Toro 2010 Annual Report Download - page 42

changes in fair value are recorded in other income (expense), net.
ITEM 7A. QUANTITATIVE AND QUALITATIVE
The average contracted rate, notional amount, pre-tax value of
DISCLOSURES ABOUT MARKET RISK
derivative instruments in accumulated other comprehensive loss
(‘‘AOCL’’), and fair value impact of derivative instruments in other
We are exposed to market risk stemming from changes in foreign
income (expense), net as of and for the fiscal year ended Octo-
currency exchange rates, interest rates, and commodity prices. We
ber 31, 2010 were as follows:
are also exposed to equity market risk pertaining to the trading
price of our common stock. Changes in these factors could cause
Value in Fair Value
fluctuations in our net earnings and cash flows. See further discus-
Average AOCL Impact
sions on these market risks below. Dollars in thousands Contracted Notional Income (Loss)
(except average contracted rate) Rate Amount (Loss) Gain
Foreign Currency Exchange Rate Risk. In the normal course of
business, we actively manage the exposure of our foreign currency Buy U.S. $/Sell Canadian dollar 0.9535 $ 8,772.0 $ (145.0) $ (293.0)
Buy U.S. $/Sell Australian dollar 0.9387 65,537.8 (1,893.7) (5,157.0)
exchange rate market risk by entering into various hedging instru-
Buy U.S. $/Sell Euro 1.3387 76,643.0 (2,844.3) 1,563.1
ments, authorized under company policies that place controls on Buy U.S. $/Sell British pound 1.5761 2,836.9 – (46.9)
these activities, with counterparties that are highly rated financial Buy Mexican peso/Sell U.S. $ 13.0919 20,088.8 703.9 240.4
institutions. Our hedging activities involve the primary use of for- Buy Romanian New Lei/Sell Euro 4.263 2,516.6 – (8.6)
ward currency contracts. We use derivative instruments only in an Our net investment in foreign subsidiaries translated into U.S.
attempt to limit underlying exposure from currency fluctuations and dollars is not hedged. Any changes in foreign currency exchange
to minimize earnings and cash flow volatility associated with for- rates would be reflected as a foreign currency translation adjust-
eign currency exchange rate changes and not for trading pur- ment, a component of accumulated other comprehensive loss in
poses. We are exposed to foreign currency exchange rate risk stockholders’ equity, and would not impact net earnings.
arising from transactions in the normal course of business, such as
Interest Rate Risk. Our market risk on interest rates relates pri-
sales and loans to wholly owned foreign subsidiaries, foreign plant
marily to LIBOR-based short-term debt from commercial banks, as
operations, and purchases from suppliers. Because our products
well as the potential increase in fair value of long-term debt result-
are manufactured or sourced primarily from the United States and
ing from a potential decrease in interest rates. However, we do not
Mexico, a stronger U.S. dollar and Mexican peso generally has a
have a cash flow or earnings exposure due to market risks on
negative impact on our results from operations, while a weaker
long-term debt. We generally do not use interest rate swaps to
dollar and peso generally has a positive effect. Our primary cur-
mitigate the impact of fluctuations in interest rates. Assuming a
rency exchange rate exposures are with the Euro, the Australian
hypothetical increase of one percent (100 basis points) in
dollar, the Canadian dollar, the British pound, the Mexican peso,
short-term interest rates, with all other variables remaining con-
and the Japanese yen against the U.S. dollar.
stant, including the average balance of short-term debt outstanding
We enter into various contracts, principally forward contracts that
during fiscal 2010, interest expense would have increased
change in value as foreign currency exchange rates change, to
$12 thousand in fiscal 2010. Included in long-term debt is
protect the value of existing foreign currency assets, liabilities,
$225.5 million of fixed-rate debt that is not subject to variable inter-
anticipated sales, and probable commitments. Decisions on
est rate fluctuations. As a result, we have no earnings or cash flow
whether to use such contracts are made based on the amount of
exposure due to market risks on our long-term debt obligations. As
exposures to the currency involved and an assessment of the
of October 31, 2010, the estimated fair value of long-term debt
near-term market value for each currency. Worldwide foreign cur-
with fixed interest rates was $227.4 million compared to its carry-
rency exchange rate exposures are reviewed monthly. The gains
ing amount of $225.5 million. The fair value is estimated by dis-
and losses on these contracts offset changes in market values of
counting the projected cash flows using the rate that similar
the related exposures. Therefore, changes in market values of
amounts and terms of debt could currently be borrowed.
these hedge instruments are highly correlated with changes in
During the second quarter of fiscal 2007, we entered into three
market values of underlying hedged items both at inception of the
treasury lock agreements based on a 30-year U.S. Treasury secur-
hedge and over the life of the hedge contract. Further information
ity with a principal balance of $30 million for two of the agreements
regarding gains and losses on our derivative instruments is
and $40 million for the third agreement. These treasury lock agree-
presented in Note 14 of the notes to our consolidated financial
ments provided for a single payment at maturity, which was
statements.
April 23, 2007, based on the change in value of the reference
The following foreign currency exchange contracts held by us
treasury security. These agreements were designated as cash flow
have maturity dates in fiscal 2011 and 2012. All items are
hedges and resulted in a net settlement of $0.2 million. This loss
non-trading and stated in U.S. dollars. Some derivative instruments
was recorded in accumulated other comprehensive loss, and will
we enter into do not meet the cash flow hedging criteria; therefore,
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