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Derivative Instruments
 9 Months Ended
Sep. 30, 2015
Derivative Instruments
10. Derivative Instruments

ASC 815 Derivatives and Hedging as amended, requires that all derivative instruments be recorded on the balance sheet at fair value and establishes criteria for designation and effectiveness of the hedging relationships. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as a part of a hedging relationship and, further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, the Company must designate the hedging instrument, based upon the exposure hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

The Company designates that all of its hedging instruments are cash flow hedges. For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive loss, net of tax, and is reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The amount by which the cumulative change in the value of the hedge more than offsets the cumulative change in the value of the hedged item (i.e., the ineffective portion) is recorded in earnings, net of tax, in the period the ineffectiveness occurs.

The Company utilizes certain derivative instruments to enhance its ability to manage currency as well as raw materials price risk. Derivative instruments are entered into for periods consistent with the related underlying exposures and do not constitute positions independent of those exposures. The Company does not enter into contracts for speculative purposes. The contracts are executed with major financial institutions with no credit loss anticipated for failure of the counterparties to perform.

Foreign Currency Forward Contracts

The Company is exposed to foreign currency exchange risk as a result of transactions in currencies other than the functional currency of certain subsidiaries. The Company utilizes foreign currency forward purchase and sale contracts to manage the volatility associated with foreign currency purchases, sales and certain intercompany transactions in the normal course of business. Currencies for which the Company utilizes foreign currency forward contracts include the British pound, Canadian dollar, Euro and Mexican peso.

 

Gains and losses on these instruments are recorded in accumulated other comprehensive loss, net of tax, until the underlying transaction is recorded in earnings. When the hedged item is realized, gains or losses are reclassified from accumulated other comprehensive loss to the statement of earnings. The assessment of effectiveness for forward contracts is based on changes in the forward rates. These hedges have been determined to be effective.

The majority of the amounts in accumulated other comprehensive loss for cash flow hedges is expected to be reclassified into earnings within one year and all of the hedges will be reclassified into earnings no later than December 31, 2016.

The following table summarizes, by currency, the contractual amounts of the Company’s foreign currency forward contracts:

 

(dollars in millions)

                            
     September 30,  
     2015      2014  
     Buy      Sell      Buy      Sell  

British pound

    $ —         $ 1.1       $ —         $ 1.3   

Canadian dollar

      —           64.9         —           85.9   

Euro

      9.2         1.9         17.0         1.4   

Mexican peso

      16.9         —           11.5         —     
  

 

 

     

 

 

     

 

 

     

 

 

  

Total

    $ 26.1       $ 67.9       $ 28.5       $ 88.6   
  

 

 

     

 

 

     

 

 

     

 

 

  

Commodity Futures Contracts

In addition to entering into supply arrangements in the normal course of business, the Company also enters into futures contracts to fix the cost of certain raw material purchases, principally copper, with the objective of minimizing changes in cost due to market price fluctuations. The hedging strategy for achieving this objective is to purchase commodity futures contracts on the open market of the London Metals Exchange (LME) or over the counter contracts based on the LME.

The minimal after-tax loss on the effective portion of the contracts as of September 30, 2015 was recorded in accumulated other comprehensive loss and will be reclassified into cost of products sold in the period in which the underlying transaction is recorded in earnings. The effective portion of the contracts will be reclassified within one year. Commodity hedges outstanding at September 30, 2015 involve a total of approximately 1.4 million pounds of copper.

 

The impact of derivative contracts on the Company’s financial statements is as follows:

Fair value of derivatives designated as hedging instruments under ASC 815:

 

(dollars in millions)

                   
    

Balance Sheet Location

    September 30,
2015		      December 31,
2014		  

Foreign currency contracts

   

Other current assets

    $ 5.8       $ 4.6   
  

Accrued liabilities

      (3.0 )       (3.0 ) 

Commodities contracts

   

Accrued liabilities

      (0.3 )       (0.2 ) 
     

 

 

     

 

 

  

Total derivatives designated as hedging instruments

    $ 2.5       $ 1.4   
     

 

 

     

 

 

  

The effect of derivatives designated as hedging instruments on the statement of earnings is as follows:

Three Months Ended September 30 (dollars in millions):

 

Derivatives in ASC 815 cash flow hedging relationships

    Amount of gain
(loss)
recognized in
OCI on
derivative
(effective
portion)		      Location of
gain (loss)
reclassified
from
accumulated
OCI into
earnings
(effective
portion)		    Amount of gain
(loss) reclassified
from accumulated
OCI into earnings
(effective portion)		      Location of
gain (loss)
recognized in
earnings on
derivative
(ineffective
portion)		    Amount of
gain (loss)
recognized in
earnings on a
derivative
(ineffective
portion)		  
     2015     2014           2015     2014           2015      2014  

Foreign currency contracts

    $ 3.0      $ 1.8       Cost of
products sold		    $ 1.9      $ 0.7       N/A    $ —         $ —     

Commodities contracts

      (0.2 )      —         Cost of
products sold		      (0.1 )      —         Cost of
products sold		      —           —     
  

 

 

    

 

 

        

 

 

    

 

 

        

 

 

     

 

 

  
   $ 2.8      $ 1.8          $ 1.8      $ 0.7          $ —         $ —     
  

 

 

    

 

 

        

 

 

    

 

 

        

 

 

     

 

 

  

Nine Months Ended September 30 (dollars in millions):

 

Derivatives in ASC 815 cash flow hedging relationships

    Amount of gain
(loss)
recognized in
OCI on
derivative
(effective
portion)		      Location of
gain (loss)
reclassified
from
accumulated
OCI into
earnings
(effective
portion)		    Amount of gain
(loss) reclassified
from accumulated
OCI into earnings
(effective portion)		      Location of
gain (loss)
recognized in
earnings on
derivative
(ineffective
portion)		    Amount of
gain (loss)
recognized in
earnings on a
derivative
(ineffective
portion)		  
     2015     2014           2015     2014           2015      2014  

Foreign currency contracts

    $ 5.7      $ 2.6       Cost of
products sold		    $ 4.6      $ 2.5       N/A    $ —         $ —     

Commodities contracts

      (0.5 )      —         Cost of
products sold		      (0.3 )      —         Cost of
products sold		      —           —     
  

 

 

    

 

 

        

 

 

    

 

 

        

 

 

     

 

 

  
   $ 5.2      $ 2.6          $ 4.3      $ 2.5          $ —         $ —