Annual report pursuant to Section 13 and 15(d)

Financial Instruments and Risk Management

v3.8.0.1
Financial Instruments and Risk Management
 12 Months Ended
Dec. 31, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Financial Instruments and Risk Management
FINANCIAL INSTRUMENTS AND RISK MANAGEMENT
In the normal course of business, the Company's financial position, results of operations and cash flows are routinely subject to a variety of risks. These risks include risks associated with financial markets, primarily currency exchange rate risk and, to a lesser extent, interest rate risk and equity market risk. The Company regularly assesses these risks and has established policies and business practices designed to mitigate them. The Company does not engage in speculative trading in any financial market.
The Company actively manages the risk of changes in functional currency equivalent cash flows resulting from anticipated non-functional currency denominated purchases and sales. Our subsidiaries and joint venture that use European euros, Canadian dollars, Japanese yen, or Chinese renminbi as their functional currency are primarily exposed to changes in functional currency equivalent cash flows from anticipated U.S. dollar inventory purchases. The Company's prAna subsidiary uses U.S. dollars as its functional currency and is exposed to anticipated Canadian dollar denominated sales. The Company manages these risks by using currency forward contracts formally designated and effective as cash flow hedges. Hedge effectiveness is generally determined by evaluating the ability of a hedging instrument's cumulative change in fair value to offset the cumulative change in the present value of expected cash flows on the underlying exposures. For forward contracts, the change in fair value attributable to changes in forward points is excluded from the determination of hedge effectiveness and included in current cost of sales for hedges of anticipated U.S. dollar inventory purchases and in net sales for hedges of anticipated Canadian dollar sales. Hedge ineffectiveness was not material during the years ended December 31, 2017, 2016 and 2015.
The Company also uses foreign currency forward contracts not formally designated as hedges using euros, yen, Canadian dollars, British pounds and Swiss francs to manage the consolidated currency exchange risk associated with the remeasurement of non-functional currency denominated monetary assets and liabilities. Non-functional currency denominated monetary assets and liabilities consist primarily of cash and cash equivalents, short-term investments, payables, and intercompany loans. The gains and losses generated on these currency forward contracts not formally designated as hedges are expected to be largely offset in other non-operating income (expense), net by the gains and losses generated from the remeasurement of the non-functional currency denominated monetary assets and liabilities.
The following table presents the gross notional amount of outstanding derivative instruments (in thousands):
 
 
December 31,
 
 
2017
 
2016
Derivative instruments designated as cash flow hedges:
 
 
 
 
Currency forward contracts
 
$
448,448

 
$
206,000

Derivative instruments not designated as hedges:
 
 
 
 
Currency forward contracts
 
231,161

 
184,940


At December 31, 2017, approximately $10,261,000 of deferred net losses on both outstanding and matured derivatives accumulated in other comprehensive income are expected to be reclassified to income before tax during the next twelve months as a result of underlying hedged transactions also being recorded in net income. Actual amounts ultimately reclassified to net income are dependent on U.S. dollar exchange rates in effect against the euro, Canadian dollar, yen, and renminbi when outstanding derivative contracts mature.
At December 31, 2017, the Company's derivative contracts had remaining maturities of less than three years. The maximum net exposure to any single counterparty, which is generally limited to the aggregate unrealized gain of all contracts with that counterparty, was less than $2,000,000 at December 31, 2017. All of the Company's derivative counterparties have investment grade credit ratings. The Company is a party to master netting arrangements that contain features that allow counterparties to net settle amounts arising from multiple separate derivative transactions or net settle in the case of certain triggering events such as a bankruptcy or major default of one of the counterparties to the transaction. Finally, the Company has not pledged assets or posted collateral as a requirement for entering into or maintaining derivative positions.
The following table presents the balance sheet classification and fair value of derivative instruments (in thousands):
 
 
 
December 31,
 
Balance Sheet Classification
 
2017
 
2016
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
Currency forward contracts
Prepaid expenses and other current assets
 
$
1,648

 
$
9,805

Currency forward contracts
Other non-current assets
 
335

 
1,969

Derivative instruments in liability positions:
 
 
 
 
 
Currency forward contracts
Accrued liabilities
 
9,336

 
106

Currency forward contracts
Other long-term liabilities
 
3,820

 
—

Derivative instruments not designated as hedges:
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
Currency forward contracts
Prepaid expenses and other current assets
 
683

 
1,361

Derivative instruments in liability positions:
 
 
 
 
 
Currency forward contracts
Accrued liabilities
 
1,229

 
180


The following table presents the effect and classification of derivative instruments for the years ended December 31, 2017, 2016 and 2015 (in thousands):
 
 
 
For the Year Ended
 December 31,
 
Statement Of Operations Classification
 
2017
 
2016
 
2015
Currency Forward Contracts:
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income, net of tax
—
 
$
(15,862
)
 
$
583

 
$
9,791

Gain (loss) reclassified from accumulated other comprehensive income to income for the effective portion
Cost of sales
 
1,195

 
(724
)
 
15,446

Loss reclassified from accumulated other comprehensive income to income as a result of cash flow hedge discontinuance
Cost of sales
 
—

 
(24
)
 
—

Gain reclassified from accumulated other comprehensive income to income for the effective portion
Net sales
 
144

 
115

 
385

Gain (loss) recognized in income for amount excluded from effectiveness testing and for the ineffective portion
Cost of sales
 
2,843

 
1,240

 
(209
)
Loss reclassified from accumulated other comprehensive income to income as a result of cash flow hedge discontinuance
Other non-operating expense
 
(178
)
 
—

 
—

Gain recognized in income for amount excluded from effectiveness testing and for the ineffective portion
Net sales
 
6

 
1

 
(30
)
Derivative instruments not designated as hedges:
 
 
 
 
 
 
 
Gain (loss) recognized in income
Other non-operating expense
 
(3,943
)
 
2,739

 
2,838