Note 9 - Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2022

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

9.     DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.

Foreign Currency Forward Contracts

Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Chinese Renminbi and the Mexican Peso.  These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.

We held outstanding foreign currency forward contracts with notional amounts of $17.3 million and $17.1 million as of March 31, 2022 and December 31, 2021, respectively.  

Interest Rate Swap Agreements

To partially mitigate risks associated with the variable interest rates on the revolver borrowings under the credit agreement (further described in Note 10, "Debt"), in December 2021, we executed a pay-fixed, receive-variable interest rate swap agreement with each of two multinational financial institutions under which we (i) pay interest at a fixed rate of 1.3055% and receive variable interest of one-month LIBOR on a notional amount of $30.0 million and (ii) pay interest at a fixed rate of 1.3180% and receive variable interest of one-month LIBOR on a notional amount of $30.0 million (the “2021 Swaps”).  The effective date of the 2021 Swaps was December 31, 2021, and settlements with the counterparties began on January 31, 2022 and occur on a monthly basis. The 2021 Swaps will terminate on August 31, 2026.

The 2021 Swaps are designated as cash flow hedges for accounting purposes and as such, changes in their fair value are recognized in accumulated other comprehensive loss in the condensed consolidated balance sheets and are reclassified into the condensed consolidated statements of operations within interest expense in the period in which the hedged transaction affects earnings. 

Fair Values of Derivative Financial Instruments

The fair values of our derivative financial instruments and their classifications in our condensed consolidated balance sheets as of March 31, 2022 and December 31, 2021 were as follows:

	Balance Sheet Classification	March 31, 2022		December 31, 2021
Derivative assets:
Foreign currency forward contracts:
Designated as cash flow hedges	Other current assets	$	67	$	57
Not designated as hedging instruments	Other current assets		43		-
Interest rate swap agreements:
Designated as a cash flow hedge	Other assets		2,868
Total derivative assets		$	2,978	$	57
Derivative liabilities:
Foreign currency forward contracts:
Designated as cash flow hedges	Other current liabilities	$	-	$	-
Not designated as hedging instruments	Other current liabilities		-		19
Interest rate swap agreements:
Designated as a cash flow hedge	Other long-term liabilities		-		116
Total derivative liabilities		$	-	$	135

Derivative Financial Instruments in Cash Flow Hedging Relationships

The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss (“AOCL”) and on the condensed consolidated statements of operations for the three months ended March 31, 2022 and March 31, 2021 were as follows:  

	Three Months Ended March 31,
	2022			2021
Net gains recognized in AOCL:
Foreign currency forward contracts	$	154		$	-
Interest rate swap agreements		2,809			-
	$	2,963		$	-
Net gains (losses) reclassified from AOCL to the condensed consolidated statements of operations:
Foreign currency forward contracts	$	67		$	-
Interest rate swap agreements		(176	)		-
	$	(109	)	$	-

The gain related to the foreign currency forward contracts is included as a component of currency translation adjustment on the accompanying condensed consolidated statements of comprehensive income at March 31, 2022 and December 31, 2021.  The unrealized gains (losses) related to the interest rate swap agreements on the accompanying condensed consolidated statements of comprehensive income at March 31, 2022 and December 31, 2021 includes an immaterial amount of unrealized gain (loss) on marketable securities as of each date.  There were no net gains (losses) reclassified from AOCL to the consolidated statements of operations during the three months ended March 31, 2021.

Derivative Financial Instruments Not Designated as Hedging Instruments

Gains recognized on derivative financial instruments not designated as hedging instruments in our condensed consolidated statements of operations for the three months ended March 31, 2022 and March 31, 2021 were as follows: 

		Three Months Ended March 31,
	Classification in Consolidated Statements of Operations	2022			2021
Foreign currency forward contracts	Other (expense) income, net	$	(7	)	$	10
		$	(7	)	$	10