Derivative Financial Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging Activities

Note 7: Derivative Financial Instruments and Hedging Activities

The Company is exposed to certain risks arising from both business operations and economic conditions, including interest rate risk and foreign exchange risk. To mitigate the impact of interest rate and foreign exchange risk, the Company enters into derivative financial instruments. The Company maintains the majority of its overall interest rate exposure on floating rate borrowings to a fixed-rate basis, primarily with interest rate swap agreements. The Company manages exposure to foreign exchange fluctuations primarily through short-term forward contracts.

There have been no significant changes to the interest rate and foreign exchange risk management objectives from those disclosed in the Company’s audited Consolidated Financial Statements for the year ended December 31, 2019.

Interest Rate Derivative Instruments

As of September 30, 2020, the Company's active interest rate hedging instruments consist of five interest rate swap agreements designated as cash flow hedges. The Company's hedge instrument balances as of September 30, 2020 relate solely to these interest rate swaps. The hedge instruments expire in August 2025 and are further described below.

The Company records changes in the fair value of derivatives designated and qualifying as cash flow hedges in Accumulated other comprehensive loss in the unaudited Condensed Consolidated Balance Sheets and subsequently reclassifies the change into earnings in the period that the hedged forecasted transaction affects earnings. As of September 30, 2020 and December 31, 2019, there is $165.5 million and $74.5 million in pre-tax losses, respectively, included in Accumulated other comprehensive loss related to these agreements, which will be reclassified to Interest expense as interest payments are made in accordance with the Company's 2018 Credit Agreement; refer to Note 8: Long-term Debt and Other Borrowings for discussion of this agreement. During the next twelve months, the Company estimates that pre-tax losses of $37.4 million will be reclassified to Interest expense in the unaudited Condensed Consolidated Statements of Operations.

Non-designated Foreign Exchange Derivative Instruments

Additionally, the Company enters into short-term forward contracts to mitigate the risk of fluctuations in foreign currency exchange rates that would adversely impact some of the Company’s foreign currency denominated transactions. Hedge accounting was not elected for any of these contracts. As such, changes in the fair value of these contracts are recorded directly in earnings. There are gains of $2.1 million and $1.6 million for the three months ended September 30, 2020 and 2019, respectively. There are gains of $2.3 million and $1.5 million for the nine months ended September 30, 2020 and 2019, respectively. This activity was included in Other income, net, in the unaudited Condensed Consolidated Statements of Operations.

As of September 30, 2020 and December 31, 2019, the Company had 21 and 23 foreign currency exchange forward contracts outstanding, respectively, covering a notional amount of $538.8 million and $498.2 million, respectively. The fair value of forward contracts disclosed above are included in Other current assets and Other current liabilities in the unaudited Condensed Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019. As of September 30, 2020 and December 31, 2019, the Company has not posted and does not hold any collateral related to these agreements.

The following table presents the fair value of derivatives as of September 30, 2020 and December 31, 2019 (in millions):

			September 30, 2020				December 31, 2019
	September 30, 2020		Assets		Liabilities		Assets		Liabilities
Derivative Instrument	Notional		Fair Value		Fair Value		Fair Value		Fair Value
Designated:
Cash flow hedges:
Interest rate swaps	$	2,050.0	$	—	$	176.3	$	—	$	97.7
Non-designated:
Foreign currency forward contracts	538.8		3.1		2.1		1.0		2.2

The fair value of derivative assets is included within Other non-current assets and the fair value of derivative liabilities is included within Other non-current liabilities in the unaudited Condensed Consolidated Balance Sheets. The Company does not net derivatives in the unaudited Condensed Consolidated Balance Sheets.

The following table presents the effect of derivatives designated as hedges, net of applicable income taxes, in the unaudited Condensed Consolidated Statements of Operations for the three months ended September 30, 2020 and 2019 (in millions):

	Beginning Accumulated Other Comprehensive Loss (Gain)		Amount of Loss (Gain) Recognized in Other Comprehensive Loss on Derivatives(1)		Amount of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss into Statement of Operations(2)		Ending Accumulated Other Comprehensive Loss (Gain)
Three Months Ended September 30, 2020
Interest rate cash flow hedges	$	178.0	$	(19.3)	$	9.3	$	168.0
	$	178.0	$	(19.3)	$	9.3	$	168.0
Three Months Ended September 30, 2019
Interest rate cash flow hedges	$	70.0	$	26.6	$	1.1	$	97.7
	$	70.0	$	26.6	$	1.1	$	97.7

(1) Amount is net of related income tax expense of $0.0 million for the three months ended September 30, 2020 and 2019.

(2) Amount is net of related income tax expense of $0.7 million and $0.8 million for the three months ended September 30, 2020 and 2019, respectively.

Gains of $10.0 million and $1.9 million were reclassified into earnings during the three months ended September 30, 2020 and 2019, respectively, related to interest rate hedges and were recognized in Interest expense in the unaudited Condensed Consolidated Statements of Operations.

The following table presents the effect of derivatives designated as hedges, net of applicable income taxes, in the unaudited Condensed Consolidated Statements of Operations for the nine months ended September 30, 2020 and 2019 (in millions):

	Beginning Accumulated Other Comprehensive Loss (Gain)		Amount of Loss (Gain) Recognized in Other Comprehensive Loss on Derivatives(1)			Amount of (Loss) Gain Reclassified from Accumulated Other Comprehensive Loss into Statement of Operations(2)			Ending Accumulated Other Comprehensive Loss (Gain)
Nine Months Ended September 30, 2020
Interest rate cash flow hedges	$	79.0	$	78.0		$	11.0		$	168.0
	$	79.0	$	78.0	1	$	11.0	2	$	168.0
Nine Months Ended September 30, 2019
Interest rate cash flow hedges	$	(13.3)	$	105.9		$	5.1		$	97.7
	$	(13.3)	$	105.9	1	$	5.1	2	$	97.7

(1) Amount is net of related income tax expense of $0.0 million and $5.1 million for the nine months ended September 30, 2020 and 2019, respectively.

(2) Amount is net of related income tax expense of $2.1 million and $2.3 million for the nine months ended September 30, 2020 and 2019, respectively.

Gains of $13.1 million and $7.4 million were reclassified into earnings during the nine months ended September 30, 2020 and 2019, respectively, related to interest rate hedges and were recognized in Interest expense in the unaudited Condensed Consolidated Statements of Operations.