Toro 2007 Annual Report Download - page 69

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Derivative Instruments and Hedging Activities
The company uses derivative instruments to manage exposure to
foreign currency exchange rates. Toro uses derivative instruments
only in an attempt to limit underlying exposure from currency rate
fluctuations, and not for trading purposes. The company docu-
ments all relationships between hedging instruments and the
hedged items, as well as its risk-management objectives and
strategy for undertaking various hedge transactions. The company
assesses, both at the hedge’s inception and on an ongoing basis,
whether the derivative instruments that are used in hedging trans-
actions are effective in offsetting changes in cash flows of the
hedged item.
The company enters into foreign currency exchange contracts
to hedge the risk from forecasted settlement in local currencies of
trade sales and purchases. These contracts are designated as
cash flow hedges with the fair value recorded in accumulated other
comprehensive loss and as a hedge asset or liability in prepaid
expenses or accrued liabilities, as applicable. Once the forecasted
transaction has been recognized as a sale or inventory purchase
and a related asset or liability recorded in the balance sheet, the
related fair value of the derivative hedge contract is reclassified
from accumulated other comprehensive loss to sales or cost of
sales. During fiscal 2007, 2006, and 2005, the amount of losses
treated as a reduction of net sales for contracts to hedge sales
were $2,240, $446, and $3,016, respectively. During fiscal 2007,
2006, and 2005, the amount of gains treated as a reduction to cost
of sales for contracts to hedge inventory purchases were $1,002,
$61, and $1,280, respectively. The unrecognized after-tax (loss)
gain portion of the fair value of the contracts recorded in accumu-
lated other comprehensive loss as of October 31, 2007 and 2006
was $(3,763) and $420, respectively.
During the second quarter of fiscal 2007, the company 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
treasury lock agreements provided for a single payment at matur-
ity, 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 $182,
which was recorded in accumulated other comprehensive loss,
and will be amortized to interest expense over the 30-year term of
the senior notes. The unrecognized loss portion of the fair value of
these agreements in accumulated other comprehensive loss as of
October 31, 2007 was $179.
The company also enters into other foreign currency exchange
contracts to hedge intracompany financing transactions and other
activities, which do not meet the hedge accounting criteria of
SFAS No. 133, “Accounting for Derivative Instruments and
Hedging Activities;” therefore, changes in fair value of these
instruments are recorded in other income, net.
Fair Value
Estimated fair value amounts have been determined using avail-
able information and appropriate valuation methodologies.
Because considerable judgment is required in developing the
estimates of fair value, these estimates are not necessarily indica-
tive of the amounts that could be realized in a current market
exchange. For cash and cash equivalents, receivables, short-term
debt, and accounts payable, carrying value is a reasonable esti-
mate of fair value. The estimate of fair value for the company’s
foreign currency contracts was a net liability of $7,178 and $361 as
of October 31, 2007 and 2006, respectively.
As of October 31, 2007, the estimated fair value of long-term
debt with fixed interest rates was $241,607 compared to its carry-
ing value of $229,209. As of October 31, 2006, the estimated fair
value of long-term debt with fixed interest rates was $184,910
compared to its carrying value of $175,000. The fair value is
estimated by discounting the projected cash flows using the rate at
which similar amounts of debt could currently be borrowed.
14
QUARTERLY FINANCIAL DATA
(unaudited)
Summarized quarterly financial data for fiscal 2007 and 2006 are
as follows:
Fiscal year ended
October 31, 2007
Quarter First Second Third Fourth
Net sales $ 379,088 $ 686,653 $ 478,707 $ 332,456
Gross profit 140,065 244,716 177,443 116,151
Net earnings 18,450 74,966 42,486 6,534
Basic net earnings per share1 0.45 1.82 1.05 0.16
Diluted net earnings
per share1 0.44 1.77 1.02 0.16
Fiscal year ended
October 31, 2006
Quarter First Second Third Fourth
Net sales $ 369,640 $ 659,004 $ 477,861 $ 329,486
Gross profit 131,874 230,256 170,336 110,850
Net earnings 14,279 70,082 40,322 4,462
Basic net earnings per share1 0.33 1.62 0.94 0.11
Diluted net earnings per share1 0.32 1.56 0.91 0.10
1 Net earnings per share amounts do not sum to equal full year total due to
changes in the number of shares outstanding during the periods and rounding.
ITEM 9. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.