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Note 7 - Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2022

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

7.	Derivative Instruments and Hedging Activities

In the normal course of business, the Company is exposed to interest rate and foreign currency exchange rate fluctuations. Consistent with the Company’s strategy for financial risk management, the Company has established a program that utilizes foreign currency forward contracts and interest rate swaps to offset the risks associated with the effects of these exposures.

For each derivative entered into in which the Company seeks to obtain cash flow hedge accounting treatment, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking the hedge transaction, the nature of the risk being hedged, how the hedging instrument’s effectiveness in offsetting the hedged risk will be assessed prospectively and retrospectively, and a description of the method of measuring ineffectiveness. This process includes linking all derivatives to specific firm commitments or forecasted transactions and designating the derivatives as cash flow hedges. The Company also formally assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in cash flows of hedged items. The effective portion of these hedged items is reflected in Unrealized gain (loss) on cash flow hedges on the Condensed Consolidated Statements of Comprehensive Income. If it is determined that a derivative is not highly effective, or that it has ceased to be a highly effective hedge, the Company is required to discontinue hedge accounting with respect to that derivative prospectively.

As of September 30, 2022, the total notional amount of the foreign currency forward contracts was $17.8 million (CAD$24.6 million) and $7.3 million (EUR$7.4 million), which included $0.7 million (CAD$1.0 million) of foreign currency forward contracts not designated as cash flow hedges. As of December 31, 2021, the total notional amount of the foreign currency forward contracts was $19.0 million (CAD$24.1 million), and all foreign currency forward contracts were designated as cash flow hedges. As of September 30, 2022, the Company’s foreign currency forward contracts mature at various dates through October 2023 and are subject to an enforceable master netting arrangement.

As of September 30, 2022, the interest rate swap, which effectively converts a portion of the Company’s variable-rate debt to fixed-rate debt, was designated as cash flow hedge. The Company receives floating interest payments monthly based on the Secured Overnight Financing Rate (“SOFR”) and pays a fixed rate of 1.941% to the counterparty. As of September 30, 2022, the total notional amount was $31.7 million, which amortizes ratably on a monthly basis to zero by the April 2024 maturity date.

On August 9, 2022, the Company entered into an interest rate swap transaction which will begin April 3, 2023 at a notional amount of $15.0 million, which will amortize ratably on a monthly basis to zero by the April 2028 maturity date. The Company will receive floating interest payments monthly based on the 30‑day Average SOFR and will pay a fixed rate of 2.96% to the counterparty.

The following table summarizes the gains (losses) recognized on derivatives in the Condensed Consolidated Financial Statements (in thousands):

		Three Months Ended September 30,								Nine Months Ended September 30,
		2022				2021				2022				2021

Foreign currency forward contracts:
Net sales		$	599			$	145			$	841			$	44
Property and equipment			32				-				(95	)			-

Interest rate swaps:
Interest expense			4				-				(78	)			-
Total		$	635			$	145			$	668			$	44

As of September 30, 2022, unrealized pretax gains (losses) on outstanding cash flow hedges in Accumulated other comprehensive loss was $0.3 million, of which $0.4 million, $(1.1) million, and $0.6 million are expected to be reclassified to Net sales, Property and equipment, and Interest expense, respectively, within the next twelve months as a result of underlying hedged transactions also being recorded in these line items. See Note 13, “Accumulated Other Comprehensive Loss” for additional information regarding foreign currency forward contract gains and losses.