Derivatives and Hedging Activities

Derivatives Designated as Hedging Instruments

Net Investment Hedges. The Company is exposed to the impact of foreign exchange rate fluctuations on its investments in foreign subsidiaries whose functional currencies are other than the U.S. dollar. In order to mitigate the impact of foreign currency exchange rates, the Company has entered into various foreign currency loans which are designated as hedges against the Company's net investment in foreign subsidiaries. As of September 30, 2016 and December 31, 2015, the total principal amount of foreign currency loans, which were designated as net investment hedges, was $674,873,000 and $411,881,000, respectively. In March 2016, the Company began using foreign exchange forward contracts to hedge against the effect of foreign exchange rate fluctuations on a portion of its net investment in the foreign subsidiaries. For a net investment hedge, changes in the fair value of the hedging instrument designated as a net investment hedge, except the ineffective portion and forward points, are recorded as a component of other comprehensive income in the condensed consolidated balance sheet.

The Company recorded net foreign exchange gains of $5,542,000 and $44,426,000 in other comprehensive income (loss) for the three and nine months ended September 30, 2016, respectively. The Company recorded net foreign exchange gains of $4,426,000 and net foreign exchange losses of $5,963,000 in other comprehensive income (loss) for the three and nine months ended September 30, 2015, respectively. The Company recorded no ineffectiveness from its net investment hedges for the three and nine months ended September 30, 2016 and 2015.

Cash Flow Hedges. The Company hedges its exposure to foreign currency exchange rate fluctuations for forecasted revenues and expenses in its EMEA region in order to help manage the Company’s exposure to foreign currency exchange rate fluctuations between the U.S. dollar and the British Pound, Euro and Swiss Franc. The foreign currency forward and option contracts that the Company uses to hedge this exposure are designated as cash flow hedges under the accounting standard for derivatives and hedging. The Company also uses purchased collar options to manage a portion of its exposure to foreign currency exchange rate fluctuations, where the Company writes a foreign currency call option and purchases a foreign currency put option. When two or more derivative instruments in combination are jointly designated as a cash flow hedging instrument, they are treated as a single instrument.

Effective January 1, 2015, the Company entered into intercompany hedging instruments (“intercompany derivatives”) with a wholly-owned subsidiary of the Company and simultaneously entered into derivative contracts with unrelated parties to hedge certain forecasted revenues and expenses denominated in currencies other than the U.S. dollar.

The following disclosure is prepared on a consolidated basis. Assets and liabilities resulting from intercompany derivatives have been eliminated in consolidation.

As of September 30, 2016, the Company’s cash flow hedges had maturity dates ranging from October 2016 to September 2018 as follows (in thousands):



	Notional Amount		Fair Value ⁽¹⁾			Accumulated other comprehensive income (loss) ^(2) (3)
Derivative assets	$	388,269	$	25,353		$	53,713
Derivative liabilities	167,706		(3,750		)	(33,791		)
	$	555,975	$	21,603		$	19,922


⁽¹⁾	All derivative assets related to cash flow hedges are included in the condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.


⁽²⁾	Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss).


⁽³⁾	The Company recorded a net gain of $13,994 within accumulated other comprehensive income (loss) relating to cash flow hedges that will be reclassified to revenue and expenses as they mature in the next 12 months.

As of December 31, 2015, the Company’s cash flow hedges had maturities dates ranging from January 2016 to December 2017 as follows (in thousands):



	Notional Amount		Fair Value ⁽¹⁾			Accumulated other comprehensive income (loss)⁽²⁾⁽³⁾
Derivative assets	$	367,330	$	16,027		$	34,578
Derivative liabilities	47,447		(813		)	(19,709		)
	$	414,777	$	15,214		$	14,869


⁽¹⁾	All derivative assets related to cash flow hedges are included in the condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.


⁽²⁾	Included in the condensed consolidated balance sheets within accumulated other comprehensive income (loss).


⁽³⁾	The Company recorded a net gain of $12,940 within accumulated other comprehensive income (loss) relating to cash flow hedges that will be reclassified to revenue and expense as they mature over the next 12 months.

During the three months ended September 30, 2016 and 2015, the ineffective and excluded portions of cash flow hedges recognized in other income (expense) were not significant. During the three months ended September 30, 2016, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenue was $10,063,000 and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses was $4,987,000. During the three months ended September 30, 2015, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenue was $5,590,000 and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses were not significant.

During the nine months ended September 30, 2016 and 2015, the ineffective portions of cash flow hedges recognized in other income (expense) were not significant. During the nine months ended September 30, 2016, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenue was $22,671,000 and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses was $11,664,000. During the nine months ended September 30, 2015, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenue was $21,096,000 and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses was $4,167,000.

Derivatives Not Designated as Hedging Instruments

Embedded Derivatives. The Company is deemed to have foreign currency forward contracts embedded in certain of the Company’s customer agreements that are priced in currencies different from the functional or local currencies of the parties involved. These embedded derivatives are separated from their host contracts and carried on the Company’s balance sheet at their fair value. The majority of these embedded derivatives arise as a result of the Company’s foreign subsidiaries pricing their customer contracts in the U.S. dollar. Gains and losses on these embedded derivatives are included within revenues in the Company’s condensed consolidated statements of operations. During the three months ended September 30, 2016 and 2015, gains (losses) associated with these embedded derivatives were not significant. During the nine months ended September 30, 2016, the losses associated with these embedded derivatives were $7,287,000. During the nine months ended September 30, 2015, gains (losses) associated with these embedded derivatives were not significant.

Economic Hedges of Embedded Derivatives. The Company uses foreign currency forward contracts to manage the foreign exchange risk associated with the Company’s customer agreements that are priced in currencies different from the functional or local currencies of the parties involved (“economic hedges of embedded derivatives”). Foreign currency forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Gains and losses on these contracts are included in revenues along with gains and losses of the related embedded derivatives. The Company entered into various economic hedges of embedded derivatives during the three and nine months ended September 30, 2016 and 2015. During the three months ended September 30, 2016 and 2015, the gains (losses) associated with these contracts were not significant. During the nine months ended September 30, 2016, the gains associated with these contracts were $5,266,000. During the nine months ended September 30, 2015, the net losses from these contracts were $2,019,000.

Foreign Currency Forward and Option Contracts. The Company also uses foreign currency forward and option contracts to manage the foreign exchange risk associated with certain foreign currency-denominated monetary assets and liabilities. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of its foreign currency-denominated assets and liabilities change. Gains and losses on these contracts are included in other income (expense), net, along with foreign currency gains and losses of the related foreign currency-denominated assets and liabilities associated with these foreign currency forward and option contracts. The Company entered into various foreign currency forward and option contracts during the three and nine months ended September 30, 2016 and 2015. During the three and nine months ended September 30, 2016, the Company recognized net gains of $3,169,000 and $44,649,000, respectively, associated with these contracts. During the three and nine months ended September 30, 2015, the Company recognized net gain of $12,776,000 and $10,315,000, respectively, associated with these contracts.

Offsetting Derivative Assets and Liabilities

The following table presents the fair value of derivative instruments recognized in the Company’s condensed consolidated balance sheets as of September 30, 2016 (in thousands):



	Gross Amounts		Gross amounts offset in the balance sheet		Net amounts⁽¹⁾		Gross amounts not offset in the balance sheet ⁽²⁾			Net
Assets:
Designated as hedging instruments:
Cash flow hedges
Foreign currency forward and option contracts	$	25,353	$	—	$	25,353	$	(3,385	)	$	21,968
Net Investment Hedges
Foreign currency forward contracts	60		—		60		—			60
	25,413		—		25,413		(3,385		)	22,028
Not designated as hedging instruments:
Embedded derivatives	3,587		—		3,587		—			3,587
Economic hedges of embedded derivatives	234		—		234		(17		)	217
Foreign currency forward contracts	70		—		70		—			70
	3,891		—		3,891		(17		)	3,874
Additional netting benefit	—		—		—		(2,621		)	(2,621		)
	$	29,304	$	—	$	29,304	$	(6,023	)	$	23,281
Liabilities:
Designated as hedging instruments
Cash flow hedges
Foreign currency forward contracts	$	3,750	$	—	$	3,750	$	(3,385	)	$	365
Net Investment Hedges
Foreign currency forward contracts	—		—		—		—			—
	3,750		—		3,750		(3,385		)	365
Not designated as hedging instruments:
Embedded derivatives	3,245		—		3,245		—			3,245
Economic hedges of embedded derivatives	75		—		75		(17		)	58
Foreign currency forward contracts	3,210		—		3,210		—			3,210
	6,530		—		6,530		(17		)	6,513
Additional netting benefit	—		—		—		(2,621		)	(2,621		)
	$	10,280	$	—	$	10,280	$	(6,023	)	$	4,257


⁽¹⁾	As presented in the Company’s condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.


⁽²⁾	The Company enters into master netting agreements with its counterparties for transactions other than embedded derivatives to mitigate credit risk exposure to any single counterparty. Master netting agreements allow for individual derivative contracts with a single counterparty to offset in the event of default.

The following table presents the fair value of derivative instruments recognized in the Company’s condensed consolidated balance sheets as of December 31, 2015 (in thousands):



	Gross Amounts		Gross amounts offset in the balance sheet		Net balance sheet amounts ⁽¹⁾		Gross amounts not offset in the balance sheet ⁽²⁾			Net
Assets:
Designated as hedging instruments:
Foreign currency forward and option contracts	$	16,027	$	—	$	16,027	$	(813	)	$	15,214
Not designated as hedging instruments:
Embedded derivatives	8,926		—		8,926		—			8,926
Economic hedges of embedded derivatives	744		—		744		—			744
Foreign currency forward contracts	43,203		—		43,203		(34,577		)	8,626
	52,873		—		52,873		(34,577		)	18,296
Additional netting benefit	—		—		—		(9,512		)	(9,512		)
	$	68,900	$	—	$	68,900	$	(44,902	)	$	23,998
Liabilities:
Designated as hedging instruments:
Foreign currency forward and option contracts	$	813	$	—	$	813	$	(813	)	$	—
Not designated as hedging instruments:
Embedded derivatives	1,772		—		1,772		—			1,772
Economic hedges of embedded derivatives	417		—		417		—			417
Foreign currency forward contracts	76,923		—		76,923		(34,577		)	42,346
	79,112		—		79,112		(34,577		)	44,535
Additional netting benefit	—		—		—		(9,512		)	(9,512		)
	$	79,925	$	—	$	79,925	$	(44,902	)	$	35,023


⁽¹⁾	As presented in the Company’s condensed consolidated balance sheets within other current assets, other assets, other current liabilities and other liabilities.


⁽²⁾	The Company enters into master netting agreements with its counterparties for transactions other than embedded derivatives to mitigate credit risk exposure to any single counterparty. Master netting agreements allow for individual derivative contracts with a single counterparty to offset in the event of default.