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Financial Review continued
We selectively use financial instruments to manage the impact of foreign exchange rate and interest rate fluctuations on earnings. The counterparties to these contracts are a diversified group of major financial institutions. We do not have significant exposure to any one counterparty. We do not enter into financial instruments for trading or speculative purposes. Our foreign currency exposure is concentrated in Western Europe, Asia Pacific, Japan and Latin America. We face transactional currency exposures that arise when we enter into transactions in non-hyperinflationary countries, generally on an intercompany basis, that are denominated in currencies other than our functional currency. We hedge substantially all such foreign exchange exposures primarily through the use of forward contracts and currency options. We also face currency exposure that arises from translating the results of our worldwide operations to the U.S. dollar at exchange rates that have fluctuated from the beginning of the period. We purchase option and forward contracts to partially protect against adverse foreign exchange rate movements. Gains or losses on our derivative instruments are largely offset by the losses or gains on the underlying hedged transactions. For foreign currency derivative instruments, market risk is determined by calculating the impact on fair value of an assumed one-time change in foreign exchange rates relative to the U.S. dollar. Fair values were estimated based on market prices, when available, or dealer quotes. The reduction in fair value of our purchased option contracts is limited to the option's fair value. With respect to the derivative instruments outstanding at September 30, 2002, a 10% appreciation of the U.S. dollar over a one-year period would increase pre-tax earnings by approximately $27 million, while a 10% depreciation of the U.S. dollar would decrease pre-tax earnings by approximately $15 million. Comparatively, considering our derivative instruments outstanding at September 30, 2001, a 10% appreciation of the U.S. dollar over a one-year period would have increased pre-tax earnings by approximately $34 million, while a 10% depreciation of the U.S. dollar would have decreased pre-tax earnings by approximately $15 million. These calculations do not reflect the impact of exchange gains or losses on the underlying positions that would be offset, in part, by the results of the derivative instruments. Our primary interest rate exposure results from changes in short-term U.S. dollar interest rates. Our debt portfolio at September 30, 2002, is primarily U.S. dollar-denominated, with less than 2% being foreign denominated. Therefore, transaction and translation exposure relating to our debt portfolio is minimal. In an effort to manage interest rate exposures, we strive to achieve an acceptable balance between fixed and floating rate debt and may enter into interest rate swaps to help maintain that balance. For interest rate derivative instruments, market risk is determined by calculating the impact to fair value of an assumed one-time change in interest rates across all maturities. Fair values were estimated based on market prices, when available, or dealer quotes. A change in interest rates on short-term debt is assumed to impact earnings and cash flow but not fair value because of the short maturities of these instruments. A change in interest rates on long-term debt is assumed to impact fair value but not earnings or cash flow because the interest rates are fixed. See Note 9 of the Notes to Consolidated Financial Statements for additional discussion of our debt portfolio. Based on our overall interest rate exposure at September 30, 2002 and 2001, a change of 10% in interest rates would not have a material effect on our earnings or cash flows over a one-year period. An increase of 10% in interest rates would decrease the fair value of our long-term debt and interest rate swaps at September 30, 2002 and 2001 by approximately $27 million and $26 million, respectively. A 10% decrease in interest rates would increase the fair value of our long-term debt and interest rate swaps at both September 30, 2002 and 2001 by approximately $30 million. See Note 10 of the Notes to Consolidated Financial Statements for additional discussion of our outstanding forward exchange contracts, currency options and interest rate swaps at September 30, 2002.
Cash provided by operations, which continues to be our primary source of funds to finance operating needs and capital expenditures, was $836 million in 2002 compared to $779 million in 2001. In fiscal 2002, net cash provided by operating activities was reduced by a $100 million cash contribution to the U.S pension plan. An additional cash contribution of $100 million was made to the U.S. pension plan early in fiscal 2003. We made these contributions because of the decline in the market value of pension assets during 2001 and 2002. The increase in cash provided by changes in working capital reflects lower trade receivables and inventory levels in 2002. Capital expenditures were $260 million in 2002, compared to $371 million in the prior year. This decline reflects an overall reduction of spending from the peak period of capital expenditures relating to the conversion of safety-engineered devices. Medical capital spending, which totaled $182 million in 2002, included spending for safety-engineered devices and capacity expansion for prefillable syringes in Columbus, Nebraska. Clinical Lab capital spending, which totaled $42 million in 2002, included spending for safety-engineered devices and various capacity expansions. Biosciences capital spending, which totaled $23 million in 2002, included spending on various production expansions. Funds expended outside the above segments included amounts related to our enterprise-wide program to upgrade our business information systems, known internally as Genesis. We expect capital expenditures to be approximately $275 million in 2003. Net cash used for financing activities was $314 million in 2002 as compared to $201 million during 2001. The increase in cash used for financing activities was due primarily to the repurchase of 6.6 million shares of our common stock for $224 million during 2002. At September 30, 2002, 3.4 million shares remained under a September 2001 Board of Directors' resolution that authorized the repurchase of up to 10 million common shares. Total debt at September 30, 2002 remained virtually unchanged from the prior year. Short-term debt was 35% of total debt at year-end, compared to 37% at the end of 2001. Floating rate debt was 59% of total debt at the end of 2002 and 69% of total debt at the end of 2001. Our weighted average cost of total debt at the end of 2002 was 4%, down from 4.8% at the end of last year due to lower short-term interest rates. Debt to capitalization at year-end improved to 32.5% from 34.1% last year, reflecting an increase in shareholder's equity, while debt remained virtually unchanged. Cash and equivalents were $243 million and $82 million at September 30, 2002 and 2001, respectively. We anticipate generating excess cash in 2003, which could be used to repay debt and repurchase additional common shares. In August 2001, we negotiated a $900 million syndicated credit facility, consisting of a $450 million five-year line of credit and a $450 million 364-day line of credit. In August 2002, the 364-day line of credit was renewed and extended for an additional 364-day period. There were no borrowings outstanding under this syndicated credit facility at September 30, 2002. It can be used to support our commercial paper program, under which $415 million was outstanding at September 30, 2002, and for other general corporate purposes. In addition, we have informal lines of credit outside the United States. At September 30, 2002, our long-term debt was rated "A2" by Moody's and "A+" by Standard and Poor's and our commercial paper ratings were "P-1" by Moody's and "A-1" by Standard and Poor's. We continue to have a high degree of confidence in our ability to refinance maturing short-term and long-term debt, as well as to incur substantial additional debt, if required. Return on equity was 19.9% in 2002 compared with 18.7% in 2001 or 20.5%, excluding the cumulative effect of change in accounting principle and goodwill amortization in 2001.
We believe that our core products, our international diversification and our ability to meet the needs of the worldwide healthcare industry with cost-effective and innovative products will continue to cushion the long-term impact on BD of potential economic and political disruptions in the countries in which we do business, including the effects of possible healthcare system reforms. In 2002, inflation did not have a material impact on our overall operations. On April 8, 2002, we entered into a non-binding letter of intent with AorTech International plc ("AorTech") to sell our critical care product line. During the fourth quarter of 2002, AorTech announced that it would not proceed with the acquisition of this product line. We will, therefore, continue to manage and support the critical care product line and, accordingly, will not incur a loss on the sale, as originally anticipated. As of September 30, 2002, we have no plans to divest any other product line.
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