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42
which may at times be concentrated with certain counterparties, although counterparty nonperformance is not anticipated.
The Company is also exposed to interest rate risk from its ABL Facility.
Foreign Currency Fluctuations
In the normal course of business, the Company is exposed to gains and losses resulting from fluctuations in foreign
currency exchange rates relating to transactions of its international subsidiaries, including certain balance sheet exposures
(payables and receivables denominated in foreign currencies) (see Note 18 “Derivatives and Hedging” to the Notes to
Consolidated Financial Statements in this Form 10-K). In addition, the Company is exposed to gains and losses resulting
from the translation of the operating results of the Company’s international subsidiaries into U.S. dollars for financial
reporting purposes. As part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency
exchange rates, the Company uses derivative financial instruments in the form of foreign currency forward contracts and
put and call option contracts (“foreign currency exchange contracts”) to hedge transactions that are denominated primarily
in British Pounds, Euros, Japanese Yen, Canadian Dollars, Australian Dollars and South Korean Won. For most currencies,
the Company is a net receiver of foreign currencies and, therefore, benefits from a weaker U.S. dollar and is adversely
affected by a stronger U.S. dollar relative to those foreign currencies in which the Company transacts significant amounts
of business.
Foreign currency exchange contracts are used only to meet the Company’s objectives of offsetting gains and losses
from foreign currency exchange exposures with gains and losses from the contracts used to hedge them in order to reduce
volatility of earnings. The extent to which the Company’s hedging activities mitigate the effects of changes in foreign
currency exchange rates varies based upon many factors, including the amount of transactions being hedged. Foreign
currency rates for financial reporting purposes had a negative impact upon the Company’s consolidated reported financial
results in 2013 compared to 2012 (see “Risk Factors” contained in Item 1A and “Results of Operations” contained in
Item 7). The Company does not enter into foreign currency exchange contracts for speculative purposes. Foreign currency
exchange contracts generally mature within 12 months from their inception.
The Company does not designate foreign currency exchange contracts as derivatives that qualify for hedge
accounting under ASC 815, “Derivatives and Hedging.” As such, changes in the fair value of the contracts are recognized
in earnings in the period of change. At December 31, 2013, 2012 and 2011, the notional amounts of the Company’s foreign
currency exchange contracts used to hedge the exposures discussed above were approximately $42.3 million, $137.1
million and $165.5 million, respectively. At December 31, 2013 and 2012, there were no outstanding foreign exchange
contracts designated as cash flow hedges for anticipated sales denominated in foreign currencies.
As part of the Company’s risk management procedure, a sensitivity analysis model is used to measure the potential
loss in future earnings of market-sensitive instruments resulting from one or more selected hypothetical changes in interest
rates or foreign currency values. The sensitivity analysis model quantifies the estimated potential effect of unfavorable
movements of 10% in foreign currencies to which the Company was exposed at December 31, 2013 through its foreign
currency exchange contracts.
The estimated maximum one-day loss from the Company’s foreign currency exchange contracts, calculated using
the sensitivity analysis model described above, is $4.3 million at December 31, 2013. The Company believes that such
a hypothetical loss from its foreign currency exchange contracts would be partially offset by increases in the value of the
underlying transactions being hedged.
The sensitivity analysis model is a risk analysis tool and does not purport to represent actual losses in earnings that
will be incurred by the Company, nor does it consider the potential effect of favorable changes in market rates. It also
does not represent the maximum possible loss that may occur. Actual future gains and losses will differ from those
estimated because of changes or differences in market rates and interrelationships, hedging instruments and hedge
percentages, timing and other factors.
Interest Rate Fluctuations
The Company is exposed to interest rate risk from its ABL Facility (see Note 4 “Financing Arrangements” to the
Notes to Consolidated Financial Statements in this Form 10-K). The interest rate applicable to outstanding loans under
the ABL Facility fluctuates depending on the Company’s trailing 12 month EBITDA (as defined by the ABL Facility)
combined with the Company’s availability ratio, which is expressed as a percentage of (a) the average daily availability