Financial Instruments and Risk Management (Notes)

6 Months Ended

Jul. 03, 2021

Investments, All Other Investments [Abstract]

Financial Instruments and Risk Management

DERIVATIVE FINANCIAL INSTRUMENTS

The Company follows FASB ASC Topic 815, Derivatives and Hedging ("ASC 815"), which requires that all derivative instruments be recorded on the consolidated condensed balance sheets at fair value by establishing criteria for designation and effectiveness of hedging relationships. The Company does not hold or issue financial instruments for trading purposes.

The Company utilizes foreign currency forward exchange contracts designated as cash flow hedges to manage the volatility associated primarily with U.S. dollar inventory purchases made by non-U.S. wholesale operations in the normal course of business. These foreign currency forward exchange hedge contracts extended out to a maximum of 538 days, 538 days, and 412 days as of July 3, 2021, January 2, 2021 and June 27, 2020, respectively. If, in the future, the foreign exchange contracts are determined not to be highly effective or are terminated before their contractual termination dates, the Company would remove the hedge designation from those contracts and reclassify into earnings the unrealized gains or losses that would otherwise be included in accumulated other comprehensive income (loss) within stockholders’ equity. During the quarter ended June 27, 2020, the Company reclassified $1.3 million to other income for foreign currency contracts that were no longer deemed highly effective.

The Company had an interest rate swap arrangement to mitigate interest volatility with regard to variable rate borrowings under the Amended Senior Credit Facility. The interest rate swap exchanged floating rate for fixed rate interest payments without the exchange of the underlying notional amounts, and had been designated as cash flow hedge of the underlying debt. The arrangement was terminated during the fourth quarter of fiscal 2020.

The Company has a cross currency swap to minimize the impact of exchange rate fluctuations. The hedging instrument, which, unless otherwise terminated, will mature on September 1, 2021, has been designated as a hedge of a net investment in a foreign operation. The Company will pay 2.75% on the euro-denominated notional amount and receive 5.00% on the U.S. dollar notional amount, with an exchange of principal at maturity. Changes in fair value related to movements in the foreign currency exchange spot rate are recorded in accumulated other comprehensive income (loss), offsetting the currency translation adjustment related to the underlying net investment that is also recorded in accumulated other comprehensive income (loss). All other changes in fair value are recorded in interest expense. In accordance with ASC 815, the Company has formally documented the relationship between the cross-currency swap and the Company’s investment in its euro-denominated subsidiary, as well as its risk management objective and strategy for undertaking the hedge transaction. This process included linking the derivative to its net investment on the balance sheet. The Company also assessed at the hedge’s inception, and continues to assess on an ongoing basis, whether the derivative used in the hedging transaction is highly effective in offsetting changes in the net investment of the foreign operations.

The notional amounts of the Company’s derivative instruments are as follows:

(Dollars in millions)	July 3, 2021		January 2, 2021		June 27, 2020
Foreign exchange hedge contracts	$	293.9	$	250.7	$	161.1
Interest rate swap	—		—		314.6
Cross currency swap	79.8		79.8		79.8

The recorded fair values of the Company’s derivative instruments are as follows:

(In millions)	July 3, 2021		January 2, 2021		June 27, 2020
Financial assets:
Foreign exchange hedge contracts	$	1.6	$	—	$	4.1
Financial liabilities:
Foreign exchange hedge contracts	$	(4.1)	$	(8.8)	$	(0.1)
Interest rate swap	—		—		(9.8)
Cross currency swap	(8.6)		(10.8)		(1.9)