Derivatives and Hedging

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 16. Derivatives and Hedging

In the normal course of business, the Company is exposed to gains and losses resulting from fluctuations in foreign currency exchange rates relating to transactions of its international subsidiaries. As part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates, the Company uses designated cash flow hedges and non-designated hedges in the form of foreign currency forward contracts to mitigate the impact of foreign currency translation on transactions that are denominated primarily in Japanese Yen, British Pounds, Euros, Canadian Dollars, Australian Dollars and Korean Won, and designated cross-currency debt swaps to mitigate the impact of variable interest rates on long-term debt.

The Company accounts for its foreign currency forward contracts and cross-currency debt swaps in accordance with Topic 815. Topic 815 requires the recognition of all derivative instruments as either assets or liabilities on the balance sheet, the measurement of those instruments at fair value and the recognition of changes in the fair value of derivatives in earnings in the period of change, unless the derivative qualifies as a designated cash flow hedge that offsets certain exposures. Certain criteria must be satisfied in order for derivative financial instruments to be classified and accounted for as a cash flow hedge. Gains and losses from the remeasurement of qualifying cash flow hedges are recorded as a component of other comprehensive income and released into earnings as a component of cost of goods sold or net sales during the period in which the hedged transaction takes place. Gains and losses on the ineffective portion of hedges (hedges that do not meet accounting requirements

due to ineffectiveness) and derivatives that are not elected for hedge accounting treatment are immediately recorded in earnings as a component of cost of goods sold and other income (expense), respectively.

Foreign currency forward contracts are used only to meet the Company’s objectives of minimizing variability in the Company’s operating results arising from foreign exchange rate movements. The Company does not enter into foreign currency forward contracts for speculative purposes. The Company utilizes counterparties for its derivative instruments that it believes are credit-worthy at the time the transactions are entered into and the Company closely monitors the credit ratings of these counterparties.

The following table summarizes the fair value of the Company's derivative instruments as well as the location of the asset and/or liability on the consolidated condensed balance sheets at September 30, 2019 and December 31, 2018 (in thousands):



	Balance Sheet Location	Fair Value of Asset Derivatives
	Balance Sheet Location	September 30, 2019		December 31, 2018
Derivatives designated as cash flow hedging instruments:
Foreign currency forward contracts	Other current assets	$	370	$	54

Cross-currency debt swap agreements	Other current assets	5,429		—
	Other assets	5,013		—

Interest rate hedge agreements	Other current assets	285		—
Total		$	11,097	$	54
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other current assets	$	2,804	$	4,485



	Balance Sheet Location	Fair Value of Liability Derivatives
	Balance Sheet Location	September 30, 2019		December 31, 2018
Derivatives designated as cash flow hedging instruments:
Foreign currency forward contracts	Accounts payable and accrued expenses	$	30	$	39

Cross-currency debt swap agreements	Accounts payable and accrued expenses	151		—

Interest rate hedge agreements	Accounts payable and accrued expenses	1,727		—
	Other long-term liabilities	8,648		—
Total		$	10,556	$	39
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Accounts payable and accrued expenses	$	337	$	197

The Company's derivative instruments are subject to a master netting agreement with each respective counterparty bank and are therefore net settled at their maturity date. Although the Company has the legal right of offset under the master netting agreements, the Company has elected not to present these contracts on a net settlement amount basis, and therefore present these contracts on a gross basis on the accompanying consolidated condensed balance sheets at September 30, 2019 and December 31, 2018.

Cash Flow Hedging Instruments

Hedges of Foreign Currency Exchange Risk

The Company uses foreign currency derivatives designated as qualifying cash flow hedging instruments, including currency forward contracts and cross-currency swaps, to help mitigate the Company's foreign currency exposure on intercompany sales of inventory to its foreign subsidiaries to mitigate the exposure. These contracts generally mature within 12 to 15 months from their inception. At September 30, 2019, the notional amounts of the Company's foreign currency forward contracts designated as cash flow hedge instruments were approximately $10,756,000. At December 31, 2018, the Company had no outstanding foreign currency forward contracts designated as cash flow hedges. The reporting of gains and losses on these cash flow hedging instruments depends on whether the gains or losses are effective at offsetting changes in the cash flows of the underlying hedged items. The Company uses the critical terms method to measure the effectiveness of the foreign currency forward contracts and evaluates the effectiveness on a quarterly basis. The effective portion of the gains and losses on the hedging instruments are recorded in other comprehensive income until recognized in earnings during the period that the hedged transactions take place. Any ineffective portion of the gains and losses from the hedging instruments is recognized in earnings immediately. The Company would discontinue hedge accounting prospectively (i) if it is determined that the derivative is no longer effective in offsetting changes in the cash flows of a hedged item, (ii) when the derivative expires or is sold, terminated, or exercised, (iii) if it becomes probable that the forecasted transaction being hedged by the derivative will not occur, (iv) if a hedged firm commitment no longer meets the definition of a firm commitment, or (v) if it is determined that designation of the derivative as a hedge instrument is no longer appropriate. The Company estimates the fair value of its foreign currency forward contracts based on pricing models using current market rates. These contracts are classified under Level 2 of the fair value hierarchy (see Note 15).

As of September 30, 2019, the Company recorded a net gain of $1,037,000 in other comprehensive income related to its foreign currency hedging activities. Of this amount, net gains of $413,000 and $222,000 for the three and nine months ended September 30, 2019, respectively, were relieved from other comprehensive income and recognized in cost of goods sold for the underlying intercompany sales that were recognized, and net gains of $144,000 and $709,000 for the three and nine months ended September 30, 2019, respectively, were relieved from other comprehensive income related to the amortization of forward points. The Company recognized a net gain of $168,000 and a net loss of $32,000 in cost of goods sold for the three and nine months ended September 30, 2018, respectively. There were no ineffective hedge gains or losses recognized during the nine months ended September 30, 2019. Based on the current valuation, the Company expects to reclassify net gains of $841,000 from accumulated other comprehensive income into net earnings during the next 12 months.

Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate hedges as part of its interest rate risk management strategy. Interest rate hedges designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2019, such derivatives were used to hedge the variable cash flows associated with the Company’s variable rate $480,000,000 term loan pursuant to the Term Loan Facility.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest income (expense) in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest income (expense) as interest payments are made or received on the Company’s variable-rate debt. Based on the current valuation, the Company expects to reclassify net interest expense of $1,000,000 from accumulated other comprehensive income into earnings during the next 12 months.

As of September 30, 2019, the notional amounts of the outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk were $198,854,000.

During the nine months ended September 30, 2019, the Company recorded a net gain of $14,297,000 in other comprehensive income (loss) related to its cross currency swap activities, and net losses of $10,559,000 related to its interest rate hedging activities. Of this amount, net gains of $9,718,000 and $11,925,000 were relieved from other comprehensive income and recognized in other income for the three and nine months ended September 30, 2019, respectively. There were no ineffective hedge gains or losses recognized during the three and nine months ended September 30, 2019.

The following tables summarize the net effect of all cash flow hedges on the consolidated condensed financial statements for the three and nine months ended September 30, 2019 (in thousands):



	Gain/(Loss) Recognized in Other Comprehensive Income (Effective Portion)
	Three Months Ended September 30,					Nine Months Ended September 30,
Derivatives designated as cash flow hedging instruments	2019			2018		2019			2018
Foreign currency forward contracts	$	464		$	256	$	1,037		$	394
Cross-currency debt swap agreements	13,133			—		14,297			—
Interest rate hedge agreements	(2,662		)	—		(10,559		)	—
	$	10,935		$	256	$	4,775		$	394



	Gain/(Loss) Reclassified from Other Comprehensive Income into Earnings (Effective Portion)
	Three Months Ended September 30,					Nine Months Ended September 30,
Derivatives designated as cash flow hedging instruments	2019			2018		2019			2018
Foreign currency forward contracts	$	556		$	168	$	930		$	(32	)
Cross-currency debt swap agreements	9,868			—		12,119			—
Interest rate hedge agreements	(150		)	—		(194		)	—
	$	10,274		$	168	$	12,855		$	(32	)

Foreign Currency Forward Contracts Not Designated as Hedging Instruments

The Company uses foreign currency forward contracts that are not designated as qualifying cash flow hedging instruments to mitigate certain balance sheet exposures (payables and receivables denominated in foreign currencies), as well as gains and losses resulting from the translation of the operating results of the Company’s international subsidiaries into U.S. dollars for financial reporting purposes. These contracts generally mature within 12 months from their inception. At September 30, 2019 and December 31, 2018, the notional amounts of the Company’s foreign currency forward contracts used to mitigate the exposures discussed above were approximately $87,243,000 and $459,600,000, respectively. The Company estimates the fair values of foreign currency forward contracts based on pricing models using current market rates, and records all derivatives on the balance sheet at fair value with changes in fair value recorded in the consolidated condensed statements of operations. The foreign currency contracts are classified under Level 2 of the fair value hierarchy (see Note 15).

The following table summarizes the location of net gains and losses in the consolidated condensed statements of operations that were recognized during the three and nine months ended September 30, 2019 and 2018, respectively, in addition to the derivative contract type (in thousands):



	Location of Net Gain Recognized in Income on Derivative Instruments	Amount of Net Gain Recognized in Income on Derivative Instruments
Derivatives not designated as hedging instruments		Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives not designated as hedging instruments		2019		2018		2019		2018
Foreign currency forward contracts	Other expense, net	$	4,035	$	1,802	$	5,476	$	5,161

In addition, for the three and nine months ended September 30, 2019, the Company recognized net foreign currency losses of $10,051,000 and $12,660,000 related to transactions with its foreign subsidiaries, respectively.