7. 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 these risks and only hold such 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 balance sheet date. We report all of our derivative instruments at fair value and account for changes in the fair value of derivative instruments within “Accumulated other comprehensive income” 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 8. “Fair Value Measurements” to our condensed consolidated financial statements 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 condensed consolidated balance sheets as of September 30, 2015 and December 31, 2014 (in thousands):



	September 30, 2015
	Prepaid Expenses and Other Current Assets		Other Current Liabilities		Other Liabilities
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	$	—	$	197	$	—
Cross-currency swap contract	—		7,673		15,364
Interest rate swap contract	—		35		—
Total derivatives designated as hedging instruments	$	—	$	7,905	$	15,364

Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	$	1,733	$	2,394	$	—
Total derivatives not designated as hedging instruments	$	1,733	$	2,394	$	—
Total derivative instruments	$	1,733	$	10,299	$	15,364



	December 31, 2014
	Prepaid Expenses and Other Current Assets		Other Current Liabilities		Other Liabilities
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	$	1,213	$	—	$	—
Cross-currency swap contract	—		2,996		8,995
Interest rate swap contract	—		164		46
Total derivatives designated as hedging instruments	$	1,213	$	3,160	$	9,041

Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	$	8,578	$	4,497	$	—
Total derivatives not designated as hedging instruments	$	8,578	$	4,497	$	—
Total derivative instruments	$	9,791	$	7,657	$	9,041

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



	September 30, 2015
							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	$	(197	)	—	(197	)	—	—	$	(197	)
Cross-currency swap contract	$	(23,037	)	—	(23,037	)	—	—	$	(23,037	)
Interest rate swap contract	$	(35	)	—	(35	)	—	—	$	(35	)



	December 31, 2014
							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	$	1,213		—	1,213		—	—	$	1,213
Cross-currency swap contract	$	(11,991	)	—	(11,991	)	—	—	$	(11,991	)
Interest rate swap contract	$	(210	)	—	(210	)	—	—	$	(210	)

The following tables present the effective amounts related to derivative instruments designated as cash flow hedges affecting accumulated other comprehensive income and our condensed consolidated statements of operations for the nine months ended September 30, 2015 and 2014 (in thousands):



	Foreign Exchange Forward Contracts			Interest Rate Swap Contract			Cross Currency Swap Contract			Total
Balance in accumulated other comprehensive income (loss) at December 31, 2014	$	6,621		$	(210	)	$	(3,399	)	$	3,012
Amounts recognized in other comprehensive income (loss)	703			22			(11,373		)	(10,648		)
Amounts reclassified to earnings impacting:
Net sales	(1,782		)	—			—			(1,782		)
Cost of sales	(5,509		)	—			—			(5,509		)
Foreign currency (loss) gain, net	—			—			12,126			12,126
Interest expense, net	—			153			327			480
Balance in accumulated other comprehensive income (loss) at September 30, 2015	$	33		$	(35	)	$	(2,319	)	$	(2,321	)



	Foreign Exchange Forward Contracts			Interest Rate Swap Contract			Cross Currency Swap Contract			Total
Balance in accumulated other comprehensive income (loss) at December 31, 2013	$	4,351		$	(703	)	$	(5,820	)	$	(2,172	)
Amounts recognized in other comprehensive income (loss)	(904		)	—			3,071			2,167
Amounts reclassified to earnings impacting:
Foreign currency (loss) gain, net	—			—			(880		)	(880		)
Interest expense, net	—			396			185			581
Balance in accumulated other comprehensive income (loss) at September 30, 2014	$	3,447		$	(307	)	$	(3,444	)	$	(304	)

We recorded no amounts related to ineffective portions of our derivative instruments designated as cash flow hedges during the three and nine months ended September 30, 2015 and 2014. We recognized unrealized losses of $0.2 million and unrealized gains of $0.3 million related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within “Other expense, net” during the three and nine months ended September 30, 2015, respectively. We recognized unrealized gains of $1.0 million and $1.1 million related to amounts excluded from effectiveness testing for our foreign exchange forward contracts designated as cash flow hedges within “Other expense, net” during the three and nine months ended September 30, 2014, respectively.

The following table presents amounts related to derivative instruments not designated as hedges affecting our condensed consolidated statements of operations for the three and nine months ended September 30, 2015 and 2014 (in thousands):



		Amount of Gain (Loss) Recognized in Income
		Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) on Derivatives Recognized in Income	2015			2014			2015		2014
Foreign exchange forward contracts	Foreign currency (loss) gain, net	$	9,527		$	(4,427	)	$	1,543	$	(7,467	)
Foreign exchange forward contracts	Cost of sales	$	(2,232	)	$	7,023		$	7,731	$	8,366

Interest Rate Risk

We use cross-currency swap 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 entitled us to receive a three-month floating Kuala Lumpur Interbank Offered Rate (“KLIBOR”) interest rate while requiring 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 line with our scheduled principal payments on the underlying hedged debt. As of September 30, 2015 and December 31, 2014, the notional value of this cross-currency swap contract was MYR 232.6 million ($52.2 million) and MYR 310.1 million ($88.6 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 September 30, 2015 and December 31, 2014. For the three and nine months ended September 30, 2015 and 2014, there were no 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 while being required to pay a fixed rate of 2.80%. The notional amount of the interest rate swap contract is scheduled to decline in line with our scheduled principal payments on the underlying hedged debt. As of September 30, 2015 and December 31, 2014, the notional value of this interest rate swap contract was €2.2 million ($2.5 million) and €10.3 million ($12.5 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 September 30, 2015 and December 31, 2014. For the three and nine months ended September 30, 2015 and 2014, there were no amounts of ineffectiveness from this cash flow hedge.

In the following 12 months, we expect to reclassify to earnings $0.8 million of net unrealized losses related to swap contracts that are included in “Accumulated other comprehensive income” at September 30, 2015 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 rates when we realize the earnings effect of the underlying loans.

Foreign Currency Exchange Risk

Cash Flow Exposure

We expect many of our subsidiaries to have material future cash flows that will be denominated in currencies other than the subsidiaries’ functional currencies. Changes in the exchange rates between the functional currencies of our subsidiaries 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 September 30, 2015 and December 31, 2014, these foreign exchange forward contracts hedged our forecasted cash flows for 36 months and 6 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 a derivative’s unrealized gain or loss in “Accumulated other comprehensive income” 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 September 30, 2015 and December 31, 2014. During the three and nine months ended September 30, 2015 and 2014, we did not discontinue any cash flow hedges because a hedging relationship was no longer highly effective. As of September 30, 2015 and December 31, 2014, 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):



	September 30, 2015
Currency	Notional Amount	USD Equivalent
Indian rupee	INR1,290.0	$19.6



	December 31, 2014
Currency	Notional Amount	USD Equivalent
Australian dollar	AUD 38.4	$31.5
Japanese yen	JPY 1,223.2	$10.3

As of September 30, 2015 and December 31, 2014, the unrealized gains on these contracts were less than $0.1 million and $6.6 million, respectively.

In the following 12 months, we expect to reclassify to earnings less than $0.1 million of net unrealized gains related to these forward contracts that are included in “Accumulated other comprehensive income” at September 30, 2015 as we realize the earnings effect of the related forecasted transactions. The amount we ultimately record to earnings will depend on the actual exchange rates when we realize the related forecasted transactions.

Transaction Exposure and Economic Hedging

Many of our subsidiaries have assets and liabilities (primarily cash, receivables, marketable securities, payables, 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 the functional currencies of our subsidiaries and the other currencies in which these assets and liabilities are denominated will create fluctuations in our reported condensed 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 such 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 between certain of our subsidiaries and 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 (loss) gain, net” on our condensed consolidated statements of operations, depending on where the gain or loss from the economically hedged item is classified. As of September 30, 2015, the total net unrealized loss on our economic hedge foreign exchange forward contracts was $0.7 million. As of December 31, 2014, the total net unrealized gain on our economic hedge foreign exchange forward contracts was $4.1 million. As these amounts do not qualify for hedge accounting, changes in the fair value of such derivative instruments are recorded directly to earnings. These contracts mature at various dates within the next three years.

As of September 30, 2015 and December 31, 2014, 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):



	September 30, 2015
Transaction	Currency	Notional Amount	USD Equivalent
Purchase	Euro	€53.2	$59.7
Sell	Euro	€124.2	$139.5
Purchase	Australian dollar	AUD 18.7	$13.1
Sell	Australian dollar	AUD 107.7	$75.4
Purchase	Malaysian ringgit	MYR 16.2	$3.6
Sell	Malaysian ringgit	MYR 94.3	$21.2
Sell	Canadian dollar	CAD 5.9	$4.4
Purchase	Japanese yen	JPY 652.9	$5.4
Sell	Japanese yen	JPY 7,423.2	$62.0
Purchase	British pound	GBP 8.2	$12.4
Sell	British pound	GBP 16.0	$24.2
Purchase	Chinese yuan	CNY 32.3	$5.1
Purchase	Indian rupee	INR 237.1	$3.6
Sell	Indian rupee	INR 6,347.2	$96.2
Sell	South African rand	ZAR 68.1	$4.9
Purchase	Chilean peso	CLP 6,610.0	$9.4
Sell	Chilean peso	CLP 6,610.0	$9.4



	December 31, 2014
Transaction	Currency	Notional Amount	USD Equivalent
Purchase	Euro	€91.1	$110.9
Sell	Euro	€92.4	$112.5
Purchase	Australian dollar	AUD 26.0	$21.3
Sell	Australian dollar	AUD 118.0	$96.7
Purchase	Malaysian ringgit	MYR 146.0	$41.7
Sell	Malaysian ringgit	MYR 93.6	$26.7
Purchase	Canadian dollar	CAD 0.7	$0.6
Sell	Canadian dollar	CAD 8.3	$7.1
Purchase	Japanese yen	JPY 244.6	$2.1
Sell	Japanese yen	JPY 2,322.1	$19.5
Purchase	British pound	GBP 1.4	$2.2
Sell	British pound	GBP 37.7	$58.6