Derivative Financial Instruments

9 Months Ended

Sep. 28, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

We account for derivative financial instruments in accordance with the ASC guidance on “Derivatives and Hedging”.  This ASC requires us to recognize the value of derivative instruments as either assets or liabilities in the statement of financial position at fair value.  The accounting for changes in the fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated as a hedge and qualifies as part of a hedging relationship.  The accounting also depends on the type of hedging relationship, whether a cash flow hedge, a fair value hedge, or hedge of a net investment in a foreign operation.  On entry into a derivative instrument, we formally designate and document it as a hedge of a specific underlying exposure, as well as the risk management objectives and strategies for undertaking the hedge transaction.

Derivatives are recorded in our Consolidated Balance Sheets at fair value in prepaid expenses and other current assets, other noncurrent assets, accounts payable and accrued expenses or other noncurrent liabilities, depending on whether the amount is an asset or liability and whether it is short-term or long-term in nature.  The fair values of derivatives used to hedge or modify our risks fluctuate over time.  These fair value amounts should not be viewed in isolation, but rather in relation to the cash flows or fair value of the underlying hedged transactions or assets and other exposures, as well as the overall reduction in our risk.  In addition, the earnings impact resulting from our derivative instruments is recorded in the same line item within the Consolidated Statements of Income as the underlying exposure being hedged.

We predominantly designate our hedges as cash flow hedges.  A cash flow hedge requires that the effective portion of 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.  The ineffective portion of the change in fair value of a derivative instrument is to be recognized in earnings in the same line in which the hedge transaction affects earnings.

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.  However, because these contracts are entered into with highly rated financial institutions, we do not anticipate non-performance by any of the counterparties.  The exposure is usually the amount of the unrealized gains, if any, in such contracts.

Because of the high degree of effectiveness between the hedging instrument and the underlying exposure being hedged, fluctuations in the value of the derivative instruments are generally offset by changes in the cash flows or fair value of the underlying exposures being hedged.  In addition, we perform an assessment of hedge effectiveness, both at inception and at least quarterly thereafter, in order to determine whether the financial instruments that are used in hedging transactions are effective at offsetting changes in the cash flows or fair value of the related underlying exposures. Any ineffective portion of a financial instrument’s change in fair value is immediately recognized in earnings.

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 expire within one year. Our foreign currency hedges were entered into to hedge our 2012 and 2013 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.  Based on our formal assessment of hedge effectiveness of our qualifying foreign currency forward contracts, we determined that the impact of hedge ineffectiveness was de minimis for the quarters and nine month periods ended September 28, 2012 and September 30, 2011, respectively.

Bunker Fuel Hedges

We are exposed to fluctuations in bunker fuel prices on our results of operations and financial condition and mitigate that exposure by entering into bunker fuel swap agreements, which permit us to lock in bunker fuel purchase prices.  One of our subsidiaries entered into bunker fuel swap agreements in order to hedge fuel costs incurred by our owned and chartered vessels through 2012. We designated our bunker fuel swap agreements as cash flow hedges.  

15.  Derivative Financial Instruments (continued)

Certain of our derivative instruments contain provisions that require the current credit relationship between the Company and its 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 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 28, 2012 is $3.5 million.  As of September 28, 2012, no triggering event has occurred and thus we are not required to post collateral.  If the credit-risk-related contingent features underlying these agreements were triggered on September 28, 2012, we would not be required to post collateral to our counterparty because the collateralization threshold has not been met.

We had the following outstanding foreign currency forward and bunker fuel swap contracts as of September 28, 2012:

Foreign Currency Contracts Qualifying as Cash Flow Hedges:	Notional Amount			Bunker Fuel Swap Contracts Qualifying as Cash Flow Hedges:	Notional Amount
Euro	€	217.4	million	3% U.S. Gulf Coast	26,514	barrels
British pound	£	13.8	million	3.5% Rotterdam Barge	5,397	metric tons
Japanese yen	JPY	6,571.6	million
Costa Rican colon	CRC	9,416.3	million
Chilean peso	CLP	939.9	million
Brazilian real	BRL	4.0	million
Kenya shilling	KES	345.8	million

The following table reflects the fair values of derivative instruments , all of which are designated as Level 2 of the fair value hierarchy, as of September 28, 2012 and December 30, 2011 (U.S. dollars in millions):

Derivatives Designated as Hedging Instruments (1)
	Foreign exchange contracts				Bunker fuel swap agreements
Balance Sheet Location:	September 28, 2012 (2)		December 30, 2011		September 28, 2012
Asset derivatives:
Prepaid expenses and other current assets	$	6.7	$	22.3	$	0.2
Total asset derivatives	$	6.7	$	22.3	$	0.2
Liability derivatives:
Accounts payable and accrued expenses	$	11.1	$	14.8	$	—
Other noncurrent liabilities	$	2.7	$	—	$	—
Total liability derivatives	$	13.8	$	14.8	$	—

⁽¹⁾ See Note 16, "Fair Value Measurements", for fair value disclosures.

⁽²⁾ We expect that $4.2 million and $2.7 million of the net fair value of hedges recognized as a net loss in accumulated other comprehensive income ("AOCI") will be transferred to earnings during the next 12 months and 2013, respectively, along with the effect of the related forecasted transaction.

15.  Derivative Financial Instruments (continued)

The following table reflects the effect of derivative instruments on the Consolidated Statements of Income for the quarters and nine months ended September 28, 2012 and September 30, 2011, respectively (U.S. dollars in millions):

Derivatives in Cash Flow Hedging Relationships	Amount of Gain (Loss) Recognized in Other Comprehensive Income on Derivatives (Effective Portion)						Location of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)	Amount of Gain (Loss) Reclassified from AOCI into Income (Effective Portion)
	Quarter ended							Quarter ended
	September 28, 2012			September 30, 2011				September 28, 2012			September 30, 2011
Foreign exchange contracts	$	(14.9	)	$	20.7		Net sales	$	2.8		$	(6.4	)
Foreign exchange contracts	(0.1		)	(2.8		)	Cost of products sold	1.4			0.3
Bunker fuel swap agreements (1)	1.9			—			Cost of products sold	(0.4		)	—
Total	$	(13.1	)	$	17.9			$	3.8		$	(6.1	)
	Nine months ended							Nine months ended
	September 28, 2012			September 30, 2011				September 28, 2012			September 30, 2011
Foreign exchange contracts	$	(14.8	)	$	16.2		Net sales	$	10.5		$	(18.6	)
Foreign exchange contracts	0.4			(2.0		)	Cost of products sold	3.4			0.7
Bunker fuel swap agreements (1)	0.2			—			Cost of products sold	(0.1		)	—
Total	$	(14.2	)	$	14.2			$	13.8		$	(17.9	)

⁽¹⁾ The bunker fuel swap agreements had an ineffective portion of $0.1 million for the nine months ended September 28, 2012. There was no ineffective portion for the quarter ended September 28, 2012.