Derivative Instruments

3 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

6. Derivative Instruments

Interest Rate Swap Contracts

The Company uses interest rate swap contracts to minimize the effect of fluctuating variable interest rates under the Secured Credit Facility on Interest expense, net within its reported operating results. As cash flow hedges, the interest rate swaps are revalued at current market rates, with the changes in valuation reflected directly in Other comprehensive (loss) income, to the extent that the hedge is effective. The gains or losses on the interest rate swaps reported in Accumulated other comprehensive (loss) income in equity are reclassified into Interest expense, net in the periods in which the monthly interest settlement is paid on the interest rate swap.

The notional values of the Company’s outstanding interest rate swap contracts were as follows:

	December 31, 2022		September 30, 2022
	(dollars in thousands)
Interest rate swap contracts	$	1,220,000	$	1,220,000

On October 30, 2020, the Company completed a series of transactions to amend and extend certain interest rate swap agreements by an additional three years. These interest rate swap transactions consisted of the following: (i) $360.0 million of the interest rate swaps were de-designated as cash flow hedges, (ii) the Company entered into a $360.0 million pay-variable receive-fixed interest rate swap which was designed to economically offset the terms of the $360.0 million of swaps in (i) and which are not designated as cash flow hedges, and (iii) the Company entered into a $500.0 million new pay-fixed interest rate swap with an extended maturity. The new pay-fixed interest rate swap is considered a hybrid instrument with a financing component and an embedded at-market derivative that was designated as a cash flow hedge (see discussion of cash flow presentation below).

At the time of the de-designation of the above $360.0 million in interest rate swaps, there was approximately $38.2 million of unrealized losses recorded in Accumulated other comprehensive (loss) income. This amount is amortized to interest expense through the remaining term of the original de-designated swaps unless it becomes probable that the cash flows originally hedged will not occur, in which case the proportionate amount of the loss will be recorded to interest expense at that time. The $360.0 million of interest rate swaps de-designated as cash flows hedges and the $360.0 million of offsetting swaps will be marked to market with changes in fair value recognized, along with the fixed and variable payments on these swaps, in interest expense which are expected to nearly offset each other. The Company presents the derivatives on a gross basis on the balance sheet.

The $500.0 million pay-fixed interest rate swap is a hybrid instrument in accordance with ASC 815, Derivatives and Hedging, consisting of a financing component and an embedded at-market derivative. The financing component is accounted for at amortized cost over the life of the swap while the embedded at-market derivative is accounted for at fair value on the balance sheet and designated as a cash flow hedge. This $500.0 million swap is indexed to one-month LIBOR and is net settled on a monthly basis with the counterparty for the difference between the fixed rate of 2.2025% and the variable rate based upon one-month LIBOR (subject to a floor of 0.75%) as applied to the notional amount of the swap. In connection with the transactions discussed above, no cash was exchanged between the Company and the counterparty. The

liability of the terminated interest rate swaps as well as the inception value of the receive-fixed interest rate swap was blended into the new pay-fixed interest rate swap. Cash settlements related to interest rate contracts will generally be classified as operating activities on the condensed consolidated statements of cash flows. The cash flows related to the portion of the hybrid instrument treated as debt are classified as financing activities in the condensed consolidated statements of cash flows while the portion treated as an at-market derivative is classified as operating activities.

See Note 10 for further information.

Foreign Currency Forward Contracts

The Company enters into foreign currency forward contracts to minimize the effect of fluctuating variable foreign currency denominated cash flows impacting Gross profit within its reported operating results. When entered, these financial instruments are designated as cash flow hedges of underlying exposures and de-designated when the foreign currency denominated sale of inventory is made to a third party. As cash flow hedges, the forward contracts are revalued at current foreign exchange rates with the changes in the valuation reflected directly in Accumulated other comprehensive (loss) income, to the extent that the hedge is effective. The gains or losses on the forward contracts reported in Accumulated other comprehensive (loss) income in equity (deficit) are reclassified into Cost of goods sold in the period or periods in which the foreign currency denominated sale of inventory is made to a third party and the contracts are de-designated. The gains or losses from changes in the fair value of foreign exchange contracts de-designated as cash flow hedges are recorded in Foreign currency (gain) loss. The Company also enters into foreign currency forward contracts that economically hedge its risk on foreign currency denominated receivables. The gains or losses from changes in fair value on these contracts are recorded in Foreign currency (gain) loss. Cash settlements related to forward currency forward contracts are classified as operating activities on the condensed consolidated statements of cash flows.

There were no outstanding foreign currency forward contracts as of December 31, 2022 or September 30, 2022.

Cash Flow Hedges Impact on the Condensed Consolidated Statements of Comprehensive (Loss) Income

For derivatives designated as cash flow hedges, the (loss) gain recognized in Other comprehensive (loss) income was:

	Three Months Ended December 31,
	2022		2021
	(dollars in thousands)
Interest rate swap contracts	$	(1,345)	$	2,880

Cash Flow Hedges Impact on the Condensed Consolidated Statements of Operations

For derivatives designated as cash flow hedges, the gain reclassified from Accumulated other comprehensive (loss) income into the condensed consolidated statements of operations was:

	Three Months Ended December 31,
	2022		2021
	(dollars in thousands)
Interest rate swap contracts	$	(1,487)	$	2,673

For derivatives de-designated as cash flow hedges and economic hedges on foreign currency denominated receivables, the (gain) loss recognized directly into Foreign currency (gain) loss in the condensed consolidated statements of operations was:

	Three Months Ended December 31,
	2022		2021
	(dollars in thousands)
Foreign currency forward contracts	$	—	$	(320)

As of December 31, 2022, the Company estimates that it will recognize approximately $9.7 million of gains associated with the above contracts in net (loss) income within the next 12 months.

Commodity Index Contracts

The Company used commodity index contracts to reduce its exposure to fluctuations in cash flows relating to the purchases of aluminum and steel-based components and raw materials impacting Gross profit. The commodity index contracts were accounted for as financial instruments and the Company did not apply hedge accounting. There were no outstanding commodity index contracts as of December 31, 2022.

The notional values of the Company’s outstanding commodity index contracts were as follows:

	December 31, 2022	September 30, 2022
	(volumes in pounds)
Steel index contracts	—	600,000

As financial instruments, the commodity index hedges were revalued at current commodity index rates with the changes in the valuation reflected directly in Cost of goods sold. The Company recorded a corresponding loss (gain) on the change in fair market value as follows:

	Three Months Ended December 31,
	2022		2021
	(dollars in thousands)
Commodity index contracts	$	—	$	221

See Note 10 for further information.

Counterparty Credit Risk

Using derivative instruments means assuming counterparty credit risk. Counterparty credit risk relates to the loss the Company could incur if a counterparty were to default on a derivative contract. The Company deals with only investment-grade counterparties and monitors the overall credit risk and exposure to individual counterparties. The Company did not experience any nonperformance by a counterparty during the three months ended December 31, 2022 or 2021. The Company did not require, nor did it post, collateral or security on such contracts.