Derivative Financial Instruments

9 Months Ended

Sep. 25, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

13. Derivative Financial Instruments

Our derivative financial instruments reduce our exposure to fluctuations in foreign exchange rates, variable interest rates and bunker fuel prices. We designate our derivative financial instruments as cash flow hedges.

Counterparties expose us to credit loss in the event of non-performance on hedges. We monitor our exposure to counterparty non-performance risk both at inception of the hedge and at least quarterly thereafter.

Fluctuations in the value of the derivative instruments are generally offset by changes in the cash flows of the underlying exposures being hedged. A cash flow hedge requires that the change in the fair value of a derivative instrument be recognized in other comprehensive (loss) income, a component of shareholders’ equity, and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same income statement line item as the earnings effect of the hedged item.

Certain of our derivative instruments contain provisions that require the current credit relationship between us and our counterparty to be maintained throughout the term of the derivative instruments. If that credit relationship changes, certain provisions could be triggered, and the counterparty could request immediate collateralization of derivative instruments in a net liability position above a certain threshold. The aggregate fair value of all derivative instruments with a credit-risk-related contingent feature that are in a liability position on September 25, 2020 is $61.6 million. As of September 25, 2020, no triggering event has occurred and thus we are not required to post collateral.

Derivative instruments are disclosed on a gross basis. There are various rights of setoff associated with our derivative instruments that are subject to an enforceable master netting arrangement or similar agreements. Although various rights of setoff and master netting arrangements or similar agreements may exist with the individual counterparties, individually, these financial rights are not material.

Foreign Currency Hedges

We are exposed to fluctuations in currency exchange rates against the U.S. dollar on our results of operations and financial condition, and we mitigate that exposure by entering into foreign currency forward contracts. Certain of our subsidiaries periodically enter into foreign currency forward contracts in order to hedge portions of forecasted sales or cost of sales denominated in foreign currencies, which generally mature within one year. Our foreign currency hedges were entered into for the purpose of hedging portions of our 2020 and 2021 foreign currency exposure.

The foreign currency forward contracts qualifying as cash flow hedges were designated as single-purpose cash flow hedges of forecasted cash flows.

We had the following outstanding foreign currency forward contracts as of September 25, 2020 (in millions):

Foreign currency contracts qualifying as cash flow hedges:

Notional amount

Euro

EUR

105.8

British pound

GBP

16.4

Japanese yen

JPY

2,749.0

Korean won

KRW

10,465.0

13. Derivative Financial Instruments (continued)

Bunker Fuel Hedges

We are exposed to fluctuations in bunker fuel prices on our results of operations and financial condition, and we mitigate that exposure by entering into bunker fuel swap agreements which permit us to lock in bunker fuel prices. During the nine months ended September 25, 2020, one of our subsidiaries entered into bunker fuel swap agreements in order to hedge portions of our fuel expenses incurred by our owned and chartered vessels throughout 2020 and 2021. We designated our bunker fuel swap agreements as cash flow hedges.

We had the following outstanding bunker fuel swap contracts as of September 25, 2020:

Bunker fuel swap contracts:

Notional amount

0.5% U.S. Gulf Coast (1)

174,161

barrels

3% U.S. Gulf Coast (1)

90,116

metric tons

0.5% Singapore

42,111

metric tons

(1) During the nine months ended September 25, 2020, we dedesignated portions of our bunker fuel cash flow hedges due to decreases in our forecasted fuel consumption for certain fuel types which was partially driven by the delay of the receipt of three of our six new refrigerated container vessels due to the COVID-19 pandemic. The notional amounts which were dedesignated consisted of 133,855 barrels of fuel related to our 0.5% U.S. Gulf Coast contracts and 63,753 metric tons of fuel related to our 3% U.S. Gulf Coast contracts. When hedges are dedesignated, any changes in fair value of the associated derivatives since the date of dedesignation are recognized in other (expense) income, net. Additionally, in the case that the hedged forecasted fuel consumption is not probable of occurring in the originally specified time period or within the following two months, the related accumulated other comprehensive gain or loss associated with the hedge is reclassified to other (expense) income, net immediately. We recorded a gain of $0.8 million during the quarter ended September 25, 2020 and $0.3 million during the nine months ended September 25, 2020 related to our dedesignated cash flow hedges in other (expense) income, net.

Interest Rate Contracts

We are exposed to fluctuations in variable interest rates on our results of operations and financial condition and we mitigate that exposure by entering into interest rate swaps. We entered into interest rate swaps in order to hedge the risk of the fluctuation on future interest payments related to our variable rate LIBOR-based borrowings through 2028.

Gains or losses on interest rate swaps are recorded in other comprehensive (loss) income and will be subsequently reclassified into earnings as the interest expense on debt is recognized in earnings. At September 25, 2020, the notional value of interest rate contracts outstanding was $400.0 million, with $200.0 million maturing in 2024 and the remaining $200.0 million maturing in 2028. Refer to Note 8, “Debt and Finance Lease Obligations.”

13. Derivative Financial Instruments (continued)

The following table reflects the fair values of derivative instruments, which are designated as level 2 in the fair value hierarchy, as of September 25, 2020 and December 27, 2019 (U.S. dollars in millions):


	Derivatives designated as hedging instruments (1)
	Foreign exchange contracts				Bunker fuel swaps				Interest rate swaps				Total
Balance Sheet location:	September 25, 2020		December 27, 2019		September 25, 2020		December 27, 2019		September 25, 2020		December 27, 2019		September 25, 2020		December 27, 2019
Asset derivatives:
Prepaid expenses and other current assets	$	1.3	$	1.7	$	0.4	$	—	$	—	$	—	$	1.7	$	1.7

Total asset derivatives	$	1.3	$	1.7	$	0.4	$	—	$	—	$	—	$	1.7	$	1.7

Liability derivatives:
Accounts payable and accrued expenses	$	4.1	$	0.7	$	1.1	$	—	$	—	$	—	$	5.2	$	0.7
Other noncurrent liabilities	—		—		0.9		—		55.1		30.3		56.0		30.3
Total liability derivatives	$	4.1	$	0.7	$	2.0	$	—	$	55.1	$	30.3	$	61.2	$	31.0

(1) See Note 14, "Fair Value Measurements", for fair value disclosures.

At September 25, 2020, $0.7 million is included in prepaid expenses and other current assets, $0.1 million is included in other noncurrent assets, and $0.4 million is included in accounts payable and accrued expenses for the portions of our bunker fuel swap contracts which are no longer designated as hedging instruments.

We expect that $3.7 million of the net fair value of designated and dedesignated hedges recognized as a net loss in accumulated other comprehensive loss will be transferred to earnings during the next 12 months and the remaining net loss of $55.5 million over a period of 8 years, along with the earnings effect of the related forecasted transactions.

13. Derivative Financial Instruments (continued)

The following table reflects the effect of derivative instruments designated in hedging relationships on the Consolidated Statements of Operations for the quarters and nine months ended September 25, 2020 and September 27, 2019 (U.S. dollars in millions):


Derivatives in cash flow hedging relationships	Amount of gain (loss) recognized in other comprehensive (loss) income on derivatives				Location of (loss) gain reclassified from accumulated other comprehensive loss into income	Amount of gain (loss) reclassified from accumulated other comprehensive loss into income
	Quarter ended					Quarter ended
	September 25, 2020		September 27, 2019			September 25, 2020		September 27, 2019
Foreign exchange contracts	$	(1.8)	$	1.9	Net sales	$	(3.6)	$	2.4
Foreign exchange contracts	(0.2)		—		Cost of products sold	(0.1)		0.5
Bunker fuel swaps	0.9		—		Cost of products sold	0.2		—

Interest rate swaps, net of tax	1.4		(7.3)		Interest expense	(2.8)		(0.6)
Total	$	0.3	$	(5.4)	Total	$	(6.3)	$	2.3

	Nine months ended					Nine months ended
	September 25, 2020		September 27, 2019			September 25, 2020		September 27, 2019
Foreign exchange contracts	$	(3.5)	$	3.0	Net sales	$	(0.9)	$	4.9
Foreign exchange contracts	(0.3)		0.7		Cost of products sold	0.4		1.1
Bunker fuel swaps	(1.3)		—		Cost of products sold	(1.0)		—

Interest rate swaps, net of tax	(21.8)		(28.7)		Interest expense	(6.3)		(1.4)
Total	$	(26.9)	$	(25.0)	Total	$	(7.8)	$	4.6