Black & Decker 2012 Annual Report Download - page 89

75
For 2012, the hedged items’ impact to the Consolidated Statement of Operations was a loss of $1.9 million in Cost of Sales. For
2011, the hedged items’ impact to the Consolidated Statement of Operations was a gain of $21.1 million in Cost of Sales. There
was no impact related to the interest rate contracts’ hedged items for any period presented. The impact of de-designated hedges
was immaterial for all periods presented.
During 2012, 2011 and 2010, an after-tax loss of $2.9 million, an after-tax loss of $15.9 million and an after-tax loss of $2.9
million, respectively, was reclassified from Accumulated other comprehensive income (loss) into earnings (inclusive of the
gain/loss amortization on terminated derivative financial instruments) during the periods in which the underlying hedged
transactions affected earnings.
Interest Rate Contract: The Company enters into interest rate swap agreements in order to obtain the lowest cost source of
funds within a targeted range of variable to fixed-rate debt proportions. As of December 29, 2012, all interest rate swaps
designated as cash flow hedges were terminated as discussed below. At December 31, 2011, the Company had $400 million of
forward starting swaps outstanding fixing the interest rate on the expected refinancing of debt in 2012.
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%. The objective of the hedge was to offset the expected variability on
future payments associated with the interest rate on debt instruments. In 2012, these contracts were terminated. The
terminations resulted in cash payments of $102.6 million, which was recorded in accumulated other comprehensive loss and
will be amortized to earnings over future periods. The cash flows stemming from the termination of such interest rate swaps
designated as cash flow hedges are presented within financing activities in the Consolidated Statements of Cash Flows.
In May 2010, the Company executed forward starting interest rate swaps with an aggregate notional amount of $400 million
fixing interest at 3.95%. The objective of the hedge was to offset the expected variability on future payments associated with
the interest rate on debt instruments. In connection with the August 31, 2010 issuance of the $400 million of senior unsecured
2040 Term Bonds, as discussed in Note H, Long Term Debt and Financing Arrangements, these forward-starting interest rate
swaps were terminated. The terminations resulted in cash payments of $48.4 million. This loss was recorded in Accumulated
other comprehensive loss and will be amortized to earnings over future periods. The cash flows stemming from the termination
of such interest rate swaps designated as cash flow hedges are presented within financing activities in the Consolidated
Statement of Cash Flows.
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 and Comprehensive Income in other-net. At December 29, 2012, the notional value of the forward
currency contracts outstanding was $154.0 million, all of which was designated, and matures at various dates through 2013. At
December 31, 2011, the notional value of the forward currency contracts outstanding was $196.8 million, of which $19.8
million had been de-designated, maturing at various dates through 2013.
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. At December 29, 2012, the notional value of option contracts outstanding was $173.0 million maturing at various
dates through 2013. As of December 31, 2011, there were no purchased option contracts outstanding.
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 October 2012, the Company entered into interest rate swaps with notional values
which equaled the Company's $400 million 3.4% notes due in 2021 and the Company's $400 million 5.2% notes due in 2040.
In January 2012, the Company entered into interest rate swaps with notional values which equaled the Company's $150 million
7.05% notes due in 2028. 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.