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FINANCIAL INSTRUMENTS
 6 Months Ended
Jun. 28, 2014
FINANCIAL INSTRUMENTS  
FINANCIAL INSTRUMENTS

(11)                          FINANCIAL INSTRUMENTS

 

Currency Forward Contracts

 

We manufacture and sell our products in a number of countries and, as a result, are exposed to movements in foreign currency exchange rates. Our objective is to preserve the economic value of non-functional currency-denominated cash flows and to minimize the impact of changes as a result of currency fluctuations. Our principal currency exposures relate to the Euro, South African Rand, Chinese Yuan and Great Britain Pound.

 

From time to time, we enter into forward contracts to manage the exposure on contracts with forecasted transactions denominated in non-functional currencies and to manage the risk of transaction gains and losses associated with assets/liabilities denominated in currencies other than the functional currency of certain subsidiaries (“FX forward contracts”). In addition, some of our contracts contain currency forward embedded derivatives (“FX embedded derivatives”), because the currency of exchange is not “clearly and closely” related to the functional currency of either party to the transaction. Certain of our FX forward contracts are designated as cash flow hedges. To the extent these derivatives are effective in offsetting the variability of the hedged cash flows, changes in the derivatives’ fair value are not included in current earnings, but are included in accumulated other comprehensive income (“AOCI”). These changes in fair value are reclassified into earnings as a component of revenues or cost of products sold, as applicable, when the forecasted transaction impacts earnings. In addition, if the forecasted transaction is no longer probable, the cumulative change in the derivatives’ fair value is recorded as a component of “Other income (expense), net” in the period in which the transaction is no longer considered probable of occurring. To the extent a previously designated hedging transaction is no longer an effective hedge, any ineffectiveness measured in the hedging relationship is recorded in earnings in the period in which it occurs.

 

We had FX forward contracts with an aggregate notional amount of $192.6 and $191.3 outstanding as of June 28, 2014 and December 31, 2013, respectively, with all such contracts scheduled to mature within the next 12 months. We also had FX embedded derivatives with an aggregate notional amount of $122.3 and $145.8 at June 28, 2014 and December 31, 2013, respectively. The unrealized losses, net of taxes, recorded in AOCI related to FX forward contracts were $0.8 and $1.0 as of June 28, 2014 and December 31, 2013, respectively. We anticipate reclassifying the unrealized loss as of June 28, 2014 to income within 12 months.

 

Commodity Contracts

 

From time to time, we enter into commodity contracts to manage the exposure on forecasted purchases of commodity raw materials. At June 28, 2014 and December 31, 2013, the outstanding notional amount of commodity contracts was 5.5 and 3.4 pounds of copper, respectively. We designate and account for these contracts as cash flow hedges and, to the extent these commodity contracts are effective in offsetting the variability of the forecasted purchases, the change in fair value is included in AOCI. We reclassify AOCI associated with our commodity contracts to cost of products sold when the forecasted transaction impacts earnings. As of June 28, 2014 and December 31, 2013, the fair value of these contracts was $0.1 and $0.4 (current assets), respectively. The unrealized gain (loss), net of taxes, recorded in AOCI was $(0.1) and $0.2 as of June 28, 2014 and December 31, 2013, respectively. We anticipate reclassifying the unrealized loss as of June 28, 2014 to income within 12 months.

 

The following summarizes the gross and net fair values of our FX forward and commodity contracts by counterparty at June 28, 2014 and December 31, 2013, respectively:

 

 

 

June 28, 2014

 

December 31, 2013

 

 

 

Gross
Assets

 

Gross
Liabilities

 

Net Assets /
Liabilities

 

Gross
Assets

 

Gross
Liabilities

 

Net Assets /
Liabilities

 

FX forward contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A

 

$

0.3

 

$

(0.1

)

$

0.2

 

$

0.7

 

$

(0.1

)

$

0.6

 

Counterparty B

 

0.1

 

(0.1

)

—

 

0.1

 

(0.4

)

(0.3

)

Aggregate of other counterparties

 

0.6

 

(0.1

)

0.5

 

0.3

 

—

 

0.3

 

Totals (1)

 

$

1.0

 

$

(0.3

)

$

0.7

 

$

1.1

 

$

(0.5

)

$

0.6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity contracts:

 

 

 

 

 

 

 

 

 

 

 

 

 

Counterparty A (2)

 

$

0.1

 

$

—

 

$

0.1

 

$

0.4

 

$

—

 

$

0.4

 

 

 

(1)                 We enter into arrangements designed to provide the right of setoff in the event of counterparty default or insolvency, and have elected to offset the fair values of our qualifying financial instruments in our condensed consolidated balance sheets. Amounts presented in our condensed consolidated balance sheets are as follows:

 

 

 

June 28,

 

December 31,

 

 

 

2014

 

2013

 

Designated as hedging instruments:

 

 

 

 

 

Other current assets

 

$

0.2

 

$

0.3

 

Accrued expenses

 

(0.1

)

—

 

 

 

0.1

 

0.3

 

 

 

 

 

 

 

Not designated as hedging instruments:

 

 

 

 

 

Other current assets

 

0.6

 

0.6

 

Accrued expenses

 

—

 

(0.3

)

 

 

0.6

 

0.3

 

Net fair value of FX forward contracts

 

$

0.7

 

$

0.6

 

 

(2)                 Related contracts are designated as hedging instruments. Net amounts at June 28, 2014 and December 31, 2013 are recorded in “Other current assets.”

 

The following summarizes the fair value of our FX embedded derivative instruments, which are not designated as hedging instruments, and the related balance sheet classification as of June 28, 2014 and December 31, 2013:

 

 

 

June 28,

 

December 31,

 

Balance Sheet Classification

 

2014

 

2013

 

Other current assets

 

$

0.4

 

$

0.7

 

Accrued expenses

 

(6.8

)

(6.5

)

Other long-term liabilities

 

(1.9

)

(2.1

)

 

 

$

(8.3

)

$

(7.9

)

 

The following summarizes the pre-tax gain (loss) recognized in AOCI resulting from derivative financial instruments designated as cash flow hedging relationships for the three and six months ended June 28, 2014 and June 29, 2013:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28, 2014

 

June 29, 2013

 

June 28, 2014

 

June 29, 2013

 

FX forward contracts

 

$

0.2

 

$

(11.0

)

$

0.5

 

$

(4.1

)

Commodity contracts

 

0.6

 

(1.3

)

(0.7

)

(2.3

)

 

 

$

0.8

 

$

(12.3

)

$

(0.2

)

$

(6.4

)

 

The following summarizes the pre-tax loss related to derivative financial instruments designated as cash flow hedging relationships reclassified from AOCI to income through ‘‘Revenues’’ for FX forward contracts and ‘‘Cost of products sold’’ for commodity contracts for the three and six months ended June 28, 2014 and June 29, 2013:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28, 2014

 

June 29, 2013

 

June 28, 2014

 

June 29, 2013

 

FX forward contracts

 

$

—

 

$

(0.2

)

$

—

 

$

(0.8

)

Commodity contracts

 

(0.1

)

0.1

 

(0.2

)

0.1

 

 

 

$

(0.1

)

$

(0.1

)

$

(0.2

)

$

(0.7

)

 

During the three and six months ended June 29, 2013, losses of $0.2 were recognized in ‘‘Other income (expense), net’’ relating to derivative ineffectiveness and amounts excluded from effectiveness testing.

 

The following summarizes the gain (loss) recognized in ‘‘Other income (expense), net’’ for the three and six months ended June 28, 2014 and June 29, 2013 related to derivative financial instruments not designated as cash flow hedging relationships:

 

 

 

Three months ended

 

Six months ended

 

 

 

June 28, 2014

 

June 29, 2013

 

June 28, 2014

 

June 29, 2013

 

FX forward contracts

 

$

1.4

 

$

1.1

 

$

1.8

 

$

(1.9

)

FX embedded derivatives

 

0.1

 

2.6

 

(2.1

)

5.7

 

 

 

$

1.5

 

$

3.7

 

$

(0.3

)

$

3.8