Derivatives and Hedging Activities

Hedge Accounting and Hedging Program

During the second quarter of 2017, we implemented a cash flow hedging program. The purpose of our hedging program is to manage the foreign currency exchange rate risk on forecasted expenses denominated in currencies other than the functional currency of the operating unit. We do not issue derivatives for trading or speculative purposes.

In May 2017, we entered into a two-year cross-currency par forward contract to hedge a portion of our Mexico forecasted expenses denominated in Pesos ("MXN"). To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions. The par forward contract is designated and qualifies as a cash flow hedge. Our derivative instrument is recorded at fair value on the condensed consolidated balance sheets and is classified based on the instrument's maturity date. We record changes in the intrinsic value of the effective portion of the gain or loss on the derivative instrument as a component of Other Comprehensive Income and we reclassify that gain or loss into earnings in the same line item associated with the forecasted transaction and in the same period during which the hedged transaction affects earnings. The total notional amount of our outstanding derivative as of June 30, 2018 was approximately 330.2 million MXN. The term of our currency forward contract is May 1, 2017 to May 1, 2019. The derivative instrument matures in equal monthly amounts at a fixed forward rate of 20.01MXN/USD over the term of the two-year contract.

In January 2018, we entered into an additional six-month cross-currency par forward contract that extends our current hedge of a portion of our Mexico forecasted expenses denominated in MXN. The total notional amount of this outstanding derivative as of June 30, 2018 was approximately 183.9 million MXN. The term of the six-month contract is May 1, 2019 to November 1, 2019. The derivative instrument matures in equal monthly amounts at a fixed forward rate of 20.43 MXN/USD over the term of the six-month contract.

The following table presents the fair values of our derivative instruments included within the Condensed Consolidated Balance Sheet as of June 30, 2018 and December 31, 2017 (in thousands):



	Derivatives
	Condensed Consolidated Balance Sheet Location	June 30, 2018		December 31, 2017
Derivatives designated as cash flow hedging instruments
Foreign exchange forward contract:
	Accrued Liabilities	$	306	$	187
	Other long-term liabilities	265		402
Total derivatives designated as cash flow hedging instruments		$	571	$	589

The following table presents the amounts affecting the Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2018 and 2017 (in thousands):



	Line Item in the Condensed Consolidated Statements of Operations	Three months ended June 30,			Six months ended June 30,
		2018		2017	2018		2017
Derivatives designated as cash flow hedging instruments
Foreign exchange forward contracts	Cost of goods sold	$	261	22	$	496	$	22

We recognized the following gains on our foreign exchange contracts designated as a cash flow hedge (in thousands):



	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives					Amount of Gain Reclassified From Accumulated Other Comprehensive Income into Income
	Three months ended June 30,						Three months ended June 30,
	Three months ended June 30,						Three months ended June 30,
	2018			2017		Location of Gain Reclassified From Accumulated Other Comprehensive Income into Income	2018		2017
Derivatives designated as cash flow hedges:
Foreign exchange forward contract	$	(2,109	)	$	1,826	Cost of goods sold	$	261	$	22
Total derivatives designated as cash flow hedging instruments	$	(2,109	)	$	1,826		$	261	$	22



	Amount of Gain Recognized in Other Comprehensive Income on Derivatives				Amount of Gain Reclassified From Accumulated Other Comprehensive Income into Income
	Six months ended June 30,					Six months ended June 30,
	Six months ended June 30,					Six months ended June 30,
	2018		2017		Location of Gain Reclassified From Accumulated Other Comprehensive Income into Income	2018		2017
Derivatives designated as cash flow hedges:
Foreign exchange forward contract	$	514	$	1,826	Cost of goods sold	$	496	$	22
Total derivatives designated as cash flow hedging instruments	$	514	$	1,826		$	496	$	22

As of June 30, 2018, we expect approximately $0.3 million of the deferred losses on the outstanding derivatives in accumulated other comprehensive income to be reclassified to net income during the next 12 months concurrent with the underlying hedged transactions also being reported in net income.