# Toro Co: Form 10-Q for the period ended Aug 4, 2023

- Company: [Toro Co](/companies/ttc.md) (CIK 737758)
- Form: 10-Q
- Filed: 2023-09-07
- Accepted by EDGAR: Sep 7, 2023, 12:26 ET
- Period: 2023-08-04
- Accession: 0000737758-23-000024
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/737758/000073775823000024/ttc-20230804.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/737758/000073775823000024/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-08-04.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-05-06 to 2023-08-04 | $1.08bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2022-11-01 to 2023-08-04 | $3.57bn | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-05-06 to 2023-08-04 | $709.4m | us-gaap:CostOfGoodsAndServicesSold |
| Cost of revenue | 9 months, 2022-11-01 to 2023-08-04 | $2.32bn | us-gaap:CostOfGoodsAndServicesSold |
| Gross profit | 3 months, 2023-05-06 to 2023-08-04 | $372.4m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2022-11-01 to 2023-08-04 | $1.25bn | us-gaap:GrossProfit |
| Selling, general and administrative | 3 months, 2023-05-06 to 2023-08-04 | $240.2m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Selling, general and administrative | 9 months, 2022-11-01 to 2023-08-04 | $760.6m | us-gaap:SellingGeneralAndAdministrativeExpense |
| Operating income | 3 months, 2023-05-06 to 2023-08-04 | −$19.1m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2022-11-01 to 2023-08-04 | $336.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-05-06 to 2023-08-04 | $15.0m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2022-11-01 to 2023-08-04 | $43.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-05-06 to 2023-08-04 | −$13.6m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2022-11-01 to 2023-08-04 | $54.2m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2023-05-06 to 2023-08-04 | −$15.0m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Net income | 9 months, 2022-11-01 to 2023-08-04 | $259.4m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted EPS | 3 months, 2023-05-06 to 2023-08-04 | −$0.14 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2022-11-01 to 2023-08-04 | $2.46 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2023-05-06 to 2023-08-04 | −$0.14 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2022-11-01 to 2023-08-04 | $2.48 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2023-05-06 to 2023-08-04 | 104,286,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2022-11-01 to 2023-08-04 | 105,409,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2022-11-01 to 2023-08-04 | $154.7m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2022-11-01 to 2023-08-04 | $105.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2022-11-01 to 2023-08-04 | $106.5m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2022-11-01 to 2023-08-04 | $60.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Current assets | at 2023-08-04 | $1.73bn | us-gaap:AssetsCurrent |
| Total assets | at 2023-08-04 | $3.59bn | us-gaap:Assets |
| Current liabilities | at 2023-08-04 | $907.5m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2023-08-04 | $1.06bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-08-04 | $0 | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-08-04 | $1.48bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 46,331 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® brand, which are intended to provide innovative turf management solutions to landscape contractors and other customers including homeowners who prefer professional solutions. 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 nine months ended August 4, 2023, Intimidator's results of operations had an incremental impact on our Professional segment net sales of $49.6 million. Intimidator's operations, excluding the non-cash impairment charges recorded at the end of the third quarter of fiscal 2023, had an immaterial impact on Professional segment earnings for the nine months ended August 4, 2023. For additional information regarding the acquisition, refer to Note 2, *Business Combinations*, in the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q.

### Impairment

During the preparation of our financial statements for the third quarter of fiscal 2023, we identified deterioration in year-to-date fiscal 2023 results of Intimidator compared to previous expectations and resulting downward revisions to our projected future results of Intimidator made during the third quarter of fiscal 2023 as part of our annual long range strategic planning process, including future expected cash flows, which were significantly lower than previously expected. The underperformance was attributable to summer seasonality trends that did not materialize primarily due to reduced retail demand from homeowners who prefer professional solutions. This reduced retail demand from homeowners who prefer professional solutions was driven by persistent hot and dry weather patterns across key regions, coupled with a number of macro factors, including higher interest rates, economic uncertainty, and consumer spending preferences following the exceptional demand during the pandemic. Additionally, we had previously replenished the Intimidator customer channel, which, combined with the reduced retail demand, caused a significant reduction in shipments and customer reorders during the third quarter of fiscal 2023, as well as a material reduction in projected future financial results for Intimidator.

Based on the above factors, we concluded it was more likely than not that the indefinite-lived Spartan trade name intangible asset was impaired and that the fair value of the Intimidator reporting unit was less than its carrying amount. As such, we performed quantitative impairment analyses to compare the fair value of the Spartan trade name intangible asset and the Intimidator reporting unit with their respective carrying amounts.

As a result of these analyses, at the end of the third quarter of fiscal 2023, we recorded an impairment charge of $18.0 million related to the indefinite-lived Spartan trade name intangible asset reported under the Professional segment. Further, during the same period, we recorded an impairment charge of $133.3 million related to goodwill of the Intimidator reporting unit also reported under the Professional segment. Subsequent to these impairment charges, the remaining balance of the indefinite-lived Spartan trade name intangible asset is $81.1 million and the remaining balance of goodwill for the Intimidator reporting unit is $30.5 million. These impairment charges are included in the Non-cash impairment charges caption on the Condensed Consolidated Statements of (Loss) Earnings. These impairment charges resulted in a $36.7 million income tax benefit (deferred tax asset) associated with the remaining tax deductible basis in goodwill and other intangible assets.

### RESULTS OF OPERATIONS

### Overview

Consolidated net sales for the third quarter of fiscal 2023 were $1,081.8 million, down 6.8 percent compared to $1,160.6 million in the third quarter of fiscal 2022. For the first nine months of fiscal 2023, consolidated net sales were $3,570.0 million, up 6.8 percent compared to $3,342.7 million from the same period in the prior fiscal year.

Professional segment net sales for the third quarter of fiscal 2023 were $896.3 million, an increase of 1.1 percent compared to $886.2 million in the third quarter of the prior fiscal year. For the first nine months of fiscal 2023, Professional segment net sales were $2,845.7 million, an increase of 14.5 percent compared to $2,484.9 million in the prior fiscal year comparable period.

Residential segment net sales for the third quarter of fiscal 2023 were $175.3 million, a decrease of 35.1 percent compared to $270.0 million in the third quarter of the prior fiscal year. For the first nine months of fiscal 2023, Residential segment net sales were $705.8 million, a decrease of 16.5 percent compared to $845.0 million in the prior fiscal year comparable period.

Primarily as a result of the non-cash impairment charges, we incurred a net loss for the third quarter of fiscal 2023 of $15.0 million, or $0.14 net loss per diluted share, compared to net earnings of $125.2 million, or $1.19 per diluted share, for the third quarter of fiscal 2022. Net earnings for the first nine months of fiscal 2023 were $259.4 million, or $2.46 per diluted share, compared to $325.8 million, or $3.08 per diluted share, in the comparable fiscal 2022 period.

Adjusted net earnings for the third quarter of fiscal 2023 were $99.4 million, or $0.95 per diluted share, compared to $125.1 million, or $1.19 per diluted share, for the third quarter of fiscal 2022. Adjusted net earnings for the first nine months of fiscal 2023 were $369.4 million, or $3.50 per diluted share, compared to $327.0 million, or $3.09 per diluted share, in the comparable fiscal 2022 period. Reconciliations of non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures are included in the section titled "Non-GAAP Financial Measures" within this MD&A.

We continued our history of paying quarterly cash dividends and increased our cash dividend for the third quarter of fiscal 2023 by 13.3 percent to $0.34 per share compared to $0.30 per share paid in the third quarter of fiscal 2022. We also continued to repurchase shares of our common stock under our Board authorized repurchase program, thereby reducing our total shares outstanding. As a result of the combination of quarterly cash dividends and share repurchases, we returned $166.5 million of cash to our shareholders during the first nine months of fiscal 2023.

Field inventory levels were higher as of the end of the third quarter of fiscal 2023 compared to the end of the third quarter of fiscal 2022 primarily driven by channel replenishment and lower than anticipated retail demand from homeowners who prefer professional solutions.

Our order backlog represents unfulfilled customer orders at a point in time. Our order backlog (including shipments beyond 12 months) was slightly lower as of the end of the third quarter of fiscal 2023 compared to the end of the fourth quarter of fiscal 2022 primarily driven by improved manufacturing output and seasonal variability. Our order backlog remains significantly elevated over what the company would consider normal, due to demand for underground and specialty construction and golf and grounds products continuing to outpace production of such products.

### Net Sales

Consolidated net sales for the third quarter of fiscal 2023 were $1,081.8 million, down 6.8 percent compared to $1,160.6 million in the third quarter of fiscal 2022. The decrease for the third quarter comparison was primarily driven by lower shipments in the Residential segment. For the year-to-date period of fiscal 2023, consolidated net sales were $3,570.0 million, up 6.8 percent compared to $3,342.7 million from the same period in the prior fiscal year. The increase for the year-to-date comparison was mainly driven by net price realization, higher shipments, and the incremental net sales attributable to the acquisition of Intimidator.

Net sales in international markets increased by $18.8 million and $99.9 million for the third quarter and year-to-date periods of fiscal 2023, respectively. Changes in foreign currency exchange rates resulted in a decrease in our net sales of approximately $1.3 million and $7.4 million for the third quarter and year-to-date periods of fiscal 2023, respectively. The international net sales increases for both the third quarter and year-to-date comparisons were primarily driven by higher shipments and net price realization in the Professional segment, partially offset by lower shipments in the Residential segment.

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

|  | Three Months Ended August 4, 2023 | July 29, 2022 | Nine Months Ended August 4, 2023 | July 29, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Net sales | 100.0% | 100.0% | 100.0% | 100.0% |
| Cost of sales | (65.6) | (65.5) | (65.0) | (66.9) |
| Gross profit | 34.4 | 34.5 | 35.0 | 33.1 |
| Selling, general and administrative expense | (22.2) | (20.5) | (21.3) | (20.4) |
| Non-cash impairment charges | (14.0) | — | (4.3) | — |
| Operating (loss) earnings | (1.8) | 14.0 | 9.4 | 12.7 |
| Interest expense | (1.4) | (0.8) | (1.2) | (0.7) |
| Other income, net | 0.6 | 0.3 | 0.6 | 0.2 |
| (Loss) earnings before income taxes | (2.6) | 13.5 | 8.8 | 12.2 |
| Income tax benefit (provision) | 1.2 | (2.7) | (1.5) | (2.5) |
| Net (loss) earnings | (1.4)% | 10.8% | 7.3% | 9.7% |

### Gross Profit and Gross Margin

Gross profit for the third quarter of fiscal 2023 was $372.4 million, down 6.9 percent compared to $399.9 million in the third quarter of fiscal 2022. Adjusted gross profit for the third quarter of fiscal 2023 was $372.4 million, down 7.0 percent compared to $400.3 million for the third quarter of fiscal 2022. Gross margin was 34.4 percent for the third quarter of fiscal 2023 compared to 34.5 percent for the third quarter of fiscal 2022, a decrease of 10 basis points. The decrease in gross margin for the third quarter comparison was primarily due to higher material costs, mostly offset by lower freight expense. Gross profit for the year-to-date period of fiscal 2023 was $1,248.0 million, up 12.9 percent compared to $1,105.8 million in the same period of fiscal 2022. Adjusted gross profit for the year-to-date period of fiscal 2023 was $1,248.2 million, up 12.7 percent compared to $1,107.2 million for the same period of fiscal 2022. Gross margin was 35.0 percent for the year-to-date period of fiscal 2023 compared to 33.1 percent for the prior fiscal year comparable period, an increase of 190 basis points. The increase in gross margin for year-to-date period of fiscal 2023 was primarily due to net price realization and productivity improvements, partially offset by higher material 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 $3.3 million, or 1.4 percent, for the third quarter of fiscal 2023 and increased $80.1 million, or 11.8 percent, for the year-to-date period of fiscal 2023 compared to the same respective periods of fiscal 2022. As a percentage of net sales, SG&A expense increased 170 basis points and increased 90 basis points for the third quarter and year-to-date periods of fiscal 2023, respectively, compared to the same respective periods of fiscal 2022. The increase in SG&A expense as a percentage of net sales for the third quarter comparison was primarily due to lower net sales, higher marketing costs, and increased investment in research and engineering. The increase in SG&A expense as a percentage of net sales for the year-to-date comparison was primarily due to higher marketing and warranty costs, partially offset by net sales leverage.

### Non-Cash Impairment Charges

We recorded non-cash impairment charges of $151.3 million within our Professional segment related to Intimidator in the third quarter and year-to-date period of fiscal 2023. No impairment charges were recognized in the third quarter or year-to-date period of fiscal 2022.

### Interest Expense

Interest expense increased $5.8 million and $19.6 million for the third quarter and year-to-date periods of fiscal 2023, respectively, compared to the same respective periods of fiscal 2022. The increase in interest expense for both the third quarter and year-to-date comparisons was primarily due to higher average interest rates.

### Other Income, Net

Other income, net increased $2.3 million and $13.0 million for the third quarter and year-to-date periods of fiscal 2023, respectively, compared to the same respective periods of fiscal 2022. The increase for the third quarter comparison was primarily due to higher income from our Red Iron joint venture. The increase for the year-to-date comparison was primarily due to higher income from our Red Iron joint venture and the favorable impact from derivative instruments.

### Income Tax (Benefit) Provision

The effective tax rate for the third quarter of fiscal 2023 was 47.6 percent compared to 20.3 percent in the third quarter of fiscal 2022. The effective tax rate for the year-to-date period of fiscal 2023 was 17.3 percent compared to 20.4 percent in the same period of fiscal 2022. The change in the effective tax rate for the third quarter comparison was primarily due to the tax benefit from non-cash impairment charges in the current-year period. The decrease in the effective tax rate for the year-to-date comparison was primarily due to the tax benefit from non-cash impairment charges and higher tax benefits recorded as excess tax deductions for stock compensation in the current-year period.

The adjusted effective tax rate for the third quarter of fiscal 2023 was 19.0 percent, compared to an adjusted effective tax rate of 20.7 percent in the third quarter of fiscal 2022. The decrease was primarily due to an increased benefit from the geographic mix of earnings in the current-year period. The adjusted effective tax rate for the year-to-date period of fiscal 2023 was 20.6 percent, compared to 20.8 percent in the same period 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 (Loss) Earnings

The net loss for the third quarter of fiscal 2023 was $15.0 million, or $0.14 net loss per diluted share, compared to net earnings of $125.2 million, or $1.19 per diluted share, for the third quarter of fiscal 2022. Net earnings for the first nine months of fiscal 2023 were $259.4 million, or $2.46 per diluted share, compared to $325.8 million, or $3.08 per diluted share, for the same period of fiscal 2022. The decrease in net earnings per diluted share for the third quarter comparison was primarily due to the non-cash impairment charges, lower Residential segment earnings, and higher interest expense. The decrease in net earnings per diluted share for the year-to-date comparison was primarily due to the non-cash impairment charges, lower Residential segment earnings, and higher interest expense, partially offset by strong Professional segment earnings. Adjusted net earnings for the third quarter of fiscal 2023 were $99.4 million, or $0.95 per diluted share, compared to $125.1 million, or $1.19 per diluted share, for the third quarter of fiscal 2022, a decrease of 20.2 percent per diluted share. Adjusted net earnings for the first nine months of fiscal 2023 were $369.4 million, or $3.50 per diluted share, compared to $327.0 million, or $3.09 per diluted share, for the same year-to-date period of fiscal 2022, an increase of 13.3 percent per diluted share.

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 August 4, 2023 | July 29, 2022 | Dollar Value Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Professional | $896,321 | $886,232 | $10,089 | 1.1% |
| Residential | 175,314 | 269,962 | (94,648) | (35.1) |
| Other | 10,149 | 4,356 | 5,793 | 133.0 |
| Total net sales\* | $1,081,784 | $1,160,550 | $(78,766) | (6.8)% |
| \*Includes international net sales of: | $234,964 | $216,142 | $18,822 | 8.7% |

*(Dollars in thousands)*

|  | Nine Months Ended August 4, 2023 | July 29, 2022 | Dollar Value Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Professional | $2,845,714 | $2,484,927 | $360,787 | 14.5% |
| Residential | 705,765 | 845,039 | (139,274) | (16.5) |
| Other | 18,471 | 12,712 | 5,759 | 45.3 |
| Total net sales\* | $3,569,950 | $3,342,678 | $227,272 | 6.8% |
| \*Includes international net sales of: | $756,686 | $656,799 | $99,887 | 15.2% |

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

*(Dollars in thousands)*

|  | Three Months Ended August 4, 2023 | July 29, 2022 | Dollar Value Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Professional | $13,049 | $166,191 | $(153,142) | (92.1)% |
| Residential | 3,848 | 26,348 | (22,500) | (85.4) |
| Other | (45,460) | (35,448) | (10,012) | (28.2) |
| Total segment (loss) earnings | $(28,563) | $157,091 | $(185,654) | (118.2)% |

*(Dollars in thousands)*

|  | Nine Months Ended August 4, 2023 | July 29, 2022 | Dollar Value Change | Percentage Change |
| --- | ---: | ---: | ---: | ---: |
| Professional | $384,621 | $424,833 | $(40,212) | (9.5)% |
| Residential | 64,411 | 95,203 | (30,792) | (32.3) |
| Other | (135,462) | (110,742) | (24,720) | (22.3) |
| Total segment earnings | $313,570 | $409,294 | $(95,724) | (23.4)% |

### Professional Segment

### Segment Net Sales

Worldwide net sales for our Professional segment for the third quarter of fiscal 2023 increased 1.1 percent compared to the third quarter of fiscal 2022. The increase was driven primarily by higher shipments of construction and golf and grounds products and net price realization, partially offset by lower shipments of lawn care equipment. Worldwide net sales for our Professional segment for the year-to-date period of fiscal 2023 increased 14.5 percent compared to the same period of fiscal 2022. The increase was driven primarily by higher shipments, net price realization, and the incremental net sales attributable to the acquisition of Intimidator.

### Segment Earnings

Professional segment earnings for the third quarter of fiscal 2023 decreased 92.1 percent compared to the third quarter of fiscal 2022, and Professional segment earnings margin decreased to 1.5 percent from 18.8 percent in the third quarter of fiscal 2022. The decrease in Professional segment earnings margin was primarily due to the non-cash impairment charges and higher material and manufacturing costs, partially offset by productivity improvements and net price realization. Professional segment earnings for the year-to-date period of fiscal 2023 decreased 9.5 percent compared to the same period of fiscal 2022, and Professional segment earnings margin decreased to 13.5 percent from 17.1 percent in the year-to-date period of fiscal 2022. The decrease in Professional segment earnings margin was primarily due to the non-cash impairment charges and higher material costs, partially offset by net price realization, productivity improvements, and net sales leverage.

### Residential Segment

### Segment Net Sales

Worldwide net sales for our Residential segment for the third quarter of fiscal 2023 decreased 35.1 percent compared to the third quarter of fiscal 2022. The decrease was primarily driven by lower shipments of products broadly across the segment. Worldwide net sales for our Residential segment for the year-to-date period of fiscal 2023 decreased 16.5 percent compared to the same period of fiscal 2022. The decrease was primarily driven by lower shipments, partially offset by net price realization.

### Segment Earnings

Residential segment earnings for the third quarter of fiscal 2023 decreased 85.4 percent compared to the third quarter of fiscal 2022, and Residential segment earnings margin decreased to 2.2 percent from 9.8 percent in the third quarter of fiscal 2022. The decrease in Residential segment earnings margin for the third quarter of fiscal 2023 was largely driven by lower sales volume and unfavorable product mix, partially offset by lower material costs. Residential segment earnings for the year-to-date period of fiscal 2023 decreased 32.3 percent compared to the same period of fiscal 2022, and Residential segment earnings margin decreased to 9.1 percent from 11.3 percent in the year-to-date period of fiscal 2022. The decrease in Residential segment earnings margin for the year-to-date period of fiscal 2023 was largely driven by lower sales volume and unfavorable product mix, partially offset by net price realization.

### Other Activities

### Other Net Sales

Net sales for our Other activities includes sales from our wholly-owned domestic distribution company net of intersegment sales from the Professional and Residential segments to the distribution company. Net sales for our Other activities in the third quarter of fiscal 2023 increased by $5.8 million compared to the same period in fiscal 2022. Net sales for our Other activities in the year-to-date period of fiscal 2023 increased by $5.8 million compared to the same period in fiscal 2022.

### Other Operating Loss

The operating loss for our Other activities for the third quarter of fiscal 2023 increased $10.0 million compared to the third quarter of fiscal 2022 and was primarily due to higher interest expense and higher corporate expenses, partially offset by higher income from our Red Iron joint venture.

The operating loss for our Other activities for the year-to-date period of fiscal 2023 increased $24.7 million compared to the same period in fiscal 2022 and was primarily due to higher interest expense and higher corporate expenses, partially offset by higher income from our Red Iron joint venture and the favorable impact from derivative instruments.

### FINANCIAL POSITION

### Working Capital

The macroeconomic environment remains challenging and has continued to result in supply chain disruptions and difficult conditions for sourcing certain key components. Our continued goal is to maintain requisite inventory levels to meet our anticipated production requirements, avoid manufacturing delays, and meet the demand for our products, as well as attempting to ensure service parts availability for our customers. Accounts receivable as of the end of the third quarter of fiscal 2023 increased $40.0 million, or 11.4 percent, compared to the end of the third quarter of fiscal 2022, primarily driven by payment terms and higher International sales. Inventory levels were up $173.4 million, or 18.5 percent, as of the third quarter of fiscal 2023 compared to the third quarter of fiscal 2022, primarily due to higher finished goods resulting from decreased demand for solutions sold to homeowners. Accounts payable decreased $79.7 million, or 16.4 percent, as of the end of the third quarter of fiscal 2023 compared to the end of the third quarter of fiscal 2022, primarily driven by a reduction in purchases year over year.

### Cash Flow

### Cash Flows from Operating Activities

Cash provided by operating activities for the first nine months of fiscal 2023 was $154.7 million compared to $154.6 million for the first nine months of fiscal 2022 mainly due to higher net earnings excluding our non-cash impairment charges, mostly offset by net unfavorable fluctuations in working capital, in each case during the current fiscal year period compared to the prior fiscal year period.

### Cash Flows from Investing Activities

Cash used in investing activities for the first nine months of fiscal 2023 was $119.2 million compared to $480.6 million for the first nine months of fiscal 2022. This decrease in cash used in investing activities was primarily driven by cash used to acquire Intimidator in the prior fiscal year period, partially offset by higher purchases of property, plant, and equipment in the current fiscal year period.

### Cash Flows from Financing Activities

Cash used in financing activities for the first nine months of fiscal 2023 was $82.4 million compared to cash provided by financing activities for the first nine months of fiscal 2022 of $162.7 million. This change in cash flows from 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 August 4, 2023, we had available liquidity of $675.3 million, consisting of cash and cash equivalents of $147.9 million, of which $90.7 million was held by our foreign subsidiaries, and availability under our revolving credit facility of $527.4 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 in our 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)*

|  | August 4, 2023 | July 29, 2022 | October 31, 2022 |
| --- | ---: | ---: | ---: |
| $600 million revolving credit facility, due October 2026 | $70,000 | $65,000 | $— |
| $270 million term loan, due October 2026 | 270,000 | 270,000 | 270,000 |
| $200 million term loan, due April 2027 | 200,000 | 200,000 | 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 | 100,000 |
| 7.8% debentures, due June 2027 | 100,000 | 100,000 | 100,000 |
| 6.625% senior notes, due May 2037 | 124,148 | 124,086 | 124,102 |
| Less: unamortized debt issuance costs | 2,839 | 3,470 | 3,334 |
| Total long-term debt | 1,061,309 | 1,055,616 | 990,768 |
| Less: current portion of long-term debt | — | 65,000 | — |
| Long-term debt, less current portion | $1,061,309 | $990,616 | $990,768 |

As of August 4, 2023, we had $70.0 million of outstanding borrowings under our revolving credit facility and $2.6 million outstanding under the sublimit for standby letters of credit, which resulted in $527.4 million of unutilized availability under our 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 third quarter of fiscal 2023 that was paid on July 12, 2023. This was an increase of 13.3 percent over our cash dividend of $0.30 per share for the third quarter of fiscal 2022. We expect to continue paying our quarterly cash dividend to shareholders for the remainder of fiscal 2023.

### Share Repurchases

During the first nine months of fiscal 2023, we repurchased 577,115 shares of our common stock in the open market under our Board authorized repurchase program, thereby reducing our total shares outstanding. As of August 4, 2023, 6,949,491 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 in our 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 nine 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 nine month periods ended August 4, 2023 and July 29, 2022 were $2,160.8 million and $1,886.1 million, respectively. The total amount of net receivables outstanding under the arrangement with Red Iron as of August 4, 2023, July 29, 2022 and October 31, 2022 were $1,010.5 million, $690.7 million and $776.1 million, respectively. The total amount of receivables due from Red Iron to us as of August 4, 2023, July 29, 2022 and October 31, 2022 were $30.4 million, $14.4 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 nine month periods ended August 4, 2023 and July 29, 2022 were $367.6 million and $458.9 million, respectively. The total amount of net receivables outstanding under the arrangements with HCFC and the other third-party financial institutions as of August 4, 2023, July 29, 2022, and October 31, 2022 were $187.2 million, $205.1 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 August 4, 2023, July 29, 2022, and October 31, 2022, we were contingently liable to repurchase up to a maximum amount of $118.8 million, $79.9 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 nine months ended August 4, 2023 and July 29, 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 and nine month periods ended August 4, 2023 and July 29, 2022:

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

|  | Three Months Ended August 4, 2023 | July 29, 2022 | Nine Months Ended August 4, 2023 | July 29, 2022 |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | $372,354 | $399,906 | $1,247,999 | $1,105,751 |
| Acquisition-related costs1 | — | 401 | 225 | 1,425 |
| Adjusted gross profit | $372,354 | $400,307 | $1,248,224 | $1,107,176 |
| Operating (loss) earnings | $(19,072) | $163,048 | $336,151 | $425,251 |
| Acquisition-related costs1 | — | 704 | 447 | 3,456 |
| Non-cash impairment charges2 | 151,263 | — | 151,263 | — |
| Adjusted operating earnings | $132,191 | $163,752 | $487,861 | $428,707 |
| Operating (loss) earnings margin | (1.8)% | 14.0% | 9.4% | 12.7% |
| Acquisition-related costs1 | —% | 0.1% | —% | 0.1% |
| Non-cash impairment charges2 | 14.0% | —% | 4.3% | —% |
| Adjusted operating earnings margin | 12.2% | 14.1% | 13.7% | 12.8% |
| (Loss) earnings before income taxes | $(28,563) | $157,091 | $313,570 | $409,294 |
| Acquisition-related costs1 | — | 704 | 447 | 3,456 |
| Non-cash impairment charges2 | 151,263 | — | 151,263 | — |
| Adjusted earnings before income taxes | $122,700 | $157,795 | $465,280 | $412,750 |
| Income tax (benefit) provision | $(13,600) | $31,941 | $54,208 | $83,509 |
| Acquisition-related costs1 | — | 143 | 96 | 716 |
| Non-cash impairment charges2 | 36,621 | — | 36,621 | — |
| Tax impact of share-based compensation3 | 324 | 581 | 5,004 | 1,568 |
| Adjusted income tax provision | $23,345 | $32,665 | $95,929 | $85,793 |
| Net (loss) earnings | $(14,963) | $125,150 | $259,362 | $325,785 |
| Acquisition-related costs, net of tax1 | — | 561 | 351 | 2,740 |
| Non-cash impairment charges, net of tax2 | 114,642 | — | 114,642 | — |
| Tax impact of stock-based compensation3 | (324) | (581) | (5,004) | (1,568) |
| Adjusted net earnings | $99,355 | $125,130 | $369,351 | $326,957 |
| Net (loss) earnings per diluted share | $(0.14) | $1.19 | $2.46 | $3.08 |
| Acquisition-related costs, net of tax1 | — | 0.01 | — | 0.03 |
| Non-cash impairment charges, net of tax2 | 1.09 | — | 1.09 | — |
| Tax impact of stock-based compensation3 | — | (0.01) | (0.05) | (0.02) |
| Adjusted net earnings per diluted share | $0.95 | $1.19 | $3.50 | $3.09 |
| Effective tax rate | 47.6% | 20.3% | 17.3% | 20.4% |
| Non-cash impairment charges2 | (27.5)% | —% | 1.7% | —% |
| Tax impact of stock-based compensation3 | (1.1)% | 0.4% | 1.6% | 0.4% |
| Adjusted effective tax rate | 19.0% | 20.7% | 20.6% | 20.8% |

1 On January 13, 2022, we completed our acquisition of Intimidator. Acquisition-related costs for the nine month period ended August 4, 2023 represent integration costs. Acquisition-related costs for the three and nine month periods ended July 29, 2022 represent transaction and integration costs. For additional information regarding the acquisition of Intimidator, refer to Note 2, *Business Combinations*, within the Notes to Condensed Consolidated Financial Statements included within Part I, Item 1 of this Quarterly Report on Form 10-Q.

2 At the end of the third quarter of fiscal 2023, the company recorded non-cash impairment charges within our Professional reportable segment related to the Intimidator operating segment, as discussed in more detail under the heading "Company Overview-Impairment" in this section.

3 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 and nine month periods ended August 4, 2023 and July 29, 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 nine month periods ended August 4, 2023 and July 29, 2022:

*(Dollars in thousands)*

|  | Nine Months Ended August 4, 2023 | July 29, 2022 |
| --- | ---: | ---: |
| Net cash provided by operating activities | $154,665 | $154,563 |
| Less: Purchases of property, plant, and equipment, net of proceeds from insurance claim | 98,586 | 75,772 |
| Free cash flow | 56,079 | 78,791 |
| Net earnings | $259,362 | $325,785 |
| Free cash flow conversion percentage | 21.6% | 24.2% |

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

There have been no material changes to our critical accounting policies and estimates since our 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, 7,811 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 August 4, 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 | 0.6928 | $99,283 | $104,087 | $4,804 |
| Buy U.S. dollar/Sell Canadian dollar | 1.3189 | 40,337 | 40,754 | 417 |
| Buy U.S. dollar/Sell Euro | 1.1124 | 165,062 | 165,421 | 359 |
| Buy U.S. dollar/Sell British pound | 1.2610 | 48,549 | 48,288 | (261) |
| Buy Mexican peso/Sell U.S. dollar | 21.2350 | $45,350 | $53,703 | $8,353 |

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 August 4, 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 $70.0 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.

## Controls and procedures

As filed, 3,693 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 August 4, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 14,586 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, other than the updated risk factors below.

### Economic and Operational Risks

***Our Professional segment includes a variety of products that depend on certain and varied factors.***

Our Professional segment includes a variety of products that are sold by distributors or dealers, or directly to government customers, rental companies, construction companies, professional and other users, including homeowners, 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. Any one or a combination of the following factors, among others, many of which have been adversely impacted by COVID-19, have in the past resulted and could in the future result in a decrease in spending and demand for our products, resulting in an adverse effect on our Professional segment net sales and earnings:

- reduced revenue for golf courses resulting from a reduction in the level of interest in the game of golf and/or a decrease in rounds played, memberships, and/or food and beverage sales, as applicable;
- reduced investment in golf course renovations and improvements;
- the level of new golf course development and golf course closures;
- reduced consumer and business spending on property maintenance, such as lawn care and snow and ice removal activities;
- low or reduced levels of infrastructure improvements and other construction activities;
- decreased oil and gas construction activities;
- a decline in acceptance of, and demand for, ag-irrigation solutions for agricultural production;
- availability of cash or credit on acceptable terms for our customers 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 depend on several factors, including product placement, consumer confidence and spending levels, changing buying patterns of customers and the impact of significant sales or promotional events.***

The elimination, reduction, or changes in the placement of shelf space assigned to our Residential segment products at mass retailers and home centers have in the past adversely affected and in the future could adversely affect our Residential segment net sales. Our Residential segment net sales also depend upon the buying patterns of consumers and changes to buying patterns could result in reduced sales. For example, after the COVID-19 pandemic, consumers have shifted more of their spending away from home related products, including our Residential segment products, and back to other areas, compared to the historic levels of home related spending we experienced during the heights of the pandemic, which has adversely affected and may continue to adversely affect our Residential net sales. In addition, as consumers purchase products at home centers and mass retailers that typically offer broader and lower price points than dealers, demand for and sales of our Residential segment products purchased at mass retailers and home centers, as compared to dealers and hardware retailers, have increased, adversely affecting our margins. 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, but the loss of any such customer, a significant reduction in sales to such customers, 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 have in the past and could in the future be impacted as a result of the timing of significant sales or promotional events for our Residential products.

### Strategic Risks

***Our strategy to pursue acquisitions and alliances, strong customer relations, and new joint ventures, investments, and partnerships involves risk.***

One of our strategies is to drive growth in our businesses and expand our global presence through targeted acquisitions and alliances, strong customer relations, and new joint ventures, investments, and partnerships that add value and complement our existing brands and product portfolio. For example, in January 2022, we acquired the Intimidator Group, and more recently, we announced a strategic partnership with Lowe's.

Our continued ability to grow through acquisitions will depend, in part, on the availability of suitable target 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 operate and integrate the acquired business effectively. Any acquisition, alliance, joint venture, investment, or partnership could impair our business, financial condition, reputation, and operating results. For instance, the benefits of an acquisition, or new alliance, joint venture, investment, or partnership may take more time than expected to achieve, or may not develop at all. Acquisitions, alliances, joint ventures, investments, and partnerships may involve a number of risks, the occurrence of which could adversely affect our business, reputation, financial condition, and operating results, including:

- diversion of management's attention to manage and integrate the acquired business;
- disruption to our existing operations and plans;
- inability to effectively manage our expanded operations;
- difficulties, delays, or unanticipated costs in integrating and assimilating information and financial systems, internal controls, operations, manufacturing processes and products or in realizing projected efficiencies, growth prospects, cost savings, and other synergies;
- inability to successfully integrate or develop a distribution channel for acquired product lines;
- 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 indefinite-lived intangible assets, and/or long-lived assets because 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 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, or are delayed in achieving, the growth prospects, net sales, net earnings, cost and/or revenue synergies, or other 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 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;
- 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 valid 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 despite the existence of representations, warranties and indemnities in any definitive agreement and/or a representation and warranty insurance policy, if applicable, 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 acquisitions, occurrence of non-recurring charges, or other potential financial accounting or reporting impacts.

For example, at the end of the third quarter of fiscal 2023, we recorded non-cash impairment charges of $18.0 million related to the indefinite-lived Spartan® trade name intangible asset and $133.3 million related to the goodwill of the Intimidator reporting unit. These impairment charges resulted in a $36.7 million income tax benefit (deferred tax asset) associated with the remaining tax deductible basis in goodwill and other intangible assets.

In addition, we need effective internal controls to provide reliable and accurate financial reports and to effectively prevent fraud. Integrating acquired businesses may make our systems and controls more complex and 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. In fiscal 2022, we excluded the Intimidator Group in our assessment in accordance with applicable SEC guidance, and continue to integrate its controls into our internal control over financial reporting. 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.

### Financial Risks

***We incurred non-cash impairment charges during the third quarter of fiscal 2023 which adversely affected our third quarter of fiscal 2023 operating results and we may be required to incur additional future impairment and other charges, which could adversely affect our operating results.***

In connection with our acquisitions and other business combinations, including our January 2022 acquisition of Intimidator and March 2020 acquisition of Venture Products, applicable accounting standards require the net tangible and intangible assets of the acquired business to be recorded on our consolidated balance sheet at their fair values as of the date of acquisition and any excess in the purchase price paid by us over the fair value of net tangible and intangible assets of any acquired business to be recorded as goodwill. Goodwill and indefinite-lived intangible assets are not amortized, but are tested at least annually for impairment or more frequently as events and circumstances dictate. Goodwill is tested for impairment at the reporting unit level, which is generally an operating segment or underlying business component. Indefinite-lived intangible assets are tested for impairment at the individual indefinite-lived intangible asset or asset group level, as appropriate. Finite-lived intangible assets other than goodwill considered long-lived assets for impairment testing purposes, are tested for impairment as events and circumstances dictate, and are required to be amortized over their estimated useful lives and this amortization expense may be significant to our ongoing financial results.

If we determine that the anticipated future cash flows from our reporting units, indefinite-lived intangible assets or asset groups, or long-lived asset groups may be less than their respective carrying values, our goodwill, indefinite-lived intangible assets, and/or long-lived assets may be deemed to be impaired. If this occurs, applicable accounting rules may require us to write down the value of the goodwill, indefinite-lived intangible assets, and/or long-lived assets on our balance sheet to reflect the extent of any such impairment. Any such write-down of goodwill, indefinite-lived intangible assets, and/or long-lived assets would generally be recognized as a non-cash expense in our Consolidated Statements of Earnings for the accounting period during which any such write down occurs.

For example, at the end of the third quarter of fiscal 2023, we recorded non-cash impairment charges of $18.0 million related to the indefinite-lived Spartan trade name intangible asset and $133.3 million related to the goodwill of the Intimidator reporting unit. These impairment charges resulted in a $36.7 million income tax benefit (deferred tax asset) associated with the remaining tax deductible basis in goodwill and other intangible assets. As of August 4, 2023, we had goodwill of $451.3 million, which is maintained in various reporting units, including goodwill from the Intimidator and Venture Products business combinations, and indefinite-lived intangible assets of $271.6 million, which together comprise 20.2 percent of our total assets as of August 4, 2023. Any future impairment charges could be significant and could adversely affect our future consolidated operating results and financial condition.

Filed Sep 7, 2023.
Source: SEC EDGAR, the filing index for accession 0000737758-23-000024. Last ingested by Listed: Nov 3, 2026, 12:55 ET. No prices; not investment advice.