Graco 2009 Annual Report Download - page 50

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Newell Rubbermaid Inc. 2009 Annual Report
48
Research and Development Costs
Research and development costs relating to both future and current products are charged to selling, general and administrative expenses as incurred.
These costs totaled $118.4 million, $119.5 million and $111.2 million in 2009, 2008 and 2007, respectively.
Derivative Financial Instruments
Derivative financial instruments are generally used to manage certain commodity, interest rate and foreign currency risks. These instruments primarily
include interest rate swaps, cross-currency interest rate swaps, forward exchange contracts and options. The Company’s forward exchange contracts,
options and cross-currency interest rate swaps do not subject the Company to exchange rate risk because gains and losses on these instruments generally
offset gains and losses on the assets, liabilities, and other transactions being hedged. However, these instruments, when settled, impact the Company’s
cash flows from operations to the extent the underlying transaction being hedged is not simultaneously settled due to an extension, a renewal or otherwise.
On the date in which the Company enters into a derivative, the derivative is designated as a hedge of the identified exposure. The Company measures
effectiveness of its hedging relationships both at hedge inception and on an ongoing basis. No material ineffectiveness was recorded on designated hedges
in 2009, 2008 or 2007.
Interest Rate Risk Management
Gains and losses on interest rate swaps designated as cash flow hedges, to the extent that the hedge relationship has been effective, are deferred in other
comprehensive income (loss) and recognized in interest expense over the period in which the Company recognizes interest expense on the related debt
instrument. Any ineffectiveness on these instruments is immediately recognized in interest expense in the period that the ineffectiveness occurs.
Interest rate swaps designated as fair value hedges include interest rate swaps on long-term debt, cross-currency interest rate swaps and forward
exchange contracts. The Company records the fair value of interest rate swaps on long-term debt as an asset or liability with a corresponding adjustment to
the carrying value of the debt. Any ineffectiveness on these instruments is immediately recognized in interest expense in the period that the ineffectiveness
occurs. See foreign currency management below for discussion of cross-currency interest rate swaps and forward exchange contracts.
Gains or losses resulting from the early termination of interest rate swaps are deferred as an increase or decrease to the carrying value of the related
debt and amortized as an adjustment to the yield of the related debt instrument over the remaining period originally covered by the swap. The cash received
or paid relating to the termination of interest rate swaps is included in other as an operating activity in the Consolidated Statements of Cash Flows.
Foreign Currency Management
The Company utilizes forward exchange contracts and options to manage foreign exchange risk related to both known and anticipated intercompany transactions
and third-party commercial transaction exposures of approximately one year in duration or less. For instruments designated as cash flow hedges, the effective
portion of the changes in fair value of these instruments is reported in other comprehensive income (loss) and reclassified into earnings in the same period or
periods in which the hedged transactions affect earnings. Any ineffective portion is immediately recognized in earnings. For instruments designated as fair value
hedges, the changes in fair value are reported in earnings, generally offsetting the change in value of the underlying instrument being hedged.
The Company has historically utilized cross-currency interest rate swaps to hedge long-term intercompany financing transactions. Gains and losses
related to qualifying forward exchange contracts, which hedge certain anticipated transactions, are recognized in other comprehensive income (loss) until
the underlying transaction occurs.
The fair values of foreign currency hedging instruments are recorded in the captions Prepaid expenses and other, Other assets, Other accrued liabilities
or Other noncurrent liabilities in the Consolidated Balance Sheets depending on the maturity of the Company’s cross-currency interest rate swaps and forward
contracts at December 31, 2009 and 2008. The earnings impact of cash flow hedges relating to forecasted purchases of inventory is generally reported in cost
of products sold to match the underlying transaction being hedged. For hedged forecasted transactions, hedge accounting is discontinued if the forecasted
transaction is no longer probable of occurring, in which case previously deferred hedging gains or losses would be recorded to earnings immediately.
Disclosures About Fair Value of Financial Instruments
The Company’s financial instruments include cash and cash equivalents, accounts receivable, accounts payable, derivative instruments, convertible note hedge
instruments, notes payable and short and long-term debt. The carrying values for current financial assets and liabilities, including cash and cash equivalents,
accounts receivable and accounts payable, approximate fair value due to the short maturity of such instruments. The fair values of the Company’s derivative
instruments are recorded in the Consolidated Balance Sheets and are disclosed in Footnote 11. The fair values of the Company’s convertible note hedge instruments
are disclosed in Footnote 10. The fair values of certain of the Company’s short and long-term debt are based on quoted market prices and are as follows (in millions):
2009 2008
Fair Value Book Value Fair Value Book Value
Medium-term notes $1,520.7 $1,426.6 $1,418.3 $1,572.3
Preferred securities underlying the junior convertible subordinated debentures 307.5 421.2 219.0 421.2
Convertible Notes $ 660.3 $ 284.3 N/A N/A
The carrying amounts of all other significant debt, including the term loan, approximate fair value. The term loan is not publicly traded and accordingly,
the fair value of this instrument was determined using a discounted cash flow model and market rates of interest as of December 31, 2009.