Derivative Financial Instruments

9 Months Ended

Sep. 30, 2012

Derivative Financial Instruments

Derivative Financial Instruments

4. Derivative Financial Instruments

The company’s risk management objective is to ensure that business exposures to risk that have been identified and measured and are capable of being controlled are minimized using the most effective and efficient methods to eliminate, reduce, or transfer such exposures.  Operating decisions consider associated risks and structure transactions to manage risk whenever possible.

Use of derivative instruments is consistent with the overall business and risk management objectives of the company.  Derivative instruments may be used to manage business risk within limits specified by the company’s risk policy and manage exposures that have been identified through the risk identification and measurement process, provided that they clearly qualify as “hedging” activities as defined in the risk policy.  Use of derivative instruments is not automatic, nor is it necessarily the only response to managing pertinent business risk.  Use is permitted only after the risks that have been identified are determined to exceed defined tolerance levels and are considered to be unavoidable.

The primary risks managed by the company by using derivative instruments are interest rate risk, commodity price risk and foreign currency exchange risk.  Interest rate swap and cap instruments are entered into to manage interest rate or fair value risk.  Swap contracts on various commodities are entered into to manage the price risk associated with forecasted purchases of materials used in the company’s manufacturing process.  The company also enters into various foreign currency derivative instruments to manage foreign currency risk associated with the company’s projected foreign currency denominated purchases, sales, and receivable and payable balances.

ASC Topic 815-10, “Derivatives and Hedging,” requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position.  In accordance with ASC Topic 815-10, the company designates commodity swaps, foreign currency exchange contracts, and interest rate derivative contracts as cash flow hedges of forecasted purchases of commodities and currencies, and fixed or variable rate interest payments.  Also in accordance with ASC Topic 815-10, the company designates fixed-to-float interest rate swaps as fair market value hedges of fixed rate debt, which synthetically swap the company’s fixed rate debt to floating rate debt.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of Other Comprehensive Income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  Gains and losses on the derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness, are recognized in current earnings.  In the next twelve months the company estimates $1.0 million of unrealized losses net of tax related to commodity price and currency exchange rate hedging will be reclassified from other comprehensive income into earnings.  Foreign currency and commodity hedging is generally completed prospectively on a rolling basis for between twelve and twenty-four months, respectively, depending on the type of risk being hedged.

The risk management objective for the company’s fair market value interest rate hedges is to effectively change the amount of the underlying debt equal to the notional value of the hedges from a fixed to a floating interest rate based on the benchmark six-month U.S. LIBOR rate.  These swaps include an embedded call feature to match the terms of the call schedule embedded in the Senior Notes. Changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the debt due to changes in the U.S. six-month LIBOR benchmark interest rate.

As of September 30, 2012 and December 31, 2011, the company had the following outstanding commodity and currency forward contracts that were entered into to hedge forecasted transactions:

	Units Hedged
Commodity	September 30, 2012	December 31, 2011		Type
Aluminum	1,501	1,254	MT	Cash Flow
Copper	513	684	MT	Cash Flow
Natural Gas	227,127	346,902	MMBtu	Cash Flow
Steel	10,758	8,231	Tons	Cash Flow
	Units Hedged
Short Currency	September 30, 2012	December 31, 2011	Type
Canadian Dollar	7,681,869	25,083,644	Cash Flow
European Euro	80,882,410	67,565,453	Cash Flow
South Korean Won	2,552,218,195	3,224,015,436	Cash Flow
Singapore Dollar	4,800,000	4,800,000	Cash Flow
United States Dollar	2,701,939	5,538,777	Cash Flow
Chinese Renminbi	59,595,280	111,177,800	Cash Flow

As of June 30, 2011, the company offset, dedesignated and wrote-off all of its previous interest rate swaps against Term Loan A and B interest due to the amendment of its Senior Credit Facility (See Note 8, “Debt,” for a description of the Senior Credit Facility).  As of September 30, 2012, the company had outstanding $350.0 million notional amount of 3.00% LIBOR caps related to the term loan portion of the Senior Credit Facility.  The remaining unhedged portions of Term Loans A and B continue to bear interest according to the terms of the Senior Credit Facility.

In the third quarter of 2011, the company monetized the derivative asset related to the fixed-to-float interest rate swaps in connection with the 2018 and 2020 Notes and received $21.5 million.  The gain was treated as an increase to the debt balances for each of the 2018 and 2020 Notes and will be amortized against interest expense over the life of the original swap.  The company subsequently entered new interest rate swaps.

In the third quarter of 2012, the company further monetized the derivative asset related to certain portions of its fixed-to-float interest rate swaps related to its 2018 and 2020 Notes and received $14.8 million in the quarter.  Consistent with the prior year monetization, the company treated the gain as an increase to the debt balances for each of the 2018 and 2020 notes, which will be amortized against interest expense over the life of the original swaps.

For derivative instruments that are not designated as hedging instruments under ASC Topic 815-10, the gains or losses on the derivatives are recognized in current earnings within cost of sales or other income, net in the Condensed Consolidated Statements of Operations.  As of September 30, 2012 and December 31, 2011, the company had the following outstanding currency forward contracts that were not designated as hedging instruments:

	Units Hedged
Short Currency	September 30, 2012	December 31, 2011	Recognized Location	Purpose
British Pound	7,100,000	—	Other income, net	Accounts Payable and Receivable Settlement
Euro	35,378,670	33,150,213	Other income, net	Accounts Payable and Receivable Settlement
United States Dollar	—	6,000,000	Other income, net	Accounts Payable and Receivable Settlement
Australian Dollar	1,988,000	7,569,912	Other income, net	Accounts Payable and Receivable Settlement

The fair value of outstanding derivative contracts recorded as assets in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2012 and December 31, 2011 was as follows:

		ASSET DERIVATIVES
		September 30, 2012		December 31, 2011
(in millions)	Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts	Other current assets	$	1.3	$	0.6
Commodity contracts	Other current assets	0.1		—
Interest rate swap contracts: Fixed-to-float	Other non-current assets	—		0.5
Interest rate cap contracts	Other non-current assets	0.7		0.3
Total derivatives designated as hedging instruments		$	2.1	$	1.4

		ASSET DERIVATIVES
		September 30, 2012		December 31, 2011
(in millions)	Balance Sheet Location	Fair Value
Derivatives NOT designated as hedging instruments
Foreign exchange contracts	Other current assets	$	0.4	$	0.1
Total derivatives NOT designated as hedging instruments		$	0.4	$	0.1
Total asset derivatives		$	2.5	$	1.5

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Balance Sheet as of September 30, 2012 and December 31, 2011 was as follows:

		LIABILITY DERIVATIVES
		September 30, 2012		December 31, 2011
(in millions)	Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts	Accounts payable and accrued expenses	$	1.7	$	5.2
Commodity contracts	Accounts payable and accrued expenses	1.3		2.5
Total derivatives designated as hedging instruments		$	3.0	$	7.7

		LIABILITY DERIVATIVES
		September 30, 2012		December 31, 2011
(in millions)	Balance Sheet Location	Fair Value
Derivatives NOT designated as hedging instruments
Foreign exchange contracts	Accounts payable and accrued expenses	$	0.2	$	1.6
Interest rate swap contracts: Float-to-fixed	Accounts payable and accrued expenses	2.5		9.5
Total derivatives NOT designated as hedging instruments		$	2.7	$	11.1
Total liability derivatives		$	5.7	$	18.8

The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three months ended September 30, 2012 and September 30, 2011 for gains or losses initially recognized in Other Comprehensive Income (OCI) in the Condensed Consolidated Balance Sheet was as follows:

	Amount of Gain or (Loss) on Derivative Recognized in OCI (Effective Portion, net of tax)					Location of Gain or (Loss) Reclassified from Accumulated	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships (in millions)	September 30, 2012		September 30, 2011			OCI into Income (Effective Portion)	September 30, 2012			September 30,  2011
Foreign exchange contracts	$	2.7	$	(6.1	)	Cost of sales	$	(3.6	)	$	0.7
Interest rate swap & cap contracts	—		0.2			Interest expense	—			—
Commodity contracts	0.9		(2.0		)	Cost of sales	(0.8		)	(0.1		)
Total	$	3.6	$	(7.9	)		$	(4.4	)	$	0.6

Derivatives	Location of Gain or (Loss) on Derivative Recognized in Income (Ineffective Portion and Amount Excluded from	Amount of Gain or (Loss) on Derivative Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Relationships (in millions)	Effectiveness Testing)	September 30, 2012			September 30, 2011
Commodity contracts	Cost of sales	$	(0.1	)	$	(0.1	)
Total		$	(0.1	)	$	(0.1	)

Derivatives Not Designated as	Location of Gain or (Loss) Recognized on Derivative in	Amount of Gain or (Loss) on Derivative Recognized in Income
Hedging Instruments (in millions)	Income	September 30, 2012		September 30, 2011
Foreign exchange contracts	Other income	$	0.3	$	1.5
Interest rate swaps	Other income	2.3		2.4
Total		$	2.6	$	3.9

The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the nine months ended September 30, 2012 and September 30, 2011 for gains or losses initially recognized in Other Comprehensive Income (OCI) in the Condensed Consolidated Balance Sheet was as follows:

	Amount of Gain or (Loss) on Derivative Recognized in OCI (Effective Portion, net of tax)						Location of Gain or (Loss) Reclassified from Accumulated	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships (in millions)	September 30, 2012			September 30, 2011			OCI into Income (Effective Portion)	September 30, 2012			September 30, 2011
Foreign exchange contracts	$	2.5		$	(4.2	)	Cost of sales	$	(6.9	)	$	(4.2	)
Interest rate swap & cap contracts	(0.1		)	1.3			Interest expense	—			(7.9		)
Commodity contracts	0.7			(2.3		)	Cost of sales	(2.2		)	0.8
Total	$	3.1		$	(5.2	)		$	(9.1	)	$	(11.3	)

Derivatives	Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from	Amount of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Relationships (in millions)	Effectiveness Testing)	September 30, 2012			September 30, 2011
Commodity contracts	Cost of sales	$	(0.2	)	$	(0.1	)
Total		$	(0.2	)	$	(0.1	)

Derivatives Not Designated as	Location of Gain or (Loss) Recognized in Income on	Amount of Gain or (Loss) Recognized in Income on Derivative
Hedging Instruments (in millions)	Derivative	September 30, 2012			September 30, 2011
Foreign exchange contracts	Other income	$	(1.2	)	$	(1.2	)
Interest rate swaps	Other income	6.9			$	2.4
Total		$	5.7		$	1.2

The effect of Fair Market Value designated derivative instruments on the Condensed Consolidated Statements of Operations for the three months ended September 30, 2012 and September 30, 2011 for gains or losses recognized through income was as follows:

Derivatives Designated as Fair Market Value	Location of Gain or (Loss) on Derivative	Amount of Gain or (Loss) on Derivative Recognized in Income
Instruments under ASC 815 (in millions)	Recognized in Income	September 30, 2012		September 30, 2011
Interest rate swap contracts	Interest expense	$	—	$	7.1
Total		$	—	$	7.1

The effect of Fair Market Value designated derivative instruments on the Condensed Consolidated Statement of Operations for the nine months ended September 30, 2012 and September 30, 2011 for gains or losses recognized through income was as follows:

Derivatives Designated as Fair Market Value	Location of Gain or (Loss) on Derivative	Amount of Gain or (Loss) on Derivative Recognized in Income
Instruments under ASC 815 (in millions)	Recognized in Income	September 30, 2012		September 30, 2011
Interest rate swap contracts	Interest expense	$	11.5	$	18.8
Total		$	11.5	$	18.8