Derivative Financial Instruments

6 Months Ended

Jun. 30, 2020

Derivative Financial Instruments

Derivative Financial Instruments

5.  Derivative Financial Instruments

In June 2019, we entered into three separate interest rate swap agreements with a notional amount of $300.0 million (collectively, the “June 2019 Swap Agreements”) 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 the June 2019 Swap Agreements (the “Modified June 2019 Swap Agreement”) that extended the length of one of the June 2019 Swap Agreements 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 the June 2019 Swap Agreements (the “Unmodified June 2019 Swap Agreements”) did not change. 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.

On April 22, 2020, we repaid $315.0 million of the Second Amended and Restated Term Loan B. In conjunction, the June 2019 Swap Agreements and the Modified June 2019 Swap Agreement were de-designated as the hedged items were no longer probable to occur due to the repayment of the debt. As a result, $14.9 million was reclassified from accumulated other comprehensive income to interest expense in the unaudited condensed consolidated statement of operations. 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 $300.0 million of notional amount counter-agreements (the “April 2020 Counter-agreements”) to economically offset the impact of the de-designated swap agreements.

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 June 30, 2020 and December 31, 2019, respectively, consisted of the following:

	Derivative Assets
(Amounts in thousands)	June 30, 2020		December 31, 2019
Derivatives Designated as Cash Flow Hedges
Interest Rate Swap Agreements — Current	$	—	$	485
Interest Rate Swap Agreements — Noncurrent		—		1,440
Derivatives Not Designated as Hedging Instruments
Interest Rate Swap Agreements - Current		655		—
Interest Rate Swap Agreements - Noncurrent		677		—
	$	1,332	$	1,925

Derivative liabilities recorded at fair value in our condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019, respectively, consisted of the following:

	Derivative Liabilities
(Amounts in thousands)	June 30, 2020		December 31, 2019
Derivatives Designated as Cash Flow Hedges
Interest Rate Swap Agreements — Current	$	4,639	$	788
Interest Rate Swap Agreements — Noncurrent		13,693		2,667
Derivatives Not Designated as Hedging Instruments
Interest Rate Swap Agreements - Current		4,345		—
Interest Rate Swap Agreements - Noncurrent		11,395		—
	$	34,072	$	3,455

Gains and losses before taxes on derivatives not designated as hedging instruments included in our unaudited condensed consolidated statements of operations for the three and six months ended June 30, 2020 and June 30, 2019 were as follows:

	Amount of Loss Recognized in Income on Derivative
	Three Months Ended				Six Months Ended
(Amounts in thousands)	June 30, 2020		June 30, 2019		June 30, 2020		June 30, 2019
Interest Rate Swap Agreements	$	447	$	—	$	447	$	—
Total	$	447	$	—	$	447	$	—

Gains and losses before taxes on derivatives designated as a cash flow hedge for the three and six months ended June 30, 2020 and June 30, 2019 were as follows:

Three Months Ended June 30, 2020 and June 30, 2019

	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	$	(3,786)	$	(2,866)	$	(1,044)	$	—
Total	$	(3,786)	$	(2,866)	$	(1,044)	$	—

Six Months Ended June 30, 2020 and June 30, 2019

	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	$	(32,580)	$	(2,866)	$	(924)	$	—
Total	$	(32,580)	$	(2,866)	$	(924)	$	—

During the six months ended June 30, 2020, we recognized in AOCI a loss of $32.6 million related to our swap agreements. This loss was caused by a decrease in both current interest rates, the interest rate forward curve and the expectation of future payment by us to our hedging counterparties based on current assumptions of the market. Upon de-designation of the June 2019 Swap Agreements and the Modified June 2019 Swap Agreement, we reclassified $14.9 million from accumulated other comprehensive (loss) income to interest expense in the unaudited condensed consolidated statement of operations.