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Derivatives and Hedging
9 Months Ended
Sep. 30, 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.

 

As of September 30, 2013, the company had total gross notional amounts of $127 million of foreign currency contracts and $12 million of commodity contracts outstanding relating to engineering and construction contract obligations and intercompany transactions. The foreign currency contracts are of varying duration, none of which extend beyond April 2014. The commodity contracts are of varying duration, none of which extend beyond May 2017. The impact to earnings due to hedge ineffectiveness was immaterial for the three and nine months ended September 30, 2013 and 2012.

 

The fair values of derivatives designated as hedging instruments under ASC 815 as of September 30, 2013 and December 31, 2012 are as follows:

 

 

 

Asset Derivatives

 

Liability Derivatives

 

 

 

Balance Sheet

 

September 30,

 

December 31,

 

Balance Sheet

 

September 30,

 

December 31,

 

(in thousands)

 

Location

 

2013

 

2012

 

Location

 

2013

 

2012

 

Commodity contracts

 

Other current assets

 

$

219

 

$

95

 

Other accrued liabilities

 

$

106

 

$

15

 

Foreign currency contracts

 

Other current assets

 

805

 

640

 

Other accrued liabilities

 

3,344

 

2,130

 

Commodity contracts

 

Other assets

 

 

 

Noncurrent liabilities

 

184

 

13

 

Foreign currency contracts

 

Other assets

 

 

 

Noncurrent liabilities

 

 

21

 

Total

 

 

 

$

1,024

 

$

735

 

 

 

$

3,634

 

$

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 and nine months ended September 30, 2013 and 2012 is as follows:

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

Fair Value Hedges (in thousands)

 

Location of Gain (Loss)

 

2013

 

2012

 

2013

 

2012

 

Foreign currency contracts

 

Corporate general and administrative expense

 

$

(81

)

$

(12,075

)

$

4,064

 

$

(19,773

)

 

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 associated with the derivative instruments designated as cash flow hedges is as follows:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

Cash Flow Hedges (in thousands)

 

2013

 

2012

 

2013

 

2012

 

Commodity contracts

 

$

47

 

$

619

 

$

79

 

$

1,011

 

Foreign currency contracts

 

(490

)

884

 

(2,962

)

2,910

 

Total

 

$

(443

)

$

1,503

 

$

(2,883

)

$

3,921

 

 

The after-tax amount of gain (loss) reclassified from AOCI into earnings associated with the derivative instruments designated as cash flow hedges is as follows:

 

 

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

 

 

September 30,

 

September 30,

 

Cash Flow Hedges (in thousands)

 

Location of Gain (Loss)

 

2013

 

2012

 

2013

 

2012

 

Commodity contracts

 

Total cost of revenue

 

$

(1

)

$

710

 

$

59

 

$

1,654

 

Foreign currency contracts

 

Total cost of revenue

 

(1,319

)

557

 

(1,454

)

558

 

Interest rate contracts

 

Interest expense

 

(262

)

(262

)

(786

)

(786

)

Total

 

 

 

$

(1,582

)

$

1,005

 

$

(2,181

)

$

1,426

 

 

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.

 

In the third quarter of 2013, the company adopted ASU 2013-10, “Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” ASU 2013-10 permits the use of the Fed Funds Effective Swap Rate as a U.S. benchmark interest rate for hedge accounting purposes and also removes the restriction on using different benchmark rates for similar hedges. ASU 2013-10 is effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of ASU 2013-10 did not have a material impact on the company’s financial position, results of operations or cash flows.