NOTE 8: DERIVATIVES AND FAIR VALUE MEASUREMENTS

Derivatives

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are interest rate risk, foreign currency risk, and commodity price risk. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s floating-rate borrowings. We use foreign currency exchange contracts to hedge our Canadian subsidiaries’ variability in cash flows from the forecasted payment of currencies other than the functional currency. From time to time, we may enter into fixed price sales contracts with our customers for certain of our inventory components. We may enter into metal commodity futures and options contracts periodically to reduce volatility in the price of metals. We may also enter into natural gas price swaps to manage the price risk of forecasted purchases of natural gas. The Company currently does not account for its derivative contracts as hedges but rather marks them to market with a corresponding offset to current earnings. The Company regularly reviews the creditworthiness of its derivative counterparties and does not expect to incur a significant loss from the failure of any counterparties to perform under any agreements.

The following table summarizes the location and fair value amount of our derivative instruments reported in our Consolidated Balance Sheets as of September 30, 2014 and December 31, 2013:

Asset Derivatives

Liability Derivatives

September 30, 2014

December 31, 2013

September 30, 2014

December 31, 2013

Balance
Sheet
Location

Fair Value

Balance
Sheet
Location

Fair Value

Balance
Sheet
Location

Fair Value

Balance
Sheet
Location

Fair Value

(In millions)

Derivatives not designated as hedging instruments under ASC 815

Commodity contracts

Prepaid
expenses
and
other
current
assets

—

Prepaid
expenses
and
other
current
assets

—

Other
accrued
liabilities

0.2

Other
accrued
liabilities

0.2

As of September 30, 2014 and December 31, 2013, the Company’s foreign currency exchange contracts had a U.S. dollar notional amount of $2.4 million and $2.2 million, respectively. As of September 30, 2014 and December 31, 2013, the Company had 20 tons and 131 tons, respectively, of nickel futures or option contracts related to forecasted purchases. As of September 30, 2014 and December 31, 2013, the Company had net 1,880 tons and 4,600 tons, respectively, of hot roll steel coil option contracts related to forecasted purchases and sales. The Company has aluminum price swaps related to forecasted purchases, which had a notional amount of 1,465 tons and 195 tons as of September 30, 2014 and December 31, 2013, respectively.

The following table summarizes the location and amount of gains and losses reported in our Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2014 and 2013:


Derivatives not designated as hedging instruments under ASC 815	Location of Gain/(Loss) Recognized in Income on Derivatives	Amount of Gain/(Loss) Recognized in Income on Derivatives
		Three Months Ended September 30,					Nine Months Ended September 30,
		2014			2013		2014		2013
		(In millions)
Metal commodity contracts	Cost of materials sold	$	(0.2	)	$	0.2	$	0.1	$	(0.5	)

Fair Value Measurements

To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

Level 1 – quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access as of the reporting date.

Level 2 – inputs other than quoted prices included within Level 1 that are directly observable for the asset or liability or indirectly observable through corroboration with observable market data.

Level 3 – unobservable inputs, such as internally-developed pricing models for the asset or liability due to little or no market activity for the asset or liability.

The following table presents assets and liabilities measured and recorded at fair value on our Consolidated Balance Sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2014:


	At September 30, 2014
	Level 1		Level 2		Level 3
	(In millions)
Assets
Cash equivalents:
Commercial paper	$	38.6	$	—	$	—

Prepaid and other current assets:
Common stock—available-for-sale investment	$	11.9	$	—	$	—

Liabilities
Mark-to-market derivatives:
Commodity contracts	$	—	$	0.2	$	—


	At December 31, 2013
	Level 1		Level 2		Level 3
	(In millions)
Assets
Cash equivalents:
Commercial paper	$	39.9	$	—	$	—

Prepaid and other current assets:
Common stock – available-for-sale investment	$	20.7	$	—	$	—

Liabilities
Mark-to-market derivatives:
Commodity contracts	$	—	$	0.2	$	—

The fair value of each derivative contract is determined using Level 2 inputs and the market approach valuation technique, as described in ASC 820. The Company has various commodity derivatives to lock in nickel prices for varying time periods. The fair value of derivatives is determined by comparing the spot price of each individual contract to the forward market price for a similar contract as published by the London Metal Exchange as of the valuation date. The Company also has commodity derivatives to lock in hot roll coil and aluminum prices for varying time periods. The fair value of derivatives is determined by comparing the spot price of each individual contract to the forward market price of a similar contract for the commodity as published by the Chicago Mercantile Exchange as of the valuation date. In addition, the Company has numerous foreign exchange contracts to hedge our Canadian subsidiaries’ variability in cash flows from the forecasted payment of currencies other than the functional currency, the Canadian dollar. The Company defines the fair value of foreign exchange contracts as the amount of the difference between the contracted and forward market value at the end of the period. The Company estimates the current market value of foreign exchange contracts by obtaining month-end market quotes of foreign exchange rates and forward rates for contracts with similar terms. The Company uses the exchange rates provided by Reuters. Each contract term varies in the number of months, but on average is between 3 to 12 months in length.

The carrying and estimated fair values of the Company’s financial instruments at September 30, 2014 and December 31, 2013 were as follows:


	At September 30, 2014				At December 31, 2013
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In millions)
Cash and cash equivalents	$	68.6	$	68.6	$	74.0	$	74.0
Restricted cash		1.9		1.9		1.8		1.8
Receivables less provision for allowances, claims and doubtful accounts		468.2		468.2		385.4		385.4
Accounts payable		286.0		286.0		207.2		207.2
Long-term debt, including current portion		1,227.8		1,279.8		1,294.8		1,348.8

The estimated fair value of the Company’s cash and cash equivalents, receivables less provision for allowances, claims and doubtful accounts and accounts payable approximate their carrying amounts due to the short-term nature of these financial instruments. The estimated fair value of the Company’s long-term debt and the current portions thereof is determined by using quoted market prices of Company debt securities (Level 2 inputs).

Assets Held for Sale

The Company had $5.4 million and $4.7 million of assets held for sale, classified within “prepaid expenses and other current assets,” as of September 30, 2014 and December 31, 2013, respectively. The Company recorded zero and $2.0 million of impairment charges in the nine months ended September 30, 2014 and 2013, respectively, related to certain assets held for sale in order to recognize the assets at their fair value less cost to sell in accordance with ASC 360-10-35-43, “Property, Plant and Equipment – Other Presentation Matters.” The fair values less costs to sell of long-lived assets held for sale are assessed each reporting period that they remain classified as held for sale. Any increase or decrease in the held for sale long-lived asset’s fair value less cost to sell is reported as an adjustment to its carrying amount, except that the adjusted carrying amount cannot exceed the carrying amount of the long-lived asset at the time it was initially classified as held for sale. The fair values of each property were determined based on appraisals obtained from a third-party, pending sales contracts, or recent listing agreements with third-party brokerage firms.

The following table presents those assets that were measured and recorded at fair value on our Consolidated Balance Sheets on a non-recurring basis and their level within the fair value hierarchy at September 30, 2014:


	September 30, 2014
	Level 1		Level 2		Level 3
	(In millions)
Assets
Prepaid expenses and other current assets – assets held for sale	$	—	$	5.4	$	—


	At December 31, 2013
	Level 1		Level 2		Level 3
	(In millions)
Assets
Prepaid expenses and other current assets – assets held for sale	$	—	$	4.7	$	—

Available-For-Sale Investments

The Company has classified investments made during 2010 and 2012 as available-for-sale at the time of their purchase. Investments classified as available-for-sale are recorded at fair value with the related unrealized gains and losses included in accumulated other comprehensive income. Management evaluates investments in an unrealized loss position on whether an other-than-temporary impairment has occurred on a periodic basis. Factors considered by management in assessing whether an other-than-temporary impairment has occurred include: the nature of the investment; whether the decline in fair value is attributable to specific adverse conditions affecting the investment; the financial condition of the investee; the severity and the duration of the impairment; and whether we intend to sell the investment or will be required to sell the investment before recovery of its amortized cost basis. When it is determined that an other-than-temporary impairment has occurred, the investment is written down to its fair value at the end of the period in which it is determined that an other-than-temporary decline has occurred. The investment has been in a gross unrealized loss position for less than twelve months. Management does not currently intend to sell the investment before recovery of its amortized cost basis. Realized gains and losses are recorded within the statement of operations upon sale of the security and are based on specific identification.

The Company’s available-for-sale securities as of September 30, 2014 can be summarized as follows:


	At September 30, 2014
	Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In millions)
Common stock	$	17.4	$	—	$	(5.5	)	$	11.9

The Company’s available-for-sale securities as of December 31, 2013 can be summarized as follows:


	At December 31, 2013
	Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In millions)
Common stock	$	17.4	$	3.3	$	—	$	20.7

There is no maturity date for these investments and there have been no sales during the nine months ended September 30, 2014.