Derivative Financial Instruments
|9 Months Ended|
Sep. 30, 2019
|Derivative Instruments and Hedging Activities Disclosure [Abstract]|
|Derivative Financial Instruments||Derivative Financial Instruments
Interest Rate Swap Agreements
We are exposed to interest rate risk on our variable rate debt. We have entered into interest rate swap agreements to effectively convert portions of our variable rate debt to a fixed-rate basis. The principal objective of these contracts is to eliminate or reduce the variability of the cash flows in interest payments associated with our variable rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows.
On March 31, 2016, we entered into two interest rate swap agreements (collectively the “2016 Swap Agreements”). The 2016 Swap Agreements covered an aggregate notional amount of $75.0 million from March 2016 to September 2019 by replacing the obligation’s variable rate with a blended fixed rate of 0.89%. The 2016 Swap Agreements matured on September 30, 2019.
On December 24, 2018, we entered into two interest rate swap agreements (collectively the “2018 Swap Agreements”). The 2018 Swap Agreements cover an aggregate notional amount of $100.0 million from December 2018 to February 2022 by replacing the obligation’s variable rate with a blended fixed rate of 2.57%. We designated both the 2016 and 2018 Swap Agreements (collectively the “Swap Agreements”) as cash flow hedges of interest rate risk.
The changes in the fair value of the Swap Agreements are recorded in accumulated other comprehensive income and are subsequently reclassified into earnings in the period that the hedged forecasted transactions affect earnings. Amounts reported in accumulated other comprehensive income related to the Swap Agreements will be reclassified to interest expense as interest payments are made on our variable rate debt.
Foreign Exchange Currency Contracts
We are exposed to market risk that includes changes in foreign exchange rates. We have operations in certain foreign countries where the functional currency is the local currency. For international operations that are determined to be extensions of the parent company, the U.S. dollar is the functional currency. As of September 30, 2019, we have entered into a series of foreign exchange forward contracts to hedge the effect of adverse fluctuations in foreign currency exchange rates for the Indian rupee and Philippines peso. These contracts are designated as cash flow hedges of forecasted transactions, are intended to offset the impact of movement of exchange rates on future operating costs and are scheduled to mature within twelve months.
The changes in the fair value of these contracts are initially reported in accumulated other comprehensive income and are subsequently reclassified into cost of revenue and operating expenses in the same period that the hedge transaction affects earnings.
The table below presents the fair value of the derivative instruments as well as their classification in the Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018:
As of September 30, 2019, we have not posted any collateral related to our derivative instruments. If we had breached any of the default provisions at September 30, 2019, we could have been required to settle our obligations under the agreements at their termination value of $2.7 million.
The tables below present the amount of gains and losses related to the derivative instruments and their location in the Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2019 and 2018, in thousands:
As of September 30, 2019, we estimate that $0.9 million of the net loss related to derivatives designated as cash flow hedges recorded in other comprehensive income is expected to be reclassified into earnings within the next twelve months.Gains and losses on our cash flow hedges are net of income tax expense of $0.4 million and $0.7 million during the three and nine months ended September 30, 2019, respectively. The income tax effect of the gains and losses on our cash flow hedges during the three and nine months ended September 30, 2018 was immaterial. Cash flows from these derivative instruments are included within the operating activities in the Condensed Consolidated Statements of Cash Flows, as the Company’s accounting policy is to present cash flows from hedging instruments in the same category as the item being hedged.
The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts.
Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef