Quarterly report pursuant to Section 13 or 15(d)

DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES

v3.20.1
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
 3 Months Ended
Mar. 28, 2020
Derivative Instruments and Hedging Activities Disclosure [Abstract]  
DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
Summary of Derivative Financial Instruments
On April 24, 2019, the Company began entering into derivative contracts with external counterparties to hedge certain foreign currency transactions. The notional amount of all outstanding foreign currency exchange contracts was $318.0 million at March 2020 and $341.6 million at December 2019, consisting primarily of contracts hedging exposures to the euro, Mexican peso, Canadian dollar, British pound, Polish zloty and Swedish krona. Foreign currency exchange contracts have maturities up to 20 months.
On July 24, 2019, the Company entered into "floating to fixed" derivative agreements to mitigate exposure to volatility in LIBOR rates on the Company's future interest payments. The notional amount of the interest rate swap agreements was $400.0 million at March 2020 and $475.0 million at December 2019. Because these interest rate swap agreements meet the criteria for hedge accounting, all related gains and losses are deferred within accumulated other comprehensive loss ("AOCL") and are being amortized through April 18, 2024.
The Company's outstanding derivative financial instruments met the criteria for hedge accounting at the inception of the hedging relationship, although a limited number of foreign currency exchange contracts intended to hedge assets and liabilities are not designated as hedges for accounting purposes. At each reporting period, the Company assesses whether the hedging relationships continue to be highly effective in offsetting changes in cash flows of hedged items. If it was determined that the hedging relationship ceased to be highly effective, the Company would discontinue hedge accounting. All designated hedging relationships were determined to be highly effective as of March 2020.
The following table presents the fair value of outstanding derivatives on an individual contract basis:
 
 
Fair Value of Derivatives with Unrealized Gains
 
 
Fair Value of Derivatives with Unrealized Losses
 
 
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
March 2020
 
 
December 2019
 
 
March 2020
 
 
December 2019
 
 
 
 
 
 
 
 
 
 
 
Derivatives designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
$
5,717

 
 
$
5,199

 
 
$
(14,603
)
 
 
$
(2,690
)
Interest rate swap agreements
 
—

 
 
—

 
 
(17,528
)
 
 
(3,089
)
Derivatives not designated as hedging instruments:
 
 
 
 
 
 
 
 
 
 
 
Foreign currency exchange contracts
 
1,271

 
 
364

 
 
(477
)
 
 
(105
)
Total derivatives
 
$
6,988

 
 
$
5,563

 
 
$
(32,608
)
 
 
$
(5,884
)

The Company records and presents the fair value of all derivative assets and liabilities in the Company's balance sheets on a gross basis, even though certain of the derivative contracts are subject to master netting agreements. If the Company were to offset and record the asset and liability balances of its derivative contracts on a net basis in accordance with the terms of its master netting agreements, the amounts presented in the Company's balance sheets would be adjusted from the current gross presentation to the net amounts.
The following table presents a reconciliation of gross to net amounts for derivative asset and liability balances:
 
 
March 2020
 
 
December 2019
 
 
 
 
 
 
 
 
 
 
(In thousands)
 
Derivative Asset
 
Derivative Liability
 
 
Derivative Asset
 
Derivative Liability
Gross amounts presented in the balance sheet
 
$
6,988

 
$
(32,608
)
 
 
$
5,563

 
$
(5,884
)
Gross amounts not offset in the balance sheet
 
(2,970
)
 
2,970

 
 
(1,133
)
 
1,133

Net amounts
 
$
4,018

 
$
(29,638
)
 
 
$
4,430

 
$
(4,751
)
The following table presents the location of derivatives in the Company's balance sheet, with current or noncurrent classification based on maturity dates:
(In thousands)
 
March 2020
 
 
December 2019
Other current assets
 
$
5,217

 
 
$
4,303

Accrued liabilities
 
(10,256
)
 
 
(2,058
)
Other assets
 
1,771

 
 
1,260

Other liabilities
 
(22,352
)
 
 
(3,826
)

Cash Flow Hedges
The following tables present the effects of cash flow hedges included in the Company's statement of operations and statement of comprehensive (loss) income:
(In thousands)
Gain (Loss) on Derivatives Recognized in AOCL
 
 
 
Cash Flow Hedging Relationships
 
Three Months Ended March 2020
 
Foreign currency exchange contracts
 
$
(10,906
)
 
Interest rate swap agreements
 
(14,670
)
 
Total
 
$
(25,576
)
 
(In thousands)
Gain (Loss) Reclassified from AOCL into Income
 
 
 
Location of Gain (Loss)
 
Three Months Ended March 2020
 
Net revenues
 
$
(358
)
 
Cost of goods sold
 
3,741

 
Other expense, net
 
(4
)
 
Interest expense
 
(231
)
 
Total
 
$
3,148

 

During the three months ended March 2020, the Company determined that, due to a reduction in forecasted sales, it was probable that forecasted transactions of certain foreign currency cash flow hedges would no longer occur as originally expected. Accordingly, $0.4 million of gains related to the ineffective portion of these contracts were reclassified from AOCL into earnings. To minimize the future earnings impact of these over-hedged items, the Company executed offsetting non-designated trades through the same maturity dates.
Derivative Contracts Not Designated as Hedges
The Company uses derivative contracts to manage foreign currency exchange risk on certain accounts receivable and accounts payable. These contracts are not designated as hedges and are recorded at fair value in the Company's balance sheets. Changes in the fair values of these instruments are recognized directly in earnings. Gains or losses on these contracts largely offset the net transaction gains or losses on the related assets and liabilities.
The following table presents a summary of these derivatives included in the Company's statement of operations:
(In thousands)
 
Location of Gain (Loss) on Derivatives Recognized in Income
 
 
Gain (Loss) on Derivatives Recognized in Income
 
 
 
 
 
Derivatives Not Designated as Hedges
 
 
 
Three Months Ended March 2020
 
Foreign currency exchange contracts
 
Net revenues
 
 
$
4

 
 
 
Cost of goods sold
 
 
(3,672
)
 
 
 
Other expense, net
 
 
23

 
Total
 
 
 
 
$
(3,645
)
 

Other Derivative Information
At March 2020, AOCL included $5.7 million of pre-tax net deferred losses for foreign currency exchange contracts and interest rate swap agreements that are expected to be reclassified to earnings during the next 12 months. The amounts ultimately reclassified to earnings will depend on rates in effect when outstanding derivative contracts are settled.