Download Annual Report, 2.44 MB - Xyratex

XYRATEX LTDNOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS (Continued)(U.S. dollars and amounts in thousands, except per share data, unless otherwise stated)12. Short-term Borrowings and Long-term Debt (Continued)overdraft facilities. Any amounts borrowed under the revolving credit facility would be repayable in2008. Any amounts borrowed under the overdraft facility would be repayable on demand.Interest is payable at 0.75% above LIBOR on the overdraft facility, the term loan and therevolving credit facility. Amounts under the revolving credit and overdraft facilities may be borrowed inU.K. pounds or U.S. dollars and separate currency LIBOR rates apply for each currency. The termloan and revolving credit facility contain restrictive covenants that, among other provisions, requirecompliance with certain financial covenants including levels of income from operations relative to netinterest and tangible net assets as determined in accordance with accounting principles generallyaccepted in the U.K.. The facilities are collateralized by substantially all of the assets of the Company.Prior to September 2003 the Company had similar revolving credit and revolving facilities with theBank which were denominated in U.K. pounds. Until February 2003, the previous revolving creditfacility was subject to a guarantee from a related party (see Note 17).13. Financial InstrumentsThe Company’s principal financial instruments, other than derivatives, comprise long-term debt,short-term borrowings, cash and cash equivalents, accounts receivable, accounts payable and accruedliabilities. The Company also enters into derivatives (forward foreign currency contracts) in order tomanage currency risks arising from the Company’s operations and its sources of finance. The Companydoes not hold financial instruments for trading purposes.Forward foreign exchange contracts and forward foreign exchange optionsOver 90% of the Company’s revenues are denominated in the U.S. dollar, whereas certainexpenses are incurred in U.K. pounds. Therefore, the Company is exposed to foreign currencyexchange rate risk which creates volatility in income and cash flows from period to period. In part, theCompany manages this exposure through entering into forward foreign exchange contracts to reducethe volatility of income and cash flows associated with this risk.The Company formally documents all relationships between hedging instruments and hedgeditems, as well as its risk-management objectives and strategies for undertaking various hedgetransactions. The Company links all derivatives that are designated as hedging instruments in foreigncurrency cash flow hedges to forecasted transactions or firm commitments. In accordance with theprovision of FAS 133, the Company assesses, both at the inception of each hedge and on an on-goingbasis, whether the derivatives that are designated in hedge qualifying relationship are highly effective inoffsetting changes in the cash flows of hedged items. If it is determined that a derivative is no longerhighly effective as a hedge, the Company discontinues hedge accounting prospectively. Thecounterparty to the foreign currency contracts is an international bank. Such contracts are generally for15 months or less.The Company reclassified a gain of $755 net of tax of $324 from AOCI to earnings during the yearended November 30, 2005 due to the realization of the underlying transactions. Such amounts wererecorded as selling, general and administrative expense. The Company recorded the change in fairmarket value of derivatives related to its cash flow hedges, the balances of which are recorded in othercurrent assets, to AOCI of $1,356 and $755, net of tax of $581 and $324 for the year endedF-35