Derivative Financial Instruments

6 Months Ended

Jul. 02, 2023

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 effective interest rate on the 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 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, the maturity date of the 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 2, 2023, January 1, 2023, and July 3, 2022:

	Derivative Assets
(Amounts in thousands)	July 2, 2023		January 1, 2023		July 3, 2022
Derivatives Not Designated as Hedging Instruments
Interest rate swap agreements — other current assets	$	3,631	$	6,135	$	3,688
Interest rate swap agreements — other non-current assets		3,984		4,446		2,829
	$	7,615	$	10,581	$	6,517

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Derivative liabilities recorded at fair value in our unaudited condensed consolidated balance sheets as of July 2, 2023, January 1, 2023, and July 3, 2022:

	Derivative Liabilities
(Amounts in thousands)	July 2, 2023		January 1, 2023		July 3, 2022
Derivatives Not Designated as Hedging Instruments
Interest rate swap agreements — other accrued liabilities	$	4,535	$	8,476	$	7,589
Interest rate swap agreements — other long-term liabilities		5,382		6,224		5,196
	$	9,917	$	14,700	$	12,785

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Gains and losses on derivatives not designated as hedging instruments are recognized in “Interest expense, net” in our condensed consolidated statements of operations, and were not material for the three months ended July 2, 2023 and July 3, 2022 or for the six months ended July 2, 2023 and July 3, 2022.

Gains and losses before taxes on derivatives designated as hedging instruments that were recognized in “Interest expense” in the condensed consolidated statements of operations for the three and six months ended July 2, 2023, and July 3, 2022, were as follows:

Three Months Ended July 2, 2023 and July 3, 2022

	Gain (Loss)				Gain (Loss) Reclassified from
	Recognized in AOCL				AOCL into Interest Expense, Net
(Amounts in thousands)	2023		2022		2023		2022
Interest rate swap agreements	$	—	$	—	$	792	$	774
Total	$	—	$	—	$	792	$	774

Six Months Ended July 2, 2023 and July 3, 2022

	Gain (Loss)				Gain (Loss) Reclassified from
	Recognized in AOCL				AOCL into Interest Expense, Net
(Amounts in thousands)	2023		2022		2023		2022
Interest rate swap agreements	$	—	$	11,778	$	1,579	$	(343)
Total	$	—	$	11,778	$	1,579	$	(343)

As of July 2, 2023, we expect to reclassify net gains of $3.2 million, currently recorded in AOCL, into “Interest expense, net” within the next twelve months.