Toro 2007 Annual Report Download - page 49

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in interest rates consisted mainly of $0.4 million of short-term debt
outstanding. Assuming a hypothetical increase of one percent (100
basis points) in short-term interest rates, with all other variables
remaining constant, including the average balance of short-term
debt outstanding during fiscal 2007, interest expense would have
increased $0.5 million in fiscal 2007. Included in long-term debt is
$229.2 million of fixed-rate debt that is not subject to variable
interest rate fluctuations. As a result, we have no earnings or cash
flow exposure due to market risks on our long-term debt
obligations. As of October 31, 2007, the estimated fair value of
long-term debt with fixed interest rates was $241.6 million
compared to its carrying value of $229.2 million. The fair value is
estimated by discounting the projected cash flows using the rate
that similar amounts of debt could currently be borrowed.
During the second quarter of fiscal 2007, we entered into three
treasury lock agreements based on a 30-year U.S. Treasury
security with a principal balance of $30 million for two of the
agreements and $40 million for the third agreement. These treas-
ury lock agreements provided for a single payment at maturity,
which was April 23, 2007, based on the change in value of the
reference treasury security. These agreements were designated
as cash flow hedges and resulted in a net settlement of $0.2
million. This loss is recorded in accumulated other comprehensive
loss, and will be amortized to interest expense over the 30-year
term of the senior notes.
Commodity Risk. We are subject to market risk from fluctuating
market prices of certain purchased commodity raw materials
including steel, aluminum, fuel, petroleum-based resin, and liner-
board. In addition, we are a purchaser of components and parts
containing various commodities, including steel, aluminum, copper,
lead, rubber, and others which are integrated into our end prod-
ucts. While such materials are typically available from numerous
suppliers, commodity raw materials are subject to price fluctua-
tions. We generally buy these commodities and components
based upon market prices that are established with the vendor as
part of the purchase process. We generally attempt to obtain firm
pricing from most of our suppliers for volumes consistent with
planned production. To the extent that commodity prices increase
and we do not have firm pricing from our suppliers, or our suppliers
are not able to honor such prices, we may experience a decline in
our gross margins to the extent we are not able to increase selling
prices of our products or obtain manufacturing efficiencies to offset
increases in commodity costs. Further information regarding rising
prices for commodities is presented in Part II, Item 7, “Manage-
ment’s Discussion and Analysis of Financial Condition and Results
of Operation” of this report in the section entitled “Inflation.”
We enter into fixed-price contracts for future purchases of natu-
ral gas in the normal course of operations as a means to manage
natural gas price risks. These contracts meet the definition of
“normal purchases or normal sales” and therefore, are not consid-
ered derivative instruments for accounting purposes. Our
manufacturing facilities enter into these fixed-price contracts for
approximately 70 to 85 percent of their monthly anticipated usage.
Equity Price Risk. The trading price volatility of Toro common
stock impacts compensation expense related to our stock-based
compensation plans. Further information is presented in Note 9 of
the notes to our consolidated financial statements regarding our
stock-based compensation plans.