Derivative Financial Instruments

The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices and commodity prices. As part of the Company’s risk management program, a variety of financial instruments such as interest rate swaps, currency swaps, purchased currency options and foreign exchange contracts, are used to mitigate interest rate exposure and foreign currency exposure.

Financial instruments are not utilized for speculative purposes. If the Company elects to do so and if the instrument meets the criteria specified in Accounting Standards Codification (“ASC”) 815, management designates its derivative instruments as cash flow hedges, fair value hedges or net investment hedges. Generally, commodity price exposures are not hedged with derivative financial instruments and instead are actively managed through customer pricing initiatives, procurement-driven cost reduction initiatives and other productivity improvement projects.

A summary of the fair value of the Company’s derivatives recorded in the Consolidated Balance Sheets at June 30, 2012 and December 31, 2011 follows (in millions):



	Balance Sheet Classification	2012		2011		Balance Sheet Classification	2012		2011
Derivatives designated as hedging instruments:
Interest Rate Contracts Cash Flow	Other current assets	$	—	$	—	Accrued expenses	$	42.8	$	86.9
Interest Rate Contracts Fair Value	Other current assets	12.0		21.7		Accrued expenses	2.6		5.2
	LT other assets	18.6		15.2		LT other liabilities	—		—
Foreign Exchange Contracts Cash Flow	Other current assets	9.4		5.3		Accrued expenses	—		1.4
	LT other assets	2.2		—		LT other liabilities	—		0.8
Net Investment Hedge	Other current assets	15.9		27.7		Accrued expenses	2.3		—
		$	58.1	$	69.9		$	47.7	$	94.3
Derivatives not designated as hedging instruments:
Foreign Exchange Contracts	Other current assets	$	91.0	$	48.1	Accrued expenses	$	119.4	$	63.4
	LT other assets	—		24.5		LT other liabilities	11.0		24.0
		$	91.0	$	72.6		$	130.4	$	87.4

The counterparties to all of the above mentioned financial instruments are major international financial institutions. The Company is exposed to credit risk for net exchanges under these agreements, but not for the notional amounts. The credit risk is limited to the asset amounts noted above. The Company limits its exposure and concentration of risk by contracting with diverse financial institutions and does not anticipate non-performance by any of its counterparties. Further, as more fully discussed in Note L, Fair Value Measurements, the Company considers non-performance risk of its counterparties at each reporting period and adjusts the carrying value of these assets accordingly. The risk of default is considered remote.

During the first six months of 2012 and 2011, significant cash flows related to derivatives including those that are separately discussed in Cash Flow Hedges, Fair Value Hedges and Net Investment Hedges below resulted in net cash received of $0.7 million and cash paid of $82.1 million, respectively.

CASH FLOW HEDGES

There was an $75.1 million and a $75.9 million after-tax loss as of June 30, 2012 and December 31, 2011, respectively, reported for cash flow hedge effectiveness in accumulated other comprehensive loss. An after-tax loss of $2.5 million is expected to be reclassified to earnings as the hedged transactions occur or as amounts are amortized within the next twelve months. The ultimate amount recognized will vary based on fluctuations of the hedged currencies and interest rates through the maturity dates.

The tables below detail pre-tax amounts reclassified from accumulated other comprehensive income (loss) into earnings for active derivative financial instruments during the periods in which the underlying hedged transactions affected earnings for the six months ended June 30, 2012 and July 2, 2011 (in millions):



Year-to-date 2012 (In millions)	Gain (Loss) Recorded in OCI			Classification of Gain (Loss) Reclassified from OCI to Income	Gain (Loss) Reclassified from OCI to Income (Effective Portion)		Gain (Loss) Recognized in Income (Ineffective Portion*)
Interest Rate Contracts	$	(8.1	)	Interest expense	$	—	$	—
Foreign Exchange Contracts	$	6.0		Cost of Sales	$	1.0	$	—



Year-to-date 2011 (In millions)	Gain (Loss) Recorded in OCI			Classification of Gain (Loss) Reclassified from OCI to Income	Gain (Loss) Reclassified from OCI to Income (Effective Portion)			Gain (Loss) Recognized in Income (Ineffective Portion*)
Interest Rate Contracts	$	(12.2	)	Interest expense	$	—		$	—
Foreign Exchange Contracts	$	(17.0	)	Cost of sales	$	(10.3	)	—

* Includes ineffective portion and amount excluded from effectiveness testing on derivatives.

For the second quarter and the first six months of 2012, the hedged items’ impact to the Consolidated Statement of Operations and Comprehensive Income was a loss of $0.2 million and a loss of $1.0 million, respectively, in Cost of Sales, which is offsetting the loss shown above. For the second quarter and first six months of 2011, the hedged items’ impact to the Consolidated Statement of Operations and Comprehensive Income was a gain of $5.1 million and $10.3 million in Cost of Sales. There was no impact related to the interest rate contracts’ hedged items and the impact of de-designated hedges was immaterial for all periods presented.

For the second quarter and first six months of 2012 an after-tax loss of $0.6 million and $0.8 million, respectively, were reclassified from Accumulated other comprehensive income (loss) into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) during the periods in which the underlying hedged transactions affected earnings. For the second quarter and first six months of 2011, an after-tax loss of $4.1 million and $8.3 million, respectively, were reclassified from Accumulated other comprehensive income (loss) into earnings (inclusive of the gain/loss amortization on terminated derivative financial instruments) during the periods in which the underlying hedged transactions affected earnings.

Interest Rate Contract: The Company enters into interest rate swap agreements in order to obtain the lowest cost source of funds within a targeted range of variable to fixed-rate debt proportions. At June 30, 2012 and December 31, 2011, the Company had $160.0 million and $400.0 million, respectively, of forward starting swaps outstanding fixing the interest rate on the expected refinancing of debt in 2012 as discussed below.

In December 2009, the Company executed forward starting interest rate swaps with an aggregate notional amount of $400.0 million fixing interest at 4.7835%. The objective of the hedge was to offset the expected variability on future payments associated with the interest rate on debt instruments. In January 2012, contracts with a total notional amount of $240.0 million of these forward-starting interest rate swaps were terminated. The terminations resulted in cash payments of $56.4 million, which was recorded in accumulated other comprehensive loss and will be amortized to earnings over future periods. The cash flows stemming from the termination of such interest rate swaps designated as cash flow hedges are presented within financing activities in the Condensed Consolidated Statement of Cash Flows.

Foreign Currency Contracts

Forward Contracts: Through its global businesses, the Company enters into transactions and makes investments denominated in multiple currencies that give rise to foreign currency risk. The Company and its subsidiaries regularly purchase inventory from subsidiaries with non-U.S. dollar functional currencies which creates currency-related volatility in the Company’s results of operations. The Company utilizes forward contracts to hedge these forecasted purchases of inventory. Gains and losses reclassified from accumulated other comprehensive loss for the effective and ineffective portions of the hedge as well as any amounts excluded from effectiveness testing are recorded in cost of sales. Gains and losses incurred after a hedge has been de-designated are not recorded in Accumulated other comprehensive income, but are recorded directly to the Consolidated Statement of Operations and Comprehensive Income in other-net. At June 30, 2012, the notional value of forward currency contracts outstanding was $267.5 million, of which $5.0 million had been de-designated and matures at various dates through 2013. At December 31, 2011, the notional value of forward currency contracts outstanding was $196.8 million, of which $19.8 million has been de-designated, maturing at various dates through 2013.

Purchased Option Contracts: The Company and its subsidiaries have entered into various inter-company transactions whereby the notional values are denominated in currencies other than the functional currencies of the party executing the trade. In order to better match the cash flows of its inter-company obligations with cash flows from operations, the Company enters into purchased option contracts. Gains and losses reclassified from accumulated other comprehensive income (loss) for the effective and ineffective portions of the hedge as well as any amounts excluded from effectiveness testing are recorded in cost of sales. At June 30, 2012, the notional value of purchased option contracts was $70.0 million maturing at various dates through 2013. As of December 31, 2011, there were no purchased option contracts outstanding.

FAIR VALUE HEDGES

Interest Rate Risk: In an effort to optimize the mix of fixed versus floating rate debt in the Company’s capital structure, the Company enters into interest rate swaps. In January 2012, the Company entered into interest rate swaps with a notional of $150.0 million, related to the Company’s $150.0 million 7.05% notes due in 2028. Also, in January 2012, the Company entered into an incremental interest rate swap with a notional value of $200.0 million, related to the Company’s $400.0 million 3.4% notes due in 2021, as a $200.0 million notional value interest rate swap from December 2011 was already in place. These interest rate swaps effectively converted the Company’s fixed rate debt to floating rate debt based on LIBOR, thereby hedging the fluctuation in fair value resulting from changes in interest rates. In January 2012, the Company terminated interest rate swaps with notional values equal to the Company’s $300.0 million 4.75% notes due in 2014, $300.0 million 5.75% notes due in 2016, $200.0 million 4.9% notes due in 2012 and $250.0 million 6.15% notes due in 2013. These terminations resulted in cash receipts of $35.8 million. The resulting gain of $28.0 million was deferred and will be amortized to earnings over the remaining life of the notes. The changes in fair value of the interest rate swaps during the period were recognized in earnings as well as the offsetting changes in fair value of the underlying notes. The notional value of open contracts was $550.0 million and $1.25 billion as of June 30, 2012 and December 31, 2011, respectively. A summary of the fair value adjustments relating to these swaps is as follows (in millions):



	Second Quarter 2012					Year-to-Date 2012
Income Statement Classification	Gain/(Loss) on Swaps		Gain /(Loss) on Borrowings			Gain/(Loss) on Swaps		Gain /(Loss) on Borrowings
Interest Expense	$	27.6	$	(27.6	)	$	25.0	$	(25.0	)



	Second Quarter 2011					Year-to-Date 2011
Income Statement Classification	Gain/(Loss) on Swaps		Gain /(Loss) on Borrowings			Gain/(Loss) on Swaps		Gain /(Loss) on Borrowings
Interest Expense	$	15.9	$	(15.9	)	$	11.1	$	(11.1	)

In addition to the amounts in the table above, the net swap accruals for each period and amortization of the gains on terminated swaps are also reported as a reduction of interest expense and totaled $6.6 million and $13.2 million for the second quarter and first six months of 2012, respectively, and $5.0 million and $9.4 million for the second quarter and first six months of 2011, respectively. Interest expense on the underlying debt was $6.1 million and $15.8 million for the second quarter and first six months of 2012, respectively, and $14.1 million and $27.6 million for the first six months of 2011, respectively.

NET INVESTMENT HEDGES

Foreign Exchange Contracts: The Company utilizes net investment hedges to offset the translation adjustment arising from re-measurement of its investment in the assets and liabilities of its foreign subsidiaries. The total after-tax amounts in accumulated other comprehensive loss were losses of $37.1 million and $32.7 million at June 30, 2012 and December 31, 2011, respectively. As of June 30, 2012, the Company had foreign exchange contracts that mature at various dates through March 2013 with notional values totaling $956.1 million outstanding hedging a portion of its pound sterling denominated net investment. As of December 31, 2011, the Company had foreign exchange contracts that mature at various dates through October 2012 with notional values totaling $925.4 million outstanding hedging a portion of its pound sterling denominated net investment. For the first six months of 2012, maturing foreign exchange contracts resulted in net cash receipts of $7.0 million. For the first six months of 2011, maturing foreign exchange contracts resulted in net cash payments of $29.2 million. Gains and losses on net investment hedges remain in accumulated other comprehensive income (loss) until disposal of the underlying assets.

The pre-tax gain or loss from year-to-date fair value changed was as follows (in millions):



	Second Quarter 2012							Year-to-Date 2012
Income Statement Classification	Amount Recorded in OCI Gain (Loss)			Effective Portion Recorded in Income Statement		Ineffective Portion* Recorded in Income Statement		Amount Recorded in OCI Gain (Loss)			Effective Portion Recorded in Income Statement		Ineffective Portion* Recorded in Income Statement
Other-net	$	24.8		$	—	$	—	$	(7.1	)	$	—	$	—

	Second Quarter 2011							Year-to-Date 2011
Income Statement Classification	Amount Recorded in OCI Gain (Loss)			Effective Portion Recorded in Income Statement		Ineffective Portion* Recorded in Income Statement		Amount Recorded in OCI Gain (Loss)			Effective Portion Recorded in Income Statement		Ineffective Portion* Recorded in Income Statement
Other-net	$	(1.9	)	$	—	$	—	$	(35.9	)	$	—	$	—

* Includes ineffective portion and amount excluded from effectiveness testing.

UNDESIGNATED HEDGES

Foreign Exchange Contracts: Currency swaps and foreign exchange forward contracts are used to reduce risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (such as affiliate loans, payables and receivables). The objective of these practices is to minimize the impact of foreign currency fluctuations on operating results. The total notional amount of the contracts outstanding at June 30, 2012 was $4.9 billion of forward contracts and $101.3 million in currency swaps, maturing at various dates primarily through May 2013 with the currency swap maturing in December 2014. The total notional amount of the contracts outstanding at December 31, 2011 was $3.9 billion of forward contracts and $100.8 million in currency swaps. The income statement impacts related to derivatives not designated as hedging instruments for 2012 and 2011 are as follows (in millions):



Derivatives Not Designated as Hedging Instruments under ASC 815	Income Statement Classification	Second Quarter 2012 Amount of Gain (Loss) Recorded in Income on Derivative			Year-to-Date 2012 Amount of Gain (Loss) Recorded in Income on Derivative
Foreign Exchange Contracts	Other-net	$	8.6		$	(0.1	)

Derivatives Not Designated as Hedging Instruments under ASC 815	Income Statement Classification	Second Quarter 2011 Amount of Gain (Loss) Recorded in Income on Derivative			Year-to-Date 2011 Amount of Gain (Loss) Recorded in Income on Derivative
Foreign Exchange Contracts	Other-net	$	(29.7	)	$	(39.6	)