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Derivative Financial Instruments
 9 Months Ended
Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Financial Instruments

NOTE J - Derivative Financial Instruments

As part of its risk management strategy, the Company enters into derivative contracts to hedge against the risks of interest rates, foreign currency rates and commodity prices. Certain derivative instruments designated as fair value hedges, cash flow hedges or net investment hedges are subject to hedge accounting. Derivative instruments that are not subject to hedge accounting are held as derivatives not designated as hedged instruments. The Company’s policies prohibit the use of derivatives for speculation or trading. At the inception of each hedge relationship, the Company documents its risk management objectives, procedures and accounting treatment. All of the Company’s interest-rate, commodity as well as certain foreign-exchange contracts are transacted under International Swaps and Derivatives Association (ISDA) master agreements. Each agreement permits the net settlement of amounts owed in the event of default and certain other termination events. For derivative financial instruments, the Company has elected not to offset derivative positions in the balance sheet with the same counterparty under the same agreements and is not required to post or receive collateral.

Exposure limits and minimum credit ratings are used to minimize the risks of counterparty default. The Company’s maximum exposure to potential default of its derivative counterparties is limited to the asset position of its derivative portfolio. The asset position of the Company’s derivative portfolio was $85.2 at September 30, 2023.

The Company assesses hedges at inception and on an ongoing basis to determine the designated derivatives are highly effective in offsetting changes in fair values or cash flow of the hedged items. Hedge accounting is discontinued prospectively when the Company determines a derivative financial instrument has ceased to be a highly effective hedge. Cash flows from derivative instruments are included in Operating activities in the Condensed Consolidated Statements of Cash Flows.

Interest-Rate Contracts: The Company enters into various interest-rate contracts, including interest-rate swaps and cross currency interest-rate swaps. Interest-rate swaps involve the exchange of fixed for floating rate or floating for fixed rate interest payments based on the contractual notional amounts in a single currency. Cross currency interest-rate swaps involve the exchange of notional amounts and interest payments in different currencies. The Company is exposed to interest-rate and exchange-rate risk caused by market volatility as a result of its borrowing activities. The objective of these contracts is to mitigate the fluctuations on earnings, cash flows and fair value of borrowings. Net amounts paid or received are reflected as adjustments to interest expense.

At September 30, 2023, the notional amount of the Company’s interest-rate contracts was $2,530.7. Notional maturities for all interest-rate contracts are $6.2 for the remainder of 2023, $550.9 for 2024, $990.9 for 2025, $548.4 for 2026, $263.5 for 2027, $170.8 for 2028 and thereafter.

Foreign-Exchange Contracts: The Company enters into foreign-exchange contracts to hedge certain anticipated transactions and assets and liabilities denominated in foreign currencies, particularly the Canadian dollar, the euro, the British pound, the Australian dollar, the Brazilian real and the Mexican peso. The objective is to reduce fluctuations in earnings and cash flows associated with changes in foreign currency exchange rates. The Company enters into foreign-exchange contracts as net investment hedges to reduce the foreign currency exposure from its investments in foreign subsidiaries. At September 30, 2023, the notional amount of the outstanding foreign-exchange contracts was $2,164.2. Foreign-exchange contracts typically mature within one year.

Commodity Contracts: The Company enters into commodity forward contracts to hedge the prices of certain commodities used in the production of trucks. The objective is to reduce the fluctuation in earnings and cash flows associated with adverse movement in commodity prices. At September 30, 2023, the notional amount of the outstanding commodity contracts was $20.0. Commodity contracts mature within one year.

The following table presents the balance sheet classification, fair value, gross and pro forma net amounts of derivative financial instruments:

 

 

September 30, 2023

 

 

December 31, 2022

 

 

 

ASSETS

 

 

LIABILITIES

 

 

ASSETS

 

 

LIABILITIES

 

Derivatives designated under hedge accounting:

 

 

 

 

 

 

 

 

 

 

 

 

Interest-rate contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Financial Services:

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

$

43.3

 

 

 

 

 

$

58.0

 

 

 

 

Deferred taxes and other liabilities

 

 

 

 

$

81.5

 

 

 

 

 

$

82.6

 

Foreign-exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Truck, Parts and Other:

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

 

39.1

 

 

 

 

 

 

57.3

 

 

 

 

Accounts payable, accrued expenses and other

 

 

 

 

 

10.2

 

 

 

 

 

 

9.5

 

Financial Services:

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

 

1.6

 

 

 

 

 

 

1.6

 

 

 

 

Deferred taxes and other liabilities

 

 

 

 

 

4.3

 

 

 

 

 

 

5.1

 

Commodity contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Truck, Parts and Other:

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

 

.1

 

 

 

 

 

 

1.5

 

 

 

 

Accounts payable, accrued expenses and other

 

 

 

 

 

2.0

 

 

 

 

 

 

.6

 

 

$

84.1

 

 

$

98.0

 

 

$

118.4

 

 

$

97.8

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign-exchange contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Truck, Parts and Other:

 

 

 

 

 

 

 

 

 

 

 

 

Other current assets

 

$

.9

 

 

 

 

 

$

1.0

 

 

 

 

Accounts payable, accrued expenses and other

 

 

 

 

$

.9

 

 

 

 

 

$

.1

 

Financial Services:

 

 

 

 

 

 

 

 

 

 

 

 

Other assets

 

 

.2

 

 

 

 

 

 

 

 

 

 

Deferred taxes and other liabilities

 

 

 

 

 

.2

 

 

 

 

 

 

.1

 

Commodity contracts:

 

 

 

 

 

 

 

 

 

 

 

 

Truck, Parts and Other:

 

 

 

 

 

 

 

 

 

 

 

 

Accounts payable, accrued expenses and other

 

 

 

 

 

 

 

 

 

 

 

.2

 

 

$

1.1

 

 

$

1.1

 

 

$

1.0

 

 

$

.4

 

Gross amounts recognized in Balance Sheets

 

$

85.2

 

 

$

99.1

 

 

$

119.4

 

 

$

98.2

 

Less amounts not offset in financial instruments:

 

 

 

 

 

 

 

 

 

 

 

 

Truck, Parts and Other:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign-exchange contracts

 

$

(2.5

)

 

$

(2.5

)

 

$

(.1

)

 

$

(.1

)

Commodity contracts

 

 

(.1

)

 

 

(.1

)

 

 

(.5

)

 

 

(.5

)

Financial Services:

 

 

 

 

 

 

 

 

 

 

 

 

Foreign-exchange contracts

 

 

(.7

)

 

 

(.7

)

 

 

(1.8

)

 

 

(1.8

)

Interest-rate contracts

 

 

(20.7

)

 

 

(20.7

)

 

 

(21.5

)

 

 

(21.5

)

Pro forma net amount

 

$

61.2

 

 

$

75.1

 

 

$

95.5

 

 

$

74.3

 

 

The following table presents the amount of loss (gain) from derivative financial instruments recorded in the Consolidated Statements of Comprehensive Income:

 

 

 

Three Months Ended

Nine Months Ended

 

 

 

September 30, 2023

September 30, 2023

 

 

 

INTEREST-

 

 

FOREIGN-

 

 

INTEREST-

 

 

FOREIGN-

 

 

 

RATE

 

 

EXCHANGE

 

 

RATE

 

 

EXCHANGE

 

Truck, Parts and Other:

 

 

 

 

 

 

 

 

 

 

 

 

Net sales and revenues

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

$

13.2

 

 

 

 

 

$

25.2

 

Cost of sales and revenues

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

(9.6

)

 

 

 

 

 

1.8

 

Derivatives not designated as hedging instruments

 

 

 

 

 

.3

 

 

 

 

 

 

(3.7

)

Interest and other (income) expenses, net

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

3.3

 

 

 

 

 

 

9.5

 

Net investment hedges

 

 

 

 

 

(2.0

)

 

 

 

 

 

(6.7

)

Derivatives not designated as hedging instruments

 

 

 

 

 

(.4

)

 

 

 

 

 

4.5

 

 

 

 

 

 

$

4.8

 

 

 

 

 

$

30.6

 

Financial Services:

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other borrowing expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

$

(42.1

)

 

$

(.8

)

 

$

17.9

 

 

$

(.3

)

Fair value hedges

 

 

2.7

 

 

 

 

 

 

7.0

 

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

.7

 

 

 

 

 

 

.6

 

 

 

$

(39.4

)

 

$

(.1

)

 

$

24.9

 

 

$

.3

 

Total

 

$

(39.4

)

 

$

4.7

 

 

$

24.9

 

 

$

30.9

 

 

 

 

 

Three Months Ended

Nine Months Ended

 

 

 

September 30, 2022

September 30, 2022

 

 

 

INTEREST-

 

 

FOREIGN-

 

 

INTEREST-

 

 

FOREIGN-

 

 

 

RATE

 

 

EXCHANGE

 

 

RATE

 

 

EXCHANGE

 

Truck, Parts and Other:

 

 

 

 

 

 

 

 

 

 

 

 

Net sales and revenues

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

$

2.0

 

 

 

 

 

$

17.1

 

Cost of sales and revenues

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

(6.2

)

 

 

 

 

 

(3.5

)

Derivatives not designated as hedging instruments

 

 

 

 

 

.4

 

 

 

 

 

 

.3

 

Interest and other (income) expenses, net

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

 

 

 

 

3.9

 

 

 

 

 

 

8.8

 

Net investment hedges

 

 

 

 

 

(1.4

)

 

 

 

 

 

(4.2

)

Derivatives not designated as hedging instruments

 

 

 

 

 

(5.8

)

 

 

 

 

 

(4.5

)

 

 

 

 

 

$

(7.1

)

 

 

 

 

$

14.0

 

Financial Services:

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other borrowing expenses

 

 

 

 

 

 

 

 

 

 

 

 

Cash flow hedges

 

$

(56.2

)

 

$

(3.0

)

 

$

(99.3

)

 

$

(7.6

)

Fair value hedges

 

 

(.2

)

 

 

 

 

 

(.1

)

 

 

 

Derivatives not designated as hedging instruments

 

 

 

 

 

2.9

 

 

 

 

 

 

3.1

 

 

 

$

(56.4

)

 

$

(.1

)

 

$

(99.4

)

 

$

(4.5

)

Total

 

$

(56.4

)

 

$

(7.2

)

 

$

(99.4

)

 

$

9.5

 

 

The loss from commodity contracts recorded in Cost of sales and revenue was $4.2 and $1.8 for the three and nine months ended September 30, 2023, respectively and $7.0 and $17.4 for the three and nine months ended September 30, 2022, respectively.

 

Fair Value Hedges

Changes in the fair value of derivatives designated as fair value hedges are recorded in earnings together with the changes in fair value of the hedged item attributable to the risk being hedged. The following table presents the amounts recorded on the Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges:

 

 

 

 

 

 

 

September 30

 

 

December 31

 

 

 

 

 

 

 

2023

 

 

2022

 

Financial Services

 

 

 

 

 

 

 

 

 

 

Term notes:

 

 

 

 

 

 

 

 

 

 

Carrying amount of the hedged liabilities

 

 

 

 

 

$

123.1

 

 

$

319.8

 

Cumulative basis adjustment included in the carrying amount

 

 

 

 

 

 

9.8

 

 

 

27.7

 

 

The above table excludes the cumulative basis adjustments on discontinued hedge relationships of $14.9 and $7.1 as of September 30, 2023 and December 31, 2022, respectively.

 

 

Cash Flow Hedges

Substantially all of the Company’s interest-rate contracts, some foreign-exchange contracts and all commodity contracts have been designated as cash flow hedges. Changes in the fair value of derivatives designated as cash flow hedges are recorded in AOCI. Amounts in AOCI are reclassified into net income in the same period in which the hedged transaction affects earnings. The Company elected to exclude the forward premium component (excluded component) on some foreign-exchange cash flow hedges and amortize the excluded component over the life of the derivative instruments. The amortization of the excluded component is recognized in Interest and other (income), net in Truck, Parts and Other segment and Interest and other borrowing expenses in Financial Services segment in the Consolidated Statements of Comprehensive Income. The maximum length of time over which the Company is hedging its exposure to the variability in future cash flows is 9.2 years.

The following tables presents the pre-tax effects of gain (loss) on cash flow hedges recognized in other comprehensive income (loss) (OCI):

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2023

 

 

September 30, 2023

 

 

 

INTEREST-

 

 

FOREIGN-

 

 

 

 

 

INTEREST-

 

 

FOREIGN-

 

 

 

 

 

 

RATE

 

 

EXCHANGE

 

 

COMMODITY

 

 

RATE

 

 

EXCHANGE

 

 

COMMODITY

 

Gain (loss) recognized in OCI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Truck, Parts and Other

 

 

 

 

$

33.7

 

 

$

(4.8

)

 

 

 

 

$

(33.5

)

 

$

(2.9

)

Financial Services

 

$

44.9

 

 

 

1.6

 

 

 

 

 

$

(33.0

)

 

 

3.2

 

 

 

 

 

 

$

44.9

 

 

$

35.3

 

 

$

(4.8

)

 

$

(33.0

)

 

$

(30.3

)

 

$

(2.9

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30, 2022

 

 

September 30, 2022

 

 

 

INTEREST-

 

 

FOREIGN-

 

 

 

 

 

INTEREST-

 

 

FOREIGN-

 

 

 

 

 

 

RATE

 

 

EXCHANGE

 

 

COMMODITY

 

 

RATE

 

 

EXCHANGE

 

 

COMMODITY

 

Gain (loss) recognized in OCI:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Truck, Parts and Other

 

 

 

 

$

35.4

 

 

$

(7.9

)

 

 

 

 

$

35.5

 

 

$

(15.7

)

Financial Services

 

$

49.4

 

 

 

(.1

)

 

 

 

 

$

109.1

 

 

 

(.4

)

 

 

 

 

 

$

49.4

 

 

$

35.3

 

 

$

(7.9

)

 

$

109.1

 

 

$

35.1

 

 

$

(15.7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The amount of gain recorded in AOCI at September 30, 2023 that is estimated to be reclassified into earnings in the following 12 months if interest rates and exchange rates remain unchanged is approximately $9.5, net of taxes. The fixed interest earned on finance receivables will offset the amount recognized in interest expense, resulting in a stable interest margin consistent with the Company’s risk management strategy.

 

The amount of gains reclassified out of AOCI into net income based on the probability that the original forecasted transactions would not occur was nil and $.2 for the three months and nine months ended September 30, 2023, respectively and nil and $.1 for the same periods ended September 30, 2022.

 

Net Investment Hedges

Changes in the fair value of derivatives designated as net investment hedges are recorded in AOCI as an adjustment to the Cumulative Translation Adjustment (CTA). At September 30, 2023, the notional amount of the outstanding net investment hedges was $443.6. For the three and nine months ended September 30, 2023, the pre-tax gain recognized in OCI for the net investment hedges were $13.9 and $10.5, respectively and $22.8 and $58.8 for the same periods ending September 30, 2022.

Derivatives Not Designated As Hedging Instruments

For other risk management purposes, the Company enters into derivative instruments that do not qualify for hedge accounting. These derivative instruments are used to mitigate the risk of market volatility arising from borrowings and foreign currency denominated transactions. Changes in the fair value of derivatives not designated as hedging instruments are recorded in earnings in the period in which the change occurs.