Polaris 2013 Annual Report Download - page 64

Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Inflation, Foreign Exchange Rates, Equity Prices and Interest Rates
The changing relationships of the U.S. dollar to the Japanese yen, the Mexican Peso, the Canadian dollar, the
Australian dollar, the Euro and other foreign currencies have had a material impact from time to time. We
actively manage our exposure to fluctuating foreign currency exchange rates by entering into foreign exchange
hedging contracts.
Japanese Yen: During 2013, purchases totaling approximately four percent of our cost of sales were from yen-
denominated suppliers. Fluctuations in the yen to U.S. dollar exchange rate primarily impacts cost of sales.
Mexican Peso: With increased production at our Monterrey, Mexico facility, our costs in the Mexican peso
have continued to increase. We began hedging the Mexican peso in 2012. Fluctuations in the peso to U.S.
dollar exchange rate primarily impacts cost of sales.
Canadian Dollar: We operate in Canada through a wholly owned subsidiary. The relationship of the U.S.
dollar in relation to the Canadian dollar impacts both sales and net income.
Other currencies: We operate in various countries, principally in Europe and Australia, through wholly owned
subsidiaries and also sell to certain distributors in other countries. We also purchase components from certain
suppliers directly for our U.S. operations in transactions denominated in Euros and other foreign currencies.
The relationship of the U.S. dollar in relation to these other currencies impacts each of sales, cost of sales and
net income.
At December 31, 2013, we had the following open foreign currency hedging contracts for 2014, and expect the
following currency impact on gross profit when compared to the respective prior year periods:
Foreign currency hedging contracts
Currency impact compared to the
Notional amounts Average prior year period
Currency (in thousands of exchange rate of
Foreign Currency Position US Dollars) open contracts 2013 2014
Australian Dollar ........ Long — None Negative Negative
Canadian Dollar (CAD) . . . Long $39,744 $0.96 to 1 CAD Negative Negative
Euro ................. Long — None Neutral Neutral
Japanese Yen ........... Short 17,864 97.28 Yen to $1 Positive Positive
Mexican Peso ........... Short 28,422 13.33 Peso to $1 Slightly positive Neutral
Norwegian Kroner ....... Long 1,885 $0.17 to 1 Krone Slightly negative Slightly negative
Swedish Krona .......... Long 15,623 $0.15 to 1 Krona Positive Slightly negative
Additionally, the assets and liabilities in all our foreign entities are translated at the foreign exchange rate in
effect at the balance sheet date. Translation gains and losses are reflected as a component of accumulated
other comprehensive income, net in the shareholders’ equity section of the accompanying consolidated balance
sheets. Revenues and expenses in all of our foreign entities are translated at the average foreign exchange rate
in effect for each month of the quarter. Certain assets and liabilities related to intercompany positions
reported on our consolidated balance sheet that are denominated in a currency other than the entity’s
functional currency are translated at the foreign exchange rates at the balance sheet date and the associated
gains and losses are included in net income.
We are subject to market risk from fluctuating market prices of certain purchased commodities and raw
materials including steel, aluminum, petroleum-based resins, certain rare earth metals and diesel fuel. In
addition, we are a purchaser of components and parts containing various commodities, including steel,
aluminum, rubber and others, which are integrated into the Company’s end products. While such materials are
typically available from numerous suppliers, commodity raw materials are subject to price fluctuations. We
generally buy these commodities and components based upon market prices that are established with the
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