Financial Instruments

12 Months Ended

Dec. 31, 2018

9. Financial Instruments

We do not enter into financial instruments for trading or speculative purposes. We principally use financial instruments to reduce the impact of changes in foreign currency exchange rates and commodities used as raw materials in our products. The principal derivative financial instruments we enter into on a routine basis are foreign exchange contracts. Derivative financial instruments are recorded at fair value. The counterparties to derivative contracts are major financial institutions. We are subject to credit risk on these contracts equal to the fair value of these instruments. Management currently believes that the risk of incurring material losses is unlikely and that the losses, if any, would be immaterial to the Company.

Raw materials used by the Company are subject to price volatility caused by weather, supply conditions, geopolitical and economic variables, and other unpredictable external factors. As a result, from time to time, we enter into commodity swaps to manage the price risk associated with forecasted purchases of materials used in our operations. We account for these commodity derivatives as economic hedges or cash flow hedges. Changes in the fair value of economic hedges are recorded directly into current period earnings. There were no material commodity swap contracts outstanding for the years ended December 31, 2018 and 2017.

We enter into foreign exchange contracts primarily to hedge forecasted sales and purchases denominated in select foreign currencies, thereby limiting currency risk that would otherwise result from changes in exchange rates. The periods of the foreign exchange contracts correspond to the periods of the forecasted transactions, which generally do not exceed 12 to 15 months subsequent to the latest balance sheet date.

For derivative instruments that are designated as fair value hedges, the gain or loss on the derivative instrument, as well as the offsetting loss or gain on the hedged item, are recognized on the same line of the statement of income. The effective portions of cash flow hedges are reported in other comprehensive income (“OCI”) and are recognized in the statement of income when the hedged item affects earnings. The changes in fair value for net investment hedges are recognized in the statement of income when realized upon sale or upon complete or substantially complete liquidation of the investment in the foreign entity. The ineffective portion of all hedges is recognized in current period earnings. In addition, changes in the fair value of all economic hedge transactions are immediately recognized in current period earnings. Our primary foreign currency hedge contracts pertain to the Canadian dollar, the British pound, the Chinese yuan and the Mexican peso. The gross U.S. dollar equivalent notional amount of all foreign currency derivative hedges outstanding at December 31, 2018 was $345.3 million, representing a net settlement assets of $3.4 million. Based on foreign exchange rates as of December 31, 2018, we estimate that $3.3 million of net foreign currency derivative losses included in OCI as of December 31, 2018 will be reclassified to earnings within the next twelve months.

The fair values of foreign exchange and commodity derivative instruments on the consolidated balance sheets as of December 31, 2018 and 2017 were:



		Fair Value

(In millions)	Location	2018		2017
Assets:
Foreign exchange contracts	Other current assets	$	5.3	$	0.8
Commodity contracts	Other current assets		—		0.2
Net investment hedges	Other current assets		0.7		—
	Total assets	$	6.0	$	1.0
Liabilities:
Foreign exchange contracts	Other current liabilities	$	1.9	$	5.6
Net investment hedges	Other current liabilities		—		0.8
	Total liabilities	$	1.9	$	6.4

The effects of derivative financial instruments on the consolidated statements of income in 2018, 2017 and 2016 were:



(In millions)	Gain (Loss) Recognized in Income

Type of hedge	Location	2018		2017			2016
Cash flow	Cost of products sold	$	2.0	$	0.9		$	(3.5	)
Fair value	Other (income) expense, net		3.7		(2.0	)		2.0
Total		$	5.7	$	(1.1	)	$	(1.5	)

The effective portion of cash flow hedges recognized in other comprehensive income were net gains (losses) of $10.1 million and $(1.8) million in 2018 and 2017, respectively. In the year ended December 31, 2018, the ineffective portion of cash flow hedges recognized in other income, net, was $3.8 million and insignificant in the years ended December 31, 2017 and 2016.