Quarterly report pursuant to Section 13 or 15(d)

Derivative Financial Instruments and Hedging Activities

v3.23.3
Derivative Financial Instruments and Hedging Activities
 9 Months Ended
Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments and Hedging Activities Derivative Financial Instruments and Hedging Activities
In February 2021, the Company adopted a derivative investment policy, which provides guidelines and objectives related to managing financial and operational exposures arising from market changes in short term interest rates. In accordance with this policy, the Company can enter into interest rate swaps or similar instruments, will endeavor to evaluate all the risks inherent in a transaction before entering into a derivative financial instrument and will not enter into derivative financial instruments for speculative or trading purposes. Hedging relationships are formally documented at the inception of the hedge and hedges must be highly effective in offsetting changes to future cash flows on hedged transactions at the inception of a hedge and on an ongoing basis to be designated for hedge accounting treatment.
The Company is exposed to interest rate risk related to its variable rate debt obligations under the 2021 Credit Agreement. In order to manage the volatility in interest rate markets, in February 2021, the Company entered into two interest rate swap agreements to manage exposure arising from this risk. On a combined basis, the agreements had a constant notional amount over a five-year term that would have ended on February 5, 2026. While they were outstanding, each agreement paid the Company 30-day LIBOR on the notional amount and the Company paid a fixed rate of interest equal to 0.73%. These derivative instruments were considered cash flow hedges. On May 11, 2023, these two swaps were settled and a new swap was entered into with different terms that aligned with changes in the 2021 Credit Agreement arising from the First Amendment. The new swap has a constant notional amount over a five-year term that ends on April 26, 2028. The agreement pays the Company 30-day SOFR on the notional amount and the Company pays a fixed rate of interest equal to 1.74%. The Company does not have any other derivative financial instruments.
The fair values of the Company’s derivative financial instruments are categorized as Level II of the fair value hierarchy as the values are derived using the market approach based on observable market inputs including quoted prices of similar instruments and interest rate forward curves.
The tables below present the location and gross fair value amounts of the Company's derivative financial instruments and the associated notional amounts designated as cash flow hedges as of the applicable balance sheet date (in thousands):
 
September 30, 2023
  Balance Sheet Location Notional Fair Value Derivative Assets
Derivatives designated as hedges:
Cash flow hedges
Interest rate swaps Derivative financial instruments $ 20,000 $ 2,165

 
December 31, 2022
  Balance Sheet Location Notional Fair Value Derivative Assets
Derivatives designated as hedges:
Cash flow hedges
Interest rate swaps Derivative financial instruments $ 20,000 $ 1,965
The table below presents the effect of our derivative financial instruments designated as hedging instruments in accumulated other comprehensive income (“AOCI”) (in thousands):

  Three Months Ended September 30,
2023 2022
Gain on cash flow hedges - interest rate swaps    
Beginning balance $ 1,442 $ 1,140
Unrealized gain recognized in AOCI 434 679
Amounts reclassified to interest expense (a) (180) (74)
Tax provision (62) (146)
Ending balance $ 1,634 $ 1,599
(a) Negative amounts represent interest income. Interest expense as presented in the condensed consolidated statement of operations and comprehensive income for the three months ended September 30, 2023 and 2022 was $0.6 million and $0.4 million, respectively.
  Nine Months Ended September 30,
2023 2022
Gain on cash flow hedges - interest rate swaps    
Beginning balance $ 1,489 $ 268
Unrealized gain recognized in AOCI 754 1,802
Amounts reclassified to interest expense (a) (b) (554) (48)
Tax provision (55) (423)
Ending balance $ 1,634 $ 1,599
(a) Negative amounts represent interest income and positive amounts represent interest expense. Interest expense as presented in the condensed consolidated statement of operations and comprehensive income for the nine months ended September 30, 2023 and 2022 was $1.7 million and $1.0 million, respectively.
(b) As of September 30, 2023, $0.7 million of income is expected to be reclassified into earnings within the next 12 months.
The Company did not incur any hedge ineffectiveness during the nine months ended September 30, 2023.