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Derivatives and Risk Management

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Risk Management

Note 9. Derivatives and Risk Management

Due to the global nature of our operations, we are exposed to foreign currency exchange rate fluctuations. We enter into FX derivative contracts to reduce the impact of foreign currency exchange rate fluctuations on earnings and cash flow. We are also exposed to equity price risk in connection with our Notes, including exchange and settlement provisions based on the price of our ordinary shares at exchange or maturity of the Notes. In addition, the capped call transactions associated with the Notes also include settlement provisions that are based on the price of our ordinary shares, subject to a capped price per share.

We measure all outstanding derivatives each period end at fair value and report the fair value as either financial assets or liabilities on 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, changes in the fair value of the derivative will be 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 our condensed consolidated statements of income (loss) as shown in the tables below. We evaluate hedge effectiveness at inception. Cash flows from derivative contracts are reported as operating activities on our condensed consolidated statements of cash flows.

Freestanding FX Derivative Contracts

The gross notional amount of FX derivative contracts not designated as hedging instruments outstanding at September 30, 2020 and December 31, 2019 was $332.2 million and $338.0 million, respectively. These derivative contracts are designed to offset the FX effects in earnings of various intercompany loans and trade receivables. We recorded net (losses) gains for these freestanding derivatives of $(11.7) million and $3.1 million for the three months ended September 30, 2020 and 2019, respectively, and $(4.8) million and $6.8 million for the nine months ended September 30, 2020 and 2019, respectively. These (losses) and gains are included in foreign exchange and other gains (losses) on our condensed consolidated statement of income (loss).

Counterparty Credit Risk

We are exposed to credit risk in the event of non-performance by the counterparties to our derivatives at maturity.

The two counterparties to the capped call transactions are financial institutions. To limit our credit risk, we selected financial institutions with a minimum long-term investment grade credit rating. Our exposure to the credit risk of the counterparties is not secured by any collateral. If a counterparty becomes subject to insolvency proceedings, we will become an unsecured creditor in those proceedings, with a claim equal to our exposure at that time under the capped call transactions with that counterparty.

To manage credit risk with respect to our other derivatives, the Company selects and periodically reviews counterparties based on credit ratings, limits its exposure with respect to each counterparty, and monitors the market positions. However, if one or more of these counterparties were in a liability position to the Company and were unable to meet their obligations, any transactions with the counterparty could be subject to early termination, which could result in substantial losses for the Company.

Cash Flow Hedges

The gross notional amounts of open derivative contracts designated as cash flow hedges at September 30, 2020 and December 31, 2019 were as follows (in thousands):

Description of Derivative Contract						September 30, 2020						December 31, 2019
FX derivative contracts to be exchanged for British Pounds						$	7,610					$	10,128
FX derivative contracts to be exchanged for Japanese Yen						16,023						25,342
FX derivative contracts to be exchanged for Euros						36,553						48,838
Interest rate swap contracts (1)						—						22,442
						$	60,186					$	106,750

(1)Interest rate swap contracts were de-designated upon the repayment of the 2014 European Investment Bank loan. Refer to “Note 8. Financing Arrangements.”

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 are as follows (in thousands):

Description of Derivative Contract						After-Tax Net Gain in AOCI as of September 30, 2020						After-Tax Net Gain in AOCI as of Amount Expected to be Reclassified to Earnings in Next 12 Months
FX derivative contracts						$	1,512					$	1,512

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 were as follows (in thousands):

												Three Months Ended September 30,
												2020												2019
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						Gains (Losses) Reclassified from AOCI to Earnings
FX derivative contracts						Foreign exchange and other gains (losses)						$	1,482					$	(692)					$	(689)					$	963
FX derivative contracts						SG&A						—						534						—						(742)
Interest rate swap contracts						Interest expense						—						—						—						(40)
												$	1,482					$	(158)					$	(689)					$	181

												Nine Months Ended September 30,
												2020												2019
Description of Derivative Contract						Location in Earnings of Reclassified Gain or Loss						Gains Recognized in OCI						(Losses) Gains Reclassified from AOCI to Earnings						Gains Recognized in OCI						Gains (Losses) Reclassified from AOCI to Earnings
FX derivative contracts						Foreign exchange and other gains (losses)						$	632					$	(777)					$	933					$	3,094
FX derivative contracts						SG&A						—						209						—						(1,470)
Interest rate swap contracts						Interest expense						—						(113)						—						(26)
												$	632					$	(681)					$	933					$	1,598

We offset fair value amounts associated with our derivative instruments on our condensed consolidated balance sheets that are executed with the same counterparty under master netting arrangements. Our netting arrangements include a right to set off or net together purchases and sales of similar products in the settlement process.

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

September 30, 2020

Asset Derivatives

Liability Derivatives

Derivatives Designated as Hedging Instruments

Balance Sheet Location

Fair Value (1)

Balance Sheet Location

Fair Value (1)

FX derivative contracts

Prepaid expenses and other current assets

$

1,775

FX derivative contracts

Accrued liabilities

12

Total derivatives designated as hedging instruments

1,787

Derivatives Not Designated as Hedging Instruments

Interest rate swap contracts

Accrued liabilities

$

139

FX derivative contracts

Prepaid expenses and other current assets

4,052

Accrued liabilities

51

FX derivative contracts

Prepaid expense and other current assets

34

Capped call derivatives

Other assets

38,999

Embedded exchange feature

Long-term derivative liability

59,398

Other derivatives

Accrued liabilities

1,160

Other derivatives

Long-term derivative liability

190

Total derivatives not designated as hedging instruments

43,051

60,972

Total derivatives

$

44,838

$

60,972

December 31, 2019						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																		Accrued liabilities						$	313
Interest rate swap contracts																		Long-term derivative liability						61
FX derivative contracts						Prepaid expenses and other current assets						$	148					Accrued liabilities						169
FX derivative contracts						Accrued liabilities						387
Total derivatives designated as hedging instruments												535												543
Derivatives Not Designated as Hedging Instruments
FX derivative contracts						Accrued liabilities						26						Accrued liabilities						3,104
FX derivative contracts																		Prepaid expenses and other current assets						33
Total derivatives not designated as hedging instruments												26												3,137
Total derivatives												$	561											$	3,680

(1)For the classification of inputs used to evaluate the fair value of our derivatives, refer to “Note 7. Fair Value Measurements.”

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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

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