Derivative Instruments

12 Months Ended

Dec. 31, 2013

Derivative Instruments

Derivative Instruments

16. 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 consolidated balance sheets were as follows:

Asset Derivatives

		December 31,
(Dollars in thousands)	Balance Sheet Locations	2013		2012
Derivatives designated as hedging instruments under ASC 815:
Foreign exchange contracts	Other current assets	$	850	$	545
Natural Gas	Other current assets	189		—
Foreign exchange contracts	Other assets	94		142
Natural Gas	Other assets	13		—
Total derivatives designated as hedging instruments under ASC 815		1,146		687
Derivatives not designated as hedging instruments under ASC 815:
Foreign exchange contracts	Other current assets	728		433
Total asset derivatives		$	1,874	$	1,120

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

Liability Derivatives

		December 31,
(Dollars in thousands)	Balance Sheet Locations	2013		2012
Derivatives designated as hedging instruments under ASC 815:
Foreign exchange contracts	Accounts payable and accrued liabilities	$	391	$	191
Natural gas contracts	Accounts payable and accrued liabilities	—		360
Foreign exchange contracts	Accrued pension and other liabilities	27		61
Total derivatives designated as hedging instruments under ASC 815		418		612
Derivatives not designated as hedging instruments under ASC 815:
Foreign exchange contracts	Accounts payable and accrued liabilities	5		34
Total liability derivatives		$	423	$	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.

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 other comprehensive income (loss) (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 years ended December 31, 2013, 2012 and 2011, 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.

	December 31
(Dollars in thousands)	2013			2012
Accumulated OCI derivative gain or (loss) at January 1	$	74		$	(1,359	)
Effective portion of changes in fair value	1,461			338
Reclassifications from accumulated OCI derivative to earnings	(463		)	1,065
Foreign currency translation	(198		)	30
Accumulated OCI derivative gain at December 31	$	874		$	74

Derivatives in ASC 815 Cash Flow Hedging Relationships:

	Amount of Gain or (Loss)
	Recognized in OCI on Derivatives
	(Effective Portion)
	December 31,
(Dollars in thousands)	2013		2012			2011
Foreign Exchange Contracts	$	1,326	$	612		$	(22	)
Natural Gas Contracts	135		(274		)	(1,247		)
Total	$	1,461	$	338		$	(1,269	)

Derivatives in ASC 815 Cash Flow Hedging Relationships:

		Amount of Gain or (Loss)
		Reclassified from Accumulated
	Location of Gain or	OCI in Income (Effective Portion)
	(Loss) Recognized in	December 31,
(Dollars in thousands)	Income on Derivatives	2013			2012			2011
Foreign Exchange Contracts	Cost of products sold (excluding depreciation)	$	1,018		$	530		$	(290	)
Currency Swap	Interest expense	—			—			—
Natural Gas Contracts	Cost of products sold (excluding depreciation)	(555		)	(1,595		)	(2,071		)
Total		$	463		$	(1,065	)	$	(2,361	)

Derivatives in ASC 815 Cash Flow Hedging Relationships:

		Amount of Gain or (Loss)
		Recognized in Income on
		Derivatives (Ineffective
		Portion and Amount
		Excluded from
	Location of	Effectiveness Testing)
	Gain or (Loss) Recognized in	December 31,
(Dollars in thousands)	Income on Derivatives	2013		2012			2011
Foreign Exchange Contracts	Other expense — net	$	198	$	(30	)	$	(75	)
Total		$	198	$	(30	)	$	(75	)

Assuming market rates remain constant with the rates at December 31, 2013, a gain of $0.5 million is expected to be recognized in earnings over the next 12 months.

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

	December 31,
(in thousands except for mmbtu)	2013		2012		2011
Natural gas contracts (mmbtu)	525,000		235,000		700,000
Foreign exchange contracts	$	44,110	$	42,399	$	35,304

Other

The Company has also entered into certain derivatives to minimize its exposure of 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:

Derivatives Not Designated as Hedging Instruments Under ASC 815:

		Amount of Gain or (Loss)
		Recognized in Income on
	Location of	Derivatives
	Gain or (Loss) Recognized in	December 31,
(Dollars in thousands)	Income on Derivatives	2013		2012		2011
Foreign Exchange Contracts (1)	Other expense - net	$	1,256	$	963	$	(189	)
Total		$	1,256	$	963	$	(189	)

(1)As of December 31, 2013, 2012,and 2011, these foreign exchange contracts were entered into and settled during the respective periods.

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 December 31, 2013 was $1.9 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.

	December 31, 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	$	1,874		$	423		$	1,120		$	646
Gross derivative amounts not offset in the balance sheet that are eligible for offsetting
Derivatives — foreign currency contracts	(423		)	(423		)	(286		)	(286		)
Net amount	$	1,451		$	—		$	834		$	360

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.