Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

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Derivative Instruments and Hedging Activities
3 Months Ended
Mar. 31, 2014
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities

9. Derivative Instruments and Hedging Activities

Interest Rate Risk Management

The Company previously engaged in an interest rate hedging strategy for which the hedged transactions were the forecasted interest payments on the Credit Facility. The hedged risk was the variability of forecasted interest rate cash flows, where the hedging strategy involved the purchase of interest rate swaps. These interest rate swaps expired in July 2013 and the Company has not entered into new interest swap arrangements as of March 31, 2014.

Foreign Currency Instruments

The Company also designates certain foreign currency derivatives, such as certain foreign currency forward and option contracts, as freestanding derivatives for which hedge accounting does not apply. The changes in the fair market value of these freestanding derivatives are included in selling, general and administrative expenses in the Company’s condensed consolidated statements of income. The Company uses foreign currency forward contracts to hedge foreign-currency-denominated intercompany transactions and to partially mitigate the impact of foreign currency fluctuations. The Company also uses foreign currency option contracts to partially mitigate the impact of foreign currency fluctuations. The fair value of the forward and option contracts are based on third-party quotes. The Company’s foreign currency derivative contracts are generally executed on a monthly basis.

The Company designates as cash-flow hedges those foreign currency forward contracts it enters into to hedge forecasted inventory purchases and intercompany management fees that are subject to foreign currency exposures. Forward contracts are used to hedge forecasted inventory purchases over specific months. Changes in the fair value of these forward contracts, excluding forward points, designated as cash-flow hedges are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity, and are recognized in cost of sales in the condensed consolidated statement of income during the period which approximates the time the hedged inventory is sold. The Company also hedges forecasted intercompany management fees over specific months. These contracts allow the Company to sell Euros in exchange for U.S. dollars at specified contract rates. Changes in the fair value of these forward contracts designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within shareholders’ equity, and are recognized in selling, general and administrative expenses in the condensed consolidated statement of income during the period when the hedged item and underlying transaction affect earnings.

As of March 31, 2014 and December 31, 2013, the aggregate notional amounts of all foreign currency contracts outstanding designated as cash flow hedges were approximately $215.2 million and $244.7 million, respectively. At March 31, 2014, these outstanding contracts were expected to mature over the next twelve months. The Company’s derivative financial instruments are recorded on the condensed consolidated balance sheet at fair value based on third-party quotes. As of March 31, 2014, the Company recorded assets at fair value of $2.9 million and liabilities at fair value of $3.3 million relating to all outstanding foreign currency contracts designated as cash-flow hedges. As of December 31, 2013, the Company recorded assets at fair value of $5.7 million and liabilities at fair value of $4.4 million relating to all outstanding foreign currency contracts designated as cash-flow hedges. The Company assesses hedge effectiveness and measures hedge ineffectiveness at least quarterly. During the three months ended March 31, 2014, and 2013, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of March 31, 2014, and December 31, 2013.

As of March 31, 2014 and December 31, 2013, the majority of the Company’s outstanding foreign currency forward contracts had maturity dates of less than twelve months with the majority of freestanding derivatives expiring within three months as of March 31, 2014 and December 31, 2013. There were no foreign currency option contracts outstanding as of March 31, 2014 and December 31, 2013. As of March 31, 2014, the Company had aggregate notional amounts of approximately $559.6 million of foreign currency contracts, inclusive of freestanding contracts and contracts designated as cash flow hedges.

Gains and Losses on Derivative Instruments

The following table summarizes gains (losses) relating to derivative instruments recorded in other comprehensive income (loss) during the three months ended March 31, 2014, and 2013:

 

     Amount of Gain (Loss) Recognized
in Other Comprehensive Income (Loss)
 
     For the Three Months Ended  
     March 31, 2014     March 31, 2013  
     (In millions)  

Derivatives designated as hedging instruments:

    

Foreign exchange currency contracts relating to inventory and intercompany management fee hedges

   $ (0.2   $ (4.1

The following table summarizes gains (losses) relating to derivative instruments recorded to income during the three months ended March 31, 2014 and 2013:

     Location of Gain
(Loss)
Recognized in Income
   Amount of Gain (Loss)
Recognized in Income
 
      For the Three Months Ended  
        March 31, 2014     March 31, 2013  
          (In millions)  

Derivatives designated as hedging instruments:

       

Foreign exchange currency contracts relating to inventory hedges and intercompany management fee hedges (1)

   Selling, general and

administrative expenses

   $ (1.6   $ (1.1

Derivatives not designated as hedging instruments:

       

Foreign exchange currency contracts

   Selling, general and
administrative expenses
   $ (2.9   $ (8.7

 

(1) For foreign exchange contracts designated as hedging instruments, the amounts recognized in income (loss) represent the amounts excluded from the assessment of hedge effectiveness. There were no ineffective amounts recorded for derivatives designated as hedging instruments.

The following table summarizes gains (losses) relating to derivative instruments reclassified from accumulated other comprehensive loss into income during the three months ended March 31, 2014 and 2013:

 

     Location of Gain
(Loss)
Reclassified
from Accumulated
Other Comprehensive
Loss into Income
(Effective Portion)
   Amount of Gain (Loss) Reclassified
from Accumulated
Other Comprehensive
Loss into Income
 
      For the Three Months Ended  
      March 31, 2014      March 31, 2013  
          (In millions)  

Derivatives designated as hedging instruments:

        

Foreign exchange currency contracts relating to inventory hedges

   Cost of sales    $ 0.3       $ (1.3

Foreign exchange currency contracts relating to intercompany management fee hedges

   Selling, general and
administrative expenses
     —        $ (0.1

Interest rate contracts

   Interest expense, net      —        $ (0.9

The Company reports its derivatives at fair value as either assets or liabilities within its condensed consolidated balance sheet. See Note 12, Fair Value Measurements, for information on derivative fair values and their condensed consolidated balance sheet location as of March 31, 2014, and December 31, 2013.