Financial Instruments and Risk Management (Notes)

9 Months Ended

Sep. 26, 2020

Investments, All Other Investments [Abstract]

Financial Instruments and Risk Management

DERIVATIVE FINANCIAL INSTRUMENTS

The Company follows FASB ASC Topic 815, Derivatives and Hedging ("ASC 815"), which requires that all derivative instruments be recorded on the consolidated condensed balance sheets at fair value by establishing criteria for designation and effectiveness of hedging relationships. The Company does not hold or issue financial instruments for trading purposes.

The Company utilizes foreign currency forward exchange contracts designated as cash flow hedges to manage the volatility associated primarily with U.S. dollar inventory purchases made by non-U.S. wholesale operations in the normal course of business. These foreign currency forward exchange hedge contracts extended out to a maximum of 545 days as of September 26, 2020, December 28, 2019 and September 28, 2019. If, in the future, the foreign exchange contracts are determined not to be highly effective or are terminated before their contractual termination dates, the Company would remove the hedge designation from those contracts and reclassify into earnings the unrealized gains or losses that would otherwise be included in accumulated other comprehensive income (loss) within stockholders’ equity. During fiscal 2020, the Company reclassified $1.3 million to other income for foreign currency contracts that were no longer deemed highly effective.

The Company also utilizes foreign currency contracts that are not designated as hedging instruments to manage foreign currency transaction exposure. Foreign currency derivatives not designated as hedging instruments are offset by foreign exchange gains or losses resulting from the underlying exposures of foreign currency denominated assets and liabilities.

The Company has an interest rate swap arrangement, which unless otherwise terminated, will mature on December 6, 2023. This agreement, which exchanges floating rate for fixed rate interest payments over the life of the agreement without the exchange of the underlying notional amounts, has been designated as a cash flow hedge of the interest payments associated with the underlying debt. The notional amounts of the interest rate swap arrangement is used to measure interest to be paid or received and does not represent the amount of exposure to credit loss. The differential paid or received on the interest rate swap arrangement is recognized as interest expense. In accordance with ASC 815, the Company has formally documented the relationship between the interest rate swap and the variable rate borrowing, as well as its risk management objective and strategy for undertaking the hedge transaction. This process included linking the derivative to the specific liability or asset on the balance sheet. The Company also assessed at the inception of the hedge, and continues to assess on an ongoing basis, whether the derivative used in the hedging transaction is highly effective in offsetting changes in the cash flows of the hedged item.

The Company has a cross currency swap to minimize the impact of exchange rate fluctuations. The hedging instrument, which, unless otherwise terminated, will mature on September 1, 2021, has been designated as a hedge of a net investment in a foreign operation. The Company pays 2.75% on the euro-denominated notional amount and receive 5.00% on the U.S. dollar notional amount, with an exchange of principal at maturity. Changes in fair value related to movements in the foreign currency exchange spot rate are recorded in accumulated other comprehensive income, offsetting the currency translation adjustment related to the underlying net investment that is also recorded in accumulated other comprehensive income. All other changes in fair value are recorded in interest expense. In accordance with ASC 815, the Company has formally documented the relationship between the cross-currency swap and the Company’s investment in its euro-denominated subsidiary, as well as its risk management objective and strategy for undertaking the hedge transaction. This process included linking the derivative to its net investment on the balance sheet. The Company also assessed at the hedge’s inception, and continues to assess on an ongoing basis, whether the derivative used in the hedging transaction is highly effective in offsetting changes in expected cash flows of the hedged item.

The notional amounts of the Company’s derivative instruments are as follows:

(Dollars in millions)	September 26, 2020		December 28, 2019		September 28, 2019
Foreign exchange contracts:
Hedge contracts	$	188.3	$	246.3	$	237.7
Non-hedge contracts	—		7.3		—
Interest rate swap	293.9		355.8		366.2
Cross currency swap	79.8		79.8		79.8

The recorded fair values of the Company’s derivative instruments are as follows:

(In millions)	September 26, 2020		December 28, 2019		September 28, 2019
Financial assets:
Foreign exchange contracts - hedge	$	1.3	$	2.3	$	6.3
Financial liabilities:
Foreign exchange contracts - hedge	$	(0.4)	$	(1.8)	$	(0.2)
Interest rate swap	(8.6)		(1.8)		(3.0)
Cross currency swap	(6.2)		(3.0)		(2.1)