Toro 2011 Annual Report Download - page 44

The following foreign currency exchange contracts held by us During the second quarter of fiscal 2007, we entered into three
have maturity dates in fiscal 2012 and 2013. All items are treasury lock agreements based on a 30-year U.S. Treasury secur-
non-trading and stated in U.S. dollars. Some derivative instruments ity with a principal balance of $30 million for two of the agreements
we enter into do not meet cash flow hedge accounting criteria; and $40 million for the third agreement. These treasury lock agree-
therefore, changes in fair value are recorded in other income ments provided for a single payment at maturity, which was
(expense), net. The average contracted rate, notional amount, April 23, 2007, based on the change in value of the reference
pre-tax value of derivative instruments in accumulated other com- treasury security. These agreements were designated as cash flow
prehensive loss (‘‘AOCL’’), and fair value impact of derivative hedges and resulted in a net settlement of $0.2 million. This loss
instruments in other income (expense), net as of and for the fiscal was recorded in accumulated other comprehensive loss, and will
year ended October 31, 2011 were as follows: be amortized to interest expense over the 30-year term of the
senior notes.
Value in Fair Value Commodity Risk. We are subject to market risk from fluctuating
Average AOCL Impact market prices of certain purchased commodity raw materials
Dollars in thousands Contracted Notional Income (Loss)
(except average contracted rate) Rate Amount (Loss) Gain including steel, aluminum, fuel, petroleum-based resin, and
linerboard. In addition, we are a purchaser of components and
Buy U.S. $/Sell Canadian dollar 0.9681 $11,569.4 $ 481.8 $ (509.5)
parts containing various commodities, including steel, aluminum,
Buy U.S. $/Sell Australian dollar 0.9950 68,894.8 (748.0) (6,119.3)
Buy U.S. $/Sell Euro 1.4047 82,244.4 1,733.4 (2,753.6) copper, lead, rubber, and others that are integrated into our end
Buy U.S. $/Sell British pound 1.5964 3,512.1 – (25.4) products. While such materials are typically available from numer-
Buy Mexican peso/Sell U.S. $ 13.0696 29,687.2 (1,414.7) 1,182.7 ous suppliers, commodity raw materials are subject to price fluctu-
Buy British Pound/Sell Euro 0.8709 6,304.6 – 67.7 ations. We generally buy these commodities and components
Buy Swiss Franc/Sell Romanian New Lei 3.5500 1,106.2 – (20.0)
Buy Euro/Sell U.S. $ 1.3859 6,132.8 – (523.1) based upon market prices that are established with the vendor as
Buy Euro/Sell Romanian New Lei 4.3895 19,292.7 – (22.8) part of the purchase process. We generally attempt to obtain firm
pricing from most of our suppliers for volumes consistent with
Our net investment in foreign subsidiaries translated into U.S.
planned production. To the extent that commodity prices increase
dollars is not hedged. Any changes in foreign currency exchange
and we do not have firm pricing from our suppliers, or our suppli-
rates would be reflected as a foreign currency translation adjust-
ers are not able to honor such prices, we may experience a
ment, a component of accumulated other comprehensive loss in
decline in our gross margins to the extent we are not able to
stockholders’ equity, and would not impact net earnings.
increase selling prices of our products or obtain manufacturing effi-
Interest Rate Risk. Our market risk on interest rates relates pri- ciencies to offset increases in commodity costs. Further information
marily to LIBOR-based short-term debt from commercial banks, as regarding rising prices for commodities is presented in Part II,
well as the potential increase in fair value of long-term debt result- Item 7, ‘‘Management’s Discussion and Analysis of Financial Con-
ing from a potential decrease in interest rates. However, we do not dition and Results of Operations’’ of this report in the section enti-
have a cash flow or earnings exposure due to market risks on tled ‘‘Inflation.’’ We enter into fixed-price contracts for future
long-term debt. We generally do not use interest rate swaps to purchases of natural gas in the normal course of operations as a
mitigate the impact of fluctuations in interest rates. Included in means to manage natural gas price risks. Our manufacturing facili-
long-term debt is $227.2 million of fixed-rate debt that is not sub- ties enter into these fixed-price contracts for approximately 40 to
ject to variable interest rate fluctuations. As a result, we have no 80 percent of their monthly-anticipated usage.
earnings or cash flow exposure due to market risks on our
Equity Price Risk. The trading price volatility of our common
long-term debt obligations. As of October 31, 2011, the estimated
stock impacts compensation expense related to our stock-based
fair value of long-term debt with fixed interest rates was
compensation plans. Further information is presented in Note 10 of
$248.7 million compared to its carrying amount of $228.7 million.
the Notes to Consolidated Financial Statements regarding our
The fair value is estimated by discounting the projected cash flows
stock-based compensation plans.
using the rate that similar amounts and terms of debt could cur-
rently be borrowed.
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