Black & Decker 2011 Annual Report Download - page 83

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In December 2009, the Company executed forward starting interest rate swaps with an aggregate notional amount of $400 million
fixing 10 years of interest payments at 4.78% beginning in November of 2012. The objective of the hedge is to offset the expected
variability on future payments associated with the interest rate on debt instruments expected to be issued in November 2012. Gains or
losses on the swaps are recorded in accumulated other comprehensive loss and will be subsequently reclassified into earnings as the
future interest expense is recognized in earnings or as ineffectiveness occurs. These swaps have a mandatory early termination
requirement in November 2012.
Foreign Currency Contracts
Forward Contracts: Through its global businesses, the Company enters into transactions and makes investments denominated in
multiple currencies that give rise to foreign currency risk. The Company and its subsidiaries regularly purchase inventory from
subsidiaries with non-U.S. dollar functional currencies which creates currency-related volatility in the Company’s results of
operations. The Company utilizes forward contracts to hedge these forecasted purchases of inventory. Gains and losses reclassified
from Accumulated other comprehensive loss for the effective and ineffective portions of the hedge as well as any amounts excluded
from effectiveness testing are recorded in Cost of sales. Gains and losses incurred after a hedge has been de-designated are not
recorded in Accumulated other comprehensive income, but are recorded directly to the Consolidated Statement of Operations in
Other-net. At December 31, 2011, the notional value of the forward currency contracts outstanding was $196.8 million, of which
$19.8 million has been de-designated, maturing at various dates through 2013. At January 1, 2011, the notional value of the forward
currency contracts outstanding was $82.5 million, of which $13.8 million had been de-designated and matured at various dates
through 2011.
Purchased Option Contracts: The Company and its subsidiaries have entered into various inter-company transactions whereby the
notional values are denominated in currencies other than the functional currencies of the party executing the trade. In order to better
match the cash flows of its inter-company obligations with cash flows from operations, the Company enters into purchased option
contracts. Gains and losses reclassified from Accumulated other comprehensive income (loss) for the effective and ineffective
portions of the hedge as well as any amounts excluded from effectiveness testing are recorded in cost of sales. As of December 31,
2011, there were no such outstanding option contracts. At January 1, 2011, the notional value of option contracts outstanding was
$54.7 million, of which $8.8 million had been de-designated.
FAIR VALUE HEDGES
Interest Rate Risk: In an effort to optimize the mix of fixed versus floating rate debt in the Company’s capital structure, the Company
enters into interest rate swaps. In December 2011, the Company entered into an interest rate swap with a notional value of $200
million, related to the Company’s $400 million 3.4% notes due in 2021. In December 2010, the Company entered into interest rate
swaps with notional values which equaled the Company’s $300 million 4.75% notes due in 2014 and $300 million 5.75% notes due in
2016. In January 2009, the Company entered into interest rate swaps with notional values which equaled the Company’s $200 million
4.9% notes due in 2012 and $250 million 6.15% notes due in 2013. These interest rate swaps effectively converted the Company’s
fixed rate debt to floating rate debt based on LIBOR, thereby hedging the fluctuation in fair value resulting from changes in interest
rates. The changes in fair value of the interest rate swaps were recognized in earnings as well as the offsetting changes in fair value of
the underlying notes. The notional value of open contracts was $1.250 billion and $1.050 billion as of December 31, 2011 and
January 1, 2011, respectively. A summary of the fair value adjustments relating to these swaps is as follows (in millions):
Year
-
to
-
Date 2011
Year
-
to
-
Date 2010
Income Statement
Classification
Gain/(Loss)
on
Swaps
Gain
/(Loss)
on
Borrowings
Gain/(Loss)
on
Swaps
Gain
/(Loss)
on
Borrowings
Interest Expense ................................
...................
$ 27.8 $ (27.8) $ 1.3
$ (1.3)
In addition to the amounts in the table above, the net swap accruals for each period and amortization of the gains on terminated swaps
are also reported in interest expense and totaled $19.3 million and $12.7 million for 2011 and 2010, respectively. Interest expense on
the underlying debt was $56.0 million and $28.3 million for 2011 and 2010, respectively.
NET INVESTMENT HEDGES
Foreign Exchange Contracts: The Company utilizes net investment hedges to offset the translation adjustment arising from re-
measurement of its investment in the assets and liabilities of its foreign subsidiaries. The total after-tax amounts in Accumulated other
comprehensive loss were losses of $32.7 million and $32.7 million at December 31, 2011 and January 1, 2011, respectively. As of
December 31, 2011, the Company had foreign exchange contracts that mature at various dates through October 2012 with notional
values totaling $925.4 million outstanding hedging a portion of its pound sterling denominated net investment. As of January 1, 2011,
the Company had foreign exchange contracts with notional values totaling $223.1 million outstanding hedging a portion of its euro
denominated investment and foreign exchange contracts with notional values of $800.9 million outstanding hedging a portion of its