DERIVATIVE FINANCIAL INSTRUMENT AND HEDGING ACTIVITY

3 Months Ended

Mar. 31, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENT AND HEDGING ACTIVITY

DERIVATIVE FINANCIAL INSTRUMENT AND HEDGING ACTIVITY

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 March 31, 2024, the notional amount of the interest rate swap was $139.4 million and decreased quarterly by approximately $4.0 million until December 2023, after which it remains static until maturity in December 2026. As of March 31, 2024, the fair value of the interest rate swap asset recorded in other non-current assets in the unaudited interim condensed consolidated balance sheets was $7.7 million. As of March 31, 2024, $9.6 million was recorded in accumulated other comprehensive income, net of tax in the unaudited interim condensed consolidated balance sheets.

During the three months ended March 31, 2024, the gain on the fair value of the interest rate swaps, net of tax recorded in accumulated other comprehensive income in the unaudited interim condensed consolidated statements of comprehensive income was approximately $0.6 million. 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 months ended March 31, 2024 and 2023, $1.6 million of interest income and $0.5 million of interest expense was recognized in relation to the interest rate swaps. Included in this amount for the three months ended March 31, 2024 and 2023 are reclassifications out of accumulated other comprehensive income of $0.2 million of interest income and $0.7 million, respectively, 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.