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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 6 Months Ended
Jun. 30, 2014
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company is exposed to global market risks, including risks from changes in FX rates and changes in interest rates. Accordingly, the Company uses derivatives in certain instances to manage the aforementioned financial exposures that occur in the normal course of business. The Company does not hold or issue derivatives for speculative purposes.

Interest Rate Swaps

In the fourth quarter of 2010, the Company entered into interest rate swaps with a total notional amount of $300 million to convert the fixed interest rate on the Series 2005-1 Notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of the Series 2005-1 Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the Series 2005-1 Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Company’s consolidated statement of operations.

In the second quarter of 2014, the Company entered into interest rate swaps with a total notional amount of $250 million to convert the fixed interest rate on the 2010 Senior Notes to a floating interest rate based on the 3-month LIBOR. The purpose of this hedge was to mitigate the risk associated with changes in the fair value of the 2010 Senior Notes, thus the Company has designated these swaps as fair value hedges. The fair value of the swaps is adjusted quarterly with a corresponding adjustment to the carrying value of the 2010 Senior Notes. The changes in the fair value of the hedges and the underlying hedged item generally offset and the net cash settlements on the swaps are recorded each period within interest income (expense), net, in the Company’s consolidated statement of operations.

Foreign Exchange Forwards

The Company also enters into foreign exchange forwards to mitigate the change in fair value on certain assets and liabilities denominated in currencies other than a subsidiary’s functional currency. These forward contracts are not designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Accordingly, changes in the fair value of these contracts are recognized immediately in other non-operating (expense) income, net in the Company’s consolidated statements of operations along with the FX gain or loss recognized on the assets and liabilities denominated in a currency other than the subsidiary’s functional currency. These contracts have expiration dates at various times through February 2015.

The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forwards:

June 30,December 31,
20142013
Notional amount of currency pair:
Contracts to purchase USD with euros$ 71.1$ 14.2
Contracts to sell USD for euros$ 54.7$ 53.2
Contracts to purchase USD with GBP$ 0.7$ -
Contracts to purchase USD with other foreign currencies$ 1.9$ -
Contracts to sell USD for other foreign currencies$ 20.1$ -
Contracts to purchase euros with other foreign currencies€ 53.8€ 13.1
Contracts to purchase euros with GBP€ 24.1€ 22.1
Contracts to sell euros for GBP€ 67.3€ -

Net Investment Hedges

The Company enters into foreign currency forward contracts to hedge the exposure related to non-U.S. dollar net investments in certain foreign subsidiaries against adverse changes in foreign exchange rates. These forward contracts are designated as accounting hedges under the applicable sections of Topic 815 of the ASC. Hedge effectiveness is assessed based on the overall changes in the fair value of the forward contracts on a pre-tax basis. For hedges that meet the effectiveness requirements, any change in the fair value for the hedge is recorded in the currency translation adjustment component of AOCI. Any change in the fair value of these hedges that is the result of ineffectiveness would be recognized immediately in other non-operating (expense) income in the Company’s consolidated statement of operations. These outstanding contracts expire in September 2014 for contracts to sell euros for USD and in November 2014 for contracts to sell Japanese yen for USD.

The following table summarizes the notional amounts of the Company’s outstanding foreign exchange forward contracts that are designated as net investment hedges:

June 30,December 31,
20142013
Notional amount of currency pair:
Contracts to sell euros for USD€ 50.0€ 50.0
Contracts to sell Japanese yen for USD￥ 19,700￥ 19,700

The table below shows the classification between assets and liabilities on the Company’s consolidated balance sheets for the fair value of the derivative instruments:

Fair Value of Derivative Instruments
Derivatives InstrumentsBalance Sheet LocationJune 30, 2014December 31, 2013
Assets:
Derivatives designated as accounting hedges:
Interest rate swapsOther assets$ 12.6$ 10.3
FX forwards on net investment in certain foreign subsidiariesOther current assets 2.5 9.3
Total derivatives designated as accounting hedges 15.1 19.6
Derivatives not designated as accounting hedges:
FX forwards on certain assets and liabilitiesOther current assets 3.4 0.9
Total assets$ 18.5$ 20.5
Liabilities:
Derivatives designated as accounting hedges:
FX forwards on net investment in certain foreign subsidiariesAccounts payable and accrued liabilities$ 0.5$ 1.0
Derivatives not designated as accounting hedges:
FX forwards on certain assets and liabilitiesAccounts payable and accrued liabilities 0.2 0.7
Total liabilities$ 0.7$ 1.7

The following table summarizes the net gain (loss) on the Company’s foreign exchange forwards which are not designated as hedging instruments as well as the gain (loss) on the interest rate swaps designated as fair value hedges:

Amount of gain (loss) recognized in the consolidated statements of operations
Three Months EndedSix Months Ended
June 30,June 30,
Derivatives designated as fair value accounting hedgesLocation on Statement of Operations2014201320142013
Interest rate swapsInterest income(expense), net$2.0$1.0$0.5$2.1
Derivatives not designated as accounting hedges
Foreign exchange forwardsOther non-operating income (expense), net$1.3$1.0$ 0.9$ (0.1)

All gains and losses on interest rate swaps designated as cash flow hedges were initially recognized through AOCI. Realized gains and losses reported in AOCI were reclassified into interest income (expense), net as the underlying transaction was recognized. There were no cash flow hedges outstanding at both June 30, 2014 and 2013. Accordingly, there were no gains or losses recorded in AOCI in the three and six months ended June 30, 2014. The amount of losses reclassified from AOCI into net income in the three and six months ended June 30, 2013 was immaterial.

 

All gains and losses on derivatives designated as net investment hedges are recognized in the currency translation adjustment component of AOCI. The losses recognized in OCI in the three and six months ended June 30, 2014 and 2013 were immaterial. Additionally, the cumulative amount of unrecognized hedge losses recorded in AOCI at June 30, 2014 and December 31, 2013 were not material.