Derivative financial instruments

3 Months Ended

Mar. 28, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We are exposed to certain risks relating to our ongoing business operations. From time to time, we use derivative financial instruments, principally foreign currency swaps, forward foreign currency contracts, interest rate caps (options) and interest rate swaps, to reduce our exposure to foreign currency risk and interest rate risk. We do not hold or issue derivatives for speculative purposes and monitor closely the credit quality of the institutions with which we transact.

We recognize derivative instruments as either assets or liabilities in the condensed consolidated balance sheet. We designate certain of our currency swaps as net investment hedges and designate our interest rate caps and interest rate swaps as cash flow hedges. The gain or loss on the designated derivative instrument is recognized in other comprehensive income (“OCI”) and reclassified into net income in the same period or periods during which the hedged transaction affects earnings.

Derivative instruments that have not been designated in an effective hedging relationship are considered economic hedges, and their change in fair value is recognized in net income in each period.

The period end fair values of derivative financial instruments were as follows:


	As of March 28, 2020																		As of December 28, 2019
(dollars in millions)	Prepaid expenses and other assets		Other non- current assets		Accrued expenses and other current liabilities		Other non- current liabilities		Net		Prepaid expenses and other assets		Other non- current assets		Accrued expenses and other current liabilities		Other non- current liabilities		Net
Derivatives designated as hedging instruments:
—Currency swaps	$	2.2	$	—	$	—	$	(14.8)	$	(12.6)	$	4.2	$	—	$	—	$	(19.3)	$	(15.1)
—Interest rate caps	—		—		(2.5)		(2.6)		(5.1)		—		—		(4.0)		(3.0)		(7.0)
—Interest rate swaps	—		—		(11.8)		(38.5)		(50.3)		—		—		(5.3)		(29.0)		(34.3)

Derivatives not designated as hedging instruments:
—Currency swaps	0.1		—		(0.7)		—		(0.6)		—		—		(0.1)		—		(0.1)
—Currency forward contracts	0.6		—		(0.3)		—		0.3		1.2		—		(0.2)		—		1.0
	$	2.9	$	—	$	(15.3)	$	(55.9)	$	(68.3)	$	5.4	$	—	$	(9.6)	$	(51.3)	$	(55.5)

A. Instruments designated as net investment hedges

We hold cross currency swaps that have been designated as net investment hedges of certain of our European operations. As of March 28, 2020 and December 28, 2019, the notional principal amount of these contracts was $270.0 million. During July 2019, we extended the maturity of these contracts from March 2020 to March 2022. In addition, we have designated €147.0 million of our Euro-denominated debt as a net investment hedge of certain of our European operations.

The fair value gains before tax recognized in OCI in relation to the instruments designated as net investment hedging instruments were as follows:


	Three months ended
(dollars in millions)	March 28, 2020		March 30, 2019
Net fair value gains recognized in OCI in relation to:
—Euro-denominated debt	$	1.5	$	0.7
—Designated cross currency swaps	2.5		4.9
Total net fair value gains	$	4.0	$	5.6

During the three months ended March 28, 2020, a net loss of $1.6 million was recognized in interest expense in relation to our cross currency swaps that have been designated as net investment hedges, compared with a net gain of $2.2 million during the three months ended March 30, 2019.

B. Instruments designated as cash flow hedges

We use interest rate swaps and interest rate caps as part of our interest rate risk management strategy to add stability to interest expense and to manage our exposure to interest rate movements. These instruments are all designated as cash flow hedges. As of March 28, 2020 and December 28, 2019, we held three pay-fixed, receive-floating interest rate swaps with an aggregate notional amount of $870.0 million, which run from June 30, 2020 through June 30, 2023. Our interest rate caps involve the receipt of variable rate payments from a counterparty if interest rates rise above the strike rate on the contract in exchange for a premium. As of both March 28, 2020 and December 28, 2019, the notional amount of the interest rate cap contracts outstanding was $1.7 billion.

The periods covered by our interest rate caps and their notional values are as follows:


(in millions)	Notional value
June 30, 2017 to June 30, 2020	$	200.0
June 28, 2019 to June 30, 2020	$	1,000.0
July 1, 2019 to June 30, 2023	€	425.0

The movements before tax recognized in OCI in relation to our cash flow hedges were as follows:


	Three months ended
(dollars in millions)	March 28, 2020		March 30, 2019
Movement recognized in OCI in relation to:
—Fair value loss on cash flow hedges	$	(15.9)	$	(13.3)
—Deferred premium reclassified from OCI to net income	1.7		0.1
Total movement	$	(14.2)	$	(13.2)

During the three months ended March 28, 2020, a net expense of $1.7 million was reclassified to interest expense in relation to our cash flow hedges, compared with net expense of $0.1 million during the three months ended March 30, 2019.

C. Derivative instruments not designated as hedging instruments

We do not designate our currency forward contracts, which are used primarily in respect of operational currency exposures related to payables, receivables and material procurement, or the currency swap contracts that are used to manage the currency profile of Gates’ cash as hedging instruments for the purposes of hedge accounting.

As of March 28, 2020, the notional principal amount of outstanding currency swaps that are used to manage the currency profile of Gates’ cash was $32.3 million, compared with $16.7 million as of December 28, 2019.

As of March 28, 2020, the notional amount of outstanding currency forward contracts that are used to manage operational foreign exchange exposures was $64.3 million, compared with $82.5 million as of December 28, 2019.

The fair value gains recognized in net income in relation to derivative instruments that have not been designated as hedging instruments were as follows:


	Three months ended
(dollars in millions)	March 28, 2020		March 30, 2019
Fair value gains recognized in relation to:
—Currency forward contracts recognized in SG&A	$	0.3	$	2.7
—Currency swaps recognized in other income	0.5		0.2
Total	$	0.8	$	2.9