Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments And Risk Management

v3.19.2
Financial Instruments And Risk Management
 6 Months Ended
Jun. 30, 2019
Derivative Instruments and Hedges, Assets [Abstract]  
Financial Instruments And Risk Management
NOTE 15—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. Subsidiaries that use European euros, Canadian dollars, Japanese yen, Chinese renminbi, or Korean won as their functional currency are primarily exposed to changes in functional currency equivalent cash flows from anticipated U.S. dollar inventory purchases. Subsidiaries that use U.S. dollars and euros as their functional currency also have non-functional currency denominated sales for which the Company hedges the Canadian dollar and Great British pound. 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, prior to June 2019, the time value components ("forward points") were excluded from the determination of hedge effectiveness and included in current period Cost of sales for hedges of anticipated U.S. dollar inventory purchases and in Net sales for hedges of anticipated non-functional currency denominated sales on a straight-line basis over the life of the contract. Effective June 2019, the forward points are now included in the fair value of the cash flow hedge on a prospective basis. These costs or benefits will be included in Accumulated other comprehensive income until the underlying hedge transaction is recognized in either Net sales or Cost of sales, at which time, the forward points will also be recognized as a component of Net income. Hedge ineffectiveness was not material during the three and six months ended June 30, 2019 and 2018.
The Company also uses currency forward contracts not formally designated as hedges to manage the consolidated currency exchange rate risk associated with the remeasurement of non-functional currency denominated monetary assets and liabilities by subsidiaries that use U.S. dollars, euros, Canadian dollars, yen, won, or renminbi as their functional currency. Non-functional currency denominated monetary assets and liabilities consist primarily of cash and cash equivalents, short-term investments, receivables, payables, deferred income taxes, 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 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)
 
June 30,
2019
 
December 31,
2018
 
June 30,
2018
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
Currency forward contracts
 
$
353,975

 
$
399,348

 
$
493,828

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
Currency forward contracts
 
359,179

 
379,701

 
419,707


At June 30, 2019, $10.6 million of deferred net gains on both outstanding and matured derivatives recorded in Other comprehensive income are expected to be reclassified to Net income during the next twelve months as a result of underlying hedged transactions also being recorded in Net sales or Cost of sales in the Condensed Consolidated Statements of Operations. Actual amounts ultimately reclassified to Net sales or Cost of sales in the Condensed Consolidated Statements of Comprehensive Income are dependent on U.S. dollar exchange rates in effect against the euro, renminbi, Canadian dollar, and yen when outstanding derivative contracts mature.
At June 30, 2019, the Company's derivative contracts had a remaining maturity of less than four 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 $5.0 million at June 30, 2019. All of the Company's derivative counterparties have credit ratings that are at least investment grade or higher. 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 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. 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)
 
Balance Sheet Classification
 
June 30,
2019
 
December 31,
2018
 
June 30,
2018
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
$
11,392

 
$
11,818

 
$
4,692

Currency forward contracts
 
Other non-current assets
 
6,776

 
9,922

 
10,516

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
170

 
47

 
1,022

Currency forward contracts
 
Other long-term liabilities
 
140

 
1

 
327

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Derivative instruments in asset positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Prepaid expenses and other current assets
 
2,181

 
1,797

 
2,471

Derivative instruments in liability positions:
 
 
 
 
 
 
 
 
Currency forward contracts
 
Accrued liabilities
 
1,920

 
970

 
1,873

The following table presents the statement of operations effect and classification of derivative instruments:
 
 
Statement of
Operations
Classification
 
Three Months Ended June 30,
 
Six Months Ended June 30,
(in thousands)
 
 
2019
 
2018
 
2019
 
2018
Currency Forward and Option Contracts:
 
 
 
 
 
 
 
 
 
 
Derivative instruments designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) recognized in other comprehensive income, net of tax
 
—
 
$
(464
)
 
$
20,859

 
$
2,804

 
$
15,627

Gain reclassified from accumulated other comprehensive income to income for the effective portion
 
Net sales
 
75

 
19

 
110

 
24

Gain (loss) reclassified from accumulated other comprehensive income or loss to income for the effective portion
 
Cost of sales
 
925

 
(1,398
)
 
2,121

 
(3,064
)
Gain (loss) recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Net sales
 
(26
)
 
6

 
(31
)
 
12

Gain recognized in income for amount excluded from effectiveness testing and for the ineffective portion
 
Cost of sales
 
931

 
1,896

 
2,380

 
3,821

Derivative instruments not designated as cash flow hedges:
 
 
 
 
 
 
 
 
Gain (loss) recognized in income
 
Other non-operating expense
 
(1,137
)
 
2,836

 
(574
)
 
2,234