Derivative Financial Instruments

3 Months Ended

Mar. 31, 2012

Derivative Financial Instruments

NOTE I – Derivative Financial Instruments

As part of its risk management strategy, the Company enters into derivative contracts to hedge exposures to fluctuations in interest rates and foreign currency exchange rates. Certain derivative instruments designated as either cash flow hedges or fair value hedges are subject to hedge accounting. Derivative instruments that are not subject to hedge accounting are held as economic hedges. The Company’s policies prohibit the use of derivatives for speculation or trading. At the inception of each hedge relationship, the Company documents its risk management objectives, procedures and accounting treatment.

The Company has elected not to offset derivative positions in the balance sheet with the same counterparty under the same master netting agreements. The Company is not required to post or receive collateral under these agreements. Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default. The Company had no material exposures to default at March 31, 2012.

The Company uses regression analysis to assess effectiveness of interest-rate contracts on a quarterly basis. For foreign-exchange contracts, the Company performs quarterly assessments to ensure that critical terms continue to match. All components of the derivative instrument’s gain or loss are included in the assessment of hedge effectiveness. Gains or losses on the ineffective portion of cash flow hedges are recognized currently in earnings. Hedge accounting is discontinued prospectively when the Company determines that a derivative financial instrument has ceased to be a highly effective hedge.

Interest-Rate Contracts: The Company enters into various interest-rate contracts, including interest-rate swaps and cross currency interest-rate swaps. Interest-rate swaps involve the exchange of fixed for floating rate or floating for fixed rate interest payments based on the contractual notional amounts in a single currency. Cross currency interest-rate swaps involve the exchange of notional amounts and interest payments in different currencies. The Company is exposed to interest rate and exchange rate risk caused by market volatility as a result of its borrowing activities. The objective of these contracts is to mitigate the fluctuations on earnings, cash flows and fair value of borrowings. Net amounts paid or received are reflected as adjustments to interest expense.

At March 31, 2012, the notional amount of the Company’s interest-rate contracts was $3,251.9. Notional maturities for all interest-rate contracts are $514.2 for the remainder of 2012, $715.6 for 2013, $1,117.6 for 2014, $394.0 for 2015, $39.6 for 2016 and $470.9 thereafter. The majority of these contracts are floating to fixed swaps that effectively convert an equivalent amount of commercial paper and other variable rate debt to fixed rates.

Foreign-Exchange Contracts: The Company enters into foreign-exchange contracts to hedge certain anticipated transactions and assets and liabilities denominated in foreign currencies, particularly the Canadian dollar, the euro, the British pound, the Australian dollar and the Mexican peso. The objective is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. At March 31, 2012, the notional amount of the outstanding foreign-exchange contracts was $212.3. Foreign-exchange contracts mature within one year.

The following table presents the balance sheet classifications and fair value of derivative financial instruments designated under hedge accounting:

	March 31, 2012				December 31, 2011
	Assets		Liabilities		Assets		Liabilities
Derivatives designated under hedge accounting:
Interest-rate contracts:
Financial Services:
Other assets	$	1.6			$	1.4
Deferred taxes and other liabilities			$	107.6			$	107.6
Foreign-exchange contracts:
Truck and Other:
Other current assets		.2				.1
Accounts payable, accrued expenses and other				.4				2.1
Total	$	1.8	$	108.0	$	1.5	$	109.7

The following table presents the balance sheet classifications and fair value of derivative financial instruments designated as economic hedges:

	March 31, 2012				December 31, 2011
	Assets		Liabilities		Assets		Liabilities
Economic hedges:
Interest-rate contracts:
Financial Services:
Other assets					$	.8
Deferred taxes and other liabilities			$	.5			$	.4
Foreign-exchange contracts:
Truck and Other:
Other current assets	$	.2				.1
Accounts payable, accrued expenses and other				.3				.3
Financial Services:
Other assets		.1
Deferred taxes and other liabilities								.1
Total	$	.3	$	.8	$	.9	$	.8

Fair Value Hedges

Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings together with the changes in fair value of the hedged item attributable to the risk being hedged. The expense or (income) recognized in earnings related to fair value hedges was included in Interest and other borrowing expenses in the Financial Services segment of the Consolidated Statements of Comprehensive Income as follows:

	Three Months Ended March 31
	2012			2011
Interest-rate swaps	$	2.1		$	1.5
Term notes	$	(2.2	)	$	(1.6	)

Cash Flow Hedges

Substantially all of the Company’s interest-rate contracts and some foreign-exchange contracts have been designated as cash flow hedges. Changes in the fair value of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income to the extent such hedges are considered effective. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is 6.2 years.

Amounts in Accumulated other comprehensive income are reclassified into net income in the same period in which the hedged transaction affects earnings. Net realized gains and losses from interest-rate contracts are recognized as an adjustment to interest expense. Net realized gains and losses from foreign-exchange contracts are recognized as an adjustment to cost of sales or to Financial Services interest expense, consistent with the hedged transaction. For the three months ended March 31, 2012 and 2011, the Company recognized gains on the ineffective portions of $.2 and $.4, respectively.

The following table presents the pre-tax effects of derivative instruments recognized in other comprehensive income (OCI):

	Three Months Ended March 31, 2012				Three Months Ended March 31, 2011
	Interest-rate Contracts		Foreign-exchange Contracts		Interest-rate Contracts			Foreign-exchange Contracts
Loss (gain) recognized in OCI:
Truck and Other:			$	1.2				$	(4.6	)
Financial Services:	$	5.5			$	(.6	)
	$	5.5	$	1.2	$	(.6	)	$	(4.6	)

Expense reclassified from accumulated OCI into income:

	Three Months Ended March 31, 2012				Three Months Ended March 31, 2011
	Interest-rate Contracts		Foreign-exchange Contracts		Interest-rate Contracts		Foreign-exchange Contracts
Truck and Other:
Cost of sales and revenues			$	2.6			$	.5
Interest and other (income) expense, net				.4
Financial Services:
Interest and other borrowing expenses	$	2.8			$	13.9
	$	2.8	$	3.0	$	13.9	$	.5

The amount of loss recorded in accumulated OCI at March 31, 2012 that is estimated to be reclassified to interest expense or cost of sales in the following 12 months if interest rates and exchange rates remain unchanged is approximately $38.0 net of taxes. The fixed interest earned on finance receivables will offset the amount recognized in interest expense, resulting in a stable interest margin consistent with the Company’s risk management strategy.

Economic Hedges

For other risk management purposes, the Company enters into derivative instruments not designated as hedges that do not qualify for hedge accounting. These derivative instruments are used to mitigate the risk of market volatility arising from borrowings and foreign currency denominated transactions. Changes in the fair value of economic hedges are recorded in earnings in the period in which the change occurs.

The (income) expense recognized in earnings related to economic hedges is as follows:

	Three Months Ended March 31, 2012					Three Months Ended March 31, 2011
	Interest-rate Contracts		Foreign-exchange Contracts			Interest-rate Contracts		Foreign-exchange Contracts
Truck and Other:
Cost of sales and revenues								$	.1
Interest and other income, net			$	(.6	)
Financial Services:
Interest and other borrowing expenses (income)	$	1.0		(.3	)	$	.3		(.1	)
	$	1.0	$	(.9	)	$	.3