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Note 4 - Fair Value Measurements and Derivative Financial Instruments

9 Months Ended

Sep. 30, 2020

4.	FAIR VALUE MEASUREMENTS AND DERIVATIVE FINANCIAL INSTRUMENTS

Fair Value Measurements

The Company has developed valuation techniques based upon observable and unobservable inputs to calculate the fair value of non-current monetary assets and liabilities. Observable inputs reflect market data obtained from independent sources and unobservable inputs reflect internal market assumptions. These two types of inputs create the following fair value hierarchy:

●

Level 1 - Quoted prices for identical instruments in active markets.

	●	Level 2 - Quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
	●	Level 3 - Significant inputs to the valuation model are unobservable.

Financial assets and liabilities are classified within the fair value hierarchy in their entirety based on the lowest level of input that is significant to the fair value measurements. The Company’s assessment of the significance of a particular input to the fair value measurements requires judgment and may affect the valuation of the assets and liabilities being measured, as well as their level within the fair value hierarchy.

The fair values of cash equivalents, restricted cash, other short-term monetary assets and liabilities and finance leases approximate carrying values due to their nature. The carrying values of the Company’s senior credit facilities and other long-term obligations of $172,147 and $178,245 at September 30, 2020 and December 31, 2019, respectively, approximate fair value primarily as a result of the stated interest rates of the 2019 Senior Credit Facility approximating current market rates (Level 2).

The following table presents the Company’s financial assets measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019, at each hierarchical level.

	September 30, 2020								December 31, 2019
	Total		Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3
Other long-term liabilities:
Interest rate swaps	$	3,208	$	-	$	3,208	$	-	$	288	$	-	$	288	$	-

Derivative Financial Instruments

The Company currently uses interest rate swaps to manage variable interest rate risk. At low LIBOR rates, payments under the swaps increase the Company’s cash interest expense, and at high LIBOR rates, they have the opposite effect.

The outstanding amount of the swaps as of a period end are reported on the balance sheet at fair value, represented by the estimated amount the Company would receive or pay to terminate the swaps. They are valued using models based on readily observable market parameters for all substantial terms of the contracts and are classified within Level 2 of the fair value hierarchy.

Under the terms of the 2019 Senior Credit Facility, the Company is required to enter into or obtain an interest rate hedge sufficient to effectively fix or limit the interest rate on borrowings under the agreement of a minimum of $90,000 with a weighted average life of at least two years. On June 28, 2019, the Company entered into two pay-fixed, receive-floating, interest rate swaps. Each swap is in the initial notional amount of $67,500, has an interest rate of 6.1735% inclusive of a 4.5% LIBOR spread, and a maturity date of June 30, 2022. The swaps are with different counter parties. Changes in fair value of interest rate swaps are recorded to accumulated other comprehensive loss and reclassified to interest expense when the hedged transaction is recognized in earnings. Cash payments and receipts associated with interest rate swaps are classified as cash flows from operating activities. See Note 8 “Long-Term Obligations” and Note 11 “Accumulated Other Comprehensive Loss.”

The following table presents the notional amount, fair value and balance sheet classification of the Company’s derivative financial instruments designated as cash flow hedges as of September 30, 2020 and December 31, 2019.

		Notional		Fair
	Balance Sheet Location	Amount		Value
At September 30, 2020:
Interest rate swaps	Other long-term liabilities	$	129,938	$	3,208

At December 31, 2019:
Interest rate swaps	Other long-term liabilities	$	133,313	$	288

The following table presents gains and losses before income taxes on the Company’s interest rate swaps designated as a cash flow hedge for the three and nine-month periods ending September 30, 2020 and 2019.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Loss recognized in accumulated other comprehensive loss	$	(342	)	$	(396	)	$	(3,818	)	$	(362	)
(Loss) gain reclassified from accumulated other comprehensive loss to income		(507	)		197			(898	)		648

The following table presents the effect of cash flow hedge accounting on the Company’s Statements of Comprehensive Income for the three and nine-month periods ending September 30, 2020 and 2019.

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2020			2019			2020			2019
Recorded as Interest Expense:
Hedged interest payments	$	(1,570	)	$	(2,327	)	$	(5,328	)	$	(5,524	)
(Loss) gain on interest rate swap		(507	)		197			(898	)		648