Financial Instruments

12 Months Ended

Dec. 31, 2011

Financial Instruments Abstract

Financial Instruments

FINANCIAL INSTRUMENTS

In the normal course of business, the Company uses various financial instruments, including derivative instruments, to manage the risks associated with interest rate, currency rate, commodity price and share-based compensation exposures. These financial instruments are not used for trading or speculative purposes.

On the date a derivative contract is entered into, the Company designates the derivative instrument either as a cash flow hedge of a forecasted transaction, a cash flow hedge of a recognized asset or liability, or as an undesignated derivative. The Company formally documents its hedge relationships, including identification of the derivative instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. This process includes linking derivative instruments that are designated as hedges to specific assets, liabilities or forecasted transactions.

The fair market value of derivative instruments is determined through market-based valuations and may not be representative of the actual gains or losses that will be recorded when these instruments mature due to future fluctuations in the markets in which they are traded.

The Company also assesses both at the inception and at least quarterly thereafter, whether the derivatives used in cash flow hedging transactions are highly effective in offsetting the changes in the cash flows of the hedged item.

To the extent the derivative is deemed to be a highly effective hedge, the fair market value changes of the instrument are recorded to Accumulated other comprehensive income (AOCI). Any ineffective portion of a derivative instrument’s change in fair value is recorded in the Consolidated Statement of Income in the period of change. If the hedging relationship ceases to be highly effective, or it becomes probable that a forecasted transaction is no longer expected to occur, the hedging relationship will be undesignated and any future gains and losses on the derivative instrument would be recorded in the Consolidated Statement of Income.

Currency and Commodity Hedging Instruments

The notional amounts of the Company’s currency derivatives were $1,818.5 million and $1,280.4 million at December 31, 2011 and 2010, respectively. At December 31, 2011 and 2010, a gain of $2.3 million and a gain of $0.3 million, net of tax, respectively, was included in AOCI related to the fair value of the Company’s currency derivatives designated as accounting hedges. The amount expected to be reclassified into Net earnings over the next twelve months is a gain of $2.3 million. The actual amounts that will be reclassified to Net earnings may vary from this amount as a result of changes in market conditions. Gains and losses associated with the Company’s currency derivatives not designated as hedges are recorded in Net earnings as changes in fair value occur. At December 31, 2011, the maximum term of the Company’s currency derivatives was approximately 12 months.

As a result of the acquisition of Trane in June 2008, the Company assumed a cross currency swap that fixed in U.S. dollars, the currency cash flows on the £60.0 million 8.25% senior notes. These senior notes matured on June 1, 2009 along with the cross currency swap. The cross currency swap met the criteria to be accounted for as a foreign currency cash flow hedge, which allowed for deferral of any associated gains or losses within AOCI until settlement. The deferred gain remaining in AOCI related to the cross currency swap was released into Net earnings upon maturity.

During 2008, the Company discontinued the use of hedge accounting for its commodity hedges at which time the Company recognized into the Consolidated Statement of Income all deferred gains and losses related to its existing commodity hedges at the time of discontinuance. All further gains and losses associated with the Company’s commodity derivatives were recorded in Net earnings as changes in fair value occurred. The Company had no commodity derivatives outstanding as of December 31, 2011 and 2010.

Other Derivative Instruments

During the third quarter of 2008, the Company entered into interest rate locks for the forecasted issuance of approximately $1.4 billion of Senior Notes due in 2013 and 2018. These interest rate locks met the criteria to be accounted for as cash flow hedges of a forecasted transaction. Consequently, the changes in fair value of the interest rate locks were recognized in AOCI. No further gain or loss will be recognized in AOCI related to these interest rate locks as the contracts were effectively terminated upon issuance of the underlying debt. However, the amount of AOCI associated with these interest rate locks at the time of termination will be recognized into Interest expense over the term of the notes. At December 31, 2011 and 2010, $9.0 million and $10.8 million, respectively, of losses remained in AOCI related to these interest rate locks. The amount expected to be reclassified into Interest expense over the next twelve months is $1.8 million.

In March 2005, the Company entered into interest rate locks for the forecasted issuance of $300 million of Senior Notes due 2015. These interest rate locks met the criteria to be accounted for as cash flow hedges of a forecasted transaction. Consequently, the changes in fair value of the interest rate locks were recognized in AOCI. No further gain or loss will be recognized in AOCI related to these interest rate locks as the contracts were effectively terminated upon issuance of the underlying debt. However, the amount of AOCI associated with these interest rate locks at the time of termination will be recognized into Interest expense over the term of the notes. At December 31, 2011 and 2010, $4.3 million and $5.4 million, respectively, of losses remained in AOCI related to these interest rate locks. The amount expected to be reclassified into Interest expense over the next twelve months is $1.2 million.

The following table presents the fair values of derivative instruments included within the Consolidated Balance Sheet as of December 31:

	Asset derivatives				Liability derivatives
In millions	2011		2010		2011		2010
Derivatives designated as hedges:
Currency derivatives	$	3.1	$	1.9	$	0.3	$	1.7
Derivatives not designated as hedges:
Currency derivatives	6.2		19.6		21.9		0.9
Total derivatives	$	9.3	$	21.5	$	22.2	$	2.6

Asset and liability derivatives included in the table above are recorded within Other current assets and Accrued expenses and other current liabilities, respectively, on the Consolidated Balance Sheet.

The following table represents the amounts associated with derivatives designated as hedges affecting the Consolidated Statement of Income and AOCI for the years ended December 31:

	Amount of gain (loss) recognized in AOCI							Location of gain (loss) reclassified from AOCI and recognized into earnings	Amount of gain (loss) reclassified from AOCI and recognized into earnings
In millions	2011		2010		2009				2011			2010			2009
Currency derivatives	$	2.4	$	2.2	$	(7.1	)	Other, net	$	0.1		$	(0.4	)	$	5.3
Interest rate locks	—		—		—			Interest expense	(2.9		)	(2.8		)	(2.8		)
Total	$	2.4	$	2.2	$	(7.1	)		$	(2.8	)	$	(3.2	)	$	2.5

The following table represents the amounts associated with derivatives not designated as hedges affecting the Consolidated Statement of Income for the years ended December 31:

In millions	Location of gain (loss) recognized in earnings	Amount of gain (loss) recognized in earnings
		2011			2010		2009
Currency derivatives	Other, net	$	(7.4	)	$	56.4	$	64.2
Commodity derivatives	Other, net	—			—		1.8
Total		$	(7.4	)	$	56.4	$	66.0

The gains and losses associated with the Company’s undesignated currency derivatives are materially offset in the Consolidated Statement of Income by changes in the fair value of the underlying transactions.

Accounts Receivable Purchase Program

On March 31, 2009, the Company expanded its existing Trane accounts receivable purchase program to encompass originators from all four of the business segments. For the year ended December 31, 2009, the Company recorded a cash outflow of approximately $63 million within cash flow from operations, which represented the decrease in the net interests of the receivables sold to the conduits administered by unaffiliated financial institutions. On February 17, 2010, the Company terminated the expanded facility prior to its expiration in March 2010.

Concentration of Credit Risk

The counterparties to the Company’s forward contracts consist of a number of investment grade major international financial institutions. The Company could be exposed to losses in the event of nonperformance by the counterparties. However, the credit ratings and the concentration of risk in these financial institutions are monitored on a continuous basis and present no significant credit risk to the Company.

Fair Value of Financial Instruments

The carrying value of cash and cash equivalents, accounts receivable, short-term borrowings and accounts payable are a reasonable estimate of their fair value due to the short-term nature of these instruments.