Derivative Instruments and Hedging Activity

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activity [Abstract]

Derivative Instruments and Hedging Activity

9. Derivative Instruments and Hedging Activity

The Company may use forward exchange contracts and foreign currency denominated debt to manage its exposure to foreign exchange risk in order to reduce the effect of fluctuating foreign currencies on short-term foreign currency denominated intercompany transactions, non-functional currency raw material purchases, non-functional currency sales, and other known foreign currency exposures. These forward exchange contracts generally have maturities of less than 18 months. The Company’s primary hedging activities and their accounting treatment are summarized below.

Forward exchange contracts – Certain forward exchange contracts have been designated as cash flow hedges. The Company had $23.8 million and $59.9 million of forward exchange contracts designated as cash flow hedges outstanding as of September 30, 2020, and December 31, 2019, respectively. For the nine months ended September 30, 2020, losses of $1.4 million were reclassified into net earnings in the Company’s Consolidated Condensed Statement of Earnings that offset the underlying transactions’ impact on earnings in the same period. For the three months ended September 30, 2020 and the three and nine months ended September 30, 2019, the amounts reclassified into net earnings in the Company’s Consolidated Condensed Statement of Earnings that offset the underlying transactions’ impact on earnings in the same period were not material. In addition, the Company utilizes forward exchange contracts that are not designated as cash flow hedges. The results of these transactions were not material to the financial statements.

Net investment hedges – The Company has designated certain foreign currency denominated long-term borrowings as partial hedges of the Company’s foreign currency net asset positions. As of September 30, 2020, the total value of the Company’s net investment hedges was $316.7 million. These net investment hedges included Euro and British Pound denominated long-term debt. As of December 31, 2019, the total value of the Company’s net investment hedges was $363.4 million. These net investment hedges then included Euro, Swiss Franc, and British Pound denominated long-term debt. Changes in the fair value of this debt attributable to changes in the spot foreign exchange rate are recorded in foreign currency translation in Other Comprehensive Income (OCI). For the three and nine months ended September 30, 2020, the impact of foreign exchange rates on these debt instruments increased debt by $13.1 million and $9.8 million, respectively, which has been recorded as foreign currency translation in OCI. For the three and nine months ended September 30, 2020, gains of $0.3 million and losses of $10.8 million, respectively, were reclassified into net earnings in the Company’s Consolidated Condensed Statement of Earnings that offset the underlying transactions’ impact on earnings in the same period. The losses during the nine months ended September 30, 2020, were primarily associated with the termination of the net investment hedge related to the Swiss Franc debt that was terminated in connection with the sale of the inks product line on June 30, 2020. See Note 2, Divestitures, for additional information. There were no amounts reclassified into net earnings for the three and nine months ended September 30, 2019.