Derivative financial instruments

12 Months Ended

Jul. 01, 2017

Derivative financial instruments

Derivative financial instruments

4. Derivative financial instruments

Many of the Company’s subsidiaries purchase and sell products in currencies other than their functional currencies. This subjects the Company to the risks associated with fluctuations in foreign currency exchange rates. The Company reduces this risk by utilizing natural hedging (i.e., offsetting receivables and payables in the same foreign currency) as well as by creating offsetting positions through the use of derivative financial instruments, primarily forward foreign exchange contracts typically with maturities of less than 60 days (“economic hedges”). The Company continues to have exposure to foreign currency risks to the extent they are not hedged. The Company adjusts any economic hedges to fair value through the consolidated statements of operations primarily within “other (expense) income, net.” Therefore, the changes in valuation of the underlying items being economically hedged are classified in the same consolidated statements of operations line item as the changes in fair value of the forward foreign exchange contracts. The fair value of forward foreign currency exchange contracts, which are based upon Level 2 criteria under the ASC 820 fair value hierarchy, are classified in the captions “other current assets” or “accrued expenses and other,” as applicable, in the accompanying consolidated balance sheets as of July 1, 2017, and July 2, 2016. The Company’s master netting and other similar arrangements with various financial institutions related to derivative financial instruments allow for the right of offset. The Company’s policy is to present derivative financial instruments with the same counterparty as either a net asset or liability when the right of offset exists.

The Company generally does not hedge its investments in its foreign operations. The Company does not enter into derivative financial instruments for trading or speculative purposes and monitors the financial stability and credit standing of its counterparties.

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 from suppliers. The Company’s foreign operations transactions are denominated primarily in the following currencies: U.S. Dollar, Euro, British Pound, Japanese Yen, Chinese Yuan and Taiwan Dollar. The Company also, to a lesser extent, has foreign operations transactions primarily in Canadian, other European and Asian foreign currencies.

The fair values of derivative financial instruments in the Company’s consolidated balance sheets are as follows:

	July 1,		July 2,
	2017		2016
	(Thousands)
Forward foreign currency exchange contracts not receiving hedge accounting treatment recorded in:
Other current assets	$	7,297	$	9,681
Accrued expenses		4,142		6,369

In addition to amounts included in the above table, there was $34.0 million of accrued expenses related to a derivative financial instrument used to economically hedge the fair value changes in marketable securities discussed further in Note 3

The amount recorded to other (expense) income, net related to derivative financial instruments are as follows:

	Years Ended
	July 1,		July 2,		June 27,
	2017		2016		2015
	(Thousands)
Net derivative financial instrument (loss) gain	$	(8,624)	$	274	$	(3,139)

Excluded from the above table is approximately $35.0 million of derivative financial instrument losses in other (expenses) income, net, that are associated with foreign currency derivative financial instruments purchased to economically hedge the British Pound purchase price of the PF acquisition as discussed in Note 2 and approximately $34.0 million of derivative financial instrument losses in other (expenses) income, net, that economically hedge the unrealized gain from marketable securities, which is also classified within other (expenses) income, net, as discussed further in Note 3.

The Company’s outstanding economic hedges had average maturities of 56 days and 55 days as of July 1, 2017, and July 2, 2016, respectively. Under the Company’s economic hedging policies, gains and losses on the derivative financial instruments are classified within the same line item in the consolidated statements of operations and as the underlying assets or liabilities being economically hedged.