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FINANCIAL INSTRUMENTS | 9 Months Ended
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Oct. 02, 2021
Derivative Instruments and Hedging Activities Disclosure [Abstract] |
FINANCIAL INSTRUMENTS | FINANCIAL INSTRUMENTS The Company is exposed to market risk from changes in foreign currency exchange rates, interest rates, stock prices and commodity prices. As part of the Company’s risk management program, a variety of financial instruments such as interest rate swaps, currency swaps, purchased currency options, foreign exchange contracts and commodity contracts, may be used to mitigate interest rate exposure, foreign currency exposure and commodity price exposure. If the Company elects to do so and if the instrument meets the criteria specified in ASC 815, Derivatives and Hedging, management designates its derivative instruments as cash flow hedges, fair value hedges or net investment hedges. Generally, commodity price exposures are not hedged with derivative financial instruments and instead are actively managed through customer pricing initiatives, procurement-driven cost reduction initiatives and other productivity improvement projects. Financial instruments are not utilized for speculative purposes. A summary of the fair values of the Company’s derivatives recorded in the Condensed Consolidated Balance Sheets at October 2, 2021 and January 2, 2021 is as follows:
(Millions of Dollars) | Balance Sheet Classification |  | October 2, 2021 |  | January 2, 2021 |  | Balance Sheet Classification |  | October 2, 2021 |  | January 2, 2021
Derivatives designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |
Interest Rate Contracts Cash Flow | Other current assets |  | $ | — |  |  | $ | — |  |  | Accrued expenses |  | $ | 60.6 |  |  | $ | 90.9 |
Foreign Exchange Contracts Cash Flow | Other current assets |  | 17.8 |  |  | — |  |  | Accrued expenses |  | 0.9 |  |  | 23.7 |
| LT other assets |  | 0.4 |  |  | — |  |  | LT other liabilities |  | — |  |  | — |
Net Investment Hedge | Other current assets |  | 2.3 |  |  | 3.5 |  |  | Accrued expenses |  | 0.5 |  |  | 55.1 |
| LT other assets |  | 0.4 |  |  | — |  |  | LT other liabilities |  | — |  |  | 5.7 |
Total designated as hedging |  |  | $ | 20.9 |  |  | $ | 3.5 |  |  |  |  | $ | 62.0 |  |  | $ | 175.4 |
Derivatives not designated as hedging instruments: |  |  |  |  |  |  |  |  |  |  |
Foreign Exchange Contracts | Other current assets |  | $ | 8.7 |  |  | $ | 10.5 |  |  | Accrued expenses |  | $ | 7.2 |  |  | $ | 15.6 |
Total |  |  | $ | 29.6 |  |  | $ | 14.0 |  |  |  |  | $ | 69.2 |  |  | $ | 191.0 |
The counterparties to all of the above mentioned financial instruments are major international financial institutions. The Company is exposed to credit risk for net exchanges under these agreements, but not for the notional amounts. The credit risk is limited to the asset amounts noted above. The Company limits its exposure and concentration of risk by contracting with diverse financial institutions and does not anticipate non-performance by any of its counterparties. Further, as more fully discussed in Note M, Fair Value Measurements, the Company considers non-performance risk of its counterparties at each reporting period and adjusts the carrying value of these assets accordingly. The risk of default is considered remote. As of October 2, 2021 and January 2, 2021, there were no assets that had been posted as collateral related to the above mentioned financial instruments. During the nine months ended October 2, 2021 and September 26, 2020, cash flows related to derivatives, including those that are separately discussed below, resulted in net cash paid of $99.4 million and net cash received of $33.7 million, respectively. CASH FLOW HEDGES There were after-tax mark-to-market losses of $46.6 million and $103.0 million as of October 2, 2021 and January 2, 2021, respectively, reported for cash flow hedge effectiveness in Accumulated other comprehensive income (loss). An after-tax gain of $5.3 million is expected to be reclassified to earnings as the hedged transactions occur or as amounts are amortized within the next twelve months. The ultimate amount recognized will vary based on fluctuations of the hedged currencies and interest rates through the maturity dates. The tables below detail pre-tax amounts of derivatives designated as cash flow hedges in Accumulated other comprehensive income (loss) during the periods in which the underlying hedged transactions affected earnings for the three and nine months ended October 2, 2021 and September 26, 2020:
|  | Third Quarter 2021
(Millions of dollars) |  | Gain (Loss) Recorded in OCI |  | Classification of Gain (Loss) Reclassified from OCI to Income |  | Gain (Loss) Reclassified from OCI to Income |  | Gain (Loss) Recognized in Income on Amounts Excluded from Effectiveness Testing
Interest Rate Contracts |  | $ | 2.9 |  |  | Interest expense |  | $ | (0.8) |  |  | $ | — |
Foreign Exchange Contracts |  | $ | 11.0 |  |  | Cost of sales |  | $ | (9.9) |  |  | $ | — |
|  | Year-to-Date 2021
(Millions of Dollars) |  | Gain (Loss) Recorded in OCI |  | Classification of Gain (Loss) Reclassified from OCI to Income |  | Gain (Loss) Reclassified from OCI to Income |  | Gain (Loss) Recognized in Income on Amounts Excluded from Effectiveness Testing
Interest Rate Contracts |  | $ | 30.3 |  |  | Interest expense |  | $ | (2.9) |  |  | $ | — |
Foreign Exchange Contracts |  | $ | 19.2 |  |  | Cost of sales |  | $ | (21.3) |  |  | $ | — |
|  | Third Quarter 2020
(Millions of dollars) |  | Gain (Loss) Recorded in OCI |  | Classification of Gain (Loss) Reclassified from OCI to Income |  | Gain (Loss) Reclassified from OCI to Income |  | Gain (Loss) Recognized in Income on Amounts Excluded from Effectiveness Testing
Interest Rate Contracts |  | $ | 1.9 |  |  | Interest expense |  | $ | (4.3) |  |  | $ | — |
Foreign Exchange Contracts |  | $ | (5.3) |  |  | Cost of sales |  | $ | 5.9 |  |  | $ | — |
|  | Year-to-Date 2020
(Millions of Dollars) |  | Gain (Loss) Recorded in OCI |  | Classification of Gain (Loss) Reclassified from OCI to Income |  | Gain (Loss) Reclassified from OCI to Income |  | Gain (Loss) Recognized in Income on Amounts Excluded from Effectiveness Testing
Interest Rate Contracts |  | $ | (92.1) |  |  | Interest expense |  | $ | (13.5) |  |  | $ | — |
Foreign Exchange Contracts |  | $ | 10.1 |  |  | Cost of sales |  | $ | 12.5 |  |  | $ | — |
A summary of the pre-tax effect of cash flow hedge accounting on the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended October 2, 2021 and September 26, 2020 is as follows:
|  | Third Quarter 2021 |  | Year-to-Date 2021
(Millions of Dollars) |  | Cost of Sales |  | Interest Expense |  | Cost of Sales |  | Interest Expense
Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the cash flow hedges are recorded |  | $ | 2,871.7 |  |  | $ | 45.8 |  |  | $ | 8,261.8 |  |  | $ | 139.8 |
Gain (loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |
Hedged Items |  | $ | 9.9 |  |  | $ | — |  |  | $ | 21.3 |  |  | $ | — |
Gain (loss) reclassified from OCI into Income |  | $ | (9.9) |  |  | $ | — |  |  | $ | (21.3) |  |  | $ | — |
Interest Rate Swap Agreements: |  |  |  |  |  |  |  |
Gain (loss) reclassified from OCI into Income 1 |  | $ | — |  |  | $ | (0.8) |  |  | $ | — |  |  | $ | (2.9) |
|  | Third Quarter 2020 |  | Year-to-Date 2020
(Millions of Dollars) |  | Cost of Sales |  | Interest Expense |  | Cost of Sales |  | Interest Expense
Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the cash flow hedges are recorded |  | $ | 2,473.9 |  |  | $ | 52.7 |  |  | $ | 6,714.9 |  |  | $ | 169.7 |
Gain (loss) on cash flow hedging relationships: |  |  |  |  |  |  |  |
Foreign Exchange Contracts: |  |  |  |  |  |  |  |
Hedged Items |  | $ | (5.9) |  |  | $ | — |  |  | $ | (12.5) |  |  | $ | — |
Gain (loss) reclassified from OCI into Income |  | $ | 5.9 |  |  | $ | — |  |  | $ | 12.5 |  |  | $ | — |
Interest Rate Swap Agreements: |  |  |  |  |  |  |  |
Gain (loss) reclassified from OCI into Income 1 |  | $ | — |  |  | $ | (4.3) |  |  | $ | — |  |  | $ | (13.5) |
1 Inclusive of the gain/loss amortization on terminated derivative financial instruments. An after-tax loss of $5.3 million and after-tax gain of $1.1 million was reclassified from Accumulated other comprehensive Income (Loss) into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) for the three months ended October 2, 2021 and September 26, 2020, respectively. An after-tax loss of $13.5 million and $0.6 million was reclassified from Accumulated other comprehensive Income (Loss) into earnings (inclusive of the gain/loss amortization on terminated derivative instruments) for the nine months ended October 2, 2021 and September 26, 2020, respectively, during the periods in which the underlying hedged transactions affected earnings. Interest Rate Contracts: The Company enters into interest rate swap agreements in order to obtain the lowest cost source of funds within a targeted range of variable to fixed-debt proportions. During the first quarter of 2020, the Company entered into forward starting interest rate swaps totaling $1.0 billion to offset the expected variability on future interest rate payments associated with debt instruments expected to be issued in the future. These swaps were terminated during the first quarter of 2020 resulting in a loss of $20.5 million, which was recorded in Accumulated other comprehensive income (loss) and is being amortized to earnings as interest expense over future periods. The cash flows stemming from the maturity of such interest rate swaps designated as cash flow hedges are presented within financing activities in the Condensed Consolidated Statements of Cash Flows. As of October 2, 2021 and January 2, 2021, the Company had $400.0 million in forward starting swaps designated as cash flow hedges. Foreign Currency Contracts Forward Contracts: Through its global businesses, the Company enters into transactions and makes investments denominated in multiple currencies that give rise to foreign currency risk. The Company and its subsidiaries regularly purchase inventory from subsidiaries with functional currencies different than their own, which creates currency-related volatility in the Company’s results of operations. The Company utilizes forward contracts to hedge these forecasted purchases and sales of inventory. Gains and losses reclassified from Accumulated other comprehensive income (loss) are recorded in Cost of sales as the hedged item affects earnings. There are no components excluded from the assessment of effectiveness for these contracts. At October 2, 2021 and January 2, 2021, the notional value of forward currency contracts outstanding was $522.5 million and $595.8 million, respectively, maturing on various dates through 2022. In October 2021, the Company entered into forward currency contracts with notional values totaling $165.0 million maturing on various dates in 2022. Purchased Option Contracts: The Company and its subsidiaries have entered into various intercompany transactions whereby the notional values are denominated in currencies other than the functional currencies of the party executing the trade. In order to better match the cash flows of its intercompany obligations with cash flows from operations, the Company enters into purchased option contracts. Gains and losses reclassified from Accumulated other comprehensive loss are recorded in Cost of sales as the hedged item affects earnings. There are no components excluded from the assessment of effectiveness for these contracts. There were no outstanding purchased option contracts as of October 2, 2021 or January 2, 2021. FAIR VALUE HEDGES Interest Rate Risk: In an effort to optimize the mix of fixed versus floating rate debt in the Company’s capital structure, the Company enters into interest rate swaps. In prior years, the Company entered into interest rate swaps related to certain of its notes payable which were subsequently terminated. Amortization of the gain/loss on previously terminated swaps is reported as a reduction of interest expense. Prior to termination, the changes in the fair value of the swaps and the offsetting changes in fair value related to the underlying notes were recognized in earnings. As of October 2, 2021 and January 2, 2021, the Company did not have any active fair value interest rate swaps. A summary of the pre-tax effect of fair value hedge accounting on the Consolidated Statements of Operations and Comprehensive Income for the three and nine months ended October 2, 2021 and September 26, 2020 is as follows:
(Millions of Dollars) |  | Third Quarter 2021 Interest Expense |  | Year-to-Date 2021 Interest Expense
Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the fair value hedges are recorded |  | $ | 45.8 |  |  | $ | 139.8 |
Amortization of gain on terminated swaps |  | $ | (0.1) |  |  | $ | (0.3) |
(Millions of Dollars) | Third Quarter 2020 Interest Expense |  | Year-to-Date 2020 Interest Expense
Total amount in the Consolidated Statements of Operations and Comprehensive Income in which the effects of the fair value hedges are recorded | $ | 52.7 |  |  | $ | 169.7 |
Amortization of gain on terminated swaps | $ | (0.8) |  |  | $ | (2.4) |
A summary of the amounts recorded in the Condensed Consolidated Balance Sheets related to cumulative basis adjustments for fair value hedges as of October 2, 2021 and January 2, 2021 is as follows:
|  | October 2, 2021
(Millions of Dollars) |  | Carrying Amount of Hedged Liability (1) |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability
Long-Term Debt |  | $ | 4,246.9 |  |  | Terminated Swaps |  | $ | (20.5) |
|  | January 2, 2021
(Millions of Dollars) |  | Carrying Amount of Hedged Liability (1) |  | Cumulative Amount of Fair Value Hedging Adjustment Included in the Carrying Amount of the Hedged Liability
Long-Term Debt |  | $ | 4,245.4 |  |  | Terminated Swaps |  | $ | (20.8) |
(1) Represents hedged items no longer designated in qualifying fair value hedging relationships. NET INVESTMENT HEDGES The Company utilizes net investment hedges to offset the translation adjustment arising from re-measurement of its investment in the assets and liabilities of its foreign subsidiaries. The total after-tax amounts in Accumulated other comprehensive income (loss) were gains of $75.7 million and $72.8 million at October 2, 2021 and January 2, 2021, respectively. As of October 2, 2021, the Company had a foreign exchange contract with a notional value of $75.0 million maturing in 2021 hedging a portion of its Taiwan dollar denominated net investments and a cross currency swap with a notional value of $100.0 million maturing in 2023 hedging a portion of its Japanese yen denominated net investments. As of January 2, 2021, the Company had cross currency swaps with a notional value totaling $839.4 million maturing on various dates through 2023 hedging a portion of its Japanese yen, Euro and Swiss franc denominated net investments. The Company had no Euro denominated commercial paper designated as a net investment hedge as of October 2, 2021 and January 2, 2021. Maturing foreign exchange contracts resulted in net cash paid of $53.9 million and net cash received of $41.0 million for the nine months ended October 2, 2021 and September 26, 2020, respectively. Gains and losses on net investment hedges remain in Accumulated other comprehensive income (loss) until disposal of the underlying assets. Gains and losses representing components excluded from the assessment of effectiveness are recognized in earnings in Other, net on a straight-line basis over the term of the hedge. Gains and losses after a hedge has been de-designated are recorded directly to earnings in Other, net. The pre-tax gain or loss from fair value changes for the three and nine months ended October 2, 2021 and September 26, 2020 was as follows:
|  | Third Quarter 2021
(Millions of Dollars) |  | Total Gain (Loss) Recorded in OCI |  | Excluded Component Recorded in OCI |  | Income Statement Classification |  | Total Gain (Loss) Reclassified from OCI to Income |  | Excluded Component Amortized from OCI to Income
Forward Contracts |  | $ | (0.4) |  |  | $ | 0.3 |  |  | Other, net |  | $ | 0.4 |  |  | $ | 0.4 |
Cross Currency Swap |  | $ | (0.2) |  |  | $ | 6.0 |  |  | Other, net |  | $ | 0.8 |  |  | $ | 0.8 |
|  | Year-to-Date 2021
(Millions of Dollars) |  | Total Gain (Loss) Recorded in OCI |  | Excluded Component Recorded in OCI |  | Income Statement Classification |  | Total Gain (Loss) Reclassified from OCI to Income |  | Excluded Component Amortized from OCI to Income
Forward Contracts |  | $ | (1.4) |  |  | $ | 1.1 |  |  | Other, net |  | $ | 1.1 |  |  | $ | 1.1 |
Cross Currency Swap |  | $ | 9.1 |  |  | $ | 19.9 |  |  | Other, net |  | $ | 2.9 |  |  | $ | 2.9 |
|  | Third Quarter 2020
(Millions of Dollars) |  | Total Gain (Loss) Recorded in OCI |  | Excluded Component Recorded in OCI |  | Income Statement Classification |  | Total Gain (Loss) Reclassified from OCI to Income |  | Excluded Component Amortized from OCI to Income
Forward Contracts |  | $ | 0.3 |  |  | $ | — |  |  | Other, net |  | $ | — |  |  | $ | — |
Cross Currency Swap |  | $ | (19.0) |  |  | $ | 14.0 |  |  | Other, net |  | $ | 4.1 |  |  | $ | 4.1 |
Non-derivative designated as Net Investment Hedge |  | $ | (13.1) |  |  | $ | — |  |  | Other, net |  | $ | — |  |  | $ | — |
|  | Year-to-Date 2020
(Millions of Dollars) |  | Total Gain (Loss) Recorded in OCI |  | Excluded Component Recorded in OCI |  | Income Statement Classification |  | Total Gain (Loss) Reclassified from OCI to Income |  | Excluded Component Amortized from OCI to Income
Forward Contracts |  | $ | 0.4 |  |  | $ | — |  |  | Other, net |  | $ | — |  |  | $ | — |
Cross Currency Swap |  | $ | 22.3 |  |  | $ | 48.9 |  |  | Other, net |  | $ | 13.7 |  |  | $ | 13.7 |
Non-derivative designated as Net Investment Hedge |  | $ | (8.5) |  |  | $ | — |  |  | Other, net |  | $ | — |  |  | $ | — |
UNDESIGNATED HEDGES Foreign Exchange Contracts: Foreign exchange forward contracts are used to reduce risks arising from the change in fair value of certain foreign currency denominated assets and liabilities (such as affiliate loans, payables and receivables). The objective is to minimize the impact of foreign currency fluctuations on operating results. The total notional amount of the forward contracts outstanding at October 2, 2021 and January 2, 2021 was $1.1 billion and $1.3 billion, maturing on various dates through 2021. The gain (loss) recorded in income from changes in the fair value related to derivatives not designated as hedging instruments under ASC 815 for the three and nine months ended October 2, 2021 and September 26, 2020 are as follows:
(Millions of Dollars) | Income Statement Classification |  | Third Quarter 2021 |  | Year-to-Date 2021 |  | Third Quarter 2020 |  | Year-to-Date 2020
Foreign Exchange Contracts | Other, net |  | $ | 3.4 |  |  | $ | (20.1) |  |  | $ | (9.0) |  |  | $ | (2.6) |

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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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