15. Derivative Financial Instruments

The Company enters into contractual derivative arrangements to manage changes in market conditions related to interest on debt obligations, and foreign currency exposures. Derivative instruments utilized during the period include interest rate swap agreements and foreign currency contracts. All derivative instruments are recognized as either assets or liabilities on the balance sheet at fair value at the end of each period. The counterparties to the Company's contractual derivative agreements are all major international financial institutions. The Company is exposed to credit loss in the event of nonperformance by these counterparties. The Company continually monitors its positions and the credit ratings of its counterparties, and does not anticipate nonperformance by the counterparties. For designated hedging relationships, the Company formally documents the hedging relationship and its risk management objective and strategy for undertaking the hedge, the hedging instrument, the hedged item, the nature of the risk being hedged, how the hedging instrument's effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting cash flows of hedged items.

Cross Currency Interest Rate Swaps

The Company is exposed to foreign currency and interest rate cash flow exposure related to non-functional currency long-term debt of the Company’s wholly owned Dutch subsidiary. To manage this foreign currency and interest rate cash flow exposure, the Company entered into a cross-currency interest rate swap that converts $100.0 million of U.S. dollar denominated floating interest payments to functional currency (euro) fixed interest payments during the life of the hedging instrument. In addition, the Company has two cross-currency interest rate swaps that convert an additional $70.0 million of the U.S. dollar denominated floating interest payments to functional currency (euro) floating interest payments during the life of the hedging instruments. The effective period of one of the cross-currency interest rate swaps in the amount of $30 million (the “Initial Swap”) that the Company entered in to as of December 21, 2016 expired as of June 30, 2017. The Company net settled the Initial Swap and a new $30 million cross-currency swap transaction was entered into which will amortize down to $20 million after six-months. The effective period of the second of these two cross-currency interest rate swaps in the amount of $40 million expires on December 31, 2018. As changes in foreign exchange and interest rates impact the future cash flow of interest payments, the hedges are intended to offset changes in cash flows attributable to interest rate and foreign exchange movements.

The Company designated the $100.0 million swap as a cash flow hedge, with the effective portion of the gain or loss on the derivative reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction impacts earnings. There were no amounts recorded for ineffectiveness for the periods reported herein related to the cross-currency interest rate swaps. Changes in the fair value of the derivatives that are not designated as a cash flow hedge are recorded in other operating (income) expense, net.

Changes in the fair value of a derivative that is designated as and meets all the required criteria for a cash flow hedge are recorded in accumulated other comprehensive income and reclassified into earnings as the underlying hedged item affects earnings. As of September 30, 2017, approximately $0.3 million of net unrealized gains related to the cross-currency interest rate swaps were included in accumulated other comprehensive income.

Interest Rate Swap

In January 2017, the Company entered into an interest rate swap agreement designed to fix the variable interest rate payable on a portion of its outstanding borrowings under the 2015 Credit Agreement, for a notional value of $50.0 million, at 1.625%. The effective date was January 31, 2017 and the maturity date is January 31, 2020.

The interest rate swap agreement was designed to manage exposure to interest rates on the Company’s variable rate indebtedness. The Company recognizes all derivatives on its balance sheet at fair value. The Company has designated this interest rate swap agreement as a cash flow hedge. Changes in the fair value of the swap will be recognized in other comprehensive income until the hedged items are recognized in earnings. Hedge ineffectiveness, if any, associated with the swap will be reported by the Company in interest expense. As of September 30, 2017, approximately $35 thousand of unrealized gain related to the interest rate swap was included in accumulated other comprehensive income.

The following table summarizes outstanding swaps which the Company has recorded at September 30, 2017.

Initial US$

Date

Derivative

Notional

Entered

Financial

Amount

Floating Leg

Settlement

Effective

into

Instrument

(thousands)

(swap counterparty)

Fixed Rate

(Company)

Dates

Period of swap

12/21/2016

Cross currency interest rate swap

100,000

Variable rate 1-month USD Libor plus 1.50% to 3/31/17 and 1.75% thereafter

1.027%

EUR

N/A

Monthly on the last banking day of each month commencing December 30, 2016

12/23/2016 - 12/31/2019

12/21/2016

Cross currency interest rate swap

40,000

Variable rate 1-month USD Libor plus 1.50% to 3/31/17 and 1.75% thereafter

N/A

Variable rate 1-month EURIBOR, floored at 0.00%, plus 0.920%

Monthly on the last banking day of each month commencing December 30, 2016

12/23/2016 - 12/31/2018

6/28/2017

Cross currency interest rate swap

30,000

Variable rate 1-month USD Libor plus 1.75% thereafter

N/A

Variable rate 1-month EURIBOR, floored at 0.00%, plus 1.11%

Monthly on the last banking day of each month commencing July 31, 2017

6/30/2017 - 12/31/2017

1/31/2017

Interest rate swap

50,000

Variable rate 1-month USD Libor

1.625%

USD

N/A

Monthly on the last banking day of each month commencing February 28, 2017

1/31/2017 - 1/31/2020

The following table summarizes the location and fair value, using Level 2 inputs (see Note 4 for a description of the fair value levels), of the Company's derivatives designated and not designated as hedging instruments in the Unaudited Condensed Consolidated Balance Sheets (in thousands).


		September 30,		December, 31
	Balance Sheet Location	2017		2016
Designated as hedging instruments:
Cross currency swap agreements	Other long-term liabilities	$	13,699	$	1,642
Interest rate swap agreement	Other long-term assets		(35)		-
Not designated as hedging instruments:
Cross currency swap agreements	Other long-term liabilities		8,714		889
		$	22,378	$	2,531

The following table summarizes the location of (gain) loss reclassified from Accumulated other comprehensive loss into earnings for derivatives designated as hedging instruments and the location of (gain) loss for our derivatives not designated as hedging instruments in the Consolidated Statements of Income (in thousands).

		September 30,
	Income Statement Location	2017
Designated as hedging instruments:
Cross currency swap agreements	Other non-operating (income) expense, net	$	11,867
Not designated as hedging instruments:
Cross currency swap agreements	Other non-operating (income) expense, net		7,825
		$	19,692