Derivatives and Hedging Instruments

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 debt obligations, which are designated as hedges against the Company's net investment in foreign subsidiaries. As of December 31, 2018 and 2017, the total principal amount of foreign currency debt obligations designated as net investment hedges, was $4,139.8 million and $3,149.5 million, respectively. From time to time, the Company also uses 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 accumulated other comprehensive income (loss) in the consolidated balance sheet.

The Company recorded pre-tax net foreign exchange gains of $218.3 million and net foreign exchange losses of $235.3 million in other comprehensive income (loss) for the years ended December 31, 2018 and 2017, respectively. The Company recorded no ineffectiveness from its net investment hedges for the years ended December 31, 2018 and 2017.

Cash Flow Hedges. The Company hedges its foreign currency translation exposure for forecasted revenues and expenses in its EMEA region between the U.S. dollar and the British Pound, Euro, Swedish Krona and Swiss Franc. From time to time, 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 enters into intercompany hedging instruments ("intercompany derivatives") with a wholly-owned subsidiary of the Company in order to hedge certain forecasted revenues and expenses denominated in currencies other than the U.S. dollar. Simultaneously, the Company enters into derivative contracts with unrelated third parties to externally hedge the net exposure created by such intercompany derivatives.

The following disclosure is prepared on a consolidated basis. Assets and liabilities resulting from intercompany derivatives have been eliminated in consolidation. As of December 31, 2018, the Company's cash flow hedge instruments had maturity dates ranging from January 2019 to December 2020 as follows (in thousands):



	Notional Amount		Fair Value ⁽¹⁾			Accumulated Other Comprehensive Income (Loss) ⁽²⁾⁽³⁾
Derivative assets	$	642,542	$	38,606		$	27,968
Derivative liabilities	118,324		(865		)	(1,997		)
	$	760,866	$	37,741		$	25,971


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


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


⁽³⁾	The Company recorded a net gain of $21.4 million within accumulated other comprehensive income (loss) relating to cash flow hedges that will be reclassified to revenue and expenses as they mature over the next 12 months.

As of December 31, 2017, the Company's cash flow hedge instruments had maturity dates ranging from January 2018 to October 2019 as follows (in thousands):



	Notional Amount		Fair Value ⁽¹⁾			Accumulated Other Comprehensive Income (Loss) ⁽²⁾⁽³⁾
Derivative assets	$	72,262	$	2,379		$	2,055
Derivative liabilities	440,637		(29,777		)	(34,311		)
	$	512,899	$	(27,398	)	$	(32,256	)


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


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


⁽³⁾	The Company recorded a net loss of $26.7 million within accumulated other comprehensive income (loss) relating to cash flow hedges that will be reclassified to revenue and expenses as they mature over the next 12 months.

During the year ended December 31, 2018, the amount of net gains from the ineffective and excluded portions of cash flow hedges recognized in other income (expense) was $16.5 million. During the year ended December 31, 2017, the amount of net gains from the ineffective and excluded portions of cash flow hedges recognized in other income (expense) was $3.8 million. During the year ended December 31, 2018, the amount of net losses reclassified from accumulated other comprehensive income (loss) to revenues was $30.6 million and the amount of net gains reclassified from accumulated other comprehensive income (loss) to operating expenses were $15.3 million. During the year ended December 31, 2017, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenues was $20.8 million and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses was $11.2 million. During the year ended December 31, 2016, the amount of net gains reclassified from accumulated other comprehensive income (loss) to revenues was $38.4 million and the amount of net losses reclassified from accumulated other comprehensive income (loss) to operating expenses was $19.9 million.

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 consolidated statements of operations. The company recognized a net loss of $6.8 million during the year ended December 31, 2017. During the years ended December 31, 2018 and 2016, the gains or losses associated with these embedded derivatives were not significant.

Economic Hedges of Embedded Derivatives. The Company uses foreign currency forward contracts to help 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 years ended December 31, 2018, 2017 and 2016. During the years ended December 31, 2018 and 2017, the gains or losses associated with these economic hedges of embedded derivatives were not significant. The Company recognized a net gain of $2.9 million during the years ended December 31, 2016.

Foreign currency forward contracts. The Company also uses foreign currency forward contracts to manage the foreign exchange risk associated with certain foreign currency-denominated monetary assets and liabilities on the consolidated balance sheets. As a result of foreign currency fluctuations, the U.S. dollar equivalent values of its foreign currency-denominated monetary assets and liabilities change. Gains and losses on these contracts are included in other income (expense), on a net basis, along with the foreign currency gains and losses of the related foreign currency-denominated monetary assets and liabilities associated with these foreign currency forward contracts. The Company entered into various foreign currency forward contracts during the years ended December 31, 2018, 2017 and 2016. The Company recognized a net gain of $91.2 million during the year ended December 31, 2018, a net loss of $69.0 million during the year ended December 31, 2017 and a net gain of $74.2 million during the year ended December 31, 2016 related to its foreign currency forward contracts.

Offsetting Derivative Assets and Liabilities

The following table presents the fair value of derivative instruments recognized in the Company's consolidated balance sheets as of December 31, 2018 (in thousands):



	Gross Amounts		Gross Amounts Offset in the Consolidated Balance Sheet		Net Consolidated Balance Sheet Amounts⁽¹⁾		Gross Amounts not Offset in the Consolidated Balance Sheet ⁽²⁾			Net
Assets:
Designated as hedging instruments:
Foreign currency forward contracts designated as cash flow hedges	$	38,606	$	—	$	38,606	$	(865	)	$	37,741
Not designated as hedging instruments:
Embedded derivatives	4,656		—		4,656		—			4,656
Economic hedges of embedded derivatives	525		—		525		(104		)	421
Foreign currency forward contracts	29,287		—		29,287		(2,941		)	26,346
	34,468		—		34,468		(3,045		)	31,423
Additional netting benefit	—		—		—		(2,607		)	(2,607		)
	$	73,074	$	—	$	73,074	$	(6,517	)	$	66,557
Liabilities:
Designated as hedging instruments:
Foreign currency forward contracts designated as cash flow hedges	$	865	$	—	$	865	$	(865	)	$	—
Not designated as hedging instruments:
Embedded derivatives	2,426		—		2,426		—			2,426
Economic hedges of embedded derivatives	180		—		180		(104		)	76
Foreign currency forward contracts	6,269		—		6,269		(2,941		)	3,328
	8,875		—		8,875		(3,045		)	5,830
Additional netting benefit	—		—		—		(2,607		)	(2,607		)
	$	9,740	$	—	$	9,740	$	(6,517	)	$	3,223


⁽¹⁾	As presented in the Company's 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. For presentation on the consolidated balance sheets, the Company elects not to offset fair value amounts recognized for derivative instruments under master netting arrangements.

The following table presents the fair value of derivative instruments recognized in the Company's consolidated balance sheets as of December 31, 2017 (in thousands):



	Gross Amounts		Gross Amounts Offset in the Consolidated Balance Sheet		Net Consolidated Balance Sheet Amounts⁽¹⁾		Gross Amounts not Offset in the Consolidated Balance Sheet ⁽²⁾			Net
Assets:
Designated as hedging instruments:
Foreign currency forward contracts designated as cash flow hedges	$	2,379	$	—	$	2,379	$	(2,379	)	$	—
Not designated as hedging instruments:
Embedded derivatives	5,076		—		5,076		—			5,076
Economic hedges of embedded derivatives	325		—		325		—			325
Foreign currency forward contracts	505		—		505		(340		)	165
	5,906		—		5,906		(340		)	5,566
Additional netting benefit	—		—		—		(490		)	(490		)
	$	8,285	$	—	$	8,285	$	(3,209	)	$	5,076
Liabilities:
Designated as hedging instruments:
Foreign currency forward contracts designated as cash flow hedges	$	29,777	$	—	$	29,777	$	(2,379	)	$	27,398
Not designated as hedging instruments:
Embedded derivatives	3,503		—		3,503		—			3,503
Economic hedges of embedded derivatives	20		—		20		—			20
Foreign currency forward contracts	7,547		—		7,547		(340		)	7,207
	11,070		—		11,070		(340		)	10,730
Additional netting benefit	—		—		—		(490		)	(490		)
	$	40,847	$	—	$	40,847	$	(3,209	)	$	37,638


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

⁽²⁾