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Financial Instruments, Hedging Activities and Fair Value Measurements

6 Months Ended

Jun. 30, 2022

Financial Instruments, Hedging Activities and Fair Value Measurements

FINANCIAL INSTRUMENTS, HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS

Fair value of financial instruments

Equity securities with readily determinable fair values - Balances of equity securities are recorded within other assets, with any changes in fair value recorded within other expense (income), net. The fair values of equity securities are based upon quoted market prices, which are considered Level 1 inputs.

Long-term borrowings - The estimated fair values of these borrowings are based on recent trades, as reported by a third-party pricing service. Due to the infrequency of trades, these inputs are considered to be Level 2 inputs.

Derivative instruments - The Company’s interest rate caps, interest rate swaps, cross-currency swaps, and foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are included in the Level 2 hierarchy.

Fair value of contingent consideration

The fair value of contingent consideration associated with an acquisition completed in the year is valued at each balance sheet date, until amounts become payable, with adjustments recorded within other expense (income), net in the condensed consolidated statements of operations. During April 2021, in conjunction with an acquisition in China, we recorded the fair value of contingent consideration of $7.3 million. As of June 30, 2022, the contingent consideration had increased to $7.5 million as a result of accretion for the passage of time and currency translation. The contingent consideration was valued using a probability-weighted expected payment method. The analysis considered the timing of expected future cash flows and the probability of whether key elements of the contingent event are completed. Due to the significant unobservable inputs used in the valuations, these liabilities are categorized within Level 3 of the fair value hierarchy.

The table below presents the fair values of our financial instruments measured on a recurring basis by level within the fair value hierarchy at June 30, 2022 and December 31, 2021.


	June 30, 2022								December 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Prepaid expenses and other current assets:

Interest rate swaps (1)	$	—	$	4.5	$	—	$	4.5	$	—	$	—	$	—	$	—
Cross-currency swaps (2)	—		40.5		—		40.5		—		17.7		—		17.7
Foreign currency forward contracts (1)	—		0.1		—		0.1		—		—		—		—
Other assets:


Cross-currency swaps (2)	—		10.4		—		10.4		—		8.3		—		8.3
Investments in equity securities	0.6		—		—		0.6		0.7		—		—		0.7
Liabilities:
Other accrued liabilities:

Interest rate swaps (1)	—		—		—		—		—		24.3		—		24.3

Contingent consideration	—		—		7.5		7.5		—		—		7.8		7.8
Other liabilities:

Interest rate swaps (1)	—		—		—		—		—		1.9		—		1.9


Long-term borrowings:
2024 Dollar Term Loans	—		1,984.1		—		1,984.1		—		2,038.5		—		2,038.5
2025 Euro Senior Notes	—		428.6		—		428.6		—		513.7		—		513.7
2027 Dollar Senior Notes	—		447.7		—		447.7		—		522.9		—		522.9
2029 Dollar Senior Notes	—		569.1		—		569.1		—		679.5		—		679.5

(1) Cash flow hedge

(2) Net investment hedge

The table below presents a roll forward of activity for the Level 3 liabilities during the three and six months ended June 30, 2022.


	Fair Value Using Significant Unobservable Inputs (Level 3)
Beginning balance December 31, 2021	$	7.8
Change in fair value	—
Ending balance at March 31, 2022	7.8
Change in fair value	(0.3)



Ending balance at June 30, 2022	$	7.5

Derivative Financial Instruments

We selectively use derivative instruments to reduce market risk associated with changes in foreign currency exchange rates and interest rates. The use of derivatives is intended for hedging purposes only, and we do not enter into derivative instruments for speculative purposes.

Certain derivative instruments in use are contingent upon changes in LIBOR, which is the subject of recent reform and will cease being published in June 2023. The derivative instruments under LIBOR terms that we are currently party to will either mature before June 2023 or the agreements contain transitional language to a different reference rate.

Derivative Instruments Qualifying and Designated as Cash Flow and Net Investment Hedges

Cross-Currency Swaps Designated as Net Investment Hedges

During the three months ended March 31, 2022, we settled two fixed-for-fixed cross-currency swaps with an aggregate notional amount totaling €335.0 million, previously executed in 2020, resulting in cash proceeds of $25.0 million. Concurrently, we entered into two fixed-for-fixed cross-currency swaps with an aggregate notional amount totaling €335.0 million to hedge the variability of exchange rate impacts between the U.S. Dollar and Euro. Under the terms of the new cross-currency swap agreements, the Company notionally exchanged $365.5 million at a weighted average interest rate of 3.375% for €335.0 million at a weighted average interest rate of 2.04%. The cross-currency swaps are designated as net investment hedges and expire on February 15, 2029. These cross-currency swaps are marked to market at each reporting date and any unrealized gains or losses are included in unrealized currency translation adjustments, within accumulated other comprehensive loss ("AOCI").

Foreign Currency Forward Contracts Designated as Cash Flow Hedges

During the three months ended March 31, 2022, we designated foreign currency forward contracts with a notional value of $3.0 million as cash flow hedges of the Company’s exposure to variability in exchange rates on forecasted purchases of inventory denominated in foreign currencies. These forward currency contracts are marked to market at each reporting date and any unrealized gains or losses are included in AOCI and reclassified to cost of goods sold in the same period or periods during which the hedged transactions affect earnings.

The following table presents the fair values of derivative instruments that qualify and have been designated as cash flow and net investment hedges included in AOCI:


	June 30, 2022		December 31, 2021
AOCI:

Interest rate swaps (cash flow hedges)	$	(4.5)	$	26.3
Foreign currency forward contracts (cash flow hedges)	(0.1)		—
Cross-currency swaps (net investment hedges)	(75.5)		(26.0)
Total AOCI	$	(80.1)	$	0.3

Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis.

The following tables set forth the locations and amounts recognized during the three and six months ended June 30, 2022 and 2021 for these cash flow and net investment hedges.


		For the Three Months Ended June 30,
		2022				2021
Derivatives in Cash Flow and Net Investment Hedges	Location of Loss (Gain) Recognized in Income on Derivatives	Net Amount of Gain Recognized in OCI on Derivatives		Amount of Loss (Gain) Recognized in Income		Net Amount of Loss (Gain) Recognized in OCI on Derivatives		Amount of Loss (Gain) Recognized in Income
Interest rate caps	Interest expense, net	$	—	$	—	$	—	$	0.6
Interest rate swaps	Interest expense, net	(6.9)		4.4		0.9		7.2
Foreign currency forward contracts	Cost of goods sold	(0.1)		—		0.1		0.1
Cross-currency swaps	Interest expense, net	(53.8)		(5.1)		(0.3)		(4.7)


		For the Six Months Ended June 30,
		2022				2021
Derivatives in Cash Flow and Net Investment Hedges	Location of Loss (Gain) Recognized in Income on Derivatives	Net Amount of Gain Recognized in OCI on Derivatives		Amount of Loss (Gain) Recognized in Income		Net Amount of Loss (Gain) Recognized in OCI on Derivatives		Amount of Loss (Gain) Recognized in Income
Interest rate caps	Interest expense, net	$	—	$	—	$	—	$	1.2
Interest rate swaps	Interest expense, net	(19.3)		11.5		(0.6)		14.2
Foreign currency forward contracts	Cost of goods sold	(0.1)		—		—		0.1
Cross-currency swaps	Interest expense, net	(59.4)		(9.9)		(29.9)		(9.5)

Over the next 12 months, we expect a gain of $4.6 million pertaining to cash flow hedges to be reclassified from AOCI into earnings, related to our interest rate swaps and foreign currency forward contracts.

Derivative Instruments Not Designated as Cash Flow Hedges

We periodically enter into foreign currency forward and option contracts to reduce market risk and hedge our balance sheet exposures and cash flows for subsidiaries with exposures denominated in currencies different from the functional currency of the relevant subsidiary. These contracts have not been designated as hedges and all gains and losses are marked to market through other expense (income), net in the condensed consolidated statements of operations.

Fair value gains and losses of derivative contracts, as determined using Level 2 inputs, that have not been designated for hedge accounting treatment under ASC 815, Derivatives and hedging, are recorded in earnings as follows:


Derivatives Not Designated as Hedging Instruments under ASC 815	Location of Loss (Gain) Recognized in Income on Derivatives	Three Months Ended June 30,				Six Months Ended June 30,
		2022		2021		2022		2021

Foreign currency forward contracts	Other expense (income), net	$	2.3	$	0.9	$	2.6	$	(5.9)

- 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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