Financial Derivatives and Risk Management | 3 Months Ended |
Mar. 31, 2015 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | |
Financial Derivatives and Risk Management | Financial Derivatives and Risk Management |
The Company conducts business in many parts of the world and is subject to risks associated with changing foreign currency exchange rates. Accordingly, the Company uses derivative instruments designated as cash flow hedges and net investment hedges, as well as derivative instruments that are not designated as hedging instruments to mitigate a portion of this risk. These derivative instruments are primarily comprised of foreign currency forward exchange contracts, and are classified within Level 2 of the fair value hierarchy for which fair value is determined by using foreign currency market spot rates and forward points observable at commonly quoted intervals. The Company does not enter into foreign currency forward exchange contracts for speculative trading purposes. |
Cash Flow Hedges |
A significant portion of the Company's cost of products and services sold is denominated in the U.S. Dollar, while approximately 60 percent of the Company's sales are denominated in other currencies. Intercompany inventory purchases, which are sourced primarily from subsidiaries with U.S. Dollar functional currencies, are sold to customers by international subsidiaries in other local currencies. The Company uses foreign currency forward exchange contracts to mitigate a portion of the foreign currency risks associated with these forecasted intercompany inventory purchases. |
These foreign currency forward exchange contracts have been designated as hedges of the variability of cash flows related to forecasted inventory purchases due to changes in foreign currency exchange rates. Changes in fair value of these derivatives are deferred in AOCI within stockholders' equity until the underlying hedged items are recognized in net income. Accordingly, the Company records cash flow hedge gains or losses within cost of products and services sold when the related inventory is sold to a customer. To the extent any portion of the hedge contract is determined to be ineffective, the increase or decrease in value of the contract prior to maturity will be recognized in income immediately. The cash flow impact from these derivatives is classified in the operating activities section of the Company's consolidated statements of cash flows, which is the same category as the underlying items being hedged. Gains or losses related to the ineffective portion of these hedging instruments were not material for each of the three months ended March 31, 2015 and 2014. At March 31, 2015 and December 31, 2014, the Company had outstanding notional principal amounts of $126 and $187, respectively, in foreign currency forward exchange contracts associated with cash flow hedging transactions. |
The following table summarizes the fair values of the foreign currency forward exchange contracts designated as cash flow hedges at March 31, 2015 and December 31, 2014: |
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Item | Reporting Location | | March 31, 2015 | | December 31, 2014 |
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Forward exchange contracts asset derivative | Other current assets | | $ | 25 | | | $ | 23 | |
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Forward exchange contracts liability derivative | Other current liabilities | | — | | | — | |
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Gain recognized in AOCI, net | AOCI | | 25 | | | 24 | |
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The following table summarizes the effect of the foreign currency forward exchange contracts designated as cash flow hedges on the Company's consolidated statements of comprehensive income during the three months ended March 31, 2015 and 2014, net of immaterial tax effects. |
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Item | Reporting Location | | Three Months Ended March 31, 2015 | | Three Months Ended March 31, 2014 |
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Gain/(loss) recognized in OCI, net | OCI | | $ | 12 | | | $ | (1 | ) |
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Gain reclassified from AOCI into net income | Costs of products and services sold | | 11 | | | 1 | |
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As of March 31, 2015, the majority of these contracts are in established currencies including the Euro, Japanese Yen and British Pound. During the next twelve months the Company expects $24 of unrealized gains included in AOCI, based on the value of these contracts as of March 31, 2015, will be reclassified into income. The Company generally does not hedge its exposure to the exchange rate variability of future cash flows beyond the next ensuing twenty-four months. |
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Net Investment Hedges |
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The Company also holds investments in international subsidiaries that own net assets denominated in foreign currencies. The U.S. Dollar value of these foreign currency denominated net assets fluctuate as the exchange rate fluctuates. From time to time the Company will enter into net investment hedges to reduce the variability in the U.S. Dollar equivalent of net asset values due to changes in exchange rates. During 2014, the Company entered into foreign currency forward exchange contracts with third party banks to hedge certain net assets denominated in the Euro and Swiss Franc. |
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These hedges have been designated as net investment hedges and qualify for hedge accounting treatment, whereby changes in fair value of the derivative are reported in OCI. To the extent any portion of the hedge contract is determined to be ineffective, the increase or decrease in value of the contract prior to maturity will be recognized in income immediately. The cash flow impact from these derivatives is classified in the investing activities section of the Company's consolidated statements of cash flows. Gains or losses related to the ineffective portion of these hedging instruments were not material for the three months ended March 31, 2014. At March 31, 2015 and December 31, 2014, the Company did not have any outstanding foreign currency forward exchange contracts associated with net investment hedging transactions. |
Derivatives Not Designated As Hedges |
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The Company also uses foreign currency forward exchange contracts, which are not designated as hedging instruments, primarily to hedge a portion of the value of certain intercompany receivables and payables denominated in foreign currencies. The Company's objective is to minimize the impact of foreign currency exchange rate changes during the period of time between the original transaction date and its cash settlement. Gains and losses on these contracts are recorded in SG&A, based on the difference in the contract rate and the fair value at the end of each month for all contracts still in force, and are typically offset either partially or completely by transaction gains and losses on the related intercompany receivables and payables. The duration of the contracts typically does not exceed six months. As of March 31, 2015, the majority of these contracts are in established currencies including the Euro, British Pound and the Taiwan Dollar. The impact of these contracts was not material to the consolidated statement of income for the three months ended March 31, 2015 and 2014. The notional amount of open foreign currency forward exchange contracts for derivatives not designated as hedges at March 31, 2015 and December 31, 2014 was $177 and $195, respectively. |