Derivative Financial Instruments

12 Months Ended

Dec. 27, 2014

General Discussion of Derivative Instruments and Hedging Activities [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

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 receivable, 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. In 2014, 2013 and 2012, forward points on fair value hedges resulted in pretax gains of $10.3 million, $11.1 million and $10.3 million, 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 generally enters into cash flow hedge contracts for periods ranging from three to fifteen months. The effective portion of the gain or loss on the hedging instrument is recorded in other comprehensive loss and is reclassified into earnings as the transactions being hedged are recorded. As such, the balance in other comprehensive loss at the end of the annual reporting period 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. The balance in accumulated other comprehensive loss, net of tax, resulting from open foreign currency hedges designated as cash flow hedges was a deferred gain/(loss) of $7.8 million, $2.2 million and $(0.2) million as of December 27, 2014, December 28, 2013 and December 29, 2012, respectively. In 2014, 2013 and 2012, the Company recorded, net of tax, net gains/(losses) associated with these types of hedges of $5.6 million, $2.4 million and $(0.4) million, respectively, in other comprehensive loss. In assessing hedge effectiveness, the Company excludes forward points, which are included as a component of interest expense.

The Company also uses financial instruments, such as forward contracts and certain euro denominated borrowings under the Company's Credit Agreement, 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 losses. In 2014, 2013 and 2012, the Company recorded, net of tax, net gains/(losses) associated with these hedges of $25.5 million, $13.3 million and $(8.9) million, respectively, in other comprehensive loss. 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.

While the Company's foreign currency contracts designated as net equity and fair value hedges of non-permanent intercompany balances mitigate its exposure to foreign exchange gains or losses, other than the euro borrowings designated as a hedge, they result in an impact to operating cash flows as they are settled, whereas the hedged items do not generate offsetting cash flows. For the years ended December 27, 2014, December 28, 2013 and December 29, 2012 the cash flow impact of these currency hedges was an inflow of $4.6 million, $3.2 million and $2.1 million, respectively.

Following is a listing of the notional amounts included in the Company's outstanding derivative financial instruments as of December 27, 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 year-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	2014				2013
(In millions)	Buy		Sell		Buy		Sell
U.S. dollar	$	76.8					$	54.7
Euro	70.9				$	157.7
South Korean won	10.6				9.7
Philippine peso	7.6				11.3
New Zealand dollar	7.4				4.5
South African rand	6.4						10.4
Danish krone	3.9						3.5
Uruguayan peso	1.5				4.7
Swiss franc			$	46.7			49.4
Turkish lira			23.4				11.7
Japanese yen			14.8				3.7
Mexican peso			13.6		18.2
Indonesian rupiah			13.2		2.3
Canadian dollar			11.8				11.0
Russian ruble			11.0				22.9
Singapore dollar			8.1				1.7
Brazilian real			5.9				6.6
Polish zloty			4.5				4.7
Australian dollar			4.2				6.8
Indian rupee			3.7				6.6
Czech koruna			3.6				2.5
Norwegian krone			3.4				1.7
Malaysian ringgit			3.3				2.7
Swedish krona			3.0				1.7
Hungarian forint			2.7				2.4
Croatian kuna			2.3				2.6
Chinese renminbi			1.7		8.1
Romanian leu			1.0				1.2
British pound			1.0				1.0
Other currencies (net)			1.3				8.1
	$	185.1	$	184.2	$	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 generates 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 tables summarize the Company's derivative positions, representing the Company's only fair value measurements performed on a recurring basis, and the impact they had on the Company's financial position as of December 27, 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	2014		2013		Balance sheet location	2014		2013
Foreign exchange contracts	Non-trade amounts receivable	$	35.0	$	20.3	Accrued liabilities	$	30.3	$	19.2

The following tables summarize the Company's derivative positions and the impact they had on the Company's results of operations and comprehensive income for the years ended December 27, 2014, December 28, 2013 and December 29, 2012:

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			2012			2014		2013		2012
Foreign exchange contracts	Other expense		($36.6	)		($17.4	)		$11.9	Other expense		$35.0		$16.7		($11.9	)

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 amounts excluded from effectiveness testing)
Cash flow hedging relationships	2014		2013		2012				2014		2013		2012			2014			2013			2012
Foreign exchange contracts	$	15.9	$	6.5	$	(0.9	)	Cost of products sold	$	9.1	$	3.2	$	1.0	Interest expense	$	(4.9	)	$	(2.9	)	$	(2.5	)
Net equity hedging relationships
Foreign exchange contracts	38.8		20.8		(13.9		)	Other expense	—		—		—		Interest expense	(13.3		)	(13.2		)	(12.9		)

The Company's theoretical credit risk for each derivative instrument is its replacement cost, but management believes that the risk of incurring credit losses is remote and such losses, if any, would not be material. The Company is also exposed to market risk on its derivative instruments due to potential changes in foreign exchange rates; however, such market risk would be fully offset by changes in the valuation of the underlying items being hedged. For all outstanding derivative instruments, the net accrued gain/(loss) was $4.7 million, $1.1 million and $(2.6) million at December 27, 2014, December 28, 2013 and December 29, 2012, respectively, and were recorded either in other assets or accrued liabilities, depending upon the net position of the individual contracts. While certain of its fair value hedges of non-permanent intercompany loans mitigate its exposure to foreign exchange gains or losses, they result in an impact to operating cash flows as the hedges are settled. However, the cash flow impact of certain of these exposures is in turn partially offset by certain hedges of net equity. The notional amounts shown above change based upon the Company's outstanding exposure to fair value fluctuations.