Derivative Financial Instruments

3 Months Ended

Mar. 31, 2020

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 condensed consolidated balance sheet at fair value.

Foreign 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 both March 31, 2020 and December 31, 2019, the total amount of these forward exchange contracts was Singapore Dollar (“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 March 31, 2020, we had outstanding foreign currency contracts to purchase and sell certain pairs of currencies, as follows:


(in millions)		Sell
Currency	Purchase	USD	Euro
USD	52.7	—	47.0
Yen	9,175.8	45.2	36.2
SGD	59.8	35.2	6.7

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 U.S. Dollar (“USD”) LIBOR plus a margin, in return for paying floating interest rate payments based on three-month Japanese Yen (“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 March 2020, we purchased several series of call options for a total of 374,380 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 March 31, 2020, we had outstanding contracts to purchase 128,191 barrels of crude oil from April 2020 to September 2021, at a weighted-average strike price of $68.06 per barrel.

Effects of Derivative Instruments on Financial Position and Results of Operations

Please refer to Note 10, Fair Value Measurements, for the balance sheet location and fair values of our derivative instruments as of March 31, 2020 and December 31, 2019.

The following table summarizes the effects of derivative instruments designated as fair value hedges on the condensed consolidated statements of income:


	Amount of Gain Recognized in Income
	Three Months Ended March 31,					Location on Statement of Income
($ in millions)	2020		2019
Fair Value Hedges:
Foreign currency hedge contracts	$	(2.0)	$	(1.9)	Other income
Total	$	(2.0)	$	(1.9)

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 three months ended March 31, 2020 and 2019 were $2.0 million and $1.9 million, respectively.

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


	Amount of Gain (Loss) Recognized in OCI for the						Amount of (Gain) Loss Reclassified from Accumulated OCI into Income for the			Location of (Gain) Loss Reclassified from Accumulated OCI into Income
	Three Months Ended March 31,						Three Months Ended March 31,
($ in millions)	2020		2019		2020		2019
Fair Value Hedges
Foreign currency hedge contracts	$	3.6	$	(0.1)	$	(1.3)	$	(3.2)	Other income
Total	$	3.6	$	(0.1)	$	(1.3)	$	(3.2)
Cash Flow Hedges:
Foreign currency hedge contracts	$	0.1	$	0.5	$	(0.2)	$	(0.2)	Net sales
Foreign currency hedge contracts	0.4		(0.1)		—		(0.1)		Cost of goods and services sold


Total	$	0.5	$	0.4	$	(0.2)	$	(0.3)
Net Investment Hedges:
Foreign currency-denominated debt	$	—	$	0.1	$	—	$	—	Other income
Cross-currency swap	(1.2)		—		—		—		Other income
Total	$	(1.2)	$	0.1	$	—	$	—

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


	Three Months Ended March 31,
($ in millions)	2020		2019
Net sales	$	(0.2)	$	(0.2)
Cost of goods and services sold	—		(0.1)
Other income	(1.3)		(3.2)

The following table summarizes the effects of derivative instruments not designated as hedges on the condensed consolidated statements of income:


	Amount of Loss Recognized in Income for the
	Three Months Ended March 31,					Location on Statement of Income
($ in millions)	2020		2019
Commodity call options	$	0.2	$	—	Cost of goods and services sold
Total	$	0.2	$	—

For the three months ended March 31, 2020 and 2019, there was no material ineffectiveness related to our hedges.