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Hedging Activity and Fair Value Measurements
 3 Months Ended
Mar. 31, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Hedging Activity and Fair Value Measurements

Note 8. Hedging Activity and Fair Value Measurements

 

Hedging Activity

 

During the quarter ended March 31, 2022, we entered into several interest rate swap contracts to hedge the interest rate fluctuations related to our outstanding debt. The effective date of the contracts are December 31, 2022, and, thus, we shall have payment dates each quarter, commencing March 31, 2023. During the quarter ended December 31, 2022, we entered into several foreign currency non-delivery forward contracts to hedge the fluctuations in the exchange rate between the Colombian Peso and the U.S. Dollar. Our contracts are designated as cash flow hedges since they are highly effective in offsetting changes in the cash flows attributable to forecasted LIBOR and Colombian Peso denominated costs and expenses, respectively.

 

In determining fair value, we record our hedge contracts at fair value and consider our credit risk for contracts in a liability position, and our counter-party’s credit risk for contracts in an asset position. We assess our counter-party’s risk of non-performance when measuring the fair value of financial instruments in an asset position by evaluating their financial position, including cash on hand, as well as their credit ratings.

 

As of March 31, 2023, the fair value of our interest rate swap and foreign currency non-delivery forward contracts was in a net asset position of $9.4 million. We had 15 outstanding interest rate swap contracts to hedge $125 million related to our outstanding debt through November 2026 and 2 non-delivery forward contracts to exchange $15 million U.S. Dollars to Colombian Pesos through April 2023. We assessed the risk of non-performance of the Company to these contracts and determined it was insignificant and, therefore, did not record any adjustment to fair value as of March 31, 2023.

 

We assess the effectiveness of our interest rate swap and foreign currency non-delivery forward contracts by comparing the change in the fair value of the interest rate swap and foreign currency non-delivery forward contracts to the change in the expected cash to be paid for the hedged item. The effective portion of the gain or loss on our interest rate swap and foreign currency non-delivery forward contracts is reported as a component of accumulated other comprehensive income and is reclassified into earnings in the same line item in the income statement as the hedged item in the same period or periods during which the transaction affects earnings. The amount of gains, net, recognized in the “accumulated other comprehensive income” line item in the accompanying consolidated balance sheet as of March 31, 2023 that we expect will be reclassified to earnings within the next twelve months is $3.5 million.

 

The fair value of our interest rate swap hedges that are classified in the accompanying consolidated balance sheets as of March 31, 2023 are as follows:

 

    Derivative Assets       Derivative Liabilities  
    March 31, 2023       March 31, 2023  
Derivatives designated as hedging instruments under Subtopic 815-20:   Balance Sheet Location   Fair Value       Balance Sheet Location   Fair Value  
                       
Derivative instruments:                          
Interest rate swap contracts and foreign currency non-delivery forwards   Other current assets   $ 9,357       Accrued liabilities   $ -  
Total derivative instruments   Total derivative assets   $ 9,357       Total derivative liabilities   $ -  

 

The ending accumulated balance for the interest rate swap contracts included in accumulated other comprehensive income was $7,350 as of March 31, 2023.

 

The following table presents the gains on derivative financial instruments, and their classifications within the accompanying consolidated financial statements, for the quarter ended March 31, 2023:

 

    Derivatives in Cash Flow Hedging Relationships  
    Amount of Gain or (Loss) Recognized in OCI (Loss) on Derivatives     Location of Gain or (Loss) Reclassified from Accumulated OCI (Loss) into Income   Amount of Gain or (Loss) Reclassified from Accumulated OCI (Loss) into Income  
    Three Months Ended         Three Months Ended  
    March 31,     March 31,         March 31,     March 31,  
    2023     2022         2023     2022  
                                     
Interest rate swap contracts and foreign currency non-delivery forwards contracts   $ 7,350     $   2,622     Interest expense and operating income   $  3,193     $  -  

 

 

Fair Value Measurements

 

The Company accounts for financial assets and liabilities in accordance with accounting standards that define fair value and establish a framework for measuring fair value. The hierarchy prioritizes the inputs into three broad levels. 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 or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s assumptions used to measure assets and liabilities at fair value. A financial asset’s or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

 

The carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and advances from customers approximate their fair value due to their relatively short-term maturities. The Company bases its fair value estimate for long term debt obligations on its internal valuation that all debt is floating rate debt based on current interest rates in Colombia.

 

The fair values of derivatives used to manage interest rate risks are based on LIBOR rates and interest rate swap curves. Measurement of our derivative assets and liabilities is considered a level 2 measurement. To carry out the swap valuation, the definition of the fixed leg (obligation) and variable leg (right) is used. Once the projected flows are obtained in both fixed and variable rates, the regression analysis is performed for prospective effectiveness test. The projection curve contains the forward interest rates to project flows at a variable rate and the discount curve contains the interest rates to discount future flows, using the one-month USD Libor curve.

 

As of March 31, 2023, financial instruments carried at amortized cost that do not approximate fair value consist of long-term debt. See Note 7 – Debt. The fair value of long-term debt was calculated based on an analysis of future cash flows discounted at current market rates, which are level 2 inputs.

 

The following table summarizes the fair value and carrying amounts of our long-term debt:

 

  

March 31, 2023

   December 31, 2022 
Fair Value   170,215    172,408 
Carrying Value   169,076    168,980