Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2021

We enter into derivative instruments for risk management purposes only. We operate internationally and, in the normal course of business, are exposed to fluctuations in interest rates, foreign exchange rates and commodity prices. These fluctuations can increase the costs of financing, investing and operating the business. We use forward contracts, a type of derivative instrument, to manage certain foreign currency exposures.

By nature, all financial instruments involve market and credit risks. We enter into forward contracts with major investment grade financial institutions and have policies to monitor the credit risk of those counterparties. While there can be no assurance, we do not anticipate any material non-performance by any of these counterparties.

Foreign Currency Forward Contracts. We hedge forecasted intercompany sales denominated in foreign currencies through the use of forward contracts. We account for these forward contracts as cash flow hedges. To the extent these forward contracts meet hedge accounting criteria, changes in their fair value are not included in current earnings but are included in accumulated other comprehensive loss. These changes in fair value will be recognized into earnings as a component of sales or cost of sales when the forecasted transaction occurs.

We also enter into forward contracts to exchange foreign currencies for United States dollars in order to hedge our currency transaction exposures on intercompany receivables designated in foreign currencies. These forward contracts settle each month at month-end, at which time we enter into new forward contracts. We have not designated these forward contracts as hedges and have not applied hedge accounting to them.

The following table presents the notional contract amounts for forward contracts outstanding:


		As of
	FASB ASC Topic 815 Designation	March 31, 2021		December 31, 2020
Forward exchange contracts	Cash flow hedge	$	164,562	$	154,504
Forward exchange contracts	Non-designated	45,545		42,380

The remaining time to maturity as of March 31, 2021 is within two years for hedge designated foreign exchange contracts and approximately one month for non-hedge designated forward exchange contracts.

Statement of comprehensive income (loss) presentation

Derivatives designated as cash flow hedges

Foreign exchange contracts designated as cash flow hedges had the following effects on accumulated other comprehensive income (loss) and net earnings on our consolidated condensed statements of comprehensive income (loss) and our consolidated condensed balance sheets:


	Amount of Gain (Loss) Recognized in AOCI				Consolidated Condensed Statements of Comprehensive Income (Loss)					Amount of Gain (Loss) Reclassified from AOCI
	Three Months Ended March 31,
						Total Amount of Line Item Presented
Derivative Instrument	2021		2020		Location of amount reclassified	2021		2020		2021		2020

Foreign exchange contracts	$	3,593	$	4,295	Net Sales	$	232,677	$	214,010	$	(1,849)	$	1,201
					Cost of Sales	104,228		94,851		265		(77)
Pre-tax gain (loss)	$	3,593	$	4,295						$	(1,584)	$	1,124
Tax expense (benefit)	868		1,038							(383)		272
Net gain (loss)	$	2,725	$	3,257						$	(1,201)	$	852

At March 31, 2021, $2.3 million of net unrealized losses on forward contracts accounted for as cash flow hedges, and included in accumulated other comprehensive loss, are expected to be recognized in earnings in the next twelve months.

Derivatives not designated as cash flow hedges

Net gains and losses from derivative instruments not accounted for as hedges and gains and losses on our intercompany receivables on our consolidated condensed statements of comprehensive income (loss) were:


		Three Months Ended March 31,
Derivative Instrument	Location on Consolidated Condensed Statements of Comprehensive Income (Loss)	2021		2020

Net gain (loss) on currency forward contracts	Selling and administrative expense	$	458	$	(245)
Net loss on currency transaction exposures	Selling and administrative expense	$	(1,123)	$	(191)

Balance sheet presentation

We record these forward foreign exchange contracts at fair value. The following tables summarize the fair value for forward foreign exchange contracts outstanding at March 31, 2021 and December 31, 2020:


March 31, 2021	Location on Consolidated Condensed Balance Sheet	Asset Fair Value		Liabilities Fair Value		Net Fair Value
Derivatives designated as hedged instruments:
Foreign exchange contracts	Other current liabilities	$	1,557	$	(4,592)	$	(3,035)
Foreign exchange contracts	Other long-term assets	709		(337)		372
		$	2,266	$	(4,929)	$	(2,663)

Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other current liabilities	8		(179)		(171)

Total derivatives		$	2,274	$	(5,108)	$	(2,834)


December 31, 2020	Location on Consolidated Condensed Balance Sheet	Asset Fair Value		Liabilities Fair Value		Net Fair Value
Derivatives designated as hedged instruments:
Foreign exchange contracts	Other current liabilities	$	1,500	$	(8,826)	$	(7,326)
Foreign exchange contracts	Other long-term liabilities	23		(535)		(512)
		$	1,523	$	(9,361)	$	(7,838)

Derivatives not designated as hedging instruments:
Foreign exchange contracts	Other current liabilities	25		(150)		(125)

Total derivatives		$	1,548	$	(9,511)	$	(7,963)

Our forward foreign exchange contracts are subject to a master netting agreement and qualify for netting in the consolidated condensed balance sheets.

Fair Value Disclosure. FASB guidance defines fair value and establishes a framework for measuring fair value and related disclosure requirements. This guidance applies when fair value measurements are required or permitted. The guidance indicates, among other things, that a fair value measurement assumes that the transaction to sell an asset or transfer a liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. Fair value is defined based upon an exit price model.

Valuation Hierarchy. A valuation hierarchy was established for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, including interest rates, yield curves and credit risks, or inputs that are derived principally from or corroborated by observable market data through correlation. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement. There have been no significant changes in the assumptions.

Valuation Techniques. Assets and liabilities carried at fair value and measured on a recurring basis as of March 31, 2021 consist of forward foreign exchange contracts. The Company values its forward foreign exchange contracts using quoted prices for similar assets. The most significant assumption is quoted currency rates. The value of the forward foreign exchange contract assets and liabilities were valued using Level 2 inputs and are listed in the table above.

The carrying amounts reported in our consolidated condensed balance sheets for cash and cash equivalents, accounts receivable, accounts payable and long-term debt approximate fair value.