Derivative Instruments

3 Months Ended

Mar. 31, 2012

Derivative Instruments

Derivative Instruments

Note 6 — Derivative Instruments

The Company enters into derivative transactions to manage exposures arising in the normal course of business.  The Company does not enter into derivative transactions for speculative or trading purposes.  The Company recognizes all derivative instruments on the balance sheet at fair value.  Derivatives not designated as hedging instruments are adjusted to fair value through income.  Depending on the nature of derivatives designated as hedging instruments, changes in the fair value are either offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in shareholders’ equity through other comprehensive income until the hedged item is recognized.  Gains or losses, if any, related to the ineffective portion of any hedge are recognized through earnings in the current period.

The Company enters into forward exchange contracts to manage foreign currency exchange rate exposures associated with certain foreign currency denominated receivables and payables.  Forward exchange contracts generally have maturities of less than six months and relate primarily to major Western European currencies for the Company’s European operations, the U.S. dollar for the Company’s Brazilian operations, and the U.S. and Australian dollars for the Company’s New Zealand operations.  The Company has not designated these derivative instruments as hedging instruments.  At March 31, 2012, and December 31, 2011, the Company had outstanding forward exchange contracts with notional amounts aggregating $9.7 million and $9.8 million, respectively.  The net settlement amount (fair value) related to active forward exchange contracts is recorded on the balance sheet as either a current or long-term asset or liability and as an element of other operating (income) expense, net, which offsets the related transaction gains or losses.

The Company entered into currency swap contracts to manage changes in the fair value of U.S. dollar denominated debt held in Brazil.  The contracts effectively converted a portion of that debt to the functional currency of its Brazilian operation.  These currency swap contracts generally had maturities that matched the maturities of the underlying debt.  The Company had not designated these derivative instruments as hedging instruments.  There were no outstanding currency swap contracts as of March 31, 2012 and December 31, 2011.  The fair value related to swap contracts was recorded on the balance sheet as either a current or long-term asset or liability and as an element of other non-operating (income) expense, net, which offset the related transaction gains or losses.

The Company enters into interest-rate swap contracts to economically convert a portion of the Company’s fixed-rate debt to variable rate debt.  During the fourth quarter of 2011, the Company entered into four interest rate swap agreements with a total notional amount of $400 million.  These contracts were designated as hedges of the Company’s $400 million 4.50 percent fixed-rate debt due in 2021.  The variable rate for each of the interest rate swaps is based on the six-month London Interbank Offered Rate (LIBOR), set in arrears, plus a fixed spread.  The variable rates are reset semi-annually at each net settlement date.  The net settlement benefit to the Company, which is recorded as a reduction in interest expense, was $1.8 million for the first quarter of 2012.  The swap was not in place during the first quarter of 2011.  At March 31, 2012, the fair value of these interest rate swaps was $3.6 million, in the Bank’s favor, using discounted cash flow or other appropriate methodologies, and is included in other long-term liabilities and deferred credits with a corresponding decrease in long-term debt.  At December 31, 2011, the fair value of these interest rate swaps was $3.3 million, in the Company’s favor, using discounted cash flow or other appropriate methodologies, and is included in deferred charges and other assets with a corresponding increase in long-term debt.

The Company is exposed to credit loss in the event of non-performance by counterparties in forward exchange contracts, currency swaps, and interest-rate swap contracts.  Collateral is generally not required of the counterparties or of the Company.  In the event a counterparty fails to meet the contractual terms of a currency swap or forward exchange contract, the Company’s risk is limited to the fair value of the instrument.  The Company actively monitors its exposure to credit risk through the use of credit approvals and credit limits, and by selecting major international banks and financial institutions as counterparties.  The Company has not had any historical instances of non-performance by any counterparties, nor does it anticipate any future instances of non-performance.

The fair values, balance sheet presentation, and the hedge designation status of derivative instruments at March 31, 2012 and December 31, 2011 are presented in the table below:

		Fair Value		Fair Value
		As of		As of
(in thousands)	Balance Sheet Location	March 31, 2012		December 31, 2011
Asset Derivatives
Forward exchange contracts — not designated as hedge	Accounts receivable	$	17	$	57
Interest rate swaps — designated as hedge	Deferred charges and other investments	—		3,268
Total asset derivatives		$	17	$	3,325
Liability Derivatives
Forward exchange contracts — not designated as hedge	Accounts payable	$	14	$	60
Interest rate swaps — designated as hedge	Other long-term liabilities	3,632		—
Total liability derivatives		$	3,646	$	60

The income statement impact of derivatives not designated as hedging instruments for the years ended March 31, 2012 and 2011 are presented in the table below:

	Location of Gain (Loss)	Amount of Gain (Loss) Recognized in Income on Derivatives
	Recognized in Income	Three Months Ended
(in thousands)	on Derivatives	March 31, 2012		March 31, 2011
Forward exchange contracts	Other operating (income) expense, net	$	524	$	1,186
Currency swap contracts	Other non-operating (income) expense, net	—		(1,970		)
Total		$	524	$	(784	)