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Table of Contents
The average value represents an average of the quarter-end values. The high and low valuations represent the highest and lowest values of the quarterly
amounts.
Credit Risk
Financial instruments which potentially subject us to concentrations of credit risk consist principally of cash and cash equivalents, investments, short
and long-term investments, accounts and notes receivable and foreign currency exchange contracts. Deposits held with banks may exceed the amount of
insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and are maintained with financial institutions of reputable
credit and therefore bear minimal credit risk. We place our cash and cash equivalents and short and long-term investments primarily in investment grade
instruments and limit the amount of investment with any one issuer. We purchased bank loans with credit ratings below investment grade. The bank loans
have a senior position to other debt and have floating-rate coupons, which significantly reduces interest rate risk. As of December 31, 2005, bank loans
represent 7% of our cash and cash equivalents and short and long-term investments. We believe this investment strategy more effectively manages our
exposure to interest rate risk and diversifies our investment portfolio. We have entered into various agreements to loan fixed income securities generally on an
overnight basis. Under these securities lending agreements, the value of the collateral is equal to 102% of the fair market value of the loaned securities. The
collateral is generally cash, U.S. government-backed securities or letters of credit. At December 31, 2005, there were no outstanding securities lending
transactions. The counterparties to our foreign currency exchange contracts consist of a number of major financial institutions. In addition to limiting the
amount of the contracts we enter into with any one party, we monitor the credit quality of the counterparties.
We employ a Monte Carlo simulation model to calculate value-at-risk for changes in credit conditions for our bank loan portfolios. This model assumes
that the relationships among credit spreads, market rates and prices that have been observed daily over the last two years are valid for estimating risk over the
next trading day. Estimates of volatility and correlations of market factors are drawn from the BearMeasurisk dataset as of December 31, 2005. This model
measures the potential loss in fair value that could arise from changes in market conditions, using a 95% confidence level and assuming a one-day holding
period. The value-at-risk on the bank-loan portfolios was $0.8 million as of December 31, 2005 and $1.0 million as of December 31, 2004. The average, high
and low value-at-risk amount for 2005 and 2004 were as follows (in millions):
Average
High
Low
2005 $ 1.3 $ 1.9 $ 0.8
2004 $ 0.9 $ 1.3 $ 0.5
The credit risk associated with accounts and notes receivables is low due to the large number of customers and their broad dispersion over many
different industries and geographic areas. We establish an allowance for the estimated uncollectible portion of our accounts and notes receivable. The
allowance was $39.9 million and $41.7 million at December 31, 2005 and 2004, respectively. We customarily sell the notes receivable we derive from our
leasing activity. Generally, we do not retain any recourse on the sale of these notes.
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