Derivative Financial Instruments

6 Months Ended

Jun. 30, 2011

Derivative Financial Instruments

Derivative Financial Instruments

5. Derivative Financial Instruments

The company’s risk management objective is to ensure that business exposures to risk that have been identified and measured and are capable of being controlled are minimized using the most effective and efficient methods to eliminate, reduce, or transfer such exposures.  Operating decisions consider associated risks and structure transactions to avoid risk whenever possible.

Use of derivative instruments is consistent with the overall business and risk management objectives of the company.  Derivative instruments may be used to manage business risk within limits specified by the company’s risk policy and manage exposures that have been identified through the risk identification and measurement process, provided that they clearly qualify as “hedging” activities as defined in the risk policy.  Use of derivative instruments is not automatic, nor is it necessarily the only response to managing pertinent business risk.  Use is permitted only after the risks that have been identified are determined to exceed defined tolerance levels and are considered to be unavoidable.

The primary risks managed by the company by using derivative instruments are interest rate risk, commodity price risk and foreign currency exchange risk.  Interest rate derivative instruments are entered into to help manage interest rate or fair value risk.  Forward contracts on various commodities are entered into to help manage the price risk associated with forecasted purchases of materials used in the company’s manufacturing process.  The company also enters into various foreign currency derivative instruments to help manage foreign currency risk associated with the company’s projected purchases and sales and foreign currency denominated receivable and payable balances.

ASC Topic 815-10, “Derivatives and Hedging,” requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position.  In accordance with ASC Topic 815-10, the company designates commodity, currency forward contracts, and interest rate derivatives as cash flow hedges of forecasted purchases of commodities and currencies, and variable rate interest payments.

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 Other Comprehensive Income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  Gains and losses on the derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.  In the next twelve months the company estimates $2.9 million of unrealized and realized gains net of tax related to commodity price and currency rate hedging will be reclassified from Other Comprehensive Income into earnings.  Foreign currency and commodity hedging is generally completed prospectively on a rolling basis for between twelve and twenty-four months depending on the type of risk being hedged.

As of June 30, 2011 and December 31, 2010, the company had the following outstanding commodity and currency derivative contracts that were entered into to hedge forecasted transactions:

	Units Hedged
Commodity	June 30, 2011	December 31, 2010		Type
Aluminum	853	688	MT	Cash Flow
Copper	572	312	MT	Cash Flow
Natural Gas	211,487	304,177	MMBtu	Cash Flow
Steel	7,019	—	Tons	Cash Flow

	Units Hedged
Short Currency	June 30, 2011	December 31, 2010	Type
Canadian Dollar	23,561,557	21,186,951	Cash Flow
Chinese Renminbi	17,631,000	—	Cash Flow
European Euro	68,389,382	43,440,929	Cash Flow
South Korean Won	2,199,820,637	2,245,331,882	Cash Flow
Singapore Dollar	4,800,000	4,140,000	Cash Flow
United States Dollar	9,907,323	8,828,840	Cash Flow
Great British Pound	—	399,999	Cash Flow

The total notional amount of the company’s receive-floating/pay-fixed interest rate swaps of the company’s term loans was $650.8 million on December 31, 2010.  These hedges were dedesignated and offset on June 30, 2011.

The designated fair market value hedges of receive-fixed/pay-float swaps of the company’s 2018 Notes was $200.0 million and $200.0 million, as of June 30, 2011 and December 31, 2010, respectively.  The designated fair market value hedges of receive-fixed/pay-float swaps of the company’s 2020 Notes was $300.0 million and $300.0 million, as of June 30, 2011 and December 31, 2010, respectively.

For derivative instruments that are not designated as hedging instruments under ASC Topic 815-10, the gains or losses on the derivatives are recognized in current earnings within cost of sales or other income, net in the Consolidated Statements of Operations.

As of June 30, 2011 and December 31, 2010, the company had the following outstanding currency forward contracts that were not designated as hedging instruments:

	Units Hedged
Short Currency	June 30, 2011	December 31, 2010	Recognized Location	Purpose
Great British Pound	—	8,172,569	Other income, net	Accounts Payable and Receivable Settlement
Euro	22,842,432	7,732,026	Other income, net	Accounts Payable and Receivable Settlement
United States Dollar	39,302,482	33,158,979	Other income, net	Accounts Payable and Receivable Settlement
Japanese Yen	200,000,000	—	Other income, net	Accounts Payable and Receivable Settlement

The fair value of outstanding derivative contracts recorded as assets in the accompanying Consolidated Balance Sheet as of June 30, 2011 and December 31, 2010 was as follows:

		ASSET DERIVATIVES
		June 30, 2011		December 31, 2010
(in millions)	Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts	Other current assets	$	4.6	$	1.8
Commodity contracts	Other current assets	0.7		1.1
Total derivatives designated as hedging instruments		$	5.3	$	2.9

		ASSET DERIVATIVES
		June 30, 2011		December 31, 2010
(in millions)	Balance Sheet Location	Fair Value
Derivatives NOT designated as hedging instruments
Foreign exchange contracts	Other current assets	$	0.1	$	0.5
Total derivatives NOT designated as hedging instruments		$	0.1	$	0.5
Total asset derivatives		$	5.4	$	3.4

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying Consolidated Balance Sheet as of June 30, 2011 and December 31, 2010 was as follows:

		LIABILITY DERIVATIVES
		June 30, 2011		December 31, 2010
(in millions)	Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts	Accounts payable and accrued expenses	$	0.4	$	0.6
Interest rate swap contracts	Other non-current liabilities	10.1		38.4
Commodity contracts	Accounts payable and accrued expenses	0.4		0.3
Total derivatives designated as hedging instruments		$	10.9	$	39.3

		LIABILITY DERIVATIVES
		June 30, 2011		December 31, 2010
(in millions)	Balance Sheet Location	Fair Value
Derivatives NOT designated as hedging instruments
Foreign exchange contracts	Accounts payable and accrued expenses	$	2.3	$	—
Interest rate swap contracts	Other non-current liabilities	14.3
Total derivatives NOT designated as hedging instruments		$	16.6	$	—
Total liability derivatives		$	27.5	$	39.3

The effect of derivative instruments on the Consolidated Statement of Operations for the quarter ended June 30, 2011 and June 30, 2010 for gains or losses initially recognized in Other Comprehensive Income (OCI) in the consolidated balance sheet was as follows:

Derivatives in Cash Flow Hedging	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion, net of tax)						Location of Gain or (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Relationships	June 30, 2011			June 30, 2010			(Effective Portion)	June 30, 2011			June 30, 2010
Foreign exchange contracts	$	(1.0	)	$	(3.5	)	Cost of sales	$	2.7		$	(2.0	)
Interest rate swap contracts	—			(3.1		)	Interest expense	(2.7		)	(2.7		)
Commodity contracts	(0.3		)	(0.8		)	Cost of sales	0.2			0.3
Total	$	(1.3	)	$	(7.4	)		$	0.2		$	(4.4	)

Derivatives	Location of Gain of (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from	Amount of Gain of (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Relationships	Effectiveness Testing)	June 30, 2011		June 30, 2010
Commodity contracts	Cost of sales	$	—	$	0.2
Total		$	—	$	0.2

Derivatives Not Designated as	Location of Gain or (Loss) Recognized in Income on	Amount of Gain or (Loss) Recognized in Income on Derivative
Hedging Instruments	Derivative	June 30, 2011			June 30, 2010
Foreign exchange contracts	Other income	$	(0.6	)	$	(1.5	)
Total		$	(0.6	)	$	(1.5	)

The effect of derivative instruments on the Consolidated Statement of Operations for the six months ended June 30, 2011 and June 30, 2010 for gains or losses initially recognized in Other Comprehensive Income (OCI) in the Consolidated Balance Sheet was as follows:

Derivatives in Cash Flow Hedging	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion, net of tax)						Location of Gain or (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Relationships	June 30, 2011			June 30, 2010			(Effective Portion)	June 30, 2011			June 30, 2010
Foreign exchange contracts	$	0.9		$	(4.7	)	Cost of sales	$	3.4		$	(2.5	)
Interest rate swap contracts	1.1			(7.0		)	Interest expense	(5.3		)	(5.4		)
Commodity contracts	(0.4		)	(0.8		)	Cost of sales	0.3			0.5
Total	$	1.6		$	(12.5	)		$	(1.6	)	$	(7.4	)

Derivatives	Location of Gain of (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from	Amount of Gain of (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Relationships	Effectiveness Testing)	June 30, 2011		June 30, 2010
Commodity contracts	Cost of sales	$	—	$	—
Total		$	—	$	—

Derivatives Not Designated as	Location of Gain or (Loss) Recognized in Income on	Amount of Gain or (Loss) Recognized in Income on Derivative
Hedging Instruments	Derivative	June 30, 2011			June 30, 2010
Foreign exchange contracts	Other income	$	(2.7	)	$	0.2
Total		$	(2.7	)	$	0.2

The effect of Fair Market Value designated derivative instruments on the Consolidated Statement of Operations for the quarters ended June 30, 2011 and June 30, 2010 for gains or losses recognized through income was as follows:

Derivatives Designated as Fair Market Value Instruments under Statement 133	Location of Gain of (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
Relationships	Derivative	June 30, 2011		June 30, 2010
Interest rate swap contracts	Interest expense	$	14.3	$	—
Total		$	14.3	$	—

The effect of Fair Market Value designated derivative instruments on the Consolidated Statement of Operations for the six months ended June 30, 2011 and June 30, 2010 for gains or losses recognized through income was as follows:

Derivatives Designated as Fair Market Value Instruments under Statement 133	Location of Gain of (Loss) Recognized in Income on Derivative	Amount of Gain or (Loss) Recognized in Income on Derivative
Relationships	Derivative	June 30, 2011		June 30, 2010
Interest rate swap contracts	Interest expense	$	11.7	$	—
Total		$	11.7	$	—