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Derivative Financial Instruments
 9 Months Ended
Jul. 01, 2012
Derivative Financial Instruments [Abstract]  
Derivative Financial Instruments

(4) Derivative Financial Instruments

Consumer Products and Other

The fair value of outstanding derivative contracts recorded in the “Consumer Products and Other” sections of the accompanying Condensed Consolidated Balance Sheets were as follows:

 

                     

Asset Derivatives

  

Classification

   July 1, 2012     September 30, 2011  

Derivatives designated as hedging instruments:

                    

Commodity contracts

   Receivables   $ —       $ 274  

Foreign exchange contracts

   Receivables     4,959       3,189  

Foreign exchange contracts

   Deferred charges and other assets     326       —    
       

 

 

    

 

 

  

Total asset derivatives designated as hedging instruments

         5,285       3,463  

Derivatives not designated as hedging instruments:

                    

Foreign exchange contracts

   Receivables     271       —    
       

 

 

    

 

 

  

Total asset derivatives

       $ 5,556     $ 3,463  
       

 

 

    

 

 

  

 

                     

Liability Derivatives

  

Classification

   July 1, 2012     September 30, 2011  

Derivatives designated as hedging instruments:

                    

Interest rate contracts

   Accounts payable   $ —       $ 1,246  

Interest rate contracts

   Accrued and other current liabilities     —         708  

Commodity contracts

   Accounts payable     1,801       1,228  

Commodity contracts

   Other liabilities     892       4  

Foreign exchange contracts

   Accounts payable     753       2,698  
       

 

 

    

 

 

  

Total liability derivatives designated as hedging instruments

         3,446       5,884  

Derivatives not designated as hedging instruments:

                    

Foreign exchange contracts

   Accounts payable     1,780       10,945  

Foreign exchange contracts

   Other liabilities     1,504       12,036  

Equity conversion feature of preferred stock

  

Equity conversion feature of preferred stock

     199,360       75,350  
       

 

 

    

 

 

  

Total liability derivatives

       $ 206,090     $ 104,215  
       

 

 

    

 

 

  

Changes in AOCI from Derivative Instruments

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, and within AOCI, for the three and nine month periods ended July 1, 2012 and July 3, 2011:

 

                                                     

Derivatives in Cash Flow Hedging

Relationships

   Amount of Gain
(Loss) Recognized in
AOCI on Derivatives
(Effective Portion)		     Amount of Gain
(Loss) Reclassified
from AOCI into
Income (Effective
Portion)		     Amount of Gain (Loss)
Recognized in Income on
Derivatives  (Ineffective
Portion and Amount
Excluded from
Effectiveness Testing)		     Location of Gain
(Loss) Recognized in
Income on
Derivatives

Three Months

   2012     2011     2012     2011         2012             2011          

Commodity contracts

   $ (2,368 )    $ (109 )    $ (120 )    $ 587     $ (6 )    $ 16     Cost of goods sold

Interest rate contracts

     —         (42 )      —         (839 )      —         (44 )    Interest expense

Foreign exchange contracts

     (395 )      (11 )      (129 )      105       —         —       Net sales

Foreign exchange contracts

     5,973       (5,011 )      558       (4,346 )      —         —       Cost of goods sold
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

Total

   $ 3,210     $ (5,173 )    $ 309     $ (4,493 )    $ (6 )    $ (28 )     
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      
               

Nine Months

   2012     2011     2012     2011     2012     2011      

Commodity contracts

   $ (1,989 )    $ 1,764     $ (675 )    $ 1,921     $ 8     $ 17     Cost of goods sold

Interest rate contracts

     15       (102 )      (864 )      (2,527 )      —         (294 )    Interest expense

Foreign exchange contracts

     (61 )      216       (339 )      (102 )      —         —       Net sales

Foreign exchange contracts

     2,426       (15,801 )      (1,336 )      (8,438 )      —         —       Cost of goods sold
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

Total

   $ 391     $ (13,923 )    $ (3,214 )    $ (9,146 )    $ 8     $ (277 )     
   

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

      

Fair Value Contracts and Other

For derivative instruments that are used to economically hedge the fair value of Spectrum Brands’ third party and intercompany foreign currency payments, commodity purchases and interest rate payments, and the equity conversion feature of the Company’s Preferred Stock, the gain (loss) associated with the derivative contract is recognized in earnings in the period of change. During the three and nine month periods ended July 1, 2012 and July 3, 2011 the Company recognized the following gains (losses) on those derivatives:

 

                                     

Derivatives Not Designated

as Hedging Instruments

   Amount of Gain (Loss) Recognized in
Income on Derivatives		    

Location of Gain (Loss)
Recognized in Income on
Derivatives
    Three Months     Nine Months      
    2012     2011     2012     2011      

Equity conversion feature of preferred stock

   $ (125,540 )    $ 5,960     $ (124,010 )    $ 5,960     (Increase) decrease in fair value of equity conversion feature of preferred stock
                                   
                                   

Foreign exchange contracts

     7,941       (7,578 )      11,734       (17,468 )   

Other income (expense), net
   

 

 

    

 

 

    

 

 

    

 

 

      

Total

   $ (117,599 )    $ (1,618 )    $ (112,276 )    $ (11,508 )     
   

 

 

    

 

 

    

 

 

    

 

 

      

 

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 1, 2012, Spectrum Brands did not have any such interest swaps outstanding.

Spectrum Brands periodically enters into forward foreign exchange contracts to hedge the risk from forecasted foreign currency 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 of 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 1, 2012, Spectrum Brands had a series of foreign exchange derivative contracts outstanding through June 2013 with a contract value of $120,804. The derivative net gain on these contracts recorded in AOCI at July 1, 2012 was $1,880, net of tax expense of $1,262 and noncontrolling interest of $1,389. At July 1, 2012, the portion of derivative net losses estimated to be reclassified from AOCI into earnings over the next twelve months is $1,762 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 1, 2012, Spectrum Brands had a series of such swap contracts outstanding through July 2014 for 16 tons of raw materials with a contract value of $31,665. The derivative net loss on these contracts recorded in AOCI at July 1, 2012 was $1,279, net of tax benefit of $428 and noncontrolling interest of $946. At July 1, 2012, the portion of derivative net losses estimated to be reclassified from AOCI into earnings over the next twelve months is $850, 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 1, 2012 and September 30, 2011, Spectrum Brands had $189,538 and $265,974, respectively, of notional value for such foreign exchange derivative contracts outstanding.

Spectrum Brands is exposed to economic risk from foreign currencies, including firm commitments for purchases of materials denominated in South African Rand. Periodically, Spectrum Brands economically hedges a portion of the risk associated with these purchases through forward and swap foreign exchange contracts. These contracts are designated as fair value hedges. The hedges effectively fix the foreign exchange in U.S. Dollars on a specified amount of Rand to a future payment date. The unrealized change in fair value of the hedge contracts is recorded in earnings and as a hedge asset or liability, as applicable. Derivative gains or losses are realized as the hedged purchases of materials affects earnings. At July 1, 2012, Spectrum Brands had $2,249 of such foreign exchange derivative contracts outstanding (none as of September 30, 2011).

Credit Risk

Spectrum Brands is exposed to the risk of default by the counterparties with which Spectrum Brands transacts and generally does not require collateral or other security to support financial instruments subject to credit risk. 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 concentrated with certain domestic and foreign financial institution counterparties. Spectrum Brands considers these exposures when measuring its credit reserve on its derivative assets, which was $26 and $18 at July 1, 2012 and September 30, 2011, respectively.

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 July 1, 2012 and September 30, 2011, Spectrum Brands had posted cash collateral of $1,717 and $418, respectively, related to such liability positions. In addition, at September 30, 2011, Spectrum Brands had posted standby letters of credit of $2,000 (none at July 1, 2012) related to such liability positions. The cash collateral is included in “Receivables, net” within the accompanying Condensed Consolidated Balance Sheet.

Insurance and Financial Services

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 Indexed Annuity (“FIA”) contracts, is as follows:

 

                 
    July 1, 2012     September 30, 2011  

Assets:

               

Derivative investments:

                

Call options

   $ 156,919     $ 52,335  

Futures contracts

     3,646       —    
   

 

 

    

 

 

  
    $ 160,565     $ 52,335  
   

 

 

    

 

 

  

Liabilities:

                

Contractholder funds:

                

FIA embedded derivative

   $ 1,486,465     $ 1,396,340  

Other liabilities:

                

Futures contracts

     —         3,828  

Available-for-sale embedded derivative

     —         400  
   

 

 

    

 

 

  
    $ 1,486,465     $ 1,400,568  
   

 

 

    

 

 

  

 

The change in fair value of derivative instruments included in the Condensed Consolidated Statements of Operations is as follows:

 

                                 
    Three Month Period Ended     Nine Month Period Ended  
     July 1, 2012     July 3, 2011     July 1, 2012     July 3, 2011  

Revenues:

                                

Net investment gains (losses):

                                

Call options

   $ (44,557 )    $ (15,400 )    $ 48,722     $ (15,400 ) 

Futures contracts

     (6,577 )      1,596       33,926       1,596  
   

 

 

    

 

 

    

 

 

    

 

 

  
      (51,134 )      (13,804 )      82,648       (13,804 ) 

Net investment income:

                                

Available-for-sale embedded derivatives

     376       8       400       8  
   

 

 

    

 

 

    

 

 

    

 

 

  
    $ (50,758 )    $ (13,796 )    $ 83,048     $ (13,796 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  

Benefits and other changes in policy reserves:

                                

FIA embedded derivatives

   $ (10,338 )    $ (21,802 )    $ 90,125     $ (21,802 ) 
   

 

 

    

 

 

    

 

 

    

 

 

  

Additional Disclosures

FIA Contracts

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 Standard and Poor’s (“S&P”) 500 Index. This feature represents an embedded derivative under US GAAP. The FIA embedded derivative is valued at fair value and included in the liability for contractholder funds in the accompanying Condensed Consolidated Balance Sheets with changes in fair value included as a component of benefits and other changes in policy reserves in the Condensed Consolidated Statements of Operations.

FGL purchases 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 call options are one, two and three 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.

Credit Risk

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. 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:

 

                                     
    Credit Rating
(Moody’s/S&P)		   July 1, 2012     September 30, 2011  

Counterparty

     Notional
Amount		     Fair Value     Notional
Amount		     Fair Value  

Bank of America

   Baa2/A-   $ 1,910,817     $ 49,687     $ 1,692,142     $ 14,637  

Morgan Stanley

   Baa1/A-     1,784,389       42,854       1,629,247       15,373  

Deutsche Bank

   A2/A+     1,570,297       40,107       1,463,596       11,402  

Royal Bank of Scotland

   Baa1/A-     239,175       11,580       —         —    

Barclay’s Bank

   A2/A+     139,534       2,436       385,189       4,105  

Nomura

   Baa2/A-     107,000       9,897       107,000       4,033  

Credit Suisse

   A2/A     20,000       358       327,095       2,785  
       

 

 

    

 

 

    

 

 

    

 

 

  
        $ 5,771,212     $ 156,919     $ 5,604,269     $ 52,335  
       

 

 

    

 

 

    

 

 

    

 

 

  

Collateral Agreements

FGL is required to maintain minimum ratings as a matter of routine practice under its ISDA agreements. Under some ISDA agreements, FGL has agreed to maintain certain financial strength ratings. A downgrade below these levels provides the counterparty under the agreement the right to terminate 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. FGL’s current rating allows 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. As of July 1, 2012 and September 30, 2011, no collateral was posted by FGL’s counterparties as they did not meet the net exposure thresholds. Accordingly, 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 was $156,919 and $52,335 at July 1, 2012 and September 30, 2011, respectively.

FGL held 2,140 and 2,458 futures contracts at July 1, 2012 and September 30, 2011, respectively. The fair value of futures contracts represents the cumulative unsettled variation margin (open trade equity net of cash settlements). 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 and Financial Services” sections of the Condensed Consolidated Balance Sheets. The amount of collateral held by the counterparties for such contracts was $7,366 and $9,820 at July 1, 2012 and September 30, 2011, respectively.