Derivatives

6 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

Derivatives.

General. Our earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates, and we seek to mitigate a portion of these risks by entering into derivative contracts. The derivatives we use are interest rate swaps and foreign currency forward contracts. We recognize derivatives as either assets or liabilities at fair value in the accompanying consolidated balance sheets, regardless of whether or not hedge accounting is applied. We report cash flows arising from our hedging instruments consistent with the classification of cash flows from the underlying hedged items. Accordingly, cash flows associated with our derivative instruments are classified as operating activities in the accompanying consolidated statements of cash flows.

We formally document, designate and assess the effectiveness of transactions that receive hedge accounting initially and on an ongoing basis. Changes in the fair value of derivatives that qualify for hedge accounting treatment are recorded, net of applicable taxes, in accumulated other comprehensive income (loss), a component of stockholders’ equity in the accompanying consolidated balance sheets. When the hedged transaction occurs, gains or losses are reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. Changes in the fair value of derivatives not designated as hedging instruments are recorded in earnings throughout the term of the derivative.

Interest Rate Risk. A portion of our debt bears interest at variable interest rates and, therefore, we are subject to variability in the cash paid for interest expense. In order to mitigate a portion of this risk, we use a hedging strategy to reduce the variability of cash flows in the interest payments associated with a portion of the variable-rate debt outstanding under our Second Amended Credit Agreement that is solely due to changes in the benchmark interest rate.

Derivative Instruments Designated as Cash Flow Hedges

On August 5, 2016, we entered into a pay-fixed, receive-variable interest rate swap with a current notional amount of $175 million with Wells Fargo to fix the one-month LIBOR rate at 1.12%. The variable portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). On a monthly basis, the interest rates under both the interest rate swap and the underlying debt reset, the swap is settled with the counterparty, and interest is paid. The interest rate swap is scheduled to expire on July 6, 2021.

At June 30, 2019 and December 31, 2018, our interest rate swap qualified as a cash flow hedge. The fair value of our interest rate swap at June 30, 2019 was an asset of approximately $1.9 million, which was partially offset by approximately $0.5 million in

deferred taxes. The fair value of our interest rate swap at December 31, 2018 was an asset of approximately $5.8 million, which was offset by approximately $1.5 million in deferred taxes.

Foreign Currency Risk. We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. Our policy is to enter into foreign currency derivative contracts with maturities of up to two years. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and balances denominated in Euros, British Pounds, Chinese Renminbi, Mexican Pesos, Brazilian Reals, Australian Dollars, Hong Kong Dollars, Swiss Francs, Swedish Krona, Canadian Dollars, Danish Krone, Japanese Yen, Korean Won, and Singapore Dollars. We do not use derivative financial instruments for trading or speculative purposes. We are not subject to any credit risk contingent features related to our derivative contracts, and counterparty risk is managed by allocating derivative contracts among several major financial institutions.

Derivative Instruments Designated as Cash Flow Hedges

We enter into forward contracts on various foreign currencies to manage the risk associated with forecasted exchange rates which impact revenues, cost of sales, and operating expenses in various international markets. The objective of the hedges is to reduce the variability of cash flows associated with the forecasted purchase or sale of the associated foreign currencies. We enter into approximately 150 cash flow foreign currency hedges every month. As of June 30, 2019, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with the following notional amounts (in thousands and in local currencies):

Currency	Symbol	Forward Notional Amount
Australian Dollar	AUD	3,430
Brazilian Real	BRL	1,080
Canadian Dollar	CAD	4,330
Swiss Franc	CHF	1,970
Chinese Renminbi	CNY	166,500
Danish Krone	DKK	18,175
Euro	EUR	22,600
British Pound	GBP	4,820
Japanese Yen	JPY	1,335,000
Korean Won	KRW	4,475,000
Mexican Peso	MXN	296,500
Norwegian Krone	NOK	6,000
Swedish Krona	SEK	29,210

Derivative Instruments Not Designated as Cash Flow Hedges

We forecast our net exposure in various receivables and payables to fluctuations in the value of various currencies, and we enter into foreign currency forward contracts to mitigate that exposure. We enter into approximately 20 foreign currency fair value hedges every month. As of June 30, 2019, we had entered into foreign currency forward contracts related to those balance sheet accounts, with the following notional amounts (in thousands and in local currencies):

Currency	Symbol	Forward Notional Amount
Australian Dollar	AUD	13,788
Brazilian Real	BRL	9,000
Canadian Dollar	CAD	2,652
Swiss Franc	CHF	643
Chinese Renminbi	CNY	85,226
Danish Krone	DKK	2,544
Euro	EUR	11,717
British Pound	GBP	5,653
Hong Kong Dollar	HKD	11,000
Japanese Yen	JPY	1,445,574
Korean Won	KRW	6,000,000
Mexican Peso	MXN	25,000
Norwegian Krone	NOK	3,180
Swedish Krona	SEK	17,154
Singapore Dollar	SGD	1,676
South African Rand	ZAR	37,800

Balance Sheet Presentation of Derivative Instruments. As of June 30, 2019, and December 31, 2018, all derivative instruments, both those designated as hedging instruments and those that were not designated as hedging instruments, were recorded gross at fair value on our consolidated balance sheets. We are not subject to any master netting agreements.

The fair value of derivative instruments on a gross basis was as follows on the dates indicated (in thousands):

		Fair Value
	Balance Sheet Location	June 30, 2019			December 31, 2018
Derivative instruments designated as hedging instruments
Assets
Interest rate swap	Other assets (long-term)	$	1,907		$	5,772
Foreign currency forward contracts	Prepaid expenses and other assets	960			613
Foreign currency forward contracts	Other assets (long-term)	244			151
Liabilities
Foreign currency forward contracts	Accrued expenses	(778		)	(711		)
Foreign currency forward contracts	Other long-term obligations	(101		)	(101		)
Derivative instruments not designated as hedging instruments
Assets
Foreign currency forward contracts	Prepaid expenses and other assets	$	229		$	814
Liabilities
Foreign currency forward contracts	Accrued expenses	(1,539		)	(796		)

Income Statement Presentation of Derivative Instruments.

Derivative Instruments Designated as Cash Flow Hedges

Derivative instruments designated as cash flow hedges had the following effects, before income taxes, on other comprehensive income and net earnings in our consolidated statements of income, consolidated statements of comprehensive income and consolidated balance sheets (in thousands):

	Amount of Gain/(Loss) recognized in OCI						Consolidated Statements of Income						Amount of Gain/(Loss) reclassified from AOCI
	Three Months Ended June 30,						Three Months Ended June 30,						Three Months Ended June 30,
	2019			2018			2019			2018			2019			2018
Derivative instrument						Location in statements of income
Interest rate swaps	$	(1,812	)	$	748	Interest expense	$	(3,115	)	$	(3,338	)	$	602		$	357
Foreign currency forward contracts	1,064			394		Revenue	255,532			224,810			(92		)	(234		)
						Cost of sales	(143,568		)	(124,801		)	(104		)	138
	Amount of Gain/(Loss) recognized in OCI						Consolidated Statements of Income						Amount of Gain/(Loss) reclassified from AOCI
	Six Months Ended June 30,						Six Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018			2019			2018
Derivative instrument						Location in statements of income
Interest rate swaps	(2,669		)	$	2,868	Interest expense	(5,879		)	(5,736		)	$	1,196		$	570
Foreign currency forward contracts	51			568		Revenue	493,881			427,844			102			(385		)
						Cost of sales	(277,281		)	(239,779		)	(185		)	378

As of June 30, 2019, approximately $6,200, or $4,600 after taxes, was expected to be reclassified from accumulated other comprehensive income to earnings in revenue and cost of sales over the succeeding twelve months. As of June 30, 2019, approximately $1.3 million, or $1.0 million after taxes, was expected to be reclassified from accumulated other comprehensive income to earnings in interest expense over the succeeding twelve months.

Derivative Instruments Not Designated as Hedging Instruments

The following gains/(losses) from these derivative instruments were recognized in our consolidated statements of income for the periods presented (in thousands):

		Three Months Ended June 30,					Six Months Ended June 30,
Derivative Instrument	Location in statements of income	2019			2018		2019			2018
Foreign currency forward contracts	Other expense	$	(489	)	$	3,153	$	(755	)	$	2,038