DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

12 Months Ended

Dec. 31, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

We are exposed to market risk related to potential fluctuations in foreign currency exchange rates and interest rates. We use derivative financial instruments to mitigate the financial impact of exposure to these risks.

Accounting for derivative financial instruments is governed by ASC Topic 815, Derivatives and Hedging, (“ASC 815”). In accordance with ASC 815, we record our derivative instruments at fair value as either assets or liabilities in the Consolidated Balance Sheets. Changes in the instruments’ fair value are accounted for based on their intended use. Gains and losses on derivatives that are designated and qualify for cash flow hedge accounting are recorded as a component of accumulated other comprehensive income (“AOCI”) and reclassified into earnings when the hedged transaction materializes. Gains and losses on derivatives that are designated and qualify for net investment hedge accounting are recorded as a component of AOCI and will not be reclassified into earnings until the investment is partially or completely liquidated. The changes in the fair value of derivatives not designated as hedging instruments and those which are no longer effective as hedging instruments, are recognized immediately in earnings.

FOREIGN CURRENCY EXCHANGE AND OPTION CONTRACTS

Our New Zealand subsidiary’s domestic sales and operating expenses are predominately denominated in New Zealand dollars, while its export sales, shareholder distributions and ocean freight payments are predominately denominated in U.S. dollars. To the extent New Zealand dollar costs exceed New Zealand dollar revenues (the “foreign exchange exposure”), the New Zealand subsidiary manages the foreign exchange exposure through the use of derivative financial instruments. It typically hedges a portion of export sales receipts to cover 50% to 90% of the projected foreign exchange exposure for the following 12 months, up to 75% for the forward 12 to 18 months and up to 50% for the forward 18 to 24 months. Additionally, it will occasionally hedge export sales receipts to cover up to 50% of the foreign exchange exposure for the forward 24 to 48 months when the New Zealand dollar is at a cyclical low versus the U.S. dollar. The New Zealand subsidiary’s trading operations typically hedge a portion of export sales receipts to cover the projected foreign exchange exposure for the following three months. As of December 31, 2022, foreign currency exchange contracts and foreign currency option contracts had maturity dates through September 2025 and October 2025, respectively.

Foreign currency exchange and option contracts hedging foreign currency risk qualify for cash flow hedge accounting. We may de-designate these cash flow hedge relationships in advance or at the occurrence of the forecasted transaction. The portion of gains or losses on the derivative instrument previously accumulated in other comprehensive income for de-designated hedges remains in accumulated other comprehensive income until the forecasted transaction affects earnings. Changes in the value of derivative instruments after de-designation are recorded in earnings.

INTEREST RATE PRODUCTS

We are exposed to cash flow interest rate risk on our variable-rate debt. We use variable-to-fixed interest rate swaps and forward-starting interest rate swap agreements to hedge this exposure. For these derivative instruments, we report the gains/losses from the fluctuations in the fair market value of the hedges in AOCI and reclassify them to earnings as interest expense in the same period in which the hedged interest payments affect earnings.

To the extent we de-designate or terminate a cash flow hedging relationship and the associated hedged item continues to exist, any unrealized gain or loss of the cash flow hedge at the time of de-designation remains in AOCI and is amortized using the straight-line method through interest expense over the remaining life of the hedged item. To the extent the associated hedged item is no longer effective, the gain or loss is reclassified out of AOCI to earnings immediately.

In November 2022, we entered into a new $100 million forward-starting interest rate swap agreement, benchmarked to the Secured Overnight Financing Rate (“SOFR”), in anticipation of the new $250 million incremental term loan, which closed in December 2022. See Note 7 — Debt for additional information.

In December 2022, through a fifth amendment to the Incremental Term Loan Agreement with our primary lender, we converted all our outstanding London Inter-Bank Offered Rate (“LIBOR”) indexed term loans, in the aggregate principal amount of $750 million, to SOFR indexed rates. In conjunction with amending our Term Loan Agreement, we also concurrently modified the benchmark rate from LIBOR to Daily Simple SOFR in our active interest rate swap agreements with a total notional amount of $750 million. The conversion of these debt and interest rate swap instruments did not have a material impact on our financial position or operating results.

As of December 31, 2022, our forward-starting interest rate swap agreements with a total notional amount of $150 million continue to use LIBOR as the interest rate benchmark.

INTEREST RATE SWAPS    

The following table contains information on the outstanding interest rate swaps as of December 31, 2022:

Outstanding Interest Rate Swaps (a)
Date Entered Into	Term	Notional Amount	Related Debt Facility	Fixed Rate of Swap		Bank Margin on Debt (b)		Total Effective Interest Rate (c)
August 2015	9 years	$170,000	Term Credit Agreement	2.10	%	1.70	%	3.80	%
August 2015	9 years	180,000	Term Credit Agreement	2.26	%	1.70	%	3.96	%
April 2016	10 years	100,000	Incremental Term Loan	1.50	%	1.75	%	3.25	%
April 2016	10 years	100,000	Incremental Term Loan	1.51	%	1.75	%	3.26	%
May 2021 (d)	7 years	200,000	2021 Incremental Term Loan Facility	0.67	%	1.65	%	2.32	%
December 2022 (e)	5 years	100,000	2022 Incremental Term Loan Facility	3.72	%	1.70	%	5.42	%

(a)     All interest rate swaps have been designated as interest rate cash flow hedges and qualify for hedge accounting.

(b)    Includes the SOFR Credit Spread Adjustment component allotted to banks during the transition from LIBOR period.

(c)     Rate is before estimated patronage payments.

(d)     On February 1, 2022, our $200 million notional forward-starting interest rate swap matured into an active interest rate swap. See Note 7 - Debt for additional information.

(e) On December 1, 2022 our $100 million notional forward-starting interest rate swap matured into an active interest rate swap. See Note 7 - Debt for additional information.

FORWARD-STARTING INTEREST RATE SWAPS

The following table contains information on the outstanding forward-starting interest rate swaps as of December 31, 2022:

Outstanding Forward-Starting Interest Rate Swaps (a)
Date Entered Into	Term	Notional Amount	Fixed Rate of Swap		Related Debt Facility	Forward Date	Maximum Period Ending for Forecasted Issuance Date
April 2020	4 years	$100,000	0.88	%	Term Credit Agreement	August 2024	N/A
May 2020	4 years	50,000	0.74	%	Term Credit Agreement	August 2024	N/A

(a)     All forward-starting interest rate swaps have been designated as interest rate cash flow hedges and qualify for hedge accounting.

CARBON OPTIONS

The New Zealand subsidiary enters into carbon options from time to time to sell carbon assets. Changes in fair value of the carbon option contracts are recorded in “Interest and other miscellaneous income, net” as the contracts do not qualify for hedge accounting treatment. As of December 31, 2022, all existing carbon option contracts have expired.

The following table demonstrates the impact, gross of tax, of our derivatives on the Consolidated Statements of Income and Comprehensive Income for the years ended December 31, 2022, 2021 and 2020.

	Location on Statement of Income and Comprehensive Income	2022	2021	2020
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other comprehensive income (loss)	$5,093	($10,939)	$7,699
	Other operating income, net	(7,682)	2,974	(2,323)
Foreign currency option contracts	Other comprehensive income (loss)	610	(2,733)	1,181
	Other operating income, net	—	1,177	30
Interest rate products	Other comprehensive income (loss)	75,006	52,478	(76,567)
	Interest expense, net	2,459	14,694	10,769
Derivatives not designated as hedging instruments:
Carbon options	Interest and other miscellaneous income, net	—	—	$563

During the next 12 months, the amount of the AOCI balance, net of tax, expected to be reclassified into earnings is a gain of approximately $19.7 million. The following table contains details of the amounts expected to be reclassified into earnings:

	Amount expected to be reclassified into earnings in next 12 months
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	($3,909)
Foreign currency option contracts	(203)
Interest rate products	23,810
Total estimated gain on derivatives contracts	$19,698

The following table contains the notional amounts of the derivative financial instruments recorded in the Consolidated Balance Sheets at December 31, 2022 and 2021:

	Notional Amount
	2022	2021
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	$138,250	$149,250
Foreign currency option contracts	78,000	14,000
Interest rate swaps	850,000	550,000
Forward-starting interest rate swaps	150,000	350,000

The following table contains the fair values of the derivative financial instruments recorded in the Consolidated Balance Sheets at December 31, 2022 and 2021. Changes in balances of derivative financial instruments are recorded as operating activities in the Consolidated Statements of Cash Flows:

		Fair Value Assets (Liabilities) (a)
	Location on Balance Sheet	2022	2021
Derivatives designated as cash flow hedges:
Foreign currency exchange contracts	Other current assets	$25	$721
	Other assets	1,303	86
	Other current liabilities	(5,457)	(2,061)
	Other non-current liabilities	(410)	(694)
Foreign currency option contracts	Other current assets	66	—
	Other assets	2,131	228
	Other current liabilities	(347)	—
	Other non-current liabilities	(1,281)	(270)
Interest rate swaps	Other assets	60,843	—
	Other non-current liabilities	(51)	(15,582)
Forward-starting interest rate swaps	Other assets	11,939	11,482
Total derivative contracts:
Other current assets		$91	$721
Other assets		76,216	11,796
Total derivative assets		$76,307	$12,517
Other current liabilities		(5,804)	(2,061)
Other non-current liabilities		(1,742)	(16,546)
Total derivative liabilities		($7,546)	($18,607)

(a)See Note 9 — Fair Value Measurements for further information on the fair value of our derivatives including their classification within the fair value hierarchy.

OFFSETTING DERIVATIVES

Derivative financial instruments are presented at their gross fair values in the Consolidated Balance Sheets. Our derivative financial instruments are not subject to master netting arrangements, which would allow the right of offset.