Nordstrom 2005 Annual Report Download - page 32

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24
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
INTEREST RATE RISK
We are exposed to market risk from changes in interest rates. In seeking to minimize risk, we manage exposure through our regular operating
and financing activities. We do not use financial instruments for trading or other speculative purposes and are not party to any leveraged
financial instruments.
Interest rate exposure is managed through our mix of fixed and variable rate borrowings. Short-term borrowing and investing activities generally
bear interest at variable rates, but because they have maturities of three months or less, we believe that the risk of material loss was low, and that
the carrying amount approximated fair value.
The table below presents information about our financial instruments that are sensitive to changes in interest rates, which consist of debt
obligations and interest rate swaps for the year ended January 28, 2006. For debt obligations, the table presents principal amounts, at book value,
by maturity date, and related weighted average interest rates. For interest rate swaps, the table presents notional amounts and weighted average
interest rates by expected (contractual) maturity dates. Notional amounts are the predetermined dollar principal on which the exchanged interest
payments are based.
Dollars in thousands
2006
2007
2008
2009
2010
Thereafter
Total at
January 28,
2006
Fair value at
January 28,
2006
Long-term debt
Fixed $306,618 $6,709 $256,858 $6,958 $5,419 $362,882 $945,444 $963,092
Avg. int. rate 4.9% 8.1% 5.7% 7.8% 8.9% 7.2% 6.0%
Interest rate swap
Fixed to variable — — $250,000 — — — $250,000 $(11,050)
Avg. pay rate — — 7.09% — — — 7.09%
Avg. receive rate — — 5.63% — — — 5.63%
FOREIGN CURRENCY EXCHANGE RISK
The majority of our revenue, expense and capital expenditures are transacted in U.S. dollars. However, we periodically enter into foreign currency
purchase orders denominated in Euros for apparel, accessories and shoes. We use forward contracts to hedge against fluctuations in foreign
currency prices. The fair value of our outstanding forward contracts at January 28, 2006 was not material.
In addition, the functional currency of Façonnable, S.A.S. of Nice, France is the Euro. Assets and liabilities of Façonnable are translated into U.S.
dollars at the exchange rate prevailing at the end of the period. Income and expenses are translated into U.S. dollars at an average exchange rate
during the period. Foreign currency gains and losses from the translation of Façonnable’s balance sheet and income statement are included in
other comprehensive earnings. Foreign currency gains or losses from certain intercompany loans are recorded in other income including finance
charges, net.
We considered the potential impact of a hypothetical 10% adverse change in foreign exchange rates and we believe that such a change would not
have a material impact on our cash flows of financial instruments that are sensitive to foreign currency exchange risk. The model measured the
change in cash flows arising from the 10% adverse change in foreign exchange rates, and covered long-term debt denominated in Euros.