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DERIVATIVE FINANCIAL INSTRUMENTS | 9 Months Ended
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Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE FINANCIAL INSTRUMENTS | DERIVATIVE FINANCIAL INSTRUMENTS We are exposed to market risk in the normal course of our business operations due to our purchases of certain commodities, our ongoing investing and financing activities and our operations that use foreign currencies. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. We have established policies and procedures governing our management of market risks and the use of financial instruments to manage exposure to such risks. ASC 815 “Derivatives and Hedging” (ASC 815) requires an entity to recognize all derivatives as either assets or liabilities in the condensed balance sheets and measure those instruments at fair value. In accordance with ASC 815, we designate derivative contracts as cash flow hedges of forecasted purchases of commodities and forecasted interest payments related to variable-rate borrowings and designate certain interest rate swaps as fair value hedges of fixed-rate borrowings. We do not enter into any derivative instruments for trading or speculative purposes. Energy costs, including electricity and natural gas, and certain raw materials used in our production processes are subject to price volatility. Depending on market conditions, we may enter into futures contracts, forward contracts, commodity swaps and put and call option contracts in order to reduce the impact of commodity price fluctuations. The majority of our commodity derivatives expire within one year. We actively manage currency exposures that are associated with net monetary asset positions, currency purchases and sales commitments denominated in foreign currencies and foreign currency denominated assets and liabilities created in the normal course of business. We enter into forward sales and purchase contracts to manage currency risk to offset our net exposures, by currency, related to the foreign currency denominated monetary assets and liabilities of our operations. At September 30, 2018, we had outstanding forward contracts to buy foreign currency with a notional value of $166.2 million and to sell foreign currency with a notional value of $126.0 million. All of the currency derivatives expire within one year and are for U.S. dollar (USD) equivalents. The counterparties to the forward contracts are large financial institutions; however, the risk of loss to us in the event of nonperformance by a counterparty could be significant to our financial position or results of operations. At December 31, 2017, we had outstanding forward contracts to buy foreign currency with a notional value of $135.5 million and to sell foreign currency with a notional value of $97.7 million. At September 30, 2017, we had outstanding forward contracts to buy foreign currency with a notional value of $106.1 million and to sell foreign currency with a notional value of $94.1 million. Cash flow hedges For derivative instruments that are designated and qualify as a cash flow hedge, the change in fair value of the derivative is recognized as a component of other comprehensive income (loss) until the hedged item is recognized in earnings. Gains and losses on the derivatives representing hedge ineffectiveness are recognized currently in earnings. We had the following notional amounts of outstanding commodity contracts that were entered into to hedge forecasted purchases:
| September 30, 2018 |  | December 31, 2017 |  | September 30, 2017
| ($ in millions)
Natural gas | $ | 65.6 |  |  | $ | 39.2 |  |  | $ | 38.4 |
Copper | 48.9 |  |  | 45.2 |  |  | 42.1 |
Zinc | 8.3 |  |  | 8.4 |  |  | 8.0 |
As of September 30, 2018, the counterparties to these commodity contracts were Wells Fargo Bank, N.A. (Wells Fargo), Citibank, Merrill Lynch Commodities, Inc. and JPMorgan Chase Bank, National Association, all of which are major financial institutions. We use cash flow hedges for certain raw material and energy costs such as copper, zinc, lead, electricity and natural gas to provide a measure of stability in managing our exposure to price fluctuations associated with forecasted purchases of raw materials and energy used in our manufacturing process. At September 30, 2018, we had open positions in futures contracts through 2022. If all open futures contracts had been settled on September 30, 2018, we would have recognized a pretax gain of $0.7 million. If commodity prices were to remain at September 30, 2018 levels, approximately $0.1 million of deferred gains would be reclassified into earnings during the next twelve months. The actual effect on earnings will be dependent on actual commodity prices when the forecasted transactions occur. We use interest rate swaps as a means of minimizing cash flow fluctuations that may arise from volatility in interest rates of our variable-rate borrowings. In April 2016, we entered into three tranches of forward starting interest rate swaps whereby we agreed to pay fixed rates to the counterparties who, in turn, pay us floating rates on $1,100.0 million, $900.0 million, and $400.0 million of our underlying floating-rate debt obligations. Each tranche’s term length is for twelve months beginning on December 31, 2016, December 31, 2017 and December 31, 2018, respectively. The counterparties to the agreements are SMBC Capital Markets, Inc., Wells Fargo, PNC Bank, National Association and Toronto-Dominion Bank. These counterparties are large financial institutions; however, the risk of loss to us in the event of nonperformance by a counterparty could be significant to our financial position or results of operations. We have designated the swaps as cash flow hedges of the risk of changes in interest payments associated with our variable-rate borrowings. Accordingly, the outstanding swap agreements have been recorded at their fair market value of $9.2 million and are included in other current assets and other assets on the accompanying condensed balance sheet as of September 30, 2018, with the corresponding gain deferred as a component of other comprehensive loss. For the three months ended September 30, 2018 and 2017, $2.5 million and $1.2 million, respectively, and for the nine months ended September 30, 2018 and 2017, $5.9 million and $1.7 million, respectively, of income was recorded to interest expense on the accompanying condensed statements of operations related to these swap agreements. At September 30, 2018, we had open interest rate swaps designated as cash flow hedges with maximum terms through 2019. If all open interest rate swap contracts had been settled on September 30, 2018, we would have recognized a pretax gain of $9.2 million. If interest rates were to remain at September 30, 2018 levels, $5.8 million of deferred gains would be reclassified into earnings during the next twelve months. The actual effect on earnings will be dependent on actual interest rates when the forecasted transactions occur. Fair value hedges We use interest rate swaps as a means of managing interest expense and floating interest rate exposure to optimal levels. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. We include the gain or loss on the hedged items (fixed-rate borrowings) in the same line item, interest expense, as the offsetting loss or gain on the related interest rate swaps. As of September 30, 2018, December 31, 2017 and September 30, 2017, the total notional amounts of our interest rate swaps designated as fair value hedges were $500.0 million. In April 2016, we entered into interest rate swaps on $250.0 million of our underlying fixed-rate debt obligations, whereby we agreed to pay variable rates to the counterparties who, in turn, pay us fixed rates. The counterparties to these agreements are Toronto-Dominion Bank and SMBC Capital Markets, Inc., both of which are major financial institutions. In October 2016, we entered into interest rate swaps on an additional $250.0 million of our underlying fixed-rate debt obligations, whereby we agreed to pay variable rates to the counterparties who, in turn, pay us fixed rates. The counterparties to these agreements are PNC Bank, National Association and Wells Fargo, both of which are major financial institutions. We have designated the April 2016 and October 2016 interest rate swap agreements as fair value hedges of the risk of changes in the value of fixed-rate debt due to changes in interest rates for a portion of our fixed-rate borrowings. Accordingly, the swap agreements have been recorded at their fair market value of $47.8 million and are included in other long-term liabilities on the accompanying condensed balance sheet as of September 30, 2018, with a corresponding decrease in the carrying amount of the related debt. For the three and nine months ended September 30, 2018, $0.6 million and $0.9 million, respectively, of expense and for the three and nine months ended September 30, 2017, $0.5 million and $2.4 million, respectively, of income was recorded to interest expense on the accompanying condensed statements of operations related to these swap agreements. Financial statement impacts We present our derivative assets and liabilities in our condensed balance sheets on a net basis whenever we have a legally enforceable master netting agreement with the counterparty to our derivative contracts. We use these agreements to manage and substantially reduce our potential counterparty credit risk. The following table summarizes the location and fair value of the derivative instruments on our condensed balance sheets. The table disaggregates our net derivative assets and liabilities into gross components on a contract-by-contract basis before giving effect to master netting arrangements:
| September 30, 2018 |  | December 31, 2017 |  | September 30, 2017
| ($ in millions)
Asset Derivatives: |  |  |  |  |
Other current assets |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |
Interest rate contracts - gains | $ | 7.6 |  |  | $ | 6.9 |  |  | $ | 5.0 |
Commodity contracts - gains | 2.2 |  |  | 11.4 |  |  | 7.8 |
Commodity contracts - losses | — |  |  | (0.1 | ) |  | (0.4 | )
Derivatives not designated as hedging instruments: |  |  |  |  |
Foreign exchange contracts - gains | 0.3 |  |  | 2.0 |  |  | 0.5 |
Foreign exchange contracts - losses | (0.1 | ) |  | (1.0 | ) |  | (0.3 | )
Total other current assets | 10.0 |  |  | 19.2 |  |  | 12.6 |
Other assets |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |
Interest rate contracts - gains | 1.6 |  |  | 3.6 |  |  | 3.7 |
Total other assets | 1.6 |  |  | 3.6 |  |  | 3.7 |
Total Asset Derivatives(1) | $ | 11.6 |  |  | $ | 22.8 |  |  | $ | 16.3 |
Liability Derivatives: |  |  |  |  |
Accrued liabilities |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |
Commodity contracts - losses | 3.7 |  |  | 3.8 |  |  | 2.6 |
Commodity contracts - gains | (3.0 | ) |  | — |  |  | — |
Derivatives not designated as hedging instruments: |  |  |  |  |
Foreign exchange contracts - losses | 2.6 |  |  | — |  |  | 0.6 |
Foreign exchange contracts - gains | (0.4 | ) |  | — |  |  | (0.5 | )
Total accrued liabilities | 2.9 |  |  | 3.8 |  |  | 2.7 |
Other liabilities |  |  |  |  |
Derivatives designated as hedging instruments: |  |  |  |  |
Interest rate contracts - losses | 47.8 |  |  | 28.1 |  |  | 23.9 |
Commodity contracts - losses | 0.9 |  |  | — |  |  | — |
Commodity contracts - gains | (0.1 | ) |  | — |  |  | — |
Total other liabilities | 48.6 |  |  | 28.1 |  |  | 23.9 |
Total Liability Derivatives(1) | $ | 51.5 |  |  | $ | 31.9 |  |  | $ | 26.6 |
(1) | Does not include the impact of cash collateral received from or provided to counterparties.
The following table summarizes the effects of derivative instruments on our condensed statements of operations:
|  |  | Amount of (Loss) Gain
|  |  | Three Months Ended September 30, |  | Nine Months Ended September 30,
| Location of (Loss) Gain |  | 2018 |  | 2017 |  | 2018 |  | 2017
Derivatives – Cash Flow Hedges |  | ($ in millions)
Recognized in other comprehensive income (effective portion): |  |  |  |  |  |  |  |
Commodity contracts | ——— |  | $ | (2.9 | ) |  | $ | 2.9 |  |  | $ | (5.4 | ) |  | $ | (4.5 | )
Interest rate contracts | ——— |  | 0.3 |  |  | 0.3 |  |  | 4.5 |  |  | 0.9 |
|  |  | $ | (2.6 | ) |  | $ | 3.2 |  |  | $ | (0.9 | ) |  | $ | (3.6 | )
Reclassified from accumulated other comprehensive loss into income (effective portion): |  |  |  |  |  |  |  |
Interest rate contracts | Interest expense |  | $ | 2.5 |  |  | $ | 1.2 |  |  | $ | 5.9 |  |  | $ | 1.7 |
Commodity contracts | Cost of goods sold |  | (0.3 | ) |  | — |  |  | 1.3 |  |  | 1.9 |
|  |  | $ | 2.2 |  |  | $ | 1.2 |  |  | $ | 7.2 |  |  | $ | 3.6 |
Derivatives – Fair Value Hedges |  |  |  |  |  |  |  |
Interest rate contracts | Interest expense |  | $ | (0.6 | ) |  | $ | 0.5 |  |  | $ | (0.9 | ) |  | $ | 2.5 |
Derivatives Not Designated as Hedging Instruments |  |  |  |  |  |  |  |
Foreign exchange contracts | Selling and administration |  | $ | 0.3 |  |  | $ | (0.2 | ) |  | $ | (0.3 | ) |  | $ | 0.4 |
The ineffective portion of changes in fair value resulted in zero charged or credited to earnings for the three and nine months ended September 30, 2018 and 2017. Credit risk and collateral By using derivative instruments, we are exposed to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the fair value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes us, thus creating a repayment risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, assume no repayment risk. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties. We monitor our positions and the credit ratings of our counterparties, and we do not anticipate nonperformance by the counterparties. Based on the agreements with our various counterparties, cash collateral is required to be provided when the net fair value of the derivatives, with the counterparty, exceeds a specific threshold. If the threshold is exceeded, cash is either provided by the counterparty to us if the value of the derivatives is our asset, or cash is provided by us to the counterparty if the value of the derivatives is our liability. As of September 30, 2018, December 31, 2017 and September 30, 2017, this threshold was not exceeded. In all instances where we are party to a master netting agreement, we offset the receivable or payable recognized upon payment of cash collateral against the fair value amounts recognized for derivative instruments that have also been offset under such master netting agreements.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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