Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 29, 2014

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Derivative Instruments and Hedging Activities

Derivative Instruments and Hedging Activities

The Company is exposed to fluctuations in foreign currency exchange rates on the earnings, cash flows and financial position of its international operations. Although this currency risk is partially mitigated by the natural hedge arising from the Company's local manufacturing in many markets, a strengthening U.S. dollar generally has a negative impact on the Company. In response to this fact, the Company uses financial instruments to hedge certain of its exposures and to manage the foreign exchange impact to its financial statements. At its inception, a derivative financial instrument used for hedging is designated as a fair value, cash flow or net equity hedge.

Fair value hedges are entered into with financial instruments such as forward contracts, with the objective of limiting exposure to certain foreign exchange risks primarily associated with accounts payable and non-permanent intercompany transactions. For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current earnings. In assessing hedge effectiveness, the Company excludes forward points, which are considered to be a component of interest expense. The forward points on fair value hedges resulted in pretax gains of $2.4 million and $2.0 million in the first quarters of 2014 and 2013, respectively.

The Company also uses derivative financial instruments to hedge foreign currency exposures resulting from certain forecasted purchases and classifies these as cash flow hedges. The Company's cash flow hedge contracts are for periods ranging from one to twelve months. The effective portion of the gain or loss on the hedging instrument is recorded in other comprehensive income and is reclassified into earnings as the transactions being hedged are recorded. As such, the balance at the end of the reporting period in other comprehensive income, related to cash flow hedges, will be reclassified into earnings within the next twelve months. The associated asset or liability on the open hedges is recorded in other current assets or accrued liabilities, as applicable. In assessing hedge effectiveness, the Company excludes forward points, which are included as a component of interest expense. Forward points on cash flow hedges resulted in pretax losses of $1.3 million and $0.4 million in the first quarters of 2014 and 2013, respectively.

The Company also uses financial instruments, such as forward contracts, to hedge a portion of its net equity investment in international operations and classifies these as net equity hedges. Changes in the value of these derivative instruments, excluding any ineffective portion of the hedges, are included in foreign currency translation adjustments within accumulated other comprehensive loss. In the first quarters of 2014 and 2013, the Company recorded, net of tax, net losses associated with these hedges of $3.3 million and $5.3 million, respectively, in other comprehensive income. Due to the permanent nature of the investments, the Company does not anticipate reclassifying any portion of these amounts to the income statement in the next twelve months. In assessing hedge effectiveness, the Company excludes forward points, which are included as a component of interest expense. For the first quarters of 2014 and 2013, forward points on net equity hedges resulted in pretax losses of $3.6 million and $2.9 million, respectively.

While the Company's net equity and fair value hedges of non-permanent intercompany balances mitigate its exposure to foreign exchange gains or losses, they result in an impact to operating cash flows as they are settled, whereas the hedged items may not generate offsetting cash flows. The net cash flow impact of these currency hedges was an outflow of $4.7 million and an inflow of $3.9 million for the first quarters of 2014 and 2013, respectively.

Following is a listing of the Company's outstanding derivative financial instruments at fair value as of March 29, 2014 and December 28, 2013. Related to the forward contracts, the “buy” amounts represent the U.S. dollar equivalent of commitments to purchase foreign currencies, and the “sell” amounts represent the U.S. dollar equivalent of commitments to sell foreign currencies, all translated at the period-end market exchange rates for the U.S. dollar. All forward contracts are hedging net investments in certain foreign subsidiaries, cross-currency intercompany loans that are not permanent in nature, cross-currency external payables and receivables or forecasted purchases. Some amounts are between two foreign currencies:

Forward Contracts	March 29, 2014				December 28, 2013
(In millions)	Buy		Sell		Buy		Sell
Euro	$	116.9			$	157.7
Philippine peso	13.0				11.3
Mexican peso	9.9				18.2
Swiss franc	9.4						$	49.4
South Korean won	6.6				9.7
Chinese renminbi	6.3				8.1
Malaysian ringgit	3.0						2.7
New Zealand dollar	2.1				4.5
Uruguayan peso	0.3				4.7
U.S. dollar			$	35.5			54.7
Russian ruble			18.2				22.9
Turkish lira			15.2				11.7
Australian dollar			11.4				6.8
Canadian dollar			10.4				11.0
Brazilian real			9.1				6.6
Japanese yen			8.7				3.7
South African rand			8.1				10.4
Danish krone			7.3				3.5
Indian rupee			5.9				6.6
Hong Kong dollar			5.8				2.6
Czech koruna			3.9				2.5
Hungarian forint			3.7				2.4
Norwegian krone			3.7				1.7
Argentine peso			3.6				3.7
Polish zloty			3.6				4.7
Singapore dollar			3.2				1.7
Swedish krona			2.9				1.7
Croatian kuna			2.6				2.6
Romanian leu			1.2				1.2
British pound			1.0				1.0
Indonesian rupiah			0.9		2.3
Other currencies (net)			1.8				1.8
	$	167.5	$	167.7	$	216.5	$	217.6

In agreements to sell foreign currencies in exchange for U.S. dollars, for example, an appreciating dollar versus the opposing currency would generate a cash inflow for the Company at settlement, with the opposite result in agreements to buy foreign currencies for U.S. dollars. The above noted notional amounts change based upon changes in the Company's outstanding currency exposures.

The following table summarizes the Company's derivative positions, which are the only assets and liabilities recorded at fair value on a recurring basis, and the impact they had on the Company's financial position as of March 29, 2014 and December 28, 2013. Fair values were determined based on third party quotations (Level 2 fair value measurement):

	Asset derivatives					Liability derivatives
		Fair value					Fair value
Derivatives designated as hedging instruments (in millions)	Balance sheet location	Mar 29, 2014		Dec 28, 2013		Balance sheet location	Mar 29, 2014		Dec 28, 2013
Foreign exchange contracts	Non-trade amounts receivable	$	17.7	$	20.3	Accrued liabilities	$	15.6	$	19.2

The following table summarizes the impact of the Company's derivative positions on the results of operations for the first quarters of 2014 and 2013:

Derivatives designated as fair value hedges (in millions)	Location of gain or (loss) recognized in income on derivatives	Amount of gain or (loss) recognized in income on derivatives				Location of gain or (loss) recognized in income on related hedged items	Amount of gain or (loss) recognized in income on related hedged items
		2014		2013			2014			2013
Foreign exchange contracts	Other expense	$	1.0	$	11.8	Other expense	$	(0.5	)	$	(11.7	)

The following table summarizes the impact of Company's derivative positions on comprehensive income for the first quarters of 2014 and 2013:

Derivatives designated as cash flow and net equity hedges (in millions)	Amount of gain or (loss) recognized in OCI on derivatives (effective portion)						Location of gain or (loss) reclassified from accumulated OCI into income (effective portion)	Amount of gain or (loss) reclassified from accumulated OCI into income (effective portion)				Location of gain or (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)	Amount of gain or (loss) recognized in income on derivatives (ineffective portion and amount excluded from effectiveness testing)
Cash flow hedging relationships	2014			2013				2014		2013			2014			2013
Foreign exchange contracts	$	3.4		$	(0.2	)	Cost of products sold	$	1.7	$	—	Interest expense	$	(1.3	)	$	(0.4	)
Net equity hedging relationships
Foreign exchange contracts	(5.1		)	(8.3		)	Other expense	—		—		Interest expense	(3.6		)	(2.9		)