Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v3.5.0.2
Derivative Instruments and Hedging Activities
9 Months Ended
Sep. 30, 2016
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities

9. Derivative Instruments and Hedging Activities

Foreign Currency Instruments

The Company also designates certain foreign currency derivatives, primarily comprised of foreign currency forward 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 freestanding foreign currency derivatives to hedge foreign-currency-denominated intercompany transactions and to partially mitigate the impact of foreign currency fluctuations. The fair value of the freestanding foreign currency derivatives is 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 (deficit), and are recognized in cost of sales in the condensed consolidated statements 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 (deficit), and are recognized in selling, general and administrative expenses in the condensed consolidated statements of income during the period when the hedged item and underlying transaction affect earnings.

As of September 30, 2016 and December 31, 2015, the aggregate notional amounts of all foreign currency contracts outstanding designated as cash flow hedges were approximately $92.7 million and $112.8 million, respectively. At September 30, 2016, these outstanding contracts were expected to mature over the next fifteen 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 September 30, 2016, the Company recorded assets at fair value of $2.5 million and liabilities at fair value of $0.8 million relating to all outstanding foreign currency contracts designated as cash-flow hedges. As of December 31, 2015, the Company recorded assets at fair value of $4.2 million and liabilities at fair value of $0.5 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 and nine months ended September 30, 2016 and 2015, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of September 30, 2016 and December 31, 2015.

As of September 30, 2016 and December 31, 2015, 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 one and two months as of September 30, 2016 and December 31, 2015, respectively. As of September 30, 2016, the Company had aggregate notional amounts of approximately $299.1 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 during the three and nine months ended September 30, 2016 and 2015:

 

 

 

Amount of Gain (Loss) Recognized

in Other Comprehensive Income

 

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

September 30, 2016

 

 

September 30, 2015

 

 

September 30, 2016

 

 

September 30, 2015

 

 

 

(In millions)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to inventory

   and intercompany management fee hedges

 

$

0.8

 

 

$

4.2

 

 

$

3.1

 

 

$

13.8

 

 

The following table summarizes gains (losses) relating to derivative instruments recorded to income during the three and nine months ended September 30, 2016 and 2015:

 

 

 

Location of Gain

 

Amount of Gain (Loss)

Recognized in Income

 

 

 

(Loss)

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

Recognized in Income

 

September 30, 2016

 

 

September 30, 2015

 

 

September 30, 2016

 

 

September 30, 2015

 

 

 

 

 

(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

 

$

 

 

$

(0.1

)

 

$

0.1

 

 

$

(0.4

)

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

 

Selling, general and

administrative

expenses

 

$

0.6

 

 

$

5.6

 

 

$

(2.6

)

 

$

(0.3

)

 

(1)

For foreign exchange contracts designated as hedging instruments, the amounts recognized in income primarily represent the amounts excluded from the assessment of hedge effectiveness. There were no material ineffective amounts reported 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 and nine months ended September 30, 2016 and 2015:

 

 

 

Location of Gain

(Loss)

Reclassified

from Accumulated

Other Comprehensive

 

Amount of Gain (Loss) Reclassified

from Accumulated

Other Comprehensive

Loss into Income

 

 

 

Loss into Income

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

(Effective Portion)

 

September 30, 2016

 

 

September 30, 2015

 

 

September 30, 2016

 

 

September 30, 2015

 

 

 

 

 

(In millions)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to

   inventory hedges

 

Cost of sales

 

$

3.2

 

 

$

5.2

 

 

$

12.9

 

 

$

10.0

 

Foreign exchange currency contracts relating to

   intercompany management fee hedges

 

Selling, general and

administrative expenses

 

$

(0.2

)

 

$

0.1

 

 

$

(0.8

)

 

$

0.1

 

 

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 September 30, 2016 and December 31, 2015.