Note 13 - Financial Instruments

3 Months Ended

Mar. 04, 2017

Notes to Financial Statements

Derivative Instruments and Hedging Activities Disclosure [Text Block]

Note

13:

Financial Instruments

Overview

As a result of being a global enterprise, our earnings, cash flows and financial position are exposed to foreign currency risk from foreign currency denominated receivables and payables.

We use foreign currency forward contracts, cross-currency swaps, and interest rate swaps to manage risks associated with foreign currency exchange rates and interest rates. We do not hold derivative financial instruments of a speculative nature or for trading purposes. We record derivatives as assets and liabilities on the balance sheet at fair value. Changes in fair value are recognized immediately in earnings unless the derivative qualifies and is designated as a hedge. Cash flows from derivatives are classified in the statement of cash flows in the same category as the cash flows from the items subject to designated hedge or undesignated (economic) hedge relationship. We evaluate hedge effectiveness at inception and on an ongoing basis. If a derivative is no longer expected to be effective, hedge accounting is discontinued. Hedge ineffectiveness, if any, is recorded in earnings.

We are exposed to credit risk in the event of nonperformance of counterparties for foreign currency forward exchange contracts and interest rate swap agreements. We select investment-grade multinational banks and financial institutions as counterparties for derivative transactions and monitors the credit quality of each of these banks on periodic basis as warranted. We do not anticipate nonperformance by any of these counterparties, and valuation allowances, if any, are

de

minimis.

Cash Flow H

e

dges

Effective

February

24,

2017,

we entered into a cross-currency swap agreement to convert a notional amount of

$42,600

of foreign currency denominated intercompany loans into U.S. dollars. The swap matures in

2020.

Effective

October

7,

2015,

we entered into

three

cross-currency swap agreements to convert a notional amount of

$134,736

of foreign currency denominated intercompany loans into U.S. dollars. The

first

swap matures in

2017,

the

second

swap matures in

2018

and the

third

swap matures in

2019.

As of

March

4,

2017,

the combined fair value of the swaps was an asset of

$4,971

and was included in other assets in the Condensed Consolidated Balance Sheets. The swaps were designated as cash-flow hedges for accounting treatment. The lesser amount between the cumulative change in the fair value of the actual swaps and the cumulative change in the fair value of hypothetical swaps is recorded in accumulated other comprehensive income (loss) in the Condensed Consolidated Balance Sheets. The difference between the cumulative change in the fair value of the actual swaps and the cumulative change in the fair value of hypothetical swaps are recorded as other income (expense), net in the Condensed Consolidated Statements of Income. In a perfectly effective hedge relationship, the

two

fair value calculations would exactly offset each other. Any difference in the calculation represents hedge ineffectiveness. The ineffectiveness calculations as of

March

4,

2017

resulted in additional pre-tax loss of

$20

for the

three

months ended

March

4,

2017

as the change in fair value of the cross-currency swaps was less than the change in the fair value of the hypothetical swaps. The amount in accumulated other comprehensive income (loss) related to cross-currency swaps was a loss of

$1,146

as of

March

4,

2017.

The estimated net amount of the existing loss that is reported in accumulated other comprehensive income (loss) as of

March

4,

2017

that is expected to be reclassified into earnings within the next

twelve

months is

$986.

As of

March

4,

2017,

we do not believe any gains or losses will be reclassified into earnings as a result of the discontinuance of these cash flow hedges because the original forecasted transaction will not occur.

The following table summarizes the cross-currency swaps outstanding as of

March

4,

2017:

	Fiscal Year of Expiration	Interest Rate			Notional Value		Fair Value
Pay EUR	2017		3.05	%	$	44,912	$	2,181
Receive USD			3.9145	%
Pay EUR	2018		3.45	%	$	44,912	$	1,750
Receive USD			4.5374	%
Pay EUR	2019		3.80	%	$	44,912	$	1,329
Receive USD			5.0530	%
Pay EUR	2020		1.95	%	$	42,600	$	(289	)
Receive USD			4.30375	%
Total					$	177,336	$	4,971

Except for the cross-currency swap agreements listed above, foreign currency derivative instruments outstanding are not designated as hedges for accounting purposes. The gains and losses related to mark-to-market adjustments are recognized as other income or expense in the Condensed Consolidated Statements of Income during the periods in which the derivative instruments are outstanding. See Note

14

for the fair value amounts of these derivative instruments.

As of

March

4,

2017,

we had forward foreign currency contracts maturing between

March

21,

2017

and

April

13,

2018.

The mark-to-market effect associated with these contracts, on a net basis, was a gain of

$3,117

as of 

March

4,

2017.

These gains were largely offset by the underlying transaction gains and losses resulting from the foreign currency exposures for which these contracts relate.

Fair Value Hedges

We entered into interest rate swap agreements to convert

$150,000

of our

$300,000

4.000%

Notes that were issued on

February

14,

2017

to a variable interest rate of

1

-month LIBOR (in advance) plus

1.86

percent. See Note 

6

for further discussion on the issuance of our

4.000%

Notes. The combined fair value of the interest rate swaps in total was a liability of

$3,135

at

March

4,

2017

and was included in other liabilities in the Condensed Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as fair value hedges. We are applying the shortcut method in accounting for these interest rate swaps as we expect that the changes in the fair value of the swap will offset the changes in the fair value of the

4.000%

Notes resulting in no ineffectiveness. As a result of applying the shortcut method, the change in the fair value of the interest rate swap and an equivalent amount for the change in the fair value of the debt will be reflected in other income (expense) and no ineffectiveness will be recognized in our Condensed Consolidated Statements of Income.

We have interest rate swap agreements to convert

$75,000

of our senior notes to variable interest rates. The change in fair value of the senior notes, attributable to the change in the risk being hedged, was a liability of

$1,107

at

March

4,

2017

and was included in long-term debt and current maturities of long-term debt in the Condensed Consolidated Balance Sheets. The combined fair value of the swaps in total was an asset of

$1,077

at

March

4,

2017

and

$1,579

at

December

3,

2016

and were included in other assets in the Condensed Consolidated Balance Sheets. The swaps were designated for hedge accounting treatment as fair value hedges. The changes in the fair value of the swap and the fair value of the senior notes attributable to the change in the risk being hedged are recorded as other income (expense), net in the Condensed Consolidated Statements of Income. In a perfectly effective hedge relationship, the

two

fair value calculations would exactly offset each other. Any difference in the calculation represents hedge ineffectiveness. For the

three

months ended

March

4,

2017

and

February

27,

2016,

a pre-tax gain of

$3

and

$143,

respectively, was recorded as the fair value of the interest rate swaps decreased by more than the change in the fair value of the Senior Notes attributable to the change in the risk being hedged.

Concentrations of credit risk with respect to trade accounts receivable are limited due to the large number of entities in the customer base and their dispersion across many different industries and countries. As of

March

4,

2017,

there were no significant concentrations of credit risk.