Derivative Instruments and Hedging Activities

9 Months Ended

Jul. 01, 2017

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Our currency exchange contracts and interest rate swaps are designated as cash flow hedges and qualify as hedging instruments. We also have derivatives which are not designated as cash flow hedges and, therefore, are accounted for and reported under foreign currency guidance. Regardless of designation for accounting purposes, we believe all of our derivative instruments are hedges of transactional risk exposures. The fair value of our outstanding designated and undesignated derivative assets and liabilities are reported in the Consolidated Balance Sheets as follows: 

	July 1, 2017
(in thousands)	Prepaid Expenses and Other Current Assets		Other Accrued Liabilities
Designated hedge derivatives
Cash flow derivatives	$	101	$	339
Interest rate swaps	3,491		—
Total designated hedge derivatives	3,592		339
Hedge derivatives not designated
Balance sheet derivatives	—		43
Total hedge derivatives	$	3,592	$	382

	October 1, 2016
(in thousands)	Prepaid Expenses and Other Current Assets		Other Accrued Liabilities
Designated hedge derivatives
Cash flow derivatives	$	149	$	633
Hedge derivatives not designated
Balance sheet derivatives	—		78
Total hedge derivatives	$	149	$	711

A reconciliation of the net fair value of foreign exchange cash flow hedge assets and liabilities subject to master netting arrangements recorded in the Consolidated Balance Sheets to the net fair value that could have been reported in the respective Consolidated Balance Sheets is as follows: 

(in thousands)	Gross Recognized Amount		Gross Offset Amount		Net Amount Presented		Derivatives Subject to Offset			Cash Collateral Received		Net Amount 1
July 1, 2017
Assets	$	3,592	$	—	$	3,592	$	—		$	—	$	3,592
Liabilities	339		—		339		—			—		339
October 1, 2016
Assets	$	149	$	—	$	149	$	(147	)	$	—	$	2
Liabilities	633		—		633		(147		)	—		486

¹  Net fair value of foreign exchange cash flow hedge assets and liabilities that could have been reported in the Consolidated Balance Sheets.

Cash Flow Hedging – Currency Risks

Currency exchange contracts utilized to maintain the functional currency value of expected financial transactions denominated in foreign currencies are designated as cash flow hedges. Qualifying gains and losses related to changes in the market value of these contracts are reported as a component of accumulated other comprehensive income (loss) (AOCI) within shareholders’ equity in the Consolidated Balance Sheets and reclassified into earnings in the same period during which the underlying hedged transaction affects earnings. The effective portion of the cash flow hedges represents the change in fair value of the hedge that offsets the change in the functional currency value of the hedged item. We periodically assess whether our currency exchange contracts are effective and, when a contract is determined to be no longer effective as a hedge, we discontinue hedge accounting prospectively. Subsequent changes in the market value of ineffective currency exchange contracts are recognized as an increase or decrease in revenue in the Consolidated Statements of Income as that is the same line item in which the underlying hedged transaction is reported. 

As of July 1, 2017 and October 1, 2016, we had outstanding cash flow hedge currency exchange contracts with gross notional U.S. dollar equivalent amounts of $31,825 and $29,092, respectively. Upon netting offsetting contracts to sell foreign currencies against contracts to purchase foreign currencies, irrespective of contract maturity dates, the net notional U.S. dollar equivalent amount of contracts outstanding was $28,441 and $24,884 as of July 1, 2017 and October 1, 2016, respectively. As of July 1, 2017, the net market value of the foreign currency exchange contracts was a net liability of $238, consisting of $339 in liabilities and $101 in assets. As of October 1, 2016, the net market value of the foreign currency exchange contracts was a net liability of $484, consisting of $149 in assets and $633 in liabilities.

The pretax amounts recognized in AOCI on currency exchange contracts, including (gains) losses reclassified into earnings in the Consolidated Statements of Income and gains (losses) recognized in other comprehensive income (loss) (OCI), are as follows:

	Three Months Ended						Nine Months Ended
(in thousands)	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Beginning unrealized net gain (loss) in AOCI	$	(115	)	$	(335	)	$	(400	)	$	608
Net (gain) loss reclassified into revenue (effective portion)	58			223			(679		)	205
Net gain (loss) recognized in OCI (effective portion)	(222		)	(143		)	800			(1,068		)
Ending unrealized net gain (loss) in AOCI	$	(279	)	$	(255	)	$	(279	)	$	(255	)

The amount recognized in earnings as a result of the ineffectiveness of cash flow hedges was $0 and $7 in the three and nine months ended July 1, 2017, respectively, and less than $1 in both the three and nine months ended July 2, 2016. As of July 1, 2017 and July 2, 2016, the amount projected to be reclassified from AOCI into earnings in the next twelve months was a net loss of $279 and $246, respectively. The maximum remaining maturity of any forward or optional contract as of July 1, 2017 and July 2, 2016 was 1.5 and 1.0 years, respectively.

Interest Rate Swaps

On October 20, 2016, we entered into a floating to fixed interest rate swap agreement to mitigate our exposure to interest rate increases related to a portion of our tranche B term loan facility. The total notional amount of the interest rate swap is $275,000 as of July 1, 2017. The swap agreement expires April 3, 2021. As a result of this agreement, every month we pay fixed interest at 1.256% in exchange for interest received at one month U.S. LIBOR. The market value of the interest rate swap as of July 1, 2017 was an asset of $3,491. The interest rate swap has been designated as a cash flow hedge. As a result, changes in the fair value of the interest rate swap are recorded in AOCI within shareholders’ equity in the Consolidated Balance Sheets.

The pretax amounts recognized in AOCI on interest rate swaps, including (gains) losses reclassified into earnings in the Consolidated Statements of Income and gains (losses) recognized in OCI, are as follows:

	Three Months Ended					Nine Months Ended
(in thousands)	July 1, 2017			July 2, 2016		July 1, 2017		July 2, 2016
Beginning unrealized net gain (loss) in AOCI	$	4,310		$	—	$	—	$	—
Net (gain) loss reclassified into interest expense (effective portion)	182			—		598		—
Net gain (loss) recognized in OCI (effective portion)	(1,001		)	—		2,893		—
Ending unrealized net gain (loss) in AOCI	$	3,491		$	—	$	3,491	$	—

As of July 1, 2017, the amount projected to be reclassified from AOCI into earnings in the next twelve months was a net gain of $96.

Foreign Currency Balance Sheet Derivatives

We also use foreign currency derivative contracts to maintain the functional currency value of monetary assets and liabilities denominated in non-functional foreign currencies. The gains and losses related to the changes in the market value of these derivative contracts are included in other income (expense), net in the Consolidated Statements of Income.

As of July 1, 2017 and October 1, 2016, we had outstanding foreign currency balance sheet derivative contracts with gross notional U.S. dollar equivalent amounts of $25,186 and $13,187, respectively. Upon netting offsetting contracts by counterparty banks to sell foreign currencies against contracts to purchase foreign currencies, irrespective of contract maturity dates, the net notional U.S. dollar equivalent amount of contracts outstanding as of July 1, 2017 and October 1, 2016 was $7,282 and $1,347, respectively. As of July 1, 2017 and October 1, 2016, the net market value of the foreign exchange balance sheet derivative contracts was a net liability of $43 and $78, respectively.

The net gain (loss) recognized in the Consolidated Statements of Income on foreign exchange balance sheet derivative contracts was as follows:

	Three Months Ended						Nine Months Ended
(in thousands)	July 1, 2017			July 2, 2016			July 1, 2017			July 2, 2016
Net gain (loss) recognized in other income (expense), net	$	(680	)	$	(64	)	$	(691	)	$	(898	)