DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

9 Months Ended

Sep. 30, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to market risk related to potential fluctuations in foreign currency exchange rates, interest rates and fuel prices. The Company’s New Zealand JV uses derivative financial instruments to mitigate the financial impact of exposure to these risks.

Accounting for derivative financial instruments is governed by Accounting Standards Codification Topic 815, Derivatives and Hedging, (“ASC 815”). In accordance with ASC 815, the Company records its derivative instruments at fair value as either assets or liabilities in the Consolidated Balance Sheets. Changes in the instruments’ fair value are accounted for based on their intended use. Gains and losses on derivatives that are designated and qualify for cash flow hedge accounting are recorded as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings when the hedged transaction materializes. The ineffective portion of any hedge as well as changes in the fair value of derivatives not designated as hedging instruments and those which are no longer effective as hedging instruments, are recognized immediately in earnings. The Company’s hedge ineffectiveness was immaterial for all periods presented.

Foreign Currency Exchange and Option Contracts

The functional currency of the New Zealand JV is the New Zealand dollar. These operations are exposed to foreign currency risk on export sales and ocean freight payments which are predominately denominated in U.S. dollars. The New Zealand JV typically hedges 50 percent to 90 percent of its estimated foreign currency exposure with respect to the following three months forecasted sales and purchases, 50 percent to 75 percent of forecasted sales and purchases for the forward three to 12 months and up to 50 percent of the forward 12 to 18 months.

The fair value of foreign currency exchange contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract using a risk-free interest rate. The fair value of foreign currency option contracts is based on a mark-to-market calculation using the Black Scholes option pricing model.

Interest Rate Swaps

The Company uses interest rate swaps to manage the New Zealand JV’s exposure to interest rate movements on its variable rate debt attributable to changes in the New Zealand Bank bill rate. By converting a portion of these borrowings from floating rates to fixed rates the Company has reduced the impact of interest rate changes on its expected future cash outflows. As of September 30, 2014, the Company’s long-term interest rate contracts hedged 81 percent of the New Zealand JV’s variable rate debt and had maturity dates through January 2020.

Fuel Hedge Contracts

The Company uses fuel swap contracts to manage its New Zealand JV’s exposure to changes in New Zealand’s domestic diesel prices. The fuel swaps are quoted by domestic banks in New Zealand dollar price terms. As of September 30, 2014 all of the contracts had maturities of less than one year. The fair value of the fuel swap contracts is determined by a mark-to-market valuation which estimates fair value by discounting the difference between the contracted forward price and the current forward price for the residual maturity of the contract. Due to the low volume of diesel fuel purchases made by the New Zealand JV, the Company decided to no longer hedge its diesel fuel purchases effective November 2013.

The following tables demonstrate the impact of the Company’s derivatives on the Consolidated Statements of Income and Comprehensive Income for the three and nine months ended September 30, 2014 and 2013.

		Three Months Ended September 30,
	Income Statement Location	2014			2013
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive income (loss)	$	(2,537	)	$	2,602
	Other operating (income) expense	—			619
Foreign currency option contracts	Other comprehensive income (loss)	(2,227		)	832
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Other operating (income) expense	$	—		$	(360	)
Foreign currency option contracts	Other operating (income) expense	—			(480		)
Interest rate swaps	Interest and miscellaneous (expense) income, net	(1,765		)	2,079
Fuel hedge contracts	Cost of sales (benefit)	(62		)	162

		Nine Months Ended September 30,
	Income Statement Location	2014			2013
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive income (loss)	$	(1,868	)	$	1,093
	Other operating (income) expense	—			619
Foreign currency option contracts	Other comprehensive income (loss)	(2,006		)	468
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Other operating (income) expense	$	25		$	(1,786	)
Foreign currency option contracts	Other operating (income) expense	7			1,011
Interest rate swaps	Interest and miscellaneous (expense) income, net	(3,628		)	4,729
Fuel hedge contracts	Cost of sales (benefit)	163			14

During the next 12 months, the amount of the September 30, 2014 AOCI balance, net of tax, expected to be reclassified into earnings as a result of the maturation of the Company’s derivative instruments is a loss of approximately $1.5 million.

The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets:

	Notional Amount
	September 30, 2014		December 31, 2013
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	$	24,810	$	32,300
Foreign currency option contracts	70,500		38,000
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	$	—	$	1,950
Foreign currency option contracts	—		4,000
Interest rate swaps	180,858		183,851
Fuel hedge contracts (in thousands of barrels)	1		38

The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets:

	Location on Balance Sheet	Fair Value Assets (Liabilities) (a)
		September 30, 2014			December 31, 2013
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Prepaid and other current assets	$	—		$	915
	Other current liabilities	(696		)	—
	Other non-current liabilities	(181		)	—
Foreign currency option contracts	Prepaid and other current assets	134			673
	Other assets	89			—
	Other current liabilities	(1,555		)	(214		)
	Other non-current liabilities	(164		)	—
Derivatives not designated as hedging instruments:
Foreign currency exchange contracts	Prepaid and other current assets	$	—		$	25
Foreign currency option contracts	Prepaid and other current assets	—			8
Interest rate swaps	Other non-current liabilities	(5,519		)	(4,659		)
Fuel hedge contracts	Prepaid and other current assets	—			160
	Other current liabilities	(3		)	—
Total derivative contracts:
Prepaid and other current assets		$	134		$	1,781
Other assets		89			—
Total derivative assets		223			1,781
Other current liabilities		(2,254		)	(214		)
Other non-current liabilities		(5,864		)	(4,659		)
Total derivative liabilities		$	(8,118	)	$	(4,873	)

(a) See Note 11 — Fair Value Measurements for further information on the fair value of our derivatives including their classification within the fair value hierarchy.

Offsetting Derivatives

Derivative financial instruments are presented at their gross fair values in the Consolidated Balance Sheets. The Company’s derivative financial instruments are not subject to master netting arrangements which would allow the right of offset.