Derivative Financial Instruments and Hedging Activities

9 Months Ended

Jan. 25, 2012

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Financial Instruments and Hedging Activities

Derivative Financial Instruments and Hedging Activities

The Company operates internationally, with manufacturing and sales facilities in various locations around the world, and utilizes certain derivative financial instruments to manage its foreign currency, debt and interest rate exposures. At January 25, 2012, the Company had outstanding currency exchange, interest rate, and cross-currency interest rate derivative contracts with notional amounts of $1.96 billion, $760 million and $399 million, respectively. At April 27, 2011, the Company had outstanding currency exchange, interest rate, and cross-currency interest rate derivative contracts with notional amounts of $1.86 billion, $1.51 billion and $377 million, respectively.

The following table presents the fair values and corresponding balance sheet captions of the Company’s derivative instruments as of January 25, 2012 and April 27, 2011:

	January 25, 2012						April 27, 2011
	Foreign Exchange Contracts		Interest Rate Contracts		Cross- Currency Interest Rate Swap Contracts		Foreign Exchange Contracts		Interest Rate Contracts		Cross- Currency Interest Rate Swap Contracts
	(Dollars in Thousands)
Assets:
Derivatives designated as hedging instruments:
Other receivables, net	$	18,392	$	10,260	$	23,717	$	28,139	$	38,703	$	—
Other non-current assets	6,287		30,443		10,792		7,913		16,723		14,898
	24,679		40,703		34,509		36,052		55,426		14,898
Derivatives not designated as hedging instruments:
Other receivables, net	570		—		—		9,329		—		—
Other non-current assets	—		—		—		—		—		—
	570		—		—		9,329		—		—
Total assets	$	25,249	$	40,703	$	34,509	$	45,381	$	55,426	$	14,898
Liabilities:
Derivatives designated as hedging instruments:
Other payables	$	8,801	$	—	$	2,666	$	27,804	$	—	$	6,125
Other non-current liabilities	466		—		—		8,054		—		—
	9,267		—		2,666		35,858		—		6,125
Derivatives not designated as hedging instruments:
Other payables	6,308		739		—		1,024		—		—
Other non-current liabilities	—		—		—		—		—		—
	6,308		739		—		1,024		—		—
Total liabilities	$	15,575	$	739	$	2,666	$	36,882	$	—	$	6,125

Refer to Note 14 for further information on how fair value is determined for the Company’s derivatives.

The following table presents the pre-tax effect of derivative instruments on the statement of income for the third quarters endedJanuary 25, 2012 and January 26, 2011:

	Third Quarter Ended
	January 25, 2012									January 26, 2011
	Foreign Exchange Contracts			Interest Rate Contracts			Cross-Currency Interest Rate Swap Contracts			Foreign Exchange Contracts			Interest Rate Contracts			Cross-Currency Interest Rate Swap Contracts
							(Dollars in Thousands)
Cash flow hedges:
Net gains/(losses) recognized in other comprehensive loss (effective portion)	$	13,634		$	—		$	(8,985	)	$	10,091		$	—		$	(2,335	)
Net gains/(losses) reclassified from other comprehensive loss into earnings (effective portion):
Sales	$	1,456		$	—		$	—		$	1,361		$	—		$	—
Cost of products sold	(4,419		)	—			—			(5,491		)	—			—
Selling, general and administrative expenses	(57		)	—			—			(53		)	—			—
Other income/(expense), net	12,875			—			(8,373		)	21,825			—			571
Interest income/(expense)	33			(59		)	(1,449		)	33			—			(1,214		)
	9,888			(59		)	(9,822		)	17,675			—			(643		)
Fair value hedges:
Net losses recognized in other expense, net	—			(4,113		)	—			—			(25,207		)	—
Derivatives not designated as hedging instruments:
Net losses recognized in other expense, net	(1,846		)	—			—			(998		)	—			—
Net losses recognized in interest income	—			(739		)	—			—			—			—
	(1,846		)	(739		)	—			(998		)	—			—
Total amount recognized in statement of income	$	8,042		$	(4,911	)	$	(9,822	)	$	16,677		$	(25,207	)	$	(643	)

The following table presents the pre-tax effect of derivative instruments on the statement of income for the nine months endedJanuary 25, 2012 and January 26, 2011:

	Nine Months Ended
	January 25, 2012									January 26, 2011
	Foreign Exchange Contracts			Interest Rate Contracts			Cross-Currency Interest Rate Swap Contracts			Foreign Exchange Contracts			Interest Rate Contracts			Cross-Currency Interest Rate Swap Contracts
							(Dollars in Thousands)
Cash flow hedges:
Net gains/(losses) recognized in other comprehensive loss (effective portion)	$	31,965		$	(2,341	)	$	18,644		$	3,064		$	—		$	18,202
Net gains/(losses) reclassified from other comprehensive loss into earnings (effective portion):
Sales	$	5,549		$	—		$	—		$	2,037		$	—		$	—
Cost of products sold	(14,223		)	—			—			(14,679		)	—			—
Selling, general and administrative expenses	48			—			—			(189		)	—			—
Other income, net	20,878			—			21,289			21,477			—			24,607
Interest income/(expense)	214			(88		)	(4,392		)	45			—			(2,934		)
	12,466			(88		)	16,897			8,691			—			21,673
Fair value hedges:
Net losses recognized in other expense, net	—			(14,723		)	—			—			(35,534		)	—
Net losses recognized in interest expense	—			—			—			—			(351		)	—
	—			(14,723		)	—			—			(35,885		)	—
Derivatives not designated as hedging instruments:
Net losses recognized in other expense, net	(5,915		)	—			—			(6,126		)	—			—
Net losses recognized in interest income	—			(739		)	—			—			—			—
	(5,915		)	(739		)	—			(6,126		)	—			—
Total amount recognized in statement of income	$	6,551		$	(15,550	)	$	16,897		$	2,565		$	(35,885	)	$	21,673

Foreign Currency Hedging:

The Company uses forward contracts and to a lesser extent, option contracts to mitigate its foreign currency exchange rate exposure due to forecasted purchases of raw materials and sales of finished goods, and future settlement of foreign currency denominated assets and liabilities. The Company’s principal foreign currency exposures that are hedged include the Australian dollar, British pound sterling, Canadian dollar, Euro, and the New Zealand dollar. Derivatives used to hedge forecasted transactions and specific cash flows associated with foreign currency denominated financial assets and liabilities that meet the criteria for hedge accounting are designated as cash flow hedges. Consequently, the effective portion of gains and losses is deferred as a component of accumulated other comprehensive loss and is recognized in earnings at the time the hedged item affects earnings, in the same line item as the underlying hedged item.

During the first quarter of Fiscal 2011, the Company early terminated certain foreign currency forward contracts, receiving cash proceeds of $11.6 million, and will release the gain in accumulated other comprehensive loss to earnings when the underlying transactions occur. The underlying transactions are scheduled to occur at various points in time through 2014.

Interest Rate Hedging:

The Company uses interest rate swaps to manage debt and interest rate exposures. The Company is exposed to interest rate volatility with regard to existing and future issuances of fixed and floating rate debt. Primary exposures include U.S. Treasury rates, London Interbank Offered Rates (LIBOR), and commercial paper rates in the United States. Derivatives used to hedge risk associated with changes in the fair value of certain fixed-rate debt obligations are primarily designated as fair value hedges. Consequently, changes in the fair value of these derivatives, along with changes in the fair value of the hedged debt obligations that are attributable to the hedged risk, are recognized in current period earnings.

The Company had outstanding cross-currency interest rate swaps with a total notional amount of $398.6 million and $377.3 million as of January 25, 2012 and April 27, 2011, respectively, which were designated as cash flow hedges of the future payments of loan principal and interest associated with certain foreign denominated variable rate debt obligations. These contracts are scheduled to mature in Fiscal 2013 and 2014.

Deferred Hedging Gains and Losses:

As of January 25, 2012, the Company is hedging forecasted transactions for periods not exceeding 4 years. During the next 12 months, the Company expects $0.3 million of net deferred gains reported in accumulated other comprehensive loss to be reclassified to earnings, assuming market rates remain constant through contract maturities. Hedge ineffectiveness related to cash flow hedges, which is reported in current period earnings as other income/(expense), net, was not significant for the third quarters and nine months endedJanuary 25, 2012 and January 26, 2011. Amounts reclassified to earnings because the hedged transaction was no longer expected to occur were not significant for the third quarters and nine months endedJanuary 25, 2012 and January 26, 2011.

Other Activities:

The Company enters into certain derivative contracts in accordance with its risk management strategy that do not meet the criteria for hedge accounting but which have the economic impact of largely mitigating foreign currency or interest rate exposures. The Company maintained foreign currency forward contracts with a total notional amount of $426.0 million and $309.9 million that did not meet the criteria for hedge accounting as of January 25, 2012 and April 27, 2011, respectively. These forward contracts are accounted for on a full mark-to-market basis through current earnings, with gains and losses recorded as a component of other income/(expense), net. Net unrealized (losses)/gains related to outstanding contracts totaled $(5.7) million and $8.3 million as of January 25, 2012 and April 27, 2011, respectively. These contracts are scheduled to mature within one year.

Forward contracts that were put in place to help mitigate the unfavorable impact of translation associated with key foreign currencies resulted in gains of $6.2 million and $11.4 million for the third quarter and nine months ended January 25, 2012, respectively, and gains of $0.2 million and losses of $12.8 million for the third quarter and nine months ended January 26, 2011, respectively.

The Company entered into a three-year total rate of return swap with an unaffiliated international financial institution during the third quarter of Fiscal 2012 with a notional amount of $119 million. This instrument is being used as an economic hedge to reduce the interest cost related to the Company's $119 million remarketable securities. The swap is being accounted for on a full mark-to-market basis through current earnings, with gains and losses recorded as a component of interest income. During the third quarter ended January 25, 2012, the Company recorded a $0.9 million reduction in interest income, representing changes in the fair value of the swap and interest earned on the arrangement. Net unrealized losses totaled $0.7 million as of January 25, 2012. In connection with this swap, the Company is required to maintain a restricted cash collateral balance of $34.1 million with the counterparty for the term of the swap.

Concentration of Credit Risk:

Counterparties to currency exchange and interest rate derivatives consist of major international financial institutions. The Company continually monitors its positions and the credit ratings of the counterparties involved and, by policy, limits the amount of credit exposure to any one party. While the Company may be exposed to potential losses due to the credit risk of non-performance by these counterparties, losses are not anticipated. The Company closely monitors the credit risk associated with its counterparties and customers and to date has not experienced material losses.