Quarterly report pursuant to Section 13 or 15(d)

Financial Instruments

v3.19.3
Financial Instruments
 9 Months Ended
Sep. 30, 2019
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
Financial Instruments
14. Financial Instruments:
The Company uses (1) interest rate related derivative instruments to manage its exposure to changes in interest rates on its variable-rate debt instruments, (2) commodity derivatives to manage its exposure to commodity price fluctuations, and (3) foreign currency related derivative instruments to manage its foreign currency exposure to its net investments in certain foreign operations. The Company does not speculate using derivative instruments.
By using derivative financial instruments to hedge exposures to changes in interest rates, commodity prices and foreign currency, the Company exposes itself to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the
derivative contract. When the fair value of a derivative contract is an asset, the counterparty owes the Company, which creates credit risk for the Company. When the fair value of a derivative contract is a liability, the Company owes the counterparty and therefore, the Company is not exposed to the counterparty’s credit risk in those circumstances. The Company minimizes counterparty credit risk in derivative instruments by entering into transactions with high quality counterparties. The derivative instruments entered into by the Company do not contain credit-risk-related contingent features.
Market risk is the adverse effect on the value of a derivative instrument that results from a change in interest rates, currency exchange rates or commodity prices. The market risk associated with the Company’s derivative instruments is managed by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
Use of Derivative Financial Instruments to Manage Commodity Price Risk. The Company is exposed to risks in energy costs due to fluctuations in energy prices, particularly natural gas. The Company has a hedging program in the United States which allows the Company to mitigate exposure to natural gas volatility with natural gas swap agreements. Fair value is determined based on estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices of comparable contracts. The respective current and non-current liabilities are recorded in accrued liabilities and other long-term liabilities and the respective current and non-current assets are recorded in prepaid and other current assets and other long-term assets, as applicable, in the Company’s consolidated balance sheet. As the derivatives are designated and qualify as cash flow hedges, the gains or losses on the natural gas swaps are recorded in stockholders’ equity as a component of other comprehensive income (loss) (“OCI”), net of tax. Reclassifications of the gains and losses on natural gas hedges into earnings are recorded in production costs and subsequently charged to cost of goods sold in the condensed consolidated statements of income in the period in which the associated inventory is sold. As of September 30, 2019, the Company’s natural gas swaps had a remaining notional quantity of 3.3 million MMBTU to mitigate commodity price volatility through December 2021.
Use of Derivative Financial Instruments to Manage Interest Rate Risk. The Company is exposed to fluctuations in interest rates on its senior secured credit facilities. Changes in interest rates will not affect the market value of such debt but will affect the Company’s interest payments over the term of the loans. Likewise, an increase in interest rates could have a material impact on the Company’s cash flow. The Company hedges the interest rate fluctuations on debt obligations through interest rate cap agreements. The Company records these agreements at fair value as assets or liabilities in its consolidated balance sheet. As the derivatives are designated and qualify as cash flow hedges, the gains or losses on the interest rate cap agreements are recorded in stockholders’ equity as a component of OCI, net of tax. Reclassifications of the gains and losses on the interest rate cap agreements into earnings are recorded as part of interest expense in the condensed consolidated statements of income as the Company makes its interest payments on the hedged portion of its senior secured credit facilities. Fair value is determined based on estimated amounts that would be received or paid to terminate the contracts at the reporting date based on quoted market prices.
In July 2016, the Company entered into interest rate cap agreements, paying a premium of $1,551 to mitigate interest rate volatility from July 2016 through July 2020 by employing varying cap rates, ranging from 1.50% to 3.00%, on $1,000,000 of notional variable-rate debt. The cap rate currently in effect at September 30, 2019 is 3.00%. In November 2018, the Company entered into additional interest rate cap agreements to mitigate interest rate volatility from July 2020 through July 2022, with a cap rate of 3.50% on $500,000 of notional variable-rate debt.
Use of Derivative Financial Instruments to Manage Foreign Currency Risk. The Company is exposed to risks related to its net investments in foreign operations due to fluctuations in foreign currency exchange rates, particularly between the United States dollar and the Euro. In February 2018, the Company entered into multiple cross-currency interest rate swap arrangements with an aggregate notional amount of €280,000 ($306,345 as of September 30, 2019) to hedge this exposure on the net investments of certain of its Euro-denominated subsidiaries. The Company records these swap agreements at fair value as assets or liabilities in its consolidated balance sheet. As the derivatives are designated and qualify as net investment hedges, changes in the fair value of the swaps attributable to changes in the spot exchange rates are recognized in cumulative translation adjustment (“CTA”) within OCI and are held there until the hedged net investments are sold or substantially liquidated. Upon such sale or liquidation, the amount recognized in CTA is reclassified to earnings and reported in the same line item as the gain or loss on the liquidation of the net investments. Changes in the fair value of the swaps attributable to the cross-currency basis spread are excluded from the assessment of hedge effectiveness and are recorded in current period earnings.
The fair values of derivative instruments held as of September 30, 2019 and December 31, 2018 are shown below:
 
Balance sheet location
 
September 30, 2019
 
December 31, 2018
Derivative assets:
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
Natural gas swaps
Prepaid and other current assets
 
$
—

 
$
21

Interest rate caps
Prepaid and other current assets
 
—

 
1,358

Interest rate caps
Other long-term assets
 
—

 
546

 
 
 
—

 
1,925

Derivatives designed as net investment hedges:
 
 
 
 
 
Cross-currency interest rate swaps
Prepaid and other current assets
 
7,517

 
5,499

Cross-currency interest rate swaps
Other long-term assets
 
32,608

 
13,344

 
 
 
40,125

 
18,843

Total derivative assets
 
 
$
40,125

 
$
20,768

 
 
 
 
 
 
Derivative liabilities:
 
 
 
 
 
Derivatives designated as cash flow hedges:
 
 
 
 
 
Natural gas swaps
Accrued liabilities
 
$
626

 
$
36

Natural gas swaps
Other long-term liabilities
 
302

 
148

Interest rate caps
Other long-term liabilities
 
3,202

 
1,842

Total derivative liabilities
 
 
$
4,130

 
$
2,026

 
 
 
 
 
 

The following tables show the effect of the Company’s derivative instruments designated as cash flow hedges on AOCI for the three and nine months ended September 30, 2019 and 2018:
 
 
 
 
Three months ended September 30,
 
 
 
 
2019
 
2018
 
 
Location of gain (loss) reclassified from AOCI into income
 
Amount of gain (loss) recognized in OCI on derivatives
 
Amount of gain (loss) reclassified from AOCI into income
 
Amount of gain (loss) recognized in OCI on derivatives
 
Amount of gain (loss) reclassified from AOCI into income
Interest rate caps
 
Interest (expense) income
 
$
(216
)
 
$
(157
)
 
$
(93
)
 
$
(71
)
Natural gas swaps
 
Cost of goods sold
 
(185
)
 
(291
)
 
(300
)
 
(30
)
 
 
 
 
$
(401
)
 
$
(448
)
 
$
(393
)
 
$
(101
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30,
 
 
 
 
2019
 
2018
 
 
Location of gain (loss) reclassified from AOCI into income
 
Amount of gain (loss) recognized in OCI on derivatives
 
Amount of gain (loss) reclassified from AOCI into income
 
Amount of gain (loss) recognized in OCI on derivatives
 
Amount of gain (loss) reclassified from AOCI into income
Interest rate caps
 
Interest (expense) income
 
$
(3,264
)
 
$
(449
)
 
$
(3,396
)
 
$
(164
)
Natural gas swaps
 
Cost of goods sold
 
(951
)
 
(187
)
 
(482
)
 
(101
)
 
 
 
 
$
(4,215
)
 
$
(636
)
 
$
(3,878
)
 
$
(265
)
 
 
 
 
 
 
 
 
 
 
 


The following tables show the effect of the Company’s cash flow hedge accounting on the condensed consolidated statements of income for the three and nine months ended September 30, 2019 and 2018:
 
 
Location and amount of gain (loss) recognized in income on cash flow hedging relationships
 
 
Three months ended September 30,
 
 
2019
 
2018
 
 
Cost of goods sold
 
Interest (expense) income
 
Cost of goods sold
 
Interest (expense) income
Total amounts of income and expense line items presented in the statement of income in which the effects of cash flow hedges are recorded
 
$
(310,904
)
 
$
(27,697
)
 
$
(319,703
)
 
$
(28,238
)
 
 
 
 
 
 
 
 
 
The effects of cash flow hedging:
 
 
 
 
 
 
 
 
Gain (loss) on cash flow hedging relationships:
 
 
 
 
 
 
 
 
Interest contracts:
 
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from AOCI into income
 
—

 
(157
)
 
—

 
(71
)
Commodity contracts:
 
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from AOCI into income
 
(291
)
 
—

 
(30
)
 
—

 
 
 
 
 
 
 
 
 
 
 
Location and amount of gain (loss) recognized in income on cash flow hedging relationships
 
 
Nine months ended September 30,
 
 
2019
 
2018
 
 
Cost of goods sold
 
Interest (expense) income
 
Cost of goods sold
 
Interest (expense) income
Total amounts of income and expense line items presented in the statement of income in which the effects of cash flow hedges are recorded
 
(905,395
)
 
(84,855
)
 
(934,088
)
 
(84,622
)
 
 
 
 
 
 
 
 
 
The effects of cash flow hedging:
 
 
 
 
 
 
 
 
Gain (loss) on cash flow hedging relationships:
 
 
 
 
 
 
 
 
Interest contracts:
 
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from AOCI into income
 
—

 
(449
)
 
—

 
(164
)
Commodity contracts:
 
 
 
 
 
 
 
 
Amount of gain (loss) reclassified from AOCI into income
 
(187
)
 
—

 
(101
)
 
—


The amount of unrealized losses in AOCI related to the Company’s cash flow hedges that is expected to be reclassified to the condensed consolidated statement of income over the next twelve months is $1,431 as of September 30, 2019.
The following tables show the effect of the Company’s net investment hedges on AOCI and the condensed consolidated statements of income for the three and nine months ended September 30, 2019 and 2018:
 
Amount of gain (loss) recognized in OCI on derivative
 
Location of gain (loss) reclassified from AOCI into income
 
Amount of gain (loss) reclassified from AOCI into income
 
Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)
 
Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)
 
Three months ended September 30,
 
 
Three months ended September 30,
 
 
Three months ended September 30,
 
2019
2018
 
 
2019
2018
 
 
2019
2018
Cross-currency interest rate swaps
$
15,342

$
1,138

 
Gain (loss) on sale of subsidiary
 
$
—

$
—

 
Interest (expense) income
 
$
2,395

$
2,271

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Amount of gain (loss) recognized in OCI on derivative
 
Location of gain (loss) reclassified from AOCI into income
 
Amount of gain (loss) reclassified from AOCI into income
 
Location of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)
 
Amount of gain (loss) recognized in income on derivative (amount excluded from effectiveness testing)
 
Nine months ended
September 30,
 
 
Nine months ended
September 30,
 
 
Nine months ended
September 30,
 
2019
2018
 
 
2019
2018
 
 
2019
2018
Cross-currency interest rate swaps
$
21,282

$
8,799

 
Gain (loss) on sale of subsidiary
 
$
—

$
—

 
Interest (expense) income
 
$
6,888

$
5,662