Derivative Instruments and Hedging Activities |
6 Months Ended | ||||||||||||||||||||||||||||||||||||
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Jun. 30, 2026 | |||||||||||||||||||||||||||||||||||||
| Derivative Instruments and Hedging Activities Disclosure [Abstract] | |||||||||||||||||||||||||||||||||||||
| Derivative Instruments and Hedging Activities | Derivative Instruments and Hedging Activities The Company is exposed to interest rate risk on its variable rate borrowings under the Credit Agreement (see Note 8), which bears interest at rates based on the Secured Overnight Financing Rate (“SOFR”) plus an applicable margin. Accordingly, interest rate fluctuations affect the amount of interest expense the Company is obligated to pay. The Company uses interest rate derivative instruments with the objective of managing its exposure to interest rate movements, thereby reducing the effect of interest rate changes on its future cash flows. In June 2026, the Company entered into an interest rate collar agreement with a notional amount of $35.7 million (subject to amortization per the terms of the agreement). The collar became effective on June 30, 2026 and matures on July 23, 2030. Under the terms of the collar, the Company purchased an interest rate cap at a rate of 4.250% and simultaneously sold an interest rate floor at a rate of 3.715%, both referencing 3-month USD SOFR CME Term, with payments due quarterly. The collar was entered into on a zero-cost basis, with no net premium paid or received. The collar effectively limits the Company's interest expense on the hedged notional amount to a range bounded by the floor rate and the cap rate, as follows: (i) if SOFR exceeds the cap rate of 4.250%, the counterparty pays the Company the excess; (ii) if SOFR falls below the floor rate of 3.715%, the Company pays the shortfall; and (iii) if SOFR is between the floor rate and the cap rate, no payment is made by either party. The Company has designated the interest rate collar as a cash flow hedge of the variability in interest payments on our Credit Agreement attributable to changes in SOFR, in accordance with ASC 815, Derivatives and Hedging. To qualify for hedge accounting, a derivative must be highly effective at reducing the risk associated with the exposure being hedged. The Company assesses hedge effectiveness on an ongoing basis using quantitative or qualitative methods to confirm that the collar is highly effective in offsetting changes in the cash flows of the hedged interest payments. The effective portion of changes in the fair value of the interest rate collar (unrealized gains and losses) is recorded as a component of AOCI. Amounts recorded in AOCI are reclassified into interest expense in the period in which the hedged forecasted interest payment affects earnings. For the three and six months ended June 30, 2026, the Company recorded an unrealized loss on the interest rate collar of $0.1 million. The Company estimates that approximately $6 thousand of gains currently recorded in AOCI will be reclassified to interest expense within the next 12 months as the hedged interest payments are recognized in earnings. ASC 815 requires companies to recognize all derivative instruments as either assets or liabilities at fair value in the balance sheet. The fair value of the interest rate collar is based on quoted market prices for similar instruments obtained from commercial banks, utilizing significant observable inputs (Level 2 inputs within the fair value hierarchy). When derivative instruments are used, we are exposed to credit loss in the event of non-performance by the counterparty; however, we do not anticipate non-performance by the counterparty. The amounts included in AOCI will be reclassified to interest expense should the hedge no longer be considered effective or should the hedged forecasted transactions become probable of not occurring. No amount of ineffectiveness was recorded in net income for the three and six months ended June 30, 2026. The Company will continue to assess the effectiveness of the hedge on an ongoing basis. Accumulated Other Comprehensive Income (Loss) The following table summarizes activity in AOCI related to the interest rate collar for the periods presented:
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