Derivatives and Hedging

In the ordinary course of business, we use derivative instruments, including swaps, forwards and/or options, to manage potential losses from foreign currency exposures and interest bearing assets or liabilities. The principal objective of such derivative instruments is to minimize the risks and/or costs associated with our global financial and operating activities. We do not utilize derivative or other financial instruments for trading or other speculative purposes. We recognize all derivatives as either assets or liabilities on the balance sheet on a gross basis, measure those instruments at fair value and recognize the change in fair value in earnings in the period of change, unless the derivative qualifies as an effective hedge that offsets certain exposures. In 2015, we agreed with almost all of our counterparties with whom we had entered into cross-currency swaps, interest rate swaps or foreign exchange contracts, to enter into bilateral collateralization contracts under which will receive or provide cash collateral, as the case may be, for the net position with each of these counterparties. As of December 31, 2016, cash collateral positions consisted of $7.0 million recorded in accrued and other current liabilities and $1.2 million recorded in prepaid and other current assets in the accompanying consolidated balance sheet. As of December 31, 2015, $7.8 million was recorded in accrued and other current liabilities in the accompanying consolidated balance sheet.

As of December 31, 2016 and 2015, we held derivative instruments that are designated and qualify as cash flow hedges where the effective portion of the gain or loss on the derivative is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings. In 2016 and in 2015, we did not record any hedge ineffectiveness related to any cash-flow hedges in earnings. Based on their valuation as of December 31, 2016, we expect approximately $7.6 million of derivative losses included in accumulated other comprehensive loss will be reclassified into income during the next 12 months. The cash flows derived from derivatives are classified in the consolidated statements of cash flows in the same category as the consolidated balance sheet account of the underlying item.

As of December 31, 2016 and 2015, we held derivative instruments that qualify for hedge accounting as fair value hedges. For derivative instruments that are designated and qualify as a fair value hedge, the effective portion of the gain or loss on the derivative is reflected in earnings. This earnings effect is offset by the change in the fair value of the hedged item attributable to the risk being hedged that is also recorded in earnings. In 2016 and 2015, we concluded there was no ineffectiveness. The cash flows derived from derivatives are classified in the consolidated statements of cash flows in the same category as the consolidated balance sheet account of the underlying item.

Interest Rate Derivatives

We use interest rate derivative contracts to align our portfolio of interest bearing assets and liabilities with our risk management objectives. During 2015, we entered into five cross currency interest rate swaps through 2025 for a total notional amount of €180.0 million which qualify for hedge accounting as cash flow hedges. We determined that no ineffectiveness exists related to these swaps. As of December 31, 2016, the €180.0 million notional swap amount had a fair value of $1.4 million and accrued and unpaid interest of $1.7 million which are recorded in other long-term assets and prepaid and other current assets, respectively, in the accompanying consolidated balance sheet. As of December 31, 2015, this swap had a fair value of $5.3 million and accrued and unpaid interest of $1.6 million which are both recorded in other long-term assets in the accompanying consolidated balance sheet.

During 2014, we entered into interest rate swaps, which effectively fixed the fair value of $200.0 million of our fixed rate private placement debt and qualify for hedge accounting as fair value hedges. We determined that no ineffectiveness exists related to these swaps. As of December 31, 2016, the $200.0 million notional swap amount had a fair value of $3.1 million and accrued and unpaid interest of $0.6 million which are both recorded in other long-term assets and prepaid and other current assets, respectively, in the accompanying consolidated balance sheet. As of December 31, 2015, this swap had a fair value of $5.0 million and accrued and unpaid interest of $0.8 million which are both recorded in other long-term assets in the accompanying balance sheet.

Call Options

We entered into Call Options during 2014 which, along with the sale of the Warrants, represent the Call Spread Overlay entered into in connection with the Cash Convertible Notes and which are more fully described in Note 15. We used $105.2 million of the proceeds from the issuance of the Cash Convertible Notes to pay the premium for the Call Options, and simultaneously received $68.9 million (net of issuance costs) from the sale of the Warrants, for a net cash outlay of $36.3 million for the Call Spread Overlay. The Call Options are intended to address the equity price risk inherent in the cash conversion feature by offsetting cash payments in excess of the principal amount due upon any conversion of the Cash Convertible Notes.

Aside from the initial payment of a premium of $105.2 million for the Call Options, we will not be required to make any cash payments under the Call Options. We will, however, be entitled to receive under the terms of the Call Options an amount of cash generally equal to the amount by which the market price per share of our common stock exceeds the exercise price of the Call Options during the relevant valuation period. The exercise price under the Call Options is equal to the conversion price of the Cash Convertible Notes.

The Call Options, for which our common stock is the underlying security, are a derivative asset that requires mark-to-market accounting treatment due to the cash settlement features until the Call Options settle or expire. The Call Options are measured and reported at fair value on a recurring basis, within Level 2 of the fair value hierarchy. For further discussion of the inputs used to determine the fair value of the Call Options, refer to Note 14. The fair value of the Call Options at December 31, 2016 and 2015 was approximately $185.8 million and $169.0 million, respectively which is recorded in other long-term assets in the accompanying consolidated balance sheet.

The Call Options do not qualify for hedge accounting treatment. Therefore, the change in fair value of these instruments is recognized immediately in our consolidated statements of income in other expense, net. For the years ended December 31, 2016 and 2015, the changes in the fair value of the Call Options resulted in gains of $16.7 million and $21.3 million, respectively. Because the terms of the Call Options are substantially similar to those of the Cash Convertible Notes' embedded cash conversion option, discussed below, we expect the effect on earnings from those two derivative instruments to mostly offset each other.

Cash Convertible Notes Embedded Cash Conversion Option

The embedded cash conversion option within the Cash Convertible Notes is required to be separated from the Cash Convertible Notes and accounted for separately as a derivative liability, with changes in fair value reported in our consolidated statements of income in other expense, net until the cash conversion option settles or expires. For further discussion of the Cash Convertible Notes, refer to Note 15. The initial fair value liability of the embedded cash conversion option was $105.2 million, which simultaneously reduced the carrying value of the Cash Convertible Notes (effectively an original issuance discount). The embedded cash conversion option is measured and reported at fair value on a recurring basis, within Level 2 of the fair value hierarchy. For further discussion of the inputs used to determine the fair value of the embedded cash conversion option, refer to Note 14. The fair value of the embedded cash conversion option at December 31, 2016 and 2015 was approximately $187.5 million and $171.0 million which is recorded in other long-term liabilities in the accompanying balance sheet. For the years ended December 31, 2016 and 2015 the change in the fair value of the embedded cash conversion option resulted in losses of $16.6 million and $21.5 million, respectively.

Foreign Currency Derivatives

As a globally active enterprise, we are subject to risks associated with fluctuations in foreign currencies in our ordinary operations. This includes foreign currency-denominated receivables, payables, debt, and other balance sheet positions including intercompany items. We manage balance sheet exposure on a group-wide basis using foreign exchange forward contracts, foreign exchange options and cross-currency swaps.

Undesignated Derivative Instruments

We are party to various foreign exchange forward, option and swap arrangements which had, at December 31, 2016, an aggregate notional value of $347.6 million and fair values of $3.2 million and $6.1 million included in prepaid and other current assets and accrued and other current liabilities, respectively, which expire at various dates through December 2017. We were party to various foreign exchange forward and swap arrangements which had, at December 31, 2015, an aggregate notional value of $264.2 million and fair values of $1.4 million and $0.5 million included in prepaid and other current assets and accrued and other current liabilities, respectively, which expired at various dates through March 2016. The transactions have been entered into to offset the effects from short-term balance sheet exposure to foreign currency exchange risk. Changes in the fair value of these arrangements have been recognized in other expense, net.

Fair Values of Derivative Instruments

The following table summarizes the fair value amounts of derivative instruments reported in the consolidated balance sheets as of December 31, 2016 and 2015:



	Derivatives in Asset Positions Fair value				Derivatives in Liability Positions Fair value
(in thousands)	2016		2015		2016			2015
Derivative instruments designated as hedges
Interest rate contracts⁽¹⁾	$	6,655	$	12,687	$	—		$	—
Total derivative instruments designated as hedges	$	6,655	$	12,687	$	—		$	—
Undesignated derivative instruments
Call spread overlay	$	185,750	$	169,037	$	(187,546	)	$	(170,951	)
Foreign exchange contracts	3,154		1,393		(6,089		)	(525		)
Total derivative instruments	$	188,904	$	170,430	$	(193,635	)	$	(171,476	)

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(1) The fair value amounts for the interest rate contracts include accrued interest.

Gains and Losses on Derivative Instruments

The following tables summarize the classification and gains and losses on derivative instruments for the years ended December 31, 2016, 2015 and 2014:



Year-Ended December 31, 2016 (in thousands)	Gain/(loss) recognized in AOCI			Location of gain/loss in income statement	(Gain) loss reclassified from AOCI into income			Gain (loss) recognized in income
Cash flow hedges
Interest rate contracts	$	(3,969	)	Other expense, net	$	(6,228	)	n/a

Fair value hedges
Interest rate contracts	$	—		Other expense, net	$	—		$	(1,930	)

Undesignated derivative instruments
Call spread overlay	n/a			Other expense, net	n/a			$	118
Foreign exchange contracts	n/a			Other expense, net	n/a			(6,072		)
								$	(5,954	)



Year-Ended December 31, 2015 (in thousands)	Gain/(loss) recognized in AOCI		Location of (gain) loss in income statement	(Gain) loss reclassified from AOCI into income			Gain (loss) recognized in income
Cash flow hedges
Interest rate contracts	$	5,337	Other expense, net	$	(5,273	)	n/a

Fair value hedges
Interest rate contracts	$	—	Other expense, net	$	—		$	1,691

Undesignated derivative instruments
Call spread overlay	n/a		Other expense, net	n/a			$	(171	)
Foreign exchange contracts	n/a		Other expense, net	n/a			21,434
							$	21,263



Year-Ended December 31, 2014 (in thousands)	Gain/(loss) recognized in AOCI		Location of (gain) loss in income statement	(Gain) loss reclassified from AOCI into income		Gain (loss) recognized in income
Fair value hedges
Interest rate contracts	$	—	Other expense, net	$	—	$	3,294

Undesignated derivative instruments
Call spread overlay	n/a		Other expense, net	n/a		$	(1,743	)
Foreign exchange contracts	n/a		Other expense, net	n/a		$	61,713
						$	59,970

The amounts noted in the table above for accumulated other comprehensive income (AOCI) do not include any adjustment for the impact of deferred income taxes.