Derivative financial instruments

6 Months Ended

Jun. 29, 2024

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We are exposed to certain financial risks relating to our ongoing business operations. From time to time, we use derivative financial instruments, principally foreign currency swaps, forward foreign currency contracts, interest rate caps (options) and interest rate swaps, to reduce our exposure to foreign currency risk and interest rate risk. We do not hold or issue derivatives for speculative purposes and monitor closely the credit quality of the institutions with which we transact.

We recognize derivative instruments as either assets or liabilities in the condensed consolidated balance sheet. We designate certain of our currency swaps as net investment hedges and designate our interest rate caps and interest rate swaps as cash flow hedges. The gain or loss on the designated derivative instrument is recognized in other comprehensive income (“OCI”) and reclassified into net income in the same period or periods during which the hedged transaction affects earnings.

Derivative instruments that have not been designated in an effective hedging relationship are considered economic hedges, and their change in fair value is recognized in net income in each period.

The period end fair values of derivative financial instruments were as follows:


	As of June 29, 2024										As of December 30, 2023
(dollars in millions)	Prepaid expenses and other assets		Other non- current assets		Accrued expenses and other current liabilities		Other non- current liabilities		Net		Prepaid expenses and other assets		Other non- current assets		Accrued expenses and other current liabilities		Other non- current liabilities		Net
Derivatives designated as hedging instruments:
—Currency swaps	$	10.5	$	—	$	—	$	(53.8)	$	(43.3)	$	8.5	$	—	$	—	$	(77.7)	$	(69.2)

—Interest rate swaps	32.3		2.3		(9.9)		(2.2)		22.5		29.9		11.8		(9.9)		(13.6)		18.2

Derivatives not designated as hedging instruments:

—Currency forward contracts	2.3		—		(0.3)		—		2.0		3.9		—		(1.8)		—		2.1
	$	45.1	$	2.3	$	(10.2)	$	(56.0)	$	(18.8)	$	42.3	$	11.8	$	(11.7)	$	(91.3)	$	(48.9)

A. Instruments designated as net investment hedges

We hold cross currency swaps that have been designated as net investment hedges of certain of our European and Chinese operations. We hold USD-EUR cross currency swaps with a notional principal amount of €254.5 million and extended maturity date of March 31, 2027, and additional USD-EUR cross currency swaps with the notional principal amount of €501.6 million and contract term from November 16, 2022 to November 16, 2027. All USD-EUR cross currency swaps were designated as net investment hedges of certain of our European operations. In May 2023, we amended our €254.5 million USD-EUR cross currency swaps to transition from a floating rate based on the London Interbank Offered Rate (“LIBOR”) to a floating rate based on a term secured overnight financing rate (“Term SOFR”). In November 2023, we executed a USD to Chinese Yuan fixed-to-fixed cross currency swap with a notional principal amount of ¥1,784.0 million with a contract term from November 30, 2023 to November 30, 2026. This has been designated as a net investment hedge of certain of our Chinese operations. As of both June 29, 2024 and December 30, 2023, the aggregated notional principal amounts of the cross currency swaps were €756.1 million and ¥1,784.0 million.

The fair value gains (losses) before tax recognized in OCI in relation to the instruments designated as net investment hedging instruments were as follows:


	Three months ended				Six months ended
(dollars in millions)	June 29, 2024		July 1, 2023		June 29, 2024		July 1, 2023
Net fair value gains recognized in OCI in relation to:

—Designated cross currency swaps	6.9		(9.9)		25.9		(22.1)
Total net fair value gains (losses)	$	6.9	$	(9.9)	$	25.9	$	(22.1)

During the three and six months ended June 29, 2024, a net gain of $1.1 million and $4.3 million, respectively, was recognized in interest expense in relation to our cross currency swaps that have been designated as net investment hedges, compared to a net gain of $2.5 million and $5.5 million, respectively, during the three and six months ended July 1, 2023.

B. Instruments designated as cash flow hedges

We use interest rate swaps and interest rate caps as part of our interest rate risk management strategy to add stability to interest expense and to manage our exposure to interest rate movements. These instruments are all designated as cash flow hedges. As of both June 29, 2024 and December 30, 2023, we held pay-fixed, receive-floating interest rate swaps with an aggregate notional amount of $1,255.0 million. Interest rate swaps with a notional amount of $870.0 million run from June 30, 2020 through June 30, 2025, while interest rate swaps with a notional amount of $385.0 million have the contract term from November 16, 2022 to November 16, 2027.

The movements before tax recognized in OCI in relation to our cash flow hedges were as follows:


	Three months ended				Six months ended
(dollars in millions)	June 29, 2024		July 1, 2023		June 29, 2024		July 1, 2023
Movement recognized in OCI in relation to:
—Fair value gain on cash flow hedges	$	3.8	$	23.6	$	17.4	$	13.6
—Amortization to net income of prior period fair value losses	—		4.4		—		8.9
—Deferred OCI reclassified to net income	(9.0)		(8.2)		(18.0)		(15.1)
Total movement	$	(5.2)	$	19.8	$	(0.6)	$	7.4

C. Derivative instruments not designated as hedging instruments

We do not designate our currency forward contracts, which are used primarily in respect of operational currency exposures related to payables, receivables and material procurement, or the currency swap contracts that are used to manage the currency profile of Gates’ cash as hedging instruments for the purposes of hedge accounting.

As of June 29, 2024 and December 30, 2023, there were no outstanding currency swaps.

As of June 29, 2024, the notional amount of outstanding currency forward contracts that are used to manage operational foreign exchange exposures was $140.7 million, compared to $140.8 million as of December 30, 2023.

The fair value gains recognized in net income in relation to derivative instruments that have not been designated as hedging instruments were as follows:


	Three months ended				Six months ended
(dollars in millions)	June 29, 2024		July 1, 2023		June 29, 2024		July 1, 2023
Fair value gains recognized in relation to:
—Currency forward contracts recognized in SG&A	$	1.1	$	2.9	$	3.2	$	4.1

Total	$	1.1	$	2.9	$	3.2	$	4.1