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Note 6 - Financial Instruments and Fair Value Measurements

9 Months Ended

Sep. 30, 2020

NOTE 6 – FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

Derivative Instruments and Hedging Activities

The Company’s derivative assets and liabilities consist principally of foreign exchange forward contracts and interest rate caps and are carried at fair value based on significant observable inputs (Level 2 inputs). Derivatives entered into by the Company are typically executed over-the-counter and are valued using internal valuation techniques, as quoted market prices are not readily available. The valuation technique and inputs depend on the type of derivative and the nature of the underlying exposure. The Company principally uses discounted cash flows along with fair value models that primarily use market observable inputs. These models take into account a variety of factors including, where applicable, maturity, currency exchange rates, interest rate yield curves and counterparty credit risks.

Currency Risk. The Company uses currency exchange contracts to manage its exposure to changes in currency exchange rates associated with certain of its non-U.S.-dollar denominated receivables and payables. The Company primarily hedges a portion of its current-year currency exposure to several currencies, which normally include, but are not limited to, the Canadian and New Zealand dollars, the Brazilian Real, the South African Rand, the Euro and the British pound sterling. The fluctuations in the value of these forward contracts largely offset the impact of changes in the value of the underlying risk they economically hedge.

In March 2019, the Company entered into foreign exchange forward contracts, designated as cash flow hedges, to hedge its exposure to Norwegian Kroner ("NOK"), related to the Company’s contract to purchase the new polar ice-class vessel (see Note 11 – Commitments and Contingencies). The cost of the foreign exchange forward contracts will be amortized to interest expense over their lives, from the effective date through settlement dates.

Interest Rate Risk. The Company uses interest rate caps, designated as cash flow hedges, to manage the risk related to its floating rate corporate debt.

The Company records the effective portion of changes in the fair value of its cash flow hedges to other comprehensive income (loss), net of tax, and subsequently reclassifies these amounts into earnings in the period during which the hedged transaction is recognized. Any changes in fair values of hedges that are determined to be ineffective are immediately reclassified from accumulated other comprehensive income (loss) into earnings. No gains or losses of the Company’s cash flow hedges were considered to be ineffective for the period ended September 30, 2020. The Company reclassified $5.3 million from other comprehensive income (loss) to earnings for the nine months ended September 30, 2020 due to the maturity of a cash flow hedge and the hedged item. The Company estimates that approximately $6.9 million of losses currently recorded in accumulated other comprehensive income (loss) will be recognized in earnings over the next 12 months due to maturity of the cash flow hedge and the hedged item. The Company will continue to assess the effectiveness of the hedges on an ongoing basis.

The Company held the following derivative instruments with absolute notional values as of September 30, 2020:

(in thousands)	*Absolute Notional Value*
Interest rate caps	$	100,000
Foreign exchange contracts		93,868

Estimated fair values (Level 2) of derivative instruments were as follows:

	*As of September 30, 2020*				*As of December 31, 2019*
	(unaudited)
(In thousands)	*Fair Value, Asset Derivatives*		*Fair Value, Liability Derivatives*		*Fair Value, Asset Derivatives*		*Fair Value, Liability Derivatives*
Derivative instruments designated as cash flow hedging instruments:
Foreign exchange forward (a)	$	-	$	6,909	$	-	$	4,459
Interest rate cap (b)		-		-		138		-
Total	$	-	$	6,909	$	138	$	4,459
Derivative instruments not designated as cash flow hedging instruments:
Foreign exchange forward (c)	$	31	$	640	$	459	$	70
Total	$	31	$	640	$	459	$	70

__________
(a)	Recorded in accounts payable and accrued expenses, and other long-term liabilities.
(b)	Recorded in prepaid expenses and other current assets, and other long-term assets.
(c)	Recorded in prepaid expenses and other current assets, and accounts payable and accrued expenses.

Changes in the fair value of the Company’s hedging instruments are recorded in accumulated other comprehensive income, pursuant to the guidelines of cash flow hedge accounting as outlined in ASC 815.

The effects of derivatives recognized in the Company’s condensed consolidated financial statements were as follows:

	*For the three months ended September 30,*						*For the nine months ended September 30,*
(In thousands)	*2020*			*2019*			*2020*			*2019*
Derivative instruments designated as cash flow hedging instruments:	(unaudited)			(unaudited)			(unaudited)			(unaudited)
Foreign exchange forward (a)	$	(1,745	)	$	(7,094	)	$	2,261		$	(8,066	)
Interest rate cap (b)		-			(298	)		137			(587	)

Derivative instruments not designated as cash flow hedging instruments:
Foreign exchange forward (c)		989			(715	)		(1,008	)		442
Total	$	(756	)	$	(8,107	)	$	1,390		$	(8,211	)


(a)	For the three and nine months ended September 30, 2020, a $1.7 million gain and a $7.6 million loss, respectively, was recognized, net of tax, as a component of other comprehensive income (loss) within stockholders’ equity, and for the nine months ended September 30, 2020, $5.3 million was recognized as a loss on foreign currency in the condensed consolidated statements of income. For the three and nine months ended September 30, 2019, $1.6 million was recognized as a loss on foreign currency in the condensed consolidated statements of income, and $5.5 million and $6.4 million, respectively, was recognized, net of tax, as a component of other comprehensive income (loss) within stockholders’ equity.
(b)	Recognized, net of tax, as a component of other comprehensive income (loss) within stockholders’ equity
(c)	Gains (losses) related to derivative instruments are expected to be largely offset by (losses) gains on the underlying exposures being hedged. During the three and nine months ended September 30, 2020, a gain of $1.0 million and a loss of $1.0 million was recognized in gain (loss) on foreign currency. During the three and nine months ended September 30, 2019, a loss of $0.7 million and a gain of $0.4 million, respectively, was recognized in gain (loss) on foreign currency.

Fair Value Measurements

The carrying amounts of cash and cash equivalents, accounts payable and accrued expenses, approximate fair value due to the short-term nature of these instruments. The carrying value of long-term debt approximates fair value given that the terms of the agreement were comparable to the market as of September 30, 2020. As of September 30, 2020 and December 31, 2019, the Company had no other significant liabilities that were measured at fair value on a recurring basis.