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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | 9 Months Ended
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Sep. 30, 2017
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES |
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | NOTE 8 — DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company maintains a foreign exchange risk management policy designed to establish a framework to protect the value of the Company’s non-functional denominated transactions from adverse changes in exchange rates. Sales of the Company’s products can be denominated in a currency different from the currency in which the related costs to produce the product are denominated. Changes in exchange rates on such inter-country sales or intercompany loans can impact the Company’s results of operations. The Company’s policy is not to engage in speculative foreign currency hedging activities, but to minimize our net foreign currency transaction exposure, defined as firm commitments and transactions recorded and denominated in currencies other than the functional currency. The Company may use foreign currency forward exchange contracts, options and cross currency swaps to economically hedge these risks. For derivative instruments designated as hedges, the Company formally documents the nature and relationships between the hedging instruments and the hedged items, as well as the risk management objectives, strategies for undertaking the various hedge transactions, and the method of assessing hedge effectiveness at inception. Quarterly thereafter, the Company formally assesses whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair value or cash flows of the hedged item. Additionally, in order to designate any derivative instrument as a hedge of an anticipated transaction, the significant characteristics and expected terms of any anticipated transaction must be specifically identified, and it must be probable that the anticipated transaction will occur. All derivative financial instruments used as hedges are recorded at fair value in the Consolidated Balance Sheets (See Note 9 - Fair Value). CASH FLOW HEDGE For derivative instruments that are designated and qualify as a cash flow hedge, the changes in fair values are recorded in accumulated other comprehensive loss and included in unrealized (losses) gains on cash flow hedges. The changes in the fair values of derivatives designated as cash flow hedges are reclassified from accumulated other comprehensive loss to net income when the underlying hedged item is recognized in earnings. Cash flows from the settlement of derivative contracts designated as cash flow hedges offset cash flows from the underlying hedged items and are included in operating activities in the Consolidated Statements of Cash Flows. As disclosed in Note 5 – Long-Term Obligations, our wholly owned UK subsidiary borrowed $280 million in term loan borrowings under a new credit facility. In order to mitigate the currency risk of U.S. dollar debt on a Euro functional currency entity and to mitigate the risk of variability in interest rates, we entered into a EUR/USD floating-to-fixed cross currency swap on July 20, 2017 in the notional amount of $280 million to effectively hedge the foreign exchange and interest rate exposure on the $280 million term loan. Related to this hedge, approximately $3.6 million of net after-tax loss is included in accumulated other comprehensive earnings at September 30, 2017. The amount expected to be recognized into earnings during the next 12 months related to the interest component of our cross currency swap based on prevailing foreign exchange and interest rates at September 30, 2017 is $3.3 million. The amount expected to be recognized into earnings during the next 12 months related to the foreign exchange component of our cross currency swap is dependent on fluctuations in currency exchange rates. As of September 30, 2017, the fair value of the cross currency swap was a $12.1 million liability. The swap contract expires on July 20, 2022. HEDGE OF NET INVESTMENTS IN FOREIGN OPERATIONS A significant number of the Company’s operations are located outside of the United States. Because of this, movements in exchange rates may have a significant impact on the translation of the financial condition and results of operations of the Company’s foreign subsidiaries. A weakening U.S. dollar relative to foreign currencies has an additive translation effect on the Company’s financial condition and results of operations. Conversely, a strengthening U.S. dollar has a dilutive effect. The Company in some cases maintains debt in these subsidiaries to offset the net asset exposure. The Company does not otherwise actively manage this risk using derivative financial instruments. In the event the Company plans on a full or partial liquidation of any of our foreign subsidiaries where the Company’s net investment is likely to be monetized, the Company will consider hedging the currency exposure associated with such a transaction. OTHER As of September 30, 2017, the Company has recorded the fair value of foreign currency forward exchange contracts of $0.3 million in prepaid and other and $0.4 million in accounts payable and accrued liabilities in the balance sheet. All forward exchange contracts outstanding as of September 30, 2017 had an aggregate contract amount of $85.3 million. Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets as of September 30, 2017 and December 31, 2016
|  |  |  | September 30, 2017 |  | December 31, 2016 |
|  |  |  |  |  | Derivatives |  |  |  | Derivatives |
|  |  |  | Derivatives |  | not |  | Derivatives |  | not |
|  |  |  | Designated |  | Designated |  | Designated |  | Designated |
|  | Balance Sheet |  | as Hedging |  | as Hedging |  | as Hedging |  | as Hedging |
|  | Location |  | Instruments |  | Instruments |  | Instruments |  | Instruments |
Derivative Assets |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign Exchange Contracts |  | Prepaid and other |  | $ | — |  | $ | 327 |  | $ | — |  | $ | 1,612 |
|  |  |  | $ | — |  | $ | 327 |  | $ | — |  | $ | 1,612 |
Derivative Liabilities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign Exchange Contracts |  | Accounts payable and accrued liabilities |  | $ | — |  | $ | 375 |  | $ | — |  | $ | 2,881 |
Cross Currency Swap Contract (1) |  | Accounts payable and accrued liabilities |  |  | 12,097 |  |  | — |  |  | — |  |  | — |
|  |  |  | $ | 12,097 |  | $ | 375 |  | $ | — |  | $ | 2,881 |
(1)This cross currency swap contract is composed of both an interest component and a foreign exchange component. The Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss) for the Quarters Ended September 30, 2017 and September 30, 2016
|  |  |  |  |  | Amount of Gain (Loss) |  | Total Amount |
|  | Amount of Gain (Loss) |  | Location of (Loss) |  | Reclassified from |  | of Affected |
Derivatives in Cash |  | Recognized in |  | Gain Recognized |  | Accumulated |  | Income |
Flow Hedging |  | Other Comprehensive |  | in Income on |  | Other Comprehensive |  | Statement |
Relationships |  | Income on Derivative |  | Derivatives |  | Income on Derivative |  | Line Item |
|  | 2017 |  | 2016 |  |  |  | 2017 |  | 2016 |  |  |
Cross currency swap contract: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest component |  | $ | (3,648) |  | $ | — |  | Interest expense |  | $ | 678 |  | $ | — |  | $ | (9,733) |
Foreign exchange component |  |  | (7,481) |  |  | — |  | Miscellaneous, net |  |  | (7,481) |  |  | — |  |  | (2,200) |
|  | $ | (11,129) |  | $ | — |  |  |  | $ | (6,803) |  | $ | — |  | $ | (11,933) |
The Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income (Loss) for the Nine Months Ended September 30, 2017 and September 30, 2016
|  |  |  |  |  | Amount of Gain (Loss) |  | Total Amount |
|  | Amount of Gain (Loss) |  | Location of (Loss) |  | Reclassified from |  | of Affected |
Derivatives in Cash |  | Recognized in |  | Gain Recognized |  | Accumulated |  | Income |
Flow Hedging |  | Other Comprehensive |  | in Income on |  | Other Comprehensive |  | Statement |
Relationships |  | Income on Derivative |  | Derivatives |  | Income on Derivative |  | Line Item |
|  | 2017 |  | 2016 |  |  |  | 2017 |  | 2016 |  |  |
Cross currency swap contract: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Interest component |  | $ | (3,648) |  | $ | — |  | Interest expense |  | $ | 678 |  | $ | — |  | $ | (25,707) |
Foreign exchange component |  |  | (7,481) |  |  | — |  | Miscellaneous, net |  |  | (7,481) |  |  | — |  |  | (509) |
|  | $ | (11,129) |  | $ | — |  |  |  | $ | (6,803) |  | $ | — |  | $ | (26,216) |
The Effect of Derivatives Not Designated as Hedging Instruments on the Condensed Consolidated Statements of Income for the Quarters Ended September 30, 2017 and September 30, 2016
|  |  |  | Amount of (Loss) Gain |
Derivatives Not Designated |  | Location of (Loss) Gain Recognized |  | Recognized in Income |
as Hedging Instruments |  | in Income on Derivatives |  | on Derivatives |
|  |  |  | 2017 |  | 2016 |
Foreign Exchange Contracts |  | Other (Expense) Income: Miscellaneous, net |  | $ | (15,534) |  | $ | 3,191 |
|  |  |  | $ | (15,534) |  | $ | 3,191 |
The Effect of Derivatives Not Designated as Hedging Instruments on the Condensed Consolidated Statements of Income for the Nine Months Ended September 30, 2017 and September 30, 2016
|  |  |  | Amount of (Loss) Gain |
Derivatives Not Designated |  | Location of (Loss) Gain Recognized |  | Recognized in Income |
as Hedging Instruments |  | in Income on Derivatives |  | on Derivatives |
|  |  |  | 2017 |  | 2016 |
Foreign Exchange Contracts |  | Other (Expense) Income: Miscellaneous, net |  | $ | (64,651) |  | $ | (1,875) |
|  |  |  | $ | (64,651) |  | $ | (1,875) |
|  |  |  |  |  |  |  |  |  | Gross Amounts not Offset |  |  |  |
|  |  |  |  | Gross Amounts |  | Net Amounts |  | in the Statement of |  |  |  |
|  |  |  |  | Offset in the |  | Presented in |  | Financial Position |  |  |  |
|  | Gross |  | Statement of |  | the Statement of |  | Financial |  | Cash Collateral |  | Net |
|  | Amount |  | Financial Position |  | Financial Position |  | Instruments |  | Received |  | Amount |
Description |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
September 30, 2017 |
Derivative Assets |  | $ | 327 |  | — |  | $ | 327 |  | — |  | — |  | $ | 327 |
Total Assets |  | $ | 327 |  | — |  | $ | 327 |  | — |  | — |  | $ | 327 |
Derivative Liabilities |  | $ | 12,472 |  | — |  | $ | 12,472 |  | — |  | — |  | $ | 12,472 |
Total Liabilities |  | $ | 12,472 |  | — |  | $ | 12,472 |  | — |  | — |  | $ | 12,472 |
December 31, 2016 |
Derivative Assets |  | $ | 1,612 |  | — |  | $ | 1,612 |  | — |  | — |  | $ | 1,612 |
Total Assets |  | $ | 1,612 |  | — |  | $ | 1,612 |  | — |  | — |  | $ | 1,612 |
Derivative Liabilities |  | $ | 2,881 |  | — |  | $ | 2,881 |  | — |  | — |  | $ | 2,881 |
Total Liabilities |  | $ | 2,881 |  | — |  | $ | 2,881 |  | — |  | — |  | $ | 2,881 |
As part of our repatriation activities, during the second quarter of 2017 we had a €700 million intercompany receivable balance on a U.S. Dollar functional subsidiary. In order to minimize the foreign currency risk, the Company executed foreign currency forward contracts to sell Euros and receive U.S. Dollars. These foreign currency forward contracts matured on July 27, 2017, which coincided with the date of the planned repatriation and resulted in the Company delivering €700 million in cash and receiving approximately $751 million in cash. At maturity, the foreign exchange transaction loss on the forward contract amounted to $66.2 million. This impact was offset by the revaluation of the €700 million intercompany accounts receivable balance that had $69.5 million gain during the same period. Therefore, the forward points on these forward contracts had a $3.3 million favorable impact on other (expense) income miscellaneous, net for the nine months ended September 30, 2017.

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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