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DERIVATIVE FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 29, 2012
DERIVATIVE FINANCIAL INSTRUMENTS |
DERIVATIVE FINANCIAL INSTRUMENTS |
(11) DERIVATIVE FINANCIAL INSTRUMENTS Currency Forward Contracts We manufacture and sell our products in a number of countries and, as a result, are exposed to movements in foreign currency exchange rates. Our objective is to preserve the economic value of non-functional currency denominated cash flows and to minimize their impact. Our principal currency exposures relate to the Euro, Chinese Yuan, South African Rand and British Pound. From time to time, we enter into currency protection agreements (“FX forward contracts”) to manage the exposure on contracts with forecasted transactions denominated in non-functional currencies and to manage the risk of transaction gains and losses associated with assets/liabilities denominated in currencies other than the functional currency of certain subsidiaries. In addition, some of our contracts contain currency forward embedded derivatives (“FX embedded derivatives”), as the currency of exchange is not “clearly and closely” related to the functional currency of either party to the transaction. Certain of our FX forward contracts are designated as cash flow hedges, as deemed appropriate. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value are not included in current earnings, but are included in accumulated other comprehensive income (“AOCI”). These changes in fair value will subsequently be reclassified into earnings as a component of revenues or cost of products sold, as applicable, when the forecasted transaction impacts earnings. In addition, if the forecasted transaction is no longer probable, the cumulative change in the derivatives’ fair value will be recorded as a component of “Other income (expense), net” in the period it occurs. To the extent that a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded in earnings in the period it occurs. We had FX forward contracts with an aggregate notional amount of $115.2 and $66.1 outstanding as of September 29, 2012 and December 31, 2011, respectively. These FX forward contracts typically have maturity dates ranging from one to two years. We had FX embedded derivatives with an aggregate notional amount outstanding of $111.4 and $73.2 at September 29, 2012 and December 31, 2011, respectively. The unrealized loss, net of taxes, recorded in AOCI related to FX forward contracts was $3.6 and $3.7 as of September 29, 2012 and December 31, 2011, respectively. We anticipate reclassifying approximately $2.8 of the unrealized loss to income over the next 12 months. Commodity Contracts From time to time, we enter into commodity contracts to manage the exposure on forecasted purchases of commodity raw materials (“commodity contracts”). At September 29, 2012 and December 31, 2011, the outstanding notional amount of commodity contracts was 4.1 million and 2.9 million pounds of copper, respectively. We designate and account for these contracts as cash flow hedges and, to the extent these commodity contracts are effective in offsetting the variability of the forecasted purchases, the change in fair value is included in AOCI. We reclassify the AOCI associated with our commodity contracts to cost of products sold when the forecasted transaction impacts earnings. The unrealized gain (loss), net of taxes, recorded in AOCI was $0.3 and $(0.7) as of September 29, 2012 and December 31, 2011, respectively. We anticipate reclassifying the unrealized gain to income over the next 12 months. The amount of gain/loss recognized during the periods ended September 29, 2012 and October 1, 2011 related to the ineffectiveness of the hedges was not material. The following summarizes the fair value of our derivative financial instruments:
|  | September 29, 2012 |  | December 31, 2011 |
|  | Balance Sheet |  |  |  | Balance Sheet |  |  |
|  | Classification |  | Fair Value |  | Classification |  | Fair Value |
Derivative contracts designated as hedging instruments: |  |  |  |  |  |  |  |  |
FX forward contracts |  | Other current assets |  | $ | 1.2 |  | Other current assets |  | $ | — |
Commodity contracts |  | Other current assets |  | 0.7 |  | Other current assets |  | — |
|  |  |  | $ | 1.9 |  |  |  | $ | — |
FX forward contracts |  | Accrued expenses |  | $ | (2.0 | ) | Accrued expenses |  | $ | (0.4 | )
Commodity contracts |  | Accrued expenses |  | — |  | Accrued expenses |  | (0.8 | )
|  |  |  | $ | (2.0 | ) |  |  | $ | (1.2 | )
Derivative contracts not designated as hedging instruments: |  |  |  |  |  |  |  |  |
FX embedded derivatives |  | Other current assets |  | $ | 0.7 |  | Other current assets |  | $ | 1.2 |
FX forward contracts |  | Accrued expenses |  | $ | (0.6 | ) | Accrued expenses |  | $ | (0.4 | )
FX embedded derivatives |  | Accrued expenses |  | (2.2 | ) | Accrued expenses |  | (0.3 | )
FX embedded derivatives |  | Other long-term liabilities |  | (12.9 | ) | Other long-term liabilities |  | (14.8 | )
|  |  |  | $ | (15.7 | ) |  |  | $ | (15.5 | )
The following summarizes the effect of derivative financial instruments in cash flow hedging relationships on AOCI and the condensed consolidated statements of operations for the three months ended September 29, 2012 and October 1, 2011:
|  | Amount of gain (loss) |  |  |  | Amount of gain (loss) |
|  | recognized in AOCI, |  |  |  | reclassified from AOCI to |
|  | pre-tax (1) |  | Classification of gain (loss) |  | income, pre-tax (1) |
|  | 2012 |  | 2011 |  | reclassified from AOCI |  | 2012 |  | 2011 |
FX forward contracts |  | $ | (0.6 | ) | $ | 0.4 |  | Cost of products sold |  | $ | (0.8 | ) | $ | 0.1 |
Commodity contracts |  | 0.8 |  | (2.4 | ) | Cost of products sold |  | 0.3 |  | 0.1 |
|  | $ | 0.2 |  | $ | (2.0 | ) |  |  | $ | (0.5 | ) | $ | 0.2 |
The following summarizes the effect of derivative financial instruments in cash flow hedging relationships on AOCI and the condensed consolidated statements of operations for the nine months ended September 29, 2012 and October 1, 2011:
|  | Amount of gain (loss) |  |  |  | Amount of gain (loss) |
|  | recognized in AOCI, |  |  |  | reclassified from AOCI to |
|  | pre-tax (1) |  | Classification of gain (loss) |  | income, pre-tax (1) |
|  | 2012 |  | 2011 |  | reclassified from AOCI |  | 2012 |  | 2011 |
FX forward contracts |  | $ | (1.2 | ) | $ | 0.4 |  | Cost of products sold |  | $ | (1.2 | ) | $ | (0.4 | )
Commodity contracts |  | 1.0 |  | (2.4 | ) | Cost of products sold |  | (0.7 | ) | 0.9 |
|  | $ | (0.2 | ) | $ | (2.0 | ) |  |  | $ | (1.9 | ) | $ | 0.5 |
(1) | During the three and nine months ended September 29, 2012, losses of $0.2 and $0.3 were recognized in other expense, net relating to derivative ineffectiveness and amounts excluded from effectiveness testing. During the nine months ended October 1, 2011, losses of $0.2 were recognized in other expense, net relating to derivative ineffectiveness and amounts excluded from effectiveness testing.
The following summarizes the effect of derivative financial instruments not designated as cash flow hedging relationships on the condensed consolidated statements of operations for the three months ended September 29, 2012 and October 1, 2011:
|  | Classification of gain (loss) |  | Amount of gain (loss) recognized in income |
|  | recognized in income |  | 2012 |  | 2011 |
FX forward contracts |  | Other expense, net |  | $ | 1.8 |  | $ | (35.2 | )
FX embedded derivatives |  | Other expense, net |  | (1.8 | ) | 3.8 |
|  |  |  | $ | — |  | $ | (31.4 | )
The following summarizes the effect of derivative financial instruments not designated as cash flow hedging relationships on the condensed consolidated statements of operations for the nine months ended September 29, 2012 and October 1, 2011:
|  | Classification of gain (loss) |  | Amount of gain (loss) recognized in income |
|  | recognized in income |  | 2012 |  | 2011 |
FX forward contracts |  | Other expense, net |  | $ | 2.0 |  | $ | (33.6 | )
FX embedded derivatives |  | Other expense, net |  | (3.1 | ) | 1.0 |
|  |  |  | $ | (1.1 | ) | $ | (32.6 | )

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- Definition The entire disclosure for the entity's entire derivative instruments and hedging activities. Describes an entity's risk management strategies, derivatives in hedging activities and non-hedging derivative instruments, the assets, obligations, liabilities, revenues and expenses arising therefrom, and the amounts of and methodologies and assumptions used in determining the amounts of such items. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Statement of Financial Accounting Standard (FAS) -Number 133 -Paragraph 44 -LegacyDoc This reference is SUPERSEDED by the Accounting Standards Codification effective for interim and annual periods ending after September 15, 2009. This reference is included to help users transition from the previous accounting hierarchy and will be removed from future versions of this taxonomy. 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