Derivative Financial Instruments

6 Months Ended

Jun. 30, 2012

Derivative Financial Instruments

Derivative Financial Instruments

Note 6 — Derivative Financial Instruments

Interest Rate Swap Agreements

In June 2012 and in 2010, we entered into agreements to swap $75 million and $98 million, respectively, of floating rate obligations for fixed rate obligations at 0.6725% and 1.03% against LIBOR in U.S. dollars.  Both swaps are scheduled to mature in March 2014, and were accounted for as cash flow hedges of our floating rate bank loans. To ensure the swaps were highly effective, all the principal terms of the swaps matched the terms of the bank loans.  The fair value of both interest rate swaps was a liability of $0.9 million at June 30, 2012 and the fair value of the $98 million interest rate swap was a liability $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 December 2014.  The aggregate notional amount of these contracts was $275.8 million and $168.9 million at June 30, 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, losses of $7.8 million and $3.1 million, were recorded in other comprehensive income (“OCI”) for the three months and six months ended June 30, 2012, respectively, and gains of $2.7 million and $7.5 million for the three- and six-month periods ended June 30, 2011, respectively.  The carrying amount of these contracts was $0.8 million classified in other assets and $8.0 million in other liabilities on the Condensed Consolidated Balance Sheets at June 30, 2012 and $0.6 million in other assets and $6.1 million classified in other liabilities at December 31, 2011.  During the three months ended June 30, 2012 and 2011, we recognized net losses of $0.8 million and net gains of $1.8 million, respectively, recorded in gross margin.  During the six months ended June 30, 2012 and 2011, we recognized net losses of $1.3 million and net gains of $1.3 million, respectively, recorded in gross margin.  For the quarters and six-month periods ended June 30, 2012 and 2011, hedge ineffectiveness was immaterial.

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 June 30, 2012 and 2011, we recognized net foreign exchange losses of $3.2 million and foreign exchange gains of $2.7 million, respectively, in the Condensed Consolidated Statements of Operations.  During the six-month periods ended June 30, 2012 and 2011, we recognized net foreign exchange losses of $0.1 million and net foreign exchange gains of $7.7 million respectively, in the Consolidated Statements of Operations. The net foreign exchange impact recognized from these hedges offset the translation exposure of these transactions.  The carrying amount of the contracts for asset and liability derivatives not designated as hedging instruments was $1.0 million classified in other assets and $0.4 million in other liabilities and $0.1 million classified in other assets and $3.8 million in other liabilities on the June 30, 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 and six months ended June 30, 2012 and 2011 was as follows:

	Quarter Ended June 30,						Six Months Ended June 30,
(In millions)	2012			2011			2012			2011
Unrealized gains (losses) at beginning of period, net of tax	$	(0.7	)	$	3.8		$	(4.5	)	$	(0.2	)
(Gains) losses reclassified to net sales	0.5			(1.5		)	0.9			(1.1		)
Increase (decrease) in fair value	(5.7		)	2.4			(2.3		)	6.0
Unrealized gains (losses) at end of period, net of tax	$	(5.9	)	$	4.7		$	(5.9	)	$	4.7

As of June 30, 2012, unrealized losses recorded in “accumulated other comprehensive income,” net of tax, total $5.9 million, of which $3.4 million are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.