Derivative Financial Instruments

6 Months Ended

Jul. 01, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

As a result of its operating and financing activities, the Company is exposed to market risks from changes in interest and foreign currency exchange rates. These market risks may adversely affect the Company’s operating results and financial position. The Company seeks to minimize risk from changes in interest and foreign currency exchange rates through the use of derivative financial instruments. Derivative contracts are not collateralized and are entered into with large, reputable financial institutions that are monitored for counterparty risk.

Foreign currency contracts

The Company operates in foreign countries, which exposes it to market risk associated with foreign currency exchange rate fluctuations. The Company uses derivative financial instruments to manage its exposure to foreign currency exchange rate risk, specifically forward sales of the Canadian Dollar (“CAD”), and U.S. Dollar (“USD”) – CAD cross currency swaps. These instruments lock in the exchange rate for a portion of the estimated cash flows of the Company’s Canadian operations. As of July 1, 2023 and December 31, 2022, the Company’s forward contracts had USD equivalent gross notional amounts of $68.1 million and $42.1 million, respectively. Additionally, as of July 1, 2023 and December 31, 2022, cross currency swaps with notional amounts of $275.0 million were outstanding.

Interest rate swap contracts

The Company’s market risk is affected by changes in interest rates. The Company’s Term Loan Facility bears interest based on market rates plus an applicable spread. Because the interest rate on the Company’s floating-rate debt is tied to market rates, the Company manages its exposure to interest rate movements by effectively converting a portion of its floating-rate debt to fixed-rate debt. Interest rate swaps involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreement without exchange of the underlying notional amount.

The Company has agreements with each of its derivative counterparties that contain a provision whereby 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.

At July 1, 2023 and December 31, 2022, interest rate swaps with notional amounts of $275.0 million were outstanding.

The fair values of cross currency swap contracts, forward contracts and interest rate swap contracts are as follows:


(in thousands)	Balance Sheet Location	July 1, 2023		December 31, 2022
Derivatives not designated as hedging instruments:
Forward contracts	Derivative asset – current	$	8	$	237
Cross currency swaps	Derivative asset – current	—		6
Cross currency swaps	Derivative asset – non-current	19,842		22,987
Total derivatives in an asset position		$	19,850	$	23,230
Forward contracts	Accounts payable and accrued liabilities	$	609	$	14
Cross currency swaps	Accounts payable and accrued liabilities	740		66
Total derivatives in a liability position		$	1,349	$	80
Derivatives designated as hedging instruments:
Interest rate swaps	Derivative asset – current	$	9,621	$	8,382
Interest rate swaps	Derivative asset – non-current	6,181		8,090
Total derivatives in an asset position		$	15,802	$	16,472
Total deferred gain	Accumulated other comprehensive income	$	19,406	$	21,014

The impact of derivative financial instruments on the unaudited interim condensed consolidated statement of operations and comprehensive income is as follows:


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
(in thousands)	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022
(Loss) gain on forward contracts recognized in gain (loss) on foreign currency, net	$	(624)	$	480	$	(689)	$	170
(Loss) gain on cross currency swaps recognized in gain (loss) on foreign currency, net	$	(4,619)	$	11,173	$	(3,930)	$	914
Gain (loss) on interest rate swaps recognized in interest expense	$	2,729	$	(190)	$	5,123	$	(417)

The table below presents the effect of cash flow hedge accounting on other comprehensive income (loss):


	Thirteen Weeks Ended				Twenty-Six Weeks Ended
(in thousands)	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022
Amount of gain recognized in other comprehensive income	$	4,768	$	530	$	3,515	$	11,452
Amount of gain (loss) reclassified from accumulated other comprehensive income into net income	$	2,729	$	(143)	$	5,123	$	(381)

Amounts reclassified from accumulated other comprehensive income into net income are recognized in interest expense. Within the next 12 months, the Company estimates that an additional $11.6 million of gains currently recognized within accumulated other comprehensive income will be reclassified as a decrease in interest expense.