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 occasionally entered into in order to maintain a balanced risk of fixed and floating interest rates associated with the Company’s long-term debt. Commodity hedging contracts are occasionally 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 December 31, 2018 and 2017, Polaris had the following open foreign currency contracts (in thousands):



	December 31, 2018				December 31, 2017
Foreign Currency	Notional Amounts (in U.S. dollars)		Net Unrealized Gain (Loss)		Notional Amounts (in U.S. dollars)		Net Unrealized Gain (Loss)
Australian Dollar	—		—		$	24,250	$	(134	)
Canadian Dollar	$	55,133	$	2,564	94,292		(159		)
Mexican Peso	19,222		564		9,999		(133		)
Total	$	74,355	$	3,128	$	128,541	$	(426	)

These contracts, with maturities through March 2020, met the criteria for cash flow hedges, and are recorded in other current assets or other current liabilities on the consolidated balance sheet. The unrealized gains or losses, after tax, are recorded as a component of accumulated other comprehensive loss in shareholders’ equity.

During 2018 the Company entered into interest rate swap transactions to hedge the variable interest rate payments for the Term Loan Facility. In connection with this transaction, the Company pays interest based upon a fixed rate and receives variable rate interest payments based on the one-month LIBOR.

At December 31, 2018 and 2017, Polaris had the following open interest rate swap contracts (in thousands):



		December 31, 2018					December 31, 2017
Effective Date	Maturity Date	Notional Amounts		Net Unrealized Gain (Loss)			Notional Amounts		Net Unrealized Gain (Loss)
May 2, 2018	May 4, 2021	$	25,000	$	397		$	—	$	—
September 28, 2018	September 30, 2019	250,000		(163		)	—		—
September 30, 2019	September 30, 2023	150,000		(2,899		)	—		—
Total		$	425,000	$	(2,665	)	$	—	$	—

These contracts, with maturities through September 2023, met the criteria for cash flow hedges, and are recorded in other current assets or other current liabilities on the consolidated balance sheet. Assets and liabilities are offset in the consolidated balance sheet if the right of offset exists. The unrealized gains or losses, after tax, are recorded as a component of accumulated other comprehensive loss in shareholders’ equity.

Polaris occasionally enters into derivative contracts to hedge a portion of the exposure related to diesel fuel and aluminum. As of December 31, 2018, and 2017, there were no outstanding commodity derivative contracts in place.

The table below summarizes the carrying values of derivative instruments as of December 31, 2018 and 2017 (in thousands):



	Carrying Values of Derivative Instruments as of December 31, 2018
	Fair Value— Assets		Fair Value— (Liabilities)			Derivative Net Carrying Value
Derivatives designated as hedging instruments
Foreign exchange contracts⁽¹⁾	$	3,128	$	—		$	3,128
Interest rate contracts⁽¹⁾	—		(2,665		)	(2,665		)
Total derivatives designated as hedging instruments	$	3,128	$	(2,665	)	$	463



	Carrying Values of Derivative Instruments as of December 31, 2017
	Fair Value— Assets		Fair Value— (Liabilities)			Derivative Net Carrying Value
Derivatives designated as hedging instruments
Foreign exchange contracts⁽¹⁾	$	621	$	(1,047	)	$	(426	)
Total derivatives designated as hedging instruments	$	621	$	(1,047	)	$	(426	)


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

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 amount of gains (losses), net of tax, related to the effective portion of derivative instruments designated as cash flow hedges included in accumulated other comprehensive loss for the years ended December 31, 2018 and 2017 was $457,000 and (330,000), respectively.

See Note 9 for information about the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive income loss into the income statement for derivative instruments designated as hedging instruments. The ineffective portion of foreign currency contracts was not material for the years ended December 31, 2018 and 2017.