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Derivative Financial Instruments
 6 Months Ended
Jun. 30, 2017
Derivative Financial Instruments  
Derivative Financial Instruments

6. Derivative Financial Instruments

Foreign Exchange Derivative Instruments

The Company principally uses financial instruments to reduce the impact of changes in foreign currency exchange rates. The principal derivative financial instruments the Company enters into are foreign exchange forward contracts. The Company does not enter into foreign exchange forward contracts for trading or speculative purposes.

Foreign exchange forward contracts are primarily used to hedge purchases denominated in select foreign currencies, thereby limiting currency risk that would otherwise result from changes in exchange rates. The periods of the foreign exchange forward contracts correspond to the periods of the forecasted transactions, which do not exceed 24 months subsequent to the latest balance sheet date. The primary foreign exchange forward contracts pertain to the U.S. dollar, the Japanese yen, the British pound sterling, the Canadian dollar, the Korean won and the Euro. The gross U.S. dollar equivalent notional amount outstanding of all foreign exchange forward contracts designated under hedge accounting as of June 30, 2017 and December 31, 2016 was $308.8 million and $371.2 million, respectively.

The counterparties to derivative contracts are major financial institutions. The credit risk of counterparties does not have a significant impact on the valuation of the Company’s derivative instruments.

The fair values of foreign exchange hedges on the consolidated balance sheets were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance Sheet

 

June 30, 

 

December 31, 

 

(in thousands)

    

Location

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

Asset derivatives

 

Other current assets

 

$

3,582

 

$

11,357

 

 

 

Other noncurrent assets

 

 

1,680

 

 

5,286

 

Liability derivatives

 

Other current liabilities

 

 
3,742

 

 
1,106

 

 

 

Other noncurrent liabilities

 

 
687

 

 
32

 

 

The effect of foreign exchange hedges on accumulated other comprehensive income (loss) and the consolidated statements of operations was as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in

 

 

 

Other Comprehensive Income (Loss)

 

 

 

Three months ended

Six months ended

 

 

June 30, 

 

June 30, 

 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Type of hedge

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow

 

$

425

 

$

(12,136)

 

$

(11,320)

 

$

(23,625)

 

 

 

$

425

 

$

(12,136)

 

$

(11,320)

 

$

(23,625)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gain (Loss) Recognized in

 

 

Statement of Operations

 

 

Three months ended

 

Six months ended

 

 

June 30, 

 

June 30, 

(in thousands)

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Location of gain (loss) in statement of operations

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

$

1,284

 

$

2,846

 

$

3,095

 

$

7,757

Selling, general and administrative expense

 

 

(30)

 

 

(952)

 

 

(1,616)

 

 

(2,707)

 

 

$

1,254

 

$

1,894

 

$

1,479

 

$

5,050

 

Gains and losses on derivatives designated as cash flow hedges are reclassified from other comprehensive income (loss) to cost of goods sold at the time that the forecasted transaction impacts the income statement. Based on the current valuation, the Company expects to reclassify a net loss of $1.3 million from accumulated other comprehensive income (loss) into cost of goods sold during the next 12 months.

Undesignated Foreign Exchange Derivative Instruments

The Company may elect to enter into foreign exchange forwards to mitigate the change in fair value of specific assets and liabilities which do not qualify as hedging instruments under U.S. GAAP. Accordingly, these undesignated instruments are recorded at fair value as a derivative asset or liability with the corresponding change in fair value recognized in selling, general and administrative expense, together with the re-measurement gain or loss from the hedged asset or liability. The gross U.S. dollar equivalent notional amount of all outstanding foreign exchange forward contracts not designated under hedge accounting was $1.7 million as of June 30, 2017. There were no outstanding foreign exchange forward contracts not designated under hedge accounting as of December 31, 2016.