Toro 2013 Annual Report Download - page 46

Interest Rate Risk. Our market risk on interest rates relates pri- including steel, aluminum, petroleum-based resin, and linerboard.
marily to LIBOR-based short-term debt from commercial banks, as In addition, we are a purchaser of components and parts contain-
well as the potential increase in fair value of long-term debt result- ing various commodities, including steel, aluminum, copper, lead,
ing from a potential decrease in interest rates. We generally do not rubber, and others that are integrated into our end products. While
use interest rate swaps to mitigate the impact of fluctuations in such materials are typically available from numerous suppliers,
interest rates. Included in long-term debt is $223.5 million of commodity raw materials are subject to price fluctuations. We gen-
fixed-rate debt that is not subject to variable interest rate fluctua- erally buy these commodities and components based upon market
tions. As a result, we have no earnings or cash flow exposure due prices that are established with the vendor as part of the purchase
to market risks on our long-term debt obligations. As of Octo- process. We generally attempt to obtain firm pricing from most of
ber 31, 2013, the estimated fair value of long-term debt with fixed our suppliers for volumes consistent with planned production. To
interest rates was $243.1 million compared to its carrying amount the extent that commodity prices increase and we do not have firm
of $223.5 million. Market risk for fixed-rate, long-term debt is esti- pricing from our suppliers, or our suppliers are not able to honor
mated as the potential increase in fair value, resulting from a hypo- such prices, we may experience a decline in our gross margins to
thetical 10 percent decrease in interest rates, and amounts to the extent we are not able to increase selling prices of our prod-
approximately $16.8 million. The fair value is estimated by dis- ucts or obtain manufacturing efficiencies to offset increases in
counting the projected cash flows using the rate that similar commodity costs. Further information regarding rising prices for
amounts and terms of debt could currently be borrowed. commodities is presented in Part II, Item 7, ‘‘Management’s Dis-
During the second quarter of fiscal 2007, we entered into three cussion and Analysis of Financial Condition and Results of Opera-
treasury lock agreements based on a 30-year U.S. Treasury secur- tions’’ of this report in the section entitled ‘‘Inflation.’’ We enter into
ity with a principal balance of $30 million for two of the agreements fixed-price contracts for future purchases of natural gas in the nor-
and $40 million for the third agreement. These treasury lock agree- mal course of operations as a means to manage natural gas price
ments provided for a single payment at maturity, which was risks. In fiscal 2013, our manufacturing facilities enter into these
April 23, 2007, based on the change in value of the reference fixed-price contracts for approximately 15 to 40 percent of their
treasury security. These agreements were designated as cash flow monthly-anticipated usage.
hedges and resulted in a net settlement of $0.2 million. This loss Equity Price Risk. The trading price volatility of our 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 10 of
senior notes. the Notes to 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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