STOCK-BASED COMPENSATION PLANS

12 Months Ended

Oct. 31, 2012

STOCK-BASED COMPENSATION PLANS

STOCK-BASED COMPENSATION PLANS

10 STOCK-BASED COMPENSATION PLANS

The company maintains The Toro Company 2010 Equity and Incentive Plan, as amended, for officers, other employees, and non-employee members of the company's Board of Directors. The company's incentive plan allows it to grant equity-based compensation awards, including stock options, restricted stock and restricted stock unit awards, and performance share awards.

   The compensation costs related to stock-based awards were as follows:

Fiscal years ended October 31		2012		2011		2010
Stock option awards	$	4,200	$	4,654	$	4,117
Restricted stock awards		1,721		699		68
Performance share awards		3,582		3,180		2,257
Total compensation cost for stock-based awards	$	9,503	$	8,533	$	6,442
Tax benefit realized for tax deductions from stock-based awards	$	13,266	$	4,469	$	4,933

   The number of unissued shares of common stock available for future equity-based grants under the company's equity-based compensation plan was 4,448,174 as of October 31, 2012.

Stock Option Awards.   Under the company's incentive plan, stock options are granted with an exercise price equal to the closing price of the company's common stock on the date of grant, as reported by the New York Stock Exchange. Options are generally granted to officers, other employees, and non-employee members of the company's Board of Directors on an annual basis in the first quarter of the company's fiscal year. Options generally vest one-third each year over a three-year period and have a ten-year term. Other options granted to certain non-officer employees vest in full on the three-year anniversary of the date of grant and have a ten-year term. Compensation expense equal to the grant date fair value is generally recognized for these awards over the vesting period. Stock options granted to officers and other employees are subject to accelerated expensing if the option holder meets the retirement definition set forth in the plan. In that case, the fair value of the options is expensed in the fiscal year of grant because the option holder must be employed as of the end of the fiscal year in which the options are granted in order for the options to continue to vest following retirement. Similarly, if a non-employee director has served on the company's Board of Directors for ten full fiscal years or more, the fair value of the options granted is fully expensed on the date of the grant.

   The table below presents stock option activity for fiscal 2012:

	Stock Option Awards			Weighted Average Exercise Price	Weighted Average Contractual Life(years)		Intrinsic Value
Outstanding as of October 31, 2011	3,763,384		$	20.92	5.6	$	25,117
Granted	493,088			28.14
Exercised	(1,032,742	)		19.21
Cancelled	(23,914	)		26.37
Outstanding as of October 31, 2012	3,199,816		$	22.54	6.0	$	62,982
Exercisable as of October 31, 2012	2,177,910		$	20.38	5.0	$	47,561

   As of October 31, 2012, there was $1,459 of total unrecognized compensation expense related to unvested stock options. That cost is expected to be recognized over a weighted-average period of 1.9 years.

   The following table presents the total market value of stock options exercised and the total intrinsic value of options exercised during the following fiscal years:

Fiscal years ended October 31		2012		2011		2010
Market value of stock options exercised	$	35,901	$	25,592	$	24,588
Intrinsic value of options exercised		16,061		11,434		8,198

   The fair value of each stock option is estimated on the date of grant using the Black-Scholes valuation method with the assumptions noted in the table below. The expected life is a significant assumption as it determines the period for which the risk-free interest rate, volatility, and dividend yield must be applied. The expected life is the average length of time that officers, other employees, and non-employee members of the Board of Directors are expected to exercise their stock options, which is based on historical experience. Separate groups of employees that have similar historical exercise behavior are considered separately for valuation purposes. Expected volatilities are based on the movement of the company's common stock over the most recent historical period equivalent to the expected life of the option. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury rate over the expected life at the time of grant. Dividend yield is estimated over the expected life based on the company's dividend policy, historical cash dividends paid, expected future cash dividends, and expected changes in the company's stock price.

   The following table illustrates the valuation assumptions of stock-based compensation for the following fiscal years:

Fiscal years ended October 31	2012	2011	2010
Expected life of option in years	6	6	6
Expected volatility	34.87% – 35.02%	33.34% – 33.43%	33.00% – 33.10%
Weighted-average volatility	35.01%	33.42%	33.00%
Risk-free interest rate	1.20%	1.72% – 2.36%	2.51% – 2.87%
Expected dividend yield	1.31% – 1.40%	1.04% – 1.16%	1.52% – 1.68%
Weighted-average dividend yield	1.32%	1.05%	1.54%
Weighted-average fair value at date of grant	$8.56	$10.15	$6.16

Restricted Stock Awards.   Under the company's incentive plan, restricted stock awards are generally granted to certain non-officer employees. Restricted stock awards vest one-third each year over a three-year period or vest in full on the three-year anniversary of the date of grant, or longer. Compensation expense equal to the grant date fair value, which is equal to the closing price of the company's common stock on the date of grant multiplied by the number of shares subject to the restricted stock award, is recognized for these awards over the vesting period.

   The company granted restricted stock awards during the following fiscal years as follows:

Fiscal years ended October 31		2012		2011		2010
Weighted-average fair value at date of grant	$	33.61	$	27.17	$	28.25
Fair value of restricted stock awards vested		967		37		–

   The table below summarizes the activity during fiscal 2012 for unvested restricted share awards:

	Restricted Stock			Weighted- Average Fair Value at Date of Grant
Unvested as of October 31, 2011	107,438		$	26.52
Granted	48,524			33.61
Vested	(38,950	)		24.84
Forfeited	(2,098	)		29.81
Unvested as of October 31, 2012	114,914		$	30.02

   As of October 31, 2012, there was $1,742 of total unrecognized compensation expense related to unvested restricted stock awards. That cost is expected to be recognized over a weighted-average period of 2.2 years.

Performance Share Awards.   The company grants performance share awards to executive officers and other employees under which they are entitled to receive shares of the company's common stock contingent on the achievement of performance goals of the company, which are generally measured over a three-year period. The number of shares of common stock a participant receives will be increased (up to 200 percent of target levels) or reduced (down to zero) based on the level of achievement of performance goals and will vest at the end of a three-year period. Performance share awards are granted on an annual basis in the first quarter of the company's fiscal year. Compensation expense is recognized for these awards on a straight-line basis over the vesting period based on the per share fair value as of the date of grant and the probability of achieving performance goals.

   The company granted performance share awards as follows:

Fiscal years ended October 31		2012		2011		2010
Weighted-average fair value at date of grant	$	28.24	$	31.76	$	20.37
Fair value of performance share awards vested		1,828		1,429		798

   The table below summarizes the activity during fiscal 2012 for unvested performance share awards:

	Performance Shares			Weighted- Average Fair Value at Date of Grant
Unvested as of October 31, 2011	637,996		$	20.88
Granted	202,400			28.24
Vested	(64,268	)		14.31
Forfeited	(192,796	)		14.31
Unvested as of October 31, 2012	583,332		$	26.33

   As of October 31, 2012, there was $3,222 of total unrecognized compensation expense related to unvested performance share awards. That cost is expected to be recognized over a weighted-average period of 1.6 years.