Derivatives and Risk Management

12 Months Ended

Jan. 02, 2021

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 its 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 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 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 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) will be immediately recognized in earnings. There were no gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges for fiscal years 2020, 2019 or 2018.

As of January 2, 2021, the Company had the following outstanding forward contracts designated as cash flow hedges that were entered into to hedge the future payments of intercompany inventory transactions (in millions):


Functional Currency		Contract Currency
Type	Amount	Type	Amount
Euro	81.3	U.S. dollar	98.2
Canadian dollar	22.0	U.S. dollar	17.1
British pound	8.8	U.S. dollar	11.8
Mexican peso	218.8	U.S. dollar	10.9
Japanese yen	985.6	U.S. dollar	9.5
Australian dollar	7.2	U.S. dollar	5.5
U.S. dollar	3.2	Japanese Yen	345.0

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 January 2, 2021, the Company had non-designated forward contracts of $1.4 million on 21.9 million rand, and as of December 28, 2019, the Company had non-designated forward contracts of $1.5 million on 22.6 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 effective portion of gains and losses on cash flow hedges that were recognized in other comprehensive income (loss), net of taxes during fiscal years 2020, 2019 and 2018 are set forth below (in thousands):


Fiscal Year	2020		2019		2018
Cash flow hedges:
Forward contracts	$	2,217	$	6,060	$	18,044

Total gain (loss) recognized in other comprehensive income (loss), net of taxes	$	2,217	$	6,060	$	18,044

The following table illustrates the effective portion of gains and losses on derivative instruments recorded in 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 during fiscal years 2020, 2019 and 2018 (in thousands):


Derivative Instruments	Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Location	Effect of Derivative Instruments	Fiscal Year 2020		Fiscal Year 2019		Fiscal Year 2018
Forward contracts designated as cash flow hedging instruments	Cost of sales	Total gain (loss) reclassified from accumulated other comprehensive income (loss)	$	3,748	$	9,939	$	—
Forward contracts designated as cash flow hedging instruments	Other income (expense)-net	Total gain (loss) reclassified from accumulated other comprehensive income (loss)	$	602	$	1,720	$	(2,629)
Forward contracts not designated as hedging instruments	Other income (expense)-net	Total gain (loss) recognized in income	$	(113)	$	(88)	$	244

Interest rate swap not designated as a cash flow hedging instrument	Other income (expense)-net	Total gain (loss) recognized in income	$	—	$	—	$	67

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 consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):


	Asset Derivatives						Liability Derivatives
	January 2, 2021			December 28, 2019			January 2, 2021			December 28, 2019
	Consolidated Balance Sheets Location	Fair Value		Consolidated Balance Sheets Location	Fair Value		Consolidated Balance Sheets Location	Fair Value		Consolidated Balance Sheets Location	Fair Value
Forward contracts designated as cash flow hedging instruments	Prepaid expenses and other current assets	$	345	Prepaid expenses and other current assets	$	3,327	Accrued expenses-other	$	2,178	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	86		Accrued expenses-other	63


Forward contracts designated as cash flow hedging instruments	Intangible and other assets-net	48		Intangible and other assets-net	21		Other long-term liabilities	35		Other long-term liabilities	104

Total		$	393		$	3,348		$	2,299		$	1,824

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


	Effect of Derivative Instruments
	Fiscal Year 2020				Fiscal Year 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 consolidated statements of income (loss) and comprehensive income (loss) in which the effects of cash flow hedges are recorded	$	842,987	$	(4,828)	$	1,118,274	$	26,984
Gain (loss) on cash flow hedging relationships:
Forward contracts designated as cash flow hedging instruments:
Total gain (loss) reclassified from other comprehensive income (loss)	3,748		602		9,939		1,720
Forward contracts not designated as cash flow hedging instruments:
Total gain (loss) recognized in income	—		(113)		—		(88)

At the end of fiscal year 2020, the Company had forward contracts designated as cash flow hedges with maturities extending through June 2022. As of January 2, 2021, an estimated net loss of $1.6 million is expected to be reclassified into earnings within the next twelve months at prevailing foreign currency exchange rates.