(16) Financial Instruments

The carrying values of the Company’s debt instruments vary from their fair values. The fair values were determined by reference to the quoted market prices of these securities (Level 2 of the fair value hierarchy). As of September 29, 2012, the aggregate carrying value of the Company’s Notes was $626.2 million, as compared to an estimated aggregate fair value of $700.6 million. As of December 31, 2011, the aggregate carrying value of the Company’s Notes was $695.4 million, as compared to an estimated aggregate fair value of $764.6 million.

Derivative Instruments and Hedging Activities

The Company has used derivative financial instruments, including forwards, futures, options, swaps and other derivative contracts to reduce the effects of fluctuations in foreign exchange rates, interest rates and commodity prices and the resulting variability of the Company’s operating results. The Company is not a party to leveraged derivatives. On the date that a derivative contract is entered into, the Company designates the derivative as either (1) a hedge of a recognized asset or liability or of an unrecognized firm commitment (a fair value hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability (a cash flow hedge) or (3) a hedge of a net investment in a foreign operation (a net investment hedge).

Foreign exchange — The Company uses forwards, swaps and other derivative contracts to reduce the effects of fluctuations in foreign exchange rates on known foreign currency exposures. Gains and losses on the derivative instruments are intended to offset gains and losses on the hedged transaction in an effort to reduce exposure to fluctuations in foreign exchange rates. The principal currencies hedged by the Company include the Mexican peso, various European currencies, the Chinese renminbi and the Canadian dollar. Forwards, swaps and other derivative contracts are accounted for as cash flow hedges when the hedged item is a forecasted transaction or relates to the variability of cash flows to be received or paid. As of September 29, 2012 and December 31, 2011, contracts designated as cash flow hedges with $593.2 million and $585.7 million, respectively, of notional amount were outstanding with maturities of less than 15 months and 17 months, respectively. As of September 29, 2012 and December 31, 2011, the fair value of these contracts was approximately $14.6 million and ($39.1) million, respectively. As of September 29, 2012 and December 31, 2011, other foreign currency derivative contracts that did not qualify for hedge accounting with $43.0 million and $148.4 million, respectively, of notional amount were outstanding. These foreign currency derivative contracts consist principally of hedges of cash transactions of up to seven months, hedges of intercompany loans and hedges of certain other balance sheet exposures. As of September 29, 2012 and December 31, 2011, the fair value of these contracts was approximately ($1.7) million and ($5.4) million, respectively.

The fair value of outstanding foreign currency derivative contracts and the related classification in the accompanying condensed consolidated balance sheets as of September 29, 2012 and December 31, 2011, is shown below (in millions):


	September 29, 2012			December 31, 2011
Contracts qualifying for hedge accounting:
Other current assets	$	15.9		$	0.2
Other long-term assets		1.8			—
Other current liabilities		(3.0	)		(38.1	)
Other long-term liabilities		(0.1	)		(1.2	)

		14.6			(39.1	)

Contracts not qualifying for hedge accounting:
Other current assets		0.4			—
Other current liabilities		(2.1	)		(5.4	)

		(1.7	)		(5.4	)

	$	12.9		$	(44.5	)

Pretax amounts related to foreign currency derivative contracts that were recognized in and reclassified from accumulated other comprehensive loss are shown below (in millions):


	Three Months Ended						Nine Months Ended
	September 29, 2012			October 1, 2011			September 29, 2012		October 1, 2011
Contracts qualifying for hedge accounting:
Gains (losses) recognized in accumulated other comprehensive loss	$	18.3		$	(55.2	)	$	48.1	$	(45.8	)
(Gains) losses reclassified from accumulated other comprehensive loss		(0.3	)		3.9			5.6		1.6

Comprehensive income (loss)	$	18.0		$	(51.3	)	$	53.7	$	(44.2	)

For the three and nine months ended September 29, 2012, net sales includes gains of $0.2 million and $0.7 million, respectively, reclassified from accumulated other comprehensive loss related to foreign currency derivative contracts. For the three and nine months ended September 29, 2012, cost of sales includes gains (losses) of $0.1 million and ($6.3) million, respectively, reclassified from accumulated other comprehensive loss related to foreign currency derivative contracts. For the three and nine months ended October 1, 2011, net sales includes losses of $0.8 million and $1.0 million, respectively, reclassified from accumulated other comprehensive loss related to foreign currency derivative contracts. For the three and nine months ended October 1, 2011, cost of sales includes losses of $3.1 million and $0.6 million, respectively, reclassified from accumulated other comprehensive loss related to foreign currency derivative contracts.

Interest rate — Historically, the Company used interest rate swap and other derivative contracts to manage its exposure to fluctuations in interest rates. Interest rate swap and other derivative contracts which fix the interest payments of certain variable rate debt instruments or fix the market rate component of anticipated fixed rate debt instruments are accounted for as cash flow hedges. Interest rate swap and other derivative contracts which hedge the change in fair value of certain fixed rate debt instruments are accounted for as fair value hedges. As of September 29, 2012 and December 31, 2011, there were no interest rate contracts outstanding. The Company will continue to evaluate, and may use, derivative financial instruments, including forwards, futures, options, swaps and other derivative contracts to manage its exposures to fluctuations in interest rates in the future.

Commodity prices — The Company uses derivative instruments to reduce its exposure to fluctuations in certain commodity prices. These derivative instruments are utilized to hedge forecasted inventory purchases and to the extent that they qualify and meet hedge accounting criteria, they are accounted for as cash flow hedges. Commodity swap contracts that are not designated as cash flow hedges are marked to market with changes in fair value recognized immediately in the condensed consolidated statements of comprehensive income (loss). See Note 10, “Other Expense, Net.” As of September 29, 2012 and December 31, 2011, commodity swap contracts with $0.7 million and $3.4 million, respectively, of notional amount were outstanding with maturities of less than one month and ten months, respectively. As of September 29, 2012 and December 31, 2011, the fair market value of these contracts was approximately zero and ($0.3) million, respectively.

The fair value of outstanding commodity swap contracts and the related classification in the accompanying condensed consolidated balance sheets as of September 29, 2012 and December 31, 2011, are shown below (in millions):


	September 29, 2012		December 31, 2011
Contracts qualifying for hedge accounting:
Other current liabilities	$	—	$	(0.3	)

Pretax amounts related to commodity swap contracts that were recognized in and reclassified from accumulated other comprehensive loss are shown below (in millions):


	Three Months Ended			Nine Months Ended
	October 1, 2011			September 29, 2012		October 1, 2011
Contracts qualifying for hedge accounting:
Gains (losses) recognized in accumulated other comprehensive loss	$	(0.7	)	$	0.1	$	(0.9	)
Losses reclassified from accumulated other comprehensive loss		0.1			0.2		0.1

Comprehensive income (loss)	$	(0.6	)	$	0.3	$	(0.8	)

For the nine months ended September 29, 2012, cost of sales includes losses of $0.2 million reclassified from accumulated other comprehensive loss related to commodity swap contracts. For the three and nine months ended October 1, 2011, cost of sales includes losses of $0.1 million reclassified from accumulated other comprehensive loss related to commodity swap contracts.

As of September 29, 2012 and December 31, 2011, pretax net gains (losses) of approximately $14.6 million and ($39.4) million, respectively, related to the Company’s derivative instruments and hedging activities were recorded in accumulated other comprehensive loss. During the twelve month period ending September 28, 2013, the Company expects to reclassify into earnings net gains of approximately $12.9 million recorded in accumulated other comprehensive loss as of September 29, 2012. Such gains will be reclassified at the time that the underlying hedged transactions are realized. For the three and nine months ended September 29, 2012, amounts recognized in the accompanying condensed consolidated statements of comprehensive income (loss) related to changes in the fair value of cash flow and fair value hedges excluded from the Company’s effectiveness assessments and the ineffective portion of changes in the fair value of cash flow and fair value hedges were not material. For the three and nine months ended October 1, 2011, other expense, net includes gains (losses) of ($2.1) million and $5.0 million, respectively, related to changes in the fair value of foreign currency derivative contracts that did not qualify for hedge accounting.

Fair Value Measurements

GAAP provides that fair value is an exit price, defined as a market-based measurement that represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are based on one or more of the following three valuation techniques:

Market:

This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Income:

This approach uses valuation techniques to convert future amounts to a single present value amount based on current market expectations.

Cost:

This approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).

Further, GAAP prioritizes the inputs and assumptions used in the valuation techniques described above into a three-tier fair value hierarchy as follows:

Level 1:

Observable inputs, such as quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2:

Inputs, other than quoted market prices included in Level 1, that are observable either directly or indirectly for the asset or liability.

Level 3:

Unobservable inputs that reflect the entity’s own assumptions about the exit price of the asset or liability. Unobservable inputs may be used if there is little or no market data for the asset or liability at the measurement date.

The Company discloses fair value measurements and the related valuation techniques and fair value hierarchy level for its assets and liabilities that are measured or disclosed at fair value.

Items measured at fair value on a recurring basis – Fair value measurements and the related valuation techniques and fair value hierarchy level for the Company’s assets and liabilities measured or disclosed at fair value on a recurring basis as of September 29, 2012 and December 31, 2011, are shown below (in millions):


	September 29, 2012
	Frequency		Asset (Liability)		Valuation Technique		Level 1		Level 2		Level 3
Foreign currency derivative contracts		Recurring	$	12.9		Market/Income	$	—	$	12.9	$	—


	December 31, 2011
	Frequency		Asset (Liability)			Valuation Technique		Level 1		Level 2			Level 3
Foreign currency derivative contracts		Recurring	$	(44.5	)		Market/Income	$	—	$	(44.5	)	$	—
Commodity swap contracts		Recurring	$	(0.3	)		Market/Income	$	—	$	(0.3	)	$	—

The Company determines the fair value of its derivative contracts using quoted market prices to calculate the forward values and then discounts such forward values to the present value. The discount rates used are based on quoted bank deposit or swap interest rates. If a derivative contract is in a net liability position, these discount rates are adjusted by an estimate of the credit spread that would be applied by market participants purchasing these contracts from the Company’s counterparties. To estimate this credit spread, the Company uses significant assumptions and factors other than quoted market rates, which would result in the classification of its derivative liabilities within Level 3 of the fair value hierarchy, to the extent that such adjustment is necessary. As of September 29, 2012 and December 31, 2011, there were no derivative contracts that were classified within Level 3 of the fair value hierarchy. In addition, there were no transfers in or out of Level 3 of the fair value hierarchy during the first nine months of 2012.

Items measured at fair value on a non-recurring basis – The Company measures certain assets and liabilities at fair value on a non-recurring basis, which are not included in the table above. As these non-recurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. As a result of the Guilford acquisition, provisional Level 3 fair value estimates related to property, plant and equipment of $93.0 million and intangible assets of $53.0 million were recorded in the accompanying condensed consolidated balance sheet as of September 29, 2012. For further information on these provisional fair value measurements, see Note 2, “Acquisition.” As of December 31, 2011, there were no significant assets or liabilities measured at fair value on a non-recurring basis.