Derivative Financial Instruments

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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 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).

We assess hedge effectiveness 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 Condensed Consolidated Statement of Earnings for the three and nine months ended September 30, 2019.

Foreign Currency Hedges

We use 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.

We continue to monitor the Company’s overall currency exposure and may elect to add cash flow hedges in the future. At September 30, 2019, we had a net unrealized gain of $452 in accumulated other comprehensive (loss) income, of which $432 is expected to be reclassified to income within the next 12 months. At September 30, 2018 we had a net unrealized gain of $867 in accumulated other comprehensive (loss) income. The notional amount of foreign currency forward contracts outstanding was $11,738 at September 30, 2019.

Interest Rate Swaps

We use interest rate swaps to convert a portion of our revolving credit facility’s outstanding balance from a variable rate of interest to a fixed rate. As of September 30, 2019, we have agreements to fix interest rates on $50,000 of long-term debt through February 2024. 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 are recorded in other comprehensive (loss) income. The estimated net amount of the existing gains that are reported in accumulated other comprehensive (loss) income that are expected to be reclassified into earnings within the next twelve months is approximately $127.

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of September 30, 2019, are shown in the following table:



	As of
	September 30,			December 31,
	2019			2018
Interest rate swaps reported in Other current assets	$	127		$	576
Interest rate swaps reported in Other assets	—			369
Interest rate swaps reported in Other long-term obligations	(498		)	—
Foreign currency hedges reported in Other current assets	$	395		$	393

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 foreign currency derivative assets of $463 and foreign currency derivative liabilities of $68 at September 30, 2019.

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



	Three Months Ended					Nine Months Ended
	September 30,		September 30,			September 30,		September 30,
	2019		2018			2019		2018
Foreign Exchange Contracts:
Amounts reclassified from AOCI to earnings:
Net sales	$	—	$	152		$	—	$	115
Cost of goods sold	286		(52		)	562		88
Selling, general and administrative expense	23		3			62		(2		)
Total amounts reclassified from AOCI to earnings	309		103			624		201
Loss recognized in other expense for hedge ineffectiveness	—		—			—		(1		)
Total derivative gain on foreign exchange contracts recognized in earnings	$	309	$	103		$	624	$	200

Interest Rate Swaps:
Benefit recorded in Interest expense	$	117	$	114		$	430	$	284
Total gain	$	426	$	217		$	1,054	$	484