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Derivative Instruments
9 Months Ended
Sep. 30, 2018
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments
Derivative Instruments
In August 2017 the FASB issued ASU 2017-12. We adopted this new standard on January 1, 2018, using the modified retrospective method, which did not have an impact on our financial position or results of operations; however, the adoption of this new standard resulted in additional disclosures and a change in the income statement classification with respect to where we recognize ineffective hedge transaction gains and losses. For additional information on this new standard, please read Note 1, Summary of Significant Accounting Policies - New Accounting Pronouncements, to these condensed consolidated financial statements.
Foreign Currency Forward Contracts - Hedging Instruments
Due to the global nature of our operations, portions of our revenues and operating expenses are recorded in currencies other than the U.S. dollar. The value of revenues and operating expenses measured in U.S. dollars is therefore subject to changes in foreign currency exchange rates. In order to mitigate these changes, we use foreign currency forward contracts to lock in exchange rates associated with a portion of our forecasted international revenues and operating expenses.
Foreign currency forward contracts in effect as of September 30, 2018 and December 31, 2017, had durations of 1 to 15 months and 1 to 21 months, respectively. These contracts have been designated as cash flow hedges and unrealized gains or losses on the portion of these foreign currency forward contracts that are included in the effectiveness test are reported in accumulated other comprehensive income (loss) (referred to as AOCI in the tables below). Realized gains and losses of such contracts are recognized in revenues when the sale of product in the currency being hedged is recognized and in operating expenses when the expense in the currency being hedged is recorded. Prior to the adoption of ASU 2017-12 on January 1, 2018, to the extent ineffective, hedge transaction gains and losses were reported in other income (expense), net. Effective January 1, 2018, we recognize all fair value changes of derivatives in earnings, including any ineffective portion, in the same line item in our condensed consolidated statements of income that has been impacted by the hedged item.
The notional value of foreign currency forward contracts that were entered into to hedge forecasted revenues and operating expenses is summarized as follows:
 
Notional Amount
Foreign Currency: (In millions)
As of
September 30,
2018
 
As of
December 31,
2017
Euro
$
1,662.5

 
$
1,875.6

British pound
34.9

 
150.9

Canadian dollar
26.9

 
83.5

Swiss franc
9.4

 
88.7

Total foreign currency forward contracts
$
1,733.7

 
$
2,198.7


The pre-tax portion of the fair value of these foreign currency forward contracts that were included in accumulated other comprehensive income (loss) in total equity reflected net losses of $3.3 million and $113.0 million as of September 30, 2018 and December 31, 2017, respectively. We expect the net losses of $3.3 million to be settled over the next 15 months, of which $7.0 million of these losses are expected to be settled over the next 12 months, with any amounts in accumulated other comprehensive income (loss) to be reported as an adjustment to revenues or operating expenses. We consider the impact of our and our counterparties’ credit risk on the fair value of the contracts as well as the ability of each party to execute its contractual obligations. As of September 30, 2018 and December 31, 2017, credit risk did not change the fair value of our foreign currency forward contracts.
The following tables summarize the effect of foreign currency forward contracts designated as hedging instruments in our condensed consolidated statements of income:
For the Three Months Ended September 30, 2018
 
For the Nine Months Ended September 30, 2018
Net Gains/(Losses)
Reclassified from AOCI into Operating Income (in millions)
Net Gains/(Losses)
Recognized in Operating Income (in millions)
 
Net Gains/(Losses)
Reclassified from AOCI into Operating Income (in millions)
Net Gains/(Losses)
Recognized in Operating Income (in millions)
Location
 
2018
 
Location
 
2018
 
Location
 
2018
 
Location
 
2018
Revenues
 
$
(8.4
)
 
Revenues
 
$
0.3

 
Revenues
 
$
(51.7
)
 
Revenues
 
$
7.3

Operating expenses
 
$
(0.3
)
 
Operating expenses
 
$
0.4

 
Operating expenses
 
$
0.6

 
Operating expenses
 
$
—



For the Three Months Ended September 30, 2017
 
For the Nine Months Ended September 30, 2017
Net Gains/(Losses)
Reclassified from AOCI into Operating Income (in millions)
Net Gains/(Losses)
Recognized Directly into Net Income (in millions)
 
Net Gains/(Losses)
Reclassified from AOCI into
Operating Income (in millions)
Net Gains/(Losses)
Recognized Directly into Net
Income (in millions)
Location
 
2017
 
Location
 
2017
 
Location
 
2017
 
Location
 
2017
Revenues
 
$
(18.8
)
 
Other income (expense)
 
$
0.7

 
Revenue
 
$
(15.1
)
 
Other income (expense)
 
$
6.7

Operating expenses
 
$
0.5

 
Other income (expense)
 
$
0.2

 
Operating expenses
 
$
0.7

 
Other income (expense)
 
$
(0.1
)
Interest Rate Contracts - Hedging Instruments
We have entered into interest rate swap contracts on certain borrowing transactions to manage our exposure to interest rate changes.
In connection with the issuance of our 2.90% Senior Notes, we entered into interest rate swaps with an aggregate notional amount of $675.0 million, which expire on September 15, 2020. The interest rate swap contracts are designated as hedges of the fair value changes in our 2.90% Senior Notes attributable to changes in interest rates. Since the specific terms and notional amount of the swaps match the debt being hedged, these contracts are assumed to be highly effective and all changes in the fair value of the swaps are recognized as a component of our 2.90% Senior Notes with no net impact recorded in income. Any net interest payments made or received on the interest rate swap contracts are recognized as a component of interest expense in our condensed consolidated statements of income.
Foreign Currency Forward Contracts - Other Derivatives
We also enter into other foreign currency forward contracts, usually with durations of one month or less, to mitigate the foreign currency risk related to certain balance sheet positions. We have not elected hedge accounting for these transactions.
The aggregate notional amount of these outstanding foreign currency contracts was $691.7 million and $564.9 million as of September 30, 2018 and December 31, 2017, respectively. Net gains of $5.2 million and $4.8 million related to these contracts were recognized as a component of other income (expense), net for the three and nine months ended September 30, 2018, respectively, compared to net gains of $1.2 million and $5.7 million, respectively, in the prior year comparative periods.
Summary of Derivatives
While certain of our derivative instruments are subject to netting arrangements with our counterparties, we do not offset derivative assets and liabilities in our condensed consolidated balance sheets.
The following table summarizes the fair value and presentation in our condensed consolidated balance sheets of our outstanding derivative instruments, including those designated as hedging instruments:
 
 
Fair Value
(In millions)
Balance Sheet Location
As of September 30, 2018
Hedging Instruments:
 
 
Asset derivatives
Other current assets
$
25.6

 
Investments and other assets
$
5.4

Liability derivatives
Accrued expenses and other
$
10.9

 
Other long-term liabilities
$
18.7

Other Derivatives:
 
 
Asset derivatives
Other current assets
$
4.1

Liability derivatives
Accrued expenses and other
$
1.6



 
 
Fair Value
(In millions)
Balance Sheet Location
As of December 31, 2017
Hedging Instruments:
 
 
Asset derivatives
Other current assets
$
0.7

 
Investments and other assets
$
0.2

Liability derivatives
Accrued expenses and other
$
84.7

 
Other long-term liabilities
$
23.6

Other Derivatives:
 
 
Asset derivatives
Other current assets
$
1.8

Liability derivatives
Accrued expenses and other
$
3.0