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Hedging Instruments
 9 Months Ended
Sep. 30, 2015
Hedging Instruments [Abstract]  
Hedging Instruments

Note 18.    HEDGING Instruments

 

Disclosure within this footnote is presented to provide transparency about how and why we use derivative and non-derivative instruments (collectively “hedging instruments”), how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect our financial position, results of operations and cash flows.  

 

We are exposed to certain risks related to our ongoing business operations. The primary risks that we manage by using hedging instruments are foreign currency exchange risk and interest rate risk. Our subsidiaries enter into foreign currency exchange contracts to manage the exchange risk associated with their forecasted intercompany inventory purchases and sales for the next year. From time to time, we may also enter into other foreign currency exchange contracts or foreign-denominated debt issuances to minimize the impact of foreign currency fluctuations associated with specific balance sheet exposures,  including net investments in certain foreign subsidiaries. We enter into interest rate swaps to minimize the impact of interest rate fluctuations associated with borrowings under our variable-rate Credit Facility. 

 

The primary purpose of our foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions, including transactions denominated in euro, British pound, Japanese yen, Canadian dollar, Australian dollar and Swiss franc. We also utilize natural hedges to mitigate our transaction and commitment exposures. Our corporate policy prescribes the range of allowable hedging activity. We enter into foreign currency exchange contracts with well-capitalized multinational financial institutions, and we do not hold or engage in transactions involving derivative instruments for purposes other than risk management.  

 

We recognize all hedging instruments on the balance sheet at fair value at the balance sheet date. Instruments that do not qualify for hedge accounting treatment must be recorded at fair value through earnings. To qualify for hedge accounting treatment, cash flow and net investment hedges must be highly effective in offsetting changes to expected future cash flows or fair value on hedged transactions. If the instrument qualifies for hedge accounting, changes in the fair value of the hedging instrument from the effective portion of the hedge are deferred in AOCI, net of tax, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. We immediately record in earnings the extent to which a hedging instrument is not effective in achieving offsetting changes in fair value. We de-designate hedging instruments from hedge accounting when the likelihood of the hedged transaction occurring becomes less than probable. For de-designated instruments, the gain or loss from the time of de-designation through maturity of the instrument is recognized in earnings. Any gain or loss in AOCI at the time of de-designation is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. See Note 13 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information regarding the effect of hedging instruments on the condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014.

 

We enter into master netting arrangements with the counterparties to our derivative transactions which permit certain outstanding receivables and payables to be offset in the event of default. Our derivative contracts do not require either party to post cash collateral. We elect to present our derivative assets and liabilities in the accompanying condensed consolidated balance sheets on a gross basis. All cash flows related to our foreign currency exchange contracts and interest rate swaps are classified as operating cash flows, which is consistent with the cash flow treatment of the underlying items being hedged. 

 

Cash Flow Hedges 

 

We have designated our foreign currency exchange contracts and variable-to-fixed interest rate swaps as cash flow hedges as these derivative instruments mitigate the exposure to variability in the cash flows of forecasted transactions attributable to foreign currency exchange and interest rates. Unless noted otherwise, we have also designated our derivative instruments as qualifying for hedge accounting treatment.   

 

We did not de-designate any instruments from hedge accounting treatment during the three and nine months ended September 30, 2015 or 2014. Gains or losses related to hedge ineffectiveness recognized in earnings during the three and nine months ended September  30, 2015 and 2014 were not material.  At September 30, 2015, the estimated amount of net gains, net of income tax expense, which are expected to be reclassified out of AOCI and into earnings within the next 12 months, is $4.3 million if exchange and interest rates do not fluctuate from the levels at September 30, 2015. 

 

We enter into foreign currency exchange contracts for amounts that are less than the full value of forecasted intercompany inventory purchases and sales. Our hedging strategy related to intercompany inventory purchases and sales is to employ the full amount of our planned hedges for the succeeding year at the conclusion of our budgeting process for that year. We primarily utilize foreign currency exchange contracts with durations of less than 24 months. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions for the current and following year. As a result, our risk with respect to foreign currency exchange rate fluctuations and the notional value of foreign currency exchange contracts may vary throughout the year. The U.S. dollar is the currency purchased or sold in all of our foreign currency exchange contracts. The notional amount of foreign currency exchange contracts to hedge forecasted intercompany inventory purchases and sales totaled $211.0 million and $186.7 million at September  30, 2015 and December 31, 2014, respectively.

 

We have entered into forward fixed interest rate swap agreements to manage the economic effect of variable interest obligations on amounts borrowed under the terms of our Credit Facility. Beginning on March 30, 2012, the variable interest rate associated with $40 million of borrowings outstanding under the Credit Facility became effectively fixed at 1.36% plus the range of applicable interest rate fixed credit spreads (“Credit Spread”) through June 30, 2016. Beginning on March 28, 2013, the variable interest rate associated with an additional $40 million of borrowings outstanding under the Credit Facility became effectively fixed at 1.64% plus the Credit Spread through June 30, 2016.

 

Net Investment Hedge

 

In June 2015, we issued and sold through a private placement an aggregate principal amount of €88.9 million (approximately USD $100 million) in euro-denominated 1.785% Series C Senior Notes due June 18, 2025. We have designated these euro-denominated notes as a hedge of our euro net investment in certain foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the euro relative to the U.S. dollar. As a result of this designation, gains and losses from the change in translated U.S. dollar value of these euro-denominated notes are recorded in AOCI rather than to earnings. We recorded a $0.4 million loss and a $0.3 million gain, net of income tax, within AOCI as a result of this net investment hedge for the three and nine months ended September 30, 2015, respectively. This unrealized gain recorded at September 30, 2015 will not be reclassified in earnings until the complete or substantially complete liquidation of the net investment in the hedged foreign operations or all or a portion of the hedge no longer qualifies for hedge accounting treatment. See Note 10 to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q for further information regarding the issuance of these euro-denominated notes.

 

Fair Values of Hedging Instruments Designated as Hedges in Consolidated Balance Sheets

 

 

The fair values of hedging instruments and their respective classification on the condensed consolidated balance sheets and amounts subject to offset under master netting arrangements consisted of the following (in thousands): 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging Assets

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

 
2015 

 

 
2014 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

Balance Sheet Classification

 

 

 

 

 

 

Foreign currency exchange contracts

 

Other current assets

 

$
7,808 

 

$
12,226 

Foreign currency exchange contracts

 

Other long-term assets, net

 

 
650 

 

 

-

Total derivative instruments presented as cash flow hedges on the balance sheet

 

 
8,458 

 

 
12,226 

Gross amounts subject to master netting arrangements not offset on the balance sheet

 

 
1,836 

 

 
1,323 

Net amount

 

 

 

$
6,622 

 

$
10,903 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hedging Liabilities

 

 

 

 

 

September 30,

 

 

December 31,

 

 

 

 

 
2015 

 

 
2014 

 

 

 

 

 

 

 

 

 

Derivatives designated as hedging instruments

 

Balance Sheet Classification

 

 

 

 

 

 

Foreign currency exchange contracts

 

Accrued liabilities

 

$
1,458 

 

$
1,323 

Foreign currency exchange contracts

 

Other long-term liabilities

 

 
378 

 

 

-

Interest rate swaps

 

Accrued liabilities

 

 
688 

 

 
1,117 

Total derivative instruments presented as cash flow hedges on the balance sheet

 

 
2,524 

 

 
2,440 

Foreign currency borrowings designated as net investment hedge on the balance sheet

 

Long-term debt

 

 
99,556 

 

 

 -

Total hedging instruments presented on the balance sheet

 

 
102,080 

 

 
2,440 

Gross amounts subject to master netting arrangements not offset on the balance sheet

 

 
1,836 

 

 
1,323 

Net amount

 

 

 

$
100,244 

 

$
1,117 

 

The effect of derivative instruments designated as cash flow hedges on the condensed consolidated balance sheets consisted of the following (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Loss) Gain Recognized in AOCI on Derivative Instruments (Effective Portion)

 

 

 

 

For the Three Months Ended

 

For the Nine Months Ended

 

 

 

 

September 30,

 

September 30,

 

Derivative instruments

 

 

 
2015 

 

 
2014 

 

 
2015 

 

 
2014 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedging derivatives:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency exchange contracts, net of tax

 

 

$
(988)

 

$
5,775 

 

$
(3,158)

 

$
3,560 

 

Interest rate swaps, net of tax

 

 

 
114 

 

 
224 

 

 
270 

 

 
364 

 

Total cash flow hedges

 

 

$
(874)

 

$
5,999 

 

$
(2,888)

 

$
3,924