Derivative Financial Instruments

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Our ongoing business operations expose us to various risks, such as fluctuating interest rates, foreign currency 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 investment or trading purposes. All derivatives are recorded in our consolidated balance sheet at fair value.

Foreign Currency Exchange Rate Risk

We have entered into forward exchange contracts, designated as fair value hedges, to manage our exposure to fluctuating foreign exchange rates on cross-currency intercompany loans. As of December 31, 2019, the total amount of these forward exchange contracts was SGD 601.5 million and $13.4 million. As of December 31, 2018, the total amount of these forward exchange contracts was €10.0 million, SGD 601.5 million and $13.4 million.

In addition, we have entered into several foreign currency contracts, designated as cash flow hedges, for periods of up to eighteen months, intended to hedge the currency risk associated with a portion of our forecasted transactions denominated in foreign currencies. As of December 31, 2019, we had outstanding foreign currency contracts to purchase and sell certain pairs of currencies, as follows:


(in millions)		Sell
Currency	Purchase	USD	Euro
USD	38.4	—	33.6
Yen	6,550.4	37.8	20.6
SGD	29.4	16.5	4.6

In November and December 2019, in conjunction with the repayment of the outstanding long-term borrowings under our Credit Facility denominated in Euro and Yen, we de-designated these borrowings as hedges of our net investments in certain European subsidiaries and Daikyo. The amounts recorded as cumulative translation adjustments within accumulated other comprehensive loss related to these borrowings (prior to de-designation) will remain in accumulated other comprehensive loss indefinitely, unless certain future events occur, such as the disposition of the operations for which the net investment hedges relate.

In December 2019, in conjunction with the repayment of the outstanding long-term borrowings under our Credit Facility denominated in Yen, we entered into a forward exchange contract, designated as a cash flow hedge, to manage our exposure to fluctuating foreign exchange rates. This forward exchange contract matured on December 30, 2019.

In December 2019, we entered into the cross-currency swap for $90 million, which we designated as a hedge of our net investment in Daikyo. The notional amount of the cross-currency swap is ¥9.8 billion ($90 million) and the swap termination date is December 31, 2024. Under the cross-currency swap, we receive floating interest rate payments based on three-month USD LIBOR plus a margin, in return for paying floating interest rate payments based on three-month Yen LIBOR plus a margin.

Commodity Price Risk

Many of our proprietary 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.

From November 2017 through October 2019, we purchased several series of call options for a total of 352,682 barrels of crude oil to mitigate our exposure to such oil-based surcharges and protect operating cash flows with regards to a portion of our forecasted elastomer purchases.

As of December 31, 2019, we had outstanding contracts to purchase 135,967 barrels of crude oil from January 2020 to June 2021 at a weighted-average strike price of $70.71 per barrel.

Effects of Derivative Instruments on Financial Position and Results of Operations

Please refer to Note 12, Fair Value Measurements, for the balance sheet location and fair values of our derivative instruments as of December 31, 2019 and 2018.

The following table summarizes the effects of derivative instruments designated as fair value hedges in our consolidated statements of income for the years ended December 31:


	Amount of Gain Recognized in Income					Location on Statement of Income
($ in millions)	2019		2018
Fair Value Hedges:
Foreign currency hedge contracts	$	(6.9)	$	(6.3)	Other (income) expense
Total	$	(6.9)	$	(6.3)

We recognize in earnings the initial value of forward point components on a straight-line basis over the life of the fair value hedge. The amounts recognized in earnings, pre-tax, for forward point components for the years ended December 31, 2019 and 2018 were $8.7 million and $3.7 million, respectively. We expect to recognize $5.6 million in earnings, pre-tax, for forward point components in 2020.

The following table summarizes the effects of derivative instruments designated as fair value, cash flow, and net investment hedges on OCI and earnings, net of tax, for the years 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)	2019		2018		2019		2018
Fair Value Hedges:
Foreign currency hedge contracts	$	4.8	$	—	$	(4.6)	$	—	Other (income) expense
Total	$	4.8	$	—	$	(4.6)	$	—
Cash Flow Hedges:
Foreign currency hedge contracts	$	0.8	$	0.4	$	(0.9)	$	0.6	Net sales
Foreign currency hedge contracts	(0.2)		2.2		(0.6)		0.3		Cost of goods and services sold

Forward treasury locks	—		—		0.3		0.3		Interest expense
Total	$	0.6	$	2.6	$	(1.2)	$	1.2
Net Investment Hedges:
Foreign currency-denominated debt	$	0.6	$	0.8	$	—	$	—	Other (income) expense
Cross-currency swap	(1.1)		—		—		—		Other (income) expense
Total	$	(0.5)	$	0.8	$	—	$	—

The following table summarizes the effects of derivative instruments designated as fair value, cash flow, and net investment hedges by line item in our consolidated statements of income for the years ended December 31:


($ in millions)	2019		2018
Net sales	$	(0.9)	$	0.6
Cost of goods and services sold	(0.6)		0.3
Other (income) expense	(4.6)		—
Interest expense	0.3		0.3

The following table summarizes the effects of derivative instruments not designated as hedges in our consolidated statements of income for the years ended December 31:


	Amount of Loss (Gain) Recognized in Income					Location on Statement of Income
($ in millions)	2019		2018
Commodity call options	$	0.4	$	(0.1)	Cost of goods and services sold
Total	$	0.4	$	(0.1)

During 2019 and 2018, there was no material ineffectiveness related to our hedges.