Derivative Financial Instruments

The company’s risk management objective is to ensure that business exposures to risks that have been identified and measured and are capable of being controlled are minimized or managed using what it believes to be the most effective and efficient methods to manage, eliminate, reduce, or transfer such exposures. Operating decisions consider associated risks and transactions are structured to minimize or manage risk whenever possible.

Use of derivative instruments is consistent with the overall business and risk management objectives of the company. Derivative instruments may be used to manage business risk within limits specified by the company’s risk policy and manage exposures that have been identified through the risk identification and measurement process, provided that they clearly qualify as “hedging” activities as defined in the risk policy. Use of derivative instruments is not automatic, nor is it necessarily the only response to managing pertinent business risk. Use is permitted only after the risks that have been identified are determined to exceed defined tolerance levels and are considered to be unavoidable.

The primary risks managed by the company by using derivative instruments are interest rate risk, commodity price risk and foreign currency exchange risk. Interest rate swap and cap instruments are used to manage interest rate or fair value risk. Swap contracts on various commodities are used to manage the price risk associated with forecasted purchases of materials used in the company’s manufacturing processes. The company also enters into various foreign currency derivative instruments to manage foreign currency risk associated with the company’s projected foreign currency denominated purchases, sales, and receivable and payable balances.

ASC Topic 815-10, “Derivatives and Hedging,” requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the statement of financial position. In accordance with ASC Topic 815-10, the company designates commodity swaps, foreign currency exchange contracts, and float-to-fixed interest rate derivative contracts as cash flow hedges of forecasted purchases of commodities and currencies, and of variable rate interest payments. Also in accordance with ASC Topic 815-10, the company designates fixed-to-float interest rate swaps as fair market value hedges of fixed rate debt, which synthetically swap the company’s fixed rate debt to floating rate debt.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income and is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. In the next twelve months the company estimates that $0.1 million of unrealized losses net of tax related to commodity price and currency exchange rate hedging will be reclassified from other comprehensive income into earnings. Foreign currency and commodity hedging is generally completed prospectively on a rolling basis for between twelve and twenty-four months, respectively, depending on the type of risk being hedged.

The risk management objective for the company’s fair market value interest rate hedges is to effectively change the amount of the underlying debt equal to the notional value of the hedges from a fixed to a floating interest rate based on the benchmark one-month LIBOR rate. These swaps include an embedded call feature to match the terms of the call schedule embedded in the Senior Notes. Changes in the fair value of the interest rate swap are expected to offset changes in the fair value of the debt due to changes in the one-month LIBOR benchmark interest rate.

As of June 30, 2014 and December 31, 2013, the company had the following outstanding commodity and foreign currency exchange contracts that were intended to hedge forecasted transactions:



	Units Hedged
Commodity	June 30, 2014	December 31, 2013	Unit	Type
Aluminum	2,495	1,622	MT	Cash Flow
Copper	919	382	MT	Cash Flow
Natural Gas	216,533	214,277	MMBtu	Cash Flow
Steel	13,866	11,503	Tons	Cash Flow



	Units Hedged
Short Currency	June 30, 2014	December 31, 2013	Type
Canadian Dollar	10,430,790	11,011,092	Cash Flow
European Euro	73,297,652	74,934,975	Cash Flow
South Korean Won	3,038,650,026	1,258,808,642	Cash Flow
Singapore Dollar	6,345,076	5,280,000	Cash Flow
United States Dollar	24,100,000	14,380,959	Cash Flow
Chinese Renminbi	—	245,324,730	Cash Flow
British Pound	496,464	—	Cash Flow
Japanese Yen	48,000,000	—	Cash Flow

As of both June 30, 2014 and December 31, 2013, the company had outstanding $100.0 million notional amount of 3.00% LIBOR caps related to the term loan portion of its credit facility. The remaining unhedged portions of Term Loans A and B continue to bear interest according to the terms of the New Senior Credit Facility without the benefit of the interest rate cap.

As of June 30, 2014, the company had outstanding $175.0 million notional amount of float-to-fixed interest rate swaps outstanding related to Term Loan A under the New Senior Credit Facility that were designated as cash flow hedges. As a result, $175.0 million of Term Loan A was hedged at an interest rate of 1.635%, plus the applicable spread based on the Consolidated Total Leverage Ratio of the company as defined under the New Senior Credit Facility.

As of both June 30, 2014 and December 31, 2013, the company had $75.0 million and $125.0 million total notional amount of fixed-to-float interest rate swaps outstanding related to the Senior Notes due 2020 and 2022, respectively, that were designated as fair value hedges.

See Note 8, "Debt," for a description of the debt instruments.

For derivative instruments that are not designated as hedging instruments under ASC Topic 815-10, the gains or losses on the derivatives are recognized in current earnings within cost of sales or other income, net in the Condensed Consolidated Statements of Operations. As of June 30, 2014 and December 31, 2013, the company had the following outstanding foreign currency exchange contracts that were not designated as hedging instruments:



	Units Hedged
Short Currency	June 30, 2014	December 31, 2013	Recognized Location	Purpose
Euro	10,624,220	31,738,273	Other income, net	Accounts Payable and Receivable Settlement
United States Dollar	—	29,091,053	Other income, net	Accounts Payable and Receivable Settlement
Australian Dollar	—	1,000,000	Other income, net	Accounts Payable and Receivable Settlement
Chinese Renminbi	—	125,000,000	Other income, net	Accounts Payable and Receivable Settlement
Japanese Yen	48,000,000	—	Other income, net	Accounts Payable and Receivable Settlement
Singapore Dollar	865,076	—	Other income, net	Accounts Payable and Receivable Settlement

The fair value of outstanding derivative contracts recorded as assets in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 was as follows:



		ASSET DERIVATIVES
		June 30, 2014		December 31, 2013
(in millions)	Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts	Other current assets	$	0.7	$	2.3
Commodity contracts	Other current assets	0.2		0.2
Commodity contracts	Other non-current assets	0.1		—
Total derivatives designated as hedging instruments		$	1.0	$	2.5



		ASSET DERIVATIVES
		June 30, 2014		December 31, 2013
(in millions)	Balance Sheet Location	Fair Value
Derivatives NOT designated as hedging instruments
Foreign exchange contracts	Other current assets	$	0.4	$	0.6
Total derivatives NOT designated as hedging instruments		$	0.4	$	0.6

Total asset derivatives		$	1.4	$	3.1

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 was as follows:



		LIABILITY DERIVATIVES
		June 30, 2014		December 31, 2013
(in millions)	Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts	Accounts payable and accrued expenses	$	0.8	$	0.5
Commodity contracts	Accounts payable and accrued expenses	0.2		0.4
Interest rate swap contracts: Float-to-fixed	Other non-current liabilities	1.7		—
Interest rate swap contracts: Fixed-to-float	Other non-current liabilities	7.5		14.9
Total derivatives designated as hedging instruments		$	10.2	$	15.8



		LIABILITY DERIVATIVES
		June 30, 2014		December 31, 2013
(in millions)	Balance Sheet Location	Fair Value
Derivatives NOT designated as hedging instruments
Foreign exchange contracts	Accounts payable and accrued expenses	$	0.8	$	0.6
Total derivatives NOT designated as hedging instruments		$	0.8	$	0.6

Total liability derivatives		$	11.0	$	16.4

The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the three months ended June 30, 2014 and June 30, 2013 for gains or losses initially recognized in Other Comprehensive Income (OCI) in the Condensed Consolidated Balance Sheets was as follows:



	Amount of Gain or (Loss) on Derivative Recognized in OCI (Effective Portion, net of tax)						Location of Gain or (Loss) Reclassified from Accumulated	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships (in millions)	June 30, 2014			June 30, 2013			OCI into Income (Effective Portion)	June 30, 2014			June 30, 2013
Foreign exchange contracts	$	(0.2	)	$	0.5		Cost of sales	$	0.3		$	0.5
Commodity contracts	$	0.4		$	(0.2	)	Cost of sales	$	(0.1	)	$	(0.6	)
Interest rate swap contracts: Float-to-fixed	(1.1		)	—			Interest expense	—			—
Total	$	(0.9	)	$	0.3			$	0.2		$	(0.1	)



Derivatives	Location of Gain or (Loss) on Derivative Recognized in Income (Ineffective Portion and Amount Excluded from	Amount of Gain or (Loss) on Derivative Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Relationships (in millions)	Effectiveness Testing)	June 30, 2014		June 30, 2013
Commodity contracts	Cost of sales	$	—	$	(0.1	)
Total		$	—	$	(0.1	)



Derivatives Not Designated as	Location of Gain or (Loss) Recognized on Derivative in	Amount of Gain or (Loss) on Derivative Recognized in Income
Hedging Instruments (in millions)	Income	June 30, 2014			June 30, 2013
Foreign exchange contracts	Other income	$	(0.4	)	$	(0.6	)
Total		$	(0.4	)	$	(0.6	)

The effect of derivative instruments on the Condensed Consolidated Statements of Operations for the six months ended June 30, 2014 and June 30, 2013 for gains or losses initially recognized in Other Comprehensive Income (OCI) in the Condensed Consolidated Balance Sheets was as follows:



	Amount of Gain or (Loss) on Derivative Recognized in OCI (Effective Portion, net of tax)						Location of Gain or (Loss) Reclassified from Accumulated	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
Derivatives in Cash Flow Hedging Relationships (in millions)	June 30, 2014			June 30, 2013			OCI into Income (Effective Portion)	June 30, 2014			June 30, 2013
Foreign exchange contracts	$	(1.1	)	$	(1.8	)	Cost of sales	$	0.6		$	0.8
Commodity contracts	$	0.2		$	(0.3	)	Cost of sales	$	(0.2	)	$	(1.1	)
Interest rate swaps contracts: Float-to-fixed	(1.1		)	—			Interest expense	—			—
Total	$	(2.0	)	$	(2.1	)		$	0.4		$	(0.3	)



Derivatives	Location of Gain or (Loss) on Derivative Recognized in Income (Ineffective Portion and Amount Excluded from	Amount of Gain or (Loss) on Derivative Recognized in Income (Ineffective Portion and Amount Excluded from Effectiveness Testing)
Relationships (in millions)	Effectiveness Testing)	June 30, 2014		June 30, 2013
Commodity contracts	Cost of sales	$	—	$	(0.1	)
Total		$	—	$	(0.1	)



Derivatives Not Designated as	Location of Gain or (Loss) Recognized on Derivative in	Amount of Gain or (Loss) on Derivative Recognized in Income
Hedging Instruments (in millions)	Income	June 30, 2014			June 30, 2013
Foreign exchange contracts	Other income	$	(0.4	)	$	(0.8	)
Total		$	(0.4	)	$	(0.8	)

The effect of Fair Market Value designated derivative instruments on the Condensed Consolidated Statements of Operations for the three months ended June 30, 2014 and June 30, 2013 for gains or losses recognized through income was as follows:



Derivatives Designated as Fair Market Value	Location of Gain or (Loss) on Derivative	Amount of Gain or (Loss) on Derivative Recognized in Income
Instruments under ASC 815 (in millions)	Recognized in Income	June 30, 2014		June 30, 2013
Interest rate swap contracts: Fixed-to-float	Interest expense	$	3.8	$	(6.0	)
Total		$	3.8	$	(6.0	)

The effect of Fair Market Value designated derivative instruments on the Condensed Consolidated Statements of Operations for the six months ended June 30, 2014 and June 30, 2013 for gains or losses recognized through income was as follows:



Derivatives Designated as Fair Market Value	Location of Gain or (Loss) on Derivative	Amount of Gain or (Loss) on Derivative Recognized in Income
Instruments under ASC 815 (in millions)	Recognized in Income	June 30, 2014		June 30, 2013
Interest rate swap contracts: Fixed-to-float	Interest expense	$	7.4	$	(7.3	)
Total		$	7.4	$	(7.3	)