Financial Instruments Measured at Fair Value

9 Months Ended

Sep. 28, 2024

Financial Instruments Measured at Fair Value

Financial Instruments Measured at Fair Value

Note H – Financial Instruments Measured at Fair Value

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The company utilizes a fair value hierarchy, which maximizes the use of observable inputs and minimizes the use of unobservable inputs when measuring fair value. The fair value hierarchy has three levels of inputs that may be used to measure fair value:

Level 1 Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2 Quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability.

Level 3 Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable.

The following table presents assets measured at fair value on a recurring basis at September 28, 2024:

(thousands)	Balance Sheet Location	Level 1		Level 2		Level 3		Total
Cash equivalents (a)	Cash and cash equivalents	$	10,777	$	—	$	—	$	10,777
Equity investments (b)	Other assets		46,741		—		—		46,741
Foreign exchange contracts designated as net investment hedges	Other assets / other current assets		—		40,040		—		40,040
		$	57,518	$	40,040	$	—	$	97,558

The following table presents assets (liabilities) measured at fair value on a recurring basis at December 31, 2023:

(thousands)	Balance Sheet Location	Level 1		Level 2		Level 3		Total
Cash equivalents (a)	Cash and cash equivalents	$	8,729	$	—	$	—	$	8,729
Equity investments (b)	Other assets		57,625		—		—		57,625
Interest rate swap designated as fair value hedge	Other liabilities		—		(454)		—		(454)
Foreign exchange contracts designated as net investment hedges	Other assets / other current assets		—		47,245		—		47,245
		$	66,354	$	46,791	$	—	$	113,145

(a) Cash equivalents include highly liquid investments with an original maturity of less than three months.

(b) The company has an approximately 9% equity ownership interest in Marubun Corporation and a portfolio of mutual funds with quoted market prices. The company recorded unrealized gains (losses) of $1.6 million and ($8.5) million for the third quarter and first nine months of 2024, respectively, on equity securities held at the end of the quarter. The company recorded unrealized (losses) gains of ($4.2) million and $1.6 million for the third quarter and first nine months of 2023, respectively, on equity securities held at the end of the quarter.

Assets and liabilities that are measured at fair value on a nonrecurring basis relate primarily to goodwill and identifiable intangible assets (refer to Note C). The company tests these assets for impairment if indicators of potential impairment exist or at least annually if indefinite-lived.

Derivative Instruments

The company uses various financial instruments, including derivative instruments, for purposes other than trading. Certain derivative instruments are designated at inception as hedges and assessed for effectiveness both at inception and on an ongoing basis. Derivative instruments not designated as hedges are carried at fair value on the consolidated balance sheets with changes in fair value recognized in earnings.

Interest Rate Swaps

The company manages the risk of variability in interest rates of future expected debt issuances by entering into various forward-starting interest rate swaps, designated as cash flow hedges. Changes in fair value of interest rate swaps designated as cash flow hedges are recorded in the shareholders’ equity section in the company’s consolidated balance sheets in “Accumulated other comprehensive loss” and will be reclassified into income over the life of the anticipated debt issuance or in the period the hedged forecasted cash flows are deemed no longer probable to occur. Reclassified gains and losses are recorded within the line item “Interest and other financing expense, net” in the consolidated statements of operations. The fair value of interest rate swaps are estimated using a discounted cash flow analysis on the expected cash flows of each derivative using observable inputs, including interest rate curves and credit spreads.

In June 2023, the company terminated its outstanding forward-starting interest rate swaps and received a cash payment of $56.7 million, which was reported in the “Cash flows from financing activities” section of the consolidated statements of cash flows. In April 2024, the forecasted bond issuance occurred, and the $56.7 million gain will be amortized to "Interest and other financing expense, net" in the company's consolidated statement of operations over the 10-year life of the bond.

The company occasionally enters into interest rate swap transactions, designated as fair value hedges, that convert certain fixed-rate debt to variable-rate debt in order to manage its targeted mix of fixed- and floating-rate debt. For qualifying interest rate fair value hedges, gains or losses on derivatives are included in “Interest and other financing expense, net” in the consolidated statements of operations. The change in fair value of the hedged item attributable to the risk being hedged is reported as an adjustment to its carrying value and is also included in “Interest and other financing expense, net”.

As of December 31, 2023, the company had one outstanding interest rate swap designated as a fair value hedge of its 6.125% notes due in March 2026, the terms of which were as follows:

		Notional Amount		Interest Rate due	Interest Rate due to
Trade Date	Maturity Date	(thousands)		from Counterparty	Counterparty
February 2023	March 2026	$	500,000	6.125%	SOFR+0.508%

The counterparty to the interest rate swap had the option to cancel the swaps after one year, without penalty. In March 2024, the counterparty cancelled the swap and the company de-designated the fair value hedging relationship.

Foreign Exchange Contracts

The company’s foreign currency exposure relates primarily to international transactions where the currency collected from customers can be different from the currency used to purchase the product. The company’s exposures to such transactions are denominated primarily in the following currencies: Euro, Indian Rupee, and Israeli New Shekel. The company enters into foreign exchange forward, option, or swap contracts (collectively, the “foreign exchange contracts”) to facilitate the

hedging of foreign currency exposures resulting from inventory purchases and sales and mitigate the impact of changes in foreign currency exchange rates related to these transactions. Foreign exchange contracts generally have terms of no more than six months. The company does not enter into foreign exchange contracts for trading purposes. The risk of loss on a foreign exchange contract is the risk of nonperformance by the counterparties, which the company minimizes by limiting its counterparties to major financial institutions. The fair value of the foreign exchange contracts is estimated using foreign currency spot rates and forward rates quotes by third-party financial institutions. The notional amount of the foreign exchange contracts inclusive of foreign exchange contracts designated as a net investment hedge at September 28, 2024 and December 31, 2023 was $1.1 billion and $1.0 billion, respectively.

Gains and losses related to non-designated foreign currency exchange contracts are recorded in “Cost of sales” on the company’s consolidated statements of operations. Gains and losses related to foreign currency exchange contracts designated as cash flow hedges are recorded in “Cost of sales,” “Selling, general, and administrative,” and “Interest and other financing expense, net” based upon the nature of the underlying hedged transaction, on the company’s consolidated statements of operations. Gains or losses on these contracts are deferred and recognized when the underlying future purchase or sale is recognized or when the corresponding asset or liability is revalued, and were not material to the financial statements for the periods presented.

The following foreign exchange contracts were designated as net investment hedges, hedging a portion of the company’s net investments in subsidiaries with Euro-denominated net assets:

	Notional Amount (thousands)
Maturity Date	September 28, 2024		December 31, 2023
September 2024	EUR	—	EUR	50,000
April 2025	EUR	100,000	EUR	100,000
January 2028	EUR	100,000	EUR	100,000
Total	EUR	200,000	EUR	250,000

The change in the fair value of derivatives designated as net investment hedges are recorded in CTA within “Accumulated other comprehensive loss” on the company’s consolidated balance sheets. Amounts excluded from the assessment of hedge effectiveness are included in “Interest and other financing expense, net” on the company’s consolidated statements of operations.

During the third quarter of 2024, a foreign exchange contract designated as a net investment hedge matured and the company received $10.6 million, which is reported in the “Cash flows from investing activities” section of the consolidated statements of cash flows.

During the first quarter of 2023, a foreign exchange contract designated as a net investment hedge matured and the company received $10.7 million, which is reported in the “Cash flows from investing activities” section of the consolidated statements of cash flows.

The effects of derivative instruments on the company’s consolidated statements of operations and other comprehensive income are as follows:

		Quarter Ended				Nine Months Ended
		September 28,		September 30,		September 28,		September 30,
(thousands)	Income Statement Line	2024		2023		2024		2023
Gain (Loss) Recognized in Income
Foreign exchange contracts, net investment hedge (a)	Interest Expense	$	1,722	$	1,804	$	5,330	$	5,656
Interest rate swaps, cash flow hedge	Interest Expense		449		(683)		51		(2,199)
Interest rate swap, fair value hedge (b)	Interest Expense		—		(247)		454		(2,043)
Total		$	2,171	$	874	$	5,835	$	1,414
Gain (Loss) Recognized in Other Comprehensive Income (Loss) before reclassifications, net of tax
Foreign exchange contracts, net investment hedge (c)		$	(5,110)	$	5,448	$	2,610	$	3,902
Interest rate swaps, cash flow hedge			(684)		—		(684)		585
Total		$	(5,794)	$	5,448	$	1,926	$	4,487

(a) Represents derivative amounts excluded from the assessment of effectiveness for the net investment hedges reclassified from CTA to “Interest and other financing expenses, net”.

(b) The cumulative amount of fair value hedging adjustments to the carrying value of hedged debt instruments totaled a loss of $0.4 million for the first nine months of 2024, and a gain of $0.2 million and $1.1 million for the third quarter and first nine months of 2023, respectively. During the first quarter of 2024, the fair value hedge was terminated.

(c) Includes derivative losses of $3.5 million and $2.1 million for the third quarter and first nine months of 2024, respectively, and $0.9 million and $1.0 million for the third quarter and first nine months of 2023, respectively, which were excluded from the assessment of effectiveness for the net investment hedges and recognized in other comprehensive income (loss), net of tax.

Other

The carrying amount of “cash and cash equivalents”, “accounts receivable, net”, and “accounts payable” approximate their fair value due to the short maturities of these financial instruments.