Famous Footwear 2004 Annual Report Download - page 36

Table of Contents
BROWN SHOE COMPANY, INC. 2003 FORM 10-K
purposes. We also are exposed to credit-related losses in the event of nonperformance by counterparties to these financial instruments.
Counterparties to these agreements, however, are major international financial institutions, and we believe the risk of loss due to
nonperformance is minimal.
A description of our accounting policies for derivative financial instruments is included in Note 11 to the consolidated financial statements.
FOREIGN CURRENCY EXCHANGE RATES
In the normal course of business, we are exposed to foreign currency exchange rate risks as a result of having assets, liabilities and
inventory purchase commitments outside the United States. We employ an established foreign currency hedging strategy to protect earnings
and cash flows from the adverse impact of exchange rate movements. A substantial portion of inventory sourced from foreign countries is
purchased in United States dollars and, accordingly, is not subject to exchange rate fluctuations. However, where the purchase price is to be
paid in a foreign currency, we enter into foreign exchange contracts or option contracts, with maturity periods of normally less than one year,
to reduce our exposure to foreign exchange risk. The level of outstanding contracts during the year is dependent on the seasonality of our
business and demand for footwear from various locations throughout the world. The changes in market value of foreign exchange contracts
have a high correlation to the price changes in the currency of the related hedged transactions. The potential loss in fair value of our net
currency positions at January 31, 2004 resulting from a hypothetical 10% adverse change in all foreign currency exchange rates would not be
material.
Assets and liabilities outside the United States are primarily located in Canada and Hong Kong. Our investments in foreign subsidiaries with
a functional currency other than the United States dollar are generally considered long-term and thus are not hedged. The net investment in
such foreign subsidiaries translated into dollars using the year-end exchange rates was approximately $40 million at January 31, 2004. The
potential loss in fair value resulting from a hypothetical 10% adverse change in foreign exchange rates would be approximately $4.0 million.
Any loss in fair value would be reflected as a cumulative translation adjustment in other comprehensive income and would not impact net
earnings.
INTEREST RATES
Our financing arrangements include $119.5 million of outstanding variable rate debt at January 31, 2004. We have interest rate swap
derivative instruments outstanding at year-end to fix the interest rate on $100 million of the borrowings outstanding under the revolving bank
credit facility. Changes in interest rates impact fixed and variable rate debt differently. A change in the interest rate on fixed rate debt will only
impact the fair value of the debt, whereas a change in the interest rates on variable rate debt will impact interest expense and cash flows.
Under the bank credit agreement and after consideration of our interest rate swap instruments, the only portion of our outstanding debt
obligation subject to variable interest rates is $19.5 million. A hypothetical 10% adverse change in interest rates on the average outstanding
borrowings during fiscal 2003 would not have been material to our net earnings or cash flows.
At January 31, 2004, the fair value of our long-term debt is estimated at approximately $100.0 million, based upon the borrowing rate
currently available to us for financing arrangements with similar terms and maturities. The fair value of our interest rate swap instruments
associated with this debt at January 31, 2004 was an unrealized loss of $4.5 million. Market risk is viewed as the potential change in fair
value of our debt resulting from a hypothetical 10% adverse change in interest rates and would be zero for our long-term debt and
approximately $0.5 million related to the interest rate swap agreements at January 31, 2004.
Information appearing under the caption “Derivative Financial Instruments” in Note 11 of the consolidated financial statements is incorporated
herein by reference.
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