FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

9 Months Ended

Sep. 30, 2024

FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

(9) FINANCIAL INSTRUMENTS AND RISK MANAGEMENT

In accordance with ASC 820, the Company uses a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. Observable inputs are from sources independent of the Company. Unobservable inputs reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. These tiers include the following:

Level 1 — inputs include observable unadjusted quoted prices in active markets for identical assets or liabilities

Level 2 — inputs include other than quoted prices in active markets that are either directly or indirectly observable

Level 3 — inputs include unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions

In determining fair value, the Company uses various valuation techniques and prioritizes the use of observable inputs. The availability of observable inputs varies from instrument to instrument and depends on a variety of factors including the type of instrument, whether the instrument is actively traded, and other characteristics particular to the instrument. For many financial instruments, pricing inputs are readily observable in the market, the valuation methodology used is widely accepted by market participants, and the valuation does not require significant management judgment. For other financial instruments, pricing inputs are less observable in the marketplace and may require management judgment.

Recurring fair value measurements

A summary of the Company’s financial instruments recognized at fair value, and the fair value measurements used are as follows:


		As of September 30, 2024
	Balance Sheet Location	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
Assets:
Interest rate swaps	Other current assets	$	28.4	$	—	$	28.4	$	—

Economic hedges	Other current assets	7.8		—		7.8		—
Interest rate swaps	Other noncurrent assets	27.3		—		27.3		—
Total assets		$	63.5	$	—	$	63.5	$	—

Liabilities:

Foreign currency exchange forwards	Accrued expenses and other liabilities	$	7.3	$	—	$	7.3	$	—
Private warrants	Current portion of warrant liabilities	464.2		—		464.2		—
Total liabilities		$	471.5	$	—	$	471.5	$	—


		As of December 31, 2023
	Balance Sheet Location	Total		Quoted prices in active markets for identical assets (Level 1)		Other observable inputs (Level 2)		Unobservable inputs (Level 3)
Assets:
Interest rate swaps	Other current assets	$	36.4	$	—	$	36.4	$	—
Interest rate swaps	Other noncurrent assets	44.5		—		44.5		—
Total assets		$	80.9	$	—	$	80.9	$	—

Liabilities:


Private warrants	Warrant liabilities	$	195.0	$	—	$	195.0	$	—
Total liabilities		$	195.0	$	—	$	195.0	$	—

Interest rate swaps — From time to time the Company may enter into derivative financial instruments designed to hedge the variability in interest expense on floating rate debt. Derivatives are recognized as assets or liabilities in the Unaudited Condensed Consolidated Balance Sheets at their fair value. When the derivative instrument qualifies as a cash flow hedge changes in the fair value are deferred through other comprehensive income depending on the effectiveness of the instrument.

The Company uses interest rate swaps to manage the interest rate risk of the Company’s total debt portfolio and related overall cost of borrowing. At both September 30, 2024 and December 31, 2023, interest rate swap agreements designated as cash flow hedges effectively swapped a notional amount of $1,000.0 of SOFR-based floating rate debt for fixed rate debt. The Company’s interest rate swaps mature in March 2027. During the three and nine months ended September 30, 2024 and 2023, the Company recognized $10.8, $32.2, $10.8 and $28.4, respectively, within “Interest expense, net” on the Unaudited Condensed Consolidated Statements of Earnings (Loss). At September 30, 2024, the Company expects that approximately $28.4 of pre-tax net gains on cash flow hedges will be reclassified from accumulated other comprehensive income (loss) into earnings during the next twelve months.

The interest rate swaps are valued using the SOFR yield curves at the reporting date. Counterparties to these contracts are highly rated financial institutions. The fair values of the Company’s interest rate swaps are adjusted for nonperformance risk and creditworthiness of the counterparty through the Company’s credit valuation adjustment (“CVA”). The CVA is calculated at the counterparty level utilizing the fair value exposure at each payment date and applying a weighted probability of the appropriate survival and marginal default percentages.

Foreign currency exchange forwards - The Company may enter into derivative financial instruments designed to hedge the exposure to changes in foreign currency exchange rates. Derivatives are recognized as assets or liabilities in the Unaudited Condensed Consolidated Balance Sheets at their fair value. The Company values foreign currency exchange swaps using broker quotations or market transactions on the listed or over-the-counter market, as such, these derivative instruments are classified in Level 2. When the derivative instrument qualifies as a cash flow hedge changes in the fair value are deferred through other comprehensive income depending on the effectiveness of the instrument. The Company reclassifies the gain or loss associated with the cash flow hedges into earnings when the underlying exposure is recognized. At September 30, 2024, we have derivative instruments which hedge our exposure to certain foreign currency exchange rates with a notional amount of $163.0. For the three and nine months ended September 30, 2024, there were $1.4 and $0.8 realized losses, respectively, associated with the foreign currency exchange swaps within "Cost of sales - products" on the Unaudited Condensed Consolidated Statements of Earnings (Loss).

Economic hedges - At September 30, 2024, we have derivative instruments which hedge our purchases of aluminum and copper with notional amounts of 9,860.0 and 9,030.0 metric tons, respectively. The Company values these instruments using broker quotations, market transactions or option pricing model based on observable market inputs, as such, these derivative instruments are classified in Level 2. These derivative instruments are treated as economic hedges and for the three and nine months ended September 30, 2024, the Company recognized mark-to-market gains of $3.3 and $6.4, respectively, within "Other operating expense (income)" on the Unaudited Condensed Consolidated Statement of Earnings (Loss).

Private warrants — The fair value of the private warrants is considered a Level 2 valuation and is determined using the Black-Sholes-Merton valuation model. The Company recognized a loss of $67.2 and $269.2, respectively, for the three and nine months ended September 30, 2024 in "Change in the fair value of warrant liabilities" on the Unaudited Condensed Consolidated Statement of Earnings (Loss) associated with the mark-to-market adjustment on the 5,266,667 outstanding private warrants. On February 24, 2023, GS Sponsor LLC elected to exercise 5,266,666 warrants on a cashless basis pursuant to the agreement governing the warrants, in exchange for which the Company issued 1,368,194 shares of Class A common stock. For the nine months ended September 30, 2023, the Company recognized a gain of $7.7 in "Change in the fair value of warrant liabilities" on the Unaudited Condensed Consolidated Statement of Earnings (Loss) associated with the exercise of these private warrants. Additionally, the Company recognized a loss of $61.6 and $111.1, respectively, for the three and nine months ended September 30, 2023 in "Change in the fair value of warrant liabilities" on the Unaudited Condensed Consolidated Statement of Earnings (Loss) associated with the mark-to-market adjustment on the remaining 5,266,667 outstanding private warrants.

The significant assumptions which the Company used in the model are:


Warrant valuation inputs	September 30, 2024			December 31, 2023
Stock price	$	99.49		$	48.03
Strike price	$	11.50		$	11.50
Remaining life	0.36			1.10
Volatility	97.5		%	55.0		%
Interest rate (1)	4.65		%	4.73		%
Dividend yield (2)	0.10		%	0.21		%

(1) Interest rate determined from a constant maturity treasury yield.

(2) September 30, 2024 and December 31, 2023 dividend yield assumes $0.10 per share per annum.

Net investment hedge — From time to time the Company designates certain intercompany debt to hedge a portion of its investment in foreign subsidiaries and affiliates. The net impact of translation adjustments from these hedges was $(2.8), $20.4, $(1.5) and $19.5, respectively, for the three and nine months ended September 30, 2024 and 2023 and is included in “Foreign currency translation” in the Unaudited Condensed Consolidated Statement of Other Comprehensive Income (Loss). As of September 30, 2024 and December 31, 2023, $78.6 and $225.0, respectively, of the Company’s intercompany debt was designated to hedge investments in certain foreign subsidiaries and affiliates.

Other fair value measurements

The Company determines the fair value of debt using Level 2 inputs based on quoted market prices. The following table presents the estimated fair value and carrying value of long-term debt, including the current portion of long-term debt as of September 30, 2024 and December 31, 2023.


	September 30, 2024				December 31, 2023
	Fair Value		Par Value (1)		Fair Value		Par Value (1)
Term Loan due 2027	$	2,104.9	$	2,102.2	$	2,104.9	$	2,118.1
Senior Secured Notes due 2028	819.8		850.0		794.0		850.0

(1)See “Note 5 — Debt” for additional information.