Derivative Instruments, Hedging Activities and Fair Value

3 Months Ended

Mar. 31, 2012

Derivative Instruments, Hedging Activities and Fair Value

Derivative Instruments, Hedging Activities and Fair Value

12.  Derivative Instruments, Hedging Activities and Fair Value

Derivative Instruments and Hedging Activities

The Company uses derivative instruments, including foreign currency forward exchange contracts, commodity contracts and cross-currency interest rate swaps, to manage certain foreign currency, commodity price and interest rate exposures.  Derivative instruments are viewed as risk management tools by the Company and are not used for trading or speculative purposes.

All derivative instruments are recorded on the balance sheet at fair value.  Changes in the fair value of derivatives used to hedge foreign-currency-denominated balance sheet items are reported directly in earnings along with offsetting transaction gains and losses on the items being hedged.  Derivatives used to hedge forecasted cash flows associated with foreign currency commitments or forecasted commodity purchases may be accounted for as cash flow hedges, as deemed appropriate and if the criteria for hedge accounting are met.  Gains and losses on derivatives designated as cash flow hedges are deferred as a separate component of equity and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions.  Generally, at March 31, 2012, these deferred gains and losses will be reclassified to earnings over 10 to 15 years from the balance sheet date.  The ineffective portion of all hedges, if any, is recognized currently in earnings.

The fair value of outstanding derivative contracts recorded as assets and liabilities on the Condensed Consolidated Balance Sheets at March 31, 2012 and December 31, 2011 were as follows:

	Asset Derivatives			Liability Derivatives
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
March 31, 2012
Derivatives designated as hedging instruments:
Foreign currency forward exchange contracts	Other current assets	$	28	Other current liabilities	$	—
Cross currency interest rate swaps	Other assets	38,289		Noncurrent liabilities	5,353
Total derivatives designated as hedging instruments		$	38,317		$	5,353
Derivates not designated as hedging instruments:
Foreign currency forward exchange contracts	Other current assets	$	518	Other current liabilities	$	1,488

	Asset Derivatives			Liability Derivatives
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
December 31, 2011
Derivatives designated as hedging instruments:
Foreign currency forward exchange contracts	Other current assets	$	274	Other current liabilities	$	—
Cross currency interest rate swaps	Other assets	44,636		Noncurrent liabilities	1,792
Total derivatives designated as hedging instruments		$	44,910		$	1,792
Derivates not designated as hedging instruments:
Foreign currency forward exchange contracts	Other current assets	$	2,912	Other current liabilities	$	1,207

The effect of derivative instruments on the Condensed Consolidated Statements of Income and the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2012 and 2011 was as follows:

Derivatives Designated as Hedging Instruments

(In thousands)	Amount of Gain (Loss) Recognized in Other Comprehensive Income (“OCI”) on Derivative - Effective Portion			Location of Gain (Loss) Reclassified from Accumulated OCI into Income - Effective Portion	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income - Effective Portion		Location of Gain (Loss) Recognized in Income on Derivative - Ineffective Portion and Amount Excluded from Effectiveness Testing	Amount of Gain (Loss) Recognized in Income on Derivative - Ineffective Portion and Amount Excluded from Effectiveness Testing
For the three months ended March 31, 2012:
Foreign currency forward exchange contracts	$	(362	)	Cost of services and products sold	$	34		$	—
Cross-currency interest rate swaps	1,339				—		Cost of services and products sold	(11,247		) (a)
	$	977			$	34		$	(11,247	)
For the three months ended March 31, 2011:
Foreign currency forward exchange contracts	$	(527	)		$	—		$	—
Cross-currency interest rate swaps	7,821				—		Cost of services and products sold	(18,781		) (a)
	$	7,294			$	—		$	(18,781	)

(a)   These gains (losses) offset foreign currency fluctuation effects on the debt principal.

Derivatives Not Designated as Hedging Instruments

	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative for the Three Months Ended March 31 (a)
(In thousands)		2012			2011
Foreign currency forward exchange contracts	Cost of services and products sold	$	(4,694	)	$	(5,121	)

(a) These gains (losses) offset amounts recognized in cost of service and products sold principally as a result of intercompany or third party foreign currency exposures.

Foreign Currency Forward Exchange Contracts

The Company conducts business in multiple currencies and, accordingly, is subject to the inherent risks associated with foreign exchange rate movements.  The financial position and results of operations of substantially all of the Company’s foreign subsidiaries are measured using the local currency as the functional currency.  Foreign currency-denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods.  The aggregate effects of translating the balance sheets of these subsidiaries are deferred and recorded in Accumulated other comprehensive loss, which is a separate component of equity.

The Company uses derivative instruments to hedge cash flows related to foreign currency fluctuations.  At March 31, 2012 and December 31, 2011, the Company had $311.1 million and $324.5 million of contracted amounts, respectively, of foreign currency forward exchange contracts outstanding.  These contracts are part of a worldwide program to minimize foreign currency exchange operating income and balance sheet exposure by offsetting foreign currency exposures of certain future payments between the Company and its various subsidiaries, vendors or customers.  The unsecured contracts outstanding at March 31, 2012 mature at various times within three months and are with major financial institutions.  The Company may be exposed to credit loss in the event of non-performance by the contract counterparties.  The Company evaluates the creditworthiness of the counterparties and does not expect default by them.  Foreign currency forward exchange contracts are used to hedge commitments, such as foreign currency debt, firm purchase commitments and foreign currency cash flows for certain export sales transactions.

The following tables summarize, by major currency, the contractual amounts of the Company’s foreign currency forward exchange contracts in U.S. dollars at March 31, 2012 and December 31, 2011.  The “Buy” amounts represent the U.S. dollar equivalent of commitments to purchase foreign currencies, and the “Sell” amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies.  The recognized gains and losses offset amounts recognized in cost of services and products sold principally as a result of intercompany or third party foreign currency exposures.

March 31, 2012

(In thousands)	Type	U.S. Dollar Equivalent		Maturity	Recognized Gain (Loss)
British pounds sterling	Sell	$	2,776	April 2012	$	(4	)
British pounds sterling	Buy	2,405		April 2012	3
Euros	Sell	185,694		April 2012 through June 2012	(1,144		)
Euros	Buy	106,894		April 2012 through June 2012	88
Other currencies	Sell	4,384		April 2012 through June 2012	(10		)
Other currencies	Buy	8,947		April 2012	125
Total		$	311,100		$	(942	)

December 31, 2011

(In thousands)	Type	U.S. Dollar Equivalent		Maturity	Recognized Gain (Loss)
British pounds sterling	Sell	$	18,350	January 2012	$	(20	)
British pounds sterling	Buy	4,364		January 2012	(12		)
Euros	Sell	178,889		January 2012 through October 2012	2,345
Euros	Buy	105,247		January 2012 through April 2012	(878		)
Other currencies	Sell	2,957		January 2012 through March 2012	62
Other currencies	Buy	14,656		January 2012	235
Total		$	324,463		$	1,732

In addition to foreign currency forward exchange contracts, the Company designates certain loans as hedges of net investments in foreign subsidiaries.  The Company recorded pre-tax net losses of $4.3 million and $6.9 million during the three months ended March 31, 2012 and 2011, respectively into Accumulated other comprehensive loss, which is a separate component of stockholders’ equity.

Cross-Currency Interest Rate Swaps

The Company uses cross-currency interest rate swaps in conjunction with certain debt issuances in order to secure a fixed local currency interest rate.  Under these cross-currency interest rate swaps, the Company receives interest based on a fixed or floating U.S. dollar rate and pays interest on a fixed local currency rate based on the contractual amounts in dollars and the local currency, respectively.  The cross-currency interest rate swaps are recorded on the Condensed  Consolidated Balance Sheets at fair value, with changes in value attributed to the effect of the swaps’ interest spread recorded in Accumulated other comprehensive loss, which is a separate component of equity.  Changes in value attributed to the effect of foreign currency fluctuations are recorded in the income statement and offset currency fluctuation effects on the debt principal.

Cross-Currency Interest Rate Swaps

			Interest Rates
(In millions)	Contractual Amount		Receive	Pay
Maturing 2018	$	250.0	Fixed U.S. dollar rate	Fixed euro rate
Maturing 2020	220.0		Fixed U.S. dollar rate	Fixed British pound sterling rate
Maturing 2013	1.8		Floating U.S. dollar rate	Fixed rupee rate

Fair Value of Derivative Assets and Liabilities and Other Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).  The Company utilizes market data or assumptions that the Company believes market participants would use in valuing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.

The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs).  The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).  The three levels of the fair value hierarchy are described below:

·Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

·Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

·Level 3—Inputs that are both significant to the fair value measurement and unobservable.

In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety.  The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

At March 31, 2012 and December 31, 2011, all derivative assets and liabilities were valued at Level 2 of the fair value hierarchy.  The following table indicates the different financial instruments of the Company at March 31, 2012 and December 31, 2011:

Level 2 Fair Value Measurements

(In thousands)	March 31 2012		December 31 2011
Assets
Foreign currency forward exchange contracts	$	546	$	3,186
Cross-currency interest rate swaps	38,289		44,636
Liabilities
Foreign currency forward exchange contracts	1,488		1,207
Cross-currency interest rate swaps	5,353		1,792

The following table reconciles the beginning and ending balances for liabilities measured on a recurring basis using unobservable inputs (Level 3) for the three months ended March 31:

	Three Months Ended March 31
(In thousands)	2012		2011
Balance at beginning of period	$	—	$	3,872
Acquisitions during the period	—		—
Fair value adjustments included in earnings	—		(3,966		)
Effect of exchange rate changes	—		94
Balance at end of period	$	—	$	—

The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information.  Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs, such as forward rates, interest rates, the Company’s credit risk and counterparties’ credit risks, and minimize the use of unobservable inputs.  The Company is able to classify fair value balances based on the ability to observe those inputs.  Commodity derivatives, foreign currency forward exchange contracts and cross-currency interest rate swaps are classified as Level 2 fair value based upon pricing models using market-based inputs.  Model inputs can be verified, and valuation techniques do not involve significant management judgment.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings approximate fair value due to the short-term maturities of these assets and liabilities.  At March 31, 2012 and December 31, 2011, the total fair value of long-term debt, including current maturities, was $1.0 billion and $935.1 million, respectively, compared to carrying value of $935.5 million and $857.4 million, respectively.  Fair values for debt are based on quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities.