Derivative Financial Instruments

9 Months Ended

Sep. 30, 2014

Derivative Financial Instruments [Abstract]

Derivative Financial Instruments

NOTE 14.  DERIVATIVE FINANCIAL INSTRUMENTS

We are exposed to market risk from changes in foreign exchange rates, interest rates and commodity prices that could impact our results of operations, cash flows and financial condition.  We use forward swaps and option contracts to hedge these exposures.  Exposure to individual counterparties is controlled and derivative financial instruments are entered into with a diversified group of major financial institutions.  Forward swaps and option contracts are entered into for periods consistent with underlying exposure and do not constitute positions independent of those exposures.  At inception, hedges that we designate as hedging instruments are formally documented as either (1) a hedge of a forecasted transaction or “cash flow” hedge, or (2) a hedge of the fair value of a recognized liability or asset or “fair value” hedge.  We also formally assess both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in either the fair value or cash flows of the hedged item.  If it is determined that a derivative ceases to be a highly effective hedge, or if the anticipated transaction is no longer probable of occurring, we discontinue hedge accounting, and any future mark-to-market adjustments are recognized in earnings.  We use derivative financial instruments as risk management tools and not for speculative trading purposes.

Counterparty Risk

We only enter into derivative transactions with established counterparties having a credit rating of BBB or better.  We monitor counterparty credit default swap levels and credit ratings on a regular basis.  All of our derivative transactions with counterparties are governed by master International Swap and Derivatives Association agreements (“ISDAs”) with netting arrangements.  These agreements can limit our exposure in situations where we have gain and loss positions outstanding with a single counterparty.  We do not post nor do we receive cash collateral with any counterparty for our derivative transactions.  These ISDAs do not have any credit contingent features; however, a default under our bank credit facility would trigger a default under these agreements.  Exposure to individual counterparties is controlled, and thus we consider the risk of counterparty default to be negligible. 

Commodity Price Risk

We purchase natural gas for use in the manufacturing process and to heat many of our facilities.  As a result, we are exposed to fluctuations in the price of natural gas.  We have a policy to reduce cost volatility for North American natural gas purchases by purchasing natural gas forward contracts and swaps, purchased call options, and zero-cost collars up to 24 months forward to reduce our overall exposure to natural gas price movements.  The contracts are based on forecasted usage of natural gas measured in mmBtu’s.  There is a high correlation between the hedged item and the hedged instrument.  The gains and losses on these transactions offset gains and losses on the transactions being hedged.  These instruments are designated as cash flow hedges.  At September 30, 2014 and December 31, 2013, the notional amount of these hedges was $16.8 million and $20.1 million, respectively.  The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of goods sold in the period during which the underlying gas is consumed.  The mark-to-market gains or losses on ineffective portions of hedges are recognized in cost of goods sold immediately.  The earnings impact of the ineffective portion of these hedges was not material for the third quarter and first nine months of 2014 and 2013.   

Currency Rate Risk – Sales and Purchases

We manufacture and sell our products in a number of countries throughout the world and, as a result, we are exposed to movements in foreign currency exchange rates.  To a large extent, our global manufacturing and sales provide a natural hedge of foreign currency exchange rate movement, as foreign currency expenses generally offset foreign currency revenues.  We manage our cash flow exposures on a net basis and use derivatives to hedge the majority of our unmatched foreign currency cash inflows and outflows.  As of September 30, 2014, our majorpre-hedging foreign currency exposures are to the Canadian dollar, the Chinese Renminbi and the Euro. 

We use foreign currency forward exchange contracts to reduce our exposure to the risk that the eventual net cash inflows and outflows resulting from the sale of products to foreign customers and purchases from foreign suppliers will be adversely affected by changes in exchange rates.  These derivative instruments are used for forecasted transactions and are classified as cash flow hedges.  Cash flow hedges are executed quarterly, generally up to 15 months forward, and allow us to further reduce our overall exposure to exchange rate movements, since gains and losses on these contracts offset gains and losses on the transactions being hedged.  The notional amount of these hedges was $116.0 million and $130.9 million at September 30, 2014 and December 31, 2013, respectively.  Gains and losses on these instruments are recorded in other comprehensive income, to the extent effective, until the underlying transaction is recognized in earnings.  The earnings impact of the ineffective portion of these hedges was not material for the third quarter and first nine months of 2014 and 2013. 

Currency Rate Risk - Intercompany Loans and Dividends

We may use foreign currency forward exchange contracts to hedge exposures created by cross-currency intercompany loans and dividends.  The translation adjustments related to these loans are recorded in other non-operating income or expense.  The offsetting gains or losses on the related derivative contracts are also recorded in other non-operating income or expense.  These contracts are decreased or increased as repayments are made or additional intercompany loans are extended or adjusted for intercompany dividend activity as necessary.  The notional amount of these hedges was $68.6 million and $36.7 million at September 30, 2014 and December 31, 2013, respectively.    

Interest Rate Risk

We utilize interest rate swaps to minimize the fluctuations in earnings caused by interest rate volatility.  As a result of interest rate fluctuations, interest expense on variable-rate liabilities will increase or decrease. The following table summarizes our interest rate swaps (dollar amounts in millions):

Trade Date	Notional Amount	Interest Rate Paid		Coverage Period	Risk Coverage
March 31, 2011	$100.0	2.303	%	March 2011 to November 2015	Term Loan A
March 31, 2011	$200.0	2.523	%	March 2011 to November 2015	Term Loan B
March 27, 2012	$250.0	1.928	%	March 2012 to March 2018	Term Loan B
March 27, 2012	$200.0	2.810	%	November 2015 to March 2018	Term Loan B
April 16, 2013	$250.0	1.398	%	November 2015 to March 2018	Term Loan A

Under the terms of the Term Loan A swaps we receive 3-month LIBOR and pay a fixed rate over the hedged period.  Under the terms of the Term Loan B swaps, we receive the greater of 3-month LIBOR or the 1% LIBOR Floor and pay a fixed rate over the hedged period.  These swaps are designated as cash flow hedges against changes in LIBOR for a portion of our variable rate debt. 

Financial Statement Impacts

The following tables detail amounts related to our derivatives as of September 30, 2014 and December 31, 2013. Our derivative assets not designated as hedging instruments were not material at September 30, 2014 and December 31, 2013.  Our derivative liabilities not designated as hedging instruments were not material at September 30, 2014 and were $0.6 million at December 31, 2013.  The derivative asset and liability amounts below are shown in gross amounts; we have not netted assets with liabilities.

	Derivative Assets			Derivative Liabilities
		Fair Value			Fair Value
	Balance Sheet   Location	September 30, 2014	December 31, 2013	Balance Sheet   Location	September 30, 2014	December 31, 2013
Derivatives designated as hedging instruments
Natural gas commodity contracts	Other current assets	$ 0.2	$ 0.7	Accounts payable and accrued expenses	$ 0.5	$ 0.2
Foreign exchange contracts	Other current assets	3.8	5.2	Accounts payable and accrued expenses	0.6	-
Foreign exchange contracts	Other non-current assets	0.6	0.6	Other long-term liabilities	0.1	-
Interest rate swap contracts	Other non-current assets	2.8	4.6	Other long-term liabilities	9.4	12.5
Total derivatives designated as hedging instruments		$ 7.4	$ 11.1		$ 10.6	$ 12.7

	Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (“AOCI”) (Effective Portion)(a)		Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
	Nine Months Ended			Three Months Ended		Nine Months Ended
	September 30,			September 30,		September 30,
	2014	2013		2014	2013	2014	2013
Derivatives in Cash Flow Hedging Relationships
Natural gas commodity contracts	($0.3)	($0.5)	Cost of goods sold	($0.2)	($0.3)	$ 0.9	($2.3)
Foreign exchange contracts – purchases	0.6	1.9	Cost of goods sold	0.3	0.7	0.8	0.8
Foreign exchange contracts – sales	3.0	-	Net sales	0.8	-	3.5	-
Interest rate swap contracts	(6.6)	(10.6)	Interest Expense	-	-	-	-
Total	($3.3)	($9.2)		$ 0.9	$ 0.4	$ 5.2	($1.5)

(a) As of September 30, 2014 the amount of existing gains in AOCI expected to be recognized in earnings over the next twelve months is $2.9 million. 

	Location of Gain (Loss) Recognized in Income on Derivatives (Ineffective Portion) (a)
Derivatives in Cash Flow Hedging Relationships
Natural gas commodity contracts	Cost of goods sold
Foreign exchange contracts – purchases and sales	SG&A expense
Interest rate swap contracts	Interest expense

(a) The amount recognized in income related to the ineffective portion of the hedging relationships was immaterial for the third quarter and first nine months of 2014 and 2013.  No gains or losses are excluded from the assessment of the hedge effectiveness.

The amount of pre-tax gain recognized in income for derivative instruments not designated as hedging instruments was $8.9 million for the third quarter and $6.5 million for the first nine months of 2014.  No gain or loss was recognized in the third quarter or first nine months of 2013.