11.

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), gains or losses 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 Company utilizes certain derivative instruments to enhance its ability to manage currency exposure 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. Principal 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 consolidated 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 amounts in accumulated other comprehensive loss for cash flow hedges will be reclassified into earnings no later than December 31, 2018.

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


December 31 (dollars in millions)	2017				2016
	Buy		Sell		Buy		Sell
British pound	$	—	$	1.2	$	—	$	1.2
Canadian dollar		—		48.1		—		56.9
Euro		29.3		—		25.4		1.8
Mexican peso		16.3		—		16.9		—

Total	$	45.6	$	49.3	$	42.3	$	59.9

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 steel, with the objective of minimizing changes in cost due to market price fluctuations. The hedging strategy for achieving this objective is to purchase steel futures contracts on the New York Metals Exchange (NYMEX) and copper futures contracts on the open market of the London Metals Exchange (LME) or over the counter contracts based on the LME.

With NYMEX, the Company is required to make cash deposits on unrealized losses on steel derivative contracts.

The after-tax gains and losses of the contracts as of December 31, 2017 were recorded in accumulated other comprehensive loss and will be reclassified into cost of products sold in the periods in which the underlying transactions are recorded in earnings. The after-tax gains and losses of the contracts will be reclassified within one year. Contractual amounts of the Company’s commodities futures contracts were immaterial as of December 31, 2017.

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

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


		Fair Value
December 31 (dollars in millions)	Balance Sheet Location	2017			2016
Foreign currency contracts	Other current assets	$	0.2		$	1.9
	Accrued liabilities		(1.8	)		(2.0	)
Commodities contracts	Other current assets		0.2			0.8
	Accrued liabilities		—			(0.3	)

Total derivatives designated as hedging instruments		$	(1.4	)	$	0.4

The effect of derivative instruments on the consolidated statement of earnings is as follows.

Years ended December 31 (dollars in millions)


Derivatives in ASC 815 cash flow hedging relationships	Amount of gain (loss) recognized in other comprehensive loss on derivative						Location of gain (loss) reclassified from accumulated other comprehensive loss into earnings	Amount of gain (loss) reclassified from accumulated other comprehensive loss into earnings
	2017			2016				2017		2016
Foreign currency contracts	$	(1.1	)	$	(3.8	)	Cost of products sold	$	0.4	$	(1.4	)
Commodities contracts		0.5			2.4		Cost of products sold		0.6		1.6

	$	(0.6	)	$	(1.4	)		$	1.0	$	0.2