Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

Note 10. Derivative Instruments and Hedging Activities

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 variable to fixed interest rate swap agreements for a notional amount of $1,361.2 million to hedge a portion of the outstanding principal balance of its variable rate term loan debt.

As of September 30, 2020, 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 the Company’s total long-term debt of $2,270.6 million, not including debt issuance costs and discounts. These contracts fix approximately 60% of the Company’s term loan variable rate exposure at 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 September 30, 2020, the Company expects to reclassify losses of $15.0 million out of accumulated other comprehensive loss (“AOCL”) into earnings within the next 12 months.

The following table summarizes the notional amounts and fair values of the Company’s outstanding derivatives by risk category and instrument type within the unaudited condensed consolidated balance sheet as of September 30, 2020 and December 31, 2019.

			Fair Value		Fair Value
			Accrued		Other
	Notional		Liabilities		Non-current
	Amount		and Other		Liabilities
Derivatives Designated as Hedging Instruments	(in millions)
Interest rate swap contracts as of September 30, 2020	$	1,327.0	$	15.0	$	—
Interest rate swap contracts as of December 31, 2019	$	1,337.2	$	14.7	$	6.1

Gains (losses) on derivatives designated as cash flow hedges included in the unaudited condensed consolidated statements of comprehensive income (loss) for the three and nine months ended September 30, 2020 and 2019 are shown in the table below.

	Three months ended				Nine months ended
	September 30,				September 30,
	2020		2019		2020		2019
Interest rate swap contracts(1)	(in millions)
Gain (loss) recorded in AOCL on derivatives, before tax	$	5.7	$	(0.3)	$	6.1	$	(16.7)
Tax impact		(1.2)		(0.4)		(1.3)		4.4
Gain (loss) recorded in AOCL on derivatives, net		4.5		(0.7)		4.8		(12.3)

(1) Gains (losses) on derivatives reclassified from AOCL into income are included in “Interest expense” in the unaudited condensed consolidated statements of operations, the same line item as the earnings effect of the hedged item. Losses recognized for the three and nine months ended September 30, 2020 total $5.8 million and $15.4 million, respectively.

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