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Financial Instruments and Fair Value Measurements

9 Months Ended

Sep. 30, 2021

Financial Instruments and Fair Value Measurements

8. Financial Instruments and Fair Value Measurements

Fair Value Measurements

The Company defines fair value as the price that would be received to sell an asset, or paid to transfer a liability, in an orderly transaction between market participants at the measurement date. To increase consistency and comparability in fair value measurements, the Company uses a three-level hierarchy that prioritizes the use of observable inputs. The three levels are:

Level 1 — Quoted market prices for identical instruments in an active market;

Level 2 — Quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs); and

Level 3 — Unobservable inputs that reflect management's determination of assumptions that market participants would use in pricing the asset or liability. These inputs are developed based on the best information available, including our own data.

The determination of where an asset or liability falls in the hierarchy requires significant judgment.

Interest Rate Swaps

The Company uses interest rate swap agreements to minimize its exposure to interest rate fluctuations on variable rate debt borrowings. Interest rate swaps involve the exchange of fixed and variable rate interest payments and do not represent an actual exchange of the underlying notional amounts between parties.

In the second quarter of 2018, the Company entered into one forward starting non-amortizing interest rate swap with a notional amount of $300.0 million to convert variable rate debt to fixed rate debt. The interest rate swap became effective in June 2018 with an expiration date in June 2023. The interest rate swap resulted in interest payments based on an average fixed rate of 2.938% plus the applicable margin per the requirements in the Corporate Credit Agreement.

In the first quarter of 2019, the Company entered into three forward starting non-amortizing interest rate swaps, with a notional amount of $89.0 million each, to convert variable rate debt to fixed rate debt. The interest rate swaps became effective in March 2019 with expiration dates in March 2024. The interest rate swaps resulted in interest payments based on an average fixed rate per swap of 2.275%, 2.244% and 2.328% plus the applicable margin per the requirements in the Corporate Credit Agreement.

Upon inception, the interest rate swaps were designated as cash flow hedges under ASC 815, with gains and losses, net of tax, measured on an ongoing basis recorded in accumulated other comprehensive loss. The fair value of the interest rate swaps was categorized as Level 2 in the fair value hierarchy as they were based on well-recognized financial principles and available market data.

The Company terminated four interest rate swaps in the Predecessor period in connection with the repayment in full of the Term Loan B under the Corporate Credit Agreement that occurred as part of the Merger Agreement. As a result of the repayment, the hedged interest payments were no longer considered probable of occurring and a loss on termination of $20.1 million that had been previously recorded to Accumulated Other Comprehensive Income ("AOCI") was recorded in the Predecessor period in “Other (income) expense, net” on the Condensed Consolidated Statements of Operations. Cash payments resulting from the termination of the interest rate swaps are classified as operating activities in the Company’s Condensed Consolidated Statement of Cash Flows.

As of December 31, 2020, the fair value of the interest rate swap liability was $25.4 million and is recorded in the Condensed Consolidated Balance Sheets as follows:

		Predecessor
(dollars in millions)	Balance Sheet Location	December 31, 2020		Quoted Prices in active markets Level 1		Significant observable inputs Level 2		Significant unobservable inputs Level 3
Liabilities:
Interest Rate Swap	Other current liabilities	$	9.3	$	—	$	9.3	$	—
Interest Rate Swap	Other noncurrent liabilities	$	16.1	$	—	$	16.1	$	—

The amount of gains (losses) recognized in AOCI (effective portion) net of reclassifications into earnings is as follows:

	Successor		Predecessor		Predecessor		Successor		Predecessor		Predecessor
(dollars in millions)	September 8, 2021 to September 30, 2021		July 1, 2021 to September 7, 2021		Three Months Ended September 30, 2020		September 8, 2021 to September 30, 2021		January 1, 2021 to September 7, 2021		Nine Months Ended September 30, 2020
Interest Rate Swap	$	—	$	—	$	1.7	$	—	$	5.3	$	(8.6	)

The amount of losses reclassified from AOCI into earnings is as follows:

		Successor		Predecessor			Predecessor			Successor		Predecessor			Predecessor
(dollars in millions)	Statement of Operations Location	September 8, 2021 to September 30, 2021		July 1, 2021 to September 7, 2021			Three Months Ended September 30, 2020			September 8, 2021 to September 30, 2021		January 1, 2021 to September 7, 2021			Nine Months Ended September 30, 2020
Interest Rate Swap	Other (income) expense, net	$	—	$	(20.1	)	$	—		$	—	$	(20.1	)	$	—
Interest Rate Swap	Interest expense	$	—	$	(0.8	)	$	(2.3	)	$	—	$	(5.4	)	$	(6.0	)

Disclosure on Financial Instruments

The carrying values of the Company's financial instruments approximate the estimated fair values as of September 30, 2021 and December 31, 2020, except for the Company's long-term debt and other financing arrangements. The carrying and fair values of these items are as follows:

	Successor				Predecessor
	September 30, 2021				December 31, 2020
(dollars in millions)	Carrying Value		Fair Value		Carrying Value		Fair Value
Long-term debt, including current portion*	$	1,372.8	$	1,370.5	$	1,921.8	$	1,973.4
Other financing arrangements		53.8		53.8		42.1		58.6

*Excludes finance leases, other financing arrangements and note issuance costs.

In connection with the Merger, the Successor period carrying values of the Company’s long-term debt and other financing arrangements include fair value adjustments as of the Merger Date. The fair value of our long-term debt was based on closing or estimated market prices of the Company’s debt at September 30, 2021 and December 31, 2020, which is considered Level 2 of the fair value hierarchy. The fair value of the other financing arrangements was calculated using a discounted cash flow model that incorporates current borrowing rates for obligations of similar duration, which is considered Level 3 of the fair value hierarchy. As of September 30, 2021, the current borrowing rate was estimated by applying the Company's credit spread to the risk-free rate for a similar duration borrowing.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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