Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments

v2.4.1.9
Financial Instruments
 3 Months Ended
Apr. 04, 2015
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Financial Instruments
Note 4 – Financial Instruments

The Company operates globally with manufacturing and sales facilities in various locations around the world.  Due to the Company’s global operations, the Company engages in activities involving both financial and market risks.  The Company utilizes normal operating and financing activities, along with derivative financial instruments, to minimize these risks.

Derivative Financial Instruments. The Company uses derivative financial instruments to manage its risks associated with movements in foreign currency exchange rates, interest rates and commodity prices.  Derivative instruments are not used for trading or speculative purposes.  For certain derivative contracts, on the date a derivative contract is entered into, the Company designates the derivative as a hedge of a forecasted transaction (cash flow hedge).  The Company formally documents its hedge relationships, including identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking the hedge transaction.  This process includes linking derivatives that are designated as hedges to specific forecasted transactions.  The Company also assesses, both at the hedge’s inception and monthly thereafter, whether the derivatives used in hedging transactions are highly effective in offsetting the changes in the anticipated cash flows of the hedged item.  If the hedging relationship ceases to be highly effective, or it becomes probable that a forecasted transaction is no longer expected to occur, gains and losses on the derivative are recorded in Cost of sales or Interest expense as appropriate.  There were no material adjustments as a result of ineffectiveness to the results of operations for the three months ended April 4, 2015 and March 29, 2014. The fair value of derivative financial instruments is determined through market-based valuations and may not be representative of the actual gains or losses that will be recorded when these instruments mature due to future fluctuations in the markets in which they are traded.  The effects of derivative and financial instruments are not expected to be material to the Company’s financial position or results of operations when considered together with the underlying exposure being hedged. Use of derivative financial instruments exposes the Company to credit risk with its counterparties when the fair value of a derivative contract is an asset. The Company mitigates this risk by entering into derivative contracts with highly rated counterparties. The maximum amount of loss due to counterparty credit risk is limited to the asset value of derivative financial instruments.

Cash Flow Hedges. The Company enters into certain derivative instruments that are designated and qualify as cash flow hedges.  The Company executes both forward and option contracts, based on forecasted transactions, to manage foreign exchange exposure mainly related to inventory purchase and sales transactions.  The Company also enters into commodity swap agreements, based on anticipated purchases of aluminum, copper and natural gas, to manage risk related to price changes.  From time-to-time, the Company enters into forward starting interest rate swaps to hedge the interest rate risk associated with the anticipated issuance of debt.

A cash flow hedge requires that as changes in the fair value of derivatives occur, the portion of the change deemed to be effective is recorded temporarily in Accumulated other comprehensive loss, an equity account, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.  As of April 4, 2015, the term of derivative instruments hedging forecasted transactions ranged from one to 21 months. 

Fair Value Hedges. From time-to-time, the Company enters into fixed-to-floating interest rate swaps to convert a portion of the Company's long-term debt from fixed to floating rate debt. An interest rate swap is entered into with the expectation that the change in the fair value of the interest rate swap will offset the change in the fair value of the debt instrument attributable to changes in the benchmark interest rate. Each period, the change in the fair value of the interest rate swap asset or liability is recorded in debt.

Other Hedging Activity. The Company has entered into certain foreign currency forward contracts that have not been designated as a hedge for accounting purposes. These contracts are used to manage foreign currency exposure related to changes in the value of assets or liabilities caused by changes in foreign exchange rates.  The change in the fair value of the foreign currency derivative contract and the corresponding change in the fair value of the asset or liability of the Company are both recorded through earnings, each period as incurred.

Foreign Currency. The Company enters into forward and option contracts to manage foreign exchange exposure related to forecasted transactions and assets and liabilities that are subject to risk from foreign currency rate changes.  These exposures include: product costs; revenues and expenses; associated receivables and payables; intercompany obligations and receivables; and other related cash flows.

Forward exchange contracts outstanding at April 4, 2015, December 31, 2014 and March 29, 2014 had notional contract values of $148.0 million, $153.5 million and $154.7 million, respectively.  Option contracts outstanding at April 4, 2015, December 31, 2014 and March 29, 2014 had notional contract values of $70.1 million, $87.0 million and $62.7 million, respectively.  The forward and options contracts outstanding at April 4, 2015 mature during 2015 and 2016 and mainly relate to the Euro, Canadian dollar, Japanese yen, Brazilian real, British pound, Australian dollar, Swedish krona, Mexican peso, Norwegian krone, and New Zealand dollar. As of April 4, 2015, the Company estimates that during the next 12 months, it will reclassify approximately $9.5 million of net gains (based on current rates) from Accumulated other comprehensive loss to Cost of sales.

Interest Rate. In the second quarter of 2014, the Company entered into fixed-to-floating interest rate swaps to convert a portion of the Company's long-term debt from fixed to floating rate debt. As of both April 4, 2015 and December 31, 2014, the outstanding swaps had notional contract values of $200.0 million, of which $150.0 million correspond to the Company's 4.625 percent Senior notes due 2021 and $50.0 million correspond to the Company's 7.375 percent Debentures due 2023. There were no fixed-to-floating interest rate swaps outstanding as of March 29, 2014. These instruments have been designated as fair value hedges, with the fair value recorded in long-term debt as discussed in Note 16 – Debt.

The Company also enters into forward starting interest rate swaps from time-to-time to hedge the interest rate risk associated with anticipated debt issuances. There were no forward starting interest rate swaps outstanding at April 4, 2015, December 31, 2014 or March 29, 2014.

As of April 4, 2015, December 31, 2014 and March 29, 2014, the Company had $5.2 million, $5.2 million and $5.3 million, respectively, of net deferred losses associated with all forward starting interest rate swaps, which were included in Accumulated other comprehensive loss.  These amounts include gains deferred on forward starting interest rate swaps terminated in July 2006, net of losses deferred on forward starting swaps terminated in August 2008 and the forward starting swaps terminated in May 2013. As of April 4, 2015, the Company estimates that during the next 12 months, it will reclassify approximately $0.1 million of net losses resulting from settled forward starting interest rate swaps from Accumulated other comprehensive loss to Interest expense.

Commodity Price. The Company uses commodity swaps to hedge anticipated purchases of aluminum, copper and natural gas.  Commodity swap contracts outstanding at April 4, 2015, December 31, 2014 and March 29, 2014 had notional contract values of $23.9 million, $22.9 million and $32.7 million, respectively.  The contracts outstanding mature through 2016.  The amount of gain or loss associated with the change in fair value of these instruments is deferred in Accumulated other comprehensive loss and recognized in Cost of sales in the same period or periods during which the hedged transaction affects earnings.  As of April 4, 2015, the Company estimates that during the next 12 months it will reclassify approximately $0.2 million in net gains (based on current prices) from Accumulated other comprehensive loss to Cost of sales.

As of April 4, 2015, the fair values of the Company’s derivative instruments were:
(in millions)
 
 
 
 
 
 
Derivative Assets
 
Derivative Liabilities
Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives Designated as Cash Flow Hedges
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other
 
$
6.9

 
Accrued expenses
 
$
0.9

Commodity contracts
 
Prepaid expenses and other
 
—

 
Accrued expenses
 
2.5

Total
 
 
 
$
6.9

 
 
 
$
3.4

 
 
 
 
 
 
 
 
 
Derivatives Designated as Fair Value Hedges
 
 
 
 
 
 
 
 
Interest rate contracts
 
Prepaid expenses and other
 
$
3.0

 
Accrued expenses
 
$
1.7

Interest rate contracts
 
 Other long-term assets
 
4.9

 
Other long-term liabilities
 
—

Total
 
 
 
$
7.9

 
 
 
$
1.7

 
 
 
 
 
 
 
 
 
Other Hedging Activity
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other
 
$
1.0

 
Accrued expenses
 
$
0.0

Total
 
 
 
$
1.0

 
 
 
$
0.0


As of December 31, 2014, the fair values of the Company’s derivative instruments were:
(in millions)
 
 
 
 
 
 
Derivative Assets
 
Derivative Liabilities
Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives Designated as Cash Flow Hedges
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other
 
$
5.9

 
Accrued expenses
 
$
1.5

Commodity contracts
 
Prepaid expenses and other
 
0.3

 
Accrued expenses
 
0.7

Total
 
 
 
$
6.2

 
 
 
$
2.2

 
 
 
 
 
 
 
 
 
Derivatives Designated as Fair Value Hedges
 
 
 
 
 
 
 
 
Interest rate contracts
 
 Prepaid expenses and other
 
$
3.9

 
Accrued expenses
 
$
1.3

Total
 
 
 
$
3.9

 
 
 
$
1.3

 
 
 
 
 
 
 
 
 
Other Hedging Activity
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 Prepaid expenses and other
 
$
1.0

 
Accrued expenses
 
$
0.1

Total
 
 
 
$
1.0

 
 
 
$
0.1



As of March 29, 2014, the fair values of the Company’s derivative instruments were:
(in millions)
 
 
 
 
 
 
Derivative Assets
 
Derivative Liabilities
Instrument
 
Balance Sheet Location
 
Fair Value
 
Balance Sheet Location
 
Fair Value
Derivatives Designated as Cash Flow Hedges
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
Prepaid expenses and other
 
$
2.0

 
Accrued expenses
 
$
1.5

Commodity contracts
 
Prepaid expenses and other
 
0.0

 
Accrued expenses
 
1.5

Total
 
 
 
$
2.0

 
 
 
$
3.0

 
 
 
 
 
 
 
 
 
Other Hedging Activity
 
 
 
 
 
 
 
 
Foreign exchange contracts
 
 Prepaid expenses and other
 
$
0.2

 
Accrued expenses
 
$
0.1

Total
 
 
 
$
0.2

 
 
 
$
0.1



The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended April 4, 2015 was: 
(in millions)
 
 
 
 
 
 
Derivatives Designated as Cash Flow Hedging Instruments
 
Amount of Gain (Loss) on Derivatives Recognized in Accumulated Other Comprehensive Loss (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
Interest rate contracts
 
$
—

 
Interest expense
 
$
0.0

Foreign exchange contracts
 
6.7

 
Cost of sales
 
2.6

Commodity contracts
 
(2.7
)
 
Cost of sales
 
(1.8
)
Total
 
$
4.0

 
 
 
$
0.8


Derivatives Designated as Fair Value Hedging Instruments
 
Location of Gain (Loss) on Derivatives
Recognized in Earnings
 
Amount of Gain (Loss) on Derivatives Recognized in Earnings
Interest rate contracts
 
Interest expense
 
$
1.1

Total
 
 
 
$
1.1


Other Hedging Activity
 
Location of Gain (Loss) on Derivatives
Recognized in Earnings
 
Amount of Gain (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts
 
Cost of sales
 
$
6.2

Foreign exchange contracts
 
Other income, net
 
0.7

Total
 
 
 
$
6.9


The effect of derivative instruments on the Condensed Consolidated Statements of Comprehensive Income for the three months ended March 29, 2014 was:
(in millions)
 
 
 
 
 
 
Derivatives Designated as Cash Flow Hedging Instruments
 
Amount of Gain (Loss) on Derivatives Recognized in Accumulated Other Comprehensive Loss (Effective Portion)
 
Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
 
Amount of Gain (Loss) Reclassified from Accumulated Other Comprehensive Loss into Earnings (Effective Portion)
Foreign exchange contracts
 
$
0.0

 
Cost of sales
 
$
(0.4
)
Commodity contracts
 
(1.1
)
 
Cost of sales
 
(2.2
)
Total
 
$
(1.1
)
 
 
 
$
(2.6
)
Other Hedging Activity
 
Location of Gain (Loss) on Derivatives
Recognized in Earnings
 
Amount of Gain (Loss) on Derivatives Recognized in Earnings
Foreign exchange contracts
 
Cost of sales
 
$
(0.5
)
Foreign exchange contracts
 
Other income, net
 
(0.1
)
Total
 
 
 
$
(0.6
)


Concentration of Credit Risk. The Company enters into financial instruments and invests a portion of its cash reserves in marketable debt securities with banks and investment firms with which the Company has business relationships, and regularly monitors the credit ratings of its counterparties.  The Company sells a broad range of recreational products to a worldwide customer base and extends credit to its customers based upon an ongoing credit evaluation program.  The Company’s business units maintain credit organizations to manage financial exposure and perform credit risk assessments on an individual account basis.  Accounts are not aggregated into categories for credit risk determinations.  There are no concentrations of credit risk resulting from accounts receivable that are considered material to the Company’s financial position.  Refer to Note 9 – Financing Receivables for more information.
Fair Value of Other Financial Instruments. The carrying values of the Company’s short-term financial instruments, including cash and cash equivalents, accounts and notes receivable and short-term debt, including current maturities of long-term debt, approximate their fair values because of the short maturity of these instruments.  At April 4, 2015, December 31, 2014 and March 29, 2014, the fair value of the Company’s long-term debt was approximately $470.7 million, $460.2 million and $468.9 million, respectively, and was determined using Level 1 and Level 2 inputs described in Note 5 – Fair Value Measurements, including quoted market prices or discounted cash flows based on quoted market rates for similar types of debt.  The carrying value of long-term debt, including current maturities, was $457.6 million, $455.7 million and $459.2 million as of April 4, 2015, December 31, 2014 and March 29, 2014, respectively.