DERIVATIVE INSTRUMENTS

Interest Rate Hedging

The Company’s interest rate risk relates to U.S. dollar denominated variable interest rate borrowings. The Company uses interest rate swap derivative instruments to manage earnings and cash flow exposure resulting from changes in interest rates. These interest rate swaps apply a fixed interest rate on a portion of our expected LIBOR-indexed floating-rate borrowings. The Company held the following interest rate swaps as of March 31, 2018 (amounts in thousands):



Hedged Item	Current Notional Amount		Designation Date	Effective Date	Termination Date	Fixed Interest Rate		Floating Rate	Estimated Fair Value
									Assets (Liabilities)
3-month USD LIBOR Loan	$	50,000	June 22, 2016	December 31, 2016	June 30, 2019	1.062	%	3-month USD LIBOR	$	822
3-month USD LIBOR Loan	50,000		June 22, 2016	December 31, 2016	June 30, 2019	1.062	%	3-month USD LIBOR	835
1-month USD LIBOR Loan	50,000		July 12, 2016	December 31, 2016	June 30, 2019	0.825	%	1-month USD LIBOR	850
3-month USD LIBOR Loan	50,000		February 6, 2017	June 30, 2017	June 30, 2020	1.834	%	3-month USD LIBOR	791
1-month USD LIBOR Loan	100,000		February 6, 2017	June 30, 2017	June 30, 2020	1.652	%	1-month USD LIBOR	1,621
1-month USD LIBOR Loan	100,000		March 27, 2017	December 31, 2017	June 30, 2021	1.971	%	1-month USD LIBOR	1,529
1-month USD LIBOR Loan	150,000		December 13, 2017	January 1, 2018	December 31, 2022	2.201	%	1-month USD LIBOR	2,343
1-month USD LIBOR Loan	150,000		December 13, 2017	January 1, 2018	December 21, 2022	2.201	%	1-month USD LIBOR	2,284
1-month USD LIBOR Loan	100,000		December 13, 2017	July 1, 2019	June 30, 2024	2.423	%	1-month USD LIBOR	1,034
1-month USD LIBOR Loan	50,000		December 13, 2017	July 1, 2019	June 30, 2024	2.423	%	1-month USD LIBOR	642
1-month USD LIBOR Loan	200,000		December 13, 2017	January 1, 2018	December 31, 2024	2.313	%	1-month USD LIBOR	3,437
Total interested rate derivatives designated as cash flow hedge	$	1,050,000							$	16,188

The Company has designated these derivative instruments as cash flow hedges. The Company records the effectiveness of these derivative instruments and has recorded the changes in the fair value of the derivative instrument designated as a cash flow hedge as unrealized gains or losses in accumulated other comprehensive income (“AOCI”), net of tax, until the hedged item affected earnings, at which point any gain or loss was reclassified to earnings. If the hedged cash flow does not occur, or if it becomes probable that it will not occur, the Company will reclassify the remaining amount of any gain or loss on the related cash flow hedge recorded in AOCI to interest expense at that time.

Foreign Currency Hedging

From time to time the Company enters into foreign currency hedge contracts intended to protect the U.S. dollar value of certain forecasted foreign currency denominated transactions. The Company assesses the effectiveness of the contracts that are designated as hedging instruments. The changes in fair value of foreign currency cash flow hedges are recorded in AOCI, net of tax, until the hedged item affects earnings. Once the related hedged item affects earnings, the Company reclassifies amounts recorded in AOCI to earnings. If the hedged forecasted transaction does not occur, or if it becomes probable that it will not occur, the Company will reclassify the amount of any gain or loss on the related cash flow hedge to earnings at that time. For contracts not designated as hedging instruments, the changes in fair value of the contracts are recognized in other income (expense), net in the consolidated statements of operation, along with the offsetting foreign currency gain or loss on the underlying assets or liabilities.

The success of the Company’s hedging program depends, in part, on forecasts of certain activity denominated in foreign currency. The Company may experience unanticipated currency exchange gains or losses to the extent that there are differences between forecasted and actual activities during periods of currency volatility. In addition, changes in currency exchange rates related to any unhedged transactions may affect earnings and cash flows.

On November 28, 2017, the Company entered into a foreign currency forward contract, with a notional amount of $8.9 million to mitigate the foreign currency exchange risk related to a certain intercompany loan denominated in Swiss Francs ("CHF"). The contract is not designated as a hedging instrument. For the three months ended March 31, 2018, the Company recognized $0.2 million loss from the change in fair value of the contract, which was included in other income (expense), net in the consolidated statement of operations. The fair value of the foreign currency forward contact was a liability of $0.1 million as of March 31, 2018, that is included in accrued expenses and other current liabilities in the consolidated balance sheet.

Cross-Currency Rate Swap

On October 2, 2017, the Company entered into cross currency swap agreements to convert a notional amount of $300.0 million equivalent to 291.2 million of CHF denominated intercompany loans into U.S. dollars. The CHF-denominated intercompany loans were the result of the purchase of intellectual property by a subsidiary in Switzerland as part of the Codman Acquisition. The objective of these cross-currency swaps is to reduce volatility of earnings and cash flows associated with changes in the foreign currency exchange rate. Under the terms of these contracts, which have been designated as cash flow hedges, the Company will make interest payments in Swiss Francs and receive interest in U.S. dollars. Upon the maturity of these contracts, the Company will pay the principal amount of the loans in Swiss Francs and receive U.S. dollars from the counterparties.

The Company held the following cross-currency rate swaps as of March 31, 2018 (dollar amounts in thousands):



	Effective Date	Termination Date	Fixed Rate	Aggregate Notional Amount		Fair Value Liability

Pay CHF	October 2, 2017	October 2, 2020	1.75%	CHF	97,065	$	(3,694	)
Receive U.S.$	October 2, 2017	October 2, 2020	4.38%	$	100,000	$	(3,694	)

Pay CHF	October 2, 2017	October 2, 2021	1.85%	CHF	48,533	(2,123		)
Receive U.S.$	October 2, 2017	October 2, 2021	4.46%	$	50,000	(2,123		)

Pay CHF	October 2, 2017	October 2, 2022	1.95%	CHF	145,598	(7,091		)
Receive U.S.$	October 2, 2017	October 2, 2022	4.52%	$	150,000	(7,091		)

Total						$	(12,908	)

The cross-currency swaps were carried on the consolidated balance sheet at fair value, and changes in the fair values were recorded as unrealized gains or losses in AOCI. For the three months ended March 31, 2018, the Company recorded a loss of $6.4 million in other income (expense), net related to change in fair value related to the foreign currency rate translation to offset the gains or losses recognized on the intercompany loans. For the three months ended March 31, 2018, the Company recorded a loss of $7.0 million in AOCI related to the change in fair value of the cross-currency swap and a gain of $1.9 million in other income, net included in the consolidated statements of operations related to the interest rate differential of the cross-currency swap. As of March 31, 2018, an estimated gain of $7.7 million is expected to be reclassified within the next twelve months to other income, net from AOCI. As of March 31, 2018, the Company does not expect any gains or losses will be reclassified into earnings as a result of the discontinuance of these cash flow hedges because the original forecasted transaction will not occur.

Counterparty Credit Risk

The Company manages its concentration of counterparty credit risk on its derivative instruments by limiting acceptable counterparties to a group of major financial institutions with investment grade credit ratings, and by actively monitoring their credit ratings and outstanding positions on an ongoing basis. Therefore, the Company considers the credit risk of the counterparties to be low. Furthermore, none of the Company’s derivative transactions is subject to collateral or other security arrangements, and none contain provisions that depend upon the Company’s credit ratings from any credit rating agency.

Fair Value of Derivative Instruments

The Company has classified all of its derivative instruments within Level 2 of the fair value hierarchy because observable inputs are available for substantially the full terms of the derivative instruments. The fair value of the foreign currency forward exchange contracts related to inventory purchases is determined by comparing the forward rate as of the end of the period and the settlement rate specified in each contract. The fair value of the interest rate swaps was developed using a market approach based on publicly available market yield curves and the terms of the related swap. The Company performs ongoing assessments of counterparty credit risk.

The following table summarizes the fair value and presentation for derivatives designated as hedging instruments in the condensed consolidated balance sheets as of March 31, 2018 and December 31, 2017:



	Fair Value as of
Location on Balance Sheet ⁽¹⁾:	March 31, 2018		December 31, 2017
	(In thousands)
Derivatives designated as hedges — Assets:
Prepaid expenses and other current assets
Interest rate swap⁽²⁾	$	2,992	$	1,521
Cross-currency swap	7,652		7,757
Other assets
Interest rate swap⁽²⁾	13,647		2,491
Cross-currency swap	—		—
Total derivatives designated as hedges — Assets	$	24,291	$	11,769

Derivatives designated as hedges — Liabilities:
Accrued expenses and other current liabilities
Interest rate swap⁽²⁾	$	451	$	1,845
Cross-currency swap	—		—
Other liabilities
Interest rate swap⁽²⁾	—		1,575
Cross-currency swap	20,560		11,714
Total derivatives designated as hedges — Liabilities	$	21,011	$	15,134


⁽¹⁾	The Company classifies derivative assets and liabilities as non-current based on the cash flows expected to be incurred within the following 12 months.


⁽²⁾	At March 31, 2018 and December 31, 2017, the notional amount related to the Company’s interest rate swaps was $1.05 billion. There is no expected reduction in this notional amount in the next twelve months.

The following presents the effect of derivative instruments designated as cash flow hedges on the accompanying condensed consolidated statement of operations during the three months ended March 31, 2018 and 2017:



	Balance in AOCI Beginning of Quarter			Amount of Gain (Loss) Recognized in AOCI			Amount of Gain (Loss) Reclassified from AOCI into Earnings			Balance in AOCI End of Quarter			Location in Statements of Operations
	(In thousands)
Three Months Ended March 31, 2018
Interest rate swap	$	592		$	14,940		$	(656	)	$	16,188		Interest (expense)
Cross-currency swap	(5,104		)	(7,027		)	(4,454		)	(7,677		)	Other income (expense)
	$	(4,512	)	$	7,913		$	(5,110	)	$	8,511

Three Months Ended March 31, 2017
Interest rate swap	$	1,871		$	586		$	(22	)	$	2,479		Interest (expense)
	$	1,871		$	586		$	(22	)	$	2,479

At March 31, 2018, the Company expects $10.2 million of pre-tax income recorded in AOCI related to cash flow hedges to be reclassified to earnings in the next twelve months.