Toro 2009 Annual Report Download - page 44

contracts to hedge sales were $8.0 million and $2.2 million, amount of $228.8 million. The fair value is estimated by discount-
respectively. During fiscal 2009, the losses treated as an increase ing the projected cash flows using the rate that similar amounts
to costs of sales for contracts to hedge inventory purchases were and terms of debt could currently be borrowed.
$4.2 million. During fiscal 2008 and 2007, the gains treated as a During the second quarter of fiscal 2007, we entered into three
reduction to cost of sales for contracts to hedge inventory treasury lock agreements based on a 30-year U.S. Treasury secur-
purchases were $0.7 million and $1.0 million, respectively. ity with a principal balance of $30 million for two of the agreements
The following foreign currency exchange contracts held by us and $40 million for the third agreement. These treasury lock agree-
have maturity dates in fiscal 2010 and 2011. All items are ments provided for a single payment at maturity, which was
non-trading and stated in U.S. dollars. Some derivative instruments April 23, 2007, based on the change in value of the reference
we enter into do not meet the cash flow hedging criteria; therefore, treasury security. These agreements were designated as cash flow
changes in fair value are recorded in other (expense) income, net. hedges and resulted in a net settlement of $0.2 million. This loss
The average contracted rate, notional amount, pre-tax value of was recorded in accumulated other comprehensive loss, and will
derivative instruments in accumulated other comprehensive loss be amortized to interest expense over the 30-year term of the
(AOCL), and fair value impact of derivative instruments in other senior notes.
(expense) income, net as of and for the fiscal year ended Octo- Commodity Risk. We are subject to market risk from fluctuating
ber 31, 2009 were as follows: market prices of certain purchased commodity raw materials
including steel, aluminum, fuel, petroleum-based resin, and
Value in Fair Value linerboard. In addition, we are a purchaser of components and
Average AOCL Impact parts containing various commodities, including steel, aluminum,
Dollars in thousands Contracted Notional Income (Loss) copper, lead, rubber, and others which are integrated into our end
(except average contracted rate) Rate Amount (Loss) Gain products. While such materials are typically available from numer-
Buy U.S. $/Sell Canadian dollar 0.9203 $ 8,927.0 $ (72.2) $ 701.3 ous suppliers, commodity raw materials are subject to price fluctu-
Buy U.S. $/Sell Australian dollar 0.8274 56,446.0 (2,309.9) 1,633.5 ations. We generally buy these commodities and components
Buy U.S. $/Sell Euro 1.4227 71,286.8 (2,024.0) 7,462.4 based upon market prices that are established with the vendor as
Buy U.S. $/Sell British pound 1.6406 3,609.2 — 5.8 part of the purchase process. We generally attempt to obtain firm
Buy Australian dollar/Sell U.S. $ 0.9275 10,104.3 — (323.6)
Buy Mexican peso/Sell U.S. $ 13.2257 14,063.6 (238.6) (4,193.1) pricing from most of our suppliers for volumes consistent with
planned production. To the extent that commodity prices increase
Our net investment in foreign subsidiaries translated into U.S. and we do not have firm pricing from our suppliers, or our suppli-
dollars is not hedged. Any changes in foreign currency exchange ers are not able to honor such prices, we may experience a
rates would be reflected as a foreign currency translation adjust- decline in our gross margins to the extent we are not able to
ment, a component of accumulated other comprehensive loss in increase selling prices of our products or obtain manufacturing effi-
stockholders’ equity, and would not impact net earnings. ciencies to offset increases in commodity costs. Further information
Interest Rate Risk. Our market risk on interest rates relates pri- regarding rising prices for commodities is presented in Part II,
marily to LIBOR-based short-term debt from commercial banks, as Item 7, ‘‘Management’s Discussion and Analysis of Financial Con-
well as the potential increase in fair value of long-term debt result- dition and Results of Operations’’ of this report in the section enti-
ing from a potential decrease in interest rates. However, we do not tled ‘‘Inflation.’’
have a cash flow or earnings exposure due to market risks on We enter into fixed-price contracts for future purchases of natu-
long-term debt. We generally do not use interest rate swaps to ral gas in the normal course of operations as a means to manage
mitigate the impact of fluctuations in interest rates. Assuming a natural gas price risks. These contracts meet the definition of ‘‘nor-
hypothetical increase of one percent (100 basis points) in mal purchases or normal sales’’ and therefore, are not considered
short-term interest rates, with all other variables remaining con- derivative instruments for accounting purposes. Our manufacturing
stant, including the average balance of short-term debt outstanding facilities enter into these fixed-price contracts for approximately 65
during fiscal 2009, interest expense would have increased to 80 percent of their monthly anticipated usage.
$0.1 million in fiscal 2009. Included in long-term debt is $228.8 mil- Equity Price Risk. The trading price volatility of Toro common
lion of fixed-rate debt that is not subject to variable interest rate stock impacts compensation expense related to our stock-based
fluctuations. As a result, we have no earnings or cash flow expo- compensation plans. Further information is presented in Note 10 of
sure due to market risks on our long-term debt obligations. As of the notes to our consolidated financial statements regarding our
October 31, 2009, the estimated fair value of long-term debt with stock-based compensation plans.
fixed interest rates was $232.9 million compared to its carrying
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