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Fair Value of Financial Instruments
 12 Months Ended
Dec. 31, 2020
Fair Value of Financial Instruments  
Fair Value of Financial Instruments
14. Fair Value of Financial Instruments
 
 
Fair value is
 
defined as the
 
price that would
 
be received to
 
sell an asset
 
or paid to
 
transfer a liability
 
in a transaction
 
between
market participants
 
as of
 
the measurement
 
date. Fair
 
value is
 
measured using
 
the fair
 
value hierarchy
 
and related
 
valuation
methodologies as
 
defined in
 
the authoritative
 
literature. This
 
guidance provides
 
a fair
 
value framework
 
that requires
 
the
categorization of assets and liabilities into three
 
levels based upon the assumptions (inputs)
 
used to price the assets or liabilities.
Level 1 provides the most reliable measure of fair value, whereas
 
Level 3 generally requires significant management judgment.
 
 
The three levels are defined as follows:
 
 
Level 1 -
 
Quoted prices in active markets for identical assets and liabilities.
 
Level 2 -
 
Quoted prices for similar
 
instruments in active
 
markets, quoted prices
 
for identical or similar
 
instruments in
markets that
 
are not
 
active and
 
model-derived valuations,
 
in which
 
all significant
 
inputs are
 
observable in
active markets.
 
Level 3 -
 
Significant unobservable
 
inputs reflecting management's
 
own assumptions about
 
the inputs used
 
in pricing
the asset or liability.
 
 
The Company’s financial instruments historically consisted of
 
cash and cash equivalents, accounts receivable, accounts payable,
debt, interest rate swaps and foreign
 
currency derivatives. Cash and
 
cash equivalents, accounts receivable
 
and accounts payable
carrying values as of December 31, 2020 and December
 
31, 2019 approximate fair value due to the
 
short-term maturities of these
financial instruments.
 
As of
 
December 31,
 
2020, the
 
carrying amounts
 
of the
 
WF Term
 
Loans and
 
WF Revolving
 
Loan
approximate fair
 
value due
 
to the
 
short-term nature
 
of the
 
underlying variable
 
rate LIBOR
 
agreements. The
 
FGI Term Loan
approximate fair value
 
as of December
 
31, 2020, due
 
to the immaterial
 
movement in interest
 
rates since the
 
Company entered
into the
 
Promissory Note
 
on of
 
October 20,
 
2020. The
 
carrying amounts
 
of long
 
-term debt
 
and the
 
revolving line
 
of credit
approximate fair value as of December 31, 2019 due to the short-term nature of the underlying variable rate LIBOR
 
agreements.
The Company had
 
Level 2 fair
 
value measurements at
 
December 31,
 
2019 relating to
 
the Company’s
 
interest rate swaps
 
and
foreign currency derivatives.
 
 
Derivative and hedging activities
 
 
Foreign currency derivatives
 
 
The Company conducts business in foreign countries and pays certain
 
expenses in foreign currencies; therefore, the Company is
exposed to foreign currency
 
exchange risk between the
 
U.S. Dollar and foreign
 
currencies, which could
 
impact the Company
 
’s
operating income and cash flows. To mitigate risk associated with foreign currency exchange, the Company entered into forward
contracts to exchange
 
a fixed amount
 
of U.S. Dollars
 
for a fixed
 
amount of foreign
 
currency, which
 
were used to
 
fund future
reign currency cash flows. At
 
inception, all forward contracts were formally documented as cash flow
 
hedges and were measured
at fair value each reporting period.
 
 
Derivatives are formally
 
assessed both at
 
inception and at
 
least quarterly thereafter,
 
to ensure that
 
derivatives used in
 
hedging
transactions are highly effective in offsetting changes in cash flows
 
of the hedged item. If it is determined that
 
a derivative ceases
to be
 
a highly
 
effective hedge,
 
or if
 
the anticipated
 
transaction is
 
no longer
 
probable of
 
occurring, hedge
 
accounting is
discontinued, and
 
any future
 
mark-to-market adjustments
 
are recognized
 
in earnings.
 
The effective
 
portion of
 
gain or
 
loss is
reported in accumulated
 
other comprehensive income
 
and the ineffective
 
portion is reported
 
in earnings. The
 
impacts of these
contracts were
 
largely offset
 
by gains
 
and losses
 
resulting from
 
the impact
 
of changes
 
in exchange
 
rates on
 
transactions
denominated in the foreign currency. As of December 31, 2020, the Company had no outstanding
 
foreign currency derivatives.
 
 
 
Interest Rate Swaps
 
 
The Company
 
entered into
 
interest rate
 
swap contracts
 
to fix
 
the interest
 
rate on
 
an initial
 
aggregate amount
of
 
$
35,000,000
 
thereby reducing exposure to interest
 
rate changes. The Company paid
 
a fixed rate of
 
2.49
%
 
to the counterparty
and receives 30
 
day LIBOR
 
for both cash
 
flow hedges. At inception,
 
all interest rate
 
swaps were formally
 
documented as cash
flow hedges and are
 
measured at fair value
 
each reporting period
 
.
 
During the 2020 year,
 
the Company closed the
 
positions, see
Note 9 – Debt
, for additional information.
 
 
Financial statements impacts
 
The following tables detail amounts related to our derivatives designated
 
as hedging instruments as of December
 
31, 2019:
Fair Values
 
of Derivatives Instruments
Asset Derivatives
Liability Derivatives
Balance Sheet Location
Fair Value
Balance Sheet Location
Fair Value
Foreign exchange contracts
Prepaid expense other
 
current assets
$
452,000
Accrued liabilities other
$
—
Notional contract values
$
15,358,000
$
—
Interest rate swaps
Other non-current assets
$
—
Other non-current
 
liabilities
$
706,000
Notional swap values
$
—
$
29,750,000
As of December
 
31, 2019, the
 
Company had foreign
 
exchange contracts related
 
to the Mexican
 
Peso and the
 
Canadian Dollar
with exchange rates ranging from
19.53
 
to
20.58
 
and
1.32
, respectively.
 
 
The following tables
 
summarize the amount
 
of unrealized /
 
realized gain and
 
loss recognized
 
in Accumulated Comprehensive
Income (AOCI) for the years ended December
 
31, 2020, 2019 and 2018:
Derivatives in
 
subtopic 815-20
 
Cash Flow
 
Hedging
 
Relationship
Amount of Unrealized Gain or
 
(Loss) Recognized in Accumulated
 
Other Comprehensive Income on
 
Derivative
Location of Gain or
 
(Loss) Reclassified
 
from Accumulated
 
Other Comprehensive
 
Income
(A)
Amount of Realized Gain or (Loss)
 
Reclassified from Accumulated
 
Other Comprehensive Income
2020
2019
2018
2020
2019
2018
Foreign exchange
 
contracts
$
142,000
$
1,499,000
$
(385,000)
Cost of goods sold
$
526,000
$
272,000
$
68,000
Selling, general and
 
administrative expense
$
68,000
$
25,000
$
—
Interest rate swaps
$
(915,000)
$
(708,000)
$
(223,000)
Interest Expense
$
(1,620,000)
$
(67,000)
$
(159,000)
(A)
 
The foreign currency derivative activity reclassified from
 
Accumulated Other Comprehensive Income is allocated to
cost of goods sold and selling, general and administrative expense based
 
on the percentage of Mexican Peso spend.