Derivatives and Hedging Activities

Risk Management Objective of Using Derivatives

The Company is exposed to certain risk arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, liquidity, and credit risk primarily by managing the amount, sources, and duration of its assets and liabilities and the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the receipt or payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing, and duration of the Company’s known or expected cash receipts and its known or expected cash payments principally related to the Company’s borrowings.

Certain of the Company’s foreign operations expose the Company to fluctuations of foreign exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments to protect the value or fix the amount of certain liabilities in terms of its functional currency, the U.S. dollar.

Cash Flow Hedges of Interest Rate Risk

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps and caps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. Interest rate caps designated as cash flow hedges involve the receipt of variable amounts from a counterparty if interest rates rise above the strike rate on the contract in exchange for an up-front premium. During 2018, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive (loss) income and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis, as documented at hedge inception in accordance with the Company’s accounting policy election. The earnings recognition of excluded components is presented in interest expense. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. Between March 31, 2018 and March 31, 2019, the Company estimates that an additional $0.1 million will be reclassified as a decrease to interest expense.

As of March 31, 2018, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk:



	Number of	At Inception	At March 31, 2018
Interest Rate Derivative	Instruments	Notional	Notional
Interest rate swaps	1	$45,000,000	$37,500,000
Interest rate caps	1	$15,000,000	$15,000,000

Cash Flow Hedges of Foreign Exchange Risk

The Company is exposed to fluctuations in various foreign currencies against its functional currency, the US dollar. The Company uses foreign currency derivatives including cross-currency interest rate swaps to manage its exposure to fluctuations in the USD-EUR exchange rate. Cross-currency interest rate swaps involve exchanging fixed rate interest payments for fixed rate interest receipts both of which will occur at the USD-EUR forward exchange rates in effect upon entering into the instrument. The Company designates these derivatives as cash flow hedges of foreign exchange risks.

For derivatives designated and that qualify as cash flow hedges of foreign exchange risk, the gain or loss on the derivative is recorded in accumulated other comprehensive (loss) income and subsequently reclassified in the period(s) during which the hedged transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction. During the next 12 months, the Company estimates that an additional $0.8 million will be reclassified as a decrease to interest expense.

As of March 31, 2018, the Company had the following outstanding foreign currency derivatives that were used to hedge its foreign exchange risks:

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the balance sheet as of March 31, 2018 and December 31, 2017.



		Fair Value of Derivative Instruments
		Asset Derivatives				Liability Derivatives
		March 31, 2018		December 31, 2017		March 31, 2018			December 31, 2017
Derivatives Designated as Hedging Instruments	Balance Sheet Location	Fair Value		Fair Value		Fair Value			Fair Value
Interest rate products	Other assets/liabilities - current	$	108,877	$	243	$	—		$	(71,915	)
Interest rate products	Other assets - non-current	205,468		84,058		—			—
Cross currency contract	Other assets - current	503,159		655,305		—			—
Cross currency contract	Long-term derivative liability	—		—		(4,512,878		)	(2,995,657		)
Total derivatives designated as hedging instruments		$	817,504	$	739,606	$	(4,512,878	)	$	(3,067,572	)

The tables below presents the effect of cash flow hedge accounting on accumulated other comprehensive (loss) income for the three months ended March 31, 2018 and 2017.



Derivatives in Subtopic 815-20 Hedging Relationships	Amount of Gain or (Loss) Recognized in OCI on Derivatives
	Three Months Ended March 31,
	2018		2017
Derivatives in Cash Flow Hedging Relationships
Interest rate products	$	268,549	$	—
Cross currency contract	1,119,762		—
Total	$	1,388,311	$	—



Location of Gain or (Loss) Reclassified from Accumulated OCI into Income	Amount of Gain or (Loss) Reclassified from Accumulated OCI into Income
	Three Months Ended March 31,
	2018			2017
Interest expense	$	(38,279	)	$	—
Interest expense	219,500			—
Gain (loss) on foreign currency transactions	(1,283,667		)	—
Total	$	(1,102,446	)	$	—

The table below presents the effect of the Company’s derivative financial instruments on the income statement for the three months ended March 31, 2018 and 2017.



	Three Months Ended March 31,
	2018
	Interest Expense			Foreign Currency Adjustment
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded	$	(607,686	)	$	103,043
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	181,221		$	(1,283,667	)
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring	$	—		$	—



	Three Months Ended March 31,
	2017
	Interest Expense			Foreign Currency Adjustment
Total amounts of income and expense line items presented in the statement of financial performance in which the effects of fair value or cash flow hedges are recorded	$	(2,332	)	$	(2,200	)
Gain or (loss) on cash flow hedging relationships in Subtopic 815-20
Interest contracts
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income	$	—		$	—
Amount of gain or (loss) reclassified from accumulated other comprehensive income into income as a result that a forecasted transaction is no longer probable of occurring	$	—		$	—

As of March 31, 2018, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $4.1 million. As of March 31, 2018, the Company had not posted any collateral related to these agreements. If the Company had breached any of credit-risk related provisions at March 31, 2018, it could have been required to settle its obligations under the agreements at their termination value of $4.1 million.

Foreign Currency Derivative

Number of Instruments

Pay Fixed Notional

Receive Fixed Notional

Cross-currency interest rate swap

€42,000,517

$48,750,000

(amortizing to €40,277,419 as of March 31, 2018)

(amortizing to $46,750,000 as of March 31, 2018)