Derivative Financial Instruments

12 Months Ended

Dec. 31, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

 Derivative Financial Instruments

Our ongoing business operations expose us to various risks such as fluctuating interest rates, foreign exchange rates and increasing commodity prices. To manage these market risks, we periodically enter into derivative financial instruments such as interest rate swaps, options and foreign exchange contracts for periods consistent with and for notional amounts equal to or less than the related underlying exposures. We do not purchase or hold any derivative financial instruments for speculation or trading purposes. All derivatives are recorded on the balance sheet at fair value.

Interest Rate Risk

During the second quarter of 2012, we entered into two forward treasury lock agreements for a total notional amount of $160.0 million, to protect against changes in the benchmark 10-year Treasury rate during the 30-60 day period leading up to the issuance date of our private placement debt.  We designated these treasury locks as cash flow hedges. On June 19, 2012, the pricing for our private placement debt (refer to Note 11, Debt) was finalized and accordingly, we terminated both treasury lock agreements, resulting in a $4.6 million settlement payment made by us. This amount which was reflected in accumulated other comprehensive income will be expensed over the life of the private placement debt.

In February 2013, we borrowed $42.8 million pursuant to a five-year term loan with a variable interest rate, primarily to finance the construction and acquisition of our new corporate office and research building. In anticipation of this debt, in 2011, we entered into a forward-start interest rate swap to hedge the variability in cash flows due to changes in the applicable interest rate over the five-year period beginning in the first quarter of 2013. Under this swap, we will receive variable interest rate payments based on one-month London Interbank Offering Rates (“LIBOR”) plus a margin in return for making monthly fixed interest payments at 5.41%. We designated the forward-start interest rate swap as a cash flow hedge.

In addition, we have a $25.0 million interest rate swap agreement outstanding as of December 31, 2012, that is designated as a cash flow hedge to protect against volatility in the interest rate payable on our Series B Notes. Under this swap, we receive variable interest rate payments based on three-month LIBOR in return for making quarterly fixed rate payments. Including the applicable margin, the interest rate swap agreement effectively fixes the interest rate payable on the Series B Notes at 5.51%.

Foreign Exchange Rate Risk

During 2012, we entered into several foreign currency hedge contracts that were designated as cash flow hedges of forecasted transactions denominated in foreign currencies, which are described in more detail below.

We entered into a series of foreign currency contracts intended to hedge the currency risk associated with a portion of our forecasted Yen-denominated purchases of inventory from Daikyo Seiko Ltd. (“Daikyo”) made by West in the United States. As of December 31, 2012, there were twelve monthly contracts outstanding at ¥200.8 million ($2.5 million) each, for an aggregate notional amount of ¥2.4 billion ($30.0 million).

We also entered into a series of foreign currency contracts to hedge the currency risk associated with a portion of our forecasted U.S. dollar (“USD”) denominated inventory purchases made by certain European subsidiaries. As of December 31, 2012, there were twelve monthly contracts outstanding at an average monthly amount of $1.2 million, for an aggregate notional amount of $14.0 million.

In addition we entered into a series of foreign currency contracts to hedge the currency risk associated with a portion of our forecasted Yen-denominated inventory purchases made by certain European subsidiaries. As of December 31, 2012, there were nine monthly contracts outstanding at an average monthly amount of ¥43.8 million (approximately $0.5 million), for an aggregate notional amount of ¥394.0 million ($4.6 million).

Lastly, we entered into a series of foreign currency contracts to hedge the currency risk associated with a portion of our forecasted Euro-denominated sales of finished goods by one of our USD functional-currency subsidiaries. As of December 31, 2012, there were twelve monthly contracts outstanding at $1.4 million each, for an aggregate notional amount of $16.8 million.

A portion of our debt consists of borrowings denominated in currencies other than the U.S. dollar. We designated our €81.5 million Euro-denominated notes as a hedge of our net investment in certain European subsidiaries. A cumulative foreign currency translation loss of $7.6 million pre-tax ($4.7 million after tax) on this debt was recorded within accumulated other comprehensive loss as of December 31, 2012. We have also designated our ¥500.0 million Yen-denominated note payable as a hedge of our net investment in a Japanese affiliate. At December 31, 2012, there was a cumulative foreign currency translation loss on this Yen-denominated debt of $0.4 million pre-tax ($0.2 million after tax) which was also included within accumulated other comprehensive loss.

Commodity Price Risk

Many of our Packaging Systems products are made from synthetic elastomers, which are derived from the petroleum refining process. We purchase the majority of our elastomers via long-term supply contracts, some of which contain clauses that provide for surcharges related to fluctuations in crude oil prices. The following economic hedges did not qualify for hedge accounting treatment since they did not meet the highly effective requirement at inception.

In May 2012, we purchased a series of call options for a total of 45,100 barrels of crude oil, intended to mitigate our exposure to such oil-based surcharges and protect operating cash flows with regard to a portion of our forecasted elastomer purchases during the months of July through October 2012. These contracts allow us to benefit from a decline in crude oil prices, as there is no downward exposure other than the $0.1 million premium that we paid to purchase the contracts.

During the year ended December 31, 2012 and 2011, a loss of $0.1 million and a gain of $0.6 million, respectively, was recorded in cost of goods and services sold related to these options. As of December 31, 2012, there were no call options outstanding.

Effects of Derivative Instruments on Financial Position and Results of Operations

Refer to Note 13, Fair Value Measurements, for the balance sheet location and fair values of our derivative instruments as of December 31, 2012 and 2011.

The following table summarizes the effects, net of tax, of derivative instruments designated as hedges on other comprehensive income (“OCI”) and earnings for the year ended December 31:

	Amount of Gain (Loss) Recognized in OCI						Amount of (Gain) Loss Reclassified from Accumulated OCI into Income				Location of Gain (Loss) Reclassified from Accumulated OCI into Income
($ in millions)	2012			2011			2012		2011
Cash Flow Hedges:
Foreign currency hedge contracts	$	(0.2	)	$	(0.3	)	$	—	$	0.3	Net sales
Foreign currency hedge contracts	(0.8		)	—			—		—		Cost of goods and services sold
Interest rate swap contracts	(1.9		)	(4.9		)	2.0		3.2		Interest expense
Forward treasury lock	(2.9		)	—			0.2		—		Interest expense
Total	$	(5.8	)	$	(5.2	)	$	2.2	$	3.5
Net Investment Hedges:
Foreign currency-denominated debt	$	(1.1	)	$	1.3		$	—	$	—	Foreign exchange and other
Total	$	(1.1	)	$	1.3		$	—	$	—

During 2012 and 2011, there was no material ineffectiveness related to our cash flow and net investment hedges.