Derivatives and Risk Management

Due to the global nature of our operations, we are exposed to foreign currency exchange rate fluctuations. In addition, due to certain loans with floating interest rates, we are also subject to the impact of changes in interest rates on our interest payments. We enter into foreign currency exchange rate (“FX”) derivative contracts and interest rate swap contracts to reduce the impact of foreign currency rate and interest rate fluctuations on earnings and cash flow. We measure all outstanding derivatives each period end at fair value and report the fair value as either financial assets or liabilities in the condensed consolidated balance sheets. We do not enter into derivative contracts for speculative purposes. At inception of the contract, the derivative is designated as either a freestanding derivative or a hedge. Derivatives that are not designated as hedging instruments are referred to as freestanding derivatives with changes in fair value included in earnings.

If the derivative qualifies for hedge accounting, depending on the nature of the hedge and hedge effectiveness, changes in the fair value of the derivative will either be recognized immediately in earnings or recorded in other AOCI until the hedged item is recognized in earnings upon settlement/termination. FX derivative gains and losses in AOCI are reclassified to the consolidated statement of income (loss) as shown in the tables below and interest rate swap gains and losses in AOCI are reclassified to interest expense in the consolidated statement of income (loss). We evaluate hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be highly effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded in earnings. Cash flows from derivative contracts are reported as operating activities in the condensed consolidated statements of cash flows.

Freestanding Derivative FX Contracts

The gross notional amount of freestanding derivatives outstanding at September 30, 2017 and December 31, 2016 was $239.0 million and $489.1 million, respectively. These derivative contracts are designed to offset the FX effects in earnings of various intercompany loans, our EIB loan, and trade receivables. We recorded net losses for these freestanding derivatives of $0.7 million and $7.9 million for the three and nine months ended September 30, 2017, respectively, and net gains (losses) of $(1.8) million and $0.4 million for the three and nine months ended September 30, 2016, respectively. These gains and losses are included in ‘Foreign exchange and other gains (losses)’ in the condensed consolidated statements of income (loss).

Cash Flow Hedges

Notional amounts of open derivative contracts designated as cash flow hedges (in thousands):



Description of Contract	September 30, 2017		December 31, 2016
FX derivative contracts to be exchanged for British Pounds	$	16,928	$	6,663
FX derivative contracts to be exchanged for Japanese Yen	44,618		57,840
FX derivative contracts to be exchanged for Canadian Dollars	13,341		—
Interest rate swap contracts	62,917		63,246
	$	137,804	$	127,749

After-tax net loss associated with derivatives designated as cash flow hedges recorded in the ending balance of AOCI and the amount expected to be reclassified to earnings in the next 12 months (in thousands):



Description of Contract	September 30, 2017			Net Amount Expected to be Reclassified to Earnings in the Next 12 Months
FX derivative contracts	$	(287	)	$	(287	)
Interest rate swap contracts	(261		)	(69		)
	$	(548	)	$	(356	)

Pre-tax gains (losses) for derivative contracts designated as cash flow hedges recognized in Other Comprehensive Income (Loss) (“OCI”) and the amount reclassified to earnings from AOCI (in thousands):



		Three Months Ended September 30,
		2017						2016
Description of Contract	Location in Earnings of Reclassified Gain or Loss	Losses Recognized in OCI			(Losses) Gains Reclassified from AOCI to Earnings			(Losses) Gains Recognized in OCI		Losses Reclassified from AOCI to Earnings
FX derivative contracts	Foreign exchange and other (losses) gains	$	(2,537	)	$	(1,623	)	$	2,535	$	2,795
FX derivative contracts	SG&A	—			269			—		(1,876		)
Interest rate swap contracts	Interest expense	—			797			263		(163		)
		$	(2,537	)	$	(557	)	$	2,798	$	756



		Nine Months Ended September 30,
		2017						2016
Description of Contract	Location in Earnings of Reclassified Gain or Loss	Losses Recognized in OCI			(Losses) Gains Reclassified from AOCI to Earnings			Losses Recognized in OCI			Gains (Losses) Reclassified from AOCI to Earnings
FX derivative contracts	Foreign exchange and other (losses) gains	$	(10,124	)	$	(6,833	)	$	(5,932	)	$	2,943
FX derivative contracts	SG&A	—			1,623			—			(3,437		)
Interest rate swap contracts	Interest expense	—			1,009			(38		)	(252		)
		$	(10,124	)	$	(4,201	)	$	(5,970	)	$	(746	)

The following tables present the fair value on a gross basis, and the location of, derivative contracts reported in the condensed consolidated balance sheets (in thousands):



September 30, 2017	Liability Derivatives
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value ₍₁₎
Interest rate swap contracts	Accrued liabilities	$	875
Interest rate swap contracts	Other long-term liabilities	932
FX derivative contracts	Accrued liabilities	724
Total derivatives designated as hedging instruments		2,531
Derivatives Not Designated as Hedging Instruments
FX derivative contracts	Accrued liabilities	1,456
Total derivatives not designated as hedging instruments		1,456
		$	3,987



December 31, 2016	Asset Derivatives			Liability Derivatives
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value ₍₁₎		Balance Sheet Location	Fair Value ₍₁₎
Interest rate swap contracts	Prepaid expenses and other current assets	$	—	Accrued liabilities	$	942
Interest rate swap contracts	Other assets	—		Other long-term liabilities	1,392
FX derivative contracts	Prepaid expenses and other current assets	4,911		Accrued liabilities	—
Total derivatives designated as hedging instruments		4,911			2,334
Derivatives Not Designated as Hedging Instruments
FX derivative contracts	Prepaid expenses and other current assets	3,358		Accrued liabilities	—
Total derivatives not designated as hedging instruments		3,358			—
		$	8,269		$	2,334


(1)	For the classification of input used to evaluate the fair value of our derivatives, refer to “Note 6. Fair Value Measurements.”