DERIVATIVE FINANCIAL INSTRUMENTS

12 Months Ended

Dec. 31, 2023

DERIVATIVE FINANCIAL INSTRUMENTS

DERIVATIVE FINANCIAL INSTRUMENTS

8. 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.

Beginning in 2021, the Company began entering 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, and 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 (income) expense, net in the consolidated statements of income and comprehensive income. To minimize foreign currency exposure, the Company had foreign currency contracts with notional amounts of $22,193 and $18,891 at December 31, 2023 and 2022, respectively. The foreign currency contracts are recorded in the consolidated balance sheets at fair value and resulting gains or losses are recorded in other expense (income), net in the consolidated statements of income and comprehensive income. During the year ended December 31, 2023, the Company had losses of $281 on foreign currency contracts which is included in other expense (income), net and generally offset the gains or losses from the foreign currency adjustments on the intercompany balances that are also included in other expense (income), 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. 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 mature 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. As of December 31, 2023, the Company holds notional amounts of $100,000 in interest rate derivatives.

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 2023 and 2022, such derivatives were used to hedge the variable cash flows associated with existing variable-rate debt.

The Company estimates that an additional $3,367 will be reclassified as a reduction to interest expense over the next twelve months. Additionally, 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 consolidated balance sheets as of December 31, 2023 and 2022 (in thousands):

		Asset Derivatives
		Fair value as of:
Derivatives designated as	Balance Sheet	December 31,		December 31,
hedging instruments	Location	2023		2022
Foreign currency contracts	Prepaid expenses and other assets	$	54	$	48
Interest rate swaps	Prepaid expenses and other assets		2,254		—
Interest rate swaps	Other long-term assets		2,177		7,236
		$	4,485	$	7,284

The table below presents the effect of cash flow hedge accounting on other comprehensive (loss) income (OCI) for the years ended December 31, 2023, 2022 and 2021 (in thousands):

	Amount of pre-tax (gain) loss recognized in OCI
	on derivatives
Derivatives in cash flow hedging relationships	Year ended December 31,
	2023		2022		2021
Interest rate swaps	$	(935)	$	7,621	$	1,180

Location of gain (loss) reclassified	Amount of pre-tax gain (loss) reclassified from accumulated OCI into income
from accumulated OCI into income	Year ended December 31,
	2023		2022		2021
Interest expense	$	3,814	$	532	$	(929)

The table below presents the effect of the Company’s derivative financial instruments on the consolidated statements of income and comprehensive income for the years ended December 31, 2023, 2022 and 2021 (in thousands):

		Total amounts of income and expense line items presented
		that reflect the effects of cash flow hedges recorded
		Year ended December 31,
Derivatives designated as hedging instruments	Income Statement Location	2023		2022		2021
Interest rate swaps	Interest Expense	$	12,383	$	7,692	$	3,236

The Company does not have any offsetting of derivatives as of December 31, 2023 and 2022.

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.