DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2020

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

NOTE 8.    DERIVATIVE FINANCIAL INSTRUMENTS

We are impacted by changes in foreign currency exchange rates. We may manage these risks through the use of derivative financial instruments, primarily forward contracts with banks. These forward contracts manage the exchange rate risk associated with assets and liabilities denominated in nonfunctional currencies. These derivative instruments are not designated as hedges; however, they do offset the fluctuations of our assets and liabilities due to foreign exchange rate changes. These forward contracts are typically for one-month periods. As of June 30, 2020, and December 31, 2019, we did not have any currency exchange rate contracts outstanding.

During the three and six months ended June 30, 2020 and 2019, the Company recorded insignificant gains and losses related to the foreign currency exchange contracts, which were offset by corresponding gains and losses on the revaluation of the underlying assets and liabilities and both are included as a component of Other income (expense), net, in our Unaudited Consolidated Statements of Operations.

In April 2020, the Company executed interest rate swap contracts with independent financial institutions to partially reduce the variability of cash flows in LIBOR indexed debt interest payments on our Term Loan Facility (under the Company’s existing Credit Agreement dated as of September 10, 2019).  These transactions are accounted for as cash flow hedging instruments.

The interest rate swap contracts fixed 85% of the outstanding principal balance on our term loan to a total interest rate of 1.271%. This is comprised of 0.521% average fixed rate per annum in exchange for a variable interest rate based on one-month USD-LIBOR-BBA plus the credit spread in the Company’s existing Credit Agreement, which is 75 basis points at current leverage ratios.

The following table summarizes the notional amount of the Company’s qualified hedging instruments:

	June 30,		December 31,
	2020		2019
Interest rate swap contracts	$	281,969	$	—

As of June 30, 2020, Accumulated other comprehensive loss on the unaudited consolidated balance sheet includes $2.8 million, net of tax, related to changes in fair value on the interest rate swap contracts. The following table summarizes activity related to qualified hedging instruments:

	Three Months Ended June 30,				Six Months Ended June 30,
	2020		2019		2020		2019
Gain (loss) recognized in Other comprehensive income (loss), net of tax	$	(2,844)	$	—	$	(2,844)	$	—

See Note 7. Fair Value Measurements for information regarding fair value of derivative instruments.

As a result of the use of derivative financial instruments, the Company is exposed to the risk that counterparties to derivative contracts may fail to meet their contractual obligations. The Company manages counterparty credit risk in derivative contracts by reviewing counterparty creditworthiness on a regular basis and limiting exposure to any single counterparty.