Derivative Financial Instruments

3 Months Ended

Mar. 31, 2020

Derivative Financial Instruments

Derivative Financial Instruments

5.  Derivative Financial Instruments

In June 2019, we entered the June 2019 Swap Agreements with an aggregate notional amount of $300.0 million to mitigate the risk of an increase in the LIBOR interest rate in effect on the Second Amended and Restated Term Loan B. The term of the June 2019 Swap Agreements began in June 2019 and expires in June 2023. Upon execution, we designated and documented the June 2019 Swap Agreements as cash flow hedges. The June 2019 Swap Agreements serve as economic hedges and provide protection against rising interest rates.

In August 2019, we entered the August 2019 Swap Agreements with an aggregate notional amount of $400.0 million to mitigate the risk of an increase in the LIBOR interest rate in effect on the Second Amended and Restated Term Loan B. The term of the August 2019 Swap Agreements began in August 2019 and expires in August 2024. Upon execution, we designated and documented the August 2019 Swap Agreements as cash flow hedges. The August 2019 Swap Agreements serve as economic hedges and provide protection against rising interest rates.

In March 2020, we completed a blend and extend on $100.0 million of our June 2019 Swap Agreements (the “Modified June 2019 Swap Agreement”) that extended the length of the swap agreement through April 2026 and mitigates the risk of an increase in the LIBOR interest rate in effect on the Second Amended and Restated Term Loan B. The remaining $200.0 million of our June 2019 Swap Agreements (the “Unmodified June 2019 Swap Agreements”) remain unchanged. Upon execution, we designated and documented the Modified June 2019 Swap Agreement as a cash flow hedge. The Modified June 2019 Swap Agreement serves as an economic hedge and provides protection against rising interest rates.

By utilizing a derivative instrument to hedge our exposure to LIBOR rate changes, we are exposed to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. To mitigate this risk, the hedging instrument is placed with counterparties that we believe pose minimal credit risk. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices or currency exchange rates. We manage the market risk associated with derivative instruments by establishing and monitoring parameters that limit the types and degree of market risk that we may undertake. We hold and issue derivative instruments for risk management purposes only and do not utilize derivatives for trading or speculative purposes.

We record derivative instruments at fair value on our unaudited condensed consolidated balance sheets. When in qualifying relationships, the effective portion of all cash flow designated derivatives are deferred in AOCI and are reclassified to interest expense when the forecasted transaction takes place. Ineffective changes, if any, and changes in the fair value of derivatives that are not designated as hedging instruments are recorded directly to “interest expense” and “other expense (income), net”, respectively. Derivative assets and derivative liabilities that have maturity dates equal

to or less than twelve months from the balance sheet date are included in prepaid and other current assets and other accrued liabilities, respectively. Derivative assets and derivative liabilities that have maturity dates greater than twelve months from the balance sheet date are included in deposits and other assets and other long-term liabilities, respectively.

Our derivatives are measured on a recurring basis using Level 2 inputs. The fair value measurements of our derivatives are based on market prices that generally are observable for similar assets or liabilities at commonly quoted intervals.

Derivative assets recorded at fair value in our condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively, consisted of the following:

	Derivative Assets
(Amounts in thousands)	March 31, 2020		December 31, 2019
Derivatives Designated as Cash Flow Hedges
Interest Rate Swap Agreements — Current	$	—	$	485
Interest Rate Swap Agreements — Noncurrent		—		1,440
	$	—	$	1,925

Derivative liabilities recorded at fair value in our condensed consolidated balance sheets as of March 31, 2020 and December 31, 2019, respectively, consisted of the following:

	Derivative Liabilities
(Amounts in thousands)	March 31, 2020		December 31, 2019
Derivatives Designated as Cash Flow Hedges
Interest Rate Swap Agreements — Current	$	(7,689)	$	(788)
Interest Rate Swap Agreements — Noncurrent		(22,795)		(2,667)
	$	(30,484)	$	(3,455)

As of March 31, 2020, we had no derivatives not designated as cash flow hedges.

Losses before taxes on derivatives designated as cash flow hedges for the three months ended March 31, 2020 and 2019 were as follows:

	Loss				Loss Reclassified from
	Recognized in AOCI				AOCI into Operations
	(Effective Portion)				(Effective Portion)
(Amounts in thousands)	2020		2019		2020		2019
Interest Rate Swap Agreements	$	(28,794)	$	—	$	120	$	—
Total	$	(28,794)	$	—	$	120	$	—

During the three months ended March 31, 2020, we recognized in AOCI a loss of $28.8 million related to our swap agreements. This loss was caused by a decrease in both current interest rates and the interest rate forward curve and the expectation of future payment by us to our hedging counterparties based on current assumptions of the market.

On April 22, 2020, we repaid $315.0 million of the Second Amended and Restated Term Loan B. In conjunction, certain of our hedging instruments that were entered into to mitigate the risk of an increase in the LIBOR interest rate will be dedesignated. Consistent with company policy, we hold and issue derivative instruments for risk management purposes only and do not utilize derivative instruments for trading or speculative purposes. Accordingly, in April 2020 we entered into counter-agreements to economically offset the impact of the dedesignated swap agreements.