Equifax 2002 Annual Report Download - page 38

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
that we file from time to time with the SEC, including but not
limited to, our Annual Report on Form 10-K for the year ended
December 31, 2002.
QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISK
In the normal course of our business, we are exposed to market
risk, primarily from changes in foreign currency exchange rates and
changes in interest rates, that could impact our results of opera-
tions and financial position. We manage our exposure to these
market risks through our regular operating and financing activities,
and when deemed appropriate, through the use of derivative finan-
cial instruments, such as interest rate swaps, to hedge certain of
these exposures. We use derivative financial instruments as risk
management tools and not for speculative or trading purposes.
FOREIGN CURRENCY EXCHANGE RATE RISK
A substantial majority of our revenue, expense, and capital expen-
diture activities are transacted in U.S. dollars. However, we do
transact business in other currencies, primarily the British pound,
the euro, the Canadian dollar, and the Brazilian real. For most of
these foreign currencies, we are a net recipient, and therefore,
benefit from a weaker U.S. dollar and are adversely affected by a
stronger U.S. dollar relative to the foreign currencies in which we
transact significant amounts of business.
We are required to translate, or express in U.S. dollars, the assets
and liabilities of our foreign subsidiaries that are denominated or
measured in foreign currencies at the applicable year-end rate of
exchange on our consolidated balance sheet, and income state-
ment items of our foreign subsidiaries at the average rates prevail-
ing during the year. We record the resulting translation adjustment,
and gains and losses resulting from the translation of intercom-
pany balances of a long-term investment nature, as components
of our shareholders’ equity. Other immaterial foreign currency
translation gains and losses are recorded in our consolidated
statements of income. We do not, as a matter of policy, hedge
translational foreign currency exposure. We will, however, hedge
foreign currency exchange rate risks associated with material
transactions that are denominated in a foreign currency.
At December 31, 2002 we have hedged our foreign currency
exchange rate risks associated with the acquisition of our Italian
businesses in the fourth quarter of 2000, by borrowing under our
$465.0 million revolving credit facility in euros. At December 31,
2002, the foreign currency exchange rate risks associated with
loans which funded the acquisition of our Italian businesses during
the fourth quarter of 2000 were hedged by denominating a portion
of the borrowings under our $465.0 million revolving credit facility
in euros.
At December 31, 2002, a 10% weaker U.S. dollar against the
currencies of all foreign countries in which we had operations
during 2002, would have resulted in an increase of our revenues
by $27.8 million, and an increase of our pre-tax operating profit by
$6.4 million. A 10% stronger U.S. dollar would have resulted in
similar decreases to our revenues and pre-tax operating profit.
INTEREST RATE RISK
Our exposure to market risk for changes in interest rates primarily
relates to our variable rate revolving credit debt and the interest
rate swap agreements associated with portions of our fixed rate
public debt.
We attempt to achieve the lowest all-in weighted average cost of
debt while simultaneously taking into account the mix of our fixed
and floating rate debt, and the average life and scheduled maturi-
ties of our debt. At December 31, 2002, our weighted average cost
of debt was 5.1% and the weighted average life of our debt was
5.8 years.
We generally target a mix of fixed and floating rate debt which lies
within a range of 30-70% fixed, with the balance being floating rate.
At December 31, 2002, 66% of our debt was fixed rate, and the
remaining 34% floating rate. We use derivatives to manage our expo-
sure to changes in interest rates by entering into interest rate swaps.
As of December 31, 2002, we had $279.0 million, notional amount, of
interest rate swap agreements outstanding with bank counterparties.
Our variable rate indebtedness consists primarily of our $465.0 mil-
lion revolving credit facility and a separate C$100.0 million revolv-
ing credit facility in Canada. The rate of interest we pay on our
$465.0 million facility is based on a floating rate pricing grid tied to
our long-term senior unsecured debt rating. We are currently rated
A – by Standard & Poor’s and Baa1 by Moody’s Investor Service. In
the case of a split rating, pricing is based on the higher rating, i.e.,
A – from S&P. We can borrow under the facility at floating rates of
interest tied to Base Rate and the London Interbank Offered Rate,
or LIBOR. A competitive bid option is also available, dependent on
liquidity in the bank market. At December 31, 2002, $21.8 million
of debt was outstanding and $443.2 million of additional borrow-
ing capacity was available under this facility. Borrowings under our
Canadian facility bear interest at a floating rate tied to Prime,
LIBOR, or Canadian Banker’s Acceptances. As of December 31,
2002, C$46.0 million (U.S.$29.3 million) of debt was outstanding,
and C$54.0 million (U.S.$34.3 million) of additional borrowing
capacity was available under our Canadian facility.
34