Financial Instruments and Risk Management | Financial Instruments and Risk Management In the ordinary course of business, the Company may enter into contractual arrangements (also referred to as derivatives) to reduce its exposure to foreign currency. The Company has master netting agreements with certain of its counterparties as set forth in detail below that allow for the settlement of contracts in an asset position with contracts in a liability position in the event of default. The Company manages counterparty risk through the utilization of investment grade commercial banks, diversification of counterparties, and its counterparty netting arrangements. The section below outlines the types of derivatives in place as of December 31, 2024 and September 30, 2024, as well as the Company’s objectives and strategies for holding derivative instruments. Foreign Currency Risk A significant share of the Company’s sales is tied to currencies other than the U.S. dollar, the Company’s reporting currency. As such, a weakening of currencies relative to the U.S. dollar can have an unfavorable impact on reported earnings. Conversely, strengthening of currencies relative to the U.S. dollar can improve reported results. The primary currencies to which the Company is exposed include the euro, the Japanese yen, the British pound, the Canadian dollar, and the Australian dollar. Additionally, the Company’s foreign subsidiaries enter into internal and external transactions that create non-functional currency balance sheet positions at the foreign subsidiary level. These exposures are generally the result of intercompany purchases, intercompany loans and, to a lesser extent, external purchases, and are revalued in the foreign subsidiary’s local currency at the end of each month. Changes in the value of the non-functional currency balance sheet positions in relation to the foreign subsidiary’s local currency results in an exchange gain or loss recorded in Other expense, net in the Condensed Consolidated Statements of Earnings and Comprehensive (Loss) Income. The primary currency to which the Company’s foreign subsidiaries are exposed is the U.S. dollar. Interest Rate Risk The Company has interest rate risk with respect to interest expense on variable rate debt. At December 31, 2024, the Company had $199.0 of variable rate debt outstanding, which consisted primarily of outstanding borrowings under the Revolving Credit Facility in the U.S. Cash Flow Hedges As of December 31, 2024, the Company maintains a cash flow hedging program related to foreign currency risk. These derivative instruments have a high correlation to the underlying exposure being hedged and have been deemed highly effective by the Company for accounting purposes in offsetting the associated risk. The Company has forward currency contracts to hedge cash flow uncertainty associated with currency fluctuations. These transactions are accounted for as cash flow hedges. The Company had unrealized pre-tax gains of $4.8 and pre-tax losses of $2.4 as of December 31, 2024 and September 30, 2024, respectively, on these forward currency contracts, which are accounted for as cash flow hedges and included in AOCI in the Condensed Consolidated Balance Sheets. Assuming foreign exchange rates versus the U.S. dollar remain at December 31, 2024 levels over the next 12 months, the majority of the pre-tax gain included in AOCI in the Condensed Consolidated Balance Sheets as of December 31, 2024 is expected to be included in Other expense, net in the Condensed Consolidated Statements of Earnings and Comprehensive (Loss) Income. Contract maturities for these hedges extend into fiscal 2026. As of December 31, 2024, there were 64 open foreign currency contracts with a total notional value of $99.7. Derivatives not Designated as Hedges The Company has foreign currency derivative contracts, which are not designated as cash flow hedges for accounting purposes, to hedge balance sheet exposures. Any gains or losses on these contracts are expected to be offset by exchange gains or losses on the underlying exposures and, thus, are not expected to be subject to significant market risk. The change in the estimated fair value of the foreign currency contracts for the three months ended December 31, 2024, resulted in a gain of $0.9 compared to a loss of $1.1 for the three months ended December 31, 2023, and was recorded in Other expense, net in the Condensed Consolidated Statements of Earnings and Comprehensive (Loss) Income. As of December 31, 2024, there was The following table provides estimated fair values of derivative instruments: Fair Value of Assets (Liabilities) as of (1) December 31, September 30, Derivatives designated as cash flow hedging relationships: Foreign currency contracts $ 4.8 $ (2.4) Derivatives not designated as cash flow hedging relationships: Foreign currency contracts $ — $ 0.1 (1) Derivative assets are presented in Other current assets or Other assets. Derivative liabilities are presented in Other current liabilities or Other liabilities. The following table provides the pre-tax amounts of gains and losses on derivative instruments: Three Months Ended 2024 2023 Derivatives designated as cash flow hedging relationships: Foreign currency contracts Gain recognized in OCI (1) $ 7.7 $ 1.1 Gain reclassified from AOCI into income (1) (2) 0.5 1.6 Derivatives not designated as cash flow hedging relationships: Foreign currency contracts Gain recognized in income (2) $ 0.9 $ 1.1 (1) Each of these derivative instruments had a high correlation to the underlying exposure being hedged for the periods indicated and have been deemed highly effective by the Company in offsetting associated risk. (2) Gain was recorded in Other expense, net in the Condensed Consolidated Statements of Earnings and Comprehensive (Loss) Income. The following table provides financial assets and liabilities for balance sheet offsetting: As of December 31, 2024 As of September 30, 2024 Assets (1) Liabilities (2) Assets (1) Liabilities (2) Foreign currency contracts Gross amounts of recognized assets (liabilities) $ 4.8 $ — $ 0.1 $ (2.7) Gross amounts offset in the balance sheet — — — 0.3 Net amounts of assets (liabilities) presented in the balance sheet $ 4.8 $ — $ 0.1 $ (2.4) (1) All derivative assets are presented in Other current assets or Other assets on the Condensed Consolidated Balance Sheets. (2) All derivative liabilities are presented in Other current liabilities or Other liabilities on the Condensed Consolidated Balance Sheets. Fair Value Hierarchy Accounting guidance on fair value measurements for certain financial assets and liabilities requires that assets and liabilities carried at fair value be classified in one of the following three categories: Level 1: Quoted market prices in active markets for identical assets or liabilities. Level 2: Observable market-based inputs or unobservable inputs that are corroborated by market data. Level 3: Unobservable inputs reflecting the reporting entity’s own assumptions or external inputs from inactive markets. The following table sets forth the Company’s financial assets and liabilities, which are carried at fair value and measured on a recurring basis during the period, all of which are classified as Level 2 within the fair value hierarchy: December 31, September 30, Assets (Liabilities) at estimated fair value: Deferred compensation liability $ (21.5) $ (21.1) Derivatives - foreign currency contracts asset 4.8 (2.3) Net assets (liabilities) at estimated fair value $ (16.7) $ (23.4) The estimated fair value of the deferred compensation liability is determined based upon the quoted market prices of the investment options that are offered under the plan. As of December 31, 2024 and September 30, 2024, the estimated fair value of foreign currency contracts is the amount that the Company would receive or pay to terminate the contracts, considering first the quoted market prices of comparable agreements or, in the absence of quoted market prices, factors such as interest rates, currency exchange rates, and remaining maturities. As of December 31, 2024 and September 30, 2024, the Company had no Level 1 financial assets or liabilities, other than pension plan assets, and no Level 3 financial assets or liabilities. As of December 31, 2024 and September 30, 2024, the fair market value of fixed rate long-term debt was $1,162.4 and $1,180.0, respectively, compared to its carrying value of $1,250.0 in each period. The estimated fair value of the long-term debt was estimated using yields obtained from independent pricing sources for similar types of borrowing arrangements which has been determined based on Level 2 inputs. |