Derivatives

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.

The effective portion of derivative gains and losses are recorded in accumulated other comprehensive (loss) income until the hedged transaction affects earnings upon settlement, at which time they are reclassified to interest expense, cost of goods sold, or net sales. If it is probable that an anticipated hedged transaction 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 (loss) income to other income (expense).

On April 1, 2018, the company adopted the provisions of ASU No. 2017-12 "Derivatives and Hedging (Topic 815): Target Improvements to Accounting for Hedging Activities". As a result, hedge effectiveness was reviewed qualitatively by verifying that the critical terms of the hedging instrument and the forecasted transaction continue to match, and that there have been no adverse developments that have increased the risk that the counterparty will default. No recognition of ineffectiveness was recorded in our Consolidated Statement of Earnings as a result of this qualitative analysis for the year ended December 31, 2018.

Foreign Currency Hedges

In January of 2016, we began using forward contracts to mitigate currency risk related to a portion of our forecasted foreign Euro denominated revenues and Mexican Peso denominated expenses. The currency forward contracts are designed as cash flow hedges and are recorded in the Consolidated Balance Sheets at fair value.

As of December 31, 2018, we were hedging a portion of our forecasted Peso expenses for the following twelve months. We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At December 31, 2018, we had a net unrealized loss of $371 in accumulated other comprehensive loss, of which $318 is expected to be reclassified to income within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $15,700 at December 31, 2018.

Interest Rate Swaps

We use interest rate swaps to convert the revolving credit facility’s variable rate of interest into a fixed rate on a portion of our debt balance. In the second quarter of 2012, we entered into four separate one-year 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, we entered into four additional one-year interest rate swap agreements to fix interest rates on $25,000 of long-term debt for the periods January 2013 to January 2017. In the third quarter of 2016, we entered into three additional one-year interest rate swap agreements to fix interest rates on $50,000 of long-term debt for the periods August 2017 to August 2020. 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 $576.

The location and fair values of derivative instruments designated as hedging instruments in the Consolidated Balance Sheets as of December 31, 2018, are shown in the following table:



	As of December 31,
	2018		2017
Foreign currency hedges reported in Accrued expenses and other liabilities	$	—	$	742
Foreign currency hedges reported in Other current assets	$	393	$	—
Interest rate swaps reported in Other current assets	$	576	$	278
Interest rate swaps reported in Other assets	$	369	$	693

The Company has elected to net its foreign currency derivative assets and liabilities in the balance sheet in accordance with ASC 210-20 (Balance Sheet, Offsetting). On a gross basis, there were $423 foreign currency derivative assets and foreign currency derivative liabilities were $30.

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



	Years Ended December 31,
	2018			2017			2016
Foreign Exchange Contracts:
Amounts reclassified from AOCI to earnings:
Net sales	$	383		$	(488	)	$	(124	)
Cost of goods sold	(6		)	497			111
Selling, general and administrative	107			45			1
Total amounts reclassified from AOCI to earnings	484			54			(12		)
Loss recognized in other expense for hedge ineffectiveness	—			(1		)	(1		)
Loss recognized in other expense for derivatives not designated as cash flow hedges	—			(15		)	(5		)
Total derivative gain (loss) on foreign exchange contracts recognized in earnings	$	484		$	38		$	(18	)

Interest Rate Swaps:
Interest Expense	$	(421	)	$	(37	)	$	(928	)
Total income (loss) on derivatives recognized in earnings	$	63		$	1		$	(946	)