XML 17 R8.htm IDEA: XBRL DOCUMENT  v2.3.0.11
Derivative Financial Instruments
 9 Months Ended
Jul. 03, 2011
Derivative Financial Instruments [Abstract]  
Derivative Financial Instruments
(4) Derivative Financial Instruments
HGI
As of July 3, 2011, the Company had outstanding Preferred Stock that contained a conversion option (see Note 9). If the Company were to issue certain equity securities at a price lower than the conversion price of the Preferred Stock, the conversion price would be adjusted to the share price of the newly issued equity securities (a “down round” provision). Therefore, in accordance with the guidance in ASC 815, Derivatives and Hedging, this conversion option is considered to be an embedded derivative that must be separately accounted for as a liability at fair value with any changes in fair value reported in current earnings. This embedded derivative has been bifurcated from its host contract, marked to fair value and included in “Equity conversion option of preferred stock” in the “Consumer Products and Other” sections of the accompanying Condensed Consolidated Balance Sheet with the change in fair value included as a component of “Other income (expense), net” in the Condensed Consolidated Statements of Operations. The Company valued the conversion feature using the Monte Carlo simulation approach, which utilizes various inputs including the Company’s stock price, volatility, risk free rate and discount yield.
The estimated fair value of the bifurcated conversion option at July 3, 2011 was $79,740. The Company recorded income of $5,960 in “Other income (expense), net” due to a change in fair value from the May 13, 2011 issue date.
Spectrum Brands
Derivative financial instruments are used by Spectrum Brands principally in the management of its interest rate, foreign currency and raw material price exposures. Spectrum Brands does not hold or issue derivative financial instruments for trading purposes. When hedge accounting is elected at inception, Spectrum Brands formally designates the financial instrument as a hedge of a specific underlying exposure if such criteria are met, and documents both the risk management objectives and strategies for undertaking the hedge. Spectrum Brands formally assesses both at the inception and at least quarterly thereafter, whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the forecasted cash flows of the related underlying exposure. Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the forecasted cash flows of the underlying exposures being hedged. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized in earnings. For derivatives that are not designated as cash flow hedges, or do not qualify for hedge accounting treatment, the change in the fair value is also immediately recognized in earnings.
The fair value of outstanding derivative contracts recorded in the “Consumer Products and Other” sections of the accompanying Condensed Consolidated Balance Sheet were as follows:
                     
Asset Derivatives   Classification   July 3, 2011     September 30, 2010  
Derivatives designated as hedging instruments:
                   
Commodity contracts
  Receivables   $ 1,997     $ 2,371  
Commodity contracts
  Deferred charges and other assets     1,424       1,543  
Foreign exchange contracts
  Receivables     588       20  
Foreign exchange contracts
  Deferred charges and other assets     2       55  
 
               
Total asset derivatives designated as hedging instruments
        4,011       3,989  
Derivatives not designated as hedging instruments:
                   
Foreign exchange contracts
  Receivables     38       —  
 
               
Total asset derivatives
      $ 4,049     $ 3,989  
 
               
                     
Liability Derivatives   Classification   July 3, 2011     September 30, 2010  
Derivatives designated as hedging instruments:
                   
Interest rate contracts
  Accounts payable   $ 2,620     $ 3,734  
Interest rate contracts
  Accrued and other current liabilities     854       861  
Interest rate contracts
  Other liabilities     —       2,032  
Commodity contracts
  Accounts payable     105       —  
Foreign exchange contracts
  Accounts payable     13,644       6,544  
Foreign exchange contracts
  Other liabilities     1,517       1,057  
 
               
Total liability derivatives designated as hedging instruments
        18,740       14,228  
Derivatives not designated as hedging instruments:
                   
Foreign exchange contracts
  Accounts payable     15,520       9,698  
Foreign exchange contracts
  Other liabilities     22,669       20,887  
 
               
Total liability derivatives
      $ 56,929     $ 44,813  
 
               
Cash Flow Hedges
For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of AOCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.
The following table summarizes the pretax impact of derivative instruments designated as cash flow hedges on the accompanying Condensed Consolidated Statements of Operations for the three and nine month periods ended July 3, 2011 and July 4, 2010:
                                                     
                                    Amount of Gain ( Loss)      
                                    Recognized in Income on      
    Amount of Gain (Loss)     Amount of Gain (Loss)     Derivatives (Ineffective      
Derivatives in Cash
Flow Hedging		   Recognized in AOCI on
Derivatives 		    Reclassified from AOCI
into Income 		    Portion and Amount
Excluded from 		    Location of Gain
(Loss) Recognized
Relationships   (Effective Portion)     (Effective Portion)     Effectivess Testing)     in Income on
Three Months   2011     2010     2011     2010     2011     2010   Derivatives
Commodity contracts
  $ (109 )   $ (4,647 )   $ 587     $ 155     $ 16     $ (73 )   Cost of goods sold
Interest rate contracts
    (42 )     (998 )     (839 )     (587 )     (44 )     (5,845) (A)   Interest expense
Foreign exchange contracts
    (11 )     (864 )     105       (216 )     —       —     Net sales
Foreign exchange contracts
    (5,011 )     5,820       (4,346 )     1,601       —       —     Cost of goods sold
 
                                       
Total
  $ (5,173 )   $ (689 )   $ (4,493 )   $ 953     $ (28 )   $ (5,918 )    
 
                                       
                                                     
Nine Months   2011     2010     2011     2010     2011     2010      
Commodity contracts
  $ 1,764     $ (2,201 )   $ 1,921     $ 1,106     $ 17     $ 68     Cost of goods sold
Interest rate contracts
    (102 )     (12,644 )     (2,527 )     (3,565 )     (294 )     (5,845) (A)   Interest expense
Foreign exchange contracts
    216       (1,214 )     (102 )     (402 )     —       —     Net sales
Foreign exchange contracts
    (15,801 )     7,865       (8,438 )     1,382       —       —     Cost of goods sold
 
                                       
Total
  $ (13,923 )   $ (8,194 )   $ (9,146 )   $ (1,479 )   $ (277 )   $ (5,777 )    
 
                                       
 
(A)   Includes $(4,305) reclassified from AOCI associated with the refinancing of the senior credit facility (see Note 8).
Fair Value Contracts
For derivative instruments that are used to economically hedge the fair value of Spectrum Brands’ third party and intercompany foreign exchange payments, commodity purchases and interest rate payments, the gain (loss) is recognized in earnings in the period of change associated with the derivative contract. During the three and nine month periods ended July 3, 2011 and July 4, 2010 Spectrum Brands recognized the following gains (losses) on these derivative contracts:
                                     
    Amount of Gain (Loss) Recognized in Income on
Derivatives		     Location of Gain (Loss)
Derivatives Not Designated   Three Months     Nine Months     Recognized in Income on
as Hedging Instruments   2011     2010     2011     2010     Derivatives
Commodity contracts
  $ —     $ (53 )   $ —     $ 99     Cost of goods sold
Foreign exchange contracts
    (7,578 )     (9,538 )     (17,468 )     (11,827 )   Other income (expense), net
 
                           
Total
  $ (7,578 )   $ (9,591 )   $ (17,468 )   $ (11,728 )    
 
                           
Additional Disclosures
Cash Flow Hedges
Spectrum Brands uses interest rate swaps to manage its interest rate risk. The swaps are designated as cash flow hedges with the changes in fair value recorded in AOCI and as a derivative hedge asset or liability, as applicable. The swaps settle periodically in arrears with the related amounts for the current settlement period payable to, or receivable from, the counter-parties included in accrued liabilities or receivables, respectively, and recognized in earnings as an adjustment to interest expense from the underlying debt to which the swap is designated. At July 3, 2011, Spectrum Brands had a portfolio of U.S. dollar denominated interest rate swaps outstanding, which effectively fix the interest on floating rate debt (exclusive of lender spreads), as follows: 2.25% for a notional principal amount of $300,000 through December 2011 and 2.29% for a notional principal amount of $300,000 through January 2012. At September 30, 2010, Spectrum Brands had a portfolio of U.S. dollar-denominated interest rate swaps outstanding, which effectively fixed the interest on floating rate debt (exclusive of lender spreads), as follows: 2.25% for a notional principal amount of $300,000 through December 2011 and 2.29% for a notional principal amount of $300,000 through January 2012 (the “U.S. dollar swaps”). The derivative net loss on these contracts recorded in AOCI at July 3, 2011 was $(639), net of tax benefit of $718 and noncontrolling interest of $533. The derivative net loss on the U.S. dollar swaps contracts recorded in AOCI at September 30, 2010 was $(1,458), net of tax benefit of $1,640 and noncontrolling interest of $1,217. At July 3, 2011, the portion of derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is $(639), net of tax and noncontrolling interest.
Spectrum Brands periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign denominated third party and intercompany sales or payments. These obligations generally require Spectrum Brands to exchange foreign currencies for U.S. Dollars, Euros, Pounds Sterling, Australian Dollars, Brazilian Reals, Canadian Dollars or Japanese Yen. These foreign exchange contracts are cash flow hedges of fluctuating foreign exchange related to sales or product or raw material purchases. Until the sale or purchase is recognized, the fair value of the related hedge is recorded in AOCI and as a derivative hedge asset or liability, as applicable. At the time the sale or purchase is recognized, the fair value of the related hedge is reclassified as an adjustment to “Net sales” or purchase price variance in “Cost of goods sold”. At July 3, 2011, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through September 2012 with a contract value of $270,955. At September 30, 2010, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through June 2012 with a contract value of $299,993. The derivative net loss on these contracts recorded in AOCI at July 3, 2011 was $(5,614), net of tax benefit of $4,270 and noncontrolling interest of $4,687. The derivative net loss on these contracts recorded in AOCI at September 30, 2010 was $(2,900), net of tax benefit of $2,204 and noncontrolling interest of $2,422. At July 3, 2011, the portion of derivative net losses estimated to be reclassified from AOCI into earnings over the next 12 months is $(5,042) net of tax and noncontrolling interest.
Spectrum Brands is exposed to risk from fluctuating prices for raw materials, specifically zinc used in its manufacturing processes. Spectrum Brands hedges a portion of the risk associated with these materials through the use of commodity swaps. The hedge contracts are designated as cash flow hedges with the fair value changes recorded in AOCI and as a hedge asset or liability, as applicable. The unrecognized changes in fair value of the hedge contracts are reclassified from AOCI into earnings when the hedged purchase of raw materials also affects earnings. The swaps effectively fix the floating price on a specified quantity of raw materials through a specified date. At July 3, 2011, Spectrum Brands had a series of such swap contracts outstanding through September 2012 for 10 tons of raw materials with a contract value of $20,872. At September 30, 2010, Spectrum Brands had a series of such swap contracts outstanding through September 2012 for 15 tons of raw materials with a contract value of $28,897. The derivative net gain on these contracts recorded in AOCI at July 3, 2011 was $1,173, net of tax expense of $1,147 and noncontrolling interest of $980. The derivative net gain on these contracts recorded in AOCI at September 30, 2010 was $1,230, net of tax expense of $1,201 and noncontrolling interest of $1,026. At July 3, 2011, the portion of derivative net gains estimated to be reclassified from AOCI into earnings over the next 12 months is $679, net of tax and noncontrolling interest.
Fair Value Contracts
Spectrum Brands periodically enters into forward and swap foreign exchange contracts to economically hedge the risk from third party and intercompany payments resulting from existing obligations. These obligations generally require Spectrum Brands to exchange foreign currencies for U.S. Dollars, Euros or Australian Dollars. These foreign exchange contracts are economic fair value hedges of a related liability or asset recorded in the accompanying Condensed Consolidated Balance Sheets. The gain or loss on the derivative hedge contracts is recorded in earnings as an offset to the change in value of the related liability or asset at each period end. At July 3, 2011 and September 30, 2010, Spectrum Brands had $277,510 and $333,562, respectively, of notional value for such foreign exchange derivative contracts outstanding.
Credit Risk
Spectrum Brands is exposed to the default risk of the counterparties with which Spectrum Brands transacts. Spectrum Brands monitors counterparty credit risk on an individual basis by periodically assessing each such counterparty’s credit rating exposure. The maximum loss due to credit risk equals the fair value of the gross asset derivatives that are primarily concentrated with a foreign financial institution counterparty. Spectrum Brands considers these exposures when measuring its credit reserve on its derivative assets, which were $62 and $75 at July 3, 2011 and September 30, 2010, respectively. Additionally, Spectrum Brands does not require collateral or other security to support financial instruments subject to credit risk.
Spectrum Brands’ standard contracts do not contain credit risk related contingent features whereby Spectrum Brands would be required to post additional cash collateral as a result of a credit event. However, Spectrum Brands is typically required to post collateral in the normal course of business to offset its liability positions. At both July 3, 2011 and September 30, 2010, Spectrum Brands had posted cash collateral of $294 and $2,363, respectively, related to such liability positions. In addition, at both July 3, 2011 and September 30, 2010, Spectrum Brands had posted standby letters of credit of $2,000 and $4,000 related to such liability positions. The cash collateral is included in “Receivables, net” within the accompanying Condensed Consolidated Balance Sheets.
FGL
FGL recognizes all derivative instruments as assets or liabilities in the Condensed Consolidated Balance Sheet at fair value and any changes in the fair value of the derivatives are recognized immediately in the Condensed Consolidated Statements of Operations. The fair value of derivative instruments, including derivative instruments embedded in Fixed Index Annuity (“FIA”) contracts, is as follows:
         
    July 3, 2011  
Assets:
       
Derivative investments:
       
Call options
  $ 203,671  
Futures contracts
    1,514  
 
     
 
  $ 205,185  
 
     
 
       
Liabilities:
       
 
       
Contractholder funds:
       
FIA embedded derivatives
  $ 1,444,506  
Other liabilities:
       
Available-for-sale embedded derivative
    411  
 
     
 
  $ 1,444,917  
 
     
The change in fair value of derivative instruments included in the Condensed Consolidated Statements of Operations is as follows:
         
    For the period  
    April 6, 2011 to  
    July 3, 2011  
Revenues:
       
Net investment gains (losses):
       
Call options
  $ (15,400 )
Futures contracts
    1,596  
 
     
 
    (13,804 )
Net investment income:
       
Available-for-sale embedded derivatives
    8  
 
     
 
  $ (13,796 )
 
     
 
       
Benefits and other changes in policy reserves:
       
FIA embedded derivatives
  $ (21,802 )
 
     
FGL has FIA contracts that permit the holder to elect an interest rate return or an equity index linked component, where interest credited to the contracts is linked to the performance of various equity indices, primarily the S&P 500 Index. This feature represents an embedded derivative. The FIA embedded derivative is valued at fair value and included in the liability for contractholder funds in the Condensed Consolidated Balance Sheet with changes in fair value included as a component of benefits and other changes in policy reserves in the Condensed Consolidated Statements of Operations.
When FIA deposits are received from policyholders, a portion of the deposit is used to purchase derivatives consisting of a combination of call options and futures contracts on the applicable market indices to fund the index credits due to FIA contractholders. The majority of all such call options are one year options purchased to match the funding requirements of the underlying policies. On the respective anniversary dates of the index policies, the index used to compute the interest credit is reset and FGL purchases new one, two or three year call options to fund the next index credit. FGL manages the cost of these purchases through the terms of its FIA contracts, which permit FGL to change caps or participation rates, subject to guaranteed minimums on each contract’s anniversary date. The change in the fair value of the call options and futures contracts is generally designed to offset the portion of the change in the fair value of the FIA embedded derivative related to index performance. The call options and futures contracts are marked to fair value with the change in fair value included as a component of net investment gains (losses). The change in fair value of the call options and futures contracts includes the gains and losses recognized at the expiration of the instrument term or upon early termination and the changes in fair value of open positions.
Other market exposures are hedged periodically depending on market conditions and FGL’s risk tolerance. FGL’s FIA hedging strategy economically hedges the equity returns and exposes FGL to the risk that unhedged market exposures result in divergence between changes in the fair value of the liabilities and the hedging assets. FGL uses a variety of techniques including direct estimation of market sensitivities and value-at-risk to monitor this risk daily. FGL intends to continue to adjust the hedging strategy as market conditions and FGL’s risk tolerance change.
FGL is exposed to credit loss in the event of nonperformance by its counterparties on the call options and reflects assumptions regarding this nonperformance risk in the fair value of the call options. The nonperformance risk is the net counterparty exposure based on the fair value of the open contracts less collateral held. The credit risk associated with such agreements is minimized by purchasing such agreements from several financial institutions with ratings above “A3” from Moody’s Investor Services or “A-” from Standard and Poor’s Corporation. Additionally, FGL maintains a policy of requiring all derivative contracts to be governed by an International Swaps and Derivatives Association (“ISDA”) Master Agreement.
Information regarding FGL’s exposure to credit loss on the call options it holds is presented in the following table:
                                         
            July 3, 2011        
            Notional             Collateral     Net Credit  
Counterparty   Credit Rating     Amount     Fair Value     Held     Risk  
Barclay’s Bank
  Aa3   $ 410,820     $ 20,158     $ —     $ 20,158  
Credit Suisse
  Aa1     436,595       22,265       19,360       2,905  
Bank of America
    A2       1,543,319       55,171       —       55,171  
Deutsche Bank
  Aa3     1,570,408       51,411       18,013       33,398  
Morgan Stanley
    A2       1,655,489       54,666       28,085       26,581  
 
                               
 
          $ 5,616,631     $ 203,671     $ 65,458     $ 138,213  
 
                               
In addition to the collateral presented in the table above, FGL has fixed maturity securities of $20,190 pledged as collateral by Bank of America which are considered off balance sheet and therefore not recorded in the Condensed Consolidated Financial Statements as of July 3, 2011. FGL holds cash and cash equivalents received from counterparties for call option collateral, which is included in “Other liabilities” in the “Insurance” sections of the Condensed Consolidated Balance Sheet. Both the cash and cash equivalents and fixed maturity securities held as collateral limit the maximum amount of loss due to credit risk that FGL would incur if parties to the call options failed completely to perform according to the terms of the contracts to $118,023 at July 3, 2011.
FGL is required to maintain minimum ratings as a matter of routine practice in its ISDA agreements. Under some ISDA agreements, FGL has agreed to maintain certain financial strength ratings. A downgrade below these levels could result in termination of the open derivative contracts between the parties, at which time any amounts payable by FGL or the counterparty would be dependent on the market value of the underlying derivative contracts. Downgrades of FGL have given multiple counterparties the right to terminate ISDA agreements. No ISDA agreements have been terminated, although the counterparties have reserved the right to terminate the ISDA agreements at any time. In certain transactions, FGL and the counterparty have entered into a collateral support agreement requiring either party to post collateral when the net exposures exceed pre-determined thresholds. These thresholds vary by counterparty and credit rating. Downgrades of FGL’s ratings have increased the threshold amount in FGL’s collateral support agreements, reducing the amount of collateral held and increasing the credit risk to which FGL is exposed.
FGL held 2,679 futures contracts at July 3, 2011. The fair value of futures contracts represents the cumulative unsettled variation margin. FGL provides cash collateral to the counterparties for the initial and variation margin on the futures contracts which is included in “Cash and cash equivalents” in the “Insurance” sections of the Condensed Consolidated Balance Sheet. The amount of collateral held by the counterparties for such contracts at July 3, 2011 was $10,698.