Derivatives and Financial Instruments

The Company's financial instruments comprise bank and other loans, senior loan notes, derivatives, trade payables deferred and deferred contingent consideration. Other than derivatives, the main purpose of these financial instruments is to raise finance for the Company's operations. The Company also has various financial assets such as trade receivables and cash and cash equivalents, which arise directly from its operations.

Derivative financial instruments

We are exposed to market risk during the normal course of business from changes in currency exchange rates, interest rates and commodity prices such as aluminum prices. We manage exposures through a combination of normal operating and financing activities and through the use of derivative financial instruments such as foreign currency forward purchase contracts and aluminum forward purchase contracts. We do not use market risk-sensitive instruments for trading or speculative purposes. The Company had $0.2 million and $0.1 million derivative financial instruments disclosed within Accounts and other receivables as of June 30, 2019 and December 31, 2018, respectively. There were also $0.3 million and nil derivative financial instruments recorded in Other current liabilities at June 30, 2019, and December 31, 2018, respectively.

The fair value of forward foreign currency exchange contracts deferred in equity was a loss of $0.8 million and a loss of $0.4 million at June 30, 2019, and December 31, 2018, respectively. During the Second Quarter of 2019, $0.2 million was transferred to the Income Statement.

Forward foreign currency exchange contracts

The Company incurs currency transaction risk whenever one of the Company's operating subsidiaries enters into either a purchase or sales transaction in a currency other than its functional currency. Currency transaction risk is reduced by matching sales and expenses in the same currency. The Company's U.S. operations have little currency exposure, as most purchases, costs and sales are conducted in U.S. dollars. The Company's U.K. operations are exposed to exchange transaction risks, mainly because these operations sell goods priced in euros and U.S. dollars, and purchase raw materials priced in U.S. dollars and its functional currency is GBP sterling. The Company also incurs currency transaction risk if it lends currency other than its functional currency to one of its joint venture partners.

At June 30, 2019, and December 31, 2018, the Company held various forward foreign currency exchange contracts designated as hedges in respect of forward sales for U.S. dollars and euros for the receipt of GBP sterling or euros. The Company also held forward foreign currency exchange contracts designated as hedges in respect of forward purchases for euros, U.S. and Canadian dollars by the sale of GBP sterling. The contract totals in GBP sterling and euros, range of maturity dates and range of exchange rates are disclosed below, with the value denominated in GBP sterling given that is the currency the majority of the contracts are held in.



	June 30, 2019
Sales hedges	U.S. dollars	Euros
Contract totals/£m	2.0	8.8
Maturity dates	07/19	07/19 to 08/19
Exchange rates	$1.2669 to $1.3419	€1.0949 to €1.1671



Purchase hedges	U.S. dollars	Euros	Canadian dollars
Contract totals/£m	5.4	0.9	2.6
Maturity dates	07/19 to 08/19	07/19 to 09/19	07/19
Exchange rates	$1.2703 to $1.3239	€1.1112 to €1.1286	$	1.6806



	December 31, 2018
Sales hedges	U.S. dollars	Euros
Contract totals/£m	4.8	7.2
Maturity dates	01/19 to 07/19	01/19 to 07/19
Exchange rates	$1.2519 to $1.3419	€1.0949 to €1.1702

Purchase hedges

U.S. dollars

Euros

Canadian dollars

Czech koruna

Contract totals/£m

7.5

1.7

2.9

0.1

Maturity dates

01/19 to 07/19

01/19 to 06/19

01/19 to 03/19

01/19

Exchange rates

$1.2609 to $1.3380

€1.1074 to €1.1221

$1.7039 to $1.7416

CZK 28.4490

The above contracts are held in GBP sterling, therefore the analysis in the table has been given in GBP sterling to avoid any movements as a result of translation.

9. Derivatives and Financial Instruments (continued)

Fair value of financial instruments

The following methods were used to estimate the fair values of each class of financial instrument:

Cash at bank and in hand / overdrafts

The carrying value approximates to the fair value as a result of the short-term maturity of the instruments. Cash at bank and in hand are subject to a right to offset in the U.S.

Bank loans

Bank and other loans, excluding overdrafts, of $103.2 million were outstanding at June 30, 2019, and $75.0 million were outstanding at December 31, 2018. Bank and other loans are shown net of issue costs of $1.2 million and $1.4 million at June 30, 2019, and December 31, 2018, respectively, and are to be amortized to the expected maturity of the facilities. Of the bank and other loans outstanding, $28.2 million and none is variable interest rate debt and subject to floating interest rate risk, with the remainder being fixed rate debt, at June 30, 2019, and December 31, 2018, respectively.

Forward foreign currency exchange rate contracts

The fair value of these contracts was calculated by determining what the Company would be expected to receive or pay on termination of each individual contract by comparison to present market prices.

LME derivative contracts

The fair value of these contracts has been calculated by valuing the contracts against the equivalent forward rates quoted on the LME.

Deferred contingent consideration

The deferred contingent consideration is in relation to the acquisition of Truetech and Innotech (Luxfer Magtech) in 2014 and is linked to the future profitability of the entity.

The Company uses the following hierarchy for determining and disclosing the fair value of financial instruments by valuation technique:

Level 1: quoted (unadjusted) prices in active markets for identical assets or liabilities.

Level 2: other techniques for which all inputs which have a significant effect on the recorded fair value are observable, either directly or indirectly.

Level 3: techniques which use inputs which have a significant effect on the recorded fair value that are not based on observable market data.

The fair values of the financial instruments of the Company at June 30, 2019, were analyzed using the hierarchy as follows:



In millions	Total			Level 1		Level 2			Level 3
Derivative financial assets:
Foreign currency contract assets	$	0.2		$	—	$	0.2		$	—
Derivative financial liabilities:
Foreign currency contract liabilities	(0.3		)	—		(0.3		)	—
Interest bearing loans and borrowings:
Loan Notes due 2021	(25.0		)	—		(25.0		)	—
Loan Notes due 2023	(25.6		)	—		(25.6		)	—
Loan Notes due 2026	(26.2		)	—		(26.2		)	—
Revolving Credit Facility	(28.2		)	—		(28.2		)	—
Other financial liabilities:
Lease liabilities	(16.4		)	—		(16.4		)	—
Deferred contingent consideration	(0.5		)	—		—			(0.5		)

9. Derivatives and Financial Instruments (continued)

The following table presents the changes in Level 3 instruments for the Second Quarter ended June 30, 2019.



In millions	2019
Balance at January 1,	$	0.9
Payments made during year	(0.5		)
Unwind of discount on deferred consideration	0.1
Balance at June 30,	$	0.5
Total losses for the period included in profit and loss for assets held at the end at June 30,	0.1
Change in unrealized (gains) or losses for the period included in profit and loss for assets held at the end at June 30,	$	0.1