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 eliminate, reduce or transfer such exposures. Operating decisions consider these associated risks and structure transactions to minimize or manage these risks whenever possible.

The use of derivative instruments is consistent with the overall business and risk management objectives of the Company. The Company uses derivative instruments to manage business risk exposures that have been identified through the risk identification and measurement process, provided that they clearly qualify as "hedging" activities as defined in its risk policy. It is the Company's policy to enter into derivative transactions only to the extent true exposures exist; the Company does not enter into derivative transactions for trading or other speculative purposes.

The primary risks the Company manages using derivative instruments are commodity price risk, interest rate risk and foreign currency exchange 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 process. The Company also enters into various foreign currency derivative instruments to help manage foreign currency risk associated with its projected purchases and sales and foreign currency denominated receivable and payable balances. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s fixed and floating-rate borrowings. Cross-currency interest rate swaps are entered into to protect the value of the Company’s investments in its foreign subsidiaries.

ASC Subtopic 815-10, "Derivatives and Hedges," requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. In accordance with ASC Subtopic 815-10, the Company designates commodity swaps and foreign currency exchange contracts as cash flow hedges of forecasted purchases of commodities and currencies, certain interest rate swaps as cash flow hedges of floating-rate borrowings, and the remainder as fair value hedges of fixed-rate borrowings, and certain cross-currency interest rate swaps as hedges of net investments in its foreign subsidiaries.

Cash flow hedging strategy

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 (loss) and 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 $0.9 million of unrealized gains, net of tax, related to commodity price and currency rate hedging, which will be reclassified from other comprehensive (loss) income into earnings. Foreign currency and commodity hedging is generally completed prospectively on a rolling basis for fifteen and thirty-six months, respectively, depending on the type of risk being hedged.

During the three months ended March 31, 2017, the Company entered into two interest rate swap agreements with a total notional amount of $600.0 million to manage interest rate risk exposure by converting the Company’s floating-rate debt to a fixed-rate basis for the next two to three years, thus reducing the impact from fluctuations in interest rates on future interest expense. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal. Approximately 43.0% of the Company’s outstanding long-term debt had its interest payments designated as cash flow hedges under these interest rate swap agreements as of March 31, 2017. The Company did not enter into any interest rate swap agreements during the three months ended March 31, 2016.

As of March 31, 2017 and December 31, 2016, the Company had the following outstanding commodity and currency forward contracts that were entered into as hedge forecasted transactions:



	Units Hedged
Commodity	March 31, 2017	December 31, 2016	Unit	Type
Aluminum	2,115	1,663	MT	Cash flow
Copper	709	746	MT	Cash flow
Natural gas	26,523	56,416	MMBtu	Cash flow
Steel	7,225	8,663	Short tons	Cash flow



	Units Hedged
Currency	March 31, 2017	December 31, 2016	Type
Canadian Dollar	17,230,000	26,130,000	Cash flow
European Euro	15,782,119	11,261,848	Cash flow
British Pound	5,028,775	4,191,763	Cash flow
Mexican Peso	107,400,000	148,200,000	Cash flow
Thailand Baht	13,941,893	23,231,639	Cash flow
Singapore Dollar	3,775,000	4,375,000	Cash flow

For derivative instruments that are not designated as hedging instruments, the gains or losses on the derivatives are recognized in current earnings within "Other expense (income) — net" in the accompanying consolidated (condensed) statement of operations. As of March 31, 2017 and December 31, 2016, the Company had the following outstanding commodity and currency forward contracts that were not designated as hedging instruments:



	Units Hedged
Commodity	March 31, 2017	December 31, 2016	Unit	Type
Aluminum	13	28	MT	Cash flow
Steel	189	240	Short tons	Cash flow



	Units Hedged
Currency	March 31, 2017	December 31, 2016	Recognized Location	Purpose
Singapore Dollar	28,127,000	—	Other expense (income) — net	Notes payable and receivable settlement
European Euro	75,300,000	16,000,000	Other expense (income) — net	Notes and accounts payable and receivable settlement
British Pound	4,790,037	8,192,692	Other expense (income) — net	Accounts payable and receivable settlement
Chinese Yuan	107,383,629	—	Other expense (income) — net	Notes payable and receivable settlement
Swiss Franc	4,000,000	3,150,000	Other expense (income) — net	Accounts payable and receivable settlement

Fair value hedging strategy

For derivative instruments that are designated and qualify as a fair value hedge (i.e., hedging the exposure to changes in the fair value of an asset or a liability or an identified portion thereof that is attributable to a particular risk), the gain or loss on the derivative instrument as well as the offsetting gain or loss on the hedged item attributable to the hedged risk are recognized in the same line item associated with the hedged item in current earnings.

During the three months ended March 31, 2017, the Company entered into an interest rate swap agreement with a total notional amount of $425.0 million to manage interest rate risk exposure by converting the Company’s fixed-rate debt to a floating-rate basis for the next seven years. This agreement involves the receipt of fixed rate amounts in exchange for floating rate interest payments over the life of the agreement without an exchange of the underlying principal. Approximately 31.0% of the Company’s outstanding long-term debt had its interest payments designated as a fair value hedge under this interest rate swap agreement as of March 31, 2017. The Company did not enter into any interest rate swap agreements during the three months ended March 31, 2016.

Hedge of net investment in foreign operations strategy

For derivative instruments that are designated and qualify as a hedge of a net investment in a foreign currency, the gain or loss is reported in other comprehensive income as part of the cumulative translation adjustment to the extent it is effective. Any ineffective portions of net investment hedges are recognized in earnings during the period of change.

The Company entered into a cross-currency interest rate swap contract to protect the value of its net investments in Euro. The carrying value of the net investment in Euro that is designated as a hedging instrument is remeasured at each reporting date to reflect the changes in the foreign currency exchange spot rate, with changes since the last remeasurement date recorded in other comprehensive income. The Company uses the forward-rate method of assessing hedge effectiveness when cross-currency swap contracts are designated as hedging instruments.

The fair value of outstanding derivative contracts recorded as assets in the accompanying consolidated (condensed) balance sheets as of March 31, 2017 and December 31, 2016 was as follows:



	ASSET DERIVATIVES
(in millions)	Balance Sheet Location	Fair Value
		March 31, 2017		December 31, 2016
Derivatives designated as hedging instruments:
Foreign currency exchange contracts	Prepaids and other current assets	$	0.9	$	0.6
Commodity contracts	Prepaids and other current assets	1.0		0.9
Cross-currency swap contract	Prepaids and other current assets	1.1		—
Commodity contracts	Other non-current assets	0.4		0.2
Interest rate swap contracts	Other non-current assets	1.2		—
Cross-currency swap contract	Other non-current assets	2.2		—
Total derivatives designated as hedging instruments		6.8		1.7

Derivatives NOT designated as hedging instruments:
Foreign currency exchange contracts	Prepaids and other current assets	0.1		—
Total derivatives NOT designated as hedging instruments		0.1		—

Total asset derivatives		$	6.9	$	1.7

The fair values of outstanding derivative contracts recorded as liabilities in the accompanying consolidated (condensed) balance sheets as of March 31, 2017 and December 31, 2016 were as follows:



	LIABILITY DERIVATIVES
(in millions)	Balance Sheet Location	Fair Value
		March 31, 2017		December 31, 2016
Derivatives designated as hedging instruments:
Foreign currency exchange contracts	Accrued expenses and other liabilities	$	0.4	$	0.8
Commodity contracts	Accrued expenses and other liabilities	—		0.1
Interest rate swap contracts	Accrued expenses and other liabilities	2.8		—
Interest rate swap contracts	Other long-term liabilities	5.7		—
Total derivatives designated as hedging instruments		8.9		0.9

Derivatives NOT designated as hedging instruments:
Foreign currency exchange contracts	Accrued expenses and other liabilities	0.2		0.2
Total derivatives NOT designated as hedging instruments		0.2		0.2

Total liability derivatives		$	9.1	$	1.1

The effects of derivative instruments in the accompanying consolidated (condensed) statements of operations for the three months ended March 31, 2017 and 2016 for gains or losses initially recognized in "Accumulated other comprehensive loss" ("AOCI") in the accompanying consolidated (condensed) balance sheets were as follows:



Derivatives in cash flow hedging relationships (in millions)	Amount of gain (loss) recognized in AOCI on derivative (effective portion, net of tax)					Location of gain (loss) reclassified from AOCI into income (effective portion)	Amount of gain (loss) reclassified from AOCI into income (effective portion)
	Three Months Ended March 31,						Three Months Ended March 31,
	2017			2016			2017		2016
Foreign exchange contracts	$	0.4		$	0.1	Cost of sales	$	0.2	$	(0.1	)
Commodity contracts	—			0.8		Cost of sales	0.2		(0.9		)
Interest rate swap contracts	(1.0		)	—		Selling, general and administrative expenses	—		—
Cross-currency swap contract ⁽¹⁾	3.3			—		Selling, general and administrative expenses	—		—
Total	$	2.7		$	0.9		$	0.4	$	(1.0	)

⁽¹⁾The amount of gain recognized in AOCI for the cross-currency swap contract is included in other comprehensive income as part of the cumulative translation adjustment in the accompanying unaudited consolidated (condensed) statements of comprehensive income.



Derivatives relationships (in millions)	Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)				Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing)
	Three Months Ended March 31,
	2017		2016
Commodity contracts	$	0.3	$	—	Cost of sales
Total	$	0.3	$	—



Derivatives NOT designated as hedging instruments (in millions)	Amount of gain (loss) recognized in income on derivative						Location of gain (loss) recognized in income on derivative
	Three Months Ended March 31,
	2017			2016
Foreign exchange contracts	$	(0.3	)	$	(0.1	)	Other expense (income) — net
Commodity contracts	—			0.5			Other expense (income) — net
Total	$	(0.3	)	$	0.4