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DERIVATIVE FINANCIAL INSTRUMENTS

6 Months Ended

Jun. 30, 2020

11. DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to certain risks arising from both its business operations and economic conditions. The Company principally manages its exposures to a wide variety of business and operational risks through management of its core business activities. The Company manages economic risks, including interest rate, and foreign exchange risk primarily through the use of derivative financial instruments. Specifically, the Company enters into derivative financial instruments to manage exposures that arise from business activities that result in the payment of future known and uncertain cash amounts, the value of which are determined by interest rates. The Company’s derivative financial instruments are used to manage differences in the amount, timing and duration of the Company’s known or expected cash payments principally related to the Company’s borrowings.

The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. In February 2017, the Company entered into three interest rate swaps with a combined notional amount of $40,000 that mature in February 2022. In March 2020, the Company entered into two additional interest rate swaps with a combined notional amount of $20,000 that increases to $60,000 in March 2022 and matures in December 2024.

The changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in Accumulated Other Comprehensive Income (Loss) and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2020 and 2019, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

The Company estimates that an additional $891 will be reclassified as an increase to interest expense over the next twelve months. Additionally, the Company does not use derivatives for trading or speculative purposes and currently does not have any derivatives that are not designated as hedges.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the condensed consolidated balance sheets as of June 30, 2020 and December 31, 2019 (in thousands):

Asset Derivatives

Liability Derivatives

Fair value as of:

Derivatives designated as

Balance Sheet

June 30,

December 31,

Balance Sheet

June 30,

December 31,

hedging instruments

Location

2020

2019

Location

2020

2019

Interest rate products

Other long-term assets

—

Other long-term liabilities

2,228

363

The tables below present the effect of cash flow hedge accounting on other comprehensive income (loss) (“OCI”) for the three and six months ended June 30, 2020 and 2019 (in thousands):


	Amount of gain (loss) recognized in OCI				Amount of gain (loss) recognized in OCI
	on derivatives				on derivative
Derivatives in cash flow hedging relationships	Three months ended June 30,				Six months ended June 30,
	2020		2019		2020		2019
Interest rate products	$	(448)	$	(387)	$	(1,560)	$	(597)

Amount of gain (loss) reclassified from

accumulated OCI into income

Location of (gain) loss reclassified

Three months ended June 30,

Six months ended June 30,

from accumulated OCI into income

2020

2019

2020

2019

Interest income (expense)

(155)

(186)

101

The table below presents the effect of the Company’s derivative financial instruments on the condensed consolidated statements of income and comprehensive income for the three and six months ended June 30, 2020 and 2019 (in thousands):

Total amounts of income and expense

line items presented that reflect the

effects of cash flow hedges recorded

Three months ended June 30,

Six months ended June 30,

Derivatives designated as hedging instruments

Income Statement Location

2020

2019

2020

2019

Interest rate products

Interest Expense

901

1,435

1,955

2,615

The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of June 30, 2020 and December 31, 2019. The net amounts of derivative assets or liabilities can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets and liabilities are presented in the condensed consolidated balance sheets (in thousands).

Gross amounts

Net amounts of liabilities

Gross amounts not offset in the condensed consolidated

As of

Gross amounts

offset in the

presented in the

balance sheets

June 30,

of recognized

condensed consolidated

Financial

Cash collateral

2020

liabilities

balance sheets

instruments

received

Net amount

Derivatives

2,228

—

2,228

—

2,228

Gross amounts

Net amounts of liabilities

Gross amounts not offset in the condensed consolidated

As of

Gross amounts

offset in the

presented in the

balance sheets

December 31,

of recognized

condensed consolidated

Financial

Cash collateral

2019

liabilities

balance sheets

instruments

received

Net amount

Derivatives

363

—

363

—

363

The Company has agreements with each of its derivative counterparties that contain a provision where if the Company either defaults or is capable of being declared in default on any of its indebtedness, then the Company could also be declared in default on its derivative obligations.