Derivative Financial Instruments

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company principally uses derivative financial instruments to reduce the impact of foreign currency fluctuations and interest rate variability on the Company's results of operations. The principal derivative financial instruments the Company enters into are foreign exchange forward contracts and interest rate swaps. The Company does not enter into derivative financial instrument contracts for trading or speculative purposes.

Foreign Exchange Derivative Instruments

Foreign exchange forward contracts are foreign exchange derivative instruments primarily used to reduce foreign currency risk related to transactions denominated in a currency other than functional currency. These instruments are designated as cash flow hedges. The periods of the foreign exchange forward contracts correspond to the periods of the hedged forecasted transactions, which do not exceed 24 months subsequent to the latest balance sheet date. The primary foreign exchange forward contracts pertain to the U.S. dollar, the Japanese yen, the British pound sterling, the Canadian dollar, the Korean won and the euro. The gross U.S. dollar equivalent notional amount outstanding of all foreign exchange forward contracts designated under hedge accounting as of March 31, 2020 and December 31, 2019 was $276.4 million and $287.9 million, respectively.

As a result of the impact of the COVID-19 pandemic, the Company de-designated certain foreign exchange cash flow hedges deemed ineffective. The gross outstanding U.S. dollar equivalent notional amount of these foreign exchange forward contracts as of March 31, 2020 was $17.2 million, which is not included in the amounts above. See Note 1 for further discussion on the Company's evaluation and response to the COVID-19 pandemic.

The Company also enters into foreign exchange forward contracts, which do not qualify as hedging instruments under U.S. GAAP, to reduce foreign currency transaction risk related to certain intercompany assets and liabilities denominated in a currency other than functional currency. These undesignated instruments are recorded at fair value as a derivative asset or liability with the corresponding change in fair value recognized in selling, general and administrative expense. There were no outstanding foreign exchange forward contracts not designated under hedge accounting as of March 31, 2020 and December 31, 2019.

Interest Rate Derivative Instruments

The Company enters into interest rate swap contracts to reduce interest rate risk related to floating rate debt. Under the contracts, the Company pays fixed and receives variable rate interest, in effect converting a portion of its floating rate debt to fixed rate debt. The interest rate swap contracts are accounted for as cash flow hedges. As of both March 31, 2020 and December 31, 2019, the notional value of the Company's outstanding interest rate swap contracts was $160.0 million.

Impact on Financial Statements

The fair value of hedge instruments recognized on the unaudited condensed consolidated balance sheets was as follows:



(in thousands)		March 31,		December 31,
Balance Sheet Location	Hedge Instrument Type	2020		2019
Prepaid and other assets ⁽¹⁾	Foreign exchange forward	$	11,772	$	4,549
Other assets	Foreign exchange forward	3,443		1,109
Accrued expenses and other liabilities ⁽²⁾	Foreign exchange forward	2,670		2,561
	Interest rate swap	3,630		1,862
Other noncurrent liabilities	Foreign exchange forward	406		115
	Interest rate swap	611		789

(1) Excludes $0.7 million related to hedges deemed ineffective as of March 31, 2020.

(2) Excludes $0.1 million related to hedges deemed ineffective as of March 31, 2020.

The hedge instrument gain (loss) recognized in accumulated other comprehensive loss, net of tax was as follows:



	Three months ended
	March 31,
(in thousands)	2020			2019
Type of hedge
Foreign exchange forward	$	9,467		$	2,087
Interest rate swap	(2,065		)	(728		)
Total	$	7,402		$	1,359

Gains and losses on derivative instruments designated as cash flow hedges are reclassified from accumulated other comprehensive loss, net of tax at the time the forecasted hedged transaction impacts the statement of operations or at the time the hedge is determined to be ineffective. Based on the current valuation, during the next 12 months the Company expects to reclassify a net gain of $7.2 million related to foreign exchange derivative instruments from accumulated other comprehensive loss, net of tax, into cost of goods sold and a net loss of $3.6 million related to interest rate derivative instruments from accumulated other comprehensive loss, net of tax into interest expense, net. For further information related to amounts recognized in accumulated other comprehensive loss, net of tax, see Note 11.

The hedge instrument gain (loss) recognized on the unaudited condensed consolidated statements of operations was as follows:



	Three months ended
	March 31,
(in thousands)	2020			2019
Location of gain (loss) in statement of operations
Foreign exchange forward:
Cost of goods sold	$	1,542		$	1,606
Selling, general and administrative ⁽¹⁾⁽²⁾	1,534			(314		)
Total	$	3,076		$	1,292

Interest Rate Swap:
Interest expense, net	$	(478	)	$	(157	)
Total	$	(478	)	$	(157	)

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(1)	Relates to net gains (losses) on foreign exchange forward contracts derived from previously designated cash flow hedges.


(2)	Excludes net gains of $0.7 million reclassified out of accumulated other comprehensive loss, net of tax related to hedges deemed ineffective during the three months ended March 31, 2020.

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, as well as its own credit quality, and considers the risk of counterparty default to be minimal.