## ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk 

## MARKET RISK 

The Company is exposed to certain market risks as part of its ongoing business operations, including risks from changes in foreign currency exchange rates, interest rates and commodity prices that could impact its financial condition, results of operations and cash flows. The Company manages its exposure to these and other market risks through regular operating and financing activities, and on a limited basis, through the use of derivative financial instruments. Derivative financial instruments are used solely as risk management tools and not for speculative investment 

## FOREIGN CURRENCY EXCHANGE RISK 

The Company operates on a global basis and is exposed to the risk that its financial condition, results of operations and cash flows could be adversely affected by changes in foreign currency exchange rates. The Company is primarily exposed to foreign currency exchange rate risk with respect to its transactions and net assets denominated in Swiss Francs, Japanese Yen, Euro, Canadian Dollars and Australian Dollars. The Company manages the foreign currency exposure centrally, on a combined basis, which allows the Company to net exposures and to take advantage of any natural offsets. In order to reduce the uncertainty of foreign exchange rate movements on transactions denominated in foreign currencies, the Company enters into derivative financial instruments in the form of foreign exchange forward contracts with major international financial institutions. These forward contracts are designed to hedge anticipated foreign currency transactions, primarily intercompany sale and purchase transactions, for periods consistent with commitments. Realized and unrealized gains and losses on these contracts that qualify as cash flow hedges are temporarily recorded in other comprehensive income, then recognized in earnings when the hedged item affects net earnings. 

The notional amounts of outstanding foreign exchange forward contracts, principally Japanese Yen, Euro, Canadian Dollars and Australian Dollars, entered into with third parties, at December 31, 2003 and 2002, were $506 million and $252 million, respectively. For all contracts outstanding at December 31, 2003, the Company has an obligation to purchase U.S. Dollars and sell Japanese Yen, Euro, Canadian Dollars and Australian Dollars at set maturity dates ranging from January 2004 through December 2005. The weighted average contract rates for 2004 and 2005 are Yen:USD 116 and 115, USD:Euro 1.06 and 1.11, Canadian Dollar:USD 1.41 and 1.43 and USD:Australian Dollar 0.64 and 0.62, respectively. 

The Company maintains written policies and procedures governing its risk management activities. The Company’s policy requires that critical terms of hedging instruments are the same as hedged forecasted transactions. On this basis, with respect to cash flow hedges, changes in cash flows attributable to hedged transactions are generally expected to be completely offset by changes in the fair value of hedge instruments. As part of its risk management program, the Company furthermore performs sensitivity analyses to assess potential changes in revenue, operating results, cash flows and financial position relating to hypothetical movements in currency exchange rates. A sensitivity analysis of changes in the fair value of foreign exchange forward contracts outstanding at December 31, 2003, indicated that, if the U.S. Dollar uniformly changed in value by 10 percent relative to the Japanese Yen, Euro, Canadian Dollar and Australian Dollar, with no change in the interest differentials, the fair value of those contracts would increase or decrease earnings before income taxes, depending on the direction of the change, by an average approximate amount of $25.2 million, $21.9 million, $4.9 million and $4.9 million for the Yen, Euro, Canadian Dollar and Australian Dollar contracts, respectively. Any change in the fair value of foreign exchange forward contracts as a result of a fluctuation in a currency exchange rate is expected to be largely offset by a change in the value of the hedged transaction. Consequently, foreign exchange contracts would not subject the Company to material risk due to exchange rate movements because gains and losses on these contracts offset gains and losses on the assets, liabilities, and transactions being hedged. 

The Company had net investment exposures to net foreign currency denominated assets and liabilities of approximately $1,775 million and $135 million at December 31, 2003 and 2002, respectively, primarily in Swiss Francs, Japanese Yen and Euro. Approximately $1,333 million of the net asset exposure at December 31, 2003 relates to goodwill and intangible assets recorded in the Europe and Asia Pacific geographic segments as a result of the Exchange Offers. 

## COMMODITY PRICE RISK 

The Company purchases raw material commodities such as cobalt chrome, titanium, tantalum, polymer and sterile packaging. The Company enters into 12 to 24 month supply contracts, where available, on these commodities to alleviate the impact of market fluctuation in prices. As part of the Company’s risk management program, sensitivity analyses related to potential commodity price changes are performed. A 10 percent price change across all these commodities would not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. 

