Derivative Financial Instruments

12 Months Ended

Oct. 02, 2022

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments

Derivative Financial Instruments

We use certain interest rate derivative contracts to hedge interest rate exposures on our variable rate debt. Also, we may enter in foreign currency derivative contracts with financial institutions to reduce the risk that cash flows and earnings could adversely be affected by foreign currency exchange rate fluctuations. Our hedging program is not designated for trading or speculative purposes.

We recognize derivative instruments as either assets or liabilities on the accompanying consolidated balance sheets at fair value. We record changes in the fair value (i.e., gains or losses) of the derivatives that have been designated as cash flow hedges in our consolidated balance sheets as accumulated other comprehensive income, and in our consolidated statements of income for those derivatives designated as fair value hedges. Our derivative contracts are categorized within Level 2 of the fair value hierarchy.

In the anticipation of the planned acquisition of RPS, we entered into a forward contract during the fourth quarter of fiscal 2022 to acquire GBP 714.0 million at a rate of 1.0852 for a total of USD 774.8 million. The contract matures on December 30, 2022. Although an effective economic hedge of our foreign exchange risk related to this transaction, the forward contract did not qualify for hedge accounting. As a result, the forward contract is marked-to-market with changes in fair value recognized in earnings each period. The intrinsic value of the forward contract was immaterial at inception as the GBP/USD spot and forward exchange rates were essentially the same. The fair value of the forward contract at October 2, 2022 was $19.9 million, which resulted in an unrealized gain of the same amount in the fourth quarter fiscal 2022, which is reflected in “Other income" on the consolidated income statement for fiscal 2022. The related $19.9 million asset is reported in "Prepaid expenses and other current assets" on the consolidated balance sheet at October 2, 2022.

In fiscal 2018, we entered into five interest rate swap agreements that we designated as cash flow hedges to fix the interest rates on the borrowings under our term loan facility. As of October 2, 2022, the notional principal of our outstanding interest swap agreements was $200.0 million ($40.0 million each.) The interest rate swaps have a fixed interest rate of 2.79% and expire in July 2023 for all five agreements. At October 2, 2022 and October 3, 2021, the fair value of the effective portion of our interest rate swap agreements designated as cash flow hedges before tax effect was an unrealized gain of $2.4 million and an unrealized loss of $9.4 million, which were reported in "Other long-term assets" and "Other current liabilities" on our consolidated balance sheets, respectively. Additionally, the related gain of $11.8 million, a gain of $6.1 million and a loss of $4.6 million for fiscal year ended 2022, 2021 and 2020, respectively, were recognized and reported on our consolidated statements of comprehensive income. We expect to reclassify a credit of $3.1 million from accumulated other comprehensive loss to interest expense within the next 12 months. There were no other derivative instruments that were not designated as hedging instruments for fiscal 2022, 2021 and 2020.