Henry Schein 2003 Annual Report Download - page 32

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks, which include changes in U.S. and international interest rates, as well as changes in foreign currency
exchange rates as measured against the U.S. dollar and each other. We attempt to reduce these risks by utilizing interest rate swap
agreements and foreign currency forward and swap contracts. These hedging activities provide only limited protection against interest
rate and currency exchange risks. Factors that could impact the effectiveness of our programs include volatility of the interest rate and
currency markets and availability of hedging instruments. All interest rate swap and currency contracts that we enter into are components
of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated interest rate and currency exposure,
not for speculation.
Interest Rate Swaps
We have fixed rate Senior Notes of $130.0 million at 6.94% and $100.0 million at 6.66%. During the fourth quarter of 2003, we entered
into interest rate swap agreements to exchange our fixed interest rates for variable interest rates payable on the $230.0 million Senior
Notes. The variable rate is comprised of LIBOR plus the spreads and resets on the interest due dates for the Senior Notes. As a result
of these interest rate swap agreements, as well as our existing variable rate credit lines and loan agreements, we are exposed to risk from
changes in interest rates. A hypothetical 100 basis point increase in interest rates would increase our annual interest expense by
approximately $2.4 million.
As of December 27, 2003, the fair value of our interest rate swap agreements recorded in other non-current assets was approximately
$700 thousand, which represented the amount that would be earned upon unwinding the interest rate swap agreements based on market
conditions at that time. Changes in the fair value of these interest rate swap agreements are reflected as an adjustment to the related
assets with an offsetting adjustment to the carrying value of the $230.0 million notes as such hedges are deemed fully effective.
Foreign Exchange
The value of certain foreign currencies as compared to the U.S. dollar may affect our financial results. Fluctuations in exchange rates may
positively or negatively affect our revenues, gross margins, operating expenses, and retained earnings, all of which are expressed in U.S.
dollars. Where we deem it prudent, we engage in hedging programs, using primarily foreign currency forward and swap contracts, aimed
at limiting the impact of foreign currency exchange rate fluctuations on earnings. We purchase short-term foreign currency forward and
swap contracts to protect against currency exchange risks associated with long-term intercompany loans, due from our international
subsidiaries and the payment of merchandise purchases to foreign vendors. We do not hedge the translation of foreign currency profits
into U.S. dollars as we regard this as an accounting not an economic exposure.
As of December 27, 2003, we had outstanding foreign currency forward and swap contracts aggregating $105.5 million, of which $97.0
million related to intercompany debt and $8.5 million related to the purchase of merchandise from foreign vendors. The contracts hedge
against currency fluctuations of British Pounds ($32.9 million), Euros ($61.7 million), Australian Dollars ($9.0 million), Swiss Francs ($1.4
million), Japanese Yen ($355 thousand), Swedish Krona ($82 thousand) and New Zealand Dollars ($82 thousand). As of December 27,
2003, the fair value of these contracts, calculated as the gross value of future U.S. dollar payments and receipts determined by quoted
market prices was $114.9 million. These contracts expire through January 2005. For the year ended December 27, 2003, we recognized
a loss relating to our foreign currency forward and swap contracts of $200 thousand.
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