Sunbeam 2010 Annual Report Download - page 18

Management’s Discussion and Analysis
Jarden Corporation Annual Report 2010
Risk Management
From time to time, the Company enters into derivative transactions to hedge its exposures to interest rate, foreign currency rate and
commodity price fluctuations. The Company does not enter into derivative transactions for trading purposes.
Interest Rate Contracts
The Company manages its fixed and floating rate debt mix using interest rate swaps. The Company uses 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, depending on market conditions, to convert the fixed rates of long-term debt into short-
term variable rates. 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.
Fair Value Hedges
At December 31, 2010, the Company has $350 million notional amount outstanding in swap agreements that exchange a fixed rate
of interest for variable rate of interest (LIBOR) plus an average spread of approximately 480 basis points. These floating rate swaps,
which were entered into during the fourth quarter of 2010, are designated as fair value hedges against $350 million of principal on
the 7 1/2% senior subordinated notes due 2017 for the remaining life of these notes. The effective portion of the fair value gains or
losses on these swaps is offset by fair value adjustments in the underlying debt.
During 2010, the Company terminated $625 million notional amount outstanding in swap agreements that exchange a fixed rate of
interest for a variable rate of interest and received $3.1 million in net proceeds. These floating rate swaps were not designated as
effective hedges for accounting purposes and the fair market value gains are included in the results of operations.
Cash Flow Hedges
During 2010, the Company entered into a $200 million notional amount forward-starting interest rate swap, which became effective
commencing December 31, 2010, that exchanges a variable rate of interest (LIBOR) for a fixed rate of interest of approximately
1.4% over the term of the agreement, which matures on December 31, 2013. Additionally, during 2010, the Company entered into
a $200 million notional amount forward-starting interest rate swap, that becomes effective commencing December 30, 2011, that
will exchange a variable rate of interest (LIBOR) for an average fixed rate of interest of approximately 1.8% over the term of the
agreement, which matures on December 31, 2013.
At December 31, 2010, the Company has $650 million notional amount outstanding in swap agreements (including the $200 million
notional amount forward-starting swap that becomes effective commencing December 30, 2011) 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 and have maturity dates through December 2013. At December 31,
2010 the weighted average fixed rate of interest on these swaps, excluding the forward-starting swap, was approximately 1.7%.
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 (loss) (“AOCI”).
Cross-Currency Contracts
The Company uses cross-currency swaps to hedge foreign currency risk on certain U.S. dollar-based debt of foreign subsidiaries. At
December 31, 2010, the Company had a $22.4 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 fair value hedge on a U.S. dollar-based term loan of a Canadian subsidiary. Changes in the fair market value
of this cross-currency swap are recorded as an offset to the corresponding 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 and have maturity dates through September
2012. 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 AOCI and is
recognized in earnings at the same time that the hedged item affects earnings and is included in the same caption in the statements
of operations as the underlying hedged item. At December 31, 2010, the Company had approximately $559 million notional amount
of foreign currency contracts outstanding that are designated as cash flow hedges of forecasted inventory purchases and sales.
At December 31, 2010, the Company had outstanding approximately $76 million notional amount of foreign currency contracts that
are not designated as effective hedges for accounting purposes and have maturity dates through March 2012. Fair market value
gains or losses are included in the results of operations.
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