Toro 2009 Annual Report Download - page 67

Management continues to evaluate this lawsuit and is unable to cash flow hedging instruments and hedged items, as well as its
reasonably estimate the likelihood of loss or the amount or range risk-management objective and strategy for undertaking hedge
of potential loss that could result from the litigation. Therefore, no transactions. This process includes linking all derivatives to the
accrual has been established for potential loss in connection with forecasted transactions, such as sales to third parties and foreign
this lawsuit. Management is also unable to assess at this time plant operations. Derivative instruments that are designated and
whether this lawsuit will have a material adverse effect on the qualify as a cash flow hedge, all changes in fair values of out-
company’s annual consolidated operating results or financial condi- standing cash flow hedge derivatives, except the ineffective por-
tion, although an unfavorable resolution or outcome could be mate- tion, are recorded in other comprehensive income (OCI), until net
rial to the company’s consolidated operating results for a particular earnings is affected by the variability of cash flows of the hedged
period. transaction. Gains and losses on the derivative representing either
hedge ineffectiveness or hedge components excluded from the
assessment of effectiveness are recognized in net earnings. The
consolidated statement of earnings classification of effective hedge
14 FINANCIAL INSTRUMENTS results is the same as that of the underlying exposure. Results of
hedges of sales and foreign plant operations are recorded in net
Concentrations of Credit Risk sales and cost of sales, respectively, when the underlying hedged
Financial instruments, which potentially subject the company to transaction affects net earnings. The maximum amount of time the
concentrations of credit risk, consist principally of accounts receiva- company hedges its exposure to the variability in future cash flows
ble that are concentrated in two business segments: professional for forecasted trade sales and purchases is two years.
and residential markets for outdoor landscape equipment and sys- The company formally assesses at a hedge’s inception and on
tems. The credit risk associated with these segments is limited an ongoing basis, whether the derivatives that are used in the
because of the large number of customers in the company’s cus- hedging transaction have been highly effective in offsetting
tomer base and their geographic dispersion, except for the resi- changes in the cash flows of the hedged items and whether those
dential segment that has significant sales to The Home Depot. derivatives may be expected to remain highly effective in future
periods. When it is determined that a derivative is not, or has
Derivative Instruments and Hedging Activities ceased to be, highly effective as a hedge, the company discontin-
The company is exposed to foreign currency exchange rate risk ues hedge accounting prospectively. When the company discontin-
arising from transactions in the normal course of business, such as ues hedge accounting because it is no longer probable, but it is
sales to third party customers, sales and loans to wholly owned still reasonably possible that the forecasted transaction will occur
foreign subsidiaries, foreign plant operations, and purchases from by the end of the originally expected period or within an additional
suppliers. The company actively manages the exposure of its for- two-month period of time thereafter, the gain or loss on the deriva-
eign currency exchange rate market risk by entering into various tive remains in accumulated other comprehensive loss (AOCL) and
hedging instruments, authorized under company policies that place is reclassified to net earnings when the forecasted transaction
controls on these activities, with counterparties that are highly affects net earnings. However, if it is probable that a forecasted
rated financial institutions. The company’s hedging activities transaction will not occur by the end of the originally specified time
involve the primary use of forward currency contracts. The com- period or within an additional two-month period of time thereafter,
pany uses derivative instruments only in an attempt to limit under- the gains and losses that were accumulated in other comprehen-
lying exposure from foreign currency exchange rate fluctuations sive income are recognized immediately in net earnings. In all situ-
and to minimize earnings and cash flow volatility associated with ations in which hedge accounting is discontinued and the deriva-
foreign currency exchange rate changes. Decisions on whether to tive remains outstanding, the company carries the derivative at its
use such contracts are made based on the amount of exposure to fair value on the balance sheet, recognizing future changes in the
the currency involved, and an assessment of the near-term market fair value in other (expense) income, net. For the fiscal years
value for each currency. The company’s policy is not to allow the ended October, 31 2009 and 2008, there were no gains or losses
use of derivatives for trading or speculative purposes. The com- on contracts reclassified into earnings as a result of the discontinu-
pany’s primary foreign currency exchange rate exposures are with ance of cash flow hedges. As of October 31, 2009, the notional
the Euro, the Australian dollar, the Canadian dollar, the British amount outstanding of forward contracts designated as cash flow
pound, the Mexican peso, and the Japanese yen against the U.S. hedges was $79,601.
dollar.
Derivatives not designated as hedging instruments. The com-
Cash flow hedges. The company recognizes all derivative instru- pany also enters into forward currency contracts to mitigate the
ments as either assets or liabilities at fair value on the consoli-
dated balance sheet and formally documents relationships between
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