6. Financial Instruments

Foreign Exchange Derivative Instruments

The company enters into readily marketable forward and option contracts with financial institutions to help reduce its exposure to foreign currency exchange rate fluctuations. These contracts limit volatility because gains and losses associated with foreign exchange rate movements are generally offset by movements in the underlying hedged item. The notional value of the company’s forward currency and option contracts was $128.1 million and $205.2 million at December 31, 2012 and 2011, respectively.

Interest Rate Derivative Instruments

On December 20, 2010, the company entered into an interest rate swap contract in connection with a debt offering. See Note 9 of the notes to consolidated financial statements. The swap contract effectively converts the 2.875% fixed-rate notes to a floating-rate instrument. The notional value of the company’s interest rate swap contract is $250.0 million.

The location and fair values of derivative instruments segregated between those derivatives that are designated as hedging instruments and those that are not designated as hedging instruments at December 31, are as follows:


	Balance Sheet Location	Fair Value of Derivatives
Derivatives Designated as Hedging Instruments	Balance Sheet Location	2012		2011
(dollars in millions)
Forward currency contracts	Other current assets	$	1.4	$	1.5
Option currency contracts	Other current assets		0.6		4.3
Interest rate swap contract	Other assets		13.3		12.1

		$	15.3	$	17.9

Forward currency contracts	Accrued expenses	$	0.4	$	6.4

		$	0.4	$	6.4

Derivatives Not Designated as Hedging Instruments
(dollars in millions)
Forward currency contracts	Other current assets	$	—	$	3.8

		$	—	$	3.8

The location and amounts of gains and losses on derivative instruments designated as cash flow hedges and the impact on shareholders’ investment for the years ended December 31, are as follows:


	Gain/(Loss) Recognized in Other Comprehensive Income (Loss)								Location of Gain/(Loss) Reclassified from Accumulated Other Comp. Loss into Income	Gain/(Loss) Reclassified from Accumulated Other Comp. Loss into Income^(A)
(dollars in millions)	2012			2011			2010			2012			2011		2010
Forward currency contracts	$	3.5		$	(3.9	)	$	0.1	Costs of goods sold	$	(0.9	)	$	1.0	$	0.4
Option currency contracts		(2.8	)		2.5			0.8	Costs of goods sold		1.9			—		0.4

	$	0.7		$	(1.4	)	$	0.9		$	1.0		$	1.0	$	0.8

^(A)	The tax effect of the amount reclassified from accumulated other comprehensive loss to income was $0.1 million, $1.0 million and $0.1 million at December 31, 2012, 2011 and 2010, respectively.

At December 31, 2012, the company had losses of approximately $0.7 million in accumulated other comprehensive loss in the consolidated balance sheet that are expected to be reclassified into earnings in 2013.

The location and amounts of gains and losses on the derivative instrument designated as a fair value hedge for the years ended December 31, are as follows:


			Gain Recognized on Swap						(Loss) Recognized on Long-Term Debt
(dollars in millions)	Income Statement Location		2012		2011		2010		2012			2011			2010
Interest rate swap contract		Interest expense	$	1.2	$	11.4	$	0.7	$	(1.2	)	$	(11.4	)	$	(0.7	)

The location and amounts of gains and losses on derivative instruments not designated as hedging instruments for the years ended December 31, are as follows:


		Gain Recognized in Earnings
(dollars in millions)	Income Statement Location	2012		2011		2010
Forward currency contracts^(A)	Other (income) expense, net	$	3.0	$	2.0	$	1.8

^(A)	These derivative contracts mitigate changes in the value of remeasured foreign currency denominated intercompany loans attributable to changes in foreign currency exchange rates.

Financial Instruments Measured at Fair Value on a Recurring Basis

Fair value is defined as the exit price that would be received to sell an asset or paid to transfer a liability. Fair value is a market-based measurement that is determined using assumptions that market participants would use in pricing an asset or liability. The fair value guidance establishes a three-level hierarchy which maximizes the use of observable inputs and minimizes the use of unobservable inputs used in measuring fair value. The levels within the hierarchy range from Level 1 having observable inputs to Level 3 having unobservable inputs.

The following table summarizes certain financial instrument assets and (liabilities) measured at fair value on a recurring basis at December 31:


	2012		2011
(dollars in millions)
Foreign government bonds and notes	$	—	$	3.6
Forward currency contracts		1.0		(1.1	)
Option currency contracts		0.6		4.3
Interest rate swap contract		13.3		12.1

The fair values were measured using significant other observable inputs and valued by reference to similar financial instruments, adjusted for restrictions and other terms specific to each instrument. These financial instruments are categorized as Level 2 under the fair value hierarchy.

The fair value of the liability for contingent consideration related to prior acquisitions was $77.1 million at each of the years ended December 31, 2012 and 2011. The fair value was measured using significant unobservable inputs and is categorized as Level 3 under the fair value hierarchy.

Financial Instruments Not Measured at Fair Value

There were no commercial paper borrowings outstanding at December 31, 2012. The fair value of commercial paper borrowings of $304.5 million at December 31, 2011 approximated the carrying value.

The estimated fair value of long-term debt including the effect of the related swap contract was $1,532.2 million and $1,038.7 million at December 31, 2012 and 2011, respectively. The fair value was estimated using dealer quotes for similarly-rated debt instruments over the remaining contractual term of the company’s obligation. Long-term debt is categorized as Level 2 under the fair value hierarchy.

Concentration Risks

The company is potentially subject to concentration of credit risk through its cash equivalents and accounts receivable. The company performs periodic evaluations of the relative credit standing of these financial institutions and limits the amount of credit exposure with any one institution. Concentrations of risk with respect to trade accounts receivable are limited due to the large number of customers dispersed across many geographic areas. However, accounts receivable balances include sales to government-supported healthcare systems outside the United States. The company continues to monitor sovereign debt issues and economic conditions in Europe and evaluates accounts receivable in certain countries for potential collection risks. Deteriorating economic conditions and other factors in certain countries in Europe have resulted in, and may continue to result in, an increase in the average length of time that it takes to collect these accounts receivable and may require the company to re-evaluate the collectability of these receivables in future periods. The company has experienced significant delays in the collection of accounts receivable associated with the national healthcare systems in Spain, Italy, Greece and Portugal. At December 31, 2012, the company’s accounts receivable, net of allowances, from the national healthcare systems in these countries and amounts past due greater than 365 days were as follows:


	Accounts receivable, net		Greater than 365 days past due
(dollars in millions)
Spain	$	18.5	$	0.4
Italy		27.5		4.5
Greece		13.0		4.0
Portugal		3.7		0.8

	$	62.7	$	9.7

During 2010, the company recorded to other (income) expense, net, a write-down of Greece receivables of $3.8 million based on a proposal that the Greek government announced to settle its outstanding debts from 2007 through 2009, primarily by issuing non-interest bearing bonds. During 2011, the company received $16.8 million of bonds, net of discount, in settlement of 2007 through 2009 accounts receivable. During 2011, the company recorded to other (income) expense, net, charges totaling $11.5 million related to other-than-temporary impairments of these bonds. In March 2012, the Greek government approved a private sector bond exchange program for holders of Greek public debt, including those bonds held by the company. As a result, the company’s bonds were exchanged for a combination of new Greek government bonds and certain other notes. In July 2012, the company sold these bonds and notes.

Sales to distributors, which supply the company’s products to many end-users, accounted for approximately 36% of the company’s net sales in 2012, and the five largest distributors combined, including the company’s Medicon joint venture, accounted for approximately 65% of distributors’ sales. One large distributor accounted for approximately 9% of the company’s net sales in each of 2012, 2011 and 2010. This distributor represented gross receivables of approximately $40.9 million and $41.6 million as of December 31, 2012 and 2011, respectively.