Henry Schein 2009 Annual Report Download - page 62

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50
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risks, which include changes in interest rates, as well as changes in foreign
currency exchange rates as measured against the U.S. dollar and each other, and changes to the credit markets.
We attempt to minimize these risks by using interest rate swap agreements and foreign currency forward and
swap contracts and through maintaining counter-party credit limits. These hedging activities provide only
limited protection against interest rate and currency exchange and credit risks. Factors that could influence
the effectiveness of our programs include volatility of the interest rate and currency markets and availability
of hedging instruments and liquidity of the credit markets. All interest rate swap and foreign currency
forward and swap contracts that we enter into are components of hedging programs and are entered into for
the sole purpose of hedging an existing or anticipated interest rate and currency exposure. We do not enter
into such contracts for speculative purposes. We manage our credit risks by diversifying our investments,
maintaining a strong balance sheet and having multiple sources of capital.
Interest Rate Swap Agreements
We have remaining fixed rate senior notes of $20.0 million at 6.7%. During 2003, we entered into
interest rate swap agreements to exchange these fixed interest rates for variable interest rates. The variable
rates are comprised of LIBOR plus spreads and reset on the interest due dates for the senior notes. As a result
of these interest rate swap agreements, as well as our existing variable rate credit lines and loan agreements,
we are exposed to risk from changes in interest rates. A hypothetical 100 basis point increase in interest rates
would increase our annual interest expense by approximately $0.2 million.
As of December 26, 2009, the fair value of our interest rate swap agreements recorded in other current
and non-current assets in our consolidated balance sheet was $0.5 million, which represented the amount that
would be received upon unwinding the interest rate swap agreements based on market conditions at that time.
Changes in the fair value of these interest rate swap agreements are reflected as an adjustment to current and
non-current assets or liabilities with an offsetting adjustment to the carrying value of the $20.0 million notes
as such hedges are deemed fully effective.
Foreign Currency Agreements
The value of certain foreign currencies as compared to the U.S. dollar may affect our financial results.
Fluctuations in exchange rates may positively or negatively affect our revenues, gross margins, operating
expenses and retained earnings, all of which are expressed in U.S. dollars. Where we deem it prudent, we
engage in hedging programs using primarily foreign currency forward and swap contracts aimed at limiting
the impact of foreign currency exchange rate fluctuations on earnings. We purchase short-term (i.e., 12
months or less) foreign currency forward and swap contracts to protect against currency exchange risks
associated with intercompany loans due from our international subsidiaries and the payment of merchandise
purchases to foreign suppliers. We do not hedge the translation of foreign currency profits into U.S. dollars,
as we regard this as an accounting exposure, not an economic exposure.
As of December 26, 2009, the fair value of our foreign currency exchange agreements, which expire
through August 3, 2010, recorded in other current liabilities was $1.9 million, as determined by quoted market
prices. A hypothetical 5% change in the value of the U.S. dollar would change the fair value of our foreign
currency exchange agreements by $2.7 million. For the year ended December 26, 2009, we had realized net
gains of $1.2 million and unrealized losses of $2.5 million relating to such agreements.
Short-Term Investments
We limit our credit risk with respect to our cash equivalents, available-for-sale securities, short-term
investments and derivative instruments, by monitoring the credit worthiness of the financial institutions who
are the counter-parties to such financial instruments. As a risk management policy, we limit the amount of
credit exposure by diversifying and utilizing numerous investment grade counter-parties.