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 $1.68 billion and $1.38 billion at June 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):

	June 30, 2011				December 31, 2010
	Principal		Fair Value		Principal		Fair Value
Fixed rate Senior Notes	$	1,250.0	$	1,369.5	$	750.0	$	828.6
2.5% Convertible Debentures		371.1		522.3		500.0		724.4
	$	1,621.1	$	1,891.8	$	1,250.0	$	1,553.0

As indicated in Note 8 of the Notes to Consolidated 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 at an average strike price of $47.69 per share. The total premium paid for these options was $21.9 million. If the individual options are “in-the-money” upon expiration at various dates during August 2011, the option value will be settled on a net-cash basis with the third party financial intermediary, otherwise, the options will be allowed to expire if they have no value to the Company at that time. Changes in the fair value of the call options are being recognized in other costs in the period in which the change occurs.

The fair value of the options are determined using a Black-Scholes-Merton option pricing formula consisting of current assumptions involving the Company's stock price at June 30, 2011, the expected volatility of the Company's stock through August 2011 and short-term risk-free interest rates. The change in the estimated fair value of the call options determined using these level 3 unobservable market inputs was as follows (in millions):

	Three Months Ended June 30, 2011
Beginning balance	$	–
Premium paid		21.9
Change in estimated fair value		1.6
Balance at June 30, 2011	$	23.5

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 June 30, 2011, some of which extend through 2012. 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. 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, most of which have been accounted for as cash flow hedges as of June 30, 2011, follows:

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

	Notional Amount - Swaps						Notional Amount - Buy						Notional Amount - Sell
	2011		2012		Total		2011		2012		Total		2011			2012			Total
FX Forward Contracts
Notional currency in:
BRL		–		–		–		–		–		–		(31.0	)		–			(31.0	)
EUR		–		–		–		37.9		7.6		45.5		(32.4	)		–			(32.4	)
GBP		–		–		–		2.2		34.0		36.2		(11.9	)		–			(11.9	)
MYR		–		–		–		19.2		–		19.2		–			–			–
NOK		–		–		–		–		90.0		90.0		–			–			–
RON		–		–		–		10.0		–		10.0		(10.0	)		–			(10.0	)
SGD		–		–		–		13.4		–		13.4		(0.4	)		–			(0.4	)
USD		–		–		–		9.5		0.3		9.8		(54.7	)		(31.6	)		(86.3	)

FX Options
EUR		–		–		–		69.6		–		69.6		–			–			–

Interest Rate Swaps
USD		–		800.0		800.0		–		–		–		–			–			–

Equity call options
Number of shares								5.0		–		5.0

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

	June 30, 2011				December 31, 2010
	Assets		Liabilities		Assets		Liabilities
Derivatives designated as hedges:
Foreign exchange contracts –
Current	$	1.6	$	1.2	$	0.7	$	1.8
Non-current		0.1		0.1		–		–
Total derivatives designated as hedges		1.7		1.3		0.7		1.8
Derivatives not designated as hedges:
Foreign exchange contracts –
Current		3.5		2.4		1.4		–
Non-current		–		1.3		–		–
Interest Rate Swaps –
Current		3.3		–		–		–
Non-current		–		–		4.8		–
Equity call options –
Current		23.5		–		–		–
Non-current		–		–		–		–
Total derivatives not designated as hedges		30.3		3.7		6.2		–
Total derivatives	$	32.0	$	5.0	$	6.9	$	1.8

The effects of derivative financial instruments on the Company's consolidated condensed financial statements for the three months ended June 30, 2011 and June 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 June 30,				Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income at June 30,				Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives at June 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	$	0.4	$	(6.9)	Revenues	$	0.2	$	(2.0)	Cost of sales - ineffective portion	$	(0.1)	$	(1.7)
					Cost of sales		(0.8)		(3.4)
					Depreciation and amortization		−		−
Total	$	0.4	$	(6.9)		$	(0.6)	$	(5.4)		$	(0.1)	$	(1.7)

The effects of derivative financial instruments on the Company's consolidated condensed financial statements for the six months ended June 30, 2011 and June 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 June 30,				Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income at June 30,				Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income on Derivatives at June 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	$	2.9	$	(12.9)	Revenues	$	1.8	$	(2.6)	Cost of sales - ineffective portion	$	(0.3)	$	(2.0)
					Cost of sales		(6.5)		(6.1)
					Depreciation and amortization		(0.1)		(0.1)
Total	$	2.9	$	(12.9)		$	(4.8)	$	(8.8)		$	(0.3)	$	(2.0)

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

	Three Months Ended June 30,					Six Months Ended June 30,
	2011			2010		2011			2010
Foreign currency contracts:
Cost of sales	$	(1.3	)	$	1.2	$	(0.8	)	$	2.8

Interest rate swaps:
Interest, net		–			2.0		(0.2	)		6.1

Equity call options:
Other costs		1.6			–		1.6			–

Total	$	0.3		$	3.2	$	0.6		$	8.9