FINANCIAL INSTRUMENTS AND FAIR VALUE | 3 Months Ended |
Mar. 30, 2014 |
Derivative Instruments and Hedging Activities Disclosure [Abstract] | ' |
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES | ' |
FINANCIAL INSTRUMENTS AND FAIR VALUE |
We are exposed to market risks arising principally from changes in foreign currency exchange rates, interest rates and commodity prices. We use certain derivative instruments to manage these risks. These include interest rate swaps to manage interest rate risk, foreign currency forward exchange contracts and options to manage foreign currency exchange rate risk, and commodities futures and options contracts to manage commodity market price risk exposures. |
We also use derivatives that do not qualify for hedge accounting treatment. We account for such derivatives at market value with the resulting gains and losses reflected in the income statement. We do not hold or issue derivative instruments for trading or speculative purposes and are not a party to any instruments with leverage or prepayment features. |
In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by entering into exchanged-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults. |
Commodity Price Risk |
We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and transportation services. We generally hedge commodity price risks for 3 to 24 month periods. The majority of our commodity derivative instruments meet hedge accounting requirements and are designated as cash flow hedges. We account for the effective portion of mark-to-market gains and losses in other comprehensive income, to be recognized in cost of sales in the same period that we record the hedged raw material requirements in cost of sales. The ineffective portion of gains and losses is recorded currently in cost of sales. |
Foreign Exchange Price Risk |
We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Malaysian ringgit, Swiss franc, Chinese renminbi, Japanese yen, and Brazilian real. We typically utilize foreign currency forward exchange contracts and options to hedge these exposures for periods ranging from 3 to 24 months. The contracts are either designated as cash flow hedges or undesignated. The notional amount of foreign exchange contracts accounted for as cash flow hedges was $146.6 million at March 30, 2014 and $158.4 million at December 31, 2013. The effective portion of the changes in fair value on these contracts is recorded in other comprehensive income and reclassified into earnings in the same period in which the hedged transactions affect earnings. The net notional amount of foreign exchange contracts that are not designated as accounting hedges was $387.4 million at March 30, 2014 and $2.8 million at December 31, 2013. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure. |
Interest Rate Risk |
In order to manage interest rate exposure, from time to time we enter into interest rate swap agreements, which are designated as cash flow hedges, with gains and losses deferred in other comprehensive income to be recognized as an adjustment to interest expense in the same period that the hedged interest payments affect earnings. The notional amount of interest rate derivative instruments outstanding was $250.0 million at March 30, 2014 and December 31, 2013. |
Equity Price Risk |
We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. In the first quarter of 2014, we entered into equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for periods of 3 to 12 months. The change in fair value of these derivatives is recorded in selling, marketing and administrative expense, together with the change in the related liabilities. The notional amount of the contracts outstanding at March 30, 2014 was $23.4 million. |
Fair Value of Derivative Instruments |
The following table summarizes the fair value of the derivative instruments as recorded in the Consolidated Balance Sheets as of the dates below: |
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| | Balance Sheet Caption | | March 30, 2014 | | December 31, 2013 | | | | | | | | | | | | | | | | | | | | | | |
In thousands of dollars | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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Derivative Assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives designated as hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commodities futures and options (1) | | Prepaid expenses and other current assets | | $ | 3,824 | | | $ | 4,306 | | | | | | | | | | | | | | | | | | | | | | | |
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Foreign exchange contracts (2) | | Prepaid expenses and other current assets | | 2,919 | | | 2,227 | | | | | | | | | | | | | | | | | | | | | | | |
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Foreign exchange contracts (2) | | Other long-term assets | | 893 | | | 586 | | | | | | | | | | | | | | | | | | | | | | | |
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Interest rate swap agreements (3) | | Other long-term assets | | 14,097 | | | 22,745 | | | | | | | | | | | | | | | | | | | | | | | |
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Total derivatives designated as hedges | | | | $ | 21,733 | | | $ | 29,864 | | | | | | | | | | | | | | | | | | | | | | | |
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Derivatives not designated as hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Deferred compensation derivatives (4) | | Prepaid expenses and other current assets | | $ | 69 | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | |
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Foreign exchange contracts (2) | | Other long-term assets | | 324 | | | 166 | | | | | | | | | | | | | | | | | | | | | | | |
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Total derivatives not designated as hedges | | | | $ | 393 | | | $ | 166 | | | | | | | | | | | | | | | | | | | | | | | |
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Derivative Liabilities | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Derivatives designated as hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commodities futures and options (1) | | Accrued liabilities | | $ | — | | | $ | 129 | | | | | | | | | | | | | | | | | | | | | | | |
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Total derivatives designated as hedges | | | | $ | — | | | $ | 129 | | | | | | | | | | | | | | | | | | | | | | | |
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Derivatives not designated as hedges: | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts (2) | | Accrued liabilities | | $ | 10,435 | | | $ | — | | | | | | | | | | | | | | | | | | | | | | | |
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Foreign exchange contracts (2) | | Other long-term liabilities | | 357 | | | 198 | | | | | | | | | | | | | | | | | | | | | | | |
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Total derivatives not designated as hedges | | | | $ | 10,792 | | | $ | 198 | | | | | | | | | | | | | | | | | | | | | | | |
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-1 | The fair value of commodities futures and options contracts is based on quoted market prices and is, therefore, categorized as Level 1 within the fair value hierarchy. As of March 30, 2014, prepaid expenses and other current assets reflects the net of assets of $34.4 million and accrued liabilities of $30.6 million associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The comparable amounts reflected net in accrued liabilities at December 31, 2013 were assets of $23.8 million and accrued liabilities of $23.9 million. At December 31, 2013, the amount reflected in prepaid expenses and other current assets related to the fair value of options contracts. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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-2 | The fair value of foreign currency forward exchange contracts is the difference between the contract and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign currency forward exchange contracts on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences. These contracts are classified as Level 2 within the fair value hierarchy. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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-3 | The fair value of the interest rate swap agreements represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments. Such contracts are categorized as Level 2 within the fair value hierarchy. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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-4 | The fair value of the deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index and is, therefore, categorized as Level 2 within the fair value hierarchy. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Other Financial Instruments |
The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and short-term debt approximated fair value as of March 30, 2014 and December 31, 2013 because of the relatively short maturity of these instruments. |
The carrying value of long-term debt, including the current portion, was $1,794.5 million as of March 30, 2014, compared with a fair value of $1,967.8 million. The estimated fair value of long-term debt is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 within the valuation hierarchy. |
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The effect of derivative instruments on the Consolidated Statements of Income for the three months ended March 30, 2014 and March 31, 2013 was as follows: |
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| | Non-designated Hedges | | Cash Flow Hedges |
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| | Gains (losses) recognized in income | | Gains (losses) recognized in other comprehensive income (“OCI”) (effective portion) | | Gains (losses) reclassified from accumulated OCI into income (effective portion) (a) | | Gains (losses) recognized in income (ineffective portion) (b) |
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In thousands of dollars | | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 | | 2014 | | 2013 |
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Commodities futures and options | | $ | 2,339 | | | $ | — | | | $ | 39,955 | | | $ | (9,320 | ) | | $ | 15,900 | | | $ | (5,800 | ) | | $ | (412 | ) | | $ | 388 | |
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Foreign exchange contracts (c) | | (10,468 | ) | | — | | | 1,136 | | | (1,507 | ) | | 143 | | | 869 | | | — | | | — | |
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Interest rate swap agreements | | — | | | — | | | (8,648 | ) | | 7,733 | | | (1,127 | ) | | (912 | ) | | — | | | (428 | ) |
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Deferred compensation derivatives | | 69 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
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Total | | $ | (8,060 | ) | | $ | — | | | $ | 32,443 | | | $ | (3,094 | ) | | $ | 14,916 | | | $ | (5,843 | ) | | $ | (412 | ) | | $ | (40 | ) |
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(a) | Gains (losses) reclassified from accumulated OCI into income were included in cost of sales for commodities futures and options contracts and for foreign exchange forward contracts and options designated as hedges of purchases of inventory or other productive assets. Other gains and losses for foreign exchange forward contracts were included in selling, marketing and administrative expenses. Gains (losses) reclassified from accumulated OCI into income for interest rate swap agreements were included in interest expense. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(b) | Gains (losses) recognized in income were included in cost of sales for commodities futures and options contracts and in interest expense for interest rate swap agreements. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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(c) | For the quarter ended March 30, 2014, we realized losses from non-designated foreign currency forward exchange contracts used to cap the anticipated acquisition price of Shanghai Golden Monkey as denominated in U.S. dollars. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
All gains (losses) related to the ineffective portion of the hedging relationship were recognized in earnings. We recognized no components of gains and losses on cash flow hedging derivatives in income due to excluding such components from the hedge effectiveness assessment. |
The amount of net gains on cash flow hedging derivatives, including interest rate swap agreements, foreign currency forward exchange contracts, and commodities futures and options contracts, expected to be reclassified into income in the next twelve months was approximately $33.3 million after tax as of March 30, 2014. This amount was primarily associated with commodities futures and options contracts. |