Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2015

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

The Company is exposed to certain risks relating to its ongoing business operations. From time to time, the primary risks managed by using derivative instruments are foreign currency risk, interest rate risk and commodity price fluctuations. Derivative contracts on various currencies are entered into in order to manage foreign currency exposures associated with certain product sourcing activities and intercompany cash flows. Interest rate swaps are entered into in order to manage to maintain a balanced risk to fixed and floating interest rates associated with the Company’s long-term debt. 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 U.S. 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 September 30, 2015, Polaris had the following open foreign currency contracts (in thousands):

Foreign Currency	Notional Amounts (in U.S. Dollars)		Net Unrealized Gain (Loss)
Australian Dollar	$	13,006	$	1,038
Canadian Dollar	126,926		5,474
Japanese Yen	8,852		(22		)
Mexican Peso	33,188		(3,347		)
Total	$	181,972	$	3,143

These contracts, with maturities through December 30, 2016, met the criteria for cash flow hedges and the unrealized gains or losses, after tax, are recorded as a component of accumulated other comprehensive loss in shareholders’ equity.

The Company uses "receive fixed-rate, pay variable-rate" interest rate swaps to maintain a balanced risk to fixed and floating rates on a portion of the 2021 Senior notes. The interest rate swap contracts are considered perfect hedges because the critical terms and notional amounts match those of the fixed-rate debt being hedged and are therefore accounted as a fair value hedge using the shortcut method. Under the shortcut method, the Company recognizes the change in the fair value of the derivatives with an offsetting change to the carrying value of the debt. Accordingly, there is no impact on the Consolidated Statements of Income from the fair value of the derivatives.

Polaris enters into derivative contracts to hedge a portion of the exposure related to diesel fuel. These diesel fuel derivative contracts have not met the criteria for hedge accounting. The Company recognized a loss for the three and nine months ended September 30, 2015 of $1,826,000 and $2,496,000, respectively, in cost of sales on commodity contracts not designated as hedging instruments. The gain (loss) amounts for the comparative periods in 2014 were not material.

The table below summarizes the carrying values of derivative instruments as of September 30, 2015 and December 31, 2014 (in thousands):

	Carrying Values of Derivative Instruments as of September 30, 2015
	Fair Value— Assets		Fair Value— (Liabilities)			Derivative Net Carrying Value
Derivatives designated as hedging instruments
Foreign exchange contracts(1)	$	6,598	$	(3,455	)	$	3,143
Interest rate swap contracts(1)	594		—			594
Total derivatives designated as hedging instruments	$	7,192	$	(3,455	)	$	3,737
Commodity contracts(1)	—		$	(1,743	)	$	(1,743	)
Total derivatives not designated as hedging instruments	—		$	(1,743	)	$	(1,743	)
Total derivatives	$	7,192	$	(5,198	)	$	1,994

	Carrying Values of Derivative Instruments as of December 31, 2014
	Fair Value— Assets		Fair Value— (Liabilities)			Derivative Net Carrying Value
Derivatives designated as hedging instruments
Foreign exchange contracts(1)	$	534	$	(3,104	)	$	(2,570	)
Total derivatives designated as hedging instruments	$	534	$	(3,104	)	$	(2,570	)
Commodity contracts(1)	—		$	(4,609	)	$	(4,609	)
Total derivatives not designated as hedging instruments	—		$	(4,609	)	$	(4,609	)
Total derivatives	$	534	$	(7,713	)	$	(7,179	)

(1) Assets are included in prepaid expenses and other and liabilities are included in other accrued expenses on the accompanying consolidated balance sheets.

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive loss 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 current income statement.

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 in accumulated other comprehensive loss for the three and nine months ended September 30, 2015 and 2014 (in thousands):

Unrealized Gains (Losses) From Derivatives in Cash Flow Hedging Relationships	Three months ended September 30,				Nine months ended September 30,
	2015		2014		2015		2014
Foreign currency contracts	$	3,332	$	2,603	$	3,563	$	1,588

See Note 5 for information about the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive loss into the income statement for derivative instruments designated as hedging instruments. The ineffective portion of foreign currency contracts was not material for the three and nine month periods ended September 30, 2015.