Toro 2008 Annual Report Download - page 45

well as the potential increase in fair value of long-term debt result- including steel, aluminum, fuel, petroleum-based resin, and
ing from a potential decrease in interest rates. However, we do not linerboard. In addition, we are a purchaser of components and
have a cash flow or earnings exposure due to market risks on parts containing various commodities, including steel, aluminum,
long-term debt. We generally do not use interest rate swaps to copper, lead, rubber, and others which are integrated into our end
mitigate the impact of fluctuations in interest rates. As of Octo- products. While such materials are typically available from numer-
ber 31, 2008, our financial liabilities with exposure to changes in ous suppliers, commodity raw materials are subject to price fluctu-
interest rates consisted mainly of $2.3 million of short-term debt ations. We generally buy these commodities and components
outstanding. Assuming a hypothetical increase of one percent (100 based upon market prices that are established with the vendor as
basis points) in short-term interest rates, with all other variables part of the purchase process. We generally attempt to obtain firm
remaining constant, including the average balance of short-term pricing from most of our suppliers for volumes consistent with
debt outstanding during fiscal 2008, interest expense would have planned production. To the extent that commodity prices increase
increased $0.6 million in fiscal 2008. Included in long-term debt is and we do not have firm pricing from our suppliers, or our suppli-
$230.8 million of fixed-rate debt that is not subject to variable inter- ers are not able to honor such prices, we may experience a
est rate fluctuations. As a result, we have no earnings or cash flow decline in our gross margins to the extent we are not able to
exposure due to market risks on our long-term debt obligations. As increase selling prices of our products or obtain manufacturing effi-
of October 31, 2008, the estimated fair value of long-term debt ciencies to offset increases in commodity costs. Further information
with fixed interest rates was $194.5 million compared to its carry- regarding rising prices for commodities is presented in Part II,
ing amount of $230.8 million. The fair value is estimated by dis- Item 7, ‘‘Management’s Discussion and Analysis of Financial Con-
counting the projected cash flows using the rate that similar dition and Results of Operation’’ of this report in the section enti-
amounts of debt could currently be borrowed. tled ‘‘Inflation.’’
During the second quarter of fiscal 2007, we entered into three We enter into fixed-price contracts for future purchases of natu-
treasury lock agreements based on a 30-year U.S. Treasury secur- ral gas in the normal course of operations as a means to manage
ity with a principal balance of $30 million for two of the agreements natural gas price risks. These contracts meet the definition of ‘‘nor-
and $40 million for the third agreement. These treasury lock agree- mal purchases or normal sales’’ and therefore, are not considered
ments provided for a single payment at maturity, which was derivative instruments for accounting purposes. Our manufacturing
April 23, 2007, based on the change in value of the reference facilities enter into these fixed-price contracts for approximately 65
treasury security. These agreements were designated as cash flow to 80 percent of their monthly anticipated usage.
hedges and resulted in a net settlement of $0.2 million. This loss Equity Price Risk. The trading price volatility of Toro common
was recorded in accumulated other comprehensive loss, and will stock impacts compensation expense related to our stock-based
be amortized to interest expense over the 30-year term of the compensation plans. Further information is presented in Note 9 of
senior notes. the notes to our consolidated financial statements regarding our
Commodity Risk. We are subject to market risk from fluctuating stock-based compensation plans.
market prices of certain purchased commodity raw materials
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