7. Derivative Instruments

The Company’s corporate and foreign subsidiaries use foreign currency forward exchange contracts and foreign exchange option contracts to limit the exposure of exchange rate fluctuations on certain foreign currency receivables, payables, and other known and forecasted transactional exposures for periods consistent with the expected cash flow of the underlying transactions. The foreign currency forward exchange and foreign exchange option contracts generally mature within eighteen months and are designed to limit exposure to exchange rate fluctuations. The Company also uses cash flow hedges to limit the exposure to changes in natural gas prices. The natural gas forward contracts generally mature within one to eighteen months. The Company enters into derivative financial instruments with high credit quality counterparties and diversifies its positions among such counterparties. In addition, various master netting arrangements are in place with counterparties to facilitate settlement of gains and losses on these contracts. The Company does not currently offset derivative positions on these contracts. The Company accounts for its derivative instruments under Accounting Standards Codification (ASC) 815 “Derivatives and Hedging.”

The fair value of outstanding derivative contracts recorded as assets in the accompanying condensed consolidated balance sheets were as follows:

		September 30,		December 31,
Asset Derivatives	Balance Sheet Locations	2013		2012
Derivatives designated as hedging instruments under ASC 815:
Foreign exchange contracts	Other current assets	$	716	$	545
Foreign exchange contracts	Other assets	12		142

Total derivatives designated as hedging instruments under ASC 815		728		687
Derivatives not designated as hedging
instruments under ASC 815:
Foreign exchange contracts	Other current assets	854		433

Total asset derivatives		$	1,582	$	1,120

The fair value of outstanding derivative contracts recorded as liabilities in the accompanying condensed consolidated balance sheets were as follows:

		September 30,		December 31,
Liability Derivatives	Balance Sheet Locations	2013		2012
Derivatives designated as hedging instruments under ASC 815:
Foreign exchange contracts	Accounts payable and accrued liabilities	$	366	$	191
Natural gas contracts	Accounts payable and accrued liabilities	69		360
Foreign exchange contracts	Accrued pension and other liabilities	62		61

Total derivatives designated as hedging instruments under ASC 815		497		612
Derivatives not designated as hedging Instruments under ASC 815:
Foreign exchange contracts	Accounts payable and accrued liabilities	33		34

Total liability derivatives		$	530	$	646

In accordance with ASC 820, “Fair Value Measurements and Disclosures,” the fair value of the Company’s foreign exchange forward contracts, foreign exchange option contracts, and natural gas forward contracts is determined using Level 2 inputs, which are defined as observable inputs. The inputs used are from market sources that aggregate data based upon market transactions.

The use of derivatives exposes the Company to the risk that a counter party may default on a derivative contract. The aggregate fair value of the Company’s derivative instruments in asset positions as of September 30, 2013 was $1.6 million, representing the maximum loss that the Company would recognize at that date if all counterparties failed to perform as contracted. The Company has entered into master agreements with counterparties for its foreign exchange contracts that may allow for netting of exposures in the event of default or termination of the counterparty agreement due to breach of contract. The Company does not net its derivative positions by counterparty for purposes of balance sheet presentation and disclosure.

The gross and net amounts of derivative assets and liabilities were as follows (in thousands):

	September 30, 2013						December 31, 2012
	Fair Value of Assets			Fair Value of Liabilities			Fair Value of Assets			Fair Value of Liabilities
Gross derivative amounts recognized in the balance sheet	$	1,582		$	530		$	1,120		$	646
Gross derivative amounts not offset in the balance sheet that are eligible for offsetting
Derivatives — foreign currency contracts	(461		)	(461		)	(286		)	(286		)
Net amount	$	1,121		$	69		$	834		$	360

Cash Flow Hedges

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 income (OCI) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings and were not material for the three and nine months ended September 30, 2013 and 2012, respectively.

The following table provides details on the changes in accumulated OCI relating to derivative assets and liabilities that qualified for cash flow hedge accounting.

	Three Months Ended			Nine Months Ended
	September 30, 2013			September 30, 2013

Accumulated OCI derivative gain or (loss) at July 1, 2013 and January 1, 2013, respectively	$	1,069		$	74
Effective portion of changes in fair value	(355		)	788
Reclassifications from accumulated OCI derivative to earnings	(269		)	(293		)
Foreign currency translation	(11		)	(135		)
Accumulated OCI derivative gain or (loss) at September 30, 2013	$	434		$	434

	Amount of Gain or (Loss)
	Recognized in OCI on Derivatives
	(Effective Portion)
	Three Months Ended
	September 30,
Derivatives in ASC 815 Cash Flow Hedging Relationships:	2013			2012

Foreign Exchange Contracts	$	(336	)	$	(301	)
Natural Gas Contracts	(19		)	67
Total	$	(355	)	$	(234	)

	Amount of Gain or (Loss)
	Recognized in OCI on Derivatives
	(Effective Portion)
	Nine Months Ended
	September 30,
Derivatives in ASC 815 Cash Flow Hedging Relationships:	2013			2012

Foreign Exchange Contracts	$	874		$	131
Natural Gas Contracts	(86		)	(217		)
Total	$	788		$	(86	)

		Amount of Gain or (Loss)
		Reclassified from Accumulated
		OCI in Income (Effective Portion) (1)
	Location of Gain or	Three Months Ended
Derivatives in ASC 815 Cash Flow	(Loss) Recognized in	September 30,
Hedging Relationships:	Income on Derivatives	2013			2012

Foreign Exchange Contracts	Cost of products sold
	(excluding depreciation)	$	339		$	196
Natural Gas Contracts	Cost of products sold
	(excluding depreciation)	(70		)	(385		)
Total		$	269		$	(189	)

		Amount of Gain or (Loss)
		Reclassified from Accumulated
		OCI in Income (Effective Portion) (1)
	Location of Gain or	Nine Months Ended
Derivatives in ASC 815 Cash Flow	(Loss) Recognized in	September 30,
Hedging Relationships:	Income on Derivatives	2013			2012

Foreign Exchange Contracts	Cost of products sold
	(excluding depreciation)	$	769		$	326
Natural Gas Contracts	Cost of products sold
	(excluding depreciation)	(476		)	(1,307		)
Total		$	293		$	(981	)

		Amount of Gain or (Loss)
		Recognized in Income on
		Derivatives (Ineffective
		Portion and Amount
		Excluded from
		Effectiveness Testing) (2)
	Location of Gain or	Three Months Ended
Derivatives in ASC 815 Cash Flow	(Loss) Recognized in	September 30,
Hedging Relationships:	Income on Derivatives	2013		2012

Foreign Exchange Contracts	Other expense — net	$	—	$	(1	)
Total		$	—	$	(1	)

		Amount of Gain or (Loss)
		Recognized in Income on
		Derivatives (Ineffective
		Portion and Amount
		Excluded from
		Effectiveness Testing) (2)
	Location of Gain or	Nine Months Ended
Derivatives in ASC 815 Cash Flow	(Loss) Recognized in	September 30,
Hedging Relationships:	Income on Derivatives	2013		2012

Foreign Exchange Contracts	Other expense — net	$	—	$	(2	)
Total		$	—	$	(2	)

(1) Assuming market rates remain constant with the rates at September 30, 2013, a gain of $0.2 million is expected to be recognized in earnings over the next 12 months.

(2) For the three and nine months ended September 30, 2013 and 2012, the amount of gain (loss) recognized in income was all attributable to the ineffective portion of the hedging relationships.

The Company had the following outstanding derivative contracts that were entered into to hedge forecasted transactions:

	September 30,		December 31,
(in thousands except for mmbtu)	2013		2012
Natural gas contracts (mmbtu)	395,000		235,000
Foreign exchange contracts	$	46,730	$	42,399

Other

The Company has also entered into certain derivatives to minimize its exposure to exchange rate fluctuations on certain foreign currency receivables, payables, and other known and forecasted transactional exposures. The Company has not qualified these contracts for hedge accounting treatment and therefore, the fair value gains and losses on these contracts are recorded in earnings as follows:

		Amount of Gain or (Loss)
		Recognized in Income on
		Derivatives
	Location of Gain or	Three Months Ended
Derivatives Not Designated as	(Loss) Recognized in	September 30,
Hedging Instruments Under ASC 815:	Income on Derivatives	2013		2012

Foreign Exchange Contracts *	Other expense — net	$	152	$	131
Total		$	152	$	131

		Amount of Gain or (Loss)
		Recognized in Income on
		Derivatives
	Location of Gain or	Nine Months Ended
Derivatives Not Designated as	(Loss) Recognized in	September 30,
Hedging Instruments Under ASC 815:	Income on Derivatives	2013		2012

Foreign Exchange Contracts *	Other expense — net	$	833	$	501
Total		$	833	$	501

*As of September 30, 2013 and 2012, these foreign exchange contracts were entered into and settled during the respective periods.

Management’s policy for managing foreign currency risk is to use derivatives to hedge up to 75% of the forecasted intercompany sales to its European, Canadian, and Japanese subsidiaries. The hedges involving foreign currency derivative instruments do not span a period greater than eighteen months from the contract inception date. Management uses various hedging instruments including, but not limited to foreign currency forward contracts, foreign currency option contracts and foreign currency swaps. Management’s policy for managing natural gas exposure is to use derivatives to hedge from zero to 75% of the forecasted natural gas requirements. These cash flow hedges currently span up to eighteen months from the contract inception date. Hedge effectiveness is measured on a quarterly basis and any portion of ineffectiveness is recorded directly to the Company’s earnings.