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Newell Rubbermaid Inc. 2010 Annual Report
NEWELL RUBBERMAID 2010 Annual Report 39
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
MARKET RISK
The Company’s market risk is impacted by changes in interest rates, foreign currency exchange rates and certain commodity
prices. Pursuant to the Company’s policies, natural hedging techniques and derivative financial instruments may be utilized to
reduce the impact of adverse changes in rates and prices. The Company does not hold or issue derivative instruments for
trading purposes.
Interest Rates
Interest rate risk is present with both fixed- and floating-rate debt. The Company manages its interest rate exposure through
its mix of fixed- and floating-rate debt and its conservative debt ratio target. Interest rate swap agreements designated as
fair value hedges are used to mitigate the Company’s exposure to changes in the fair value of fixed-rate debt resulting from
fluctuations in benchmark interest rates. Accordingly, benchmark interest rate fluctuations impact the fair value of the
Company’s fixed-rate debt, which are offset by corresponding changes in the fair value of the swap agreements. Interest rate
swaps may also be used to adjust interest rate exposures when appropriate based on market conditions, and for qualifying
hedges, the interest differential of swaps is included in interest expense. Excluding debt for which a fixed rate has been
swapped for a floating rate, fixed-rate debt represented approximately 43.7% of the Company’s $2.37 billion of total debt
as of December 31, 2010.
Foreign Currency Exchange Rates
The Company is exposed to foreign currency risk in the ordinary course of business since a portion of the Company’s sales,
expenses and operating transactions is conducted on a global basis in various foreign currencies. To the extent that business
transactions are not denominated in the functional currency of the entity entering into the transaction, the Company is exposed
to transactional foreign currency exchange rate risk. The Company’s foreign exchange risk management policy emphasizes
hedging anticipated intercompany and third-party commercial transaction exposures of one-year duration or less. The Company
uses foreign exchange forward contracts as economic hedges for commercial transactions and to offset the future impact of
gains and losses resulting from changes in the expected amount of functional currency cash flows to be received or paid upon
settlement of the anticipated intercompany and third-party commercial transactions. Gains and losses related to the settlement
of qualifying hedges of commercial and intercompany transactions are deferred and included in the basis of the underlying
transactions. The Company also uses natural hedging techniques such as offsetting or netting like foreign currency flows and
denominating contracts in the appropriate functional currency.
The Company also incurs gains and losses recorded within shareholders’ equity due to the translation of the financial
statements from the functional currency of its subsidiaries to U.S. Dollars. The Company utilizes capital structures of foreign
subsidiaries combined with forward contracts to minimize its exposure to foreign currency risk. The Company may hedge portions
of its net investments in foreign subsidiaries, including intercompany loans, with forward contracts and cross-currency hedges.
Gains and losses related to qualifying forward exchange contracts and cross-currency hedges, which are generally used to hedge
intercompany loans and net investments in foreign subsidiaries, are recognized in other comprehensive income (loss).
Commodity Prices
The Company purchases certain raw materials, including resin, corrugate, steel, stainless steel, aluminum and other metals,
which are subject to price volatility caused by unpredictable factors. The Company’s resin purchases are principally comprised
of polyethylene and polypropylene in roughly equal quantities. While future movements of raw material costs are uncertain, a
variety of programs, including periodic raw material purchases, purchases of raw materials for future delivery and customer
price adjustments help the Company address this risk. Where practical, the Company uses derivatives as part of its risk
management process.
Financial Instruments
In managing the impact of interest rate changes and foreign currency fluctuations, the Company uses interest rate swaps, foreign
currency forward contracts and cross-currency swaps. Derivatives were recorded at fair value in the Company’s Consolidated
Balance Sheet at December 31, 2010 as follows (in millions):
Prepaid expenses and other $ 2.6
Other assets 42.3
Other accrued liabilities $ (2.0)
See Footnote 11 of the Notes to Consolidated Financial Statements for additional information on derivatives.