Derivatives

12 Months Ended

Dec. 31, 2011

Derivatives [Abstract]

Derivatives

10.    Derivatives:

General

Our earnings and cash flows are subject to fluctuations due to changes in commodity prices, interest rates, and foreign currency exchange rates, and we seek to mitigate a portion of these risks by entering into derivative contracts. The derivatives we use are commodity futures contracts, interest rate swaps, and currency forward contracts. We do not use derivatives for speculative purposes.

The derivatives we enter into may be, but are not always, accounted for as hedges. To qualify for hedge accounting, the derivatives must be highly effective in reducing the risk exposure that they are designed to hedge, and it must be probable that the underlying transaction will occur. For instruments designated as cash flow hedges, we must formally document, at inception, the relationship between the derivative and the hedged item, the risk management objective, the hedging strategy for use of the hedged instrument, and how hedge effectiveness is, and will be, assessed. This documentation also includes linking the derivatives that are designated as cash flow hedges to forecasted transactions. We assess hedge effectiveness at inception and at least quarterly throughout the hedge designation period.

We recognize all derivatives as either assets or liabilities at fair value in the Consolidated Balance Sheets, regardless of whether or not hedge accounting is applied. For more information on the fair value of these derivative instruments, see Note 22. We report cash flows arising from our hedging instruments consistent with the classification of cash flows from the underlying hedged items. Accordingly, cash flows associated with our derivative programs are classified as operating activities in the accompanying Consolidated Statements of Cash Flows.

We monitor our derivative positions and credit ratings of our counterparties and do not anticipate losses due to counterparty non-performance.

Hedge Accounting

The derivatives that we use as hedges of commodity prices and movements in interest rates are accounted for as cash flow hedges. The effective portion of the gain or loss on the derivatives accounted for as hedges is recorded, net of applicable taxes, in AOCI, a component of Stockholders’ Equity in the accompanying Consolidated Balance Sheets. When earnings are affected by the variability of the underlying cash flow, the applicable offsetting amount of the gain or loss from the derivatives that is deferred in AOCI is reclassified into earnings in the same financial statement line item that the hedged item is recorded. Ineffectiveness, if any, is recorded in earnings each period. If the hedging relationship ceases to be highly effective, the net gain or loss shall remain in AOCI and will be reclassified into earnings when earnings are affected by the variability of the underlying cash flow. If it becomes probable that the forecasted transaction will not occur by the end of the originally specified period or within two months thereafter, the net gain or loss remaining in AOCI will be reclassified to earnings immediately.

Accounting for Derivatives When Hedge Accounting is Not Applied

We may also enter into derivatives that economically hedge certain of our risks, even though hedge accounting does not apply or we elect not to apply hedge accounting to these instruments. The changes in fair value of the derivatives act as an economic offset to changes in the fair value of the underlying items. Changes in the fair value of instruments not designated as cash flow hedges are recorded in earnings throughout the term of the derivative instrument and are reported in Losses (gains) and other expenses, net in the accompanying Consolidated Statements of Operations.

Objectives and Strategies for Using Derivative Instruments

Commodity Price Risk

We utilize a cash flow hedging program to mitigate our exposure to volatility in the prices of metal commodities we use in our production processes. The hedging program includes the use of futures contracts. We enter into these contracts based on our hedging strategy, a dollar cost averaging strategy. As part of this strategy, a higher percentage of commodity price exposures are hedged near term with lower percentages hedged at future dates. This strategy provides us with protection against near-term price volatility while allowing us to adjust to market price movements over time. Upon entering into futures contracts, we lock in prices and are subject to derivative losses should the metal commodity prices decrease and gains should the prices increase.

Interest Rate Risk

A portion of our debt bears interest at variable interest rates, and therefore, we are subject to variability in the cash paid for interest expense. In order to mitigate a portion of this risk, we use a hedging strategy to eliminate the variability of cash flows in the interest payments associated with the first $100 million of the total variable-rate debt outstanding under our revolving credit facility that is solely due to changes in the benchmark interest rate. This strategy allows us to fix a portion of our interest payments.

On June 12, 2009, we entered into a $100 million pay-fixed, receive-variable interest rate swap with a large financial institution at a fixed interest rate of 2.66%. The variable portion of the interest rate swap is tied to the 1-Month LIBOR (the benchmark interest rate). The interest rates under both the interest rate swap and the underlying debt are reset, the swap is settled with the counterparty, and interest is paid, on a monthly basis. The interest rate swap expires October 12, 2012. We account for the interest rate swap as a cash flow hedge.

Foreign Currency Risk

Foreign currency exchange rate movements create a degree of risk by affecting the U.S. dollar value of assets and liabilities arising in foreign currencies. Our objective for entering into foreign currency forward contracts is to mitigate the impact of short-term currency exchange rate movements on certain short-term intercompany transactions. In order to meet that objective, we periodically enter into foreign currency forward contracts that act as economic hedges against changes in foreign currency exchange rates. These forward contracts are not designated as hedges and generally expire during the quarter that we enter into them. By entering into these forward contracts, we lock in exchange rates that would otherwise cause losses should the U.S. dollar appreciate and gains should the U.S. dollar depreciate.

Cash Flow Hedges

We include gains or losses in AOCI in connection with our commodity cash flow hedges. The gains or losses related to commodity price hedges are expected to be reclassified into earnings within the next 18 months based on the prices of the commodities at settlement date. Assuming that commodity prices remain constant, $6.0 million of derivative losses are expected to be reclassified into earnings within the next 12 months. Commodity futures contracts that are designated as cash flow hedges and are in place as of December 31, 2011 are scheduled to mature through May 2013.

We also include gains or losses in AOCI from our $100 million pay-fixed receive variable interest rate swap. Assuming that the benchmark interest rate remains constant, $1.1 million of derivative losses are expected to be reclassified into earnings within the next 12 months. The interest rate swap expires on October 12, 2012.

We recorded the following amounts related to our cash flow hedges (in millions):

	As of December 31,
	2011			2010
Commodity Price Hedges:
Losses (gains) included in AOCI	$	6.1		$	(11.7	)
(Benefit from) provision for income taxes		(3.5	)		6.7
Interest Rate Swap:
Losses included in AOCI	$	1.1		$	2.3
Benefit from income taxes		(0.6	)		(1.3	)

We had the following outstanding commodity futures contracts designated as cash flow hedges (in millions):

	As of December 31,
	2011		2010
	(Pounds)		(Pounds)
Copper		23.3		18.5

Derivatives not Designated as Cash Flow Hedges

For commodity derivatives not designated as cash flow hedges, we follow the same hedging strategy as for derivatives designated as cash flow hedges. We elect not to designate these derivatives as cash flow hedges at inception of the arrangement. We had the following outstanding commodity futures contracts not designated as cash flow hedges (in millions):

	As of December 31,
	2011		2010
	(Pounds)		(Pounds)
Copper		2.8		1.4
Aluminum		3.0		1.4

We had the following outstanding foreign currency forward contracts not designated as cash flow hedges (in millions):

	As of December 31,
	2011		2010
Notional amounts:
Brazilian Reals		4.5		5.6
U.S. Dollars		2.0		—
Mexican Pesos		172.0		138.0
Euros		7.8		15.6
British Pounds		6.5		2.0

Information About the Location and Amounts of Derivative Instruments

For information on the location and amounts of derivative fair values in the Consolidated Balance Sheets and derivative gains and losses in the Consolidated Statements of Operations, see the tabular information presented below (in millions):

	Fair Values of Derivative Instruments(1)
	Derivatives Designated  as Hedging Instruments As of December 31,				Derivatives Not Designated as Hedging Instruments As of December 31,
	2011		2010		2011		2010
Current Assets:
Other Assets
Commodity futures contracts	$	—	$	17.4	$	—	$	1.4
Foreign currency forward contracts		—		—		1.2		0.2
Non-Current Assets:
Other Assets, net
Commodity futures contracts		0.1		1.3		—		0.1
Total Assets	$	0.1	$	18.7	$	1.2	$	1.7
Current Liabilities:
Accrued Expenses
Commodity futures contracts	$	9.4	$	—	$	1.8	$	—
Interest rate swap		1.8		2.2		—		—
Foreign currency forward contracts		—		—		0.1		—
Non-Current Liabilities:
Other Liabilities
Commodity futures contracts		0.3		—		0.2		—
Interest rate swap		—		1.4		—		—
Total Liabilities	$	11.5	$	3.6		$2.1		$—

(1) All our derivative instruments are classified as Level 2 within the fair value hierarchy. For more information on other fair value measurements, see Note 22.

Derivatives in Cash Flow Hedging Relationships

	For the Years Ended December 31,
	2011			2010			2009
Amount of Loss or (Gain) Reclassified from AOCI into Income (Effective Portion):
Commodity futures contracts(1)	$	(12.1	)	$	(11.2	)	$	19.6
Interest rate swap(2)		2.5			2.4			1.3
	$	(9.6	)	$	(8.8	)	$	20.9
Amount of (Gain) or Loss Recognized in Income on Derivatives (Ineffective Portion):
Commodity futures contracts(3)	$	0.1		$	(0.4	)	$	(0.1	)

Derivatives Not Designated as Hedging Instruments

	For the Years Ended December 31,
	2011		2010			2009
Amount of (Gain) or Loss Recognized in Income on Derivatives:
Commodity futures contracts(3)	$	3.5	$	(1.7	)	$	(3.4	)
Foreign currency forward contracts(3)		0.3		(0.2	)		3.1
	$	3.8	$	(1.9	)	$	(0.3	)

(1) The loss (gain) is recorded in Cost of Goods Sold in the accompanying Consolidated Statements of Operations.

(2) The loss (gain) is recorded in Interest expense, net in the accompanying Consolidated Statements of Operations.

(3) The loss (gain) is recorded in Losses (gains) and other expenses, net in the accompanying Consolidated Statements of Operations.