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

FORM 10-Q

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

For the Quarterly Period Ended February 2, 2024

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

For the Transition Period from           to          
Commission File Number: 1-8649

THE TORO COMPANY
(Exact name of registrant as specified in its charter)
Delaware41-0580470
State or Other Jurisdiction of
Incorporation or Organization
I.R.S. Employer Identification No.

 8111 Lyndale Avenue South
Bloomington, Minnesota 55420-1196
Telephone Number: (952) 888-8801
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Common Stock, par value $1.00 per shareTTCNew York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    No 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes    No 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filerAccelerated filer
Non-accelerated filerSmaller reporting company
Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No 
The number of shares of the registrant’s common stock outstanding as of February 29, 2024 was 104,406,800.


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

2

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q contains not only historical information, but also forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. In addition, we or others on our behalf may make forward-looking statements from time to time in oral presentations, including telephone conferences and/or web casts open to the public, in press releases or reports, on our web sites or otherwise. Statements that are not historical are forward-looking and reflect expectations and assumptions that we believe to be reasonable. Forward-looking statements are based on our current expectations of future events and often can be identified in this report and elsewhere by using words such as "expect," "strive," "outlook," "guidance," "forecast," "goal," "anticipate," "continue," "plan," "estimate," "project," "target," "improve," "believe," "become," "should," "could," "will," "would," "possible," "may," "likely," "intend," "can," "pursue," "potential," "pro forma," "approximately," variations of such words or the negative thereof, and similar expressions or future dates. Our forward-looking statements generally relate to our future performance, including our anticipated operating results, liquidity requirements, and financial condition; the anticipated impacts of current global supply chain disruptions, the inflationary environment, current wars and international sanctions and geopolitical tensions, tight labor markets and other macroeconomic factors; our business strategies, priorities, goals, and commitments; acquisitions and any impairment, restructuring, or other charges in connection therewith or resulting therefrom; business and productivity initiatives and anticipated sales growth, profitability, cost savings and other benefits associated therewith; and the effect of laws, rules, policies, regulations, tax reform, new accounting pronouncements, and outstanding litigation on our business and future performance.
Forward-looking statements are only projections and involve risks and uncertainties that could cause actual results to differ materially from those projected or implied in the forward-looking statements. The following are some of the factors known to us that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements:
Adverse economic conditions and outlook in the United States and in other countries in which we conduct business, such as but not limited to: economic uncertainty; business slowdowns, suspensions or delays of production and commercial activity; slow or negative economic growth rates or recessionary conditions; reduced or negative consumer confidence; reduced consumer spending levels; changing consumer preferences; inflationary or deflationary pressures; higher short-term, mortgage, and other interest rates; increased or prolonged high or low unemployment rates and tight labor markets; higher costs, longer lead times and reduced availability of commodities, components, parts, and accessories, including as a result of transportation-related costs, inflation, changing prices, foreign currency fluctuations, tariffs, and/or duties; slowdowns or reductions in levels of interest in the game of golf or golf course activity, development, renovation, or improvement; golf course closures; reduced customer, governmental or municipal spending; reduced infrastructure spending; reduced levels of home ownership, construction, or sales; home foreclosures; the impact of U.S. federal debt, state debt, and sovereign debt defaults; reduced credit availability or unfavorable credit terms for us or our distributors, dealers, or end-user customers; and general economic and political conditions and expectations;
Effect that weather conditions or climate change have on demand for our products and operations, including our supply chain;
Continuing disruption, and/or shortages in the availability of and the cost of commodities, components, parts, or accessories used in our products;
Our ability to maintain appropriate inventory levels, including as a result of global supply chain disruptions or changes in purchasing patterns by customers, and if we underestimate or overestimate demand for our products, and the effect of inventory management decisions of our distribution channel customers;
Risks associated with our acquisitions and alliances, strong customer relations, and new joint ventures, investments, or partnerships and our failure to successfully complete divestitures or other restructuring activities, including without limitation our ability to integrate acquired businesses and to address material issues both identified and not uncovered during our due diligence review, loss of substantial customers, and the ability of acquired companies or our alliances, joint ventures, investments or partnerships to achieve satisfactory operating results, including results being accretive to earnings, realization of synergies and expected cash flow generation, which could lead to impairment, restructuring, and other charges;
Our ability to continue to enhance existing products and develop and market new products that respond to customer needs and preferences and achieve market acceptance, including in particular alternative power, smart connected, and autonomous solutions;
Changes in our product mix;
Effect of competition;
Our ability to cost-effectively expand and renovate existing facilities, open and manage new or acquired facilities, move production between manufacturing facilities, and/or any disruption at or near any of our facilities or other operations or those of our suppliers, distribution channel customers, mass retailers, or home centers where our products are sold;
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Our ability to retain our executive officers or other key employees, attract and retain other qualified employees or successfully implement executive officer, key employee or other leadership or employee transitions and any failure by us, or our suppliers or distribution channel partners, to hire and/or retain a labor force to enhance existing products and develop and market new products, adequately staff manufacturing operations, perform service or warranty work or other necessary activities, or allow employees to adequately and safely perform their jobs;
Changes in composition of, financial viability of, and the relationships with, our distribution channel customers;
Risks associated with our credit arrangements and ratings and any material change in the availability or terms of, or termination or disruption of, credit offered to our customers, distributors, and dealers;
Risks associated with our international operations, including but not limited to the effect of foreign currency exchange rate fluctuations and compliance with foreign legal and regulatory requirements, current wars and international sanctions and geopolitical tensions, political risks associated with the potential instability of governments and legal systems in countries in which we or our customers or suppliers conduct business, and other current and potential conflicts;
Our failure to comply with all applicable legal and regulatory requirements and the effect of product quality issues, product liability claims, and other litigation to which we are or may be subject;
Our ability to obtain and protect our intellectual property and other proprietary rights or operate our business without infringing upon the intellectual property or other proprietary rights of others;
Failure of our information systems or information security practices or those of our business partners or third-party service providers to adequately perform and/or protect sensitive or confidential information;
Risks associated with a possible U.S. governmental shutdown and its impact on the U.S. economy, capital markets and our business;
Our ability to achieve our financial projections or other business initiatives, including our recently announced Amplifying Maximum Productivity (“AMP”) initiative, in the time periods that we anticipate or at all;
Changes in accounting or tax standards and policies and/or assumptions utilized in determining accounting tax estimates; and
Impact of increased scrutiny on our environmental, social and governance (“ESG”) practices and our ability to meet our ESG company goals.
For more information regarding these and other uncertainties and factors that could cause our actual results to differ materially from what we have anticipated in our forward-looking statements or otherwise could materially adversely affect our business, financial condition, or operating results, see our most recently filed Annual Report on Form 10-K, Part I, Item 1A, "Risk Factors;" and our subsequent filings with the SEC.
All forward-looking statements included in this report are expressly qualified in their entirety by the foregoing cautionary statements. We caution readers not to place undue reliance on any forward-looking statement which speaks only as of the date made and to recognize that forward-looking statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, the risks described in our most recent Annual Report on Form 10-K, Part I, Item 1A, "Risk Factors," and our subsequent SEC filings, as well as others that we may consider immaterial or do not anticipate at this time. These risks and uncertainties are not exclusive and further information concerning the company and our businesses, including factors that potentially could materially affect our financial results or condition, may emerge from time to time. We make no commitment to revise or update any forward-looking statements in order to reflect actual results, events or circumstances occurring or existing after the date any forward-looking statement is made, or changes in factors or assumptions affecting such forward-looking statements. We advise you, however, to consult any further disclosures we make on related subjects in our future Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K we file with or furnish to the SEC.
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE TORO COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Earnings (Unaudited)
(Dollars and shares in millions, except per share data)
 Three Months Ended
February 2, 2024February 3, 2023
Net sales$1,001.9 $1,148.8 
Cost of sales657.4 752.9 
Gross profit344.5 395.9 
Selling, general and administrative expense255.9 259.5 
Operating earnings88.6 136.4 
Interest expense(16.2)(14.1)
Other income, net7.7 9.0 
Earnings before income taxes80.1 131.3 
Provision for income taxes15.2 24.4 
Net earnings$64.9 $106.9 
Basic net earnings per share of common stock$0.62 $1.02 
Diluted net earnings per share of common stock$0.62 $1.01 
Weighted-average number of shares of common stock outstanding — Basic104.4 104.5 
Weighted-average number of shares of common stock outstanding — Diluted104.7 105.6 
See accompanying Notes to Condensed Consolidated Financial Statements.



THE TORO COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
(Dollars in millions)
 Three Months Ended
February 2, 2024February 3, 2023
Net earnings$64.9 $106.9 
Other comprehensive income (loss), net of tax: 
Foreign currency translation adjustments7.3 21.2 
Derivative instruments, net of tax of $(1.9); $(5.9), respectively
(5.3)(16.7)
Other comprehensive income, net of tax2.0 4.5 
Comprehensive income$66.9 $111.4 
See accompanying Notes to Condensed Consolidated Financial Statements.
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THE TORO COMPANY AND SUBSIDIARIES
Condensed Consolidated Balance Sheets (Unaudited)
(Dollars in millions, except per share data)
February 2, 2024February 3, 2023October 31, 2023
ASSETS   
Cash and cash equivalents$198.5 $174.0 $193.1 
Receivables, net489.1 377.3 407.4 
Inventories, net1,177.1 1,131.4 1,087.8 
Prepaid expenses and other current assets101.8 75.0 110.5 
Total current assets1,966.5 1,757.7 1,798.8 
Property, plant, and equipment, net639.2 584.1 641.7 
Goodwill451.2 584.6 450.8 
Other intangible assets, net531.5 577.1 540.1 
Right-of-use assets121.8 74.6 125.3 
Investment in finance affiliate48.4 45.7 50.6 
Deferred income taxes20.3 11.7 14.2 
Other assets22.2 19.4 22.8 
Total assets$3,801.1 $3,654.9 $3,644.3 
LIABILITIES AND STOCKHOLDERS’ EQUITY   
Current portion of long-term debt$6.8 $ $ 
Accounts payable421.8 475.2 430.0 
Accrued liabilities474.5 496.8 499.1 
Short-term lease liabilities18.8 16.0 19.5 
Total current liabilities921.9 988.0 948.6 
Long-term debt, less current portion1,179.8 1,091.0 1,031.5 
Long-term lease liabilities108.4 60.7 112.1 
Deferred income taxes0.4 31.4 0.4 
Other long-term liabilities42.7 39.6 40.8 
Stockholders’ equity:   
Preferred stock, par value $1.00 per share, authorized 1,000,000 voting and 850,000 non-voting shares, none issued and outstanding
   
Common stock, par value $1.00 per share, authorized 175,000,000 shares; issued and outstanding 104,013,541 shares as of February 2, 2024, 104,283,002 shares as of February 3, 2023, and 103,843,485 shares as of October 31, 2023
104.0 104.3 103.8 
Retained earnings1,478.9 1,368.5 1,444.1 
Accumulated other comprehensive loss(35.0)(28.6)(37.0)
Total stockholders’ equity1,547.9 1,444.2 1,510.9 
Total liabilities and stockholders’ equity$3,801.1 $3,654.9 $3,644.3 
See accompanying Notes to Condensed Consolidated Financial Statements.
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THE TORO COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in millions)
 Three Months Ended
February 2, 2024February 3, 2023
Cash flows from operating activities:  
Net earnings$64.9 $106.9 
Adjustments to reconcile net earnings to net cash used in operating activities:  
Non-cash income from finance affiliate(5.0)(3.8)
Distributions from (contributions to) finance affiliate, net7.2 (2.6)
Depreciation of property, plant, and equipment22.0 19.2 
Amortization of other intangible assets8.7 9.1 
Stock-based compensation expense8.4 5.2 
Other1.1  
Changes in operating assets and liabilities, net of the effect of acquisitions:  
Receivables, net(80.2)(42.5)
Inventories, net(86.4)(76.8)
Other assets6.5 (1.6)
Accounts payable(10.3)(103.6)
Other liabilities(29.1)21.6 
Net cash used in operating activities(92.2)(68.9)
Cash flows from investing activities:  
Purchases of property, plant, and equipment(19.1)(29.3)
Proceeds from insurance claim 7.1 
Proceeds from asset disposals 0.3 
Net cash used in investing activities(19.1)(21.9)
Cash flows from financing activities:  
Net borrowings under the revolving credit facility1
155.0 100.0 
Proceeds from exercise of stock options1.5 14.0 
Payments of withholding taxes for stock awards(2.2)(2.6)
Dividends paid on TTC common stock(37.6)(35.5)
Other(2.6)(1.5)
Net cash provided by financing activities114.1 74.4 
Effect of exchange rates on cash and cash equivalents2.6 2.2 
Net increase (decrease) in cash and cash equivalents5.4 (14.2)
Cash and cash equivalents as of the beginning of the fiscal period193.1 188.2 
Cash and cash equivalents as of the end of the fiscal period$198.5 $174.0 
1    Presentation of prior year revolving credit facility and long-term debt activity has been conformed to the current year presentation. There was no change to net cash provided by financing activities.
See accompanying Notes to Condensed Consolidated Financial Statements.
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THE TORO COMPANY AND SUBSIDIARIES
Condensed Consolidated Statements of Stockholders' Equity (Unaudited)
(Dollars in millions, except per share data)
 Common
Stock
Retained
Earnings
Accumulated Other
Comprehensive Loss
Total Stockholders'
Equity
Balance as of October 31, 2023$103.8 $1,444.1 $(37.0)$1,510.9 
Cash dividends paid on common stock - $0.36 per share
— (37.6)— (37.6)
Issuance of 248,137 shares of common stock under stock-based compensation plans, less contribution of 54,526 shares to a deferred compensation trust
0.2 1.3 — 1.5 
Stock-based compensation expense— 8.4 — 8.4 
Purchase of 23,555 shares of common stock
— (2.2)— (2.2)
Other comprehensive income— — 2.0 2.0 
Net earnings— 64.9 64.9 
Balance as of February 2, 2024$104.0 $1,478.9 $(35.0)$1,547.9 
Balance as of October 31, 2022$104.0 $1,280.8 $(33.1)$1,351.7 
Cash dividends paid on common stock - $0.34 per share
— (35.5)— (35.5)
Issuance of 351,032 shares of common stock under stock-based compensation plans, less contribution of 14,270 shares to a deferred compensation trust
0.3 13.7 — 14.0 
Stock-based compensation expense— 5.2 — 5.2 
Purchase of 23,565 shares of common stock
— (2.6)— (2.6)
Other comprehensive income— — 4.5 4.5 
Net earnings— 106.9 — 106.9 
Balance as of February 3, 2023$104.3 $1,368.5 $(28.6)$1,444.2 
See accompanying Notes to Condensed Consolidated Financial Statements.
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THE TORO COMPANY AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
February 2, 2024
 
1Basis of Presentation
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with the instructions to Form 10-Q and do not include all the information and notes required by United States ("U.S.") generally accepted accounting principles ("GAAP") for complete financial statements. Unless the context indicates otherwise, the terms "company," "TTC," "we," "our," or "us" refer to The Toro Company and its consolidated subsidiaries. All intercompany accounts and transactions have been eliminated from the unaudited Condensed Consolidated Financial Statements.
In the opinion of management, the unaudited Condensed Consolidated Financial Statements include all adjustments, consisting primarily of recurring accruals, considered necessary for the fair presentation of the company's consolidated financial position, results of operations, and cash flows for the periods presented. Due to seasonality within the industries in which the company's businesses operate, among other factors, operating results for the three months ended February 2, 2024 cannot be annualized to determine the expected results for the fiscal year ending October 31, 2024.
The company’s fiscal year ends on October 31 and quarterly results are reported based on three-month periods that generally end on the Friday closest to the calendar quarter end. For comparative purposes, however, the company’s second and third quarters always include exactly 13 weeks of results so that the quarter end date for these two quarters is not necessarily the Friday closest to the calendar month end.
For further information regarding the company's basis of presentation, refer to the Consolidated Financial Statements and Notes to Consolidated Financial Statements included in the company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2023. The policies described in that report are used for preparing the company's quarterly reports on Form 10-Q.
Accounting Policies and Estimates
In preparing the Condensed Consolidated Financial Statements in conformity with U.S. GAAP, management must make decisions that impact the reported amounts of assets, liabilities, revenues, expenses, and the related disclosures, including disclosures of contingent assets and liabilities. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. Estimates are used in determining, among other items, sales promotion and incentive accruals, incentive compensation accruals, income tax accruals, inventory valuation, warranty accruals, allowances for current expected credit losses, pension accruals, self-insurance accruals, legal accruals, right-of-use assets and lease liabilities, useful lives for tangible and finite-lived intangible assets, future cash flows associated with impairment testing for goodwill, indefinite-lived intangible assets and other long-lived assets, and valuations of the assets acquired and liabilities assumed in a business combination or an asset acquisition, when applicable. These estimates and assumptions are based on management’s best estimates and judgments at the time they are made and are generally derived from management's understanding and analysis of the relevant and current circumstances, historical experience, and actuarial and other independent external third-party specialist valuations, when applicable. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors that management believes to be reasonable under the circumstances, including the economic environment. Management adjusts such estimates and assumptions when facts and circumstances dictate. As future events and their effects cannot be determined with certainty, actual amounts could differ significantly from those estimated at the time the Condensed Consolidated Financial Statements are prepared.
New Accounting Pronouncements
In December 2023, the Financial Accounting Standards Board ("FASB") issued ASU No. 2023-09, Income Taxes (Topic 740): Improvements to income tax disclosures, which is designed to enhance the transparency and decision usefulness of income tax disclosures primarily related to the rate reconciliation and income taxes paid information. The amended guidance will become effective for the company's fiscal 2026 annual period. The company is currently evaluating the impact of this new standard on its Condensed Consolidated Financial Statements and related disclosures.
In November 2023, the FASB issued ASU No. 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures, which is intended to enhance reportable segment disclosure requirements, primarily through additional, more detailed disclosures about significant segment expenses. The ASU requires disclosures to include significant segment expenses that are regularly provided to the chief operating decision maker ("CODM"), an amount for other segment items by reportable segment and a description of its composition, and the title and position of the CODM and an explanation of how the CODM uses the reported measure of segment profit or loss in assessing segment performance and deciding how to allocate resources. The ASU also requires all annual disclosures currently required by Topic 280 to be included in interim periods. The amended
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guidance will become effective for the company's fiscal 2025 annual period, and interim periods beginning with the first quarter of fiscal 2026. The company is currently evaluating the impact of this new standard on its Condensed Consolidated Financial Statements and related disclosures.
In September 2022, the FASB issued ASU No. 2022-04, Supplier Finance Programs (Subtopic 405-50): Disclosure of Supplier Finance Program Obligations. The new standard requires disclosure of the key terms of supplier finance programs, the associated obligations outstanding, and a description of where those obligations are presented in the balance sheet. Additionally, effective for the company's fiscal 2025 annual period, the new standard requires a rollforward of the associated obligations outstanding during the annual period, including the amount of obligations confirmed and the amount of obligations subsequently paid. The amended guidance was adopted in the first quarter of fiscal 2024 and did not have a material impact on the company's Condensed Consolidated Financial Statements. For additional information regarding the company's supplier finance program, refer to Note 13, Commitments and Contingencies.
The company believes that all other recently issued accounting pronouncements from the FASB that the company has not noted above will not have a material impact on its Condensed Consolidated Financial Statements or do not apply to its operations.
2Segment Data
The company's businesses are organized, managed, and internally grouped into segments based on similarities in products and services. Segment selection is based on the manner in which the company's chief operating decision maker organizes segments for making operating and investment decisions and assessing performance. The company has identified twelve operating segments and has aggregated certain of those operating segments into two reportable segments: Professional and Residential. The aggregation of the company's segments is based on the segments having the following similarities: economic characteristics, types of products and services, types of production processes, type or class of customers, and method of distribution. The company's remaining activities are presented as "Other" due to their insignificance. The company's Other activities consist of the company's wholly-owned domestic distribution company, the company's corporate activities, and the elimination of intersegment revenues and expenses.
The following tables present summarized financial information concerning the company’s reportable business segments and Other activities (dollars in millions):
Three Months Ended February 2, 2024ProfessionalResidentialOtherTotal
Net sales$756.5 $240.1 $5.3 $1,001.9 
Intersegment gross sales (eliminations)10.7 0.1 (10.8)— 
Earnings (loss) before income taxes112.8 23.5 (56.2)80.1 
Total assets$2,761.1 $654.7 $385.3 $3,801.1 
Three Months Ended February 3, 2023ProfessionalResidentialOtherTotal
Net sales$880.7 $264.6 $3.5 $1,148.8 
Intersegment gross sales (eliminations)10.9  (10.9)— 
Earnings (loss) before income taxes144.1 37.8 (50.6)131.3 
Total assets$2,782.8 $541.2 $330.9 $3,654.9 
The following table presents the details of operating loss before income taxes for the company's Other activities:
 Three Months Ended
(Dollars in millions)February 2, 2024February 3, 2023
Corporate expenses$(48.1)$(43.7)
Interest expense(16.2)(14.1)
Earnings from the company's wholly-owned domestic distribution company and other income, net8.1 7.2 
Total operating loss$(56.2)$(50.6)
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3Revenue
The following tables disaggregate the company's reportable segment net sales by major product type and geographic market (dollars in millions):
Three Months Ended February 2, 2024ProfessionalResidentialOtherTotal
Revenue by product type:    
Equipment$647.0 $231.9 $4.6 $883.5 
Irrigation109.5 8.2 0.7 118.4 
Total net sales$756.5 $240.1 $5.3 $1,001.9 
Revenue by geographic market: 
United States$586.1 $205.5 $5.3 $796.9 
International countries170.4 34.6  205.0 
Total net sales$756.5 $240.1 $5.3 $1,001.9 
Three Months Ended February 3, 2023ProfessionalResidentialOtherTotal
Revenue by product type:    
Equipment$778.3 $253.4 $2.4 $1,034.1 
Irrigation102.4 11.2 1.1 114.7 
Total net sales$880.7 $264.6 $3.5 $1,148.8 
Revenue by geographic market: 
United States$696.5 $203.4 $3.5 $903.4 
International countries184.2 61.2  245.4 
Total net sales$880.7 $264.6 $3.5 $1,148.8 
Contract Liabilities
Contract liabilities relate to deferred revenue recognized for cash consideration received at contract inception in advance of the company's performance under the respective contract and generally relate to the sale of separately priced extended warranty contracts, service contracts, and non-refundable customer deposits. The company recognizes revenue over the term of the contract in proportion to the costs expected to be incurred in satisfying the performance obligations under the separately priced extended warranty and service contracts. For non-refundable customer deposits, the company recognizes revenue as of the point in time in which the performance obligation has been satisfied under the contract with the customer, which typically occurs upon change in control at the time a product is shipped. As of February 2, 2024 and October 31, 2023, $27.6 million and $25.6 million, respectively, of deferred revenue associated with outstanding separately priced extended warranty contracts, service contracts, and non-refundable customer deposits was reported within accrued liabilities and other long-term liabilities in the Condensed Consolidated Balance Sheets. For the three months ended February 2, 2024, the company recognized $3.4 million of the October 31, 2023 deferred revenue balance within net sales in the Condensed Consolidated Statements of Earnings. The company expects to recognize approximately $8.6 million of the October 31, 2023 deferred revenue amount within net sales throughout the remainder of fiscal 2024, $7.8 million in fiscal 2025, and $5.8 million thereafter.
4Goodwill and Other Intangible Assets, Net
Goodwill
The changes in the carrying amount of goodwill by reportable segment for the first three months of fiscal 2024 were as follows:
(Dollars in millions)ProfessionalResidentialOtherTotal
Balance as of October 31, 2023$440.5 $10.3 $ $450.8 
Translation adjustments0.3 0.1  0.4 
Balance as of February 2, 2024$440.8 $10.4 $ $451.2 
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Other Intangible Assets, Net
The components of other intangible assets, net as of February 2, 2024, February 3, 2023, and October 31, 2023 were as follows (dollars in millions):
February 2, 2024Weighted-Average Useful Life in YearsGross Carrying AmountAccumulated AmortizationNet
Patents9.9$18.2 $(16.2)$2.0 
Customer-related15.8327.6 (112.7)214.9 
Developed technology7.1102.1 (65.6)36.5 
Trade names13.710.7 (4.2)6.5 
Total finite-lived13.6458.6 (198.7)259.9 
Indefinite-lived - trade names271.6 — 271.6 
Total other intangible assets, net$730.2 $(198.7)$531.5 
February 3, 2023Weighted-Average Useful Life in YearsGross Carrying AmountAccumulated AmortizationNet
Patents9.9$18.3 $(15.5)$2.8 
Non-compete agreements5.56.9 (6.9) 
Customer-related16.0321.3 (89.9)231.4 
Developed technology7.1102.1 (55.8)46.3 
Trade names13.710.7 (3.6)7.1 
Backlog and other0.65.7 (5.7) 
Total finite-lived13.4465.0 (177.4)287.6 
Indefinite-lived - trade names289.5 — 289.5 
Total other intangible assets, net$754.5 $(177.4)$577.1 
October 31, 2023Weighted-Average Useful Life in YearsGross Carrying AmountAccumulated AmortizationNet
Patents9.9$18.2 $(16.0)$2.2 
Non-compete agreements5.56.9 (6.9) 
Customer-related15.8327.5 (106.7)220.8 
Developed technology7.1102.0 (63.1)38.9 
Trade names13.710.7 (4.0)6.7 
Backlog and other0.65.7 (5.7) 
Total finite-lived13.3471.0 (202.4)268.6 
Indefinite-lived - trade names271.5 — 271.5 
Total other intangible assets, net$742.5 $(202.4)$540.1 
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Amortization expense for finite-lived intangible assets for the three months ended February 2, 2024 was $8.7 million. Amortization expense for finite-lived intangibles assets for the three months ended February 3, 2023 was $9.1 million. As of February 2, 2024, estimated amortization expense for the remainder of fiscal 2024 and succeeding fiscal years is as follows:
(Dollars in millions)February 2, 2024
2024 (remaining)$25.8 
202531.7 
202630.5 
202725.6 
202822.3 
202920.4 
Thereafter103.6 
Total estimated amortization expense$259.9 
5Indebtedness
The following is a summary of the company's indebtedness:
(Dollars in millions)February 2, 2024February 3, 2023October 31, 2023
$600 million revolving credit facility, due October 2026
$195.0 $100.0 $40.0 
$270 million term loan, due October 2026
270.0 270.0 270.0 
$200 million term loan, due April 2027
200.0 200.0 200.0 
3.81% series A senior notes, due June 2029
100.0 100.0 100.0 
3.91% series B senior notes, due June 2031
100.0 100.0 100.0 
3.97% senior notes, due June 2032
100.0 100.0 100.0 
7.8% debentures, due June 2027
100.0 100.0 100.0 
6.625% senior notes, due May 2037
124.2 124.1 124.2 
Less: unamortized debt issuance costs2.6 3.1 2.7 
Total long-term debt1,186.6 1,091.0 1,031.5 
Less: current portion of long-term debt6.8   
Long-term debt, less current portion$1,179.8 $1,091.0 $1,031.5 
As of February 2, 2024, principal payments required on the company's outstanding indebtedness, based on the maturity dates defined within the company's debt arrangements, for the remainder of fiscal 2024 and succeeding fiscal years are as follows:
(Dollars in millions)February 2, 2024
2024 (remaining)$ 
202537.0 
2026458.0 
2027270.0 
2028 
2029100.0 
Thereafter325.0 
Total principal payments required$1,190.0 
Covenants
The company is in compliance with all covenants under the company’s outstanding indebtedness as of February 2, 2024.
6Inventories, Net
The company uses a combination of inventory valuation methods. Inventories are valued at the lower of cost or net realizable value, with cost determined by the first-in, first-out ("FIFO") and average cost methods for certain of the company's inventories. All remaining inventories are valued at the lower of cost or market, with cost determined under the last-in, first-out ("LIFO")
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method. As needed, the company records an inventory valuation adjustment for excess, slow-moving, and obsolete inventory that is equal to the excess of the cost of the inventory over the estimated net realizable value or market value for the inventory depending on the inventory costing method. Such inventory valuation adjustment is based on a review and comparison of current inventory levels to planned production, as well as planned and historical sales of the inventory. The inventory valuation adjustment to net realizable value or market value establishes a new cost basis of the inventory that cannot be subsequently reversed.
Inventories, net were as follows:
(Dollars in millions)February 2, 2024February 3, 2023October 31, 2023
Raw materials and work in process$431.0 $498.3 $400.3 
Finished goods and service parts902.8 803.0 844.2 
Total FIFO and average cost value1,333.8 1,301.3 1,244.5 
Less: adjustment to LIFO value156.7 169.9 156.7 
Total inventories, net$1,177.1 $1,131.4 $1,087.8 
7Property, Plant, and Equipment, Net
Property, plant, and equipment assets are carried at cost less accumulated depreciation. The company generally accounts for depreciation of property, plant, and equipment utilizing the straight-line method over the estimated useful lives of the assets. Buildings and leasehold improvements are generally depreciated over 10 to 40 years, machinery and equipment are generally depreciated over three to 15 years, tooling is generally depreciated over three to five years, and computer hardware and software and website development costs are generally depreciated over two to five years. Expenditures for major renewals and improvements, which substantially increase the useful lives of existing assets, are capitalized. Costs associated with general maintenance and repairs are expensed as incurred within cost of sales or selling, general and administrative expense in the Condensed Consolidated Statements of Earnings depending on the nature and use of the related asset. Interest is capitalized during the construction period for significant capital projects.
Property, plant, and equipment, net was as follows:
(Dollars in millions)February 2, 2024February 3, 2023October 31, 2023
Land and land improvements$69.4 $61.4 $69.0 
Buildings and leasehold improvements356.2 327.7 355.8 
Machinery and equipment625.6 559.8 624.6 
Tooling260.7 227.0 260.4 
Computer hardware and software98.9 105.5 98.0 
Construction in process151.8 169.1 133.2 
Property, plant, and equipment, gross1,562.6 1,450.5 1,541.0 
Less: accumulated depreciation923.4 866.4 899.3 
Property, plant, and equipment, net$639.2 $584.1 $641.7 
8Product Warranty Guarantees
The company’s products are warranted to provide assurance that the product will function as expected and to ensure customer confidence in design, workmanship, and overall quality. Standard warranty coverage is generally provided for specified periods of time and on select products’ hours of usage and generally covers parts, labor, and other expenses for non-maintenance repairs. In addition to the standard warranties offered by the company on its products, the company also sells separately priced extended warranty coverage on select products for a prescribed period after the original warranty period expires. For additional information on the contract liabilities associated with the company's separately priced extended warranties, refer to Note 3, Revenue.
At the time of sale, the company recognizes expense and records an accrual by product line for estimated costs in connection with forecasted future warranty claims. The company's estimate of the cost of future warranty claims is based primarily on the estimated number of products under warranty, historical average costs incurred to service warranty claims, the trend in the historical ratio of claims to sales, and the historical length of time between the sale and resulting warranty claim. The company periodically assesses the adequacy of its warranty accruals based on changes in these factors and records any necessary adjustments if the cost of actual claims experience indicates that adjustments to the company's warranty accrual are necessary.
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Additionally, from time to time, the company may also establish warranty accruals for its estimate of the costs necessary to settle major rework campaigns on a product-specific basis during the period in which the circumstances giving rise to the major rework campaign become known and when the costs to satisfactorily address the situation are both probable and estimable. The warranty accrual for the cost of a major rework campaign is primarily based on an estimate of the cost to repair each affected unit and the number of affected units expected to be repaired.
The changes in accrued warranties were as follows:
 Three Months Ended
(Dollars in millions)February 2, 2024February 3, 2023
Beginning balance$143.9 $134.5 
Changes in accrual related to warranties issued during the period16.7 23.3 
Payments made during the period(20.6)(18.7)
Changes in accrual related to pre-existing warranties2.4 6.0 
Ending balance$142.4 $145.1 
9Investment in Joint Venture
The company is party to a joint venture with Huntington Distribution Finance, Inc. ("HDF"), a subsidiary of The Huntington National Bank, established as Red Iron Acceptance, LLC ("Red Iron"), the primary purpose of which is to provide customer inventory financing to certain distributors and dealers of certain of the company’s products in the U.S. The company has also entered into a limited inventory repurchase agreement with Red Iron. For additional information regarding the customer financing aspect of the arrangement, as well as the limited inventory purchase agreement, refer to Note 13, Commitments and Contingencies.
The company owns 45 percent of Red Iron and HDF owns 55 percent of Red Iron. The company accounts for its investment in Red Iron under the equity method of accounting. The company and HDF each contributed a specified amount of the estimated cash required to enable Red Iron to purchase the company's floor plan financing receivables and to provide financial support for Red Iron's floor plan financing programs. Red Iron borrows the remaining requisite estimated cash utilizing an $1,350.0 million secured revolving credit facility established under a credit agreement between Red Iron and HDF. The company's total investment in Red Iron as of February 2, 2024, February 3, 2023 and October 31, 2023 was $48.4 million, $45.7 million, and $50.6 million, respectively. The company has not guaranteed the outstanding indebtedness of Red Iron.
10Stock-Based Compensation
Compensation costs related to stock-based compensation awards were as follows:
Three Months Ended
(Dollars in millions)February 2, 2024February 3, 2023
Stock option awards$4.8 $1.7 
Performance share awards1.1 0.8 
Restricted stock unit awards1.9 1.6 
Unrestricted common stock awards0.6 1.1 
Total compensation cost for stock-based compensation awards$8.4 $5.2 
Stock Option Awards
Stock options are granted with an exercise price equal to the closing price of the company’s common stock on the date of grant, as reported by the New York Stock Exchange. Options are generally granted to executive officers, other employees, and non-employee members of the company’s Board of Directors ("Board") on an annual basis in the first quarter of the company’s fiscal year but may also be granted throughout the fiscal year in connection with hiring, mid-year promotions, leadership transition, or retention, as needed and applicable. Options generally vest one-third each year over a three-year period and have a ten-year term but in certain circumstances, the vesting requirement may be modified such that options granted to certain employees vest in full on the three-year anniversary of the date of grant and have a ten-year term. Compensation cost equal to the grant date fair value determined under the Black-Scholes valuation method is generally recognized for these awards over the vesting period. Compensation cost recognized for other employees not considered executive officers and non-employee Board members is net of estimated forfeitures, which are determined at the time of grant based on historical forfeiture experience. Stock options granted to executive officers and other employees are subject to accelerated expensing if the option holder meets
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the retirement definition set forth in the company's stock-based compensation plans. In that case, the fair value of the options is expensed in the fiscal year of grant because generally, if the option holder is employed as of the end of the fiscal year in which the options are granted, such options will not be forfeited but continue to vest according to their schedule following retirement. Similarly, if a non-employee Board member has served on the company's Board for ten full fiscal years or more, the awards will not be forfeited but continue to vest according to their schedule following retirement. Therefore, the fair value of the options granted is fully expensed on the date of the grant.
The fair value of each stock option is estimated on the date of grant using various inputs and assumptions under the Black-Scholes valuation method. The expected life is a significant assumption as it determines the period for which the risk-free interest rate, stock price volatility, and dividend yield must be applied. The expected life is the average length of time in which executive officers, other employees, and non-employee Board members are expected to exercise their stock options, which is primarily based on historical exercise experience. The company groups executive officers and non-employee Board members for valuation purposes based on similar historical exercise behavior. Expected stock price volatility is based on the daily movement of the company’s common stock over the most recent historical period equivalent to the expected life of the option. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate over the expected life at the time of grant. The expected dividend yield is estimated over the expected life based on the company’s historical cash dividends paid, expected future cash dividends and dividend yield, and expected changes in the company’s stock price.
The table below illustrates the weighted-average valuation assumptions used under the Black-Scholes valuation method for options granted in the first three months of the following fiscal periods:
 Fiscal 2024Fiscal 2023
Expected life of option in years6.386.32
Expected stock price volatility26.75%25.19%
Risk-free interest rate3.94%3.79%
Expected dividend yield1.15%0.95%
Per share weighted-average fair value at date of grant$30.42$33.23
Performance Share Awards
The company grants performance share awards to executive officers and other employees under which they are entitled to receive shares of the company’s common stock contingent on the achievement of performance goals of the company, which are generally measured over a three-year period. The number of shares of common stock a participant receives can be increased (up to 200 percent of target levels) or reduced (down to zero) based on the level of achievement of performance goals and will vest at the end of a three-year period. Performance share awards are generally granted on an annual basis in the first quarter of the company’s fiscal year. Compensation cost is recognized for these awards on a straight-line basis over the vesting period based on the per share fair value, which is equal to the closing price of the company's common stock on the date of grant, and the probability of achieving each performance goal. The per share weighted-average fair value of performance share awards granted during the first quarter of fiscal 2024 and 2023 was $99.60 and $112.14, respectively.
Restricted Stock Unit Awards
Restricted stock unit awards are generally granted to certain employees who are not executive officers. Occasionally, restricted stock unit awards may be granted, including to executive officers, in connection with hiring, mid-year promotions, leadership transition, or retention. Restricted stock unit awards generally vest one-third each year over a three-year period, or vest in full on the three-year anniversary of the date of grant. Compensation cost equal to the grant date fair value, net of estimated forfeitures, is recognized for these awards over the vesting period. The grant date fair value is equal to the closing price of the company's common stock on the date of grant multiplied by the number of shares subject to the restricted stock unit awards and estimated forfeitures are determined on the grant date based on historical forfeiture experience. The per share weighted-average fair value of restricted stock unit awards granted during the first three months of fiscal 2024 and 2023 was $98.73 and $109.78, respectively.
Unrestricted Common Stock Awards
During the first three months of fiscal 2024 and 2023, 7,544 and 10,329 shares, respectively, of fully vested unrestricted common stock awards were granted to certain Board members as a component of their compensation for their service on the Board and were recorded within selling, general and administrative expense in the Condensed Consolidated Statements of Earnings. Additionally, the Company's Board members may elect to convert a portion or all of their calendar year annual retainers otherwise payable in cash into shares of the company's common stock.
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11Stockholders' Equity
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss ("AOCL"), net of tax, within the Condensed Consolidated Statements of Stockholders' Equity were as follows:
(Dollars in millions)February 2, 2024February 3, 2023October 31, 2023
Foreign currency translation adjustments$34.4 $30.1 $41.7 
Pension benefits4.3 3.6 4.3 
Cash flow derivative instruments(3.7)(5.1)(9.0)
Total accumulated other comprehensive loss$35.0 $28.6 $37.0 
The components and activity of AOCL, net of tax, for the three month periods ended February 2, 2024 and February 3, 2023 were as follows:
(Dollars in millions)Foreign 
Currency
Translation
Adjustments
Pension
Benefits
Cash Flow Derivative InstrumentsTotal
Balance as of October 31, 2023$41.7 $4.3 $(9.0)$37.0 
Other comprehensive (income) loss before reclassifications(7.3) 3.0 (4.3)
Amounts reclassified from AOCL  2.3 2.3 
Net current period other comprehensive (income) loss(7.3) 5.3 (2.0)
Balance as of February 2, 2024$34.4 $4.3 $(3.7)$35.0 
(Dollars in millions)Foreign 
Currency
Translation
Adjustments
Pension
Benefits
Cash Flow Derivative InstrumentsTotal
Balance as of October 31, 2022$51.3 $3.6 $(21.8)$33.1 
Other comprehensive (income) loss before reclassifications(21.2) 21.6 0.4 
Amounts reclassified from AOCL  (4.9)(4.9)
Net current period other comprehensive (income) loss(21.2) 16.7 (4.5)
Balance as of February 3, 2023$30.1 $3.6 $(5.1)$28.6 
For additional information on the components reclassified from AOCL to the respective line items in net earnings for derivative instruments refer to Note 15, Derivative Instruments and Hedging Activities.
12Per Share Data
Reconciliation of basic and diluted weighted-average number of shares of common stock outstanding was as follows:
 Three Months Ended
(Shares in millions)February 2, 2024February 3, 2023
Weighted-average number of shares of common stock outstanding - Basic104.4 104.5 
Effect of dilutive shares0.3 1.1 
Weighted-average number of shares of common stock outstanding - Diluted104.7 105.6 
The effect of dilutive shares from stock option awards and restricted stock unit awards is computed under the treasury stock method. Stock option awards to purchase 850,327 and 268,737 shares of common stock during the first quarter of fiscal 2024 and 2023, respectively, were excluded from the computation of diluted net earnings per share of common stock because they were anti-dilutive.
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13Commitments and Contingencies
Customer Financing Arrangements
Inventory Financing
The company is party to inventory financing arrangements with Red Iron, Huntington Commercial Finance Canada, Inc. ("HCFC"), and other third-party financial institutions (collectively, the "financial institutions") which provide inventory financing to certain dealers and distributors of certain of the company's products in the U.S. and internationally. These financing arrangements are structured as an advance in the form of a payment by the financial institutions to the company on behalf of a distributor or dealer with respect to invoices financed by the financial institution. These payments extinguish the obligation of the dealer or distributor to make payment to the company under the terms of the applicable invoice.
Under separate agreements between the financial institutions and the dealers and distributors, the financial institutions provide loans to the dealers and distributors for the advances paid by the financial institutions to the company. Under these financing arrangements, down payments are not required, and depending on the finance program for each product line, finance charges are incurred by the company, shared between the company and the distributor and/or the dealer, or paid by the distributor or dealer. The financial institutions retain a security interest in the distributors' and dealers' financed inventories and such inventories are monitored regularly through audits. Financing terms to the distributors and dealers require payment as the inventory, which secures the indebtedness, is sold to end-users or when payment otherwise become due under the agreements between the financial institutions and the distributors and dealers, whichever occurs first. Rates are generally indexed to the Secured Overnight Financing Rate ("SOFR"), or an alternative variable rate, plus a fixed percentage that differs based on whether the financing is for a distributor or dealer. Rates may also vary based on the product that is financed.
The net amount of receivables financed for dealers and distributors under this arrangement with Red Iron for the three months ended February 2, 2024 and February 3, 2023 were $425.6 million and $674.4 million, respectively. The total amount of net receivables outstanding under this arrangement with Red Iron as of February 2, 2024, February 3, 2023, and October 31, 2023 were $963.9 million, $942.0 million and $1,019.0 million, respectively. The total amount of receivables due from Red Iron to the company as of February 2, 2024, February 3, 2023, and October 31, 2023 were $25.6 million, $17.3 million and $34.4 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 months ended February 2, 2024 and February 3, 2023 were $131.0 million and $111.3 million, respectively. As of February 2, 2024, February 3, 2023, and October 31, 2023, $202.6 million, $166.1 million and $234.7 million, respectively, of receivables financed by HCFC and the other third-party financial institutions were outstanding.
Inventory Repurchase Agreements
The company has entered into a limited inventory repurchase agreement with Red Iron and HCFC under which the company has 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 the company's floor plan financing agreements with the other third-party financial institutions, the company also entered into inventory repurchase agreements with the other third-party financial institutions. Under such inventory repurchase agreements, the company has agreed to repurchase products repossessed by the other third-party financial institutions. As of February 2, 2024, February 3, 2023 and October 31, 2023, the company was contingently liable to repurchase up to a maximum amount of $28.7 million, $79.4 million, and $32.2 million, respectively, of inventory related to receivables under these inventory repurchase agreements. The company's 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. The company has repurchased immaterial amounts of inventory pursuant to such arrangements for the three months ended February 2, 2024 and February 3, 2023.
Supplier Finance Program
The company has a supply chain finance service agreement with a third-party financial institution to provide a web-based platform that facilitates the ability of participating suppliers to finance payment obligations from the company with the third-party financial institution. Participating suppliers may, at their sole discretion, make offers to finance one or more payment obligations of the company prior to their scheduled due dates at a discounted price to the third-party financial institution. The company's obligations to its suppliers, including amounts due and scheduled payment dates, are not affected by suppliers' decisions to finance amounts under this supply chain finance arrangement. The company guarantees its payment obligations under the supply chain finance arrangement with the third-party financial institution. The company does not pledge assets as security to the suppliers or the third-party financial institution. As of February 2, 2024, February 3, 2023 and October 31, 2023, $103.2 million, $159.7 million, and $99.6 million, respectively, of the company's outstanding payment obligations were
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financed by participating suppliers through the third-party financial institution's supply chain finance web-based platform. These obligations are presented within accounts payable in the Condensed Consolidated Balance Sheets.
Litigation
From time to time, the company is party to litigation in the ordinary course of business. Such matters are generally subject to uncertainties and to outcomes that are not predictable with assurance and that may not be known for extended periods of time. Litigation occasionally involves claims for punitive, as well as compensatory, damages arising out of the use of the company’s products. Although the company is self-insured to some extent, the company maintains insurance against certain product liability losses. The company is also subject to litigation and administrative and judicial proceedings with respect to claims involving asbestos and the discharge of hazardous substances into the environment. Some of these claims assert damages and liability for personal injury, remedial investigations or clean-up and other costs and damages. The company is also occasionally involved in commercial disputes, employment or employment-related disputes, and patent litigation cases in which it is asserting or defending against patent infringement claims. To prevent possible infringement of the company’s patents by others, the company periodically reviews competitors’ products. To avoid potential liability with respect to others’ patents, the company reviews certain patents issued by the U.S. Patent and Trademark Office and foreign patent offices. The company believes these activities help minimize its risk of being a defendant in patent infringement litigation.
The company records a liability in its Condensed Consolidated Financial Statements for costs related to claims, including future legal costs, settlements, and judgments, where the company has assessed that a loss is probable and an amount can be reasonably estimated. If the reasonable estimate of a probable loss is a range, the company records the most probable estimate of the loss or the minimum amount when no amount within the range is a better estimate than any other amount. The company discloses a contingent liability even if the liability is not probable or the amount is not estimable, or both, if there is a reasonable possibility that a material loss may have been incurred. In the opinion of management, the amount of liability, if any, with respect to these matters, individually or in the aggregate, will not materially affect the company's consolidated results of operations, financial position, or cash flows.
In situations where the company receives, or expects to receive, a favorable ruling related to a litigation settlement, the company follows the accounting standards codification guidance for gain contingencies. The company does not allow for the recognition of a gain contingency within its Condensed Consolidated Financial Statements prior to the settlement of the underlying events or contingencies associated with the gain contingency. As a result, the consideration related to a gain contingency is recorded in the Condensed Consolidated Financial Statements during the period in which all underlying events or contingencies are resolved and the gain is realized.
14Leases
The company enters into contracts that are, or contain, operating lease agreements for certain property, plant, or equipment assets utilized in the normal course of business, such as buildings for manufacturing facilities, office space, distribution centers, and warehouse facilities; land for product testing sites; machinery and equipment for research and development activities, manufacturing and assembly processes, and administrative tasks; and vehicles for sales, service, marketing, and distribution activities. Contracts that explicitly or implicitly relate to property, plant, and equipment are assessed at inception to determine if the contract is, or contains, a lease. Such contracts for operating lease agreements convey the company's right to direct the use of, and obtain substantially all of the economic benefits from, an identified asset for a defined period of time in exchange for consideration. The lease term begins and is determined upon lease commencement, which is the point in time when the company takes possession of the identified asset, and generally includes all non-cancelable periods. Lease expense for the company's operating leases is recognized on a straight-line basis over the lease term and is recorded within cost of sales or selling, general and administrative expense within the Condensed Consolidated Statements of Earnings as dictated by the nature and use of the underlying asset. The company does not recognize right-of-use assets and lease liabilities, but does recognize expense on a straight-line basis, for short-term operating leases which have a lease term of 12 months or less and do not include an option to purchase the underlying asset.
Lease payments are determined at lease commencement and generally represent fixed lease payments as defined within the respective lease agreement or, in the case of certain lease agreements, variable lease payments that are measured as of the lease commencement date based on the prevailing index or market rate. Future adjustments to variable lease payments are defined and scheduled within the respective lease agreement and are determined based upon the prevailing market or index rate at the time of the adjustment relative to the market or index rate determined at lease commencement. Certain other lease agreements contain variable lease payments that are determined based upon actual utilization of the identified asset. Such future adjustments to variable lease payments and variable lease payments based upon actual utilization of the identified asset are not included within the determination of lease payments at commencement but rather, are recorded as variable lease expense in the period in which the variable lease cost is incurred.
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Right-of-use assets represent the company's right to use an underlying asset throughout the lease term and lease liabilities represent the company's obligation to make lease payments arising from the lease agreement. The company accounts for operating lease liabilities at lease commencement and on an ongoing basis as the present value of the minimum remaining lease payments under the respective lease term. Minimum remaining lease payments are generally discounted to present value based the estimated incremental borrowing rate at lease commencement as the rate implicit in the lease is generally not readily determinable. Right-of-use assets are measured as the amount of the corresponding operating lease liability for the respective operating lease agreement, adjusted for prepaid or accrued lease payments, the remaining balance of any lease incentives received, unamortized initial direct costs, and impairment of the operating lease right-of-use asset, as applicable.
The following table presents the lease expense incurred on the company’s operating, short-term, and variable leases:
Three Months Ended
(Dollars in millions)February 2, 2024February 3, 2023
Operating lease expense$9.2 $6.1 
Short-term lease expense1.0 0.9 
Total lease expense$10.2 $7.0 
The following table presents supplemental cash flow information related to the company's operating leases:
Three Months Ended
(Dollars in millions)February 2, 2024February 3, 2023
Right-of-use assets obtained in exchange for lease obligations$1.6 $1.9 
Operating cash flows for amounts included in the measurement of lease liabilities$7.5 $6.2 
The following table presents other lease information related to the company's operating leases:
February 2, 2024February 3, 2023October 31, 2023
Weighted-average remaining lease term of operating leases in years9.25.89.3
Weighted-average discount rate of operating leases4.87 %3.61 %4.83 %
The following table reconciles the total undiscounted future cash flows based on the anticipated future minimum operating lease payments by fiscal year for the company's operating leases to the present value of operating lease liabilities recorded within the Condensed Consolidated Balance Sheets as of February 2, 2024:
(Dollars in millions)February 2, 2024
2024 (remaining)$18.1 
202523.8 
202617.8 
202714.2 
202812.0 
Thereafter69.7 
Total future minimum operating lease payments155.6 
Less: imputed interest28.4 
Present value of operating lease liabilities$127.2 
15Derivative Instruments and Hedging Activities
Risk Management Objective of Using Derivatives
The company is 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. The company’s primary 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.
To reduce its exposure to foreign currency exchange rate risk, the company enters into various derivative instruments to hedge against such risk, authorized under a company policy that places controls on these hedging activities, with counterparties that
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are highly rated financial institutions. The company’s policy does not allow the use of derivative instruments for trading or speculative purposes. The company has also made an accounting policy election to use the portfolio exception with respect to measuring counterparty credit risk for derivative instruments and to measure the fair value of a portfolio of financial assets and financial liabilities on the basis of the net open risk position with each counterparty.
The company’s hedging activities primarily involve the use of forward currency contracts to hedge most foreign currency transactions, including forecasted sales and purchases denominated in foreign currencies. The company uses derivative instruments only in an attempt to limit underlying exposure from foreign currency exchange rate fluctuations and to minimize earnings and cash flow volatility associated with foreign currency exchange rate fluctuations. 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.
The company recognizes all derivative instruments at fair value on the Condensed Consolidated Balance Sheets as either assets or liabilities. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as a cash flow hedging instrument.
Cash Flow Hedging Instruments
The company formally documents relationships between cash flow hedging instruments and the related hedged transactions, as well as its risk-management objective and strategy for undertaking cash flow hedging instruments. This process includes linking all cash flow hedging instruments to the forecasted transactions, such as sales to third-parties and costs associated with foreign plant operations, including purchases from suppliers. At the cash flow hedge’s inception and on an ongoing basis, the company formally assesses whether the cash flow hedging instruments have been highly effective in offsetting changes in the cash flows of the hedged transactions and whether those cash flow hedging instruments may be expected to remain highly effective in future periods.
Changes in the fair values of the spot rate component of outstanding, highly effective cash flow hedging instruments included in the assessment of hedge effectiveness are recorded in other comprehensive income within AOCL on the Condensed Consolidated Balance Sheets and are subsequently reclassified to net earnings within the Condensed Consolidated Statements of Earnings during the same period in which the cash flows of the underlying hedged transaction affect net earnings. Changes in the fair values of hedge components excluded from the assessment of effectiveness are recognized immediately in net earnings under the mark-to-market approach. The classification of gains or losses recognized on cash flow hedging instruments and excluded components within the Condensed Consolidated Statements of Earnings is the same as that of the underlying exposure. Results of cash flow hedging instruments, and the related excluded components, of sales and costs associated with foreign plant operations, including purchases from suppliers, are recorded in net sales and cost of sales, respectively. The maximum amount of time the company hedges its exposure to the variability in future cash flows for forecasted trade sales and purchases is two years.
When it is determined that a derivative instrument is not, or has ceased to be, highly effective as a cash flow hedge, the company discontinues cash flow hedge accounting prospectively. The gain or loss on the dedesignated derivative instrument remains in AOCL and is reclassified to net earnings within the same Condensed Consolidated Statements of Earnings line item as the underlying exposure when the forecasted transaction affects net earnings. When the company discontinues cash flow hedge accounting because it is no longer probable, but it is still reasonably possible that the forecasted transaction will occur by the end of the originally expected period or within an additional two-month period of time thereafter, the gain or loss on the derivative instrument remains in AOCL and is reclassified to net earnings within the same Condensed Consolidated Statements of Earnings line item as the underlying exposure when the forecasted transaction affects net earnings. However, if it is probable that a forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter, the gains and losses that were in AOCL are immediately recognized in net earnings within other income, net in the Condensed Consolidated Statements of Earnings. In all situations in which cash flow hedge accounting is discontinued and the derivative instrument remains outstanding, the company carries the derivative instrument at its fair value on the Condensed Consolidated Balance Sheets, recognizing future changes in the fair value within other income, net in the Condensed Consolidated Statements of Earnings.
As of February 2, 2024, the notional amount outstanding of forward currency contracts designated as cash flow hedging instruments was $368.6 million.
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Derivatives Not Designated as Cash Flow Hedging Instruments
The company also enters into foreign currency contracts that include forward currency contracts to mitigate the remeasurement of specific assets and liabilities on the Condensed Consolidated Balance Sheets. These contracts are not designated as cash flow hedging instruments. Accordingly, changes in the fair value of hedges of recorded balance sheet positions, such as cash, receivables, payables, intercompany notes, and other various contractual claims to pay or receive foreign currencies other than the functional currency, are recognized immediately in other income, net, on the Condensed Consolidated Statements of Earnings together with the transaction gain or loss from the hedged balance sheet position.
The following table presents the fair value and location of the company’s derivative instruments on the Condensed Consolidated Balance Sheets:
(Dollars in millions)February 2, 2024February 3, 2023October 31, 2023
Derivative assets:   
Derivatives designated as cash flow hedging instruments:   
Prepaid expenses and other current assets   
Forward currency contracts$6.9 $7.8 $13.7 
Derivatives not designated as cash flow hedging instruments:
Prepaid expenses and other current assets
Forward currency contracts2.9 2.8 3.1 
Total derivative assets$9.8 $10.6 $16.8 
Derivative liabilities:
Derivatives designated as cash flow hedging instruments:
Accrued liabilities
Forward currency contracts$ $1.4 $ 
Derivatives not designated as cash flow hedging instruments:
Accrued liabilities
Forward currency contracts 0.1  
Total derivative liabilities$ $1.5 $ 
The company entered into an International Swap Dealers Association ("ISDA") Master Agreement with each counterparty that permits the net settlement of amounts owed under their respective contracts. The ISDA Master Agreement is an industry standardized contract that governs all derivative contracts entered into between the company and the respective counterparty. Under these master netting agreements, net settlement generally permits the company or the counterparty to determine the net amount payable or receivable for contracts due on the same date or in the same currency for similar types of derivative transactions. The company records the fair value of its derivative instruments at the net amount on its Condensed Consolidated Balance Sheets.
The following table presents the effects of the master netting arrangements on the fair value of the company’s derivative instruments that are recorded on the Condensed Consolidated Balance Sheets:
(Dollars in millions)February 2, 2024February 3, 2023October 31, 2023
Derivative assets:
Forward currency contracts:
Gross amount of derivative assets$10.6 $11.1 $16.8 
Derivative liabilities offsetting derivative assets0.8 0.5  
Net amount of derivative assets$9.8 $10.6 $16.8 
Derivative liabilities:
Forward currency contracts:
Gross amount of derivative liabilities$ $1.5 $ 
Derivative assets offsetting derivative liabilities   
Net amount of derivative liabilities$ $1.5 $ 
22

The following table presents the impact and location of the amounts reclassified from AOCL into net earnings on the Condensed Consolidated Statements of Earnings and the impact of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the company's derivatives designated as cash flow hedging instruments for the three months ended February 2, 2024 and February 3, 2023:
Three Months Ended
Gain Reclassified from AOCL into Earnings(Loss) Gain Recognized in OCI on Derivatives
(Dollars in millions)February 2, 2024February 3, 2023February 2, 2024February 3, 2023
Derivatives designated as cash flow hedging instruments:
Forward currency contracts:
Net sales$0.9 $4.1 $(5.7)$(17.3)
Cost of sales1.4 0.8 0.4 0.6 
Total derivatives designated as cash flow hedging instruments$2.3 $4.9 $(5.3)$(16.7)
The company recognized immaterial gains and losses within other income, net in the Condensed Consolidated Statements of Earnings during the first quarter of fiscal 2024 and fiscal 2023, respectively, due to the discontinuance of cash flow hedge accounting on certain forward currency contracts designated as cash flow hedging instruments. As of February 2, 2024, the company expects to reclassify approximately $3.6 million of gains from AOCL to earnings during the next twelve months.
The following tables present the impact and location of derivative instruments on the Condensed Consolidated Statements of Earnings for the company’s derivatives designated as cash flow hedging instruments and the related components excluded from effectiveness testing:
Gain Recognized in Earnings on Cash Flow Hedging Instruments
(Dollars in millions)February 2, 2024February 3, 2023
Three Months EndedNet SalesCost of SalesNet SalesCost of Sales
Condensed Consolidated Statements of Earnings income (expense) amounts in which the effects of cash flow hedging instruments are recorded$1,001.9 $(657.4)$1,148.8 $(752.9)
Gain on derivatives designated as cash flow hedging instruments:
Forward currency contracts:
Amount of gain reclassified from AOCL into earnings0.9 1.4 4.1 0.8 
Gain on components excluded from effectiveness testing recognized in earnings based on changes in fair value$0.8 $0.7 $1.2 $0.6 
The following table presents the impact and location of derivative instruments on the Condensed Consolidated Statements of Earnings for the company’s derivatives not designated as cash flow hedging instruments:
 Three Months Ended
(Dollars in millions)February 2, 2024February 3, 2023
Loss on derivatives not designated as cash flow hedging instruments
Forward currency contracts:
Other loss, net$(1.1)$(3.4)