I. 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 these exposures.

Financial instruments are not utilized for speculative purposes. If the Company elects to do so and if the instrument meets the criteria specified in 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. In the first quarter of 2010, the Company acquired a portfolio of derivative financial instruments in conjunction with the Merger, which Black & Decker entered into in the ordinary course of business. At the March 12, 2010 merger date, the Company established its intent for each derivative and terminated all outstanding interest rate swaps and foreign currency forwards hedging future purchases of inventory denominated in a foreign currency. For other foreign currency forwards, the Company elected to leave the instruments in place as an economic hedge only and account for them as undesignated. Net investment hedges were re-designated.

A summary of the fair value of the Company’s derivatives recorded in the Consolidated Balance Sheets at October 1, 2011 and January 1, 2011 is as follows (in millions):


	Balance Sheet Classification	2011		2010		Balance Sheet Classification	2011		2010
Derivatives designated as hedging instruments:
Interest Rate Contracts Cash Flow	LT other assets	$	—	$	—	LT other liabilities	$	79.3	$	17.3
Interest Rate Contracts Fair Value	Other current assets		28.4		5.5	Accrued expenses		7.8		—
	LT other assets		25.4		10.7	LT other liabilities		—		11.9
Foreign Exchange Contracts Cash Flow	Other current assets		5.2		0.7	Accrued expenses		0.2		5.6
	LT other assets		1.6		—	LT other liabilities		0.3		—
Net Investment Hedge	Other current assets		17.1		11.7	Accrued expenses		0.8		17.7

		$	77.7	$	28.6		$	88.4	$	52.5


Derivatives not designated as hedging instruments:
Foreign Exchange Contracts	Other current assets	$	60.5	$	26.4	Accrued expenses	$	53.9	$	59.1
	LT other assets		34.1		—	LT other liabilities		21.3		4.1

		$	94.6	$	26.4		$	75.2	$	63.2

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 nonperformance 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 nine months ended October 1, 2011, significant cash flows related to derivatives including those that are separately discussed in Cash Flow Hedges, Net Investment Hedges and Undesignated Hedges below resulted in net cash paid of $93.0 million.

During the nine months ended October 2, 2010, significant cash flows related to derivatives included net cash paid of $47.2 million on matured foreign exchange contracts and currency swaps. The Company also received $30.0 million from the termination of $325 million notional of fixed-to-variable interest rate swaps that became undesignated at the merger date and as a result the cash inflow was reported within investing activities in the condensed consolidated statement of cash flows.

CASH FLOW HEDGES There was a $72.9 million after-tax loss and a $50.2 million after-tax loss reported for cash flow hedge effectiveness in Accumulated other comprehensive loss as of October 1, 2011 and January 1, 2011, respectively. An after-tax loss of $0.9 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 loss into earnings for active derivative financial instruments during the periods in which the underlying hedged transactions affected earnings for the nine months ended October 1, 2011 and October 2, 2010 (in millions):


Year-to-date 2011	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	$ (62.0)	Interest expense	$ —	$—
Foreign Exchange Contracts	(2.2)	Cost of sales	(20.5)	—


Year-to-date 2010	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	$(56.4)	Interest expense	$(1.6)	$—
Foreign Exchange Contracts	(11.0)	Cost of sales	1.0	$—
Foreign Exchange Contracts	6.5	Other, net	7.9	$—

*	Includes ineffective portion and amount excluded from effectiveness testing.

For the third quarter and first nine months of 2011, the hedged items’ impact to the Consolidated Statements of Operations was a gain of $10.2 million and $20.5 million, respectively, in Cost of sales. For the third quarter and first nine months of 2010, the hedged items’ impact to the Consolidated Statements of Operations was a gain of $14.8 million and a loss of $7.9 million, respectively, in Other, net and losses of $0.7 and $1.0, respectively, in Cost of sales. There was no impact related to the interest rate contracts’ hedged items for any period presented. The impact of de-designated hedges was immaterial for all periods presented.

For the third quarter and first nine months of 2011, an after-tax loss of $6.6 million and $14.9 million, respectively, was reclassified from Accumulated other comprehensive 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. For the third quarter and first nine months of 2010, an after-tax loss of $8.0 million and a gain of $4.6 million, respectively, was reclassified from Accumulated other comprehensive 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 Contracts

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 October 1, 2011 and January 1, 2011, the Company had $400 million of forward starting swaps outstanding fixing the interest rate on the expected refinancing of debt in 2012.

In May 2010, the Company executed forward starting interest rate swaps with an aggregate notional amount of $400 million fixing interest at 3.95%. The objective of the hedge was to offset the expected variability on future payments associated with the interest rate on debt instruments. In connection with the August 31, 2010 issuance of the $400 million of senior unsecured 2040 Term Bonds, these forward-starting interest rate swaps were terminated. The terminations resulted in cash payments of $48.4 million. This loss ($30.0 million on an after-tax basis) was recorded in Accumulated other comprehensive loss and will be amortized to earnings over the first ten years in which the interest expense related to the 2040 Term Bonds is recognized.

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 loss, but are recorded directly to the Consolidated Statements of Operations in Other, net. At October 1, 2011, the notional value of the forward currency contracts outstanding was $194.0 million, of which $16.2 million had been de-designated, maturing at various dates through 2013. At January 1, 2011, the notional value of the forward currency contracts outstanding was $82.5 million, of which $13.8 million had been de-designated, maturing at various dates through 2011.

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 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 loss, but are recorded directly to the

Consolidated Statements of Operations in Other, net. At January 1, 2011, the notional value of option contracts outstanding was $54.7 million, $8.8 million of which had been de-designated. At October 1, 2011, there were no 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 December 2010, the Company entered into interest rate swaps with notional values which equaled the Company’s $300 million 4.75% notes due in 2014 and $300 million 5.75% notes due in 2016. In January 2009, the Company entered into interest rate swaps with notional values which equaled the Company’s $200 million 4.9% notes due in 2012 and $250 million 6.15% notes due in 2013. 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. The changes in fair value of the interest rate swaps were recognized in earnings as well as the offsetting changes in fair value of the underlying notes. The notional value of open contracts was $1.050 billion as of October 1, 2011 and January 1, 2011. A summary of the fair value adjustments relating to these swaps for the third quarter and first nine months of 2011 and 2010 is as follows (in millions):


	Third 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	$ 17.0	$(17.0)	$ 28.0	$ (28.0)

	Third Quarter 2010		Year-to-Date 2010
Income Statement Classification	Gain/(Loss) on Swaps	Gain /(Loss) on Borrowings	Gain/(Loss) on Swaps	Gain /(Loss) on Borrowings
Interest Expense	$ 5.8	$ (5.8)	$ 12.1	$ (12.1)

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 $4.9 million and $14.3 million for the third quarter and first nine months of 2011, respectively, and $2.9 million and $8.8 million for the third quarter and first nine months of 2010, respectively. Interest expense on the underlying debt was $14.0 million and $41.6 million for the third quarter and first nine months of 2011, respectively, and $6.3 million and $18.9 million for the third quarter and first nine months of 2010, respectively.

NET INVESTMENT HEDGES

Foreign Exchange Contracts: The Company utilizes net investment hedges to offset the translation adjustment arising from remeasurement 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 $38.9 million and $32.7 million at October 1, 2011 and January 1, 2011, respectively. As of October 1, 2011, the Company had foreign exchange contracts that mature at various dates through July 2012 with notional values of $853.3 million outstanding hedging a portion of its pound sterling denominated net investment. As of January 1, 2011, the Company had foreign exchange contracts with notional values totaling $223.1 million outstanding hedging a portion of its euro denominated net investment and foreign exchange contracts with notional values of $800.9 million outstanding hedging a portion of its pound sterling denominated net investment. In the first nine months of 2011, maturing foreign exchange contracts resulted in cash payments of $34.5 million. In the first nine months of 2010, maturing foreign exchange contracts resulted in net cash receipts of $27.9 million. Gains and losses on net investment hedges remain in Accumulated other comprehensive loss until disposal of the underlying assets. The details of the pre-tax amounts are below (in millions):

Third 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

$ 23.6

$—

$(12.4)

$—

Third Quarter 2010

Year-to-Date 2010

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

$ (79.1)

$—

$ (24.8)

$—

*	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 October 1, 2011 was $3.720 billion of forward contracts and $102.0 million in currency swaps, maturing at various dates primarily through May 2013 with one currency swap maturing in December 2014. The total notional amount of the contracts outstanding at January 1, 2011 was $2.273 billion of forward contracts and $219.4 million in currency swaps. In the first nine months of 2011, a maturing currency swap resulted in a cash payment of $15.8 million. The income statement impacts related to derivatives not designated as hedging instruments for the third quarter and first nine months of 2011 and 2010 are as follows (in millions):


Derivatives Not Designated as Hedging Instruments under ASC 815	Income Statement Classification		Third 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	$45.9	$6.3

Derivatives Not Designated as Hedging Instruments under ASC 815	Income Statement Classification		Third Quarter 2010 Amount of Gain (Loss) Recorded in Income on Derivative	Year-to-Date 2010 Amount of Gain (Loss) Recorded in Income on Derivative
Foreign Exchange Contracts		Other, net	$ 50.9	$ 18.0
		Cost of Sales	(0.5)	2.2