DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2023

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

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.

The Company enters into foreign currency contracts with 30-day maturities to hedge its short-term balance sheet exposure, primarily intercompany, that are denominated in currencies (Euro, Mexican Peso, New Zealand Dollar, Chinese Renminbi, Swedish Krona, Canadian Dollar) other than the subsidiary’s functional currency and are adjusted to current values using period-end exchange rates. The resulting gains or losses are recorded in other expense, net in the condensed consolidated statements of income and comprehensive (loss) income. To minimize foreign currency exposure, the Company had foreign currency contracts with notional amounts of $20,851 and $18,891 at September 30, 2023 and December 31, 2022, respectively. The foreign currency contracts are recorded in the condensed consolidated balance sheets at fair value and resulting gains or losses are recorded in other expense, net in the condensed consolidated statements of income and comprehensive income (loss). During the three and nine months ended September 30, 2023, the Company had losses of $174 and $270, respectively, and during the three and nine months ended September 30, 2022, the Company had losses of $82 and $149, respectively, on foreign currency contracts which is included in other expense, net and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in other expense, net.

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 on its variable-rate debt. 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 March 2020, the Company entered into two interest rate swaps with a combined notional amount of $20,000 that increased to $60,000 in March 2022 and matures in December 2024. In March 2022 the Company entered into an additional interest rate swap with a notional amount of $40,000 that matures in December 2026. In March 2023, the Company executed amendments to the existing swaps to amend the index on the interest rate derivatives from LIBOR to SOFR, in line with the existing Amended Revolving Facility. These amendments had no material financial impact to the Company’s operations or financial position.

The changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive loss and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. During 2023 and 2022, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

The Company estimates that $4,008 will be reclassified as a decrease to interest expense over the next twelve months related to its interest rate derivatives. The Company does not use derivatives for trading or speculative purposes.

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 September 30, 2023 and December 31, 2022:

		Asset Derivatives
		Fair value as of:
Derivatives designated as	Balance Sheet	September 30,		December 31,
hedging instruments	Location	2023		2022
Foreign currency contracts	Prepaid expenses and other assets	$	25	$	48
Interest rate swaps	Other long-term assets		6,452		7,236
		$	6,477	$	7,284
		Liability Derivatives
		Fair value as of:
Derivatives designated as	Balance Sheet	September 30,		December 31,
hedging instruments	Location	2023		2022
Foreign currency contracts	Accrued liabilities	$	7	$	—

The tables below present the effect of cash flow hedge accounting on other comprehensive income (loss) (“OCI”) for the three and nine months ended September 30, 2023 and 2022:

	Amount of pre-tax gain recognized				Amount of pre-tax gain recognized
	in OCI on derivatives				in OCI on derivatives
Derivatives in cash flow hedging relationships	Three months ended September 30,				Nine months ended September 30,
	2023		2022		2023		2022
Interest rate swaps	$	790	$	2,916	$	1,995	$	7,335

	Amount of pre-tax gain (loss) reclassified				Amount of pre-tax gain (loss) reclassified
	from accumulated OCI into income				from accumulated OCI into income
Location of gain (loss) reclassified	Three months ended September 30,				Nine months ended September 30,
from accumulated OCI into income	2023		2022		2023		2022
Interest expense	$	1,014	$	229	$	2,854	$	(59)

The table below presents the line items that reflect the effect of the Company’s derivative financial instruments on the condensed consolidated statements of income and comprehensive income (loss) for the three and nine months ended September 30, 2023 and 2022:

		Total amounts of income and expense				Total amounts of income and expense
		line items presented that reflect the				line items presented that reflect the
		effects of cash flow hedges recorded				effects of cash flow hedges recorded
		Three months ended September 30,				Nine months ended September 30,
Derivatives designated as hedging instruments	Income Statement Location	2023		2022		2023		2022
Interest rate swaps	Interest Expense	$	3,164	$	2,337	$	9,309	$	4,900

The tables below present a gross presentation, the effects of offsetting, and a net presentation of the Company’s derivatives as of September 30, 2023 and December 31, 2022. 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:

Derivative assets:

Net amounts

Gross amounts

of assets

Gross amounts not offset in the consolidated

As of

Gross amounts

offset in the

presented in the

balance sheets

September 30,

of recognized

consolidated

consolidated

Financial

Cash collateral

2023

assets

balance sheets

balance sheets

instruments

received

Net amount

Derivatives

$

6,477

$

—

$

6,477

$

—

$

—

$

6,477

Net amounts

Gross amounts

of assets

Gross amounts not offset in the consolidated

As of

Gross amounts

offset in the

presented in the

balance sheets

December 31,

of recognized

consolidated

consolidated

Financial

Cash collateral

2022

assets

balance sheets

balance sheets

instruments

received

Net amount

Derivatives

$

7,284

$

—

$

7,284

$

—

$

—

$

7,284

Derivative liabilities:

Net amounts

Gross amounts

of liabilities

Gross amounts not offset in the consolidated

As of

Gross amounts

offset in the

presented in the

balance sheets

September 30,

of recognized

consolidated

consolidated

Financial

Cash collateral

2023

liabilities

balance sheets

balance sheets

instruments

received

Net amount

Derivatives

$

—

$

—

$

7

$

—

$

—

$

7

Net amounts

Gross amounts

of liabilities

Gross amounts not offset in the consolidated

As of

Gross amounts

offset in the

presented in the

balance sheets

December 31,

of recognized

consolidated

consolidated

Financial

Cash collateral

2022

liabilities

balance sheets

balance sheets

instruments

received

Net amount

Derivatives

$

—

$

—

$

—

$

—

$

—

$

—

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.