Toro 2011 Annual Report Download - page 42

non-maintenance repairs. Warranty coverage generally does not reserves for excess, slow moving, and obsolete inventory based
cover operator abuse or improper use. At the time of sale, we on inventory levels, expected product life, and forecasted sales
accrue a warranty reserve by product line for estimated costs in demand. Valuation of inventory can also be affected by significant
connection with future warranty claims. We also establish reserves redesign of existing products or replacement of an existing product
for major rework campaigns. The amount of our warranty reserves by an entirely new generation product. In assessing the ultimate
is based primarily on the estimated number of products under war- realization of inventories, we are required to make judgments as to
ranty, historical average costs incurred to service warranty claims, future demand requirements compared with inventory levels.
the trend in the historical ratio of claims to sales, and the historical Reserve requirements are developed according to our projected
length of time between the sale and resulting warranty claim. We demand requirements based on historical demand, competitive fac-
periodically assess the adequacy of our warranty reserves based tors, and technological and product life cycle changes. It is possi-
on changes in these factors and record any necessary adjustments ble that an increase in our reserve may be required in the future if
if actual claim experience indicates that adjustments are neces- there is a significant decline in demand for our products and we do
sary. Actual claims could be higher or lower than amounts esti- not adjust our manufacturing production accordingly.
mated, as the amount and value of warranty claims are subject to We also record a reserve for inventory shrinkage. Our inventory
variation due to such factors as performance of new products, sig- shrinkage reserve represents anticipated physical inventory losses
nificant manufacturing or design defects not discovered until after that are recorded based on historical loss trends, ongoing cycle-
the product is delivered to customers, product failure rates, and count and periodic testing adjustments, and inventory levels. Though
higher or lower than expected service costs for a repair. We management considers reserve balances adequate and proper,
believe that analysis of historical trends and knowledge of potential changes in economic conditions in specific markets in which we
manufacturing or design problems provide sufficient information to operate could have an effect on the reserve balances required.
establish a reasonable estimate for warranty claims at the time of Accounts and Notes Receivable Valuation. We value accounts
sale. However, since we cannot predict with certainty future war- and notes receivable, net of an allowance for doubtful accounts.
ranty claims or costs associated with servicing those claims, our Each fiscal quarter, we prepare an analysis of our ability to collect
actual warranty costs may differ from our estimates. An unex- outstanding receivables that provides a basis for an allowance esti-
pected increase in warranty claims or in the costs associated with mate for doubtful accounts. In doing so, we evaluate the age of
servicing those claims would result in an increase in our warranty our receivables, past collection history, current financial conditions
accrual and a decrease in our net earnings. of key customers, and economic conditions. Based on this evalua-
Sales Promotions and Incentives. At the time of sale to a cus- tion, we establish a reserve for specific accounts and notes receiv-
tomer, we record an estimate for sales promotion and incentive able that we believe are uncollectible, as well as an estimate of
costs that are classified as a reduction from gross sales or as a uncollectible receivables not specifically known. A deterioration in
component of SG&A expense. Examples of sales promotion and the financial condition of any key customer, inability of customers
incentive programs include rebate programs on certain professional to obtain bank credit lines, or a significant slow-down in the econ-
products sold to distributors, volume discounts, retail financing sup- omy could have a material negative impact on our ability to collect
port, floor planning, cooperative advertising, commissions, and a portion or all of the accounts and notes receivable. We believe
other sales discounts and promotional programs. The estimates for that an analysis of historical trends and our current knowledge of
sales promotion and incentive costs are based on the terms of the potential collection problems provide us with sufficient information
arrangements with customers, historical payment experience, field to establish a reasonable estimate for an allowance for doubtful
inventory levels, volume purchases, and expectations for changes accounts. However, since we cannot predict with certainty future
in relevant trends in the future. Actual results may differ from these changes in the financial stability of our customers or in the general
estimates if competitive factors dictate the need to enhance or economy, our actual future losses from uncollectible accounts may
reduce sales promotion and incentive accruals or if customer differ from our estimates. In the event we determined that a
usage and field inventory levels vary from historical trends. Adjust- smaller or larger uncollectible accounts reserve is appropriate, we
ments to sales promotions and incentive accruals are made from would record a credit or charge to SG&A expense in the period
time to time as actual usage becomes known in order to properly that we made such a determination.
estimate the amounts necessary to generate consumer demand
New Accounting Pronouncements to be Adopted
based on market conditions as of the balance sheet date.
In June 2011, the Financial Accounting Standards Board (‘‘FASB’’)
Inventory Valuation. We value our inventories at the lower of issued Accounting Standards Update (‘‘ASU’’) No. 2011-05, Com-
the cost of inventory or net realizable value, with cost determined prehensive Income (Topic 220) – Presentation of Comprehensive
by either the LIFO method for most U.S. inventories or the first-in, Income. ASU No. 2011-05 guidance amended the presentation of
first-out (‘‘FIFO’’) method for all other inventories. We establish comprehensive income to allow an entity the option to present the
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