Derivative Instruments and Hedging Activities
Our risk management and derivative accounting policies are presented in Notes 1 and 18 of the Notes included in our Annual Report and did not significantly change during the first three quarters of 2012.
Significant Derivative/Hedge Positions
Derivative Activity Related to the Acquisition
In May 2012, in connection with the Acquisition, we issued $1.9 billion of senior notes with portions maturing in 2017, 2022 and 2042. Prior to the issuance of the notes, we systematically removed a portion of our interest rate market risk by entering into Treasury Locks. This resulted in an increase in the certainty of our yield to maturity when issuing the notes. Subsequent to entering into the hedges, market interest rates decreased, resulting in more favorable interest rates for the issued notes. Consequently, we recognized a cash loss of $39.2 million on settlement of the Treasury Locks recorded in Interest expense. See Note 13, "Debt" for further discussion.
Additionally, in June 2012, we issued a Convertible Note to the Seller simultaneous with the closing of the Acquisition. The Seller may exercise a put right with respect to put the Convertible Note to us during the conversion period for the greater of the principal amount of the Convertible Note or the aggregate cash value of 12,894,044 shares of our Class B Common Stock, as adjusted for certain corporate events. The Convertible Note's embedded conversion feature was determined to meet the definition of a derivative required to be bifurcated and separately accounted for at fair value with changes in fair value recorded in earnings. At issuance, we recorded a liability of $15.2 million related to the conversion feature. See Note 13, "Debt" for further discussion.
On April 3, 2012, we entered into a term loan agreement that provides for a 4-year Euro-denominated term loan facility equal to $150 million (or €120 million at issuance), which was funded upon close of the Acquisition on June 15, 2012. In the third quarter of 2012, we designated the term loan as a net investment hedge of our Central European operations. As a result, all foreign exchange gains and losses due to fluctuations in the Euro-denominated borrowing have been prospectively recognized as currency translation adjustments in Accumulated other comprehensive income ("AOCI"). See Note 13, "Debt" for further discussion of the term loan.
Cross Currency Swaps
We historically designated the cross currency swap contracts as cash flow hedges of the variability of cash flows related to British Pound ("GBP") denominated principal and interest payments on intercompany notes of GBP 530 million. In September 2011, we cash settled approximately 25% of our GBP 530 million/$774 million and CAD 1.2 billion/GBP 530 million cross currency swaps. As a result of the settlement, we extinguished $98.7 million of the outstanding liability. Simultaneously with the settlement of the swaps, we paid down an equal portion of the outstanding principal of the intercompany notes in the amount of GBP 132 million.
In October 2011, we simultaneously extended both the terms of approximately half of the original intercompany notes and cross currency swaps, such that the new maturities are March 2014. The remaining approximate 25% was left unadjusted and continued to be due in May 2012. Following this extension, in November 2011, we dedesignated all of the remaining swaps as cash flow hedges and designated the aggregate swaps as a net investment hedge of our Canadian business.
In March 2012, we cash settled the remaining approximate 25% of our original cross currency swaps that was not refinanced in October 2011 as discussed above. As a result of the settlement, we extinguished $110.6 million of the outstanding liability. Our outstanding cross currency swaps were in a net liability position of $222.2 million classified as non-current at September 29, 2012.
Derivative Fair Value Measurements
We utilize market approaches to estimate the fair value of our derivative instruments by discounting anticipated future cash flows derived from the derivative's contractual terms and observable market interest, foreign exchange and commodity rates. The fair values of our derivatives also include credit risk adjustments to account for our counterparties' credit risk, as well as our own non-performance risk. The table below summarizes our derivative assets and liabilities that were measured at fair value as of September 29, 2012, and December 31, 2011.
|
| | | | | | | | | | | | | | | |
| | | September 29, 2012 |
| Total at
September 29, 2012 | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
| (In millions) |
Cross currency swaps | $ | (222.2 | ) | | $ | — |
| | $ | (222.2 | ) | | $ | — |
|
Foreign currency forwards | (10.1 | ) | | — |
| | (10.1 | ) | | — |
|
Commodity swaps | (3.0 | ) | | — |
| | (3.0 | ) | | — |
|
Equity conversion feature of debt | (29.0 | ) | | — |
| | — |
| | (29.0 | ) |
Total | $ | (264.3 | ) | | $ | — |
| | $ | (235.3 | ) | | $ | (29.0 | ) |
|
| | | | | | | | | | | | | | | |
| | | December 31, 2011 |
| Total at
December 31, 2011 | | Quoted prices in active markets (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
| (In millions) |
Cross currency swaps | $ | (311.9 | ) | | $ | — |
| | $ | (311.9 | ) | | $ | — |
|
Foreign currency forwards | 2.2 |
| | — |
| | 2.2 |
| | — |
|
Commodity swaps | (6.9 | ) | | — |
| | (6.9 | ) | | — |
|
Total | $ | (316.6 | ) | | $ | — |
| | $ | (316.6 | ) | | $ | — |
|
The following tables present additional information about Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended September 29, 2012. Both observable and unobservable inputs may be used to determine the fair value of positions that we have classified within the Level 3 category. As a result, the unrealized gains (losses) during the period for assets and liabilities within the Level 3 category presented in the tables below may include changes in fair value during the period that were attributable to both observable (e.g., changes in market interest rates) and unobservable (e.g., changes in unobservable long-dated volatilities) inputs.
The table below summarizes derivative valuation activity using significant unobservable inputs (Level 3) (in millions):
|
| | | |
| Rollforward of Level 3 Inputs |
Total at December 31, 2011 | $ | — |
|
Total gains or losses (realized/unrealized) | |
Included in earnings | (13.8 | ) |
Included in AOCI | — |
|
Purchases | — |
|
Sales | — |
|
Issuances(1) | (15.2 | ) |
Settlements | — |
|
Net transfers In/Out of Level 3 | — |
|
Total at September 29, 2012 | $ | (29.0 | ) |
Unrealized gains or losses for Level 3 assets/liabilities outstanding at September 29, 2012(1) | $ | (13.8 | ) |
| |
(1) | At issuance, we recorded a liability of $15.2 million related to the Convertible Note's embedded conversion feature. |
As of September 29, 2012, we had no significant transfers between Level 1 and 2. As of December 31, 2011, we did not hold derivatives classified as Level 3. We did not have any significant transfers between Level 1 and Level 2 during fiscal year 2011. New derivative contracts transacted during fiscal year 2011 were all included in Level 2.
Quantitative information regarding significant unobservable inputs used for recurring Level 3 fair value measurements of financial instruments carried at fair value, were as follows (in millions): |
| | | | | | |
| Balance at September 29, 2012 | Valuation Technique | Significant Unobservable Input(s)/Sensitivity of the Fair Value to Changes in the Unobservable Inputs | Range |
Equity conversion feature of debt | $ | (29.0 | ) | Option model | Implied volatility(1) | 23-25% |
| |
(1) | Significant increase (decrease) in the unobservable input in isolation would result in a significantly higher (lower) fair value measurement. |
Results of Period Derivative Activity
The tables below include the year to date results of our derivative activity in the Condensed Consolidated Balance Sheets as of September 29, 2012, and December 31, 2011, and the Condensed Consolidated Statements of Operations for the third quarters and first three quarters ended September 29, 2012, and September 24, 2011.
Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheet (in millions, except for certain commodity swaps with notional amounts measured in Metric Tonnes, as noted)
|
| | | | | | | | | | | | | | | |
| September 29, 2012 |
| | | | Asset derivatives | | Liability derivatives |
| Notional amount | | Balance sheet location | | Fair value | | Balance sheet location | | Fair value |
Derivatives designated as hedging instruments: | | | | | | | | | | |
Cross currency swaps | CAD | 601.3 | | Other current assets | | $ | — |
| | Current derivative hedging instruments | | $ | — |
|
| | | | Other non-current assets | | — |
| | Non-current derivative hedging instruments | | (222.2 | ) |
Foreign currency forwards | USD | 511.7 | | Other current assets | | 0.3 |
| | Current derivative hedging instruments | | (6.9 | ) |
| | | | Other non-current assets | | 0.4 |
| | Non-current derivative hedging instruments | | (3.9 | ) |
Commodity swaps | Gigajoules | 1.8 |
| | Other current assets | | 0.1 |
| | Current derivative hedging instruments | | (1.2 | ) |
| | | | Other non-current assets | | 0.1 |
| | Non-current derivative hedging instruments | | (0.1 | ) |
Total derivatives designated as hedging instruments | | | | | $ | 0.9 |
| | | | $ | (234.3 | ) |
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Equity conversion feature of debt | EUR | 500.0 |
| | | | | | Current portion of long-term debt and short-term borrowings | | $ | (29.0 | ) |
Aluminum swaps | Metric tonnes (actual) | 4,050 |
| | Other current assets | | — |
| | Current derivative hedging instruments | | (1.7 | ) |
| | | | Other non-current assets | | — |
| | Non-current derivative hedging instruments | | (0.2 | ) |
Diesel swaps | Metric tonnes (actual) | 6,251 |
| | Other current assets | | 0.1 |
| | Current derivative hedging instruments | | — |
|
| | | | Other non-current assets | | — |
| | Non-current derivative hedging instruments | | (0.1 | ) |
Total derivatives not designated as hedging instruments | | | | | $ | 0.1 |
| | | | $ | (31.0 | ) |
| | | | |
| | | |
|
Non-derivative financial instruments in net investment hedge relationships: | | | | | | | | | | |
€120 million term loan due 2016 | EUR | 93.7 |
| | | | | | Long-term debt | | $ | (120.5 | ) |
Total non-derivative financial instruments in net investment hedge relationships | | | | | | | $ | (120.5 | ) |
|
| | | | | | | | | | | | | | | |
| December 31, 2011 |
| | | | Asset derivatives | | Liability derivatives |
| Notional amount | | Balance sheet location | | Fair value | | Balance sheet location | | Fair value |
Derivatives designated as hedging instruments: | | | | | | | | | | |
Cross currency swaps | CAD | 901.3 | | Other current assets | | $ | — |
| | Current derivative hedging instruments | | $ | (103.2 | ) |
| | | | Other non-current assets | | — |
| | Non-current derivative hedging instruments | | (208.7 | ) |
Foreign currency forwards | USD | 464.6 | | Other current assets | | — |
| | Current derivative hedging instruments | | (1.3 | ) |
| | | | Other non-current assets | | 3.4 |
| | Non-current derivative hedging instruments | | — |
|
Commodity swaps | Gigajoules | 2.2 | | Other current assets | | — |
| | Current derivative hedging instruments | | (1.8 | ) |
| | | | Other non-current assets | | — |
| | Non-current derivative hedging instruments | | (0.5 | ) |
Total derivatives designated as hedging instruments | | | | | $ | 3.4 |
| | | | $ | (315.5 | ) |
Derivatives not designated as hedging instruments: | | | | | | | | | | |
Aluminum swaps | Metric tonnes (actual) | 8,825 |
| | Other current assets | | $ | — |
| | Current derivative hedging instruments | | $ | (1.3 | ) |
| |
| | Other non-current assets | | — |
| | Non-current derivative hedging instruments | | (3.3 | ) |
Diesel swaps | Metric tonnes (actual) | 9,668 |
| | Other current assets | | 0.1 |
| | Current derivative hedging instruments | | — |
|
Total derivatives not designated as hedging instruments | | | | | $ | 0.1 |
| | | | $ | (4.6 | ) |
MCBC allocates the current and non-current portion of each contract to the corresponding derivative account above.
The Effect of Derivative Instruments on the Condensed Consolidated Statement of Operations (in millions)
|
| | | | | | | | | | | | | | | | |
For the Thirteen Weeks Ended September 29, 2012 |
Derivatives in cash flow hedge relationships | | Amount of (gain) loss recognized in OCI on derivative (effective portion) | | Location of gain (loss) reclassified from AOCI into income (effective portion) | | Amount of gain (loss) recognized from AOCI on derivative (effective portion) | | Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) | | Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) |
Forward starting interest rate swaps | | $ | — |
| | Interest expense, net | | $ | (0.4 | ) | | Interest expense, net | | $ | — |
|
Foreign currency forwards | | 14.9 |
| | Other income (expense), net | | (0.7 | ) | | Other income (expense), net | | — |
|
| | |
| | Cost of goods sold | | (1.6 | ) | | Cost of goods sold | | — |
|
Commodity swaps | | 0.6 |
| | Cost of goods sold | | (0.5 | ) | | Cost of goods sold | | — |
|
Total | | $ | 15.5 |
| | | | $ | (3.2 | ) | | | | $ | — |
|
|
| | | | | | | | | | | | | | | | |
For the Thirteen Weeks Ended September 29, 2012 |
Derivatives and non-derivative financial instruments in net investment hedge relationships | | Amount of (gain) loss recognized in OCI on derivative (effective portion) | | Location of gain (loss) reclassified from AOCI into income (effective portion) | | Amount of gain (loss) recognized from AOCI on derivative (effective portion) | | Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) | | Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) |
Cross currency contracts | | $ | 13.3 |
| | Other income (expense), net | | $ | — |
| | Other income (expense), net | | $ | — |
|
€120 million term loan due 2016 | | 4.7 |
| | Other income (expense), net | | — |
| | Other income (expense), net | | — |
|
Total | | $ | 18.0 |
| | | | $ | — |
| | | | $ | — |
|
Note: Amounts recognized in AOCI related to cash flow and net investment hedges are presented gross of taxes
During the period we recorded no significant ineffectiveness related to these cash flow and net investment hedges.
|
| | | | | | | | | | | | | | | | |
For the Thirteen Weeks Ended September 24, 2011 |
Derivatives in cash flow hedge relationships | | Amount of (gain) loss recognized in OCI on derivative (effective portion) | | Location of gain (loss) reclassified from AOCI into income (effective portion) | | Amount of gain (loss) recognized from AOCI on derivative (effective portion) | | Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) | | Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) |
Cross currency swaps(1) | | $ | (3.8 | ) | | Other income (expense), net | | $ | 33.3 |
| | Other income (expense), net | | $ | — |
|
| | |
| | Interest expense, net | | (3.9 | ) | | Interest expense, net | | — |
|
Forward starting interest rate swaps | | 0.6 |
| | Interest expense, net | | (0.6 | ) | | Interest expense, net | | — |
|
Foreign currency forwards | | 21.2 |
| | Other income (expense), net | | (2.4 | ) | | Other income (expense), net | | — |
|
| | |
| | Cost of goods sold | | (3.1 | ) | | Cost of goods sold | | — |
|
Commodity swaps | | 0.4 |
| | Cost of goods sold | | — |
| | Cost of goods sold | | — |
|
Total | | $ | 18.4 |
| | | | $ | 23.3 |
| | | | $ | — |
|
Note: Amounts recognized in AOCI are presented gross of taxes
| |
(1) | The foreign exchange gain (loss) component of these cross currency swaps is offset by the corresponding gain (loss) on the hedged forecasted transactions in Other income (expense), net and Interest expense, net. |
During the period we recorded no significant ineffectiveness related to these cash flow hedges.
|
| | | | | | | | | | | | | | | | |
For the Thirty-Nine Weeks Ended September 29, 2012 |
Derivatives in cash flow hedge relationships | | Amount of (gain) loss recognized in OCI on derivative (effective portion) | | Location of gain (loss) reclassified from AOCI into income (effective portion) | | Amount of gain (loss) recognized from AOCI on derivative (effective portion) | | Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) | | Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) |
Forward starting interest rate swaps | | $ | — |
| | Interest expense, net | | $ | (1.2 | ) | | Interest expense, net | | $ | — |
|
Foreign currency forwards | | 17.7 |
| | Other income (expense), net | | (1.7 | ) | | Other income (expense), net | | — |
|
| | | | Cost of goods sold | | (4.0 | ) | | Cost of goods sold | | — |
|
Commodity swaps | | (0.1 | ) | | Cost of goods sold | | (1.2 | ) | | Cost of goods sold | | — |
|
Total | | $ | 17.6 |
| | | | $ | (8.1 | ) | | | | $ | — |
|
|
| | | | | | | | | | | | | | | | |
For the Thirty-Nine Weeks Ended September 29, 2012 |
Derivatives and non-derivative financial instruments in net investment hedge relationships | | Amount of (gain) loss recognized in OCI on derivative (effective portion) | | Location of gain (loss) reclassified from AOCI into income (effective portion) | | Amount of gain (loss) recognized from AOCI on derivative (effective portion) | | Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) | | Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) |
Cross currency contracts | | $ | 26.5 |
| | Other income (expense), net | | $ | — |
| | Other income (expense), net | | $ | — |
|
€120 million term loan due 2016 | | 4.7 |
| | Other income (expense), net | | — |
| | Other income (expense), net | | — |
|
Total | | $ | 31.2 |
| | | | $ | — |
| | | | $ | — |
|
Note: Amounts recognized in AOCI related to cash flow and net investment hedges are presented gross of taxes
During the period we recorded no significant ineffectiveness related to these cash flow and net investment hedges.
|
| | | | | | | | | | | | | | | | |
For the Thirty-Nine Weeks Ended September 24, 2011 |
Derivatives in cash flow hedge relationships | | Amount of (gain) loss recognized in OCI on derivative (effective portion) | | Location of gain (loss) reclassified from AOCI into income (effective portion) | | Amount of gain (loss) recognized from AOCI on derivative (effective portion) | | Location of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) | | Amount of gain (loss) recognized in income on derivative (ineffective portion and amount excluded from effectiveness testing) |
Cross currency swaps(1) | | $ | (5.6 | ) | | Other income (expense), net | | $ | 16.4 |
| | Other income (expense), net | | $ | — |
|
| | |
| | Interest expense, net | | (10.9 | ) | | Interest expense, net | | — |
|
Forward starting interest rate swaps | | 1.2 |
| | Interest expense, net | | (1.2 | ) | | Interest expense, net | | — |
|
Foreign currency forwards | | 21.3 |
| | Other income (expense), net | | (7.0 | ) | | Other income (expense), net | | — |
|
| | | | Cost of goods sold | | (9.5 | ) | | Cost of goods sold | | — |
|
Commodity swaps | | 3.0 |
| | Cost of goods sold | | 0.2 |
| | Cost of goods sold | | — |
|
Total | | $ | 19.9 |
| | | | $ | (12.0 | ) | | | | $ | — |
|
Note: Amounts recognized in AOCI are presented gross of taxes
| |
(1) | The foreign exchange gain (loss) component of these cross currency swaps is offset by the corresponding gain (loss) on the hedged forecasted transactions in Other income (expense), net and Interest expense, net. |
During the period we recorded no significant ineffectiveness related to these cash flow hedges.
We expect net losses of approximately $8.2 million (pre-tax) recorded in AOCI at September 29, 2012 will be reclassified into earnings within the next 12 months. The maximum length of time over which forecasted transactions are hedged is three years, and such transactions relate to foreign exchange, interest rate and commodity exposures.
Other Derivatives (in millions)
|
| | | | | | |
For the Thirteen Weeks Ended September 29, 2012 |
Derivatives Not In Hedging Relationship | | Location of Gain (Loss) Recognized in Income on Derivative | | Amount of Gain (Loss) Recognized in Income on Derivative |
Equity conversion feature of debt | | Interest expense, net | | $ | (7.7 | ) |
| | Other income (expense), net | | (0.5 | ) |
Commodity swaps | | Cost of goods sold | | (0.6 | ) |
Total | | | | $ | (8.8 | ) |
|
| | | | | | |
For the Thirteen Weeks Ended September 24, 2011 |
Derivatives Not In Hedging Relationship | | Location of Gain (Loss) Recognized in Income on Derivative | | Amount of Gain (Loss) Recognized in Income on Derivative |
Commodity swaps | | Cost of goods sold | | $ | (3.0 | ) |
Cash settled total return swaps | | Other income (expense), net | | — |
|
Option contracts | | Other income (expense), net | | — |
|
Foreign currency forwards | | Other income (expense), net | | — |
|
Total | | | | $ | (3.0 | ) |
|
| | | | | | |
For the Thirty-Nine Weeks Ended September 29, 2012 |
Derivatives Not In Hedging Relationship | | Location of Gain (Loss) Recognized in Income on Derivative | | Amount of Gain (Loss) Recognized in Income on Derivative |
Equity conversion feature of debt | | Interest expense, net | | $ | (13.3 | ) |
| | Other income (expense), net | | (0.5 | ) |
Commodity swaps | | Cost of goods sold | | — |
|
Total | | | | $ | (13.8 | ) |
|
| | | | | | |
For the Thirty-Nine Weeks Ended September 24, 2011 |
Derivatives Not In Hedging Relationship | | Location of Gain (Loss) Recognized in Income on Derivative | | Amount of Gain (Loss) Recognized in Income on Derivative |
Commodity swaps | | Cost of goods sold | | $ | (3.0 | ) |
Cash settled total return swaps | | Other income (expense), net | | (0.6 | ) |
Option contracts | | Other income (expense), net | | 1.5 |
|
Foreign currency forwards | | Other income (expense), net | | (0.1 | ) |
Total | | | | $ | (2.2 | ) |