FINANCIAL INSTRUMENTS AND DERIVATIVES

3 Months Ended

Mar. 31, 2014

Notes to Financial Statements [Abstract]

FINANCIAL INSTRUMENTS AND DERIVATIVES

FINANCIAL INSTRUMENTS AND DERIVATIVES

Derivative Instruments and Hedging Activities

The Company’s activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates, interest rates and commodity prices. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company’s operating results and equity. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert variable rate debt to fixed rate debt and to convert fixed rate debt to variable rate debt, cross currency basis swaps to convert debt denominated in one currency to another currency and commodity swaps to fix certain variable raw material costs.

Derivative Instruments Designated as Hedging

Cash Flow Hedges

The following table summarizes the notional amounts of cash flow hedges by derivative instrument type at March 31, 2014 and the notional amounts expected to mature during the next 12 months, with a discussion of the various cash flow hedges by derivative instrument type following the table:

	Aggregate  Notional  Amount		Aggregate Notional Amount Maturing within 12 Months
(in thousands)
Foreign exchange forward contracts	$	388,046	$	292,884
Interest rate swaps	195,150		121,621
Commodity contracts	2,234		2,234
Total derivative instruments designated as cash flow hedges	$	585,430	$	416,739

Foreign Exchange Risk Management

The Company uses a layered hedging program to hedge select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings of the consolidated Company. The Company accounts for the designated foreign exchange forward contracts as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the tested effectiveness of the foreign exchange forward contracts. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time value component of the fair value of the derivative is deemed ineffective and is reported currently in “Other expense (income), net” on the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operating activities on the Consolidated Statements of Cash Flows. The Company hedges various currencies, with the most significant activity occurring in euros, Swedish kronor, Canadian dollars, and Swiss francs.

These foreign exchange forward contracts generally have maturities up to 18 months and the counterparties to the transactions are typically large international financial institutions.

Interest Rate Risk Management

The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt. At March 31, 2014, the Company has two groups of significant interest rate swaps. One of the groups of swaps has notional amounts totaling 12.6 billion Japanese yen, and effectively converts the underlying variable interest rate to a fixed interest rate of 0.2% for an initial term of three years, ending in September 2014. Another swap has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rate to a fixed interest rate of 0.7% for an initial term of five years, ending in September 2016.

The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes. Any cash flows associated with these instruments are included in cash from operating activities on the Consolidated Statements of Cash Flows.

Commodity Risk Management

The Company enters into precious metal commodity swap contracts to effectively fix certain variable raw material costs typically for up to 18 months. These swaps are used to stabilize the cost of components used in the production of certain of the Company’s products. The Company generally accounts for the commodity swaps as cash flow hedges. As a result, the Company records the fair value of the contracts primarily through AOCI based on the tested effectiveness of the commodity swaps. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the Consolidated Statements of Operations in the same period that the hedged transaction is recorded. The time value component of the fair value of the derivative is deemed ineffective and is reported currently in “Interest expense” on the Consolidated Statements of Operations in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operating activities on the Consolidated Statements of Cash Flows.

The following tables summarize the amount of gains (losses) recorded in AOCI in the Consolidated Balance Sheets and income (expense) in the Company’s Consolidated Statements of Operations related to all cash flow hedges for the quarters ended March 31, 2014 and 2013:

March 31, 2014
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Effective Portion Reclassified from AOCI into Income (Expense)			Ineffective Portion Recognized in Income (Expense)
(in thousands)
Effective Portion:
Interest rate swaps	$	(387	)	Interest expense	$	(926	)
Foreign exchange forward contracts	1,067			Cost of products sold	(1,646		)
Foreign exchange forward contracts	(10		)	SG&A expenses	(99		)
Commodity contracts	101			Cost of products sold	(246		)
Ineffective Portion:
Foreign exchange forward contracts				Other expense (income), net				$	106
Commodity contracts				Interest expense				(13		)
Total in cash flow hedging	$	771			$	(2,917	)	$	93

March 31, 2013
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Effective Portion Reclassified from AOCI into Income (Expense)			Ineffective Portion Recognized in Income (Expense)
(in thousands)
Effective Portion:
Interest rate swaps	$	191		Interest expense	$	(913	)
Foreign exchange forward contracts	4,022			Cost of products sold	499
Foreign exchange forward contracts	187			SG&A expenses	(30		)
Commodity contracts	(16		)	Cost of products sold	157
Ineffective Portion:
Foreign exchange forward contracts				Other expense (income), net				$	(13	)
Commodity contracts				Interest expense				(14		)
Total for cash flow hedging	$	4,384			$	(287	)	$	(27	)

Overall, the derivatives designated as cash flow hedges are considered to be highly effective. At March 31, 2014, the Company expects to reclassify $6.0 million of deferred net losses on cash flow hedges recorded in AOCI to the Consolidated Statement of Operations during the next 12 months. This reclassification is primarily due to the sale of inventory that includes hedged purchases and recognized interest expense on interest rate swaps. The maximum term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable interest rate debt) is 18 months.

For the roll forward of derivative instruments designated as cash flow hedges in AOCI see Note 3, Comprehensive Income.

Hedges of Net Investments in Foreign Operations

The Company has significant investments in foreign subsidiaries the most significant of which are denominated in euros, Swiss francs, Japanese yen and Swedish kronor. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. To hedge a portion of this exposure the Company employs both derivative and non-derivative financial instruments. The derivative instruments consist of foreign exchange forward contracts and cross currency basis swaps. The non-derivative instruments consist of foreign currency denominated debt held at the parent company level. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in derivative and non-derivative financial instruments designated as hedges of net investments, which are included in AOCI. Any cash flows associated with these instruments are included in investing activities on the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, in which case all cash flows will be classified as financing activities on the Consolidated Statements of Cash Flows.

The following table summarizes the notional amounts of hedges of net investments by derivative instrument type at March 31, 2014 and the notional amounts expected to mature during the next 12 months:

	Aggregate  Notional  Amount		Aggregate Notional Amount Maturing within 12 Months
(in thousands)
Foreign exchange forward contracts	$	180,466	$	115,718
Cross currency basis swaps	489,253		90,950
Total derivative instruments designated as net investment hedges	$	669,719	$	206,668

On February 14, 2014, the Company dedesignated 449.8 million euros of foreign exchange forward contracts that were previously designated as net investment hedges. The change in the value of the dedesignated hedges will be recorded in “Other expense (income), net” on the Consolidated Statement of Operations and will offset the change in the value of non-designated euro denominated cross currency basis swaps as further noted in the section below titled Derivative Instruments Not Designated as Hedges.

On March 25, 2014, the Company entered into additional foreign exchange forward contracts designated as hedges of net investment with a notional amount of 25.0 million euros.

The fair value of the cross currency basis swaps and foreign exchange forward contracts is the estimated amount the Company would receive or pay at the reporting date, taking into account the effective interest rates, cross currency swap basis rates and foreign exchange rates. The effective portion of the change in the value of these derivatives is recorded in AOCI, net of tax effects.

The following tables summarize the amount of gains (losses) recorded in AOCI on the Consolidated Balance Sheets and income (expense) on the Company’s Consolidated Statements of Operations related to the hedges of net investments for the quarters ended March 31, 2014 and 2013:

March 31, 2014
	Gain (Loss) in AOCI			Consolidated Statements of Operations Location	Recognized in Income (Expense)
(in thousands)
Effective Portion:
Cross currency basis swaps	$	(4,660	)	Interest income	$	677
				Interest expense	541
Foreign exchange forward contracts	3,068			Other expense (income), net	248
Total for net investment hedging	$	(1,592	)		$	1,466

March 31, 2013
	Gain (Loss) in AOCI		Consolidated Statements of Operations Location	Recognized in Income (Expense)
(in thousands)
Effective Portion:
Cross currency basis swaps	$	39,885	Interest income	$	1,387
			Interest expense	(1,603		)
Total for net investment hedging	$	39,885		$	(216	)

Fair Value Hedges

The Company uses interest rate swaps to convert a portion of its fixed interest rate debt to variable interest rate debt. The Company has a group of U.S. dollar denominated interest rate swaps with an initial total notional value of $150.0 million to effectively convert the underlying fixed interest rate of 4.1% on the Company’s $250.0 million Private Placement Notes (“PPN”) to variable rate for an initial term of five years, ending February 2016. The notional value of the swaps will decline proportionately as portions of the PPN mature. These interest rate swaps are designated as fair value hedges of the interest rate risk associated with the hedged portion of the fixed rate PPN. Accordingly, the Company will carry the portion of the hedged debt at fair value, with the change in debt and swaps offsetting each other on the Consolidated Statements of Operations. Any cash flows associated with these instruments are included in operating activities on the Consolidated Statements of Cash Flows.

The following table summarizes the notional amounts of fair value hedges by derivative instrument type at March 31, 2014 and the notional amounts expected to mature during the next 12 months:

	Aggregate  Notional  Amount		Aggregate Notional Amount Maturing within 12 Months
(in thousands)
Interest rate swaps	$	105,000	$	60,000

The following tables summarize the amount of income (expense) recorded on the Company’s Consolidated Statements of Operations related to the hedges of fair value for the quarters ended March 31, 2014 and 2013:

	Consolidated Statements of Operations Location	Income (Expense) Recognized
		Three months ended March 31,
(in thousands)		2014		2013
Interest rate swaps	Interest expense	$	87	$	62

Derivative Instruments Not Designated as Hedges

The Company enters into derivative instruments to hedge the foreign exchange revaluation risk associated with recorded assets and liabilities that are denominated in a non-functional currency. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in “Other expense (income), net” on the Consolidated Statements of Operations. The Company primarily uses foreign exchange forward contracts and cross currency basis swaps to hedge these risks. Any cash flows associated with the foreign exchange forward contracts and interest rate swaps not designated as hedges are included in cash from operating activities on the Consolidated Statements of Cash Flows. Any cash flows associated with the cross currency basis swaps not designated as hedges are included in investing activities on the Consolidated Statements of Cash Flows except for derivative instruments that include an other-than-insignificant financing element, in which case the cash flows will be classified as financing activities on the Consolidated Statements of Cash Flows.

The following tables summarize the aggregate notional amounts of the Company’s economic hedges not designated as hedges by derivative instrument types at March 31, 2014 and the notional amounts expected to mature during the next 12 months:

	Aggregate  Notional  Amount		Aggregate Notional Amount Maturing within 12 Months
(in thousands)
Foreign exchange forward contracts	$	1,085,950	$	1,085,950
Interest rate swaps	3,980		995
Cross currency basis swaps	751,253		732,718
Total for instruments not designated as hedges	$	1,841,183	$	1,819,663

The Company maintains Swiss franc denominated cross currency basis swaps to offset an intercompany Swiss franc note receivable at a U.S. dollar functional entity. The hedge declines each quarter to coincide with expected repayments of the note. At March 31, 2014, the remaining notional value of the cross currency swaps was 116.4 million Swiss francs.

On February 14, 2014, a series of U.S. dollar denominated intercompany note receivables were transferred from a euro functional entity to a U.S. dollar functional entity at which point the underlying foreign currency revaluation risk that was hedged by non-designated cross currency swaps totaling 449.8 million euro was eliminated. As a result, the company dedesignated an offsetting amount of 449.8 million euro of net investment hedges. The change in the value of the dedesignated net investment hedges will be recorded in “Other expense (income), net” on the Consolidated Statement of Operations and will offset the change in the value of the non-designated euro denominated cross currency swaps until both sets of hedges mature in December 2014.

The following table summarizes the amounts of gains (losses) recorded on the Company’s Consolidated Statements of Operations related to the economic hedges not designated as hedging for the quarters ended March 31, 2014 and 2013:

	Consolidated Statements of Operations Location	Gain (Loss) Recognized
		Three months ended March 31,
(in thousands)		2014			2013
Foreign exchange forward contracts (a)	Other expense (income), net	$	(4,441	)	$	2,515
DIO equity option contracts	Other expense (income), net	(228		)	(33		)
Interest rate swaps	Interest expense	(11		)	10
Cross currency basis swaps (a)	Other expense (income), net	825			(25,432		)
Total for instruments not designated as hedges		$	(3,855	)	$	(22,940	)

(a) The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances which are recorded in “Other expense (income), net” on the Consolidated Statements of Operations.

Consolidated Balance Sheets Location of Derivative Fair Values

The following tables summarize the fair value and consolidated balance sheet location of the Company’s derivatives at March 31, 2014 and December 31, 2013:

	March 31, 2014
(in thousands)	Prepaid Expenses and Other Current Assets		Other Noncurrent Assets, Net		Accrued Liabilities		Other Noncurrent Liabilities
Designated as Hedges
Foreign exchange forward contracts	$	1,777	$	413	$	9,699	$	347
Commodity contracts	—		—		167		—
Interest rate swaps	1,629		258		501		567
Cross currency basis swaps	761		—		3,161		19,849
Total	$	4,167	$	671	$	13,528	$	20,763
Not Designated as Hedges
Foreign exchange forward contracts	$	1,299	$	—	$	3,091	$	—
DIO equity option contracts	—		—		—		370
Interest rate swaps	—		—		83		228
Cross currency basis swaps	—		—		36,919		1,967
Total	$	1,299	$	—	$	40,093	$	2,565

	December 31, 2013
(in thousands)	Prepaid Expenses and Other Current Assets		Other Noncurrent Assets, Net		Accrued Liabilities		Other Noncurrent Liabilities
Designated as Hedges
Foreign exchange forward contracts	$	1,517	$	255	$	10,280	$	940
Commodity contracts	—		1		434		1
Interest rate swaps	789		1,617		466		419
Cross currency basis swaps	530		—		2,223		16,413
Total	$	2,836	$	1,873	$	13,403	$	17,773
Not Designated as Hedges
Foreign exchange forward contracts	$	3,128	$	—	$	2,328	$	—
DIO equity option contracts	—		—		—		142
Interest rate swaps	—		—		85		256
Cross currency basis swaps	—		—		38,551		1,941
Total	$	3,128	$	—	$	40,964	$	2,339

Balance Sheet Offsetting

Substantially all of the Company’s derivative contracts are subject to netting arrangements, whereby the right to offset occurs in the event of default or termination in accordance with the terms of the arrangements with the counterparty. While these contracts contain the enforceable right to offset through netting arrangements with the same counterparty, the Company elects to present them on a gross basis on the Consolidated Balance Sheets.

Offsetting of financial assets and liabilities under netting arrangements at March 31, 2014:

							Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands)	Gross Amounts Recognized		Gross Amount Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Received/Pledged		Net Amount
Assets
Foreign exchange forward contracts	$	3,489	$	—	$	3,489	$	(3,226	)	$	—	$	263
Interest rate swaps	1,887		—		1,887		(1,585		)	—		302
Cross currency basis swaps	761		—		761		(761		)	—		—
Total Assets	$	6,137	$	—	$	6,137	$	(5,572	)	$	—	$	565

							Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands)	Gross Amounts Recognized		Gross Amount Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Received/Pledged		Net Amount
Liabilities
Foreign exchange forward contracts	$	13,137	$	—	$	13,137	$	(2,349	)	$	—	$	10,788
Commodity contracts	167		—		167		—			—		167
DIO equity option contracts	370		—		370		—			—		370
Interest rate swaps	1,379		—		1,379		(77		)	—		1,302
Cross currency basis swaps	61,896		—		61,896		(3,146		)	—		58,750
Total Liabilities	$	76,949	$	—	$	76,949	$	(5,572	)	$	—	$	71,377

Offsetting of financial assets and liabilities under netting arrangements at December 31, 2013:

							Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands)	Gross Amounts Recognized		Gross Amount Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Received/Pledged		Net Amount
Assets
Foreign exchange forward contracts	$	4,900	$	—	$	4,900	$	(4,641	)	$	—	$	259
Commodity contracts	1		—		1		(1		)	—		—
Interest rate swaps	2,406		—		2,406		(1,979		)	—		427
Cross currency basis swaps	530		—		530		(530		)	—		—
Total Assets	$	7,837	$	—	$	7,837	$	(7,151	)	$	—	$	686

							Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands)	Gross Amounts Recognized		Gross Amount Offset in the Consolidated Balance Sheets		Net Amounts Presented in the Consolidated Balance Sheets		Financial Instruments			Cash Collateral Received/Pledged		Net Amount
Liabilities
Foreign exchange forward contracts	$	13,548	$	—	$	13,548	$	(3,467	)	$	—	$	10,081
Commodity contracts	435		—		435		(1		)	—		434
DIO equity option contracts	142		—		142		—			—		142
Interest rate swaps	1,226		—		1,226		(62		)	—		1,164
Cross currency basis swaps	59,128		—		59,128		(3,621		)	—		55,507
Total Liabilities	$	74,479	$	—	$	74,479	$	(7,151	)	$	—	$	67,328