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Financial Instruments, Hedging Activities and Fair Value Measurements

6 Months Ended

Jun. 30, 2021

Financial Instruments, Hedging Activities and Fair Value Measurements

FINANCIAL INSTRUMENTS, HEDGING ACTIVITIES AND FAIR VALUE MEASUREMENTS

Fair value of financial instruments

Equity securities with readily determinable fair values - Balances of equity securities are recorded within other assets, with any changes in fair value recorded within other income, net. The fair values of equity securities are based upon quoted market prices, which are considered Level 1 inputs.

Long-term borrowings - The estimated fair values of these borrowings are based on recent trades, as reported by a third-party pricing service. Due to the infrequency of trades, these inputs are considered to be Level 2 inputs.

Derivative instruments - The Company’s interest rate caps, interest rate swaps, cross-currency swaps, and foreign currency forward contracts are valued using broker quotations, or market transactions in either the listed or over-the-counter markets. As such, these derivative instruments are included in the Level 2 hierarchy.

Fair value of contingent consideration

The fair value of contingent consideration associated with an acquisition completed in the current year is valued at each balance sheet date, until amounts become payable, with adjustments recorded within other operating (benefits) charges in the condensed consolidated statements of operations. During the six months ended June 30, 2021, in conjunction with the acquisition described in Note 3, we recorded fair value of contingent consideration of $7.3 million. The contingent consideration was valued using a probability-weighted expected payment method. The analysis considered the timing of expected future cash flows and the probability of key elements of the approval process are completed. Due to the significant unobservable inputs used in the valuations, these liabilities are categorized within Level 3 of the fair value hierarchy.

The table below presents the fair values of our financial instruments measured on a recurring basis by level within the fair value hierarchy at June 30, 2021 and December 31, 2020.


	June 30, 2021								December 31, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Prepaid expenses and other current assets:

Cross-currency swaps (2)	$	—	$	17.1	$	—	$	17.1	$	—	$	16.7	$	—	$	16.7

Other assets:



Investments in equity securities	0.7		—		—		0.7		0.8		—		—		0.8
Liabilities:
Other accrued liabilities:
Interest rate caps (1)	—		1.0		—		1.0		—		2.0		—		2.0
Interest rate swaps (1)	—		29.2		—		29.2		—		28.9		—		28.9

Contingent consideration	—		—		4.4		4.4		—		—		—		—
Other liabilities:

Interest rate swaps (1)	—		16.0		—		16.0		—		31.1		—		31.1
Cross-currency swaps (2)	—		31.9		—		31.9		—		52.0		—		52.0
Contingent consideration	—		—		2.9		2.9		—		—		—		—
Long-term borrowings:
2024 Dollar Term Loans	—		2,045.0		—		2,045.0		—		2,043.0		—		2,043.0
2025 Euro Senior Notes	—		546.2		—		546.2		—		564.3		—		564.3
2027 Dollar Senior Notes	—		524.6		—		524.6		—		533.1		—		533.1
2029 Dollar Senior Notes	—		685.0		—		685.0		—		704.6		—		704.6

(1) Cash flow hedge

(2) Net investment hedge

The table below presents a roll forward of activity for the Level 3 liabilities for the three and six months ended June 30, 2021.


	Fair Value Using Significant Unobservable Inputs (Level 3)
Beginning balance January 1, 2021	$	—
Activity	—




Ending balance at March 31, 2021	—
Business acquisition	7.3




Ending balance at June 30, 2021	$	7.3

Derivative Financial Instruments

We selectively use derivative instruments to reduce market risk associated with changes in foreign currency exchange rates and interest rates. The use of derivatives is intended for hedging purposes only, and we do not enter into derivative instruments for speculative purposes.

The following table presents the fair values of derivative instruments that qualify and have been designated as cash flow and net investment hedges included in accumulated other comprehensive loss ("AOCI"):


	June 30, 2021		December 31, 2020
AOCI:
Interest rate caps (cash flow hedges)	$	1.4	$	2.6
Interest rate swaps (cash flow hedges)	45.2		60.0
Foreign currency forward contracts (cash flow hedges)	0.2		0.3
Cross-currency swaps (net investment hedges)	14.8		35.2
Total AOCI	$	61.6	$	98.1

Gains and losses on the derivative representing hedge components excluded from the assessment of effectiveness are recognized over the life of the hedge on a systematic and rational basis.

The following tables set forth the locations and amounts recognized during the three and six months ended June 30, 2021 and 2020 for these cash flow and net investment hedges.


		For the Three Months Ended June 30,
		2021				2020
Derivatives in Cash Flow and Net Investment Hedges	Location of Loss (Gain) Recognized in Income on Derivatives	Net Amount of Loss (Gain) Recognized in OCI on Derivatives		Amount of Loss (Gain) Recognized in Income		Net Amount of Loss (Gain) Recognized in OCI on Derivatives		Amount of Loss (Gain) Recognized in Income
Interest rate caps	Interest expense, net	$	—	$	0.6	$	—	$	0.6
Interest rate swaps	Interest expense, net	0.9		7.2		6.1		2.9
Foreign currency forward contracts (1)	Cost of goods sold	0.1		0.1		—		—
Cross-currency swaps	Interest expense, net	(0.3)		(4.7)		3.1		(3.7)

(1) Activity during the three months ended June 30, 2020 rounds to zero


		For the Six Months Ended June 30,
		2021				2020
Derivatives in Cash Flow and Net Investment Hedges	Location of Loss (Gain) Recognized in Income on Derivatives	Net Amount of (Gain) Recognized in OCI on Derivatives		Amount of Loss (Gain) Recognized in Income		Net Amount of Loss (Gain) Recognized in OCI on Derivatives		Amount of Loss (Gain) Recognized in Income
Interest rate caps	Interest expense, net	$	—	$	1.2	$	1.1	$	0.9
Interest rate swaps	Interest expense, net	(0.6)		14.2		47.6		4.5
Foreign currency forward contracts (1)	Cost of goods sold	—		0.1		—		—
Cross-currency swaps	Interest expense, net	(29.9)		(9.5)		(19.4)		(7.4)

(1) Activity during the six months ended June 30, 2020 rounds to zero

Over the next 12 months, we expect losses of $30.7 million pertaining to cash flow hedges to be reclassified from AOCI into earnings, related to our interest rate caps, interest rate swaps, and foreign currency forward contracts.

Derivative Instruments Not Designated as Cash Flow Hedges

We periodically enter into foreign currency forward and option contracts to reduce market risk and hedge our balance sheet exposures and cash flows for subsidiaries with exposures denominated in currencies different from the functional currency of the relevant subsidiary. These contracts have not been designated as hedges and all gains and losses are marked to market through other income, net in the condensed consolidated statements of operations.

Fair value gains and losses of derivative contracts, as determined using Level 2 inputs, that have not been designated for hedge accounting treatment are recorded in earnings as follows:


Derivatives Not Designated as Hedging Instruments under ASC 815	Location of Gain (Loss) Recognized in Income (Loss) on Derivatives	Three Months Ended June 30,				Six Months Ended June 30,
		2021		2020		2021		2020

Foreign currency forward contracts	Other income, net	$	0.9	$	0.8	$	(5.9)	$	(0.9)

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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