Note 6 – Derivative Financial Instruments

The Company uses derivative financial instruments in the form of foreign currency forward exchange contracts and interest rate swap contracts for the purpose of minimizing exposure to changes in foreign currency exchange rates on business transactions and interest rates, respectively. The Company’s policy is to execute such instruments with banks the Company believes to be creditworthy and not to enter into derivative financial instruments for speculative purposes. These derivative financial instruments do not subject the Company to undue risk, as gains and losses on these instruments generally offset gains and losses on the underlying assets, liabilities, or anticipated transactions that are being hedged.

All derivative financial instruments are recorded at fair value in the Consolidated Balance Sheet. For a derivative that has not been designated as an accounting hedge, the change in the fair value is recognized immediately through earnings. For a derivative that has been designated as an accounting hedge of an existing asset or liability (a fair value hedge), the change in the fair value of both the derivative and underlying asset or liability is recognized immediately through earnings. For a derivative designated as an accounting hedge of an anticipated transaction (a cash flow hedge), the change in the fair value is recorded on the Consolidated Balance Sheet in Accumulated Other Comprehensive Income (AOCI) to the extent the derivative is effective in mitigating the exposure related to the anticipated transaction. The change in the fair value related to the ineffective portion of the hedge, if any, is immediately recognized in earnings. The amount recorded within AOCI is reclassified into earnings in the same period during which the underlying hedged transaction affects earnings.

The fair value of derivative instruments is presented on a gross basis, as the Company does not have any derivative contracts which are subject to master netting arrangements. The Company did not have any hedges with credit-risk-related contingent features or that required the posting of collateral as of March 30, 2018, and September 29, 2017. The cash flows from derivative contracts are recorded in operating activities in the Consolidated Statement of Cash Flows.

Foreign Currency Forward Exchange Contracts

The Company transacts business in various foreign currencies, which subjects the Company’s cash flows and earnings to exposure related to changes in foreign currency exchange rates. These exposures arise primarily from purchases or sales of products and services from third parties. Foreign currency forward exchange contracts provide for the purchase or sale of foreign currencies at specified future dates at specified exchange rates, and are used to offset changes in the fair value of certain assets or liabilities or forecasted cash flows resulting from transactions denominated in foreign currencies. At March 30, 2018, and September 29, 2017, the Company had outstanding foreign currency forward exchange contracts principally to sell U.S. dollars with notional amounts of $476.8 million and $406.9 million, respectively. The notional value of our foreign currency forward contracts includes $100.0 million related to the hedge of a portion of our net monetary assets, including the embedded derivatives in our backlog. These notional values consist primarily of contracts for the British pound sterling, Canadian dollar, and European euro and are stated in U.S. dollar equivalents at spot exchange rates at the respective dates.

Interest Rate Swaps

The Company manages its exposure to interest rate risk by maintaining an appropriate mix of fixed and variable rate debt, which over time are expected to moderate the costs of debt financing. When considered necessary, the Company may use financial instruments in the form of interest rate swaps to help meet this objective.

Embedded Derivative Instruments

The Company’s embedded derivatives are the result of entering into sales or purchase contracts that are denominated in a currency other than the Company’s functional currency or the supplier’s or customer’s functional currency.

Net Investment Hedge

In April 2015 the Company issued €330.0 million in 3.625% Senior Notes due April 2023 (2023 Notes) which require semi-annual interest payments in April and October each year until maturity. The Company designated the 2023 Notes and accrued interest as a hedge of the investment of certain foreign business units. The foreign currency gain or loss that is effective as a hedge is reported as a component of AOCI in shareholders’ equity. To the extent that this hedge is ineffective, the foreign currency gain or loss is recorded in earnings. There has been no ineffectiveness of the hedge since inception.

Fair Value of Derivative Instruments

Fair value of derivative instruments in the Consolidated Balance Sheet at March 30, 2018, and September 29, 2017, consisted of:

In Thousands		Fair Value
		March 30,		September 29,
	Classification	2018		2017
Foreign Currency Forward Exchange Contracts:
	Other current assets	$	8,413	$	11,433
	Other assets		805		2,783
	Accrued liabilities		1,928		2,506
	Other liabilities		1,324		398

Embedded Derivative Instruments:
	Other current assets	$	792	$	604
	Other assets		326		142
	Accrued liabilities		872		1,657
	Other liabilities		319		582

The effect of derivative instruments on the Consolidated Statement of Operations and Comprehensive Income (Loss) for the three month and six month periods ended March 30, 2018, and March 31, 2017, consisted of:

Fair Value Hedges and Embedded Derivatives

The Company recognized the following gains (losses) on contracts designated as fair value hedges and embedded derivatives:

In Thousands	Three Months Ended						Six Months Ended
Gain (Loss)	March 30,			March 31,			March 30,			March 31,
	2018			2017			2018			2017

Fair Value Hedges:
Recognized in cost of sales	$	(893	)	$	692		$	(1,271	)	$	(241	)
Recognized in selling, general & administrative		(691	)		561			(1,014	)		(207	)

Embedded derivatives:
Recognized in sales	$	386		$	(518	)	$	706		$	(265	)

Cash Flow Hedges

The Company recognized the following gains (losses) on contracts designated as cash flow hedges:

In Thousands	Three Months Ended						Six Months Ended
Gain (Loss)	March 30,			March 31,			March 30,			March 31,
	2018			2017			2018			2017
Foreign currency forward exchange contracts:
Recognized in AOCI (effective portion)	$	(11,797	)	$	9,355		$	(14,291	)	$	6,939
Reclassified from AOCI into sales		4,984			(3,446	)		6,918			(7,871	)

Net Investment Hedges

The Company recognized the following gains (losses) on contracts designated as net investment hedges:

In Thousands	Three Months Ended						Six Months Ended
Gain (Loss)	March 30,			March 31,			March 30,			March 31,
	2018			2017			2018			2017
2023 Notes and Accrued Interest:
Recognized in AOCI	$	(10,682	)	$	(4,534	)	$	(16,979	)	$	19,379

During the second quarter of fiscal 2018 and 2017, the Company recorded gains of $2.3 million and $1.1 million, respectively, on foreign currency forward exchange contracts that have not been designated as accounting hedges. During the first six months of fiscal 2018 and 2017, the Company recorded gains of $2.4 million and $0.2 million, respectively, on foreign currency forward exchange contracts that have not been designated as accounting hedges. These foreign currency exchange gains and losses are included in selling, general and administrative expense.

There was no significant impact to the Company’s earnings related to the ineffective portion of any hedging instruments during the first six months of fiscal 2018 and 2017. In addition, there was no significant impact to the Company’s earnings when a hedged firm commitment no longer qualified as a fair value hedge or when a hedged forecasted transaction no longer qualified as a cash flow hedge during the first six months of fiscal 2018 and 2017.

Amounts included in AOCI are reclassified into earnings when the hedged transaction settles. The Company expects to reclassify approximately $7.0 million of net gain into earnings over the next 12 months. The maximum duration of the Company’s foreign currency cash flow hedge contracts at March 30, 2018, was 24 months.