# TORO CO (TTC) FY 2021 MD&A

Verbatim Item 7 Management's Discussion and Analysis from TORO CO's 10-K for fiscal year 2021.

SEC filing source: https://www.sec.gov/Archives/edgar/data/737758/000073775821000030/ttc-20211031.htm
Accession: 0000737758-21-000030
Filing date: 2021-12-17
Report date: 2021-10-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture.
Confidence: high

Company profile: /company/TTC/
All MD&A years: /company/TTC/mda/
Next year: /company/TTC/mda/fy2022/ (FY 2022)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is intended to provide a reader of our 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. Our Consolidated Financial Statements and Notes to Consolidated Financial Statements are included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K and all references in this MD&A to the Notes to Consolidated Financial Statements can be found in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.

Unless expressly stated otherwise, the comparisons presented in this MD&A refer to the year-over-year comparison of changes in our Financial Condition and Results of Operations as of and for the fiscal years ended October 31, 2021 and 2020. Discussion of fiscal 2019 items and the year-over-year comparison of changes in our Financial Condition and Results of Operations as of and for the fiscal years ended October 31, 2020 and 2019 can be found in Part II, Item 7, "Management’s Discussion and Analysis of Financial Condition and Results of Operations," of our Annual Report on Form 10-K for the fiscal year ended October 31, 2020. Statements that are not historical are forward-looking and involve risks and uncertainties, including those discussed in Part I, Item 1A, "Risk Factors," and elsewhere in this Annual Report on Form 10-K. These risks and uncertainties could cause our actual results to differ materially from any future performance suggested throughout this MD&A.

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

Non-GAAP Financial Measures

Throughout this MD&A, we have provided financial measures that are not calculated or presented in accordance with U.S. GAAP ("non-GAAP financial measures"), as information supplemental and in addition to the most directly comparable financial measures presented in this Annual Report on Form 10-K 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 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

General

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; ag-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 the foundation of our enterprise strategic priorities of accelerating growth, driving productivity and operational excellence, and empowering our people, and our focus on alternative power, smart connected, and autonomous solutions are embedded as part of our "Sustainability Endures" strategy. Our Sustainability Endures strategy also provides transparency on our continued efforts to address sustainability-focused matters, including ESG priorities.

We sell our products worldwide through a network of distributors, dealers, mass retailers, hardware retailers, equipment rental centers, home centers, as well as online (direct to end-users). We strive to provide innovative, well-built, and dependable products supported by an extensive service network. A significant portion of our net sales has historically been, and we expect will continue to be, attributable to new and enhanced products. We define new products as those introduced in the current and previous two fiscal years. We classify our operations into two reportable business segments: Professional and Residential, and 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.

Executive Summary

We began fiscal 2021 in the midst of the COVID-19 pandemic, which continued to cause many challenges for our business and manufacturing operations. Specifically, COVID-19 was the catalyst for the current challenging global macroeconomic environment that has disrupted the global supply chain and created an inflationary environment throughout fiscal 2021. The impact of COVID-19 on our business is more fully described within the section titled "Impact of COVID-19" in this MD&A. Despite these challenges, we achieved double-digit consolidated net sales growth in fiscal 2021.

Our Professional segment achieved 16.1 percent net sales growth in fiscal 2021 primarily due to a combination of strong demand for most products and strategic pricing actions across our product lines. More specifically, we benefited

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from a continued strong rebound in demand for many of the products in our Professional segment businesses that were more adversely impacted by COVID-19 during fiscal 2020. Most notably, our landscape contractor business continued to build upon the momentum generated during the fourth quarter of fiscal 2020 as we continued to experience strong retail demand from contractors and our channel partners worked to replenish their field inventory levels during fiscal 2021. Additionally, our golf business continued to experience strong demand as golf course investments increased and spending patterns normalized as budgetary constraints moderated. Our rental and specialty construction business also experienced strong demand primarily due to favorable construction industry trends. While the strong demand experienced in our Professional segment was positive, our Professional segment growth was partially offset by a reduction of net sales within our underground construction business driven by supply chain disruptions that resulted in product availability issues that limited our ability to meet the heightened demand for most of our products.

Our Residential segment continued to build on the momentum generated during fiscal 2020 and achieved 23.1 percent net sales growth in fiscal 2021 primarily as a result of strong retail demand across most product lines as a result of new and enhanced products, favorable weather conditions, expanded retail placement, and continued investments by homeowners in their properties. We also achieved net sales growth during fiscal 2021 as a result of strategic pricing actions across our product lines. While the sales growth achieved in our Residential segment was positive, the shift to a greater percentage of Residential segment net sales as a percentage of consolidated net sales has, and may continue to, adversely pressure our consolidated gross margins.

We continued our history of paying quarterly cash dividends throughout fiscal 2021 and increased our fiscal 2021 quarterly cash dividend by 5.0 percent to $0.2625 per share compared to $0.25 per share paid in fiscal 2020. We also resumed repurchasing shares of our common stock, thereby reducing our total shares outstanding. As a result of the combination of quarterly cash dividends and share repurchases, we returned $414.7 million of cash to our shareholders during fiscal 2021. As of October 31, 2021, we had a strong liquidity profile with available liquidity of $1,002.5 million, consisting of cash and cash equivalents of $405.6 million and availability under our revolving credit facility of $596.9 million.

Additionally, our fiscal 2021 results included the following items of significance that are provided in summary format here and described in greater detail throughout the "Results of Operations," "Business Segments," and "Financial Position" sections of this MD&A:

•Consolidated net sales for fiscal 2021 were $3,959.6 million, an increase of 17.2 percent compared to $3,378.8 million in fiscal 2020.

•Professional segment net sales for fiscal 2021 were $2,929.6 million, an increase of 16.1 percent compared to $2,523.5 million in fiscal 2020.

•Residential segment net sales for fiscal 2021 were $1,010.1 million, an increase of 23.1 percent compared to $820.7 million in fiscal 2020.

•Gross margin was 33.8 percent in fiscal 2021 compared to 35.2 percent in fiscal 2020, a decrease of 140 basis points.

•Non-GAAP gross margin was 33.8 percent in fiscal 2021 compared to 35.4 percent in fiscal 2020, a decrease of 160 basis points.

•SG&A expense as a percentage of net sales in fiscal 2021 was 20.7 percent compared to 22.6 percent in fiscal 2020, an improvement of 190 basis points.

•Net earnings for fiscal 2021 were $409.9 million, or $3.78 per diluted share, compared to $329.7 million, or $3.03 per diluted share, in fiscal 2020.

•Non-GAAP net earnings for fiscal 2021 were $392.7 million, or $3.62 per diluted share, compared to $327.7 million, or $3.02 per diluted share, in fiscal 2020.

•Field inventory levels were lower as of the end of fiscal 2021 compared to the end of fiscal 2020 as a result of strong retail demand for our products that exceeded product availability.

Please refer to the section titled "Non-GAAP Financial Measures" within this MD&A for reconciliations of non-GAAP financial measures to the most directly comparable reported U.S. GAAP financial measures.

As we look ahead to fiscal 2022, we currently expect the strong demand environment to continue across both our Professional and Residential segments and benefit our future net sales. We also expect to continue to realize favorable impacts to both our net sales and gross margins as a result of our strategic pricing actions and to our gross margins from our productivity initiatives. However, the current challenging supply chain and inflationary environment is anticipated to continue and adversely impact our gross margins into fiscal 2022 and we anticipate that our quarterly sales cadence during fiscal 2022 will be driven more by our ability to produce product than historical demand patterns and seasonality. We intend to continue our historical practice of prudently managing expenses and adjusting production levels as needed to align with anticipated sales volumes and availability of commodity and component parts inventories, while also prioritizing investments that support long-term sustainable growth across our businesses. However, given our current expectation of continuing supply chain disruptions into fiscal 2022 our ability to effectively and efficiently adjust production levels as needed may be limited.

Power Forward

Despite uncertainty concerning the duration of COVID-19 and its impact on the global economy and supply chains, we continued to embrace employee initiatives aligned with driving defined enterprise financial performance goals. As a result, for fiscal 2021, we implemented a one-year employee

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initiative, "Power Forward." This employee initiative was intended to help us drive net sales and operating earnings growth and specifically focused on enterprise-wide financial performance goals of net sales of $3.7 billion and non-GAAP operating earnings of $485.0 million for fiscal 2021. Due to strong business performance, we exceeded both enterprise-wide financial performance goals during fiscal 2021 as we realized $4.0 billion of net sales and $507.0 million of non-GAAP operating earnings.

New Multi-Year Employee Initiative

Our new multi-year employee initiative, "Drive for Five," is intended to align and engage employees on furthering our strategic growth by offering innovative business and product categories to serve our customers. As such, the core focus of this initiative is our goal of exceeding $5.0 billion in net sales through organic growth, while continuing our historical focus on improving profitability, by the end of fiscal 2024. We believe this goal will continue and enhance the innovation and growth momentum for the organization.

Impact of COVID-19

In March 2020, the World Health Organization declared COVID-19 a global pandemic. COVID-19 has negatively impacted public health and portions of the global economy, significantly disrupted global supply chains, and created volatility in financial markets. The global impact of the pandemic has had a material impact on parts of our business, as well as our employees, customers, and suppliers, and caused many challenges for our business and manufacturing operations.

Our main focus from the beginning of the pandemic has been, and will continue to be, the health, safety, and well-being of our employees, customers, suppliers and communities around the world. In support of continuing our global manufacturing and business operations, we have adopted, and continue to adhere to, rigorous and meaningful safety measures recommended by the U.S. Centers for Disease Control and Prevention, World Health Organization, and federal, state, local, and foreign authorities in an effort to protect our employees, customers, suppliers, and communities. These important safety measures enacted at our facilities and other sites include implementing social distancing protocols such as the reconfiguration of manufacturing processes and other workspaces, frequent disinfecting of our facilities and workspaces, and providing or accommodating the wearing of face coverings and other sanitary measures at our facilities and sites where face coverings are required by government mandates. During fiscal 2021, we implemented an employee campaign in support of COVID-19 vaccine efforts. This campaign was designed to provide information about, and support and encourage our employees to receive, a COVID-19 vaccination. As part of this campaign, we facilitated offering the vaccine to our employees at certain of our facilities. We expect to continue certain applicable and appropriate safety measures for purposes of our global manufacturing and business operations and we may take further actions as

government authorities require or recommend or as we determine to be in the best interests of our employees, customers, suppliers, and communities.

In addition to our vigilant safety measures, we have also maintained our focus on our responsibility to meet the needs of our customers. While our facilities remained operational during fiscal 2021 and we experienced a lesser degree of intermittent partial or full factory closures due to government mandated measures as compared to fiscal 2020, our manufacturing operations were adversely impacted by the global macroeconomic environment, and more specifically, global supply chain disruptions that limited our ability to procure certain commodities and components parts in a timely manner to meet manufacturing production requirements. As a result, we experienced various degrees of commodity and component parts availability issues, which resulted in manufacturing inefficiencies and limited our ability to meet customer demand and adequately replenish certain raw materials, work in process, and finish goods inventory levels. Additionally, the global macroeconomic environment has resulted in a greater degree of inflationary cost pressures on commodity, component parts, and other related costs during fiscal 2021 as compared to fiscal 2020. Although we regularly monitor the adequacy of the supply of commodities, components, parts, and accessories and the financial health of the companies in our supply chain, and use alternative suppliers when necessary and available, financial hardship and/or government mandated restrictions on our suppliers caused by COVID-19, insufficient demand planning, and/or the inability of companies throughout our supply chain to deliver on supply commitments, requirements, and/or demands as a result of COVID-19 or otherwise, has and could continue to cause a disruption in our ability to procure the commodities, components, and parts required to manufacture our products. Ongoing communications continue with our suppliers in an attempt to identify and mitigate such risks and to proactively manage inventory levels of commodities, components, and parts to align with anticipated demand for our products and other government actions.

The continuing implications of COVID-19 on our business and manufacturing operations remain uncertain and will depend on certain future developments, including the duration of the pandemic; any adverse impact due to variants of the virus; its impact on market demand for our products; its impact on the global supply chain; its impact on our employees, customers, and suppliers; the range of government mandated restrictions and other measures; and the success of the deployment of COVID-19 vaccines, their effectiveness against the novel strain and related variants, and their rate of adoption. As a result, the ultimate impact on our future business and manufacturing operations, as well as Results of Operations, Financial Position, and Cash Flows as a result of COVID-19 is unknown at this time. We will continue to monitor the situation and the guidance from global government authorities, as well as federal, state, local and foreign public health authorities, and may take additional

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meaningful actions based on their requirements and recommendations in an attempt to protect the health and well-being of our employees, customers, suppliers, and communities. In these circumstances, there may be developments outside our control requiring us to adjust our operating plans and implement appropriate cost reduction measures and such developments could occur rapidly. If the adverse impacts from COVID-19 continue or worsen beyond expectations, our business and related Results of Operations, Financial Position, or Cash Flows could be adversely impacted. Any sustained adverse impacts to our business, the industries in which we operate, market demand for our products, and/or certain suppliers or customers may also affect the future valuation of certain of our assets, and therefore, may increase the likelihood of a charge related to an impairment, write-off, valuation adjustment, allowance, or reserve associated with such assets, including, but not limited to, goodwill, indefinite and finite-lived intangible assets, inventories, accounts receivable, deferred income taxes, right-of-use assets, and property, plant and equipment. Such a charge could be material to our future Results of Operations, Financial Position, or Cash Flows. For additional information regarding risks associated with COVID-19, refer to Part I, Item 1A, "Risk Factors," of this Annual Report on Form 10-K.

Acquisition of Venture Products

On March 2, 2020, during the second quarter of fiscal 2020, we completed our acquisition of Venture Products, the manufacturer of Ventrac-branded products. Venture Products designs, manufactures, markets, and sells articulating turf, landscape, and snow and ice management equipment for grounds, landscape contractor, golf, municipal, and rural acreage customers and provides innovative product offerings that broadened and strengthened our Professional segment and expanded our dealer network. The acquisition consideration was $163.2 million, of which $24.9 million of cash consideration was paid to the former Venture Products shareholders during fiscal 2021 upon the satisfaction of indemnification and certain other obligations of Venture Products to the company. We funded the acquisition consideration with borrowings under our revolving credit facility and net cash provided by operating activities. Subsequent to the closing date, results of operations for Venture Products have been included within our Professional segment within our Consolidated Financial Statements and had an incremental impact to our Professional segment net sales and segment earnings for the fiscal year ended October 31, 2021. For additional information regarding the Venture Products acquisition, refer to Note 2, Business Combinations and Asset Acquisitions, in the Notes to Consolidated Financial Statements included in Part II, Item 8, "Financial Statements and Supplementary Data," of this Annual Report on Form 10-K.

RESULTS OF OPERATIONS

Net Sales

Consolidated net sales in fiscal 2021 were $3,959.6 million compared to $3,378.8 million in fiscal 2020, an increase of 17.2 percent. This net sales increase was primarily driven by the following factors:

•increased sales of Professional landscape contractor zero-turn riding mowers due to strong retail demand and low field inventory levels at the end of fiscal 2020;

•price increases across our Professional and Residential segment product lines;

•strong retail demand for Residential zero-turn riding and walk power mowers due to new and enhanced products;

•increased shipments of golf equipment and Professional irrigation products as a result of the normalization of golf course spending patterns and course investments; and

•strong demand for rental and specialty construction equipment due to favorable construction industry trends.

The consolidated net sales increase was partially offset by reduced sales of underground construction equipment as a result of supply chain challenges limiting product availability and our ability to meet construction industry demand.

Net sales in international markets were $827.6 million for fiscal 2021 compared to $678.1 million in fiscal 2020, an increase of 22.0 percent. Changes in foreign currency exchange rates resulted in an increase in our net sales of $19.3 million in fiscal 2021. The international net sales increase was primarily driven by increased shipments of golf equipment and irrigation products and strong demand for both Professional and Residential segment zero-turn riding products.

The following table summarizes our Results of Operations as a percentage of our consolidated net sales:

[[GREPCENT_TABLE]]
[["Fiscal Years Ended October 31","","2021","","2020"],["Net sales","","100.0","%","","100.0","%"],["Cost of sales","","(66.2)","","","(64.8)"],["Gross margin","","33.8","","","35.2"],["SG&A expense","","(20.7)","","","(22.6)"],["Operating earnings","","13.1","","","12.6"],["Interest expense","","(0.7)","","","(1.0)"],["Other income, net","","0.2","","","0.4"],["Earnings before income taxes","","12.6","","","12.0"],["Provision for income taxes","","(2.2)","","","(2.2)"],["Net earnings","","10.4","%","","9.8","%"]]
[[/GREPCENT_TABLE]]

Gross Profit and Gross Margin

Gross profit represents net sales less cost of sales and gross margin represents gross profit as a percentage of net sales. Refer to Note 1, Summary of Significant Accounting Policies and Related Data, of the Notes to Consolidated Financial Statements within the section entitled "Cost of Sales," for a description of expenses included in cost of sales. Gross profit for fiscal 2021 was $1,338.5 million, up 12.5 percent compared to gross profit of $1,189.8 million in fiscal 2020.

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Gross margin was 33.8 percent in fiscal 2021 compared to 35.2 percent in fiscal 2020, a decrease of 140 basis points. Non-GAAP gross profit was $1,338.5 million, up 12.0 percent compared to non-GAAP gross profit of $1,194.6 million in fiscal 2020. Non-GAAP gross margin was 33.8 percent in fiscal 2021 compared to 35.4 percent in fiscal 2020, a decrease of 160 basis points. The decrease in gross margin and non-GAAP gross margin in fiscal 2021 as compared to fiscal 2020 was primarily due to the macroeconomic inflationary environment resulting in higher commodity, component parts, and freight costs. This negative impact was partially offset by the following factors:

•improved net price realization as a result of price increases across our Professional and Residential segment product lines;

•productivity improvements; and

•favorable product mix.

Non-GAAP gross profit and non-GAAP gross margin exclude the impact of acquisition-related costs for our acquisitions of Venture Products and CMW, including charges incurred for the take-down of the inventory fair value step-up amounts resulting from purchase accounting adjustments, and the impact of management actions, including charges incurred for inventory write-downs related to the Toro underground wind down. 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 $56.8 million, or 7.4 percent, in fiscal 2021 compared to fiscal 2020. Refer to Note 1, Summary of Significant Accounting Policies and Related Data, of the Notes to Consolidated Financial Statements within the section entitled "Selling, General and Administrative Expense" for a description of expenses included in SG&A expense. The SG&A expense rate represents SG&A expense as a percentage of net sales. The SG&A expense rate in fiscal 2021 was 20.7 percent compared to 22.6 percent in fiscal 2020, an improvement of 190 basis points. This SG&A expense rate improvement was primarily the result of leveraging expense over higher sales volumes, which further benefited from a favorable net legal settlement with Briggs & Stratton Corporation.

Interest Expense

Interest expense primarily consists of interest costs incurred on outstanding borrowings related to our fixed and variable interest rate debt arrangements, as well as amortization of the debt issuance costs associated with our debt arrangements. Interest expense for fiscal 2021 decreased $4.5 million compared to fiscal 2020. This decrease was driven by lower average outstanding borrowings under our debt arrangements and lower average interest rates due to reductions in LIBOR rates in fiscal 2021 compared to fiscal 2020.

Other Income, Net

Other income, net primarily consists of our proportionate share of income or losses from our Red Iron joint venture, realized foreign currency exchange rate gains and losses, interest and dividend income, gains or losses recognized on actuarial valuation changes for our pension and post-retirement plans, retail financing revenue, and other miscellaneous income. Other income, net for fiscal 2021 was $10.2 million compared to $13.9 million in fiscal 2020, a decrease of $3.7 million. This decrease in other income, net was primarily due to the following factors:

•lower income from our Red Iron joint venture as a result of lower field inventory levels and increased inventory turnover at our channel partners throughout fiscal 2021 as compared to fiscal 2020 as a result of strong retail demand for our products that exceeded product availability and

•the unfavorable impact of foreign currency exchange rates.

The other income, net decrease was partially offset by a settlement charge incurred for the termination of our U.S. defined benefit pension plan recognized in fiscal 2020 that did not reoccur in fiscal 2021.

Provision for Income Taxes

The effective tax rate for fiscal 2021 was 18.0 percent compared to 19.0 percent in fiscal 2020. The decrease in the effective tax rate for fiscal 2021 was driven by the following factors:

•increased earnings in more favorable tax jurisdictions,

•one-time adjustments related to prior fiscal years, partially offset by

•decreased tax benefits recorded as excess tax deductions for stock-based compensation.

The non-GAAP effective tax rate for fiscal 2021 was 19.6 percent, compared to a non-GAAP effective tax rate of 20.9 percent in fiscal 2020. The decrease in the non-GAAP effective tax rate or fiscal 2021 was primarily driven by the following factors:

•increased earnings in more favorable tax jurisdictions, and

•one-time adjustments related to prior fiscal years.

The non-GAAP effective tax rate excludes the impact of discrete tax benefits recorded as excess tax deductions for stock-based compensation. 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.

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Net Earnings and Net Earnings per Diluted Share

Fiscal 2021 net earnings were $409.9 million compared to $329.7 million in fiscal 2020, an increase of 24.3 percent. Fiscal 2021 diluted net earnings per share were $3.78, an increase of 24.8 percent from $3.03 per diluted share in fiscal 2020. The net earnings increase for fiscal 2021 was primarily driven by the following factors:

•higher sales volumes, which were further benefited from improved net price realization as a result of price increases across our Professional and Residential segment product line and favorable product mix;

•productivity improvements;

•favorable net legal settlements; and

•acquisition-related costs for our acquisitions of Venture Products and CMW recorded in fiscal 2020 that did not repeat in fiscal 2021.

Those favorable net earnings factors were partially offset by the adverse impacts of the macroeconomic inflationary environment, which resulted in higher commodity, component parts, and freight costs.

Non-GAAP net earnings for fiscal 2021 were $392.7 million, or $3.62 per diluted share, compared to $327.7 million, or $3.02 per diluted share, in fiscal 2020, an increase of 19.9 percent per diluted share. The non-GAAP net earnings increase for fiscal 2021 was primarily driven by the following factors:

•higher sales volumes, which were further benefited from improved net price realization as a result of price increases across our Professional and Residential segment product line and favorable product mix, and

•productivity improvements.

Those favorable non-GAAP net earnings factors were partially offset by the adverse impacts of the macroeconomic inflationary environment, which resulted in higher commodity, component parts, and freight costs.

Non-GAAP net earnings and non-GAAP net earnings per diluted share exclude the net impact of certain litigation settlements; the impact of discrete tax benefits recorded as excess tax deductions for stock-based compensation; acquisition-related costs related to our acquisitions of Venture Products and CMW, including charges incurred related to certain purchase accounting adjustments and integration and transaction costs; and management actions, including charges incurred for inventory write-downs related to the Toro underground wind down. 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

As more fully described in Note 3, Segment Data, of the Notes to Consolidated Financial Statements, we operate in two reportable business segments: Professional and Residential. Segment earnings for our Professional and Residential reportable segments are defined as earnings from operations plus other income, net. Our remaining activities consisting of our wholly-owned domestic distribution companies, Red Iron joint venture, our corporate activities, and the elimination of intersegment revenues and expenses, are presented as "Other" due to their insignificance. Corporate activities include general corporate expenditures, such as finance, human resources, legal, information services, public relations, business development, and similar activities, as well as other unallocated corporate assets and liabilities, such as corporate facilities and deferred tax assets and liabilities. The following information provides perspective on the net sales and operating results of our reportable business segments' and Other activities.

Professional Segment

Professional segment net sales represented 74.0 percent and 74.7 percent of consolidated net sales for fiscal 2021 and 2020, respectively. The following table presents our Professional segment's net sales, earnings, and earnings as a percentage of net sales (dollars in millions):

[[GREPCENT_TABLE]]
[["Fiscal Years Ended October 31","","2021","","2020"],["Net sales","","$","2,929.6","","","$","2,523.5"],["Percentage change from prior year","","16.1","%","","3.3","%"],["Segment earnings","","$","507.3","","","$","426.6"],["Segment earnings as a percentage of segment net sales","","17.3","%","","16.9","%"]]
[[/GREPCENT_TABLE]]

Professional Segment Net Sales

Net sales for our Professional segment in fiscal 2021 increased 16.1 percent compared to fiscal 2020. This increase was primarily driven by strong demand for many of the products in our portfolio of Professional segment businesses, most notably the Professional segment businesses that were adversely impacted by COVID-19 during fiscal 2020.

Factors driving the Professional segment net sales increase include:

•increased sales of landscape contractor zero-turn riding mowers due to strong retail demand and low field inventory levels at the end of fiscal 2020;

•price increases across our Professional segment product lines;

•increased shipments of golf equipment and irrigation products as a result of the normalization of golf course spending patterns and course investments;

•strong demand for rental and specialty construction equipment due to favorable construction industry trends; and

•incremental net sales as a result of our acquisition of Venture Products and increased sales of such products in fiscal 2021.

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The Professional segment net sales increase was partially offset by reduced sales of underground construction equipment as a result of product availability that limited our ability to meet construction industry demand.

Professional Segment Earnings

Professional segment earnings increased 18.9 percent in fiscal 2021 compared to fiscal 2020, and when expressed as a percentage of Professional segment net sales, increased to 17.3 percent from 16.9 percent. The following factors positively impacted Professional segment earnings as a percentage of Professional segment net sales for fiscal 2021:

•improved net price realization as a result of price increases across our Professional segment product lines;

•reduced SG&A expense as a percentage of net sales due to leveraging expense over higher sales volumes;

•productivity improvements, including COVID-19-related production downtime in fiscal 2020 that was experienced to a lesser degree in fiscal 2021; and

•favorable product mix.

The Professional segment earnings increase as a percentage of Professional segment net sales was partially offset by the macroeconomic inflationary environment resulting in higher commodity, component parts, and freight costs.

Residential Segment

Residential segment net sales represented 25.5 percent and 24.3 percent of consolidated net sales for fiscal 2021 and 2020, respectively. The following table presents our Residential segment's net sales, earnings, and earnings as a percentage of net sales (dollars in millions):

[[GREPCENT_TABLE]]
[["Fiscal Years Ended October 31","","2021","","2020"],["Net sales","","$","1,010.1","","","$","820.7"],["Percentage change from prior year","","23.1","%","","24.1","%"],["Segment earnings","","$","121.5","","","$","113.7"],["Segment earnings as a percentage of segment net sales","","12.0","%","","13.8","%"]]
[[/GREPCENT_TABLE]]

Residential Segment Net Sales

Net sales for our Residential segment in fiscal 2021 increased by 23.1 percent compared to fiscal 2020. This increase was primarily driven by growth across most of our product lines, most notably due to the following drivers:

•strong retail demand for zero-turn riding and walk power mowers due to new and enhanced products;

•price increases across our Residential segment product lines;

•increased sales of snow thrower products as a result of favorable weather conditions in key regions during the first half of fiscal 2021, enhanced retail placement, and strong pre-season retail demand; and

•increased sales of our 60V Flex-Force battery-powered home solutions products primarily due to successful new product introductions and enhanced retail placement.

Residential Segment Earnings

Residential segment earnings increased 6.9 percent in fiscal 2021 compared to fiscal 2020, and when expressed as a percentage of Residential segment net sales, decreased to 12.0 percent from 13.8 percent. This Residential segment earnings decrease as a percentage of Residential segment net sales was due to the macroeconomic inflationary environment resulting in higher commodity, component parts, and freight costs. The decrease was partially offset by the following items:

•improved net price realization as a result of price increases across our Residential segment product lines;

•productivity improvements, including COVID-19-related production downtime in fiscal 2020 that was experienced to a lesser degree in fiscal 2021;

•reduced SG&A expense as a percentage of net sales due to leveraging expense over higher sales volumes; and

•favorable product mix.

Other Activities

Net sales for our Other activities consist of sales from our wholly-owned domestic distribution companies less intercompany sales from our Professional and Residential business segments to the wholly-owned domestic distribution companies. As further described in Note 7, Management Actions, in the Notes to Consolidated Financial Statements, during the first quarter of fiscal 2021, we completed the sale of our Northeastern U.S. distribution company, resulting in us owning only one wholly-owned domestic distribution company during most of fiscal 2021. Net sales for our Other activities represented 0.5 percent and 1.0 percent of consolidated net sales for fiscal 2021 and 2020, respectively.

The following table presents net sales and operating loss for our Other activities (dollars in millions):

[[GREPCENT_TABLE]]
[["Fiscal Years Ended October 31","","2021","","2020"],["Net sales","","$","19.9","","","$","34.6"],["Percentage change from prior year","","(42.5)","%","","3.7","%"],["Operating loss","","$","(129.0)","","","$","(133.2)"]]
[[/GREPCENT_TABLE]]

Other Net Sales

Net sales for our Other activities in fiscal 2021 decreased $14.7 million compared to fiscal 2020, primarily as a result of the sale of our Northeastern U.S. distribution company during the first quarter of fiscal 2021, partially offset by the following factors:

•reduced intercompany sales eliminations for sales from our Professional and Residential segments to our remaining wholly-owned domestic distribution company as a result of the sale of our Northeastern U.S. distribution company and

•increased sales from our remaining wholly-owned domestic distribution company driven by strong retail demand.

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Other Operating Loss

Operating loss for our Other activities decreased $4.2 million in fiscal 2021 compared to fiscal 2020. This operating loss decrease was primarily driven by the following factors:

•a favorable net legal settlement with Briggs & Stratton Corporation;

•reduced SG&A expense as a result of the sale of our Northeastern U.S. distribution company; and

•reduced interest expense as a result of lower average outstanding borrowings under our debt arrangements and lower average interest rates due to reductions in LIBOR rates in fiscal 2021 compared to fiscal 2020.

The operating loss decrease for our Other activities was partially offset by the following items:

•a charge incurred for a legal settlement related to a series of ongoing patent infringement disputes; and

•increased incentive compensation costs as a result of strong business performance.

Refer to Note 12, Commitments and Contingencies, of the Notes to Consolidated Financial Statements within the section entitled "Litigation" for additional information regarding the favorable net legal settlement with Briggs & Stratton Corporation.

FINANCIAL POSITION

Working Capital

Given the challenging macroeconomic environment experienced throughout most of fiscal 2021 that has created supply chain disruption and more specifically, resulted in challenging conditions for sourcing adequate amounts of certain commodity and component parts inventory and, in certain cases, the inability of our suppliers to meet our commodity and component parts demand requirements, our working capital strategy for fiscal 2021 shifted to place primary emphasis on increasing our commodity and component parts inventories in an attempt to hold requisite inventory levels to meet our production requirements, avoid manufacturing delays, and meet the strong demand for our products, as well as attempting to ensure service parts availability for our customers. The following table highlights several key measures of our working capital performance (dollars in millions):

[[GREPCENT_TABLE]]
[["Fiscal Years Ended October 31","","2021","","2020"],["Average receivables, net","","$","315.3","","","$","296.5"],["Average inventories, net","","$","678.0","","","$","705.1"],["Average accounts payable","","$","407.1","","","$","319.5"],["Average days outstanding for receivables","","29.1","","","32.0"],["Average inventory turnover (times per fiscal year)","","3.9","","","3.1"]]
[[/GREPCENT_TABLE]]

As of the end of fiscal 2021, our average net working capital was 14.8 percent compared to 20.2 percent as of the end of fiscal 2020. We calculate our average net working capital as average net accounts receivable plus average net inventory,

less average accounts payable as a percentage of net sales for a twelve month period.

The following factors impacted our average net working capital during fiscal 2021 as compared to fiscal 2020:

•Average net receivables increased by 6.3 percent, primarily due to higher sales to channels not financed through our Red Iron joint venture or other third-party floor plan financing arrangements. Our average days outstanding for receivables decreased to 29.1 days in fiscal 2021 compared to 32.0 days in fiscal 2020.

•Average net inventories decreased by 3.8 percent, mainly due to lower finished goods inventories in certain of our Professional segment businesses as a result of strong demand for our products that exceeded product availability. This decrease was partially offset by higher raw materials and work in process inventories in our Residential segment and certain of our Professional segment businesses due to supply chain challenges that prevented the conversion of raw materials and work in process inventories into finished goods.

•Average accounts payable increased by 27.4 percent, mainly due to largely normalized corporate spending activity throughout fiscal 2021 as compared to the lower corporate spending activity in fiscal 2020 as a result of COVID-19.

Cash Flows

Cash flows provided by/(used in) operating, investing, and financing activities during the past two fiscal years are shown in the following table (in millions):

[[GREPCENT_TABLE]]
[["","","Cash Provided by/ (Used in)"],["Fiscal Years Ended October 31","","2021","","2020"],["Operating activities","","$","555.5","","","$","539.4"],["Investing activities","","(128.5)","","","(216.1)"],["Financing activities","","(503.7)","","","2.4"],["Effect of exchange rates on cash","","2.4","","","2.4"],["Net (decrease) increase in cash and cash equivalents","","(74.3)","","","328.1"],["Cash and cash equivalents as of the end of the fiscal period","","$","405.6","","","$","479.9"]]
[[/GREPCENT_TABLE]]

Cash Flows from Operating Activities

Our primary source of funds is cash generated from operations. In fiscal 2021, cash provided by operating activities increased by $16.1 million, or 3.0 percent, from fiscal 2020. This increase was primarily due to a greater cash benefit from accounts payable due to largely normalized corporate spending activity and timing of invoice payments, as well as higher net earnings. The increase to cash provided by operating activities was partially offset by more cash utilized for inventory purchases in our Professional and Residential segment businesses as a result of strong demand for our products and timing of component parts purchases and higher accounts receivable as a result of the timing of sales to channels not financed through our Red Iron joint

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venture or other third-party floor plan financing arrangements.

Cash Flows from Investing Activities

Capital expenditures and acquisitions are a significant use of our capital resources. These investments are intended to enable sales growth in new and expanding markets, help us meet product demand, and increase our manufacturing efficiencies and capacity. Cash used in investing activities in fiscal 2021 decreased by $87.6 million from fiscal 2020. This decrease was primarily due to less cash utilized for the fiscal 2021 holdback release for our Venture Products business than was used for the initial cash consideration transferred on the acquisition date during fiscal 2020, as well as cash proceeds received from the fiscal 2021 first quarter sale of our Northeastern U.S. distribution company. The decrease to cash used in investing activities was partially offset by higher cash used for our asset acquisitions of Turflynx, Lda and Left Hand Robotics, Inc. and increased purchases of property, plant and equipment in fiscal 2021 as a result of the cessation of the actions taken in fiscal 2020 to preserve our liquidity position as a result of COVID-19.

Cash Flows from Financing Activities

Cash used in financing activities in fiscal 2021 was $503.7 million compared to $2.4 million of cash provided by financing activities in fiscal 2020. This increase in cash used in financing activities was mainly due to less cash provided by borrowings under our debt arrangements during fiscal 2021 as compared to fiscal 2020 and more cash used for repurchases of shares of our common stock under our Board authorized repurchase program as we resumed repurchase activity during fiscal 2021, partially offset by lower cash used for repayments of outstanding indebtedness.

Cash and Cash Equivalents

Cash and cash equivalents as of the end of fiscal 2021 decreased by $74.3 million compared to the end of fiscal 2020. As of October 31, 2021, cash and cash equivalents held by our foreign subsidiaries were $117.3 million. We consider that $30.9 million of cash and cash equivalents held by our foreign subsidiaries are intended to be indefinitely reinvested. Should these cash and cash equivalents be distributed in the future in the form of dividends or otherwise, we may be subject to foreign withholding taxes, state income taxes, and/or additional federal taxes for currency fluctuations. As of October 31, 2021, the unrecognized deferred tax liabilities for temporary differences related to our investment in non-U.S. subsidiaries, and any withholding, state, or additional federal taxes upon any future repatriation, are not material and have not been recorded.

Capital Expenditures

We make ongoing capital investments in our property, plant, and equipment and believe that our historical capital investments in our manufacturing facilities and other capital assets have increased the production capacity of our operations and enabled us to meet the needs of our

customers. Fiscal 2021 capital expenditures of $104.0 million were $25.9 million higher than fiscal 2020. This increase was primarily due to increased capital investment levels in fiscal 2021 as a result of the cessation of the actions taken in fiscal 2020 to preserve our liquidity position as a result of COVID-19. We anticipate fiscal 2022 capital expenditures in the range of $150.0 million to $175.0 million as we plan to continue to invest in future growth through the expansion of our manufacturing operations and other facilities and capital assets, new product tooling, productivity and automation enhancements in our manufacturing and distribution processes, and continued replacement of production equipment.

Other Long-Term Assets

Other long-term assets as of October 31, 2021 were $1,447.0 million compared to $1,425.6 million as of October 31, 2020, an increase of $21.4 million. This increase was primarily due to an increase in purchases of property, plant, and equipment and an incremental increase of other intangible assets as a result of our asset acquisitions of Turflynx, Lda and Left Hand Robotics, Inc. These increases to other long-term assets were partially offset by depreciation of property, plant and equipment and the amortization of our other intangible assets and right-of-use lease assets during fiscal 2021.

Additionally, included in other long-term assets as of October 31, 2021 was goodwill in the amount of $421.7 million. Based on our annual goodwill impairment analysis, we determined there was no impairment of goodwill during fiscal 2021 for any of our reporting units as the fair values of the reporting units exceeded their carrying values, including goodwill.

Liquidity and Capital Resources

Our businesses are seasonally working capital intensive and require funding for purchases of raw materials used in production, replacement parts inventory, payroll and other administrative costs, capital expenditures, establishment of new facilities, expansion and renovation of existing facilities, as well as for financing receivables from customers that are not financed with Red Iron or other third-party financial institutions. Our accounts receivable balance historically increases between January and April as a result of typically higher sales volumes and extended payment terms made available to our customers, and typically decreases between May and December when payments are received.

We generally fund cash requirements for working capital needs, capital expenditures, contractual obligations, acquisitions, investments, debt repayments, interest payments, quarterly cash dividend payments, and common stock repurchases, all as applicable, through cash provided by operating activities, availability under our revolving credit facility, and in certain instances, other forms of financing arrangements. Our revolving credit facility has been adequate for these purposes, although we have negotiated and completed additional financing arrangements as needed to allow us to complete acquisitions or for other corporate

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purposes. We currently believe that our existing 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, capital expenditures, investments, debt repayments, interest payments, quarterly cash dividend payments, and common stock repurchases, all as applicable, for at least the next twelve months. As of October 31, 2021, we had available liquidity of $1,002.5 million, consisting of cash and cash equivalents of $405.6 million, of which $117.3 million was held by our foreign subsidiaries, and availability under our revolving credit facility of $596.9 million.

Indebtedness

The following is a summary of our indebtedness (in thousands):

[[GREPCENT_TABLE]]
[["October 31","","2021","","2020"],["Revolving credit facility","","$","\u2014","","","$","\u2014"],["$270 million term loan","","270,000","","","\u2014"],["$200 million term loan","","\u2014","","","100,000"],["$300 million term loan","","\u2014","","","180,000"],["$190 million term loan","","\u2014","","","90,000"],["3.81% series A senior notes","","100,000","","","100,000"],["3.91% series B senior notes","","100,000","","","100,000"],["7.8% debentures","","100,000","","","100,000"],["6.625% senior notes","","124,040","","","123,978"],["Less: unamortized discounts, debt issuance costs, and deferred charges","","2,798","","","2,855"],["Total long-term debt","","691,242","","","791,123"],["Less: current portion of long-term debt","","\u2014","","","99,873"],["Long-term debt, less current portion","","$","691,242","","","$","691,250"]]
[[/GREPCENT_TABLE]]

Principal payments required on our outstanding indebtedness, based on the maturity dates defined within our debt arrangements, for each of the next five fiscal years are as follows: fiscal 2022, $0.0 million; fiscal 2023, $0.0 million; fiscal 2024, $0.0 million; fiscal 2025, $27.0 million; fiscal 2026, $243.0 million; and after fiscal 2026, $425.0 million. Interest payments required on our outstanding indebtedness, assuming no prepayments of indebtedness, for each of the next five fiscal years are as follows: fiscal 2022, $26.7 million; fiscal 2023, $26.7 million; fiscal 2024, $26.7 million; fiscal 2025, $26.6 million; fiscal 2026, $26.1 million; and after fiscal 2026, $128.2 million. Interest on variable rate debt was calculated using the interest rate as of October 31, 2021.

Revolving Credit Facility

Seasonal cash requirements are financed from operations, cash on hand, and with borrowings under our revolving credit facility, as applicable. On October 5, 2021, we entered into an amended and restated credit agreement ("amended credit agreement") that provided for, among other things, a five-year unsecured revolving credit facility with a borrowing capacity of up to $600.0 million ("revolving credit facility") that matures on October 5, 2026 and replaced our prior $600.0 million unsecured senior revolving credit facility

scheduled to mature on June 19, 2023. Included in the revolving credit facility is a $10.0 million sublimit for standby letters of credit and a $30.0 million sublimit for swingline loans. At our election, and with the approval of the named borrowers on the revolving credit facility and the election of the lenders to fund such increase, the aggregate maximum principal amount available under the revolving credit facility may be increased by an amount of up to $300.0 million. Funds are available under the revolving credit facility for working capital, capital expenditures, and other lawful corporate purposes, including, but not limited to, acquisitions and common stock repurchases, subject in each case to compliance with certain financial covenants as defined within the amended credit agreement. As of October 31, 2021, we had no outstanding borrowings under the revolving credit facility and $3.1 million outstanding under the sublimit for standby letters of credit, resulting in $596.9 million of unutilized availability under our revolving credit facility. As of October 31, 2020, we had no outstanding borrowings under our prior revolving credit facility and $2.5 million outstanding under our prior sublimit for standby letters of credit, resulting in $597.5 million of unutilized availability under our prior revolving credit facility.

Outstanding loans under the revolving credit facility (other than swingline loans), if applicable, bear interest at a variable rate generally based on LIBOR or an alternative variable rate based on the highest of the Bank of America prime rate, the federal funds rate or a rate generally based on LIBOR, in each case depending on the leverage ratio (as measured quarterly and defined as the ratio of (i) total indebtedness to (ii) consolidated EBIT (earnings before interest and taxes) plus depreciation and amortization expense) and our debt rating. Swingline loans under the revolving credit facility bear interest at a rate determined by the swingline lender or an alternative variable rate based on the highest of the Bank of America prime rate, the federal funds rate or a rate generally based on LIBOR, in each case depending on the leverage ratio and our debt rating. Interest is payable quarterly in arrears. Our debt rating for long-term unsecured senior, non-credit enhanced debt was unchanged during the fourth quarter of fiscal 2021 by Standard and Poor's Ratings Group at BBB and by Moody's Investors Service at Baa3. If our debt rating falls below investment grade and/or our leverage ratio rises above 1.50, the basis point spread we currently pay on outstanding debt under the revolving credit facility would increase. However, the credit commitment could not be canceled by the banks based solely on a ratings downgrade. During fiscal 2020, we incurred interest expense of $0.8 million on the outstanding borrowings under our prior revolving credit facility. No interest expense was incurred under our current and prior revolving credit facilities during fiscal 2021.

Our revolving credit facility contains customary covenants, including, without limitation, financial covenants, such as a maximum leverage ratio; and negative covenants, which among other things, limit cash dividends, disposition of

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assets, consolidations and mergers, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain minimum thresholds and exceptions. Under the revolving credit facility, we are not limited in the amount for payments of cash dividends and common stock repurchases as long as, both before and after giving pro forma effect to such payments, our leverage ratio from the previous quarter compliance certificate is less than or equal to 3.5 (or, at our option (which we may exercise twice during the term of the facility) after certain acquisitions with aggregate consideration in excess of $75.0 million, for the first four quarters following the exercise of such option, is less than or equal to 4.0), provided that immediately after giving effect of any such proposed action, no default or event of default would exist. As of October 31, 2021, we were not limited in the amount for payments of cash dividends and common stock repurchases. We were in compliance with all covenants under the amended credit agreement for our revolving credit facility as of October 31, 2021, and we expect to be in compliance with all covenants during fiscal 2022. If we were out of compliance with any covenant required by this credit agreement following the applicable cure period, the banks could terminate their commitments unless we could negotiate a covenant waiver from the banks. In addition, our long-term senior notes, debentures, term loan facility, and any amounts outstanding under the revolving credit facility could become due and payable if we were unable to obtain a covenant waiver or refinance our borrowings under the amended credit agreement.

$270.0 Million Term Loan Credit Agreement

The amended credit agreement executed on October 5, 2021 also provided for a five-year unsecured term loan in an aggregate principal amount of $270.0 million, the entire amount of which was funded on October 5, 2021 and matures on October 5, 2026 ("$270.0 million term loan"). Under the amended credit agreement, incremental term loan commitments may be established at our election and the approval of the borrowers on the $270.0 million term loan by an amount of up to $100.0 million.

Beginning December 31, 2024, we are required to make quarterly principal amortization payments on the $270.0 million term loan equal to $6.75 million. On October 5, 2026, the aggregate principal amount of any remaining outstanding borrowings under the $270.0 million term loan are required to be repaid. The $270.0 million term loan may be prepaid and terminated at our election at any time without penalty or premium. Amounts repaid or prepaid may not be reborrowed. As of October 31, 2021, there was $270.0 million of outstanding borrowings under the $270.0 million term loan.

Outstanding borrowings under the $270.0 million term loan bear interest at a variable rate generally based on LIBOR or an alternative variable rate based on the highest of the Bank of America prime rate, the federal funds rate or a rate generally based on LIBOR, depending on the leverage ratio (as measured quarterly and defined as the ratio of (i) total indebtedness to (ii) consolidated EBIT (earnings before

interest and taxes) plus depreciation and amortization expense) and our debt rating. Interest is payable quarterly in arrears. For the fiscal year ended October 31, 2021, we incurred interest expense of $0.2 million on the outstanding borrowings under the $270.0 million term loan. No interest expense was incurred during fiscal 2020.

The $270.0 million term loan contains customary covenants, including, without limitation, financial covenants generally consistent with those applicable under our revolving credit facility. We were in compliance with all covenants related to the $270.0 million term loan as of October 31, 2021, and we expect to be in compliance with all covenants during fiscal 2022. If we were out of compliance with any covenant required by the $270.0 million term loan following the applicable cure period, our term loan facility, long-term senior notes, debentures, and any amounts outstanding under the revolving credit facility could become due and payable if we were unable to obtain a covenant waiver or refinance our borrowings under the $270.0 million term loan.

$500.0 Million Term Loan Credit Agreement

In March 2019, we entered into a term loan credit agreement with a syndicate of financial institutions for the purpose of partially funding the CMW purchase price and the related fees and expenses incurred in connection with such acquisition. The term loan credit agreement provided for a $200.0 million three-year unsecured senior term loan facility maturing on April 1, 2022 ("$200.0 million term loan") and a $300.0 million five-year unsecured senior term loan facility maturing on April 1, 2024 ("$300.0 million term loan" and collectively with the $200.0 million term loan, the "$500.0 million term loan"). The funds under the $500.0 million term loan were received on the CMW closing date.

As of October 31, 2020, we had prepaid $100.0 million and $120.0 million of the outstanding principal balances of the $200.0 million term loan and $300.0 million term loan, respectively. Thus, as of October 31, 2020, there was $100.0 million and $180.0 million of outstanding borrowings under the $200.0 million term loan and $300.0 million term loan, respectively. During the second quarter of fiscal 2021, we prepaid $10.0 million of the remaining outstanding borrowings under the $300.0 million term loan. As a result of the execution of the amended credit agreement during the fourth quarter of fiscal 2021, the remaining $100.0 million and $170.0 million outstanding principal balances under the $200.0 million term loan and $300.0 million term loan, respectively, were paid in full. As a result of the prepayment, there were no outstanding borrowings under the $200.0 million three-year unsecured senior term loan facility and $300.0 million five-year unsecured senior term loan facility, respectively, as of October 31, 2021.

Interest was previously calculated on outstanding borrowings under the $500.0 million term loan by utilizing a variable rate generally based on LIBOR or an alternative variable rate, based on the highest of the Bank of America prime rate, the federal funds rate, or a rate generally based on LIBOR, in each case subject to an additional basis point spread as

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defined in the $500.0 million term loan. Interest was payable quarterly in arrears. During the fiscal years ended October 31, 2021 and 2020, we incurred $3.1 million and $5.2 million, respectively, of interest expense on the outstanding borrowings of the $500.0 million term loan.

$190.0 Million Term Loan Credit Agreement

On March 30, 2020, we entered into a $190.0 million term loan credit agreement ("$190.0 million term loan") with certain financial institutions for the purpose of refinancing certain of our outstanding borrowings incurred in connection with the acquisition of Venture Products on March 2, 2020, as well as a precautionary measure to increase our liquidity and preserve financial flexibility in light of the uncertainty in the global financial and commercial markets as a result of COVID-19. The $190.0 million term loan provided for a $190.0 million three-year unsecured senior term loan facility maturing on June 19, 2023.

As of October 31, 2020, we had prepaid $100.0 million of the outstanding principal balance of the $190.0 million term loan, resulting in a remaining outstanding principal balance of $90.0 million. During the first quarter of fiscal 2021, we prepaid the remaining $90.0 million outstanding principal balance under the $190.0 million term loan. As a result of the prepayment, there were no outstanding borrowings under the $190.0 million term loan as of October 31, 2021.

Interest was previously calculated on outstanding borrowings under the $190.0 million term loan by utilizing a variable rate based on LIBOR or an alternative variable rate with a minimum rate of 0.75 percent, subject to an additional basis point spread as defined in the term loan credit agreement. Interest was payable quarterly in arrears. For the fiscal years ended October 31, 2021 and 2020 we incurred interest expense of approximately $0.3 million and $2.4 million, respectively, on the outstanding borrowings under the $190.0 million term loan.

3.81% Series A and 3.91% Series B Senior Notes

On April 30, 2019, we entered into a private placement note purchase agreement with certain purchasers ("holders") pursuant to which we agreed to issue and sell an aggregate principal amount of $100.0 million of 3.81% Series A Senior Notes due June 15, 2029 ("Series A Senior Notes") and $100.0 million of 3.91% Series B Senior Notes due June 15, 2031 ("Series B Senior Notes" and together with the Series A Senior Notes, the "Senior Notes"). On June 27, 2019, we issued $100.0 million of the Series A Senior Notes and $100.0 million of the Series B Senior Notes pursuant to the private placement note purchase agreement. The Senior Notes are our unsecured senior obligations.

No principal is due on the Senior Notes prior to their stated due dates. We have the right to prepay all or a portion of either series of the Senior Notes in amounts equal to not less than 10.0 percent of the principal amount of the Senior Notes then outstanding upon notice to the holders of the series of Senior Notes being prepaid for 100.0 percent of the principal amount prepaid, plus a make-whole premium, as set forth in

the private placement note purchase agreement, plus accrued and unpaid interest, if any, to the date of prepayment. In addition, at any time on or after the date that is 90 days prior to the maturity date of the respective series, we have the right to prepay all of the outstanding Senior Note of such series for 100.0 percent of the principal amount so prepaid, plus accrued and unpaid interest, if any, to the date of prepayment. Upon the occurrence of certain change of control events, we are required to offer to prepay all Senior Notes for the principal amount thereof plus accrued and unpaid interest, if any, to the date of prepayment.

Interest on the Senior Notes is payable semiannually on the 15th day of June and December in each year. For each of the fiscal years ended October 31, 2021 and 2020, we incurred interest expense on the Senior Notes of $7.7 million.

Our private placement note purchase agreement contains customary representations and warranties, as well as certain customary covenants, including, without limitation, financial covenants, such as the maintenance of minimum interest coverage and maximum leverage ratios, and other covenants, which, among other things, provide limitations on transactions with affiliates, mergers, consolidations and sales of assets, liens and priority debt. Under the private placement note purchase agreement, we are not limited in the amount for payments of cash dividends and common stock repurchases as long as, both before and after giving pro forma effect to such payments, our leverage ratio from the previous quarter compliance certificate is less than or equal to 3.5 (or, at our option (which we may exercise twice during the term of the facility) after certain acquisitions with aggregate consideration in excess of $75.0 million, for the first four quarters following the exercise of such option, is less than or equal to 4.0), provided that immediately after giving effect of any such proposed action, no default or event of default would exist. As of October 31, 2021, we were not limited in the amount for payments of cash dividends and common stock repurchases. We were in compliance with all covenants related to the private placement note purchase agreement as of October 31, 2021 and we expect to be in compliance with all covenants during fiscal 2022. If we were out of compliance with any covenant required by this private placement note purchase agreement following the applicable cure period, our term loan facility, long-term senior notes, debentures, and any amounts outstanding under the revolving credit facility would become due and payable if we were unable to obtain a covenant waiver or refinance our borrowings under our private placement note purchase agreement.

7.8% Debentures

In June 1997, we issued $175.0 million of debt securities consisting of $75.0 million of 7.125 percent coupon 10-year notes and $100.0 million of 7.8 percent coupon 30-year debentures. The $75.0 million of 7.125 percent coupon 10-year notes were repaid at maturity during fiscal 2007. In connection with the issuance of $175.0 million in long-term debt securities, we paid $23.7 million to terminate three

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forward-starting interest rate swap agreements with notional amounts totaling $125.0 million. These swap agreements had been entered into to reduce exposure to interest rate risk prior to the issuance of the new long-term debt securities. As of the inception of one of the swap agreements, we had received payments that were recorded as deferred income to be recognized as an adjustment to interest expense over the term of the new debt securities. As of the date the swaps were terminated, this deferred income totaled $18.7 million. The excess termination fees over the deferred income recorded was deferred and is being recognized as an adjustment to interest expense over the term of the debt securities issued. Interest on the debentures is payable semiannually on the 15th day of June and December in each year. For each of the fiscal years ended October 31, 2021 and 2020, we incurred interest expense of $8.0 million.

6.625% Senior Notes

On April 26, 2007, we issued $125.0 million in aggregate principal amount of 6.625 percent senior notes due May 1, 2037 and priced at 98.513 percent of par value. The resulting discount of $1.9 million is being amortized over the term of the notes using the straight-line method as the results obtained are not materially different from those that would result from the use of the effective interest method. Although the coupon rate of the senior notes is 6.625 percent, the effective interest rate is 6.741 percent after taking into account the issuance discount. The senior notes are our unsecured senior obligations and rank equally with our other unsecured and unsubordinated indebtedness. The indentures under which the senior notes were issued contain customary covenants and event of default provisions. We may redeem some or all of the senior notes at any time at the greater of the full principal amount of the senior notes being redeemed or the present value of the remaining scheduled payments of principal and interest discounted to the redemption date on a semi-annual basis at the treasury rate plus 30 basis points, plus, in both cases, accrued and unpaid interest. In the event of the occurrence of both (i) a change of control of the company, and (ii) a downgrade of the notes below an investment grade rating by both Moody's Investors Service, Inc. and Standard & Poor's Ratings Services within a specified period, we would be required to make an offer to purchase the senior notes at a price equal to 101 percent of the principal amount of the senior notes plus accrued and unpaid interest to the date of repurchase. Interest on the senior notes is payable semiannually on the 1st day of May and November in each year. For each of the fiscal years ended October 31, 2021 and 2020, we incurred interest expense of $8.4 million.

Capital Structure

The following table details the components of our capital structure and debt-to-capitalization ratio (in millions, except percentage data):

[[GREPCENT_TABLE]]
[["October 31","","2021","","2020"],["Long-term debt, including current portion","","$","691.2","","","$","791.1"],["Stockholders' equity","","$","1,151.1","","","$","1,114.8"],["Debt-to-capitalization ratio","","37.5","%","","41.5","%"]]
[[/GREPCENT_TABLE]]

Our debt-to-capitalization ratio decreased in fiscal 2021 compared to fiscal 2020 primarily due to lower outstanding indebtedness as a result of repayments of outstanding borrowings on our debt arrangements during fiscal 2021, as well as higher stockholders' equity in fiscal 2021 compared to fiscal 2020 as a result of higher net earnings, partially offset by increased repurchases of our common stock under our Board authorized repurchase program and increased cash dividend payments on shares of our common stock.

Cash Dividends

In each quarter of fiscal 2021, our Board of Directors declared a common stock cash dividend of $0.2625 per share, which was a 5.0 percent increase over our common stock cash dividend of $0.25 per share paid each quarter in fiscal 2020. On December 14, 2021, our Board of Directors increased our fiscal 2022 first quarter common stock cash dividend by 14.3 percent to $0.30 per share from the quarterly common stock cash dividend of $0.2625 per share paid in the first quarter of fiscal 2021. Future common stock cash dividends will depend upon our Financial Condition, Results of Operations, capital requirements, and other factors deemed relevant by our Board of Directors.

Share Repurchases

Our Board authorized stock repurchase program provides shares for use in connection with our stock-based compensation plans, among other uses, and has no expiration. The following table provides information with respect to repurchases of our common stock during the past two fiscal years (in millions, except share and per share data):

[[GREPCENT_TABLE]]
[["Fiscal Years Ended October 31","","2021","","2020"],["Shares of Board authorized common stock purchased","","2,989,794","","","\u2014"],["Cost to repurchase common stock","","$","302.3","","","$","\u2014"],["Average price paid per share","","$","101.10","","","$","\u2014"]]
[[/GREPCENT_TABLE]]

In March 2020, we announced our intention to curtail share repurchases as a prudent measure to enhance our liquidity position in response to COVID-19. During fiscal 2021, we resumed repurchasing shares of our common stock, thereby reducing our total shares outstanding. As of October 31, 2021, 4,052,462 shares remained available for repurchase under our Board authorized stock repurchase program. We currently expect to continue share repurchases in fiscal 2022, depending on our cash balance, debt repayments, market conditions, our anticipated working capital needs, and/or other factors.

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Customer Financing Arrangements

Wholesale Financing

We are party to a joint venture with TCF Inventory Finance, Inc. ("TCFIF"), a subsidiary of The Huntington National Bank, established as Red Iron, the primary purpose of which is to provide inventory financing to certain distributors and dealers of certain of our products in the U.S. that enables them to carry representative inventories of certain of our products. Under separate agreements between Red Iron and the dealers and distributors, Red Iron provides loans to the dealers and distributors for the advances paid by Red Iron to us. Under these financing arrangements, down payments are not required, and depending on the finance program for each product line, finance charges are incurred by us, shared between us and the distributor and/or the dealer, or paid by the distributor or dealer. Red Iron retains a security interest in the distributors' and dealers' financed inventories and such inventories are monitored regularly. Financing terms to the distributors and dealers require payment as the equipment, which secures the indebtedness, is sold to customers or when payment otherwise become due under the agreements between these financing entities and the distributors and dealers, whichever occurs first. Rates are generally indexed to LIBOR, 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 these financing arrangements during fiscal 2021 and 2020 were $2,282.6 million and $1,832.5 million, respectively. The total amount of net receivables outstanding under this arrangement as of October 31, 2021 and 2020 was $420.5 million and $386.8 million, respectively. The total amount of receivables due from Red Iron to us as of October 31, 2021 and 2020 were $31.0 million and $12.6 million, respectively.

Under a separate agreement, TCF Commercial Finance Canada, Inc. ("TCFCFC") provides inventory financing to dealers of certain of our products in Canada. We also have floor plan financing agreements with other third-party financial institutions to provide floor plan financing to certain dealers and distributors not financed through Red Iron or TCFCFC, which include agreements with third-party financial institutions in the U.S. and internationally. These third-party financial institutions and TCFCFC financed $460.5 million and $410.7 million of receivables for such dealers and distributors during the fiscal years ended October 31, 2021 and 2020, respectively. As of October 31, 2021 and 2020, $151.5 million and $137.6 million, respectively, of receivables financed by the third-party financing companies and TCFCFC, excluding Red Iron, were outstanding.

We entered into a limited inventory repurchase agreement with Red Iron and TCFCFC. Under such limited inventory repurchase agreement, we have agreed to repurchase products repossessed by Red Iron and TCFCFC, up to a maximum aggregate amount of $7.5 million in a calendar year.

Additionally, as a result of our floor plan financing agreements with the separate third-party financial institutions, we have also entered into inventory repurchase agreements with the separate third-party financial institutions. Under such inventory repurchase agreements, we have agreed to repurchase products repossessed by the separate third-party financial institutions. As of October 31, 2021 and 2020, we were contingently liable to repurchase up to a maximum amount of $96.8 million and $128.1 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 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 over the past three fiscal years. 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.

We continue to provide financing in the form of open account terms directly to home centers and mass retailers, general line irrigation dealers, certain domestic and international distributors and dealers other than the Canadian distributors and dealers to whom Red Iron or other third-party financing institutions provide financing arrangements, ag-irrigation dealers and distributors, government customers, and rental companies.

End-User Financing

We have agreements with third-party financing companies to provide financing options to end-customers throughout the world. The purpose of these agreements is to provide end-users of our products alternative financing options when purchasing our products. We have no material contingent liabilities for residual value or credit collection risk under these agreements with third-party financing companies.

From time to time, we enter into agreements where we provide recourse to third-party finance companies in the event of default by the customer for financing payments to the third-party finance company. We may recover a portion of any required recourse payments incurred under these agreements from repossession and resale of the equipment collateralizing the receivables. Our maximum exposure for credit collection under those arrangements as of October 31, 2021 and 2020 was $11.4 million and $12.5 million, respectively.

Termination or any material change to the terms of our end-user financing arrangements, availability of credit for our customers, including any delay in securing replacement credit sources, or significant financed product repurchase requirements could have a material adverse impact on our future operating results.

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NON-GAAP FINANCIAL MEASURES

We have provided 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 presented in this Annual Report on Form 10-K 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 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 Performance Measures

The following table provides a reconciliation of financial performance measures calculated and reported in accordance with U.S. GAAP to the most directly comparable non-GAAP financial performance measures for the fiscal years ended October 31, 2021 and 2020 (In thousands, except per share and percentage data):

[[GREPCENT_TABLE]]
[["Fiscal Years Ended","","October 31, 2021","","October 31, 2020"],["Gross profit","","$","1,338,492","","","$","1,189,774"],["Acquisition-related costs2","","\u2014","","","3,950"],["Management actions3","","\u2014","","","857"],["Non-GAAP gross profit","","$","1,338,492","","","$","1,194,581"],["Gross margin","","33.8","%","","35.2","%"],["Acquisition-related costs2","","\u2014","%","","0.2","%"],["Non-GAAP gross margin","","33.8","%","","35.4","%"],["Operating earnings","","$","518,280","","","$","426,357"],["Litigation settlements, net1","","(11,325)","","","\u2014"],["Acquisition-related costs2","","\u2014","","","6,183"],["Management actions3","","\u2014","","","857"],["Non-GAAP operating earnings","","$","506,955","","","$","433,397"],["Earnings before income taxes","","$","499,818","","","$","407,070"],["Litigation settlements, net1","","(11,325)","","","\u2014"],["Acquisition-related costs2","","\u2014","","","6,183"],["Management actions3","","\u2014","","","857"],["Non-GAAP earnings before income taxes","","$","488,493","","","$","414,110"],["Net earnings","","$","409,880","","","$","329,701"],["Litigation settlements, net1","","(9,022)","","","\u2014"],["Acquisition-related costs2","","\u2014","","","5,021"],["Management actions3","","\u2014","","","677"],["Tax impact of stock-based compensation4","","(8,185)","","","(7,652)"],["Non-GAAP net earnings","","$","392,673","","","$","327,747"],["Net earnings per diluted share","","$","3.78","","","$","3.03"],["Litigation settlements, net1","","(0.08)","","","\u2014"],["Acquisition-related costs2","","\u2014","","","0.05"],["Management actions3","","\u2014","","","0.01"],["Tax impact of stock-based compensation4","","(0.08)","","","(0.07)"],["Non-GAAP net earnings per diluted share","","$","3.62","","","$","3.02"],["Effective tax rate","","18.0","%","","19.0","%"],["Tax impact of stock-based compensation4","","1.6","%","","1.9","%"],["Non-GAAP effective tax rate","","19.6","%","","20.9","%"]]
[[/GREPCENT_TABLE]]

1    On November 19, 2020, Exmark Manufacturing Company Incorporated ("Exmark"), a wholly-owned subsidiary of TTC, and Briggs & Stratton Corporation ("BGG") entered into a settlement agreement ("Settlement Agreement") relating to the decade-long patent infringement litigation that Exmark originally filed in May 2010 against Briggs & Stratton Power Products Group, LLC ("BSPPG"), a former wholly-owned subsidiary of BGG (Case No. 8:10CV187, U.S. District Court for the District of Nebraska) (the "Infringement Action"). The Settlement Agreement provided, among other things, that upon approval by the bankruptcy court, and such

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approval becoming final and nonappealable, BGG agreed to pay Exmark $33.65 million ("Settlement Amount"). During January 2021, the first quarter of fiscal 2021, the Settlement Amount was received by Exmark in connection with the settlement of the Infringement Action and at such time, the underlying events and contingencies associated with the gain contingency related to the Infringement Action were satisfied. As such, we recognized in selling, general and administrative expense within the Consolidated Statements of Earnings during the first quarter of fiscal 2021 (i) the gain associated with the Infringement Action and (ii) a corresponding expense related to the contingent fee arrangement with our external legal counsel customary in patent infringement cases equal to approximately 50 percent of the Settlement Amount. Additionally, during the third quarter of fiscal 2021, we recorded a charge related to a legal settlement for a series of ongoing patent infringement disputes within selling, general and administrative expense in the Consolidated Statements of Earnings. Accordingly, litigation settlements, net represent the net amount recorded for the settlement of the Infringement Action and the charge incurred for the settlement of the patent infringement disputes. Refer to the headings titled "Litigation" and "Litigation Settlement" within Note 12, Commitments and Contingencies, of the Notes to Consolidated Financial Statements for additional information regarding the settlement of the Infringement Action.

2    On March 2, 2020, we completed the acquisition of Venture Products and on April 1, 2019, we completed the acquisition of CMW. Acquisition-related costs for the fiscal year ended October 31, 2020 represent transaction costs incurred for our acquisition of Venture Products, as well as integration costs and charges incurred for the take-down of the inventory fair value step-up amounts resulting from purchase accounting adjustments related to the acquisitions of Venture Products and CMW. No acquisition-related costs were incurred for the fiscal year ended October 31, 2021. For additional information regarding these acquisitions, refer to Note 2, Business Combinations and Asset Acquisitions, of the Notes to Consolidated Financial Statements.

3    During the third quarter of fiscal 2019, we announced the Toro underground wind down. Management actions for the fiscal year ended October 31, 2020 represent inventory write-down charges incurred for the Toro underground wind down. No charges were incurred for the Toro underground wind down for the fiscal year ended October 31, 2021. Refer to Note 7, Management Actions, of the Notes to Consolidated Financial Statements for additional information regarding these management actions.

4    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 under The Toro Company Amended and Restated 2010 Equity and Incentive Plan, 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 fiscal years ended October 31, 2021 and 2020.

Reconciliation of Non-GAAP Liquidity Measures

We define non-GAAP free cash flow as net cash provided by operating activities less purchases of property, plant and equipment. Non-GAAP free cash flow conversion percentage represents non-GAAP free cash flow as a percentage of net earnings. We consider non-GAAP free cash flow and non-GAAP free cash flow conversion percentage to be 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 Consolidated Balance Sheets, after reinvesting in necessary capital expenditures required to maintain and grow our business. The following table provides a reconciliation of net cash provided by operating activities, the most directly comparable GAAP financial measure, to non-GAAP free cash flow for the fiscal years ended October 31, 2021 and October 31, 2020 (In thousands, except percentage data):

[[GREPCENT_TABLE]]
[["Fiscal Years Ended","","October 31, 2021","","October 31, 2020"],["Net cash provided by operating activities","","$","555,469","","","$","539,374"],["Less: Purchases of property, plant and equipment","","104,012","","","78,068"],["Non-GAAP free cash flow","","451,457","","","461,306"],["Net earnings","","$","409,880","","","$","329,701"],["Non-GAAP free cash flow percentage","","110.1","%","","139.9","%"]]
[[/GREPCENT_TABLE]]

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

In preparing our Consolidated Financial Statements in conformity with U.S. GAAP, we must make decisions that impact the reported amounts of assets, liabilities, revenues and expenses, and related disclosures. Such decisions include the selection of the appropriate accounting principles to be applied and the assumptions on which to base accounting estimates. In reaching such decisions, we apply judgment based on our understanding and analysis of the relevant circumstances, historical experience, and actuarial and other independent external third-party specialist valuations, when applicable. As a result, actual amounts could differ from those estimated at the time the Consolidated Financial Statements are prepared.

Our significant accounting policies are described in Note 1 of the Notes to Consolidated Financial Statements. Some of those significant accounting policies require us to make difficult, subjective, or complex judgments or estimates. An accounting estimate is considered to be critical if it meets both of the following criteria: (i) the estimate requires assumptions about matters that are highly uncertain and susceptible to change at the time the accounting estimate is made and different estimates reasonably could have been used and (ii) changes in the estimate may have a material impact on the presentation of our Financial Condition or Results of Operations. Our critical accounting policies and estimates include the following:

Sales Promotions and Incentives

We recognize revenues based on the transaction price of the good or service sold to our customers, which is measured as the amount of consideration we expect to receive in exchange for transferring product or rendering services pursuant to the terms of the contract with a customer. The amount of consideration we receive and the revenue we recognize varies

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with changes in the variable consideration associated with the estimated expense of certain of our sales promotions and incentives programs offered to customers that are determined to represent price concessions. The estimated expense of each sales promotion and incentive program is classified and recorded as a reduction from gross sales or as a component of selling, general and administrative expense within the Consolidated Statements of Earnings when revenue is recognized, depending on the nature of the respective program. Generally, the cost of a program is recorded as a reduction from gross sales when revenue is recognized and thus is considered to be variable consideration if the expense is determined to represent a price concession because the program either: (i) results in an immediate reduction of the transaction price with no anticipated future costs or consideration to be provided to the customer or (ii) we anticipate a future cost based on historical or expected future business practice for which we do not receive a distinct good or service in exchange for the future consideration provided to the customer under the program. In other circumstances, the anticipated future cost of a program based on historical or expected future business practice is recorded as selling, general and administrative expense because we receive a distinct good or service in exchange for the future consideration provided to the customer under the program.

Examples of significant sales promotions and incentive programs that are considered to be variable consideration because the cost of the program is classified as a reduction from gross sales are as follows:

•Off-Invoice Discounts: Our off-invoice discounts represent an immediate reduction in the selling price of our products that is realized at the time of sale with no anticipated future cost or consideration provided to the customer.

•Rebate Programs: Our rebate programs are generally based on claims submitted from either our direct customers or end-users of our products or are based on our purchase or retail sales goals for our direct customers of certain quantities or mixes of product during a specified time period, depending upon the program. The amount of the rebate varies based on the specific program and is either a dollar amount or a percentage of the purchase price and can also be based on actual retail price as compared to our selling price. Consideration is typically provided to our customers for our rebate programs after the initial sale of our products to our direct customers and thus, there is generally an anticipated future cost at the time revenue is recognized based on historical and expected future business practice.

•Financing Programs: Our financing programs consist of wholesale floor plan financing with Red Iron and separate third-party financial institutions and end-user retail financing. Costs incurred for wholesale floor plan financing programs represent financing costs associated with programs under which we share the expense of financing distributor and dealer inventories through third-party financing arrangements for a specific period

of time. This charge represents interest for a pre-established length of time based on a predefined rate from the contract between the company and Red Iron or the separate third-party financial institution to finance distributor and dealer inventory purchases. End-user retail financing is similar to floor planning with the difference being that retail financing programs are offered to end-user customers under which we, at our discretion, may pay a portion of interest costs on behalf of end-users for financing purchases of our equipment.

Examples of significant sales promotions and incentive programs that are not considered to be variable consideration because the cost of the program is classified as a component of selling, general, and administrative expense are as follows:

•Commissions Paid to Distributors and Dealers: For certain products, we use a distribution network of distributors and dealers that purchase and take possession of products for sale to the end customer. We also have dealers and distributors that act as sales agents for us on certain products using a direct-selling type model. Under this direct-selling type model, our network of distributors and dealers facilitates a sale directly to the dealer or end-user customer on our behalf. Commissions to distributors and dealers in these instances represent commission payments to sales agents that are also our customers. In addition, TTC dealers are often paid a commission to set up and deliver riding product purchased at certain home centers.

•Cooperative Advertising: Cooperative advertising programs are based on advertising costs incurred by distributors and dealers for promoting our products. We support a portion of those advertising costs in which claims are submitted by the distributor or dealer along with evidence of the advertising material procured/produced and evidence of the cost incurred in the form of third-party invoices or receipts.

Regardless of classification of the cost of the sales promotion and incentive program within the Consolidated Statements of Earnings, we record an accrual within the Consolidated Balance Sheets for the estimated future expense of certain of our sales promotion and incentive programs for which we anticipate a future cost based on historical or expected future business practice by using the expected value method and applying the portfolio approach practical expedient under the accounting standards codification guidance for revenue from contracts with customers. Under such approach, our determination of variable consideration associated with the estimated expense of certain of our sales promotions and incentives programs is primarily based on the terms of the sales arrangements and sales promotion and incentive programs with customers, historical payment and rebate claims experience, field inventory levels, quantity or mix of products purchased, forecasted sales volumes, types of programs offered, and expectations for the acceptance of sales promotion and incentive programs offered in the future or changes in other relevant trends.

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Of our sales promotion and incentive programs that are considered to be variable consideration, our off-invoice discounts and financing programs are less subject to complex judgment or estimates as compared to our rebate programs, which are subject to a more significant level of estimation uncertainty as they require inputs and assumptions that are more susceptible to change or subjectivity. Specifically, our rebate programs are primarily sensitive to fluctuations in historical payment and rebate claims experience as compared to actual realized payment and rebate claims, field inventory levels, and forecasted wholesale and retail sales volumes and the quantity or mix of products.

Adjustments to sales promotions and incentive accruals are made from time to time as actual usage becomes known in order to properly estimate the amounts necessary to generate consumer demand based on market conditions as of the balance sheet date. As of October 31, 2021, we had recorded an accrual for sales promotion and incentive programs of $103.7 million within the Consolidated Balance Sheets. We believe that our accrual for sales promotion and incentive programs is adequate as of October 31, 2021 and historically has been adequate; however, due to the inherent uncertainty in the accrual estimation process, actual results may differ from these estimates if competitive factors dictate the need to enhance, modify, or reduce sales promotion and incentive programs or if customer usage, product mix, and field inventory levels vary from historical trends.

Goodwill and Indefinite-Lived Intangible Assets

Goodwill is initially recognized as a result of the excess of purchase consideration transferred over the estimated fair value of the net assets acquired in a business combination and indefinite-lived intangible assets are initially recognized at their estimated fair values as a result of a business combination or asset acquisition. As of October 31, 2021, our goodwill and indefinite-lived intangible asset balances, which consist of certain trade names, were $421.7 million and $190.6 million, respectively. Goodwill and indefinite-lived intangible assets are not amortized, but are tested at least annually for impairment during the fourth quarter of our fiscal year unless events or changes in circumstances indicate that impairment may have occurred prior to our annual assessment. We test goodwill for impairment at the reporting unit level and test indefinite-lived intangible assets for impairment at the individual indefinite-lived intangible asset or asset group level, as appropriate. A reporting unit is an operating segment or, under certain circumstances, a component of an operating segment that constitutes a business, has available discrete financial information, and whose operating results are regularly reviewed by management. We combine and aggregate components of an operating segment as a single reporting unit if the components have similar economic characteristics. Our 11 reporting units are the same as our 11 operating segments as defined in Note 3, Segment Data, of the Notes to Consolidated Financial Statements. Eight of our reporting units contain goodwill on their respective balance sheets as of October 31, 2021.

Our impairment testing for goodwill is performed separately from our impairment testing of indefinite-lived intangible assets; however, for both types of assets we may elect to first perform a qualitative assessment to determine whether changes in events or circumstances since our most recent quantitative test for impairment indicate that it is more likely than not that the fair value of a reporting unit or the fair value of an indefinite-lived intangible asset, or asset group, is less than its respective carrying amount. For both types of assets, we have an unconditional option to bypass the qualitative assessment for any reporting unit or indefinite-lived intangible asset, or asset group, and proceed directly to performing the respective quantitative analysis. If elected, in conducting the initial qualitative assessment, we analyze our most recent estimates of the fair value of each reporting unit and indefinite-lived intangible asset, or asset group, by assessing actual and projected growth trends for operating results, as well as historical operating results versus planned performance. Additionally, each reporting unit and indefinite-lived intangible asset, or asset group, is assessed for critical areas that may impact its business or brand and operating performance, including macroeconomic conditions, industry and market considerations, cost factors such as commodities and component parts and labor, changes in competition and technology such as new or discontinued products, changes in management or key personnel and business or brand strategy, market-related exposures such as fluctuations in our company's market capitalization and share price, and/or any other potential risks to operating performance, such as regulatory and environmental changes or otherwise, all as applicable. We also assess for changes in the composition or carrying value of a reporting unit's net assets. All assumptions and estimates used in the qualitative assessment require significant judgment. If, after evaluating the weight of the changes in events and circumstances, both positive and negative, we conclude that an impairment of goodwill or an indefinite-lived intangible asset, or asset group, may exist, a quantitative test for impairment is performed. During fiscal 2021, we elected to bypass the qualitative assessment for all of our reporting units and indefinite-lived intangible assets, or asset groups, and proceed directly to performing the respective quantitative analyses.

If performed due to identified impairment indicators under the qualitative assessment or our election to bypass the qualitative assessment and move directly to the quantitative analysis, the quantitative impairment analysis for both goodwill and indefinite-lived intangibles assets is conducted under the income approach. Under the income approach, we calculate the fair value of our reporting units and indefinite-lived intangible assets using the present value of future cash flows. Assumptions utilized in determining fair value under the income approach, such as forecasted operating results, terminal growth rates, and weighted-average cost of capital ("WACC") or discount rates, are consistent with internal projections and operating plans. Materially different assumptions regarding future performance of our businesses and brands, terminal growth rates, and/or WACC or discount

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rate could result in impairment losses and such losses could be material.

During the fourth quarter of fiscal 2021, we performed our annual quantitative goodwill impairment test, which is a one-step process. In performing the quantitative analysis, we compare the carrying value of a reporting unit, including goodwill, to its fair value. The carrying amount of each reporting unit is determined based on the amount of equity required for the reporting unit's activities, considering the specific assets and liabilities of the reporting unit. We do not assign corporate assets and liabilities to reporting units that do not relate to the operations of the reporting unit or are not considered in determining the fair value of the reporting unit.

Our estimate of the fair value of our reporting units under the income approach requires the use of significant judgment regarding the selection of various inputs and assumptions, including projected operating results and growth rates from our forecasting process, applicable tax rates, estimated capital expenditures and depreciation, estimated changes in working capital, terminal growth rates applied to projected operating results in the terminal period, and a WACC rate. These inputs and assumptions, which are independently determined and vary for each reporting unit, are based on historical experience, our projections of future operating results and contemplate current and future business, industry, and economic conditions, as well as relevant observable market inputs and consideration of risk regarding future performance for purposes of determining the WACC and terminal growth rates. The WACC rate selected is commensurate with the risks and uncertainty inherent in the respective reporting unit and in our projected operating results and is calculated based on weighted average returns on debt and equity from guideline public companies. Therefore, changes in the market that are beyond our control and that impact our guideline public companies may have an adverse effect on our future calculations of the estimated fair values of our reporting units. Terminal growth rates are generally determined based on economic and industry growth expectations, while also considering the lifecycle stage of each respective reporting unit. Where available, and as appropriate, comparable EBITDA and revenue multiples are derived from the market prices of stocks of guideline public companies and are used to assist in developing an estimated business enterprise value of our reporting units under the market approach to corroborate our determination of the estimated fair values of our reporting units under the income approach. Identifying appropriate guideline public companies for purposes of computing estimated market multiples and selecting an appropriate WACC rate is subjective. We select guideline public companies that are engaged in the same or similar lines of business and that have reasonably similar qualitative factors as our reporting units, while also considering relevant quantitative factors such as profitability and market capitalization, where applicable. As a final corroboratory step, we reconcile the aggregate estimated fair value of our reporting units resulting from the income approach to our company's market capitalization.

If the fair value of the reporting unit exceeds its carrying value, goodwill of the reporting unit is not impaired. If the carrying value of a reporting unit exceeds its fair value, an impairment charge would be recognized for the amount by which the carrying value of the reporting unit exceeds the its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Based on the quantitative goodwill impairment analysis, which was also performed in prior fiscal years, we determined there was no impairment of goodwill during fiscal 2021 for any of our reporting units as the fair value of each reporting unit substantially exceeded its respective carrying value, including goodwill, in excess of 100 percent. We also performed sensitivity analyses on the key inputs and assumptions used in determining the estimated fair value of our reporting units under the discounted cash flow model under the income approach by utilizing more conservative assumptions that reflect reasonably likely future changes in the terminal growth rate and WACC rate. The WACC rate was increased by 150 basis points with no impairment indicated for any of our reporting units. The terminal growth rate was decreased by 150 basis points with no impairment indicated for any of our reporting units.

Individual indefinite-lived intangible assets, or asset groups, are quantitatively tested for impairment by comparing the carrying amounts of the respective asset, or asset group, to its estimated fair value determined under the income approach. If the fair value of the indefinite-lived intangible asset, or asset group, is less than its carrying value, an impairment loss is recognized in an amount equal to the excess. During the fourth quarter of fiscal 2021, we performed a quantitative impairment analysis for our indefinite-lived intangible assets. Our estimate of the fair value for an indefinite-lived intangible asset, or asset group, is determined under the relief from royalty method under the income approach and uses various inputs and assumptions, including projected revenues from our forecasting process, assumed royalty rates that could be payable if we did not own the intangible asset, terminal growth rates applied to forecasted revenues, and a discount rate. These inputs and assumptions contemplate business, industry, and overall economic conditions, as well as relevant market data for royalty rates of similar intangible assets. Based on our quantitative impairment analysis, which was also performed in prior fiscal years, we conclude that our indefinite-lived intangible assets were not impaired during fiscal 2021 as the estimated fair value of each of our material indefinite-lived intangible assets substantially exceeded its carrying value, in excess of 50.0 percent. We also performed sensitivity analyses on the key inputs and assumptions used in determining the estimated fair value of indefinite-lived intangible assets under the relief from royalty model by utilizing more conservative assumptions that reflect reasonably likely future changes in the royalty rate and discount rate. The discount rate was increased by 75 basis points with no impairment indicated for any of our material indefinite-lived intangible assets. The royalty rate was decreased by 75 basis points with no impairment indicated for any of our material indefinite-lived intangible assets.

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Determining the estimated fair values of our reporting units and indefinite-lived intangible assets, or asset groups, requires considerable judgment and such estimate are sensitive to changes in the underlying inputs and assumptions. As a result, there can be no assurance that the inputs and assumptions made for purposes of our annual impairment assessments will prove to be an accurate prediction of the future. Certain events or circumstances that could reasonably be expected to negatively affect the underlying key inputs and assumptions ultimately affect the estimated fair values of our reporting units and indefinite-lived intangible assets, and may require us to assess for impairment on an interim basis. Such events or circumstances could include a decrease in expected future operating results and the related cash flows; adverse economic, market, and industry conditions, including unfavorable impacts on our guideline public companies used in determining our WACC rate and the business enterprise value of our reporting units under the market approach; prolonged periods of unfavorable weather conditions; changes in regulatory conditions impacting our products and industries; a volatile supply chain environment and/or increased costs of commodities, component parts, and labor; lack of customer acceptance of new or innovative technologies; increased competition; and other factors. While our annual impairment assessment in fiscal 2021 supported the carrying amount of our goodwill and indefinite-lived intangible assets, we may be required to re-evaluate the carrying amount in future periods utilizing different inputs and assumptions that reflect the then current market conditions and expectations regarding our operating performance, which may result in a future impairment that could be material.

Product Warranty Guarantees

Our products are warranted to provide assurance that the product will function as expected and to ensure customer confidence in design, workmanship, and overall quality. Warranty coverage on our products 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. Warranty coverage generally does not cover operator abuse or improper use. In addition to the standard warranties offered on our products, we also sell separately priced extended warranty coverage on select products for a prescribed period after the original warranty period expires.

At the time of sale, we recognize expense and record a warranty accrual by product line for estimated costs in connection with forecasted future warranty claims. Our 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 warranty claims to sales, and the historical length of time between the sale and resulting warranty claim. If applicable, historical claims experience may be adjusted for known product design improvements or for the impact of unusual product quality issues. We periodically assess the adequacy of our warranty

accruals based on changes in our estimates and assumptions and record any necessary adjustments if the cost of actual claim experience differs from our estimate and indicates that adjustments to our warranty accrual are necessary. Factors that could have an impact on actual future claims and our warranty accrual include, but are not limited to, items such as performance of new products; product failure rates; factors impacting product usage, such as weather; changes in sales volumes and shifts in product mix; manufacturing quality and product design issues, including significant manufacturing or design defects not discovered until after the product is delivered to customers; the extent of customers affected by the product failure; higher or lower than expected service and component part costs to satisfactorily address the repair, and upon rare occasion, changes to the warranty coverage periods. Additionally, from time to time, we also establish warranty accruals for our 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.

We believe that our analysis of historical warranty claim trends and knowledge of potential manufacturing and/or product design improvements or issues provide sufficient information to establish a reasonable estimate for the cost of future warranty claims at the time of sale and our warranty accruals as of the date of our Consolidated Balance Sheets. We believe that our $116.8 million warranty accrual as of October 31, 2021 is adequate and historically has been adequate; however, due to the inherent uncertainty in the accrual estimation process, including forecasting future warranty claims, costs associated with servicing future warranty claims, and unexpected major rework campaigns that may arise in the future, our actual warranty costs incurred may differ from our warranty accrual estimate. An unexpected increase in warranty claims and/or in the costs associated with servicing those claims would result in an increase in our warranty accruals and a decrease in our net earnings.

Inventory Valuation

For the majority of our inventories, we value inventories at the lower of the cost of inventory or net realizable value, with cost determined by either the first-in, first-out or average cost method. All remaining inventories are valued at the lower of cost or market, with cost determined under the last-in, first-out method. As needed, we record 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 inventory costing method. The inventory valuation adjustment to net realizable value or market value establishes a new cost basis of the inventory that cannot be subsequently reversed. Such inventory

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valuation adjustments for excess, obsolete, and slow moving inventory are not reduced or removed until the product is sold or disposed of.

In developing inventory valuation adjustments for excess, slow moving, and obsolete inventory, we are required to use judgment and make estimates of future sales demand and production requirements compared with current inventory levels. Our estimate of forecasted sales demand and production requirements is primarily based on actual orders received, historical demand, technological and product life cycle changes, product pricing, economic trends, and competitive factors, such as market and pricing trends for similar products. Although management considers our inventory valuation adjustment for excess, slow-moving, and obsolete inventory to be adequate at $39.7 million as of October 31, 2021, forecasting sales demand and production requirements involves significant management judgment regarding future events. Future events that could significantly influence our judgments and related estimates include general economic conditions within the specific markets in which we operate, changes in demand for our products and customer preference, price fluctuations, and actions of our competitors, including the introduction of new products, technological advances, and pricing changes. Forecasted sales demand and production requirements can also be affected by the significant redesign of our existing products or the replacement of an existing product by an entirely new generation of product. It is possible that an unfavorable adjustment to our inventory valuation adjustment for excess, slow moving, and obsolete inventory may be required in the future if there is a change in any of the aforementioned factors that adversely impacts our estimates of future demand for our products and we do not adjust our purchases or production schedule accordingly.

Business Combinations

When applicable, we account for the acquisition of a business in accordance with the accounting standards codification guidance for business combinations, whereby the total consideration transferred is allocated to the assets acquired and liabilities assumed, including amounts attributable to non-controlling interests, when applicable, based on their respective estimated fair values as of the date of acquisition. Goodwill represents the excess of consideration transferred over the estimated fair value of the net assets acquired in a business combination.

Assigning estimated fair values to the net assets acquired requires the use of significant estimates, judgments, inputs, and assumptions regarding the fair value of intangible assets that are separately identifiable from goodwill, inventory, and property, plant, and equipment. While the ultimate responsibility for determining estimated fair values of the acquired net assets resides with management, for material acquisitions we may retain the services of certified valuation specialists to assist with assigning estimated fair values to certain acquired assets and assumed liabilities, including intangible assets that are separately identifiable from

goodwill, inventory, and property, plant, and equipment. Estimated fair values of acquired intangible assets that are separately identifiable from goodwill, inventory, and property, plant, and equipment are generally based on available historical information, future expectations, available market data, and assumptions determined to be reasonable but are inherently uncertain with respect to future events, including economic conditions, competition, technological obsolescence, the useful life of the acquired assets, and other factors. These significant estimates, judgments, inputs, and assumptions include, when applicable, the selection of an appropriate valuation method depending on the nature of the respective asset, such as the income approach, the market or sales comparison approach, or the cost approach; estimating future cash flows based on projected revenues and/or margins that we expect to generate subsequent to the acquisition; applying an appropriate discount rate to estimate the present value of those projected cash flows we expect to generate; selecting an appropriate terminal growth rate and/or royalty rate or estimating a customer attrition or technological obsolescence factor where necessary and appropriate given the nature of the respective asset; assigning an appropriate contributory asset charge where needed; determining an appropriate useful life and the related depreciation or amortization method for the respective asset; and assessing the accuracy and completeness of other historical financial metrics of the acquiree used as standalone inputs or as the basis for determining estimated projected inputs such as margins, customer attrition, and costs to hold and sell product.

In determining the estimated fair value of intangible assets that are separately identifiable from goodwill, we typically utilize the income approach, which discounts the projected future cash flows using a discount rate that appropriately reflects the risks associated with the projected cash flows. Generally, we estimate the fair value of acquired trade names using the relief from royalty method under the income approach, which is based on the hypothetical royalty stream that would be received if we were to license the acquired trade name. For most other acquired intangible assets, we estimate fair value using the excess earnings method under the income approach, which is typically applied when cash flows are not directly generated by the asset, but rather, by an operating group that includes the particular asset. In certain instances, particularly in relation to developed technology or patents, we may utilize the cost approach depending on the nature of the respective intangible asset and the recency of the development or procurement of such technology. The useful lives and amortization methods for the acquired intangible assets that are separately identifiable from goodwill are generally determined based on the period of expected cash flows used to measure the fair value of the acquired intangible assets and the nature of the use of the respective acquired intangible asset, adjusted as appropriate for entity-specific factors including legal, regulatory, contractual, competitive, economic, and/or other factors such as customer attrition rates and product or order lifecycles that may limit the useful life of the respective acquired intangible

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asset. In determining the estimated fair value of acquired inventory, we typically utilize the cost approach for raw materials and the sales comparison approach for work in process, finished goods, and service parts. In determining the estimated fair value of acquired property, plant, and equipment, we typically utilize the sales comparison approach or the cost approach depending on the nature of the respective asset and the recency of the construction or procurement of such asset.

We may refine the estimated fair values of assets acquired and liabilities assumed, if necessary, over a period not to exceed one year from the date of acquisition by taking into consideration new information that, if known as of the date of acquisition, would have affected the estimated fair values ascribed to the assets acquired and liabilities assumed. The judgments made in determining the estimated fair value assigned to assets acquired and liabilities assumed, as well as the estimated useful life and depreciation or amortization method of each asset, can materially impact the net earnings of the periods subsequent to an acquisition through depreciation and amortization, and in certain instances through impairment charges, if the asset becomes impaired in the future. During the measurement period, any purchase price allocation changes that impact the carrying value of goodwill will affect any measurement of goodwill impairment taken during the measurement period, if applicable. If necessary, purchase price allocation revisions that occur outside of the measurement period are recorded within cost of sales or selling, general and administrative expense within the Consolidated Statements of Earnings depending on the nature of the adjustment.

Recent Accounting Pronouncements

For information regarding recent accounting pronouncements, refer to Note 1, Summary of Significant Accounting Policies and Related Data, in our Notes to Consolidated Financial Statements under the sections entitled "New Accounting Pronouncements Adopted" and "New Accounting Pronouncements Not Yet Adopted."