DERIVATIVE FINANCIAL INSTRUMENTS

Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.

Foreign Currency Forward Contracts

Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Israeli shekel. We also periodically utilize foreign currency forward contracts to manage exposures resulting from forecasted customer collections to be remitted in currencies other than the applicable functional currency, and exposures from cash, cash equivalents and short-term investments denominated in currencies other than the applicable functional currency. These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.

We held outstanding foreign currency forward contracts with notional amounts of $153.5 million and $144.0 million as of January 31, 2018 and 2017, respectively.

Interest Rate Swap Agreement

To partially mitigate risks associated with the variable interest rates on the term loan borrowings under the Prior Credit Agreement, in February 2016, we executed a pay-fixed, receive-variable interest rate swap agreement with a multinational financial institution under which we pay interest at a fixed rate of 4.143% and receive variable interest of three-month LIBOR (subject to a minimum of 0.75%), plus a spread of 2.75%, on a notional amount of $200.0 million. Although the Prior Credit Agreement was terminated on June 29, 2017, the interest rate swap agreement remains in effect, and serves as an economic hedge to partially mitigate the risk of higher borrowing costs under the 2017 Credit Agreement resulting from increases in market interest rates. The effective date of the agreement was November 1, 2016, and settlements with the counterparty began on February 1, 2017 and occur on a quarterly basis. The agreement will terminate on September 6, 2019.

Prior to June 29, 2017, the interest rate swap agreement was designated as a cash flow hedge and as such, changes in its fair value were recognized in accumulated other comprehensive income (loss) in the consolidated balance sheet and were reclassified into the statement of operations within interest expense in the period in which the hedged transaction affected earnings. Hedge ineffectiveness, if any, was recognized currently in the consolidated statement of operations.

On June 29, 2017, concurrent with the execution of the 2017 Credit Agreement and termination of the Prior Credit Agreement, the interest rate swap agreement was no longer designated as a cash flow hedge for accounting purposes, and because future occurrence of the specific forecasted variable cash flows which had been hedged by the interest rate swap agreement was no longer probable, the $0.9 million fair value of the interest rate swap at that date was reclassified from accumulated other comprehensive income (loss) into the consolidated statement of operations as income within other income (expense), net. Ongoing changes in the fair value of the interest rate swap agreement are now recognized within other income (expense), net in the consolidated statement of operations.

Fair Values of Derivative Financial Instruments

The fair values of our derivative financial instruments and their classifications in our consolidated balance sheets as of January 31, 2018 and 2017 were as follows:



		January 31,
(in thousands)	Balance Sheet Classification	2018		2017
Derivative assets:
Foreign currency forward contracts:
Designated as cash flow hedges	Prepaid expenses and other current assets	$	3,682	$	927
Not designated as hedging instruments	Prepaid expenses and other current assets	—		719
Interest rate swap agreement:
Designated as a cash flow hedge	Other assets	—		1,429
Not designated as a hedging instrument	Prepaid expenses and other current assets	1,330		—
	Other assets	1,250		—
Total derivative assets		$	5,012	$	3,075

Derivative liabilities:
Foreign currency forward contracts:
Designated as cash flow hedges	Accrued expenses and other current liabilities	$	—	$	288
Not designated as hedging instruments	Accrued expenses and other current liabilities	1,061		958
	Other liabilities	247		—
Interest rate swap agreement:
Designated as a cash flow hedge	Accrued expenses and other current liabilities	—		408
Total derivative liabilities		$	1,308	$	1,654

Derivative Financial Instruments in Cash Flow Hedging Relationships

The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss (“AOCL”) and on the consolidated statement of operations for the years ended January 31, 2018, 2017, and 2016 were as follows:



	Year Ended January 31,
(in thousands)	2018			2017		2016
Net gains (losses) recognized in Other comprehensive (loss) income:
Foreign currency forward contracts	$	3,312		$	575	$	(1,871	)
Interest rate swap agreement	(341		)	632		—
	$	2,971		$	1,207	$	(1,871	)
Net gains (losses) reclassified from Other comprehensive (loss) income to the consolidated statements of operations:
Foreign currency forward contracts	$	6,813		$	1,257	$	(8,151	)
Interest rate swap agreement	(254		)	—		—
	$	6,559		$	1,257	$	(8,151	)

For information regarding the line item locations of the net gains (losses) on derivative financial instruments reclassified out of AOCL into the consolidated statements of operations, see Note 8, “Stockholders’ Equity”.

There were no gains or losses from ineffectiveness of these cash flow hedges recorded for the years ended January 31, 2018, 2017, and 2016. All of the foreign currency forward contracts underlying the $3.3 million of net unrealized gains recorded in our accumulated other comprehensive loss at January 31, 2018 mature within twelve months, and therefore we expect all such gains to be reclassified into earnings within the next twelve months.

Derivative Financial Instruments Not Designated as Hedging Instruments

(Losses) gains recognized on derivative financial instruments not designated as hedging instruments in our consolidated statements of operations for the years ended January 31, 2018, 2017, and 2016 were as follows:



	Classification in Consolidated Statements of Operations	Year Ended January 31,
(in thousands)	Classification in Consolidated Statements of Operations	2018			2017			2016
Foreign currency forward contracts	Other (expense) income, net	$	(2,546	)	$	(323	)	$	394
Interest rate swap	Other (expense) income, net	2,529			—			—
		$	(17	)	$	(323	)	$	394