Sunbeam 2006 Annual Report Download - page 36

Commercial commitments are items that the Company could be obligated to pay in the future and are not included in the
above table. As of December 31,2006,the Company had approximately $27 million in standby and commercial letters of
credit, 99%of which expire in 2007.
Other than as discussed specifically above, these amounts are not required to be included in its Consolidated Balance Sheets.
RISK MANAGEMENT
From time to time the Company may elect to enter into derivative transactions to hedge its exposures to interest rate and
foreign currency fluctuations. The Company does not enter into derivative transactions for speculative purposes.
The Company actively manages its fixed and floating rate debt mix using interest rate swaps. The Company will enter into
fixed and floating rate swaps to alter its exposure to the impact of changing interest rates on its consolidated results of opera-
tions and future cash outflows for interest. Floating rate swaps are used to convert the fixed rates of long-term debt into
short-term variable rates to take advantage of current market conditions. Fixed rate swaps are used to reduce the Company’s
risk of the possibility of increased interest costs. Interest rate swap contracts are therefore used by the Company to separate
interest rate risk management from the debt funding decision.
At December 31,2006,the Company had $725 million of notional amount outstanding in swap agreements that exchange
variable interest rates (LIBOR) for fixed interest rates over the terms of the agreements. The Company designated these swaps
as cash flow hedges of the interest rate risk attributable to forecasted variable interest payments. At December 31,2006 the
weighted average fixed rate of interest on these swaps was 5.1%. The effective portion of the after tax fair value gains or losses
on these swaps is included as a component of accumulated other comprehensive income. There was no ineffectiveness recog-
nized at December 31,2006 or 2005.
In addition, as of December 31,2006 the Company had $105 million notional amount interest rate swaps that exchange a
fixed rate interest for floating rate six-month LIBOR plus a 523 to 528 basis point spread. These floating rate swaps are desig-
nated as fair value hedges against $105 million of principal on the 93/4%Senior Subordinated Notes due 2012.The effective
portion of the fair value gains or losses on these swaps was offset by fair value adjustments in the underlying borrowings. There
was no ineffectiveness recognized at December 31,2006 or 2005.In conjunction with the Financing Transactions discussed in
Capital Resources above, these interest rate swaps were terminated on February 13,2007.
As part of the foreign repatriation transactions, on December 21,2005,in connection with Sunbeam Corporation
(Canada) Limited (“Sunbeam Canada”) legal reorganization and IRC §965 dividend, Sunbeam Canada obtained a senior
secured term loan facility (“Canadian Term Loan”) of $43 million U.S. dollars. Sunbeam Canada chose to limit the foreign
currency exchange exposure of this US dollar loan funded by a Canadian dollar based entity by entering into a cross-currency
interest rate swap that fixes the exchange rate of the amortizing loan balance for the life of the loan. The swap instrument
exchanges the variable interest rate bases of the U.S. dollar balance (3-month U.S. LIBOR plus a spread of 175 basis points)
and the equivalent Canadian dollar balance (3-month CAD BA plus a spread of 192 basis points). This swap instrument is
designed to achieve hedge accounting treatment under Financial Accounting Standards Board Statement No. 133 (“SFAS
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 corre-
sponding offset to long-term debt.
The Company uses forward foreign currency contracts to mitigate the foreign currency exchange rate exposure on the cash
flows related to forecasted inventory purchases. The derivatives used to hedge these forecasted transactions that meet the crite-
ria for hedge accounting are accounted for as cash flow hedges. The effective portion of the gains or losses on these derivatives
aredeferred as a component of accumulated other comprehensive income and arerecognized in earnings at the same time
that the hedged item affects earnings and are included in the same caption in the statement of operations as the underlying
hedged item. At December 31,2006,the Company had approximately $178 million notional amount of foreign currency
contracts outstanding.
Management’s Discussion and Analysis
Jarden Corporation 2006 Annual Report
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