Derivatives and Hedging

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging

Note 18. 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 well as fluctuations in foreign currency exchange rates and changes in interest rates relating to its long-term debt. The Company uses designated cash flow hedges and non-designated hedges in the form of foreign currency forward contracts as part of its strategy to manage the level of exposure to the risk of fluctuations in foreign currency exchange rates and 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. The Company also uses cross-currency debt swap contracts and interest rate hedge contracts to mitigate the impact of variable rates on its long-term debt as well as changes in foreign currencies.

The Company accounts for its foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge contracts in accordance with ASC Topic 815. ASC 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 accumulated other comprehensive income (loss) and released into earnings as a component of cost of goods sold or net sales, other income (expense) and interest expense during the period in which the hedged transaction takes place. Remeasurement gains or losses of derivatives that are not elected for hedge accounting treatment are recorded in earnings immediately as a component of other income (expense).

Foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge 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 and changes in interest rates. The Company does not enter into foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge 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 foreign currency forward contracts, cross-currency debt swap contracts and interest rate hedge contracts as well as the location of the asset and/or liability on the consolidated balance sheets at December 31, 2019 and 2018 (in thousands):

		Fair Value of Asset Derivatives
		December 31,
	Balance Sheet Location	2019		2018
Derivatives designated as cash flow hedging instruments:
Foreign currency forward contracts	Other current assets	$	53	$	54
Cross-currency debt swap contracts	Other current assets	6,163		—
		$	6,216	$	54
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other current assets	$	8	$	4,485

		Fair Value of Liability Derivatives
		December 31,
	Balance Sheet Location	2019		2018
Derivatives designated as cash flow hedging instruments:
Foreign currency forward contracts	Accounts payable and accrued expenses	$	24	$	39
Cross-currency debt swap contracts	Accounts payable and accrued expenses	25		—
Interest rate hedge contracts	Accounts payable and accrued expenses	1,865		—
	Other long-term liabilities	7,030		—
		$	8,944	$	39
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Accounts payable and accrued expenses	$	741	$	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 balance sheets at December 31, 2019 and 2018.

Cash Flow Hedging Instruments

Foreign Currency Forward Contracts

The Company uses foreign currency derivatives designated as qualifying cash flow hedging instruments, including foreign currency forward contracts to help mitigate the Company's foreign currency exposure on intercompany sales of inventory to its foreign subsidiaries. These contracts generally mature within 12 to 15 months from their inception. At December 31, 2019 and 2018, the Company had no outstanding foreign currency forward contracts designated as cash flow hedge instruments.

As of December 31, 2019, the Company recorded a net gain of $1,033,000 in accumulated other comprehensive income (loss) related to foreign currency forward contracts. Of this amount, net gains of $398,000 were relieved from accumulated other comprehensive income (loss) and recognized in cost of goods sold for the underlying intercompany sales that were recognized. There were no ineffective hedge gains or losses recognized during 2019. Net gains of $767,000 were relieved from accumulated other comprehensive income (loss) related to the amortization of forward points. Based on the current valuation, the Company expects to reclassify net gains of $661,000 from accumulated other comprehensive income (loss) into net earnings during the next 12 months. See Note 2 for a roll-forward of accumulated other comprehensive income (loss).

In the years ended December 31, 2018 and 2017, the Company recognized a net gain of $236,000 and a net loss of $187,000 in cost of goods sold related to foreign currency forward contracts, respectively.

Cross-Currency Debt Swap and Interest Rate Hedge Contract

The Company uses the combination of a cross-currency debt swap and interest rate hedge, designated as cash flow hedges, to mitigate the risk of changes in interest rates associated with the Company's variable-rate Term Loan Facility (Note 6). In order to achieve this, the Company entered into agreements with lenders party to the Term Loan Facility to convert a portion of the USD denominated Term Loan Facility, which has a higher variable interest rate, to a Euro denominated synthetic note at a lower fixed rate. Over the life of the facility, the Company will receive variable interest payments from the counterparty lenders in exchange for the Company making fixed rate payments, without exchange of the underlying notional amount. In addition, the cross-currency debt swap mitigates the risk of foreign currency exchange fluctuations related to the Euro denominated synthetic note. As of December 31, 2019, the notional amount of the outstanding cross-currency debt swap and interest rate hedge contract was $198,353,000.

During the year ended December 31, 2019, the Company recorded a net gain of $11,212,000 in accumulated other comprehensive income (loss) related to the remeasurement of the cross currency swap contract. Of this amount, net gains of $7,783,000 were relieved from accumulated other comprehensive income (loss), of which $5,027,000 was recognized in interest expense and $2,756,000 related to foreign currency exchange was recognized in other income (expense) during the year ended December 31, 2019. The Company did not have cross-currency debt swap contracts in the years ended December 31, 2018 and 2017.

During the year ended December 31, 2019, the Company recorded a net loss of $9,434,000 related to the remeasurement of the interest rate hedge contract. Of this amount, net losses of $552,000 were relieved from accumulated other comprehensive income (loss) and recognized in interest expense during the year ended December 31, 2019. Based on the current valuation, the Company expects to reclassify a net loss of $1,865,000 from accumulated other comprehensive income (loss) into earnings during the next 12 months. The Company did not have interest rate hedge contracts in the years ended December 31, 2018 and 2017.

The following tables summarize the net effect of all cash flow hedges on the consolidated financial statements for the year ended December 31, 2019, 2018, and 2017 (in thousands):

	Net Gain (Loss) Recognized in Accumulated Other Comprehensive Income (Loss) (Effective Portion)
	Year Ended December 31,
Derivatives designated as cash flow hedging instruments	2019			2018		2017
Foreign currency forward contracts	$	1,033		$	389	$	(2,679	)
Cross-currency debt swap contracts	11,212			—		—
Interest rate hedge contracts	(9,434		)	—		—
	$	2,811		$	389	$	(2,679	)

	Net Gain (Loss) Reclassified from Accumulated Other Comprehensive Income (Loss) into Earnings (Effective Portion)
	Year Ended December 31,
Derivatives designated as cash flow hedging instruments	2019			2018		2017
Foreign currency forward contracts	$	1,165		$	236	$	(187	)
Cross-currency debt swap contracts	7,783			—		—
Interest rate hedge contracts	(552		)	—		—
	$	8,396		$	236	$	(187	)

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 December 31, 2019, 2018 and 2017, the notional amounts of the Company’s foreign currency forward contracts used to mitigate the exposures discussed above were approximately $72,119,000, $459,600,000 and $4,821,000, respectively. The significant increase in 2018 includes a foreign currency forward contract that was put in place to mitigate the risk of foreign currency fluctuations in connection with the acquisition of Jack Wolfskin, which was denominated in Euros (see Note 5). 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 statements of operations. The foreign currency contracts are classified under Level 2 of the fair value hierarchy (see Note 17).

The following table summarizes the location of gains and losses on the consolidated statements of operations that were recognized during the years ended December 31, 2019, 2018 and 2017, respectively, in addition to the derivative contract type (in thousands):

		Amount of Net Gain (Loss) Recognized in Income on Derivative Instruments
Derivatives not designated as hedging instruments	Location of Net gain (loss) recognized in  income on derivative instruments	Years Ended December 31,
		2019		2018		2017
Foreign currency forward contracts	Other income (expense), net	$	4,176	$	9,705	$	(7,958	)

In addition, during the year ended December 31, 2019, 2018, and 2017, the Company recognized net foreign currency losses of $5,838,000, and $2,824,000 and gains of $808,000 related to transactions with foreign subsidiaries, respectively.