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Derivative Instruments and Hedging Activities | 9 Months Ended
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Sep. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Instruments and Hedging Activities | DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company has significant manufacturing operations in the United States, France, Germany, Finland and Brazil, and it purchases a portion of its tractors, combines and components from third-party foreign suppliers, primarily in various European countries and in Japan. The Company also sells products in over 150 countries throughout the world. The Company’s most significant transactional foreign currency exposures are the Euro, Brazilian real and the Canadian dollar in relation to the United States dollar, and the Euro in relation to the British pound. The Company attempts to manage its transactional foreign exchange exposure by hedging foreign currency cash flow forecasts and commitments arising from the anticipated settlement of receivables and payables and from future purchases and sales. Where naturally offsetting currency positions do not occur, the Company hedges certain, but not all, of its exposures through the use of foreign currency contracts. The Company’s translation exposure resulting from translating the financial statements of foreign subsidiaries into United States dollars may be partially hedged from time to time. The Company’s most significant translation exposures are the Euro, the British pound and the Brazilian real in relation to the United States dollar and the Swiss franc in relation to the Euro. When practical, the translation impact is reduced by financing local operations with local borrowings. The Company uses floating rate and fixed rate debt to finance its operations. The floating rate debt obligations expose the Company to variability in interest payments due to changes in the EURIBOR and LIBOR benchmark interest rates. The Company believes it is prudent to limit the variability of a portion of its interest payments, and to meet that objective, the Company periodically enters into interest rate swaps to manage the interest rate risk associated with the Company’s borrowings. The Company designates interest rate contracts used to convert the interest rate exposure on a portion of the Company’s debt portfolio from a floating rate to a fixed rate as cash flow hedges, while those contracts converting the Company’s interest rate exposure from a fixed rate to a floating rate are designated as fair value hedges. The Company’s senior management establishes the Company’s foreign currency and interest rate risk management policies. These policies are reviewed periodically by the Finance Committee of the Company’s Board of Directors. The policies allow for the use of derivative instruments to hedge exposures to movements in foreign currency and interest rates. The Company’s policies prohibit the use of derivative instruments for speculative purposes. All derivatives are recognized on the Company’s Condensed Consolidated Balance Sheets at fair value. On the date the derivative contract is entered into, the Company designates the derivative as either (1) a cash flow hedge of a forecasted transaction, (2) a fair value hedge of a recognized liability, (3) a hedge of a net investment in a foreign operation, or (4) a non-designated derivative instrument. The Company formally documents all relationships between hedging instruments and hedged items, as well as the risk management objectives and strategy for undertaking various hedge transactions. The Company formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flow of hedged items or the net investment hedges in foreign operations. When it is determined that a derivative is no longer highly effective as a hedge, hedge accounting is discontinued on a prospective basis. The Company categorizes its derivative assets and liabilities into one of three levels based on the assumptions used in valuing the asset or liability. See Note 15 for a discussion of the fair value hierarchy as per the guidance in ASC 820. The Company’s valuation techniques are designed to maximize the use of observable inputs and minimize the use of unobservable inputs. Counterparty Risk The Company regularly monitors the counterparty risk and credit ratings of all the counterparties to the derivative instruments. The Company believes that its exposures are appropriately diversified across counterparties and that these counterparties are creditworthy financial institutions. If the Company perceives any risk with a counterparty, then the Company would cease to do business with that counterparty. There have been no negative impacts to the Company from any non-performance of any counterparties. Derivative Transactions Designated as Hedging Instruments Cash Flow Hedges Foreign Currency Contracts The Company uses cash flow hedges to minimize the variability in cash flows of assets or liabilities or forecasted transactions caused by fluctuations in foreign currency exchange rates. The changes in the fair values of these cash flow hedges are recorded in accumulated other comprehensive loss and are subsequently reclassified into “Cost of goods sold” during the period the sales and purchases are recognized. These amounts offset the effect of the changes in foreign currency rates on the related sale and purchase transactions. During 2017, the Company designated certain foreign currency contracts as cash flow hedges of expected future sales and purchases. The total notional value of derivatives that were designated as cash flow hedges was $107.4 million and $111.2 million as of September 30, 2017 and December 31, 2016, respectively. Interest Rate Contract The Company monitors the mix of short-term and long-term debt regularly. From time to time, the Company manages the risk to interest rate fluctuations through the use of derivative financial instruments. During 2015, the Company entered into an interest rate swap instrument with a notional amount of €312.0 million (or approximately $368.1 million at September 30, 2017) and an expiration date of June 26, 2020. The swap was designated and accounted for as a cash flow hedge. Under the swap agreement, the Company pays a fixed interest rate of 0.33% plus the applicable margin, and the counterparty to the agreement pays a floating interest rate based on the three-month EURIBOR. Changes in the fair value of the interest rate swap are recorded in accumulated other comprehensive loss and are subsequently reclassified into “Interest expense, net” as a rate adjustment in the same period in which the related interest on the Company’s floating rate term loan facility affects earnings. The following table summarizes the after-tax impact that changes in the fair value of derivatives designated as cash flow hedges had on accumulated other comprehensive loss and net income during the three and nine months ended September 30, 2017 and 2016 (in millions):
|  |  | Recognized in Net Income
Three Months Ended September 30, | Gain (Loss) Recognized in Accumulated Other Comprehensive Loss |  | Classification of Gain (Loss) |  | Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
2017 |  |  |  |  |
Foreign currency contracts(1) | $ | (0.3 | ) |  | Cost of goods sold |  | $ | 1.1 |
Interest rate contract | (1.0 | ) |  | Interest expense, net |  | (0.6 | )
Total | $ | (1.3 | ) |  |  |  | $ | 0.5 |
2016 |  |  |  |  |
Foreign currency contracts | $ | 1.5 |  |  | Cost of goods sold |  | $ | 0.2 |
Interest rate contract | (0.1 | ) |  | Interest expense, net |  | (0.5 | )
Total | $ | 1.4 |  |  |  |  | $ | (0.3 | )
|  |  | Recognized in Net Income
Nine Months Ended September 30, | Gain (Loss) Recognized in Accumulated Other Comprehensive Loss |  | Classification of Gain (Loss) |  | Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Income
2017 |  |  |  |  |
Foreign currency contracts(1) | $ | 2.9 |  |  | Cost of goods sold |  | $ | (0.3 | )
Interest rate contract | (0.6 | ) |  | Interest expense, net |  | (1.7 | )
Total | $ | 2.3 |  |  |  |  | $ | (2.0 | )
2016 |  |  |  |  |
Foreign currency contracts | $ | 1.2 |  |  | Cost of goods sold |  | $ | 0.2 |
Interest rate contract | (7.5 | ) |  | Interest expense, net |  | (1.4 | )
Total | $ | (6.3 | ) |  |  |  | $ | (1.2 | )
____________________________________ (1) The outstanding contracts as of September 30, 2017 range in maturity through December 2018. There was no ineffectiveness with respect to the cash flow hedges during the three and nine months ended September 30, 2017 and 2016. The following table summarizes the activity in accumulated other comprehensive loss related to the derivatives held by the Company during the nine months ended September 30, 2017 (in millions):
|  | Before-Tax Amount |  | Income Tax |  | After-Tax Amount
Accumulated derivative net losses as of December 31, 2016 |  | $ | (10.1 | ) |  | $ | (1.4 | ) |  | $ | (8.7 | )
Net changes in fair value of derivatives |  | 2.2 |  |  | (0.1 | ) |  | 2.3 |
Net losses reclassified from accumulated other comprehensive loss into income |  | 2.3 |  |  | 0.3 |  |  | 2.0 |
Accumulated derivative net losses as of September 30, 2017 |  | $ | (5.6 | ) |  | $ | (1.2 | ) |  | $ | (4.4 | )
Fair Value Hedges The Company uses interest rate swap agreements designated as fair value hedges to minimize exposure to changes in the fair value of fixed-rate debt that results from fluctuations in benchmark interest rates. During 2015, the Company entered into an interest rate swap instrument with a notional amount of $300.0 million and an expiration date of December 1, 2021 designated as a fair value hedge of the Company’s 5 7/8% senior notes (Note 6). Under the interest rate swap, the Company paid a floating interest rate based on the three-month LIBOR plus a spread of 4.14% and the counterparty to the agreement paid a fixed interest rate of 5 7/8%. The gains and losses related to changes in the fair value of the interest rate swap were recorded to “Interest expense, net” and offset changes in the fair value of the underlying hedged 5 7/8% senior notes. During 2016, the Company terminated the existing interest rate swap transaction and received cash proceeds of approximately $7.3 million. The resulting gain was deferred and is being amortized as a reduction to “Interest expense, net” over the remaining term of the Company’s 5 7/8% senior notes through December 1, 2021. Refer to Note 6 for further information. Net Investment Hedges The Company uses non-derivative and derivative instruments, to hedge a portion of its net investment in foreign operations against adverse movements in exchange rates. For instruments that are designated as hedges of net investments in foreign operations, changes in the fair value of the derivative instruments are recorded in foreign currency translation adjustments, a component of accumulated other comprehensive loss, to offset changes in the value of the net investments being hedged. When the net investment in foreign operations is sold or substantially liquidates, the amounts recorded in accumulated other comprehensive loss are reclassified to earnings. To the extent foreign currency denominated debt is dedesignated from a net investment hedge relationship, changes in the value of the foreign currency denominated debt are recorded in earnings through the maturity date. During 2015, the Company designated its €312.0 million (or approximately $368.1 million as of September 30, 2017) term loan facility with a maturity date of June 26, 2020 as a hedge of its net investment in foreign operations to offset foreign currency translation gains or losses on the net investment. The following table summarizes the notional values of the instrument designated as a net investment hedge (in millions):
| Notional Amount as of
| September 30, 2017 |  | December 31, 2016
Foreign currency denominated debt | $ | 368.1 |  |  | $ | 329.2 |
The following table summarizes the after-tax impact of changes in the fair value of the instrument designated as a net investment hedge during the three and nine months ended September 30, 2017 and 2016 (in millions):
| (Loss) Gain Recognized in Accumulated Other Comprehensive Loss for the Three Months Ended |  | (Loss) Gain Recognized in Accumulated Other Comprehensive Loss for the Nine Months Ended
| September 30, 2017 |  | September 30, 2016 |  | September 30, 2017 |  | September 30, 2016
Foreign currency denominated debt | $ | (11.8 | ) |  | $ | (4.8 | ) |  | $ | (38.9 | ) |  | $ | (8.9 | )
There was no ineffectiveness with respect to the net investment hedge during the three and nine months ended September 30, 2017 and 2016. Derivative Transactions Not Designated as Hedging Instruments During 2017 and 2016, the Company entered into foreign currency contracts to economically hedge receivables and payables on the Company and its subsidiaries’ balance sheets that are denominated in foreign currencies other than the functional currency. These contracts were classified as non-designated derivative instruments. Gains and losses on such contracts are substantially offset by losses and gains on the remeasurement of the underlying asset or liability being hedged and are immediately recognized into earnings. As of September 30, 2017 and December 31, 2016, the Company had outstanding foreign currency contracts with a notional amount of approximately $1,391.6 million and $1,550.2 million, respectively. The following table summarizes the impact that changes in the fair value of derivatives not designated as hedging instruments had on earnings (in millions):
|  |  | For the Three Months Ended |  | For the Nine Months Ended
| Classification of Gain |  | September 30, 2017 |  | September 30, 2016 |  | September 30, 2017 |  | September 30, 2016
Foreign currency contracts | Other expense, net |  | $ | 13.9 |  |  | $ | — |  |  | $ | 35.8 |  |  | $ | 14.3 |
The table below sets forth the fair value of derivative instruments as of September 30, 2017 (in millions):
| Asset Derivatives as of September 30, 2017 |  | Liability Derivatives as of September 30, 2017
| Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Derivative instruments designated as hedging instruments: |  |  |  |  |  |  |  |  |
Foreign currency contracts | Other current assets |  | $ | 1.4 |  |  | Other current liabilities |  | $ | 1.7 |
Interest rate contract | Other noncurrent assets |  | — |  |  | Other noncurrent liabilities |  | 5.3 |
Derivative instruments not designated as hedging instruments: |  |  |  |  |  |  |
Foreign currency contracts | Other current assets |  | 5.1 |  |  | Other current liabilities |  | 4.1 |
Total derivative instruments |  |  | $ | 6.5 |  |  |  |  | $ | 11.1 |
The table below sets forth the fair value of derivative instruments as of December 31, 2016 (in millions):
| Asset Derivatives as of December 31, 2016 |  | Liability Derivatives as of December 31, 2016
| Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Derivative instruments designated as hedging instruments: |  |  |  |  |  |  |  |  |
Foreign currency contracts | Other current assets |  | $ | 0.2 |  |  | Other current liabilities |  | $ | 3.8 |
Interest rate contract | Other noncurrent assets |  | — |  |  | Other noncurrent liabilities |  | 6.4 |
Derivative instruments not designated as hedging instruments: |  |  |  |  |  |  |
Foreign currency contracts | Other current assets |  | 6.3 |  |  | Other current liabilities |  | 3.2 |
Total derivative instruments |  |  | $ | 6.5 |  |  |  |  | $ | 13.4 |

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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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