DERIVATIVE FINANCIAL INSTRUMENT AND HEDGING ACTIVITY

9 Months Ended

Sep. 30, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENT AND HEDGING ACTIVITY

DERIVATIVE FINANCIAL INSTRUMENT AND HEDGING ACTIVITY

At times the Company may use derivative financial instruments to hedge exposure to interest rate risks. All derivative financial instruments are recognized as either assets or liabilities at fair value on the consolidated balance sheet and are classified as current or non-current based on the scheduled maturity of the instrument.

When entering into a hedge arrangement and intend to apply hedge accounting, the Company formally documents the hedge relationship and will designate the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge. When it is determined that a derivative financial instrument qualifies as a cash flow hedge and is effective, the changes in fair value of the instrument are recorded in accumulated other comprehensive loss, net of tax in the consolidated balance sheets and will be reclassified to earnings when the hedged item affects earnings.

In April 2020, the Company entered into an interest rate swap with Citizens Bank, N.A. to manage its exposure to changes in LIBOR-based interest rates underlying total borrowings under term facilities related to the Prior Credit Agreement, and the interest rate swap matures in December 2026. Concurrent with the termination of the Prior Credit Agreement and entry into the Credit Agreement with Truist Bank, the interest rate swap with a notional value of $168.6 million at origin on November 21, 2021 was novated and Truist Bank is the new counterparty.

As described further below, the Company amended its Credit Agreement to transition from LIBOR to SOFR due to the cessation of LIBOR, and accordingly, the interest rate swap transitioned from LIBOR to SOFR. The swap is used to manage changes in SOFR-based interest rates underlying a portion of the borrowing under the Term Facility.

The interest rate swap provides an effective fixed interest rate of 2.26% and has been designated as an effective cash flow hedge and therefore qualifies for hedge accounting. As of September 30, 2023, the notional amount of the interest rate swap was $139.4 million and decreases quarterly by approximately $4.0 million until December 2023, after which it remains static until maturity in December 2026. As of September 30, 2023, the fair value of the interest rate swap asset recorded in other non-current assets in the unaudited interim condensed consolidated balance sheets was $10.0 million. As of September 30, 2023, $14.1 million was recorded in accumulated other comprehensive income, net of tax in the unaudited interim condensed consolidated balance sheets.

During the three months ended September 30, 2023 , the change in fair value of the interest rate swaps was a gain of $0.5 million. During the nine months ended September 30, 2023, the change in fair value of the interest rate swaps was a gain of $0.3 million. During the three and nine months ended September 30, 2023, the gain on the interest rate swap of $0.4 million and $1.9 million was recorded in accumulated other comprehensive income (loss), net of tax in the unaudited interim condensed consolidated statements of comprehensive income (loss), respectively. Differences between the hedged SOFR rate and the fixed rate are recorded as interest expense in the same period that the related interest is recorded for the Term Facility based on the SOFR rate. In the three and nine months ended September 30, 2023, $0.7 million and $1.8 million of interest expense was recognized in relation to the interest rate swaps, respectively. Included in this amount for the three months ended September 30, 2023 and 2022 are reclassifications out of accumulated other comprehensive income (loss) of $0.7 million and $0.7 million and during the nine months ended September 30, 2023 and 2022 are $2.1 million and $2.1 million in expense related to terminated and de-designated cash flow hedges.

In conjunction with the amendment of the Credit Agreement (see note 4), the Company’s derivative positions automatically transitioned to SOFR, the designated fallback terms, as determined by the International Swaps and Derivatives Association on August 1, 2023. Concurrently, the Company updated its hedge documentation to reflect the change of the benchmark index, which changed solely as a result of reference rate reform. Under ASC 848, Reference Rate Reform, hedge accounting may continue without de-designation if certain criteria are met. For cash flow hedges in which the designated hedged risk is LIBOR (or another rate that is expected to be discontinued), the guidance allows an entity to assert that it remains probable that the hedged forecasted transaction will occur. The Company applied the optional expedient within ASC 848 to conclude the updates to the hedge relationship due to reference rate reform did not have a material impact on the Company's consolidated financial statements.