Annual report pursuant to Section 13 and 15(d)

Derivative Instruments and Hedging Activities

v3.10.0.1
Derivative Instruments and Hedging Activities
12 Months Ended
Dec. 31, 2018
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 primarily 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 loss within shareholders’ deficit, 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 loss within shareholders’ deficit, and are recognized in selling, general, and administrative expenses within the Company’s consolidated statement of income during the period when the hedged item and underlying transaction affect earnings.

As of December 31, 2018 and 2017, the aggregate notional amounts of all foreign currency contracts outstanding designated as cash flow hedges were approximately $43.8 million and $104.9 million, respectively. As of December 31, 2018, these outstanding contracts were expected to mature over the next eleven 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, 2018, the Company recorded assets at fair value of $0.5 million and liabilities at fair value of $0.7 million relating to all outstanding foreign currency contracts designated as cash-flow hedges. As of December 31, 2017, the Company recorded assets at fair value of $2.9 million and liabilities at fair value of $4.0 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, 2018, 2017, and 2016, the ineffective portion relating to these hedges was immaterial and the hedges remained effective as of December 31, 2018 and 2017.

As of December 31, 2018 and 2017, 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 as of December 31, 2018 and 2017.

The tables below provide information about the details of all foreign currency forward contracts that were outstanding as of December 31, 2018 and 2017:

 

 

 

Weighted-Average Contract Rate

 

 

Notional Amount

 

 

Fair Value Gain (Loss)

 

 

 

(in millions, except weighted-average contract rate)

 

As of December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

Buy Brazilian real sell U.S. dollar

 

 

3.92

 

 

$

4.3

 

 

$

 

Buy British pound sell Euro

 

 

0.90

 

 

 

8.3

 

 

 

 

Buy British pound sell U.S. dollar

 

 

1.27

 

 

 

2.7

 

 

 

 

Buy Chinese yuan sell Euro

 

 

8.14

 

 

 

58.6

 

 

 

1.7

 

Buy Colombian peso sell U.S. dollar

 

 

3,313.00

 

 

 

1.8

 

 

 

 

Buy Euro sell Australian dollar

 

 

1.61

 

 

 

1.1

 

 

 

 

Buy Euro sell British pound

 

 

0.91

 

 

 

4.7

 

 

 

 

Buy Euro sell Canadian dollar

 

 

1.55

 

 

 

0.2

 

 

 

 

Buy Euro sell Chinese yuan

 

 

7.91

 

 

 

6.3

 

 

 

 

Buy Euro sell Ghanaian cedi

 

 

5.73

 

 

 

8.5

 

 

 

(0.2

)

Buy Euro sell Hong Kong dollar

 

 

8.90

 

 

 

1.1

 

 

 

 

Buy Euro sell Indonesian rupiah

 

 

16,780.97

 

 

 

7.3

 

 

 

(0.1

)

Buy Euro sell Japanese yen

 

 

128.00

 

 

 

0.3

 

 

 

 

Buy Euro sell Kazakhstani tenge

 

 

431.37

 

 

 

0.7

 

 

 

 

Buy Euro sell Malaysian ringgit

 

 

4.79

 

 

 

3.7

 

 

 

 

Buy Euro sell Mexican peso

 

 

23.48

 

 

 

55.0

 

 

 

(0.9

)

Buy Euro sell Peruvian nuevo sol

 

 

3.83

 

 

 

2.2

 

 

 

 

Buy Euro sell Philippine peso

 

 

60.58

 

 

 

3.9

 

 

 

 

Buy Euro sell Russian ruble

 

 

78.87

 

 

 

3.3

 

 

 

 

Buy Euro sell South African rand

 

 

16.55

 

 

 

4.6

 

 

 

0.1

 

Buy Euro sell Taiwan dollar

 

 

34.98

 

 

 

1.2

 

 

 

 

Buy Euro sell Thai baht

 

 

37.32

 

 

 

0.8

 

 

 

 

Buy Euro sell U.S. dollar

 

 

1.15

 

 

 

51.2

 

 

 

(0.1

)

Buy Euro sell Ukrainian hryvnia

 

 

32.28

 

 

 

2.6

 

 

 

 

Buy Hong Kong dollar sell Euro

 

 

9.00

 

 

 

3.1

 

 

 

 

Buy Indian rupee sell U.S. dollar

 

 

70.32

 

 

 

1.5

 

 

 

 

Buy Indonesian rupiah sell U.S. dollar

 

 

14,670.00

 

 

 

7.0

 

 

 

0.1

 

Buy Korean won sell U.S. dollar

 

 

1,116.38

 

 

 

5.0

 

 

 

0.1

 

Buy Mexican peso sell Euro

 

 

22.89

 

 

 

10.9

 

 

 

0.1

 

Buy Mexican peso sell U.S. dollar

 

 

19.68

 

 

 

0.7

 

 

 

 

Buy Norwegian krone sell U.S. dollar

 

 

8.69

 

 

 

1.2

 

 

 

 

Buy Philippine peso sell Euro

 

 

60.27

 

 

 

1.5

 

 

 

 

Buy Swedish krona sell U.S. dollar

 

 

8.90

 

 

 

1.1

 

 

 

 

Buy Taiwan dollar sell U.S. dollar

 

 

30.17

 

 

 

9.4

 

 

 

0.1

 

Buy U.S. dollar sell Brazilian real

 

 

3.85

 

 

 

4.4

 

 

 

 

Buy U.S. dollar sell British pound

 

 

1.27

 

 

 

1.4

 

 

 

 

Buy U.S. dollar sell Colombian peso

 

 

3,262.80

 

 

 

1.4

 

 

 

 

Buy U.S. dollar sell Euro

 

 

1.16

 

 

 

97.6

 

 

 

0.5

 

Buy U.S. dollar sell Mexican peso

 

 

22.02

 

 

 

4.9

 

 

 

0.2

 

Total forward contracts

 

 

 

 

 

$

385.5

 

 

$

1.6

 

 

 

 

Weighted-Average Contract Rate

 

 

Notional Amount

 

 

Fair Value Gain (Loss)

 

 

 

(in millions, except weighted-average contract rate)

 

As of December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

Buy Argentine peso sell Euro

 

 

21.40

 

 

$

0.5

 

 

$

 

Buy Australian dollar sell Euro

 

 

1.55

 

 

 

0.9

 

 

 

 

Buy British pound sell Euro

 

 

0.88

 

 

 

3.4

 

 

 

(0.1

)

Buy British pound sell U.S. dollar

 

 

1.35

 

 

 

2.8

 

 

 

 

Buy Canadian dollar sell Euro

 

 

1.52

 

 

 

0.5

 

 

 

 

Buy Chilean peso sell Euro

 

 

749.55

 

 

 

0.6

 

 

 

 

Buy Chinese yuan sell Euro

 

 

8.03

 

 

 

25.9

 

 

 

0.4

 

Buy Euro sell Argentine peso

 

 

21.46

 

 

 

0.5

 

 

 

 

Buy Euro sell Australian dollar

 

 

1.56

 

 

 

4.8

 

 

 

(0.1

)

Buy Euro sell Canadian dollar

 

 

1.52

 

 

 

0.5

 

 

 

 

Buy Euro sell Chilean peso

 

 

749.35

 

 

 

1.1

 

 

 

 

Buy Euro sell Chinese yuan

 

 

7.84

 

 

 

26.5

 

 

 

0.2

 

Buy Euro sell Ghana cedi

 

 

5.61

 

 

 

3.0

 

 

 

(0.1

)

Buy Euro sell Hong Kong dollar

 

 

9.26

 

 

 

6.8

 

 

 

0.1

 

Buy Euro sell Indonesian rupiah

 

 

16,113.59

 

 

 

11.5

 

 

 

0.1

 

Buy Euro sell Japanese yen

 

 

133.88

 

 

 

0.4

 

 

 

 

Buy Euro sell Kazakhstani tenge

 

 

401.40

 

 

 

1.7

 

 

 

 

Buy Euro sell Malaysian ringgit

 

 

4.84

 

 

 

1.6

 

 

 

 

Buy Euro sell Mexican peso

 

 

22.65

 

 

 

59.1

 

 

 

3.6

 

Buy Euro sell Peruvian nuevo sol

 

 

3.85

 

 

 

4.9

 

 

 

 

Buy Euro sell Philippine peso

 

 

60.03

 

 

 

5.3

 

 

 

 

Buy Euro sell Russian ruble

 

 

70.38

 

 

 

10.8

 

 

 

(0.1

)

Buy Euro sell South African rand

 

 

16.37

 

 

 

3.8

 

 

 

(0.3

)

Buy Euro sell Taiwan dollar

 

 

35.59

 

 

 

0.6

 

 

 

 

Buy Euro sell Thai baht

 

 

38.33

 

 

 

1.3

 

 

 

 

Buy Euro sell U.S. dollar

 

 

1.18

 

 

 

59.1

 

 

 

0.9

 

Buy Hong Kong dollar sell Euro

 

 

9.31

 

 

 

3.0

 

 

 

 

Buy Indonesian rupiah sell Euro

 

 

16,164.33

 

 

 

4.8

 

 

 

 

Buy Indonesian rupiah sell U.S. dollar

 

 

13,676.00

 

 

 

6.2

 

 

 

 

Buy Kazakhstani tenge sell U.S. dollar

 

 

338.75

 

 

 

0.9

 

 

 

 

Buy Korean won sell U.S. dollar

 

 

1,077.18

 

 

 

5.4

 

 

 

0.1

 

Buy Malaysian ringgit sell Euro

 

 

4.90

 

 

 

0.5

 

 

 

 

Buy Mexican peso sell Euro

 

 

22.97

 

 

 

7.1

 

 

 

(0.2

)

Buy Norwegian krone sell U.S. dollar

 

 

8.26

 

 

 

1.2

 

 

 

 

Buy Peruvian nuevo sol sell Euro

 

 

3.85

 

 

 

2.3

 

 

 

 

Buy Russian ruble sell Euro

 

 

70.47

 

 

 

4.4

 

 

 

0.1

 

Buy South African rand sell Euro

 

 

15.18

 

 

 

0.9

 

 

 

 

Buy Swedish krona sell U.S. dollar

 

 

8.37

 

 

 

1.9

 

 

 

0.1

 

Buy Taiwan dollar sell U.S. dollar

 

 

29.78

 

 

 

5.9

 

 

 

0.1

 

Buy Thai baht sell Euro

 

 

38.69

 

 

 

2.2

 

 

 

 

Buy U.S. dollar sell British pound

 

 

1.34

 

 

 

6.8

 

 

 

(0.1

)

Buy U.S. dollar sell Colombian peso

 

 

2,996.00

 

 

 

1.0

 

 

 

 

Buy U.S. dollar sell Euro

 

 

1.15

 

 

 

141.1

 

 

 

(5.3

)

Buy U.S. dollar sell South African rand

 

 

13.93

 

 

 

1.9

 

 

 

(0.2

)

Total forward contracts

 

 

 

 

 

$

435.4

 

 

$

(0.8

)

 

The following tables summarize the derivative activity during the years ended December 31, 2018, 2017, and 2016 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, 2018, 2017, and 2016:

 

 

 

Amount of (Loss) Gain Recognized in Other Comprehensive (Loss) Income

 

 

 

Year Ended December 31,

 

 

 

2018

 

 

2017

 

 

2016

 

 

 

(in millions)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(3.6

)

 

$

(7.9

)

 

$

8.1

 

 

As of December 31, 2018, 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 $1.8 million.

The following table summarizes gains (losses) relating to derivative instruments recorded to income during the years ended December 31, 2018, 2017, and 2016:

 

 

 

Amount of (Loss) Gain Recognized in Income

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

2018

 

 

2017

 

 

2016

 

 

Location of (Loss) Gain Recognized in Income

 

 

(in millions)

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

(2.1

)

 

$

(0.1

)

 

$

0.2

 

 

Selling, general, and administrative expenses

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

 

$

(4.0

)

 

$

(8.6

)

 

$

(4.3

)

 

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, 2018, 2017, and 2016.

The following table summarizes gains (losses) relating to derivative instruments reclassified from accumulated other comprehensive loss into income during the years ended December 31, 2018, 2017, and 2016:

 

 

 

Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss to Income

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

2018

 

 

2017

 

 

2016

 

 

Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss to Income (Effective Portion)

 

 

(in millions)

 

 

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to inventory hedges

 

$

3.6

 

 

$

(0.5

)

 

$

14.7

 

 

Cost of sales

Foreign exchange currency contracts relating to intercompany management fee hedges

 

$

(3.8

)

 

$

(2.2

)

 

$

0.3

 

 

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 sheet locations as of December 31, 2018 and 2017.