DERIVATIVES AND RISK MANAGEMENT

3 Months Ended

Apr. 04, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Cash Flow Hedges. The primary risks managed by using derivative instruments are the fluctuations in global currencies that will ultimately be used by non-U.S. dollar functional currency subsidiaries to settle future payments of intercompany inventory transactions denominated in U.S. dollars. Specifically, the Company projects future intercompany purchases by its non-U.S. dollar functional currency subsidiaries generally over a period of up to 24 months. The Company enters into forward contracts, generally for up to 85% of the forecasted purchases, to manage fluctuations in global currencies that will ultimately be used to settle such U.S. dollar denominated inventory purchases. Additionally, the Company enters into forward contracts to manage fluctuations in Japanese yen exchange rates that will be used to settle future third-party inventory component purchases by a U.S. dollar functional currency subsidiary. Forward contracts represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon settlement date and exchange rate. These forward contracts are designated as single cash flow hedges. Fluctuations in exchange rates will either increase or decrease the Company’s U.S. dollar equivalent cash flows from these inventory transactions, which will affect the Company’s U.S. dollar earnings. Gains or losses on the forward contracts are expected to offset these fluctuations to the extent the cash flows are hedged by the forward contracts.

These forward contracts meet the criteria for hedge accounting, which requires that they represent foreign currency-denominated forecasted transactions in which (i) the operating unit that has the foreign currency exposure is a party to the hedging instrument and (ii) the hedged transaction is denominated in a currency other than the hedging unit’s functional currency.

At the inception of each forward contract designated as a cash flow hedge, the hedging relationship is expected to be highly effective in achieving offsetting cash flows attributable to the hedged risk. The Company assesses hedge effectiveness

under the critical terms matched method at inception and at least quarterly throughout the life of the hedging relationship. If the critical terms (i.e., amounts, currencies and settlement dates) of the forward contract match the terms of the forecasted transaction, the Company concludes that the hedge is effective. Hedge accounting is discontinued if it is determined that the derivative is not highly effective.

For a derivative instrument that is designated and qualifies as a cash flow hedge, the gain or loss on the derivative is reported as a component of accumulated other comprehensive income (loss), net of taxes and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings.

All derivative instruments are recognized as either assets or liabilities at fair value in the condensed consolidated balance sheets. The Company records all forward contract hedge assets and liabilities on a gross basis as they do not meet the balance sheet netting criteria because the Company does not have master netting agreements established with the derivative counterparties that would allow for net settlement. Derivatives designated as cash flow hedges are recorded at fair value at each balance sheet date and the change in fair value is recorded to accumulated other comprehensive income (loss) within the equity section of the Company’s condensed consolidated balance sheets until such derivative’s gains or losses become realized or the cash flow hedge relationship is terminated.

Hedge accounting must be discontinued for a cash flow hedge of a forecasted transaction upon determining that it is no longer probable that the forecasted transaction will occur within the period originally specified at hedge inception. The cumulative hedge accounting gain or loss associated with the discontinued hedge would remain in accumulated other comprehensive income (loss), and would be reclassified into earnings when the forecasted transaction affects earnings, unless it is probable that the forecasted transaction will not occur by the end of the originally specified time period or within an additional two-month period of time thereafter. In that case, the entire amount recorded in accumulated other comprehensive income (loss) would immediately be reclassified into earnings. However, in rare cases, the existence of extenuating circumstances that are related to the nature of the forecasted transaction and are outside the control or influence of the Company may cause the forecasted transaction to be probable of occurring on a date that is beyond the additional two-month period of time, in which case the net derivative instrument gain or loss related to the discontinued cash flow hedge will continue to be reported in accumulated other comprehensive income (loss) until it is reclassified into earnings. The Company has identified some delays in the timing of forecasted inventory transactions and has applied the extenuating case exception since the delays are attributable to the COVID-19 pandemic. The Company determined that the delayed forecasted transactions are still probable of occurring after the additional two-month period, and therefore will retain the amounts associated with the discontinued cash flow hedge in accumulated other comprehensive income (loss) until the forecasted transaction affects earnings.

If the cash flow hedge relationship is terminated, the derivative’s gains or losses that are recorded in accumulated other comprehensive income (loss) are immediately recognized in earnings. There were no gains or losses reclassified into earnings as a result of the discontinuance of cash flow hedges in the First Quarter or Prior Year Quarter.

As of April 4, 2020, the Company had the following outstanding forward contracts designated as cash flow hedges that were entered into to hedge future payments of inventory transactions (in millions):



Functional Currency		Contract Currency
Type	Amount	Type	Amount
Euro	108.2	U.S. dollar	124.0
Canadian dollar	38.3	U.S. dollar	29.1
British pound	13.2	U.S. dollar	17.3
Japanese yen	1,234.5	U.S. dollar	11.6
Mexican peso	160.9	U.S. dollar	8.2
Australian dollar	6.4	U.S. dollar	4.4
U.S. dollar	19.2	Japanese yen	2,045.0

Non-designated Hedges. The Company also periodically enters into forward contracts to manage exchange rate risks associated with certain intercompany transactions and for which the Company does not elect hedge accounting treatment. As of April 4, 2020, the Company had non-designated forward contracts of $0.5 million on 6.6 million rand associated with a South African rand-denominated foreign subsidiary. Changes in the fair value of derivatives not designated as hedging instruments are recognized in earnings when they occur.

The gains and losses on cash flow hedges that were recognized in other comprehensive income (loss), net of taxes during the First Quarter and Prior Year Quarter are set forth below (in thousands):



	For the 14 Weeks Ended April 4, 2020		For the 13 Weeks Ended March 30, 2019
Cash flow hedges:
Forward contracts	$	6,573	$	1,446
Total gain (loss) recognized in other comprehensive income (loss), net of taxes	$	6,573	$	1,446

The following table illustrates the gains and losses on derivative instruments recorded in accumulated other comprehensive income (loss), net of taxes during the term of the hedging relationship and reclassified into earnings, and gains and losses on derivatives not designated as hedging instruments recorded directly to earnings during the First Quarter and Prior Year Quarter (in thousands):



Derivative Instruments	Condensed Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) Location	Effect of Derivative Instruments	For the 14 Weeks Ended April 4, 2020			For the 13 Weeks Ended March 30, 2019
Forward contracts designated as cash flow hedging instruments	Cost of sales	Total gain (loss) reclassified from accumulated other comprehensive income (loss)	$	2,647		$	2,473
Forward contracts designated as cash flow hedging instruments	Other income (expense)-net	Total gain (loss) reclassified from accumulated other comprehensive income (loss)	$	(2,316	)	$	(18	)
Forward contracts not designated as hedging instruments	Other income (expense)-net	Total gain (loss) recognized in income	$	205		$	(13	)

The following table discloses the fair value amounts for the Company’s derivative instruments as separate asset and liability values, presents the fair value of derivative instruments on a gross basis, and identifies the line items in the condensed consolidated balance sheets in which the fair value amounts for these categories of derivative instruments are included (in thousands):



	Asset Derivatives						Liability Derivatives
	April 4, 2020			December 28, 2019			April 4, 2020			December 28, 2019
Derivative Instruments	Condensed Consolidated Balance Sheets Location	Fair Value		Condensed Consolidated Balance Sheets Location	Fair Value		Condensed Consolidated Balance Sheets Location	Fair Value		Condensed Consolidated Balance Sheets Location	Fair Value
Forward contracts designated as cash flow hedging instruments	Prepaid expenses and other current assets	$	11,641	Prepaid expenses and other current assets	$	3,327	Accrued expenses-other	$	243	Accrued expenses-other	$	1,657
Forward contracts not designated as cash flow hedging instruments	Prepaid expenses and other current assets	113		Prepaid expenses and other current assets	—		Accrued expenses-other	—		Accrued expenses-other	63
Forward contracts designated as cash flow hedging instruments	Intangible and other assets-net	531		Intangible and other assets-net	21		Other long-term liabilities	30		Other long-term liabilities	104
Total		$	12,285		$	3,348		$	273		$	1,824

The following table summarizes the effects of the Company's derivative instruments on earnings (in thousands):



	Effect of Derivative Instruments
	For the 14 Weeks Ended April 4, 2020					For the 13 Weeks Ended March 30, 2019
	Cost of Sales		Other Income (Expense)-net			Cost of Sales		Other Income (Expense)-net
Total amounts of income and expense line items presented in the condensed consolidated statements of income (loss) and comprehensive income (loss) in which the effects of cash flow hedges are recorded	$	250,358	$	(7,290	)	$	217,341	$	25,912
Gain (loss) on cash flow hedging relationships:
Forward contracts designated as cash flow hedging instruments:
Total gain (loss) reclassified from other comprehensive income (loss)	2,647		(2,316		)	2,473		(18		)

At the end of the First Quarter, the Company had forward contracts designated as cash flow hedges with maturities extending through June 2021. As of April 4, 2020, an estimated net gain of $10.0 million is expected to be reclassified into earnings within the next twelve months at prevailing foreign currency exchange rates.