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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.  20549

FORM 10-Q

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

For the Quarterly Period Ended January 31, 2020

         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: (952) 888-8801
(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

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 Exchange Act). Yes    No 
  
The number of shares of the registrant’s common stock outstanding as of February 27, 2020 was 106,979,296.
 



THE TORO COMPANY
FORM 10-Q
TABLE OF CONTENTS
 
Description
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


2


PART I.  FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TORO COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (Unaudited)
(Dollars and shares in thousands, except per share data)
 
 
Three Months Ended
 
 
January 31, 2020
 
February 1, 2019
Net sales
 
$
767,483

 
$
602,956

Cost of sales
 
479,395

 
387,339

Gross profit
 
288,088

 
215,617

Selling, general and administrative expense
 
196,959

 
145,563

Operating earnings
 
91,129

 
70,054

Interest expense
 
(8,156
)
 
(4,742
)
Other income, net
 
3,166

 
4,708

Earnings before income taxes
 
86,139

 
70,020

Provision for income taxes
 
16,048

 
10,480

Net earnings
 
$
70,091

 
$
59,540

 
 
 
 
 
Basic net earnings per share of common stock
 
$
0.65

 
$
0.56

 
 
 
 
 
Diluted net earnings per share of common stock
 
$
0.65

 
$
0.55

 
 
 
 
 
Weighted-average number of shares of common stock outstanding — Basic
 
107,423

 
106,258

 
 
 
 
 
Weighted-average number of shares of common stock outstanding — Diluted
 
108,655

 
107,781


See accompanying Notes to Condensed Consolidated Financial Statements.



THE TORO COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in thousands) 
 
 
Three Months Ended
 
 
January 31, 2020
 
February 1, 2019
Net earnings
 
$
70,091

 
$
59,540

Other comprehensive income (loss), net of tax:
 
 
 
 

Foreign currency translation adjustments
 
(724
)
 
3,431

Derivative instruments, net of tax of $189 and $(1,352), respectively
 
652

 
(4,009
)
Other comprehensive loss, net of tax
 
(72
)
 
(578
)
Comprehensive income
 
$
70,019

 
$
58,962


See accompanying Notes to Condensed Consolidated Financial Statements.

3


THE TORO COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in thousands, except per share data)
 
 
January 31, 2020
 
February 1, 2019
 
October 31, 2019
ASSETS
 
 

 
 

 
 

Cash and cash equivalents
 
$
108,914

 
$
249,965

 
$
151,828

Receivables, net
 
321,192

 
225,528

 
268,768

Inventories, net
 
738,960

 
416,650

 
651,663

Prepaid expenses and other current assets
 
51,442

 
41,789

 
50,632

Total current assets
 
1,220,508

 
933,932

 
1,122,891

 
 
 
 
 
 
 
Property, plant, and equipment, net
 
431,253

 
279,270

 
437,317

Goodwill
 
362,136

 
227,091

 
362,253

Other intangible assets, net
 
347,643

 
104,017

 
352,374

Right-of-use assets
 
73,137

 

 

Investment in finance affiliate
 
25,455

 
25,430

 
24,147

Deferred income taxes
 
6,161

 
39,589

 
6,251

Other assets
 
25,316

 
13,485

 
25,314

Total assets
 
$
2,491,609

 
$
1,622,814

 
$
2,330,547

 
 
 
 
 
 
 
LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 

 
 

 
 

Current portion of long-term debt
 
$
113,903

 
$

 
$
79,914

Accounts payable
 
348,003

 
281,526

 
319,230

Accrued liabilities
 
348,027

 
283,452

 
357,826

Short-term lease liabilities
 
14,374

 

 

Total current liabilities
 
824,307

 
564,978

 
756,970

 
 
 
 
 
 
 
Long-term debt, less current portion
 
601,016

 
312,551

 
620,899

Long-term lease liabilities
 
62,015

 

 

Deferred income taxes
 
50,676

 
1,410

 
50,579

Other long-term liabilities
 
41,545

 
49,478

 
42,521

 
 
 
 
 
 
 
Stockholders’ equity:
 
 

 
 

 
 

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

 

 

Common stock, par value $1.00 per share, authorized 175,000,000 shares; issued and outstanding 106,977,274 shares as of January 31, 2020, 105,746,538 shares as of February 1, 2019, and 106,742,082 shares as of October 31, 2019
 
106,977

 
105,747

 
106,742

Retained earnings
 
837,194

 
613,165

 
784,885

Accumulated other comprehensive loss
 
(32,121
)
 
(24,515
)
 
(32,049
)
Total stockholders’ equity
 
912,050

 
694,397

 
859,578

Total liabilities and stockholders’ equity
 
$
2,491,609

 
$
1,622,814

 
$
2,330,547


See accompanying Notes to Condensed Consolidated Financial Statements.

4


THE TORO COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
 
 
Three Months Ended
 
 
January 31, 2020
 
February 1, 2019
Cash flows from operating activities:
 
 

 
 

Net earnings
 
$
70,091

 
$
59,540

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

 
 

Non-cash income from finance affiliate
 
(1,751
)
 
(2,429
)
Distributions from (contributions to) finance affiliate, net
 
442

 
(459
)
Depreciation of property, plant and equipment
 
18,089

 
13,670

Amortization of other intangible assets
 
4,714

 
1,913

Fair value step-up adjustment to acquired inventory
 
470

 

Stock-based compensation expense
 
3,960

 
3,924

Deferred income taxes
 
141

 
(1,225
)
Other
 
175

 

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

 
 

Receivables, net
 
(53,044
)
 
(31,331
)
Inventories, net
 
(88,557
)
 
(52,380
)
Prepaid expenses and other assets
 
237

 
8,119

Accounts payable, accrued liabilities, deferred revenue and other liabilities
 
21,734

 
26,643

Net cash (used in) provided by operating activities
 
(23,299
)
 
25,985

 
 
 
 
 
Cash flows from investing activities:
 
 

 
 

Purchases of property, plant and equipment
 
(11,821
)
 
(14,180
)
Proceeds from asset disposals
 
25

 
3

Investment in unconsolidated entities
 

 
(150
)
Acquisitions, net of cash acquired
 

 
(12,498
)
Net cash used in investing activities
 
(11,796
)
 
(26,825
)
 
 
 
 
 
Cash flows from financing activities:
 
 

 
 

Borrowings under debt arrangements
 
82,025

 

Repayments under debt arrangements
 
(68,025
)
 

Proceeds from exercise of stock options
 
6,710

 
7,569

Payments of withholding taxes for stock awards
 
(1,361
)
 
(1,872
)
Purchases of Toro common stock
 

 
(20,043
)
Dividends paid on Toro common stock
 
(26,856
)
 
(23,923
)
Net cash used in financing activities
 
(7,507
)
 
(38,269
)
 
 
 
 
 
Effect of exchange rates on cash and cash equivalents
 
(312
)
 
(50
)
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(42,914
)
 
(39,159
)
Cash and cash equivalents as of the beginning of the fiscal period
 
151,828

 
289,124

Cash and cash equivalents as of the end of the fiscal period
 
$
108,914

 
$
249,965


See accompanying Notes to Condensed Consolidated Financial Statements.

5


THE TORO COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
(Dollars in thousands, except per share data)
 
 
Common
Stock
 
Retained
Earnings
 
Accumulated Other
Comprehensive Loss
 
Total Stockholders'
Equity
Balance as of October 31, 2019
 
$
106,742

 
$
784,885

 
$
(32,049
)
 
$
859,578

Cash dividends paid on common stock - $0.25 per share
 

 
(26,856
)
 

 
(26,856
)
Issuance of 351,501 shares for stock options exercised and restricted stock units vested
 
253

 
3,889

 

 
4,142

Stock-based compensation expense
 

 
3,960

 

 
3,960

Contribution of stock to a deferred compensation trust
 

 
2,568

 

 
2,568

Purchase of 17,740 shares of common stock
 
(18
)
 
(1,343
)
 

 
(1,361
)
Other comprehensive loss
 

 

 
(72
)
 
(72
)
Net earnings
 

 
70,091

 

 
70,091

Balance as of January 31, 2020
 
$
106,977

 
$
837,194

 
$
(32,121
)
 
$
912,050

 
 
 
 
 
 
 
 
 
Balance as of October 31, 2018
 
$
105,601

 
$
587,252

 
$
(23,937
)
 
$
668,916

Cash dividends paid on common stock - $0.225 per share
 

 
(23,923
)
 

 
(23,923
)
Issuance of 537,786 shares for stock options exercised and restricted stock units vested
 
538

 
5,627

 

 
6,165

Stock-based compensation expense
 

 
3,924

 

 
3,924

Contribution of stock to a deferred compensation trust
 

 
1,404

 

 
1,404

Purchase of 391,900 shares of common stock
 
(392
)
 
(21,523
)
 

 
(21,915
)
Cumulative transition adjustment due to the adoption of ASU 2014-09
 

 
864

 

 
864

Other comprehensive loss
 

 

 
(578
)
 
(578
)
Net earnings
 

 
59,540

 

 
59,540

Balance as of February 1, 2019
 
$
105,747

 
$
613,165

 
$
(24,515
)
 
$
694,397


See accompanying Notes to Condensed Consolidated Financial Statements.

6


THE TORO COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
January 31, 2020
 
1
Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by United States ("U.S.") generally accepted accounting principles ("GAAP") for complete financial statements. Unless the context indicates otherwise, the terms "company," "TTC," "Toro," "we," "our," or "us" refer to The Toro Company and its consolidated subsidiaries. All intercompany accounts and transactions have been eliminated from the unaudited Condensed Consolidated Financial Statements.
In the opinion of management, the unaudited Condensed Consolidated Financial Statements include all adjustments, consisting primarily of recurring accruals, considered necessary for the fair presentation of the company's Consolidated Financial Position, Results of Operations, and Cash Flows for the periods presented. Since the company’s business is seasonal, operating results for the three months ended January 31, 2020 cannot be annualized to determine the expected results for the fiscal year ending October 31, 2020.
The company’s fiscal year ends on October 31, and quarterly results are reported based on three-month periods that generally end on the Friday closest to the quarter end. For comparative purposes, however, the company’s second and third quarters always include exactly 13 weeks of results so that the quarter end date for these two quarters is not necessarily the Friday closest to the calendar month end.
For further information regarding the company's basis of presentation, refer to the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in the company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2019. The policies described in that report are used for preparing the company's quarterly reports on Form 10-Q.
Accounting Policies
In preparing the Condensed Consolidated Financial Statements in conformity with U.S. GAAP, management must make decisions that impact the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures, including disclosures of contingent assets and liabilities. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Estimates are used in determining, among other items, sales promotion and incentive accruals, incentive compensation accruals, income tax accruals, legal accruals, inventory valuation and reserves, warranty reserves, allowance for doubtful accounts, pension and post-retirement accruals, self-insurance accruals, useful lives for tangible and definite-lived intangible assets, future cash flows associated with impairment testing for goodwill, indefinite-lived intangible assets and other long-lived assets, and valuations of the assets acquired and liabilities assumed in a business combination, when applicable. These estimates and assumptions are based on management’s best estimates and judgments at the time they are made and are generally derived from management's understanding and analysis of the relevant circumstances, historical experience, and actuarial and other independent external third-party specialist valuations, when applicable. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the current economic environment. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with certainty, actual amounts could differ significantly from those estimated at the time the Condensed Consolidated Financial Statements are prepared.
New Accounting Pronouncements Adopted
In February 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-02, Leases (Topic 842) ("ASU 2016-02"), which, among other things, requires lessees to recognize most leases on-balance sheet. The standard requires the recognition of right-of-use assets and lease liabilities by lessees for those leases classified as operating leases under legacy accounting guidance at Accounting Standards Codification ("ASC") Topic 840, Leases. The standard also requires a greater level of quantitative and qualitative disclosures regarding the nature of the entity’s leasing activities than were previously required under U.S. GAAP. In January 2018, the FASB issued ASU No. 2018-01, Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842, which provides an optional transition practical expedient to not evaluate existing or expired land easements under the amended lease guidance. In July 2018, the FASB issued ASU 2018-10, Codification Improvements to Topic 842 (Leases), which provides narrow amendments to clarify how to apply certain aspects of the new lease standard. Additionally, in July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, which provides an alternative transition method that permits an entity to use the effective date of ASU No. 2016-02 as the date of initial application through the recognition of a cumulative effect adjustment to the opening balance of retained earnings upon adoption. Consequently,

7


an entity's reporting for the comparative periods presented in the financial statements in which it adopts the new lease standard will continue to be in accordance with previous U.S. GAAP under ASC Topic 840, Leases.
ASU No. 2016-02, as augmented by ASU No. 2018-01, ASU No. 2018-10, and ASU No. 2018-11 (the "amended guidance"), was adopted by the company on November 1, 2019, the first quarter of fiscal 2020, under the modified retrospective transition method with no cumulative-effect adjustment to beginning retained earnings within the Condensed Consolidated Balance Sheet as of such date. Under such transition method, the company elected the following practical expedients:
The transition package of practical expedients, which among other things, allows the company to carryforward the historical lease classification determined under previous U.S. GAAP.
The transition practical expedient to not reassess the company's accounting for land easements that exist as of the adoption of the amended guidance.
The short-term lease exemption to not record right-of-use assets and lease liabilities on the Condensed Consolidated Balance Sheet for leases with an initial lease term of 12 months or less, which has resulted in recognizing the lease payments related to such leases within the company's Condensed Consolidated Statements of Earnings on a straight-line basis over the lease term.
The company did not elect the transition practical expedient to use hindsight in determining the lease term and in assessing the impairment of right-of-use assets.
Upon adoption of the amended guidance, the company recorded $78.1 million of right-of-use assets and $77.1 million of corresponding lease liabilities within the Condensed Consolidated Balance Sheet as of November 1, 2019. The adoption of the standard did not have a material impact on the company's Condensed Consolidated Statements of Earnings, Condensed Consolidated Statements of Cash Flows, business processes, internal controls, and information systems. As permitted under the amended guidance, prior period amounts were not restated, but will continue to be reported under the legacy accounting guidance that was in effect for the respective prior periods.
In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which amends ASC 718, Compensation - Stock Compensation, to include share-based payment transactions for acquiring goods and services from nonemployees. The standard requires that most of the guidance related to stock compensation granted to employees be followed for nonemployees, including the measurement date, valuation approach, and performance conditions. The amended guidance was adopted in the first quarter of fiscal 2020 and did not have a material impact on the company's Condensed Consolidated Financial Statements.
2
Business Combinations
The Charles Machine Works, Inc. ("CMW")
On April 1, 2019 ("closing date"), pursuant to the Agreement and Plan of Merger dated February 14, 2019 ("merger agreement"), the company completed the 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 the company's Professional segment product portfolio and expanded its 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 the company merged with and into CMW, with CMW continuing as the surviving entity and a wholly-owned subsidiary of the company. 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, the company 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, the company finalized such cash, debt and working capital adjustments and these adjustments resulted in an aggregate merger consideration of $685.0 million ("purchase price"). The company funded the purchase price for the acquisition by using a combination of cash proceeds from the issuance of borrowings under the company's unsecured senior term loan credit agreement and borrowings under the company's unsecured senior revolving credit facility. For additional information regarding the financing agreements utilized to fund the purchase price, refer to Note 6, Indebtedness. As a result of the acquisition, the company incurred approximately $10.2 million of acquisition-related transaction costs, all of which were incurred during the fiscal year ended October 31, 2019 and recorded within selling, general and administrative expense within the Consolidated Statements of Earnings for such fiscal period.

8


Purchase Price Allocation
The company accounted for the acquisition in accordance with the accounting standards codification guidance for business combinations, whereby the total purchase price was allocated to the acquired net tangible and intangible assets of CMW based on their fair values as of the closing date. As of January 31, 2020, the company has substantially completed its process for measuring the fair values of the assets acquired and liabilities assumed based on information available as of the closing date, with the exception of the company's valuation of income taxes as the company requires additional information to finalize its valuation of income taxes. Thus, the preliminary measurements of fair value reflected for income taxes are subject to change as additional information becomes available and as additional analysis is performed. The company expects to finalize its preliminary valuation of income taxes and complete the allocation of the purchase price during its fiscal 2020 second quarter, but no later than one year from the closing date of the acquisition, as required.
The following table summarizes the allocation of the purchase price to the fair values assigned to the CMW assets acquired and liabilities assumed. These fair values are based on internal company and independent external third-party valuations:
(Dollars in thousands)
 
April 1, 2019
Cash and cash equivalents
 
$
16,341

Receivables
 
65,674

Inventories
 
241,429

Prepaid expenses and other current assets
 
9,218

Property, plant and equipment
 
142,779

Goodwill
 
135,521

Other intangible assets
 
264,190

Other long-term assets
 
7,971

Accounts payable
 
(36,655
)
Accrued liabilities
 
(52,258
)
Deferred income tax liabilities
 
(86,231
)
Other long-term liabilities
 
(6,665
)
Total fair value of net assets acquired
 
701,314

Less: cash and cash equivalents acquired
 
(16,341
)
Total purchase price
 
$
684,973


The goodwill recognized is primarily attributable to the value of the workforce, the reputation of CMW and its family of brands, customer and dealer growth opportunities, and expected synergies. Key areas of expected cost synergies include increased purchasing power for commodities, components, parts, accessories, supply chain consolidation, and administrative efficiencies. The goodwill resulting from the acquisition of CMW was recognized within the company's Professional segment and is the primary driver for the increase in the company's Professional segment goodwill to $350.1 million as of January 31, 2020 from $215.0 million as of February 1, 2019. No changes were made to the carrying amount of goodwill related to the company's acquisition of CMW from the amounts reported within the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2019. Goodwill is mostly non-deductible for tax purposes.
Other Intangible Assets Acquired
The allocation of the purchase price to the net assets acquired resulted in the recognition of $264.2 million of other intangible assets as of the closing date. The fair values of the acquired trade name, customer-related, developed technology and backlog intangible assets were determined using the income approach. Under the income approach, an intangible asset's fair value is equal to the present value of future economic benefits to be derived from ownership of the asset. The fair values of the trade names were determined using the relief from royalty method, which is based on the hypothetical royalty stream that would be received if the company were to license the trade name and was based on expected future revenues. The fair values of the customer-related, developed technology, and backlog intangible assets were determined using the excess earnings method and were based on the expected operating cash flows attributable to the respective other intangible asset, which were determined by deducting expected economic costs, including operating expenses and contributory asset charges, from revenue expected to be generated from the respective other intangible asset. The useful lives of the other intangible assets were determined based on the period of expected cash flows used to measure the fair value of the intangible assets adjusted as appropriate for entity-specific factors including legal, regulatory, contractual, competitive, economic, and/or other factors that may limit the useful life of the respective intangible asset.

9


The fair values of the other intangible assets acquired on the closing date, related accumulated amortization from the closing date through January 31, 2020, and weighted-average useful lives were as follows:
(Dollars in thousands)
 
Weighted-Average Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Customer-related
 
18.3
 
$
130,800

 
$
(7,193
)
 
$
123,607

Developed technology
 
7.8
 
20,900

 
(2,885
)
 
18,015

Trade names
 
20.0
 
5,200

 
(216
)
 
4,984

Backlog
 
0.5
 
3,590

 
(3,590
)
 

Total definite-lived
 
16.6
 
160,490

 
(13,884
)
 
146,606

Indefinite-lived - trade names
 
 
 
103,700

 

 
103,700

Total other intangible assets, net
 
 
 
$
264,190

 
$
(13,884
)
 
$
250,306


Amortization expense for the definite-lived intangible assets resulting from the acquisition of CMW for the three months ended January 31, 2020 was $3.1 million. Estimated amortization expense for the remainder of fiscal 2020 and succeeding fiscal years is as follows: fiscal 2020 (remainder), $9.4 million; fiscal 2021, $12.6 million; fiscal 2022, $11.5 million; fiscal 2023, $10.1 million; fiscal 2024, $9.4 million; fiscal 2025, $7.7 million; and after fiscal 2025, $85.9 million.
Results of Operations
CMW's results of operations are included within the company's Professional reportable segment in the company's Condensed Consolidated Financial Statements. During the three month period ended January 31, 2020, the company recognized $160.9 million of net sales and $9.4 million of segment earnings from CMW's operations, respectively.
Unaudited Pro Forma Financial Information
Unaudited pro forma financial information has been prepared as if the acquisition had taken place on November 1, 2017 and has been prepared for comparative purposes only. The unaudited pro forma financial information is not necessarily indicative of the results that would have been achieved had the acquisition actually taken place on November 1, 2017 and the unaudited pro forma financial information does not purport to be indicative of future Consolidated Results of Operations. The unaudited pro forma financial information does not reflect any synergies, operating efficiencies, and/or cost savings that may be realized from the integration of the acquisition. The unaudited pro forma results for the three month periods ended January 31, 2020 and February 1, 2019 have been adjusted to exclude the pro forma impact of the take-down of the inventory fair value step-up amount and amortization of the backlog intangible asset; include the pro forma impact of amortization of other intangible assets, excluding backlog, based on the purchase price allocations and useful lives; include the pro forma impact of the depreciation of property, plant, and equipment based on the purchase price allocations and useful lives; include the pro forma impact of additional interest expense relating to the acquisition; exclude the pro forma impact of transaction costs incurred by the company directly attributable to the acquisition; and include the pro forma tax effect of both earnings before income taxes and the pro forma adjustments.
The following table presents unaudited pro forma financial information related to the company's acquisition of CMW:
 
 
Three Months Ended
(Dollars in thousands, except per share data)
 
January 31, 2020
 
February 1, 2019
Net sales
 
$
767,483

 
$
777,537

Net earnings
 
70,561

 
56,515

Basic net earnings per share of common stock
 
0.66

 
0.53

Diluted net earnings per share of common stock
 
$
0.65

 
$
0.52

Northeastern U.S. Distribution Company
Effective November 30, 2018, during the first quarter of fiscal 2019, the company completed the acquisition of substantially all of the assets of, and assumed certain liabilities of, a Northeastern U.S. distribution company. The purchase price of this acquisition was allocated to the identifiable assets acquired and liabilities assumed based on estimates of their fair value, with the excess purchase price recorded as goodwill. This acquisition was immaterial based on the company's Consolidated Financial Condition and Results of Operations. Additional purchase accounting disclosures have been omitted given the immateriality of this acquisition in relation to the company's Consolidated Financial Condition and Results of Operations.

10


3
Segment Data
The company's businesses are organized, managed, and internally grouped into segments based on similarities in products and services. Segment selection is based on the manner in which management organizes segments for making operating and investment decisions and assessing performance. The company has identified ten operating segments and has aggregated certain of those segments into two reportable segments: Professional and Residential. The aggregation of the company's segments is based on the segments having the following similarities: economic characteristics, types of products and services, types of production processes, type or class of customers, and method of distribution. The company's remaining activities are presented as "Other" due to their insignificance. These Other activities consist of the company's wholly-owned domestic distribution companies, the company's corporate activities, and the elimination of intersegment revenues and expenses.
The following tables present summarized financial information concerning the company’s reportable segments and Other activities:
(Dollars in thousands)
 
 
 
 
 
 
 
 
Three Months Ended January 31, 2020
 
Professional
 
Residential
 
Other
 
Total
Net sales
 
$
594,721

 
$
165,848

 
$
6,914

 
$
767,483

Intersegment gross sales (eliminations)
 
8,771

 
27

 
(8,798
)
 

Earnings (loss) before income taxes
 
102,474

 
21,566

 
(37,901
)
 
86,139

Total assets
 
$
1,853,739

 
$
324,089

 
$
313,781

 
$
2,491,609

(Dollars in thousands)
 
 
 
 
 
 
 
 
Three Months Ended February 1, 2019
 
Professional
 
Residential
 
Other
 
Total
Net sales
 
$
455,006

 
$
145,158

 
$
2,792

 
$
602,956

Intersegment gross sales (eliminations)
 
13,609

 
99

 
(13,708
)
 

Earnings (loss) before income taxes
 
87,978

 
13,072

 
(31,030
)
 
70,020

Total assets
 
$
959,768

 
$
235,520

 
$
427,526

 
$
1,622,814


The following table presents the details of operating loss before income taxes for the company's Other activities:
 
 
Three Months Ended
(Dollars in thousands)
 
January 31, 2020
 
February 1, 2019
Corporate expenses
 
$
(32,442
)
 
$
(28,314
)
Interest expense
 
(8,156
)
 
(4,742
)
Earnings from wholly-owned domestic distribution companies and other income, net
 
2,697

 
2,026

Total operating loss
 
$
(37,901
)
 
$
(31,030
)

4
Revenue
The company enters into contracts with its customers for the sale of products or rendering of services in the ordinary course of business. A contract with commercial substance exists at the time the company receives and accepts a purchase order under a sales contract with a customer. The company recognizes revenue when, or as, performance obligations under the terms of a contract with its customer are satisfied, which occurs with the transfer of control of product or services. Control is typically transferred to the customer at the time a product is shipped, or in the case of certain agreements, when a product is delivered or as services are rendered. Revenue is recognized based on the transaction price, which is measured as the amount of consideration the company expects to receive in exchange for transferring product or rendering services pursuant to the terms of the contract with a customer. The amount of consideration the company receives and the revenue the company recognizes varies with changes in sales promotions and incentives offered to customers, as well as anticipated product returns. A provision is made at the time revenue is recognized as a reduction of the transaction price for expected product returns, rebates, floor plan costs, and other sales promotion and incentive expenses. If a contract contains more than one performance obligation, the transaction price is allocated to each performance obligation based on the relative standalone selling price of the respective promised good or service. The company does not recognize revenue in situations where collectability from the customer is not probable, and defers the recognition of revenue until collection is probable or payment is received and performance obligations are satisfied.

11


Freight and shipping revenue billed to customers concurrent with revenue producing activities is included within revenue and the cost for freight and shipping is recognized as an expense within cost of sales when control has transferred to the customer. Shipping and handling activities that occur after control of the related products is transferred are treated as a fulfillment activity rather than a promised service, and therefore, are not considered a performance obligation. Sales, use, value-added, and other excise taxes the company collects concurrent with revenue producing activities are excluded from revenue. Incremental costs of obtaining a contract for which the performance obligations will be satisfied within the next twelve months are expensed as incurred. Incidental items, including goods or services, that are immaterial in the context of the contract are recognized as expense when incurred. Additionally, the company has elected not to disclose the balance of unfulfilled performance obligations for contracts with a contractual term of twelve months or less.
The following tables disaggregate the company's reportable segment net sales by major product type and geographic market (in thousands):
Three Months Ended January 31, 2020
 
Professional
 
Residential
 
Other
 
Total
Revenue by product type:
 
 

 
 

 
 

 
 

Equipment
 
$
523,909

 
$
152,458

 
$
5,525

 
$
681,892

Irrigation
 
70,812

 
13,390

 
1,389

 
85,591

Total net sales
 
$
594,721

 
$
165,848

 
$
6,914

 
$
767,483

 
 
 
 
 
 
 
 
 
Revenue by geographic market:
 
 
 
 
 
 
 
 

United States
 
$
454,396

 
$
130,338

 
$
6,914

 
$
591,648

Foreign Countries
 
140,325

 
35,510

 

 
175,835

Total net sales
 
$
594,721

 
$
165,848

 
$
6,914

 
$
767,483

Three Months Ended February 1, 2019
 
Professional
 
Residential
 
Other
 
Total
Revenue by product type:
 
 

 
 

 
 

 
 

Equipment
 
$
387,550

 
$
133,510

 
$
1,969

 
$
523,029

Irrigation
 
67,456

 
11,648

 
823

 
79,927

Total net sales
 
$
455,006

 
$
145,158

 
$
2,792

 
$
602,956

 
 
 
 
 
 
 
 
 
Revenue by geographic market:
 
 
 
 
 
 
 
 

United States
 
$
348,104

 
$
110,515

 
$
2,792

 
$
461,411

Foreign Countries
 
106,902

 
34,643

 

 
141,545

Total net sales
 
$
455,006

 
$
145,158

 
$
2,792

 
$
602,956

Contract Liabilities
Contract liabilities relate to deferred revenue recognized for payments received at contract inception in advance of the company's performance under the respective contract and generally relate to the sale of separately priced extended warranty contracts, service contracts, and non-refundable customer deposits. The company recognizes revenue over the term of the contract in proportion to the costs expected to be incurred in satisfying the performance obligations under the separately priced extended warranty and service contracts. For non-refundable customer deposits, the company recognizes revenue as of the point in time in which the performance obligation has been satisfied under the contract with the customer, which typically occurs upon change in control at the time a product is shipped. As of January 31, 2020 and October 31, 2019, $20.5 million and $22.0 million, respectively, of deferred revenue associated with outstanding separately priced extended warranty contracts, service contracts, and non-refundable customer deposits was reported within accrued liabilities and other long-term liabilities in the Condensed Consolidated Balance Sheets. For the three months ended January 31, 2020, the company recognized $3.6 million of the October 31, 2019 deferred revenue balance within net sales in the Condensed Consolidated Statements of Earnings. The company expects to recognize approximately $7.1 million of the October 31, 2019 deferred revenue amount within net sales throughout the remainder of fiscal 2020, $6.4 million in fiscal 2021, and $5.0 million thereafter.

12


5
Goodwill and Other Intangible Assets, Net
Goodwill
The changes in the carrying amount of goodwill by reportable segment for the first three months of fiscal 2020 were as follows:
(Dollars in thousands)
 
Professional
 
Residential
 
Other
 
Total
Balance as of October 31, 2019
 
$
350,250

 
$
10,469

 
$
1,534

 
$
362,253

Translation adjustments
 
(116
)
 
(1
)
 

 
(117
)
Balance as of January 31, 2020
 
$
350,134

 
$
10,468

 
$
1,534

 
$
362,136


Other Intangible Assets, Net
The components of other intangible assets, net as of January 31, 2020 were as follows:
(Dollars in thousands)
 
Weighted-Average Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Patents
 
9.9
 
$
18,238

 
$
(13,307
)
 
$
4,931

Non-compete agreements
 
5.5
 
6,875

 
(6,798
)
 
77

Customer-related
 
18.4
 
220,364

 
(36,970
)
 
183,394

Developed technology
 
7.6
 
51,902

 
(32,264
)
 
19,638

Trade names
 
15.4
 
7,485

 
(2,208
)
 
5,277

Backlog and other
 
0.6
 
4,390

 
(4,390
)
 

Total definite-lived
 
15.5
 
309,254

 
(95,937
)
 
213,317

Indefinite-lived - trade names
 
 
 
134,326

 

 
134,326

Total other intangible assets, net
 
 
 
$
443,580

 
$
(95,937
)
 
$
347,643

The components of other intangible assets, net as of February 1, 2019 were as follows:
(Dollars in thousands)
 
Weighted-Average Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Patents
 
9.9
 
$
18,255

 
$
(12,524
)
 
$
5,731

Non-compete agreements
 
5.5
 
6,891

 
(6,794
)
 
97

Customer-related
 
18.5
 
89,702

 
(24,929
)
 
64,773

Developed technology
 
7.6
 
31,079

 
(28,774
)
 
2,305

Trade names
 
5.0
 
2,319

 
(1,850
)
 
469

Other
 
1.0
 
800

 
(800
)
 

Total definite-lived
 
14.2
 
149,046

 
(75,671
)
 
73,375

Indefinite-lived - trade names
 
 
 
30,642

 

 
30,642

Total other intangible assets, net
 
 
 
$
179,688

 
$
(75,671
)
 
$
104,017


13


The components of other intangible assets, net as of October 31, 2019 were as follows:
(Dollars in thousands)
 
Weighted-Average Useful Life
 
Gross Carrying Amount
 
Accumulated Amortization
 
Net
Patents
 
9.9
 
$
18,230

 
$
(13,102
)
 
$
5,128

Non-compete agreements
 
5.5
 
6,868

 
(6,786
)
 
82

Customer-related
 
18.4
 
220,390

 
(33,547
)
 
186,843

Developed technology
 
7.6
 
51,911

 
(