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Derivatives | 9 Months Ended
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Sep. 30, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Derivatives | Derivatives In the normal course of business, the Company is exposed to foreign currency exchange rate risk and interest rate risk on its variable-rate debt. To manage these risks, the Company utilizes a variety of practices including, where considered appropriate, derivative instruments. The Company has no derivative instruments for trading or speculative purposes or derivatives with credit risk-related contingent features. All derivative instruments used by the Company are either exchange traded or are entered into with major financial institutions in order to reduce credit risk and risk of nonperformance by third parties. The fair values of the Company’s derivative instruments are determined using observable inputs and are considered Level 2 assets or liabilities. The Company utilizes currency forward, swap and, to a lesser extent, option contracts to selectively hedge its exposure to foreign currency risk when it is practical and economical to do so. The use of these contracts minimizes transactional exposure to exchange rate changes. We designate certain of our foreign currency hedges as cash flow hedges. Changes in the fair value of cash flow hedges are reported as a component of Accumulated other comprehensive loss and reclassified into earnings when the forecasted transaction affects earnings. For foreign exchange contracts not designated as cash flow hedges, changes in the contracts’ fair values are recorded to net income each period. The Company selectively hedges its exposure to interest rate increases on variable-rate, long-term debt when it is practical and economical to do so. Changes in the fair value of interest rate contracts considered cash flow hedges are reported as a component of Accumulated other comprehensive loss and reclassified into earnings when the forecasted transaction affects earnings. The Company also uses cross currency swap contracts to selectively hedge its exposure to foreign currency related changes in our net investments in certain foreign operations. We designate these cross currency swap contracts as net investment hedges. Changes in the fair value of these hedges are deferred within the foreign currency translation component of Accumulated other comprehensive income and reclassified into earnings when the foreign investment is sold or substantially liquidated. On January 20, 2017, the Company entered into an interest rate swap transaction with a major financial institution for a three year term on a notional amount of $315 million. The interest rate swap is intended to manage the Company's interest rate risk by fixing the interest rate on a portion of the Company's debt currently outstanding under its credit facility that was previously subject to a floating interest rate equal to 1-month LIBOR plus a credit spread. The swap provides for the Company to pay a fixed rate of 1.65% per annum in addition to the credit spread on such portion of its outstanding debt in exchange for receiving a variable interest rate based on 1-month LIBOR. On September 25, 2018, in conjunction with the debt refinancing discussed in Note 10. Debt, the Company settled a notional amount of $130 million which resulted in a gain of $1.8 million as of the settlement date. This gain was amortized on a ratable basis from Accumulated other comprehensive loss into income as interest expense over the remaining term of the interest rate swap. On September 11, 2019, the Company terminated this interest rate swap. Concurrently, on September 11, 2019, the Company entered into a pay-fixed, receive-variable interest rate swap with a maturity date of January 31, 2027. The instrument is a hedge on a portion of the Company’s debt facility through the existing credit agreement. Under the terms of the interest rate swap, SWM will pay a fixed amount of interest each period in an amount equal to 1.724% on a notional amount of $185 million and receive interest payments monthly in an amount equal to the One-Month USD-LIBOR rate on the notional amount. The notional amount will reduce throughout the term of the swap as follows: •September 13, 2019 - December 31, 2020 $185 million notional •December 31, 2020 - December 31, 2021 $150 million notional •December 31, 2021 - January 31, 2027 $100 million notional As with the previous interest rate swap, the terms of the swap mirror the terms of the underlying debt, including timing of the payments and interest rates. On January 20, 2017, the Company entered into a three year cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $100 million swapped to €93.7 million at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of 1.65% per annum and pay to our swap counterparty Euro interest at a fixed rate of -0.18% per annum. On September 11, 2019, SWM entered into an offsetting swap with a major financial institution whose terms perfectly mirrored the January 20, 2017 swap and which economically offset the previous cross-currency swap. At the maturity date of the new swap and the previous swap, January 20, 2020, there was no cash impact to the Company to settle these instruments as they perfectly offset each other. On October 24, 2018, the Company entered into a three year cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $75 million swapped to €65.4 million at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of 6.875% per annum and pay to our swap counterparty Euro interest at a fixed rate of 3.6725% per annum. The cross-currency swap will mature on October 1, 2021. On January 29, 2019, the Company entered into a cross-currency swap with a major financial institution designated as a hedge of a portion of the Company's net investment in certain Euro-denominated subsidiaries. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $75 million swapped to €66.0 million at maturity. The Company will receive from our swap counterparty U.S. dollar interest at a fixed rate of 6.875% per annum and pay to our swap counterparty Euro interest at a fixed rate of 4.0525% per annum. The cross-currency swap will mature on October 1, 2021. On September 11, 2019, the Company entered into a new pay-EUR, receive-USD cross-currency swap arrangement with a major financial institution having a maturity date of April 1, 2023. The terms of the cross-currency swap provide for an exchange of principal on a notional amount of $100 million swapped to €90.9 million at maturity. Under the terms of the new cross-currency swap, SWM will pay a fixed amount of Euro-denominated interest at a rate of 5.638% semiannually and receive USD denominated payments at a rate of 6.875% semiannually on the notional amount of the swap. The following table presents the fair value of asset and liability derivatives and the respective condensed consolidated balance sheet locations at September 30, 2020 ($ in millions):
| Asset Derivatives |  | Liability Derivatives
| Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Derivatives designated as hedges: |  |  |  |  |  |  |
Foreign exchange contracts | Accounts receivable, net |  | $ | 2.6 |  |  | Accrued expenses and other current liabilities |  | $ | 3.7 |
Foreign exchange contracts | Other assets |  | — |  |  | Other liabilities |  | 8.6 |
Interest rate contracts | Accounts receivable, net |  | 0.6 |  |  | Other liabilities |  | 8.9 |
Total derivatives designated as hedges |  |  | 3.2 |  |  |  |  | 21.2 |
Derivatives not designated as hedges: |  |  |  |  |  |  |
Foreign exchange contracts | Accounts receivable, net |  | — |  |  | Accrued expenses and other current liabilities |  | 0.1 |
Total derivatives not designated as hedges |  |  | — |  |  |  |  | 0.1 |
Total derivatives |  |  | $ | 3.2 |  |  |  |  | $ | 21.3 |
The following table presents the fair value of asset and liability derivatives and the respective condensed consolidated balance sheet locations at December 31, 2019 ($ in millions):
| Asset Derivatives |  | Liability Derivatives
| Balance Sheet Location |  | Fair Value |  | Balance Sheet Location |  | Fair Value
Derivatives designated as hedges: |  |  |  |  |  |  |
Foreign exchange contracts | Accounts receivable, net |  | $ | 4.8 |  |  | Accrued expenses |  | $ | 5.6 |
Foreign exchange contracts | Other assets |  | 6.3 |  |  | Other liabilities |  | 5.5 |
Interest rate contracts | Accounts receivable, net |  | — |  |  | Accrued expenses |  | 0.2 |
Interest rate contracts | Other assets |  | — |  |  | Other liabilities |  | — |
Total derivatives designated as hedges |  |  | $ | 11.1 |  |  |  |  | $ | 11.3 |
Derivatives not designated as hedges: |  |  |  |  |  |  |
Foreign exchange contracts | Accounts receivable, net |  | 0.1 |  |  | Accounts payable |  | — |
Total derivatives not designated as hedges |  |  | $ | 0.1 |  |  |  |  | $ | — |
Total derivatives |  |  | $ | 11.2 |  |  |  |  | $ | 11.3 |
The following table provides the gross effect that derivative instruments designated in hedging relationships had on Accumulated other comprehensive loss and results of operations ($ in millions):
Derivatives Designated in Hedging Relationships |  | Unrealized (Loss) Gain Recognized in AOCI on Derivatives, Net of Tax |  | Location of (Loss) Gain Reclassified from AOCI |  | (Loss) Gain Reclassified from AOCI
|  | Three Months Ended |  | Nine Months Ended |  |  |  | Three Months Ended |  | Nine Months Ended
|  | September 30, |  | September 30, |  |  |  | September 30, |  | September 30,
|  | 2020 |  | 2019 |  | 2020 |  | 2019 |  |  |  | 2020 |  | 2019 |  | 2020 |  | 2019
Derivatives designated as cash flow hedge |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | $ | (0.3) |  |  | $ | (1.3) |  |  | $ | (6.1) |  |  | $ | (1.5) |  |  | Net sales |  | $ | (0.9) |  |  | $ | (0.3) |  |  | $ | (2.5) |  |  | $ | (0.9) |
Foreign exchange contracts |  | — |  |  | — |  |  | 1.4 |  |  | 0.1 |  |  | Other income (expense), net |  | 0.1 |  |  | (0.4) |  |  | 1.1 |  |  | (0.3) |
Interest rate contracts |  | 0.2 |  |  | 0.1 |  |  | (8.8) |  |  | 1.5 |  |  | Interest expense |  | — |  |  | 2.5 |  |  | — |  |  | 5.7 |
Derivatives designated as net investment hedge |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Foreign exchange contracts |  | (10.0) |  |  | — |  |  | (3.4) |  |  | — |  |  | Other income (expense), net |  | — |  |  | — |  |  | — |  |  | — |
Total |  | $ | (10.1) |  |  | $ | (1.2) |  |  | $ | (16.9) |  |  | $ | 0.1 |  |  |  |  | $ | (0.8) |  |  | $ | 1.8 |  |  | $ | (1.4) |  |  | $ | 4.5 |
The Company's designated derivative instruments are highly effective. As such, related to the hedge ineffectiveness or amounts excluded from hedge effectiveness testing, there were no gains or losses recognized immediately in income for the three and nine months ended September 30, 2020 or 2019, other than those related to the cross-currency swap, noted below. The Company’s cross currency swaps were designated with terms based on the spot rate of the EUR. Future changes in the components related to the spot change on the notional will be recorded in OCI and remain there until the hedged subsidiaries are substantially liquidated. All coupon payments are recorded in earnings and the initial value of excluded components currently recorded in Accumulated other comprehensive loss as an unrealized translation adjustment are amortized to interest expense over the remaining term of the swap. For the three months ended September 30, 2020 and 2019, respectively, $0.0 million and $0.2 million was reclassified from Accumulated other comprehensive loss into income as interest expense and $1.4 million and $0.3 million was recognized in income as derivative amounts excluded from effectiveness testing as Interest expense. For the nine months ended September 30, and 2019, respectively, $0.0 million and $0.6 million was reclassified from Accumulated other comprehensive loss into income as interest expense and $4.9 million and $1.2 million was recognized in income as derivative amounts excluded from effectiveness testing as Interest expense. The following table provides the effect that derivative instruments not designated as cash flow hedging instruments had on net income ($ in millions):
Derivatives Not Designated as Cash Flow Hedging Instruments |  | Location of Gain Recognized in Income |  | Amount of Gain Recognized in Income
|  |  |  | Three Months Ended |  | Nine Months Ended
|  |  |  | September 30, 2020 |  | September 30, 2019 |  | September 30, 2020 |  | September 30, 2019
Foreign exchange contracts |  | Other income, net |  | $ | (0.6) |  |  | $ | (0.1) |  |  | $ | (0.1) |  |  | $ | (0.1) |

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- Definition The entire disclosure for derivative instruments and hedging activities including, but not limited to, risk management strategies, non-hedging derivative instruments, assets, liabilities, revenue and expenses, and methodologies and assumptions used in determining the amounts. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 815 -URI http://asc.fasb.org/topic&trid=2229140 + Details
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