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Fair Value Measurements and Financial Instruments

9 Months Ended

Sep. 30, 2024

Fair Value Measurements and Financial Instruments

Fair Value Measurements

Fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based upon assumptions that market participants would use in pricing an asset or liability. As a basis for considering such assumptions, a three-tier fair value hierarchy is utilized, which prioritizes the inputs used in measuring fair value as follows:


Level 1:			Observable inputs such as quoted prices in active markets;
Level 2:			Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
Level 3:			Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.

Items Measured at Fair Value on a Recurring Basis

Estimates of the fair value of foreign currency derivative instruments are determined using exchange traded prices and rates. The Company also considers the risk of non-performance in the estimation of fair value and includes an adjustment for non-performance risk in the measure of fair value of derivative instruments. In certain instances where market data is not available, the Company uses management judgment to develop assumptions that are used to determine fair value. Fair value measurements and the fair value hierarchy level for the Company’s assets and liabilities measured or disclosed at fair value on a recurring basis as of September 30, 2024 and December 31, 2023 were as follows:


	September 30, 2024		December 31, 2023		Input
Derivatives designated as hedging instruments:
Forward foreign exchange contracts - other current assets	$	—	$	1,285	Level 2
Forward foreign exchange contracts - accrued liabilities	$	(4,687)	$	(998)	Level 2
Derivatives not designated as hedging instruments: (1)
Forward foreign exchange contracts - other current assets	$	—	$	—	Level 2
Forward foreign exchange contracts - accrued liabilities	$	—	$	—	Level 2

(1) The derivatives not designated as hedging instruments had a zero fair value as of September 30, 2024 due to the one-month forward exchange contract being executed on such date. At inception, forward contracts usually have zero fair values as a result of there being no immediate value attributed to the contract. The Company did not have any outstanding non-designated derivatives as of December 31, 2023.

Items Measured at Fair Value on a Nonrecurring Basis

In addition to items that are measured at fair value on a recurring basis, the Company measures certain assets and liabilities at fair value on a nonrecurring basis, which are not included in the table above. As these nonrecurring fair value measurements are generally determined using unobservable inputs, these fair value measurements are classified within Level 3 of the fair value hierarchy.

Items Not Carried at Fair Value

Fair values of the Company’s First Lien Notes, Third Lien Notes, and 2026 Senior Notes were as follows:


	September 30, 2024		December 31, 2023
Aggregate fair value	$	1,010,079	$	984,448
Aggregate carrying value (1)	$	1,051,175	$	1,038,808

(1) Excludes unamortized debt issuance costs and unamortized original issue discount.

Fair values were based on quoted market prices and are classified within Level 1 of the fair value hierarchy.

Derivative Instruments and Hedging Activities

The Company is exposed to fluctuations in foreign currency exchange rates, interest rates and commodity prices. The Company enters into derivative instruments primarily to hedge portions of its forecasted foreign currency denominated cash flows and designates these derivative instruments as cash flow hedges in order to qualify for hedge accounting. The Company also enters into derivative instruments to manage exposure related to foreign currency denominated monetary assets and liabilities.

The Company formally documents its hedge relationships, including the identification of the hedging instruments and the hedged items, as well as its risk management objectives and strategies for undertaking various hedge transactions. The Company also formally assesses whether a cash flow hedge is highly effective in offsetting changes in cash flows of the hedged item. Derivatives are recorded at fair value in other current assets, other assets, accrued liabilities and other long-term liabilities.

For a cash flow hedge, the change in fair value of the derivative is recorded in accumulated other comprehensive income (loss) (“AOCI”) in the condensed consolidated balance sheets, to the extent that the hedges are effective, and reclassified into earnings when the underlying hedged transaction is realized. The realized gains and losses are recorded on the same line as the hedged transaction in the condensed consolidated statements of operations. Derivatives not designated as hedging instruments are marked-to-market with changes in fair value recorded in earnings. Cash flows from derivatives used to manage foreign exchange risks are classified as operating activities within the consolidated statements of cash flows.

The Company is exposed to credit risk in the event of nonperformance by its counterparties on its derivative financial instruments. The Company mitigates this credit risk exposure by entering into agreements directly with major financial institutions with high credit standards that are expected to fully satisfy their obligations under the contracts.

Cash Flow Hedges

Forward Foreign Exchange Contracts. The Company uses forward contracts to mitigate the potential volatility to earnings and cash flows arising from changes in currency exchange rates that impact the Company’s foreign currency transactions. The principal currencies hedged by the Company include various European currencies, the Canadian Dollar, and the Mexican Peso. As of September 30, 2024 and December 31, 2023, the notional amount of these contracts was $244,045 and $207,131, respectively, and consisted of hedges of cash flow transactions extending out to December 2025.

Pretax amounts related to the Company’s cash flow hedges that were recognized in other comprehensive income (loss) (“OCI”) were as follows:


	(Loss) Gain Recognized in OCI
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Cash flow hedges	$	(4,040)	$	(813)	$	(5,738)	$	9,429

Pretax amounts related to the Company’s cash flow hedges that were reclassified from AOCI and recognized in cost of products sold were as follows:


	(Loss) Gain Reclassified from AOCI to Income
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Cash flow hedges	$	(1,932)	$	4,321	$	(764)	$	12,900

Derivatives Not Designated as Hedges

Forward Foreign Exchange Contracts. Effective in the third quarter of 2024, the Company began using one-month forward contracts to manage exposure related to foreign currency denominated monetary assets and liabilities. The contracts are not designated as cash flow or fair value hedges under ASC 815, and therefore are marked-to-market with changes in fair value recorded to earnings. The principal currency hedged by the Company is the Mexican Peso. As of September 30, 2024, the notional amount outstanding was $14,749. The Company did not have any outstanding non-designated derivatives as of December 31, 2023.

Pretax amounts related to the Company’s non-designated derivatives recognized in other expense, net were as follows:


	Gain Recognized in Income
	Three Months Ended September 30,				Nine Months Ended September 30,
	2024		2023		2024		2023
Non-designated foreign currency contracts	$	233	$	—	$	233	$	—

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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