Financial Instruments and Derivatives Instruments

9 Months Ended

Oct. 02, 2011

Financial Instruments and Derivatives Instruments

Financial Instruments and Derivatives Instruments

4. Financial Instruments and Derivatives Instruments

The Company measures certain financial assets and liabilities at fair value on a recurring basis, including deferred compensation plan assets and related liability and contingent consideration. The fair values of these financial assets and liabilities were determined using the following inputs at October 2, 2011, December 31, 2010 and October 3, 2010:

	Fair Value Measurements at October 2, 2011 Using:
			Quoted Prices in Active Markets for Identical Assets		Significant Other Observable Inputs		Significant Unobservable Inputs
	Total		(Level 1)		(Level 2)		(Level 3)
	(in millions)
Assets
Plan asset for deferred compensation(1)	$	3.8	$	3.8	$	—	$	—
Total assets	$	3.8	$	3.8	$	—	$	—
Liabilities
Contingent consideration(2)	$	2.2	$	—	$	—	$	2.2
Plan liability for deferred compensation(2)	3.8		3.8		—		—
Total liabilities	$	6.0	$	3.8	$	—	$	2.2

	Fair Value Measurements at December 31, 2010 Using:
	Total		(Level 1)		(Level 2)		(Level 3)
	(in millions)
Assets
Plan asset for deferred compensation(1)	$	3.7	$	3.7	$	—	$	—
Total assets	$	3.7	$	3.7	$	—	$	—
Liabilities
Contingent consideration(2)	$	1.9	$	—	$	—	$	1.9
Plan liability for deferred compensation(2)	3.7		3.7		—		—
Total liabilities	$	5.6	$	3.7	$	—	$	1.9

	Fair Value Measurements at October 3, 2010 Using:
	Total		(Level 1)		(Level 2)		(Level 3)
	(in millions)
Assets
Plan asset for deferred compensation(1)	$	3.4	$	3.4	$	—	$	—
Total assets	$	3.4	$	3.4	$	—	$	—
Liabilities
Contingent consideration(2)	$	1.9	$	—	$	—	$	1.9
Plan liability for deferred compensation(2)	3.4		3.4		—		—
Total liabilities	$	5.3	$	3.4	$	—	$	1.9

(1) Included in other, net on the Company’s consolidated balance sheet.

(2) Included in other noncurrent liabilities on the Company’s consolidated balance sheet.

The table below provides a summary of the changes in fair value of all financial assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the period December 31, 2010 to October 2, 2011.

			Purchases,		Total realized and unrealized
	Balance		sales,		(gains) losses included in:				Balance
	December 31,		settlements,				Comprehensive		October 2,
	2010		net		Earnings		income		2011
	(in millions)
Contingent consideration	$	1.9	$	—	$	0.3	$	—	$	2.2

The Level 3 contingent consideration obligation in connection with the Blue Ridge Atlantic Enterprises, Inc. (BRAE) acquisition was $2.2 million as of October 2, 2011 and $1.9 million as of December 31, 2010.  The increase in fair value of this obligation of $0.3 million for the nine months ended October 2, 2011 was recorded in selling, general and administrative expenses.  See Note 5 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, for a detailed description of the acquisition.

Short-term investment securities as of October 2, 2011 consists of a certificate of deposit with a remaining maturity of greater than three months at the date of purchase, for which the carrying amount is a reasonable estimate of fair value.

Cash equivalents consist of instruments with remaining maturities of three months or less at the date of purchase and consist primarily of money market funds and certificates of deposits, for which the carrying amount is a reasonable estimate of fair value.

The Company uses financial instruments from time to time to enhance its ability to manage risk, including foreign currency and commodity pricing exposures, which exist as part of its ongoing business operations.  The use of derivatives exposes the Company to counterparty credit risk for nonperformance and to market risk related to changes in currency exchange rates and commodity prices. The Company manages its exposure to counterparty credit risk through careful due diligence and diversification of counterparties. The Company’s counterparties in derivative transactions are substantial commercial banks with significant experience using such derivative instruments. The impact of market risk on the fair value and cash flows of the Company’s derivative instruments is monitored and the Company restricts the use of derivative financial instruments to hedging activities. The Company does not enter into contracts for trading purposes nor does the Company enter into any contracts for speculative purposes.  The use of derivative instruments is approved by senior management under written guidelines.

The Company has exposure to a number of foreign currency rates, including the Canadian dollar, the euro, the Chinese yuan and the British pound.  To manage this risk, the Company generally uses a layering methodology whereby at the end of any quarter, the Company has generally entered into forward exchange contracts, which hedge approximately 50% of the projected intercompany purchase transactions for the next twelve months.  The Company uses this strategy for purchases between Canada and the U.S., for purchases between the Euro zone and the U.S., and for purchases between the Euro zone and the United Kingdom.  The average volume of contracts can vary but generally approximates $9 to $15 million in open contracts at the end of any given quarter.  At October 2, 2011, the Company had contracts for purchases between Canada and the U.S. for notional amounts aggregating approximately $9.0 million to buy U.S. dollars.  The Company accounts for the forward exchange contracts as an economic hedge and has not elected to use hedge accounting.  Realized and unrealized gains and losses on the contracts are recognized in other (income) expense in the consolidated statements of operations.  These contracts do not subject the Company to significant market risk from exchange movement because they offset gains and losses on the related foreign currency denominated transactions. The fair value of the foreign exchange contracts as of October 2, 2011 was not material.

Fair Value

The carrying amounts of cash and cash equivalents, short-term investments, trade receivables and trade payables approximate fair value because of the short maturity of these financial instruments.

The fair values of the Company’s 5.47% senior notes due 2013, 5.85% senior notes due 2016 and 5.05% senior notes due 2020, are based on a discounted cash flow model using like industrial companies, the Company’s credit metrics, the Company’s size, as well as current market demand. The fair value of the Company’s variable rate debt approximates its carrying value. The carrying amount and the estimated fair market value of the Company’s long-term debt, including the current portion, are as follows:

	October 2,		December 31,
	2011		2010
	(in millions)
Carrying amount	$	454.2	$	378.7
Estimated fair value	$	499.8	$	407.5