Sunbeam 2005 Annual Report Download - page 24

Management’s Discussion and Analysis of Financial Condition and
Results of Operations (cont’d)
instrument is designed to achieve hedge accounting treatment under Financial Accounting Standards Board
Statement No. 133 (“FAS 133”) as a fair value hedge of the underlying term loan. The fair market value of
this cross-currency interest rate swap as of December 31, 2005 was immaterial and is included as a long-
term liability in the Consolidated Balance Sheet, with a corresponding offset to long-term debt.
On January 24, 2005, we entered into two interest rate swaps, effective on January 26, 2005, that
converted the floating rate interest related to an aggregate of $125 million under the Term Loan for a fixed
obligation. Such interest rate swaps carry a fixed interest rate of 6.025% per annum (including a 2%
applicable margin) for a term of five years. We entered into two interest rate swaps in December 2004 that
were effective on January 4, 2005. These swaps convert the interest payments related to an aggregate of
$300 million of floating rate debt for a fixed obligation. The first interest rate swap, for $150 million of
notional value, carries a fixed interest rate of 5.625% per annum (also including a 2% applicable margin) for
a term of three years. The second interest rate swap, also for $150 million of notional value, carries a fixed
interest rate of 6.0675% per annum (also including a 2% applicable margin) for a term of five years. All four
interest rate swaps have interest payment dates that are the same as the Term Loan. The swaps are
considered to be cash flow hedges and are also considered to be effective hedges against changes in future
interest payments of our floating-rate debt obligation for both tax and accounting purposes.
In connection with the closing of the THG Acquisition, we entered into two additional interest rate
swaps effective July 18, 2005. These swaps convert an aggregate of $200 million under the Term Loan for a
fixed obligation. Each of these swaps are for $100 million of notional value and carry a fixed interest rate of
5.84% and 5.86% per annum (both including a 1.75% applicable margin) for a term of five years. These
swaps are considered to be cash flow hedges and are also considered to be effective hedges against changes
in future interest payments of the Company’s floating-rate debt obligation for both tax and accounting
purposes.
On November 22, 2005, we unwound the six interest rate swaps (discussed above) with which we
received a variable rate of interest and paid a fixed rate of interest and contemporaneously entered into six
new interest rate swaps (“Replacement Swaps”). The Replacement Swaps have exactly the same terms and
counterparties as the prior swaps except for the fixed rate of interest that we are obligated to pay. Similar to
the swaps they replaced, the Replacement Swaps converted an aggregate of $625 million of floating rate
interest payments (excluding our applicable margin) under our Term Loan facility for a fixed obligation.
The variable interest rate of interest is based on three-month LIBOR. The fixed rates range from 4.73% to
4.805%. In return for unwinding the swaps, we received $16.8 million of cash proceeds. These proceeds
will be amortized over the remaining life of the swaps as a credit to interest expense and the unamortized
balances are included in our Consolidated Balance Sheets as an increase to the value of the long term debt.
Gains and losses related to the effective portion of the interest rate swaps are reported as a component
of other comprehensive income and are reclassified into earnings in the same period that the hedged
transaction affects earnings. As of December 31, 2005, the fair market value of the Replacement Swaps, was
unfavorable to us in the amount of approximately $0.5 million, and such amount is included as an
unrealized loss in “Accumulated Other Comprehensive Income” in our Consolidated Balance Sheets.
We utilize forward foreign exchange rate contracts (“Forward Contracts”) to reduce our foreign
currency exchange rate exposures. We designate qualifying Forward Contracts as cash flow hedge
instruments. At December 31, 2005, the fair value of our open Forward Contracts was an asset of
approximately $1.0 million, and is reflected in “Other current assets” in our Consolidated Balance Sheets.
The unrealized change in the fair values of open Forward Contracts from designation date (January 24,
2005) to December 31, 2005 was a net gain of approximately $1.2 million, of which $1.3 million of net gains
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