Annual report pursuant to Section 13 and 15(d)

Derivative Instruments and Hedging Activities

v3.24.0.1
Derivative Instruments and Hedging Activities
 12 Months Ended
Dec. 31, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Derivative Instruments and Hedging Activities

11. Derivative Instruments and Hedging Activities

Interest Rate Risk Management

The Company engaged in an interest rate hedging strategy for which the hedged transactions were forecasted interest payments on the Company’s 2018 Credit Facility, which are based on variable rates.

During the first quarter of 2020, the Company entered into various interest rate swap agreements with effective dates ranging between February 2020 and March 2020. These agreements collectively provided for the Company to pay interest at a weighted-average fixed rate of 0.98% on aggregate notional amounts of $100.0 million under the 2018 Credit Facility until their respective expiration dates ranging between February 2022 and March 2023, while receiving interest based on LIBOR on the same notional amounts for the same periods. At inception, these swap agreements were designated as cash flow hedges against the variability in certain LIBOR-based borrowings under the 2018 Credit Facility, effectively fixing the interest rate on such notional amounts at a weighted-average effective rate of, depending on the Company’s total leverage ratio, between 2.73% and 3.23%. These hedge relationships qualified as effective under FASB ASC Topic 815, Derivatives and Hedging, or ASC 815, and consequently all changes in the fair value of these interest rate swaps were recorded as a component of accumulated other comprehensive loss within shareholders’ deficit, and were recognized in interest expense within the Company’s consolidated statement of income during the period when the hedged item and underlying transaction affected earnings. As of December 31, 2023 and December 31, 2022, the aggregate notional amounts of interest rate swap agreements outstanding were approximately zero and $25.0 million, respectively. The fair values of the interest rate swap agreements were based on third-party bank quotes, and as of December 31, 2022, the Company recorded assets at fair value of $0.3 million relating to these interest rate swap agreements.

Foreign Currency Instruments

The Company designates certain foreign currency derivatives, primarily comprised of foreign currency forward contracts and option contracts, as freestanding derivatives for which hedge accounting does not apply. The changes in the fair market value of these freestanding derivatives are included in selling, general, and administrative expenses within the Company’s consolidated statements of income. The Company primarily uses freestanding foreign currency derivatives to hedge foreign currency-denominated intercompany transactions and to partially mitigate the impact of foreign currency fluctuations. The fair value of the freestanding foreign currency derivatives is based on third-party quotes. The Company’s foreign currency derivative contracts are generally executed on a monthly basis.

The Company designates as cash flow hedges those foreign currency forward contracts it enters into to hedge forecasted inventory purchases and intercompany management fees that are subject to foreign currency exposures. Forward contracts are used to hedge forecasted inventory purchases over specific months. Changes in the fair value of these forward contracts designated as cash flow hedges, excluding forward points, are recorded as a component of accumulated other comprehensive loss within shareholders’ deficit, and are recognized in cost of sales within the Company’s consolidated statement of income during the period which approximates the time the hedged inventory is sold. The Company also hedges forecasted intercompany management fees over specific months. These contracts allow the Company to sell Euros in exchange for U.S. dollars at specified contract rates. Changes in the fair value of these forward contracts designated as cash flow hedges, excluding forward points, are recorded as a component of accumulated other comprehensive loss within shareholders’ deficit, and are recognized in selling, general, and administrative expenses within the Company’s consolidated statement of income during the period when the hedged item and underlying transaction affect earnings. The Company has elected to record changes in the fair value of amounts excluded from the assessment of effectiveness currently in earnings.

As of December 31, 2023 and 2022, the aggregate notional amounts of all foreign currency contracts outstanding designated as cash flow hedges were approximately $76.3 million and $70.6 million, respectively. As of December 31, 2023, these outstanding contracts were expected to mature over the next fifteen months. The Company’s derivative financial instruments are recorded on the consolidated balance sheets at fair value based on third-party quotes. As of December 31, 2023, the Company recorded assets at fair value of zero and liabilities at fair value of $3.3 million relating to all outstanding foreign currency contracts designated as cash flow hedges. As of December 31, 2022, the Company recorded assets at fair value of $1.5 million and liabilities at fair value of $3.2 million relating to all outstanding foreign currency contracts designated as cash flow hedges. The Company assesses hedge effectiveness at least quarterly and the hedges remained effective as of December 31, 2023 and 2022.

As of both December 31, 2023 and 2022, the majority of the Company’s outstanding foreign currency forward contracts had maturity dates of less than twelve months with the majority of freestanding derivatives expiring within one month.

The tables below provide information about the details of all foreign currency forward contracts that were outstanding as of December 31, 2023 and 2022:

 

 

 

Weighted-
Average
Contract Rate

 

 

Notional
Amount

 

 

Fair Value
Gain (Loss)

 

 

 

(in millions, except weighted-average contract rate)

 

As of December 31, 2023

 

 

 

 

 

 

 

 

 

Buy Chinese yuan sell U.S. dollar

 

 

7.13

 

 

$

21.8

 

 

$

—

 

Buy Danish krone sell U.S. dollar

 

 

6.79

 

 

 

0.9

 

 

 

—

 

Buy Euro sell Chilean peso

 

 

956.26

 

 

 

2.3

 

 

 

—

 

Buy Euro sell British pound

 

 

0.87

 

 

 

1.3

 

 

 

—

 

Buy Euro sell Hong Kong dollar

 

 

8.58

 

 

 

5.8

 

 

 

—

 

Buy Euro sell Indonesian rupiah

 

 

17,045.60

 

 

 

3.9

 

 

 

—

 

Buy Euro sell Kazakhstani tenge

 

 

508.75

 

 

 

8.9

 

 

 

—

 

Buy Euro sell Mexican peso

 

 

20.10

 

 

 

70.0

 

 

 

(2.9

)

Buy Euro sell Peruvian nuevo sol

 

 

4.06

 

 

 

1.1

 

 

 

—

 

Buy Euro sell Taiwan dollar

 

 

34.12

 

 

 

1.0

 

 

 

—

 

Buy Euro sell U.S. dollar

 

 

1.11

 

 

 

19.8

 

 

 

(0.1

)

Buy Euro sell Vietnamese dong

 

 

26,800.00

 

 

 

6.2

 

 

 

—

 

Buy Kazakhstani tenge sell U.S. dollar

 

 

457.70

 

 

 

9.6

 

 

 

—

 

Buy Korean won sell U.S. dollar

 

 

1,296.13

 

 

 

22.2

 

 

 

0.1

 

Buy Mexican peso sell U.S. dollar

 

 

17.18

 

 

 

12.5

 

 

 

0.1

 

Buy Norwegian krone sell U.S. dollar

 

 

10.30

 

 

 

1.8

 

 

 

—

 

Buy Polish zloty sell U.S. dollar

 

 

3.97

 

 

 

1.0

 

 

 

—

 

Buy Romanian leu sell U.S. dollar

 

 

4.54

 

 

 

1.3

 

 

 

—

 

Buy Swedish krona sell U.S. dollar

 

 

10.13

 

 

 

1.1

 

 

 

—

 

Buy Taiwan dollar sell U.S. dollar

 

 

31.05

 

 

 

8.7

 

 

 

0.2

 

Buy U.S. dollar sell Brazilian real

 

 

4.91

 

 

 

7.4

 

 

 

(0.1

)

Buy U.S. dollar sell Colombian peso

 

 

3,970.58

 

 

 

—

 

 

 

—

 

Buy U.S. dollar sell Euro

 

 

1.10

 

 

 

144.2

 

 

 

(1.0

)

Buy U.S. dollar sell British pound

 

 

1.27

 

 

 

1.3

 

 

 

—

 

Buy U.S. dollar sell Indian rupee

 

 

83.30

 

 

 

9.0

 

 

 

—

 

Buy U.S. dollar sell Japanese yen

 

 

143.00

 

 

 

2.6

 

 

 

—

 

Buy U.S. dollar sell Malaysian ringgit

 

 

4.64

 

 

 

7.4

 

 

 

(0.1

)

Buy U.S. dollar sell Mexican peso

 

 

17.18

 

 

 

6.6

 

 

 

(0.1

)

Buy U.S. dollar sell Philippine peso

 

 

55.70

 

 

 

3.6

 

 

 

—

 

Total forward contracts

 

 

 

 

$

383.3

 

 

$

(3.9

)

 

 

 

Weighted-
Average
Contract Rate

 

 

Notional
Amount

 

 

Fair Value
Gain (Loss)

 

 

 

(in millions, except weighted-average contract rate)

 

As of December 31, 2022

 

 

 

 

 

 

 

 

 

Buy British pound sell U.S. dollar

 

 

1.18

 

 

$

1.2

 

 

$

—

 

Buy Chinese yuan sell U.S. dollar

 

 

6.76

 

 

 

67.1

 

 

 

(0.7

)

Buy Danish krone sell U.S. dollar

 

 

7.18

 

 

 

0.8

 

 

 

—

 

Buy Euro sell Australian dollar

 

 

1.58

 

 

 

2.2

 

 

 

—

 

Buy Euro sell British pound

 

 

0.88

 

 

 

2.9

 

 

 

—

 

Buy Euro sell Canadian dollar

 

 

1.45

 

 

 

2.4

 

 

 

—

 

Buy Euro sell Chilean peso

 

 

923.81

 

 

 

5.0

 

 

 

—

 

Buy Euro sell Hong Kong dollar

 

 

8.30

 

 

 

4.1

 

 

 

—

 

Buy Euro sell Indonesian rupiah

 

 

16,539.00

 

 

 

14.8

 

 

 

0.1

 

Buy Euro sell Japanese yen

 

 

140.08

 

 

 

1.8

 

 

 

—

 

Buy Euro sell Kazakhstani tenge

 

 

505.00

 

 

 

1.9

 

 

 

—

 

Buy Euro sell Korean won

 

 

1,349.36

 

 

 

1.1

 

 

 

—

 

Buy Euro sell Malaysian ringgit

 

 

4.70

 

 

 

13.6

 

 

 

—

 

Buy Euro sell Mexican peso

 

 

21.95

 

 

 

58.1

 

 

 

(1.2

)

Buy Euro sell Peruvian nuevo sol

 

 

4.06

 

 

 

1.8

 

 

 

—

 

Buy Euro sell Philippine peso

 

 

58.83

 

 

 

1.8

 

 

 

—

 

Buy Euro sell Taiwan dollar

 

 

32.43

 

 

 

1.3

 

 

 

—

 

Buy Euro sell U.S. dollar

 

 

1.07

 

 

 

42.3

 

 

 

0.2

 

Buy Euro sell Vietnamese dong

 

 

25,485.00

 

 

 

6.9

 

 

 

—

 

Buy Indonesian rupiah sell U.S. dollar

 

 

15,782.00

 

 

 

6.3

 

 

 

0.1

 

Buy Mexican peso sell Euro

 

 

20.76

 

 

 

6.7

 

 

 

—

 

Buy Mexican peso sell U.S. dollar

 

 

19.77

 

 

 

24.8

 

 

 

0.2

 

Buy Norwegian krone sell U.S. dollar

 

 

10.25

 

 

 

1.9

 

 

 

0.1

 

Buy Polish zloty sell U.S. dollar

 

 

4.66

 

 

 

0.8

 

 

 

—

 

Buy Swedish krona sell U.S. dollar

 

 

10.62

 

 

 

1.1

 

 

 

—

 

Buy Taiwan dollar sell U.S. dollar

 

 

30.42

 

 

 

7.3

 

 

 

—

 

Buy U.S. dollar sell Brazilian real

 

 

5.38

 

 

 

2.5

 

 

 

—

 

Buy U.S. dollar sell Chinese yuan

 

 

6.86

 

 

 

50.8

 

 

 

(0.2

)

Buy U.S. dollar sell Colombian peso

 

 

4,784.57

 

 

 

1.7

 

 

 

—

 

Buy U.S. dollar sell Euro

 

 

1.07

 

 

 

196.4

 

 

 

(1.8

)

Buy U.S. dollar sell Indian rupee

 

 

82.58

 

 

 

2.9

 

 

 

—

 

Buy U.S. dollar sell Mexican peso

 

 

20.02

 

 

 

12.4

 

 

 

(0.1

)

Buy U.S. dollar sell Philippine peso

 

 

57.66

 

 

 

4.3

 

 

 

(0.1

)

Total forward contracts

 

 

 

 

$

551.0

 

 

$

(3.4

)

 

The following tables summarize the derivative activity during the years ended December 31, 2023, 2022, and 2021 relating to all the Company’s derivatives.

Gains and Losses on Derivative Instruments

The following table summarizes gains (losses) relating to derivative instruments recorded in other comprehensive loss during the years ended December 31, 2023, 2022, and 2021:

 

 

 

Amount of (Loss) Gain Recognized in
Other Comprehensive Income (Loss)

 

 

 

Year Ended December 31,

 

 

 

2023

 

 

2022

 

 

2021

 

 

 

(in millions)

 

Derivatives designated as hedging instruments:

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to inventory and intercompany management fee hedges

 

$

(7.7

)

 

$

(5.5

)

 

$

0.1

 

Interest rate swaps

 

 

—

 

 

 

0.5

 

 

 

—

 

 

As of December 31, 2023, the estimated amount of existing net losses related to cash flow hedges recorded in accumulated other comprehensive loss that are expected to be reclassified into earnings over the next twelve months was $2.0 million.

The effect of cash flow hedging relationships on the Company’s consolidated statements of income for the years ended December 31, 2023, 2022, and 2021 was as follows:

 

 

 

Location and Amount of (Loss) Gain
Recognized in Income on Cash Flow Hedging Relationships

 

 

 

Year Ended December 31,

 

 

 

2023

 

 

 

Cost of sales

 

 

Selling, general, and administrative expenses

 

 

Interest expense

 

 

 

(in millions)

 

Total amounts presented in the consolidated statements of income

 

$

1,191.0

 

 

$

1,866.0

 

 

$

165.9

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to inventory hedges:

 

 

 

 

 

 

 

 

 

Amount of loss reclassified from accumulated other comprehensive loss to income

 

 

(7.6

)

 

 

—

 

 

 

—

 

Amount of loss excluded from assessment of effectiveness recognized in income

 

 

(5.7

)

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to intercompany management fee hedges:

 

 

 

 

 

 

 

 

 

Amount of loss reclassified from accumulated other comprehensive loss to income

 

 

—

 

 

 

(0.8

)

 

 

—

 

Amount of gain excluded from assessment of effectiveness recognized in income

 

 

—

 

 

 

0.4

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps:

 

 

 

 

 

 

 

 

 

Amount of gain reclassified from accumulated other comprehensive loss to income

 

 

—

 

 

 

—

 

 

 

0.3

 

Amount of gain excluded from assessment of effectiveness recognized in income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

Location and Amount of (Loss) Gain
Recognized in Income on Cash Flow Hedging Relationships

 

 

 

Year Ended December 31,

 

 

 

2022

 

 

 

Cost of sales

 

 

Selling, general, and administrative expenses

 

 

Interest expense

 

 

 

(in millions)

 

Total amounts presented in the consolidated statements of income

 

$

1,173.6

 

 

$

1,810.4

 

 

$

139.3

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to inventory hedges:

 

 

 

 

 

 

 

 

 

Amount of loss reclassified from accumulated other comprehensive loss to income

 

 

(5.3

)

 

 

—

 

 

 

—

 

Amount of loss excluded from assessment of effectiveness recognized in income

 

 

(6.2

)

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to intercompany management fee hedges:

 

 

 

 

 

 

 

 

 

Amount of gain reclassified from accumulated other comprehensive loss to income

 

 

—

 

 

 

2.1

 

 

 

—

 

Amount of gain excluded from assessment of effectiveness recognized in income

 

 

—

 

 

 

0.4

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps:

 

 

 

 

 

 

 

 

 

Amount of gain reclassified from accumulated other comprehensive loss to income

 

 

—

 

 

 

—

 

 

 

0.2

 

Amount of gain excluded from assessment of effectiveness recognized in income

 

 

—

 

 

 

—

 

 

 

—

 

 

 

 

Location and Amount of (Loss) Gain
Recognized in Income on Cash Flow Hedging Relationships

 

 

 

Year Ended December 31,

 

 

 

2021

 

 

 

Cost of sales

 

 

Selling, general, and administrative expenses

 

 

Interest expense

 

 

 

(in millions)

 

Total amounts presented in the consolidated statements of income

 

$

1,239.3

 

 

$

2,012.1

 

 

$

153.1

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to inventory hedges:

 

 

 

 

 

 

 

 

 

Amount of loss reclassified from accumulated other comprehensive loss to income

 

 

(2.4

)

 

 

—

 

 

 

—

 

Amount of loss excluded from assessment of effectiveness recognized in income

 

 

(3.6

)

 

 

—

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts relating to intercompany management fee hedges:

 

 

 

 

 

 

 

 

 

Amount of loss reclassified from accumulated other comprehensive loss to income

 

 

—

 

 

 

(0.2

)

 

 

—

 

Amount of gain excluded from assessment of effectiveness recognized in income

 

 

—

 

 

 

0.1

 

 

 

—

 

 

 

 

 

 

 

 

 

 

 

Interest rate swaps:

 

 

 

 

 

 

 

 

 

Amount of loss reclassified from accumulated other comprehensive loss to income

 

 

—

 

 

 

—

 

 

 

(0.9

)

Amount of gain excluded from assessment of effectiveness recognized in income

 

 

—

 

 

 

—

 

 

 

—

 

 

The following table summarizes gains (losses) recorded to income relating to derivative instruments not designated as hedging instruments during the December 31, 2023, 2022, and 2021:

 

 

 

Amount of (Loss) Gain Recognized in Income

 

 

 

 

 

Year Ended December 31,

 

 

 

 

 

2023

 

 

2022

 

 

2021

 

 

Location of (Loss) Gain
Recognized in Income

 

 

(in millions)

 

 

 

Derivatives not designated as hedging instruments:

 

 

 

 

 

 

 

 

 

 

 

Foreign exchange currency contracts

 

$

(5.9

)

 

$

(6.5

)

 

$

5.9

 

 

Selling, general, and administrative expenses

 

The Company reports its derivatives at fair value as either assets or liabilities within its consolidated balance sheets. See Note 13, Fair Value Measurements, for information on derivative fair values and their consolidated balance sheet locations as of December 31, 2023 and 2022.