Financial Instruments and Hedging Activities, Concentrations of Credit Risk and Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2011

Financial Instruments and Hedging Activities, Concentrations of Credit Risk and Fair Value of Financial Instruments [Abstract]

Financial Instruments and Hedging Activities, Concentrations of Credit Risk and Fair Value of Financial Instruments

Note 14. Financial Instruments and Hedging Activities, Concentrations of Credit Risk and Fair Value of Financial Instruments

Derivative Instruments and Hedging Activities

     As a result of having sales, purchases and certain intercompany transactions denominated in currencies other than the functional currencies of Cooper’s businesses, Cooper is exposed to the effect of currency exchange rate changes on its cash flows and earnings. Cooper enters into currency forward exchange contracts to hedge significant non-functional currency denominated transactions for periods consistent with the terms of the underlying transactions. Contracts generally have maturities that do not exceed one year.

     Currency forward exchange contracts executed to hedge forecasted transactions are accounted for as cash flow hedges. Currency forward exchange contracts executed to hedge a recognized asset, liability or firm commitment are accounted for as fair value hedges. Cooper sometimes enters into certain currency forward exchange contracts that are not designated as hedges. These contracts are intended to reduce cash flow volatility generally related to short-term intercompany financing transactions. Cooper also enters into commodity swaps to reduce the volatility of price fluctuations on a portion of up to eighteen months of forecasted material purchases. These instruments are designated as cash flow hedges. Cooper does not enter into speculative derivative transactions.

     During October 2005 Cooper entered into cross-currency swaps designated as cash flow hedges to effectively convert its newly issued $325 million, 5.25% fixed-rate debt maturing in November 2012 to €272.6 million of 3.55% fixed-rate debt. The $325 million debt issuance proceeds were swapped to €272.6 million and lent through an intercompany loan to a non-U.S. subsidiary to partially fund repayment of the 300 million Euro bond debt that matured on October 25, 2005. The cross-currency swaps mature in November 2012.

     Assets and liabilities measured on a recurring basis at fair value using Level 2 inputs and a market approach are as follows:

	September 30, 2011					December 31, 2010
	Assets		Liabilities			Assets		Liabilities
	(in millions)
Short-term currency forward exchange contracts	$	17.4	$	(23.2	)	$	23.9	$	(24.7	)
Long-term currency forward exchange contracts		59.5		(24.4	)		63.3		(26.4	)
Short-term commodity swaps		—		(3.3	)		2.9		—
Long-term cross-currency swaps		—		(35.2	)		—		(30.2	)

     Except as discussed below, the currency forward exchange contracts and commodity swaps in the above table are designated as hedging instruments. Currency forward exchange contracts representing assets of approximately $38.8 and $48.7 million and liabilities of $28.0 and $38.3 million at September 30, 2011 and December 31, 2010, respectively are not designated as hedging instruments.

     There were no changes in the valuation techniques used to measure asset or liability fair values on a recurring basis in 2011 or 2010.

     Gains or losses on derivative instruments are reported in the same line item as the underlying hedged transaction in the consolidated statements of income. The net gain or loss on currency forward exchange contracts was not material in the nine month periods ended September 30, 2011 and 2010. For commodity swaps, Cooper recognized, in cost of sales, a net gain of $1.4 and $1.9 million in the nine month periods ended September 30, 2011 and 2010, respectively. At September 30, 2011, Cooper estimates that approximately $3.6 million of net gains on derivative instruments designated as cash flow hedges will be reclassified from accumulated other nonowner changes in equity to earnings during the next twelve months. The amount of discontinued cash flow hedges in the nine month periods ended September 30, 2011 and 2010 was not material.

     The table below summarizes the U. S. dollar equivalent contractual amounts of Cooper’s forward exchange contracts at September 30, 2011 and December 31, 2010.

	September 30,		December 31,
	2011		2010
	(in millions)
U.S. Dollar	$	579.4	$	894.8
Euro		411.7		335.4
British Pound Sterling		153.2		143.9
Canadian Dollar		—		370.6
Other		23.9		32.3
	$	1,168.2	$	1,777.0

     The contractual amounts of Cooper’s commodity swap contracts at September 30, 2011 and December 31, 2010 was approximately $19 million and $14 million, respectively.

Other Instruments

     In the normal course of business, Cooper executes stand-by letters of credit, performance bonds and other guarantees that ensure Cooper’s performance or payment to third parties that are not reflected in the consolidated balance sheets. The aggregate notional value of these instruments was $119.7 million and $108.7 million at September 30, 2011 and December 31, 2010, respectively. In the past, no significant claims have been made against these financial instruments. Management believes the likelihood of demand for payment under these instruments is minimal and expects no material losses to occur in connection with these instruments.

Concentrations of Credit Risk

     Concentrations of credit risk with respect to trade receivables are limited due to the wide variety of customers as well as their dispersion across many different geographic areas with no one customer receivable exceeding 4.6% of accounts receivable at September 30, 2011 (5.0% at December 31, 2010). At September 30, 2011, Cooper has approximately 32% of its cash and cash equivalents held at two financial institutions. Cooper believes these financial institutions to be financially stable.

Fair Value of Financial Instruments Other than Derivatives

     Cooper’s financial instruments other than derivative instruments consist primarily of cash and cash equivalents, trade receivables, trade payables and debt instruments. The book values of cash and cash equivalents, trade receivables, and trade payables are considered to be representative of their respective fair values. Cooper had a book value of approximately $1.43 billion and $1.43 billion for debt instruments at September 30, 2011 and December 31, 2010, respectively. The fair value of these debt instruments, as represented primarily by quoted market prices, was approximately $1.55 billion and $1.52 billion at September 30, 2011 and December 31, 2010, respectively.