Derivative Instruments

3 Months Ended

Apr. 03, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

Teledyne transacts business in various foreign currencies and has international sales and expenses denominated in foreign currencies, subjecting the Company to foreign currency risk. The Company’s primary foreign currency risk management objective is to protect the United States dollar value of future cash flows and minimize the volatility of reported earnings. The Company utilizes foreign currency forward contracts to reduce the volatility of cash flows primarily related to forecasted revenues and expenses denominated in Canadian dollars for our Canadian companies, including DALSA. These contracts are designated and qualify as cash flow hedges.

Cash Flow Hedging Activities

The effectiveness of the cash flow hedge contracts, excluding time value, is assessed prospectively and retrospectively on a monthly basis using regression analysis, as well as using other timing and probability criteria. To receive hedge accounting treatment, all hedging relationships are formally documented at the inception of the hedges and must be highly effective in offsetting changes to future cash flows on hedged transactions. The effective portion of the cash flow hedge contracts’ gains or losses resulting from changes in the fair value of these hedges is initially reported, net of tax, as a component of AOCI in stockholders’ equity until the underlying hedged item is reflected in our consolidated statements of income, at which time the effective amount in AOCI is reclassified to cost of sales in our consolidated statements of income. Net deferred losses recorded in AOCI, net of tax, for contracts that will mature in the next twelve months total $0.2 million. These losses are expected to be offset by anticipated gains in the value of the forecasted underlying hedged item.

In the event that the gains or losses in AOCI are deemed to be ineffective, the ineffective portion of gains or losses resulting from changes in fair value, if any, is reclassified to other income and expense. In the event that the underlying forecasted transactions do not occur, or it becomes remote that they will occur, within the defined hedge period, the gains or losses on the related cash flow hedges will be reclassified from AOCI to other income and expense. During the current reporting period, all forecasted transactions occurred and, therefore, there were no such gains or losses reclassified to other income and expense. As of April 3, 2016, Teledyne had foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sell U.S. dollars totaling $73.2 million. These foreign currency forward contracts have maturities ranging from June 2016 to February 2018.

Non-Designated Hedging Activities

In addition, the Company utilizes foreign currency forward contracts to mitigate foreign exchange rate risk associated with foreign-currency-denominated monetary assets and liabilities, including intercompany receivables and payables. As of April 3, 2016, Teledyne had foreign currency contracts of this type in the following pairs (in millions):

Contracts to Buy			Contracts to Sell
Currency	Amount		Currency	Amount
Canadian Dollars	C$	55.8	U.S. Dollars	US$	41.7
Canadian Dollars	C$	10.6	Euros	€	6.9
Euros	€	7.1	U.S. Dollars	US$	8.0
Great Britain Pounds	£	1.1	Australian Dollars	A$	2.2
Great Britain Pounds	£	21.5	U.S. Dollars	US$	31.4
Singapore Dollars	S$	1.7	U.S. Dollars	US$	1.2
U.S. Dollars	US$	2.2	Japanese Yen	¥	250.0

The above table includes non-designated hedges derived from terms contained in triggered or previously designated cash flow hedges. The gains and losses on these derivatives which are not designated as hedging instruments under ASC 815, Derivatives and Hedging ("ASC 815"), are intended to, at a minimum, partially offset the transaction gains and losses recognized in earnings. All derivatives are recorded on the balance sheet at fair value. As discussed below, the accounting for gains and losses resulting from changes in fair value depends on the use of the derivative and whether it is designated and qualifies for hedge accounting. Teledyne does not use foreign currency forward contracts for speculative or trading purposes.

The effect of derivative instruments designated as cash flow hedges in our condensed consolidated financial statements for the first quarter ended April 3, 2016 and March 29, 2015 was as follows (in millions):

	First Quarter
	2016			2015
Net gain (loss) recognized in AOCI (a)	$	4.0		$	(4.6	)
Net loss reclassified from AOCI into cost of sales (a)	$	(2.2	)	$	(1.4	)
Net foreign exchange gain (loss) recognized in other income and expense (b)	$	(0.2	)	$	0.2

a)    Effective portion, pre-tax

b)     Amount excluded from effectiveness testing

The effect of derivative instruments not designated as cash flow hedges recognized in other income and expense for the first quarter ended April 3, 2016 was income of $2.7 million and expense of $4.9 million for the first quarter ended March 29, 2015.

Fair Value of Derivative Financial Instruments

The fair values of the Company’s derivative financial instruments are presented below. All fair values for these derivatives were measured using Level 2 information as defined by the accounting standard hierarchy (in millions):

Asset/(Liability) Derivatives	Balance sheet location	April 3, 2016			January 3, 2016
Derivatives designated as hedging instruments:
Cash flow forward contracts	Other assets	$	0.8		$	—
Cash flow forward contracts	Accrued liabilities	—			(4.7		)
Cash flow forward contracts	Other long-term liabilities	(0.8		)	(1.3		)
Total derivatives designated as hedging instruments		—			(6.0		)
Derivatives not designated as hedging instruments:
Non-designated forward contracts	Other current assets	2.8			0.2
Non-designated forward contracts	Accrued liabilities	(1.8		)	(6.0		)
Total derivatives not designated as hedging instruments		1.0			(5.8		)
Total asset (liability) derivatives		$	1.0		$	(11.8	)