Black & Decker 2015 Annual Report Download - page 89

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For 2015 and 2014, the hedged items’ impact to the Consolidated Statement of Operations was a loss of $57.4 million and a
loss of $0.2 million, respectively, in Cost of Sales. There was no impact related to the interest rate contracts’ hedged items for
any period presented.
For 2015, an after-tax gain of $22.4 million and for 2014 and 2013, after-tax losses of $7.5 million and $11.7 million,
respectively, were reclassified from Accumulated other comprehensive 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 Contracts: 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 January 2, 2016, and for January 3, 2015, the
Company had $400 million of forward starting swaps outstanding which were executed in 2014. The objective of the hedges is
to offset the expected variability on future payments associated with the interest rate on debt instruments expected to be issued
in 2018. 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.
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-US 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 and sales of inventory. 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. Gains and losses incurred after a
hedge has been de-designated are not recorded in Accumulated other comprehensive income (loss), but are recorded directly to
the Consolidated Statements of Operations in Other-net. At January 2, 2016, the notional value of the forward currency
contracts outstanding was $439.3 million, maturing on various dates through 2017. At January 3, 2015, the notional value of
the forward currency contracts outstanding was $369.5 million, maturing on various dates in 2015.
Purchased Option Contracts: The Company and its subsidiaries enter into various intercompany 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 intercompany 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 January 2, 2016, the notional value of option contracts outstanding was $197.4 million, maturing on various dates
through 2016. As of January 3, 2015, the notional value of purchased option contracts was $185.0 million, maturing on various
dates in 2015.
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 2014, the Company entered into interest rate swaps on the first five years of the
Company's $400 million 5.75% notes due 2053. In 2012, the Company entered into interest rate swaps with notional values
which equaled the Company's $400 million 3.40% notes due 2021 and $150 million 7.05% notes due 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.
Previously, the Company entered into interest rate swaps related to certain of its notes payable which were subsequently
terminated as discussed below.
In 2014, the Company terminated $400 million of interest rate swaps hedging the Company's $400 million 5.20% notes due
2040. These terminations resulted in cash payments of $33.4 million and the resulting loss of $38.9 million was deferred and
will be amortized to earnings over the life of the remaining notes.
In 2013, the Company repurchased the $300 million 5.75% notes due in 2016 and, as a result, $8.1 million of the previously
deferred gain was recognized in earnings at that time.
The changes in fair value of the interest rate swaps during the period were recognized in earnings as well as the offsetting
changes in fair value of the underlying notes. The notional value of open contracts was $950.0 million as of both January 2,
2016 and January 3, 2015. A summary of the fair value adjustments relating to these swaps is as follows (in millions):