DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2012

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 4 – DERIVATIVE FINANCIAL INSTRUMENTS

We enter into derivative financial instruments primarily to hedge certain firm purchase commitments and forecasted transactions denominated in foreign currencies. We record these contracts at fair value on our consolidated balance sheets. Depending on the hedge designation at the inception of the contract, the related gains and losses on these contracts are either: (1) deferred as a component of accumulated other comprehensive income (loss) (“AOCI”) until the hedged item is recognized in earnings; (2) offset against the change in fair value of the hedged firm commitment through earnings; or (3) recognized immediately in earnings. At the inception and on an ongoing basis, we assess the hedging relationship to determine its effectiveness in offsetting changes in cash flows or fair value attributable to the hedged risk. We exclude from our assessment of effectiveness the portion of the fair value of the forward contracts attributable to the difference between spot exchange rates and forward exchange rates. The ineffective portion of a derivative’s change in fair value and any portion excluded from the assessment of effectiveness are immediately recognized in earnings. Gains and losses on derivative financial instruments that are immediately recognized in earnings are included as a component of gain (loss) on foreign currency—net in our condensed consolidated statements of income. At September 30, 2012, we had designated the majority of our foreign currency forward-exchange contracts as cash flow hedging instruments.

At September 30, 2012, we had deferred $3.6 million of net gains on these derivative financial instruments in AOCI, and we expect to reclassify approximately $1.3 million of deferred losses out of AOCI over the next 12 months.

At September 30, 2012, our derivative financial instruments consisted of foreign currency forward-exchange contracts. The notional value of our outstanding derivative contracts totaled approximately $1.3 billion at September 30, 2012, with maturities extending through 2017. Of this amount, approximately $870 million is associated with various foreign currency expenditures we expect to incur on one of our EPCI projects. The fair value of these contracts at September 30, 2012 was in a net asset position totaling $7.3 million. The fair value of outstanding derivative instruments is determined using observable financial market inputs, such as quoted market prices, and is classified as Level 2 in nature.

The following tables summarize our derivative financial instruments:

Asset and Liability Derivatives

	September 30, 2012		December 31, 2011
	(Unaudited)
	(In thousands)
Derivatives Designated as Hedges:
Location
Accounts receivable–other	$	9,524	$	2,765
Other assets		7,736		66
Total asset derivatives	$	17,260	$	2,831
Accounts payable	$	8,344	$	6,891
Other liabilities		1,642		969
Total liability derivatives	$	9,986	$	7,860

The Effects of Derivative Instruments on our Financial Statements

	Three Months Ended September 30,					Nine Months Ended September 30,
	2012		2011			2012			2011
	(Unaudited) (In thousands)
Derivatives Designated as Hedges:
Amount of gain (loss) recognized in other comprehensive income (loss)	$	19,324	$	(6,536	)	$	(4,880	)	$	4,842
Income (loss) reclassified from AOCI into income: effective portion
Location
Cost of operations	$	2,867	$	468		$	4,837		$	426
Loss recognized in income: ineffective portion and amount excluded from effectiveness testing
Location
Gain (loss) on foreign currency – net	$	3,546	$	(1,437	)	$	15,011		$	(3,260	)