Financial Instruments and Risk Management

6 Months Ended

Jun. 29, 2019

Financial Instruments and Risk Management

The Company uses forward foreign exchange contracts to manage its exposures to movements in foreign exchange rates. As of June 29, 2019, the notional U.S. dollar equivalent of the Company’s derivative portfolio was $531,767, consisting of contracts hedging exposures primarily related to the Euro, Australian dollar, Canadian dollar and Mexican peso.

Fair Values of Derivative Instruments

The fair values of derivative financial instruments related to forward foreign exchange contracts recognized in the Condensed Consolidated Balance Sheets of the Company were as follows:



	Balance Sheet Location	Fair Value
	Balance Sheet Location	June 29, 2019			December 29, 2018
Hedges	Other current assets	$	5,733		$	18,381
Non-hedges	Other current assets	8,667			12,410
Total derivative assets		14,400			30,791

Hedges	Accrued liabilities	(1,058		)	(286		)
Non-hedges	Accrued liabilities	(988		)	(114		)
Total derivative liabilities		(2,046		)	(400		)

Net derivative asset		$	12,354		$	30,391

Cash Flow Hedges

The Company uses forward foreign exchange contracts to reduce the effect of fluctuating foreign currencies on short-term foreign currency-denominated transactions, foreign currency-denominated investments and other known foreign currency exposures. Gains and losses on these contracts are intended to offset losses and gains on the hedged transaction in an effort to reduce the earnings volatility resulting from fluctuating foreign currency exchange rates.

The Company expects to reclassify into earnings during the next 12 months a net gain from AOCI of approximately$15,291. The Company is hedging exposure to the variability in future cash flows for forecasted transactions over the next 18 months.

The effect of cash flow hedge derivative instruments on the Condensed Consolidated Statements of Income and AOCI is as follows:



	Amount of Gain Recognized in AOCI on Derivative Instruments				Amount of Gain Recognized in AOCI on Derivative Instruments
	Quarter Ended				Six Months Ended
	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
Foreign exchange contracts	$	1,274	$	26,982	$	1,714	$	25,274



	Location of Gain (Loss) Reclassified from AOCI into Income	Amount of Gain (Loss) Reclassified from AOCI into Income					Amount of Gain (Loss) Reclassified from AOCI into Income
		Quarter Ended					Six Months Ended
		June 29, 2019		June 30, 2018			June 29, 2019		June 30, 2018
Foreign exchange contracts ⁽¹⁾	Cost of sales	$	8,347	$	(5,554	)	$	14,364	$	(7,219	)


(1)	The Company does not exclude amounts from effectiveness testing that would require recognition into earnings based on changes in fair value.



	Quarter Ended				Six Months Ended
	June 29, 2019		June 30, 2018		June 29, 2019		June 30, 2018
Total cost of sales in which the effects of cash flow hedges are recorded	$	1,086,248	$	1,055,487	$	2,053,396	$	1,948,070

Cross-Currency Swaps

In July 2019, the Company entered into two cross-currency swaps with a total notional amount of €300,000 in order to hedge the currency fluctuation impact of the Company’s net investment in its European businesses. The swaps are contracts to exchange fixed-rate payments in one currency for fixed-rate payments in another currency. These instruments will mature in 2024. The execution of the swaps had no impact on the financial statements for the quarter ended June 29, 2019. As part of the ongoing accounting for these derivative instruments, the Company will determine the fair value and record this amount as an asset or liability each reporting period. The Company has elected to utilize hedge accounting, which will result in the change in fair value of the derivatives to be recorded as an adjustment to equity.

Mark to Market Hedges

A derivative used as a hedging instrument whose change in fair value is recognized to act as a hedge against changes in the values of the hedged item is designated as a mark to market hedge. The Company uses foreign exchange derivative contracts as hedges against the impact of foreign exchange fluctuations on existing accounts receivable and payable balances and intercompany lending transactions denominated in foreign currencies. Foreign exchange derivative contracts are recorded as mark to market hedges when the hedged item is a recorded asset or liability that is revalued in each accounting period. These contracts are not designated as hedges under the accounting standards and are recorded at fair value in the Condensed Consolidated Balance Sheets. Any gains or losses resulting from changes in fair value are recognized directly into earnings. Gains or losses on these contracts largely offset the net remeasurement gains or losses on the related assets and liabilities.

The effect of derivative contracts not designated as hedges on the Condensed Consolidated Statements of Income is as follows:



	Location of Gain (Loss) Recognized in Income on Derivatives	Amount of Gain (Loss) Recognized in Income					Amount of Gain (Loss) Recognized in Income
		Quarter Ended					Six Months Ended
		June 29, 2019			June 30, 2018		June 29, 2019			June 30, 2018
Foreign exchange contracts	Cost of sales	$	(9,361	)	$	10,011	$	(18,758	)	$	19,111
Foreign exchange contracts	Selling, general and administrative expenses	(262		)	472		(921		)	775
Total		$	(9,623	)	$	10,483	$	(19,679	)	$	19,886