Derivative Instruments

9 Months Ended

Sep. 30, 2021

Derivative Instruments [Abstract]

Derivative Instruments

NOTE 10—DERIVATIVE INSTRUMENTS

The Company’s ongoing business operations expose it to various risks, including fluctuating foreign exchange rates and interest rate risk. To manage these risks, the Company periodically enters into derivative financial instruments, such as foreign exchange forward contracts and interest rate swap agreements. The Company does not hold or enter into financial instruments for trading or speculative purposes. All derivatives are recorded on the condensed consolidated balance sheets at fair value.

Foreign Exchange Forward Contracts

Certain subsidiaries have assets and liabilities denominated in currencies other than their respective functional currencies, which creates foreign exchange risk. The Company’s principal strategy in managing its exposure to changes in foreign currency exchange rates is to naturally hedge the foreign currency-denominated liabilities on its balance sheet against corresponding assets of the same currency, such that any changes in liabilities due to fluctuations in exchange rates are offset by changes in their corresponding foreign currency assets. In order to further reduce this exposure, the Company also uses foreign exchange forward contracts to economically hedge the impact of the variability in exchange rates on assets and liabilities denominated in certain foreign currencies. The Company entered into a specific such foreign exchange forward contract in December 2020 in order to economically hedge the euro-denominated purchase

price of the Arkema PMMA business, which was acquired on May 3, 2021, as discussed in Note 3. These derivative contracts are not designated for hedge accounting treatment.

As of September 30, 2021, the Company had open foreign exchange forward contracts with a notional U.S. dollar equivalent absolute value of $1,177.9 million. The following table displays the notional amounts of the most significant net foreign exchange hedge positions outstanding as of September 30, 2021:

	September 30,
Buy / (Sell)	2021
Euro	$	(1,037.4)
Chinese Yuan	$	(38.6)
Swiss Franc	$	32.8
Mexican Peso	$	(17.8)
Korean Won	$	(15.3)

Open foreign exchange forward contracts as of September 30, 2021 had maturities occurring over a period of two months.

Foreign Exchange Cash Flow Hedges

The Company also enters into forward contracts with the objective of managing the currency risk associated with forecasted U.S. dollar-denominated raw materials purchases by one of its subsidiaries whose functional currency is the euro. By entering into these forward contracts, which are designated as cash flow hedges, the Company buys a designated amount of U.S. dollars and sells euros at the prevailing market rate to mitigate the risk associated with the fluctuations in the euro-to-U.S. dollar foreign currency exchange rates. The qualifying hedge contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in Accumulated Other Comprehensive Income (“AOCI”) to the extent effective, and reclassified to cost of sales in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.

Open foreign exchange cash flow hedges as of September 30, 2021 had maturities occurring over a period of three months, and had a net notional U.S. dollar equivalent of $24.0 million.

Interest Rate Swaps

On September 6, 2017, the Company issued the 2024 Term Loan B, which currently bears an interest rate of LIBOR plus 2.00%, subject to a 0.00% LIBOR floor. In order to reduce the variability in interest payments associated with the Company’s variable rate debt, during 2017 the Company entered into certain interest rate swap agreements to convert a portion of these variable rate borrowings into a fixed rate obligation. These interest rate swap agreements are designated as cash flow hedges, and as such, the contracts are marked-to-market at each reporting date and any unrealized gains or losses are included in AOCI to the extent effective, and reclassified to interest expense in the period during which the transaction affects earnings or it becomes probable that the forecasted transaction will not occur.

As of September 30, 2021, the Company had open interest rate swap agreements with a net notional U.S. dollar equivalent of $200.0 million which had an effective date of September 29, 2017 and mature in September 2022. Under the terms of the swap agreements, the Company is required to pay the counterparties a stream of fixed interest payments at a rate of 1.81%, and in turn, receives variable interest payments based on 1-month LIBOR (0.08% as of September 30, 2021) from the counterparties.

Net Investment Hedge

The Company accounts for its cross currency swaps (“CCS”) under the spot method, meaning that changes in the fair value of the hedge included in the assessment of effectiveness (changes due to spot foreign exchange rates) are recorded within AOCI, where they remain until either the sale or substantially complete liquidation of the subsidiary subject to the hedge. Additionally, the initial value of any component excluded from the assessment of effectiveness is recognized in income using a systematic and rational method over the life of the hedging instrument and any difference between the change in the fair value of the excluded component and amounts recognized in income under that systematic and rational method is recognized in AOCI. The Company amortizes any initial excluded component value of a CCS as

a reduction of “Interest expense, net” in the condensed consolidated statements of operations using the straight-line method over the remaining term of the related CCS. Additionally, interest receipts and payments are accrued under the terms of the Company’s CCS and are recognized within “Interest expense, net” in the condensed consolidated statements of operations.

The Company entered into a CCS arrangement (the “2017 CCS”) on September 1, 2017, swapping U.S. dollar principal and interest payments of $500.0 million at an interest rate of 5.375% on its 2025 Senior Notes for euro-denominated payments of €420.0 million at a weighted average interest rate of 3.45% for approximately five years. The 2017 CCS was initially designated under the forward method and then redesignated under the spot method effective April 1, 2018. At the time of redesignation, the 2017 CCS had a cumulative foreign currency translation loss in AOCI of $38.0 million. The excluded component value related to the 2017 CCS at April 1, 2018 was $23.6 million, which was being amortized over its remaining term. On February 26, 2020, the Company settled its 2017 CCS and replaced it with a new CCS arrangement (the “2020 CCS”) that carried substantially the same terms as the 2017 CCS. Upon settlement of the 2017 CCS, the Company realized net cash proceeds of $51.6 million. The remaining $13.8 million unamortized balance of the initial excluded component related to the 2017 CCS at the time of settlement will remain in AOCI until either the sale or substantially complete liquidation of the relevant subsidiaries. Under the 2020 CCS, the Company notionally exchanged $500.0 million at an interest rate of 5.375% for €459.3 million at a weighted average interest rate of 3.672% for approximately 2.7 years, with a final maturity of November 3, 2022. The cash flows under the 2020 CCS are aligned with the Company’s principal and interest obligations on its 5.375% 2025 Senior Notes.

Summary of Derivative Instruments

The following table presents the effect of the Company’s derivative instruments, including those not designated for hedge accounting treatment, on the condensed consolidated statements of operations for the three and nine months ended September 30, 2021 and 2020:

	Location and Amount of Gain (Loss) Recognized in Statements of Operations
	Three Months Ended								Three Months Ended
	September 30, 2021								September 30, 2020
	Cost of sales		Interest expense, net		Acquisition purchase price hedge gain (loss)		Other income, net		Cost of sales		Interest expense, net		Acquisition purchase price hedge gain (loss)		Other expense, net
Total amount of income and (expense) line items presented in the statements of operations in which the effects of derivative instruments are recorded	$	(1,101.0)	$	(23.0)	$	—	$	0.1	$	(572.9)	$	(10.0)	$	—	$	(1.2)
The effects of cash flow hedge instruments:
Foreign exchange cash flow hedges
Amount of gain (loss) reclassified from AOCI into income	$	0.3	$	—	$	—	$	—	$	(0.7)	$	—	$	—	$	—
Interest rate swaps
Amount of loss reclassified from AOCI into income	$	—	$	(0.9)	$	—	$	—	$	—	$	(0.8)	$	—	$	—
The effects of net investment hedge instruments:
Cross currency swaps (CCS)
Amount of gain excluded from effectiveness testing	$	—	$	1.9	$	—	$	—	$	—	$	1.6	$	—	$	—
Amount of loss recognized in income (1)	$	—	$	—	$	—	$		$	—	$	—	$	—	$	(0.8)
The effects of derivatives not designated as hedge instruments:
Foreign exchange forward contracts
Amount of gain (loss) recognized in income	$	—	$	—	$	—	$	23.3	$	—	$	—	$	—	$	(13.2)

	Location and Amount of Gain (Loss) Recognized in Statements of Operations
	Nine Months Ended								Nine Months Ended
	September 30, 2021								September 30, 2020
	Cost of sales		Interest expense, net		Acquisition purchase price hedge gain (loss)		Other expense, net		Cost of sales		Interest expense, net		Acquisition purchase price hedge gain (loss)		Other expense, net
Total amount of income and (expense) line items presented in the statements of operations in which the effects of derivative instruments are recorded	$	(2,951.7)	$	(56.6)	$	(22.0)	$	(8.4)	$	(1,789.1)	$	(32.0)	$	—	$	(3.0)
Effects of cash flow hedge instruments:
Foreign exchange cash flow hedges
Amount of gain reclassified from AOCI into income	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Interest rate swaps
Amount of loss reclassified from AOCI into income	$	—	$	(2.6)	$	—	$	—	$	—	$	(1.6)	$	—	$	—
Effects of net investment hedge instruments:
Cross currency swaps
Amount of gain excluded from effectiveness testing (2)	$	—	$	5.5	$	—	$	—	$	—	$	7.0	$	—	$	—
Amount of loss recognized in income (1)	$	—	$	—	$	—	$		$	—	$	—	$	—	$	(0.8)
Effects of derivatives not designated as hedge instruments:
Foreign exchange forward contracts
Amount of gain (loss) recognized in income (3)	$	—	$	—	$	(22.0)	$	43.4	$	—	$	—	$	—	$	(7.5)

(1) Amount represents the change in fair value of the portion of the 2020 CCS that was de-designated from hedge accounting for the three and nine months ended September 30, 2020.

(2) Amounts include the effects on AOCI of both the 2017 CCS through its settlement on February 26, 2020 and the 2020 CCS from when it was entered into on February 26, 2020 through September 30, 2020.

(3) The $22.0 million loss incurred from the change in fair value of the forward currency hedge arrangement on the euro-denominated purchase price of the Arkema PMMA business during the nine months ended September 30, 2021 is presented separately in the condensed consolidated statements of operations from the gains recorded on the Company’s other foreign exchange forward contracts.

The following table presents the effect of cash flow and net investment hedge accounting on AOCI for the three and nine months ended September 30, 2021 and 2020:

`	Gain (Loss) Recognized in AOCI on Balance Sheet
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Designated as Cash Flow Hedges
Foreign exchange cash flow hedges	$	0.4	$	(0.3)	$	3.1	$	0.6
Interest rate swaps		0.8		0.7		2.5		(5.2)
Total	$	1.2	$	0.4	$	5.6	$	(4.6)
Designated as Net Investment Hedges
Cross currency swaps (CCS) (1)	$	13.1	$	(24.2)	$	32.1	$	(11.6)
Total	$	13.1	$	(24.2)	$	32.1	$	(11.6)

(1) Amount for the nine months ended September 30, 2020 includes the effects on AOCI of both the 2017 CCS through its settlement on February 26, 2020 and the 2020 CCS from when it was entered into on February 26, 2020 through September 30, 2020.

	Gain (Loss) Recognized in Other expense, net in Statement of Operations
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020
Settlements and changes in the fair value of forward contracts (not designated as hedges) (1)	$	23.3	$	(13.2)	$	43.4	$	(7.5)
Remeasurement of foreign currency-denominated assets and liabilities	$	(23.7)	$	14.0	$	(43.0)	$	8.9
Total	$	(0.4)	$	0.8	$	0.4	$	1.4

(1) Amounts do not include the loss of $22.0 million recorded from the change in fair value of the forward currency hedge arrangement on the euro-denominated purchase price of the Arkema PMMA business during the nine months ended September 30, 2021.

The Company expects to reclassify in the next twelve months an approximate $2.5 million net loss from AOCI into earnings related to the Company’s outstanding foreign exchange cash flow hedges and interest rate swaps as of September 30, 2021 based on current foreign exchange rates.

The following tables summarize the gross and net unrealized gains and losses, as well as the balance sheet

classification, of outstanding derivatives recorded in the condensed consolidated balance sheets:

	September 30, 2021
	Foreign		Foreign
	Exchange		Exchange		Interest		Cross
Balance Sheet	Forward		Cash Flow		Rate		Currency
Classification	Contracts		Hedges		Swaps		Swaps		Total
Asset Derivatives:
Accounts receivable, net of allowance	$	18.6	$	0.9	$	—	$	4.2	$	23.7
Gross derivative asset position		18.6		0.9		—		4.2		23.7
Less: Counterparty netting		(0.1)		—		—		—		(0.1)
Net derivative asset position	$	18.5	$	0.9	$	—	$	4.2	$	23.6
Liability Derivatives:
Accounts payable	$	(0.8)	$	—	$	(3.4)	$	—	$	(4.2)
Other noncurrent obligations		—		—		—		(33.7)		(33.7)
Gross derivative liability position		(0.8)		—		(3.4)		(33.7)		(37.9)
Less: Counterparty netting		0.1		—		—		—		0.1
Net derivative liability position	$	(0.7)	$	—	$	(3.4)	$	(33.7)	$	(37.8)
Total net derivative position	$	17.8	$	0.9	$	(3.4)	$	(29.5)	$	(14.2)

	December 31, 2020
	Foreign		Foreign
	Exchange		Exchange		Interest		Cross
Balance Sheet	Forward		Cash Flow		Rate		Currency
Classification	Contracts		Hedges		Swaps		Swaps		Total
Asset Derivatives:
Accounts receivable, net of allowance (1)	$	8.2	$	—	$	—	$	5.0	$	13.2
Gross derivative asset position		8.2		—		—		5.0		13.2
Less: Counterparty netting		(6.5)		—		—		—		(6.5)
Net derivative asset position	$	1.7	$	—	$	—	$	5.0	$	6.7
Liability Derivatives:
Accounts payable (1)	$	(8.3)	$	(2.1)	$	(3.4)	$	—	$	(13.8)
Other noncurrent obligations		—		—		(2.5)		(66.5)		(69.0)
Gross derivative liability position		(8.3)		(2.1)		(5.9)		(66.5)		(82.8)
Less: Counterparty netting		6.5		—		—		—		6.5
Net derivative liability position	$	(1.8)	$	(2.1)	$	(5.9)	$	(66.5)	$	(76.3)
Total net derivative position	$	(0.1)	$	(2.1)	$	(5.9)	$	(61.5)	$	(69.6)

(1) Balance as of December 31, 2020 includes a $7.3 million receivable representing the fair value of the forward currency hedge arrangement on the euro-denominated purchase price of the Arkema PMMA business.

Forward contracts, interest rate swaps, and cross currency swaps are entered into with a limited number of counterparties, each of which allows for net settlement of all contracts through a single payment in a single currency in the event of a default on or termination of any one contract. As such, in accordance with the Company’s accounting policy, these derivative instruments are recorded on a net basis by counterparty within the condensed consolidated balance sheets.

Refer to Notes 11 and 18 of the condensed consolidated financial statements for further information regarding the fair value of the Company’s derivative instruments and the related changes in AOCI.