Snapple 2009 Annual Report Download - page 104

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Economic Hedge
As discussed above, as of December 31, 2009, the remaining $405 million in notional amount of the interest
rate swap is used to economically hedge the volatility in floating interest rate associated with borrowings under the
Revolver. Borrowings under the Revolver have similar terms to the Term Loan A. The interest rate swap is not
designated as a hedging instrument and effectively converts variable interest rates on the Revolver to fixed rates.
Any change in the fair value of the interest rate swap will be recorded as interest expense going forward in the period
of change.
Fair Value Hedges
The Company is also exposed to the risk of changes in the fair value of certain fixed-rate debt attributable to
changes in interest rates and manages these risks through the use of receive-fixed, pay-variable interest rate swaps.
In December 2009, the Company entered into two interest rate swaps having an aggregate notional amount of
$850 million and durations ranging from two to three years in order to convert fixed-rate, long-term debt to floating
rate debt. These swaps were entered into at the inception of the 2011 and 2012 Notes. See Note 9 for further
information.
These swaps are accounted for as fair value hedges under U.S. GAAP and qualify for the “shortcut method” of
accounting for hedges. As of December 31, 2009, the carrying value of the 2011 and 2012 Notes were adjusted by
$8 million, to reflect the change in fair value of the Company’s interest rate swap agreements. See Note 9 for further
information.
Foreign Exchange
The Company’s Canadian business purchases its inventory through transactions denominated and settled in
U.S. Dollars, a currency different from the functional currency of the Canadian business. These inventory purchases
are subject to exposure from movements in exchange rates. The Company uses foreign exchange forward contracts
designated as cash flow hedges to manage operational exposures resulting from changes in these foreign currency
exchange rates. The intent of the foreign exchange contracts is to provide predictability in the Company’s overall
cost structure. These foreign exchange contracts, carried at fair value, have maturities between one and 24 months.
As of December 31, 2009, the Company had outstanding foreign exchange forward contracts with notional amounts
of $85 million. There were no foreign exchange forward contracts in place for the year ended December 31, 2008,
that qualified for hedge accounting under U.S. GAAP.
Commodities
DPS centrally manages the exposure to volatility in the prices of certain commodities used in its production
process through futures contracts and supplier pricing agreements. The intent of these contracts and agreements is to
provide predictability in the Company’s overall cost structure. The Company enters into futures contracts that
economically hedge certain of its risks, although hedge accounting under U.S. GAAP may not apply. In these cases,
there exists a natural hedging relationship in which changes in the fair value of the instruments act as an economic
offset to changes in the fair value of the underlying items. Changes in the fair value of these instruments are recorded
in net income throughout the term of the derivative instrument and are reported in the same line item of the
Consolidated Statements of Operations as the hedged transaction. Gains and losses are recognized as a component
of unallocated corporate costs until the Company’s operating segments are affected by the completion of the
underlying transaction, at which time the gain or loss is reflected as a component of the respective segment’s
operating profit (“SOP”).
84
DR PEPPER SNAPPLE GROUP, INC.
NOTES TO AUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)