Famous Footwear 2004 Annual Report Download - page 66

Table of Contents
Notes to Consolidated Financial Statements (continued)
BROWN SHOE COMPANY, INC. 2003 FORM 10-K
variability of cash flows paid on variable rate debt. The Company is exposed to credit-related losses in the event of nonperformance by
counterparties to these financial instruments. Counterparties to these agreements are, however, major international financial institutions,
and the risk of loss due to nonperformance is believed to be minimal.
The Company enters into foreign exchange instruments, designated as cash flow hedges, to hedge foreign currency transactions primarily
related to the purchase of inventory, as well as to fund foreign office expenses and royalty income denominated in foreign currencies. The
Company enters into instruments that mature at the same time the transactions denominated in the same currency are scheduled or
expected to occur. The term of the instruments is generally less than one year. As such, the unrealized gains or losses associated with these
instruments are deferred and recognized in other comprehensive income until such time as the hedged item affects earnings. Continuous
monitoring of the outstanding instruments is performed, and if some portion of the instruments is deemed ineffective, the changes in fair
value are immediately recognized in earnings. Unrealized gains and losses on these instruments are included in other assets or other
accrued expenses, as applicable, on the consolidated balance sheets. Gains and losses on these instruments are reclassified to net sales,
cost of goods sold or selling and administrative expenses, consistent with the recognition in net earnings and classification of the underlying
hedged transaction.
The Company’s outstanding derivative financial instruments related to foreign exchange risk consisted of the following:
(U.S. $ thousands) January 31, 2004 February 1, 2003
Deliverable Financial Instruments
Euro $ 9,800 $12,100
Canadian dollars 11,500 5,000
Japanese yen and other currencies 1,100 1,000
Non-Deliverable Financial Instruments
New Taiwanese dollars 2,400 5,200
$24,800 $23,300
Unrealized gains related to these instruments, based on dealer-quoted prices, were $0.1 million and $0.8 million at January 31, 2004 and
February 1, 2003, respectively. We expect to reclassify the unrealized gain of $0.1 million from other comprehensive income to net earnings
in 2004.
At the end of 2003, the Company had interest rate swap agreements, expiring in October 2004 and October 2006, that convert variable rate
interest payable on $100 million of long-term borrowings under its revolving bank credit agreement to a fixed rate of 6.88%. Unrealized
losses on these swap agreements, based on order-quoted prices, were $4.5 million at January 31, 2004 and $6.2 million at February 1,
2003. Since the Company expects to hold the swap agreements and the related debt until maturity, the accumulated unrealized loss on the
swap agreements will decline to zero over the remaining lives of the agreements.
During 2003 and 2002, changes in the fair value of derivatives, net of reclassifications from other comprehensive income to earnings,
resulted in a decrease in other comprehensive income of $0.7 million and $2.8 million, net of taxes, respectively. The Company reclassified
$1.9 million and $1.5 million of expense into net earnings from Other Comprehensive Income in 2003 and 2002, respectively. During 2003
and 2002, ineffective hedges were not material.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts and fair values of the Company’s financial instruments at January 31, 2004 and February 1, 2003 are:
January 31, 2004 February 1, 2003
Carrying Fair Carrying Fair
($ thousands) Amount Value Amount Value
Long-term debt, including
current maturities $100,000 $100,000 $123,493 $124,130
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