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Note 4 - Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2023

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

4.	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 March 31, 2023, the total notional amount of the foreign currency forward contracts was $14.4 million (CAD$19.5 million) and $1.1 million (EUR€1.1 million), which included $0.3 million (CAD$0.4 million) of foreign currency forward contracts not designated as cash flow hedges. As of December 31, 2022, the total notional amount of the foreign currency forward contracts was $17.1 million (CAD$23.2 million) and $1.1 million (EUR€1.1 million), which included $0.3 million (CAD$0.4 million) of foreign currency forward contracts not designated as cash flow hedges. As of March 31, 2023, the Company’s foreign currency forward contracts mature at various dates through September 2024 and are subject to an enforceable master netting arrangement.

The Company has an interest rate swap which effectively converts a portion of its variable-rate debt to fixed-rate debt and is designated as a cash flow hedge. The Company receives floating interest payments monthly based on the Secured Overnight Finance Rate (“SOFR”) and pays a fixed rate of 1.941% to the counterparty. As of March 31, 2023 and December 31, 2022, the total notional amount of the interest rate swap was $21.7 million and $26.7 million, respectively, 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 began April 3, 2023 at a notional amount of $15.0 million and amortizes ratably on a monthly basis to zero by the April 2028 maturity date. The Company receives floating interest payments monthly based on the 30 day Average SOFR and pays 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 March 31,
		2023				2022
Foreign currency forward contracts:
Net sales		$	(282	)		$	12
Property and equipment			(87	)			-

Interest rate swaps:
Interest expense			158				-
Total		$	(211	)		$	12

As of March 31, 2023, unrealized pretax gains on outstanding cash flow hedges in Accumulated other comprehensive loss was $0.8 million, of which $0.2 million, approximately $0, 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 9, “Accumulated Other Comprehensive Loss” for additional quantitative information regarding foreign currency forward contract and interest rate swap gains and losses.