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 primary risks the Company manages using derivative instruments are interest rate risk, commodity price risk and foreign currency exchange risk. 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. 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.

The Company recognizes all derivative instruments as either assets or liabilities at fair value in the consolidated balance sheets. Commodity swaps and foreign currency exchange contracts are designated 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 "Accumulated other comprehensive 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 $1.6 million of unrealized gains, net of tax, related to currency rate and commodity price hedging will be reclassified from "Accumulated other comprehensive loss" into earnings. Foreign currency and commodity hedging is generally completed prospectively on a rolling basis for 15 and 36 months, respectively, depending on the type of risk being hedged.

During the first quarter of 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, 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 and have termination dates of March 2019 for $175.0 million notional amount and March 2020 for the remaining $425.0 million notional amount. Approximately 47.4% 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 December 31, 2017. The Company did not enter into any interest rate swap agreements during the year ended December 31, 2016.

As of December 31, 2017, 2016 and 2015, the Company had the following outstanding commodity and currency forward contracts that were entered into as hedges of forecasted transactions:



	Units Hedged
Commodity	2017	2016	2015	Unit
Aluminum	1,620	1,663	1,215	MT
Copper	667	746	472	MT
Natural gas	—	56,416	49,396	MMBtu
Steel	7,713	8,663	11,073	Short tons



	Units Hedged
Currency	2017	2016	2015
Canadian Dollar	18,080,000	26,130,000	587,556
European Euro	8,545,000	11,261,848	231,810
British Pound	7,807,744	4,191,763	113,115
Mexican Peso	126,400,000	148,200,000	28,504,800
Thailand Baht	—	23,231,639	—
Singapore Dollar	1,765,000	4,375,000	—

The effects of derivative instruments on the consolidated statements of comprehensive income and consolidated statements of operations for the years ended December 31, 2017, 2016 and 2015 for gains or losses initially recognized in AOCI in the consolidated balance sheets were as follows:



Derivatives in cash flow hedging relationships (in millions)	Pretax gain (loss) recognized in AOCI (effective portion)								Location of gain (loss) reclassified from AOCI into income (effective portion)	Pretax gain (loss) reclassified from AOCI into income (effective portion)
	2017		2016			2015				2017		2016			2015
Foreign currency exchange contracts	$	3.8	$	(0.1	)	$	(0.8	)	Cost of sales	$	3.3	$	—		$	(1.4	)
Commodity contracts	2.4		2.2			(5.3		)	Cost of sales	1.1		(1.5		)	(3.4		)
Interest rate swap contracts	2.8		—			—			Interest expense	—		—			—
Total	$	9.0	$	2.1		$	(6.1	)		$	4.4	$	(1.5	)	$	(4.8	)



Derivatives in cash flow hedging 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)
	2017		2016		2015
Commodity contracts	$	0.2	$	—	$	0.1	Cost of sales
Total	$	0.2	$	—	$	0.1

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 first quarter of 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. This agreement involved 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. On June 14, 2017, this interest rate swap agreement was terminated and the Company received $7.7 million, the fair value of the swap including accrued interest. Accordingly, hedge accounting was discontinued and the hedge accounting adjustment to the Company's Senior Notes due 2024 of $0.3 million will be amortized to "Interest expense" in the consolidated statements of operations through February 2024.

On October 3, 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. 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 and terminates in February 2024. Approximately 33.6% 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 December 31, 2017.

The gain or loss on the hedged items (that is, fixed-rate borrowing of 9.50% Senior Notes due 2024) attributable to the hedged benchmark interest rate risk (risk of changes in the applicable LIBOR swap rate) and the offsetting gain or loss on the related interest rate swap is as follows:



Derivatives in fair value hedging relationships (in millions)	Gain/(Loss) on Swap							Income Statement Classification	Gain/(Loss) on Borrowings
	2017			2016		2015			2017		2016		2015
Interest rate swap contract	$	(9.0	)	$	—	$	—	Interest Expense	$	8.7	$	—	$	—
Total	$	(9.0	)	$	—	$	—		$	8.7	$	—	$	—

The difference of $0.3 million represents hedge ineffectiveness. The net swap settlements that accrue each period are reported in "Interest expense" in the consolidated statements of operations. As of December 31, 2017, the total notional amount of the Company’s receive-fixed/pay-variable interest rate swap was $425.0 million. The Company did not enter into any interest rate swap agreements during the year ended December 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 "Accumulated other comprehensive loss" 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.

During the first quarter of 2017, the Company entered into a three year cross-currency interest rate swap contract for a notional value of €50.0 million to protect the value of its net investment in Euros. The carrying value of the net investment in Euros 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 "Accumulated other comprehensive loss." The Company uses the forward-rate method of assessing hedge effectiveness when cross-currency swap contracts are designated as hedging instruments. The Company did not enter into any cross-currency interest rate swap contracts during the years ended December 31, 2016 or 2015.



Derivatives in net investments hedging relationships (in millions)	Pretax gain (loss) recognized in AOCI (effective portion)							Location of gain (loss) reclassified from AOCI into income (effective portion)	Amount of gain (loss) reclassified from AOCI into income (effective portion)
	2017			2016		2015			2017		2016		2015
Interest rate swap contract	$	(7.5	)	$	—	$	—	Selling, general and administrative expenses	$	—	$	—	$	—
Total	$	(7.5	)	$	—	$	—		$	—	$	—	$	—

As of December 31, 2017, there was no ineffectiveness on hedges designated as net investment hedges.

Derivatives Not Designated as Hedging Instruments

The Company enters into foreign currency exchange contracts that are not designated as hedge relationships to offset, in part, the impact of certain intercompany transactions and to further mitigate short-term currency impacts. These derivative instruments are not designated as hedging relationships; therefore, fair value gains and losses on these contracts are recorded in earnings.

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 consolidated statements of operations. As of December 31, 2017, 2016 and 2015, the Company had the following outstanding currency forward contracts that were not designated as hedging instruments:



	Units Hedged
Commodity	2017	2016	2015	Unit	Type
Aluminum	—	28	—	MT	Cash flow
Steel	—	340	—	Short tons	Cash flow



	Units Hedged
Currency	2017	2016	2015	Recognized Location	Purpose
Canadian Dollar	—	—	1,117,850	Other expense (income) — net	Accounts payable and receivable settlement
European Euro	69,300,000	16,000,000	—	Other expense (income) — net	Accounts payable and receivable settlement
Swiss Franc	4,800,000	3,150,000	—	Other expense (income) — net	Accounts payable and receivable settlement
British Pound	14,912,019	8,192,692	—	Other expense (income) — net	Accounts payable and receivable settlement
Singapore Dollar	28,127,000	—	—	Other expense (income) — net	Accounts payable and receivable settlement



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
	Year Ended
	2017			2016			2015
Foreign currency exchange contracts	$	(6.5	)	$	(0.2	)	$	0.1		Other expense (income) — net
Commodity contracts — short-term	—			0.8			(0.7		)	Other expense (income) — net
Commodity contracts — long-term	—			—			(0.1		)	Other expense (income) — net
Total	$	(6.5	)	$	0.6		$	(0.7	)

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



		Asset Derivatives
(in millions)	Balance Sheet Location	Fair Value
		2017		2016
Derivatives designated as hedging instruments:
Foreign currency exchange contracts	Prepaids and other current assets	$	1.1	$	0.6
Commodity contracts	Prepaids and other current assets	1.7		0.9
Interest rate swap contracts	Prepaids and other current assets	1.7		—
Commodity contracts	Other non-current assets	0.6		0.2
Interest rate swap contracts	Other non-current assets	2.3		—
Total derivatives designated as hedging instruments		$	7.4	$	1.7

Total asset derivatives		$	7.4	$	1.7

The fair value of outstanding derivative contracts recorded as liabilities in the consolidated balance sheets as of December 31, 2017 and 2016 was as follows:



		Liability Derivatives
(in millions)	Balance Sheet Location	Fair Value
		2017		2016
Derivatives designated as hedging instruments:
Foreign currency exchange contracts	Accrued expenses and other liabilities	$	0.6	$	0.8
Commodity contracts	Accrued expenses and other liabilities	0.1		0.1
Interest rate swap contracts	Other long-term liabilities	17.7		—
Total derivatives designated as hedging instruments		$	18.4	$	0.9

Derivatives NOT designated as hedging instruments:
Foreign currency exchange contracts	Accrued expenses and other liabilities	$	0.5	$	0.2
Total derivatives NOT designated as hedging instruments		$	0.5	$	0.2

Total liability derivatives		$	18.9	$	1.1