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HEDGING INSTRUMENTS | 3 Months Ended
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Mar. 31, 2024
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
HEDGING INSTRUMENTS | HEDGING INSTRUMENTS Disclosure within this note is presented to provide transparency about how and why we use derivative and non-derivative instruments (collectively “hedging instruments”), how the instruments and related hedged items are accounted for, and how the instruments and related hedged items affect our financial position, results of operations, and cash flows. We are exposed to certain risks related to our ongoing business operations. We utilize hedging instruments to manage a portion of our foreign currency exchange risk and interest rate risk. To manage the impact of interest rate fluctuations associated with $250.0 million of borrowings under our variable-rate Credit Facility, we entered into an interest rate swap in 2023. We have designated the interest rate swap as a cash flow hedge. Our subsidiaries enter into foreign currency exchange contracts to manage the exchange risk associated with their forecasted intercompany inventory purchases and sales for the next year. From time to time, we may also enter into other foreign currency exchange contracts, cross currency swaps, or foreign-denominated debt issuances to minimize the impact of foreign currency fluctuations associated with specific balance sheet exposures, including net investments in certain foreign subsidiaries. The primary purpose of our foreign currency hedging activities is to protect against the volatility associated with foreign currency transactions, including transactions denominated in the euro, British pound, Japanese yen, Canadian dollar, and Australian dollar. We also utilize natural hedges to mitigate our transaction and commitment exposures. Our corporate policy prescribes the range of allowable hedging activity. We enter into foreign currency exchange contracts with large well-capitalized multinational financial institutions, and we do not hold or engage in transactions involving derivative instruments for purposes other than risk management. Our accounting policies for these contracts are based on our designation of such instruments as hedging transactions. We recognize all hedging instrument assets and liabilities at fair value at the balance sheet date. Instruments that do not qualify for hedge accounting treatment are recorded at fair value through earnings. To qualify for hedge accounting treatment, cash flow and net investment hedges must be highly effective in offsetting changes to expected future cash flows or fair value on hedged transactions. If the instrument qualifies for hedge accounting, changes in the fair value of the hedging instrument from the effective portion of the hedge are deferred in AOCI, net of tax, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. We immediately record in earnings the extent to which a hedging instrument is not effective in achieving offsetting changes in fair value. We de-designate hedging instruments from hedge accounting when the likelihood of the hedged transaction occurring becomes less than probable. For de-designated instruments, the gain or loss from the time of de-designation through maturity of the instrument is recognized in earnings. Any gain or loss in AOCI at the time of de-designation is reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Refer to “Note 14. Accumulated Other Comprehensive Income” for further information regarding the effect of hedging instruments on our unaudited condensed consolidated statements of income for the three months ended March 31, 2024, and 2023. We enter into master netting arrangements with the counterparties to our derivative transactions, which permit certain outstanding receivables and payables to be offset in the event of default. Our derivative contracts do not require either party to post cash collateral. We elect to present our derivative assets and liabilities in the unaudited condensed consolidated balance sheets on a gross basis. All cash flows related to our foreign currency exchange contracts are classified as operating cash flows, which is consistent with the cash flow treatment of the underlying items being hedged. Cash Flow Hedges We have designated our foreign currency exchange contracts and our interest rate swap as cash flow hedges as these derivative instruments manage our exposure to variability in the cash flows of forecasted transactions attributable to foreign currency exchange and to interest rates on variable interest obligations under the terms of our Credit Facility. Unless noted otherwise, we have also designated our derivative instruments as qualifying for hedge accounting treatment. We did not de-designate any instruments from hedge accounting treatment during the three months ended March 31, 2024, or 2023. As of March 31, 2024, the estimated amount of gains, net of tax, from our foreign exchange contracts which are expected to be reclassified out of AOCI and into earnings within the next 12 months is $2.9 million if exchange rates do not fluctuate from the levels as of March 31, 2024. As of March 31, 2024, the estimated amount of gains, net of tax, from our interest rate swap contract which are expected to be reclassified out of AOCI and into earnings within the next twelve months is $2.2 million if interest rates do not fluctuate from the levels as of March 31, 2024. Foreign Currency Exchange Contracts: We target to hedge approximately 75% to 85% of the estimated exposure from intercompany product purchases and sales denominated in the euro, British pound, Canadian dollar, Japanese yen, and Australian dollar. We have additional unhedged foreign currency exposures related to intercompany foreign transactions and emerging markets where it is not practical to hedge. We primarily utilize foreign currency exchange contracts with durations of less than 24 months. Quarterly, we enter into contracts to hedge incremental portions of anticipated foreign currency transactions for the current and following year. As a result, our risk with respect to foreign currency exchange rate fluctuations and the notional value of foreign currency exchange contracts may vary throughout the year. The U.S. dollar is the currency purchased or sold in all of our foreign currency exchange contracts. The notional amount of foreign currency exchange contracts to hedge forecasted intercompany inventory purchases and sales totaled $285.9 million and $294.0 million as of March 31, 2024, and December 31, 2023, respectively. Interest Rate Swap: We entered into an interest rate swap contract to manage the economic effect of variable interest obligations on amounts borrowed under the terms of the Credit Facility. Beginning on March 31, 2023, the variable interest rate associated with $250.0 million of borrowings outstanding under the Credit Facility became effectively fixed at 3.9% plus the applicable credit spread, through October 20, 2025. The following table presents the effect of cash flow hedge accounting on our unaudited condensed consolidated statements of income and comprehensive income, and provides information regarding the location and amounts of pretax gains or losses of derivatives:
(in thousands) |  |  |  | Three Months Ended March 31, |
|  |  |  | 2024 |  | 2023 |
Financial statement line items in which effects of cash flow hedges are recorded |  | Cost of revenue |  | $ | 371,025 |  |  | $ | 357,224 |  |
Foreign exchange contracts |  |  |  |  |  |  |
Amount of gain reclassified from accumulated other comprehensive income into net income |  |  |  | $ | 810 |  |  | $ | 335 |  |
Financial statement line items in which effects of cash flow hedges are recorded |  | Interest expense |  | $ | (7,911) |  |  | $ | (13,127) |  |
Interest rate swap contract |  |  |  |  |  |  |
Amount of gain reclassified from accumulated other comprehensive income into net income |  |  |  | $ | 957 |  |  | $ | — |  |
Net Investment Hedges, Euro-Denominated Notes In June 2015, we issued and sold through a private placement an aggregate principal amount of €88.9 million in euro-denominated 1.785% Series C Senior Notes due June 18, 2025. We have designated these euro-denominated notes as a hedge of our euro net investment in certain foreign subsidiaries to reduce the volatility in stockholders’ equity caused by changes in foreign currency exchange rates in the euro relative to the U.S. dollar. As a result of this designation, gains and losses from the change in translated U.S. dollar value of these euro-denominated notes are recorded in AOCI rather than to earnings. We recorded gains of $1.6 million, net of tax, within AOCI as a result of this net investment hedge for the three months ended March 31, 2024, and losses of $1.5 million for the three months ended March 31, 2023. The related cumulative unrealized gain recorded as of March 31, 2024, will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated or all or a portion of the hedge no longer qualifies for hedge accounting treatment. Refer to Note 13 to the consolidated financial statements included in our 2023 Annual Report for further information regarding the issuance of these euro-denominated notes. Net Investment Hedges, Cross Currency Swaps We have entered into several cross currency swap contracts as a hedge of our net investment in foreign operations to offset foreign currency translation gains and losses on the net investment. These cross currency swaps have maturity dates beginning on June 30, 2025, through June 30, 2028. At maturity of the cross currency swap contracts we will deliver the notional amount of €15 million and will receive approximately $17.5 million from the counterparties on June 18, 2025; we will deliver the notional amount of €35 million and will receive $37.8 million from the counterparties on March 31, 2028; and we will deliver the notional amount of €90 million and will receive $98.2 million from the counterparties on June 30, 2028. The changes in fair value of the cross currency swap contracts are recorded in AOCI and will be reclassified to earnings when the foreign subsidiaries are sold or substantially liquidated. During the three months ended March 31, 2024, we recorded gains of $2.0 million, net of tax, within AOCI as a result of these net investment hedges, and losses of $1.2 million during the three months ended March 31, 2023. We will receive quarterly interest payments from the counterparties based on a fixed interest rate until maturity of the cross currency swaps. This interest rate component is excluded from the assessment of hedge effectiveness and is recognized as a reduction to interest expense over the life of the hedge instrument. We recognized approximately $0.3 million related to the excluded component as a reduction of interest expense for the three months ended March 31, 2024, and $0.7 million for the three months ended March 31, 2023. Fair Values of Hedging Instruments Designated as Hedges in Consolidated Balance Sheets The fair values of hedging instruments and their respective classification on our unaudited condensed consolidated balance sheets and amounts subject to offset under master netting arrangements consisted of the following derivative instruments, unless otherwise noted:
(in thousands) |  |  |  | Hedging Assets
|  |  |  | March 31, 2024 |  | December 31, 2023
Derivatives and non-derivatives designated as hedging instruments |  | Balance Sheet Classification |  |  |  |
Foreign currency exchange contracts |  | Other current assets |  | $ | 4,715 |  |  | $ | 1,783 |
Cross currency swaps |  | Other current assets |  | — |  |  | — |
Interest rate swap contract |  | Other long-term assets |  | 3,256 |  |  | 1,451 |
Foreign currency exchange contracts |  | Other long-term assets |  | 59 |  |  | — |
Cross currency swaps |  | Other long-term assets |  | 1,046 |  |  | 664 |
Total derivative instruments presented as hedging instruments on the balance sheet |  |  |  | 9,076 |  |  | 3,898 |
Gross amounts subject to master netting arrangements not offset on the balance sheet |  |  |  | (1,067) |  |  | (1,783) |
Net amount |  |  |  | $ | 8,009 |  |  | $ | 2,115 |
(in thousands) |  |  |  | Hedging Liabilities
|  |  |  | March 31, 2024 |  | December 31, 2023
Derivatives and non-derivatives designated as hedging instruments |  | Balance Sheet Classification |  |  |  |
Foreign currency exchange contracts |  | Accrued liabilities |  | $ | 999 |  |  | $ | 5,532 |
Cross currency swaps |  | Other long-term liabilities |  | 2,736 |  |  | 5,041 |
Foreign currency exchange contracts |  | Other long-term liabilities |  | 81 |  |  | — |
Total derivative instruments presented as hedging instruments on the balance sheet |  |  |  | 3,816 |  |  | 10,573 |
Non-derivative foreign currency denominated debt designated as net investment hedge on the balance sheet (1) |  | Long-term debt |  | 96,064 |  |  | 98,187 |
Total hedging instruments presented on the balance sheet |  |  |  | 99,880 |  |  | 108,760 |
Gross amounts subject to master netting arrangements not offset on the balance sheet |  |  |  | (1,067) |  |  | (1,783) |
Net amount |  |  |  | $ | 98,813 |  |  | $ | 106,977 |
(1) Amounts represent reported carrying amounts of our foreign currency-denominated debt. Refer to “Note 18. Fair Value Measurements” for information regarding the fair value of our long-term debt.

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