Note 10. 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 accumulated other comprehensive income (“AOCI”) until the hedged item is recognized in earnings upon settlement/termination. FX derivative gains and losses in AOCI are reclassified to the condensed consolidated statements of income as shown in the tables below and interest rate swap gains and losses in AOCI are reclassified to interest expense in the condensed consolidated statements of income. 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 FX derivative contracts, not designated as hedging instruments, outstanding at June 30, 2018 and December 31, 2017 was $256.0 million and $231.9 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 $4.1 million and $5.4 million for the three months ended June 30, 2018 and June 30, 2017, respectively and net losses of $11.7 million and $7.2 million for the six months ended June 30, 2018 and June 30, 2017, respectively. The net losses are included in “Foreign exchange and other (losses) gains” in the condensed consolidated statements of income.

Cash Flow Hedges

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



Description of Derivative Contract	June 30, 2018		December 31, 2017
FX derivative contracts to be exchanged for British Pounds	$	11,655	$	16,847
FX derivative contracts to be exchanged for Japanese Yen	22,122		32,302
FX derivative contracts to be exchanged for Canadian Dollars	15,779		16,494
FX derivative contracts to be exchanged for Euros	38,581		—
Interest rate swap contracts	46,570		55,965
	$	134,707	$	121,608

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 twelve months (in thousands):



Description of Derivative Contract	June 30, 2018			Amount Expected to be Reclassified to Earnings in Next 12 Months
FX derivative contracts	$	(1,011	)	$	(1,011	)
Interest rate swap contracts	(253		)	(64		)
	$	(1,264	)	$	(1,075	)

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 June 30,
		2018						2017
Description of Derivative Contract	Location in Earnings of Reclassified Gain or Loss	Losses Recognized in OCI			(Losses) Gains Reclassified from AOCI to Earnings			Losses Recognized in OCI			(Losses) Gains Reclassified from AOCI to Earnings
FX derivative contracts	Foreign exchange and other gains (losses)	$	(25	)	$	(1,358	)	$	(755	)	$	(532	)
FX derivative contracts	SG&A	—			549			—			544
Interest rate swap contracts	Interest expense	—			(17		)	—			543
		$	(25	)	$	(826	)	$	(755	)	$	555



		Six Months Ended June 30,
		2018					2017
Description of Derivative Contract	Location in Earnings of Reclassified Gain or Loss	Gains Recognized in OCI		(Losses) Gains Reclassified from AOCI to Earnings			Losses Recognized in OCI			(Losses) Gains Reclassified from AOCI to Earnings
FX derivative contracts	Foreign exchange and other gains (losses)	$	189	$	(512	)	$	(7,587	)	$	(5,210	)
FX derivative contracts	SG&A	—		1,174			—			1,354
Interest rate swap contracts	Interest expense	—		(17		)	—			212
		$	189	$	645		$	(7,587	)	$	(3,644	)

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):



June 30, 2018	Liability Derivatives
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value ₍₁₎
Interest rate swap contracts	Accrued liabilities	$	683
Interest rate swap contracts	Other long-term liabilities	538
FX derivative contracts	Accrued liabilities	1,209
Total derivatives designated as hedging instruments		2,430
Derivatives Not Designated as Hedging Instruments
FX derivative contracts	Accrued liabilities	827
Total derivatives not designated as hedging instruments		827
Total derivatives		$	3,257



December 31, 2017	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	$	834
Interest rate swap contracts	Other assets	—		Other long-term liabilities	751
FX derivative contracts	Prepaid expenses and other current assets	—		Accrued liabilities	460
Total derivatives designated as hedging instruments		—			2,045
Derivatives Not Designated as Hedging Instruments
FX derivative contracts	Prepaid expenses and other current assets	519		Accrued liabilities	—
Total derivatives not designated as hedging instruments		519			—
Total derivatives		$	519		$	2,045


(1)	For the classification of inputs used to evaluate the fair value of our derivatives, refer to “Note 8. Fair Value Measurements.”