NOTE 10 – 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.

Certain of the Company's inventory purchases are denominated in foreign currencies, which expose the Company to market risk associated with foreign currency exchange rate movements. The Company's policy generally is to hedge major foreign currency transaction exposures through foreign exchange forward contracts. These contracts are entered into with major financial institutions thereby minimizing the risk of credit loss. In addition, the Company's investments in foreign subsidiaries are denominated in foreign currencies, which create exposures to changes in foreign currency exchange rates. The Company uses debt and derivatives denominated in the applicable foreign currency as a means of hedging a portion of this risk.

With the Company’s significant level of variable interest rate long-term debt and net investment hedges, changes in the interest rate environment can have a major impact on the Company’s earnings, depending upon its interest rate exposure. As a result, the Company manages its interest rate exposure with the use of interest rate swaps, when appropriate, based upon market conditions.

The manufacturing of some of the Company’s products requires the use of commodities, which are subject to market fluctuations. In order to limit the unanticipated impact on earnings from such market fluctuations, the Company selectively enters into commodity swaps for certain materials used in the production of its products. Additionally, the Company uses non-derivative methods, such as the precious metal consignment agreements to effectively hedge commodity risks.

Derivative instruments not designated as hedging

The Company wrote put options (also referred to as “DIO equity option contracts”) to the original sellers of the DIO investment for the remaining DIO common shares held by the seller. The equity options provide the seller the ability to require the Company to purchase their remaining shares on hand at a price based on an agreed-upon formula at specific timeframes in the future. The sellers are also allowed to sell their remaining shares on the open market. Changes in the fair value of the DIO equity option contracts are reported in “Other expense (income), net” on the consolidated statements of operations. This derivative is further discussed in Note 11, Fair Value Measurement.

Cash Flow Hedges

The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt. At June 30, 2011, the Company has two groups of significant variable interest rate to fixed rate interest rate swaps. One group of swaps has notional amounts totaling 12.6 billion Japanese yen, and effectively converts the underlying variable interest rates to an average fixed interest rate of 1.6% for a term of ten years, ending in March 2012. Another swap has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rates to a fixed interest rate of 4.2% for a term of seven years, ending in March 2012. On June 24, 2011 the Company entered into a Treasury Rate Lock (“T-Lock”) transaction to hedge the base interest rate variability exposure on a planned ten year bond issuance in anticipation of the Astra Tech acquisition. The T-Lock will result in an effective base interest yield of 3.02% plus market spread and fees at issuance on a notional amount of $500.0 million.

The Company enters into forward exchange contracts to hedge the foreign currency exposure of its anticipated purchases of certain inventory. In addition, forward exchange contracts are used by certain of the Company's subsidiaries to hedge intercompany inventory purchases, which are denominated in non-local currencies. The forward exchange contracts that are used in these programs typically mature in eighteen months or less. For these derivatives which qualify as hedges of future anticipated cash flows, the effective portion of changes in fair value is temporarily deferred in AOCI until the hedged item is recognized in earnings.

The Company selectively enters into commodity swaps to effectively fix certain variable raw material costs. At June 30, 2011, the Company had swaps in place to purchase 675 troy ounces of platinum bullion for use in the production of its impression material products. The average fixed rate of this agreement is $1,732 per troy ounce. In addition, the Company had swaps in place to purchase 28,128 troy ounces of silver bullion for use in the production of its amalgam products at an average fixed rate of $34 per troy ounce.

The following tables summarize the notional amounts and fair value of the Company’s cash flow hedges and non-designated derivatives at June 30, 2011:

										Fair Value Net
	Notional Amounts Maturing in the Year									Asset (Liability)
Foreign Exchange Forward Contracts	2011			2012			2013			June 30, 2011
(in thousands)

Forward sale, 7.8 million Australian dollars	$	3,779		$	3,929		$	227		$	(435	)
Forward purchase, 7.1 million British pounds		(5,743	)		(5,478	)		(201	)		(284	)
Forward sale, 32.9 million Canadian dollars		18,362			13,505			1,404			(1,088	)
Forward sale, 5.2 million Danish krone		1,022			-			-			9
Forward purchase, 1.0 million euros		(1,436	)		-			-			952
Forward sale, 0.9 billion Japanese yen		11,251			-			-			314
Forward sale, 132.2 million Mexican pesos		11,282			-			-			52
Forward purchase, 2.6 million Norwegian krone		(474	)		-			-			(1	)
Forward sale, 2.3 million Singapore dollars		1,846			-			-			45
Forward sale, 5.8 billion South Korean won		5,471			-			-			77
Forward purchase, 12.1 million Swiss francs		(14,356	)		-			-			103
Forward purchase, 26.7 million Taiwanese dollars		(927	)		-			-			(6	)

Total foreign exchange forward contracts	$	30,077		$	11,956		$	1,430		$	(262	)

											Fair Value Net
	Notional Amounts Maturing in the Year										Asset (Liability)
									2015 and
Interest Rate Swaps	2011		2012		2013		2014		Beyond		June 30, 2011
(in thousands)

Euro	$	686	$	1,371	$	1,371	$	1,048	$	3,408	$	(524	)
Japanese yen		-		156,038		-		-		-		(1,340	)
Swiss francs		-		77,386		-		-		-		(2,027	)
U.S. dollars		500,000		-		-		-		-		10,550
Total interest rate swaps	$	500,686	$	234,795	$	1,371	$	1,048	$	3,408	$	6,659

	Notional Amounts Maturing				Fair Value Net
	in the Year				Asset (Liability)
Commodity Contracts	2011		2012		June 30, 2011
(in thousands)

Silver swap - U.S. dollar	$	690	$	297	$	44
Platinum swap - U.S. dollar		815		352		(2	)
Total commodity contracts	$	1,505	$	649	$	42

At June 30, 2011, deferred net losses on derivative instruments of $1.5 million, which were recorded in AOCI, are expected to be reclassified to current earnings during the next twelve months. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases and 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 eighteen months. Overall, the derivatives designated as cash flow hedges are highly effective. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company’s policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.

Hedges of Net Investments in Foreign Operations

The Company has numerous investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in foreign currency exchange rates. Currently, the Company uses non-derivative financial instruments, including foreign currency denominated debt held at the parent company level and derivative financial instruments to hedge some of this exposure. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in the non-derivative and derivative financial instruments designated as hedges of net investments.

The Company has Swiss franc and euro cross currency interest rate swaps that are designated as net investment hedges of the Swiss franc and euro denominated net assets. The interest rate differential is recognized in income as interest income or interest expense as it is accrued. Foreign currency translation is recorded in AOCI, net of tax.

The fair value of these cross currency interest rate swap agreements is the estimated amount the Company would either pay or receive at the reporting date, taking into consideration the effective interest rates and foreign exchange rates. At June 30, 2011 and December 31, 2010, the estimated net fair values of the swap agreements were negative $280.5 million and negative $169.1 million, respectively, which are recorded in AOCI, net of tax, and as “Accrued liabilities” and “Other noncurrent liabilities” in the consolidated balance sheets.

The following tables summarize the notional amounts and fair value of the Company’s cross currency basis swaps that are designated as hedges of net investments in foreign operations at June 30, 2011:

							Fair Value Net
	Notional Amounts Maturing in the Year						Asset (Liability)
Cross Currency Basis Swaps	2011		2012		2013		June 30, 2011
(in thousands)

Swiss franc 592.5 million @ 1.17 pay CHF 3 mth. LIBOR receive USD 3 mth. LIBOR	$	95,720	$	67,385	$	542,294	$	(197,403	)
Euro 358.0 million @ $1.22 pay EUR 3 mth. EURIBOR receive USD 3 mth. LIBOR		-		-		519,727		(83,057	)
Total cross currency basis swaps	$	95,720	$	67,385	$	1,062,021	$	(280,460	)

At June 30, 2011, the Company had Swiss franc-denominated and Japanese yen-denominated debt and cross currency basis swaps denominated in euro and Swiss franc to hedge the currency exposure related to a designated portion of the net assets of its euro, Swiss franc and Japanese yen denominated subsidiaries. At June 30, 2011 and December 31, 2010, the accumulated translation gains on investments in foreign subsidiaries, primarily denominated in euro, Swiss franc and Japanese yen, net of these net investment hedges, were $123.0 million and $45.4 million, respectively, which are included in AOCI, net of tax.

Fair Value Hedges

Effective April 4, 2011, the Company entered into 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 Note (“Note”) to variable rate for a term of five years, ending February 2016. The notional value of the swaps will decline proportionately as portions of the Note 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 Note. Accordingly, the Company will carry the portion of the hedged debt at fair value, with the change in debt and swap offsetting each other in the income statement. At June 30, 2011, the estimated net fair value of these interest rate swaps was $2.8 million.

The following tables summarize the notional amounts and fair value of the Company’s fair value hedges at June 30, 2011:

					Fair Value Net
	Notional Amounts Maturing in the Year				Asset (Liability)
			2015 and
Interest Rate Swaps	2014		Beyond		June 30, 2011
(in thousands)

U.S. dollars	$	45,000	$	105,000	$	2,809
Total interest rate swaps	$	45,000	$	105,000	$	2,809

The following tables summarize the fair value and consolidated balance sheet location of the Company’s derivatives at June 30, 2011 and December 31, 2010:

	June 30, 2011
	Prepaid
(in thousands)	Expenses		Other				Other
	and Other		Noncurrent		Accrued		Noncurrent
Designated as Hedges	Current Assets		Assets, Net		Liabilities		Liabilities

Foreign exchange forward contracts	$	525	$	12	$	1,277	$	105
Commodity contracts		44		-		2		-
Interest rate swaps		6,871		9,495		3,367		3,007
Cross currency basis swaps		-		-		51,983		228,477
Total	$	7,440	$	9,507	$	56,629	$	231,589

Not Designated as Hedges

Foreign exchange forward contracts	$	1,155	$	-	$	572	$	-
DIO equity option contracts		-		-		-		842
Interest rate swaps		-		-		89		435
Total	$	1,155	$	-	$	661	$	1,277

	December 31, 2010
	Prepaid
(in thousands)	Expenses		Other				Other
	and Other		Noncurrent		Accrued		Noncurrent
Designated as Hedges	Current Assets		Assets, Net		Liabilities		Liabilities

Foreign exchange forward contracts	$	2,455	$	21	$	1,139	$	135
Commodity contracts		88		-		-		-
Interest rate swaps		-		-		4,213		871
Cross currency basis swaps		-		-		21,516		147,589
Total	$	2,543	$	21	$	26,868	$	148,595

Not Designated as Hedges

Foreign exchange forward contracts	$	821	$	-	$	600	$	-
Interest rate swaps		-		-		104		556
Total	$	821	$	-	$	704	$	556

The following table summarizes the consolidated statement of operations impact of the Company’s cash flow hedges for the three and six months ended June 30, 2011 and 2010:

Three Months Ended June 30, 2011

Derivatives in Cash Flow Hedging					Effective Portion
	Gain (Loss)			Classification	Reclassified from
(in thousands)	in AOCI			of Gains (Losses)	AOCI into Income
Interest rate contracts	$	9,879		Interest expense	$	(1,318	)
Foreign exchange forward contracts		238		Cost of products sold		386
Foreign exchange forward contracts		(195	)	SG&A expenses		(95	)
Commodity contracts		29		Cost of products sold		91
Total	$	9,951			$	(936	)

Derivatives in Cash Flow Hedging		Ineffective portion
	Classification	Recognized
(in thousands)	of Gains (Losses)	in Income
Interest rate contracts	Other expense, net	$	65
Foreign exchange forward contracts	Other expense, net		(188	)
Commodity contracts	Interest expense		1
Total		$	(122	)

Three Months Ended June 30, 2010

Derivatives in Cash Flow Hedging					Effective Portion
	Gain (Loss)			Classification	Reclassified from
(in thousands)	in AOCI			of Gains (Losses)	AOCI into Income
Interest rate swaps	$	(302	)	Interest expense	$	(1,075	)
Foreign exchange forward contracts		3,425		Cost of products sold		(48	)
Foreign exchange forward contracts		679		SG&A expenses		124
Commodity contracts		48		Cost of products sold		182
Total	$	3,850			$	(817	)

Derivatives in Cash Flow Hedging		Ineffective portion
	Classification	Recognized
(in thousands)	of Gains (Losses)	in Income
Interest rate swaps	Other expense, net	$	(104	)
Foreign exchange forward contracts	Interest expense		(195	)
Commodity contracts	Interest expense		2
Total		$	(297	)

Six Months Ended June 30, 2011

Derivatives in Cash Flow Hedging					Effective Portion
	Gain (Loss)			Classification	Reclassified from
(in thousands)	in AOCI			of Gains (Losses)	AOCI into Income
Interest rate contracts	$	9,598		Interest expense	$	(2,569	)
Foreign exchange forward contracts		(694	)	Cost of products sold		854
Foreign exchange forward contracts		(462	)	SG&A expenses		11
Commodity contracts		56		Cost of products sold		196
Total	$	8,498			$	(1,508	)

Derivatives in Cash Flow Hedging		Ineffective portion
	Classification	Recognized
(in thousands)	of Gains (Losses)	in Income
Interest rate contracts	Other expense, net	$	167
Foreign exchange forward contracts	Interest expense		(216	)
Foreign exchange forward contracts	Other expense, net		(188	)
Commodity contracts	Interest expense		(2	)
Total		$	(239	)

Six Months Ended June 30, 2010

Derivatives in Cash Flow Hedging					Effective Portion
	Gain (Loss)			Classification	Reclassified from
(in thousands)	in AOCI			of Gains (Losses)	AOCI into Income
Interest rate contracts	$	(879	)	Interest expense	$	(3,239	)
Foreign exchange forward contracts		2,903		Cost of products sold		25
Foreign exchange forward contracts		697		SG&A expenses		218
Commodity contracts		171		Cost of products sold		440
Total	$	2,892			$	(2,556	)

Derivatives in Cash Flow Hedging		Ineffective portion
	Classification	Recognized
(in thousands)	of Gains (Losses)	in Income
Interest rate contracts	Other expense, net	$	192
Foreign exchange forward contracts	Interest expense		(287	)
Commodity contracts	Interest expense		(6	)
Total		$	(101	)

The following tables summarize the consolidated statement of operations impact of the Company’s hedges of net investment for the three and six months ended June 30, 2011 and 2010:

Three Months Ended June 30, 2011

Derivatives in Net Investment Hedging					Gain (Loss)
	Gain (Loss)			Classification	Recognized
(in thousands)	in AOCI			of Gains (Losses)	in Income
Cross currency interest rate swaps	$	(58,388	)	Interest income	$	170
				Interest expense		(40	)
Cross currency interest rate swaps		(11,635	)	Interest expense		(1,270	)
Total	$	(70,023	)		$	(1,140	)

Three Months Ended June 30, 2010

Derivatives in Net Investment Hedging				Gain (Loss)
	Gain (Loss)		Classification	Recognized
(in thousands)	in AOCI		of Gains (Losses)	in Income
Cross currency interest rate swaps	$	13,809	Interest income	$	173
			Interest expense		(22	)
Cross currency interest rate swaps		45,645	Interest expense		(464	)
Total	$	59,454		$	(313	)

Six Months Ended June 30, 2011

Derivatives in Net Investment Hedging					Gain (Loss)
	Gain (Loss)			Classification	Recognized
(in thousands)	in AOCI			of Gains (Losses)	in Income
Cross currency interest rate swaps	$	(71,336	)	Interest income	$	369
				Interest expense		(65	)
Cross currency interest rate swaps		(41,367	)	Interest expense		(2,226	)
Total	$	(112,703	)		$	(1,922	)

Six Months Ended June 30, 2010

Derivatives in Net Investment Hedging				Gain (Loss)
	Gain (Loss)		Classification	Recognized
(in thousands)	in AOCI		of Gains (Losses)	in Income
Cross currency interest rate swaps	$	23,019	Interest income	$	220
			Interest income		(79	)
Cross currency interest rate swaps		74,403	Interest expense		(1,121	)
Total	$	97,422		$	(980	)

The following tables summarize the consolidated statement of operations impact of the Company’s fair value hedges for the three and six months ended June 30, 2011:

Derivatives in Fair Value Hedging
	Classification	Three Months Ended		Six Months Ended
(in thousands)	of Gains (Losses)	June 30, 2011		June 30, 2011
Interest rate swaps	Interest expense	$	615	$	615
Total		$	615	$	615

The following tables summarize the consolidated statement of operations impact of the Company’s derivatives not designated as hedges for the three and six months ended June 30, 2011 and 2010:

Derivatives Not Designated as Hedging
	Classification	Three Months Ended			Six Months Ended
(in thousands)	of Gains (Losses)	June 30, 2011			June 30, 2011
Foreign exchange forward contracts	Other expense, net	$	(394	)	$	1,309
DIO equity option contracts	Other expense, net		26			26
Interest rate swaps	Interest expense		107			51
Total		$	(261	)	$	1,386

Derivatives Not Designated as Hedging
	Classification	Three Months Ended			Six Months Ended
(in thousands)	of Gains (Losses)	June 30, 2010			June 30, 2010
Foreign exchange forward contracts	Other expense, net	$	(8,601	)	$	(10,878	)
Interest rate swaps	Interest expense		(31	)		(179	)
Total		$	(8,632	)	$	(11,057	)

Amounts recorded in AOCI, net of tax, related to cash flow hedging instruments for the three and six months ended June 30, 2011 and 2010:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands, net of tax)	2011			2010			2011			2010

Beginning balance	$	(2,275	)	$	(4,387	)	$	(1,468	)	$	(4,799	)

Changes in fair value of derivatives		6,137			2,933			5,101			2,272
Reclassifications to earnings from equity		467			510			696			1,583
Total activity		6,604			3,443			5,797			3,855

Ending balance	$	4,329		$	(944	)	$	4,329		$	(944	)

Amounts recorded in AOCI, net of tax, related to hedges of net investments in foreign operations for the three and six months ended June 30, 2011 and 2010:

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(in thousands, net of tax)	2011			2010			2011			2010

Beginning balance	$	106,664		$	61,006		$	45,417		$	111,115

Foreign currency translation adjustment		66,059			(127,527	)		152,497			(201,846	)
Changes in fair value of:
Foreign currency debt		(6,687	)		(3,620	)		(5,673	)		(2,722	)
Derivative hedge instruments		(42,995	)		36,505			(69,200	)		59,817
Total activity		16,377			(94,642	)		77,624			(144,751	)

Ending balance	$	123,041		$	(33,636	)	$	123,041		$	(33,636	)