Toro 2007 Annual Report Download - page 48

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with SFAS No. 109, “Accounting for Income Taxes.” It prescribes a
recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken
on a tax return. We adopted the provisions of this interpretation as
of November 1, 2007, as required, and the adoption of this Inter-
pretation will not have a material impact to our fiscal 2008
consolidated financial condition or results of operations.
No other new accounting pronouncement that has been issued
but not yet effective for us during fiscal 2007 is expected to have a
material impact on our consolidated financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk stemming from changes in foreign
currency exchange rates, interest rates, and commodity prices. We
are also exposed to equity market risk pertaining to the trading
price of our common stock. Changes in these factors could cause
fluctuations in our net earnings and cash flows. See further discus-
sions on these market risks below.
Foreign Currency Exchange Rate Risk. In the normal course of
business, we actively manage the exposure of our foreign currency
market risk by entering into various hedging instruments, author-
ized under company policies that place controls on these activities,
with counterparties that are highly rated financial institutions. Our
hedging activities involve the primary use of forward currency
contracts. We use derivative instruments only in an attempt to limit
underlying exposure from currency fluctuations and to minimize
earnings and cash flow volatility associated with foreign currency
exchange rate changes, and not for trading purposes. We are
exposed to foreign currency exchange rate risk arising from trans-
actions in the normal course of business, such as sales and loans
to wholly owned subsidiaries as well as sales to third party cus-
tomers and purchases from suppliers. Because our products are
manufactured or sourced primarily from the United States, a
stronger U.S. dollar generally has a negative impact on our results
from operations outside the United States, while a weaker dollar
generally has a positive effect. Our primary currency exchange
rate exposure is with the Euro, the Australian dollar, the Canadian
dollar, the British pound, the Mexican peso, and the Japanese yen
against the U.S. dollar.
We enter into various contracts, principally forward contracts
that change in value as foreign exchange rates change, to protect
the value of existing foreign currency assets, liabilities, anticipated
sales, and probable commitments. Decisions on whether to use
such contracts are made based on the amount of exposures to the
currency involved, and an assessment of the near-term market
value for each currency. Worldwide foreign currency exchange
rate exposures are reviewed monthly. The gains and losses on
these contracts offset changes in the value of the related expo-
sures. Therefore, changes in market values of these hedge
instruments are highly correlated with changes in market values of
underlying hedged items both at inception of the hedge and over
the life of the hedge contract. During fiscal 2007, 2006, and 2005,
the amount of losses treated as a reduction of net sales for con-
tracts to hedge sales were $2.2 million, $0.4 million, and $3.0
million, respectively. The gains treated as a reduction to cost of
sales for contracts to hedge inventory purchases were $1.0 million
for fiscal 2007, $0.1 million for fiscal 2006, and $1.3 million for
fiscal 2005.
The following foreign currency exchange contracts held by us
have maturity dates in fiscal 2008. All items are non-trading and
stated in U.S. dollars. Some derivative instruments we enter into
do not meet the hedging criteria of SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities;” therefore, changes
in fair value are recorded in other income, net. The average con-
tracted rate, notional amount, pre-tax value of derivative
instruments in accumulated other comprehensive loss (AOCL),
and fair value impact of derivative instruments in other income, net
as of and for the fiscal year ended October 31, 2007 were as
follows:
Value in Fair Value
Average AOCL Impact
Dollars in thousands Contracted Notional Income (Loss)
(except average contracted rate) Rate Amount (Loss) Gain
Buy U.S. $/Sell Canadian dollar 0.9899 $ 7,919.0 $ (551.0) $ 43.5
Buy U.S. $/Sell Australian
dollar 0.8722 57,973.3 (2,222.2) (2,667.2)
Buy U.S. $/Sell Euro 1.3961 94,516.7 (3,438.5) (1,344.7)
Buy U.S. $/Sell British pound 2.0598 3,707.6 – (31.1)
Buy Australian dollar/Sell
U.S. $ 0.9311 74.5 – –
Buy Euro/Sell Australian dollar 0.6163 79.1 – (3.4)
Buy British pound/Sell U.S. $ 2.0898 104.5 – (0.6)
Buy Japanese yen/Sell U.S. $ 114.6200 87.2 – (0.6)
Buy Mexican peso/Sell U.S. $ 11.0828 9,654.6 239.1 1,008.3
Our net investment in foreign subsidiaries translated into U.S.
dollars is not hedged. Any changes in foreign currency exchange
rates would be reflected as a foreign currency translation adjust-
ment, a component of accumulated other comprehensive loss in
stockholders’ equity, and would not impact net earnings.
Interest Rate Risk. Our market risk on interest rates relates
primarily to LIBOR-based short-term debt from commercial banks
as well as the potential increase in fair value of long-term debt
resulting from a potential decrease in interest rates. However, we
do not have a cash flow or earnings exposure due to market risks
on long-term debt. We generally do not use interest rate swaps to
mitigate the impact of fluctuations in interest rates. As of
October 31, 2007, our financial liabilities with exposure to changes