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Fair Value Measurements and Derivative Instruments | 9 Months Ended
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Sep. 30, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
Fair Value Measurements and Derivative Instruments | Fair Value Measurements and Derivative Instruments In the normal course of business, we are exposed to certain risks related to fluctuations in currency exchange rates, commodity prices and interest rates. We use various derivative financial instruments, primarily foreign currency derivatives, commodity derivative contracts, and interest rate swaps as part of our overall strategy to manage risks from these market fluctuations. Certain of our derivative contracts contain provisions that require us to provide collateral. Since the counterparties to these financial instruments are large commercial banks and similar financial institutions, we do not believe that we are exposed to material counterparty credit risk. We do not anticipate nonperformance by any of the counterparties to our instruments. Foreign currency derivatives We enter into foreign currency derivatives from time to time to attempt to manage exposure to changes in currency exchange rates. These foreign currency instruments, which include, but are not limited to, forward exchange contracts and purchased currency options, are used to hedge global currency exposures such as foreign currency denominated debt, receivables, payables, sales and purchases. Foreign currency forward and swap contracts are used to mitigate the foreign exchange risk of balance sheet items. These derivatives are fair value hedges. Gains and losses from these derivatives are recorded in cost of goods sold and they are largely offset by the financial impact of translating foreign currency-denominated payables and receivables. In the first quarter of 2022 and in the second and third quarters of 2023, we entered into foreign currency derivatives with maturities of one month to 12 months in order to protect against the risk that cash flows associated with certain sales and purchases denominated in a currency other than the U.S. dollar will be adversely affected by future changes in foreign exchange rates. These derivatives are designated as cash flow hedges. The resulting unrealized gains or losses from these derivatives are recorded in AOCI and subsequently, when realized, are reclassified to net sales or cost of goods sold in the Condensed Consolidated Statements of Operations when the hedged exposures affect earnings. Commodity derivative contracts From time to time, we enter into commodity derivative contracts for refined oil products. These contracts are entered into to protect against the risk that eventual cash flows related to these products will be adversely affected by future changes in prices. The unrealized gains or losses related to commodity derivative contracts designated as cash flow hedges are recorded in AOCI and subsequently, when realized, are reclassified to the Condensed Consolidated Statement of Operations when the hedged item impacts earnings, which is when the finished product is sold. The last of our commodity derivative contracts matured as of June 30, 2022 and we have not entered into any new contracts as of September 30, 2023. Interest rate swap contracts We have utilized interest rate swaps in the past to limit exposure to market fluctuations on our variable-rate debt. For each derivative agreement that is designated as a cash-flow hedge, the unrealized gain or loss is recorded in AOCI and, when realized, is recorded to interest expense. Upon discontinuance of a designated cash-flow hedging relationship, when interest payments are still probable of occurring, the fair value at the date of discontinuance is deferred into AOCI and amortized into interest expense based upon the term of the cash-flow hedging relationship. We entered into interest rate swap contracts that were "pay fixed, receive variable." Our risk management objective was to fix our cash flows associated with the risk of variability in the one-month USD LIBOR for a portion of our outstanding debt. It was expected that the swaps would fix the cash flows associated with the forecasted interest payments on our debt to an effective fixed interest rate of 4.2%, which could be lowered to 3.95% depending on credit ratings. Since their modification concurrent with the 2018 Term Loan Facility modification in the first quarter of 2021, the swaps contained an other-than-insignificant financing element. As such, they were considered hybrid instruments composed of a debt host and an embedded derivative and the associated cash (outflows)/inflows are classified as financing (use)/source of cash. The embedded derivative is treated as a cash-flow hedge. In the first quarter of 2022, in connection with the partial repayment of principal on our 2018 Term Loan Facility and our probability assessment of the variable-rate debt remaining outstanding through the term of the swaps, we de-designated one interest rate swap contract with a $250.0 million notional amount, maturing in the third quarter of 2024. The fair value of the embedded derivative at the de-designation date was a gain of $6.6 million and was recorded in AOCI and is being amortized into interest expense over the remaining life of the swap. In the third quarter of 2022, we redeemed $67.0 million of our $250.0 million notional amount de-designated interest rate swap. The change in fair value of the de-designated embedded derivative in the first nine months of 2023 resulted in a loss of $7.1 million, compared to a gain of $7.0 million in the first nine months of 2022, recorded in interest expense in the Condensed Consolidated Statements of Operations. In the second quarter of 2023, in connection with the repayment of the $433.7 million outstanding balance on our 2018 Term Loan Facility, we terminated our $183.0 million notional de-designated interest rate swap and our $250.0 million notional designated interest rate swap and received net cash of $20.4 million. The net cash received included a $23.1 million gain on the embedded derivatives, partially offset by a $2.8 million loss on the settlement of our debt host liability as of the termination date. As of December 31, 2022, the debt host liability was $3.8 million, with $2.3 million included in "Other accrued liabilities" and $1.5 million included in "Other long-term obligations" on the Condensed Consolidated Balance Sheets. As of September 30, 2023, a cumulative loss of $2.5 million related to the debt host liability was recorded in AOCI and will be amortized into interest expense using the effective interest method through August 2024. Out of the $23.1 million gain on the embedded derivatives, $6.9 million for the de-designated swap was recorded in interest expense and $16.2 million for the designated swap was recorded in AOCI and will be amortized into interest expense using the effective interest method through August 2024. All derivatives are recorded on the balance sheet at fair value. If the derivative is designated and effective as a cash flow hedge, changes in the fair value of the derivative are recognized in AOCI until the hedged item is recognized in earnings. The ineffective portion of a derivative's fair value, if any, is recognized in earnings immediately. If a derivative is not a hedge, changes in the fair value are adjusted through earnings. The fair values of the outstanding derivatives are recorded on the balance sheet as assets (if the derivatives are in a gain position) or liabilities (if the derivatives are in a loss position). The fair values will also be classified as short-term or long-term depending upon their maturity dates. The fair value of all of our derivatives was determined using Level 2 inputs. The notional amounts of our outstanding derivative instruments as of September 30, 2023 and December 31, 2022 were as follows:
| September 30, 2023 |  | December 31, 2022
| Notional Amount |  | Notional Amount
| (Dollars in thousands)
Derivative instruments designated as hedges: |  |  |
Foreign currency derivatives | $ | 21,264 |  |  | $ | — |
Interest rate swap contracts | — |  |  | 250,000 |
Derivative instruments not designated as hedges: |  |  |
Foreign currency derivatives | $ | 40,049 |  |  | $ | 70,420 |
Interest rate swap contracts | — |  |  | 183,000 |
The following table summarizes the fair value of our outstanding derivatives designated as hedges (on a gross basis) and balance sheet classification as of September 30, 2023 and December 31, 2022:
| September 30, 2023 |  | December 31, 2022
| Fair Value |  | Fair Value
| (Dollars in thousands)
Prepaid and other current assets |  |  |
Interest rate swap contracts | $ | — |  |  | $ | 10,246 |
Total | $ | — |  |  | $ | 10,246 |
Other assets |  |  |
Interest rate swap contracts | $ | — |  |  | $ | 5,575 |
Total | $ | — |  |  | $ | 5,575 |
Other accrued liabilities |  |  |
Foreign currency derivatives | $ | (565) |  |  | $ | — |
Net (liability) asset | $ | (565) |  |  | $ | 15,821 |
As a result of the settlement of commodity derivative contracts and interest rate swaps, as of September 30, 2023, net realized pre-tax gains of $6.0 million and $12.6 million, respectively, were reported in AOCI and will be released to earnings within the next 12 months. As of September 30, 2023, net realized pre-tax gains of $0.1 million related to our foreign currency derivatives were reported in AOCI and will be released to earnings within the next 12 months. No ineffectiveness expense was recorded in the third quarter of 2023 or 2022 or in first nine months of 2023. In the first nine months of 2022, we recorded $0.8 million of ineffectiveness income to cost of goods sold in the Condensed Consolidated Statements of Operations related to the settlement of commodity derivative contracts. See the table below for amounts recognized on the effective portion of our commodity derivative contracts in the Condensed Consolidated Statement of Operations. The pre-tax realized (gains) losses on designated cash flow hedges are recognized in the Statements of Operations when the hedged item impacts earnings and were as follows for the periods ended September 30, 2023 and 2022:
|  |  |  | Amount of (Gain)/Loss Recognized
|  | Location of Realized (Gain)/Loss Recognized in the Condensed Consolidated Statement of Operations |  | Three Months Ended September 30,
|  |  | 2023 |  | 2022
Derivatives designated as cash flow hedges: |  |  |  | (Dollars in thousands)
Foreign currency derivatives |  | Cost of goods sold |  | $ | 3,501 |  |  | $ | 762 |
Commodity derivative contracts |  | Cost of goods sold |  | (4,234) |  |  | (5,018) |
Interest rate swap contracts |  | Interest expense |  | (2,700) |  |  | (991) |
|  |  |  | Amount of (Gain)/Loss Recognized
|  | Location of Realized (Gain)/Loss Recognized in the Condensed Consolidated Statement of Operations |  | Nine Months Ended September 30,
|  |  | 2023 |  | 2022
Derivatives designated as cash flow hedges: |  |  |  | (Dollars in thousands)
Foreign currency derivatives |  | Cost of goods sold |  | $ | 5,541 |  |  | $ | 762 |
Commodity derivative contracts |  | Cost of goods sold |  | (11,521) |  |  | (10,973) |
Interest rate swap contracts |  | Interest expense |  | (7,882) |  |  | (532) |
Pretax gains and losses on non-designated derivatives recognized in earnings were as follows:
|  |  |  | Amount of (Gain)/Loss Recognized
|  | Location of (Gain)/Loss Recognized in the Condensed Consolidated Statement of Operations |  | Three Months Ended September 30,
|  |  | 2023 |  | 2022
Derivatives not designated as hedges: |  |  |  | (Dollars in thousands)
Foreign currency derivatives |  | Cost of goods sold, other expense (income), net |  | $ | 180 |  |  | $ | (144) |
Interest rate swap contracts |  | Interest expense |  | — |  |  | (249) |
|  |  |  | Amount of (Gain)/Loss Recognized
|  | Location of (Gain)/Loss Recognized in the Condensed Consolidated Statement of Operations |  | Nine Months Ended September 30,
|  |  | 2023 |  | 2022
Derivatives not designated as hedges: |  |  |  | (Dollars in thousands)
Foreign currency derivatives |  | Cost of goods sold, other expense (income), net |  | $ | 500 |  |  | $ | 299 |
Interest rate swap contracts |  | Interest expense |  | (2,957) |  |  | (6,964) |
The following table summarizes the fair value of our outstanding derivatives not designated as hedges (on a gross basis) and balance sheet classification as of September 30, 2023 and December 31, 2022:
| September 30, 2023 |  | December 31, 2022
| Fair Value |  | Fair Value
| (Dollars in thousands)
Prepaid and other current assets |  |  |
Interest rate swap contracts | $ | — |  |  | $ | 7,492 |
Foreign currency derivatives | 516 |  |  | 92 |
Other assets |  |  |
Interest rate swap contracts | — |  |  | 4,071 |
Other accrued liabilities |  |  |
Foreign currency derivatives | (84) |  |  | (282) |
Net asset | $ | 432 |  |  | $ | 11,373 |

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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://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 40 -Name Accounting Standards Codification -Section 50 -Paragraph 5 -Subparagraph (f) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480237/815-40-50-5 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Topic 815 -SubTopic 10 -Name Accounting Standards Codification -Section 50 -Paragraph 5C -Subparagraph (b) -Publisher FASB -URI https://asc.fasb.org//1943274/2147480434/815-10-50-5C Reference 3: http://fasb.org/us-gaap/role/ref/legacyRef -Topic 815 -Name Accounting Standards Codification -Publisher FASB -URI https://asc.fasb.org//815/tableOfContent + Details
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