Derivative instruments and hedging activities

We recognize all of our derivative instruments as either assets or liabilities in our statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

We have operations in over 50 countries. Sales outside of the Americas accounted for approximately 62% of our net sales during each of the three months ended June 30, 2018 and 2017, and approximately 62% and 61% of our net sales during the six months ended June 30, 2018 and 2017, respectively. Our activities expose us to a variety of market risks, including the effects of changes in foreign currency exchange rates. These financial risks are monitored and managed by us as an integral part of our overall risk management program.

We maintain a foreign currency risk management strategy that uses derivative instruments (foreign currency forward contracts) to help protect our earnings and cash flows from fluctuations caused by the volatility in currency exchange rates. Movements in foreign currency exchange rates pose a risk to our operations and competitive position, in that exchange rate changes may affect our profitability and cash flow, and the business or pricing strategies of our non-U.S. based competitors.

The vast majority of our foreign sales are denominated in the customers’ local currency. We purchase foreign currency forward contracts as hedges of forecasted sales that are denominated in foreign currencies and as hedges of foreign currency denominated financial assets or liabilities. These contracts are entered into to help protect against the risk that the eventual dollar-net-cash inflows resulting from such sales or firm commitments will be adversely affected by changes in exchange rates. We also purchase foreign currency forward contracts as hedges of forecasted expenses that are denominated in foreign currencies. These contracts are entered into to help protect against the risk that the eventual dollar-net-cash outflows resulting from foreign currency operating and cost of sales expenses will be adversely affected by changes in exchange rates.

We designate foreign currency forward contracts as cash flow hedges of forecasted net sales or forecasted expenses. In addition, we hedge our foreign currency denominated balance sheet exposures using foreign currency forward contracts that are not designated as hedging instruments. None of our derivative instruments contain a credit-risk-related contingent feature.

Cash flow hedges

To help protect against the reduction in value caused by a fluctuation in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales over the next one to three years, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted net sales and forecasted expenses denominated in foreign currencies with forward contracts. For forward contracts, when the dollar strengthens significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the forward contracts designated as hedges. We purchase foreign currency forward contracts for up to 100% of our forecasted exposures in selected currencies (primarily in Euro, Japanese yen, Hungarian forint, British pound, Malaysian ringgit, Korean won and Chinese yuan) and limit the duration of these contracts to 36 months or less.

For derivative instruments that are designated and qualify as a cash flow hedge, the effective portion of the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (“OCI”) and reclassified into earnings in the same line item (net sales, operating expenses, or cost of sales) associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative representing either hedge ineffectiveness or hedge components excluded from the assessment of effectiveness are recognized in current earnings or expenses during the current period and are classified as a component of “net foreign exchange gain (loss).” Hedge effectiveness of foreign currency forwards designated as cash flow hedges are measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the forecasted transaction’s terminal value.

We held forward contracts designated as cash flow hedges with the following notional amounts:



(In thousands)	US Dollar Equivalent
	As of June 30, 2018		As of December 31,
	(Unaudited)		2017
Chinese yuan	$	80,203	$	39,197
Euro	153,178		177,406
Japanese yen	15,657		22,857
Hungarian forint	30,364		41,296
British pound	6,463		9,931
Malaysian ringgit	20,694		28,287
Korean won	13,359		—
Total forward contracts notional amount	$	319,918	$	318,974

The contracts in the foregoing table had contractual maturities of 18 months or less and 24 months or less at June 30, 2018 and December 31, 2017, respectively.

At June 30, 2018, we expect to reclassify $2.2 million of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $0.2 million of gains on derivative instruments from accumulated OCI to cost of sales during the next twelve months when the cost of sales are incurred and $0.3 million of gains on derivative instruments from accumulated OCI to operating expenses during the next twelve months when the hedged operating expenses occur. Expected amounts are based on derivative valuations at June 30, 2018. Actual results may vary materially as a result of changes in the corresponding exchange rates subsequent to this date.

The gains and losses recognized in earnings due to hedge ineffectiveness were not material for each of the six months ended June 30, 2018 and 2017 and are included as a component of net income under the line item “net foreign exchange gain (loss).”

Other Derivatives

Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge our foreign denominated net receivable or net payable positions to help protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically attempt to hedge up to 90% of our outstanding foreign denominated net receivables or net payables and typically limit the duration of these foreign currency forward contracts to approximately 90 days or less. The gain or loss on the derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item “net foreign exchange gain (loss).” As of June 30, 2018 and December 31, 2017, we held foreign currency forward contracts that were not designated as hedging instruments with a notional amount of $34 million and $63 million, respectively.

The following tables present the fair value of derivative instruments on our Consolidated Balance Sheets at June 30, 2018 and December 31, 2017, respectively.



	Asset Derivatives
	June 30, 2018			December 31, 2017
(In thousands)	(Unaudited)

	Balance Sheet Location	Fair Value		Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts - ST forwards	Prepaid expenses and other current assets	$	4,980	Prepaid expenses and other current assets	$	4,707

Foreign exchange contracts - LT forwards	Other long-term assets	2,027		Other long-term assets	2,339
Total derivatives designated as hedging instruments		$	7,007		$	7,046

Derivatives not designated as hedging instruments

Foreign exchange contracts - ST forwards	Prepaid expenses and other current assets	$	792	Prepaid expenses and other current assets	$	187
Total derivatives not designated as hedging instruments		$	792		$	187

Total derivatives		$	7,799		$	7,233



	Liability Derivatives
	June 30, 2018				December 31, 2017
(In thousands)	(Unaudited)				December 31, 2017
	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
	Balance Sheet Location	Fair Value			Balance Sheet Location	Fair Value
Derivatives designated as hedging instruments
Foreign exchange contracts - ST forwards	Other current liabilities	$	(2,286	)	Other current liabilities	$	(7,487	)

Foreign exchange contracts - LT forwards	Other long-term liabilities	(899		)	Other long-term liabilities	(3,959		)
Total derivatives designated as hedging instruments		$	(3,185	)		$	(11,446	)

Derivatives not designated as hedging instruments

Foreign exchange contracts - ST forwards	Other current liabilities	$	(47	)	Other current liabilities	$	(1,297	)
Total derivatives not designated as hedging instruments		$	(47	)		$	(1,297	)

Total derivatives		$	(3,232	)		$	(12,743	)

The following tables present the effect of derivative instruments on our Consolidated Statements of Income for three months ended June 30, 2018 and 2017, respectively:



June 30, 2018
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship	Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)	Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Foreign exchange contracts - forwards	$	17,632		Net sales	$	(1,295	)	Net foreign exchange gain/(loss)	$	—

Foreign exchange contracts - forwards	(3,052		)	Cost of sales	302			Net foreign exchange gain/(loss)	—

Foreign exchange contracts - forwards	(2,548		)	Operating expenses	321			Net foreign exchange gain/(loss)	—
Total	$	12,032			$	(672	)		$	—



June 30, 2017
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship	Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)	Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Foreign exchange contracts - forwards	$	(9,488	)	Net sales	$	669		Net foreign exchange gain/(loss)	$	—

Foreign exchange contracts - forwards	3,171			Cost of sales	(428		)	Net foreign exchange gain/(loss)	—

Foreign exchange contracts - forwards	2,795			Operating expenses	(416		)	Net foreign exchange gain/(loss)	—
Total	$	(3,522	)		$	(175	)		$	—



(In thousands)
Derivatives not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income		Amount of Gain (Loss) Recognized in Income
		June 30, 2018		June 30, 2017
		(Unaudited)		(Unaudited)
Foreign exchange contracts - forwards	Net foreign exchange gain/(loss)	$	1,573	(632		)

Total		$	1,573	$	(632	)

The following tables present the effect of derivative instruments on our Consolidated Statements of Income for the six months ended June 30, 2018 and 2017, respectively:



June 30, 2018
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship	Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)	Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Foreign exchange contracts - forwards	$	12,560		Net sales	$	(3,915	)	Net foreign exchange gain/(loss)	$	—

Foreign exchange contracts - forwards	(2,326		)	Cost of sales	643			Net foreign exchange gain/(loss)	—

Foreign exchange contracts - forwards	(1,972		)	Operating expenses	777			Net foreign exchange gain/(loss)	—
Total	8,262				$	(2,495	)		$	—



June 30, 2017
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship	Gain or (Loss) Recognized in OCI on Derivative (Effective Portion)			Location of Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)	Gain or (Loss) Reclassified from Accumulated OCI into Income (Effective Portion)			Location of Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)	Gain or (Loss) Recognized in Income on Derivative (Ineffective Portion)
Foreign exchange contracts - forwards	$	(14,797	)	Net sales	$	2,749		Net foreign exchange gain/(loss)	$	—

Foreign exchange contracts - forwards	4,480			Cost of sales	(978		)	Net foreign exchange gain/(loss)	—

Foreign exchange contracts - forwards	3,983			Operating expenses	(979		)	Net foreign exchange gain/(loss)	—
Total	$	(6,334	)		$	792			$	—



(In thousands)
Derivatives not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income			Amount of Gain (Loss) Recognized in Income
		June 30, 2018			June 30, 2017
		(Unaudited)			(Unaudited)
Foreign exchange contracts - forwards	Net foreign exchange gain/(loss)	$	(188	)	(3,178		)
Total		$	(188	)	$	(3,178	)

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