Derivative Financial Instruments

3 Months Ended

Jan. 01, 2023

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. We also enter into 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.

We entered into a forward contract in 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 that was integrated with our planned acquisition of RPS. This contract matured on December 30, 2022. On December 28, 2022, we entered into an extension of the integrated forward contract to acquire GBP 714.0 million at a rate of 1.086 for a total of USD 775.4 million, extending the maturity date to January 23, 2023, the closing date of the RPS

acquisition. Although an effective economic hedge of our foreign exchange risk related to this transaction, the forward contract does 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, and an unrealized gain of the same amount was recognized in the fourth quarter of fiscal 2022 results. The fair value of the forward contract at January 1, 2023 was $87.9 million, which is reported in the "Prepaid expenses and other current assets" on our consolidated balance sheet at January 1, 2023. This resulted in an unrealized gain of $68.0 million in the first quarter of fiscal 2023, which was recognized in earnings and reported in the “Other non-operating income" on our consolidated income statement. The forward contract was settled on January 23, 2023, with a cumulative gain of approximately $109 million.

In fiscal 2018, we entered into five interest rate swap agreements that we designated as cash flow hedges to fix the interest rate on the borrowings under our term loan facility. At January 1, 2023, the notional principal of our outstanding interest swap agreements was $196.9 million ($39.4 million each.) The interest rate swaps have a fixed interest rate of 2.79% and expire in July 2023 for all five agreements. At January 1, 2023 and October 2, 2022, the fair values of the effective portion of our interest rate swap agreements designated as cash flow hedges before tax effect were unrealized gains of $2.3 million and $2.4 million, respectively, which were reported in "Other non-current assets" on our consolidated balance sheets. Additionally, the related loss of $0.1 million for the three months ended January 1, 2023, compared to the related gain of $2.7 million for the prior-year period, were recognized and reported on our consolidated statements of comprehensive income. We expect to reclassify a credit of $2.2 million from accumulated other comprehensive loss to interest expense within the next twelve months. There were no other derivative instruments designated as hedging instruments for the first quarter of fiscal 2023.