10. Derivative Financial Instruments

As a global company, we are exposed in the normal course of business to interest rate and foreign currency risks that could affect our consolidated net assets, financial position, results of operations, and cash flows. We use derivative instruments to hedge against such risks, and we only hold derivative instruments for hedging purposes, not for speculative or trading purposes.

Depending on the terms of the specific derivative instruments and market conditions, some of our derivative instruments may be assets and others liabilities at any particular consolidated balance sheet date. We report all of our derivative instruments at fair value and we account for changes in the fair value of derivative instruments within accumulated other comprehensive income (loss) if the derivative instruments qualify for hedge accounting. For those derivative instruments that do not qualify for hedge accounting (“economic hedges”), we record the changes in fair value directly to earnings. See Note 11 “Fair Value Measurements,” for information about the techniques we use to measure the fair value of our derivative instruments.

The following tables present the fair values of derivative instruments included in our consolidated balance sheets as of December 31, 2013 and 2012 (in thousands):



	December 31, 2013
	Prepaid Expenses and Other Current Assets		Other Assets		Other Current Liabilities		Other Liabilities
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	$	2,357	$	282	$	—	$	—
Cross-currency swap contract	—		—		1,934		7,739
Interest rate swap contract	—		—		334		369
Total derivatives designated as hedging instruments	$	2,357	$	282	$	2,268	$	8,108

Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	$	5,639	$	—	$	5,828	$	—
Total derivatives not designated as hedging instruments	$	5,639	$	—	$	5,828	$	—
Total derivative instruments	$	7,996	$	282	$	8,096	$	8,108



	December 31, 2012
	Prepaid Expenses and Other Current Assets		Other Current Liabilities		Other Liabilities
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	$	2,121	$	—	$	—
Cross-currency swap contract	—		316		1,582
Interest rate swap contracts	—		473		994
Total derivatives designated as hedging instruments	$	2,121	$	789	$	2,576

Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	$	5,109	$	5,036	$	—
Total derivatives not designated as hedging instruments	$	5,109	$	5,036	$	—
Total derivative instruments	$	7,230	$	5,825	$	2,576

The impact of offsetting balances associated with derivative instruments designated as hedging instruments is shown below (in thousands):



	December 31, 2013
							Gross Amounts Not Offset in Consolidated Balance Sheet
	Gross Asset (Liability)			Gross Offset in Consolidated Balance Sheet	Net Amount Recognized in Financial Statements		Financial Instruments	Cash Collateral Pledged	Net Amount
Foreign exchange forward contracts	$	2,639		—	2,639		—	—	$	2,639
Cross-currency swap contracts	$	(9,673	)	—	(9,673	)	—	—	$	(9,673	)
Interest rate swap contracts	$	(703	)	—	(703	)	—	—	$	(703	)



	December 31, 2012
							Gross Amounts Not Offset in Consolidated Balance Sheet
	Gross Asset (Liability)			Gross Offset in Consolidated Balance Sheet	Net Amount Recognized in Financial Statements		Financial Instruments	Cash Collateral Pledged	Net Amount
Foreign exchange forward contracts	$	2,121		—	2,121		—	—	$	2,121
Cross-currency swap contracts	$	(1,898	)	—	(1,898	)	—	—	$	(1,898	)
Interest rate swap contracts	$	(1,467	)	—	(1,467	)	—	—	$	(1,467	)

The following table presents the effective amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive income (loss) and our consolidated statements of operations for the years ended December 31, 2013, 2012, and 2011 (in thousands):



	Foreign Exchange Forward Contracts			Interest Rate Swap Contracts			Cross Currency Swap Contract			Total
Balance at December 31, 2010	$	(1,448	)	$	(1,219	)	$	—		$	(2,667	)
Amounts recognized in other comprehensive income (loss)	(12,086		)	(2,112		)	(5,042		)	(19,240		)
Amounts reclassified to net sales as a result of forecasted transactions being probable of not occurring	(3,954		)	—			—			(3,954		)
Amounts reclassified to earnings impacting:
Net sales	51,239			—			—			51,239
Foreign currency (loss) gain	—			—			(957		)	(957		)
Interest expense	—			760			100			860
Balance at December 31, 2011	33,751			(2,571		)	(5,899		)	25,281
Amounts recognized in other comprehensive income (loss)	(11,040		)	(1,650		)	2,680			(10,010		)
Amounts reclassified to net sales as a result of forecasted transactions being probable of not occurring	(4,372		)	—			—			(4,372		)
Amounts reclassified to earnings impacting:
Net sales	(9,359		)	—			—			(9,359		)
Foreign currency (loss) gain	—			—			(5,176		)	(5,176		)
Interest expense	—			2,754			364			3,118
Balance at December 31, 2012	8,980			(1,467		)	(8,031		)	(518		)
Amounts recognized in other comprehensive income (loss)	8,486			(30		)	(6,666		)	1,790
Amounts reclassified to net sales as a result of forecasted transactions being probable of not occurring	(13,115		)	—			—			(13,115		)
Amounts reclassified to earnings impacting:
Net sales	—			—			—			—
Foreign currency (loss) gain	—			—			8,426			8,426
Interest expense	—			794			451			1,245
Balance at December 31, 2013	$	4,351		$	(703	)	$	(5,820	)	$	(2,172	)

We recorded immaterial amounts related to ineffective portions of our derivative instruments designated as cash flow hedges during the years ended December 31, 2013, 2012, and 2011 directly to other income (expense), net. In addition, we recognized unrealized losses of $2.1 million, unrealized gains of $2.0 million, and unrealized losses of $2.7 million related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within other income, net during the years ended December 31, 2013, 2012, and 2011, respectively.

The following table presents the amounts related to derivative instruments not designated as cash flow hedges affecting our consolidated statements of operations for the years ended December 31, 2013, 2012, and 2011 (in thousands):



	Amount of Gain (Loss) Recognized in Income on Derivatives
Derivatives not designated as hedging instruments:	Location of Gain (Loss) Recognized in Income on Derivatives	2013			2012			2011
Foreign exchange forward contracts	Foreign currency (loss) gain	$	6,063		$	3,185		$	(1,796	)
Foreign exchange forward contracts	Cost of sales	$	(3,760	)	$	(1,284	)	$	(1,844	)
Foreign exchange forward contracts	Net Sales	$	5,324		$	—		$	—

Interest Rate Risk

We use cross-currency swap contracts and interest rate swap contracts to mitigate our exposure to interest rate fluctuations associated with certain of our debt instruments; we do not use such swap contracts for speculative or trading purposes.

On September 30, 2011, we entered into a cross-currency swap contract to hedge the floating rate foreign currency denominated loan under our Malaysian Ringgit Facility Agreement. This swap had an initial notional value of Malaysian Ringgit (“MYR”) MYR 465.0 million and entitles us to receive a three-month floating Kuala Lumpur Interbank Offered Rate (“KLIBOR”) interest rate, and requires us to pay a U.S. dollar fixed rate of 3.495%. Additionally, this swap hedges the foreign currency risk of the Malaysian Ringgit denominated principal and interest payments as we make swap payments in U.S. dollars and receive swap payments in Malaysian Ringgits at a fixed exchange rate of 3.19 MYR to USD. The notional amount of the swap is scheduled to decline in correspondence to our scheduled principal payments on the underlying hedged debt. As of December 31, 2013 and 2012, the notional value of this cross-currency swap contract was MYR 387.5 million and MYR 465.0 million, respectively. This swap is a derivative instrument that qualifies for accounting as a cash flow hedge in accordance with ASC 815 and we designated it as such. We determined that this swap was highly effective as a cash flow hedge at December 31, 2013 and 2012. For the years ended December 31, 2013 and 2012, there were immaterial amounts of ineffectiveness from this cash flow hedge.

On May 29, 2009, we entered into an interest rate swap contract to hedge a portion of the floating rate loans under our Malaysian Credit Facility, which became effective on September 30, 2009 with an initial notional value of €57.3 million and pursuant to which we are entitled to receive a six-month floating Euro Interbank Offered Rate (“EURIBOR”) interest rate, and are required to pay a fixed rate of 2.80%. The notional amount of the interest rate swap contract is scheduled to decline in correspondence to our scheduled principal payments on the underlying hedged debt. As of December 31, 2013 and 2012, the notional value of this interest rate swap contract was €19.7 million and €29.1 million, respectively. This derivative instrument qualifies for accounting as a cash flow hedge in accordance with ASC 815 and we designated it as such. We determined that our interest rate swap contract was highly effective as a cash flow hedge at December 31, 2013 and 2012. For the years ended December 31, 2013, 2012, and 2011, there were immaterial amounts of ineffectiveness from this cash flow hedge.

In the following 12 months, we expect to reclassify to earnings $2.3 million of net unrealized losses related to swap contracts that are included in accumulated other comprehensive income (loss) at December 31, 2013 as we realize the earnings effect of the underlying loans. The amount we ultimately record to earnings will depend on the actual interest rates and foreign exchange rate when we realize the earnings effect of the underlying loans.

Foreign Currency Exchange Risk

Cash Flow Exposure

We expect many of the subsidiaries of our business to have material future cash flows, including net sales and expenses that will be denominated in currencies other than a subsidiaries’ functional currency. Our primary cash flow exposures are net sales and expenses. Changes in the exchange rates between our subsidiaries’ functional currency and the other currencies in which they transact will cause fluctuations in the cash flows we expect to receive or pay when these cash flows are realized or settled. Accordingly, we enter into foreign exchange forward contracts to hedge a portion of these forecasted cash flows. As of December 31, 2013 and 2012, these foreign exchange contracts hedged our forecasted cash flows for up to 18 months and 3 months, respectively. These foreign exchange forward contracts qualify for accounting as cash flow hedges in accordance with ASC 815, and we designated them as such. We initially report the effective portion of the derivative’s unrealized gain or loss in accumulated other comprehensive income (loss) and subsequently reclassify amounts into earnings when the hedged transaction occurs and impacts earnings. We determined that these derivative financial instruments were highly effective as cash flow hedges at December 31, 2013 and 2012. During the years ended December 31, 2013, 2012, and 2011, we did not discontinue any cash flow hedges because a hedging relationship was no longer highly effective.

During the year ended December 31, 2013, we purchased foreign exchange forward contracts to hedge the exchange risk on forecasted cash flows denominated in Australian dollars. As of December 31, 2013 and 2012, the notional values associated with our foreign exchange forward contracts qualifying as cash flow hedges were as follows (notional amounts and U.S. dollar equivalents in millions):



December 31, 2013

Currency	Notional Amount	USD Equivalent
Australian dollar	AUD148.9	$132.4



December 31, 2012

Currency	Notional Amount	USD Equivalent
Canadian dollar	CAD192.0	$195.1

As of December 31, 2013 and 2012, the unrealized gain on these contracts was $4.4 million and $9.0 million, respectively.

In the following 12 months, we expect to reclassify to earnings $3.9 million of net unrealized gains related to these forward contracts that are included in accumulated other comprehensive income (loss) at December 31, 2013 as we realize the earnings effect of the related forecasted transactions. The amount we ultimately record to earnings will depend on the actual exchange rate when we realize the related forecasted transactions.

Transaction Exposure and Economic Hedging

Many subsidiaries of our business have assets and liabilities (primarily receivables, marketable securities and investments, accounts payable, debt, and solar module collection and recycling liabilities) that are denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between our subsidiaries’ functional currencies and the other currencies in which these assets and liabilities are denominated can create fluctuations in our reported consolidated statements of operations, and cash flows. We may enter into foreign exchange forward contracts or other financial instruments to economically hedge assets and liabilities against the effects of currency exchange rate fluctuations. The gains and losses on the foreign exchange forward contracts will economically offset all or part of the transaction gains and losses that we recognize in earnings on the related foreign currency denominated assets and liabilities.

We purchase foreign exchange forward contracts to economically hedge balance sheet and other exposures related to transactions with third parties. Such contracts are considered economic hedges and do not qualify for hedge accounting. We recognize gains or losses from the fluctuation in foreign exchange rates and the fair value of these derivative contracts in “Net sales,” “Cost of sales,” and “Foreign currency gain (loss)” on our consolidated statements of operations, depending on where the gain or loss from the economically hedged item is classified on our consolidated statements of operations. As of December 31, 2013 the total net unrealized loss on our economic hedge foreign exchange forward contracts was $0.2 million. As of December 31, 2012 the total net unrealized gain on our economic hedge foreign exchange forward contracts was $0.1 million. As these amounts do not qualify for hedge accounting, changes in fair value related to such derivative instruments are recorded directly to earnings. These contracts have maturities of less than three months.

As of December 31, 2013 and 2012, the notional values of our foreign exchange forward contracts that do not qualify for hedge accounting were as follows (notional amounts and U.S. dollar equivalents in millions):



December 31, 2013
Transaction	Currency	Notional Amount	USD Equivalent
Purchase	Euro	€108.2	$149.2
Sell	Euro	€116.7	$161.0
Purchase	Australian dollar	AUD 7.3	$6.5
Sell	Australian dollar	AUD 14.6	$13.0
Purchase	Malaysian ringgit	MYR 185.1	$55.5
Sell	Malaysian ringgit	MYR 95.0	$28.5
Purchase	Canadian dollar	CAD 24.0	$22.6
Sell	Canadian dollar	CAD 40.3	$37.9
Sell	Japanese yen	JPY 775.0	$5.9



December 31, 2012
Transaction	Currency	Notional Amount	USD Equivalent
Purchase	Euro	€128.7	$170.2
Sell	Euro	€134.2	$177.5
Sell	Australian dollar	AUD 8.5	$8.8
Purchase	Malaysian ringgit	MYR 136.4	$45.0
Sell	Malaysian ringgit	MYR 36.0	$11.9
Purchase	Canadian dollar	CAD 22.4	$22.6
Sell	Canadian dollar	CAD 15.8	$16.0