|
(8) The company limits exposure to foreign currency fluctuations in most of its engineering and construction contracts through provisions that require client payments in currencies corresponding to the currencies in which cost is incurred. Certain financial exposure, which includes currency and commodity price risk associated with engineering and construction contracts, currency risk associated with intercompany transactions, and risk associated with interest rate volatility may subject the company to earnings volatility. In cases where financial exposure is identified, the company generally mitigates the risk by utilizing derivative instruments. The company’s derivative instruments are designated as either fair value or cash flow hedges in accordance with SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (ASC 815). The company formally documents its hedge relationships at inception, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. The company also formally assesses, both at inception and at least quarterly thereafter, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in the fair value of the hedged items. The fair values of all derivative instruments are recognized as assets or liabilities at the balance sheet date. For fair value hedges, the effective portion of the change in the fair value of the derivative instrument is offset against the change in the fair value of the underlying asset or liability through earnings. For cash flow hedges, the effective portion of the derivative instruments’ gains or losses due to changes in fair value are recorded as a component of accumulated other comprehensive income (loss) (“OCI”) and are reclassified into earnings when the hedged items settle. Any ineffective portion of a derivative instrument’s change in fair value is recognized in earnings immediately. The company does not enter into derivative instruments or hedging activities for speculative or trading purposes.
As of September 30, 2011, the company had total gross notional amounts of $580 million of foreign exchange forward contracts and $19 million of commodity swap forward contracts outstanding relating to engineering and construction contract obligations and intercompany transactions. The foreign exchange forward contracts are of varying duration, none of which extend beyond March 2012. The commodity swap forward contracts are of varying duration, none of which extend beyond August 2014. The impact to earnings due to hedge ineffectiveness was immaterial for the three and nine months ended September 30, 2011 and 2010, respectively.
The fair values of derivatives designated as hedging instruments under ASC 815 as of September 30, 2011 and December 31, 2010 were as follows:
|
|
|
Asset Derivatives |
|
Liability Derivatives |
|
|
(in thousands) |
|
Balance Sheet
Location |
|
September 30,
2011 |
|
December 31,
2010 |
|
Balance Sheet
Location |
|
September 30,
2011 |
|
December 31,
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity swaps |
|
Other current assets |
|
$ |
3,402 |
|
$ |
3,675 |
|
Other accrued liabilities |
|
$ |
— |
|
$ |
32 |
|
|
Foreign currency forwards |
|
Other current assets |
|
17,173 |
|
731 |
|
Other accrued liabilities |
|
8,636 |
|
2,527 |
|
|
Commodity swaps |
|
Other assets |
|
291 |
|
1,463 |
|
Noncurrent liabilities |
|
65 |
|
32 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total derivatives |
|
|
|
$ |
20,866 |
|
$ |
5,869 |
|
|
|
$ |
8,701 |
|
$ |
2,591 |
|
The amount of gain (loss) recognized in earnings associated with the derivative instruments designated as fair value hedges was as follows:
|
|
|
|
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
|
Fair Value Hedges (in thousands) |
|
Location of Gain (Loss) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forwards |
|
Total cost of revenue |
|
$ |
— |
|
$ |
(959 |
) |
$ |
— |
|
$ |
3,226 |
|
|
Foreign currency forwards |
|
Corporate general and administrative expense |
|
10,836 |
|
7,274 |
|
15,147 |
|
5,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
10,836 |
|
$ |
6,315 |
|
$ |
15,147 |
|
$ |
8,899 |
|
The amount of gain (loss) recognized in earnings on derivatives for the fair value hedges noted in the table above offsets the amount of gain (loss) recognized in earnings on the hedged items in the same locations on the Condensed Consolidated Statement of Earnings.
The amount of gain (loss) recorded in OCI associated with the derivative instruments designated as cash flow hedges was as follows:
|
|
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
|
Cash Flow Hedges (in thousands) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity swaps |
|
$ |
525 |
|
$ |
(423 |
) |
$ |
3,639 |
|
$ |
(2,511 |
) |
|
Foreign currency forwards |
|
(1,222 |
) |
(675 |
) |
(1,089 |
) |
(82 |
) |
|
Treasury rate lock agreements |
|
(10,512 |
) |
— |
|
(10,512 |
) |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
(11,209 |
) |
$ |
(1,098 |
) |
$ |
(7,962 |
) |
$ |
(2,593 |
) |
The amount of gain (loss) reclassified from OCI into earnings associated with the derivative instruments designated as cash flow hedges was as follows:
|
|
|
|
|
Three Months Ended
September 30, |
|
Nine Months Ended
September 30, |
|
|
Cash Flow Hedges (in thousands) |
|
Location of Gain (Loss) |
|
2011 |
|
2010 |
|
2011 |
|
2010 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity swaps |
|
Total cost of revenue |
|
$ |
2,512 |
|
$ |
(1,774 |
) |
$ |
4,996 |
|
$ |
(2,392 |
) |
|
Foreign currency forwards |
|
Total cost of revenue |
|
(129 |
) |
739 |
|
(1,061 |
) |
524 |
|
|
Treasury rate lock agreements |
|
Interest Expense |
|
(70 |
) |
— |
|
(70 |
) |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
$ |
2,313 |
|
$ |
(1,035 |
) |
$ |
3,865 |
|
$ |
(1,868 |
) | |