Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 28, 2015

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 $2.8 million and $2.4 million in the first quarters of 2015 and 2014, 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. At initiation, the Company's cash flow hedge contracts are for periods ranging from one to fifteen 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.

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 financial instruments, excluding any ineffective portion of the hedges, are included in foreign currency translation adjustments within accumulated other comprehensive loss. The Company recorded a $19.5 million net gain associated with net equity hedges in other comprehensive income, net of tax, in the first quarter of 2015, and a net loss of $3.3 million associated with such hedges in the first quarter of 2014. 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 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 in some cases the hedged items do not generate offsetting cash flows. The net cash flow impact of these currency hedges was an inflow of $3.6 million and an outflow of $4.7 million for the first quarters of 2015 and 2014, respectively.

The Company considers the total notional value of its forward contracts as the best measure of the volume of derivative transactions. As of March 28, 2015 and December 27, 2014, the notional amounts of outstanding forward contracts to purchase currencies were $101.8 million and $185.1 million, respectively, and the notional amounts of outstanding forward contracts to sell currencies were $110.0 million and $184.2 million, respectively. As of March 28, 2015, the notional values of the largest positions outstanding were to purchase U.S. dollars $45.8 million and euro $29.3 million.

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 28, 2015 and December 27, 2014. 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 28, 2015		Dec 27, 2014		Balance sheet location	Mar 28, 2015		Dec 27, 2014
Foreign exchange contracts	Non-trade amounts receivable	$	32.0	$	35.0	Accrued liabilities	$	37.8	$	30.3

The following table summarizes the impact of the Company's fair value hedging positions on the results of operations for the first quarters of 2015 and 2014:

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
		2015			2014			2015		2014
Foreign exchange contracts	Other expense	$	(24.7	)	$	1.0	Other expense	$	25.1	$	(0.5	)

The following table summarizes the impact of Company's hedging activities on comprehensive income for the first quarters of 2015 and 2014:

Cash flow and net equity hedges (in millions)	Amount of gain or (loss) recognized in OCI (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 (ineffective portion and amount excluded from effectiveness testing)	Amount of gain or (loss) recognized in income (ineffective portion and amount excluded from effectiveness testing)
Cash flow hedging relationships	2015		2014				2015		2014			2015			2014
Foreign exchange contracts	$	3.4	$	3.4		Cost of products sold	$	4.3	$	1.7	Interest expense	$	(2.9	)	$	(1.3	)
Net equity hedging relationships
Foreign exchange contracts	19.5		(5.1		)	Other expense	—		—		Interest expense	(3.5		)	(3.6		)
Euro denominated debt	10.9		—			Other expense	—		—		Other expense	—			—