NOTE 14. FINANCIAL INSTRUMENTS

Fair Value

Accounting guidance on fair value measurements specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. These two types of inputs create the following fair value hierarchy:

Level 1 — Quoted prices for identical instruments in active markets.

Level 2 — Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets.

Level 3 — Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

This hierarchy requires us to use observable market data, when available, and to minimize the use of unobservable inputs when determining fair value. We determine the fair value of structured liabilities (where performance is linked to structured interest rates, inflation or currency risks) using the London InterBank Offer Rate (“LIBOR”) swap curve and forward interest and exchange rates at period end. Such instruments are classified as Level 2 based on the observability of significant inputs to the model. We do not have any instruments classified as Level 1 or Level 3, other than those included in pension asset trusts included in Note 13.

These valuations take into consideration our credit risk and our counterparties’ credit risk. The estimated change in the fair value of these instruments due to such changes in our own credit risk (or instrument-specific credit risk) was immaterial as of December 31, 2012.

The amounts recorded in the balance sheet (carrying amount) and the estimated fair values of financial instruments at December 31 consisted of the following:


	2012				2011
(DOLLARS IN THOUSANDS)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Cash and cash equivalents⁽¹⁾	$	324,422	$	324,422	$	88,279	$	88,279
Credit facilities and bank overdrafts⁽²⁾		297,147		297,147		158,971		158,971
Long-term debt:⁽³⁾
Senior notes — 2007		500,000		634,000		500,000		617,000
Senior notes — 2006		225,000		248,000		225,000		250,000

(1)	The carrying amount of cash and cash equivalents approximates fair value due to the short maturity of those instruments.

(2)	The carrying amount of our credit facilities and bank overdrafts approximates fair value as the interest rate is reset frequently based on current market rates as well as the short maturity of those instruments.

(3)	The fair value of our long-term debt was calculated using discounted cash flows applying current interest rates and current credit spreads based on our own credit risk.

Derivatives

We periodically enter into foreign currency forward contracts with the objective of reducing exposure to cash flow volatility associated with our intercompany loans, foreign currency receivables and payables and anticipated purchases of certain raw materials used in operations. These contracts generally involve the exchange of one currency for a second currency at a future date, have maturities not exceeding twelve months and are with counterparties which are major international financial institutions.

In 2003, we executed a 10-year Yen — U.S. dollar currency swap related to the monthly sale and purchase of products between the U.S. and Japan which has been designated as a cash flow hedge. This swap matured in January 2013.

During the third quarter of 2010, we entered into two interest rate swap agreements effectively converting the fixed rate on a portion of our long-term borrowings to a variable short-term rate based on the LIBOR plus an interest markup. These swaps are designated as fair value hedges and will mature in the third quarter of 2013. Any amounts recognized in Interest expense have been immaterial for the year ended December 31, 2012.

During the year ended December 31, 2012, we entered into multiple forward currency contracts which qualified as net investment hedges, in order to mitigate a portion of our net European investments from foreign currency risk. The effective portions of net investment hedges are recorded in OCI as a component of Foreign currency translation adjustments in the accompanying Consolidated Statement of Income and Comprehensive Income. Realized gains/(losses) are deferred in AOCI where they will remain until the net investments in our European subsidiaries are divested. Four of these forward currency contracts matured during the year ended December 31, 2012. The outstanding forward currency contacts have remaining maturities of less than one year.

During the year ended December 31, 2012, we continued to enter into several forward currency contracts which qualified as cash flow hedges. The objective of these hedges is to protect against the currency risk associated with forecasted U.S. dollar (USD) denominated raw material purchases made by Euro (EUR) functional currency entities which result from changes in the EUR/USD exchange rate. The effective portions of cash flow hedges are recorded in OCI as a component of (Losses)/gains on derivatives qualifying as hedges in the accompanying Consolidated Statement of Income and Comprehensive Income. Realized gains/(losses) in AOCI related to cash flow hedges of raw material purchases are recognized as a component of Cost of goods sold in the accompanying Consolidated Statement of Income and Comprehensive Income in the same period as the related costs are recognized.

The following table shows the notional amount of the Company’s derivative instruments outstanding as of December 31, 2012 and December 31, 2011:


(DOLLARS IN THOUSANDS)	December 31, 2012		December 31, 2011
Forward currency contracts	$	143,483	$	147,078
Interest rate swaps	$	100,000	$	100,000

The following tables show the Company’s derivative instruments measured at fair value (Level 2 of the fair value hierarchy) as reflected in the Consolidated Balance Sheets as of December 31, 2012 and December 31, 2011 (in thousands):


	December 31, 2012
	Fair Value of Derivatives Designated as Hedging Instruments			Fair Value of Derivatives Not Designated as Hedging Instruments			Total Fair Value
Derivative assets^(a)
Foreign currency contracts	$	676		$	2,535		$	3,211
Interest rate swaps		328			—			328

	$	1,004		$	2,535		$	3,539
Derivative liabilities^(b)
Foreign currency contracts	$	5,251		$	278		$	5,529

	December 31, 2011
	Fair Value of Derivatives Designated as Hedging Instruments			Fair Value of Derivatives Not Designated as Hedging Instruments			Total Fair Value
Derivative assets^(a)
Foreign currency contracts	$	9,333		$	5,473		$	14,806
Interest rate swaps		286			—			286

	$	9,619		$	5,473		$	15,092
Derivative liabilities^(b)
Foreign currency contracts	$	(3,368	)	$	(2,054	)	$	(5,422	)

(a)	Derivative assets are recorded to Prepaid expenses and other current assets in the Consolidated Balance Sheet.

(b)	Derivative liabilities are recorded as Other current liabilities in the Consolidated Balance Sheet.

The following table shows the effect of the Company’s derivative instruments which were not designated as hedging instruments in the Consolidated Statement of Income and Comprehensive Income for the years ended December 31, 2012 and December 31, 2011 (in thousands):


Derivatives Not Designated as Hedging Instruments under ASC 815	Amount of Gain or (Loss) For the years ended December 31,					Location of Gain or (Loss) Recognized in Income on Derivative
	2012		2011
Foreign currency contract	$	17,847	$	(2,451	)		Other expense, net

Most of these net gains (losses) offset any recognized gains (losses) arising from the revaluation of the related intercompany loans during the same respective periods.

The following table shows the effect of the Company’s derivative instruments designated as cash flow and net investment hedging instruments in the Consolidated Statement of Income and Comprehensive Income for the years ended December 31, 2012 and December 31, 2011 (in thousands):


	Amount of Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)					Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)		Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
	For the years ended December 31,							For the years ended December 31,
	2012			2011				2012			2011
Derivatives in Cash Flow Hedging Relationships:
Cross currency swap⁽¹⁾	$	1,975		$	1,206		Other expense, net	$	(2,787	)	$	(2,467	)
Forward currency contract		(6,523	)		7,179		Other expense, net		4,206			(5,156	)

Derivatives in Net Investment Hedging Relationships:
Forward currency contract		(395	)		265		N/A		—			—

Total	$	(4,943	)	$	8,650			$	1,419		$	(7,623	)

(1)	Ten year swap executed in 2003.

The ineffective portion of the above noted cash flow hedges and net investment hedges was not material for the years ended December 31, 2012 and 2011.

The Company expects approximately $1.2 million (net of tax), of derivative gains included in AOCI at December 31, 2012, based on current market rates, will be reclassified into earnings within the next 12 months. The majority of this amount will vary due to fluctuations in foreign currency exchange rates.