Toro 2013 Annual Report Download - page 68

Office and foreign patent offices. Management believes these the residential segment that has significant sales to The Home
activities help minimize its risk of being a defendant in patent Depot.
infringement litigation. The company records a liability in its consol-
Derivative Instruments and Hedging Activities
idated financial statements for costs related to claims, including
The company is exposed to foreign currency exchange rate risk
future legal costs, settlements and judgments, where the company
arising from transactions in the normal course of business, such as
has assessed that a loss is probable and an amount can be rea-
sales to third party customers, sales and loans to wholly owned
sonably estimated. If the reasonable estimate of a probable loss is
foreign subsidiaries, foreign plant operations, and purchases from
a range, the company records the most probable estimate of the
suppliers. The company actively manages the exposure of its for-
loss or the minimum amount when no amount within the range is a
eign currency exchange rate market risk by entering into various
better estimate than any other amount. The company discloses a
hedging instruments, authorized under company policies that place
contingent liability even if the liability is not probable or the amount
controls on these activities, with counterparties that are highly
is not estimable, or both, if there is a reasonable possibility that a
rated financial institutions. The company’s hedging activities prima-
material loss may have been incurred. In the opinion of manage-
rily involve the use of forward currency contracts, as well as cross
ment, the amount of liability, if any, with respect to these matters,
currency swaps that are intended to offset intercompany loan
individually or in the aggregate, will not materially affect its consoli-
exposures. The company uses derivative instruments only in an
dated results of operations, financial position, or cash flows.
attempt to limit underlying exposure from foreign currency
Canadian Lawnmower Engine Horsepower Marketing and exchange rate fluctuations and to minimize earnings and cash flow
Sales Practices Litigation. In March 2010, individuals who volatility associated with foreign currency exchange rate changes.
claimed to have purchased lawnmowers in Canada filed class Decisions on whether to use such contracts are primarily based on
action litigation against the company and other defendants that, the amount of exposure to the currency involved and an assess-
similar to the class action litigation previously filed by plaintiffs in ment of the near-term market value for each currency. The com-
the United States and settled by the company pursuant to a settle- pany’s policy does not allow the use of derivatives for trading or
ment agreement that became final in February 2011, (i) contained speculative purposes. The company also made an accounting pol-
allegations under applicable Canadian law that the horsepower icy election to use the portfolio exception permitted in ASU
labels on the products the plaintiffs purchased were inaccurate, No. 2011-04 with respect to measuring counterparty credit risk for
(ii) sought certification of a class of all persons in Canada who, derivative instruments, and to measure the fair value of a portfolio
beginning January 1, 1994 purchased a lawnmower containing a of financial assets and financial liabilities on the basis of the net
gas combustible engine up to 30 horsepower that was manufac- open risk position with each counterparty. The company’s primary
tured or sold by the company and other defendants, and currency exchange rate exposures are with the Euro, the Austra-
(iii) sought under applicable Canadian law unspecified compensa- lian dollar, the Canadian dollar, the British pound, the Mexican
tory and punitive damages, attorneys’ costs and fees, and equita- peso, the Japanese yen, the Chinese Yuan, and the Romanian
ble relief. In June 2013, the company and certain other defend- New Leu against the U.S. dollar, as well as the Romanian New
ants, in order to avoid further protracted and expensive litigation, Leu against the Euro.
entered into a settlement agreement to resolve all claims against The company entered into an International Swap Dealers Asso-
them in the Canadian litigation. As a group, such settling defend- ciation Master Agreement (‘‘ISDA’’) with each counterparty that
ants agreed to pay an aggregate amount of CAD $4,200. In Sep- permits the net settlement of amounts owed under their respective
tember 2013, courts in Ontario and Quebec held hearings to con- contracts. Under these master netting agreements, net settlement
sider the settlement, which was subsequently approved and generally permits the company or the counterparty to determine
became final in October 2013. the net amount payable or receivable for contracts due on the
same date or in the same currency for similar types of derivative
transactions. The company records the fair value of its derivative
contracts at the net amount in its consolidated balance sheets.
14 FINANCIAL INSTRUMENTS
Cash Flow Hedges. The company recognizes all derivative
Concentrations of Credit Risk instruments as either assets or liabilities at fair value on the con-
Financial instruments, which potentially subject the company to solidated balance sheet and formally documents relationships
concentrations of credit risk, consist principally of accounts receiva- between cash flow hedging instruments and hedged transactions,
ble that are concentrated in the professional and residential busi- as well as its risk-management objective and strategy for undertak-
ness segments. The credit risk associated with these segments is ing hedge transactions. This process includes linking all derivatives
limited because of the large number of customers in the com- to the forecasted transactions, such as sales to third parties and
pany’s customer base and their geographic dispersion, except for foreign plant operations. Changes in fair values of outstanding
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