Derivative Financial Instruments

9 Months Ended

Sep. 27, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

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

Counterparties expose us to credit loss in the event of non-performance of 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 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 were in a liability position on September 27, 2024 was $2.6 million. As of September 27, 2024, 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.

Cash flows from derivative instruments that are designated as cash flow hedges are classified in the same category as the cash flows from the underlying hedged items. In the event that hedge accounting is discontinued, cash flows related to changes in fair value subsequent to the date of discontinuance are classified within investing activities.

Foreign Currency Hedges

Our results of operations and financial condition are exposed to fluctuations in currency exchange rates against the U.S. dollar, 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. At September 27, 2024, our foreign currency forward hedge a portion of our 2024 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 contracts as of September 27, 2024 (in millions):

Foreign currency contracts qualifying as cash flow hedges:

Notional amount

Euro

EUR

89.4

British pound

GBP

11.6

Japanese yen

JPY

1,396.0

Kenyan shilling

KES

526.7

Interest Rate Contracts

Our results of operations and financial condition are exposed to fluctuations in variable interest rates, and we mitigate that exposure by entering into interest rate swaps. During 2018, 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. We amended our Second A&R Credit Agreement and our interest rate swaps to transition from LIBOR to SOFR as a reference rate effective January 3, 2023.

Gains or losses on interest rate swaps are recorded in other comprehensive income and are subsequently reclassified into earnings as the interest expense on debt is recognized in earnings. The notional value of the interest rate contract outstanding was $200.0 million, which was expected to mature in 2028. During the quarter ended September 27, 2024, we agreed to terminate our outstanding interest rate swap in exchange for $7.3 million in cash proceeds, net of fees of approximately $0.2 million, which is included in the change in "Other assets and liabilities" on the Consolidated Statements of Cash Flows for the nine months ended September 27, 2024. Based on our assessment that the originally hedged cash flows associated with our variable rate borrowings remain probable, the proceeds received as a result of our terminated interest rate swap will remain in accumulated other comprehensive loss and be reclassified to earnings through interest expense over the remaining life of the hedged outstanding debt.

The following table reflects the fair values of derivative instruments, which are designated as level 2 in the fair value hierarchy, as of September 27, 2024 and December 29, 2023 (U.S. dollars in millions):


	Derivatives designated as hedging instruments (1)
	Foreign exchange contracts				Interest rate swaps			Total
Balance Sheet location:	September 27, 2024		December 29, 2023			September 27, 2024		December 29, 2023		September 27, 2024		December 29, 2023
Asset derivatives:
Prepaid expenses and other current assets	$	0.4	$	0.1		$	—	$	2.1	$	0.4	$	2.2
Other noncurrent assets	—		—			—		5.8		—		5.8
Total asset derivatives	$	0.4	$	0.1		$	—	$	7.9	$	0.4	$	8.0

Liability derivatives:
Accounts payable and accrued expenses	$	2.6	$	0.4		$	—	$	—	$	2.6	$	0.4

Total liability derivatives	$	2.6	$	0.4		$	—	$	—	$	2.6	$	0.4

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

As of September 27, 2024, we expect that $1.2 million of the net fair value of our cash flow hedges recognized as a net gain in accumulated other comprehensive loss, inclusive of amounts associated with our interest rate swap terminated during the quarter ended September 27, 2024, will be transferred to earnings during the next 12 months, and the remaining net gain of $3.2 million over the following 4 years, along with the earnings effect of the related forecasted transactions.

The following table reflects the effect of derivative instruments on the Consolidated Statements of Comprehensive Income for the quarters and nine months ended September 27, 2024 and September 29, 2023 (U.S. dollars in millions):


	Net amount of gain (loss) recognized in other comprehensive income on derivatives
	Quarter ended				Nine months ended
Derivative instruments	September 27, 2024		September 29, 2023		September 27, 2024		September 29, 2023
Foreign exchange contracts	$	(3.8)	$	2.5	$	1.4	$	7.0

Interest rate swaps, net of tax	(2.5)		2.3		(0.9)		2.1
Total	$	(6.3)	$	4.8	$	0.5	$	9.1

Refer to Note 15, “Accumulated Other Comprehensive Loss,” for the effect of derivative instruments on the Consolidated Statements of Operations related to amounts reclassified from accumulated other comprehensive loss for the quarters and nine months ended September 27, 2024 and September 29, 2023.