Derivative Financial Instruments |
6. Derivative Financial Instruments The Company’s Korean subsidiary from time to time has entered into zero cost collar contracts to hedge the risk of changes in the functional-currency-equivalent cash flows attributable to currency rate changes on U.S. dollar denominated revenues. Details of the zero cost collar contracts as of September 30, 2023 are as follows (in thousands):
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March 07, 2022 |
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$ |
12,000 |
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October 2023 to December 2023 |
April 27, 2022 |
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$ |
12,000 |
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October 2023 to December 2023 |
March 08, 2023 |
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$ |
9,000 |
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October 2023 to December 2023 |
April 03, 2023 |
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$ |
23,000 |
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December 2023 to June 2024 |
August 09, 2023 |
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$ |
27,000 |
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January 2024 to September 2024 | Details of the zero cost collar contracts as of December 31, 2022 are as follows (in thousands):
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January 04, 2022 |
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$ |
30,000 |
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January 2023 to June 2023 |
March 07, 2022 |
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$ |
24,000 |
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July 2023 to December 2023 |
April 27, 2022 |
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$ |
42,000 |
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January 2023 to December 2023 | The zero cost collar contracts qualify as cash flow hedges under ASC 815, “Derivatives and Hedging,” since at both the inception of the contracts and on an ongoing basis, the hedging relationship was and is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk during the term of the contracts. The fair values of the Company’s outstanding zero cost collar contracts recorded as liabilities as of September 30, 2023 and December 31, 2022 are as follows (in thousands):
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Derivatives designated as hedging instruments: |
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Liability Derivatives: |
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Zero cost collars |
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Other current liabilities |
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$ |
2,104 |
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$ |
2,015 |
| Offsetting of derivative liabilities as of September 30, 2023 is as follows (in thousands):
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Liability Derivatives: |
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Zero cost collars |
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$ |
2,104 |
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$ |
— |
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$ |
2,104 |
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$ |
— |
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$ |
(1,680 |
) |
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$ |
424 |
| Offsetting of derivative liabilities as of December 31, 2022 is as follows (in thousands):
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Liability Derivatives: |
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Zero cost collars |
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$ |
2,015 |
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$ |
— |
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$ |
2,015 |
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$ |
— |
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$ |
(1,940 |
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$ |
75 |
| For derivative instruments that are designated and qualify as cash flow hedges, gains or losses on the derivative aside from components excluded from the assessment of effectiveness are reported as a component of accumulated other comprehensive income or loss (“AOCI”) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Gains and losses on the derivative, representing hedge components excluded from the assessment of effectiveness, are recognized in current earnings. The following table summarizes the impact of derivative instruments on the consolidated statements of operations for the three months ended September 30, 2023 and 2022 (in thousands):
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Into Statement of Operations |
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Location/Amount of Gain (Loss) Statement of Operations on Derivatives |
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Zero cost collars |
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$ |
(1,013 |
) |
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$ |
(11,757 |
) |
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Net sales |
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$ |
(698 |
) |
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$ |
(2,820 |
) |
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Other income, net |
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$ |
(161 |
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$ |
146 |
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$ |
(1,013 |
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$ |
(11,757 |
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$ |
(698 |
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$ |
(2,820 |
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$ |
(161 |
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$ |
146 |
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| The following table summarizes the impact of derivative instruments on the consolidated statements of operations for the nine months ended September 30, 2023 and 2022 (in thousands):
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Into Statement of Operations |
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Location/Amount of Gain (Loss) Statement of Operations on Derivatives |
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Nine Months Ended September 30, |
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Zero cost collars |
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$ |
(2,523 |
) |
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$ |
(19,498 |
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Net sales |
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$ |
(2,544 |
) |
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$ |
(5,378 |
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Other income, net |
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$ |
(235 |
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$ |
201 |
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$ |
(2,523 |
) |
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$ |
(19,498 |
) |
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$ |
(2,544 |
) |
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$ |
(5,378 |
) |
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$ |
(235 |
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$ |
201 |
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| As of September 30, 2023, the amount expected to be reclassified from accumulated other comprehensive loss into loss within the next 12 months is $1,204 thousand. The Company set aside cash deposit to the counterparty, Standard Chartered Bank Korea Limited (“SC”), as required for the zero cost collar contracts. This cash deposit is recorded as hedge collateral on the consolidated balance sheets. Cash deposits as of September 30, 2023 and December 31, 2022 are as follows (in thousands):
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SC |
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$ |
1,000 |
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$ |
1,000 |
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Total |
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$ |
1,000 |
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$ |
1,000 |
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| The Company is required to deposit additional cash collateral with Nomura Financial Investment (Korea) Co., Ltd. (“NFIK”) and SC for any exposure in excess of $500 thousand. As of September 30, 2023, $1,680 thousand of additional cash collateral was required by NFIK, and recorded as hedge collateral on the consolidated balance sheet. As of December 31, 2022, $1,840 thousand and $100 thousand of additional cash collateral were required by NFIK and SC, respectively, and recorded as hedge collateral on the consolidated balance sheet. These zero cost collar contracts may be terminated by the counterparties if the Company’s total cash and cash equivalents is less than $30,000 thousand at the end of a fiscal quarter, unless a waiver is obtained.
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