Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2016

Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

We manage our exposure to foreign exchange and interest rate risk through various strategies, including the use of derivative financial instruments. We use forward foreign exchange contracts as economic hedges to manage the cash flow volatility arising from foreign exchange rate fluctuations. We use interest rate swaps to manage our interest expense and structure our debt portfolio to achieve a mix of fixed rate and floating rate debt. We do not use derivative instruments for trading or speculative purposes. Using derivative instruments exposes us to the risk that counterparties to the derivative contracts will fail to meet their contractual obligations. To mitigate counterparty credit risk, we have a policy of only entering into derivative contracts with carefully selected major financial institutions based on specific minimum credit standards and other factors.

We evaluate the effects of changes in foreign currency exchange rates, interest rates and other relevant market risks on our derivative instruments. We periodically determine the potential loss from market risk on our derivative instruments by performing a value-at-risk, or VaR, analysis. VaR is a statistical model that utilizes historical currency exchange and interest rate data to measure the potential impact on future earnings of our derivative financial instruments assuming normal market conditions. The VaR model is not intended to represent actual losses but is used as a risk estimation and management tool. Based on the results of the model, we estimate with 95% confidence a maximum one-day change in the net fair value of our derivative financial instruments at December 31, 2016 was not significant.

Foreign Exchange Risk

As an integral part of our global treasury operations, we centralize our cash and use multicurrency pools to manage the foreign exchange risk that arises from imbalances between subsidiaries and their respective treasury centers from which they borrow or invest funds. However, in certain circumstances, subsidiaries borrowing or investing with a treasury center operating in a different currency creates a foreign exchange exposure. At December 31, 2016 and 2015, we had outstanding forward foreign exchange contracts with an aggregate notional amount of $99.0 million and $22.1 million, respectively, to manage the foreign exchange risk associated with these activities. Additionally, there are circumstances where revenue and expense transactions are not denominated in the same currency. In these instances, amounts are either promptly settled or hedged with forward foreign exchange contracts. At December 31, 2016 and 2015, we had outstanding forward foreign exchange contracts with an aggregate notional amount of $94.0 million and $85.9 million, respectively, to manage the foreign exchange risk of these activities. The fair value of the forward foreign contracts at December 31, 2016 and 2015 was a net liability of $1.1 million and $0.1 million, respectively. As terms of our forward foreign exchange contracts are generally less than 90 days, they are included in other current assets and other current liabilities as appropriate.

Foreign currency derivative instruments are designated as fair value hedges; therefore, any gain or loss in fair value incurred on those instruments is recorded in results of operations and is generally offset by decreases or increases in the fair value of the underlying exposures. By using these financial instruments, we reduced financial risk of adverse foreign exchange changes by foregoing any gain (reward) which might have occurred if the markets moved favorably.

Interest Rate Risk

We use interest rate swaps to manage our interest cost and structure our long-term debt portfolio to achieve a mix of fixed rate and floating rate debt. Based on market conditions, we may terminate the swaps to reduce our exposure to rising interest rates or to monetize any gain and lock in a reduction in interest expense over the term of the underlying debt. At December 31, 2016 and 2015, the total amount of the fixed-to-floating interest rate swaps was $1.25 billion and $1.75 billion, respectively. See Note 6 for a discussion of our interest rate swaps, including the fair value of the swaps and the effect on the senior notes.