Derivative Financial Instruments

6 Months Ended

Jul. 01, 2023

Derivative Instruments and Hedging Activities Disclosure [Abstract]

In March 2021, we entered into eight interest rate swap agreements (“Swap Agreements”) with several financial institutions for a combined notional value of $560 million. The Swap Agreements were entered into to reduce the consolidated interest rate risk associated with variable rate, long-term debt.

In March and April 2023, we modified two of the eight Swap Agreements, each with a notional value of $70 million that matures in May 2024 as follows: (i) the original interest rate swap agreements were cancelled for no termination payment and (ii) we simultaneously entered into new pay-fixed interest rate swap agreements with a notional amount of $70 million each, effectively blending the asset positions of the original interest rate swap agreements into new interest swap agreements and extending the term of our hedged positions to February 2027. In connection with these transactions, no cash was exchanged between us and the counterparty. The new pay-fixed interest rate swap agreements qualify as a hybrid instrument in accordance with Accounting Standards Codification 815, Derivatives and Hedging, consisting of financing components and embedded at-market derivatives that were designated as cash flow hedges. The amounts remaining in accumulated other comprehensive loss for the modified interest rate swap agreements as of July 1, 2023 were approximately $5 million in aggregate and are being amortized as a reduction to interest expense over the effective period of the original interest rate swap agreements, or May 2024. The financing components are accounted for at amortized cost over the life of the swap while the embedded at-market derivatives are accounted for at fair value.

On June 23, 2023, we amended the Swap Agreements to transition from a hedge of LIBOR-based cash flows to a hedge of SOFR-based cash flows. Under the amended Swap Agreements, we convert a portion of our variable interest rate obligations based on Term SOFR with a minimum rate of 0.39% per annum to a base fixed weighted average rate of 1.13% over the remaining terms. We designated the Swap Agreements as cash flow hedges of the variability in expected cash outflows for interest payments.

The Swap Agreements are adjusted to fair value on a quarterly basis. The fair value of each swap is presented within the Unaudited Consolidated Balance Sheets, and we recognize any changes in the fair value as an adjustment of accumulated other comprehensive loss within equity to the extent the swap is effective. As interest expense is accrued on the debt obligation, amounts in accumulated other comprehensive loss related to the Swap Agreements are reclassified into income resulting in a net interest expense on the hedged amount of the underlying debt obligation equal to the effective yield of the fixed rate of the swap.

The following table summarizes the fair value and presentation of derivative instruments in the Unaudited Consolidated Balance Sheets as well as the changes in fair value recorded in accumulated other comprehensive loss:


	Fair Value of Derivative Assets
(in millions)	Financial Statement Line Item	July 1, 2023		December 31, 2022





Derivatives designated as hedging instruments:
Interest rate swaps	Other current assets	$	23	$	23
Interest rate swaps	Other assets	20		22
Total derivative assets designated as hedging instruments		$	43	$	45








Unrealized gain	Accumulated other comprehensive loss	$	40	$	42

The following table summarizes the effect of derivative instruments designated as cash flow hedges in other comprehensive income and the Unaudited Consolidated Statements of Operations:


	Three Months Ended				Six Months Ended
(in millions)	July 1, 2023		July 2, 2022		July 1, 2023		July 2, 2022
Gains recorded in accumulated other comprehensive loss, beginning of period:	$	35	$	29	$	42	$	6
Current period (loss) gain recognized in/reclassified from other comprehensive income	5		1		(2)		24
Gains recorded in accumulated other comprehensive loss, end of period	$	40	$	30	$	40	$	30

Unrealized gains expected to be reclassified from accumulated other comprehensive loss in the next 12 months are estimated to be $29 million as of July 1, 2023.