Annual report pursuant to Section 13 and 15(d)

Derivative Instruments and Hedging Activities

v3.6.0.2
Derivative Instruments and Hedging Activities
12 Months Ended
Dec. 31, 2016
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities

11. Derivative Instruments and Hedging Activities

Foreign Currency Instruments

The Company 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 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’ (deficit) equity, and are recognized in cost of sales in the 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’ (deficit) equity, and are recognized in selling, general and administrative expenses in the consolidated statement of income during the period when the hedged item and underlying transaction affect earnings.

As of December 31, 2016 and December 31, 2015, the aggregate notional amounts of all foreign currency contracts outstanding designated as cash flow hedges were approximately $90.0 million and $112.8 million, respectively. At December 31, 2016, these outstanding contracts had maturity dates of less than fifteen months. The Company’s derivative financial instruments are recorded on the consolidated balance sheets at fair value based on third-party quotes. As of December 31, 2016, the Company recorded assets at fair value of $4.6 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 years ended December 31, 2016, and 2015, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of December 31, 2016, and December 31, 2015.

As of December 31, 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 month and two months as of December 31, 2016 and December 31, 2015, respectively.

The table below describes all foreign currency forward contracts that were outstanding as of December 31, 2016 and December 31, 2015:

 

Foreign Currency

 

Average

Contract Rate

 

 

Original

Notional Amount

 

 

Fair Value

Gain (Loss)

 

 

 

 

 

 

 

(In millions)

 

 

(In millions)

 

At December 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

Buy Chinese yuan sell Euro

 

 

7.51

 

 

$

61.8

 

 

$

1.0

 

Buy Colombian peso sell U.S. dollar

 

 

3,111.41

 

 

 

2.6

 

 

 

0.1

 

Buy Euro sell Australian dollar

 

 

1.46

 

 

 

1.7

 

 

 

 

Buy Euro sell Chilean peso

 

 

723.80

 

 

 

1.0

 

 

 

 

Buy Euro sell Hong Kong dollar

 

 

8.11

 

 

 

13.4

 

 

 

0.1

 

Buy Euro sell Indonesian rupiah

 

 

14,394.40

 

 

 

9.4

 

 

 

(0.1

)

Buy Euro sell Japanese yen

 

 

122.54

 

 

 

0.6

 

 

 

 

Buy Euro sell Mexican peso

 

 

22.01

 

 

 

52.2

 

 

 

1.2

 

Buy Euro sell Peruvian nuevo sol

 

 

3.61

 

 

 

3.9

 

 

 

(0.1

)

Buy Euro sell Philippine peso

 

 

53.11

 

 

 

5.4

 

 

 

(0.1

)

Buy Euro sell Russian ruble

 

 

68.37

 

 

 

5.6

 

 

 

(0.3

)

Buy Euro sell U.S. dollar

 

 

1.08

 

 

 

74.5

 

 

 

(1.5

)

Buy Euro sell South African rand

 

 

15.02

 

 

 

3.4

 

 

 

(0.1

)

Buy British pound sell Euro

 

 

0.84

 

 

 

3.1

 

 

 

 

Buy Hong Kong dollar sell Euro

 

 

8.11

 

 

 

11.9

 

 

 

(0.1

)

Buy Indonesian rupiah sell Euro

 

 

14,222.02

 

 

 

3.9

 

 

 

 

Buy Korean won sell U.S. dollar

 

 

1,167.30

 

 

 

5.0

 

 

 

(0.2

)

Buy Kazakhstani tenge sell U.S. dollar

 

 

342.00

 

 

 

0.9

 

 

 

 

Buy Mexican peso sell Euro

 

 

21.30

 

 

 

11.9

 

 

 

(0.3

)

Buy Norwegian krone sell U.S. dollar

 

 

8.70

 

 

 

1.1

 

 

 

 

Buy Peruvian nuevo sol sell Euro

 

 

3.57

 

 

 

1.0

 

 

 

 

Buy Philippine peso sell Euro

 

 

52.42

 

 

 

1.7

 

 

 

 

Buy Russian ruble sell Euro

 

 

67.50

 

 

 

3.2

 

 

 

0.1

 

Buy Swedish krona sell U.S. dollar

 

 

9.17

 

 

 

0.8

 

 

 

 

Buy Taiwan dollar sell U.S. dollar

 

 

32.08

 

 

 

17.1

 

 

 

(0.1

)

Buy U.S. dollar sell Colombian peso

 

 

3,092.61

 

 

 

5.6

 

 

 

(0.1

)

Buy U.S. dollar sell Euro

 

 

1.06

 

 

 

140.4

 

 

 

4.5

 

Buy U.S. dollar sell Japanese yen

 

 

117.39

 

 

 

0.5

 

 

 

 

Buy U.S. dollar sell South African rand

 

 

14.14

 

 

 

2.1

 

 

 

(0.1

)

Buy South African rand sell Euro

 

 

14.75

 

 

 

0.4

 

 

 

 

Buy South African rand sell U.S. dollar

 

 

14.24

 

 

 

1.1

 

 

 

 

Total forward contracts

 

 

 

 

 

$

447.2

 

 

$

3.9

 

 

Foreign Currency

 

Average

Contract Rate

 

 

Original

Notional Amount

 

 

Fair Value

Gain (Loss)

 

 

 

 

 

 

 

(In millions)

 

 

(In millions)

 

At December 31, 2015

 

 

 

 

 

 

 

 

 

 

 

 

Buy Chinese yuan sell Euro

 

 

6.98

 

 

$

7.8

 

 

$

(0.3

)

Buy Chinese yuan sell U.S. dollar

 

 

6.47

 

 

 

118.9

 

 

 

(3.2

)

Buy Colombian peso sell U.S. dollar

 

 

3,170.89

 

 

 

0.5

 

 

 

 

Buy Euro sell Australian dollar

 

 

1.52

 

 

 

2.0

 

 

 

 

Buy Euro sell Canadian dollar

 

 

1.53

 

 

 

1.1

 

 

 

 

Buy Euro sell Chinese yuan

 

 

7.15

 

 

 

3.7

 

 

 

 

Buy Euro sell Indonesian rupiah

 

 

15,620.20

 

 

 

15.0

 

 

 

(0.4

)

Buy Euro sell Mexican peso

 

 

18.22

 

 

 

74.8

 

 

 

2.6

 

Buy Euro sell Peruvian nuevo sol

 

 

3.74

 

 

 

3.3

 

 

 

 

Buy Euro sell Philippine peso

 

 

50.19

 

 

 

1.2

 

 

 

 

Buy Euro sell Russian ruble

 

 

79.61

 

 

 

0.6

 

 

 

 

Buy Euro sell U.S. dollar

 

 

1.09

 

 

 

25.5

 

 

 

(0.2

)

Buy British pound sell Euro

 

 

0.74

 

 

 

3.7

 

 

 

 

Buy Kazakhstani tenge sell U.S. dollar

 

 

297.53

 

 

 

1.8

 

 

 

(0.4

)

Buy Mexican peso sell Euro

 

 

17.77

 

 

 

2.5

 

 

 

(0.1

)

Buy Norwegian krone sell U.S. dollar

 

 

8.23

 

 

 

1.2

 

 

 

(0.1

)

Buy Swedish krona sell U.S. dollar

 

 

8.21

 

 

 

2.0

 

 

 

 

Buy Taiwan dollar sell U.S. dollar

 

 

32.84

 

 

 

13.7

 

 

 

(0.1

)

Buy U.S. dollar sell Brazilian real

 

 

3.34

 

 

 

7.0

 

 

 

1.3

 

Buy U.S. dollar sell Colombian peso

 

 

3,291.97

 

 

 

2.7

 

 

 

(0.1

)

Buy U.S. dollar sell Euro

 

 

1.10

 

 

 

187.4

 

 

 

1.0

 

Buy U.S. dollar sell Korean won

 

 

1,128.10

 

 

 

2.0

 

 

 

0.1

 

Buy U.S. dollar sell Swedish krona

 

 

8.38

 

 

 

0.5

 

 

 

 

Total forward contracts

 

 

 

 

 

$

478.9

 

 

$

0.1

 

 

The following tables summarize the derivative activity during the years ended December 31, 2016, 2015, and 2014 relating to all the Company’s derivatives.

Gains and Losses on Derivative Instruments

The following table summarizes gains (losses) relating to derivative instruments recorded in other comprehensive loss during the years ended December 31, 2016, 2015, and 2014:

 

 

 

Amount of Gain (Loss) Recognized

in Other Comprehensive Loss

For the Year Ended

 

 

 

December 31

2016

 

 

December 31

2015

 

 

December 31

2014

 

 

 

(In millions)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to inventory

   and intercompany management fee hedges

 

$

8.1

 

 

$

14.8

 

 

$

16.8

 

 

As of December 31, 2016, the estimated amount of existing net gains related to cash flow hedges recorded in accumulated other comprehensive loss that are expected to be reclassified into earnings over the next twelve months was $5.7 million.

The following table summarizes gains (losses) relating to derivative instruments recorded to income during the years ended December 31, 2016, 2015, and 2014:

 

 

 

Amount of Gain (Loss)

Recognized in Income

For the Year Ended

 

 

 

 

 

December 31

2016

 

 

December 31

2015

 

 

December 31

2014

 

 

Location of Gain (Loss)

Recognized in Income

 

 

(In millions)

 

 

 

Derivatives designated as hedging

   instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to

   inventory hedges and intercompany

   management fee hedges(1)

 

$

0.2

 

 

$

0.4

 

 

$

(4.6

)

 

Selling, general and

administrative expenses

Derivatives not designated as hedging

   instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

 

$

(4.3

)

 

$

(4.1

)

 

$

(26.2

)

 

Selling, general and

administrative expenses

 

(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 for the years ended December 31, 2016 and 2014. For the year ended December 31, 2015, there was a $1.3 million benefit related to hedge ineffectiveness partially offset against a $0.9 million expense related to amounts excluded from the assessment of hedge effectiveness recognized in income (loss).

The following table summarizes gains (losses) relating to derivative instruments reclassified from accumulated other comprehensive loss into income during the years ended December 31, 2016, 2015, and 2014:

 

 

 

Amount of Gain (Loss) Reclassified

from Accumulated Other

Comprehensive Loss into Income

 

 

Location of Gain

(Loss) Reclassified

 

 

For the Year Ended

 

 

from Accumulated Other

 

 

December 31

2016

 

 

December 31

2015

 

 

December 31

2014

 

 

Comprehensive Loss into

Income (effective portion)

 

 

(In millions)

 

 

 

Derivatives designated as hedging

   instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to

   inventory hedges

 

$

14.7

 

 

$

15.8

 

 

$

4.0

 

 

Cost of sales

Foreign exchange currency contracts relating to

   intercompany management fee hedges

 

$

0.3

 

 

$

0.2

 

 

$

 

 

Selling, general

and administrative

expenses

 

The Company reports its derivatives at fair value as either assets or liabilities within its consolidated balance sheets. See Note 13, Fair Value Measurements, for information on derivative fair values and their consolidated balance sheets location as of December 31, 2016 and 2015.