# Toro Co: Form 10-Q for the period ended Feb 3, 2023

- Company: [Toro Co](/companies/ttc.md) (CIK 737758)
- Form: 10-Q
- Filed: 2023-03-09
- Accepted by EDGAR: Mar 9, 2023, 17:51 ET
- Period: 2023-02-03
- Accession: 0000737758-23-000005
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/737758/000073775823000005/ttc-20230203.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/737758/000073775823000005/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-02-03.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2022-11-01 to 2023-02-03 | $1.15bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2022-11-01 to 2023-02-03 | $752.9m | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2022-11-01 to 2023-02-03 | $395.9m | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2022-11-01 to 2023-02-03 | $259.5m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2022-11-01 to 2023-02-03 | $136.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2022-11-01 to 2023-02-03 | $14.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2022-11-01 to 2023-02-03 | $24.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2022-11-01 to 2023-02-03 | $106.9m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2022-11-01 to 2023-02-03 | $1.01 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2022-11-01 to 2023-02-03 | $1.02 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2022-11-01 to 2023-02-03 | 105,577,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2022-11-01 to 2023-02-03 | −$68.8m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 3 months, 2022-11-01 to 2023-02-03 | $29.3m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2022-11-01 to 2023-02-03 | $35.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 3 months, 2022-11-01 to 2023-02-03 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Current assets | at 2023-02-03 | $1.76bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-02-03 | $3.65bn | us-gaap:Assets |
| Current liabilities | at 2023-02-03 | $988.0m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2023-02-03 | $1.09bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-02-03 | $0 | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-02-03 | $1.44bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 34,711 characters.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our Condensed Consolidated 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 the context indicates otherwise, the terms "company," "TTC," "we," "our," or "us" refer to The Toro Company and its consolidated subsidiaries. This MD&A should be read in conjunction with the MD&A included in Part II, Item 7 of our Annual Report on Form 10-K for the fiscal year ended October 31, 2022. Unless expressly stated otherwise, the comparisons presented in this MD&A refer to the same period in the prior fiscal year. Our MD&A is presented as follows:

- Company Overview
- Results of Operations
- Business Segments
- Financial Position
- Non-GAAP Financial Measures
- Critical Accounting Policies and Estimates

This discussion contains various "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 and we refer readers to the section titled "Cautionary Note Regarding Forward-Looking Statements" located at the beginning of this Quarterly Report on Form 10-Q for more information.

### Non-GAAP Financial Measures

Throughout this MD&A, we have provided financial and liquidity measures that are not calculated or presented in accordance with United States ("U.S.") generally accepted accounting principles ("GAAP") ("non-GAAP financial measures," "adjusted" before specified financial measures, and "non-GAAP liquidity measures"), as information supplemental and in addition to the most directly comparable financial measures presented in this Quarterly Report on Form 10-Q that are calculated and presented in accordance with U.S. GAAP. We believe that these non-GAAP financial measures, when considered in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with U.S. GAAP, provide investors with useful supplemental financial information to better understand our core operational performance and cash flows. These non-GAAP financial measures, however, should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the most directly comparable U.S. GAAP financial measures. Reconciliations of non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A.

### COMPANY OVERVIEW

The Toro Company is in the business of designing, manufacturing, marketing, and selling 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. Our purpose is to help our customers enrich the beauty, productivity, and sustainability of the land. Sustainability is integrated into our enterprise strategic priorities of accelerating profitable growth, driving productivity and operational excellence, and empowering our people. Our focus on alternative power, smart connected, and autonomous solutions, as well as our continued efforts to address sustainability-focused matters, including environmental, social, and governance priorities, are embedded as part of our "Sustainability Endures" initiative.

We sell our products worldwide through a network of distributors, dealers, mass retailers, hardware retailers, equipment rental centers, and home centers, as well as online and 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, as described in greater detail within the section titled "Business Segments" in this MD&A.

### Acquisition of Intimidator Group

On January 13, 2022 ("the closing date"), during the first quarter of fiscal 2022, we acquired the privately-held Intimidator Group ("Intimidator"). Intimidator primarily designs, manufactures, markets, and sells a commercial-grade line of zero-turn mowers under the Spartan Mowers brand, which are intended to provide innovative turf management solutions to landscape contractors and other customers who require a commercial-grade solution. The acquisition of Intimidator broadened our Professional reportable segment and expanded our manufacturing footprint and dealer network. The aggregate purchase consideration was $399.8 million. Subsequent to the closing date, Intimidator's results of operations have been included within our Professional reportable segment in our Condensed Consolidated Financial Statements and had an incremental impact to our

Professional reportable segment net sales for the first twelve months post acquisition, or through the first quarter of fiscal 2023. For the three months ended February 3, 2023, Intimidator's results of operations had an incremental impact on our Professional segment net sales of $49.6 million. Intimidator's operations had an immaterial impact on Professional segment earnings for the three months ended February 3, 2023. For additional information regarding the acquisition, refer to Note 2, *Business Combination*, in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

### RESULTS OF OPERATIONS

### Overview

Consolidated net sales for the first quarter of fiscal 2023 were $1,148.8 million, up 23.2 percent compared to $932.7 million in the first quarter of fiscal 2022. Professional segment net sales for the first quarter of fiscal 2023 were $880.7 million, an increase of 30.9 percent compared to $672.9 million in the first quarter of the prior fiscal year. Residential segment net sales for the first quarter of fiscal 2023 were $264.6 million, an increase of 3.6 percent compared to $255.4 million in the first quarter of the prior fiscal year.

Net earnings for the first quarter of fiscal 2023 were $106.9 million, or $1.01 per diluted share, compared to $69.5 million, or $0.66 per diluted share, for the first quarter of fiscal 2022. Adjusted net earnings for the first quarter of fiscal 2023 were $103.6 million, or $0.98 per diluted share, compared to $69.7 million, or $0.66 per diluted share, for the first quarter of fiscal 2022. Reconciliations of non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A.

We continued our history of paying quarterly cash dividends and increased our cash dividend for the first quarter of fiscal 2023 by 13.3 percent to $0.34 per share compared to $0.30 per share paid in the first quarter of fiscal 2022.

Field inventory levels were higher as of the end of the first quarter of fiscal 2023 compared to the end of the first quarter of fiscal 2022 primarily driven by increased inventory costs resulting from inventory buildup to offset longer lead times and meet expected future demand, in addition to inflation.

Our order backlog represents unfulfilled customer orders at a point in time. Our order backlog (including shipments beyond 12 months) was slightly higher as of the end of the first quarter of fiscal 2023 compared to the end of the fourth quarter of fiscal 2022 driven by continued strong demand.

### Net Sales

Consolidated net sales for the first quarter of fiscal 2023 were $1,148.8 million, up 23.2 percent compared to $932.7 million in the first quarter of fiscal 2022. This net sales increase was primarily driven by higher volume, net price realization and the acquisition of Intimidator.

Net sales in international markets increased by $50.4 million for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022. The international net sales increase for the first quarter of fiscal 2023 was mainly driven by higher volume and net price realization. Changes in foreign currency exchange rates resulted in a decrease in our net sales of approximately $6.3 million for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022.

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

|  | Three Months Ended February 3, 2023 | January 28, 2022 |
| --- | ---: | ---: |
| Net sales | 100.0% | 100.0% |
| Cost of sales | (65.5) | (67.8) |
| Gross profit | 34.5 | 32.2 |
| Selling, general and administrative expense | (22.6) | (22.4) |
| Operating earnings | 11.9 | 9.8 |
| Interest expense | (1.2) | (0.8) |
| Other income, net | 0.7 | 0.3 |
| Earnings before income taxes | 11.4 | 9.3 |
| Provision for income taxes | (2.1) | (1.8) |
| Net earnings | 9.3% | 7.5% |

### Gross Profit and Gross Margin

Gross profit for the first quarter of fiscal 2023 was $395.9 million, up 31.8 percent compared to $300.5 million in the first quarter of fiscal 2022. Adjusted gross profit for the first quarter of fiscal 2023 was $396.1 million, up 31.8 percent compared to

$300.5 million for the first quarter of fiscal 2022. Gross margin was 34.5 percent for the first quarter of fiscal 2023 compared to 32.2 percent for the first quarter of fiscal 2022, an increase of 230 basis points. The increase in gross margin was primarily due to net price realization and productivity improvements, partially offset by higher material, freight, and manufacturing costs. Reconciliations of non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A.

### Selling, General, and Administrative ("SG&A") Expense

SG&A expense increased $50.6 million, or 24.3 percent, for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022. As a percentage of net sales, SG&A expense increased 20 basis points for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022. The increase in SG&A expense as a percentage of net sales for the first quarter comparison was primarily due to higher warranty costs in certain of our Professional segment businesses, partially offset by net sales leverage.

### Interest Expense

Interest expense increased $7.1 million for the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022. This increase was driven by higher average outstanding borrowings under our debt arrangements and higher average interest rates.

### Other Income, Net

Other income, net for the first quarter of fiscal 2023 increased $6.5 million compared to the first quarter of fiscal 2022. This increase was primarily due to higher income from our Red Iron joint venture and the favorable impact from derivative instruments.

### Provision for Income Taxes

The effective tax rate for the first quarter of fiscal 2023 was 18.6 percent compared to 20.2 percent in the first quarter of fiscal 2022. The decrease in the effective tax rate for the first quarter was primarily due to higher tax benefits recorded as excess tax deductions for stock compensation in the current-year period compared to the same period of fiscal 2022. The adjusted effective tax rate for the first quarter of fiscal 2023 was 21.4 percent, compared to an adjusted effective tax rate of 20.9 percent in the first quarter of fiscal 2022. Reconciliations of non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures."

### Net Earnings

Net earnings for the first quarter of fiscal 2023 were $106.9 million, or $1.01 per diluted share, compared to $69.5 million, or $0.66 per diluted share, for the first quarter of fiscal 2022, an increase of 53.0 percent per diluted share. Adjusted net earnings for the first quarter of fiscal 2023 were $103.6 million, or $0.98 per diluted share, compared to $69.7 million, or $0.66 per diluted share, for the first quarter of fiscal 2022, an increase of 48.5 percent per diluted share. The increase in net earnings per diluted share for the first quarter comparison was primarily due to net price realization, higher Professional segment net sales volume, and productivity improvements, partially offset by higher material, freight, and manufacturing costs. Reconciliations of non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A.

### BUSINESS SEGMENTS

We operate in two reportable business segments: Professional and Residential. Segment earnings for our Professional and Residential segments are defined as earnings from operations plus other income, net. Our remaining activities are presented as "Other" due to their insignificance. Operating loss for our Other activities included earnings (loss) from our wholly-owned domestic distribution company, Red Iron joint venture, corporate activities, other income, and interest expense. Corporate activities include general corporate expenditures, such as finance, human resources, legal, information services, public relations, and similar activities, as well as other unallocated corporate assets and liabilities, such as corporate facilities and deferred tax assets and liabilities. The following tables summarize net sales for our reportable business segments and Other activities:

*(Dollars in thousands)*

|  | Three Months Ended February 3, 2023 | January 28, 2022 | Dollar Value Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Professional | $880,660 | $672,885 | $207,775 | 30.9% |
| Residential | 264,615 | 255,402 | 9,213 | 3.6 |
| Other | 3,565 | 4,363 | (798) | (18.3) |
| Total net sales\* | $1,148,840 | $932,650 | $216,190 | 23.2% |
| \*Includes international net sales of: | $245,337 | $194,986 | $50,351 | 25.8% |

29

The following tables summarize segment earnings for our reportable business segments and operating (loss) for our Other activities:

*(Dollars in thousands)*

|  | Three Months Ended February 3, 2023 | January 28, 2022 | Dollar Value Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Professional | $144,076 | $93,272 | $50,804 | 54.5% |
| Residential | 37,832 | 31,760 | 6,072 | 19.1 |
| Other | (50,594) | (37,885) | (12,709) | (33.5) |
| Total segment earnings | $131,314 | $87,147 | $44,167 | 50.7% |

### Professional Segment

### Segment Net Sales

Worldwide net sales for our Professional segment for the first quarter of fiscal 2023 increased 30.9 percent compared to the first quarter of fiscal 2022. The increase was driven primarily by higher shipments of product broadly across the segment, net price realization, and incremental revenue from our acquisition of Intimidator.

### Segment Earnings

Professional segment earnings for the first quarter of fiscal 2023 increased 54.5 percent compared to the first quarter of fiscal 2022, and Professional segment earnings margin increased to 16.4 percent from 13.9 percent in the first quarter of fiscal 2022. The increase in Professional segment earnings margin was primarily due to net price realization, net sales leverage and productivity improvements, partially offset by higher material, freight, and manufacturing costs, and the addition of Intimidator at a lower initial earnings margin than the segment average.

### Residential Segment

### Segment Net Sales

Worldwide net sales for our Residential segment for the first quarter of fiscal 2023 increased 3.6 percent compared to the first quarter of fiscal 2022. The increase in Residential segment net sales for the first quarter of 2023 was primarily driven by net price realization and higher shipments of zero turn riding mowers, partially offset by lower shipments of snow products.

### Segment Earnings

Residential segment earnings for the first quarter of fiscal 2023 increased 19.1 percent compared to the first quarter of fiscal 2022, and Residential segment earnings margin increased to 14.3 percent from 12.4 percent in the first quarter of fiscal 2022. The increase in Residential segment earnings margin for the first quarter of fiscal 2023 was largely driven by net price realization and productivity improvements, partially offset by higher material, freight, and manufacturing costs, and higher SG&A expense.

### Other Activities

### Other Net Sales

Net sales for our Other activities included sales from our wholly-owned domestic distribution company less sales from the Professional and Residential segments to the distribution company. Net sales for our Other activities in the first quarter of fiscal 2023 decreased by $0.8 million compared to the same period in fiscal 2022. This decrease was due to increased intercompany sales eliminations for sales from our Professional and Residential segments to the wholly-owned domestic distribution company, partially offset by higher sales by the wholly-owned domestic distribution company.

### Other Operating Loss

The operating loss for our Other activities for the first quarter of fiscal 2023 increased $12.7 million compared to the first quarter of fiscal 2022 and was primarily due to higher corporate expenses and higher interest expense, partially offset by higher income from our Red Iron joint venture and the favorable impact of foreign currency exchange rate fluctuations.

### FINANCIAL POSITION

### Working Capital

Given the challenging macroeconomic environment that has created supply chain disruption and, more specifically, resulted in challenging conditions for sourcing adequate amounts of certain commodities, components, parts, and accessories, our working capital strategy continues to place primary emphasis on procuring key commodities, components, parts, and accessories when available in an attempt to maintain requisite inventory levels to meet our anticipated production requirements, avoid manufacturing delays, and meet the anticipated continued strong demand for our products, as well as attempting to ensure service parts availability for our customers. Accounts receivable as of the end of the first quarter of fiscal 2023 increased $11.0 million, or 3.0 percent, compared to the end of the first quarter of fiscal 2022, primarily driven by higher International sales, partially offset by lower Residential segment sales volume for certain customers in the last month of the quarter and a lower receivable from our Red Iron joint venture as a result of decreased sales financed under the joint venture near quarter-end. Inventory levels were up $299.4 million, or 36.0 percent, as of the first quarter of fiscal 2023 compared to the first quarter of fiscal 2022, primarily due to higher finished goods, work-in-process, and parts inventory driven by increased costs resulting from inflation and constrained component supply which limited finished product assembly. Accounts payable increased $0.7 million, or 0.2 percent, as of the end of the first quarter of fiscal 2023 compared to the end of the first quarter of fiscal 2022.

### Cash Flow

### Cash Flows from Operating Activities

Cash used in operating activities for the first three months of fiscal 2023 was $68.8 million compared to cash used in operating activities for the first three months of fiscal 2022 of $90.0 million. This decrease in cash used in operating activities was primarily due to higher net earnings, partially offset by increased cash consumed within inventory.

### Cash Flows from Investing Activities

Cash used in investing activities for the first three months of fiscal 2023 was $22.0 million compared to cash used in investing activities for the first three months of fiscal 2022 of $413.4 million. This decrease in cash used in investing activities was driven by cash used to acquire Intimidator in fiscal 2022, partially offset by higher purchases of property, plant, and equipment in the current fiscal year period.

### Cash Flows from Financing Activities

Cash provided by financing activities for the first three months of fiscal 2023 was $74.4 million compared to cash provided by financing activities for the first three months of fiscal 2022 of $293.3 million. This decrease in cash provided by financing activities was mainly due to lower net borrowings, partially offset by lower share repurchases, in each case during the current fiscal year period compared to the prior fiscal year period. The net borrowings incurred during the prior fiscal year period were used in part to acquire Intimidator.

### Liquidity and Capital Resources

As of February 3, 2023, we had available liquidity of $670.9 million, consisting of cash and cash equivalents of $174.0 million, of which $75.5 million was held by our foreign subsidiaries, and availability under our revolving credit facility of $496.9 million. We believe our current liquidity position, including the funds available through existing, and potential future, financing arrangements and forecasted cash flows from operations will be sufficient to provide the necessary capital resources for our anticipated working capital needs, payroll, and other administrative costs, capital expenditures, lease payments, purchase commitments, contractual obligations, acquisitions, investments, establishment of new facilities, expansion and renovation of existing facilities, financing receivables from customers that are not financed with Red Iron or other third-party financial institutions, contingent consideration payments, debt repayments, interest payments, quarterly cash dividend payments, and common stock repurchases, all as applicable, for at least the next twelve months.

### Indebtedness

Our debt arrangements are described in further detail within our most recently filed Annual Report on Form 10-K for the fiscal year ended October 31, 2022. The following is a summary of our indebtedness:

*(Dollars in thousands)*

|  | February 3, 2023 | January 28, 2022 | October 31, 2022 |
| --- | ---: | ---: | ---: |
| $600 million revolving credit facility, due October 2026 | $100,000 | $400,000 | $— |
| $270 million term loan, due October 2026 | 270,000 | 270,000 | 270,000 |
| $200 million term loan, due April 2027 | 200,000 | — | 200,000 |
| 3.81% series A senior notes, due June 2029 | 100,000 | 100,000 | 100,000 |
| 3.91% series B senior notes, due June 2031 | 100,000 | 100,000 | 100,000 |
| 3.97% senior notes, due June 2032 | 100,000 | — | 100,000 |
| 7.8% debentures, due June 2027 | 100,000 | 100,000 | 100,000 |
| 6.625% senior notes, due May 2037 | 124,117 | 124,055 | 124,102 |
| Less: unamortized debt issuance costs | 3,102 | 2,701 | 3,334 |
| Total long-term debt | 1,091,015 | 1,091,354 | 990,768 |
| Less: current portion of long-term debt | — | 100,000 | — |
| Long-term debt, less current portion | $1,091,015 | $991,354 | $990,768 |

As of February 3, 2023, we had $100.0 million of outstanding borrowings under our revolving credit facility, and $3.1 million outstanding under the sublimit for standby letters of credit, which resulted in $496.9 million of unutilized availability under the revolving credit facility.

We are in compliance with our debt covenants and other requirements of our revolving credit facility and term loan credit agreements, indentures, and private placement note purchase agreements.

### Cash Dividends

Our Board of Directors approved a cash dividend of $0.34 per share for the first quarter of fiscal 2023 that was paid on January 11, 2023. This was an increase of 13.3 percent over our cash dividend of $0.30 per share for the first quarter of fiscal 2022. We currently expect to continue paying our quarterly cash dividend to shareholders for the remainder of fiscal 2023.

### Share Repurchases

During the first three months of fiscal 2023, we did not repurchase shares of our common stock. As of February 3, 2023, 7,526,606 shares remained available for repurchase under our Board authorized repurchase program. We expect to repurchase shares of our common stock throughout the remainder of fiscal 2023, depending on our cash balance, debt repayments, market conditions, our anticipated working capital needs, the price of our common stock, and/or other factors.

### Customer Financing Arrangements

Our customer financing arrangements are described in further detail within our most recently filed Annual Report on Form 10-K for the fiscal year ended October 31, 2022. There have been no material changes to our customer financing arrangements during the first three months of fiscal 2023.

#### Inventory Financing

We are party to inventory financing arrangements with Red Iron, HCFC, and other third-party financial institutions which provide inventory financing to certain dealers and distributors of certain of our products in the U.S. and internationally.

The net amount of receivables financed for dealers and distributors under the arrangement with Red Iron for the three month periods ended February 3, 2023 and January 28, 2022 were $674.4 million and $528.1 million, respectively. The total amount of net receivables outstanding under the arrangement with Red Iron as of February 3, 2023, January 28, 2022 and October 31, 2022 were $942.0 million, $494.6 million and $776.1 million, respectively. The total amount of receivables due from Red Iron to us as of February 3, 2023, January 28, 2022 and October 31, 2022 were $17.3 million, $28.1 million and $17.7 million, respectively.

The net amount of receivables financed for dealers and distributors under the arrangements with HCFC and the other third-party financial institutions for the three month periods ended February 3, 2023 and January 28, 2022 were $111.3 million and $106.5 million, respectively. The total amount of net receivables outstanding under the arrangements with HCFC and the other third-party financial institutions as of February 3, 2023, January 28, 2022, and October 31, 2022 were $166.1 million, $220.0 million, and $220.0 million, respectively.

#### Inventory Repurchase Agreements

We have entered into a limited inventory repurchase agreement with Red Iron and HCFC under which we have agreed to repurchase certain repossessed products, up to a maximum aggregate amount of $7.5 million in a calendar year.

Additionally, as a result of our financing agreements with the other third-party financial institutions, we have also entered into inventory repurchase agreements with the other third-party financial institutions. Under such inventory repurchase agreements, we have agreed to repurchase products repossessed by the other third-party financial institutions. As of February 3, 2023, January 28, 2022, and October 31, 2022, we were contingently liable to repurchase up to a maximum amount of $79.4 million, $172.3 million, and $80.0 million, respectively, of inventory related to receivables under these inventory repurchase agreements.

Our financial exposure under these inventory repurchase agreements is limited to the difference between the amount paid to Red Iron, HCFC or other third-party financing institutions for repurchases of inventory and the amount received upon subsequent resale of the repossessed product. We have repurchased immaterial amounts of inventory pursuant to such arrangements for the three months ended February 3, 2023 and January 28, 2022. However, a decline in retail sales or financial difficulties of our distributors or dealers could cause this situation to change and thereby require us to repurchase financed product, which could have an adverse effect on our results of operations, financial position, or cash flows.

### NON-GAAP FINANCIAL MEASURES

We have provided in this Quarterly Report on Form 10-Q certain non-GAAP financial measures, which are not calculated or presented in accordance with U.S. GAAP, as information supplemental and in addition to the most directly comparable financial measures that are calculated and presented in accordance with U.S. GAAP. We use these non-GAAP financial measures in making operating decisions and assessing liquidity because we believe they provide meaningful supplemental information regarding our core operational performance and cash flows, as a measure of our liquidity, 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 and benefits not related to our regular, ongoing business, including, without limitation, certain non-cash, large, and/or unpredictable charges and benefits; acquisitions and dispositions; legal judgments, settlements, or other matters; and tax positions. We believe that these non-GAAP financial measures, when considered in conjunction with our Condensed Consolidated Financial Statements prepared in accordance with U.S. GAAP, provide investors with useful supplemental financial information to better understand our core operational performance and cash flows. These non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the most directly comparable U.S. GAAP financial measures. The non-GAAP financial measures may differ from similar measures used by other companies.

### Reconciliation of Non-GAAP Financial Measures

The following table provides a reconciliation of the non-GAAP financial performance measures used in this report to the most directly comparable measures calculated and reported in accordance with U.S. GAAP for the three month periods ended February 3, 2023 and January 28, 2022:

*(Dollars in thousands, except per share data)*

|  | Three Months Ended February 3, 2023 | January 28, 2022 |
| --- | ---: | ---: |
| Gross profit | $395,924 | $300,476 |
| Acquisition-related costs1 | 225 | — |
| Adjusted gross profit | $396,149 | $300,476 |
| Operating earnings | $136,427 | $91,626 |
| Acquisition-related costs1 | 447 | 1,016 |
| Adjusted operating earnings | $136,874 | $92,642 |
| Earnings before income taxes | $131,314 | $87,147 |
| Acquisition-related costs1 | 447 | 1,016 |
| Adjusted earnings before income taxes | $131,761 | $88,163 |
| Net earnings | $106,860 | $69,510 |
| Acquisition-related costs1 | 351 | 804 |
| Tax impact of stock-based compensation2 | (3,605) | (620) |
| Adjusted net earnings | $103,606 | $69,694 |
| Net earnings per diluted share | $1.01 | $0.66 |
| Acquisition-related costs1 | — | 0.01 |
| Tax impact of stock-based compensation2 | (0.03) | (0.01) |
| Adjusted net earnings per diluted share | $0.98 | $0.66 |
| Effective tax rate | 18.6% | 20.2% |
| Tax impact of stock-based compensation2 | 2.8% | 0.7% |
| Adjusted effective tax rate | 21.4% | 20.9% |

1 On January 13, 2022, we completed our acquisition of Intimidator. Acquisition-related costs for the three month period ended February 3, 2023 represent integration costs. Acquisition-related costs for the three month period ended January 28, 2022 represent transaction and integration costs incurred in connection with the acquisition. For additional information regarding the acquisition of Intimidator, refer to Note 2, *Business Combination*, within the Notes to Condensed Consolidated Financial Statements included within Part I, Item 1 of this Quarterly Report on Form 10-Q.

2 The accounting standards codification guidance governing employee stock-based compensation requires that any excess tax deduction for stock-based compensation be immediately recorded within income tax expense. Employee stock-based compensation activity, including the exercise of stock options, can be unpredictable and can significantly impact our net earnings, net earnings per diluted share, and effective tax rate. These amounts represent the discrete tax benefits recorded as excess tax deductions for stock-based compensation during the three month periods ended February 3, 2023 and January 28, 2022.

### Reconciliation of Non-GAAP Liquidity Measures

We define free cash flow as net cash provided by operating activities less purchases of property, plant, and equipment, net of proceeds from insurance claim. Free cash flow conversion percentage represents free cash flow as a percentage of net earnings. We consider free cash flow and free cash flow conversion percentage to be non-GAAP liquidity measures that provide useful information to management and investors about our ability to convert net earnings into cash resources that can be used to pursue opportunities to enhance shareholder value, fund ongoing and prospective business initiatives, and strengthen our Condensed Consolidated Balance Sheets, after reinvesting in necessary capital expenditures required to maintain and grow our business. The following table provides a reconciliation of non-GAAP free cash flow and free cash flow conversion percentage to net cash provided by operating activities, which is the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP, for the three month periods ended February 3, 2023 and January 28, 2022:

*(Dollars in thousands)*

|  | Three Months Ended February 3, 2023 | January 28, 2022 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(68,849) | $(90,043) |
| Less: Purchases of property, plant, and equipment, net of proceeds from insurance claim | 22,215 | 11,903 |
| Free cash flow | (91,064) | (101,946) |
| Net earnings | $106,860 | $69,510 |
| Free cash flow conversion percentage | (85.2)% | (146.7)% |

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates since our most recent Annual Report on Form 10-K for the fiscal year ended October 31, 2022. Refer to Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations", and Part II, Item 8, Note 1, *Summary of Significant Accounting Policies and Related Data*, within our Annual Report on Form 10-K for the fiscal year ended October 31, 2022 for a discussion of our critical accounting policies and estimates.

## Market risk

As filed, 8,414 characters.

We are exposed to market risk stemming from changes in foreign currency exchange rates, interest rates, and commodity costs. We are also exposed to equity market risk pertaining to the trading price of our common stock. Changes in these factors could cause fluctuations in our earnings and cash flows. There have been no material changes to the market risk information regarding equity market risk included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2022. Refer to Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk", within our Annual Report on Form 10-K for the fiscal year ended October 31, 2022 for a complete discussion of our market risk. Refer below for further discussion on foreign currency exchange rate risk, interest rate risk, and commodity cost risk.

### Foreign Currency Exchange Rate Risk

We are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as sales to third-party customers, sales and loans to wholly-owned foreign subsidiaries, costs associated with foreign plant operations, and purchases from suppliers. Our primary foreign currency exchange rate exposures are with the Euro, the Australian dollar, the Canadian dollar, the British pound, the Mexican peso, the Japanese yen, the Chinese renminbi, and the Romanian new leu against the U.S. dollar, as well as the Romanian new leu against the Euro. 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 results from operations, while a weaker U.S. dollar and Mexican peso generally have a positive effect.

To reduce our exposure to foreign currency exchange rate risk, we enter into various derivative instruments to hedge against such risk, authorized under a company policy that places controls on these hedging activities, with counterparties that are highly rated financial institutions. Decisions on whether to use such derivative instruments are primarily based on the amount of exposure to the currency involved and an assessment of the near-term market value for each currency. Our worldwide foreign currency exchange rate exposures are reviewed monthly. The gains and losses on our derivative instruments offset the changes in values of the related underlying exposures. Therefore, changes in the values of our derivative instruments are highly correlated with changes in the market values of underlying hedged items both at inception and over the life of the derivative instrument. For additional information regarding our derivative instruments, see Note 16, *Derivative Instruments and Hedging Activities*, in our Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

The foreign currency exchange contracts in the table below have maturity dates in fiscal 2023 through fiscal 2025. All items are non-trading and stated in U.S. dollars. As of February 3, 2023, the average contracted rate, notional amount, fair value, and the gain (loss) at fair value of outstanding derivative instruments were as follows:

*(Dollars in thousands, except average contracted rate)*

|  | Average Contracted Rate | Notional Amount | Fair Value | Gain (Loss) at Fair Value |
| --- | ---: | ---: | ---: | ---: |
| Buy U.S. dollar/Sell Australian dollar | 0.7123 | $106,505 | $105,545 | $(960) |
| Buy U.S. dollar/Sell Canadian dollar | 1.2873 | 40,628 | 41,763 | 1,135 |
| Buy U.S. dollar/Sell Euro | 1.1341 | 148,152 | 150,669 | 2,517 |
| Buy U.S. dollar/Sell British pound | 1.2815 | 40,430 | 41,644 | 1,214 |
| Buy Mexican peso/Sell U.S. dollar | 22.1863 | $42,864 | $48,095 | $5,231 |

Our net investment in foreign subsidiaries translated into U.S. dollars is not hedged. Any changes in foreign currency exchange rates would be reflected as a foreign currency translation adjustment, a component of accumulated other comprehensive loss in stockholders’ equity on the Condensed Consolidated Balance Sheets, and would not impact net earnings.

### Interest Rate Risk

Our interest rate risk relates primarily to fluctuations in variable interest rates on our revolving credit facility and term loan credit agreements, as well as the potential increase in the fair value of our fixed-rate long-term debt resulting from a potential decrease in interest rates. We generally do not use interest rate swaps to mitigate the impact of fluctuations in interest rates. We have no earnings or cash flow exposure due to interest rate risks on our fixed-rate long-term debt obligations. Our indebtedness as of February 3, 2023 includes $524.1 million of gross fixed-rate long-term debt that is not subject to variable interest rate fluctuations, $470.0 million of gross variable rate debt under our term loan credit agreements, and $100.0 million outstanding on our variable rate revolving credit facility.

### Commodity Cost Risk

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. These changes may be affected by several factors, including, for example, demand; inflation; deflation; changing prices; foreign currency fluctuations; tariffs; duties; trade regulatory actions; industry actions; and changes to international trade policies, agreements, and/or regulation and competitor activity, including antidumping and countervailing duties on certain products imported from foreign countries, such as certain engines imported into the U.S. from China.

Our primary cost exposures for commodities, components, parts, and accessories used in our products are with steel, aluminum, petroleum, and natural gas-based resins, linerboard, copper, lead, rubber, engines, transmissions, transaxles, hydraulics, electrification components, and others. Our largest spend categories for commodities, components, parts, and accessories are generally steel, engines, hydraulic components, transmissions, resin, aluminum, and electrification components, 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.

In any given period, we strategically attempt to mitigate potential unfavorable impact as a result of changes to the cost of commodities, components, parts, and accessories that affect our product lines through our productivity initiatives; however, our productivity initiatives may not be as effective as anticipated depending on macroeconomic cost trends for commodities, components, parts, and accessories costs and/or other factors. Our productivity initiatives include, but are not limited to, collaborating with suppliers, reviewing alternative sourcing options, substituting materials, SKU rationalization, utilizing Lean methods, engaging in internal cost reduction efforts, and utilizing tariff exclusions and duty drawback mechanisms, all as appropriate. When appropriate, we may also increase prices on some of our products to offset changes in the cost of commodities, components, parts, and accessories. To the extent that commodity and component costs increase and we do not have firm pricing from our suppliers, or our suppliers are not able to honor such prices, and/or our productivity initiatives and/or product price increases are less effective than anticipated and/or do not fully offset cost increases, we may experience a decline in our gross margins. In the first three months of fiscal 2023, the average cost of commodities, components, parts, and accessories purchased, including the impact of inflation and tariff costs, was higher compared to the average cost of commodities, components, parts, and accessories purchased in the first three months of fiscal 2022. We anticipate that the average cost of commodities, components, parts, and accessories purchased, including the impact of inflation and tariff costs, for the remainder of fiscal 2023 will be similar to the average costs experienced during the comparable period of fiscal 2022.

## Controls and procedures

As filed, 3,695 characters.

### Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) that are designed to provide reasonable assurance that information required to be disclosed by us in the reports we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, we recognize that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and we are required to apply our judgment in evaluating the cost-benefit relationship of possible internal controls.

Our management evaluated, with the participation of our Chairman of the Board, President and Chief Executive Officer and our Vice President, Chief Financial Officer, the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chairman of the Board, President and Chief Executive Officer and our Vice President, Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of such period to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including the Chairman of the Board, President and Chief Executive Officer and Vice President, Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

### Changes in Internal Control Over Financial Reporting

On January 13, 2022, during the first quarter of fiscal 2022, we completed the acquisition of Intimidator. Prior to this acquisition, Intimidator was a privately-held company not subject to the Sarbanes-Oxley Act of 2002, the rules and regulations of the SEC, or other corporate governance requirements to which public companies may be subject. In accordance with guidance issued by the SEC, companies are permitted to exclude acquisitions from their final assessment of internal control over financial reporting during the year of acquisition. As part of our ongoing integration activities, we are in the process of incorporating internal controls over significant processes specific to Intimidator that we believe are appropriate and necessary to account for the acquisition and to consolidate and report our financial results. We expect to complete our integration activities related to internal control over financial reporting for Intimidator during fiscal 2023. Accordingly, we expect to include Intimidator within our assessment of internal control over financial reporting as of October 31, 2023.

With the exception of internal control related integration activities associated with our acquisition of Intimidator, there was no change in our internal control over financial reporting that occurred during the three month period ended February 3, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 616 characters.

We are affected by risks specific to us, as well as factors that affect all businesses operating in a global market. The material risk factors known to us that could materially adversely affect our business, reputation, industry, operating results, or financial position or could cause our actual results to differ materially from our anticipated results or other expectations, including those expressed in any forward-looking statement made in this report, are described in our most recently filed Annual Report on Form 10-K, Part I, Item 1A. "Risk Factors." There has been no material change in those risk factors.

Filed Mar 9, 2023.
Source: SEC EDGAR, the filing index for accession 0000737758-23-000005. Last ingested by Listed: Oct 24, 2026, 14:55 ET. No prices; not investment advice.