Toro 2010 Annual Report Download - page 53

and other excise taxes are not recognized in revenue. Freight rev- Selling, General, and Administrative Expense
enue billed to customers is included in net sales. Selling, general, and administrative expense primarily comprises
Retail customers may obtain financing through third-party financ- payroll and benefit costs, occupancy and operating costs of distri-
ing companies to assist in their purchase of the company’s prod- bution and corporate facilities, warranty expense, depreciation and
ucts. Most of these leases are classified as sales-type leases. amortization expense on non-manufacturing assets, advertising
However, based on the terms and conditions of the financing and marketing expenses, selling expenses, engineering and
agreements, some transactions are classified as operating leases, research costs, information systems costs, incentive and profit
which results in recognition of revenue over the lease term on a sharing expense, and other miscellaneous administrative costs,
straight-line basis. such as legal costs for internal and outside services that are
The company ships some of its products to a key retailer’s sea- expensed as incurred.
sonal distribution centers on a consignment basis. The company
retains title of its products stored at the seasonal distribution cen- Cost of Financing Distributor/Dealer Inventory
ters. As the company’s products are removed from the seasonal The company enters into limited inventory repurchase agreements
distribution centers by the key retailer and shipped to the key with a third party financing company and Red Iron. The company
retailer’s stores, title passes from the company to the key retailer. has repurchased immaterial amounts of inventory under these
At that time, the company invoices the key retailer and recognizes repurchase agreements over the last three fiscal years. However,
revenue for these consignment transactions. The company does an adverse change in retail sales could cause this situation to
not offer a right of return for products shipped to the key retailer’s change and thereby require the company to repurchase a portion
stores from the seasonal distribution centers. The amount of con- of financed product. See Note 13 for additional information regard-
signment inventory as of October 31, 2010 and 2009 was $12,819 ing the company’s repurchase arrangements.
and $11,103, respectively. Included as a reduction to net sales are costs associated with
Revenue earned from service and maintenance contracts is rec- programs under which the company shares the expense of financ-
ognized ratably over the contractual period. Revenue from ing distributor and dealer inventories, referred to as floor plan
extended warranty programs is deferred at the time the contract is expenses. This charge represents interest for a pre-established
sold and amortized into net sales using the straight-line method length of time based on a predefined rate from a contract with third
over the extended warranty period. party financing sources to finance distributor and dealer inventory
purchases. These financing arrangements are used by the com-
Sales Promotions and Incentives pany as a marketing tool to assist customers to buy inventory. The
At the time of sale, the company records an estimate for sales financing costs for distributor and dealer inventories were $14,490,
promotion and incentive costs. Examples of sales promotion and $9,452, and $12,597 for the fiscal years ended October 31, 2010,
incentive programs include rebate programs on certain professional 2009, and 2008, respectively.
products sold to distributors, volume discounts, retail financing sup-
port, cooperative advertising, commissions, and other sales dis- Advertising
counts and promotional programs. The estimates of sales promo- General advertising expenditures and the related production costs
tion and incentive costs are based on the terms of the are expensed in the period incurred or the first time advertising
arrangements with customers, historical payment experience, field takes place. Cooperative advertising represents expenditures for
inventory levels, volume purchases, and expectations for changes shared advertising costs that the company reimburses to custom-
in relevant trends in the future. The expense of each program is ers. These obligations are accrued and expensed when the related
either classified as a reduction from gross sales or as a compo- revenues are recognized in accordance with the programs estab-
nent of selling, general, and administrative expense. lished for various product lines. Advertising costs were $39,281,
$33,496, and $43,137 for the fiscal years ended October 31, 2010,
Cost of Sales 2009, and 2008, respectively.
Cost of sales primarily comprises direct materials and supplies
consumed in the manufacture of product, as well as manufacturing Stock-Based Compensation
labor, depreciation expense, and direct overhead expense neces- The company’s stock-based compensation awards include per-
sary to convert purchased materials and supplies into finished formance shares issued to key employees that are contingent on
product. Cost of sales also includes inbound freight costs, out- the achievement of performance goals of the company, as well as
bound freight costs for shipping products to customers, obsoles- non-qualified stock options and limited restricted stock awards.
cence expense, cost of services provided, and cash discounts on Compensation expense equal to the grant date fair value is recog-
payments to vendors. nized for these awards over the vesting period. See Note 10 for
additional information regarding stock-based compensation plans.
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