FINANCIAL INSTRUMENTS AND FAIR VALUE

We are exposed to market risks arising principally from changes in foreign currency exchange rates, interest rates and commodity prices. We use certain derivative instruments to manage these risks. These include interest rate swaps to manage interest rate risk, foreign currency forward exchange contracts and options to manage foreign currency exchange rate risk, and commodities futures and options contracts to manage commodity market price risk exposures.

We also use derivatives that do not qualify for hedge accounting treatment. We account for such derivatives at market value with the resulting gains and losses reflected in the income statement. We do not hold or issue derivative instruments for trading or speculative purposes and are not a party to any instruments with leverage or prepayment features.

In entering into these contracts, we have assumed the risk that might arise from the possible inability of counterparties to meet the terms of their contracts. We mitigate this risk by entering into exchanged-traded contracts with collateral posting requirements and/or by performing financial assessments prior to contract execution, conducting periodic evaluations of counterparty performance and maintaining a diverse portfolio of qualified counterparties. We do not expect any significant losses from counterparty defaults.

Commodity Price Risk

We enter into commodities futures and options contracts and other commodity derivative instruments to reduce the effect of future price fluctuations associated with the purchase of raw materials, energy requirements and transportation services. We generally hedge commodity price risks for 3 to 24 month periods. The majority of our commodity derivative instruments meet hedge accounting requirements and are designated as cash flow hedges. We account for the effective portion of mark-to-market gains and losses in other comprehensive income, to be recognized in cost of sales in the same period that we record the hedged raw material requirements in cost of sales. The ineffective portion of gains and losses is recorded currently in cost of sales.

Foreign Exchange Price Risk

We are exposed to foreign currency exchange rate risk related to our international operations, including non-functional currency intercompany debt and other non-functional currency transactions of certain subsidiaries. Principal currencies hedged include the euro, Canadian dollar, Malaysian ringgit, Swiss franc, Chinese renminbi, Japanese yen, and Brazilian real. We typically utilize foreign currency forward exchange contracts and options to hedge these exposures for periods ranging from 3 to 24 months. The contracts are either designated as cash flow hedges or are undesignated. The net notional amount of foreign exchange contracts accounted for as cash flow hedges was $506 at September 28, 2014 and $158,375 at December 31, 2013. The effective portion of the changes in fair value on these contracts is recorded in other comprehensive income and reclassified into earnings in the same period in which the hedged transactions affect earnings. The net notional amount of foreign exchange contracts that are not designated as accounting hedges was $5,354 at September 28, 2014 and $2,823 at December 31, 2013. The change in fair value on these instruments is recorded directly in cost of sales or selling, marketing and administrative expense, depending on the nature of the underlying exposure.

Interest Rate Risk

In order to manage interest rate exposure, from time to time we enter into interest rate swap agreements, which are designated as cash flow hedges, with gains and losses deferred in other comprehensive income to be recognized as an adjustment to interest expense in the same period that the hedged interest payments affect earnings. The notional amount of interest rate derivative instruments outstanding was $700,000 at September 28, 2014 and $250,000 at December 31, 2013.

Equity Price Risk

We are exposed to market price changes in certain broad market indices related to our deferred compensation obligations to our employees. In the first quarter of 2014, we entered into equity swap contracts to hedge the portion of the exposure that is linked to market-level equity returns. These contracts are not designated as hedges for accounting purposes and are entered into for periods of 3 to 12 months. The change in fair value of these derivatives is recorded in selling, marketing and administrative expense, together with the change in the related liabilities. The notional amount of the contracts outstanding at September 28, 2014 was $25,306.

Fair Value of Derivative Instruments

The following table summarizes the fair value of the derivative instruments as recorded in the Consolidated Balance Sheets as of the dates below:



	Balance Sheet Caption	September 28, 2014		December 31, 2013
Derivative Assets
Derivatives designated as hedges:
Commodities futures and options (1)	Prepaid expenses and other current assets	$	6,313	$	4,306
Foreign exchange contracts (2)	Prepaid expenses and other current assets	497		2,227
Interest rate swap agreements (3)	Prepaid expenses and other current assets	5,083		—
Foreign exchange contracts (2)	Other long-term assets	244		586
Interest rate swap agreements (3)	Other long-term assets	—		22,745
Cross-currency swap agreement (4)	Other long-term assets	1,559		—
Total derivatives designated as hedges		$	13,696	$	29,864

Derivatives not designated as hedges:
Deferred compensation derivatives (5)	Prepaid expenses and other current assets	$	371	$	—
Foreign exchange contracts (2)	Prepaid expenses and other current assets	3,328		445
Foreign exchange contracts (2)	Other long-term assets	170		166
Total derivatives not designated as hedges		$	3,869	$	611

Derivative Liabilities
Derivatives designated as hedges:
Commodities futures and options (1)	Accrued liabilities	$	2,622	$	129
Foreign exchange contracts (2)	Accrued liabilities	1,408		—
Foreign exchange contracts (2)	Other long-term liabilities	422		—
Interest rate swap agreements (3)	Other long-term liabilities	2,336		—
Total derivatives designated as hedges		$	6,788	$	129

Derivatives not designated as hedges:
Foreign exchange contracts (2)	Accrued liabilities	$	698	$	—
Foreign exchange contracts (2)	Other long-term liabilities	115		198
Total derivatives not designated as hedges		$	813	$	198

(1)

The fair value of commodities futures and options contracts is based on quoted market prices and is, therefore, categorized as Level 1 within the fair value hierarchy. As of September 28, 2014, accrued liabilities reflects the net of assets of $44,675 and accrued liabilities of $47,195 associated with cash transfers receivable or payable on commodities futures contracts reflecting the change in quoted market prices on the last trading day for the period. The comparable amounts reflected on a net basis in accrued liabilities at December 31, 2013 were assets of $23,780 and accrued liabilities of $23,909. At September 28, 2014 and December 31, 2013, the amount reflected in prepaid expenses and other current assets related to the fair value of options contracts.

(2)

The fair value of foreign currency forward exchange contracts is the difference between the contract and current market foreign currency exchange rates at the end of the period. We estimate the fair value of foreign currency forward exchange contracts on a quarterly basis by obtaining market quotes of spot and forward rates for contracts with similar terms, adjusted where necessary for maturity differences. These contracts are classified as Level 2 within the fair value hierarchy.

(3)

The fair value of interest rate swap agreements represents the difference in the present value of cash flows calculated at the contracted interest rates and at current market interest rates at the end of the period. We calculate the fair value of interest rate swap agreements quarterly based on the quoted market price for the same or similar financial instruments. Such contracts are categorized as Level 2 within the fair value hierarchy.


(4)	The fair value of the cross-currency swap agreement is categorized as Level 2 within the fair value hierarchy and is estimated based on the difference between the contract and current market foreign currency exchange rates at the end of the period.


(5)	The fair value of deferred compensation derivatives is based on quoted prices for market interest rates and a broad market equity index and is, therefore, categorized as Level 2 within the fair value hierarchy.

Fair Value of Other Financial Instruments

The carrying amounts of cash and cash equivalents, short-term investments, accounts receivable, accounts payable and short-term debt approximated fair value as of September 28, 2014 and December 31, 2013 because of the relatively short maturity of these instruments.

The carrying value of long-term debt, including the current portion, was $1,810,651 as of September 28, 2014, compared with a fair value of $1,973,308. The estimated fair value of long-term debt is based on quoted market prices for similar debt issues and is, therefore, classified as Level 2 within the valuation hierarchy.

Income Statement Impact of Derivative Instruments

The effect of derivative instruments on the Consolidated Statements of Income for the three months ended September 28, 2014 and September 29, 2013 was as follows:



	Non-designated Hedges				Cash Flow Hedges
	Non-designated Hedges				Cash Flow Hedges
	Gains recognized in income (a)				Gains (losses) recognized in other comprehensive income (“OCI”) (effective portion)					Gains (losses) reclassified from accumulated OCI into income (effective portion) (b)						Gains recognized in income (ineffective portion) (c)

	2014		2013		2014			2013		2014			2013			2014		2013
Commodities futures and options	$	393	$	—	$	3,256		$	84,170	$	27,000		$	4,000		$	2,553	$	2,728
Foreign exchange contracts	7,033		—		(612		)	6,286		(361		)	1,456			—		—
Interest rate swap agreements	—		—		(4,661		)	1,200		(1,114		)	(1,114		)	—		428
Deferred compensation derivatives	371		—		—			—		—			—			—		—
Total	$	7,797	$	—	$	(2,017	)	$	91,656	$	25,525		$	4,342		$	2,553	$	3,156


(a)	Gains recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.

(b)


(c)	Gains representing hedge ineffectiveness were included in cost of sales for commodities futures and options contracts and in interest expense for interest rate swap agreements.

The effect of derivative instruments on the Consolidated Statements of Income for the nine months ended September 28, 2014 and September 29, 2013 was as follows:



	Non-designated Hedges					Cash Flow Hedges
	Non-designated Hedges					Cash Flow Hedges
	Gains (losses) recognized in income (a)					Gains (losses) recognized in OCI (effective portion)					Gains (losses) reclassified from accumulated OCI into income (effective portion) (b)						Gains recognized in income (ineffective portion) (c)

	2014			2013		2014			2013		2014			2013			2014		2013
Commodities futures and options	$	2,732		$	—	$	62,523		$	69,670	$	55,300		$	(5,500	)	$	2,461	$	3,271
Foreign exchange contracts	(1,759		)	—		(301		)	6,501		3,536			3,382			—		—
Interest rate swap agreements	—			—		(19,998		)	21,515		(3,351		)	(2,858		)	—		—
Deferred compensation derivatives	1,909			—		—			—		—			—			—		—
Total	$	2,882		$	—	$	42,224		$	97,686	$	55,485		$	(4,976	)	$	2,461	$	3,271


(a)	Gains recognized in income for non-designated commodities futures and options contracts were included in cost of sales. Gains (losses) recognized in income for non-designated foreign currency forward exchange contracts and deferred compensation derivatives were included in selling, marketing and administrative expenses.

(b)

Gains (losses) reclassified from accumulated OCI into income were included in cost of sales for commodities futures and options contracts and for foreign currency forward exchange contracts designated as hedges of purchases of inventory or other productive assets. Other gains for foreign currency forward exchange contracts were included in selling, marketing and administrative expenses. For the nine months ended September 28, 2014, this included $3,801 relating to unrealized gains on foreign currency forward exchange contracts that were reclassified from accumulated OCI to selling, marketing and administrative expenses as a result of the discontinuance of cash flow hedge accounting because it was determined to be probable that the original forecasted transactions would not occur within the time period originally designated or the subsequent two months thereafter. Losses reclassified from accumulated OCI into income for interest rate swap agreements were included in interest expense.


(c)	Gains representing hedge ineffectiveness were included in cost of sales for commodities futures and options contracts.

The amount of net gains on cash flow hedging derivatives, including interest rate swap agreements, foreign currency forward exchange contracts, and commodities futures and options contracts, expected to be reclassified into income in the next twelve months was approximately $28,781 after tax as of September 28, 2014. This amount was primarily associated with commodities futures and options contracts.