Toro 2014 Annual Report Download - page 49

the life of the hedge contract. Further information regarding gains During the second quarter of fiscal 2007, we entered into three
and losses on our derivative instruments is presented in Note 14 of treasury lock agreements based on a 30-year U.S. Treasury secur-
the Notes to Consolidated Financial Statements. 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 2015 and 2016. 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 cash flow hedge accounting criteria; treasury security. These agreements were designated as cash flow
therefore, changes in fair value are recorded in other 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.
income, net as of and for the fiscal year ended October 31, 2014 Commodity Risk. We are subject to market risk from fluctuating
were as follows: market prices of certain purchased commodity raw materials
including steel, aluminum, petroleum and natural gas-based resins,
Value in Fair Value and 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 Gain
(except average contracted rate) Rate Amount (Loss) (Loss) copper, lead, rubber, and others that are integrated into our end
products. While such materials are typically available from numer-
Buy U.S. $/Sell Australian dollar 0.8959 $45,869.6 $ 717.0 $ 666.0
ous suppliers, commodity raw materials are subject to price fluctu-
Buy U.S. $/Sell Canadian dollar 1.0823 8,722.4 405.5 196.1
Buy U.S. $/Sell Euro 1.3153 95,690.9 3,917.1 (768.0) ations. We generally buy these commodities and components
Buy U.S. $/Sell British pound 1.5987 9,272.3 247.4 6.8 based upon market prices that are established with the vendor as
Buy Euro/ Sell U.S. $ 1.2523 6,787.3 – 831.4 part of the purchase process. We generally attempt to obtain firm
Buy Mexican peso/ Sell U.S. $ 13.4633 15,375.2 (641.3) 543.5 pricing from most of our suppliers for volumes consistent with
Buy Euro/Sell Romanian New Leu 4.4105 10,643.2 (542.8) (536.3)
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
regarding rising prices for commodities is presented in Part II,
Interest Rate Risk. Our market risk on interest rates relates pri- Item 7, ‘‘Management’s Discussion and Analysis of Financial Con-
marily to LIBOR-based short-term debt and a term loan from com- dition and Results of Operations’’ of this report in the section enti-
mercial banks, as well as the potential increase in fair value of our tled ‘‘Inflation.’’ We enter into fixed-price contracts for future
fixed-rate long-term debt resulting from a potential decrease in purchases of natural gas in the normal course of operations as a
interest rates. We generally do not use interest rate swaps to miti- means to manage natural gas price risks. In fiscal 2014, our manu-
gate the impact of fluctuations in interest rates. Included in facturing facilities entered into these fixed-price contracts for
long-term debt is $224.0 million of fixed-rate debt that is not sub- approximately 40 percent of their monthly-anticipated usage.
ject to variable interest rate fluctuations and $130.0 million LIBOR-
based term loan, which is subject to market risk based on changes Equity Price Risk. The trading price volatility of our common
in LIBOR rates. We have no earnings or cash flow exposure due stock impacts compensation expense related to our stock-based
to market risks on our fixed-rate long-term debt obligations. As of compensation plans. Further information is presented in Note 10 of
October 31, 2014, the estimated fair value of long-term debt with the Notes to Consolidated Financial Statements regarding our
fixed interest rates was $261.0 million compared to its carrying stock-based compensation plans.
amount of $224.0 million. Market risk for fixed-rate, long-term debt
is estimated as the potential increase in fair value, resulting from a
hypothetical 10 percent decrease in interest rates, and amounts to
approximately $15.8 million. The fair value is estimated by dis-
counting the projected cash flows using the rate that similar
amounts and terms of debt could currently be borrowed.
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