Management’s Discussion and AnalysisMarket Risk ExposuresThe Company has activities in more than 100 countries and a number of different industries. These operations expose the Company to a variety of market risks, including the effects of changes in interest rates, commodities prices and foreign currency exchange rates. These financial and commodity exposures are monitored and managed by the Company as an integral part of its overall risk management program. The Company utilizes various derivative and non-derivative financial instruments, as discussed below, to hedge its interest rate, commodities prices and foreign currency exposures when appropriate. The risk that counterparties to these instruments may be unable to perform is minimized by limiting the counterparties used to major financial institutions with investment grade credit ratings. The Company does not expect to incur a loss from the failure of any counterparty to perform under the agreements. The Company does not use derivative financial instruments for purposes other than hedging underlying financial or commercial exposures. The sensitivity analyses discussed below for the market risk exposures were based on the facts and circumstances in effect at December 31, 2003. Actual results will be determined by a number of factors that are not under management’s control and could vary materially from those disclosed. Interest Rate RiskThe Company uses both fixed and floating rate debt and off-balance sheet instruments to finance its operations. Floating rate obligations, including the Company’s U.S. bank credit facility, the accounts receivable securitization facility and some of its operating lease facilities, expose the Company to fluctuations in cash flows due to changes in the general level of interest rates. In order to limit the variability of future cash flows, the Company has converted floating rate cash flows on a portion ($50.0 million effective December 2003 through August 2005) of its accounts receivable securitization facility to fixed-rate cash flows by entering into interest rate swap agreements which involve the exchange of floating rate payments for fixed rate payments. The fair value liability of these interest swaps at December 31, 2003 was $0.9 million. In addition to the interest rate swaps, the Company also has fixed rate debt, including the Company’s Senior Notes and Dominion Terminal Associates debt. The fixed rate debt and interest rate swaps are subject to fluctuations in their fair values as a result of changes in interest rates. Based on interest rate swaps in effect and the contractual interest and discount rates on the floating rate debt and the securitization facility, respectively, at December 31, 2003, a hypothetical 10% increase in these rates would increase cash outflows by approximately $0.6 million over a twelve-month period (in other words, the Company’s weighted average interest rate on its unhedged floating rate instruments was 3.99% per annum at December 31, 2003. If that average rate were to increase by 40 basis points to 4.39%, the cash outflows associated with these instruments would increase by $0.6 million annually). The effect of a hypothetical 10% increase in interest rates on the Company’s operating lease facilities would also not have a material effect on the Company’s financial position or results of operations over the next fiscal year. The effect on the fair value of the interest rate swaps for a hypothetical 10% decrease in the yield curves from year-end 2003 levels is not material. The effect on the fair value of the Company’s Senior Notes and Dominion Terminal Associates debt for a hypothetical 10% decrease in the yield curves from year-end 2003 levels would result in a $4.9 million increase in the fair value of such debt. Commodities Price RiskThe Company consumes various commodities in the normal course of its business and, from time to time, utilizes derivative financial instruments to minimize the variability in forecasted cash flows due to price movements in these commodities. The derivative contracts are entered into in accordance with guidelines set forth in the Company’s risk management policies. During 2003, the Company utilized swap contracts to fix a portion of forecasted jet fuel purchases at specific price levels. In addition, depending on market conditions, the Company has been able to adjust its pricing through the use of surcharges on customers to partially offset large increases in the cost of jet fuel. During 2003, the Company utilized forward sales contracts and option strategies to hedge the selling price on a portion of its forecasted natural gas and gold sales. The Company exited the natural gas business in 2003 and the gold business in early 2004. Following the sale of the gold business, the Company has no outstanding forward gold sales contracts. The following table represents the Company’s outstanding jet fuel swap contracts as of December 31, 2003. Amounts presented as the fair value after a hypothetical 10% change in commodity prices reflect a hypothetical 10% reduction in the future price of jet fuel.
(a) Notional amount in millions of gallons of fuel. Foreign Currency RiskThe Company, primarily through its Brink’s and BAX Global operations, has certain exposures to the effects of foreign currency exchange rate fluctuations on the results of foreign operations which are reported in U.S. dollars. The Company is exposed periodically to the foreign currency rate fluctuations that affect transactions not denominated in the functional currency of domestic and foreign operations. To mitigate these exposures, the Company, from time to time, enters into foreign currency forward contracts. The Company does not use derivative financial instruments to hedge investments in foreign subsidiaries due to their long-term nature. The effects of a hypothetical simultaneous 10% appreciation in the U.S. dollar from year-end 2003 levels against all other currencies of countries in which the Company operates are as follows:
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