Financial Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Financial Derivatives and Hedging Activities

15. FINANCIAL DERIVATIVES AND HEDGING ACTIVITIES

As part of our overall risk management practices, we enter into financial derivatives primarily designed to either i) hedge foreign currency risks associated with forecasted transactions – “cash flow hedges”; or ii) mitigate the impact that changes in currency exchange rates have on intercompany financing transactions and foreign currency denominated receivables and payables – “foreign currency hedges.”

Derivatives Designated as Hedging Instruments—Cash Flow Hedges We use currency forward contracts as cash flow hedges to manage our exposure to fluctuations in the currency exchange rates on certain forecasted production costs expected to be incurred over a twelve month to eighteen month period of time. Currency forward contracts involve fixing the exchange rate for delivery of a specified amount of foreign currency on a specified date.

We designate certain currency forward contracts as cash flow hedges of forecasted raw material purchases or certain production costs with exposure to changes in foreign currency exchange rates. The effective portion of changes in the fair value of derivatives designated and that qualify as cash flow hedges of foreign exchange risk is deferred as a component of accumulated other comprehensive income in the accompanying condensed consolidated balance sheets and is subsequently reclassified into costs of products sold in the period that inventory produced using the hedged transaction affects earnings. The ineffective portion of the change in fair value of the derivative is recognized directly to earnings and reflected in the accompanying condensed consolidated statements of income as non-operating income (expense) under the caption “Other, net.”

We had the following outstanding derivatives that were used to hedge foreign exchange risks associated with forecasted transactions and designated as hedging instruments:

In thousands	September 30 2015		December 31 2014
Derivative
Sell/Buy - sell notional
Euro / British Pound		9,189		4,592
Sell/Buy - buy notional
Euro / Philippine Peso		661,453		523,313
British Pound / Philippine Peso		471,607		260,535
Euro / U.S. Dollar		47,751		32,527
U.S. Dollar / Canadian Dollar		19,205		10,036

These contracts have maturities of between twelve months and eighteen months from the date originally entered into.

Derivatives Not Designated as Hedging Instruments—Foreign Currency Hedges We also enter into forward foreign exchange contracts to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities. None of these contracts are designated as hedges for financial accounting purposes and, accordingly, changes in value of the foreign exchange forward contracts and in the offsetting underlying on-balance-sheet transactions are reflected in the accompanying condensed consolidated statements of income under the caption “Other, net.”

The following sets forth derivatives used to mitigate the impact changes in currency exchange rates have on balance sheet monetary assets and liabilities:

In thousands	September 30 2015		December 31 2014
Derivative
Sell/Buy - sell notional
U.S. Dollar / Euro		—		4,000
U.S. Dollar / British Pound		7,000		9,000
Euro / British Pound		—		2,000
British Pound / Euro		2,000		—
Sell/Buy - buy notional
Euro / U.S. Dollar		7,000		—
British Pound / Euro		15,500		3,000

These contracts have maturities of one month from the date originally entered into.

Fair Value Measurements The following table summarizes the fair values of derivative instruments for the period indicated and the line items in the accompanying condensed consolidated balance sheets where the instruments are recorded:

In thousands	September 30 2015		December 31 2014		September 30 2015		December 31 2014
Balance sheet caption	Prepaid Expenses and Other Current Assets				Other Current Liabilities
Designated as hedging:
Forward foreign currency exchange contracts	$	693	$	3,106	$	1,676	$	394
Not designated as hedging:
Forward foreign currency exchange contracts	$	91.0	$	70	$	0	$	161

The amounts set forth in the table above represent the net asset or liability giving effect to rights of offset with each counterparty. The effect of netting the amounts presented above did not have a material effect on our consolidated financial position.

The following table summarizes the amount of income or (loss) from derivative instruments recognized in our results of operations for the periods indicated and the line items in the accompanying condensed consolidated statements of income where the results are recorded:

	Three months ended September 30						Nine months ended September 30
In thousands	2015			2014			2015		2014
Designated as hedging:
Forward foreign currency exchange contracts:
Effective portion – cost of products sold	$	1,972		$	(137	)	$	4,595	$	(1,227	)
Ineffective portion – other – net		(184	)		81			104		181
Not designated as hedging:
Forward foreign currency exchange contracts:
Other – net	$	621		$	595		$	1,028	$	1,792

The impact of activity not designated as hedging was substantially offset by the remeasurement of the underlying on-balance sheet item.

The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The fair values of the foreign exchange forward contracts are considered to be Level 2. Foreign currency forward contracts are valued using foreign currency forward and interest rate curves. The fair value of each contract is determined by comparing the contract rate to the forward rate and discounting to present value. Contracts in a gain position are recorded in the condensed consolidated balance sheets under the caption “Prepaid expenses and other current assets” and the value of contracts in a loss position is recorded under the caption “Other current liabilities.”

A rollforward of fair value amounts recorded as a component of accumulated other comprehensive income is as follows:

In thousands	2015			2014
Balance at January 1,	$	3,282		$	(1,296	)
Deferred gains on cash flow hedges		1,100			2,223
Reclassified to earnings		(4,595	)		1,227
Balance at September 30,	$	(213	)	$	2,154

We expect substantially all of the amounts recorded as a component of accumulated other comprehensive income will be realized in results of operations within the next twelve months and the amount ultimately recognized will vary depending on actual market rates.

Credit risk related to derivative activity arises in the event the counterparty fails to meet its obligations to us. This exposure is generally limited to the amounts, if any, by which the counterparty’s obligations exceed our obligation to them. Our policy is to enter into contracts only with financial institutions which meet certain minimum credit ratings.