Toro 2011 Annual Report Download - page 66

In March 2010, individuals who claim to have purchased value for each currency. The company’s policy is not to allow the
lawnmowers in Canada filed class action litigation against the com- use of derivatives for trading or speculative purposes. The com-
pany and other defendants that, (i) contains allegations under pany’s primary foreign currency exchange rate exposures are with
applicable Canadian law that are similar to the allegations made by the Euro, the Australian dollar, the Canadian dollar, the British
the United States plaintiffs, (ii) seeks certification of a class of all pound, the Mexican peso, the Japanese yen, and the Chinese
persons in Canada who, beginning January 1, 1994 purchased a Yuan against the U.S. dollar. The company also has exposure with
lawnmower containing a gas combustible engine up to 30 horse- the Romanian New Lei against the Euro and U.S. dollar as a result
power that was manufactured or sold by the company and other of its new manufacturing facility in Romania.
defendants, and (iii) seeks under applicable Canadian law unspeci- Cash Flow Hedges. The company recognizes all derivative
fied compensatory and punitive damages, attorneys’ costs and instruments as either assets or liabilities at fair value on the con-
fees, and equitable relief. solidated balance sheet and formally documents relationships
Management continues to evaluate this Canadian litigation. In between cash flow hedging instruments and hedged items, as well
the event the company is unable to favorably resolve this litigation, as its risk-management objective and strategy for undertaking
management is unable to assess at this time whether this litigation hedge transactions. This process includes linking all derivatives to
would have a material adverse effect on the company’s annual the forecasted transactions, such as sales to third parties and for-
consolidated operating results or financial condition, although an eign plant operations. Derivative instruments that are designated
unfavorable resolution or outcome could be material to the com- and qualify as a cash flow hedge, all changes in fair values of
pany’s consolidated operating results for a particular period. outstanding cash flow hedge derivatives, except the ineffective por-
tion, are recorded in other comprehensive income (‘‘OCI’’), until net
earnings is affected by the variability of cash flows of the hedged
transaction. Gains and losses on the derivative representing either
14 FINANCIAL INSTRUMENTS hedge ineffectiveness or hedge components excluded from the
assessment of effectiveness are recognized in net earnings. The
Concentrations of Credit Risk
consolidated statement of earnings classification of effective hedge
Financial instruments, which potentially subject the company to
results is the same as that of the underlying exposure. Results of
concentrations of credit risk, consist principally of accounts receiva-
hedges of sales and foreign plant operations are recorded in net
ble that are concentrated in the Professional and Residential busi-
sales and cost of sales, respectively, when the underlying hedged
ness segments. The credit risk associated with these segments is
transaction affects net earnings. The maximum amount of time the
limited because of the large number of customers in the com-
company hedges its exposure to the variability in future cash flows
pany’s customer base and their geographic dispersion, except for
for forecasted trade sales and purchases is two years.
the residential segment that has significant sales to The Home
The company formally assesses at a hedge’s inception and on
Depot.
an ongoing basis, whether the derivatives that are used in the
hedging transaction have been highly effective in offsetting
Derivative Instruments and Hedging Activities
changes in the cash flows of the hedged items and whether those
The company is exposed to foreign currency exchange rate risk
derivatives may be expected to remain highly effective in future
arising from transactions in the normal course of business, such as
periods. When it is determined that a derivative is not, or has
sales to third party customers, sales and loans to wholly owned
ceased to be, highly effective as a hedge, the company discontin-
foreign subsidiaries, foreign plant operations, and purchases from
ues hedge accounting prospectively. When the company discontin-
suppliers. The company actively manages the exposure of its for-
ues hedge accounting because it is no longer probable, but it is
eign currency exchange rate market risk by entering into various
still reasonably possible that the forecasted transaction will occur
hedging instruments, authorized under company policies that place
by the end of the originally expected period or within an additional
controls on these activities, with counterparties that are highly
two-month period of time thereafter, the gain or loss on the deriva-
rated financial institutions. The company’s hedging activities
tive remains in accumulated other comprehensive loss (‘‘AOCL’’)
involve the primary use of forward currency contracts and cross
and is reclassified to net earnings when the forecasted transaction
currency swaps to offset intercompany loan exposures. The com-
affects net earnings. However, if it is probable that a forecasted
pany uses derivative instruments only in an attempt to limit under-
transaction will not occur by the end of the originally specified time
lying exposure from foreign currency exchange rate fluctuations
period or within an additional two-month period of time thereafter,
and to minimize earnings and cash flow volatility associated with
the gains and losses that were accumulated in other comprehen-
foreign currency exchange rate changes. Decisions on whether to
sive income are recognized immediately in net earnings. In all situ-
use such contracts are made based on the amount of exposure to
ations in which hedge accounting is discontinued and the deriva-
the currency involved, and an assessment of the near-term market
tive remains outstanding, the company carries the derivative at its
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