Financial Instruments

12 Months Ended

Dec. 31, 2018

Derivative Instruments and Hedging Activities Disclosure [Abstract]

FINANCIAL INSTRUMENTS

FINANCIAL INSTRUMENTS

Derivatives and Hedging

In the normal course of business, the Company is exposed to risks relating to changes in foreign currency exchange rates, commodity prices and interest rates. Derivative financial instruments, such as foreign currency exchange forward contracts, commodities futures contracts and interest rate swaps are used to manage the risks associated with changes in the conditions of those markets. All derivatives are recognized in the Consolidated Balance Sheets at fair value. The counterparties to the Company’s derivative agreements are primarily major international financial institutions. The Company continually monitors its derivative positions and the credit ratings of its counterparties and does not anticipate nonperformance by the counterparties.

Foreign Currency

The Company conducts a significant portion of its business in currencies other than the U.S. dollar and a portion of its business in currencies other than the functional currencies of its subsidiaries. As a result, the Company’s operating results are impacted by foreign currency exchange rate volatility.

The Company holds foreign currency forward contracts to purchase and sell various currencies to mitigate foreign currency exposure primarily with U.S. dollars and euro. The Company has not designated any foreign currency exchange forward contracts as eligible for hedge accounting and, as a result, changes in the fair value of foreign currency forward contracts are recorded in the Consolidated Statements of Operations as "Other income (expense), net." The total notional value of foreign currency exchange forward contracts held at December 31, 2018 and 2017 was approximately $102 million and $201 million, respectively, with settlement dates generally within one year.

Commodities

As part of its risk management policy, the Company enters into commodity futures contracts for the purpose of mitigating its exposure to fluctuations in prices of certain metals used in the production of its finished goods.  The Company held futures contracts to purchase and sell various metals, primarily tin and silver, for a notional amount of $28.9 million and $31.8 million at December 31, 2018 and 2017, respectively.  Substantially all contracts outstanding at December 31, 2018 have delivery dates within one year. The Company has not designated these derivatives as hedging instruments and, accordingly, records changes in their fair values in the Consolidated Statements of Operations as "Other income (expense), net."

Unrealized gains and losses on derivative contracts are accounted for in the Consolidated Statements of Cash Flows as "Operating activities."

Interest Rates

The Company entered into interest rate swaps to effectively fix the floating base rate portion of its interest payments on approximately $1.12 billion of U.S. dollar denominated debt and €276 million of euro denominated debt at 1.96% and 1.20%, respectively, through June 2020.

Changes in the fair value of a derivative instrument that is designated as, and meets all the required criteria of, a cash flow hedge are recorded in "Other comprehensive (loss) income" and reclassified from "Accumulated other comprehensive loss" into earnings as the underlying hedged item affects earnings. Amounts reclassified into earnings related to interest rate swaps are included in the Condensed Consolidated Statements of Operations as "Interest expense, net."

During 2018, the Company's interest rate swaps were deemed highly effective utilizing the dollar-offset method of assessing hedge effectiveness. The ineffectiveness resulting from the repriced portion of the Company's euro-denominated debt in 2017 totaled $1.0 million in 2018, and was recorded in the Consolidated Statements of Operations as "Other income (expense), net." The Company expects to reclassify $5.9 million of income from "Accumulated other comprehensive loss" to "Interest expense, net" in its Consolidated Statement of Operations during 2019.

Subsequent Event

In connection with the pay down of the Credit Facilities on January 31, 2019, the Company terminated and settled its existing interest rate swaps, and all remaining balances resulting from changes in fair value that were included in "Accumulated other comprehensive loss" were reclassified to the income statement during the first quarter of 2019.

The Company also entered into new interest rate swaps to effectively fix the floating rate of the interest payments associated with the new $750 million term loan through January 2024 with all remaining interest payments associated with the last two years (beginning from February 2024 to January 2026) reverting back to floating. In addition, the Company also entered into a net investment hedge to effectively convert the term loans borrowings under the New Credit Agreement, a U.S. dollar denominated debt obligation, into fixed-rate euro-denominated debt. Under this agreement, which expires in January 2024, the Company is obligated to make periodic euro-denominated coupon payments to the hedge counterparties on an aggregate initial notional amount of €662 million, in exchange for periodic U.S. dollar-denominated coupon payments from these hedge counterparties on an aggregate initial notional amount of $750 million.

The net result of the above hedges is a fixed interest rate of approximately 2.3% through January 2024.

Fair Value Measurements

The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis:

			December 31,
($ amounts in millions)	Balance sheet location	Classification	2018		2017
Asset Category
Foreign exchange and metals contracts not designated as hedging instruments	Other current assets	Level 2	$	0.9	$	2.0
Interest rate swaps designated as cash flow hedging instruments	Other current assets	Level 2	6.5		—
Interest rate swaps designated as cash flow hedging instruments	Other assets	Level 2	2.6		3.4
Available for sale equity securities	Other assets	Level 1	0.3		2.4
Available for sale equity securities	Other assets	Level 2	—		0.6
Total			$	10.3	$	8.4
Liability Category
Interest rate swaps designated as cash flow hedging instruments	Accrued expenses and other liabilities	Level 2	$	0.6	$	2.8
Foreign exchange and metals contracts not designated as hedging instruments	Accrued expenses and other liabilities	Level 2	1.2		1.4
Interest rate swaps designated as cash flow hedging instruments	Other liabilities	Level 2	0.3		0.8
Long-term contingent consideration	Contingent consideration	Level 3	57.4		79.2
Total			$	59.5	$	84.2

The following methods and assumptions were used to estimate the fair value of each class of the Company’s financial assets and liabilities:

Derivatives - Derivative assets and liabilities include foreign currency, metals and interest rate derivatives. The values are determined using pricing models based upon observable market inputs, such as market spot and futures prices on over-the-counter derivative instruments, market interest rates and consideration of counterparty credit risk.

Available for sale equity securities - Available for sale equity securities classified as Level 1 assets are measured using quoted market prices at the reporting date multiplied by the quantity held. Available for sales equity securities classified as Level 2 assets are measured using quoted prices for similar instruments in active markets.

Long-term contingent consideration - The long-term contingent consideration represents a potential liability of up to $100 million tied to the achievement of certain common stock trading price performance metrics and Adjusted EBITDA targets over a seven-year period ending December 2020 in connection with the MacDermid Acquisition.

• Common Stock - The common stock performance target, which represents an expected future payment value of $40.0 million, has been satisfied and is recorded at its present value utilizing a discount rate of approximately 2.48%. An increase or decrease in the discount rate of 1% changes the fair value measure of the metric by approximately $0.8 million. In the first quarter of 2019, the Company paid $40.0 million related to the achievement of these common stock performance targets.

• Adjusted EBITDA - The estimated fair value of the Adjusted EBITDA performance metric is derived using the income approach with unobservable inputs, based on present value and multi-year forecast assumptions, which include a discount rate of 10.5% and probability weighted Adjusted EBITDA assessments of expected future payment values of $0.0 million, $30.0 million and $60.0 million. At December 31, 2018, the Company determined there was a higher probability of achieving the Adjusted EBITDA target that results in an expected payment of $30.0 million based on the most recent multi-year forecast, which resulted in a reduction of the contingent consideration liability of $22.2 million. An increase or a decrease in the probability weighted Adjusted EBITDA assessments of future payment values of 10.0% changes the estimated fair value measure of the performance metric by approximately $2.4 million.

Changes in the estimated fair value of the long-term contingent consideration are recorded in the Consolidated Statements of Operations as "Selling, technical, general and administrative" expenses.

There were no significant transfers between the fair value hierarchy levels during 2018.

The carrying value and estimated fair value of the Company’s long-term debt each totaled $5.35 billion at December 31, 2018, and $5.44 billion and $5.58 billion, respectively, at December 31, 2017. The carrying values noted above include unamortized premiums, discounts and debt issuance costs. The estimated fair value of long-term debt is measured using quoted market prices at the reporting date multiplied by the gross carrying amount of the related debt, which excludes unamortized premiums, discounts and debt issuance costs. Such instruments are valued using Level 2 inputs.

Nonrecurring Fair Value Measurements

As a result of the 2016 annual goodwill impairment test, Industrial & Specialty segment recorded an impairment charge of $46.6 million to reduce the carrying value of its Energy Solutions reporting unit to its fair value. This measurement was performed on a non-recurring basis using significant unobservable inputs (Level 3). See Note 8, Goodwill and Intangible Assets, to the Consolidated Financial Statements for further information.