DERIVATIVES

9 Months Ended

Sep. 30, 2019

Derivative Instruments and Hedging Activities Disclosure [Abstract]

The Company is a party to interest rate swap agreements with an aggregate notional value of $100.0 million at September 30, 2019. 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 expire in March 2023. The notional amounts are reduced over these periods. In June 2019, the Company entered into new interest rate swap agreements, with an aggregate notional value of $25.0 million at September 30, 2019. These non-designated interest rate swaps serve 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 and expire in February 2025.

The Company is exposed to market risks as well as changes in foreign currency exchange rates as measured against the USD and each other, and changes to credit risk of derivative counterparties. The Company attempts to minimize these risks by primarily using foreign currency forward contracts and by maintaining counterparty credit limits. These hedging activities provide only limited protection against currency exchange and credit risk. Factors that could influence the effectiveness of the Company’s hedging programs include currency markets and availability of hedging instruments and liquidity of the credit markets. All foreign currency forward contracts that the Company enters into are components of hedging programs and are entered into for the sole purpose of hedging an existing or anticipated currency exposure. The Company does not enter into such contracts for speculative purposes and as of September 30, 2019, the Company does not have any foreign currency forward contract derivatives that are not designated as hedges. The aggregate gross notional value of foreign exchange contracts that were not designated as hedges at September 30, 2018 was $9.7 million.

Fluctuations in the value of certain foreign currencies as compared to the USD may positively or negatively affect the Company’s revenues, gross margins, operating expenses, and retained earnings, all of which are expressed in USD. Where the Company deems it prudent, the Company engages in hedging programs using foreign currency forward contracts aimed at

limiting the impact of foreign currency exchange rate fluctuations on earnings. The Company purchases short-term (i.e. 12 months or less) foreign currency forward contracts to protect against currency exchange risks associated with the payment of merchandise purchases to foreign suppliers. The Company does not hedge the translation of foreign currency profits into USD, as the Company regards this as an accounting exposure rather than an economic exposure. The aggregate gross notional values of foreign exchange contracts at September 30, 2019 was $4.5 million. These foreign exchange contracts have been designated as hedges in to order to apply hedge accounting.

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


Derivatives designated as hedging instruments	Balance Sheet Location	September 30, 2019		December 31, 2018
Interest rate swaps	Prepaid Expenses	$	495	$	42
	Other Assets	1,479		157
Foreign exchange contracts	Prepaid Expenses	339		—


Derivatives not designated as hedging instruments	Balance Sheet Location	September 30, 2019		December 31, 2018
Interest rate swaps	Other Assets	$	717	$	—

The fair values of the derivatives 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 (losses) related to the Company’s derivative financial instruments designated as hedging instruments are recognized in other comprehensive (loss) income, net of taxes, as follows (in thousands):


	Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives designated as hedging instruments	2019		2018		2019		2018
Interest rate swaps	$	107	$	(381)	$	1,331	$	(658)
Foreign exchange contracts	44		—		398		—
	$	151	$	(381)	$	1,729	$	(658)

Gains (losses) on the interest rate swaps, designated as hedges, will be reclassified into earnings as interest expense as the interest on the debt is recognized. During the three and nine months ended September 30, 2019, the Company recognized $(0.1) million and $(0.2) million of interest expense related to the interest rate swaps, respectively. During the three and nine months ended September 30, 2018, the Company recognized $(0.1) million and $(0.3) million of interest expense related to the interest rate swaps, respectively.

Gains (losses) on the foreign exchange contracts will be reclassified into cost of sales as the hedged merchandise purchases are sold. The amount recorded as a gain in cost of sales for the three and nine months ended September 30, 2019 was $0.2 million and $0.3 million, respectively.

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


		Three Months Ended September 30,						Nine Months Ended September 30,
Derivatives not designated as hedging instruments	Location of gain (loss)	2019		2018		2019		2018
Interest rate swaps	Interest expense	$	390	—		$	740	—
Foreign exchange contracts	Selling, general and administrative expense	—		$	(193)	—		$	(240)