DERIVATIVE INSTRUMENTS

9 Months Ended

Sep. 30, 2022

10. DERIVATIVE INSTRUMENTS

The Company is exposed to certain market risks during the ordinary course of business due to adverse changes in interest rates. The exposure to interest rate risk primarily results from the Company’s variable-rate borrowing. The Company may elect to use derivative financial instruments to manage risks from fluctuations in interest rates. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates can be volatile and the Company’s risk management activities do not eliminate these risks.

Interest Rate Swap

In May 2022, the Company entered into an interest rate swap agreement, effective on June 30, 2022, with Bank of America, N.A, which has a $150 million notional value, and a maturity date of June 30, 2027. Beginning in July 2022, the Company makes interest payments based on the 1-month SOFR rate (“variable rate payment”) and receives or pays the differential between the variable rate payment and the fixed 2.815% SOFR rate on a monthly basis. Also included in the total interest payment in any period is an applicable margin based on the Company’s consolidated leverage ratio.

In connection with the swap, no cash was exchanged between the Company and the counterparty.

The Company designated its interest rate swap as a cash flow hedge and structured it to be highly effective. Consequently, unrealized gains and losses related to the fair value of the interest rate swap are recorded to accumulated other comprehensive income (loss), net of tax.

The impacts of the Company’s derivative instruments on the accompanying Consolidated Statements of Comprehensive Income for the three months and six months ended September 30, 2022 are presented in the table below (in thousands):

	Three Months Ended					For the Nine Months Ended
	September 30, 2022			September 30, 2021		September 30, 2022			September 30, 2021
Unrealized loss on cash flow hedge	$	6,473		$	-	$	5,942		$	-
Tax effect at statutory rate (federal and state) of 25.55%		(1,654	)		-		(1,518	)		-
Other Comprehensive loss	$	4,819		$	-	$	4,424		$	-

The valuations of the Company’s interest rate derivatives are measured as the present value of all expected future cash flows based on SOFR-based yield curves. The present value calculation uses discount rates that have been adjusted to reflect the credit quality of the Company and its counterparty which is a Level 2 fair value measurement.

The carrying and fair value of the Company’s interest rate derivatives (included in Other current assets and Other assets) were as follows:

	September 30, 2022		September 30, 2021
Interest rate swap:
Other current assets	$	1,948	$	-
Other assets	$	3,995	$	-