Derivatives

12 Months Ended

Dec. 31, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives

9.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. For qualifying hedges, the change in fair value is deferred in accumulated other comprehensive income, a component of stockholders’ equity in the accompanying consolidated balance sheets, and recognized in earnings at the same time the hedged item affects earnings. 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. 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 Third Amended Credit Agreement that is solely due to changes in the benchmark interest rate.

Derivatives Designated as Cash Flow Hedges

On August 5, 2016, we entered into a pay-fixed, receive-variable interest rate swap with a current notional amount of $175 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 interest rate swap is scheduled to expire on July 6, 2021.

On December 23, 2019, we entered into a pay-fixed, receive-variable interest rate swap with a notional amount of $75 million with Wells Fargo to fix the one-month LIBOR rate at 1.71% for the period from July 6, 2021 to July 31, 2024. 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 will reset, the swap will be settled with the counterparty, and interest will be paid.

At December 31, 2019 and 2018, our interest rate swaps qualified as cash flow hedges. The fair value of our interest rate swaps at December 31, 2019 was an asset of approximately $1.2 million (partially offset by approximately $307,000 in deferred taxes), and a liability of ($290,000), partially offset by approximately ($75,000) in deferred taxes. The fair value of our interest rate swap at December 31, 2018 was an asset of approximately $5.8 million, which was offset by approximately $1.5 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 Chinese Renminbi, Euros, British Pounds, Mexican Pesos, Brazilian Reals, Australian Dollars, Hong Kong Dollars, Swiss Francs, Swedish Krona, Canadian Dollars, Danish Krone, Japanese Yen, and South Korean Won, among others. 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 gain or loss on the derivative instrument is temporarily reported as a component of other comprehensive income (loss) and then 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. We entered 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 150 cash flow foreign currency hedges every month. As of December 31, 2019, 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
Australian Dollar	AUD	8,540
Brazilian Real	BRL	10,315
Canadian Dollar	CAD	8,025
Swiss Franc	CHF	3,660
Chinese Renminbi	CNY	591,000
Danish Krone	DKK	33,575
Euro	EUR	37,750
British Pound	GBP	8,380
Japanese Yen	JPY	1,145,000
Korean Won	KRW	8,950,000
Mexican Peso	MXN	527,000
Norwegian Krone	NOK	15,475
Swedish Krona	SEK	54,170

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 December 31, 2019, 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
Australian Dollar	AUD	14,282
Brazilian Real	BRL	19,500
Canadian Dollar	CAD	1,706
Swiss Franc	CHF	306
Chinese Renminbi	CNY	52,598
Danish Krone	DKK	5,987
Euro	EUR	752
British Pound	GBP	7,594
Hong Kong Dollar	HKD	11,000
Japanese Yen	JPY	1,530,000
Korean Won	KRW	4,868,000
Mexican Peso	MXN	35,000
Norwegian Krone	NOK	3,767
New Zealand Dollar	NZD	1,542
Swedish Krona	SEK	13,577
Singapore Dollar	SGD	1,790
South African Rand	ZAR	50,843

Balance Sheet Presentation of Derivatives. As of December 31, 2019 and 2018, 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	December 31, 2019		December 31, 2018
Derivative instruments designated as hedging instruments
Assets
Interest rate swaps	Other assets (long-term)	$	1,192	$	5,772
Foreign currency forward contracts	Prepaid expenses and other assets		1,663		613
Foreign currency forward contracts	Other assets (long-term)		466		151
(Liabilities)
Interest rate swaps	Other long-term obligations		(290)		—
Foreign currency forward contracts	Accrued expenses		(1,813)		(711)
Foreign currency forward contracts	Other long-term obligations		(764)		(101)
Derivative instruments not designated as hedging instruments
Assets
Foreign currency forward contracts	Prepaid expenses and other assets	$	318	$	814
(Liabilities)
Foreign currency forward contracts	Accrued expenses		(1,678)		(796)

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 ("OCI"), accumulated other comprehensive income ("AOCI") and net earnings in our consolidated statements of income, consolidated statements of comprehensive income and consolidated balance sheets (in thousands):

	Amount of Gain/(Loss)							Amount of Gain/(Loss)
	recognized in OCI							reclassified from AOCI
	Year Ended December 31,							Year ended December 31,
	2019		2018		2017			2019		2018		2017
Derivative instrument							Location in statements of income
Interest rate swaps	$	(2,830)	$	1,559	$	853	Interest expense	$	2,040	$	1,537	$	95
Foreign currency forward contracts		(587)		539		491	Revenue		577		136		(277)
							Cost of sales		(578)		361		625

All other amounts included in earnings related to designated cash flow hedges are immaterial.

As of December 31, 2019, approximately $315,000, or $234,000 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 December 31, 2019, approximately $877,000, or $651,000 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 years presented (in thousands):

		Year ended December 31,
Derivative Instrument	Location in statements of income	2019		2018		2017
Foreign currency forward contracts	Other income (expense)	$	(307)	$	4,147	$	(4,746)

See Note 16 for more information about our derivatives.