Derivative Instruments, Hedging Activities and Fair Value

Derivative Instruments and Hedging Activities

The Company uses derivative instruments, including foreign currency exchange forward contracts, interest rate swaps and cross-currency interest rate swaps ("CCIRs"), to manage certain foreign currency and interest rate exposures. Derivative instruments are viewed as risk management tools by the Company and are not used for trading or speculative purposes.

All derivative instruments are recorded on the Condensed Consolidated Balance Sheets at fair value. Changes in the fair value of derivatives used to hedge foreign currency denominated balance sheet items are reported directly in earnings, along with offsetting transaction gains and losses on the items being hedged. Derivatives used to hedge forecasted cash flows associated with foreign currency commitments may be accounted for as cash flow hedges, as deemed appropriate if the criteria for hedge accounting are met. Gains and losses on derivatives designated as cash flow hedges are deferred in Accumulated other comprehensive loss, a separate component of equity, and reclassified to earnings in a manner that matches the timing of the earnings impact of the hedged transactions. The ineffective portion of all hedges, if any, is recognized currently in earnings.

The fair value of outstanding derivative contracts recorded as assets and liabilities on the Condensed Consolidated Balance Sheets was as follows:



	Asset Derivatives			Liability Derivatives
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
March 31, 2018
Derivatives designated as hedging instruments:
Foreign currency exchange forward contracts	Other current assets	$	1,755
Interest rate swaps	Other current assets	1,198
Interest rate swaps	Other assets	1,991		Other liabilities	$	612
Total derivatives designated as hedging instruments		$	4,944		$	612
Derivatives not designated as hedging instruments:
Foreign currency exchange forward contracts	Other current assets	$	3,528	Other current liabilities	$	9,227



	Asset Derivatives			Liability Derivatives
(In thousands)	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
December 31, 2017
Derivatives designated as hedging instruments:
Foreign currency exchange forward contracts	Other current assets	$	2,329	Other current liabilities	$	153
Interest rate swaps	Other current assets	464
Interest rate swaps	Other assets	170		Other liabilities	1,368
Total derivatives designated as hedging instruments		$	2,963		$	1,521
Derivatives not designated as hedging instruments:
Foreign currency exchange forward contracts	Other current assets	$	2,915	Other current liabilities	$	6,970

All of the Company's derivatives are recorded in the Condensed Consolidated Balance Sheets at gross amounts and not offset. All of the Company's interest rate swaps, CCIRs and certain foreign currency exchange forward contracts are transacted under International Swaps and Derivatives Association ("ISDA") documentation. Each ISDA master agreement permits the net settlement of amounts owed in the event of default. The Company's derivative assets and liabilities subject to enforceable master netting arrangements resulted in a net asset of $0.6 million and a net liability of $0.2 million at March 31, 2018 and December 31, 2017, respectively.

The effect of derivative instruments on the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Income, was as follows:

Derivatives Designated as Hedging Instruments



(In thousands)	Amount Recognized in Other Comprehensive Income (“OCI”) on Derivative - Effective Portion				Location of Amount Reclassified from Accumulated OCI into Income - Effective Portion	Amount Reclassified from Accumulated OCI into Income - Effective Portion or Equity			Location of Amount Recognized in Income on Derivative - Ineffective Portion and Amount Excluded from Effectiveness Testing	Amount Recognized in Income on Derivative - Ineffective Portion and Amount Excluded from Effectiveness Testing
Three Months Ended March 31, 2018:
Foreign currency exchange forward contracts	$	240			Product revenues	$	(212	)		$	—
Foreign currency exchange forward contracts	—				Retained earnings (b)	(1,520		)		—
Interest rate swaps	3,310					—				—
Cross-currency interest rate swaps	(93		)	(c)	Interest expense	271				—
	$	3,457				$	(1,461	)		$	—
Three Months Ended March 31, 2017:
Foreign currency exchange forward contracts	$	(236	)		Cost of services and products sold	$	1			$	—
Interest rate swaps	(522		)			—				—
Cross-currency interest rate swaps	(128		)		Interest Expense	242			Cost of services and products sold	(210		)	(a)
	$	(886	)			$	243			$	(210	)

(a) These gains (losses) offset foreign currency fluctuation effects on the debt principal.

(b) The Company has adopted the new revenue recognition standard utilizing the modified retrospective transition method, including use of practical expedients. See Note 2, Recently Adopted and Recently Issued Accounting Standards for additional information.

(c) Amounts represent changes in foreign currency translation related to balances in Accumulated other comprehensive loss.

Derivatives Not Designated as Hedging Instruments



	Location of Gain (Loss) Recognized in Income on Derivative	Amount of Gain (Loss) Recognized in Income on Derivative for the Three Months Ended March 31 (d)
(In thousands)	Location of Gain (Loss) Recognized in Income on Derivative	2018			2017
Foreign currency exchange forward contracts	Cost of services and products sold	$	(5,466	)	$	1,550

(d) These gains (losses) offset amounts recognized in cost of services and products sold principally as a result of intercompany or third party foreign currency exposures.

Foreign Currency Exchange Forward Contracts

The Company conducts business in multiple currencies and, accordingly, is subject to the inherent risks associated with foreign exchange rate movements. The financial position and results of operations of substantially all of the Company’s foreign subsidiaries are measured using the local currency as the functional currency. Foreign currency-denominated assets and liabilities are translated into U.S. dollars at the exchange rates existing at the respective balance sheet dates, and income and expense items are translated at the average exchange rates during the respective periods. The aggregate effects of translating the balance sheets of these subsidiaries are deferred and recorded in Accumulated other comprehensive loss, which is a separate component of equity.

The Company uses derivative instruments to hedge cash flows related to foreign currency fluctuations. Foreign currency exchange forward contracts outstanding are part of a worldwide program to minimize foreign currency exchange operating income and balance sheet exposure by offsetting foreign currency exposures of certain future payments between the Company and various subsidiaries, suppliers or customers. The unsecured contracts are with major financial institutions. The Company may be exposed to credit loss in the event of non-performance by the contract counterparties. The Company evaluates the creditworthiness of the counterparties and does not expect default by them. Foreign currency exchange forward contracts are used to hedge commitments, such as foreign currency debt, firm purchase commitments and foreign currency cash flows for certain export sales transactions.

The following tables summarize, by major currency, the contractual amounts of the Company’s foreign currency exchange forward contracts in U.S. dollars. The “Buy” amounts represent the U.S. dollar equivalent of commitments to purchase foreign currencies, and the “Sell” amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies. The recognized gains and losses offset amounts recognized in cost of services and products sold principally as a result of intercompany or third party foreign currency exposures.

Contracted Amounts of Foreign Currency Exchange Forward Contracts Outstanding at March 31, 2018:



(In thousands)	Type	U.S. Dollar Equivalent		Maturity	Recognized Gain (Loss)
British pounds sterling	Sell	$	77,579	April 2018	$	(202	)
British pounds sterling	Buy	10,789		April 2018 through May 2018	134
Euros	Sell	311,405		April 2018 through December 2018	(6,322		)
Euros	Buy	203,648		April 2018 through November 2018	3,613
Other currencies	Sell	41,660		April 2018 through August 2018	(1,148		)
Other currencies	Buy	2,901		April 2018	(19		)
Total		$	647,982		$	(3,944	)

Contracted Amounts of Foreign Currency Exchange Forward Contracts Outstanding at December 31, 2017:



(In thousands)	Type	U.S. Dollar Equivalent		Maturity	Recognized Gain (Loss)
British pounds sterling	Sell	$	76,761	January 2018	$	(769	)
British pounds sterling	Buy	5,960		January 2018	72
Euros	Sell	314,649		January 2018 through December 2018	(4,916		)
Euros	Buy	223,111		January 2018 through November 2018	4,564
Other currencies	Sell	39,889		January 2018 through June 2018	(1,049		)
Other currencies	Buy	11,487		January 2018	219
Total		$	671,857		$	(1,879	)

In addition to foreign currency exchange forward contracts, the Company designates certain loans as hedges of net investments in international subsidiaries. The Company recorded pre-tax net gains of $9.5 million and $1.9 million during the three months ended March 31, 2018 and March 31, 2017, respectively, in Accumulated other comprehensive loss.

Interest Rate Swaps

The Company uses interest rate swaps in conjunction with certain debt issuances in order to secure a fixed interest rate. The interest rate swaps are recorded on the Condensed Consolidated Balance Sheets at fair value, with changes in value attributed to the effect of the swaps’ interest spread and changes in the credit worthiness of the counter-parties recorded in Accumulated other comprehensive loss.

In January 2017 and February 2018, the Company entered into a series of interest rate swaps that cover the period from 2018 through 2022, and had the effect of converting $300.0 million of the Term Loan Facility from floating-rate to fixed-rate beginning in 2018. The fixed rates provided by the swaps replace the adjusted LIBOR rate in the interest calculation, ranging from 1.65% for 2018 to 3.124% for 2022.

The following table indicates the notional amounts of the Company's interest rate swaps at March 31, 2018:



	Annual Notional Amount		Interest Rates
(In millions)	Annual Notional Amount		Receive	Pay
Maturing 2018 through 2022	$	300.0	Floating U.S. dollar rate	Fixed U.S. dollar rate

Cross-Currency Interest Rate Swaps

The Company may use CCIRs in conjunction with certain debt issuances in order to secure a fixed local currency interest rate. Under these CCIRs, the Company receives interest based on a fixed or floating U.S. dollar rate and pays interest on a fixed local currency rate based on the contractual amounts in dollars and the local currency, respectively. At maturity, there is also the payment of principal amounts between currencies. The CCIRs are recorded on the Condensed Consolidated Balance Sheets at fair value, with changes in value attributed to the effect of the swaps' interest spread and changes in the credit worthiness of the counter-parties recorded in Accumulated other comprehensive loss. Changes in value attributed to the effect of foreign currency fluctuations are recorded on the Condensed Consolidated Statements of Operations and offset currency fluctuation effects on the debt principal. The Company had no outstanding CCIRs at March 31, 2018.

Fair Value of Derivative Assets and Liabilities and Other Financial Instruments

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price). The Company utilizes market data or assumptions that the Company believes market participants would use in valuing the asset or liability, including assumptions about risk and the risks inherent in the inputs to the valuation technique.

The fair value hierarchy distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs), and (2) an entity’s own assumptions about market participant assumptions based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which give the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The three levels of the fair value hierarchy are described below:


•	Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

•

Level 2—Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means.


•	Level 3—Inputs that are both significant to the fair value measurement and unobservable.

In instances in which multiple levels of inputs are used to measure fair value, hierarchy classification is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability. The following table indicates the fair value hierarchy of the financial instruments of the Company:



Level 2 Fair Value Measurements (In thousands)	March 31 2018		December 31 2017
Assets
Foreign currency exchange forward contracts	$	5,283	$	5,244
Interest rate swaps	3,189		634
Liabilities
Foreign currency exchange forward contracts	9,227		7,123
Interest rate swaps	612		1,368

The Company primarily applies the market approach for recurring fair value measurements and endeavors to utilize the best available information. Accordingly, the Company utilizes valuation techniques that maximize the use of observable inputs, such as forward rates, interest rates, the Company’s credit risk and counterparties’ credit risks, and which minimize the use of unobservable inputs. The Company is able to classify fair value balances based on the ability to observe those inputs. Foreign currency exchange forward contracts, interest rate swaps and CCIRs are based upon pricing models using market-based inputs (Level 2). Model inputs can be verified, and valuation techniques do not involve significant management judgment.

The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable, accrued liabilities and short-term borrowings approximate fair value due to the short-term maturities of these assets and liabilities. At March 31, 2018 and December 31, 2017, the total fair value of long-term debt (excluding deferred financing costs), including current maturities, was $643.5 million and $599.1 million, respectively, compared with a carrying value of $636.8 million and $593.7 million, respectively. Fair values for debt are based on pricing models using market based inputs (Level 2) for similar issues or on the current rates offered to the Company for debt of the same remaining maturities.