Derivative Financial Instruments

3 Months Ended

Mar. 31, 2017

Derivative Instruments And Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

NOTE 15. 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 an investment-grade credit rating.  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.  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 hedge instrument.  The gains and losses on these instruments offset gains and losses on the transactions being hedged.  These instruments are designated as cash flow hedges.  As of March 31, 2017 and December 31, 2016, the notional amount of these hedges was $10.8 million and $7.4 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 three months ended March 31, 2017 and 2016.   

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.  Our major foreign currency exposures as of March 31, 2017, based on operating profits by currency, are to the Russian ruble, Canadian dollar and Chinese renminbi.

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 $34.6 million as of March 31, 2017 and December 31, 2016.  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 three months ended March 31, 2017 and 2016. 

Currency Rate Risk - Intercompany Loans and Dividends

Where efficient, reliable and liquid markets exist we may utilize foreign currency forward exchange contracts to hedge exposures created by cross-currency intercompany loans and dividends.  The translation adjustments related to these loans and any offsetting gains or losses on the related derivative contracts are recorded in other non-operating income or expense.  We did not have any open hedges related to intercompany loans and dividends as of March 31, 2017 or December 31, 2016.

Interest Rate Risk

We utilize interest rate swaps to minimize the fluctuations in earnings caused by interest rate volatility. Interest expense on variable-rate liabilities increases or decreases as a result of interest rate fluctuations. The following table summarizes our interest rate swaps as of March 31, 2017:

Trade Date	Notional Amount		Coverage Period	Risk Coverage
November 13, 2016	$	250.0	November 2016 to March 2018	Term Loan A
November 13, 2016	$	200.0	November 2016 to March 2021	Term Loan A
April 1, 2016	$	100.0	April 2016 to March 2023	Term Loan B

In connection with the refinancing of our credit facilities in April 2016, $450.0 million of notional amount Term Loan B swaps with a trade date of March 27, 2012 were settled and $10.7 million of losses recorded as a component of accumulated other comprehensive income were reclassified to interest expense during the three months ended March 31, 2016, with the cash payment for the settlement of this swap occurring during the second quarter of 2016.  

Under the terms of the Term Loan A swap with trade dates of November 13, 2016, we receive 1-month LIBOR and pay a fixed rate over the hedged period.  Under the terms of our Term Loan B swap with a trade date of April 1, 2016, we receive the greater of 3-month LIBOR or a 0.75% 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.  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 mark-to-market gains or losses on the ineffective portion of hedges are recognized in interest expense.  There was no earnings impact of the ineffective portion of these hedges for the three months ended March 31, 2017 and 2016.

Financial Statement Impacts

The following tables detail amounts related to our derivatives as of March 31, 2017 and December 31, 2016.  We had no derivative assets or liabilities not designated as hedging instruments as of March 31, 2017 or December 31, 2016.  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	March 31, 2017		December 31, 2016		Balance Sheet Location	March 31, 2017		December 31, 2016
Derivatives designated as hedging instruments
Natural gas commodity contracts	Other current assets	$	0.5	$	1.0	Accounts payable and accrued expenses	$	0.1	$	-
Foreign exchange contracts	Other current assets		0.5		1.4	Accounts payable and accrued expenses		0.2		-
Foreign exchange contracts	Other non-current assets		-		0.2	Other long-term liabilities		-		-
Interest rate swap contracts	Other current assets		0.1		-	Accounts payable and accrued expenses		-		-
Interest rate swap contracts	Other non-current assets		8.3		7.4	Other long-term liabilities		-		0.5
Total derivatives designated as hedging instruments		$	9.4	$	10.0		$	0.3	$	0.5

	Amount of Gain (Loss) Recognized in Accumulated Other Comprehensive Income (“AOCI”) (Effective Portion)						Location of (Loss) GainReclassifiedfrom AOCI into Income (Effective Portion)	Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
	Three Months Ended							Three Months Ended
	March 31,							March 31,
	2017			2016				2017		2016
Derivatives in cash flow hedging relationships
Natural gas commodity contracts	$	(0.5	)	$	(0.6	)	Cost of goods sold	$	0.1	$	(0.8	)
Foreign exchange contracts – purchases		(0.5	)		(0.4	)	Cost of goods sold		-		0.5
Foreign exchange contracts – sales		(0.2	)		(3.4	)	Net sales		0.2		0.8
Interest rate swap contracts		1.5			(3.1	)	Interest expense		-		(10.7	)
Total	$	0.3		$	(7.5	)		$	0.3	$	(10.2	)

As of March 31, 2017, the amount of existing gains in AOCI expected to be recognized in earnings over the next twelve months is $1.0 million. 

There was no pre-tax gain or loss recognized in income for derivative instruments not designated as hedging instruments for the three months ended March 31, 2017 and 2016.