Derivative Instruments and Hedging Activities

20 Months Ended

Dec. 31, 2011

Derivative Instruments and Hedging Activities

Note 10. Derivative Instruments and Hedging Activities

The Company is exposed to certain risks relating to its ongoing business operations. The primary risks managed by using derivative instruments are foreign currency risk, interest rate risk and commodity price fluctuations. Forward exchange contracts on various currencies are entered into in order to manage foreign currency exposures associated with certain product sourcing activities and intercompany sales. Interest rate swaps are entered into from time to time in order to manage interest rate risk associated with the Company’s variable-rate borrowings. Commodity hedging contracts are entered into in order to manage fluctuating market prices of certain purchased commodities and raw materials that are integrated into the Company’s end products.

The Company’s foreign currency management objective is to mitigate the potential impact of currency fluctuations on the value of its United States dollar cash flows and to reduce the variability of certain cash flows at the subsidiary level. The Company actively manages certain forecasted foreign currency exposures and uses a centralized currency management operation to take advantage of potential opportunities to naturally offset foreign currency exposures against each other. The decision of whether and when to execute derivative instruments, along with the duration of the instrument, can vary from period to period depending on market conditions, the relative costs of the instruments and capacity to hedge. The duration is linked to the timing of the underlying exposure, with the connection between the two being regularly monitored. Polaris does not use any financial contracts for trading purposes. At December 31, 2011, Polaris had open Canadian Dollar contracts with notional amounts totaling United States $156,941,000 and a net unrealized gain of $3,601,000, open contracts to purchase Euros with notional amounts totaling United States $22,948,000 and an unrealized loss of $819,000, open Swedish Krona contracts with notional amounts totaling United States $6,442,000 and an unrealized gain of $437,000, and open Australian Dollar contracts with notional amounts totaling United States $10,243,000 and a net unrealized gain of $359,000. These contracts have maturities through December 2012. The Company had no open Yen foreign currency derivative contracts in place at December 31, 2011.

Polaris has entered into derivative contracts to hedge a portion of the exposure for gallons of diesel fuel for 2012 and metric tons of aluminum for 2012. These diesel fuel and aluminum derivative contracts did not meet the criteria for hedge accounting.

The tables below summarize the carrying values of derivative instruments as of December 31, 2011 and 2010 (in thousands):

	Carrying Values of Derivative Instruments as of December 31,  2011
	Fair Value—Assets		Fair Value—(Liabilities)			Derivative Net Carrying Value
Derivatives designated as hedging instruments
Foreign exchange contracts(2)	$	4,738	$	(1,160	)	$	3,578
Total derivatives designated as hedging instruments	$	4,738	$	(1,160	)	$	3,578
Commodity contracts(2)	$	193	$	(1,530	)	$	(1,337	)
Total derivatives not designated as hedging instruments	$	193	$	(1,530	)	$	(1,337	)
Total Derivatives	$	4,931	$	(2,690	)	$	2,241

	Carrying Values of Derivative Instruments as of December 31,  2010
	Fair Value—Assets		Fair Value—(Liabilities)			Derivative Net Carrying Value
Derivatives Designated as Hedging Instruments
Interest rate contracts(1)		—	$	(126	)	$	(126	)
Foreign exchange contracts(2)	$	39		(2,058	)		(2,019	)
Total derivatives designated as hedging instruments	$	39	$	(2,184	)	$	(2,145	)
Commodity contracts(2)	$	889		—		$	889
Total derivatives not designated as hedging instruments	$	889		—		$	889
Total Derivatives	$	928	$	(2,184	)	$	(1,256	)

(1) Included in Other Current Liabilities on the accompanying consolidated balance sheet.

(2) Assets are included in Prepaid expenses and other and liabilities are included in Other Current Liabilities on the accompanying consolidated balance sheet.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of Accumulated other comprehensive income and reclassified into the income statement in the same period or periods during which the hedged transaction affects the income statement. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in the statement of income. The table below provides data about the amount of gains and losses, net of tax, related to derivative instruments designated as cash flow hedges included as a component of Accumulated other comprehensive income for the twelve month periods ended December 31:

(In thousands):	Amount of Gain  (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)		Amount of Gain  (Loss) Recognized in Accumulated OCI on Derivative (Effective Portion)
Derivatives in Cash Flow Hedging Relationships	Twelve Months Ended December 31, 2011		Twelve Months Ended December 31, 2010
Interest rate contracts	$	62	$	609
Foreign currency contracts		3,509		(1,048	)
Total	$	3,571	$	(439	)

The table below provides data about the amount of gains and losses, net of tax, reclassified from Accumulated other comprehensive income into income on derivative instruments designated as hedging instruments for the twelve months ended December 31, (in thousands):

Derivatives in Cash Flow Hedging Relationships	Location of Gain  (Loss) Reclassified from Accumulated OCI Into Income	Amount of Gain  (Loss) Reclassified from Accumulated OCI into Income			Amount of Gain  (Loss) Reclassified from Accumulated OCI into Income
		Twelve Months Ended December 31, 2011			Twelve Months Ended December 31, 2010
Interest rate contracts	Interest expense	$	(152	)	$	(1,039	)
Foreign currency contracts	Other income, net		(807	)		(1,133	)
Foreign currency contracts	Cost of sales		—			24
Total		$	(959	)	$	(2,148	)

The net amount of the existing gains or losses at December 31, 2011 that is expected to be reclassified into the statement of income within the next 12 months is not expected to be material. The ineffective portion of foreign currency contracts was not material for the twelve months ended December 31, 2011 and 2010.

The Company recognized a loss of $1,295,000 and a gain of $643,000 in Cost of sales on commodity contracts not designated as hedging instruments for the twelve month period ended December 31, 2011 and 2010, respectively.