Note 14: Fair Value of Financial Instruments

The Company's financial instruments consist primarily of cash and cash equivalents, trade receivables, trade payables, derivative instruments and debt instruments. The book values of cash and cash equivalents, trade receivables, trade payables, derivative instruments and floating-rate debt instruments are considered to be representative of their respective fair values.

Cash and cash equivalents include highly liquid investments with a maturity of ninety days or less at the time of purchase. Cash equivalents consist primarily of money market securities, U.S. treasury bills, other U.S. agency notes, short-term commercial paper and corporate debt securities, all of which are considered Level 1 under the ASC's fair value hierarchy. Total cash equivalents were approximately $1.17 billion and $1.38 billion at September 30, 2011 and December 31, 2010, respectively.

Fair value of the Company's fixed rate debt (based on level 1 quoted market rates) was (in millions):

	September 30, 2011				December 31, 2010
	Principal		Fair Value		Principal		Fair Value
Fixed rate Senior Notes	$	1,250.0	$	1,443.7	$	750.0	$	828.6
2.5% Convertible Debentures		–		–		500.0		724.4
	$	1,250.0	$	1,443.7	$	1,250.0	$	1,553.0

As indicated in Note 8 of the Notes to Consolidated Condensed Financial Statements, during the second quarter of 2011, the Company entered into an agreement with a third party financial intermediary for the purchase of 5.0 million call options on its common stock for a total premium payment of $21.9 million. During the third quarter of 2011, the Company received net proceeds of $9.7 million for the settlement of 3.2 million options. The remaining 1.8 million of options expired upon maturity as the market value of the options was below their strike price.

Proceeds received and changes in the estimated fair value of the call options were as follows (in millions):

	Nine Months Ended September 30, 2011
Beginning balance	$	–
Premium paid		21.9
Proceeds received from settlement of options		(9.7	)
Change in estimated fair value		(12.2	)
Balance at September 30, 2011	$	–

In order to mitigate the effect of exchange rate changes, the Company will often attempt to structure sales contracts to provide for collections from customers in the currency in which the Company incurs its manufacturing costs. In certain instances, the Company will enter into forward foreign currency exchange contracts to hedge specific large anticipated receipts or disbursements in currencies for which the Company does not traditionally have fully offsetting local currency expenditures or receipts. The Company was party to a number of long-term foreign currency forward contracts at September 30, 2011, some of which extend through 2013. The purpose of the majority of these contracts was to hedge large anticipated non-functional currency cash flows on major subsea, drilling, valve or other equipment contracts involving the Company's United States operations and its wholly-owned subsidiaries in Italy, Romania, Singapore and the United Kingdom. Many of these contracts have been designated as and are accounted for as cash flow hedges with changes in the fair value of those contracts recorded in accumulated other comprehensive income in the period such change occurs. Certain other contracts, many of which are centrally- managed, are intended to offset other foreign currency exposures but have not been designated as hedges for accounting purposes and, therefore, any change in the fair value of those contracts are reflected in earnings in the period such change occurs. The Company determines the fair value of its outstanding foreign currency forward contracts based on quoted exchange rates for the respective currencies applicable to similar instruments. These quoted exchange rates are considered to be Level 2 observable market inputs. Information relating to the contracts as of September 30, 2011 follows:

Total gross volume bought (sold) by notional currency and maturity date on open derivative contracts at September 30, 2011 was as follows (in millions):

Notional Amount Swaps

Notional Amount - Buy

Notional Amount - Sell

2011

2012

Total

2011

2012

2013

Total

2011

2012

2013

Total

FX Forward Contracts

Notional currency

in:

EUR

–

59.6

92.3

1.0

152.9

(1.5

)

(20.2

)

–

(21.7

)

GBP

–

0.1

34.0

–

34.1

(2.0

)

(11.7

)

–

(13.7

)

MYR

–

19.2

–

19.2

–

NOK

–

90.0

–

90.0

–

RON

–

(10.0

)

–

(10.0

)

SGD

–

13.8

3.2

–

17.0

–

USD

–

13.6

0.7

–

14.3

(52.0

)

(41.9

)

(0.1

)

(94.0

)

FX Options

EUR

–

30.1

–

30.1

–

Interest Rate Swaps

USD

–

800.0

–

The fair values of derivative financial instruments recorded in the Company's Consolidated Condensed Balance Sheets at September 30, 2011 and December 31, 2010 were as follows:

	September 30, 2011				December 31, 2010
	Assets		Liabilities		Assets		Liabilities
Derivatives designated as hedges:
Foreign exchange contracts –
Current	$	0.8	$	6.3	$	0.7	$	1.8
Non-current		–		0.2		–		–
Total derivatives designated as hedges		0.8		6.5		0.7		1.8

Derivatives not designated as hedges:
Foreign exchange contracts –
Current		1.1		5.9		1.4		–
Non-current		0.1		4.2		–		–

Interest Rate Swaps –
Current		1.4		–		–		–
Non-current		–		–		4.8		–

Total derivatives not designated as hedges		2.6		10.1		6.2		–

Total derivatives	$	3.4	$	16.6	$	6.9	$	1.8

The effects of derivative financial instruments on the Company's consolidated condensed financial statements for the three months ended September 30, 2011 and September 30, 2010 were as follows (in millions):

	Effective Portion									Ineffective Portion and Other
Derivatives in Cash Flow Hedging Relationships	Amount of Pre-Tax Gain (Loss) Recognized in OCI on Derivatives at September 30,				Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income at September 30,				Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives at September 30,
Derivatives in Cash Flow Hedging Relationships	2011		2010			2011		2010		Location of Gain (Loss) Recognized in Income on Derivatives	2011		2010

Foreign exchange contracts	$	(7.1)	$	4.4	Revenues	$	0.6	$	(2.4)	Cost of sales - ineffective portion	$	(0.3)	$	0.5
					Cost of sales		(1.7)		(3.6)
					Depreciation and amortization		−		−
Total	$	(7.1)	$	4.4		$	(1.1)	$	(6.0)		$	(0.3)	$	0.5

The effects of derivative financial instruments on the Company's consolidated condensed financial statements for the nine months ended September 30, 2011 and September 30, 2010 were as follows (in millions):

	Effective Portion									Ineffective Portion and Other
Derivatives in Cash Flow Hedging Relationships	Amount of Pre-Tax Gain (Loss) Recognized in OCI on Derivatives at September 30,				Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income at September 30,				Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives at September 30,
Derivatives in Cash Flow Hedging Relationships	2011		2010			2011		2010		Location of Gain (Loss) Recognized in Income on Derivatives	2011			2010

Foreign exchange contracts	$	(4.2)	$	(8.5)	Revenues	$	2.5	$	(5.0)	Cost of sales - ineffective portion	$	(0.7)		$	(1.5)
					Cost of sales		(8.2)		(9.7)
					Depreciation and amortization		(0.1)		(0.1)
Total	$	(4.2)	$	(8.5)		$	(5.8)	$	(14.8)		$	(0.7	)	$	(1.5)

The amount of gain (loss) recognized on derivatives not designated as hedging instruments was (in millions):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2011			2010			2011			2010
Foreign currency contracts:
Cost of sales	$	(1.4	)	$	(2.3	)	$	(2.2	)	$	0.5
Other costs		(6.4	)		–			(6.4	)		–

Interest rate swaps:
Interest, net		–			1.1			(0.2	)		7.2

Equity call options:
Other costs		(13.8	)		–			(12.2	)		–

Total	$	(21.6	)	$	(1.2	)	$	(21.0	)	$	7.7