Derivative Instruments and Risk Management

12 Months Ended

Dec. 31, 2015

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Instruments and Risk Management

3. Derivative Instruments and Risk Management

Changes in interest rates, foreign exchange rates, the price of the Common Stock and commodity prices expose the Company to market risk.  The Company manages these risks by the use of derivative instruments, such as cash flow and fair value hedges, diesel hedge contracts, equity derivatives and foreign exchange forward contracts.  The Company does not use derivatives for trading or speculative purposes.

The Company formally designates and documents qualifying instruments as hedges of underlying exposures when it enters into derivative arrangements.  Changes in the fair value of derivatives designated as hedges and qualifying for hedge accounting are recorded in other comprehensive income and reclassified into earnings during the period in which the hedged exposure affects earnings.  The Company reviews the effectiveness of its hedging instruments on a quarterly basis.  If the Company determines that a derivative instrument is no longer highly effective in offsetting changes in fair values or cash flows, it recognizes the hedge ineffectiveness in current period earnings and discontinues hedge accounting with respect to the derivative instrument.  Changes in the fair value of derivatives not designated as hedges or those not qualifying for hedge accounting are recognized in current period earnings.  Upon termination of cash flow hedges, the Company reclassifies gains and losses from other comprehensive income based on the timing of the underlying cash flows, unless the termination results from the failure of the intended transaction to occur in the expected timeframe.  Such untimely transactions require immediate recognition in earnings of gains and losses previously recorded in other comprehensive income.

During 2015 and 2014, the Company used derivative instruments to mitigate risk, some of which were designated as hedging instruments.  The tables following the discussion of the derivative instruments below summarize the fair value of the Company’s derivative instruments and the effect of derivative instruments on the Company’s consolidated statements of income and on other comprehensive income.

Derivatives Designated as Hedging Instruments

Diesel Fuel Hedges

The Company uses independent freight carriers to deliver its products.  These carriers currently charge the Company a basic rate per mile for diesel fuel price increases.  During 2015 and 2014, the Company entered into hedge agreements with counterparties to mitigate the volatility of diesel fuel prices, and not to speculate in the future price of diesel fuel.  Under the hedge agreements, the Company agreed to pay a fixed price per gallon of diesel fuel determined at the time the agreements were executed and to receive a floating rate payment that is determined on a monthly basis based on the average price of the Department of Energy’s Diesel Fuel Index during the applicable month and is designed to offset any increase or decrease in fuel costs that the Company pays to it common carriers.  The agreements covered approximately 63% of the Company’s 2015 diesel fuel requirements and are expected to cover approximately 32% of the Company’s estimated diesel fuel requirements for 2016.  These diesel fuel hedge agreements qualify for hedge accounting.  Therefore, changes in the fair value of such agreements are recorded under Accumulated Other Comprehensive Income (Loss) on the balance sheet.

Foreign Currency

The Company is subject to exposure from fluctuations in foreign currency exchange rates, primarily U.S. Dollar/Euro, U.S. Dollar/ Pound, U.S. Dollar/Canadian Dollar, U.S. Dollar/Mexican Peso, U.S. Dollar/Australian Dollar, U.S. Dollar/Brazilian Real and U.S. Dollar/Chinese Yuan.  

The Company enters into forward exchange contracts to reduce the impact of foreign exchange rate fluctuations related to anticipated but not yet committed sales or purchases denominated in U.S. Dollar, Canadian Dollar, Pound and Euro.  The Company entered into forward exchange contracts to protect itself from the risk that, due to fluctuations in currency exchange rates, it would be adversely affected by net cash outflows.  The face value of the unexpired contracts as of December 31, 2015 totaled $151.2 in U.S. Dollars, of which $118.0 qualify as foreign currency cash flow hedges and, therefore, changes in the fair value of the contracts are recorded in Other Comprehensive Income (Loss) and reclassified to earnings when the hedged transaction affected earnings.  

Interest Rate Swaps

On December 9, 2014, the Company entered into interest rate swap agreements that effectively convert the interest rate on the $300.0 aggregate principal amount of 2.45% senior notes, due December 15, 2019, to a floating rate of three-month LIBOR plus a fixed spread of 0.756%.  These interest rate swap agreements have been designated as hedges of the changes in fair value of the underlying debt obligation attributable to changes in interest rates and are accounted as fair value hedges. The fair value of these interest rate swap agreements is reflected in the Consolidated Balance Sheet within Other Assets or Deferred and Other Long-term Liabilities, with an offsetting amount recorded in long-term debt to adjust the carrying amount of the hedged debt obligation.    

Derivatives not Designated as Hedging Instruments

Equity Derivatives

The Company has entered into equity derivative contracts covering the Common Stock in order to minimize its liability under its Executive Deferred Compensation Plan resulting from changes in the quoted fair values of the Common Stock to participants who have investments under the Plan in a notional Common Stock fund.  The contracts are settled in cash.  Since the equity derivatives contracts do not qualify for hedge accounting,the Company is required to mark such contracts to market throughout the contract term and record changes in fair value in the consolidated statement of income.

The following tables summarize the fair value of the Company’s derivative instruments and the effect of such derivative instruments on the Company’s Consolidated Statements of Income and on Other Comprehensive Income (“OCI”):

		Notional Amount
		December 31,		Fair Value at December 31,
	Balance Sheet Location	2015		2015			2014
Derivatives designated as hedging instruments
Asset Derivatives
Foreign exchange contracts	Other current assets	$	77.2	$	5.0		$	2.8
Foreign exchange contracts	Other assets	$	29.9		1.3			0.0
Interest rate swap	Other assets	$	300.0		1.3			0.0
Total assets				$	7.6		$	2.8
Liability Derivatives
Diesel fuel contracts	Accounts payable and accrued expenses	2.0 gallons		$	1.9		$	4.4
Foreign exchange contracts	Deferred and other long-term liabilities	$	10.9		0.3			0.0
Interest rate swap	Deferred and other long-term liabilities	Not applicable			0.0			0.9
Total liabilities				$	2.2		$	5.3
Derivatives not designated as hedging      instruments
Asset Derivatives
Equity derivatives	Other current assets	Not applicable		$	0.0		$	2.8
Foreign exchange contracts	Other current assets	$	33.2		1.8			0.0
Total assets				$	1.8		$	2.8
Liability Derivatives
Equity derivatives	Other current liabilities	$	32.4	$	0.1		$	0.0
Total liabilities				$	0.1		$	0.0
		Amount of Gain (Loss) Recognized in OCI
		from Derivatives
	Other Comprehensive Income (Loss)	For the Year Ended December 31,
	Location	2015		2014			2013
Derivatives designated as hedging instruments
Diesel fuel contracts (net of taxes)	Other comprehensive income (loss)	$	1.5	$	(3.0	)	$	0.1
Foreign exchange contracts (net of taxes)	Other comprehensive income (loss)		3.2		1.9			0.2
Total gain (loss) recognized in OCI		$	4.7	$	(1.1	)	$	0.3
		Amount of Gain (Loss) Recognized in Income
		For the Year Ended December 31,
	Income Statement Location	2015		2014			2013
Derivatives not designated as hedging     instruments
Equity derivatives	Selling, general and administrative expenses	$	2.1	$	4.7		$	5.3
Foreign exchange contracts	Other income (expense), net		3.4		0.0			(0.1	)
Total gain (loss) recognized in income		$	5.5	$	4.7		$	5.2

The notional amount of a derivative instrument is the nominal or face amount used to calculate payments made on that instrument.  The fair values of the derivative instruments disclosed above were measured based on Level 2 inputs (observable market-based inputs or unobservable inputs that are corroborated by market data).