Derivative instruments and hedging activities

6 Months Ended

Jun. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative instruments and hedging activities

We recognize all of our derivative instruments as either assets or liabilities in our statement of financial position at fair value. The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, we designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation.

We have direct operations in approximately 40 countries. Sales outside of the Americas accounted for approximately 55% and 59% of our net sales during the three months ended June 30, 2023 and 2022, respectively, and approximately 57% and 59% during the six months ended June 30, 2023 and 2022, respectively. Our activities expose us to a variety of market risks, including the effects of changes in foreign currency exchange rates. These financial risks are monitored and managed by us as an integral part of our overall risk management program.

The vast majority of our foreign sales are denominated in the customers' local currency. Movements in foreign currency exchange rates pose a risk to our operations and competitive position, in that exchange rate changes may affect our profitability and cash flow, and the business or pricing strategies of our non-U.S. based competitors. We use foreign currency forward contracts as hedges of forecasted sales and expenses that are denominated in foreign currencies and as hedges of foreign currency denominated financial assets or liabilities. These contracts are entered into to help protect against the risk that the eventual dollar-net-cash inflows or outflows resulting from these transactions will be adversely affected by changes in exchange rates. We designate foreign currency forward contracts as cash flow hedges of forecasted net sales or forecasted expenses. In addition, we hedge our foreign currency denominated balance sheet exposures using foreign currency forward contracts that are not designated as hedging instruments. None of our derivative instruments contain a credit-risk-related contingent feature.

Cash flow hedges

To help minimize the financial impact of fluctuations in foreign currency exchange rates of forecasted foreign currency cash flows resulting from international sales over the next one to three years, we have instituted a foreign currency cash flow hedging program. We hedge portions of our forecasted net sales and forecasted expenses denominated in foreign currencies with forward contracts. For forward contracts, when the value of the dollar changes significantly against the foreign currencies, the change in the present value of future foreign currency cash flows may be offset by the change in the fair value of the forward contracts designated as hedges. We use foreign currency forward contracts for up to 100% of our forecasted exposures in selected currencies (primarily in Euro, Japanese yen, Hungarian forint, British pound, Malaysian ringgit, Korean won and Chinese yuan) and limit the duration of these contracts to 40 months or less.

For foreign currency derivative instruments that are designated and qualify as a cash flow hedge, the gain or loss on the derivative is reported as a component of accumulated other comprehensive income ("OCI") and reclassified into earnings in the same line item (net sales, operating expenses, or cost of sales) associated with the forecasted transaction and in the same period or periods during which the hedged transaction affects earnings. Cash flows from derivative instruments are classified in the statement of cash flows in the same category as the cash flows from the hedged or economically hedged item, primarily in operating activities. Hedge effectiveness of foreign currency forwards designated as cash flow hedges is measured by comparing the hedging instrument’s cumulative change in fair value from inception to maturity to the forecasted transaction’s terminal value.

We held forward contracts designated as cash flow hedges with the following notional amounts:


(In thousands)	US Dollar Equivalent
	As of June 30, 2023		As of December 31,
	(Unaudited)		2022
British pound	$	16,688	$	13,929
Chinese yuan	94,463		73,419
Euro	130,162		109,091
Hungarian forint	8,813		19,529
Japanese yen	28,647		21,285
Korean won	20,298		14,048
Malaysian ringgit	2,941		8,856
Total forward contracts notional amount	$	302,012	$	260,157

The contracts in the foregoing table had contractual maturities of 18 months or less at June 30, 2023 and 12 months or less at December 31, 2022.

At June 30, 2023, we expected to reclassify $5.0 million of gains on derivative instruments from accumulated OCI to net sales during the next twelve months when the hedged international sales occur, $0.6 million of losses on derivative instruments from accumulated OCI to cost of sales during the next twelve months when the hedged cost of sales are incurred and $0.5 million of losses on derivative instruments from accumulated OCI to operating expenses during the next twelve months when the hedged operating expenses occur. Expected amounts are based on derivative valuations at June 30, 2023. Actual results may vary materially as a result of changes in the corresponding exchange rates subsequent to this date.

In 2022, we entered into interest rate swap agreements with an aggregate notional value of $300 million and a term of three years. The economic effect of the swap agreements is to mitigate the uncertainty of the cash flows associated with floating-rate interest payments due under our term loan and revolving credit facility (“Credit Facility") by fixing the underlying annual interest rate for a portion of our outstanding debt under the Credit Facility at 3.9%, plus a margin. We have designated these interest rate swap agreements as qualifying hedging instruments and are accounting for these as cash flow hedges pursuant to ASC 815, Derivatives and Hedging.

The fair values of these interest rate swap agreements are included in prepaid expenses and other current assets and other long-term liabilities in our condensed consolidated balance sheets at June 30, 2023 and December 31, 2022. Changes in the fair values of these interest rate swap agreements are reported in accumulated other comprehensive loss in our condensed consolidated balance sheets and an amount is reclassified out of accumulated other comprehensive loss into Other (expense) income in the same period that the corresponding interest expense is recognized.

We do not use any interest rate swap agreements for trading purposes.

Other Derivatives

Other derivatives not designated as hedging instruments consist primarily of foreign currency forward contracts that we use to hedge our foreign denominated monetary assets and liabilities to help protect against the change in value caused by a fluctuation in foreign currency exchange rates. We typically attempt to hedge up to 90% of our outstanding foreign denominated net receivables or net payables and typically limit the duration of these foreign currency forward contracts to approximately 90 days or less. The gain or loss on the derivatives as well as the offsetting gain or loss on the hedge item attributable to the hedged risk is recognized in current earnings under the line item “Other expense.” As of June 30, 2023 and December 31, 2022, we held foreign currency forward contracts that were not designated as hedging instruments with a notional amount of $341 million and $282 million, respectively.

The following tables present the fair value of derivative instruments on our Condensed Consolidated Balance Sheets at June 30, 2023 and December 31, 2022, respectively.


	Asset Derivatives
		June 30, 2023		December 31, 2022
(In thousands)		(Unaudited)
	Balance Sheet Location	Fair Value		Fair Value

Derivatives designated as hedging instruments
Foreign exchange contracts - ST forwards	Prepaid expenses and other current assets	$	8,074	$	8,968
Interest rate contracts - ST forwards	Prepaid expenses and other current assets	3,411		2,299
Interest rate contracts - LT forwards	Other long-term assets	1,056		—
Foreign exchange contracts - LT forwards	Other long-term assets	893		—
Total derivatives designated as hedging instruments		$	13,434	$	11,267

Derivatives not designated as hedging instruments
Foreign exchange contracts - ST forwards	Prepaid expenses and other current assets	$	4,443	$	1,057
Total derivatives not designated as hedging instruments		$	4,443	$	1,057

Total derivatives		$	17,877	$	12,324


	Liability Derivatives
		June 30, 2023		December 31, 2022
(In thousands)		(Unaudited)
	Balance Sheet Location	Fair Value		Fair Value

Derivatives designated as hedging instruments
Foreign exchange contracts - ST forwards	Accrued expenses and other current liabilities	$	(4,202)	$	(9,940)
Foreign exchange contracts - LT forwards	Other long-term liabilities	(25)		(196)
Interest rate contracts - LT forwards	Other long-term liabilities	—		(1,013)
Total derivatives designated as hedging instruments		$	(4,227)	$	(11,149)

Derivatives not designated as hedging instruments
Foreign exchange contracts - ST forwards	Accrued expenses and other current liabilities	$	(2,040)	$	(8,177)
Total derivatives not designated as hedging instruments		$	(2,040)	$	(8,177)

Total derivatives		$	(6,267)	$	(19,326)

The following tables present the effect of derivative instruments on our Condensed Consolidated Statements of Income for the three months ended June 30, 2023 and 2022, respectively:


June 30, 2023
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship	Gain or (Loss) Recognized in OCI on Derivative		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income	Gain or (Loss) Reclassified from Accumulated OCI into Income
Foreign exchange contracts - forwards	$	4,682	Net sales	$	3,646

Foreign exchange contracts - forwards	557		Cost of sales	(412)

Foreign exchange contracts - forwards	458		Operating expenses	(302)

Interest rate swap contracts - forwards	5,146		Other (expense) income	802
Total	$	10,843		$	3,734


June 30, 2022
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship	Gain or (Loss) Recognized in OCI on Derivative		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income	Gain or (Loss) Reclassified from Accumulated OCI into Income
Foreign exchange contracts - forwards	$	10,252	Net sales	$	5,055

Foreign exchange contracts - forwards	(2,446)		Cost of sales	(860)

Foreign exchange contracts - forwards	(1,645)		Operating expenses	(691)


Total	$	6,161		$	3,504

(In thousands)

Derivatives not Designated as Hedging Instruments

Location of Gain (Loss) Recognized in Income

Amount of Gain (Loss) Recognized in Income

June 30, 2023

June 30, 2022

(Unaudited)

Foreign exchange contracts - forwards

Other (expense) income

4,176

3,590

Total

4,176

3,590

The following tables present the effect of derivative instruments on our Condensed Consolidated Statements of Income for the six months ended June 30, 2023 and 2022, respectively:


June 30, 2023
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship	Gain or (Loss) Recognized in OCI on Derivative		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income	Gain or (Loss) Reclassified from Accumulated OCI into Income
Foreign exchange contracts - forwards	$	2,953	Net sales	$	5,890

Foreign exchange contracts - forwards	1,700		Cost of sales	(972)

Foreign exchange contracts - forwards	1,334		Operating expenses	(630)

Interest rate swap contracts - forwards	3,180		Other (expense) income	1,329
Total	$	9,167		$	5,617


June 30, 2022
(In thousands)
(Unaudited)
Derivatives in Cash Flow Hedging Relationship	Gain or (Loss) Recognized in OCI on Derivative		Location of Gain or (Loss) Reclassified from Accumulated OCI into Income	Gain or (Loss) Reclassified from Accumulated OCI into Income
Foreign exchange contracts - forwards	$	12,136	Net sales	$	6,794

Foreign exchange contracts - forwards	(2,467)		Cost of sales	(1,187)

Foreign exchange contracts - forwards	(1,642)		Operating expenses	(931)


Total	$	8,027		$	4,676


(In thousands)
Derivatives not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income	Amount of Gain (Loss) Recognized in Income		Amount of Gain (Loss) Recognized in Income
		June 30, 2023		June 30, 2022
		(Unaudited)		(Unaudited)
Foreign exchange contracts - forwards	Other (expense) income	$	3,319	$	2,787
Total		$	3,319	$	2,787

NATIONAL INSTRUMENTS CORP 10-Q