Derivative Financial Instruments

9 Months Ended

Sep. 30, 2013

Derivative Financial Instruments

Derivative Financial Instruments

Note 6 — Derivative Financial Instruments

Interest Rate Swap Agreements

In June 2012 and in 2010, we entered into agreements to swap $75 million and $98 million, respectively, of floating rate obligations for fixed rate obligations at 0.6725% and 1.03% against LIBOR in U.S. dollars.  Both swaps were scheduled to mature in March 2014, and were accounted for as cash flow hedges of our floating rate bank loans. With the June 2013 refinancing, the 1.03% interest rate swap totaling $98 million associated with our term loan was dedesignated and $0.4 million of deferred expenses were released from accumulated other comprehensive income.  During the third quarter, this swap was marked to market through interest expense until it was finally terminated and settled in cash for $0.5 million. The principal terms of the remaining $75 million of floating rate swaps match the terms of the new revolving bank loans thereby allowing hedge accounting to continue on these swaps.  During the third quarter of 2013, we entered into new swaps totaling $75 million for maturities in March and September 2016, at fixed rate obligations ranging from 0.81% to 1.034% against LIBOR in U.S. dollars.  The new swaps are accounted for as cash flow hedges of our floating rate bank loans.  The fair value of all interest rate swaps was a liability of $0.7 million at September 30, 2013 and a liability $1.0 million at December 31, 2012.

Foreign Currency Forward Exchange Contracts

A number of our European subsidiaries are exposed to the impact of exchange rate volatility between the U.S. dollar and the subsidiaries’ functional currencies, being either the Euro or the British Pound Sterling.  We entered into contracts to exchange U.S. dollars for Euros and British Pound Sterling through March 2016.  The aggregate notional amount of these contracts was $208.5 million and $201.2 million at September 30, 2013 and December 31, 2012, respectively.  The purpose of these contracts is to hedge a portion of the forecasted transactions of European subsidiaries under long-term sales contracts with certain customers.  These contracts are expected to provide us with a more balanced matching of future cash receipts and expenditures by currency, thereby reducing our exposure to fluctuations in currency exchange rates.  The effective portion of the hedges, gains of $9.1 million and $4.1 million, were recorded in other comprehensive income (“OCI”) for the three months and nine months ended September 30, 2013, respectively, and gains of $4.8 million and $1.7 million for the three- and nine-month periods ended September 30, 2012, respectively.  The carrying amount of these contracts was $9.0 million classified in other assets and $0.6 million in other liabilities on the Condensed Consolidated Balance Sheets at September 30, 2013 and $3.6 million in other assets and $1.6 million classified in other liabilities at December 31, 2012.  During the three months ended September 30, 2013 and 2012, we recognized net losses of $0.2 million and $1.4 million, respectively, which were recorded in gross margin.  During the nine months ended September 30, 2013 and 2012, we recognized net losses of $0.9 million and $2.8 million, respectively, which were recorded in gross margin.  For the quarters and nine-month periods ended September 30, 2013 and 2012, hedge ineffectiveness was immaterial.

In addition, we enter into foreign exchange forward contracts which are not designated as hedges.  These are used to provide an offset to transactional gains or losses arising from the remeasurement of non-functional monetary assets and liabilities such as accounts receivable.  The change in the fair value of the derivatives is recorded in the statement of operations.  There are no credit contingency features in these derivatives.  During the quarters ended September 30, 2013 and 2012, we recognized net foreign exchange gains of $6.8 million and foreign exchange gains of $1.4 million, respectively, in the Condensed Consolidated Statements of Operations.  During the nine-month periods ended September 30, 2013 and 2012, we recognized net foreign exchange gains of $4.3 million and net foreign exchange losses of $1.5 million respectively, in the Consolidated Statements of Operations.  The net foreign exchange impact recognized from these hedges offset the translation exposure of these transactions.  The carrying amount of the contracts for asset and liability derivatives not designated as hedging instruments was $3.7 million classified in other assets and nothing in other liabilities and $3.1 million classified in other assets and $0.1 million in other liabilities on the September 30, 2013 and December 31, 2012 Condensed Consolidated Balance Sheets, respectively.

The change in fair value of our foreign currency forward exchange contracts under hedge designations recorded net of tax within accumulated other comprehensive income for the quarters and nine months ended September 30, 2013 and 2012 was as follows:

	Quarter Ended September 30,						Nine Months Ended September 30,
(In millions)	2013			2012			2013		2012
Unrealized (losses) gains at beginning of period, net of tax	$	(0.9	)	$	(5.9	)	$	2.4	$	(4.5	)
Losses reclassified to net sales	0.1			0.8			0.7		1.7
Increase in fair value	7.5			3.6			3.6		1.3
Unrealized gains (losses) at end of period, net of tax	$	6.7		$	(1.5	)	$	6.7	$	(1.5	)

We expect to reclassify $3.7 million of unrealized gains into earnings over the next twelve months as the hedged sales are recorded.