Interest Rate Risk. Our debt
bears interest at variable interest rates and, therefore, we are
subject to variability in the cash paid for interest expense. In
order to mitigate a portion of this risk, we use a hedging strategy
to reduce the variability of cash flows in the interest payments
associated with a portion of the variable-rate debt outstanding
under our Third Amended Credit Agreement that is solely due to
changes in the benchmark interest rate.
Derivative Instruments Designated as
Cash Flow Hedges
On August 5, 2016, we entered into a pay-fixed,
receive-variable interest rate swap with a current notional amount
of $175 million with Wells Fargo to fix the one-month
LIBOR rate at 1.12%. The variable portion of the interest rate
swap is tied to the one-month LIBOR rate (the benchmark interest
rate). On a monthly basis, the interest rates under both the
interest rate swap and the underlying debt reset, the swap is
settled with the counterparty, and interest is paid. The interest
rate swap is scheduled to expire on July 6, 2021.
On December 23, 2019, we entered into a pay-fixed, receive-variable
interest rate swap with a notional amount of $75 million with
Wells Fargo to fix the one-month LIBOR rate at 1.71% for the
period from July 6, 2021 to July 31, 2024. The variable portion of
the interest rate swap is tied to the one-month LIBOR rate (the
benchmark interest rate). On a monthly basis, the interest rates
under both the interest rate swap and the underlying debt will
reset, the swap will be settled with the counterparty, and interest
will be paid.
At March 31, 2020 and December 31, 2019, our
interest rate swaps qualified as cash flow hedges. The fair
value of our interest rate swaps at March 31, 2020 was a
liability of approximately $4.8 million, which was partially offset
by approximately $1.2 million in deferred taxes. The fair value of
our interest rate swaps at December 31, 2019 was an asset
of approximately $1.2 million, partially offset by approximately
$307,000 in deferred taxes, and a liability of $(290,000),
partially offset by approximately $(75,000) in deferred taxes.
Foreign Currency Risk. We
operate on a global basis and are exposed to the risk that our
financial condition, results of operations, and cash flows could be
adversely affected by changes in foreign currency exchange rates.
To reduce the potential effects of foreign currency exchange rate
movements on net earnings, we enter into derivative financial
instruments in the form of foreign currency exchange forward
contracts with major financial institutions. Our policy is to enter
into foreign currency derivative contracts with maturities of up to
two years. We are primarily exposed to foreign currency exchange
rate risk with respect to transactions and balances denominated in
Chinese Renminbi, Euros, British Pounds, Mexican Pesos, Brazilian
Reals, Australian Dollars, Hong Kong Dollars, Swiss Francs, Swedish
Krona, Canadian Dollars, Danish Krone, Japanese Yen, and South
Korean Won, among others. We do not use derivative financial
instruments for trading or speculative purposes. We are not subject
to any credit risk contingent features related to our derivative
contracts, and counterparty risk is managed by allocating
derivative contracts among several major financial
institutions.
Derivative Instruments Designated as
Cash Flow Hedges
For derivative instruments
that are designated and qualify as cash flow hedges, the gain or
loss on the derivative instrument is temporarily reported as a
component of other comprehensive income (loss) and then
reclassified into earnings in the same line item associated with
the forecasted transaction and in the same period or periods during
which the hedged transaction affects earnings. We entered into
forward contracts on various foreign currencies to manage the risk
associated with forecasted exchange rates which impact revenues,
cost of sales, and operating expenses in various international
markets. The objective of the hedges is to reduce the variability
of cash flows associated with the forecasted purchase or sale of
the associated foreign currencies.
We enter into approximately 150 cash flow foreign currency hedges
every month. As of March 31, 2020 and
December 31, 2019 we had entered into foreign currency
forward contracts, which qualified as cash flow hedges, with
notional amounts of $173.2 million and $212.5 million,
respectively.