Financial Instruments

9 Months Ended

Sep. 30, 2011

Financial Instruments

Financial Instruments

17. Financial Instruments

Fair values of the Senior Notes approximated $458,438 and $477,563 at September 30, 2011 and December 31, 2010, respectively, based on quoted market prices, compared to the recorded values of $450,000.

Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments, including forwards and swap contracts, to manage its exposure to fluctuations in foreign exchange and interest rates. For a fair value hedge, both the effective and ineffective, if significant, portions are recorded in earnings and reflected in the condensed consolidated statement of operations. For a cash flow hedge, the effective portion of the change in the fair value of the derivative is recorded in accumulated other comprehensive income ("AOCI") in the condensed consolidated balance sheet. The ineffective portion, if significant, is recorded in other income or expense. When the underlying hedged transaction is realized or the hedged transaction is no longer probable, the gain or loss included in accumulated other comprehensive income is recorded in earnings and reflected in the condensed consolidated statement of operations on the same line as the gain or loss on the hedged item attributable to the hedged risk.

As part of the FMEA joint venture, SPBT had undesignated derivative forward contracts to hedge currency risk of the Euro against the Polish Zloty which is included in the Company's condensed consolidated financial statements. The forward contract is used to mitigate the potential volatility of cash flows arising from changes in currency exchange rates that impact the Company's foreign currency transactions. The unrealized gain or loss on the forward contracts is reported as a component of other expense. The unrealized loss for the three and nine months ended September 30, 2011 was $5,487.

The Company formally documents its hedge relationships, including the identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the cash flow hedges. The Company also formally assesses whether a cash flow hedge is highly effective in offsetting changes in the cash flows of the hedged item. Derivatives are recorded at fair value in other current assets and other current liabilities.

Cash Flow Hedges

Forward foreign exchange contracts – The Company enters into forward contracts to hedge currency risk of the U.S. Dollar against the Mexican Peso, the Canadian Dollar against the U.S. Dollar and the Euro against the Czech Koruna, Polish Zloty and the U.S. Dollar. The forward contracts are used to mitigate the potential volatility to earnings and cash flow arising from changes in currency exchange rates that impact the Company's foreign currency transactions. The gain or loss on the forward contracts is reported as a component of other comprehensive income ("OCI") and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. These foreign currency derivative contracts consist of hedges of transactions up to April 2014. The amount reclassified from AOCI into cost of products sold was $410 and $883 for the three and nine months ended September 30, 2011.

A summary of the outstanding contracts and the respective notional amounts at September 30, 2011 is below:

		Notional Amount		Notional Amount (local currency)
Designated
Mexican Peso	USD		1,800		22,264
United States Dollar	CAD		5,092		5,100
Czech Koruna	EUR		2,523		62,000
Polish Zloty	EUR		3,184		12,646
United States Dollar	EUR		2,200		2,952

At September 30, 2011, the fair value before taxes of the Company's forward exchange contracts and the accounts in the condensed consolidated balance sheet in which the fair value amounts are included are shown below:

	Successor
	September 30, 2011
Designated
Other current assets	$	239
Accrued liabilities		(725	)
	$	(486	)
Undesignated
Accrued liabilities	$	(2,024	)
Other long-term liabilities		(2,638	)
	$	(4,662	)

Interest rate swaps – The Company has an interest rate swap contract to manage cash flow fluctuations of variable rate debt due to changes in market interest rates. This contract which fixes the interest payment of a certain variable rate debt instrument is accounted for as a cash flow hedge. As of September 30, 2011, the USD notional amount of this contract was $4,438. At September 30, 2011, the fair value before taxes of the Company's interest rate swap contract was $189 and is recorded in accrued liabilities and other long-term liabilities in the Company's condensed consolidated balance sheet with the offset reflected in AOCI, net of deferred taxes. The amount reclassified from AOCI into interest expense for this swap was $40 and $61 for the three months ended September 30, 2011 and 2010, respectively. Amounts reclassified from AOCI into interest expense were $131 for the nine months ended September 30, 2011, $81 for the four months ended September 30, 2010 and $102 for the five months ended May 31, 2010. The amount to be reclassified in the next twelve months is expected to be approximately $121. The maturity date of this swap contract is September 2013.

Fair Value Measurements

ASC 820 clarifies that fair value is an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, ASC 820 establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value as follows:

Level 1: Observable inputs such as quoted prices in active markets;

Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and

Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Estimates of the fair value of foreign currency and interest rate derivative instruments are determined using exchange traded prices and rates. The Company also considers the risk of non-performance in the estimation of fair value, and includes an adjustment for non-performance risk in the measure of fair value of derivative instruments. In certain instances where market data is not available, the Company uses management judgment to develop assumptions that are used to determine fair value. Fair value measurements and the fair value hierarchy level for the Company's liabilities measured or disclosed at fair value on a recurring basis as of December 31, 2010 and September 30, 2011, are shown below:

	Successor - December 31, 2010
Contract	Asset (Liability)			Level 1		Level 2		Level 3
Interest rate swap	$	(300	)	$	—	$	—	$	(300	)
Total	$	(300	)	$	—	$	—	$	(300	)

	Successor - September 30, 2011
Contract	Asset (Liability)			Level 1		Level 2		Level 3
Interest rate swap	$	(189	)	$	—	$	—	$	(189	)
Forward foreign exchange contracts		(5,148	)		—		—		(5,148	)
Total	$	(5,337	)	$	—	$	—	$	(5,337	)

A reconciliation of changes in assets and liabilities related to derivative instruments measured at fair value using the market and income approach adjusted for the Company and their counterparty's credit risks for the nine months ended September 30, 2011, is shown below:

	Net Derivative Liabilities
Beginning Balance as of January 1, 2011	$	300
Total losses (realized or unrealized) included in earnings (or changes in net liabilities)		6,501
Included in other comprehensive income		(450	)
Settlements		(1,014	)
Ending Balance as of September 30, 2011	$	5,337
The amount of total (gains) or losses for the period included in earnings (or changes in net liabilities) attributable to the change in unrealized (gains) or losses relating to assets still held at the reporting date	$	—

(Gains) and losses (realized and unrealized) included in earnings (or changes in net liabilities) for the nine months ended September 30, 2011 are reported in cost of products sold and other income (expense):

	Successor
	Nine Months Ended
	September 30, 2011
Total losses included in earnings (or changes in net liabilities) for the period (above)	$	6,501
Change in unrealized losses relating to assets still held at the reporting date		—

Items measured at fair value on a non-recurring basis

In addition to items that are measured at fair value on a recurring basis, the Company measures certain assets and liabilities at fair value on a non-recurring basis, which are not included in the table above. As these non-recurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. For further information on assets and liabilities measured at fair value on a non-recurring basis, see Note 2. "Acquisitions" and Note 4. "Restructuring."