Hedging

6 Months Ended

Jun. 30, 2011

Hedging

Hedging

Note 5 – Hedging

Derivative instruments are carried at fair value in the Condensed Consolidated Balance Sheets. For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gains or losses is deferred as a component of "Accumulated other comprehensive income (loss)" and reclassified into net income in the same period during which the hedged transaction affects net income. Gains and losses on derivatives representing hedge ineffectiveness are recognized in net income currently. See further information regarding fair value measurements of derivatives in Note 6.

The company purchases euro put option contracts to hedge the cash flow and earnings risks that any significant decline in the value of the euro would have on the conversion of euro-based revenue into U.S. dollars. Purchased euro put options require an upfront premium payment and can reduce these risks without limiting the benefit received from a stronger euro. The company may also sell short-term euro call options to reduce its net option premium expense, although call options can limit the benefit received from a stronger euro. Foreign currency hedge premium expense also reduces any favorable effects of exchange rates when converting euro-denominated sales to U.S. dollars. These purchased euro put options and sold euro call options are designated as cash flow hedging instruments. At June 30, 2011, unrealized net losses of $3 million on the company's purchased euro put options were deferred in "Accumulated other comprehensive income (loss)," which would be reclassified to net income, if realized, in the next twelve months. At June 30, 2011, unrealized net losses of less than $1 million on the company's sold euro call options were deferred in "Accumulated other comprehensive income (loss)," which would be reclassified to net income, if realized, in the next twelve months.

Most of the company's foreign operations use the U.S. dollar as their functional currency. As a result, balance sheet translation adjustments due to currency fluctuations are recognized currently in "Cost of sales" in the Condensed Consolidated Statements of Income. To minimize the resulting volatility, the company also enters into 30-day euro forward contracts each month to economically hedge the net monetary assets exposed to euro exchange rates. These 30-day euro forward contracts are not designated as hedging instruments, and gains and losses on these forward contracts are recognized currently in "Cost of sales" in the Condensed Consolidated Statements of Income. In the second quarter of 2011, the company recognized $3 million of losses on 30-day euro forward contracts, and $4 million of gains from fluctuations in the value of the net monetary assets exposed to euro exchange rates. In the second quarter of 2010, the company recognized $14 million of gains on 30-day euro forward contracts, and $16 million of expense from fluctuations in the value of the net monetary assets exposed to euro exchange rates. For the six months ended June 30, 2011, the company recognized $10 million of losses on 30-day euro forward contracts, and $12 million of gains from fluctuations in the value of the net monetary assets exposed to euro exchange rates. For the six months ended June 30, 2010, the company recognized $20 million of gain on 30-day euro forward contracts, and $27 million of expense from fluctuations in the value of the net monetary assets exposed to euro exchange rates.

The company also enters into bunker fuel forward contracts for its shipping operations, which permit it to lock in fuel purchase prices for up to three years and thereby minimize the volatility that changes in fuel prices could have on its operating results. These bunker fuel forward contracts are designated as cash flow hedging instruments. At June 30, 2011, unrealized net gains of $52 million on the company's bunker fuel forward contracts were deferred in "Accumulated other comprehensive income (loss)," including net gains of $31 million which would be reclassified to net income, if realized, in the next twelve months.

At June 30, 2011 the company's portfolio of derivatives consisted of the following:

	Notional Amount		Average Rate/Price			Settlement Period
Derivatives designated as hedging instruments:
Currency derivatives:
Purchased euro put options	€	96 million	$	1.42/	€		2011
Sold euro call options	€	96 million	$	1.49/	€		2011
Fuel derivatives:
3.5% Rotterdam Barge:
Bunker fuel forward contracts		92,615 mt	$	426/mt			2011
Bunker fuel forward contracts		110,224 mt	$	455/mt			2012
Bunker fuel forward contracts		89,226 mt	$	483/mt			2013
Bunker fuel forward contracts		36,738 mt	$	569/mt			2014
Singapore/New York Harbor:
Bunker fuel forward contracts		24,357 mt	$	455/mt			2011
Bunker fuel forward contracts		19,456 mt	$	485/mt			2012
Bunker fuel forward contracts		15,753 mt	$	518/mt			2013
Bunker fuel forward contracts		6,486 mt	$	605/mt			2014
Derivatives not designated as hedging instruments:
30-day euro forward contracts	€	105 million	$	1.44/	€		July 2011

Activity related to the company's derivative assets and liabilities designated as hedging instruments is as follows:

	2011									2010
(In thousands)	Purchased Euro Put Options			Sold Euro Call Options			Bunker Fuel Forward Contracts			Purchased Euro Put Options			Sold Euro Call Options			Bunker Fuel Forward Contracts
Balance at beginning of year	$	293		$	0		$	27,314		$	6,527		$	0		$	6,257
Realized (gains) losses included in net income		1,586			0			(5,428	)		(1,200	)		0			(2,170	)
Purchases (sales)1		6,710			(1,697	)		0			0			0			0
Changes in fair value		(2,178	)		(510	)		37,938			4,055			0			1,183
Balance at March 31	$	6,411		$	(2,207	)	$	59,824		$	9,382		$	0		$	5,270
Realized (gains) losses included in net income		1,386			0			(12,240	)		(8,030	)		(14	)		2,652
Purchases (sales)1		0			0			0			2,181			(501	)		0
Changes in fair value		(5,442	)		239			6,406			12,392			247			(17,579	)
Balance at June 30	$	2,355		$	(1,968	)	$	53,990		$	15,925		$	(268	)	$	(9,657	)

¹  Purchases (sales) represent the cash premiums paid upon the purchase of euro put options or received upon the sale of euro call options. Bunker fuel forward contracts require no up-front cash payment and have an initial fair value of zero.

The following table summarizes the fair values of the company's derivative instruments on a gross basis and the location of these instruments on the Condensed Consolidated Balance Sheets. To the extent derivatives in an asset position and derivatives in a liability position are with the same counterparty, they are netted in the Condensed Consolidated Balance Sheets because the company enters into master netting arrangements with each of its hedging partners.

		Derivatives in an Asset Position						Derivatives in a Liability Position
	Balance Sheet	Jun. 30		Dec. 31		Jun. 30		Jun. 30			Dec. 31			Jun. 30
(In thousands)	Location	2011		2010		2010		2011			2010			2010
Derivatives designated as hedging instruments:
Purchased euro put options	Other current assets	$	1,278	$	215	$	14,568	$	0		$	0		$	0
Purchased euro put options	Accrued liabilities		1,077		78		1,357		0			0			0
Sold euro call options	Other current assets		0		0		0		(1,072	)		0			(340	)
Sold euro call options	Accrued liabilities		0		0		72		(896	)		0			0
Bunker fuel forward contracts	Other current assets		32,376		15,861		0		0			0			(1,069	)
Bunker fuel forward contracts	Accrued liabilities		0		0		0		0			0			(10,760	)
Bunker fuel forward contracts	Investments and other assets, net		21,614		11,453		3,435		0			0			0
Bunker fuel forward contracts	Other liabilities		0		0		0		0			0			(1,263	)
		$	56,345	$	27,607	$	19,432	$	(1,968	)	$	0		$	(13,432	)
Derivatives not designated as hedging instruments:
30-day euro forward contracts	Other current assets	$	0	$	0	$	800	$	(1,188	)	$	(1,267	)	$	0
30-day euro forward contracts	Accrued liabilities		0		0		486		(248	)		(574	)		0
		$	0	$	0	$	1,286	$	(1,436	)	$	(1,841	)	$	0
		$	56,345	$	27,607	$	20,718	$	(3,404	)	$	(1,841	)	$	(13,432	)

The following table summarizes the effect of the company's derivatives designated as cash flow hedging instruments on OCI and earnings:

	Quarter Ended June 30, 2011												Quarter Ended June 30, 2010
(In thousands)	Purchased Euro Put Options			Sold Euro Call Options			Bunker Fuel Forward Contracts			Total			Purchased Euro Put Options		Sold Euro Call Options		Bunker Fuel Forward Contracts			Total
Gain (loss) recognized in OCI on derivative (effective portion)	$	(1,859	)	$	239		$	7,015		$	5,395		$	15,058	$	233	$	(16,164	)	$	(873	)
Gain (loss) reclassified from accumulated OCI into income (effective portion)1		811			0			12,240			13,051			11,429		14		(2,652	)		8,791
Gain (loss) recognized in income on derivative (ineffective portion)1		0			0			(609	)		(609	)		0		0		(1,415	)		(1,415	)
	Six Months Ended June 30, 2011												Six Months Ended June 30, 2010
(In thousands)	Purchased Euro Put Options			Sold Euro  Call Options			Bunker Fuel Forward Contracts			Total			Purchased Euro Put Options		Sold Euro  Call Options		Bunker Fuel Forward Contracts			Total
Gain (loss) recognized in OCI on derivative (effective portion)	$	(883	)	$	(271	)	$	44,594		$	43,440		$	22,191	$	233	$	(15,754	)	$	6,670
Gain (loss) reclassified from accumulated OCI into income (effective portion)1		793			0			17,668			18,461			15,069		14		(482	)		14,601
Gain (loss) recognized in income on derivative (ineffective portion)1		0			0			(250	)		(250	)		0		0		(642	)		(642	)

¹ Both the gain (loss) reclassified from accumulated OCI into income (effective portion) and the gain (loss) recognized in income on derivative (ineffective portion), if any, are included in "Net sales" for purchased euro put options and sold euro call options and "Cost of sales" for bunker fuel forward contracts.