Risk Factors
32
Ahold Annual Report 2003
Risk Factors
We face risks related to our union contracts.
As of year-end 2003, approximately 103,000
employees in our U.S. retail operating companies
and approximately 5,600 employees in our U.S.
foodservice operating companies were represented
by unions. Collective bargaining agreements
covering approximately 7% of our total U.S. retail
employees and approximately 7% of our total U.S.
foodservice employees have expired or will expire before
the end of 2004. Furthermore, although only a minority
of our employees in Spain and the Czech Republic are
union members, almost all of our employees in these
two countries are covered by collective bargaining
agreements. Collective bargaining agreements covering
all of our employees in the Czech Republic and 28%
of our employees in Spain will expire before the end
of 2004. In Spain, some of the collective bargaining
agreements have been renewed and others are under
negotiation. Collective bargaining agreements covering
approximately 95% of our employees in The Netherlands
will expire before the end of 2004.
Failure of our operating companies to effectively
renegotiate these contracts could result in work
stoppages. We may not be able to resolve any issues
in a timely manner and our contingency plans may not
be sufficient to avoid an impact on our business. A work
stoppage due to failure of one or more of our operating
companies to renegotiate a collective bargaining
agreement, or otherwise, could have a material adverse
effect on our financial condition, results of operations
and liquidity.
Poor performance of the stock markets and rising cost
of health care benefits may cause us to record significant
charges to our existing pension plans and benefit plans.
Adverse stock market developments may negatively
affect the assets of our pension funds, causing higher
pension charges, pension premiums and contributions
payable. We have a number of defined benefit pension
plans, covering the majority of our employees in The
Netherlands and in the U.S. Pension plan assets
principally consist of long-term interest-earning
investments, quoted equity securities and real estate.
The performance of stock markets could have a material
impact on our financial condition, as 47% of European
plan assets and 52% of U.S. plan assets are equity
securities. The poor performance of the stock markets
in 2002 and 2001 had a negative influence on the
investment results of our pension funds, resulting in
additional pension charges, pension premiums and
payments to such funds. Pension charges in 2003
were EUR 57 million higher than in 2002. Our
contributions to our defined benefit plans in 2003 were
EUR 80 million higher than in 2002, partly as a result
of compliance with minimum plan assets to liabilities
coverage ratios prescribed by U.S. and European
laws. Furthermore, we recognized an additional defined
benefit plans minimum unfunded pension liability
of approximately EUR 19 million net of tax, before
minority share at year-end 2003. The increase in
pension charges and contributions, as well as the
additional minimum liability, were partly offset by
currency translation.
If we are required to make significant contributions
to fund our pension plans, our cash flow available
for other uses may be significantly reduced. If we
are unable at any time to meet any required funding
obligations for some of our U.S. pension plans,
or if the Pension Benefit Guaranty Corporation
("PBGC") concludes that, as insurer of certain
U.S. plan benefits, its risk may increase unreasonably
if the plans continue, under ERISA, the PBGC could
terminate the plans and place liens on material
amounts of our assets. Our pension plans that cover
our Dutch retail and foodservice operations are
governed by the Pensioen en Verzekeringskamer
("PVK"). In the future, PVK may require us to make
contributions to our pension plans to meet minimum
funding requirements.
In addition, health care costs have risen
significantly in recent years and this trend is expected
to continue in the near future. We may be required to
expend significantly higher amounts to fund employee
health care plans in the future. Significant increases
in health care and pension funding requirements
could have a material adverse effect on our financial
condition, results of operations and liquidity.
We face risks related to fluctuations in interest rates.
We are exposed to fluctuations in interest rates.
As of year-end 2003, approximately EUR 1.2 billion,
or 16%, of our long-term borrowings (excluding
our capital leases) bear interest on a floating basis.
Accordingly, changes in interest rates can affect the
cost of these interest-bearing borrowings. As a result,
our financial condition, results of operations and
liquidity could be materially adversely affected.
Our attempts to mitigate interest rate risk by financing
non-current assets and a portion of current assets
with equity and long-term liabilities with fixed interest
rates and our use of derivative financial instruments,
such as interest rate swaps, to manage our risk could
result in our failure to realize savings if interest rates
fall. For additional information, please see "Operating
and Financial Review and Prospects - Quantitative
and Qualitative Disclosures about Market Risk".
