(13) Financial Instruments

The carrying values of the Company’s debt instruments vary from their fair values. The fair values were determined by reference to the quoted market prices of these securities (Level 2 input based on the GAAP fair value hierarchy). As of December 31, 2013, the aggregate carrying value of the Notes was $1,057.1 million, as compared to an estimated aggregate fair value of $1,077.1 million. As of December 31, 2012, the aggregate carrying value of the 2018 Notes and 2020 Notes was $626.3 million, as compared to an estimated aggregate fair value of $696.6 million.

Derivative Instruments and Hedging Activities

Foreign exchange — The Company uses forwards, swaps and other derivative contracts to reduce the effects of fluctuations in foreign exchange rates on known foreign currency exposures. Gains and losses on the derivative instruments are intended to offset gains and losses on the hedged transaction in an effort to reduce exposure to fluctuations in foreign exchange rates. The principal currencies hedged by the Company include the Mexican peso, various European currencies, the Chinese renminbi, the Thai baht and the Canadian dollar. As of December 31, 2013 and 2012, contracts designated as cash flow hedges with $917.4 million and $836.4 million, respectively, of notional amount were outstanding with maturities of less than eighteen months. As of December 31, 2013 and 2012, the fair value of these contracts was approximately $6.5 million and $19.9 million, respectively. As of December 31, 2013 and 2012, other foreign currency derivative contracts that did not qualify for hedge accounting with $149.2 million and $23.4 million, respectively, of notional amount were outstanding. These foreign currency derivative contracts consist principally of hedges of cash transactions of up to twelve months, hedges of intercompany loans and hedges of certain other balance sheet exposures. As of December 31, 2013 and 2012, the fair value of these contracts was approximately ($0.1) million and zero, respectively.

The fair value of outstanding foreign currency derivative contracts and the related classification in the accompanying consolidated balance sheets are shown below (in millions):


December 31,	2013			2012
Contracts qualifying for hedge accounting:
Other current assets	$	12.4		$	22.3
Other long-term assets		0.7			0.5
Other current liabilities		(6.5	)		(2.8	)
Other long-term liabilities		(0.1	)		(0.1	)

		6.5			19.9

Contracts not qualifying for hedge accounting:
Other current assets		0.4			0.1
Other current liabilities		(0.5	)		(0.1	)

		(0.1	)		—

	$	6.4		$	19.9

Pretax amounts related to foreign currency derivative contracts that were recognized in and reclassified from accumulated other comprehensive loss are shown below (in millions):


For the year ended December 31,	2013			2012		2011
Contracts qualifying for hedge accounting:
Gains (losses) recognized in accumulated other comprehensive loss	$	18.8		$	55.8	$	(50.4	)
(Gains) losses reclassified from accumulated other comprehensive loss		(32.2	)		3.2		12.6

Other comprehensive income (loss)	$	(13.4	)	$	59.0	$	(37.8	)

For the years ended December 31, 2013, 2012 and 2011, net sales includes gains (losses) of $3.9 million, $1.0 million and ($1.7) million, respectively, reclassified from accumulated other comprehensive loss related to foreign currency derivative contracts. For the years ended December 31, 2013, 2012 and 2011, cost of sales includes gains (losses) of $28.3 million, ($4.2) million and ($10.9) million, respectively, reclassified from accumulated other comprehensive loss related to foreign currency derivative contracts.

Interest rate — Historically, the Company used interest rate swap and other derivative contracts to manage its exposure to fluctuations in interest rates. As of December 31, 2013 and 2012, there were no interest rate contracts outstanding. The Company will continue to evaluate, and may use, derivative financial instruments, including forwards, futures, options, swaps and other derivative contracts, to manage its exposures to fluctuations in interest rates in the future.

Commodity prices — Historically, the Company used commodity swap and other derivative contracts to reduce its exposure to fluctuations in certain commodity prices. These derivative instruments were utilized to hedge forecasted inventory purchases, and to the extent that they met hedge accounting criteria, they were accounted for as cash flow hedges. Commodity swap contracts that were not accounted for as cash flow hedges were marked to market with changes in fair value recognized immediately in the accompanying consolidated statements of income (Note 2, “Summary of Significant Accounting Policies”). As of December 31, 2013 and 2012, there were no commodity swap contracts outstanding.

Pretax amounts related to commodity swap contracts that were recognized in and reclassified from accumulated other comprehensive loss are shown below (in millions):


For the year ended December 31,	2012		2011
Contracts qualifying for hedge accounting:
Gains (losses) recognized in accumulated other comprehensive loss	$	0.1	$	(0.5	)
Losses reclassified from accumulated other comprehensive loss		0.2		0.2

Other comprehensive income (loss)	$	0.3	$	(0.3	)

For each of the years ended December 31, 2012 and 2011, cost of sales includes losses of $0.2 million reclassified from accumulated other comprehensive loss related to commodity swap contracts.

As of December 31, 2013 and 2012, pretax net gains of approximately $6.5 million and $19.9 million, respectively, related to the Company’s derivative instruments and hedging activities were recorded in accumulated other comprehensive loss. During the year ending December 31, 2014, the Company expects to reclassify into earnings net gains of approximately $5.9 million recorded in accumulated other comprehensive loss as of December 31, 2013. Such gains will be reclassified at the time that the underlying hedged transactions are realized. For the years ended December 31, 2013, 2012 and 2011, amounts recognized in the accompanying consolidated statements of income related to changes in the fair value of cash flow hedges that were excluded from the Company’s effectiveness assessments and the ineffective portion of changes in the fair value of cash flow and fair value hedges were not material. In addition, the Company recognized tax benefits (expense) of $5.4 million, ($19.0) million and $1.8 million in other comprehensive income (loss) related to its derivative instruments and hedging activities for the years ended December 31, 2013, 2012 and 2011, respectively.

Fair Value Measurements

GAAP provides that fair value is an exit price, defined as a market-based measurement that represents the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Fair value measurements are based on one or more of the following three valuation techniques:


Market:		This approach uses prices and other relevant information generated by market transactions involving identical or comparable assets or liabilities.

Income:		This approach uses valuation techniques to convert future amounts to a single present value amount based on current market expectations.

Cost:		This approach is based on the amount that would be required to replace the service capacity of an asset (replacement cost).

Further, GAAP prioritizes the inputs and assumptions used in the valuation techniques described above into a three-tier fair value hierarchy as follows:


Level 1:		Observable inputs, such as quoted market prices in active markets for identical assets or liabilities that are accessible at the measurement date.

Level 2:		Inputs, other than quoted market prices included in Level 1, that are observable either directly or indirectly for the asset or liability.

Level 3:		Unobservable inputs that reflect the entity’s own assumptions about the exit price of the asset or liability. Unobservable inputs may be used if there is little or no market data for the asset or liability at the measurement date.

The Company discloses fair value measurements and the related valuation techniques and fair value hierarchy level for its assets and liabilities that are measured or disclosed at fair value.

Items measured at fair value on a recurring basis – Fair value measurements and the related valuation techniques and fair value hierarchy level for the Company’s assets and liabilities measured or disclosed at fair value on a recurring basis as of December 31, 2013 and 2012, are shown below (in millions):


December 31, 2013
	Frequency	Asset		Valuation Technique	Level 1		Level 2		Level 3
Foreign currency derivative contracts	Recurring	$	6.4	Market/Income	$	—	$	6.4	$	—


December 31, 2012
	Frequency	Asset		Valuation Technique	Level 1		Level 2		Level 3
Foreign currency derivative contracts	Recurring	$	19.9	Market/Income	$	—	$	19.9	$	—

The Company determines the fair value of its derivative contracts using quoted market prices to calculate the forward values and then discounts such forward values to the present value. The discount rates used are based on quoted bank deposit or swap interest rates. If a derivative contract is in a net liability position, the Company adjusts these discount rates, if required, by an estimate of the credit spread that would be applied by market participants purchasing these contracts from the Company’s counterparties. To estimate this credit spread, the Company uses significant assumptions and factors other than quoted market rates, which would result in the classification of its derivative liabilities within Level 3 of the fair value hierarchy. As of December 31, 2013 and 2012, there were no derivative contracts that were classified within Level 3 of the fair value hierarchy. In addition, there were no transfers in or out of Level 3 of the fair value hierarchy during 2013 and 2012.

For further information on fair value measurements and the Company’s defined benefit pension plan assets, see Note 8, “Pension and Other Postretirement Benefit Plans.”

Items measured at fair value on a non-recurring basis – The Company measures certain assets and liabilities at fair value on a non-recurring basis, which are not included in the table above. As these non-recurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy. As of December 31, 2013, there were no significant assets or liabilities measured at fair value on a non-recurring basis. As a result of the Guilford acquisition in 2012, Level 3 fair value estimates related to property, plant and equipment of $89.9 million and intangible assets of $56.0 million were recorded in the accompanying consolidated balance sheet as of December 31, 2012.

For further information on assets and liabilities measured at fair value on a non-recurring basis, see Note 2, “Summary of Significant Accounting Policies,” and Note 4, “Restructuring.”