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Derivatives and Hedging
 12 Months Ended
Dec. 31, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivatives and Hedging
Note 16. Derivatives and Hedging
In the normal course of business, the Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international subsidiaries. As part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses designated cash flow hedges and non-designated hedges in the form of foreign currency forward contracts to mitigate the impact of foreign currency translation on transactions that are denominated primarily in Japanese Yen, British Pounds, Euros, Canadian Dollars, Australian Dollars and Korean Won.
The Company accounts for its foreign currency forward contracts in accordance with ASC Topic 815. ASC Topic 815 requires the recognition of all derivatives instruments as either assets or liabilities on the balance sheet, the measurement of those instruments at fair value and the recognition of changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as a designated cash flow hedge that offsets certain exposures. Certain criteria must be satisfied in order for derivative financial instruments to be classified and accounted for as a cash flow hedge. Gains and losses from the remeasurement of qualifying hedges are recorded as a component of other comprehensive income and released into earnings as a component of cost of goods sold or net sales during the period in which the hedged transaction takes place. Gains and losses on the ineffective portion of hedges (hedges that do not meet accounting requirements due to ineffectiveness) and derivatives that are not elected for hedge accounting treatment are immediately recorded in earnings as a component of other income (expense).
Foreign currency forward contracts are used only to meet the Company’s objectives of minimizing variability in the Company’s operating results arising from foreign exchange rate movements. The Company does not enter into foreign currency forward contracts for speculative purposes. The Company utilizes counterparties for its derivative instruments that it believes are credit-worthy at the time the transactions are entered into and the Company closely monitors the credit ratings of these counterparties.
The following table summarizes the fair value of the Company's foreign currency forward contracts as well as the location of the asset and/or liability on the consolidated balance sheets at December 31, 2015 and 2014 (in thousands):
 
Asset Derivatives
 
December 31, 2015
 
December 31, 2014
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward contracts
Other current assets
 
$
520

 
Other current assets
 
$
—

 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward contracts
Other current assets
 
$
160

 
Other current assets
 
$
40

 
Liability Derivatives
 
December 31, 2015
 
December 31, 2014
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives designated as cash flow hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward contracts
Accounts payable and
accrued expenses
 
$
296

 
Accounts payable and
accrued expenses
 
$
—

 
 
 
 
 
 
 
 
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
Foreign currency forward contracts
Accounts payable and
accrued expenses
 
$
46

 
Accounts payable and
accrued expenses
 
$
246


Cash Flow Hedging Instruments
In January 2015, the Company entered into foreign currency forward contracts designated as qualifying cash flow hedges to help mitigate the Company's foreign currency exposure on intercompany sales of inventory to its foreign subsidiaries. These contracts generally mature within 12 to 15 months from their inception. At December 31, 2015, the notional amount of the Company's foreign currency forward contracts designated as cash flow hedge instruments was approximately $55,938,000. The Company did not enter into cash flow hedging contracts in 2014. The reporting of gains and losses on these cash flow hedging instruments depends on whether the gains or losses are effective at offsetting changes in the cash flows of the underlying hedged items. The Company uses the hypothetical derivative method to measure the effectiveness of the foreign currency forward contracts and evaluates the effectiveness on a quarterly basis. The effective portion of the gains and losses on the hedging instruments are recorded in other comprehensive income until recognized in earnings during the period that the hedged transactions take place. Any ineffective portion of the gains and losses from the hedging instruments is recognized in earnings immediately. The Company would discontinue hedge accounting prospectively if (i) it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) if a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if it is determined that designation of the derivative as a hedge instrument is no longer appropriate. The Company estimates the fair value of its foreign currency forward contracts based on pricing models using current market rates. These contracts are classified under Level 2 of the fair value hierarchy (see Note 15).
As of December 31, 2015, the Company recorded a net gain of $2,316,000 in other comprehensive income (loss) related to its hedging activities. Of this amount, $1,791,000 was relieved from other comprehensive income (loss) and recognized in cost of goods sold for the underlying intercompany sales that were recognized during 2015. In addition, the Company recognized $1,149,000 in other income (expense) as a result of hedge ineffectiveness, of which $576,000 was reclassified from other comprehensive income for hedges that no longer met the accounting requirements. Forward points were expensed as incurred. Based on the current valuation, the Company expects to reclassify net gains of $525,000 from accumulated other comprehensive income (loss) into net earnings during the next 12 months.
The following tables summarize the net effect of all cash flow hedges on the consolidated financial statements for the year ended December 31, 2015 (in thousands):
 
 
Net Gain Recognized in Other Comprehensive Income (Loss)
(Effective Portion)
 
 
Year Ended 
 December 31,
Derivatives designated as cash flow hedging instruments
 
2015
 
2014
Foreign currency forward contracts
 
$
2,316

 
$
—

 
 
Net Gain Reclassified from
Other Comprehensive Income (Loss) into Earnings
(Effective Portion)
 
 
Year Ended 
 December 31,
Derivatives designated as cash flow hedging instruments
 
2015
 
2014
Foreign currency forward contracts
 
$
1,791

 
$
—

 
 
Net Gain Recognized in Other Income (Expense)
(Ineffective Portion)
 
 
Year Ended 
 December 31,
Derivatives designated as cash flow hedging instruments
 
2015
 
2014
Foreign currency forward contracts
 
$
1,149

 
$
—


The following table details the amounts reclassified from accumulated other comprehensive loss to cost of goods sold, as well as changes in foreign currency translation for the year ended December 31, 2015 (in thousands). Amounts shown do not include any tax effect due to the valuation allowance on the Company's deferred taxes in the United States (see Note 9).
Beginning balance, December 31, 2014
 
$
(796
)
Change in fair value of derivative instruments
 
2,892

Amounts reclassified from accumulated other comprehensive loss to other income (expense) due to hedge instrument ineffectiveness
 
(576
)
Amounts reclassified from accumulated other comprehensive income to cost of goods sold
 
(1,791
)
Foreign currency translation adjustments
 
(11,542
)
Ending balance, December 31, 2015
 
$
(11,813
)

Foreign Currency Forward Contracts Not Designated as Hedging Instruments
At December 31, 2015, 2014 and 2013, the notional amounts of the Company’s foreign currency forward contracts used to mitigate the exposures discussed above were approximately $43,098,000, $62,866,000 and $42,264,000, respectively. The increase in foreign currency forward contracts reflects the general timing of when the Company enters into these contracts. The Company estimates the fair values of foreign currency forward contracts based on pricing models using current market rates, and records all derivatives on the balance sheet at fair value with changes in fair value recorded in the statement of operations. The foreign currency contracts are classified under Level 2 of the fair value hierarchy (see Note 15).
The following table summarizes the location of gains and losses on the consolidated statements of operations that were recognized during the years ended December 31, 2015, 2014 and 2013, respectively, in addition to the derivative contract type (in thousands):
 
 
 
Amount of Gain Recognized in Income on Derivative Instruments
Derivatives not designated as hedging instruments
Location of gain recognized in 
income on derivative instruments
 
Years Ended December 31,
 
2015
 
2014
 
2013
Foreign currency forward contracts
Other income (expense), net
 
$
1,322

 
$
6,356

 
$
6,764


In addition, during the years ended December 31, 2015, 2014 and 2013, the Company recognized net foreign currency losses of $1,611,000, $6,198,000 and $821,000, respectively, related to transactions with foreign subsidiaries.