Derivative Financial Instruments

9 Months Ended

Sep. 26, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

All derivatives are recorded as assets or liabilities in the consolidated balance sheets at their respective fair values. For derivatives that qualify for hedge accounting, we assess, both at inception and on an ongoing basis, whether the derivative financial instrument is highly effective in offsetting cash flows of the hedged item and whether it is probable that the hedged forecasted transaction will occur. Changes in the fair value related to the derivatives considered highly effective are initially recorded in accumulated other comprehensive income and recognized in earnings at the same time as either the change in fair value of the underlying hedged item or the effect of the hedged item’s exposure to the variability of cash flows. Changes in the fair value of derivatives that do not qualify for hedge accounting, or fail to meet the criteria, thereafter, are also recognized in the consolidated statements of operations. See Note 20 - Fair Value of Financial Instruments for additional information on the fair value of our derivative assets and liabilities.

Foreign currency derivatives – We are exposed to the impact of foreign currency fluctuations in certain countries in which we operate. In most of these countries, the exposure to foreign currency movements is limited because the operating revenues and expenses of our business units are substantially denominated in the local currency. To the extent borrowings, sales, purchases, or other transactions are not executed in the local currency of the operating unit, we are exposed to foreign currency risk. To mitigate the exposure, we enter into a variety of foreign currency derivative contracts, such as forward contracts, option collars, and cross-currency hedges. To manage the effect of exchange fluctuations on forecasted sales,

purchases, acquisitions, inventory and capital expenditures, and certain intercompany transactions that are denominated in foreign currencies, we have foreign currency derivative contracts with a total notional amount of $105.5 million. We have foreign currency derivative contracts, with a total notional amount of $24.0 million, to hedge the effects of translation gains and losses on intercompany loans and interest. To mitigate the impact to the consolidated earnings of the Company from the effect of the translation of certain subsidiaries’ local currency results into U.S. dollars, we have foreign currency derivative contracts with a total notional amount of $97.8 million. We do not use derivative financial instruments for trading or speculative purposes. We have not elected hedge accounting for any foreign currency derivative contracts. We record mark-to-market changes in the values of these derivatives in other (income) expense. We recorded mark-to-market losses of $0.2 million and gains of $3.0 million in the three and nine months ended September 26, 2020, respectively, and gains of $0.1 million and losses of $2.7 million in the three and nine months ended September 28, 2019, respectively.

Interest rate derivatives – We are exposed to interest rate risk in connection with our variable rate long-term debt and partially mitigate this risk through interest rate derivatives such as swaps and caps. In May 2020, we entered into interest rate swap agreements to manage this risk. The interest rate swaps have outstanding notional amounts aggregating to $370.0 million and mature in December 2023 with a weighted average fixed rate of 0.395% paid against one-month LIBOR floored at 0.00%. The interest rate swap agreements are designated as cash flow hedges and will effectively change the base rate on a corresponding portion of the aggregate debt outstanding under our Term Loan Facility.

No portion of these interest rate contracts were deemed ineffective during the three and nine months ended September 26, 2020. We recorded a cumulative pre-tax mark-to-market loss of $0.5 million and $2.2 million, offset by a cumulative tax benefit of $0.2 million and $0.6 million in consolidated other comprehensive income during the three and nine months ended September 26, 2020, respectively. We reclassified $0.2 million previously recorded in other comprehensive income to interest expense and $0.1 million as a benefit to income tax expense. These reclassifications of interest rate hedge adjustments resulted in a $0.1 million decrease in net income during the three and nine months ended September 26, 2020, respectively.

As of September 26, 2020, approximately $0.9 million is expected to be reclassified to interest expense over the next 12 months.

The derivative agreements with our swap counterparties contain a provision whereby we could be declared in default on our derivative obligations if we either default or, in certain cases, are capable of being declared in default of any of our indebtedness greater than specified thresholds. These agreements also contain a provision where we could be declared in default subsequent to a merger or restructuring type event if the creditworthiness of the resulting entity is materially weaker.

During the first quarter of 2019, we entered into two interest rate cap contracts against three-month U.S.-dollar LIBOR, each with a cap rate of 3.00%. These caps have a combined notional amount of $150.0 million, were effective as of March 2019, and terminate in December 2021. We have not elected hedge accounting and have recorded insignificant mark-to-market adjustments in the three and nine months ended September 26, 2020 and September 28, 2019.

In conjunction with the December 2017 refinancing of the Term Loan Facility, we terminated all of the interest rate swaps which had outstanding notional amounts aggregating to $914.3 million and recorded a loss on termination of $3.6 million in consolidated other comprehensive income (loss), which was being amortized as interest expense over the pre-termination life of the interest rate swaps. As of December 31, 2019, the loss on termination has been fully amortized. We recorded interest expense deriving from the amortization of the loss on termination of interest rate swaps of $0.4 million and $1.3 million during the three and nine months ended September 28, 2019.

The fair values of derivative instruments held are as follows:


	Derivative assets
(amounts in thousands)	Balance Sheet Location	September 26, 2020		December 31, 2019
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Other current assets	$	3,097	$	1,372
Interest rate cap contracts	Other assets	$	—	$	6


	Derivatives liabilities
(amounts in thousands)	Balance Sheet Location	September 26, 2020		December 31, 2019
Derivatives designated as hedging instruments:
Interest rate contracts	Accrued expenses and other current liabilities	$	809	$	—
Interest rate contracts	Deferred credits and other liabilities	$	1,213	$	—
Derivatives not designated as hedging instruments:
Foreign currency forward contracts	Accrued expenses and other current liabilities	$	2,870	$	4,068