Note 6 — Derivative Financial Instruments

Interest Rate Swap and Interest Lock Agreements

As of September 30, 2017, the Company had agreements to swap $50 million of floating rate obligations for fixed rate obligations at an average of 1.087% against LIBOR in U.S. dollars, which matures in September 2019. The swaps were 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 fair value of the interest rate swaps were assets of $0.6 million and $0.7 million at September 30, 2017 and December 31, 2016, respectively.

In December 2016, we swapped €25.0 million of floating rate obligations for fixed rate obligations at a rate of 0.365% against EURIBOR in Euros. The swap amortizes over seven equal annual installments, which began on June 30, 2017 until the final maturity on June 30, 2023. In April 2017, we swapped €35.0 million of floating rate obligations at a rate of 0.59% against EURIBOR in Euros. The swap amortizes over six unequal annual installments beginning June 30, 2019 until the final maturity on June 30, 2024. Both derivatives are accounted for as cash flow hedges of the floating rate Euro term loan. To ensure the swap is highly effective, all of the principal terms of the swap matched the terms of the bank loan. The fair value of the interest rate swaps were liabilities of $0.4 million and $0.1 million at September 30, 2017 and December 31, 2016, respectively.

The Company also uses treasury locks to protect against unfavorable movements in the benchmark treasury rate related to forecasted debt issuances. In September 2016 and February 2017, the Company entered into interest rate treasury lock agreements with notional values of $150 million and $100 million for the 2017 note issuance. We accounted for these interest rate treasury locks as cash flow hedges so any change in fair value was recorded into other comprehensive income and then amortized into interest expense over the life of the bonds upon issuance. On February 15, 2017, we issued senior notes due 2027 and received $10.0 million in cash in settlement of the derivatives. The amount recorded in other comprehensive income will be released to interest expense over the life of the senior notes. The effect of these treasury locks is to reduce the interest rate on these senior notes by approximately 0.25%.

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 2020, which we account for as cash flow hedges. The aggregate notional amount of these contracts was $317.6 million and $423.8 million at September 30, 2017 and December 31, 2016, respectively. The purpose of these contracts is to hedge a portion of the forecasted transactions of our 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 $9.7 million and $31.7 million, respectively, were recorded in other comprehensive income (“OCI”) for the three and nine months ended September 30, 2017 and losses of $1.4 million and $10.7 million, respectively, were recorded in OCI for the three and nine months ended September 30, 2016. We classified the carrying amount of these contracts of $13.5 million in other assets and $4.3 million in other liabilities on the Condensed Consolidated Balance Sheets at September 30, 2017 and $33.9 million in other liabilities at December 31, 2016. During the three and nine months ended September 30, 2017, we recognized net losses of $0.6 million and $11.4 million in gross margin, respectively. During the three and nine months ended September 30, 2016, we recognized net losses of $5.0 million and $13.5 million in gross margin, respectively. For the quarters and nine months ended September 30, 2017 and 2016, 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 re-measurement 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, 2017 and 2016, we recognized net foreign exchange gains of $4.0 million and $0.8 million, respectively, in the Condensed Consolidated Statements of Operations. During the nine months ended September 30, 2017 and 2016, we recognized net foreign exchange gains of $15.4 million and of $3.4 million, respectively, in the Condensed 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 $0.1 million classified in other assets and $1.6 million in other liabilities and $1.0 million classified in other assets and $0.3 million in other liabilities on the September 30, 2017 and December 31, 2016 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, 2017 and 2016 was as follows:

	Quarter Ended September 30,						Nine Months Ended September 30,
(In millions)	2017			2016			2017			2016
Unrealized losses at beginning of period, net of tax	$	(1.3	)	$	(16.5	)	$	(25.9	)	$	(15.0	)
Losses reclassified to net sales		0.6			4.0			8.9			10.1
Increase (decrease) in fair value		7.2			(1.7	)		23.5			(9.3	)
Unrealized gains (losses) at end of period, net of tax	$	6.5		$	(14.2	)	$	6.5		$	(14.2	)

We expect to reclassify $1.7 million of unrealized gains into earnings over the next twelve months as the hedged sales are recorded.