Derivatives

General. Our earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates, and we seek to mitigate a portion of these risks by entering into derivative contracts. The derivatives we use are interest rate swaps and foreign currency forward contracts. We recognize derivatives as either assets or liabilities at fair value in the accompanying consolidated balance sheets, regardless of whether or not hedge accounting is applied. We report cash flows arising from our hedging instruments consistent with the classification of cash flows from the underlying hedged items. Accordingly, cash flows associated with our derivative programs are classified as operating activities in the accompanying consolidated statements of cash flows.

We formally document, designate and assess the effectiveness of transactions that receive hedge accounting initially and on an ongoing basis. Changes in the fair value of derivatives that qualify for hedge accounting treatment are recorded, net of applicable taxes, in accumulated other comprehensive income (loss), a component of stockholders’ equity in the accompanying consolidated balance sheets. For the ineffective portions of qualifying hedges, the change in fair value is recorded through earnings in the period of change. Changes in the fair value of derivatives not designated as hedging instruments are recorded in earnings throughout the term of the derivative.

Interest Rate Risk. A portion of our debt bears interest at variable interest rates and, therefore, we are subject to variability in the cash paid for interest expense. In order to mitigate a portion of this risk, we use a hedging strategy to reduce the variability of cash flows in the interest payments associated with a portion of the variable-rate debt outstanding under our Second Amended Credit Agreement that is solely due to changes in the benchmark interest rate.

Derivatives Designated as Cash Flow Hedges

On December 19, 2012, we entered into a pay-fixed, receive-variable interest rate swap having an initial notional amount of $150 million with Wells Fargo to fix the one-month LIBOR rate at 0.98%. The variable portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). The interest rates under both the interest rate swap and the underlying debt reset, the swap is settled with the counterparty, and interest is paid on a monthly basis. The notional amount of the interest rate swap is reduced quarterly by 50% of the minimum principal payment due under the terms of our Second Amended Credit Agreement. The interest rate swap is scheduled to expire on December 19, 2017.

On August 5, 2016, we entered into a pay-fixed, receive-variable interest rate swap having an initial notional amount of $42.5 million with Wells Fargo to fix the one-month LIBOR rate at 1.12%. The variable portion of the interest rate swap is tied to the one-month LIBOR rate (the benchmark interest rate). On a monthly basis, the interest rates under both the interest rate swap and the underlying debt reset, the swap is settled with the counterparty, and interest is paid. The notional amount of the interest rate swap increases quarterly by an amount equal to the decrease of the hedge entered into on December 19, 2012, up to the amount of $175.0 million. The interest rate swap is scheduled to expire on July 6, 2021.

At September 30, 2017 and December 31, 2016, our interest rate swaps qualified as cash flow hedges. The fair value of our interest rate swaps at September 30, 2017 was an asset of approximately $4.4 million, which was partially offset by approximately $1.7 million in deferred taxes. The fair value of our interest rate swaps at December 31, 2016 was an asset of approximately $5.0 million, which was partially offset by approximately $1.9 million in deferred taxes.

Foreign Currency Risk. We operate on a global basis and are exposed to the risk that our financial condition, results of operations, and cash flows could be adversely affected by changes in foreign currency exchange rates. To reduce the potential effects of foreign currency exchange rate movements on net earnings, we enter into derivative financial instruments in the form of foreign currency exchange forward contracts with major financial institutions. Our policy is to enter into foreign currency derivative contracts with maturities of up to two years. We are primarily exposed to foreign currency exchange rate risk with respect to transactions and balances denominated in Euros, British Pounds, Chinese Yuan Renminbi, Mexican Pesos, Brazilian Reals, Australian Dollars, Hong Kong Dollars, Swiss Francs, Swedish Krona, Canadian Dollars, Singapore Dollars, Japanese Yen, Korean Won, and Danish Krone. Our consolidated financial statements are denominated in, and our principal currency is, the U.S. Dollar. We do not use derivative financial instruments for trading or speculative purposes. We are not subject to any credit risk contingent features related to our derivative contracts, and counterparty risk is managed by allocating derivative contracts among several major financial institutions.

Derivatives Designated as Cash Flow Hedges

For derivative instruments that are designated and qualify as cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same line item associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss on the derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item, if any (i.e., the ineffective portion) or hedge components excluded from the assessment of effectiveness, are recognized in earnings during the current period. We enter into forward contracts on various foreign currencies to manage the risk associated with forecasted exchange rates which impact revenues, cost of sales, and operating expenses in various international markets. The objective of the hedges is to reduce the variability of cash flows associated with the forecasted purchase or sale of the associated foreign currencies.

We enter into approximately 100 foreign currency cash flow hedges every month. As of September 30, 2017, we had entered into foreign currency forward contracts, which qualified as cash flow hedges, with the following notional amounts (in thousands and in local currencies):



Currency	Symbol	Forward Notional Amount
Euro	EUR	5,555
Swiss Franc	CHF	1,088
Danish Krone	DKK	7,775
British Pound	GBP	2,550
Mexican Peso	MXN	64,425
Swedish Krona	SEK	10,805

Derivatives Not Designated as Cash Flow Hedges

We forecast our net exposure in various receivables and payables to fluctuations in the value of various currencies, and we enter into foreign currency forward contracts to mitigate that exposure. We enter into approximately 20 foreign currency fair value hedges every month. As of September 30, 2017, we had entered into foreign currency forward contracts related to those balance sheet accounts with the following notional amounts (in thousands and in local currencies):



Currency	Symbol	Forward Notional Amount
Euro	EUR	21,801
British Pound	GBP	1,128
Chinese Yuan Renminbi	CNY	39,954
Mexican Peso	MXN	17,537
Brazilian Real	BRL	8,500
Australian Dollar	AUD	4,599
Hong Kong Dollar	HKD	11,000
Swiss Franc	CHF	278
Swedish Krona	SEK	6,007
Canadian Dollar	CAD	1,968
Singapore Dollar	SGD	3,585
Japanese Yen	JPY	178,500
South Korean Won	KRW	1,800,000

Balance Sheet Presentation of Derivatives. As of September 30, 2017 and December 31, 2016, all derivatives, both those designated as hedging instruments and those that were not designated as hedging instruments, were recorded gross at fair value on our consolidated balance sheets. We are not subject to any master netting agreements. The fair value of derivative instruments on a gross basis is as follows (in thousands):



		Fair Value
	Balance Sheet Location	September 30, 2017			December 31, 2016
Derivatives designated as hedging instruments
Assets
Interest rate swaps	Prepaid expenses and other assets (current)	$	79		$	—
Interest rate swaps	Other assets (long-term)	4,309			4,991
Foreign currency forward contracts	Prepaid expenses and other assets (current)	646			116
Foreign currency forward contracts	Other assets (long-term)	158			18

(Liabilities)
Foreign currency forward contracts	Accrued expenses (current)	$	(286	)	$	(275	)
Foreign currency forward contracts	Other long-term obligations	(96		)	(18		)

Derivatives not designated as hedging instruments
Assets
Foreign currency forward contracts	Prepaid expenses and other assets (current)	$	485		$	220
(Liabilities)
Foreign currency forward contracts	Accrued expenses (current)	(210		)	(171		)

Income Statement Presentation of Derivatives

Derivatives Designated as Cash Flow Hedges

Derivative instruments designated as cash flow hedges had the following effects, before income taxes, on other comprehensive income and net earnings in our consolidated statements of income, consolidated statements of comprehensive income and consolidated balance sheets (in thousands):



	Amount of Gain/(Loss) recognized in OCI						Amount of Gain/(Loss) reclassified from AOCI
	Three Months Ended September 30,						Three Months Ended September 30,
	2017		2016				2017			2016
Derivative instrument						Location in Statements of Income
Interest rate swaps	$	1	$	(256	)	Interest expense	$	96		$	(153	)

Foreign currency forward contracts	100		—			Revenue	(101		)	—
						Cost of goods sold	250			—



	Amount of Gain/(Loss) recognized in OCI							Amount of Gain/(Loss) reclassified from AOCI
	Nine Months Ended September 30,							Nine Months Ended September 30,
	2017			2016				2017			2016
Derivative instrument							Location in Statements of Income
Interest rate swaps	$	(611	)	$	(1,503	)	Interest expense	$	(8	)	$	(519	)

Foreign currency forward contracts	841			—			Revenue	(141		)	—
							Cost of goods sold	213			—

The net amount recognized in earnings during the three and nine-month periods ended September 30, 2017 and 2016 due to ineffectiveness and amounts excluded from the assessment of hedge effectiveness were not significant.

As of September 30, 2017, approximately $461,000, or $282,000 after taxes, was expected to be reclassified from accumulated other comprehensive income to earnings in revenue and cost of sales over the succeeding twelve months. As of September 30, 2017, approximately $624,000, or $381,000 after taxes, was expected to be reclassified from accumulated other comprehensive income to earnings in interest expense over the succeeding twelve months.

Derivatives Not Designated as Hedging Instruments

The following gains/(losses) from these derivative instruments were recognized in our consolidated statements of income for the periods presented (in thousands):



		Three months ended September 30,						Nine months ended September 30,
		2017			2016			2017			2016
Derivative Instrument	Location in Statements of Income
Foreign currency forward contracts	Other income (expense)	$	(1,459	)	$	(76	)	$	(4,150	)	$	(222	)

See Note 11 for more information about our derivatives.