DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2014

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

In the normal course of business, the Company enters into two types of derivatives to hedge its interest rate exposure and foreign currency exposure: hedges of fair value exposures and hedges of cash flow exposures.  Fair value exposures relate to recognized assets or liabilities and firm commitments, while cash flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities or forecasted transactions.  

The Company operates internationally, with manufacturing and sales facilities in various locations around the world, and uses certain financial instruments to manage its foreign currency, interest rate and fair value exposures.  To qualify a derivative as a hedge at inception and throughout the hedge period, the Company formally documents the nature and relationships between hedging instruments and hedged items, as well as its risk-management objectives and strategies for undertaking various hedge transactions, and the method of assessing hedge effectiveness.  Additionally, for hedges of forecasted transactions, the significant characteristics and expected terms of a forecasted transaction must be specifically identified, and it must be probable that each forecasted transaction will occur.  If it is deemed probable that the forecasted transaction will not occur, then the gain or loss would be recognized in current earnings.  Financial instruments qualifying for hedge accounting must maintain a specified level of effectiveness between the hedging instrument and the item being hedged, both at inception and throughout the hedged period.  The Company does not engage in trading or other speculative use of financial instruments.

The Company has used and may use forward contracts and options to mitigate its exposure to changes in foreign currency exchange rates on third party and intercompany forecasted transactions.  The primary currencies to which the Company is exposed are the Euro, British Pound and Australian Dollar.  The effective portion of unrealized gains and losses associated with forward contracts and the intrinsic value of option contracts are deferred as a component of Accumulated other comprehensive income until the underlying hedged transactions are reported in the Company’s Consolidated Statement of Income.  The Company has used and may use interest rate swaps to mitigate its exposure to changes in interest rates related to existing issuances of variable rate debt and changes in the fair value of fixed rate debt.  Primary exposure includes movements in the London Interbank Offer Rate (“LIBOR”).

Changes in the fair value of derivatives designated as fair value hedges are recognized in earnings as offsets to changes in fair value of exposures being hedged.  The change in fair value of derivatives designated as cash flow hedges are deferred in Accumulated other comprehensive income and are recognized in earnings as hedged transactions occur.  Contracts deemed ineffective are recognized in earnings immediately.

In the Consolidated Statement of Income, the Company records hedging activity related to debt instruments in interest expense and hedging activity related to foreign currency in the accounts for which the hedged items are recorded.  On the Consolidated Statement of Cash Flows, the Company records cash flows from hedging activities in the same manner as it records the underlying item being hedged.

In November 2007, the Company entered into an interest rate swap agreement that converted a fixed rate interest payment into a variable rate interest payment.  In November 2012, this interest rate swap agreement was terminated. Furthermore, as discussed in Note M – “Long-Term Obligations,” the Company redeemed the 8% Senior Subordinated notes associated with this swap and therefore, as a result of the termination and redemption, recorded a gain of approximately $16 million which decreased the Loss on early extinguishment of debt associated with the redemption.

The Company is also a party to currency exchange forward contracts that generally mature within one year to manage its exposure to changing currency exchange rates.  At December 31, 2014, the Company had $378.5 million notional amount of currency exchange forward contracts outstanding that were initially designated as hedge contracts, most of which mature on or before December 31, 2015.  The fair market value of these contracts at December 31, 2014 was a net loss of $0.4 million.  At December 31, 2014, $313.4 million notional amount ($0.6 million of fair value losses) of these forward contracts have been designated as, and are effective as, cash flow hedges of forecasted and specifically identified transactions.  During 2014 and 2013, the Company recorded the change in fair value for these cash flow hedges to Accumulated other comprehensive income and reclassified to earnings a portion of the deferred gain or loss from Accumulated other comprehensive income as the hedged transactions occurred and were recognized in earnings.

The Company records the interest rate swap and foreign exchange contracts at fair value on a recurring basis.   There were no interest rate swaps recorded as of December 31, 2014 and 2013. The foreign exchange contracts designated as hedging instruments are categorized under Level 2 of the ASC 820 hierarchy and are recorded at December 31, 2014 and 2013 as a net liability of $0.4 million and a net asset of $3.8 million, respectively.  See Note A – “Basis of Presentation,” for an explanation of the ASC 820 hierarchy. The fair values of these foreign exchange forward contracts are derived using quoted forward foreign exchange prices to interpolate values of outstanding trades at the reporting date based on their maturities.

The Companyuses forward foreign exchange contracts to mitigate its exposure to changes in foreign currency exchange rates on third party and intercompany forecasted transactions. Certain of these contracts have not been designated as hedging instruments. Changes in the fair value of derivative financial instruments are recognized as gains or losses in Cost of goods sold or Other income (expense) - net in the Consolidated Statement of Income.

Concurrent with the sale of part of A.S.V., Inc. to Manitex, the Company invested in a subordinated convertible promissory note from Manitex, which included an embedded derivative, the conversion feature. At the date of issuance, the embedded derivative was measured at fair value. The derivative is marked-to-market each period with changes in fair value recorded in Other income (expense) - net in the Consolidated Statement of Income.

The following table provides the location and fair value amounts of derivative instruments designated as hedging instruments that are reported in the Consolidated Balance Sheet (in millions):

Asset Derivatives	Balance Sheet Account	December 31, 2014			December 31, 2013
Foreign exchange contracts	Other current assets	$	10.1		$	10.0
Liability Derivatives
Foreign exchange contracts	Other current liabilities	10.5			6.2
Total Derivatives		$	(0.4	)	$	3.8

The following table provides the location and fair value amounts of derivative instruments not designated as hedging instruments that are reported in the Consolidated Balance Sheet (in millions):

Asset Derivatives	Balance Sheet Account	December 31, 2014		December 31, 2013
Foreign exchange contracts	Other current assets	$	2.2	$	4.1
Debt conversion feature	Other assets	3.0		—
Total asset derivatives		$	5.2	$	4.1
Liability Derivatives
Foreign exchange contracts	Other current liabilities	1.0		0.8
Total liability derivatives		$	1.0	$	0.8
Total Derivatives		$	4.2	$	3.3

The following tables provide the effect of derivative instruments that are designated as hedges in the Consolidated Statements of Income, Comprehensive Income and Accumulated other comprehensive income (“OCI”) (in millions):

Gain Recognized on Derivatives in Income:		Year Ended December 31,
Fair Value Derivatives	Location	2014			2013			2012
Interest rate contract	Interest expense	$	—		$	—		$	16.3
Interest rate contract	Loss on early extinguishment of debt	—			—			16.0
Total		$	—		$	—		$	32.3
(Loss) Gain Recognized on Derivatives in OCI:		Year Ended December 31,
Cash Flow Derivatives		2014			2013			2012
Foreign exchange contracts		$	(3.4	)	$	3.1		$	3.2
(Loss) Gain Reclassified from Accumulated OCI into Income (Effective):		Year Ended December 31,
Account		2014			2013			2012
Cost of goods sold		$	3.0		$	1.2		$	(5.2	)
Other income (expense) – net		0.5			3.2			(5.1		)
Total		$	3.5		$	4.4		$	(10.3	)
Gain (Loss) Recognized on Derivatives (Ineffective) in Income:		Year Ended December 31,
Account		2014			2013			2012
Other income (expense) – net		$	(0.4	)	$	(2.8	)	$	4.9

The following table provides the effect of derivative instruments that are not designated as hedges in the Consolidated Statements of Income and Comprehensive Income (in millions):

Gain (Loss) Recognized on Derivatives not designated as hedges in Income:	Year Ended December 31,
Account	2014		2013		2012
Cost of Goods Sold	$	—	$	0.7	$	(0.8	)
Other income (expense) – net	—		1.6		—
Total	$	—	$	2.3	$	(0.8	)

Counterparties to the Company’s currency exchange forward contracts are major financial institutions with credit ratings of investment grade or better and no collateral is required.  There are no significant risk concentrations.  Management continues to monitor counterparty risk and believes the risk of incurring losses on derivative contracts related to credit risk is low and any losses would be immaterial.

Unrealized net gains (losses), net of tax, included in OCI are as follows (in millions):

	Year Ended December 31,
	2014			2013			2012
Balance at beginning of period	$	2.7		$	(0.4	)	$	(3.6	)
Additional gains (losses) – net	(1.4		)	6.1			(1.9		)
Amounts reclassified to earnings	(2.0		)	(3.0		)	5.1
Balance at end of period	$	(0.7	)	$	2.7		$	(0.4	)

The estimated amount of existing losses for derivative contracts recorded in OCI as of December 31, 2014 that are expected to be reclassified into earnings in the next 12 months is $0.7 million.