Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives Designated as Hedging Instruments

Net Investment Hedges. The Company is exposed to the impact of foreign exchange rate fluctuations on the value of investments in its 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 investments in foreign subsidiaries. As of September 30, 2019 and December 31, 2018, the total principal amounts of foreign currency debt obligations designated as net investment hedges were $3,961.7 million and $4,139.8 million, respectively.

The Company also uses cross-currency interest rate swaps to hedge a portion of its net investment in its European operations. As of September 30, 2019, U.S. Dollar to Euro cross-currency interest rate swap contracts with a total notional amount of $750.0 million were outstanding, with maturity dates in April 2022, January 2024 and January 2025. At maturity of each outstanding contract, the Company will receive U.S. Dollars from and pay Euros to the contract counterparty. During the term of each contract, the Company receives interest payments in U.S. Dollars and makes interest payments in Euros based on a notional amount and fixed interest rates determined at contract inception. The Company did not have any cross-currency interest rate swaps outstanding as of December 31, 2018.

The effect of net investment hedges on accumulated other comprehensive income and the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 was as follows (in thousands):



Amount of gain or (loss) recognized in accumulated other comprehensive income:
		Three Months Ended September 30,				Nine Months Ended September 30,
		2019		2018		2019		2018
Foreign currency debt		$	151,825	$	27,213	$	181,431	$	179,056
Cross-currency interest rate swaps (included component) ⁽¹⁾		30,505		—		36,331		—
Cross-currency interest rate swaps (excluded component) ⁽²⁾		6,566		—		10,117		—
Total		$	188,896	$	27,213	$	227,879	$	179,056

Amount of gain or (loss) recognized in earnings:
	Location of gain or (loss)	Three Months Ended September 30,				Nine Months Ended September 30,
	Location of gain or (loss)	2019		2018		2019		2018
Cross-currency interest rate swaps (excluded component) ⁽²⁾	Interest expense	$	5,072	$	—	$	14,163	$	—
Total		$	5,072	$	—	$	14,163	$	—


⁽¹⁾	Included component represents foreign exchange spot rates.


⁽²⁾	Excluded component represents cross-currency basis spread and interest rates.

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. The foreign currency forward and option contracts that the Company uses to hedge this exposure are designated as cash flow hedges. As of September 30, 2019 and December 31, 2018, the total notional amounts of these foreign exchange contracts were $848.6 million and $760.9 million, respectively.

The Company enters into intercompany hedging instruments ("intercompany derivatives") with wholly-owned subsidiaries 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 effect of cash flow hedges on accumulated other comprehensive income and the condensed consolidated statements of operations for the three and nine months ended September 30, 2019 and 2018 was as follows (in thousands):



Amount of gain or (loss) recognized in accumulated other comprehensive income:
		Three Months Ended September 30,						Nine Months Ended September 30,
		2019			2018			2019			2018
Foreign currency forward and option contracts (included component) ⁽¹⁾		$	20,979		$	8,246		$	29,345		$	49,836
Foreign currency option contracts (excluded component) ⁽²⁾		(1,518		)	—			(2,923		)	—
Total		$	19,461		$	8,246		$	26,422		$	49,836

Amount of gain or (loss) reclassified from accumulated other comprehensive income to income:
		Three Months Ended September 30,						Nine Months Ended September 30,
	Location of gain or (loss)	2019			2018			2019			2018
Foreign currency forward contracts	Revenues	$	27,843		$	(3,294	)	$	56,388		$	(34,613	)
Foreign currency forward contracts	Costs and operating expenses	(14,474		)	1,441			(29,548		)	17,542
Total		$	13,369		$	(1,853	)	$	26,840		$	(17,071	)

Amount of gain or (loss) excluded from effectiveness testing included in income:
		Three Months Ended September 30,						Nine Months Ended September 30,
	Location of gain or (loss)	2019			2018			2019			2018
Foreign currency forward contracts	Other income (expense)	$	—		$	3,860		$	88		$	10,290
Foreign currency option contracts (excluded component) ⁽²⁾	Revenues	(538		)	—			(555		)	—
Total		$	(538	)	$	3,860		$	(467	)	$	10,290


⁽¹⁾	Included component represents foreign exchange spot rates.


⁽²⁾	Excluded component represents option's time value.

As of September 30, 2019, the Company's cash flow hedge instruments had maturity dates ranging from October 2019 to September 2021 and the Company recorded a net gain of $43.0 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, 2018, the Company's cash flow hedge instruments had maturity dates ranging from January 2019 to December 2020 and the Company recorded a net gain of $21.4 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.

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 U.S. Dollars.

Economic Hedges of Embedded Derivatives. The Company uses foreign currency forward contracts to 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.

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. As of September 30, 2019 and December 31, 2018, the total notional amounts of these foreign currency contracts were $1,950.6 million and $1,500.4 million, respectively.

The following table presents the effect of derivatives not designated as hedging instruments in the Company's condensed consolidated statements of operations (in thousands):



Amount of gain or (loss) recognized in earnings:
		Three Months Ended September 30,						Nine Months Ended September 30,
	Location of gain or (loss)	2019			2018			2019			2018
Embedded derivatives	Revenues	$	2,830		$	742		$	3,552		$	2,206
Economic hedge of embedded derivatives	Revenues	(3,221		)	(422		)	(2,680		)	(1,360		)
Foreign currency forward contracts	Other income (expense)	77,644			17,061			96,143			60,737
Total		$	77,253		$	17,381		$	97,015		$	61,583

Fair Value of Derivative Instruments

The following table presents the fair value of derivative instruments recognized in the Company's condensed consolidated balance sheets as of September 30, 2019 and December 31, 2018 (in thousands):



	September 30, 2019				December 31, 2018
	Assets ⁽¹⁾		Liabilities ⁽²⁾		Assets ⁽¹⁾		Liabilities ⁽²⁾
Designated as hedging instruments:
Cash flow hedges
Foreign currency forward and option contracts	$	59,401	$	—	$	38,606	$	865
Net investment hedges
Cross-currency interest rate swaps	46,449		—		—		—
Total designated as hedging	105,850		—		38,606		865

Not designated as hedging instruments:
Embedded derivatives	7,131		1,336		4,656		2,426
Economic hedges of embedded derivatives	492		697		525		180
Foreign currency forward contracts	28,778		3		29,287		6,269
Total not designated as hedging	36,401		2,036		34,468		8,875
Total Derivatives	$	142,251	$	2,036	$	73,074	$	9,740


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


⁽²⁾	As presented in the Company's condensed consolidated balance sheets within other current liabilities and other liabilities.

Offsetting Derivative Assets and Liabilities

The Company presents its derivative instruments and the accrued interest related to cross-currency interest rate swaps at gross fair values in the condensed consolidated balance sheets. 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 or the accrued interest related to cross-currency interest rate swaps under master netting arrangements. The following table presents information related to these offsetting arrangements as of September 30, 2019 and December 31, 2018 (in thousands):



	Gross Amounts Offset in Consolidated Balance Sheet
	Gross Amounts		Gross Amounts Offset in the Balance Sheet		Net Amounts		Gross Amounts not Offset in the Balance Sheet			Net
September 30, 2019
Derivative assets	$	154,394	$	—	$	154,394	$	(6,307	)	$	148,087
Derivative liabilities	8,203		—		8,203		(6,307		)	1,896

December 31, 2018
Derivative assets	$	73,074	$	—	$	73,074	$	(6,517	)	$	66,557
Derivative liabilities	9,740		—		9,740		(6,517		)	3,223