Lexmark 2013 Annual Report Download - page 61

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57
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK SENSITIVITY
The market risk inherent in the Company’s financial instruments and positions represents the potential loss arising from adverse
changes in interest rates and foreign currency exchange rates.
Interest Rates
At December 31, 2013, the fair value of the Company’s senior notes was estimated at $745.1 million based on the prices the bonds
have recently traded in the market as well as the overall market conditions on the date of valuation, stated coupon rates, the number of
coupon payments each year and the maturity dates. The fair value of the senior notes exceeded the carrying value as recorded in the
Consolidated Statements of Financial Position at December 31, 2013 by approximately $45.5 million. Market risk is estimated as the
potential change in fair value resulting from a hypothetical 10% adverse change in interest rates and amounts to approximately $14.7
million at December 31, 2013.
At December 31, 2012, the fair value of the Company’s senior notes was estimated at $684.8 million based on the prices the bonds
had recently traded in the market as well as the overall market conditions on the date of valuation, stated coupon rates, the number of
coupon payments each year and the maturity dates. The fair value of the senior notes exceeded the carrying value as recorded in the
Consolidated Statements of Financial Position at December 31, 2012 by approximately $35.2 million. Market risk is estimated as the
potential change in fair value resulting from a hypothetical 10% adverse change in interest rates and amounts to approximately
$7.1 million at December 31, 2012.
At December 31, 2012, the fair value of the Company’s forward starting interest rate swap was estimated to be a liability of $1.4
million based on market levels of the benchmark interest rate at the close of business on December 31, 2012, as well as the frequency
of payments to and from the counterparty and the effective and termination dates. Market risk was estimated as the potential change in
fair value resulting from a 50 basis point decrease in the benchmark interest rate and amounted to $11.7 million at December 31, 2012.
There were no outstanding interest rate swaps at December 31, 2013.
Refer to Part II, Item 8, Note 18 of the Notes to Consolidated Financial Statements for additional information regarding the
Company’s forward starting interest rate swap.
See Part II, Item 8, Note 3 of the Notes to Consolidated Financial Statements and the section titled “LIQUIDITY AND CAPITAL
RESOURCES — Investing Activities:” in Item 7 of this report for a discussion of the Company’s auction rate securities portfolio
which is incorporated herein by reference.
Foreign Currency Exchange Rates
Foreign currency exposures arise from transactions denominated in a currency other than the functional currency of the Company or
the respective foreign currency of each of the Company’s subsidiaries. The primary currencies to which the Company was exposed on
a transaction basis as of the end of the fourth quarter include the Canadian dollar, the Mexican peso, the Chinese renminbi, the
Australian dollar, the Philippine peso, the Euro, the Argentine peso and the Swedish krona. The Company primarily hedges its
transaction foreign exchange exposures with foreign currency forward contracts with maturity dates of approximately three months or
less, though all foreign currency exposures may not be fully hedged. The potential loss in fair value at December 31, 2013 for such
contracts resulting from a hypothetical 10% adverse change in all foreign currency exchange rates versus the U.S. dollar is
approximately $3.0 million. This loss would be mitigated by corresponding gains on the underlying exposures. The potential gain in
fair value at December 31, 2012 for such contracts resulting from a hypothetical 10% adverse change in all foreign currency exchange
rates versus the U.S. dollar was approximately $5.0 million. This gain would have been mitigated by corresponding losses on the
underlying exposures.
57