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Derivative Financial Instruments | 9 Months Ended
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Sep. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | Derivative Financial Instruments As part of our risk management strategy, we use derivative instruments to hedge certain foreign currency and interest rate exposures. Refer to "Note 13: Shareholder's Equity" and "Note 14: Fair Values of Financial Instruments" for additional disclosures on our derivative instruments. The fair values of our derivative instruments are determined using the income approach and significant other observable inputs (also known as "Level 2"). We have used observable market inputs based on the type of derivative and the nature of the underlying instrument. The key inputs include interest rate yield curves (swap rates and futures) and foreign exchange spot and forward rates, all of which are available in an active market. We have utilized the mid-market pricing convention for these inputs. We include, as a discount to the derivative asset, the effect of our counterparty credit risk based on current published credit default swap rates when the net fair value of our derivative instruments is in a net asset position. We consider our own nonperformance risk when the net fair value of our derivative instruments is in a net liability position by discounting our derivative liabilities to reflect the potential credit risk of our counterparty through applying a current market indicative credit spread to all cash flows. The fair values of our derivative instruments were as follows:
|  |  |  | Fair Value
Derivative Assets |  | Balance Sheet Location |  | September 30, 2019 |  | December 31, 2018
Derivatives designated as hedging instruments under ASC 815-20 |  | In thousands
Interest rate swap contract |  | Other current assets |  | $ | 346 |  |  | $ | 1,866 |
Interest rate cap contracts |  | Other current assets |  | 43 |  |  | 535 |
Foreign exchange options |  | Other current assets |  | 493 |  |  | — |
Cross currency swap contract |  | Other current assets |  | 1,212 |  |  | 1,631 |
Interest rate swap contract |  | Other long-term assets |  | — |  |  | 746 |
Interest rate cap contracts |  | Other long-term assets |  | — |  |  | 251 |
Cross currency swap contract |  | Other long-term assets |  | 4,163 |  |  | 1,339 |
Derivatives not designated as hedging instruments under ASC 815-20 |  |  |  |
Foreign exchange forward contracts |  | Other current assets |  | 57 |  |  | 157 |
Total asset derivatives |  |  |  | $ | 6,314 |  |  | $ | 6,525 |
Derivative Liabilities |  |  |  |  |  |
Derivatives not designated as hedging instruments under ASC 815-20 |  |  |  |
Foreign exchange forward contracts |  | Other current liabilities |  | $ | 100 |  |  | $ | 337 |
The changes in accumulated other comprehensive income (loss) (AOCI), net of tax, for our derivative and nonderivative hedging instruments designated as hedging instruments, net of tax, were as follows:
In thousands | 2019 |  | 2018
Net unrealized loss on hedging instruments at January 1, | $ | (13,179 | ) |  | $ | (13,414 | )
Unrealized gain (loss) on hedging instruments | 4,995 |  |  | 4,770 |
Realized (gains) losses reclassified into net income (loss) | (5,799 | ) |  | (2,207 | )
Net unrealized loss on hedging instruments at September 30, | $ | (13,983 | ) |  | $ | (10,851 | )
Reclassification of amounts related to hedging instruments are included in interest expense in the Consolidated Statements of Operations for the periods ended September 30, 2019 and 2018. Included in the net unrealized gain (loss) on hedging instruments at September 30, 2019 and 2018 is a loss of $14.4 million, net of tax, related to our nonderivative net investment hedge, which terminated in 2011. This loss on our net investment hedge will remain in AOCI until earnings are impacted by a sale or liquidation of the associated foreign operation. A summary of the effect of netting arrangements on our financial position related to the offsetting of our recognized derivative assets and liabilities under master netting arrangements or similar agreements is as follows:
Offsetting of Derivative Assets | Gross Amounts of Recognized Assets Presented in the Consolidated Balance Sheets |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |
In thousands |  | Derivative Financial Instruments |  | Cash Collateral Received |  | Net Amount
September 30, 2019 | $ | 6,314 |  |  | $ | (45 | ) |  | $ | — |  |  | $ | 6,269 |
December 31, 2018 | 6,525 |  |  | (103 | ) |  | — |  |  | 6,422 |
Offsetting of Derivative Liabilities | Gross Amounts of Recognized Liabilities Presented in the Consolidated Balance Sheets |  | Gross Amounts Not Offset in the Consolidated Balance Sheets |  |
In thousands |  | Derivative Financial Instruments |  | Cash Collateral Pledged |  | Net Amount
September 30, 2019 | $ | 100 |  |  | $ | (45 | ) |  | $ | — |  |  | $ | 55 |
December 31, 2018 | 337 |  |  | (103 | ) |  | — |  |  | 234 |
Our derivative assets and liabilities subject to netting arrangements consist of foreign exchange forwards and options and interest rate contracts with six counterparties at September 30, 2019 and five counterparties at December 31, 2018. No derivative asset or liability balance with any of our counterparties was individually significant at September 30, 2019 or December 31, 2018. Our derivative contracts with each of these counterparties exist under agreements that provide for the net settlement of all contracts through a single payment in a single currency in the event of default. We have no pledges of cash collateral against our obligations, and we have not received pledges of cash collateral from our counterparties under the associated derivative contracts. Cash Flow Hedges As a result of our floating rate debt, we are exposed to variability in our cash flows from changes in the applicable interest rate index. We enter into interest rate caps and swaps to reduce the variability of cash flows from increases in the LIBOR based borrowing rates on our floating rate credit facility. These instruments do not protect us from changes to the applicable margin under our credit facility. At September 30, 2019, our LIBOR-based debt balance was $587.5 million. In October 2015, we entered into an interest rate swap, which is effective from August 31, 2016 to June 23, 2020, and converts $214 million of our LIBOR-based debt from a floating LIBOR interest rate to a fixed interest rate of 1.42% (excluding the applicable margin on the debt). The notional balance will amortize to maturity at the same rate as required minimum payments on our term loan. Changes in the fair value of the interest rate swap are recognized as a component of other comprehensive income (OCI) and are recognized in earnings when the hedged item affects earnings. The amounts paid or received on the hedge are recognized as an adjustment to interest expense along with the earnings effect of the hedged item. The amount of net gains expected to be reclassified into earnings in the next 12 months is $0.3 million. In November 2015, we entered into three interest rate cap contracts with a total notional amount of $100 million at a cost of $1.7 million. The interest rate cap contracts expire on June 23, 2020 and were entered into in order to limit our interest rate exposure on $100 million of our variable LIBOR based debt up to 2.00%. In the event LIBOR is higher than 2.00%, we will pay interest at the capped rate of 2.00% with respect to the $100 million notional amount of such agreements. As of December 31, 2016, due to the accelerated revolver payments from surplus cash, we elected to de-designate two of the interest rate cap contracts as cash flow hedges and discontinued the use of cash flow hedge accounting. The amounts recognized in AOCI from de-designated interest rate cap contracts were maintained in AOCI as the forecasted transactions were still probable to occur, and subsequent changes in fair value were recognized within interest expense. In April 2018, due to increases in our total LIBOR-based debt, we elected to re-designate the two interest rate cap contracts as cash flow hedges. As of that date and going forward changes in the fair value of these instruments are recognized as a component of OCI, and these changes together with amounts previously maintained in AOCI will be recognized in earnings when the hedged item affects earnings. The amounts paid or received on the hedge are recognized as an adjustment to interest expense along with the earnings effect of the hedged item. The amount of net losses expected to be reclassified into earnings for all interest rate cap contracts in the next 12 months is $0.5 million. In April 2018, we entered into a cross-currency swap, which converts $56.0 million of floating LIBOR-based U.S. Dollar denominated debt into 1.38% fixed rate euro denominated debt. This cross-currency swap matures on April 30, 2021 and mitigates the risk associated with fluctuations in interest and currency rates impacting cash flows related to U.S. Dollar denominated debt in a euro functional currency entity. Changes in the fair value of the cross-currency swap are recognized as a component of OCI and are recognized in earnings when the hedged item affects earnings. The amounts paid or received on the hedge are recognized as an adjustment to interest expense along with the earnings effect of the hedged item. The amount of net gains expected to be reclassified into earnings in the next 12 months is $1.2 million. As a result of our forecasted inventory purchases in a non-functional currency, we are exposed to foreign exchange risk. We hedge portions of these purchases. During January 2019, we entered into foreign exchange option contracts for a total notional amount of $72 million at a cost of $1.3 million. The contracts mature ratably throughout the year with final maturity in October 2019. Changes in the fair value of the option contracts are recognized as a component of OCI and are recognized in product cost of revenues when the hedged item affects earnings. The before-tax effects of our accounting for derivative instruments designated as hedges on AOCI were as follows:
Derivatives in ASC 815-20 Cash Flow Hedging Relationships |  | Amount of Gain (Loss) Recognized in OCI on Derivative |  | Gain (Loss) Reclassified from AOCI into Income
Location |  | Amount
In thousands |  | 2019 |  | 2018 |  |  |  | 2019 |  | 2018
Three Months Ended September 30, |  |  |  |  |  |  |  |  |  |
Interest rate swap contracts |  | $ | 13 |  |  | $ | 302 |  |  | Interest expense |  | $ | 359 |  |  | $ | 314 |
Interest rate cap contracts |  | 356 |  |  | (220 | ) |  | Interest expense |  | 252 |  |  | (149 | )
Foreign exchange options |  | 1,011 |  |  | — |  |  | Product cost of revenues |  | 289 |  |  | — |
Cross currency swap contract |  | 2,703 |  |  | 599 |  |  | Interest expense |  | 387 |  |  | 363 |
Cross currency swap contract |  | — |  |  | — |  |  | Other income/(expense), net |  | 2,168 |  |  | (733 | )
Nine Months Ended September 30, |  |  |  |  |  |  |  |  |  |
Interest rate swap contract |  | $ | (987 | ) |  | $ | 2,062 |  |  | Interest expense |  | $ | 1,278 |  |  | $ | 649 |
Interest rate cap contracts |  | 646 |  |  | 149 |  |  | Interest expense |  | 849 |  |  | (685 | )
Foreign exchange options |  | 1,229 |  |  | — |  |  | Product cost of revenues |  | 451 |  |  | — |
Cross currency swap contract |  | 4,126 |  |  | 2,975 |  |  | Interest expense |  | 1,297 |  |  | 570 |
Cross currency swap contract |  | — |  |  | — |  |  | Other income/(expense), net |  | 2,453 |  |  | 1,635 |
These reclassification amounts presented above also represent the loss (gain) recognized in net income (loss) on hedging relationships under ASC 815-20 on the Consolidated Statements of Operations. For the three months and nine months ended September 30, 2019 and 2018, there were no amounts reclassified from AOCI as a result that a forecasted transaction is no longer probable of occurring, and there were no amounts excluded from effectiveness testing recognized in earnings based on changes in fair value. Derivatives Not Designated as Hedging Relationships We are also exposed to foreign exchange risk when we enter into non-functional currency transactions, both intercompany and third party. At each period-end, non-functional currency monetary assets and liabilities are revalued with the change recognized within other income and expense. We enter into monthly foreign exchange forward contracts, which are not designated for hedge accounting, with the intent to reduce earnings volatility associated with currency exposures. As of September 30, 2019, a total of 50 contracts were offsetting our exposures from the euro, pound sterling, Indonesian rupiah, Chinese yuan, Canadian dollar, Indian rupee and various other currencies, with notional amounts ranging from $120,000 to $26.4 million. The effect of our derivative instruments not designated as hedges on the Consolidated Statements of Operations was as follows:
Derivatives Not Designated as Hedging Instrument under ASC 815-20 |  | Location |  | Gain (Loss) Recognized on Derivatives in Other Income (Expense)
In thousands |  |  |  | 2019 |  | 2018
Three Months Ended September 30, |  |  |  |
Foreign exchange forward contracts |  | Other income (expense), net |  | $ | (329 | ) |  | $ | (1,149 | )
Interest rate cap contracts |  | Interest expense |  | — |  |  | — |
Nine Months Ended September 30, |  |  |  |  |  |
Foreign exchange forward contracts |  | Other income (expense), net |  | $ | (1,241 | ) |  | $ | 964 |
Interest rate cap contracts |  | Interest expense |  | — |  |  | 377 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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