Note 13. Interest Rate Hedge

The Company is exposed to certain market risks during the normal course of its business arising from adverse changes in interest rates. The Company selectively uses derivative financial instruments (“derivatives”), including interest rate swaps, to manage interest rate risk. The Company does not hold or issue derivative instruments for speculative purposes. Fluctuations in interest rates can be volatile, and the Company’s risk management activities do not totally eliminate these risks. Consequently, these fluctuations could have a significant effect on the Company’s financial results.

The Company’s exposure to interest rate risk results primarily from its variable rate borrowings. On May 9, 2018, the Company entered into pay-fixed interest rate swap agreements for a notional amount covering $1,361.2 million of the outstanding principal balance of its variable rate term loan debt.

As of June 30, 2018, the Company is the fixed rate payor on two interest rate swap contracts that effectively fix the LIBOR-based index used to determine the interest rates charged on a total of $2,262.9 million, not including debt issuance costs and discount, of the Company’s LIBOR-based variable rate borrowings. These contracts carry fixed rates of 2.7% and have an expiration date of May 2021. These swap agreements qualify as hedging instruments and have been designated as cash flow hedges of forecasted LIBOR-based interest payments. As all of the critical terms of each of the derivative instruments matched the underlying terms of the hedged debt and related forecasted interest payments, these hedges were considered highly effective. Based on LIBOR-based swap yield curves as of June 30, 2018, the Company expects to reclassify losses of $4.9 million out of accumulated other comprehensive loss (“AOCL”) into earnings within the next 12 months.

The following table summarizes the notional amounts, fair values and classification of the Company’s outstanding derivatives by risk category and instrument type within the condensed consolidated balance sheet as of June 30, 2018. The Company did not have any derivative instruments as of December 31, 2017.

June 30, 2018

Fair Value

Accrued

Derivative

Notional

Non-Current

Liabilities

Classification

Amount

Other Assets

and Other

Derivatives Designated as Hedging Instruments

(in millions)

Interest rate swap contracts

Cash Flow

1,357.7

4.1

4.9

Losses recognized in the condensed consolidated statements of operations for the three and six months ended June 30, 2018 total $1.2 million.

Gains and losses on derivatives designated as cash flow hedges included in the condensed consolidated statements of comprehensive loss for the three and six months ended June 30, 2018 are shown in the table below. The Company did not have any derivative instruments for the three months or six months ended June 30, 2017.


	Three months ended				Six months ended
	June 30,				June 30,
	2018		2017		2018		2017
Interest rate swap contracts(1)	(in millions)
Loss recorded in AOCL on derivatives	$	(0.6)	$	—	$	(0.6)	$	—
Gain (loss) reclassified from AOCL into income		—		—		—		—

(1)

Losses on derivatives reclassified from AOCL into income will be included in “Interest expense” in the condensed consolidated statements of operations, the same income statement line item as the earnings effect of the hedged item.

For the periods presented, all cash flows associated with derivatives are classified as operating cash flows in the condensed consolidated statements of cash flows.