DERIVATIVES

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Interest Rate Swap Agreements

The Company is a party to interest rate swap agreements, with an aggregate notional value of $75.0 million at September 30, 2020. The interest rate swaps are designated 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.

The Company entered into additional interest rate swap agreements, with an aggregate notional value of $25.0 million at September 30, 2020, that do not meet the criteria for hedge accounting treatment. As a result, these interest rate swap agreements are considered non-designated interest rate swaps that serve as economic 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's total outstanding notional value of interest rate swaps was $100.0 million at September 30, 2020.

Foreign Exchange Contracts

The Company is a party from time to time to 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. Fluctuations in the value of certain foreign currencies as compared to the U.S. dollar 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 Company's foreign exchange contracts, that had been designed as hedges in order to apply hedge accounting, matured in April 2020. At September 30, 2020 the Company did not have any outstanding foreign exchange contracts.

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 to changes to the credit risk of derivative counterparties. The Company attempts to minimize these risks primarily by 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 those impacting currency markets and the 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, 2020, the Company does not have any foreign currency forward contract derivatives that are not designated as hedges.

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, 2020		December 31, 2019
Interest rate swaps	Prepaid expenses	$	—	$	427
	Other assets	—		1,267
	Accrued expenses	614		—
	Other Long-Term Liabilities	1,233		—
Foreign exchange contracts	Prepaid expenses	—		180


Derivatives not designated as hedging instruments	Balance Sheet Location	September 30, 2020		December 31, 2019
Interest rate swaps	Other assets	$	—	$	402
	Other Long-Term Liabilities	1,913		—

The fair values of the interest rate swaps 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 fair values of the

foreign exchange contracts were based on Level 2 observable inputs using quoted market prices for similar assets in an active market. 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, realized and unrealized, related to the Company’s derivative financial instruments designated as hedging instruments are recognized in other comprehensive income (loss), net of taxes, as follows (in thousands):


	Three Months Ended September 30,				Nine Months Ended September 30,
Derivatives designated as hedging instruments	2020		2019		2020		2019
Interest rate swaps	$	216	$	107	$	(2,669)	$	1,331
Foreign exchange contracts	—		44		109		398
	$	216	$	151	$	(2,560)	$	1,729

Realized gains and losses on the interest rate swaps are reclassified into earnings as the interest expense on the debt is recognized. The Company had no terminated or matured interest rate swaps during the three and nine months ended September 30, 2020.

Realized gains and losses on foreign exchange contracts that are reported in other comprehensive income (loss) are reclassified into cost of sales as the underlying inventory purchased is sold.

During the three months ended September 30, 2020, the Company reclassified $0.3 million of cash flow hedges in other comprehensive losses to earnings related to realized interest rate swap losses. During the nine months ended September 30, 2020, the Company reclassified $0.7 million of cash flow hedges in other comprehensive losses to earnings. This was comprised of $0.9 million related to realized interest rate swap losses and a gain of $0.2 million related to foreign exchange contracts recognized in cost of sales.

During the three months ended September 30, 2019, the Company reclassified $0.1 million of cash flow hedges in other comprehensive losses to earnings. This was comprised of $0.1 million related to realized interest rate swap losses and a gain of $0.2 million related to foreign exchange contracts recognized in cost of sales. During the nine months ended September 30, 2019, the Company reclassified $0.2 million of cash flow hedges in other comprehensive losses to earnings. This was comprised of $0.1 million related to realized interest rate swap losses and a gain of $0.3 million related to foreign exchange contracts recognized in cost of sales.

Interest and mark to market 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)	2020		2019		2020		2019
Interest rate swaps	Mark to market gain (loss) on interest rate derivatives	$	99	$	367	$	(2,316)	$	717
	Interest expense	(111)		23		(213)		23
		$	(12)	$	390	$	(2,529)	$	740