Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

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DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
 6 Months Ended
Jun. 30, 2017
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

NOTE 9.      DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

 

Risk Management Objective of Using Derivatives

 

The Company is exposed to certain risk arising from both its business operations and economic conditions. To manage this risk, the Company enters into derivative financial instruments from time to time. Certain of the Company’s foreign operations expose the Company to fluctuations of foreign interest rates and exchange rates. These fluctuations may impact the value of the Company’s cash receipts and payments in terms of the Company’s functional currency. The Company enters into derivative financial instruments from time to time to protect the value or fix the amount of certain obligations in terms of its functional currency, the US dollar.

 

Hedges of Foreign Exchange Risk

 

The Company is exposed to fluctuations in various foreign currencies against its functional currency, the US dollar. The Company uses foreign currency derivatives, specifically vanilla foreign currency forwards, to manage its exposure to fluctuations in the USD-CAD and AUD-USD exchange rates. Currency forward agreements involve fixing the foreign currency exchange rate for delivery of a specified amount of foreign currency on a specified date. The currency forward agreements are typically cash settled in US dollars for their fair value at or close to their settlement date.

 

The Company does not currently designate any of these foreign exchange forwards under hedge accounting, but rather reflects the changes in fair value immediately in earnings. Derivatives not designated as hedges are not speculative and are used to manage the Company’s exposure to foreign exchange rates. Changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings and were equal to a loss of $0.3 million for the quarter ended June 30, 2017 and a loss of $26,000 for the same quarter in the prior year. For the six month period ending June 30, 2017 and June 30, 2016, the Company recorded a loss of $0.2 million and $0.6 million, respectively. As of June 30, 2017, the Company had the following outstanding derivatives that were not designated as hedges in qualifying hedging relationships (in thousands except for number of instruments):

 

Non-Designated Derivative Summary

 

    Number of
Instruments		   Sell Notional   Buy Notional
FX Forward Contracts                        
Sell AUD/Buy USD Fwd Contract     6     $ 650     $ 493  
Sell CAD/Buy USD Fwd Contract     9     $ 7,100     $ 5,415  
Total     15             $ 5,908  

 

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Balance Sheet as of June 30, 2017 and December 31, 2016 (in thousands):

 

    Tabular Disclosure of Fair Values of Derivative Instruments
    Derivatives Asset   Derivative Liabilities
    Fair Value as of:
    June 30,   December 31,   June 30,   December 31,
    2017   2016   2017   2016
Derivatives Not Designated as Hedging Instruments            
FX Forward Contracts                                
Balance Sheet Location   Other Assets     Other Assets     Other Current Liabilities     Other Current Liabilities  
Sell AUD/Buy USD Fwd Contract   $ —       $ —       $ 5     $ —    
Sell CAD/Buy USD Fwd Contract   $ —       $ —       $ 72     $ —    
                                 
Total   $ —       $ —       $ 77     $ —    

 

The table below presents the effect of the Company’s derivative financial instruments on the Income Statement as of June 30, 2017 and June 30, 2016 (in thousands):

Effect of Derivative Instruments on the Income Statement for Derivatives Not Designated
as Hedging Instruments for the Three and Six Months Ended June 30, 2017 and 2016

 

Derivatives Not Designated as
Hedging Instruments		   Location of Gain or (Loss) Recognized in Income   Amount of Gain or (Loss) Recognized in Income   Amount of Gain or (Loss) Recognized in Income
        Three Months Ended   Six Months Ended
        June 30,   June 30,
        2017   2016   2017   2016
Sell AUD/Buy USD Fwd Contract   Other Inc/(Exp)   $ (15 )   $ 8     $ (23 )   $ (27 )
Sell CAD/Buy USD Fwd Contract   Other Inc/(Exp)     (251 )     (34 )     (213 )     (579 )
Total       $ (266 )   $ (26 )   $ (236 )   $ (606 )

 

The table below presents the total fair value classification within the fair value hierarchy for the complete portfolio of derivative transactions at June 30, 2017 (in thousands):

 

    Recurring Fair Value Measurements
    Quoted Prices in Active Markets for Identical Assets and Liabilities   Significant Other Observable Inputs   Significant Unobservable Inputs   Total Fair Value
    (Level 1)   (Level 2)   (Level 3)   at As of
    June 30,   June 30,   June 30,   June 30,
    2017   2016   2017   2016   2017   2016   2017   2016
Assets                                                                
Derivative Financial Instruments   $ —       $ —       $ —       $ —       $ —       $ —       $ —       $ —    
Liabilities                                                                
Derivative Financial Instruments   $ —       $ —       $ (77 )   $ (351 )   $ —       $ —       $ (77 )   $ (351 )

 

As of June 30, 2017, the fair value of derivatives in a net liability position was $77,000 inclusive of counterparty credit risk. As of the balance sheet date, the Company has not posted any collateral related to these agreements. If the Company had breached any of these provisions at June 30, 2017, it could have been required to settle its obligations under the agreements at their termination value of $77,000.