Derivative Financial Instruments

9 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company’s earnings and cash flows are subject to market risks as a result of foreign currency exchange rate and interest rate fluctuations. The Company uses derivative financial instruments to manage its exposure to foreign currency exchange rate and interest rate fluctuations which is inherent to its ongoing business operations. The Company and its subsidiaries do not enter into derivative contracts for speculative purposes.

Foreign Exchange Forward Contracts

The Company enters into foreign exchange forward contracts in an attempt to reduce the impact of foreign currency exchange rate fluctuations and designates these contracts as cash flow hedges at inception. The objective is to reduce the volatility of forecasted cash flows and expenses caused by movements in foreign currency exchange rates, in particular the Indian rupee. The Company is currently using foreign exchange forward contracts to hedge the anticipated foreign currency expenses of its subsidiary in India.

The Company recognizes in earnings amounts related to its designated cash flow hedges accumulated in other comprehensive income during the same period in which the corresponding underlying hedged transaction affects earnings. As of September 30, 2022, a net unrealized loss of approximately $2.7 million accumulated in other comprehensive income (loss) is expected to be reclassified into earnings within the next twelve months.

The Company has forecasted the amount of its anticipated foreign currency expenses based on its historical performance and projected financial plan. As of September 30, 2022, the remaining open foreign exchange contracts, carried at fair value, are hedging Indian rupee expenses and have a maturity of approximately twelve months or less. These foreign exchange contracts mature monthly as the foreign currency denominated expenses are paid and any gain or loss is offset against operating expense. Once the hedged item is recognized, the cash flow hedge is de-designated and subsequent changes in value are recognized in other income (expense), net, to offset changes in the value of the resulting non-functional currency monetary assets or liabilities.

The notional amounts of these foreign exchange forward contracts in U.S. dollar equivalents were to buy $109.4 million and $83.9 million of Indian rupees as of September 30, 2022 and December 31, 2021, respectively.

Interest Rate Swaps

The Company has entered into various interest rate swap agreements to offset the variability of cash flows associated with the floating rate interest payments related to the Term Loan Facilities. See Note 7. Borrowings in the Notes to Condensed Consolidated Financial Statements of this Report for further discussion of the credit facilities. These swaps are designated as cash flow hedges of floating rate interest payments. As of September 30, 2022, the Company has two interest rate swaps outstanding with a total current notional amount of $1.3 billion, with fixed rate at 1.525%. All cash flows relating to swaps that are considered to have an other-than-insignificant financing component at the inception date are included in cash flows from financing activities in the condensed consolidated statement of cash flows. The interest rate swaps will mature by December 2022. We record any change in the fair value of the cash flow designated interest rate swaps in other comprehensive income (loss), until the hedged cash flow occurs, at which point any gain (loss) is reclassified into earnings. One of the two interest rate swaps was de-designated in November 2020. The other comprehensive loss at de-designation is amortized to interest expense over the original hedge period and future gains and losses on the de-designated swap is recognized as interest expense. A net unrealized gain of approximately $3.6 million and $4.1 million currently accumulated in other comprehensive income (loss) for the interest rate swaps as of September 30, 2022 and December 31, 2021, respectively, is expected to be reclassified into earnings within the next twelve months.

In March 2020, the Company restructured existing swap agreements by extending the hedging period to take advantage of lower interest rates and produce an immediate reduction in cash outflows. The restructured swaps are considered a hybrid instrument under ASC 815 due to the negative market value at designation: a borrowing and an embedded interest rate swap with a fair value of zero that has been designated as a cash flow hedge of interest expense on the Company’s outstanding LIBOR borrowings. The borrowing associated with the hybrid instruments had a balance of $1.7 million and $6.5 million as of September 30, 2022 and December 31, 2021, respectively and is recorded in accrued liabilities. The borrowing is being amortized to interest expense over its remaining term and the fair value of the embedded interest rate swap is recorded in other comprehensive income until recognized as interest expense at each settlement date.

Balance Sheet Hedges

Balance sheet hedges consist of cash flow hedge contracts that have been de-designated and non-designated balance sheet hedges. These foreign exchange contracts are carried at fair value and either did not or no longer qualify for hedge accounting treatment and are not designated as hedging instruments. Changes in the value of the foreign exchange contracts are recognized in other income (expense), net and offset the foreign currency gain or loss on the underlying net monetary assets or liabilities. The notional amounts of foreign currency purchase contracts open in U.S. dollar equivalents were to buy $10.2 million and $9.4 million of Indian rupees at September 30, 2022 and December 31, 2021, respectively. There were no open foreign currency contracts to sell at September 30, 2022 and December 31, 2021, respectively.

The following table reflects the fair value amounts for designated and non-designated hedging instruments at September 30, 2022 and December 31, 2021 (in thousands):


	September 30, 2022				December 31, 2021
	Fair Value Derivative Assets(i)		Fair Value Derivative Liabilities(ii)		Fair Value Derivative Assets(i)		Fair Value Derivative Liabilities(ii)
Designated hedging instruments
Foreign currency forward contracts	$	—	$	3,797	$	1,405	$	52
Interest Rate Swaps	5,597		—		—		1,992
Non-designated hedging instruments
Foreign currency forward contracts	—		470		204		—
Interest Rate Swaps	2,627		—		—		5,733
Total fair value of hedging instruments	$	8,224	$	4,267	$	1,609	$	7,777

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(i)Included in prepaid expenses and other current assets, and other assets on the condensed consolidated balance sheets.

(ii)Included in accrued and other liabilities on the condensed consolidated balance sheets.

The Company presents its derivative assets and derivative liabilities at gross fair values in the condensed consolidated balance sheets. However, under the master netting agreements with the respective counterparties of the foreign exchange contracts, subject to applicable requirements, the Company is allowed to net settle transactions of the same currency with a single net amount payable by one party to the other. The derivatives held by the Company are not subject to any credit contingent features negotiated with its counterparties. The Company is not required to pledge nor is entitled to receive cash collateral related to the above contracts. As of September 30, 2022 and December 31, 2021, there were no derivative assets or liabilities that were net settled under the master netting agreements.

The Company evaluates prospectively as well as retrospectively the effectiveness of its hedge programs using statistical analysis. Prospective testing is performed at the inception of the hedge relationship and quarterly thereafter. Retrospective testing is performed on a quarterly basis.

The before-tax effects of derivative instruments designated as cash flow hedges on the accumulated other comprehensive income and condensed consolidated statements of operations for the periods indicated below are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021

Amount of (loss) gain recognized in other comprehensive loss(i)	$	(1,754)	$	402	$	4,223	$	577
Amount of (loss) gain related to foreign exchange forward contracts reclassified from accumulated other comprehensive income (loss) into income(ii)	$	(784)	$	688	$	(311)	$	2,861
Amount of gain (loss) related to interest rate swaps reclassified from accumulated other comprehensive loss into income as interest expense	$	2,180	$	(5,913)	$	(491)	$	(16,981)

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(i)The before-tax loss of $(2,469) related to foreign exchange forward contracts and before-tax gain of $715 related to interest rate swaps were recognized in other comprehensive income (loss) during the three months ended September 30, 2022. The before-tax gain of $1,148 related to foreign exchange forward contracts and before-tax loss of $(746) related to interest rate swaps were recognized in other comprehensive income (loss) during the three months ended September 30, 2021.The before-tax loss of $(5,459) related to foreign exchange forward contracts and before-tax gain of $9,682 related to interest rate swaps were recognized in other comprehensive income (loss) during the nine months ended September 30, 2022.The before-tax gain of $1,445 related to foreign exchange forward contracts and before-tax loss of $(868) related to interest rate swaps were recognized in other comprehensive income (loss) during the nine months ended September 30, 2021.

(ii)For the three months ended September 30, 2022, the before-tax losses of $(176) and $(608) were included in cost of service revenues and operating expenses, primarily research and development expense, respectively, on the condensed consolidated statements of operations. For the three months ended September 30, 2021, the before-tax gains of $131 and $557 were included in cost of service revenues and operating expenses, primarily research and development expense, respectively, on the condensed consolidated statements of operations. For the nine months ended September 30, 2022, the before-tax losses of $(67) and $(244) were included in cost of service revenues and operating expenses, primarily research and development expense, respectively, on the condensed consolidated statements of operations. For the nine months ended September 30, 2021, the before-tax gain of $544 and $2,317 were included in cost of service revenues and operating expenses, primarily research and development expense, respectively, on the condensed consolidated statements of operations.

The before-tax gain (loss) recognized in other income (expense), net for non-designated foreign currency forward contracts and interest rate swaps for the periods indicated below are as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Gain (Loss) recognized in other income (expense), net (i)	$	124	$	(26)	$	5,444	$	(209)

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(i)Gain (loss) recognized in other income (expense), net includes the debt component of restructured interest rate swap treated as a hybrid instrument.

See Note 5. Fair Value Measurements and Note 13. Commitments and Contingencies in the Notes to Condensed Consolidated Financial Statements of this Report for a further discussion.