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Hedging Activities, Derivative Instruments and Credit Risk

12 Months Ended

Dec. 31, 2019

Hedging Activities, Derivative Instruments and Credit Risk [Abstract]

Hedging Activities, Derivative Instruments and Credit Risk

Note 18:

Hedging Activities, Derivative Instruments and Credit Risk

Hedging Activities

The Company is exposed to certain market risks during the normal course of its business arising from adverse changes in interest rates and foreign currency exchange rates. The Company selectively uses derivative financial instruments (“derivatives”), including foreign currency forward contracts and interest rate swaps, to manage the risks from fluctuations in foreign currency exchange rates and interest rates, respectively. The Company does not purchase or hold derivatives for trading or speculative purposes. Fluctuations in interest rates and foreign currency exchange rates can be volatile, and the Company’s risk management activities do not totally eliminate these risks. Consequently, these fluctuations could have a significant effect on the Company’s financial results.

The Company’s exposure to interest rate risk results primarily from its variable-rate borrowings. The Company manages its debt centrally, considering tax consequences and its overall financing strategies. The Company manages its exposure to interest rate risk by using pay-fixed interest rate swaps as cash flow hedges of variable rate debt in order to adjust the relative fixed and variable proportions.

A substantial portion of the Company’s operations is conducted by its subsidiaries outside of the United States in currencies other than the USD. Almost all of the Company’s non-U.S. subsidiaries conduct their business primarily in their local currencies, which are also their functional currencies. Other than the USD, the EUR, GBP, and Chinese Renminbi are the principal currencies in which the Company and its subsidiaries enter into transactions. The Company is exposed to the impacts of changes in foreign currency exchange rates on the translation of its non-U.S. subsidiaries’ assets, liabilities and earnings into USD. The Company has certain U.S. subsidiaries borrow in currencies other than the USD.

The Company and its subsidiaries are also subject to the risk that arises when they, from time to time, enter into transactions in currencies other than their functional currency. To mitigate this risk, the Company and its subsidiaries typically settle intercompany trading balances monthly. The Company also selectively uses forward currency contracts to manage this risk. These contracts for the sale or purchase of European and other currencies generally mature within one year.

Derivative Instruments

The following table summarizes the notional amounts, fair values and classification of the Company’s outstanding derivatives by risk category and instrument type within the Consolidated Balance Sheets as of December 31, 2019 and December 31, 2018.

	December 31, 2019
Derivative Classification		Notional Amount ⁽¹⁾		Fair Value ⁽¹⁾ Other Current Assets		Fair Value ⁽¹⁾ Other Assets		Fair Value ⁽¹⁾ Accrued Liabilities		Fair Value ⁽¹⁾ Other Liabilities

Derivatives Designated as Hedging Instruments
Interest rate swap contracts	Cash Flow	$	825.0	$	—	$	—	$	13.1	$	—
Derivatives Not Designated as Hedging Instruments
Foreign currency forwards	Fair Value	$	55.2	$	0.5	$	—	$	—	$	—
Foreign currency forwards	Fair Value	$	106.9	$	—	$	—	$	0.5	$	—

	December 31, 2018
Derivative Classification		Notional Amount ⁽¹⁾		Fair Value ⁽¹⁾ Other Current Assets		Fair Value ⁽¹⁾ Other Assets		Fair Value ⁽¹⁾ Accrued Liabilities		Fair Value ⁽¹⁾ Other Liabilities
Derivatives Designated as Hedging Instruments
Interest rate swap contracts	Cash Flow	$	925.0	$	—	$	—	$	11.2	$	8.7
Derivatives Not Designated as Hedging Instruments
Foreign currency forwards	Fair Value	$	143.3	$	1.3	$	—	$	—	$	—
Foreign currency forwards	Fair Value	$	27.5	$	—	$	—	$	0.1	$	—

⁽¹⁾

Notional amounts represent the gross contract amounts of the outstanding derivatives excluding the total notional amount of positions that have been effectively closed through offsetting positions. The net gains and net losses associated with positions that have been effectively closed through offsetting positions but not yet settled are included in the asset and liability derivatives fair value columns, respectively.

Gains and losses on derivatives designated as cash flow hedges included in the Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2019, 2018 and 2017 are presented in the table below.

	2019			2018			2017
Interest Rate Swap Contracts
(Loss) gain recognized in AOCI on derivatives	$	(7.4	)	$	10.1		$	1.5
Loss reclassified from AOCI into income (effective portion)⁽¹⁾		(15.6	)		(14.5	)		(18.5	)
Loss reclassified from AOCI into income (missed forecast)⁽²⁾		—			(0.6	)		—

⁽¹⁾

Losses on derivatives reclassified from accumulated other comprehensive income (“AOCI”) into income were included in “Interest expense” in the Consolidated Statements of Operations.

⁽²⁾

In the third quarter of 2018, the Company used excess cash to pay down $150.0 million of its Dollar Term Loan Facility. Due to this unforecasted pay down of debt, the Company paid $2.7 million in the amendment of the interest rate swap contracts to reflect the updated forecasted cash flows. The updated forecasts caused certain hedged items to be deemed probable of not occurring in the future and thus, the Company accelerated the release of AOCI related to those hedged items. Losses reclassified from AOCI into income (missed forecast) were included in “Loss on extinguishment of debt” in the Consolidated Statements of Operations.

As of December 31, 2019, the Company was the fixed rate payor on four interest rate swap contracts that effectively fix the LIBOR-based index used to determine the interest rates charged on a total of $825.0 million of the Company’s LIBOR-based variable rate borrowings. These contracts carry fixed rates ranging from 3.6% to 4.3% and expire in 2020. These swap agreements qualify as hedging instruments and have been designated as cash flow hedges of forecasted LIBOR-based interest payments. Based on LIBOR-based swap yield curves as of December 31, 2019, the Company expects to reclassify losses of $14.1 million out of AOCI into earnings during the next 12 months. The Company’s LIBOR-based variable rate borrowings outstanding as of December 31, 2019 were $927.6 million and €601.2 million.

The Company had six foreign currency forward contracts outstanding as of December 31, 2019 with notional amounts ranging from $10.0 million to $56.1 million. These contracts are used to hedge the change in fair value of recognized foreign currency denominated assets or liabilities caused by changes in currency exchange rates. The changes in the fair value of these contracts generally offset the changes in the fair value of a corresponding amount of the hedged items, both of which are included within “Other operating expense, net” in the Consolidated Statements of Operations. The Company’s foreign currency forward contracts are subject to master netting arrangements or agreements between the Company and each counterparty for the net settlement of all contracts through a single payment in a single currency in the event of default on or termination of any one contract with that certain counterparty. It is the Company’s practice to recognize the gross amounts in the Consolidated Balance Sheets. The amount available to be netted is not material.

The Company’s (losses) gains on derivative instruments not designated as accounting hedges and total net foreign currency transaction (losses) gains for the years ended December 31, 2019, 2018 and 2017 were as follows.

	2019			2018		2017
Foreign currency forward contracts (losses) gains	$	(4.9	)	$	5.2	$	(7.0	)
Total foreign currency transaction (losses) gains, net		(8.1	)		1.9		(9.3	)

The Company has a significant investment in consolidated subsidiaries with functional currencies other than the USD, particularly the EUR. On August 17, 2017, the Company designated the €615.0 million Euro Term Loan as a hedge of the Company’s net investment in subsidiaries with EUR functional currencies. As of December 31, 2019, the Euro Term Loan of €601.2 million remained designated.

The Company’s gains, net of income tax, associated with changes in the value of debt for the years ended December 31, 2019 and 2018, and the net balance of such gains included in accumulated other comprehensive (loss) income as of December 31, 2019 and 2018 were as follows.

	2019		2018
Gain, net of income tax, recorded through other comprehensive income	$	12.0	$	24.4
Balance included in accumulated other comprehensive (loss) income as of December 31, 2019 and 2018, respectively		75.8		56.5

With the exception of the cash proceeds from the termination of the cross currency interest rate swap contracts described earlier, all cash flows associated with derivatives are classified as operating cash flows in the Consolidated Statements of Cash Flows.

There were no off-balance sheet derivative instruments as of December 31, 2019 or 2018.

Credit Risk

Credit risk related to derivatives arises when amounts receivable from a counterparty exceed those payable. Because the notional amount of the derivative instruments only serves as a basis for calculating amounts receivable or payable, the risk of loss with any counterparty is limited to a fraction of the notional amount. The Company minimizes the credit risk related to derivatives by transacting only with multiple, high-quality counterparties that are major financial institutions with investment-grade credit ratings. The Company has not experienced any financial loss as a result of counterparty nonperformance in the past. The majority of the derivative contracts to which the Company is a party, settle monthly or quarterly, or mature within one year. Because of these factors, the Company believes it has minimal credit risk related to derivative contracts as of December 31, 2019.

Concentrations of credit risk with respect to trade receivables are limited due to the wide variety of customers and industries to which the Company’s products and services are sold, as well as their dispersion across many different geographic areas. As a result, the Company does not believe it has any significant concentrations of credit risk as of December 31, 2019 or 2018.