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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
    Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Fiscal Year Ended October 31, 2019
or
            Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Transition Period from        to
Commission file number: 1-8649
THE TORO COMPANY
(Exact name of registrant as specified in its charter)
Delaware
 
41-0580470
(State or other jurisdiction of Incorporation or Organization)
 
(I.R.S. Employer Identification No.)
8111 Lyndale Avenue South
Bloomington, Minnesota 55420-1196
Telephone number: (952888-8801
(Address, including zip code, and telephone number, including area code, of registrant's principal executive offices)
___________________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, par value $1.00 per share
TTC
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes  No 
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes  No 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes  No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
Non-accelerated filer
 
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes  No 
The aggregate market value of the common stock held by non-affiliates of the registrant, based on the closing price of the common stock on May 3, 2019, the last business day of the registrant's most recently completed second fiscal quarter, as reported by the New York Stock Exchange, was approximately $8.0 billion.
The number of shares of the registrant's common stock outstanding as of December 13, 2019 was 106,833,222.
Documents Incorporated by Reference: Portions of the registrant's definitive Proxy Statement for the 2020 Annual Meeting of Shareholders expected to be held March 17, 2020 are incorporated by reference into Part III of this Annual Report on Form 10-K.
 



THE TORO COMPANY
FORM 10-K
TABLE OF CONTENTS

Description
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I
ITEM 1.   BUSINESS
Introduction
The Toro Company was incorporated in Minnesota in 1935 as a successor to a business founded in 1914 and reincorporated in Delaware in 1983. Unless the context indicates otherwise, the terms "company," "Toro," "we," "our," or "us" refer to The Toro Company and its consolidated subsidiaries. Our executive offices are located at 8111 Lyndale Avenue South, Bloomington, Minnesota, 55420-1196, and our telephone number is (952)-888-8801. Our website for corporate and investor information is www.thetorocompany.com, which also contains links to our branded product sites. The information contained on our websites or connected to our websites is not incorporated by reference into this Annual Report on Form 10-K (this "report") and should not be considered part of this report.
We design, manufacture, and market professional turf maintenance equipment and services, turf irrigation systems, landscaping equipment and lighting products, snow and ice management products, agricultural irrigation systems ("ag-irrigation"), rental, specialty and underground construction equipment, and residential yard and snow thrower products. We produced our first mower for golf course use in 1919 when we mounted five reel mowers on a Toro tractor, and we introduced our first lawn mower for residential use in 1938. We have continued to enhance our product lines over the more than 100 years we have been in business. We classify our operations into two reportable business segments: Professional and Residential. Our remaining activities are presented as "Other" due to their insignificance. These Other activities consist of earnings (loss) from our wholly-owned domestic distribution companies, corporate activities, and the elimination of intersegment revenues and expenses. Net sales of our reportable segments and Other activities accounted for the following percentages of our consolidated net sales for fiscal 2019: Professional, 77.8 percent; Residential, 21.1 percent; and Other, 1.1 percent.
Our products are advertised and sold worldwide through a network of distributors, dealers, mass retailers, hardware retailers, home centers, as well as online (direct to end-users) under the primary trademarks of Toro®, eXmark®, BOSS®, Ditch Witch®, American Augers®, Subsite®, HammerHead®, Trencor®, Radius®, Irritrol®, Unique Lighting Systems®, Rain Master®, Pope®, PERROT®, Hayter®, and Lawn-Boy®, most of which are registered in the United States ("U.S.") and/or in the primary countries outside the U.S. where we market our products branded under such trademarks. This report also contains trademarks, trade names, and service marks that are owned by other persons or entities, such as The Home Depot, Inc. ("The Home Depot").
We emphasize quality and innovation in our products, customer service, manufacturing, and marketing. We strive to provide well-built, dependable products supported by an extensive service network. We have committed funding for research, development, and engineering in order to improve and enhance
 
existing products and develop new products. Through these efforts, we seek to be responsive to trends that may affect our target markets now and in the future. 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 plan to continue to pursue targeted acquisitions using a disciplined approach that adds value while complementing our existing brands and product portfolio.
Our purpose is to help our customers enrich the beauty, productivity, and sustainability of the land. Our vision is to be the most trusted leader in solutions for the outdoor environment. Every day. Everywhere. Our mission is to deliver superior innovation and to deliver superior customer care.
Acquisition of The Charles Machine Works, Inc.
On April 1, 2019 ("closing date"), pursuant to the Agreement and Plan of Merger dated February 14, 2019 ("merger agreement"), we completed our acquisition of The Charles Machine Works, Inc. ("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. The transaction was structured as a merger, pursuant to which a wholly-owned subsidiary of Toro merged with and into CMW, with CMW continuing as the surviving entity and a wholly-owned subsidiary of Toro. As a result of the merger, all of the outstanding equity securities of CMW were canceled and now only represent the right to receive the applicable consideration as described in the merger agreement. At the closing date, 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 at the closing date. During the fourth quarter of fiscal 2019, we finalized such customary adjustments that resulted in an additional $5.7 million of merger consideration being paid and an aggregate merger consideration of $685.0 million ("purchase price"). 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 from our unsecured senior revolving credit facility. For additional information regarding the acquisition and the financing agreements utilized to fund the aggregate merger consideration, refer to Note 2, Business Combinations, and Note 6, Indebtedness, in the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.

3


Products by Market
We strive to be a leader in adapting advanced technologies to products and services that provide innovative solutions for turf care maintenance, landscapes, agricultural fields, rental, specialty and underground construction, snow and ice management, and residential demands. The following is a summary of our products, by market, for our Professional segment and our products for our Residential segment:
Professional Segment
We design professional turf; landscape and lighting; rental, specialty and underground construction; snow and ice management; and agricultural products and market them worldwide through a network of distributors and dealers, as well as directly to government customers, rental companies, and large retailers. These channel partners then sell or rent our products primarily to professional users engaged in maintaining turf, such as golf courses, sports fields, municipal properties, as well as residential and commercial landscapes; installing, repairing, and replacing underground pipe and utilities; managing snow and ice needs; irrigating turf and agricultural fields; and creating, renovating, and illuminating landscapes.
Golf Market
Products for the golf market include large reel and rotary riding products for fairway, rough, and trim cutting; riding and walking mowers for putting greens and specialty areas; greens rollers; turf sprayer equipment; utility vehicles; aeration equipment; and bunker maintenance equipment. In late fiscal 2019, we introduced the Toro-branded Greensmaster® Fixed-Head Series walk-behind greens mower, which is designed to provide a consistent quality of cut, reduce operator error, and improve operator comfort and performance through the use of new innovative operator controls, including a telescoping loop handle that can be adjusted to fit the operator. Additionally, in late fiscal 2019, we introduced the Toro-branded Greensmaster eTriFlexTM hybrid riding greens mower. These EnergySmart® models of our legacy TriFlexTM series of greens mowers carry no hydraulic fluid and are designed to be operationally quiet through the use of all-electric components for traction, steering, lift, and cutting. Additionally, the eTriFlex™ 3360 (Engine/Generator model) is designed to provide fuel savings over comparable Triplex mowers, and the 3370 (All-Battery model) eliminates the need for a liquid fuel source altogether.
We manufacture and market underground irrigation systems for the golf market, including sprinkler heads, controllers, turf sensors, and electric, battery-operated, and hydraulic valves. Our golf irrigation product portfolio is centered around the most critical elements of a golf course irrigation system. From our Lynx® central control software platform, to a dual offering of field control system technology including Lynx Smart Module two-wire and satellite, to the innovative INFINITY® sprinkler, Toro-branded golf irrigation products are designed to help customers reduce the cost of operational inputs while delivering exceptional playing conditions. In fiscal 2019, building on the success of INFINITY Smart Access® top-accessibility, we introduced the INFINITY Razor®, an accessory that is designed to save considerable time and labor by allowing
 
superintendents to incrementally raise sprinkler height levels without the need to excavate and re-level heads. The Razor, like many Toro innovations, was a direct result of Toro's "Voice of the Customer" program. Toro's customers, like golf course superintendents, have come to rely on Toro for productivity solutions designed to improve their turf management process. Our customers around the world also enjoy 24/7 service and support from our award-winning Toro National Support Network.
Landscape Contractor Market
We market products to landscape contractors under the Toro and eXmark brands. Products for the landscape contractor market include zero-turn radius riding mowers, heavy-duty walk behind mowers, mid-size walk behind mowers, stand-on mowers, as well as lawn solution, turf renovation, and tree care equipment. We offer some products with electronic fuel injection engine options, which are designed to provide improved fuel efficiency and lower emissions. In fiscal 2019, Toro introduced a new special edition model in our Titan® HD 2000 Series of commercial zero-turn riding mowers, which features the new MyRIDE® suspended operator platform designed to allow for three inches of suspension travel to isolate bumps and vibrations for the operator, as well as 24-inch drive tires with black cast aluminum wheels and a factory installed LED light kit. In fiscal 2019, eXmark introduced Staris®, a redesigned stand-on mower platform designed to improve productivity, cut quality, and serviceability for landscape contractors by aligning frame size with deck width and lowering the center of gravity of the machine to allow for improved handling and control in operation.
Sports Fields and Grounds Market
Equipment products for the sports fields and grounds market include riding rotary and reel mowers and attachments, aerators, infield grooming equipment, multipurpose vehicles and debris management products, which include versatile debris vacuums, blowers, and sweepers. In addition to equipment products, we also manufacture and market irrigation systems under the Toro and PERROT brands for the sports fields and grounds market, including sprinkler heads, controllers, turf sensors, and electric, battery-operated, and hydraulic valves. These products are sold through distributors and dealers, who then sell to owners and/or managers of sports fields, governmental properties, and residential and commercial landscapes, as well as directly to government customers. Our Outcross® 9060 is a multi-purpose, turf-friendly vehicle that is designed to perform the work of a tractor and super-duty vehicle with multiple attachment options, including the Groundsmaster® 1200 pull-behind rotary, which is designed to deliver the same combination of productivity, durability, and superior cut as our other Groundsmaster equipment, with features such as a 12-foot width of cut and independently articulating decks.

4


Underground Construction Market
Our acquisition of CMW added a breadth of new products to our underground construction product portfolio. For additional information regarding our acquisition of CMW, refer to Note 2, Business Combinations, in the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
CMW is known as "The Underground Authority" with a family of brands sold primarily under the trade names of Ditch Witch, American Augers, Trencor, HammerHead, Subsite, and Radius. CMW designs, manufactures, and sells a range of professional products to serve the underground construction market. Ditch Witch has built a legacy in the underground construction market as a result of innovative product offerings, most notably, the patented All Terrain drilling system included on certain horizontal directional drills. The All Terrain drilling system is designed to deliver more power to the bit than other rock-drilling systems and thereby results in exceptional drilling productivity in the widest range of ground formations. American Augers and Trencor comprise one of the largest categories of horizontal directional drills and trenchers in the underground construction market and are designed to effectively handle the largest underground construction challenges. HammerHead is an innovative portfolio of trenchless solutions for the underground construction market, including rehabilitation, replacement, and installation equipment and consumables, designed to solve underground infrastructure challenges. Subsite manufactures and markets a comprehensive suite of Underground Awareness® products, featuring horizontal directional drilling support equipment, utility locators, utility inspection systems, and equipment machine controls designed to keep underground construction professionals safe and efficient. Radius offers a comprehensive line of drilling tools for underground construction professionals, including drive chucks and sub savers, drill pipe, starter rods and quick connects, bits and blades, rock tools, reamers, and swivels.
In August 2019, we announced a new underground construction business strategy that included a plan to wind down our Toro-branded large horizontal directional drill and riding trencher product categories ("Toro underground wind down"). This action is aligned with our broader integration plan for the CMW businesses and is intended to allow us to maximize efficiencies and cost synergies post-acquisition and enable us to adapt to changing underground construction market conditions regarding our underground product portfolio. While the Toro underground wind down is still ongoing as of October 31, 2019, the transition is expected to be finalized by the end of fiscal 2020. For additional information regarding the Toro underground wind down, refer to Note 7, Management Actions, in the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
 
Rental and Specialty Construction Market
Products for the rental and specialty construction market include Toro and Ditch Witch-branded stand-on compact utility loaders/skid steers; walk-behind trenchers; stump grinders; and turf renovation products. We also have a line of Toro-branded rental products that feature concrete and mortar mixers, material handlers, compaction equipment, and other concrete equipment. Our rental and specialty construction products are mainly sold to rental companies and large retailers who subsequently rent the products to end-users, as well as through dealers, who then sell to end-users that in many cases are the same customers as those in our landscape contractor market. Toro-branded compact utility loaders are the cornerstone products for our Toro-branded rental and specialty construction business, which are designed to improve the efficiency in creation and renovation of landscapes. Our Dingo® TX 1000 compact utility loader provides market leading operating capacity in a lightweight, maneuverable design. We offer over 35 attachments for our compact utility loaders, including trenchers, augers, vibratory plows, and backhoes. In fiscal 2019, we introduced the revolutionary Dingo TXL 2000 Telescoping, which features telescoping arms that are designed to enable the machine to reach over obstacles, dig below grade, and generally extend the operator's working range.
Our acquisition of CMW added a robust portfolio of Ditch Witch-branded mini stand-on skid steer products that are marketed and sold to contractors, municipalities, and other governmental entities through a comprehensive dealer network. Such Ditch Witch-branded mini stand-on skid steer products provide innovative and versatile solutions designed to increase efficiency and performance, as well as reduce manual labor for landscape and construction tasks in which end-users are unable to utilize larger equipment.
Snow and Ice Management Market
Products for the snow and ice management market are marketed mainly in North America under the BOSS brand and include snowplows, salt and sand spreaders, and related parts, as well as accessories for light and medium duty trucks, all-terrain vehicles, utility task vehicles, skid steers, and front-end loaders. These products are mainly sold through distributors and dealers, who then sell to end-users that in many cases are the same customers as those in our landscape contractor and sports fields and grounds markets, such as contractors, municipalities, and other governmental entities. Our BOSS-branded snow and ice management products are designed to provide innovative solutions to contractors, municipalities, and other governmental entities. One example of such innovation is our recently acquired and upgraded stand-on Snowrator®, which is designed to be a maneuverable, multi-tasking, and labor-saving snow removal and de-icing solution through its ability to make quick work of snow and ice covered sidewalks and other tight areas where large equipment is unable to reach and shoveling by hand was previously necessary.

5


Commercial Irrigation and Lighting Market
Turf irrigation products marketed under the Toro and Irritrol brands include rotors; sprinkler bodies and nozzles; plastic, brass, and hydraulic valves; drip tubing and subsurface irrigation; electric control devices; and wired and wireless rain, freeze, climate, and soil sensors. These products are installed by professional contractors and are designed for use in commercial and residential turf irrigation applications and can be installed into new systems or used to replace or retrofit existing systems. Most of the product lines are designed for professionally installed, underground automatic irrigation. Electric controllers activate valves and sprinklers in a typical irrigation system. Both the Toro and Irritrol brands have received the U.S. Environmental Protection Agency ("EPA") WaterSense award, as well as the EPA WaterSense certification for numerous irrigation controller families and models. In 2019, we continued to strengthen our SMRT Logic™ offering by adding the Rain Dial® to our line-up of compatible connected controllers. Professional contractors are now able to offer their customers various controller options between the Toro Evolution®, the Irritrol KD2 Series, and the Irritrol Rain Dial® Series to deliver irrigation and lighting control with the touch of a button using our SMRTScape App.
We manufacture and market lighting products under the Unique Lighting Systems brand name consisting of a line of high quality, professionally installed lighting fixtures and transformers for commercial and residential landscapes. Our lighting product line is offered through distributors and landscape contractors that also purchase our irrigation products. Our Light Logic™ remote control system provides operators with wireless scene control for landscape lighting and can upgrade existing systems with expanded control. The Light Logic™ Plus system is designed to deliver cloud-based control from any location using a web-enabled computer or device for outdoor landscape features such as lighting, irrigation, and pond or fountain pumps. In fiscal 2019, we expanded on our popular FLEX GOLD™ VIVID SERIES of LED lamps by adding color-changing options to go along with our white adjustable color temperature lamps that allow end-users to dial-in temperatures between 2700 – 6500K.
Agricultural-Irrigation Market
Products for the agricultural-irrigation market include products that are designed around efficient means of water application, including Aqua-Traxx® PBX drip tape, Neptune® flat emitter dripline, Blue Stripe® polyethylene tubing, BlueLine® drip line, and NGE® emitters, all used in agricultural and landscape applications. Population growth combined with limited resources for land and water, as well as water use restrictions, have continued to drive the need for more efficient irrigation solutions for agriculture, including our Aqua-Traxx Flow Control drip tape that is designed to allow growers to achieve water uniformity while retaining flexibility to adjust system flow rates when needed. In addition to these core products, we offer a full complement of design software, control devices, and connection options to complete the system. These products are sold mainly through dealers and distributors who then sell to end-users for use primarily in vegetable fields, fruit and nut
 
orchards and vineyards. In fiscal 2019, we began implementing a "closed loop system" designed to address environmental sustainability by providing our customers with a mechanism by which they can return the resin that is used in our products from the field so that it can be reused in our manufacturing processes, thus reducing the impact of plastic usage and waste.
Residential Segment
We market our Residential segment products to homeowners through a variety of distribution channels, including outdoor power equipment distributors and dealers, mass retailers, hardware retailers, home centers, as well as online (direct to end-users). We also license our trademark on certain home solutions products as a means of expanding our brand presence.
Walk Power Mower Products
We manufacture and market numerous walk power mower models under our Toro and Lawn-Boy brand names, as well as the Hayter brand in the United Kingdom. Models differ as to cutting width, type of starter mechanism, method of grass clipping discharge, deck type, operational controls, and power sources, and are either self-propelled or operator-propelled push mowers. For the United Kingdom market, we offer a line of rear-roller walk power mowers, a design that provides a striped finish. In fiscal 2019, Toro launched a new line of products with the Flex-Force Power System® featuring 60V lithium-ion technology. This product line includes new Toro 22-inch Recycler® 60V walk power mowers. The mowers start with the push of a button, and the deck is made of steel instead of plastic for added durability. Other features include Toro's Personal Pace® self-propel system that is designed to automatically adjust to the user's walking speed, and SMARTSTOW®, which is designed to allow the mower to be stored upright, reducing the storage footprint by up to 70 percent. All of the products in the 60V Flex-Force Power System line feature Toro's lithium-ion smart batteries, which are designed to be interchangeable among products in the 60V Flex-Force Power System line and reduce emissions and noise.
Riding Products
We manufacture and market riding products under the Toro brand name. Riding products consist of zero-turn radius riding mowers that are designed to save homeowners time by using superior maneuverability to cut around obstacles more quickly and easily than tractor technology. Many models of our riding products are available with a variety of engines, decks, transmissions, and accessories. Our TimeCutter® SS and TimeCutter MX zero-turn radius riding mowers are equipped with our Smart Speed® control system, which is designed to allow the operator to choose different ground speed ranges without changing the blade or engine speed. In fiscal 2019, we introduced two new models in our TimeCutter MX line of residential zero-turn radius riding mowers, the MX5000 and MX5050. Both models have a 50-inch heavy-duty fabricated deck featuring our IronForged® cutting system that tackles challenging cutting conditions and new 18-inch thickly padded premium seats for improved operator comfort. The MX5050 also features our Smart Speed control system, which is designed to allow the operator to choose from three speeds, providing

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optimal performance when trimming, towing attachments, and mowing.
Snow Thrower Products
We manufacture and market a range of gas-powered single-stage and two-stage snow thrower models, as well as a range of electric and battery-powered single-stage snow thrower models. Our electric snow throwers are designed to be lightweight and ideal for clearing up to twelve inches of snow from decks, steps, sidewalks, and small driveways. Single-stage snow throwers are walk behind units with lightweight four-cycle gasoline engines. Most single-stage snow thrower models include our Power Curve® snow thrower technology, and some feature our Quick Shoot™ control system that is designed to enable operators to quickly change snow-throwing direction. Our pivoting scraper is designed to keep the rotor in constant contact with the pavement. Our two-stage snow throwers are generally designed for relatively large areas of deep and heavy snow. Our two-stage snow throwers include a line of models featuring our patented Anti-Clogging System and Quick Stick® chute control technology. In fiscal 2019, we introduced a refreshed line of Toro Power Clear® gas-powered, single-stage snow throwers as well as the new Flex-Force 60V lithium-ion powered single-stage snow products. These models are designed to efficiently remove snow while reducing clogging with the curved paddles and funneled housing of the Power Curve Technology. The new Flex-Force 60V lithium-ion powered single-stage snow products also feature Toro's lithium-ion smart batteries.
Home Solutions Products
We design and market home solutions products under the Toro and Pope brand names. Our Toro brand name products include yard tools such as electric, gas, and battery grass trimmers; electric and battery hedge trimmers; and electric, gas, and battery blower-vacuums. Toro's new assortment of products with the Flex-Force Power System featuring 60V lithium-ion technology also includes leaf blowers and string trimmers. The new 60V leaf blower is designed to deliver more power than other products in the market in order to efficiently clear large piles of leaves and debris, while the 60V cordless string trimmer features a high-performance brushless motor designed for extended life with low maintenance. Each of these products feature Toro's lithium-ion smart batteries.
In Australia and New Zealand, we design and market garden product offerings, such as underground, hose, and hose-end retail irrigation products under the Pope brand name. These garden watering and irrigation solutions include hoses; reels, carts and hangers; sprinklers; hand sprays and wands; hose end fittings; tap timers; various irrigation tools; and pots and accessories designed to develop and maintain gardens. In fiscal 2019, we launched or refreshed in excess of fifty retail garden products and successfully executed significant packaging cost savings measures. Toro was classified as "advanced" in its most recent audit of sustainable packaging activities undertaken by the Australian Packaging Covenant, a government body established to drive improvements in environmental sustainability relating to packaging. In fiscal 2019, we
 
introduced new models into the "Auto Wind Hose Reel" product category, designed with a focus on controlled rewind and user safety. Additionally, in fiscal 2019 we introduced new products in the hose end sprinkler category, creating a patented click-and-go system intended to give users a wider choice of sprinkler and base options.
International Operations and Business Segments
We currently manufacture our products in the U.S., Mexico, Australia, the United Kingdom, Italy, Romania, Germany, Poland, and China for sale throughout the world. We maintain sales offices in the U.S., Belgium, the United Kingdom, Australia, Japan, China, Italy, Poland, Germany, Spain, and France. New product development is pursued primarily in the U.S. with the intention of global distribution. Our net sales outside the U.S. were 23.1 percent, 24.6 percent, and 24.4 percent of total consolidated net sales for fiscal 2019, 2018, and 2017, respectively. For additional financial information regarding our international operations and geographical areas, and our reportable business segments, refer to Note 3, Segment Data, in the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
As a result of our international operations, we are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business. For additional information regarding our foreign currency exchange rate risk exposure, refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk" of this Annual Report on Form 10-K.
Engineering and Research
We are committed to an ongoing engineering program dedicated to developing innovative new products and improvements in the quality and performance of existing products. However, a focus on innovation also carries certain risks that new technology could be slow to be accepted or not accepted by the marketplace. We attempt to mitigate these risks through our focus on, and commitment to, understanding our customers' needs and requirements. We invest time up front with customers, using "Voice of the Customer" tools, to help us develop innovative products that are intended to meet or exceed customer expectations. We use Design for Manufacturing and Assembly ("DFM/A") tools to ensure early manufacturing involvement in new product designs intended to reduce production costs. DFM/A focuses on reducing the number of parts required to assemble new products, as well as designing products to move more efficiently through the manufacturing process. We strive to make improvements to our new product development system as part of our continuing focus on Lean methods to shorten development time and reduce costs, while also improving quality.

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Manufacturing and Production
In addition to most final assembly, we have strategically identified specific core manufacturing competencies for vertical integration, such as injection molding, extrusion, welding, stamping, fabrication, laser cutting, painting, machining, and aluminum die casting, and have chosen outside vendors to provide other services, where applicable. We design component parts in cooperation with our vendors, contract with them for the development of tooling, and subsequently enter into agreements with such vendors to purchase component parts manufactured using the tooling. We also have some agreements with third-party manufacturers to manufacture certain products on our behalf. In addition, our vendors regularly test new technologies to be applied in the design and production of component parts. Manufacturing operations include robotic and computer-automated equipment intended to speed production, reduce costs, and improve the quality, fit, and finish of our products. Operations are also designed to be flexible enough to accommodate product design changes that are necessary to respond to market conditions and changing customer requirements.
In order to utilize our manufacturing facilities and technology more efficiently and effectively, we pursue continuous improvements in our manufacturing processes with the use of Lean methods that are intended to streamline work and eliminate waste. We spend considerable effort to reduce manufacturing costs through Lean methods and process improvement, product and platform design, application of advanced technologies, enhanced environmental management systems, safety improvements, and improved supply-chain management.
Our Professional segment products are manufactured throughout the year. Our Residential segment lawn and garden products are also generally manufactured throughout the year. However, our Residential segment snow thrower products are manufactured in the summer and fall months but may be extended into the winter months, depending upon demand. Our products are tested in conditions and locations similar to those in which they are intended to be used. We use computer-aided design and manufacturing systems to shorten the time between initial concept and final production. DFM/A principles are used throughout the product development process to optimize product quality and reduce cost.
Our production levels and inventory management goals are based on estimates of wholesale and retail demand for our products, taking into account production capacity, labor availability, timing of shipments, and field inventory levels. Our production system utilizes Kanban, supplier pull, and build-to-order methodologies in our manufacturing facilities, as appropriate, for the business units they support in order to better align the production of our products to meet customer demand. We believe this has resulted in improved service levels for our participating suppliers, distributors, dealers, and other channels.
We periodically shut down production at our manufacturing facilities in order to allow for maintenance, rearrangement,
 
capital equipment installation, seasonality, and as needed, to adjust for market demand and facility renovation projects.
Commodities, Components, Parts, and Accessories
We purchase commodities comprised of raw materials such as steel, aluminum, petroleum and natural gas-based resins, linerboard, and other materials, as well as components, such as engines, transmissions, transaxles, hydraulics, and electric motors, for use in our products. In addition, we are a purchaser of parts and accessories containing various commodities, including steel, aluminum, copper, lead, rubber, and others that are integrated into our end products. Our largest spend for commodities, components, parts, and accessories are generally for steel, engines, hydraulic components, transmissions, resin, aluminum, and electric motors, all of which we purchase from several suppliers around the world. We generally purchase commodities, components, parts, and accessories based upon market prices that are established with suppliers as part of the purchase process and generally attempt to obtain firm pricing from most of our suppliers for volumes consistent with planned production and estimates of wholesale and retail demand for our products. Most of the commodities, components, parts, and accessories utilized in our products are generally commercially available from a number of sources, and are in adequate supply. However, certain items are sourced from single suppliers. In fiscal 2019, similar to fiscal 2018, we experienced work stoppages as a result of supply chain challenges related to the availability or quality of commodities, components, parts, and accessories.
Most of the commodities, components, parts, and accessories used in our manufacturing process and end-products, or to be sold as standalone end-products, are exposed to commodity cost changes, including, for example, as a result of inflation, deflation, changing prices, tariffs, and/or duties. We strategically work to mitigate any unfavorable impact as a result of changes to the cost of commodities, components, parts, and accessories that affect our product lines. Historically, we have mitigated, and we currently expect that we would mitigate, any commodity, components, parts, and accessories cost increases, in part, by collaborating with suppliers, reviewing alternative sourcing options, substituting materials, utilizing Lean methods, engaging in internal cost reduction efforts, utilizing tariff exclusions and duty drawback mechanisms, and increasing prices on some of our products, all as appropriate. Additionally, we enter into fixed-price contracts for future purchases of natural gas in the normal course of operations as a means to manage natural gas price risks. However, to the extent that commodity and component costs increase, as a result of inflation, tariffs, duties, or otherwise, and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, we may experience a decline in our gross margins to the extent we are not able to increase selling prices of our products or obtain manufacturing efficiencies to offset increases in commodity, component, parts, and accessories costs.
In fiscal 2019, the average cost of commodities, components, parts, and accessories purchased, including the impact of inflation and tariff costs, was higher compared to the average

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cost of commodities, components, parts, and accessories purchased in fiscal 2018. We anticipate the average price of commodities, components, parts, and accessories, including the impact of inflation, deflation, tariff, and/or duty costs, in fiscal 2020 to be slightly lower than the average price paid for commodities, components, parts, and accessories during fiscal 2019.
Service and Warranty
Our products are warranted to ensure customer confidence in design, workmanship, and overall quality. Warranty coverage is generally for specified periods of time and on select products' hours of usage, and generally covers parts, labor, and other expenses for non-maintenance repairs. Warranty coverage generally does not cover operator abuse or improper use. An authorized company distributor or dealer must perform warranty work. Distributors and dealers submit claims for warranty reimbursement and are credited for the cost of repairs, labor, and other expenses as long as the repairs meet our prescribed standards. Warranty expense is accrued at the time of sale based on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of claims to sales, the historical length of time between the sale and resulting warranty claim, and other minor factors. Special warranty reserves are also accrued for major rework campaigns. Service support outside of the warranty period is provided by authorized distributors and dealers at the customer's expense. We sell extended warranty coverage on select products for a prescribed period after the original warranty period expires.
Product Liability
We have rigorous product safety standards and continually work to improve the safety and reliability of our products. We monitor for accidents and possible claims and establish liability estimates based on internal evaluations of the merits of individual claims. We purchase insurance coverage for catastrophic product liability claims for incidents that exceed our self-insured retention levels.
Patents and Trademarks
We own patents, trademarks, and trade secrets related to our products in the U.S. and certain countries outside the U.S. in which we conduct business. We expect to apply for future patents and trademarks, as appropriate, in connection with the development of innovative new products, services, and enhancements. Although we believe that, in the aggregate, our patents are valuable, and patent protection is beneficial to our business and competitive positioning, our patent protection will not necessarily deter or prevent competitors from attempting to develop similar products. We are not materially dependent on any one or more of our patents; however, certain Toro trademarks that contribute to our identity and the recognition of our products and services, including the Toro® name and logo, are an integral part of our business.
We regularly review certain patents issued by the U.S. Patent and Trademark Office ("USPTO") and international patent offices to help avoid potential liability with respect to others'
 
patents. Additionally, we periodically review competitors' products to prevent possible infringement of our patents by others. We believe these activities help us minimize our risk of being a defendant in patent infringement litigation. We are currently involved in patent litigation cases where we are asserting our patents against competitors and defending against patent infringement assertions by others. Such cases are at varying stages in the litigation process.
Similarly, we periodically monitor various trademark registers and the market to prevent infringement of and damage to our trademarks by others. From time to time, we are involved in trademark oppositions where we are asserting our trademarks against third-parties who are attempting to establish rights in trademarks that are confusingly similar to ours. We believe these activities help minimize risk of harm to our trademarks, and help maintain distinct products and services that we believe are well regarded in the marketplace.
Seasonality
Shipments of our Residential segment products, which accounted for 21.1 percent of total consolidated net sales in fiscal 2019, are seasonal, with shipments of lawn and garden products occurring primarily between February and June, depending upon seasonal weather conditions and demand for our products. Shipments of snow thrower products occur primarily between July and January, depending upon pre-season demand, in-season snowfalls, and product availability. Opposite seasons in global markets in which we sell our Residential products somewhat moderate this seasonality of our Residential segment product sales.
Seasonality of Professional segment product sales also exists, but is tempered because the selling season in the Southern U.S. and our markets in the Southern hemisphere continue for a longer portion of the year than in Northern regions of the world. Our BOSS snow and ice management business offers a portfolio of counter-seasonal products in our Professional segment with our shipments of snow and ice management equipment occurring primarily between April and December, which can result in variability of shipment volumes depending upon pre-season demand, in-season snowfalls, and product availability. Additionally, CMW has historically been less seasonal than certain of our Professional segment businesses primarily due to its strong presence in the Southern U.S. markets and the inherent nature of the underground construction market being less impacted by seasonal factors.
Overall, our worldwide shipment volumes are historically the highest in our fiscal second quarter and retail demand is generally highest in our fiscal third quarter. Typically, our accounts receivable balances increase between January and April as a result of higher shipment volumes and extended payment terms made available to our customers. Accounts receivable balances typically decrease between May and December when payments are received. Our financing requirements are subject to variations due to seasonal changes in working capital levels, which typically increase in the first half of our fiscal year and decrease in the second half of our fiscal year. Seasonal cash requirements of our business are

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financed from a combination of cash flows from operations, cash on hand, and borrowings under our revolving credit facility, as applicable.
The following table presents total consolidated net sales and net earnings for each fiscal quarter as a percentage of the total fiscal year:
Fiscal Years
 
2019
 
2018
Quarter
 
Net Sales
 
Net Earnings
 
Net Sales
 
Net Earnings
First
 
19
%
 
22
%
 
21
%
 
8
%
Second1,2
 
31
%
 
42
%
 
33
%
 
48
%
Third1,2
 
27
%
 
22
%
 
25
%
 
29
%
Fourth1
 
23
%
 
14
%
 
21
%
 
15
%
1 
Fiscal 2019 net sales and net earnings were impacted by our acquisition of CMW. Refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 2, Business Combinations, of the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information regarding CMW and its impact to our fiscal 2019 Results of Operations.
2 
During fiscal 2019, CMW's financial position, results of operations, and cash flows were reported on a calendar month end. Accordingly, April 30, 2019 and July 31, 2019 were the quarterly period end dates closest to our quarterly fiscal periods ended May 3, 2019 and August 2, 2019, respectively. This reporting period difference did not have material impact on our Consolidated Results of Operations during our second and third fiscal quarters. For our fiscal 2019 fourth quarter, the reporting period end for both CMW and Toro was October 31, 2019.
Effects of Weather
From time to time, weather conditions in particular geographic regions or markets may adversely or positively affect sales of some of our products and field inventory levels and result in a negative or positive impact on our future net sales and results of operations.
Working Capital
Our businesses are seasonally working capital intensive and require funding for purchases of commodities, components, parts, and accessories used in production of end-products and/or sold as standalone end-products; 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 Acceptance, LLC ("Red Iron"), our joint venture with TCF Inventory Finance, Inc. ("TCFIF"), or with other third-party financial institutions. Our 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. We fund our operations through a combination of cash flows from operations, cash on hand, and, as applicable, short-term and/or long-term debt, including borrowings under our revolving credit facility. Cash management is centralized, and
 
intercompany financing is used, wherever possible, to provide working capital to wholly owned subsidiaries as needed. In addition, our revolving credit facility is available for additional working capital needs, acquisitions, or other investment opportunities, as applicable.
Distribution and Marketing
We market the majority of our products through 68 domestic and 140 international distributors, as well as a large number of equipment dealers, irrigation dealers and distributors, mass retailers, hardware retailers, home centers, and online (direct to end-users) in more than 129 countries worldwide. Our distribution systems are intended to assure quality of sales and market presence, as well as to provide effective after-purchase service and support.
Professional segment products are sold to distributors and dealers primarily for resale to golf courses, sports fields, industrial facilities, contractors, and government customers, and in some markets for resale to dealers. We sell some Professional segment products directly to government customers and municipalities, rental companies, and agricultural irrigation dealers, as well as to end-users in certain international markets. Select irrigation and lighting products are sold to professional irrigation and lighting distributors and dealers, and certain professional-grade retail irrigation products are sold to home centers. Products for the rental and specialty construction and underground construction markets are sold to dealers and rental companies. Landscape contractor turf products are also sold to dealers in certain regions of North America. Snow and ice management products are primarily sold to distributors and dealers for resale to contractors.
Residential segment products, such as walk power mowers, zero-turn radius riding mowers, and snow throwers, are generally sold to home centers, mass retailers, dealers, hardware retailers, as well as online (direct to end-users). In certain markets, these same products are sold to distributors for resale to hardware retailers and dealers. Home solutions products are primarily sold to home centers, mass retailers, and hardware retailers. Internationally, Residential segment products are sold to dealers and mass merchandisers in Australia, Canada, and select countries in Europe. In most other countries, Residential segment products are mainly sold to distributors for resale to dealers and mass retailers.
On November 30, 2018, during the first quarter of fiscal 2019, we completed our acquisition of a Northeastern U.S. distribution company, refer to Note 2, Business Combinations. During fiscal 2017 and 2018, we owned one wholly-owned domestic distribution company. Our primary purpose in owning domestic distributorships is to improve operations and test and deploy new strategies and business practices that could be replicated by our independent distributors, as well as facilitating ownership transfers.
Our current marketing strategy is to maintain distinct brands and brand identification for Toro, eXmark, BOSS, Ditch Witch, American Augers, Trencor, Subsite, HammerHead, Radius, Unique Lighting Systems, Rain Master, Pope, PERROT, Hayter, and Lawn-Boy products.

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Across our brands, we market our Professional segment and Residential segment products during the appropriate season through multiple channels, including digital and online media, radio, print, direct mail, email, television, and social media. Most of our advertising and marketing efforts emphasize our brands, products, features, and other valuable trademarks. Advertising is purchased by us, through our agency partners, as well as through cooperative programs with distributors, dealers, and retailers.
Customers and Customer Financing Arrangements
Overall, we believe that in the long-term we are not dependent on any single customer; and during fiscal 2019 and 2018, no customer accounted for 10.0 percent or more of our total consolidated gross sales. Historically, the Residential segment of our business has had significant sales to The Home Depot as a customer, which accounted for approximately 10.0 percent of our total consolidated gross sales in fiscal 2017. While the loss of any substantial customer could have a material adverse short-term impact on our business, we believe that our diverse distribution channels and customer base should reduce the long-term impact of any such loss.
Wholesale Financing
We are party to a joint venture with TCFIF, a subsidiary of TCF National Bank, established as Red Iron. The primary purpose of Red Iron is to provide inventory financing to certain distributors and dealers of certain of our products in the U.S. In addition, TCF Commercial Finance Canada, Inc. ("TCFCFC") provides inventory financing to dealers of certain of our products in Canada. Under these financing arrangements, down payments are not required, and depending on the finance program for each product line, finance charges are paid by us, shared between us and the distributor and/or the dealer, or paid by the distributor or dealer. Red Iron retains a security interest in the distributors' and dealers' financed inventories and such inventories are monitored regularly. Financing terms to the distributors and dealers require payment as the equipment, which secures the indebtedness, is sold to customers or when payment otherwise becomes due under the agreements between these financing entities and the distributors and dealers, whichever occurs first. Rates are generally indexed to LIBOR plus a fixed percentage that differs based on whether the financing is for a distributor or dealer. Rates may also vary based on the product that is financed. We also have agreements with other third-party financial institutions to provide floor plan financing to certain dealers and for certain products not financed through Red Iron, which include agreements with third-party financial institutions as a result of our acquisition of CMW.
Additionally, we continue to provide financing in the form of open account terms directly to home centers and mass retailers, general line irrigation dealers, certain international distributors and dealers, ag-irrigation dealers and distributors, government customers, and rental companies.
 
End-User Financing
We have agreements with third-party financing companies to provide lease-financing options to golf course, sports field and grounds equipment and underground construction equipment customers in the U.S, Canada, Australia, and select countries in Europe. The purpose of these agreements is to provide end-users of our products alternative financing options when purchasing our products.
Backlog of Orders
Our backlog of orders is dependent upon when customers place orders and is not necessarily an indicator of our expected results for our fiscal 2020 net sales. The approximate backlog of orders as of October 31, 2019 and 2018 was $112.5 million and $77.8 million, respectively, an increase of 44.6 percent. Backlog orders were higher at the end of fiscal 2019 compared to the end of fiscal 2018 as a result of our acquisition of CMW, partially offset by reduced backlog in certain of our Professional segment businesses due to higher field inventory levels for our Professional segment zero-turn riding mowers due to soft retail demand. For additional information regarding the acquisition of CMW, refer to Note 2, Business Combinations, in the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K. We expect the existing backlog of orders will be filled in early fiscal 2020.
Competition
Our products are sold in highly competitive markets throughout the world. The principal competitive factors in our markets are product innovation, quality and reliability, pricing, product support and customer service, warranty, brand awareness, reputation, distribution, shelf space, and financing options. We believe we offer total solutions and full service packages with high quality products that have the latest technology and design innovations. In addition, by selling our products through a network of distributors, dealers, mass retailers, hardware retailers, home centers, as well as online (direct to end-users), users are offered comprehensive service support during and after the warranty period. We compete in many product lines with numerous manufacturers, some of which have substantially larger operations and financial resources than us. We believe that we have a competitive advantage because we manufacture a broad range of product lines, we are committed to product innovation and customer service, we have a strong history in and focus on professional and residential landscapes and CMW has a similar history in and focus in the underground construction industry, and our distribution channels position us well to compete in various markets.
Internationally, our Residential segment products face more competition because many foreign competitors design, manufacture, and market products in their respective countries. We experience this competition primarily in Europe. In addition, fluctuations in the value of the U.S. dollar affect the price of our products in foreign markets, thereby impacting their competitiveness. We provide pricing support, as appropriate, to foreign customers to remain competitive in international markets.

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Employees
During fiscal 2019, we employed an average of 8,237 employees. The total number of employees as of October 31, 2019 was 9,329. We consider our employee relations to be good. As of October 31, 2019, we had four collective bargaining agreements that expire in October 2020, March 2022, May 2022, and October 2022, covering approximately 13.0 percent of our total employees.
Environmental Matters and Other Governmental Regulation
We are subject to numerous international, federal, state, and other governmental laws, rules, and regulations relating to, among others, climate change; emissions to air, including Tier 4 or similar engine emission regulations; discharges to water; restrictions placed on water usage and water availability; product and associated packaging; use of certain chemicals; restricted substances, including "conflict minerals" disclosure rules; import and export compliance, including country of origin certification requirements; worker and product user health and safety; energy efficiency; product life-cycles; outdoor noise laws; and the generation, use, handling, labeling, collection, management, storage, transportation, treatment, and disposal of hazardous substances, wastes, and other regulated materials. For example:
The U.S. EPA, the California Air Resources Board, and similar regulators in other U.S. states and foreign jurisdictions in which we sell our products have phased in, or are phasing in, emission regulations setting maximum emission standards for certain equipment. Specifically, these agencies from time to time adopt increasingly stringent engine emission regulations. Following the EPA implementation of Tier 4 emission requirements applicable to diesel engines several years ago, China and the European Union ("EU") also have adopted similar regulations, and similar emission regulations are also being considered in other markets in which we sell our products.
The U.S. federal government, several U.S. states, and certain international jurisdictions in which we sell our products, including the EU and each of its member states, have implemented one or more of the following: (i) product life-cycle laws, rules, or regulations, which are intended to reduce waste and environmental and human health impact, and require manufacturers to label, collect, dispose, and recycle certain products, including some of our products, at the end of their useful life, including the Waste Electrical and Electronic Equipment directive, which mandates the labeling, collection, and disposal of specified waste electrical and electronic equipment; (ii) the Restriction on the use of Hazardous Substances directive or similar substance level laws, rules, or regulations, which restrict the use of several specified hazardous materials in the manufacture of specific types of electrical and electronic equipment; (iii) the Registration, Evaluation, Authorization and Restriction of Chemicals directive or similar substance level laws, rules, or regulations that require notification of use of certain chemicals, or ban or restrict the use of certain chemicals; (iv) country of origin
 
laws, rules, or regulations, which require certification of the geographic origin of our finished goods products and/or components used in our products through documentation and/or physical markings, as applicable; (v) energy efficiency laws, rules, or regulations, which are intended to reduce the use and inefficiencies associated with energy and natural resource consumption and require specified efficiency ratings and capabilities for certain products; (vi) outdoor noise laws, which are intended to reduce noise emissions in the environment from outdoor equipment; (vii) conflict minerals laws, such as the Dodd-Frank Wall Street Reform and Consumer Protection Act and the rules promulgated by the U.S. Securities and Exchange Commission ("SEC"), which require specific procedures for the determination and disclosure of the use of certain minerals, known as "conflict minerals," which are mined from the Democratic Republic of the Congo and adjoining countries; and (viii) other product substance restriction laws, some of which require certain labeling of products, such as California Proposition 65.
Our products, when used by residential users, may be subject to various federal, state, and international laws, rules, and regulations that are designed to protect consumers, including rules and regulations of the U.S. Consumer Product Safety Commission.
Although we believe that we are in substantial compliance with currently applicable laws, rules, and regulations, we are unable to predict the ultimate impact of adopted or future laws, rules, and regulations on our business, properties or products. Such laws, rules, or regulations may cause us to incur significant expenses to achieve or maintain compliance, may require us to modify our products, may adversely affect the price of or demand for some of our products, and may ultimately affect the way we conduct our operations. Failure to comply with these current or future laws, rules, or regulations could result in harm to our reputation and/or could lead to fines and other penalties, including restrictions on the importation of our products into, or the sale of our products in, one or more jurisdictions until compliance is achieved.
We are also involved in the evaluation and environmental clean-up of a limited number of properties currently and previously owned. We do not expect that these matters will have a material adverse effect on our Consolidated Financial Position or Results of Operations.
Available Information
We are a U.S. public reporting company under the Securities Exchange Act of 1934, as amended ("Exchange Act"), and file reports, proxy statements, and other information with the SEC. Copies of these reports, proxy statements, and other information can be accessed from the SEC's home page on the Internet at http://www.sec.gov.
We make available, free of charge on our website www.thetorocompany.com (select the "Investor Information" link and then the "Financials & Filings" link), our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, Proxy Statements on

12


Schedule 14A, Section 16 reports, amendments to those reports, and other documents filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The information contained on our website or connected to our website is not incorporated by reference into this Annual Report on Form 10-K and should not be considered part of this report.
Forward-Looking Statements
This Annual Report on Form 10-K contains, or incorporates by reference, 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 of the 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 websites or otherwise. Statements that are not historical are forward-looking and reflect expectations and assumptions. Forward-looking statements are based on our current expectations of future events, and often can be identified in this report and elsewhere by using words such as "expect," "strive," "looking ahead," "outlook," "guidance," "forecast," "goal," "optimistic," "anticipate," "continue," "plan," "estimate," "project," "believe," "should," "could," "will," "would," "possible," "may," "likely," "intend," "can," "seek," "potential," "pro forma," or the negative thereof and similar expressions or future dates. Our forward-looking statements generally relate to our future performance, including our anticipated operating results, liquidity requirements, and financial condition; our business strategies and goals; the integration of CMW; 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 most significant factors known to us that could materially adversely affect our business, reputation, operations, industry, financial position, or future financial performance are described below in Part I, Item 1A, "Risk Factors." 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 elsewhere in this report, including in Part I, Item 1A, "Risk Factors," as well as others that we may consider immaterial or do not anticipate at this time. The risks and uncertainties described in this report, including in Part I, Item 1A, "Risk Factors," are not exclusive and further information concerning our company and our businesses, including factors that potentially could materially affect our operating results or financial 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 Quarterly Reports on Form 10-Q and Current Reports on Form 8-K that we file with, or furnish to, the SEC.
ITEM 1A.   RISK FACTORS
The following are significant risk factors known to us that could materially adversely affect our business, reputation, operating results, industry, financial position, or future financial performance:
Our net sales and earnings could be adversely affected by economic conditions and outlook in the U.S. and in other countries in which we conduct business.
Adverse economic conditions and outlook in the U.S. and in other countries in which we conduct business can impact demand for our products and, ultimately, our net sales and earnings. These include, but are not limited to, recessionary conditions; slow or negative economic growth rates; the impact of U.S. federal debt, state debt, and sovereign debt defaults and austerity measures by certain European countries; reduced governmental or municipal spending; slow down or reductions in levels of golf course development, renovation, and improvement; golf course closures; reduced levels of home ownership, construction, and sales; home foreclosures; negative consumer confidence; reduced consumer spending levels resulting from tax increases or other factors; 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 credit availability or unfavorable credit terms for our distributors, dealers, and end-user customers; higher short-term, mortgage, and other interest rates; reduced infrastructure spending; and general economic and political conditions and expectations. In the past, some of these factors have caused our distributors, dealers, and end-user customers to reduce spending and delay or forego purchases of our products, which have had an adverse effect on our net sales and earnings.
Weather conditions may reduce demand for some of our products and adversely affect our net sales or otherwise adversely affect our operating results.
From time to time, weather conditions in a particular geographic region may adversely affect sales, demand, and field inventory levels of some of our products. For example, in the past, drought or unusually wet conditions have had an adverse effect on sales of certain mowing equipment products, unusually rainy weather or severe drought conditions that result in watering bans, or otherwise, have had an adverse effect on sales of our irrigation products, and lower snowfall accumulations in key markets have had an adverse effect on sales of our Residential snow thrower products and products of our Professional snow and

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ice management business. Similarly, adverse weather conditions in one season may negatively impact customer purchasing patterns and net sales for some of our products in another season. For example, lower snowfall accumulations may result in lower winter season revenues for landscape contractor professionals, causing such customers to forego or postpone spring purchases of our mowing equipment products. To the extent that unfavorable weather conditions are exacerbated by global climate change or otherwise, our sales and operating results may be affected to a greater degree than we have previously experienced.
Fluctuations in foreign currency exchange rates have affected our operating results and could continue to result in declines in our reported net sales and net earnings.
Because the functional currency of most of our foreign operations is the applicable local currency, and because our financial reporting currency is the U.S. dollar, preparation of our Consolidated Financial Statements requires that we translate the assets, liabilities, expenses, and revenues of our foreign operations into U.S. dollars at the applicable exchange rate. Accordingly, we are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as sales and loans to wholly owned subsidiaries, sales to third-party customers, purchases from suppliers, and bank lines of credit with creditors denominated in foreign currencies. Our primary foreign currency exchange rate exposure is with the Euro, the Australian dollar, the Canadian dollar, the British pound, the Mexican peso, the Japanese yen, the Chinese Renminbi, and the Romanian New Leu against the U.S. dollar, as well as the Romanian New Leu against the Euro.
Our reported net sales and net earnings are subject to fluctuations in foreign currency exchange rates that have affected our operating results and could continue to result in declines in our reported net sales and net earnings. Because our products are manufactured or sourced primarily from the U.S. and Mexico, a stronger U.S. dollar and Mexican peso generally have a negative impact on our operating results, while a weaker U.S. dollar and Mexican peso generally have a positive effect. In addition, currency exchange rate fluctuations may affect the comparative prices between products we sell and products our foreign competitors sell in the same market, which may adversely affect demand for our products. Substantial exchange rate fluctuations as a result of the strengthening of the U.S. dollar or otherwise, may have an adverse effect on our operating results, financial condition, and cash flows, as well as the comparability of our Consolidated Financial Statements between reporting periods. Further, we may also experience foreign currency exchange rate exposure as a result of the volatility and uncertainty that may arise as a result of the United Kingdom's process for exiting the EU.
While we actively manage the exposure of our foreign currency market risk in the normal course of business by entering into various derivative instruments to hedge against such risk, these derivative instruments involve risks and may not effectively limit our underlying exposure to foreign currency exchange rate fluctuations or minimize our net earnings and cash volatility
 
associated with foreign currency exchange rate changes. Further, the failure of one or more counterparties to our foreign currency exchange rate contracts to fulfill their obligations to us could adversely affect our operating results.
Increases in the cost of commodities, components, parts, and accessories that we purchase and/or increases in our other costs of doing business, have, and could continue to, adversely affect our profit margins and businesses.
We purchase commodities, components, parts, and accessories for use in our manufacturing process and end-products or to be sold as standalone end-products. Most of the commodities, components, parts, and accessories used in our manufacturing process and end-products are exposed to commodity cost changes, including, for example, as a result of inflation, deflation, changing prices, tariffs, and/or duties. Our primary commodity cost exposures are with steel, aluminum, petroleum and natural gas-based resins, copper, lead, rubber, linerboard, and others. To the extent that commodity, component, parts, or accessories costs increase, as a result of inflation, tariffs, duties, or otherwise, and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, we may experience a decline in our profit margins. Furthermore, changes to international trade policies or agreements could result in additional tariffs, duties or other charges on commodities, components, parts or accessories we import into the U.S. and/or use in our products. In addition, increases in other costs of doing business may also adversely affect our profit margins and businesses. For example, an increase in fuel costs and/or freight rates may result in an increase in our transportation costs, which also could adversely affect our operating results and businesses.
Historically, we have mitigated commodity, component, parts, or accessories cost increases, in part, by collaborating with suppliers, reviewing alternative sourcing options, substituting materials, utilizing Lean methods, engaging in internal cost reduction efforts, and increasing prices on some of our products, all as appropriate. However, we may not be able to fully offset increased commodity, component, parts, or accessories costs in the future. Further, if our price increases are not accepted by our customers and the market, our net sales, profit margins, earnings, and market share could be adversely affected.
Disruption and/or shortages in the availability of commodities, components, parts, or accessories used in our products has, and could continue to, adversely affect our business.
Although most of the commodities, components, parts or accessories used in our end-products or sold as standalone end-products are generally commercially available from a number of sources and in adequate supply, certain items are sourced from single suppliers. Any disruption or shortages in the availability of commodities, components, parts, or accessories used in our end-products or sold as standalone end-products, including as a result of labor staffing or other challenges that may be experienced by our suppliers, natural disasters, adverse weather, or other events, our inability to timely or otherwise obtain substitutes for such items, or any deterioration in our

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relationships with, the financial viability or quality of, or the personnel relationships at, our suppliers, could adversely affect our business and operating results.
Our Professional segment includes a variety of product portfolios that are dependent upon certain and varied factors.
Our Professional segment includes a variety of product portfolios that are sold by distributors or dealers, or directly to government customers, rental companies, construction companies, and professional users engaged in maintaining and creating properties and landscapes, such as golf courses, sports fields, residential and commercial properties and landscapes, and governmental and municipal properties. Among other things, any one or a combination of the following factors could result in a decrease in spending and demand for our products and have an adverse effect on our Professional segment net sales:
reduced levels of investment in golf course renovations and improvements and new golf course development; reduced revenue for golf courses resulting from a decrease in rounds played and/or memberships, as applicable; and increased number of golf course closures;
reduced consumer and business spending on property maintenance, such as lawn care and snow and ice removal activities, and/or unfavorable weather conditions, causing property owners and landscape contractor professionals to forego or postpone purchases of our products;
low or reduced levels of residential, commercial, and/or municipal construction projects and/or infrastructure improvements;
a decline in acceptance of and demand for ag-irrigation solutions for agricultural production;
availability of cash or credit on acceptable terms to finance new product purchases; and
customer and/or government budgetary constraints resulting in reduced spending for grounds maintenance or construction equipment.
Our Residential segment net sales are dependent upon consumers buying our Residential segment products at dealers, mass retailers, 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.
The elimination or reduction of shelf space assigned to our Residential segment products or other changes to the placement of our products by or at mass retailers and home centers, could adversely affect our Residential segment net sales. Our Residential segment net sales also are dependent upon the buying patterns of consumers and changing buying patterns of consumers could result in reduced sales of one or more of our Residential segment products. For example, as consumers purchase products at home centers and mass retailers that offer broader and lower price points than dealers, we have experienced increased demand and sales of our Residential segment products purchased at mass retailers and home centers. Historically, The Home Depot has been a substantial customer
 
of ours, which accounted for approximately 10.0 percent of our total consolidated gross sales in fiscal 2017. We believe that our diverse distribution channels and customer base should reduce the long-term impact on us if we were to lose any substantial customer. However, the loss of any substantial customer, a significant reduction in sales to such customers, or our inability to maintain adequate product placement at mass retailers and home centers or our inability to respond to future changes in buying patterns of consumers or new distribution channels could have a material adverse impact on our business and operating results. Furthermore, our quarterly or annual results can be impacted as a result of the timing of significant sales or promotional events for our Residential products.
Changes in our product mix between reportable segments and/or within a reportable segment could adversely impact our financial performance, including profit margins and net earnings.
Our Professional segment products generally have higher profit margins than our Residential segment products. Accordingly, our financial performance, including our profit margins and net earnings, can be impacted depending on the mix of products we sell during a given period. For example, if we experience lower sales of our Professional segment products that generally carry higher profit margins than our Residential segment products, our financial performance, including profit margins and net earnings, could be negatively impacted. Similarly, within each reportable segment, if we experience lower sales of products that generally carry higher profit margins, our financial performance, including profit margins and net earnings, could be negatively impacted.
We intend to grow our business in part through acquisitions and alliances, strong customer relations, and new joint ventures, investments, and partnerships, which could be risky and may harm our business, reputation, financial condition, and operating results.
One of our strategies is to drive growth in our businesses and accelerate opportunities to expand our global presence through targeted acquisitions and alliances, such as our CMW acquisition, strong customer relations, and new joint ventures, investments, and partnerships that add value while supplementing and complementing our existing brands and product portfolio. Our ability to grow through acquisitions will depend, in part, on the availability of suitable candidates at acceptable prices, terms, and conditions, our ability to compete effectively for acquisition candidates, and the availability of capital and personnel resources to complete such acquisitions and run and integrate the acquired business effectively. Any acquisition, alliance, joint venture, investment, or partnership could impair our business, financial condition, reputation, and operating results. The benefits of an acquisition, or new alliance, joint venture, investment, or partnership may take more time than expected to develop or integrate into our operations, and we cannot guarantee that previous or future acquisitions, alliances, joint ventures, investments, or partnerships will, in fact, produce any benefits. Acquisitions, alliances, joint ventures, investments, and partnerships may involve a number

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of risks, the occurrence of which could adversely affect our business, reputation, financial condition, and operating results, including:
diversion of management's attention;
disruption to our existing operations and plans;
inability to effectively manage our expanded operations;
difficulties or delays in integrating and assimilating information and financial systems, operations, manufacturing processes and products of an acquired business or other business venture or in realizing projected efficiencies, growth prospects, cost savings, and synergies;
inability to successfully integrate or develop a distribution channel for acquired product lines;
potential loss of key employees, customers, distributors, or dealers of the acquired businesses or adverse effects on existing business relationships with suppliers, customers, distributors, and dealers;
write-off of significant amounts of goodwill, other intangible assets, and/or long-lived assets as a result of deterioration in the performance of an acquired business or product line, adverse market conditions, changes in the competitive landscape, changes in laws or regulations that restrict activities of an acquired business or product line, or as a result of a variety of other circumstances;
delays or challenges in transitioning distributors and dealers of acquired businesses to available floor plan financing arrangements;
violation of confidentiality, intellectual property, and non-compete obligations or agreements by employees of an acquired business or lack of or inadequate formal intellectual property protection mechanisms in place at an acquired business;
adverse impact on overall profitability if our expanded operations do not achieve the financial results projected in our valuation models;
reallocation of amounts of capital from other operating initiatives and/or an increase in our leverage and debt service requirements to pay acquisition purchase prices or other business venture investment costs, which could in turn restrict our ability to access additional capital when needed or pursue other important elements of our business strategy;
failure by acquired businesses or other business ventures to comply with applicable international, federal, and state product safety or other regulatory standards;
infringement by acquired businesses or other business ventures of intellectual property rights of others;
inaccurate assessment of additional post-acquisition or business venture investments, undisclosed, contingent or other liabilities or problems, unanticipated costs associated with an acquisition or other business venture, and an inability to recover or manage such liabilities and costs; and
incorrect estimates made in the accounting for acquisitions and incurrence of non-recurring charges.
In addition, effective internal controls are necessary for us to provide reliable and accurate financial reports and to effectively
 
prevent fraud. The integration of acquired businesses may result in our systems and controls becoming increasingly complex and more difficult to manage. We devote significant resources and time to comply with the internal control over financial reporting requirements of the Sarbanes-Oxley Act of 2002. However, we cannot be certain that these measures will ensure that we design, implement, and maintain adequate control over our financial processes and reporting in the future, particularly in the context of acquisitions of other businesses, regardless of whether such acquired business was previously privately or publicly held. Any difficulties in the assimilation of acquired businesses into our internal control framework could harm our operating results or cause us to fail to meet our financial reporting obligations. Also, some acquisitions may require the consent of the lenders under our credit agreements. We cannot predict whether such approvals would be forthcoming or the terms on which the lenders would approve such acquisitions. These risks, among others, could be heightened if we complete a large acquisition or other business venture or multiple transactions within a relatively short period of time.
Our recent acquisition of The Charles Machine Works, Inc. involves a number of risks, the occurrence of which could adversely affect our business, financial condition, and operating results.
On April 1, 2019, we completed our acquisition of CMW. Such acquisition involves certain risks, the occurrence of which could adversely affect our business, financial condition, and operating results, including:
diversion of management's attention to manage the CMW businesses and integrate CMW’s operations;
disruption to our existing operations and plans or inability to effectively manage our expanded operations;
failure, difficulties or delays in securing, integrating and assimilating information, financial systems, internal controls, operations, manufacturing processes and products, or the distribution channel for CMW’s businesses and product lines;
potential loss of key employees, customers, distributors, dealers, or suppliers or other adverse effects on existing business relationships with customers, distributors, dealers, and suppliers;
adverse impact on overall profitability if our expanded operations do not achieve the growth prospects, net sales, earnings, cost or revenue synergies, or other financial results projected in our valuation models, delays in the realization thereof or costs or charges incurred to achieve any revenue or cost synergies, including as a result of the Toro underground wind down or otherwise;
the increase in our leverage and debt service requirements to fund the purchase price of the acquisition could restrict our ability to access additional capital when needed, result in a decrease in our credit rating, or limit our ability to pursue other important elements of our business strategy;
inaccurate assessment of undisclosed, contingent or other liabilities, unanticipated costs associated with the acquisition, and despite the existence of representations, warranties and indemnities in the merger agreement and a

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representation and warranty insurance policy, an inability to recover or manage such liabilities and costs; and
impacts as a result of purchase accounting adjustments, incorrect estimates made in the accounting for the acquisition, or the potential future write-off of significant amounts of goodwill, intangible assets and/or other tangible long-lived assets if the CMW business does not perform in the future as expected, or other potential financial accounting or reporting impacts.
We may be required to incur impairment and other charges resulting from the impairment of goodwill or other intangible assets recorded in connection with acquisitions. 
We recently completed the CMW acquisition and expect to continue to complete selected acquisitions in the future as a component of our growth strategy. In connection with acquisitions, applicable accounting standards generally require the net tangible and intangible assets of the acquired business to be recorded on the balance sheet of the acquiring company at their fair values as of the date of acquisition. Any excess in the purchase price paid by the acquiring company over the fair value of net tangible and intangible assets of the acquired business is recorded as goodwill. Definite lived-intangible assets other than goodwill are required to be amortized over their estimated useful lives and this amortization expense may be significant. If it is later determined that the anticipated future cash flows from the acquired business may be less than the carrying values of the assets and goodwill of the acquired business, the assets, including both definite-lived and indefinite-lived intangible assets, or goodwill may be deemed to be impaired. In this case, the acquiring company may be required under applicable accounting rules to write down the value of the assets or goodwill on its balance sheet to reflect the extent of the impairment. This write-down of assets or goodwill is generally recognized as a non-cash expense in the statement of operations of the acquirunsuing company for the accounting period during which the write down occurs. As of October 31, 2019, we had goodwill of $362.3 million, which is maintained in various reporting units, including goodwill from the CMW acquisition, and other intangible assets of $352.4 million, which together comprise 30.7 percent of our total assets as of October 31, 2019. If we determine that our goodwill or other intangible assets recorded in connection with the CMW acquisition or any other prior or future acquisitions have become impaired, we will be required to record a charge resulting from the impairment. Impairment charges could be significant and could adversely affect our consolidated results of operations and financial position.
Our labor needs, and those of our suppliers and distribution channel partners, fluctuate throughout the year and by region. Any failure by us, or our suppliers or distribution channel partners, 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, among other things, result in disruptions in our manufacturing and other processes, which have, and could
 
continue to, adversely affect our business and operating results and, our reputation could suffer.
Our labor needs, and those of our suppliers and distribution channel partners, fluctuate throughout the year and by region. During periods of peak manufacturing activity it is often necessary to sharply increase the number of production staff by utilizing new hires and temporary labor. Production staff hired during such periods of peak manufacturing activity may not have the same level of training, competency, experience, or commitment as regular production employees. In addition, as a result of low unemployment rates, a limited workforce population available in areas around the locations where we, or our suppliers and distribution channel partners, manufacture products or conduct business, or other factors, we, or our suppliers and distribution channel partners, may not have a sufficient pool of experienced and competent individuals with the right skills available to fulfill labor requirements on a cost-effective basis or otherwise. If we, or our suppliers and distribution channel partners, are unable to hire and/or retain a labor force to adequately staff manufacturing operations, perform service or warranty work, or other necessary activities, particularly during periods of peak manufacturing activity, or if such labor force is not adequately trained or does not adhere to protocols established to create a safe workplace, we could experience, among other things, disruptions in our manufacturing and other processes, which could adversely impact our business, operating results and reputation.
Failure to successfully complete divestitures or other restructuring activities could negatively affect our operations.
From time to time, we may divest of all or a portion of certain businesses, joint venture or minority equity investment interests, subsidiaries, or product categories. For example, during the fourth quarter of fiscal 2019, we divested of a used underground construction equipment business, which we acquired as a result of our acquisition of CMW. Divestitures involve risk, including, potential increased expense associated with the divestitures, potential issues with the customers or suppliers of the divested business or products, and potential issues with the acquirers of any divested business. Additionally, from time to time, we may wind down certain business activities, product lines, and/or perform other organizational restructuring projects in an effort to reduce costs and streamline operations. For example, in fiscal 2019, we decided to wind down our Toro-branded large directional drill and riding trencher product categories and pursue other organizational restructuring activities as part of our initial CMW integration objectives. Such activities involve risks as they may divert management's attention from our core businesses, increase expenses on a short‑term basis and lead to potential issues with employees, customers or suppliers. If these activities are not completed in a timely manner, anticipated cost savings, synergies and efficiencies are not realized, business disruption occurs during the pendency of or following such activities, or unanticipated charges are incurred, particularly if material, there may be a negative effect on our business, financial condition, results of operations and cash flows.

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If we underestimate or overestimate demand for our products and do not maintain appropriate inventory levels, our net sales and/or working capital could be negatively impacted.
Our ability to manage our inventory levels to meet our customers' demand for our products is important for our business. Our production levels and inventory management goals for our products are based on estimates of demand for our products, taking into account production capacity, timing of shipments, and field inventory levels. If we overestimate or underestimate both channel and retail demand for any of our products during a given season, we may not maintain appropriate inventory levels, which could negatively impact our net sales, profit margins, net earnings, and/or working capital, hinder our ability to meet customer demand, result in loss of customers, or cause us to incur excess and obsolete inventory charges.
Our business and operating results are subject to the inventory management decisions of our distribution channel customers.
We are subject to risks relating to the inventory management decisions and operational and sourcing practices of our distribution network. Our distribution channel customers carry inventories of our products as part of their ongoing operations and adjust those inventories based on their assessments of future needs, including anticipated end-customer demand. Such adjustments may impact our inventory management and working capital goals as well as operating results. If the inventory levels of our distribution channel customers are higher than they desire, they may postpone product purchases from us, which could cause our sales to be lower than the end-user demand for our products and negatively impact our inventory management and working capital goals as well as our operating results. Similarly, our results could be negatively impacted through the loss of sales if either we do not produce an adequate supply of products for our distribution channel and/or our distribution channel customers do not maintain field inventory levels sufficient to meet end-user demand.
Changes in composition of, financial viability of, and the relationships with, our distribution channel customers could negatively impact our business and operating results.
If we fail to maintain an effective network of dealers and distributors for our products, we may not have adequate market coverage for the optimal level of sales of our products. Additionally, our distribution channel customers may not commit the necessary resources to market and sell our products to the level of our expectations, and, regardless of the resources they commit, they may not be successful. Any weak demand for, or quality issues with, our products may cause our distribution channel customers to reduce or terminate their relationships with us or adversely affect our ability to engage new dealers and distributors. Changes in the ownership or control of our distribution channel customers could also adversely affect our relationships with them. If we are not able to maintain effective distribution channels, if our distribution channel customers are not successful in the marketing and selling our products, or if we experience a significant reduction in, cancellation or change in the size and timing of orders from
 
our distribution channel customers, our sales could decline and have an adverse effect on our business and operating results.
In addition, if adverse economic or business conditions or other events causes a decline in sales by our distribution channel customers or weakens their financial condition, our net sales and earnings could be adversely affected. Such situation could adversely affect the ability of such customers to pay amounts owed, which could require us to repurchase financed product.
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.
Our products are sold in highly competitive markets throughout the world. Principal competitive factors in our markets include product innovation, quality and reliability, pricing, product support and customer service, warranty, brand awareness, reputation, distribution, product availability, product placement and shelf space, and financing options. We compete in many product lines with numerous manufacturers, some of which have substantially larger operations and greater financial resources than us. As a result, they may be able to adapt more quickly to new or emerging technologies and changes in customer preferences, or devote greater resources to the development, promotion, and sale of their products or disruptive new products or technologies than we can. In addition, competition could increase if new companies enter the market, existing competitors combine or consolidate their operations or if existing competitors expand their product lines or intensify efforts within existing product lines. Our current products, products under development, and our ability to develop new and improved products may be insufficient to enable us to compete effectively with our competitors. Internationally, our Residential segment products typically face more competition because many foreign competitors design, manufacture, and market products in their respective countries. We experience this competition primarily in Europe. In addition, fluctuations in the value of the U.S. dollar may affect the price of our products in foreign markets, thereby impacting their competitiveness. We may not be able to compete effectively against competitors' actions, which may include the movement by competitors with manufacturing operations to low cost countries for significant cost and price reductions, and which could harm our business and operating results.
A significant percentage of our consolidated net sales is generated outside of the U.S., a portion of which is financed by third-parties, and we intend to continue to expand our international operations. Our international operations require significant management attention and financial resources, expose us to difficulties presented by international economic, political, legal, regulatory, accounting, and business factors, and may not be successful or produce desired levels of net sales.
We currently manufacture our products in the U.S., Mexico, Australia, the United Kingdom, Italy, Romania, Germany, Poland, and China for sale throughout the world. We maintain

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sales offices in the U.S., Belgium, the United Kingdom, Australia, Japan, China, Italy, Poland, Germany, Spain, and France. Our net sales outside the U.S. were 23.1 percent, 24.6 percent, and 24.4 percent of our total consolidated net sales for fiscal 2019, 2018, and 2017, respectively. International markets have been, and will continue to be, a focus for us for revenue growth, both organically and through acquisitions. We believe many opportunities exist in the international markets, and over time, we intend for international net sales to comprise a larger percentage of our total consolidated net sales. Several factors, including the implications of the United Kingdom's process for exiting the EU, implications of withdrawal by the U.S. from, or revisions to, international trade agreements, foreign trade or other policy changes between the U.S. and other countries, weakened international economic conditions or the impact of sovereign debt defaults by certain European countries, could adversely affect our international net sales. Additionally, the expansion of our existing international operations and entry into additional international markets require significant management attention and financial resources. Many of the countries in which we manufacture or sell our products, or otherwise have an international presence are, to some degree, subject to political, economic, and/or social instability. Our international operations expose us and our representatives, agents, and distribution channel customers to risks inherent in operating in foreign jurisdictions. These risks include:
increased costs of customizing products for foreign countries;
difficulties in managing and staffing international operations and increases in infrastructure costs including legal, tax, accounting, and information technology;
the imposition of additional U.S. and foreign governmental controls or regulations;
new or enhanced trade restrictions and restrictions on the activities of foreign agents, representatives, and distribution channel customers;
withdrawal from or revisions to international trade policies or agreements and the imposition or increases in import and export licensing and other compliance requirements, customs duties and tariffs, import and export quotas and other trade restrictions, license obligations, and other non-tariff barriers to trade;
the imposition of U.S. and/or international sanctions against a country, company, person, or entity with whom we do business that would restrict or prohibit our business with the sanctioned country, company, person, or entity;
international pricing pressures;
laws and business practices favoring local companies;
adverse currency exchange rate fluctuations;
longer payment cycles and difficulties in enforcing agreements and collecting receivables through certain foreign legal systems;
higher tax rates and potentially adverse tax consequences, including restrictions on repatriating cash and/or earnings to the U.S.;
fluctuations in our operating performance based on our geographic mix of sales;
transportation delays and interruptions;
 
national and international conflicts, including foreign policy changes, acts of war or terrorist acts;
difficulties in protecting, enforcing or defending intellectual property rights; and
multiple, changing, and often inconsistent enforcement of laws, rules, regulations and standards, including rules relating to taxes, environmental, health and safety matters.
Our international operations may not produce desired levels of net sales or, among other things one or more of the factors listed above may harm our business and operating results. Any material decrease in our international sales or profitability could also adversely impact our operating results.
In addition, a portion of our international net sales is 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.
Brexit and political uncertainty in the United Kingdom and the EU could disrupt our operations and adversely affect our operating results.
We have manufacturing operations and a sales office in the United Kingdom. The United Kingdom’s intention to exit the EU, commonly referred to as “Brexit,” has caused significant political and economic uncertainty in the United Kingdom, EU, and elsewhere. The impact of Brexit and the resulting turmoil on the political and economic future of the United Kingdom and the EU is uncertain, and we may be adversely affected in ways we cannot currently anticipate. The ultimate effects of Brexit will depend, in part, on any agreements the United Kingdom makes to retain access to the EU markets, and vice versa, either during a transitional period or more permanently. Brexit also may result in significant changes in the British regulatory environment, which could increase our compliance costs. We may find it more difficult to conduct business in the United Kingdom and the EU, as Brexit may result in increased regulatory complexity and increased restrictions on the movement of capital, goods and personnel. Any of these effects of Brexit, and other similar referenda that we cannot anticipate, could disrupt our operations and adversely affect our operating results.

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Changes to or withdrawal from trade regulation, quotas, duties, agreements, policies, or tariffs, caused by the changing U.S. and geopolitical environments or otherwise, may negatively impact our business, operating results and financial condition.
Uncertainty exists regarding the future relationship between the U.S. and other countries with respect to trade regulation, quotas, duties, agreements, policies, and tariffs. The current U.S. administration has called for support for implementing and, in some instances, has already proposed or taken action with respect to major changes to certain trade agreements or policies. Furthermore, the U.S. or other countries that are parties to various trade agreements may not approve or ratify any new or revised trade agreements. Implications of withdrawal by the U.S. from, or revisions to, international trade agreements, foreign trade or other policy changes between the U.S. and other countries could adversely and materially affect our business, operating results, and financial condition.
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, we may experience a decrease in demand for our products, and our net sales, which have historically benefited from the introduction of new products, may be adversely affected.
One of our strategies is to develop innovative, customer-valued products to generate revenue growth. In the past, our sales from new products, which we define as those introduced in the current and previous two fiscal years, have represented a significant component of our net sales and are expected to continue to represent a significant component of our future net sales. We may not be able to compete as effectively with our competitors, and ultimately satisfy the needs and preferences of our customers, unless we can continue to enhance existing products and develop new innovative products for the markets in which we compete, including by incorporating new, emerging, and/or disruptive technologies that may become preferred by our customers. Product development requires significant financial, technological, talent, and other resources. Product improvements and new product introductions also require significant research, planning, design, development, engineering, and testing at the technological, product, and manufacturing process levels and we may not be able to timely develop and introduce product improvements or new products. Our competitors' new products may beat our products to market, be higher quality or more reliable, be more effective with more features and/or less expensive than our products, incorporate new, emerging, and/or disruptive technologies, obtain better market acceptance, or render our products obsolete. Any new products that we develop may not receive market acceptance or otherwise generate any meaningful net sales or profits for us relative to our expectations based on, among other things, existing and anticipated investments in manufacturing capacity and commitments to fund advertising, marketing, promotional programs, and research and development.
 
Any disruption at any of our facilities or in our manufacturing or other operations, or those of our distribution channel customers or suppliers, or our inability to cost-effectively expand existing, open and manage new or acquired, and/or move production between manufacturing facilities could adversely affect our business and operating results.
We currently manufacture most of our products at 14 locations in the U.S., two locations in both Mexico and China, and one location in each of Australia, Italy, the United Kingdom, Romania, Germany, and Poland. We also have several locations that serve as distribution centers, warehouses, test labs, service centers, and corporate offices. In addition, we have agreements with other third-party manufacturers to manufacture products on our behalf. We also market our products through domestic and international distributors, as well as a large number of dealers, hardware retailers, home centers, mass retailers and online, and source commodities, components, parts, and accessories from a variety of international and domestic suppliers.
Our facilities and our manufacturing and other operations and those of our distribution channel customers and suppliers may incur losses or experience disruptions as a result of natural disasters, inclement weather, and/or climate change-related events, such as tornadoes, hurricanes, earthquakes, floods, tsunamis, typhoons, drought, fire, other extreme weather conditions, and other natural disasters and events that occur as a result of such events, such as water or other natural resource shortages, rising sea levels, power shortages, or telecommunications failures. In addition, losses or disruptions could occur as a result of man-made disasters and other external events, such as terrorist acts or acts of war, pandemics, boycotts and sanctions or widespread criminal activities such as drug cartel-related violence that may disrupt our production activities and maquiladora operations based in Juarez, Mexico. A work slowdown, strike, or similar action could occur at any one of our facilities (or the facilities of our distribution channel customers and suppliers) currently operating under a collective bargaining agreement, such facilities could fail to renew or enter into new collective bargaining agreements, or we may have to enter into a new collective bargaining agreement at a facility not currently covered by an agreement. Furthermore, we could decide, or be forced, to shift production to one of our other manufacturing facilities or we may decide to open new or acquired manufacturing or distribution facilities or move production between our facilities to align production capacity with production goals.
Such events and disruptions could make it difficult or impossible to manufacture or to deliver products to our distribution channel customers, produce or maintain sufficient inventory of our products, meet the demands of our customers, receive commodities, components, parts or accessories from our suppliers, or perform critical functions, which could adversely affect our business globally or in certain regions. Such events also may result in shortages of commodities, components, parts, or accessories, higher fuel and commodity costs, and delays in shipments to our distribution channel customers. Our business and operating results could be

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impacted to a greater degree than we previously experienced to the extent that unfavorable weather conditions are exacerbated by global climate change or otherwise. Our insurance coverage with respect to natural disasters and other disruptions is limited and is subject to deductibles and coverage limits. Such coverage may not be adequate, or may not continue to be available at commercially reasonable rates and terms. The occurrence of any such events could negatively impact our business and operating results.
Management information systems are critical to our business. If our management information systems or those of our business partners or third-party service providers fail to adequately perform, or if we, our business partners, or third-party service providers experience an interruption in the operation of such systems, our business, reputation, financial condition, and operating results could be adversely affected.
We have many management information systems that are critical to our business, some of which are managed by third-parties. These management information systems are used to record, process, summarize, transmit, and store electronic information, and to manage or support a variety of business processes and activities, including, among other things, our accounting and financial functions, including maintaining our internal controls; our manufacturing and supply chain processes; and the data related to our research and development efforts.
We may be unable to enhance our existing management information systems or implement new management information systems when necessary, may experience unanticipated delays, complications or expenses in implementing, integrating and operating our systems, and/or require substantial expenditures as well as interruptions in operations in connection with any system changes we might pursue, including as may be necessary during the integration of CMW. The failure of our management information systems or those of our business partners or third-party service providers to perform properly, or difficulties encountered in the development of or transfer over to new systems or the modification or upgrade of existing systems, could disrupt our business and harm our reputation, which may result in decreased sales, increased overhead costs, excess or obsolete inventory, and product shortages, causing our business, reputation, financial condition, and operating results to suffer.
Additionally, we take steps to secure our management information systems and any access provided by our business partners or third-party service providers, including our computer systems, intranet and internet sites, email and other telecommunications and data networks. However, the security measures we have implemented may not be effective and our systems may be vulnerable to theft, loss, damage, and interruption from a number of potential sources and events, including unauthorized access or security breaches, natural or man-made disasters, cyber attacks, computer viruses, malware, phishing, denial of service attacks, power loss, or other disruptive events. Information technology security threats have been increasing in frequency and sophistication. Cyber attacks
 
may be random, coordinated, or targeted, including sophisticated computer crime threats. These threats pose a risk to the security of our systems and networks, and those of our business partners and third-party service providers, and to the confidentiality, availability, and integrity of our data. Our business, reputation, operating results, and financial condition could be adversely affected if, as a result of a significant cyber event or otherwise, our operations are disrupted or shutdown; our confidential, proprietary information is stolen or disclosed; our intranet and internet sites are compromised; data is manipulated or destroyed; we incur costs, are required to pay fines, or our customers lose confidence in our ability to adequately protect their information in connection with stolen or disclosed customer, employee, or other confidential or sensitive information; we must dedicate significant resources to system repairs or increase cyber security protection; or we otherwise incur significant litigation or other costs.
Our reliance upon patents, trademark laws, and contractual provisions to protect our proprietary rights may not be sufficient to protect our intellectual property from others who may sell similar products. In addition, our products may infringe the proprietary rights of others.
We hold patents relating to various aspects of our products and believe that proprietary technical know-how is important to our business and the loss of such intellectual property could have a material adverse effect on our business and operating results. Proprietary rights relating to our products are protected from unauthorized use by third-parties only to the extent that they are covered by valid and enforceable patents or are maintained in confidence as trade secrets. We cannot be certain that we will be issued any patents from any pending or future patent applications owned by or licensed to us, or that the claims allowed under any issued patents will be sufficiently broad to protect our technology. In the absence of enforceable patent protection, we may be vulnerable to competitors who attempt to copy our products or gain access to our trade secrets and know-how. Others may initiate litigation to challenge the validity of our patents, allege that we infringe their patents, or use their resources to design comparable products that do not infringe our patents. We may incur substantial costs if our competitors or others initiate litigation to challenge the validity of our patents, or allege that we infringe their patents, or if we initiate any proceedings to protect our proprietary rights. If the outcome of any such litigation is unfavorable to us, our business, operating results, and financial condition could be adversely affected.
We also cannot be certain that our products or technologies have not infringed or will not infringe the proprietary rights of others. Any such infringement could cause third-parties, including our competitors, to bring claims against us, resulting in significant costs, possible damages and substantial uncertainty. We could also be forced to develop an alternative that could be costly and time-consuming, or acquire a license, which we might not be able to do on terms favorable to us, or at all.
We rely on trade secrets and proprietary know-how that we seek to protect, in part, by confidentiality agreements with our

21


employees, suppliers, consultants, and others. These agreements may be breached, and we may not have adequate remedies for any such breach. Even if these confidentiality agreements are not breached, our trade secrets may otherwise become known or be independently developed by competitors.
Our business, properties, and products are subject to governmental policies and regulations, with which compliance may require us to incur expenses, or modify our products or operations, and non-compliance may result in harm to our reputation and/or expose us to penalties. Governmental policies and regulations may also adversely affect the demand for some of our products and our operating results.
Our business, properties, and products are subject to numerous international, federal, state, and other governmental laws, rules, policies, and regulations relating to, among other things; climate change; emissions to air, including engine emission requirements; discharges to water; restrictions placed on water usage and water availability; product and associated packaging; use of certain chemicals; restricted substances, including "conflict minerals" disclosure rules; import and export compliance, including country of origin certification requirements; worker and product user health and safety; energy efficiency; product life-cycles; outdoor noise laws; the generation, use, handling, labeling, collection, management, storage, transportation, treatment, and disposal of hazardous substances, wastes, and other regulated materials; and the registration of certain technologies with various government agencies throughout the world and operation of those technologies within the limits imposed by those agencies, including but not limited to radio frequency, broadband or other wireless technologies and technologies within the airspace of commercial airplanes, such as unmanned aerial systems. In addition, our business is subject to numerous international, federal, state, and other governmental laws, rules, policies, and regulations that may adversely affect our operating results, including, (i) taxation and tax policy changes, tax rate changes, new tax laws, or revised tax law interpretations or guidance, including as a result of the Tax Act, which individually or in combination may cause our effective tax rate to increase or result in tax charges, (ii) healthcare laws or regulations, which may cause us to incur higher employee healthcare costs, or (iii) changes to U.S. or international trade policies or agreements that could result in additional tariffs, duties or other charges on commodities, components, parts or accessories that we import and/or use in our products. Although we believe that we are in substantial compliance with currently applicable laws, rules, policies, and regulations, we are unable to predict the ultimate impact of adopted or future laws, rules, policies, and regulations on our business, properties, or products. Any of these laws, rules, policies, or regulations may cause us to incur significant expenses to achieve or maintain compliance, require us to modify our products, adversely affect the price of, or demand for, some of our products, and ultimately affect the way we conduct our operations. Failure to comply with any of these laws, rules, policies, or regulations could result in harm to our reputation and/or could lead to fines and other penalties,
 
including restrictions on the importation of our products into, and the sale of our products in, one or more jurisdictions until compliance is achieved. In addition, our competitors may adopt strategies with respect to compliance with any such laws, rules, policies or regulations that differ significantly from our strategies. This may have the effect of changing customer preferences and our markets in ways that we did not anticipate which may adversely affect market demand for our products and, ultimately, our net sales and financial results. Other laws or regulations impacting our supply chain, such as the United Kingdom Modern Slavery Act, or data privacy requirements, such as the General Data Protection Regulation, may have similar consequences.
Changes in accounting standards, policies, or assumptions utilized in determining accounting estimates could adversely affect our financial statements, including our operating results and financial condition.
In preparing the Consolidated Financial Statements in conformity with U.S. generally accepted accounting principles ("GAAP"), we must make decisions that impact our results of operations and/or financial condition. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgments based on our understanding and analysis of the relevant circumstances, historical experience, and actuarial and other independent external third-party specialist valuations, all as appropriate. As a result, actual amounts could differ from those estimated at the time the Consolidated Financial Statements are prepared. In addition, various authoritative accounting or regulatory entities, including the Financial Accounting Standards Board ("FASB"), Public Company Accounting Oversight Board, and the SEC may amend, expand, and/or eliminate the financial accounting or reporting standards that govern the preparation of our Consolidated Financial Statements or could reverse their previous interpretations or positions on how various financial accounting and/or reporting standards should be applied. For example, the FASB issued Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers, and ASU No. 2016-02, Leases, that amend the accounting standards and related disclosure requirements related to revenue recognition and lease accounting, respectively. Additionally, the adoption of ASU 2016-09, Stock-based Compensation, during the first quarter of fiscal 2017 has added, and we expect that it will continue to add, variability to our provision for income taxes, mainly due to the timing of stock option exercises, vesting of restricted stock units, and the trading price of our common stock. We disclose the impact of accounting pronouncements that have been issued but not yet adopted within our annual and quarterly reports on Form 10-K and Form 10-Q, respectively. However, we do not provide an assessment of proposed accounting pronouncements, as such proposals are subject to change through the exposure process and therefore, we cannot meaningfully assess their effects on our Consolidated Financial Statements. Future changes to accounting standards could modify the accounting policies and procedures that are

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currently utilized in the preparation of our Consolidated Financial Statements. Such changes may be difficult to predict and implement and could materially, or otherwise, impact how we prepare and report our Consolidated Financial Statements, results of operations, and financial condition. For additional information regarding our accounting policies, accounting pronouncements adopted, and accounting pronouncements not yet adopted, refer to Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," of this report in the section entitled "Critical Accounting Policies and Estimates” and Note 1, Summary of Significant Accounting Policies and Related Data, of the Notes to Consolidated Financial Statements included in Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report on Form 10-K.
Climate change legislation, regulations, or accords may adversely impact our operations.
We are currently subject to rules limiting emissions and other climate-related rules and regulations in certain jurisdictions where we operate. In addition, we may become subject to additional legislation, regulations, or accords regarding climate change, and compliance with any new rules could be difficult and costly as a result of increased energy, environmental, and other costs and capital expenditures to comply with any such legislation, regulation, or accord. Due to uncertainty in the regulatory and legislative processes and the negotiation and adoption of international climate change accords, as well as the scope of such requirements and initiatives, we cannot currently determine the effect any such legislation, regulation, or accord may have on our products and operations.
The 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.
Because we own and lease real property, various environmental laws may impose liability on us for the costs of cleaning up and responding to hazardous substances that may have been released on our property, including releases unknown to us. These environmental laws and regulations could also require us to pay for environmental remediation and response costs at third-party locations where we disposed of or recycled hazardous substances. We are currently involved in the evaluation and clean-up of a limited number of properties we either currently or previously owned. Although we do not expect that these current matters will have a material adverse effect on our financial position or operating results, our future costs of complying with the various environmental requirements, as they now exist or may be altered in the future, 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.
Various legislative proposals, if enacted, could put us in a competitively advantaged or disadvantaged position and affect customer demand for our products relative to the product offerings of our competitors. For example, any fiscal-stimulus or other legislative enactment that inordinately impacts the lawn and garden, outdoor power equipment, or irrigation industries generally by promoting the purchase, such as through customer rebate or other incentive programs, of certain types of mowing, snow and ice management, or irrigation equipment or other products that we sell, could impact us positively or negatively, depending on whether we manufacture products that meet the specified legislative criteria, including in areas such as fuel efficiency, alternative energy or water usage, or if, as a result of such legislation, customers perceive our product offerings to be relatively more or less attractive than our competitors' product offerings. We cannot currently predict whether any such legislation will be enacted, what any such legislation's specific terms and conditions would encompass, how any such legislation would impact the competitive landscape within our markets, or how, if at all, any such legislation might ultimately affect customer demand for our products or our operating results.
We operate in many different jurisdictions and we could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act ("FCPA") and similar worldwide anti-corruption laws.
The U.S. FCPA and similar worldwide anti-corruption laws generally prohibit companies and their intermediaries from making certain improper payments for the purpose of obtaining or retaining business. The continued expansion of our international operations could increase the risk of violations of these laws in the future. Significant violations of these laws, or allegations of such violations, could harm our reputation, disrupt our business, and result in significant fines and penalties that could have a material adverse effect on our results of operations or financial condition.
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.
The manufacture, sale, and use of our products expose us to significant risks associated with product quality issues and product liability claims. If a product liability claim or series of claims is brought against us for uninsured liabilities or in excess of our insurance coverage, and it is ultimately determined that we are liable, our business could suffer. While we believe that we appropriately instruct our customers on the proper usage of our products, we cannot ensure that they will implement our instructions accurately or completely. If our products are defective or used incorrectly by our customers, injury may result and this could give rise to product quality issues and/or product liability claims against us or adversely affect our brand image or reputation. Any losses that we may suffer from product

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quality issues and/or product liability claims, and the effect that any product quality and/or product liability litigation may have upon the reputation and marketability of our products, may have a negative impact on our business, reputation, and operating results. Product defects can occur through our own product development, design, and manufacturing processes or through our reliance on third-parties for certain component design and manufacturing activities. Some of our products or product improvements were developed relatively recently and defects or risks that we have not yet identified, such as unanticipated use of our products, may give rise to product quality issues and/or product liability claims. Additionally, we could experience a material design, testing, or manufacturing failure in our products, a quality system failure, failures in our products and other challenges that are associated with our inability to properly manage changes in the suppliers and components that we use in our products, insufficient testing procedures, other safety issues, or heightened regulatory scrutiny that could warrant a recall of some of our products. A recall of some of our products could also result in increased product liability claims. Unforeseen product quality and/or product liability problems in the development and production of new and existing products could also result in loss of market share, decreased demand, reduced sales, rework costs, and higher warranty expense.
We are also subject to 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 personnel transitions, we may not be able to meet strategic objectives and our business could suffer.
Our ability to meet our strategic objectives and otherwise grow our business will depend to a significant extent on the continued contributions of our leadership team. Our future success will also depend in large part on our ability to identify, attract, engage, train, and retain other highly qualified personnel worldwide, including in particular managerial, functional support, technical, sales and marketing, operations, and customer service personnel. Competition for these individuals is intense, and we may not succeed in identifying, attracting, or retaining qualified personnel. The loss or interruption of the services of any of our executive officers or other key employees, the inability to identify, attract, or retain qualified personnel in the future, the inability to successfully implement executive officer, key employee or other personnel transitions, delays in hiring qualified personnel, inability to hire necessary office or production employees due to low unemployment conditions or otherwise, or any employee work slowdowns, strikes, or similar actions could make it difficult for us to conduct and manage our business and meet key objectives, which could harm our business, financial condition, and operating results.
We are dependent upon the availability of floor plan financing, including through our Red Iron financing joint venture with TCFIF or otherwise, 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 our floor plan arrangements, challenges or delays in transferring new distributors and dealers from any business we might acquire or otherwise to available floor plan platforms, any termination or disruption of our floor plan arrangements, or any delay in securing replacement credit sources could adversely affect our net sales and operating results.
We are a party to various floor plan arrangements, including a financing joint venture with TCFIF and TCFCFC, for the primary purpose of providing reliable, competitive floor plan financing to certain of our distributors and dealers primarily in the U.S. and Canada, as applicable, to support their businesses, as well as to improve our working capital for our other strategic purposes. As a result, we are dependent upon such arrangements for our inventory financing programs.
The availability of financing from our floor plan arrangements will be affected by many factors, including, among others, the overall credit markets, the credit worthiness of our dealers and distributors, and regulations that may affect such financing providers. Any material change in the availability or terms of credit offered to our customers by our floor plan financing providers, challenges or delays in transferring new distributors and dealers from any business we might acquire or otherwise to our available financing platforms, any termination or disruption of our floor plan arrangements, or any delay in securing replacement credit sources could adversely affect our sales and operating results.
The terms of our credit arrangements and the indentures governing our senior notes and debentures could limit our ability to conduct our business, take advantage of business opportunities and respond to changing business, market, and economic conditions. Additionally, we are subject to counterparty risk in our credit arrangements.
Our credit arrangements and the indentures governing our 3.81 percent Series A Senior Notes, 3.91 percent Series B Senior Notes, 6.625 percent senior notes, and 7.8 percent debentures include a number of financial and operating restrictions. For example, our credit arrangements contain financial covenants that, among other things, require us to maintain a minimum interest coverage ratio and a maximum leverage ratio. Our credit arrangements and/or indentures also contain provisions that restrict our ability, subject to specified exceptions, to, among other things:
create liens or other encumbrances on our assets;
dispose of assets;
engage in mergers or consolidations; and
pay dividends that are significantly higher than those currently being paid, make other distributions to our shareholders, or redeem shares of our common stock.
These provisions may limit our ability to conduct our business, take advantage of business opportunities, and respond to changing business, market, and economic conditions. In addition, they may place us at a competitive disadvantage

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relative to other companies that may be subject to fewer, if any, restrictions or may otherwise adversely affect our business. Transactions that we may view as important opportunities, such as significant acquisitions, may be subject to the consent of the lenders under our credit arrangements, which consent may be withheld or granted subject to conditions specified at the time that may affect the attractiveness or viability of the transaction.
Although we have in place a $600.0 million revolving credit facility that does not expire until June 2023, market deterioration or other factors could jeopardize the counterparty obligations of one or more of the banks participating in our revolving credit facility, which could have an adverse effect on our business if we are not able to replace such revolving credit facility or find other sources of liquidity on acceptable terms.
If we are unable to comply with the terms of our credit arrangements and indentures, especially the financial covenants, our credit arrangements could be terminated and our senior notes, debentures, and any amounts outstanding under our revolving credit facility could become due and payable.
We cannot assure that we will be able to comply with all of the terms of our credit arrangements, senior notes, and indentures, particularly the financial covenants. Our ability to comply with such terms depends on the success of our business and our operating results. Various risks, uncertainties, and events beyond our control could affect our ability to comply with the terms of our credit arrangements, senior notes, and/or indentures. If we were out of compliance with any covenant required by our credit arrangements following any applicable cure periods, the banks could terminate their commitments unless we could negotiate a covenant waiver. The banks could condition such waiver on amendments to the terms of our credit arrangements that may be unfavorable to us. In addition, our 3.81 percent Series A Senior Notes, 3.91 percent Series B Senior Notes, 6.625 percent senior notes, and 7.8 percent debentures, and any amounts outstanding under our revolving credit facility could become due and payable if we were unable to obtain a covenant waiver or refinance our debt under our credit arrangements. If our debt rating falls below investment grade and/or our leverage ratio rises above 1.50, the interest rate we currently pay on outstanding debt under our revolving credit facility could increase, which could adversely affect our operating results.
A downgrade in our credit ratings could increase our cost of funding and/or adversely affect our access to capital markets or the availability of funding from a variety of lenders. 
Our credit ratings are important to our cost and availability of capital. The major rating agencies routinely evaluate our credit profile and assign credit ratings to us. This evaluation is based on a number of factors, which include financial strength, business and financial risk, as well as transparency with rating agencies and timeliness of financial reporting. The addition of further leverage to our capital structure could result in a downgrade to our credit ratings in the future. For instance, if our credit rating falls below investment grade and/or our leverage ratio rises above 1.50, the interest rate we currently
 
pay on outstanding debt under our revolving credit facility could increase. As such, 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 are expanding and renovating our corporate and other facilities, primarily driven by our need to expand the capacity available for our manufacturing operations and office space. These expansion efforts include expanding and/or renovating certain of our facilities, such as our Tomah, Wisconsin manufacturing facility and Plymouth, Wisconsin warehouse. We financed, and expect to continue to finance, such efforts with cash on hand and cash from operating activities. The expansion and renovation of our corporate and other facilities entail risks that could cause disruption in the operations of our business. Such risks include potential interruption in manufacturing processes, delivery of raw materials, shipping finished goods, and data flow; unforeseen construction, scheduling, engineering, environmental, or geological problems; and unanticipated cost increases.
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.
We generally provide projected financial information, such as our expected revenue growth and net earnings per share. These financial projections are based on management’s current assumptions and expectations. The failure to achieve our financial projections could have an adverse effect on our business, operating results and financial condition.
We also set goals and objectives for the timing of certain accomplishments, initiatives and milestones regarding our business or operating results. Whether we achieve our goals and objectives of such initiatives can vary due to a number of factors, including the risk factors described in this report. As a result, there can be no assurance that we will succeed in achieving the goals and objectives of our initiatives in the time periods that we anticipate, or ever. The failure to achieve such goals and objectives in the time periods that we anticipate, or at all, could have an adverse effect on our business, operating results and financial condition.
ITEM 1B.   UNRESOLVED STAFF COMMENTS
None.

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ITEM 2.   PROPERTIES
Our significant facilities are listed below by location, ownership, and function as of October 31, 2019:
Location
 
Ownership
 
Products Manufactured / Use
Abilene, TX
 
Leased
 
Office, professional products, and service center
Albany, GA
 
Owned
 
Professional service area and office
Albis, France
 
Leased
 
Professional service area and office
Althengstett, Germany
 
Owned
 
Professional products, distribution facility, and office
Ankeny, IA
 
Leased
 
Professional and residential distribution center
Baraboo, WI
 
Leased
 
Professional and residential distribution center
Barcelona, Spain
 
Leased
 
Professional products warehouse and office
Beatrice, NE
 
Owned/Leased
 
Professional products, test facility, and office
Beijing, China
 
Leased
 
Professional products manufacturing, distribution facility, and office
Beverley, Australia
 
Owned
 
Professional products, distribution facility, service area, and office
Bloomington, MN
 
Owned/Leased
 
Corporate headquarters, warehouse, and test facility
Boulder, CO
 
Leased
 
Professional office
Braeside, Australia
 
Leased
 
Distribution facility, service area, and office
Branchburg, NJ
 
Owned
 
Distribution facility, service area, and office
Brooklyn Center, MN
 
Leased
 
Distribution facility, service area, and office
Capena, Italy
 
Leased
 
Distribution center
Corpus Christi, TX
 
Owned
 
Professional service area and office
El Cajon, CA
 
Owned/Leased
 
Professional products, distribution facility, test site, and office
El Paso, TX
 
Owned/Leased
 
Residential component parts and professional products manufacturing, and distribution facility
Fiano Romano, Italy
 
Owned/Leased
 
Professional products, distribution facility, and office
Forest Park, GA
 
Leased
 
Professional service area and office
Fresno, CA
 
Leased
 
Professional products warehouse
Grandville, MI
 
Leased
 
Professional service area and office
Harlingen, TX
 
Leased
 
Professional service area and office
Hertfordshire, United Kingdom
 
Owned
 
Professional and residential products, distribution facility, test lab, and office
Howell, MI
 
Owned
 
Professional service area and office
Iron Mountain, MI
 
Owned/Leased
 
Professional products, distribution facility, and office
Juarez, Mexico
 
Leased
 
Professional and residential products and warehouse
Lake Mills, WI
 
Owned
 
Professional products manufacturing and distribution facility and office
Oevel, Belgium
 
Owned
 
Distribution center, service area, and office
Perry, OK
 
Owned/Leased
 
Professional products, test facility, warehouse, distribution facility, and office
Petaluma, CA
 
Leased
 
Professional products manufacturing and distribution facility, service area, and office
Ploiesti, Romania
 
Owned
 
Professional products, distribution facility, test facility, and office
Plymouth, WI
 
Owned
 
Professional and residential parts distribution center
Pune, India
 
Leased
 
Corporate service center
Riverside, CA
 
Owned/Leased
 
Professional products, test facility, distribution facility, and office
Ronkonkoma, NY
 
Owned
 
Distribution facility, service area, and office
Sanford, FL
 
Leased
 
Professional products and distribution center
Savannah, GA
 
Leased
 
Professional service area and office
Shakopee, MN
 
Owned
 
Components for professional and residential products
St. Louis, MO
 
Leased
 
Distribution facility, service area, and office
Sterling, KY
 
Leased
 
Professional products manufacturing and distribution facility, service area, and office
Tomah, WI
 
Owned/Leased
 
Professional products and distribution center
Traverse City, MI
 
Leased
 
Professional and warehouse
Ustron, Poland
 
Owned
 
Professional products, distribution facility, and office
Weatherford, TX
 
Owned
 
Professional products manufacturing and distribution facility and office
West Salem, OH
 
Owned
 
Professional products manufacturing and distribution facility and office
Windom, MN
 
Owned/Leased
 
Residential and professional products and warehouses
Xiamen City, China
 
Leased
 
Professional and residential products and related components, distribution facility, and office
As of October 31, 2019, we utilize manufacturing, distribution, warehouse, and office facilities totaling approximately 8.3 million square feet of space worldwide, compared to 6.5 million square feet of space worldwide as of October 31, 2018. The increase in utilized square feet of space from October 31, 2018 to October 31, 2019 is primarily due to the acquisition of CMW. For additional

26


information regarding our acquisition of CMW, refer to Note 2 , Business Combinations, in the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Plant utilization varies during the year depending on the production cycle. We consider each of our current facilities to be in good operating condition and management believes we have sufficient manufacturing capacity for production in fiscal 2020, although efforts for the expansion and renovation of certain facilities for future operational growth are underway as of October 31, 2019. These expansion and renovation efforts include expanding and renovating certain of our facilities, such as our Tomah, Wisconsin manufacturing facility and Plymouth, Wisconsin warehouse.
ITEM 3.   LEGAL PROCEEDINGS
We are a party to litigation in the ordinary course of business. Litigation occasionally involves claims for punitive, as well as compensatory, damages arising out of the use of our products. Although we are self-insured to some extent, we maintain insurance against certain product liability losses. We are also subject to litigation and administrative and judicial proceedings with respect to claims involving asbestos and the discharge of hazardous substances into the environment. Some of these claims assert damages and liability for personal injury, remedial investigations or clean-up, and other costs and damages. We are also typically involved in commercial disputes, employment disputes, and patent litigation cases in the ordinary course of business. To prevent possible infringement of our patents by others, we periodically review competitors' products. To avoid potential liability with respect to others' patents, we regularly review certain patents issued by the United States Patent and Trademark Office and foreign patent offices. We believe these activities help us minimize our risk of being a defendant in patent infringement litigation. We are currently involved in patent litigation cases, including cases by or against competitors, where we are asserting and defending against claims of patent infringement. Such cases are at varying stages in the litigation process. For a description of our material legal proceedings, see Note 12, Commitments and Contingent Liabilities of the Notes to Consolidated Financial Statements, in the section entitled "Litigation" included in Part II, Item 8, "Financial Statements and Supplementary Data" of this report, which is incorporated into this Item 3 by reference.
ITEM 4.   MINE SAFETY DISCLOSURES
Not applicable.

27


INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The list below identifies those persons designated by our Board of Directors as executive officers of the company. The list sets forth each such person's age and position with the company as of December 13, 2019, as well as other positions held by him or her for at least the last five years. There are no family relationships between any director, executive officer, or person nominated to become a director or executive officer of the company. There are no arrangements or understandings between any executive officer and any other person pursuant to which he or she was selected as an officer of the company.
Name, Age, and Position
 
Business Experience during the Last Five or More Years
Richard M. Olson
55, Chairman of the Board, President and Chief Executive Officer
 
Chairman of the Board since November 2017 and President and Chief Executive Officer since November 2016. From September 2015 through October 2016, he served as President and Chief Operating Officer. From June 2014 through August 2015, he served as Group Vice President, International Business, Global Ag-Irrigation Business, and Distributor Development. From March 2013 through May 2014, he served as Vice President, International Business. From March 2012 to February 2013, he served as Vice President, Exmark.
Jody M. Christy
51, Vice President, BOSS
 
Vice President, BOSS since December 2018. From June 2016 to November 2018, he served as General Manager, BOSS. At the time of the acquisition of BOSS in November 2014 to May 2016, he served as Director, Engineering for BOSS. Prior to the acquisition of BOSS in November 2014, from January 2012 to October 2014, he served as the Head of Engineering for BOSS.
Amy E. Dahl
45, Vice President, Human Resources and Distributor Development
 
Vice President, Human Resources since April 2015, and in December 2016 she assumed responsibility for our distributor development activity. From June 2013 through March 2015, she served as Managing Director, Corporate Communications and Investor Relations. From July 2012 to May 2013, she served as Assistant General Counsel and Assistant Secretary. Effective January 10, 2020, she will become the company's Vice President, Human Resources, Distributor Development and General Counsel, as well as its Corporate Secretary.
Timothy P. Dordell
57, Vice President, Secretary and General Counsel
 
Vice President, Secretary and General Counsel since May 2007. On November 8, 2019, Mr. Dordell notified the company of his decision to retire, which is effective January 10, 2020.
Blake M. Grams
52, Vice President, Global Operations
 
Vice President, Global Operations since June 2013. From December 2008 to May 2013, he served as Vice President, Corporate Controller.
Bradley A. Hamilton
55, Group Vice President, Commercial, International, and Irrigation Businesses
 
Group Vice President, Commercial, International, and Irrigation Businesses since October 2018. From November 2017 to September 2018, he served as Group Vice President, Commercial and International Businesses. From October 2016 to November 2017, he served as Vice President, Commercial Business. From April 2015 to October 2016, he served as General Manager, Commercial Business. From June 2014 through March 2015, he served as Managing Director, Distributor Development and Financial Services. From March 2012 through May 2014, he served as Director, Distributor Development.
Gregory S. Janey
41, Vice President, Residential and Landscape Contractor Businesses
 
Vice President, Residential and Landscape Contractor Businesses since November 2019. From November 2017 to October 2019, he served as General Manager, Residential and Landscape Contractor Businesses. From April 2015 to October 2017, he served as Director, Marketing International Business. From January 2013 through March 2015, he served as Director, Residential Mass Sales and National Accounts in our Residential Business.
Peter D. Moeller
42, Vice President, Sitework Systems Business
 
Vice President, Sitework Systems Business since November 2019. From November 2017 to October 2019, he served as General Manager, Sitework Systems Business. From April 2015 to October 2017, he served as Managing Director, Business Development and Strategic Planning. From September 2010 to March 2015, he served as Director, Marketing for Irrigation Business.
Renee J. Peterson
58, Vice President, Treasurer and Chief Financial Officer
 
Vice President, Treasurer and Chief Financial Officer since July 2013. From August 2011 to July 2013, she served as Vice President, Finance and Chief Financial Officer.
Darren L. Redetzke
55, Vice President, International Business
 
Vice President, International Business since April 2015. From August 2010 to April 2015, he served as Vice President, Commercial Business.
Richard W. Rodier
59, Group Vice President, Construction Businesses
 
Group Vice President, Construction Businesses since April 2019. From November 2017 to April 2019, he served as Vice President, Commercial Business. From October 2016 to November 2017, he served as Vice President, Sitework Systems. From February 2009 to October 2016, he served as General Manager, Sitework Systems.
Kurt D. Svendsen
53, Vice President, Information Services
 
Vice President, Information Services since June 2013. From September 2011 to June 2013, he served as Managing Director, Corporate Communications and Investor Relations.

28


PART II
ITEM 5.   MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
Common Stock
Our common stock is listed for trading on the New York Stock Exchange and trades under the symbol "TTC". As of October 31, 2019 and 2018, we had 175,000,000 shares of common stock authorized, $1.00 par value. As of October 31, 2019 and 2018, we had 106,742,082 and 105,600,652 shares of common stock outstanding, respectively. In each quarter of fiscal 2019, our Board of Directors declared a common stock cash dividend of $0.225 per share, which was a 12.5 percent increase over our common stock cash dividend of $0.20 per share paid in each quarter of fiscal 2018. As announced on December 3, 2019, our Board of Directors increased our fiscal 2020 first quarter common stock cash dividend by 11.1 percent to $0.25 per share from the quarterly common stock cash dividend of $0.225 paid in the first quarter of fiscal 2019. Future common stock cash dividends will depend upon our financial condition, capital requirements, results of operations, and other factors deemed relevant by our Board of Directors. Restrictions on our ability to pay dividends are disclosed in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations".
Preferred Stock
As of October 31, 2019 and 2018, we had 1,000,000 voting shares and 850,000 non-voting shares of preferred stock authorized, $1.00 par value. No shares of preferred stock were outstanding as of October 31, 2019 and 2018.
Shareholders
As of December 13, 2019, we had approximately 2,911 shareholders of record.
Purchases of Equity Securities
The following table sets forth information with respect to shares of our common stock purchased by the company during each of the three fiscal months in our fourth quarter ended October 31, 2019.
Period
 
Total Number of Shares (or Units) Purchased1, 2
 
Average Price Paid per Share (or Unit)
 
Total Number of Shares (or Units) Purchased As Part of Publicly Announced Plans or Programs1
 
Maximum Number of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs1
August 3, 2019 through August 30, 2019
 

 
$

 

 
7,042,256

August 31, 2019 through September 27, 2019
 

 

 

 
7,042,256

September 28, 2019 through October 31, 2019
 
1,172

 
73.93

 

 
7,042,256

Total
 
1,172

 
$
73.93

 

 
 

1 
On December 3, 2015, the company's Board of Directors authorized the repurchase of 8,000,000 shares of the company's common stock in open-market or in privately negotiated transactions. On December 4, 2018, the company’s Board of Directors authorized the repurchase of up to an additional 5,000,000 shares of the company’s common stock in open-market or privately negotiated transactions. This authorized stock repurchase program has no expiration date but may be terminated by the company's Board of Directors at any time. No shares were repurchased under this authorized stock repurchase program during the fourth quarter of fiscal 2019 and 7,042,256 shares remained available to repurchase under this authorized stock repurchase program as of October 31, 2019.
2 
Includes 1,172 units ("shares") of the company's common stock purchased in open-market transactions at an average price of $73.93 per share on behalf of a rabbi trust formed to pay benefit obligations of the company to participants in deferred compensation plans. These 1,172 shares were not repurchased under the company's repurchase programs described in footnote 1 above.

29


The Toro Company Common Stock Comparative Performance Graph
The information contained in The Toro Company Common Stock Comparative Performance Graph section shall not be deemed to be "soliciting material" or "filed" or incorporated by reference in future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically request that it be treated as soliciting material or incorporate it by reference into a document filed under the Securities Act or the Exchange Act.
The following graph and table depict the cumulative total shareholder return (assuming reinvestment of dividends) on $100 invested in each of Toro common stock, the S&P 500 Index, and an industry peer group for the five-year period from October 31, 2014 through October 31, 2019.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among The Toro Company, the S&P 500 Index,
and Peer Group
https://cdn.kscope.io/d76ce4af032dcd4cb8b2739c2aa7c4d1-chart-d46660b4c53156bea0c.jpg
*$100 invested on 10/31/14 in stock or index, including reinvestment of dividends. Fiscal years ending October 31.
Fiscal Years Ended October 31
 
2014
 
2015
 
2016
 
2017
 
2018
 
2019
The Toro Company
 
$
100.00

 
$
123.75

 
$
159.70

 
$
212.00

 
$
192.49

 
$
267.18

S&P 500
 
100.00

 
105.20

 
109.94

 
135.93

 
145.91

 
166.81

Peer Group
 
$
100.00

 
$
87.42

 
$
102.45

 
$
149.67

 
$
137.51

 
$
169.20

The industry peer group is based on companies previously included in the Fortune 500 Industrial and Farm Equipment Index, which was discontinued after 2002 and currently includes: AGCO Corporation, Briggs & Stratton Corporation, Caterpillar Inc., Crane Co., Cummins Inc., Deere & Company, Dover Corporation, Flowserve Corporation, Harsco Corporation, Illinois Tool Works Inc., International Game Technology Plc, ITT Inc., Kennametal Inc., Lennox International Inc., NACCO Industries, Inc., Parker-Hannifin Corporation, Pentair Plc, Snap-On Inc., Teleflex Inc., Terex Corporation, and The Timken Company.

30


ITEM 6.   SELECTED FINANCIAL DATA
The following table presents our selected financial data for each of the fiscal years in the five-year period ended October 31, 2019. The table should be read in conjunction with Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
(Dollars in thousands, except per share data)
 Fiscal Years Ended October 31
 
2019 3
 
2018 2
 
2017
 
2016
 
2015 1
Consolidated Statements of Earnings data:
 
 
 
 
 
 
 
 
 
 
Net sales
 
$
3,138,084

 
$
2,618,650

 
$
2,505,176

 
$
2,392,175

 
$
2,390,875

Net earnings
 
273,983

 
271,939

 
267,717

 
230,994

 
201,591

Basic net earnings per share
 
2.57

 
2.56

 
2.47

 
2.10

 
1.81

Diluted net earnings per share
 
$
2.53

 
$
2.50

 
$
2.41

 
$
2.06

 
$
1.78

Consolidated Balance Sheets data:
 
 

 
 

 
 

 
 

 
 

Total assets
 
$
2,330,547

 
$
1,570,984

 
$
1,493,787

 
$
1,384,572

 
$
1,300,429

Long-term debt, including current portion
 
$
700,813

 
$
312,549

 
$
331,887

 
$
350,961

 
$
374,723

Consolidated Statements of Cash Flows data:
 
 

 
 

 
 

 
 

 
 

Cash dividends per share of Toro common stock
 
$
0.90

 
$
0.80

 
$
0.70

 
$
0.60

 
$
0.50

1 
Basic and diluted net earnings per share have been adjusted for prior periods presented to reflect the impact of our two-for-one stock split effective September 16, 2016.
2 
Net earnings and basic and diluted net earnings per share were significantly impacted by the enactment of Public Law No. 115-97 ("Tax Act" or "U.S. Tax Reform"), originally introduced as the Tax Cuts and Jobs Act, during fiscal 2018. Refer to the section entitled "Results of Operations" included in Part I, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and Note 8, Income Taxes, of the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, as well as our Annual Report on Form 10-K for the fiscal year ended October 31, 2018, for additional information regarding U.S. Tax Reform and its impact to our fiscal 2018 Results of Operations.
3 
The company's Consolidated Financial Statements include results of the CMW business from April 1, 2019, the date of acquisition, including charges incurred for acquisition-related purchase accounting adjustments and transaction and integration costs. Refer to the section entitled "Results of Operations" included in Part II, Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations," and Note 2, Business Combinations, of the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information regarding our acquisition of CMW and its impact to our fiscal 2019 Results of Operations.

31


ITEM 7.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our financial statements with a narrative from the perspective of management on our financial condition, results of operations, liquidity, and certain other factors that may affect our future results. Unless expressly stated otherwise, the comparisons presented in this MD&A refer to the year-over-year comparison of changes in our financial condition and results of operations as of and for the fiscal years ended October 31, 2019 and October 31, 2018. Discussion of fiscal 2017 items and the year-over-year comparison of changes in our financial condition and results of operation as of and for the fiscal years ended October 31, 2018 and October 31, 2017 can be found in Part II, Item 7. "Management’s Discussion and Analysis of Financial Condition and Results of Operations" of our Annual Report on Form 10-K for the fiscal year ended October 31, 2018.
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
We have provided non-GAAP financial measures, which are not calculated or presented in accordance with accounting principles generally accepted in the United States ("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 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. Further, we believe that such non-GAAP financial measures, when considered in conjunction with our Consolidated Financial Statements prepared in accordance with U.S. GAAP, provide investors with useful supplemental financial information to better understand our core operational performance.
Reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported 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 GAAP financial measures. Further, these non-GAAP financial measures may differ from similar measures used by other companies.
Statements that are not historical are forward-looking and involve risks and uncertainties, including those discussed in Part I, Item 1A, "Risk Factors" and elsewhere in this report. These risks could cause our actual results to differ materially from any future performance suggested throughout this MD&A.
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.
Acquisition of CMW
As more fully described in Part I, Item 1, "Business" within the section titled "Acquisition of The Charles Machine Works, Inc." and Note 2, Business Combinations, in the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data," 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. The transaction was structured as a merger, pursuant to which a wholly-owned subsidiary of Toro merged with and into CMW, with CMW continuing as the surviving entity and a wholly-owned subsidiary of Toro. As a result of the merger, all of the

32


outstanding equity securities of CMW were canceled and now only represent the right to receive the applicable consideration as described in the merger agreement. At the closing date, 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 at the closing date. During the fourth quarter of fiscal 2019, we finalized such customary adjustments that resulted in an additional $5.7 million of merger consideration being paid and an aggregate merger consideration of $685.0 million ("purchase price"). 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 from our unsecured senior revolving credit facility. For additional information regarding the financing agreements utilized to fund the aggregate merger consideration, refer to the section titled "Financial Position" within this MD&A and Note 6, Indebtedness, in the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K.
Summary of Fiscal 2019 Results
Our fiscal 2019 results included the following items of significance:
Net sales for fiscal 2019 increased by 19.8 percent to $3,138.1 million when compared to fiscal 2018. The sales increase was primarily driven by incremental sales as a result of our acquisition of CMW, the year-over-year impact of price increases across our Professional and Residential segment product lines, strong channel demand for our Professional segment snow and ice management products and Residential snow thrower products, incremental sales as a result of our acquisition of a Northeastern U.S. distribution company, as well as the successful introduction of innovative new products in the Professional and Residential segments.
Professional segment net sales grew 25.5 percent in fiscal 2019 compared to fiscal 2018.
Residential segment net sales increased 1.0 percent in fiscal 2019 compared to fiscal 2018.
International net sales for fiscal 2019 increased by 12.7 percent compared to fiscal 2018, primarily driven by incremental sales as a result of our acquisition of CMW. Foreign currency exchange rates unfavorably impacted our international net sales by approximately $14.1 million in fiscal 2019. International net sales comprised 23.1 percent of our total consolidated net sales in fiscal 2019 compared to 24.6 percent and 24.4 percent in fiscal 2018 and 2017, respectively.
Gross margin was 33.4 percent in fiscal 2019, a decrease of 250 basis points from 35.9 percent in fiscal 2018. Non-GAAP adjusted gross margin was 35.1 percent in fiscal 2019, a decrease of 80 basis points from 35.9 percent in fiscal 2018.
Selling, general, and administrative ("SG&A") expense was 23.0 percent as a percentage of net sales in fiscal 2019,
 
an increase of 130 basis points from 21.7 percent in fiscal 2018.
Fiscal 2019 net earnings of $274.0 million increased 0.8 percent compared to fiscal 2018, and diluted net earnings per share increased 1.2 percent to $2.53 in fiscal 2019 compared to $2.50 in fiscal 2018. Fiscal 2019 non-GAAP adjusted net earnings were $324.3 millionan increase of 11.8 percent compared to fiscal 2018, and non-GAAP adjusted diluted net earnings per share increased 12.4 percent to $3.00 in fiscal 2019 compared to $2.67 in fiscal 2018.
Our receivables and inventories increased by 39.1 percent and 81.9 percent, respectively, as of the end of fiscal 2019 compared to the end of fiscal 2018, primarily due to incremental receivables and inventories as a result of our acquisition of CMW.
Our field inventory levels were up as of the end of fiscal 2019 compared to the end of fiscal 2018, primarily as a result of higher Professional segment field inventory that was primarily due to incremental field inventory as a result of our acquisition of CMW and higher field inventory for our Professional segment zero-turn riding mowers due to soft retail demand.
We continued our history of paying quarterly cash dividends in fiscal 2019. We increased our fiscal 2019 quarterly cash dividend by 12.5 percent to $0.225 per share compared to our quarterly cash dividend in fiscal 2018 of $0.20 per share.
Please refer to the sections entitled “Results of Operations", "Business Segments", and "Financial Position" within this MD&A for more specific disclosures regarding the above items of significance and additional details concerning our financial condition, results of operations, and liquidity for fiscal 2019. Additionally, please refer to the section titled "Non-GAAP Financial Measures" within this MD&A for reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported GAAP financial measures.
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. In fiscal year 2019, we fell short of our organic revenue growth and our operating earnings as a percentage of net sales goals by achieving 1.1 percent organic revenue growth and 10.4 percent of operating earnings as a percentage of net sales, respectively.
With our transformational acquisition of CMW, we will complete the third and final fiscal year of our Vision 2020 initiative with a revised enterprise-wide performance goal of adjusted operating earnings of $485.0 million, which is intended to help us drive profitable growth as a combined enterprise.

33


RESULTS OF OPERATIONS
Overview
The following table summarizes our results of operations as a percentage of our consolidated net sales:
Fiscal Years Ended October 31
 
2019
 
2018
 
2017
Net sales
 
100.0
 %
 
100.0
 %
 
100.0
 %
Cost of sales
 
(66.6
)
 
(64.1
)
 
(63.2
)
Gross margin
 
33.4

 
35.9

 
36.8

SG&A expense
 
(23.0
)
 
(21.7
)
 
(22.6
)
Operating earnings
 
10.4

 
14.2

 
14.2

Interest expense
 
(0.9
)
 
(0.7
)
 
(0.8
)
Other income, net
 
0.8

 
0.7

 
0.7

Provision for income taxes
 
(1.6
)
 
(3.8
)
 
(3.4
)
Net earnings
 
8.7
 %
 
10.4
 %
 
10.7
 %
Net Sales
Worldwide net sales in fiscal 2019 were $3,138.1 million compared to $2,618.7 million in fiscal 2018, an increase of 19.8 percent. This net sales increase was primarily attributable to the following factors:
Increased worldwide sales of Professional segment products, which were primarily driven by incremental sales as a result of our acquisition of CMW, the year-over-year impact of price increases across our Professional segment product lines, and strong channel demand for our snow and ice management, landscape contractor, and Toro-branded rental and specialty construction equipment, partially offset by fewer shipments of our irrigation products due to unfavorable weather in key regions.
Increased sales for our Other activities were primarily due to increased shipments of our golf and grounds equipment through our wholly-owned domestic distribution companies driven by our acquisition of a Northeastern U.S. distribution company.
Increased worldwide sales of Residential segment products were primarily due to the year-over-year impact of price increases across our Residential segment product lines, strong retail demand for snow throwers, the successful introduction of new products, and increased parts sales, partially offset by soft retail demand for zero-turn riding mowers and reduced sales of our Pope-branded irrigation products by unfavorable weather conditions.
Net sales in international markets increased by 12.7 percent in fiscal 2019 compared to fiscal 2018. This net sales increase was primarily attributable to the following factors:
incremental sales as a result of our acquisition of CMW,
strong channel demand for our golf and grounds equipment, and
strong retail demand for Residential snow thrower products.
 
These international net sales increases were partially offset by the following factors:
decreased sales of Residential and Professional segment zero-turn riding mowers due to soft retail demand,
lower sales of Pope-branded products due to unfavorable weather in key regions, and
changes in foreign currency exchange rates unfavorably impacted our international net sales by approximately $14.1 million in fiscal 2019.
Gross Margin
Gross margin represents gross profit (net sales less cost of sales) as a percentage of net sales. See Note 1, Summary of Significant Accounting Policies and Related Data, of the Notes to Consolidated Financial Statements, in the section entitled "Cost of Sales," included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for a description of expenses included in cost of sales. Gross margin decreased by 250 basis points to 33.4 percent in fiscal 2019 from 35.9 percent in fiscal 2018. This decrease was mainly the result of the following factors:
the unfavorable impact of higher commodity and tariff costs on purchased raw materials and component parts,
the impact of purchase accounting adjustments related to our acquisition of CMW,
unfavorable product mix,
charges related to the Toro underground wind down, and
supply chain challenges and inclement weather resulting in manufacturing inefficiencies within our Professional segment.
Somewhat offsetting those unfavorable gross margin factors were:
improved net price realization driven by price increases across our product lines,
productivity initiatives related to commodities, components, parts, and accessories sourcing, and
lower freight costs due to cost reduction initiatives.
Adjusted non-GAAP gross margin decreased 80 basis points to 35.1 percent in fiscal 2019 from 35.9 percent in fiscal 2018. This decrease was mainly the result of the following factors:
the unfavorable impact of higher commodity and tariff costs on purchased raw materials and component parts,
unfavorable product mix, and
supply chain challenges and inclement weather resulting in manufacturing inefficiencies within our Professional segment.
Somewhat offsetting those unfavorable adjusted non-GAAP gross margin factors were:
improved net price realization driven by price increases across our product lines,
productivity initiatives related to commodities, components, parts, and accessories sourcing, and
lower freight costs due to cost reduction initiatives.

34


Adjusted non-GAAP gross margin excludes the impact of certain purchase accounting adjustments resulting from our acquisition of CMW, including charges incurred for the take-down of the inventory fair value step-up amount and amortization of the backlog intangible asset, as well as the impact of management actions, including the charges incurred for inventory write-downs, anticipated inventory retail support activities, and accelerated depreciation of fixed assets related to the Toro underground wind down and restructuring charges incurred for our corporate restructuring event. Please refer to the section titled "Non-GAAP Financial Measures" within this MD&A for reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported GAAP financial measures.
Selling, General and Administrative Expense
SG&A expense increased $155.0 million, or 27.3 percent, in fiscal 2019 compared to fiscal 2018. See Note 1, Summary of Significant Accounting Policies and Related Data, of the Notes to Consolidated Financial Statements, in the section entitled "Selling, General, and Administrative Expense," included in Part II, Item 8, "Financial Statements and Supplementary Data" of this report for a description of expenses included in SG&A expense. SG&A expense rate represents SG&A expense as a percentage of net sales. The SG&A expense rate in fiscal 2019 was 23.0 percent compared to 21.7 percent in fiscal 2018, an unfavorable increase of 130 basis points. As a percentage of net sales, our SG&A expense rate increase was primarily due to the following factors:
the acquisition of CMW, which resulted in incremental administrative, indirect sales and marketing, engineering, warranty, and service expense; integration and acquisition-related expenditures, and higher amortization of other intangible assets;
increased warranty costs in certain of our legacy businesses; and
increased engineering expense for new product development in our legacy businesses.
These unfavorable SG&A expense rate factors were partially offset by decreased direct marketing expense in our legacy businesses.
Interest Expense
Interest expense for fiscal 2019 increased $9.7 million, or 51.0 percent, compared to fiscal 2018. This increase was driven by interest expense incurred on higher outstanding borrowings incurred to fund the purchase price for our acquisition of CMW.
Other Income, Net
Other income, net consists mainly of our proportionate share of income or losses from our Red Iron joint venture, realized currency exchange rate gains and losses, litigation settlements and/or recoveries, interest income, dividend income, gains or losses recognized on actuarial valuation changes for our pension and post-retirement plans, retail financing revenue, and other miscellaneous income. Refer to Note 16, Other Income, Net, of the Notes to Consolidated Financial Statements,
 
included in Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K for additional information regarding the components of other income, net.
Other income, net for fiscal 2019 was $25.9 million compared to $18.4 million in fiscal 2018, an increase of $7.5 million. The increase in other income, net was primarily due to the following factors:
realized gain on actuarial valuation changes for our pension and post-retirement plans of $6.8 million and
higher earnings from our equity investment in Red Iron of $0.8 million.
These increases were partially offset by the following factors:
increased legal expense, net of litigation recoveries, of $1.0 million and
the loss on the sale of a used underground construction equipment business of $0.9 million.
Provision for Income Taxes
The effective tax rate for fiscal 2019 was 14.9 percent compared to 27.0 percent in fiscal 2018. The effective tax rate was significantly impacted by the enactment of the Tax Act during fiscal 2018, including the remeasurement of deferred tax assets and liabilities, which resulted in a non-cash discrete tax charge of $19.3 million, and the calculation of the deemed repatriation tax, which resulted in a discrete tax charge of $13.4 million, payable over eight years.  In addition to these one-time charges resulting from the Tax Act, the decrease in the effective tax rate was partially driven by the reduction in the U.S. federal corporate tax rate from a blended rate of 23.3 percent in fiscal 2018 to a rate of 21.0 percent in fiscal 2019. See Note 8, Income Taxes, of the Notes to Consolidated Financial Statements, included in Part II, Item 8, "Financial Statements and Supplementary Data" of this report for further discussion the impacts on US Tax Reform.
The adjusted non-GAAP effective tax rate for fiscal 2019 was 19.3 percent, compared to an adjusted non-GAAP effective tax rate of 22.1 percent in fiscal 2018. The decrease in the adjusted non-GAAP effective tax rate was primarily driven by the reduction in the U.S. federal corporate tax rate from a blended rate of 23.3 percent in fiscal 2018 to a rate of 21.0 percent in fiscal 2019.
The adjusted non-GAAP effective tax rate excludes costs incurred related to our acquisition of CMW, including integration and transaction costs and certain purchase accounting adjustments; the impact of management actions, including the charges related to the Toro underground wind down, our corporate restructuring event, and the divestiture of a used underground construction equipment business; the tax benefit for the excess tax deduction for share-based compensation; and one-time charges incurred under the Tax Act. Please refer to the section titled "Non-GAAP Financial Measures" within this MD&A for reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported GAAP financial measures.

35


Net Earnings
Fiscal 2019 net earnings were $274.0 million compared to $271.9 million in fiscal 2018, an increase of 0.8 percent. Fiscal 2019 diluted net earnings per share were $2.53, an increase of 1.2 percent from $2.50 per diluted share in fiscal 2018. The net earnings increase for fiscal 2019 was primarily due to the following factors:
the significant impact of the one-time charges as a result of the Tax Act on our fiscal 2018 net earnings,
incremental earnings as a result of our acquisition of CMW,
improved net price realization driven by price increases across our product lines,
the reduction in the U.S federal corporate tax rate from a blended rate of 23.3 percent in fiscal 2018 to a rate of 21.0 percent in fiscal 2019,
productivity initiatives related to commodities and component parts sourcing, and
the realized gain on actuarial valuation changes for our pension and post-retirement plans.
These increases to net earnings were partially offset by the following factors:
the unfavorable impact of purchase accounting adjustments and integration and acquisition-related expenditures from our CMW acquisition,
higher commodity and tariff costs on purchased raw materials and component parts,
unfavorable product mix,
charges related to the Toro underground wind down,
higher interest expense incurred on outstanding indebtedness, and
charges related to our corporate restructuring event.
Non-GAAP adjusted net earnings for fiscal 2019 were $324.3 million, or $3.00 per diluted share, compared to $290.1 million, or $2.67 per diluted share, in fiscal 2018, an increase of 12.4 percent per diluted share. The non-GAAP adjusted net earnings increase for fiscal 2019 was primarily due to the following factors:
incremental earnings as a result of our acquisition of CMW,
improved net price realization driven by price increases across our product lines,
the reduction in the U.S federal corporate tax rate from blended rate of 23.3 percent in fiscal 2018 to a rate of 21.0 percent in fiscal 2019,
productivity initiatives related to commodities and component parts sourcing, and
the realized gain on actuarial valuation changes for our pension and post-retirement plans.
These increases to adjusted non-GAAP net earnings were partially offset by the following factors:
higher commodity and tariff costs on purchased raw materials and component parts,
unfavorable product mix, and
higher interest expense incurred on outstanding indebtedness.
 
Adjusted net earnings excludes costs incurred related to our acquisition of CMW, including integration and transaction costs and certain purchase accounting adjustments; the impact of management actions, including the charges related to the Toro underground wind down, our corporate restructuring event, and the divestiture of a used underground construction equipment business; the tax benefit for the excess tax deduction for share-based compensation; and one-time charges incurred under the Tax Act. Please refer to the section titled "Non-GAAP Financial Measures" within this MD&A for reconciliations of adjusted non-GAAP financial measures to the most directly comparable reported GAAP financial measures.
Commodity Cost Changes
Commodities, components, parts, and accessories purchased for use in our manufacturing process and end-products or to be sold as standalone end-products are subject to the effects of inflation, deflation, changing prices, tariffs, and/or duties. During fiscal 2019, the average cost of commodities, components, parts, and accessories purchased, including the impact of inflation and tariff costs, were higher compared to the average cost of commodities, components, parts, and accessories purchased in fiscal 2018. The increase in the average cost of commodities, components, parts, and accessories had an unfavorable impact on our gross margins during fiscal 2019 as compared to fiscal 2018.
We strategically work to mitigate any unfavorable impact as a result of changes in the cost of commodities, components, parts, and accessories that affect our product lines; as a result, we anticipate the costs associated with commodity, components, parts, and accessories in fiscal 2020 to be slightly lower than the average cost of commodities, components, parts, and accessories purchased during fiscal 2019. Historically, we have mitigated, and we currently expect that we would mitigate, any commodity, components, parts, and accessories cost increases, in part, by collaborating with suppliers, reviewing alternative sourcing options, substituting materials, utilizing Lean methods, engaging in internal cost reduction efforts, utilizing tariff exclusions and duty drawback mechanisms, and increasing prices on some of our products, all as appropriate. Further information regarding commodity cost risk is presented in Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk," of this Annual Report on Form 10-K in the section entitled "Commodity Cost Risk".

36


BUSINESS SEGMENTS
As more fully described in Note 3, Segment Data, of the Notes to Consolidated Financial Statements included within Part II, Item 8, "Financial Statements and Supplementary Data" of this Annual Report on Form 10-K, 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, corporate activities, other income, and interest expense. Corporate activities include general corporate expenditures (finance, human resources, legal, information services, public relations, business development, and similar activities) and other unallocated corporate assets and liabilities, such as corporate facilities and deferred tax assets and liabilities. The following information provides perspective on our reportable business segments' and Other activities net sales and operating results.
Professional Segment
Professional segment net sales represented approximately 77.9 percent of consolidated net sales for fiscal 2019, 74.4 percent for fiscal 2018, and 72.3 percent for fiscal 2017. The following table presents our Professional segment's net sales, operating earnings, and operating earnings as a percent of net sales:
(Dollars in millions)
 
 
 
 
 
 
Fiscal Years Ended October 31
 
2019
 
2018
 
2017
Net sales
 
$
2,443.4

 
$
1,947.0

 
$
1,811.7

% change from prior year
 
25.5
%
 
7.5
%
 
6.2
%
Operating earnings
 
$
380.9

 
$
399.8

 
$
379.5

As a percent of net sales
 
15.6
%
 
20.5
%
 
20.9
%
Segment Net Sales
Worldwide net sales for the Professional segment in fiscal 2019 were up by 25.5 percent compared to fiscal 2018 primarily as a result of the following factors:
incremental sales as a result of our acquisition of CMW;
the year-over-year impact of price increases across our Professional segment product lines;
higher shipments of our snow and ice management products due to strong channel and retail demand driven by late snowfalls in key regions during the Spring of 2019, as well as strong sales of the redesigned stand-on Snowrator;
continued growth in our landscape contractor business driven by the successful introduction of the new eXmark-branded Staris stand-on zero-turn riding mower, incremental sales of lawn solution products as a result of our acquisition of L.T. Rich Products, Inc. ("L.T. Rich"), higher parts sales, and strong channel demand for walk-behind and walk-power mowers; and
increased shipments of our rental and specialty construction equipment due to the successful new product
 
introduction of our Dingo TXL 2000 compact utility loader and continued channel demand for our line of Dingo compact utility loaders.
Somewhat offsetting those increases were fewer shipments of our irrigation products primarily due to unfavorable weather in key regions resulting in soft retail demand.
Segment Earnings
Operating earnings for the Professional segment in fiscal 2019 decreased 4.7 percent compared to fiscal 2018. Expressed as a percentage of Professional segment net sales, Professional segment operating earnings decreased by 490 basis points to 15.6 percent in fiscal 2019 compared to 20.5 percent in fiscal 2018. The following factors unfavorably impacted Professional segment operating earnings as a percentage of Professional segment net sales for fiscal 2019:
our acquisition of CMW resulting in charges incurred for purchase accounting adjustments and acquisition-related and integration expenditures; incremental administrative, indirect sales and marketing, engineering, warranty, and service expense; and higher amortization of other intangible assets;
the unfavorable impact of higher commodity and tariff costs on purchased raw materials and component parts;
supply chain challenges and inclement weather resulting in manufacturing inefficiencies;
charges related to the Toro underground wind down;
unfavorable product mix;
increased warranty costs in certain of our legacy businesses; and
increased engineering expense for new product development.
Somewhat offsetting these unfavorable factors were the following items:
improved net price realization driven by pricing increases across our Professional segment product lines,
productivity initiatives related to commodities and component parts sourcing,
lower freight costs due to cost reduction initiatives, and
decreased direct marketing expense in our legacy businesses.
Residential Segment
Residential segment net sales represented approximately 21.1 percent of consolidated net sales for fiscal 2019, 24.9 percent for fiscal 2018, and 26.9 percent for fiscal 2017. The following table presents our Residential segment's net sales, operating earnings, and operating earnings as a percent of net sales:
(Dollars in millions)
 
 
 
 
 
 
Fiscal Years Ended October 31
 
2019
 
2018
 
2017
Net sales
 
$
661.3

 
$
654.4

 
$
673.2

% change from prior year
 
1.0
%
 
(2.8
)%
 
0.6
%
Operating earnings
 
$
65.2

 
$
64.8

 
$
74.7

As a percent of net sales
 
9.9
%
 
9.9
 %
 
11.1
%

37


Segment Net Sales
Worldwide net sales for the Residential segment in fiscal 2019 were up by 1.0 percent compared to fiscal 2018 primarily as a result of the following factors:
the year-over-year impact of price increases across our Residential segment product lines,
strong retail demand for our snow throwers, including the successful introduction of our line of 60V lithium-ion powered single-stage snow thrower products,
higher shipments of walk power mowers driven by the launch of our 60V lithium-ion powered walk power mowers, and
increased parts sales driven by channel demand.
Somewhat offsetting those increases were the following factors:
fewer shipments of zero-turn riding mowers driven by soft retail demand and
reduced sales of our Pope-branded irrigation products driven by unfavorable weather conditions in key regions.
Segment Earnings
Operating earnings for the Residential segment in fiscal 2019 increased 0.5 percent compared to fiscal 2018. Expressed as a percentage of Residential segment net sales, Residential segment operating earnings were flat as a percent of sales at 9.9 percent in both fiscal 2019 and fiscal 2018. The following factors positively impacted Residential segment operating earnings as a percentage of Residential segment net sales for fiscal 2019:
improved net price realization as a result of pricing increases across our Residential segment product lines,
favorable manufacturing variance, and
lower direct marketing costs.
Offsetting these positive factors were the following items:
the unfavorable impact of higher commodity and tariff costs on purchased raw materials and component parts,
unfavorable product mix,
increased warranty cost, and
higher engineering expense for new product development.
Other Activities
Net sales for our Other activities, which includes sales from our wholly-owned domestic distribution companies less sales from our Professional and Residential business segments to the wholly-owned domestic distribution companies, represented approximately 1.0 percent of consolidated net sales for fiscal 2019, 0.7 percent for fiscal 2018, and 0.8 percent for fiscal 2017. The following table presents net sales and operating losses for our Other activities:
(Dollars in millions)
 
 
 
 
 
 
Fiscal Years Ended October 31
 
2019
 
2018
 
2017
Net sales
 
$
33.4

 
$
17.2

 
$
20.2

% change from prior year
 
93.5
%
 
(14.8
)%
 
14.1
%
Operating losses
 
$
(123.9
)
 
$
(92.2
)
 
$
(101.0
)
 
Other Net Sales
Net sales for our Other activities in fiscal 2019 increased approximately $16.1 million compared to fiscal 2018, primarily due to increased sales of our golf and grounds equipment through our wholly-owned domestic distribution companies driven by our acquisition of a Northeastern U.S. distribution company.
Other Operating Loss
Operating loss for our Other activities in fiscal 2019 increased by $31.7 million, or 34.4 percent, compared to fiscal 2018. This loss increase was primarily attributable to costs incurred for continued CMW integration efforts, higher interest expense incurred on outstanding indebtedness, charges incurred for our corporate restructuring event, higher incentive compensation expense, and increased legal expense, net of litigation recoveries. The increase in loss was partially offset by the realized gain on actuarial valuation changes for our pension and post-retirement plans and higher Red Iron income.
FINANCIAL POSITION
Working Capital
Our strategy for fiscal 2019 continued 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. We calculate our average net working capital as average net accounts receivable plus average net inventory, less average accounts payable as a percentage of net sales for a twelve month period. As of the end of fiscal 2019, our average net working capital was 16.3 percent compared to 13.7 percent as of the end of fiscal 2018. This capital increase was mainly due to a higher average net inventory and net accounts receivable than the corresponding increase to average net accounts payable as a percentage of net sales due to our acquisition of CMW, as well as higher net inventory balances in our legacy businesses due to lower than forecasted sales in our Professional segment driven by soft retail demand and build-ahead for fiscal 2020 new product introductions in our Residential segment.
The following table highlights several key measures of our working capital performance:
(Dollars in millions)
 
 
 
 
Fiscal Years Ended October 31
 
2019
 
2018
Average cash and cash equivalents
 
$
180.0

 
$
237.6

Average receivables, net
 
$
265.4

 
$
214.7

Average inventories, net
 
$
560.5

 
$
404.5

Average accounts payable
 
$
315.5

 
$
259.3

Average days outstanding for receivables
 
30.9

 
29.9

Average inventory turnover (times)
 
3.7

 
4.2


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The following factors impacted our working capital during fiscal 2019:
Average net receivables increased by 23.6 percent in fiscal 2019 compared to fiscal 2018, primarily due to incremental net receivables as a result of our acquisition of CMW. Our average days outstanding for receivables increased to 30.9 days in fiscal 2019 compared to 29.9 days in fiscal 2018.
Average net inventories increased by 38.6 percent in fiscal 2019 compared to fiscal 2018. Inventory levels as of the end of fiscal 2019 compared to the end of fiscal 2018 were up by $293.4 million, or 81.9 percent, primarily due to incremental net inventory as a result of our acquisition of CMW, as well as higher net inventory balances in our legacy businesses due to lower than forecasted sales in our Professional segment driven by soft retail demand and build-ahead for fiscal 2020 new product introductions in our Residential segment.
Average accounts payable increased by 21.7 percent in fiscal 2019 compared to fiscal 2018, mainly due to incremental accounts payable as a result of our acquisition of CMW and negotiating more favorable payment terms with suppliers as a component of our working capital initiatives.
Cash Flow
Cash flows provided by/(used in) operating, investing, and financing activities during the past three fiscal years are shown in the following table:
(Dollars in millions)
 
Cash Provided by/(Used in)
Fiscal Years Ended October 31
 
2019
 
2018
 
2017
Operating activities
 
$
337.4

 
$
364.8

 
$
360.7

Investing activities
 
(772.9
)
 
(127.9
)
 
(83.8
)
Financing activities
 
299.5

 
(252.1
)
 
(245.3
)
Effect of exchange rates on cash
 
(1.2
)
 
(5.9
)
 
5.0

Net increase/(decrease) in cash and cash equivalents
 
(137.3
)
 
(21.1
)
 
36.7

Cash and cash equivalents as of fiscal year end
 
$
151.8

 
$
289.1

 
$
310.3

Cash Flows from Operating Activities
Our primary source of funds is cash generated from operations. In fiscal 2019, cash provided by operating activities decreased by $27.4 million, or 7.5 percent, from fiscal 2018. This decrease was mainly driven by more cash utilized for purchases of inventory and a lower year-over-year cash source benefit from extending payment terms with vendors as a component of our working capital initiatives. Somewhat offsetting this decrease was higher net earnings, which includes the unfavorable non-cash take-down of the CMW inventory purchase accounting step-up amount, and lower cash utilized for prepaid taxes.
Cash Flows from Investing Activities
Capital expenditures and acquisitions are a significant use of our capital resources. These investments are intended to enable sales growth in new and expanding markets, help us meet
 
product demand, and increase our manufacturing efficiencies and capacity. Cash used in investing activities in fiscal 2019 increased by $645.0 million from fiscal 2018 mainly due to more cash utilized for our acquisitions of CMW and a Northeastern U.S. distribution company in fiscal 2019 than the cash utilized for the acquisition of L.T. Rich in fiscal 2018, partially offset by cash proceeds from the sale of a used underground construction equipment business.
Cash Flows from Financing Activities
Cash provided by financing activities in fiscal 2019 was $299.5 million compared to $252.1 million of cash used in financing activities in fiscal 2018, an increase of $551.6 million. This increase in cash provided by financing activities was mainly due to the cash proceeds as the result of the issuance of indebtedness under our term loan credit agreement and amounts drawn on our revolving credit facility to fund the CMW acquisition and the issuance of our private placement senior notes, reduced cash utilized for purchases of Toro common stock compared to fiscal 2018, and higher cash provided from the exercise of stock options. These sources of cash were partially offset by more cash utilized for repayments of our outstanding indebtedness under our revolving credit facility and term loan credit agreement and more cash utilized for dividend payments on shares of our common stock compared to fiscal 2018.
Cash and Cash Equivalents
Cash and cash equivalents as of the end of fiscal 2019 decreased by $137.3 million compared to the end of fiscal 2018.
As of October 31, 2019, cash and cash equivalents held by our foreign subsidiaries were approximately $97.5 million. We consider that $17.2 million of cash and cash equivalents held by our foreign subsidiaries are intended to be indefinitely reinvested. Should these cash and cash equivalents be distributed in the future in the form of dividends or otherwise, we may be subject to foreign withholding taxes, state income taxes, and/or additional federal taxes for currency fluctuations. As of October 31, 2019, the unrecognized deferred tax liabilities for temporary differences related to our investment in non-U.S. subsidiaries, and any withholding, state, or additional federal taxes upon any future repatriation, are not material and have not been recorded.
Capital Expenditures
Fiscal 2019 capital expenditures of $92.9 million were $2.8 million higher than fiscal 2018. This increase was mainly attributable to incremental capital expenditures as a result of our acquisition of CMW, as well as continued investment in our facilities, new product tooling, productivity improvements in our manufacturing and distribution processes, and continued replacement of production equipment. Capital expenditures for fiscal 2020 are expected to be approximately $100.0 million as we plan to continue to invest in our facilities, new product tooling, productivity improvements in our manufacturing and distribution processes, and continued replacement of production equipment.

39


Other Long-Term Assets
Other long-term assets as of October 31, 2019 were $1,207.7 million compared to $676.3 million as of October 31, 2018, an increase of $531.3 million. This increase was driven mainly by our acquisition of CMW, which resulted in significant increases in other intangible assets; property, plant and equipment; and goodwill. In addition, our other long-term assets increased as a result of purchases of property, plant, and equipment in our legacy businesses. These increases to other long-term assets were partially offset by amortization of intangible assets and the reclassification of our long-term deferred tax assets to long-term deferred tax liabilities as a result of our acquisition of CMW.
Included in other long-term assets as of October 31, 2019 was goodwill in the amount of $362.3 million. Based on our annual goodwill impairment analysis, we determined there was no impairment of goodwill during fiscal 2019 for any of our reporting units as the fair values of the reporting units exceeded their carrying values, including goodwill.
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 believe that 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, quarterly cash dividend payments, and common stock repurchases, all as applicable, for at least the next twelve months.
Indebtedness
As of October 31, 2019, we had $700.8 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 under our $200.0 million three year unsecured senior term loan facility, $180.0 million under our $300.0 million five year unsecured senior term loan facility, $100.0 million of 3.81 percent Series A Senior Notes, $100.0 million of 3.91 percent Series B Senior Notes, and no outstanding borrowings under our revolving credit facility. The October 31, 2019 outstanding indebtedness amounts were partially offset by debt issuance costs and deferred charges of $3.1 million related to our outstanding indebtedness. As of October 31, 2019, we have reclassified $79.9 million of the remaining outstanding principal balance under the term loan credit agreement, net of the related
 
proportionate share of debt issuance costs, to current portion of long-term debt within the Condensed Consolidated Balance Sheets as we intend to prepay such amount utilizing cash flows from operations within the next twelve months.
As of October 31, 2018, we had $312.5 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, and $91.0 million of outstanding borrowings under our revolving credit facility. The October 31, 2018 outstanding indebtedness amounts were partially offset by debt issuance costs and deferred charges of $2.3 million related to our outstanding indebtedness. As of October 31, 2018, the $91.0 million of outstanding borrowings under our revolving credit facility was classified as long-term debt within our Condensed Consolidated Balance Sheets.
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. Included in our $600.0 million revolving credit facility is a $10.0 million sublimit for standby letters of credit and a $30.0 million sublimit for swingline loans. At our election, and with the approval of the named borrowers on the revolving credit facility and the election of the lenders to fund such increase, the aggregate maximum principal amount available under the facility may be increased by an amount up to $300.0 million. Funds are available under the revolving credit facility for working capital, capital expenditures, and other lawful corporate purposes, including, but not limited to, acquisitions and common stock repurchases, subject in each case to compliance with certain financial covenants described below.
Outstanding loans under the revolving credit facility (other than swingline loans), if applicable, bear interest at a variable rate generally based on LIBOR or an alternative variable rate based on the highest of the Bank of America prime rate, the federal funds rate or a rate generally based on LIBOR, in each case subject to an additional basis point spread that is calculated based on the better of the leverage ratio (as measured quarterly and defined as the ratio of total indebtedness to consolidated earnings before interest and taxes plus depreciation and amortization expense) and debt rating of Toro. Swingline loans under the revolving credit facility bear interest at a rate determined by the swingline lender or an alternative variable rate based on the highest of the Bank of America prime rate, the federal funds rate or a rate generally based on LIBOR, in each case subject to an additional basis point spread that is calculated based on the better of the leverage ratio and debt rating of Toro. Interest is payable quarterly in arrears. Our debt rating for long-term unsecured senior, non-credit enhanced debt was unchanged during the fourth quarter of fiscal 2019 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 applicable in determining the interest payable on our outstanding debt under the revolving credit facility could increase. However, the credit commitment could not be

40


canceled by the banks based solely on a ratings downgrade. For the fiscal years ended October 31, 2019 and October 31, 2018, we incurred interest expense of approximately $1.9 million and $1.3 million, respectively, on outstanding borrowings under the revolving credit facility.
Our revolving credit facility contains customary covenants, including, without limitation, financial covenants, such as the maintenance of minimum interest coverage and maximum leverage ratios; and negative covenants, which among other things, limit disposition of assets, consolidations and mergers, restricted payments, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. Under the revolving credit facility, we are not limited in the amount for payments of cash dividends and common stock repurchases as long as, both before and after giving pro forma effect to such payments, our leverage ratio from the previous quarter compliance certificate is less than or equal to 3.5 (or, at our option (which we may exercise twice during the term of the facility) after certain acquisitions with aggregate consideration in excess of $75.0 million, for the first four quarters following the exercise of such option, is less than or equal to 4.0), provided that immediately after giving effect to any such proposed action, no default or event of default would exist. As of October 31, 2019, 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 October 31, 2019, and we expect to be in compliance with all covenants during 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 revolving credit facility.
As of October 31, 2019, we had no borrowings under the revolving credit facility but did have $1.9 million outstanding under the sublimit for standby letters of credit, resulting in $598.1 million of unutilized availability under our revolving credit facility. As of October 31, 2018, we had $91.0 million of outstanding borrowings under the revolving credit facility and $1.5 million outstanding under the sublimit for standby letters of credit, resulting in $507.5 million of unutilized availability under our revolving credit facility.
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