Risk Management and Derivatives

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company is exposed to global market risks, including the effects of changes in foreign currency and interest rates. The Company uses derivative instruments to manage financial exposures that occur in the normal course of business and does not hold or issue derivatives for trading or speculative purposes.

The Company may elect to designate certain derivatives as hedging instruments under U.S. GAAP. The Company formally documents all relationships between designated hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking hedge transactions. This process includes linking all derivatives designated as hedges to forecasted cash flows and assessing, both at inception and on an ongoing basis, the effectiveness of the hedging relationships.

The Company's foreign exchange risk management program consists of designated cash flow hedges and undesignated hedges. As of March 31, 2020, the Company has hedge instruments, primarily for U.S. Dollar/Chinese Renminbi, British Pound/U.S. Dollar, U.S. Dollar/Canadian Dollar, Euro/U.S. Dollar, U.S. Dollar/Japanese Yen, and U.S. Dollar/Mexican Peso currency pairs. All derivatives are recognized on the unaudited consolidated balance sheets at fair value and classified based on the instrument’s maturity date.

The following table presents the fair values of derivative instruments within the unaudited consolidated balance sheets. Refer to Note 9 for a discussion of the fair value measurements.


(In thousands)	Balance Sheet Classification	March 31, 2020				December 31, 2019				March 31, 2019
Derivatives designated as hedging instruments under ASC 815
Foreign currency contracts	Other current assets	$	35,087			$	4,040			$	10,185
Foreign currency contracts	Other long term assets	4,791				24				273
Interest rate swap contracts	Other long term assets	—				—				—
Total derivative assets designated as hedging instruments				$	39,878			$	4,064			$	10,458

Foreign currency contracts	Other current liabilities	$	789			$	8,772			$	1,973
Foreign currency contracts	Other long term liabilities	—				$	2,443			$	307
Total derivative liabilities designated as hedging instruments				$	789			$	11,215			$	2,280

Derivatives not designated as hedging instruments under ASC 815
Foreign currency contracts	Other current assets	$	8,582			$	2,337			$	4,611
Total derivative assets not designated as hedging instruments				$	8,582			$	2,337			$	4,611

Foreign currency contracts	Other current liabilities	$	1,740			$	9,510			$	840
Total derivative liabilities not designated as hedging instruments				$	1,740			$	9,510			$	840

The following table presents the amounts in the unaudited consolidated statements of operations in which the effects of cash flow hedges are recorded and the effects of cash flow hedge activity on these line items.


	Three months ended March 31,
	2020						2019
(In thousands)	Total		Amount of Gain (Loss) on Cash Flow Hedge Activity		Total		Amount of Gain (Loss) on Cash Flow Hedge Activity
Net revenues	$	930,240	$	1,788	$	1,204,722	$	3,792
Cost of goods sold	499,256		1,117		659,935		740
Interest expense, net	(5,960)		(9)		(4,238)		1,625
Other income (expense), net	1,534		21		(667)		640

The following tables present the amounts affecting the unaudited statements of comprehensive income (loss).


(In thousands)	Balance as of December 31, 2019		Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives		Amount of gain (loss) reclassified from other comprehensive income (loss) into income		Balance as of March 31, 2020
Derivatives designated as cash flow hedges
Foreign currency contracts	(6,005)		46,876		2,905		37,965
Interest rate swaps	(577)		—		(9)		(568)
Total designated as cash flow hedges	$	(6,582)	$	46,876	$	2,896	$	37,397


(In thousands)	Balance as of December 31, 2018		Amount of gain (loss) recognized in other comprehensive income (loss) on derivatives		Amount of gain (loss) reclassified from other comprehensive income (loss) into income		Balance as of March 31, 2019
Derivatives designated as cash flow hedges
Foreign currency contracts	21,908		(4,971)		5,172		11,766
Interest rate swaps	954		68		1,625		(604)
Total designated as cash flow hedges	$	22,862	$	(4,903)	$	6,797	$	11,162

The following table presents the amounts in the unaudited consolidated statements of operations in which the effects of undesignated derivative instruments are recorded and the effects of fair value hedge activity on these line items.


	Three months ended March 31,
	2020						2019
(In thousands)	Total		Amount of Gain (Loss) on Fair Value Hedge Activity		Total		Amount of Gain (Loss) on Fair Value Hedge Activity
Other income (expense), net	$	1,534	$	(2,826)	$	(667)	$	(449)

Cash Flow Hedges

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 driven by non-functional currency generated revenue, non-functional currency inventory purchases, investments in U.S. Dollar denominated available-for-sale debt securities, and certain other intercompany transactions. The Company enters into foreign currency contracts to reduce the risk associated with the foreign currency exchange rate fluctuations on these transactions. Certain contracts are designated as cash

flow hedges. As of March 31, 2020, December 31, 2019 and March 31, 2019, the aggregate notional value of the Company's outstanding cash flow hedges was $681.5 million, $879.8 million and $507.6 million, respectively, with contract maturities ranging from one to twenty-four months.

The Company may enter 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. The interest rate swap contracts are accounted for as cash flow hedges. Refer to Note 7 for a discussion of long term debt. As of March 31, 2020, the Company had no outstanding interest rate swap contracts.

For contracts designated as cash flow hedges, the changes in fair value are reported as other comprehensive income (loss) and are recognized in current earnings in the period or periods during which the hedged transaction affects current earnings. Effective hedge results are classified in the unaudited consolidated statements of operations in the same manner as the underlying exposure.

The Company evaluated the probability of certain hedged forecasted transactions and determined certain transactions, against which hedges were designated, were no longer probable of occurring by the end of the originally specified time period, as a result of the impacts of COVID-19. The amounts recorded in other income (expense), previously recorded in accumulated other comprehensive income, as a result of the discontinuance of cash flow hedges was not material for the three months ended March 31, 2020.

Undesignated Derivative Instruments

The Company may elect to enter into foreign exchange forward contracts to mitigate the change in fair value of specific assets and liabilities on the unaudited consolidated balance sheets. These undesignated instruments are recorded at fair value as a derivative asset or liability on the unaudited consolidated balance sheets with their corresponding change in fair value recognized in other expense, net, together with the re-measurement gain or loss from the hedged balance sheet position. As of March 31, 2020, December 31, 2019 and March 31, 2019, the total notional value of the Company's outstanding undesignated derivative instruments was $303.0 million, $304.2 million and $497.4 million, respectively.

Credit Risk

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 risk is generally limited to the unrealized gains in the derivative contracts. However, the Company monitors the credit quality of these financial institutions and considers the risk of counterparty default to be minimal.