Quarterly report pursuant to Section 13 or 15(d)

Derivative Instruments and Hedging Activities

v3.19.2
Derivative Instruments and Hedging Activities
6 Months Ended
Jun. 30, 2019
Derivative Instruments And Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities

10. 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 condensed 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 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, 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 selling, general, and administrative expenses within the Company’s condensed consolidated statement of income during the period when the hedged item and underlying transaction affect earnings.

As of June 30, 2019 and December 31, 2018, the aggregate notional amounts of all foreign currency contracts outstanding designated as cash flow hedges were approximately $27.4 million and $43.8 million, respectively. As of June 30, 2019, 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 sheets at fair value based on third-party quotes. As of June 30, 2019, the Company recorded assets at fair value of $0.3 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, 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. The Company assesses hedge effectiveness at least quarterly and the hedges remained effective as of June 30, 2019 and December 31, 2018.

As of June 30, 2019 and December 31, 2018, 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 June 30, 2019 and December 31, 2018. As of June 30, 2019, the Company had aggregate notional amounts of approximately $373.7 million of foreign currency contracts, inclusive of freestanding contracts and contracts designated as cash flow hedges.

The following tables summarize the derivative activity during the three and six months ended June 30, 2019 and 2018 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) income during the three and six months ended June 30, 2019 and 2018:

 

 

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

2019

 

 

June 30,

2018

 

 

June 30,

2019

 

 

June 30,

2018

 

 

 

(in millions)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

 

 

$

4.5

 

 

$

(1.0

)

 

$

0.5

 

 

As of June 30, 2019, the estimated amount of existing net losses 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 $0.2 million.

The effect of cash flow hedging relationships on the Company’s condensed consolidated statements of income for the three and six months ended June 30, 2019 and 2018 was as follows:

 

 

 

Location and Amount of Gain (Loss) Recognized in Income on Cash Flow Hedging Relationships

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

2019

 

 

June 30,

2018

 

 

June 30,

2019

 

 

June 30,

2018

 

 

 

Cost of sales

 

 

Selling, general, and administrative expenses

 

 

Cost of sales

 

 

Selling, general, and administrative expenses

 

 

Cost of sales

 

 

Selling, general, and administrative expenses

 

 

Cost of sales

 

 

Selling, general, and administrative expenses

 

 

 

(in millions)

 

Total amounts presented in the condensed consolidated statements of income

 

$

243.2

 

 

$

477.0

 

 

$

235.4

 

 

$

510.2

 

 

$

484.8

 

 

$

912.4

 

 

$

475.3

 

 

$

970.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to inventory hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain reclassified from accumulated other comprehensive loss to income

 

 

0.1

 

 

 

 

 

 

1.5

 

 

 

 

 

 

0.1

 

 

 

 

 

 

2.0

 

 

 

 

Amount of (loss) gain excluded from assessment of effectiveness recognized in income(1)

 

 

(0.6

)

 

 

 

 

 

 

 

 

(0.8

)

 

 

(1.3

)

 

 

 

 

 

 

 

 

(3.1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to intercompany management fee hedges:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount of gain (loss) reclassified from accumulated other comprehensive loss to income

 

 

 

 

 

0.4

 

 

 

 

 

 

(1.6

)

 

 

 

 

 

0.8

 

 

 

 

 

 

(4.0

)

Amount of gain excluded from assessment of effectiveness recognized in income

 

 

 

 

 

0.1

 

 

 

 

 

 

0.6

 

 

 

 

 

 

0.1

 

 

 

 

 

 

0.9

 

 

(1)

As a result of adopting ASU 2017-12 during the first quarter of 2019, for the three and six months ended June 30, 2019, the Company recognized gains (losses) excluded from the assessment of effectiveness on foreign exchange currency contracts relating to inventory hedges in cost of sales within its condensed consolidated statements of income. Prior to the adoption of ASU 2017-12, for the three and six months ended June 30, 2018, the Company recognized gains (losses) excluded from the assessment of effectiveness on foreign exchange currency contracts relating to inventory hedges in selling, general, and administrative expenses within its condensed consolidated statements of income.

 

The following table summarizes gains (losses) recorded to income relating to derivative instruments not designated as hedging instruments during the three and six months ended June 30, 2019 and 2018:

 

 

 

Amount of (Loss) Gain Recognized in Income

 

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

 

 

June 30,

2019

 

 

June 30,

2018

 

 

June 30,

2019

 

 

June 30,

2018

 

 

Location of (Loss) Gain Recognized in Income

 

 

(in millions)

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

 

$

(2.5

)

 

$

1.1

 

 

$

(0.2

)

 

$

(1.6

)

 

Selling, general, and administrative expenses

 

The Company reports its derivatives at fair value as either assets or liabilities within its condensed consolidated balance sheets. See Note 13, Fair Value Measurements, for information on derivative fair values and their condensed consolidated balance sheets location as of June 30, 2019 and December 31, 2018.