Ingram Micro 1999 Annual Report Download - page 30

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Ingram Micro
Annual Report
The proceeds from stock option exercises provide an additional source of cash to the Company. In 1999, 1998 and 1997,
respectively, cash proceeds from the exercise of stock options, including applicable tax benefits, totaled $20.8 million, $93.9
million, and $28.4 million, respectively.
The Company believes that cash provided by operating activities, supplemented as necessary with funds available under credit
arrangements (including the $1.65 billion in credit facilities, the June 1998 sale of the Company’s convertible debentures and the
Company’s facilities relating to accounts receivable), will provide sufficient resources to meet its present and future working capital
and cash requirements for at least the next 12 months.
Capital Expenditures
The Company presently expects to spend approximately $130 million in fiscal 2000 for capital expenditures due to continued
expansion of its business.
Market Risk
The Company is exposed to the impact of foreign currency fluctuations and interest rate changes due to its international
sales and global funding. In the normal course of business, the Company employs established policies and procedures to manage
its exposure to fluctuations in the value of foreign currencies and interest rates using a variety of financial instruments. It is the
Company’s policy to utilize financial instruments to reduce risks where internal netting cannot be effectively employed. It is the
Company’s policy not to enter into foreign currency or interest rate transactions for speculative purposes.
In addition to product sales and costs, the Company has foreign currency risk related to debt that is denominated in currencies
other than the dollar and cross-currency swaps hedging intercompany debt.The Company’s foreign currency risk management
objective is to protect its earnings and cash flows resulting from sales, purchases and other transactions from the adverse impact
of exchange rate movements. Foreign exchange risk is managed by using forward and option contracts to hedge receivables and
payables. By policy, the Company maintains hedge coverage between minimum and maximum percentages. Cross-currency swaps
are used to hedge foreign currency denominated payments related to intercompany and third-party loans. During 1999, hedged
transactions were denominated primarily in Euros, Canadian dollars, Australian dollars, Chilean pesos,Thai baht, Mexican pesos,
Swedish krona, British pounds and Norwegian kroner.
The Company is exposed to changes in interest rates primarily as a result of its long-term debt used to maintain liquidity and
finance inventory, capital expenditures and business expansion. Interest rate risk is also present in the cross-currency swaps hedging inter-
company and third-party loans.The Company’s interest rate risk-management objective is to limit the impact of interest rate changes on
earnings and cash flows and to lower its overall borrowing costs.To achieve its objectives the Company uses a combination of fixed- and
variable-rate debt.As of January 1, 2000 and January 2, 1999, approximately 34% and 28%, respectively, of the outstanding debt had
fixed interest rates.The Company finances working capital needs through various bank loans and commercial paper programs.
Market Risk Management
Foreign exchange and interest rate risk and related derivatives use is monitored using a variety of techniques including a review
of market value, sensitivity analysis and Value-at-Risk (“VaR”).The VaR model determines the maximum potential loss in the fair
value of foreign exchange rate-sensitive financial instruments assuming a one-day holding period.The VaR model estimates were
made assuming normal market conditions and a 95% confidence level.There are various modeling techniques that can be used
in the VaR computation.The Company’s computations are based on interrelationships between currencies and interest rates
(a “variance/co-variance” technique).These interrelationships were determined by observing foreign currency market changes and
interest rate changes over the preceding 90 days.The value of foreign currency options does not change on a one-to-one basis with
changes in the underlying currency rate.The potential loss in option value was adjusted for the estimated sensitivity (the “delta” and
“gamma”) to changes in the underlying currency rate.The model includes all of the Company’s forwards, options, cross-currency
swaps and nonfunctional currency denominated debt (i.e., the Company’s market-sensitive derivative and other financial instruments
as defined by the SEC).The accounts receivable and accounts payable denominated in foreign currencies, which certain of these
instruments are intended to hedge, were excluded from the model.