Derivative Financial Instruments

12 Months Ended

Dec. 31, 2013

Derivative Financial Instruments

Derivative Financial Instruments

Note 12 — 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.  As a result of our refinancing of the bank loan, we de-designated the notional $98 million swap which resulted in a charge of $0.4 million.   In September, we terminated the swap and settled for cash of $0.5 million.  Also in September, we entered into three new interest rate swaps, whereby we pay a fixed rate in exchange for floating LIBOR.  The maturity dates of the new swaps are from March 2016 to September 2016 at an average rate of 0.81567%.

All swaps are accounted for as cash flow hedges of our floating rate bank loans.  To ensure the swaps were highly effective, all of the principal terms of the swaps matched the terms of the bank loans.  The remaining balance of the swaps at December 31, 2013 was approximately $150 million.  The fair value of all interest rate swaps was a liability of $0.6 million and $1.0 million at December 31, 2013 and 2012, respectively.

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 June 2016.  The aggregate notional amount of these contracts was $187.1 million and $201.2 million at December 31, 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 was a gain of $7.9 million, $6.4 million and $2.9 million, for the years ended December 31, 2013, 2012 and 2011, respectively and are recorded in other comprehensive income (“OCI”).  At December 31, 2013, $11.5 million of the carrying amount of these contracts was classified in other assets and $0.6 million in other liabilities on the consolidated balance sheets and $3.6 million in other assets and $1.6 million classified in other liabilities at December 31, 2012.  During the years ended December 31, 2013, 2012 and 2011, we recognized a net gain of $0.4 million, a net loss of $3.1 million and a net gain of $3.1 million, respectively, recorded in gross margin.  For the three years ended December 31, 2013, 2012 and 2011, 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 years ended December 31, 2013, 2012 and 2011, we recognized a net foreign exchange gain of $7.6 million, a gain of $5.3 million, and a loss of $4.8 million, respectively, in the consolidated statements of operations. The carrying amount of the contracts for asset and liability derivatives not designated as hedging instruments was $2.6 million classified in other assets and $0.1 million in other liabilities and $3.1 million classified in other assets and $0.1 million in other liabilities on the December 31, 2013 and 2012 consolidated balance sheets, respectively.

The activity in “accumulated other comprehensive income (loss)” related to foreign currency forward exchange contracts for the years ended December 31, 2013, 2012 and 2011 was as follows:

(In millions)	2013			2012			2011
Unrealized gains (losses) at beginning of period	$	2.4		$	(4.5	)	$	(0.2	)
(Losses) gains reclassified to net sales	(0.3		)	2.4			(2.2		)
Increase (decrease) in fair value, net of tax of $2.8 million, $1.9 million and ($0.8) million in 2013, 2012 and 2011 respectively	5.1			4.5			(2.1		)
Unrealized gains (losses) at end of period	$	7.2		$	2.4		$	(4.5	)

Unrealized gains of $4.8 million recorded in “accumulated other comprehensive income,” net of tax of $2.3 million, as of December 31, 2013 are expected to be reclassified into earnings over the next twelve months as the hedged sales are recorded.  The impact of credit risk adjustments was immaterial for the three years.