DERIVATIVES AND RISK MANAGEMENT

9 Months Ended

Oct. 03, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Cash Flow Hedges. The primary risks managed by using derivative instruments are the fluctuations in global currencies that will ultimately be used by non-U.S. dollar functional currency subsidiaries to settle future payments of intercompany inventory transactions denominated in U.S. dollars. Specifically, the Company projects future intercompany purchases by its non-U.S. dollar functional currency subsidiaries generally over a period of up to 24 months. The Company enters into forward contracts, generally for up to 85% of the forecasted purchases, to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Additionally, the Company enters into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. Forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date and exchange rate. These forward contracts are designated as single cash flow hedges. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows from these inventory transactions, which will affect the Company’s U.S. dollar earnings. Gains or losses on the forward contracts are expected to offset these fluctuations to the extent the cash flows are hedged by the forward contracts.

These forward contracts meet the criteria for hedge accounting, which requires that they represent foreign currency-denominated forecasted transactions in which (i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) the hedged transaction is denominated in a currency other than the hedging unit’s functional currency.

At the inception of each forward contract designated as a cash flow hedge, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk. The Company assesses hedge effectiveness under the critical terms matched method at inception and at least quarterly throughout the life of the hedging relationship. If the critical terms (i.e., amounts, currencies and settlement dates) of the forward contract match the terms of the forecasted transaction, the Company concludes that the hedge is effective. Hedge accounting is discontinued if it is determined that the derivative is not highly effective.

For a derivative instrument that is designated and qualifies as a cash flow hedge, the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss), net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.

All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets. The Company records all forward contract hedge assets and liabilities on a gross basis as they do not meet the balance sheet netting criteria because the Company does not have master netting agreements established with the derivative counterparties that would allow for net settlement. Derivatives designated as cash flow hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded to accumulated other comprehensive income (loss) within the equity section of the Company’s condensed consolidated balance sheets until such derivative’s gains or losses become realized or the cash flow hedge relationship is terminated.

Hedge accounting must be discontinued for a cash flow hedge of a forecasted transaction upon determining that it is no longer probable that the forecasted transaction will occur within the period originally specified at hedge inception. The cumulative hedge accounting gain or loss associated with the discontinued hedge would remain in accumulated other comprehensive income (loss), and would be reclassified into earnings when the forecasted transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. In that case, the entire amount recorded in accumulated other comprehensive income (loss) would immediately be reclassified into earnings. However, in rare cases, the existence of extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of the Company may cause the forecasted transaction to be probable of occurring on a date that is beyond the additional two-month period of time, in which case the net derivative instrument gain or loss related to the discontinued cash flow hedge will continue to be reported in accumulated other comprehensive income (loss) until it is reclassified into earnings. The Company has identified some delays in the timing of forecasted inventory transactions and has applied the extenuating case exception since the delays are attributable to the COVID-19 pandemic. The Company determined that the delayed forecasted transactions are still probable of occurring after the additional two-month period, and therefore will retain the amounts associated with the discontinued cash flow hedge in accumulated other comprehensive income (loss) until the forecasted transaction affects earnings.

If the cash flow hedge relationship is terminated, the derivative’s gains or losses that are recorded in accumulated other comprehensive income (loss) are immediately recognized in earnings. There were no gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges in the Third Quarter, Prior Year Quarter, Year To Date Period or Prior Year YTD Period.

As of October 3, 2020, the Company had the following outstanding forward contracts designated as cash flow hedges that were entered into to hedge future payments of inventory transactions (in millions):

Functional Currency

Contract Currency

Type

Amount

Type

Amount

Euro

48.3

U.S. dollar

55.2

Canadian dollar

16.4

U.S. dollar

12.5

British pound

5.8

U.S. dollar

7.5

Japanese yen

509.5

U.S. dollar

4.8

U.S. dollar

7.8

Japanese yen

825.0

Non-designated Hedges. The Company also periodically enters into forward contracts to manage exchange rate risks associated with certain intercompany transactions and for which the Company does not elect hedge accounting treatment. As of October 3, 2020, the Company had non-designated forward contracts of $0.9 million on 15.1 million rand associated with a South African rand-denominated foreign subsidiary. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur.

The gains and losses on cash flow hedges that were recognized in other comprehensive income (loss), net of taxes are set forth below (in thousands):


	For the 13 Weeks Ended October 3, 2020		For the 13 Weeks Ended September 28, 2019
Cash flow hedges:
Forward contracts	$	(3,650)	$	6,062

Total gain (loss) recognized in other comprehensive income (loss), net of taxes	$	(3,650)	$	6,062


	For the 40 Weeks Ended October 3, 2020		For the 39 Weeks Ended September 28, 2019
Cash flow hedges:
Forward contracts	$	2,293	$	8,226

Total gain (loss) recognized in other comprehensive income (loss), net of taxes	$	2,293	$	8,226

The following tables disclose the gains and losses on derivative instruments recorded in accumulated other comprehensive income (loss), net of taxes during the term of the hedging relationship and reclassified into earnings, and gains and losses on derivatives not designated as hedging instruments recorded directly to earnings (in thousands):


Derivative Instruments	Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Location	Effect of Derivative Instruments	For the 13 Weeks Ended October 3, 2020		For the 13 Weeks Ended September 28, 2019
Forward contracts designated as cash flow hedging instruments	Cost of sales	Total gain (loss) reclassified from accumulated other comprehensive income (loss)	$	(27)	$	2,518
Forward contracts designated as cash flow hedging instruments	Other income (expense)-net	Total gain (loss) reclassified from accumulated other comprehensive income (loss)	$	13	$	1,120
Forward contracts not designated as hedging instruments	Other income (expense)-net	Total gain (loss) recognized in income	$	(63)	$	27


Derivative Instruments	Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Location	Effect of Derivative Instruments	For the 40 Weeks Ended October 3, 2020		For the 39 Weeks Ended September 28, 2019
Forward contracts designated as cash flow hedging instruments	Cost of sales	Total gain (loss) reclassified from accumulated other comprehensive income (loss)	$	5,285	$	7,309
Forward contracts designated as cash flow hedging instruments	Other income (expense)-net	Total gain (loss) reclassified from accumulated other comprehensive income (loss)	$	101	$	1,347
Forward contracts not designated as hedging instruments	Other income (expense)-net	Total gain (loss) recognized in income	$	30	$	(6)

The following table discloses the fair value amounts for the Company’s derivative instruments as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line items in the condensed consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):


	Asset Derivatives						Liability Derivatives
	October 3, 2020			December 28, 2019			October 3, 2020			December 28, 2019
Derivative Instruments	Condensed Consolidated Balance Sheets Location	Fair Value		Condensed Consolidated Balance Sheets Location	Fair Value		Condensed Consolidated Balance Sheets Location	Fair Value		Condensed Consolidated Balance Sheets Location	Fair Value
Forward contracts designated as cash flow hedging instruments	Prepaid expenses and other current assets	$	329	Prepaid expenses and other current assets	$	3,327	Accrued expenses-other	$	1,571	Accrued expenses-other	$	1,657
Forward contracts not designated as cash flow hedging instruments	Prepaid expenses and other current assets	—		Prepaid expenses and other current assets	—		Accrued expenses-other	6		Accrued expenses-other	63



Forward contracts designated as cash flow hedging instruments	Intangible and other assets-net	—		Intangible and other assets-net	21		Other long-term liabilities	—		Other long-term liabilities	104

Total		$	329		$	3,348		$	1,577		$	1,824

The following tables summarize the effects of the Company's derivative instruments on earnings (in thousands):


	Effect of Derivative Instruments
	For the 13 Weeks Ended October 3, 2020				For the 13 Weeks Ended September 28, 2019
	Cost of Sales		Other Income (Expense)-net		Cost of Sales		Other Income (Expense)-net
Total amounts of income and expense line items presented in the condensed consolidated statements of income (loss) and comprehensive income (loss) in which the effects of cash flow hedges are recorded	$	205,726	$	—	$	260,946	$	(1,424)
Gain (loss) on cash flow hedging relationships:
Forward contracts designated as cash flow hedging instruments:
Total gain (loss) reclassified from other comprehensive income (loss)	$	(27)	$	13	$	2,518	$	1,120
Forward contracts not designated as hedging instruments:
Total gain (loss) recognized in income	$	—	$	(63)	$	—	$	27


	Effect of Derivative Instruments
	For the 40 Weeks Ended October 3, 2020				For the 39 Weeks Ended September 28, 2019
	Cost of Sales		Other Income (Expense)-net		Cost of Sales		Other Income (Expense)-net
Total amounts of income and expense line items presented in the condensed consolidated statements of income (loss) and comprehensive income (loss) in which the effects of cash flow hedges are recorded	$	574,496	$	(6,411)	$	714,573	$	24,995
Gain (loss) on cash flow hedging relationships:
Forward contracts designated as cash flow hedging instruments:
Total gain (loss) reclassified from other comprehensive income (loss)	$	5,285	$	101	$	7,309	$	1,347
Forward contracts not designated as hedging instruments:
Total gain (loss) recognized in income	$	—	$	30	$	—	$	(6)

At the end of the Third Quarter, the Company had forward contracts designated as cash flow hedges with maturities extending through June 2021. As of October 3, 2020, an estimated net loss of $1.1 million is expected to be reclassified into earnings within the next twelve months at prevailing foreign currency exchange rates.