Derivatives and Hedging Activities

Derivatives Designated as Hedging Instruments

Net Investment Hedges. The Company is exposed to the impact of foreign exchange rate fluctuations on its investments in foreign subsidiaries whose functional currencies are other than the U.S. dollar. In order to mitigate the impact of foreign currency exchange rates, the Company has entered into various foreign currency debt obligations, which are designated as hedges against the Company's net investment in foreign subsidiaries. As of September 30, 2018 and December 31, 2017, the total principal amount of foreign currency debt obligations designated as net investment hedges, were $4,190.8 million and $3,149.5 million, respectively. From time to time, the Company also uses foreign exchange forward contracts to hedge against the effect of foreign exchange rate fluctuations on a portion of its net investment in the foreign subsidiaries. For a net investment hedge, changes in the fair value of the hedging instrument designated as a net investment hedge, except the ineffective portion and forward points, are recorded as a component of accumulated other comprehensive income (loss) in the condensed consolidated balance sheet.

The Company recorded pre-tax net foreign exchange gains of $27.2 million and $179.0 million in other comprehensive income (loss) for the three and nine months ended September 30, 2018, respectively, and pre-tax net foreign exchange losses of $60.7 million and $191.1 million in other comprehensive income (loss) for the three and nine months ended September 30, 2017, respectively. The Company recorded no ineffectiveness from its net investment hedges for the three and nine months ended September 30, 2018 and 2017.

Cash Flow Hedges. The Company hedges its foreign currency translation exposure for forecasted revenues and expenses in its EMEA region between the U.S. dollar and the British Pound, Euro, Swedish Krona and Swiss Franc. From time to time, the foreign currency forward and option contracts that the Company uses to hedge this exposure are designated as cash flow hedges under the accounting standard for derivatives and hedging.

The Company enters into intercompany hedging instruments ("intercompany derivatives") with a wholly-owned subsidiary of the Company in order to hedge certain forecasted revenues and expenses denominated in currencies other than the U.S. dollar. Simultaneously, the Company enters into derivative contracts with unrelated third parties to externally hedge the net exposure created by such intercompany derivatives.

The following disclosure is prepared on a consolidated basis. Assets and liabilities resulting from intercompany derivatives have been eliminated in consolidation. As of September 30, 2018, the Company's cash flow hedge instruments had maturity dates ranging from October 2018 to September 2020 as follows (in thousands):



	Notional Amount		Fair Value ⁽¹⁾			Accumulated Other Comprehensive Income (Loss) ^(2) (3)
Derivative assets	$	626,012	$	29,965		$	23,770
Derivative liabilities	135,194		(3,549		)	(6,190		)
Total	$	761,206	$	26,416		$	17,580


⁽¹⁾	All derivatives related to cash flow hedges are included in the condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.


⁽²⁾	Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss).


⁽³⁾	The Company recorded a net gain of $11.0 million within accumulated other comprehensive income (loss) relating to cash flow hedges that will be reclassified to revenues and expenses as they mature in the next 12 months.

As of December 31, 2017, the Company's cash flow hedge instruments had maturity dates ranging from January 2018 to October 2019 as follows (in thousands):



	Notional Amount		Fair Value ⁽¹⁾			Accumulated Other Comprehensive Income (Loss) ^(2) (3)
Derivative assets	$	72,262	$	2,379		$	2,055
Derivative liabilities	440,637		(29,777		)	(34,311		)
Total	$	512,899	$	(27,398	)	$	(32,256	)


⁽¹⁾	All derivatives related to cash flow hedges are included in the condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.


⁽²⁾	Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss).


⁽³⁾	The Company recorded a net loss of $26.7 million within accumulated other comprehensive income (loss) relating to cash flow hedges that will be reclassified to revenues and expenses as they mature over the next 12 months.

During the three months ended September 30, 2018, the amount of net gains from the ineffective and excluded portions of cash flow hedges recognized in other income (expense) was $3.9 million. During the three months ended September 30, 2017, the ineffective and excluded portions of cash flow hedges recognized in other income (expense) were not significant. During the three months ended September 30, 2018, the amount of net losses reclassified from accumulated other comprehensive income (loss) to revenues was $3.3 million and the amount of net gains reclassified from accumulated other comprehensive income (loss) to operating expenses was not significant. During the three months ended September 30, 2017, the amount of net losses reclassified from accumulated other comprehensive income (loss) to revenues and the amount of net gains reclassified from accumulated other comprehensive income (loss) to operating expenses were not significant.

During the nine months ended September 30, 2018, the amount of net gains from the ineffective and excluded portions of cash flow hedges recognized in other income (expense) was $10.3 million. During the nine months ended September 30, 2017, the amount of net gains from the ineffective and excluded portions of cash flow hedges recognized in other income (expense) was $3.6 million. During the nine months ended September 30, 2018, the amount of net losses reclassified from accumulated other comprehensive income (loss) to revenues was $34.6 million and the amount of net gains reclassified from accumulated other comprehensive income (loss) to operating expenses was $17.5 million. During the nine months ended September 30, 2017, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenues was $25.8 million and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses was $13.4 million.

Derivatives Not Designated as Hedging Instruments

Embedded Derivatives. The Company is deemed to have foreign currency forward contracts embedded in certain of the Company’s customer agreements that are priced in currencies different from the functional or local currencies of the parties involved. These embedded derivatives are separated from their host contracts and carried on the Company’s balance sheet at their fair value. The majority of these embedded derivatives arise as a result of the Company’s foreign subsidiaries pricing their customer contracts in the U.S. dollar. Gains and losses on these embedded derivatives are included within revenues in the Company’s condensed consolidated statements of operations. During the three and nine months ended September 30, 2018, the gains (losses) associated with these embedded derivatives were not significant. During the three months ended September 30, 2017, the gains (losses) associated with these embedded derivatives were not significant. During the nine months ended September 30, 2017, the net losses associated with these embedded derivatives was $6.3 million.

Economic Hedges of Embedded Derivatives. The Company uses foreign currency forward contracts to help manage the foreign exchange risk associated with the Company’s customer agreements that are priced in currencies different from the functional or local currencies of the parties involved ("economic hedges of embedded derivatives"). Foreign currency forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Gains and losses on these contracts are included in revenues along with gains and losses of the related embedded derivatives. The Company entered into various economic hedges of embedded derivatives during the three and nine months ended September 30, 2018 and 2017. During the three and nine months ended September 30, 2018 and 2017, the gains (losses) associated with these contracts were not significant.

Foreign Currency Forward Contracts. The Company also uses foreign currency forward contracts to manage the foreign exchange risk associated with certain foreign currency-denominated monetary assets and liabilities. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of its foreign currency-denominated monetary assets and liabilities change. Gains and losses on these contracts are included in other income (expense), on a net basis, along with the foreign currency gains and losses of the related foreign currency-denominated monetary assets and liabilities associated with these foreign currency forward contracts. The Company entered into various foreign currency forward contracts during the three and nine months ended September 30, 2018 and 2017. During the three and nine months ended September 30, 2018, the Company recognized net gains of $17.1 million and $60.7 million, respectively, associated with these contracts. During the three and nine months ended September 30, 2017, the Company recognized net losses of $23.1 million and $60.2 million, respectively, associated with these contracts.

Offsetting Derivative Assets and Liabilities

The following table presents the fair value of derivative instruments recognized in the Company's condensed consolidated balance sheets as of September 30, 2018 (in thousands):



	Gross Amounts		Gross Amounts Offset in the Consolidated Balance Sheet		Net Consolidated Balance Sheet Amounts⁽¹⁾		Gross Amounts not Offset in the Consolidated Balance Sheet⁽²⁾			Net
Assets:
Designated as hedging instruments:
Foreign currency forward contracts designated as cash flow hedges	$	29,965	$	—	$	29,965	$	(3,549	)	$	26,416
Not designated as hedging instruments:
Embedded derivatives	5,648		—		5,648		—			5,648
Economic hedges of embedded derivatives	24		—		24		(10		)	14
Foreign currency forward contracts	22,503		—		22,503		(652		)	21,851
	28,175		—		28,175		(662		)	27,513
Additional netting benefit	—		—		—		(1,245		)	(1,245		)
	$	58,140	$	—	$	58,140	$	(5,456	)	$	52,684
Liabilities:
Designated as hedging instruments:
Foreign currency forward contracts designated as cash flow hedges	$	3,549	$	—	$	3,549	$	(3,549	)	$	—
Not designated as hedging instruments:
Embedded derivatives	1,922		—		1,922		—			1,922
Economic hedges of embedded derivatives	300		—		300		(10		)	290
Foreign currency forward contracts	1,607		—		1,607		(652		)	955
	3,829		—		3,829		(662		)	3,167
Additional netting benefit	—		—		—		(1,245		)	(1,245		)
	$	7,378	$	—	$	7,378	$	(5,456	)	$	1,922


⁽¹⁾	As presented in the Company's condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.

⁽²⁾

The Company enters into master netting agreements with its counterparties for transactions other than embedded derivatives to mitigate credit risk exposure to any single counterparty. Master netting agreements allow for individual derivative contracts with a single counterparty to offset in the event of default. For presentation on the condensed consolidated balance sheets, the Company does not offset fair value amounts recognized for derivative instruments under master netting arrangements.

The following table presents the fair value of derivative instruments recognized in the Company's condensed consolidated balance sheets as of December 31, 2017 (in thousands):



	Gross Amounts		Gross Amounts Offset in the Consolidated Balance Sheet		Net Consolidated Balance Sheet Amounts⁽¹⁾		Gross Amounts not Offset in the Consolidated Balance Sheet⁽²⁾			Net
Assets:
Designated as hedging instruments:
Foreign currency forward contracts designated as cash flow hedges	$	2,379	$	—	$	2,379	$	(2,379	)	$	—
Not designated as hedging instruments:
Embedded derivatives	5,076		—		5,076		—			5,076
Economic hedges of embedded derivatives	325		—		325		—			325
Foreign currency forward contracts	505		—		505		(340		)	165
	5,906		—		5,906		(340		)	5,566
Additional netting benefit	—		—		—		(490		)	(490		)
	$	8,285	$	—	$	8,285	$	(3,209	)	$	5,076
Liabilities:
Designated as hedging instruments:
Foreign currency forward contracts designated as cash flow hedges	$	29,777	$	—	$	29,777	$	(2,379	)	$	27,398
Not designated as hedging instruments:
Embedded derivatives	3,503		—		3,503		—			3,503
Economic hedges of embedded derivatives	20		—		20		—			20
Foreign currency forward contracts	7,547		—		7,547		(340		)	7,207
	11,070		—		11,070		(340		)	10,730
Additional netting benefit	—		—		—		(490		)	(490		)
	$	40,847	$	—	$	40,847	$	(3,209	)	$	37,638


⁽¹⁾	As presented in the Company's condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.

⁽²⁾