FINANCIAL INSTRUMENTS AND DERIVATIVES

Derivative Instruments and Hedging Activities

The Company's activities expose it to a variety of market risks, which primarily include the risks related to the effects of changes in foreign currency exchange rates, interest rates and commodity prices. These financial exposures are monitored and managed by the Company as part of its overall risk management program. The objective of this risk management program is to reduce the volatility that these market risks may have on the Company's operating results and equity. The Company employs derivative financial instruments to hedge certain anticipated transactions, firm commitments, or assets and liabilities denominated in foreign currencies. Additionally, the Company utilizes interest rate swaps to convert variable rate debt to fixed rate and to convert fixed rate debt to variable rate debt, cross currency basis swaps to convert debt denominated in one currency to another currency and commodity swaps to fix its variable raw materials.

Derivative Instruments Not Designated as Hedging

The Company enters into derivative financial instruments to hedge the foreign exchange revaluation risk associated with recorded assets and liabilities that are denominated in a non-functional currency. The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in “Other expense (income), net” on the consolidated statements of operations. The Company primarily uses forward foreign exchange contracts and cross currency basis swaps to hedge these risks. The Company's significant contracts outstanding as of December 31, 2011 are summarized in the tables that follow.

On August 31, 2011, the Company entered into a cross currency basis swap with a total notional value of $650.0 million with five financial institutions to hedge the revaluation of a non-functional currency intercompany loan that was put into place in conjunction with the financing of the Astra Tech acquisition. The swaps mature in December 2014, and the Company pays three month U. S. dollar LIBOR on $650.0 million and receives three-month Euro Inter-Bank Offered Rate ("EURIBOR") minus 45.72 basis points on EUR 449.8 million . The spot-to-spot change in the value of the swap will be recorded in “Other expense (income), net” while the interest income and expense will be recorded in “Interest income” on the consolidated statements of operations.

The Company wrote put options (“DIO equity option contracts”) to the original sellers of the DIO investment for the remaining DIO common shares held by the seller. The equity options provide the seller the ability to require the Company to purchase their remaining shares on hand at a price based on an agreed-upon formula at specific timeframes in the future. The sellers are also allowed to sell their remaining shares on the open market. Changes in the fair value of the DIO equity option contracts are reported in “Other expense (income), net” on the consolidated statements of operations. This derivative is further discussed in Note 16, Fair Value Measurement.

Cash Flow Hedges

Foreign Exchange Risk Management

The Company uses a layered hedging program to hedge select anticipated foreign currency cash flows to reduce volatility in both cash flows and reported earnings of the consolidated Company. The Company accounts for the forward foreign exchange contracts as cash flow hedges. As a result, the Company records the fair value of the contract primarily through AOCI based on the tested effectiveness of the forward foreign exchange contracts. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the consolidated statements of operations in the same period that the hedged transaction is recorded. Any time value component of the hedge fair value is deemed ineffective and will be reported currently in “Other expense (income), net” on the consolidated statements of operations in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.

These foreign exchange contracts generally have maturities up to eighteen months and the counterparties to the transactions are typically large international financial institutions. The Company's significant contracts outstanding as of December 31, 2011 are summarized in the table that follows.

Interest Rate Risk Management

The Company uses interest rate swaps to convert a portion of its variable interest rate debt to fixed interest rate debt. As of December 31, 2011, the Company has two groups of significant interest rate swaps. One of the groups of swaps has notional amounts totaling 12.6 billion Japanese yen, and effectively converts the underlying variable interest rates to an average fixed interest rate of 0.2% for a term of three- years, ending in September 2014. Another swap has a notional amount of 65.0 million Swiss francs, and effectively converts the underlying variable interest rates to a fixed interest rate of 0.7% for a term of five- years, ending in September 2016.

On June 24, 2011 the Company entered into a $500.0 million Treasury Rate Lock (“T-Lock”) , which was terminated on August 19, 2011, to hedge the base rate interest variability exposure of the Company's planned ten year bond issuance. The T-Lock was cash settled for a payment of $34.6 million, of which $3.8 million was deemed ineffective and expensed in the current period in Other expense (income), net on the consolidated statements of operations, while $30.8 million remained effective on the Company's issuance of $450.0 million ten year bonds. The effective portion of the hedge is recognized in AOCI. As interest is accrued on the bond in the future, the Company will release the pro rata amount in AOCI into interest expense on the consolidated statements of operations.

The Company enters into interest rate swap contracts infrequently as they are only used to manage interest rate risk on long-term debt instruments and not for speculative purposes. The Company's significant contracts outstanding as of December 31, 2011 are summarized in the table that follows.

Commodity Risk Management

The Company selectively enters into commodity swaps to effectively fix certain variable raw material costs. These swaps are used purely to stabilize the cost of components used in the production of certain of the Company's products. The Company generally accounts for the commodity swaps as cash flow hedges. As a result, the Company records the fair value of the swap primarily through AOCI based on the tested effectiveness of the commodity swap. The Company measures the effectiveness of cash flow hedges of anticipated transactions on a spot-to-spot basis rather than on a forward-to-forward basis. Accordingly, the spot-to-spot change in the derivative fair value will be deferred in AOCI and released and recorded on the consolidated statements of operations in the same period that the hedged transaction is recorded. Any time value component of the hedge fair value is deemed ineffective and will be reported currently in “Interest expense” in the period which it is applicable. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.

At December 31, 2011, the Company had swaps in place to purchase 1,126 troy ounces of platinum bullion for use in production at an average fixed rate of $1,527 per troy ounce. In addition, the Company had swaps in place to purchase 125,058 troy ounces of silver bullion for use in production at an average fixed rate of $28 per troy ounce.

The following tables summarize the notional amounts and fair value of the Company's cash flow hedges and non-designated derivatives at December 31, 2011:



Foreign Exchange Forward Contracts	Notional Amount Maturing in the Year						Fair Value Net Asset (Liability)
(in thousands)	2012			2013			December 31, 2011
Forward sale, 13.2 million Australian dollars	$	11,895		$	1,076		$	(736	)
Forward purchase, 6.9 million British pounds	(10,456		)	(190		)	554
Forward sale, 35.0 million Canadian dollars	26,709			8,226			1,061
Forward purchase, 14.9 million Danish kroner	(2,597		)	—			4
Forward sale, 97.5 million euros	83,981			43,167			2,188
Forward sale, 0.5 billion Japanese yen	9,998			(3,105		)	(803		)
Forward sale, 159.3 million Mexican pesos	11,391			—			45
Forward purchase, 11.8 million Norwegian kroner	(1,974		)	—			72
Forward sale, 5.4 million Polish zlotys	1,568			—			(6		)
Forward sale, 2.5 million Singapore dollars	1,924			—			(14		)
Forward sale, 5.7 billion South Korean won	4,940			—			(31		)
Forward purchase, 1.2 billion Swedish kronor	(139,982		)	(27,873		)	1,347
Forward sale, 25.3 million Swiss francs	20,202			7,637			770
Forward sale, 47.0 million Taiwanese dollars	1,553			—			(46		)

Total foreign exchange forward contracts	$	19,152		$	28,938		$	4,405



Interest Rate Swaps	Notional Amount Maturing in the Year										Fair Value Net Asset (Liability)
(in thousands)	2012		2013		2014		2015		2016 and Beyond		December 31, 2011
Euro	$	1,221	$	1,221	$	934	$	934	$	2,101	$	(581	)
Japanese yen	—		—		162,956		—		—		739
Swiss francs	—		—		—		—		69,197		(553		)
Total interest rate swaps	$	1,221	$	1,221	$	163,890	$	934	$	71,298	$	(395	)



Commodity Contracts	Notional Amount Maturing in the Year				Fair Value Net Asset (Liability)
(in thousands)	2012		2013		December 31, 2011
Silver swap - U.S. dollar	$	3,216	$	327	$	(62	)
Platinum swap - U.S. dollar	1,452		84		(182		)
Total commodity contracts	$	4,668	$	411	$	(244	)



	Notional
	Amounts
	Maturing in the		Fair Value Net
Cross Currency Basis Swaps	Year		Asset (Liability)
(in thousands)	2014		December 31, 2011
Euro 449.8 million @ $1.45 rec. EUR 3 mth. EURIBOR pay USD 3 mth. LIBOR	$	581,568	$	(67,690	)
Total cross currency basis swaps	$	581,568	$	(67,690	)

At December 31, 2011, deferred net gains on derivative instruments of $3.0 million, which were recorded in AOCI, are expected to be reclassified to current earnings during the next twelve months. This reclassification is primarily due to the sale of inventory that includes previously hedged purchases and interest rate swaps. The maximum term over which the Company is hedging exposures to variability of cash flows (for all forecasted transactions, excluding interest payments on variable interest rate debt) is eighteen months. Overall, the derivatives designated as cash flow hedges are highly effective. Any cash flows associated with these instruments are included in cash from operations in accordance with the Company's policy of classifying the cash flows from these instruments in the same category as the cash flows from the items being hedged.

Hedges of Net Investments in Foreign Operations

The Company has numerous investments in foreign subsidiaries. The net assets of these subsidiaries are exposed to volatility in currency exchange rates. Currently, the Company uses both non-derivative financial instruments, including foreign currency denominated debt held at the parent company level and derivative financial instruments to hedge some of this exposure. Translation gains and losses related to the net assets of the foreign subsidiaries are offset by gains and losses in the non-derivative and derivative financial instruments designated as hedges of net investments, which are included in accumulated other comprehensive income.

During the third quarter 2011, the Company entered into euro denominated forward exchange contracts that hedged an investment in a foreign subsidiary. These forward contracts totaled 450.0 million euro and were designated as net investment hedges. These hedges were settled during the third quarter at the closing of the Astra Tech acquisition and the Company recorded a loss of $1.5 million included in AOCI, net of tax.

During the third quarter of 2011, the Company entered into five new cross currency basis swaps totaling 260.0 million euros (the “Euro Swaps”). The Euro Swaps mature in October 2013, and the Company pays three-month Euro Inter-Bank Offered Rate ("EURIBOR") minus 52.75 basis points on EUR 260.0 million and receives three-month U.S. dollar LIBOR on $350.9 million. During the fourth quarter of 2011, the Company entered into three new cross currency basis swaps totaling $80.4 million Swiss franc (the “Swiss Swaps”). The Swiss Swaps mature in November 2014, and the Company pays three-month Swiss franc London Inter-Bank Offered Rate ("LIBOR") minus 44.5 basis points on Swiss francs 80.4 million and receives three-month U.S. dollar LIBOR on $87.6 million. The new contracts were entered into to replace maturing contracts. The Swiss franc and euro cross currency interest rate swaps are designated as net investment hedges of the Swiss and euro denominated net assets. The interest rate differential is recognized in the earnings as "Interest income" or "Interest expense" on the consolidated statements of operations as it is accrued. The foreign currency revaluation is recorded in AOCI, net of tax effects.

At December 31, 2011 and 2010, the Company had Swiss franc-denominated and Japanese yen-denominated debt and cross currency basis swaps denominated in euro and Swiss franc to hedge the currency exposure related to a designated portion of the net assets of its European, Swiss and Japanese subsidiaries. The fair value of the cross currency interest rate swap agreements is the estimated amount the Company would (pay) receive at the reporting date, taking into account the effective interest rates and foreign exchange rates. As of December 31, 2011 and December 31, 2010, the estimated net fair values of the cross currency interest rate swap agreements was a liability of $111.9 million and a liability of $169.1 million, respectively, which are recorded in accumulated other comprehensive income, net of tax effects. At December 31, 2011and 2010, the accumulated translation gain (loss) on investments in foreign subsidiaries, primarily denominated in Euros, Swiss francs, Japanese yen and Swedish krona, net of these net investment hedges, were $134.2 million in losses and $45.4 million in gains, respectively, which were included in AOCI, net of tax effects.

The following tables summarize the notional amounts and fair value of the Company's cross currency basis swaps that are designated as hedges of net investments in foreign operations at December 31, 2011:



Cross Currency Basis Swaps	Notional Amounts Maturing in the Year						Fair Value Net Asset (Liability)
(in thousands)	2012		2013		2014		December 31, 2011
Swiss franc 592.5 million @ 1.12 pay CHF 3 mth. LIBOR rec. USD 3 mth. LIBOR	$	60,254	$	484,910	$	85,591	$	(99,917	)
Euro 618.0 million @ $1.27 pay EUR 3 mth. EURIBOR rec. USD 3 mth. LIBOR	—		799,105		—		(12,009		)
Total cross currency basis swaps	$	60,254	$	1,284,015	$	85,591	$	(111,926	)

Fair Value Hedges

Effective April 4, 2011, the Company entered into a group of U.S. dollar denominated interest rate swaps with an initial total notional value of $150.0 million to effectively convert the underlying fixed interest rate of 4.1% on the Company's $250.0 million PPN to variable rate for a term of five years, ending February 2016. The notional value of the swaps will decline proportionately as portions of the PPN mature. These interest rate swaps are designated as fair value hedges of the interest rate risk associated with the hedged portion of the fixed rate PPN. Accordingly, the Company will carry the portion of the hedged debt at fair value, with the change in debt and swap offsetting each other in the income statement. At December 31, 2011, the estimated net fair value of these interest rate swaps was $4.5 million.

The following tables summarize the notional amounts and fair value of the Company's fair value hedges at December 31, 2011:



							Fair Value Net
Interest Rate Contracts	Notional Amounts Maturing in the Year						Asset (Liability)
(in thousands)	2014		2015		2016 and Beyond		December 31, 2011
U. S. dollar	45,000		60,000		45,000		4,463
Total interest rate contracts	$	45,000	$	60,000	$	45,000	$	4,463

The following tables summarize the fair value and consolidated balance sheet location of the Company's derivatives at December 31, 2011 and December 31, 2010:



	December 31, 2011
	Prepaid Expenses and Other Current Assets		Other Noncurrent Assets, Net		Accrued Liabilities		Other Noncurrent Liabilities
(in thousands)

Designated as Hedges
Foreign exchange forward contracts	$	5,464	$	896	$	641	$	107
Commodity contracts	—		15		257		2
Interest rate swaps	2,539		3,160		—		1,050
Cross currency basis swaps	—		19,838		13,790		117,974
Total	$	8,003	$	23,909	$	14,688	$	119,133
Not Designated as Hedges
Not Designated as Hedges
Foreign exchange forward contracts	$	1,943	$	—	$	3,150	$	—
DIO equity option contracts	—		—		—		419
Interest rate swaps	—		—		105		476
Cross currency basis swaps	—		—		$	—	$	67,690
Total	$	1,943	$	—	$	3,255	$	68,585



	December 31, 2010
	Prepaid Expenses and Other Current Assets		Other Noncurrent Assets, Net		Accrued Liabilities		Other Noncurrent Liabilities
(in thousands)

Designated as Hedges
Foreign exchange forward contracts	$	2,455	$	21	$	1,139	$	135
Commodity contracts	88		—		—		—
Interest rate swaps	—		—		4,213		871
Cross currency basis swaps	—		—		21,516		147,589
Total	$	2,543	$	21	$	26,868	$	148,595
Not Designated as Hedges
Not Designated as Hedges
Foreign exchange forward contracts	$	821	$	—	$	600	$	—
Interest rate swaps	—		—		104		556
Total	$	821	$	—	$	704	$	556

The following tables summarize the statements of operations impact of the Company’s cash flow hedges for the years ended December 31, 2011 and 2010:



December 31, 2011
Derivatives in Cash Flow Hedging	Gain (Loss) in AOCI			Classification of Gains (Losses)	Effective Portion Reclassified from AOCI into Income

(in thousands)
Interest rate contracts	$	(30,008	)	Interest expense	$	(4,903	)
Foreign exchange forward contracts	6,858			Cost of products sold	1,503
Foreign exchange forward contracts	377			SG&A expenses	39
Commodity contracts	(191		)	Cost of products sold	273
Total	$	(22,964	)		$	(3,088	)



Derivatives in Cash Flow Hedging	Classification of Gains (Losses)	Ineffective portion Recognized in Income

(in thousands)
Interest rate contracts	Other expense, net	$	(6,151	)
Foreign exchange forward contracts	Interest expense	(403		)
Foreign exchange forward contracts	Interest expense	(1,307		)
Commodity contracts	Interest expense	2
Total		$	(7,859	)



December 31, 2010

Derivatives in Cash Flow Hedging	Gain (Loss) in AOCI			Classification of Gains (Losses)	Effective Portion Reclassified from AOCI into Income

(in thousands)
Interest rate contracts	$	(1,978	)	Interest expense	$	(5,636	)
Foreign exchange forward contracts	2,314			Cost of products sold	665
Foreign exchange forward contracts	670			SG&A expenses	630
Commodity contracts	324			Cost of products sold	662
Total	$	1,330			$	(3,679	)



Derivatives in Cash Flow Hedging	Classification of Gains (Losses)	Ineffective portion Recognized in Income

(in thousands)
Interest rate contracts	Other expense, net	$	232
Foreign exchange forward contracts	Interest expense	(672		)
Commodity contracts	Interest expense	(14		)
Total		$	(454	)

The following tables summarize the statements of operations impact of the Company’s hedges of net investments for the years ended December 31, 2011 and 2010:



December 31, 2011

Derivatives in Net Investment Hedging	Gain (Loss) in AOCI			Classification of Gains (Losses)	Gain (Loss) Recognized in Income

(in thousands)
Cross currency interest rate swaps	$	3,308		Interest income	$	1,085
				Interest expense	(108		)
Cross currency interest rate swaps	30,125			Interest expense	(5,675		)
Foreign exchange forward contracts	(2,462		)	Interest expense	—
Total	$	30,971			$	(4,698	)



December 31, 2010

Derivatives in Net Investment Hedging	Gain (Loss) in AOCI			Classification of Gains (Losses)	Gain (Loss) Recognized in Income

(in thousands)
Cross currency interest rate swaps	$	(61,211	)	Interest income	$	869
				Interest expense	(105		)
Cross currency interest rate swaps	34,862			Interest expense	(2,508		)
Total	$	(26,349	)		$	(1,744	)

The following tables summarize the statements of operations impact of the Company’s hedges of fair value for the years ended December 31, 2011 and 2010:



December 31, 2011

Derivatives in Cash Flow Hedging
	Classification of Gains (Losses)	December 31,
(in thousands)	Classification of Gains (Losses)	2011		2010
Interest rate contracts	Interest expense	$	6,328	$	—
Total		$	6,328	$	—

The following table summarizes the statements of operations impact of the Company’s hedges not designated as hedging for the years ended December 31, 2011 and 2010:



Derivatives Not Designated as Hedging
	Classification of Gains (Losses)	December 31,
(in thousands)	Classification of Gains (Losses)	2011			2010
Foreign exchange forward contracts (a)	Other expense, net	$	(2,921	)	$	1,181
DIO equity option contracts	Other expense, net	383			—
Interest rate contracts	Interest expense	(186		)	(155		)
Cross currency interest rate contracts (a)	Other expense, net	(68,432		)	—
Cross currency interest rate contracts	Interest income	1,219			—
Total		$	(69,937	)	$	1,026

(a) The gains and losses on these derivative transactions offset the gains and losses generated by the revaluation of the underlying non-functional currency balances and are recorded in “Other expense (income), net” on the consolidated statements of operations.

Amounts recorded in AOCI related to cash flow hedging instruments at:



	December 31,
(in thousands, net of tax)	2011			2010

Beginning balance	$	(1,468	)	$	(4,799	)
Changes in fair value of derivatives	(14,357		)	1,248
Reclassifications to earnings from equity	3,088			2,083
Total activity	(11,269		)	3,331
Ending balance	$	(12,737	)	$	(1,468	)

Amounts recorded in AOCI related to hedges of net investments in foreign operations at:



	December 31,
(in thousands, net of tax)	2011			2010

Beginning balance	$	45,417		$	111,115
Foreign currency translation adjustment	(200,121		)	(33,208		)
Changes in fair value of:
foreign currency debt	(9,553		)	(16,311		)
derivative hedge instruments	20,527			(16,179		)
Total activity	(189,147		)	(65,698		)
Ending balance	$	(143,730	)	$	45,417