Derivative Instruments

6 Months Ended

Jul. 02, 2016

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments

Derivative Instruments

The Company conducts business on a multinational basis in a wide variety of foreign currencies; as such, the Company manages these risks using derivative financial instruments. The exposure to market risk for changes in foreign currency exchange rates arises from cross-border financing activities between subsidiaries and foreign currency denominated monetary assets and liabilities. The objective is to preserve the economic value of non-functional currency denominated cash flows. Therefore, the goal is to hedge transaction exposures with natural offsets to the fullest extent possible, and once these opportunities have been exhausted, through foreign exchange forward and option contracts with third parties.

The Company entered into a credit agreement which provides for a term loan of $2.2 billion (“Term Loan”) and a revolving credit facility of $250.0 million (“Revolving Credit Facility”). See Note 10 Long-Term Debt. As such, the Company has exposure to market risk for changes in interest expense calculated off of variable interest rates on the term facility that was used to fund the Acquisition. The Company entered into forward interest rate swaps to hedge a portion of the interest rate risk associated with the Term Loan.

In accordance with ASC 815, “Derivative and Hedging,” the Company recognizes derivative instruments as either assets or liabilities on the consolidated balance sheet and measures them at fair value. Gains and losses resulting from changes in fair value are accounted for depending on the use of the derivative and whether it is designated as and qualifies for hedge accounting. The Company’s master netting and other similar arrangements with the respective counterparties allow for net settlement under certain conditions, which are designed to reduce credit risk by permitting net settlement with the same counterparty.

Credit and Market Risk

Financial instruments, including derivatives, expose the Company to counterparty credit risk for nonperformance and to market risk related to interest and currency exchange rates. The Company manages its exposure to counterparty credit risk through specific minimum credit standards, diversification of counterparties, and procedures to monitor concentrations of credit risk. Its counterparties in derivative transactions are commercial banks with significant experience using derivative instruments. The Company monitors the impact of market risk on the fair value and cash flows of its derivative and other financial instruments considering reasonably possible changes in interest rates and currency exchange rates and restricts the use of derivative financial instruments to hedging activities. The Company continually monitors the creditworthiness of its customers to which it grants credit terms in the normal course of business. The terms and conditions of the Company’s credit sales are designed to mitigate or eliminate concentrations of credit risk with any single customer.

Non-Designated Foreign Currency Derivatives

The Company uses forward contracts to manage exposure related to its British Pound, Canadian Dollar, Czech Koruna, Brazilian Real, Malaysian Ringgit, and Euro denominated net assets. Forward contracts typically mature within three months after execution of the contracts. The Company records monetary gains and losses on these contracts and options in income each quarter along with the transaction gains and losses related to its net asset positions, which would ordinarily offset each other.

Summary financial information related to these activities included in the Company’s consolidated statements of operations as other (expenses) income is as follows (in millions):

	Three Months Ended						Six Months Ended
	July 2, 2016			July 4, 2015			July 2, 2016			July 4, 2015
Realized gain (loss) from foreign exchange derivatives	$	2		$	(1	)	$	(3	)	$	3
(Loss) gain on net foreign currency assets	(7		)	12			(1		)	(19		)
Foreign exchange (loss) gain	$	(5	)	$	11		$	(4	)	$	(16	)

	July 2, 2016		December 31, 2015
Notional balance of outstanding contracts (in millions):
British Pound/US dollar	£	3	£	5
Euro/US dollar	€	124	€	133
British Pound/Euro	£	—	£	7
Canadian Dollar/US dollar	$	12	$	5
Czech Koruna/US dollar	Kč	137	Kč	140
Brazilian Real/US dollar	R$	7	R$	28
Malaysian Ringgit/US dollar	RM	114	RM	13
Net fair value of outstanding contracts (in millions)	$	—	$	1

Hedging of Anticipated Sales

The Company manages the exchange rate risk of anticipated Euro denominated sales using put options, forward contracts and participating forwards. The Company designates these contracts as cash flow hedges which mature within twelve months after the execution of the contracts. Gains and losses on these contracts are deferred in accumulated other comprehensive loss until the contracts are settled and the hedged sales are realized. The deferred gain or loss will then be reported as an increase or decrease to net sales. At the end of the fourth quarter of 2015, the Company expanded its hedging activities to manage the exposure from the Enterprise segment related to fluctuations of foreign currency exchange rates. The impact is reflected in the consolidated statements of comprehensive loss.

Summary financial information related to the cash flow hedges within the statements of accumulated comprehensive loss is as follows (in millions):

	Three Months Ended					Six Months Ended
	July 2, 2016		July 4, 2015			July 2, 2016			July 4, 2015
Change in unrealized gain (loss) on anticipated sales hedging:
Gross	$	14	$	(6	)	$	(5	)	$	(4	)
Income tax expense (benefit)	3		(1		)	(1		)	(1		)
Net	$	11	$	(5	)	$	(4	)	$	(3	)

Summary financial information related to the cash flow hedges of future revenues is as follows:

	July 2, 2016			December 31, 2015
Notional balance of outstanding contracts versus the dollar (in millions)	€	445		€	193
Hedge effectiveness	100		%	100		%

	Three Months Ended					Six Months Ended
	July 2, 2016			July 4, 2015		July 2, 2016			July 4, 2015
Net (loss) gain included in revenue	$	(5	)	$	5	$	(6	)	$	11

The Company records its foreign exchange contracts at fair value on its consolidated balance sheets as a current asset or liability, depending upon the fair value calculation as detailed in Note 3 Fair Value Measurements. The amounts recorded on the consolidated balance sheets are as follows (in millions):

	July 2, 2016		December 31, 2015
Assets:
Prepaid expenses and other current assets	$	2	$	7
Total	$	2	$	7
Liabilities:
Accrued liabilities	$	4	$	—
Total	$	4	$	—

Forward Interest Rate Swaps

The Company's forward interest rate swaps hedge the interest rate risk associated with the variable interest payments on its Term Loan. The change in fair value of swaps which are designated as cash flow hedges are recognized in accumulated other comprehensive loss whereas those which were not designated in a hedging relationship are reported in the Company's consolidated statements of operations as interest expense and other, net. Any ineffectiveness is immediately recognized in earnings.

The balance sheet position of the forward interest rate swaps designated in a hedge relationship is as follows (in millions, except percentages):

	July 2, 2016			December 31, 2015
Accrued liabilities	$	7		$	1
Other long-term liabilities	$	24		$	14
Hedge effectiveness	100		%	100		%

The forward interest rate swaps not designated in a hedging relationship are recorded in a net liability position of $9 million as of July 2, 2016 and $11 million as of December 31, 2015 in the consolidated balance sheets.

The gross fair values and related offsetting counterparty fair values as well as the net fair value amounts at July 2, 2016 were as follows (in millions):

	Gross Fair Value		Counterparty Offsetting		Net Fair Value in the Consolidated Balance Sheets
Counterparty A	$	20	$	12	$	8
Counterparty B	7		3		4
Counterparty C	7		3		4
Counterparty D	14		6		8
Counterparty E	7		3		4
Counterparty F	8		4		4
Counterparty G	8		—		8
Total	$	71	$	31	$	40

Certain of the forward interest rate swaps, each with a term of 1 year, are designated as cash flow hedges of interest rate exposure associated with variability in future cash flows on the Term Loan. The notional amount of these designated swaps effective in each year of the cash flow hedge relationships does not exceed the principal amount of the Term Loan which is hedged.

These swaps have the following notional amounts per year (in millions):

	July 2, 2016
Year 2017	$	697
Year 2018	544
Year 2019	544
Year 2020	272
Year 2021	272
Notional balance of outstanding contracts	$	2,329

The gain/ loss recognized on the forward interest rate swaps not designated in a hedge relationship is combined with interest expense and other, net in the consolidated statements of operations is as follows (in millions):

	Three Months Ended					Six Months Ended
	July 2, 2016		July 4, 2015			July 2, 2016		July 4, 2015
Interest income (expense) on forward interest rate swaps	$	1	$	(2	)	$	2	$	—

The unrealized gain/loss recognized in other comprehensive loss on the forward interest rate swaps designated in a hedging relationship is as follows (in millions):

	Three Months Ended					Six Months Ended
	July 2, 2016			July 4, 2015		July 2, 2016			July 4, 2015
Change in unrealized loss (gain) on forward interest rate swap hedging:
Gross	$	(5	)	$	5	$	(15	)	$	(7	)
Income tax (benefit) expense	(2		)	2		(5		)	(3		)
Net	$	(3	)	$	3	$	(10	)	$	(4	)

Losses of zero and $1 million were reclassified from accumulated other comprehensive loss into interest expense and other, net on the forward interest rate swaps designated in a hedging relationship during the three and six month periods ended July 2, 2016, respectively. There were no significant reclassifications during the three or six month periods ended July 4, 2015.

At July 2, 2016, the Company expects that approximately $21 million in losses on the forward interest rate swaps designated in a hedging relationship that will be reclassified from accumulated other comprehensive loss into earnings during the next 4 quarters.