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The condition of the U.S. dollar fluctuated throughout the
year, and was moderately weaker against other major
currencies where we conduct operations at the fiscal year end
over the previous year end, causing a favorable change in the
accumulated other comprehensive income (loss) (refer to
Note A) component of stockholders’ equity of $26.0 million
this year versus $30.2 million last year. This change was in
addition to changes of $(41.6) million, $5.3 million and
$5.7 million related to adjustments required for minimum
pension and other postretirement liabilities, unrealized gains
on derivatives and unrealized gains on securities, respectively.
We do not have any off-balance sheet financings, other than
the minimum leasing commitments described in Note F to the
Consolidated Financial Statements. We have no subsidiaries
that are not included in our financial statements, nor do we
have any interests in or relationships with any special purpose
entities that are not reflected in our financial statements.
We are exposed to market risk from changes in interest rates
and foreign currency exchange rates because we fund our
operations through long- and short-term borrowings and
denominate our business transactions in a variety of foreign
currencies. We utilize a sensitivity analysis to measure the
potential loss in earnings based on a hypothetical 1% increase
in interest rates and a 10% change in foreign currency rates.
A summary of our primary market risk exposures follows.
Our primary interest rate risk exposure results from our
floating rate debt, including various revolving and other lines
of credit (refer to Note B). At May 31, 2007, approximately
49.1% of our debt was subject to floating interest rates.
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If interest rates were to increase 100 bps from May 31, 2007
and assuming no changes in debt from the May 31, 2007 levels,
the additional annual interest expense would amount to
approximately $4.9 million on a pre-tax basis. A similar
increase in interest rates in fiscal 2006 would have resulted in
approximately $3.3 million in additional interest expense.
Our hedged risks are associated with certain fixed rate debt
whereby we have a $200.0 million notional amount interest
rate swap contract designated as a fair value hedge to pay
floating rates of interest based on six-month LIBOR that
matures in fiscal 2010. Because critical terms of the debt and
interest rate swap match, the hedge is considered perfectly
effective against changes in the fair value of debt, and
therefore, there is no need to periodically reassess the
effectiveness during the term of the hedge.
All derivative instruments are recognized on the balance sheet
and measured at fair value. Changes in the fair values of
derivative instruments that do not qualify as hedges and/or
any ineffective portion of hedges are recognized as a gain or
loss in our Consolidated Statement of Income in the current
period. Changes in the fair value of derivative instruments
used effectively as fair value hedges are recognized in earnings
(losses), along with the change in the value of the hedged
item. Such derivative transactions are accounted for under
SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities," as amended and interpreted. We do not
hold or issue derivative instruments for speculative purposes.
Our foreign sales and results of operations are subject to the
impact of foreign currency fluctuations (refer to Note A).
As most of our foreign operations are in countries with fairly
stable currencies, such as Belgium, Canada, Germany, the
Netherlands and the United Kingdom, this effect has not
generally been material. In addition, foreign debt is
denominated in the respective foreign currency, thereby
eliminating any related translation impact on earnings.
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