Sara Lee 2009 Annual Report Download - page 41

The material guarantees, within the scope of FASB Interpretation
No. 45, “Guarantor’s Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others”
(FIN 45), for which the maximum potential amount of future payments
can be determined, include the corporation’s contingent liability on
leases on property operated by others that is described above, and
the corporation’s guarantees of certain third-party debt. These debt
guarantees require the corporation to make payments under specific
debt arrangements in the event that the third parties default on their
debt obligations. The maximum potential amount of future payments
that the corporation could be required to make in the event that these
third parties default on their debt obligations is $16 million. At the
present time, the corporation does not believe it is probable that any
of these third parties will default on the amount subject to guarantee.
Risk Management
Geographic Risks The corporation maintains a presence in a large
number of nations in the world. This includes geographic locations
where the corporation has a direct economic presence through owned
manufacturing or distribution facilities, or companies where Sara Lee
maintains a direct equity investment. The corporation also has an
indirect economic presence in many geographic locations through
third-party suppliers who provide inventory, distribution services or
business process outsourcing services. In most cases, alternative
sources of supply are available for inventory products that are man-
ufactured or purchased from these foreign locations. However, the
general insurance coverage that is maintained by the corporation
does not cover losses resulting from acts of war or terrorism. As
a result, a loss of a significant direct or indirect manufacturing
or distribution location could impact the corporation’s operations,
cash flows and liquidity.
Foreign Exchange, Interest and Commodity Risks The corporation
is exposed to market risk from changes in foreign currency exchange
rates, interest rates and commodity prices. To mitigate the risk from
interest rate, foreign currency exchange rate and commodity price
fluctuations, the corporation enters into various hedging transactions
that have been authorized pursuant to the corporation’s policies
and procedures. The corporation does not use financial instruments
for trading purposes and is not a party to any leveraged derivatives.
Foreign Exchange The corporation primarily uses foreign currency
forward and option contracts to hedge its exposure to adverse changes
in foreign currency exchange rates. The corporation’s exposure to
foreign currency exchange rates exists primarily with the European
euro, British pound, Brazilian real, Danish krone, Hungarian forint,
Russian ruble and Australian dollar against the U.S. dollar. Hedging
is accomplished through the use of financial instruments as the
gain or loss on the hedging instrument offsets the gain or loss on
an asset, a liability or a basis adjustment to a firm commitment.
Hedging of anticipated transactions is accomplished with financial
instruments as the realized gain or loss on the hedge occurs on
or near the maturity date of the anticipated transactions.
Interest Rates The corporation uses interest rate swaps to modify
its exposure to interest rate movements, reduce borrowing costs and
to lock in interest rates on anticipated debt issuances. The corpora-
tion’s net exposure to interest rate risk consists of floating-rate
instruments that are benchmarked to U.S. and European short-term
money market interest rates. Interest rate risk management is
accomplished through the use of swaps to modify interest payments
under these instruments.
Commodities The corporation is a purchaser of certain commodities
such as beef, pork, coffee, wheat, corn, corn syrup, soybean and
corn oils, butter, sugar, natural gas and diesel fuel. The corporation
generally buys these commodities based upon market prices that
are established with the vendor as part of the purchase process.
In circumstances where commodity derivative instruments are used,
there is a high correlation between the commodity costs and the
derivative instrument.
Risk Management Activities The corporation maintains risk man-
agement control systems to monitor the foreign exchange, interest
rate and commodity risks, and the corporation’s offsetting hedge
positions. The risk management control system uses analytical
techniques including market value, sensitivity analysis and value
at risk estimations.
Value at Risk The value at risk estimations are intended to measure
the maximum amount the corporation could lose from adverse
market movements in interest rates and foreign currency exchange
rates, given a specified confidence level, over a given period of
time. Loss is defined in the value at risk estimation as fair market
value loss. As a result, foreign exchange gains or losses that are
charged directly to translation adjustments in common stockholders’
equity are included in this estimate. The value at risk estimation
utilizes historical interest rates and foreign currency exchange rates
from the past year to estimate the volatility and correlation of these
rates in the future. The model uses the variance-covariance statistical
modeling technique and includes all interest rate-sensitive debt and
swaps, foreign exchange hedges and their corresponding underlying
exposures. Foreign exchange value at risk includes the net assets
invested in foreign locations. The estimated value at risk amounts
shown below represent the potential loss the corporation could incur
from adverse changes in either interest rates or foreign currency
exchange rates for a one-day period. The average value at risk
amount represents the simple average of the quarterly amounts
for the past year. These amounts are not significant compared
with the equity, historical earnings trend or daily change in market
capitalization of the corporation.
Sara Lee Corporation and Subsidiaries 39