The Toro Company

12/17/2025 | Press release | Distributed by Public on 12/17/2025 13:35

Annual Report for Fiscal Year Ending October 31, 2025 (Form 10-K)

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, 2025 and 2024. Discussion of fiscal 2023 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, 2024 and 2023 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, 2024. 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
Throughout this MD&A, we have provided financial and liquidity measures that are not calculated or presented in accordance with U.S. GAAP ("non-GAAP financial measures," "adjusted" before specified financial measures, and "non-GAAP liquidity measures"), as information supplemental and in addition to the most directly comparable financial measures presented in this 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."
COMPANY OVERVIEW
Executive Summary
Our fiscal 2025 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:
•Consolidated net sales for fiscal 2025 were $4,510.4 million, a decrease of 1.6 percent compared to $4,583.8 million in fiscal 2024.
•Professional segment net sales for fiscal 2025 were $3,624.0 million, an increase of 1.9 percent compared to $3,556.9 million in fiscal 2024.
•Residential segment net sales for fiscal 2025 were $858.4 million, a decrease of 14.0 percent compared to $998.3 million in fiscal 2024.
•Gross margin was 33.4 percent in fiscal 2025, a decrease of 40 basis points compared to 33.8 percent in fiscal 2024.
•Adjusted gross margin was 34.1 percent in fiscal 2025, an increase of 20 basis points compared to 33.9 percent in fiscal 2024.
•SG&A expense as a percentage of net sales in fiscal 2025 was 22.5 percent, an increase of 30 basis points compared to 22.2 percent in fiscal 2024.
•Net earnings for fiscal 2025 were $316.1 million, or $3.17 per diluted share, compared to $418.9 million, or $4.01 per diluted share, in fiscal 2024.
•Adjusted net earnings for fiscal 2025 were $419.6 million, or $4.20 per diluted share, compared to $435.2 million, or $4.17 per diluted share, in fiscal 2024.
•Field inventory was lower as of the end of fiscal 2025 compared to the end of fiscal 2024, primarily due to decreased balances of golf and grounds and turf products, partially offset by higher balances of underground construction products.
•Our order backlog represents unfulfilled customer orders at a point in time. Our order backlog (including shipments beyond 12 months) decreased $0.4 billion to $0.8 billion as of October 31, 2025 from $1.2 billion as of October 31, 2024, primarily driven by improved manufacturing output and more normalized order patterns. Although we continue to see sustained demand for underground construction and golf and grounds products, we expect backlog to normalize by mid-fiscal 2026 given our improved manufacturing output and lower lead times.
We continued our history of paying quarterly cash dividends throughout fiscal 2025 and increased our fiscal 2025 quarterly cash dividend by 5.6 percent to $0.38 per share compared to $0.36 per share paid in fiscal 2024. We also repurchased shares of our common stock under our Board authorized stock repurchase program ("stock repurchase program"), thereby reducing our total shares of common stock outstanding. As a result of the combination of quarterly cash dividends and common stock repurchases, we returned $441.1 million of cash to our shareholders during fiscal 2025. As of October 31, 2025, we had a strong liquidity profile with available liquidity of $1,238.9 million, consisting of cash and cash equivalents of $341.0 million and availability under our revolving credit facility of $897.9 million.
Tariffs
The tariff environment is complex and evolving. Our business has incurred, and expects to continue to incur, additional costs as it relates to tariffs. We have taken and will continue to take action to mitigate inflationary pressures caused by tariffs through a combination of targeted price increases, strategic sourcing adjustments, manufacturing and product portfolio optimization, as well as our ongoing efforts to drive sustainable efficiency gains in our operations and administrative structures.
AMP Initiative
In the first quarter of fiscal 2024, we launched a significant productivity initiative named AMP, which is a multi-year initiative now on track to achieve at least $125 million of run-rate savings by fiscal 2027, up from the initial program estimate of at least $100 million. The program is driven by sustainable supply-base, design-to-value, route-to-market, and operational efficiency transformation. We expect to reinvest a portion of the savings from this initiative to drive further innovation and growth. As of the fourth quarter of fiscal 2025, the AMP initiative has delivered cumulative cost savings of $78.5 million and anticipated annualized cost savings of $86.2 million. Refer to the section titled "Non-GAAP Financial Measures" for information about the productivity initiative charges incurred to generate these savings.
Impairment of Spartan Trade Name
During the third quarter of fiscal 2025, we recorded an impairment charge of $81.1 million related to the indefinite-lived Spartan trade name intangible asset reported under the Professional segment. Subsequent to this impairment charge, the indefinite-lived Spartan trade name intangible asset is fully impaired, resulting in a carrying value of zero. This impairment charge is included in the Non-cash impairment charge caption on the Consolidated Statements of Earnings. The impairment charge resulted in a $19.7 million income tax benefit (deferred tax asset) associated with the remaining tax deductible basis of the intangible asset. For additional information regarding the impairment charge, refer to Note 5, Goodwill and Other Intangible Assets,in our Notes to Consolidated Financial Statements included in Part II, Item 8 of this Annual Report on Form 10-K.
Tax
On July 4, 2025, new U.S tax legislation was signed into law (known as the "One Big Beautiful Bill Act" or "OBBB") which makes permanent many of the tax provisions enacted in 2017 as part of the Tax Cuts and Jobs Act that were set to expire at the end of 2025. In addition, the OBBB makes changes to certain U.S. corporate tax provisions, but many are generally not effective until 2026 or later. The Company is currently evaluating the impact of the new legislation but does not expect it to have a material impact on the results of operations.
RESULTS OF OPERATIONS
Net Sales
Consolidated net sales in fiscal 2025 were $4,510.4 million compared to $4,583.8 million in fiscal 2024, a decrease of 1.6 percent. This net sales decrease was primarily driven by lower Residential segment shipments and prior year divestitures, partially offset by net price realization and higher Professional segment shipments.
Net sales in international markets were $878.3 million for fiscal 2025 compared to $923.0 million in fiscal 2024, a decrease of 4.8 percent. The international net sales decrease was primarily driven by lower shipments of both Residential and Professional segment products. Changes in foreign currency exchange rates resulted in a decrease in our net sales of $4.2 million in fiscal 2025.
The following table summarizes our results of operations as a percentage of our consolidated net sales:
Fiscal Years Ended October 31 2025 2024
Net sales 100.0 % 100.0 %
Cost of sales (66.6) (66.2)
Gross margin 33.4 33.8
SG&A expense (22.5) (22.2)
Non-cash impairment charge (1.8) -
Operating earnings 9.1 11.6
Interest expense (1.3) (1.3)
Other income, net 0.6 0.9
Earnings before income taxes 8.4 11.2
Provision for income taxes (1.4) (2.1)
Net earnings 7.0 % 9.1 %
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 2025 was $1,504.8 million, down 2.9 percent compared to gross profit of $1,549.3 million in fiscal 2024. Gross margin was 33.4 percent in fiscal 2025 compared to 33.8 percent in fiscal 2024, a decrease of 40 basis points. This gross margin decrease was primarily due to lower net sales volume, higher material and manufacturing costs, inventory valuation adjustments, and higher productivity initiative charges, partially offset by productivity improvements, net price realization, and product mix.
Selling, General and Administrative ("SG&A") Expense
SG&A expense decreased $2.2 million, or 0.2 percent, in fiscal 2025 compared to fiscal 2024. 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. As a percentage of net sales, SG&A expense was 22.5 percent in fiscal 2025 compared to 22.2 percent in fiscal 2024, an increase of 30 basis points. The increase in SG&A expense as a percentage of net sales was primarily due to lower net sales volume and higher incentive expenses, partially offset by cost savings measures.
Non-Cash Impairment Charge
We recorded a non-cash impairment charge of $81.1 million within our Other activities in fiscal 2025. No impairment charges were recognized in fiscal 2024.
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 2025 decreased $2.8 million compared to fiscal 2024. This decrease was primarily driven by lower average interest rates during fiscal 2025 compared to fiscal 2024.
Other Income, Net
Other income, net for fiscal 2025 was $26.8 million compared to $41.4 million in fiscal 2024, a decrease of $14.6 million in fiscal 2025 as compared to fiscal 2024. This decrease in other income, net was primarily due to prior year net gains on divestitures, current year net losses on divestitures, prior year net favorable legal settlement activity, and lower income from our Red Iron joint venture, partially offset by the favorable impact from derivative instruments.
Provision for Income Taxes
The effective tax rate for fiscal 2025 was 16.3 percent compared to 18.3 percent in fiscal 2024. The decrease in the effective tax rate for fiscal 2025 was primarily due to the impact of the non-cash impairment charge and a more favorable geographic mix of earnings in the current year, partially offset by lower tax benefits recorded as excess tax deductions for stock compensation. The adjusted effective tax rate for fiscal 2025 was 17.8 percent, compared to an adjusted effective tax rate of 18.8 percent in fiscal 2024. The decrease in the adjusted effective tax rate was primarily due to a more favorable geographic mix of earnings.
Net Earnings and Net Earnings Per Diluted Share
Fiscal 2025 net earnings were $316.1 million compared to $418.9 million in fiscal 2024, a decrease of 24.5 percent. Fiscal 2025 diluted net earnings per share were $3.17, a decrease of 20.9 percent from $4.01 per diluted share in fiscal 2024. The decrease in net earnings per diluted share for fiscal 2025 was primarily due to the non-cash impairment charge, higher productivity initiative charges, lower Residential segment earnings, and higher incentive expenses, partially offset by higher Professional segment earnings and lower shares outstanding. Adjusted net earnings for fiscal 2025 were $419.6 million, or $4.20 per diluted share, compared to $435.2 million, or $4.17 per diluted share, in fiscal 2024.
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 (loss) before interest and taxes ("EBIT") for our Professional and Residential reportable segments are defined as earnings from operations plus other income, net. Our remaining activities consisting of a wholly-owned domestic distribution company, Red Iron joint venture, certain corporate activities, impairment charges, 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 technology, public relations, business development, and similar activities, productivity initiative charges, and 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 results of our reportable business segments and Other activities.
Professional Segment
Professional segment net sales represented 80.3 percent and 77.6 percent of consolidated net sales for fiscal 2025 and 2024, respectively. The following table presents our Professional segment's net sales, EBIT, and EBIT margin (dollars in millions):
Fiscal Years Ended October 31 2025 2024
Net sales $ 3,624.0 $ 3,556.9
Percentage change from prior year 1.9 % (3.2) %
EBIT $ 702.5 $ 638.9
EBIT margin 19.4 % 18.0 %
Professional Segment Net Sales
Net sales for our Professional segment in fiscal 2025 increased 1.9 percent compared to fiscal 2024. This increase was primarily driven by higher shipments of golf, grounds, and underground construction products, as well as net price realization, partially offset by prior year divestitures and lower shipments of specialty construction products.
Professional Segment EBIT
Professional segment EBIT increased 10.0 percent in fiscal 2025 compared to fiscal 2024, and Professional segment EBIT margin increased to 19.4 percent from 18.0 percent. The increase in Professional segment EBIT margin for fiscal 2025 was primarily due to net price realization, productivity improvements, cost savings measures, partially offset by higher material and manufacturing costs and inventory valuation adjustments.
Residential Segment
Residential segment net sales represented 19.0 percent and 21.8 percent of consolidated net sales for fiscal 2025 and 2024, respectively. The following table presents our Residential segment's net sales, EBIT, and EBIT margin (dollars in millions):
Fiscal Years Ended October 31 2025 2024
Net sales $ 858.4 $ 998.3
Percentage change from prior year (14.0) % 16.9 %
EBIT $ 35.8 $ 78.4
EBIT margin 4.2 % 7.9 %
Residential Segment Net Sales
Net sales for our Residential segment in fiscal 2025 decreased by 14.0 percent compared to fiscal 2024. This decrease was primarily driven by lower shipments broadly across the segment, as well as the prior year Pope divestiture.
Residential Segment EBIT
Residential segment EBIT decreased 54.3 percent in fiscal 2025 compared to fiscal 2024, and Residential segment EBIT margin decreased to 4.2 percent from 7.9 percent. The decrease in Residential segment EBIT margin for fiscal 2025 was primarily driven by lower net sales volume, higher material and manufacturing costs, and inventory valuation adjustments, partially offset by productivity improvements and cost savings measures.
Other Activities
Net sales for our Other activities consist of sales from a wholly-owned domestic distribution company less intercompany sales from our Professional and Residential business segments to a wholly-owned domestic distribution company. Net sales for our Other activities represented 0.7 percent and 0.6 percent of consolidated net sales for fiscal 2025 and 2024, respectively.
The following table presents net sales and EBIT (Loss) for our Other activities (dollars in millions):
Fiscal Years Ended October 31 2025 2024
Net sales $ 28.0 $ 28.6
Percentage change from prior year (2.1) % 17.2 %
EBIT (Loss)1
$ (301.6) $ (142.6)
1 Presentation of fiscal 2024 EBIT (Loss) has been conformed to the current year presentation.
Other Net Sales
Net sales for our Other activities includes sales from a wholly-owned domestic distribution company net of intersegment sales from the Professional and Residential segments to the distribution company. Net sales for our Other activities in fiscal 2025 decreased $0.6 million compared to fiscal 2024.
Other EBIT (Loss)
The loss before interest and taxes for our Other activities increased $159.0 million in fiscal 2025 compared to fiscal 2024. This year-over-year loss increase was primarily driven by the non-cash impairment charge, higher productivity initiative charges, and higher incentive expenses.
FINANCIAL POSITION
Working Capital
Our ongoing goal is to maintain requisite inventory levels to meet our anticipated production requirements, avoid manufacturing delays, and meet the demand for our products, as well as working to ensure service parts availability for our customers. The following table highlights several key measures of our working capital performance (dollars in millions except average days outstanding and turnover):
Fiscal Years Ended October 31 2025 2024
Average receivables, net $ 455.2 $ 480.0
Average inventories, net 1,115.6 1,156.8
Average accounts payable $ 427.5 $ 449.0
Average days outstanding for receivables 36.8 38.2
Average inventory turnover (times per fiscal year) 2.7 2.6
As of the end of fiscal 2025, our average net working capital was 25.3 percent compared to 25.9 percent as of the end of fiscal 2024. 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 2025 as compared to fiscal 2024:
•Average net receivables decreased by 5.2 percent, primarily driven by timing of shipments and lower net sales volume. Our average days outstanding for receivables decreased to 36.8 days in fiscal 2025 compared to 38.2 days in fiscal 2024.
•Average net inventories decreased by 3.6 percent, primarily due to lower raw materials, work in process, and finished goods balances.
•Average accounts payable decreased by 4.8 percent, primarily due to lower purchases.
Capital Expenditures
We make ongoing capital investments in our property, plant, and equipment and believe that in periods of normalized supply chain conditions our historical capital investments in our manufacturing facilities and other capital assets will increase the production capacity and efficiencies of our operations to better enable us to meet the needs of our customers. Fiscal 2025 capital expenditures of $83.7 million were $19.8 million lower than our fiscal 2024 capital expenditures of $103.5 million.
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 (dollars in millions):
Cash Provided by/(Used in)
Fiscal Years Ended October 31 2025 2024
Operating activities $ 662.0 $ 569.9
Investing activities (77.4) (59.7)
Financing activities (446.1) (505.1)
Effect of exchange rates on cash 3.0 1.3
Net increase in cash and cash equivalents 141.5 6.4
Cash and cash equivalents as of the end of the fiscal period $ 341.0 $ 199.5
Cash Flows from Operating Activities
Our primary source of funds is cash generated from operations. In fiscal 2025, cash provided by operating activities increased $92.1 million from fiscal 2024. This increase was mainly due to net favorable fluctuations in working capital.
Cash Flows from Investing Activities
Acquisitions and capital expenditures are a significant use of our capital resources. These investments are intended to enable sales growth in new, existing, and expanding markets, help us meet product demand, and increase our manufacturing efficiencies and capacity. In fiscal 2025, cash used in investing activities increased $17.7 million from fiscal 2024. This increase was primarily driven by lower proceeds from divestitures, partially offset by lower purchases of property, plant, and equipment in the current year period compared to the prior period.
Cash Flows from Financing Activities
In fiscal 2025, cash used in financing activities decreased $59.0 million from fiscal 2024. This decrease was mainly due to net debt repayments in the prior year, partially offset by higher common stock repurchases.
Liquidity and Capital Resources
As of October 31, 2025, we had available liquidity of $1,238.9 million, consisting of cash and cash equivalents of $341.0 million, of which $141.3 million was held by our foreign subsidiaries, and availability under our revolving credit facility of $897.9 million.
We expect that $45.8 million of cash and cash equivalents held by our foreign subsidiaries will 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, 2025, 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.
We believe our current liquidity position, including the funds available through existing, and potential future, financing arrangements and projected cash flows from operations will be sufficient to provide the necessary capital resources for our anticipated working capital needs, payroll, and other administrative costs, capital expenditures, lease payments, purchase commitments, contractual obligations, acquisitions, investments, establishment of new facilities, expansion and renovation of existing facilities, financing receivables from customers that are not financed with Red Iron or other third-party financial institutions, contingent consideration payments, debt repayments, interest payments, quarterly cash dividend payments, and common stock repurchases, all as applicable, for at least the next twelve months.
Indebtedness
The following is a summary of our indebtedness (dollars in millions):
October 31 2025 2024
Revolving credit facility, due October 2029 $ - $ -
Term loan, due October 2029 200.0 200.0
Term loan, due April 2027 - 200.0
3.81% series A senior notes, due June 2029 100.0 100.0
3.91% series B senior notes, due June 2031 100.0 100.0
3.97% senior notes, due June 2032 100.0 100.0
5.27% senior notes, due September 2032 200.0 -
7.8% debentures, due June 2027 100.0 100.0
6.625% senior notes, due May 2037 124.3 124.2
Less: unamortized debt issuance costs 2.8 2.4
Long-term debt $ 921.5 $ 921.8
Less: current portion of long-term debt - 10.0
Long-term debt, less current portion $ 921.5 $ 911.8
Principal payments required on our outstanding indebtedness, based on the maturity dates defined within our debt arrangements, for each of the succeeding fiscal years is as follows (dollars in millions):
Succeeding fiscal year Principal payments
2026 $ -
2027 100.0
2028 20.0
2029 280.0
2030 -
Thereafter 525.0
Total principal payments $ 925.0
Interest payments required on our outstanding indebtedness, assuming no prepayments of indebtedness, for each of the succeeding fiscal years is as follows (dollars in millions):
Succeeding fiscal year Interest payments
2026 $ 48.3
2027 48.3
2028 45.3
2029 38.5
2030 29.0
Thereafter $ 82.8
Interest on variable rate debt was calculated using the interest rate as of October 31, 2025.
Our revolving credit facility has a borrowing capacity of up to $900.0 million that matures on October 2, 2029. Included in the revolving credit facility is a $10.0 million sublimit for standby letters of credit and a $75.0 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 $450.0 million. As of October 31, 2025 we had no outstanding borrowings under the revolving credit facility and $2.1 million outstanding under the sublimit for standby letters of credit, resulting in $897.9 million of unutilized availability under our revolving credit facility. As of October 31, 2024 we had no outstanding borrowings under the revolving credit facility and $2.7 million outstanding under the sublimit for standby letters of credit, resulting in $897.3 million of unutilized availability under our revolving credit facility. As of October 31, 2025, our debt ratings for long-term unsecured senior, non-credit enhanced debt by Standard and Poor's Ratings Group and by Moody's Investors Service were BBB and Baa1, respectively, and in both cases with a stable outlook.
Our debt agreements contain customary representations and warranties of the company, event of default provisions, as well as certain customary covenants, including, without limitation, financial covenants, such as the maintenance of a maximum leverage ratio; and negative covenants, which among other things, limit cash dividends, disposition of assets, consolidations and mergers, liens, and other matters customarily restricted in such agreements. Most of these restrictions are subject to certain
minimum thresholds, and we were in compliance with all covenants under our outstanding indebtedness as of October 31, 2025. The agreements governing our outstanding indebtedness are described in Note 6, Indebtedness, of the Notes to Consolidated Financial Statements.
Capital Structure
The following table details the components of our capital structure and debt-to-capitalization ratio (dollars in millions, except percentage data):
October 31 2025 2024
Long-term debt $ 921.5 $ 921.8
Stockholders' equity $ 1,453.3 $ 1,551.9
Debt-to-capitalization ratio 38.8 % 37.3 %
Our debt-to-capitalization ratio increased in fiscal 2025 compared to fiscal 2024 primarily due to shareholder buybacks and dividends partially offset by our continued profitability.
Cash Dividends
In each quarter of fiscal 2025, our Board of Directors declared a common stock cash dividend of $0.38 per share, which was a 5.6 percent increase over our common stock cash dividend of $0.36 per share paid each quarter in fiscal 2024. On December 9, 2025, our Board of Directors increased our fiscal 2026 first quarter common stock cash dividend by 2.6 percent to $0.39 per share. 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.
Common Stock Repurchases
Our 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 (dollars in millions, except share and per share data):
Fiscal Years Ended October 31 2025 2024
Shares of Board authorized common stock repurchased 3,780,167 2,777,534
Cost to repurchase common stock $ 290.0 $ 245.5
Average price paid per share $ 76.72 $ 88.39
As of October 31, 2025, 4,391,790 shares of our common stock remained available for repurchase under our stock repurchase program. On December 9, 2025, the company's Board of Directors authorized the repurchase of up to an additional 6,000,000 shares of common stock under the stock repurchase program. This repurchase authorization has no expiration date. We currently expect to continue stock repurchases in fiscal 2026, depending on our cash balance, debt repayments, common stock price and other market conditions, our anticipated working capital needs, and/or other factors.
Customer Financing
Inventory Financing Arrangements
We are party to inventory financing arrangements with Red Iron, HCFC, and other third-party financial institutions (collectively, the "financial institutions") which provide inventory financing to certain dealers and distributors of certain of our products in the U.S. and internationally. These financing arrangements are structured as an advance in the form of a payment by the financial institutions to us on behalf of a distributor or dealer with respect to invoices financed by the financial institution. These payments extinguish the obligation of the dealer or distributor to make payment to us under the terms of the applicable invoice.
Under separate agreements between the financial institutions and the dealers and distributors, the financial institutions provide loans to the dealers and distributors for the advances paid by the financial institutions to 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. The financial institutions retain a security interest in the distributors' and dealers' financed inventories and such inventories are monitored regularly through audits. Financing terms to the distributors and dealers require payment as the inventory, which secures the indebtedness, is sold to end-users or when payment otherwise becomes due under the agreements between the financial institutions and the distributors and dealers, whichever occurs first. Rates are generally indexed to the Secured Overnight Financing Rate ("SOFR"), or an alternative variable rate, plus a fixed percentage that differs based on whether the financing is for a distributor or dealer. Rates may also vary based on the product that is financed.
The net amount of receivables financed for dealers and distributors under the arrangement with Red Iron during fiscal 2025 and 2024 was $2,680.9 million and $2,613.3 million, respectively. The total amount of net receivables outstanding under the arrangement with Red Iron as of October 31, 2025 and 2024 was $807.6 million and $979.6 million, respectively. The total amount of receivables due from Red Iron to us as of October 31, 2025 and 2024 were $21.6 million and $26.0 million, respectively.
The net amount of receivables financed for dealers and distributors under the arrangements with HCFC and the other third-party financial institutions during fiscal 2025 and 2024 was $712.5 million and $612.1 million, respectively. As of October 31, 2025 and 2024, $308.3 million and $272.2 million, respectively, of receivables financed by HCFC and the other third-party financial institutions were outstanding.
Inventory Repurchase Agreements
We have entered into a limited inventory repurchase agreement with Red Iron and HCFC under which we have agreed to repurchase certain repossessed products, up to a maximum aggregate amount of $7.5 million in a calendar year.
We have also entered into inventory repurchase agreements with the other third-party financial institutions under which we have agreed to repurchase certain repossessed products. As of October 31, 2025 and 2024, we were contingently liable to repurchase up to a maximum amount of $29.0 million and $29.5 million of repossessed inventory, respectively.
Our financial exposure under these inventory repurchase agreements is limited to the difference between the amount paid to Red Iron, HCFC or other third-party financing institutions for repurchases of inventory and the amount received upon subsequent resale of the repossessed product. We have repurchased immaterial amounts of inventory pursuant to such arrangements 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.
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, 2025 and 2024 was $4.1 million and $2.9 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.
Open Account Terms
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, ag-irrigation dealers and distributors, government customers, and rental companies.
NON-GAAP FINANCIAL MEASURES
We have provided in this Annual Report on Form 10-K certain non-GAAP financial measures, which are not calculated or presented in accordance with U.S. GAAP, as information supplemental and in addition to the most directly comparable financial measures that are calculated and presented in accordance with U.S. GAAP. We use these non-GAAP financial measures in making operating decisions and assessing liquidity because we believe they provide meaningful supplemental information regarding our core operational performance and cash flows, as a measure of our liquidity, and provide us with a better understanding of how to allocate resources to both ongoing and prospective business initiatives. Additionally, these non-GAAP financial measures facilitate our internal comparisons to both our historical operating results and to our competitors' operating results by factoring out potential differences caused by charges and benefits not related to our regular, ongoing business, including, without limitation, certain non-cash, large, and/or unpredictable charges and benefits; acquisitions and dispositions; legal judgments, settlements, or other matters; and tax positions.
We believe that these non-GAAP financial measures, when considered in conjunction with our Consolidated Financial Statements prepared in accordance with U.S. GAAP, provide investors with useful supplemental financial information to better
understand our core operational performance and cash flows. These non-GAAP financial measures should not be considered superior to, as a substitute for, or as an alternative to, and should be considered in conjunction with, the most directly comparable U.S. GAAP financial measures. The non-GAAP financial measures may differ from similar measures used by other companies.
Reconciliation of Non-GAAP Financial Measures
The following table provides a reconciliation of 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, 2025 and 2024 (dollars in millions, except per share and percentage data):
Fiscal Years Ended October 31, 2025 October 31, 2024
Gross profit $ 1,504.8 $ 1,549.3
Productivity initiative1
31.6 5.7
Adjusted gross profit $ 1,536.4 $ 1,555.0
Gross margin 33.4 % 33.8 %
Productivity initiative1
0.7 % 0.1 %
Adjusted gross margin 34.1 % 33.9 %
Operating earnings $ 409.9 $ 533.3
Productivity initiative1
48.1 27.2
Non-cash impairment charge2
81.1 -
Adjusted operating earnings $ 539.1 $ 560.5
Operating earnings margin 9.1 % 11.6 %
Productivity initiative1
1.1 % 0.6 %
Non-cash impairment charge2
1.8 % - %
Adjusted operating earnings margin 12.0 % 12.2 %
Earnings before income taxes $ 377.6 $ 512.8
Productivity initiative1
51.7 23.1
Non-cash impairment charge2
81.1 -
Adjusted earnings before income taxes $ 510.4 $ 535.9
Income tax provision $ 61.5 $ 93.9
Productivity initiative1
9.3 3.3
Non-cash impairment charge2
19.7 -
Tax impact of stock-based compensation3
0.3 3.5
Adjusted income tax provision $ 90.8 $ 100.7
Net earnings $ 316.1 $ 418.9
Productivity initiative1
42.4 19.8
Non-cash impairment charge2
61.4 -
Tax impact of stock-based compensation3
(0.3) (3.5)
Adjusted net earnings $ 419.6 $ 435.2
Net earnings per diluted share $ 3.17 $ 4.01
Productivity initiative1
0.42 0.19
Non-cash impairment charge2
0.61 -
Tax impact of stock-based compensation3
- (0.03)
Adjusted net earnings per diluted share $ 4.20 $ 4.17
Effective tax rate 16.3 % 18.3 %
Productivity initiative1
- % (0.2) %
Non-cash impairment charge2
1.4 % - %
Tax impact of stock-based compensation3
0.1 % 0.7 %
Adjusted effective tax rate 17.8 % 18.8 %
1 In the first quarter of fiscal 2024, we launched a significant productivity initiative named AMP, as discussed in more detail under the heading "Company Overview-AMP Initiative" in this section. We considered the nature, frequency, and scale of this initiative compared to our prior productivity initiatives when determining that the expenses associated with AMP, unlike our prior productivity initiatives, are not common, normal, recurring operating expenses and are not representative of our ongoing business operations. Productivity initiative charges for the fiscal years ended October 31, 2025 and 2024 primarily
represent facility exit costs, severance and termination benefits, compensation for fully-dedicated AMP personnel, third-party consulting costs, and product-line exit costs.
2 At the end of the third quarter of fiscal 2025, the company recorded a non-cash impairment charge within Other activities related to the Spartan trade name, as discussed in more detail under the heading "Company Overview-Impairment of Spartan Trade Name" in this section.
3 The accounting standards codification guidance governing employee stock-based compensation requires that any excess or deficient tax deduction for stock-based compensation be immediately recorded within income tax expense. Employee stock-based compensation activity, including the exercise of stock options, can be unpredictable and can significantly impact our net earnings, net earnings per diluted share, and effective tax rate. These amounts represent the discrete tax benefits recorded as excess tax deductions for stock-based compensation during the fiscal years ended October 31, 2025 and 2024.
Reconciliation of Non-GAAP Liquidity Measures
We define free cash flow as net cash provided by operating activities less purchases of property, plant, and equipment, net of proceeds from insurance claim. Free cash flow conversion percentage represents free cash flow as a percentage of net earnings, excluding the non-cash impairment charge. We consider free cash flow and free cash flow conversion percentage to be non-GAAP liquidity measures that provide useful information to management and investors about our ability to convert net earnings into cash resources that can be used to pursue opportunities to enhance shareholder value, fund ongoing and prospective business initiatives, and strengthen our Consolidated Balance Sheets, after reinvesting in necessary capital expenditures required to maintain and grow our business.
The following table provides a reconciliation of free cash flow and free cash flow conversion percentage to net cash provided by operating activities, which is the most directly comparable financial measure calculated and reported in accordance with U.S. GAAP for the fiscal years ended October 31, 2025 and October 31, 2024 (dollars in millions, except percentage data):
Fiscal Years Ended October 31, 2025 October 31, 2024
Net cash provided by operating activities $ 662.0 $ 569.9
Less: Purchases of property, plant, and equipment, net of proceeds from insurance claim 83.7 99.2
Free cash flow 578.3 470.7
Net earnings, excluding the non-cash impairment charge of $81.1 million $ 397.2 $ 418.9
Free cash flow conversion percentage 145.6 % 112.4 %
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 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 SG&A 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 SG&A 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 inventory financing arrangements with financial institutions and end-user financing. Costs incurred for inventory financing arrangements represent dealer and distributor financing costs shared by the company for a pre-established length of time based on a predefined rate from the contract between the company and the financial institution to finance dealer and distributor inventory purchases. End-user financing is 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 SG&A 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 mass retailers and 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, projected 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.
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 projected 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, 2025, we had recorded an accrual for sales promotion and incentive programs of $168.6 million within the Consolidated Balance Sheets. We believe that our accrual for sales promotion and incentive programs is adequate as of October 31, 2025 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 or modify sales promotion and incentive programs or if customer usage, product mix, or field inventory levels vary from historical trends.
Impairment
Goodwill
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. As of October 31, 2025, our goodwill balance was $450.9 million. Goodwill is not amortized, but is assessed for impairment at the reporting unit level at least annually during the fourth quarter of each fiscal year unless events or changes in circumstances indicate that impairment may have occurred prior to the annual assessment. Based on a change made to our operating segments during the fourth quarter of fiscal 2025, as discussed in Note 3, Segment Data, of the Notes to Consolidated Financial Statements, we have eight operating segments. The company tested goodwill of the new reporting units for impairment both before and following the change in reporting unit structure, and no impairment was identified. Seven of our reporting units contained goodwill on their respective balance sheets as of October 31, 2025.
During the fourth quarter of fiscal 2025, consistent with prior fiscal years, we performed our annual quantitative goodwill impairment assessment, 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. 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 its fair value, not to exceed the total amount of goodwill allocated to that reporting unit. Based on the fourth quarter annual quantitative goodwill impairment analysis, we determined there was no impairment of goodwill for any of our reporting units as the fair value of each reporting unit exceeded its respective carrying value, including goodwill. Further, the fair value of each reporting unit exceeded its respective carrying value, including goodwill, in excess of 11 percent.
The fair value of each reporting unit under the quantitative goodwill impairment test was determined using a discounted cash flow model under the income approach which requires the use of significant judgment regarding the selection of various inputs and assumptions, including projected operating results and growth rates from the company's projection 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 weighted-average cost of capital ("WACC") rate. Actual future results may differ significantly from the assumptions used in our valuations resulting in future impairment losses and such losses could be material. As such estimates are sensitive to changes in the underlying inputs and assumptions, we performed sensitivity analyses to address this risk. The WACC rate could be increased by 95 basis points with no impairment indicated for any of our reporting units. Additionally, the terminal growth rate could be decreased by 135 basis points with no impairment indicated for any of our reporting units.
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.
While our annual impairment assessment performed in the fourth quarter of fiscal 2025 supported the carrying amount of our goodwill, we may be required to re-evaluate the carrying amounts 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.
Indefinite-Lived Intangible Assets
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, 2025, our indefinite-lived intangible asset balances, which consist of certain trade names,
were $190.6 million. Indefinite-lived intangible assets are not amortized, but are assessed for impairment at least annually during the fourth quarter of each fiscal year unless events or changes in circumstances indicate that impairment may have occurred prior to the annual assessment. We assess indefinite-lived intangible assets for impairment at the individual indefinite-lived intangible asset.
Fiscal 2025 Impairment
During the preparation of the financial statements for the third quarter of fiscal 2025, we concluded that impairment indicators existed for our indefinite-lived Spartan trade name intangible asset. Based on the resulting impairment assessment performed, we recorded an impairment charge of $81.1 million related to the indefinite-lived Spartan trade name intangible asset in the third quarter of fiscal 2025. For additional information regarding the impairment charge, refer to Note 1, Summary of Significant Accounting Policies and Related Data, of the Notes to Consolidated Financial Statements.
Annual Impairment Analysis
During the fourth quarter of fiscal 2025, consistent with prior fiscal years, we performed our annual quantitative impairment assessment for indefinite-lived intangible assets by comparing the carrying amounts of each respective asset to its estimated fair value. If the fair value of the indefinite-lived intangible asset is less than its carrying value, an impairment loss is recognized in an amount equal to the excess. Based on our fourth quarter quantitative impairment analysis, we determined that our indefinite-lived intangible assets were not impaired as the estimated fair value of each of our indefinite-lived intangible assets exceeded its carrying value. Further, the fair value of each of our indefinite-lived intangible assets exceeded its carrying value in excess of 14 percent.
Fair value was determined using the relief-from-royalty method under the income approach which requires the use of significant judgment regarding the selection of various inputs and assumptions, including projected revenues from the company's projection process, assumed royalty rates that could be payable if the company did not own the intangible asset, terminal growth rates applied to projected revenues, applicable tax rates, 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. Actual future results may differ significantly from the assumptions used in our valuations resulting in future impairment losses and such losses could be material. As such estimates are sensitive to changes in the underlying inputs and assumptions, we performed sensitivity analyses to address this risk. The discount rate could be increased by 170 basis points with no impairment indicated for any of our indefinite-lived intangible assets. The royalty rate could be decreased by 35 basis points with no impairment indicated for any of our indefinite-lived intangible assets.
Determining the estimated fair values of our reporting units and indefinite-lived intangible assets requires considerable judgment and such estimates 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 may negatively affect the underlying key inputs and assumptions and ultimately affect the estimated fair values of our reporting units and indefinite-lived intangible assets. 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 continued volatile supply chain environment and/or additional increases in the 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 performed in the fourth quarter of fiscal 2025 supported the carrying amount of our indefinite-lived intangible assets, we may be required to re-evaluate the carrying amounts 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 projected 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 $152.2 million warranty accrual as of October 31, 2025 is adequate and historically has been adequate; however, due to the inherent uncertainty in the accrual estimation process, including projecting 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
Approximately half of our inventories are valued 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. Other 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 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 projected 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 we believe our inventory valuation reserve for excess, slow-moving, and obsolete inventory is adequate at $60.5 million as of October 31, 2025, projecting 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. Projected 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 reserve 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 modify 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 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 about facts and circumstances that existed as of the acquisition date 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 section entitled "New Accounting Pronouncements".
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