Derivative Financial Instruments and Risk Management

9 Months Ended

Sep. 30, 2021

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Risk Management

DERIVATIVE FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

Derivative Financial Instruments

All derivatives are recorded as assets or liabilities in the Balance Sheet at their respective fair values. For derivatives designated as cash flow hedges, the unrealized gain or loss related to the derivatives is recorded in Other comprehensive income (loss) until the hedged transaction affects earnings. The Company assesses at inception of the hedge, whether the derivative in the hedging transaction will be highly effective in offsetting changes in cash flows of the hedged item. Changes in the fair value of derivatives that do not meet the criteria for designation as a hedge are recognized in earnings.

Foreign Exchange: The Company manufactures and sells products in a number of countries throughout the world and, as a result, the Company is exposed to movements in foreign currency exchange rates. Major foreign currency exposures involve the markets in Western Europe, South America and Asia. Some of the Company's sales and purchase contracts contain embedded derivatives due to the nature of doing business in certain jurisdictions, which are taken into consideration as part of the Company's risk management policy. The purpose of the Company's foreign currency hedging activities is to manage the economic impact of exchange rate volatility associated with anticipated foreign currency purchases and sales made in the normal course of business. The Company primarily utilizes forward foreign exchange contracts with maturities of less than 2 years in managing this foreign exchange rate risk. The Company has not designated these forward foreign exchange contracts, which had a notional value at September 30, 2021 of $843.3 million, as hedges and therefore does not apply hedge accounting.

The fair values of our foreign currency derivative assets are recorded within other current assets and other assets, and the fair values of foreign currency derivative liabilities are recorded within other current liabilities and other liabilities. The following table presents the fair value of foreign currency derivatives and embedded derivatives included within the Balance Sheet:

	As of September 30, 2021				As of December 31, 2020
(In millions)	Derivative Assets		Derivative Liabilities		Derivative Assets		Derivative Liabilities
Total	$	8.0	$	4.9	$	10.0	$	12.7

A master netting arrangement allows counterparties to net settle amounts owed to each other as a result of separate offsetting derivative transactions. The Company enters into master netting arrangements with its counterparties when possible to mitigate credit risk in derivative transactions by permitting the Company to net settle for transactions with the same counterparty. However, it does not net settle with such counterparties. As a result, derivatives are presented at their gross fair values in the Balance Sheet.  

As of September 30, 2021 and December 31, 2020, information related to these offsetting arrangements was as follows:

(In millions)	As of September 30, 2021
Offsetting of Assets	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheet		Net Presented in the Consolidated Balance Sheet		Amount Subject to Master Netting Agreement		Net Amount
Derivatives	$	11.7	$	—	$	11.7	$	(2.8)	$	8.9

(In millions)	As of September 30, 2021
Offsetting of Liabilities	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Presented in the Consolidated Balance Sheet		Amount Subject to Master Netting Agreement		Net Amount
Derivatives	$	5.3	$	—	$	5.3	$	(2.8)	$	2.5

(In millions)	As of December 31, 2020
Offsetting of Assets	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheet		Net Presented in the Consolidated Balance Sheet		Amount Subject to Master Netting Agreement		Net Amount
Derivatives	$	10.0	$	—	$	10.0	$	(8.6)	$	1.4

(In millions)	As of December 31, 2020
Offsetting of Liabilities	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheet		Net Presented in the Consolidated Balance Sheet		Amount Subject to Master Netting Agreement		Net Amount
Derivatives	$	16.6	$	—	$	16.6	$	(8.6)	$	8.0

The following table presents the location and amount of the gain (loss) on foreign currency derivatives and on the remeasurement of assets and liabilities denominated in foreign currencies, as well as the net impact recognized in the Income Statement: 

Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income
		Three Months Ended September 30,				Nine Months Ended September 30,
(In millions)		2021		2020		2021		2020
Foreign exchange contracts	Revenue	$	(1.0)	$	1.5	$	(0.6)	$	(0.8)
Foreign exchange contracts	Cost of sales	(0.3)		(0.6)		0.5		(0.8)
Foreign exchange contracts	Selling, general and administrative expense	0.8		0.5		1.1		1.8
Total		(0.5)		1.4		1.0		0.2
Remeasurement of assets and liabilities in foreign currencies		0.4		(1.7)		(1.4)		0.1
Net gain (loss) on foreign currency transactions		$	(0.1)	$	(0.3)	$	(0.4)	$	0.3

Interest Rates: The Company has entered into four interest rate swaps executed in March 2020 with a combined notional amount of $200 million expiring in April 2025, and one interest rate swap executed in May 2020 with a notional amount of $50 million expiring in May 2025. These interest rate swaps fix the interest rate applicable to certain of the Company's variable-rate debt. The agreements swap one-month LIBOR for fixed rates. The Company has designated these swaps as cash flow hedges and all changes in fair value of the swaps are recognized in accumulated other comprehensive income (loss).

At September 30, 2021, the fair value of these derivatives designated as cash flow hedges were recorded in the Balance Sheet as other liabilities of $1.0 million and as accumulated other comprehensive income, net of tax, of $0.7 million.

Net Investment: The Company has entered into a cross currency swap agreement that synthetically swaps $116.4 million of fixed rate debt to Euro denominated fixed rate debt. The agreement is designated as a net investment hedge for accounting purposes. Accordingly, the gain or loss on this derivative instrument is included in the foreign currency translation component of other comprehensive income until the net investment is sold, diluted, or liquidated. Coupons received for the cross currency swap are excluded from the net investment hedge effectiveness assessment and are recorded in interest expense, net on the condensed consolidated statements of income. Coupon interest from cross currency swap agreement recorded in interest expense, net was approximately $0.7 million for both the three months ended September 30, 2021 and 2020, and $2.2 million for both the nine months ended September 30, 2021 and 2020.

At September 30, 2021, the fair value of these derivatives designated as net investment hedges were recorded in the Balance Sheet as other assets of $4.2 million and as accumulated other comprehensive income, net of tax, of $3.1 million.

Refer to Note 10. Fair Value Of Financial Instruments for a description of how the values of the above financial instruments are determined.

Credit Risk

By their nature, financial instruments involve risk including credit risk for non-performance by counterparties. Financial instruments that potentially subject the Company to credit risk primarily consist of trade receivables and derivative contracts. The Company manages the credit risk on financial instruments by transacting only with financially secure counterparties, requiring credit approvals and establishing credit limits, and monitoring counterparties’ financial condition. Maximum exposure to credit loss in the event of non-performance by the counterparty, for all receivables and derivative contracts as of September 30, 2021, is limited to the amount drawn and outstanding on the financial instrument. Refer to Note 1. Description of Business and Basis of Presentation in Item 8. Financial Statements and Supplementary Data of the Company's most recent Annual Report on Form 10-K, for a description of how allowance for credit loss is determined on financial assets measured at amortized cost, which includes Trade receivables, Contract assets, and non-current receivables.