Derivative Instruments

9 Months Ended

Sep. 30, 2013

Derivative Instruments

12. Derivative Instruments

We do not enter into financial instruments for trading or speculative purposes. We principally use foreign exchange contracts and interest rate swap contracts to reduce the impact of changes in foreign currency exchange rates and interest rates.

We enter into foreign exchange contracts to hedge forecasted sales and purchases denominated in select foreign currencies, thereby limiting currency risk that would otherwise result from changes in exchange rates. The periods of the foreign exchange contracts correspond to the periods of the forecasted transactions, which generally do not exceed 12 to 15 months from the most recent balance sheet date.

We also enter into foreign exchange contracts to hedge our risk to changes in the fair value of recognized foreign currency denominated assets and liabilities. Our primary foreign currency hedge contracts pertain to the Australian dollar, the British pound, the Canadian dollar, the Euro, and the Mexican peso.

During the three months ended September 30, 2013, we entered into fixed-to-floating interest rate swaps with aggregate notional amounts of $150 million. These swap agreements hedge changes in the fair value of a portion of our fixed-rate debt that result from changes in interest rates. Our counterparty pays us a fixed interest rate equal to the coupon on the debt and we pay the counterparty a floating interest rate based on U.S. LIBOR plus a fixed spread. The swap agreements are designated as fair value hedges.

In January 2013, we entered into a cross currency interest rate swap with a notional amount of €60 million. The derivative is structured as a swap of floating U.S. LIBOR to floating EURIBOR, with both floating interest rates reset and paid quarterly through termination of the swap in June 2014. This is a non-designated economic hedge of our exposure to European assets.

During 2012, we entered into fixed-to-floating interest rate swaps with an aggregate notional amount of $200 million. These swap agreements hedge changes in the fair value of a portion of our fixed-rate debt that result from changes in interest rates. Our counterparty pays us a fixed interest rate equal to the coupon on the debt and we pay the counterparty a floating interest rate based on U.S. LIBOR plus a fixed spread. The swap agreements are designated as fair value hedges.

The counterparties to our derivative contracts are major financial institutions. We are subject to credit risk on these contracts equal to the fair value of these instruments. As of September 30, 2013, management believes that the risk of incurring material losses is unlikely and that the losses, if any, would be immaterial.

All derivatives are recognized at their fair value. On the date the derivative contract is entered into, we designate the derivative as (1) a hedge of the fair value of a recognized asset or liability (fair value hedge), (2) a hedge of a forecasted transaction or the variability of cash flow to be paid (cash flow hedge), or (3) an undesignated instrument. Changes in the fair value of a derivative that is qualified, designated and highly effective as a fair value hedge, along with the offsetting gain or loss on the hedged asset or liability, are recorded in current earnings. We include the gain or loss on the hedged items in the same line item as the offsetting loss or gain on the related derivatives. Changes in the fair value of a derivative that is qualified, designated and highly effective as a cash flow hedge are recorded in other comprehensive income (“OCI”) until they are reclassified to net income in the same period or periods during which the hedged transaction affects net income. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in net income.

The U.S. dollar equivalent notional amount of all of our foreign exchange contracts and interest rate swaps outstanding at September 30, 2013 and December 31, 2012 are as follows (in millions):

	Notional Amount
	September 30, 2013		December 31, 2012
Type of hedge
Cash flow – foreign exchange contracts	$	113.1	$	64.6
Fair value – foreign exchange contracts		365.7		189.2
Fair value – interest rate contracts		350.0		200.0
Undesignated hedge – cross currency interest rate swap		81.2		—

In November 2013, we entered into a fixed-to-floating interest rate swap with a notional amount of $50 million. The swap agreement is designated as a fair value hedge.

The fair values of derivative instruments on the unaudited condensed consolidated balance sheet as of September 30, 2013 and December 31, 2012 are as follows (in millions):

		Fair Value
	Balance Sheet Classification	September 30, 2013		December 31, 2012
Derivatives designated as hedges:
Assets
Foreign exchange contracts	Other current assets	$	5.0	$	2.8
Interest rate contracts	Other non-current assets		2.4		3.2
Liabilities
Foreign exchange contracts	Other current liabilities	$	4.3	$	3.0
Derivatives not designated as hedges:
Liabilities
Cross currency interest rate swap	Other current liabilities	$	0.3	$	—

The effects of derivative financial instruments on the unaudited condensed consolidated statements of income and comprehensive income for the three months ended September 30, 2013 and 2012 are as follows (in millions):

	Gain (Loss)
	Recognized in OCI (Effective Portion)						Recognized in Income
	2013			2012			Location of Gain (Loss) Recognized in Income	2013			2012
Derivatives designated as hedges:
Cash flow — foreign exchange contracts	$	(3.0	)	$	(1.2	)	Net sales	$	2.8		$	(1.2	)
Fair value — interest rate contracts		n/a			n/a		Interest expense		3.8			2.2
Fair value — foreign exchange contracts		n/a			n/a		Other income		(3.7	)		2.7
Total	$	(3.0	)	$	(1.2	)		$	2.9		$	3.7
Derivatives not designated as hedges:
Economic hedge — cross currency interest rate swap		n/a			n/a		Other income	$	(3.0	)	$	—

The effects of derivative financial instruments on the unaudited condensed consolidated statements of income and comprehensive income for the nine months ended September 30, 2013 and 2012 are as follows (in millions):

	Gain (Loss)
	Recognized in OCI (Effective Portion)					Recognized in Income
	2013		2012			Location of Gain (Loss) Recognized in Income	2013			2012
Derivatives designated as hedges:
Cash flow — foreign exchange contracts	$	5.1	$	(3.3	)	Net sales	$	3.9		$	(2.4	)
Cash flow — interest rate contracts		—		—		Loss on early extinguishment of debt		3.1			—
Fair value — interest rate contracts		n/a		n/a		Interest expense		1.3			3.7
Fair value — foreign exchange contracts		n/a		n/a		Other income		(0.2	)		2.5
Total	$	5.1	$	(3.3	)		$	8.1		$	3.8
Derivatives not designated as hedges:
Economic hedge — cross currency interest rate swap		n/a		n/a		Other income	$	(0.4	)	$	—

We estimate that approximately $3 million of net derivative gains included in accumulated other comprehensive loss as of September 30, 2013 will be reclassified to earnings within the next twelve months as of September 30, 2013.

In the three and nine months ended September 30, 2013 and 2012, the ineffective portion of cash flow hedges recognized in other income was insignificant.