Derivatives and Hedging

6 Months Ended

Jun. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging

Derivatives and Hedging

The Company is exposed to various risks arising from business operations and market conditions, including fluctuations in interest rates and certain foreign currencies. When deemed appropriate, the Company uses derivative and non-derivative instruments as risk management tools to mitigate the potential impact of interest rate and foreign exchange rate risks. The objective of using these tools is to reduce fluctuations in the Company’s earnings and cash flows associated with changes in these rates. Derivative financial instruments are not used for trading or other speculative purposes. The Company has not historically incurred, and does not expect to incur in the future, any losses as a result of counterparty default related to derivative instruments.

The Company formally documents relationships between hedging instruments and hedged items, as well as the risk management objective and strategy for undertaking various hedge transactions. This process includes linking cash flow hedges to specific forecasted transactions or variability of cash flow to be paid. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the designated derivative and non-derivative instruments that are used in hedging transactions are highly effective in offsetting changes in the cash flows of the hedged items. When a designated instrument is determined not to be highly effective as a hedge or the underlying hedged transaction is no longer probable, hedge accounting is discontinued prospectively.

Cash Flow Hedges

In July 2018 and February 2019, the Company entered into interest rate swaps to mitigate variability in forecasted interest payments on $500,000 and $300,000, respectively, of the Company’s U.S. dollar-denominated unsecured variable rate debt. The interest rate swaps effectively convert a portion of the floating rate interest payment into a fixed rate interest payment. The Company designated the interest rate swaps as qualifying hedging instruments and accounts for these derivatives as cash flow hedges. The fair values of the interest rate cash flow hedges were not material as of June 30, 2019. Gains or losses related to the interest rate cash flow hedges were not material during the three and six months ended June 30, 2019.

Hedges of Net Investments in Foreign Operations

In July 2018, concurrent with the cash flow hedge described above, the Company entered into a cross-currency interest rate swap agreement to effectively convert $500,000 of the U.S. dollar-denominated unsecured variable rate debt to fixed-rate Euro-denominated debt. In February 2019, the Company terminated the cross-currency interest rate swap agreement and entered into a forward contract to effectively convert $800,000 of the U.S. dollar-denominated unsecured debt to Euro-denominated debt. No gains or losses were recognized at termination. The risk management objective of these transactions is to manage foreign currency risk relating to a European subsidiary and reduce the variability in the functional currency equivalent cash flows of the unsecured variable rate debt. The Company designated the instruments as qualifying hedging instruments and accounts for these derivatives as a hedge of the foreign currency exchange rate exposure of an equal amount of the Company's Euro-denominated net investment in a European subsidiary. The fair value of the forward currency hedge was not material as of June 30, 2019. Gains or losses related to the cross-currency interest rate swap and the forward contract were not material during the three and six months ended June 30, 2019.

As of June 30, 2019, the Company also had designated €700,000 of the face value of Euro-denominated debt, a non-derivative financial instrument, as a hedge of the foreign currency exchange rate exposure of an equal amount to the Company's Euro-denominated net investment in a European subsidiary. As of June 30, 2019, the Euro-denominated debt had a total carrying amount of $795,900, which is included in long-term debt in the Company’s condensed consolidated balance sheets. For the three months ended June 30, 2019, the Company recorded a loss, net of tax, of approximately $7,716, and for the six months ended June 30, 2019, the Company recorded a gain, net of tax, of approximately $3,730. For the three and six months ended June 30, 2018, the Company recorded a gain, net of tax, of approximately $32,755 and $16,045, respectively. These amounts are recorded in the cash flow and net investment hedges section of accumulated other comprehensive loss in the Company’s condensed consolidated statements of income and comprehensive income.

The Company did not reclassify any gains or losses related to net investment hedges from accumulated other comprehensive loss into earnings during the three or six months ended June 30, 2019. Amounts would only be reclassified into earnings if the European subsidiary were liquidated, or otherwise disposed.