Note 12 - Derivative Instruments and Hedging Activities

12 Months Ended

Dec. 31, 2022

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

12.     DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Our primary objective for holding derivative financial instruments is to manage foreign currency exchange rate risk and interest rate risk, when deemed appropriate. We enter into these contracts in the normal course of business to mitigate risks and not for speculative purposes.

Foreign Currency Forward Contracts

Under our risk management strategy, we periodically use foreign currency forward contracts to manage our short-term exposures to fluctuations in operational cash flows resulting from changes in foreign currency exchange rates. These cash flow exposures result from portions of our forecasted operating expenses, primarily compensation and related expenses, which are transacted in currencies other than the U.S. dollar, most notably the Chinese renminbi and the Mexican peso.  These foreign currency forward contracts generally have maturities of no longer than twelve months, although occasionally we will execute a contract that extends beyond twelve months, depending upon the nature of the underlying risk.

We held outstanding foreign currency forward contracts with notional amounts of $25.7 million and $17.1 million as of December 31, 2022 and 2021, respectively.  The Company's foreign currency forward contracts related to the Chinese renminbi are designated as cash flow hedges for accounting purposes and as such, changes in their fair value are recognized in accumulated other comprehensive income (loss) in the consolidated balance sheet and are reclassified into the statement of operations within cost of goods sold in the period in which the hedged transaction affects earnings. 

Interest Rate Swap Agreements

To partially mitigate risks associated with the variable interest rates on the revolver borrowings under the New Credit Agreement, in November 2021, we executed a pay-fixed, receive-variable interest rate swap agreement with each of two multinational financial institutions under which we (i) pay interest at a fixed rate of 1.3055% and receive variable interest of one-month LIBOR on a notional amount of $30.0 million and (ii) pay interest at a fixed rate of 1.3180% and receive variable interest of one-month LIBOR on a notional amount of $30.0 million (the “2021 Swaps”).  The effective date of the 2021 Swaps was December 31, 2021, and settlements with the counterparties began on January 31, 2022 and occur on a monthly basis. The 2021 Swaps swill terminate on August 31, 2026. In January 2023, and in connection with related changes to its credit agreement, the Company amended its two interest rate swap agreements to transition the related reference rates in these agreements from LIBOR to SOFR, effective January 31, 2023. 

The 2021 Swaps are designated as cash flow hedges for accounting purposes and as such, changes in their fair value are recognized in accumulated other comprehensive income (loss) in the consolidated balance sheet and are reclassified into the statement of operations within interest expense in the period in which the hedged transaction affects earnings. 

Fair Values of Derivative Financial Instruments

The fair values of our derivative financial instruments and their classifications in our consolidated balance sheets as of December 31, 2022 were as follows:

	Balance Sheet Classification	December 31, 2022		December 31, 2021
Derivative assets:
Foreign currency forward contracts:
Designated as cash flow hedges	Other current assets	$	359	$	57
Interest rate swap agreements:
Designated as a cash flow hedge	Other assets		5,539		-
Total derivative assets		$	5,898	$	57
Derivative liabilities:
Foreign currency forward contracts:
Not designated as hedging instruments	Other current liabilities	$	-	$	19
Interest rate swap agreements:
Designated as a cash flow hedge	Other long-term liabilities		-		116
Total derivative liabilities		$	-	$	135

Derivative Financial Instruments in Cash Flow Hedging Relationships

The effects of derivative financial instruments designated as cash flow hedges on accumulated other comprehensive loss (“AOCL”) and on the consolidated statements of operations for the years ended December 31, 2022 and 2021 were as follows:  

	Year Ended December 31,
	2022			2021
Net (losses) gains recognized in AOCL:
Foreign currency forward contracts	$	(119	)	$	57
Interest rate swap agreements		5,886			(116	)
	$	5,767		$	(59	)
Net (losses) gains reclassified from AOCL to the consolidated statement of operations:
Foreign currency forward contracts	$	(805	)	$	-
Interest rate swap agreements		230			-
	$	(575	)	$	-

The losses related to the foreign currency forward contracts are included as a component of currency translation adjustment on the accompanying consolidated statements of comprehensive income at December 31, 2022 and 2021.    

Derivative Financial Instruments Not Designated as Hedging Instruments

(Losses) gains recognized on derivative financial instruments not designated as hedging instruments in our consolidated statements of operations for the years ended December 31, 2022 and 2021 were as follows: 

		Year Ended December 31,
	Classification in Consolidated Statements of Operations	2022		2021
Foreign currency forward contracts	Other expense, net		58		62
		$	58	$	62