
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		2013		2012		2011

Stock option awards	$	4,710	$	4,200	$	4,654
Restricted stock and restricted stock unit awards		1,694		1,721		699
Performance share awards		3,833		3,582		3,180

Total compensation cost for stock-based awards	$	10,237	$	9,503	$	8,533

Tax benefit realized for tax deductions from stock-based awards	$	10,614	$	13,266	$	4,469

The number of unissued shares of common stock available for future equity-based grants under the company's equity-based compensation plan was 3,873,904 as of October 31, 2013. Stock options, restricted stock and restricted stock units, and performance shares are issued from treasury shares.

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 2013:



	Stock Option Awards		Weighted Average Exercise Price	Weighted Average Contractual Life(years)		Intrinsic Value

Outstanding as of October 31, 2012	3,199,816		$22.54	6.0	$	62,982
Granted	381,639		42.14
Exercised	(498,513	)	18.63
Cancelled	(13,164	)	35.91

Outstanding as of October 31, 2013	3,069,778		$25.55	5.9	$	102,493

Exercisable as of October 31, 2013	2,220,781		$21.97	4.9	$	82,099

As of October 31, 2013, there was $1,712 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		2013		2012		2011

Market value of stock options exercised	$	23,160	$	35,901	$	25,592
Intrinsic value of options exercised		13,875		16,061		11,434

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 in which officers, other employees, and non-employee directors are expected to exercise their stock options, which is primarily 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 historical cash dividends paid, expected future cash dividends and dividend yield, 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	2013	2012	2011

Expected life of option in years	6	6	6
Expected volatility	35.18% – 35.19%	34.87% – 35.02%	33.34% – 33.43%
Weighted-average volatility	35.19%	35.01%	33.42%
Risk-free interest rate	0.88%	1.20%	1.72% – 2.36%
Expected dividend yield	1.04% – 1.07%	1.31% – 1.40%	1.04% – 1.16%
Weighted-average dividend yield	1.07%	1.32%	1.05%

Weighted-average fair value at date of grant	$13.03	$8.56	$10.15

Restricted Stock and Restricted Stock Unit Awards. Under the company's incentive plan, restricted stock and restricted stock unit awards are generally granted to certain non-officer employees. Occasionally, restricted stock or restricted stock unit awards may be granted in connection with hiring, mid-year promotions, leadership transition, or retention. In fiscal 2013, the company began granting restricted stock unit awards. Restricted stock and restricted stock unit awards generally vest one-third each year over a three-year period, or vest in full on the three-year anniversary of the date of grant. Such awards may have performance-based rather than time-based vesting requirements. 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 and restricted stock unit awards, is recognized for these awards over the vesting period.

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



Fiscal years ended October 31		2013		2012		2011

Weighted-average fair value at date of grant	$	46.10	$	33.61	$	27.17
Fair value of restricted stock and restricted stock unit awards vested		1,207		967		37

The table below summarizes the activity during fiscal 2013 for unvested restricted stock and restricted stock unit awards:



	Restricted Stock and Units			Weighted- Average Fair Value at Date of Grant

Unvested as of October 31, 2012	114,914		$	30.02
Granted	41,270			46.10
Vested	(42,214	)		28.59
Forfeited	(4,682	)		37.45

Unvested as of October 31, 2013	109,288		$	36.32

As of October 31, 2013, there was $1,894 of total unrecognized compensation expense related to unvested restricted stock and restricted stock unit awards. That cost is expected to be recognized over a weighted-average period of 2.1 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 vest at the end of a three-year period. Performance share awards are generally 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 each performance goal.

The company granted performance share awards as follows:



Fiscal years ended October 31		2013		2012		2011

Weighted-average fair value at date of grant	$	42.06	$	28.24	$	31.76
Fair value of performance share awards vested		9,057		1,828		1,429

The table below summarizes the activity during fiscal 2013 for unvested performance share awards:



	Performance Shares			Weighted- Average Fair Value at Date of Grant

Unvested as of October 31, 2012	583,332		$	26.33
Granted	152,800			42.06
Vested	(215,332	)		20.37
Forfeited	–			–

Unvested as of October 31, 2013	520,800		$	33.41

As of October 31, 2013, there was $3,497 of total unrecognized compensation expense related to unvested performance share awards. That cost is expected to be recognized over a weighted-average period of 1.7 years.