Toro 2012 Annual Report Download - page 43
Download and view the complete annual report
Please find page 43 of the 2012 Toro annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.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 production schedule 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.
higher or lower than expected service costs for a repair. We Though management considers reserve balances adequate and
believe that analysis of historical trends and knowledge of potential proper, changes in economic conditions in specific markets in
manufacturing or design problems provide sufficient information to which we operate could have an effect on the reserve balances
establish a reasonable estimate for warranty claims at the time of required.
sale. However, since we cannot predict with certainty future war- Accounts and Notes Receivable Valuation. We value accounts
ranty claims or costs associated with servicing those claims, our and notes receivable, net of an allowance for doubtful accounts.
actual warranty costs may differ from our estimates. An unex- Each fiscal quarter, we prepare an analysis of our ability to collect
pected increase in warranty claims or in the costs associated with outstanding receivables that provides a basis for an allowance esti-
servicing those claims would result in an increase in our warranty mate for doubtful accounts. In doing so, we evaluate the age of
accrual and a decrease in our net earnings. our receivables, past collection history, current financial conditions
Sales Promotions and Incentives. At the time of sale to a cus- of key customers, and economic conditions. Based on this evalua-
tomer, we record an estimate for sales promotion and incentive tion, we establish a reserve for specific accounts and notes receiv-
costs that are classified as a reduction from gross sales or as a able that we believe are uncollectible, as well as an estimate of
component of SG&A expense. Examples of sales promotion and uncollectible receivables not specifically known. A deterioration in
incentive programs include rebate programs on certain professional the financial condition of any key customer, inability of customers
products sold to distributors, volume discounts, retail financing sup- to obtain bank credit lines, or a significant slow-down in the econ-
port, floor planning, cooperative advertising, commissions, and omy could have a material negative impact on our ability to collect
other sales discounts and promotional programs. The estimates for a portion or all of the accounts and notes receivable. We believe
sales promotion and incentive costs are based on the terms of the that an analysis of historical trends and our current knowledge of
arrangements with customers, historical payment experience, field potential collection problems provide us with sufficient information
inventory levels, volume purchases, and expectations for changes to establish a reasonable estimate for an allowance for doubtful
in relevant trends in the future. Actual results may differ from these accounts. However, since we cannot predict with certainty future
estimates if competitive factors dictate the need to enhance or changes in the financial stability of our customers or in the general
reduce sales promotion and incentive accruals or if customer economy, our actual future losses from uncollectible accounts may
usage and field inventory levels vary from historical trends. Adjust- differ from our estimates. In the event we determined that a
ments to sales promotions and incentive accruals are made from smaller or larger uncollectible accounts reserve is appropriate, we
time to time as actual usage becomes known in order to properly would record a credit or charge to SG&A expense in the period
estimate the amounts necessary to generate consumer demand that we made such a determination.
based on market conditions as of the balance sheet date.
New Accounting Pronouncement to be Adopted
Inventory Valuation. We value our inventories at the lower of In December 2011, the Financial Accounting Standards Board
the cost of inventory or net realizable value, with cost determined (‘‘FASB’’) issued Accounting Standards Update (‘‘ASU’’)
by either the LIFO method for most U.S. inventories or the first-in, No. 2011-11, Disclosures about Offsetting Assets and Liabilities.
first-out (‘‘FIFO’’) method for all other inventories. We establish ASU No. 2011-11 requires entities to disclose gross and net infor-
reserves for excess, slow moving, and obsolete inventory based mation about both instruments and transactions eligible for offset in
on inventory levels, expected product life, and forecasted sales the statement of financial position and those subject to an agree-
demand. Valuation of inventory can also be affected by significant ment similar to a master netting arrangement. This would include
37