Toro 2008 Annual Report Download - page 43

factors as performance of new products, significant manufacturing We also record a reserve for inventory shrinkage. Our inventory
or design defects not discovered until after the product is delivered shrinkage reserve represents anticipated physical inventory losses
to customers, product failure rates, and higher or lower than that are recorded based on historical loss trends, ongoing cycle-
expected service costs for a repair. We believe that analysis of count and periodic testing adjustments, and inventory levels.
historical trends and knowledge of potential manufacturing or Though management considers reserve balances adequate and
design problems provide sufficient information to establish a rea- proper, changes in economic conditions in specific markets in
sonable estimate for warranty claims at the time of sale. However, which we operate could have an effect on the reserve balances
since we cannot predict with certainty future warranty claims or required.
costs associated with servicing those claims, our actual warranty Accounts and Notes Receivable Valuation. We value accounts
costs may differ from our estimates. An unexpected increase in and notes receivable, net of an allowance for doubtful accounts.
warranty claims or in the costs associated with servicing those Each fiscal quarter, we prepare an analysis of our ability to collect
claims would result in an increase in our warranty accrual and a outstanding receivables that provides a basis for an allowance esti-
decrease in our net earnings. mate for doubtful accounts. In doing so, we evaluate the age of
Sales Promotions and Incentives. At the time of sale to a cus- our receivables, past collection history, current financial conditions
tomer, we record an estimate for sales promotion and incentive of key customers, and economic conditions. Based on this evalua-
costs which are classified as a reduction from gross sales or as a tion, we establish a reserve for specific accounts and notes receiv-
component of SG&A expense. Examples of sales promotion and able that we believe are uncollectible, as well as an estimate of
incentive programs include rebate programs on certain professional uncollectible receivables not specifically known. Portions of our
products sold to distributors, volume discounts, retail financing sup- accounts receivable are protected by a security interest in products
port, floor planning, cooperative advertising, commissions, and held by customers, which minimizes our collection exposure. A
other sales discounts and promotional programs. The estimates for deterioration in the financial condition of any key customer, inability
sales promotion and incentive costs are based on the terms of the of customers to obtain bank credit lines, or a significant slow-down
arrangements with customers, historical payment experience, field in the economy could have a material negative impact on our abil-
inventory levels, volume purchases, and expectations for changes ity to collect a portion or all of the accounts and notes receivable.
in relevant trends in the future. Actual results may differ from these We believe that an analysis of historical trends and our current
estimates if competitive factors dictate the need to enhance or knowledge of potential collection problems provide us with suffi-
reduce sales promotion and incentive accruals or if customer cient information to establish a reasonable estimate for an allow-
usage and field inventory levels vary from historical trends. Adjust- ance for doubtful accounts. However, since we cannot predict with
ments to sales promotions and incentive accruals are made from certainty future changes in the financial stability of our customers
time to time as actual usage becomes known in order to properly or in the general economy, our actual future losses from uncollecti-
estimate the amounts necessary to generate consumer demand ble accounts may differ from our estimates. In the event we deter-
based on market conditions as of the balance sheet date. mined that a smaller or larger uncollectible accounts reserve is
appropriate, we would record a credit or charge to SG&A expense
Inventory Valuation. We value our inventories at the lower of in the period that we made such a determination.
the cost of inventory or net realizable value, with cost determined
by either the last-in, first-out (LIFO) method for most U.S. invento- New Accounting Pronouncements to be Adopted
ries or the first-in, first-out (FIFO) method for all other inventories. In April 2008, the Financial Accounting Standards Board (FASB)
We establish reserves for excess, slow moving, and obsolete finalized Staff Position No. 142-3, ‘‘Determination of the Useful Life
inventory based on inventory levels, expected product life, and of Intangible Assets’’ (FSP 142-3). This position amends the fac-
forecasted sales demand. Valuation of inventory can also be tors that should be considered in developing renewal or extension
affected by significant redesign of existing products or replacement assumptions used to determine the useful life of a recognized
of an existing product by an entirely new generation product. In intangible asset under Statement of Financial Accounting Stan-
assessing the ultimate realization of inventories, we are required to dards (SFAS) No. 142, ‘‘Goodwill and Other Intangible Assets.’’
make judgments as to future demand requirements compared with FSP 142-3 applies to intangible assets that are acquired individu-
inventory levels. Reserve requirements are developed according to ally or with a group of other assets and both intangible assets
our projected demand requirements based on historical demand, acquired in business combinations and asset acquisitions. We will
competitive factors, and technological and product life cycle adopt the provisions of FSP 142-3 on November 1, 2009, as
changes. It is possible that an increase in our reserve may be required.
required in the future if there is a significant decline in demand for In December 2007, the FASB issued SFAS No. 141 (Revised
our products and we do not adjust our manufacturing production 2007), ‘‘Business Combinations.’’ SFAS No. 141R applies to all
accordingly.
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