Note 9 - Derivatives

9 Months Ended

Sep. 30, 2019

Derivative Instruments And Hedging Activities Disclosure [Abstract]

(9)	Derivatives

The Company operates internationally and is exposed to fluctuations in foreign exchange rates and interest rates in the normal course of business. The Company, from time to time, uses derivatives to reduce exposure to market risks resulting from fluctuations in interest rates and foreign exchange rates.

All financial instruments involve market and credit risks. The Company is exposed to credit losses in the event of non-performance by the counterparties to the contracts. While there can be no assurance, the Company does not anticipate non-performance by these counterparties.

Foreign Currency Forward Contracts

The Company periodically enters into foreign currency forward contracts to protect against currency fluctuations of forecasted cash flows and existing balance sheet exposures at its foreign operations, as deemed appropriate. The Company may or may not elect to designate certain forward contracts for hedge accounting treatment.

For derivatives that are not designated for hedge accounting treatment, changes in the fair value are immediately recognized in earnings. This treatment has the potential to increase volatility of the Company’s earnings.

None of the foreign currency forward contracts entered into during the nine months ended September 30, 2019 and 2018 were designated for hedge accounting treatment. The notional amounts of the Company’s outstanding foreign exchange forward contracts were $40,666 and $35,734 at September 30, 2019 and December 31, 2018, respectively. The Company does not hold or purchase any foreign currency forward contracts for trading or speculative purposes and no contractual term is greater than twelve months.

The fair value of the Company’s foreign exchange forward contracts outstanding was a gain of $234 and a loss of $430 at September 30, 2019 and December 31, 2018, respectively. Losses are reflected under the caption “Accrued expenses and other current liabilities” and gains are reflected under the caption “Prepaid expenses and other current assets” on the Company’s balance sheet and “Other revenues, net” on the Company’s income statement.

Interest Rate Swap

The Company entered into an interest rate swap in February 2019 to reduce the impact of changes in interest rates on its floating rate debt through February 2023. The swap is a contract to exchange floating rate for fixed interest payments periodically over the life of the agreement without the exchange of the underlying notional debt amount.

The swap contract outstanding at September 30, 2019 has been designated as a cash flow hedge and, accordingly, changes in the fair value of this derivative are not recorded in earnings but are recorded each period in AOCI and reclassified into earnings as interest expense in the same period during which the hedged transaction affects earnings. The ineffective portion of the interest rate swap is recognized in earnings and has been immaterial to the Company's financial results.

As of September 30, 2019, the interest rate swap had a notional value of $200,000, at a fixed rate of 2.54%. The fair value of this swap is based on quoted market prices and was in a loss position of $7,479 at September 30, 2019. The Company did not have an interest rate swap outstanding at December 31, 2018. Losses are reflected in the Company’s balance sheet under the caption “Accrued expenses and other current liabilities.”

At September 30, 2019, the Company’s interest rate swap fixed 40.6% of the variable interest rate debt. Holding all other variables constant, if the LIBOR portion of the weighted average interest rate in the variable debt increased by 100 basis points, the effect on the Company would have been higher interest expense of $2,614 for the nine months ended September 30, 2019.

Assuming current market conditions continue, a loss of $1,803 is expected to be reclassed out of AOCI into earnings within the next twelve months.

CAMBREX CORP 10-Q