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DERIVATIVE INSTRUMENTS | 9 Months Ended
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Oct. 01, 2023
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
DERIVATIVE INSTRUMENTS | DERIVATIVE INSTRUMENTS We are exposed to market risks arising principally from changes in foreign currency exchange rates, interest rates and commodity prices. We use certain derivative instruments to manage these risks. These include interest rate swaps to manage interest rate risk, foreign currency forward exchange contracts to manage foreign currency exchange rate risk, and commodities futures and options contracts to manage commodity market price risk exposures. In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by entering into exchange-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults. Commodity Price Risk We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and transportation services. We generally hedge commodity price risks for 3- to 24-month periods. Our open commodity derivative contracts had a notional value of $155,320 as of October 1, 2023 and $243,009 as of December 31, 2022. Derivatives used to manage commodity price risk are not designated for hedge accounting treatment. Therefore, the changes in fair value of these derivatives are recorded as incurred within cost of sales. As discussed in Note 13, we define our segment income to exclude gains and losses on commodity derivatives until the related inventory is sold, at which time the related gains and losses are reflected within segment income. This enables us to continue to align the derivative gains and losses with the underlying economic exposure being hedged and thereby eliminate the mark-to-market volatility within our reported segment income. Foreign Exchange Price Risk We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Japanese yen, British pound, Brazilian real, Malaysian ringgit, Mexican peso and Swiss franc. We typically utilize foreign currency forward exchange contracts to hedge these exposures for periods ranging from 3 to 12 months. The contracts are either designated as cash flow hedges or are undesignated. The net notional amount of foreign exchange contracts accounted for as cash flow hedges was $76,824 at October 1, 2023 and $59,448 at December 31, 2022. The effective portion of the changes in fair value on these contracts is recorded in other comprehensive income and reclassified into earnings in the same period in which the hedged transactions affect earnings. The net notional amount of foreign exchange contracts that are not designated as accounting hedges was $19,172 at October 1, 2023 and $1,843 at December 31, 2022. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure. Interest Rate Risk In order to manage interest rate exposure, from time to time, we enter into interest rate swap agreements to protect against unfavorable interest rate changes relating to forecasted debt transactions. These swaps, which are settled upon issuance of the related debt, are designated as cash flow hedges and the gains and losses that are deferred in other comprehensive income are being recognized as an adjustment to interest expense over the same period that the hedged interest payments affect earnings. Equity Price Risk We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. To mitigate this risk, we use equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for periods of 3 to 12 months. The change in fair value of these derivatives is recorded in selling, marketing and administrative expense, together with the change in the related liabilities. The notional amount of the contracts outstanding at October 1, 2023 and December 31, 2022 was $23,641 and $18,803, respectively. The following table presents the classification of derivative assets and liabilities within the Consolidated Balance Sheets as of October 1, 2023 and December 31, 2022:
|  | October 1, 2023 |  | December 31, 2022
|  | Assets (1) |  | Liabilities (1) |  | Assets (1) |  | Liabilities (1)
Derivatives designated as cash flow hedging instruments: |  |  |  |  |  |  |  |
Foreign exchange contracts |  | $ | 3,080 |  |  | $ | 3,022 |  |  | $ | 3,921 |  |  | $ | 261 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |
Commodities futures and options (2) |  | 874 |  |  | 3,861 |  |  | 685 |  |  | 662 |
Deferred compensation derivatives |  | 1,776 |  |  | — |  |  | 1,222 |  |  | — |
Foreign exchange contracts |  | 116 |  |  | 59 |  |  | 246 |  |  | — |
|  | 2,766 |  |  | 3,920 |  |  | 2,153 |  |  | 662 |
Total |  | $ | 5,846 |  |  | $ | 6,942 |  |  | $ | 6,074 |  |  | $ | 923 |
(1)Derivative assets are classified on our Consolidated Balance Sheets within prepaid expenses and other as well as other non-current assets. Derivative liabilities are classified on our Consolidated Balance Sheets within accrued liabilities and other long-term liabilities. (2)As of October 1, 2023, amounts reflected on a net basis in liabilities were assets of $36,052 and liabilities of $36,023, which are associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The comparable amounts reflected on a net basis in liabilities at December 31, 2022 were assets of $25,308 and liabilities of $25,296. At October 1, 2023 and December 31, 2022, the remaining amount reflected in assets and liabilities related to the fair value of other non-exchange traded derivative instruments, respectively. Income Statement Impact of Derivative Instruments The effect of derivative instruments on the Consolidated Statements of Income for the three months ended October 1, 2023 and October 2, 2022 was as follows:
|  | Non-designated Hedges |  | Cash Flow Hedges
|  | Gains (losses) recognized in income (a) |  | Gains (losses) recognized in other comprehensive income (“OCI”) |  | Gains (losses) reclassified from accumulated OCI (“AOCI”) into income (b) |  |
|  | 2023 |  | 2022 |  | 2023 |  | 2022 |  | 2023 |  | 2022 |  |  |  |
Commodities futures and options |  | $ | 17,103 |  |  | $ | (14,044) |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  |  |  |
Foreign exchange contracts |  | (583) |  |  | (39) |  |  | 2,945 |  |  | 891 |  |  | (1,924) |  |  | 421 |  |  |  |  |
Interest rate swap agreements |  | — |  |  | — |  |  | — |  |  | — |  |  | (2,274) |  |  | (2,679) |  |  |  |  |
Deferred compensation derivatives |  | (1,103) |  |  | (1,098) |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  |
Total |  | $ | 15,417 |  |  | $ | (15,181) |  |  | $ | 2,945 |  |  | $ | 891 |  |  | $ | (4,198) |  |  | $ | (2,258) |  |  |  |  |
The effect of derivative instruments on the Consolidated Statements of Income for the nine months ended October 1, 2023 and October 2, 2022 was as follows:
|  | Non-designated Hedges |  | Cash Flow Hedges
|  | Gains (losses) recognized in income (a) |  | Gains (losses) recognized in other comprehensive income (“OCI”) |  | Gains (losses) reclassified from accumulated OCI (“AOCI”) into income (b) |  |
|  | 2023 |  | 2022 |  | 2023 |  | 2022 |  | 2023 |  | 2022 |  |  |  |
Commodities futures and options |  | $ | 52 |  |  | $ | 28,027 |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  | $ | — |  |  |  |  |
Foreign exchange contracts |  | 359 |  |  | (173) |  |  | (3,711) |  |  | 245 |  |  | (196) |  |  | (956) |  |  |  |  |
Interest rate swap agreements |  | — |  |  | — |  |  | 3,173 |  |  | — |  |  | (13,255) |  |  | (8,187) |  |  |  |  |
Deferred compensation derivatives |  | 1,776 |  |  | (6,142) |  |  | — |  |  | — |  |  | — |  |  | — |  |  |  |  |
Total |  | $ | 2,187 |  |  | $ | 21,712 |  |  | $ | (538) |  |  | $ | 245 |  |  | $ | (13,451) |  |  | $ | (9,143) |  |  |  |  |
(a)Gains (losses) recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses. (b)Gains (losses) reclassified from AOCI into income for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. Losses reclassified from AOCI into income for interest rate swap agreements were included in interest expense. The amount of pre-tax net losses on derivative instruments, including interest rate swap agreements and foreign currency forward exchange contracts expected to be reclassified into earnings in the next 12 months was approximately $17,930 as of October 1, 2023. This amount is primarily associated with interest rate swap agreements.

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