Derivative Financial Instruments

3 Months Ended

Mar. 31, 2012

Derivative Financial Instruments

Derivative Financial Instruments

Note 6 — Derivative Financial Instruments

Interest Rate Swap Agreements

In 2010, we entered into an agreement to swap $98 million of a floating rate obligation for a fixed rate obligation at an average of 1.03% against LIBOR in U.S. dollars.  The swap is scheduled to mature on March 31, 2014, and was accounted for as a cash flow hedge of our floating rate bank loan. To ensure the swap was highly effective, all the principal terms of the swap matched the terms of the bank loan.  The fair value of the interest rate swap was a liability of $0.8 million at March 31, 2012 and $0.6 million at December 31, 2011.

Foreign Currency Forward Exchange Contracts

A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries’ functional currencies, being either the Euro or the British Pound Sterling.  We entered into contracts to exchange U.S. dollars for Euros and British Pound Sterling through November 2014.  The aggregate notional amount of these contracts was $200.7 million and $168.9 million at March 31, 2012 and December 31, 2011, respectively.  The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers.  These contracts are expected to provide us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates.  The effective portion of the hedges was a gain of $4.7 million and $4.8 million for the quarters ended March 31, 2012 and 2011, respectively, and are recorded in other comprehensive income.  The carrying amount of these contracts was $2.2 million classified in other assets and $2.3 million in other liabilities on the Condensed Consolidated Balance Sheets at March 31, 2012 and $0.6 million in other assets and $6.6 million classified in other liabilities at December 31, 2011.  During each of the quarters ended March 31, 2012 and 2011, we recognized a net $0.5 million reduction in gross margin.  For the quarters ended March 31, 2012 and 2011, hedge ineffectiveness was immaterial.  Cash flows associated with these contracts are classified within net cash provided by operating activities.

In addition, we enter into foreign exchange forward contracts which are not designated as hedges.  These are used to provide an offset to transactional gains or losses arising from the remeasurement of non-functional monetary assets and liabilities such as accounts receivable.  The change in the fair value of the derivatives is recorded in the statement of operations.  There are no credit contingency features in these derivatives.  During the quarters ended March 31, 2012 and 2011, we recognized net foreign exchange gains of $3.2 million and foreign exchange gains of $5.0 million, respectively, in the Condensed Consolidated Statements of Operations, which offsets the translation exposure of these transactions.  The carrying amount of the contracts for asset and liability derivatives not designated as hedging instruments was $0.5 million classified in other assets and $0.2 million in other liabilities and $0.1 million classified in other assets and $3.8 million in other liabilities on the March 31, 2012 and December 31, 2011 Condensed Consolidated Balance Sheets, respectively.

The change in fair value of our foreign currency forward exchange contracts under hedge designations recorded net of tax within accumulated other comprehensive income for the quarters ended March 31, 2012 and 2011 was as follows:

	Quarter Ended March 31,
(In millions)	2012			2011
Unrealized losses at beginning of period	$	(4.5	)	$	(0.2	)
Losses reclassified to net sales	0.4			0.4
Increase in fair value	3.4			3.6
Unrealized (losses) gains at end of period	$	(0.7	)	$	3.8

As of March 31, 2012, unrealized losses recorded in “accumulated other comprehensive income,” net of tax, total $0.7 million, of which $0.1 million are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.