Financial Instruments and Hedging Activities

The Company is exposed to global market risks, including the effect of changes in interest rates and foreign currency fluctuations. The Company uses foreign currency denominated debt and derivative instruments to mitigate the impact of these changes. The Company does not use derivatives with a level of complexity or with a risk higher than the exposures to be hedged and does not hold or issue derivatives for trading purposes.

The Company documents its risk management objective and strategy for undertaking hedging transactions, as well as all relationships between hedging instruments and hedged items. The Company’s derivatives that are designated as hedging instruments consist mainly of interest rate exchange agreements, forward foreign currency exchange agreements and foreign currency options. Interest rate exchange agreements are entered into to manage the interest rate risk associated with the Company’s fixed and floating- rate borrowings. Forward foreign currency exchange agreements and foreign currency options are entered into to mitigate the risk that forecasted foreign currency cash flows (such as royalties denominated in foreign currencies) will be adversely affected by changes in foreign currency exchange rates. Certain foreign currency denominated debt is used, in part, to protect the value of the Company’s investments in certain foreign subsidiaries and affiliates from changes in foreign currency exchange rates.

The Company also enters into certain derivatives that are not designated as hedging instruments. The Company has entered into equity derivative contracts to mitigate market-driven changes in certain of its supplemental benefit plan liabilities. Changes in the fair value of these derivatives are recorded in selling, general & administrative expenses together with the changes in the supplemental benefit plan liabilities. In addition, the Company uses forward foreign currency exchange agreements and foreign currency exchange agreements to mitigate the change in fair value of certain foreign currency denominated assets and liabilities. Since these derivatives are not designated as hedging instruments, the changes in the fair value of these hedges are recognized immediately in nonoperating (income) expense together with the currency gain or loss from the hedged balance sheet position. A portion of the Company’s foreign currency options (more fully described in the Cash Flow Hedging Strategy section) are undesignated as hedging instruments as the underlying foreign currency royalties are earned.

All derivative instruments designated as hedging instruments are classified as fair value, cash flow or net investment hedges. All derivatives (including those not designated as hedging instruments) are recognized on the Consolidated balance sheet at fair value and classified based on the instruments’ maturity date. Changes in the fair value measurements of the derivative instruments are reflected as adjustments to other comprehensive income (OCI) and/or current earnings.

The following table presents the fair values of derivative instruments included on the Consolidated balance sheet:


	Derivative Assets					Derivative Liabilities
In millions	Balance Sheet Classification	September 30, 2011		December 31, 2010		Balance Sheet Classification	September 30, 2011			December 31, 2010
Derivatives designated as hedging instruments
Foreign currency	Prepaid expenses and other current assets	$	7.6	$	7.5	Accrued payroll and other liabilities				$	(4.6	)
Interest rate	Prepaid expenses and other current assets		14.6		0.5
Foreign currency	Miscellaneous other assets		1.2
Interest rate	Miscellaneous other assets		49.4		72.1	Other long-term liabilities		(10.5	)		(0.3	)
Total derivatives designated as hedging instruments		$	72.8	$	80.1		$	(10.5	)	$	(4.9	)
Derivatives not designated as hedging instruments
Foreign currency	Prepaid expenses and other current assets	$	5.0	$	6.0	Accrued payroll and other liabilities	$	(10.2	)	$	(3.8	)
Equity	Prepaid expenses and other current assets		132.6		104.4
Foreign currency	Miscellaneous other assets		2.4		2.7
Total derivatives not designated as hedging instruments		$	140.0	$	113.1		$	(10.2	)	$	(3.8	)
Total derivatives ⁽¹⁾		$	212.8	$	193.2		$	(20.7	)	$	(8.7	)

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The fair value of derivatives is presented on a gross basis. Accordingly, the 2011 and 2010 total asset and liability fair values do not agree with the values provided in the Fair Value Measurements note because that disclosure reflects netting adjustments related to specific counterparties of $9.6 million and $0.3 million, respectively.

The following table presents the pretax amounts affecting income and OCI for the nine months ended September 30, 2011 and 2010, respectively:


In millions
Derivatives in Fair Value Hedging Relationships	Gain (Loss) Recognized in Income on Derivative					Hedged Items in Fair Value Hedging Relationships				Gain (Loss) Recognized in Income on Related Hedged Items
Derivatives in Fair Value Hedging Relationships	2011			2010		Hedged Items in Fair Value Hedging Relationships				2011			2010

Interest rate	$	(6.8	)	$	24.5		Fixed-rate debt			$	6.8		$	(24.5	)

Derivatives in Cash flow Hedging Relationships	Gain (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)					Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)				Gain (Loss) Recognized in Income on Derivative (Amount Excluded from Effectiveness Testing and Ineffective Portion)
Derivatives in Cash flow Hedging Relationships		2011			2010		2011		2010		2011			2010

Foreign currency	$	(4.3	)	$	13.8		$ (3.2	)	$ 10.5	$	(6.1	)	$	(22.1	)
Interest rate⁽¹⁾	$	(10.5	)				1.7		0.5					0.3
Total	$	(14.8	)	$	13.8		$ (1.5	)	$ 11.0	$	(6.1	)	$	(21.8	)


Net Investment Hedging Relationships	Gain (Loss) Recognized in Accumulated OCI on Derivative (Effective portion)						Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)					Derivatives Not Designated as Hedging Instruments	Gain (Loss) Recognized in Income on Derivative
Net Investment Hedging Relationships	2011			2010			2011			2010		Derivatives Not Designated as Hedging Instruments	2011			2010


Foreign currency denominated debt	$	(73.6	)	$	(86.8	)						Foreign currency	$	(5.6	)	$	10.1
Foreign currency derivatives⁽²⁾		(9.4	)		(4.3	)		(8.2	)			Equity⁽³⁾		16.9			15.7
Total	$	(83.0	)	$	(91.1	)	$	(8.2	)	$	-	Interest Rate		1.5
												Total	$	12.8		$	25.8

Gains (losses) recognized in income on derivatives are recorded in Nonoperating (income) expense, net unless otherwise noted.

⁽¹⁾	The amount of gain (loss) reclassified from accumulated OCI into income is recorded in Interest expense.

⁽²⁾	The amount of gain (loss) reclassified from accumulated OCI into income is recorded in Impairment and other charges (credits), net.

⁽³⁾	The amount of gain (loss) recognized in income on the derivatives used to hedge the supplemental benefit plan liabilities is recorded in Selling, general & administrative expenses.

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Fair Value Hedging Strategy

The Company enters into fair value hedges to reduce the exposure to changes in the fair value of certain liabilities. The fair value hedges the Company enters into consist of interest rate exchange agreements which convert a portion of its fixed-rate debt into floating-rate debt. All of the Company’s interest rate exchange agreements meet the shortcut method requirements. Accordingly, changes in the fair value of the interest rate exchange agreements are exactly offset by changes in the fair value of the underlying debt. No ineffectiveness has been recorded to net income related to interest rate exchange agreements designated as fair value hedges for the nine month period ended September 30, 2011. A total of $2.0 billion of the Company’s outstanding fixed-rate debt was effectively converted to floating-rate debt resulting from the use of interest rate exchange agreements.

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Cash Flow Hedging Strategy

The Company enters into cash flow hedges to reduce the exposure to variability in certain expected future cash flows. The types of cash flow hedges the Company enters into include interest rate exchange agreements, forward foreign currency exchange agreements and foreign currency options.

The Company periodically uses interest rate exchange agreements to effectively convert a portion of floating-rate debt, including forecasted debt issuances, into fixed-rate debt and the agreements are intended to reduce the impact of interest rate changes on future interest expense. At September 30, 2011, $250.0 million of the Company’s anticipated debt issuances were effectively converted to fixed-rate resulting from the use of interest rate exchange agreements.

To protect against the reduction in value of forecasted foreign currency cash flows (such as royalties denominated in foreign currencies), the Company uses forward foreign currency exchange agreements and foreign currency options to hedge a portion of anticipated exposures.

When the U.S. dollar strengthens against foreign currencies, the decline in present value of future foreign denominated royalties is offset by gains in the fair value of the forward foreign currency exchange agreements and/or foreign currency options. Conversely, when the U.S. dollar weakens, the increase in the present value of future foreign denominated royalties is offset by losses in the fair value of the forward foreign currency exchange agreements and/or foreign currency options.

Although the fair value changes in the foreign currency options may fluctuate over the period of the contract, the Company’s total loss on a foreign currency option is limited to the upfront premium paid for the contract. However, the potential gains on a foreign currency option are unlimited as the settlement value of the contract is based upon the difference between the exchange rate at inception of the contract and the spot exchange rate at maturity. In limited situations, the Company uses foreign currency option collars, which limit the potential gains and lower the upfront premium paid, to protect against currency movements.

The hedges cover the next 15 months for certain exposures and are denominated in various currencies. As of September 30, 2011, the Company had derivatives outstanding with an equivalent notional amount of $202.6 million that were used to hedge a portion of forecasted foreign currency denominated royalties.

The Company excludes the time value of foreign currency options, as well as the discount or premium points on forward foreign currency exchange agreements, from its effectiveness assessment on its cash flow hedges. As a result, changes in the fair value of the derivatives due to these components, as well as the ineffectiveness of the hedges, are recognized in earnings currently. The effective portion of the gains or losses on the derivatives is reported in the deferred hedging adjustment component of OCI in shareholders’ equity and reclassified into earnings in the same period or periods in which the hedged transaction affects earnings.

The Company recorded after tax adjustments related to cash flow hedges to the deferred hedging adjustment component of accumulated OCI in shareholders’ equity. The Company recorded a net decrease of $8.6 million for the nine months ended September 30, 2011 and a net increase of $1.8 million for the nine months ended September 30, 2010. Based on interest rates and foreign currency exchange rates at September 30, 2011, no significant amount of the $6.4 million in cumulative deferred hedging gains, after tax, at September 30, 2011, will be recognized in earnings over the next 12 months as the underlying hedged transactions are realized.

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Hedge of Net Investment in Foreign Operations Strategy

The Company primarily uses foreign currency denominated debt (third party and intercompany) to hedge its investments in certain foreign subsidiaries and affiliates. Realized and unrealized translation adjustments from these hedges are included in shareholders’ equity in the foreign currency translation component of OCI and offset translation adjustments on the underlying net assets of foreign subsidiaries and affiliates, which also are recorded in OCI. As of September 30, 2011, a total of $4.6 billion of the Company’s foreign currency denominated debt was designated to hedge investments in certain foreign subsidiaries and affiliates.

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Credit Risk

The Company is exposed to credit-related losses in the event of non-performance by the counterparties to its hedging instruments. The counterparties to these agreements consist of a diverse group of financial institutions. The Company continually monitors its positions and the credit ratings of its counterparties and adjusts positions as appropriate. The Company did not have significant exposure to any individual counterparty at September 30, 2011 and has master agreements that contain netting arrangements. Some of these agreements also require each party to post collateral if credit ratings fall below, or aggregate exposures exceed, certain contractual limits. At September 30, 2011, neither the Company nor its counterparties were required to post collateral on any derivative position, other than on hedges of certain of the Company’s supplemental benefit plan liabilities where its counterparties were required to post collateral on their liability positions.