Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments

v3.21.2
Financial Instruments
9 Months Ended
Sep. 30, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
FINANCIAL INSTRUMENTS FINANCIAL INSTRUMENTS
Derivatives and Hedging
In the normal course of business, the Company is exposed to risks relating to changes in foreign currency exchange rates, commodity prices and interest rates. Derivative financial instruments, such as foreign currency exchange forward contracts, commodities futures contracts, interest rate swaps and net investment hedges are used to manage the risks associated with changes in the conditions of those markets. All derivatives are recognized in the Condensed Consolidated Balance Sheets at fair value. The counterparties to the Company’s derivative agreements are primarily major international financial institutions. The Company continually monitors its derivative positions and the credit ratings of its counterparties and does not anticipate nonperformance on their part.
Interest Rates and Cross-Currency Swaps
The Company uses interest rate swaps and cross currency swaps to reduce its exposure to interest rate risk and foreign currency risk. The Company designates the interest rate swaps as cash flow hedges and the cross currency swaps as net investment hedges. The proceeds from these contracts are reflected as "Cash flows from operating activities" in the Consolidated Statement of Cash Flows. For interest rate swaps, changes in fair value are recorded in "Accumulated other comprehensive loss" and reclassified to "Interest expense, net" in the Condensed Consolidated Statements of Operations as the underlying hedged item affects earnings. For cross currency swaps changes in fair value are recorded in "Foreign currency translation" in "Accumulated other comprehensive loss." These cross-currency swaps effectively convert the Company's term loans under the Credit Agreement, which are U.S. dollar denominated debt obligations, into fixed-rate euro-denominated debt through the expiration of the swaps.
The Company entered into forward starting interest rate swaps with an effective date of September 1, 2021 to effectively fix the floating rate of the interest payments associated with the $400 million Add-on through January 2025. These contracts were designated as a cash flow hedge. The Company also entered into forward starting cross-currency swaps to effectively convert the $400 million Add-on, which is a U.S. dollar denominated debt obligation, into fixed-rate euro-denominated debt through January 2025. The Company designated these contracts as a net investment hedge of the foreign currency exposure of a portion of its net investment in certain euro functional subsidiaries. The changes in the fair value of these swap contracts were not material before their effective date of September 1, 2021.
In 2019, the Company entered into interest rate swaps to effectively fix the floating rate of the interest payments associated with the initial $750 million term loans under the Credit Agreement through January 2024. These contracts were designated as a cash flow hedge. The Company also entered into cross-currency swaps to effectively convert the $750 million term loans, which are U.S. dollar denominated debt obligations, into fixed-rate euro-denominated debt through January 2024. The Company designated these contracts as a net investment hedge of the foreign currency exposure of a portion of its net investment in certain euro functional subsidiaries.
The net result of the above hedges, which expire in January 2024 and 2025, respectively, is an interest rate of approximately 2.1%, which could vary in the future due to changes in the euro and the U.S. dollar exchange rate.
For the three and nine months ended September 30, 2021, the Company's interest rate swaps and cross-currency swaps were deemed highly effective. The Company expects to reclassify $18.8 million of expense from "Accumulated other comprehensive loss" to "Interest expense, net" in the Condensed Consolidated Statements of Operations within the next twelve months.
Foreign Currency
The Company conducts a significant portion of its business in currencies other than the U.S. dollar and a portion of its business in currencies other than the functional currencies of its subsidiaries. As a result, the Company’s operating results are impacted by foreign currency exchange rate volatility.
At September 30, 2021, the Company held foreign currency forward contracts to purchase and sell various currencies to mitigate foreign currency exposure primarily with the U.S. dollar and British pound. The Company has not designated any foreign currency exchange forward contracts as eligible for hedge accounting and, as a result, changes in the fair value of foreign currency forward contracts are recorded in the Condensed Consolidated Statements of Operations as "Other expense, net." The total notional value of foreign currency exchange forward contracts held at September 30, 2021 and December 31, 2020 was approximately $26.6 million and $78.5 million, respectively, with settlement dates generally within one year. The market value of the foreign currency forward contracts was a $0.1 million net current liability at September 30, 2021 and a $0.5 million net current liability at December 31, 2020.
Commodities
As part of its risk management policy, the Company enters into commodity futures contracts for the purpose of mitigating its exposure to fluctuations in prices of certain metals used in the production of its finished goods. The Company held futures contracts to purchase and sell various metals, primarily tin and silver, for a notional amount of $58.7 million and $25.0 million at September 30, 2021 and December 31, 2020, respectively. The market value of the metals forward contracts was a $1.1 million net current asset at September 30, 2021 and a $1.2 million net current liability at December 31, 2020. Substantially all contracts outstanding at September 30, 2021 had delivery dates within one year. The Company has not designated these derivatives as hedging instruments and, accordingly, records changes in their fair values in the Condensed Consolidated Statements of Operations as "Other expense, net."
Realized gains and losses on derivative contracts are accounted for as "Operating activities" in the Condensed Consolidated Statements of Cash Flows.
Fair Value Measurements
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis:
 (dollars in millions) Balance sheet location Classification September 30, 2021 December 31, 2020
Asset Category        
Foreign exchange contracts not designated as hedging instruments Other current assets Level 2 $ 0.1  $ 0.2 
Metals contracts not designated as hedging instruments Other current assets Level 2 2.6  0.4 
Cross currency swaps designated as net investment hedge Other current assets Level 2 21.8  16.3 
Interest rate swaps designated as cash flow hedging instruments Other assets Level 2 3.0  — 
Cross currency swaps designated as net investment hedge Other assets Level 2 1.7  — 
Total $ 29.2  $ 16.9 
Liability Category
Foreign exchange contracts not designated as hedging instruments Accrued expenses and other current liabilities Level 2 $ 0.2  $ 0.7 
Metals contracts not designated as hedging instruments Accrued expenses and other current liabilities Level 2 1.5  1.6 
Interest rate swaps designated as cash flow hedging instruments Accrued expenses and other current liabilities Level 2 18.8  17.6 
Interest rate swaps designated as cash flow hedging instruments Other liabilities Level 2 17.7  33.5 
Cross currency swaps designated as net investment hedge Other liabilities Level 2 9.0  43.3 
Total $ 47.2  $ 96.7 
Derivative assets and liabilities include foreign currency, metals, forward starting swaps, interest rate swaps and cross currency swaps. The fair values are determined using pricing models based upon observable market inputs, such as market spot and futures prices on over-the-counter derivative instruments, market interest rates and consideration of counterparty credit risk.
There were no significant transfers of financial instruments between the fair value hierarchy levels for the three and nine months ended September 30, 2021.
The carrying value and estimated fair value of the Company’s long-term debt totaled $1.90 billion and $1.94 billion, respectively, at September 30, 2021. At December 31, 2020, the carrying value and estimated fair value totaled $1.52 billion and $1.55 billion, respectively. The carrying values noted above include unamortized discounts and debt issuance costs. The estimated fair value of long-term debt is measured using quoted market prices for similar instruments at the reporting date multiplied by the gross carrying amount of the related debt, which excludes unamortized discounts and debt issuance costs. Such instruments are valued using Level 2 inputs.