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Note 7 - Financial Instruments and Fair Value Measurements

12 Months Ended

Dec. 31, 2021

NOTE 7 — FINANCIAL INSTRUMENTS AND FAIR VALUE MEASUREMENTS

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).

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.

The Company entered into interest rate cap agreements to hedge its exposure to interest rate movements and to manage its interest expense related to the Term Facility and designated these interest rate caps as a cash flow hedge. The Company receives payments on the interest rate cap for any period that the one-month USD-LIBOR rate increases beyond the strike rate. The termination date of the interest rate cap agreement is May 31, 2023. The detailed terms of the interest rate caps and the portion of the corporate Term Facility that they hedge are as follows:

	Interest Rate Caps	Corporate Debt
Trade date and borrowing date	May 29, 2018	March 27, 2018
Effective date	September 27, 2018	Not applicable
Termination date	May 31, 2023	March 31, 2025
Notional amount	$100,000,000	$100,000,000
Fixed interest rate (plus spread)	3.00% May 1, 2019 until maturity	Not applicable
Variable interest rate	1 month LIBOR	1 month LIBOR + 3.50%
Settlement	Monthly on last day of each month	Monthly on last day of each month
Interest payment dates	Monthly on last day of each month	Monthly on last day of each month
Reset dates	Last day of each month	Last day of each month

Changes in the fair value of this interest rate cap are recorded in accumulated other comprehensive income, pursuant to the guidelines of cash flow hedge accounting as outlined in ASC 815 and ASU 2017-12. The Company expects minimal losses currently recorded in accumulated other comprehensive income related to the interest rate caps to be recognized in earnings over the next 12 months. The cost of the interest rate cap will be amortized to interest expense over its life, from the effective date through termination date.

In March 2019, the Company entered into foreign exchange forward contracts, designated as cash flow hedges, to hedge its exposure to the NOK, related to the Company’s contract to purchase the new polar ice-class vessel, the National Geographic Resolution, delivered September 2021. The cost of the foreign exchange forward contracts were amortized to interest expense over their lives, from the effective date through each hedge’s settlement date.

The Company recorded the effective portion of changes in the fair value of its cash flow hedges to other comprehensive income (loss), net of tax, and subsequently reclassified these amounts into earnings in the period during which the hedged transaction was recognized. Any changes in fair values of hedges that would be determined to be ineffective would be 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 and reclassified from other comprehensive income (loss) to earnings for the years ended December 31, 2021, 2020 and 2019. The Company reclassified $2.7 million, $5.3 million and $1.6 million in losses, net of tax, from other comprehensive income (loss) to earnings for the years ended December 31, 2021, 2020 and 2019, respectively, due to the maturity of a cash flow hedge and the hedged item.

The Company held the following derivative instruments with absolute notional values as of December 31, 2021:

(in thousands)	Absolute Notional Value
Interest rate caps	$	100,000
Foreign exchange contracts		8,892

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

	*As of December 31,*
	*2021*				*2020*
(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)	$	-	$	-	$	-	$	2,008
Interest rate cap (b)		9		-		-		-
Total	$	9	$	-	$	-	$	2,008
Derivative instruments not designated as cash flow hedging instruments:
Foreign exchange forward (c)	$	664	$	-	$	953	$	-
Total	$	664	$	-	$	953	$	-

__________

	(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.

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

	*For the years ended December 31,*
(In thousands)	*2021*			*2020*			*2019*
Derivative instruments designated as cash flow hedging instruments:
Foreign exchange forward (a)	$	(605	)	$	(2,832	)	$	(5,062	)
Interest rate cap (b)		(363	)		(247	)		(572	)

Derivative instruments not designated as cash flow hedging instruments:
Foreign exchange forward (c)		288			554			1,718
Total	$	(680	)	$	(2,525	)	$	(3,916	)

__________

	(a)	For the year ended December 31, 2021, $2.7 million was recognized as a loss on foreign currency in the consolidated statements of operations and $2.0 million was recognized, net of tax, as a component of other comprehensive income (loss) within stockholders’ equity. For the year ended December 31, 2020, $5.3 million was recognized as a loss on foreign currency in the consolidated statements of operations, and $2.4 million, was recognized, net of tax, as a component of other comprehensive income (loss) within stockholders’ equity. For the year ended December 31, 2019, $1.6 million was recognized as a loss on foreign currency in the consolidated statements of operations, and $3.4 million, 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 years ended December 31, 2021, 2020 and 2019, gains of $0.3 million, $0.6 million and $1.7 million, respectively, were recognized in gain (loss) on foreign currency.

In connection with the acquisition of Classic Journeys, the purchase agreement includes a contingent consideration earnout, see Note 9—Acquisitions, which is required to be fair valued.

The Company makes fair value measurement of contingent acquisition consideration liabilities using Level 3 unobservable inputs. The Company recognizes the fair value of its contingent acquisition consideration based on its estimated fair value at the beginning period date using Monte Carlo simulations, using discount factors, which incorporates weighted average cost of capital and long and short-term risk-free rates, the projected results of the acquired business and the time remaining in the earnout period. Subsequent adjustments to the fair value are due to the passage of time as the payment date approaches or changes to management’s estimates of the projected performance target. In determining the fair value, the Company reviews current results along with projected results for the remaining earnout period to calculate the expected contingent acquisition consideration to be paid using the agreed upon formula as laid out in the acquisition agreement. The fair value of this liability will be adjusted based on the change in fair value resulting from the passage of time at the applicable discount rate, or changes in the forecasted results as we approach the payment dates absent any significant changes in assumptions related to the valuation or the probability of payment.

The following tables present the estimated fair value measurements of the (level 3) contingent acquisition consideration using the fair value hierarchy:

	*As of December 31,*

(In thousands)	*2021*		*2020*		*2019*
Liabilities:
Contingent acquisition consideration	$	155	$	-	$	-
Total	$	155	$	-	$	-

During the year ended December 31, 2021, the Company recorded a liability of $0.2 million for the deferred contingent consideration at the acquisition date. The possible contingent acquisition consideration payout is either zero or $0.6 million, depending on the achievement of certain average net profits targets by the acquired operation. This liability is recorded on the consolidated balance sheet in other liabilities at December 31, 2021.

The following table sets forth a reconciliation of changes in the fair value of contingent acquisition consideration level 3 financial liabilities:

	*For the year ended December 31, 2021*
(In thousands)
Balance, January 1,	$	-
Additions to level 3		155
Change in fair value		-
Balance December 31,	$	155