Graco 2012 Annual Report Download - page 82

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76
The fair values of outstanding derivatives that are not designated as hedges for accounting purposes were not material as of
December 31, 2012 and 2011.
The Company is not a party to any derivatives that require collateral to be posted prior to settlement. During 2012, the Company
entered into fixed-for-floating interest rate contracts with third-party financial institutions for $500.0 million principal amount of
medium-term notes due 2020. During the term of these contracts, the Company will receive semi-annual interest payments from
the counterparties based on a fixed annual interest rate of 4.70%; and, concurrently, the Company will make semi-annual interest
payments at a rate indexed to the LIBOR. During 2011, the Company, at its option, terminated certain interest rate swap contracts
that were previously accounted for as fair value hedges. See Footnote 9 for further details.
Fair Value Hedges
The pretax effects of derivative instruments designated as fair value hedges on the Company’s Consolidated Statements of
Operations for 2012, 2011 and 2010 were as follows (in millions):
Derivatives in fair value relationships Location of gain (loss)
recognized in income
Amount of gain (loss) recognized in income
2012 2011 2010
Interest rate swaps Interest expense, net $ (4.0) $ 16.2 $ 23.9
Fixed-rate debt Interest expense, net $ 4.0 $ (16.2) $ (23.9)
The Company did not realize any ineffectiveness related to fair value hedges during 2012, 2011 and 2010.
Cash Flow Hedges
The pretax effects of derivative instruments designated as cash flow hedges on the Company’s Consolidated Statements of
Operations and AOCI for 2012, 2011 and 2010 were as follows (in millions):
Derivatives in cash flow hedging relationships Location of gain (loss)
recognized in income
Amount of gain (loss) reclassified from AOCI into income
2012 2011 2010
Foreign exchange contracts on inventory-
related purchases Cost of products sold $ (0.1) $ (5.1) $ (1.8)
Foreign exchange contracts on intercompany
borrowings Interest expense, net (0.1)(0.7) 0.5
Forward interest rate swaps Interest expense, net (0.1) — —
Commodity swap Cost of products sold (2.9) — —
$(3.2) $ (5.8) $ (1.3)
Derivatives in cash flow hedging relationships
Amount of gain (loss) recognized in AOCI
2012 2011 2010
Foreign exchange contracts on inventory-related purchases $ (1.7) $ (2.8) $ (1.4)
Foreign exchange contracts on intercompany borrowings (2.1) 1.8 4.3
Forward interest rate swaps (2.5) — —
Commodity swap (2.9) — —
$(9.2) $ (1.0) $ 2.9
During 2012, the Company entered into forward interest rate swap contracts with certain counterparties for an aggregate $250.0
million notional amount (the "Forward Swaps") to swap floating LIBOR rates with a weighted-average fixed rate of 1.8%. The
Forward Swaps had original maturities in March 2013. The Forward Swaps were intended to fix the "risk-free" component of the
interest rate of the Company's forecasted debt issuances that were probable of occurring at the time the Forward Swaps were
entered into. In November 2012, the Forward Swaps were settled upon the issuance of the $350.0 million principal amount of
2.05% medium-term notes due 2017 (the “2017 Notes”). The Company determined that the Forward Swaps met the hedge
accounting criteria under the relevant authoritative guidance, and accordingly, the Forward Swaps are accounted for as cash flow
hedges. Upon the settlement of the Forward Swaps, the Company recognized pretax losses of $2.5 million in AOCI, and the
Company will reclassify these losses into earnings as interest expense over the term of the instruments the Forward Swaps were
intended to hedge.