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 as well as interest rate and cross-currency 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 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 to other income (expense), net.

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 Statements of Earnings for the three and nine months ended September 30, 2022.

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, 2022, we had a net unrealized gain of $616 in accumulated other comprehensive (loss) income, $520 of which is expected to be reclassified to earnings within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $14,701 at September 30, 2022.

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, 2022, we have agreements to fix interest rates on $50,000 of long-term debt until December 2026. 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 $968.

The Company has operations and investments in various international locations and is subject to risks associated with changing foreign exchange rates. In order to hedge the Krone-based purchase price of the Ferroperm acquisition, the Company entered into a cross currency interest rate swap agreement on June 27, 2022 that synthetically swapped $25,000 of variable rate debt to Krone denominated variable rate debt. Upon completion of the Ferroperm acquisition on June 30, 2022, the transaction was designated as a net investment hedge for accounting purposes and will mature on June 30, 2027.

Accordingly, any gains or losses on this derivative instrument will be included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted or liquidated. At September 30, 2022 we had a net unrealized gain of $1,561 in accumulated other comprehensive (loss) income. Interest payments received for the cross currency swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense in the Condensed Consolidated Statements of Earnings. The assumptions used in measuring fair value of the cross currency swap are considered level 2 inputs, which are based upon the Krone to United States Dollar exchange rate market.

Prior to designation as a net investment hedge, a gain of $111 was recorded in other expense within the Condensed Consolidated Statements of Earnings during the second quarter of 2022.

The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of September 30, 2022, are shown in the following table:


	As of
	September 30,		December 31,
	2022		2021
Interest rate swaps reported in Other current assets	$	1,258	$	—
Interest rate swaps reported in Other assets	$	2,072	$	—
Interest rate swaps reported in Accrued Expenses and other liabilities	$	—	$	(437	)
Interest rate swaps reported in Other long-term obligations	$	—	$	(353	)
Foreign currency hedges reported in Other current assets	$	789	$	135
Net investment hedge reported in Other assets	$	1,675	$	—

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 $789 and foreign currency derivative liabilities of $0 at September 30, 2022.

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,
	2022		2021			2022			2021
Foreign Exchange Contracts:
Amounts reclassified from AOCI to earnings:
Cost of goods sold		216		442			524			992
Total gain reclassified from AOCI to earnings		216		442			524			992
Total derivative gain on foreign exchange contracts recognized in earnings	$	216	$	442		$	524		$	992
Interest Rate Swaps:
Income (expense) recorded in Interest expense	$	79	$	(191	)	$	(194	)	$	(554	)
Cross-Currency Swap:
Income (expense) recorded in Interest expense	$	175	$	—		$	175		$	—
Total net gains on derivatives	$	470	$	251		$	505		$	438

In the second quarter of 2022, the Company used derivative contracts to manage foreign currency exchange risk related to funds to be used for the purchase price of the Ferroperm acquisition. These contracts were not designated as hedges and therefore changes in the fair values of these instruments were recognized directly in earnings. All contracts were settled in conjunction with the closing of the Ferroperm acquisition. As a result of these contracts, the Company recognized a $1,776 loss in other expense in the Condensed Consolidated Statements of Earnings during the second quarter of 2022.