Under Armour 2015 Annual Report Download - page 55

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U.S. dollar strengthens, it could have a negative impact on our foreign revenues upon translation of those results
into the U.S. dollar upon consolidation of our financial statements. In addition, we are exposed to gains and
losses resulting from fluctuations in foreign currency exchange rates on transactions generated by our foreign
subsidiaries in currencies other than their local currencies. These gains and losses are primarily driven by
intercompany transactions and inventory purchases denominated in currencies other than the functional currency
of the purchasing entity. These exposures are included in other expense, net on the consolidated statements of
income.
From time to time, we may elect to use foreign currency forward contracts to reduce the risk from exchange
rate fluctuations primarily on intercompany transactions and projected inventory purchases for our international
subsidiaries. As we expand our international business, we anticipate expanding our current hedging program to
include additional currency pairs and instruments. We do not enter into derivative financial instruments for
speculative or trading purposes.
As of December 31, 2015, the aggregate notional value of our outstanding foreign currency forward
contracts was $468.1 million, which was comprised of Canadian Dollar/U.S. Dollar, Euro/U.S. Dollar, Yen/Euro,
Mexican Peso/Euro and Pound Sterling/Euro currency pairs with contract maturities of one to eleven months.
The foreign currency forward contracts outstanding as of December 31, 2015 have weighted average contractual
forward foreign currency exchange rates of 1.38 CAD per $1.00, €0.91 per $1.00, 135.83 JPY per €1.00, 18.82
MXN per €1.00 and £0.74 per €1.00. The majority of our foreign currency forward contracts are not designated
as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings. During 2014, we
began entering into foreign currency forward contracts designated as cash flow hedges. For foreign currency
forward contracts designated as cash flow hedges, changes in fair value, excluding any ineffective portion, is
recorded in other comprehensive income until net income is affected by the variability in cash flows of the
hedged transaction. The effective portion is generally released to net income after the maturity of the related
derivative and is classified in the same manner as the underlying exposure. During the years ended December 31,
2015 and 2014, we reclassified $3.5 million and $0.4 million from other comprehensive income to cost of goods
sold related to foreign currency forward contracts designated as cash flow hedges, respectively. The fair values of
the Company’s foreign currency forward contracts were assets of $3.8 million and $0.8 million as of
December 31, 2015 and 2014, respectively, and were included in prepaid expenses and other current assets on the
consolidated balance sheet. Refer to Note 9 to the Consolidated Financial Statements for a discussion of the fair
value measurements. Included in other expense, net were the following amounts related to changes in foreign
currency exchange rates and derivative foreign currency forward contracts:
Year Ended December 31,
(In thousands) 2015 2014 2013
Unrealized foreign currency exchange rate gains (losses) $(33,359) $(11,739) $(1,905)
Realized foreign currency exchange rate gains (losses) 7,643 2,247 477
Unrealized derivative gains (losses) 388 1 13
Realized derivative gains (losses) 16,404 3,081 243
We enter into foreign currency forward contracts with major financial institutions with investment grade
credit ratings and are exposed to credit losses in the event of non-performance by these financial institutions.
This credit risk is generally limited to the unrealized gains in the foreign currency forward contracts. However,
we monitor the credit quality of these financial institutions and consider the risk of counterparty default to be
minimal. Although we have entered into foreign currency forward contracts to minimize some of the impact of
foreign currency exchange rate fluctuations on future cash flows, we cannot be assured that foreign currency
exchange rate fluctuations will not have a material adverse impact on our financial condition and results of
operations.
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