Derivatives and Hedging

3 Months Ended

Mar. 31, 2013

Derivatives and Hedging

Derivatives and Hedging

(8) The company limits exposure to foreign currency fluctuations in most of its engineering and construction contracts through provisions that require client payments in currencies corresponding to the currencies in which cost is incurred. Certain financial exposure, which includes currency and commodity price risk associated with engineering and construction contracts, currency risk associated with intercompany transactions, deposits denominated in non-functional currencies, and risk associated with interest rate volatility may subject the company to earnings volatility. In cases where financial exposure is identified, the company generally mitigates the risk by utilizing derivative instruments as hedging instruments that are designated as either fair value or cash flow hedges in accordance with ASC 815, “Derivatives and Hedging.” The company formally documents its hedge relationships at inception, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction. The company also formally assesses, both at inception and at least quarterly thereafter, whether the hedging instruments are highly effective in offsetting changes in the fair value of the hedged items. The fair values of all hedging instruments are recognized as assets or liabilities at the balance sheet date. For fair value hedges, the effective portion of the change in the fair value of the hedging instrument is offset against the change in the fair value of the underlying asset or liability through earnings. For cash flow hedges, the effective portion of the hedging instruments’ gains or losses due to changes in fair value are recorded as a component of AOCI and are reclassified into earnings when the hedged items settle. Any ineffective portion of a hedging instrument’s change in fair value is immediately recognized in earnings. The company does not enter into hedging instruments or engage in hedging activities for speculative purposes. The company maintains master netting arrangements with certain counterparties to facilitate the settlement of derivative instruments; however, the company reports the fair value of derivative instruments on a gross basis.

In the first quarter of 2013, the company adopted ASU 2011-11, “Disclosures about Offsetting Assets and Liabilities” and ASU 2013-01, “Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities.” ASU 2011-11 requires an entity to disclose the nature of its rights of setoff and related arrangements associated with its financial instruments and derivative instruments. ASU 2013-01 clarifies which instruments and transactions are subject to the offsetting disclosure requirements established by ASU 2011-11.

As of March 31, 2013, the company had total gross notional amounts of $314 million of foreign exchange forward contracts and less than $1 million of commodity swap forward contracts outstanding relating to engineering and construction contract obligations and intercompany transactions. The foreign exchange forward contracts are of varying duration, none of which extend beyond March 2014. The commodity swap forward contracts are of varying duration, none of which extend beyond August 2014. The impact to earnings due to hedge ineffectiveness was immaterial for the three months ended March 31, 2013 and 2012.

The fair values of derivatives designated as hedging instruments under ASC 815 as of March 31, 2013 and December 31, 2012 were as follows:

	Asset Derivatives					Liability Derivatives
	Balance Sheet	March 31,		December 31,		Balance Sheet	March 31,		December 31,
(in thousands)	Location	2013		2012		Location	2013		2012
Commodity swaps	Other current assets	$	53	$	95	Other accrued liabilities	$	—	$	15
Foreign currency forwards	Other current assets	3,404		640		Other accrued liabilities	328		2,130
Commodity swaps	Other assets	—		—		Noncurrent liabilities	1		13
Foreign currency forwards	Other assets	—		—		Noncurrent liabilities	—		21
Total		$	3,457	$	735		$	329	$	2,179

The pre-tax amount of gain (loss) recognized in earnings associated with the hedging instruments designated as fair value hedges for the three months ended March 31, 2013 and 2012 was as follows:

		Three Months Ended March 31,
Fair Value Hedges (in thousands)	Location of Gain (Loss)	2013		2012
Foreign currency forwards	Corporate general and administrative expense	$	3,819	$	(13,573	)

The pre-tax amount of gain (loss) recognized in earnings on hedging instruments for the fair value hedges noted in the table above offset the amounts of gain (loss) recognized in earnings on the hedged items in the same locations on the Condensed Consolidated Statement of Earnings.

The after-tax amount of gain (loss) recognized in OCI and reclassified from AOCI into earnings associated with the derivative instruments designated as cash flow hedges for the three months ended March 31, 2013 and 2012 was as follows:

						After-Tax Amount of Gain
	After-Tax Amount of Gain					(Loss) Reclassified from
	Recognized in OCI					AOCI into Earnings
	Three Months Ended					Three Months Ended
	March 31,					March 31,
Cash Flow Hedges (in thousands)	2013		2012		Location of Gain (Loss)	2013			2012
Commodity swaps	$	31	$	552	Total cost of revenue	$	47		$	176
Foreign currency forwards	54		2,088		Total cost of revenue	147			(270		)
U.S. Treasury rate lock agreements	—		—		Interest expense	(262		)	(262		)
Total	$	85	$	2,640		$	(68	)	$	(356	)