Derivatives

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

11.   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 Third 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 September 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 September 30, 2019 was an asset of approximately $1.2 million, which was partially offset by approximately $0.3 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 September 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	5,930
Brazilian Real	BRL	7,830
Canadian Dollar	CAD	6,495
Swiss Franc	CHF	3,780
Chinese Renminbi	CNY	408,000
Danish Krone	DKK	32,225
Euro	EUR	33,150
British Pound	GBP	7,315
Japanese Yen	JPY	1,190,000
Korean Won	KRW	7,000,000
Mexican Peso	MXN	453,500
Norwegian Krone	NOK	14,050
Swedish Krona	SEK	43,450

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 September 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	12,695
Brazilian Real	BRL	13,000
Canadian Dollar	CAD	1,795
Swiss Franc	CHF	739
Chinese Renminbi	CNY	69,069
Danish Krone	DKK	4,072
Euro	EUR	1,225
British Pound	GBP	6,982
Hong Kong Dollar	HKD	11,000
Japanese Yen	JPY	1,380,856
Korean Won	KRW	7,343,000
Mexican Peso	MXN	35,000
Norwegian Krone	NOK	2,999
Swedish Krona	SEK	12,647
Singapore Dollar	SGD	600
South African Rand	ZAR	40,218

Balance Sheet Presentation of Derivative Instruments. As of September 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	September 30, 2019		December 31, 2018
Derivative instruments designated as hedging instruments
Assets
Interest rate swap	Other assets (long-term)	$	1,201	$	5,772
Foreign currency forward contracts	Prepaid expenses and other assets		1,821		613
Foreign currency forward contracts	Other assets (long-term)		496		151
Liabilities
Foreign currency forward contracts	Accrued expenses		(1,262)		(711)
Foreign currency forward contracts	Other long-term obligations		(333)		(101)
Derivative instruments not designated as hedging instruments
Assets
Foreign currency forward contracts	Prepaid expenses and other assets	$	541	$	814
Liabilities
Foreign currency forward contracts	Accrued expenses		(505)		(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 (“OCI”), accumulated other comprehensive income (“AOCI”), and net earnings in our consolidated statements of income, consolidated statements of comprehensive income and consolidated balance sheets (in thousands):

	Amount of Gain/(Loss)					Consolidated Statements of				Amount of Gain/(Loss)
	recognized in OCI					Income				reclassified from AOCI
	Three Months Ended September 30,					Three Months Ended September 30,				Three Months Ended September 30,
	2019		2018			2019			2018	2019			2018
Derivative instrument					Location in statements of income
Interest rate swap	$	(186)	$	664	Interest expense	$	(3,415)	$	(2,329)	$	520	$	428
Foreign currency forward contracts		505		543	Revenue		243,049		221,659		118		86
					Cost of sales		(138,913)		(119,620)		(112)		26

	Amount of Gain/(Loss)					Consolidated Statements of			Amount of Gain/(Loss)
	recognized in OCI					Income			reclassified from AOCI
	Nine Months Ended September 30,					Nine Months Ended September 30,			Nine Months Ended September 30,
	2019		2018			2019		2018	2019			2018
Derivative instrument					Location in statements of income
Interest rate swap		(2,855)	$	3,532	Interest expense		(9,295)	(8,064)	$	1,716	$	998
Foreign currency forward contracts		555		1,112	Revenue		736,930	649,504		220		(299)
					Cost of sales		(416,194)	(359,400)		(298)		404

As of September 30, 2019, approximately $(467,000), or $(347,000) 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 September 30, 2019, approximately $933,000, or $693,000 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 September 30,				Nine Months Ended September 30,
Derivative Instrument	Location in statements of income	2019		2018		2019		2018
Foreign currency forward contracts	Other income (expense)	$	2,402	$	1,143	$	1,647	$	3,181