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 U.S. dollar value of future cash flows and minimize the volatility of reported 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. 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 and in British pounds for our UK companies, including e2v. These contracts are designated and qualify as cash flow hedges. The Company has converted a U.S. dollar denominated, variable rate debt obligation into a euro fixed rate obligation using a receive float, pay fixed cross currency swap. This cross currency swap is designated as a cash flow hedge.

Cash Flow Hedging Activities

The effectiveness of the forward contract cash flow hedge, which exclude time value, and the cross currency swap cash flow hedge 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 forward 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. For the cross currency swap cash flow hedge, effective amounts are recorded in AOCI, and reclassified into interest expense in the consolidated statements of income. In addition, for the cross currency swap an amount is reclassified from AOCI to other income and expense each reporting period, to offset the earnings impact of the remeasurement of the hedged liability. Net deferred losses recorded in AOCI, net of tax, for the forward contracts that will mature in the next twelve months total $1.2 million. These losses are expected to be offset by anticipated gains in the value of the forecasted underlying hedged item. Amounts related to the cross currency swap expected to be reclassified from AOCI into income in the next twelve months total $0.1 million.

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 March 31, 2019, Teledyne had foreign currency forward contracts designated as cash flow hedges to buy Canadian dollars and to sell U.S. dollars totaling $80.9 million. These foreign currency forward contracts have maturities ranging from June 2019 to May 2020. Teledyne had foreign currency forward contracts designated as cash flow hedges to buy British pounds and to sell U.S. dollars totaling $17.4 million. These foreign currency forward contracts have maturities ranging from June 2019 to May 2020. Together the contracts had a negative fair value of $2.0 million. The cross currency swap has notional amounts of €93.0 million equivalent to $100.0 million, and matures in October 2019.

The effect of derivative instruments designated as cash flow hedges in the condensed consolidated financial statements for the first quarter ended March 31, 2019 and April 1, 2018 was as follows (in millions):



	First Quarter
	2019			2018
Net gain (loss) recognized in AOCI (a)	$	4.3		$	(3.7	)
Net gain (loss) reclassified from AOCI into cost of sales (a)	$	(0.6	)	$	1.2
Net gain reclassified from AOCI into interest expense (a)	$	0.8		$	0.5
Net gain (loss) reclassified from AOCI into other income and expense, net (b)	$	1.8		$	(3.0	)
Net foreign exchange gain (loss) recognized in other income and expense, net (c)	$	(0.2	)	$	—

a) Effective portion, pre-tax

b) Amount reclassified to offset earnings impact of liability hedged by cross currency swap

c) Amount excluded from effectiveness testing

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 March 31, 2019, Teledyne had non-designated 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$	24.4	U.S. Dollars	US$	18.5
Canadian Dollars	C$	13.2	Euros	€	8.7
Great Britain Pounds	£	1.1	Australian Dollars	A$	2.1
Great Britain Pounds	£	33.1	U.S. Dollars	US$	43.2
Singapore Dollars	S$	2.3	U.S. Dollars	US$	1.7
Euros	€	31.2	U.S. Dollars	US$	35.1
U.S. Dollars	US$	2.7	Japanese Yen	¥	300.0
Danish Krone	DKR	63.0	U.S. Dollars	US$	9.5
Great Britain Pounds	£	7.3	Euros	€	8.5
Great Britain Pounds	£	2.4	Hong Kong Dollars	HK$	24.6

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 are intended to, at a minimum, partially offset the transaction gains and losses recognized in earnings. Teledyne does not use foreign currency forward contracts for speculative or trading purposes.

The effect of derivative instruments not designated as cash flow hedges recognized in other income and expense for the first quarter ended March 31, 2019 was income of $1.6 million. The effect of derivative instruments not designated as cash flow hedges in other income and expense for the first quarter ended April 1, 2018 was expense of $0.8 million. The income/expense was largely offset by losses/gains in the value of the underlying hedged item excluding the impact of forward points.

Fair Value of Derivative Financial Instruments

The Company has elected to use the income approach to value the derivatives, using observable Level 2 market expectations at measurement date and standard valuation techniques to convert future amounts to a single present amount. Level 2 inputs for the valuations are limited to quoted prices for similar assets or liabilities in active markets (specifically futures contracts on LIBOR and EURIBOR) and inputs other than quoted prices that are observable for the asset or liability (specifically LIBOR and EURIBOR cash and swap rates, foreign currency forward rates and cross currency basis spreads). Mid-market pricing is used as a practical expedient for fair value measurements. The fair value measurement of an asset or liability must reflect the nonperformance risk of the entity and the counterparty. Therefore, the impact of the counterparty’s creditworthiness when in an asset position and the Company’s creditworthiness when in a liability position has also been factored into the fair value measurement of the derivative instruments and did not have a material impact on the fair value of these derivative instruments. Both the counterparty and the Company are expected to continue to perform under the contractual terms of the 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	March 31, 2019			December 30, 2018
Derivatives designated as hedging instruments:
Cash flow forward contracts	Other assets	$	0.1		$	—
Cash flow cross currency swap	Accrued liabilities	(4.3		)	(6.3		)
Cash flow forward contracts	Accrued liabilities	(2.1		)	(4.2		)
Total derivatives designated as hedging instruments		(6.3		)	(10.5		)
Derivatives not designated as hedging instruments:
Non-designated forward contracts	Other current assets	0.3			—
Non-designated forward contracts	Accrued liabilities	(0.7		)	(0.6		)
Total derivatives not designated as hedging instruments		(0.4		)	(0.6		)
Total liability derivatives, net		$	(6.7	)	$	(11.1	)