Market Risk
Market risks relating to our operations include changes in interest rates and changes in foreign exchange rates. We enter into interest rate swaps to minimize the risk and costs associated with financing activities, as well as to attain an appropriate mix of fixed and floating rate debt. The swap agreements are contracts to exchange fixed or variable rates for variable or fixed interest rate payments periodically over the life of the instruments. The following tables provide information about our derivative financial instruments and other financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swaps, the table presents notional amounts and interest rates by contractual maturity dates. The applicable floating rate index is included for variable rate instruments. All amounts are stated in United States dollar equivalents.
Interest Rate Sensitivity as of January 31, 2003
Principal (Notional) Amount by Expected Maturity
Average Interest (Swap) Rate
| (Dollar Amounts in Millions) | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | Fair value
1/31/03 |
| Liabilities | | | | | | | | |
| U.S. dollar denominated long-term | | | | | | | | |
| debt including current portion | | | | | | | | |
| Fixed rate debt | $ 4,529 | $ 2,290 | $ 2,755 | $ 2,019 | $ 1,576 | $ 6,201 | $ 19,370 | $ 18,604 |
| Average interest rate – USD rate | 5.4% | 6.4% | 6.0% | 6.2% | 6.6% | 6.9% | 6.3% | |
| Great Britain pound denominated | | | | | | | | |
| long-term debt including | | | | | | | | |
| current portion | | | | | | | | |
| Fixed rate debt | 9 | 94 | – | 37 | – | 1,635 | 1,775 | 1,860 |
| Average interest rate | 9.6% | 4.4% | | 8.4% | | 5.2% | 5.2% | |
Page 25 of Annual Report
Interest Rate Sensitivity as of January 31, 2003
Principal (Notional) Amount by Expected Maturity
Average Interest (Swap) Rate
| (Dollar amounts in millions) | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | Fair value
1/31/03 |
Interest Rate Derivative Financial
Instruments Related to Debt | | | | | | | | |
| Interest rate swaps – | | | | | | | | |
| Pay variable/receive fixed | – | $ 1,250 | – | – | – | $ 3,250 | $ 4,500 | $ 426 |
| Weighted average rate paid – | | | | | | | | |
| Rate D plus 1.70% | | | | | | | | |
| Weighted average fixed rate | | | | | | | | |
| received – USD rate | – | 6.6% | – | – | – | 6.9% | 6.8% | |
| Interest rate swap – | | | | | | | | |
| Pay variable/receive fixed | – | 500 | $ 1,097 | $ 1,750 | – | 445 | 3,792 | 377 |
| Weighted average rate paid – | | | | | | | | |
| Rate B plus .84% | | | | | | | | |
| Weighted average fixed rate | | | | | | | | |
| received – USD rate | – | 7.5% | 5.1% | 5.8% | – | 7.3% | 6.0% | |
| Interest rate basis swap | – | – | – | – | – | 500 | 500 | 2 |
| Weighted average rate paid – Rate C | | | | | | | | |
| Weighted average rate received – | | | | | | | | |
| Rate A minus 0.06% | | | | | | | | |
Rate A – one-month U.S. LIBOR
Rate B – three-month U.S. LIBOR
Rate C – U.S. commercial paper
Rate D – six-month U.S. LIBOR
Interest Rate Sensitivity as of January 31, 2002
Principal (Notional) Amount by Expected Maturity
Average Interest (Swap) Rate
| (Dollar amounts in millions) | 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | Total | Fair value
1/31/02 |
| Liabilities | | | | | | | | |
U.S. dollar denominated long-term
debt including current portion | | | | | | | | |
| Fixed rate debt | $ 2,164 | $ 3,445 | $ 1,874 | $ 704 | $ 2,235 | $ 5,850 | $ 16,272 | $ 17,201 |
| Average interest rate – USD rate | 6.3% | 6.0% | 6.7% | 6.7% | 6.7% | 7.2% | 6.7% | |
Great Britain pound denominated
long-term debt including
current portion | | | | | | | | |
| Fixed rate debt | 93 | 129 | – | – | – | 1,450 | 1,672 | 1,718 |
| Average interest rate | 9.6% | 3.8% | | | | 7.3% | 6.9% | |
Page 26 of Annual Report
Interest Rate Sensitivity as of January 31, 2002
Principal (Notional) Amount by Expected Maturity
Average Interest (Swap) Rate
| (Dollar amounts in millions) | 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | Total | Fair value
1/31/02 |
Interest Rate Derivative Financial
Instruments Related to Debt | | | | | | | | |
| Interest rate swap – | | | | | | | | |
| Pay variable/receive fixed | $ 500 | – | – | – | – | – | $ 500 | $ 28 |
| Weighted average rate paid – | | | | | | | | |
| Rate A minus 0.15% | | | | | | | | |
| Weighted average fixed rate | | | | | | | | |
| received – USD rate | 6.9% | – | – | – | – | – | 6.9% | |
| Interest rate swap – | | | | | | | | |
| Pay variable/receive fixed | – | – | $ 500 | $ 597 | $ 1,750 | $ 445 | 3,292 | 144 |
| Weighted average rate paid – | | | | | | | | |
| Rate B plus 1.01% | | | | | | | | |
| Weighted average fixed rate | | | | | | | | |
| received – USD rate | – | – | 7.5% | 5.9% | 5.9% | 7.3% | 6.3% | |
| Interest rate basis swap | – | – | – | – | – | 500 | 500 | 1 |
| Average rate paid – Rate C | | | | | | | | |
| Average rate received – | | | | | | | | |
| Rate A minus 0.06% | | | | | | | | |
Rate A – one-month U.S. LIBOR
Rate B – three-month U.S. LIBOR
Rate C – U.S. commercial paper
The Company holds currency swaps to hedge its net investment in the United Kingdom. In addition to the instruments in the table below, the Company has designated debt of approximately GBP 1 billion as hedges of the net investment in the United Kingdom. The following tables provide information about our cross-currency interest rate swap agreements by functional currency, and presents the information in United States dollar equivalents. For these instruments the tables present notional amounts, exchange rates and interest rates by contractual maturity date.
The Company also holds cross currency swaps which hedge the foreign currency risk of debt denominated in currencies other than the local currency.
Foreign Currency Exchange Rate Sensitivity as of January 31, 2003
Principal (Notional) Amount by Expected Maturity
| (Dollar amounts in millions) | 2004 | 2005 | 2006 | 2007 | 2008 | Thereafter | Total | Fair value
1/31/03 |
| Currency Swap Agreements | | | | | | | | |
| Payment of Great Britain pounds | | | | | | | | |
| Notional amount | – | – | – | – | – | $ 1,250 | $ 1,250 | $ 126 |
| Average contract rate | – | – | – | – | – | 0.6 | 0.6 | |
| Fixed rate received – USD rate | – | – | – | – | – | 7.4% | 7.4% | |
| Fixed rate paid – | | | | | | | | |
| Great Britain pound rate | – | – | – | – | – | 5.8% | 5.8% | |
| Payment of Canadian dollars | | | | | | | | |
| Notional amount | – | – | – | – | – | 325 | 325 | 8 |
| Average contract rate | – | – | – | – | – | 1.5 | 1.5 | |
| Fixed rate received – USD rate | – | – | – | – | – | 5.6% | 5.6% | |
| Fixed rate paid – Canadian dollar rate | – | – | – | – | – | 5.7% | 5.7% | |
| Payment of Japanese yen | | | | | | | | |
| Notional amount | – | – | – | – | $ 432 | – | 432 | 2 |
| Average contract rate | – | – | – | – | 120 | – | 120 | |
| Fixed rate received – USD rate | – | – | – | – | 3.6% | – | 3.6% | |
| Fixed rate paid – Japanese yen rate | – | – | – | – | 0.2% | – | 0.2% | |
Page 27 of Annual Report
Foreign Currency Exchange Rate Sensitivity as of January 31, 2002
Principal (Notional) Amount by Expected Maturity
| (Dollar amounts in millions) | 2003 | 2004 | 2005 | 2006 | 2007 | Thereafter | Total | Fair value
1/31/02 |
| Currency Swap Agreements | | | | | | | | |
| Payment of Great Britain pounds | | | | | | | | |
| Notional amount | – | – | – | – | – | $ 1,250 | $ 1,250 | $ 192 |
| Average contract rate | – | – | – | – | – | 0.6 | 0.6 | |
| Fixed rate received – USD rate | – | – | – | – | – | 7.4% | 7.4% | |
| Fixed rate paid – | | | | | | | | |
| Great Britain pound rate | – | – | – | – | – | 5.8% | 5.8% | |
| Payment of Canadian dollars | | | | | | | | |
| Notional amount | – | – | – | – | – | 325 | 325 | 8 |
| Average contract rate | – | – | – | – | – | 1.5 | 1.5 | |
| Fixed rate received – USD rate | – | – | – | – | – | 5.6% | 5.6% | |
| Fixed rate paid – Canadian dollar rate | – | – | – | – | – | 5.7% | 5.7% | |
During the fourth quarter of fiscal 2002, the Company terminated certain cross currency instruments that hedged portions of the Company’s investments in Canada, Germany and the United Kingdom. The instruments terminated had notional amounts of $6.7 billion. The Company received $1.1 billion in cash related to the fair value of the instruments at the time of the terminations. Prior to the terminations, these instruments were classified as net investment hedges and were recorded at fair value as current assets on the balance sheet with a like amount recorded in the shareholders’ equity section of the balance sheet in line "other accumulated comprehensive income." No gain related to the terminations was recorded in the Company’s income statement.
We routinely enter into forward currency exchange contracts in the regular course of business to manage our exposure against foreign currency fluctuations on cross-border purchases of inventory. These contracts are generally for durations of six months or less. At January 31, 2003 and 2002, we held contracts to purchase and sell various currencies with notional amounts of $185 million and $117 million, respectively, and net fair values of less than $1 million at either fiscal year.
The fair values of the currency swap agreements are recorded in the consolidated balance sheets within the line "other assets and deferred charges."
