Notes to Consolidated Financial Statements
We have available credit facilities with domestic and foreign banks for various purposes. The amount of unused credit facilities at November 30, 2005 was $512.0 million, of which $400.0 million supports a commercial paper borrowing arrangement. Of these unused facilities, $112.0 million expire in 2006 and $400.0 million expire in 2010. Some credit facilities in support of commercial paper issuance require a commitment fee. Annualized commitment fees at November 30, 2005 and 2004 were both $0.3 million.
Rental expense under operating leases was $24.6 million in 2005, $23.5 million in 2004 and $23.0 million in 2003. Future annual fixed rental payments for the years ending November 30 are as follows (in millions):
2006 - $15.1
2007 - $12.4
2008 - $10.5
2009 - $8.2
2010 - $7.0
Thereafter - $7.6
At November 30, 2005, we had guarantees outstanding of $8.7 million with terms ranging from one to three years. At November 30, 2005 and 2004, we had outstanding letters of credit of $12.2 million and $12.3 million, respectively. These letters of credit typically act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. The unused portion of our letter of credit facility was $33.8 million at November 30, 2005.
8. FINANCIAL INSTRUMENTS
We utilize derivative financial instruments to enhance our ability to manage risk, including foreign currency and interest rate exposures, which exist as part of our ongoing business operations. We do not enter into contracts for trading purposes, nor are we a party to any leveraged derivative instrument. The use of derivative financial instruments is monitored through regular communication with senior management and the utilization of written guidelines.
All derivatives are recognized at fair value in the consolidated balance sheet and recorded in either other assets or other accrued liabilities. In evaluating the fair value of financial instruments, including derivatives, we use third-party market quotes or calculate an estimated fair value on a discounted cash flow basis using the rates available for instruments with the same remaining maturities.
Foreign Currency
We are potentially exposed to foreign currency fluctuations affecting net investments,
transactions and earnings denominated in foreign currencies. We selectively
hedge the potential effect of these foreign currency fluctuations by entering
into foreign currency exchange contracts with highly-rated financial institutions.
Contracts which are designated as hedges of anticipated purchases denominated in a foreign currency (generally purchases of raw materials in U.S. dollars by operating units outside the U.S.) are considered cash flow hedges. The gains and losses on these contracts are deferred in other comprehensive income until the hedged item is recognized in cost of goods sold, at which time the net amount deferred in other comprehensive income is also recognized in cost of goods sold. Gains and losses from hedges of assets, liabilities or firm commitments are recognized through income, offsetting the change in fair value of the hedged item.
At November 30, 2005, we had foreign currency exchange contracts maturing within one year to purchase or sell $24.0 million of foreign currencies versus $51.1 million at November 30, 2004. All of these contracts were designated as hedges of anticipated purchases denominated in a foreign currency to be completed within one year or hedges of foreign currency denominated assets or liabilities. Hedge ineffectiveness was not material.
Interest Rates
We finance a portion of our operations with both fixed and variable rate debt instruments, primarily commercial paper, notes and bank loans. We utilize interest rate swap agreements to minimize worldwide financing costs and to achieve a desired mix of variable and fixed rate debt.
In 2005, we entered into forward starting interest rate swaps to manage the interest rate risk associated with the anticipated issuance of $100 million fixed rate medium-term notes expected to be issued in late 2005. We designated these outstanding interest rate swap contracts as hedges of the future cash interest payments. The loss on these swaps of $0.2 million was deferred in other comprehensive income and will be amortized over the ten-year life of the medium-term notes as a component of interest expense. Hedge ineffectiveness associated with these hedges was not material at November 30, 2005. Subsequent to year end, the medium-term notes were issued and the swaps were settled.
In 2004, we entered into an interest rate swap contract with a total notional amount of $50 million to receive interest at 3.36% and pay a variable rate of interest based on six-month LIBOR minus 0.21%. We designated this swap, which expires on April 15,2009, as a fair value hedge of the changes in fair value of the $50 million of medium-term notes maturing on April 15,2009. No hedge ineffectiveness is recognized as the interest rate swap's provisions match the applicable provisions of the debt.
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