revolving credit facility with a new three year term loan
for $190.0 million , which also added incremental liquidity; reducing capital
expenditures; continuing the curtailment of share repurchases under our Board
authorized repurchase program; and monitoring and participating in government
economic stabilization efforts and certain legislative provisions, such as
deferring certain tax payments, as applicable. As a result, we believe that our
existing liquidity position, including the funds available through existing, and
potential future, financing arrangements and forecasted cash flows will be
sufficient to provide the necessary capital resources for our anticipated
working capital needs, capital expenditures, investments, debt repayments,
interest payments, quarterly cash dividend payments, and common stock
repurchases, all as applicable, for at least the next twelve months. As of
July 31, 2020 , we had available liquidity of approximately $992.1 million ,
consisting of cash and cash equivalents of approximately $394.1 million , of
which approximately $95.3 million was held by our foreign subsidiaries, and
availability under our unsecured senior revolving credit facility of $598.0
million .
Indebtedness
As of July 31, 2020 , we had $890.9 million of outstanding indebtedness that
included $100.0 million of 7.8 percent debentures due June 15, 2027 , $124.0
million of 6.625 percent senior notes due May 1, 2037 , $100.0 million
outstanding under our $200.0 million three year unsecured senior term loan
facility, $180.0 million outstanding under our $300.0 million five year
unsecured senior term loan facility, $190.0 million outstanding under our $190.0
million three year unsecured senior term loan facility, $100.0 million
outstanding under our Series A Senior Notes, $100.0 million outstanding under
our Series B Senior Notes, and no outstanding borrowings under our revolving
credit facility. The July 31, 2020 outstanding indebtedness amounts were
partially offset by debt issuance costs and deferred charges of $3.1 million
related to our outstanding indebtedness. As of July 31, 2020 , we have
reclassified $108.9 million of the remaining outstanding principal balance under
the $190.0 million term loan, net of the related proportionate share of debt
issuance costs, to current portion of long-term debt within the Condensed
Consolidated Balance Sheet. As of July 31, 2020 , approximately $19.0 million of
the $108.9 million that has been reclassified to current portion of long-term
debt within the Condensed Consolidated Balance Sheets represents required
quarterly amortization payments due within the next twelve months and the
remaining $89.9 million represents the amount we intend to prepay utilizing
anticipated cash flows from operations within the next twelve months.
As of August 2, 2019 , we had $720.7 million of outstanding indebtedness that
included $100.0 million of 7.8 percent debentures due June 15, 2027 , $123.9
million of 6.625 percent senior notes due May 1, 2037 , $100.0 million
outstanding under our $200.0 million three year unsecured senior term loan
facility, $200.0 million outstanding under our $300.0 million five year
unsecured senior term loan facility, $100.0 million outstanding under our Series
A Senior Notes, $100.0 million outstanding under our Series B Senior Notes, and
no outstanding borrowings under our revolving credit facility. The August 2,
2019 outstanding indebtedness amounts were partially offset by debt issuance
costs and deferred charges of $3.2 million related to our outstanding
indebtedness.
Our domestic and non-U.S. operations maintained credit lines for import letters
of credit in the aggregate amount of approximately $13.6 million and $13.2
million as of July 31, 2020 and August 2, 2019 , respectively. We had $2.0
million and $3.3 million outstanding on such import letters of credit as of
July 31, 2020 and August 2, 2019 , respectively.
Revolving Credit Facility
Seasonal cash requirements are financed from operations, cash on hand, and with
borrowings under our $600.0 million unsecured senior five-year revolving credit
facility that expires in June 2023 , as applicable. Included in our $600.0
million revolving credit facility is a $10.0 million sublimit for standby
letters of credit and a $30.0 million sublimit for swingline loans. At our
election, and with the approval of the named borrowers on the revolving credit
facility and the election of the lenders to fund such increase, the aggregate
maximum principal amount available under the facility may be increased by an
amount up to $300.0 million . Funds are available under the revolving credit
facility for working capital, capital expenditures, and other lawful corporate
purposes, including, but not limited to, acquisitions and common stock
repurchases, subject in each case to compliance with certain financial covenants
described below.
Outstanding loans under the revolving credit facility (other than swingline
loans), if applicable, bear interest at a variable rate generally based on LIBOR
or an alternative variable rate based on the highest of the Bank of America
prime rate, the federal funds rate or a rate generally based on LIBOR, in each
case subject to an additional basis point spread that is calculated based on the
better of the leverage ratio (as measured quarterly and defined as the ratio of
total indebtedness to consolidated earnings before interest and taxes plus
depreciation and amortization expense) and debt rating of TTC. Swingline loans
under the revolving credit facility bear interest at a rate determined by the
swingline lender or an alternative variable rate based on the highest of the
Bank of America prime rate, the federal funds rate or a rate generally based on
LIBOR, in each case subject to an additional basis point spread that is
calculated based on the better of the leverage ratio and debt rating of TTC.
Interest is payable quarterly in arrears. Our debt rating for long-term
unsecured senior, non-credit enhanced debt was unchanged during the third
quarter of fiscal 2020 by Standard and Poor's Ratings Group at BBB and by
Moody's Investors Service at Baa3. If our debt rating falls below investment
grade and/or our leverage ratio rises above 1.50, the basis point spread we
currently pay on
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outstanding debt under the revolving credit facility would increase. However,
the credit commitment could not be canceled by the banks based solely on a
ratings downgrade. For the three month period ended July 31, 2020 , no interest
expense was incurred on our revolving credit facility as we did not have
outstanding borrowings during such period. For the nine month period ended
July 31, 2020 , we incurred interest expense of approximately $0.8 million on the
outstanding borrowings under our revolving credit facility. For the three and
nine month periods ended August 2, 2019 , we incurred interest expense of
approximately $0.2 million and $1.9 million , respectively, on the outstanding
borrowings under our revolving credit facility.
Our revolving credit facility contains customary covenants, including, without
limitation, financial covenants, such as the maintenance of minimum interest
coverage and maximum leverage ratios; and negative covenants, which among other
things, limit disposition of assets, consolidations and mergers, restricted
payments, liens, and other matters customarily restricted in such agreements.
Most of these restrictions are subject to certain minimum thresholds and
exceptions. Under the revolving credit facility, we are not limited in the
amount for payments of cash dividends and common stock repurchases as long as,
both before and after giving pro forma effect to such payments, our leverage
ratio from the previous quarter compliance certificate is less than or equal to
3.5 (or, at our option (which we may exercise twice during the term of the
facility) after certain acquisitions with aggregate consideration in excess of
$75.0 million , for the first four quarters following the exercise of such
option, is less than or equal to 4.0), provided that immediately after giving
effect of any such proposed action, no default or event of default would exist.
As of July 31, 2020 , we were not limited in the amount for payments of cash
dividends and common stock repurchases. We were in compliance with all covenants
related to the credit agreement for our revolving credit facility as of July 31,
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 of July 31, 2020 , we had no outstanding borrowings under the revolving credit
facility and $2.0 million outstanding under the sublimit for standby letters of
credit, resulting in $598.0 million of unutilized availability under our
revolving credit facility. As of August 2, 2019 , we had no outstanding
borrowings under the revolving credit facility and $1.9 million outstanding
under the sublimit for standby letters of credit, resulting in $598.1 million of
unutilized availability under the revolving credit facility.
$500.0 Million Term Loan Credit Agreement
In March 2019 , we entered into a term loan credit agreement with a syndicate of
financial institutions for the purpose of partially funding the purchase price
of our acquisition of CMW and the related fees and expenses incurred in
connection with such acquisition. The term loan credit agreement provided for a
$200.0 million three year unsecured senior term loan facility maturing on April
1, 2022 and a $300.0 million five year unsecured senior term loan facility
maturing on April 1, 2024 (collectively, the "$500.0 million term loan"). The
funds under the $500.0 million term loan were received on April 1, 2019 in
connection with the closing of the acquisition of CMW. There are no scheduled
principal amortization payments prior to maturity on the $200.0 million three
year unsecured senior term loan facility. For the $300.0 million five year
unsecured senior term loan facility, we are required to make quarterly principal
amortization payments of 2.5 percent of the original aggregate principal balance
reduced by any applicable prepayments beginning with the last business day of
the thirteenth calendar quarter ending after April 1, 2019 , with the remainder
of the unpaid principal balance due at maturity. No principal payments are
required during the first three and one-quarter (3.25) years of the $300.0
million five year unsecured senior term loan facility. The term loan facilities
may be prepaid and terminated at our election at any time without penalty or
premium. As of July 31, 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 the Bank of America prime rate, the federal funds rate, or a rate
generally based on LIBOR, in each case subject to an additional basis point
spread as defined in the $500.0 million term loan. Interest is payable quarterly
in arrears. For the three and nine month periods ended July 31, 2020 , we
incurred interest expense of approximately $0.9 million and $4.3 million on the
outstanding borrowings under the $500.0 million term loan, respectively. For the
three and nine month periods ended August 2, 2019 , we incurred interest expense
of approximately $3.7 million and $5.3 million on the outstanding borrowings
under the $500.0 million term loan.
The $500.0 million term loan 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
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$75.0 million , for the first four quarters following the exercise of such
option, is less than or equal to 4.0), provided that immediately after giving
effect of any such proposed action, no default or event of default would exist.
As of July 31, 2020 , we were in compliance with all covenants related to our
$500.0 million term loan and were not limited in the amount for payments of cash
dividends and common stock repurchases. Additionally, we expect to be in
compliance with all covenants related to our $500.0 million term loan during the
remainder of fiscal 2020. If we were out of compliance with any covenant
required by the $500.0 million term loan credit agreement following the
applicable cure period, our term loan facilities, long-term senior notes,
debentures, and any amounts outstanding under the revolving credit facility
could become due and payable if we were unable to obtain a covenant waiver or
refinance our borrowings under our $500.0 million term loan credit agreement.
$190.0 Million Term Loan Credit Agreement
On March 30, 2020 , we entered into the $190.0 million term loan ("$190.0 million
term loan") with certain financial institutions for the purpose of refinancing
certain of our outstanding borrowings incurred in connection with the
acquisition of Venture Products on March 2, 2020 , as well as a precautionary
measure to increase our liquidity and preserve financial flexibility in light of
the current uncertainty in the global financial and commercial markets as a
result of COVID-19. The $190.0 million term loan provided for a $190.0 million
three year unsecured senior term loan facility maturing on June 19, 2023 .
Beginning with the last business day of March 2021 , we are required to make
quarterly amortization payments on the $190.0 million term loan equal to 5.0%
for the first four payments and 7.5% thereafter of the original aggregate
principal amount reduced by any applicable prepayments. The $190.0 million term
loan may be prepaid and terminated at our election at any time without penalty
or premium. Amounts repaid or prepaid may not be reborrowed. As of July 31,
2020 , there was $190.0 million of outstanding borrowings under the $190.0
million term loan and we have reclassified $108.9 million of the remaining
outstanding principal balance under the $190.0 million term loan, net of the
related proportionate share of deferred debt issuance costs, to current portion
of long-term debt within the Condensed Consolidated Balance Sheets. As of
July 31, 2020 , approximately $19.0 million of the $108.9 million that has been
reclassified to current portion of long-term debt within the Condensed
Consolidated Balance Sheets represents required quarterly amortization payments
due within the next twelve months and the remaining $89.9 million represents the
amount we intend to prepay utilizing anticipated cash flows from operations
within the next twelve months.
The $190.0 million term loan contains customary covenants, including, without
limitation, financial covenants generally consistent with those applicable under
the our revolving credit facility, such as the maintenance of minimum interest
coverage and maximum leverage ratios; and negative covenants, which among other
things, limit disposition of assets, consolidations and mergers, restricted
payments, liens, and other matters customarily restricted in such agreements.
Most of these restrictions are subject to certain minimum thresholds and
exceptions. We were in compliance with all covenants related to the $190.0
million term loan as of July 31, 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 nine month periods
ended July 31, 2020 , we incurred interest expense of approximately $1.1 million
and $1.5 million , respectively, on the outstanding borrowings under the $190.0
million term loan.
3.81% Series A and 3.91% Series B Senior Notes
On April 30, 2019 , we entered into a private placement note purchase agreement
with certain purchasers pursuant to which we agreed to issue and sell an
aggregate principal amount of $100.0 million of 3.81% Series A Senior Notes due
June 15, 2029 ("Series A Senior Notes") and $100.0 million of 3.91% Series B
Senior Notes due June 15, 2031 ("Series B Senior Notes" and together with the
Series A Senior Notes, the "Senior Notes"). On June 27, 2019 , we issued $100.0
million of the Series A Senior Notes and $100.0 million of the Series B Senior
Notes pursuant to the private placement note purchase agreement. The Senior
Notes are senior unsecured obligations of TTC. Interest on the Senior Notes is
payable semiannually on the 15th day of June and December in each year. For the
three and nine month periods ended July 31, 2020 , we incurred interest expense
of approximately $1.9 million and $5.8 million on the outstanding borrowings
under the private placement note purchase agreement. For the three and nine
month periods ended August 2, 2019 , we incurred interest expense of
approximately $0.8 million on the outstanding borrowings under the private
placement note purchase agreement.
No principal is due on the Senior Notes prior to their stated due dates. We have
the right to prepay all or a portion of either series of the Senior Notes in
amounts equal to not less than 10.0 percent of the principal amount of the
Senior Notes then outstanding upon notice to the holders of the series of Senior
Notes being prepaid for 100.0 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.
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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 of July 31, 2020 , we were
not limited in the amount for payments of cash dividends and stock repurchases.
We were in compliance with all covenants related to the private placement note
purchase agreement as of July 31, 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 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 third
quarter of fiscal 2020 that was paid on July 9, 2020 . This was an increase of
11.1 percent over our cash dividend of $0.225 per share for the third quarter of
fiscal 2019. We currently expect to continue paying our quarterly cash dividend
to shareholders for the remainder of fiscal 2020.
Share Repurchases
During the first nine months of fiscal 2020, we curtailed repurchasing shares of
our common stock in the open market under our Board authorized repurchase
program. In March 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 of July 31, 2020 , we expect to continue the curtailment
of 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
repurchase program in the future at any time, depending on our cash balance,
debt repayments, market conditions, our anticipated working capital needs,
and/or other factors.
Customer Financing Arrangements
Our customer financing arrangements are described in further detail within our
most recently filed Annual Report on Form 10-K. There have been no material
changes to our customer financing arrangements with the exception of the
amendments to certain agreements pertaining to our Red Iron joint venture
described in further detail within the section titled "Wholesale Financing"
below.
Wholesale Financing
Our Red Iron joint venture with TCF Inventory Finance, Inc. ("TCFIF"), a
subsidiary of TCF National Bank , provides inventory financing to certain
distributors and dealers of certain of our products in the U.S. that enables
them to carry representative inventories of certain of our products. On December
20, 2019 , during the first quarter of fiscal 2020, we amended certain agreements
pertaining to the Red Iron joint venture. The purpose of these amendments was,
among other things, to: (i) adjust certain rates under the floor plan financing
rate structure charged to our distributors and dealers participating in
financing arrangements through the Red Iron joint venture; (ii) extend the term
of the Red Iron joint venture from October 31, 2024 to October 31, 2026 , subject
to two-year extensions thereafter unless either we or TCFIF provides written
notice to the other party of non-renewal at least one year prior to the end of
the then-current term; (iii) amend certain exclusivity-related provisions,
including the definition of our products that are subject to exclusivity,
inclusion of a two-year review period by us for products acquired in future
acquisitions to assess, without a commitment to exclusivity, the potential
benefits and detriments of including such acquired products under the Red Iron
financing arrangement, and the pro-rata payback over a five-year period of the
exclusivity incentive payment we received from TCFIF in 2016; (iv) extend the
maturity date of the revolving credit facility used by Red Iron primarily to
finance the acquisition of inventory from us by our distributors and dealers
from October 31, 2024 to October 31, 2026 and to increase the amount available
under such revolving credit facility from $550 million to $625 million ; and
(v) memorialize certain other non-material amendments. Under separate agreements
between Red Iron and the dealers and distributors, Red Iron provides loans to
the dealers and distributors for the advances paid by Red Iron to us. The net
amount of receivables financed for dealers and distributors under this
arrangement for the nine month period ended July 31, 2020 and August 2, 2019 was
$1,374.3 million and $1,513.3 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
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in the U.S. and internationally in Australia . These third-party financial
institutions financed $308.3 million and $144.1 million of receivables for such
dealers and distributors during the nine month periods ended July 31, 2020 and
August 2, 2019 , respectively. As of July 31, 2020 and August 2, 2019 , $175.6
million and $138.2 million of receivables financed by these 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 TCF Commercial Finance Canada, Inc. , 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 of July 31, 2020 , we were contingently liable to
repurchase up to a maximum amount of $140.0 million of inventory related to
receivables under these inventory repurchase agreements. Our financial exposure
under these inventory repurchase agreements is limited to the difference between
the amount paid to Red Iron or other third-party 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 nine month period ended July 31, 2020
and August 2, 2019 . However, a decline in retail sales or financial difficulties
of our 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 the Venture Products merger agreement described in
further detail in the section titled "Company Overview" within this MD&A.
Off-Balance Sheet Arrangements
We have off-balance sheet arrangements 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.
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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 nine month periods endedJuly 31, 2020 andAugust 2, 2019 : Three Months Ended Nine Months EndedAugust 2 ,
(Dollars in thousands, except per share data)
August 2, 2019 July 31, 2020 2019 Gross profit$ 294,574 $ 265,981 $ 889,379 $ 802,896 Acquisition-related costs1 1,087 26,172 3,950 35,691 Management actions2 - 9,117 857 9,117 Non-GAAP gross profit$ 295,661 $ 301,270 $ 894,186 $ 847,704 Gross margin 35.0 % 31.7 % 35.0 % 33.4 % Acquisition-related costs1 0.2 % 3.1 % 0.2 % 1.5 % Management actions2 - % 1.1 % - % 0.4 % Non-GAAP gross margin 35.2 % 35.9 % 35.2 % 35.3 % Operating earnings$ 115,952 $ 73,944 $ 332,876 $ 281,723 Acquisition-related costs1 1,161 29,304 6,183 51,058 Management actions2 - 9,148 857 9,148 Non-GAAP operating earnings$ 117,113 $ 112,396 $ 339,916 $ 341,929 Earnings before income taxes$ 110,993 $ 71,235 $ 318,503 $ 278,435 Acquisition-related costs1 1,161 29,304 6,183 51,058 Management actions2 - 9,148 857 9,148 Non-GAAP earnings before income taxes$ 112,154 $ 109,687 $ 325,543 $ 338,641 Net earnings$ 88,968 $ 60,607 $ 257,505 $ 235,717 Acquisition-related costs1 924 23,953 4,922 41,814 Management actions2 - 7,351 682 7,351 Tax impact of share-based compensation3 (1,173) (1,200) (4,550) (11,518) U.S. Tax Reform4 - (926) - (926) Non-GAAP net earnings$ 88,719 $ 89,785 $ 258,559 $ 272,438 51
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Three Months Ended Nine Months Ended
(Dollars in thousands, except per share data)
August 2, 2019 July 31, 2020 August 2, 2019 Diluted EPS$ 0.82 $ 0.56 $ 2.37 $ 2.18 Acquisition-related costs1 0.01 0.22 0.05 0.39 Management actions2 - 0.07 - 0.07 Tax impact of share-based compensation3 (0.01) (0.01) (0.04) (0.11) U.S. Tax Reform4 - (0.01) - (0.01) Non-GAAP diluted EPS$ 0.82 $ 0.83 $ 2.38 $ 2.52 Effective tax rate 19.8 % 14.9 % 19.2 % 15.3 % Acquisition-related costs1 - % (1.4) % - % (0.7) % Management actions2 - % 1.6 % - % 0.5 % Tax impact of share-based compensation3 1.1 % 1.7 % 1.4 % 4.1 % U.S. Tax Reform4 - % 1.3 % - % 0.3 % Non-GAAP effective tax rate 20.9 % 18.1 % 20.6 % 19.5 % 1 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 month period endedJuly 31, 2020 represent integration costs and charges incurred for the take-down of the inventory fair value step-up amount resulting from purchase accounting adjustments related to the acquisition ofVenture Products . Acquisition-related costs for the nine month period endedJuly 31, 2020 represent transaction costs incurred for our acquisition ofVenture Products , as well as integration costs and charges incurred for the take-down of the inventory fair value step-up amounts resulting from purchase accounting adjustments related to the acquisitions ofVenture Products and CMW. Acquisition-related costs for the three and nine month periods endedAugust 2, 2019 represent transaction and integration costs, as well as charges incurred for the take-down of the inventory fair value step-up amount and amortization of the backlog intangible asset resulting from purchase accounting adjustments related to our acquisition of CMW. 2 During the third quarter of fiscal 2019, we announced the wind down of our Toro-branded large horizontal directional drill and riding trencher product line ("Toro underground wind down"). Management actions for the nine month period endedJuly 31, 2020 represent inventory write-down charges incurred for the Toro underground wind down. No charges were incurred for the three month period endedJuly 31, 2020 related to the Toro underground wind down. Management actions for the three and nine month periods endedAugust 2, 2019 represent charges incurred for the write-down of inventory, inventory retail support activities, and accelerated depreciation on fixed assets related to the Toro underground wind down. For additional information regarding the Toro underground wind down, refer to Note 7, Management Actions, within the Notes to Condensed Consolidated Financial Statements included within Part 1, Item 1, "Financial Statements" of this Quarterly Report on Form 10-Q. 3 In the first quarter of fiscal 2017, we adopted Accounting Standards Update No. 2016-09, Stock-based Compensation: Improvements to Employee Share-based Payment Accounting, which requires that any excess tax deduction for share-based compensation be immediately recorded within income tax expense. These amounts represent the discrete tax benefits recorded as excess tax deductions for share-based compensation during the three and nine month periods endedJuly 31, 2020 andAugust 2, 2019 . 4 Signed into law onDecember 22, 2017 , Public Law No. 115-97 ("Tax Act" or "U.S. Tax Reform"), reduced theU.S. federal corporate tax rate from 35.0 percent to 21.0 percent, effectiveJanuary 1, 2018 . This reduction in rate required the re-measurement of our net deferred taxes as of the date of enactment. The Tax Act also imposed a one-time deemed repatriation tax on our historical undistributed earnings and profits of foreign affiliates. During the three and nine month periods endedAugust 2, 2019 , we recorded a tax benefit of$0.9 million related to a prior year true-up of the Tax Act. The Tax Act did not impact our Results of Operations for the three and nine month periods endedJuly 31, 2020 . 52 -------------------------------------------------------------------------------- Table of Contents 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. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which modifies the measurement approach for credit losses on financial assets measured on an amortized cost basis from an 'incurred loss' method to an 'expected loss' method. Such modification of the measurement approach for credit losses eliminates the requirement that a credit loss be considered probable, or incurred, to impact the valuation of a financial asset measured on an amortized cost basis. The amended guidance requires the measurement of expected credit losses to be based on relevant information, including historical experience, current conditions, and a reasonable and supportable forecast that affects the collectability of the related financial asset. This amendment will affect trade receivables, off-balance-sheet credit exposures, and any other financial assets not excluded from the scope of this amendment that have the contractual right to receive cash. The amended guidance will become effective 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. 53 -------------------------------------------------------------------------------- Table of Contents 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; slowdowns or reductions in levels of golf course activity, including food and beverage spending, development, renovation, and improvement; golf course closures; reduced governmental or municipal spending; reduced levels of home ownership, construction, and sales; home foreclosures; negative consumer confidence; reduced consumer spending levels; further increased unemployment rates; prolonged high unemployment rates; higher costs of commodities, components, parts, and accessories and/or transportation-related costs, including as a result of inflation, changing prices, tariffs, and/or duties; inflationary or deflationary pressures; reduced infrastructure spending; the impact ofU.S. federal debt, state debt and sovereign debt 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 normal working locations and perform work; the impact of COVID-19 on the financial and credit markets and economic activity generally; our ability to access lending, capital markets, and other sources of liquidity when needed on reasonable terms or at all; our ability to comply with the financial covenants in our debt agreements if the material economic downturn as a result of COVID-19 results in substantially increased indebtedness and/or lower EBITDA for us; and the negative impacts as a result of the occurrence of a global or national recession, depression or other sustained adverse market event as a result of COVID-19. •Our Professional segment net sales are dependent upon certain factors, many of which have been adversely impacted by COVID-19, including golf course revenues and the amount of investment in golf course renovations and improvements; the level of new golf course development and golf course closures; infrastructure improvements; demand for our products in the rental, specialty and underground construction markets, including those related to oil and gas construction activities; the extent to which property owners outsource their lawn care and snow and ice removal activities; residential and/or municipal commercial construction activity; continued acceptance of, and demand for, ag-irrigation solutions; the timing and occurrence of winter weather conditions; availability of cash or 54 -------------------------------------------------------------------------------- Table of Contents credit to Professional segment customers on acceptable terms to finance new product purchases; and the amount of government and other customer revenues, budget, and spending levels for grounds maintenance or construction equipment. •Increases in the cost, or disruption and/or shortages in the availability, of commodities, components, parts and accessories containing various materials that we purchase for use in our manufacturing process and end-products or to be sold as stand-alone end-products, such as steel, aluminum, petroleum and natural gas-based resins, linerboard, copper, lead, rubber, engines, transmissions, transaxles, hydraulics, electric motors, and other commodities, components, parts and accessories, including as a result of COVID-19, increased costs, increased tariffs, duties or other charges as a result of changes toU.S. or international trade policies or trade agreements, trade regulation and/or industry activity, or antidumping and countervailing duty petitions on certain products imported from foreign countries, including certain engines imported intothe United States fromChina , or the inability of suppliers, including Briggs & Stratton a supplier of engines for certain of our products, that filed for Chapter 11 bankruptcy onJuly 20, 2020 , to continue operations or otherwise remain in business as a result of COVID-19, financial difficulties, or otherwise, have affected our profit margins, operating results and businesses and could continue to result in declines in our profit margins, operating results and businesses. •Our ability to manage our inventory levels to meet our customers' demand for our products is important for our business. Managing inventory levels in the current COVID-19 commercial environment is particularly difficult as a result of changes to production operations, locations and schedules as well as demand volatility. Such manufacturing inefficiencies have resulted in unfavorable manufacturing variances that have negatively impacted our financial results. If such manufacturing inefficiencies continue, we underestimate or overestimate both channel and retail demand for our products, are not able to manufacture product to fulfill customer demand, and/or do not produce or maintain appropriate inventory levels, our net sales, profit margins, net earnings, and/or working capital could be negatively impacted. •Changes in the composition of, financial viability of, and/or the relationships with, our distribution channel customers could negatively impact our business and operating results. •Our business and operating results are subject to the inventory management decisions of our distribution channel customers. Adjustments in the carrying amount of inventories by our distribution channel customers have impacted and may continue to impact our inventory management and working capital goals as well as operating results. •Weather conditions, including unfavorable weather conditions exacerbated by global climate changes or otherwise, may reduce demand for some of our products and/or cause disruptions in our operations, including as a result of disruption in our supply chain, and adversely affect our net sales and operating results, or may affect the timing of demand for some of our products and/or our ability to manufacture product to fulfill customer demand, which may adversely affect net sales and operating results in subsequent periods. •Fluctuations in foreign currency exchange rates have in the past affected our operating results and could continue to result in declines in our net sales and net earnings. •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, have been impacted and will continue to be impacted depending on the mix of products we sell during a given period, as our Professional segment products generally have higher profit margins than our Residential segment products. Similarly, within each segment, lower sales of products that generally carry higher profit margins, have impacted our financial performance, including profit margins and net earnings, and such financial performance could continue to be negatively impacted. •We intend to grow our business in part through acquisitions 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 ofJuly 31, 2020 , we had goodwill of$424.2 million and other intangible assets of$413.3 million , including goodwill and other intangible assets from the CMW andVenture Products acquisitions, which together comprise 29.8 percent of our total assets as ofJuly 31, 2020 . These amounts are maintained in various reporting units. If we determine that our goodwill or other intangible assets recorded have become impaired, we will be required to record a charge resulting from the impairment. Impairment charges, including such charges that could arise as a result of the COVID-19 pandemic, could be significant and could adversely affect our consolidated results of operations and financial position. 55 -------------------------------------------------------------------------------- Table of Contents •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, 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, including certain engines imported intothe United States fromChina , 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 global governmental, business and individual actions that have been, and continue to be, taken in response to COVID-19. Furthermore, we have incurred additional costs as a result of necessary actions and preparedness plans to help ensure the health and safety of our employees and continued operations, including remote working accommodations, enhanced cleaning processes, protocols designed to implement appropriate social distancing practices, and/or adoption of additional wage and benefit programs to assist employees. •Management information systems are critical to our business. If our information systems or information security practices, or those of our business partners or third-party service providers, fail to adequately perform and/or protect sensitive or confidential information, or if we, our business partners, or third-party service providers experience an interruption in, or breach of, the operation of such systems or practices, including by theft, loss or damage from unauthorized access, security breaches, natural or man-made disasters, cyber attacks, computer viruses, malware, phishing, denial of service attacks, power loss or other disruptive events, our business, reputation, financial condition, and operating results could be adversely affected. •Our reliance upon patents, trademark laws, and contractual provisions to protect our proprietary rights may not be sufficient to protect our intellectual property from 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, compliance with which may require us to incur expenses or modify our products or operations and non-compliance with which may result in harm to our reputation and/or expose us to penalties. Governmental policies and regulations may also adversely affect the demand for some of our products and our operating results. In addition, changes in laws, policies, and regulations in theU.S. or other countries in which we conduct business also may adversely affect our financial results, including as a result of, (i) adoption of laws and regulations to address COVID-19, (ii) taxation and tax policy changes, tax rate changes, new tax laws, new or revised tax law interpretations or guidance, including as a result of the Tax Act, (iii) changes to, or adoption of new, healthcare laws or regulations, or (iv) changes toU.S. or international policies or trade agreements or trade regulation and/or industry activity, including antidumping and countervailing duty petitions on certain products imported from foreign countries, including certain engines imported intothe United States fromChina , 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. 56 -------------------------------------------------------------------------------- Table of Contents •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. •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 . 57
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