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notes to consolidated financial statements
The company has entered into foreign currency forward contracts to
hedge transactions related to intercompany debt, subsidiary royalties,
product purchases, firm commitments and other intercompany transactions.
The company uses these contracts to hedge against the effect of
foreign currency exchange rate fluctuations on forecasted cash flows. These contracts generally relate to the company's European operations
and are denominated in euros. The company had foreign currency forward
exchange contracts that totaled approximately $239 million at
December 31, 2003, $199 million at December 31, 2002 and $130 million
at December 31, 2001. These contracts generally expire within one
year. In addition, at December 31, 2001 the company had approximately
$190 million of foreign currency forward exchange contracts outstanding
related to short-term financing of the Henkel-Ecolab acquisition. These
contracts matured in February 2002. The gains and losses related to
these contracts were included as a component of other comprehensive
income until the hedged item is reflected in earnings.
The company enters into interest rate swap agreements to manage
interest rate exposures and to achieve a desired proportion of variable
and fixed rate debt.
In 2003, the company entered into an interest rate swap
agreement that converts $30 million of the 7.19% senior notes from a
fixed interest rate to a floating or variable interest rate. This agreement
is effective until January 2006. The interest rate swap was designated
as a fair value hedge and had an insignificant value as of December 31,
2003. The mark to market gain on this agreement has been recorded as
part of interest expense and has been offset by the market to market on
this portion of the 7.19% senior notes.
During 2002, the company entered into an interest rate swap
agreement in connection with the issuance of its Euronotes. This
agreement converts approximately euro 78 million (approximately $94
million at year-end 2003) of the Euronote debt from a fixed interest rate
to a floating or variable interest rate and is effective until February 2007.
This interest rate swap was designated as a fair value hedge and had a
value of $6.4 million and $3.5 million as of December 31, 2003 and
2002, respectively. The mark to market gain on this agreement has been
recorded as part of interest expense and has been offset by the loss
recorded in interest expense on the mark to market on this portion of the
Euronotes. There is no hedge ineffectiveness on this interest rate swap.
The company has also entered into an interest rate swap
agreement to provide for a fixed rate of interest on the first 50 million
Australian dollars (approximately $36 million at year-end 2003) of
Australian floating-rate debt. This agreement is effective through
November 2004 and has a fixed annual pay rate of approximately 6
percent. This interest rate swap agreement was designated as, and
effective as, a cash flow hedge of the outstanding debt. The change in
fair value of the interest rate swap is recorded in other comprehensive
income and recognized as earnings to offset the forecasted hedged
transactions as they occur.
In February 2002, the company issued euro 300 million of 5.375 percent
Euronotes, due 2007. The company designated a portion (approximately
euro 200 million at year-end 2002 and euro 290 million at year-end
2003) of this Euronote debt as a hedge of existing foreign currency
exposures related to net investments the company has in certain
European subsidiaries. Accordingly, the transaction gains and losses on
this portion of the Euronotes that are designated and effective as hedges
of the company's net investments have been included as a component
of the cumulative translation account within accumulated other comprehensive
income (loss). Total transaction losses related to the Euronotes
and charged to this shareholders' equity account were $52.5 million and
$26.0 million for the years ended December 31, 2003 and 2002, respectively. Transaction gains and losses on the remaining portion of
the Euronotes have been included in earnings and were offset by transaction
gains and losses related to other euro denominated assets held
by the company's U.S. operations.
The company is exposed to credit loss in the event of nonperformance
of counterparties for foreign currency forward exchange contracts and
interest rate swap agreements. The company's risk is limited to the fair
value of these contracts. The company monitors its exposure to credit
risk by using credit approvals and credit limits and selecting major
international banks and financial institutions as counterparties. The
company does not anticipate nonperformance by any of these counterparties.
The carrying amount and the estimated fair value of other financial
instruments held by the company were:
| 2003 |
2002 |
2001 |
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Carrying amount
Cash and cash equivalents |
$ 85,626 |
$ 49,205 |
$ 41,793 |
| Notes payable |
30,050 |
54,847 |
71,466 |
| Commercial paper |
36,200 |
92,100 |
424,700 |
Long-term debt (including
current maturities) |
608,394 |
552,895 |
249,507 |
Fair value
Long-term debt (including
current maturities) |
$656,576 |
$588,003 |
$260,518 |
The carrying amounts of cash equivalents, notes payable and commercial
paper approximate fair value because of their short maturities.
The fair value of long-term debt is based on quoted market prices
for the same or similar debt instruments.
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