DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2021

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

10.    DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, and foreign exchange risk primarily through the use of derivative financial instruments.

Beginning in the first quarter of 2021, the Company began entering into contracts with 30-day maturities to hedge its short-term balance sheet exposure, primarily intercompany, that are denominated in currencies (Euro, Mexican Peso, New Zealand Dollar, Chinese Renminbi, Swedish Krona) other than the subsidiary’s functional currency and are adjusted to current values using period-end exchange rates. The resulting gains or losses are recorded in other (income) expense, net in the condensed consolidated statements of income and comprehensive income. To minimize foreign currency exposure, the Company had foreign currency contracts with notional amounts of $10,500 at September 30, 2021. The foreign currency contracts are recorded in the condensed consolidated balance sheets at fair value and resulting gains or losses are recorded in other (income) expense, net in the condensed consolidated statements of income and comprehensive income. During the three and nine months ended September 30, 2021, the Company had losses of $82 and $149, respectively, on foreign currency contracts which is included in other (income) expense, net and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in other (income) expense, net.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements on its variable-rate debt. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In February 2017, the Company entered into three interest rate swaps with a combined notional amount of $40,000 that mature in February 2022. In March 2020, the Company entered into two additional interest rate swaps with a combined notional amount of $20,000 that increases to $60,000 in March 2022 and matures in December 2024.

The changes in the fair value of interest rate derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2021 and 2020, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

The Company estimates that an additional $657 will be reclassified as an increase to interest expense over the next twelve months related to its interest rate derivatives. Additionally, the Company does not use derivatives for trading or speculative purposes.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of September 30, 2021 and December 31, 2020 (in thousands):

		Liability Derivatives
		Fair value as of:
Derivatives designated as	Balance Sheet	September 30,		December 31,
hedging instruments	Location	2021		2020
Interest rate products	Accrued liabilities	$	313	$	—
Interest rate products	Other long-term liabilities		370		1,889
Foreign currency contracts	Accrued liabilities		38		—
		$	721	$	1,889

The tables below present the effect of cash flow hedge accounting on other comprehensive income (loss) (“OCI”) for the three and nine months ended September 30, 2021 and 2020 (in thousands):

	Amount of pre-tax (loss) gain recognized				Amount of pre-tax gain (loss) recognized
	in OCI on derivatives				in OCI on derivatives
Derivatives in cash flow hedging relationships	Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020
Interest rate products	$	(34)	$	(133)	$	513	$	(2,184)

	Amount of pre-tax loss reclassified				Amount of pre-tax loss reclassified
	from accumulated OCI into income				from accumulated OCI into income
Location of (loss) gain reclassified	Three months ended September 30,				Nine months ended September 30,
from accumulated OCI into income	2021		2020		2021		2020
Interest expense	$	(237)	$	(224)	$	(693)	$	(410)

The table below presents the line items that reflect the effect of the Company’s derivative financial instruments on the condensed consolidated statements of income and comprehensive income for the three and nine months ended September 30, 2021 and 2020 (in thousands):

		Total amounts of income and expense				Total amounts of income and expense
		line items presented that reflect the				line items presented that reflect the
		effects of cash flow hedges recorded				effects of cash flow hedges recorded
		Three months ended September 30,				Nine months ended September 30,
Derivatives designated as hedging instruments	Income Statement Location	2021		2020		2021		2020
Interest rate products	Interest Expense	$	777	$	844	$	2,445	$	2,799

The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2021 and December 31, 2020. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented in the condensed consolidated balance sheets (in thousands):

Gross amounts

Net amounts of liabilities

Gross amounts not offset in the consolidated

As of

Gross amounts

offset in the

presented in the

balance sheets

September 30,

of recognized

consolidated

consolidated

Financial

Cash collateral

2021

liabilities

balance sheets

balance sheets

instruments

received

Net amount

Derivatives

$

738

$

17

$

721

$

—

$

—

$

721

Gross amounts

Net amounts of liabilities

Gross amounts not offset in the consolidated

As of

Gross amounts

offset in the

presented in the

balance sheets

December 31,

of recognized

consolidated

consolidated

Financial

Cash collateral

2020

liabilities

balance sheets

balance sheets

instruments

received

Net amount

Derivatives

$

1,889

$

—

$

1,889

$

—

$

—

$

1,889

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.