Derivative Financial Instruments

6 Months Ended

Jun. 30, 2013

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

The Company uses forward foreign currency exchange contracts to partially reduce risks related to transactions denominated in foreign currencies. The Company offsets fair value amounts related to foreign currency exchange contracts executed with the same counterparty. These contracts hedge firm commitments and forecasted transactions relating to cash flows associated with sales and purchases denominated in currencies other than the Company's subsidiaries' functional currencies. Changes in the fair value of forward foreign currency exchange contracts that are effective as hedges are recorded in accumulated other comprehensive income (loss) (“OCI”). Deferred gains or losses are reclassified from OCI to the unaudited condensed consolidated statements of comprehensive income in the same period as the gains or losses from the underlying transactions are recorded and are generally recognized in cost of sales. The ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings and generally recognized in cost of sales.

The Company uses interest rate swap agreements to partially reduce risks related to floating rate financing agreements that are subject to changes in the market rate of interest. Terms of the interest rate swap agreements provide for the Company to receive a variable interest rate and pay a fixed interest rate. The Company's interest rate swap agreements and its variable rate financings are based upon LIBOR. Changes in the fair value of interest rate swap agreements that are effective as hedges are recorded in OCI. Deferred gains or losses are reclassified from OCI to the unaudited condensed consolidated statements of comprehensive income in the same period as the gains or losses from the underlying transactions are recorded and are generally recognized in interest expense. The ineffective portion of derivatives that are classified as hedges is immediately recognized in earnings and included on the line “Other” in the “Other (income) expense” section of the unaudited condensed consolidated statements of operations.

Interest rate swap agreements and forward foreign currency exchange contracts held by the Company have been designated as hedges of forecasted cash flows. The Company does not currently hold any nonderivative instruments designated as hedges or any derivatives designated as fair value hedges.

The Company periodically enters into foreign currency exchange contracts that do not meet the criteria for hedge accounting. These derivatives are used to reduce the Company's exposure to foreign currency risk related to forecasted purchase or sales transactions or forecasted intercompany cash payments or settlements. Gains and losses on these derivatives are included on the line “Cost of sales” or “Other” in the “Other (income) expense” section of the unaudited condensed consolidated statements of operations.

Cash flows from hedging activities are reported in the unaudited condensed consolidated statements of cash flows in the same classification as the hedged item, generally as a component of cash flows from operations.

The Company measures its derivatives at fair value on a recurring basis using significant observable inputs, which is Level 2 as defined in the fair value hierarchy. The Company uses a present value technique that incorporates the LIBOR swap curve, foreign currency spot rates and foreign currency forward rates to value its derivatives, including its interest rate swap agreements and foreign currency exchange contracts, and also incorporates the effect of its subsidiary and counterparty credit risk into the valuation.

Foreign Currency Derivatives: HBB held forward foreign currency exchange contracts denominated in Canadian dollars with total notional amounts of $6.0 million, $10.5 million and $12.2 million at June 30, 2013, December 31, 2012 and June 30, 2012, respectively. The fair value of these contracts approximated a net asset of $0.3 million, a net liability of less than $0.1 million, and a net asset of $0.3 million at June 30, 2013, December 31, 2012, and June 30, 2012, respectively.

Forward foreign currency exchange contracts that qualify for hedge accounting are used to hedge transactions expected to occur within the next twelve months. The mark-to-market effect of forward foreign currency exchange contracts that are considered effective as hedges has been included in OCI. Based on market valuations at June 30, 2013, $0.2 million of the amount included in OCI is expected to be reclassified as income into the consolidated statement of comprehensive income (loss) over the next twelve months, as the transactions occur.

Interest Rate Derivatives: HBB has interest rate swap agreements that hedge interest payments on its one-month LIBOR borrowings. The following table summarizes the notional amounts, related rates and remaining terms of active interest rate swap agreements at June 30, 2013, December 31, 2012, and June 30, 2012:

Notional Amount						Average Fixed Rate
JUNE 30 2013		DECEMBER 31 2012		JUNE 30 2012		JUNE 30 2013		DECEMBER 31 2012		JUNE 30 2012		Remaining Term at June 30, 2013
(In millions)
$	20.0	$	25.0	$	25.0	1.4	%	4.0	%	4.1	%	delayed contracts extending to January 2020

The fair value of all interest rate swap agreements was a net asset of $0.8 million, a net liability of $0.5 million, and a net liability of $0.9 million at June 30, 2013, December 31, 2012, and June 30, 2012, respectively. The mark-to-market effect of interest rate swap agreements that are considered effective as hedges has been included in OCI. Based on market valuations at June 30, 2013, $0.5 million of the amount included in OCI is expected to be reclassified as income into the consolidated statement of comprehensive income (loss) over the next twelve months, as cash flow payments are made in accordance with the interest rate swap agreements. The interest rate swap agreements held by HBB on June 30, 2013 are expected to continue to be effective as hedges.

The following table summarizes the fair value of derivatives designated as hedging instruments reflected on a gross basis at June 30, 2013, December 31, 2012, and June 30, 2012 as recorded in the unaudited condensed consolidated balance sheets:

	Derivative Assets
	Balance Sheet Location	JUNE 30 2013		DECEMBER 31 2012		JUNE 30 2012
Interest rate swap agreements	Prepaid expenses and other	$	64	$	—	$	—
Interest rate swap agreements	Other non-current assets	700		—		—
Foreign currency exchange contracts	Prepaid expenses and other	326		—		257
		$	1,090	$	—	$	257
	Derivative Liabilities
	Balance Sheet Location	JUNE 30 2013		DECEMBER 31 2012		JUNE 30 2012
Interest rate swap agreements	Other current liabilities	$	—	$	456	$	878
Foreign currency exchange contracts	Other current liabilities	—		4		—
		$	—	$	460	$	878

The following table summarizes the pre-tax impact of derivative instruments for the three and six months endedJune 30, 2013 and 2012 as recorded in the unaudited condensed consolidated statements of operations:

	Amount of Gain or (Loss) Recognized in OCI on Derivatives (Effective Portion)										Location of Gain or (Loss) Reclassified from OCI into Income (Effective Portion)	Amount of Gain or (Loss) Reclassified from OCI into Income (Effective Portion)
	THREE MONTHS					SIX MONTHS						THREE MONTHS						SIX MONTHS
Derivatives in Cash Flow Hedging Relationships	2013		2012			2013		2012				2013			2012			2013			2012
Interest rate swap agreements	$	763	$	(10	)	$	760	$	(95	)	Interest expense	$	(228	)	$	(343	)	$	(460	)	$	(743	)
Foreign currency exchange contracts	170		374			369		(120		)	Cost of sales	27			230			17			(9		)
Total	$	933	$	364		$	1,129	$	(215	)		$	(201	)	$	(113	)	$	(443	)	$	(752	)
												Amount of Gain or (Loss) Recognized in Income on Derivatives
												THREE MONTHS						SIX MONTHS
Derivatives Not Designated as Hedging Instruments											Location of Gain or (Loss) Recognized in Income on Derivative	2013			2012			2013			2012
Interest rate swap agreements											N/A	$	—		$	—		$	—		$	—
Foreign currency exchange contracts											Other	—			67			—			(162		)
Total												$	—		$	67		$	—		$	(162	)

See Note 8 for a discussion of the Company's fair value disclosures. There was no gain or loss recognized resulting from ineffectiveness and no amounts were excluded from effectiveness testing.