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Derivative Financial Instruments | 6 Months Ended
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Jun. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivative Financial Instruments | Note 13 - Derivative Financial Instruments 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 income (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 six months ended June 30, 2023. 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 June 30, 2023, we had a net unrealized gain of $2,387 in accumulated other comprehensive (loss) income, $2,387 of which is expected to be reclassified to earnings within the next 12 months. The notional amount of foreign currency forward contracts outstanding was $16,538 at June 30, 2023. 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 June 30, 2023, 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 $1,629. Cross-Currency Swap 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 are included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted or liquidated. At June 30, 2023, we had a net unrealized loss of $1,003 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. The location and fair values of derivative instruments designated as hedging instruments in the Condensed Consolidated Balance Sheets as of June 30, 2023 are shown in the following table:
|  | As of |
|  | June 30, |  |  | December 31, |
|  | 2023 |  |  | 2022 |
Interest rate swaps reported in Other current assets |  | $ | 1,629 |  |  | $ | 1,561 |
Interest rate swaps reported in Other assets |  | $ | 1,463 |  |  | $ | 1,434 |
Cross-currency swap reported in Accrued expenses and other liabilities |  | $ | (701 | ) |  | $ | (357 | )
Foreign currency hedges reported in Other current assets |  | $ | 2,095 |  |  | $ | 945 |
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 $2,233 and foreign currency derivative liabilities of $138 at June 30, 2023. The effect of derivative instruments on the Condensed Consolidated Statements of Earnings is as follows:
|  | Three Months Ended |  |  | Six Months Ended |
|  | June 30, |  |  | June 30, |  |  | June 30, |  |  | June 30, |
|  | 2023 |  |  | 2022 |  |  | 2023 |  |  | 2022 |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |  |  |  |  |
Amounts reclassified from AOCI to earnings: |  |  |  |  |  |  |  |  |  |  |  |
Net sales |  | $ | (63 | ) |  | $ | — |  |  | $ | (97 | ) |  | $ | — |
Cost of goods sold |  |  | 589 |  |  |  | 162 |  |  |  | 844 |  |  |  | 308 |
Total gain reclassified from AOCI to earnings |  |  | 526 |  |  |  | 162 |  |  |  | 747 |  |  |  | 308 |
Total derivative gain on foreign exchange contracts recognized in earnings |  | $ | 526 |  |  | $ | 162 |  |  | $ | 747 |  |  | $ | 308 |
Interest Rate Swaps: |  |  |  |  |  |  |  |  |  |  |  |
Income (expense) recorded in Interest expense |  | $ | 441 |  |  | $ | (101 | ) |  | $ | 817 |  |  | $ | (273 | )
Cross-Currency Swap: |  |  |  |  |  |  |  |  |  |  |  |
Income recorded in Interest expense |  | $ | 136 |  |  | $ | — |  |  | $ | 295 |  |  | $ | — |
Total net gains on derivatives |  | $ | 1,103 |  |  | $ | 61 |  |  | $ | 1,859 |  |  | $ | 35 |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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