Derivative Financial Instruments

6 Months Ended

Jul. 03, 2022

Derivative Financial Instruments

Derivative Financial Instruments

5.  Derivative Financial Instruments

We hold interest rate swap agreements that mitigate the risk of an increase in the LIBOR rate in effect on the Second Amended and Restated Term Loan B. We enter into derivative contracts for risk management purposes only and do not utilize derivative instruments for trading or speculative purposes. As such, in conjunction with the repayment of a portion of the Second Amended and Restated Term Loan B in April 2020, certain of our interest rate swap agreements were de-designated because the hedged interest was no longer probable to occur.

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 expenses 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.

On March 24, 2022, we terminated the August 2019 Swap Agreements for net cash proceeds of $7.4 million. The swap agreements were used as economic hedges against rising interest rates and had been designated as cash flow hedges prior to termination. We recorded the settlement in accumulated other comprehensive income in the amount of $7.7 million which will be amortized through September 2024 until the maturity of the Second Amended and Restated Term Loan B.

Derivative assets recorded at fair value in an asset position as well as their classification on our unaudited condensed consolidated balance sheets as of July 3, 2022, January 2, 2022, and July 4, 2021:

	Derivative Assets
(Amounts in thousands)	July 3, 2022		January 2, 2022		July 4, 2021
Derivatives Not Designated as Hedging Instruments
Interest rate swap agreements — other current assets	$	3,688	$	—	$	833
Interest rate swap agreements — other non-current assets		2,829		—		—
	$	6,517	$	—	$	833

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Derivative liabilities recorded at fair value in our unaudited condensed consolidated balance sheets as of July 3, 2022, January 2, 2022, and July 4, 2021:

	Derivative Liabilities
(Amounts in thousands)	July 3, 2022		January 2, 2022		July 4, 2021
Derivatives Designated as Cash Flow Hedges
Interest rate swap agreements — other accrued liabilities	$	—	$	(3,986)	$	(5,169)
Interest rate swap agreements — other long-term liabilities		—		(1,046)		(6,434)
Derivatives Not Designated as Hedging Instruments
Interest rate swap agreements — other accrued liabilities	$	(7,589)	$	(4,012)	$	(4,830)
Interest rate swap agreements — other long-term liabilities		(5,196)		(4,581)		(6,549)
	$	(12,785)	$	(13,625)	$	(22,982)

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Earnings before taxes on derivatives not designated as a cash flow hedge of $0.2 million and $0.3 million were presented in “Interest expense” in the condensed consolidated statement of operations for the three and six months ended July 3, 2022, respectively.

Gains and losses before taxes on derivatives designated as hedging instruments that were presented in “Interest expense” in the condensed consolidated statements of operations for the three and six months ended July 3, 2022, and July 4, 2021, were as follows:

Three Months Ended July 3, 2022 and July 4, 2021

	Loss				Loss Reclassified from
	Recognized in AOCL				AOCL into Operations
(Amounts in thousands)	2022		2021		2022		2021
Interest rate swap agreements	$	—	$	(1,354)	$	774	$	(1,381)
Total	$	—	$	(1,354)	$	774	$	(1,381)

Six Months Ended July 3, 2022 and July 4, 2021

	Gain (Loss)				Loss Reclassified from
	Recognized in AOCL				AOCL into Operations
(Amounts in thousands)	2022		2021		2022		2021
Interest rate swap agreements	$	11,778	$	2,529	$	(343)	$	(2,742)
Total	$	11,778	$	2,529	$	(343)	$	(2,742)

As of July 3, 2022, we expect to reclassify net losses of $3.1 million, currently recorded in AOCL, into “Interest expense, net” within the next twelve months. However, the actual amount reclassified could vary due to future changes in the fair value of derivatives.