Derivatives and Hedging Activities

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivatives and Hedging Activities

Note 9 - Derivatives and Hedging Activities

Hedge Accounting and Hedging Programs

We are exposed to changes in interest rates, primarily relating to changes in interest rates on our first lien term loan. Consequently, from time to time, we may use interest rate swaps or other financial instruments to manage our exposure to interest rate movements. Our primary objective in holding derivatives is to reduce the volatility of cash flows associated with changes in interest rates. We do not enter into derivative transactions for speculative or trading purposes.

We recognize derivative instruments and hedging activities on a gross basis as either assets or liabilities on the Company’s Condensed Consolidated Balance Sheets and measure them at fair value. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the earnings effect of the hedged forecasted transactions in a cash flow hedge. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedge, and the hedges must be highly effective in offsetting changes to future cash flows on hedged transactions.

In April 2019, the Company entered into two separate interest rate swap agreements to convert a portion of the Company’s floating-rate debt that is based on LIBOR to a fixed-rate, reducing the impact of interest rate changes on future interest expense. The first agreement converts $350.0 million of floating rate debt under our first lien credit facility to fixed rate obligations. The second agreement caps the interest rate applied to $500.0 million of the Company’s floating-rate debt in the event the interest rate should rise above the cap strike rate. Our interest rate swap contracts mature in April 2022, and our interest rate cap contract matures in April of 2024.

During the three months ended September 30, 2020, we began to hedge the variability of forecasted interest payments on our first lien debt using forward-starting swaps. The total notional amount of these forward-starting interest rate swaps is $500.0 million as of September 30, 2020. These forward-starting interest rate swaps will fix the benchmark interest rate and hedge the variability of forecasted interest payments from April 2022 through January 2026.

During the second quarter of 2020, the Company reduced its LIBOR based debt to $756.4 million (refer to Note 8), which is below the total notional amounts of our Derivative Instruments of $850.0 million as of the date of the debt repayment. Consequently, concurrent with the repayment of the entire aggregate principal amount outstanding under the Second Lien Credit Agreement and prepayment of $100.0 million aggregate principal amount of the first lien term loans outstanding under the First Lien Credit Agreement, we dedesignated the Derivative Instruments. As the forecasted interest payments on $93.7 million not redesignated was probable to not occur, the Company reclassified the existing deferred loss on that portion of the derivative of $3.3 million from AOCI into Interest expense, net in the Consolidated Statements of Operations.

During the three months ended September 30, 2020 the Company dedesignated and redesignated certain hedges contemporaneously with the inception of our forward-starting interest rate swaps to achieve optimal interest rate protections. As of September 30, 2020, $243.6 million of the notional amount of the interest rate cap contract is not designated as an accounting hedge.

As of September 30, 2020, the Company had the following outstanding interest rate derivatives that were designated as cash flow hedges of interest rate risk ($ in millions):

Interest Rate Derivatives (Level 2)	Number of Instruments	Notional Aggregate Principal Amount		Interest Cap / Swap Rate		Maturity Date
Interest rate cap contract	One	$	256.4	3.500	%	April 30, 2024
Interest rate swap contracts	Two	$	350.0	2.301	%	April 29, 2022
Forward-starting interest rate swap contracts	Two	$	500.0	0.370	%	January 30, 2026

The following table summarizes the fair value and presentation in the Company’s Condensed Consolidated Balance Sheets for derivatives as of September 30, 2020 (in millions):

		Fair Value of Derivative Liabilities
Instrument	Balance Sheet Location	September 30, 2020		December 31, 2019
		(Unaudited)
Derivatives designated as hedging instruments
Interest rate cap contract	Accrued expenses and other current liabilities	$	0.2	$	0.3
Interest rate cap contract	Other long-term liabilities	0.2		0.4
Interest rate swap contracts	Accrued expenses and other current liabilities	7.0		2.3
Interest rate swap contracts	Other long-term liabilities	3.6		3.0
Forward-starting interest rate swap contracts	Other long-term liabilities	1.0		N/A
Total designated derivative liabilities		$	12.0	$	6.0
Derivatives not designated as hedging instruments
Interest rate cap contract	Accrued expenses and other current liabilities	$	0.2	$	—
Interest rate cap contract	Other long-term liabilities	0.2		—
Total undesignated derivative liabilities		$	0.4	$	—
Total derivative liabilities		$	12.4	$	6.0

The change in fair value of any derivative instruments was recorded, net of income tax, in Accumulated other comprehensive income (loss) (“AOCI”) on the Company’s Condensed Consolidated Balance Sheets to the extent the agreements were designated as effective hedges. In the period that the hedged item affects earnings, such as when

interest payments are made on the Company’s variable-rate debt, we reclassify the related gain or loss on the interest rate swap cash flow hedges and any receipts on the cap to Interest expense, net and as operating cash flows in our Consolidated Statements of Cash Flows. Over the next 12 months, we expect to reclassify approximately $5.6 million into interest expense from AOCI.Refer to the Company’s Consolidated Statements of Comprehensive Income (Loss) for amounts reclassified from AOCI into earnings related to the Company’s Derivative Instruments designated as cash flow hedging instruments for each of the reporting periods.