Derivative and Other Hedging Financial Instruments

3 Months Ended

Mar. 31, 2013

Derivative and Other Hedging Financial Instruments

7. Derivative and Other Hedging Financial Instruments

Interest Rate Contracts

The Company manages its fixed and floating rate debt mix using interest rate swaps. The Company uses fixed and floating rate swaps to alter its exposure to the impact of changing interest rates on its consolidated results of operations and future cash outflows for interest. Floating rate swaps are used, depending on market conditions, to convert the fixed rates of long-term debt into short-term variable rates. Fixed rate swaps are used to reduce the Company’s risk of the possibility of increased interest costs. Interest rate swap contracts are therefore used by the Company to separate interest rate risk management from the debt funding decision.

Cash Flow Hedges

During 2013, the Company entered into an aggregate $250 notional amount of interest rate swaps that exchange a variable rate of interest (LIBOR) for an average fixed rate of interest of approximately 1.6% over the term of the agreements, which mature on December 31, 2017. These swaps are forward-starting and are effective commencing December 31, 2015. The Company has designated these swaps as cash flow hedges of the interest rate risk attributable to forecasted variable interest (LIBOR) payments.

At March 31, 2013, the Company had $1.2 billion notional amount outstanding in swap agreements, which include $500 and $250 notional amount of forward-starting swaps that will become effective commencing December 31, 2013 and 2015, respectively, that exchange a variable rate of interest (LIBOR) for fixed interest rates over the terms of the agreements and are designated as cash flow hedges of the interest rate risk attributable to forecasted variable interest payments and have maturity dates through December 2017. At March 31, 2013, the weighted average fixed rate of interest on these swaps, excluding the forward-starting swaps, was approximately 1.6%. The effective portion of the after-tax fair value gains or losses on these swaps is included as a component of AOCI.

Foreign Currency Contracts

The Company uses forward foreign currency contracts to mitigate the foreign currency exchange rate exposure on the cash flows related to forecasted inventory purchases and sales and have maturity dates through January 2015. The derivatives used to hedge these forecasted transactions that meet the criteria for hedge accounting are accounted for as cash flow hedges. The effective portion of the gains or losses on these derivatives is deferred as a component of AOCI and is recognized in earnings at the same time that the hedged item affects earnings and is included in the same caption in the statements of operations as the underlying hedged item. At March 31, 2013, the Company had approximately $449 notional amount outstanding of foreign currency contracts outstanding that are designated as cash flow hedges of forecasted inventory purchases and sales.

The Company also uses foreign currency contracts, which include forward foreign currency contracts and foreign currency options, to mitigate the foreign currency exposure of certain other foreign currency transactions. At March 31, 2013, the Company had approximately $212 notional amount outstanding of these foreign currency contracts that are not designated as effective hedges for accounting purposes and have maturity dates through August 2014. Fair market value gains or losses are included in the results of operations and are classified in SG&A.

Commodity Contracts

The Company enters into commodity-based derivatives in order to mitigate the risk that the rising price of these commodities could have on the cost of certain of the Company’s raw materials. These commodity-based derivatives provide the Company with cost certainty, and in certain instances, allow the Company to benefit should the cost of the commodity fall below certain dollar thresholds. At March 31, 2013, the Company had approximately $2 notional amount outstanding of commodity-based derivatives that are not designated as effective hedges for accounting purposes and have maturity dates through March 2014. Fair market value gains or losses are included in the results of operations and are classified in SG&A.

The following table presents the fair value of derivative financial instruments as of March 31, 2013 and December 31, 2012:

	March 31, 2013				December 31, 2012
	Fair Value of Derivatives				Fair Value of Derivatives
(in millions)	Asset (a)		Liability (a)		Asset (a)		Liability (a)
Derivatives designated as effective hedges:
Cash flow hedges:
Interest rate swaps	$	—	$	11.7	$	—	$	12.4
Foreign currency contracts		14.9		2.3		9.0		4.2
Subtotal		14.9		14.0		9.0		16.6
Derivatives not designated as effective hedges:
Foreign currency contracts		6.3		1.0		1.2		2.0
Commodity contracts		0.1		0.1		0.1		0.2
Subtotal		6.4		1.1		1.3		2.2
Total	$	21.3	$	15.1	$	10.3	$	18.8
(a)    Consolidated balance sheet location:
Asset: Other current and non-current assets
Liability: Other current and non-current liabilities

The following table presents gain and loss activity (on a pretax basis) for the three months ended March 31, 2013 and 2012 related to derivative financial instruments designated as effective hedges:

	Three Months Ended March 31, 2013								Three Months Ended March 31, 2012
	Gain/(Loss)								Gain/(Loss)
(in millions)	Recognized in OCI  (a) (effective portion)		Reclassified from  AOCI to Income			Recognized in Income  (b)			Recognized in OCI  (a) (effective portion)			Reclassified from  AOCI to Income			Recognized in Income (b)
Derivatives designated as effective hedges:
Cash flow hedges:
Interest rate swaps	$	0.7	$	—		$	—		$	(0.5	)	$	—		$	—
Foreign currency contracts		13.9		6.1			(0.9	)		1.3			0.2			(0.7	)
Total	$	14.6	$	6.1		$	(0.9	)	$	0.8		$	0.2		$	(0.7	)
Location of gain/(loss) in the consolidated results of operations:
Net sales			$	(0.2	)	$	—					$	(0.3	)	$	—
Cost of sales				6.3			—						0.5			—
SG&A				—			(0.9	)					—			(0.7	)
Total			$	6.1		$	(0.9	)				$	0.2		$	(0.7	)

(a) Represents effective portion recognized in Other Comprehensive Income (“OCI”).

(b) Represents portion excluded from effectiveness testing.

At March 31, 2013, deferred net gains of approximately $15 within AOCI are expected to be reclassified to earnings over the next twelve months.

The following table presents gain and loss activity (on a pretax basis) for the three months ended March 31, 2013 and 2012 related to derivative financial instruments not designated as effective hedges:

	Gain/(Loss) Recognized in Income (a)
	Three Months Ended March  31,
(in millions)	2013		2012
Derivatives not designated as effective hedges:
Cash flow derivatives:
Foreign currency contracts	$	6.4	$	(1.9	)
Commodity contracts		0.1		0.5
Fair value derivatives:
Interest rate swaps		—		0.3
Total	$	6.5	$	(1.1	)

(a) Classified in SG&A.

Net Investment Hedge

The Company designated its Euro-denominated 7 ¹/₂% senior subordinated notes due 2020, with an aggregate principal balance of €150 (the “Hedging Instrument”), as a net investment hedge of the foreign currency exposure of its net investment in certain Euro-denominated subsidiaries. Foreign currency gains and losses on the Hedging Instrument are included as a component of AOCI. At March 31, 2013, $1.7 of deferred losses have been recorded in AOCI.