Derivatives and Risk Management

3 Months Ended

Mar. 31, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Note 7. 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 March 31, 2021 and December 31, 2020 was $200.4 million and $352.6 million, respectively. These derivative contracts are designed to offset the FX effects in earnings of various intercompany loans and trade receivables. We recorded net gains for these freestanding derivatives of $7.7 million and $8.1 million for the three months ended March 31, 2021 and 2020, respectively. These gains are included in foreign exchange and other 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.

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

We utilize FX derivative contracts, designed as cash flow hedges, to hedge the variability of cash flows associated with our 12 months U.S. dollar forecasts of revenues and costs denominated in British Pound, Japanese Yen and the Euro. We transfer to earnings from AOCI the gain or loss realized on the FX derivative contracts at the time of invoicing.

The gross notional amounts of open derivative contracts designated as cash flow hedges at March 31, 2021 and December 31, 2020 were as follows (in thousands):


Description of Derivative Contract	March 31, 2021		December 31, 2020
FX derivative contracts to be exchanged for British Pounds	$	10,214	$	9,545
FX derivative contracts to be exchanged for Japanese Yen	16,209		18,637
FX derivative contracts to be exchanged for Euros	41,325		47,444
	$	67,748	$	75,626

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 are as follows (in thousands):


Description of Derivative Contract	After-Tax Net Gain in AOCI as of March 31, 2021		After-Tax Net Gain in AOCI as of Amount Expected to be Reclassified to Earnings in Next 12 Months
FX derivative contracts	$	1,249	$	1,249

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 March 31,
		2021				2020
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 Reclassified from AOCI to Earnings
FX derivative contracts	Foreign exchange and other losses	$	(2,223)	$	(1,496)	$	(2,080)	$	(605)
FX derivative contracts	SG&A	—		685		—		(91)
Interest rate swap contracts	Interest expense	—		—		—		(28)
		$	(2,223)	$	(811)	$	(2,080)	$	(724)

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):


March 31, 2021	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	$	1,048	Accrued liabilities	$	724
FX derivative contracts	Accrued liabilities	331
Total derivatives designated as hedging instruments		1,379			724
Derivatives Not Designated as Hedging Instruments
Interest rate swap contracts				Accrued liabilities	36
FX derivative contracts	Prepaid expenses and other current assets	863		Accrued liabilities	705
Capped call derivatives	Other assets	84,852
Embedded exchange feature				Long-term derivative liability	148,091
Other derivatives				Accrued liabilities	931
Other derivatives				Long-term derivative liability	192
Total derivatives not designated as hedging instruments		85,715			149,955
Total derivatives		$	87,094		$	150,679


December 31, 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	$	1,998	Accrued liabilities	$	14
FX derivative contracts	Accrued liabilities	895
Total derivatives designated as hedging instruments		2,893			14
Derivatives Not Designated as Hedging Instruments
Interest rate swap contracts				Accrued liabilities	74
FX derivative contracts	Prepaid expenses and other current assets	55		Accrued liabilities	4,073
Capped call derivatives	Long-term derivative assets	72,302
Embedded exchange feature				Long-term derivative liability	121,756
Other derivatives				Accrued liabilities	4,106
Other derivatives				Long-term derivative liability	184
Total derivatives not designated as hedging instruments		72,357			130,193
Total derivatives		$	75,250		$	130,207

(1)For the classification of inputs used to evaluate the fair value of our derivatives, refer to “Note 5. Fair Value Measurements.”