Derivatives and Hedging

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The company limits exposure to foreign currency fluctuations in most of its engineering and construction contracts through provisions that require client payments in currencies corresponding to the currencies in which cost is incurred. Certain financial exposure, which includes currency and commodity price risk associated with engineering and construction contracts, currency risk associated with monetary assets and liabilities denominated in nonfunctional currencies and risk associated with interest rate volatility, may subject the company to earnings volatility. In cases where financial exposure is identified, the company generally implements a hedging strategy utilizing derivative instruments or hedging instruments to mitigate the risk. The company's hedging instruments are designated as either fair value or cash flow hedges in accordance with ASC 815, "Derivatives and Hedging." The company formally documents its hedge relationships at inception, including identification of the hedging instruments and the hedged items, its risk management objectives and strategies for undertaking the hedge transaction, and the initial quantitative assessment of the hedging instrument's effectiveness in offsetting changes in the fair value of the hedged items. The company subsequently assesses hedge effectiveness qualitatively, unless the facts and circumstances of the hedge relationship change to an extent that the company can no longer assert qualitatively that the hedge is highly effective. The fair values of all hedging instruments are recognized as assets or liabilities at the balance sheet date. For fair value hedges, the change in the fair value of the hedging instrument is offset against the change in the fair value of the underlying asset or liability through earnings. For cash flow hedges,

the hedging instrument's gain or loss due to changes in fair value is recorded as a component of AOCI and is reclassified into earnings when the hedged item settles. For derivatives that are not designated or do not qualify as hedging instruments, the change in the fair value of the derivative is offset against the change in the fair value of the underlying asset or liability through earnings. The company does not enter into derivative instruments for speculative purposes. Under ASC 815, in certain limited circumstances, foreign currency payment provisions could be deemed embedded derivatives. If an embedded foreign currency derivative is identified, the derivative is bifurcated from the host contract and the change in fair value is recognized through earnings. The company maintains master netting arrangements with certain counterparties to facilitate the settlement of derivative instruments; however, the company reports the fair value of derivative instruments on a gross basis.

As of September 30, 2019, the company had total gross notional amounts of $713 million of foreign currency contracts outstanding (primarily related to the British Pound, Kuwaiti Dinar, Indian Rupee, Philippine Peso, South Korean Won, Canadian Dollar and Chinese Yuan) and $11 million of commodity contracts outstanding that were designated as hedging instruments. The foreign currency contracts are of varying duration, none of which extend beyond March 2022. The commodity contracts are of varying duration, none of which extend beyond January 2020.

The fair values of derivatives designated as hedging instruments under ASC 815 as of September 30, 2019 and December 31, 2018 were as follows:



	Asset Derivatives					Liability Derivatives
(in thousands)	Balance Sheet Location	September 30, 2019		December 31, 2018		Balance Sheet Location	September 30, 2019		December 31, 2018
Foreign currency contracts	Other current assets	$	7,238	$	12,861	Other accrued liabilities	$	7,964	$	16,582
Commodity contracts	Other current assets	2,421		—		Other accrued liabilities	—		—
Foreign currency contracts	Other assets	1,719		2,669		Noncurrent liabilities	7,423		1,698
Total		$	11,378	$	15,530		$	15,387	$	18,280

The after-tax amount of gain (loss) recognized in OCI associated with derivative instruments designated as cash flow hedges was as follows:



	Three Months Ended September 30,				Nine Months Ended September 30,
Cash Flow Hedges (in thousands)	2019		2018		2019		2018
Foreign currency contracts	(8,611	)	(3,736	)	(4,285	)	(10,785	)
Commodity contracts	1,767		—		1,766		—
	(6,844	)	(3,736	)	(2,519	)	(10,785	)

The after-tax amount of losses reclassified from AOCI into earnings associated with derivative instruments designated as cash flow hedges was as follows:



		Three Months Ended September 30,						Nine Months Ended September 30,
Cash Flow Hedges (in thousands)	Location of Gain (Loss)	2019			2018			2019			2018
Foreign currency contracts	Total cost of revenue	$	(288	)	$	(1,522	)	$	(1,134	)	$	(2,305	)
Interest rate contracts	Interest expense	(262		)	(262		)	(786		)	(786		)
Total		$	(550	)	$	(1,784	)	$	(1,920	)	$	(3,091	)

As of September 30, 2019, the company also had total gross notional amounts of $14 million of foreign currency contracts and $19 million of commodity contracts outstanding that were not designated as hedging instruments. The foreign currency contracts primarily related to engineering and construction contract obligations denominated in nonfunctional currencies. As of September 30, 2019, the company had total gross notional amounts of $24 million associated with contractual foreign currency payment provisions that were deemed embedded derivatives. Net losses associated with the company’s derivatives and embedded derivatives included in “Total cost of revenue” were $1 million and $2 million for the three and nine months ended September 30, 2019, respectively. Net losses of $1 million and $2 million associated with the company’s derivatives and embedded derivatives were included in

“Total cost of revenue” and “Corporate general and administrative expense” for the three and nine months ended September 30, 2018, respectively.