Derivative Financial Instruments

6 Months Ended

Jun. 30, 2013

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

In February 2013, we borrowed $42.8 million pursuant to a five-year term loan with a variable interest rate, related to the purchase of our new corporate office and research building. In anticipation of this debt, we entered into a forward-start interest rate swap for the same notional amount to hedge the variability in cash flows due to changes in the applicable interest rate over the stated period. Under this swap, we 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 this swap as a cash flow hedge.

We also have an interest rate swap agreement outstanding as of June 30, 2013, that is designated as a cash flow hedge to protect against volatility in the interest rate payable on $25.0 million of floating rate notes maturing on July 28, 2015 (“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 Japanese Yen (“Yen”) denominated purchases of inventory from Daikyo Seiko Ltd. (“Daikyo”) made by West in the United States. As of June 30, 2013, there were six monthly contracts outstanding at ¥200.8 million ($2.5 million) each, for an aggregate notional amount of ¥1.2 billion ($15.0 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 June 30, 2013, there were six monthly contracts outstanding at an average monthly amount of $1.1 million, for an aggregate notional amount of $6.8 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 June 30, 2013, there were six monthly contracts outstanding at an average monthly amount of ¥46.2 million (approximately $0.5 million), for an aggregate notional amount of ¥185.0 million ($1.9 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 June 30, 2013, there were six monthly contracts outstanding at $1.4 million each, for an aggregate notional amount of $8.4 million.

A portion of our debt consists of borrowings denominated in currencies other than the U.S. dollar. We designated our €82.1 million Euro-denominated debt as a hedge of our net investment in certain European subsidiaries. A cumulative foreign currency translation gain of $0.3 million pre-tax ($0.2 million after tax) on this debt was recorded within accumulated other comprehensive loss as of June 30, 2013. We have also designated our ¥500.0 million Yen-denominated note payable as a hedge of our net investment in a Japanese affiliate. At June 30, 2013, there was a cumulative foreign currency translation gain on this Yen-denominated debt of $0.3 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 February 2013, we purchased a series of call options for a total of 58,000 barrels of crude oil 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 December 2013. With these contracts we may 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 three and six months ended June 30, 2013, we recorded a $0.1 million loss in cost of goods and services sold related to these outstanding call options. During the three and six months ended June 30, 2012, a loss of $0.1 million was recorded in cost of goods and services sold relating to 2012 crude-oil options.

Effects of Derivative Instruments on Financial Position and Results of Operations

Refer to Note 5, Fair Value Measurements, for the balance sheet location and fair values of our derivative instruments as of June 30, 2013 and December 31, 2012.

The following tables summarize the effects of derivative instruments designated as hedges on other comprehensive income (“OCI”) and earnings, net of tax:

	Amount of Gain (Loss) Recognized in OCI for						Amount of Loss Reclassified from Accumulated OCI into Income for				Location of Loss Reclassified from Accumulated OCI into Income
	Three Months Ended June 30,						Three Months Ended June 30,
($ in millions)	2013			2012			2013		2012
Cash Flow Hedges:
Foreign currency hedge contracts	$	(0.1	)	$	—		$	—	$	—	Net sales
Foreign currency hedge contracts	(1.0		)	0.6			0.9		—		Cost of goods and services sold
Interest rate swap contracts	0.4			(1.0		)	0.4		0.8		Interest expense
Forward treasury locks	—			(2.8		)	0.1		—		Interest expense
Total	$	(0.7	)	$	(3.2	)	$	1.4	$	0.8
Net Investment Hedges:
Foreign currency-denominated debt	$	(1.0	)	$	4.1		$	—	$	—	Foreign exchange and other
Total	$	(1.0	)	$	4.1		$	—	$	—

	Amount of Gain (Loss) Recognized in OCI for						Amount of Loss Reclassified from Accumulated OCI into Income for				Location of Loss Reclassified from Accumulated OCI into Income
	Six Months Ended June 30,						Six Months Ended June 30,
($ in millions)	2013			2012			2013		2012
Cash Flow Hedges:
Foreign currency hedge contracts	$	0.2		$	—		$	—	$	—	Net sales
Foreign currency hedge contracts	(2.7		)	0.3			1.5		—		Cost of goods and services sold
Interest rate swap contracts	0.5			(1.4		)	0.8		1.5		Interest expense
Forward treasury locks	—			(2.8		)	0.1		—		Interest expense
Total	$	(2.0	)	$	(3.9	)	$	2.4	$	1.5
Net Investment Hedges:
Foreign currency-denominated debt	$	1.4		$	2.4		$	—	$	—	Foreign exchange and other
Total	$	1.4		$	2.4		$	—	$	—

For the three and six month periods ended June 30, 2013 and 2012, there was no material ineffectiveness related to our cash flow and net investment hedges.