Toro 2014 Annual Report Download - page 46

Inflation CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We are subject to the effects of inflation, deflation, and changing In preparing our consolidated financial statements in conformity
prices. During fiscal 2014, we experienced slightly higher average with U.S. generally accepted accounting principles (‘‘GAAP’’), we
commodity prices compared to the average prices paid for com- must make decisions that impact the reported amounts of assets,
modities in fiscal 2013, which hindered our gross margin growth liabilities, revenues and expenses, and related disclosures. Such
rate in fiscal 2014 as compared to fiscal 2013. We intend to con- decisions include the selection of the appropriate accounting princi-
tinue to closely follow prices of commodities and components that ples to be applied and the assumptions on which to base account-
affect our product lines, and we anticipate average prices paid for ing estimates. In reaching such decisions, we apply judgments
some commodities and components to be slightly higher in fiscal based on our understanding and analysis of the relevant circum-
2015 as compared to fiscal 2014. Historically, we have mitigated, stances, historical experience, and actuarial valuations. Actual
and we currently expect to continue to mitigate, commodity price amounts could differ from those estimated at the time the consoli-
increases, in part, by collaborating with suppliers, reviewing alter- dated financial statements are prepared.
native sourcing options, substituting materials, engaging in internal Our significant accounting policies are described in Note 1 of the
cost reduction efforts, and increasing prices on some of our prod- Notes to Consolidated Financial Statements. Some of those signifi-
ucts, all as appropriate. cant accounting policies require us to make difficult subjective or
complex judgments or estimates. An accounting estimate is consid-
Acquisitions ered to be critical if it meets both of the following criteria: (i) the
On November 27, 2013, during the first quarter of fiscal 2014, we estimate requires assumptions about matters that are highly uncer-
completed the acquisition of certain assets of a quality value-priced tain at the time the accounting estimate is made, and (ii) different
line of outdoor lighting fixtures for the landscape lighting market. estimates reasonably could have been used, or changes in the
The purchase price of this acquisition was $1.2 million. estimate that are reasonably likely to occur from period to period
On September 30, 2013, during the fourth quarter of fiscal 2013, may have a material impact on the presentation of our financial
we completed the acquisition of certain assets and assumed cer- condition, changes in financial condition, or results of operations.
tain liabilities for a company in China that manufactures water- Our critical accounting estimates include the following:
efficient drip irrigation products, sprinklers, emitters, and filters for Warranty Reserve. Warranty coverage on our products is gener-
agriculture, landscaping, and green house production. The ally for specified periods of time and on select products’ hours of
purchase price of this acquisition was $3.5 million. usage, and generally covers parts, labor, and other expenses for
On April 25, 2012, during the second quarter of fiscal 2012, we non-maintenance repairs. Warranty coverage generally does not
completed the acquisition of certain assets for an equipment line of cover operator abuse or improper use. At the time of sale, we
concrete and mortar mixers, material handlers, compaction equip- accrue a warranty reserve by product line for estimated costs in
ment, and other concrete power tools for the rental and specialty connection with future warranty claims. We also establish reserves
construction market. On February 10, 2012, also during the second for major rework campaigns. The amount of our warranty reserves
quarter of fiscal 2012, we completed the acquisition of certain is based primarily on the estimated number of products under war-
assets and assumed certain liabilities for an equipment line of ranty, historical average costs incurred to service warranty claims,
vibratory plows, trenchers, and horizontal directional drills for the the trend in the historical ratio of claims to sales, and the historical
specialty construction market. On December 9, 2011, during the length of time between the sale and resulting warranty claim. We
first quarter of fiscal 2012, we completed the acquisition of certain periodically assess the adequacy of our warranty reserves based
assets and assumed certain liabilities for a greens roller product on changes in these factors and record any necessary adjustments
line for the golf course market. The aggregate purchase price of if actual claim experience indicates that adjustments are neces-
these acquisitions was $11.1 million. sary. Actual claims could be higher or lower than amounts esti-
These acquisitions were immaterial based on our consolidated mated, as the number and value of warranty claims can vary due
financial condition and results of operations and all were to such factors as performance of new products, significant manu-
accounted for as business combinations. facturing or design defects not discovered until after the product is
On November 14, 2014, during the first quarter of fiscal 2015, delivered to customers, product failure rates, and higher or lower
we acquired substantially all of the assets (excluding accounts than expected service costs for a repair. We believe that analysis
receivable) of the BOSS professional snow and ice management of historical trends and knowledge of potential manufacturing or
business of privately held Northern Star Industries, Inc., as previ- design problems provide sufficient information to establish a rea-
ously discussed. sonable estimate for warranty claims at the time of sale. However,
since we cannot predict with certainty future warranty claims or
costs associated with servicing those claims, our actual warranty
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