DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

The Company operates internationally, with manufacturing and sales facilities in various locations around the world. In the normal course of business, the Company primarily uses cash flow derivatives to manage foreign currency and interest rate exposures on third party and intercompany forecasted transactions.  For a derivative to qualify for hedge accounting treatment 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, 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 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 records all derivative contracts at fair value on a recurring basis. All of the Company’s derivative financial instruments are categorized under Level 2 of the ASC 820 hierarchy, see Note A - “Basis of Presentation,” for an explanation of the ASC 820 hierarchy.

Foreign Exchange Contracts

The Company enters into foreign exchange contracts to manage the variability of future cash flows associated with recognized assets or liabilities or forecasted transactions due to changing currency exchange rates.  Primary currencies to which the Company is exposed are the Euro, British Pound and Australian Dollar.   These foreign exchange contracts are designated as cash flow hedging instruments. Fair values of these contracts are derived using quoted forward foreign exchange prices to interpolate values of outstanding trades at the reporting date based on their maturities. Most of the foreign exchange contracts outstanding as of September 30, 2017 mature on or before September 30, 2018.  At September 30, 2017 and December 31, 2016, the Company had $258.5 million and $245.5 million notional amount, respectively, of foreign exchange contracts outstanding that were initially designated as cash flow hedge contracts. The effective portion of unrealized gains and losses associated with foreign exchange contracts are deferred as a component of Accumulated other comprehensive income (loss) (“AOCI”) until the underlying hedged transactions settle and are reclassified to Cost of goods sold in the Company’s Condensed Consolidated Statement of Comprehensive Income (Loss).

Certain foreign exchange contracts entered into by the Company have not been designated as hedging instruments to mitigate its exposure to changes in foreign currency exchange rates on third party forecasted transactions and recognized assets and liabilities. The Company had $74.1 million and $339.7 million notional amount of foreign exchange contracts outstanding that were not designated as hedging instruments at September 30, 2017 and December 31, 2016, respectively.  The majority of gains and losses recognized from foreign exchange contracts not designated as hedging instruments were offset by changes in the underlying hedged items, resulting in no material net impact on earnings. Changes in the fair value of these derivative financial instruments were recognized as gains or losses in Other income (expense) – net in the Condensed Consolidated Statement of Comprehensive Income (Loss).

Other

Other derivatives include cross currency swaps, interest rate swaps and a debt conversion feature. Changes in the fair value of our cross currency and interest rate swaps are deferred in AOCI. Gains or losses on cross currency swaps are reclassified to Other income (expense) - net in the Condensed Consolidated Statement of Comprehensive Income (Loss) when the underlying hedged item is re-measured. Gains or losses on interest rate swaps are reclassified to Cost of goods sold in the Condensed Consolidated Statement of Comprehensive Income (Loss) when underlying hedged transactions settle. Changes in fair value of the debt conversion feature are recorded in Other income (expense) - net in the Condensed Consolidated Statement of Comprehensive Income (Loss).

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

		September 30, 2017						December 31, 2016
Asset Derivatives	Balance Sheet Account	Derivatives designated as hedges			Derivatives not designated as hedges			Derivatives designated as hedges			Derivatives not designated as hedges
Foreign exchange contracts	Other current assets	$	5.8		$	0.1		$	4.2		$	2.6
Debt conversion feature	Other assets	$	—		$	1.4		$	—		$	1.1
Total asset derivatives		$	5.8		$	1.5		$	4.2		$	3.7
Liability Derivatives
Foreign exchange contracts	Other current liabilities	$	(2.2	)	$	(0.1	)	$	(6.8	)	$	(1.2	)
Cross currency swap	Other current liabilities	(0.2		)	—			—			—
Cross currency swap	Other non-current liabilities	(2.4		)	—			—			—
Total liability derivatives		(4.8		)	(0.1		)	(6.8		)	(1.2		)
Total Derivatives		$	1.0		$	1.4		$	(2.6	)	$	2.5

The following tables provide the effect of derivative instruments that are designated as hedges in the Condensed Consolidated Statement of Comprehensive Income (Loss) and AOCI (in millions):

Gain (Loss) Recognized on Derivatives in AOCI, net of tax:	Three Months Ended September 30,						Nine Months Ended September 30,
Cash Flow Derivatives	2017			2016			2017			2016
Foreign exchange contracts	$	(0.9	)	$	(0.2	)	$	4.6		$	(4.8	)
Cross currency swap	(0.2		)	—			(0.2		)	—
Interest rate swap	—			—			—			(0.2		)
Total	$	(1.1	)	$	(0.2	)	$	4.4		$	(5.0	)
Gain (Loss) Reclassified from AOCI into Income (Effective):	Three Months Ended September 30,						Nine Months Ended September 30,
Account	2017			2016			2017			2016
Cost of goods sold	$	2.5		$	(1.5	)	$	1.0		$	(0.4	)
Other income (expense) – net	(1.6		)	—			(2.3		)	—
Total	$	0.9		$	(1.5	)	$	(1.3	)	$	(0.4	)
Gain (Loss) Recognized on Derivatives (Ineffective) in Income :	Three Months Ended September 30,						Nine Months Ended September 30,
Account	2017			2016			2017			2016
Cost of goods sold	$	0.8		$	0.1		$	1.6		$	1.0
Other income (expense) – net	0.3			(0.2		)	0.2			(0.2		)
Total	$	1.1		$	(0.1	)	$	1.8		$	0.8

Derivatives not designated as hedges are used to offset foreign exchange gains or losses resulting from the underlying exposures of foreign currency denominated assets and liabilities. The following table provides the effect of non-designated derivatives outstanding at the end of the period in the Condensed Consolidated Statement of Comprehensive Income (Loss) (in millions):

Gain (Loss) Recognized in Income on Derivatives not designated as hedges:	Three Months Ended September 30,				Nine Months Ended September 30,
Account	2017		2016		2017			2016
Other income (expense) – net	$	1.2	$	7.0	$	(1.1	)	$	(2.8	)

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

Counterparties to the Company’s foreign exchange 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 unlikely and any losses would be immaterial.

See Note P - “Stockholders’ Equity” for unrealized net gains (losses), net of tax, included in AOCI. Within the unrealized net gains (losses) included in AOCI as of September 30, 2017, it is estimated that $2.0 million of gains are expected to be reclassified into earnings in the next twelve months.