Toro 2008 Annual Report Download - page 44

business combinations and requires most identifiable assets, liabili- dollar and peso generally has a positive effect. Our primary cur-
ties, noncontrolling interests, and goodwill acquired to be recorded rency exchange rate exposure is with the Euro, the Australian dol-
at ‘‘full fair value.’’ This statement also establishes disclosure lar, the Canadian dollar, the British pound, the Mexican peso, and
requirements that will enable users to evaluate the nature and the Japanese yen against the U.S. dollar.
financial effects of the business combination. We will adopt the We enter into various contracts, principally forward contracts that
provisions of SFAS No. 141R to any business combination occur- change in value as foreign exchange rates change, to protect the
ring on or after November 1, 2009, as required. value of existing foreign currency assets, liabilities, anticipated
In September 2006, the FASB issued SFAS No. 157, ‘‘Fair sales, and probable commitments. Decisions on whether to use
Value Measurements.’’ SFAS No. 157 defines fair value, estab- such contracts are made based on the amount of exposures to the
lishes a framework for measuring fair value, and expands disclo- currency involved and an assessment of the near-term market
sures concerning fair value. We will adopt the provisions of SFAS value for each currency. Worldwide foreign currency exchange rate
No. 157 for financial assets and liabilities and nonfinancial assets exposures are reviewed monthly. The gains and losses on these
and liabilities measured at fair value on a recurring basis during contracts offset changes in the value of the related exposures.
the first quarter of fiscal 2009, as required. We will adopt the provi- Therefore, changes in market values of these hedge instruments
sions of SFAS No. 157 for nonfinancial assets and liabilities that are highly correlated with changes in market values of underlying
are not required or permitted to be measured on a recurring basis hedged items both at inception of the hedge and over the life of
during the first quarter of fiscal 2010, as required. We are currently the hedge contract. During fiscal 2008, 2007, and 2006, the
evaluating the requirements of SFAS No. 157 and, we do not amount of losses treated as a reduction of net sales for contracts
expect this new pronouncement will have a material impact on our to hedge sales were $8.0 million, $2.2 million, and $0.4 million,
consolidated financial condition or results of operations. respectively. The gains treated as a reduction to cost of sales for
No other new accounting pronouncement that has been issued contracts to hedge inventory purchases were $0.7 million for fiscal
but not yet effective for us during fiscal 2008 has had or is 2008, $1.0 million for fiscal 2007, and $0.1 million for fiscal 2006.
expected to have a material impact on our consolidated financial The following foreign currency exchange contracts held by us
statements. have maturity dates in fiscal 2009 and 2010. All items are
non-trading and stated in U.S. dollars. Some derivative instruments
ITEM 7A. QUANTITATIVE AND QUALITATIVE we enter into do not meet the hedging criteria of SFAS No. 133,
‘‘Accounting for Derivative Instruments and Hedging Activities’’
DISCLOSURES ABOUT MARKET RISK
therefore, changes in fair value are recorded in other income, net.
We are exposed to market risk stemming from changes in foreign The average contracted rate, notional amount, pre-tax value of
currency exchange rates, interest rates, and commodity prices. We derivative instruments in accumulated other comprehensive loss
are also exposed to equity market risk pertaining to the trading (AOCL), and fair value impact of derivative instruments in other
price of our common stock. Changes in these factors could cause income, net as of and for the fiscal year ended October 31, 2008
fluctuations in our net earnings and cash flows. See further discus- were as follows:
sions on these market risks below.
Value in Fair Value
Foreign Currency Exchange Rate Risk. In the normal course of Average AOCL Impact
business, we actively manage the exposure of our foreign currency Dollars in thousands Contracted Notional Income (Loss)
market risk by entering into various hedging instruments, autho- (except average contracted rate) Rate Amount (Loss) Gain
rized under company policies that place controls on these activi- Buy U.S. $/Sell Canadian dollar 0.9660 $ 7,244.8 $ 1,139.1 $ (7.2)
ties, with counterparties that are highly rated financial institutions. Buy U.S. $/Sell Australian dollar 0.7733 45,001.5 5,458.5 519.6
Buy U.S. $/Sell Euro 1.4450 96,743.8 10,725.4 (5,947.2)
Our hedging activities involve the primary use of forward currency
Buy U.S. $/Sell British pound 1.6250 4,225.0 – (21.3)
contracts. We use derivative instruments only in an attempt to limit Buy Mexican peso/Sell U.S. $ 11.6702 29,562.5 (3,684.8) 754.2
underlying exposure from currency fluctuations and to minimize
Our net investment in foreign subsidiaries translated into U.S.
earnings and cash flow volatility associated with foreign currency
dollars is not hedged. Any changes in foreign currency exchange
exchange rate changes and not for trading purposes. We are
rates would be reflected as a foreign currency translation adjust-
exposed to foreign currency exchange rate risk arising from trans-
ment, a component of accumulated other comprehensive loss in
actions in the normal course of business, such as sales and loans
stockholders’ equity, and would not impact net earnings.
to wholly owned subsidiaries as well as sales to third party cus-
tomers and purchases from suppliers. Because our products are Interest Rate Risk. Our market risk on interest rates relates pri-
manufactured or sourced primarily from the United States and marily to LIBOR-based short-term debt from commercial banks, as
Mexico, a stronger U.S. dollar and Mexican peso generally has a
negative impact on our results from operations, while a weaker
36