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Derivatives | 9 Months Ended
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Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives | 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 programs 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. For the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. 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 Second Amended Credit Agreement that is solely due to changes in the benchmark interest rate. Derivatives 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 $175.0 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, 2018 and December 31, 2017, our interest rate swap qualified as a cash flow hedge. The fair value of our interest rate swap at September 30, 2018 was an asset of approximately $8.3 million, which was partially offset by approximately $2.1 million in deferred taxes. The fair value of our interest rate swap at December 31, 2017 was an asset of approximately $5.7 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. Derivatives Designated as Cash Flow Hedges For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and 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. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion) or hedge components excluded from the assessment of effectiveness, are recognized in earnings during the current period. 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, 2018, 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
Canadian Dollar | CAD | 2,460
Swiss Franc | CHF | 1,215
Chinese Renminbi | CNY | 60,000
Danish Krone | DKK | 10,835
Euro | EUR | 12,270
British Pound | GBP | 3,355
Japanese Yen | JPY | 330,000
Mexican Peso | MXN | 93,575
Swedish Krona | SEK | 12,780
Derivatives 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, 2018, 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 | 11,150
Brazilian Real | BRL | 8,500
Canadian Dollar | CAD | 3,098
Swiss Franc | CHF | 255
Chinese Renminbi | CNY | 95,228
Danish Krone | DKK | 2,885
Euro | EUR | 25,861
British Pound | GBP | 1,584
Hong Kong Dollar | HKD | 11,000
Japanese Yen | JPY | 260,000
Korean Won | KRW | 2,700,000
Mexican Peso | MXN | 18,700
Swedish Krona | SEK | 10,536
Singapore Dollar | SGD | 6,900
Balance Sheet Presentation of Derivatives. As of September 30, 2018, and December 31, 2017, all derivatives, 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 is as follows (in thousands):
|  |  |  | Fair Value |  |
|  | Balance Sheet Location |  | September 30, 2018 |  | December 31, 2017
Derivatives designated as hedging instruments |  |  |  |  |  |
Assets |  |  |  |  |  |
Interest rate swap |  | Other assets (long-term) |  | $ | 8,284 |  | $ | 5,749
Foreign currency forward contracts |  | Prepaid expenses and other assets |  | 813 |  | 363
Foreign currency forward contracts |  | Other assets (long-term) |  | 161 |  | 35
Liabilities |  |  |  |  |  |
Foreign currency forward contracts |  | Accrued expenses |  | (240) |  | (468)
Foreign currency forward contracts |  | Other long-term obligations |  | (56) |  | (82)
Derivatives not designated as hedging instruments |  |  |  |  |  |
Assets |  |  |  |  |  |
Foreign currency forward contracts |  | Prepaid expenses and other assets |  | $ | 360 |  | $ | 223
Liabilities |  |  |  |  |  |
Foreign currency forward contracts |  | Accrued expenses |  | (475) |  | (841)
Income Statement Presentation of Derivatives. Derivatives Designated as Cash Flow Hedges Derivative instruments designated as cash flow hedges had the following effects, before income taxes, on other comprehensive income and net earnings in our consolidated statements of income, consolidated statements of comprehensive income and consolidated balance sheets (in thousands):
| Amount of Gain/(Loss) Recognized in OCI |  |  |  | Amount of Gain/(Loss) Reclassified from AOCI |
| Three Months Ended September 30, |  |  |  | Three Months Ended September 30, |
| 2018 | 2017 |  |  | 2018 | 2017
Derivative instrument |  |  |  | Location in statements of income |  |
Interest rate swaps | $ | 664 | $ | 1 |  | Interest Expense | $ | 428 | $ | 96
Foreign currency forward contracts | 543 | 100 |  | Revenue | 86 | (101)
|  |  |  | Cost of sales | 26 | 250
| Amount of Gain/(Loss) Recognized in OCI |  |  |  | Amount of Gain/(Loss) Reclassified from AOCI |
| Nine Months Ended September 30, |  |  |  | Nine Months Ended September 30, |
| 2018 | 2017 |  |  | 2018 | 2017
Derivative instrument |  |  |  | Location in statements of income |  |
Interest rate swaps | $ | 3,532 | $ | (611) |  | Interest Expense | $ | 998 | $ | (8)
Foreign currency forward contracts | 1,112 | 841 |  | Revenue | (299) | (141)
|  |  |  | Cost of sales | 404 | 213
The net amount recognized in earnings during the three and nine months ended September 30, 2018 and 2017 due to ineffectiveness and amounts excluded from the assessment of hedge effectiveness were not significant. As of September 30, 2018, approximately $858,000, or $637,000 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, 2018, approximately $2.6 million, or $2.0 million after taxes, was expected to be reclassified from accumulated other comprehensive income to earnings in interest expense over the succeeding twelve months. Derivatives 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, |  |
|  |  |  | 2018 |  | 2017 |  | 2018 |  | 2017
Derivative Instrument |  | Location in statements of income |  |  |  |  |  |  |  |
Foreign currency forward contracts |  | Other expense |  | $ | 1,143 |  | $ | (1,459) |  | $ | 3,181 |  | $ | (4,150)

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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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