8. Derivatives

Hedging Objectives—We are exposed to certain risks relating to ongoing business operations. The primary risks managed by using derivative instruments are foreign currency exchange rate risk and interest rate risk. Forward contracts on various foreign currencies are entered into to manage the foreign currency exchange rate risk on operational exposure denominated in foreign currencies. Interest rate swaps are entered into to manage interest rate risk associated with our floating-rate borrowings. In accordance with authoritative guidance on accounting for derivatives and hedging, we designate foreign currency forward contracts as cash flow hedges on operational exposure and interest rate swaps as cash flow hedges of floating-rate borrowings.

Cash Flow Hedging Strategy—To protect against the reduction in value of forecasted foreign currency cash flows resulting from export sales over the next year, we have instituted a foreign currency cash flow hedging program. We hedge portions of our expenses denominated in foreign currencies with forward contracts. When the dollar strengthens significantly against the foreign currencies, the decline in present value of future foreign currency revenue is offset by gains in the fair value of the forward contracts designated as hedges. Conversely, when the dollar weakens, the increase in the present value of future foreign currency cash flows is offset by losses in the fair value of the forward contracts.

We enter into interest rate swap agreements to manage interest rate risk exposure. The interest rate swap agreements modify our exposure to interest rate risk by converting floating-rate debt to a fixed rate basis, thus reducing the impact of interest rate changes on future interest expense and net earnings. These agreements involve the receipt of floating rate amounts in exchange for fixed rate interest payments over the life of the agreements without an exchange of the underlying principal amount.

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 (ineffective portion) or hedge components excluded from the assessment of effectiveness, are recognized in the consolidated statements of operations during the current period.

Our interest rate swaps are not designated in a cash flow hedging relationship because we no longer qualified for hedge accounting treatment following the amendment and restatement of our senior secured credit facility in February of 2013 (see Note 7, Debt). Derivatives not designated as hedging instruments are carried at fair value with changes in fair value reflected in the consolidated statement of operations.

Forward Contracts—In order to hedge our operational exposure to foreign currency movements, we are a party to certain foreign currency forward contracts that extend until March 1, 2015. We have designated these instruments as cash flow hedges. No hedging ineffectiveness was recorded in earnings relating to the forwards during the three months ended March 31, 2014 and 2013. As the outstanding contracts settle, it is estimated that $4 million in gains will be reclassified from other comprehensive income (loss) to earnings. We have also entered into short-term forward contracts to hedge a portion of our foreign currency exposure related to travel supplier liability payments. As part of our risk management strategy, these derivatives were not designated for hedge accounting at inception; therefore, the change in fair value of these contracts is recorded in our consolidated statements of operations.

As of March 31, 2014 and December 31, 2013, we had the following unsettled purchased foreign currency forward contracts that were entered into to hedge our operational exposure to foreign currency movements (in thousands, except for average contract rates):


March 31, 2014 Outstanding Notional Amount
Buy Currency	Sell Currency	Foreign Amount		USD Amount		Average Contract Rate

US Dollar	Australian Dollar		5,750	$	5,151		0.8958
Euro	US Dollar		16,350		22,054		1.3489
British Pound Sterling	US Dollar		20,300		32,729		1.6123
Indian Rupee	US Dollar		1,266,000		19,647		0.0155
Polish Zloty	US Dollar		115,750		36,181		0.3126


December 31, 2013 Outstanding Notional Amount
Buy Currency	Sell Currency	Foreign Amount		USD Amount		Average Contract Rate

US Dollar	Australian Dollar		5,625	$	5,041		0.8962
Australian Dollar	US Dollar		975		996		1.0215
Euro	US Dollar		12,800		16,624		1.2988
British Pound Sterling	US Dollar		18,450		28,908		1.5668
Indian Rupee	US Dollar		1,174,000		18,593		0.0158
Polish Zloty	US Dollar		170,400		52,748		0.3096

Interest Rate Swap Contracts—In April 2007, in connection with our then existing senior secured credit facilities, we entered into six interest rate swaps. Under the terms of the swaps, the interest rate payments and receipts are quarterly on the last day of January, April, July and October. The reset dates on the swaps are also the last day of January, April, July and October each year until maturity.

The table below includes the outstanding interest rate swaps as of March 31, 2014. No interest rate swaps matured during the three months ended March 31, 2014 and 2013.

Notional
Amount

Interest Rate
Received

Interest
Rate Paid

Effective Date

Maturity Date

Outstanding:

400 million

1 month LIBOR

2.03

July 29, 2011

September 30, 2014

350 million

1 month LIBOR

2.51

April 30, 2012

September 30, 2014

$750 million

The objective of the swaps is to hedge the interest payments associated with floating-rate liabilities on the notional amounts of a portion of our senior secured debt as summarized in the table above. Our interest rate swaps are not designated in a cash flow hedging relationship because we no longer qualified for hedge accounting treatment following the amendment and restatement of our senior secured credit facility in February of 2013 (see Note 7, Debt). Derivatives not designated as hedging instruments are carried at fair value with changes in fair value reflected in the consolidated statement of operations.

The estimated fair values of our derivatives designated as hedging instruments as of March 31, 2014 and December 31, 2013 are provided below (in thousands):


	Derivative Assets (Liabilities)
Derivatives designated as hedging instruments		Fair Value as of
Derivatives designated as hedging instruments	Balance Sheet Location	March 31, 2014		December 31, 2013

Foreign exchange contracts	Prepaid expenses	$	3,609	$	5,374

The effects of derivative instruments, net of taxes, on other comprehensive income (loss) (“OCI”) for the three months ended March 31, 2014 and 2013 are provided below (in thousands):


Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in OCI on Derivative (Effective Portion)
	Three Months Ended March 31,
	2014		2013

Foreign exchange contracts	$	208	$	(2,108	)


Derivatives in Cash Flow Hedging Relationships	Income Statement Location	Amount of Gain (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)
		Three Months Ended March 31,
		2014		2013

Foreign exchange contracts	Cost of revenue	$	1,683	$	577

As described in Note 7, Debt, on February 19, 2013 we entered into an agreement that amended and restated our existing senior secured credit facilities. As a result, a critical term of the interest rate swap agreements no longer matched the senior secured debt, and we no longer qualified for hedge accounting as of January 1, 2013. For the three months ended March 31, 2014, we reclassified $4 million, or $2 million, net of tax, from OCI to interest expense related to the derivatives that no longer qualify for hedge accounting. As of March 31, 2014, the estimated fair value of interest rate swaps not designated as hedging instruments was an $8 million liability and included in other accrued liabilities in our consolidated balance sheet. The accumulated unrealized loss related to these derivatives was $7 million at March 31, 2014 and will be amortized from other comprehensive income (loss) into interest expense through the maturity date of the respective swap agreements. The adjustment to fair value of these interest rate swap agreements for the three months ended March 31, 2014 was not material to our results of operations. We had no other derivatives not designated as hedging instruments as of March 31, 2014 and 2013. See “—Forward Contracts” for additional information on our purpose for entering into derivatives not designated as hedging instruments and our overall risk management strategies.

Embedded Derivative Related to Senior Secured Notes—The 2019 Notes (see Note 7, Debt) include a contingent call option to redeem up to 40% of the notes in the event of an equity offering at a rate of 108.50%, until May 15, 2015. This contingent call option is not clearly and closely related to the hybrid indenture and therefore requires separate accounting. The change in fair value of the option was not material for the three months ended March 31, 2014 and 2013.