Derivative Financial Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

8. Derivative Financial Instruments

The Company’s Korean subsidiary from time to time has entered into zero cost collar and forward 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 derivative contracts as of September 30, 2019 are as follows (in thousands):

Date of transaction	Type of derivative	Total notional amount		Month of settlement
April 2, 2019	Zero cost collar	$	15,000	October 2019 to December 2019
April 9, 2019	Zero cost collar	$	15,000	October 2019 to December 2019
April 25, 2019	Zero cost collar	$	15,000	October 2019 to December 2019
August 13, 2019	Zero cost collar	$	60,000	January 2020 to June 2020
September 27, 2019	Zero cost collar	$	42,000	January 2020 to June 2020

Details of derivative contracts as of December 31, 2018 are as follows (in thousands):

Date of transaction	Type of derivative	Total notional amount		Month of settlement
June 27, 2018	Zero cost collar	$	18,000	January 2019 to June 2019
June 27, 2018	Forward	$	36,000	January 2019 to June 2019

The zero cost collar and forward 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 and forward contracts recorded as assets and liabilities as of September 30, 2019 and December 31, 2018 are as follows (in thousands):

Derivatives designated as hedging instruments:		September 30, 2019		December 31, 2018
Asset Derivatives:
Zero cost collars	Other current assets	$	13	$	—
Liability Derivatives:
Zero cost collars	Other current liabilities	$	2,234	$	117
Forward	Other current liabilities	$	—	$	607

Offsetting of derivative assets and liabilities as of September 30, 2019 is as follows (in thousands):

As of September 30, 2019	Gross amounts of recognized assets/liabilities		Gross amounts offset in the balance sheets		Net amounts of assets/liabilities presented in the balance sheets		Gross amounts not offset in the balance sheets					Net amount
							Financial instruments		Cash collateral pledged
Asset Derivatives:
Zero cost collars	$	13	$	—	$	13	$	—	$	—		$	13
Liability Derivatives:
Zero cost collars	$	2,234	$	—	$	2,234	$	—	$	(590	)	$	1,644

Offsetting of derivative liabilities as of December 31, 2018 is as follows (in thousands):

As of December 31, 2018	Gross amounts of recognized liabilities		Gross amounts offset in the balance sheets		Net amounts of liabilities presented in the balance sheets		Gross amounts not offset in the balance sheets					Net amount
							Financial instruments		Cash collateral pledged
Liability Derivatives:
Zero cost collars	$	117	$	—	$	117	$	—	$	(360	)	$	(243	)
Forward	$	607	$	—	$	607	$	—	$	(1,450	)	$	(843	)

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 (“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, 2019 and 2018 (in thousands):

Derivatives in ASC 815 Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in AOCI on Derivatives (Effective Portion)					Location/Amount of Loss Reclassified from AOCI Into Statement of Operations (Effective Portion)								Location/Amount of Gain (Loss) Recognized in Statement of Operations on Derivatives (Ineffective Portion) (1)
	Three Months Ended September 30,							Three Months Ended September 30,									Three Months Ended September 30,
	2019			2018				2019			2018						2019			2018
Zero cost collars	$	(2,803	)	$	386		Net sales	$	(1,600	)	$	—			Other income	(expense), net	$	(33	)	$	18
Forwards	$	—		$	660		Net sales	$	—		$	(140	)		Other income	(expense), net	$	—		$	(102	)
Forwards—excluded time value (1)															Other income	(expense), net	$	—		$	(434	)
	$	(2,803	)	$	1,046			$	(1,600	)	$	(140	)				$	(33	)	$	(518	)
							Total Revenue	$	229,677		$	206,000

The following table summarizes the impact of derivative instruments on the consolidated statement of operations for the nine months ended September 30, 2019 and 2018 (in thousands):

Derivatives in ASC 815 Cash Flow Hedging Relationships	Amount of Loss Recognized in AOCI on Derivatives (Effective Portion)						Location/Amount of Gain (Loss) Reclassified from AOCI Into Statement of Operations (Effective Portion)							Location/Amount of Loss Recognized in Statement of Operations on Derivatives (Ineffective Portion) (1)
	Nine Months Ended September 30,								Nine Months Ended September 30,								Nine Months Ended September 30,
	2019			2018					2019			2018					2019			2018
Zero cost collars	$	(3,905	)	$	(756	)		Net sales	$	(1,803	)	$	2,191		Other income	(expense), net	$	(44	)	$	(300	)
Forwards	$	(1,798	)	$	(135	)		Net sales	$	(1,750	)	$	2,310		Other income	(expense), net	$	(125	)	$	(1,765	)
Forwards—excluded time value (1)															Other income	(expense), net	$	—		$	(161	)
	$	(5,703	)	$	(891	)			$	(3,553	)	$	4,501				$	(169	)	$	(2,226	)
								Total Revenue	$	592,202		$	571,504

(1) The FASB issued the new guidance about hedging activities (ASU 2017-12), which provides new rules about income statement classification and eliminates the requirement to separately measure and report hedge ineffectiveness. In addition, under the same guidance, excluded time value for forward contracts is presented in earnings in the same income statement line item that is used to present the earnings effect of the hedged item. The Company adopted the new guidance in the first quarter of 2019 and recorded $98 thousand as a reduction of net sales for the same period, and the comparative prior period amounts were not restated and continued to be reported under the accounting standards in effect for such period.

As of September 30, 2019, the amount expected to be reclassified from accumulated other comprehensive income into loss within the next twelve months is $2,199 thousand.

The Company set aside $9,400 thousand and $4,000 thousand in cash deposits to the counterparties, Nomura Financial Investment (Korea) Co., Ltd. (“NFIK”) and Deutsche Bank AG, Seoul Branch (“DB”), as required for the zero cost collar and forward contracts outstanding as of September 30, 2019 and December 31, 2018, respectively. These cash deposits are recorded as hedge collateral on the consolidated balance sheets.

The Company is required to deposit additional cash collateral with NFIK and DB for any exposure in excess of $500 thousand, and $590 thousand and $1,810 thousand of additional cash collateral were required and recorded as hedge collateral on the consolidated balance sheets as of September 30, 2019 and December 31, 2018, respectively.

These forward and zero cost collar contracts may be terminated by the counterparty in a number of circumstances, including if the Company’s long-term debt rating falls below B-/B3 or 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 from the counterparty.