Derivative instruments and hedging activities

6 Months Ended

Jun. 25, 2022

European Wax Center, Inc. and Subsidiaries

Derivative instruments and hedging activities

7. Derivative instruments and hedging activities

In December 2018, the Company entered into an interest rate cap derivative instrument which was designated as a cash flow hedge. The Company’s objective was to mitigate the impact of interest expense fluctuations on the Company’s profitability resulting from interest rate changes by capping the LIBOR component of the interest rate at 4.5% on $175,000 of principal outstanding under its long-term debt arrangement, as the interest rate cap provided for payments from the counterparty when LIBOR rises above 4.5%. The interest rate cap was terminated in March 2022.

Changes in the fair value of the interest rate cap were recognized in other comprehensive loss and was reclassified out of accumulated other comprehensive loss and into interest expense upon termination of the interest rate cap. Cash flows related to derivatives qualifying as hedges are included in the same section of the condensed consolidated statements of cash flows as the underlying assets and liabilities

being hedged. Refer to Note 3—Fair value measurements for information on the fair value of the Company’s interest rate cap derivative instrument.

Our cash flow hedge position related to the interest rate cap derivative instrument is as follows:

	Balance Sheet Classification	June 25, 2022		December 25, 2021
Derivatives designated as hedging instruments:
Interest rate cap, current portion	Other current liabilities	$	—	$	(182	)
Interest rate cap, non-current portion	Other long-term liabilities		—		(60	)
Total derivative liabilities designated as    hedging instruments		$	—	$	(242	)

The table below presents the net unrealized gain recognized in other comprehensive income (“OCI”) resulting from fair value adjustments of hedging instruments:

	Net Unrealized Gain Recognized in OCI
	For the Thirteen Weeks Ended				For the Twenty-Six Weeks Ended
	June 25, 2022		June 26, 2021		June 25, 2022		June 26, 2021
Derivatives designated as hedging instruments:
Interest rate cap	$	—	$	80	$	—	$	239
Total	$	—	$	80	$	—	$	239

As a result of the termination of the interest rate cap, we recognized a gain of approximately $138 as a component of interest expense on the condensed consolidated statement of operations for the 26 weeks ended June 25, 2022. Of this gain, $196 related to fair value adjustments which was partially offset by $58 related to cash paid to terminate the interest rate cap.