Under Armour 2013 Annual Report Download - page 83

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14. Risk Management and Derivatives
Foreign Currency Risk Management
The Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates
relating to transactions generated by its international subsidiaries in currencies other than their local currencies.
These gains and losses are primarily driven by intercompany transactions. From time to time, the Company may
elect to enter into foreign currency forward contracts to reduce the risk associated with foreign currency
exchange rate fluctuations on intercompany transactions and projected inventory purchases for its European and
Canadian subsidiaries. In addition, the Company may elect to enter into foreign currency forward contracts to
reduce the risk associated with foreign currency exchange rate fluctuations on Pound Sterling denominated
balance sheet items.
As of December 31, 2013, the aggregate notional value of our outstanding foreign currency forward
contracts was $20.6 million, which was comprised of Canadian Dollar/U.S. Dollar, Euro/U.S. Dollar, and Pound
Sterling/Euro currency pairs with contract maturities of 1 month. The foreign currency forward contracts are not
designated as cash flow hedges, and accordingly, changes in their fair value are recorded in earnings. The fair
values of the Company’s foreign currency forward contracts were assets of $12.1 thousand and $4.8 thousand as
of December 31, 2013 and 2012, respectively, and were included in prepaid expenses and other current assets on
the consolidated balance sheet. Refer to Note 9 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) 2013 2012 2011
Unrealized foreign currency exchange rate gains (losses) $(1,905) $ 2,464 $(4,027)
Realized foreign currency exchange rate gains (losses) 477 (182) 298
Unrealized derivative gains (losses) 13 675 (31)
Realized derivative gains (losses) 243 (3,030) 1,696
Interest Rate Risk Management
In order to maintain liquidity and fund business operations, the Company enters into long term debt
arrangements with various lenders which bear a range of fixed and variable rates of interest. The nature and
amount of the Company’s long-term debt can be expected to vary as a result of future business requirements,
market conditions and other factors. The Company may elect to enter into interest rate swap contracts to reduce
the impact associated with interest rate fluctuations. In December 2012, the Company began utilizing an interest
rate swap contract to convert a portion of variable rate debt under the $50.0 million loan to fixed rate debt. The
contract pays fixed and receives variable rates of interest based on one-month LIBOR and has a maturity date of
December 2019. The interest rate swap contract is accounted for as a cash flow hedge and accordingly, the
effective portion of the changes in fair value are recorded in other comprehensive income and reclassified into
interest expense over the life of the underlying debt obligation.
As of December 31, 2013, the notional value of the Company’s outstanding interest rate swap contract was
$25.0 million. During the years ended December 31, 2013 and 2012, the Company recorded a $317.6 thousand
and $21.1 thousand increase in interest expense, representing the effective portion of the contract reclassified
from accumulated other comprehensive income. The fair value of the interest rate swap contract was an asset of
$1.1 million as of December 31, 2013, and was included in other long term assets on the consolidated balance
sheet. The fair value of the interest rate swap contract was a liability of $0.1 million as of December 31, 2012,
and was included in other long term liabilities on the consolidated balance sheet.
The Company enters into derivative contracts with major financial institutions with investment grade credit
ratings and is exposed to credit losses in the event of non-performance by these financial institutions. This credit
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