Derivative Instruments

6 Months Ended

Jun. 30, 2017

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.  The Company also uses natural gas forward contracts to limit the exposure to changes in natural gas prices and interest rate swap contracts to limit its exposure to changes in variable interest rate debt obligations.  Management’s policy for managing risk is to use derivatives to hedge up to 75% of the value of the forecasted exposure.  The foreign currency exchange contracts generally mature within eighteen months, while the natural gas contracts generally mature within twenty-four months.

In May 2017, the Company entered into a $50.0 million interest rate swap contract (the Swap) with a 2023 termination date, to manage its exposure to its variable rate LIBOR-based borrowings. 

The Company accounts for its derivative instruments under Accounting Standards Codification (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 other income (expense) - net.

The fair value of outstanding derivative contracts in the condensed consolidated balance sheets was as follows:

Asset Derivatives	Balance Sheet Locations	June 30, 2017		December 31, 2016
Derivatives designated as hedging instruments:
Foreign exchange contracts	Other current assets	$	232	$	670
Natural gas contracts	Other current assets		66		255
Foreign exchange contracts	Other assets		2		179
Natural gas contracts	Other assets		5		43
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other current assets		557		21
Total asset derivatives		$	862	$	1,168

Liability Derivatives	Balance Sheet Locations	June 30, 2017		December 31, 2016
Derivatives designated as hedging instruments:
Foreign exchange contracts	Accounts payable and accrued liabilities	$	412	$	30
Natural gas contracts	Accounts payable and accrued liabilities		96		—
Foreign exchange contracts	Accrued pension and other liabilities		93		1
Natural gas contracts	Accrued pension and other liabilities		91		—
Interest rate swap contract	Accrued pension and other liabilities		397		—
Derivatives not designated as hedging instruments:
Foreign exchange contracts	Accounts payable and accrued liabilities		169		1,421
Total liability derivatives		$	1,258	$	1,452

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

(in thousands except for millions of British Thermal Units (mmbtu))	June 30, 2017		December 31, 2016
Natural gas contracts (mmbtu)		1,470,000		540,000
Foreign exchange contracts	$	61,610	$	199,420
Interest rate swap contract	$	50,000	$	—

The use of derivatives exposes the Company to the risk that a counterparty 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.

	June 30, 2017				December 31, 2016
	Fair Value		Fair Value		Fair Value		Fair Value
	of Assets		of Liabilities		of Assets		of Liabilities
Gross derivative amounts recognized in the balance sheet	$	862	$	1,258	$	1,168	$	1,452
Gross derivative amounts not offset in the balance sheet that are eligible for offsetting		(473)		(473)		(52)		(52)
Net amount	$	389	$	785	$	1,116	$	1,400

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.  The location of the gain or (loss) reclassified into earnings (effective portion) for derivatives in cash flow hedging relationships is cost of products sold (excluding depreciation and amortization) except for the Swap, which is reclassified into earnings in interest expense.

	Amount of Gain or (Loss) Recognized
	in OCI on Derivatives (Effective Portion)
	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Foreign exchange contracts	$	(569)	$	(407)	$	(1,054)	$	(1,446)
Natural gas contracts		(140)		398		(369)		207
Interest rate swap contract		(489)		—		(489)		—
Total	$	(1,198)	$	(9)	$	(1,912)	$	(1,239)

	Amount of Gain or (Loss) Recognized from
	Accumulated OCI into Earnings (Effective Portion) (1)
	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Foreign exchange contracts	$	66	$	153	$	143	$	434
Natural gas contracts		15		(315)		27		(590)
Interest rate swap contract		(92)		—		(92)		—
Total	$	(11)	$	(162)	$	78	$	(156)

(1) Assuming market rates remain constant with the rates as of June 30, 2017, a gain of $0.2 million is expected to be recognized in earnings over the next 12 months.

During the three and six months ended June 30, 2017 and 2016, there was no gain or (loss) recognized in earnings on derivatives related to the ineffective portion and the amount excluded from effectiveness testing.

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, in other income (expense) - net as follows:

	Amount of Gain or (Loss) Recognized in Earnings on Derivatives
	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017		2016
Foreign exchange contracts	$	(7,639)	$	(262)	$	(9,275)	$	1,290
Total	$	(7,639)	$	(262)	$	(9,275)	$	1,290

For the three and six months ended June 30, 2017, non-designated contracts pertaining to an intercompany loan related to the acquisition of the New Business resulted in net losses of $8.0 million and $9.6 million, respectively, which were offset by foreign exchange transaction gains of $7.9 million and $10.3 million, respectively, both of which were recorded in earnings, within other income (expense) – net.  The realized portion of this loss from the settlement of these contracts was reflected in other financing on the condensed consolidated statements of cash flows.