Sunbeam 2009 Annual Report Download - page 30

Management’s Discussion and Analysis
Jarden Corporation Annual Report 2009
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 operations 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 advan-
tage 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.
Cash Flow Hedges
At December 31, 2009, the Company had $650 million of notional amount outstanding in swap agreements that exchange variable
interest rates (LIBOR) for fixed interest rates over the terms of the agreements and are designated as cash flow hedges of the interest rate risk
attributable to forecasted variable interest payments. The effective portion of the after tax fair value gains or losses on these swaps is includ-
ed as a component of accumulated other comprehensive income. The fair market value of these swaps was a liability of $15.2 million at
December 31, 2009.
At December 31, 2009, the Company had outstanding a $40 million notional amount swap agreement that exchanges a variable
interest rate (LIBOR) for fixed rate of interest over the term of the agreement that is not designated as an effective hedge for accounting
purposes and the fair market value gains or losses are included in the results of operations. This swap matures June 30, 2010 and has a fixed
rate of interest of 4.79%. The fair market value of this swap was a liability of $0.9 million at December 31, 2009.
Fair Value Hedges
At December 31, 2009, the Company had $350 million of notional amount outstanding in swap agreements that exchange a fixed
rate of interest for a variable interest rate (LIBOR) plus an approximate 395 basis point spread. These floating rate swaps, which mature in
2017, are not designated as effective hedges for accounting purposes and the fair market value gains or losses are included in the results of
operations. The fair market value of these swaps was a liability of $15.5 million at December 31, 2009.
In January 2010, the Company entered into an aggregate $275 million notional amount of interest rate swaps that exchange a fixed
rate of interest for a variable interest rate (LIBOR) an approximate 357 basis point spread. These floating rate swaps, which mature in 2017,
are not designated as effective hedges for accounting purposes and the fair market value gains or losses will be included in the results of
operations.
The Company uses cross-currency swaps to hedge foreign currency risk on certain U.S. dollar-based debt of foreign subsidiaries. At
December 31, 2009, the Company had a $22.6 million notional amount cross-currency swap outstanding that exchanges Canadian dollars
for U.S. dollars. This swap 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 is designated as a fair
value hedge on a U.S dollar based term loan of a Canadian subsidiary. The fair market value of this cross-currency swap at December 31,
2009, was a liability of $2.8 million, with a corresponding offset to long-term debt.
Forward Foreign Currency Contracts
The Company uses forward foreign currency contracts (“foreign currency contracts”) to mitigate the foreign currency exchange rate
exposure on the cash flows related to forecasted inventory purchases and sales. The derivatives used to hedge these forecasted transactions
that meet the criteria for hedge accounting are accounted for as cash flow hedges. The effective portion of the gains or losses on these
derivatives is deferred as a component of accumulated other comprehensive income and is recognized in earnings at the same time that
the hedged item affects earnings and is included in the same caption in the statement of operations as the underlying hedged item.
At December 31, 2009, the Company had approximately $336 million notional amount of foreign currency contracts outstanding
that are designated as cash flow hedges of forecasted inventory purchases and sales and mature through December 2011. The fair market
value of these foreign currency contracts was a net liability of $6.7 million at December 31, 2009.
At December 31, 2009, the Company had outstanding approximately $49 million notional amount of foreign currency contracts that
are not designated as effective hedges and have maturity dates through August 2011. Fair market value gains or losses are included in the
results of operations. The fair market value of these foreign currency contracts was a net liability of $0.2 million at December 31, 2009.
Commodity Contracts
The Company enters into commodity-based derivatives in order to mitigate the impact that the rising price of these commodities
has on the cost of certain of the Company’s raw materials. These derivatives provide the Company with maximum cost certainty, and in
certain instances allow the Company to benefit should the cost of the commodity fall below certain dollar levels. At December 31, 2009, the
Company had outstanding approximately $13 million notional amount of commodity-based derivatives that are not designated as effective
hedges for accounting purposes and have maturity dates through September 2010. Fair market value gains or losses are included in the
results of operations and as of December 31, 2009, their aggregate fair market value was a net asset of $1.3 million.
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