Note 6 — Derivative Financial Instruments

Interest Rate Swap and Interest Lock Agreements

As of June 30, 2018, the Company had interest rate swaps, having a combined notional value of $50.0 million, that swap floating rate obligations for fixed rate obligations at an average rate of 1.09% against LIBOR in U.S. dollars. Both swaps mature in September 2019. The swaps are accounted for as cash flow hedges of our floating rate bank loan. To ensure the swaps were highly effective, all of the critical terms of the swaps matched the terms of the bank loan. The fair value of the interest rate swaps was an asset of $0.9 million and $0.8 million at June 30, 2018 and December 31, 2017, respectively.

At June 30 2018, we had interest swaps related to European debt obligations which had a combined notional value of approximately €52.9 million. These derivatives swapped floating rate obligations for fixed rate obligations at a weighted average rate of 0.51% against Euribor in Euros. The swaps amortize through the final maturities of the obligations on June 30, 2023 and June 30, 2024, in annual installments. The derivatives are accounted for as cash flow hedges of the floating rate term loans. To ensure the swaps are highly effective, all of the principal terms of the swap matched the terms of the bank loans. The fair value of the interest rate swaps was a liability of $0.4 million both at June 30, 2018 and December 31, 2017.

The Company had treasury lock agreements to protect against unfavorable movements in the benchmark treasury rate related to the issuance of our 3.95% Senior Unsecured Notes. These hedges were designated as cash flow hedges thus any change in fair value was recorded as a component of other comprehensive income. As part of the issuance of our senior notes, we net settled these derivatives for $10 million in cash. As a result of settling these derivatives the previously deferred gains recorded in other comprehensive income will be released to interest expense over the life of the senior notes. The effect of these settled treasury locks will reduce the effective interest rate on the 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 December 2020, which we account for as cash flow hedges. The aggregate notional amount of these contracts was $399.5 million and $285.4 million at June 30, 2018 and December 31, 2017, 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. For effective portion of the hedges, losses of $20.9 million and $12.5 million, respectively, were recorded in other comprehensive income (“OCI”) for the three and six months ended June 30, 2018, and gains of $18.6 million and $22.0 million for the three and six months ended June 30, 2017, respectively. We classified the carrying amount of these contracts of $5.2 million in other assets and $9.2 million in other liabilities on the Condensed Consolidated Balance Sheets at June 30, 2018 and $14.7 million in other assets and $2.8 million in other liabilities at December 31, 2017. We recognized net gains of $1.1 million and net gains of $3.4 million in gross margin during the three and six months ended June 30, 2018, and losses of $4.2 million and $10.8 million for the three and six months ended June 30, 2017, respectively. For the three and six months ended June 30, 2018 and 2017, respectively, 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 June 30, 2018 and 2017, we recognized net foreign exchange losses of $6.0 million and gains of $9.9 million, respectively, in the Condensed Consolidated Statements of Operations. During the six months ended June 30, 2018 and 2017, we recognized net foreign exchange losses of $4.0 million and gains of $11.4 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 derivatives not designated as hedging instruments was $0.6 million classified in other assets and $1.0 million in other liabilities, and $1.3 million classified in other assets, and $0.1 million in other liabilities on the June 30, 2018 and December 31, 2017 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 six months ended June 30, 2018 and June 30, 2017 was as follows:

	Quarter Ended June 30,						Six Months Ended June 30,
(In millions)	2018			2017			2018			2017
Unrealized gains (losses) at beginning of period, net of tax	$	13.4		$	(18.3	)	$	8.6		$	(25.9	)
(Gains) Losses reclassified to net sales		(0.7	)		3.3			(2.3	)		8.3
(Decrease) Increase in fair value		(15.8	)		13.7			(9.4	)		16.3
Unrealized losses at end of period, net of tax	$	(3.1	)	$	(1.3	)	$	(3.1	)	$	(1.3	)

We expect to reclassify $1.1 million of unrealized losses into earnings over the next twelve months as the underlying hedge item, revenue, is recorded.