Derivative Financial Instruments

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company's financial position and results of operations are subject to certain financial market risks. The Company regularly assesses these risks and has established risk management practices designed to mitigate the impact of certain foreign currency exchange rate and interest rate risk exposures. The Company does not engage in speculative trading in any financial market.

The Company uses currency forward contracts, not formally designated as hedges, to manage the consolidated exchange rate risk associated with the remeasurement of certain non-functional currency denominated monetary assets and liabilities primarily by subsidiaries that use U.S. dollars, European euros, Canadian dollars, Swedish kronor, Norwegian kroner, Brazilian real and British pound sterling as their functional currency. Changes in fair value of foreign currency forward contracts are recognized in other (income) expense, net at the end of each reporting period. In general, these gains and losses are offset in the Consolidated Statements of Income by the reciprocal gains and losses from the underlying assets or liabilities which originally gave rise to the exposure. At September 30, 2020, the Company’s foreign currency forward contracts, not formally designated as hedges, had maturities of three months or less.

In addition, the Company manages the risk of changes in the fair value of certain monetary liabilities attributable to changes in exchange rates. The Company manages these risks by using currency forward contracts formally designated and effective as fair value hedges. Hedge effectiveness is generally determined by evaluating the alignment of the hedging instrument's critical terms with the critical terms of the hedged item. The forward points attributable to the hedging instruments are excluded from the assessment of effectiveness and amortized to other (income) expense, net using a systematic and rational methodology. Differences between the change in fair value of the excluded component and amounts recognized under the systematic and rational method are recognized in other comprehensive income. The change in fair value of the hedging instruments attributable to the hedged risk is reported in other (income) expense, net. The change in fair value of the hedged item attributable to the hedged risk is reported as an adjustment to its carrying value and also included in other (income) expense, net. At September 30, 2020, the Company’s foreign currency forward contracts formally designated as fair value hedges had maturities of three years or less.

Interest Rate Swap

The Company's outstanding debt at September 30, 2020 consists of fixed rate notes and an unsecured credit facility consisting of an unsecured revolving loan facility, an unsecured U.S. dollar term loan and an unsecured Swedish kronor term loan, all of which accrue interest at a floating rate. As discussed in Note 13, "Debt," interest expense on the Company's floating rate debt is calculated based on a fixed spread over the applicable Eurocurrency rate (e.g. LIBOR) subject to a floor of zero percent. Therefore, fluctuations in market interest rates will cause interest expense increases or decreases on a given amount of floating rate debt.

The Company is managing its interest rate risk related to certain floating rate debt through an interest rate swap (“swap”) in which the Company receives floating rate payments subject to a floor of zero percent and makes fixed rate payments. The impact of the swap is to fix the floating rate basis for the calculation of interest on the unsecured Swedish kronor term loan at 0.590 percent. The swap is designated and effective as a cash flow hedge with individual swap cash flows recorded as an asset or liability in the Company's Consolidated Balance Sheets at fair value. Hedge effectiveness is generally determined by evaluating the alignment of the hedging instrument's critical terms with the critical terms of the hedged item. Fair value adjustments are recorded as an adjustment to accumulated other comprehensive income. All of the Company's derivative counterparties have investment grade credit ratings. The Company is a party to master netting arrangements that contain features that allow counterparties to net settle amounts arising from multiple separate derivative transactions or net settle in the case of certain triggering events such as a bankruptcy or major default of one of the counterparties to the transaction. The Company has not pledged assets or posted collateral as a requirement for entering into or maintaining derivative positions.

The following table presents the gross notional amounts of outstanding derivative instruments (in thousands):



	September 30, 2020		December 31, 2019
Derivative instruments designated as cash flow hedges:
Interest Rate Swap	$	143,249	$	143,302
Derivative instruments designated as fair value hedges:
Currency Forward Contracts	255,000		340,000
Derivative instruments not formally designated as hedges:
Currency Forward Contracts	149,591		104,835

Note 6. Derivative Financial Instruments - (Continued)

Interest Rate Swap - (Continued)

The following table presents the balance sheet classification and fair value of derivative instruments (in thousands):



		September 30,		December 31,
	Classification	2020		2019
Derivative instruments designated as cash flow hedges:
Derivative instruments in asset positions:
Interest Rate Swap	Prepaid expense and other current assets	$	726	$	404
Derivative instruments in liability positions:
Interest Rate Swap	Other current liabilities	911		453
Interest Rate Swap	Other long-term liabilities	1,814		1,012
Derivative instruments designated as fair value hedges:
Derivative instruments in liability positions:
Currency forward contracts	Other current liabilities	2,831		454
Currency forward contracts	Other long-term liabilities	2,099		1,189
Derivative instruments not formally designated as hedges:
Derivative instruments in asset positions:
Currency forward contracts	Prepaid expenses and other current assets	142		3,010
Derivative instruments in liability positions:
Currency forward contracts	Other current liabilities	6,629		391

The following table presents the statement of income classification of derivative instruments (in thousands):



		Three Months Ended September 30,					Nine Months Ended September 30,
	Classification	2020			2019		2020			2019
Derivative instruments designated as cash flow hedges:
Loss recognized in other comprehensive income (loss), net of tax	Other comprehensive income (loss)	$	54		$	132	$	704		$	1,718
Loss reclassified from other comprehensive income (loss) to earnings for the effective portion	Interest expense	199			218		474			438
Derivative instruments designated as fair value hedges:
Loss recognized in earnings for effective portion	Other (income) expense, net	9,109			—		9,670			—
Gain recognized in income for amount excluded from effectiveness testing	Other (income) expense, net	(1,051		)	—		(3,239		)	—
Loss (gain) recognized in other comprehensive income (loss), net of tax	Other comprehensive income (loss)	550			—		(3,261		)	—
Derivative instruments not formally designated as hedges:
(Gain) loss recognized in earnings	Other (income) expense, net	(9,747		)	2,319		(2,970		)	2,611