Derivative Financial Instruments

3 Months Ended

Mar. 31, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

Our earnings and cash flows are subject to fluctuations due to changes in foreign currency exchange rates and interest rates. We selectively use derivative financial instruments including foreign currency forward contracts and interest rate swaps to manage our exposure to these risks.

The use of derivative financial instruments exposes the Company to credit risk, which relates to the risk of nonperformance by a counterparty to the derivative contracts. We manage our credit risk by entering into derivative contracts with only highly rated financial institutions and by using netting agreements.

Foreign Currency Hedges

In January of 2016, we began using forward contracts to mitigate currency risk related to a portion of our forecasted foreign currency revenues and costs. The currency forward contracts are designed as cash flow hedges and are recorded in the Condensed Consolidated Balance Sheets at fair value. Each month, we assess the effectiveness of these hedging relationships based on the total change in their fair value using regression analysis. The effective portion of derivative gains and losses are recorded in accumulated other comprehensive income until the hedged transaction affects earnings upon settlement, at which time they are reclassified to cost of goods sold or net sales. Ineffectiveness is recorded in other income (expense) in our Consolidated Statement of Earnings. If it becomes probable that an anticipated transaction that is hedged will not occur by the end of the originally specified time period, we reclassify the gains or losses related to that hedge from accumulated other comprehensive income to other income (expense).

We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At March 31, 2016, we had a net unrealized gain of $379 in accumulated other comprehensive income, which is expected to be reclassified to income within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $17.2 million at March 31, 2016.

Interest Rate Swaps

CTS uses interest rate swaps to convert the revolving credit facility’s variable rate of interest into a fixed rate. In the second quarter of 2012, CTS entered into four separate interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2012, CTS entered into four additional interest rate swap agreements to fix interest rates on $25,000 of long-term debt for the periods January 2013 to January 2017. The difference to be paid or received under the terms of the swap agreements will be recognized as an adjustment to interest expense when settled.

These swaps are treated as cash flow hedges and consequently, the changes in fair value were recorded in other comprehensive income (loss). The estimated net amount of the existing gains or losses that are reported in accumulated other comprehensive income (loss) that is expected to be reclassified into earnings within the next twelve months is approximately $674. 

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of March 31, 2016, are shown in the following table:

	As of
	March 31,			December 31,
	2016			2015
Foreign currency hedges reported in Other current assets	$	379		$	—
Interest rate swaps reported in Accrued liabilities	$	(674	)	$	(768	)

The Company has elected to net its derivative assets and liabilities in the balance sheet in accordance with ASC 210-20. On a gross basis, there were foreign exchange derivative assets of $675 and foreign exchange derivative liabilities of $296.

The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows:

	Three Months Ended
	March 31,			March 29,
	2016			2015
Foreign Exchange Contracts:
Loss recognized in Net Sales	$	(7	)	$	—
Gain recognized in Cost of Goods Sold	1			—
Gain recognized Selling, General and Administrative expense	4			—
Gain recognized in Other (expense) income	6			—
Interest Rate Swaps:
Interest Expense	$	152		$	190
Total	$	156		$	190