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 October 27, 2013, the Company had outstanding currency exchange, interest rate, and cross-currency swap derivative contracts with notional amounts of $2.06 billion, $9 billion and $8.3 billion respectively. At April 28, 2013, the Company had outstanding currency exchange, interest rate, and cross-currency interest rate derivative contracts with notional amounts of $873 million, $160 million and $316 million, respectively.

The following table presents the fair values and corresponding balance sheet captions of the Company’s derivative instruments as of October 27, 2013 and April 28, 2013:



	Successor						Predecessor
	October 27, 2013						April 28, 2013
	Foreign Exchange Contracts		Interest Rate Contracts		Cross-Currency Swap Contracts		Foreign Exchange Contracts		Interest Rate Contracts		Cross- Currency Interest Rate Swap Contracts
	(In thousands)
Assets:
Derivatives designated as hedging instruments:
Other receivables, net	$	29,011	$	—	$	—	$	23,240	$	4,226	$	—
Other non-current assets	6,291		137,894		—		11,498		29,103		—
	35,302		137,894		—		34,738		33,329		—
Derivatives not designated as hedging instruments:
Other receivables, net	9,630		—		—		825		—		—
Other non-current assets	—		—		—		—		—		—
	9,630		—		—		825		—		—
Total assets	$	44,932	$	137,894	$	—	$	35,563	$	33,329	$	—
Liabilities:
Derivatives designated as hedging instruments:
Other payables	$	5,079	$	—	$	—	$	1,508	$	—	$	34,805
Other non-current liabilities	272		—		166,429		217		—		37,520
	5,351		—		166,429		1,725		—		72,325
Derivatives not designated as hedging instruments:
Other payables	31,054		—		—		4,860		—		—
Other non-current liabilities	—		—		—		—		960		—
Total liabilities	$	36,405	$	—	$	166,429	$	6,585	$	960	$	72,325

Refer to Note 15 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 consolidated statement of income for the second quarters ended October 27, 2013 and October 28, 2012:



	Second Quarter Ended
	Successor									Predecessor
	October 27, 2013 FY 2014									October 28, 2012 FY 2013
	Foreign Exchange Contracts			Interest Rate Contracts			Cross-Currency Swap Contracts			Foreign Exchange Contracts			Interest Rate Contracts			Cross-Currency Interest Rate Swap Contracts
	(In thousands)
Cash flow hedges:
Net gains/(losses) recognized in other comprehensive loss (effective portion)	$	10,692		$	(102,253	)	$	(166,429	)	$	7,184		$	—		$	(6,798	)
Net gains/(losses) reclassified from other comprehensive loss into earnings (effective portion):
Sales	$	(558	)	$	—		$	—		$	2,439		$	—		$	—
Cost of products sold	1,190			—			—			(3,920		)	—			—
Selling, general and administrative expenses	(46		)	—			—			31			—			—
Other expense, net	—			—			—			1,259			—			(5,908		)
Interest expense	—			—			—			(70		)	(59		)	(1,215		)
	586			—			—			(261		)	(59		)	(7,123		)
Fair value hedges:
Net losses recognized in other expense, net	—			—			—			—			(3,900		)	—

Derivatives not designated as hedging instruments:
Unrealized gain on derivative instruments	—			—			—			—			—			—
Net (losses)/gains recognized in other expense, net	(8,881		)	—			—			564			—			—
Net gains recognized in interest income	—			—			—			—			297			—
	(8,881		)	—			—			564			297			—
Total amount recognized in statement of operations	$	(8,295	)	$	—		$	—		$	303		$	(3,662	)	$	(7,123	)

The following table presents the pre-tax effect of derivative instruments on the consolidated statement of income for the six months ended October 27, 2013 and October 28, 2012:



	Successor									Predecessor
	February 8 - October 27, 2013 FY 2014									April 29 - June 7, 2013 FY 2014									Six Months Ended October 28, 2012 FY 2013
	Foreign Exchange Contracts			Interest Rate Contracts			Cross-Currency Swap Contracts			Foreign Exchange Contracts			Interest Rate Contracts			Cross-Currency Interest Rate Swap Contracts			Foreign Exchange Contracts			Interest Rate Contracts			Cross-Currency Interest Rate Swap Contracts
	(In thousands)
Cash flow hedges:
Net gains/(losses) recognized in other comprehensive loss (effective portion)	$	19,308		$	19,959		$	(166,429	)	$	2,603		$	—		$	(4,079	)	$	12,360		$	—		$	(1,675	)
Net (losses)/gains reclassified from other comprehensive loss into earnings (effective portion):
Sales	$	(325	)	$	—		$	—		$	990		$	—		$	—		$	4,184		$	—		$	—
Cost of products sold	1,427			—			—			1,814			—			—			(5,288		)	—			—
Selling, general and administrative expenses	(46		)	—			—			—			—			—			(117		)	—			—
Other expense, net	—			—			—			(1,858		)	—			(9,821		)	8,559			—			3,009
Interest income/(expense)	—			—			—			61			(20		)	(538		)	(120		)	(118		)	(2,667		)
	1,056			—			—			1,007			(20		)	(10,359		)	7,218			(118		)	342
Fair value hedges:
Net (losses)/gains recognized in other expense, net	—			(180		)	—			—			(5,925		)	—			—			734			—

Derivatives not designated as hedging instruments:
Unrealized gain on derivative instruments	—			117,934			—			—			—			—			—			—			—
Net losses recognized in other expense, net	(27,270		)	—			—			(3,890		)	—			—			(1,111		)	—			—
Net gains recognized in interest income	—			—			—			—			—			—			—			490			—
	(27,270		)	117,934			—			(3,890		)	—			—			(1,111		)	490			—
Total amount recognized in statement of operations	$	(26,214	)	$	117,754		$	—		$	(14,249	)	$	(10,379	)	$	(10,359	)	$	7,213		$	1,106		$	118,096

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.

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 and London Interbank Offered Rates (LIBOR). 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 also entered into cross-currency interest rate swaps 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. As a result of the merger, these contracts were terminated in May 2013.

Prior to the Merger date, Merger Subsidiary entered into interest rate swaps to mitigate exposure to variable rate debt that was raised to finance the acquisition. These agreements were not designated as hedging instruments prior to the acquisition date, and as such, we recognized the fair value of these instruments as an asset with income of $117.9 million in the Successor period. As a result of the Merger and the transactions entered into in connection therewith, we have assumed the liabilities and obligations of Merger Subsidiary. Upon consummation of the acquisition, these interest rate swaps with an aggregate notional amount of $9.0 billion met the criteria for hedge accounting and were designated as hedges of future interest payments.

Deferred Hedging Gains and Losses:

As of October 27, 2013, the Company is hedging forecasted transactions for periods not exceeding 2 years. During the next 12 months, the Company expects $10.4 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 as well as reclassifications to earnings due to hedged transactions no longer expected to occur, which is reported in current period earnings as other income/(expense), net, was not significant for the first quarters of Fiscal 2014 and Fiscal 2013, respectively.

Hedges of Net Investments in Foreign Operations:

We have numerous investments in our foreign subsidiaries, the net assets of which are exposed to volatility in foreign currency exchange rates. Beginning in October 2013, we have used cross currency swaps to hedge a portion of our net investment in such foreign operations against adverse movements in exchange rates. We designated cross currency swap contracts between pound sterling and USD, the Euro and USD, the Australian Dollar and USD, and the Japanese Yen and USD, as net investment hedges of a portion of our equity in foreign operations in those currencies. The component of the gains and losses on our net investment in these designated foreign operations driven by changes in foreign exchange rates, are economically offset by movements in the fair values of our cross currency swap contracts. The fair value of the swaps is calculated each period with changes in fair value reported in foreign currency translation adjustments within accumulated other comprehensive income (loss), net of tax. Such amounts will remain in other comprehensive income (loss) until the complete or substantially complete liquidation of our investment in the underlying foreign operations.

In relation to the cross currency swaps:

•We pay 6.462% per annum on the pound sterling notional amount of £2.795 billion and receive 6.15% per annum on the USD notional amount of $4.5 billion on each January 8, April 8, July 8 and October 8, through the maturity date of the swap, which was also expected to be on October 8, 2019.

•We pay 5.696% per annum on the Euro notional amount of €2.21 billion and receive 6.15% per annum on the USD notional amount of $3.0 billion on each January 9, April 9, July 9 and October 9, through the maturity date of the swap, which was also expected to be on October 9, 2019.

•We pay 9.164% per annum on the Australian dollar notional amount of A$793.8 million and receive 6.15% per annum on the USD notional amount of $750.0 million on each January 10, April 10, July 10 and October 10, through the maturity date of the swap, which was also expected to be on October 10, 2019.

•We pay 4.104% per annum on the Japanese yen notional amount of ¥4,854.5 billion and receive 6.15% per annum on the USD notional amount of $50.0 million on each January 11, April 11, July 11 and October 11, through the maturity date of the swap, which was also expected to be on October 11, 2019.

The net amounts paid or received on a quarterly basis are recorded in Other income/(expense), net, in the consolidated statement of operations, and are immaterial in the quarter ended October 27, 2013.

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 $1,081.2 million and $369.9 million that did not meet the criteria for hedge accounting as of October 27, 2013 and April 28, 2013, 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 gains/(losses) related to outstanding contracts totaled $(19.8) million and $(4.0) million as of October 27, 2013 and April 28, 2013, respectively. These contracts are scheduled to mature within one year.

During the first quarter of Fiscal year 2013, forward contracts were put into place to help mitigate the unfavorable impact of translation associated with key foreign currencies which resulted in a loss of $(4.8) million for the second quarter ended October 28, 2012 and a gain of $1.4 million for the six months ended October 28, 2012.

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 was being used as an economic hedge to reduce the interest cost related to the Company's $119 million remarketable securities. The swap was being accounted for on a full mark-to-market basis through current earnings, with gains and losses recorded as a component of interest income. As a result of the Merger, the remarketable securities were repaid and the associated total rate of return swap was terminated.

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.