Derivative Instruments and Hedging Activities (Tables)

3 Months Ended

Mar. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Schedule of Derivative Assets and Liabilities at Fair Value

The fair value of our warrants to acquire common shares of HEXO at a strike price of CAD 6.00 per share are estimated using the Black-Scholes option-pricing model. As of March 31, 2020 and December 31, 2019, respectively, the assumptions used to estimate the fair value of the HEXO warrants are as follows:

	As of March 31, 2020		As of December 31, 2019
Expected term (years)	1.50		1.75
Estimated volatility	96.05	%	81.45	%
Risk-free interest rate	0.54	%	1.69	%
Expected dividend yield	—	%	—	%

The expected term is based on the contractual maturity date of the warrants. Estimated volatility is based on a blend of implied volatility and historical volatility of HEXO's stock. The risk-free rate utilized is based on a zero-coupon Canadian Treasury security yield with a remaining term equal to the expected term of the warrants. The expected dividend yield is determined by historical dividend levels.

The table below summarizes our derivative assets and liabilities that were measured at fair value as of March 31, 2020 and December 31, 2019.

				Fair value measurements as of March 31, 2020
	As of March 31, 2020			Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
	(In millions)
Cross currency swaps	$	19.8		$	—	$	19.8		$	—
Interest rate swaps	(297.4		)	—		(297.4		)	—
Foreign currency forwards	16.9			—		16.9			—
Commodity swaps and options	(140.1		)	—		(140.1		)	—
Warrants	0.8			—		0.8			—
Total	$	(400.0	)	$	—	$	(400.0	)	$	—

				Fair value measurements as of December 31, 2019
	As of December 31, 2019			Quoted prices in active markets (Level 1)		Significant other observable inputs (Level 2)			Significant unobservable inputs (Level 3)
	(In millions)
Cross currency swaps	$	10.0		$	—	$	10.0		$	—
Interest rate swaps	(111.5		)	—		(111.5		)	—
Foreign currency forwards	2.1			—		2.1			—
Commodity swaps and options	(41.2		)	—		(41.2		)	—
Warrants	2.7			—		2.7			—
Total	$	(137.9	)	$	—	$	(137.9	)	$	—

As of March 31, 2020 and December 31, 2019, we had no significant transfers between Level 1 and Level 2. New derivative contracts transacted during the three months ended March 31, 2020 were all included in Level 2.

Fair Value of Derivative Instruments in the Condensed Consolidated Balance Sheets

Fair Value of Derivative Instruments in the Unaudited Condensed Consolidated Balance Sheets (in millions):

	As of March 31, 2020
			Derivative Assets			Derivative Liabilities
	Notional amount		Balance sheet location	Fair value		Balance sheet location	Fair value
Derivatives designated as hedging instruments:
Cross currency swaps	$	400.0	Other current assets	$	—	Accounts payable and other current liabilities	$	—
			Other non-current assets	19.8		Other liabilities	—
Interest rate swaps	$	1,500.0	Other non-current assets	—		Other liabilities	(297.4		)
Foreign currency forwards	$	200.9	Other current assets	10.6		Accounts payable and other current liabilities	—
			Other non-current assets	6.3		Other liabilities	—
Total derivatives designated as hedging instruments				$	36.7		$	(297.4	)
Derivatives not designated as hedging instruments:
Commodity swaps(1)	$	674.9	Other current assets	$	0.6	Accounts payable and other current liabilities	$	(102.3	)
			Other non-current assets	0.2		Other liabilities	(38.6		)
Commodity options(1)	$	18.4	Other current assets	—		Accounts payable and other current liabilities	—
Warrants	$	49.1	Other non-current assets	0.8		Other liabilities	—
Total derivatives not designated as hedging instruments				$	1.6		$	(140.9	)

	As of December 31, 2019
			Derivative Assets			Derivative Liabilities
	Notional amount		Balance sheet location	Fair value		Balance sheet location	Fair value
Derivatives designated as hedging instruments:
Cross currency swaps	$	900.0	Other current assets	$	1.8	Accounts payable and other current liabilities	$	—
			Other non-current assets	8.2		Other liabilities	—
Interest rate swaps	$	1,500.0	Other non-current assets	—		Other liabilities	(111.5		)
Foreign currency forwards	$	237.9	Other current assets	1.9		Accounts payable and other current liabilities	(0.8		)
			Other non-current assets	1.4		Other liabilities	(0.4		)
Total derivatives designated as hedging instruments				$	13.3		$	(112.7	)
Derivatives not designated as hedging instruments:
Commodity swaps(1)	$	598.4	Other current assets	$	5.7	Accounts payable and other current liabilities	$	(36.4	)
			Other non-current assets	1.0		Other liabilities	(11.5		)
Commodity options(1)	$	18.4	Other current assets	—		Accounts payable and other current liabilities	—
Warrants	$	53.1	Other non-current assets	2.7		Other liabilities	—
Total derivatives not designated as hedging instruments				$	9.4		$	(47.9	)

(1) Notional includes offsetting buy and sell positions, shown in terms of absolute value. Buy and sell positions are shown gross in the asset and/or liability position, as appropriate.

Items Designated and Qualifying as Hedged Items in Fair Value Hedging Relationships in the Unaudited Condensed Consolidated Balance Sheets (in millions):

Line item in the balance sheet in which the hedged item is included	Carrying amount of the hedged assets/liabilities				Cumulative amount of fair value hedging adjustment(s) in the hedged assets/liabilities(1)  Increase/(Decrease)
	As of March 31, 2020		As of December 31, 2019		As of March 31, 2020		As of December 31, 2019
	(In millions)
Current portion of long-term debt and short-term borrowings	$	—	$	—	$	—	$	(0.2	)
Long-term debt	$	—	$	—	$	5.8	$	6.5

(1)    Entire balances relate to hedging adjustments on discontinued hedging relationships.

The Effect of Derivative Instruments on the Condensed Consolidated Statements of Operations

The Pretax Effect of Cash Flow Hedge and Net Investment Hedge Accounting on Accumulated Other Comprehensive Income (Loss) (in millions):

Three Months Ended March 31, 2020
Derivatives in cash flow hedge relationships	Amount of gain (loss) recognized in OCI on derivative			Location of gain (loss) reclassified from AOCI into income	Amount of gain (loss) recognized from AOCI on derivative
Forward starting interest rate swaps	$	(185.9	)	Interest income (expense), net	$	(0.7	)
Foreign currency forwards	15.8			Cost of goods sold	1.0
				Other income (expense), net	(0.3		)
Total	$	(170.1	)		$	—

Three Months Ended March 31, 2020
Derivatives in net investment hedge relationships	Amount of gain (loss) recognized in OCI on derivative		Location of gain (loss) reclassified from AOCI into income	Amount of gain (loss) recognized from AOCI on derivative		Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)(1)
Cross currency swaps	$	13.0	Interest income (expense), net	$	—	Interest income (expense), net	$	5.7
Total	$	13.0		$	—		$	5.7

Three Months Ended March 31, 2020
Non-derivative financial instruments in net investment hedge relationships	Amount of gain (loss) recognized in OCI on derivative		Location of gain (loss) reclassified from AOCI into income	Amount of gain (loss) recognized from AOCI on derivative		Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)
EUR 800 million notes due 2024	$	14.5	Other income (expense), net	$	—	Other income (expense), net	$	—
Total	$	14.5		$	—		$	—

Three Months Ended March 31, 2019
Derivatives in cash flow hedge relationships	Amount of gain (loss) recognized in OCI on derivative			Location of gain (loss) reclassified from AOCI into income	Amount of gain (loss) recognized from AOCI on derivative
Forward starting interest rate swaps	$	(32.4	)	Interest income (expense), net	$	(0.7	)
Foreign currency forwards	(7.0		)	Cost of goods sold	0.8
				Other income (expense), net	(0.2		)
Total	$	(39.4	)		$	(0.1	)

Three Months Ended March 31, 2019
Derivatives in net investment hedge relationships	Amount of gain (loss) recognized in OCI on derivative		Location of gain (loss) reclassified from AOCI into income	Amount of gain (loss) recognized from AOCI on derivative		Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)(1)
Cross currency swaps	$	16.1	Interest income (expense), net	$	—	Interest income (expense), net	$	4.0
Total	$	16.1		$	—		$	4.0

(1) Represents amounts excluded from the assessment of effectiveness for which the difference between changes in fair value and period amortization is recorded in other comprehensive income.

Three Months Ended March 31, 2019
Non-derivative financial instruments in net investment hedge relationships	Amount of gain (loss) recognized in OCI on derivative		Location of gain (loss) reclassified from AOCI into income	Amount of gain (loss) recognized from AOCI on derivative		Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)	Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)
EUR 800 million notes due 2024	$	20.0	Other income (expense), net	$	—	Other income (expense), net	$	—
EUR 500 million notes due 2019	10.1		Other income (expense), net	—		Other income (expense), net	—
Total	$	30.1		$	—		$	—

We expect net gains of approximately $8 million (pretax) recorded in AOCI as of March 31, 2020 related to cash flow hedges will be reclassified into earnings within the next 12 months. For derivatives designated in cash flow hedge relationships, the maximum length of time over which forecasted transactions are hedged as of March 31, 2020 is approximately 4 years, as well as those related to our forecasted debt issuances in 2021, 2022, and 2026.

The Effect of Fair Value and Cash Flow Hedge Accounting on the Unaudited Condensed Consolidated Statements of Operations (in millions):

Three Months Ended March 31, 2020
	Location and amount of gain (loss) recognized in income on fair value and cash flow hedging relationships(1)
	Cost of goods sold			Other income (expense), net			Interest income (expense), net
Total amount of income and expense line items presented in the unaudited condensed consolidated statement of operations in which the effects of fair value or cash flow hedges are recorded	$	(1,479.0	)	$	(4.8	)	$	(68.9	)
Gain (loss) on cash flow hedging relationships:
Forward starting interest rate swaps
Amount of gain (loss) reclassified from AOCI into income	—			—			(0.7		)
Foreign currency forwards
Amount of gain (loss) reclassified from AOCI into income	1.0			(0.3		)	—

Three Months Ended March 31, 2019
	Location and amount of gain (loss) recognized in income on fair value and cash flow hedging relationships(1)
	Cost of goods sold			Other income (expense), net			Interest income (expense), net
Total amount of income and expense line items presented in the unaudited condensed consolidated statement of operations in which the effects of fair value or cash flow hedges are recorded	$	(1,413.0	)	$	23.9		(73.3	)
Gain (loss) on cash flow hedging relationships:
Forward starting interest rate swaps
Amount of gain (loss) reclassified from AOCI into income	—			—			(0.7	)
Foreign currency forwards
Amount of gain (loss) reclassified from AOCI into income	0.8			(0.2		)	—

(1)    We had no outstanding fair value hedges during the first quarter of 2020 or 2019.

Derivatives Not Designated as Hedging Instruments

The Effect of Derivatives Not Designated as Hedging Instruments on the Unaudited Condensed Consolidated Statements of Operations (in millions):

Three Months Ended March 31, 2020
Derivatives not in hedging relationships	Location of gain (loss) recognized in income on derivative	Amount of gain (loss) recognized in income on derivative
Commodity swaps	Cost of goods sold	$	(112.5	)
Warrants	Other income (expense), net	(1.7		)
Total		$	(114.2	)

Three Months Ended March 31, 2019
Derivatives not in hedging relationships	Location of gain (loss) recognized in income on derivative	Amount of gain (loss) recognized in income on derivative
Commodity swaps	Cost of goods sold	$	32.7
Warrants	Other income (expense), net	22.9
Total		$	55.6

Lower current commodity market prices relative to our hedged positions, primarily for aluminum and diesel, drove the losses recognized in income related to commodity swaps for the three months ended March 31, 2020. Contrarily, higher commodity market prices relative to our hedged positions during the three months ended March 31, 2019, primarily in aluminum and diesel, drove the total gain recognized in income related to commodity swaps in the prior year.