DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

9 Months Ended

Sep. 30, 2023

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

7. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

The Company accounts for its derivative instruments and hedging activities under ASC 815, “Derivatives and Hedging.” The following table presents the fair values of the Company’s derivative instruments:

	Fair value
	September 30,		December 31,
Derivatives designated as hedging instruments	2023		2022		Balance Sheet location
Assets:
Commodity contracts	$	3,273	$	—	Accounts receivable, net
Commodity contracts	$	371	$	—	Other assets
Liabilities:
Commodity contracts	$	(210)	$	—	Accrued liabilities

	Fair value
	September 30,		December 31,
Derivatives not designated as hedging instruments	2023		2022		Balance Sheet location
Assets:
Foreign currency exchange contracts	$	1,614	$	965	Accounts receivable, net
Liabilities:
Foreign currency exchange contracts	$	(919)	$	(4,698)	Accrued liabilities

Cash Flow Hedging Strategy

The Company uses cash flow hedges to minimize the variability in cash flows of forecasted transactions caused by fluctuations in commodity prices. The changes in the fair values of derivatives designated as cash flow hedges are recorded in accumulated other comprehensive income (loss) (“AOCI”) and are reclassified into the line item in our condensed consolidated statement of income in which the hedged items are recorded in the same period that the hedged items affect earnings. The changes in the fair values of hedges that are determined to be ineffective are immediately reclassified from AOCI into earnings. The maximum length of time for which the Company hedges its exposure to the variability in future cash flows is currently less than two years.

The Company has entered into commodity hedge contracts to mitigate the price risk associated with a portion of its forecasted aluminum purchases. These derivative instruments were designated as part of the Company’s commodity cash flow hedging program. The objective of this hedging program is to reduce the variability of cash flows associated with future purchases of aluminum. The total notional values of derivatives that were designated and qualified for this program were $83.8 million as of September 30, 2023. Transactions under the commodity cash flow hedging program were executed beginning in May 2023.

The following table presents the impact that changes in the fair values of derivatives designated as cash flow hedges had on other comprehensive income (“OCI”), AOCI and earnings:

Three-months ended September 30, 2023
Derivatives				Gain (loss)
designated as	Gain (loss) recognized		Location of gain (loss)	reclassified from
hedging instruments	in AOCI		recognized in income	AOCI into income
Commodity contracts	$	4,700	Cost of sales	$	—

Nine-months ended September 30, 2023
Derivatives				Gain (loss)
designated as	Gain (loss) recognized		Location of gain (loss)	reclassified from
hedging instruments	in AOCI		recognized in income	AOCI into income
Commodity contracts	$	3,434	Cost of sales	$	—

As of September 30, 2023, the Company estimates that it will reclassify into earnings net gains (losses) of $3.1 million from the amount recorded in AOCI as the anticipated cash flows occur during the next 12 months.

Economic (Non-Designated) Hedging Strategy

The Company is exposed to foreign currency exchange rate risks related primarily to its foreign business operations. During the nine-months ended September 30, 2023 and the year-ended December 31, 2022, the Company entered into forward currency exchange contracts with financial institutions to create an economic hedge to specifically manage a portion of the foreign exchange risk exposure associated with certain consolidated subsidiaries’ non-functional currency denominated assets and liabilities. All foreign currency exchange contracts of the Company that were outstanding as of September 30, 2023 have terms of one month or less. The Company does not enter into forward currency exchange contracts for speculation or trading purposes.

The Company has not designated its foreign currency exchange contracts as hedge transactions. Therefore, gains and losses on the Company’s foreign currency exchange contracts are recognized in interest and other income (expense), net, in the condensed consolidated statements of income, and are largely offset by the changes in the fair value of the underlying economically hedged item. The total notional values of derivatives related to our foreign currency economic hedges were $310.3 million and $299.8 million as of September 30, 2023 and December 31, 2022, respectively.

The net gains (losses) on derivatives not designated as hedging instruments in the condensed consolidated statements of income were as follows:

		Gain (loss)
		recognized in income on
		derivatives
		Three-months ended
Derivatives not designated as	Location of gain (loss)	September 30,		September 30,
hedging instruments	recognized in income on derivatives	2023		2022
Foreign currency exchange contracts	Interest and other income (expense), net	$	5,080	$	4,631

		Gain (loss)
		recognized in income on
		derivatives
		Nine-months ended
Derivatives not designated as	Location of gain (loss)	September 30,		September 30,
hedging instruments	recognized in income on derivatives	2023		2022
Foreign currency exchange contracts	Interest and other income (expense), net	$	(4,695)	$	1,355

Certain of the Company’s counterparty agreements contain provisions that require the Company to post collateral on derivative instruments in a net liability position. As of September 30, 2023, no amounts were posted as collateral.