DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Oct. 01, 2011

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

(11) DERIVATIVE FINANCIAL INSTRUMENTS

Interest Rate Swaps

Prior to the August 2010 repayment of our variable rate term loan, we maintained interest rate protection agreements (“Swaps”) to hedge the associated interest rate risk. These Swaps, which we designated and accounted for as cash flow hedges, effectively converted the majority of the borrowings under our variable rate term loan to a fixed rate of 4.795% plus the applicable margin. In connection with the repayment of our term loan, we terminated all our Swaps resulting in a cash payment of $26.9 (including $2.6 of accrued interest) and a charge to earnings of $24.3 during the three months ended October 2, 2010.

Currency Forward Contracts

We manufacture and sell our products in a number of countries and, as a result, are exposed to movements in foreign currency exchange rates. Our objective is to preserve the economic value of non-functional currency denominated cash flows and to minimize the impact of any currency fluctuations. Our principal currency exposures relate to the Euro, Chinese Yuan, South African Rand and British Pound.

From time to time, we enter into currency protection agreements (“FX forward contracts”) to manage the exposure on contracts with forecasted transactions denominated in non-functional currencies and to manage the risk of transaction gains and losses associated with assets/liabilities denominated in currencies other than the functional currency of certain subsidiaries. In addition, some of our contracts contain currency forward embedded derivatives (“FX embedded derivatives”), as the currency of exchange is not “clearly and closely” related to the functional currency of either party to the transaction. Certain of our FX forward contracts are designated as cash flow hedges, as deemed appropriate. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value are not included in current earnings, but are included in accumulated other comprehensive income (“AOCI”). These changes in fair value will subsequently be reclassified into earnings as a component of revenues or cost of goods sold, as applicable, when the forecasted transaction impacts earnings. In addition, if the forecasted transaction is no longer probable, the cumulative change in the derivatives’ fair value will be recorded as a component of “Other expense, net” in the period it occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded in earnings in the period it occurs. We had FX forward contracts with an aggregate notional amount of $844.5 and $199.5 outstanding as of October 1, 2011 and December 31, 2010, respectively. We had FX embedded derivatives with an aggregate notional amount outstanding of $107.9 and $200.9 at October 1, 2011 and December 31, 2010, respectively. The unrealized loss, net of taxes, recorded in AOCI related to FX forward contracts was $3.6 and $4.1 as of October 1, 2011 and December 31, 2010, respectively. We anticipate reclassifying approximately $1.8 of the unrealized loss to income over the next 12 months.

Beginning on August 30, 2011, we entered into FX forward contracts to hedge a significant portion of the purchase price of the Clyde Union acquisition, which, as previously noted, will be paid in GBP. From the inception of these agreements until October 1, 2011, the U.S. dollar strengthened against the GBP by approximately 5.0%. As a result, we recorded a non-cash charge during the third quarter of 2011 of $30.6, which was recorded in “Other expense, net” and based on the fair value of these agreements as of October 1, 2011.

Commodity Contracts

From time to time, we enter into commodity contracts to manage the exposure on forecasted purchases of commodity raw materials (“commodity contracts”). At October 1, 2011 and December 31, 2010, the outstanding notional amount of commodity contracts was 2.3 million and 1.8 million pounds of copper, respectively. We designate and account for these contracts as cash flow hedges and, to the extent these commodity contracts are effective in offsetting the variability of the forecasted purchases, the change in fair value is included in AOCI. We reclassify the AOCI associated with our commodity contracts to cost of products sold when the forecasted transaction impacts earnings. As of October 1, 2011 and December 31, 2010, the fair values of these contracts were $2.2 (current liability) and $1.0 (current asset), respectively. The unrealized gain (loss), net of taxes, recorded in AOCI was ($1.2) and $0.8 as of October 1, 2011 and December 31, 2010, respectively. We anticipate reclassifying the unrealized loss to income over the next 12 months.

The following summarizes the fair value of our derivative financial instruments:

	October 1, 2011				December 31, 2010
	Balance Sheet Classification	Fair Value			Balance Sheet Classification	Fair Value
Derivative contracts designated as hedging instruments:
Commodity contracts	Other current assets	$	—		Other current assets	$	1.0
FX forward contracts	Other current assets	0.1			—	—
		$	0.1			$	1.0
FX forward contracts	Accrued expenses	$	—		Accrued expenses	$	(2.9	)
Commodity contracts	Accrued expenses	(2.2		)	—	—
		$	(2.2	)		$	(2.9	)
Derivative contracts not designated as hedging instruments:
FX forward contracts	Other current assets	$	1.0		Other current assets	$	0.5
FX embedded derivatives	Other current assets	0.8			Other current assets	2.6
		$	1.8			$	3.1
FX forward contracts	Accrued expenses	$	(30.9	)	Accrued expenses	$	(1.4	)
FX embedded derivatives	Accrued expenses	(0.6		)	Accrued expenses	(1.8		)
FX embedded derivatives	Other long-term liabilities	(16.6		)	Other long-term liabilities	(33.2		)
		$	(48.1	)		$	(36.4	)

The following summarizes the effect of derivative financial instruments in cash flow hedging relationships on AOCI and the condensed consolidated statements of operations for the three months ended October 1, 2011 and October 2, 2010:

	Amount of gain (loss) recognized in AOCI, pre-tax (1)						Classification of gain (loss)	Amount of gain (loss) reclassified from AOCI to income, pre-tax (1)
	2011			2010			reclassified from AOCI	2011		2010
Swaps	$	—		$	(3.1	)	Interest expense	$	—	$	(1.9	)
Swaps	—			—			Loss on early extinguishment of interest rate protection agreements and term loan	—		(24.3		)
FX forward contracts	0.4			(1.0		)	Cost of products sold	0.1		—
FX embedded derivatives	—			(0.5		)	Cost of products sold	—		0.5
Commodity contracts	(2.4		)	0.8			Cost of products sold	0.1		(0.1		)
	$	(2.0	)	$	(3.8	)		$	0.2	$	(25.8	)

The following summarizes the effect of derivative financial instruments in cash flow hedging relationships on AOCI and the condensed consolidated statements of operations for the nine months ended October 1, 2011 and October 2, 2010:

	Amount of gain (loss) recognized in AOCI, pre-tax (1)						Classification of gain (loss)	Amount of gain (loss) reclassified from AOCI to income, pre-tax (1)
	2011			2010			reclassified from AOCI	2011			2010
Swaps	$	—		$	(9.3	)	Interest expense	$	—		$	(12.7	)
Swaps	—			—			Loss on early extinguishment of interest rate protection agreements and term loan	—			(24.3		)
FX forward contracts	0.4			(4.3		)	Cost of products sold	(0.4		)	—
FX embedded derivatives	—			2.1			Cost of products sold	—			1.1
Commodity contracts	(2.4		)	(0.1		)	Cost of products sold	0.9			0.5
	$	(2.0	)	$	(11.6	)		$	0.5		$	(35.4	)

(1) During the nine months ended October 1, 2011, losses of $0.2 were recognized in “Other expense, net” relating to derivative ineffectiveness and amounts excluded from effectiveness testing. During the three and nine months ended October 2, 2010, gains of $0.2 and $1.1, respectively, were recognized in “Other expense, net” relating to derivative ineffectiveness and amounts excluded from effectiveness testing.

The following summarizes the effect of derivative financial instruments not designated as cash flow hedging relationships on the condensed consolidated statements of operations for the three months ended October 1, 2011 and October 2, 2010:

	Classification of gain (loss) recognized in	Amount of gain (loss) recognized in income
	income	2011			2010
FX forward contracts	Other expense, net	$	(35.2	)	$	0.4
FX embedded derivatives	Other expense, net	3.8			(2.0		)
		$	(31.4	)	$	(1.6	)

The following summarizes the effect of derivative financial instruments not designated as cash flow hedging relationships on the condensed consolidated statements of operations for the nine months ended October 1, 2011 and October 2, 2010:

	Classification of gain (loss) recognized in	Amount of gain (loss) recognized in income
	income	2011			2010
FX forward contracts	Other expense, net	$	(33.6	)	$	2.9
FX embedded derivatives (1)	Other expense, net	1.0			(24.5		)
		$	(32.6	)	$	(21.6	)

(1) Includes $4.6 of losses reclassified from AOCI during the nine months ended October 2, 2010 resulting from the discontinuance of cash flow hedge accounting as the forecasted transactions were determined to no longer be probable.