Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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. 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 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. The decision of whether and when to execute derivative instruments, along with the duration of the instrument, may 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, 2019 and December 31, 2018, the Company had the following open foreign currency contracts (in thousands):



	September 30, 2019				December 31, 2018
Foreign Currency	Notional Amounts (in U.S. Dollars)		Net Unrealized Gain (Loss)		Notional Amounts (in U.S. Dollars)		Net Unrealized Gain (Loss)
Australian Dollar	$	8,695	$	288	$	—	$	—
Canadian Dollar	136,559		33		55,133		2,564
Mexican Peso	14,321		643		19,222		564
Total	$	159,575	$	964	$	74,355	$	3,128

These contracts, with maturities through September 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.

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

At September 30, 2019 and December 31, 2018, the Company had the following open interest rate swap contracts (in thousands):



		September 30, 2019					December 31, 2018
Effective Date	Termination Date	Notional Amounts		Net Unrealized Gain (Loss)			Notional Amounts		Net Unrealized Gain (Loss)
May 2, 2018	May 4, 2021	$	25,000	$	(98	)	$	25,000	$	397
September 28, 2018	September 30, 2019	—		—			250,000		(163		)
September 30, 2019	September 30, 2023	150,000		(9,119		)	150,000		(2,899		)
May 3, 2019	May 3, 2020	100,000		(372		)	—		—
Total		$	275,000	$	(9,589	)	$	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.

The table below summarizes the carrying values of derivative instruments as of September 30, 2019 and December 31, 2018 (in thousands):



	Carrying Values of Derivative Instruments as of September 30, 2019
	Fair Value— Assets		Fair Value— (Liabilities)			Derivative Net Carrying Value
Derivatives designated as hedging instruments
Foreign exchange contracts	$	964	$	—		$	964
Interest rate contracts	—		(9,589		)	(9,589		)
Total derivatives designated as hedging instruments	$	964	$	(9,589	)	$	(8,625	)



	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	$	3,128	$	—		$	3,128
Interest rate contracts	—		(2,665		)	(2,665		)
Total derivatives designated as hedging instruments	$	3,128	$	(2,665	)	$	463

Gains and losses on derivative instruments representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in the current statement of income.

The amount of gains (losses), net of tax, related to the effective portions of derivative instruments designated as cash flow hedges included in accumulated other comprehensive loss for the three and nine months ended September 30, 2019 were $(449,000) and $(6,948,000), respectively, compared to $(2,111,000) and $2,998,000 for the same respective periods in 2018.

See Note 7 for information about the amount of gains and losses, net of tax, reclassified from accumulated other comprehensive loss into the statements of income for derivative instruments designated as hedging instruments. The ineffective portion of foreign currency contracts was not material for the three and nine month period ended September 30, 2019.