Derivative Instruments

3 Months Ended

Mar. 31, 2015

Derivative Instruments

Derivative Instruments

4.   Derivative Instruments

The Company uses 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.  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 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 natural gas forward contracts to limit the exposure to changes in natural gas prices.  Management’s policy for managing natural gas exposure is to use derivatives to hedge up to 75% of the forecasted natural gas requirements.  The natural gas forward contracts generally mature within twenty-four months.

The Company accounts for its derivative instruments under ASC 815 “Derivatives and Hedging.”  Hedge effectiveness is measured on a quarterly basis and any portion of ineffectiveness as well as hedge components excluded from the assessment of effectiveness, are recorded directly to current earnings.  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 fair value of outstanding derivative contracts in the condensed consolidated balance sheets was as follows:

Asset Derivatives	Balance Sheet Locations	March 31, 2015		December 31, 2014
Derivatives designated as hedging instruments:
Foreign exchange contracts	Other current assets	$	2,061	$	1,665
Foreign exchange contracts	Other assets	111		182
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other current assets	239		308
Total asset derivatives		$	2,411	$	2,155

Liability Derivatives	Balance Sheet Locations	March 31, 2015		December 31, 2014
Derivatives designated as hedging instruments:
Natural gas contracts	Accounts payable and accrued liabilities	$	672	$	427
Foreign exchange contracts	Accrued pension and other liabilities	1		—
Natural gas contracts	Accrued pension and other liabilities	143		372
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Accounts payable and accrued liabilities	212		62
Total liability derivatives		$	1,028	$	861

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

(in thousands except for mmbtu)	March 31, 2015		December 31, 2014
Natural gas contracts (mmbtu)	965,000		810,000
Foreign exchange contracts	$	45,869	$	41,237

The use of derivatives exposes the Company to the risk that a counter party may default on a derivative contract. The Company enters into derivative financial instruments with high credit quality counterparties and diversifies its positions among such counterparties. The aggregate fair value of the Company’s derivative instruments in asset positions represents the maximum loss that the Company would recognize at that date if all counterparties failed to perform as contracted. The Company has entered into various master netting arrangements with counterparties to facilitate settlement of gains and losses on these contracts. These arrangements 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.

	March 31, 2015						December 31, 2014
	Fair Value of Assets			Fair Value of Liabilities			Fair Value of Assets			Fair Value of Liabilities
Gross derivative amounts recognized in the balance sheet	$	2,411		$	1,028		$	2,155		$	861
Gross derivative amounts not offset in the balance sheet that are eligible for offsetting	(84		)	(84		)	(26		)	(26		)
Net  amount	$	2,327		$	944		$	2,129		$	835

Derivatives in Cash Flow Hedging Relationships

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.

	Amount of Gain or (Loss) Recognized
	in OCI on Derivatives (Effective Portion)
	Three Months Ended March 31,
	2015			2014
Foreign exchange contracts	$	1,050		$	(356	)
Natural gas contracts	(323		)	105
Total	$	727		$	(251	)

	Amount of Gain or (Loss) Reclassified from
	Accumulated OCI into Earnings (Effective Portion) (1)
	Three Months Ended March 31,
	2015			2014
Foreign exchange contracts	$	444		$	133
Natural gas contracts	(124		)	4
Total	$	320		$	137

(1) Assuming market rates remain constant with the rates as of March 31, 2015, a gain of $1.7 million is expected to be recognized in earnings over the next 12 months.

The location of the gain or (loss) reclassified into earnings related to the effective portion for derivatives in cash flow hedging relationships is cost of products sold (excluding depreciation and amortization).

During the quarters ended March 31, 2015 and 2014, there was no gain or (loss) recognized in earnings on derivatives related to the ineffective portion and the amount excluded from effectiveness testing, which would have been recorded in other expense — net.

Derivatives Not Designated as Hedging Instruments

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:

	Amount of Gain or (Loss) Recognized
	in Earnings on Derivatives
	Three Months Ended March 31,
	2015			2014
Foreign exchange contracts	$	(1,030	)	$	(198	)
Total	$	(1,030	)	$	(198	)

The location of the gain or (loss) recognized in earnings for derivatives not designated as hedging instruments is other expense — net.