Toro 2008 Annual Report Download - page 14

for our participating suppliers, distributors, and dealers, the pro- engines, hydraulic components, transmissions, plastic resin, and
gram has resulted in inventory reductions for us and through the electric motors purchased from several suppliers around the world.
distribution system.
Service and Warranty
We periodically shut down production to allow for maintenance,
Our products are warranted to ensure customer confidence in
rearrangement, and capital equipment installation at our manufac-
design, workmanship, and overall quality. Warranty length varies
turing facilities. Capital expenditures for fiscal 2009 are planned to
depending on whether product usage is for ‘‘residential’’ or ‘‘profes-
be approximately $45 to $50 million as we expect to continue to
sional’’ applications within individual product lines. Warranty cover-
invest in tooling for new products and manufacturing equipment.
age ranges from a period of six months to seven years and gener-
Engineering and Research ally covers parts, labor, and other expenses for non-maintenance
We are committed to an ongoing engineering program dedicated to repairs. Warranty coverage generally does not cover operator
developing innovative new products and improvements in the qual- abuse or improper use. An authorized distributor or dealer must
ity and performance of existing products. However, a focus on perform warranty work. Distributors, dealers, and contractors sub-
innovation also carries certain risks that new technology could be mit claims for warranty reimbursement and are credited for the
slow to be accepted or not accepted by the marketplace. We cost of repairs, labor, and other expenses as long as the repairs
attempt to mitigate this risk through our focus on and commitment meet our prescribed standards. Warranty expense is accrued at
to understanding our customers’ needs and requirements. We are the time of sale based on the estimated number of products under
investing more time upfront with customers, using ‘‘Voice of the warranty, historical average costs incurred to service warranty
Customer’’ tools to ensure we develop innovative products that claims, the trend in the historical ratio of claims to sales, the histor-
meet or exceed customer expectations. We are also utilizing ical length of time between the sale and resulting warranty claim,
Design for Manufacturing and Assembly (DFMA) tools and enhanc- and other minor factors. Warranty reserves are also accrued for
ing our New Product Development System to ensure early manu- major rework campaigns and product recalls. Service support
facturing involvement in new product designs to reduce production outside of the warranty period is provided by distributors and deal-
costs. DFMA focuses on reducing the number of parts required to ers at the customer’s expense. We also sell extended warranty
assemble new products as well as designing products to move coverage on select products for a prescribed period after the fac-
more efficiently through the manufacturing process. We are also tory warranty period expires.
making several improvements to our engineering process as part
Product Liability
of our Lean initiatives.
We have rigorous product safety standards and work continually to
Our engineering expenses are primarily incurred in connection
improve the safety and reliability of our products. We monitor acci-
with the development of new products that may have additional
dents and possible claims and establish liability estimates with
applications or represent extensions of existing product lines,
respect to claims based on internal evaluations of the merits of
improvements to existing products, and cost reduction efforts. Our
individual claims. We purchase excess insurance coverage for cat-
expenditures for engineering and research were $63.0 million
astrophic product liability claims for incidents that exceed our
(3.4 percent of net sales) in fiscal 2008, $59.9 million (3.2 percent
self-insured retention levels.
of net sales) in fiscal 2007, and $57.3 million (3.1 percent of net
sales) in fiscal 2006.
Patents
We hold patents in the United States and foreign countries and
Raw Materials
apply for patents as applicable. Although we believe our patents
During fiscal 2008, we experienced a significant increase in com-
are valuable and patent protection is beneficial, our patent protec-
modity costs which hampered our gross margin in fiscal 2008 com-
tion will not necessarily deter or prevent competitors from attempt-
pared to fiscal 2007. We were not able to fully offset the commod-
ing to develop similar products. We are not materially dependent
ity cost increases despite increasing prices on most of our
on any one or more of our patents.
products, continuing efforts at engaging in proactive vendor negoti-
To prevent possible infringement of our patents by others, we
ations, reviewing alternative sourcing options, substituting materi-
periodically review competitors’ products. To help avoid potential
als, and internal cost reduction efforts.
liability with respect to others’ patents, we regularly review certain
Most of the components of our products are affected by com-
patents issued by the United States Patent and Trademark Office
modity pressures and they are commercially available from a num-
(USPTO) and foreign patent offices. We believe these activities
ber of sources. In fiscal 2008, we experienced no significant work
help us minimize our risk of being a defendant in patent infringe-
stoppages as a result of shortages of raw materials or commodi-
ment litigation. We are currently involved in patent litigation cases,
ties. The highest value component costs are generally for steel,
both where we are asserting patents and where we are defending
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