NOTE G — DERIVATIVES

The Company is a party to interest rate swap agreements, with an aggregate notional value of $125.0 million at September 30, 2018. The Company designated the interest rate swaps as cash flow hedges of the Company’s exposure to the variability of the payment of interest on a portion of its Term Loan borrowings. The hedge periods of these agreements commenced in April 2018 and will expire in March 2023. The notional amounts are reduced over these periods.

The Company has also entered into certain foreign exchange contracts, primarily to offset the earnings impact related to fluctuations in foreign currency exchange rates associated with inventory purchases denominated in foreign currencies. The aggregate gross notional values of foreign exchange contracts at September 30, 2018 and December 31, 2017 were $9.7 million and $34.9 million, respectively. These foreign exchange contracts have not been designated as hedges as required in order to apply hedge accounting. The changes in the fair values of these contracts are recorded in earnings immediately.

The fair values of the Company’s derivative financial instruments included in the unaudited condensed consolidated balance sheets are presented as follows (in thousands):


Derivatives designated as hedging instruments	Balance Sheet Location	September 30, 2018		December 31, 2017
Interest rate swaps	Prepaid Expenses	$	—	$	11
	Accrued Expenses		168		—
	Deferred rent & other long-term liabilities		691		—

Derivatives not designated as hedging instruments	Balance Sheet Location	September 30, 2018		December 31, 2017
Foreign exchange contracts	Accrued expenses	$	4	$	1,951

The fair values of the derivative financial instruments have been obtained from the counterparties to the agreements and were based on Level 2 observable inputs using proprietary models and estimates about relevant future market conditions.

The counterparties to the derivative financial instruments are major international financial institutions. The Company is exposed to credit risk for the net exchanges under these agreements, but not for the notional amounts. The Company does not anticipate non-performance by any of its counterparties.

The amounts of gains and losses related to the Company’s derivative financial instruments designated as hedging instruments are recognized in other comprehensive income (loss) as follows (in thousands):


	Three Months Ended September 30,					Nine Months Ended September 30,
Derivatives designated as hedging instruments	2018			2017		2018			2017
Interest rate swaps	$	(381	)	$	(4)	$	(658	)	$	10

During the three and nine months ended September 30, 2018 the Company recognized $0.3 million of interest expense related to the interest rate swaps. Gains or losses on the interest rate swaps will be reclassified into earnings as interest expense as the interest expense on the debt is recognized in earnings.

In connection with the financing transaction described in Note F—Debt, to the unaudited condensed consolidated financial statements included in this Quarterly Report, in March 2018 the Company settled its outstanding interest rate swaps, which had been accounted for as hedges and had an aggregate notional value of $5.3 million. The net gain at such time in accumulated other comprehensive income at December 31, 2017 related to the interest rate swaps was reclassified into interest expense during the three months ended March 31, 2018.

The amounts of the gains and losses related to the Company’s derivative financial instruments not designated as hedging instruments are recognized in earnings as follows (in thousands):


	Location of gain (loss)	Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives not designated as hedging instruments	Location of gain (loss)	2018			2017			2018			2017
Foreign exchange contracts	Selling, general and administrative expense	$	(193	)	$	(1,082	)	$	(240	)	$	(2,648	)