Financial Instruments and Risk Management

3 Months Ended

Apr. 01, 2023

Disclosure Financial Instruments and Risk Management [Abstract]

Financial Instruments and Risk Management

The Company uses forward foreign exchange contracts and cross-currency swap contracts to manage its exposures to movements in foreign exchange rates primarily related to the Euro, Australian dollar, Canadian dollar and Mexican peso and interest rate contracts to manage its exposures to movements in interest rates. The Company also uses a combination of cross-currency swap contracts and long-term debt to manage its exposure to foreign currency risk associated with the Company’s net investment in its European subsidiaries.


	Hedge Type	April 1, 2023		December 31, 2022
U.S. dollar equivalent notional amount of derivative instruments:
Forward foreign exchange contracts	Cash Flow and Mark to Market	$	348,595	$	397,908
Interest rate contracts	Cash Flow	$	900,000	$	—
Cross-currency swap contracts	Cash Flow	$	—	$	352,920
Cross-currency swap contracts	Net Investment	$	—	$	335,940

Fair Values of Derivative Instruments

The fair values of derivative instruments related to forward foreign exchange contracts, cross-currency swap contracts and interest rate contracts recognized in the Condensed Consolidated Balance Sheets of the Company were as follows:


	Balance Sheet Location	Fair Value
		April 1, 2023		December 31, 2022
Derivatives designated as hedging instruments:
Forward foreign exchange contracts	Other current assets	$	2,575	$	1,892
Interest rate contracts	Other current assets	10		—
Cross-currency swap contracts	Other current assets	—		1,033
Forward foreign exchange contracts	Other noncurrent assets	—		110
Cross-currency swap contracts	Other noncurrent assets	—		16,477
Derivatives not designated as hedging instruments:
Forward foreign exchange contracts	Other current assets	2,707		5,402
Total derivative assets		5,292		24,914

Derivatives designated as hedging instruments:
Forward foreign exchange contracts	Accrued liabilities	(1,684)		(1,263)
Cross-currency swap contracts	Accrued liabilities	—		(252)
Forward foreign exchange contracts	Other noncurrent liabilities	—		(178)
Interest rate contracts	Other noncurrent liabilities	(14,684)		—
Cross-currency swap contracts	Other noncurrent liabilities	—		(27,753)
Derivatives not designated as hedging instruments:
Forward foreign exchange contracts	Accrued liabilities	(4,013)		(4,841)
Total derivative liabilities		(20,381)		(34,287)

Net derivative liability		$	(15,089)	$	(9,373)

Cash Flow Hedges

The Company uses forward foreign exchange contracts and cross-currency swap contracts to reduce the effect of fluctuating foreign currencies on 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.

On April 1, 2021, in connection with a reduction in the amount of the 3.5% Senior Notes designated in the European net investment hedge discussed below, the Company entered into three pay-fixed rate, receive-fixed rate cross-currency swap contracts with a total notional amount of €300,000. The Company designated these cross-currency swap contracts to hedge the undesignated portion of the foreign currency cash flow exposure related to the Company’s 3.5% Senior Notes. These cross-currency swap contracts, swapped Euro-denominated interest payments for U.S. dollar-denominated interest payments, thereby economically converting €300,000 of the Company’s €500,000 fixed-rate 3.5% Senior Notes to a fixed-rate 4.7945% USD-denominated obligation. In February 2023, in connection with the redemption of the 3.5% Senior Notes, the Company unwound these cross-currency swap contracts, which had an original maturity date of June 15, 2024. The Company paid $30,935 to settle the cross-currency swap contracts, which was reported in “Net cash from operating activities” in the Condensed Consolidated Statements of Cash Flows. The remaining gain in AOCI of $1,254 was released into earnings at the time of settlement and is recorded in the “Interest expense, net” line in the Condensed Consolidated Statements of Income.

In March 2023, the Company entered into an interest rate contract with a total notional amount of $900,000, which amortizes down to $600,000 on March 31, 2025. The Company designated this interest rate contract, which matures on March 31, 2026, to hedge the variability in contractually specified interest rates above 50 basis points associated with future interest payments on a portion of the Company’s variable-rate term loans to lock in certainty of future cash flows.

The Company expects to reclassify into earnings during the next 12 months a net gain from AOCI of approximately $4,312. The Company is hedging exposure to the variability in future foreign currency-denominated cash flows for forecasted transactions over the next 11 months and the variability in future interest payments on debt over the next 36 months.

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


	Amount of Gain (Loss) Recognized in AOCI on Derivative Instruments
	Quarters Ended
	April 1, 2023		April 2, 2022
Forward foreign exchange contracts	$	(72)	$	(3,186)
Interest rate contracts	(14,674)		—
Cross-currency swap contracts	(2,865)		(4,218)

Total	$	(17,611)	$	(7,404)


	Location of Gain (Loss) Reclassified from AOCI into Income	Amount of Gain (Loss) Reclassified from AOCI into Income
		Quarters Ended
		April 1, 2023		April 2, 2022


Forward foreign exchange contracts(1)	Cost of sales	$	3,410	$	1,612
Forward foreign exchange contracts(1)	Income from discontinued operations, net of tax	—		(307)
Interest rate contracts	Interest expense, net	10		—
Cross-currency swap contracts(1)	Selling, general and administrative expenses	973		(9,733)
Cross-currency swap contracts(1)	Interest expense, net	581		(1,361)

Total		$	4,974	$	(9,789)

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

The following table presents the amounts in the Condensed Consolidated Statements of Income in which the effects of cash flow hedges are recorded:


	Quarters Ended
	April 1, 2023		April 2, 2022
Cost of sales	$	939,717	$	991,978
Selling, general and administrative expenses	$	392,374	$	413,666
Interest expense, net	$	58,452	$	31,963
Income from discontinued operations, net of tax	$	—	$	4,525

Net Investment Hedges

In July 2019, the Company entered into two pay-fixed rate, receive-fixed rate cross-currency swap contracts with a total notional amount of €300,000 that were designated as hedges of a portion of the beginning balance of the Company’s net investment in its European subsidiaries. These cross-currency swap contracts, which had an original maturity date of May 15, 2024, swapped U.S. dollar-denominated interest payments for Euro-denominated interest payments, thereby economically converting a portion of the Company’s fixed-rate 4.625% Senior Notes to a fixed-rate 2.3215% Euro-denominated obligation.

In July 2019, the Company also designated the full amount of its 3.5% Senior Notes with a carrying value of €500,000, which was a nonderivative financial instrument, as a hedge of a portion of the beginning balance of the Company’s European net investment. As of April 1, 2021, the Company reduced the amount of its 3.5% Senior Notes designated in the European net investment hedge from €500,000 to €200,000. As of December 31, 2022, the U.S. dollar equivalent carrying value of Euro-denominated long-term debt designated as a partial European net investment hedge was $214,110. In February 2023, in connection with the redemption of the 3.5% Senior Notes, the Company de-designated the remainder of the 3.5% Senior Notes in the European net investment hedge and unwound these cross-currency swap contracts. The Company received $18,942 to settle the cross-currency swap contracts, which was reported in “Net cash from investing activities” in the Condensed Consolidated Statement of Cash Flows. There was a cumulative gain of $5,525 from the designated portion of the 3.5% Senior

Notes and a cumulative gain of $19,001 from the cross-currency swap contracts that will remain in cumulative translation adjustment, a component of AOCI, until the net investment in the Company’s EUR-functional subsidiaries is sold, liquidated, or substantially liquidated. The Company does not have any derivative or nonderivative financial instruments designated as net investment hedges as of April 1, 2023.

The amount of after-tax gains (losses) included in AOCI in the Condensed Consolidated Balance Sheets related to derivative instruments and nonderivative financial instruments designated as net investment hedges are as follows:


	Amount of Gain (Loss) Recognized in AOCI
	Quarters Ended
	April 1, 2023		April 2, 2022
Euro-denominated long-term debt	$	(469)	$	4,721
Cross-currency swap contracts	531		1,932
Total	$	62	$	6,653

The effect of derivative and non-derivative instruments designated as net investment hedges on the Condensed Consolidated Statements of Income are as follows:


	Location of Gain (Loss) Reclassified from AOCI into Income	Amount of Gain (Loss) Reclassified from AOCI into Income
		Quarters Ended
		April 1, 2023		April 2, 2022
Euro-denominated long-term debt	Income from discontinued operations, net of tax	$	—	$	(13,348)
Cross-currency swap contracts	Income from discontinued operations, net of tax	—		(2,505)
Cross-currency swap contracts (amounts excluded from effectiveness testing)	Interest expense, net	960		2,012
Total		$	960	$	(13,841)

The following table presents the amounts in the Condensed Consolidated Statements of Income in which the effects of net investment hedges are recorded:


	Quarters Ended
	April 1, 2023		April 2, 2022
Income from discontinued operations, net of tax	$	—	$	4,525
Interest expense, net (amounts excluded from effectiveness testing)	$	58,452	$	31,963

Mark to Market Hedges

Derivatives used in mark to market hedges are not designated as hedges under the accounting standards. The Company uses forward 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. Forward 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. 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 instruments 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
		Quarters Ended
		April 1, 2023		April 2, 2022
Forward foreign exchange contracts	Cost of sales	$	(2,260)	$	(4,202)
Forward foreign exchange contracts	Selling, general and administrative expenses	848		292
Total		$	(1,412)	$	(3,910)