DERIVATIVE FINANCIAL INSTRUMENTS

9 Months Ended

Sep. 30, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

NOTE 18. DERIVATIVE FINANCIAL INSTRUMENTS

We are exposed to market risk in the normal course of our business operations due to our purchases of certain commodities, our ongoing investing and financing activities and our operations that use foreign currencies. The risk of loss can be assessed from the perspective of adverse changes in fair values, cash flows and future earnings. We have established policies and procedures governing our management of market risks and the use of financial instruments to manage exposure to such risks. ASC 815 “Derivatives and Hedging” (ASC 815) requires an entity to recognize all derivatives as either assets or liabilities in the condensed balance sheets and measure those instruments at fair value. In accordance with ASC 815, we designate derivative contracts as cash flow hedges of forecasted purchases of commodities and forecasted interest payments related to variable-rate borrowings and designate certain interest rate swaps as fair value hedges of fixed-rate borrowings. We do not enter into any derivative instruments for trading or speculative purposes.

Energy costs, including electricity and natural gas, and certain raw materials used in our production processes are subject to price volatility. Depending on market conditions, we may enter into futures contracts, forward contracts, commodity swaps and put and call option contracts in order to reduce the impact of commodity price fluctuations. The majority of our commodity derivatives expire within one year.

We actively manage currency exposures that are associated with net monetary asset positions, currency purchases and sales commitments denominated in foreign currencies and foreign currency denominated assets and liabilities created in the normal course of business. We enter into forward sales and purchase contracts to manage currency risk to offset our net exposures, by currency, related to the foreign currency denominated monetary assets and liabilities of our operations. At September 30, 2022, we had outstanding forward contracts to buy foreign currency with a notional value of $273.6 million and to sell foreign currency with a notional value of $96.0 million. All of the currency derivatives expire within one year and are for U.S. dollar (USD) equivalents. The counterparties to the forward contracts are large financial institutions; however, the risk of loss to us in the event of nonperformance by a counterparty could be significant to our financial position or results of operations. At December 31, 2021, we had outstanding forward contracts to buy foreign currency with a notional value of $199.0 million and to sell foreign currency with a notional value of $124.4 million. At September 30, 2021, we had outstanding forward contracts to buy foreign currency with a notional value of $320.6 million and to sell foreign currency with a notional value of $114.6 million.

Cash Flow Hedges

For derivative instruments that are designated and qualify as a cash flow hedge, the change in fair value of the derivative is recognized as a component of other comprehensive income (loss) until the hedged item is recognized in earnings.

We had the following notional amounts of outstanding commodity contracts that were entered into to hedge forecasted purchases:


	September 30, 2022		December 31, 2021		September 30, 2021
	($ in millions)
Natural gas	$	92.1	$	37.7	$	50.4
Ethane	45.5		60.3		42.6
Metals	134.5		126.3		132.8
Total notional	$	272.1	$	224.3	$	225.8

As of September 30, 2022, the counterparties to these commodity contracts were Wells Fargo Bank, N.A., Citibank, N.A., JPMorgan Chase Bank, National Association and Bank of America Corporation, all of which are major financial institutions.

We use cash flow hedges for certain raw material and energy costs such as copper, zinc, lead, ethane, electricity and natural gas to provide a measure of stability in managing our exposure to price fluctuations associated with forecasted purchases of raw materials and energy used in our manufacturing process. At September 30, 2022, we had open derivative contract positions through 2027. If all open futures contracts had been settled on September 30, 2022, we would have recognized a pretax loss of $13.1 million.

If commodity prices were to remain at September 30, 2022 levels, approximately $10.8 million of deferred losses, net of tax, would be reclassified into earnings during the next twelve months. The actual effect on earnings will be dependent on actual commodity prices when the forecasted transactions occur.

Fair Value Hedges

We use interest rate swaps as a means of managing interest expense and floating interest rate exposure to optimal levels. For derivative instruments that are designated and qualify as a fair value hedge, the gain or loss on the derivative as well as the offsetting loss or gain on the hedged item attributable to the hedged risk are recognized in current earnings. We include the gain or loss on the hedged items (fixed-rate borrowings) in the same line item, interest expense, as the offsetting loss or gain on the related interest rate swaps.

In 2021, we redeemed the 2025 Notes, which resulted in recognition of the outstanding deferred swap loss. For the nine months ended September 30, 2021, $1.8 million of expense was recorded to interest expense on the accompanying condensed statements of operations related to these swap agreements.

Financial Statement Impacts

We present our derivative assets and liabilities in our condensed balance sheets on a net basis whenever we have a legally enforceable master netting agreement with the counterparty to our derivative contracts. We use these agreements to manage and substantially reduce our potential counterparty credit risk.

The following table summarizes the location and fair value of the derivative instruments on our condensed balance sheets. The table disaggregates our net derivative assets and liabilities into gross components on a contract-by-contract basis before giving effect to master netting arrangements:


	September 30, 2022		December 31, 2021		September 30, 2021
	($ in millions)
Asset derivatives:
Other current assets
Derivatives designated as hedging instruments:
Commodity contracts - gains	$	15.1	$	31.8	$	66.7
Commodity contracts - losses	(1.5)		(6.2)		(1.1)
Derivatives not designated as hedging instruments:
Foreign exchange contracts - gains	1.3		2.0		0.9
Foreign exchange contracts - losses	(0.2)		(0.8)		(0.3)
Total other current assets	14.7		26.8		66.2
Other assets
Derivatives designated as hedging instruments:
Commodity contracts - gains	3.8		7.9		13.7
Commodity contracts - losses	(0.1)		—		—
Total other assets	3.7		7.9		13.7
Total asset derivatives(1)	$	18.4	$	34.7	$	79.9
Liability derivatives:
Accrued liabilities
Derivatives designated as hedging instruments:
Commodity contracts - losses	$	34.7	$	3.6	$	2.0
Commodity contracts - gains	(6.8)		(0.7)		(0.5)
Derivatives not designated as hedging instruments:
Foreign exchange contracts - losses	5.3		0.7		6.2
Foreign exchange contracts - gains	(1.8)		(0.1)		(1.4)
Total accrued liabilities	31.4		3.5		6.3
Other liabilities
Derivatives designated as hedging instruments:
Commodity contracts - losses	2.6		0.3		0.7

Total other liabilities	2.6		0.3		0.7
Total liability derivatives(1)	$	34.0	$	3.8	$	7.0

(1) Does not include the impact of cash collateral received from or provided to counterparties.

The following table summarizes the effects of derivative instruments on our condensed statements of operations:


		Amount of Gain (Loss)
		Three Months Ended September 30,				Nine Months Ended September 30,
	Location of Gain (Loss)	2022		2021		2022		2021
Derivatives – Cash Flow Hedges		($ in millions)
Recognized in other comprehensive loss:
Commodity contracts	———	$	6.6	$	41.7	$	23.0	$	205.5
Reclassified from accumulated other comprehensive loss into income:
Commodity contracts	Cost of goods sold	$	17.8	$	23.5	$	66.3	$	156.7
Derivatives – Fair Value Hedges
Interest rate contracts	Interest expense	$	—	$	—	$	—	$	(1.8)
Derivatives Not Designated as Hedging Instruments
Commodity contracts	Cost of goods sold	$	—	$	—	$	0.5	$	—
Foreign exchange contracts	Selling and administration	$	(15.6)	$	(6.2)	$	(42.7)	$	(14.4)

Credit Risk and Collateral

By using derivative instruments, we are exposed to credit and market risk. If a counterparty fails to fulfill its performance obligations under a derivative contract, our credit risk will equal the fair value gain in a derivative. Generally, when the fair value of a derivative contract is positive, this indicates that the counterparty owes us, thus creating a repayment risk for us. When the fair value of a derivative contract is negative, we owe the counterparty and, therefore, assume no repayment risk. We minimize the credit (or repayment) risk in derivative instruments by entering into transactions with high-quality counterparties. We monitor our positions and the credit ratings of our counterparties, and we do not anticipate non-performance by the counterparties.

Based on the agreements with our various counterparties, cash collateral is required to be provided when the net fair value of the derivatives, with the counterparty, exceeds a specific threshold. If the threshold is exceeded, cash is either provided by the counterparty to us if the value of the derivatives is our asset, or cash is provided by us to the counterparty if the value of the derivatives is our liability. As of September 30, 2022, December 31, 2021 and September 30, 2021, this threshold was not exceeded. In all instances where we are party to a master netting agreement, we offset the receivable or payable recognized upon payment of cash collateral against the fair value amounts recognized for derivative instruments that have also been offset under such master netting agreements.