Derivative Financial Instruments and Hedging Activities

12 Months Ended

Apr. 27, 2011

Derivative Financial Instruments and Hedging Activities [Abstract]

Derivative Financial Instruments and Hedging Activities

12.   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 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. At April 28, 2010, the Company had outstanding currency exchange, interest rate, and cross-currency interest rate derivative contracts with notional amounts of $1.64 billion, $1.52 billion and $160 million, respectively. The fair value of derivative financial instruments was a net asset of $72.7 million and $97.7 million at April 27, 2011 and April 28, 2010, respectively.

The following table presents the fair values and corresponding balance sheet captions of the Company’s derivative instruments as of April 27, 2011 and April 28, 2010:

	April 27, 2011						April 28, 2010
					Cross-						Cross-
					Currency						Currency
	Foreign		Interest		Interest Rate		Foreign		Interest		Interest Rate
	Exchange		Rate		Swap		Exchange		Rate		Swap
	Contracts		Contracts		Contracts		Contracts		Contracts		Contracts
	(Dollars in Thousands)
Assets:
Derivatives designated as hedging instruments:
Other receivables, net	$	28,139	$	38,703	$	—	$	7,408	$	70,746	$	—
Other non-current assets		7,913		16,723		14,898		16,604		38,460		—
		36,052		55,426		14,898		24,012		109,206		—
Derivatives not designated as hedging instruments:
Other receivables, net		9,329		—		—		555		—		—
Other non-current assets		—		—		—		—		—		—
		9,329		—		—		555		—		—
Total assets	$	45,381	$	55,426	$	14,898	$	24,567	$	109,206	$	—
Liabilities:
Derivatives designated as hedging instruments:
Other payables	$	27,804	$	—	$	6,125	$	16,672	$	—	$	3,510
Other non-current liabilities		8,054		—		—		4,279		—		8,422
		35,858		—		6,125		20,951		—		11,932
Derivatives not designated as hedging instruments:
Other payables		1,024		—		—		3,153		—		—
Other non-current liabilities		—		—		—		—		—		—
		1,024		—		—		3,153		—		—
Total liabilities	$	36,882	$	—	$	6,125	$	24,104	$	—	$	11,932

Refer to Note 10 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 fiscal year ended April 27, 2011:

	Fiscal Year Ended
	April 27, 2011
							Cross-Currency
	Foreign Exchange			Interest Rate			Interest Rate
	Contracts			Contracts			Swap Contracts
	(Dollars in Thousands)
Cash flow hedges:
Net gains recognized in other comprehensive loss (effective portion)	$	3,626		$	—		$	16,649
Net gains/(losses) reclassified from other comprehensive loss into earnings (effective portion):
Sales	$	3,375		$	—		$	—
Cost of products sold		(23,372	)		—			—
Selling, general and administrative expenses		(141	)		—			—
Other (expense)/income, net		35,744			—			24,644
Interest income/(expense)		226			—			(4,484	)
		15,832			—			20,160
Fair value hedges:
Net losses recognized in other (expense)/income, net		—			(51,125	)		—
Net losses recognized in interest expense		—			(351	)		—
		—			(51,476	)		—
Derivatives not designated as hedging instruments:
Net gains recognized in other (expense)/income, net		3,351			—			—
Net gains recognized in interest income		—			—			—
		3,351			—			—
Total amount recognized in statement of income	$	19,183		$	(51,476	)	$	20,160

The following table presents the pre-tax effect of derivative instruments on the statement of income for the fiscal year ended April 28, 2010:

	Fiscal Year Ended
	April 28, 2010
							Cross-Currency
	Foreign Exchange			Interest Rate			Interest Rate
	Contracts			Contracts			Swap Contracts
	(Dollars in Thousands)
Cash flow hedges:
Net losses recognized in other comprehensive loss (effective portion)	$	(38,422	)	$	—		$	(13,692	)
Net gains/(losses) reclassified from other comprehensive loss into earnings (effective portion):
Sales	$	1,141		$	—		$	—
Cost of products sold		(5,104	)		—			—
Selling, general and administrative expenses		108			—			—
Other (expense)/income, net		(11,574	)		—			(7,819	)
Interest income/(expense)		20			—			(1,867	)
		(15,409	)		—			(9,686	)
Fair value hedges:
Net losses recognized in other (expense)/income, net		—			(41,730	)		—
Derivatives not designated as hedging instruments:
Net losses recognized in other (expense)/income, net		(59	)		—			—
Net gains recognized in interest income		—			30,469			—
		(59	)		30,469			—
Total amount recognized in statement of income	$	(15,468	)	$	(11,261	)	$	(9,686	)

The following table presents the pre-tax effect of derivative instruments on the statement of income for the fiscal year ended April 29, 2009:

	Fiscal Year Ended
	April 29, 2009
							Cross-Currency
	Foreign Exchange			Interest Rate			Interest Rate
	Contracts			Contracts			Swap Contracts
	(Dollars in Thousands)
Cash flow hedges:
Net gains recognized in other comprehensive loss (effective portion)	$	42,617		$	—		$	—
Net gains/(losses) reclassified from other comprehensive loss into earnings (effective portion):
Sales	$	(6,809	)	$	—		$	—
Cost of products sold		45,836			—			—
Selling, general and administrative expenses		1,896			—			—
Other (expense)/income, net		(15,777	)		—			—
Interest income/(expense)		1,112			—			—
		26,258			—			—
Fair value hedges:
Net gains recognized in other income/(expense), net		—			57,976			—
Derivatives not designated as hedging instruments:
Net gains/(losses) recognized in other income/(expense), net		65,135			(110	)		—
Net gains recognized in interest income		—			20,200			—
		65,135			20,090			—
Total amount recognized in statement of income	$	91,393		$	78,066		$	—

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 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.

The Company has used certain foreign currency debt instruments as net investment hedges of foreign operations. Losses of $32.3 million, net of income taxes of $20.4 million, which represented effective hedges of net investments, were reported as a component of accumulated other comprehensive loss within unrealized translation adjustment for the fiscal year ended April 28, 2010.

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 $377.3 million and $159.5 million as of April 27, 2011 and April 28, 2010, 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. The swaps that were entered into in Fiscal 2010 are scheduled to mature in 2013 and the swaps that were entered into in the third quarter of Fiscal 2011 are scheduled to mature in Fiscal 2014.

Hedge accounting adjustments related to debt obligations totaled $150.5 million and $207.1 million as of April 27, 2011 and April 28, 2010, respectively. See Note 7 for further information.

Deferred Hedging Gains and Losses:

As of April 27, 2011, the Company is hedging forecasted transactions for periods not exceeding 3 years. During the next 12 months, the Company expects $7.8 million of net deferred losses 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 years ended April 27, 2011, April 28, 2010 and April 29, 2009. The Company excludes the time value component of option contracts from the assessment of hedge effectiveness. Amounts reclassified to earnings because the hedged transaction was no longer expected to occur were not significant for the years ended April 27, 2011, April 28, 2010 and April 29, 2009.

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 $309.9 million and $284.5 million that did not meet the criteria for hedge accounting as of April 27, 2011 and April 28, 2010, 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 $8.3 million and $(2.6) million as of April 27, 2011 and April 28, 2010, 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 (losses)/gains of $(16.9) million, $(2.5) million and $107.3 million for the years ended April 27, 2011, April 28, 2010 and April 29, 2009, respectively. During Fiscal 2011, 2010 and 2009, the Company also (paid)/received $(11.5) million, $(1.7) million and $106.3 million of cash related to these forward contracts, respectively.

During Fiscal 2010, the Company terminated its $175 million notional total rate of return swap that was being used as an economic hedge to reduce a portion of the interest cost related to the Company’s remarketable securities. The unwinding of the total rate of return swap was completed in conjunction with the exchange of $681 million of dealer remarketable securities discussed in Note 7. Upon termination of the swap, the Company received net cash proceeds of $47.6 million, in addition to the release of the $192.7 million of restricted cash collateral that the Company was required to maintain with the counterparty for the term of the swap. Prior to termination, the swap was being accounted for on a full mark-to-market basis through earnings, as a component of interest income. The Company recorded a benefit in interest income of $28.3 million for the year ended April 28, 2010, and $28.1 million for the year ended April 29, 2009, representing changes in the fair value of the swap and interest earned on the arrangement, net of transaction fees.

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. During Fiscal 2011, one customer represented approximately 11% of the Company’s sales. The Company closely monitors the credit risk associated with its counterparties and customers and to date has not experienced material losses.