Derivative Financial Instruments

6 Months Ended

Jun. 30, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS

The Company is exposed to market risks such as fluctuations in foreign currency exchange rates, interest rates, and aluminum and other commodity prices. Derivatives may be used to offset some of the effects of these market risks on the expected future cash flows and on certain existing assets and liabilities. In certain cases, the Company may or may not designate certain derivative instruments as hedges for accounting purposes. The Company may choose not to hedge certain exposures for a variety of reasons including, but not limited to, accounting considerations and the prohibitive economic cost of hedging particular exposures.

Market Risks

Foreign Currency Exchange Rate Risk

The Company has manufacturing locations primarily in Mexico and Poland, and sells its products globally. As a result, the Company’s financial results could be significantly affected by foreign currency exchange rates. To help mitigate gross margin and cash flow fluctuations due to changes in foreign currency exchange rates, certain subsidiaries in Mexico and Poland, whose functional currency is the U.S. dollar or the Euro, hedge a portion of their forecasted foreign currency costs denominated in the Mexican Peso and Polish Zloty. The Company may hedge portions of its forecasted foreign currency exposure up to 48 months.

Interest Rate Risk

The Company has borrowings under its Senior Secured Credit Facilities that are at variable rates of interest and expose it to interest rate risk. If interest rates increase, debt service obligations on the variable rate indebtedness will increase even though the amount borrowed remains the same. The Company has entered into interest rate swaps exchanging floating for fixed rate interest payments in order to reduce its interest rate volatility.

Commodity Price Risk

The principal raw material used in manufacturing aluminum wheels is aluminum alloys. While wheel prices under OEM customer contracts are adjusted for fluctuations in the cost of this material, the prices of our aftermarket wheels are generally fixed months in advance of the spring and winter sales seasons. Accordingly, the Company hedges a portion of its aftermarket aluminum purchases to offset the effect of fluctuating aluminum cost on its margins. In addition, the manufacture of aluminum wheels is energy intensive, so the Company fixes a portion of its natural gas and electricity purchases with derivatives or contractual arrangements with energy suppliers.

Derivative Financial Instruments

The Company has derivatives designated as cash flow hedges that hedge the exposure to variability in expected future cash flows. These derivatives are accounted for as either assets or liabilities and adjusted to fair value each period with the resulting gain or loss recognized in other comprehensive income or loss ("OCI" or "OCL") until the underlying hedged transaction is recognized in earnings. Once the hedged transaction is recognized in earnings for foreign exchange and commodity derivatives, the gain or loss initially recorded in accumulated OCI or OCL is recognized in cost of sales, while gains or losses on interest rate swaps are recognized in interest expense, net. Derivatives that have not been designated as hedges are adjusted to fair value each period and any gain or loss is recognized in other income (expense), net.

The following tables display the fair value of derivatives by financial statement line item as of June 30, 2024 and December 31, 2023:


	June 30, 2024
	Current Derivative Financial Instruments		Derivative Financial Instruments		Accrued Liabilities		Other Noncurrent Liabilities
Derivatives designated as hedging instruments:
Foreign exchange contracts	$	26,422	$	27,418	$	382	$	10
Commodity contracts		533		46		2,037		1,085
Interest rate contracts		3,306		811		—		—
Derivatives not designated as hedging instruments:
Foreign exchange contracts		—		—		1,966		—
Total derivative financial instruments	$	30,261	$	28,275	$	4,385	$	1,095


	December 31, 2023
	Current Derivative Financial Instruments		Derivative Financial Instruments		Accrued Liabilities		Other Noncurrent Liabilities
Derivatives designated as hedging instruments:
Foreign exchange contracts	$	33,075	$	39,902	$	440	$	596
Commodity contracts		549		115		2,394		729
Interest rate contracts		3,162		454		—		—
Derivatives not designated as hedging instruments:
Foreign exchange contracts		1,512		—		677		—
Total derivative financial instruments	$	38,298	$	40,471	$	3,511	$	1,325

The following table summarizes the notional amount of the Company's derivative financial instruments as of June 30, 2024 and December 31, 2023:


	Notional Amount
	June 30, 2024		December 31, 2023
Derivatives designated as hedging instruments:
Foreign exchange contracts	$	377,035	$	432,529
Commodity contracts		16,601		27,013
Interest rate contracts		200,000		200,000
Derivatives not designated as hedging instruments:
Foreign exchange contracts		49,079		34,764
Total derivative financial instruments	$	642,715	$	694,306

Notional amounts are presented on a net basis. The notional amounts of the derivative financial instruments do not represent amounts exchanged by the parties and, therefore, are not a direct measure of the exposure to the financial risks described above. The amounts exchanged are calculated by reference to the notional amounts and by other terms of the derivatives, such as interest rates, foreign currency exchange rates or commodity prices.

The following table summarizes the gain or loss recognized in OCI or OCL, the amounts reclassified from accumulated OCI or OCL into earnings, and the amounts recognized directly into earnings for the three and six months ended June 30, 2024 and June 30, 2023:


	Three Months Ended					Six Months Ended
	June 30, 2024			June 30, 2023		June 30, 2024			June 30, 2023
Derivatives designated as hedging instruments:
Amount of gain or (loss) recognized in OCI on derivatives, net of tax	$	(15,976	)	$	30,344	$	(13,282	)	$	48,464
Amount of pre-tax gain or (loss) reclassified from accumulated OCI into:
Cost of sales		8,785			4,946		16,815			7,978
Interest expense, net		1,140			1,204		2,287			2,100
Derivatives not designated as hedging instruments:
Amount of pre-tax gain or (loss) recognized in other income (expense), net		(2,049	)		1,398		(1,824	)		3,993