Tecumseh Products 2012 Annual Report Download - page 59

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The following table presents the amounts recorded on our balance sheet for assets and liabilities measured at fair value on a
recurring basis as of December 31, 2012.
(in millions)
Total Fair
Value Level 1 Level 2 Level 3
Assets:
Commodity futures contracts .................................... $ 0.4 $ — $ 0.4 $ —
Foreign currency derivatives..................................... 0.3 — 0.3 —
Balance as of December 31, 2012.................................... $ 0.7 $ — $ 0.7 $ —
Liabilities:
Foreign currency derivatives..................................... (0.9)—
(0.9)—
Balance as of December 31, 2012.................................... $ (0.9)$ — $ (0.9)$ —
The following table presents the amounts recorded on our balance sheet for assets and liabilities measured at fair value on a
recurring basis as of December 31, 2011.
(in millions)
Total Fair
Value Level 1 Level 2 Level 3
Assets:
Commodity futures contracts .................................... $ 0.2 $ — $ 0.2 $ —
Balance as of December 31, 2011............................. 0.2 — 0.2 —
Liabilities:
Commodity futures contracts .................................... $ (3.5)$ — $ (3.5)$ —
Foreign currency derivatives..................................... (13.1)$ — (13.1)$ —
Balance as of December 31, 2011.................................... $ (16.6)$ — $ (16.6)$ —
NOTE 14. Derivative Instruments and Hedging Activities
We are exposed to foreign currency exchange rate risk arising from transactions in the normal course of business, such as sales
to foreign customers not denominated in the seller’s functional currency, foreign operations, and purchases from foreign
suppliers. We actively manage the exposure of our foreign currency exchange rate market risk and market fluctuations in
commodity prices by entering into various hedging instruments, authorized under our policies that place controls on these
activities, with counterparties that are highly rated financial institutions. We are exposed to credit-related losses in the event of
non-performance by these counterparties; however, our exposure is generally limited to the unrealized gains in our contracts
should any of the counterparties fail to perform as contracted.
Our hedging activities primarily involve use of foreign currency forward exchange contracts and commodity futures contracts.
These contracts are designated as cash flow hedges at the inception of the contract. We use derivative instruments only in an
attempt to limit underlying exposure from foreign currency exchange rate fluctuations and commodity price fluctuations to
minimize earnings and cash flow volatility associated with these risks. Decisions on whether to use such contracts are made
based on the amount of exposure to the currency or commodity involved and an assessment of the near-term market value for
each risk. Our policy is not to allow the use of derivatives for trading or speculative purposes. Our primary foreign currency
exchange rate exposures are with the Brazilian Real, the Euro, and the Indian Rupee, against the U.S. Dollar. Our primary
commodity risk is the price risk associated with forecasted purchases of materials used in our manufacturing process.
Cash flow hedges. We recognize all derivative instruments as either assets or liabilities at fair value on the consolidated balance
sheet and formally document relationships between cash flow hedging instruments and hedged items, as well as our risk-
management objective and strategy for undertaking hedge transactions at the inception of the contract. This process includes
linking all derivatives to the forecasted exposure, such as sales to third parties denominated in a non-local currency or a
commodity purchase. For derivative instruments that are designated and qualify as a cash flow hedge, all changes in fair values
of outstanding cash flow hedge derivatives, except the ineffective portion, are recorded in accumulated other comprehensive
income (“AOCI”), until the hedged exposure affects earnings. The effective portions of gains or losses on hedging instruments
are reclassified from AOCI into earnings in the same line item associated with the forecasted transaction. Gains and losses on
the derivative representing either ineffective hedges or hedge components excluded from the assessment of effectiveness are
recognized immediately in earnings. In either case, the derivatives affect cash flow at the time the contract is settled. The
consolidated statement of operations classification of effective hedge results is the same as that of the underlying exposure. The
maximum amount of time we hedge our exposure to the variability in future cash flows for forecasted trade sales and purchases
is eighteen months.