Derivative Instruments

The Company’s earnings and cash flows are subject to fluctuations due to changes in interest rates and foreign currency exchange rates. The Company allows for the use of derivative financial instruments to manage interest rate and foreign currency exchange rate exposure, but does not allow derivatives to be used for speculative purposes.

All derivative instruments are recognized on the consolidated balance sheets at their fair value and are either designated as a hedge of a forecasted transaction or undesignated. Changes in the fair value of a derivative designated as a hedge are recorded in other comprehensive income until earnings are affected by the hedged transaction, and are then reported in current earnings. Changes in the fair value of undesignated derivative instruments and the ineffective portion of designated derivative instruments are reported in current earnings.

Interest Rate Risk

The Company’s primary debt obligations utilize variable-rate LIBOR, exposing the Company to variability in interest payments due to changes in interest rates. The Company entered into interest rate swap agreements to reduce the volatility of financing costs, achieve a desired proportion of fixed-rate versus floating-rate debt and to hedge the variability in cash flows attributable to interest rate risks caused by changes in the LIBOR benchmark.

The Company designated the swaps as cash flow hedges and is assessing their effectiveness using the hypothetical derivative method in conjunction with regression. Effective gains and losses, deferred to AOCI, are reclassified into earnings over the life of the associated hedge.

Foreign Currency Exchange Rate Risk

Foreign currency fluctuations affect investments in foreign subsidiaries and foreign currency cash flows related to third party purchases, product shipments, and foreign-denominated debt. The Company is also exposed to the translation of foreign currency earnings to the U.S. dollar. Management uses foreign currency forward contracts to selectively hedge its foreign currency cash flow exposure and manage risk associated with changes in currency exchange rates. The Company’s principal foreign currency exposure is to the Canadian dollar, and to a lesser extent, the euro.

The notional amounts of outstanding derivative instruments as of September 29, 2018 and December 31, 2017 are presented below.



	September 29, 2018		December 31, 2017
Interest rate swaps (a)	$	200,000	$	200,000
Foreign exchange forward contracts (b)	$	398,248	$	240,591
Foreign exchange forward contracts (c)	$	96,810	$	—

(a) Maturity date of December 2020

(b) Monthly maturity dates through September 2019

The fair values of derivative instruments included in the consolidated balance sheet as of September 29, 2018 and December 31, 2017 are provided in the below table. See Note 8 — Fair Value Measurements for additional information related to the Company’s derivatives.



	Balance Sheet Location	September 29, 2018			December 31, 2017
Assets:
Derivatives designated as hedging instruments:
Interest rate swaps	Other current assets	$	1,332		$	—
Interest rate swaps	Other assets	2,624			749
Foreign exchange forward contracts	Other current assets	1,293			—
Foreign exchange forward contracts	Other assets	756			—
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts	Other current assets	68			427

Liabilities:
Derivatives designated as hedging instruments:
Foreign exchange forward contracts	Other current liabilities	(4,662		)	—
Total derivatives		$	1,411		$	1,176

The effects of derivative instruments designated as cash flow hedges, the related changes in AOCI and the gains and losses in income for the three and nine months ended September 29, 2018 are presented below. The Company did not have any derivatives designated as hedges during the three and nine months ended September 23, 2017.



	Three Months Ended September 29, 2018
Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in OCI on Derivative			Gain (Loss) Reclassified from AOCI into Income			Location on Statement of Income
Interest rate swaps	$	530		$	74		Interest Expense
Foreign exchange forward contracts	5,002			60			Other operating income (expense), net
Foreign exchange forward contracts	1,399			(1,399		)	Cost of sales
Foreign exchange forward contracts	1,570			1,529			Interest income and other, net

	Nine Months Ended September 29, 2018
Derivatives in Cash Flow Hedging Relationships	Gain (Loss) Recognized in OCI on Derivative			Gain (Loss) Reclassified from AOCI into Income			Location on Statement of Income
Interest rate swaps	$	3,095		$	(112	)	Interest Expense
Foreign exchange forward contracts	(5,406		)	1,188			Other operating income (expense), net
Foreign exchange forward contracts	1,466			(1,466		)	Cost of sales
Foreign exchange forward contracts	181			973			Interest income and other, net

The effects of derivative instruments not designated as hedging instruments on the statement of income for the three and nine months ended September 29, 2018 and September 23, 2017 were as follows:



		Three Months Ended					Nine Months Ended
Derivatives Not Designated as Hedging Instruments	Location of Gain (Loss) Recognized in Income on Derivative	September 29, 2018			September 23, 2017		September 29, 2018			September 23, 2017
Foreign exchange contracts	Other operating income (expense), net	$	(250	)	$	—	$	(3,791	)	$	—
Foreign currency collar	Other non-operating income	—			14,087		—			16,149

The after-tax amounts of unrealized gains (losses) in AOCI related to hedge derivatives at September 29, 2018 and December 31, 2017 are presented below:



	September 29, 2018			December 31, 2017
Interest rate cash flow hedges	$	3,086		$	619
Foreign exchange cash flow hedges	(3,403		)	—

The amount of future reclassifications from AOCI will fluctuate with movements in the underlying markets.