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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments Derivative Financial InstrumentsThe Company is subject to volatility in interest rates due to variable-rate debt. To manage this risk, the Company has entered into multiple interest rate swap agreements. The January 2019 agreement hedges $100.0 million of variable interest-rate debt, or 16%, of the Company’s outstanding variable-rate debt as of September 30, 2020. The August 2019 agreement hedges $225.0 million of variable interest-rate debt, or 37%, of the Company’s outstanding variable-rate debt as of September 30, 2020. Each agreement converts the Company’s variable-rate debt to a fixed-rate basis into 2024, thus reducing the impact of interest rate changes on future interest expense.
These agreements involve the receipt of variable-rate amounts in exchange for fixed-rate interest payments over the life of the respective agreement without an exchange of the underlying notional amount. The Company’s objective for utilizing these derivative instruments is to reduce its exposure to fluctuations in cash flows due to changes in interest rates.
For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified into interest expense in the same period during which the hedged transaction affects earnings. Amounts reported in Accumulated Other Comprehensive Income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. During the next twelve months, the Company estimates that an additional $5.0 million will be reclassified as an increase to interest expense. The Company classifies cash inflow and outflows from derivatives within operating activities on the Condensed Consolidated Statements of Cash Flows.
The Company is subject to volatility in foreign exchange rates due to foreign-currency denominated intercompany loans. The Company implemented cross-currency swaps to manage the foreign currency exchange rate risk on these intercompany loans. These agreements effectively mitigate the Company’s exposure to fluctuations in cash flows due to foreign exchange rate risk by converting the Company’s floating exchange rate to a fixed-rate basis for the life of the intercompany loans. These agreements involve the receipt of fixed USD amounts in exchange for payment of fixed AUD and NZD amounts over the life of the respective intercompany loan. The entirety of the Company’s outstanding intercompany loans receivable balances, $153.5 million AUD and $37.5 million NZD, were hedged under the cross-currency swap agreements at September 30, 2020.
For derivatives designated and that qualify as cash flow hedges of foreign exchange risk, the gain or loss on the derivative is recorded in Accumulated Other Comprehensive Income and subsequently reclassified in the period(s) during which the hedged transaction affects earnings within the same income statement line item as the earnings effect of the hedged transaction. During the next twelve months, the Company estimates a nominal amount will be reclassified as a decrease to interest expense. The Company classifies cash inflow and outflows from derivatives within operating activities on the Condensed Consolidated Statements of Cash Flows.
The Company is subject to volatility in foreign currencies against its functional currency, the US dollar.  Periodically, the Company uses foreign currency derivatives including currency forward contracts to manage its exposure to fluctuations in exchange rates. While these derivatives are hedging the fluctuations in foreign currencies, they do not meet the requirements to be accounted for as hedging instruments. As a result, the changes in the fair value of derivatives not designated in hedging relationships are recorded directly in earnings. During the first quarter of 2020, the Company’s previous two outstanding foreign exchange forward contracts, which were entered into in conjunction with the funding of the Nova Cold Acquisition that were not designated as hedges in a qualifying hedging relationship, matured. The first contract was entered into in December 2019 with a notional to purchase CAD $217.0 million and sell USD matured on January 2, 2020 and settled for a gain of $2.1 million. The second contract was entered into simultaneously with a notional to sell CAD $217.0 million and purchase USD maturing on January 31, 2020 and was subsequently designated as a net investment hedge on January 2, 2020. The net unrealized gain on the change in fair value of the foreign exchange forward contracts included within “Foreign currency exchange gain (loss), net” on the accompanying Condensed Consolidated Statement of Operations for the nine months ended September 30, 2020 was $0.1 million.
The Company is also exposed to fluctuations in foreign exchange rates on property investments it holds in foreign countries. The Company uses forward currency forwards to hedge its exposure to changes in exchange rates on certain of its foreign investments as well. For derivatives designated as net investment hedges, the changes in the fair value of the derivatives are reported in Accumulated Other Comprehensive Income as part of the cumulative
translation adjustment. Amounts are reclassified out of accumulated other comprehensive income into earnings when the hedged net investment is either sold or substantially liquidated.
On January 2, 2020, the Company designated the above noted forward currency contract with a notional to sell CAD $217.0 million and purchase USD maturing on January 31, 2020. This contract was then settled for a gain of $0.2 million and a new contract was entered into with same notional to sell CAD $217.0 million and purchase USD which matured on February 28, 2020. The second contract was settled for a gain of $2.8 million upon the maturity date of February 28, 2020.
As of September 30, 2020 and December 31, 2019, the Company did not have any currency forwards that were designated as net investment hedges outstanding.
The Company determines the fair value of these derivative instruments using a present value calculation with significant observable inputs classified as Level 2 of the fair value hierarchy. Derivative asset balances are recorded on the Condensed Consolidated Balance Sheets within “Other assets” and derivative liability balances are recorded on the Condensed Consolidated Balance Sheets within “Accounts payable and accrued expenses”. The following table illustrates the disclosure in tabular format of fair value amounts of derivative instruments at September 30, 2020 and December 31, 2019 (in thousands):
Derivative AssetsDerivative Liabilities
September 30, 2020December 31, 2019September 30, 2020December 31, 2019
Designated derivatives
Foreign exchange contracts$2,572 $1,376 $— $— 
Interest rate contracts— 2,933 17,466 3,505 
Undesignated derivatives
Foreign exchange forwards— 2,546 — 2,589 
Total derivatives$2,572 $6,855 $17,466 $6,094 
The following table presents the effect of the Company’s derivative financial instruments on the accompanying Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2020 and 2019, including the impacts to Accumulated Other Comprehensive Income (AOCI) (in thousands):
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on DerivativeLocation of Gain or (Loss) Reclassified from AOCI into IncomeAmount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
Three Months Ended September 30,Three Months Ended September 30,
2020201920202019
Interest rate contracts$1,099 $5 Interest expense$(1,243)$102 
Foreign exchange contracts(7,196)6,082 Foreign currency exchange gain, net(3,807)5,512 
Foreign exchange contracts— — Interest expense(43)110 
Total designated cash flow hedges$(6,097)$6,087 $(5,093)$5,724 
Amount of Gain or (Loss) Recognized in Other Comprehensive Income on DerivativeLocation of Gain or (Loss) Reclassified from AOCI into IncomeAmount of Gain or (Loss) Reclassified from Accumulated Other Comprehensive Income into Income
Nine Months Ended September 30,Nine Months Ended September 30,
2020201920202019
Interest rate contracts$(16,895)$(3,633)Interest expense$(2,181)$102 
Foreign exchange contracts1,168 5,736 Foreign currency exchange loss, net77 6,005 
Foreign exchange contractsInterest expense164 110 
Foreign exchange forwards5,250 — — — 
Total designated cash flow hedges$(10,477)$2,103 $(1,940)$6,217 
Interest expense recorded in the accompanying Condensed Consolidated Statements of Operations was $23.1 million and $24.9 million during the three months ended September 30, 2020 and 2019, respectively, and $70.1 million and $70.6 million during the nine months ended September 30, 2020 and 2019, respectively. The Company recorded total foreign currency exchange loss, net in its Condensed Consolidated Statements of Operations of $0.2 million and $0.4 million for the three and nine months ended September 30, 2020, respectively. During the nine months ended September 30, 2019, the Company recorded total foreign currency exchange loss, net in its Condensed Consolidated Statements of Operations of $0.1 million. The total foreign currency exchange loss for the three months ended September 30, 2019 was nominal.
The table below presents a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2020 and December 31, 2019. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented on the accompanying Condensed Consolidated Balance Sheets (in thousands):
September 30, 2020
Offsetting of Derivative Assets
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
Gross Amounts of Recognized AssetsGross Amounts Offset in the Condensed Consolidated Balance SheetNet Amounts of Assets presented in the Condensed Consolidated Balance SheetFinancial InstrumentsCash Collateral ReceivedNet Amount
Derivatives$2,572 $— $2,572 $(2,572)$— $— 
Offsetting of Derivative Liabilities
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
Gross Amounts of Recognized LiabilitiesGross Amounts Offset in the Condensed Consolidated Balance SheetNet Amounts of Liabilities presented in the Condensed Consolidated Balance SheetFinancial InstrumentsCash Collateral ReceivedNet Amount
Derivatives$(17,466)$— $(17,466)$2,572 $— $(14,894)
December 31, 2019
Offsetting of Derivative Assets
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
Gross Amounts of Recognized AssetsGross Amounts Offset in the Condensed Consolidated Balance SheetNet Amounts of Assets presented in the Condensed Consolidated Balance SheetFinancial InstrumentsCash Collateral ReceivedNet Amount
Derivatives$6,855 $— $6,855 $(3,966)$— $2,889 
Offsetting of Derivative Liabilities
Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
Gross Amounts of Recognized LiabilitiesGross Amounts Offset in the Condensed Consolidated Balance SheetNet Amounts of Liabilities presented in the Condensed Consolidated Balance SheetFinancial InstrumentsCash Collateral ReceivedNet Amount
Derivatives$(6,094)$— $(6,094)$3,966 $— $(2,128)
As of September 30, 2020, the fair value of derivatives in a net liability position, which includes accrued interest but excludes any adjustment for nonperformance risk, related to these agreements was $17.6 million. As of September 30, 2020, the Company has not posted any collateral related to these agreements. .
The Company has agreements with each of its derivative counterparties that contain a provision where the Company could be declared in default on its derivative obligations if repayment of the underlying indebtedness is accelerated by the lender due to the Company’s default on the indebtedness. In addition, termination events such as the Company’s credit agreement not being secured, or not being guaranteed pursuant to the Company, could cause the Company to be in default on its derivative obligations. The Company has not defaulted on any of its derivative obligations.
If the Company had breached any of these provisions at September 30, 2020, it could have been required to settle its obligations under the agreements at their termination value of $17.7 million
Refer to Note 16 for additional details regarding the impact of the Company’s derivatives on AOCI for the three and nine months ended September 30, 2020 and 2019, respectively.